Turn Out the Lights… The Party’s Over!
MOODY'S REVISES PROLOGIS' OUTLOOK TO NEGATIVE
Wed Nov 05 14:24:07 2008 EST
The following is a press release from Moody’s Investors Service:
Approximately $4.7 Billion of Securities Affected
New York, November 05, 2008 — Moody’s Investors Service affirmed its Baa1 senior unsecured debt rating of ProLogis, and revised its rating outlook for the REIT to negative, from stable. According to Moody’s, this change in rating outlook reflects the anticipated decline in the CDFS cash flows as a result of slower leasing in a weaker economic environment and reduced valuations on contributed assets owing to tight credit markets. Resulting increased volatility in ProLogis’ earnings is also a concern particularly in an increasingly weak economic environment and constrained capital markets. In addition, the REIT continues to have a large development pipeline in a sharply deteriorating global economic environment, coupled with a challenging debt maturity schedule in 2009 and 2010, specifically at its fund level.
Moody’s said that the REIT’s ratings continue to reflect ProLogis’ established franchise in the industrial property sector, its leadership among U.S. REITs in developing a successful fund management business, and being able to export its development and management skills. ProLogis’ size and scale in markets with high barriers to entry produce a strong franchise. The REIT has superior diversity not only geographically, but by tenancy, industry and economic environment. These credit positives are attenuated by the REIT’s desire to continue to build and cycle-test its fund management business (launched in 1999), in more difficult business environments, as well as the volatile nature of development and, to a lesser extent, CDFS cash flows.
ProLogis’ CDFS business operates in tandem with its fund management platform, and earmarks the REIT’s efforts to provide logistical solutions for its customers so as to build preferred customer relationships with them, thereby enhancing the REIT’s franchise and helping to drive revenue growth. As part of its CDFS platform, ProLogis develops properties (both on spec and on a build-to-suit basis) which, upon stabilization, are primarily targeted for contribution to one of the ProLogis-managed funds, which attenuates, but does not eliminate, the REIT’s risk. ProLogis’ risks center on leasing and construction - linked to its JVs and funds. While this segment has been highly profitable for ProLogis in recent periods, primarily due to the gains realized upon the contribution of the assets during an upbeat market period, Moody’s views development as an intrinsically risky activity, and perceives CDFS cash flows as less stable than those typical of industrial property rental streams, such as those generated by ProLogis’ core, stabilized property portfolio.
ProLogis’ liquidity and funding have been managed prudently. For ProLogis, with its extensive, through-the-cycle development program and international exposure, liquidity becomes particularly important. The REIT addressed this issue by establishing and subsequently expanding its multi-currency global line. This revolving credit line totals US$3.7
billion, matures in October 2009 (extendable to October 2010 at PLD’s option), and allows for disbursements in US dollar, euro, yen, sterling, Chinese renminbi, South Korean won and Canadian dollar. In addition, ProLogis typically finances its fund assets locally, which further mitigates cross-currency risks. Moody’s stated that ProLogis’ rating outlook will likely return to stable once ProLogis has demonstrated greater predictability of their CDFS cash flows resulting in increased earnings stability. Stable rating outlook will also be predicated on the REIT proactively managing through all its near-term debt maturities on balance sheet and at the JV funds level, maintaining its fixed charge coverage at over 4.0x (including 100% of CDFS and capitalized interest and preferred units distributions and excluding JVs), its effective leverage in the low 50% range (without JVs), and its secured debt as a percent of gross assets in the single digits (without JVs). Moody’s would also expect ProLogis to maintain ample liquidity at all times. A downgrade would result from effective leverage over 60% of gross assets or secured debt above 20%, and fixed charge coverage below 2.3X (based on pro rata consolidation of Funds and JVs). Continued challenges in the execution of ProLogis’ fund management platform or international investments as demonstrated by further earnings volatility, as well as the decrease of its unencumbered asset pool (at book value) closer to 1.5X unsecured debt, would also put downward pressure on the rating.