Summary of the Third Quarter of 2013 Compared with the Previous Quarter
- Turnover increased to EUR 62.1 million (Q2/2013: EUR 61.6 million) mainly due to finalised (re)development projects, including Koskikeskus and Rocca al Mare.
- Net rental income increased by EUR 1.2 million, or 2.8 per cent, to EUR 43.9 million (EUR 42.7 million), mainly due to lower property operating expenses reflecting normal seasonal variations.
- EPRA operating profit increased by EUR 1.7 million, or 4.5 per cent, to EUR 39.5 million (EUR 37.8 million), mainly due to higher net rental income and lower administrative expenses. EPRA earnings increased to EUR 24.2 million (EUR 20.8 million) mainly due to higher EPRA operating profit and lower direct financial expenses. EPRA earnings per share increased to EUR 0.055 (EUR 0.047). EPRA key figures exclude non-recurring items such as fair value changes in investment properties.
- The fair value change in investment properties was EUR 6.3 million (EUR 3.3 million), and the fair value of investment properties totalled EUR 2,739.4 million (EUR 2,711.3 million). The weighted average net yield requirement for investment properties remained at 6.3 per cent (6.3%).
Summary of January–September 2013 Compared with the Corresponding Period of 2012
-Turnover increased to EUR 186.6 million (Q1-Q3/2012: EUR 177.1 million).
- Net rental income increased by EUR 7.0 million, or 5.8 per cent, to EUR 126.9 million (EUR 119.9 million). Net rental income of like-for-like properties increased by EUR 4.4 million, or 4.9 per cent, excluding the impact of the stronger Swedish krona, while the completion of (re)development projects and the acquisition of shopping centres in 2012 increased net rental income by EUR 2.9 million.
- Earnings per share were EUR 0.14 (EUR 0.18). The decrease was mainly due to non-recurring financial expenses of EUR 26.8 million in Q2/2013 related mostly to the unwinding of interest rate swaps and a higher number of shares.
- EPRA earnings per share (basic) were EUR 0.154 (EUR 0.154).
- Net cash from operating activities per share decreased to EUR 0.04 (EUR 0.15) mainly due to above-mentioned non-recurring financial expenses and timing issues.
Key Figures
IFRS based key figures | Q3/2013 | Q3/2012 | Q2/2013 | Q1-Q3/2013 | Q1-Q3/2012 | Change-% 1) | 2012 |
Turnover, EUR million | 62.1 | 60.9 | 61.6 | 186.6 | 177.1 | 5.4% | 239.2 |
Net rental income, EUR million | 43.9 | 42.6 | 42.7 | 126.9 | 119.9 | 5.8% | 162.0 |
Profit/loss attributable to parent company shareholders, EUR million | 32.3 | 30.2 | 1.7 | 60.1 | 56.8 | 5.8% | 77.2 |
Earnings per share (basic), EUR2) | 0.07 | 0.10 | 0.00 | 0.14 | 0.18 | -21.7% | 0.24 |
Net cash from operating activities per share, EUR2) | 0.06 | 0.04 | -0.06 | 0.04 | 0.15 | -70.4% | 0.19 |
Fair value of investment properties, EUR million | 2,739.4 | 2,695.5 | 2,711.3 | 2,739.4 | 2,695.5 | 1.6% | 2,714.2 |
Equity ratio, % | 44.1 | 34.8 | 42.7 | 44.1 | 34.8 | 26.9% | 37.8 |
Loan to Value (LTV), % | 53.4 | 58.1 | 54.2 | 53.4 | 58.1 | -8.1% | 54.5 |
EPRA based key figures | Q3/2013 | Q3/2012 | Q2/2013 | Q1-Q3/2013 | Q1-Q3/2012 | Change-% 1) | 2012 |
EPRA operating profit, EUR million | 39.5 | 37.3 | 37.8 | 112.6 | 101.4 | 11.0% | 135.7 |
% of turnover | 63.6% | 61.3% | 61.2% | 60.4% | 57.3% | 5.4% | 56.7% |
EPRA Earnings, EUR million | 24.2 | 17.8 | 20.8 | 64.7 | 47.7 | 35.4% | 63.9 |
EPRA Earnings per share (basic), EUR2) | 0.055 | 0.057 | 0.047 | 0.154 | 0.154 | 0.2% | 0.199 |
EPRA NAV per share, EUR | 3.06 | 3.71 | 2.99 | 3.06 | 3.71 | -17.6% | 3.49 |
EPRA NNNAV per share, EUR | 2.83 | 3.24 | 2.77 | 2.83 | 3.24 | -12.6% | 3.08 |
1) Change-% is calculated from exact figures and refers to the change between 2013 and 2012.
2) Result per share key figures have been calculated with the issue-adjusted number of shares resulting from the rights issue executed in March 2013.
CEO’s Comment
Comments from Citycon Oyj’s Chief Executive Officer Marcel Kokkeel on the reporting period:
“The first three quarters of 2013 showed a continued good like-for-like net rental income development of 4.9 per cent. This growth was mainly a result of rental uplifts, increased speciality leasing income and strict management of operating expenses. Despite the challenging economic environment Citycon’s focused strategy on grocery-anchored shopping centres in urban areas with high-barriers to entry enables solid growth. The administrative cost savings programme, with a goal of saving up to EUR 5 million in 2013 compared to 2012, is well on track. During the first nine months of the year, administrative expenses have decreased by EUR 3.5 million compared to the same period last year.
During the third quarter, the economic occupancy rate increased by 1.0 ppt to the level of 95.8 per cent. This increase was driven by new leases, as well as by the successful sale of non-core assets. Based on a 50 per cent consolidation of Kista Galleria, the occupancy rate would have been 96.1 per cent at the end of Q3. In the Baltics, Citycon has a close to 100 per cent occupancy rate. We further improved the strength of the Estonian portfolio in September by opening Estonia’s first H&M and first department store chain, Debenhams in Citycon’s largest shopping centre in Tallinn, Rocca al Mare. A second H&M store will open later this year in Kristiine. Since these openings, we have seen an approximately 15 per cent increase in footfall in Rocca al Mare compared to last year.
In accordance with our strategy, we have continued our sales of non-core assets during Q3. During the quarter, we completed the divestment of three assets for a total value of approx. EUR 8 million. We will continue our strategy of maximising value of our non-core properties prior to divestment.
As stated on the Capital Markets Day in September, the company will maintain its focus on organic growth, including internal efficiency improvements, accretive (re)developments and non-core property disposals. Based on a stable outlook for the remainder of the year, the management has further narrowed its guidance.”
Main Events January–September 2013
Financial position
On 14 June, the company issued an unsecured EUR 500 million eurobond. This seven-year bond will mature on 24 June 2020 and carries fixed annual interest at a rate of 3.75 per cent, payable annually. Prior to the bond issue, Citycon received two long-term corporate investment grade credit ratings in May, BBB- from Standard & Poor’s and Baa3 from Moody’s, both with a stable outlook. The bond was rated BBB- by Standard & Poor’s and Baa3 by Moody’s, in line with Citycon’s corporate credit rating. The company used the proceeds of the bond to prepay existing bank loans, pay down lines of credit and to repurchase part of its domestic bonds maturing in 2014 and 2017, with a combined value of EUR 421.9 million. In Q3 the company also repaid the maturing convertible capital loan, issued in 2006 and amounting to EUR 39.8 million. The debt prepayment and the related unwinding of interest rate swaps and bond buy-backs caused some non-recurring indirect financial expenses in Q2 that are explained in more detail in the Net financial expenses section.
In February, based on the authorisation granted at the EGM of 6 February 2013, the Citycon Board of Directors decided on an approximately EUR 200 million share issue based on the shareholders’ pre-emptive subscription rights. A total of 114,408,000 new shares were offered at EUR 1.75 per share. The subscription period was 21 February–7 March. All offered shares were subscribed and subsequently entered in the Finnish Trade Register on 14 March.
Leasing Activity
The economic occupancy rate of the shopping centres was 96.4 per cent (96.5%), equivalent to 95.8 per cent (95.4%) for the entire property portfolio. The increase in the occupancy rate was mainly due to decreased vacancies in the supermarket and shops portfolio as well as due to successful disposal of supermarket and shop properties. Based on a 50 per cent consolidation of Kista Galleria, the economic occupancy rate for the entire property portfolio would have been 96.1 per cent at the end of the period.
In May, Citycon renewed eleven grocery store lease agreements with the trading sector company Kesko. These stores are part of Citycon’s supermarket and shops portfolio. The agreements cover some 44,000 square metres of leasable area and increase the average remaining length of Citycon’s total lease portfolio by approximately four months.
Acquisitions and Divestments
On 18 July, Citycon sold the mixed-use property, Backa, in the Greater Gothenburg area to a local buyer for approximately SEK 42 million (approx. EUR 4.9 million).
On 15 July, Citycon sold the office building on Wavulinintie, Helsinki, to ELF Invest Oy for approximately EUR 1.4 million.
On 10 July, Citycon sold the retail property, Espoon Louhenkulma, in Helsinki Metropolitan Area to a local investor for approximately EUR 1.3 million.
On 16 April, Citycon sold the office and retail property, Lindome, in the Greater Gothenburg area to a local buyer for approximately SEK 81 million (approx. EUR 9.7 million).
On 7 March, the company sold the office and retail property, Hindås, located in the Greater Gothenburg area, to a local buyer for approximately SEK 12 million (approx. EUR 1.4 million).
On 28 February, Citycon sold its 50 per cent share of IsoKristiina shopping centre in Lappeenranta to Mutual Pension Insurance Company Ilmarinen. This disposal was related to the initiated (re)development project.
On 27 February, Citycon sold Ultima Oy, a company owning an undeveloped plot in Vantaa, to YIT Construction Ltd for approximately EUR 4.4 million.
On 17 January, together with the Canada Pension Plan Investment Board (“CPPIB”), Citycon acquired the Kista Galleria shopping centre in Stockholm from DNB Livsforsikring ASA for approximately SEK 4.6 billion (approx. EUR 530 million). Citycon and CPPIB each own 50 per cent of the shopping centre. The centre’s gross leasable area is over 90,000 square metres, of which approximately 60,000 square metres consist of retail premises. Kista Galleria attracts approximately 18 million visitors a year, more than any other shopping centre in the area, with annual sales of approximately EUR 280 million. More information on this transaction is available in the stock exchange release issued on 17 January 2013.
In addition, during the period Citycon agreed on the sale of one non-core asset in Finland for a price of approximately EUR 2.9 million. The closing of this sale is expected to occur at the end of the year or beginning of 2014. In Q2 Citycon signed an agreement to sell one residential portfolio in Sweden for a total price of approximately SEK 41 million (approx. EUR 4.7 million). This transaction is expected to be closed in Q4 2013.
(Re)development projects
In May, Citycon announced the beginning of the first phase of the extension to Iso Omena shopping centre. The estimated investment for this three-phase project, including partial (re)development of the existing shopping centre, will total approximately EUR 175 million. The first phase of the project, covering a EUR 120 million investment, will be carried out in a 50/50 partnership with NCC Property Development Oy. The extension will expand the leasable retail area of the shopping centre, by approximately 25,000 square metres, to over 75,000 square metres. More information on the project is available in the stock exchange and press releases issued on 31 May 2013.
In February, Citycon decided to expand and (re)develop the IsoKristiina shopping centre, located in Lappeenranta city centre. The total investment will be slightly above EUR 100 million. The (re)development will increase the centre’s leasable area from 21,000 square metres to 34,000 square metres. Mutual Pension Insurance Company Ilmarinen acquired a 50 per cent share of the existing shopping centre, and will provide 50 per cent of the project financing. More information on the project is available in the press release issued on 28 February 2013.
The renovation of Åkermyntan Centrum in Stockholm was finalised during Q2 2013.
Other events
At its annual conference in September, the European Public Real Estate Association (EPRA), which represents listed real estate companies, acclaimed Citycon's Annual and Sustainability Report 2012 as one of the best in the industry. This was Citycon’s fourth consecutive Gold Award in the Financial Best Practices series. For the second year in a row, the company also won gold for Sustainability Best Practices, a new award series introduced in 2012.
On 30 January, statutory collaborative negotiations in the Finnish Business Unit were concluded concerning the reorganisation of business operations. As a result of these negotiations, Citycon reduced the number of employees in its Finnish Business Unit by 10. At the same time, a cluster-based organisational model was adopted in all of Citycon’s operating countries, resulting in shopping centres being combined to form entities led by commercial directors.
Reporting of Kista Galleria
In Citycon’s reporting, Kista Galleria is treated as a joint venture and the shopping centre’s result or fair value will not impact on the turnover, net rental income or fair value of investment properties of the group. Kista Galleria is consolidated in Citycon's financial statements based on the equity method, meaning that Citycon's share of Kista Galleria's profit for the period is recognised in the line "Share of result in joint ventures" in the statement of comprehensive income and Citycon's share of Kista Galleria's total assets is recognised in the line "Investments in joint ventures" in the statement of financial position. In addition, the management fee received by Citycon is reported in the line "other operating income and expenses" and the interest income on the shareholder loan is reported in "net financial income and expenses". Kista Galleria contributed to the IFRS based profit for the period by approximately EUR 2.5 million in Q3 and by approximately EUR 8.3 million for the period January–September. Citycon's management and Board of Directors also follow the performance of Kista Galleria as if it were fully consolidated with Citycon's net rental income and operating profit. The "Notes to the interim condensed consolidated financial statements" on pages 25–26 (Note 3. Segment Information) include more information on Kista Galleria shopping centre.
Events after the Reporting Period
No events after the reporting period.
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.
The initiation of planned projects will be carefully evaluated against strict pre-leasing criteria. Citycon intends to continue the divestment of its non-core properties after value maximisation activities. The company is also considering alternative property financing sources.
In 2013, Citycon expects to continue generating solid cash flow and anticipates that its turnover will grow by EUR 8–13 million compared with the previous year (EUR 7–17 million announced in Q2). The company expects its EPRA operating profit to grow by EUR 11–16 million (EUR 8–18 million announced in Q2) based on the existing property portfolio, including recent acquisitions and divestments, and its EPRA earnings to increase by EUR 22–26 million from the previous year (EUR 18–28 million announced in Q2). The company forecasts an EPRA EPS (basic) of EUR 0.200–0.215 based on the existing property portfolio and the increased number of shares compared with the earlier announced figure of EUR 0.19–0.23. The estimate for EPRA earnings per share (basic) reflects the increased number of shares after the rights offering executed in March.
These estimates are based on (re)development projects that have already been completed and those to be completed in the future, as well as on the prevailing level of inflation, 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
During Q3, market conditions have continued to be challenging in Citycon’s operating countries; however, there are signs of a gradual strengthening of the Swedish economy. During the year, consumer confidence levels have improved in Citycon’s operating countries and remained well above the Eurozone average.
Retail sales growth has been strong in Estonia and Lithuania, positive in Finland and Sweden and negative in Denmark during 2013. Total retail sales growth for the first eight months was 0.7 per cent in Finland, 1.5 per cent in Sweden, 5.0 per cent in Estonia, 4.9 per cent in Lithuania and -1.3 per cent in Denmark (source: Statistics Finland, Statistics Sweden, Statistics Estonia, Statistics Lithuania, Statistics Denmark).
During the first nine months of the year, household consumer confidence has improved in all of Citycon’s operating countries, except for in Estonia where it has stayed stable. In Estonia and Lithuania the household consumer confidence indicator has remained negative (source: Eurostat).
Retail sales growth and the inflation rate are key factors in Citycon's business, and have an impact on rents from retail premises. Consumer prices continued to rise during the year in Finland and Estonia, whereas they remained fairly stable in Sweden, Lithuania and Denmark. In August, inflation was 1.2 per cent in Finland, 0.1 per cent in Sweden, 2.9 per cent in Estonia, 0.4 per cent in Lithuania and 0.4 per cent in Denmark (source: Statistics Finland, Statistics Sweden, Statistics Estonia, Statistics Lithuania, Statistics Denmark).
In all of Citycon’s operating countries, except for Lithuania, seasonally adjusted unemployment rates are lower than the European Union average (10.9%). The unemployment rates in Finland and Sweden have stayed relatively stable during the year and were 8.0 per cent in both countries in August. Denmark’s unemployment rate remains low, at 6.6 per cent for August. In Estonia the unemployment rate has been decreasing (7.9% in July), whereas unemployment in Lithuania has continued to be on a high level (12.3% in August) (Source: Eurostat).
Property Market
In Finland the inactivity of the property investment market continued in Q3. However, the demand for core assets remains strong, as equity rich investors keep looking for safe havens. There are also first signs of investors starting to diversify their portfolios, both in terms of risk and geography by looking for more value added and secondary opportunities. However, stronger economic fundaments are needed before more robust growth could be expected. The shopping centre prime yields have remained stable both quarter-on-quarter and year-on-year and no significant change is expected in 2014. Prime shopping centre rents remained stable compared to the previous quarter, but increased by 0.9 per cent year-on-year. The softening outlook for retail sales limits the rental growth potential and has made occupiers somewhat more cautious which has lengthened certain leasing negotiations and slowed down decision making.
In Sweden the demand for core retail assets remains strong but the transactional activity has been low. In Q3 the investment volume for retail properties was weaker than in Q1 and Q2. Due to the strong demand, prime shopping centre yields have remained stable. Prime shopping centre rents are generally stable compared to the previous quarter but increased by around 2 per cent over the year. Subdued retail turnover growth limits the rental growth. Generally, prime retail rents will perform better than secondary retail rental growth.
In Estonia prime shopping centre rents have remained stable in Q3, but increased year-on-year in line with inflation approximately by 3 per cent. Vacancy rates in professionally managed prime centres are close to 0 per cent and demand for small to mid-size rental units is high, whereas older shopping centres in remote locations face challenges to renew contracts. Although the market lacks large volume transactions the investment market in Q3 was active. Prime shopping centre yields have dropped to 7.5 per cent and the strong economic fundamentals support further yield compression, although at the same time the increasing cost of financing affects the yields negatively.
(Source: Jones Lang LaSalle)
Tenants’ Sales and Footfall in Citycon’s Shopping Centres
During the period, total sales in Citycon’s shopping centres grew by 1 per cent and the footfall by 2 per cent, year-on-year. In Finland sales remained at the same level than in the comparison period, in Sweden sales increased by 2 per cent and in Baltic Countries and New Business sales grew by 4 per cent. Footfall decreased in Finland by 2 per cent, it grew in Sweden by 5 per cent and in the Baltic Countries and New Business by 10 per cent. The growth in footfall derived mainly from the larger shopping centres like Liljeholmstorget; but it was also impacted by the completion of the Magistral (re)development, as the centre was closed in the comparison period. Like-for-like shopping centre sales and footfall remained at the same level than in the comparison period. There are estimates included in the sales and footfall figures.
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 developments in the company’s operating regions. Such developments affect demand, vacancy rates and market rents in retail premises. In addition, key near-term risks include rising financial expenses due to higher loan margins and interest rates, reduced availability of debt financing and the fair value development of properties in the current uncertain economic conditions. However, the company’s refinancing risk was considerably reduced as a result of the EUR 500 million eurobond issued in June.
Although the financial situation has so far had only minor effects on the rent levels of retail premises and on occupancy rates, in Citycon's operating regions lower demand for retail premises, higher vacancy rates and lower market rent levels pose challenges in a sluggish economic environment. Economic developments, particularly trends impacting on consumer confidence and behaviour, inevitably affect demand for retail premises. During 2013, risks to economic growth have persisted. During periods of weak economic growth the rental levels of retail premises typically fall, leasing of new premises is more difficult and vacancy rates rise.
The implementation of Citycon's strategy will require new financing going forward, which means that risks associated with the availability and cost of financing are of importance to Citycon. Banks’ willingness to lend money continues to be moderate, availability of financing is limited and loan margins remain at a high level. In the future, tightening regulation of the banking and insurance sectors (e.g. the Basel III and Solvency II regulations) is likely to elevate the costs of debt financing and to limit the availability of long-term bank loans. This may 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. Loan agreements were signed at low margins before the financial crisis; when new loans are taken out, the margins are likely to be higher. Along with rising market interest rates, such a rise in loan margins is likely to push Citycon's average interest rate upwards in the future.
The company is actively seeking to diversify its funding sources, as demonstrated by the EUR 500 million eurobond issued in June 2013 and the EUR 150 million domestic bond issued in May 2012, in order to mitigate the risks related to bank financing. However, there are no guarantees that such alternative funding sources will be available in the future at cost-efficient margins. Bond issues, along with the EUR 360 million credit facility agreement signed with Nordic banks in September 2012, the EUR 90 million rights issue in October 2012 and the EUR 200 million rights issue in March 2013 considerably strengthened the balance sheet, improved the available liquidity and decreased the refinancing risk for the coming years.
The fair value development of investment properties continues to be characterised by uncertainty caused by the sovereign debt crisis and the resulting tough economic conditions. Several factors are affecting the fair value of the investment properties owned by Citycon, such as general and local economic development, interest rate levels, foreseeable inflation rates, market rent trends, vacancy rates, property investors' yield requirements and the competitive environment. This uncertainty will be reflected most strongly in retail properties located outside major cities, or in otherwise less attractive properties, because investor demand is not currently focused on these properties and banks are more reluctant to offer financing for such projects. On the other hand, the fair value of winning shopping centres, which attract investor interest in uncertain conditions, has remained stable or even increased during 2013.
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 43–46 of the Financial Statements for 2012 and on pages 50–51 of the Annual Report for 2012.
Helsinki, 15 October 2013
Citycon Oyj
Board of Directors
Financial Reporting Schedule and AGM 2014
Citycon Oyj will release its full-year financial report as well as financial statements and the report by the Board of Directors for the period 1 January–31 December 2013 on Wednesday, 5 February 2014.
Citycon’s Annual General Meeting will be held in Helsinki, Finland, on Wednesday, 19 March 2014 starting at 2:00 p.m.
Citycon will issue three interim reports during the financial year 2014 in accordance with the following schedule:
January–March 2014 on Thursday, 24 April 2014 at about 9.00 a.m.,
January–June 2014 on Thursday, 10 July 2014 at about 9.00 a.m. and
January–September 2014 on Thursday, 16 October 2014 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.com
Eero Sihvonen, Executive Vice President and CFO
Tel. +358 20 766 4459 or +358 50 557 9137
eero.sihvonen@citycon.com
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