Summary of the First Quarter of 2013 Compared with the Previous Quarter
- Turnover increased to EUR 62.9 million (Q4/2012: EUR 62.1 million).
- Net rental income decreased by EUR 1.7 million, or 4.2 per cent, to EUR 40.4 million (EUR 42.1 million), mainly due to seasonal variations in property operating expenses.
- EPRA operating profit increased by EUR 1.2 million, or 3.5 per cent to EUR 35.4 million (EUR 34.2 million) mainly due to lower direct administrative expenses by EUR 2.6 million. EPRA earnings per share increased to EUR 0.052 (EUR 0.046) due to higher EPRA operating profit, lower financial expenses by EUR 1.0 million and higher share of result in joint ventures by EUR 1.1 million. The increase in share of result in joint ventures was due to the acquisition of Kista Galleria –shopping centre in January 2013. EPRA key figures exclude non-recurring items such as fair value changes in investment properties.
- The fair value change in investment properties was EUR 11.8 million (EUR 3.8 million), while the fair value of investment properties totalled EUR 2,730.9 million (EUR 2,714.2 million). The average net yield requirement for investment properties was 6.3 per cent (6.3%).
Summary of the First Quarter of 2013 Compared with the Corresponding Period of 2012
- Turnover increased to EUR 62.9 million (Q1/2012: EUR 57.8 million).
- Net rental income increased by EUR 2.8 million, or 7.5 per cent, to EUR 40.4 million (EUR 37.5 million). Completion of (re)development projects and the acquisition of shopping centres in 2012 increased net rental income by EUR 1.6 million.
- Net rental income of like-for-like properties increased by EUR 1.0 million, or 3.5 per cent, excluding the impact of the strengthened Swedish krona.
- Earnings per share were EUR 0.07 (EUR 0.05).
- EPRA Earnings per share (basic) was EUR 0.052 (EUR 0.046).
- Net cash from operating activities per share stayed at the same level and was EUR 0.05 (EUR 0.05).
Key Figures
IFRS based key figures | Q1/2013 | Q1/2012 | Change-% 1) | Q4/2012 | 2012 |
Turnover, EUR million | 62.9 | 57.8 | 8.7 % | 62.1 | 239.2 |
Net rental income, EUR million | 40.4 | 37.5 | 7.5 % | 42.1 | 162.0 |
Profit/loss attributable to parent company shareholders, EUR million | 26.1 | 15.8 | 65.1 % | 20.4 | 77.2 |
Earnings per share (basic), EUR 2) | 0.07 | 0.05 | 36.2 % | 0.06 | 0.24 |
Net cash from operating activities per share, EUR 2) | 0.05 | 0.05 | -12.5 % | 0.04 | 0.19 |
Fair value of investment properties, EUR million | 2,730.9 | 2,547.8 | 7.2 % | 2,714.2 | 2,714.2 |
Equity ratio, % | 40.4 | 35.9 | 12.6 % | 37.8 | 37.8 |
Loan to Value (LTV), % | 51.6 | 56.5 | -8.7 % | 54.5 | 54.5 |
EPRA based key figures | |||||
EPRA operating profit, EUR million | 35.4 | 31.0 | 14.3 % | 34.2 | 135.7 |
% of turnover | 56.3 % | 53.6 % | 5.1 % | 55.1 % | 56.7 % |
EPRA Earnings, EUR million | 19.7 | 14.3 | 37.5 % | 16.2 | 63.9 |
EPRA Earnings per share (basic), EUR 2) | 0.052 | 0.046 | 13.4 % | 0.046 | 0.199 |
EPRA NAV per share, EUR | 2.99 | 3.54 | -15.6 % | 3.49 | 3.49 |
EPRA NNNAV per share, EUR | 2.70 | 3.19 | -15.4 % | 3.08 | 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 beginning of the year:
”The first quarter of 2013 showed solid performance. We were able to increase like-for-like net rental income by 3.5 per cent; additionally we managed to reduce administrative expenses by EUR 1.3 million compared to the first quarter 2012. In January, Citycon and our joint venture partner CPPIB got ownership of Kista Galleria. The acquisition significantly strengthens our position in Sweden, and we are now one of the leaders in Swedish shopping centre markets. It also substantially balances our portfolio mix between Finland and Sweden. In the first quarter, Kista Galleria’s performance was in accordance with our expectations. One of Citycon’s priorities is to successfully process the integration of Kista Galleria within the existing organization. According to research1), the average retail brand penetration in the Nordics is approximately 45 per cent below the European average. Therefore we see great opportunities to attract more international retailers to the Nordic region whereby Kista Galleria will support our position and offering to retailers.
We successfully executed the company’s largest ever equity raise of EUR 200 million via a rights issue. This is a strategic move to permanently de-leverage the company. The rights issue resulted in a 150 per cent oversubscription. First and foremost, the additional equity gives the company the flexibility to further focus on business improvement, organic growth, (re)developments and to recycle capital after value enhancement activities. The company is committed to further strengthen its balance sheet by capital recycling through divestments of non-core properties and joint venture partnerships in selected shopping centres. During the period, Citycon signed a (re)development and extension agreement with the Finnish pension insurance company Ilmarinen for IsoKristiina shopping centre in Lappeenranta. Furthermore, in this quarter Ilmarinen bought a 50 per cent share of the existing shopping centre. During the quarter, the company also signed or closed the divestment of three non-core properties.
The cost savings program continues in 2013 with a goal to save up to EUR 5 million administrative expenses compared to 2012 level. The structural changes have resulted in targeted cost savings during the first quarter.”
1) www.retailindex.com
Other Events 1 January–31 March 2013
Financial position
On 12 February 2013, based on the authorisation granted by 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 for subscription at a price of EUR 1.75 per share. The share subscription period was 21 February – 7 March. All of the offered shares were subscribed in the share offering. The new shares were entered in the Finnish Trade Register on 14 March.
Leasing Activity
The economic occupancy rate of the shopping centres was 95.9 per cent (97.0%). The economic occupancy rate of the whole property portfolio was 95.0 per cent (95.5%). The temporary decline in occupancy rate was mainly due to increased vacancy in Sweden and a finalized (re)development project with temporary vacancy.
Acquisitions and Divestments
On 17 January, Citycon acquired the Kista Galleria shopping centre in Stockholm together with CPPIB from DNB Livsforsikring ASA for approximately SEK 4.6 billion (approx. EUR 530 million). Citycon and CPPIB each own one half of the shopping centre. The centre’s gross leasable area is approximately 90,000 square metres, of which approximately 60,000 square metres is in retail premises. Kista Galleria attracts around 18 million visitors a year, more than any other shopping centre in the area, with annual sales amounting to EUR 280 million. More information on this transaction is available in the stock exchange release issued on 17 January.
In Citycon’s reporting, Kista Galleria will be treated as a joint venture and the shopping centre’s result or fair value will not impact the turnover, net rental income or fair value of investment properties of the group. The centre is consolidated with the equity method and it is recorded as share of result in joint ventures in the statement of comprehensive income. In the statement of financial position, Citycon’s share of Kista Galleria is reported within the line called “Investments in joint ventures”.
On 22 January, Citycon signed an agreement to sell the office and retail property Lindome in Greater Gothenburg area to a local buyer for approximately SEK 81 million (approx. EUR 9.7 million). Closing of the transaction took place after the reporting period.
On 27 February, Citycon sold Ultima Oy, an undeveloped plot in Vantaa, to YIT Construction Ltd for approximately EUR 4.4 million.
On 28 February, Citycon sold 50 per cent share of the shopping centre IsoKristiina in Lappeenranta to Mutual Pension Insurance Company Ilmarinen. The disposal is related to the starting (re)development project.
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)
(Re)development projects
In February, Citycon decided to expand and redevelop the shopping centre IsoKristiina, located in Lappeenranta’s city centre. The total investment will be slightly above EUR 100 million. The (re)development will increase the centre’s leasable area from 19,800 square metres to 34,000 square metres. Mutual Pension Insurance Company Ilmarinen acquired 50 per cent share of the existing shopping centre IsoKristiina and joins the project with 50 per cent share.
Reorganisation and other events
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. Simultaneously a cluster-based organisational model was adopted in all of Citycon’s operating countries. Based on this operating model, shopping centres have been combined to form entities which are led by commercial directors.
Events after the Reporting Period
On 3 April, Citycon signed an agreement to sell the office building Wavulinintie, located in Helsinki, to ELF Invest Oy for approximately EUR 1.4 million. The transaction is expected to be closed on 30 April.
On 16 April, the transaction relating to the sale of retail and office property Lindome for EUR 9.7 million was closed in accordance with the agreement signed on 22 January.
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 the property portfolio and strengthen the company’s financial position. The company is also considering alternative property financing sources.
In 2013, Citycon expects to continue generating a solid cash flow and anticipates that its turnover will grow by EUR 5–20 million and its EPRA operating profit by EUR 5–20 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 15–30 million from the previous year. Furthermore, it forecasts that its EPRA EPS (basic) will be EUR 0.19–0.24 based on the existing property portfolio and increased number of shares. The estimate for EPRA Earnings per share (basic) reflects the increased number of shares from the rights offering.
These estimates are based on already completed (re)development projects and those to 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, the first part of 2013 has been characterised by continued financial uncertainty in Citycon’s operating countries.
During the beginning of the year, retail sales growth was strong in Estonia and positive in Finland and Sweden. The total retail sales growth for the first two months was 2.0 per cent in Finland, 0.9 per cent in Sweden and 3.2 per cent in Estonia. (Sources: Statistics Finland, Statistiska Central Byrån, Statistics Estonia)
During the beginning of the year, the household consumer confidence improved in Finland and Sweden. In Estonia and Lithuania the household consumer confidence indicator remained negative, but developed positively during the period. (Eurostat)
Retail sales growth and the inflation rate are key factors for Citycon's business and have an impact on rents from retail premises. Consumer prices continued to rise at the beginning of the year in Finland and Estonia. In March, inflation was 1.7 per cent in Finland, 0.0 per cent in Sweden and 3.5 per cent in Estonia. (Statistics Finland, Statistiska Central Byrån, Statistics Estonia)
In Finland and Sweden, seasonally adjusted unemployment is lower than the European Union average (10.9%): at the end of February, the unemployment rate in Finland was 8.1 per cent and in Sweden 8.2 per cent. In Estonia and Lithuania, the unemployment rates remain high: at the end of January 9.9 per cent in Estonia and 13.3 per cent in Lithuania. (Eurostat)
The instability of the financial market in Europe is affecting the availability and margins of debt financing.
Property Market
In Finland only few retail property transactions were closed in the first quarter 2013 keeping the retail property transaction volume clearly below EUR 100 million. Investment demand has remained relatively stable in the Finnish market, but the limited supply of prime assets has limited transactional activity. The forecast for 2013 does not indicate any significant changes in the market. Shopping centre prime yields have remained stable but the secondary yields are facing upward pressure. Retail rents have also been increasing even though the softening outlook for retail sales might weaken the future prospects. However, rental growth has been focused on the prime locations.
In Sweden the retail property transaction volume in the first quarter 2013 was some SEK 1.6 billion, which is higher than the SEK 0.6 billion of retail property transacted in the first quarter 2012, but significantly lower than in the fourth quarter 2012 when some SEK 7.6 billion of retail property was transacted. Investors’ interest continues to be strong for retail property which has a good location and specification with relatively strong tenants and low vacancy rates. However, retail property investments which do not meet some or all of these criteria are more difficult to sell. Yields for prime shopping centres are currently in the region of 5.50 per cent. These yields have remained stable since mid-2011.
Strong retail sales has encouraged demand for retail space in Estonia, especially in Tallinn downtown areas and modern shopping centres. The average vacancy at Tallinn shopping centres is close to zero and rents have risen nearly 2 per cent. Also the investment market has strengthened and retail yields have dropped below 8 per cent. In Lithuania retail property market has shown some increase in activity from the fourth quarter 2012.
(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 one per cent and the footfall by two per cent, year-on-year. In Finland sales decreased by one per cent, in Sweden sales remained at the same level than in the comparison period and in Baltic Countries and New Business sales grew by 6 per cent. The sales development was impacted particularly by the fewer number of trading days compared to the first quarter of 2012 and delayed spring. Footfall decreased in Finland by 3 per cent and grew in Sweden by 9 per cent and in Baltic Countries and New Business by 22 per cent. The growth in footfall is mainly due to Liljeholmstorget, it was also impacted by the completion of Magistral (re)development as the centre was closed in the comparison period. Like-for-like shopping centre sales decreased by one per cent and the footfall remained at the same level as 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, 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 and interest rates, reduced availability of debt financing and the fair value development of properties in uncertain economic conditions.
Although the financial crisis’ effects on rent levels for retail premises, and on occupancy rates, have so far been minor in Citycon's operating areas, 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 consumer behaviour, inevitably affect demand for retail premises. Sovereign debt problems in the euro area have continued during 2013, and as a result, financial growth forecasts for 2013 involve a lot of uncertainty. Risks to economic growth persists and, in conditions of weak economic growth, the rental levels of retail premises typically fall, leasing of new premises is more difficult, and vacancy rates rise.
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 fundamental importance to Citycon. Banks’ willingness to lend money to real estate companies continues to be moderate, 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 elevate the 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, entailing that the margins on these loans will rise. Such a rise in loan margins along with rising market interest rates are 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 150 million domestic bond issue in May 2012, in order to mitigate the risks related to bank financing, but there are no guarantees, that such alternative funding sources will be available in the future at cost efficient margins. 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 2013 and 2014.
The fair value development of investment properties continue to be characterised by high 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, the market rent trend, vacancy rates, property investors' yield requirements and the competitive environment. This uncertainty will reflect most strongly on 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 not particularly keen to offer financing for such projects. Yet, at the same time, the fair value of winning shopping centres, which attract investor interest in uncertain conditions, 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, 23 April 2013
Citycon Oyj
Board of Directors
Financial Reports in 2013
Citycon will issue two more interim reports during the financial year 2013 as follows:
January–June 2013 on Wednesday, 10 July 2013 at around 9.00 a.m. and
January–September 2013 on Wednesday, 16 October 2013 at around 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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NASDAQ OMX Helsinki
Major media
www.citycon.com