The first half of the year showed good like-for-like net rental income growth of 4.9 per cent and occupancy rate improved to 95.6 per cent (95.1%).
Summary of the Second Quarter of 2012 Compared with the First Quarter of the Year
- Turnover increased to EUR 58.4 million (Q1/2012: EUR 57.8 million).
- Net rental income increased by EUR 2.2 million, or 5.8 per cent, to EUR 39.7 million (EUR 37.5 million), mainly due to acquisition of Arabia, completed (re)development projects and lower property operating expenses reflecting ordinary seasonal variations.
- EPRA operating profit increased by EUR 2.2 million, or 7.0 per cent to EUR 33.1 million (EUR 31.0 million) mainly due to higher net rental income. EPRA earnings per share increased to EUR 0.06 (EUR 0.05). EPRA key figures exclude non-recurring items such as fair value changes of investment properties.
- The fair value change of investment properties was EUR 0.1 million (EUR 5.9 million) and the fair value of investment properties totalled EUR 2,602.0 million (EUR 2,547.8 million). The average net yield requirement for investment properties was 6.4 per cent (6.4%).
Summary of January – June of 2012 Compared with the Corresponding Period of 2011
- Turnover increased to EUR 116.2 million (Q1-Q2/2011: EUR 106.0 million).
- Net rental income increased by EUR 8.5 million, or 12.4 per cent, to EUR 77.3 million (EUR 68.7 million). Completion of redevelopment projects and the acquisitions of the Kristiine, Högdalen Centrum and Arabia shopping centres increased net rental income by EUR 6.9 million.
- Net rental income from like-for-like properties increased by EUR 2.7 million, or 4.9 per cent, excluding the impact of the strengthened Swedish krona.
- Earnings per share were EUR 0.10 (EUR 0.08).
- EPRA EPS (basic) was EUR 0.11 (EUR 0.11).
- Net cash from operating activities per share increased to EUR 0.11 (EUR 0.08) mainly due to higher operational performance as well as timing differences and extraordinary items.
- The company specifies its guidance regarding turnover, EPRA operating profit and EPRA Earnings.
Key Figures
IFRS based key figures | Q2/2012 | Q2/2011 | Q1/2012 | Q1-Q2/2012 | Q1-Q2/2011 | Change-% 1) | 2011 | ||
Turnover, EUR million | 58.4 | 54.1 | 57.8 | 116.2 | 106.0 | 9.6% | 217.1 | ||
Net rental income, EUR million | 39.7 | 36.3 | 37.5 | 77.3 | 68.7 | 12.4% | 144.3 | ||
Profit/loss attributable to parent company shareholders, EUR million | 10.9 | 7.9 | 15.8 | 26.6 | 19.1 | 39.7% | 13.0 | ||
Earnings per share (basic), EUR | 0.04 | 0.03 | 0.06 | 0.10 | 0.08 | 23.0% | 0.05 | ||
Net cash from operating activities per share, EUR | 0.06 | -0.01 | 0.05 | 0.11 | 0.08 | 44.2% | 0.25 | ||
Fair value of investment properties, EUR million | 2,547.8 | 2,602.0 | 2,506.4 | 3.8% | 2,522.1 | ||||
Equity ratio, % | 35.9 | 35.0 | 34.8 | 0.6% | 36.0 | ||||
EPRA based key figures | |||||||||
EPRA operating profit, EUR million | 33.1 | 30.2 | 31.0 | 64.1 | 57.2 | 12.0% | 117.4 | ||
% of turnover | 56.8% | 56.0% | 53.6% | 55.2% | 54.0% | 2.2% | 54.1% | ||
EPRA Earnings, EUR million | 15.6 | 13.2 | 14.3 | 29.9 | 25.8 | 15.7% | 53.3 | ||
EPRA Earnings per share (basic), EUR | 0.06 | 0.05 | 0.05 | 0.11 | 0.11 | 1.9% | 0.21 | ||
EPRA NAV per share, EUR | 3.54 | 3.60 | 3.73 | -3.5% | 3.62 | ||||
EPRA NNNAV per share, EUR | 3.19 | 3.21 | 3.43 | -6.6% | 3.29 | ||||
1) Change-% is calculated from exact figures and refers to the change between 2012 and 2011. | |||||||||
CEO’s Comment
Comments from Citycon Oyj’s Chief Executive Officer Marcel Kokkeel on the first half of 2012:
”The first half of 2012 showed good rental growth: we were able to increase our like-for-like net rental income by 4.9 per cent.
Our leasing efforts continued to bring positive results: during the period, we were for example able to sign an agreement with Hennes & Mauritz to enter the Estonian market by opening two stores in our centres in Tallinn, latest next year. This is a perfect example of successful cross-border leasing and it shows the benefits of our Nordic-Baltic strategy.
Also we entered the Danish market by acquiring Albertslund Centrum. The shopping centre fits well into our portfolio: it is a very well located, urban shopping centre, dominant in its catchment area with great repositioning and redevelopment potential. The acquisition is a solid vantage point and low risk entrance to the local market.
We see good signs from additional income generation by specialty leasing and internal extensions as well as from cost management. Energy consumption was down in all our operating regions compared to last year due to improved consumption reduction activities. Despite increased energy taxes and prices, some cost savings were reached. We will continue pursuing this viable alliance between sustainability and economic results.
Two (re)development projects were completed, Magistral in Tallinn and Myllypuro in Helsinki. (Re)development projects will continue to be our main source of organic growth in the future even though we have only three projects currently on-going. We continue planning several redevelopment and extension projects in our best shopping centres.
The company will maintain its focus on income enhancement and solid cash flows going forward. Financing and especially diversification of funding sources as well as property disposals will remain our top priority: the EUR 150 million bond we issued in May is a clear proof of that.”
Main Events
Financing
In May, the company issued a EUR 150 million senior unsecured domestic bond. The five-year bond matures on 11 May 2017. The bond carries fixed annual interest at the rate of 4.25 per cent, payable annually.
Leasing Activity
The occupancy rate for shopping centres increased to 96.8 per cent (96.5%), especially due to good development in the Swedish shopping centres. The occupancy rate for the entire property portfolio was 95.6 per cent (95.1%).
During the period Citycon signed a contract with Hennes & Mauritz regarding the opening of two stores in Tallinn in order to bring the chain into Estonian market. The stores will be opened in autumn 2013 at the latest.
Acquisitions and Disposals
On 7 June, Citycon entered into an agreement to purchase shopping centre Albertslund Centrum in Greater Copenhagen area in Denmark from the Municipality of Albertslund for DKK 181 million (approximately EUR 24 million). This is the company’s first acquisition in Denmark. The shopping centre’s gross leasable area is currently approximately 16,000 square metres. The transaction also includes a grocery store extension which will be purchased at the time of its completion in the end of 2014. The extension will increase the GLA to approximately 20,000 square metres. The occupancy rate of the shopping centre is 97.5 per cent. On the acquisition date, the net initial yield on the investment was approximately 7.5 per cent. The deal was closed early July. More information on the transaction is available in the stock exchange release issued on 7 June 2012.
In April, Citycon acquired shopping centre Arabia in Helsinki, Finland, for EUR 19.5 million from Tapiola Group. Shopping centre Arabia is located some four kilometres north-east from Helsinki CBD on a lot owned by the City of Helsinki. This shopping centre has a gross leasable area of approximately 14,000 square metres, with 11,400 square metres of retail premises. The net initial yield on the acquisition price was around 6 per cent but it is expected to grow rapidly to 7 per cent after the planned commercial development measures have been implemented. The shopping centre houses more than 30 stores and its occupancy rate at the time of the acquisition stood at 93.0 per cent. More information on the transaction is available in the stock exchange release issued on 4 April 2012.
Also in April, the company acquired the remaining minority shares in shopping centre Koskikeskus by buying out 41.7 per cent of the shares in MREC Kiinteistö Oy Tampereen Koskenranta in Tampere, Finland, one of the MREC’s of Koskikeskus, for EUR 7.8 million. Following the acquisition, the company owns shopping centre Koskikeskus in its entirety, which will facilitate the smooth completion of the redevelopment project going on in the centre.
The company divested four non-core properties, two in Sweden and two in Finland. In addition, Citycon agreed on the sale of two residential companies in Sweden for a total price of SEK 140 million (about EUR 15.6 million). These transactions are expected to be completed in July and August.
Redevelopment projects
Shopping centre Magistral in Tallinn reopened for business in May after the completion of an eight-month renovation and extension project. The property was fully leased out. The leasable area of the shopping centre increased by 2,200 square metres to 11,700 square metres.
The last part of the development project carried out at shopping centre Myllypuron Ostari in Myllypuro, Helsinki, was completed in May.
The redevelopment project of shopping centre Koskikeskus in Tampere is Citycon’s largest on-going project, involving an estimated investment of EUR 37.9 million. The project is proceeding as planned. The shopping centre is open and continues to serve customers during the entire project.
Other events
Citycon changed its Group structure as of 1 April 2012. The change was executed through business transfers where Citycon’s Finnish real estate operations were transferred to two new holding companies Citycon Finland Oy and Etelä-Suomen Kauppakiinteistöt Oy. Following the business transfers these companies own, manage and maintain Citycon’s properties in Finland. This change will not impact any of Citycon’s other operations.
Michael Schönach, Citycon’s Executive Vice President, Finnish Operations, and member of the Corporate Management Committee left his position in the company as of 15 May 2012. Further, Nils Styf was appointed Citycon Oyj’s Chief Investment Officer and member of the Corporate Management Committee. He took up his position in June.
Events after the Reporting Period
On 7 June 2012, Citycon announced the signing of an agreement to acquire shopping centre Albertslund Centrum in the municipality of Albertslund, west of Copenhagen, Denmark, for DKK 181 million (approximately EUR 24 million). Closing of the transaction took place on 1 July 2012.
On 2 July, Citycon acquired the Citytalo property, located in Oulu, Northern Finland, at a purchase price of EUR 13.5 million from the local parish union and private owners. Situated in the heart of Oulu’s city centre, the Citytalo property is adjacent to shopping centre Galleria, owned by Citycon. Citytalo has a total leasable area of around 2,800 square metres. The premises are fully leased, with Clas Ohlson, Gina Tricot and DinSko as anchor tenants. The extension and redevelopment project of shopping centre Galleria, currently being planned, is the main reason for acquiring the Citytalo property. At the time of acquisition, its net yield is around 6.5 per cent.
On 2 July, Citycon acquired 25 per cent of shopping centre Strömpilen and retail property called Länken located in Umeå, Sweden for SEK 121 million (approximately EUR 13.8 million) from Balticgruppen AB. Citycon acquired 75 per cent of the properties in June 2007 and the seller Balticgruppen AB remained as a minority owner with 25 per cent share. At the time of signing the initial purchase agreement the parties entered into a shareholders’ agreement, whereby the minority owner was granted the right to sell its share to Citycon within a certain period of time. The realized transaction relates to this agreement. The purchase price has been determined in accordance with said agreement and is in-line with the most recent fair value of the properties. Following the acquisition, Citycon owns shopping centre Strömpilen and retail property Länken entirely.
On 16 May, Citycon agreed to sell all the shares in Citycon Jakobsberg Bostäder 3 AB for SEK 90.0 million (approx. EUR 10.0 million) to Lärjungen Lägenheter 18 AB owned by Akelius Lägenheter AB. Closing of the transaction took place on 2 July 2012. The sold company owned 129 apartments in Jakobsbergs Centrum in the municipality of Järfälla in Sweden. The aggregate gross leasable area of the apartments is approximately 9,800 square meters. Citycon recognizes a gain on sale of approximately EUR 2.9 million on the transaction.
Outlook
Citycon continues to focus on increasing both its net cash flow from operating activities and its direct operating profit. In order to implement this strategy, the company is pursuing value-added activities, selected acquisitions and proactive asset management.
Initiation of planned projects will be carefully evaluated against strict pre-leasing criteria. Citycon intends to continue the divestment of its non-core properties, in order to improve its property portfolio and strengthen its financial position. The company has identified non-core assets worth approximately EUR 200 million to be sold, although there is no guarantee that such transactions can be executed in the prevailing uncertain market conditions during 2012. The company is also considering alternative property financing sources.
In 2012, Citycon expects to continue generating solid cash flow and anticipates that its turnover will grow by EUR 13–19 million and its EPRA operating profit by EUR 12–18 million compared with the previous year, based on the existing property portfolio including recent acquisitions and divestments. The company expects its EPRA earnings to increase by EUR 5–11 million from the previous year. Furthermore, it forecasts that its EPRA EPS (basic) will be EUR 0.21–0.23 based on the existing property portfolio and number of shares. These estimates are based on already completed (re)development projects and those that will be completed in the future, as well as on the prevailing level of inflation and the euro-krona exchange rate, and current interest rates. Properties taken offline for planned development projects will reduce net rental income during the year.
Business Environment
On the whole, positive signs were seen in Citycon's operating countries in the first months of 2012, with growing retail, but the uncertainty in the markets has mounted due to the government debt situation in some eurozone countries.
Retail sales grew in both Finland, Sweden and Estonia. The total retail sales growth rate for the first five months was 5.6 per cent in Finland, 2.9 per cent in Sweden and 9.0 per cent in Estonia. (Sources: Statistics Finland, Statistiska Central Byrån, Statistics Estonia)
Household consumer confidence remained strong in Finland and Sweden, where the household consumer confidence indicator was still positive, unlike in Estonia and Lithuania (Eurostat).
Retail sales growth and the inflation rate are key factors for Citycon's business and have an impact on the rents from retail premises. Consumer prices continued to rise at the beginning of the year in all of Citycon's operating countries. In May, inflation was 3.1 per cent in Finland, 1.0 per cent in Sweden, 3.8 per cent in Estonia and 2.5 per cent in Lithuania. (Statistics Finland, Statistiska Central Byrån, Statistics Estonia, Statistics Lithuania).
In Finland and Sweden, seasonally adjusted unemployment is lower than the European Union average (10.3%): at the end of May, the unemployment rate in Finland was 7.6 per cent and in Sweden 7.8 per cent. In Estonia and Lithuania, the unemployment rates remain high: in March, 10.9 per cent in Estonia and 13.7 per cent in Lithuania. (Eurostat)
The instability of the financial market in Europe is affecting the availability and margins of debt financing.
Property Market
Demand for investment has been increasing in the Finnish property investment market but the supply of prime assets has limited transactional activities. Despite a retail investment volume in H1 2012, which was about 25 per cent higher than the figure for H1 2011, no major increase in transaction volumes is in forecast for 2012. As a result of strong investment demand, shopping centre prime yields have remained stable but the secondary yields are facing upward pressure. As a consequence of relatively strong development in retail sales, retail rents have also been increasing, although such increases have been concentrated in the very best locations only.
In Sweden the retail property transaction volume for the first half of 2012 was lower than in the previous year being only about 40 per cent of the transaction volume of H1 2011. Prime yields for shopping centres have remained stable over the last four quarters.
Despite global turmoil the outlook for Estonian retail is positive. Also property investment market has activated and retail yields have dropped below 8 per cent.
(Source: Jones Lang LaSalle Finland Oy)
Tenants’ Sales and Footfall in Citycon’s Shopping Centres
During the period, total sales in Citycon’s shopping centres grew by 7 per cent and the footfall increased by 2 per cent, year-on-year. Sales growth was seen in all of the company’s operating countries: 6 per cent in Finland, 6 per cent in Sweden and 12 per cent in the Baltic countries. The footfall increased by 2 per cent in Finland, by 5 per cent in Sweden, but decreased by 2 per cent in the Baltic countries as one centre was closed until May for redevelopment. Positive developments in sales and footfall are mainly attributable to redevelopment projects completed in recent years. Like-for-like shopping centre sales grew by 4 per cent and footfall by1 per cent and both were positive in all operating countries.
Short-Term Risks and Uncertainties
Citycon’s Board of Directors considers the company’s major short-term risks and uncertainties to be associated with economic development in the company’s operating regions, which affects demand, vacancy rates and market rents in retail premises. In addition, key near-term risks include rising financial expenses due to higher loan margins, reduced availability of debt financing and the fair value development of properties in uncertain economic conditions.
Although the financial crisis’ effects on both rent levels for retail premises and occupancy rates have so far been minor in Citycon's operating areas, demand for retail premises, reduction of vacancy rates and lower market rent levels pose challenges in a sluggish economic environment. Economic developments, particularly trends impacting on consumer confidence and consumer behaviour, inevitably affect demand for retail premises. Sovereign debt problems in the euro area have continued during 2012, and as a result, financial growth forecasts for 2012 involve more uncertainty than normally is the case. Risks to economic growth are still present and in conditions of weak economic growth, rental levels of retail premises typically fall, leasing of new premises is more difficult, and vacancy rates rise.
Implementation of Citycon's growth strategy requires new financing, which means that risks associated with the availability and cost of financing are of fundamental importance to Citycon. Banks’ willingness to lend money to real estate companies continues to be moderate, the availability of financing is limited and loan margins have remained on a high level or even increased further. In the future, tightening regulation of the banking and insurance sectors (Basel III and Solvency II regulations) is likely to support the elevated costs of debt financing, and to limit the availability of long-term bank loans. This will probably raise the cost of Citycon's new loan financing. So far this change in margins has been mitigated by reduced underlying base rates and Citycon’s active financing policy. Over the next few years, Citycon will have to refinance loan agreements which were signed at low margins before the financial crisis, and consequently, the margins on these loans will rise. Such a rise in loan margins is likely to push Citycon's average interest rate upwards in the future, even if market interest rates remain largely unchanged.
The company is actively seeking to diversify its funding sources, as demonstrated by the EUR 150 million domestic bond issue in May, in order to mitigate the risks related to bank financing, but there are no guarantees, that such alternative funding sources would be available in the future at cost efficient prices.
The fair value development of investment properties continues to be characterised by high uncertainty caused by the sovereign debt crisis and the resulting harsh economic conditions. Several factors affect the fair value of the investment properties owned by Citycon, such as general and local economic development, interest rate levels, foreseeable inflation, the market rent trend, vacancy rates, property investors' yield requirements and the competitive environment. This uncertainty is reflected most strongly on retail properties that are located outside major cities, or which are otherwise less attractive, because investor demand is not currently focused on these properties, and banks are not particularly keen to offer financing for such projects. Yet, at the same time, the fair value of the best shopping centres, which attract investor interest in uncertain conditions, remained stable or even increased during 2012.
The company’s short-term risks and uncertainties, as well as its risk management and risk management principles, are discussed in more depth at www.citycon.com/riskmanagement, on pages 40-42 of the Financial Statements for 2011, and on pages 73–74 of the Annual Report for 2011.
The Interim Report for the period 1 January–30 June 2012 in its entirety is enclosed to this release and it is also available on the corporate website at www.citycon.com.
Helsinki, 10 July 2012
Citycon Oyj
Board of Directors
Financial Reports in 2012
Citycon will issue one more interim report during the financial year 2012:
January–September 2012 on Wednesday, 10 October 2012 at about 9.00 a.m.
For more investor information, please visit the corporate website at www.citycon.com.
For further information, please contact:
Marcel Kokkeel, CEO
Tel. +358 20 766 4521 or +358 40 154 6760
marcel.kokkeel@citycon.fi
Eero Sihvonen, Executive Vice President and CFO
Tel. +358 20 766 4459 or +358 50 557 9137
eero.sihvonen@citycon.fi
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