-- We are revising our outlook on Prologis Inc. and Prologis L.P.
to positive from stable.
-- We expect Prologis' plans to monetize roughly $2.1 billion of its
assets in Japan will create meaningful net proceeds that Prologis will use for
deleveraging its balance sheet.
-- We expect this transaction to reduce the company's leverage, improve
its currently high debt-to-EBITDA metrics, and improve liquidity.
-- Further, U.S. industrial real estate fundamentals are improving,
supporting our expectation for Prologis' portfolio to produce positive
same-store NOI in the low single-digit area next year.
-- Our positive outlook reflects our belief that the company's financial
profile will improve and trend toward our view of an "intermediate" financial
On Dec. 17, 2012, Standard & Poor's Ratings Services revised its outlook on
Prologis Inc. and Prologis L.P. (together, Prologis), to positive from stable.
At the same time, we affirmed our 'BBB-' corporate credit rating on Prologis
and our 'BB' issue-level rating on the company's preferred stock.
We believe that Prologis' recently announced plans to monetize $2.1 billion of
its assets in Japan will generate meaningful net cash proceeds resulting in
reduced leverage and improved debt-to-EBITDA, debt coverage metrics and
liquidity, and lower foreign exchange exposure. As a result, our view of the
company's financial risk profile is moving toward "intermediate", an
improvement from our current "significant" assessment. Further, we believe
that industrial fundamentals will continue to improve gradually during 2013
and that Prologis will continue to monetize additional assets in the coming
year to reach its target look-through leverage level of 30% and debt-to-EBITDA
Standard & Poor's Ratings Services' ratings on Prologis Inc. reflect a
"satisfactory" business risk profile and "significant" financial risk profile.
The business risk profile is marked by strong geographic and tenant diversity.
We believe that the integration of Prologis and the former AMB Property Corp.
platform is proceeding smoothly, and operating expense synergies are on track
to exceed expectations set following the merger of the two companies in 2011.
Leasing activity has been robust despite choppy economic conditions. While
Prologis' mark-to-market rent growth remained modestly negative through the
third quarter of 2012, we expect rents upon rollover to turn positive by year
end and remain positive during 2013. The company's financial risk profile, in
our view, is currently characterized by weak EBITDA-based credit metrics and a
short average debt tenor (less than four years), but book leverage is moderate
and liquidity is adequate to meet the company's capital needs. Prologis also
has good access to capital and there is strong investor demand for its
San Francisco-based Prologis owns, invests in, and manages one of the largest
industrial real estate platforms. The platform has a strong global footprint
with operations in the U.S., Europe, and Japan, and Prologis is developing
platforms in Brazil and China. As of Sept. 30, 2012, Prologis owned or had
investments in (on a consolidated basis or through unconsolidated joint
ventures) properties and development projects expected to total approximately
565 million sq. ft. in 21 countries leased to more than 4,500 customers. The
company's total operating portfolio (including consolidated and unconsolidated
investments) had a gross book value of $41.1 billion, $17.9 billion of which
was held in unconsolidated off-balance-sheet fund and coinvestment ventures.
Prologis' ownership positions in these ventures ranges from 15.0% to 50%. The
portfolio exhibits strong geographic and tenant diversity and is benefiting
from the June 2011 merger between AMB Property Corp. and Prologis. As a
result, the company's largest tenant accounts for just 2.2% of base rent and
the top 25 tenants account for a modest 18.1%.
We continue to expect a gradual recovery for the industrial real estate sector
despite the generally tepid macroeconomy, as absorption of space remains
positive due to modestly improved demand and very low new supply. Of Prologis'
global and regional market holdings, its U.S. industrial markets (roughly 56%
of Prologis' global and regional market sq. ft.) are in recovery mode. The
company's European portfolio (23%) is largely concentrated in healthier
northern European industrial markets, which are generally stable, although we
acknowledge there is the potential for weakness within its Spanish and Italian
holdings (together, less than 4% by sq. ft.). As a result, we believe that
Prologis' average portfolio occupancy will continue to improve through 2013
due to our expectation for growth in global trade, high levels of tenant
retention, and strengthening demand in smaller space (less than 100,000 sq.
While we believe rent growth for Prologis' new and renewed leases will be
negative for the full year, the rate of decline has been decelerating. Rent
rolldown for the same-store pool dipped 1.8% in the third quarter, compared
with a 3.9% decrease in the second quarter. Lease rollover (at the company's
pro rata share) for the remaining quarter of 2012 is fairly low at 1.8% of
base rents across the consolidated and unconsolidated portfolios; lease
expirations next year total 15.7% of rents. We expect Prologis' portfolio to
realize modest positive rent growth upon rollover during 2013.
The company intends to continue pursuing significant asset monetization as it
disposes of noncore assets and contributes assets to new funds to reduce
balance sheet debt and strengthen key credit ratios. The largest and most
meaningful include the contribution of its Japanese assets into a new J-REIT
and the recapitalization of Prologis European Properties (100% owned).
Although the timing remains uncertain, we believe that these transactions are
likely to occur by year-end 2013 and that Prologis will use proceeds to repay
debt and to fund acquisition and development activities.
Our debt-plus-preferred-stock to undepreciated real estate was moderate at
45% as of Sept. 30, 2012. Our debt-to-annualized EBITDA remains high for the
rating at 10.1x, but we expect it will decline over the next several quarters
due to a combination of deleveraging and income growth. Coverage measures are
improving: our debt service coverage rose to 2.1x in the third quarter and FCC
was roughly 2.0x. Total coverage of all obligations (including common
dividends) but not including capital expenditures (cap-ex) was 1.1x.
The company's active global development pipeline totaled $1.53 billion in
expected investment as of Sept. 30, 2012 (Prologis' share was $1.36 billion).
If we include non-income-producing land held for development in the
development portfolio, this figure rises to roughly 12% of total assets. This
level of activity is within the company's targeted 10%-15% range, but in our
view, it increases Prologis' business risk even though a large proportion of
current development is build-to-suit. As of Sept. 30, 2012, development
properties were 47% leased, although we note that the company is targeting
speculative development in markets that have more favorable dynamics.
Additionally, a larger proportion of new speculative starts are being pursued
within Prologis' sponsored investment funds: the unconsolidated development
portfolio is 22% leased, compared with 53% leasing in Prologis' consolidated
developments. We expect the company will continue to grow its development
pipeline as conditions improve and as a way to monetize its
non-income-producing land holdings.
Prologis' liquidity is adequate, in our view, to meet its capital needs
through year-end 2013. Relevant aspects of our assessment of the company's
liquidity profile include the following:
-- We expect the company's liquidity sources through year-end 2013 to
exceed its uses by more than 1.2x.
-- The company has good relationships with its banks in our assessment,
and we believe it has a good standing in the credit markets.
Sources of capital as of Sept. 30, 2012, included $158 million of cash and
$802 million of availability under Prologis' credit facilities. We also
estimate that the company will generate roughly $1.0 billion in funds from
operations (FFO) for common shareholders over the next five quarters.
Estimated uses of capital include $376 million of senior notes maturing for
the five quarters ended Dec. 31, 2013, $483 million of convertible notes, and
$68 million of unsecured consolidated entities' debt. We assume that Prologis
refinances maturing mortgages, including those within its consolidated
entities. Estimated uses of capital also include roughly $250 million of
cap-ex (including leasing costs) and roughly $668 million of common dividends.
We assume that Prologis will fund development (including new starts) in a
leverage neutral manner, with the company deriving its equity funding largely
from asset sales proceeds. Prologis, in our view, has the flexibility and
intends to continue to monetize assets. Given current strong investor demand,
we think it is likely that the company can continue to execute this strategy.
We note that Prologis had 41% availability under two credit facilities at
Sept. 30, 2012, which include a $1.71 billion global line of credit (subject
to currency fluctuations and expandable to $2.71 billion) due June 2015 (with
a one-year extension option) and a 36.5 billion yen-denominated facility
(roughly $470 million) that is expandable to 56.5 billion yen ($728 million)
and due in March 2014 (with a one-year extension option). At quarter-end, the
company was in compliance with its bank and bond covenants. Additionally,
Prologis has a sizeable pool of unencumbered assets that could be mortgaged
for debt refinancing purposes, and the company has demonstrated access to the
public debt and equity markets.
The positive outlook reflects the likelihood that we would consider raising
our rating if Prologis successfully executes its pending transaction in Japan.
We believe that the Japan transaction will generate meaningful net cash
proceeds resulting in reduced leverage; improved debt-to-EBITDA, debt coverage
metrics and liquidity; and lower foreign exchange exposure. As a result, our
view of the company's financial risk profile is moving toward "intermediate"
from our current "significant" assessment. Further, we believe that industrial
fundamentals will continue to improve gradually during 2013 and that Prologis
will continue to monetize additional assets in the coming year to reach its
target look-through leverage level of 30% (or mid- to low-30% area under S&P's
calculation) and debt-to-EBITDA of 6x by year-end 2013. However, if asset
monetizations and related improvements to the company's financial profile are
slower to occur than we believe, we would consider revising the outlook back
Related Criteria And Research
-- Methodology: Management and Governance Credit Factors for Corporate
Entities and Insurers, Nov. 13, 2012
-- Industry Report Card: Strong Access And Gradually Improving
Fundamentals Continue to Support North American REITs, Oct. 19, 2012
-- Issuer Ranking: North American REITs and Real Estate Operating
Companies, Strongest To Weakest, Oct. 10, 2012
-- Key Credit Factors: Global Criteria for Rating Real Estate Companies,
June 21, 2011
-- Methodology and Assumptions: Liquidity Descriptors for Global
Corporate Issuers, Sept. 28, 2011
Ratings Affirmed; Outlook Action
PLD International Finance Inc.
Corporate Credit Rating BBB-/Positive/-- BBB-/Stable/--
Preferred Stock BB
Senior Unsecured BBB-
Preferred Stock BB
Senior Unsecured BBB-