Fitch Upgrades Prologis, Inc.'s IDR to 'BBB'; Outlook Stable
NEW YORK -- February 21, 2013
Fitch Ratings has upgraded the credit ratings of Prologis, Inc. (NYSE: PLD),
its operating partnership, Prologis, L.P. and its subsidiary Prologis Tokyo
Finance Investment Limited Partnership (collectively, Prologis or the company)
--Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
--$582 million preferred stock to 'BB+' from 'BB'.
--IDR to 'BBB' from 'BBB-';
--$1.7 billion global senior credit facility to 'BBB' from
--$5.0 billion senior unsecured notes to 'BBB' from 'BBB-';
--$944.0 million senior unsecured convertible notes to 'BBB' from 'BBB-';
--EUR487.5 million senior unsecured term loan to 'BBB' from 'BBB-'.
Prologis Tokyo Finance Investment Limited Partnership
--JPY36.5 billion senior unsecured revolving credit facility to 'BBB' from
--JPY10 billion senior unsecured term loan to 'BBB' from 'BBB-'.
The Rating Outlook has been revised to Stable from Positive.
Key Rating Drivers
The upgrade of Prologis' IDR to 'BBB' centers on the company's material
reduction in leverage, principally via the announced European joint venture
(European JV) with Norges Bank Investment Management (NBIM) and the successful
recent initial public offering of Nippon Prologis REIT, Inc., a Japanese REIT
(J-REIT). Credit strengths include the company's global industrial real estate
platform including the private capital franchise, a granular tenant roster,
and strong access to capital. Credit concerns include fixed charge coverage
that is low for the rating but projected to improve, as well as increasing
development (including speculative projects) and significant 2014 debt
maturities that weaken liquidity.
Material Leverage Reduction
PLD's leverage was 7.1x as of Dec. 31, 2012 pro forma for dispositions and
fund contributions, down from 8.2x in FY2012 and 7.8x in 4Q'2011 and
meaningfully below the 8.0x leverage threshold Fitch previously established as
a key ratings driver for positive ratings momentum. Fitch expects leverage
will improve modestly to the high 6x range over the next 12-to-24 months
assuming low-single digit same-store NOI growth and additional debt repayment
via contributions and dispositions. PLD's pro forma and forecasted leverage
are strong for the 'BBB' rating for a large global industrial REIT. In a
stress case not anticipated by Fitch in which same-store NOI declines are
similar to those experienced in 2009-2010, leverage would approach 8.0x, which
would be weak for a 'BBB' rating.
Upon completion of the June 2011 ProLogis-AMB merger, PLD announced a
10-quarter strategic plan that would re-align the portfolio with greater
exposure to global markets, strengthen the company's financial position,
streamline the private capital business, and improve asset utilization. Debt
repayment via proceeds from asset dispositions and contributions (most notably
the European JV and J-REIT listing) has been the primary mechanism through
which PLD has achieved its goal to strengthen its financial position.
On Dec. 20, 2012, PLD announced a joint venture with NBIM to which PLD would
contribute 195 stabilized European properties. The JV is structured as a 50-50
venture with an equity commitment of EUR2.4 billion ($3.1 billion) including a
EUR1.2 billion ($1.55 billion) co-investment by both NBIM and Prologis. The
venture has an initial term of 15 years. Prologis will have the ability to
reduce its ownership to 20% following the second anniversary of closing, which
is expected in March 2013.
On Feb. 14, 2013, Nippon Prologis REIT, Inc. (NPR), a J-REIT externally
managed by PLD, priced its initial public offering. Prologis contributed 12
Japan properties to NPR for initial consideration of approximately JPY 173
billion ($1.9 billion) and received cash proceeds of JPY 153 billion ($1.7
billion). PLD expects to sell additional Japanese properties to NPR going
The company's large platform limits exposure to regional fundamentals, with
49.6% of 4Q'2012 NOI derived from Prologis-defined global markets in the
Americas, 21.1% in Europe, 12.4% in Asia, and the remainder in regional and
other markets. The private capital platform provides an additional layer of
fee income and recurring cash distributions to cover PLD's fixed charges. In
addition, Prologis has a granular tenant roster, including top three tenants
DHL (2.0% of annual base rent), CEVA Logistics (1.4% of annual base rent) and
Kuehne & Nagel (1.3% of annual base rent), with no other tenant exceeding 1.0%
of annual base rent.
Historically Strong Access to Capital
Legacy ProLogis and AMB Property Corporation both had strong access to
capital, and since the merger, Prologis has raised proceeds via a
multicurrency unsecured term loan and private capital financings and recast
its multicurrency unsecured revolving credit facility. The company has not
raised meaningful proceeds in the unsecured bond or equity markets due to a
lack of need since the merger. The company will likely fund a significant
portion of near-term corporate uses of liquidity with asset sales and
contributions proceeds and will fund longer-term liquidity needs via unsecured
bond and equity offerings.
Increasing Development Activity
Prologis' development activities entail moderate lease-up risk, as
build-to-suit assets represented approximately 57% of the development pipeline
as of Dec. 31, 2012, with the remainder being speculative projects. The
pipeline is increasing but remains somewhat small, as cost to complete
development represented 3.2% of gross assets as of Dec. 31, 2012 compared with
1.4% as of Dec. 31, 2011. The pipeline should remain active in the coming
years due to industrial real estate supply-demand dynamics.
Adequate Liquidity Despite 2014 Maturities
Liquidity coverage, defined as liquidity sources divided by uses, is 1.3x for
the period Jan. 1, 2013 through Dec. 31, 2014. Liquidity sources include
unrestricted cash, availability under revolving credit facilities pro forma
for Prologis' share of projected contributions to the Norges JV and J-REIT and
projected retained cash flows from operating activities. Liquidity uses
include pro rata debt maturities after extension options at PLD's option and
pro forma debt transfer related to the Norges JV, and projected recurring
capital expenditures. When including Prologis' share of projected development
starts as a liquidity use, liquidity coverage weakens to 1.0x. 2014 debt
maturities represented 25.2% of pro rata debt maturities as of Dec. 31, 2012,
which adversely impact liquidity coverage, however a portion of these
maturities are extendable at the company's option.
Prologis has strong contingent liquidity with unencumbered assets (4Q'2012
estimated unencumbered NOI divided by a 7.0% capitalization rate pro forma for
the Norges JV, J-REIT, and other contributions and dispositions) to unsecured
debt of 2.4x. When applying a stressed 50% haircut to the book value of land
held, unencumbered asset coverage improves to 2.6x. In addition, the covenants
in the company's debt agreements do not restrict financial flexibility, and
the company's AFFO payout ratio was 92.9% in 2012 indicating some liquidity
generated from operating cash flow.
Fixed-Charge Coverage to Improve
The company's fixed charge coverage ratio is low for the 'BBB' rating at 1.7x
in 4Q'2012 pro forma. Fixed-charge coverage was 1.6x in 4Q'2012 due to higher
merger-related G&A expense and higher pro rata capital expenditures stemming
from heavy leasing volume. This compares with the 1.8x for FY2012 and 1.8x for
4Q'2011. Fitch defines fixed-charge coverage as recurring operating EBITDA
including Fitch's estimate of recurring cash distributions from unconsolidated
entities less recurring capital expenditures less straight-line rent
adjustments divided by total interest incurred and preferred stock dividends.
Fitch's base case anticipates that coverage will approach 2.5x over the next
12-to-24 months due to low single-digit same-store NOI growth as occupancy
continues to rise and rental rate rollover declines moderate. Same-store cash
NOI increased by 0.8% in 4Q'2012 after growth of 3.0%, 2.3% and 3.1% in
3Q'2012, 2Q'2012 and 1Q'2012, respectively. Total occupancy was 94.0% as of
Dec. 31, 2012 compared with 92.2% as of Dec. 31, 2011, and rental rates
declined by 2.3% on average during 2012 compared with a 7.0% average decline
during 2011. Coverage sustaining between 2.0x and 2.5x would be appropriate
for a 'BBB+' rating.
In a stress case not anticipated by Fitch in which same-store NOI declines by
levels experienced in 2009 - 2010 and development leasing is limited, coverage
would remain around 2.0x, which would remain adequate for the 'BBB' rating.
The two-notch differential between PLD's IDR and preferred stock rating is
consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'.
Based on Fitch research titled 'Treatment and Notching of Hybrids in
Nonfinancial Corporate and REIT Credit Analysis', available on Fitch's web
site at 'www.fitchratings.com', 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.
The following factors may result in positive momentum on the rating and/or
--Liquidity coverage including development sustaining above 1.25x (base case
liquidity coverage is 1.3x, but 1.0x including development);
--Fitch's expectation of leverage sustaining below 6.5x (pro forma leverage is
--Fitch's expectation of fixed-charge coverage sustaining above 2.0x (pro
forma coverage is 1.7x).
The following factors may result in negative momentum on the rating and/or
--Liquidity coverage including development sustaining below 1.0x;
--Fitch's expectation of leverage sustaining above 8.0x;
--Fitch's expectation of fixed charge coverage ratio sustaining below 1.5x.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis (Dec. 13, 2012);
--Recovery Ratings and Notching Criteria for Equity REITs (Nov. 12, 2012);
--Corporate Rating Methodology (Aug. 8, 2012);
--Parent and Subsidiary Rating Linkage (Aug. 8, 2012);
--Criteria for Rating U.S. Equity REITs and REOCs (Feb. 27, 2012).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Criteria for Rating U.S. Equity REITs and REOCs
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