Fitch Rates Prologis, L.P.'s $500MM 3.35% Notes due 2021 'BBB'; Outlook Stable

Fri Oct 25, 2013 3:28pm EDT

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(The following statement was released by the rating agency) NEW YORK, October 25 (Fitch) Fitch Ratings assigns a credit rating of 'BBB' to the $500 million aggregate principal amount of guaranteed notes issued by Prologis, L.P., the operating partnership of Prologis, Inc. (NYSE: PLD; collectively including rated subsidiaries; Prologis or the company). The 2021 notes have an annual coupon rate of 3.35% and were priced at 99.984% of the principal amount to yield 3.353% to maturity or 145 basis points (bps) over the benchmark rate. The notes are senior unsecured obligations of Prologis, L.P. that are fully and unconditionally guaranteed by Prologis, Inc. In the short term, Prologis intends to use the net proceeds from the sale of the notes to repay borrowings under its global line and to fund the cash purchase of certain of its senior notes that are tendered pursuant to its offers to purchase such notes, which commenced on Oct. 24, 2013. Fitch currently rates Prologis as follows: Prologis, Inc. --Issuer Default Rating (IDR) 'BBB'; --$100 million preferred stock 'BB+'. Prologis, L.P. --IDR 'BBB'; --$2 billion global senior credit facility 'BBB'; --$5.8 billion senior unsecured notes 'BBB'; --$460 million senior unsecured exchangeable notes 'BBB'; --$659 million multi-currency senior unsecured term loan 'BBB'. Prologis Tokyo Finance Investment Limited Partnership --JPY45 billion senior unsecured revolving credit facility 'BBB'; --JPY10 billion senior unsecured term loan 'BBB'. The Rating Outlook is Stable. KEY RATING DRIVERS The 'BBB' rating takes into account the company's global industrial real estate platform including the investment management franchise, a high-quality portfolio, management's focus on strategic priorities, strong access to capital as evidenced by recent activity (the 2021 notes as well as bond offerings in August 2013, unconsolidated investment financings, a $1.4 billion follow-on common stock offering, the recasting of the global line of credit, and the establishment of an at-the-market or 'ATM' equity offering program). Largely tempering the ratings and Outlook is pro rata leverage that is high for the 'BBB' rating though expected to decline principally via EBITDA growth due to recovering fundamentals. The company has adequate liquidity, and endeavors to match-fund acquisitions and development with proceeds from dispositions and fund contributions. Contingent liquidity is supported by strong unencumbered asset coverage of unsecured debt. GLOBAL PLATFORM Prologis had $46.9 billion of assets under management as of Sept. 30, 2013. The company's large platform limits the risk of over-exposure to any one region's fundamentals. PLD derived 83.5% of its 3Q'13 net operating income (NOI) from Prologis-defined global markets (56.8% in the Americas, 20.2% in Europe, and 6.5% in in Asia), and the remaining 16.5% of 3Q'13 NOI was derived from 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, bolstered materially by the joint venture with Norges Bank Investment Management (Prologis European Logistics Partners Sarl or PELP) and initial public offering of Nippon Prologis REIT, Inc., a Japanese REIT (J-REIT), in 2013. HIGH-QUALITY PORTFOLIO Prologis has a high-quality portfolio as evidenced by the focus on properties with proximity to ports or intermodal yards, cross-docking capabilities and structural items such as tall clearance heights. The portfolio has limited tenant concentration which is a credit strength, with only the top three tenants comprising more than 1% of annual base rent (ABR). PLD's top tenants at Sept. 30, 2013 were DHL (1.9% of ABR), CEVA Logistics (1.3% of ABR), and Kuehne & Nagel (1.3% of ABR). STRONG ACCESS TO CAPITAL The company's access to capital is strong as evidenced by the diversified capital structure which includes secured and unsecured debt from public and private sources, as well as preferred, common and private equity capital. During the third quarter, Prologis raised $671.6 million of third-party equity for its open-ended funds, including: $398.4 million for Prologis European Properties Fund II (PEPF II); $180 million for Prologis Targeted U.S. Logistics Fund (USLF); and $93.2 million for PELP. Additionally, PEPF II issued a 2.75% coupon EUR300 million unsecured bond in the Euro bond market subsequent to the quarter's end. In addition to recent U.S. dollar denominated bond offerings, Prologis upsized its global credit facility in July 2013 to $2 billion from $1.65 billion and improved pricing to LIBOR plus 130 bps, a reduction of 40 bps from the prior global credit facility. The company also recast its Japan revolver, upsizing this facility to JPY45 billion from JPY36.5 billion. In April 2013, Prologis completed a public offering of 35.7 million shares of common stock at a price of $41.60 per share, generating approximately $1.4 billion in net proceeds, which were used predominantly for new and current investments. The J-REIT also completed a follow-on offering subsequent to its IPO. PLD did not directly benefit from the newly raised proceeds; however, the offering will allow the J-REIT to fund additional asset purchases from PLD, which should benefit PLD's corporate liquidity. The company also recently established an ATM program through which it may issue up to $750 million of common stock. HIGH LEVERAGE FOR 'BBB' EXPECTED TO DECLINE Fitch views pro rata leverage as more meaningful than consolidated leverage given PLD's willingness to buy back and/or recapitalize unconsolidated assets (e.g. interests in Prologis European Properties in 2011, as well as interests in Prologis Institutional Alliance Fund II and Prologis North American Industrial Fund III in 2013) and its agnostic view towards property management for consolidated and unconsolidated assets. Third-quarter 2013 pro rata leverage was 7.9x compared with 7.7x in 2Q'13 and 8.1x in 1Q'13. The increase in 3Q stemmed from debt-financed development activity. Fitch's base case assumes between 1.5% and 2.5% same-store NOI growth over the next several years along with incremental NOI from development starts and acquisitions net of dispositions and contributions. Under this base case, pro rata leverage would remain in the mid-to-low 7x range. This is high for a 'BBB' rating generally but appropriate given PLD's portfolio size and access to capital. Leverage reduction may be choppy sequentially as the timing of dispositions and fund contributions may not match acquisitions and development starts in a linear manner. In a stress case not anticipated by Fitch in which same-store NOI declines by levels experienced in 2009-2010, leverage would exceed 8x, which would be weak for a 'BBB' rating. On a consolidated basis, 3Q'13 leverage was 7.9x including recurring cash distributions from unconsolidated entities (9.3x excluding recurring cash distributions from unconsolidated entities) compared with 8.2x (9.3x excluding recurring cash distributions from unconsolidated entities) in FY2012. IMPROVING FUNDAMENTALS During 3Q'13, cash same-store NOI (SSNOI) increased by 1.8% and GAAP and cash rental rates on leases signed in the quarter increased 6.1% and 0.4%, respectively, from in-place rents. GAAP rental rates on rollover were positive for the past three quarters following 17 quarters of declines. Operating portfolio occupancy was 93.9% as of Sept. 30, 2013, up from 93.7% as of June 30, 2013 and slightly down from 94.0% as of Dec. 31, 2012. Third-quarter 2013 pro rata fixed-charge coverage pro forma for the guaranteed notes issuances and tender offers is solid for the 'BBB' rating at 2.4x compared with 2.0x in 2Q'13 and 1.8x in 1Q'13. Fitch defines pro rata fixed-charge coverage as pro rata recurring operating EBITDA (excluding gains and losses on asset sales) less pro rata 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 expected low single-digit SSNOI growth, which is strong for the 'BBB' rating. On a consolidated basis, 3Q'13 pro forma fixed-charge coverage was 1.9x including recurring cash distributions from unconsolidated entities (1.5x excluding recurring cash distributions from unconsolidated entities) compared with 1.8x (1.5x excluding recurring cash distributions from unconsolidated entities) in 2012. INCREASING BUILD-TO-SUIT DEVELOPMENT Prologis' development activities entail lease-up risk; however, build-to-suit projects represented approximately 64.7% of PLD's share of 3Q'13 development starts (48.3% year-to-date through Sept. 30, 2013) up from 57% of the development pipeline in FY2012. The pipeline's size is increasing and large on an absolute basis but manageable on a relative basis as cost to complete development represented 3.4% of gross assets as of Sept. 30, 2013. The pipeline should remain active in the coming years due to industrial real estate supply-demand dynamics. Demand for industrial REIT space is skewed toward larger and newer facilities from tenants such as e-commerce companies, traditional retailers, and third-party logistics providers. Conversely, new supply should remain in check as construction underway represents 0.4% of total stock compared with 1.5% during the previous upcycle, according to Property and Portfolio Research, Inc. SIZEABLE DEVELOPMENT FUNDING Fitch's base case assumes $1.85 billion of development starts for full-year 2013, of which PLD's share would be approximately 75%, followed by approximately $1 billion of annual starts in both 2014 and 2015, with assumed development yields in the 7.5% range. In the unlikely event that the company funds this activity principally with its global senior credit facility and long-term debt financings, leverage would increase. Continued equity funding could have positive rating implications. ADEQUATE LIQUIDITY Liquidity coverage is forecasted to be 1.3x for the period Oct. 1, 2013 to Dec. 31, 2015. Assuming a 90% refinance rate on upcoming secured debt maturities, liquidity coverage would improve to 1.7x. Fitch defines liquidity coverage as liquidity sources divided by uses. Liquidity sources include unrestricted cash, availability under revolving credit facilities pro forma for the 2021 notes issuance and tender offer, projected retained cash flows from operating activities, and proceeds from dispositions and contributions. Liquidity uses include pro rata debt maturities after extension options at PLD's option, projected recurring capital expenditures, and projected acquisitions and development starts. Prologis has strong contingent liquidity with unencumbered assets (3Q'13 estimated unencumbered NOI divided by a stressed 8% capitalization rate) to pro forma unsecured debt of 2.4x. When applying a stressed 50% haircut to the book value of land held, pro forma unencumbered asset coverage improves to 2.5x. In addition, the covenants in the company's debt agreements do not restrict financial flexibility. However, the company's AFFO payout ratio was 97.4% in 3Q'13, indicating limited liquidity generated from operating cash flow. 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. RATING SENSITIVITIES The following factors may result in positive momentum in the rating and/or Outlook: --Liquidity coverage including development sustaining above 1.25x (liquidity coverage is 1.3x for the period Oct. 1, 2013 to Dec. 31, 2015 but 1.7x assuming a 90% refinance rate on upcoming secured debt maturities); --Fitch's expectation of leverage sustaining below 6.5x (pro rata leverage was 7.9x at 3Q'13; consolidated leverage including recurring cash distributions from unconsolidated entities was 7.9x); --Fitch's expectation of fixed-charge coverage sustaining above 2.0x (pro rata coverage was 2.4x in 3Q'13 pro forma for the 2021 notes issuance and tender offer; consolidated coverage including recurring cash distributions from unconsolidated entities was 1.9x). The following factors may result in negative momentum in the rating and/or Outlook: --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. Contact: Primary Analyst Sean Pattap Senior Director +1-212-908-0642 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Britton Costa Associate Director +1-212-908-0524 Committee Chairperson Steven Marks Managing Director +1-212-908-9161 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology,' Aug. 5, 2013; --'Parent and Subsidiary Rating Linkage,' Aug. 5, 2013; --'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 Rating and Notching Criteria for Equity REITs,' Nov. 12, 2012. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Parent and Subsidiary Rating Linkage here Criteria for Rating U.S. Equity REITs and REOCs here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Recovery Rating and Notching Criteria for Equity REITs – Effective May 12, 2011 to May 3, 2012 here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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