Moody's Raises Prologis (PLD) Preferred Rating to 'Baa2'; Outlook Stable

Moody's Investors Service upgraded Prologis, L.P.'s senior unsecured rating to Baa1, from Baa2 and Prologis, Inc.'s (NYSE: PLD) preferred stock rating to Baa2, from Baa3. The rating outlook is stable.

The ratings upgrade reflects the REIT's substantial improvement in its operational metrics with same-store NOI increasing for the last ten quarters, while maintaining strong portfolio occupancy of 94.5% as of March 31, 2014. The REIT also has experienced positive rental growth for the last five quarters, which is expected to continue for 2014 and beyond. In addition, Prologis completed large capital transactions which de-levered its balance sheet and should result in important enhancements to its key credit metrics. Prologis has good liquidity supported by the REIT's substantial cash on hand ($189 million as of 3/31/2014), robust cash flows, as well as committed unsecured bank credit lines that consist of a $2.5 billion global revolver expiring in July 2017, with a one year extension, and a Yen45 million Japanese Yen revolver (approximately $500 million) expiring in May 2018. The credit lines were largely undrawn with only $120 million outstanding and $73 million in letters of credit at March 31, 2014. Prologis refinanced most its near-term unsecured debt maturities and there are no unsecured bonds coming due until 2017. At 1Q14, fixed charge coverage and net debt to EBITDA were at 2.58x and 8.0x respectively, but are expected to significantly improve by YE2014 and be more commensurate with a high Baa rating. Currently, the REITs effective leverage and secured debt levels are strong for its current rating category. The REIT's operations are benefiting from strong industrial real estate fundamentals.

The following ratings were upgraded, with a stable outlook:

Prologis, L.P. -- Senior unsecured to Baa1, from Baa2; senior unsecured shelf to (P)Baa1, from Baa2; subordinate shelf to (P)Baa2 , from (P)Baa3

Prologis, Inc.-- Preferred stock to Baa2, from Baa3, preferred stock shelf to (P)Baa2, from (P)Baa3

RATINGS RATIONALE

The Baa1 rating reflects Prologis' position as the world's largest owner, manager and developer of industrial facilities, strong franchise, large scale, ample liquidity, and extensive geographic reach across the Americas, Europe and Asia. Prologis has $51.1 billion of assets owned, managed and under development as of March 31, 2014. Prologis has $23.8 billion of directly owned assets and $27.3 billion of assets under management on behalf of third party funds. 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 is further supported by the REIT's large pool of high quality unencumbered assets, which should continue to improve in size, quality and geographic diversity as the REIT continues to execute on its on balance sheet development program. Prologis' credit profile benefits from strong tenant relationships underpinning a growing global franchise and the diversification gains derived from its established fund management platform and international strategy. However, these positive ratings factors are counterbalanced by the REIT's exposure to a large development pipeline and land bank as well as risks associated with its material share of joint venture arrangements to support its growth strategy.

The stable rating outlook reflects Moody's expectation that the REIT will continue to generate meaningful cash flows, maintain good liquidity and proactively manage debt maturities on balance sheet and at the funds level. The stable outlook also assumes Prologis' continued progress to de-lever its balance sheet, while focusing on maintaining occupancies above 90% in its core portfolio, growing rental revenue, leasing up its development pipeline and monetizing its land bank.

Moody's stated that Prologis' ratings could be upgraded if the REIT continues its strong operating performance while continuing to improve its credit metrics so that net debt to EBITDA is closer to 5x and fixed charge is sustained above 3x. A ratings upgrade would also require that the REIT pursues balanced growth strategy that would limit its JV/Fund revenues over total revenues and development over total gross assets to no more than its current levels. Although unlikely in the near term, a downgrade in Prologis ratings would be precipitated by deterioration in credit metrics, including net debt/EBITDA greater than 8.0x, a decline in fixed charge coverage to below 2.2x; coupled with significant increase in development exposure over 15% of gross assets and JV/Fund revenues as a percent of total revenues rising above mid-teens. In addition, broad deterioration in the macroeconomic or specifically industrial environment would also be viewed negatively.

Moody's last rating action with respect to Prologis was on July 17, 2013, when the rating agency affirmed the Baa2 senior unsecured rating and Baa3 preferred stock ratings of Prologis, L.P. and Prologis, Inc., respectively, and revised the rating outlook to positive from stable.

The principal methodology used in this rating was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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