DBRS Morningstar Confirms IRG Industrial, LLC Ratings at BBB (low) with Stable Trends

DBRS, Inc. (DBRS Morningstar) confirmed IRG Industrial, LLC's (IRG or the Company) Issuer Rating and Senior Unsecured Debt ratings at BBB (low), with Stable trends. The Stable trends factor in expected improvement in leverage to below 8.7 times (x) by YE2022, notwithstanding the considerably weak debt-to-EBITDA ratio expected for 2021 in the low 11.0x range compared with the DBRS Morningstar expectation of 9.3x from the January 2021 review. IRG's ongoing growth strategy of acquisition and modernization of assets has elevated debt-to-EBITDA to 11.7x the last 12 months June 30, 2021.

The rating is supported by (1) strong diversification across tenant base, properties, and geographies across the U.S.; (2) a solid lease maturity profile that continues to improve as properties are repurposed and modernized; (3) IRG's cash flow stability from its modernized and refurbished industrial properties; (4) DBRS Morningstar's expectation for meaningful improvement in debt-to-EBITDA and EBITDA interest coverage in the coming year in line and thereafter; and (5) IRG's track record of repositioning assets to generate high returns on investments, particularly in the midwestern U.S. The ratings are constrained by (1) elevated leverage as measured by total debt-to-EBITDA; (2) IRG's lack of scale, with EBITDA that is less than half of what is typical of real estate entities in the BBB rating category; (3) average tenant quality with many smaller tenants, a small number of which are investment grade, which heightens counterparty risk; and (4) limited asset-type diversity with a significant amount of industrial space and a smaller number of large flex and multi-use projects.

IRG has successfully raised $335 million in unsecured notes in 2021 to term-out debt from its credit facility and refinance maturing mortgages, thereby unencumbering assets. However, total debt has been increasing to fund its growth strategy. This increase in debt without a corresponding marginal increase in EBITDA has pressured the debt-to EBITDA ratio. IRG expects strong net operating income growth, and by extension EBITDA growth, in 2022, primarily via contractual agreements, such that the debt-to EBITDA ratio is expected to meaningfully improve to 8.7x or below, and the EBITDA interest coverage ratio is expected to be at or above 2.65x by YE2022. DBRS Morningstar expects to see continual progress in both these financial metrics during 2022.

All else equal, if IRG is unable to demonstrate a path to improving leverage throughout 2022 and to culminate debt-to-EBITDA at or below 8.7x by YE2022 plus provide clarity on further improvement in 2023 and thereafter, a negative rating action is likely. DBRS Morningstar does not contemplate a positive rating action in the near to medium term.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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