Fitch Ratings has assigned a 'BBB+' rating to Rexford Industrial Realty L.P.'s (NYSE: REXR) senior unsecured notes.

Rexford intends to use net proceeds for acquisition, redevelopment and repositioning funding.

Key Rating Drivers

Strong Credit Metrics: Fitch expects REXR to remain within its target leverage range of 4.0x-4.5x through the forecast period as the company positions its balance sheet to execute its growth strategy, while benefiting from strong same-store NOI (SSNOI) growth and incremental NOI from its non-stabilized portfolio. REXR's leverage was 4.3x for the year ended Dec. 31, 2022, which is strong for the 'BBB' category.

Fitch expects the company's fixed-charge coverage (FCC) to sustain around the mid-5x level through 2024 (5.9x for year ending Dec. 31, 2022) as property NOI growth continues but is partially offset by a higher interest rate environment. Fitch calculates REXR's FCC as operating EBITDA, including recurring cash distributions from unconsolidated JVs, less recurring maintenance capex and non-cash rental income over cash interest expense and preferred dividends.

Rexford has funded external growth largely through equity, particularly its $1 billion At-the-Market (ATM) equity program, of which approximately $165 million remains available as of Dec. 31, 2022. The company has taken advantage of robust organic growth persisting in the industrial property sector and the relatively strong appetite for its common stock by funding a high percentage of its acquisitions with equity, enabling Rexford to operate with lower leverage in the current environment. Along these lines, Rexford was able to access the equity market on Nov. 15, 2022 to raise an incremental $643 million in forward sale agreements to be settled by May 2024.

Improved Capital Access: The company has demonstrated access to the public bond market through its first two issuances in November 2020 and August 2021, which continues with this offering. Fitch views this as a credit positive that diversifies the company's capital access and enhances financial flexibility. Prior to November 2020, Rexford had issued $325 million of private placement unsecured notes since July 2015, which expanded the company's capital access beyond secured means.

However, Fitch still views Rexford as a less seasoned public bond issuer compared with higher rated REIT peers. As of Dec. 31, 2022, Rexford's capital structure consisted primarily of common stock (80.1%) and also contained net debt (14.8%), operating partnership (OP) units (3.2%) and preferred stock (1.9%).

Concentrated Portfolio in Top Market: Fitch views REXR's exposure to vibrant, supply-constrained SoCal industrial markets as a net credit positive that offsets concentration risks, such as a regional economic downturn or the loss of a significant tenant. The SoCal industrial market is the largest in the country (about 2.2 billion sf) and has consistently outperformed most U.S. logistic hubs with respect to market fundamentals, aided by high topographic and regulatory supply barriers.

Fitch expects the portfolio's asset and tenant granularity to improve as REXR executes its value-add, acquisition-led growth strategy. This should increase scale and diversification while reducing asset-concentration risk. Along these lines, REXR has increased its number of properties by 67% since YE 2019. REXR has been a net acquirer; acquisitions totaled $1.23 billion, $1.85 billion, and $2.39 billion for the full YE Dec. 31, 2020, Dec. 31, 2021, and Dec. 31, 2022 periods, respectively, with minimal dispositions completed over this time frame. Fitch anticipates that REXR will continue to be a net acquirer prospectively, with acquisitions (and to a lesser extent redevelopment) fueling external growth during the forecast period.

Fitch sees limited execution risk for acquisitions given the strength and fragmented nature of REXR's target market and the company's focused expertise in the region. Therefore, Fitch does not expect the company to expand beyond its current focus on the SoCal market. In addition, REXR's portfolio and target market are buoyed by the ongoing effect of e-commerce and its concomitant impact on demand for industrial real estate.

The company's portfolio has higher asset and geographic concentration than some of its industrial REIT peers, although is in markets with higher per-square-foot values compared with other industrial REIT peers. However, the multiple-building aspect of the portfolio, wherein many of its larger assets are leased to multiple tenants, as well as their infill locations, help offset asset concentration risk.

Transparent Operating Strategy: REXR's transparent, well-defined operating strategy is also a credit positive. The company targets 100% fee simple ownership of industrial assets in supply-constrained logistics markets in the SoCal region, which is the largest market in the U.S. at approximately 2.2 billion square feet. Los Angeles County was the company's largest market at 61% of annual base rent, followed by Riverside/San Bernardino County (15%) and Orange County (10%) as of Dec. 31, 2022.

REXR does not pursue ground-up, greenfield development. However, the company periodically redevelops properties that currently comprises approximately 9.0% of gross assets, although unfunded commitments are approximately 3.6% of gross assets as of Dec. 31, 2022.

Derivation Summary

REXR's ratings reflect the issuer's solid portfolio of industrial real estate in one of the strongest markets in the U.S., and leverage that is appropriate for the rating category. The company is positioned to grow faster than smaller but otherwise more geographically diverse industrial REIT peers First Industrial (BBB/Stable) and STAG Industrial (BBB/Stable) in the near-to-medium term, and has a transparent business model with minimal exposure to ground-up development risk. These strengths are balanced by higher asset concentration and a less geographically diversified portfolio and lower demonstrated access to capital relative to higher-rated REIT peers.

Fitch rates the IDRs of the parent REIT (Rexford Industrial Realty, Inc.) and subsidiary operating partnership (Rexford Industrial Realty, L.P.) on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties.

Based on Fitch's 'Non-Financial Corporates Hybrids Treatment and Notching Criteria,' the two-notch differential between Rexford's IDR and preferred stock rating is consistent for corporate entities with an IDR of 'BBB+'; these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default. Fitch applies 50% equity credit to the company's preferred securities given the cumulative nature of coupon deferral with settlement through a manner other than equity (cash). Certain metrics calculate leverage including preferred stock.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer

Mid-single digit SSNOI growth in 2023-2024, given the cushion in the mark to market of leases despite an anticipated recessionary environment;

Approximately $1.0 billion-$1.2 billion of acquisitions in 2023-2024 at 5.0% yields;

No dispositions in the forecast period;

Redevelopment/repositioning of $125 million per annum in 2023-2024;

Annual unsecured debt issuance of $300 million-$350 million in 2024-2025;

Equity issuance of approximately $750 million-$850 million in 2023-2024.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive momentum in Rexford's ratings and/or Outlook is unlikely absent the company demonstrating superior capital markets access across the broader REIT universe, consistent with other 'A' category rated REITs. However, the following factors may collectively or individually result in upward rating momentum:

Demonstration of Rexford possessing superior capital access consistent with the 'A' category, which could include such things such as frequency of issuance, familiarity by credit investors, importance among credit investors and pricing;

Fitch's expectation of leverage (net debt/recurring operating EBITDA) sustaining below 3.5x over the rating horizon;

Fitch's expectation of FCC sustaining above 6.0x over the rating horizon.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch's expectation of leverage (net debt/recurring operating EBITDA) sustaining above 4.5x over the ratings horizon;

Fitch's expectation of FCC sustaining below 4.5x over the ratings horizon;

Fitch's expectation of worsening capital access.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Solid Liquidity: Fitch calculates Rexford's liquidity coverage is 2.7x for the Dec. 31, 2022 to Dec. 31, 2024 period. This results in a liquidity surplus of approximately $907 million, which is before any proceeds from this notes offering. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under the revolving credit facility and expected retained cash flows from operating activities after dividend payments) divided by uses of liquidity (debt maturities and recurring capex). Rexford has minimal debt maturities until 2025.

Issuer Profile

As of Dec. 31, 2022, REXR owned 356 properties comprising 42.4 million square feet of gross leasable area across five Southern California submarkets. The REIT's portfolio is comprised of business parks, light industrial buildings and warehouses, concentrating on industrial applications.

ESG CONSIDERATIONS

Rexford Industrial Realty, Inc. has an ESG Relevance Score of '4' for Exposure to Environmental Impacts due to portfolio concentration in a region that has exposure to extreme weather events, (i.e. earthquakes and wildfires) and their potential deleterious effect on the company's operations, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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