Morningstar DBRS Changes Trends on IRG Industrial, LLC Credit Ratings to Negative from Stable; Confirms Ratings at BBB (low)

DBRS, Inc. (Morningstar DBRS) changed the trends on IRG Industrial, LLC's (IRG or the Company) Issuer Rating and Senior Unsecured Notes rating to Negative from Stable and confirmed both credit ratings at BBB (low). The Negative trends are a result of a deteriorated financial risk assessment as total Debt-to-EBITDA and EBITDA Interest Coverage ratio weakened relative to Morningstar DBRS' prior expectations. As a result, the ratings are currently outside of the BBB (low) category; however, Morningstar DBRS recognizes various levers the Company has available to affect considerably lower leverage in the near term.

KEY CREDIT RATING CONSIDERATIONS
The Negative trends consider (1) the Company's elevated leverage profile, primarily driven by advances on its revolving credit facility to affiliate entities that have yet to substantially repay; (2) the Company's exposure to unhedged variable interest rates contributing to weaker EBITDA Interest Coverage; (3) slower-than-expected EBITDA growth for year-end (YE) 2024; and (4) the greater-than-expected distributions over the last 12 months (LTM) as of June 30, 2024. The Negative trends also consider the possibility that the Company will enact measures to improve its financial profile in the near term by reducing its debt outstanding.

CREDIT RATING DRIVERS
All else equal, Morningstar DBRS would consider downgrading the ratings if the Company fails to execute on its deleveraging initiatives in the near term and thereby fails to demonstrate a path to comfortably and sustainably maintain a total Debt-to-EBITDA of 9.3 times (x) or better and an EBITDA Interest Coverage ratio of 2.00x or better thereafter. Conversely, all else equal, Morningstar DBRS would restore Stable trends if the Company successfully executes its deleveraging initiatives such that it can comfortably and sustainably maintain a total Debt-to-EBITDA of 9.3x or better, and an EBITDA Interest Coverage ratio of 2.00x or better thereafter.

FINANCIAL OUTLOOK
Morningstar DBRS expects IRG's total Debt-to-EBITDA and EBITDA Interest Coverage metrics for YE2024 to be in the low-10.0x range and mid-1.00x range, respectively, compared with the LTM June 30, 2024, respective ratios of 10.8x and 1.64x. Morningstar DBRS expects significant improvement in leverage by Q3 2025, leading to total Debt-to-EBITDA and EBITDA Interest Coverage of the 9.0x range and low-2.00x range by YE2025. In Morningstar DBRS' view, this deleveraging will occur largely as a result of the Company enacting deleveraging measures, as well as moderate EBITDA growth by way of same-property net operating income growth and continued lease-up of transitional assets. The ability of the Company to successfully execute its deleveraging initiatives does, however, present significant uncertainties in terms of the timing and quantum of such deleveraging events, and the resultant financial risk assessment profile of IRG.

CREDIT RATING RATIONALE
The rating confirmations are supported by IRG's (1) diversification across tenant base, properties, and geographies across the U.S., (2) lease maturity profile and near-term mark-to-market opportunities, (3) modernized and upgraded industrial assets, and (4) the Company's track record of repositioning transitional assets. The ratings are constrained by (1) IRG's elevated leverage as measured by total debt-to-EBITDA, (2) deteriorated EBITDA Interest Coverage ratio, (3) a smaller portfolio size relative to its investment-grade peers, and (4) the continued execution risk of its transitional asset plans.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of IRG Industrial, LLC, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of IRG Industrial, LLC, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of IRG Industrial, LLC, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431170

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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