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Global Credit Research - 23 Jun 2010
Approximately $4.7 billion in securities affected
New York, June 23, 2010 -- Moody's Investors Service has placed ProLogis' senior unsecured
debt at Baa2 and preferred stock at Baa3 under review for possible downgrade.
The review reflects the considerable decline in the REIT's cash
flows and earnings as a result of lower rental rates in a weak economy;
also, following the elimination of its CDFS segment and reduced
contribution activity, ProLogis no longer generates significant
gains on asset contributions to its property funds. The operational
results in the past four quarters have led to a substantial deterioration
in ProLogis' debt protection measures and operating performance
culminating in weak key credit metrics for a Baa2 rated REIT in 1Q10.
In its review Moody's will monitor the pace of improvement in cash
flow and earnings, which ProLogis expects to occur during the remainder
of 2010 as it leases its development pipeline, monetizes its land
bank, completes previously announced build to suit developments
and incrementally improves overall portfolio occupancy. Moody's
acknowledges that ProLogis' committed focus on its core business
and moving away from the fund business provides the REIT with more predictable
Positively, ProLogis has made substantial progress addressing the
liquidity and development issues present at the end of 2008 and has successfully
executed its outlined plan. ProLogis has raised $7.6B
in capital since the beginning of 2009 ($3B of asset sales,
$1.5B of equity and $3.1B of new debt).
The capital has been used to reduce PLD's 2010 maturities from $3.6B
at September 30, 2008 to $208M at March 31, 2010 as
well as refinance other near term maturities. The REIT has no significant
on balance sheet maturities until April 2012 when ~$900M of convertible
notes come due. ProLogis also successfully renewed its revolving
credit line (now due August 2012) reducing its line borrowings from ~$3B
to ~$170M, albeit with a reduced total facility size of $2.25B.
ProLogis' funds have made substantial progress refinancing 2010
debt maturities with ~$343M of debt coming due in 2010.
More substantial amounts do mature though in 2012-14 (~$1.5B,
~$1.7B and $2.6B, respectively).
The majority of this debt is secured with flexible prepayment provisions
and we expect it to be successfully refinanced, especially given
the recent thawing of the secured debt markets.
Furthermore, ProLogis has made considerable progress with its development
pipeline: at September 30, 2008 the pipeline was $8.2B
and 47.7% leased, whereas at March 31, 2010
the pipeline was $4.6B and 67.1% leased.
The REIT has also shifted its development philosophy away from speculative
development for its funds to build to suit on balance sheet projects.
ProLogis' Baa2 senior unsecured rating continues to reflect the
REIT's large pool of high quality unencumbered assets, which
should improve in size, quality and geographic diversity as the
REIT executes on its on balance sheet development program. ProLogis
benefits from strong tenant relationships underpinning a developing global
franchise, the diversification gains derived from its established
fund management platform and international strategy. The REIT possesses
a global leadership position in the warehouse distribution business,
coupled with a strong management team and demonstrated access to committed
equity capital at some of its funds and access to all capital markets.
The rating will likely be confirmed if ProLogis' earnings recover
as expected, fixed charge coverage stays at or above 2.0x
(including gains on fund contributions, capitalized interest and
preferred unit distributions, but excluding JVs) and net debt /
EBITDA moves closer to 8.5x. Also, greater predictability
of its cash flows resulting in increased earnings visibility would be
viewed positively. A rating affirmation will also be predicated
on the REIT sustaining its effective leverage below 50% (without
JVs), and its secured debt as a percent of gross assets at less
than 10% (without JVs). Moody's would also expect ProLogis
to maintain ample liquidity at all times.
A downgrade will most likely result if the REIT's earnings do not
improve materially from the weak 1Q10 levels. In addition,
a downgrade could occur if effective leverage rises closer to 55%
of gross assets (without JVs) or secured debt increases closer to 15%
(without JVs), and fixed charge coverage remains below 2.0x
(including gains on fund contributions, capitalized interest and
preferred unit distributions, but excluding JVs), while net
debt / EBITDA remains above 9.0x. A decrease of its unencumbered
asset pool (at book value) closer to 1.5x unsecured debt would
also put downward pressure on the rating.
Moody's last rating action with respect to ProLogis was on December 4,
2008, when its ratings were lowered -- senior unsecured debt
to Baa2 from Baa1 and preferred stock to Baa3 from Baa2. The rating
outlook remained negative.
The following ratings were placed under review for possible downgrade:
ProLogis -- Senior unsecured at Baa2; preferred stock
at Baa3; senior unsecured shelf at (P)Baa2; preferred shelf
ProLogis, [NYSE: PLD] based in Denver, Colorado,
USA is a leading provider of distribution facilities and services with
over 475 million square feet (44 million m2) in 2,898 distribution
facilities owned, managed and under development. As of March
31, 2010 it reported assets of $16.8 billion and equity
of $7.7 billion.
The principal methodology used in rating ProLogis was the Rating Methodology
for REITs and Other Commercial Property Firms, published in January
2006 and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research and Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Senior Vice President
Commercial Real Estate Finance
Moody's Investors Service
Asst Vice President - Analyst
Commercial Real Estate Finance
Moody's Investors Service
Moody's places ProLogis' ratings under review for possible downgrade (senior unsecured at Baa2)
No Related Data.
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