Nov 27 (The following statement was released by the rating agency)
Fitch Ratings assigns a credit rating of 'BBB' to
the EUR700 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 2022
notes have an annual coupon rate of 3% and were priced at 99.483% of the
principal amount to yield 3.072% to maturity or 167.4 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. The company intends to use a
portion of the net proceeds of approximately EUR693.6 million to repurchase all
of the outstanding principal amount of its 5.875% notes due Oct. 23, 2014. The
total principal amount of the 5.875% notes of Prologis International Funding
S.A., a majority-owned subsidiary of Prologis, is approximately EUR494 million.
An indirect subsidiary of Prologis holds approximately EUR86 million of these
notes, and approximately EUR407 million is being reduced with net proceeds of
the 2022 notes offering. The company will use the remaining net proceeds for
general corporate purposes, including to repay or repurchase other indebtedness.
In the short term, the company intends to use the net proceeds to repay
borrowings under its multi-currency senior term loan and/or its global line of
In addition to the 2022 notes, Fitch currently rates Prologis as follows:
--Issuer Default Rating (IDR) 'BBB';
--$100 million preferred stock 'BB+'.
--$2 billion global senior credit facility 'BBB';
--$659 million multi-currency senior unsecured term loan 'BBB';
--$5 billion senior unsecured notes 'BBB';
--$460 million senior unsecured exchangeable notes '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
Prologis, Inc.'s 'BBB' IDR reflects the stable cash flow from the company's
global industrial property portfolio that contributes towards fixed-charge
coverage appropriate for the rating, strong asset quality, and excellent access
to capital. The rating is tempered by leverage that remains elevated for the
rating though expected to decline principally via improving fundamentals. The
company endeavors to match-fund acquisitions and development expenditures with
proceeds from dispositions and fund contributions, a strategy that materially
impacts corporate liquidity. Contingent liquidity is strong as measured by
unencumbered asset coverage of unsecured debt.
Improving Cash Flow
The vast majority of PLD's earnings are derived from property-level net
operating income (NOI), which is complemented by the company's investment
management income. During the third quarter of 2013 (3Q'13), cash same-store NOI
(SSNOI) increased by 1.8% and cash rental rates on leases signed in the quarter
increased 0.4% from in-place rents, a leading indicator for 2014 SSNOI growth.
Lease expirations are elevated in the near term, with 2.5% of pro rata base
rents expiring in 4Q'13 followed by 16% in 2014 and 18.1% in 2015; however, the
current strength of the industrial real estate market mitigates most of the risk
and allows such expirations to be an opportunity for additional growth. Fitch
expects PLD's SSNOI growth will be 1.5% in 4Q'13 followed by 2.5% in 2014 and
2015 based largely on positive net absorption. Operating portfolio occupancy was
93.9% as of Sept. 30, 2013, up from 93.7% as of June 30, 2013 and down slightly
from 94% as of Dec. 31, 2012.
Pro forma for the recent issuance of $500 million 3.35% senior notes due 2021
and tender offers (including an any and all debt tender offer and maximum tender
offer) as well as the EUR700 million 3% senior notes due 2022 and repurchase of
5.875% notes due 2014, third-quarter 2013 pro rata fixed-charge coverage is
appropriate for the 'BBB' rating at 2.0x compared with 1.9x in 2Q'13 and 1.7x 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
pro rata 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 2.0x 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.
Prologis had $46.9 billion of assets under management as of Sept. 30, 2013. The
company's large platform limits the effects of any one region's fundamentals to
the overall cash flows. PLD derived 83.5% of its 3Q'13 NOI from Prologis-defined
global markets (56.8% in the Americas, 20.2% in Europe, and 6.5% in Asia), and
the remaining 16.5% of 3Q'13 NOI was derived from regional and other markets.
Private Capital Simplification
The company has reduced the total number of funds that it manages via
consolidation and the purchase of assets upon closed end fund expirations. The
majority of funds are infinite life, which eliminates take-out risk at the
fund's maturity. In addition, the fund platform provides an additional layer of
fee income and recurring cash distributions to cover PLD's fixed charges.
Notable 2013 transactions to simplify the platform have included a venture with
Norges Bank Investment Management (Prologis European Logistics Partners Sarl or
PELP) and the initial public offering and follow-on offering of Nippon Prologis
REIT, Inc. (NPR), a Japanese REIT (J-REIT). In addition, Prologis recently
announced the formation of Prologis China Logistics Venture 2 with HIP China
Logistics Investments Limited; the venture's investment strategy is to build,
acquire and manage logistics properties in China like Prologis China Logistics
Strong Asset Quality
PLD has a high-quality portfolio as evidenced by a 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).
Excellent Capital Access
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 stock, 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 Eurobond market subsequent to the
In April 2013, Prologis completed a public offering of common stock, 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 would in turn support PLD's corporate liquidity. The
company also recently established an ATM program through which it may issue up
to $750 million of common stock, though it has yet to utilize this program.
Proactive Liability Management
In addition to recent U.S. dollar and Euro denominated bond offerings, tender
offers, and debt repurchases, Prologis upsized its global credit facility in
July 2013 to $2 billion from $1.65 billion and improved all-in 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.
Development Track Record
Development is a core tenet of PLD's business model, and through multiple
property cycles, Prologis has developed over a thousand properties at
mid-to-high teen percentage margins. Development improves the quality of the
portfolio, creates value via the entitlement, construction and leaseup of new
properties and enables PLD to realize cash gains on the contribution of the
stabilized developments to managed funds.
Credit concerns related to development include inherent cyclicality, potential
for impairments, and effects on corporate liquidity. As evidenced by the past
downturn, when leasing is insufficient to meet occupancy stabilization levels
required for contribution, partially stabilized developments remain on PLD's
balance sheet, reducing additional development expenditures until contributions
occur. PLD's ability to cease development expenditures materially drives
Partially mitigating the aforementioned risks is the fact that the total
development pipeline of approximately $2 billion is well below the peak of over
$6 billion (including legacy Prologis and AMB Property Corporation). The
pipeline's size is large on an absolute basis but manageable on a relative basis
as PLD's share of cost to complete development represented 2.5% or pro rata
gross assets as of Sept. 30, 2013. However, the pipeline entails moderate
lease-up risk. Build-to-suit projects represented approximately 48.3% of
development starts year-to-date through 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. However, PLD's ability to continue development and
improve credit metrics is partially reliant on factors outside of management's
control including accommodative investment sales and equity markets.
Sizeable Development Funding
Fitch's base case assumes $650 million of development starts for 4Q'13, of which
PLD's share would be approximately 75%, followed by approximately $1.7 billion
of annual starts in both 2014 and 2015, with assumed development yields in the
7.5% range. Fitch also assumes $2.65 billion of 4Q dispositions and
contributions (primarily contributions in Europe and Japan and dispositions in
the U.S. and Japan), of which PLD's share would be approximately 80%, followed
by approximately $1.75 billion of dispositions and contributions in both 2014
and 2015 with assumed yields in the low 7% range. In the unlikely event that the
company funds development principally with its global senior credit facility and
long-term debt financings, leverage would increase. Continued funding with
predominantly equity proceeds could have positive rating implications.
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 acquisition and
development activity. Fitch's base case assumes between 1.5% and 2.5% SSNOI
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 approach 7x by year-end 2014 and
6.5x by year-end 2015, which would be strong for the 'BBB' rating. Current
leverage is high for a 'BBB' rating generally but appropriate given PLD's
portfolio size and access to capital. Leverage 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 SSNOI 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 fiscal year (FY)
Match-Funded Liquidity Strategy
Fitch liquidity coverage is strong for the rating at 1.6x for the period Oct. 1,
2013 to Dec. 31, 2015. 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 and 2022 notes issuances,
tender offer and debt repurchases, projected retained cash flows from operating
activities, and proceeds from dispositions and contributions that have not yet
closed but are expected to close in 4Q'13. Liquidity uses include pro rata debt
maturities after extension options at PLD's option, projected recurring capital
expenditures, and expected 4Q'13 acquisitions and development starts. Liquidity
coverage would be weaker excluding 4Q'13 dispositions and contributions as
liquidity sources and 4Q'13 acquisitions and development starts as liquidity
uses, or if 2014-2015 acquisitions and development starts outpace dispositions
and contributions. Assuming a 90% refinance rate on upcoming secured debt
maturities, liquidity coverage would improve to 2.4x. As of Sept. 30, 2013, pro
forma near-to-medium term debt maturities are staggered; 0.9% of pro rata debt
matures during 4Q'13, followed by 6.6% in 2014 and 9.3% in 2015.
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 and 25% haircut to construction in progress, pro forma
unencumbered asset coverage improves to 2.6x. 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.
The Stable Outlook reflects Fitch's expectation that liquidity coverage will
remain around 1.0x, leverage will remain between 7.0x and 8.0x over the next 12
months and fixed-charge coverage will remain around 2.0x over the next 12
The following factors may result in positive momentum in the rating and/or
--Liquidity coverage including development sustaining above 1.25x (Fitch
liquidity coverage is 1.6x when including dispositions and contributions as
liquidity sources and acquisitions and development starts as liquidity uses);
--Fitch's expectation of pro rata leverage sustaining below 6.5x (pro rata
leverage was 7.9x at 3Q'13);
--Fitch's expectation of pro rata fixed-charge coverage sustaining above 2.0x
(pro rata coverage was 2.0x in 3Q'13 pro forma).
The following factors may result in negative momentum in the rating and/or
--Liquidity coverage including development sustaining below 1.0x;
--Fitch's expectation of leverage sustaining above 7.5x;
--Fitch's expectation of fixed charge coverage ratio sustaining below 1.5x.