Fitch Rates Prologis' $600MM 7.375% Coupon Senior Notes 'BBB'; Outlook Negative

NEW YORK, Oct 28, 2009 (BUSINESS WIRE) -- Fitch Ratings has assigned a 'BBB' rating to ProLogis' $600 million par value senior notes, with a coupon rate of 7.375%. The notes, which mature on October 30, 2019, were priced at 99.728% of the principal amount to yield 7.414%. The proceeds of the offering will be used to refinance near-term debt maturities and for general corporate purposes. The Outlook on the Issuer Default Rating (IDR) is Negative.

Fitch currently rates ProLogis (NYSE: PLD) as follows: --IDR of 'BBB'; --Global line of credit 'BBB' (the global line has a current commitment size of $3.8 billion, was recently extended to October 2012, and will have a commitment size of $2.25 billion after October 2010); --$3.7 billion senior notes 'BBB'; --$2.2 billion convertible senior notes 'BBB'; --$350 million preferred stock 'BBB-'.

The ratings reflect ProLogis' strong liquidity profile, large and global unencumbered industrial property pool, the stabilization of core portfolio occupancy in recent months, and reduced development risk. Credit concerns include an increase in leverage measured as net debt to operating EBITDA, which is driven by reduced same-store net operating income, the weakened earnings power of the company given the impact of the recession on industrial property fundamentals and the reduction in corporate distribution facilities services (CDFS) revenue, and remaining lease-up risk associated with its development properties, which is mitigated somewhat by lease-up activity to date.

ProLogis' sources of liquidity (cash pro forma for the bond issuance, availability under the global line of credit pro forma for the reduced commitment size, expected retained cash flows from operating activities) less uses of liquidity (consolidated and pro rata share of unconsolidated debt maturities and expected recurring capital expenditures) result in a liquidity surplus of approximately $880 million for Sept. 30, 2009 through Dec. 31, 2011.

Under this base case pro forma for the bond issuance, Fitch calculates that ProLogis has a liquidity coverage ratio of 1.5 times (x) for this period assuming no additional asset sales or capital raises. In the event that 80% of the company's secured debt maturities are refinanced, liquidity coverage would be 3.0x. ProLogis has also improved liquidity throughout the year by generating $1.2 billion of asset sales and property contributions through Sept. 30, 2009.

In addition, ProLogis continued to access the capital markets to improve liquidity in the third quarter of 2009 (3Q'09), raising net proceeds of $325 million through at-the-market equity issuances and also raising $350 million in a 7.625% coupon bond offering priced to yield 7.75%.

The ratings further reflect ProLogis' $12.6 billion unencumbered property pool, which covered unsecured debt by 2.5x as of Sept. 30, 2009, an improvement over 2.2x coverage at Dec. 31, 2008. The improvement in the ratio was largely driven by the repayment of borrowings under the company's global line of credit from the net proceeds of its sale of $1.1 billion of common shares in April 2009.

This coverage illustrates solid downside protection to unsecured bondholders.

With respect to the core portfolio, portfolio occupancies have improved, as ProLogis' non-development portfolio was 92.7% leased at the end of the third quarter, an increase of 20 basis points over 92.5% leased at June 30, 2009.

Despite the stabilization of occupancy, rents remain under pressure in the current economic environment, as market rents declined by 14.7% in 3Q'09.

Fitch notes that ProLogis' development pipeline remains significantly under-leased, but the company has made meaningful progress with leasing activity, as the static development portfolio (in place at Dec. 31, 2008) was 61.7% leased at the end of the third quarter, up from 54.1% at June 30, 2009 and 41.4% at Dec. 31, 2008.

Fitch downgraded ProLogis' IDR and senior debt ratings to 'BBB' from 'BBB+' and preferred stock to 'BBB-' from 'BBB' and assigned a Negative Outlook in December 2008 reflecting the size of the development pipeline and the expectation that certain credit metrics would weaken in light of conditions in the financial markets and the broader economy. The company's leverage ratio, measured as net debt to operating EBITDA, was 10.3x as of Sept. 30, 2009, compared with 8.8x as of Dec. 31, 2008. Likewise, the earnings power of the portfolio has been affected by reduced pricing power with respect to the stabilized properties (core portfolio same-store net operating income decreased 4.3% in 3Q'09) and a significant reduction in CDFS proceeds. Earnings from the company's property funds have also been affected by impairments and other non-cash charges. The company's Fitch-calculated fixed-charge coverage ratio was 1.4x for TTM Sept.

30, 2009, but fixed charge coverage as defined under the company's global line of credit agreement was 2.2x for the year the year-to-date period ended Sept.

30, 2009. In addition, from the perspective of bondholders, unencumbered debt service coverage (defined as unencumbered net operating income-to-unsecured interest expense) was 2.2x for the year-to-date period ended Sept. 30, 2009, which is appropriate for a 'BBB' IDR.

The Negative Rating Outlook reflects the lease-up risk for the development pipeline. The Outlook also reflects that despite the limited new supply of industrial property product entering the market, demand for space has been fairly weak, making it challenging to lease space on favorable terms. The Negative Outlook further takes into account that even though the company has reduced its direct debt by over $3 billion since Dec. 31, 2008, overall leverage, as measured by net debt-to-recurring EBITDA, remains high for the existing ratings.

Given the Negative Outlook, Fitch will continue to monitor the company's progress with a particular focus on leverage, as measured by net debt to recurring operating EBITDA, fixed charge coverage, lease-up activity within the development pipeline, and refinancing activity with respect to the company's fund debt maturities.

ProLogis is a REIT based in Denver, Colorado that owns distribution facilities, with more than 475 million square feet of industrial space owned and managed in markets across North America, Europe and Asia. The company leases its industrial facilities to more than 4,500 customers, including manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises with large-scale distribution needs.

Additional information is available at www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.

PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

SOURCE: Fitch Ratings CONTACT: Fitch Ratings, New York Sean Pattap, 212-908-0642 Janice Svec, 212-908-0304 or Media Relations: Sandro Scenga, 212-908-0278 Email: [e-mail] Copyright Business Wire 2009 -0- KEYWORD: United States

North America

New York INDUSTRY KEYWORD: Professional Services

Banking SUBJECT CODE: Bond/Stock Rating