PEPR Results for the quarter and year ended 31 December 2009
(Thomson Reuters ONE) - News release ProLogis European Properties Results for the quarter and year ended 31 December 2009 2009 deleveraging initiatives completedLuxembourg - 11 February 2010 - ProLogis European Properties (Euronext: PEPR),one of Europe's largest owners of modern distribution facilities, today reportsresults for the quarter and year ended 31 December 2009.Highlights * 94.5% of EUR1.3 billion debt maturities due in 2009/2010 refinanced or repaid, primarily due to: * EUR366.8 million of new or extended secured financings completed during the year * EUR440.9 million of new secured financings completed, post year end * EUR61.1 million of convertible preferred equity raised * EUR189.1 million of net proceeds from completed asset sales * Record levels of leasing activity deliver sustained high occupancy of 96.1% * 76% customer retention rate achieved in the year * 5.2% valuation decrease on the portfolio since 30 June 2009 (4.5% excluding foreign exchange adjustments) with only a 0.4% decrease in Q4 2009 Quarter to 31 December 2009 Year to 31 December 2009 * EPRA earning[1] decreased to EUR0.05 * EPRA earnings[1] per ordinary per ordinary unit (Q4 2008: EUR0.15 unit decreased EUR0.13 to EUR0.54 per unit) due to decreased rental (2008: EUR0.67 per unit), due to income, one-time CMBS termination decreased rental income, one-time costs and the loss of dividends from CMBS termination costs and the ProLogis European Properties Fund II loss of dividends from PEPF II, ("PEPF II"), partially offset by partially offset by lower lower finance expenses operating and finance expenses * IFRS earnings of EUR0.04 per ordinary * IFRS loss of EUR1.62 per ordinary unit (Q4 2008 loss: EUR3.02 per unit), unit for the year (2008 loss: due to improving portfolio values in EUR3.03 per unit), related to a Q4 2009 and losses related to PEPF slowdown in portfolio value II in 2008 declines in 2009 and losses related to PEPF II in 2008, offset by losses on property disposals * EPRA net asset value('NAV')[1] per * EPRA NAV[1] per ordinary unit ordinary unit of EUR6.15, broadly flat decreased23%, to EUR6.15 over the compared to 30 September 2009 (EUR6.18 period (2008: EUR8.02 per unit) as per unit) a result of declining portfolio values and asset sales, partially offset by lower levels of debt * IFRS NAV per ordinary unit increased * IFRS NAV per ordinary unit fell to EUR5.97 (Q3 2009: EUR5.93 per unit) 13.6% to EUR5.97 (2008: EUR7.38 per unit) * 31 lease transactions covering * 88 lease transactions covering 331,600m2, maintaining high 947,300m2, compared to 82 portfolio occupancy with almost transactions covering 661,700m2 double Q4 2008 activity in 2008Commenting on the results, Peter Cassells, chief executive officer of PEPR,said:"2009 has been an incredibly active year for PEPR, with an absolute focus onmaintaining industry leading portfolio occupancy, deleveraging the business inone of the toughest markets in recent history and meeting guidance targets. Weare delighted to have maintained consistently high occupancy levels throughoutthe market downturn and delivered record levels of leasing. We completed closeto 950,000 square metres of leasing transactions, resulting in an extremely highlevel of customer retention for the year."This consistently strong operational performance and our modern portfolio in astable investment class has enabled us to attract a disproportionate share ofall new commercial real estate debt financing in what remains an extremely tightand conservative credit market. Our recently announced EUR300 million loan is oneof the first Pan-European syndicated real estate loans closed since thebeginning of the global financial crisis."By addressing our debt maturities and paying down a significant part ofoutstanding debt, we have successfully completed our objectives for the year andput PEPR on a firm footing for the future. Throughout the downturn, we retainedour position as the owner of the largest and most geographically diverseportfolio of logistics and distribution facilities in Europe. As the marketsreturn to a more normalised environment, we will continue to execute our corestrategy of active asset management to generate capital appreciation and a highlevel of distributable cash flow for our investors."As outlined in September, PEPR remains committed to enhancing its corporategovernance and plans to propose a number of amendments to the ManagementRegulations at PEPR's forthcoming AGM. In the meantime, we retain theflexibility to raise additional capital in the form of further convertiblepreferred units if required."Whilst 2009 was a testing time for the European commercial property sector,there are signs of improvement in investment market sentiment across themajority of countries and particularly the UK. However, we remain cautious overnet occupier demand and short-term rental declines. Our operational priority for2010 is to ensure we benefit from any improvements in occupier demand andcontinue to drive cash flow from the portfolio through proactive assetmanagement and exemplary customer service."GuidanceEPRA earnings for 2010 are expected to be betweenEUR0.45 and EUR0.50 per ordinaryunit, reflecting the anticipated increase in PEPR's finance costs, preferreddividend payments and management assumptions for rental decline and stableoccupancy levels for the year. In addition, management projections reflect ananticipated improvement in the average sterling exchange rate.Distributable cash flow, after payment of preferred dividends, is forecast to bebetween EUR0.45 and EUR0.50 per unit. The terms of PEPR's EUR900 million unsecuredcredit 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 isprudent to do so and when permitted under the terms of the EUR900 millionfacility.Deleveraging initiativesIn December 2008, PEPR outlined a series of initiatives to improve liquidity andaddress upcoming debt maturities. The plan included the suspension of dividendsand the use of asset sales proceeds to reduce outstanding debt, the raising ofnew debt to substantially refinance the 2010 Commercial Mortgage BackedSecurities ("CMBS") maturities and a maturity extension for a portion or all ofthe 2010 tranches of the EUR900 million unsecured credit facility.Since then, PEPR has completed and received proceeds on eight new or extendedloan agreements totalling EUR807.7 million, of which EUR554.8 million was agreedwith new lenders to PEPR. In addition, PEPR has received net proceeds of EUR189.1million from portfolio sales and EUR54.1 million from the preferred equity raise,whilst retaining EUR134.4 million of distributable cash flow.The new loan agreements comprise EUR366.8 million completed and funded during2009: * A three-year extension, to March 2013, for EUR126.0 million of the EUR151.1 million secured bank loan with Deutsche Pfandbriefbank AG that was originally due to mature in March 2010. The loan is secured by a portfolio of 24 Central European distribution facilities. * A new £86.1 million (EUR100.0 million) four-year secured bank loan with Eurohypo AG. The loan is secured by a portfolio of 15 UK distribution facilities and will mature in July 2013. * A new five-year secured bank loan for approximately EUR48.0 million, split into two tranches, with Helaba (Landesbank Hessen-Th?gen). The first tranche is for SEK 332.5 million (approximately EUR32.5 million) and the second for EUR15.5 million. The facility is secured by a portfolio of four distribution facilities in Sweden, the first time PEPR has used its Swedish assets for specific financing, and will mature in October 2014. * A new EUR45.3 million three-year secured bank loan with Helaba. The loan is secured by a portfolio of six Dutch assets and will mature in January 2013. * A new £43.0 million (approximately EUR47.5 million), three and a quarter year, secured bank loan with Cr?t Agricole CIB, formerly Calyon. The loan is secured by a portfolio of 10 UK assets and will mature in March 2013.Plus a further EUR440.9 million of transactions completed since year end: * A EUR300 million pan-European syndicated loan with six European lenders with Goldman Sachs as sole arranger. The syndicate includes Deutsche Pfandbriefbank AG (as Facility and Security Agent), AXA, BAWAG P.S.K., Credit Foncier de France, M&G Investments and ING Real Estate Finance. The loan is secured by a portfolio of 39 properties located in four countries and will mature in January 2014. * A EUR74.5 million loan, of which EUR66.9 million has been received and a further EUR7.6 million committed, with Deutsche Pfandbriefbank AG. The EUR66.9 million tranche is secured by a portfolio of nine French and UK assets and will mature in December 2013. * A EUR74.0 million four-year secured loan, split into two tranches, with Berlin-Hannoversche Hypothekenbank AG. The first tranche of EUR48.3 million was received in December 2009 with the remainder received in January. The loan is secured by a portfolio of 17 German and Polish assets and will mature in January 2014.In addition, PEPR has decided to reduce the principal of the EUR300 millionrevolving portion of the EUR900 million unsecured credit facility by EUR200 millionto EUR100 million, saving PEPR EUR0.8 million in undrawn facility fees for theremainder of 2009. This reduction is effective from 12 February 2010.PEPR closed on two portfolio disposals during the first half of 2009, one for atotal of EUR119.5 million related to Dutch and German assets and one for £64.4million for UK assets. PEPR received net proceeds of EUR189.1 million in relationto these disposals.In November 2009, PEPR launched a EUR61.1 million equity offerin the form of fullyunderwritten perpetual convertible preferred units ("Preferred Units"). ThePreferred Units were offered at EUR5.93 per unit, equal to the net asset value perordinary unit as at 30 September 2009. The Preferred Units will initially pay anannual dividend of 10.5%, payable quarterly, which may be deferred to allow forthe prudent amortisation of debt. The Preferred Units may be converted into PEPRordinary units at the discretion of holders at any time and may be redeemed atthe issuer's discretion after seven years or within 24 months if there is achange of legal form of PEPR and if certain conditions are met. Automaticconversion occurs after seven years if certain conditions are met.Proceeds from these activities have enabled PEPR to significantly strengthen itsBalance Sheet, which after the prepayment of EUR17.0 million in February 2010,includes only EUR73.6 million of remaining CMBS debt to be repaid before May2010. The next debt maturity date is December 2012. The continued retention ofdistributable cash flow and the options of additional asset sales and a furtherequity raise, as allowed by the Management Regulations, leave PEPR wellpositioned for the future.Portfolio revaluationThe entire portfolio was independently revalued at 31 December 2009, with netmarket value decreasing 0.4%, excluding foreign exchange adjustments, from thevaluation carried out at 30 September 2009. The overall net market value,including the impact of foreign exchange, remained broadly flat at EUR2,839.2million as compared to EUR2,843.7 million at end September 2009.Portfolio net market value decreased 4.5%, excluding foreign exchangeadjustments, from the usual bi-annual valuation in June 2009. The overall netmarket value, including the impact of foreign exchange, decreased 5.2%, toEUR2,839.2 million from EUR2,994.1 million at end June 2009.The continental European assets recorded negative valuation movements over thesix months to December 2009, with an overall decline of 6.2%, to EUR2,345.7million to EUR2,502.1 million. Property values in Central Europe fell furthest,down 7.5% in the three months to end September 2009 and a further 2.3% to endDecember 2009, driven by a reduction in estimated rental values as well as acontinued upwards yield shift of around 40 basis points.The Northern and Southern European portfolios suffered similar valuationdecreases over the second half of 2009, declining 3.3% and 4.7% respectively inthe quarter ended 30 September 2009 and a further decline of 2.0% and 1.2% bythe end of the year. The key drivers for this were falling rental values inSouthern Europe and a further repricing of shorter dated income across theportfolio.The UK witnessed a sharp correction in values in the second half of the year,remaining roughly flat at £415.7 million in the three months to 30 September2009 and increasing 5.5% to £439.2 million by the end of 2009, driven byimproving market sentiment and strong demand from institutions, UK retail fundsand overseas investors. The weakening of the sterling exchange rate during thesecond half of 2009 impacted these improved valuations, with the total value ofthe UK portfolio increasing only 0.3%, to EUR493.5 million from EUR492.0 million atend June 2009.Reflecting these valuation declines, the gross yield[2] of the portfolio at 31December 2009 increased to 9.1% (8.7% net yield[1]) from 8.8% (8.3% net yield)at 30 June 2009.Portfolio performanceProLogis (NYSE: PLD), PEPR's external manager, has maintained strong leasingmomentum during the fourth quarter, with 31 lease transactions covering 331,600square metres being completed. Three leases, covering 47,900 square metres, arenew leases in Italy, Poland and Spain. A further two leases were expansions,adding 4,400 square metres to existing customers' supply chains. The remaining26 leases were lease renewals with customers such as Eurofred, Geodis, GoodyearDunlop, Iron Mountain, Johnson & Johnson and L'Oreal.These transactions resulted in a weighted average rental decline of 8.5% overthe expiring rental level and an average of 3.4 years to lease break, or 5.9years to lease expiry on the new leases. These are in line with market rentaldecreases of between 5-15% across the markets and are encouraging given strongoccupier demand for shorter leases during the downturn.However, the final quarter of the year also saw three of PEPR's customersdefault on their leases, totalling 40,200 square metres or 0.8% of annualisedrental income. These defaults were anticipated and had been fully provided for.PEPR remains focused on monitoring customer performance to minimise future risk.Total accounts receivable from customers for 2009 decreased to EUR46.9 millionfrom EUR63.2 million at 30 September 2009 and from EUR60.1 million at 31 December2008. At the end of 2009, PEPR held a EUR2.5 million provision for bad anddoubtful debts.Of the 76 lease breaks and expiries during 2009, covering 655,900 square metres,only 22 were exercised representing 159,000 square metres. This resulted in anexcellent customer retention rate of 76% for the year. Furthermore, this highretention rate has continued into 2010. Of the 36 lease breaks or expiries dueas at 31 December 2009 or during Q1 2010, covering 337,000 square metres, theknown retention rate is 60% based on agreements already concluded withoccupiers.During the first half of 2009, PEPR agreed to dispose of a portfolio of ninestand-alone assets in Germany and The Netherlands to Curzon Capital Partners II,managed by AEW Europe, for EUR119.5 million. The portfolio comprises some 229,000square metres of distribution space at four locations in Germany and threelocations in The Netherlands. In addition, PEPR sold five distributionfacilities, covering 79,700 square metres, in the UK to an affiliate of HarbertEuropean Real Estate Fund II, L.P. and Harbert European Real Estate Fund II(Parallel), L.P. (collectively, "Harbert"), generating net proceeds of £64.4million. The sale of both these portfolios had a EUR9.2 million impact on rentalincome for the remainder of year and represents some EUR16 million on anannualised basis.At the end of December 2009, the portfolio comprised 232 distributionfacilities, covering 4.9 million square metres across 11 European countries witha net market value of EUR2.8 billion. The portfolio risk profile remainsattractive, with occupancy at an industry-leading 96.1%, a diversified customerbase, and on average 3.2 years to next lease break or 5.3 years to lease expiry.An overview of the portfolio is provided on page 21 of the full statementattached.Like-for-like portfolio-------------------------------------------------------------------------------- LIKE-FOR-LIKE PORTFOLIO OVERVIEW AS AT 31 DECEMBER 2009-----------------------+------------------+-----------------+------------------- | | 31 | % of |31 December |December |31 December +------------ +---------- +------------ Port-| | | folio|2009 2008 Change|2009 2008 Change |2009 2008 Change | | | | Annualised rent | Net Open Market | |in EUR per leasable | Value | Occupancy by m2| m² | In EUR per m² | %-----------------------+------------------+-----------------+------------------- Southern[4] 49%|49.83 50.75 -1.8%| 545 639 -14.8%|98.6% 99.1% -0.5% | | | Northern[5] 19%|58.07 56.78 +2.3%| 632 721 -12.3%|94.5% 93.8% +0.7% | | | Central[6] 18%|44.84 46.94 -4.5%| 508 626 -18.9%|88.5% 95.4% -6.9% | | | UK[7] 14%|64.31 64.71 -0.6%| 698 737 -5.2%|98.6% 96.6% +2.0% ------+------------------+-----------------+------------------- Total / Averages 100%|52.60 53.23 -1.2%| 577 666 -13.4%|96.1% 97.1% -1.0% | | |The like-for-like portfolio includes all properties owned by PEPR as at 31December 2009.On a like-for-like basis, average annualised rent per square metre decreased1.2% over the year, as the increased rent and occupancy in Northern Europe we remore than offset by reducing rents on rolling leases, particularly in Centraland Southern Europe, and increased portfolio vacancy.Over the year, the total open market value per square metre of the like-for-likeportfolio decreased by 13.4%, with continental European countries recordingvaluation decreases of between 12.3% and 18.9% and the UK showing signs ofimprovement, down 5.2% on the year after having recovered 5.5% in the secondhalf.Market outlookEurope's logistics property markets appear to be approaching the bottom of thecycle, with investment yields either stabilising or beginning to compress acrossa number of markets. The movement was led by the UK, which has seen asignificant rebound in yields during the second half of 2009, with the coremarkets of Western Europe also stabilising prior to the end of the year. CentralEurope may be expected to follow as investor confidence returns.Whilst investment transactions in the logistics sector fell to around EUR6 billionin 2009 from EUR12 billion the previous year, the volume of transactions increasedsteadily throughout the year from the low point in the first quarter. With somemoderate improvement in the availability of bank financing, there is growingevidence that more investors are returning to the market for both prime andmid-range properties, though demand remains concentrated in the traditional coremarkets.New speculative development starts have ground to a halt across all markets andoccupancy rates in many locations have stopped slipping. Net effective rents,however, remain under downward pressure. Looking ahead, although the majority ofthe European economies are forecast to recover earlier, we do not expect to seematerial improvement in the occupier markets until late 2010.Corporate GovernanceAs previously announced, PEPR remains committed to implementing the corporategovernance improvements originally envisaged under the proposedsoci?d'investissement ?apital fixe ('SICAF') conversion and intends to propose anumber of amendments to the Management Regulations at the 2010 Annual GeneralMeeting.Key enhancements that may be implemented under the current legal structureinclude the removal of voting right restrictions; lowering of the threshold topropose items for an AGM agenda from 20% to 3% and a Board on which onlyindependent board members may vote on ProLogis related issues.PEPR will evaluate a potential legal structure conversion to a SICAF once theappropriate changes have been made to Luxembourg law.Financial resultsEarningsIFRS earnings for the fourth quarter of EUR7.5 million increased exponentiallycompared to the IFRS loss of EUR577.0 million reported for the same period in2008, primarily due to lower portfolio fair value movements and the lossesrecorded in 2008 in relation to PEPR's investment in and disposal of PEPF II. Q42009 IFRS earnings were negatively impacted by lower rental income, EUR4.9 millionof early termination fees related to interest rate swaps associated with theEUR376.1 million of CMBS debt repaid and prepaid during the quarter and thewrite-off of EUR3.3 million legal structure conversion costs.EPRA earnings, which provide a guide to underlying business performance,decreased from EUR28.4 million for Q4 2008 to EUR10.1 million in Q4 2009. Thereduction is due to the early termination of CMBS interest rate swaps and thereceipt of EUR6.2 million of dividends from PEPF II in Q4 2008. In addition,rental income declined by EUR7.8 million between the two periods reflectingportfolio disposals, lower UK sourced income when measured in euro due tosterling's decline, lower market rents on new lease agreements and the marginaldecline in portfolio occupancy. This decline was partially offset by lowerfinance costs.PEPR recorded an IFRS loss of EUR310.6 million for 2009, compared to a loss ofEUR577.9 million for 2008, the difference primarily reflecting the EUR282.4 millionof losses recorded in relation to PEPR's investment in and disposal of PEPF IIduring that year. 2009 IFRS results were negatively impacted by EUR42.6 million oflosses on property disposals, lower rental income, EUR10.0 million of earlytermination fees related to interest rate swaps associated with CMBS debt repaidduring the year and a EUR3.3 million write-off of legal structure conversioncosts. These impacts were partially offset by a lower unrealised portfoliovaluation decline, lower operating and finance costs and an increased taxbenefit as compared to 2008.EPRA earnings for the year decreased 18.8% to EUR103.6 million from EUR127.7 millionin 2008, due to a EUR26.9 million decrease in rental income and the EUR10.0 millionearly termination of CMBS interest rate swaps, partially offset by loweroperating and finance costs for the year. In addition, 2008 included the receiptof EUR15.9 million of dividends from PEPF II.A reconciliation between IFRS and EPRA earnings is shown on page 14 of the fullstatement attached.Total revenueFourth quarter rental and other property income fell by EUR7.9 million to EUR63.7million (Q4 2008: EUR71.6 million), primarily related to the loss of EUR4.5 millionof rental income from the portfolio sales, a EUR1.2 million fall in UK sourcedincome when measured in euro and a further element due to declining rents on newlease agreements and declining occupancy levels.Rental and property income for the year fell by 9.4% to EUR265.8 million (2008:EUR293.3 million), as a result of the loss of EUR9.2 million of rental income fromthe portfolio sales and a EUR7.0 million fall in UK sourced income when measuredin euro, with the remainder due to the decrease in rental levels over the yearand the modest decline in portfolio occupancy. In addition, as previouslyreported, 2008 included a EUR9.4 million non-recurring adjustment relating torental income originally agreed when the properties were acquired and ultimatelysettled in 2008.Operating expensesTotal operating expenses comprise the cost of operating the portfolio andmanaging PEPR as a listed real estate fund.Cost of rental activities includes ground rents paid, property management fees,the provision for bad debt and other non-recoverable property related expenses.The cost of rental activities remained broadly flat in Q4 2009 at EUR7.0 millionas compared to Q4 2008 (EUR7.3 million).For the year as a whole, cost of rental activities decreased 18.5 % to EUR26.4million (2008: EUR32.4 million) largely as a result of EUR3.2 million of bad debtexpense being recorded in 2008 in relation to customers defaults, compared toEUR1.3 million in 2009. In addition, property management fees declined 19.7%, toEUR14.7 million for the year (2008: EUR18.3 million) as they are directly correlatedto gross portfolio value which has been impacted by portfolio disposals andvaluation movements.Fund expenses comprise the non-property related costs associated within ourbusiness, including fund management, custodian and professional fees. Theseexpenses increased by EUR3.4 million to EUR6.5 million in Q4 2009 primarily due tothe write-off of EUR3.3 million of legal structure conversion costs.For the year, fund expenses increased by EUR1.8 million to EUR14.1 million,primarily due to the write-off of legal structure conversion cost, partiallyoffset by the EUR1.0 million non-reclaimable VAT expense recorded in 2008.Underlying fund management fees declined EUR1.2 million, to EUR4.9 million from EUR6.1million in 2008. These fund management fees are directly correlated to the grossmarket value of the portfolio.Profit/(loss) on disposal of investment propertiesNet loss on disposal of EUR42.7 million for 2009 relates to the two completedportfolio disposals. The first, nine Dutch and German assets sold to AEW and thesecond the disposal of five UK assets to Harbert.Property fair value movementsTotal property fair value movements for Q4 2009 resulted in a small net loss ofEUR15.0 million compared to a net loss of EUR370.6 million recorded in Q4 2008.Apart from the improvement in market conditions in the latter part of 2009compared to 2008, this difference also reflects the additional portfoliorevaluation completed at 30 September 2009, where the portfolio fair value fellby a net EUR124.1 million during the third quarter. On a like-for-like basis,total portfolio value movement for the second half of 2009 resulted in a netloss of EUR139.1 million compared to the net loss for the corresponding period in2008.Total property fair value movements for 2009 resulted in a net loss of EUR445.8million, comprising EUR476.3 million of revaluations losses, partially offset byEUR6.9 million of revaluation gains and a EUR23.6 million reduction in associatedprovision for purchasers' costs.Further details on the portfolio valuation movements are provided inthePortfolio revaluation section on page 4 of the full statement attached.FinancingInterest income for the year decreased to EUR2.4 million from EUR5.3 million in2008, driven by lower levels of cash and lower interest rates received ondeposits during the period, offset by the receipt of a EUR1.3 million dividendfrom PEPF II in Q1 2009.Finance costs for the period, comprise interest expense, debt amortisationcharges and foreign exchange gains/losses.-------------------------------------------------------------------------- FINANCE EXPENSE-------------------------------------------------------------------------- (Unless otherwise stated, amounts are expressed in thousands of euros) Year ended 31 December 2009 2008 Interest expense 96,173 108,321 Amortisation of initial borrowing costs 10,524 6,403 Net foreign currency (gains)/losses 1,092 1,400 ----------- ----------------- 107,789 116,124--------------------------------------------------------------------------Interest expense for the year decreased 11.2% compared to 2008, primarilyrelated to the repayment of EUR793.5 million of CMBS debt during the year and thelow floating interest rate associated with the EUR900 million unsecured creditfacility, partially offset by increased borrowing during 2008 to invest in PEPFII. Average interest rates have declined from 5.3% in 2008 to 4.6% in 2009. Inaddition, the 2009 charge includes EUR10.0 million of early termination fees oninterest rate swaps associated with CMBS debt repaid during the year.Amortisation charges increased by EUR4.1 million in 2009 as a result of EUR1.1million of accelerated amortisation related to the early retirement of CMBSdebt. In addition, PEPR incurred fees relating to the EUR366.8 million of new orextended debt facilities completed during the year and the tangible net worthcovenant amendments in the EUR900 million unsecured credit facility.ProLogis European Properties Fund II ("PEPF II")PEPF II is a private equity fund, established by ProLogis, to acquire assetsfrom both ProLogis' development pipeline in Europe and from third-parties. InAugust 2007, PEPR committed to invest EUR900 million over a three-year period inPEPF II for a 30% stake.In December 2008 and February 2009, PEPR sold its entire investment andassociated future funding obligations in PEPF II, receiving cash proceeds ofEUR58.1 million and eliminating future funding obligations of EUR522 million. As aresult of this transaction, PEPR has no stake in PEPF II and no future fundingobligations.PEPR received a pro-rata distribution of EUR1.3 million from PEPF II for the firstquarter of 2009.Debt structurePEPR's financing structure utilises a mix of secured and unsecured debt sources.At the end of 2009, 31% of outstanding debt was secured against specific poolsof assets with no recourse to the security of other debt or assets elsewherewithin the business.PEPR has a number of financial debt covenants within its credit facilities. Atthe end of December 2009, PEPR was in compliance with all covenants.-------------------------------------------------------------------------------- SUMMARY OF FINANCIAL DEBT COVENANTS-------------------------------------------------------------------------------- Limit 31 Dec. 2009 30 Sep. 2009 Unsecured debt: EUR900m unsecured credit facility Leverage less than 60% 55% 55% Fixed charge coverage a least 1.5x 2.0x 2.1x Unencumbered interest coverage a least 1.5x 2.0x 2.0x Net Worth (excluding Intangible assets) at least EUR1.0bn EUR1.2bn EUR1.3bn Unsecured debt as % of unsecured assets less than 65% 61% 57% EUR500m 2014 Eurobond Secured debt as % of total assets less than 40% 17% 21% Fonds commun de placement structure: Loan to value (total debt as percentage of gross portfolio value) - see page 15 less than 60%[8] 55.0% 55.7%--------------------------------------------------------------------------------In addition to the covenants in the table above, the EUR500 million Eurobond isredeemable at par if there is a change of control of PEPR and a subsequentdowngrade of PEPR's credit rating to Ba1 or below within 120 days. On 19 June2009, PEPR was downgraded to a Ba1 rating, with negative outlook, by Moody'sInvestors Service.The only financial covenant applicable to the CMBS is that income received fromthe secured assets must exceed interest cost by at least 1.5 times for eachquarter. A breach of this ratio does not constitute a default but does requirecash trapping within the breached CMBS pool until the breach is remedied. As at15 October 2009, the most recent reporting date, this ratio was 2.8x for CMBSIII and 2.9x for the CMBS IV.Total outstanding debt as at 31 December 2009 was EUR1,638.9 million, a 21.7%decrease since year end 2008 (EUR2,094.1 million), primarily due to the earlyrepayment of EUR944.6 million of CMBS and secured bank debt and the elimination ofEUR4.25 million of the EUR500 million Eurobond, partially offset by EUR411.8 millionof new or extended debt facilities and the EUR73.0 million increase in funds drawnunder the EUR300 million revolving portion of the unsecured credit facility. Atthe end of 2009, EUR227.0 million remains undrawn under the facility and PEPR hasEUR64.5 million cash on its Balance Sheet.In January 2010, PEPR repaid all outstanding debt under the 2010 tranches of theEUR900 million unsecured credit facility. In addition, with effect from 12February 2010, PEPR has reduced the principal under the revolving portion ofthat facility to EUR100 million from EUR300 million. As a result PEPR has access toEUR100 million of undrawn debt facilities.The weighted average interest rate for 2009 decreased to 4.6% compared to 5.3%in 2008, primarily due to the 200 basis point decrease in European marketinterest rates during the period. At 31 December 2009, 61% of PEPR's debt was atfixed rates of interest, with the remaining floating debt based on EURIBOR orLIBOR with margins varying between 215 to 270 basis points on the EUR900 millionunsecured credit facility.PEPR expects the average interest rate for 2010 to increase as a result of the175 basis point increase in the EUR500 million unsecured Eurobond coupon, thatcame into effect on 23 October 2009, due to Moody's Investors Service creditrating downgrade in June 2009. In addition, the average interest rate will beimpacted by the fixed rates achieved on new debt facilities and the higherproportion of debt at fixed rates of interest.An overview of PEPR's outstanding debt is on page 20 of the full statementattached.TaxThe overall tax position for 2009 is a credit of EUR58.0 million compared to acredit of EUR48.9 million in 2009. In both years, the current income tax expensewas more than offset by large deferred tax credits related to portfoliovaluation declines recorded during those years.The current income tax expense of EUR31.5 million for 2009 represents a EUR7.9million increase over the 2008 (EUR23.6 million), of which EUR5.7 million relates toincome tax on capital gains generated by the AEW asset sale. Adjusting for thisone-off tax expense, the 2009 current income tax expense represents an effectivetax rate of 19.9% for the year, using EPRA pre-tax earnings as a proxy fortaxable income, compared to 15.7% for 2008.Distributable cash flow and distributionsIn December 2008, PEPR suspended future dividend payments as part of thebusiness' strategic initiatives to improve liquidity and as a condition for adebt covenant amendment on PEPR's EUR900 million unsecured credit facility. Underthe current terms of that facility, PEPR is prohibited from paying an ordinarydividend until either PEPR raises EUR200 million of aggregate new equity (of whichEUR61.1 million has been raised) or the facility is repaid.Distributable cash flow of EUR15.4 million, or EUR0.08 per ordinary unit, for Q42009 will therefore be retained in the business to reduce debt and improveliquidity. Distributable cash flow for 2009 equalled EUR0.55 per unit, or EUR104.2million.PEPR intends to revert to paying an ordinary dividend as soon as it is prudentto do so and when permitted under the terms of the EUR900m unsecured creditfacility.Earnings webcast and conference call details:We invite you to access the live presentation webcast and conference call, heldtoday,Thursday 11 February 2010, at 12 noon CET, by clicking on the linkentitled ""Fourth Quarter and Year End 2009 Financial Results Webcast" locatedon the homepage of our website, www.prologis-ep.com
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