Fitch Upgrades ProLogis' IDR to 'BB+'; Outlook Revised to Stable

The upgrade of PLD's Issuer Default Rating to 'BB+' from 'BB' centers on significant expected reductions in the industrial REIT's leverage. Proceeds from the company's recently priced follow on common equity offering and the sale of industrial properties and other assets to affiliates of Blackstone Real Estate Advisors will be used to reduce borrowings under the company's global line of credit, address a November 2010 senior note maturity, and tender for longer-dated senior notes. Over the next 12 months, Fitch estimates PLD's net debt to recurring operating EBITDA will approach 9.0 times (x). The company's fixed charge coverage ratio is also expected to improve due to the de-levering transactions, while downward mark-to-market rate reductions on the core portfolio are also ebbing. Overall, Fitch believes that PLD's long-term credit profile is now consistent with the higher end of the 'BB' rating category.

Credit concerns revolve around Fitch's view that PLD's ability to continue monetizing its significant land holdings remains vulnerable to execution risk due to the fragile economic recovery. In addition, Fitch favorably views PLD's strategy to increase exposure to major logistics corridors through asset sales and development from a long-term demand standpoint; however, the sale of certain properties outside of major corridors may result in lower stabilized property cash flows if demand for new industrial space stalls.

The revision of the Outlook to Stable reflects PLD's high-quality unencumbered industrial property portfolio that provides value to bondholders, its good liquidity position, staggered debt maturity schedule, and management's focus on strengthening the balance sheet.

PLD's leverage ratio, defined as net debt to recurring operating EBITDA including Fitch's estimate of recurring cash distributions from unconsolidated investees, was 12.2x as of Sept. 30, 2010, compared with 12.5x and 15.0x as of Dec. 31, 2009 and Dec. 31, 2008, respectively. Pro forma for $1.1 billion of net proceeds from the recently priced equity offering (80 million shares with an additional 12 million shares to cover overallotments at $12.30 per share) and the Blackstone asset sale at a purchase price of $1.02 billion to repay debt and tender for longer-dated bonds, PLD's leverage ratio would be approximately 10.2x. Fitch previously stated that a leverage ratio of below 10.0x would have a positive impact on the ratings and/or Outlook. Over the next 12 months, Fitch anticipates leverage approaching 9.0x due to the incremental cash flow from completed development properties in lease-up as well as same-store cash flow stabilization.

While the economic recovery remains tenuous as evidenced by the high unemployment rate and sluggish U.S. GDP growth, PLD benefits from a global platform, and operating fundamentals are improving modestly. During the third quarter of 2010 (3Q'10), same-store rental rates on lease turnovers decreased by 8.5% compared with a 15.7% decline in 2Q'10. Same-store net operating income increased by approximately 0.3% in 3Q'10 after declining by 3.1% and 4.2% in 2Q'10 and 1Q2010, respectively, and declining by 4.2% for full-year 2009. Improvement stems principally from the company's increasing occupancy, with the leased rate in the direct owned operating portfolio increasing to 86% as of Sept. 30, 2010 from 84.8% as of June 30, 2010.

PLD's fixed charge coverage ratio (defined as recurring operating EBITDA including Fitch's estimate of recurring cash distributions from unconsolidated investees less recurring capital expenditures less straight-line rent adjustments, divided by cash interest expense, capitalized interest and preferred dividends) was 1.4x for the trailing 12 months ended Sept. 30, 2010, unchanged from full year 2009. The company has outperformed its industrial markets through market cycles, and Fitch anticipates that same-store net operating income will grow incrementally in 2011 and 2012 due to improving fundamentals and expected improvements in occupancy on completed development space. The company's reductions in cash interest expense via repayments of debt through the equity capital raise, Blackstone asset sale, and expected tender offer, offset by the reduction in net operating income from assets sold to Blackstone, are projected to improve PLD's fixed charge coverage ratio to a range between 1.5x and 2.0x during 2011 and 2012.

PLD's ability to monetize its land held for development will occur gradually, which is incorporated into the 'BB+' IDR. The company held 157 completed development properties that were 73.1% leased as of Sept. 30, 2010 and an additional 10 properties under development that were 65.6% leased as of Sept. 30, 2010. However, land held for development was $2.4 billion (12.8% of gross assets) as of Sept. 30, 2010, which is slightly down from $2.6 billion (13.9% of gross assets) as of Dec. 31, 2009.

PLD's recently announced initiative to increase its exposure to major logistics corridors from 71% of direct-owned and pro rata investment management properties to a range of 80% to 90% should position the company to grow property cash flows in major population and distribution hubs. That being said, the sale of certain direct-owned properties outside of major corridors may result in lower stabilized property cash flows if demand for new development continues to be incremental.

The Stable Outlook reflects PLD's high-quality unencumbered industrial property portfolio that provides value to bondholders. Unencumbered asset coverage (calculated as unencumbered assets - based on a 7.5% capitalization rate on NOI pro forma for the stabilization of completed development and the Blackstone asset sale - divided by senior debt pro forma for the repayment of debt via the equity offering and tender offer) was 1.6x, up from 1.3x as of Sept. 30, 2010. Unencumbered asset coverage of senior debt would be 1.8x when considering 50% of the book value of PLD's land. Overall, the covenants within PLD's global line of credit agreement and bond indenture, which include unencumbered asset covenants, are not expected to limit the company's financial flexibility following the company's de-levering transactions.

PLD also has a good liquidity position, driven by staggered near-term debt maturities, a sizeable borrowing capacity from the global line of credit, and improved organic liquidity via a recently announced dividend reduction. Sources of liquidity (unrestricted cash, availability under the company's global line pro forma for the repayment of outstanding borrowings and net of letters of credit, projected retained cash flows from operating activities after dividends and other distributions pro forma the company's reduction in its common stock dividend to $0.1125 per share per quarter from $0.15 per share per quarter) divided by uses of liquidity (pro rata debt maturities pro forma for the repayment of the November 2010 bond maturity and projected capital expenditures including remaining development costs to incur) result in a liquidity coverage ratio of approximately 1.2x for Oct. 1, 2010 through Dec. 31, 2012. Assuming the company refinances its consolidated and pro rata share of property fund mortgage debt at 80% of outstanding principal (consistent with refinancing activity in PLD's Mexico Industrial Fund in 3Q'10 and expected refinancing activity in PLD's North American Properties Fund I in 4Q'2010), liquidity coverage would be 1.6x.

Pro forma for the repayment of borrowings under the company's revolving credit facility and assuming a tender for bonds maturing beyond 2012, PLD's debt maturity schedule is manageable with no more than 15% of debt maturing annually over the next five years. Management's focus on improving the balance sheet while also positioning the company to take advantage of moderating market fundamentals also provides stability to the rating at the 'BB+' level.

The two-notch differential between PLD's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BB+'. Based on Fitch's criteria report, 'Equity Credit for Hybrids & Other Capital Securities,' the company's preferred stock is 75% equity-like and 25% debt-like since they are perpetual and have no covenants but have a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock to recurring EBITDA (including Fitch's estimate of recurring cash distributions from unconsolidated investees) was 12.4x as of Sept. 30, 2010 but is expected to decline to 10.3x pro forma for the de-levering equity capital raise.

The following factors may have a positive impact on the ratings and/or Outlook:

--Net debt to recurring operating EBITDA including Fitch's estimate of recurring cash distributions from unconsolidated investees sustaining below 8.5x (as of Sept. 30, 2010, leverage was 12.2x but is expected to be approximately 10.2x pro forma for de-levering transactions and approach 9.0x over the next 12 months);

--Material improvements in leasing of the completed development portfolio which could result in increased fixed charge coverage;

--Unencumbered asset coverage - calculated as applying a 7.5% capitalization rate on unencumbered NOI - to senior debt maintaining above 2.0x (as of Sept. 30, 2010, unencumbered asset coverage was 1.6x pro forma for the Blackstone asset sale and repayment of debt).

The following factors may have a negative impact on the ratings and/or Outlook:

--Net debt to recurring operating EBITDA sustaining above 10.0x;

--Fitch-defined fixed charge coverage maintaining below 1.5x;

--A liquidity shortfall.

ProLogis is an equity REIT that owns, manages, and develops distribution facilities, with operations in 23 major logistics corridors and other markets across North America, Europe, and Asia. As of Sept. 30, 2010, the company owned and managed more than 475 million square feet of industrial space leased to more than 4,400 customers including manufacturers, retailers, transportation companies, and third-party logistics providers. As of Sept. 30, 2010, PLD had $34.9 billion in total assets owned and under management, $18.6 billion in gross book assets, a common equity market capitalization of $5.6 billion, and a total market capitalization of $14.1 billion.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--Corporate Rating Methodology, Aug. 13, 2010;

--Criteria for Rating U.S. Equity REITs and REOCs, April 16, 2010;

--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29, 2009;

--Rating Hybrid Securities, Dec. 29, 2009;

--Recovery Rating and Notching Criteria for REITs, Dec. 23, 2009.

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

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Contributing Sources

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Fitch Upgrades ProLogis' IDR to 'BB+'; Outlook Revised to Stable