Fitch: Prologis Equity Offering Hastens Delevering; 2014 Maturities,
Development Offset Implications
NEW YORK -- April 26, 2013
Prologis, Inc.'s (NYSE: PLD) recent $1.3 billion follow-on common stock
offering is a material credit positive, according to Fitch Ratings. Recent
delevering and expectations of continued progress were incorporated into the
upgrade of PLD's Issuer Default Rating (IDR) to 'BBB' in February 2013. The
timing and scope of the offering surpassed Fitch's expectations and hastened
delevering; however, sizable 2014 debt maturities and expected development
starts remain upcoming funding priorities. Absent additional equity offerings,
leverage would increase from 1Q2013 pro forma levels. Additional equity
funding would have positive rating implications all else being equal.
Fitch currently rates PLD, its operating partnership, Prologis, L.P. and its
subsidiary Prologis Tokyo Finance Investment Limited Partnership
(collectively, Prologis or the company) as follows:
--$100 million preferred stock 'BB+'.
--$1.7 billion global senior credit facility 'BBB';
--$5 billion senior unsecured notes 'BBB';
--$738 million senior unsecured convertible notes 'BBB';
--EUR487.5 million senior unsecured term loan 'BBB'.
Prologis Tokyo Finance Investment Limited Partnership
--JPY36.5 billion senior unsecured revolving credit facility 'BBB';
--JPY10 billion senior unsecured term loan 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
As noted by Fitch on Feb. 21, 2013, the upgrade of PLD's IDR was driven in
large part by the material reduction in leverage, principally via the European
joint venture with Norges Bank Investment Management (NBIM) and the initial
public offering of Nippon Prologis REIT, Inc., a Japanese REIT. The recent
equity offering bolsters PLD's liquidity and accelerates its delevering
progress. The 'BBB' rating takes into account 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
development funding including speculative projects and significant 2014 debt
maturities that weaken liquidity.
During 1Q2013, PLD's industrial portfolio continued to recover. Cash
same-store NOI (SSNOI) increased by 1.8% in 1Q2013 and rental rates on the
operating portfolio was positive 2% after 17 quarters of negative rollover.
Operating portfolio occupancy declined sequentially to 93.7% as of March 31,
2013 from 94% as of Dec. 31, 2012. Fitch projects low single digit SSNOI
growth through 2015.
The company's large platform limits the risk of over-exposure to any one
region's fundamentals, with 52.6% of 1Q'2013 NOI derived from Prologis-defined
global markets in the Americas, 21.1% in Europe, 8.7% 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% of annual base rent), CEVA Logistics (1.3%
of annual base rent) and Kuehne & Nagel (1.2% of annual base rent), with no
other tenant exceeding 1% of annual base rent.
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 follow-on equity
offering above consensus net asset value is another indication of PLD's strong
access to capital.
LEVERAGE SOLID FOR 'BBB'
1Q2013 leverage was 6.8x including Fitch's estimate of recurring JV cash
distributions (7.8x excluding JV cash distributions), compared with 8.4x in
4Q2012. Assuming all of the net proceeds were used to repay debt, the common
stock offering accelerates the delevering process to 6.1x pro forma including
Fitch's estimate of recurring JV cash distributions (6.9x excluding JV cash
distributions). Fitch expects that a portion of net proceeds from the offering
will be used to fund development, and absent additional equity offerings,
leverage would trend back towards the mid-6x range.
INCREASING SPECULATIVE DEVELOPMENT
Prologis' development activities entail lease-up risk, as speculative projects
represented approximately 65% of 1Q2013 development starts (including PLD's
share and its partners' share), up from 43% of the development pipeline in
FY2012. The pipeline is increasing and large on an absolute basis but
manageable on a relative basis as cost to complete development represented 3%
of gross assets at March 31, 2013, compared with 3.2% as of Dec. 31, 2012. The
pipeline should remain active in the coming years due to industrial real
estate supply-demand dynamics.
SIZEABLE DEVELOPMENT FUNDING
Fitch's base case assumes $1.65 billion of development starts for 2013, of
which PLD's share is approximately $1.2 billion, followed by approximately $1
billion of annual starts in 2014 and 2015, with assumed development yields in
the 7.5% range. In the event that the company funds this activity principally
with its global senior credit facility and long-term debt financings, leverage
would increase, while continued equity funding could have positive rating
DISPOSITION/CONTRIBUTION EXECUTION RISK LARGELY REMOVED
Fitch base case assumes $8.75 billion of dispositions and contributions in
2013, $5.25 billion of which is PLD's share in 2013 (representing the midpoint
of PLD guidance). This includes the $1.55 billion of asset contributions to
the Norges JV, $1.7 billion of contributions to the J-REIT, and $2 billion in
additional dispositions and contributions.
NEAR-TERM MATURITIES ADDRESSED
Prologis intends to use the net proceeds from the common stock offering for
general corporate purposes. In the short-term, it expects to repay global line
borrowings ($421 million) and the 6.30% senior notes due 2013 ($202.3 million)
and to repurchase all of the 2.625% convertible senior notes due 2038 ($342
ADEQUATE LIQUIDITY DESPITE 2014 MATURITIES
The offering addresses near-term debt maturities, and liquidity coverage
including development is projected to be 1.0x for the period April 1, 2013 to
Dec. 31, 2014 assuming no additional capital raises. This is principally due
to 2014 maturities, which represent 25.9% of total pro rata maturities.
Liquidity sources include unrestricted cash, availability under revolving
credit facilities pro forma for common stock offering, and projected retained
cash flows from operating activities. Liquidity uses include pro rata debt
maturities after extension options at PLD's option, projected recurring
capital expenditures. When including incremental dispositions and
contributions as a liquidity source and acquisitions and development starts as
a liquidity use, liquidity coverage is 1.2x. Assuming 90% of 2013-2014 secured
debt maturities are refinanced, liquidity coverage is 1.7x.
Prologis has strong contingent liquidity with unencumbered assets (1Q'2013
estimated unencumbered NOI divided by a 7.0% capitalization rate) to pro forma
unsecured debt of 2.7x. When applying a stressed 50% haircut to the book value
of land held, pro forma unencumbered asset coverage improves to 2.8x. At a
stressed 8% capitalization rate, pro forma unencumbered asset coverage is
2.3x, and 2.5x when applying a stressed 50% haircut to the book value of land
held. In addition, the covenants in the company's debt agreements do not
restrict financial flexibility, and the company's AFFO payout ratio was 96.2%
in 1Q2013 indicating some liquidity generated from operating cash flow.
PREFERRED REDEMPTIONS IMPROVE COVERAGE
1Q2013 fixed-charge coverage pro forma for the common stock offering and
recent preferred stock redemptions is appropriate for the 'BBB' rating at
2.0x, compared with 1.8x in 1Q2013 and 1.6x in 4Q2012. 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
expected single-digit same-store NOI growth, which is strong for the 'BBB'
PREFERRED STOCK NOTCHING
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 (liquidity
coverage is 1.0x and 1.2x when including incremental dispositions and
contributions as a liquidity source and acquisitions and development starts as
a liquidity use);
--Fitch's expectation of leverage sustaining below 6.5x (pro forma leverage is
6.1x assuming all of the net proceeds are used to repay debt but in the mid-6x
range absent additional equity offerings);
--Fitch's expectation of fixed-charge coverage sustaining above 2.0x (pro
forma coverage is 2.0x).
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'.
Applicable Criteria and Related Research:
--Criteria for Rating U.S. Equity REITs and REOCs (Feb. 26, 2013);
--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).
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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Sean Pattap, +1-212-908-0642
Fitch Ratings, Inc.
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Britton Costa, +1-212-908-0524
Steven Marks, +1-212-908-9161
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