Citycon Oyj's Interim Report for 1 January–30 June 2013

Summary of the Second Quarter of 2013 Compared with the First Quarter of the Year
- Turnover decreased to EUR 61.6 million (Q1/2013: EUR 62.9 million) mainly due to divestments and (re)development projects.
- Net rental income increased by EUR 2.3 million, or 5.8 per cent, to EUR 42.7 million (EUR 40.4 million), mainly due to seasonal variations in property operating expenses.
- EPRA operating profit increased by EUR 2.3 million, or 6.6 per cent, to EUR 37.8 million (EUR 35.4 million), mainly due to higher net rental income. EPRA earnings increased to EUR 20.8 million (EUR 19.7 million) mainly due to higher EPRA operating profit. EPRA earnings per share decreased to EUR 0.047 (EUR 0.052) due to a higher number of shares resulting from the rights issue in March 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 3.3 million (EUR 11.8 million), and the fair value of investment properties totalled EUR 2,711.3 million (EUR 2,730.9 million). The weighted average net yield requirement for investment properties was 6.3 per cent (6.3%).

Summary of January – June 2013 Compared with the Corresponding Period of 2012
-Turnover increased to EUR 124.5 million (Q1-Q2/2012: EUR 116.2 million).
- Net rental income increased by EUR 5.8 million, or 7.5 per cent, to EUR 83.0 million (EUR 77.3 million). Completion of (re)development projects and the acquisition of shopping centres in 2012 increased net rental income by EUR 2.6 million.
- Net rental income of like-for-like properties increased by EUR 2.9 million, or 4.8 per cent, excluding the impact of the stronger Swedish krona.
- Earnings per share were EUR 0.07 (EUR 0.09). The reduction was mainly due to non-recurring financial expenses of EUR 26.8 million related to the refinancing and due to a higher number of shares.
- EPRA earnings per share (basic) were EUR 0.099 (EUR 0.096).
- Net cash from operating activities per share decreased to EUR -0.02 (EUR 0.10) mainly due to above-mentioned non-recurring financial expenses and timing issues.
 
Key Figures

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 first half of the year:

“The first half of 2013 showed further improvements in rental growth and cost savings; we were able to increase like-for-like net rental income by 4.8 per cent and reduce administrative expenses by EUR 2.8 million compared to the corresponding period in 2012. Overall, Citycon’s operating results in the first half of 2013 were positive. The occupancy rate reduced slightly during the second quarter, but remained at a solid level, close to 95 per cent. Leasing and vacancy reduction will continue to be a top priority for management.

In May, Citycon renewed eleven grocery store lease agreements in supermarket and shop properties with its largest tenant Kesko. The renewed leases increase the average length of Citycon’s total lease portfolio by approximately four months. This is a clear example of Citycon’s value-enhancing activities in its non-core portfolio.

During the reporting period, the company has strengthened its portfolio through acquisitions and (re)development projects. Following the start of the (re)development project at IsoKristiina shopping centre in Lappeenranta in April, Citycon announced the initiation of the first phase of the extension and (re)development project at Iso Omena shopping centre in June. The Iso Omena extension will further enhance Citycon’s position in Espoo, the fastest growing and most affluent area in the Helsinki Metropolitan Area. Organic growth will continue to be a key focus for Citycon and the (re)development of existing core shopping centres contribute to this.

The company’s goal has been to diversify funding sources and refinance debt. After receiving two investment grade credit ratings from Standard & Poor’s (BBB-) and Moody’s (Baa3) in May, we successfully placed a EUR 500 million seven-year eurobond with an annual coupon of 3.75 per cent. This strategic transaction enabled us to increase liquidity and extend average debt maturities. The proceeds of the bond have been used to pay back existing loans and repurchase domestic bonds maturing in 2014 and 2017. The one-off increase in financial expenses was mainly due to the unwinding of interest rate swaps in relation to the repayment of existing debt. Going forward, this transaction will reduce our interest expenses and improve the interest cover covenant.”

Other Events 1 January–30 June 2013

Financial position
In May, Citycon received two long-term corporate investment grade credit ratings, BBB- from Standard & Poor’s and Baa3 from Moody’s. Both credit ratings have stable outlook.

On 14 June, the company issued an unsecured EUR 500 million eurobond. The seven-year bond matures on 24 June 2020 and carries fixed annual interest at the rate of 3.75 per cent, payable annually. 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 to prepay existing bank loans, pay down lines of credit and to repurchase part of its domestic bonds maturing in 2014 and 2017, together EUR 421.9 million. During Q3, Citycon will additionally repay the convertible bond maturing in August and other debt for a total of approximately EUR 55 million. The debt prepayment and the related unwinding of interest rate swaps and bond buy-backs caused some non-recurring indirect financial expenses that are explained in more detail in the Net financial expenses section.

In February, following 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 95.8 per cent (96.8%), and of the whole property portfolio 94.8 per cent (95.6%). The decline in the occupancy rate was mainly due to increased vacancies in Sweden and a finalised (re)development project with temporary vacancy.

In May, Citycon renewed eleven grocery store lease agreements with the trading sector company Kesko. The 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 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 3 April, Citycon signed an agreement to sell the office building on Wavulinintie, Helsinki, to ELF Invest Oy for approximately EUR 1.4 million. The closing of the transaction is expected to take place in July.

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. The disposal was related to the started (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, Citycon acquired Kista Galleria shopping centre in Stockholm, together with the Canada Pension Plan Investment Board (“CPPIB”), 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 approximately 90,000 square metres, of which approximately 60,000 square metres is in retail premises. Kista Galleria attracts approximately 18 million visitors a year, more than any other shopping centre in the area, with annual sales of 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 and one residential portfolio in Sweden for a total price of SEK 83 million (approximately EUR 9.7 million). These transactions are expected to be closed in Q3 and Q4 2013.

(Re)development projects
In May, Citycon announced the start of the first phase of the extension to Iso Omena shopping centre. The estimated investment for the three-phase project, including partial (re)development of the existing shopping centre, totals 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 expands 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 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 19,800 square metres to 34,000 square metres. Mutual Pension Insurance Company Ilmarinen acquired a 50 per cent share of the existing shopping centre and joins the project with a 50 per cent share. 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.

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 ten. 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 the turnover, net rental income or fair value of investment properties of the group. Kista Galleria is consolidated into Citycon's financial statements with 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 the account net financial income and expenses. However, Citycon's management and the Board of Directors additionally follow the performance of Kista Galleria as if it was fully consolidated into Citycon's net rental income and operating profit. The Notes to the interim condensed consolidated financial statements on pages 27-28 (Note 3. Segment Information) include more information about 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 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 solid cash flow and anticipates that its turnover will grow by EUR 7–17 million and its EPRA operating profit by EUR 8–18 million compared with the previous year. This is based on the existing property portfolio, including recent acquisitions and divestments. The company expects its EPRA earnings to increase by EUR 18–28 million from the previous year, and further forecasts an EPRA EPS (basic) of EUR 0.19–0.23 based on the existing property portfolio and the 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 (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

On the whole, the first part of 2013 has been characterised by continued financial uncertainty in Citycon’s operating countries.

At 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 five months was 1.6 per cent in Finland, 1.5 per cent in Sweden and 5.0 per cent in Estonia (source: Statistics Finland, Statistiska Central Byrån, Statistics Estonia).

During the first half of the year, household consumer confidence improved in Finland and in Sweden. In Estonia and Lithuania the household consumer confidence indicator remained negative, but developed positively during the period (source: 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, but decreased slightly in Sweden. In May, inflation was 1.6 per cent in Finland, -0.2 per cent in Sweden and 3.3 per cent in Estonia (source: Statistics Finland, Statistiska Central Byrån, Statistics Estonia).

In Finland, Sweden and Estonia, seasonally adjusted unemployment is lower than the European Union average (10.9%). At the end of May, the unemployment rate in Finland was 8.4 per cent and in Sweden 7.9 per cent. In Estonia and Lithuania, unemployment rates have been high but are decreasing: at the end of April they were 8.3 per cent in Estonia and 12.5 per cent in Lithuania (Source: Eurostat).

The instability of the financial markets in Europe is affecting the availability and margins of debt financing.

Property Market
In the second quarter of 2013, the retail property market remained quiet in Finland and it seems that the transaction volume for H1 is remaining below the corresponding period in 2012. There is a possibility that the second half of the year might be more active than the first half, due to potential increase in supply. 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 future prospects. Rental growth, however, has been focused on the prime locations.

In Sweden the retail property transaction volume in the second quarter 2013 was some SEK 2.5 billion, which is higher than the SEK 1.6 billion of retail property transacted in the first quarter 2013, but significantly lower than in the fourth quarter 2012, when some SEK 7.6 billion of retail property was transacted. In the second quarter of 2013, the majority of the retail transactions involved an international investor. Investor interest continues to be strong for retail property that is in a good location and has high specification, with relatively strong tenants and low vacancy rates. However, retail property investments that do not meet some or all of these criteria are more difficult to sell. Yields for prime shopping centres have remained stable since mid-2011.

Demand for retail space is strong in Estonia, especially in central areas of Tallinn and modern shopping centres. Vacancy rates in Tallinn shopping centres is close to zero and rents have remained stable or have slightly increased due to fewer rental discounts and index increments. In addition, the investment market has strengthened and retail yields have dropped below 8 per cent. In Lithuania, the retail property market has shown an increase in activity from the fourth quarter of 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 three per cent, year-on-year. In Finland sales remained at the same level than in the comparison period, in Sweden sales increased by one per cent and in Baltic Countries and New Business sales grew by four per cent. The sales development was particularly impacted by the delayed spring. Footfall decreased in Finland by one per cent, it grew in Sweden by nine per cent and in the Baltic Countries and New Business by 14 per cent. The growth in footfall is mainly due to Liljeholmstorget; 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 remained at the same level than in the comparison period and footfall increased by two per cent. 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. The refinancing risk of the company was, however, reduced considerably as a result of the EUR 500 million eurobond issued in June.

Although the effects of the financial crisis on rent levels for retail premises and on occupancy rates have so far been minor 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 consumer behaviour, inevitably affect demand for retail premises. During 2013 risks to the economic growth have persisted, 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.

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 fundamental importance to Citycon. The willingness of banks to lend money continues to be moderate, availability of financing is limited, and loan margins remain at a high level or have even increased. In the future, tightening regulation of the banking and insurance sectors (e.g. 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. When refinancing loan agreements that were signed at low margins before the financial crisis, the margins on the new loans will be higher. 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 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. The 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 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, market rent trends, vacancy rates, property investors' yield requirements, and the competitive environment. This uncertainty will be reflected 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 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, have remained stable or have 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, 9 July 2013

Citycon Oyj
Board of Directors


Financial Reports in 2013

Citycon will issue one more interim report during the financial year 2013 as follows:

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.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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www.citycon.com