(The following statement was released by the rating agency)
NEW YORK, October 25 (Fitch) Fitch Ratings assigns a credit rating of 'BBB' to
the $500 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 2021
notes have an annual coupon rate of 3.35% and were priced at 99.984% of the
principal amount to yield 3.353% to maturity or 145 basis points (bps) over the
benchmark rate. The notes are senior unsecured obligations of Prologis, L.P.
that are fully and unconditionally guaranteed by Prologis, Inc.
In the short term, Prologis intends to use the net proceeds from the sale of the
notes to repay borrowings under its global line and to fund the cash purchase of
certain of its senior notes that are tendered pursuant to its offers to purchase
such notes, which commenced on Oct. 24, 2013.
Fitch currently rates Prologis as follows:
--Issuer Default Rating (IDR) 'BBB';
--$100 million preferred stock 'BB+'.
--$2 billion global senior credit facility 'BBB';
--$5.8 billion senior unsecured notes 'BBB';
--$460 million senior unsecured exchangeable notes 'BBB';
--$659 million multi-currency senior unsecured term loan '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
The 'BBB' rating takes into account the company's global industrial real estate
platform including the investment management franchise, a high-quality
portfolio, management's focus on strategic priorities, strong access to capital
as evidenced by recent activity (the 2021 notes as well as bond offerings in
August 2013, unconsolidated investment financings, a $1.4 billion follow-on
common stock offering, the recasting of the global line of credit, and the
establishment of an at-the-market or 'ATM' equity offering program).
Largely tempering the ratings and Outlook is pro rata leverage that is high for
the 'BBB' rating though expected to decline principally via EBITDA growth due to
recovering fundamentals. The company has adequate liquidity, and endeavors to
match-fund acquisitions and development with proceeds from dispositions and fund
contributions. Contingent liquidity is supported by strong unencumbered asset
coverage of unsecured debt.
Prologis had $46.9 billion of assets under management as of Sept. 30, 2013. The
company's large platform limits the risk of over-exposure to any one region's
fundamentals. PLD derived 83.5% of its 3Q'13 net operating income (NOI) from
Prologis-defined global markets (56.8% in the Americas, 20.2% in Europe, and
6.5% in in Asia), and the remaining 16.5% of 3Q'13 NOI was derived from regional
and other markets. The private capital platform provides an additional layer of
fee income and recurring cash distributions to cover PLD's fixed charges,
bolstered materially by the joint venture with Norges Bank Investment Management
(Prologis European Logistics Partners Sarl or PELP) and initial public offering
of Nippon Prologis REIT, Inc., a Japanese REIT (J-REIT), in 2013.
Prologis has a high-quality portfolio as evidenced by the 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 Sept. 30, 2013 were DHL (1.9% of ABR), CEVA Logistics (1.3%
of ABR), and Kuehne & Nagel (1.3% of ABR).
STRONG ACCESS TO CAPITAL
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, common and private equity capital.
During the third quarter, Prologis raised $671.6 million of third-party equity
for its open-ended funds, including: $398.4 million for Prologis European
Properties Fund II (PEPF II); $180 million for Prologis Targeted U.S. Logistics
Fund (USLF); and $93.2 million for PELP. Additionally, PEPF II issued a 2.75%
coupon EUR300 million unsecured bond in the Euro bond market subsequent to the
In addition to recent U.S. dollar denominated bond offerings, Prologis upsized
its global credit facility in July 2013 to $2 billion from $1.65 billion and
improved 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.
In April 2013, Prologis completed a public offering of 35.7 million shares of
common stock at a price of $41.60 per share, generating approximately $1.4
billion in net proceeds, which were used predominantly for new and current
investments. The J-REIT also completed a follow-on offering subsequent to its
IPO. PLD did not directly benefit from the newly raised proceeds; however, the
offering will allow the J-REIT to fund additional asset purchases from PLD,
which should benefit PLD's corporate liquidity. The company also recently
established an ATM program through which it may issue up to $750 million of
HIGH LEVERAGE FOR 'BBB' EXPECTED TO DECLINE
Fitch views pro rata leverage as more meaningful than consolidated leverage
given PLD's willingness to buy back and/or recapitalize unconsolidated assets
(e.g. interests in Prologis European Properties in 2011, as well as interests in
Prologis Institutional Alliance Fund II and Prologis North American Industrial
Fund III in 2013) and its agnostic view towards property management for
consolidated and unconsolidated assets.
Third-quarter 2013 pro rata leverage was 7.9x compared with 7.7x in 2Q'13 and
8.1x in 1Q'13. The increase in 3Q stemmed from debt-financed development
activity. Fitch's base case assumes between 1.5% and 2.5% same-store NOI growth
over the next several years along with incremental NOI from development starts
and acquisitions net of dispositions and contributions. Under this base case,
pro rata leverage would remain in the mid-to-low 7x range. This is high for a
'BBB' rating generally but appropriate given PLD's portfolio size and access to
capital. Leverage reduction may be choppy sequentially as the timing of
dispositions and fund contributions may not match acquisitions and development
starts in a linear manner.
In a stress case not anticipated by Fitch in which same-store NOI declines by
levels experienced in 2009-2010, leverage would exceed 8x, which would be weak
for a 'BBB' rating.
On a consolidated basis, 3Q'13 leverage was 7.9x including recurring cash
distributions from unconsolidated entities (9.3x excluding recurring cash
distributions from unconsolidated entities) compared with 8.2x (9.3x excluding
recurring cash distributions from unconsolidated entities) in FY2012.
During 3Q'13, cash same-store NOI (SSNOI) increased by 1.8% and GAAP and cash
rental rates on leases signed in the quarter increased 6.1% and 0.4%,
respectively, from in-place rents. GAAP rental rates on rollover were positive
for the past three quarters following 17 quarters of declines. Operating
portfolio occupancy was 93.9% as of Sept. 30, 2013, up from 93.7% as of June 30,
2013 and slightly down from 94.0% as of Dec. 31, 2012.
Third-quarter 2013 pro rata fixed-charge coverage pro forma for the guaranteed
notes issuances and tender offers is solid for the 'BBB' rating at 2.4x compared
with 2.0x in 2Q'13 and 1.8x in 1Q'13. Fitch defines pro rata fixed-charge
coverage as pro rata recurring operating EBITDA (excluding gains and losses on
asset sales) less pro rata recurring capital expenditures less straight-line
rent adjustments divided by total 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 low single-digit SSNOI growth, which is
strong for the 'BBB' rating.
On a consolidated basis, 3Q'13 pro forma fixed-charge coverage was 1.9x
including recurring cash distributions from unconsolidated entities (1.5x
excluding recurring cash distributions from unconsolidated entities) compared
with 1.8x (1.5x excluding recurring cash distributions from unconsolidated
entities) in 2012.
INCREASING BUILD-TO-SUIT DEVELOPMENT
Prologis' development activities
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