NEW YORK--(BUSINESS WIRE)--Fitch Ratings has revised the Rating Outlook for Prologis, Inc. (NYSE: PLD), its operating partnership, Prologis, L.P., and its subsidiary Prologis Japan Finance Y.K. (formerly known as AMB Japan Finance Y.K.) to Positive from Stable. In addition, Fitch has affirmed the following credit ratings:
--Issuer Default Rating (IDR) at 'BBB-';
--$582 million preferred stock at 'BB'.
--IDR at 'BBB-';
--$1.75 billion global senior credit facility at 'BBB-';
--$4.7 billion senior unsecured notes at 'BBB-';
--$1.4 billion senior unsecured convertible notes at 'BBB-'.
Prologis Japan Finance Y.K.
--JPY36.5 billion senior unsecured revolving credit facility at 'BBB-'.
Fitch has also assigned a 'BBB-' rating to Prologis, L.P.'s EUR487.5 million senior unsecured term loan with an initial maturity of Feb. 2, 2014. The proceeds from this term loan were used for general corporate purposes including the repayment of ProLogis, L.P.'s EUR157.5 million senior unsecured term loan and Prologis Japan Finance Y.K.'s JPY12.5 billion senior unsecured term loan. Fitch has withdrawn the 'BBB-' ratings on the EUR157.5 million and JPY12.5 billion term loans.
The revision of the Rating Outlook to Positive reflects that the company's credit profile is migrating toward a 'BBB' IDR. The Positive Outlook takes into account improving fundamentals across the company's broad industrial real estate platform, coupled with the ongoing implementation of a strategy to de-lever the company through property dispositions and fund contributions. Fitch anticipates that this strategy will result in improving asset quality via asset sales in non-core markets.
PLD's credit strengths include a global franchise (including the private capital platform), a granular tenant roster, strong access to capital, and a large unencumbered asset base. Credit concerns include high leverage for the rating as a result of PLD's large land holdings (though leverage is trending toward a level consistent with a 'BBB' IDR) and sizeable debt maturities through 2015. In addition, PLD's liquidity position will depend materially on its ability to sell and contribute assets to funds.
Operating performance continues to improve due to favorable tenant demand. Occupancy increased to 92.2% in the fourth quarter of 2011 (4Q'11) from 91% in 3Q'11, and rental rate declines moderated to negative 4.5% in 4Q'11 compared with negative 8.6% in 3Q'11. Overall, same-property NOI grew by 40 basis points in 4Q'11 compared with negative 70 basis points in 3Q'11. Fixed charge coverage (recurring operating EBITDA including Fitch's estimate of recurring cash distributions from unconsolidated entities less recurring capital expenditures and straight-line rent adjustments divided by cash interest incurred and preferred dividends) was 2.0 times (x) in 4Q'11, up from 1.8x in 3Q'11 due to stabilizing fundamentals, reduced fixed charges and G&A expense reductions via merger synergies. When combining the results of legacy ProLogis and AMB Property Corporation, fixed charge coverage was 1.6x in 2010 and 1.4x in 2009.
Fitch anticipates that fixed charge coverage may decline somewhat in the near term due to earnings reductions from expected asset sales but that coverage will sustain in the low 2x range over the next 12 to 24 months due to flat-to-low single digit same store results, incremental earnings from development and private capital income, and merger synergies. The low 2x range is appropriate for a 'BBB' IDR for an industrial REIT of PLD's size. In a stress case not anticipated by Fitch resulting in negative same-store NOI, fixed-charge coverage could sustain below 2x, which would be appropriate for a 'BBB-' IDR.
One of the company's strategic initiatives since the ProLogis and AMB Property Corporation merger in June 2011 is aligning the portfolio with an investment strategy focused on global markets. Consistent with that strategy, during the second half of 2011, PLD completed approximately $1.65 billion in contributions and building and land dispositions in predominantly non-global markets, of which approximately $1.38 billion was PLD's share. As a result, the percentage of the portfolio in global markets increased to 84.2% of total operating portfolio as of Dec. 31, 2011 from 78.6% as of June 30, 2011. Additionally, the company continues to selectively develop in high growth potential markets, which Fitch views favorably.
Bondholders benefit from Prologis' global franchise as it mitigates exposure to regional demand drivers. As of Dec. 31, 2011, PLD's operating portfolio consisted of 3,200 buildings in 22 countries in the Americas, Europe and Asia. As of Dec. 31, 2011, the company had approximately $43.3 billion in total assets under management including $24.7 billion in the private capital segment. Prologis continues to streamline this segment via fund dissolutions and consolidations.
PLD's tenant roster is granular and includes more than 4,500 customers. As of Dec. 31, 2011, top tenants were DHL at 2.4% of annual base rents, CEVA Logistics at 1.4%, Kuehne & Nagel at 1.2%, Home Depot, Inc. (Fitch IDR of 'A-' with a Stable Rating Outlook) at 1.1% and SNCF Geodis at 1%, and no other tenant exceeds 1% of total rent. Lease expirations are manageable with 14.1%, 16.3% and 15.4% of Prologis' share of annual base rents expiring in 2012, 2013 and 2014, respectively.
Prologis has strong access to capital and financial flexibility. The company raised $7.2 billion in capital in 2011, including $2.2 billion in a new global line of credit and Yen revolver commitments. Fitch calculates that 4Q'11 annualized unencumbered NOI divided by a capitalization rate of 7% to unsecured debt was 2.2x at Dec. 31, 2011, which is appropriate for a 'BBB' IDR. When including 50% of PLD's book value of unencumbered land and development, asset coverage increases to 2.3x. In addition, the covenants in the company's senior note indentures and credit agreements do not restrict PLD's financial flexibility.
Leverage remains high for an industrial REIT but is trending toward a level consistent with a 'BBB' IDR. Net debt to 4Q'11 annualized recurring operating EBITDA including Fitch's estimate of recurring cash distributions from unconsolidated entities was 7.8x compared with 8.6x in 3Q'11. Improvements stem from proceeds from dispositions and contributions used to repay debt along with modest EBITDA growth.
As part of the company's goal to strengthen its financial position, Prologis is focused on reducing leverage. Fitch anticipates that leverage will approach 7.0x over the next 12 to 24 months prior to a recapitalization of PEPR principally due to debt repayment from asset sale and contribution proceeds. Leverage sustaining between 7x and 8x is appropriate for a 'BBB' IDR for an industrial REIT of PLD's size and good asset quality. In a stress case not anticipated by Fitch resulting in negative same-store NOI, leverage could sustain above 8x, which would be appropriate for a 'BBB-' IDR.
PLD's liquidity position changes materially when layering in proceeds from expected asset sales and fund contributions. Sources of liquidity (unrestricted cash, availability under the company's credit facilities pro forma for the 487.5 million Euro senior term loan effective February 2012, and projected retained cash flows after dividends and distributions) divided by uses of liquidity (PLD's share of debt maturities and projected recurring capital expenditures) was 0.6x for Jan. 1, 2012 to Dec. 31, 2013.
Adding $3.5 billion of proceeds from asset sales as a liquidity source and $1.075 billion of capital requirements from acquisitions and development starts as a liquidity use, liquidity coverage would be 1.2x. $3.5 billion represents Prologis' 70% share of proceeds, net of proceeds to PLD's co-investment partners, from the midpoint of 2012 disposition and contribution guidance. $1.075 billion represents Prologis' 40% share of capital requirements, net of capital requirements for PLD's co-investment partners, from the midpoint of 2012 acquisition guidance plus Prologis' 70% share of capital requirements, net of capital requirements for PLD's co-investment partners, from the midpoint of 2012 development start guidance.
While Prologis has a solid capital raising track record, execution risks are present in the company's deleveraging and debt repayment strategy. An economic slowdown or the company's inability to sell and contribute assets to funds as contemplated could place pressure on the company's ability to address debt maturities and its liquidity position. Debt maturities are heavily weighted towards the next several years, with 9.7% of debt maturing in 2012, 14.4% maturing in 2013, 17.7% in 2014 and 16% in 2015.
While Prologis operates a global portfolio, Europe represents approximately 24.7% of 4Q'11 NOI. Despite macroeconomic uncertainties in the Euro zone, European industrial property fundamentals are somewhat stable and PLD's European property occupancy increased to 91.6% in 4Q'11 from 90% in 3Q'11.
European distribution facility fundamentals appear stable, although macroeconomic uncertainties in the Euro zone indicate risks vis-a-vis the future structure of Prologis European Properties (PEPR), which holds the majority of Prologis' consolidated assets in Europe. PEPR is currently a publicly listed vehicle that is expected to be delisted in the near future and recapitalized and unconsolidated from PLD's balance sheet after 2012. Presently, the future structure for PEPR remains unclear. Broadly, the Fitch report, 'European Senior Fixed Income Investor Survey Q112,' dated Feb. 13, 2012, notes that most European participants in a recent fixed income investor survey think the eurozone crisis will persist through 2012. While this may generally dampen near-term investor appetite, the PEPR portfolio includes prime assets that are desirable to institutional investors. A PEPR recapitalization would enable PLD to monetize a portion of its investment, with the proceeds likely used to repay debt or fund development.
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.
The following factors may result in an upgrade to 'BBB':
--Fixed charge coverage sustaining above 2.0x (fixed charge coverage ratio was 2.0x in 4Q'11);
--Net debt to recurring operating EBITDA sustaining below 8.0x (leverage was 7.8x in 4Q'11);
--Unencumbered asset coverage sustaining above 2.0x (as of Dec. 31, 2011, when including 50% of PLD's book value of unencumbered land and development, unencumbered asset coverage was 2.3x).
The following factors may result in negative momentum on the Outlook:
--An inability to continue executing on the company's strategic priorities, which entail substantial dispositions and fund contributions to reduce leverage;
--Fixed charge coverage sustaining below 2.0x;
--Net debt to recurring operating EBITDA sustaining above 8.0x;
--Unencumbered asset coverage sustaining below 2.0x.
The following factors may result in negative momentum on the rating:
--Fixed charge coverage ratio sustaining below 1.5x;
--Leverage sustaining above 9.0x;
--Liquidity coverage after dispositions, fund contributions, acquisitions and development starts sustaining below 1.0x.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'European Senior Fixed-Income Investor Survey Q112,' Feb. 13, 2012;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' Dec. 15, 2011;
--'Corporate Rating Methodology,' Aug. 12, 2011;
--'Parent and Subsidiary Rating Linkage,' Aug. 12, 2011;
--'Recovery Rating and Notching Criteria for Equity REITs,' May 12, 2011;
--'Criteria for Rating U.S. Equity REITs and REOCs,' March 15, 2011.
Applicable Criteria and Related Research:
European Senior Fixed Income Investor Survey Q112
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Rating and Notching Criteria for Equity REITs
Criteria for Rating U.S. Equity REITs and REOCs