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 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 [ABR]), CEVA Logistics (1.3% of
ABR), Kuehne & Nagel (1.1% of ABR), and Amazon.com, 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 '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 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.
Additional information is available at 'www.fitchratings.com'.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Corporate Rating Sheet on Telefonica
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=59285
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