PEPR cuts full-year earnings forecast following H1 decline

ProLogis European Properties (PEPR), one of Europe’s largest owners of modern distribution facilities, said on Thursday it has lowered its EPRA earnings and distributable cash flow guidance for 2010 to between EUR 0.40 and EUR 0.44 per ordinary unit from between EUR 0.45 and EUR 0.50 due to the slowdown in the pace of improvement in market conditions.
The company reported a drop in Q2 EPRA earnings for ordinary unitholders to EUR 21.2 mln from EUR 31.2 mln, bringing H1 EPRA earnings to EUR 40.4 mln, down from EUR 60.4 mln in the year-earlier period. PEPR said the decline was primarily due to increased operating expenses, a higher tax charge and EUR 3.2 mln of preferred dividends.

Rental and other property income fell by 8.6% to EUR 125.1 mln in the first half, reflecting the loss of EUR 8.7 mln in rental income from portfolio sales, a decline of EUR 6.8 mln as a result of leases rolling back to market and lower portfolio occupancy,

The entire portfolio was independently revalued at 30 June 2010, with net market value decreasing 1.1% from the valuation carried out at 31 December 2009, excluding the effect of foreign exchange translations. Including the impact of foreign exchange effects, the overall net market value increased 0.3% to EUR 2,847.2 mln compared to EUR 2,839.2 mln a year earlier.

Continental European assets recorded an overall valuation decline of 1.4% from EUR 2,345.7 mln to EUR 2,312.2 mln 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, whilst 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 mln from £439.2 mln 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 EUR 535 mln from EUR 493.5 mln at end-2009.

Looking ahead, PEPR said 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.' While the majority of core European markets have seen rents and incentives stabilise and indicators point to the worst of the decline in values being over, the company nonetheless expects occupier markets to remain soft for the remainder of 2010.

'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,' PEPR said in its earnings statement.