Fitch Rates Prologis, L.P.'s EUR700MM 3.375% Notes Due 2024 'BBB'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--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:
--Issuer Default Rating (IDR) 'BBB';
--$100 million preferred stock 'BB+'.
--$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.
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.
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.
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
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Criteria for Rating U.S. Equity REITs and REOCs