Fitch Ratings assigns a credit rating of 'BBB' to the EUR600 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 2020 notes
have an annual coupon rate of 1.375% and were priced at 99.834% of the
principal amount to yield 1.404% to maturity or 85 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 EUR596.9 million for
general corporate purposes, including the acquisition and development of
European properties and additional investments in European co-investment
ventures. In the short term, Prologis intends to use the net proceeds to
repay borrowings under its global line of credit and/or multi-currency
senior term loan.
In addition to the 2020 notes, Fitch currently rates Prologis as follows:
Prologis, Inc.
--Issuer Default Rating (IDR) 'BBB';
--$78.2 million preferred stock 'BB+'.
Prologis, L.P.
--IDR 'BBB';
--$2.5 billion global senior credit facility 'BBB';
--$5.6 billion senior unsecured notes 'BBB';
--$460 million senior unsecured exchangeable notes 'BBB';
--EUR500 million multi-currency senior unsecured term loan 'BBB'.
Prologis Tokyo Finance Investment Limited Partnership
--Senior unsecured guaranteed notes 'BBB';
--JPY45 billion senior unsecured revolving credit facility 'BBB';
--JPY40.9 billion senior unsecured term loan 'BBB'.
The Rating Outlook is Positive.
KEY RATING DRIVERS
The Positive Outlook reflects the material improvement in the company's
liquidity position, increasing cash flow in excess of fixed charges,
reflecting strong property fundamentals and the expectation that
leverage will decline to levels commensurate with a 'BBB+' IDR. Prologis
reduced leverage over the past year by growing EBITDA and repaying debt
with proceeds from asset sales and contributions to co-investment
ventures. However, leverage remains high for the 'BBB' rating (pro rata
7.5x in second quarter 2014 [2Q'14] and 7.8x for the trailing 12 months
(TTM) ended June 30, 2014, due in part to the company's land holdings).
Credit strengths include strong asset quality, excellent access to
capital, and a global platform with diversification by location and
tenant. Prologis has adequate unencumbered asset coverage of unsecured
debt. The main credit concerns are the high leverage and the continued
increase in the company's speculative development pipeline which results
in elevated lease-up risk.
Material Improvement in Liquidity; Change in Strategy
Prologis improved its liquidity position over the past year and Fitch
expects the company will seek to maintain sufficient liquidity before
considering proceeds from dispositions and contributions. While Fitch
expects PLD will continue to match-fund its development expenditures
with dispositions and contributions, maintaining sufficient liquidity
before the match-funding reduces the risks to unsecured bondholders
during periods of capital markets dislocation.
The company's liquidity coverage ratio improved to 1.3x for the period
July 1, 2014 to Dec. 31,
2016 from 0.8x a year prior as a result of multiple bond offerings and
increased availability under the bank facility agreements, despite the
offsetting effect of using some of the proceeds to tender for longer
dated bonds. Fitch defines liquidity coverage as liquidity sources
divided by uses for the period July 1, 2014 to Dec. 31, 2016. Liquidity
sources include unrestricted cash, availability under revolving credit
facilities pro forma for the repurchase of 2017-2018 notes in July 2014
and senior notes due 2020, 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, and pro rata cost to complete development. Under a
scenario by which the company's 3.25% exchangeable debentures convert to
equity in 2015, liquidity coverage would improve to 1.5x.
On a pro forma basis, only 0.4% of pro rata debt matures for the
remainder of 2014, followed by
8.5% in 2015 and 8.1% in 2016. Internally generated liquidity is
moderate as the company's adjusted funds from operations (AFFO) payout
ratio was 83.5% in 2Q'14, down from 95.4% in full-year 2013. Based on
the current payout ratio, the company would retain approximately $130
million in annual cash flow.
Improving Fundamentals and Fixed-Charge Coverage
Positive net absorption continues to benefit Prologis' portfolio while
macro industrial indicators such as manufacturing levels, housing starts
and homebuilder confidence indicate that demand may continue to outpace
supply. The company's average net effective rent change on rollover was
6.4% for the TTM ended June 30, 2014, up from 4.5% on average in 2013.
Average occupancy also increased to 94.5% for the TTM ended June 30,
2014 from 94.1% on average for 2013, and cash same-store net operating
income (NOI) grew by 3.6% on average for the TTM ended June 30, 2014, up
from 1.6% on average in 2013.
Pro rata fixed-charge coverage (FCC) was 2.4x in 2Q'14 (2.1x TTM), up
from 1.8x in 2013. Fitch defines pro rata FCC 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 projects that a minor increase in occupancy and
rental rate growth in the high single digits (since in-place rents over
the next several years remain approximately 10% below market rents) will
result in 3%-4% same store NOI (SSNOI) growth over the next several
years. This should result in FCC sustaining in the 2.5x to 3.0x range,
which is appropriate for a 'BBB+' rating.
High Leverage Expected to Decline
The company's 7.5x pro rata debt-to-EBITDA ratio as of June 30, 2014 is
high for the 'BBB' rating. Fitch projects that pro rata leverage will
decline through 2016 to approximately 6.5x due primarily to SSNOI
growth. Fitch's leverage threshold of 6.5x for a 'BBB+' rating for
Prologis acknowledges the company's strong asset quality and lower
portfolio yields.
Pro Rata Treatment
Fitch looks primarily at pro rata leverage (pro rata net debt-to-pro
rata recurring operating EBITDA) rather than consolidated metrics given
Fitch's expectation that PLD has and would in the future support or
recapitalize unconsolidated entities, its agnostic view toward property
management for consolidated and unconsolidated assets, and its focus on
pro rata portfolio and debt metrics.
As a supplementary measure, Fitch calculates consolidated leverage as
consolidated net debt-to consolidated recurring operating EBITDA plus
Fitch's estimate of recurring cash distributions from unconsolidated
co-investment ventures, since these cash distributions benefit unsecured
bondholders. However, this supplementary measure may understate leverage
given the inclusion of cash distributions from joint ventures but
exclusion of the corresponding non-recourse debt. Fitch does not expect
Prologis to take any of the co-investment ventures' assets or debt onto
its balance sheet over the next several years.
Excellent Access to Capital
The company issued $7.1 billion and EUR2.5 billion in unsecured bonds
since 2009 (using the proceeds to refinance and repurchase bonds and for
general corporate purposes) and $3.7 billion of follow-on common equity
at a weighted average discount of 1.8% to consensus estimated net asset
value. The company also has a $750 million at-the-market equity offering
program, though it has yet to utilize this program. Debt issuance
volumes have been particularly strong over the past year as the company
has issued EUR2.5 billion and $1.75 billion of bonds since August 2013.
Strategic capital is another important source of funding for PLD. In
2014, PLD formed Prologis
U.S. Logistics Venture with Norway's sovereign wealth fund NBIM (the
second venture between
NBIM and Prologis following the formation of Prologis European Logistics
Partners Sarl in 2013). Strategic capital raises also include publicly
traded vehicles (FIBRA Prologis and Nippon Prologis REIT). The company
rationalized and restructured certain of its investment ventures to
increase the permanency of its capital and reduce the inter-dependence
over the past several years, which Fitch views favorably.
Global Platform
Prologis had $51.6 billion of assets under management as of June 30,
2014 and the global platform limits the risk of over-exposure to any one
region's fundamentals. PLD derived 83.3% of its 2Q'14 NOI from
Prologis-defined global markets (56.2% in the Americas, 21.8% in Europe,
and 5.3% in Asia), and the remaining 16.7% of 2Q'14 NOI was derived from
regional and other markets.
The portfolio generally has 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, as only the top four tenants comprise more than 1% of
annual base rent (ABR). PLD's top tenants at March 31, 2014 were DHL
(2.1% of ABR), CEVA Logistics (1.4% of ABR), Kuehne & Nagel (1.3% of
ABR) and Geodis (1.2% of ABR).
Adequate Unencumbered Asset Coverage
Prologis has adequate contingent liquidity with a stressed value of
unencumbered assets (2Q'14 unencumbered NOI divided by a stressed 8%
capitalization rate) to net unsecured debt of 2.0x. When applying a 50%
haircut to the book value of land held and a 25% haircut to construction
in progress, unencumbered asset coverage improves to 2.2x.
Increasing Speculative Development
PLD's strategy of developing industrial properties centers on value
creation and complements the company's core business of collecting rent
from owned assets. After construction and stabilization, the company
either holds such assets on its balance sheet or contributes them to
managed co-investment ventures. PLD endeavors to match-fund development
expenditures and acquisitions with cash from dispositions or
contributions of assets to the ventures. If the company does not
anticipate disposition or contribution volumes, PLD management has
stated that the company would scale back development starts and
acquisitions accordingly, though the sector has a mixed track record of
forecasting market cycles.
Fitch views PLD's improved focus on risk management related to its
business, including development (i.e. Prologis Integrated Risk Index)
favorably. Development is substantially smaller today with total
expected investment (TEI) at 9.1% of undepreciated assets at June 30,
2014 versus 31.8% at year-end 2007 (ProLogis and AMB Property
Corporation pro forma). Costs to complete are 3.7% of undepreciated
assets at June 30, 2014 (2.8% pro rata) compared with 14.1% at year-end
2007. However, speculative development increased post-merger to 82.4% at
June 30, 2014 from 58.2% in 2013 and 43.2% in 2012, which illustrates
elevated lease-up risk.
Preferred Stock Notching
The two-notch differential between PLD's IDR and its preferred stock
rating is consistent with Fitch's 'Treatment and Notching of Hybrids in
Nonfinancial Corporate and REIT Credit Analysis' criteria report dated
Dec. 23, 2013, as PLD's preferred securities have cumulative coupon
deferral options exercisable by PLD and thus have readily triggered
loss-absorption provisions in a going concern.
RATING SENSITIVITIES
The following factors may result in a ratings upgrade to 'BBB+':
--Fitch's expectation of pro rata leverage sustaining below 6.5x is
Fitch's primary rating sensitivity (pro rata leverage was 7.5x in 2Q'14
and 7.8x TTM);
--Fitch's expectation of consolidated leverage sustaining below 6x
(consolidated leverage was 6.1x in 2Q'14 and 6.5x TTM. Fitch defines
consolidated leverage as net debt to recurring operating EBITDA
including recurring cash distributions from unconsolidated entities to
Prologis);
--Fitch's expectation of liquidity coverage sustaining above 1.25x (this
ratio is 1.3x for the period
July 1, 2014 to Dec. 31, 2016 but improves to 1.5x under a scenario by
which the company's 3.25% exchangeable debentures convert to equity in
2015);
--Fitch's expectation of FCC sustaining above 2x (this ratio was 2.4x in
2Q'14 and 2.1x TTM).
The following factors may result in negative action on the ratings
and/or Rating Outlook:
--Fitch's expectation of pro rata leverage sustaining above 7.5x;
--Fitch's expectation of consolidated leverage sustaining above 7.0x;
--Fitch's expectation of liquidity coverage sustaining below 1.0x;
--Fitch's expectation of FCC sustaining below 1.5x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors,' (Feb. 26,
2014);
--'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).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363
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
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=737957
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=888594
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