Making steady progress
Luxembourg - 28 April 2011 - ProLogis European Properties (Euronext: PEPR), one of Europe's largest owners of modern distribution facilities, today reports results for the quarter ended 31 March 2011.

Highlights

48 lease transactions covering 388,500m2, including 127,400m2 of new or expanded leases
93.2% portfolio occupancy (Q4 2010: 94.5%), in line with expectations
Loan-to-value ratio improved to 52.6% from 53.0% at the end of 2010, further reduction post quarter end to 51.5%
EPRA([1]) earnings €0.10 per ordinary unit (Q1 2010: €0.10 per ordinary unit)
Generated €18.3 million, or €0.10 per unit, of distributable cash flow (Q1 2010: €22.9 million or €0.12 per ordinary unit)
IFRS earnings of €0.06 per ordinary unit (Q1 2010: €0.08 per ordinary unit)
EPRA net asset value €6.37 per ordinary unit (Q4 2010: €6.32 per ordinary unit)
IFRS net asset value €5.72 per ordinary unit (Q4 2010: €5.62 per ordinary unit)
Commenting on the results, Peter Cassells, chief executive officer of PEPR, said: "We are pleased to report financial results firmly in line with the guidance set at the beginning of the year and steady operating performance during the first quarter of 2011.

"Leasing activity has carried on at the high levels seen in 2010 with 388,500 square metres completed in the first three months of the year, including over 127,000 square metres of new agreements or lease expansions. Portfolio occupancy at 93.2% is in line with our forecasts and remains well above the market average. We continue to expect average occupancy for 2011 to be in the 93% to 94% range, in line with 2010 levels.

"In addition, we continue to make progress with our deleveraging efforts. Loan-to-value reduced to 52.6% at March 2011 from 53.0% at the end of December 2010. Post quarter end we have reduced this further to 51.5% following the early repayment of one of our more expensive debt facilities, a €51 million secured loan originally due to mature in October 2014. This repayment is in line with our strategy to further improve our capital structure as we pursue a return to an investment grade credit rating. With no debt maturing until late 2012 and our continued focus on deleveraging actions, we are confident in our ability to achieve this upgrade.

"We are currently in the process of reviewing the tender offer document relating to ProLogis' mandatory public take-over bid of €6.10 per ordinary unit as well as the bid of €6.10 per convertible preferred unit. We have retained external advisors to assist in this matter and intend to provide a reasoned opinion in relation to the offer as soon as practicable. We will continue to focus on acting in the interests of PEPR as a whole and all unitholders and as such remain open to exploring all options that we consider value enhancing."

Tender offer

On 21 April 2011, ProLogis (NYSE: PLD) published a tender offer document relating to its mandatory public take-over bid of PEPR of €6.10 in cash per ordinary unit and the bid of €6.10 in cash per convertible preferred unit. The offer period set by ProLogis started on 22 April 2011 and the acceptance period, or deadline for tendering units into the offer, will end on 6 May 2011 unless extended by ProLogis as per the terms of the offer document or otherwise in accordance with applicable Luxembourg regulation.

As required by applicable Luxembourg regulation, ProLogis Management S.à r.l., acting in its capacity as the management company of PEPR (the "Management Company") in accordance with PEPR's management regulations, will review the offer document and provide a reasoned opinion in relation to the offer as soon as practicable. In forming its view, the Management Company will seek the advice and guidance of the independent members of the PEPR Board and reaffirms its commitment to act in the interests of PEPR as a whole and all unitholders.

PEPR has engaged Deutsche Bank as financial advisor and Arendt & Medernach and Freshfields Bruckhaus Deringer LLP as legal counsel.

The tender offer document is available to download on the ProLogis website, www.prologis.com.

Market outlook

Overall, the European logistics market conditions continue to improve, with economic forecasters predicting modest positive real GDP growth across Europe of between 1.5 and 2.0% during 2011-2012. However, there is continued evidence of varying rates of recovery, with Germany, France and Central Europe benefitting more directly from the global recovery. Italy, Spain and the Benelux region remain softer, while the UK is still reacting to recently implemented austerity measures.

Overall market vacancy rates across Europe have remained high, at up to 20% in some markets. However, in the majority of markets this is driven by a growing stockpile of obsolete properties while vacancy levels for the more efficient stock are declining. Modern supply in some prime markets has become noticeably scarce. New supply remains limited to build-to-suit projects with only a small amount of speculative development taking place.

As a consequence, rental levels have stabilised in several markets and lease incentives are reducing. Prime markets are expected to see modest rental growth in the latter part of 2011 and most markets should deliver rental growth in 2012.

The recovery of the European logistics investment market remains on track, although investor demand continues to be focused on prime, long leased assets with strong covenant occupiers. As a result, capital values are expected to remain stable during 2011 as any further yield compression is likely to be offset by lower market rents in the near-term.

Portfolio performance

Leasing activity has remained steady, with 48 lease transactions covering 388,500 square metres completed during the quarter. 20 of these agreements, covering 261,100 square metres, were lease renewals with customers such as Geodis, H&M, Schenker and Wincanton. As a result, customer retention for the first quarter was 60% when measured by rental value, in line with historical average retention rates.

The increased level of new leases signed in the fourth quarter 2010 continued into 2011, with 24 new leases signed for a total of 89,600 square metres across all four regions. These include a twelve-year, 10,500 square metre lease with a global luxury brand in Italy and an 11,500 square metre three-year lease with Samsung in Poland. In addition, four lease expansions were agreed adding 37,800 square metres to space leased to existing customers.

The first quarter leasing transactions resulted in a weighted average rental decline of 4.8% over the previous rental level for these assets. The leases have an average of 2.6 years to lease break or 4.9 years to lease expiry, keeping the entire portfolio lease maturity profile stable.

As outlined in PEPR's Q4 2010 results, there were two customer defaults in the UK and Italy during the first quarter on leases totalling 31,800 square metres.

In summary, at 31 March 2011, the portfolio comprised 232 distribution facilities, covering 4.9 million square metres across 11 European countries with an estimated net market value of €2.8 billion. The portfolio risk profile remains attractive, with above market average occupancy of 93.2% and a diversified customer base. On average the portfolio has 3.4 years to lease break or 5.3 years to lease expiry with over 55% of leases set to expire in 2015 or beyond. An overview of the portfolio is provided on page 18.

Guidance

PEPR maintains its guidance for 2011, with EPRA earnings expected to be between €0.37 and €0.42 per ordinary unit and distributable cash flow expected to be between €0.33 and €0.38 per ordinary unit.

PEPR has retained distributable cash flow since December 2008 as part of the business' strategic initiatives to improve liquidity and as a condition for a debt covenant amendment on PEPR's unsecured credit facility. In October 2010, PEPR received approval from the bank syndicate on its unsecured credit facility to partially remove the restrictions on dividend payments. However, PEPR intends to continue to retain distributable cash flow for the foreseeable future in order to further deleverage the balance sheet and to ensure a return to an investment grade credit rating.

Financial results

Earnings

IFRS earnings for Q1 2011 decreased to €12.4 million (Q1 2010: €17.1 million), primarily due to the one-off receipt of €2.6 million insurance proceeds in 2010, a €1.3 million decline in rental income and €4.0 million of higher unrealised valuation losses recorded as compared to last year. These declines were offset by a €3.2 million decrease in tax and finance costs in 2011.

Adjusted EPRA earnings for ordinary unitholders, which provide a better guide to underlying business performance, increased to €19.4 million in Q1 2011 (Q1 2010: €19.1 million). A €2.1 million decrease in tax and finance costs more than offset the decline in rental income.

A reconciliation between IFRS and EPRA earnings is shown on page 11.

Total revenue

Q1 2011 rental and other property income fell by €4.0 million to €60.5 million (Q1 2010: €64.5 million), primarily due to the non-recurring receipt of €2.6 million in the corresponding period relating to the finalisation of insurance and legal claims. In addition, lower market rents on new lease agreements and the marginal decline in portfolio occupancy resulted in a €2.0 million drop in rental income. These declines were partially offset by a €0.7 million increase in UK and Swedish sourced income when measured in euro.


Operating expenses

Total operating expenses comprise the cost of operating the portfolio and managing 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 increased slightly to €6.6 million in Q1 2011 (Q1 2010: €6.3 million), primarily related to a slight increase in bad debt expense and non-recoverable property costs related to the higher level of portfolio vacancy. Property management fees remained broadly flat given their direct correlation to gross portfolio value.

Fund expenses comprise the non-property related costs associated within our business, including fund management, custodian and professional fees. These expenses declined to €2.6 million (Q1 2010: €3.0 million) given the write-off of €0.5 million of legal and advisory fees associated with a previously contemplated second preferred equity raise in 2010. Again, fund management fees remained stable.

Property fair value movements

Whilst no portfolio revaluations were carried out in the first quarter, PEPR incurred a €5.3 million gross valuation loss on property related to capital expenditure, leasing commissions and rent levelling adjustments booked during the quarter.

Financing

Finance expense comprises interest expense, debt amortisation charges and foreign exchange gains/losses.

Q1 2011 interest expense fell to €22.0 million (Q1 2010: €22.8 million) given €2.5 million of savings related to the reduction in average outstanding debt between the two periods. This improvement was offset by a €1.8 million increase in expense due to the increase in average interest rate for the quarter to 5.6% from 5.2% in the comparable period. Interest coverage remains at a healthy level of 2.3 times.

Amortisation charges decreased by €1.1 million to €2.0 million in Q1 2011 (Q1 2010: €3.1 million), reflecting the accelerated amortisation charges incurred in the prior period related to the reduction in size of the revolver and early repayment of the first tranche of the senior unsecured credit facility.