NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to withdraw the 'BBB-' rating on the JPY10 billion 3.25% private placement senior unsecured term loan due 2020 with Prologis Japan Finance Y.K. as borrower and assign a 'BBB-' rating to the same term loan with Prologis Tokyo Finance Investment Limited Partnership as the new borrower. Fitch also expects to withdraw the 'BBB-' rating on the JPY36.5 billion senior unsecured revolving credit facility with Prologis Japan Finance Y.K. as borrower. Fitch currently rates Prologis, Inc. (NYSE: PLD) and its operating partnership, Prologis, L.P. (collectively, Prologis or the company) as follows:
--Issuer Default Rating (IDR) 'BBB-';
--$582 million preferred stock 'BB'.
--$1.8 billion global senior credit facility 'BBB-';
--$4.6 billion senior unsecured notes 'BBB-';
--$1.4 billion senior unsecured convertible notes 'BBB-';
--EUR487.5 million senior unsecured term loan 'BBB-';
--JPY36.5 billion senior unsecured revolving credit facility (previously listed as an obligation of Prologis Japan Finance Y.K.).
The Rating Outlook is Positive.
Prologis has the right to substitute the borrower under the July 8, 2010 JPY10 billion loan agreement and is simplifying its financing structure with a new tax efficient vehicle, Prologis Tokyo Finance Investment Limited Partnership. The JPY10 billion 3.25% private placement senior unsecured term loan due 2020 remains a senior unsecured obligation that is guaranteed by Prologis, Inc. and Prologis, L.P. The terms of the loan agreement have not been modified. In addition, the JPY36.5 billion revolving credit facility remains a senior unsecured obligation that is guaranteed by Prologis, Inc. and Prologis, L.P. under the Yen revolver agreement dated June 3, 2011.
The Positive Outlook 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 and the ongoing implementation of a strategy to de-lever the company through property dispositions and fund contributions. In addition to the de-levering implications, Fitch anticipates that this strategy will result in improving portfolio asset quality via sales of lower quality assets 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 (bps) in 4Q'11 compared with negative 70 bps 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 building and land dispositions and fund contributions 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 unencumbered assets to unsecured debt was 2.2x at Dec. 31, 2011 when annualizing 4Q'11 unencumbered NOI and utilizing a capitalization rate of 7%, 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 7.0x 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 8.0x, 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 $1.1 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.
Despite Prologis' 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 Eurozone, 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. The majority of Prologis' consolidated assets in Europe are held in Prologis European Properties (PEPR). 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 and the aforementioned macroeconomic environment adds to the uncertainty. .
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:
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 27, 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.
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
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