Moody's lowers ProLogis debt rating

Moody's Investors Services lowered its rating on real estate investment trust ProLogis' senior unsecured debt to "Baa2" from "Baa1."

The rating is still at investment grade. The rating outlook remains negative for the Denver-based REIT, which specializes in distribution facilities.

Moody's said late Thursday the action reflects its expectation that ProLogis "will face significant earnings and liquidity pressures in the coming quarters."

The ratings agency expressed concern about ProLogis' earnings becoming stressed and "significant challenges" the REIT faces in leasing the projects it has in development.

"Furthermore, the REIT will need to address its funds' refinancing needs," Moody's said, noting that the company needs more credit than it currently has available.

"These significant challenges are partially mitigated by the REIT's decision to stop new development," Moody's said. It also noted the REIT is "working diligently on raising additional funds, as well as refinancing upcoming maturities of its funds' debt." The agency said the development stoppage will help earnings become more stable, although they will likely grow at a slower pace.

"We continue to regard ProLogis' management team as one of the better operators in its space and are encouraged by the board's decisive actions and orderly CEO transition," Moody's said.

The negative outlook relates to expected declines in cash flow as a result of slower leasing in a weak economy and reduced valuations on contributed assets owing to tight credit markets, the large development pipeline despite the recent cutbacks and a challenging debt maturity schedule in the next two years.

The outlook will likely return to stable once ProLogis has demonstrated greater cash flow predictability and more stable earnings. "Moody's would also expect ProLogis to maintain ample liquidity at all times," the agency said.

Separately, Fitch Ratings cut ProLogis' issuer default rating and lowered its outlook on Wednesday.

In a statement following the two downgrades, ProLogis said the ratings agencies acknowledge the company's long-term plans to reduce debt and shrink its development pipeline, while noting short-term concerns. "We will keep the rating agencies and our investors informed of our progress as we implement these strategies," said Chief Financial Officer Bill Sullivan. "In the meantime, the rating changes have a limited impact on the company as the ratings in and of themselves do not affect our ability to draw on or to extend our senior credit facilities into 2010."

In midday trading, ProLogis shares gained 45 cents, or 12.4 percent, to $4.07. The stock has traded between $2.20 and $66.58 in the past 52 weeks.