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Fitch: Prologis Equity Offering Hastens Delevering; 2014 Maturities, Development Offset Implications
April 26, 2013 / 6:21 PM / 5 years ago

Fitch: Prologis Equity Offering Hastens Delevering; 2014 Maturities, Development Offset Implications

(The following statement was released by the rating agency) NEW YORK, April 26 (Fitch) 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: Prologis, Inc. --IDR 'BBB'; --$100 million preferred stock 'BB+'. Prologis, L.P. --IDR 'BBB'; --$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. IMPROVING FUNDAMENTALS 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. GLOBAL PLATFORM 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 implications. 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 million). 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' rating. 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 on the rating and/or Outlook: --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 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: --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 Analysis here Recovery Ratings and Notching Criteria for Equity REITs here Corporate Rating Methodology here Parent and Subsidiary Rating Linkage here Criteria for Rating U.S. Equity REITs and REOCs here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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