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 2024 notes
have an annual coupon rate of 3.375% and were priced at 98.919% of the
principal amount to yield 3.505% to maturity or 160 basis points (bps)
over the mid-swap 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 the net proceeds of approximately EUR689.3 million 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 global line of credit.
In addition to the 2024 notes, 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';
--$659 million multi-currency senior unsecured term loan 'BBB';
--$6 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 leverage that remains elevated for
the rating though expected to decline principally via improving property
fundamentals. The rating is supported by the stable cash flow from the
company's global industrial real estate portfolio that contributes
towards appropriate fixed-charge coverage, strong asset quality, and
excellent access to capital. Development continues to be a core tenet
for the company and Prologis 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.
High Leverage for 'BBB'; Expected to Decline
Current leverage is high for a 'BBB' rating (8.0x pro rata at 4Q'13),
but Fitch's base case forecasts that pro rata leverage will approach 7x
by year-end 2014 and 6.5x by year-end 2015, which would be strong for
the 'BBB' rating. However, the decline in leverage may be choppy
sequentially as the timing of dispositions and fund contributions may
not match that of acquisitions and development starts.
Fitch defines leverage as net debt to recurring operating EBITDA on a
pro rata basis given PLD's willingness to buy back and/or recapitalize
unconsolidated assets and its agnostic view towards property management
for consolidated and unconsolidated assets. Fitch's methodology differs
from that of PLD's, which also seeks to incorporate the development
business by either including gains on dispositions and contributions or
adjusting EBITDA to reflect future NOI contributions.
In a stress case not anticipated by Fitch in which same store net
operating income (SSNOI) declines by levels experienced in 2009-2010,
leverage would exceed 8x, which would be weak for a 'BBB' rating.
Improving Cash Flow Supports Fixed Charge Coverage
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 fourth quarter of 2013 (4Q'13),
cash SSNOI increased by 3.0% and net effective rents on leases signed in
the quarter increased 5.9% from in-place rents, a leading indicator for
2014 SSNOI growth.
Approximately 14.4% of pro rata base rents expire in 2014 followed by
19.3% in 2015, and the current strength of the industrial real estate
market allows such expirations to be an opportunity for additional
growth. Fitch expects PLD's SSNOI growth will be 3% in 2014 followed by
similar growth in 2015 based largely on positive net absorption.
Operating portfolio occupancy was 95.1% as of Dec. 31, 2013, up from
93.9% as of Sept. 30, 2013 and 94% as of Dec. 31, 2012.
Pro forma for the EUR700 million 3.375% senior notes due 2024, repayment
of borrowings under the unsecured global line of credit and a portion of
borrowings under the multicurrency unsecured term loan, fourth-quarter
2013 pro rata fixed-charge coverage is appropriate for the 'BBB' rating
at 1.7x compared with 1.8x in 3Q'13 and 1.9x in 2Q'13. 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 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 SSNOI growth, which is strong for
the 'BBB' rating.
Global Platform
The company's large platform ($48.2 billion of assets under management
at Dec. 31, 2013) limits the effects of any one region's fundamentals to
the overall cash flows. PLD derived 84.0% of its 4Q'13 NOI from
Prologis-defined global markets (59.8% in the Americas, 18.6% in Europe,
and 5.6% in Asia).
Private Capital Simplification
The company has reduced the total number of co-investment vehicles 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. Recently formed ventures
include Prologis China Logistics Venture 2 with HIP China Logistics
Investments Limited and subsequent to quarter-end, Prologis U.S.
Logistics Venture (USLV) with Norges Bank Investment Management.
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 Dec. 31, 2013 were DHL (1.8% of ABR), CEVA
Logistics (1.3% of ABR), and Kuehne & Nagel (1.2% 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.
Prologis completed a total of $17.5 billion of capital markets activity
in 2013. Notably, 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
company's sponsored JREIT, Nippon Prologis REIT, Inc. (NPR) also
completed a follow-on offering subsequent to its 2013 IPO. The company
established an ATM program during 2013 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.
Risks & Returns of Development
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 lease-up 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 the effects on corporate
liquidity and inherent cyclicality. 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 and are initially funded with short-term debt at the
REIT, thus reducing corporate liquidity.
Partially mitigating the aforementioned risks is the fact that the total
development pipeline is significantly smaller at approximately $2
billion at Dec. 31, 2013 versus $6 billion (including legacy ProLogis
and AMB Property Corporation) at Dec. 31, 2007. 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 2.9% of pro rata gross
assets as of Dec. 31, 2013. However, the pipeline entails moderate
lease-up risk as build-to-suit projects represented approximately 41.8%
of development starts for full-year 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.
Match-Funded Liquidity Strategy
Fitch base case liquidity coverage is strong for the rating at 1.9x for
the period Jan. 1, 2014 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 2024 notes offering, and projected retained cash flows
from operating activities. Liquidity uses include pro rata debt
maturities after extension options at PLD's option and projected
recurring capital expenditures.
Liquidity coverage would be 1.4x when including dispositions and
contributions as liquidity sources and acquisitions and development
starts as liquidity uses. Assuming a 90% refinance rate on upcoming
secured debt maturities, liquidity coverage would be 1.6x. As of Dec.
31, 2013, near-to-medium term debt maturities are staggered; 5.8% of pro
rata debt matures during 2014, followed by 9.7% in 2015.
Prologis has strong contingent liquidity with unencumbered assets (4Q'13
estimated unencumbered NOI divided by a stressed 8% capitalization rate)
to pro forma unsecured debt of 2.2x. 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 2.4x. In
addition, the covenants in the company's debt agreements do not restrict
financial flexibility. However, the company's AFFO payout ratio was
95.4% in 2013, 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.
Stable Outlook
The Stable Outlook reflects Fitch's expectation that leverage will
remain between 7.0x and 8.0x over the next 12 months, offset by
liquidity coverage of above 1.0x and fixed-charge coverage of around
2.0x over the next 12 months.
RATING SENSITIVITIES
The following factors may result in positive momentum in the rating
and/or Outlook:
--Fitch's expectation of pro rata leverage sustaining below 6.5x (pro
rata leverage was 8.0x at 4Q'13);
--Liquidity coverage including development sustaining above 1.25x (Fitch
base case liquidity coverage is 1.9x, but 1.4x when including
dispositions and contributions as liquidity sources and acquisitions and
development starts as liquidity uses);
--Fitch's expectation of pro rata fixed-charge coverage sustaining above
2.0x (pro rata coverage was 1.8x in 4Q'13 pro forma).
The following factors may result in negative momentum in the rating
and/or Outlook:
--Fitch's expectation of leverage sustaining above 7.5x;
--Liquidity coverage including development sustaining below 1.0x;
--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:
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis' (Dec. 23, 2013);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19,
2013);
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820397
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