ProLogis European PropertiesCompany
PEPR maintains solid operating performance and continues to reduce debt (NL) |
Friday 23 July 2010 ProLogis European Properties, one of Europe’s largest owners of modern distribution facilities, yesterday (July 22, 2010) reported results for the second quarter and six months ended June 30, 2010. |
Highlights
- 0.3% increase in the portfolio value since December 31, 2009 resulting from a valuation decrease of 1.1% more than offset by an improvement in foreign exchange rates
- EPRA1 net asset value per ordinary unit up by 2.0% to €6.27 since end 2009, reflecting stabilizing portfolio values and a further quarter of retained earnings; IFRS net asset value per ordinary unit up to €5.99 from €5.97 at end 2009 �� Maintained high level of portfolio occupancy at 93.7%, comfortably above the market average
- Further progress on refinancing and deleveraging initiatives:
• all Commercial Mortgage-Backed Securities (“CMBS”) fully repaid
• no significant debt maturities until December 2012
• in advanced discussions on new revolving credit facility
- Continued improvement of loan-to-value ratio: to 53.3% from 53.7% in March and 55.0% at end 2009
- Revised guidance: EPRA earnings and distributable cash flow per ordinary unit in the range of €0.40 to €0.44 due to slower forecasted growth in occupier demand than previously anticipated.
Commenting on the results, Peter Cassells, Chief Executive Officer of PEPR, said: “We have delivered solid operating performance and financial results during what continues to be a challenging market environment. These results are testament to the quality of PEPR’s pan-European portfolio, established customer relationships and the expertise of its management teams.
“The first half of the year was dominated by significant leasing activity as we continue to prioritize for portfolio occupancy as a key objective. As a result of this activity, we have maintained our occupancy levels at a high 93.7%, well above the industry average, while at the same time removing some of the risks surrounding future lease expiries, especially in weaker markets.”
Chief Executive’s review
Continued uncertainty over the pace and scale of economic recovery in Europe as well as the introduction of austerity measures in a number of EU member countries has hindered improvements in occupier market conditions and as a result the rental markets remain soft. We believe that a patchy economic recovery will lead to a gradual absorption of existing vacancy; this has been borne out by the volume of leasing transactions witnessed in the UK over the last six months as it begins to emerge from the recent economic crises. However, we now do not anticipate any material improvement in market conditions across the greater region until 2011.
Despite these challenges, we are pleased to report an increase in net asset value per ordinary unit due to the stabilization of property values across the majority of markets, combined with the strengthening of sterling in the first half of the year and the continued retention of earnings. Interestingly, property values within all our markets moved within a tight band of plus or minus 2% since year-end 2009, potentially signaling the trough of European portfolio values.
Our reported earnings for the second quarter and half year are broadly in line with our expectations. However, we expect the slowdown in the pace of recovery in Europe generally will impact our second half portfolio performance more than previously anticipated, accordingly we are revising our full-year guidance for both EPRA earnings and distributable cash flow to between €0.40 and €0.44 per ordinary unit from between €0.45 and €0.50 per ordinary unit.
During the second half of 2010, we will strive to improve further our financial metrics, continuing to reduce leverage and seeking a return to an investment grade credit rating over time. In addition, we will ensure that we remain well placed to capture the benefits of any improvements in occupier demand, maintaining high portfolio occupancy through consistently strong leasing performance and driving cash flow from the portfolio through proactive asset management and exemplary customer service.
Market outlook
The market outlook continues to be challenging, with improvements seen in the first quarter faltering during the latter part of the second quarter amidst concerns over sovereign debt defaults. As a result, the pan-European economic recovery remains slow and intermittent with some evidence of strengthening in a few markets.
Economic commentators are still forecasting continued slow but positive real GDP growth of between zero and 1% a year in 2010 and 2011, with only a modest risk of a double-dip recession. The strengthening of global currencies against the Euro may be a positive development in driving exports and manufacturing in some countries, especially Germany and France, which could consequently lead to an increase in demand for warehouse space across the region.
While the investment markets have seen improving levels of activity resulting in a marked reduction in cap rates on prime product with long leases, occupational demand remains soft with limited net absorption of distribution space. Market activity continues to be dominated by consolidation, particularly within the third-party logistics sector, and reconfiguration of customer supply chains.
Customers continue to request greater flexibility in lease terms, resulting in ongoing pressure on net effective rents, especially in areas with excess existing stock. However, the majority of core European markets have seen rents and incentives stabilize and indicators point to the worst of the decline in values being over. Management nonetheless expect the occupier markets to remain soft for the remainder of 2010.
Portfolio revaluation
The entire portfolio was independently revalued at June 30, 2010, with net market value decreasing 1.1% from the valuation carried out at December 31, 2009 prior to the effect of foreign exchange translations. Including the impact of foreign exchange, the overall net market value increased 0.3% to €2,847.2 million as compared to €2,839.2 million at year end 2009.
Continental European assets recorded an overall valuation decline of 1.4% from €2,345.7 million to €2,312.2 million over the six months to June 2010, including movements in the Swedish krona exchange rate. Excluding this currency effect, continental European asset values fell 1.65% over the same period. Property values in Northern Europe and Central Europe fell 2.05% and 1.95% respectively, while Southern Europe suffered a more modest decline of 1.4%. These valuations demonstrate a marked slowdown in the rate of portfolio value decline from the 6.2% fall suffered in the second half of 2009 and the 9.2% decline in the first half of 2009, driven by a reduction in cap rates across most markets offset by further softening of rental values and a repricing of shorter dated income across the portfolio.
The UK witnessed a slight increase in values in the six months to June 2010, increasing 1.2% to £444.5 million from £439.2 million at the end of 2009, driven by improving market sentiment and strong demand from institutions, UK retail funds and overseas investors. The strengthening of the sterling exchange rate during the first half of 2010 took the total value of the UK portfolio up 8.4% in euro terms, to €535.0 million from €493.5 million at end 2009.
The net initial yield of the portfolio at June 30, 2010 decreased to 7.7% from 8.4% at December 31, 2009, taking into account the slight decline in value and lower annualized in-place rental income.
Portfolio performance
ProLogis (NYSE: PLD), PEPR’s external manager, has maintained strong leasing momentum during the second quarter, with 31 lease transactions covering 249,500 m² being completed. Five leases, covering 41,900 m², were new leases in Czech Republic, France, Germany and Poland. A further eight leases were expansions, adding 9,800 m² to existing customers’ supply chains. The remaining 18 transactions were lease renewals with customers such as Carrefour, FM Logistics, Geodis, Iron Mountain and John Lewis.
These transactions resulted in a weighted average rental decline of 7.7% over the expiring rental level, in line with management expectations given market rental decreases of between 5-20% across Europe. The level of over-renting inherent in the portfolio has reduced to 3.4% at June 30, 2010.
Of the 36 lease breaks and expiries during the first six months, covering 356,900 m², 12 were exercised representing 146,000 m². This resulted in a customer retention rate of 65% by rental value for the half-year, at the top end of PEPR’s historical average customer retention rate. It is likely that PEPR’s customer retention rate and portfolio occupancy will deteriorate in the third quarter before staging a recovery in the final quarter and into 2011 given the continued weakness in the occupational markets.
The second quarter of the year saw two instances of customer defaults on leases totaling 7,100 m², or less than 0.1% of annualized rental income. PEPR remains focused on monitoring customer performance to minimize future risk. Total accounts receivable from customers for half-year 2010 decreased to €46.4 million, from €48.9 million at March 31, 2010 and from €46.9 million at December 31, 2010. At the end of June 2010, PEPR held a €2.7 million provision for bad and doubtful debts (HY 2009: €1.4 million).
At June 30, 2010, the portfolio comprised 232 distribution facilities, covering 4.9 million m² across 11 European countries with a net market value of €2.8 billion. The portfolio risk profile remains attractive, with high occupancy of 93.7%, a diversified customer base, and on average 3.4 years to next lease break or 5.4 years to lease expiry.
On a like-for-like basis, average annualized rent per square meter decreased 7.9% over the year, partly as a result of rent incentives given on the significant number of leases signed between the two periods and increased portfolio vacancy.
Over the year, the total market value per square meter of the like-for-like portfolio decreased by 5.5%, with continental European countries recording valuation decreases of between 7.1% and 11.1% and the UK improving, up 6.6%.
Guidance
PEPR management has lowered EPRA earnings and distributable cash flow guidance for 2010 to between €0.40 and €0.44 per ordinary unit from between €0.45 and €0.50 per ordinary unit given the slowdown in the pace of improvement in market conditions. In addition, despite the significant strides made in enhancing PEPR’s financial metrics during the past year and a half, it is unlikely that PEPR will return to an investment grade credit rating by October 23, 2010, the annual coupon reset date on the €500 million Eurobond issuance. An investment grade rating would reset the coupon on the Eurobond to 5.875% from 7.625% which had previously been assumed in PEPR’s guidance.
The terms of PEPR's €300 million unsecured credit facility currently prohibit cash distributions to ordinary unitholders. As a result, PEPR does not contemplate paying ordinary dividends in 2010, although it intends to revert to paying an ordinary dividend as soon as it is prudent to do so and when permitted under the terms of the facility.
Source: PEPR |
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