The announcement by ProLogis (NYSE:PLD) yesterday that the company has revised its 2008 Funds From Operations (FFO) guidance from $4.65-$4.85 per share to $4.00-$4.35 per share does not lead Fitch to change its credit ratings or Stable Outlook for ProLogis. Fitch currently rates ProLogis as follows:
--Issuer Default Rating (IDR) 'BBB+';
--Unsecured lines of credit ($2.2 billion outstanding as of June 30, 2008), 'BBB+';
--$4.8 billion senior unsecured notes 'BBB+';
--$2.9 billion senior unsecured convertible notes 'BBB+';
--$350 million preferred stock 'BBB'.
PLD's revision of 2008 FFO guidance is mainly driven by the company's expectation that development gains will be lower than previously anticipated due to a combination of slower leasing volume, a stronger dollar, and increasing capitalization rates on industrial real estate. Prior to PLD's FFO guidance revision, a major credit concern for Fitch has been that a sizeable portion of ProLogis' EBITDA is derived from development gains and sponsor funds management fees. However, per Fitch's 'Criteria for U.S. REIT Risk-Adjusted Earnings,' Fitch has historically discounted these cash flows to reflect the variability of these activities through stressed periods such as the current market cycle. Since Fitch has incorporated the variability of these cash flows in its ratings for ProLogis, PLD's announcement of lower development gains does not alter Fitch's opinion of ProLogis' long-term creditworthiness.
In addition, Fitch's ratings and Stable Rating Outlook for ProLogis continue to reflect PLD's large and highly diversified global franchise, strong management team, large unencumbered property portfolio, granular and diversified tenant base, and solid same-property operating performance, even in this persistently challenging real estate operating environment.
Fitch's 'BBB+' IDR for ProLogis also centers on PLD's liquidity position. When reviewing PLD's liquidity position, Fitch believes that PLD's cash and availability under lines of credit as of June 30, 2008, plus ongoing retained cash flows provided by operating activities, less 2008 and 2009 debt maturities and capital expenditures, point to a liquidity surplus of approximately $2 billion. However, Fitch notes that PLD's sizeable development pipeline (both on-balance sheet and through joint ventures) will ultimately factor into PLD's liquidity profile during this period.
Furthermore, even though REIT unsecured debt markets have been inactive for several months, Fitch views favorably the fact that PLD opportunistically accessed the capital markets in April 2008. The company priced an offering of $550 million of 2.625% convertible senior notes due 2038 and concurrently priced an offering of $600 million of 6.625% fixed-rate senior notes due May 15, 2018, both of which are rated 'BBB+' by Fitch.
ProLogis owns, manages and develops distribution facilities and has operations in 132 markets across North America, Europe and Asia. The company has $40.4 billion of assets owned, managed and under development, comprising 542.3 million square feet (50.4 million square meters) in 2,884 properties as of June 30, 2008.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.