Fitch Affirms First Industrial's IDR at 'BBB-'; Revises Outlook to Positive

KEY RATING DRIVERS
Fitch's affirmation of First Industrial's 'BBB-' IDR reflects the company's solid and diversified portfolio of low capital intensity industrial properties, as well as Fitch's expectation for leverage and fixed-charge coverage to sustain at levels that are appropriate-to-strong for the 'BBB-' rating through 2017. The ratings also consider FR's solid liquidity position, supported by its measured approach to development risk, and good unencumbered asset coverage of unsecured debt (UA/UD).

The Positive Outlook incorporates the improvement in FR's portfolio market and asset quality stemming from its portfolio repositioning program and FR's stronger credit metrics, which align more closely now with other 'BBB'-rated REIT credits with similar asset profiles.

During the one-to-two-year Rating Outlook horizon, Fitch will monitor the company's ability to re-access the unsecured bond market at terms consistent with a low investment grade rated REIT, as well as the company's adherence to its development risk policies and maintenance of leverage towards the low end of its public 6.0x to 7.0x leverage target. Fitch is unlikely to upgrade its ratings for FR if leverage sustains towards the mid-to-high end of the company's policy range. Fitch will also consider the point in the commercial real estate cycle, including the outlook for industrial property fundamentals, in the context of its 'through-the-cycle' ratings approach.

Improved Asset Quality
Fitch expects FR's same store net operating income (SSNOI) to grow by 2% to 3% per annum through 2017, primarily due to mid-to-high single digit GAAP leasing spreads. Fitch sees limited upside to the company's strong 95.5% 3Q'15 occupancy rate. FR's SSNOI growth has exceeded its industrial REIT peer average since 2012, likely helped by the company's portfolio repositioning program.

FR has recycled $1.3 billion of capital since 2010. Like many REITs, the company has sold older, slower growing and more capital intensive (primarily Midwest industrial) assets and invested the proceeds in newer bulk distribution facilities in key U.S. logistics markets through acquisitions and development.

Operating metrics for the company's current portfolio are in-line with its peers with respect to occupancy, SSNOI growth, leasing spreads and tenant retention rates. FR's portfolio SSNOI growth underperformed its peers during the last downturn; however, the large-scale portfolio repositioning by FR and many of its peers make comparisons of historical portfolio operating performance generally unreliable. That notwithstanding, FR continues to trade at a higher market implied cap rate than the industrial peer average, which is one indication that its portfolio remains moderately weaker than its peers, despite the recent quality improvement.

Leverage and Coverage Improving
Fitch projects that leverage will sustain in the low-6.0x range through 2017 due primarily to low-single digit SSNOI growth through 2017 and incremental NOI from recently completed developments, partially offset by the temporary loss of income from property dispositions to fund new investments, including development. FR's leverage was 6.3x for the TTM ended Sept. 30, 2015, which is appropriate to moderately strong for the 'BBB-' rating. The company's annualized 3Q'15 leverage was 6.1x.

Fitch expects FR's fixed charge coverage to improve to the high 2.0x range by 2017 due to SSNOI growth, interest savings on debt refinancings and lower maintenance capex now that the company's portfolio is fully stabilized. FR's fixed charge coverage was 2.5x for the TTM ended Sept. 30, 2015 and 2.2x at Dec. 31, 2014.

Granular Portfolio
The portfolio is not overly dependent on any given region or tenant, with top markets as of Sept. 30, 2015 being Southern California including Los Angeles, the Inland Empire and San Diego (13.3% of 3Q'15 rental income), Central Pennsylvania (7.9%), Chicago (7.8%), Minneapolis/St. Paul (7.8%) and Dallas/Ft. Worth (6.5%). FR's top 10 and top 20 tenants comprised 13.5% and 21% of rental income, respectively at Sept. 30, 2015, which is reasonably well diversified and consistent with its peers.

Solid Liquidity Position
FR's liquidity coverage is solid at 1.5x for the period Oct. 1, 2015 to Dec. 31, 2017. Liquidity coverage would improve to 1.7x assuming an 80% refinance rate on secured debt maturities through 2017. On Sept. 11, 2015, FR issued a $260 million term loan and fixed the applicable interest rate at 3.39%. The company used the proceeds primarily to repay the outstanding balance on its revolving credit facility.

FR plans to utilize its revolver to repay the approximately $240 million in debt maturities in 4Q'15 and 1Q'16 which carry a weighted average rate of 6.2%. Given the discrepancy in interest costs, FR should see increased cash flow in 2016 related to the term loan financing and anticipated debt repayment. At Sept. 30, 2015, the weighted average maturity for FR's unsecured notes, term loans, and secured financings is 4.4 years, with a weighted average interest rate of 5.5%, when excluding the company's revolving credit facility.

FR's 51.2% payout ratio of adjusted funds from operations (AFFO) for the nine months ended Sept. 30, 2015 is conservative and should result in $60 million of retained cash flow annually. The company is operating within its 50% - 60% AFFO payout ratio target.

Adequate Unencumbered Asset Coverage
FR's unencumbered assets (3Q'15 unencumbered NOI divided by a stressed capitalization rate of 9.5% reflective of some adverse selection) covered net unsecured debt by 2.2x as of Sept. 30, 2015, which is adequate for a low IG-rated REIT. The company encumbered some of its better assets to refinance unsecured bond maturities during the global financial crisis. FR has since unencumbered assets as mortgages mature; however, unencumbered assets represented 69% of total assets at Sept. 30, 2015 compared with the high 90% range pre-crisis.

No Recent Unsecured Bond Issuance
FR has not issued unsecured bonds since May 2007, which Fitch views negatively in terms of the company's relative capital access and generally inconsistent with REITs rated above the 'BBB-' level. Fitch suspects the company could access the private placement unsecured bond market given strong demand and reasonable pricing for the notes issued by several of FR's smaller, less seasoned and less diversified industrial REIT peers.

However, regaining access to public unsecured debt capital could prove more challenging and costly for the company. Inaugural and infrequent REIT issuers have generally been unable to access the public bond markets for most of 2015 at attractive terms, irrespective of the traditional 10 bps to 15 bps 'new issuer' premium common to the market. In Fitch's view, FR could also encounter unfavorable legacy institutional bond investor perceptions stemming from its prior management and strategy pre 2008/2009.

First Industrial completed several unsecured bond issuances prior to 2008. However, the company over extended its balance sheet prior to the global financial crisis (GFC) and was forced to encumber assets to meet maturities during 2008/2009, as well as early in this recovery. Since then, FR has reduced leverage and begun unencumbering assets again under new management. The company has not encumbered any new assets since 2012.

FR has primarily sourced unsecured debt capital through its banking syndicate via its unsecured credit facility and separate unsecured bank term loans. Fitch views over reliance on bank term loan borrowings as a credit negative given generally shorter borrowing terms and the potential for reductions in lending demand/capital availability from bank lending syndicates.

Measured Approach to Development
FR maintains a reasonable approach to managing development risk that is generally consistent with its similarly rated peers. FR's unfunded development commitments totaled $102 million, representing 2.9% of gross assets, based on its reported pipeline at Sept. 30, 2015 adjusted for one project announced during the fourth quarter.

FR operates under a self-imposed development exposure cap of $325 million. The target represents the total invested capital allowable in non-stabilized assets, such as speculative (unleased) development and value-add acquisitions. The calculation is based on cost and is adjusted for pro-rata leasing. As of Nov. 12, 2015, FR had $186 million in remaining capacity under its cap. FR's board increased the company's development policy cap to $325 million from $250 million during 2015 to reflect growth in the company's asset base leverage at the low end of its 6x-7x financial policy.

KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer include:

--SSNOI growth of 3% and 2% during 2016 and 2017, respectively;
--Acquisitions of $75 million during 2016 at a 6% cap rate (excluding $50 million of non-income producing development land);
--Dispositions of $200 million during 2016 at a 6.5% cap rate;
--Development spending of $175 million during 2016 and $150 million during 2017;
--Development completions of $150 million during 2016 and 2017 at a 7% yield;
--Recurring maintenance capex spending of $40 million and $42.5 million in 2016 and 2017;
--G&A growth of 2% per annum through 2017;
--No equity issuance during the forecast period;
--$250 million of unsecured bond issuance in December 2016 at a 5% interest rate;
--Dividend growth of 5% per annum.

RATING SENSITIVITIES
Fitch has loosened its positive and negative leverage-based rating sensitivities by 0.5x to reflect FR's portfolio market and asset quality enhancements. The following factors may result in positive momentum for the ratings and/or Rating Outlook:

--Fitch's expectation of leverage sustaining below 6.5x (leverage for TTM ended Sept. 30, 2015 was 6.3x);
--Fitch's expectation of fixed charge coverage sustaining above 2.5x (coverage for TTM ended Sept. 30, 2015 was 2.5x);

The following factors may result in negative momentum for the ratings and/or Rating Outlook:

--An inability to regain access to unsecured bond capital on terms generally consistent with low IG-rated REITs;
--Fitch's expectation of leverage sustaining above 7.5x;
--Fitch's expectation of fixed charge coverage sustaining below 2x;
--Fitch's expectation of UA/UD (based on a stressed 9.5% capitalization rate) sustaining below 2x.

FULL LIST OF RATING ACTIONS

Fitch has affirmed its ratings for FR as follows:

First Industrial Realty Trust, Inc.
--IDR at 'BBB-'.

First Industrial, L.P.
--IDR at 'BBB-';
--Unsecured revolving credit facility at 'BBB-';
--Senior unsecured term loan at 'BBB-';
--Senior unsecured notes at 'BBB-'.

The Rating Outlook is revised to Positive from Stable.