Voorstel Monique: Eurocommercial Properties N.V. Half Year Report 31 December 2005

 

 

 

 

The direct investment result for the six months to 31 December 2005 was € 27.07 million, an increase of 12.9% over the result of € 23.97 million for the same period in 2004.

 

The direct investment result increase of 12.9% was matched by a broadly equal average increase of shares on issue during 2005 so that the result per depositary receipt was € 0.78 for the six months to 31 December 2005. This was the same as the result per depositary receipt for the six months to 31 December 2004 on the lower number of shares. The annual cash dividend payable in November 2006 is, under current circumstances, expected to be at least that paid in 2005 at the rate of € 1.55 per depositary receipt, notwithstanding the enlarged capital.

 

Strong property markets in those countries and sectors in which the Company has investments and higher spending in ECP's shopping centres were reflected in increased net rental income and higher independent property valuations. The overall valuation increase was € 96.1 million, an average rise of 6.3% over book values at 30 June 2005 plus capital expenditure during the period. The like for like net rental income at the property level on which these valuations were based was € 94.0 million per annum compared with € 91.6 million for the previous valuations in June 2005, a 2.6 % increase over the six months.

 

The highest percentage valuation rise was 8.2% in Italy, followed by 5.7% in France, 5.3% in Sweden and 0.1% in The Netherlands. The overall net valuation yield on the portfolio reduced by 30 basis points to 5.6 % compared with the overall yield on the same properties at 30 June 2005 (see details in note 3 to the attached accounts).

 

The overall net yield for the retail portfolio was 5.5%; France being 5.5%, Italy 5.3% and Sweden 5.8%. The net yield for the warehouse properties was 8.4%, assuming that the warehouse at Parisud is fully let and the yield for the only separate office building - the tax office in Amsterdam - was 6.9%.

 

The rise in property values was offset by a proportionate increase in the provision for deferred (capital gains) taxes, although it is currently thought unlikely that the full amount would be paid if and when properties are sold. On the other hand the Company's gearing (59% of net equity) and fair value movements of derivatives were beneficial so that net asset value at 31 December 2005 rose by 6.7% to € 25.53 per depositary receipt.

 

The Company increased its share capital by 815,143 depositary receipts since 30 June 2005, of which 807,643 were issued under the stock dividend plan and 7,500 under the provisions of the staff option scheme. The new total of depositary receipts on issue is therefore 35,277,618, an increase of 2.4% over the number on issue at 30 June 2005 and 12.5% over the number at 31 December 2004.

 

Borrowings now represent 59% of net shareholders equity and the average term of the loans is nine years with a large proportion (82%) of interest rates fixed, through swaps, for an average similar term. The Company has recently entered into two further long-term borrowing facilities for a total amount of € 117 million with terms of, respectively, 10 and 15 years. These two new facilities replace two existing loans for a total amount of € 58 million due to expire respectively in 2007 and 2008 and two short-term loans for a total amount of € 40 million. These changes to the loan portfolio provide the Company with long-term highly flexible access to bank borrowings for the financing of its current extension programme and future acquisitions.

 

The half year results for the financial year 2005/2006 have been drawn up in accordance with IFRS. As a result the presentation of the half year figures has changed and the comparative figures have been adjusted accordingly. For more information regarding the transition to IFRS reference is made to a separate document which can be obtained from the Company's website (www.eurocommercialproperties.com) and which is available at the offices of the Company (info@eurocommercialproperties.com) or tel. # 31 20 530 60 30). That document provides an overview of the effects of IFRS on the financial reporting of Eurocommercial Properties N.V.

 

 

The Company has a portfolio of 23 shopping centres, six warehouses and one office building with a total value of € 1.6 billion, as follows:-

 

 

The Company has agreed to buy, subject to planning consents, two retail warehouse developments to be constructed in the Western Paris suburbs with a total area of 18,000 m² scheduled for completion in 2007. The price for these two investments is € 27 million at a net yield of 6%.

 

The 25,000 m2 retail park in Caen for which the Company signed a letter of intent during the year has not yet received planning consent on which the purchase is conditional.

 

ECP has a very strong position in its three main existing markets of France, Italy and Sweden where further acquisitions are under negotiation but is continuing its researches into the German shopping centre market where it has yet to conclude a satisfactory transaction. The outflow of money from a number of German open ended property funds should lead to the sale of interesting properties but so far the activity has been largely in office buildings which are in far greater supply than shopping centres. ECP will only invest in Germany if returns can be expected

to be commensurate with the risks in a market with some fundamental imbalances and weak retail sales.

 

 

The scarcity of good property investments at reasonable prices has led the Company to accelerate its programme for the extension of its existing properties from which returns can be relatively high.

 

Extensions and/or refurbishments are planned or underway in France, Italy and Sweden. The timing of planning consent procedures is difficult to predict exactly but in broad terms the Company expects, under current circumstances, that its program of expenditure on shopping centre extensions and improvements will be approximately as follows: - 2006 € 65 million, 2007

€ 50 million, 2008 € 50 million and 2009 € 35 million.

 

In France, the refurbishment of Taverny is now complete and includes additional parking spaces. Plans are being developed in conjunction with the relevant municipalities for the extension of Centre Les Atlantes at Tours and at Centre Glisy in Amiens.

 

Three Italian centres are at various stages in the development cycle. At Centro Leonardo, Imola work is well advanced on the 10,000 m² extension with completion scheduled by the end of this year and the leasing programme proceeding successfully.

 

The 'Conferenza dei Servizi' consent has been obtained for the 11,000 m² GLA extension at Carosello, Milan with detailed building approval expected by mid year when work should commence. Completion is expected in 2008.

 

Plans are at an earlier stage of development at I Gigli, Florence for a similar sized extension with discussions commencing with the municipality. Provincial and regional consents, if available could take some years but there is strong demand by retailers for more space at this, the most successful shopping centre in Tuscany.

 

All of the Company's Swedish centres are planned to be extended or improved with the most advanced being Burlöv, Malmö where work on the 6,000 m² extension was completed and fully let in August last year. The existing gallery (15,000 m²) is now being refurbished and the entire project will be completed by May this year.

 

Planning consent has been obtained in December 2005 for an extension of 8,600 m² at Skövde, and work is expected to start during August. Pre-letting activity has commenced, and almost 3,000 m² has been allocated for an extension to the existing ICA Maxi hypermarket. At Norrköping, the municipality is assisting ECP with its plans for a 7,500 m² extension, with a planning decision expected in June. Stadium have already committed to an anchor store of 1,500 m². A planning consent permits an extension of 3,000 m² at Mellby Centre, Laholm, where it is believed there would be strong tenant demand in the service, household and fashion sectors.

 

Reported sales turnover in ECP's centres on a like for like, same floor area basis, increased by 3.7% overall for the year to 31 December 2005 compared with the previous year. This is a most satisfactory result and comfortably exceeds national sales increase figures.

The statistics for individual countries were:

 

*excludes hypermarkets

 

Rent to turnover ratios continue to be amongst the lowest in the industry, underlining the sustainability of rents in ECP's centres.

 

As noted under Net asset value the annual net property rent of € 94.0 million, upon which the independent valuations were based, increased, like for like, by 2.6% from the figure of € 91.6 million at 30 June 2005. These rental figures are based on the tenancy schedules at the valuation date, plus or minus any known or expected variation over the following twelve months.

 

The half year net property income as shown in the profit and loss account of the Company, however, differs from income at the property valuation level in three ways. Firstly the profit and loss income is that received over the completed six months reporting period rather than the valuer's assumption of the expected net income over the following calendar year. Secondly the profit and loss income is net of reported indirect property costs of € 3.7 million, largely the cost of operating regional management offices, audit and accounting fees, local taxes etc. (see note 9). The third difference arises from ECP's conservative six months accrual for turnover rent, indexation, rent reviews and income from vacant space. Net property income on this basis for the six months to 31 December 2005 rose to € 41.9 million (31 December 2004 € 39.7 million).

 

The overall occupancy level was 99% on a rental basis. The major vacancy in floor area terms was 10,000 m² at the Company's warehouse at Paris Sud representing 0.4% of rental income, but negotiations are advanced for the re-letting of this space. The occupancy level in the Company's retail properties was 99.6% by floor area or 99.7% by rent. There was no vacancy in the Company's two office buildings at Sloterdijk, Amsterdam and above the Passage du Havre, Paris.

 

Generally, for all major European property markets demand is greater than the supply of good investments and prices have risen accordingly, forcing initial yields down to around 5% for the best shopping centres. This situation can be expected to continue as long as interest rates remain low, which they are likely to do for 2006, at least.

 

These low yields are not in themselves necessarily dangerous, particularly as rents are usually indexed to inflation and therefore real returns compare favourably with Eurozone Government bonds currently yielding around 3.5%, un-indexed. There is of course the perennial risk that interest rates may rise but the more critical factor in investment markets today is rental levels and the prospects of growth or otherwise which, of course, in shopping centres is inextricably linked to consumer spending. ECP accordingly invests only in retail property where rents are in a reasonable proportion to sales turnover. This is the case in ECP's main markets of France, Italy and Sweden and finally now in Germany for new centres or where rents have been reviewed recently, showing a drop of 50% over the last ten years in some cases.

A similar fall in rents is possible or indeed has already started  in  some other countries where rent to turnover ratios are not sustainable, particulary in Eastern Europe. Rental falls in these locations raise the possibility of low or even negative total returns from currently very high prices.

 

We are very sad to report the death of Henk Bevers on 21 November 2005 at the age of 73. Mr Bevers, the former Agent of the Dutch Ministry of Finance (Director of the National Debt Management and Issuing Office), joined ECP's Board of Supervisory Directors in 1996. He made a major contribution to the success of the Company, with his deep knowledge of capital markets and extensive government and business contacts. We will all miss his expert advice and friendship very much.

 

Amsterdam, 10 February 2006

 

Board of Management

J.P. Lewis, Chairman

E.J. van Garderen