The notes are senior unsecured obligations of
In addition to the 2024 notes, Fitch currently rates
--Issuer Default Rating (IDR) 'BBB';
The Rating Outlook is Stable.
KEY RATING DRIVERS
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
Pro forma for the
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 (
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
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
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.
Proactive Liability Management
In addition to recent U.S. dollar and Euro denominated bond offerings, tender offers, and debt repurchases,
Risks & Returns of Development
Development is a core tenet of PLD's business model, and through multiple property cycles,
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
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
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
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'.
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (
--'Recovery Ratings and Notching Criteria for Equity REITs' (
--'Corporate Rating Methodology' (
--'Criteria for Rating U.S. Equity REITs and REOCs' (
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
Source: Fitch Ratings
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