Citycon Oyj's Interim Report for 1 January–31 March 2012

The year started with good like-for-like net rental income performance of 5.0 per cent and improved occupancy rate of 95.5 per cent.

Summary of the First Quarter of 2012 Compared with the Previous Quarter
- Turnover increased to EUR 57.8 million (Q4/2011: EUR 56.0 million).
- Net rental income increased by EUR 0.3 million, or 0.8 per cent, to EUR 37.5 million (EUR 37.3 million), mainly due to completed (re)development projects and CPI-indexations offset by higher property operating expenses reflecting the common seasonal variations.  
- EPRA operating profit increased by EUR 2.1 million, or 7.2 per cent to EUR 31.0 million (EUR 28.9 million) due mainly to lower administrative expenses, which decreased mainly because of lower restructuring costs. EPRA earnings per share was EUR 0.05 (EUR 0.05). EPRA key figures exclude non-recurring items such as fair value changes of investment properties.
- The fair value change of investment properties was EUR 5.9 million (EUR -17.0 million), the fair value of investment properties totalled EUR 2,547.8 million (EUR 2,522.1 million). The average net yield requirement for investment properties was 6.4 per cent (6.4%).

Summary of the First Quarter of 2012 Compared with the Corresponding Period of 2011
- Turnover increased to EUR 57.8 million (Q1/2011: EUR 52.0 million).
- Net rental income increased by EUR 5.1 million, or 15.9 per cent, to EUR 37.5 million (EUR 32.4 million). Completion of redevelopment projects and the acquisitions of the Kristiine and Högdalen Centrum shopping centres increased net rental income by EUR 4.2 million.
- Net rental income from like-for-like properties increased by EUR 1.3 million, or 5.0 per cent, excluding the impact of the strengthened Swedish krona.
- Earnings per share were EUR 0.06 (EUR 0.05).
- EPRA EPS (basic) was EUR 0.05 (EUR 0.05).
- Net cash from operating activities per share decreased to EUR 0.05 (EUR 0.09) due mainly to positive non-recurring items in the comparison period as well as timing differences.

Key Figures

1) Change-% is calculated from exact figures and refers to the change between 2012 and 2011.

CEO’s Comment
Comments from Citycon Oyj’s Chief Executive Officer Marcel Kokkeel on the beginning of the year:

”The beginning of 2012 was positive: we were able to increase our like-for-like net rental income.

During the period, we continued to focus on our internal improvement and cost efficiency programme not forgetting the customer focus. We are seeing signs from improved and faster leasing processes and additional income generation by specialty leasing and internal extensions as well as cost management. These positive signs were reflected in higher income which in turn resulted in positive revaluation in our shopping centres; EUR 8.9 million for the quarter. We also succeeded in clearly decreasing the energy consumption in our shopping centres through our active measures. Unfortunately, due to increased energy taxes and prices the energy saving was not fully reflected in our figures. We will continue pursuing this viable alliance between sustainability and economical results.

We are pleased with the clear improvement in both shopping centre sales and net rental income in all the shopping centres that we have  redeveloped or refurbished recently.

The management will maintain its focus on income enhancement and solid cash flows going forward. Refinancing and finding alternative funding sources will also remain the top priority.”

Main Events
Leasing Activity
The occupancy rate for shopping centres increased to 97.0 per cent (96.4%). Especially, the acquisition of shopping centre Kristiine and decreased vacancy in Finnish and Swedish shopping centres increased the occupancy. The occupancy rate for the entire property portfolio was 95.5 per cent (94.9%)

Acquisitions and Disposals
The company divested three non-core properties, two in Sweden and one in Finland. No new properties were acquired during the period.

Redevelopment projects
Redevelopment project of the shopping centre Koskikeskus in Tampere is Citycon’s largest on-going project with an estimated investment of EUR 37.9 million. The project is proceeding as planned. The shopping centre is open and continues to serve customers during the entire project.

Events after the Reporting Period
Citycon changed its Group structure as of 1 April 2012. The change was executed through business transfers where Citycon’s Finnish real estate operations were transferred to two new holding companies Citycon Finland Oy and Etelä-Suomen Kauppakiinteistöt Oy. Following the business transfers these companies own, manage and maintain Citycon’s properties in Finland. This change will not impact any other operations of Citycon.

On 4 April, Citycon acquired the shopping centre Arabia in Helsinki, Finland, for EUR 19.5 million from Tapiola Group. The property fits into the company’s Helsinki portfolio and provides good opportunities for earnings growth in the future. This shopping centre has a gross leasable area of approximately 14,000 square metres, with 11,400 square metres of retail premises. The net initial yield on the acquisition price is around 6 per cent but it is expected to grow rapidly to 7 per cent after planned commercial development measures. More information on the transaction is available in the stock exchange release issued on 4 April 2012.

On 11 April, the company announced that Nils Styf had been appointed Citycon Oyj’s Chief Investment Officer and a member of the Corporate Management Committee. Mr. Styf (M.Sc., b. 1976) is a Swedish citizen. He will join Citycon from the Swedish real estate fund Areim AB and is expected to take up his position in June 2012 at the latest.

On 20 April, the company agreed to acquire 41.7 per cent of the shares in MREC Kiinteistö Oy Tampereen Koskenranta in Tampere, Finland, for EUR 6.2 million. Closing of the transaction is expected to take place by the end of April. Following the acquisition, the company owns the entire shopping centre Koskikeskus, which will facilitate the smooth completion of the redevelopment project going on in the centre.
 
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 2012, Citycon expects to continue generating solid cash flow and anticipates that its turnover will grow by EUR 12–19 million and its EPRA operating profit by EUR 11–18 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 4–11 million from the previous year. Furthermore, it forecasts that its EPRA EPS (basic) will be EUR 0.21–0.23 based on the existing property portfolio and number of shares. These estimates are based on already completed (re)development projects and those 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 2012 showed positive signs in Citycon's operating countries with growing retail. However, great uncertainty persists in the markets due to sovereign debt problems in the euro area.

Retail sales grew in both Finland and Sweden. Total retail sales growth rate for the first two months was 8.1 per cent in Finland, 4.0 per cent in Sweden and 16.0 per cent in Estonia. (Sources: Statistics Finland, Statistiska Central Byrån, Statistics Estonia)

Household consumer confidence remained strong. In Finland and Sweden, the household consumer confidence indicator was still positive, unlike in Estonia and Lithuania (Eurostat).

Retail sales growth and the inflation rate are key factors for Citycon's business and have an impact on the rents from retail premises. Consumer prices continued to rise at the beginning of the year in all of Citycon's operating countries. In March, inflation was 2.9 per cent in Finland, 1.5 per cent in Sweden, 4.4 per cent in Estonia and 3.6 per cent in Lithuania. (Statistics Finland, Statistiska Central Byrån, Statistics Estonia, Statistics Lithuania)

In Finland and Sweden, seasonally adjusted unemployment is lower than the European Union average (10.2%): at the end of February, the unemployment rate in Finland was 7.4 per cent and in Sweden 7.5 per cent. In Estonia and Lithuania, the unemployment rates remain high: 11.7 per cent in Estonia and 14.6 per cent in Lithuania. (Eurostat)

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

Property Market
The Finnish property investment market has witnessed low levels of transactions since the slowdown of the market in 2008. Although demand for investment has been increasing, the supply of prime assets has limited transactional activities and no major increase in transaction volumes in forecast for 2012. The short term forecast for prime yields is stable. As a consequence of relatively strong development in retail sales, retail rents have also been increasing, although such increases have been concentrated in the very best locations only.

In Sweden the retail property transaction volume for the first half of 2012 is likely to be lower than in the previous two years due to the low transaction volume for the first quarter. Prime yields for shopping centres and retail warehouse parks have remained stable over the last 3 quarters.

Despite global turmoil the outlook for Estonian retail is positive. The largest shopping centres have enjoyed a rental rate recovery of 3-5 per cent and the vacancy rate remains near 0 per cent.
(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 9 per cent and the footfall increased by 3 per cent, year-on-year. There was sales growth in all of the company’s operating countries: 9 per cent in Finland, 7 per cent in Sweden and 16 per cent in the Baltic countries. In Finland, the footfall increased by 5 per cent, in Sweden by 6 per cent and decreased in the Baltic countries by 11 per cent as one centre is currently closed due to redevelopment. Positive developments in sales and footfall are mainly attributable to redevelopment projects completed in recent years. Like-for-like shopping centre sales grew by 6 per cent and footfall by 3 per cent and both were positive in all operating countries.

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 development in the company’s operating regions, which affects demand, vacancy rates and market rents in retail premises. In addition, key near-term risks include any rise in loan margins, weaker 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, demand for retail premises, reduction of vacancy rates and 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 continued at the beginning of 2012, and as a result, financial growth forecasts for 2012 involve more uncertainty than normally is the case. Risks to financial growth are still present and in conditions of weak economic growth, rental levels typically fall in the case of retail premises, demand for new premises is lower, and vacancy rates rise.

Implementation of Citycon's growth strategy requires new financing, 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 is still rather moderate, availability of financing is limited and loan margins have remained on a high level. In the future, tightening regulation of the banking and insurance sectors (Basel III and Solvency II regulations) is likely to push the costs of debt financing upwards, 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. In 2012, the company has no major refinancing needs, whereas over the next few years, Citycon will have to refinance some loan agreements signed at low margins before the financial crisis, entailing that the margins on these loans will rise. Such a rise in loan margins is likely to push Citycon's average interest rate upwards in the future, even if market interest rates remain largely unchanged.

The company is actively seeking to diversify its funding sources in order to mitigate the risks related to bank financing, but there are no guarantees, that such alternative funding sources would be available at cost efficient margins.

The fair value development of investment properties continue to be characterised by high uncertainty caused by the sovereign debt crisis and the resulting harsh 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, 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 the opening months of 2012.

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 40-42 of the Financial Statements for 2011, and on pages 73–74 of the Annual Report for 2011.

The Interim Report for the period 1 January–31 March 2012 in its entirety is enclosed to this release and it is also available on the corporate website at www.citycon.com.

Helsinki, 24 April 2012

Citycon Oyj
Board of Directors

Financial Reports in 2012

Citycon will issue two more interim reports during the financial year 2012 as follows:

January–June 2012 on Wednesday, 11 July 2012 at about 9.00 a.m. and
January–September 2012 on Wednesday, 10 October 2012 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.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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www.citycon.com