NEW YORK--(BUSINESS WIRE)--Fitch Ratings has withdrawn the 'BBB-' rating on the JPY10 billion 3.25% private placement senior unsecured term loan due 2020 with Prologis Japan Finance Y.K. as borrower and assigned a 'BBB-' rating to the same term loan with Prologis Tokyo Finance Investment Limited Partnership as the new borrower.
Fitch has also withdrawn the 'BBB-' rating on the JPY36.5 billion senior unsecured revolving credit facility with Prologis Japan Finance Y.K. as borrower, and Prologis, L.P. is listed as the borrower under this facility below. The ratings for Prologis Japan Finance Y.K. are no longer considered by Fitch to be relevant to the agency's coverage. 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'.
--$1.7 billion global senior credit facility 'BBB-';
--$4.7 billion senior unsecured notes 'BBB-';
--$1.3 billion senior unsecured exchangeable 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.) 'BBB-'.
The Rating Outlook is Positive.
As noted in a Fitch press release dated March 14, 2012, Prologis has the right to substitute the borrower under the July 8, 2010 JPY10 billion loan agreement and pursuant to an amendment dated June 29, 2012, Prologis Tokyo Finance Investment Limited Partnership is now the term loan borrower. 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 92.4% in the second quarter of 2012 (2Q'12) from 92.3% in 1Q'12, and rental rates declined by 3.9% in 2Q'12 compared with negative 1.1% in 1Q'12. Overall, same-property NOI grew by 40 basis points (bps) in 2Q'12 compared with a decline of 1.1% in 1Q'12 and Fitch forecasts this will continue to grow by 1% to 2% over the next 12-to-24 months. . Fixed charge coverage was 2.1 times (x) in 2Q'12, up from 2.0x during the previous two quarters, principally due to stabilizing fundamentals. 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 defines fixed charge coverage as 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.
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 first half of 2012, PLD completed approximately $1.2 billion in building and land dispositions and fund contributions in predominantly non-global markets, of which approximately $953 million was PLD's share. Fitch has forecasted $3.5 billion of dispositions in 2012 alone, and therefore continued progress is a meaningful driver of the outlook. In 2Q'12, the percentage of NOI from global markets was 83.2% compared with 82.6% in 1Q'12. 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 3,082 buildings in 21 countries in the Americas, Europe and Asia. As of June 30, 2012, the company had approximately $43.9 billion in total assets under management including $21.4 billion in the private capital segment.
PLD's tenant roster is granular and includes more than 4,500 customers. As of June 30, 2012 top tenants were DHL at 2.6% of annual base rents, CEVA Logistics at 1.4%, Kuehne & Nagel at 1.4%, Amazon.com, Inc. at 1.0% and SNCF Geodis at 0.9%, and no other tenant exceeds 1% of total rent. Lease expirations are manageable with 2.5%, 4.1% and 16.4% of Prologis' share of annual base rents expiring for the remainder of 2012, full year 2013 and full year 2014, respectively.
Prologis has strong access to capital and financial flexibility. The company completed $1.2 billion of debt financings, re-financings and pay-downs, with approximately $989 million related to the REIT and $176 million on behalf of property funds during the 2Q'12. Fitch calculates that unencumbered assets to unsecured debt ranged from 2.6x to 2.9x as of June 30, 2012 when annualizing 2Q'12 unencumbered NOI and utilizing a capitalization rate from 7% to 8%, which is appropriate for a 'BBB' IDR. When including 50% of PLD's book value of unencumbered land and development, asset coverage increases to a range from 2.7x to 3.1x. 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. Net debt to 2Q'12 annualized recurring operating EBITDA including Fitch's estimate of recurring cash distributions from unconsolidated entities was 8.4x compared with 8.5x in 1Q'12. 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 8.0x 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, 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 0.7x for July 1, 2012 to Dec. 31, 2013. Adding the forecasted $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 1.5x.
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 in 2013-2014, with 0.6% of debt maturing in 2012, 13.3% maturing in 2013, and 24.8% in 2014.
While Prologis operates a global portfolio, Europe represented approximately 22.8% of 2Q'12 NOI. Despite macroeconomic uncertainties in the Eurozone, European industrial property fundamentals are somewhat stable and PLD's European property occupancy increased to 92.8% in 2Q'12 from 92.1% in 1Q'2. The majority of Prologis' consolidated assets in Europe are held in Prologis European Properties (PEPR). PEPR unit holders approved the liquidation of the fund during its annual meeting held on June 27, 2012 and Prologis currently owns 99.5% of the ordinary units and 98.6% of the preferred units of PEPR. Presently, the future structure for PEPR remains unclear and the aforementioned macroeconomic environment adds to the uncertainty. 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 2.1x in 2Q'12);
--Net debt to recurring operating EBITDA sustaining below 8.0x (leverage was 8.4x in 2Q'12);
--Unencumbered asset coverage sustaining above 2.0x (as of June 30, 2012, when including 50% of PLD's book value of unencumbered land and development, unencumbered asset coverage ranged from 2.7x to 3.1x).
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:
--'Recovery Ratings and Notching Criteria for Equity REITs' (May 3, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 11, 2011).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage