August 13, 2013 / 8:03 PM / 4 years ago

Fitch Rates Prologis, L.P.'s $1.25B of Guaranteed Notes due 2019 and 2023 'BBB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, August 13 (Fitch) Fitch Ratings assigns a credit rating of 'BBB' to the $1.25 billion aggregate principal amount of guaranteed notes issued by Prologis, L.P., the operating partnership of Prologis, Inc. (NYSE: PLD; collectively Prologis or the company including rated subsidiaries). The $400 million 2019 notes have an annual coupon rate of 2.75% and were priced at 99.965% of the principal amount to yield 2.757% to maturity or 140 basis points (bps) over the benchmark rate. The $850 million 2023 notes have an annual coupon rate of 4.25% and were priced at 99.742% of the principal amount to yield 4.282% to maturity or 170 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 Aug. 8, 2013. Prologis may also use the net proceeds to repay or repurchase other indebtedness and for general corporate purposes. 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'; --$5.7 billion senior unsecured notes 'BBB'; --$397 million senior unsecured exchangeable notes 'BBB'; --$637.4 million multi-currency 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 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 execution of the 10-quarter plan, strong access to capital as evidenced by recent activity (the 2019 and 2023 notes, $1.4 billion follow-on common stock offering, global line of credit recast, and establishing 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 improved from recent quarters and expected to decline principally via EBITDA growth due to recovering fundamentals. The company has adequate liquidity, but liquidity coverage is adversely affected by development funding which predominantly consists of speculative projects. Partially mitigating this risk is contingent liquidity, as measured by unencumbered asset coverage of unsecured debt, being strong for the 'BBB' rating. GLOBAL PLATFORM Prologis had $46.2 billion of assets under management as of June 30, 2013. The company's large platform limits the risk of over-exposure to any one region's fundamentals. PLD derives 82.5% of its 2Q'13 net operating income (NOI) from Prologis-defined global markets (57.2% in the Americas, 19.0% in Europe, and 6.3% in in Asia), and the remaining 17.5% of 2Q'13 NOI is 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 (Norges) 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 close proximity to ports and intermodal yards, cross-docking capabilities, as well as modern construction and building features such as tall clearance heights and flexibility to house large/small tenants and active/less active tenants. The portfolio has limited tenant concentration, with only the top four tenants - DHL (1.8% of annual base rent ), CEVA Logistics (1.3% of ABR), Kuehne & Nagel (1.1% of ABR), and, Inc. (1.1% of ABR) comprising more than 1% of ABR, with no other tenant exceeding 1% of ABR. EXECUTION OF 10-QUARTER PLAN Management successfully executed its 10-quarter plan, which entailed aligning the portfolio with PLD's investment strategy (via dispositions and contributions such as the Norges JV and the J-REIT, development and acquisitions), improving the utilization of assets via land sales and lease-up of developments and existing assets, streamlining the private capital business and strengthening financial metrics. The company's current priorities include capitalizing on the rental recovery, realizing the potential of land and using scale and customer relationships to grow earnings. STRONG ACCESS TO CAPITAL The company's access to capital is strong, evidenced by a diversified capital structure including multi-currency credit facilities and term loans, senior notes, as well as common and preferred equity. In July 2013, Prologis upsized its global credit facility from $1.65 billion to $2 billion and improved pricing to LIBOR plus 130 bps, a reduction of 40 bps from the prior global credit facility, and established an ATM program through which it may issue up to $750 million of common stock. In April 2013, Prologis completed a public offering of 35.65 million shares of common stock at a price of $41.60 per share, generating approximately $1.4 billion in net proceeds, which was 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 may benefit PLD's corporate liquidity. DECREASING LEVERAGE 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. Second-quarter 2013 pro rata leverage was 7.7x compared with 8.1x in 1Q'13 and 8.0x in 4Q'12. Under Fitch's base case that 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, pro rata leverage would remain in the mid-to-low 7x range, which is high for a 'BBB' rating generally but appropriate given PLD's portfolio size and access to capital. In a stress case not anticipated by Fitch in which same-store NOI declines by levels experienced in 2009-2010, leverage would approach 8x, which would be weak for a 'BBB' rating. On a consolidated basis, 2Q'13 leverage was 7.5x including recurring cash distributions from unconsolidated entities (8.9x 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 2Q'13, cash same-store NOI (SSNOI) decreased by 0.4%; however, rental rates on rollovers increased by 4.0% after 2.0% growth in 1Q'13 following 17 quarters of declines. Operating portfolio occupancy was 93.7% as of June 30, 2013, flat from March 31, 2013 and down from 94% as of Dec. 31, 2012. Rising tenant demand is outpacing new supply, which bodes well for fundamentals going forward. Second-quarter 2013 pro rata fixed-charge coverage pro forma for the guaranteed notes issuances and tender offers is solid for the 'BBB' rating at 2.1x (2.0x as reported in 2Q'13) compared with 1.8x in 1Q'13 and 1.7x in 4Q'12. Fitch defines pro rata fixed-charge coverage as pro rata recurring operating EBITDA 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 low expected single-digit SSNOI growth, which is strong for the 'BBB' rating. On a consolidated basis, 2Q'13 pro forma coverage was 1.6x including recurring cash distributions from unconsolidated entities (1.3x excluding recurring cash distributions from unconsolidated entities) compared with 1.8x (1.5x excluding recurring cash distributions from unconsolidated entities) in 2012. INCREASING SPECULATIVE DEVELOPMENT Prologis' development activities entail lease-up risk, as speculative projects represented approximately 71% of 2Q'13 development starts (including PLD's share and its partners' share), up from 43% 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 2.6% of gross assets at June 30, 2013. 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 $1.9 billion of development starts for full-year 2013, of which PLD's share is approximately $1.2 billion, followed by approximately $1 billion of annual starts in both 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. ADEQUATE LIQUIDITY Liquidity coverage is 1.0x for July 1, 2013 to Dec. 31, 2015. Assuming a 90% refinance rate on upcoming secured debt maturities, liquidity coverage improves to 1.4x. Fitch defines liquidity coverage as liquidity sources divided by uses. Liquidity sources include unrestricted cash, availability under revolving credit facilities pro forma for the increased commitment size, 2019 and 2023 notes issuances and tender offers, 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. This takes into account additional activities such as the purchase of assets from Prologis North American Industrial Fund III in August 2013. When excluding incremental dispositions and contributions as a liquidity source and acquisitions and development starts as a liquidity use, liquidity coverage is 0.8x. Prologis has strong contingent liquidity with unencumbered assets (2Q'13 estimated unencumbered NOI divided by a stressed 8.0% capitalization rate) to pro forma unsecured debt of 2.5x. When applying a stressed 50% haircut to the book value of land held, 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 98.5% in 2Q'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 '', 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 0.9x for July 1, 2013 to Dec. 31, 2015 but 1.2x assuming a 90% refinance rate on upcoming secured debt maturities); --Fitch's expectation of leverage sustaining below 6.5x (pro rata leverage is 7.7x in 2Q'13; consolidated leverage including recurring cash distributions from unconsolidated entities is 7.5x); --Fitch's expectation of fixed-charge coverage sustaining above 2.0x (pro rata coverage is 2.1x in 2Q'13 pro forma for the 2019 and 2023 notes issuance and tender offers; consolidated coverage including recurring cash distributions from unconsolidated entities is 1.6x). 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: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available at ''. Applicable Criteria and Related Research: --Corporate Rating Methodology (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 Ratings and Notching Criteria for Equity REITs (Nov. 12, 2012). Applicable Criteria and Related Research: Recovery Ratings and Notching Criteria for Equity REITs here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Criteria for Rating U.S. Equity REITs and REOCs here Corporate Rating Sheet on Telefonica 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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