Finland-Based Citycon Outlook Revised to Negative on Weaker Performance; 'BBB/A-2' Ratings Affirmed

Research Update: Finland-Based Citycon Outlook Revised To Negative On Weaker Performance; 'BBB/A-2' Ratings Affirmed

Primary Credit Analyst: Franck Delage, Paris (33) 1-4420-6778; [email protected]

Secondary Contact: Anton Geyze, Moscow (7) 495-783-4134; [email protected]

Table Of Contents

Overview

Rating Action

Rationale

Outlook

Ratings Score Snapshot

Related Criteria

Ratings List

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 13, 2018 1 Research Update: Finland-Based Citycon Outlook Revised To Negative On Weaker Performance; 'BBB/A-2' Ratings Affirmed

Overview

• Weak results in Finland continue to hit Citycon Oyj's operating performance. • We think Citycon's credit metrics could suffer from additional negative portfolio revaluations. • We are therefore revising our outlook on Citycon to negative from stable, and affirming our 'BBB/A-2' ratings. • The negative outlook reflects that there is a one-in-three likelihood that we could downgrade Citycon if its debt-to-debt plus equity ratio increases to more than 50% or if negative operating trends continue.

Rating Action

On Feb. 13, 2018, S&P Global Ratings revised its outlook on Finland-based retail property investment company Citycon Oyj to negative from stable, and affirmed the 'BBB/A-2' long- and short-term issuer credit ratings.

We also affirmed our 'BBB' issue ratings on Citycon's senior unsecured debt.

Rationale

We revised our outlook on Citycon to negative following the continued weakness in Citycon's operating performance in Finland, which provides 37% of the company's reported asset value. This weakness is reflected in the 7.1% decline in like-for-like rental income in 2017, on the back of competitive pressure particularly in secondary cities. The overall lease spreads for renewals and re-lettings are negative, owing to the challenging retailing environment and falling footfall. Risks to Citycon's operating performance are also present in slightly declining like-for-like retail sales in 2017 in such markets as Norway (28% of the company's reported asset value) and Estonia. The occupancy rate slightly declined by 30 basis points to 96.0% in 2017 from 96.3% in 2016.

The currently high density of shopping centers (ratio of retail space per inhabitant) and increasing competition in the Nordic region and particularly in Finland are the main risks for Citycon. Moreover, regulatory barriers to entry (including limitations on the granting of building permits and land availability) are relatively low in the Nordics, especially in Finland, and far less protective than in markets like France or Western Europe, for

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 13, 2018 2 Research Update: Finland-Based Citycon Outlook Revised To Negative On Weaker Performance; 'BBB/A-2' Ratings Affirmed example. We believe these factors are behind falling footfall in Citycon's shopping centers across all Nordic markets where it is present, along with trends toward e-commerce.

At the same time, we believe that Citycon's business risk profile is supported by the company's diversification across the Nordic region, by positive demographics (fast-growing populations and urbanization trend) and economic trends (strong GDP growth and sound consumer confidence) in its key markets. Citycon's strengths also include its focus on the retail property segment, which we typically view as less volatile than offices or logistics, and its low exposure to risky development activities, mainly consisting of the renovation and extension of existing assets for less than 15% of its total portfolio value.

Our current assessment of Citycon's financial risk profile captures its leverage policy, targeting a loan-to-value (LTV) ratio in the 40%-45% range (corresponding to an S&P Global Ratings' adjusted debt-to-debt and equity ratio of about 42%-47%). However, the company's LTV ratio remained outside that range, at 46.7% at the end of 2017. Our ratio of debt-to-debt and equity remains elevated at 49% as of Dec. 31, 2017, and close to the maximum threshold of 50% expected for the current rating level.

Citycon's divestment of noncore assets in 2017 totaled €325 million, which was less than our expectation of €450 million-€500 million, though higher than their publicly indicated target. At the same time, Citycon experienced negative revaluation of its portfolio of €44 million because of widening yields and falling like-for-like rental income in Finland, as well as due to depreciation of Norwegian krone and Swedish krona against Citycon's reporting currency, the euro. We expect the company to continue to divest its noncore assets, but debt leverage dynamics will also depend on the scale of portfolio revaluation, which economic weakness in Finland and foreign exchange headwinds could continue to affect. At the same time, we acknowledge that management remains committed to bringing down LTV ratio to 40%-45% target range.

We view positively Citycon's largely unencumbered asset base, which allows us to equalize the issue ratings with the issuer credit rating on Citycon.

Our base case is based on the following assumptions: • Slightly positive like-for-like rental income growth of 0%-1% over the next 24 months, thanks to increasing consumer price inflation and growing Nordic economies, particularly that of Sweden. • Broadly flat like-for-like portfolio valuation in 2018-2019. • About €300 million in asset disposals in 2018.

As a result, we arrive at the following credit metrics: • An EBITDA interest coverage ratio close to 3x in the next three years. • Debt to debt and equity expected to remain below 50%, broadly in line with the company's policy.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 13, 2018 3 Research Update: Finland-Based Citycon Outlook Revised To Negative On Weaker Performance; 'BBB/A-2' Ratings Affirmed

Liquidity We currently assess Citycon's liquidity as adequate. In our opinion, liquidity sources will exceed uses by more than 1.2x.

Principal liquidity sources for the 12 months started Dec. 31, 2017, include: • Funds from operations of €130 million-€140 million; • €531 million of undrawn credit lines; and • Unrestricted cash balances of €3.7 million at the Citycon level as of Dec. 31, 2017.

Principal liquidity uses as of the same date include: • Debt maturities of about €124 million at the Citycon level, which includes debt outstanding under its commercial paper program; • Planned capital expenditures of €130 million-€140 million; and • Dividend payments of more than €100 million.

We expect covenant headroom to remain adequate.

Outlook

The negative outlook on Citycon reflects our view that there is a one-in-three likelihood that we could lower the rating if the debt-to-debt plus equity ratio falls below 50% or if negative operating trends continue. Further deterioration of credit metrics could be the result of a negative portfolio revaluation that is higher than expected, coupled with slow progress in divesting noncore assets. We could also lower the rating if like-for-like rental income continues to decline in Finland with the income streams from Sweden and Norway only partially offsetting such a decline.

Downside scenario We might take a negative rating action if the company's credit metrics deteriorate further with the debt-to-debt plus equity ratio increasing to more than 50% if asset valuations dropped significantly. We could also take a negative rating action if Citycon is unable to improve its operating performance in Finland or if the size of its noncore disposals is insufficient to improve credit metrics.

Upside scenario We could revise the outlook to stable if the company is able to restore its LTV ratio to be consistent with its financial policy and is able to demonstrate a meaningful turnaround of its operations in Finland.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 13, 2018 4 Research Update: Finland-Based Citycon Outlook Revised To Negative On Weaker Performance; 'BBB/A-2' Ratings Affirmed

Ratings Score Snapshot

Corporate Credit Rating: BBB/Negative/A-2

Business risk: Strong • Country risk: Very low • Industry risk: Low • Competitive position: Strong

Financial risk: Intermediate • Cash flow/Leverage: Intermediate

Anchor: bbb+

Modifiers • Diversification/portfolio effect: Neutral (no impact) • Capital structure: Neutral (no impact) • Liquidity: Adequate (no impact) • Financial policy: Neutral (no impact) • Management and governance: Satisfactory (no impact) • Comparable ratings analysis: Negative (-1 notch)

Related Criteria

• Criteria - Corporates - General: Reflecting Subordination Risk In Corporate Issue Ratings, Sept. 21, 2017 • General Criteria: Methodology For Linking Long-Term And Short-Term Ratings , April 7, 2017 • Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 • Criteria - Corporates - Industrials: Key Credit Factors For The Real Estate Industry, Nov. 19, 2013 • Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 • Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 • General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 • General Criteria: Methodology: Industry Risk, Nov. 19, 2013 • General Criteria: Group Rating Methodology, Nov. 19, 2013 • General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 • General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Ratings List

Outlook Action; Ratings Affirmed To From Citycon Oyj

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 13, 2018 5 Research Update: Finland-Based Citycon Outlook Revised To Negative On Weaker Performance; 'BBB/A-2' Ratings Affirmed

Issuer Credit Rating BBB/Negative/A-2 BBB/Stable/A-2 Senior Unsecured BBB BBB

Citycon Treasury B.V. Senior Unsecured BBB BBB

Additional Contact: Industrial Ratings Europe; [email protected]

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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