Fitch Rates ProLogis Unsecured Bond Offering 'BBB+'; Outlook Stable

Business Wire, Oct 26, 2005

NEW YORK -- Fitch rates ProLogis' offering of senior unsecured notes 'BBB '. ProLogis' Rating Outlook is Stable.

Proceeds from the bond offering are expected to be used to partially repay the $1.5 billion bridge financing that was used to complete the acquisition of Catellus Development Corp. (Catellus) on Sept. 15, 2005. The remainder of the bridge financing is expected to be repaid with proceeds from non-core asset sales over the next nine months.

The bonds being offered today have a weaker covenant package than previously issued ProLogis bonds. Certain other large issuers in the REIT sector have also sought to dilute covenant protections over the past several years. These modifications have varied from issuer to issuer. In ProLogis' case, the minimum ratio of unencumbered assets to unsecured debt will decline to 125% from 150%, and the maximum debt to total assets ratio is increased to 65% from 60%. In addition, the definition of total assets has generally been broadened to be more generous to ProLogis. These covenants also allow both recurring and nonrecurring fee income to be assigned a pre-determined capitalization rate and included as unencumbered assets.

Based on the current debt maturity schedule, ProLogis' new covenant package will not become effective until the bonds with the existing covenant package mature. Absent any prepayments, this will not occur until 2017. In fact, the bonds being offered today may mature before the new covenant package becomes effective.

In conjunction with the company's new $2.6 billion global senior credit facility (facility), bank lenders and bondholders are now considered a party to the company's Security Agency Agreement (SAA), which pledges receivables from certain subsidiaries to the lenders. Nevertheless, the SAA also grants ProLogis the right, with limited notice, to remove beneficiaries from the pledge. In Fitch's view, this feature partially offsets any implied benefit of being a party to the SAA for the bondholders. Due to this contingency, Fitch will continue to count assets pledged under the SAA as encumbered for purposes of estimating recoveries for unsecured bondholders, even though the noteholders and credit facility lenders are pari passu today.

Despite the weaker nature of the new covenant package, Fitch does not believe that the differences in covenant protection warrant a change in the Rating or Outlook for ProLogis' bonds. Consistent with other investment grade ratings, ProLogis' rating most heavily considers default probability which is negligibly impacted by the new covenants. Further, the rating also considers the company's strong operating history, management expertise, and demonstrated operating discipline over a long period. While the changes in covenants are not viewed significant to affect the rating, if management were to operate the company at the new covenant thresholds, this would place significant pressure on the rating and possibly result in rating actions.

ProLogis' rating strengths center on the size and quality of its diverse multinational pool of industrial warehouse properties. In general, the portfolio has exhibited solid occupancy rates and a strong quality of tenants and tenant diversity. In particular, Fitch believes that the company's international presence adds diversity and robustness to the core earnings stream and gives the company an edge in its ability to attract and retain high quality tenants as well as gather and interpret market intelligence. In addition, ProLogis has demonstrated substantial acumen at managing development projects in a variety of the world's most desirable warehouse and industrial real estate locations. In Fitch's view, the recent acquisition of Catellus will be accretive to this capacity. Other strengths center on the company's deep management team.

Fitch looks at ProLogis' leverage from a risk-adjusted standpoint and believes that the company's capitalization is adequate, but not strong, for the current rating category. This may improve modestly in the near term as a result of the Catellus acquisition which will cause the company's core, stabilized property base (lower risk weighted assets) to increase disproportionately relative to higher risk assets such as undeveloped land, joint venture interests, and properties under construction.

Rating concerns center on the growing component of investments in joint ventures, which tend to have less transparency with respect to commitments and contingencies, increased legal complexity, and less reliable cash flow streams to the parent company than traditional direct-owned stabilized operating properties. Other concerns center on the company's significant use of variable rate financing, which represented approximately 35% of total debt at June 30, 2005. Due to the fact that the new bond offering will pay down additional floating-rate bridge financing that is not included in the June 30, 2005 number, it is not anticipated that the company's use of variable-rate financing will decline in the near future. ProLogis also has significant releasing risk, with approximately 20.4% of total base rents maturing in 2005.