DBRS Morningstar Assigns Rating of BBB (low), Stable to IRG Industrial’s $335 Million Private Placement Notes

DBRS, Inc. (DBRS Morningstar) assigned ratings of BBB (low), Stable to IRG Industrial, LLC’s (IRG, or the Company) $45 Million, 3.54% Series A, due March 3, 2026, Senior Unsecured Notes, its $90 Million 4.02% Series B, due March 3, 2028, Senior Unsecured Notes, and its $200 Million 4.48% Series C, due March 3, 2031 (together, the Notes). This represents DBRS Morningstar’s first public rating for IRG. At the same time, DBRS Morningstar is assigning to IRG an Issuer rating of BBB (low) with a Stable trend.

The Notes are direct senior unsecured obligations of the IRG, and rank equally and rateably with all other debt securities and with all other unsecured and unsubordinated indebtedness of the Company, except to the extent prescribed by law. DBRS Morningstar understands that the net proceeds of the offering will be used, first, to repay existing indebtedness and, with remaining proceeds after debt reduction, to fund future acquisitions.

The ratings are supported by (1) IRG's cash flow stability and growth from its industrial properties, which are modernized and refurbished; (2) a solid lease maturity profile; (3) good diversity across tenants, properties, and geographies; (4) DBRS Morningstar's expectation for meaningful improvement in EBITDA interest coverage in the coming year in line with real estate entities in the BBB rating category; 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 projects (a mix of industrial, office, health science, and other properties).

The rating considers the ongoing Coronavirus Disease (COVID-19) pandemic and related public health measures, for which DBRS Morningstar believes IRG is relatively well positioned in light of its solid fundamentals (especially its industrial properties) and good access to liquidity, which provide financial flexibility. DBRS Morningstar's expectations incorporate modest impacts from the coronavirus on the Company's operations.

DBRS Morningstar notes that IRG's position within the BBB (low) rating category has limited flexibility as relates to its financial risk assessment. DBRS Morningstar expects significant improvement in leverage to less than 8.5 times (x) debt-to-EBITDA and coverage to almost 2.5x EBITDA interest coverage by year-end 2022, reflecting continued growth through redevelopment, repositioning, and lease-up, in order to maintain the Stable trend. DBRS Morningstar also anticipates that IRG will move to a more unsecured borrowing platform, including senior unsecured notes and credit facilities, which would contribute to its portfolio of unencumbered assets. Should the Company fail to achieve meaningful progress and meet DBRS Morningstar's expectations, the impact on the rating and/or trend could be negative. DBRS Morningstar does not contemplate a positive rating action in the near to medium term.

The Notes are direct senior unsecured obligations of IRG and rank equally and rateably with all other unsecured and unsubordinated indebtedness of the Company, to the extent prescribed by law.

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 methodologies are Rating Entities in the Real Estate Industry (June 4, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), 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).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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