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

 

* All figures have been drawn up in accordance with IFRS. Therefore, the comparative figures have been adjusted accordingly. In this respect reference is made to the attached reconciliation presenting the consolidated half-year results for the period ended 31 December 2004 based on IFRS compared with the published consolidated profit and loss account for the six months period ended 31 December 2004 together with a variance analysis.

 

* All figures have been drawn up in accordance with IFRS. Therefore, the comparative figures have been adjusted accordingly.

 

 

 

* All figures have been drawn up in accordance with IFRS. Therefore, the comparative figures have been adjusted accordingly.  In this respect reference is made to the attached reconciliation presenting the consolidated balance sheet as per 31 December 2004 based on IFRS compared with the published consolidated balance sheet as per 31 December 2004 together with a variance analysis.

 

 

The movements in shareholders' equity in the six months period ended 31 December 2005 were:

 

 

 

 

 

The movements in shareholders' equity in the previous six months period ended 31 December 2004 were:

 

 

The financial statements of the Company for the financial year starting 1 July 2005 and ending 30 June 2006 will be drawn up in accordance with International Financial Reporting Standards (IFRS). The financial statements for the six month period ending 31 December 2005 have been drawn up in accordance with IAS 34 (Interim Financial Reporting). The comparative figures have been taken from last year's interim report for 31 December 2004 drawn up under Netherlands GAAP and subsequently adjusted applying IFRS. In August 2006 the Company will present its 2005/2006 financial statements fully in accordance with IFRS standards then approved by the European Commission. The standards approved at that time may be different from the standards the Company currently applies. For this reason, the comparative figures as presented might change.

 

The consolidated financial statements include those of the holding company and its wholly owned subsidiaries:

 

Boleto B.V., Amsterdam

Holgura B.V., Amsterdam

Kingsford Exploitatiemaatschappij I B.V., Amsterdam

Kingsford Onroerend Goed Financiering B.V., Amsterdam

Sentinel Holdings II B.V., Amsterdam

Eurocommercial Properties Ltd., London

Eurocommercial Properties Azur S.a.r.l, Paris

Eurocommercial Properties Caumartin S.N.C., Paris

Eurocommercial Properties France S.A., Paris

Eurocommercial Properties Midi S.N.C., Paris

Eurocommercial Properties Normandie S.N.C., Paris

Eurocommercial Properties Passy S.a.r.l., Paris

Eurocommercial Properties Seine S.N.C., Paris

S.C.I. les Portes de Taverny, Paris

Eurocommercial Properties Italia S.r.l., Milan

Juma S.r.l., Milan

Aktiebolaget Laholm Mellby 2:219, Stockholm

Aktiebolaget Norrköping Silvret 1, Stockholm

Aktiebolaget Skövde K-mannen 2, Stockholm

Bergvik Köpet 3 K.B., Stockholm

Burlöv Centre Fastighets A.B., Stockholm

Eurocommercial Properties Sweden A.B., Stockholm

Hälla Shopping Fastighets A.B., Stockholm

Premi Fastighets A.B., Stockholm

Samarkandfastigheter A.B., Stockholm

 

Intra-group balances and transactions, income and expenses are eliminated.

 

The functional currency (and presentation currency) of the group is the Euro. Assets and liabilities denominated in foreign currencies are translated into Euros at the rate of exchange ruling at the balance sheet date. Transactions denominated in foreign currencies are translated at the average monthly exchange rate. Foreign exchange differences arising on translation are recognised in the profit and loss account. The functional currency of the Swedish and UK subsidiaries are SEK and GBP respectively. As at the reporting date, the assets and liabilities of these Swedish and UK subsidiaries are translated into the presentation currency of the Company at the rate of exchange ruling at the balance sheet date and, their profit and loss accounts are translated at the average monthly exchange rates for the period. The exchange differences arising on the retranslation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation shall be recognised in the profit and loss account.

 

 

Property investments are stated at fair value. It is the Company's policy that all property investments be revalued semi-annually by qualified independent experts. These revaluations represent the price, net of normal purchaser's costs, at which the property could be sold in the open market on the date of revaluation. At the balance sheet date the fair value of each property investment is based on comprehensive valuation reports from the independent experts. At 31 December the independent experts draw up an update of the previous comprehensive valuation report. At 30 September and 31 March the fair value is based on an internal review of the experts' valuations to take into account any material change to the property. If an existing property investment is renovated and/or extended for continued future use as a property investment, it is also measured at fair value. Property investments held under finance leases and leased to tenants under operational leases are stated at fair value.

 

Movements in the fair value of property investments are recognised in the profit and loss account in the period in which they occur. Any realised gains or losses from the sale of a property investment is recognised in the period in which the sale takes place as the balance between the net sale proceeds and the latest published fair value. Depreciation is not provided on property investments since these are stated at fair value in accordance with IAS 40.

 

Property investments are initially brought to account at their full acquisition cost, including registration duties, legal and other consultants' fees until the first reporting date, when the fair value is presented. Any capital expenditure is added to the cost of the property investment. The cost of financing the renovation or extension of property investments is capitalised as part of the cost of the investment, which cost amount will be published in the notes in addition to the fair value.

 

Tangible fixed assets are stated at cost less accumulated depreciation and impairment losses. They are depreciated over the expected useful lives of the assets concerned varying from two to five years. The carrying value of tangible fixed assets is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

 

All borrowings are at a floating interest rate, each time rolled over for a period of generally three months. Interest rate risk is managed by using interest rate swaps and other derivative financial instruments. Therefore, the fair value of borrowings is considered to be reflected by the nominal value.

 

The Company and its subsidiaries use derivative financial instruments to hedge (part of) its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. Derivative financial instruments will not be hold or issued for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Under IFRS derivatives must be shown on the balance sheet at their fair value, the value changes are recognised immediately in the profit and loss account, unless hedge accounting applies, in which case the value changes are accounted for directly in the equity. The application of hedge accounting is subject to detailed requirements. The Company will therefore not apply hedge accounting.

 

Deferred tax liabilities represent the nominal value of contingent liabilities to taxation arising from differences between the property appraisals and book values for tax purposes and other taxable temporary differences, taking into account recoverable tax losses.

 

Provisions are created to meet possible future liabilities and/or risks. The provision in respect of defined benefit pension plans is calculated by an external actuary, who assesses employees' future pension entitlements based on years of service. The majority of the Company's employees are members of a defined contribution scheme for which the annual premiums are an expense of the period.

Unless stated otherwise, assets and liabilities are shown at the amounts at which they were acquired or incurred. A provision for bad debts is deducted under receivables, if appropriate.

 

Rental income from property investments leased under operational leases is recognised in the profit and loss account on a straight-line basis over the term of the lease. Rent-free periods, rent discounts and other lease incentives are recognised over the term of the lease on a straight-line basis as a reduction of rental income. This applies mutatis mutandis for entry fees as an increase of rental income.

 

Service charges for which the Company acts as a principal are presented in the profit and loss account. Therefore, for those property investments for which the Company is in full control of the service charges, the service charges invoiced to tenants and the corresponding expenses are shown separately on an accrual basis. In addition service charges expenses also include charges related to vacant units and/or other irrecoverable service charges due to contractual limits or insolvent tenants.

 

These expenses include costs directly related to the leasing of investment property, such as maintenance, insurance, management, property tax, etc. and are expensed as incurred. These expenses at a property level are referred to as direct property expenses. Letting fees, relocation expenses and other outgoings when a lease is concluded, are recognised over the term of the lease on a straight-line basis as property expenses indirect. Property expenses also include expenses associated with non Netherlands property holding companies and its staff and offices and some local taxes, accounting audit and advisory fees, which are charged to the relevant buildings rather than the general expense pool. These expenses at a corporate level are referred to as indirect property expenses.

 

Company expenses comprise general overhead like advisory fees, office expenses, personnel costs and directors fees. Expenses relating to the investigation of potential property investments and the valuation of property investments including that part of staff bonuses linked to property value performance are recognised as financial and investment expenses.

 

As an Investment Institution under Netherlands tax law (fiscale beleggingsinstelling) the Company is subject to a nil rate of Netherlands corporate income tax, provided it meets certain conditions, notable the distribution of all taxable income (after permitted deductions) to shareholders within eight months of the end of each financial year. As of 1 July 2005 the Company has opted for the French tax regime applicable to 'Sociétés d'investissements immobiliers cotées' (SIIC). As from that date the revenues and capital gains from the French portfolio of the Company are tax exempt.

 

However, corporate income tax may be payable on the fiscal results of Netherlands and foreign subsidiaries, which do not have the aforesaid tax exempt status. This tax on taxable income for the year is recognised in the profit and loss account.

 

Deferred tax is the movement in deferred tax liabilities and deferred tax assets, if any.

 

The cash flow statement is prepared according to the indirect method. Cash flows in foreign currencies are translated at average exchange rates. Exchange differences affecting cash items are shown separately in the cash flow statement.

 

Segmented information is presented by property sector (retail, office, warehouse) and by country (France, Italy, Sweden and The Netherlands).

 

It is generally the Company's policy for non-Euro investments to use debt denominated in the currency of investment to provide a (partial) hedge against currency movements. Exceptionally forward contracts may be entered into from time to time when debt instruments are inappropriate for cost or other reasons. The only non-Euro investment assets and liabilities of the Company are in Sweden and as at 31 December 2005 SEK 10 was EUR 1.0651.

 

The book value of each property is its full cost of acquisition until revalued, and thereafter revaluation plus subsequent improvements or net proceeds in case of a sale. The independent valuation figures for the Company's properties represent the net price expected to be received by the Company from a notional purchaser who would deduct any purchaser's costs including registration tax. All properties in the group are freehold with the exception of Kingsfordweg 1, Amsterdam (perpetual ground lease). All properties were revalued at 31 December 2005. The yields described in the Board of Management report reflect market practice and are derived by dividing property net rent by the gross valuation (net valuation figure plus purchaser's costs including transfer duties) expressed as a percentage.

 

The current property portfolio is:

 

 

 

* These properties carry mortgage debt up to € 453 million at 31 December 2005.

**Part of the retail complex.

The three largest current receivables items are rents receivable for an amount of € 15.3 million (June 2005: € 11.0 million), a prepayment for the extension of Centro Leonardo for an amount of € 5.7 million (June 2005: € 5.7 million) and VAT receivable for an amount of € 5.2 million (June 2005: € 3.2 million). The largest noncurrent receivables item is the trademark license for an amount of € 2.3 million (June 2005: € 2.4 million).

 

The largest current creditors item is rent received in advance for an amount of € 11.8 million (June 2005: € 11.0 million). The largest noncurrent creditors item is the so called exit tax resulting from the application for the tax exempt status of the Company in France for an amount of € 16.1 million (June 2005: € 24.1 million).

 

The borrowings are all directly from major banks. The average interest rate in the current financial period was 4.6% (six months ended 31 December 2004: 4.8%). At 31 December 2005 the Company has hedged its exposure to interest rate movements on its borrowings for an average term of almost ten years. Borrowings with remaining periods to maturity of more than five years amount to € 398 million (June 2005:

€ 340 million).

The number of shares on issue increased on 30 November 2005 as a result of the issue of 807,643 bonus depositary receipts and 7,500 depositary receipts under the staff stock option plan. The weighted average of the number of shares in issue for the six months ended 31 December 2005 was 346,042,398. Holders of depositary receipts representing 47% of the issued share capital (last year 47%) opted for the bonus depositary receipts at an issue price of € 31.00 from the Company's share premium reserve, instead of a cash dividend of € 1.55 per depositary receipt for the financial year ended 30 June 2005. Accordingly, an amount of € 80.8 million of the 2004/2005 profit was taken to the reserves.

 

Net property income comprised:

 

 

Property expenses in the current financial period were:

 

Realised and unrealised value movements on investments in the current financial period were:

 

Revaluation of property investments comprised:

 

 

 

Company expenses in the current financial period comprise:

 

 

 

 

The members of the Board of Supervisory Directors and the members of the Board of Management of Eurocommercial Properties N.V. have no personal interest in investments made by the Company now nor at any time in the reporting period.

 

The most recently published prospectus of the Company is dated 31 January 2005 and is available at the Company's office and is also available at the Company's website: www.eurocommercialproperties.com

 

 

 

Depositary receipts listed on Euronext Amsterdam are registered with Centrum voor Fondsenadministratie B.V. under code: 28887

 

Depositary receipts listed on Euronext Paris are registered under code: NSCFR0ECMPP3

 

 

Since the balance sheet date 31 December 2005 no material events have taken place, which the Company would be required to disclose.

 

***

 

We have reviewed the half-year figures for the period 1 July 2005 up to and including 31 December 2005 of Eurocommercial Properties N.V., Amsterdam. We have not performed a review of the figures for the second quarter (the period 1 October 2005 up to and including 31 December 2005). These half-year figures are the responsibility of the company's management. Our responsibility is to issue a report on these half-year figures based on our review.

 

We conducted our review in accordance with standards for review engagements generally accepted in The Netherlands. These standards require that we plan and perform the review to obtain moderate assurance about whether the half-year figures are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and therefore, provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

 

Based on our review, nothing has come to our attention that causes us to believe that the half-year figures for the period 1 July 2005 up to and including 31 December 2005 do not give a true and fair view in accordance with accounting principles generally accepted in The Netherlands for interim financial reporting and the Act on the Supervision of Investment Institutions.

 

Without qualifying our opinion above, we draw attention to note 1 of the half-year figures, which refers to the possibility that due to continued developments in (endorsed) IFRS the interim financial statements may require adjustments before constituting the final IFRS financial statements.

 

Amsterdam, 10 February 2006

Ernst & Young Accountants

 

 

 

 

 

 

For additional information please contact:

 

 

Website: www.eurocommercialproperties.com