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ProLogis European Properties Sustained operational performance reflects continued demand across continental Europe
Luxembourg - 24 July 2008 - ProLogis European Properties (Euronext: PEPR), Europe's largest owner of modern distribution facilities, today reports results for the quarter and half year ended 30 June 2008.
Highlights
Quarter to 30 June 2008 Half year to 30 June 2008 * €0.18 distribution per unit * €0.38 distribution per unit, implying an annualised dividend yield of 8.4% [1] * EPRA net asset value per * EPRA net asset value per unit unit[2] of €12.03, a €0.54 decreased €0.70 to €12.03 decrease compared to the first over the half year (2007: quarter (€12.57); IFRS net €12.73); IFRS net asset value asset value per unit was €11.18 per unit decreased to €11.18 (Q1 2008: €11.59) (2007: €11.73) * 2.6% valuation decrease on the portfolio since 31 December 2007 (4.8% including foreign exchange adjustments) * EPRA earnings [2] decreased * EPRA earnings per unit slightly to €0.18 per unit (Q2 decreased €0.04 to €0.36 (HY 2007: €0.19 per unit) 2007: €0.40); IFRS loss of €0.17 per unit (HY 2007 earnings: €0.64 per unit) * €70.2m additional investment in * €161.9m additional investment ProLogis European Properties into ProLogis European Fund II Properties Fund II * 22 lease transactions covering * 42 lease transactions 138,900m2 covering 245,800m2, compared to 37 transactions covering 296,100m2 in half year 2007 [3]
Commenting on the results, Gordon Keiser, chief executive office of PEPR, said: "We are pleased to report that PEPR has continued to show good operational performance in the first half of 2008, maintaining its industry-leading high occupancy levels and completing a total of 42 lease transactions, reflecting the continued occupier demand across our European markets. However, the significant weakening of sterling versus the euro has affected our ongoing sterling earnings as compared to our earlier forecast and as a result we are marginally revising our dividend target for the year to reflect this.
"PEPR's additional investment in ProLogis European Properties Fund II demonstrates our commitment to continue to execute our growth strategy across Europe. We are confident that the strength of our business model, sustained growth in world trade and our customer relationships will enable us to benefit from the continued solid performance of the European logistics market."
Guidance As part of its usual semi-annual business review process, management has re-examined the guidance provided for the year. Given the exceptional fluctuations in the currency markets, with sterling weakening against the euro by 10% in the first six months of the year alone, combined with challenging conditions in the property and financial markets, management has decided to revise its 2008 distribution guidance to between €0.76 and €0.80 cents per unit from the earlier guidance of €0.80 to €0.86 cents per unit. PEPR continues to target a 6.0% to 6.5% cash return on its investment in PEPF II for the year.
Directly owned portfolio revaluation The entire directly owned portfolio was revalued as at 30 June 2008, with overall net market value decreasing by 2.6% from the December 2007 valuation (4.8% including foreign exchange adjustments) to €3,945.3 million (2007: €4,143.1 million).
The largest movement was in the value of the UK properties, which fell 8.5% to £631.7 million (2007: £690.7 million). The reporting of the UK portfolio in euro was also significantly impacted by the weakening of sterling in the first six months of the year. The total value of the UK portfolio, including this currency impact, decreased 16.9% to €803.4 million (2007: €966.3 million). The gross yield [4] on the UK assets increased 40 basis points to 7.3% from 6.9% at the year end.
Valuation movements on the continent were more muted with the continental portfolio showing a slight decline of 1.1% overall to €3,141.9 million (2007: €3,176.9million). PEPR experienced modest valuation increases in Poland (€7.3 million), The Netherlands (€4.1 million) and Spain (€2.6 million), more than offset by devaluations in France (€28.2 million), Italy (€6.1 million), the Czech Republic (€5.2 million), Hungary (€2.4 million) and Germany (€2.2 million).
The gross yield of the direct portfolio at 30 June 2008 increased to 7.3% (6.9% net yield [5] ) from 7.1% (6.7% net yield) at the year-end.
ProLogis European Properties Fund II ("PEPF II") PEPR made a further €70.2 million investment into PEPF II in the second quarter, thereby continuing to execute its growth strategy and indirectly investing in modern distribution facilities that complement PEPR's existing state-of-the-art portfolio and growing relationships with key customers. This investment, entirely funded from existing credit facilities, increases PEPR's gross investment in PEPF II to €295.2 million.
During the second quarter PEPF II acquired 23 facilities, covering 594,200 square metres, in 10 European countries and independently valued at €367.8 million, representing a 6.9% gross yield on investment.
PEPR received a €3.5 million distribution from PEPF II in the second quarter, a substantial increase over the first quarter distribution of €1.8 million, reflecting the addition of 27 facilities at the end of March and to a lesser extent the 23 facilities acquired in the second quarter. The second quarter distribution corresponds to a 6.0% annualised cash return [6], on target to achieve our expected income return of 6.5% to 7% on average per annum on a ten-year time horizon.
Portfolio performance On 30 June 2008, PEPR sold 23,300 square metres of land in Zaandam, north of Amsterdam, which management believes is not suitable for our target customer base. The gross consideration was €4.6 million, a modest premium to the December 2007 valuation.
After the end of the quarter, PEPR sold Zibido DC1, a 12,800 square metre distribution facility near Milan, for a gross consideration of €6.4 million. Including the lease surrender premium received, the total proceeds represented a premium to the latest NAV of over 14%.
During the second quarter, ProLogis contributed €367.8 million of modern distribution facilities into PEPF II. These 23 assets are 1.0 years old on average, 99.1% leased to global customers, such as DHL, Tesco, Unilever and Wincanton, and have 7.2 years to lease expiry, or 6.3 years to lease break on average.
As a result of this contribution, the combined portfolio of PEPR and PEPF II at the end of June comprised 340 distribution facilities, covering 7.5 million square metres across 12 European countries with an open market value of €5.6 billion. The risk profile of both portfolios remains highly attractive, providing a combined occupancy level of 97.9%, a diversified customer base, and on average 5.0 years to next lease break or 6.8 years to lease expiry. Summaries of the directly owned, PEPF II and Combined portfolios are shown on pages 20 to 22.
Within the directly owned portfolio ProLogis, as PEPR's external manager, completed 22 lease transactions covering just 138,900 square metres during the second quarter. Eleven of these were new leases, covering 105,400 square metres, mainly with existing customers, such as Fiege Logistik and Iron Mountain. Six leases were renewed for 18,500 square metres, including a 14-year term, 4,000 square metre lease for Nippon Express in The Netherlands, and five leases were expanded for an additional 15,000 square metres. Of the remaining lease breaks in 2008, only one lease break for 4,400 square metres in Hungary has been exercised.
However, the first half of the year also saw three of PEPR's customers go into default, the largest of which is E. Pawson, a family-run, third-party logistics company (3PL) in Wakefield, UK. Vacant possession of the building was obtained in June. Marketing of the two-year old, 24,000 square metre distribution facility has produced a number of viewings. In France, a 26,000 square metre building in Clesud, previously leased to LoraFret, a local 3PL, has already been re-leased. Finally, a 20,600 square metre building in Piacenza, Italy is in advanced negotiations to be re-let. This building was previously leased by Generali Trasporti, a local 3PL.
Same-store portfolio The same-store portfolio includes all properties owned by PEPR as at 1 January 2007 less subsequent disposals. At the end of June, this portfolio consisted of 228 properties, accounting for 92.6% of current directly owned portfolio open market value, or 92.8% by area.
SAME STORE PORTFOLIO OVERVIEW AS AT 30 JUNE 2008
% of 30 June 30 June 30 June portfolio 2008 2007 change 2008 2007 change 2008 2007 change Annualised rent Net Open Market in € per leasable Value Occupancy m² in € per m² % Southern [7] 47.5% 50.47 50.24 +0.5% 687 679 +1.1% 98.3% 97.6% +0.7% Northern [8] 20.7% 57.17 58.47 -2.2% 761 744 +2.3% 95.5% 97.2% -1.7% Central [9] 16.4% 47.40 53.05 -10.7% 689 679 +1.5% 94.6% 94.9% -0.3% UK [10] 15.4% 75.34 76.86 -2.0% 1,001 1,218 -17.8% 96.8% 100.0% -3.2% Total / Averages 100.0% 55.20 56.52 -2.3% 751 776 -3.2% 96.9% 97.5% -0.6%
On a same store basis, average annualised rent per square metre decreased 2.3% over the year, primarily due to increased vacancy, and reducing rents in Central Europe. Over the year, the total open market value per square metre decreased by 3.2%, with valuation increases on the continent being offset by the value decline in the UK. The gross yield [5] of the same store portfolio increased marginally to 7.4% from 7.3% at the end of June 2007.
Market outlook The continued deterioration in the financial and real estate markets is having an uneven economic impact across countries. Those countries that rely on capital markets for financing have been harder hit, especially the UK and Spain, but other Western European markets are beginning to feel the impact. The Central European markets so far appear to have been insulated; as a result spreads between UK and Central European yields are at record-low levels. With a less positive economic outlook, global trade growth is expected to slow in 2008, from the 15% annual rate from the past few years. However, world trade volumes are expected to be fuelled by continued strong growth in developing economies given an increasingly world-wide movement of finished products. This should sustain a good performance in the European logistics market in 2008, particularly driven by the transport sector and pan-European, third-party logistics providers
Financial results Earnings PEPR reported an IFRS loss for the second quarter of €50.9 million, as compared to a €80.6 million gain for the same period last year, primarily due to non-cash, fair-value accounting for our investments, portfolio reshaping, weaker sterling exchange rates and one-off receipts in 2007. EPRA earnings, a measure of underlying profitability, were €34.6 million for the quarter, or €0.18 per unit, a slight decrease over €36.2 million or €0.19 per unit for the same period last year. EPRA earnings for the half year reduced by €8.0 million, from €77.1 million to €69.1 million, primarily due to the inclusion in last year's results of an exceptionally large UK lease termination receipt of €6.0 million.
Total revenue During the second quarter, PEPR's rental and other property income decreased by €13.7 million to €74.5 million, from €88.2 million in Q2 2007. If we exclude the €6.0 million one-off receipt in 2007, the decrease is due in large part to the loss of €5.7m in rents from the sale of the Garonor portfolio in July 2007 and a €2.1 million decline in UK sourced income due to the sterling exchange rate.
Operating expenses Total operating expenses comprise the cost of operating the portfolio and managing PEPR as a fund.
Half year to 30 June Change 2008 2007 €'000 €'000 %
Cost of rental activities, including 16,597 14,788 12.2% property management fees
Fund expenses, including fund management 5,649 9,934 fees Reversal of provision for incentive fee - (4,544) 5,649 5,390 4.8%
Underlying operating expenses 22,246 20,178 10.2%
Cost of rental activities includes ground rents paid, property management fees, the provision for bad debt and other non-recoverable property related expenses, such as property insurance and property tax. During the half year, PEPR recorded a €2.4 million bad debt expense related to three customers who had defaulted on their lease obligations. The property management fee is correlated to the gross value of the directly owned portfolio and as such has declined €0.6 million compared to the same period last year.
Fund expenses include the non-property related costs associated with our business, including fund management, custodian and professional fees. The management fee is also correlated to the gross value of the directly owned portfolio and as such has declined €0.2 million compared to the same period last year.
At the end of June 2007, the incentive fee had been estimated at €4.5 million for the period from IPO to that date and was provided for in the half year results. Following the 2007 year end portfolio revaluation this hurdle rate was no longer exceeded and the provision was reversed. There is no current accrual for the incentive fee.
Profit on disposal of investment properties Net profit on disposal during the first six months of the year of €1.9 million relates to the sale of 23,300 square metres of land in Zaandam, north of Amsterdam, and will be distributed as part of the Q2 dividend.
Property fair value movements Total property fair value movements for the half year resulted in a net loss of €122.2 million, comprising €37.5 million of revaluation gains, €169.8 million of revaluation losses and a €10.1 million reduction in PEPR's purchasers' cost provision.
Further details on the portfolio valuation movements are provided in the Directly owned portfolio revaluation on page 2.
Investment fair value movements PEPR recorded a €9.7 million fair value adjustment for the first six months of 2008 relating to its investment in ProLogis European Fund II. This adjustment primarily relates to PEPR's share of the impact of weaker sterling exchange rates given PEPF II's higher portfolio weighting in the UK during the period, as well as purchaser's costs on the 50 properties acquired by PEPF II in 2008. PEPR's share of PEPF II's portfolio revaluation losses for the period had largely been provided for at the end of 2007.
PEPR received €3.5 million of distributions for the second quarter, taking distributions for the half year to €5.3 million.
Financing and debt Net financing costs, comprising interest income received, interest expense, realised and unrealised foreign exchange movements and amortisation of debt raising costs, increased slightly to €52.1 million for the half year, from €51.5 million in the comparable period.
Interest income of €2.4 million for the first six months of the year showed a €0.5 million increase over the comparable period, relating to the higher level of cash on deposit during the second quarter.
Interest expense of €51.5 million for the half year increased by €2.1 million compared to the half year 2007, primarily related to the PEPR's refinanced debt structure and the increase in European and UK market interest rates over the past year.
The weighted average interest rate for the three and six months ended 30 June 2008 was 5.2% (HY 2007: 4.9%). At the end of June 2008, 65.5% of PEPR's debt is at fixed rates of interest, (Q1 2007: 59.0%), with the remaining floating debt based on Euribor or Libor with margins varying between 65 to 70 bps on the €900 million senior unsecured debt facility and up to 137 bps on the €151.1 million secured bank loan covering Central European properties.
Amortisation charges for the six months decreased substantially to €3.2 million (HY 2007: €4.3 million) due to the termination of two Commercial Mortgage Backed Securities facilities in the third quarter of 2007. Total outstanding debt at the end of June 2008 was €2.1 billion, a 10.4% increase since the end of 2007 (€1.9 billion), due to the €161.9 million investment into PEPF II and additional borrowing under the three-year term loan of the €900 million senior unsecured debt facility. The €300 million revolving portion of the senior unsecured facility has not been utilised and PEPR has €131.4 million cash on its Balance Sheet. An overview of PEPR's outstanding debt is on page 19. At the end of June, PEPR's loan to value was 48.3%, without the consideration of the use of cash on hand, as compared to 43.3% at the end of 2007 and remains well within the 60% limit as set out in our Management Regulations.
Tax The overall tax recorded in the Income Statement for the half year is a credit of €19.3 million, comprising income tax expense of €9.8 million more than offset by a deferred tax credit of €29.1 million. The income tax expense for the six months represents a 24.7% decrease over the HY 2007 charge of €13.0 million and represents an estimated effective tax rate of 11.9% for the six months to June 2008 compared to 14.0% for the same period last year.
Distributable cash flow and distributions PEPR distributes substantially all of its distributable cash flow on a quarterly basis, whilst making provision for anticipated capital expenditure or other obligations and retaining discretion to reinvest gains on disposals. In compliance with our Management Regulations, PEPR pays all distributions quarterly from operational cash flow. The second quarter distribution per unit is €0.185843, including €0.02 relating to income from PEPR's investment in PEPF II. Distributions for the half year equalled €0.38 per unit, implying an annualised dividend yield of 8.4% based on the 30 June 2008 closing price of €9.07 per unit. The second quarter distribution will have an ex-dividend date of 28 July 2008, a record date of 30 July 2008 and a payment date of 5 August 2008.
Earnings webcast and conference call details: We invite you to access the live presentation webcast and conference call, held today, 24 July 2008, at 4pm BST / 5pm CET, by clicking on the link entitled "Second Quarter and Half Year 2008 Financial Results Webcast" located on the homepage of our website, www.prologis-ep.com.
To participate in the conference call please dial:
A replay of the presentation webcast and a transcript of the call will be available in the "Presentations & Webcasts" page of the Investor Relations section of the PEPR website, www.prologis-ep.com. A replay of the conference call will be available from 7pm GMT / 8pm CET on Thursday 24 July 2008 until Thursday 7 August 2008. To access the conference call replay, please dial one of the following numbers, using passcode 4403876#:
[1] Based on the closing unit price on 30 June 2008 of €9.07 [2] Based on EPRA (European Public Real Estate Association) Best Practices Policy Recommendations, issued in May 2008 [3] Excluding 35 leases, covering 36,200 square metres related to the Garonor portfolio sold in July 2007 [4] Annualised rental income expressed as a percentage of net open market value i.e. after deduction of purchasers' costs [5] Annualised rental income expressed as a percentage of gross open market value i.e. before deduction of purchasers' costs [6] Based on a time weighted cash investment [7] Southern Europe comprises France, Italy and Spain [8] Northern Europe comprises Belgium, Germany, The Netherlands and Sweden [9] Central Europe comprises the Czech Republic, Hungary and Poland [10] Sterling comparative figures have been re-translated using the half-year exchange rate for open market values and an average exchange rate for the six months to 30 June 2008 for rental income.
Financial statements and portfolio information The financial statements have been produced in accordance with International Financial Reporting Standards.
For further information, please contact:
Investor relations ProLogis European Properties +44 20 7518 8708 Jennifer van der Eem, VP Investor Relations jvandereem@prologis.com
Media M:Communications +44 20 7153 1523 or 7153 1549 Ed Orlebar / Charlotte McMullen orlebar@mcomgroup.com / mcmullen@mcomgroup.com
Please click on the link below for the full PDF version of the press release including tables:
