23,744,918 Shares ______
We are offering 23,744,918 new shares in a global offering. These new shares will initially be offered by way of transferable preferential subscription rights issued to our existing shareholders. Any new shares not subscribed for in the initial rights offering will subsequently be offered in an underwritten international private placement. The global offering consists of a public offering in France and a private placement to institutional investors outside of France and outside of the United States. With respect to the United States, qualified institutional buyers may exercise such rights together with any other rights they may acquire, but no other placement of rights or shares will be made in the United States by us or the underwriter. This offering circular has been prepared solely for purposes of the offering to institutional investors outside of the United States. A separate U.S. Private Placement Memorandum has been prepared for the purpose of the exercise of rights in the United States by qualified institutional buyers. Such persons should not rely on this offering circular.
Each existing share entitles the holder to receive one right. Six rights will entitle the holder to subscribe for one new share at the subscription price. The rights will be separated from the underlying existing shares and will trade on the Euronext Paris market of NYSE Euronext from November 7, 2008 through their expiration on November 20, 2008 (inclusive). Any rights not exercised prior to their expiration may be sold. Shareholders exercising their rights may also subscribe for additional shares, subject to pro rata reduction as described in this offering circular. Shares will trade ex-rights beginning on November 7, 2008. You must exercise your rights on or before 5:30 p.m., Paris time, November 20, 2008. Rights not exercised by that time will lapse.
Our shares are listed on Euronext Paris under the symbol “LI”. On November 4, 2008, the closing price of our shares was €20.00 per share on Euronext Paris. The new shares issued in the global offering will be delivered on or about December 2, 2008 and will begin trading on Euronext Paris on such date.
Subscription Price: €15.00 per new share
Investing in our shares involves risks. For a discussion of the risk factors that investors should consider before exercising rights or purchasing new shares, see "Risk Factors", beginning on page 4.
The rights and the new shares to be delivered upon exercise of the rights have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Accordingly, the rights may only be exercised, and the new shares may only be offered and sold, in transactions that are exempt from registration under the Securities Act. Outside the United States, the offering is being made in reliance on Regulation S of the Securities Act.
BNP Paribas Sole Bookrunner and Lead Manager
The date of this offering circular is November 5, 2008.
Purchasers of rights or new shares should conduct such independent investigation and analysis regarding the Company, the rights and the new shares as they deem appropriate to evaluate the merits and risks of an investment in such securities. In making any investment decision with respect to the rights or new shares, investors must rely (and will be deemed to have relied) solely on their own independent examination of the Company and the terms of the offering, including the merits and risks involved.
Investors are authorized to use this offering circular solely for the purpose of considering the purchase of our shares in the offering described herein. The information contained in this offering circular has been provided by us and other sources identified in this offering circular. Investors acknowledge and agree that the underwriter makes no representation or warranty, express or implied, as to the accuracy or completeness of such information, and nothing contained in this offering circular is, or shall be relied upon as, a promise or representation by the underwriter. Any reproduction or distribution of this offering circular and any disclosure of its contents or use of any information in this offering circular for any purpose other than considering an investment in the securities being offered is prohibited.
No person is authorized to give any information or to make any representation in connection with the offering or sale of the shares other than as contained in this offering circular. If any such information is given or made, it must not be relied upon as having been authorized by us or the underwriter or any of its affiliates. Neither the delivery of this offering circular nor any sale made hereunder shall, under any circumstances, imply that there has been no change in our affairs or those of our subsidiaries or that the information set forth herein is correct as of any date subsequent to the date hereof.
The distribution of this offering circular and the offering and sale of the shares in certain jurisdictions may be restricted by law. We and the underwriter require persons into whose possession this offering circular comes to inform themselves about and to observe any such restrictions. For a description of certain restrictions on the offering and sale of the shares, see “Notice to Investors” and “Plan of Distribution.” This offering circular does not constitute an offer of, or an invitation to purchase, any of the shares in any jurisdiction in which such offer or invitation would be unlawful.
NOTE FOR PROSPECTIVE INVESTORS IN FRANCE
This offering circular has not been and will not be submitted to the clearance procedures of the French Autorité des marches financiers (“AMF”) and, accordingly, may not be distributed to the public in France or used in connection with any offer to purchase or sell any rights or shares to the public in France. For the purpose of the offering in France and listing of the rights and the new shares on Euronext Paris, a prospectus in the French language has been prepared (consisting of (i) a registration document (Document de référence) filed with the AMF on March 10, 2008 under the number D.08-0099, (ii) the update to the Document de référence filed with the AMF on November 5, 2008 under the number D.08-0099-A01 and (iii) a note d’opération (including a summary of the prospectus), which received visa no. 08- 228 dated November 5 from the AMF (the “Note d’opération” and, together with the Document de référence and its update, the “French Prospectus”)). The French Prospectus, as approved by the AMF, is the only document by which offers to purchase or sell any rights and/or shares may be made to the public in France.
NOTE FOR PROSPECTIVE INVESTORS IN THE EUROPEAN ECONOMIC AREA
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “relevant member state”) an offer to the public of any rights or new shares which are the subject of the offering contemplated by this offering circular (the “Shares”) may not be made in that relevant member state (other than the offers contemplated in the French prospectus once the prospectus has been approved by the competent authority in France and published in accordance with the Prospectus Directive as implemented in France), except that an offer to the public in that relevant member state of any rights or new shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that relevant member state:
(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) annual net revenues of more than €50,000,000, as shown in its last annual or consolidated accounts; or
(c) in any other circumstances falling within Article 3(2) of the Prospectus Directive,
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provided that no such offer of rights or new shares shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer to the public” in relation to any rights or new shares in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and any rights or new shares to be offered so as to enable an investor to decide to purchase any rights or new shares, as the same may be varied in that member state by any measure implementing the Prospectus Directive in that member state and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state.
This public offer selling restriction under the Prospectus Directive is in addition to any other selling restrictions set out in this offering circular.
NOTE FOR PROSPECTIVE INVESTORS IN THE UNITED KINGDOM
This document is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Financial Promotion Order”), (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any rights or shares may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This document is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and will be engaged in only with relevant persons
In connection with this offering BNP Paribas as stabilizing manager may be authorized to buy our rights and/or existing shares on Euronext Paris and sell them on any market. Such transactions may affect the market price of the rights and/or shares and may lead to such price being set at a higher level than might otherwise prevail in the open market. In view of the characteristics of this offering of new shares by way of transferable preferential subscription rights issued to existing holders of our shares, purchases and sales by the stabilization manager may not be qualified as stabilization transactions within the meaning of Article 2, paragraph 7, of European Commission Regulation no. 2273/2003 dated December 22, 2003. Any such transactions will be carried out in such a way as to respect the integrity of the market, in full compliance with the Market Abuse Directive (insider trading and market manipulation) (Directive 2003/6/EC of the European Parliament and Council dated March 28, 2003). There is no assurance that such transactions will be undertaken and, if commenced, they may be discontinued at any time. We will not sustain any loss or receive any benefit as a result of any transactions carried out by the stabilizing agent. Any stabilization action or over-allotment must be conducted by the stabilizing agent (or persons acting on behalf of the stabilizing agent) in accordance with all applicable laws and rules.
NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED STATES
In the United States, only “qualified institutional buyers” within the meaning of Rule 144A under the Securities Act may exercise such rights together with any other rights they may acquire. No other exercise of rights or purchase of shares in the United States will be permitted. If you are entitled to exercise rights and choose to do so, you must sign and deliver to us, through your financial intermediary, an investor letter in the form set forth in Annex A to the separate U.S. Private Placement Memorandum that we will send to our existing shareholders in the United States that are qualified institutional buyers.
Any envelope containing an exercise form and post-marked (physically, by fax or electronically) from the United States will not be accepted unless it contains a duly executed investor letter or unless it is from a dealer or other professional fiduciary acting on behalf of a non-U.S. person as provided under Regulation S of the Securities Act. Similarly, any exercise form in which the exercising holder requests shares to be in registered form and gives an address in the United States will not be accepted unless it contains a duly executed investor letter or unless it is from a dealer or other professional fiduciary acting on behalf of a non-U.S. person as provided under Regulation S of the Securities Act.
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The subscription price paid in respect of exercise forms that do not meet the foregoing criteria will be returned without interest.
INDUSTRY AND MARKET DATA
In this offering circular, we rely on and refer to information regarding the commercial real estate markets and our competitive position in the sectors in which we compete. We have obtained this information from various third party sources and/or our own internal estimates. We believe that our third-party sources are reliable, but we have not independently verified third-party information, and neither we, nor the underwriter, make any representation as to its accuracy or completeness.
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
In this offering circular, references to “euro” and “€” are to euros, the currency of the countries participating in the third stage of the European Economic and Monetary Union, references to “dollars”, “$” or “U.S.$” are to U.S. dollars, the currency of the United States of America, references to “NOK” are to Norwegian Krone, references to “SEK” are to Swedish Krona and references to “DKK” are to Danish Krone. We publish our consolidated financial statements in euros. See “Exchange Rates and Currency Information.”
In this offering circular, various figures and percentages set out herein have been rounded and, accordingly, may not total.
In this offering circular, unless otherwise stated or the context otherwise requires, the terms “Klépierre”, “us”, “we” and the “Company” refer to Klépierre, a French société anonyme and the “Group” refers to Klépierre together with its consolidated subsidiaries.
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FORWARD-LOOKING STATEMENTS
This offering circular contains forward-looking statements that reflect our views with respect to future events and financial performance. The words “believe,” “expect,” “intend,” “aim,” “plan,” “project,” “anticipate” and similar expressions commonly identify these forward-looking statements.
Examples of forward-looking statements in this offering circular that are not historical in nature include those regarding growth prospects for the market for commercial real estate, our ability to achieve and sustain growth in our net current cash flow per share, conditions in the credit markets and information relating to our objectives and strategy, including those relating to financial performance, real estate development projects, property portfolio development, dividends and investments. We caution investors not to place undue reliance on our forward-looking statements. They involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievement, or our industry’s results, to be materially different from any future results, performance or achievements expressed or implied in this offering circular.
A wide range of factors, some of which are discussed under “Risk Factors” and elsewhere in this offering circular could materially affect future developments and performance, including the following:
• economic conditions in the markets in which we operate, including the level of indexes used to adjust base rental rates; • our ability to renew leases on favorable terms, including with anchor tenants; • our ability to successfully manage risks associated with real estate development projects and to successfully lease space to attractive tenants on favorable terms; • competition; • our ability to properly assess the value of our assets; • our ability to successfully manage the risks associated with our international operations; • the nature of our relationship with our joint venture partners; • risks associated with acquisitions, including the acquisition of Steen & Strøm; • our ability to meet our liquidity needs, to manage our interest rate and currency exposure, to maintain compliance with our financial covenants and to maintain our credit rating; • environmental, legal and regulatory risks; • conflicts of interest with our principal shareholder; • our ability to maintain our status as a SIIC and comply with the SIIC regime; • our ability to implement our strategy; and • other factors described in this offering circular, including those described under “Risk Factors”.
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive, and should be read in conjunction with other factors that are set forth in this offering circular. See “Risk Factors” for more details about such factors. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. In light of these risks, our results could differ materially from the forward-looking statements contained in this offering circular.
Our forward-looking statements speak only as of the date of this offering circular. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this offering circular to reflect any change in its expectations or any change in events, conditions or circumstances, on which any forward-looking statement contained in this offering circular is based.
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TABLE OF CONTENTS
SUMMARY...... 1 RISK FACTORS...... 4 THE RIGHTS OFFERING ...... 13 USE OF PROCEEDS...... 16 CAPITALIZATION...... 17 DIVIDENDS AND DIVIDEND POLICY...... 18 TRADING HISTORY ...... 19 SELECTED FINANCIAL DATA ...... 20 UNAUDITED PRO FORMA FINANCIAL INFORMATION ...... 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 36 BUSINESS...... 104 REGULATION...... 136 MANAGEMENT AND EMPLOYEES...... 143 PRINCIPAL SHAREHOLDERS...... 150 DESCRIPTION OF SHARE CAPITAL...... 151 TAXATION...... 160 PLAN OF DISTRIBUTION ...... 162 LEGAL MATTERS...... 166 INDEPENDENT STATUTORY AUDITORS ...... 166 INDEX TO FINANCIAL STATEMENTS...... F-1 EXHIBIT A: UNAUDITED FINANCIAL STATEMENTS OF KLÉPIERRE AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007...... A-1 EXHIBIT B: AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF KLÉPIERRE AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007 ...... B-1 EXHIBIT C: UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF STEEN & STRØM AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 ...... C-1 EXHIBIT D: AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF STEEN & STRØM AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007 ...... D-1 EXHIBIT E: KLÉPIERRE PRESS RELEASE OF OCTOBER 28, 2008 REGARDING RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 2008 ...... E-1 SCHEDULE 1: KLÉPIERRE SHOPPING CENTER HOLDINGS AS OF SEPTEMBER 30, 2008 ...... 1-1 SCHEDULE 2: RETAIL PROPERTY HOLDINGS (KLÉMURS) AS OF SEPTEMBER 30, 2008...... 2-1 SCHEDULE 3: KLÉPIERRE OFFICE PROPERTY HOLDINGS AS OF SEPTEMBER 30, 2008 ...... 3-1
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SUMMARY
The following summary is qualified in its entirety by the remainder of this offering circular.
We are a listed real estate investment company (société d’investissements immobiliers cotée, or “SIIC”) specialized in commercial real estate.
Our principal business is the ownership, development and management of shopping centers. At June 30, 2008, our property holdings included 242 shopping centers comprising a gross leasable area of 2.2 million m2 in 10 countries in Continental Europe and we managed 318 shopping centers, including 76 centers on behalf of third parties, in nine countries in Continental Europe. At June 30, 2008, the appraised value of our shopping center portfolio was €10,320.2 million. In the first half of 2008, our shopping center business generated rental revenue of €284.4 million and management fees of €30.9 million.
Through our subsidiary Klémurs, we also hold a commercial real estate portfolio comprised primarily of retail properties acquired from large chains of restaurants, service providers and retailers seeking to outsource their property portfolio. At June 30, 2008, the appraised value of Klémurs’ property holdings amounted to €621.5 million. At such date, it consisted of 280 assets, including 151 Buffalo Grill restaurants, for a total leasable area of 210,155 m2. In the first half of 2008, our retail properties business generated rental revenues of €15.1 million and management fees of €1.4 million.
We also own a select portfolio of 18 buildings located in the central business district of Paris and its near suburbs. Our office property holdings had an appraised value of €1,135.4 million at June 30, 2008, accounting for 9.5% of the total value of our portfolio. At June 30, 2008, the total space represented by our office properties amounted to 120,000 m2. Rental revenues generated by our office properties segment amounted to €25.4 million in the first half of 2008.
On October 8, 2008, we acquired, together with ABP Pension Fund, the pension fund for Dutch civil servants and teachers, the Norwegian company Steen & Strøm ASA (“Steen & Strøm”) for a total amount of €2.7 billion. We hold 56.1% of the share capital of the holding company created for the purposes of this acquisition, and the remainder is held by ABP Pension Fund. As part of the acquisition, we assumed Steen & Strøm’s existing indebtedness, amounting to 14.9 billion NOK, or €1.860 billion, as of June 30, 2008. Steen & Strøm is Scandinavia’s leading real estate company specialized in shopping centers. Steen & Strøm’s main activities are the ownership, development and management of shopping centers. Steen & Strøm owns a portfolio comprised of 30 shopping centers (18 in Norway, nine in Sweden and three in Denmark) representing a gross leasable area of approximately 959,100 m². The 30 shopping centers in Norway, Sweden and Denmark were valued at approximately €2.5 billion (total share) at June 30, 2008 in the context of the acquisition. As of the same date, Steen & Strøm had a development portfolio in Scandinavia estimated by it to be worth more than €1 billion.
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The Offering
Number of shares offered ...... We are offering 23,744,918 new shares to our existing shareholders, or one new share for every six shares held as of the close of business on November 6, 2008.
The rights...... We are offering the shares by distributing “preferential subscription rights” to our shareholders in accordance with French law. The rights:
• will be separated from the underlying existing shares on November 7, 2008,
• will be exercisable at any time up to 5:30 p.m. (Paris time) on November 20, 2008, and
• may be transferred until the expiration of the subscription period on Euronext Paris.
Rights that are not exercised by 5:30 p.m. (Paris time) on November 20, 2008 will lapse. Shareholders who do not exercise their rights will have their percentage interest in our company diluted.
The rights may not be exercised in the United States, except by qualified institutional buyers pursuant to a separate placement that we are making.
Subscription price...... The subscription price for the shares in the rights offering is €15.00 per share.
Subscription procedure...... To exercise the rights, holders must deliver a notice to the financial intermediary through which such rights are held that has an account with Euroclear France, the French book-entry securities clearance and depository system, and pay the corresponding subscription price.
Holders may also subscribe for new shares in excess of the number of shares that their rights entitle them to purchase. To the extent new shares are available for purchase as a result of unexercised rights, each holder will be allocated additional new shares in proportion to the number of rights such holder has exercised and up to the number of additional new shares for which such holder has subscribed. If the number of new shares available is not sufficient to satisfy a holder’s subscription in full, the subscription price related to any additional new shares not delivered will be returned to such holder without interest.
Trading of rights...... The preferential subscription rights will be separated from the underlying existing shares on November 7, 2008 and may be traded on Euronext Paris until the end of the subscription period (i.e. November 20, 2008). Our shares will trade ex-rights during this period.
Subscription undertakings ...... BNP Paribas, directly or through its affiliates, is our majority shareholder and has undertaken to subscribe for new shares in an amount at least equal to its total preferential subscription rights.
We are not aware of the intention of any of the other shareholders of the Company with respect to their participation (or lack thereof) in this offering.
Underwritten offering...... Any shares that are not subscribed in the rights offering will be subscribed by the underwriter, who may offer such shares in an underwritten international private placement to institutional investors. The offering price of the underwritten shares offered in any subsequent offering will be based on market conditions and may differ from the subscription price in the rights offering.
The obligations of the underwriter will be subject to customary closing
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conditions. See “Plan of Distribution.”
Lock-Up ...... We and BNP Paribas, our principal shareholder, have agreed not to, and to ensure that our subsidiaries do not, offer or sell any of our shares or securities convertible into, or exchangeable directly or indirectly for, our shares for a period of 180 days from the date hereof, without the prior written consent of the underwriter and subject to certain customary exceptions. See “Plan of Distribution”.
Form and clearance ...... New shares purchased by exercising rights may be in registered or bearer form, at the election of the subscriber. An application for the admission to the systems of Euroclear France, Clearstream Banking S.A. and Euroclear Bank S.A./N.V. will be made in respect of the new shares. The new shares will be registered in share accounts on or about December 2, 2008.
Use of proceeds ...... We expect that the net proceeds of the rights offering will be approximately €349 million, after deducting underwriting and other commissions and estimated expenses relating to the offering, assuming that all shares are subscribed for at the subscription price. We intend to use the net proceeds to refinance debt incurred in connection with the acquisition of Steen & Strøm. See “Use of Proceeds.”
Shares outstanding after the offering...... Following the rights offering, the number of shares outstanding will increase to 166,214,431, assuming that all rights are exercised in full.
Risk factors...... Prior to making an investment decision, investors should read this offering circular and consider carefully the matters discussed under “Risk Factors.”
Listing...... Our shares are, and the new shares will be, listed on Euronext Paris. The new shares will be listed on Euronext Paris on December 2, 2008 on the same line as existing shares. The preferential subscription rights will also be listed on Euronext Paris.
The international clearance codes for the our shares and the preferential subscription rights are the following:
The shares: ISIN code FR0000121964.
The preferential subscription rights: ISIN code FR0010686725.
Dividends ...... The new shares will be fungible with existing shares and will be entitled to any dividends declared on or after their date of issuance.
Recent developments...... See Exhibit E for a discussion of our results for the nine months ended September 30, 2008.
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RISK FACTORS
Prior to making an investment decision, prospective investors should consider the following risk factors. Prospective investors are cautioned, however, that this list is not exhaustive, and additional risks not currently known or which are currently deemed immaterial may also have a material adverse effect on our business, financial condition and/or results of operations.
Risks associated with our business and strategy
Risks associated with the economic environment
Our properties consist primarily of shopping centers. Changes in the leading macroeconomic indicators in countries in which we operate are likely, over the long term, to have an impact on our business, our rental revenues and the value of our property portfolio, as well as our policy of investing in and developing new properties, all of which could affect our growth prospects. Our business is affected by the level of economic activity and consumer spending levels, as well as by interest rates and the level of indices used to adjust base rents.
• General economic conditions may either stimulate or curb demand for new commercial space and therefore our ability to grow our portfolio of shopping centers (whether through the construction of new shopping centers, the expansion of existing shopping centers or the acquisition or divestment of existing shopping centers). Economic conditions may also have a long-term impact on occupancy rates and the ability of tenants to pay their rent.
• A decline or slowdown in the growth of the indices that are used to adjust most of our base rents or a change of the indices used for this purpose could also adversely affect our rental revenues.
• Our ability to raise rents — or even to maintain them at current levels — when leases come up for renewal depends mainly on the current and projected sales of our tenants, which in turn depend in part on economic conditions.
• Tenants’ sales also have an impact on the variable portion of rents (2.5% of total rental revenues for the first half of 2008).
• A prolonged deterioration of economic conditions could increase the vacancy rate of our properties, which would adversely affect our rental revenue and operating income. This would be due, on the one hand, to the lack of rental revenue, and, on the other hand, to increased costs since vacant properties may, in certain cases, require renovations before they can be brought to market, and these costs cannot be passed on to tenants.
• The profitability of our rental business depends on the solvency of our tenants. Particularly in difficult economic periods, tenants may delay or default in their rent payments, or they may become insolvent.
We may reduce their rents due to these financial difficulties.
Unfavorable changes in these factors could adversely affect our rental revenue, results of operations, financial condition and the value of our property portfolio.
Real estate markets are cyclical, which may limit our ability to acquire or sell properties on favorable terms.
The value of our portfolio is dependent on conditions in the market for space in shopping centers and, to a lesser degree, office space. All real estate markets are subject to fluctuations, including in the relationship of supply to demand, the availability of alternative investments (financial assets, interest rate levels) and the general economic environment. It is difficult to predict economic cycles in general, and those of the real estate market in particular. We may not always make investments or sell assets under favorable market conditions. Market conditions could lead or force us to postpone certain investments or certain asset sales. Unfavorable real estate market conditions could have an adverse effect on our investment and asset arbitrage policies, the development of new properties, the valuation of our property portfolio and, more generally, our business, financial condition, results and prospects.
In particular, a decline in the real estate market could have a material adverse effect on our financing terms and thus on our activities. In particular:
• We expect to meet a significant portion of our funding needs in the near term through the sale of existing real estate assets. Under adverse market conditions, these assets could take longer to sell and could be sold at prices lower than expected. This may limit our flexibility in implementing our growth strategy and operating our business.
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• Some of the financial covenants under our outstanding debt agreements and the debt agreements of our subsidiaries are based on the value of our property portfolio. Adverse market conditions may cause the value of our assets to decline. This may make it more difficult for us to maintain the financial ratios required under our debt agreements. If we are unable to maintain these ratios, we may be required to sell assets or raise additional equity capital to repay our debt or to seek waivers from our lenders of certain provisions in our debt agreements.
The indices upon which our rent increases are based are subject to change, which could limit rent increases in future periods.
Our leases provide for an annual adjustment of rental rates based on variations in specified indices. Outside France, the main component in these indices is consumer prices. In France, the principal index is the ICC index (Indice du Coût de la Construction), which is based on construction costs. Recent legislative changes in France are expected to allow parties to choose a new index, called the commercial rent index (Indice des Loyers Commerciaux, or “ILC”) beginning in 2009. This composite index will take into account, in addition to the ICC (which will represent 25% of the new ILC index), indices reflecting changes in tenants’ sales and changes in consumer prices, similar to the approach in other European countries. If the ILC grows at a slower rate than the ICC index (which has increased significantly over the past several years), rental rates in agreements that provide an adjustment clause based on the new index will experience lower rental rate increases than those subject to ICC clauses. This could adversely affect rental revenues, rental rates negotiated upon lease renewals, and the Company’s operating income. Future modifications of indices in France or in other countries in which Klépierre conducts business could adversely affect the Group’s rental revenue and its results of operations.
Many of our properties depend on anchor stores to attract shoppers and could be adversely affected by the departure or closure of a store by one or more of these tenants or by a consolidation of these actors in the retail sector.
Our shopping centers are typically anchored by one or more main tenants. The presence of these large retail chains, which generally enjoy strong consumer appeal, can have a significant impact on cash flows and on the number of shoppers visiting a shopping center. This in turn can have a significant impact on all of the tenants in a shopping center, given the central role that anchor stores, especially large retail chains, play in certain centers. A decline in the appeal of such stores or a discontinuation or decline in their business (due, for example, to particularly unfavorable market conditions), the non-renewal or the cancellation of leases by such stores, or delays in reletting their space could have an adverse effect on the overall rental revenue of certain shopping centers and our financial condition and growth prospects.
Risks related to lease renewal and rental of properties
Depending on macroeconomic and market conditions, when leases for our existing properties expire, we may be unable to renew or relet the properties on a timely basis or on terms that are as favorable as the current lease terms. We cannot guarantee that we will be able to fill our shopping centers with enough rental tenants to provide us with high occupancy rates and high rental yields. Failure to lease, renew or relet properties on favorable terms and a timely basis could adversely impact our revenues, results of operations and profitability.
When several properties are acquired at the same time, the related leases will likely expire during the same period. Our lease expiration profile at June 30, 2008 (before the acquisition of Steen & Strøm) shows a 13.3% “peak” in 2012 that reflects, in particular, the expiration of the leases relating to properties acquired from Carrefour. Higher concentrations of lease expiration dates increase our exposure to risks relating to lease renewals and the potential impact on our cash flow.
We are subject to risks associated with developing new properties.
We engage in real estate development activities for our own account, which involves risks including the following:
• Construction costs may be higher than initially budgeted; construction may take longer than expected, the complexity of certain projects may lead to technical difficulties or delays, and the price of construction materials may increase.
• Our development projects (for new projects, renovations and expansions) require regulatory approvals that could take longer to acquire than expected or could be denied.
• We may need the consent of third parties such as anchor tenants, lenders or joint venture partners, and those consents may be withheld.
• We may be unable to secure financing for our projects on favorable terms.
• Startup costs (e.g., for studies) generally cannot be postponed or cancelled in the case of a delay or abandonment of projects.
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The risks described above may result in delays, the abandonment of projects, or higher than budgeted costs, which could adversely affect our results.
Risks associated with the marketing of our properties
We may be unable to successfully market space in our shopping centers and other properties. We may have difficulty locating attractive retail tenants willing to accept the amount and structure of our proposed rents, particularly when new shopping centers are brought to market. The commercial real estate market is subject to rapid fluctuations in customer demand. We cannot guarantee that we will be able to fill our shopping centers with enough rental tenants to provide us with high occupancy rates and high rental yields. As a result, our business and operating income could be adversely affected.
We face a wide range of competition that could affect our ability to operate profitably.
We face strong competition with respect to our leasing activity. Competition may come from existing or future developments in the same market areas, other shopping centers, catalogues, discount stores or internet-based retailers, or from the appeal of certain stores located in competing shopping centers. In particular, the development of new shopping center properties by competitors near our existing centers, and renovations or expansions of competing centers could adversely affect our ability to lease space, the level of rents we can charge, and our results.
We also compete with many entities, some of which have greater financial resources and larger portfolios than we do, for properties. In some cases, these competitors and independent real estate companies have a greater local or regional presence than we do. Our largest competitors, in light of their financial resources and ability to undertake large projects for their own account, may place bids for attractive properties or development opportunities at levels that are inconsistent with our investment criteria and policies.
Risks associated with asset appraisals
On December 31 and June 30 of each year, we calculate our revalued net assets per share. To do this, we add unrealized capital gains to (or subtract unrealized losses from) our consolidated shareholders equity based on the differences between the market values appraised by independent experts and the book value of the properties shown in our consolidated financial statements. Appraised market values depend on the relationship between supply and demand, interest rates, general economic conditions and numerous other factors that could be adversely affected by poor shopping center performance or adverse changes in economic conditions.
The book value of our portfolio is based on acquisition cost for our properties. It will not be immediately adjusted in the event of a future change in market value and therefore may not represent the value we would receive upon actual property sales. As a result, the appraised value of our portfolio may not represent the value we would receive upon sale of our properties, which could have an adverse effect on our financial condition and results of operations.
The international scope of our business exposes us to risks.
We own and operate shopping centers in 13 countries in Continental Europe. Some countries in which we currently conduct or may in the future conduct business may have higher risk profiles than those of our historical markets (France, Spain, Italy). Economic and/or political conditions in such countries may be less stable, local regulations and barriers to entry may be less favorable, and conducting business in such countries may expose us to greater currency fluctuations. On a pro forma basis, reflecting the acquisition of Steen & Strøm, gross rental revenues generated by us in countries outside of the euro zone – in Slovakia, the Czech Republic, Hungary, Poland, Norway, Sweden and Denmark – represented 30.3% of our total gross rental revenues in the first half of 2008. If we are unable to successfully manage these risks, our results of operations and financial condition may be adversely affected.
We may be required to make payments to CNP Assurances and Ecureuil Vie if they exercise their exit rights under their shareholders agreements with us.
A significant number of our shopping centers in France, Spain and, to a lesser extent, Italy and Greece, are covered by shareholders’ agreements with CNP Assurances and Ecureuil Vie. As of June 30, 2008, these centers were valued at €3.3 billion.
These shareholders’ agreements include standard provisions designed to protect minority shareholders, including preemptive rights, tag along rights, and corporate governance provisions relating to investments and disposals. Each of the agreements contains two additional provisions:
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• One in our favor – a drag along right in the event we wish to transfer Klécar’s assets to a third party.
• The other in favor of the minority shareholders – an option to trigger an exit process, in 2011, 2016 and 2017 for the Italian companies, and in 2010, 2014 and 2015 for the other shopping centers, that involves several possible outcomes:
• sharing or sale of assets;
• repurchase of the minority shareholders’ securities at our option (without any obligation on our part); and/or
• sale to a third party, in which case we must pay to the minority shareholders any shortfall between the sale price and the net asset value of the underlying assets.
If the minority shareholders exercise their exit rights, and we decline to exercise our purchase option, and they then sell their interest to a third party for a price below net asset value, we would be required to indemnify them for any shortfall (up to a cap of 20% of the net asset value of the underlying assets). If there is a significant shortfall, the resulting indemnification obligation could have a material adverse effect on our liquidity and could require us to postpone or forego other investments.
Risks associated with acquisitions
Acquiring properties or the companies that own them is a part of our growth strategy. This strategy involves risks, including the following:
• We may overestimate the return on the acquired assets, acquire them at too high a price relative to the financing put in place, or be unable to acquire them on satisfactory terms, particularly when an acquisition involves a competitive bidding process or takes place in a period of high volatility or economic uncertainty.
• If an acquisition is financed through the sale of other assets, unfavorable market conditions or delays associated with selling such assets may delay or adversely affect our ability to complete an acquisition.
• Acquired assets may involve latent defects, such as sub-leases, violations by tenants of applicable regulations including environmental regulations, or failures to conform to construction plans, and these matters may be outside the scope of the warranties and indemnities set forth in the acquisition agreement.
• We may experience difficulties when integrating acquired companies due to issues relating to information technology, human relations, or other matters.
Risks associated with our financing policies
Our exposure to financing risks and our risk management and hedging policies are described in greater detail in Note 6 to our consolidated financial statements for the six months ended June 30, 2008, which are included elsewhere in this offering circular.
Liquidity risks
In order to execute our investment strategy, we require sufficient funds (in the form of borrowings or shareholders’ equity), to finance our investments and acquisitions and to repay debt as it matures. In order to benefit from the SIIC tax regime, we are required to distribute a significant portion of our profits to shareholders. We therefore rely to a large extent on debt financing to finance our growth. Debt financing may not always be available on attractive terms. Factors that could adversely affect the availability of debt financing on favorable terms include adverse developments in the equity, debt or real estate markets, downgrades in our credit rating, restrictions under our credit agreements and any other aspect of our business, financial condition or shareholder base that adversely affects the views of investors or lenders concerning our credit quality or appeal as an investment. The current adverse conditions in the primary and secondary debt markets and the overall downturn in the economy could reduce the availability of debt financing on favorable terms, which could limit our ability to expand our business through acquisitions, development projects and expansions of existing properties.
We have a substantial debt burden that could affect our future operations, and the servicing of our debt exposes us to interest rate risks.
As of June 30, 2008, our net debt, on a pro forma basis after giving effect to the acquisition of Steen & Strøm, totaled €7,035 million. Following the acquisition, the portion of the new group’s debt maturing before December 31, 2009 totaled €167
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million. We are exposed to general risks associated with debt financing, including the risk that our cash flow from operations will be insufficient to meet our debt service obligations. If our cash flow is not sufficient to cover our debt service obligations, our obligation to repay the underlying loans may be accelerated, and if the debt is secured, the lender may immediately commence proceedings to foreclose upon the collateral.
Our significant indebtedness also exposes us to the risk of interest rate fluctuations:
• Interest expense on our floating rate debt (which increased from 85% of total indebtedness on June 30, 2008, before the acquisition of Steen & Strøm to 76%, on October 9, 2008, after the acquisition) could increase significantly. At October 31, 2008, taking into account the hedging arrangements put in place by Steen & Strøm during the month of October, a 1% rise in interest rates would result in an increase in our interest expense of approximately €16.3 million.
• Increases in interest rates, especially a significant increase, would affect the value of our portfolio to the extent the yields applied by real estate experts to rental revenue from commercial properties are partially determined by interest rates. A significant increase in interest rates could result in a decline in the appraised value (valeur d’expertise) of our portfolio.
• We use derivative instruments to hedge interest rate risks, including swaps that allow us to pay a fixed or floating interest rate on floating or fixed rate debt, respectively. Developing an interest rate risk management strategy is complex, and no strategy can protect us entirely from changes in interest rates. The value of our derivative instruments, which varies based on changes in interest rates, is reflected in our balance sheet and may also have an impact on our income statement if hedges are not adequately documented or are only partially effective.
Our hedging strategy exposes us to additional risks, including the risk that our counterparties may fail to perform their obligations. The insolvency of a counterparty could result in payment defaults or delays that could have an adverse impact on our results of operations.
Quantitative information relating to the impact of interest rates before and after the implementation of our hedging arrangements can be found in Note 6.1 to our consolidated financial statements for the period ending June 30, 2008 and under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our debt agreements contain financial and other covenants that could restrict our flexibility in operating our business; failure to comply with the covenants could result in defaults that could result in the acceleration of payment obligations under those agreements.
Our debt agreements typically contain, in addition to other customary covenants and restrictions, covenants requiring us to maintain specific financial ratios, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” Complying with these covenants may limit our flexibility in operating our business and may prevent or impede certain acquisitions. At June 30, 2008, on a pro forma basis after giving effect to the acquisition of Steen & Strøm and taking into account amendments to our credit agreements adopted concurrently with the acquisition, we were in compliance with all of these financial ratios. If we were to breach our debt covenants and were unable to cure the breach within the applicable cure period, our lenders could require the immediate repayment of the debt, and if the debt is secured, could immediately begin proceedings to take possession of the property securing the loan. Some of our debt agreements contain cross-default provisions, meaning that the lenders under those debt arrangements can declare an event of default and require immediate repayment of their debt if we breach and fail to cure (within the applicable cure period) covenants under certain of our other debt agreements. As a result, any failure to maintain required financial ratios could have an adverse effect on our financial condition, results of operations, ability to meet our obligations and the market value of our shares.
A downgrade in our credit rating could adversely affect our borrowing capacity, borrowing terms and liquidity.
Our outstanding debt is periodically rated by a recognized credit rating agency. As of the date hereof, our outstanding debt was rated “BBB+, stable outlook” and our short-term debt was rated “A-2, stable outlook” by Standard & Poor’s. Credit ratings are based on our operating performance, liquidity and leverage ratios, overall financial position, and other factors viewed by the credit rating agencies as relevant to our industry and the economic outlook in general. Moreover, in granting the “BBB+, positive outlook” rating to Klépierre in January 2007, Standard & Poor’s cited the following three financial ratios:
• “Loan-to-value” ≤ 50%; • EBITDA /Interest expenses ≥ 2.5%; • Net Current Cash Flow/Net Debt ≥ 7%.
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These indicative levels are evaluated along with other factors relating to our operations and financial condition. At June 30, 2008, after giving effect to the acquisition of Steen & Strøm, we were in compliance with the first two ratios. The third ratio, Net Current Cash Flow/Net Debt, was 7.7% as of June 30, 2008 prior to the acquisition, and amounts to approximately 6% on a pro forma basis.
As indicated in “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Recent Developments”, on October 30, 2008, Standard & Poor’s revised its outlook on Klépierre (BBB+/A-2) to “stable” from “positive” (in place since January 2007). In its press release, Standard & Poor’s reiterated the above financial ratios as the criteria on which it based its rating. Standard & Poor’s also noted in its press release several underlying qualitative assumptions in its decision on our current credit rating (notably our refinancing via a capital increase of approximately half of the debt financing we used to acquire Steen & Strøm, an increase in the hedge rate on variable interest rate debt (which dropped following the acquisition of Steen & Strøm), a more active policy for the turnover of our asset portfolio and a reduction of our investments in the office properties segment.
Failure to maintain the ratios noted above or a departure from the underlying assumptions used by Standard & Poor’s in its evaluation could result in a downgrade in our credit rating, which could have a negative impact on our ability to fund acquisitions or development projects on acceptable terms and could raise our cost of financing when existing loans are refinanced. Higher interest expense could adversely affect our results of operations and the profitability of development projects and to the extent financing is not available on favorable terms, our ability to grow our business through acquisitions and development projects may be reduced.
Changes in applicable regulations may have an adverse effect on our business.
As an owner and manager of real estate assets, we must comply with regulations in force in all of the countries in which we operate. These rules relate to various matters, notably corporate law, health and safety, the environment, construction, commercial licenses, leases and zoning compliance. Changes in the regulatory framework could require us to make corresponding changes to our business, assets or strategy. We could also be subject to sanctions if one or several tenants of one of our centers fails to comply with applicable regulations. These risks could generate additional costs, which could adversely affect our business, results of operations, financial condition and the value of our portfolio. Regulatory restrictions relating to rental contracts may adversely affect our business.
Certain countries in which we operate, including France, consider contractual terms concerning the length, cancellation, renewal and indexing of rent to be matters of public policy. In particular, legal restrictions in France limit the extent to which and terms upon which property owners may increase rents in order to bring them in line with market rent or to maximize rental income. See “Regulation.” Legal restrictions in France also require minimum lease terms for certain kinds of leases and include provisions that can make it difficult to evict tenants for non-payment of rent in a timely manner.
Regulatory changes applicable to commercial leases, in particular regarding the rental period, rent indexation and rent ceilings, as well as the calculation of eviction indemnities due to tenants, could adversely affect the valuation of our portfolio, our results of operations and our financial condition.
Environmental risks may reduce the value of our assets.
In each country in which we operate, we must comply with environmental protection laws relating to the presence or use of hazardous or toxic substances and pollution and public health regulations (including provisions relating to epidemics (in particular in the shopping center segment)).
These matters may have various consequences: • Risks to public health, such as those caused by pollution at a property, could harm users and residents of the surrounding communities. Adverse events of this type would have an immediate adverse impact on visits to our shopping centers, tenant sales and result in loss of rental revenues at the affected site, and would adversely affect our public image.
• Weather-related risks could also impact our business. Exceptional snowfall could, for example, require the evacuation of a center or create risks to the structural integrity of a building that require the closure of a property.
• Failure to comply with measures relating to security and monitoring could lead to closure of a center, which could adversely affect our reputation and the public image of the related property.
• Environmental losses caused by human error could undermine our image and reputation as a manager. The damage to our public image resulting from environmental issues would be difficult to quantify.
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• Environmental laws and regulations may require us, as a current or previous owner or operator of a property, to investigate and clean up hazardous or toxic substances at a property or impacted neighboring properties.
• The presence of contamination, or the failure to remediate contamination, may also adversely affect our ability to sell, lease or redevelop a property or to borrow using a property as collateral.
Our principal shareholder, the BNP Paribas Group, may increase or decrease its ownership stake in our company and its interests may diverge from those of other shareholders.
At October 31, 2008, approximately 50.71% of our shares and 65.14% of the voting rights attaching to our shares were held by the BNP Paribas group. BNP Paribas has informed us that it will take the necessary steps to ensure that the maximum ownership and voting rights thresholds necessary to maintain our SIIC status are not exceeded. For a description of the SIIC regime, see “Regulation.”
The BNP Paribas group is in a position to control all decisions made by shareholders meetings, and minority shareholders have no veto rights in respect of such decisions.
Approximately half of our bank debt is currently provided by BNP Paribas. We also maintain various other commercial relationships with the BNP Paribas group. BNP Paribas and its subsidiaries are tenants of several of our office buildings and are co-investors in some of our shopping centers. BNP Paribas has also acted as guarantor and has given guarantees in connection with our operations. Although we believe the terms of our relationships with the BNP Paribas group are reasonable, we have not put such matters out for competitive bidding.
Our economic objectives and those of the BNP Paribas group may not always converge, which could give rise to conflicts of interest. Although we believe conflicts are likely to be limited, such conflicts could arise, which could adversely affect our results of operations, financial condition or business.
Risks associated with the acquisition of Steen & Strøm
Our recent acquisition of Steen & Strom exposes us to risks.
Our recent acquisition of Steen & Strøm exposes us to a number of risks, including the following:
• The acquisition of Steen & Strøm has increased our loan to value ratio, which may limit our flexibility to pursue further acquisitions or development opportunities.
• Acquiring Steen & Strøm has increased the proportion of our debt that bears interest at a floating rate, exposing us to greater interest rate risk.
• Scandinavia is a new market for us, and we will rely heavily on the Steen & Strøm management team to oversee our business in this region. The loss of key personnel or higher than expected employee attrition rates following the acquisition, or any failures on the part of Steen & Strøm employees to continue to manage the Scandinavian business effectively, could adversely affect our business and our ability to successfully integrate Steen & Strøm.
• The Scandinavian market may grow at a lower than projected rate.
We may fail to successfully manage the integration of Steen & Strøm, and the related investments may ultimately prove unprofitable, which could have a material adverse effect on our revenues, financial condition, results of operations and prospects.
Risks associated with the reliability of our pro forma financial information
Our pro forma consolidated financial statements included herein were prepared based on semi-annual historical financial statements of Klépierre and Steen & Strøm that were the subject of a limited review by their respective statutory auditors. These pro forma consolidated financial statements were prepared to illustrate what our balance sheet and income statement would have been had the acquisition of Steen & Strøm been completed on January 1, 2008 (for purposes of the pro forma income statement) or on June 30, 2008 (for purposes of the pro forma balance sheet). This pro forma financial information is not necessarily indicative of what our financial condition, portfolio and results of operations actually would have been had we in fact owned such assets as of such dates, and are not necessarily indicative of our future operations or results.
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Risks associated with the shareholding structure of Steen & Strøm
ABP Pension Fund holds a 43.9% interest in Steen & Strøm, and we hold a 56.1% interest. ABP Pension Fund’s interest in Steen & Strøm and certain provisions of the related shareholders agreement will allow ABP Pension Fund to exert significant influence over certain strategic decisions, such as any significant investments or asset sales to be carried out by Steen & Strøm. The shareholders’ agreement requires an 85% vote for certain decisions, which gives ABP Pension Fund effective veto power in respect of such decisions. For a description of the principal terms of the shareholders agreement, see “Business-Shareholders’ Agreement.” ABP Pension Fund may have interests that diverge from ours. Steen & Strøm’s success will therefore depend to a certain degree on our ability to collaborate successfully with ABP Pension Fund. We may have different views or approaches from those of ABP Pension Fund, and our relationship with ABP Pension Fund could deteriorate, which could disrupt Steen & Strøm’s business and in turn adversely affect our performance, financial condition or prospects.
We may be unable to sell Steen & Strøm properties targeted for sale on favorable terms.
ABP Pension Fund and we have announced that we are considering selling Steen & Strøm assets worth approximately €500 million. We may encounter delays in selling these properties and may be unable to sell them on favorable terms. If we encounter delays in selling such assets or sell them at lower than expected prices, we could be adversely affected, to the extent that such sales are intended to finance the Steen & Strøm development pipeline. We could be required to seek alternative sources of funding for certain of these development projects or to abandon or suspend such projects.
Risks related to Klémurs
If the value of Klémurs portfolio declines, it may be required to raise additional capital or forego acquisitions or development projects in order to maintain the financial ratios under its debt agreements.
The outstanding debt issued by Klémurs requires it to maintain a maximum loan-to-value ratio (net financial debt over the revalued value of the assets) of 65%. As of June 30, 2008, the ratio stood at 60%. If the value of Klémurs’ portfolio decreases, this limit could be reached, which would limit its ability to incur further debt to fund acquisitions or development projects. Moreover, Klémurs could be required to raise additional equity in order to remain in compliance with these covenants. Although we would not be contractually required to subscribe to any capital increase, failure to do so could lead to dilution of our stake in Klémurs and could hamper the success of any capital raising exercise it undertakes.
Buffalo Grill restaurants account for a substantial portion of Klémurs’ properties. If Buffalo Grill encounters financial difficulties, Klémurs’ business may suffer.
As of June 30, 2008, Buffalo Grill stores accounted for 64% of Klémurs’ total properties. If Buffalo Grill were to encounter financial difficulties or file for bankruptcy, the value of these properties would be adversely affected. Klémurs may be unable to re-rent certain of these properties on favorable conditions or at all. This would adversely affect our consolidated revenues and results of operations.
Risks Relating to the SIIC Tax Regime
We benefit from our status as a listed real estate investment company, or SIIC, which allows us to benefit from a special tax regime. For a description of the tax regime that applies to SIICs, see “Regulation.” Under this regime, we are exempt from corporate income tax, on earnings from the rental of our properties, capital gains from the sale of properties or certain interests in real estate companies, and certain dividends, subject to an obligation to distribute a portion of those earnings.
Although there are significant advantages to opting for the SIIC regime, it is a complex tax regime and involves certain risks for us and our shareholders, which are described below.
In order to maintain our eligibility for the SIIC regime, we must distribute a significant portion of our earnings, which may affect our financial position and liquidity.
To maintain eligibility for the SIIC tax exemption, we must distribute a significant portion of our earnings. Failure to meet this obligation during a given fiscal year would result in the loss of the exemption for such fiscal year.
We would lose the benefit of the SIIC tax regime if one or more of our shareholders (other than listed companies benefiting from the SIIC tax regime) were to hold 60% or more of our shares or voting rights on or after January 1, 2009.
If one of our shareholders or a group of shareholders acting in concert (in each case, other than listed companies benefiting from the SIIC tax regime) were to hold, directly or indirectly, 60% or more of our shares or voting rights on or after
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January 1, 2009, we would lose the benefit of the SIIC tax regime for the fiscal years during which the 60% shareholding limit was exceeded, subject to certain exceptions described herein. See “Regulation.” We do not currently anticipate that any shareholder will hold, directly or indirectly, 60% or more of our shares on or after January 1, 2009. BNP Paribas, which currently holds more than 60% of our voting rights, has informed us that it will take the steps necessary to ensure that the relevant ownership and voting rights limits are not exceeded on or after January 1, 2009. However, we cannot guarantee that trading in our shares or concerted actions among shareholders will not cause the 60% shareholding limit to be exceeded in the future, which would render us ineligible for the SIIC tax regime benefits in the related periods. In addition, the existence of the 60% shareholding limit could have the effect of preventing a change of control or discouraging any offer concerning our shares.
We are subject to risks associated with future changes to the SIIC tax regime or its interpretation by tax authorities or accounting bodies.
The conditions for the SIIC tax regime and the related exemptions are subject to changes depending on legislative developments or interpretations by tax authorities.
Furthermore, certain recently adopted provisions have not, as of the date hereof, been interpreted by the competent authorities. As an example, the 20% withholding tax implemented by the 2006 Amended Finance Law (see “Regulation”) has not yet been interpreted by the French tax authorities, and we cannot be sure of their interpretation. In addition, the accounting treatment of the 20% withholding tax remains uncertain.
Future changes in the SIIC regime or in the interpretation of its provisions could have a material adverse effect on our business, financial condition and results.
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THE RIGHTS OFFERING
Timetable
The following timetable sets forth certain important dates relating to the receipt and exercise or sale of rights by holders of our shares. See “Subscription” for additional information on the receipt and exercise of your rights.
Record date for allocation of rights to shareholders (close of business, Paris time)...... November 6, 2008 Allocation date...... November 7, 2008 Ex-rights date...... November 7, 2008 Beginning of rights trading period on Euronext Paris and of the period during which rights may be exercised.... November 7, 2008 End of rights trading period on Euronext Paris and of the period during which rights may be exercised (5:30 November 20, 2008 p.m., Paris time)...... New shares delivered (on or about) ...... December 2, 2008
New Shares Offered
We are offering 23,744,918 new shares initially by way of transferable, preferential subscription rights offered to our existing shareholders.
Shares Outstanding After the Offering
We expect that 166,214,431 shares will be outstanding after the offering, assuming that the rights are exercised in full.
Restrictions on Exercise of Rights
The rights and the new shares have not been and will not be registered under the Securities Act, or with any securities regulatory authority of any state or other jurisdiction in the United States, and may not be offered, sold, pledged or otherwise transferred except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable state securities laws.
Applicable laws in certain jurisdictions may restrict or condition the attribution or exercise of the rights. Shareholders subject to any such laws should consult their professional advisors as to how they can exercise their rights. Neither this offering circular nor any document relating to the rights constitutes an offer to subscribe in any countries where such an offer would violate applicable laws. See “Plan of Distribution — Selling Restrictions” and “Notice to Prospective Investors in the United States” for further information.
Irrevocability of Exercise of Rights
Holders may not revoke, cancel or otherwise modify the exercise of their rights once they have exercised them.
Form and Transferability of the Rights
Rights will be in book-entry form in Euroclear France, the French book-entry securities clearance and depository system, in an account in the name of French financial intermediaries (or the French correspondents of financial intermediaries outside France).
The rights will be entered into shareholders’ book-entry accounts and begin to trade separately from the shares on November 7, 2008. Rights trade on the cash settlement market of Euronext Paris during the rights trading period. Rights will not be listed or quoted on any other stock exchange or quotation system.
Subject to any restrictions under applicable securities or other rules and regulations, the rights will be transferable and may be exercised or sold or assigned, in whole or in part, to others. Rights may not be sold or otherwise transferred in the United States.
A holder of rights that transfers or sells its rights will have no further right to purchase new shares in the rights offering in respect of the rights transferred or sold.
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Rights Trading Period
The rights will begin trading on Euronext Paris on November 7, 2008 and will trade to and including November 20, 2008.
Delivery of Shares
New shares purchased by exercising rights may be in registered or bearer form, at the election of the subscriber. An application for the admission to the systems of Euroclear France, Clearstream Banking S.A. and Euroclear Bank S.A./N.V. will be made in respect of the new shares. The new shares will be registered in share accounts on or about December 2, 2008.
Rights Distributed
Each share held on November 6, 2008 entitled the holder to receive one right. Rights may also be purchased on Euronext Paris during the rights trading period. Any rights that holders receive or purchase on Euronext Paris may be exercised only pursuant to the procedure described under “Subscription.”
Subscription Ratio
Six rights will entitle their holder to subscribe for one new share at the subscription price per share. Holders may exercise their rights in whole or part at their discretion. We will only issue a whole number of new shares, and therefore no fractional shares will be issued. Subscriptions submitted for fractional new shares will be rounded down to the nearest number of new shares. As a result, if an investor holds fewer than six rights, it will not be able to subscribe for any new shares in the offering.
If a holder is entitled to exercise rights, it may also subscribe for new shares in excess of the number of shares that the rights, including rights the holder purchased, entitle it to purchase, so long as the holder has exercised all of the rights that it holds. To the extent new shares are available for purchase as a result of unexercised rights, holders will be allocated additional new shares in proportion to the number of rights they have exercised, and up to the number of additional new shares for which they have subscribed. In case of a shortfall in the number of additional new shares available to satisfy the subscriptions in full, the additional new shares to be delivered will be allocated in proportion to the number of rights, including rights that are purchased, exercised by the holders of rights, and the subscription price for any new shares not delivered will be returned to the account of the relevant holder without interest. Any new shares a holder purchases in addition to the shares that its rights entitle it to purchase will be subject to the same restrictions on transfer as the shares its rights entitle it to purchase.
Ex-rights Date
The ex-rights date for holders of shares is November 7, 2008. Shares that trade on or after this date are not entitled to receive rights.
Subscription
Subscription Price
The subscription price is set forth on the cover page of this offering circular. Holders must pay the subscription price for rights that they exercise to the financial intermediary through which such rights are held.
Rights Subscription Period
The subscription period for holders of shares will begin on November 7, 2008 and will continue until 5:30 p.m. (Paris time) on November 20, 2008. Rights not exercised by that time will lapse.
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Procedure for Exercising Rights
Rights are exercised by delivering a properly completed subscription form and full payment of the subscription price for the new shares through a financial intermediary that has an account with Euroclear France, for shares held through a bank, broker or another financial intermediary or to BNP Paribas Securities Services, for shares held in nominative registered form.
We have the discretion to refuse to accept any subscription form that is incomplete, unexecuted or not accompanied by any required additional documentation.
Trading in New Shares
We expect trading in new shares on Euronext Paris to commence on or about December 2, 2008.
Dividends and Voting Rights
The new shares will entitle their holders to any dividends declared on or after their date of issuance. The new shares will confer other rights, including voting rights, from the date of issue.
Additional Information
All issues regarding the timeliness, validity, form and eligibility of any subscription in the rights offering will be determined by us in our sole discretion, and our determinations will be final and binding. We may, in our sole discretion, waive any defect or irregularity, or permit it to be corrected within such time as we may determine, or reject the purported exercise of any right. We will have no duty to notify any holder of rights or any other person of any defect or irregularity in connection with the subscription for new shares and incur no liability for failure to give such notification.
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USE OF PROCEEDS
We expect that the net proceeds to Klépierre of the rights offering will be approximately €349 million, after deducting underwriting and other commissions and estimated expenses relating to the offering, assuming that all shares are subscribed for at the subscription price. We intend to use the net proceeds to refinance part of the debt incurred in connection with the acquisition of Steen & Strøm. The rights offering will allow us to strengthen our capacity to maintain our financial ratios while increasing the financial resources necessary to finance our development program.
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CAPITALIZATION
The table below sets forth our unaudited historical consolidated capitalization and information concerning our short-term liquidity as of September 30, 2008.
This table should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” which describes changes to our long-term debt since June 30, 2008, including debt incurred in connection with the acquisition of Steen & Strøm, and the financial and other information contained in this offering circular. Other than as set forth in that section, there have been no material changes to our capitalization since September 30, 2008.
At September 30, 2008
SHAREHOLDERS EQUITY AND DEBT (€ in thousands) Total current debt 435 - Guaranteed - - Secured 35 - Unguaranteed/Unsecured 400 Total Long Term Debt (excluding current portion of long- 4,990 term debt) - Guaranteed 165 - Secured 539 - Unguaranteed/Unsecured 4,286 Shareholders’ equity 2,012 - Share capital and premiums 199 - Legal reserve 19 - Other consolidated reserves 1,794
ANALYSIS OF NET FINANCIAL DEBT A. Cash 212 B. Cash equivalents 186 C. Marketable securities - D. Cash, cash equivalents and marketable securities (A + 398 B+C) E. Current financial assets - F. Current bank debt 197 G. Current portion of medium and long-term debt 34 H. Other current financial debt 204 H. Total current financial debt (F + G + H) 435 I. Net current financial debt (I – E – D) 37 J. Long-Term financial assets K. Long term bank debt 3,543 L. Bonds (non-current portion) 1,290 M. Other long term debt 157 N. Net Long-Term Debt (K + L + M ) 4,990 O. Net financial debt (J + N) 5,027
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DIVIDENDS AND DIVIDEND POLICY
We have opted for the French tax regime applicable to SIICs pursuant to Article 208 C of the French Tax Code (Code general des Impôts). This tax regime allows companies to be exempt from corporate tax on rental revenue, capital gains on sales of either real estate properties or capital interests in real estate companies and dividends received from our subsidiaries that have also elected for the SIIC tax regime. Pursuant to this regime, SIICs must distribute (i) at least 85% of the exempted profits generated by their rental business, (ii) at least 50% of the exempted profits generated by capital gains either on sales of real estate properties or capital interests in real estate companies before the end of the second fiscal year following the one when such profits were generated and (iii) 100% of the dividends they receive from their subsidiaries that have elected for the SIIC tax regime during the fiscal year following the one when those profits were generated. Such distribution obligations are determined for each company that elected for the SIIC tax regime on the basis of its individual tax and accounting results.
The French Commercial Code and our bylaws (statuts) limit the circumstances under which we may pay dividends. For a description of these restrictions, see the section entitled “Description of Share Capital—Shareholders’ Rights—Dividends.”
Dividends paid to holders of shares who are not residents of France generally will be subject to French withholding tax at a rate of 18% where the beneficiary is an individual domiciled in a European Union Member State, Iceland or Norway, and 25% in all other cases. Holders who qualify for benefits under an applicable tax treaty and who comply with the procedures for claiming treaty benefits may be entitled to a reduced rate of withholding tax and, in certain circumstances, other benefits, under conditions provided for in the relevant treaty or under French law. See “Taxation” for more details.
The table below shows the dividends we paid in respect of the years 2003 through 2007, as adjusted to take into account the three-for-one share split in 2003 but not the three-for-one share split in 2007, which took place after the payment of the dividend.
Year Ended December 31, 2003 2004 2005 2006 2007 Net dividend per share (in euros)...... 3.50 2.00 2.30 2.70 3.20
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TRADING HISTORY
The table below sets forth, for the periods indicated, the reported high and low closing prices (in euros) of our shares on Euronext Paris. All trading prices in the table are prior to the distribution of rights.
On November 4, 2008, the closing price of our shares (trading ex-rights) on Euronext Paris was €20.00.
2008 High Low
November (through November 4, 2008) ...... €20.00 €18.25 October...... €27.60 €16.00 Third Quarter...... €32.10 €25.42 September ...... €30.82 €25.42 August...... €28.91 €25.75 July ...... €32.10 €25.53 Second Quarter ...... €41.40 €31.10 June ...... €39.62 €31.10 May...... €40.75 €37.52 April...... €41.40 €36.42 First Quarter...... €40.77 €27.84 March ...... €40.10 €35.05 February...... €40.77 €32.75 January...... €37.00 €27.84 2007 Fourth Quarter ...... €41.81 €31.21 Third Quarter...... €42.62 €33.70 Second Quarter ...... €52.33 €40.68 First Quarter...... €54.90 €42.46 2006 Fourth Quarter ...... €47.77 €37.87 Third Quarter...... €39.60 €29.75 Second Quarter ...... €35.63 €26.73 First Quarter...... €34.47 €26.23 2005...... €28.32 €20.20 2004...... €22.00 €15.71 2003...... €16.30 €12.77
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Data provided by Euronext Paris.
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SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information for Klépierre. The selected consolidated financial information as of and for the years ended December 31, 2007 and 2006 and 2005 has been derived from our audited consolidated financial statements for such periods, which are included herein. The selected consolidated financial information as of and for the six months ended June 30, 2008 and 2007 has been derived from our unaudited interim consolidated financial statements for such periods, which are included herein. The selected consolidated financial information should be read in conjunction with the financial statements and the related notes thereto and "Management’s Discussion and Analysis of Financial Condition and Results of Operations". In the opinion of our management, the unaudited interim financial data reflects all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of our results of operations and financial condition for the six months ended June 30, 2008 and 2007. Operating results for the six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.
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21
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CASH-FLOWS Total share Group share 2007 2006 2005 2007 2006 2005
Cash-flow from operating activities 537.0 461.6 390.9 473.6 406.9 340.0 Current cash-flow before tax 375.9 328.5 279.1 320.6 279.7 234.0 Net current cash-flow 355.0 307.2 261.8 303.6 263.6 222.1
in millions of euros
CASH-FLOWS Total share Group share June 30, June 30, Change June 30, June 30, Change 2008 2007 2008/2007 2008 2007 2008/2007
Cash-flow from operating activities 293.3 257.1 14.1% 261.0 225.4 15.8% Current cash-flow before tax 201.9 182.5 10.6% 174.3 154.5 12.8% Net current cash-flow 192.0 173.9 10.4% 164.6 148.3 11.0%
in million of euros
REAL ESTATE HOLDINGS AND REVALUED NET ASSETS (RNA) Total share Group share 2007 2006 2005 2007 2006 2005
Holdings (1) 11,312.50 9,127.40 7,446.50 10,035.0 8,103.70 6,598.10 Revalued net assets (1) 5,166.6 4,182.40 3,151.80 RNA excluding transfer duties and after defferred taxes and marking to 38.6 30.5* 22.5* market of the fixed-rate debt (2) RNA excluding transfer duties and after defferred taxes and 41.1 32.5* 24.2* marking to market of the fixed-rate debt (2) (1) in millions of euros (2) in euros per share *data restated to reflect the 3-for-1 stock split
REAL ESTATE HOLDINGS AND REVALUED NET ASSETS (RNA) Total share Group share June 30, June 30, Change June 30, June 30, Change 2008 2007 2008/2007 2008 2007 2008/2007
Holdings (1) 11,987.10 9,997.90 19.9% 10,664.60 8,855.40 20.4% Revalued net assets (1) 5457 4648 17.4% RNA excluding transfer duties and after defferred taxes and marking to 40.0 34.2 17.0% market of the fixed-rate debt (2) RNA excluding transfer duties and after defferred taxes and 42.5 36.3 17.1% marking to market of the fixed-rate debt (2) (1) in millions of euros (2) in euros per share
FINANCIAL RATIOS
2007 2006 2005
(1) 41.1 41.7 43.4 Loan-to-Value (2) Interest coverage ratio 3.3 3.4 3.5
(1) The "loan-to-value" ratio is calculated by dividing the amount of net debt cost by the value of the revaluated holdings (including transfer duties) (total share)
(2) The interest coverage ratio is calculated by dividing the cash flow from operating activities by the net financial fees; those two amounts have to be considered on a consolidated base (total share)
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FINANCIAL RATIOS
June June 2008 2007 (1) Loan-to-Value 41.7 41.1 Interest coverage ratio (2) 3.2 3.4
(1) The "loan-to-value" ratio is calculated by dividing the amount of net debt cost by the value of the revaluated holdings (total share)
(2) The interest coverage ratio is calculated by dividing the cash flow from operating activities by the net financial fees; those two amounts have to be considered on a consolidated base (total share)
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unadjusted historical financial Pro-forma financial Pro forma statements statements to June adjustments June 30, 2008 30, 2008
Historical financial Historical financial statements statements In thousands of € June 30, 2008 June 30, 2008 Klepierre Steen & Strom ab cd= a+b+c Lease income 329,071 82,388 411,459 Land expenses (real estate) (1,301) (1,493) (2,794) Non-recovered rental expenses (9,327) - (9,327) Building expenses (owner) (15,276) (4,123) (19,399) Net lease income 303,167 76,772 379,939 Management, administrative and related income 32,259 6,291 38,550 Other operating income 6,665 - 6,665 Survey and research costs (1,446) - (1,446) Payroll expense (37,740) (14,734) (52,474) Other general expenses (12,368) (697) (13,065)
Depreciation and amortization allowance on investment property (105,025) - (32,197) (137,222)
Depreciation and amortization allowance on PPE (2,614) (1,595) 1,595 (2,614)
Provisions (197) - (197) Operating income 182,701 66,038 (30,603) 218,136
Gains on the sale of investment property and equity interests 79,352 2,296 (2,296) 79,352
Net book value of investment property and equity investment (58,042) (1,083) 1,083 (58,042) sold Gains from the sale of investment property and equity 21,310 1,214 (1,214) 21,310 investment securities Profit on the sale of short term assets 318 - 318 Net dividends and provisions on non-consolidated securities 26 - 26 Net cost of debt (91,386) (38,375) (10,057) (139,818) Change in the fair value of financial instruments 17 - 17 Change in the fair value of investment property 45,995 (45,995) (0) Effect of discounting 1,335 - 1,335 Share in earnings of equity-method investees 466 - 466 Pre-tax earnings 114,787 74,871 (87,868) 101,790 Corporate income tax (15,443) (19,867) 23,119 (12,191) Net income of consolidated entity 99,344 55,004 (64,748) 89,600 of which -#REF!#REF! Group share 80,530 30,857 (38,517) 72,870 Minority interests 18,814 24,147 (26,232) 16,729
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Notes to the Unaudited Pro Forma Financial Information
Introduction
This Unaudited Pro Forma Financial Information is intended to illustrate the effects on the Group’s half-yearly financial information for June 30, 2008 of the acquisition of a 56.1% equity stake in Steen & Strøm ASA, the remaining 43.9% of the company having been acquired by ABP Pension Fund.
This Unaudited Pro Forma Financial Information is provided purely for illustrative purposes, and does not necessarily provide an accurate indication of what the Group’s financial position or performance would have been had the acquisition been made on January 1, 2008. Nor does it provide any indication regarding the future performance of the Group.
Basis of preparation and accounting principles
The pro forma information has been prepared in accordance with the rules contained in Appendix 2 of EC regulation 809/2004 and the Committee of European Securities Regulators’ recommendation 05-054b published in February 2005.
It covers the most recent interim period, for which historical financial data is published in this document.
The pro forma consolidated financial statements have been prepared and are presented in accordance with the accounting rules and methods of the Group, as described in Note 2 “Accounting Methods and Principles” of the half-yearly financial report for June 30, 2008.
The Unaudited Pro Forma Financial Information has been prepared on the basis of: • the Klépierre half-yearly financial information as of June 30, 2008, prepared in accordance with IFRS as adopted by the European Union and approved by the company’s executive board. This financial information has been the subject of a limited review by Deloitte & Associés and Mazars & Guérard in accordance with French professional standards; • the summary consolidated half-yearly financial statements (balance sheet and income statement) of Steen & Strøm as of June 30, 2008, prepared in accordance with IAS 34 and approved by Steen & Strøm’s board of directors. These financial statements have been the subject of a limited review by Ernst & Young AS in accordance with Norwegian professional standards.
The pro forma financial information is shown in thousands of euros.
Since the historic financial statements of Steen & Strøm are shown in Norwegian Kroner (NOK), all the balance sheet data have been converted at the closing exchange rate date of June 30, 2008 (1 €= 8.021 NOK), whilst the data contained in the income statement have been converted at the average rate for the six-month period ending June 30, 2008 (1 €= 7.955 NOK).
The opening balance on the date of acquisition was established on the basis of the closing exchange rate on October 8, 2008 (1 €= 8.021 NOK).
Accounting principles used in the preparation of the pro forma financial information
The pro forma financial information has been prepared and is presented in accordance with the accounting rules and methods of the Group, as described in the consolidated financial information to June 30, 2008. The accounting principles applied by Steen & Strøm, as described in the notes to Steen & Strøm’s consolidated financial statements to December 31, 2007, differ significantly from the accounting principles applied by us:
• Steen & Strøm recognizes investment property in accordance with the fair value method set out in IAS 40 Investment Property, whilst the Group uses the cost model option offered by the same standard. Steen & Strøm does not therefore recognize amortization, but does recognize changes in the fair value of its investment property in the income statement.
The consolidated financial information for Steen & Strøm has therefore been restated in order to prepare pro forma consolidated financial statements. Changes in fair value have been cancelled, and a figure has been calculated for investment property amortization on the basis of the component method. For the purpose of determining components and amortization periods, the amortization figure for assets of the same type has been calculated using methods similar to those described in the notes to the consolidated financial statements of the Group.
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The items appearing on the Steen & Strøm balance sheet and income statement have also been reclassified in order to render them consistent with the presentation adopted by the Group. In particular the positive fair value of a derivative instrument initially classified as a reduction in liabilities was subsequently reclassified as an asset of €12.4 million.
Allocation of the acquisition price
The treatment adopted for the Steen & Strøm acquisition is that defined in IFRS 3 Business Combinations.
The assets, liabilities and potential liabilities of Steen & Strøm identifiable on the date of acquisition have been recognized at their fair value on the date of acquisition. Allocation of the acquisition price (including the estimated costs and fees involved in the business combination) at the fair values of these assets and liabilities after harmonization of accounting methods has not revealed any goodwill.
It should be noted that, for the purposes of providing pro forma financial information, the allocation of the fair value acquisition price of Steen & Strøm assets has been made provisionally on the basis of accounts estimated at the date on which control of the company was assumed. The final allocation will be presented in the Group’s future consolidated financial statements on the basis of definitive financial statements for Steen & Strøm prepared to the date on which control of the company was assumed. The amounts shown in these subsequent financial statements may differ from the amounts estimated for the purposes of preparing the pro forma consolidated financial statements.
The following table sets out the fair values of the identified assets and liabilities on the date of acquisition:
Value at the date of Carrying amount acquisition
Investment and development property 3,074,223 2,856,355 Cash and cash equivalents 68,476 68,476 Other assets 176,080 159,795 Total 3,318,779 3,084,626 Financial liabilities (1,799,928) (1,775,201) Trade payables and amounts due on fixed assets (23,446) (23,446) Other debts and provisions (42,366) (41,412) Deferred tax (332,442) (230,867) Minority interests (704) (704) Net assets 1,119,893 1,012,996
Business combination costs (inc. transaction costs) 1,119,893 Share attributable to Klépierre (56.1%) 629,796 Share attributable to APB (46.9%) 490,096
Funding assumptions
The pro forma financial statements have been prepared on the basis of the share of equity acquired by Klépierre being funded by a €356 million capital increase made on January 1, 2008 and bank borrowing.
The cost of the debt has been calculated using the effective interest rate method on the basis of the financing available and hedging instruments of the Group. In this respect, the financial interest shown in the pro forma financial statements has been calculated on the basis of the conditions applying to the 3-year €750 million syndicated loan put in place in June 2008. Given the interest rate hedges subscribed in August 2008, the overall cost of this funding will be 5.58%.
In accordance with IFRS 3:
• Borrowing costs have not been included in the business combination cost. In accordance with IAS 39, these costs are included in the initial valuation of the debt at the amortized cost. • Similarly, the expenses relating to the capital increase are not included in the business combination cost, but are applied to reduce the income generated from the issue of equity instruments (allocated to the issue premium).
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Minority interests
The minority interests relating to the ABP Group share (43.9%) of the fair value of assets and liabilities identifiable at the date of acquisition have been recognized.
Pro forma consolidated balance sheet prepared using the fair value method
In order to provide financial information comparable to that of the Group’s main competitors, which have opted for the fair value model in valuation of their investment property, the pro forma consolidated balance sheet has been restated in order to present investment property assets in accordance with the fair value model. In terms of Steen & Strøm, the fair value corresponds to the property values adopted when setting the acquisition price. It has been assumed that these values were identical at June 30, 2008.
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The pro forma balance sheet restated in accordance with the fair value model is shown below:
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Unaudited consolidated key indicators
The following tables show a selection of unaudited indicators for the Group and Steen & Strøm. These indicators are:
• Net income, Group share and net income per share • Net current cash flow and net current cash flow per share • Net assets re-valued at their liquidation value • Debt structural indicators
• Net income, Group share and net income per share
in millions of € Klépierre Steen & Strøm adjustments Pro forma
June 30, 2008 June 30, 2008 June 30, 2008
Net income, Group share 80.5 30.8 (38.5) 72.9
The pro forma net income, Group share is lower than that for the Group as a result of the amortization allowances applied to the assets of Steen & Strøm. These are calculated on the basis of a value corresponding to the acquisition price, whilst those shown for the Group reflect their historic values.
Klépierre Pro forma
June 30, 2008 June 30, 2008
Income, Group share (in 80,530 72,870 thousand of €) number of shares* 136,696,511 160,441,429
income per share in € 0.59 0.45
*the number of shares shown is the average number over the period
• Net current cash flow and net current cash flow per share
in millions of € Klépierre Steen & Strøm adjustments Pro forma
June 30, 2008 June 30, 2008 June 30, 2008
net current cash flow, Group share 164.6 11.9 (1.7)-3 174.9
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Klépierre Pro forma Klépierre
June 30, 2008 June 30, 2008 June 30, 2007
number of shares* 136,696,511 160,441,429 137,265,669
net current cash flow per share in € 1.20 1.09 1.08
*the number of shares shown is the average number over the period
• Net assets re-valued at their liquidation value
Klépierre shares created Proforma
June 30, 2008 June 30, 2008
reappraised net assets (in millions of €) 5,586 5,965
number of shares at period end 139,493,023 23,744,918 163,237,941
RNA exc. transfer duties, after taxation ofRNA unrealized exc. duties capital after gains latent and tax marking liabilities toand market the start of financialof the fixed instruments rate borrowing 40.0 36.5 (in €per share)
• Debt structure indicators
June 30, 2008 Klépierre Steen & Strøm Adjustments Pro forma (millions of euros) Gross debt(1) 5,283 1,860 255 7,398 - Cash and cash equivalents (291) (72) - (363) Net debt 4,992 1,788 255 7,035 (1)Total current and non-current financial liabilities restated in the case of Klépierre from the revaluation related to the Fair Value (€18.6 million).
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Gross debt includes a range of different funding sources, as well as partner advances (sums made available by our partners on a current account basis for jointly-held subsidiaries) and interest. The pro-forma financial statements are based on the following use made of the Group’s key lines of funding:
Klépierre June 30, 2008 Steen & Strøm Total (post-adjustment) pro forma Amount Amount Amount Amount Amount Amount (millions of euros) used available used available used available Bond issues 1,900 - 87 - 1,987 - Syndicated loans 2,205 (1) 895 - - 2,205 895 Bilateral bank loans, 436 - 218 52 652 52 including overdrafts Mortgage loans 182 - 1,483 50 1,665 50 Finance leases 286 - - - 286 - Commercial paper 215 85 (2) 12 - 227 85 Financial debt 5,224 980 1,800 102 7,024 1,082
(1) = use at June 30, 2008 before acquisition (€1950 million) + impact of the acquisition on current and long-term financial liabilities (€255 million – cf. pro forma balance sheet adjustments) (2) maximum amount of possible additional issues before commercial paper exceeds the upper limit of the dedicated line of credit (€300 million). This amount is fully available for immediate refinancing of the amounts borrowed in the event of market difficulties.
The debts of Steen & Strøm have been converted at the exchange rate prevailing on June 30, 2008 (1 €= 8.021 NOK ).
On a pro forma basis, the average cost of debt, calculated as the ratio of financial expenses to average borrowings outstanding, was 4.7% for the first half of 2008. Fixed rate debt as a proportion of total Group borrowings (coverage rate) was 73% at June 30, 2008 on a pro forma basis.
The impact of the acquisition on the key covenants and financial ratios monitored by the Group is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.
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Mazars & Guérard Deloitte & Associés 61, rue Henri Regnault 185, avenue Charles-de-Gaulle 92400 Courbevoie 92200 Neuilly-sur-Seine
Klépierre Société Anonyme 21, avenue Kléber 75016 PARIS ______
Statutory auditors’ report on the pro forma information relating to the 2008 first half and including the acquisition of the Steen & Strøm group
______
This is a free translation into English of the statutory auditors’ report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
To the Chairman of the Board of Directors,
In our capacity as statutory auditors and pursuant to EC regulation no. 809/2004, we have prepared this report on the unaudited pro forma information of the Klépierre group, presented in the form of a pro forma consolidated balance sheet and income statement for the period from 1 January to 30 June 2008, included in section 3.2 of the group’s first reference document update dated 5 November 2008.
This pro forma information has been prepared for the sole purpose of illustrating the impact that acquisition of the 56.1% stake in the Steen & Strøm group might have had on the unaudited consolidated balance sheet and income statement for the period ended 30 June 2008 had the operation taken effect at 1 January 2008. By its very nature, this pro forma information describes a hypothetical situation and does not necessarily represent the financial position or performances that might have been observed had the operation or event taken place at a date prior to its actual occurrence.
This pro forma information has been compiled under your responsibility pursuant to the provisions of EC regulation no. 809/2004 and the CESR recommendations covering pro forma information.
It is our responsibility, based on our procedures, to express an opinion, pursuant to the requirements of Annex II point 7 of EC regulation no. 809/2004, regarding the proper compilation of the pro forma information.
We carried out the procedures we deemed necessary in accordance with the professional guidelines of the French National Institute of Statutory Auditors relating to this engagement. These procedures, which did not include a review of the financial information underlying the preparation of the pro forma information, primarily consisted in verifying that the basis used to compile this pro forma information was consistent with the source documents, examining the evidence justifying the pro forma restatements and holding meetings with Klépierre Management to collect the information and explanations we deemed necessary.
In our opinion:
• the pro forma financial information has been properly compiled on the basis stated; • that basis is consistent with the accounting policies of the issuer.
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This report has been issued for the sole purpose of filing the reference document update with the AMF (French securities regulator) and, where appropriate, a public offering in France and other European Union countries in which a prospectus, including the reference document update, as approved by the AMF, is notified, and shall not be used in any other context.
Signed in Courbevoie and Neuilly-sur-Seine, 5 November 2008 The Statutory Auditors
Mazars & Guérard Deloitte & Associés
Julien Marin-Pache Pascal Colin Laure Silvestre-Siaz
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section consists of the following subsections:
• an overview of our results and the principal factors affecting them (starting on this page); • excerpts from previously published management reports analyzing our results of operation for (i) the first half of 2008 as compared with the first half of 2007, (ii) the year ended December 31, 2007 as compared with the year ended December 31, 2006, and (iii) the year ended December 31, 2006 as compared with the year ended December 31, 2005; and • a discussion of our liquidity and capital resources.
In addition, our press release dated October 28, 2008 relating to our results for the nine months ended September 30, 2008 is set out in Exhibit E to this offering circular.
Overview
We operate our business through three segments, the largest of which is our shopping center segment, which accounted for 87.9% of rental revenue in 2007 and 87.5% of rental revenue in the first half of 2008. Our other two segments are our retail properties segment (3.9% of rental revenue in 2007 and 4.7% of rental revenue in the first half of 2008), which consist of our subsidiary Klémurs, a SIIC specialized in the ownership and management of retail properties acquired from retail chains seeking to outsource their commercial real estate portfolios, and our office property segment (8.2% of rental revenue in 2007 and 7.8% of rental revenue in the first half of 2008), through which we own and manage a select portfolio of office buildings in Paris and the surrounding business districts.
Components of Operating Profit
● Rental revenues. We derive our revenues primarily from rent charged to our tenants. Our commercial leases generally provide for a base rent amount that is adjusted annually by reference to changes in an agreed index, to which is added (particularly in France and Italy) a variable rent amount that is calculated based on the sales generated by the tenant’s business. Other rental revenues include one-time entry fees paid to us when tenants in our shopping center or retail segments sign leases for newly marketed space in France, as well as parking rentals.
● Net rents. Net rents are calculated by subtracting the following amounts from rental revenues: building expenses (including shopping center expenses that are not passed on to tenants), non-recovered tenant expenses (resulting from vacant space), and land expenses. These expenses amounted to 8.2% and 7.9% of consolidated rental revenues in 2007 and the first half of 2008, respectively. These expenses only apply to our shopping center and office property segments – in our retail properties segment, all of these expenses are charged to the tenant.
● Revenues from management, administration, and other activities. These revenues are generated by Ségécé, which provides leasing and property management services to third parties along with services related to development projects.
● Other operating income. These amounts correspond to the re-invoicing of construction costs to tenants and other miscellaneous income.
● Payroll, research and other general expenses. Ségécé’s labor costs are the main component of our expenses and include the salaries and other benefits paid to Ségécé’s employees. The amount of these costs depends mainly on the number of employees and their salary levels.
● Depreciation allowance. Depreciation allowances are generally calculated on a straight-line basis, and depend mainly on the size of our portfolio of assets and the amortization period applied.
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Principal factors affecting rental revenue by segment
Shopping Centers Segment
We believe the items described below are the principal factors affecting rents in our shopping center segment.
Macroeconomic factors and competition. Our business is affected by general economic conditions in the countries and regions in which we operate, including GDP growth and consumer confidence, which drive consumer spending and, consequently, the demand for retail space. Growth in consumer spending has a favorable impact on the sales generated by our tenants, which generally results in rent increases on lease renewal and increases in variable rent (which is based on tenant sales) earned by us. Lower consumer spending produces the opposite effect.
We also face significant competition in our rental activities, particularly when other shopping centers have sales areas that overlap partially or completely with those of our shopping centers. The establishment of new shopping centers or the expansion or restructuring of existing shopping centers near our properties may have an impact on the present or future business of our shopping centers and on our results. In certain of our markets, local zoning regulations and scarcity of suitable sites for development make it more difficult for competitors to build competing properties. In other markets, development of competing properties is less difficult. Enhancing the competitiveness of our properties involves continually renovating and expanding our shopping centers. Renovation and expansion generally result in temporary reductions in rental revenues from the affected centers during the renovation process.
Although general economic conditions and competitive conditions can have a significant impact on our business over time, they generally exert their effects over the medium to long term, with relatively limited impact in the shorter term. The base rent for most leases is fixed except for an index-linked adjustment, and the variable portion of lease payments due to us represents only a small percentage of overall rental revenue. As a result, during the term of the lease, economic conditions generally do not have a significant impact on rental revenues, other than to the extent such conditions impact the indices used to adjust base rent. Conversely, when a lease is renewed, economic conditions and competitive pressures may have a significant effect on the tenant’s sales, which is the primary criterion for fixing base rent. However, given the long terms of our leases and the relatively even distribution of lease termination dates, a temporary drop in consumer spending would not necessarily prevent us from renewing leases at significantly higher rent levels.
Growth in Our Property Portfolio. Growth in our property portfolio generally accounts for the largest share of our revenue growth from year to year. The development or acquisition of new shopping centers or the expansion of existing centers increases the space available for rental and the corresponding rents. Renovations improve existing shopping centers and increase their appeal to consumers, which generally allows us to charge higher rents. The following table summarizes the portion of rental revenues attributable to organic growth on a constant portfolio basis for the periods indicated.
Six months Year ended December 31, ended June 30, Shopping Centers Segment 2005 2006 2007 2008 Total increase in rents ...... 17.6% 16.5% 13.8% 14.1% Of which due to organic growth on a constant portfolio basis...... 5.6% 4.1% 5.3% 5.5%
The acquisition of Steen & Strøm will significantly expand our rental revenues. On a pro forma basis, the acquisition of Steen & Strøm would have increased the Group’s rental revenues for the first half of 2008 by €82.4 million.
Over the long-term, our ability to continue to grow our property portfolio will depend on our ability to identify and pursue attractive investment opportunities and to finance them on satisfactory terms.
Index-linked adjustments. Our leases include an annual indexation provision under which rent is adjusted (upward or, in the rare case of deflation, downward) based on changes in an agreed index. The specific indices used vary from country to country, and are generally based on the consumer price index (at the national or European level), except in France where the construction cost index (the “ICC” index) is used. Recent legislative changes in France are expected soon to permit parties to choose a new index, called the commercial rent index (Indice des Loyers Commerciaux, or “ILC”). See “Regulation.”
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Index levels may vary significantly depending upon the year and the country in question. The following table shows the effect of indexation on shopping center rents for the periods specified (in each case, compared to the preceding period).
Six months ended Year ended December 31 June 30 2005 2006 2007 2008 France ...... 4.7% 1.8% 5.6% 4.6% Italy...... 1.3% 1.3% 1.7% 2.1% Spain...... 3.0% 3.6% 2.5% 3.9% Hungary ...... 1.9% 1.3% 1.6% 2.5% Poland...... N/A 1.7% 1.7% 0.0% Belgium ...... N/A 1.7% 1.6% 2.2% Portugal...... 2.0% 1.9% 2.4% 2.3% Czech Republic...... 2.0% 2.4% 1.7% 2.6% Greece...... 3.1% 3.6% 3.5% 4.3% Slovakia ...... 2.4% 2.4% 1.7% 2.6%
Lease renewals. Given that base rent is generally set based on a percentage of tenant sales (before taxes), to the extent a tenant’s sales (before taxes) increase at a faster rate than the relevant index used in the lease, we are generally able to obtain rent increases upon lease renewal. Because tenant sales are influenced by economic conditions at the time of renewal, the level of increases we are able to obtain upon renewal depends to a certain degree on such economic conditions.
The following table shows increases (in percentage terms) in rents upon renegotiation, by country, for the indicated periods.
Six Months Ended Country Year Ended December 31 June 30
2005 2006 2007 2008
France………………………………………….. +21.4% +18.1% +21.0% +15.1%
% of rents affected 8.3% 8.9% 9.5% 2.5%
Italy………………………………………………. +20.5% +16.0% +27.3% +33.4%
% des rents affected 10.7% 6.1% 5.7% 4.0%
Spain ……………………………………….. +9.2% +10.2% +8.9% +6.7%
% of rents affected 8.8% 13.3% 11.0% 4.6%
Hungary ………………………………………… +7.9% -4.0% -1.3% -1.0%
% of rents affected 22.7% 26.2% 29.7% 15.7%
Poland ………………………………………. - -10.0% -0.1% 18.2%
% of rents affected - 13.7% 17.8% 4.5%
Belgium ……………………………………….. - - +24.8% +31.3%
% of rents affected - - 2.3% 1.7%
Portugal……………………………………….. -3.7% -5.2% -14.0% +0.7%
% of rents affected 8.9% 5.3% 20.0% 5.8%
Czech Republic …………………. +27.2% +7.9% +25.5% +12.3%
% of rents affected 6.1% 2.4% 15.7% 7.8%
Greece……………………………………………. +6.0% +10.0% +3.2% +4.5%
% of rents affected 7.9% 8.5% 3.6% 4.3%
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Six Months Ended Country Year Ended December 31 June 30
2005 2006 2007 2008
Slovakia…………………………………….. +22.5% -13.3% +28.9% +17.6%
% of rents affected 8.1% 21.7% 3.3% 7.9%
EUROPE TOTAL ………………………. +16.6% +11.3% +12.9% +12.6% % of rents affected 9.1% 9.7% 10.8% 4.2%
Our ability to renew leases at higher rental rates depends to a large extent on tenant occupancy cost ratios. The occupancy cost ratio is calculated by dividing a tenant’s rent (including utilities but before taxes) by tenant sales (before taxes). The amount of rent a tenant is willing to pay for a particular store is largely dependent on its ability to generate sales and maintain healthy profit margins. When occupancy costs exceed a certain level, we experience difficulty in obtaining rent increases upon renewal.
Lease terms vary depending on the countries in which we operate, but are usually between five and twelve years. The longest lease terms are in France, where leases generally have terms of nine to twelve years, with an option for the tenant to terminate the lease at the end of each three-year term.
Because of the diversification of our portfolio, the expiration dates of our leases are spread over a long period of time, with only a portion of our leases coming up for renewal in any given year. The following table summarizes the scheduled expiration of our leases at June 30, 2008 (prior to the acquisition of Steen & Strøm).
Scheduled Lease Expirations at June 30, 2008 (% of total rents)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 France...... 5.3 3.4 4.3 6.4 12.0 7.7 8.1 7.0 11.8 12.5 8.6 Italy ...... 7.8 3.7 6.8 16.0 10.7 9.9 4.8 5.5 10.7 7.8 4.2 Spain ...... 10.0 10.2 8.0 13.5 11.0 6.1 4.9 7.7 4.2 7.1 5.6 Hungary.... 11.2 17.1 19.5 23.6 15.0 6.7 - 1.3 1.6 1.6 1.0 Poland ...... 3.4 3.6 22.3 9.8 39.4 3.0 0.7 9.2 0.7 7.1 0.2 Belgium.... - - - - - 0.6 77.9 7.8 1.0 2.2 - Portugal.... 6.9 21.1 6.3 5.3 20.6 18 3.3 2.7 2.0 2.9 8.6 Czech republic .... 8.2 2.3 2.0 44.0 10.6 5.8 2.3 4.3 7.5 3.0 0.1 Greece ...... 4.3 0.1 0.2 0.2 16.5 1.1 14.8 5.9 5.4 4.0 3.1 Slovakia.... 8.5 7.2 54.9 12.4 5.5 6.6 - 4.9 - - - Total ...... 6.4 5.4 6.9 10.5 13.3 7.5 7.8 6.4 8.8 9.3 6.2
Steen & Strøm’s leases generally provide for a term of five years in Norway and Denmark, and a minimum of three years in Sweden. As a result, Steen & Strøm’s lease expiration schedule is more concentrated than our pre-acquisition schedule. The acquisition of Steen & Strøm will result, on a consolidated basis, in a reduction of our overall average lease term. The following table summarizes Steen & Strøm’s scheduled lease expiration dates at June 30, 2008.
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Scheduled Lease Expirations at June 30, 2008 (% of total value)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Norway...... 11.3% 12.1% 12.1% 12.0% 14.7% 16.0% 5.7% 6.5% 3.4% 2.5% 4.0% Sweden...... 7.9% 14.6% 14.2% 16.9% 9.9% 9.1% 13.6% 4.9% 4.7% 1.7% 0.8% Denmark(1) ...... ------Total...... 8.4% 10.9% 10.7% 11.6% 10.9% 11.3% 7.1% 5.0% 3.2% 1.9% 2.2%
(1) Nearly all Danish leases are signed for indefinite periods since the Danish Business Rent Act includes strict regulations which limit the rights of the owner to agree upon a limited period with the lessee and include an automatic expiration clause at the end of the lease. All signatures on a lease with a limited period must be justified by the material needs of the owner. The owner’s interest in renegotiating the terms of the rent or reletting the premises is not a valid reason. Furthermore, the Danish Business Rent Act limits the possibilities for termination of a lease by the owner (except when the tenant defaults on rent payments). After a full rental period (usually five years), the tenant may terminate the lease at any time with an average notice of six months.
Financial occupancy rates. Financial occupancy rates have a direct impact on the Company’s rental revenue and the re- invoicing of expenses to tenants. The financial occupancy rate for shopping centers is generally high by comparison to other real estate categories, reflecting the appeal of shopping centers to consumers and retailers. In France, the ability to maintain high financial occupancy rates, even in challenging economic periods, is in part due to the existence of leasehold rights (droit au bail). Leasehold rights consist of the right of a tenant under a commercial lease to use the premises for a defined period and to renew the lease upon its expiration. The value of this right, which is generally high given the relative scarcity of real estate assets, is determined by negotiation with the new tenant. Any termination of the lease by the tenant, including at the expiration of any three-year term, results in the loss of this right and, consequently, in a reduction of the overall value of the tenant’s business. The existence of the leasehold right contributes to the stability of our tenant base because tenants wish to preserve the value they have built in the businesses carried out in the leased premises.
Since most of our properties are commercial properties, we are able to benefit fully from the stabilizing effect of leasehold rights.
During renovation of a shopping center, it is often necessary to close part of the center while the construction is underway, which often results in a temporary decline in the financial occupancy rates of such centers. The table below summarizes the Company’s financial occupancy rates by country for the periods indicated.
At December 31, At June 30, (In %) 2005 2006 2007 2008 France ...... 99.2 99.3 99.0 98.9 Italy ...... 98.0 97.9 98.0 98.3 Spain ...... 98.1 98.0 97.1 96.5 Hungary ...... 96.0 97.7 97.1 97.6 Poland ...... - 96.1 96.5 96.3 Belgium...... 90.8 97.2 97.5 98.8 Portugal ...... 98.6 96.0 97.2 95.0 Czech Republic ...... 99.3 100 97.2 95.7 Greece ...... 100 98.9 97.2 100 Slovakia ...... 96.6 93.8 95.6 97.9 TOTAL ...... 98.3 98.6 98.3 98.2
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The following table summarizes Steen & Strøm’s occupancy rates for the periods indicated:
Six months At December 31, ended June 30, (In %) 2005 2006 2007 2008 Norway...... 95.9 95.9 97.1 95.7 Sweden ...... 95.1 97.2 94.7 99.0 Denmark...... 95.4 96.8 97.7 95.0 Total ...... 95.6 96.5 96.3 96.8
Default Rates. When tenants fail to make the payments required under a lease, our rental revenues are reduced, and our non-recovered expenses increase. The following table summarizes our default rates for the dates indicated.
At December 31, At June 30, (In %) 2005 2006 2007 2008 France...... 0.4 0.3 0.4 0.8 Spain ...... 1.6 2.0 2.3 4.5 Italy ...... 1.0 1.2 1.3 1.8 Hungary ...... 4.3 3.5 3.7 7.2 Poland ...... - 6.1 6.5 5.1 Belgium...... 4.6 2.0 5.5 5.8 Portugal...... 2.4 5.1 5.4 6.4 Czech Republic ...... 15.9 3.3 9.0 5.2 Greece ...... 1.6 3.3 2.9 2.9 Slovakia ...... 2.4 19.0 22.3 23.3 Total...... 1.2 1.4 1.8 2.5
For the purposes of calculating the default rate, any invoiced amount that has not been paid within one month of the invoice date is considered to be in default.
The following table summarizes Steen & Strøm’s default rates for the dates indicated.
At December 31, At June 30, (In %) 2005 2006 2007 2008 Norway ...... 0.1 0.1 0.1 0.1 Sweden...... 0.0 0.0 0.3 1.2 Denmark...... 0.0 0.0 0.0 0.4 Total...... 0.0 0.0 0.0 0.2
Variable Rent. In addition to the base rent, most of our commercial leases, particularly in France and Italy, provide for additional variable rent to be paid based on the tenant’s revenues. The following table presents the proportion of the variable rent relative to the total rent for the periods indicated.
Proportion of variable rent Variable Rent to total rent Year ended December 31, (millions of euros) 2005 ...... 11.2 2.9% 2006 ...... 10.8 2.4% 2007 ...... 12.1 2.3% Six months ended June 30, 2008 ...... 7.7 2.7%
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The proportion of variable rents is higher in Steen & Strøm’s business than in our own. In the first half of 2008 and for 2007, the proportion of variable rents to the total rental revenue of Steen & Strøm amounted to 8.2% and 8.5%, respectively. In the first half of 2008, the breakdown by country was as follows: 7.6% in Norway, 8.9% in Sweden and 9.0% in Denmark.
Retail Properties Segment
Our retail properties segment consists of Klémurs’ activities. Increases in Klémurs’ rents are primarily driven by growth in the size of its property portfolio. On a constant portfolio basis, the most significant factor is growth in the ICC index. Because Klémurs has built its property portfolio primarily through the purchase of properties from retail chains seeking to outsource their property portfolio, its lease termination dates are more concentrated than those in the shopping center segment. Nevertheless, since Klémurs’ relationship with retailers is built upon long-term leases of their outsourced property holdings, Klémurs considers the risk of non-renewal to be low. The potential to obtain higher rents upon renewal, however, is often limited. The following graphic lists Klémurs’ lease termination dates.
70.0% 60.9% 60.0%
50.0%
40.0%
30.0%
20.0%
10.0% 6.2% 5.4% 2.6% 2.3% 0.8% 0.0% 1.6% 0.1% 1.1% 1.1% 0.3% 0.0% <2008 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Office Properties Segment
Macroeconomic conditions and competition. Demand for office space is highly sensitive to general economic conditions, and in an economic downturn, demand for office space typically declines. The supply of available office space also has a significant impact on market rents. Higher vacancy rates place downward pressure on market rates.
The Paris commercial property market saw increasing prices and demand through 2005 and 2006. Although early 2007 was very active, with a large number of transactions helping to drive up prices, the market was adversely affected in the second half of the year by the effects of the economic downturn, which had, and are continuing to have, a negative impact on the market. As the credit crisis has deepened, investors have become more cautious, and the availability of bank credit for real estate investments has been significantly reduced. For a summary of the office property market for the first half of 2008, see “— Management Report—Comparison of June 30, 2008 to June 30, 2007” below.
Index-linked adjustments. Our office property leases are indexed to the ICC index. Office properties will not be affected by the creation of the ILC.
Size of portfolio. Over the period since the beginning of 2005, we have reduced the overall size of our office properties portfolio, using the funds generated from sales of office properties to invest in our shopping center business. Over the period from the beginning of 2005 through June 30, 2008, we sold a number of office properties for total proceeds of €312.1 million. Although we have reduced the overall size of our portfolio, we have continued to invest in this segment on an opportunistic basis. We are currently constructing the Séreinis building in Issy-les-Moulineaux, a 12,000 m2 office building which should be completed in early 2009. Space in this building is currently being marketed.
Revenues from management, administration, and other activities
Revenues from management, administration and other activities are generated mainly by the business of our subsidiary, Ségécé, which manages shopping centers for third parties, as well as for us. These revenues are generated by all three segments of the Group, but relate mainly to the shopping center segment. The principal components of Ségécé’s revenues are lease
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management fees, property management fees, and fees relating to the development of new properties. The most significant portion of Ségécé’s revenues is generated through its lease management activity. These fees are calculated as a percentage of rent, along with an incentive payment in the event a rent increase is obtained upon renegotiation of the lease.
Segécé also earns fees in connection with development projects. Most of these activities are conducted on our behalf. The fees that invoiced to us are recorded in our consolidated financial statements at cost, without any markup, and the corresponding costs are capitalized in connection with the relevant projects.
Steen & Strøm also provides shopping center management services to Storebrand and Danica.
Property appraisals
The value of our real estate portfolio is appraised on December 31 and June 30 of each year by independent experts as part of the process of calculating our revalued net assets. The book value of our portfolio is based on the acquisition cost of the relevant assets. If the value of a property is appraised by experts at a value lower than the carrying value shown in our financial statements, we reduce the carrying value of the property on our balance sheet by recording the necessary income statement charges. For the methodology used to calculate our revalued net assets, see “—Management Report—Revalued Net Assets – Methodology” below.
Recent Developments
Management Changes
In a press release issued on October 31, 2008, we announced changes in the composition of our Executive and Supervisory Boards. Our Supervisory Board, in a meeting held on October 31, 2008, duly noted Mr. Dominique Hoenn’s decision to step down as President of the Supervisory Board, in accordance with the statutory age limit requirements set forth in our bylaws. His resignation is effective as of December 31, 2008. He will be replaced, as of January 1, 2009, by Mr. Michel Clair, who has served as Chairman of our Executive Board since 1998. Mr. Clair will join the Supervisory Board as of that date. Acting on the recommendation of Mr. Hoenn, and on the opinion of its Nominating and Compensation Committee, the Supervisory Board decided to appoint Mr. Laurent Morel to serve as Chairman of the Executive Board, replacing Mr. Clair. This appointment will be effective as of January 1, 2009. S&P Rating
On October 30, 2008, Standard & Poor’s Ratings Services (“S&P”) revised its outlook on Klépierre (BBB+/A-2) to “stable” from “positive”, the outlook having been “positive” since January of 2007. S&P explained its decision as follows: “The outlook revision primarily reflects less favorable conditions and increased uncertainty in the real estate and financial markets. We believe that deflationary trends in real estate asset valuations, the increasing cost of debt, and deteriorated macroeconomic perspectives across Europe could weigh on the company’s robust performance and solid credit metrics in the coming quarters. The probability of an upgrade in the near term has hence decreased.” In its press release, S&P reviewed the results of operations of Klépierre as of September 30, 2008, as well as the impact of the acquisition of Steen & Strøm. Assuming our equity refinancing of approximately half of the debt financing used to acquire Steen & Strøm, S&P decided to maintain its long-term credit rating of BBB+. In light of the withdrawn amounts under existing credit lines following the acquisition of Steen & Strøm and the absence of any significant maturities for the Group before 2010, and assuming an increase in the hedge rate of its variable interest rate debt (which decreased following the acquisition of Steen & Strøm), it decided to maintain its short-term credit rating of A-2. In terms of outlook, S&P concluded as follows: “The stable outlook reflects Klépierre’s currently comfortable position at the ‘BBB+’ rating level. We expect that Klépierre will continue to post robust rental performances, maintain very high occupancy rates across its portfolio, generally avoid construction risks in its development activities, and stabilize its exposure to higher-risk markets. We also expect that Klépierre will preserve its currently solid financial profile, in particular with minimum adjusted EBITDA interest cover (including capitalized interest) within the 2.5x-3.0x range, the ratio of funds from operations (FFO) to debt at 7%-8%, and an LTV ratio of less than 50%. We believe Klépierre can achieve this in spite of increased uncertainties and potentially more demanding conditions in the industry, especially given the protracted turmoil in the credit markets, slowing economies, and a perception of a turning point regarding the valuation of commercial real estate assets. We believe that potential for a rating upside remains, but it has become more remote in the current environment. We also believe that rating downside is unlikely at this stage, though, given the company’s very strong business profile and its intermediate financial policy.”
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Third Quarter Results
On October 28, 2008, we published a press release relating to our results for the third quarter of 2008. The press release is attached hereto as Exhibit E. The table below sets out certain key figures.
2008 2007 In millions of euros 1Q 2Q 3Q 1Q 2Q 3Q 4Q Total Rental revenues 161.3 163.6 166.3 141.2 143.8 149.0 156.2 590.2 from shopping centers 141.9 142.5 144.4 123.5 125.8 130.7 137.9 517.9 from retail properties 6.8 8.3 9.2 5.4 6.0 6.0 6.1 23.5 from office properties 12.6 12.8 12.6 12.3 12.0 12.3 12.3 48.8 Fees 14.6 17.7 16.4 13.3 16.7 17.0 17.2 64.2 Total Revenues 175.9 181.2 182.7 154.6 160.5 166.0 173.4 654.4
Management Report
Please note that the disclosure in this “Management Report” sub-section (up to but not including the sub-section entitled “Liquidity and Capital Resources”) is extracted verbatim from reports that we previously published. They include certain prospective information that should be read in the context of its initial publication (in particular, prior to the deepening of the current financial crisis). This disclosure should be read in light of the information included in “—Overview” and “—Recent Developments” above and the more recent information included in Exhibit E hereto.
Comparison of June 30, 2008 to June 30, 2007
Shopping Centers
Economic Growth Rates
After an unexpected rebound in the first quarter, global growth is expected to once again show signs of weakness observed since mid-2007. The rise in commodity prices (food and oil) and adverse capital market trends will continue to weigh on all economies. Nonetheless, Europe should be able to withstand these setbacks. For the euro zone, growth is expected to reach 1.7% in 2008, and will in fact come close to the earlier forecast (OECD, November 2007: +1.9%). As with the average for the region, economic growth will remain aligned with earlier forecasts in France (+1.8%), Belgium (+1.7%) and Greece (+3.5%). Conversely, growth will be lower in Portugal (+1.6%), Italy (+0.5%) and Spain (+1.6%). In addition, Spain’s housing market is deteriorating with impacts on domestic demand. The rate of growth will continue to be sustained in Central Europe: Slovakia (+7.3%), Poland (+5.9%), the Czech Republic (+4.5%) and, to a lesser extent, Hungary (+2.0%).
In the countries where we own property, household spending remains strong despite higher inflation.
Consumer Spending, January – May 2008
Over the first five months of the year, sales generated by our shopping centers rose by 1.1% over the satisfactory level observed last year (January – May 2007 aggregate / 2006: +3.4%).
Trends are contrasted from one country to the next.
In France, sales growth for the first five months of the year was positive (+1.3%).
In Spain, the deteriorating economic outlook seems to be having an impact on household spending nationwide, and shopping center sales are down by 2.9%.
Italian sales (-2.2%) are suffering from the competitive environment of the Tor Vergata and La Romanina shopping centers. Apart from these two centers, Italy’s decline is much less marked (-0.5%), and the mid-sized retail units are the hardest hit. For the smaller outlets, sales are up by 2.9%.
The largest increases are observed in Central Europe (+7.9% on average): Poland (+11.8%), with all sites showing significant growth; Hungary (+10,1%), where results were mixed; Slovakia (+9.4%); and the Czech Republic (+2.8%).
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Greece also reported excellent sales growth (+7.1%) and is pursuing its turnaround. In Belgium, sales from the Louvain- la-Neuve center rose by 12.1%.
Sales from Portuguese tenants declined by 4.5%, as the economic slump continues to have an adverse effect on performances. At the same time, the restructurings under way and the recent change in supermarket anchor (from Carrefour to Continente) have not yet reached the expected impact.
With the exception of household goods, all retail sectors showed growth, in particular Beauty/Health (+4.7%) and Culture/Gifts/Recreation (+2.3%). Personal products (+0.7%) and Restoration showed less rapid growth.
France – assessment of the first half of 20081
In France, retail sales fell in June by 6.2% from the exceptional level reached last year. June 2007 sales (+11.7%) were boosted by the unusually late Mother Day’s (in May this year) and an extra Saturday.
The six-month total thus shows a decline of 0.1%, although the stagnation is at the high level observed in 2007 (first half of 2007/ first half of 2006: +4.7%).
Results for the inter-municipal centers were sustained over the first half of the year, with increased sales (+1.4%). Regional centers (-0.8%) and downtown centers (-1.1%) showed a slight decline.
Retail sector sales remain strong in Beauty/Health (+3.3%) and Personal Products (+1.2%).
Declines were observed in the following sectors: Culture/Gifts/ Entertainment (-0.9%), Restaurant (-1.0%) and Household Goods (-9.5%).
Change in tenants mix Lease renewals Nbr Change in% Nbr Change in% France 72 15.2% 55 15.0% Italy 41 5.4% 89 7.5% Spain 22 27.5% 35 36.4% Hungary 80 (0.5%) 94 (1.5%) Poland 14 0.6% 4 1.1% Belgium 20 4.8% 8 36.9% Portugal 3 24.5% 2 3.7% Czech Republic 3 (0.2%) 3 9.0% Greece 5 31.3% - - Slovakia 11 31.7% 14 8.1% TOTAL EUROPE 271 10.9% 304 14.1%
Impact of index-linked rent adjustments Occupancy rate Default rate France 4.6% 98.9% 0.8% Italy 3.9% 96.5% 1.8% Spain 2.1% 98.3% 4.5% Hungary 2.5% 97.6% 7.2% Poland 2.3% 95.0% 6.4% Belgium 2.6% 95.7% 5.2% Portugal 2.6% 97.9% 23.3% Czech Republic 4.3% 100.0% 2.9% Greece 2.2% 98.8% 5.8% Slovakia 3.1% 96.3% 5.1% TOTAL EUROPE 3.7% 98.2% 2.5%
Rental Revenues
The rental business in Europe grew substantially: shopping centers’ rental revenues collected in the first six months to June 30, 2008 amounted to €284.4 million (€249.4 million at June 30, 2007), up 14%. Of the total, additional variable rental revenues represented €7.7 million.
On a constant portfolio basis, growth in rental revenues was 5.2%.
1 Excluding Angoulême Champ de Mars, Rambouillet, Orléans Saran.
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France
Rental revenues for shopping centers in France amounted to €145.7 million for the period, up by €16.2 million compared with June 30, 2007, an increase of 12.5% on a current portfolio basis and of 5.3% on a constant portfolio basis.
The increase on a constant portfolio basis is attributable to:
• The indexation of guaranteed rental revenues, +4.6% on average over the entire portfolio of real estate holdings. It should be noted that most leases (84% in terms of value) are indexed to the cost of construction index for 2Q07, which rose by 5.05%. • Relettings and lease renewals, which improved the rental value of the portfolio: rental revenues were boosted in particular by transactions completed in the second half of 2007 (135 reletting to new tenants, 156 renewals), producing a positive impact over the full six months ended June 30, 2008. On a current portfolio basis, rental revenue for the period was boosted by the following items:
• the acquisition of Leclerc supermarkets and additional plots on the sites of Blagnac and Saint Orens in July 2007, for an impact of €3.2 million on rental revenues recorded at the June 30, 2008 reporting date; • the September 2007 opening of the Angoulême Champ de Mars mall, for an impact of €1.9 million; • the June 2007 opening of the Rambouillet extension, for an impact of €1.3 million on rental revenues; • the December 2007 acquisition of the Valence Victor Hugo mall, for an impact of €1.6 million; • the October 2007 opening of the Orléans Saran opening, for an impact of €1.4 million. Additional variable rental revenues amounted to €3.8 million, which was stable versus June 30, 2007.
Rental reversion transactions in the first half of 2008 resulted in 72 changes in tenant mix (with an average increase of 15.2% in MGR) and 55 lease renewals (with an average increase in MGR of 15.0%).
The financial occupancy rate on owned assets was 98.9% on June 30, 2008, versus 99.3% on June 30, 2007, due in particular to one-off retail restructurings undertaken at the Créteil Soleil, Clermont Jaude and Lomme shopping centers. The default rate was 0.8% of rental revenues recorded on June 30, 2008, versus 0.7% on June 30, 2007.
The average occupancy cost ratio for tenants is 9.7%, up very slightly compared to June 30, 2007 (9.5%). This ratio is defined as rental revenues plus charges to sales excluding tax.
The concentration of rental revenues among retail partners is particularly low, which helps to limit the rental risk. At June 30, 2008, the PPR group is the principal partner (4.2% of rental revenues, including 2.8% for Fnac), followed by the Auchan group (4.0%) and the Vivarte group (3.0%).
Spain
At the June 30, 2008 reporting date, consolidated rental revenues for all Spanish shopping center holdings amounted to €34 million, compared with €32.1 million on June 30, 2007, a progression of €1.9 million (+5.9%).
On a constant portfolio basis, the increase was €1.6 million (+5.1%). The impact of index-linked adjustments was 3.9%.
The only change in the current portfolio relates to rental revenues received (€238 thousand) for the 14 retail outlets located across from the checkout counters of the Carrefour supermarket in the Vallecas center, which were acquired in November 2007 (the shopping center will not open until November 2008).
The principal shopping centers in terms of rental revenue contributions were Gran Sur, Augusta Saragosse, and Madrid Los Angeles.
Additional variable rental revenues amounted to €0.6 million for the period ended June 30, 2008, up by 48% compared to the same period one year earlier.
Since January 1, 2008, 41 leases have been signed with new tenants, up by 5.4%, and 89 leases were renewed (+7.5%). A total of nine lease-ups were also completed, for an annual MGR of €255 thousand.
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The average cost occupancy ratio for tenants is 11.3%, a very slight increase compared with June 30, 2007, when it stood at 11.0%.
The default rate was 1.8% in June 30, 2008, up slightly over June 30, 2007 (+1.5%), but still very low.
The financial occupancy rate for the period was 96.5%, virtually unchanged since the end of June 2007 (97%).
Italy
Consolidated rental revenues totaled €43.6 million for the six months ended June 30, 2008, up by 10.8% versus the prior year. External growth comes from the acquisition of Lonato and Verona last February and an extension of the Bari shopping center.
On a constant portfolio basis, Italian rental revenues rose by €1.5 million (+3.7%, of which 2.1% linked to index-linked rental adjustments). Growth is attributable primarily to:
• Retail restructurings: • At Val Vibrata (tenant Media Markt moved in December 2006 and opening of 16 new small outlets in the second quarter of 2007) • At Paderno-Brianza in 2005/2006, lease-up terminated in 2007 • Rental modifications: • At Rondinelle-Brescia (renewal campaign in second quarter 2008) and Pescara (impact of leases renewed in 2007). At the rental management level, since the beginning of the year, 13 lease-ups have been completed for contractual MGR of €411 thousand; 22 changes in tenant mix were also signed for additional MGR of €311 thousand annually (+27.5%). Some 35 leases were renewed (including 22 at Rondinelle-Brescia) for additional MGR of €821 thousand (+36.4%).
The average cost occupancy ratio for tenants is 9.7%, up slightly compared with June 30, 2007 (9.4%).
The financial occupancy rate as of June 30, 2008 is 98.3%, an improvement over June 30, 2007 (97.6%).
The default rate stood at 4.5% on June 30, 2008, an increase compared with June 30, 2007 (+3.3%), notably for the Capodrise, Tor Vergata, Collegno and Seriate shopping centers.
Hungary
Consolidated rental revenues amounted to €15.7 million for the six months ended June 30, 2008, an increase of €1.1 million (+8.0%).
External growth represents €0.7 million and pertains to the acquisition of the offices in the Duna center in Budapest and rental revenue adjustments for 2007.
On a constant portfolio basis, Hungarian rental revenues rose by 2.8%, slightly more than the weighted index (+2.5%). Growth was driven primarily by the Duna and Miskolc shopping centers.
The reshuffle that was undertaken in 2006 resulted in a decline in the vacancy rate, particularly with the arrival of Saturn at the Duna shopping center and of C&A at Miskolc. Conversely, the Alba center is experiencing a temporary financial vacancy due to restructurings under way for €127 thousand. The Gyor center has lost some appeal due to local competition, and the vacancy level represents around €150 thousand based on contractual MGR.
Since January 1, 2008, 19 leases have been signed for contractual MGR of €304 thousand. 174 leases have been signed with new tenants, a decline of 1% (-€46 thousand).
The financial occupancy rate stood at 97.6% on June 30, 2008, versus 96% on June 30, 2007.
The default rate rose by 7.2% compared with June 30, 2007 (3.8%), attributable in particular to late payments on re- invoicing of the electricity margin.
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Portugal
Consolidated rental revenues from the Portuguese portfolio totaled €9.3 million for the six months ended June 30, 2008, an increase of 33% that reflects the impact of full ownership of the Parque Nascente shopping center in Gondomar following the buy-out of the co-owner’s share in September 2007. The change in the portfolio also relates to the mid-sized retail unit Toys ‘R Us in the Braga center, acquired in mid-February 2007.
On a constant portfolio basis, Portuguese rental revenues were stable despite an index-linked adjustment of 2.3%. The Portuguese centers are facing a difficult economic situation, particularly with the departure of Carrefour, which was replaced by Sonae-Continente on January 1, 2008.
The Parque Nascente center showed a decline in lease income versus June 30, 2007 due to the launch of the retail restructuring of Primark, which created an additional vacancy: the decline in rental revenues was only partially offset by the gain in rental revenues provided by the opening of Media Markt in July 2007.
Over the first six months of the year, rental management underwent 14 changes in tenant mix and four lease renewals, for a gain in rental revenues of 0.6% and 1.1%, respectively.
The average cost occupancy ratio for tenants is 11.8%, a decline compared with June 30, 2007 (12.8%).
The financial occupancy rate was 95.0% for the period, a decline compared with June 30, 2007 (95.9%): the decline was attributable to the Loures and Parque Nascente centers (financial vacancy generated by Primark); the Vila Nova de Gaia occupancy rate improved versus June 2007.
The default rate on June 30, 2008 was 6.4%, a marked improvement over June 30, 2007 (10.1% on a comparable portfolio basis).
Czech Republic – Slovakia
Consolidated rental revenues amounted to €8.3 million for the period ended June 30, 2008. The increase on a constant portfolio basis was 14.5%, exceeding the weighted indexation of 2.6%.
Growth was essentially driven by the Novy Smichov shopping center (+€840 thousand), boosted by the effects of changes in tenant mix/renewals, mostly signed in the second quarter of 2007 and the first half of 2008 and, to a lesser extent, by Danubia (+€87 thousand).
Since January 1, 2008, 20 changes in tenant mix (+4.8% and +€41 thousand) and eight lease renewals for a 36.9% increase in contractual MGR (+€97 thousand) have been completed in the Czech Republic, as well as a lease-up for €10 thousand at Novo Plaza.
The Danubia center in Slovakia underwent three changes in tenant mix and two renewals, which generated a capital gain in rental revenues of 24.5% (€23K) and 3.7% (€2 thousand), respectively.
In the Czech Republic, the financial occupancy rate for Novy Smichov declined slightly, from 100% on June 30, 2007 to 99.4% on June 30, 2008, while for Novo Plaza, it went from 84.8% on June 30, 2007 to 85.7% on June 30, 2008.
In Slovakia, it improved from 90.8% to 97.9% between June 30, 2007 and June 30, 2008.
The default rate declined at Novo Plaza, from 26.1% on June 30, 2007 to 17.2% on June 30, 2008. The same is true for the Novy Smichov center, whose default rate went from 2.9% on June 30, 2007 (2.4% on December 31, 2007) to 1.7% on June 30, 2008 (dispute resolution).
The default rate for the Danubia center deteriorated slightly, going from 21.2% on June 30, 2007 to 23.3% on June 30, 2008, due in particular to the late payment of rental related expenses.
Greece
Consolidated rental revenues from Greek holdings totaled €4 million for the period ended June 30, 2008, an increase of 28.1% that primarily reflects the acquisition of Larissa in June 2007 (+€819 thousand of additional rental revenues).
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On a constant portfolio basis, the increase was limited to 1.8%, despite weighted indexing of an estimated 4.3%. The counter-performance is attributable to Athinon. A restructuring is under way to enable the center to house a mid-sized clothing store on two levels (2,000 m²) in the third quarter of 2008.
As for the rental management business, three transactions related to changes in tenant mix since the beginning of this year led to a slight decline (-0.2%), and three leases were renewed with an increase in contractual MGR of 9%.
The financial occupancy rate, excluding Athinon (acquired less than two years ago), was 100% on June 30, 2008.
The default rate is 2.9%, relatively stable versus June and December 2007.
Belgium
Rental revenues for the Louvain-le-Neuve center amounted to €6.4 million for the period ended June 30, 2008, an increase of 9.2% (2.2% related to indexation) that reflects the numerous lease-ups in 2007 (the largest being the Fnac in September).
Belgium has reported five changes in tenant mix since the beginning of this year, leading to a gain in rental revenues of 31.3%: two concern the retail shopping center itself and three concern the ground level store fronts on the adjoining rue Charlemagne.
The average cost occupancy ratio for tenants was virtually unchanged at 11.3% for the period ended June 30, 2008.
The financial occupancy rate went from 97.7% on June 30, 2007 to 98.8% on June 30, 2008, reflecting the impact of lease-ups.
The default rate was 5.8% (2.3% excluding Cinema UGC) on June 30, 2008, compared with 1.8% on June 30, 2007. This change concerns five tenants. A dispute with Cinema UGC is ongoing.
Poland
Polish rental revenues amounted to €17.4 million for the six months ended June 30, 2008, an increase of €6.7 million (+64.1%). External growth accounts for €5.9 million, and relates to the acquisitions of Rybnik Plaza and Sosnowiec Plaza (May 7, 2007), as well as Lublin Plaza (July 27, 2007).
On a constant portfolio basis, Polish rental revenues increased by 8.8% (+€854 thousand). Additional variable rental revenues represent €1.3 million, 7.6% of the total.
Faced with intense competition, the Krakow shopping center showed a decline of €146 thousand.
Conversely, the Ruda shopping center (+€229 thousand compared with June 2007) showed strong growth over 2007, attributable to a lower vacancy rate, changes in tenant mix and more restructurings. The Posnan mall, albeit to a lesser extent, has also been positively impacted by restructurings.
Since January 2008, five lease-ups have been completed for annual contractual rental revenues of €282 thousand, and 25 changes in tenant mix/renewals have generated an 18.2% increase in contractual MGR.
The default rate was 5.1%, up a slight 0.1% versus June 30, 2007, primarily due to late invoicing of electricity bills (awaiting definitive rates).
The financial occupancy rate for the period was 96.3%, a significant increase compared with June 30, 2007 (93.6%).
Outlook
France
In France, the Cost of Construction Index for 1Q08, published on July 9, 2008, shows a rise of 8.09% versus the index for 1Q07. It applies to 13% of leases in terms of value, with retroactive effect as of January 1.
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In addition, we expect rental revenues to be boosted in the second half of 2008 by the opening of the extension at Laon in June, as well as the end of the extension work at the Saint Orens and the opening of the first portion of the extension of the Blagnac mall, scheduled for the end of the year.
Between now and the year 2010, a total of 696 leases will come up for renewal, representing rental revenues of €40.4 million in current value terms.
International
At the international level, a number of restructurings will be finished before the end of 2008, generating rental invoices as of this year, i.e.:
• the opening of the C&A store (730 m²) at Novo Plaza (Czech Republic); • the second phase of the Duna Plaza restructuring (Hungary), which consists of replacing four movie theaters with two mid-sized retail units, Intersport and Vögele; • the opening of the last mid-sized unit leased at KappAhl (900 m²), on the ground level of Ruda Slaska (Poland); • and the arrival of the mid-sized unit Sprider (2,060 m²) at Athinon (Greece), with the opening scheduled for September 2008. 2008 is a year of many lease renewal campaigns in various countries:
• the Czech Republic, where lease renewals will be pursued for Novy Smichov: at the end of the first half of 2008, there were seven renewals, leading to a 37.1% improvement, and by year-end 10 expiring leases will be renewed (+€125K gain is expected, +29.8%) or relet to new tenants (+€125 thousand gain expected, +35.2%); • at the Meridiano shopping center in Tenerife, Spain, 21 leases will expire in 2008, representing €702 thousand of MGR. 17 renewals have already been negotiated, for an average increase of 19.8% (a capital gain of €122 thousand); • in Italy, leases scheduled for renewal this year concern Le Rondinelle. After 22 leases were renewed in the course of the first six months, up by an average of 40.4%, a rental reversion of 30% is expected for the 21 leases that remain to be renewed by the end of 2008; • and in Hungary, where renewal campaigns will be carried out by the end of 2008 on the following centers: Miskolc (€265 thousand in expired leases, +10% expected), Nyir (€180 thousand in expired leases, +8.4% expected), and Debrecen (€797 thousand in expired leases, +13% expected). We are also working with Ségécé over a longer time frame on signing mid-sized retail units that will bring in traffic. Primark, for which a lease was signed in June 2008, is expected to open by the fourth quarter of 2009 at the latest. The store will measure 3,728 m² on the R+1 and R+2 levels of the Parque Nascente shopping center in Portugal.
Other discussions for the location of mid-sized retail units (scheduled to open in 2009) are under way in the Czech Republic, Spain, Greece, Hungary and Poland.
Management Companies
Streamlined organization for management structures
The buyout of the interest in Ségécé which we did not already own in the fourth quarter of 2007 allowed for the simplification of management structures in an effort to streamline the organization. Management mandates, corporate accounting, administrative and legal services, as well as office management, were centralized by Ségécé in the course of the first six months of 2008.
Multi-skilled staff
Now involved not only in the development and management of shopping centers but also in office property management, as well as the accounting and legal administration of the holding companies, the staff of Ségécé—with a workforce of around 1,040 people across Europe—can now respond to all real estate needs, and now houses all of the occupations and functions of the Group.
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A change in scope: acquisition of Ipeci in France, disposal of Devimo in Belgium
As an extension of our acquisition in December 2006 of the assets of the PHH holdings, Ségécé bought out the management company Ipeci Gestion on April 8, 2008. With a staff of five, this company provides rental management services for the shopping centers in this portfolio, as well as administrative and accounting for the related assets.
A participant since February 2000 in the reorganization and development of Devimo, in collaboration with the two other shareholders (Fortis and Banimmo), Ségécé considered that this tripartite shareholder structure was not amenable to new developments in the Benelux countries. Accordingly, the 35% interest that Ségécé held in Devimo was sold on June 23, 2008.
Fees representative of each activity
Revenues for all Ségécé entities taken together – on a constant portfolio basis (restatement of Devimo and Ipeci not taken into account) – increased by 7.1%. The Development business made a substantial contribution (+19.5%). Growth in rental revenues – on a current portfolio basis – drove a 4.3% rise in real estate asset management fee income. Also worth noting is the €4.9 million in company administration fees, of which €4.2 million related to the takeover of this business by Ségécé France (mentioned above) in the first six months of 2008.
Ongoing development...
Development business in the first half of the year also included:
• expansions/restructurings in France—Nantes Beaulieu, Blagnac, Saint-Orens, Bègles, Villejuif and Clermont Jaude; • acquisitions—such as Défi Mode/Vivarte property assets, assets located in three retail areas (Rochefort-sur-Mer, Avranches and Messac), and the Lonato and Verona centers in Italy; • development, including La Roche sur Yon and Vannes La Fourchène in France, and Vallecas in Spain. ... by irrigating the rental management business ...
€761 million in lease income, including €323.3 million in France, will be invoiced by Ségécé in 2008, an increase of 7.5% versus 2007. In addition to the rental management of offices at the end of June 2008, for a fee income of €653 thousand, the impact of renewal campaigns in the shopping center sector at Bègles Rives d’Arcins, Paris Marché Saint Germain and Toulon Grand Var is noteworthy. The full-year impact of the Polish centers Sosnowiec, Rybnik and Lublin, and the management of the Czech center Pilzen will also contribute to growth in the volume of rental revenues invoiced.
.... and real estate administration
The administrative work of Property Management extends to 318 European centers, of which we own 248. Fee income was up by 5.6% for the period (including fee income related to delegated management of works). On June 30, 2008, administrative teams managed 3,213,655 m² and an operating budget of €265 million. Thanks to the in-house training modules of Ségécampus, the know-how of Ségécé can be passed on to all of its European subsidiaries.
Toward new horizons: India
In the interest of participating in strong growth in India by applying its management expertise, Ségécé plans to establish a location in the near future in Delhi. Its first objective is to comprehend and adapt to this market.
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Segment Earnings
Shopping center segment 06/30/2008 06/30/2007 Change (€M) Change (%) Lease Income 284.4 249.3 35.1 14.1% Other rental income 4.2 2.5 1,6 64.6% Rental Income 288.6 251.9 36.7 14.6% Land expenses (real estate) (1.2) (1.1) (0.0) 3.3% Non recovered land expenses(1) (8.9) (6.5) (2.4) 36.1% Building expenses (owner)(1) (14.5) (11.6) (2.9) 24.9% Net Lease Income 264.1 232.6 31.5 13.5% Management, administrative and related income 30.8 29.3 1.6 5.4% Other operating income 6.0 4.1 1.9 44.8% Survey and research costs (1.4) (0.6) (0.8) 129.9% Payroll expense (33.0) (28.9) (4.1) 14.2% Other operating expenses (8.9) (9.1) 0.2 (2.3 %) EBITDA 257.6 227.4 30.2 13.3% D&A allowance on investment and arbitrage property (94.4) (67.3) (27.1) 40.3% D&A allowance on PPE (2.0) (1.3) (0.7) 56.2% Provisions (0.2) 1.0 (1.2) (124.3)% OPERATING INCOME 160.9 159.8 1.2 0.7% Share in earnings of equity method investees 0.5 1.1 (0.6) (57.4 %) Proceeds of sales 21.6 (0.0) 21.6 SEGMENT EARNINGS 183.0 160.9 22.2 13.8% (1) 2007: after reclassification of property taxes and non-recovered rental charges
Lease income from shopping center properties rose by 14.6% compared with June 30, 2007, to €288.6 million.
Other lease income includes entry fees as well as a margin on the provision of electricity to tenants in the Hungarian and Polish shopping centers. The €1.6 million increase is primarily attributable to the invoicing of entry fees following the opening of the expansions at Rambouillet and Orléans.
Land expenses were stable, and correspond to the allocation over several periods of building leases, mostly in France.
Non-recovered rental charges mainly reflect expenses related to vacant premises and real estate taxes. The €2.4 million change is primarily attributable to the rise in non-recovered rental expenses from tenants paying a lump sum, in particular in Hungary and Poland, also factor in a portfolio scope effect related to the acquisition of the Lublin, Rybnik and Sosnoviec shopping centers (€0.5 million).
The increase in owner’s building expenses, which amounted to €2.9 million, is primarily attributable to growth in assets. It also includes one-off expenses related to the set-up of a real estate fund in Italy (€1.2 million).
Net lease income was €264.1 million, up by 13.5%.
Management and administrative fee income rose by 5.4%, or €1.6 million. This development is primarily due to lease-up fees for the Nantes-Beaujoire center in particular. Other notable developments concern the rise in property management fees.
Other income from operations includes the proceeds from the specialty leasing business (Galae) in particular, and tenant re-invoicing, up by €1.9 million compared with June 30, 2007.
Research costs, accounted for as a loss, amounted to €1.4 million, an increase of €0.8 million compared with June 30, 2007.
The €4.1 million increase in payroll expense (+14.2%) is primarily attributable to the higher staffing level, particularly in France, Spain and Eastern Europe, in the interest of adapting local structures to our new projects and acquisitions. In France, the increase also reflects the integration of the management firm IPECI, which is dedicated to the management of the shopping centers in the Progest portfolio.
Operating expenses showed little change at around €9 million.
EBITDA was €257.6 million, an increase of 13.3%.
Depreciation and amortization for the period and provisions for investment properties increased by €27.1 million. This figure includes an allowance for depreciation of €22.7 million, primarily to cover the Polish and Czech centers. It is largely attributable to the appreciation of local currencies, which led to a revaluation of these assets after they were translated into euros in our financial statements. Depreciation and amortization also increased due to portfolio growth: in France, with the acquisition
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of the Angoulême-Champ de Mars (€1.0 million) and Valence-Victor Hugo (€0.6 million) shopping centers, and of two supermarkets in the Greater Toulouse area (€0.6 million), partly offset by the disposal of a 42.6% interest in the Annecy-Courier shopping center. Abroad, the increase in depreciation and amortization was due, in particular, to the acquisition of three shopping centers in Poland (€2.8M), of the Larissa shopping center in Greece, and of Lonato and Verona in Italy.
Income from operations amounted to €160.9 million, an increase of 0.7%.
Disposals provided €21.6 million, reflecting the sale of 42.6% of the Annecy-Courier center at the end of March and the sale of the Group’s interest in Devimo (Belgium). Income also includes a €0.3 million development margin.
After taking into account the earnings of equity method investees (€0.5 million), the change in which is attributable primarily to the disposal of Devimo, earnings for the shopping center segment were €183.0 million for the period, up by 13.8%.
Retail Properties Segment
Rental revenues from the Retail segment amounted to €15.1 million, an increase of €3.7 million compared with June 30, 2007. This is a 32.3% rise on a current portfolio basis, and an 8.4% increase on a constant portfolio basis.
The rise on a constant portfolio basis is attributable to:
• The impact of index-linked rent adjustments (the French Cost of Construction Index for 2Q07 applied to leases increased by 5.05%); • The collection of €0.4 million in additional variable rental revenues from the Buffalo Grill restaurants, based on the sales revenue generated by the restaurants in 2007. On a current portfolio basis, the change is attributable to the following items:
• The acquisition on April 30 of 77 retail store properties, of which 67 bearing the Défi Mode logo, with an impact on rental revenues of €1.0 million; • The acquisition in April of 14 retail assets located at sites in Avranches, Messac and Rochefort (€0.2 million); • The acquisition in December 2007 of two Sephora retail properties, one in Metz and one in Avignon (€0.3 million); • For the Buffalo Grill portfolio, the impact over the six-month period of the eight restaurant properties acquired in late 2007, plus the impact of 15 restaurants acquired in June 2008, for a total of €0.6 million; • The contribution of Cap Nord, a company whose assets were acquired in March 2007, for €1.2 million. It should be noted that Buffalo Grill accounted for 74% of the rental revenues collected by Klémurs on June 30, 2008, versus 82% on December 31, 2007. This change reflects the diversification of the retail partners in the portfolio.
The financial occupancy rate on assets held was 99.6% on June 30, 2008 (one space measuring 1,485 m² vacant in Saint Etienne du Rouvray), compared with 100% on June 30, 2007.
The default rate is very low: 0.1% on June 30, 2008.
The average occupancy cost ratio is 9.1%.
There were no changes in tenant mix or lease renewals with an impact on the lease income recorded for the six months ended June 30, 2008.
Outlook for the second half of 2008
In the second half of 2008, the lease income earned by Klémurs will be positively impacted by the acquisitions made in the course of the first half, i.e., the 15 additional Buffalo Grill restaurants, the 77 retail properties acquired on April 30, 2008, and the 14 assets located in Avranches, Rochefort and Messac acquired in April 2008. Over the full six-month period, these assets should produce €4.7 million in rental revenues. In the first half of 2008, they contributed only €1.3 million. The new investments made should be supportive of high growth in net current cash flow per share.
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Segment Earnings
Retail properties segment 06/30/2008 06/30/2007 Change (€M) Change (%) Lease income 15.1 11.4 3.7 32.3% Other rental income --- - - Rental income 15.1 11.4 3.7 32.3% Non recovered land expenses (0.0) - (0.0) Building expenses (owner) (0.4) (0.3) (0.1) 18.7% Net lease income 14.7 11.1 3.6 32.6% Management, administrative and related income 1.4 0.6 0.8 139.3% Other operating income 0.1 - 0.1 Survey and research costs (0.0) - (0.0) Payroll expenses (0.8) (0.3) (0.6) 192.9% Other operating expenses (0.4) (0.1) (0.2) 214.3% EBITDA 14.9 11.2 3.7 33.03% D&A allowance on investment and arbitrage property (4.8) (3.6) (1.2) 32.6% D&A allowance on PPE - (0.0) 0.0 (100%) Provisions (0.0) - (0.0) OPERATING INCOME 10.1 7.6 2.5 32.9% Proceeds of sales --- - - SEGMENT EARNINGS 10.1 7.6 2.5 32.9%
Lease income from the Retail segment amounted to €15.1 million for the six months ended June 30, 2008. Lease income includes the acquisition on April 30, 2008 of 77 retail properties, including 67 Défi Mode stores, with an impact of €1.0 million on rental revenues, and various commercial assets that are mostly held by Cap Nord, acquired on March 29, 2007.
Building expenses are mainly in the form of fees paid to outside service providers, in particular for asset appraisals. The fee income for rental management and administrative services paid to Klépierre Conseil are eliminated in this presentation.
Management and administrative fee income amounted to €1.4 million, pertaining principally to the fees paid to acquire the Défi Mode retail properties.
Payroll and operating expenses amounted to €1.2 million, and include the allocation of the cost of personnel assigned to the management and development of the Company.
Depreciation and amortization for the period totaled €4.8 million, an increase of 32.6% that is attributable to the consolidation of Cap Nord and a number of different acquisitions made in the second half of 2007 and in the first half of 2008.
Retail segment earnings amounted to €10.1 million for the period, up by 32.9% compared with June 30, 2007.
Office Segment
Property Market Trends in the First Six Months of 2008 (Source CBRE – EXA)
The rental market
Rental transactions
With 1,175,000 m² let over the period, placed demand is down by 19% compared with the first six months of 2007, but remains sustained in a climate of economic and financial uncertainty.
Supply
Immediate supply is up by 7% compared with January 1, 2008, reaching 2.6 million m².
Average vacancy in the Ile-de-France region is up slightly (5.1%), but the changes are quite diverse depending on the sector. For La Défense and Neuilly-sur-Seine, the decline was significant (3.7% and 4.7%), whereas for the Northern Belt, the increase was 30%, to 12.5% vacancy. Future supply available in less than one year (4.2 million m²) rose slightly from 3.8 million m² on January 1, 2008.
Rental values
Average face rental revenues were up slightly, in particular due to a significant rise in rental revenues for prime properties at La Défense.
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Rental revenues for prime products in Paris are stable (€772/m²).
Commercial incentives are once again on the rise.
The investment market
• A clear slowdown in transactions, with €7.1 billion in France, including €4.7 billion in Ile-de-France (€10.9 billion in the first half of 2007). • Offices represent 82% of all commitments. • French investors are still the most active (39%), followed by the Germans (16%). Conversely, UK investors (6%) and American investors (15%) are less prevalent. • The absence of recent significant transactions recently gives little indication of the yields currently in force in the market.
Office Property Investments and Disposals
Over the first six months of 2008, no properties were disposed of. However, in early July, a purchase agreement on the Notre-Dame-des-Victoires building (Paris 2) was signed for €64.9 million (net seller), up by 5.9% over the last appraised value. This sale will be completed at the latest by the third quarter, as part of an asset exchange.
Construction of the Séreinis building at Issy-les-Moulineaux continued, generating an outlay of €11.1 million in the first six months of 2008. Lease-up on the building began in the early part of this year, and several large groups have indicated their interest in this office complex. The delivery date on the building is the very beginning of 2009.
Rental revenue
Gross lease income for the first six months of 2008 was €25.4 million, up by €1.1 million compared with the first six months of 2007. The rise is primarily related to relettings and lease renewals completed at the end of 2007: €1.7 million of additional rental revenues on a constant portfolio basis, €0.6 million of rental revenues lost on the three building sold in 2007.
On a constant portfolio basis, rents rose by 7.1%, from €23.7 million on June 30, 2007 to €25.4 million on June 30, 2008. This €1.7 million increase breaks down as follows:
• index-linked rent adjustments added €1.0 million in rental revenue over 2007 (+4.1%), • relettings signed in 2007 and 2008 produced €0.9 million in additional rents (+4.0%), • the vacancy at 192, avenue Charles de Gaulle in Neuilly-sur-Seine following the restructuring of one-third of the total floor area, generated a loss of €0.2 million over the six-month period. Four leases were terminated over the course of the first six months of 2008, representing total weighted leasable floor area(1) of 4,738 m². Two of these terminations involved small spaces (348 m²), for which a termination payment was granted or the space was taken over by another tenant already present in the building.
The two others concern departures of tenants over the second half of 2008. These spaces are, in one case being relet and, in the other case, being restructured or brought up to standard after the tenant’s departure.
Six leases corresponding to new lease-ups, renewals or additional clauses signed will generate €1.3 million on the full year. These signatures concern floor area of 2,494 m². Their financial conditions are up by 23.6% compared with previous conditions, after deducting rent holidays or step rent granted to tenants.
The most significant transaction of the first half of 2008 was the signature of an additional clause to extend the floor area (1,097 m²) of a tenant occupying the building at 192, avenue Charles de Gaulle in Neuilly-sur-Seine in return for a 56.1% increase in rental revenue compared with the former terms and conditions. This additional clause was signed for a firm term of 3.75 years.
The financial occupancy rate on June 30, 2008 was 96.1% (versus 99.1% on June 30, 2007). The decline in the occupancy rate is related to vacancies in the building at 192, avenue Charles de Gaulle in Neuilly-sur-Seine.
(1) Floor area figures are given as weighted m² U.W. = various types of office space (Offices, Archives – Parking – Employee Food Services) are weighted to calculate a price per square meter of office space for all space in the office building.
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At June 30, 2008, the lease portfolio represents rental volume of €55.0 million. Lease expiration dates are provided in the table below:
Lease Rents (€M) by next exit Rents (€M) by lease Year option % of total end date % of total 2008 2.2 4.1% 2.2 3.9% 2009 12.9 23.4% 4.5 8.2% 2010 11.7 21.2% 0.7 1.2% 2011 23.1 42.0% 8.2 14.9% 2012 0.0 0.0% 5.1 9.3% 2013 0.0 0.0% 7.7 14.1% 2014 0.0 0.0% 4.0 7.3% 2015 5.0 9.1% 10.6 19.2% 2016 and beyond 0.1 0.2% 12.0 21.9% TOTAL RENTS 55.0 100.0% 55.0 100.0%
As of June 30, 2008, 9,289 m² are in lease-up, representing total potential rental revenues of €3.9 million. Renewals coming up in the second half of the year 2008 concern 5,117 m² (eight leases), €2.2 million in rental revenues and 4.1% of total rental revenues. These lease-ups and renewals would increase rental volume by €2.3 million (+4.2% compared with total rents rental revenues today).
Segment Earnings
Offices segment 06/30/2008 06/30/2007 Change (€M) Change (%) Lease income 25.4 24.3 1.1 4.5% Other rental income --- Rental income 25.4 24.3 1.1 4.5% Land expenses (real estate) (0.1) (0.1) 0.0 (2.8%) Non recovered land expenses(1) (0.4) (0.6) 0.1 (23.6%) Building expenses (owner)(1) (0.4) (0.4) (0.0) 8.1% Net lease income 24.4 23.2 1.2 5.1% Management, administrative and related income 0.0 0.2 (0.1) (82.3%) Other operating income 0.0 1.1 (1.1) (97.5%) Payroll expenses (1.1) (1.1) (0.1) 5.3% Other operating expenses (0.3) (0.3) 0.0 (11.8%) EBITDA 23.1 23.1 (0.0) 0.0% DSA allowance on investment and arbitrage (5.9) (6.3) 0.3 (5.4%) property DSA allowance on PPE (0.5) (0.4) (0.0) 8.2% Provisions - - - - OPERATING INCOME 16.7 16.4 0.3 1.8% Proceeds of sales 0 (21.0) 21 -- SEGMENT EARNINGS 16.9 37.4 (20.7) (55.3%) (1) 2007: after reclassification of property taxes and non-recovered rental charges
Lease income for office properties rose by 4.5% to €25.4 million. This increase is related in particular to the lease renewals and relettings completed at year-end 2007.
Land expenses pertain to the amortization of the building lease for the building at 43 Grenelle.
Non-recovered charges amounted to €0.4 million, mainly due to the cost of the vacancy in the building at 192, Charles de Gaulle (Neuilly-sur-Seine).
Owner’s building expenses rose slightly. Expenses for the first six months of 2007 included income related to the reinvoicing of work to tenants.
Net rental revenues amounted to €24.4 million, up 5.1%.
At the June 30, 2007 reporting date, management and administrative fee income was €0.2 million, and included fees for the management of the Front de Paris building, the mandate for which ended when the asset was sold on January 15, 2007.
In 2007, other operating income included an indemnity of €0.7 million paid in connection with a tenant dispute.
Payroll expense was €1.1 million, stable compared with the first half of 2007.
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EBITDA amounted to €23.1 million, stable compared with the first half of 2007.
Depreciation and amortization decreased by €0.3 million due to asset sales.
No capital gains were generated in the first half of 2008. In the first half of 2007, a capital gain of €20.3 million was generated on the sale of the building at 5, rue de Turin (Paris 8th) and the indivisible ownership of a share in the Front de Paris building.
Office segment earnings for the six-month period totaled €16.7 million, a decline of 55.3%.
Revalued Net Assets
Methodology
We adjust the value of our net assets per share on December 31 and June 30 of each year. The valuation method used entails adding unrealized capital gains to the book value of consolidated shareholders’ equity. These unrealized gains reflect the difference between estimated market values and the net values recorded in the consolidated financial statements.
Valuations
We entrust the task of appraising our real estate holdings to various experts. For our office holdings, appraisals are conducted jointly by Atisreal Expertise (formerly Coextim) and Foncier Expertise.
For shopping center assets, appraisals are performed by the following experts:
• Retail Consulting Group Expertise (RCGE) is responsible for appraising the entire French portfolio except for Progest, plus about 50% of all holdings in Spain (centers held by Klecar Foncier Espana and Klecar Foncier Vinaza) and all holdings in Italy, the Czech Republic, Slovakia, Belgium, Portugal and Greece. • Cushman & Wakefield appraise the other half of the Spanish portfolio (centers owned by Klecar Foncier Iberica). • ICADE Expertise performs the appraisals for the Progest portfolio in France as well as all property appraisals carried out on Polish and Hungarian holdings. All of these appraisal assignments are awarded on the basis of the Real Estate Appraisal Guidelines (Charte de l’Expertise en Evaluation Immobilière) and in accordance with the recommendations issued by the COB/CNC “Barthès de Ruyter Work Group.” Fees paid to appraisers are set prior to their property valuation work, on a lump sum basis in accordance with the size and complexity of the assets being appraised, and independently of the appraised value of the assets.
June 2008 Appraisal fees Consulting fees Retail Consulting Group Expertise 254 0 Icade Expertise 130 268 Cushman & Wakefield 75 0 Foncier Expertise and Atisreal Expertise 31 0 excl. VAT in thousands of euros
Offices
The appraisers combine two approaches: the first entails a direct comparison with similar transactions completed in the market during the period, while the second involves capitalizing individual yields (observed or estimated). An analysis of these yields reveals that one of three situations prevails: lease income is either substantially equal to, higher than or lower than market value.
If lease income and market value are substantially equal, the lease income used in the valuation is the actual lease income earned on the property. If lease income is higher than market value, the valuation uses market value and takes into account a capital gain calculated from the discounted value of the difference between actual lease income and market value.
If lease income is lower than market value, the appraisers considered the scheduled term of the corresponding lease, at which time the rental price will be aligned with going rates. Pursuant to the French decree of September 30, 1953, the rental prices of properties that are used solely as office premises are automatically aligned with market rates when the leases in question
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come up for renewal. Consequently, the appraisers worked from the assumption that the owners of such property would be able to align rents with market rates when the corresponding leases came up for renewal, and took into account the current conditions of occupation in the form of a capital loss calculated as before. However, unlike prior valuation adjustments, the appraisers did not limit their approach to properties coming up for renewal in the three years to come, on the grounds that the investors participating in current market transactions make projections that extend beyond this three-year horizon. In the second case, the financial capital gain observed was added to the appraised value derived, equal to the discounted value (at a rate of 5.5%) of the difference between actual lease income and market price until the first firm period of the lease expires. In the third case, a capital loss was deducted from the derived value, equal to the discounted value (at the rate of 5.5%) of the difference between actual lease income and market price until the lease expires.
Since December 31, 2005, the appraiser reasons on the basis of the rate of return (yield) and not on the basis of the capitalization rate. In other words, the rate that was used is that applied to the income determined as before to derive an appraised value inclusive of transfer duties. Before, the rate used resulted in a valuation exclusive of transfer duties.
The decision to use this rate results from an observation of the market, in the context of transactions actually completed by investors. To derive the appraised value exclusive of transfer duties, transfer duties and fees were deducted at the rate mentioned below.
Shopping centers
To determine the fair market value of a shopping center, appraisers apply a yield rate to net annual lease income for leased-up premises, and to net market price for vacant properties. The yield rate is applied after deduction of the net present value of all reductions or rebates on leases with minimum guaranteed rents, the net present value of all expenses on vacant premises, and work to be done that cannot be passed on to tenants for payment. A standard vacancy rate is established for each asset. The discount rate used is equal to the yield applied to determine fair market value.
Gross rental revenues include minimum guaranteed rent, variable rent and the market price of any vacant premises. Net rental revenue is determined by deducting all charges from the gross rent, including management fees, expenses borne by the owner and not passed on to tenants, and charges provisioned for vacant premises and average losses on unpaid rents observed for the last five years.
The appraiser determines the yield rate on the basis of numerous variables, in particular retail sales area, layout, competition, type and percentage of ownership, rental reversion and extension potential, and comparability with recent market transactions.
Because of the structure of its portfolio and in the interest of economy and efficiency, we use two methods to appraise the value of assets that pose particular assessment issues. Accordingly, assets being appraised for the first time and assets whose last appraised value is no more than 110% of the net book value (excluding deferred taxes) are appraised twice: once on the basis of yields (see discussion above) and once using the DCF (discounted cash flow) method.
This second method determines the value of a real estate asset as the sum of discounted cash flows using the discount rate defined by the appraiser.
The appraiser estimates all of the asset’s expected revenues and expenses and derives a terminal future value at the end of the period of analysis (10 years on average). By comparing market rental values and face rent values, the appraiser captures the property’s rental potential by using market rental values at lease expiration less costs incurred to relet the property. Finally, the appraiser discounts these projected cash flows in order to determine the present value of the property asset.
The discount rate takes into account the prevailing risk-free rate (10-year OAT), to which will be added a risk and liquidity premium based on the location, the key features and the occupation of each property.
Valuation of the Ségécé group
This appraisal, which is performed on our behalf by Aon Accuracy, is primarily based on a range of estimates obtained using the Discounted Cash Flow (DCF) method.
The DCF method consists of estimating the future cash flows of current business in the company’s portfolio before the explicit or implicit cost of financing is taken into account.
In the second step, whose aim is to estimate the value of the business portfolio, these cash flows and the estimated future value of the portfolio of business at the end of the projected period (terminal value) are discounted using a reasonable rate. This discount rate, which is derived on the basis of the Modèle d’Équilibre Des Actifs Financiers (MEDAF) formula, is the sum of the
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following three factors: the risk-free interest rate, the systematic risk premium (average expected market risk premium times the beta coefficient of the business portfolio) and the specific risk premium (to account for that portion of the particular risk that is not already integrated in the cash flows). The third and last step consists of determining the value of the company’s own equity by extracting net financial debt on the date of valuation from the portfolio’s total value and, where applicable, the estimated value of minority interests on that same date.
Assessing the value of debt and interest-rate hedging instruments
Effective December 31, 2005, RNAV incorporates the fair value of debt and interest rate hedging instruments that are not recorded under consolidated net assets pursuant to IAS 32-39, which essentially involves marking to market the fixed rate, non- hedged portion of debt.
RNAV including transfer duties and before taxation on unrealized capital gains
The valuation of properties is initially presented inclusive of property transfer duties.
Properties that are held for sale under a firm commitment on the date of the valuation are valued at their probable selling price, less related fees and taxes. For properties acquired less than six months before the date of the calculation, acquisition prices are used.
We do not adjust the values of shopping centers under development, even in cases where building permits have been granted. Until these shopping centers open, they are carried in the consolidated financial statements at cost, and this figure is used to calculate revalued net assets.
The Ségécé group is appraised annually using the method described in detail above. Equity interests in other service subsidiaries, including Klégestion and Klépierre Conseil, are not reappraised. This initial calculation provides revalued net assets “including transfer duties and before taxation on unrealized capital gains.”
RNAV excluding transfer duties
A second calculation is made to establish revalued net assets excluding transfer duties.
Duties on office properties are calculated individually using the rates set forth below.
Duties on shopping centers are calculated property by property for companies that own several real-estate assets, or on the basis of revalued securities if the company owns only one property asset. This approach was considered to be the most relevant considering that investors are more likely to acquire shares in companies that own shopping centers and that we are generally more likely to seek other backers for our projects than to sell full ownership in shopping centers. Naturally, transfer duties are calculated on the basis of applicable local tax regulations. For France, the rate used for transfer duties is 6.20%. We did not opt to use the most advantageous rate (1.8%) for properties that still fall within the scope of the VAT since we do not currently plan to sell within the prescribed deadline.
RNAV excluding transfer duties and after taxation of unrealized capital gains
A third calculation is made to establish revalued net assets excluding transfer duties and after taxes on unrealized capital gains. In the consolidated balance sheet, deferred taxes are recognized pursuant to accounting regulations in force, on the basis of appraised property values, for the portion which corresponds to the difference between the net book value and the tax value as determined by capital gains tax rates in force in each country. At the June 30, 2005 reporting date, the RNAV calculation was adjusted to include the tax on unrealized capital gains corresponding to the difference between the net book value and fair value on this same basis. At the December 31, 2005 reporting date, and to align our practices with those of our principal peers, we considered the type of ownership of our properties, using the same approach as that used to determine transfer duties. For office properties, the treatment is based entirely on property ownership, but since the entire scope benefits from tax exempt status as an SIIC, there is no unrealized taxation. For the shopping centers, and depending on the country, taxes on unrealized capital gains are based on the tax rate applied to the sale of buildings for companies that own several properties, and at the tax rate applicable to securities for companies that only own a single property.
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Revalued Net Assets at June 30, 2008
Appraisal results
The value of our real estate holdings including transfer duties was €12.0 billion (total share) and €10.7 billion (group share). Total share, shopping centers represent 85.3%, retail properties represent 5.2%, and offices represent 9.5%, while the group share percentages are 84.5%, 4.9% and 10.6%, respectively.
Assets acquired during the course of the first half are carried at their acquisition price and represent 2.4% of all holdings. Projects under development are valued at their cost price, i.e., 5.1% of all holdings. These projects are mainly Vallecas (Spain), Corvin (Hungary), the Séreinis office building in Issy-Les-Moulineaux, and the Montpellier Odysseum Place de France shopping center.
On a constant portfolio basis, shopping center assets increased in value by 1.1% during the six-month period ended, while the value of retail assets grew by 0.6% over the same period and the value of office assets increased by 2.4%. Over 12 months, the respective increases are 8.3% for shopping centers, 7% for retail assets and 6.9% for offices.
Holdings, Total Share (transfer duties included)
Change Over Six Months
Change, current Change, current 06.30.2008 12.31.2008 portfolio 06.30.2008 12.31.2008 portfolio Shopping centers France 5,739.6 5,564.4 175.2 3.1% 4,818.8 4,782.0 36.8 0.8% Spain 1,127.3 1,125.2 2.0 0.2% 1,013.3 1,013.8 (0.5) 0.0% Italy 1,504.4 1,327.6 176.8 13.3% 1,334.4 1,302.2 32.2 2.5% Hungary 589.6 496.2 93.4 18.8% 381.2 380.1 1.1 0.3% Poland 399.9 390.5 9.5 2.4% 314.6 309.2 5.4 1.8% Portugal 273.7 268.3 5.4 2.0% 273.7 268.3 5.4 2.0% Others 595.7 581.7 14.1 2.4% 595.7 581.7 14.1 2.4% Total Shopping centers 10,230.2 9,753.9 476.3 4.9% 8,731.7 8,637.1 94.6 1.1% Total Retail properties 621.5 457.2 164.2 35.9% 432.8 430.0 2.7 0.6% Total Offices 1,135.4 1,101.4 34.0 3.1% 1,077.9 1,052.3 25.6 2.4% TOTAL REAL ESTATE HOLDINGS 11,987.1 11,312.5 674.5 6.0% 10,242.3 10,119.4 122.9 1.2%
Change over 12 months
Change, current Change, current 06.30.2008 12.31.2008 portfolio 06.30.2008 12.31.2008 portfolio Shopping centers France 5,739.6 4,764.7 975.0 20.5% 3,999.3 3,594.2 405.1 11.3% Spain 1,127.3 1,119.4 7.9 0.7% 1,013.3 1,013.3 0.0 0.0% Italy 1,504.4 1,264.6 239.8 19.0% 1,304.9 1,217.0 87.9 7.2% Hungary 589.6 370.3 219.2 59.2% 364.8 354.3 10.4 2.9% Poland 399.9 293.0 106.9 36.5% 224.7 211.8 12.9 6.1% Portugal 273.7 190.4 83.3 43.8% 207.6 190.4 17.2 9.1% Others 595.7 542.4 53.3 9.8% 595.2 540.3 54.9 10.2% Total Shopping centers 10,230.2 8,544.9 1,685.3 19.7% 7,709.8 7,121.4 588.4 8.3% Total Retail properties 621.5 405.5 216.0 53.3% 391.7 365.9 25.8 7.0%
Total Offices 1,135.4 1 047.5 87.9 8.4% 1,077.9 1,008.5 69.3 6.9%
TOTAL REAL ESTATE HOLDINGS 11,987.1 9,997.9 1,989.2 19.9% 9,179.3 8,495.8 683.4 8.0%
In million of euros
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Holdings, Group Share (transfer duties included)
Change Over Six Months
Change, current Change, current 06.30.2008 12.31.2008 portfolio 06.30.2008 12.31.2008 portfolio Shopping centers France 4,823.7 4,663.5 160.2 3.4% 3,985.4 3,952.7 32.7 0.8% Spain 960.1 958.4 1.7 0.2% 846.1 846.9 (0.8) (0.1%) Italy 1,379.5 1,205.5 173.9 14.4% 1,210.0 1,180.1 29.8 2.5% Hungary 589.6 496.2 93.4 18.8% 381.2 380.1 1.1 0.3% Poland 399.9 390.5 9.5 2.4% 314.6 309.2 5.4 1.8% Portugal 273.7 268.3 5.4 2.0% 273.7 268.3 5.4 2.0% Others 580.0 566.7 13.2 2.3% 580.0 566.7 13.2 2.3% Total Shopping centers 9 006.4 8,549.0 457.4 5.4% 7,590.9 7,504.0 87.0 1.2% Total Retail properties 522.7 384.6 138.1 35.9% 364.0 361.7 2.3 0.6% Total Offices 1,135.4 1,101.4 34.0 3.1% 1,077.9 1,052.3 25.6 2.4% TOTAL REAL ESTATE HOLDINGS 10,664.6 10,035.0 629.5 6.3% 9,032.8 8,918.0 114.8 1.3% In million of euros
Change over 12 months
Change, current Change, current 06.30.2008 12.31.2008 portfolio 06.30.2008 12.31.2008 portfolio Shopping centers France 4,823.7 3,984.4 839.3 21.1% 3,409.7 3,062.1 347.5 11.3% Spain 960.1 952.6 7.5 0.8% 846.1 846.6 (0.5) (0.1%) Italy 1,379.5 1,148.2 231.3 20.1% 1,180.5 1,100.6 79.9 7.3% Hungary 589.6 370.3 219.2 59.2% 364.8 354.3 10.4 2.9% Poland 399.9 293.0 106.9 36.5% 224.7 211.8 12.9 6.1% Portugal 273.7 190.4 83.3 43.8% 207.6 190.4 17.2 9.1% Others 580.0 527.9 52.1 9.9% 579.5 525.8 53.6 10.2% Total Shopping centers 9,006.4 7,466.8 1,539.6 20.6% 6,812.7 6,291.6 521.1 8.3% Total Retail properties 522.7 341.1 181.7 53.3% 329.4 307.8 21.7 7.0% Total Offices 1,135.4 1,047.5 87.9 8.4% 1,077.9 1,008.5 69.3 6.9% TOTAL REAL ESTATE HOLDINGS 10,664.6 8,855.4 1,809.2 20.4% 8,220.0 7,607.9 612.1 8.0% In million of euros
Offices
The office portfolio is valued at €1,135.4 million.
Four of these properties have an estimated unit value that exceeds €75 million, representing 48.8% of the total appraised value of this portfolio. Four have a unit value of between €75 million and €50 million, representing 23.7% of the total appraised value of this portfolio, and 12 have an appraised value that is less than €50 million.
On a constant portfolio basis, the value of our office assets increased by 2.4% on a total share basis over six months (6.9% over 12 months), of which 4.3% is attributable to higher income, partly offset by higher yields (-1.9%).
On a current portfolio basis, the change is 3.1% over six months (8.4% over 12 months) and takes into account the status of the Séreinis project in Issy-les-Moulineaux.
Based on appraised values at June 30, 2008 (transfer duties included), the immediate yield on the portfolio was 5.4%, up by 10bps base compared with December 31, 2007 (5.3%).
Shopping centers
Our shopping center holdings are valued at €10,230 million (€9,006 million, group share), an increase of €476 million compared with December 31, 2007 (+4.9%). Over 12 months, the portfolio increased by €1,685 million compared with the first six months of 2007 (+19.7%).
40 facilities and projects have an estimated unit value that exceeds €75 million, representing 57.5% of the total estimated value of this portfolio, 98 have a unit value between €75 million and €15 million, and 127 have a unit value of less than €15 million.
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On a constant portfolio basis, our shopping center holdings, including transfer duties, increased in value by 1.1% over six months (8.3% over 12 months), of which 2.2% is attributable to higher income, partly offset by higher yields (-1.1%).
External growth explains €382 million of the rise in value on a current portfolio basis. The increase in assets includes, in particular:
- in France, the valuation of new expansions (Laon, Nîmes, Orléans, Rambouillet), supermarkets and extension projects in the Toulouse region, and the Valence-Victor Hugo center.
- abroad, the acquisition of the Lublin center in Poland, the Italian centers of Lonato and Verona, and the opening of the Varese extension (Italy).
- projects under development also contribute to the increase, via the progress made on the Corvin project (Budapest) for €67 million, and the Alba extension project (Hungary) for €24 million; in France, the Aubervilliers and Montpellier-Place de France projects.
The average yield on the portfolio at June 30, 2008 was 5.5%, including transfer duties, based on appraised values at June 30, 2008.
Retail The value of the retail property portfolio was €621.5 million (€522.7 million, group share), an increase of 35.9% over six months (53.3% over 12 months).
On a constant portfolio basis, the value of retail properties (transfer duties included) rose by 0.6% (€2.7 million) over six months (7.0% over 12 months), of which 0.9% attributable to higher income and -0.3% to higher yields.
External growth provided €161.5 million to the increased value of the portfolio. On a current portfolio basis, the increase in assets includes the acquisition of 77 assets, mostly from Défi Mode (€1,16.6 M), and 14 assets located in Avranches, Messac and Rochefort-sur-mer (€17.7 million).
The average yield on the portfolio is 5.8% based on the appraised values (transfer duties included) on June 30, 2008.
On June 30, 2008, revalued net assets were up by 3.5% over six months
Based on transfer duties included appraisals, revalued net assets after deferred taxation and marking to market of debt came to €42.5 per share, compared with €41.1 per share on December 31, 2007 and €36.3 per share on June 30, 2007 (increases of 17.1% over 12 months and 3.5% over six months).
Transfer duties excluded, revalued net assets after deferred taxation and marking to market of debt came to €40.0 per share, versus €38.6 per share on December 31, 2007 and €34.2 per share on June 30, 2007.
Determination of Revalued Net Assets
06.30.2008 12.31.2007 06.30.2007 Over 6 Over 6 Group share months Group share months Group share Consolidated shareholder’s equity 2,184 2,001 1,933 Real estate companies goodwill (9) (9) (6) Unrealized portfolio 3,665 3,487 2,954 Appraised value 10,664 10,035 8,854 Net book value (6,999) (6,548) (5,900) Unrealized capital gains on non-real estate assets 49 67 103 Ségécé group capital gain 49 67 103 Tax on unrealized capital gains (199) (172) (177) Restatement of deferred taxes on securities 112 124 125 Taxes and fees related to the sale of assets (344) (332) (283) Revalued Net Assets 5,457 5,166 4,648 Marked to market of fixed rate debt excluding IAS 32-39 129 70 43 (CM) Number of shares, fully diluted 139,493,023 135,502,224 137,004,399 NAV excluding transfer duties, after taxes on unrealized 39.1 2.6% 38.1 12.4% 33.9 capital gains (in €per share) NAV excluding transfer duties, after taxes on unrealized 40.0 3.6% 38.6 12.9% 34.2 capital gains and marking to market of fixed-rate debt, in €per share NAV including transfer duties, after taxes on unrealized 42.5 3.5% 41.1 13.2% 36.3 capital gains and marking to market of fixed-rate debt, in €per share In million of euros
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Recent Trends and Outlook
Recent Developments
After the June 30, 2008 closing, we acquired the Polish shopping center in Pilzen for a total investment of €61.4 million (signed on July 11, outlay planned for July 31, 2008), bringing the number of assets owned in Poland to eight.
A purchase agreement was also signed in July pertaining to an asset swap: sale of the office building at 46 rue Notre- Dame-des-Victoires and the acquisition of the Drancy shopping center.
Finally, on July 21, we signed a purchase agreement on the Caen Paul Doumer center for a total of €28 million (net seller).
Also in July, we were granted the permit needed to begin work on the shopping center at Gare Saint Lazare in Paris (the Autorisation d’Occupation Temporaire).
Work on the future shopping center in Aubervilliers also commenced.
Pursuing plans to create Europe’s leading shopping center and retail owner, developer and manager and to diversify its economic base, we have just announced—pending the customary regulatory approvals—the joint acquisition with the Dutch pension fund ABP—of the number one in Scandinavia, Norway’s Steen & Strøm, for €2.7 billion. Steen & Strøm own 30 shopping centers in Norway, Sweden, and Denmark that together represent holdings valued at nearly €2.5 billion in total. Full year, net rental revenues are expected to reach €154 million. The company also has a pipeline of quality development projects in its Scandinavian portfolio worth more than €1 billion, including €0.5 billion in committed projects.
When this transaction is completed, the total share value of our holdings will be €14.5 billion, and its development project pipeline will be worth €4 billion, of which €1.8 billion committed.
In light of existing debt and its 56.1% interest (to ABP’s 43.9%), our total investment is around €600 million. It is expected that the deal will close in early September 2008. We have the ability to mobilize adequate resources to pay the amount falling due at this time, but plan to refinance possibly one-third to one-half of this investment subsequently by increasing capital (with preferential rights maintained). The principle, the procedures and the detailed timetable of this deal, which will be described in a prospectus submitted to the approval of the AMF (Autorité des marchés financiers), will be determined at a later date. BNP Paribas, our largest shareholder, has already notified the Company of its intention, in principle, to participate for at least the value of its current equity interest in Klépierre.
To the best of the Company’s knowledge, there are no risks or uncertainties likely to impact the second half of 2008 apart from those risk factors described on pages 30-33 of our 2007 Shelf Registration Document.
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Comparison of December 31, 2007 to December 31, 2006
Shopping Centers
Economic Growth Rates
European growth was resilient in 2007 despite various adverse developments in the international markets (collapse of the U.S. residential real estate market, turbulence in the financial markets, sharply rising oil prices, etc.). Growth for the euro zone as a whole reached 2.6%, in line with forecasts (source: OECD). Higher than average GDP growth was recorded for Slovakia (+9.3%), Poland (+6.5%), the Czech Republic (+6.1%), Greece (+4.1%) and Spain (+3.8%). Belgium matched the euro zone (+2.6%), coming in ahead of other countries where growth was more modest: France (+1.9%), Hungary (+1.8%), Italy (+1.8%) and Portugal (+1.8%).
Consumer Spending
In 2007, spending trends were positive in our shopping centers, which reported aggregate retail sales growth of 3.2% compared with the previous year. Geographically, we observed sales growth across the board, with the exception of Italy. Growth remained strong in France (+3.3%). In Spain, the figure was +4.7%, while Italy showed a slight decline (-0.4%). Excluding the impact of two shopping centers that have suffered from recent increases in competition in the suburbs around Rome, sales would have increased by 3.5% in Italy. Slovakia (+7.0%) and the Czech Republic (+5.4%) showed strong results, while Portugal recovered (+2.6%) after underperforming in 2006.
The three principal retail sectors continued to perform well in 2007: Personal Products (+3.5%), Culture/Gifts/Entertainment (+4.6%), and Beauty/Health (+6.2%). All sectors experienced sales growth, with the exception of Household Goods.
France. December retail sales in France declined in 2007 (-2.8% for small retailers, according to Banque de France figures). Shopping centers included in the Klépierre portfolio, however, were impacted to a lesser degree, since sales were up by 1.0%. As a result, 2007 ended on a satisfactory note, with sales revenue growth of 3.3% over the previous year.
Performance was even better outside of urban areas, particularly at inter-city shopping centers (+4.6%). Growth was also significant at regional shopping centers (+3.3%). And while city center locations still managed to post revenue growth of 1.3%, the sales results were weighed down by lower business volume at Marseille Bourse (reflecting downtown construction and the opening of two new Fnac outlets, one in the Marseille suburbs, the other in Aix-en-Provence) and Poitiers Cordeliers (with two new competitors entering the market). The 2007 results do not include Valenciennes Place d’Armes, a shopping center that opened in April 2006 and whose year-over-year sales of €66.6 million represented an increase of 14.1% over the comparable period of May–December 2007/2006. Aside from household goods, a segment that accounts for less than 7% of total shopping center sales, all retail segments reported growth during the period: Beauty/Health (+6.6%), Personal Products (+4.8%), Culture/Gifts/Entertainment (+3.7%), and Restaurants (+1.7%).
Belgium. In 2007, sales at the Esplanade shopping center in Louvain-la-Neuve jumped 20.2% to €143.5 million. The shopping center has maintained its strong growth momentum, which received an additional boost from the opening of a Fnac store.
Portugal. The Gondomar shopping center saw sales growth of 14.7%, helped in particular by the arrival of Media Markt in July 2007. Sales generated by the supermarket shopping centers acquired from Carrefour were up by 5%, except for the Gaia center (-1.6%).
Italy. Sales growth for the year was basically flat (-0.4%). The Romanina and Tor Vergata shopping centers felt the effects of two new competitors, especially Roma Est (which has 210 shops with total floor area of 100,000 m²). Excluding the Romanina and Tor Vergata locations, shopping center business rose by 3.5%.
Spain. The overall sales trend at our Spanish shopping centers was highly encouraging. Business was up at all the larger shopping centers, and particularly strong at the Peñacastillo, Gran Sur and Meridiano locations. A majority of the supermarket shopping centers also turned in positive figures.
The Czech Republic and Slovakia. Sales increased by 5.4% in the Czech Republic and by 7.0% in Slovakia, a trend driven by favorable trends in consumer spending. Leading the way was the Novo Plaza shopping center, which opened in Prague in March 2006, with sales up by 21.3%.
Greece. Business improved slightly in 2007, after having been negatively impacted in 2006 by the introduction of a new competitor, Cosmos, at the Makedonia center.
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Rental Revenues
Shopping center rents for the year ended December 31, 2007 rose to €517.9 million (versus €455.1 million at December 31, 2006), up by 13.8%. Of the total, variable rents accounted for €12.1 million. On a constant portfolio basis, rents rose by 5.3%.
Change in tenant mix Lease renewals Nbr Change in % Nbr Change in % France 238 21.9% 235 20.0% Italy 35 29.2% 60 26.3% Spain* 127 10.0% 168 7.9% Hungary 168 (3.2%) 197 1.0% Poland 48 (3.1%) 23 7.9% Belgium 4 24.8% - - Portugal 44 (17.6%) 22 (1.7%) Czech Republic 35 20.8% 20 34.3% Greece 7 1.8% 1 17.1% Slovakia 2 28.9% - - TOTAL EUROPE 708 11.0% 726 15.1% * Excluding so-called shared zone activities.
Impact of index- linked rent adjustments Occupancy rate Default rate France 5.6% 99.0% 0.4% Italy 1.7% 98.0% 2.3% Spain 2.5% 97.1% 1.3% Hungary 1.6% 97.1% 3.7% Poland 1.7% 96.5% 6.5% Belgium 1.6% 97.5% 5.5% Portugal 2.4% 97.5% 5.4% Czech Republic 1.7% 97.2% 9.0% Greece 3.5% 97.2% 2.9% Slovakia 1.7% 95.6% 22.3% TOTAL EUROPE 3.8% 98.3% 1.8%
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France
Shopping center rental revenues totaled €266.0 million for the year ended December 31, 2007, an increase of 16.0% versus the prior year.
On a constant portfolio basis, the 7.2% increase primarily reflects:
• Index-linked rent adjustments to base rents, which increased by an average of +5.6% overall. The majority of our leases (79% in value terms) are indexed to the ICC construction index for the second quarter of 2006, which recorded a 7.05% increase; and • Reletting of leases and lease renewals in 2006 and 2007 led to an increase in the rental value of the portfolio.
The major factors that led to the increase in rents on a current portfolio basis as opposed to a constant portfolio basis are listed below:
• The acquisition of equity interests in various portfolio companies of Progest, the owner of shopping centers including Tourville La Rivière, Osny L’Oseraie and Creil, and of the retail park at Creil-Saint-Maximin. This transaction contributed €7.2 million to total rental revenues for the year ended December 31, 2007; • The acquisition of supermarkets and additional lots at the Blagnac and Saint-Orens locations in July 2007, which contributed €3.2 million; • The opening of the Angoulême Champ de Mars shopping center in September 2007, which contributed €2.2 million; • The opening of the Rambouillet shopping center extension in June 2007, which contributed €1.5 million; and • The full year impact of properties acquired in 2006: the new Place d’Armes shopping center in downtown Valenciennes (+€1.4 million) and the Toulouse Purpan suburban shopping center (+€1.5 million).
Additional variable rent for 2007 totaled €7.0 million, versus €7.5 million for the prior year. As a result of the significant index-linked rent adjustments in 2007 for French properties, a portion of these variable rents were integrated in base rents, accounting for the decline.
Rent renegotiations involved 238 relettings (with base rents up by an average of 21.9%, and 235 lease renewals, up 20.0%).
The average occupancy cost ratio (rent + utilities/revenues excluding tax) was 9.5% on December 31, 2007, versus 9.1% on December 31, 2006. This change is directly attributable to the strong index-linked rent adjustment applied to the majority of French leases in 2007. The occupancy cost ratio nonetheless remains reasonable.
The default rate was 0.4% (compared with 0.3% on December 31, 2006). The financial occupancy rate was 99.0% on December 31, 2007 (versus 99.3% on December 31, 2006).
At the end of 2007, our biggest retail partners were the PPR group (4.3% of total rents, due in large part to Fnac), followed by the Auchan group (excluding supermarkets, 4.0%) and the Vivarte group (3.0%). The concentration of rents among retail tenants remained low, limiting rental risks.
Spain
Rental revenues for 2007 totaled €65.3 million, up by 9.3% versus the prior year. The only change in scope was the inclusion of a full year of revenues in 2007 from the Vega Plaza shopping center in Molina de Segura, which was acquired in June 2006.
On a constant portfolio basis, the increase in rents (€62.5 million) amounted to 4.6%, of which 2.5% related to index- linked adjustments to base rents. Variable rents totaled €1.1 million in 2007, an increase of 20.4% versus the prior year. The Meridiano shopping center (Tenerife) alone accounted for 18% of variable rents from Spanish properties. The strong rise is also due to ongoing improvements in the capture and verification of sales figures reported by retail tenants.
In the course of 2007, there were 24 lease-ups, 137 relettings to new commercial tenants (+9.2%) and 258 leases renewed (+4.5%). Excluding the renewals of leases for telephone booths and ATMs, lease renewals rose by 7.9%.
The default rate was 1.3%, which remained largely unchanged since December 31, 2006 (1.2%) and showed improvement over June 2007 (1.5%). The financial occupancy rate, which had been declining since December 2006 (98%),
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remained at its June 30, 2007 level (97.1%). Restructuring projects currently under way accounted for two-thirds of the financial vacancy rate at year-end 2007.
The occupancy cost ratio at year-end 2007 was 11.3% (compared with 11.5% at year-end 2006). Retail concentration remains low: together, the top 10 retailers account for 29.6% of rents. The Inditex group accounts for 6.1%, followed by Cenesa (5.2%), Alain Afflelou (2.8%), Belros (2.7%), Yelmo (2.6%), and McDonalds (2.4%). The next four retail tenants account for between 2.4% and 1.4% of total rents.
Italy
Rental revenues from our Italian shopping center properties totaled €79.2 million, an increase of 7.2% that reflected the impact of the Giussano and Varese shopping center expansions, which opened in 2006, and the Bari extension, the first portion of which opened in December 2007.
Variable rents came to €1.2 million, an increase of 17.6% due to substantial increases in sales.
On a constant portfolio basis, the increase was 5.1%, of which 1.7% is due to index-linked rent adjustments.
Upward revisions to rents in 2006 (+26%) made the most significant contribution to this sustained upward trend, which continued in 2007 with:
• 35 relettings to new commercial tenants (+29.2%); • 60 leases renewed (+26.3%); and • 12 lease-ups.
The default rate was 2.3% on December 31, 2007, a significant improvement compared with June 2007 (3.3%), but slightly higher than at year-end 2006 (2%), attributable to the difficulties encountered by the La Romanina shopping center, which faces an intense competitive environment. A major restructuring plan is in the project phase. The financial occupancy rate stands at 98%, an improvement compared with June 30, 2007 (97.6%) and December 31, 2006 (97.9%).
The occupancy cost ratio has stabilized over the last 18 months. At 9.4% on average, it remains reasonable.
Retail concentration remains low. The largest retail tenant, the Mediaworld group, represents 5.7% of total rents, while the next nine retailers (Inditex, Benetton, Risto, Miroglio, Oviesse, Piazza Italia, Cisalfa, Scarpe Scarpe, Intimissimi) account individually for between 2.9% and 2%. Together, the top 10 retailers provide 27.6% of total rent.
Hungary
Rental revenues totaled €29.8 million for the year ended December 31, 2007. The 1% increase over the prior year is attributable to the acquisition of 11,500 m² in June 2007 of office space that is integrated with the Duna Plaza shopping center. Through this acquisition, we have become the sole owner of the real estate complex, which we hope will ultimately facilitate the eventual completion of a major extension project. We are extending a major merchandising overhaul to our entire portfolio of properties in Hungary.
Media Markt opened its doors in October 2007 at Duna Plaza, and C&A in May 2007 in Miskloc. For the two centers, the expected capital gain in 2008 versus 2007 rents is an estimated €268,000 and €145,000, respectively. Other positive impacts of restructurings under way or completed are expected in the course of 2008, including that linked to the arrival of Hervis at Szeged.
There was a significant number of new contracts in this portfolio, with 33% of all leases impacted in 2007 by a rental change: 52 lease-ups (+€610 thousand), 168 relettings to new tenants (-3.2%) and 197 lease renewals (+1%). Results varied depending on the centers, with the Duna Plaza restructuring during fiscal 2007 weighing heavily on the global result. Excluding Duna Plaza, rent increases amounted to +1.4% for 134 relettings to new commercial tenants and +3.1% for 162 lease renewals.
On a constant portfolio basis, and in light of the specific context of this restructuring, rental revenue declined by 1.1% in spite of index-linked adjustments of 1.6%.
Due to the rollout of a system for capturing and verifying sales figures, a significant increase in variable rents was invoiced (€361,000 in 2007, compared with €50,000 in 2006).
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The financial occupancy rate (97.1%) for the year ended December 31, 2007 showed improvement over the June 2007 rate (96%), as restructurings were completed. The large number of pending transactions explains the slight decline with respect to December 2006 (97.7%). The default rate was 3.7% at year-end 2007 (3.5% on December 31, 2006).
Retail concentration at December 31, 2007 was relatively low, with the top 10 retailers representing 26.1% of total rental revenue. Match remains the largest tenant (4.8%), followed by Mercur Star (3.6%), Pesci Direkt (3.2%), IT Cinema (3%) and Jeans Club (2.4%). The next five retail tenants represent between 2.3% and 1.4% of the total.
The average occupancy cost ratio for tenants, including utilities, was 12% on December 31, 2007. Given the insufficient sample of sales figures examined to date, this ratio should not be considered as particularly representative. The increase in additional rents that was mentioned above suggests that there is potential for improvement in the total rental revenue.
Portugal
Rental revenue amounted to €15.7 million in 2007, compared with €11.6 million for the year ended December 31, 2006, a rise that was attributable to the integration of Minho Center in Braga, which was acquired in December 2006, and full ownership of Parque Nascente in Gondomar following the buyout in September 2007 of shares owned by the other investor.
Variable rents (€1.1 million) continued to rise (+60.3%) thanks to the performance of mid-sized units.
On a constant portfolio basis, the increase of 2.7% is primarily the result of two factors: index-linked rent adjustments (+2.4%) and rent increases. With respect to the latter, there were six lease-ups, 44 relettings to new commercial tenants (-17.6%) and 22 leases renewed, mainly involving Lourès, which faces fierce competition (-1.7%).
The relettings to new commercial tenants reflect the impact of the restructuring that was completed in 2007 on Parque Nascente, which enabled Media Markt to move in and resulted in changes to the food court. Excluding these operations, relettings to new commercial tenants generated an improvement of 3% compared with the previous rent paid.
The default rate was 5.4%, down from June 30, 2007 (10.1%). Further improvement is expected in 2008 with the restructuring planned for Parque Nascente, which will allow for the settlement of a dispute with the operator of the bowling alley and a reduction in the default rate for the center (from 5.7% at year-end 2007 to an estimated 4.0%).
The financial occupancy rate for the year was 97.5%, an improvement since June 30, 2007 (95.9%) that came despite a vacancy related primarily to restructurings under way for Parque Nascente.
The occupancy cost ratio was 11.6% on December 31, 2007, compared with 12.6% at year-end 2006. This improvement reflects the improvement in retail sales.
The retail concentration showed improvement, with the ten largest retail groups representing 31.1% of total rents, compared with 31.4% on June 30, 2007. The largest tenant is the Aki-Leroy Merlin group (9.5%), followed by Toys’R Us and Inditex (4.2% and 4.1%, respectively). The next seven retailers account for between 2.7% and 1.5% of total rents.
The Czech Republic – Slovakia
Rental revenues amounted to €15.5 million. On a current portfolio basis, Czech rents increased by €1.7 million reflecting the acquisition of the Novo Plaza center in late June 2006. On a constant portfolio basis, rents increased by 5%, attributable to the combined impact of index-linked rent adjustments (+1.7%) and rental reversion efforts carried out in both 2006 and 2007. In the course of 2007, a total of 35 relettings to new commercial tenants (+20.8% versus previous lease terms and conditions) and 20 lease renewals (+34.3%) were completed.
In Slovakia, rents collected from tenants in the Danubia shopping center were up by 11.7% on a constant portfolio basis, reflecting the full impact of the changes in tenant mix that were effected in 2006 for a mid-sized store and for two boutiques in 2007 (+28.9%). The impact of index-linked rent adjustments was limited to 1.7%.
The financial occupancy rates in the Czech Republic are 100% for Novy Smichov and 89.5% for Novo Plaza (an improvement over June 2007, 84.8% of which reflects a change in tenant mix) and 95.6% for Danubia in Slovakia (compared with 93.8% at the end of 2006). The default rate was 2.3% for Novy Smichov, 29.8% for Novo Plaza and 22.3% for Danubia. This last high rate reflects three legal disputes – absent these disputes, the rate would be only 6.9%. In the case of Novo Plaza, the liability is partially covered by payments from new tenants. The occupancy cost ratios were 10.6% in the Czech Republic and 9.9% in Slovakia at December 31, 2007.
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In the Czech Republic, retail concentration at December 31, 2007 remained fairly low (the top ten retailers represent 26.2% of total rent). The largest commercial tenant is Palace Cinemas (7.4%), followed by H&M and C&A (3% and 2.8%, respectively). The remaining seven retailers account for between 2.3% and 1.6% of rents.
Greece
Rental revenues totaled €6.9 million, an increase of 14.4% compared to December 31, 2006 and reflected in particular the acquisition of the Larissa center in June 2007. On a constant portfolio basis, rental revenues rose by only 0.4%, despite index- linked rental adjustments of 3.5%. The restructuring in process at Athinon had a significant impact on rents in light of the high vacancy rate at the center.
At the rental management level, there were seven relettings (+1.8%) and one lease was renewed (+17.1%) during the period.
The financial occupancy rate was 97.2% for all holdings, of which 31.4% was attributable to Athinon. The other centers are fully occupied. The default rate was 2.9%, a slight improvement. rental revenue concentration remains high in Greece, and is accentuated by the modest size of the portfolio. The top 10 retailers together account for 67.8% of total rent, the largest being Ster Cinemas (25.2%), followed by Marinopoulos (11.8%) and Stadium Bowling (6.4%). The next seven account for between 5% and 2.3%.
Belgium
Rental revenues from the L’esplanade in Louvain-la-Neuve center totaled €12.4 million in 2007. On a constant portfolio basis, rents increased by 7.6% thanks to six lease-ups (+€520,000) that included the arrival of a Fnac store and four relettings to new retail tenants (+24.8%). The impact in 2007 of index-linked rent adjustments was 1.6%.
Variable rents (€230,000) were invoiced, corresponding to the first full year of operation for this center.
The financial occupancy rate was stable at 97.5%. The default rate was 5.5%. If the pending dispute with the cinema complex was eliminated, the rate would be 2.6%.
The retail concentration at December 31, 2007 was average. UGC represents 10.8% of total rent, Inditex 4.9%, H&M 4.3%, and Esprit 3.6%. Together, the ten largest retail tenants account for 36.8% of total rent.
Poland
Rental revenues for the year totaled €27 million, up by 37%, reflecting the acquisition in May 2007 of the Rybnik and Sosnowiec centers and the July 2007 acquisition of the Lublin center. On a constant portfolio basis, rents declined by 2.9%. The impact of index-linked rent adjustments was +1.7%, but did not totally offset the effect of restructuring projects currently under way. Variable rents amounted to €521,000, principally for Poznan Plaza (opened in May 2005) and Sadyba Plaza following the restructurings in 2006.
The Krakow Plaza and Ruda Slaska centers are in the process of being restructured. For the first, this entails the opening of a Carrefour supermarket and the mid-sized retail clothing outlet Kappahl. For the second, a Carrefour Express and two mid- sized units, Empik (culture and recreation) and Avans, will be opened.
The impact of Krakow Plaza on relettings to new retail tenants is substantial. A total of 48 leases have been signed with new tenants, lowering previous base rents by 3.1%. Excluding Krakow Plaza, the change would have been 15.5%. Lease-ups involved five spaces (€140,000) and there were 23 leases renewed (+7.9%).
The default rate at year-end 2007 was 6.5%, compared with 6.1% at year-end 2006, and includes some receivables of more than one year that, if excluded, would bring the rate down to 5.3%. The financial occupancy rate improved, to 96.5%, and vacancies mainly concerned the two sites currently being restructured (Krakow, 91.6% and Ruda, 86%).
The concentration of retail tenants at December 31, 2007 was low, with the top 10 retailers together representing 25.9% of total rents. The largest retail tenant is Fantasy Park (5.4%), followed by Cinema City (4.1%), Reserved (3.1%), Stokrotka (2.5%) and Rossmann (1.9%).
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Management Companies
The year 2007 was characterized by the following:
• Operating result up sharply for management subsidiaries. Revenue for all Ségécé entities taken together – given that Devimo is reflected only to the extent of our ownership percentage of 35% – increased by 10.2% between 2006 and 2007. The increase was driven by the development business (+31.8%) and the property management business (+8.6%). Management companies ended the year 2007 with a 30.8% increase in profit, to €32.4 million.
• Varied and extensive development throughout Continental Europe…. Development business during the year involved: • expansions/restructurings in France, with Grand Nîmes, Rambouillet, and Orléans-Saran, and in Italy, with Val Vibrata; • acquisitions such as the Progest and Cap Nord assets in France; Lublin, Sosnowiec and Rybnik in Poland; and Larissa in Greece; and • development projects, such as Maisonément in Melun-Boissénart, Angoulême Champ de Mars in France, Corvin in Hungary and Vallecas in Spain.
• … which generates additional business for the rental management team… €730.3 million in rents, of which 396.2 million in France, were invoiced by the teams at Ségécé. This is an increase of 10.4% over 2006. In parallel, rental management fee income rose by 9.5%, reflecting: • Index-linked rent adjustments, including +7.05% for 80% of all rents invoiced in France (i.e., 43% of all European rents) that made a strong contribution to this growth; • The opening of new centers under management such as Eragny, Buffalo Grill restaurants and Cap Nord in France, five centers owned by Jeronimo Martins in Portugal; • The full-year contribution from the Tours; Métropole, Montgeron and Valenciennes centers in France; Kleminho, Retail Leiria, Viana and Braga in Portugal; and Novo Plaza in the Czech Republic; and • The impact of renewals/relettings: the Poznan and Sadyba shopping centers in Poland; Woluwé and City 2 in Belgium; Loures in Portugal; and Settimo, Brembate and Pescara in Italy also contributed to this growth.
• …and for property administration. Property administration and management work extends to 342 European centers, of which 240 are owned by Klépierre. Fee income rose by 10.8% (including fees related to the delegated management of work). On December 31, 2007, with a total of 3,518,728 m² under management and an operating budget of €272 million, the teams in charge of property administration today make a significant contribution.
• Stronger teams in the field… In order to make current growth recurrent, Ségécé this year began decentralizing the organization – both in France and for its European subsidiaries – of its development teams, by creating local relays better positioned to anticipate opportunities: in addition to the creation of four regional head offices in France, local developers were also hired to work in Hungary, Poland, the Czech Republic and Italy.
• … combined with contained operating expenses… Despite the deployment of these new resources, the relocation of subsidiaries to better adapted offices, the completion of the network for the entire European computer base, and foreign currency appreciation (Hungarian +4.9%, Polish +3% and Czech +2.1%) – which penalizes management companies whose fees are listed in euros, unlike their expenses – the increase in operating expenses was limited to 3.2%.
• Positive outlook for management companies. Ségécé intends to continue the deployment of its expertise and methods through ongoing efforts to locate or create new assets. On December 31, 2007, 922 people were assigned to the management companies full-time, including 416 in France, for a global staffing increase of 8.1%.
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Segment Earnings
Shopping center segment 12.31.2007 12.31.2006 % change
Lease income 517.9 455.1 13.8% Other rental income 6.9 8.7 (20.2%) Rental income 524.8 463.8 13.2% Land expenses (real estate) (2.3) (2.3) 0.5% Non recovered land expenses* (16.1) (10.0) 60.6% Building expenses (owner)* (27.1) (28.6) 11.2% Net lease income 479.3 427.0 12.2% Management, administrative and related income 63.3 56.2 12.5% Other operating income 14.2 6.7 113.2% Survey and research costs (1.1) (1.1) - Payroll expense (56.6) (54.3) 4.2% Other operating expenses (20.1) (17.6) 13.7% EBITDA 478.9 416.8 14.9% D&A allowance on investment and arbitrage property (150.2) (126.8) 18.4% D&A allowance on PPE (3.3) (2.2) 47.5% Provisions (3.3) 0.1 nc OPERATING INCOME 322.2 287.9 11.9% Share in earnings of equity method investees 2.6 0.7 - Proceeds of sales 20.1 2.6 - SEGMENT EARNINGS 345.0 291.1 18.5% *2006: After reclassification of property taxes and non-recovered rental charges. in millions of euros
Lease income from shopping center properties rose by 13.2% in 2007, to €524.8 million. Other lease income includes entry fees as well as a margin on the supply of electricity to tenants in the Hungarian and Polish shopping centers. The 20.2% decline, to €6.9 million, is due primarily to the increase in the cost of energy supply and to the recognition in 2006 of entry fees remaining to be spread after the termination of leases for the Créteil-Soleil and Montesson centers. Land expenses were stable, and correspond to the allocation over several periods of building leases, mostly in France.
Non-recovered rental charges mainly reflect expenses related to vacant premises and real estate taxes. The 6.1 million euro increase pertains primarily to the reclassification of a loss on the re-invoicing of Spanish shopping center utilities that were previously captured as deductions from rents. These charges also include the coverage of taxes that were previously re-invoiced to tenants (for example, IMI in Portugal) and the vacancy resulting from restructuring projects under way in Hungary at the Duna, Kanizsa, Miskolc and Szeged centers. The 2.7 million euro increase in owner’s building expenses is primarily the result of portfolio growth. These also include maintenance and repair expenses for French assets and the payment of the imposta di registro tax by the Italian property companies (Finance Act of July 2006).
Net lease income was €479.3 million, an increase of 12.2%.
Management and administrative income (fees) rose by 12.5% (+€7.0 million). This increase is primarily comprised of development fees related to the arrangement and acquisition of new centers or projects. Other noteworthy developments concern the rise in real estate management and lease-up fees, particularly in Spain due to the effect of new lease-up mandates for the Pajarete (Algesiras) and San Pablo (Sevilla) shopping centers, on behalf of the San José company. Other income from operations includes the revenues generated by Galae’s specialty leasing business, re-invoicing to tenants, a VAT tax refund and miscellaneous indemnities. It rose by €7.5 million.
Research expense was €1.1 million, a figure that was stable compared to December 31, 2006; a portion of this expense was addressed by the payment of an indemnity. The moderate rise in payroll expense (+€2.3 million or +4.2%) reflects an increase in staffing levels, particularly in Poland and the Czech Republic so that the local structure could be adapted to our newest acquisitions. General expenses rose by €2.4 million (+13.7%). Significant changes relate to computer and IT expenses incurred in connection with the rollout of a European network as well as various tax adjustments.
EBITDA amounted to €478.9 million, an increase of 14.9%.
Depreciation and amortization for the period, plus provisions for investment properties, increased by €23.4 million, due to portfolio growth, with the acquisition of the Progest assets (€3.2 million), the Braga center and 50% of the Gondobrico and Parque Nascente centers in Portugal (€3.2 million), the Rybnick, Sosnowiec and Lublin shopping centers in Poland (€3.4 million), and the Blagnac and Saint-Orens supermarkets (€1.0 million). The change also reflects a depreciation allowance that was set aside mainly for the Polish and Czech centers.
Operating income totaled €322.2 million, an increase of 11.9%.
Proceeds from asset sales totaled €20.1 million, attributable exclusively to the sale of a 50% interest in the Poitiers- Cordeliers center at the end of November, for a sale price that was 35% higher than the value appraised on June 30, 2007.
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After accounting for the earnings of equity method investees (€2.6 million), which rose due to the integration of companies in the Progest portfolio, earnings for the shopping center segment amounted to €345.0 million, an increase of 18.5%.
Retail Properties Segment
Retail property rents for the year ended December 31, 2007 totaled €23.5 million. On a constant portfolio basis, rents increased by 5.3%, attributable to the impact of index-linked rent adjustments (+7.05%) applied to historical assets only. The rents for the 128 Buffalo Grill restaurant properties that were added to the portfolio on December 18, 2006 already integrated the new index.
The rise in rents on a current portfolio basis is the result of the following factors: • The collection of rents over a full year for the 128 Buffalo Grill restaurant properties acquired in December 2006, and the acquisition in 2007 of eight additional restaurants, for a total impact of €18.6 million; • The acquisition in March 2007 of a portfolio of 14 assets (mainly Mondial Moquette stores) located in various suburban retail parks, for an impact on rents of €1.8 million.
The financial occupancy rate was 99.4% for the year ended December 31, 2007, while the default rate for the same period was 0.1%.
Segment Earnings
Rental properties segment 12.31.2007 12.31.2006 % 2007.2006
Lease income 23.5 2.9 x 8.0 Other rental income - - Rental income 23.5 2.9 x 8.0 Non recovered land expenses (0.0) - - Building expenses (owner) (0.8) (0.3) - Net lease income 22.7 2.6 x 8.6 Management, administrative and related income 0.6 - - Other operating income 0.3 - - Payroll expense (1.0) - - Other operating expenses (0.3) (0.0) - EBITDA 22.3 2.6 x 8.6 D&A allowance on investment and arbitrage property (7.3) (0.8) - D&A allowance on PPE (0.0) - - Provisions - - - OPERATING INCOME 15.0 1.8 x 8.5 Proceeds of sales - 2.4 - SEGMENT EARNINGS 15.0 4.2 x 3.6 in millions of euros
Lease income from the retail segment totaled €23.5 million for the year ended December 31, 2007. This total includes rents from Buffalo Grill restaurants and various retail assets, mostly held by Cap Nord, a company whose equity was acquired on March 29, 2007. Building expenses primarily relate to fees paid to outside service providers, in particular for the appraisal of assets. Rental management and administrative fees paid to Klépierre Conseil have been eliminated from this presentation. Management and administrative income (fees) amounted to €0.6 million, and relate to fees paid to acquire Cap Nord.
Payroll expense and general expenses totaled €1.3 million, and mainly reflect the percentage of head office expenses that are allocated to the beneficiaries of various corporate services.
After an amortization expense of €7.3 million, earnings for the retail segment amounted to €15.0 million for the year ended December 31, 2007.
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Office Segment
Ile-de-France Office Property Market Trends for 2007
Rental market
Rental Transactions
With 2,713,000 m² rented, demand in the Ile-de-France office property market remained robust in 2007, despite the financial market turbulence observed in late summer, although it was down slightly from 2006 (2,860,000 m²). The biggest contributors to the brisk pace of rental transactions were large and small floor area premises.
New or restructured premises represented 36% of spaces rented, attesting to the desire on the part of corporate tenants for high quality products.
The West (Paris Center West, the Western Crescent and La Défense) accounted for 57% of the leased volume.
The leading business tenants in the Ile-de-France office market represent the following sectors of activity: finance and legal counsel (24%), information technology (17%) and the public sector (15%).
Supply Immediately available supply declined gradually starting in 2006, and fell to 2.4 million m² at year-end 2007.
The percentage of new or restructured supply was unchanged at 20%, attributable to pre-lease-ups that tap into future available supply.
The average vacancy rate for Ile-de-France fell once again, to 4.8%. For Paris Center West, a significant decline was observed (from 4.4% to 3.3%).
Future supply available in less than one year was 3.8 million m² at year-end, versus 3.6 million at year-end 2006.
Rental values
Globally, average face rents rose in 2007. Prime property rents in Paris Center West rose during 2007, before stabilizing at the end of the year at 750 euros/m². Commercial incentives, while declining, continue to be offered.
Investment market
The market recorded a new record in 2007: €27 billion in commitments recorded in France, including €19.5 billion in Ile- de-France.
The percentage share of office properties, which represent 74% of all investment commitments declined (from 84% fiscal year 2006), with retail properties picking up the slack.
Paris and West Paris (La Défense and the western suburbs) together accounted for nearly 63% of all commitments.
With 35% of the total volume invested, French investors – while representing a significantly lower percentage than in 2006 (53%) – remained the largest investors, followed by North American (22%) and British (13%) investors.
Yields stabilized at the beginning of the second half of 2007. The market is in the process of reestablishing a scale of yields with risk premiums that are more clearly delineated on the basis of the quality and location of assets.
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Office Property Investments and Disposals
Office disposals made in 2007 Floor area (m²) Levallois-Perret (92) – Front de Paris – Ilot 5* 9,990 Paris 8th – 5 rue de Turin 2,596 Champlan 91 – 16 bis rue de Paris 880 Strasbourg 67 – Rue du Rheinfeld 15,600 3 assets sold + 39.25% of indivisible rights for a total of 74.7 million euros *Remainder of indivisible rights.
In 2007, disposals (three office properties and indivisible rights) involved 29,666 m² for a total net amount of €74.7 million, for prices that were on average higher (+11.3%) than the last appraised values.
Construction of the Séreinis building in Issy-les-Moulineaux continued in 2007, leading to the outlay of €14.6 million in fiscal year 2007.
Rents
Gross rental revenues for 2007 amounted to €48.8 million, a decline of €4.0 million compared with 2006. This decrease is the result of property disposals made in late 2006 and early 2007: €7.5 million in lost rents on the seven buildings that were disposed of in 2006 and 2007 (including €6.0 million for the Front de Paris building in Levallois-Perret).
On a constant portfolio basis, rents increased by 8.1% from €43.1 million on December 31, 2006 to €46.6 million on December 31, 2007. This 3.5 million euro increase is attributable to: • Index-linked rent adjustments, which generated €2.2 million in additional rents compared with 2006 (+5.1%); and • Reletting/renewal of leases entered into in 2006 and 2007, which produced €1.3 million of additional rental revenue (+3.0%).
A total of eight leases were terminated in the course of 2007, representing total weighted floor area∗ of 1,480 m². These departures mainly involved tenants that sought to terminate their leases early, and were entirely re-rented during the course of 2007, except for 192, avenue Charles-de-Gaulle in Neuilly-sur-Seine, which is being restructured.
19 leases correspond to lease-ups, lease renewals or amendments, which will generate €10.0 million on a full year basis, i.e., an additional €2.1 million in rent. These newly signed contracts involve floor area of 16,649 m². Financial terms of the leases were up by 25.3% compared with the corresponding prior leases, less concessions and step rents (paliers) granted to tenants.
The most significant transactions in 2007 are described below: • The renewal of a lease for premises covering 1,090 m² in the building at 46, rue Notre-Dame-des-Victoires (Paris, 2nd arrondissement); • The renegotiation of all leases held by tenant Monte Paschi in the building at 7, rue Meyerbeer (Paris, 9th arrondissement), covering 3,725 m²; and • The renewal of the Linklaters lease for 7928 m² in the building at 23-25, rue Marignan (Paris, 8th arrondissement).
For the year ended December 31, 2007, the default rate was 0.02%.
Reflecting the lease-ups completed in 2006 and 2007, the financial occupancy rate was 99.7% on December 31, 2007 (versus 98.7% at year-end 2006). On December 31, 2007, the portfolio of leases represented €55.2 million in rents, with lease expiration (opt-out clauses and full term) schedules as provided in the following table:
∗ Floor area figures are given as weighed m². U.W. = Various types of office space (Offices, Archives – Parking – Employee Food Services) are weighed to calculate a price per square meter of office space for all space in the office building.
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By date By lease of next As a % of expiration As a % of Lease expiration dates opt out the total date the total
2008 5.3 9.6% 3.7 6.7% 2009 19.9 36.0% 4.5 8.2% 2010 11.0 19.9% 0.6 1.2% 2011 14.2 25.8% 8.7 15.8% 2012 0.0 0.0% 4.9 8.9% 2013 0.0 0.0% 7.5 13.6% 2014 0.0 0.0% 3.5 6.3% 2015 4.7 8.5% 10.3 18.6% 2016 and beyond 0.1 0.2% 11.5 20.7% TOTAL RENTS 55.2 100.0% 55.2 100.0% in millions of euros
At the year-end 2007, 6,326 m² are to be leased up. Only 8,225 m² (nine leases) come up for renewal in 2008, representing 6.7% of total rents. These lease-ups and renewals would increase total rents by €3.4 million (+6.1%).
Office Segment Earnings
Offices segment 12.31.2007 12.31.2006 % change
Lease income 48.8 52.8 (7.5%) Other rental income - - - Rental income 48.8 52.8 (7.5%) Land expenses (real estate) (0.2) (0.3) (27.5%) Non recovered land expenses* (1.1) (0.8) 35.9% Building expenses (owner)* (1.4) (1.7) (15.2%) Net lease income 46.1 50.0 (7.9%) Management, administrative and related income 0.3 1.3 (78.5%) Other operating income 1.1 2.8 (59.4%) Payroll expense (1.9) (2.2) (15.3%) Other operating expenses (0.8) (0.9) (19.9%) EBITDA 44.9 50.9 (11.9%) D&A allowance on investment and arbitrage property (11.8) (13.4) (11.6%) D&A allowance on PPE (1.0) (0.8) 21.0% Provisions 0.1 (0.0) - OPERATING INCOME 32.2 36.7 (12.3%) Proceeds of sales 20.3 27.5 (26.3%) SEGMENT EARNINGS 52.5 64.2 (18.3%) *2006: After reclassification of property taxes and non-recovered rental charges. in millions of euros
For the full year 2007, lease income from office properties fell by 7.5%, to €48.8 million. This decrease reflects the impact of disposals completed in late 2006 and early 2007, primarily the Front de Paris building, the sale of which resulted in a loss of lease income totaling €6.0 million. Land expenses correspond to the amortization of the building lease for the 43, quai de Grenelle building.
Rental expenses not recovered amounted to €1.1 million, and include, in particular, the cost of vacancies in the property at 192, avenue Charles-de-Gaulle (Neuilly-sur-Seine).
Owner’s building expenses fell in line with property disposals.
Net lease income for 2007 was €46.1 million, a decline of 7.9%.
Management and administrative income (fees) totaled €0.3 million, and includes, in particular, fees for the management of the Front de Paris building. The mandate has since been terminated, when the asset was sold on January 15, 2007. Included in the total for the previous year were development fees related to the acquisition of the building located at 5, rue Meyerbeer and the Séreinis project in Issy-les-Moulineaux.
Other operating income includes an indemnity of €0.7 million, related to the settlement of a litigation over property damage. At the December 31, 2006 reporting date, this line item mainly included income from tax refunds. Payroll expense amounted to €1.9 million for fiscal year 2007, compared with €2.2 million for fiscal year 2006.
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EBITDA reached €44.9 million in 2007 (-11.9%). Depreciation and amortization expense decreased by 11.6%, with disposals accounting for €1.2 million of the decline, primarily due to the sale of the Front de Paris building. The capital gain on the sale of buildings (€20.3 million) concerns the sale of properties located at 5, rue de Turin (Paris, 8th arrondissement), Champlan (91), the share held in the Front de Paris building and the Rheinfeld warehouse (Strasbourg).
Earnings from the office segment for the full year 2007 amounted to €52.5 million, a decline of 18.3%.
Revalued Net Assets
Methodology
Klépierre adjusts the value of its net assets per share on December 31 and June 30 of each year. The valuation method used entails adding unrealized capital gains to the book value of consolidated shareholders’ equity. These unrealized gains reflect the difference between estimated market values and the net values recorded in the consolidated financial statements.
Valuations
We entrust the task of appraising our real estate holdings to various experts. For our office holdings, appraisals are conducted jointly by Atisreal Expertise (formerly Coextim) and Foncier Expertise.
For shopping center assets, appraisals are performed by the following experts:
• Retail Consulting Group Expertise (RCGE) is responsible for appraising the entire French portfolio except for Progest, plus about 50% of all holdings in Spain (centers held by Klécar Foncier España and Klécar Foncier Vinaza) and all holdings in Italy, the Czech Republic, Slovakia, Belgium, Portugal and Greece; • Cushman & Wakefield appraise the other half of the Spanish portfolio (centers owned by Klécar Foncier Iberica); and • Icade Expertise performs the appraisals for the Progest portfolio in France as well as all property appraisals carried out on Polish and Hungarian holdings.
All of these appraisal assignments are awarded on the basis of the Real Estate Appraisal Guidelines (Charte de l’Expertise en Evaluation Immobilière) and in accordance with the recommendations issued by the COB/CNC “Barthès de Ruyter Work Group.” Fees paid to appraisers are set prior to their property valuation work, on a lump sum basis in accordance with the size and complexity of the assets being appraised, and independently of the appraised value of the assets.
2007 Appraisal Consulting fees fees Retail Consulting Group Expertise 999 121 Icade Expertise 300 203 Cushman & Wakefield 150 29 Foncier Expertise and Atisreal Expertise 84 4 Excl. VAT in thousands of euros
Offices
The appraisers combine two approaches: the first involves a direct comparison with similar transactions completed in the market during the period, while the second involves capitalizing individual yields (observed or estimated). An analysis of these yields reveals that one of three situations prevails: lease income is either substantially equal to, higher than or lower than market value.
If lease income and market value are substantially equal, the lease income used in the valuation is the actual lease income earned on the property. If lease income is higher than market value, the valuation uses market value and takes into account a capital gain calculated from the discounted value of the difference between actual lease income and market value. If lease income is lower than market value, the appraisers consider the scheduled term of the corresponding lease, at which time the rental price will be aligned with going rates. Pursuant to the French decree of September 30, 1953, the rental prices of properties that are used solely as office premises are automatically aligned with market rates when the leases in question come up for renewal. Consequently, the appraisers work from the assumption that the owners of such property would be able to align rents with market rates when the corresponding leases came up for renewal, and took into account the current conditions of occupation in the form of a capital loss calculated as before. However, unlike prior valuation adjustments, the appraisers did not limit their approach to properties coming up for renewal in the three years to come, on the grounds that the investors participating in current market transactions make projections that extend beyond this three-year horizon. In the second case, the financial capital gain observed was added to the appraised value derived, equal to the discounted value (at a rate of 5.5%) of the difference between actual lease income and market price until the first firm period of the lease expires. In the third case, a capital loss was deducted from the
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derived value, equal to the discounted value (at the rate of 5.5%) of the difference between actual lease income and market price until the lease expires.
Since December 31, 2005, the appraiser bases its analysis on the rate of return (yield) and not on the basis of the capitalization rate. In other words, the rate that was used is that applied to the income determined as before to derive an appraised value inclusive of transfer duties. Before, the rate used resulted in a valuation exclusive of transfer duties.
The decision to use this rate results from an observation of the market, in the context of transactions actually completed by investors. To derive the appraised value exclusive of transfer duties, transfer duties and fees were deducted at the rate mentioned below.
Shopping centers
To determine the fair market value of a shopping center, appraisers apply a yield rate to net annual lease income for leased premises, and to net market price for vacant properties. The yield rate is applied after deduction of the net present value of all reductions or rebates on leases with base rents, the net present value of all expenses on vacant premises, and work to be done that cannot be passed on to tenants for payment. A standard vacancy rate is established for each asset. The discount rate used is equal to the yield applied to determine fair market value. Gross rental revenue includes base rent, variable rent and the market price of any vacant premises. Net rental revenue is determined by deducting all charges from the gross rent, including management fees, expenses borne by the owner and not passed on to tenants, and charges provisioned for vacant premises and average losses on unpaid rents observed for the last five years.
The appraiser determines the yield rate on the basis of numerous variables, in particular retail sales area, layout, competition, type and percentage of ownership, rental reversion and extension potential, and comparability with recent market transactions.
Because of the structure of our portfolio and in the interest of economy and efficiency, we use two methods to appraise the value of assets that pose particular assessment issues. Accordingly, properties being appraised for the first time and assets the last appraised value of which is no more than 110% of the net book value (excluding deferred taxes) are appraised twice: once on the basis of yields (see discussion above) and once using the DCF (discounted cash flow) method.
This second method determines the value of a real estate asset as the sum of discounted cash flows using the discount rate defined by the appraiser. The appraiser estimates all of the asset’s expected revenues and expenses and derives a terminal future value at the end of the period of analysis (10 years on average). By comparing market rental values and face rental values, the appraiser captures the property’s rental potential by using market rental values at lease expiration minus costs incurred to relet the property. Finally, the appraiser discounts these projected cash flows in order to determine the present value of the property asset. The discount rate takes into account the prevailing risk-free rate (10-year OAT), to which will be added a risk and liquidity premium based on the location, the key features and the occupation of each property.
Valuation of the Ségécé group
This appraisal, which is performed on our behalf by Aon Accuracy, is primarily based on a range of estimates obtained using the Discounted Cash Flow (DCF) method.
The DCF method consists in estimating the future cash flows of current business in the company’s portfolio before the explicit or implicit cost of financing is taken into account.
In the second step, the aim of which is to estimate the value of the business portfolio, these cash flows and the estimated future value of the portfolio of business at the end of the projected period (terminal value) are discounted using a reasonable rate. This discount rate, which is derived on the basis of the Modèle d’Équilibre Des Actifs Financiers (MEDAF) formula, is the sum of the following three factors: the risk-free interest rate, the systematic risk premium (average expected market risk premium times the beta coefficient of the business portfolio) and the specific risk premium (to account for that portion of the particular risk that is not already integrated in the cash flows). The third and last step consists of determining the value of the company’s own equity by extracting net financial debt on the date of valuation from the portfolio’s total value and, where applicable, the estimated value of minority interests on that same date.
Assessing the value of debt and interest-rate hedging instruments
Effective December 31, 2005, RNAV incorporates the fair value of debt and interest rate hedging instruments that are not recorded under consolidated net assets pursuant to IAS 32-39, which essentially involves marking to market the fixed rate, non- hedged portion of debt.
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RNAV including transfer duties and before taxation on unrealized capital gains
The valuation of properties is initially presented inclusive of property transfer duties.
Properties that are held for sale under a firm commitment on the date of the valuation are valued at their probable selling price, less related fees and taxes. For properties acquired less than six months before the date of the calculation, acquisition prices are used.
Klépierre does not adjust the values of shopping centers under development, even in cases where building permits have been granted. Until these shopping centers open, they are carried in the consolidated financial statements at cost, and this figure is used to calculate revalued net assets. The Ségécé group is appraised annually using the method described in detail above.
Equity interests in other service subsidiaries, including Klégestion and Klépierre Conseil, are not reappraised. This initial calculation provides revalued net assets “including transfer duties and before taxation on unrealized capital gains”.
RNAV excluding transfer duties
A second calculation is made to establish revalued net assets excluding transfer duties.
Duties on office properties are calculated individually using the rates set forth below. Duties on shopping centers are calculated property by property for companies that own several real-estate assets, or on the basis of revalued securities if the company owns only one property asset. This approach was considered to be the most relevant considering that investors are more likely to acquire shares in companies that own shopping centers and that we generally are more likely to seek other backers for its projects than to sell full ownership in shopping centers. Naturally, transfer duties are calculated on the basis of applicable local tax regulations. For France, the rate used for transfer duties is 6.20%. We did not opt to use the most advantageous rate (1.8%) for properties that still fall within the scope of the VAT since it does not currently plan to sell within the prescribed deadline.
RNAV excluding transfer duties and after taxation of unrealized capital gains
A third calculation is made to establish revalued net assets excluding transfer duties and after taxes on unrealized capital gains. In the consolidated balance sheet, deferred taxes are recognized pursuant to accounting regulations in force, on the basis of appraised property values, for the portion which corresponds to the difference between the net book value and the tax value as determined by capital gains tax rates in force in each country. At the June 30, 2005 reporting date, the RNAV calculation was adjusted to include the tax on unrealized capital gains corresponding to the difference between the net book value and fair value on this same basis. At the December 31, 2005 reporting date, and to align its practices with those of its principal peers, we considered the type of ownership of its properties, using the same approach as that used to determine transfer duties. For office properties, the treatment is based entirely on property ownership, but since the entire scope of such property benefits from tax exempt status as an SIIC, there is no unrealized taxation.
For the shopping centers, and depending on the country, taxes on unrealized capital gains are based on the tax rate applied to the sale of buildings for companies that own several properties, and at the tax rate applicable to securities for companies that only own a single property.
Revalued Net Assets (RNAV) At December 31, 2007
Appraisal results
The value of our real estate holdings including transfer duties was €11.3 billion (total share) and €10.0 billion (group share). At December 31, 2007, our shopping centers represent 86.2% on a total share basis and retail properties and offices represent 4.0% and 9.8% respectively (the group share percentages are 85.2%, 3.8% and 11.0%, respectively).
Properties acquired in the second half of the year are carried at their acquisition price and represent 2.3% of all holdings. Projects under development are valued at cost, i.e., 4.5% of all holdings. These projects are mainly Vallecas (Spain), Corvin (Hungary), the Blagnac and Saint-Orens expansions (Toulouse) and the office building Séreinis in Issy-les-Moulineaux.
On a constant portfolio basis, shopping center assets increased in value by 7.4% during the six-month period ended December 31, 2007, while the value of retail assets grew by 6.4% over the same period and the value of office assets increased by 4.3%. Over 12 months, the respective increases are 12.5% for shopping centers, 14.6% for retail assets and 14.2% for offices.
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Holdings, total share (transfer duties included) Current portfolio Constant Portfolio 12.31.2007 12.31.2006 Change 12.31.2007 12.31.2006 Change Shopping centers France 5,564.4 4,276.3 1,288.1 30.1% 3,912.9 3,355.0 557.9 16.6% Spain 1,125.2 1,084.7 40.5 3.7% 1,013.8 982.2 31.6 3.2% Italy 1,327.6 1,173.8 153.8 13.1% 1,298.9 1,160.4 138.4 11.9% Hungary 496.2 350.2 146.0 41.7% 362.6 350.2 12.4 3.5% Poland 390.5 211.9 178.5 84.2% 216.9 211.9 5.0 2.4% Portugal 268.3 177.8 90.5 50.9% 164.0 146.1 17.9 12.2% Others 581.7 487.3 94.4 19.4% 558.2 487.3 70.9 14.6% Total Shopping centers 9,753.9 7,762.0 1,991.8 25.7% 7,527.3 6,693.1 834.1 12.5% Total Retail properties 457.2 334.2 123.1 36.8% 42.9 37.4 5.5 14.6% Total Offices 1,101.4 1,031.2 70.2 6.8% 1,052.3 921.8 130.4 14.2% TOTAL REAL ESTATE HOLDINGS 11,312.5 9,127.4 2,185.1 23.9% 8,622.4 7,652.4 970.1 12.7% in millions of euros
Holdings, group share (transfer duties included) Current portfolio Constant Portfolio 12.31.2007 12.31.2006 Change 12.31.2007 12.31.2006 Change Shopping centers France 4,663.5 3,589.8 1,073.6 29.9% 3,329.2 2,851.7 477.6 16.7% Spain 958.4 923.5 34.9 3.8% 846.9 820.9 26.0 3.2% Italy 1,205.5 1,064.5 141.0 13.2% 1,176.8 1,051.8 125.0 11.9% Hungary 496.2 350.2 146.0 41.7% 362.6 350.2 12.4 3.5% Poland 390.5 211.9 178.5 84.2% 216.9 211.9 5.0 2.4% Portugal 268.3 177.8 90.5 50.9% 164.0 146.1 17.9 12.2% Others 566.7 473.7 93.1 19.7% 543.2 473.7 69.9 14.7% Total Shopping centers 8,549.0 6,791.5 1,757.6 25.9% 6,639.7 5,906.3 733.4 12.4% Total Retail properties 384.6 281.1 103.5 36.8% 36.1 31.5 4.6 14.7% Total Offices 1,101.4 1,031.2 70.2 6.8% 1,052.3 921.8 130.4 14.2% TOTAL REAL ESTATE HOLDINGS 10,035.0 8,103.7 1,931.3 23.8% 7,728.0 6,859.6 868.5 12.7% in millions of euros
Offices
The office portfolio is valued at €1,101.4 million. Four of these properties have an estimated unit value that exceeds €75 million, representing 45.7% of the total appraised value of this portfolio.
Four of our properties have a unit value of between €75 million and €50 million, representing 22.6% of the total appraised value of this portfolio, and 11 have an appraised value that is less than €50 million. On a constant portfolio basis, the value of our office assets increased by 14.2% on a total share basis over 12 months (and by 4.3% over six months), of which 7.6% is attributable to higher income and 6.6% reflects the fall in yields. The 60.2 million euro decline in the value of the portfolio over 12 months is due to the change in scope that resulted from the disposal program, the impact of which was partly neutralized by the progress on the Séreinis construction project in Issy-les-Moulineaux.
Based on appraised values at December 31, 2007 (transfer duties included), the immediate yield on the portfolio was 5.3%, a decline of around 20bps compared with December 31, 2006.
Shopping centers
Our shopping center holdings are valued at €9,753.9 million (€8,549.0 million group share), an increase of €1,991.8 million over the year (+25.7%).
39 facilities and projects have an estimated unit value that exceeds €75 million, representing 58.3% of the total estimated value of this portfolio, 89 have a unit value between 75 million and €15 million, and 130 have a unit value of less than €15 million.
On a constant portfolio basis, our shopping center holdings, including transfer duties, increased in value by 12.5% in light of the rental reversions (5.1%) and the decline in yields (7.3%). External growth explains €1,157.7 million of the rise in value on a current portfolio basis. The increase in assets includes, in particular:
• in France, the Progest holdings, the opening of the Angoulême-Champs de Mars shopping center and the appraisal of new expansions (Brest, Laon, Nîmes, Orléans, Rambouillet); • abroad, the acquisition of the three Polish centers (Rybnik, Sosnowiec and Lublin), the acquisition of the Larissa center (Greece), the purchase of 50% of the Parque Nascente and Gondobrico shopping centers (Portugal), and the opening of the Varese extension (Italy); and • projects under development, which also contributed to the increase, in particular via the Corvin operation (Budapest) which accounted for up to €111 million of the amount outlaid at December 31, 2007.
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The average yield on the portfolio at December 31, 2007 was 5.5%, including transfer duties, based on appraised values at December 31, 2007, down by 40bps compared with December 31, 2006.
Retail properties
The appraised value of the retail property portfolio is €457.2 million (€384.6 million group share), an increase of €123.1 million (+36.8%) over the fiscal year.
On a constant portfolio basis, retail property holdings, including transfer duties, increased in value by 14.6% (€5.5 million), of which 5.5% is attributable to higher revenues and 9.1% to the fall in yields.
External growth accounted for €117.6 million of the rise in the value of the holdings. On a current portfolio basis, the increase in assets includes the acquisition of the ownership of eight additional Buffalo Grill restaurant properties (€16.8 million), the purchase of commercial assets from Cap Nord, appraised for the first time on December 31, 2007, and of two Séphora outlets (€10.8 million). It also takes into account the reappraised value of the 128 Buffalo Grill restaurant properties versus the price paid to acquire them in December 2006.
The average yield for the portfolio was 5.8% based on appraisals (transfer duties included) at December 31, 2007.
For the year ended December 31, 2007 RNAV rose by 26.6%.
On the basis of appraisals including transfer duties, revalued net assets after deferred taxes on capital gains and marking to market of debt amounted to €41.1 per share, versus €36.3 per share on June 30, 2007 and €32.5 on December 31, 2006, a six- month increase of 13.2% and a 26.6% increase in 12 months.
Revalued net assets excluding transfer duties, after deferred taxes on capital gains and marking to market of debt amounted to €38.6 per share, as opposed to €34.2 on June 30, 2007 and €30.5 on December 31, 2006.
Determination of Revalued Net Assets
Group share 12.31.2007 06.30.2007 12.31.2006 Consolidated shareholder’s equity 2,001 1,933 1,955 Real estate companies goodwill (9) (6) (9) Unrealized capital gains in real estate portfolio 3,487 2,954 2,475 - Appraised value 10,035 8,854 8,104 - Net book value (6,548) (5,900) (5,628) Unrealized capital gains on non-real estate assets 67 103 102 - Ségécé group capital gain 67 103 102 Tax on unrealized capital gains (172) (177) (167) Restatement of deferred taxes on securities 124 125 94 Taxes and fees related to the sale of assets (332) (283) (267)
Revalued Net Assets 5,167 4,648 4,182 Marked to market of fixed rate debt excluding IAS 32-39 (million euros) 70 43 7 Number of shares, fully diluted and excl. treasury shares 135,502,224 137,004,399 137,305,224 NAV excluding transfer duties, after taxes on unrealized capital gains (in euros per share) 38.1 33.9 30.5 NAV excluding transfer duties, after taxes on unrealized capital gains and marking to market of fixed-rate debt, in euros per share 38.6 34.2 30.5 NAV including transfer duties, after taxes on unrealized capital gains and marking to market of fixed-rate debt, in euros per share 41.1 36.3 32.5 in millions of euros
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Comparison of December 31, 2006 to December 31, 2005
Shopping Centers Economic Growth Rates
Despite some signs of a slowdown, particularly in the United States, global GDP growth was sustained in 2006. Against this backdrop, GDP growth for the euro zone as a whole reached 2.6%, the best performance seen since 2000.
It was even higher across Central Europe (Slovakia: +8.2%, the Czech Republic: +6.2%, Poland: +5.1%, Hungary: +4.0%), in Spain (+3.7%) and in Greece (+4.0%). In France, where the third quarter was disappointing, the total for the year was 2.1%, with household spending showing resilience.
The numbers were less positive in Portugal (+1.3%) and Italy (+1.8%), two countries that are undergoing economic recovery. For Italy, this modest performance nonetheless comes as welcome news after four and a half years of virtual stagnation. Forecasts for 2007 indicate a slight decline in growth versus 2006, with the exception of Portugal. However, the outlook for private spending in 2007 remains satisfactory, on par with the 2006 level.
Consumer Spending
Year-on-year for the 12 months through November 2006, sales from shopping center business rose by 3.4% versus the same period in 2005, with satisfactory growth observed in the top three countries as measured by sales (which together account for 93% of total sales brought in): Spain (+4.9%), Italy (+3.7%) and France (+3.5%). In Italy and, to a lesser extent, in France, sales growth far exceeded growth in domestic spending. In the Czech Republic and Greece,2 sales showed no change versus the previous year, while sales declined for shopping centers in Slovakia and Portugal (which together account for 3% of total sales), by 1.8% and 2.0%, respectively – despite a good second half of the year in the case of Portugal.
In 2006, all retail sectors showed significant growth, particularly personal products (+4.8%), followed by the Beauty/Health segment (+3.7%), Culture/Gifts/Entertainment (+3.4%) and Restaurants (+2.6%). For the household goods segment, sales growth was slightly higher than last year.
France
After posting a 1.6% increase in December 2006, compared with a particularly strong showing in December 2005 (+5.4%), sales in France rose by a total of 3% for the year, driven by the performance of non- central locations (inter-communal centers up 4.4%, regional centers up 2.9%). For city center locations, the increase was a less robust 1.5%. Broken down by retail segment, personal product sales rose by 5.8% in 2006, followed by Beauty/Health (+3.4%), Restaurants (+2.6%), and Culture/Gifts/Entertainment (+1.8%). Household equipment sales fell by 1.8% over the period.
Spain
The major centers reported positive trends (+7.4% over twelve months). Supermarket shopping centers reported a 2% increase in sales, with mid-sized retail units reporting particularly high growth (nearly 10%).
Italy
The significant sales growth (+3.7%) seen in 2006 was driven by all sectors. Italy’s victory in the World Cup boosted summer sales.
Portugal
The average decline in shopping center sales was 2%, attributable to a sluggish economic backdrop and stepped-up competition. Nonetheless, mid-sized retail units once again posted higher sales (+3%).
Greece
Sales were stable over the period (+0.1%). The Makedonia center was adversely affected by the opening of Cosmos, a rival center, with a particularly visible impact in Beauty/Health. Conversely, Patras reported a significant rise in sales (+22.1%).
2 The mobile aggregate over 12 months is reconstructed by Ségécé from Eurostat monthly indicators (latest figures available are through September).
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The Czech Republic and Slovakia
Novy Smichov saw modest revenue growth (+0.3%). Sales were adversely affected by contracting sales in Beauty/Health (-2.1%) and household goods (-5.6%). Danubia reported a 1.8% decline in sales, attributable to a rise in the vacancy rate.
Belgium
Sales from the Esplanade at Louvain-la-Neuve totaled €114 million. The center got off to a good start, with sales rising substantially since October 2006 as measured by monthly comparisons.
Rental Revenues
Rental business in Europe trended upward in 2006, with lease income from our shopping center properties reaching €458.1 million, an increase of 17.3% compared with the previous year (€390.6 million). Additional variable rental revenues represented €10.8 million of the total. On a constant portfolio basis, rents rose by 4.1%.
France
Rental revenues totaled €232.3 million (including €7.5 million in additional variable rental revenues), an increase of 11% over 2005. On a constant portfolio basis, growth was 4%, driven by rental reversion and index-linked adjustments, which had an impact of +1.8%. As a reminder, the ICC index for the second quarter of 2005, which applies to 78% of guaranteed rental revenues in the portfolio, increased by a mere 0.7%. In addition, most of the other leases (19% of the portfolio) are pegged to the index for the first quarter 2006 (+7.24%).
Negotiations conducted in 2006 led to the following comparable scope changes:
• 214 re-lets and 227 lease renewals (respectively +24.8% and +19.5% versus previous conditions); and
• 30 lease-ups, representing €0.9 million in rental revenues. It should be noted that the additional variable rental revenues, which are tied to tenants revenues, increased slightly between 2006 and 2005 (+2.7%).
The sharp rise in rental revenues on a current portfolio basis versus a comparable basis is primarily due to the following factors:
• the fourth quarter 2005 acquisition of the Colombia shopping center in Rennes and an additional co-owned parcel containing 40 retail outlets in the Sevran center;
• beginning in the first quarter 2006, collection of rental revenues from the new downtown shopping center in Valenciennes (Place d’Armes) and the BHV Déco department store in the retail park of the Bègles Rives d’Arcins center;
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• completion of the Cesson Boissénart, Blagnac and Quétigny expansions and the commercial restructuring of the Montesson shopping center; and
• the December 2006 acquisition of 128 Buffalo Grill restaurant properties located in various suburban retail parks.
Uncollected past due rent represented 0.3% of total invoicing, versus 0.4% at year-end 2005. The financial occupancy rate in 2006 was 99.3% (99.2% at year-end 2005).
The average occupancy cost ratio (rental revenues + utilities over revenues excluding tax) was 9.1%, versus 8.8% at year- end 2005. This is a reasonable rate, suggesting that further rental reversion is possible when leases expire and are renewed or taken up by new tenants.
The distribution of rental revenues among tenants remains highly diversified, a factor that reduces the rental risk for the portfolio as a whole. Based on leases in force on December 31, 2006, the Buffalo Grill group is now our number one partner in France, with 7.4% of total retail rental revenues, followed by Auchan (3.5%), the PPR group (3.9%, of which Fnac for 3%), the Etam, Inditex (includes Zara), Celio and Go Sport groups (2.2% each), Camaïeu (2.1%), Vivarte (1.5%), and Armand Thiéry (1.4%).
Spain
Invoiced rental revenues totaled €59.8 million, a current portfolio increase of 6.5%. On a constant portfolio basis, the increase was 4.9%, driven by significant index-linked adjustments (3.6%). On a comparable portfolio basis, rental business in 2006 can be analyzed as follows:
• 130 relettings (+15.4%);
• 219 renewals (+8.4%); and
• 25 lease-ups (€0.5 million).
The current portfolio rise in rental revenues is attributable mainly to the acquisition of the Molina de Segura center at the end of the first half of the year.
The default rate remains stable (1.2%), and the financial occupancy rate was 98% at year-end.
The occupancy cost ratio was 11.5% in 2006, and the top ten retail tenants represent less than 29% of total rental revenues. The Inditex group is the largest contributor to rental revenues (5.9%), followed by Ceneza (5.3%), Yelmo Cineplex (2.6%), Belros (2.6%), McDonald’s (2.5%), Opticas Afflelou (2.4%), Cortefiel (2.4%), Décimas (2.3%), Hobby Zoo (1.5%) and Aki (1.4%).
Italy
For the Italian shopping center portfolio as a whole, invoiced rental revenues in 2006 totaled €73.9 million, an increase of 30.4%. The 3% increase on a constant portfolio basis was equally attributable to the impact of index-linked adjustments (+1.3%) and rental reversion. There were 92 changes to lease terms in 2006 on a comparable scope basis:
• 43 relettings (+9.8%);
• 46 renewals (+30.7%); and
• 3 lease-ups (€71,000).
The current portfolio change in rental revenues was attributable to expansions (Montebello, Giussano and Varese centers). In 2006, the default rate was 2%, the financial occupancy rate was 97.9%, and the occupancy cost ratio was 8.7%.
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The top 10 retail tenants represent less than 28% of total rental revenues. The Media World group accounts for 5.8%, followed by Inditex (3%), Benetton (2.8%), Oviesse (2.6%), Risto (2.6%), Piazza Italia (2.4%), Miroglio (2.3%), the Longoni group (2.1%), Calzedonia Intimissimi (2.1%), Scarpe & Scarpe (2.1%) and Autogrill (2%).
Hungary
In 2006, invoiced rental revenues totaled €29.5 million (+2.5%).
On a constant portfolio basis, they increased by 2.9%, reflecting the impact of index-linked adjustments (+1.3%) and rental reversion. Last year, the following lease changes were completed on a comparable basis:
• 115 relettings (-5.6% or €160,000);
• 113 renewals (-2.8% or €134,000);
• 22 lease-ups for €175,000.
These developments reflect the effort to reposition the centers commercially, in the interest of improving their competitive profile. Global negotiations involving the tenant Match were the source of two-thirds of these rental capital losses.
In the case of the Kanizsa, Alba and Szeged centers, full-scale commercial restructuring was carried out following the departure of Match, with a temporary effect on rental negotiations: 51 relettings (-16.7% or €322,000), 35 renewals (+4.7% or €37,000), and four lease-ups (+€75,000) were completed for these centers.
The financial occupancy rate was 97.7% in 2006, while the default rate was 3.5%. The concentration of rents among tenants is satisfactory: Match (5.7%), Mercur (3.5%), Fotex (3.3%), IT Magyar Cinema (3.2%), Pecsi Direkt (2.5%), Palace Cinema (2.3%), Jeans Club (2.3%), Fun Szorakoztato (2.1%), Humanic (2%) and Coin Works (1.1%).
Portugal
For the Portuguese portfolio as a whole, invoiced rental revenues totaled €11.6 million, down by 3.7%. This decline reflects difficult prevailing business conditions and, for the Loures and Parque Nascente centers, more intense competition. The impact of index-linked adjustments was +1.9%. On a comparable scope basis, 18 relettings (-7.7%, but only €51,000), four renewals (+1.8% or €5,000) and four lease-ups (+€91,000) were completed in 2006.
The eight relettings involving the Parque Nascente center generated a loss capital from of rental revenue of €540,000, primarily attributable to the movie theaters. A restructuring project is under way, with Media Markt set to become a tenant in the second quarter of 2007. In 2006, the default rate was 5.1%, the financial occupancy rate was 96%, and the occupancy cost ratio was 12.6%.
The Czech Republic and Slovakia
For these two countries, invoiced rental revenues totaled €13 million. On a constant portfolio basis, rental revenues increased by 4.8% in the Czech Republic, in particular thanks to index-linked adjustments (+2.4%). Rental changes in the comparable portfolio involved:
• 7 relettings (+8%);
• 2 renewals (+10.5%); and
• 1 lease-up.
In Slovakia, invoiced rental revenues decreased by 8.6% due to extended vacancies for several parcels. On a current portfolio basis, Czech rental revenues increased by €1.8 million thanks to the acquisition of the Novodvorska Plaza center.
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The financial occupancy rates were 100% for Novy Smichov and 93.8% for Danubia. For Novy Smichov, the default rate was 3.3%, while the occupancy cost ratio was 9.6%. For Danubia, the rates were 19% and 11.2%, respectively. About half of all unpaid past due rents were attributable to three retail anchors, which have since vacated their premises. The space has been re-let. The Novodvorska Plaza center, which opened this year and is still being leased up, reported a financial occupancy rate of 83.7%.
Greece
Invoiced rental revenues totaled €6.1 million, an increase of 6.2% that reflected index-linked adjustments (3.6%) and rental reversion. There were five changes in tenant mix that led to an average increase of 11.2% compared with previous rental conditions. The financial occupancy rate was 98.9% and the default rate was 3.3%. The average occupancy cost ratio was 12.2%.
Belgium
Invoiced rental revenues totaled €12.1 million, compared with €3.4 million in 2005, reflecting the impact over the full year of the Louvain-la-Neuve center, which opened its doors in October 2005.
On a constant portfolio basis, rental revenues rose by 21.7%. Only 1.7% of this increase was due to index-linked adjustments. The rest reflects the impact of the end of the lease-up period (in particular Rue Charlemagne), which led to an increase in the financial occupancy rate from 90.8% to 97.2%. A total of 14 lease-ups for €1 million in full-year rental revenues were completed in 2006. The default rate was 2%.
Poland
Invoiced rental revenues totaled €19.7 million. Rental revenues rose by 9.2% on a constant portfolio basis, of which 1.7% was attributable to index-linked adjustments. Rental activity in 2006 produced the following results:
• 42 relettings (down by 5.5% or €82,000);
• 28 leases renewed (down by 14.1% or €153,000); and
• 15 lease-ups, including 10 in Poznan (€492,000).
These changes reflect more intense competition in Krakow and a major commercial restructuring effort in Sadyba, which resulted in replacing Peek & Cloppenburg by more dynamic international retail anchors (such as Mango, Esprit and Aldo).
The financial occupancy rate was 96.1%, and the default rate was 6.1%.
The top 10 retail tenants accounted for 31.2% of total rental revenues: Cinema City represented 6.4%, followed by Fantasy Park (5.8%), Reserved (4.8%), Champion (2.7%), Inditex (2.5%), Smyck (2.3%), Piotr i Pawel (2%), CCC (1.6%), Albert (1.5%) and Intermarché (1.4%).
Management Companies
After acquiring an additional 50% of its Italian subsidiary and 25% of its Czech subsidiary early last year, Ségécé’s focus in 2006 was on consolidating its network of management affiliates across Europe by pursuing the deployment of its methods and organizational principles, as well as rebranding. As a result, all of its wholly-owned subsidiaries now do business under the Ségécé name. This European presence was also reflected in increased business in the monitoring of new assets located outside France, which in turn generated a 42% increase in international asset management fees.
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Square Nb. Nb. meters % Country Company Workforce centers leases managed(1) Ownership France Ségécé 350 140 5,408 1,374,268 75% Galae 6 – – – 100% Ségécé Loisirs et Transactions 2 – – – 100% Spain Ségécé España 111 89 3,103 651,478 100% Italy Ségécé Italia 87 53 1,385 322,311 100% Portugal Ségécé Portugal 43 12 949 190,243 100% Czech Rep. & Ségécé Ceska Slovakia Republika 23 3 275 77,328 100% Belgium Devimo 100 20 1,144 429,745 35% Hungary Ségécé Magyarorszag 121 16 1,404 215,354 100% Greece Ségécé Hellas 4 5 114 37,990 100% Poland Ségécé Polska 44 4 429 101,479 100%
TOTAL 891 342 14,211 3,394,774 1 Number of m² occupied by all tenants in every shopping center (excluding parking stalls, common areas and vacant premises).
Active and Diversified Organic Growth in France
With development fee income of €11.6 million for the year ended December 31, 2006, compared with just €6.9 million in 2005, Ségécé pursued its strategy of organic growth via a number of restructuring-extension projects (Blagnac, Bègles, Angers, Orléans, Rambouillet, Pontault-Combault). It also monitored transactions involving our shopping centers in Angoulême and Valenciennes and the Buffalo Grill restaurant properties. Thanks to this development, the rental management team achieved 6% growth in fee income for all mandates in France.
Steady Growth in Portugal
After taking on the management of Torreshopping and the Jeronimo Martins park in the second half of 2005, Portugal received full-year management fees for its services in 2006. As a result, its earnings rose by 39%. Currently, its business portfolio contains 949 leases, and the Portuguese management subsidiary will also manage the Braga center, which we acquired at the end of the year.
Stepped-Up Development in Spain
With 89 shopping centers under management, Ségécé España is currently focusing its resources on development, particularly involving the Vallecas, Torremolinos and Oviedo centers. It managed the acquisition of the Molina de Segura center in late June of 2006.
On Course in Italy
Wholly-owned since the beginning of the year, Ségécé Italia focused on revisiting its organization while staying on the performance course set earlier. Managing 1,385 leases at year-end 2006, we also ensured successful completion of the expansions involving the Giussano and Varese centers, as well as the restructuring of the Brianza center.
Greece Achieves Financial Equilibrium
The third-party management contract signed with the Larissa center at the end of 2005, covering 13,100 m² under management, has brought financial balance to Ségécé Hellas after only two years in operation. With four employees, it now provides rental management services for a total of five shopping centers.
Development Confirmed In The Czech Republic
With the opening of the Novodvorska Plaza in Prague on March 22, 2006, there are now three centers under management in the Czech Republic and Slovakia. This development ensures the lasting profitability of Ségécé Ceska Republika, which now employs 23 people and manages 77,328 m².
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Reorganization Under Way in Poland
Under ownership since July 2005, the Polish subsidiary of Ségécé is actively preparing its information system and organizational structure for the management of additional centers, including projects under way in Rybnik, Sosnowiec and Lublin. The group currently employs 44 people and manages 101,479 m².
Further Integration in Hungary
Managing 16 shopping centers, including 12 for Klépierre, Ségécé Magyarorszag employs 121 people, 65 of whom are directly assigned to shopping centers. The aim of the policy in force at this time is twofold: harmonize shopping center property and rental management with Group practices, and align the organizational structure with Ségécé standards.
Portfolio Under Management in Belgium Grows
With the Louvain-la-Neuve center fully operational and the new mandate obtained for the Gent Zuid center, Devimo has demonstrated its ability to keep pace with the business expansion strategy being deployed by all group subsidiaries. Currently, Devimo manages 1,144 leases and employs a workforce of 100.
Beneficial Repositioning for Galae
Galae’s repositioning in specialty leasing, which took place in 2005, is beginning to pay dividends. The subsidiary reported a net profit in 2006. With six full-time employees, Galae addresses the needs of the brands and advertisers operating in the Group’s shopping centers.
Segment earnings
Shopping center segment 12.31.2006 12.31.2005 % change
Lease income 455.2 390.6 17.3% Other rental income 8.7 5.6 56.3% Rental income 463.8 396.1 17.8% Land expenses (real estate) (2.3) (2.0) 12.5% Non recovered land expenses (5.9) (4.0) 45.9% Building expenses (owner) (28.9) (30.1) (3.9%) Net lease income 429.7 360.0 19.4% Management, administrative and related income 56.2 45.9 22.6% Other operating income 6.7 5.5 21.0% Survey and research costs (1.1) (0.8) 34.6% Payroll expense (54.3) (46.9) 15.8% Other operating expenses (17.7) (15.0) 17.9% EBITDA 419.4 348.6 20.3% D&A allowance on investment and arbitrage property (126.8) (106.8) 19.4% D&A allowance on PPE (2.2) (3.5) (36.6%) Provisions 0.1 (3.0) NC OPERATING INCOME 287.8 235.3 23.1% Share in earnings of equity method investees 0.7 0.6 20.5% Proceeds of sales 5.0 2.8 NC SEGMENT EARNINGS 293.5 238.7 23.7% in millions of euros
Lease income from shopping center properties increased by 17.8% in 2006, reaching €466.7 million. Building expenses totaled €37.1 million, slightly rising versus 2005. They include the increase in Ségécé’s ownership interest in Ségécé Italia from 50% to 100%. The fees invoiced to the group are now totally neutralized in the consolidated financial statements. Net lease income was €429.7 million in 2006, up 19.4%.
Management and administrative income (fees) rose by €10.3 million (+22.6%), attributable primarily to the change in the method of consolidation for the Italian and Hungarian management firms (€3.1 million). After neutralization of these changes in scope, the rise in fee income was 15.8%, attributable in particular to the increase in the shopping center development business in France (€3.9 million) and by new management mandates awarded in Portugal (€0.9 million). Payroll expense rose by 15.8%, reflecting the following factors: the full-year integration of the Polish management firm’s workforce; the full consolidation of Ségécé Italia (which is now wholly-owned); and the hiring of new staff by Ségécé in France with expertise in the areas of development and shopping center management. EBITDA reached €419.4 million, an increase of 20.3%. The operating ratio (total expenses/net operating income) was 14.9% for 2006, versus 15.3% for 2005. Depreciation and amortization for the period increased by €19.5 million, due in particular to portfolio growth: the acquisition in 2005 of the Polish shopping centers (€6.8 million); the Louvain-la-Neuve center (€4.5 million); the Italian shopping centers Assago, Lecce, Tor Vergata and Solbiate (€3.9 million); the Rennes Colombia center (€1.1 million); and the integration of Valenciennes (€0.9 million), Novo Plaza (€0.8
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million) and Molina de Segura (€0.4 million) in 2006. D&A net of releases and recoveries totaled €5.8 million, primarily attributable to real estate provisions on shopping centers in Poland and the Czech Republic.
Results from operations totaled €289.7 million, an increase of 23.1 % compared with 2005.
After incorporating the result of the Belgian management firm (accounted for by the equity method) and the net proceeds of sales totaling €5.0 million and including a capital gain on the sale of a 15% equity interest in Klémurs, the shopping center produced earnings in 2006 of €295.3 million, an increase of 23.7%.
Office Segment
Rental Market
Rental Transactions
In 2006, demand reached a record high, far surpassing the year 2000, which remained the benchmark. Nearly 2.9 million m² were let or sold, up by 30% compared with 2005. This brisk pace of transactions was primarily due to substantial large deals: 1.2 million m² were taken up for properties with floor area in excess of 5,000 m². 40% of the floor area let was in new or restructured buildings, as businesses sought to regroup or rationalize their operations. The traditional business districts (Paris Center West and the Western Crescent) remain the leaders of space let or sold (42%). Given the very large transactions completed in the south of Ile-de-France, space let or sold to occupiers in the Outer Rim rose by 50% (from 14% to 20%). The most active business sectors in this historic year were manufacturing (29%), financial services (19%) and the public sector (14%), although it was less active than in 2005.
Supply
Immediate supply declined by only around 8% compared with January 1, 2006, i.e. to 2.5 million m². This decrease was gradual due to the steady arrival of new and vacated space throughout the year. As a result, the vacancy rate has declined substantially to 5.2% on average for Ile-de-France, 4.4% for Paris Center West, and 5.7% for La Défense. Future supply (available within one year) was 3.6 million m², fairly stable compared with the previous year.
Rental Values
Globally, average face rental revenues are on the upturn: +5% in Paris Center West, +2% in the Western Crescent and +3% in the rest of the Inner Rim.
However, disparities persist from one sector to the next. As for rental revenues on prime properties, only Paris Center West rose, by 9%. Prime rents at La Défense fell by 8% over the same period, while relative stability was observed for the Western Crescent. Commercial incentives, while declining gradually, are still common practice.
The Investment Market
In light of the inflows of capital to the French real estate market, which continued throughout last year to run substantially ahead of supply, the record high investment total of 2005 (€15.7 billion in France and €13.8 billion in Ile-de-France) was surpassed in 2006: €23.1 billion were invested in France, of which €19.8 billion in Ile-de-France. 85% of all firm commitments were for office properties.
With 53% of the total, French investors once again led the pack, followed by North American investors (18%). Investors from the UK were in third place, with 7% of the volumes invested. The global collapse of yield rates continued for all types of investment properties, to differing degrees depending on the geographic sector and asset type. The competition between investors and the significant change in the INSEE construction index should help to maintain pressure on rates of return in 2007.
Office Property Investments and Disposals
The disposals made in 2006 (three buildings and indivisible rights) involved 28,025 m² for a total amount of €112.6 million (net seller). On average, the sale price exceeded the last appraisals (+11.3%).
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Office disposals completed in 2006 Floor area in m² –Saint-Maurice (94) 3/5, avenue du Chemin de Presles 9,885 –Paris 17e – 140/144, boulevard Malesherbes 7,156 –Levallois-Perret (92) – Front de Paris – Îlot 5* 9,991 –Vélizy (78) – 8, rue des Frères Caudron 993 3 assets sold +39.25% of indivisible rights for a total of €112.6 million *Indivisible rights.
In accordance with its opportunistic approach to the office property market, we have resumed our position as a buyer in this segment, while continuing to pursue the mature asset disposal program launched several years ago.
The two acquisitions made in 2006 provide a good illustration of our high-end positioning: • The first one, measuring 4,115 m² (useful weighted floor area), is located at 7, Rue Meyerbeer, in the heart of the Paris central business district (Quartier de l’Opéra). This prime location should eventually generate significant rental upside potential;
• The second involves the purchase of an office building to be built in the ZAC Forum Seine in Issy-les-Moulineaux, in connection with a real estate development contract or CPI (Contrat de Promotion Immobilière). The building, which is scheduled for completion in late 2008, will feature nearly 12,000 m² of office space, distributed over seven floors, and more than 300 parking stalls. This project is adjacent to another building we own, which is currently fully occupied by the commercial tenant Steria. This property is likely to be offered on the rental market when the timing is right cycle-wise.
Together, these two acquisitions represent an investment of €112.9 million, including €67.0 million in 2006 and €45.9 million spread over 2007 and 2008 in connection with the Issy-les-Moulineaux CPI. The total amount of rents used to appraise these two investments is €6.7 million. For 2007, the investment target is €100 million, while planned disposals are expected to reach €75 million. Accordingly, we have already begun our 2007 disposal program, signing a seller’s promise on one property and a memorandum of understanding on another, for a global sum of €59.9 million.
Rents
Office properties generated rents of €52.8 million in 2006, a total that was virtually unchanged compared with 2005 (€52.9 million). This stability should be viewed as a positive development in light of disposals made in 2005 (€124.8 million) and 2006 (€112.6 million). The eight properties sold in 2005 and the 4 sold in 2006 reduced the rental base by €5.3 million.
New Leases
A total of 16 leases were signed in 2006 for €4.4 million in all, a full-year increase in rental revenues of €0.5 million. These leases include 11 new tenants, three renewals, and two contractual changes, covering weighted usable floor area1 of 11,219 m². The most significant transaction in 2006 involved: • the renewal of two leases for floor area totaling 5,819 m² in the building at 11/11 bis, place du Général-Leclerc à Levallois (92); and
• the reletting of 1,969 m² of vacant floor area in the building located in the 16th arrondissement of Paris (36, rue de Marbeuf), taken up by Linklaters, already a tenant at 23-25, Rue Marignan.
Occupancy Rate Increases to Earlier Heights
Reflecting the lease-ups completed in 2005 and 2006, the financial occupancy rate on December 31, 2006 was 98.7% (versus 88.2% at year-end 2005).
1 Useful weighted floor area: floor area after adjustment for different types of spaces, such as “Offices, Archives – Parking Stalls – Company Restaurant” so that all spaces can be viewed with respect to the m² office space.
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Constant Portfolio Rise in Rental Revenues
On a constant portfolio basis, rental revenues increased by 11.9%, rising from €44.1 million on the December 31, 2005 reporting date to €49.4 million by year-end 2006. This €5.3 million increase can be broken down as follows: • index-linked adjustments of rental revenues brought in €1.1 million in additional rental revenues versus 2005 (+2.5%); and
• relettings of leases signed in 2005 and 2006, net of departures or temporary vacancy, produced €4.2 million in additional rental revenues (+11.5%).
Reduced Rental Stakes in 2007
On December 31, 2006, the portfolio of leases represented a rental base (net of protocol sales) of €50.7 million, for which expirations are given in the table below:
By date of next By date of lease As % of Lease terms - Year exit options As % of total expiration total
2007 5.9 11.7% 2.3 4.5% 2008 15.9 31.4% 12.1 23.9% 2009 13.8 27.2% 0.3 0.5% 2010 5.7 11.2% 1.2 2.3% 2011 4.9 9.7% 10.4 20.5% 2012 0.1 0.2% 4.6 9.2% 2013 0.0 0.0% 5.5 10.8% 2014 0.0 0.0% 3.1 6.1% 2015 and + 4.4 8.6% 11.2 22.1% TOTAL RENTS 50.7 100.0% 50.7 100.0% in millions of euros
At year-end 2006, there were 6,570 m² of lease-ups, representing total potential rental revenues of €2.9 million. Renewals to come in 2007 involve 6,860 m² (seven leases), or about €3.1 million in rental revenues (and 4.5% of lease income). These lease-ups and renewals would increase the rental base by €1.8 million (3.6%).
Klégestion
A company that specializes in office property and rental management, Klégestion is a wholly-owned subsidiary of the Group. For 2006, Klégestion generated revenues of €4.2 million, an increase of 7.1% compared with the previous year. It breaks down as follows: • €0.6 million in acquisition or monitoring fees, following the acquisition of 2 assets in 2006. These fees were the principal driver of the annual rise in revenues;
• €2.2 million in management fees; and
• €1.4 million in sales fees.
With a staff of 14 employees, payroll expense for 2006 was €1.2 million. Net earnings totaled €2.1 million.
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Segment earnings
Offices segment 12.31.2006 12.31.2005 % change Lease income 52.8 52.9 (0.1%) Other rental income 0.0 0.0 Rental income 52.8 52.9 (0.1%) Land expenses (real estate) (0.3) (0.3) 17.9% Non recovered land expenses (0.4) (1.2) (64.9%) Building expenses (owner) (2.0) (2.3) (10.0%) Net lease income 50.0 49.1 1.9% Management, administrative and related income 1.3 0.5 159.7% Other operating income 2.8 1.7 65.0% Survey and research costs 0.0 0.0 Payroll expense (2.2) (2.1) 4.4% Other operating expenses (0.9) (1.2) (22.7%) EBITDA 50.9 47.9 6.2% D&A allowance on investment and arbitrage property (13.4) (18.5) (27.8%) D&A allowance on PPE (0.8) (1.1) (20.2%) Provisions 0.0 (0.1) nc OPERATING INCOME 36.7 28.2 29.9% Share in earnings of equity method investees 0.0 0.0 Proceeds of sales 27.5 17.5 57.0% SEGMENT EARNINGS 64.2 45.8 40.3% in millions of euros
Lease income for office properties (€52.8 million) was stable in 2006 compared with the previous year. The loss of rental income generated by disposals was largely offset by reletting of leases in 2005 and 2006. As a result, the occupancy rate was 98.7%, compared with 88.2% in 2005, while building expenses declined by €1.1 million.
Net rental revenues totaled €50.0 million, a 1.9% increase. Other operating income included a VAT adjustment related to prior periods for €1.7 million. Personnel expense was fairly stable (€2.2 million). EBITDA was €50.9 million (+6.2%). The operating ratio (total expenses/net operating income) was 5.8% in 2006, versus 6.5% in 2005.
Depreciation and amortization for the period declined by €5.4 million, primarily due to disposals. Results from operations were €36.7 million, an increase of 29.9%. Capital gains on the sale of real estate assets were €27.5 million, related to the sale of the following buildings: Saint-Maurice (94), 140/144, boulevard Malesherbes, Vélizy (78) and a portion of the Front de Paris building in Levallois-Perret.
Earnings from the office segment totaled €64.2 million in 2006, up by 40.3%.
Revalued Net Assets
Methodology
We adjust the value of our net assets per share on December 31 and June 30 of each year. The valuation method used entails adding unrealized capital gains to the book value of consolidated shareholders’ equity. These unrealized gains reflect the difference between estimated market values and the net values recorded in the consolidated financial statements.
Valuations
We entrust the task of assessing the value of its holdings to various appraisers. For office property holdings, Foncier Expertise and Atisreal Expertise (formerly Coextim) jointly perform this task. The Retail Consulting Group (RCG) values its shopping center holdings in all countries, with the exception of the shopping centers held by Klécar Foncier Iberica (for which appraisals are performed by Cushman-Wakefield) and those located in Hungary and Poland, where the task is performed by ICADE Expertise. The holdings appraised by the latter two firms represent 20% of our shopping centers in terms of number of properties.
All of these appraisal assignments are awarded on the basis of the Real Estate Appraisal Guidelines (Charte de l’Expertise en Evaluation Immobilière) and in accordance with the recommendations issued by the COB/CNC “Barthès de Ruyter Work Group.” Fees paid to appraisers are set prior to their property valuation work, on a lump sum basis in accordance with the size and complexity of the assets being appraised, and independently of the appraised value of the assets.
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2006 Appraisal Fees Consulting Fees Atisreal Expertise- Foncier Expertise 80 – Retail Consulting Group 957 345 Icade Expertise – Icade Conseil 150 787 Cushman & Wakefield 100 – in thousands of euros
Offices
The appraisers combine two approaches: the first entails a direct comparison with similar transactions completed in the market during the period, while the second involves capitalizing individual yields (observed or estimated). An analysis of these yields reveals that one of three situations prevails: lease income is either substantially equal to, higher than or lower than market value. If lease income and market value are substantially equal, the lease income used in the valuation is the actual lease income earned on the property. If lease income is higher than market value, the valuation uses market value and takes into account a capital gain calculated from the discounted value of the difference between actual lease income and market value. If lease income is lower than market value, the appraisers consider the scheduled term of the corresponding lease, at which time the rental price will be aligned with going rates. Pursuant to the French decree of September 30, 1953, the rental prices of properties that are used solely as office premises are automatically aligned with market rates when the leases in question come up for renewal. Consequently, the appraisers work on the assumption that the owners of such property would be able to align rents with market rates when the corresponding leases came up for renewal, and took into account the current conditions of occupation in the form of a capital loss calculated as before. However, unlike prior valuation adjustments, the appraisers did not limit their approach to properties coming up for renewal in the three years to come, on the grounds that the investors participating in current market transactions make projections that extend beyond this three-year horizon. In the second case, the financial capital gain observed was added to the appraised value derived, equal to the discounted value (at a rate of 5.5%) of the difference between actual lease income and market price until the first firm period of the lease expires. In the third case, a capital loss was deducted from the derived value, equal to the discounted value (at the rate of 5.5%) of the difference between actual lease income and market price until the lease expires.
Starting on December 31, 2005, the appraiser reasons on the basis of the rate of return (yield) and not on the basis of the capitalization rate. In other words, the rate that was used is that applied to the income determined as before to derive an appraised value inclusive of transfer duties. Before, the rate used resulted in a valuation exclusive of transfer duties. The decision to use this rate results from an observation of the market, in the context of transactions actually completed by investors. To derive the appraised value exclusive of transfer duties, transfer duties and fees were deducted at the rate applicable to each relevant country (see “– RNA excluding transfer duties”).
Shopping centers
To determine the fair market value of a shopping center, appraisers apply a yield rate to net annual lease income for leased-up premises, and to net market price for vacant properties. The yield rate is applied after deduction of the net present value of all reductions or rebates on leases with base rents and the net present value of all expenses on vacant premises. The discount rate used is equal to the yield rate applied to determine fair market value. Gross rental revenue includes minimum guaranteed rental revenue, variable rental revenue and the market price of any vacant premises. Net rental revenue is determined by deducting all charges from the gross rental revenue, including management fees, expenses borne by the owner and not passed on to tenants, and charges paid on vacant premises.
The appraiser determines the yield rate on the basis of numerous variables, in particular retail sales area, layout, competition, type and percentage of ownership, rental reversion and extension potential, and comparability with recent market transactions. As for rental reversion potential, the appraiser determines the market rental value for the shopping center in its present state on the basis of the shopping center’s location and the revenues generated by its tenants. The shopping center’s development potential is determined by calculating the difference between the market rental value and the current rents being charged.
An internal rate of return is also calculated using a method that involves discounting a series of cash flows, generally to 10 years, based on a number of predefined assumptions. The estimated resale value at the end of this period is generally calculated using a cap rate that is equal to or slightly higher than that initially applied to the net end of period rental revenue. In sum, the appraiser derives a current value by determining the yield rate that applies under prevailing market conditions, the current annual rental revenue and the shopping center’s reversionary potential. The appraiser then verifies that the internal rate of return derived is consistent by calculating an IRR. This result in a value that is inclusive of transfer duties, from which duties (which are calculated at the rate applicable to each relevant country for deriving a value exclusive of duties) must be deducted (see RNA including transfer duties).
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Valuation of the Ségécé group
This appraisal, which is performed on our behalf by Aon Accuracy, is primarily based on a range of estimates obtained using the Discounted Cash Flow (DCF) method. The DCF method consists of estimating the future cash flows of current business in our portfolio before the explicit or implicit cost of financing is taken into account. In the second step, which seeks to estimate the value of the business portfolio, these cash flows and the estimated future value of the portfolio of business at the end of the projected period (terminal value) are discounted using a reasonable rate. This discount rate, which is derived on the basis of the Capital Asset Pricing Model (CAPM) formula, is the sum of the following three factors: the risk-free interest rate, the systematic risk premium (average expected market risk premium times the beta coefficient of the business portfolio) and the specific risk premium (to account for that portion of the particular risk that is not already integrated in the cash flows). The third and last step consists of determining the value of the group’s equity by extracting net financial debt on the date of valuation from the portfolio’s total value and, where applicable, the estimated value of minority interests on that same date.
Assessing the value of debt and interest-rate hedging instruments
Effective December 31, 2005, RNA incorporates the fair value of debt and interest rate hedging instruments that are not recorded under consolidated net assets pursuant to IAS 32-39, which essentially involves marking to market the fixed rate, non- hedged portion of debt.
RNA including transfer duties and before taxation on unrealized capital gains
The valuation of properties is initially presented inclusive of property transfer duties. Properties that are held for sale under a firm commitment on the date of the valuation are valued at their probable selling price, less related fees and taxes. For properties acquired less than six months before the date of the calculation, acquisition prices are used.
We do not adjust the values of shopping centers under development, even in cases where building permits have been granted. Until these shopping centers open, they are carried in the consolidated financial statements at cost, and this figure is used to calculate revalued net assets. The Ségécé group is appraised annually using the method described in detail above. Equity interests in other service subsidiaries, including Klégestion and Klépierre Conseil, are not reappraised. This initial calculation provides revalued net assets “including transfer duties and before taxation on unrealized capital gains.”
RNA excluding transfer duties
A second calculation is made to establish revalued net assets excluding transfer duties. Duties on office properties are calculated individually using the rates set forth below. Duties on shopping centers are calculated property by property for companies that own several real-estate assets, or on the basis of revalued securities if the company owns only one property asset. This approach was considered to be the most relevant considering that investors are more likely to acquire shares in companies that own shopping centers and that we generally are more likely to seek other backers for its projects than to sell full ownership in shopping centers. Naturally, transfer duties are calculated on the basis of applicable local tax regulations. For France, the rate used for transfer duties is 6.20%. We did not opt to use the most advantageous rate (1.8%) for properties that still fall within the scope of the VAT since it does not currently plan to sell within the prescribed deadline.
RNA excluding transfer duties and after taxation of unrealized capital gains
A third calculation is made to establish revalued net assets excluding transfer duties and after taxes on unrealized capital gains. In the consolidated balance sheet, deferred taxes are recognized pursuant to current accounting regulations in force, on the basis of appraised property values, for the portion which corresponds to the difference between the net book value and the tax value as determined by capital gains tax rates in force in each country. At the June 30, 2005 reporting date, the RNA calculation was adjusted to include the tax on unrealized capital gains corresponding to the difference between the net book value and fair value on this same basis. At the December 31, 2005 reporting date, and to align our practices with those of our principal peers, we considered the type of ownership of our properties, using the same approach as that used to determine transfer duties.
For office properties, the treatment is based entirely on property ownership, but since the entire scope of such property benefits from tax exempt status as an SIIC, there is no unrealized taxation.
For the shopping centers, and depending on the country, taxes on unrealized capital gains are based on the tax rate applied to the sale of buildings for companies that own several properties, and at the tax rate applicable to securities for companies that only own one property.
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Revalued Net Assets (RNAV) at December 31, 2006
Appraisal results
The value of our real estate holdings including transfer duties was €9.1 billion (total share) and €8.1 billion (group share). Of the total share, shopping centers represent 88.7% and offices 11.3%, while the group share percentages are 87.3% and 12.7%, respectively. On a constant portfolio basis, office assets increased in value by 14.9% in 2006, while the value of shopping center assets grew by 14.7% over the same period, compared with respective increases of 8.7% and 11.1% in the first half of 2006.
HOLDINGS (TOTAL SHARE) Current portfolio basis Constant portfolio basis 12.31.2006 12.31.2005 Change 12.31.2006 12.31.2005 Change Shopping centers France 4,610.5 3,403.6 1,206.9 35.5% 3,908.2 3,271.2 637.1 19.5% Spain 1,084.7 941.4 143.4 15.2% 951.2 845.2 106.0 12.5% Italy 1,173.8 1,071.2 102.6 9.6% 919.8 857.1 62.7 7.3% Hungary 350.2 340.0 10.2 3.0% 350.2 340.0 10.2 3.0% Poland 211.9 206.5 5.5 2.7% - - - - Portugal 177.8 145.6 32.3 22.2% 146.1 145.6 0.6 0.4% Other countries 487.3 387.3 100.0 25.8% 258.7 236.9 21.8 9.2% Total, Shopping Centers 8,096.2 6,495.5 1,600.7 24.6% 6,534.2 5,696.0 838.3 14.7% Total, Offices 1,031.2 951.0 80.2 8.4% 966.6 841.4 125.2 14.9% TOTAL, REAL ESTATE 9,127.4 7,446.5 1,680.9 22.6% 7,500.9 6,537.4 963.5 14.7% HOLDINGS
HOLDINGS (GROUP SHARE) Current portfolio basis Constant portfolio basis 12.31.2006 12.31.2005 Change 12.31.2006 12.31.2005 Change Shopping Centers France 3,870.9 2,808.8 1,062.1 37.8% 3205.0 2677.8 527.2 19.7% Spain 923.5 798.1 125.4 15.7% 789.9 701.9 88.0 12.5% Italy 1,064.5 972.8 91.7 9.4% 815.6 760.6 55.0 7.2% Hungary 350.2 340.0 10.2 3.0% 350.2 340.0 10.2 3.0% Poland 211.9 206.5 5.5 na - - Portugal 177.8 145.5 32.3 22.2% 146.1 145.5 0.6 0.4% Other countries 473.7 375.3 98.4 26.2% 245.6 224.9 20.7 9.2% Total, Shopping Centers 7,072.5 5,647.1 1,425.5 25.2% 5552.5 4850.8 701.7 14.5% Total, Offices 1,031.2 951.0 80.2 8.4% 966.6 841.4 125.2 14.9% TOTAL, REAL ESTATE 8,103.7 6,598.1 1,505.6 22.8% 6519.1 5692.1 826.9 14.5% HOLDINGS
Offices
On a constant portfolio basis, the value of our office properties increased by 14.9% in 2006 (and by 8.7% over six months). Based on appraised values at December 31, 2006 (transfer duties included), the average yield on the portfolio was 5.5% for 2006, a decline of around 60bps over 12 months.
Values, transfer duties Average yields included 12.31.06 (including transfer duties) €M % 12.31.2006 12.31.2005 Offices Constant basis – Total share Paris – West 551.2 57.0% 5.2% 5.7% Paris – East 50.9 5.3% 5.6% 6.0% re Paris immediate vicinity (“1 couronne”) 363.1 37.6% 5.9% 6.5% Others 1.4 0.1% 13.4% 7.9% TOTAL 966.6 100.0% 5.5% 6.1%
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In 2006, four office properties were sold for a total of €112.6 million. The sales prices were 11.3% higher than the most recent appraised values for these properties. On a current portfolio basis, the increase in the value of assets also takes into account the acquisition in December of an office property located in Paris (2nd arrondissement) and a project under development in Issy- les-Moulineaux, for which their stated book values were used for the calculation of RNA. The office portfolio is valued at €1,031.2 million. Two of these properties have an estimated unit value that exceeds €100 million, six have a unit value of between €100 million and €50 million, and 14 have a unit value of less than €50 million.
Shopping centers
On a constant portfolio basis at year-end 2006, our shopping center holdings, including transfer duties, increased in value by 14.7% in light of the rental reversions and the decline in yields. The average decline in yields over the year that was used by the appraisers was around 50bps, which translates into an average yield on the portfolio of 5.8%, including transfer duties.
Shopping centers Constant portfolio – total share Values, transfer duties Average yields (values, included 12.31.06 transfer duties included) €M % 12.31.2006 12.31.2005
France 3,908.2 59.8% 5.5% 6.0% >100 €M 1,742.9 5.0% 5.5% 100>x>50 €M 904.5 5.3% 5.6% <50 €M 1,260.9 6.3% 6.7% Spain 951.2 14.6% 6.0% 6.7% >50 €M 396.1 5.6% 6.4% <50 €M 582.1 6.3% 6.9% Italy 919.8 14.1% 6.0% 6.3% >50 €M 531.8 5.5% 5.8% <50 €M 388.0 6.6% 6.9% Portugal 146.1 2.2% 7.2% 7.2% Hungary 350.2 5.4% 7.4% 7.5% Others 258.7 4.0% 6.8% 7.4% TOTAL 6,534.2 100.0% 5.8% 6.3%
On a current portfolio basis, the increase in the value of assets includes the acquisition of Buffalo Grill restaurants, the Valenciennes and Toulouse Purpan shopping centers in France, Novo Plaza in Czech Republic, Molina de Segura in Spain, Braga
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in Portugal and various projects under development, for which their stated book values in the group’s financial statements were used to calculate RNA.
The shopping center property portfolio is valued at €8,096.2 million (€7,072.5 million, group share). Of the 236 shopping centers under our ownership (excluding those currently under construction), 15 of these properties have a unit value that exceeds €100 million, 25 have a unit value of between €50 million and €100 million, and 196 have a unit value of less than €50 million.
Revalued net assets at December 31, 2006 up by 34.1% over 12 months On the basis of appraisals including transfer duties, revalued net assets after deferred taxes on capital gains and marking to market of debt amounted to €97.4 per share, versus €72.6 on December 31, 2005 and €79.9 on June 30, 2006, a six-month increase of 21.9% and a 34.1% increase in 12 months.
Revalued net assets excluding transfer duties, after deferred taxes on capital gains and marking to market of debt amounted to €91.5 per share, as opposed to €67.5 on December 31, 2005 and €74.5 on June 30, 2006.
Determination of Revalued Net Assets 12.31.2006 06.30.2006 12.31.2005 06.30.2005 Balance Group Balance Group Balance Group Balance Group Sheet Share Sheet Share Sheet Share Sheet Share
Consolidated shareholders’ equity 2,392 1,955 2,241 1,825 2,305 1,880 2,178 1,756 Real estate companies goodwill (9) - - - Unrealized capital gains in real estate portfolio 2,475 1,776 1,449 992 -Appraised value 8,104 6,982 6,598 5,613 -Net book value (5,628) (5,205) (5,149) (4,621) Unrealized capital gains on non-real estate assets 102 83 73 65 -Ségécé group capital gain 102 83 73 65 Tax on unrealized capital gains (167) (129) (116) (56) Restatement of deferred taxes on securities 94 85 101 Taxes and fees related to the sale of assets (267) (247) (235) (223)
Revalued Net Assets 4182 3393 3,152 2,534 Number of shares. fully diluted 45,768,408 45,723,014 45,976,570 45,976,998 NAV excluding transfer duties. after taxes on unrealized capital gains (in €per share) 91.4 74.2 68.6 55.1 Marked to market of fixed rate debt excluding IAS 32-39 (in €M) 7.3 11.2 (47.4) (69.9) NAV excluding transfer duties. after taxes on unrealized capital gains and marking to market of fixed-rate debt (in €per share) 91.5 74.5 67.5 53.6 NAV including transfer duties. after taxes on unrealized capital gains and marking to market of fixed-rate debt (in €per share) 97.4 79.9 72.6 58.4 in millions of euros unless otherwise indicated
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Liquidity and Capital Resources
Overview
Real estate investments, in the form of acquisitions, development of new properties or expansions/renovations of existing properties, constitute our principal financing need, together with dividend payments and the repayment of debt. We have historically met our financing needs through cash flow generated from operating activities and asset sales, which to date have concerned mainly sales of office buildings. We have financed the remainder of our cash needs through debt financing.
We seek to maintain a level of debt financing that is appropriate in light of the value of our portfolio and the level of our operating cash flow. Accordingly, we base our financing policy on key ratios, including our loan to value ratio (net debt to revalued net assets), which we ensure does not exceed 50%, and our interest coverage ratio, which we seek to maintain at a level of at least 2.5.
Reflecting this policy, our growth over the past ten years has been accompanied not only by an increase in our overall indebtedness but also by several capital increases: in 2002, for €130 million, through the conversion of a convertible bond issued in 1998, and in 2004 and 2008, for approximately €69 million and €131 million, respectively, through dividends paid in the form of shares.
We also aim to ensure diversity in both our financing sources and their respective maturity dates by accessing multiple markets including the bank financing market and the Eurobond market. We also pursue an active interest rate hedging policy aimed at enhancing the stability of our financing costs and safeguarding our ability to achieve profitable growth.
After giving effect to the acquisition of Steen & Strøm (which closed on October 8, 2008), but before application of the net proceeds of this offering, we had aggregate borrowing capacity under our credit lines of approximately €553 million, compared to €1,235 million of capacity for Klépierre on a pre-acquisition basis at June 30, 2008, reflecting:
- the refinancing of a maturing Eurobond of €600 million on July 10, 2008,
- the incurrence of two secured financings in Italy for a total amount of €125.75 million in early July 2008,
- the payment of €601 million -- our share of the purchase price of Steen & Strøm -- on October 8, 2008,
- our entry into a new €400 million bilateral credit facility with BNP Paribas on October 7, 2008, which remains undrawn following the acquisition,
- availability under Steen & Strøm’s lines of credit (€102 million at June 30, 2008),
- and, for the remainder, operating cash flows (including payment of rents attributable to the third and fourth quarters) and expenditures relating to various investments.
Financial resources
We have historically relied on the following three main sources of liquidity:
- Operating activities, which generated net current cash flow of €192 million in the first half of 2008 and €355 million in 2007.
- The sale of real estate assets, mainly in the office property segment. Sales amounted to €137.5 million to date in 2008, and €108.9 million in 2007. We intend to accelerate our sales of properties, in both our office properties and shopping center segments, and accordingly have announced projected asset sales of approximately €1 billion by the end of 2009, of which €500 million relate to sales of Steen & Strøm assets.
- Debt: Our net debt amounted to €7,035 million at June 30, 2008, on a pro forma basis following the acquisition of Steen & Strøm (which will be partially refinanced by applying the net proceeds of the offering). Net debt is calculated by adding current and long-term financial liabilities, (restated, in the case of Klépierre, for the effect of a €18.6 million fair value hedge), and subtracting cash and cash equivalents.
We describe the methodology and assumptions used to prepare the pro forma financial information used in this offering circular under “Unaudited Pro forma Financial Information” elsewhere in this offering circular.
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As a general matter, we rely, for our debt financing, on both the bank market (syndicated loans, bilateral loans, secured financings, finance leases) and the Eurobond market (with €1,300 million of outstanding bonds (after the refinancing of a maturing Eurobond of €600 million on July 10, 2008) as of the date hereof) and, to a lesser extent, the commercial paper market. As of October 9, 2008, after financing the Steen & Strøm acquisition but before taking into account the application of the net proceeds of this offering, we had approximately €553 million in unused lines of credit.
The international financial crisis, which has intensified since the beginning of 2008, has reduced the availability of financing on favorable terms. We believe our access to financing will be facilitated by our portfolio of real estate assets, which can be pledged (subject to compliance with the covenants under our financing agreements) as collateral for secured financing and by our affiliation with the BNP Paribas group. Our credit rating from Standard & Poor’s (BBB+ with a stable outlook) is also an asset when seeking financing at the corporate level. Depending upon real estate and financial market conditions, we may also consider further accelerating sales of existing properties to finance a portion of our investment pipeline.
Use of Funds
Investments
Investments amounted to €724.1 million during the first three quarters of 2008, and €1,080 million in 2007. For additional information relating to our development projects, see “Business – Shopping Centers – Development Portfolio”.
Dividends
Our policy is to align the growth of our dividends with growth in our principal financial metrics – net current cash flow and revalued net assets. We distributed dividends of €169.4 million in 2007 (of which €131 million was distributed in the form of shares) and €146.4 million in 2006. Dividends for the 2008 fiscal year will comply with our dividend policy and distribution requirements applicable to SIICs. See “Regulation.”
Debt
Our debt
Drawings under our principal lines of credit at June 30, 2008 and following the acquisition of Steen & Strøm (before taking into account the debt of Steen & Strøm, which is described later in this section) were as follows:
June 30, 2008 October 9, 2008 (€Million) Amounts used Amounts available Amounts used Amounts available Eurobonds 1,900 - 1,300 - Syndicated Loans 1,950 1,150 3,100 - Bilateral bank loans, including 436 - 349 433 short-term bank advances Secured financing 182 - 304 - Leasing 286 - 268 - Commercial Paper 215 85 260 40 Total 4,969 1,235 5,581 473
All of our financings incurred prior to the acquisition of Steen & Strøm are denominated in euros.
• Eurobonds (€1,900 million at June 30, 2008). We have issued three series of fixed rate Eurobonds since 2001, for a total amount of €1,900 million outstanding at June 30, 2008. The initial issuance, with a principal amount of €600 million, was repaid at maturity on July 10, 2008. The other two Eurobonds mature in 2011 and 2016, and have principal amounts of €600 and €700 million, respectively.
• Syndicated Bank Debt (€1,950 million drawn at June 30, 2008). At June 30, 2008, we had three syndicated lines of credit maturing in 2011, 2013 and 2014, respectively, under which €1,800 million had been drawn, and a €150 million line of credit (entirely drawn) maturing in 2011 at the Klémurs level. BNP Paribas, our majority shareholder, was the lender of
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€1,070 million, or approximately 55%, of the €1,950 outstanding. These credit lines are subject to floating interest rates based on Euribor.
We have financed the increase in outstanding debt since June 30, 2008 (including the refinancing of the maturing Eurobond and the payment of our portion of the purchase price for Steen & Strøm), by drawing under our credit facilities. See above for a description of the principal transactions affecting the amounts available under our credit facilities. This explains the decrease in the amount available under our syndicated credit facilities from €1,150 million at June 30, 2008 to zero at October 9, 2008.
• Other Bank Debt (€904 million at June 30, 2008): We and our affiliates have incurred additional bank financing under bilateral arrangements, secured loans and finance leases for a total amount of €904 million at June 30, 2008. The most significant borrowings are:
- two bilateral loans granted by BNP Paribas for an aggregate amount of €300 million, maturing in 2010; and
- a secured loan put in place by Klécar Italia in Italy, for an outstanding amount of €112 million, maturing in 2015.
In early July 2008, we entered into two new secured loans for approximately €126 million in Italy. On October 7, 2008, we also entered into a four-year €400 million bilateral credit agreement with BNP Paribas. This credit line demonstrates the support of our majority shareholder in the midst of an otherwise tight credit market. This bilateral line of credit was not drawn to finance the acquisition of Steen & Strøm. Except for the two bilateral loans described above, which bear fixed interest rates, the above-described loans bear floating interest rates based on Euribor.
• Commercial Paper (€215 million at June 30, 2008): Our commercial paper borrowings never exceed €300 million, the cap under a backup line of credit maturing in 2013 that we maintain and would use in the event of adverse market conditions. The increase in outstanding commercial paper from €215 million at June 30, 2008 to € 260 million at October 9, 2008 reflects the use of commercial paper, together with drawings under our credit facilities, to finance a portion of our financing needs since June 30, 2008.
Assumption of Steen & Strøm Debt in the Acquisition
Steen & Strøm has historically financed itself essentially through secured financing, which represented approximately 82% of its borrowings at June 30, 2008, with the remaining balance corresponding to bilateral bank loans and two bond issuances. All of Steen & Strøm’s outstanding debt is subject to floating interest rates and denominated in local currencies. The following table summarizes the composition of Steen & Strøm’s debt at June 30, 2008 and October 9, 2008:
June 30, 2008 October 9, 2008 (€Million) Amounts used Amounts available Amounts used Amounts available Financings in NOK 894 52 877 32 Bonds 87 - 84 - Bilateral bank loans including 158 52 170 32 short-term bank advances Secured financing 637 - 611 - Commercial Paper 12 - 12 - Financings in SEK 438 50 428 48 Bilateral bank loans including 60 - 58 - short-term bank advances Secured financing 378 50 370 48 Financings in DKK 468 - 458 - Secured financing 468 - 458 - Total 1800 102 1763 80
Steen & Strøm’s drawings shown in the table above were converted into euros at the following exchange rates on the dates indicated.
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June 30, 2008 October 9, 2008 €/NOK 8.021 8.364 €/SEK 9.436 9.657 €/DKK 7.292 7.454
With the exception of a €20 million increase in drawings under a NOK-denominated bank line subsequent to June 30, 2008, Steen & Strøm’s drawings listed above would be the same on June 30 and October 9, 2008 at constant exchange rates.
• NOK-denominated financings (€894 million at June 30, 2008): Steen & Strøm’s NOK-denominated credit facilities include:
- several bank loans, for approximately €795 million, with maturity dates ranging between 2009 and 2031. At June 30, 2008, €52 million was available under these credit facilities;
- two bond issues of NOK 300 and NOK 400 million (€37 million and €50 million, respectively), maturing in 2009 and 2010, respectively;
- Norwegian commercial paper of approximately €12 million.
These borrowings are all subject to floating interest rates based on NIBOR.
• SEK-denominated credit facilities (€438 million at June 30, 2008): Steen & Strøm’s credit facilities in Swedish Krona are split among several bank loans with maturity dates ranging from 2009 to 2036. At June 30, 2008, €50 million was available for borrowing under these credit facilities, which are subject to floating interest rates based on STIBOR.
• DKK-denominated credit facilities (€468 million at June 30, 2008): Steen & Strøm has three secured financings in Danish Krone maturing in 2026, 2033 and 2024, respectively. These credit facilities are all subject to floating interest rates based on CIBOR.
In summary, following the acquisition of Steen & Strøm, our available borrowing capacity amounts to €553 million, to which will be added the net proceeds of this offering.
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Covenants and financial ratios
Our principal long-term debt instruments contain financial covenants, the breach of which could result in the acceleration of the amounts due. The following table summarizes our compliance with our principal covenants and financial ratios at June 30, 2008, on a historical and pro forma basis after giving effect to the acquisition of Steen & Strøm (partially refinanced by the capital increase).
June 30, Pro forma Financings Ratios / covenants Limit 2008 June 30, 2008 Net Indebtedness ≤ 52%; / Revalued value of assets 55% temporary 41.7% 47.4% (loan to value) limit (1) EBITDA / Interest Expense ≥ 2.5 3.2 2.6 Klépierre SA Secured Financial Debt Syndicated and ≤ 20% 3.9% 13.2% / Revalued net assets Bilateral Loans Revalued net assets (group share) ≥ €9 billion (2) €10.7 billion €11.7 billion Ratio of financial debt of subsidiaries (excluding Steen & Strøm) to total ≤ 30% 16.4% 15.6% financial debt (3) Klépierre SA Ratio of secured debt to revalued net ≤ 50% 8.1% 31.2% Eurobonds assets(4) (1) the agreements allow us to exceed the 52% limit (but not to exceed a limit of 55%) for a six month period based under certain circumstances (acquisitions or significant decreases in asset values) (2) threshold under our most restrictive credit agreement (3) the exclusion of Steen & Strøm’s debt that is non-recourse to Klépierre and the reduction of the threshold from 33% to 30% were put in place under amendments to our credit facilities negotiated prior to the closing of the Steen & Strøm acquisition (4) revalued net assets including transfer duties and before taxation
None of our debt agreements contains covenants requiring us to maintain a specific financial rating.
As of the date hereof, we are in compliance with all of our covenants under our debt agreements.
In granting its “BBB+, positive outlook” rating to Klépierre in January 2007, Standard & Poor’s cited the following three financial ratios:
• “Loan-to-value” < 50%; • EBITDA / Interest expenses > 2.5%; • Net Current Cash Flow / Net Debt > 7%.
These indicative levels are evaluated along with other elements relating to our operational and financial profile. The first two ratios are included in the table above. The third ratio, Net Current Cash Flow / Net Debt, was 7.7% at June 30, 2008 prior to the acquisition, and amounts to approximately 6% on a pro forma basis.
Steen & Strøm’s credit agreements generally contain a financial covenant that applies to each of Steen & Strøm’s secured financings and requires the borrowing entity to maintain a ratio of shareholders equity to revalued net assets of at least 20%. All companies of the Steen & Strøm and Klépierre groups that are subject to such credit agreements are in compliance with these covenants as of the date hereof.
Maturity profile of our debt
Steen & Strøm’s local currency credit facilities in its three markets generally have longer terms than our credit facilities. As a result, the average term of the Steen & Strøm group’s debt is 6.2 years (at October 9, 2008), whereas the average term of our debt at June 30, 2008 (prior to the acquisition of Steen & Strøm), was 4.9 years. The following table summarizes the maturity dates of our borrowings based on the maximum amounts authorized for borrowing under each line at October 9, 2008.
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DebtEchéanciers maturities des for dettes Klépierre post acquisition at October Steen 9, 2008 & Strøm (Authorized(Autorisations Amounts - –millions in millions d'euros) of euros)
2000 1 535 1 527 1500 1 027 427 1000 84 331 724 500 16 45 240 24 0 21 85 66 72 294 32 219 130 44 126 749 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2017 2018+ Steen & Strøm Klépierre
Management of interest rate risk
To limit our exposure to interest rate fluctuations, our policy is to hedge at least 70% of our interest rate exposure on a consolidated basis, i.e., to maintain a hedge ratio -- the proportion of our fixed rate borrowings and borrowings hedged into fixed rates relative to total borrowings -- at a level of at least 70%.
To this end, we have entered into swap agreements, most of which are intended to allow us to convert floating rate debt into fixed rate debt. As a result of these swaps, our hedge ratio was 85% at June 30, 2008. The hedge rate was further strengthened in August 2008 by the entry into new swap agreements for a notional amount of €800 million.
Steen & Strøm’s hedge rate was 33% at June 30, 2008. Since the acquisition, Steen & Strøm has taken steps aimed at increasing its hedge ratio to bring it closer to 60% on a short-term basis, if market conditions so allow. Steen & Strøm took advantage of improving local market conditions to enter into new swap contracts in October 2008, increasing its hedge ratio to 43% as of October 31, 2008.
Our consolidated hedge ratio after the acquisition of Steen & Strøm was 76% on October 9, 2008, and 78% after taking into account the additional hedges entered into by Steen & Strøm between October 9 and October 31, 2008.
The average term of Steen & Strøm’s fixed-rate debt (after hedging) is 4.3 years for a fixed right of approximately 4% (excluding margin)
Management of exchange rate risk
Most countries in which we conduct our business are located in the euro zone, with the exception of Eastern Europe (Poland, Hungary, the Czech Republic and Slovakia), and, following the acquisition of Steen & Strøm, Scandinavia (Norway, Sweden, Denmark).
In Eastern European countries, where leases are generally denominated in euros, we protect ourselves against exchange rate risk by financing the relevant companies through shareholder loans denominated in euros.
In contrast, in Scandinavia, where leases are denominated in local currencies, we raise financing in local currency. Our exposure to exchange rate risk on the Scandinavian market is therefore mainly limited to our funds invested in Steen & Strøm (€601 million), for which we are studying potential hedging arrangements or local currency refinancing.
Cost of debt
The average cost of our debt (calculated as the ratio of financing costs over average outstanding indebtedness) during the first nine months of 2008 was 4.4%, versus 4.3% during the first half of 2008.
The average cost of Steen & Strøm’s debt over the first half of 2008 was 5.6%, which reflects relatively high short-term Norwegian interest rates. In the future, the cost of Steen & Strøm’s debt should be reduced due to increased hedging implemented by Klépierre since the acquisition.
Based on our financing structure and hedging arrangements at October 31, 2008, our projected cost of debt is 4.7% at October 31, 2008. A 100 basis points increase in interest rates compared to the levels of October 31, 2008 would result in a 0.22% rise in the cost of debt – i.e. a negative pre-tax impact of €16.3 million.
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Off-balance sheet commitments
Our main off balance sheet commitments at June 30, 2008 are summarized in the section “Finance and Guarantee Commitments” in the notes to our consolidated financial statements at June 30, 2008. The guarantees given by Steen & Strøm in the context of its financings are summarized in the section “Long-Term Interest Bearing Debt” in the notes to Steen & Strøm’s consolidated financial statements at December 31, 2007.
Other
As indicated in “Risk Factors—We may be required to make payments to CNP Assurances and Ecureuil Vie if they exercise their exit rights under their shareholders’ agreements with us”, we hold a significant number of shopping centers in France and in Italy under shareholders’ agreements with CNP Assurances and Ecureuil Vie that provide certain exit rights to the minority shareholders in 2011, 2016 and 2017 for Italian companies, and in 2010, 2014 and 2015 for the other companies. If the minority shareholders sell their interests to third parties at a price below the underlying revalued net asset values, we may required to indemnify them for any shortfall (up to a maximum of 20% of the underlying revalued net assets). At June 30, 2008, these centers were valued at approximately €3.3 billion.
We also may be required to finance the capital requirements of our subsidiaries. In particular, the credit agreements entered into by Klémurs provide for the maintenance of financial ratios including a loan-to-value ratio (net debt/revalued net assets) of 65% (including subordinated debt) (the amount of this ratio was 60% at June 30, 2008). If Klémurs were required to raise additional capital in order to comply with its covenants, we would need to subscribe for an amount proportional to our current holding to avoid dilution of our interest.
Recent developments
On October 28, 2008, we issued a press release relating to our results for the nine months ended September 30, 2008. This press release is attached hereto as Exhibit E.
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BUSINESS
On October 8, 2008, we, together with the Dutch pension fund ABP, acquired Steen & Strøm, Scandinavia’s leading real estate company specialized in shopping centers. For a detailed description of this acquisition, see “—Acquisition of Steen & Strøm” below.
We are a listed real estate investment company (société d’investissements immobiliers cotée, or “SIIC”) specialized in commercial real estate and, particularly, in the ownership, development and management of shopping centers in Continental Europe. We also own and manage retail properties in suburbs and city centers acquired primarily from retail chains seeking to outsource their property portfolios, as well as high-end office buildings concentrated in Paris and its business districts.
The chart below provides an overview of our asset portfolio at June 30, 2008 (prior to the acquisition of Steen & Strøm).
Information at Shopping centers Retail properties Offices Klépierre Total June 30, 2008 (Klémurs) Number of properties 242 280 18 540 held Gross leasable area (m2) 2,153,466 210,155 119,799 2,483,420 Appraisal values (total 10,230.2 621.5 1,135.4 11,987.1 share) (M€) (85.3%) (5.2%) (9.5%) Revenues (M€) 315.3 16.5 25.4 357.2 (88.3%) (4.6%) (7.1%) - From Rentals 284.4 15.1 25.4 324.9 From Fees 30.9 1.4 0.0 32.3
Number of properties 318 280 18 under management
A portfolio focused on shopping centers
For many years, we have deliberately chosen to focus our property holdings and activities on shopping centers, because we consider this market to be particularly attractive on several levels:
− Shopping centers are characterized by high occupancy rates, leases with long terms, generally recurring growth in rental revenues – notably due to index-linked rents – and lower exposure to economic cycles than office properties;
− Regulatory limitations on new developments in our principal markets present an advantage for incumbent operators like Klépierre. For a description of the regulatory framework for our activities, see “Regulation.”
− Shopping centers require management skills that demand in-depth knowledge of the consumer sector and retailers (continual adjustment of the mix of retailers, events, merchandising, etc.).
We have several advantages in the shopping center market: the unique experience of our staff, which operate through our subsidiary Ségécé, a European leader in the management of shopping centers (active in the market for over 50 years), an integrated business model involving ownership, management and development of properties, and the deployment of this model in all of our markets. As a long-term owner, we are incentivized to make the investments required to promote the success and growth of our properties. Our experience as a property manager, including on behalf of third parties, enables us to better design sites that meet the demands of consumers and retailers, and to enhance the value of such sites through high occupancy rates and rentals to strong retail tenants. Being a developer also offers us opportunities to acquire properties on favorable terms.
A European ambition
We were formed in 1990 as a spin-off from Locabail-Immobilier, of which we retained the rental property holdings. Since that time, we have significantly expanded our portfolio of shopping centers through targeted acquisitions, the development of new centers and expansions of existing sites. Our growth has been built in large part on our ability to develop new partnerships, with retailers as well as with developers. Our agreement with Carrefour in 2000 was an important step in our European development; in Italy, we have developed centers over a number of years alongside the Finim and Finiper Groups; in Eastern Europe, following our acquisition of a shopping center in Slovakia in 2001, we acquired our first Hungarian centers in 2004 from
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Plaza Centers Europe, with whom we also collaborated when making our first investments in Poland in 2005. In each country, we have pursued a coherent growth strategy, seeking to attain critical size in property management, while at the same time pursuing development opportunities, with an emphasis on investing early in the development process.
On October 8, 2008, we acquired Steen & Strøm, Scandinavia’s leading real estate company specialized in shopping centers. For a detailed description of this acquisition, see “—Acquisition of Steen & Strøm.” Following the acquisition, our principal markets are France, Norway, Italy and Spain, which together represent approximately two-thirds of our property holdings, and we are present in 13 countries in Continental Europe.
A multi-format portfolio designed to appeal to retailers across the spectrum
As retailing concepts and the competitive environment have continued to evolve in rapid fashion, European retailers have diversified the locations of their stores; seeking not only regional, suburban and downtown shopping center locations, but also standalone locations in city centers or suburban locations.
We seek to accompany large retail chains as they grow, regardless of the type of rental location needed. In addition to our portfolio of shopping centers, we have established a subsidiary, Klémurs, which focuses primarily on properties acquired from retail chains seeking to outsource their property portfolios. Listed on the stock exchange in 2006, Klémurs has established strategic partnerships with retail groups including Buffalo Grill and Défi Mode / Vivarte.
A limited portfolio of high-end office properties in Paris
Our office portfolio consists primarily of high-end properties in the Paris central business district and the near western suburbs of Paris. The proportion of our portfolio made up of office properties has declined from 68% in 1998 to 9% at June 30, 2008. We believe our office property activities complement our shopping center business in terms of economic cycles, risk profile and opportunities to deploy and raise funds. We have pursued, and continue to pursue, an opportunistic approach to the Paris office market, Europe’s largest market in terms of size and liquidity.
As we continue to develop our position in the shopping center market, we intend to accelerate our disposals of office properties, depending on market conditions and our financing needs.
A stable growth model
Our recurring growth over the last decade is based on a financial model that is closely tied to our business model: the organic growth driven by index-linked rent adjustments in our leases and rent increases at the end of lease terms is built on a strong and recurring underlying growth driver – consumer spending. External growth depends in turn on a concerted effort to create asset value (expansions of existing properties, acquisition of new properties or targeted portfolios through partnerships, and real estate development). Finally, we believe that prudent recourse to leverage will reinforce our ability to generate recurring growth in our net current cash flow per share.
Although the overall balance has changed, the new economic and financial environment in the wake of the continuing global economic crisis that began in the summer of 2007 does not call the fundamentals of our model into question. The stability of rental revenues (long lease terms, indexation, low vacancy rates) should continue to support organic growth. On the other hand we will take an even more selective approach to our external growth strategy, focused on higher margin opportunities: we are focusing on centers we believe will generate, over the short or medium term, rent increases that exceed our rate of return. We have also reinforced our ability to participate at an earlier stage in the design process for our investments outside France, which we believe will allow us to better manage the various parameters and enhance our ability to ensure value creation at the end of the process. Finally, the tightening of financing terms and the increase in interest rate levels will lead us systematically to consider asset sales, as a means of financing investments in new properties – including shopping centers where we will favor partial sales (selling equity interests in certain shopping centers or certain asset portfolios). This policy is designed to allow us to seek arbitrage opportunities while maintaining a coherent business philosophy that will allow us to preserve our geographical presence and to maintain control over key assets.
The information presented below under “— Shopping Centers,” “– Klémurs – retail property specialist” and “– Office Properties” does not reflect the impact of the acquisition of Steen & Strøm. For information concerning the acquisition of Steen & Strøm, see Chapter 2 “Acquisition of Steen & Strøm.”
Shopping Centers
With property holdings that included 242 shopping centers comprising a gross leasable area of 2.2 million m2 in 10 countries in Continental Europe at June 30, 2008, we are one of Europe’s leading developers and managers of shopping centers.
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At June 30, 2008, we managed 318 shopping centers, including 76 centers on behalf of third parties, in nine countries in Continental Europe. Rental revenue generated by the our shopping centers amounted to €284.4 million for the first half of 2008 and €517.9 million in 2007, and management fees amounted to €30.9 million in the first half of 2008 and €63.3 million in 2007. At June 30, 2008, the appraised value of our shopping center portfolio was €10,230.2 million (total share).
The following table provides selected information concerning our portfolio of shopping centers, by country and by region, at the dates indicated. A complete list of the shopping centers owned by us is provided in Schedule 1. The names of the experts, the distribution of assets per expert and the main evaluation assumptions are described in the section entitled “Revalued Net Assets” in the Management Report for the first half of 2008 appearing in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Management Report”.
Shopping Centers Rental and management At June 30, 2008 fees (in €million)
Six months Gross Property ended Leasable holdings (2) Financial Year ended June 30, Shopping Area(1) (total share) occupancy December 2008 Centers (in m2) (in €million) rate 31, 2007 Unaudited France 105 951,712 5,739.6 98.9% 312.0 168.2 Italy 34 332,151 1,504.4 98.3% 85.0 46.5 Spain 70 278,571 1,127.3 96.5% 72.5 37.0
Central Europe Hungary 12 170,161 589.6 97.6% 31.1 16.4 Poland 7 156,572 399.9 95.0% 27.5 17.6 Czech Republic 2 65,014 229.6 100.0% 14.6 8.2 1 12,314 17.9 96.3% 1.7 0.9 Slovakia ......
Subtotal...... 22 404,061 1,237.0 96.9% 74.9 43.1
Europe (other) Portugal ...... 5 92,522 273.7 97.9% 17.4 10.1 Greece 5 38,017 113.0 98.8% 7.0 4.0 1 56,432 235.2 95.7% 12.4 6.4 Belgium ......
Subtotal...... 11 186,971 621.9 97.1% 36.8 20.5
Total 242 2,153,466 10,230.2 98.2% 581.2 315.3
(1) Gross Leasable Area (sum of all retail areas including supermarkets, but excluding hallways and other common areas) owned by Klépierre and from which it collects rents. (2) Appraised value as determined by appraisals by the Retail Consulting Group Expertise, Icade Expertise, Cushman & Wakefield, Foncier Expertise and Atisreal. Appraised value for portfolio assets held for more than 6 months. Assets held for 6 months or less are valued at acquisition cost. Development projects are valued on a break-even basis.
At June 30, 2008, our portfolio of shopping centers included:
• 13 large regional shopping centers, including Créteil Soleil and Val d’Europe in France, Assago in Italie and Novy Smichov in the Czech Republic, which represent 26% of the portfolio’s asset value. The shopping centers in this category each have more than 40,000 m2 of gross leasable area, include at least 80 stores and services and attract a regional audience.
• 185 inter-city and suburban shopping centers, representing 42% of the portfolio’s asset value. The shopping centers in this category are situated outside of major metropolitan areas; they are usually adjacent to major supermarkets and attract shoppers from surrounding communities.
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• 44 downtown shopping centers, representing 32% of the portfolio’s asset value. These centers do not include a supermarket but instead have as their anchor tenants mid-size stores focused on apparel, culture/leisure activities or restaurants.
At June 30, 2008, our 10 largest shopping centers represented 20.4% of the value of our shopping center portfolio.
France
Our most important market is France, where we own and operate a geographically diverse portfolio of 105 shopping centers with a total gross leasable area (“GLA”) of 952,000 m2, valued at €5,739.6 million (total share). In the first half of 2008, rental revenues and management fees in France amounted to €168.2 million, or 47.1% of our total revenues, and €312.0 million for the 2007 fiscal year. The financial occupancy rate was 98.9% at June 30, 2008. Of our 105 shopping centers in France, 87 are adjacent to Carrefour supermarkets.
The table below shows the locations of our shopping centers in France.
Shopping Centers Paris and Île-de-France...... 18 Rhône-Alpes ...... 11 Nord-Pas-de-Calais...... 11 Provence – Côte d’Azur...... 10 Bretagne...... 8 Other regions ...... 47 Total...... 105
Italy
With 34 shopping centers valued at €1,504.4 million (total share) at June 30, 2008, Italy is our second largest market by value. Our Italian portfolio includes a total of 332,000 m2 of GLA. In the first half of 2008, rental revenues and management fees in Italy amounted to €46.5 million, or 13% of our total revenues, and amounted to €85.0 million for the 2007 fiscal year. The financial occupancy rate was 98.3% at June 30, 2008. Of our 34 shopping centers in Italy, 16 are adjacent to Carrefour supermarkets, and 17 are adjacent to IPER or Ipercoop supermarkets.
Spain
With 70 shopping centers valued at €1,127.3 million (total share) at June 30, 2008, Spain is our third largest market by value. Our portfolio in Spain includes a total of 279,000 m2 of GLA. In the first half of 2008, rental revenues and management fees in Spain amounted to €37.0 million, or 10.4% of our total revenues, and amounted to €72.5 million for the 2007 fiscal year. The financial occupancy rate was 96.5% at June 30, 2008. All of our shopping centers in Spain were acquired or developed in partnership with Carrefour, and consist of shopping centers adjacent to Carrefour supermarkets.
Central Europe
We completed our first acquisition in Central Europe in 2001, and, at June 30, 2008, owned 22 shopping centers in Hungary, Poland, the Czech Republic and Slovakia. The aggregate portfolio in Central Europe represents a total of approximately 404,000 m2 of GLA valued at €1,237.00 (total share) at June 30, 2008. In the first half of 2008, rental revenues and management fees for Central Europe represented €43.1 million, or 12.1% of the Group’s total revenue, and amounted to €74.9 million for the 2007 fiscal year. The average financial occupancy rate for the region was 96.9% at June 30, 2008. The Group’s property holdings in Hungary, Poland and the Czech Republic are comprised primarily of shopping centers acquired from Plaza Centers Europe under the framework of agreements concluded in 2004 and 2005 and consist, for the most part, of shopping centers organized in a user-friendly way around an anchor store.
Europe (other)
We own 11 shopping centers in Portugal, Greece and Belgium. The aggregate portfolio for these three countries represented a total of approximately 187,000 m2 of GLA valued at €621.9 million (total share) at June 30, 2008. In the first half of 2008, aggregate rental revenues and management fees in these countries represented €20.5 million, or 5.7% of the Group’s total revenue, and amounted to €36.8 million for the 2007 fiscal year. The average financial occupancy rate for these countries was 97.1% at June 30, 2008.
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Rental and Property Management
Our rental and property management business involves the management of leases and property both for our own account and for the accounts of third parties. We are the leading shopping center management company in Continental Europe, with 318 properties under management (of which 76 are managed on behalf of third parties) in nine countries at June 30, 2008. The services we provide include rental management (in particular, the negotiation and renewal of leases and tenant relations), property management (notably, overseeing maintenance, renovation, expansion and improvement works) as well as the general management of operations at shopping centers. With more than 50 years of experience managing shopping centers, a presence in nine countries, and more than 13,000 commercial leases under management, our retail and property management business offers the Group a unique vantage point from which to monitor new developments and market trends. Our management revenues amounted to €63.3 million and €30.9 million in 2007 and in the first half of 2008, respectively.
Tenants
Our shopping center tenants are major international retail chains as well as independent retailers. Our rental revenues are diversified in terms of the nature of business activities carried on by tenants.
The table below lists our 15 largest tenants and the percentage of the total base rent represented by each tenant at June 30, 2008 (on an aggregate basis in all countries in which we operate).
Tenant % of Total Base Rent 1 ZARA 1.9% 2 H&M 1.3% 3 MEDIA WORLD 1.3% 4 FNAC 1.2% 5 CAMAIEU 1.1% 6 MCDONALD’S 1.0% 7 SEPHORA 0.9% 8 CELIO 0.9% 9 AFFLELOU 0.9% 10 ARMAND THIERY 0.8% 11 PHARMACIE 0.8% 12 DARTY 0.8% 13 GO SPORT 0.8% 14 PROMOD 0.7% 15 C&A 0.7% Total 15 Largest Tenants 14.9%
Base rent
The diagram below summarizes the distribution of tenants by type of business and as a percentage of rental revenue at June 30, 2008.
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Recreation SMs & Large (including movie theatres) Retail Stores LSC Culture-Gifts 3% 2% (excluding movie 13% theatres, bowling alleys, fitness centers) Services 18% 5% Health Products & Cosmetics Food & 11% Restaurants 15% Household Products 3% Personal Products 30% LSC: Large Specialized Centers SM: Supermarkets (food products)
Development portfolio
In light of changing credit market and real estate market conditions during the first half of 2008, we conducted a thorough review of our development pipeline and eliminated 14 projects, representing total investments of €900 million, bringing our development pipeline to €3 billion, according to our estimates at the end of June 2008. Of these €3 billion, €1.3 billion represent committed projects (projects underway for which we have already obtained permits and whose budgets have been approved), of which €350 million had been expended by June 30, 2008; €943 million represent controlled projects (projects in the advanced study phase, for which we hold a commitment or a title allowing us to begin construction) and €821 million correspond to identified transactions (projects that correspond to our real estate investment criteria and for which negotiations are underway).
The following table presents our development pipeline for the period from 2008-2012.
Country / Type Type I Of which expended Type II Type III In M€ Committed during the Controlled Identified 1st half of 2008 France 773.0 148.3 536.9 342.6 Spain 144.7 17.6 - 43.7 Italy 193.3 138.9 33.5 109.0 Hungary 119.0 44.2 108.4 7.5 Luxembourg - - 210.0 - Others 69.7 0.6 54.0 318.1 TOTAL 1,299.7 349.6 942.9 821.0 Gross Leasable Area 372,900 - 267,000 295,700 m² Average capitalization 6.4% > 6.5% rate(1)
(1) Average capitalization rate: ratio between total expected net rental income and the investment cost
The table below presents the principal characteristics of the main projects underway (i.e., it provides further detail on projects in the “Type 1” category in the preceding table):
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Estimated Total amount Period from net rental Total floor of investment 2008-2012 income Expected space (m2) (in €million) (in €million) (in €million) Opening Date Vallecas (Spain) 45,600 241.0 143.3 16.1 4th quarter 2008 Vittuone (Italy) 35,000 44.2 44.2 2.6 1st quarter 2009 Corvin (Hungary) 34,000 229.0 118.0 13.9 4th quarter 2009 Pilzen (Czech Republic) 19,600 61.4 61.4 4.1 4th quarter 2007(1) Aubervilliers (France) 42,000 191.2 186.7 13.8 2nd quarter 2011 Gare St Lazare (France) 10,000 129.1 122.2 9.5 2nd quarter 2011 Val d’Europe Extension 20,000 59.6 42.4 3.9 2nd quarter 2009 St Orens Extension 11,100 90.3 38.0 5.6 4th quarter (France) 2008 Blagnac Extension 11,400 105.9 59.6 6.2 2nd quarter (France) 2009 Maisonément (France) 40,000 31.7 19.8 2.9 4th quarter 2008 La Roche sur Yon (France) 16,323 22.5 22.5 1.7 4th quarter 2008 Grand Nimes Extension 1,827 16.3 16.3 1.0 1st quarter (France) 2009 Bègles Rives d’Arcins 24,000 40.2 36.8 2.6 3rd quarter Extension (France) 2009 Montpellier Odysseum 51,350 103.4 68.7 5.6 2010 (Galerie) (France) Vaux-en-Velin Extension 2,300 15.0 15.0 0.9 1st quarter (France) 2010 (1) Acquired by Klépierre in July 2008
Klémurs – a specialist in retail properties
The primary objective of Klémurs, a SIIC listed on the stock market since December 2006 in which we hold an 84.1% stake, is to build a commercial real estate portfolio comprised primarily of retail properties acquired from large chains of restaurants, service providers and retailers seeking to outsource their property portfolio. Klémurs is a specialized real estate investment company that offers retailers a viable alternative to in-house management of their retail properties, which allows Klémurs to obtain, through long-term partnerships, indexed rental revenue and variable rent linked to the performance of its partners. Klémurs also invests in certain properties at the development stage rather than acquiring them in outsourcing transactions. Klémurs allows us to expand the types of properties we can offer retailers.
Outsourcing of property holdings
As retail concepts continue to evolve, retailers are seeking new ways to reach customers and diversifying their geographic locations. Certain retailers that traditionally have relied on shopping centers and downtown locations have expanded their target area.
Outsourcing property holdings allows retailers to focus on their core business and to allocate all of their financial and operational resources to running their businesses. Moreover, outsourcing offers retailers access to the know-how and skills of a lessor specialized in both the development and management of retail parks, and frees up financial resources to fund the retailer’s business. At the same time, as a result of favorable tax provisions, retail chains can pay lower taxes on their capital gains. Such provisions apply to the sale, subject to certain conditions, of properties to listed real estate companies like Klémurs that benefit from SIIC status. For a description of the tax regime that applies to SIIC, see “Regulation.”
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Klémurs’ real estate portfolio
Acting as a partner to major retail companies, Klémurs seeks to accompany them in establishing locations in both city centers and suburban areas through various types of properties. Such properties may include “Big Box” stores located on the outskirts of cities in shopping areas generally centered around a supermarket, be located in “retail parks” (structured shopping areas proposing a complete line of stores) or consist of center-city stores located on major thoroughfares in large metropolitan areas.
The table below presents Klémurs’ property holdings at June 30, 2008, the estimated value of which is €621.5 million.3 A detailed list of Klémurs’ property holdings is set forth in Schedule 2.
Klémurs’ property holdings at June 30, 2008
Location Name of asset Number Composition Area (m2)
France (all) Buffalo Grill 151 Buffalo Grill Restaurants 85,047 France (all) Défi Mode / Vivarte 77 Stores, 67 of which are Vivarte Group 75,742 stores France (all) Cap Nord 26 Mondial Moquette, Heytens, King 20,231 Jouet and various stores Roquefort-sur- Diversified property 14 Various retail stores including La 13,752 mer, Avranches holdings Halle, Gémo, Leader Price and Malin and Messac Plaisir Paris BHV Flanders 1 BHV store 7,752 Paris Truffaut 1 Truffaut store 3,606 Rouen Rouen Candé 8 Various retail stores on rue de la 2,848 Champmeslé Avignon – Metz Sephora 2 Sephora stores 1,177
Total -- 280 -- 210,155m2
Strategic Agreements
To date, Klémurs has entered into two major strategic property acquisition agreements with large retailers.
Buffalo Grill
In 2006, we entered into a strategic agreement with Buffalo Grill for the acquisition of the properties of Buffalo Grill in France and the development of new restaurants. We exercised our contractual substitution option in favor of Klémurs in connection with Klémurs’ listing on the stock exchange. This agreement provided for the acquisition of the real estate assets of 128 Buffalo Grill restaurants in France, and the execution of commercial leases with firm nine-year terms and the option for Buffalo Grill to renew for two subsequent terms. The agreement also includes a provision relating to new stores, granting us a firm option on 30 new Buffalo Grill restaurants currently under construction or proposed, as well as a five-year preferential purchase right for any new restaurants developed by Buffalo Grill. At the end of the initial eighteen months of their partnership, Buffalo Grill and Klémurs decided to expand their agreement. Under the revised agreement, which has a term of ten years, Klémurs will accompany Buffalo Grill’s growth through a preferential purchase right for all properties developed by Buffalo Grill. More than 60 sites have already been proposed to Klémurs.
At June 30, 2008, Klémurs owned 151 Buffalo Grill restaurants, representing 85,047 m2. Of this amount, Klémurs owned 72 restaurants outright and 79 under finance leases.
3 Value calculated based on the valuations of RCG and Atis Real Expertise (ex Coextim).
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Défi Mode / Vivarte
In December 2007, Klémurs entered into a strategic agreement with the Group Défi Mode (a retail apparel chain). Under the agreement, Klémurs will acquire 112 stores in France located in retail zones in the suburbs of medium-sized cities. The total investment amount will be €153 million, and the stores to be acquired have a gross leasable area of 99,000 m2 and expected annual rents of €9.1 million. The acquisition is scheduled to take place in two phases: 77 stores (68 owned outright, seven under finance leases and two under lease upon construction) were acquired on April 30, 2008. Ten existing properties are subject to purchase commitments following due diligence before the end of the 2008 fiscal year, and 25 assets under construction are expected to be acquired in 2009 under a development agreement that gives us a preferential right for six years on any new stores developed by Défi Mode for its own account. In parallel with the outsourcing transaction, the Vivarte group acquired Défi Mode’s operations. Having established a landlord tenant relationship with Vivarte, we hope to benefit, over time, from the strong appeal of Vivarte’s best retail brands; which include La Halle aux Vêtements and La Halle aux Chaussures.
Office Properties
We own a select portfolio of 18 buildings located in the central business district of Paris and its near suburbs. Our office property holdings had an appraised value of €1,135.4 million4 at June 30, 2008, accounting for 9.5% of the total value of our portfolio. At June 30, 2008, the total space represented by our office properties amounted to 120,000 m2. The completion of the “Séreinis” project, a new 12,000 m2 office development project in Issy-les-Moulineaux near Paris, is scheduled for early 2009. This property is currently available for lease. Rents generated by our office properties segment amounted to €48.8 million at December 31, 2007 and €25.4 million in the first half of 2008, representing 8.3% and 7.8%, respectively, of our total rental revenues.
In managing our portfolio of office properties, we pursue a selective and opportunistic approach. When office properties are sold, the proceeds can be redeployed in shopping center investments, our core business. When purchasing office properties, we invest when we believe that the value creation potential of a project, due to its intrinsic properties or market conditions, is greater than the return on shopping center projects. Since 2001, we have sold “mature” office properties for more than €700 million, allocating the proceeds to the development of our portfolio of shopping centers. We may decide to accelerate our disposals of office properties depending on market conditions and our financing needs.
In 2007, we sold three office buildings and a 39.25% interest in certain other office buildings for a total amount of €74.7 million. We also agreed to acquire an office building currently under construction (the “Séreinis” project described above) under a property development contract (contrat de promotion immobilière) for a total investment of approximately €80 million, of which €68.2 million had been disbursed at September 30, 2008.
Details regarding our portfolio of office properties are provided in Schedule 3.
Acquisition of Steen & Strøm
On October 8, 2008, we acquired, together with ABP Pension Fund, the pension fund for Dutch civil servants and teachers, the Norwegian company Steen & Strøm ASA (“Steen & Strøm”) for a total amount of €2.7 billion. We hold 56.1% of the share capital of the holding company created for the purposes of this acquisition, and the remainder is held by ABP Pension Fund. As part of the acquisition, we assumed Steen & Strøm’s existing indebtedness, amounting to 12.9 billion NOK, or €1.6 billion, as of December 31, 2007 (the December 31, 2007 financial statements having been used as the basis to calculate the acquisition price). We paid €601 million to acquire our 56.1% share.
Our acquisition of Steen & Strøm is consistent with our European growth strategy: geographical diversification and development of a critical mass in each country in which we operate. This strategy allows us to diversify our property holdings, our development portfolio and our income in what we consider to be a very stable and promising market. Our acquisition of Steen & Strøm gives us a leading position in three sought after Scandinavian markets. The acquisition further reinforces our European stature, particularly vis-à-vis large retailers to whom we can offer development opportunities.
4 Value calculated based on the evaluations of RCG and Atis Real Expertise (ex Coextim) and Foncier Expertise.
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The diagram below shows the structure of our acquisition of Steen & Strøm.
Overview of Steen & Strom
Steen & Strøm is Scandinavia’s leading real estate company specialized in shopping centers. Steen & Strøm’s main activities are the ownership, development and management of shopping centers. Steen & Strøm owns a portfolio comprised of 30 shopping centers (18 in Norway, nine in Sweden and three in Denmark) representing a gross leasable area of approximately 959,100 m². The centers’ occupancy rate was 96.8% at June 30, 2008. The portfolio includes major shopping centers in Scandinavia, such as Amanda in Haugesund, Norway; Allum in Partille, Sweden and Fields in Copenhagen, Denmark. Steen & Strøm’s tenants consist of major Scandinavian retail chains, international retail chains and independent retailers.
The table below presents selected information relating to Steen & Strøm’s current portfolio of shopping centers, per country and per region, at the dates indicated.
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Shopping Centers owned by Steen & Strøm Net annualized rental Initial At June 30, 2008 Rental revenues revenues return
Net Year ended Six Months Based on annualized Portfolio(2) December ended June total rental rental Gross (total share) 31, 2007 30, 2008 revenues at revenues/ Shopping Leasable (in millions of Occupancy (in millions (in millions March 31, acquisition Centers Area(1) euros) Rate of euros) of euros) 2008 (3) price Steen & Strøm Norway ...... 18 499,100 1,200 95.7% 74.2 41.3 18 499,100 Sweden ...... 9 295,000 600 99.0% 40.8 20.1 9 295,000 Denmark ...... 3 165,000 700 95.0% 36.5 20.9 3 165,000 Total ...... 30 959,100 2,500 96.8% 151.5 82.3 30 959,100
(1) GLA : Gross Leasable Area, excluding hallways and other common areas. (2) Acquisition price in millions of euros (not including investment expenses paid for current projects (valued at €209 million)). (3) Rental revenues used in determining the acquisition price.
The 30 shopping centers in Norway, Sweden and Denmark were valued at approximately €2.5 billion (total share) at June 30, 2008 in the context of the acquisition. As of the same date, Steen & Strøm had a development portfolio estimated by it to be worth more than €1 billion, divided among three project categories (committed, controlled and identified). Steen & Strøm has assembled a significant portfolio of development projects in Scandinavia, including both the construction of new properties and the restructuring and/or extension of existing properties. Six centers are currently under construction.
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The table below presents the list of shopping centers owned and managed by Steen & Strøm at June 30, 2008.
Gross Financial Leasable Occupancy Holdings Area Rate Shopping Center Location (%) (000 m2) (%) Norway 1 Amanda Haugesund 100.0 22.6 100.0 2 Asane Storsenter Bergen 49.9 53.0 96.6 3 Farmandstredet Tønsberg 100.0 45.0 88.4 4 Gulskogen Senter* Drammen 100.0 35.0 N/A* 5 Halden Storsenter Halden 100.0 11.8 95.2 6 Hamar Storsenter Hamar 100.0 24.0 100.0 7 Karl Johansgt.16 Oslo 100.0 4.5 100.0 8 Lillestrøm Torv Skedsmo 100.0 31.8 98.8 9 Markedet Haugesund 100.0 13.0 89.7 10 Metro Lørenskog 50.0 39.6 85.3 11 Nerstranda Tromsø 100.0 12.5 92.9 12 Nordbyen Larvik 100.0 18.0 99.5 13 Økernsente Oslo 37.5 39.5 91.4 14 Sjøsiden Møsjeen 100.0 12.9 94.6 15 Stavanger Storsenter Stavanger 100.0 35.8 90.1 16 Stovnersenter Oslo 100.0 45.1 99.4 17 Torvbyen Fredrikstad 100.0 17.9 100.0 18 Vinterbro Senter As 100.0 37.1 100.0 Norway Total 499.1 95.7 Sweden 19 Allum Partille 100 61.7 98.4 20 Etage Trollhättan 100 21.0 100.0 21 Familia Astorp 100 19.7 90.0 22 Hageby Centrum* Norrköping 100 27.4 N/A* 23 Kupolen Borlänge 100 50.8 99.6 24 Marieberg Centrum Örebro 100 33.7 N/A* 25 Mitt i City Karlstad 100 20.1 99.0 26 Sollentuna Sollentuna 100 23.2 N/A* Centrum* 27 Torp Uddevalla 100 37.4 99.5 Sweden Total 295.0 99.0
28 Bruun’s Galleri Arhus 100 40.0 99.9 29 Field’s Copenhagen 100 95.0 93.7 30 Bryggen Vejle 100 30.0 92.1 Denmark Total 165.0 95.0 All centers total 959.1 96.8 *Shopping centers currently under renovation/extension
Shopping center currently under renovation/expansion
In addition, Steen & Strøm manages 12 shopping centers in Norway and 14 shopping centers in Denmark on behalf of third parties.
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The chart below presents the composition of Steen & Strøm’s portfolio of properties by country.
Denmark 31%
Norway Sweden 52% 17%
Total as of June 30, 2008 : 959,100 m² SCU
The chart below presents gross rental revenues by country at June 30, 2008.
25% Denmark 25%
Norway 51%
Sweden 24%
Total: 82.29 M€ (NOK 654.6 M)*
*average exchange rate over the first half of 2008
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The chart below presents the distribution of shopping centers by type, as a function of their surface area.
Steen & Strøm’s shopping centers are generally larger than the average Klépierre shopping center. They are often located in urban areas with easy access via public transport services (trains, subway, buses). Shopping centers in Scandinavia usually do not include a supermarket, and it is typical to find two mid-size retailers offering mainly food products in the shopping center.
> 40,000 m² 23%
< 10,000< 10.000m² m² 3% > 10.000 m² - 20.000 m² > 20.000 m² - 40.000 m² > 20,000 m² - 40,000 m² 51% > 40.000 m²
> 10,000 m² - 20,000 m² 23%
The chart below sets forth the lease expiration profile for Steen & Strøm.
14.0% 11.6% 12.0% 11.3% 10.9% 10.7% 10.9% 10.0% 8.4% 8.0% 7.1%
6.0% 5.0%
4.0% 3.2% 2.2% 1.9% 2.0%
0.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018>
Table reflects expiration dates for leases in Norway and Sweden only, since the vast majority of Danish leases are of indefinite duration.
Norway
Steen & Strøm has a strong presence in Norway. It owns all or part of 18 shopping centers, accounting for total revenues generated by retailers of NOK 8.1 billion in 2007 and NOK 5.8 billion for the first half of 2008 (or, €1 billion and €0.7 billion, respectively) and gross rental revenues amounting to NOK 594.5 million in 2007 and NOK 328.5 million for the first half of 2008 (or €74.2 million and €41.3 million, respectively). Steen & Strøm also manages 12 shopping centers on behalf of third parties, mainly Storebrand ASA (Storebrand). Storebrand is a Norwegian group whose main activities include the provision of life insurance, banking and asset management.
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The euro amounts indicated in this section have been converted on the basis of an average €/NOK exchange rate for 2007 of 8.0165 for figures at December 31, 2007 and an average €/NOK exchange rate for the first half of 2008 of 7.955 for amounts at June 30, 2008.
Sweden
In Sweden, Steen & Strøm owns nine shopping centers, accounting for total revenues generated by retailers of SEK 7.5 billion in 2007 and SEK 3.4 billion for the first half of 2008 (i.e., €0.9 billion and €0.4 billion respectively) and gross rents amounting to SEK 349.3 million in 2007 and SEK 187.9 million for the first half of 2008 (i.e., €40.8 million and €20.1 million, respectively). Steen & Strøm does not conduct any business on behalf of third parties in Sweden.
The euro amounts indicated in this section have been converted on the basis of an average €/SEK exchange rate for 2007 of 8.5576 for figures at December 31, 2007 and an average €/SEK exchange rate for the first half of 2008 of 9.348 for amounts at June 30, 2008.
Denmark
Steen & Strøm owns three shopping centers in Denmark, accounting for total revenues generated by retailers of DKK 3.8 billion in 2007 and DKK 1.2 billion for the first half of 2008 (i.e., €0.6 billion and €0.2 billion) and net rental revenues amounting to DKK 247.3 million in 2007 and DKK 155.1 millions for the first half of 2008 (i.e., €36.5 million and €20.9 million). Steen & Strøm also manages 14 shopping centers on behalf of Danica Pension, Livsforsikringsaktieselskab (Danica). A member of the Danske Bank group, Danica is one of the largest insurance companies in Denmark; its main activities are life insurance and retirement planning.
The euro amounts indicated in this section have been converted on the basis of an average €/DKK exchange rate for 2007 of 6.778 for figures at December 31, 2007 and of an average €/DKK exchange rate for the first half of 2008 of 7.457 for amounts at June 30, 2008.
Other Activities
Steen & Strøm’s shopping centers benefit from strategic locations in city centers. As a result, the same property can often accommodate a shopping center, as well as office space or public infrastructure. This is the case with the shopping center of Allum, in Sweden, which includes a train station and the city’s medical center. In Norway, Steen & Strøm holds 37.5% of a complex located on one of the major commercial thoroughfares in Oslo that includes the shopping center Økernsenteret and a 17,000m² office tower located above the shopping center. An expansion project for this shopping center and a project to develop new office space, an aquatic park, conference center, as well as cultural and athletic spaces, are currently being considered.
These other activities represented 13.8% of rental revenue in 2007 and 10.5% as of June 30, 2008.
Shopping Center Development
Steen & Strøm benefits from long-standing expertise in the development of shopping centers. In addition to its development activities for its own account, Steen & Strøm also carries out development activities on behalf of third parties, mainly Storebrand and Danica. The company’s development activities include the expansion of existing shopping centers and the development of new shopping centers.
Zoning regulations in the countries in which Steen & Strøm operates impose restrictions on the opening of new shopping centers. We consider the fact that Steen & Strøm’s properties benefit from favorable geographical locations (urban areas with easy access via public transport) and have expansion potential to be valuable assets. For a description of the applicable regulations in Scandinavian countries, see “Commercial Real Estate Market in Scandinavia – Regulatory aspects” below.
Steen & Strøm has a development portfolio that it values at more than €1 billion, of which €0.5 billion is for committed projects at June 30, 2008. For committed projects, the average rate of return at the start of such projects (the ratio of expected rental revenues at the start of the project over the expected investment cost) is 6.5%. This portfolio includes both new centers and the renovation/expansion of existing centers in Scandinavia (six centers are currently under construction).
Given the limited availability of commercial space in the largest areas in Scandinavia, Klépierre believes the geographic locations of Steen & Strøm’s properties and its development portfolio present attractive growth opportunities.
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The table below sets forth Steen & Strøm’s committed development portfolio at June 30, 2008.
Gross Total Gross Leasable Area Leasable Completion Project Description Location created (m2) Area (m2) Project Value Date
Norway Gulskogen Senter Expansion/Renovation Drammen 4,811 45,100 82.7 2010 Metro Senter Expansion/Renovation Lorenskog 4,230 55,416 54.8 2009 Norway Total 9,041 100,516 137.5 Sweden Hageby Centrum Expansion/Renovation Norrköping 15,028 47,900 118.2 2010 Marieberg Centrum Expansion/Renovation Orebro 4,930 44,500 58.6 2009 Sollentuna Centrum Expansion/Renovation Sollentulla 12,536 50,000 147.5 2009 Sweden Total 32,494 142,400 324.3 Denmark Field’s (parking) Expansion Copenhagen n/a n/a 37.2 2008 Denmark Total na na 37.2
Shopping Center Management
Steen & Strøm is involved in all phases of the operation and management of shopping centers, notably rental management, marketing, maintenance, technical management and real estate management for its own account as well as on behalf of third parties. Real estate management includes the operation of shopping centers owned by Steen & Strøm, notably those of Storebrand and Danica in Norway and Denmark and also involves the supervision of the development of new centers, both for its own account and the account of third parties.
Steen & Strøm’s first third-party management agreement was executed in 1996 for a fifteen-year term when Steen & Strøm sold 11 shopping centers to Storebrand. In addition to the management agreement, in the same year Storebrand and Steen & Strøm executed a pool agreement with the same term and which put into place a compensation system whose goal is to allow Storebrand and Steen & Strøm to mutually benefit from the performance of the shopping centers covered by the agreement. The agreement with Storebrand is renewable by tacit agreement, with the option to terminate by either party before December 31, 2008. In Denmark, Steen & Strøm executed a management agreement in 1999 concerning 14 properties owned by Danica. The agreement automatically renews annually, subject to one year’s termination notice by either party.
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Tenants
Steen & Strøm’s tenants are major Scandinavian retail chains, large international retail chains and independent retailers. Rental revenue is diversified in terms of the type of business activities carried out by tenants.
The list below includes Steen & Strøm’s 15 largest tenants at June 30, 2008. These 15 clients represented 19.9% of Steen & Strøm’s rental revenue.
% of Rental Revenue 1. H&M (apparel) 3.5% 2. ICA (food products) 2.8% 3. Bilka One Stop (supermarket) 2.1% 4. Cubus (apparel) 1.2% 5. Stadium (sporting goods & apparel) 1.1% 6. Meny (supermarkets) 1.1% 7. CinemaxX (movie theaters) 1.1% 8. Lindex (apparel) 1.1% 9. Debenhams/Magasin (department stores) 1.0% 10. Coup Obs! (supermarkets) 1.0% 11. Intersport (sporting goods & apparel) 0.9% 12. KappAhl (apparel) 0.8% 13. Clas Ohlson (DIY stores) 0.8% 14. Bertel O. Steen Eiendom (auto) 0.7% 15. Ultra Stovner (food products) 0.7% Total 15 Clients 19.9%
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The chart below presents the distribution of tenants by rental amounts by business sector (excluding warehouses and offices):
Cosmetics Toys 2% 2% Other 5% Parking Books 3% 2% Fashion Audio & Video 27% 3% Procelaine & Flatware 3% Cafés 4%
Sports 4%
Shoes 5% Wines & Spirits 22% Office Products 6% Food Products 12%
The table below presents, by country, the average annual sales of tenants per m², the average rental revenue per m² and the occupancy cost ratio at June 30, 2008.
Norway Sweden Denmark
Average annual* sales NOK 31,000 SEK 32,600 DKK 31,800 by tenants per m² €3,897 €3,487 €4,264
Average annual- rent NOK 2,062 SEK 1,704 DKK 2,319 per m² €259.2 €182.3 €310.9
Occupancy cost ratio 8.2% 7.8% 11.0% at June 30, 2008** * Average rate of change in the first half of 2008 **Occupancy Cost Ratio : Rent + utilities (excluding tax)/ revenue of tenant (excluding tax)
For a description of the regulations that apply to commercial leases in Scandinavia, see “Commercial Real Estate Market in Scandinavia – Regulatory aspects” below.
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Shareholders’ agreement
To acquire Steen & Strøm, Klépierre and ABP Pension Fund formed a jointly held Swedish holding company, Nordica Holdco AB, 56.1% owned by Klépierre (through GLG Holding BV, a Dutch holding company entirely held by Klépierre) and 43.9% owned by ABP Pension Fund. The acquisition of Steen & Strøm’s shares, which was completed on October 8, 2008, was carried out by an intermediate company, Storm Holding Norway AS, a Norwegian company entirely held by Nordica Holdco AB.
Klépierre and ABP Pension Fund executed a shareholders’ agreement on July 25, 2008 governing their relationship. An amendment of this shareholders’ agreement was executed on October 7, 2008. The main provisions of the agreement pertaining to the co-ownership of Steen & Strøm include:
• Financing of Steen & Strøm. The shareholders’ agreement provides that the Steen & Strøm group’s activities following the acquisition will be financed using internal cash flows or bank financing.
• Transfer of certain properties of Steen & Strøm. The parties agreed in principle to sell properties of Steen & Strøm valued at approximately €500 million over a period of two years after the closing of the acquisition, subject to market conditions, in particular in order to finance Steen & Strøm’s development portfolio.
• Governance. The parties agreed that Steen & Strøm’s CEO would be appointed as CEO of Nordica Holdco AB. Profit-sharing mechanisms will be implemented in order to incentivize and retain Steen & Strøm management.
• Composition of the Board of Directors of Nordica Holdco AB. The shareholders of Nordica Holdco AB appoint the members of the company’s Board of Directors. The shareholder holding more than 50% of the shares appoints three Board members, while the shareholder holding between 33.33% and 50% of the shares appoints two members. The shareholder holding more than 50% of shares (as of the date hereof, Klépierre) appoints the Chairman of the Board of Directors who does not have a tie-breaking vote. The parties agreed that in principle, the composition of the Board of Directors of Storm Holding Norway AS and Steen & Strøm will be the same as that of Nordica Holdco AB.
• Qualified majority. The agreement provides that certain resolutions will require the affirmative vote of a qualified majority of 85% of voting rights. These resolutions relate to the Steen & Strøm group’s organization (including amendment of bylaws, mergers, acquisitions, joint-ventures, liquidation, winding-up, appointment or removal of Statutory Auditors, compensation of directors, accounting policies), certain business decisions (including adoption or amendment of a strategic business plan, entry into agreements with affiliates, business outside the Steen & Strøm group’s regional markets, substantial modification of business) or its financial structure (including acquisitions or disposals involving sums in excess of €100 million, creation of liens over any asset(s) of any company of the Steen & Strøm group, contracting financial debt if doing so causes the Steen & Strøm group’s loan to value ratio to exceed 55%, modification of share capital and declaration of dividends other than in accordance with the dividend policy).
• Purchase option in case of deadlock. If a minority shareholder holding less than 50% of Steen & Strøm’s shares prevents the adoption of a resolution requiring a qualified majority and a deadlock results that significantly compromises the existence or the financial viability of the Steen & Strøm Group’s business, taken as a whole, the majority shareholder has the option, upon expiration of a 30-day period from the date on which the deadlock occurs, to adopt the disputed resolution in spite of the refusal of the minority shareholder, provided that a purchase option is exercised with respect to all of the shares of such minority shareholder at their fair market value (as defined in the agreement).
• Related party agreements. Any agreement between a Steen & Strøm group company and either party to the shareholders’ agreement, or one of their affiliates, must be on arm’s length terms.
• Priority over the Scandinavian countries and the Baltic States. The parties to the shareholders’ agreement agreed to grant Steen & Strøm a preemptive right for any investment or development opportunity for a shopping center located in Norway, Denmark, Sweden, Finland, Lithuania, Estonia and Latvia.
• Lock-up period; right of first offer; right of first refusal. The agreement requires that Steen & Strøm shares be held for one year following the closing date of the acquisition, except for certain limited permitted transfers, including intragroup transfers. Subject to the lock-up period, each party benefits from a right of first offer over any shares the other party wishes to transfer to a third party, it being specified, however, that in the case of a share transfer by a party (other than us or one of our affiliates) to an entity engaged in a competing business (as such term is defined in the agreement) with that of Klépierre, a right of first refusal, and not right of first offer, will apply to such shares.
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• Exit right. Pursuant to a liquidity procedure that may be initiated by any shareholder of Steen & Strøm in the sixth year following the closing of the acquisition, Klépierre or ABP Pension Fund may request that a shareholders’ meeting representing a two-thirds majority of the shares transfer all shares or assets of Steen & Strøm. Moreover, any shareholder holding two thirds of the shares of Steen & Strøm may request that the shareholders meeting approve the initial public offering of Steen & Strøm beginning with the sixth year following the closing of the acquisition.
• Joint Exit Right. The shareholders’ agreement also provides a tag-along provision for ABP Pension Fund in the event that we decide to transfer our shares under circumstances that result in a third party (or third parties acting in concert) coming to hold more than 50% of Steen & Strøm’s voting rights.
For a discussion of the terms and consequences of the financing of the Steen & Strøm acquisition, see “Management’s Discussion & Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Scandinavian Market
Scandinavia includes Norway, Sweden (the third largest country in Western Europe) and Denmark. The total population of Scandinavia exceeds 19 million inhabitants, of which approximately 4.7 million are located in Norway, 9.1 million in Sweden and 5.5 million in Denmark (source: OECD, 2008). Norway is part of the European Economic Area, while Sweden and Denmark are members of the European Union. None of these three countries has adopted the euro; their respective currencies are the Norwegian Krone (NOK), the Swedish Krona (SEK) and the Danish Krone (DDK). The Danish Krone is, however, strongly correlated with the euro.
The Scandinavian population is very unevenly distributed. The coastal area, in the southern part of each country, is where the capitals are located, along with the majority of the population, which remains concentrated in the major metropolitan areas. The northern areas of Scandinavia, in particular the inland areas, are characterized by low population densities. Almost all of Steen & Strøm’s shopping centers are located in the coastal and southern areas of each country.
General Environment and Prospects
In recent years, Scandinavia has benefited from a favorable economic environment. In particular, increases in the price of oil, sales of which represent approximately 20% of Norwegian GDP (source: BNP Paribas), has significantly strengthened Norway’s economic growth over the past few years. Exports have grown significantly throughout Scandinavia, but the positive effect on the economy has been partially offset by significant internal demand resulting in a parallel increase in imports.
Economic growth in the next few years is expected to be more moderate, although it should remain higher than in the rest of Europe. Various economic indicators suggest a slowdown to come:
• Monetary and financial conditions have become strained, in particular since the beginning of the credit crisis that started in the summer 2007.
• The overall economic environment has weakened, including among the main commercial partners of Scandinavian countries such as the euro zone and the United Kingdom. This could affect exports, which contribute to around 40% of GDP in Norway, and around 50% in Sweden and in Denmark.
• The strengthening of inflationary pressures, the tightening of credit terms and a deterioration of household confidence and consumption levels could also contribute to slower growth.
Macroeconomic context of commercial real estate in Scandinavia
In Scandinavia, as in the rest of Europe, we believe that commercial real estate is significantly influenced by changes in the following economic indicators.
GDP Growth
Over the period 2000-2008, Norway and Sweden registered GDP growth rates at levels higher than the averages in the European Union: 2.5% and 2.9% growth rates respectively compared to 2.4% for the European Union. Denmark’s average growth rate was slightly weaker: 1.8 % over the same period.
In the first half of 2008, Norway’s growth was in line with the limited growth rates observed in the European Union. Denmark and Sweden were more affected by the international crisis.
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The following table presents annual GDP growth rates for Scandinavia and the European Union (25 countries) over the period 2005-2008 (source: Reuters EcoWin Pro):
2005 2006 2007 1st Half 2008
Norway 2.5 % 2.1 % 4.7 % 0.6 %
Sweden 3.7 % 4.1 % 2.4 % 0.1 %
Denmark 2.3 % 3.4 % 1.5 % -0.1 %
European Union 2.3 % 3.5 % 2.5 % 0.6 %
Inflation
Inflation was more moderate in Scandinavia than in the rest of the European Union during the 2005-2008 period, although some catching up occurred in early 2008. The following table presents the evolution of inflation in the Scandinavian region during the 2005-2008 period (source: Reuters EcoWin Pro).
2005 2006 2007 2008*
Norway 1.5% 2.3% 0.7% 3.6%
Sweden 0.5% 1.4% 2.2% 3.7%
Denmark 1.8% 1.9% 1.7% 3.5%
European Union 2.3% 2.3% 2.4% 3.9%
*Period: January/August 2008
Household Consumption
Household consumption rates have grown steadily over the past ten years, underpinned by a stable labor market and increasing wages, the maintenance of interest rates at historically low levels, thus encouraging the use of credit, and moderate inflation levels. During the 2005-2007 period in particular, the levels of household consumption grew by an aggregate of 16.3% in Norway, 8.5% in Sweden and 10.2% in Denmark, compared to an average 6.6% in the European Union (source: Reuters EcoWin Pro).
However, the effects of the crisis began to be felt at the beginning of the 1st half of 2008. Norway and Sweden still registered better performance levels, however, than the averages recorded in the European Union.
The following table presents the annual growth of household consumption in the Scandinavian region and the European Union over the 2005- 2008* period (source: Reuters EcoWin):
2005 2006 2007 1st Half 2008
Norway 3.5 % 5.8 % 6.2 % 0.3%
Sweden 3.1 % 2.3 % 2.9 % 1.0%
Denmark 2.5 % 2.9 % 4.4 % -0.7%
European Union 1.9 % 2.5 % 2.0 % 0.1 %
*First Half 2008
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Labor Market
Against a backdrop of strong economic growth and moderate inflation, the Scandinavian labor market has experienced a period of wage increases, a significant labor growth rate and low unemployment levels. A shortage of labor has been observed in the area, particularly in Norway and Denmark. Over the last three years, unemployment levels recorded in the Scandinavian region have been distinctly lower than in the rest of the European Union, contributing to the relative stability of household confidence levels and encouraging consumption in the area.
The following table sets forth unemployment rates in the Scandinavian region and the European Union during the 2005- 2008 period (source: Reuters EcoWin Pro):
2005 2006 2007 June 2008
Norway 4.6 % 3.5 % 2.6 % 2.6 %
Sweden 7.3 % 7.0 % 6.2 % 5.6 %
Denmark 4.8 % 3.9 % 3.8 % 2.6 %
European Union 8.9% 8.2 % 7.2 % 6.9 %
Interest rates
In parallel, the maintenance of interest rates at historically low levels has encouraged the use of credit. Investment activities were also vigorous, particularly in the capital investment and housing sectors.
During the 2005-2008 period, the level of long-term interest rates (government loans with 10-year terms) increased significantly in the Scandinavian region, although it remained at historically low levels. The following table presents the evolution of the level of long-term interest rates in the Scandinavian region and the euro zone (data unavailable in the European Union) during the 2005-2008 period (source: Reuters Eco Win):
2005 2006 2007 2008*
Norway 3.8 % 4.1 % 4.8 % 4.6 %
Sweden 3.4 % 3.7 % 4.2 % 4.2 %
Denmark 3.4 % 3.8 % 4.3 % 4.4 %
European Union 3.4 % 3.8 % 4.2 % 4.2 %
*From January-August 2008
Commercial real estate market in Scandinavia
The commercial real estate market in Scandinavia is a mature and strictly regulated market. We believe the acquisition of Steen & Strøm positions us to benefit from Steen & Strøm’s significant presence in a market with strong barriers to entry.
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Economic aspects
Norway has 397 shopping centers5 with a total sales surface area of approximately 3.9 million m². Sweden has approximately 338 shopping centers6 with a combined total sales surface area of approximately 4.7 million m2. The top 100 shopping centers7 in Denmark have an aggregate total sales surface area of approximately 1.4 million m².
Retail sales growth has benefited shopping centers
With total retail sales in excess of €135 billion in 2006, Scandinavia is among the largest markets in Western Europe. In 2006, Norway, Sweden and Denmark ranked 3rd, 5th and 6th respectively among Europe’s 25 leading markets in terms of consumer spending per inhabitant, illustrating both the economic health of the countries, the prosperity of their inhabitants, and the potential and maturity of the commercial offering (source: King Sturge - European Retail Property-2008-Experian):
Consumption of Spending per resident Country Goods (€) (€million) Luxemburg 3,700 8,013 Switzerland 57,537 7,720 Norway 35,480 7 618 United Kingdom 424,341 7,003 Sweden 61,932 6, 832 Denmark 37,004 6, 812 France 365,465 5,976 Finland 30,633 5,825 Greece 59,833 5,369 Belgium 51,353 4,888 Ireland 19,838 4,713 Netherlands 77,097 4,704 Austria 37,896 4,587 Average 4,486 Sp ain 178,166 4,055 Germany 330,761 4,008 Italy 211,872 3,605 Portugal 33,856 3,196 Estonia 3,289 2,451 Czech Republic 21,405 2,094 Latvia 4,203 1,838 Lithuania 4, 450 1,310 Poland 48,914 1,284 Hungary 11,026 1,095 Slovakia 3,773 701
The retail market in the Scandinavian region grew significantly during the 1996-2006 period, as indicated in the table above, outperforming the European weighted average and ranking among the highest of the most developed countries.
5 The Norwegian definition of a shopping center refers to a shopping center containing more than five shops with a total sales surface area greater than 2,500 m². 6 The Swedish definition of a shopping center refers to a shopping center held and operated as a single entity and using a total sales surface area greater than 3,000 m2. 7 The Danish definition of a shopping center refers to a shopping center understood, developed and marketed as such.
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The table below sets forth retail sales growth over the 1996-2006 period and growth forecasts for the 2007-2017 period (source: King Sturge - European Retail Property-2008-Experian):
Country Sales Growth Projected Sales Growth 1996 - 2006 (%) Sales 2007 - 2017 (%) Latvia 157% 82% Estonia 174% 68% Lithuania 103% 67% Slovakia 56% 57% Portugal 57% 51% Greece 61% 46% Czech Republic 28% 45% Hungary 63% 44% Poland 26% 44% Denmark 32% 42% Luxembourg 45% 34% Sweden 60% 34% Ireland 73% 33% Finland 51% 32% Norway 43% 30% France 37% 28% Belgium 22% 24% Unit ed Kingdom 50% 24% Weighted Average 28% 23% Spain 40% 21% Netherlands 17% 16% Italy 8% 11% Germany 3% 6% Switzerland 6% 6% Austria 1% 5%
Shopping center revenue
The three Scandinavian countries show a robust growth rate in shopping center revenue in recent years, higher than that of the retail sector as a whole.
Norway
Norwegian shopping center revenues have grown significantly since 1999, at a rate of between 4 and 9% per year.
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The following chart sets forth shopping center revenue in Norway over the 2000-2006 period (source: Institutt for Bransjeananalyser AS):
In 2006, Norwegian shopping centers earned aggregate revenues amounting to approximately NOK 130 billion (tax included), representing 32% of the total amount of retail sales in Norway, compared to 28% in 2000.
Sweden
Swedish shopping center revenues have grown at an average rate of approximately 6.5% since 2000.
The following chart sets forth the revenue of shopping centers (including retail clusters) in Sweden over the 2000-2005 period (source: Köpcentrumkatalogen 06/07):
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In 2005, Swedish shopping centers (retail clusters included) generated aggregate revenues amounting to SEK 140 million (tax included) and represented 32.6% of the total amount of retail sales in Sweden, compared to 29.6% in 2000.
Denmark
From 2002 to 2006, Danish shopping center revenues grew at a rate of between 4 and 9% per year.
The following chart sets forth Danish shopping center revenue over the 2002-2006 period (source: Danmarks Største Butikcentre, ICP):
In 2006, the 100 largest Danish shopping centers generated aggregate revenues exceeding DKK 50 billion (tax included), compared to 41 billion in 2002, representing more than 20% of total retail sales in Denmark.
A mature market: Existing retail real estate offering and development pipeline
The Scandinavian shopping center market is a mature market, with consumers in Scandinavian countries benefiting from one of the richest offerings in Europe.
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The following chart presents the existing offering of real estate dedicated to retail shops in thousands of m² per inhabitant (source: Cushman Wakefield 2008):
Norway Sweden Netherlands Ireland Luxembourg Austria Denmark Estonia Spain UK Finland Portugal France Latvia EU-25 Average EU-27 Average Italy Lithuania Switzerland Czech Republic Slovenia Germany Poland Slovakia Hungary Malta Belgium Croatia Turkey Russia Romania Ukraine Greece Bosnia Herz. Bulgaria Serbia 0 100 200 300 400 500 sq.m per 1,000 population
The new development pipeline in Scandinavian countries appears relatively limited, reflecting the sufficient supply of existing space in these markets, regulatory barriers to entry and lower investment by real estate promoters. Denmark and Sweden rank low in terms of new developments in the pipeline.
The following chart presents the development pipeline in thousands of m² of gross leasable area over the 2008-2009 timeframe (source: Cushman Wakefield 2008):
Russia 9,600 Ukraine Turkey Poland UK France Italy Spain Germany Portugal Romania Bulgaria Slovakia Greece Ireland Czech Republic Sweden Serbia Netherlands Croatia Switzerland Hungary Lithuania Belgium Finland Latvia Slovenia Denmark Austria Norway Luxembourg Bosnia & Herzegovina Estonia Malta 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500
As one of the major actors in this market, Steen & Strøm has significant access to these new projects, with its development project pipeline (expansions and renovations) of more than €1 billion, of which €0.5 billion is for projects underway at June 30, 2008.
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Yield of properties dedicated to retail
The yield of properties dedicated to retail have, just as in all European markets, continued to decline since the beginning of the liquidity crisis in the summer of 2007, when they reached a historically low level.
The following table illustrates the overall decline of yields in Europe over the 2005 / 2007 period (source: King Sturge - European Retail Property-2008-Experian):
Rate of prime retail yield 2005 (%) 2006 (%) 2007 (%)
Ireland Dublin 3.3 3.0 3.0 Denmark Copenhagen 4.5 4.3 3.8 United Kingdom London 4.3 4.0 4.0 France Paris 5.0 4.5 4.0 Sweden Stockholm 5.0 4.5 4.0 Italy Milan 4.8 4.5 4.3 Belgium Brussels 5.0 4.5 4.3 Switerland Zurich 5.0 5.0 4.3 Germany Frankfurt 5.0 4.5 4.5 Spain Madrid 5.0 4.5 4.5 Netherland Amsterdam 5.3 5.0 4.5 Norway Oslo 7.0 5.5 4.5 Finland Helsinki 6.0 5.8 4.8 Austria Vienna 5.0 5.0 5.0 Greece Athens 6.5 6.0 5.0 Czech Republic Prague 7.0 6.5 5.0 Poland Warsaw 7.0 6.0 5.3 Hungary Budapest 6.8 6.0 5.8 Portugal Lisbon 7.0 6.5 6.3 Lithuania Vilnius 9.0 8.0 6.3 Slovakia Bratislava 8.5 8.3 6.5 Romania Bucharest 12.0 8.0 6.5 Turkey Istanbul 10.0 10.0 6.5 Estonia Tallinn 10.0 9.0 7.5 Latvia Riga 11.0 9.5 7.5 Slovenia Ljubljana 10.0 8.5 8.0 Russia Moscow 12.0 10.5 10.0
Since the summer of 2007, higher financing costs, the increases in risk premiums or the larger share of own funds required to carry out acquisitions or to develop new properties have increased the rates of return sought by investors. It is too soon to determine the extent of the impact on the market, which will differ depending on the category of properties --- shopping center properties are less volatile than offices or warehouses -- as well as other matters that depend on the nature of the transactions (maturity and leadership status of properties on the market, potentially competing new real estate offers, etc.). The latest figures published (Jones Lang LaSalle – September 2008) indicate a rise in prime yields for shopping centers over 12 months of 0.50% for Sweden and Norway, and 0.85% for Denmark, i.e. prime yields of 5.40%, 5.75% and 5.60%, respectively.
Regulatory Matters
Norway
Commercial Leases
Norwegian law no.17 of March 26, 1999 (Nw: Lov om husleieavtaler) relating to lease agreements governs both commercial and residential leases. The provisions in the law that apply to commercial leases are (with some minor exceptions), optional. However, most of these provisions apply unless the parties agree otherwise.
There is no mandatory minimum or maximum term. Leases are usually granted for five or ten years. A lease may be entered into for either a fixed or an indefinite term. If the lease term is fixed, the lease automatically lapses upon expiry of the term. If no term is provided in the lease agreement, the lease is generally valid for an indefinite term, with each party being able to terminate such lease on three months’ notice. There is no automatic lease renewal right when the lease term is fixed. Any such right must be agreed between the parties.
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Unless otherwise agreed, each of the parties has the right to require that the rent be adjusted annually on the basis of changes in the Norwegian Consumer Price Index. In addition, law no.17 of March 26, 1999 provides that rent may be adjusted every three years based on market rental rates. However, this provision generally does not apply to commercial leases, and adjustments to market rates occur only when a lease is renewed.
The parties are generally free to determine the amount of the rent as well as the calculation method to be used for this purpose. The rent may be calculated based on the tenant’s revenue while providing for a minimum rent, which is common practice for commercial leases.
Tenants usually pay a portion of the common expenses proportionate to the amount of space they rent. The common charges passed on to the tenants by the lessor, which are included in the rent, may vary. The charges reserved for the lessor are generally limited to typical “owner” expenses (notably, building insurance and property tax).
The tenant does not have any statutory right to transfer the lease to a third party without the lessor’s approval. Such consent may usually be withheld at the discretion of the lessor. A change of control or a merger or spin-off involving the tenant are considered to involve a transfer of the lease rights, which requires the lessor’s approval.
Norwegian law contains specific provisions intended to protect the tenant (which is assumed to be the weaker party) with respect to subletting and transferring the lease, which are generally set aside.
Although there is no legal obligation to put in place a guarantee, leases generally require a guarantee to be put in place. This usually takes the form of a guarantee by a financial institution approved by the Norwegian authorities, for an amount equal to 6 to 12 months of rent, including charges. As an alternative, smaller leases sometimes use a security deposit.
Regulations applicable to the administration, management and sale and purchase of real estate
Real estate transactions are subject to specific regulations. Under the Norwegian Real Estate Brokerage Act of 2007, all real estate agents must be licensed to carry out transactions. The Act sets out specific requirements with respect to matters including qualifications, corporate form, financial structure and soundness, guarantees, management, business history and handling of funds. There are also limitations concerning the conduct of other businesses, transactions for one’s own account and commissions and fees.
There is no specific legislation governing asset or property management companies. However, general principles of good faith, loyalty and common contract law apply.
Zoning regulations
Zoning regulations in Norway include (in order of importance) (i) governmental (state) plans, guidelines and resolutions, (ii) regional (county) plans, (iii) municipal plans, and (iv), local development (zoning) plans, ranked in this hierarchical order.
Any development of a commercial real estate complex must first comply with the applicable municipal plan (and/or, as the case may be, state and/or regional plan(s)), and second, be the subject of a building permit or a specific “framework” permit (the first step in obtaining a building permit in Norway). A commercial real estate complex may not start operations before the municipality has issued a certificate of completion or a temporary permit.
The development and expansion of shopping centers that are not provided for in regional plans is subject to a general maximum limitation of 3,000 m2, in order to ensure governmental or regional supervision of development and concentration of retail activity outside city centers and densely populated areas. The overall aim is to maintain the vitality of urban centers and limit the use of private transportation.
Sweden
Commercial Lease Agreements
The Swedish Leases Act (Sw. hyreslagen) governs commercial leases.
The length of a commercial lease is determined by the parties to the agreement. In the absence of specific provisions in the lease agreement, the lease has an indefinite term. In general, however, the term of the lease is usually set for a minimum period of at least three years because the Swedish Leases Act prohibits leases with a term of less than three years from including indexation clauses or provisions for the rebilling of property taxes and other ancillary charges.
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The parties are free to determine the rent. The rent may be fixed or proportional to the tenant’s revenue. Step up rents are allowed if agreed to by the parties. For leases with a term of three years or more, the rent is usually adjusted on an annual basis using the consumer price index.
The parties are free to provide for an extension of the lease term upon its expiration. In practice, lease agreements usually provide for a renewal option of between three and five years, depending on the type of premises.
In the case of a tacit renewal of the lease for at least one month after its contractual expiration, the lease becomes a lease with an indefinite term, and may be terminated only with nine months notice.
Nine months’ notice is also required to terminate a lease with a fixed term that is longer than nine months.
At the expiration of the lease, a tenant is not automatically entitled to a lease renewal. However, subject to certain specific conditions (absence of fault on the part of the tenant, destruction or reconstruction of the building), Swedish law provides for financial compensation in favor of the tenant in the event that the lessor refuses to renew the lease upon its expiry on reasonable market conditions. This right to compensation is known as the tenant’s “indirect renewal right.” Any provision in the lease agreement that results in the tenant’s waiver of such indirect renewal right is deemed to be unenforceable against the tenant (in order for such a waiver to be enforceable, it must be made in a separate agreement, although if it is made within nine months of the lease’s commencement date, the Swedish Rent Tribunal must in principle approve such waiver).
The principle of the tenant’s indirect renewal right is to compensate the tenant for all prejudice suffered as a result of the termination of the lease (including operating losses). If the tenant and the lessor are unable to agree on the amount of the compensation, the tenant may, within two months of the termination of the lease, initiate court proceedings for the purposes of determining this amount. The minimum amount of such compensation is one year’s rent.
The parties are free to determine the split of maintenance and repair costs under the lease agreement. The lessor will bear the maintenance and repair costs unless the lease specifies otherwise.
In accordance with the Swedish Leases Act, a tenant may not transfer its rights under a lease agreement without the lessor’s approval. If the lessor unreasonably refuses such transfer, the tenant is entitled to terminate the lease. However, the Rent Tribunal may authorize such transfer if it involves the transfer of the lease to the purchaser of the business carried out in the premises.
A tenant may not sublet the premises in their entirety without the approval of the lessor or the authorization of the Rent Tribunal. The Rent Tribunal may authorize a sublease if the lessor has no valid grounds for a rejection. A tenant may partially sublet the premises as long as doing so is not detrimental to the lessor.
There are no legal provisions relating to guarantees granted by the tenant for the benefit of the lessor in order to ensure the enforcement of the lease agreement. In practice, however, such guaranties are generally provided.
Regulations applicable to the administration, management and sale and purchase of real estate
The Swedish Real Estate Agents Act applies to all real estate agents. Moreover, all real estate agents registered as such conduct their activity under the supervision of the Committee of Swedish Real Estate Agents.
No specific legal provisions apply to property managers.
Zoning regulations
Under Swedish law, local municipalities are responsible for establishing zoning regulations governing the use of land and construction.
To this end, several types of zoning plans exist: global plans, regional plans and detailed plans. Detailed zoning plans cover matters such as public areas (notably, streets, squares or plazas and parks), areas reserved for the construction of buildings and other structures (notably, hydroelectric and power installations and traffic zones) and maritime areas for navigation and/or leisure. Detailed zoning plans also govern the use and construction of buildings, farming areas, as well as the use and construction of public space.
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Building permits
Swedish law relating to zoning and construction requires that a building permit be obtained before starting any construction work. Application for a building permit must be filed with the local zoning committee, which is the competent municipal authority. The property owner is, in principle, entitled to a building permit if the project complies with the detailed zoning plan and the applicable construction regulations. The decision of the local zoning committee may be appealed to the County Administrative Board.
A building permit is necessary in order to alter, extend or demolish buildings and installations and to modify the use thereof. The main modification of use consists of changing premises from residential to commercial use.
The local zoning committee may issue a preliminary determination concerning whether the construction of a building or other use is permitted on the intended site. Any unauthorized construction may be stopped and is subject to an obligation to demolish or restore the building. The property owner may also be ordered to pay a fine equal to four times the amount of the regular fee due in connection with a building permit
Operating permits
There is generally no authorization required from a property owner to own and manage commercial premises. If a tenant’s activity requires a specific operating permit, the tenant is responsible for obtaining such permit from the relevant authority. Such authorization may be necessary, for example, if the tenant provides food services. A license is required to serve wine, beer or spirits on the premises.
Denmark
Commercial Leases
The current Danish law on commercial leases became effective as of January 1, 2000. This law applies to all commercial leases, including those entered into prior to January 1, 2000. In contrast to the prior Danish law regarding leases, the new law introduced a high degree of contractual freedom by providing that it applies only in the absence of contrary provisions agreed by the parties.
In general, the parties are free to determine the length of the lease.
The parties are also free to determine the amount of the rent and its payment terms, including the determination of whether the rent will be fixed or proportional to the tenant’s revenue.
Rents are usually adjusted once a year based on changes in the Danish Consumer Price Index.
Pursuant to Danish law on commercial leases, each party is entitled to request the adjustment of the rent to market levels every four years. This provision applies unless otherwise agreed to by the parties.
No legal provision imposes an obligation on the tenant to provide a guarantee for the lease. However, typically, the parties agree that the tenant must obtain a guarantee equivalent to three to six months rent. The deposit takes the form of a cash deposit or a bank guarantee.
The tenant in principle pays its own electricity, water and heating expenses. The payment is generally made in advance based on the expenses of the previous year.
In the majority of commercial leases, the tenant pays, in addition to the rent, a proportional share of charges, such as, for example, guardian’s wages, property taxes, insurance, indoor and outdoor maintenance of common areas and renovation. The payment is typically made in advance. In accordance with Danish law, the lessor must specify which operating charges are to be borne by the tenant in addition to the rent. The lessor must provide an estimate of the charges in the agreement or in an appendix thereto.
The lessor is entitled to request a re-negotiation of the terms of the lease agreement every eight years. If, following such negotiations, the parties cannot reach an agreement, the lessor has the right to terminate the lease agreement at the expiration of the eighth year.
The provisions of the Danish law on commercial leases regarding termination of the lease agreement by the lessor may only be departed from for the benefit of the tenant. As a general rule, the tenant is protected from termination. However, this does
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not apply in case of breach by the tenant of its obligations under the agreement, such as the non-payment of the rent. The parties are free to agree that the lease agreement may not be terminated during a specific period. A fixed-term lease agreement will be terminated automatically at the end of the fixed-term.
The law authorizes the transfer by a tenant of its lease to another tenant, acting in the same line of business as permitted in the lease agreement. The lessor may only refuse such transfer for legitimate reasons, such as the lack of experience of the new tenant or inadequate capitalization. Since the parties may deviate from the general rule, lease agreements generally contain less restrictive conditions for lease transfers.
If the tenant is a legal entity, the lease agreement often contains a provision regarding change of control. Such provisions generally provide that any transfer of shares issued by the tenant constitutes a transfer of the lease, for which the lessor´s prior written approval is required.
Regulations applicable to the administration, management and sale and purchase of real estate
There are no specific rules or regulations that apply to agreements for property management as long as the provisions of the agreement are reasonable and comply with the general principles of good faith as defined by Danish law. Property managers are usually members of the Danish Property Federation (Ejendomsforeningen Danmark). In such case, they are required to abide by the general principles and guidelines set forth in the Danish Property Management Code of Ethics. These rules are based on “The European Code of Ethics for Real Estate Professionals,” adopted by the European Council of Real Estate Professions in 2006.
In Denmark, no law regulates the sale and purchase of commercial real estate. The parties may freely determine the terms of the purchase agreement themselves or use a real estate agent or a lawyer to draft the purchase agreement.
Zoning regulations
In Denmark, there are four levels of zoning regulations: National planning, regional planning, municipal planning and district planning. District zoning regulations are extremely detailed, and include matters such as the use of buildings and their dimensions.
The municipal council is responsible for enacting district zoning regulations.
Specific regulations apply to shopping centers. Zoning law is intended to promote the diversity of retail shops in Denmark’s numerous small and medium-sized towns. To this end, the law imposes restrictions with respect to establishing and expanding large stores and shopping centers, which means that authorizations to build shopping centers are seldom granted, especially in areas where shopping centers are already located.
Prior to the construction of buildings or to any substantial changes to existing buildings, the owner must apply for and obtain a building permit from the local municipality. When the construction works are completed, the local municipality inspects the site and issues an official authorization for occupation and use.
The general rule is that new retail businesses must be located downtown. However, there are a few exceptions to this rule, specifically with respect to small local shops and businesses with goods requiring unusually large amounts of floor space. Moreover, the size of shopping centers is subject to specific zoning regulations.
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REGULATION
Tax regime applicable to Klépierre (SIIC)
Benefit of SIIC status
In 2003, we elected to be subject to the tax regime applicable to listed real estate companies (sociétés d’investissement immobilier cotées – “SIIC”) as provided under Article 208 C of the French General Tax Code. The election of SIIC status is irrevocable. This regime allows companies listed on a regulated French market and whose share capital is greater than €15 million to benefit, subject to certain conditions, from a corporate income tax exemption on profits derived from rental activity (or the sub-letting of buildings under financial leases concluded or acquired since January 1st, 2005) for their primary activity of acquiring and/or building real estate properties for leasing purposes and the direct or indirect holding of interests in companies involved in similar activities. The income tax exemption also applies to certain capital gains created upon the sale of real estate assets related to their primary activities or upon the sale of equity interests in real estate companies and certain dividends. The benefits of this tax regime also apply to SIIC companies’ subsidiaries (held, directly or indirectly, at 95%, on a consistent basis throughout the fiscal year) engaged in the same activities as the SIIC company.
Application of the SIIC regime
This exemption is subject to the requirement that no single person, or group of persons acting in concert, may hold (directly or indirectly) 60% or more of the share capital or voting rights of the company. This condition does not apply when the shareholder or shareholders acting in concert is/are listed companies with SIIC status. This condition is evaluated on a continuous basis during each fiscal year in which the SIIC regime is applied. If this limit is exceeded due to a tender offer or exchange offer, a merger or split-off, or a conversion or redemption of a convertible debt obligation, we have a 90-day cure period (beginning at the end of the fiscal year in which the limit was exceeded) in which to conform to the SIIC requirements.
Distribution obligations
In exchange for this corporate tax exemption, SIICs must distribute to their shareholders at least 85% of the exempted profits derived from their rental business before the end of the fiscal year following the one in which such profits were derived, and at least 50 % of the exempted profits derived from either sales of real estate assets or sales of equity interests in real estate companies before the end of the second fiscal year following the one in which such profits were generated. All of the dividends received from subsidiaries that are subject to the SIIC tax regime must be redistributed before the end of the fiscal year in which they were received.
Activities eligible for SIIC status
Companies benefiting from SIIC status are not required to have an exclusive corporate purpose. They may not, however, conduct activities that are ancillary to their main purpose (such as, for example, activities of a real estate agent, real estate marketer or promoter), unless, pursuant to the terms of administrative instruction 4 H-5-03 of September 25, 2003, the value of the assets used for the exercise of such ancillary activities and which are used in connection with such activities do not represent more than 20% of the gross assets of the SIIC; failing which, the company loses the benefit of SIIC status. The profits generated by these ancillary activities are subject to corporate income tax under the ordinary tax regime.
Exit tax upon election of SIIC status
Upon electing SIIC status, the latent capital gains on real estate assets and equity interests in tax transparent companies with the same corporate purpose as that of the SIIC, that are owned by the SIIC or the SIIC’s subsidiaries that have elected for the SIIC status, are subject to corporate income tax at the rate of 16.5% (Article 219-IV of French General Tax Code, the “Exit Tax”). This Exit Tax must be paid in four equal installments, the first of which is payable on December 15th of the year in which we elected SIIC status, and the balance of which is payable in three further installments on December 15th of each of the three subsequent years.
Similar provisions apply to real estate assets and equity interests that become eligible for the exemption after the election of SIIC status.
The amount of Exit Tax that remains payable by us as of the date hereof is not significant.
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20% Withholding
If a shareholder (other than a physical person) of a company benefiting from SIIC status comes to hold, at the time a dividend is paid, directly or indirectly, at least 10% of the rights to dividends of such company, and the profits received by such shareholder are not subject to corporate income taxation or taxation under an equivalent regime, the company benefiting from SIIC status must pay a tax equal to 20% of the profits distributed to such shareholder and withheld from the exempted proceeds generated by the activities falling under the SIIC regime (the “20% Withholding”). The 20% Withholding is not due if the beneficiary of this distribution is a company required to distribute 100% of the dividends it earns (for example, a company with SIIC status) and whose shareholders (who hold, directly or indirectly, at least 10% of the rights to dividends of such company) are subject to corporate income tax or an equivalent tax regime with respect to the distributions they receive. The proceeds received are not considered to be subject to corporate income tax or to an equivalent tax regime when they are exempt or subject to tax that is more than two-thirds lower than the corporate income tax that would have been due under the ordinary tax regime in France.
The person legally liable for the 20% Withholding is the company making the distributions, rather than the relevant shareholder(s).
In the event that a shareholder of the company (other than a physical person) who is not subject to corporate income taxation or taxation under an equivalent regime with respect to proceeds received from the company, comes to hold 10% or more of the rights to dividends or voting rights of the company, the 20% Withholding would also be due by us for the sums paid to such shareholder and withheld from the tax-exempt profits generated by the activities falling under the SIIC regime.
Nevertheless, even if we pay the 20% Withholding due by us (as described in the previous paragraph), the shareholder whose own tax situation (or that of its direct or indirect shareholders) results in our being subject to the 20% Withholding shall ultimately be responsible for such tax that is paid or payable by us. In recognition of this fact, our Bylaws stipulate, in essence, that any shareholder other than a physical person whose tax situation (or that of one, or several, of its direct or indirect shareholders) causes us to become subject to the 20% Withholding (the “Withholding Shareholder”), will owe us, in connection with the payment of any distribution, a sum corresponding to the amount of the 20% Withholding due from us in connection with such distribution. The payment of this sum to us by the Withholding Shareholder will be made via a corresponding reduction of the amount of our dividend payment.
It should nevertheless be noted that in some instances, and notably, if the tax administration increases the amount of our taxable income considered to be generated from SIIC related activities, we may be required to pay the 20% Withholding, without being able to pass on the cost to the relevant Withholding Shareholder(s). This could, for example, occur if, following a tax audit, the tax administration considers that the profits were distributed by us without first having been the object of an effective distribution that was approved in a general meeting. In this case, if and to the extent that we have distributed a dividend amount for the audited fiscal year in excess of its initial distribution obligation, it is possible that we would not be subject to corporate income taxation in relation to such audit but would be forced to pay the 20% Withholding, which could constitute an accounting expense for us (non-tax deductible): the 20% Withholding would be subtracted from (i) our accounting income and thus (ii) our future distribution capacities.
Loss of SIIC status
Three events could trigger the loss of our SIIC status:
(i) the delisting of our shares from regulated French markets,
(ii) the reduction of our share capital to a level below €15 million, and
(iii) the modification of our main corporate purpose to one that no longer qualifies for SIIC status (see “Benefit of SIIC status” and “Activities eligible for SIIC status” above).
In the event of the loss of our SIIC status, except in the event that we become a 95% subsidiary of another company benefiting from the SIIC regime (thus remaining within the scope of application of such regime), we could be liable for the following tax charges:
- Taxation at the usual corporate income tax rate (i.e., 33.33%, in addition to the social contribution) on all of the profits generated by us during the fiscal year in which we lose our SIIC status, including those that would have benefited from a corporate income tax exemption had we continued to qualify for SIIC status; and
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- When we opted for the SIIC regime, the unrealized capital gains related to eligible assets (real estate assets and certain investments in real estate companies) were subject to the Exit Tax. In the event of our loss of SIIC status in the ten years following the election of this regime, an additional tax will be due from us in connection with the unrealized capital gains that have already been subject to the Exit Tax, such additional tax being calculated by applying the usual corporate income tax rate to such capital gains subject to the Exit Tax.
REGULATIONS APPLICABLE TO OPERATING ACTIVITIES
France
Regulations applicable to leases
Commercial leases
The Group’s assets in France are regulated by French laws relating to commercial leases (Articles L. 145-1 et seq. and R. 145-1 et seq. of the French Commercial Code). Any lease concluded by a tenant (who is registered in the Trade and Companies Register), with respect to a building in which a business is operated, is considered to be a commercial lease.
Commercial leases are concluded for a minimum period of nine years, with a right in favor of the tenant to terminate the lease at the end of any three-year period (unless expressly provided otherwise in the lease). Notice of termination must be given for the last day of the calendar quarter at least six months in advance. The landlord has a limited right to evict the tenant at the end of every three-year period. Eviction is thus allowed for a three-year period if an existing building is to be rebuilt, its height increased, or if renovations are recommended or authorized with respect to the building as part of a real estate restoration project.
Upon the execution of a commercial lease, the parties are free to set the initial rent. Generally, an annual indexing clause is included in the lease indexing the rent to variations in the cost of construction index (ICC) published each quarter by the INSEE. Further to law n° 2008-776 of August 4, 2008, rents for commercial leases may be indexed, subject to the respective parties’ agreement, to the Commercial Rent Index (indice des loyers commerciaux - (ILC)), a new index which uses a weighted calculation method. Fifty percent of the ILC is calculated based on the consumer price index, 25% based on the index of retail revenues in value terms and the remaining 25% based on the ICC. This index will not be applied until after the publication of the decree of implementation establishing both the list of concerned commercial activities and the terms and conditions of publication by INSEE. Furthermore, if the lease includes a sliding scale discount clause, the rent may be subject to review if, as a result of such indexation, it increases or decreases by more than 25% relative to the amount previously agreed by the parties or determined by a court. Either party may apply for a rent assessment by the court if the parties fail to agree on the rent subject to review.
The parties may provide for a variable rent that is most often calculated based on a percentage of the tenant’s revenues (before tax) in the leased premises. In cases of such an arrangement, a minimum guaranteed rent amount is generally provided for. Leases that include this type of clause are not subject to the rules requiring rents to be judicially determined upon the renewal of the lease. It is therefore in the lessor’s interest to provide for a price-determination mechanism contractually, otherwise the rent under the renewed lease will remain the same as under the expired lease.
The tenant benefits from a right to renew the lease upon its expiration. The following scenarios are possible at lease-end:
(i) The landlord may serve a termination notice with a refusal to renew. In such case, the landlord must pay the tenant an eviction indemnity unless it can demonstrate a serious breach, by the tenant, of its obligations under the lease. This eviction indemnity is intended to compensate for any damages incurred by the tenant as a result of the non-renewal of its lease, the value of its business and/or right to the lost lease, reinvestment fees related to the search for an equivalent property, moving costs, termination fees and sometimes, the depreciation balance.
(ii) The landlord may serve a termination notice and offer to renew the lease. In such case and if the tenant accepts the offer, the lease is generally renewed under the same terms and conditions as the preceding lease, subject to an amicable or judicial agreement as to the reassessment of the rent.
(iii) The tenant may request the renewal of the lease from the landlord. Two outcomes are in turn possible with respect to this scenario:
- either the landlord may agree to renew the lease, in which case the lease is generally renewed under the same terms and conditions as the prior lease, subject to an amicable or judicial agreement concerning a reassessment of the rent,
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- or the landlord may refuse to renew the lease, in which case, the landlord must pay the tenant an eviction indemnity except in the case of a serious breach, by the tenant, of its obligations under the lease.
(iv) If no notice is provided prior to the expiration of the lease, the lease will be tacitly and automatically renewed for an indefinite period of time under the same terms and conditions until (a) the tenant requests a renewal of the lease, or (b) the lessor gives notice or offers to renew (subject to compliance with the six month notice period described above).
The rule on capped rents does not apply in the following cases:
(1) In the case of significant changes in one of the factors used to determine market rent (characteristics of the premises in question, purpose of use, obligations of the parties and/or local merchantability factors, prevailing price in the neighborhood);
(2) if the term of the lease provided for contractually in the lease exceeds nine years;
(3) if the effective term of the lease exceeds 12 years (i.e., if a nine-year lease has been tacitly renewed so as to exceed 12 years);
(4) in the case of “one-use-only” leases (intended for a unique use only, as a result of special improvements made or the unique layout of the premises); or
(5) if the lease relates to premises to be used exclusively as office space.
The tenant is free to transfer its commercial lease in the context of a transfer of its business. Any contrary provision is void and unenforceable. The transfer of the “right to the lease” is also prohibited if such transfer is attempted independently of a transfer of the tenant’s business.
Professional lease regime
Leases concluded by the Group with tenants exercising a profession other than commercial or agricultural activities, are governed by the public interest provisions of law no. 86-1290 of December 23, 1986 (in particular Article 57 A thereof), the provisions of the French Civil Code and the terms of the lease itself. The lease must be in writing and concluded for a minimum term of six years and be automatically renewable for the same term. Each party may notify the other of its intent not to renew the lease upon its expiry, by giving six months’ prior notice. The tenant also has the option, at any time, of notifying the landlord of its intent to terminate the lease by giving six months’ prior notice. The initial rent is freely determined by the parties and may vary according to the terms established and agreed to by the parties.
Regulations applicable to the administration, management and sale of real estate assets
The business of real estate agents and property managers is governed by law n°70-9 of January 2, 1970 (law concerning the exercise of business activities related to real estate and real estate businesses), the so-called “Hoguet” law, and by the decree n°72-678 of July 20, 1972, amended by decree n° 2005-1315 of October 21, 2005 and decree n° 2008-355 of April 15, 2008, used for its application. Professionals who breach these provisions risk the nullification or invalidation of the transactions to which they are parties, or even criminal sanctions.
The Hoguet law requires real estate agents and property managers to obtain a professional license from the administration in order to practice their respective professions.
The request for the license must be accompanied by documentary evidence, including proof of a financial guarantee delivered in accordance with the terms of article 37 of decree n° 72-678 of July 20, 1972. This guarantee, required of all agents, is intended to protect the public against the possibility of embezzlement and theft of assets by unscrupulous agents. The law requires that the guarantee be in a form of a written commitment defining the general terms of the guarantee.
Finally, the Hoguet law regulates, in a very precise manner, the terms by which agents may participate in the management of, or in transactions relating to, the assets of others. Under this law, the real estate agent or the property manager is notably required to have entered into a written and formal mandate with its principal in order to receive any commissions.
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Urban planning authorizations
Building permits
As part of its business activities, the Group builds new properties and expands or renovates existing properties.
Pursuant to the terms of Articles L. 421-1 et seq. of the French Urban Planning Code, any person wishing to erect a building for residential use or other use must obtain a building permit prior to commencing construction. A building permit is also required to carry out major work on existing buildings when the result of such work would be a change in the current usage of the respective building, the modification of the exterior of the building, or a change in the building’s volume or the addition of floors.
However, certain arrangements and exceptions exist. Article L. 422-1 of the French Urban Planning Code provides certain exemptions, the relevant construction project or renovations, etc. being subject only to a simple notification requirement. These exemptions generally apply to minor work, such as the type of construction work that involves only minor adjustments made to a premises prior to a new tenant moving in. Moreover, Article L. 421-1 of the French Urban Planning Code considers works which, due to their nature or their small size cannot be qualified as construction projects, to be outside of the scope of application of the building permit.
In order obtain a building permit, applicants must first file an application with the relevant administrative authority. The department in charge of reviewing the application will obtain (on behalf of the authority authorized to deliver the permit) the approval or the opinion of the public persons, departments or commissions concerned by the project under review.
Moreover, the examining body will assess the constructability of the land, compliance with zoning regulations and the conditions to the completion of the project. The competent authority will issue its decision in the form of an administrative order. The building permit becomes enforceable by right once it has been notified and the prefect has received it.
The building permit must be publicly posted both at the project site and at the mayor’s office for a two-month period, so as to properly notify third parties. The building permit will lapse if the authorized construction is not started within two years after the date of notification of its delivery or of its tacit delivery, although this time period is subject to a one-year extension. Once the works are completed, the beneficiary of the building permit will file, with the mayor’s office, a declaration of completion of works and of conformity of such works with the building permit. Following this filing, the zoning department, which originally reviewed the application, will visit the project site in order to ascertain its conformity with the building permit.
The performance of works or the use of the land in breach of the Urban Planning Code and the rules on building permits may result in criminal, civil, administrative and tax liability.
Commercial operating license
Law n° 73-1193 of December 27, 1973, relating to commerce and the craft industry, also known as the “Royer” law, modified by law n° 96-1018 of July 15, 1996 and by law n° 2008-776 of August 4, 2008, requires a specific authorization known as a “CEDEL permit” for the creation and extension of any commercial building, the reorganization of existing sales spaces or changes in activity sectors. The CEDEL permit is in turn delivered by the Department Commission of Commercial Installations (Commission Départementale d’Équipement Commercial).
A commercial operating license is required for projects involving the creation or expansion of a retail outlet/shopping center with sales space of over 300 m² or that will exceed this limit upon completion. A license is also required in the event of the reopening of a retail/shopping center with sales space of over 300 m² and that has ceased operations for at least two years. This license is required for the operation of sales space in a shopping center. Any unauthorized operation of sales space is subject to heavy sanctions under the French Urban Planning Code (a monetary fine and, if the violation remains uncured, destruction of the offending floor space (measured in square meters)).
Law n° 2008-776 of August 4, 2008 modified the authorization regime for commercial licenses. First, it raised the threshold for the triggering of the commercial license authorization procedure described above from 300 m² to 1,000 m², subject to an exception to this threshold increase in the case of an immediately applicable temporary provision. Secondly, it modified the composition of the commissions in charge of granting the authorizations, as well as the criteria for requesting authorizations. These provisions shall not take effect before a date to be determined by decree.
Administrative license in Paris region (Ile-de-France)
If the Group wishes to establish business premises or offices in the Paris region (Ile-de-France), it must comply with the regulations contained in Articles L. 510-1 et seq. and R. 510-1 et seq. of the French Urban Planning Code.
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Pursuant to this regulation, a license is required for any project carried out in the Paris region by any physical person or legal entity, with respect to the construction, renovation or expansion of any premises or facilities used for industrial, commercial, professional, administrative, technical, scientific or educational activities.
Spain
Regulations applicable to leases
In Spain, commercial leases are governed by law n° 29/1994 of November 24, 1994, which gives parties relatively wide latitude to negotiate the various provisions of the lease agreement (notably, term, rent, transfer and renewal). The parties are free to determine the term of the lease with no limitations whatsoever imposed by law. It is also possible to contractually provide that all taxes and common charges (i.e., utilities and property taxes) of a shopping center be passed on to the tenants. In addition, the law requires tenants to provide a security deposit equal to two months’ rent to be deposited with organizations specifically created for this purpose in the various Self-Governed Communities. In addition to the security deposit, the lessor usually requires additional guarantees from the tenant in the form of a cash deposit or bank guarantee. The tenant’s main rights under the law are: (i) a right of first offer, should the lessor desire to sell the leased property to a third party, (ii) a right to sub-lease and/or transfer of the lease, and (iii) the right to claim a lease termination indemnity to compensate for the loss of business (associated with the inability to renew a lease). However, the law recognizes that the parties may waive the rights described above, which is a common occurrence in Spain’s shopping center sector.
Regulations applicable to the administration, management and transactions involving real estate
There is no equivalent in Spain to the French Hoguet law of January 2, 1970 requiring individuals who act as real estate agents or property administrators to be licensed (or hold a particular diploma or other educational qualification).
Urban planning authorizations
Municipalities issue the urban planning authorizations required to build or open shopping centers. The type and main features of such authorizations vary depending upon the relevant municipality. Two types of permits exist:
Pre-construction permits: (i) a building permit authorizing the construction of the shopping center and requiring the submission of technical plans prepared by an architect, and (ii) a business establishment permit confirming the adequacy of the project’s facilities for the business to be practiced in the building.
Permits following construction: (i) permit of first occupation (administrative verification of the conformity of the constructed building in relation to the building permit) and (ii) opening permit confirming that conditions stipulated in the business establishment permit are being respected.
Italy
Regulations applicable to leases
Commercial leases in Italy are governed by law n° 392/1978 of July 27, 1978. Commercial leases are concluded for a minimum period of six years with tacit renewal. The tenant has a right to renew the lease when it expires. The lessor may not refuse such automatic renewal except under certain circumstances (for instance, if the lessor decides to renovate the property or intends to use the property for its own professional purposes). If the lessor gives notice, it must pay an indemnity to the tenant in order to compensate for the loss of business. The tenant has a right of first offer should the lessor decide to sell the property.
Administration, management and real estate transaction regime
Under Italian law n° 39/1989 of February 3, 1989, property agents or administrators must be registered with the register of real estate agents maintained by the local trade register.
Urban planning authorizations
Under decree n° 114/1998, each Region (Regione) establishes the authorization procedure for the construction of a new shopping center (concessione edilizia), its opening and management. The regulations within a Region may provide for a single procedure for the procurement of all permits, licenses and authorizations needed for the construction, opening and management of a shopping center. This decree includes different authorizations based upon the various commercial surface areas: local businesses (esercizi di vicinato), mid-sized supermarkets (medie struttura di vendita) and supermarkets (grandi struttura di vendita). For mid-sized supermarkets and supermarkets, the opening requires the authorization of municipal authorities
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(commune) which verify conformity with certain general requirements (notably, zoning identification and environmental restrictions) pursuant to the laws in force in each Region. Authorization is granted or refused within 90 days after the date of the request for mid-sized supermarkets and 120 days after such request in the case of supermarkets. The opening and management of a shopping center is subject to other specific authorizations, such as a fire prevention certificate (certificate prevenzione incendi) and a certificate of conformity with respect to the electrical installations and security system (dichiarazione di conformità impianti elettrici e sistemi di sicurezza).
Regulations related to Steen & Strøm’s operating activities are described in the section entitled “Scandinavian commercial real estate market – Regulatory aspects”.
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MANAGEMENT AND EMPLOYEES
In accordance with French law applicable to a société anonyme à directoire et conseil de surveillance, a form of stock corporation, we have a two-tier management structure pursuant to which our day-to-day affairs are managed by an Executive Board (directoire) under the general supervision of, and whose members are selected by, a Supervisory Board (conseil de surveillance), the members of which are elected by our shareholders.
Executive Board
Overview
Our company’s day to day affairs are managed by an Executive Board whose members are selected by the Supervisory Board. The number of members of the Executive Board is determined by the Supervisory Board, subject to applicable legal limits. Our bylaws provide that each member of the Executive Board is elected for a term of three years. An ordinary general shareholders meeting has the power to dismiss any member of the Executive Board before completion of his or her term. There is no limitation in our bylaws on the number of terms that a member of the Executive Board may serve. Our bylaws provide for mandatory retirement from the Executive Board at age 65, but permit the Supervisory Board to extend the date for mandatory retirement of a member of the Executive Board by up to three additional years.
The chairman of the Executive Board is appointed by the Supervisory Board and represents our company in dealings with third parties. Our bylaws also authorize the Supervisory Board to appoint one or more additional members of the Executive Board as Managing Directors to represent us in dealings with third parties.
The Executive Board has full authority to manage our affairs within our corporate purpose, subject only to the powers reserved by law or under our bylaws to the Supervisory Board or meetings of our shareholders. Under our bylaws, the prior approval of the Supervisory Board is required before the Executive Board can:
• make proposals regarding the allocation of any net profits for a fiscal year;
• enter into transactions that affect our overall strategy, financial structure or scope of activities;
• issue securities affecting our share capital;
• enter into transactions with a value in excess of €8 million or the equivalent amount in another currency, to the extent they involve:
o the acquisition, disposal or creation of any company (other than intragroup transactions),
o the acquisition or sale of real estate properties (other than intragroup transactions); or
o the settlement of litigation.
The Chairman of the Supervisory Board has the authority to approve, on behalf of the Supervisory Board, any of the above transactions, provided that the value of such transactions does not exceed €46 million. The prior consent of the Chairman of the Supervisory Board is also required before the Executive Board can designate any person to serve as a board member of another company (other than companies within the Group).
Changes in governance
In a press release issued on October 31, 2008, we announced changes in the composition of our Executive and Supervisory Boards. Our Supervisory Board, in a meeting held on October 31, 2008, duly noted Mr. Dominique Hoenn’s decision to step down as Chairman of the Supervisory Board, in accordance with the age limit requirements set forth in our bylaws. His resignation is effective as of December 31, 2008. He will be replaced, as of January 1, 2009, by Mr. Michel Clair, who has served as Chairman of our Executive Board since 1998. Mr. Clair will join the Supervisory Board as of that date. Acting on the recommendation of Mr. Hoenn, and on the advice of its Nominating and Compensation Committee, the Supervisory Board decided to appoint Mr. Laurent Morel to serve as Chairman of the Executive Board, replacing Mr. Clair. This appointment will be effective as of January 1, 2009.
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The following table sets forth the composition of the Executive Board of Klépierre as of October 31, 2008, the date of the members’ initial election and the year their current term expires:
Name (Age) Position Member Since Term Expires Michel Clair (61) Chairman* 1998 2010* Claude Lobjoie (59) Member 1998 2010 Jean-Michel Gault (48) Member 2005 2010 Laurent Morel (45) Member** 2005 2010** * Mr. Clair will resign his position as the Chairman of the Executive Board effective December 31, 2008, and will join the Supervisory Board as its Chairman. ** Mr. Morel will become the Chairman of the Executive Board effective January 1, 2009.
The following biographical information describes the members of the Executive Board:
Michel Clair, Chairman of the Executive Board, 61, is a graduate of the Ecole Nationale d’Administration. Mr. Clair was appointed to the Klépierre Board of Directors in 1996, and was appointed its Chairman in 1997. At the time of the change in our corporate structure from a Board of Directors to an Executive Board and Supervisory Board, Mr. Clair was appointed Chairman of the Klépierre Executive Board on July 28, 1998. From 1975 to 1991, Mr. Clair worked in government, first as an auditor and then as a commissioner for the French Government Accounting Office. During this period, Mr. Clair held a variety of positions with the French Planning Office and the Industrial Affairs Office, and served as chief of staff for the Vice-Minister of Finance and Economy in charge of Commerce, Crafts and Services from 1986 to 1988. In 1991, he joined Compagnie Bancaire, where he was Corporate Secretary and a member of the Executive Board. After the Paribas-Compagnie Bancaire merger, he was appointed to the Paribas Executive Committee as the senior executive in charge of real estate and pooled corporate services.
Claude Lobjoie, Member of the Executive Board, 59, is an engineering graduate of INSA LYON, Mr. Lobjoie joined Compagnie Bancaire in 1970, where he served as Corporate Secretary of UCB (1991-1996) and then Chief Real Estate Officer (1996-1998). He has been a Member of the Klépierre Executive Board since 1998, and is head of the Office Property Division and Corporate Secretary. He is also President of Klégestion. Claude Lobjoie was appointed Chairman of Klépierre Services on January 1, 2002. In 2007, he became a Member of the board of directors of IEIF, and was also certified as a Chartered Surveyor.
Jean-Michel Gault, Member of the Executive Board, 48, is a graduate of the École Supérieure de Commerce in Bordeaux. He has been a Member of the Klépierre Executive Board since June 1, 2005. He began his career with GTM International (Vinci Group) as a financial controller. In 1988, he moved on to Cogedim, first as the head of Financial Services and subsequently as CFO. In 1996, he joined the Real Estate Investment Department in the Paribas Group, where he was the Compagnie Foncière CFO. In this capacity, he oversaw the Compagnie Foncière-Klépierre merger. He has been the CFO of Klépierre since 1998.
Laurent Morel, Member of the Executive Board, 45, is an engineering graduate of the École Centrale de Paris. He has been a Member of the Klépierre Executive Board since June 1, 2005 and is the head of the shopping center division. He began his career at Compagnie Bancaire (Paribas Group). In 1989, he took part in the founding and international expansion of the Arval Group, serving as CFO. In 1999, he became the first CEO of Artegy, a new BNP Paribas subsidiary with a focus on industrial vehicle rental, promoting the company’s development in France and the United Kingdom. He joined the Klépierre team in February 2005.
Supervisory Board
The Supervisory Board oversees the Executive Board’s management of our company. Under our bylaws, the Supervisory Board is composed of a minimum of three and a maximum of twelve members who are elected by the annual ordinary general shareholders’ meeting. The Supervisory Board currently has nine members. For the duration of their term, members of the Supervisory Board must each own at least sixty shares. Members of the Supervisory Board are elected for a three-year term, with terms staggered such that one-third of the Supervisory Board’s members are renewed each year. The term of a member of the Supervisory Board runs until the end of the general shareholders meeting that adopts the prior year’s accounts in the year his or her term expires. An ordinary general shareholders meeting has the power to dismiss any member of the Supervisory Board before completion of his or her term. There is no limitation in our bylaws on the number of terms that a member of the Supervisory Board may serve.
The Supervisory Board elects a Chairman and one or more Vice-Chairmen from among its members. Our bylaws provide for mandatory retirement from the Supervisory Board at age 68, but permit the Supervisory Board to extend the date for retirement of a person that reaches that age by up to three additional years. However, no more than one-third of the Supervisory Board members may be older than 70.
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The following are the current members of the Supervisory Board as of October 31, 2008, including the name, age, date on which the member of the Supervisory Board was appointed and information on his principal business activities outside Klépierre and his principal business experience.
Member Term Main Offices Held and Duties Performed Outside Name (Age) Position Since Expires(1) Klépierre During the Last Five Years Dominique Hoenn (67) Chairman*** 2007 2009*** Senior Adviser of BNP Paribas Chairman of the Board of Directors of Paribas International Chairman of the Board of Directors of BNP Private Equity Member of the Supervisory Board of Euronext N.V. (Amsterdam) Member of the Supervisory Board of NYSE Euronext Group Member of the College of Autorité des marchés financiers Director: BNP Paribas Securities Services BNP Paribas Luxembourg SA Clearstream International (Luxembourg) LCH Clearnet (Londres)
Alain Papiasse (52) Vice 2005 2010 Chairman of the Supervisory Board of BNP Chairman Paribas Immobilier Member of the Supervisory Board of CooperNeff Alternative Managers Chairman of the Board of Directors of BNP Paribas Private Bank Chairman of the Board of Directors of BP2S Chairman of the Board of Directors of BNP Paribas Luxembourg Director: Cortal Consors BNP Paribas Assurance BNP Paribas Suisse BNP Paribas UK Holdings Ltd BNP Paribas Asset Management Group Permanent representative of Sicovam Holding, Director of Euroclear plc (Switzerland)
Jérôme Bédier (52) Member 2004 2010 Member of the Supervisory Board of Générale de (Independent Director) Santé Executive Chairman of the Fédération des Entreprises du Commerce et de la Distribution (Federation of Retail and Distribution Companies) Member of the Executive Committee of the French employers’ confederation, Medef Chairman of the Board of Directors, Fondation de la Croix Saint-Simon Non-voting member of the Board of Directors of Eco-Emballages.
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Member Term Main Offices Held and Duties Performed Outside Name (Age) Position Since Expires(1) Klépierre During the Last Five Years François Demon (39) Member 2005 2010 Head of Capital Management and Structuring Policy at BNP Paribas Arbitrage.
Bertrand de Feydeau Member 1998 2009 CEO of Association Diocésaine de Paris (59) Chairman and CEO of AXA Immobilier SAS (Independent Director) Director: AXA Aedificandi Foncière des Régions Gécina Société Beaujon SAS SITC SAS Association KTO Independent advisor: Affine Sefri Cime
Bertrand Jacquillat (63) Member 2001 2008 Chairman and CEO of Associés en Finance (Independent Director) Member of the Supervisory Board of Presses Universitaires de France Director, Total SA Member of the faculty of the Institut d’Etudes Politiques de Paris
Bertrand Letamendia Member 1998 2008 Managing Partner, SNC AGF Immobilier (61) Managing Partner, SNC Phénix Immobilier (Independent Director) Director: Sogeprom Immovalor Gestion Chairman: SAS Etablissements Paindavoine SAS Etoile Foncière et Immobilière SAS Financière Cogedim Laennec SAS INVCO SAS Madeleine Opéra SAS Société Foncière Européenne SAS Société de Négociations Immobilières et Mobilières Maleville “SONIMM” Vernon SAS
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Member Term Main Offices Held and Duties Performed Outside Name (Age) Position Since Expires(1) Klépierre During the Last Five Years Vivien Lévy-Garboua Member 2000 2009 Member of the Executive Committee, BNP Paribas (60) Head of Compliance and Coordination of Internal Control at BNP Paribas Member of the Supervisory Board of BNP Paribas Immobilier Member of the Supervisory Board of Presses Universitaires de France Director: Financière BNP Paribas Compagnie d’Investissements de Paris BNP Paribas Immobilier BNP Paribas (GB) BNP Paribas SA (Switzerland) BNP Paribas Luxembourg
Philippe Thel (53) Member 2006 2008 Member of the Supervisory Board of GIPEC, PSR and BNP Paribas Immobilier SAS Permanent representative of BNP Paribas and BNP Paribas Immobilier Director of Promogim Director of Sofibus
*** Mr. Hoenn will resign his position as President of the Supervisory Board effective December 31, 2008. (1) Term expires at the time of the annual general shareholders meeting that approves the accounts for the year indicated.
Compensation
The amount of directors’ fees paid in 2007 to all of the members of the Supervisory Board totaled €210,000. The shareholders meeting on April 4, 2008 decided to increase the total amount of directors’ fees by €60,000 (i.e., to a total of €270,000).
The compensation of members of the Supervisory Board and the Executive Board consists of a fixed component and a variable component. The variable part of the compensation is determined for the four members of the Executive Board by applying a performance-related coefficient to the total of their fixed salaries. Of this total amount, 70% is allocated in proportion to each member’s fixed salary and 30% according to the achievement of personal targets.
Members of the Executive Board are eligible to participate in a supplemental retirement plan with defined benefits. The actuarial liability (excluding Michel Clair, who participates in a plan sponsored by BNP Paribas) is €694,843.
The following table summarizes the compensation and benefits paid to members of the management bodies of the Company in 2007.
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Gross salaries Directors’ Benefits in Fixed Variable fees kind Total Compensation in euros Executive Board Michel Clair 282,990.00 260,000.00 -- 5,241.00 548,231.00 Jean-Michel Gault 131,100.00 125,000.00 -- 4,443.00 260,543.00 Claude Lobjoie 193,710.00 125,000.00 -- 3,287.00 321,997.00 Laurent Morel 150,740.00 150,000.00 -- 3,698.00 304,438.00 Supervisory Board Jérôme Bédier -- -- 21,487.34 -- 21,487.34 François Demon -- -- 29,680.72 -- 29,680.72* Bertrand de Feydau -- -- 40,711.22 -- 40,711.22* Dominique Hoenn -- -- 40,456.84 -- 40,456.84* Bertrand Jacquillat -- -- 25,278.39 -- 25,278.39 Bertrand Letamendia -- -- 27,352.37 -- 27,352.37 Vivien Lévy-Garboua -- -- 16,054.51 -- 16,054.51 Alain Papiasse -- -- 20,073.98 -- 20,073.98 Philippe Thel -- -- 18,904.61 -- 18,904.61 * Directors’ fees are paid in connection with their positions as Member of the Board both at Klépierre and Klémurs
Committees of the Supervisory Board
Our bylaws permit the Supervisory Board to create committees to examine questions that it or its Chairman submit for their review. The Supervisory Board currently has four standing committees:
Investment Committee. The role of the Investment Committee is to examine the terms and conditions of potential acquisitions. The Investment Committee focuses primarily on monitoring planned or completed investments. This information is used to assess decisions relating to the acquisition, disposal or retention of assets. In addition, the Investment Committee reviews financing assumptions for proposed investments. The members of the Investment Committee are Mr. de Feydeau, Mr. Bedier, Mr. Hoenn, Mr. Thel and Mr. Demon.
Audit Committee. The role of the Audit Committee is to evaluate major accounting decisions, financial disclosures and the internal control procedures. The members of the Audit Committee are Mr. Jacquillat, Mr. Letamendia, Mr. Levy-Garboua and Mr. Papiasse.
Nominating and Compensation Committee. The Nominating and Compensation Committee issues recommendations on the appointment and compensation of Members of the Executive Board, Company stock option grants and the other entitlements of directors and officers. The members of the Nominating and Compensation Committee are Mr. Letamendia, Mr. Hoenn, Mr. Levy-Garboua and Mr. de Feydeau.
Sustainable Development Committee. The Sustainable Development Committee is responsible for classifying the principal categories of risks to which our business is exposed, implementing the action plan adopted to address these risks, and evaluating the Group’s contribution to sustainable development. The members of the sustainable development committee are Mr. Bédier, Mr. de Feydeau, and Mr. Levy-Garboua.
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Employees
As of June 30, 2008, we had a total of 1,043 employees. The following table indicates the geographic distribution of our employees by country as of June 30, 2008.
As of June 30, 2008 France 543 Spain 120 Italy 113 Portugal 50 Czech Republic and Slovakia 33 Hungary 122 Greece 3 Poland 59 TOTAL 1,043
As of June 30, 2008, Steen & Støm had 429 employees: 184 of whom were located in Norway, 80 in Sweden and 165 in Denmark.
Since June 1, 2008, Klépierre has redesigned its organizational structure in France, grouping together all of the Group’s employees, including functions such as legal, information technology, finance and human resources functions within Ségécé. Employees outside France are distributed among the subsidiaries of Ségécé, with the exception of Steen & Strøm’s personnel.
Stock options
At the meeting held on April 7, 2006, our shareholders authorized the Executive Board to grant, on one or more occasions, company stock options from purchases made by us pursuant to applicable laws. This authorization is valid for thirty- eight months. The total number of stock options granted may not entitle beneficiaries to a total number of shares in excess of 1.1% of the share capital.
Stock options have a vesting period of eight years. Under this authorization, 195,000 stock options were granted on May 30, 2006 and 143,040 were granted on May 15, 2007. As of December 31, 2007, the number of stock options not yet exercised was 1,014,122 (after the three-for-one stock split on September 3, 2007). Shares acquired by exercising stock options may be freely assigned, although members of the Executive Board and other insiders must comply with the blackout periods for trading in our securities.
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PRINCIPAL SHAREHOLDERS
The tables below show the ownership of our shares at October 31, 2008. Under our bylaws, all of the shares issued in the offering will initially have only single voting rights. See “Description of Share Capital—Shareholders’ Meetings and Voting Rights—Attendance and Voting at Shareholders’ Meetings.”
Votes Number of % of capital % voting Main Shareholders shares Total votes Simple Double owned rights(1) OGDI...... 29,120,385 47,661,720 10,579,050² 18,541,335 20.44% 23.52% Foncière de la Compagnie Bancaire ..... 25,973,999 50,998,379 949,619 25,024,380 18.23% 25.17% BNP Paribas SA ...... 12,327,961 24,205,207 450,715 11,877,246 8.65% 11.94% Compagnie Financière Ottomane ...... 4,496,009 8,497,643 494,375 4,001,634 3.16% 4.19% SETIC...... 322,781 633,761 11,801 310,980 0.23% 0.31% UCB Bail...... 1,307 2,567 47 1,260 0.00% 0.00% Total BNP Paribas Group...... 72,242,442 131,999,277 12,485,607 59,756,835 50.71% 65.14% Public 66,455,070 66,882,384 66,027,756 427,314 46.65% 33.00% Subtotal ...... 138,697,512 198,881,661 78,513,363 60,184,149 97.35% 98.14% Treasury shares(2)...... 3,772,001 3,772,001 3,772,001 - 2.65% 1.86% TOTAL...... 142,469,513 202,653,662 82,285,364 60,184,149 100% 100%
(1) Based on the theoretical number of votes (2) Treasury shares have no votes under article L. 225-210 of the French commercial code
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DESCRIPTION OF SHARE CAPITAL
General
We are a French public limited company (société anonyme) with a two-tier management structure pursuant to which an Executive Board (directoire) manages our day-to-day affairs under the general supervision of a Supervisory Board (conseil de surveillance), the members of which are elected by the shareholders. We are governed by the legal provisions applicable to sociétés anonymes, in particular Articles L. 225-57 to L. 225-93 and Articles R. 225-35 to R. 225-60 of the French Commercial Code, and by its statuts (bylaws). We are registered with the Registre du Commerce et des Sociétés de Paris (Paris Trade and Companies Registry) under the following numbers: SIREN: 780 152 914; SIRET: 780152 914 00211; NAF/APE: 6820B. Our registered office is located at 21, avenue Kléber, 75116 Paris.
This section summarizes material information concerning our share capital, together with material provisions of applicable French law and our bylaws.
This description of our share capital and bylaws and of applicable French law does not purport to be complete and is qualified in its entirety by reference to our current bylaws. The bylaws have been filed with and are available from the Secretary (Greffe) of the Registry of Commerce and Companies of Paris.
Share capital
Our current share capital amounts to €199,457,318.20 and consists of one class of ordinary shares. As of September 30, 2008, there were 142,469,513 ordinary shares outstanding, with a nominal value of €1.40 per share. All of the shares are fully paid.
All our equity securities are listed on Euronext Paris (Compartiment A).
Authorized and unissued shares of Klépierre
In resolutions adopted at the general shareholders’ meeting of April 5, 2007, our shareholders authorized the Executive Board, subject, where applicable, to authorization by the Supervisory Board as provided in the bylaws, to effect capital increases with an aggregate nominal value of €60 million, with or without preferential subscription rights, through the issuance of shares or securities convertible into or exchangeable for shares, or warrants, including in connection with public exchange offers and similar transactions.
Shareholders’ meetings and voting rights
General
In accordance with the French Commercial Code and our bylaws, there are two types of shareholders’ meetings: ordinary and extraordinary.
Ordinary general shareholders’ meetings are required for matters such as:
- electing, replacing or removing members of the Supervisory Board, or removing members of the Executive Board;
- allocating attendance fees to Members of the Supervisory Board;
- appointing independent statutory auditors;
- approving certain transactions to which we and our directors or officers, or shareholders holding more than 10% of voting rights, are parties.
- approving the annual accounts;
- declaring dividends or authorizing dividends to be paid in shares; and
- approving share buy back programs.
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Extraordinary general shareholders’ meetings are required for the approval of matters such as amendments to our bylaws, including any amendment required in connection with extraordinary corporate actions. Extraordinary corporate actions include:
- changing our name, corporate purpose or registered office;
- increasing or decreasing our share capital;
- authorizing the issuance of any securities giving rights to equity securities;
- modifying terms and conditions in connection with the transfer or sale of equity interests;
- carrying out any merger; and
- our voluntary liquidation prior to the end of our statutory term of existence, extension of our duration or transformation.
Convening shareholders’ meetings
French commercial laws and regulations require our Executive Board (or failing that, the Supervisory Board) to convene an annual ordinary general shareholders’ meeting to approve the annual accounts. This meeting must be held within six months of the end of the fiscal year. The Executive Board or the Supervisory Board may also convene an ordinary or extraordinary shareholders’ meeting upon proper notice at any time during the year. If the Executive Board or the Supervisory Board fails to convene a shareholders’ meeting at the shareholders’ request, our independent statutory auditors may call the meeting. In case of bankruptcy, there are some instances when our liquidator or court-appointed agent may also call a shareholders’ meeting. Any of the following may request the Commercial Court to appoint an agent for the purpose of calling a shareholders’ meeting:
• one or several shareholders holding at least 5% of our share capital;
• any interested party or the workers’ committee (comité d’entreprise) in case of an emergency; or
• duly qualified associations of shareholders who have held their shares in registered form for at least two years and who together hold at least a specified percentage of our voting rights.
Shareholders holding the majority of the share capital or voting rights following a public tender offer or after the acquisition of a controlling block of shares may also call a shareholders’ meeting.
Notice of shareholders’ meetings
We must announce general meetings at least 35 days in advance by means of a preliminary notice (avis de réunion), which is published in the Bulletin des Annonces légales obligatoires, or “BALO.” The preliminary notice must be sent to the AMF. The AMF recommends that a release (communiqué) be published in a newspaper of national circulation in France and published on our website simultaneously with the publication of the preliminary notice. The preliminary notice must contain, among other things, the agenda, a draft of the resolutions to be submitted to the shareholders and the procedure for voting by mail.
Additional resolutions to be submitted for approval by the shareholders at the meeting may be proposed to the Executive Board, for recommendation to the shareholders, within 10 days of the publication of the preliminary notice in the BALO by:
• one or several shareholders holding a specified percentage of shares;
• the workers’ committee; or
• a duly qualified association of shareholders who have held their shares in registered form for at least two years and who together hold a specified percentage of our voting rights.
Shareholders wishing to submit additional resolutions must provide to the Executive Board a certificate (attestation de participation) from their accredited intermediary evidencing their share ownership. This certificate must be issued again at midnight on the third business day before the shareholders’ meeting. The Executive Board must submit these resolutions to a vote of the shareholders after having made a recommendation thereon.
As of the publication of the notice of a meeting any shareholders may submit written questions to the Executive Board relating to the agenda for the meeting. The Executive Board must respond to these questions during the meeting.
At least 15 days prior to the date set for a first call, and at least six days prior to any second call, we must publish or send a final notice (avis de convocation) containing the final agenda, the date, time and place of the meeting and other information for the meeting. Such final notice must be sent by mail to all registered shareholders (who have held their shares for at least one
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month prior to the date of publication of the final notice in the BALO) and published in a newspaper authorized to publish legal announcements in the local administrative region (département) in which we are registered, as well as in the BALO, with public notice to the AMF.
In general, shareholders can only take action at shareholders’ meetings on matters listed on the agenda. As an exception to this rule, shareholders may take action with respect to the dismissal of members of the Supervisory Board even though these actions have not been included on the agenda.
Attendance and voting at shareholders’ meetings
Each share confers on the shareholder the right to cast one vote. Under our bylaws, shares may carry double voting rights, if they are fully paid up, in registered form and recorded in the name of the shareholder for a period of at least two years. Shareholders may attend ordinary meetings and extraordinary meetings and exercise their voting rights subject to the conditions specified in the French Commercial Code and our bylaws. In particular, a holder must have accurately disclosed to us the crossing of certain ownership thresholds set forth in the French Commercial Code and in our bylaws and the holder’s shares must be fully paid up. In addition, a shareholder is not permitted to vote on specified resolutions that would confer a particular benefit on that shareholder. There is no requirement that shareholders have a minimum number of shares in order to attend or to be represented at an ordinary or extraordinary general meeting or to vote by mail or by videoconference or any other means of telecommunication which allow the shareholders to be identified.
The right to participate in general meetings is subject to the recording of the shares in the name of the shareholder or of the accredited intermediary registered on behalf of such shareholder at least three business days prior to the meeting, at midnight, Paris time, either in the shareholders’ register held by or on behalf of us, or in the bearer share account held by the intermediary. The registration or record in the bearer share account held by the authorized intermediary is authenticated by a certificate of participation issued by such authorized intermediary, attached to the postal or proxy voting form or as part of an application for an admission card in the shareholder’s name or on behalf of the shareholder represented by the registered intermediary. A certificate is also issued to any shareholder who wishes to attend the meeting in person and has not received an admission card by the third business day prior to the meeting, at midnight, Paris time.
Proxies and votes by mail
In general, all shareholders who have properly registered and fully paid for their shares may participate in general meetings. Shareholders may participate in general meetings either in person or by proxy. Shareholders may vote in person, by proxy, by mail or, if decided by the Executive Board upon convening the meeting, by videoconference or any other means of telecommunications, including the Internet, that allows proper identification in accordance with current regulations.
Proxies will be sent to any shareholder upon request. In order to be counted, such proxies must be received by 3:00 p.m. Paris time prior to the date of the meeting if sent by electronic means. If sent by mail, such proxies must be received by Klépierre at least three days prior to the meeting. A shareholder may grant proxies only to his or her spouse or to another shareholder. A shareholder not domiciled in France as defined by the French Civil Code (Code Civil) may be represented at a shareholder’s meeting by an intermediary registered under the conditions set forth by the French legal and regulatory provisions in force. This shareholder will therefore be considered to be present at the meeting for the computation of the quorum and the majority. A shareholder that is a corporation is represented by its legal representative, who may grant proxies to a third party. Alternatively, the shareholder may send to Klépierre a blank proxy without nominating any representative. In this case, the chairman of the meeting will vote the blank proxies in favor of all resolutions proposed or approved by the Executive Board and against all others.
With respect to votes by mail, we must send shareholders a voting form to all registered shareholders, and on request, to any holder of shares in bearer form. The completed form must be received by us at least three days prior to the date of the shareholders’ meeting (or by 3:00 p.m. Paris time the day before the meeting, in the case of votes sent by electronic means).
Quorum
The French Commercial Code requires that shareholders together holding at least one-fifth of the shares entitled to vote be present in person, or vote by mail or by proxy or, if determined by the Executive Board and specified in the preliminary and final notices to convene the meeting, by videoconference or by any means of telecommunication that allows the shareholders to be identified, in order to meet the quorum requirement for: • an ordinary general meeting; or
• an extraordinary general meeting where only an increase in our share capital is proposed through the incorporation of reserves, profits or share premiums.
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The quorum requirement is one fourth of the shares entitled to vote, on the same basis, for any other extraordinary general meeting.
If a quorum is not met, the meeting is adjourned. When an adjourned meeting is resumed, French law provides that no quorum is required for an ordinary meeting or for an extraordinary general meeting where only an increase in our share capital is proposed through the incorporation of reserves, profits or share premiums. In the case of any other reconvened extraordinary general meeting, shareholders having at least one-fifth of the shares entitled to vote must be present in person or voting by mail or by proxy or, if determined by the Executive Board and specified in the preliminary and final notices to convene the meeting, by videoconference or by any means of telecommunications that allows holders to be identified for a quorum. If such a quorum is not present, the reconvened meeting may be adjourned for a maximum of two months. Only questions that were on the agenda of the adjourned meeting may be discussed and voted upon.
Voting thresholds
A simple majority of shareholders present or represented may pass any resolution on matters required to be considered at an ordinary general meeting, or concerning a capital increase by the incorporation of reserves, profits or a share premium at an extraordinary general meeting. At any other extraordinary general meeting, a two-thirds majority of the shareholder votes cast is required.
A unanimous shareholder vote is required to increase shareholders’ liabilities.
Absention from voting by those present either in person or by means of telecommunications if provided for by the bylaws and so determined by the Executive Board and specified in the preliminary and final notices to convene the meeting, or represented by proxy or voting by mail is counted as a vote against the resolution submitted to a shareholder vote.
In general, each shareholder is entitled to one vote per share at any shareholders’ meeting. According to our bylaws, shares may carry double voting rights, if they are fully paid up, in registered form and recorded in the name of the shareholder for a period of at least two years. As an exception, under the French Commercial Code, Klépierre shares that are held by us or by entities controlled directly or indirectly by us are not entitled to voting rights and do not count for quorum or majority purposes.
Shareholder rights
Financial statements and other communications with shareholders
In connection with the annual general shareholders’ meeting, we must provide a set of documents including our annual report and a summary of the results of the five previous fiscal years to any shareholder who so requests. French corporate law also requires a special report to inform shareholders of any transactions regarding stock options and free shares authorized and/or allocated by us.
The Chairman of our Supervisory Board is required to deliver a special report to the ordinary shareholders’ meeting with respect to the status of the preparation and organization of the work of the Supervisory Board, the status of the internal control procedures implemented by us, the principles applied to determine the remuneration and the advantage benefiting the corporate officers and the restrictions, if any, that the Supervisory Board has placed on the powers granted to Executive Board. In general, this report describes in particular the objectives of our internal controls, the organization of the participants in our internal controls and the internal control procedures that are currently in place.
Dividends
We may only distribute dividends out of our “distributable profits” plus any amounts held in our reserves that the shareholders decide to make available for distribution, other than those reserves that are specifically required by law or our bylaws. “Distributable profits” consist of unconsolidated net profit in each fiscal year, as increased or reduced by any profit or loss carried forward from prior years, less any contributions to the reserve accounts pursuant to law or our bylaws.
We have opted for the French tax regime applicable to SIICs pursuant to Article 208 C of the French Tax Code. This tax regime allows companies to be exempt from corporate tax on rental revenue, capital gains on sales of real estate properties or certain interests in real estate companies and dividends from our subsidiaries that have also elected for the SIIC tax regime. Pursuant to this regime, SIICs must distribute (i) at least 85% of the exempt profits generated by their rental business before the end of the fiscal year that follows the one during which such profits were generated, (ii) at least 50% of the exempt profits generated by capital gains on sales of real estate properties and capital interests in real estate companies before the end of the second fiscal year that follows the one during which such profits were generated and (iii) 100% of the dividends they receive from their subsidiaries which have elected to be subject to the SIIC tax regime during the fiscal year that follows the one during which those dividends where received.
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Article 31 of our bylaws states that a SIIC is subject to a withholding tax (the “Withholding Tax”) on distributions it makes or it is deemed to make, out of its profits which have not been subject to corporate income tax by virtue of Article 208 C II of the French Tax Code, to a shareholder, other than a natural person, (i) who owns, directly or indirectly, at least 10% of the dividend rights in that SIIC at the time of the distributions and (ii) who is not subject to corporate income tax (or to an equivalent taxation) in respect of such distributions (a “Withholding Tax Shareholder”). The last condition is deemed to be satisfied when such shareholder is subject to tax at a rate lower than one third of the standard rate of French corporate income tax. The Withholding Tax is assessed on the amount of the distributions made to Withholding Tax Shareholders and levied at the rate of 20%.
Pursuant to Article 31 of our bylaws, upon payment of a distribution by us, any shareholder who is a Withholding Tax Shareholder in relation to Klépierre will be liable to us for an amount equal to the Withholding Tax imposed on us in connection with that shareholder’s share in such distribution. The payment of any such distribution to a Withholding Tax Shareholder will be effected by way of credit to the Withholding Tax Shareholder’s account; the amount of the Withholding Tax relating to such distribution will be debited from the Withholding Tax Shareholder’s account, and the balance will be paid to the Withholding Tax Shareholder within five business days.
In addition, pursuant to Article 31 of our bylaws, where we declare a dividend in-kind to be paid in Klépierre shares, a portion of the dividend owed to a Withholding Tax Shareholder will be paid in cash by way of credit to such Withholding Tax Shareholder’s account in order to be set off against our withholding liability in respect of such dividend.
Legal reserve
Pursuant to the French Commercial Code, Klépierre is required to allocate 5% of its unconsolidated statutory net profit for each year (less any losses carried forward from prior years) to its legal reserve fund before dividends may be paid with respect to that year. Funds must be allocated until the amount in the legal reserve is equal to 10% of the aggregate nominal value of the issued and outstanding share capital. The legal reserve of any company subject to this requirement may only be distributed to shareholders upon its liquidation.
Approval of dividends
According to the French Commercial Code, our Executive Board may propose a dividend for approval by the shareholders at the annual general shareholders’ meeting after approval of the annual accounts. Pursuant to our bylaws, when approving the distribution of a dividend, the general meeting may grant an option to the shareholders to receive their dividend in cash or in shares. Shareholders electing to receive their dividends in shares must send their request for such type of payment within a period to be determined by the general shareholders’ meeting. If our annual shareholders’ meeting has not yet been held, and we have earned distributable profits since the end of the preceding fiscal year (after any applicable provisions or amortizations), as reflected in an interim income statement certified by our independent statutory auditors, the Executive Board may distribute interim dividends to the extent of the distributable profits for the period covered by the interim income statement. Our Executive Board exercises this authority subject to French law and regulations and may do so without obtaining shareholder approval, except in the case of a distribution of interim dividends in shares, which distribution must be approved by an ordinary shareholders’ meeting.
Distribution of dividends
Dividends are distributed to shareholders pro rata according to their respective holdings of ordinary shares. Dividends become the property of shareholders on the date of the shareholders’ meeting at which the distribution of dividends is approved. Interim dividends become the property of shareholders on the date of our Executive Board’s meeting in which the distribution of interim dividends is approved. The actual dividend payment date is decided by the shareholders at an ordinary general meeting or by our Executive Board in the absence of such a decision by the shareholders in the case of annual dividends, and by the Executive Board in the case of interim dividends.
Timing of payment
According to the French Commercial Code, we must pay any approved dividends within nine months of the end of its fiscal year, unless otherwise authorized by court order. Dividends on shares that are not claimed within five years of the date of declared payment revert to the French State.
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Changes in share capital
Increases in share capital
As provided by the French Commercial Code, our share capital may be increased only with the shareholders’ approval at an extraordinary general meeting following the recommendation of its Executive Board. Increases in our share capital may be carried out by:
- issuing additional shares (subject to the Supervisory Board’s prior approval according to our bylaws);
- increasing the nominal value of existing shares; or
- creating a new class of equity securities (subject to the Supervisory Board’s prior approval according to our bylaws).
Increases in share capital by the issuance of additional securities may be effected through one or a combination of the following:
- in consideration for cash (including instead of cash dividends as described above);
- in consideration for assets contributed in kind;
- through a merger or spin-off;
- through an exchange offer;
- by conversion, exchange or redemption of securities previously issued, or by the exercise of rights giving access to our share capital;
- by capitalization of profits, reserves or share premiums; or
- subject to various conditions, in satisfaction of debt incurred by us.
Decisions to increase the share capital through the capitalization of reserves, profits and/or share premiums require the approval of an extraordinary shareholders’ meeting, acting under the quorum and majority requirements applicable to ordinary shareholders’ meetings. Increases effected by an increase in the nominal value of shares require unanimous approval of the shareholders unless effected by capitalization of reserves, profits or share premiums. All other capital increases require the approval of an extraordinary general meeting acting under regular quorum and majority requirements. See “— Shareholders’ meetings and voting rights.” The shareholders may delegate the right to carry out any increase in share capital to our Executive Board, provided that the increase has been previously authorized by the shareholders. our Executive Board may further delegate this right to the Chairman of the Executive Board, or, pursuant to an agreement with the Chairman, to another member of the Executive Board.
Decreases in share capital
According to the French Commercial Code, any decrease in our share capital requires approval by an extraordinary shareholders’ meeting. The share capital may be reduced either by decreasing the nominal value of the outstanding share capital or by reducing the number of outstanding shares. The number of outstanding shares may be reduced either by an exchange of shares or by the repurchase and cancellation of shares. Holders of each class of shares must be treated equally unless each affected shareholder agrees otherwise.
Preferential subscription rights
According to the French Commercial Code, if we issue securities granting an interest, whether upon issuance or at some later date, in its share capital, current shareholders will have preferential subscription rights to these securities on a pro rata basis. These preferential rights require that we give priority treatment to current shareholders. The rights entitle the individual or entity that holds them to subscribe to an issue of securities that may increase our share capital. Preferential subscription rights are transferable during the subscription period relating to a particular offering. These rights may also be listed on Euronext Paris.
Preferential subscription rights with respect to any particular offering may be waived by a vote of shareholders holding a two-third majority of the shares entitled to vote at an extraordinary general meeting. Such extraordinary shareholders’ meeting may nevertheless decide to give the existing shareholders a nontransferable priority right to subscribe to the new securities, during a limited period of time. Our Executive Board and its independent statutory auditors are required by French law to present reports
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that specifically address any proposal to waive preferential subscription rights. In the event of a waiver, the issue of securities must be completed within the period prescribed by law.
Shareholders also may individually notify us that they wish to waive their own preferential subscription rights with respect to any particular offering, if they so choose.
In the event of a capital increase without preferential subscription rights to existing shareholders, French law requires that the capital increase be made at a price equal to or exceeding the average market price of the shares in the three trading days prior to the setting of the price (such average market price may be reduced by a maximum discount of 5%). However, within the limit of 10% of the share capital per year, the general extraordinary shareholders’ meeting may authorize the Executive Board to set the issuing price in accordance with terms set by the general extraordinary shareholders’ meeting following the review of reports from the Executive Board and the auditor.
Form, holding and transfer of ordinary shares
Form of ordinary shares
Our bylaws provide that the ordinary shares may be held in either bearer form or registered form, at the option of the holder.
Holding of ordinary shares
In accordance with French law relating to dematerialization of securities, shareholders’ ownership rights are represented by book entries instead of share certificates. We maintain a share account with Euroclear France (a French clearing system which holds securities for its participants) for all shares in registered form, which is administered by us. In addition, we maintain separate accounts in the name of each shareholder either directly, or, at a shareholder’s request, through the shareholder’s accredited intermediary. Each shareholder account shows the name of the holder and the number of shares held. We issue confirmations (attestations d’inscription en compte) to each registered shareholder as to shares registered in the shareholder’s account, but these confirmations are not documents of title.
Shares of a listed company may also be issued in bearer form. Shares held in bearer form are held and registered on the shareholder’s behalf in an account maintained by an accredited financial intermediary (intermédiaire teneur de compte) and are credited to an account at Euroclear France maintained by such intermediary. That account is separate from our share account with Euroclear. Each accredited financial intermediary maintains a record of shares held through it and issues certificates of inscription for the shares it holds. Transfers of shares held in bearer form may only be made through accredited financial intermediaries and Euroclear France.
In addition, according to French law, shares held by any non-French resident may be held in a collective account on the shareholder’s behalf or in several individual accounts by an intermediary.
We may at any time, in accordance with the law and at its own expense, ask its clearing organization for information about the name or corporate name, nationality and address or registered office of holders of securities conferring the right to vote at general meetings either immediately or in the future, as well as the number of securities held and any restrictions attached thereto. Furthermore, under French law, any intermediary who acts on behalf of one or more persons who are not domiciled in France must spontaneously declare that it is acting as an intermediary and we may request to be provided with the identity of the shareholders on whose behalf it is acting. Consequently, the owner of shares recorded in a true collective account or in several individual accounts by an intermediary will be represented in the shareholders meetings by this intermediary.
Transfer of ordinary shares
Our bylaws do not contain any restrictions relating to the transfer of shares.
Registered ordinary shares must be converted into bearer form before being transferred on Euronext Paris on the shareholder’s behalf and, accordingly, must be registered in an account maintained by an intermédiaire teneur de compte on the shareholder’s behalf. A shareholder may initiate a transfer by giving instructions to the relevant intermédiaire teneur de compte. A fee or commission is payable to the broker involved in the transaction, regardless of whether the transaction occurs within or outside France. No registration duty is normally payable in France, unless a transfer instrument has been executed in France.
Liquidation rights
If Klépierre is liquidated, any assets remaining after payment of its debts, liquidation expenses and all of its remaining obligations will first be distributed to repay in full the nominal value of its shares. Any surplus will be distributed pro rata among
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shareholders in proportion to the nominal value of their shareholdings. Shareholders shall only bear losses up to the amount of their contributions.
Requirements for holdings crossing certain thresholds
The French Commercial Code provides that any individual or entity, acting alone or in concert with others, that comes to own, directly or indirectly, more than 5%, 10%, 15%, 20%, 25%, 33 1/3%, 50%, 66 2/3%, 90% or 95% of the outstanding shares or voting rights of a listed company in France, such as Klépierre, or that increases or decreases its shareholding or voting rights above or below any of those percentages, must notify that company within five trading days of the date it crosses the threshold, of the number of shares (and any other securities granting access to that company’s share capital) and/or voting rights it holds, directly and in concert, as well as the number of shares and voting rights that it is deemed to hold pursuant to Article L. 233-9 of the French Commercial Code. The individual or entity must also notify the AMF within five trading days of the date it crosses the threshold. The AMF makes the notice public. In addition, our bylaws provide that any individual or entity that comes to own 2% (or a multiple thereof) of the outstanding shares of the Company must notify us within five trading days of the date it crosses the threshold by certified mail (return receipt requested) of the number of shares it holds.
Pursuant to Article 7 of our bylaws, if a shareholder (other than an individual) comes to own, directly or indirectly, more than 10% of the dividend rights in Klépierre, each such shareholder must specify in its notification whether or not it qualifies as a Withholding Tax Shareholder.
French law and AMF regulations impose additional reporting requirements on persons who acquire more than 10% or 20% of the outstanding shares or voting rights of a listed company. These persons must file a report with such company and the AMF within 10 trading days of the date they cross the threshold. In the report, the acquirer must specify if it is acting alone or in concert with others and specify its intentions for the following 12-month period, including whether or not it intends to continue its purchases, to acquire control of such company or to seek nominations to the Executive Board or Supervisory Board. The AMF makes the report public. The acquirer may amend its stated intentions, provided that it does so on the basis of significant changes in the environment, the situation or the shareholding of the persons concerned. Upon any change of intention, it must file a new report, which is made public.
In order to permit holders to give the required notice, we must publish in the BALO, not later than 15 calendar days after the annual ordinary general shareholders’ meeting, information with respect to the total number of voting rights outstanding as of the date of such meeting. In addition, if the number of outstanding voting rights changes by 5% or more between two annual ordinary general meetings, we must publish in the BALO, within 15 calendar days of such change, the number of voting rights outstanding. In both cases we must also provide the AMF with a written notice setting forth the number of voting rights outstanding. The AMF publishes the total number of voting rights so notified by all listed companies in a weekly notice mentioning the date each such number was last updated.
If any shareholder fails to comply with the legal notification requirement, the shares or voting rights in excess of the relevant threshold will be deprived of voting rights for all shareholders’ meetings until the end of a two-year period following the date on which the owner thereof complies with the notification requirements. In addition, any shareholder who fails to comply with these requirements may have all or part of its voting rights suspended for up to five years by the Commercial Court at the request of our Chairman, any shareholder or the AMF, and may be subject to criminal fines.
If a registered intermediary fails to comply with the legal notification requirement, the shares or voting rights registered in its name will be deprived of voting rights for all shareholders’ meetings until the registered intermediary complies with the notification, and payment of dividends shall be postponed until such date. In addition, if a registered intermediary willfully fails to comply with these requirements, the shares may be deprived of all or part of their voting rights and dividends for up to five years by the Commercial Court, at our request or at the request of shareholders holding at least 5% of our share capital.
Under AMF regulations, and subject to limited exemptions granted by the AMF, any person acting alone or in concert with others who comes to own more than 33 1/3% of the share capital or voting rights of a French listed company, or who acquires (or agrees to acquire) the majority of the share capital or voting rights of a French listed company, must initiate a public tender offer for the balance of the share capital of such company.
Upon the request, recorded in the minutes of the shareholders’ meeting, of a shareholder holding at least 2% of our voting rights, any individual or entity that fails to comply with such notification requirements will be deprived of voting rights with respect to the shares in excess of the relevant threshold for all shareholders’ meetings until the end of a two-year period following the date on which such person or entity complies with the notification requirements.
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Purchase and trading of our own shares
Under French law, we may not issue shares to ourselves. However, we may, either directly or through a financial intermediary acting on our behalf, acquire up to 10% of our share capital (namely, in order to reduce our share capital or to meet obligations arising from debt securities exchangeable into equity or allocations of share to employees through stock options or otherwise) within a maximum period of 18 months by implementing a share buy-back program complying with applicable laws and regulations. Any treasury shares so held by us are deprived of voting rights.
Under the Réglement général of the AMF, we may not trade in our own shares for the purpose of manipulating the market. The requirements for trades by a company in its own shares to be considered valid are set forth in Regulation No. 2273/2003 of the European Commission dated December 22, 2003. Specifically, in order for a share buy-back program to be valid the following conditions must be met:
• the objective of the share buy-back program, its duration and maximum consideration, and the maximum number of shares to be acquired must be adequately disclosed to the public prior to the start of trading;
• each share buy-back transaction must be recorded, trade reporting obligations of the relevant regulated market must be complied with and details of all share buy-back transactions must be publicly disclosed within seven trading days;
• under French law, we are required to disclose to the AMF on a monthly basis the number of shares purchased, sold or cancelled during the preceding month; and
• we may not purchase shares at a price that is higher than the higher of (i) the price of the last independent trade and (ii) the highest currently available independent bid on the relevant market, and may generally not purchase more than 25% of the average daily volume of the relevant shares on the relevant market.
There are two periods during which we are not permitted to trade in our own securities: the 15-day period before the date on which we make our annual consolidated or annual accounts, as the case may be, and our interim accounts public, and the period beginning on the date at which we become aware of information that, if disclosed, may have a significant impact on the market price of our securities and ending on the date this information is made public.
The requirements above do not apply to trades by us in our own shares that are executed on our behalf by an intermediary pursuant to a liquidity agreement, so long as the terms and implementation of the liquidity agreement comply with the ethics guidelines (charte de déontologie) approved by the AMF in its Décision of March 22, 2005.
Ownership of shares by non-French persons
Under French law, there is no limitation on the right of non-residents or non-French shareholders to own or, where applicable, to exercise their voting rights attached to, the securities of a French company.
Under the French Monetary and Financial Code, as implemented by Decree No. 2003-196 dated March 7, 2003, a person who is not a French resident is not required to obtain prior authorization (autorisation préalable) before acquiring a controlling interest in a French company (with exceptions regarding certain sensitive economic areas, such as defense, public health, etc.). However, French residents must file an administrative notice (déclaration administrative) with French authorities in connection with the acquisition of a controlling interest in any French company. Under existing administrative rulings, for example, ownership of 33 1/3% or more of a French company’s share capital or voting rights is regarded as a controlling interest, though a lower ownership percentage may be considered a controlling interest under certain circumstances. Any transaction as a result of which a non-French resident comes to own more than 33 1/3% of the share capital or voting rights of a French company also requires the filing of such an administrative notice.
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TAXATION
The following is a summary of certain French tax consequences of the acquisition, ownership and disposal by non- French residents of our shares to be acquired in this offering. This summary may only be relevant to you if you are not a resident of France and you do not hold your shares in connection with a permanent establishment or a fixed base in France through which you carry on a business or perform personal services. This summary is based on the tax laws and regulations of France, the practice of the French tax authorities, and the applicable double taxation conventions or treaties with France, all as currently in effect, and all subject to change, possibly with retroactive effect, or different interpretations. This summary does not cover all aspects of French taxation that may be relevant to the acquisition, ownership and disposal of our shares by prospective investors in light of their particular circumstances. In particular, this summary does not address the tax treatment of holders that are subject to special rules, such as partnerships, trusts, regulated investment companies, foreign states, international organizations, foreign public bodies, tax exempt entities including pension funds, banks, or other financial institutions, securities or currencies or broker-dealers, or entities with a fixed base of business in a country different from the country of which the entity is a tax resident, among others. This summary is for general information only. You are advised to consult your own tax advisors as to the particular French tax consequences of acquiring, owning, and disposing of the shares, in light of your particular situation as well as the applicability and effect of local, non-French, and other tax laws.
Dividends Withholding tax Dividends distributed by us are, in principle, subject to a withholding tax withheld by the paying agent, where the tax domicile or registered office of the beneficiary is located outside France. The rate of this withholding tax is equal to (i) 18% where the beneficiary is an individual domiciled in a European Union Member State, in Iceland or in Norway, and to (ii) 25% in any other cases. This withholding tax may be reduced or even eliminated, in particular under Article 119 ter of the French Tax Code, which is applicable, under certain conditions, to corporate shareholders that are residents within the European Community, or under double tax treaties. Non-resident holders that are entitled to and comply with the procedures for claiming benefits under an applicable tax treaty may be subject to a reduced rate (generally 15%) of French withholding tax. If a non-resident holder establishes its entitlement to treaty benefits prior to the payment of a dividend, then French tax generally will be withheld at the reduced rate provided under the applicable tax treaty. Tax Credit Dividends received by French resident individuals generally benefit from an uncapped rebate of 40% of the amount of the dividends paid and, in addition to a fixed annual allowance, are generally entitled to a tax credit equal to 50% of the dividend (the “Tax Credit”). The Tax Credit has a cap of €230 for married couples and members of a union agreement subject to joint taxation and €115 for single persons, widows or widowers, divorcees or married persons subject to separate taxation. According to the tax authorities, dividends paid to non-residents of France are generally not eligible for the allowance and the Tax Credit described above. However, certain qualifying individuals resident of countries which have entered into a tax treaty with France, who comply with the procedures for claiming benefits under such tax treaty, may benefit from a refund of the Tax Credit (net of applicable withholding tax) if the tax treaty provides for the transfer of the French tax credits to these individuals. The French tax authorities have not yet issued any guidance with respect to the procedure for claiming the refund of the Tax Credit by non-resident individuals. 20% withholding tax provided by Article 208 C II ter of the French Tax Code SIICs may, under certain circumstances, be subject to a withholding tax assessed on dividends which are paid out of exempt income and distributed to certain shareholders. This withholding tax is applicable where the following conditions are met: (i) the income is distributed to a shareholder, other than a natural person, who holds, directly or indirectly, at least 10% of the dividend rights in the SIIC, at the time a distribution of dividends, reserves, premiums or deemed distributed income within the meaning of the French Tax Code is paid, and (ii) the amounts received by the shareholder are not subject to corporate income tax or to an equivalent tax. The last condition is deemed to be satisfied if the amounts received are subject to tax at a rate lower than one third of the standard rate of French corporate income tax. If both conditions are satisfied, the withholding tax payable by the SIIC is equal to 20% of the exempt income distributed to such shareholders. However, pursuant to Article 31 of our bylaws, if we become liable to pay this withholding tax in respect of a distribution made to a shareholder who meets the conditions described above, an amount equal to this withholding tax charge will be set off against the payment owed by Klépierre to that shareholder. See “Description of Share Capital – Shareholders rights – Dividends” above.
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Procedures for claiming treaty benefits Pursuant to the guidelines issued by the French tax authorities (Instruction 4 J-1-05, dated February 25, 2005), shareholders who are entitled to treaty benefits under an applicable tax treaty with France can claim such benefits under a simplified procedure or under the normal procedure, except that corporate shareholders and mutual funds that are residents of Switzerland, and shareholders that are residents of Singapore are not eligible for the simplified procedure. The procedure to be followed generally depends upon whether the application for treaty benefits is filed before or after the dividend payment. Under the simplified procedure, in order to benefit from the lower rate of withholding tax applicable under the relevant tax treaty at the time of payment of the dividend, the shareholder must complete and deliver to the bank or financial institution keeping its account in France or to the paying agent, before the dividend payment, a certificate of residence Form 5000. If Form 5000 is not filed prior to the dividend payment, the normal procedure is applicable. In such a case, a withholding tax is levied at the ordinary French withholding tax rate, and the shareholder has to claim a refund for the excess withholding tax by filing, through the paying agent, both Form 5000 and Form 5001 no later than December 31 of the second year following the year during which the dividend is paid.
Sale or other disposition Subject to the more favorable provisions of the relevant tax treaty, holders of our shares who are not French residents for the purpose of French taxation (as well as, under certain conditions, foreign states, international organizations and certain foreign public bodies), and who hold less than 10%, directly or indirectly, alone or together with relatives, of Klepierre’s share capital, are not subject to French income tax or capital gains tax on any sale or disposition of these shares. If a transfer of listed shares is evidenced by a written agreement, such share transfer agreement is, in principle, subject to registration requirements and therefore to a 3% registration duty assessed on the higher of the purchase price or the market value of the shares (subject to a maximum duty of €5,000 per transfer). Estate and gift tax France imposes estate and gift tax on shares of a French company acquired by inheritance or gift. The tax applies without regard to the tax residence of the transferor. However, France has entered into estate and gift tax treaties with a number of countries pursuant to which, assuming certain conditions are met, residents of the treaty countries may be exempted from such tax or obtain a tax credit. Prospective investors in our shares should consult their own advisors concerning the applicability of French estate and gift tax to these shares and the availability of, and the conditions for claiming exemption under, such treaty.
Wealth tax French wealth tax (impôt de solidarité sur la fortune) does not generally apply to shares of Klepierre that are held by individual investors who are not residents of France, who own, directly or indirectly, less than 10% of our share capital and whose ownership does not enable them to exercise influence over Klepierre. Wealth tax does not apply to corporate investors. Double taxation treaties may provide for a more favorable tax treatment.
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PLAN OF DISTRIBUTION
We have entered into an underwriting agreement with BNP Paribas dated November 5, 2008 with respect to any new shares not subscribed for by holders of the rights, excluding new shares that BNP Paribas and its affiliates have undertaken to subscribe by exercising rights issued to them as shareholders. BNP Paribas has agreed to subscribe for, or procure subscribers for, and we have agreed to issue to BNP Paribas, any such new shares not subscribed in the rights offering.
BNP Paribas may effect any distribution of unsubscribed new shares, if any, from time to time in one or more transactions (which may include block transactions) on Euronext Paris, or in special offerings, exchange distributions and/or secondary distributions pursuant to and in accordance with the applicable rules of such exchange, in the over-the-counter market, in negotiated transactions, through the writing of options on unsubscribed shares (whether such options are listed on an options exchange or otherwise), or a combination of such methods of sale. The price of the shares sold in the underwritten offering, if any, will depend on market conditions and consequently could be above or below the subscription prices indicated on the cover of this offering circular.
We have agreed to pay BNP Paribas a management commission equal to 0.75% of the product of the subscription price per new share times the number of new shares issued. We have also agreed to pay BNP Paribas an underwriting commission equal to 1.5% of the product of the subscription price per new share times the number of new shares issued less the number of new shares that BNP Paribas and its affiliates have undertaken to subscribe by exercising rights issued to them as shareholders.
We have agreed to indemnify BNP Paribas against certain liabilities and to reimburse BNP Paribas for certain of its expenses in connection with the offering.
BNP Paribas will be entitled to terminate the underwriting agreement under certain circumstances.
We have agreed that during a period ending 180 calendar days after the date of the underwriting agreement, we will not, without the prior consent of BNP Paribas, issue, offer or sell, directly or indirectly, shares or other securities that are convertible, exchangeable, redeemable or in any other manner give the holder thereof the right to acquire shares or securities similar to shares (“Equity Securities”) or enter into any option or other hedging arrangement that is designed to or has the effect of causing a transfer of Equity Securities, or any other transaction having a similar economic effect.
As an exception to this agreement, the following do not require such prior consent (i) the issuance of the new shares; (ii) the issuance of our shares in connection with payment of a dividend or an interim dividend in the form of shares; (iii) Equity Securities that may be issued, offered or sold to employees, managers, and officers of ours or our affiliates in connection with existing, planned or future stock option plans or stock grant plans representing a maximum of 5% of our outstanding shares at the date of the underwriting agreement and in connection with share capital increases reserved to employees and retirees of us and our affiliates that are members of a group savings plan; and (iv) Equity Securities that are issuable in connection with a merger, contribution, exchange or offer to exchange securities or as payment for an acquisition in part or in whole in the form of shares, provided that any beneficiary of such securities that comes to hold more than 5% of our outstanding shares agrees to the restrictions above.
Omnium de Gestion et de Développement Immobilier (OGDI), SAS Foncière de la Compagnie Bancaire, BNP Paribas, Compagnie Financière Ottomane, Société d’Etudes Immobilières et de Construction (SETIC) et UCB-Bail (together the “BNP Paribas Shareholders”) have each agreed, subject to limited exceptions, severally and not jointly, that commencing on the date of the underwriting agreement and continuing to and including the date that is 180 days thereafter, they will not offer, lend, pledge, sell directly or indirectly, any securities directly or indirectly convertible or exchangeable for our shares held by them following their subscription in proportion to the preferential subscription rights held by them, or engage in any transaction with similar economic effect, without the prior written consent of BNP Paribas which shall not be unreasonably withheld..
BNP Paribas, directly or through its affiliates, is our majority shareholder, a lender under a number of our syndicated and bilateral credit facilities and provides investment banking and commercial banking services to us in the ordinary course of business and may continue to do so in the future.
In connection with the offering, BNP Paribas and any affiliate acting as an investor for its own account may take up the shares and in that capacity may retain, purchase or sell for its own account such securities and any securities of Klépierre or related investments and may offer or sell such securities or other investments otherwise than in connection with the offering. Accordingly, references in this document to the shares being offered or placed should be read as including any offering or placement of securities to BNP Paribas and any affiliate acting in such capacity. BNP Paribas does not intend to disclose the extent of any such investment or transactions otherwise than in accordance with any legal or regulatory obligation to do so.
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Under the terms of the underwriting agreement, BNP Paribas as stabilizing manager may buy our rights and/or existing shares on Euronext Paris and sell them on any market. Such transactions may affect the market price of the rights and/or shares and may lead to such price being set at a higher level than might otherwise prevail in the open market. In view of the characteristics of this offering of new shares by way of transferable preferential subscription rights issued to existing holders of our shares, purchases and sales by the stabilization manager may not be qualified as stabilization transactions within the meaning of Article 2, paragraph 7, of European Commission Regulation no. 2273/2003 dated December 22, 2003. Any such transactions will be carried out in such a way as to respect the integrity of the market, in full compliance with the Market Abuse Directive (insider trading and market manipulation) (Directive 2003/6/EC of the European Parliament and Council dated March 28, 2003). Such transactions may commence on November 7, 2008 and may be carried out for a period of days ending on November 20, 2008. There is no assurance that such transactions will be undertaken and, if commenced, they may be discontinued at any time.
Selling Restrictions
General
No action has been taken in any jurisdiction by us or the underwriter that would permit a public offering of the rights or the new shares, other than in France. No offer or sale of rights or the new shares may be made in any jurisdiction except in compliance with applicable laws. Persons receiving this offering circular are required by us and the underwriter to inform themselves about and to observe any restrictions as to the offering and exercise of the rights and the distribution of this offering circular.
France
This offering circular has not been and will not be submitted to the clearance procedures of the French Autorité des marches financiers (“AMF”) and, accordingly, may not be distributed to the public in France or used in connection with any offer to purchase or sell any rights or shares to the public in France. For the purpose of the rights offering in France and listing of the rights and the new shares on Euronext Paris, a prospectus in the French language has been prepared (consisting of (i) a registration document (Document de référence) filed with the AMF on March 10, 2008 under the number D.08-0099, (ii) the update to the Document de référence filed with the AMF on November 5, 2008 under the number D.08-0099-A01 and (iii) a note d’opération (including a summary of the prospectus), which received visa no. 08-228 dated November 5, 2008 from the AMF) (the “Note d’opération” and, together with the Document de référence and its update, the “French Prospectus”)). The French Prospectus, as approved by the AMF, is the only document by which offers to purchase or sell any rights and/or may be made to the public in France.
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “relevant member state”) an offer to the public of any rights or new shares which are the subject of the offering contemplated by this offering circular (the “Shares”) may not be made in that relevant member state (other than the offers contemplated in the French prospectus once the prospectus has been approved by the competent authority in France and published in accordance with the Prospectus Directive as implemented in France), except that an offer to the public in that relevant member state of any rights or new shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that relevant member state:
(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net revenues of more than €50,000,000, as shown in its last annual or consolidated accounts; or
(c) in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of rights or new shares shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer to the public” in relation to any rights or new shares in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and any rights or new shares to be offered so as to enable an investor to decide to purchase any rights or new shares, as the same may be varied in that member state by any measure implementing the Prospectus Directive in that member state and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state.
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This public offer selling restriction under the Prospectus Directive is in addition to any other selling restrictions set out in this offering circular.
United States
Neither the new shares nor the rights have been or will be registered under the Securities Act, or with any securities regulatory authority of any state or other jurisdiction in the United States. The new shares and the rights may not and will not be offered, sold or exercised in the United States, as defined by Regulation S under the Securities Act, unless the new shares or the rights, as the case may be, are registered under the Securities Act, or an exemption from the registration requirements of the Securities Act is available. The rights are being offered in the United States pursuant to a separate document. Rights may only be exercised in the United States by qualified institutional buyers (as defined in Rule 144A under the Securities Act) in reliance on the exemption from registration provided for private placements by Section 4(2) under the Securities Act.
In addition, until the expiration of the period beginning 40 days as from the later of (a) the commencement of the subscription period and (b) the commencement of any offering by the underwriter of new shares underlying unexercised rights, an offer to sell or a sale of new shares or rights within the United States by a dealer (whether or not it is participating in this offer) may violate the Securities Act.
Any person who acquires new shares or purchases and/or exercises preferential subscription rights will be deemed to have represented, warranted and agreed, by accepting delivery of this offering memorandum and delivery of new shares or preferential subscription rights or sale proceeds therefrom, either that the new shares are being acquired and the preferential subscription rights are being purchased and/or exercised in “offshore transactions” as defined by Regulation S under the U.S. Securities Act or that such person is a qualified institutional buyer and has provided a duly completed investor letter.
Any envelope containing an exercise form and post-marked (physically, by fax or electronically) from the United States will not be accepted unless it contains a duly executed investor letter or unless it is from a dealer or other professional fiduciary acting on behalf of a non-U.S. person as provided under Regulation S of the Securities Act. Similarly, any exercise form in which the exercising holder requests shares to be in registered form and gives an address in the United States will not be accepted unless it contains a duly executed investor letter or unless it is from a dealer or other professional fiduciary acting on behalf of a non-U.S. person as provided under Regulation S of the Securities Act. The subscription price paid in respect of exercise forms that do not meet the foregoing criteria will be returned without interest.
United Kingdom
This document is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Financial Promotion Order”), (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any rights or shares may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This document is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and will be engaged in only with relevant persons.
In connection with the offering, the underwriter is not acting for anyone other than us and will not be responsible to anyone other than us for providing the protections afforded to its clients nor for providing advice in relation to the offering.
BNP Paribas has represented and agreed that:
(i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the “FSMA”)) received by it in connection with the issue or sale of the rights or new shares in circumstances in which Section 21(1) of the FSMA would not apply to Klépierre; and
(ii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the rights or new shares in, from or otherwise involving the United Kingdom.
Japan
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The rights and new shares have not been and will not be registered under the Securities and Exchange Law of Japan and BNP Paribas its affiliates and any persons acting on its or their behalf has agreed not to offer or sell, directly or indirectly, any rights or new shares in Japan or for the account of any resident thereof.
Australia and Canada
Neither the rights nor the new shares may be offered, sold, exercised or acquired in Australia or Canada, except in accordance with applicable law.
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LEGAL MATTERS
The validity of the shares underlying the rights will be passed upon for us by Cleary Gottlieb Steen & Hamilton LLP, our French and U.S. counsel, and for the underwriter by Linklaters LLP, French and U.S. counsel to the underwriter.
INDEPENDENT STATUTORY AUDITORS
Our consolidated financial statements as of and for the years ended December 31, 2005, 2006 and 2007 have been audited by Mazars et Guérard and Deloitte & Associés, as stated in their report appearing herein. The consolidated financial statements of Steen & Strøm as of and for the years ended December 31, 2005, 2006 and 2007 have been audited by Ernst & Young AS, as stated in their report appearing herein.
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INDEX TO FINANCIAL STATEMENTS
Unaudited Financial Statements of Klépierre as of and for the six months ended June 30, 2008 and 2007...... Exhibit A Audited Consolidated Financial Statements of Klépierre as of and for the years ended December 31, 2005, 2006 and 2007...... Exhibit B Unaudited Consolidated Financial Statements of Steen & Strøm as of and for the six months ended June 30, 2008 and 2007...... Exhibit C Audited Consolidated Financial Statements of Steen & Strøm as of and for the years ended December 31, 2005, 2006 and 2007 ...... Exhibit D
F-1
Mazars & Guérard Deloitte & Associés 61, rue Henri Regnault 185, avenue Charles-de-Gaulle 92400 Courbevoie 92200 Neuilly-sur-Seine
KLEPIERRE Limited Liability Company (Société Anonyme) 21, Avenue Kléber 75016 PARIS
Statutory Auditors' review report on the first half-year financial information for 2008
Period from 1 January 2008 to 30 June 2008
This is a free translation into English of the statutory auditors’ review report issued in the French and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France. To the shareholders,
In compliance with the assignment entrusted to us by your Annual General Meeting and in accordance with the requirements of article L. 232-7 of the French Commercial Law (“Code de Commerce”), and L. 451-1-2 III of Monetary and Financial Code (“Code monétaire et financier”), we hereby report to you on: - the review of the accompanying half-year consolidated financial statements of Klépierre covering the period January 1 to June 30, 2008; - the verification of the information contained in the interim management report.
These half-year consolidated financial statements are the responsibility of the Management Board. Our role is to express a conclusion on these financial statements based on our review.
1. Conclusion on the financial statements
We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to
KLEPIERRE 3 / 3 obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Based on our limited review, nothing has come to our attention that causes us to believe that the accompanying half-year consolidated financial statements do not give a true and fair view of the assets and liabilities and of the financial position of the Group as at June 30, 2008 and of the results of its operations for the period then ended in accordance with IFRSs as adopted by the European Union.
2. Specific verification
We have also verified the information given in the interim management report commenting the half-year consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the half-year consolidated financial statements.
Signed in Courbevoie and Neuilly-sur-Seine, July 28, 2008
The Statutory Auditors
French original signed by
Mazars & Guérard Deloitte & Associés
Julien Marin-Pache Pascal Colin Laure Silvestre-Siaz
KLEPIERRE
Consolidated Financial Statements as of June 30, 2008
1. Significant events of the first half of 2008 and the previous fiscal year ------8
2. Accounting principles and methods ------13 2.1. Scope and method of consolidation------14 2.2. Accounting for business combinations------15 2.3. Foreign currency translation ------16 2.4. Intangible assets ------16 2.5. Investment property ------17 2.6. Non-current assets held for sale------19 2.7. Impairment of assets ------19 2.8. Inventory------20 2.9. Leases------20 2.10. Trade accounts and other debtors ------21 2.11. Borrowing costs------21 2.12. Provisions and contingent liabilities------22 2.13. Current and deferred taxes ------22 2.14. Treasury shares------23 2.15. Distinction between liabilities and equity ------23 2.16. Financial assets and liabilities ------23 2.17. Employee benefits ------26 2.18. Share-based payment------27 2.19. Segment reporting ------27 3. Scope of consolidation ------28
4. Notes to the financial statements: Balance sheet ------34 4.1. Non-allocated goodwill ------34 4.2. Intangible assets ------34 4.3. Tangible assets------34 4.4. Investment property and fixed assets in progress ------35 4.5. Properties held for sale------36 4.6. Equity method securities------37 4.7. Non-consolidated securities ------37 4.8. Financial assets ------38 4.9. Other non-current assets ------38 4.10. Inventories------39 4.11. Trade accounts and related receivables ------39 4.12. Other receivables------40 4.13. Cash and near cash ------41 4.14. Equity------41 4.15. Current and non-current financial liabilities------42 4.16. Interest rate hedging instruments ------46 4.17. Long-term and short-term allowances------48 4.18. Deferred taxes------48 4.19. Tax liabilities, staff benefits and other payables ------49 5. Notes to the financial statements: Income statement------50 5.1. Segment Income Statement as of June 30, 2008------50
- 2 - Semi-annual Report, June 2008
5.2. Operating revenue ------52 5.3. Operating expenses ------53 5.4. Income from sales of investment property and equity interests ------54 5.5. Net cost of debt ------54 5.6. Corporate income tax ------55 6. Exposure to risks and hedging strategy------58 6.1. Interest rate risk------58 6.2. Liquidity risk------61 6.3. Currency risk ------62 6.4. Counterparty risk------62 6.5. Equity risk------63 7. Finance and guarantee commitments ------63 7.1. Reciprocal commitments ------63 7.2. Commitments given and received------64 7.3. Guarantees ------65 7.4. Shareholders’ agreements ------66 7.5. Commitments on operating leases - Lessors ------67 7.6. Commitments on lease agreements - financing------69 7.7. Retention commitments------69 8. Compensations and employee benefits ------70 8.1. Payroll expenses ------70 8.2. Retirement commitments------70 8.3. Stock options ------72 9. Additional information------74 9.1. Disclosures of the fair value model ------74 9.2. Earnings per share------77 9.3. Affiliated companies ------78 9.4. Post balance sheet date events ------78 9.5. Identity of the consolidating company ------78
- 3 - Semi-annual Report, June 2008
Income statement as of June 30, 2008
June 30, December 31, June 30, In thousands of euros Notes 2008 2007 2007
Lease income 5.2 329 071 597 178 287 562 Land expenses (real estate) 5.3 -1 301 -2 515 -1 271 Non-recovered rental expenses 5.3 -9 327 -17 189 -4 043 Building expenses (owner) 5.3 -15 276 -29 440 -15 360
Net lease income 303 167 548 034 266 888
Management, administrative and related income 5.2 32 259 64 195 30 002 Other operating income 6 665 18 265 5 226 Survey and research costs -1 446 -1 146 -611 Payroll expense 8.1 -37 740 -64 810 -32 406 Other general expenses -12 368 -25 165 -11 807 Depreciation and amortization allowance on investment property 5.3 -105 025 -169 297 -77 132 Depreciation and amortization allowance on PPE 5.3 -2 614 -4 365 -1 784 Provisions -197 -2 663 1 140
Results of operations 182 701 363 048 179 516
Gains on the sale of investment property and equity interests 5.4 79 352 96 113 75 475 Net book value of investment property and equity investment sold 5.4 -58 042 -55 740 -54 517 Results of the sale of investment property and equity interests 21 310 40 373 20 958
Profit on the sale of short term assets 318 46 17
Net dividends and provisions on non-consolidated investments 26 549 468 Net cost of debt 5.5 -91 386 -162 931 -76 224 Change in the fair value of financial instruments 17 0 7 Effect of discounting 1 335 726 -75 Profit on the sale of short term assets 466 2 634 1 093
Pre-tax earnings 114 787 244 445 125 760
Corporate income tax 5.6 -15 443 -13 493 -9 897 Net income of consolidated entity 99 344 230 952 115 863 of which Group share 80 530 197 712 98 430 Minority interests 18 814 33 239 17 434
Net income per share in euros 0,6 1,4 0,7 Net income fully diluted share in euros 0,6 1,4 0,7
- 4 - Semi-annual Report, June 2008
Balance sheet as of June 30, 2008
June 30, December 31, June 30, In thousands of euros Notes 2008 2007 2007 Non-allocated goodwill 4.1 84 927 84 653 41 180 Intangible assets 4.2 11 504 7 269 7 497 Tangible assets 4.3 41 086 41 340 40 768 Investment property 4.4 6 857 500 6 670 090 6 164 662 Fixed assets in progress 4.4 677 080 463 983 322 340 Property held for sale 4.5 89 088 36 200 22 444 Equity method securities 4.6 44 026 46 600 44 320 Non-consolidated securities 4.8 324 512 1 272 Other non-current assets 4.9 28 440 33 846 25 246 Interest rate swaps 4.16 156 953 84 011 107 487 Deferred tax assets 4.18 34 351 33 675 28 530
NON-CURRENT ASSETS 8 025 279 7 502 179 6 805 746 Inventory 4.10 11 580 11 684 5 425 Trade accounts and notes receivable 4.11 75 271 57 287 51 931 Other receivables 4.12 281 341 215 688 223 396 Tax receivables 63 398 49 645 57 053 Other debtors 217 943 166 043 166 343 Cash and near cash 4.13 291 412 195 476 201 543
CURRENT ASSETS 659 604 480 135 482 295
TOTAL ASSETS 8 684 883 7 982 314 7 288 041
Capital 199 457 193 890 184 657 Additional paid-in capital 960 429 835 187 830 622 Statutory reserve 19 389 18 466 18 466 Consolidated reserves 924 038 756 275 800 444 Treasury shares -95 466 -96 168 -47 056 Fair value of financial instruments 104 935 51 922 75 789 Other consolidated reserves 914 569 800 521 771 711 Consolidated earnings 80 530 197 712 98 430 Shareholders' equity, group share 2 183 843 2 001 530 1 932 619 Minority interests 499 668 480 502 442 462
SHAREHOLDERS' EQUITY 2 683 511 2 482 032 2 375 081 Non-current financial liabilities 4.15 4 709 342 4 400 820 3 849 337 Long-term allowances 4.17 11 866 11 425 8 138 Interest rate swaps 4.16 1 760 7 731 Security deposits and guarantees 118 357 107 899 100 383 Deferred tax liabilities 4.18 201 395 219 069 199 803
NON-CURRENT LIABILITIES 5 042 720 4 746 944 4 157 661 Current financial liabilities 4.15 555 048 439 195 446 718 Trade payables 86 869 62 991 65 073 Payables to fixed asset suppliers 15 138 8 354 25 002 Other liabilities 4.19 212 863 163 209 161 154 Social and tax liabilities 4.19 88 734 79 589 57 352 Short-term allowances 0 0 0 CURRENT LIABILITIES 958 652 753 338 755 299
TOTAL LIABILITIES AND 8 684 883 7 982 314 7 288 041 SHAREHOLDERS' EQUITY
- 5 - Semi-annual Report, June 2008
Consolidated cash flow statement as of June 30, 2008
June 30, December 31, June 30, In thousands of euros 2008 2007 2007
Cash flow from operating activities
Net income from consolidated companies 99 344 230 951 115 864
Elimination of expenditure and income with no cash effect or not related to operating activities - Amortizations and provisions 108 559 179 462 80 720 - Capital gains and losses on asset sales net of taxes and deferred taxes - 8 519 - 28 849 - 10 958
- Reclassification of financial interests and other items 109 292 191 156 83 797
Gross cash flow from consolidated companies 308 676 572 720 269 423 Paid taxes - 23 096 - 28 505 - 10 211 Change in operating working capital requirements 20 543 72 379 37 460
Cash flow from operating activities 306 123 616 594 296 672
Cash flow from investment activities
Income from fixed assets sales 80 496 99 949 75 530 Acquisitions of intangible assets - 182 - 2 228 - 1 014 Acquisitions of tangible assets - 779 - 856 - 233 Acquisitions of investment properties - 355 081 - 362 016 - 143 240 Acquisitions of subsidiaries through deduction of acquired cash - 119 681 - 515 541 - 164 075
Change in loans and advance payments granted and other investments - 5 214 1 055 - 2 175
Net cash flow from investment activities - 400 441 - 779 637 - 235 207
Cash flow from financing activities
Dividends paid to the parent company’s shareholders - 169 416 - 146 395 - 146 395 Dividends paid to minorities - 24 423 - 58 796 - 26 670
Dividends payable 3 807 59 1 729
Change in net position 129 837 82 -
Repayment of share premium -
Acquisitions/Sale of treasury shares 767 - 65 394 - 15 527 New loans, financial debts and hedging instruments 937 929 1 432 914 375 581
Repayment of loans, financial debts and hedging instruments - 729 640 - 799 887 - 202 621 Financial interest paid - 79 715 - 167 114 - 51 635
Net cash flows from financing transactions 69 146 195 469 - 65 538
Currency fluctuations 4 355 - 1 556 294
CHANGE IN CASH AND CASH EQUIVALENTS - 20 817 30 870 - 3 779
Cash at beginning of period 93 567 62 697 62 697 Cash at end of period 72 750 93 567 58 918
- 6 - Semi-annual Report, June 2008
Statement of changes in consolidated equity as of June 30, 2008
Net Shareholders' Additional Statutory Intérêts Capital Currency Other income/loss equity Total equity paid-in capital reserve Treasury Change in minoritaires translation consolidated Total for the year (group share) shares fair value In thousands of euros reserves reserves
June 30, 2007 184 657 830 622 18 466 -47 056 75 789 0 771 711 800 444 98 430 1 932 619 442 462 2 375 081 Change in the capital of the consolidating company 9 233 4 565 - 13 798 13 798 Acquisitions and sales of treasury shares - 49 112 - 1 051 - 50 163 - 50 163 - 50 163 Capital transaction costs - - - Consolidated earnings for the year - 99 282 99 282 15 805 115 087 Assignment of earnings and dividends paid to the parent company’s - - - shareholders Change in the fair value of financial instruments - 23 867 - 23 867 - 23 867 - 23 867 Change in translation adjustment 7 075 7 075 7 075 122 7 197 Changes in accounting methods - - - Change in the scope of consolidation and % of interest 19 073 19 073 19 073 24 603 43 676 Dividends paid to minorities - - - Repayments of equity to minorities ------Other movements 3 713 3 713 3 713 - 2 490 1 223 December 31, 2007 193 890 835 187 18 466 -96 168 51 922 0 800 521 756 275 197 712 2 001 530 480 502 2 482 032 Change in the capital of the consolidating company - - - Acquisitions and sales of treasury shares 702 803 1 505 1 505 1 505 Capital transaction costs - - - Consolidated earnings for the year - 80 530 80 530 18 814 99 344 Assignment of earnings and dividends paid to the parent 5 567 125 242 923 28 394 28 394 - 197 712 - 37 586 - 37 586 company’s shareholders Change in the fair value of financial instruments 53 013 9 182 62 195 62 195 62 195 Change in translation adjustment 79 776 79 776 79 776 44 79 820 Changes in accounting methods - - - Change in the scope of consolidation and % of interest - - 24 121 24 121 Dividends paid to minorities - - - 24 336 - 24 336 Repayments of equity to minorities - - - 972 - 972 Other movements - 4 107 - 4 107 - 4 107 1 495 - 2 612 June 30, 2008 199 457 960 429 19 389 -95 466 104 935 0 914 569 924 038 80 530 2 183 843 499 668 2 683 511
- 7 - Semi-annual Report, June 2008
1. Significant events of the first half of 2008 and the previous fiscal year
First half of 2008
Developments in the Klépierre group shopping center asset portfolio
In Italy, Klépierre continued its growth with the acquisition of three new shopping centers at a total cost of 174 million euros. Lonato and Verona were acquired on February 27, 2008. The purchase of Vittuone will be finalized by 2009. Klépierre owns these 3 centers 50/50 with the development and marketing company Finiper. Ségécé Italia will take over rental management of these properties in 2009.
Opened at the end of 2006, the Verona development is 9 kilometers from the historic center of Verona. The mall covers a GLA of nearly 16,000 sq.m. offering 64 retail outlets, including 6 mid-sized units with a 9,000 sq.m. Iper hypermarket (Finiper group). The Lonato shopping center on the road between Milan and Venice opened in May 2007, and offers a GLA of 30,326 sq.m. It features 111 retail outlets, 11 mid-sized units, one of which is occupied by a 9,000 sq.m. Iper hypermarket. The Vittuone shopping center in the western suburbs of Milan is currently under construction, and is expected to open early in 2009.
In Hungary, following public consultations, Klépierre has paid 22.5 million euros for a land and the construction permits required to build a project that will create a GLA of approximately 20,000 sq.m. in the center of Székesfehérvar, right next to the company’s existing Alba mall.
Retail property
On April 30, 2008 Klémurs acquired the first block of 77 outlets under the agreement signed with Foncière Montel and Vivarte in December 2007 in an investment transaction totaling 104 million euros. 10 further acquisitions are planned for 2008. Distributed throughout France, the retail floor area of these 77 units totals 66,250 sq.m., 69 are owned outright, 6 are financed by property finance leases and 2 by construction leases. Together, they will generate 6.1 million euros in net lease income in a full year. Under the terms of the original agreement, 10 further units are subject to a firm option to buy on completion of due diligences (no later than December 31, 2008), and another 25 new outlets now under construction will be acquired in 2009. As part of the acquisition, Klépierre signed new leases with Vivarte, the group that operates Défi Mode (67 stores), la Halle aux Vêtements (1 store) and la Halle aux Chaussures (1 store). These new 12-year leases have a 6-year firm period and include indexing and variable rents clauses. The other 8 leases with retailers Chaussea, King Jouet (4 stores), Mille et une idées, Orchestra and Leader Price remain unchanged.
Disposals
Klépierre has sold 41.62% of its Courier shopping mall in Annecy to SCI Vendôme Commerces (AXA Group) for 37 million euros. Klépierre retains ownership of the remaining 58.38%.
- 8 - Semi-annual Report, June 2008
Ségécé has owned 35% of Devimo since February 2000; the remaining shares are split equally between Fortis and Banimmo, each with a 32.5% stake. Under an agreement signed on June 23, 2008 Fortis now owns 100% of Devimo equity. Klépierre’s L’esplanade shopping center in Louvain-la-Neuve will continue to be managed by Devimo for at least 3 more years.
Changes in borrowing and related conditions
On June 11 and 12, 2008 Klépierre signed a 750 million euro term loan agreement, syndicated by 6 banks. With a due date of June 2011, this new funding was secured primarily to refinance a 600 million euro bond issue, with 6.125% in coupon interest, maturing on July 10, 2008. The mandated arrangers and lenders are BNP Paribas (coordinator, documentation agent and credit agent), Banque de l’Economie du Commerce et de la Monétique (Crédit Mutuel group), Crédit Foncier de France (Caisse d’Epargne group), ING Real Estate Finance, Landesbank Hessen-Thüringen Girozentrale and Intesa San Paolo (lender). Anticipated by the negotiation of interest rate hedges over the past two years, this new funding will cost 5.05% in total. The loan is accompanied by financial covenants identical to those applying to the syndications signed in January 2006 and September 2007, the key conditions being the Loan-To-Value ratio (capped at 52%), Interest/EBITDA coverage (at least 2.5) and the secured debt/RNAV ratio (capped at 20%).
Dividend payment
The annual general meeting of shareholders held on April 4, 2008 approved the payment of a net dividend of 1.25 euros per share in respect of the 2007 fiscal year The payment is to be made in cash or in shares, based on a price per share of 32.94 euros. 77.3% of the shareholders opted to receive their dividend in the form of shares, which represents a rate of 53.5% for the free float alone (excluding BNP Paribas). The resulting capital increase totals 130,996,648.44 euros funded by the issue of 3,976,826 new shares, which were first listed on May 7, 2008. The cash dividend payment therefore totaled 37.6 million euros.
Fiscal year of 2007
• Change in Klépierre group’s shopping center holdings
In Poland, Klépierre paid Plaza Centers Europe (PCE) a total of 168 million euros to acquire the shopping centers in central Rybnik, central Sosnowiec (both acquired on May 7, 2007) and central Lublin (acquired on July 27). This transaction was made under the terms of the development agreement signed with PCE in 2005, covering 3 shopping centers in Poland and 2 in the Czech Republic. The centers were officially opened in March and May 2007, and are fully rented. Rybnik Plaza offers 81 retail outlets with a gross leasable floor area (GLA) of 18,075 sq.m. Sosnowiec Plaza has 75 retail outlets with a GLA of 13,150 sq.m., and Lublin has 91 retail outlets with a GLA of 26,100 sq.m.
In Hungary, Klépierre paid 14.2 million euros to acquire 11,566 sq.m. of office space forming part of the Duna Plaza shopping center already owned by the Group. The primary aim of the transaction is to facilitate the planned extension of the center, which currently has 224 retail outlets covering a GLA of 36,040 sq.m.
Klépierre has made an offer to Futureal Real Estate Holding Ltd. for the purchase of a planned shopping center forming part of the latest large-scale development in central Budapest. Covering 22 hectares and including 2,800 new apartments, this project is the largest service industry development initiative in the Hungarian capital, and includes 150,000 sq.m. of office space featuring a science R&D center and 10,000 sq.m. of public space surrounded by 20,000 sq.m. of leisure facilities.
- 9 - Semi-annual Report, June 2008
The shopping center will offer 34,600 sq.m. of leasable area on four levels, one of which will be entirely devoted to food and leisure. It will also include three levels of underground parking for 1,200 vehicles. Having obtained final construction permission, Klépierre then acquired the land base and signed a property development agreement with the seller to carry out the construction work. Ségécé Hungary is responsible for the marketing. Work started in August, and the handover is scheduled for Q3 of 2009. Klépierre estimates the total investment at 229 million euros, including the cost of bridging finance to the point when the completed project is open for business (this figure includes the 111 million euros spent to date).
In Italy, work began on April 19, 2007 to restructure the Val Vibrata shopping center in Colonella on the Adriatic coast. The enlarged and renovated mall offers a broader choice of retailers with the arrival of 20 new outlets, including Esprit and Camaieu.
In Portugal, Klépierre increased its equity interest in the Parque Nascente shopping center in Gondomar from 50% to 100%, with the payment of 64.8 million euros in September to acquire the 50% stake held by Prédica. In Greece, Klépierre paid 21 million euros to acquire the Carrefour Larissa shopping mall. In France, Klépierre paid 116 million euros for interests in 13 shopping centers and retail developments under the terms of an agreement signed with Mr. Henri Hermand on December 21, 2006. The entire portfolio includes over 88,000 sq.m. of total useable retail floor, of which 36,000 sq.m. was sold under this deal, which gives Klépierre a stake in a series of major shopping centers, including Creil Saint-Maximin, Tourville-la-Rivière near Rouen and Le Belvédère in Dieppe. The agreement also includes four plots of land, the largest of which is in Forbach, where plans are in place to build a 42,000 sq.m. business park next to an existing shopping mall and a hypermarket.
In July 2007, Klépierre made an offer for two Leclerc hypermarkets adjoining the existing Blagnac and Saint Orens malls in Toulouse, both of which are already owned by the Group.
After 19 months in construction, the extension to the Belair center in Rambouillet was officially opened in May 2007. The hypermarket was enlarged by 2,450 sq.m., and the mall quadrupled in area. The shopping mall now offers 45 retail outlets compared to 25 in 2005, including 5 mid-sized units (with Zara and Darty).
The Cap Saran shopping mall north of Orléans reopened to customers on October 17, 2007 following completion of a 33 million euro conversion funded by Klépierre. After 11 months of work, shoppers at the center now have 35 new retailers to choose from, reflecting current shopping trends and preferences, with the emphasis on fashion.
The extension to the Iroise shopping center in Brest was officially opened on October 25, 2007 allowing the inclusion of several new and particularly dynamic retailers, such as H&M and Darty.
Klépierre officially opened the Champ de Mars shopping center in Angoulême on September 4, 2007. Developed by Ségécé, this city center mall offers 15,500 sq.m. of retail floor area and includes a Monoprix “City-Marché”, 3 mid-sized units, 36 retail outlets, restaurants and services. This shopping center represents an investment of 63 million euros.
Finally, Klépierre sold its 50% interest in the Cordeliers center in Poitiers for a total of 34.2 million euros in late November. The sale price was 35% higher than the appraised value stated on June 30, 2007.
Retail space: Klémurs continues to apply its growth strategy
In March 2007, Klémurs paid 37.2 million euros to acquire a portfolio of 14 assets in first-rate out-of-town retail locations near major French cities.
This acquisition by Klémurs initiated the diversification of its portfolio, in particular with the addition of Mondial Moquette (which represents 58% of the investment in terms of value).
- 10 - Semi-annual Report, June 2008
The partnership with Buffalo Grill entered its development phase during the year 2007, with the acquisition of 8 new restaurants at a cost of 16.8 million euros, bringing to 136 the total number of Buffalo Grill restaurant properties owned outright (51) or via finance leases (85).
Finally, Klémurs paid 10.3 million euros at the end of December 2007 to acquire two Sephora outlets in prime shopping street locations in Metz and Avignon.
Office space: four disposals and the continuation of the Sereinis project
During the year 2007, Klépierre sold two office buildings in Levallois-Perret (Front de Paris) and the Rue de Turin (Paris, 8th arrondissement), as well as two minor assets (Champlan-91 and a warehouse in Strasbourg) for a total amount of 74.7 million euros. These 4 assets contributed 0.4 million euros to rents in 2007, and were disposed of at a price 11% above the latest appraisal value. Construction work continued on the Sereinis building in Issy-les-Moulineaux, resulting in capital expenditure of 14.6 million euros in 2007. Handover of the building is still scheduled for late 2008, and the letting phase is expected to begin shortly.
Full ownership of Ségécé strengthens group cohesion
Klépierre has acquired full ownership of Ségécé with the purchase of the minority interests previously owned by AXA Reim and BNP Paribas at a cost of 20 million euros (10%) and 30 million euros (15%), respectively.
Changes in debt and debt financing terms
On Friday, September 21, 2007, Klépierre signed a contract for a syndicated line of credit for 1 billion euros with five banks.
Initially launched at 800 million euros, this new syndicated loan is subject to the following conditions:
a firm term of 7 years; a margin of between 0.45% and 0.55% based on a Loan-To-Value grid (net debt/RNAV); financial covenants identical to those applying to the syndications signed in January 2006, the key conditions being the Loan-To-Value ratio (capped at 52%), Interest/EBITDA coverage (at least 2.5) and the secured debt/RNAV ratio (capped at 20%). The participating banks are: BNP Paribas (lead arranger), BECM (Crédit Mutuel), Cicobail (Caisse d’Epargne group), Helaba and ING (co-arrangers).
In January 2008, Standard & Poor’s confirmed Klépierre’s rating as BBB+ positive outlook.
Dividend payment The annual general meeting of shareholders held on April 5, 2007 approved the payment of a net dividend of 3.2 euros per share (1.067 euro after the 3-for-1 stock split), reflecting an increase of 18.5%. Payment was made on April 13, 2007.
- 11 - Semi-annual Report, June 2008
Stock split
In accordance with the resolution adopted by the ordinary and extraordinary general meeting of shareholders held on April 5, 2007, Klépierre implemented a 3-for-1 stock split on September 3, 2007, reducing the per share value from 4.20 euros to 1.40 euro. As a result, the number of shares was simultaneously multiplied by a factor of 3 to a new total of 138,492,687. This transaction was preceded on August 31, 2007 by a capital increase via the capitalization of reserves in the amount of 9,232,845.80 euros, increasing the per share value from 4 euros to 4.20 euros.
Following these transactions, on September 3, 2007, the share capital of Klépierre totaled 193,889,761.80 euros in the form of 138,492,687 shares, each with a par value of 1.40 euro.
- 12 - Semi-annual Report, June 2008
2. Accounting principles and methods
Corporate reporting
Klépierre is a French société anonyme (SA), subject to all the texts applicable to business corporations in France, and in particular the provisions of the commercial code. The company’s head office is located at 21 avenue Kléber in Paris.
On July 22, 2008, the Executive Board closed and authorized the publication of Klépierre SA’s consolidated financial statements for the period of January 1, 2008 to June 30, 2008.
Klépierre SA’s shares are listed on Eurolist of Euronext Paris (Compartment A).
Principles of financial statement preparation In accordance with European Regulation 1606/2002 dated July 19, 2002 on international accounting standards, Klépierre SA’s consolidated financial statements as of June 30, 2008 have been drawn up in accordance with IFRS rules, as adopted by the European Union and applicable as of that date.
The IFRS framework as adopted by the European Union includes the IFRS (International Financial Reporting Standards), the IAS (International Accounting Standards) and their interpretations (SIC and IFRIC).
The consolidated financial statements for the half-year until June 30, 2008 are presented in the form of complete accounts including all the information required by the IFRS framework.
The accounting principles applied to the consolidated financial statements of June 30, 2008 are identical to those used in the Consolidated financial statements of December 31, 2007, except for the interpretation of IFRIC 11 (intergroup and treasury share transactions), which must be applied to all fiscal years started after March 1, 2007, but which have no significant effect on the Group’s financial statements.
This interpretation requires that agreements which, on termination, confer rights to ownership of an entity’s equity instruments to the entity’s employees must be recognized as regulated equity instrument transactions regardless of the methods used by the entity to meet its obligations, whether by acquisition of the said instruments by a third party or by its stockholders.
The Group has also decided not to opt for early application of the following IFRS standards and interpretations, whose application becomes obligatory on January 1, 2009: IAS 1 revised: Presentation of Financial Statements IAS 23 revised: Borrowing costs IFRS 8 Operating segments
Compliance with accounting standards
The consolidated financial statements of Klépierre SA and all its subsidiaries were prepared in accordance with International Financial Reporting Standards (IFRS).
Consolidated Financial Statements – Basis of preparation The consolidated financial statements consist of the financial statements of Klépierre SA and its subsidiaries as of June 30, 2008. The financial statements of the subsidiaries are prepared using the same accounting period and the same method as the parent company.
- 13 - Semi-annual Report, June 2008
Subsidiaries are consolidated as of the date on which they are acquired, which is the date on which the Group acquired a controlling interest; this accounting treatment prevails until the date on which this control ceases.
The Group’s consolidated financial statements are established according to the historical cost principle, with the exception of derivative financial instruments and financial assets that are being held for sale, which are measured and carried at their fair value. The carrying amount of assets and liabilities that are hedged according to a fair value hedge relationship, and which are otherwise measured at cost, is adjusted to reflect changes in fair value attributable to the risks being hedged. The consolidated financial statements are presented in euros, and all amounts rounded to the nearest thousandth unless otherwise indicated.
Summary of judgments and material estimates
While preparing these consolidated financial statements in accordance with IFRS rules, the group management was led to use estimates and make a number of realistic and reasonable assumptions. Some facts and circumstances may lead to changes in these estimates and assumptions, which would affect the value of the Group’s assets, liabilities, equity and earnings.
- Use of estimates
The principal assumptions concerning future events and other sources of uncertainty linked to the use of estimates at year end for which there is a significant risk of material change in the net carrying amount of assets and liabilities in a subsequent year are presented below:
- Measurement of goodwill The Group tests goodwill for depreciation at least once a year. This involves estimating the value in use of the cash-generating units to which the goodwill is allocated to. In order to determine their value in use, Klépierre prepares estimates based on expected future cash flows from each cash-generating unit, and applies a pre-tax discount rate to calculate the current value of these cash flows. - Investment property
The Group has its real estate assets appraised by third-party appraisers every half year according to the methods described in paragraph 8.1. The appraisers use assumptions as to future flows and rates that have a direct impact on the value of the buildings. The IFRS reference table can be consulted on the European Commission’s web site: http://ec.europa.eu/internal_market/accounting/ias_fr.htm#adopted-commission
2.1. Scope and method of consolidation
Scope of consolidation
The consolidated financial statements cover all companies over which Klépierre has majority control, joint control or significant influence.
The calculation of the level of control takes account of potential voting rights that entitle their holders to additional votes if these rights can be exercised or converted immediately.
A subsidiary is consolidated from the date on which the Group obtains effective control.
The Group consolidates special purpose entities (SPEs) formed specifically to manage a transaction, even when the Group has no equity interest in the entity, provided that the substance of the relationship is controlled by the Group (the entity’s activities are conducted exclusively on behalf of the Group, and the Group has the decision- making and management powers). There are no special purpose entities in the Group.
- 14 - Semi-annual Report, June 2008
Consolidation method
The Group’s consolidation method is not based solely on the extent of legal ownership of each entity: - Majority control: full consolidation. Control is presumed to exist when Klépierre holds more than half of the entity’s voting rights directly or indirectly. It is likewise presumed to exist when the parent has the power to direct the entity’s financial and operational policies and appoint, recall or convene the majority of the members of the board of directors or the equivalent management body.
- Joint control: proportionate consolidation. Joint control exists only when the operational, strategic and financial decisions require unanimous consent of the controlling parties. That consent must take the form of a contractual agreement, e.g. articles of association, shareholders’ agreements and the like.
- Significant influence: equity method of consolidation. Significant influence is the power to participate in an entity’s financial and operating policy decisions, but not control or jointly control those policies. The Group is presumed to have significant influence if it directly or indirectly holds 20% or more of an entity’s voting rights. Equity-accounted shareholdings are initially recognized in the balance sheet at cost, plus or minus the share of the net position generated after the acquisition, and minus impairment.
- No influence: the company is non-consolidated. The goodwill of equity-accounted companies is included in the carrying amount of “equity-accounted investments” and may not be amortized.
Inter-company transactions Inter-company balances, together with profits resulting from transactions between group companies, are eliminated. Since January 1, 2005, any internal margin on development fees incorporated into the cost price of capitalized assets or inventories by purchasing companies is eliminated.
Financial items billed to property development companies are listed among their inventories or capital assets and recognized in the income statement.
2.2. Accounting for business combinations
According to IFRS 3, all business combinations covered by the standard must be accounted for using the purchase method.
A business combination is defined as bringing together separate entities or businesses into one reporting entity.
The acquirer must initially allocate the cost of the acquisition by posting the identifiable assets, liabilities and contingent liabilities of the acquired business (except for non-current assets held for sale) at fair value at the acquisition date.
Goodwill is the difference between the price paid to acquire the consolidated companies’ securities and the acquirer’s interest in the net fair value of the identifiable assets and liabilities acquired.
On the acquisition date, the acquirer records positive goodwill as an asset. Negative goodwill is immediately recognized in the income statement.
Goodwill is no longer amortized, pursuant to IFRS 3 “Business combinations.” However, it must be tested for impairment annually or more frequently in case any events or changes in circumstances indicate a possible impairment.
In this testing, goodwill is broken down by cash-generating units (CGU), which is a homogeneous group of assets that generates identifiable cash flows.
- 15 - Semi-annual Report, June 2008
Intangible assets are recognized separately from goodwill if they are identifiable, i.e. if they arise from contractual or other legal rights or if they can be separated from the activities of the entity acquired and are expected to generate future economic benefits. Any adjustments of the assets and liabilities recognized on a provisional basis must be made within 12 months of the acquisition date.
Recognition of the acquisition of additional stock in a controlled entity The purchase of a minority interest by the parent is not treated as a business combination within the terms of IFRS 3. As a result, there are no specific accounting rules for this type of transaction. According to IAS 8.10, in the absence of a standard or an interpretation that specifically applies to a transaction, management must use its judgment to develop a relevant accounting policy. When accounting for such an acquisition of the minority interest in a previously-controlled subsidiary, Klépierre’s approach is to recognize the purchased goodwill and to re-measure (at fair value on the date of acquisition) the additional portion of the net assets acquired. The previous holding is not revalued.
2.3. Foreign currency translation
The consolidated financial statements are presented in euro, which is Klépierre’s operating and reporting currency. Each of the Group’s subsidiaries determines its operating currency, and all items in its financial statements are stated in this operating currency.
The Group’s foreign subsidiaries carry out some transactions in currencies other than their operating currency. These transactions are initially recorded in the operating currency at the exchange rate on the date of the transaction.
On the balance sheet date, monetary assets and liabilities stated in foreign currencies are converted to the operating currency at the exchange rate of the given day. Non-monetary items stated in foreign currencies and measured at historical cost are converted using the exchange rate applied on the date of the initial transaction. Non-monetary items stated in foreign currency and carried at fair value are converted using the exchange rate that existed when the fair value was determined.
On the balance sheet date, the assets and liabilities of these subsidiaries are converted into Klépierre S.A.’s reporting currency (euro), at the exchange rate of the given date. Their profit and loss accounts are converted at the average weighted exchange rate for the year. Any resulting conversion differences are allocated directly to the shareholders’ equity as a separate item. In the event of the disposal of a foreign operation, the total accrued deferred exchange gain/loss on that foreign operation recognized as a separate component of the equity is recognized in the income statement.
2.4. Intangible assets
An intangible asset is a non-monetary asset without physical substance that must be identifiable and therefore separable from the acquired entity or arise from legal or contractual rights. It is controlled by the enterprise as a result of past events, and future economic benefits are expected from it.
IAS 38 states that an intangible asset should be amortized over the best estimate of its known useful life. Intangible assets with no known useful life should not be amortized, but tested annually for impairment (IAS 36).
- 16 - Semi-annual Report, June 2008
Assets classified as intangible assets with finite useful lives should be amortized on a straight-line basis over periods which reflect their expected useful life.
2.5. Investment property
IAS 40 defines investment property as property held by the owner or by the lessee (under a finance lease) to earn rentals or for capital appreciation or both, rather than for: - use in the production or supply of goods or services or for administrative purposes, - or sale in the ordinary course of business (trading)
Almost all Klépierre real estate meets this definition of “investment property”. Buildings occupied by the Group are recognized as “tangible assets”. After initial recognition, investment property is measured:
- either at fair value (with all changes in value recognized in the income statement), - or at cost pursuant to the methods prescribed by IAS 16, in which case the enterprise must disclose the fair value of investment property in the notes to the financial statements. The Supervisory Board meeting of May 26, 2004 voted that Klépierre should adopt the IAS 40 cost model.
To produce financial reporting that is both complete and comparable to the financial statements of key competitors applying the fair value model to their investment property, Klépierre is providing pro forma financial data restating its investment property on a fair value basis.
Cost model
Property, plant and equipment (PPE) are recorded at cost, including duties and fees, and are amortized using the components method.
Depreciation of such assets must reflect the consumption of economic benefits. It should be: - calculated on the basis of the depreciable amount, which is equal to the acquisition cost less the residual value of the assets, - or spread over the useful life of the PPE components; when the different components have different useful lives, each component whose cost has a material impact on the total cost of the asset must be separately depreciated over its own useful life. After initial recognition, property, plant and equipment are measured at their cost, less any accumulated depreciation and any impairment losses. The depreciation charge is allocated over the useful life of the assets on a straight-line basis.
The depreciation period, the depreciation method used and the residual value of the assets must be reviewed at each balance sheet date.
In addition, property, plant and equipment are tested for impairment whenever there is evidence of a loss of value at June 30 or December 31. If that evidence is confirmed by testing, the new recoverable amount of the asset is compared to its net carrying amount, and the impairment loss observed is recognized (cf §2.7).
Gains or losses on the disposal of investment property are recorded under “Result of the sale of investment property and equity interests”. Adoption of the cost model implies application of the components method. Klépierre has adopted the option offered by IFRS 1 to recognize the initial cost of its buildings (as shown in the opening balance sheet) as the revalued amount stated at January 1, 2003, the point at which the Group adopted SIIC status, this being their
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deemed market value at that date. The amounts concerned have been apportioned between land and buildings in accordance with the method set by the appraisers: - on the basis of land/building apportionment rates for office property; - by comparison with rebuilding costs for shopping centers.
An age weighting ratio has been applied to the cost of refurbishment to “as new” condition, which is then added to the rebuilding cost.
Properties acquired after January 1, 2003 and extension and refurbishment work impacting on reappraised investment property have been recognized in the balance sheet at their acquisition cost.
The component method
The component method is applied principally on the basis of recommendations by the Fédération des Sociétés Immobilières et Foncières (Federation of Property Companies – FSIF) on components and useful life:
- for properties developed by the subsidiaries themselves, assets are classified by component type and measured at their realizable value;
- for investment properties held in the portfolio (sometimes for long periods), components are broken down into four categories: business premises, shopping centers, offices and residential properties.
Four components were identified for each of these asset types (in addition to land): - Structures - Facades, waterproofing and roofing - Mechanical / Electrical / Plumbing (MEP) - Fittings Component classification is based on the historic and technical features of each property.
For first-time application of the components method, the historic cost of the property concerned is calculated on the basis on the percentage attributed to each component as a proportion of the reappraisal values adopted as presumed cost at January 1, 2003.
Offices Shopping centers Shops
Useful life Share Useful life Share Useful life Share of total of total of total Structures 60 years 60% 35-50 years 50% 30-40 years 50% Façades 30 years 15% 25 years 15% 15-25 years 15% MEP 20 years 15% 20 years 25% 10-20 years 25% Fittings 12 years 10% 10-15 years 10% 5-15 years 10%
All figures are based on an “as new” assumption. Klépierre has therefore calculated the proportions applied to fittings, MEPs and facades as of January 1, 2003 on the basis of the useful life periods shown in the table above, calculated from the date of construction or latest major refurbishment of the property. The percentage for structures is calculated using the figures shown for the other components, and is amortized over the residual term set by the appraisers in 2003. Purchase costs are divided between land and buildings. The part allocated to buildings is amortized over the useful life of the structures.
Residual value is the current estimate of the amount the company would obtain (minus disposal costs) if the property already had the age and would be in the condition it will be at the end of its useful life.
Given the useful life period applied, the residual value of components is zero.
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2.6. Non-current assets held for sale
IFRS 5 on presentation and measurement applies to measured investment property using the cost model under IAS 40 whenever the asset is available for immediate sale and meets the conditions for classification as being held for sale. An impairment test is immediately run before any asset is classified as being held for sale.
The Klépierre group has reclassified all property covered by a contract to sell (mandat de vente) in accordance with IFRS 5.
The accounting impact is as follows: - cost of sale is imputed to net carrying value or net fair value, whichever is the lower; - the properties concerned are presented separately on the face of the balance sheet; - amortization ceases.
2.7. Impairment of assets
IAS 36 applies to tangible and intangible assets, including goodwill. It requires assessing whether there is any indication that an asset may be impaired.
Such an indication might be: - a major decline in market value, - or significant changes in the technological, economic or legal environment. For testing purposes, assets are grouped into cash-generating units (CGUs). These are standardized groups of assets whose continued use generates cash inflows that are largely separate from those generated by other asset groups.
Assets must not be recognized at more than their recoverable amount.
Recoverable amount is the higher amount of an asset’s fair value less costs to sell and its value in use.
Value in use is the discounted present value of estimated future cash flows expected to arise from the planned use of an asset, and from its disposal at the end of its useful life.
An impairment loss should be recognized whenever the recoverable amount is below the carrying amount.
Under certain circumstances, the partial or total reversal of an impairment loss may subsequently be recognized in the income statement, but reversal of non-allocated goodwill is prohibited.
The Klépierre group treats each property and shopping center as a CGU. In addition, the Group’s goodwill mainly concerns Ségécé and its subsidiaries. Impairment tests are performed at least annually by an independent appraiser, and are updated whenever a significant event occurs during the year.
The tests run for Klépierre by Aon Accuracy rely on the range of valuations produced by the discounted cash flow (DCF) method over a period of 5 years. At the first stage of this method, the future cash flow that might be generated on the business portfolio of each company is estimated, without taking into account any direct or indirect financing costs. At the second stage, the value of the business portfolio, cash flows and probable value of the portfolio at the end of the forecast period (end value) are estimated and then discounted at an appropriate
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rate. The discount rate applied, which is based on the Capital Asset Pricing Model (CAPM), is the sum of the following three items: the risk-free interest rate, a general market risk premium (expected market risk premium multiplied by beta for the business portfolio), and a specific market risk premium (which takes into account the proportion of specific risk not already included in flows). At the third and final stage, the value of each company’s equity is obtained by deducting from the value of its business portfolio its net debt at the valuation date as well as the value of any minority interests at the same date.
2.8. Inventory
IAS 2 defines inventory as assets held for sale in the ordinary course of business, assets in progress and intended for sale and materials and supplies (raw materials) intended for use in products and services. Impairment must be recognized if the net realizable price (fair value net of exit costs) is lower than the booked cost.
2.9. Leases
Leases
IAS 17 defines a lease agreement by which the lessor transfers to the lessee the right to use an asset for a given period of time in exchange for a single payment or for a series of payments.
IAS 17 distinguishes two types of lease: - A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset to the lessee. Title to the asset may or may not eventually be transferred by the end of the lease term. - All other leases are classified as operating leases.
Recognition of stepped rents and rent-free periods
Lease income from the operating leases is recognized over the lease term on a straight-line basis.
Stepped rents and rent-free periods are accounted for over the life of the lease as an increase or decrease to lease income for the year.
The reference period adopted is the first firm lease term.
Entry fees
Entry fees received by the lessor are recognized as supplementary rent.
Entry fees are part of the net amount exchanged between the lessor and the lessee under a lease agreement. As such, the accounting periods in which this net amount is to be recognized should not be affected by the form of the agreement and the payment schedule. Entry fees are spread over the first firm lease term.
Early termination indemnities
Tenants who terminate their leases prior to the expiry date are liable to an early termination charge.
Such charges are imputed to the terminated contract and credited to income for the period in which they are recognized.
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Eviction indemnities
When a lessor terminates a lease prior to the expiration date, he must pay the lessor eviction indemnity.
(i) Replacement of a tenant:
In cases where paying eviction indemnity enables asset performance to be maintained or improved (higher rent, and thus higher asset value), the revised version of IAS 16 allows for the indemnity to be capitalized as part of the cost of the asset, provided that this increase in value is confirmed by independent appraisers. Otherwise, the cost is recognized as an expense.
(ii) Renovation of a property requiring removal of resident tenants:
If eviction compensation is paid as a result of major renovation or reconstruction work on a property requiring the prior removal of tenants, the cost is included among preliminary expenses and recognized as a supplementary component of total renovation costs.
Land and building leases: IAS 40 and IAS 17
Land and building leases are classified as operating or finance leases and treated in the same way as leases for other types of assets. However, since the useful life of land is usually indefinite, unless title is intended to be transferred to the lessee at the end of the lease term, the majority of the risks and rewards inherent in ownership will not be transferred to the lessee (land leases are operating leases). Initial payments made in this respect therefore constitute pre-rents and are amortized over the term of the lease, in accordance with the pattern of benefits provided. Those benefits are determined by examining each individual agreement.
Under the components method set out in IAS 40, such initial payments are classified as prepaid expenses.
2.10. Trade accounts and other debtors
Trade accounts are recognized and measured at face value minus accruals for non-recoverable amounts. Bad debts are estimated when it is likely that the entire amount receivable will not be recovered. When identified as such, non-recoverable receivables are recognized as losses.
2.11. Borrowing costs
The benchmark treatment under IAS 23 is to recognize construction-related borrowing costs as an expense in the period in which they are incurred.
The alternative treatment allowed is to include borrowing costs in the total cost of a qualifying asset if they are directly attributable to the acquisition, construction or production of that asset.
Klépierre has not opted for the benchmark treatment, and instead accounts for construction-related finance charges as part of the cost of the assets acquired. As a result, these charges are capitalized over the construction period.
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2.12. Provisions and contingent liabilities
IAS 37 “Provisions, contingent liabilities and contingent assets” states that a provision should be recognized for any liability when it is probable or certain that an outflow of resources will be required to settle the obligation, without at least an equivalent consideration being expected from the creditor.
IAS 37 requires that non-interest-bearing long-term liabilities be discounted.
2.13. Current and deferred taxes
Tax status for listed property investment companies
General features of SIIC tax status All listed property investment companies (SIICs) are entitled to the corporate tax exemption status introduced by Article 11 of the 2003 Finance Act and implemented under the Decree of July 11, 2003 provided that they are listed on a regulated French market, that they have share capital of at least 15 million euros and that their corporate purpose is either the purchase or construction of properties for rent, or direct or indirect investment in entities with the same corporate purpose. Once made, a decision to claim SIIC status is irrevocable. Subsidiaries subject to corporate income tax and at least 95% controlled by the Group may also claim SIIC status.
In return for tax exemption, companies must distribute 85% of their rental profits, 50% of their gains on disposal and 100% of the dividends paid to them by those of their subsidiaries that are subject to corporate income tax and have selected SIIC status.
Claiming SIIC status makes the entity concerned immediately subject to a 16.5% exit tax on unrealized gains on properties and on shares in partnerships not subject to corporate income tax. 25% of the exit tax falls due on December 15 of the year in which SIIC status is first claimed, with the balance payable over the three following years. The annual general meeting of shareholders held on September 26, 2003 authorized Klépierre to opt into the new SIIC status, with retrospective effect from January 1, 2003.
Discounting exit tax liability The exit tax liability is discounted on the basis of its payment schedule. This liability is payable over a 4-year period, starting at the point when the entity concerned adopts SIIC status. Following initial recognition, the liability is discounted in the balance sheet and an interest expense is recognized in the income statement at each cut-off date. In this way, the liability can be reduced to its discounted present value on that date. The discount rate is calculated on the basis of the interest rate curve, plus the period of deferment and Klépierre refinancing spread.
Corporate income tax on companies not eligible for SIIC status Since adopting SIIC status in 2003, Klépierre SA has made a distinction between SIICs that are exempt from property leasing and capital gains tax, and other companies that are subject to those taxes.
Corporate income tax on non-SIICs is calculated under French common law requirements.
French common law and deferred tax
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Corporate income tax is calculated using the rules and rates applicable in each country in which group companies are registered over the period to which the profit or loss applies.
Both current and future income taxes are offset if they originate within the same consolidated tax group, are subject to the same tax authority and if offsetting is allowed by law. Deferred taxes are recorded to reflect temporary differences between the carrying amounts of assets and liabilities in the balance sheet and their tax bases if they are expected to give rise to taxable income in future periods.
A deferred tax asset is recognized in case of tax losses carried forward under the likely assumption that the entity concerned will generate future taxable income against which those losses can be deducted.
Deferred tax assets and liabilities are measured using the liability method and the tax rate expected to apply when the asset will be realized or the liability settled, on the basis of the tax rates and tax regulations adopted, or that will be adopted, before the balance sheet date. The measurement of deferred tax assets and liabilities must reflect the tax consequences of the way in which the company expects to recover or settle the carrying amounts of its assets and liabilities at the balance sheet date.
All current and deferred tax is recognized as tax income or expense in the income statement. However, in the case of deferred tax recognized or settled since the acquisition or disposal of a subsidiary or equity-accounted affiliates, and of unrealized gains or losses on assets held for sale, the associated deferred taxes are recognized as equity. Deferred tax is calculated at those local rates applicable at the balance sheet date. The main rates applied are: 34.43% in France, 30% in Spain, 31.40% in Italy, 34% in Belgium, 25% in Greece, 26.5% in Portugal, 19% in Poland, 20% in Hungary (excluding ordinary losses capitalized at 16%), 21% in the Czech Republic and 19% in Slovakia.
2.14. Treasury shares
All treasury shares held by the Group are recorded at acquisition cost and deducted from equity. Any gain arising on the disposal of treasury shares is immediately recognized as equity so that disposal gains/losses do not impact on net profit/loss for the period.
2.15. Distinction between liabilities and equity
The difference between liabilities and equity depends on whether the issuer is under an obligation to make a cash payment to the other party. Whether cash payment can be decided by the issuer or not is the crucial distinction between these two concepts.
2.16. Financial assets and liabilities
Financial assets include long-term financial investments, assets and loans, current assets representing accounts receivable, financial securities and investments (including derivatives) and cash. Financial liabilities include borrowings, other forms of financing and bank overdrafts, derivatives and accounts payable.
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IAS 39 (Financial instruments: recognition and measurement) describes how financial assets and liabilities must be measured and recognized.
Measurement and recognition of financial assets
Loans and receivables These include receivables from equity investments, other loans and receivables. They are recognized at amortized cost, which is calculated using the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash flows to the net carrying amount of the financial instrument.
Assets held for sale These include equity investments.
Equity investments are the Group’s interest in non-consolidated companies.
Investments in equity instruments with no quoted price on an active market and whose fair value cannot be reliably measured must be carried at cost.
Cash and near cash Cash and near cash include cash on bank accounts, short-term deposits maturing in less than three months, money market funds and other investment securities.
Recognition and measurement of financial liabilities
With the exception of derivatives, all loans and other financial liabilities are measured at amortized cost using the effective interest method.
Recognition of liabilities at amortized cost Under IFRS, redemption premiums on bond issues and debt issuance expenses are deducted from the nominal value of the loans concerned and applied in the calculation of the effective interest rate.
Application of the amortized cost method to liabilities hedged at fair value A gain or loss from the change in fair value of swaps used as fair value hedges will cause the carrying amount of the (effective portion of the) hedged item to be adjusted for the corresponding gain or loss with respect to the hedged risk.
Since the characteristics of derivatives and items hedged at fair value are generally similar, any ineffectiveness carried to hedging profit or loss will be minimal.
If a swap is cancelled before the due date of the hedged liability, the amount of the debt adjustment will be amortized over the residual term, using the effective interest rate determined at the date the hedge ended.
Recognition and measurement of derivatives
As parent company of the Group, Klépierre is responsible for almost all group financing and provides centralized management of interest and exchange rate risks. This financial policy has required Klépierre to implement the facilities and associated hedging instruments required by the Group.
Klépierre hedges its liabilities using derivatives and has consequently adopted hedge accounting as per IAS 39:
- fair value hedges: hedges of the exposure to changes in fair value of balance sheet items, that are attributable to interest rate, credit or exchange risk (e.g. a fixed-rate liability)
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- cash flow hedges: hedges of the exposure to variability in cash flows, achieved by fixing the future cash flow on a variable-rate liability or asset
The Klépierre portfolio meets all IAS 39 hedge definition and effectiveness criteria.
The adoption of hedge accounting has the following consequences: - fair value hedges of existing assets and liabilities: the hedged portion of the asset/liability is accounted at fair value in the balance sheet. The gain or loss from the change in fair value is recognized immediately in the income statement. At the same time, there is an opposite corresponding adjustment in the fair value of the hedging instrument, in line with its effectiveness; - cash flow hedges: the portion of the gain or loss on the fair value of the hedging instrument that is determined to be an effective hedge is recognized directly in equity and recycled to the income statement when the hedged cash transaction affects profit or loss. The gain or loss from the change in value of the ineffective portion of the hedging instrument is recognized immediately in the income statement.
Recognition date: trade or settlement
IFRS seeks to reflect the time value of financial instruments as closely as possible by ensuring that, where possible, instruments with a deferred start date are recognized on the trade date, thus allowing calculation of the deferred start date.
However, this principle cannot be applied at blanket level to all financial instruments; commercial papers, for example, are often renewed a few days before their due date. If they were recognized at their trade date, this would artificially extend the runoff between the renewal trade date on a paper and its effective start date.
Klépierre applies the following rules: - Derivatives are recognized at their trade date and measurement takes account of deferred termination dates (if any); - Other financial instruments (especially liabilities) are recognized at the settlement date.
Determination of fair value
Financial assets and liabilities carried at fair value are measured either using listed price or valuation models that apply market criteria. The term "model" refers to mathematical methods based on generally-accepted financial theories. For any given instrument, an active and therefore liquid market is any market in which transactions regularly take place and in which there is a reliable level of supply and demand, or in which transactions take place involving instruments that are very similar to the instrument being measured.
Where prices are quoted on an active market, they are used to determine fair value. Such prices will thus be used to measure listed securities and derivatives traded on organized markets such as the futures or option markets.
Most OTC (Over The Counter) derivatives, swaps, futures, caps, floors and simple options are traded on active markets. They are measured using generally accepted models (discounted cash flow, Black and Scholes, interpolation techniques) that are based on the market prices of such instruments or similar underlying values.
Tax treatment of changes in fair value
In the case of Klépierre: - the non-SIIC part of the deferred tax on Klépierre SA financial instruments recognized at fair value is calculated pro-rata of financial profit/loss;
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- the financial instruments of foreign subsidiaries recognized at fair value generate a deferred tax calculation at the rates applying in the country concerned.
2.17. Employee benefits
Employee benefits are recognized as set out in IAS 19, which applies to all payments made for services rendered, except share-based payment, which is covered by IFRS 2.
All employee benefits, whether paid in cash or in kind, short or long-term must be identified as belonging to one of the following 4 main classifications: - short-term benefits, such as salaries and wages, annual leave, profit sharing, share savings schemes and company contributions; - post-employment benefits: these relate primarily to supplementary bank pension payments in France, and private pension schemes elsewhere; - other long-term benefits, including paid leave and seniority payments, and some deferred compensation schemes paying out in monetary units; - severance pay. Recognition and measurement varies depending on the classification into which the benefit falls.
Short-term benefits
The company recognizes a loss when it uses services provided by its employees and pays agreed benefits in return.
Post-employment benefits
In accordance with generally-accepted principles, the Group makes a distinction between defined contribution and defined benefit plans. Defined contribution plans do not generate any liability for the company, and therefore are not provisioned. Contributions paid during the period are recognized as a loss.
Defined benefit plans do generate a liability for the company, and are therefore measured and provisioned.
The classification of a benefit as either of the above is made on the economic basis of the benefit, which is used to determine whether the Group is required to provide the promised benefit to the employee under the terms of an agreement or an implicit obligation.
Post-employment benefits classified as defined benefit plans are quantified actuarially to reflect demographic and financial factors.
The amount of the provision to be recognized for the commitment will be calculated on the basis of the actuarial assumptions adopted by the company and by applying the Projected Unit Credit Method. The value of any hedging assets (plan assets and redemption rights) will be deducted from the resulting figure.
The measurement of plan liabilities and the value of its hedging assets may vary considerably from one accounting period to another as actuarial assumptions change, and may therefore give rise to actuarial gains or losses. The Group applies the corridor method to account for actuarial gains/losses on its commitments. Use of the corridor method means that as of the following financial year, the proportion of actuarial gain/loss that is in excess of the higher of the following need not be recognized: 10% of the discounted gross value of the liability or 10% of the market value of the plan hedge asset at the end of the previous period.
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Long-term benefits
These benefits, which exclude post-employment benefits or severance pay, are not fully payable within twelve months of the end of the financial year in which the employees concerned provided the services in question.
The actuarial method applied is similar to that used for post-employment defined benefits, except that actuarial gains or losses are recognized immediately and there is no corridor. Furthermore, any gain or loss resulting from changes to the plan, but deemed to apply to previous services, is recognized immediately.
Severance pay
Employees receive severance pay if their employment with the Group is terminated before they reach the statutory retirement age or if they accept voluntary redundancy. Severance pay falling due more than twelve months after the balance sheet date is discounted.
2.18. Share-based payment
IFRS 2 provides that all share-based payments must be recognized as expenses when use is made of the goods or services provided in return for these payments.
For the Klépierre group, this standard applies primarily to the purchase of shares to meet the commitments arising from its employee stock option scheme.
In accordance with IFRS 1, only plans awarded after November 7, 2002 whose rights had not been exercised at January 1, 2005 need be recognized. Consequently, Klépierre's 1999 stock option plan has not been restated. The exercise period for this particular plan ended on June 24, 2007.
2.19. Segment reporting
IAS 14 requires the reporting of financial information by line of business and geographical area in respect of primary and secondary segments. Segments are identified by analyzing risks and returns to then form homogenous segments. Lines of business and geographical segments must be reported if they account for more than 10% of the total result, revenue or balance sheet total.
If total revenue attributable to reportable segments is less than 75% of the total consolidated income, additional segments should be identified by reducing the threshold by 10% to reach 75%.
The following information should be disclosed for primary segments: segment income, pre-tax and pre-financial charge segment revenue, the carrying value of sector assets, sector liabilities and sector investments over the period.
The following information should be disclosed for secondary segments: sector income, sector assets and investments over the period. The Klépierre group discloses its sector information at two levels: level one is by business segment and level two is by geographical area. - Level 1 - business segment: shopping centers, retail property and office property - Level 2 - geographic area: France, Spain, Portugal, Italy, Greece, Hungary, Poland and “other” European countries.
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3. Scope of consolidation
Methods COMPANIES June % interest % holding 2008 (1)
SIREN no. Head office June 2008 December 2007 June 2008 December 2007
SA Klépierre 780 152 914 Paris FC 100.00% 100.00% 100.00% 100.00% Office buildings
SAS Klépierre Finance 433 613 312 Paris FC 100.00% 100.00% 100.00% 100.00% SAS LP7 428 782 486 Paris FC 100.00% 100.00% 100.00% 100.00% SAS CB Pierre 343 146 932 Paris FC 100.00% 100.00% 100.00% 100.00% SNC Général Leclerc n°11 Levallois 381 986 363 Paris FC 100.00% 100.00% 100.00% 100.00% SNC Jardins des Princes 391 237 716 Paris FC 100.00% 100.00% 100.00% 100.00% SNC Barjac Victor 390 123 057 Paris FC 100.00% 100.00% 100.00% 100.00% Shopping centers - France
SNC Kléber La Perouse 388 724 361 Paris FC 100.00% 100.00% 100.00% 100.00% SAS KLE 1 389 217 746 Paris FC 100.00% 100.00% 100.00% 100.00% SNC SCOO (ex-Secmarne) 309 660 504 Paris FC 79.94% 79.94% 79.94% 79.94% SNC Angoumars 451 149 405 Paris FC 100.00% 100.00% 100.00% 100.00% SNC Klécar France 433 496 965 Paris FC 83.00% 83.00% 83.00% 83.00% SNC KC1 433 816 501 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC2 433 816 444 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC3 433 816 725 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC4 433 816 774 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC5 433 817 269 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC6 433 842 549 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC7 433 842 515 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC8 433 842 564 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC9 433 816 246 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC10 433 816 220 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC11 433 894 243 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC12 433 894 102 Paris FC 83.00% 83.00% 100.00% 100.00% SNC KC20 449 054 949 Paris FC 83.00% 83.00% 100.00% 100.00% SAS Centre Jaude Clermont 398 960 963 Paris FC 100.00% 100.00% 100.00% 100.00% SCS Klécar Europe Sud 428 864 268 Paris FC 83.00% 83.00% 83.00% 83.00% SC Solorec 320 217 391 Paris FC 80.00% 80.00% 80.00% 80.00% SNC Centre Bourse 300 985 462 Paris FC 100.00% 100.00% 100.00% 100.00% SCS Begles Arcins 404 357 535 Paris PC 50.00% 50.00% 50.00% 50.00% SCI Bègles Papin 449 389 956 Paris FC 100.00% 100.00% 100.00% 100.00% SNC Soccendre 319 814 075 Paris FC 100.00% 100.00% 100.00% 100.00% SCI Sécovalde 405 362 682 Paris FC 55.00% 55.00% 55.00% 55.00% SAS Cécoville 409 547 015 Paris FC 100.00% 100.00% 100.00% 100.00% SNC Foncière Saint-Germain 378 668 875 Paris FC 100.00% 100.00% 100.00% 100.00% SAS Soaval 419 620 075 Paris PC 50.00% 50.00% 50.00% 50.00% SCA Klémurs (2) 419 711 833 Paris FC 84.11% 84.11% 84.11% 84.11% SAS Cécobil 408 175 966 Paris PC 50.00% 50.00% 50.00% 50.00% SCI du Bassin Nord 422 733 402 La Plaine St Denis PC 50.00% 50.00% 50.00% 50.00% SNC Le Havre Vauban 420 307 704 Paris PC 50.00% 50.00% 50.00% 50.00% SNC Le Havre Lafayette 420 292 047 Paris PC 50.00% 50.00% 50.00% 50.00% SNC Sodevac 388 233 298 Paris FC 100.00% 100.00% 100.00% 100.00% SAS Odysseum Place de France 428 788 525 Paris PC 50.00% 50.00% 50.00% 50.00% SAS Klécar Participations Italy 442 229 175 Paris FC 83.00% 83.00% 83.00% 83.00% SNC Pasteur 398 967 232 Paris FC 100.00% 100.00% 100.00% 100.00% SA Holding Gondomar 1 438 568 545 Paris FC 100.00% 100.00% 100.00% 100.00% SAS Holding Gondomar 3 438 570 129 Paris FC 100.00% 100.00% 100.00% 100.00% SAS Klépierre Participations et Financements 442 692 315 Paris FC 100.00% 100.00% 100.00% 100.00% SCI Combault 450 895 164 Paris FC 100.00% 100.00% 100.00% 100.00% SNC Klétransactions 479 087 942 Paris FC 100.00% 100.00% 100.00% 100.00% SCI La Plaine du Moulin à Vent 479 718 124 Paris PC 50.00% 50.00% 50.00% 50.00% SCI Beau Sevran Invest 441 648 714 Paris FC 83.00% 83.00% 100.00% 100.00% SAS PROGEST 330 574 625 Paris FC 100.00% 100.00% 100.00% 100.00% SCI La Rocade 319 524 070 Paris EM 38.00% 38.00% 38.00% 38.00% SCI l'Emperi 421 021 346 Paris EM 15.00% 15.00% 15.00% 15.00% SCI Girardin 339 293 532 Paris PC 33.40% 33.40% 33.40% 33.40% SC Boutiques St Maximin 314 866 484 Paris EM 42.50% 42.50% 42.50% 42.50% SARL Belvedere Invest 418 124 475 Paris FC 75.00% 62.00% 75.00% 62.00% SCI Haies Haute Pommeraie 437 731 664 Paris EM 43.00% 43.00% 43.00% 43.00% SCI Plateau des Haies 423 665 413 Paris FC 90.00% 90.00% 90.00% 90.00% SCI Halles Plérin 340 255 280 Joinville Le Pont EM 25.00% 25.00% 25.00% 25.00% SCI Boutiques d'Osny 339 797 607 Paris FC 38.27% 38.27% 67.00% 67.00% SCI Plateau de Plérin 329 393 805 Paris EM 25.00% 25.00% 25.00% 25.00% SCI la Rocade Ouest 319 658 399 Paris EM 36.73% 36.73% 36.73% 36.73% SARL Forving 442 692 539 Paris FC 90.00% 90.00% 90.00% 90.00% SCI du Plateau 382 949 873 Boulogne-Billancourt EM 24.25% 17.76% 30.00% 26.50% SA Rezé Sud 413 251 216 Rézé EM 15.00% 15.00% 15.00% 15.00% SCI Maximeuble 347 879 306 Paris FC 100.00% 100.00% 100.00% 100.00%
- 28 - Semi-annual Report, June 2008
Methods COMPANIES % interest % holding June 2008 (1)
SIREN no. Head office June 2008 December 2007 June 2008 December 2007
Shopping centers - France (cont.)
SCI Saint Maximin Construction 347 879 405 Paris PC 50.00% 50.00% 50.00% 50.00% SCI Immobilière de la Pommeraie 348 268 996 Paris PC 50.00% 50.00% 50.00% 50.00% SCI Pommeraie Parc 350 236 337 Paris PC 50.00% 50.00% 50.00% 50.00% SCI Champs des Haies 351 335 914 Paris PC 50.00% 50.00% 50.00% 50.00% SCI La Rive 348 974 080 Paris FC 47.30% 47.30% 47.30% 47.30% SCI Rebecca 428 291 520 Paris FC 70.00% 70.00% 70.00% 70.00% SCI Aulnes developpement 448 080 861 Paris FC 25.50% 25.50% 50.00% 50.00% SARL Proreal 447 572 686 Paris FC 51.00% 51.00% 51.00% 51.00% SCI Sandri-Rome 423 680 917 Paris EM 15.00% 15.00% 15.00% 15.00% SCI La Roche Invest 484 674 643 Paris FC 100.00% 32.50% 100.00% 32.50% SCI Osny Invest 420 796 708 Paris FC 57.12% 57.12% 57.12% 57.12% SNC Parc de Coquelles 348 281 965 Paris PC 50.00% 50.00% 50.00% 50.00% SCI Sogegamar 950 591 792 Paris EM 33.12% 33.12% 33.12% 33.12% SCI Achères 2000 422 380 576 Paris EM 30.00% 30.00% 30.00% 30.00% SCI Le Mais 378 907 000 Paris FC 55.00% 55.00% 55.00% 55.00% SCI le Grand Pré 352 765 994 Paris PC 50.00% 50.00% 50.00% 50.00% SCI Champs de Mais 379 159 338 Paris EM 25.00% 25.00% 25.00% 25.00% SCI des Salines 394 253 959 Paris PC 50.00% 50.00% 50.00% 50.00% SCI les Bas Champs 394 253 710 Paris PC 50.00% 50.00% 50.00% 50.00% SCI Des dunes 394 253 819 Paris PC 50.00% 50.00% 50.00% 50.00% SCI la Française 394 253 264 Paris PC 50.00% 50.00% 50.00% 50.00% SCI LC 422 654 392 Paris FC 33.00% 33.00% 60.00% 60.00% SARL Société du bois des fenêtres 418 683 124 Vélizy Villacoublay EM 20.00% 20.00% 20.00% 20.00% SAS KLE PROJET 1 493 511 620 Paris FC 100.00% 100.00% 100.00% 100.00% SAS KLECAPNOR 494 808 603 Paris FC 84.11% 84.11% 100.00% 100.00% SAS Vannes Coutume 495 178 055 Paris FC 100.00% 100.00% 100.00% 100.00% SAS KLE PROJET 2 479 506 345 Paris FC 100.00% 100.00% 100.00% 100.00% Société des Centre Toulousains 499 084 903 Paris FC 75.81% 75.81% 75.81% 75.81% SA Holding Gondomar 2 438 567 265 Paris FC 100.00% 100.00% 100.00% 100.00% SAS Holding Gondomar 4 438 567 331 Paris FC 100.00% 100.00% 100.00% 100.00% SCI Noblespécialiste 389 308 339 Paris FC 75.81% 75.81% 100.00% 100.00% SNC La Marquayssonne 379 881 121 Paris FC 75.81% 75.81% 100.00% 100.00% SCI Restorens 380 667 790 Paris FC 75.81% 75.81% 100.00% 100.00% SNC Sodirev 377 807 367 Paris FC 75.81% 75.81% 100.00% 100.00% SCI Besançon Chalezeule 498 801 778 Paris FC 100.00% 100.00% 100.00% 100.00% Edamarzy 489 704 809 Pougues les eaux FC 100.00% 0.00% 100.00% 0.00% Immo Dauland 443 572 037 Chalons sur Saone FC 84.11% 0.00% 100.00% 0.00% Carré Jaude 2 504 363 565 Paris FC 100.00% 0.00% 100.00% 0.00%
Service providers - France
SCS Ségécé 562 100 214 Paris FC 100.00% 100.00% 100.00% 100.00% SAS Klépierre Conseil 398 967 000 Paris FC 100.00% 100.00% 100.00% 100.00% SNC Galae 433 909 165 Paris FC 100.00% 100.00% 100.00% 100.00%
Country Head office Shopping centers - International
SA Coimbra Belgium Brussels FC 100.00% 100.00% 100.00% 100.00% SA Cinémas de l'Esplanade Belgium Brussels FC 100.00% 100.00% 100.00% 100.00% SA Foncière de Louvain La Neuve Belgium Brussels FC 100.00% 100.00% 100.00% 100.00% SA Place de l'acceuil Belgium Brussels FC 100.00% 100.00% 100.00% 100.00% SA Klecar Foncier Iberica Spain Madrid Alcobendas FC 83.00% 83.00% 100.00% 100.00% SA Klecar Foncier Espana Spain Madrid Alcobendas FC 83.00% 83.00% 100.00% 100.00% SA Klépierre Vinaza Spain Madrid Alcobendas FC 100.00% 100.00% 100.00% 100.00% SA Klépierre Vallecas Spain Madrid Alcobendas FC 100.00% 100.00% 100.00% 100.00% SA Klépierre Nea Efkarpia Greece Athens FC 83.00% 83.00% 100.00% 100.00% SA Klépierre Foncier Makedonia Greece Athens FC 83.01% 83.01% 100.00% 100.00% SA Klépierre Athinon A.E. Greece Athens FC 83.00% 83.00% 100.00% 100.00% SA Klépierre Peribola Patras Greece Neo Psyhiko FC 83.00% 83.00% 100.00% 100.00% Klépierre Larissa Greece Athens FC 100.00% 100.00% 100.00% 100.00% Sarl Szeged plaza Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl Szolnok plaza Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl Zalaegerszeg plaza Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl Nyiregyhaza Plaza Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% SA Duna Plaza Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl CSPL 2002 (Cespel) Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl GYR 2002 (Gyor) Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl Debrecen 2002 Hungary Budapest FC 100.00% 100.00% 100.00% 100.00%
- 29 - Semi-annual Report, June 2008
Methods COMPANIES June % interest % holding 2008 (1)
SIREN no. Head office June 2008 December 2007 June 2008 December 2007
Sarl Uj Alba 2002 Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl Miskolc 2002 Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl Kanizsa 2002 Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl KPSVR 2002 (Kaposvar) Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Sarl Duna Plaza Offices Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Klépierre Corvin Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Corvin Retail (Ex: Corvin Office) Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Klépierre Trading Hungary Budapest FC 100.00% 100.00% Srl Immobiliare Magnolia Italy Milan FC 100.00% 85.00% 100.00% 85.00% Spa ICD Italy Milan FC 100.00% 85.00% 100.00% 85.00% Spa IGC Italy Milan PC 50.00% 50.00% 50.00% 50.00% Srl Novate Italy Milan FC 100.00% 85.00% 100.00% 85.00% Spa Klecar Italia Italy Milan FC 83.00% 83.00% 100.00% 100.00% Spa Klefin Italia Italy Milan FC 100.00% 100.00% 100.00% 100.00% Galleria Commerciale Collegno Italy Milan FC 100.00% 100.00% 100.00% 100.00% Galleria Commerciale Serravalle Italy Milan FC 100.00% 100.00% 100.00% 100.00% Galleria Commerciale Assago Italy Milan FC 100.00% 100.00% 100.00% 100.00% Galleria Commerciale Klépierre Italy Milan FC 100.00% 100.00% 100.00% 100.00% Galleria Commerciale Cavallino Italy Milan FC 100.00% 100.00% 100.00% 100.00% Galleria Commerciale Solbiate Italy Milan FC 100.00% 100.00% 100.00% 100.00% Spa Clivia Italy Milan PC 50.00% 0.00% 50.00% 50.00% K2 Italy FC 85.00% 0.00% 85.00% 0.00% Klépierre Matera Italy Milan FC 100.00% 0.00% 100.00% 0.00% Sarl Klépierre Météores Luxemburg Luxemburg FC 100.00% 100.00% 100.00% 100.00% SA Klépierre Luxembourg Luxemburg Luxemburg FC 100.00% 100.00% 100.00% 100.00% Besloten vennootschap Capucine BV Netherlands Amsterdam FC 100.00% 100.00% 100.00% 100.00% Klépierre Sadyba Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Klépierre Krakow Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Klépierre Poznan Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Ruda Slaska Plaza spzoo Poland Ruda Slaska-Wirek FC 100.00% 100.00% 100.00% 100.00% Sadyba Center SA Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Krakow spzoo Poland Krakow FC 100.00% 100.00% 100.00% 100.00% Poznan SA Poland Krakow FC 100.00% 100.00% 100.00% 100.00% Klépierre Poland Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Rybnik Plaza Sp.z.o.o Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Sosnowiec Plaza Sp.z.o.o Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Klépierre Rybnik Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Klépierre Sosnowiec Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Movement Poland SA Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Klépierre Lublin Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Klépierre Galeria Poznan Sp.z.o.o Poland Krakow FC 100.00% 100.00% 100.00% 100.00% Klépierre Galeria Krakow Sp.z.o.o Poland Krakow FC 100.00% 100.00% 100.00% 100.00% Klépierre Warsaw Sp.z.o.o Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% SA Finascente Portugal Carnaxide FC 100.00% 100.00% 100.00% 100.00% SA Klélou-Immobiliare Portugal Carnaxide FC 100.00% 100.00% 100.00% 100.00% SA Klépierre Portugal SGPS SA Portugal Carnaxide FC 100.00% 100.00% 100.00% 100.00% SA Galeria Parque Nascente Portugal Lisbon FC 100.00% 100.00% 100.00% 100.00% SA Gondobrico Portugal Lisbon FC 100.00% 100.00% 100.00% 100.00% SA Klenor Imobiliaria Portugal Carnaxide FC 100.00% 100.00% 100.00% 100.00% SA Klétel Imobiliaria Portugal Carnaxide FC 100.00% 100.00% 100.00% 100.00% Kleminho Portugal Carnaxide FC 100.00% 100.00% 100.00% 100.00% Kléaveiro Portugal Carnaxide FC 100.00% 100.00% Klépierre Cz Czech Republic Prague FC 100.00% 100.00% 100.00% 100.00% Bestes Czech Republic Prague FC 99.00% 99.00% 99.00% 99.00% Entertaimnent Plaza Czech Republic Prague FC 100.00% 100.00% 100.00% 100.00% Klépierre Novo Czech Republic Prague FC 100.00% 100.00% 100.00% 100.00% Akciova Spolocnost ARCOL Slovakia Bratislava FC 100.00% 100.00% 100.00% 100.00% Service providers - International
Ségécé Espana Spain Madrid Alcobendas FC 100.00% 100.00% 100.00% 100.00% Srl Effe Kappa Italy Milan FC 100.00% 50.00% 100.00% 50.00% Ségécé Italia Italy Milan FC 100.00% 100.00% 100.00% 100.00% Ségécé Ceska Républika Czech Republic Prague FC 100.00% 100.00% 100.00% 100.00% SA Ségécé Portugal Portugal Carnaxide FC 100.00% 100.00% 100.00% 100.00% Ségécé Magyarorszag Hungary Budapest FC 100.00% 100.00% 100.00% 100.00% Ségécé Hellas Greece Athens FC 100.00% 100.00% 100.00% 100.00% Ségécé Polska Poland Warsaw FC 100.00% 100.00% 100.00% 100.00% Ségécé Slovensko Slovakia Bratislava FC 100.00% 100.00% 100.00% 100.00%
- 30 - Semi-annual Report, June 2008
Methods COMPANIES June % interest % holding 2008 (1)
SIREN no. Head office June 2008 December 2007 June 2008 December 2007 Deconsolidated companies
SA Delcis Cr Czech Republic Prague NC 0.00% 100.00% 0.00% 100.00% SA Devimo Consult Belgium Brussels NC 0.00% 35.00% 0.00% 35.00% SNC Klégestion 398 058 149 Paris NC 0.00% 100.00% 0.00% 100.00% SNC Ségécé Loisirs et Transactions 421 220 252 Paris NC 0.00% 100.00% 0.00% 100.00% SAS Poitiers Aliénor 410 245 757 Paris NC 0.00% 100.00% 0.00% 100.00% SNC CAP NORD 332 024 926 Lille NC 0.00% 84.11% 0.00% 100.00% Gie Klépierre Services 435 194 725 Paris NC 0.00% 100.00% 0.00% 100.00%
(1) FC: Full consolidation PC: Proportional consolidation EM: Equity method consolidation NC: Deconsolidated during the period
(2) Including treasury shares
Equity interests in subsidiaries
The Group consolidated 196 companies as of June 30, 2008, against 195 on December 31, 2007.
3 French companies are fully consolidated.
o Edamarzy, which owns land in Nervers, acquired by Kléprojet 1. The 0.9 million euros of goodwill on acquisition was recognized as property assets.
o Immo Dauland, acquired by Klémurs for a property development at Chalon sur Saône. The 4.2 million euros of goodwill on acquisition was recognized as property assets.
o Carré Jaude 2, a 100% owned subsidiary of Clermont Jaude was created to manage the construction works required to extend the Centre Jaude mall in Clermont-Ferrand.
Acquisition of the Italian company Clivia, which owns the Verona and Lonato malls.
Under an agreement signed with the Italian group Finiper on February 20, 2008, Klépierre Luxembourg has acquired 50% of Verona and Lonato by subscribing to a capital increase in their holding company Clivia. Reserved exclusively for the buyer, this increase resulted in a 50% dilution of Finiper group equity.
The funds injected by Klépierre Luxembourg will enable Clivia to purchase the Vittuone mall (now under construction in Milan) in 2009.
Clivia is proportionately consolidated. The 17.5 million euros of goodwill on acquisition is recognized as property assets.
Foundation of 2 Italian companies as part of the transaction to incorporate Italian assets into the K2 fund.
o K2
On May 29, 2008, the Italian K2 fund received the malls owned by the 3 Italian companies Magnolia, ICD and Novate in exchange for an equity share.
- 31 - Semi-annual Report, June 2008
Prior to this incorporation of assets, the Klépierre group increased its holding in Magnolia, ICD and Novate to 100% with the acquisition of the Finim group’s 15% share in all three companies.
On June 10, 2008, Finim reconstituted its minority interests in these Italian assets by acquiring 15% of K2 equity from Klépierre Luxembourg and Novate. As of June 30, 2008, the equity profile of the fund was as follows:
- Klépierre Luxembourg: 54.96% - Novate: 18.09% - Finim: 15% - ICD: 8.57% - Magnolia: 3.38%
o Klépierre Matera
Created in May 2008 as a 100% owned subsidiary of Novate, this company will take control of the Matera mall, initially owned by Novate, but, unlike the other Novate malls (Cienneo and Vignate), it wiil not be incorporated into the K2 fund.
Full consolidation of the company Kléaveiro in Portugal
The limited liability company Kléaveiro was created in January 2008 for the purpose of acquiring the Aveiro center.
Full consolidation of the company Klépierre Trading in Hungary.
Created in 2007 as a 100% owned subsidiary of Klépierre, Klépierre Trading bills the electricity supplied by the Hungarian shopping centers to their tenants.
Acquisition of IPECI Gestion, followed by merger with Ségécé.
In April 2008, Ségécé acquired 100% of the equity of IPECI Gestion, the management company of the Progest group. IPECI was absorbed by Ségécé on June 30, 2008. The goodwill released on acquisition of the shares is recognized as goodwill valued at 1.6 million euros.
7 companies are no longer consolidated as a result of mergers, universal transfers of assets and liabilities and disposals:
o Klégestion, Klépierre Services and Ségécé Loisirs et Transactions were absorbed by Ségécé
o Poitiers Alienor was absorbed by Klépierre
o Cap Nord was absorbed by Klecapnor
o Delcis was absorbed by Klépierre Cz with retrospective effect from July 1, 2007
o Ségécé disposed of its entire holding (35%) in Devimo Consult to a buyer outside the group
- 32 - Semi-annual Report, June 2008
The Group increased its percentage of interest in 4 companies:
o 67.5% in SC Roche Invest, resulting in a change of consolidation method from the equity method to full consolidation. The 1.2 million euros of goodwill on acquisition is recognized as property assets. A free revaluation of 1.9 million euros was first recorded in order to adjust the value of the initial investment;
o 100% in Effe Kappa. Consolidated proportionally on December 31, 2007, the company was fully consolidated on June 30, 2008;
o 13% in Belvedère Invest, with the acquisition of IPECI Gestion;
o 6.49% in SCI du Plateau, with the acquisition of IPECI Gestion and a direct purchase by Kléber La Pérouse.
The contribution of entities acquired during the year to main line items in the financial statements, which have a material impact on Group accounts, is analyzed as follows: in thousands of euros net investment indebtedness operating intangible fixed tangible fixed property and Entity Country Acquisition date lease income net earnings net fixed assets including income/loss assets assets fixed assets in bank progress overdrafts
Spa Clivia Italy February-08 2 533 1 405 439 1 862 279 139 746 141 887 80 713 SARL Edarmarzy France June-08 2 605 2 605 4 SARL Immo Dauland France June-08 7 468 7 468 2 710 TOTAL 2 533 1 405 439 1 862 279 149 819 151 960 83 427
In addition, the purchase prices and amounts paid to acquire equity shares as of June 30, 2008 were:
Amount paid for Amount paid for Purchase price of buyback of current Cash position on the the acquisition in securities accounts in June acquisition date June 2008 in thousands of euros 2008
Spa Clivia 97 839 96 289 - 22 395 SARL Edarmarzy 716 716 - - SARL Immo Dauland 4 190 3 990 - 294
- 33 - Semi-annual Report, June 2008
4. Notes to the financial statements: Balance sheet
4.1. Non-allocated goodwill
Acquisitions, new Reduction by Other June 30, December 31, June 30, businesses and disposals, retirement movements, 2007 2007 2008 in thousands of euros contributions of assets reclassification * Metropoli 913 913 913 * Vignate 520 520 520 * Galeria Parque Nascente 1 713 1 713 1 713 * Ségécé Espana 11 977 11 977 11 977 * Ségécé 9 111 52 375 52 375 * Ségécé Magyarorszag 3 176 3 389 3 389 * Scoo 814 814 814 * ICD (Brescia) 909 909 909 * IGC 3 209 3 209 3 209 * Ségécé Italia 8 150 8 150 8 150 * Effe Kappa - 274 274 * Other goodwill 688 684 684
NET GOODWILL 41 180 84 653 274 0 0 84 927
4.2. Intangible assets
The main item of intangible assets is software, which is straight-line amortized over periods of 1 to 4 years.
Reduction by Acquisitions, new Changes in June 30, December 31, disposals, Allowances Currency Other movements, June 30, businesses and consolidation 2007 2007 retirement of for the period fluctuations reclassification 2008 contributions scope in thousands of euros assets Leasehold 460 461 - 2 1 460 Business concerns 1 933 701 3 759 738 811 6 009 Software 11 289 11 753 123 - 3 806 26 48 - 1 351 6 793 Other intangible assets 5 464 6 087 1 135 - 291 - 221 293 138 1 215 8 356
Total gross value 19 145 19 001 1 256 -4 097 -221 4 078 924 676 21 617 Leasehold - 11 - - Business concerns - 99 - - 170 - 401 - 739 - 426 - 1 736 Software - 9 172 - 9 432 4 058 - 645 - 25 - 37 72 - 6 009 Other intangible assets - 2 366 - 2 300 - 32 - 20 - 15 - 2 367
Total amortizations -11 648 -11 732 0 4 058 -847 -426 -796 - 369 - 10 112
INTANGIBLE ASSETS - NET VALUE 7 497 7 269 1 256 -39 -1 068 3 652 128 307 11 504
4.3. Tangible assets
Tangible assets include two buildings operated by the Group: 21, rue La Pérouse and Espace Dumont D’Urville in Paris, together with the fixtures and fittings required for operation.
- 34 - Semi-annual Report, June 2008
Reduction by Acquisitions, new Changes in Other June 30, December 31, disposals, Allowances for Currency June 30, businesses and consolidation movements, 2007 2007 retirement of the period fluctuations 2008 contributions scope reclassification in thousands of euros assets Land 23 030 23 030 23 030 Constructions and fixtures 17 683 17 683 17 683 Furniture and equipment 8 252 9 186 549 - 546 424 452 707 10 772 Gross total value 48 965 49 899 549 - 546 - 424 452 707 51 485 Constructions and fixtures - 2 984 - 3 319 - 330 - 3 649 Furniture and equipment - 5 213 - 5 240 520 - 1 683 - 179 - 150 - 19 - 6 751 Total amortizations- 8 197 - 8 559 - 520 - 2 013 - 179 - 150 - 19 - 10 400
Provision for impairment -
TANGIBLE ASSETS - NET VALUE 40 768 41 340 549 -26 -2 013 245 302 688 41 086
.
4.4. Investment property and fixed assets in progress
Reduction by Amortization Acquisitions, new Changes in Other June 30, December 31, disposals, allowance and Currency June 30, businesses and consolidation movements, 2007 2007 retirement of changes in fluctuations 2008 contributions scope reclassification in thousands of euros assets provisions Land 3 094 454 3 332 481 86 327 - 419 15 750 74 064 - 58 950 3 449 253 Constructions and fixtures 3 598 115 3 969 548 92 320 - 206 - 213 59 668 69 952 - 57 984 4 133 085 Gross total value 6 692 569 7 302 029 178 647 - 625 - 213 75 418 144 016 - 116 934 7 582 338 Constructions and fixtures - 514 004 - 606 304 2 059 - 81 113 - 7 300 17 120 - 675 538 Total amortizations - 514 004 - 606 304 - 2 059 - 81 113 - 7 300 - 17 120 - 675 538
Provision for impairment - 13 903 - 25 635 - 23 346 - 1 140 821 - 49 300 INVESTMENT PROPERTY - NET 6 164 662 6 670 090 178 647 1 434 -104 672 66 978 144 016 -98 993 6 857 500 VALUE
Excluding the investments in progress, investments for the half year totaled 178.6 million euros. In France, the largest transaction completed in the first half of 2008 was done by Klémurs in its 154 million euro acquisition of 77 shops under its partnership with the Defimode chain and the Vivarte group, 14 retail assets in Avranches, Messac and Rochefort and 15 Buffalo Grill restaurants.
Other increases in France during this period included the acquisition of a 25% share in the Galerie Nationale in Tours (10.4 million euros), Nevers (4 million euros) and premises in Cholet (2.8 million euros).
Outside of France, the most significant investments were made in Italy at Pescara (2.8 million euros), Val Vibrata (1.5 million euros) and in Hungary with the extension of the Kaspovar center (1.7 million euros).
At 144 million euros, “Changes in consolidation scope” result from the following transactions: Clivia (139.8 million euros) and Immo Dauland (4.1 million euros).
At 116.9 million euros, “Other movements and reclassifications” includes essentially the reclassification of buildings under negotiation to the “Buildings held for sale” items (71 million euros), assets commissioned during the period, reclassified from “Fixed assets in progress” (18 million euros) and miscellaneous other movements between balance sheet items. “Provision for impairment” includes property provisions in respect of shopping centers in Poland (31.4 million euros), the Czech Republic (9.8 million euros), Italy (1.9 million euros), Spain (2.9 million euros), Greece (1 million euros), Portugal (1.2 million euros) and France (1.1 million euros).
Reduction by Acquisitions, new Amortization Changes in Other June 30, December 31, disposals, Currency June 30, businesses and allowance and consolidation movements, 2007 2007 retirement of fluctuations 2008 contributions provisions scope reclassification in thousands of euros assets
FIXED ASSETS IN PROGRESS 322 340 463 983 183 651 -33 13 996 6 206 9 277 677 080
The following factors contributed to the increase in fixed assets in progress as a result of ongoing constructions managed by the Group or delegated to third parties under Property Development Contracts (PDC):
- 35 - Semi-annual Report, June 2008
In France: the Séreinis office building (9.8 million euros), Odysseum in Montpellier (17.3 million euros), Saint Orens (16.7 million euros), Val d’Europe (13.9 million euros), Cesson (9.2 million euros), Grand Nîmes (9.1million euros), La Roche-sur-Yon (6.5 million euros), Laon (5.9 million euros), Centre Jaude in Clermont Ferrand (5.6 million euros), Aubervilliers Bassin Nord (3.6 million euros), Rennes Columbia (3 million euros), Vitrolles (2.9 million euros), Vaulx-en-Velin (2.7 million euros), Cap Saran (2.5 million euros), Galerie nationale in Tours (1.9 million euros), Villejuif (1.3 million euros), Blagnac (1.1 million euros) and Centre Bourse in Marseille (1.1 million euros).
Newly consolidated companies during the period also contributed to fixed assets in progress: Edamarzy (2.5million euros) amd Immo Dauland (3.3 million euros).
Outside France: The Alba and Corvin centers in Hungary (22.9 and 12 million euros respectively), Seriate in Italy (3.6 million euros) and Vallecas in Spain (2.1 million euros). As of June 30, 2007, the net carrying amount of investment property by business segment and geographic area was analyzed as follows:
Net carrying value of in thousands of euros investment property Shopping centers 5 758 946 France 2 805 440 Italy 1 014 036 Spain 725 663 Poland 394 615 Hungary 286 721 Belgium 151 108 Portugal 245 966 Czech Republic 49 797 Greece 69 742 Other 15 858 Shops 529 474 Office buildings 569 080 Total 6 857 500
4.5. Properties held for sale
Reduction by Acquisitions, new June 30, December 31, disposals, Other movements, June 30, businesses and 2007 2007 retirement of reclassification 2008 contributions in thousands of euros assets
BUILDINGS HELD FOR SALE 22 444 36 200 -17 680 70 568 89 088
The “Other movements” item refers to the reclassification of buildings where a sale has been agreed (the Bordeaux Saint Christoly mall and the building in the Rue Notre Dame des Victoires, Paris) or buildings held for sale (2 small French centers) offset by the reclassification of the Hungarian Zalaegerszeg and Csepel malls investment property.
The “reduction” refers to the disposal of the Courier mall in Annecy.
- 36 - Semi-annual Report, June 2008
4.6. Equity method securities
in thousands of euros Investments in companies accounted for by the equity method at June 30, 2007 44 320
Investments in companies accounted for by the equity method at December 31, 2007 46 600
% of earnings from companies accounted for by the equity method for 2008 466 Dividends received from companies accounted for by the equity method - 1 830 Other movements . Sale of Devimo Consult - 2 652 . Increased holding in SC Plateau 1 843 . Other movements - 401
Investments in companies accounted for by the equity method at June 30, 2008 44 026
As of June 30, 2008, 14 group companies were consolidated under the equity method, against 15 on December 31, 2007.
4.7. Non-consolidated securities
Joint companies are proportionally consolidated.
June 30, December 31, June 30, in thousands of euros 2008 2007 2007
Share in the balance sheet of associate companies Current assets 51 310 7 554 19 945 Non-current assets 271 683 193 189 227 449
Total assets 322 993 200 743 247 394 Current liabilities 144 363 112 186 152 381 Non-current liabilities 178 630 88 557 95 013
Total liabilities 322 993 200 743 247 394
Share in the earnings of associate companies Income from regular business 15 199 23 840 14 082 Operating expenses - 5 120 - 10 602 - 5 969 Financial result - 3 081 - 5 012 - 3 376 Pre-tax earnings 6 998 8 228 4 740 Corporate income tax - 1 823 3 275 - 1 662
Net income 5 175 11 503 3 078
- 37 - Semi-annual Report, June 2008
4.8. Financial assets
The “Financial assets” item contains the following securities:
June 30, 2008 December 31, 2007 June 30, 2007 Earnings Earnings for Gross value Net value of Gross value Net value of Equity % holding Equity for the % holding Net value of shares the period of shares shares of shares shares in thousands of euros period Principle securities 1 451 315 1 650 475 1 140 SAS Sovaly 198 - 22 100% 572 220 268 - 48 100% 572 220 309 SARL Klépierre Trading 179 - 19 100% 199 160 199 SAS Socoseine 74 - 25% 99 19 80 - 6 100% 99 19 SAS Nancy Bonsecours 69 - 7 100% 535 76 76 - 18 100% 535 76 95 SKF Spa 3 - 2 50% 245 - SVILUPPO KLEPIERRE FINIM - - 50% 245 - SNC Immo Basse 177 SARL Ollioules Restauration 100 HSC 200 SARL Vigne 60
Other investment securities 30 9 58 37 132 Total 1 481 324 1 708 512 1 272
4.9. Other non-current assets
The main items included in “Other non-current assets” are advances and loans granted to non-consolidated, equity-method and proportionally consolidated companies.
The residual value of the leased building (Lille) is treated as a finance-lease transaction recognized in non- current receivables.
Entries into June 30, December 31, June 30, scope of Increases Reductions Other 2007 2007 2008 in thousands of euros consolidation Finance lease fixed assets 1 795 1 679 - 122 1 557 Advance payments to non-consolidated companies and companies consolidated 14 147 21 649 - 8 443 - 2 093 - 12 754 15 245 using the equity method or proportionally (A) Loans 124 357 - 17 18 358 Other long-term investments - - - Security deposits 9 140 9 100 23 2 115 - 1 055 36 10 219 Other long-term financial investments 40 1 062 4 - 4 1 062
TOTAL 25 246 33 846 23 10 562 -3 165 -12 826 28 440
- 38 - Semi-annual Report, June 2008
(A) Itemized statement of advance payments:
Entries into June 30, December 31, June 30, scope of Increases Reductions Other 2007 2007 2008 in thousands of euros consolidation SCI du Bassin Nord 4 024 2 229 7 564 - 36 9 829 SA Soaval 1 554 - - SAS Bègles d'Arcins 627 627 SCI La Roche Invest 12 838 - 12 838 - SCI Plateau des Haies 572 572 SARL Forving 936 936 SCI La Rive 319 319 Gondobrico SA 435 435 Other advance payments 8 569 4 128 879 - 2 093 - 387 2 527
Total 14 147 21 649 0 8 443 -2 093 -12 754 15 245
4.10. Inventories
As of June 30, 2008, inventories were comprised of lots acquired under the “real estate agent” status.
June 30, December 31, June 30, in thousands of euros 2008 2007 2007
Group share 11 580 11 684 5 425 Share of external associates - -
Total 11 580 11 684 5 425
4.11. Trade accounts and related receivables
Trade accounts include the effect of spreading the benefits granted to the tenants of offices and shopping centers.
in thousands of Rental Other June 30, December 31, June 30, euros activities activities 2008 2007 2007
Receivables 64 524 22 387 86 911 67 827 59 939 Provisions - 10 314 - 1 326 - 11 640 - 10 540 - 8 008
Total 54 210 21 061 75 271 57 287 51 931
- 39 - Semi-annual Report, June 2008
4.12. Other receivables
June 30, December 31, June 30, 2008 2007 2007 in thousands of euros
Tax receivables 63 398 49 645 57 053 - Corporate income tax 7 365 8 622 3 586 - V.A.T. 56 033 41 023 53 467
Other debtors 217 943 166 043 166 343 - Calls for funds 96 768 78 828 75 870 - Down payments to suppliers 10 855 4 234 3 078 - Other deferred charges - - - Prepaid expenses 89 458 66 067 68 741 - Other 20 862 16 914 18 654
Total 281 341 215 688 223 396
June 2008 by due date June 30, Less than More than in thousands of euros 2008 one year one year
Tax receivables 63 398 63 398 0 - Corporate income tax 7 365 7 365 - V.A.T. 56 033 56 033
Other debtors 217 943 173 926 44 017 - Calls for funds 96 768 96 768 - - Down payments to suppliers 10 855 10 855 - - Other deferred charges - - - - Prepaid expenses 89 458 45 441 44 017 - Other 20 862 20 862 -
Total 281 341 237 324 44 017
The VAT item consists mainly of pending refunds from local tax authorities in respect of recent acquisitions (or construction projects in progress): Bassin Nord Aubervilliers (5.3 million euros), Alba (4.2 million euros), Saint- Orens (2.3 million euros), Assago (7.8million euros), Tor Vergata (8.3million euros) and La Roche Invest (3.1 million euros).
The main pre-lease payments received under construction leases or long-term lease rights are recognized as prepaid expenses and amortized over the term of the lease agreement in accordance with benefits received: Val d’Europe (16.2 million euros), 6 Klécar France malls (19.5 million euros) and Oviedo (10.1 million euros).
- 40 - Semi-annual Report, June 2008
4.13. Cash and near cash
June 30, December 31, June 30, in thousands of euros 2008 2007 2007
Near cash 120 108 56 504 51 980 - Treasury bills and certificates of deposit 17 809 6 804 8 280 - Other fixed revenue securities - - Money market investments 102 299 49 700 43 700 Cash 171 304 138 972 149 563
Total 291 412 195 476 201 543
Near cash refers to French money market open-end and mutual funds (SICAV-FCP) (102.3 million euros), Italian one-month deposit certificates (8.9 million euros) and Spanish one-week treasury bills (8.9 million euros).
The Group reported a net cash of:
June 30, December 31, June 30, in thousands of euros 2008 2007 2007 Near cash 120 108 56 504 51 980 Cash 171 304 138 972 149 563 Gross cash and near cash 291 412 195 476 201 543 Bank overdrafts 218 662 101 909 142 625 Net cash and near cash 72 750 93 567 58 918
4.14. Equity
Share capital:
As of June 30, 2008, capital was represented by 142,469,513 shares each of 1.40 euros nominal value. The share capital is fully paid , and shares are either registered or bearer.
June 30, December 31, June 30, 2008 2007 2007 Authorized ordinary shares of 1.4 euros* 142 469 513 138 492 687 46 164 229 refundable convertible preferential shares NA NA NA
Total 142 469 513 138 492 687 46 164 229
* The nominal value of 1.40 euros at June 30, 2008 is identical to that at December 31, 2007
Treasury shares:
The Group acquired shares in Klépierre S.A. as authorized by the ordinary general meeting of shareholders.
- 41 - Semi-annual Report, June 2008
As of June 30, 2008, treasury shares totaled 2,976,490 with an acquisition value of 95.5 million euros (compared to 2,990,463 shares on December 31, 2007).
As of June 30, 2008, the capital gains or losses made on sales of treasury shares were recognized under equity at 0.8 million euros, compared to 0.3 million euros on December 31, 2007 and 0.7 million euros on June 30, 2007. The cost of acquiring shares and the revenue from share sales were respectively debited from, and credited to, equity.
4.15. Current and non-current financial liabilities
Change in indebtedness Current and non-current financial liabilities totaled 5,264.4 million euros as of June 30, 2008.
Net financial debt totaled 4,992 million euros, compared to 4,652 million euros on December 31, 2007. Net financial debt is the difference between financial liabilities (excluding Fair Value Hedge revaluation) and cash and near cash.
This increase of 340 million euros results principally from investment flows (539.1 million euros) and dividend pay outs (37.6 million euros), partially offset by disposals (42.9 million euros) and free cash flow for the half- year.
June 30, December 31, June 30, in thousands of euros 2008 2007 2007
NON-CURRENT Bond issues net costs/premiums 1 870 859 1 880 378 1 872 287 *of which reevaluation of Fair Value Hedges - 18 578 - 7 701 - 14 418 Borrowings and debts from credit institutions over 1 year 2 680 381 2 362 682 1 833 145 Italy loan reclassification Sundry loans and financial debts 158 102 157 760 143 905 * Other loans * Advance payments to the group and associates 158 102 157 760 143 905
Total non-current financial liabilities 4 709 342 4 400 820 3 849 337
CURRENT Borrowings and debts from credit institutions under 1 year 37 144 44 632 37 401 Accrued interests 79 882 66 943 79 393 * on bond issues 71 315 54 263 71 251 * on loans from credit institutions 4 414 4 445 4 368 * on advance payments to the group and associates 4 153 8 235 3 774 Bank overdrafts 218 662 101 909 142 437 Commercial paper 215 000 220 000 185 000 Sundry loans and financial debts 4 360 5 711 2 487 * Other loans - - * Advance payments to the group and associates 4 360 5 711 2 487
Total current financial liabilities 555 048 439 195 446 718
- 42 - Semi-annual Report, June 2008
Principal sources of finance
As of June 30, 2008, the main sources of finance available to the Group were as follows:
the table below contains details of the three bond issues set up in 2001 (maturity 2008), 2004 (maturity 2011), and 2006 (maturity 2016). At June 30, 2008, Klépierre had total outstanding bonds of 1,900 million euros; Arrangement of a syndicated loan in January 2006: . As of June 30, 2008, 1,050 million euros of the 1,200 million euro medium-term facility had been used. It matures on January 31, 2013 . The commercial paper back-up line (300 million euros) had not been used as of June 30, 2008 A syndicated loan of up to 1,000 million euros set up in September 2007 is still unused as of June 30, 2008; A syndicated loan of up to 750 million euros set up in June 2008 and fully used as of June 30, 2008; A credit facility of 150 million euros set up in December 2006 by Klémurs and fully used as of June 30, 2008; A bilateral loan of 135 million euros set up in 2004 by Klépierre; A bilateral loan of 165 million euros set up in 2004 by Klépierre Participations et Financements; Borrowings on the Italian subsidiaries (mainly Klecar Italia: 112 million euros); 215 million euros in commercial papers.
- 43 - Semi-annual Report, June 2008
Financing % holding / Reference Maximum Repayment Amount Borrower Maturity date (in millions of euros) Klépierre rate amount profile used
Bond issues Klépierre 100% 6.125% 10/07/2008 600 in fine 600 Klépierre 100% 4.625% 15/07/2011 600 in fine 600 Klépierre 100% 4.250% 16/03/2016 700 in fine 700 Borrowings from credit institutions
Klépierre (Tranche A: back-up line) 100% Euribor 31/01/2013 300 in fine - Klépierre (Tranche B) 100% Euribor 31/01/2013 1200 in fine 1050 Syndicated loans Klépierre 100% Euribor 21/09/2014 1000 in fine - Klépierre 100% Euribor 11/06/2011 750 in fine 750 Klémurs 84% Euribor 12/12/2011 150 in fine 150 Klépierre 100% Fixed rate 22/03/2010 135 in fine 135 Bilateral loans Klépierre Part. & Fints 100% Fixed rate 22/03/2010 165 in fine 165 Restorens 100% E3m 21/10/2011 0.5 in fine 1 Klecar Italia 83% E3m 30/06/2015 112 amortizable 112 Novate 85% E3m 15/01/2023 36 amortizable 35 ICD 85% E6m 15/01/2023 18 amortizable 18 Magnolia 85% E3m 15/01/2023 7 amortizable 7 Hypernoble 100% E3m 14/12/2011 1 amortizable 1 Hypernoble 100% E3m 02/01/2012 1 amortizable 1 Mortgages Sodirev 100% E3m 05/02/2012 3 amortizable 3 Sodirev 100% E3m 05/04/2010 1 amortizable 1 LC 33% E3m 02/01/2012 0 amortizable 0 LC 33% Fixed rate 05/09/2018 1 amortizable 1 Rebecca 70% E3m 30/07/2014 3 amortizable 3 Rebecca 70% E3m 31/07/2015 1 amortizable 1 IGC 50% E3m 01/08/2011 4 amortizable 4 IGC 50% E3m 31/07/2011 6 amortizable 6 IGC 50% E3m 24/07/2011 6 amortizable 6 IGC 50% E3m 12/03/2022 16 amortizable 16 Finance lease Cecoville 100% E3m 27/12/2019 47 amortizable 47 agreements Cecoville 2020 100% E3m 03/04/2020 69 amortizable 69 Clivia 50% E3m 02/07/2022 82 amortizable 82 Kleprojet 1 100% E3m 13/12/2013 0 amortizable 0 81% E3m Klémurs & Klecapnord 84% (1) 56 amortizable 56 19% fixed Short-term line IGC 50% E3m 13/12/2007 7in fine 7 Overdrafts Klépierre Finance 100% Eonia - 105 105 Klépierre 100% Eonia - 23 23 Commercial paper Klépierre 100% - - 300 in fine 215
TOTALS(2) 6 204 4 969
(1) Klémurs contracts (Buffalo Grill assets) and its Cap Nord subsidiary; average residual lenth of 6.4 years at June 30, 2008(3.1 years taking into account the dates of early exercise of options) (2) totals are calculated without the back-up line, since the maximum amount of the "commercial paper" line is the same figure as the total amount of the back-up line
Interest on variable-rate financial instruments is revalued at six monthly intervals or more frequently. Interest on fixed-rate financial instruments is fixed until the maturity date of the instrument concerned.
Financial covenants relating to finance and rating
On January 8, 2008, Standard & Poor’s confirmed Klépierre’s rating of BBB+ and maintained the “positive” outlook rating. The ratings agency then defined the following goals for Klépierre to achieve in order to retain its rating: . EBITDA / Total net financial costs ≥ 2.5
- 44 - Semi-annual Report, June 2008
. Net debt/Revalued net assets (loan to value) ≤ 50% . Gross cash flow/Net debt ≥ 7%.
Klépierre’s main credit agreements also include the following clauses. Failure to comply with these clauses could result in demands for early refund of the relevant finance. In respect of the syndicated and bilateral loans of Klépierre and Klépierre Participations et Financements: . EBITDA / Net financial costs ≥ 2.5 . Secured financial debt/ Revalued net assets ≤ 20%; . Net debt/Revalued net assets (loan to value) ≤ 52% ; . Revalued asset group share ≥ 5 billion euros For bond issues: . Asset-backed debts pledged as guarantees to third parties capped at 50% of the revalued net asset . In the event of a change of ownership regarding one third of the voting rights leading to the Standard and Poor’s rating being reduced to below BBB-, investors have a put option that can force Klépierre to an early refund.
Breakdown of financial debts by maturity date
− Breakdown of current and non-current financial liabilities:
Less than 1 More than 5 Total 1-5 years in thousands of euros year years
NON-CURRENT Bond issues net costs/premiums 1 870 859 - 18 578 1 889 437 *of which reevaluation of Fair Value Hedges - 18 578 - 18 578 - - Borrowings and debts from credit institutions over 1 year 2 680 381 2 385 515 294 866 Italy loan reclassification 158 102 - - 158 102 Sundry loans and financial debts - - - - * Other loans 158 102 - 158 102 * Advance payments to the group and associates Total non-current financial liabilities 4 709 342 -18 578 4 274 952 452 968
CURRENT Borrowings and debts from credit institutions under 1 year 37 144 37 144 - - Accrued interests 79 882 79 882 - - * on bond issues 71 315 71 315 - - * on loans from credit institutions 4 414 4 414 - - * on advance payments to the group and associates 4 153 4 153 - - Bank overdrafts 218 662 218 662 - - Commercial paper 215 000 215 000 - - Other - - Sundry loans and financial debts 4 360 4 360 - - * Other loans - - - - * Advance payments to the group and associates 4 360 4 360 - -
Total current financial liabilities 555 048 555 048 - -
- 45 - Semi-annual Report, June 2008
− Financing amortization table (in millions of euros): Repayment year 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2017+ TOTAL 2008 bond issues 600------600 2011 bond issues ---600------600 2016 bond issues ------700-700 2006 syndicated loans -----1050----1050 2007 syndicated loans ------0 2008 syndicated loans ---750------750 Klémurs bank loan ---150------150 Klépierre bilateral loan --135------135 Klépierre Part & Fints bilateral loan --165------165 Klémurs & Klecapnord finance leases 51955444336 56 Subsidiary loans 20 27 27 31 24 24 24 112 22 108 419 Commercial paper 215------215 Overdrafts 128------128 TOTAL 968 46 332 1 536 28 1 078 28 115 725 113 4 969
Contractual flows including principal and interest (not discounted) by maturity date (in millions of euros) are as follows:
Repayment year 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2017+ TOTAL 2008 bond issues 601------601 2011 bond issues 14 28 28 615 ------684 2016 bond issues 15 30 30 30 30 30 30 30 706 - 929 2006 syndicated loans 28 56 56 56 56 1 055 - - - - 1 305 2007 syndicated loans ------2008 syndicated loans 22 44 44 769 ------879 Klémurs bank loan 488158------178 Klépierre bilateral loan 25136------143 Klépierre Part & Fints bilateral loan 36166------175 Klémurs & Klecapnord finance leases 72176554436 68 Subsidiary loans 31 49 48 50 41 40 39 123 29 111 562 Commercial paper 219------219 Overdrafts 128------128 TOTAL 1 074 246 522 1 684 131 1 129 73 156 738 117 5 871
As of June 30, 2007, the amortization table of these contractual flows was as follows (in millions of euros):
Repayment year 2 007 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2017+ TOTAL 2008 bond issues 37619------656 2011 bond issues 28282828615------727 2016 bond issues 30 30 30 30 30 30 30 30 30 706 - 974 2006 syndicated loans 35 35 35 35 35 35 954 - - - - 1164 2007 syndicated loans ------0 Klémurs bank loan 6666149 ------173 Klépierre bilateral loan 555135------150 Klépierre Part & Fints bilateral loan666166------184 Klémurs & Klecapnord finance 912205432211- 59 leases Subsidiary loans 47 27 44 54 21 12 11 9 94 3 1 323 Commercial paper 90------90 Overdrafts 32------32 TOTAL 325 768 174 459 854 80 997 41 125 710 1 4 532 Calculations based on interest rates at December 31, 2006
4.16. Interest rate hedging instruments
Rate hedging portfolio
As part of its risk management policy (cf. corresponding section), Klépierre has contracted interest rate swap agreements allowing it to switch from variable rate to fixed rate debt and vice-versa. This arrangement meant that the Klépierre hedge rate (the proportion of gross financial debt arranged or hedged at fixed rate) was 85% as of June 30, 2008.
- 46 - Semi-annual Report, June 2008
As of June 30, 2008, the Group had the following swap contracts in place: CASHFLOW HEDGING RELATIONSHIPS Fixed rate paying agent Amount (€M) Maturity date Forward start date Klépierre 100 22/12/2008 no Klépierre 300 22/12/2009 no Klépierre 200 22/12/2010 no Klépierre 500 22/12/2011 no Klépierre 300 15/04/2012 no Klépierre 150 02/01/2015 no Klépierre 100 02/01/2013 no Klépierre 200 01/02/2015 no Klépierre 100 07/02/2015 no Klépierre 100 12/03/2016 no Klépierre 100 12/03/2018 no Klépierre 200 10/07/2011 10/07/2008 Klépierre 100 02/01/2011 02/01/2009 Klépierre 100 10/07/2013 10/07/2008 Klépierre 300 10/072015 10/07/2008 Klecar Italia 90 31/12/2010 no Klémurs 50 01/01/2014 no Klémurs 50 31/12/2014 no Klémurs 150 02/01/2015 no Klémurs 100 01/04/2015 no FAIR VALUE HEDGE RELATIONSHIPS Variable rate paying agent Amount (€M) Maturity date Forward start date Klépierre 600 15/07/2011 no
The Italian company IGC (50%) also contracted an amortizable tunnel (maturity date August 2009), whose notional amount as of June 30, 2008 was 3.7 million euros, recognized as a trading instrument (change in value recognized in income).
Breakdown by maturity date
As of June 30, 2008, the breakdown of derivatives by maturity date was as follows:
in millions of euros Hedging relationship 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Klépierre fixed rate paying agent Cash flow hedge 100 300 200 800 300 200 - 750 100 - 100 2850 . Of which spot start swaps 100 300 200 500 300 100 - 450 100 - 100 2150 . Of which forward start swaps - - - 300 - 100 - 300 - - - 700 Klépierre variable rate paying agent Fair value hedge - - - 600 ------600 Klecar Italia fixed rate paying agent Cash flow hedge --90 ------90 Klémurs fixed rate paying agent Cash flow hedge ------100 250 - - - 350 . Of which spot start swaps ------100250- --350 . Of which forward start swaps ------IGC (collar) Trading -3.7------4 Total 100 304 290 1400 300 200 100 1000 100 - 100 3894 The corresponding contractual flows (interest) break down as follows (positive flows = payer flows):
in millions of euros Hedging relationship 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Spot start swaps Cash flow hedge -18 -35 -29 -25.0 -13 -9 -8 -2 -1 -1 - -141 Forward start swaps Cash flow hedge -1-6-6-4.0-4-5-4-2- - --32 Spot start swaps Fair value hedge 3664.0 ------19 Collar Trading ------Total -16 -35 -29 -25 -17 -14 -12 -4 -1 -1 - -154
As of June 30, 2007, the breakdown of derivatives by maturity date and the amortization schedule for the corresponding interest flows were as follows (in millions of euros):
- 47 - Semi-annual Report, June 2008
in millions of euros Hedging relationship 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Klépierre fixed rate paying agent Cash flow hedge - 100 300 200 500 300 - - 300 - 1700 . Of which spot start swaps - 100 300 200 500 300 - - - - 1400 . Of which forward start swaps (July 2008) ------300 - 300 Klépierre variable rate paying agent Fair value hedge - - - -600 -- - - -600 Klecar Italia fixed rate paying agent Cash flow hedge - - - 90 ------90 Klémurs fixed rate paying agent Cash flow hedge ------100 - - 100 . Of which spot start swaps ------50--50 . Of which forward start swaps (Jan and Dec 2007) ------50--50 IGC (collar) Trading --4------4 Total - 100 304 290 1100 300 - 100 300 - 2494
in millions of euros Hedging relationship 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Spot start swaps Cash flow hedge -9 -9 -8 -6 -5 -1 - - - -38 Forward start swaps Cash flow hedge - - -1 -1 -1 -1 -1 - - -5 Spot start swaps Fair value hedge -2-2-1-1------6 Collar Trading ------Total -11 -11 -10 -8 -6 -2 -1 - - - -49 Calculated on the basis of interest rates at December 31, 2006
Fair value
As of June 30, 2008, the unrealized capital gain on the Klépierre portfolio of derivatives, calculated as the sum of their fair value excluding accrued interest, was 132.9 million euros. The full coupon fair value recognized on the assets side of the balance sheet is 157 million euros, with 1.8 million euros on the liabilities side.
During the half year, the fair value of the Klépierre portfolio of derivatives increased by 64.1 million euros.
Derivatives Fair value net of Fair value change as Counterparty accrued interest as of of June 30, 2008 (€M) June 30, 2008 (€M) Cash flow hedge 154.4 74.6 Shareholders’ equity Fair value hedge -21.5 -10.5 Financial laibilities Trading 0.0 0.0 Income/Loss Total 132.9 64.1
4.17. Long-term and short-term allowances
Allowances Reversals Reversals Changes in June 30, December 31, Other June 30, for the (provision (provision consolidation 2007 2007 movements 2008 in thousands of euros period used) unused) scope
NON-CURRENT Provisions for human resource commitments - . Defined-benefits scheme 4 465 4 799 480 - 5 279 . Post-employment medical assistance - - . Early retirement and EAP - - . Other long-term benefits 1 802 1 617 269 - 1 - 17 1 868 Other provisions for contingencies and losses 1 871 5 009 671 - 881 - 88 6 2 4 719 Total non-current provisions 8 138 11 425 1 420 -882 -105 6 2 11 866
4.18. Deferred taxes
- 48 - Semi-annual Report, June 2008
June 30, December 31, Change in Other June 30, in thousands of euros 2007 2007 earnings earnings 2008
Buildings - 185 629 - 202 722 11 848 15 940 - 174 934 Other items - 14 174 - 16 347 - 426 - 9 688 - 26 461 Total deferred tax liabilities -199 803 -219 069 11 422 6 252 -201 395
June 30, December 31, Change in Other June 30, in thousands of euros 2007 2007 earnings earnings 2008
Buildings - Other items 28 530 33 675 1 131 - 455 34 351 Total deferred tax assets 28 530 33 675 1 131 -455 34 351
NET POSITIONS -171 273 -185 394 12 553 5 797 -167 044
The “Other changes” item records the impact of changes in accounting scope, exchange rate fluctuations and the restatement of hedging instruments.
4.19. Tax liabilities, staff benefits and other payables
June 30, December 31, June 30, in thousands of euros 2008 2007 2007
Social and tax liabilities 88 734 79 589 57 352 Personnel and related accounts 14 662 15 138 14 060 Social security and other bodies 4 435 4 196 3 644 State * Corporate income tax 44 906 40 436 21 423 * V.A.T. 13 270 10 732 7 963 Other taxes and duties 11 461 9 087 10 262
Other liabilities 212 863 163 209 161 154 Creditor customers 89 207 69 561 71 384 Deferred income 16 058 13 135 7 005 Other liabilities 107 598 80 513 82 765
The 89.2 million euros in advance payments received from tenants in respect of charges are recognized in “Creditor customers”.
“Other liabilities” consist primarily of funds representing the management accounts of Ségécé group principals, balanced by an equal amount of cash on the asset side of the balance sheet. These funds totaled 68.7 million euros as of June 30, 2008.
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5. Notes to the financial statements: Income statement
5.1. Segment Income Statement as of June 30, 2008
Shopping centers
June 30, December 31, June 30, in millions of euros 2008 2007 2007
Lease income 284.4 517.9 249.2 Other rental income 4.2 6.9 2.5 Lease income 288.6 524.8 251.7 Land expenses (real estate) - 1.2 - 2.3 - 1.1 Non-recovered rental expenses - 8.9 - 16.1 - 3.7 Building expenses (owner) - 14.4 - 27.1 - 14.5 Net lease income 264.1 479.4 232.5
Management, administrative and related income 30.8 63.3 29.3 Other operating income 6.0 14.2 4.1 Survey and research costs - 1.4 - 1.1 - 0.6 Payroll expense - 33.0 - 56.6 - 28.9 Other general expenses - 8.9 - 20.1 - 9.1 Depreciation and amortization allowance on investment property - 94.4 - 150.2 - 67.3 Depreciation and amortization allowance on PPE - 2.0 - 3.3 - 1.3 Provisions - 0.2 - 3.3 1.0
Results of operations, shopping center segment 160.8 322.2 159.7 Gains on the sale of investment property and equity interests 79.4 21.4 Net book value of investment property and equity investment sold - 58.1 - 1.3 Gains from the sale of investment property and equity investment securities 21.3 20.1 -
Gains on the sale of short term assets 2.5 1.2 Net book value of short term assets sold - 2.2 - 1.1 Profit on the sale of short term assets 0.2 0.1 - Share in earnings of equity-method investees 0.5 2.6 1.1 Segment earnings, shopping center segment 183.0 345.0 160.8
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Shops
June 30, December 31, June 30, in millions of euros 2008 2007 2007
Lease income 15.1 23.5 11.4 Other rental income Lease income 15.1 23.5 11.4 Land expenses (real estate) Non-recovered rental expenses - 0.0 Building expenses (owner) - 0.4 - 0.8 - 0.3 Net lease income 14.7 22.7 11.1
Management, administrative and related income 1.4 0.6 0.6 Other operating income 0.1 0.5 Survey and research costs - 0.0 - Payroll expense - 0.8 - 1.0 - 0.3 Other general expenses - 0.4 - 0.3 - 0.1 Depreciation and amortization allowance on investment property - 4.8 - 7.3 - 3.6 Depreciation and amortization allowance on PPE - Provisions - 0.0 -
Results of operations, retail segment 10.1 15.0 7.6 Gains on the sale of investment property and equity interests - Net book value of investment property and equity investment sold - Gains from the sale of investment property and equity investment securities - - -
Gains on the sale of short term assets - Net book value of short term assets sold - Profit on the sale of short term assets - - Share in earnings of equity-method investees - Segment earnings, retail segment 10.1 15.0 7.6
Office buildings
June 30, December 31, June 30, in millions of euros 2008 2007 2007
Lease income 25.4 48.8 24.4 Other rental income - - - Lease income 25.4 48.8 24.4 Land expenses (real estate) - 0.1 - 0.2 - 0.1 Non-recovered rental expenses - 0.4 - 1.1 - 0.4 Building expenses (owner) - 0.4 - 1.4 - 0.5 Net lease income 24.6 46.1 23.4
Management, administrative and related income 0.0 0.3 0.2 Other operating income 0.0 1.1 1.1 Survey and research costs - - - Payroll expense - 1.1 - 1.9 - 1.1 Other general expenses - 0.3 - 0.8 - 0.3 Depreciation and amortization allowance on investment property - 5.9 - 11.8 - 6.3 Depreciation and amortization allowance on PPE - 0.5 - 1.0 - 0.4 Provisions - 0.1
Results of operations, office segment 16.9 32.1 16.5
Gains on the sale of investment property and equity interests - Net book value of investment property and equity investment sold - Gains from the sale of investment property and equity investment securities 20.3 21.0
Profit on the sale of short term assets - - -
Segment earnings, office segment 16.9 52.4 37.5
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Corporate
June 30, December 31, June 30, in millions of euros 2008 2007 2007 Corporate and shared expenses - 5.1 - 6.2 - 4.3 Profit on the sale of short term assets - - - Net dividends and provisions on non-consolidated securities 0.0 0.5 0.5 Net cost of debt - 91.4 - 162.9 - 76.2 Change in the fair value of financial instruments 0.0 - - Effect of discounting 1.3 0.7 - 0.1 Pre-tax earnings 114.8 244.5 125.8 Corporate income tax - 15.4 - 13.5 - 9.9
Net income of consolidated entity 99.3 231.0 115.9
5.2. Operating revenue
Lease income comprises all the lease payments received in respect of office buildings, shopping centers and shops, as well as other similar income, such as car park rentals, termination penalties and entry fees received. Rental income is lease income, excluding income from entry fees and other sundry income. Group revenue comprises lease income and management and administration income received by the service provider companies. Other operating income comprises building works re-billed to tenants and sundry income. As of June 30, 2008, rental income totaled 324.9 million euros, of which 284.4 million related to shopping centers, 15.1 million to shops and 25.4 million to office buildings.
Maangement Lease income Total in millions of euros income Shopping centers 284.4 30.8 315.2 France 145.7 22.5 168.2 Italy 43.6 2.9 46.5 Spain 34.0 3.0 37.0 Hungary 15.7 0.7 16.4 Poland 17.4 0.2 17.6 Belgium 6.4 - 6.4 Portugal 9.3 0.8 10.1 Czech Republic 7.5 0.6 8.1 Greece 3.9 0.0 3.9 Other 0.9 - 0.9 Shops 15.1 1.4 16.5 Office buildings 25.4 - 25.4 Total 324.9 32.2 357.1
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Revenues generated from business outside France represented 41.2%, compared to 41.1% as of December 31, 2007.
Compared to June 30, 2007, rental income from shopping centers increased by 14.1%. 8.9% of this increase (22.4 million euros) came from external growth in 2007, to which the major contributors were: the acquisition of two hypermarkets in Toulouse (+3.1 million euros), the Victor Hugo center in Valence (1.6 million euros), the opening of the Angoulême Champs de Mars center (+1.9 million euros), the extension of Rambouillet (+1.3 million euros), the acquisition of the Larissa mall in Greece (+0.8 million euros), the Rybnick, Sosnowiec and Lublin malls in Poland (5.9 million euros) and the purchase of a 50% stake in the Parque Nascente and Gondobrico centers in Portugal (+2.2 million euros). The Lonato and Verona malls acquired in 2008 also contributed to the growth (+2.5 million euros).
5.3. Operating expenses
Land expenses correspond to amortizations and fees on construction leases.
Non-recovered rental expenses primarily come from expenses on vacant premises.
Building expenses are posted net of re-invoicing to tenants, and only include amounts at the owner’s expense.
June 30, December 31, June 30, in thousands of euros 2008 2007 2007 OPERATING EXPENDITURE (excluding Corporate activities) -25 904 -49 146 -20 674 Land expenses (real estate) -1 301 -2 515 -1 271 * Office buildings -139 -248 -144 * Shopping centers -1 162 -2 267 -1 127 * Shops Unrecovered rental expenses -9 327 -17 189 -4 043 * Office buildings -424 -1 113 -376 * Shopping centers -8 895 -16 066 -3 667 * Shops -8 -10 Building expenses -15 276 -29 442 -15 360 * Office buildings -387 -1 402 -536 * Shopping centers -14 483 -27 254 -14 482 * Shops -406 -786 -342
DEPRECIATION AND AMORTIZATION ALLOWANCE -107 639 -173 662 -78 916 Depreciation and amortization allowance on investment property -105 025 -169 297 -77 132 Depreciation and amortization allowance on property, plant & equipment -2 614 -4 365 -1 784 Amortization of goodwill 0 0 0 Total -133 543 -222 808 -99 590
Amortizations and provisions for investment property increased by 28.7 million euros, compared to June 30, 2007.
This increase results from:
• expansion of the portfolio in 2007 and 2008, with the acquisition of three malls in Poland (2.8 million euros), shops (1.2 million euros), the Angoulême-Champs de Mars mall (1.0 million euros), the Valence- Victor Hugo mall (0.6 million euros), two hypermarkets near Toulouse (0.6 million euros) and the Larissa mall in Greece (0.5 million euros);
• disposals of office buildings, resulting in a decrease of amortization allowances by 0.2 million euros;
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• property provisions net of reversals totaling 22.7 million euros and mainly related to provisions on shopping centers in Poland and the Czech Republic. The appreciation of local currencies, which has led to a revaluation of assets following conversion to euros in the Group financial statements.
5.4. Income from sales of investment property and equity interests
Income from sales totaled 21.3 million euros, they can be broken down as follows:
- 18.1 million euros from investment property, most of which is related to the sale of the Courier mall in Annecy,
- 3.7 million euros in equity securities arising as a result of selling all shares in the Belgian management company Devimo Consult.
5.5. Net cost of debt
As of June 30, 2008, the cost of debt was 91.4 million euros, compared to 76.2 million euros as of June 30, 2007, reflecting the increase of interest rates and the outstanding debt.
Recognized financial expenses totaled 12.2 million euros for the first half of 2008, compared to 18.4 million euros as of December 31, 2007.
June 30, December 31, June 30, in thousands of euros 2008 2007 2007 Investment revenues Income from sale of securities 1 652 2 468 1 235 Net interest revenue on swaps 12 378 14 456 5 570 Net deferal of payments on swaps 992 535 - Interest on advance payment to partners 11 652 16 755 6 367 Sundry interests received 784 1 103 266 Other revenues and financial income 1 130 3 074 1 488 Currency translation income 4 238 9 797 479
Total 32 826 48 188 15 405
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June 30, December 31, June 30, in thousands of euros 2008 2007 2007 Financial expenses Interest on bond issues -47 759 -96 044 -47 628 Interest on loans from credit institutions -63 948 -93 261 -38 705 Other bank interest -999 -2 309 -1 146 Net interest expense on swaps Net deferal of payments on swaps 272 Payments on cancellation of swaps - Interest on advance payment to partners -4 310 -7 130 -3 200 Other financial expenses -4 973 -7 330 -1 786 Transfer of financial charges 3 100 2 968 1 091 Currency translation losses -5 318 -8 003 -326 Allowance on provisions for loan issue expenses (1) 0 Allowance on provisions for on repayment premiums (1) 0 Allowance on provisions for loan issue expenses - Allowance on provisions for on repayment premiums - Allowance on provisions for other long-term investments -5 -10 -201 Total -124 213 -211 119 -91 629
Cost of indebtedness -91 386 -162 931 -76 224 (1) Application of actual tax charge since January 1, 2005
5.6. Corporate income tax
2 June 30, December 31, June 30, 0 in thousands of euros 2008 2007 2007 0 Current taxes payable - 27 996 - 37 982 - 6 686 Deferred tax 12 553 24 489 - 3 211 Total - 15 443 - 13 493 - 9 897
Klépierre identifies three income tax segments: - the SIIC segment, which includes Klépierre and all eligible French real-estate affiliates. Some of these companies remain under French common law tax rates; - companies under French common law tax status; - foreign companies.
The tax expense for the first half of 2008 is 15.4 million euros.
The reported SIIC tax expenses of 7.2 million euros are as follows: - a charge of 0.3 million euros on the segment’s taxable earnings. These earnings relate mainly to financial transactions conducted by the relevant companies; - a net charge of 4.8 million euros as provision for a tax of 17.4 million euros which will be paid in respect of the entry of Progest, Holding H1 and Klecapnor to the SIIC scheme, minus the reversals of provisions for deferred tax liabilities held by the 3 entities and totaling 12.5 million euros; - a charge of 2.1 million euros in deferred taxes calculated primarily on the basis of cash payment deferrals and the recognition of deficits on the balance sheet.
Other French companies outside the SIIC segment reported a tax charge of 0.9 million euros: - 0.8 million euros in current tax relating to the limited partners of Klécar Europe Sud; - 0.4 million euros in due tax payable for the period by the entities of this segment;
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- 0.3 million euro income form deferred taxes by recognizing deficits, withdrawal and restatement of amortization.
Foreign companies recorded a tax charge of 7.3 million euros: - 8.6 million euros in current tax payable, the majority of which relates to Italy (3.9 million euros), Hungary (2.1 million euros) and Poland (1.1 million euros); - 0.9 million euros of additional tax reported by the Italian companies ICD, Magnolia and Novate as a result of their assets being incorporated into the Italian K2 fund; - 4.0 million euro income from deferred taxes, mainly a result of unrealized exchange rate gains and income and allowances related to restatement of amortization using the component method; - 1.8 million euros in tax, as a result of discounting tax deficits.
Reconciliation of theoretical tax and actual tax as of June 30, 2008:
Non-SIIC sector Foreign SIIC sector Total in thousands of euros France companies tax-free taxable Total earnings earnings Pre-tax earnings and earnings from equity method companies 104 316 - 13 618 90 698 19 403 4 220 114 321 Theoretical tax charge at 34.43% - 35 916 4 689 - 31 227 - 6 680 - 1 453 - 39 361
Tax exempt SIIC sector income 50 485 50 485 50 485 Taxable sectors Impact of permanent time lags - 3 457 - 5 198 - 8 655 6 627 - 1 171 - 3 199 Restatements of untaxed consolidations - 10 551 - - 10 551 - 517 363 - 10 705 Impacts of non activated deficits - 956 - 2 389 - 3 345 - 1 277 - 2 914 - 7 536 Assignment of non activated deficits 417 67 484 757 2 905 4 146 Exit tax for long-term special capital gains reserve - - Change of tax regime - - Discounting of deferred taxes following restructuring - - discounting rates and other taxes to present value - 4 934 532 - 4 402 206 - 4 655 - 8 851 Rate differences outside France - - 422 - 422 Actual tax expense - 4 912 - 2 299 - 7 211 - 884 - 7 347 - 15 443
Ordinary deficits are capitalized when their recovery is deemed probable:
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Inventory of Inventory of Capitalized Amounts Change in Amounts Amounts not Statutory tax Change in OD ordinary deficits ordinary deficits deferred tax at capitalizable at capitalized Regularization capitalized at capitalized at Remarks rate in 2008 Dec. 31, 2007 June 30, 2008 Dec. 31, 2007 June 30, 2008 amounts June 30, 2008 June 30, 2008 Entities Portugal losses deferrable over 6 years Finascente 26.50% ------Kleminho 26.50% (567) (586) (19) 150 155 5 155 0 Holding Gondormar 1 (French company) 16.50% (6 587) (1 189) 5 398 1 086 196 -1 087 (0) 197 all deferred tax on tax losses used Holding Gondormar 3 (French company) 16.50% (841) (871) (30) 139 144 5 144 0 Spain losses deferrable over 15 years KFI 30.00% - - - (0) - -00 KFE 30.00% (13 139) (7 375) 5 764 3 262 2 213 -1 729 1 532 680 unrecognized losses prior to tax consolidation Vinaza 30.00% (3 236) (4 174) (938) 971 1 252 281 1 252 0 Vallecas 30.00% (16 632) (18 074) (1 442) 4 990 5 422 433 5 422 0 Belgium unlimited deferral of ordinary losses Cinémas LLN 34.00% (2 564) (2 701) (137) 872 918 47 919 0 Coimbra 34.00% (5 218) (5 292) (74) 1 774 1 799 25 1 799 0 Foncière LLN 34.00% (6 599) (7 595) (996) - 2 582 002 582 unrecognized tax losses Place de l'accueil 34.00% (258) (258) - 88 88 0 88 0 Hungary unlimited deferral of ordinary losses Klépierre Participations et Financements (French company) 34.43% - (648) (648) 0 223 223 (4) 220 4 Hungarian real estate companies 16.00% (13 204) (13 501) (297) 2 113 2 160 48 2 160 0 Czech Republic Czech holding comoanies 20.00% (1 202) (11) 1 191 - 2 - 0 2 unrecognized tax losses Klépierre CZ 20.00% (4 969) - 4 969 1 044 - (1 246) 202 00 Bestes 20.00% - - - -00 AMC Prague 20.00% - - - - - Greece - losses deferrable over 5 years Klépierre Larissa 25.00% (4 928) (4 518) 410 1 232 1 130 -103 1 130 - Ségécé Hellas 25.00% ------KFM 25.00% - - - 0 - - 00 Patras 25.00% (492) (334) 158 123 84 -40 84 (0) Efkarpia 25.00% (56) (50) 6 14 13 -2 12 0 Athinon 25.00% (896) (1 117) (221) 224 279 55 280 (0) Italy - ordinary losses deferrable over 5 years except Assago 31.40% ------the first 3 years, which have unlimited deferral Kléfin 27.50% (7 333) (7 118) 215 2 016 1 957 (59) 1 957 - Serravalle 31.40% (534) (303) 231 168 95 (73) 95 (0) Galleria Commerciale Klépierre 31.40% (749) - 749 235 - (235) (0) 0 Collegno 31.40% (3 069) (2 721) 348 964 854 (109) 854 0 Clivia 31.40% (254) (254) 80 80 80 - Other Italian companies 31.40% - (1 346) (1 346) 423 (0) (0) 423 unrecognized tax losses Poland - losses deferrable over 5 years Sadyba (real estate and holding) 19.00% (4 843) (5 197) (354) 920 987 67 987 0 Krakow (real estate and holdings) 19.00% (3 919) (2 439) 1 481 336 463 (311) 24 439 unrecognized tax losses Ruda (foncière) 19.00% (3 325) (3 557) (232) 453 676 44 7 504 172 unrecognized tax losses Poznan (real estate and holding) 19.00% (3 407) (3 656) (249) 647 695 47 695 - Rybnick (real estate and holding) 19.00% (1 659) (386) 1 273 282 73 (209) 73 - Sosnowiec (real estate and holding) 19.00% (1 404) (379) 1 025 234 72 (162) 72 - Lublin (real estate and holding) 19.00% (4 904) (5 188) (284) 426 986 (243) 183 803 unrecognized tax losses Other Polish holdings 19.00% (1 073) - 1 073 (0) - 0 - - unrecognized tax losses Segece Poland (Ex PCMP) 19.00% (59) - 59 (0) - (11) (11) 11 Netherlands - Capucine BV 25.50% (1 715) (2 795) (1 080) - 713 0 - 713 holding company: dividends and capital gains from share sales ate tax exempt Luxemburg - Luxembourg holding companies 20.00% (624) (3 192) (2 568) - 638 0 - 638 unrecognized tax losses France - - - unlimited deferral of ordinary losses Kléber La Pérouse 0.00% (156) (376) (220) 25 - - (25) 0 (0) deferred tax on 2007 losses used in 2008 Cap Nord 34.43% (833) (1 623) (790) - 559 - - 559 unrecognized tax losses Klécapnord 16.50% (1 087) - 1 087 179 - (179) - - company merged with Cap Nord KLE Projet 2 16.50% (1 558) (1 767) (209) 257 292 34 292 - Holding Gondormar 2 0.00% (209) (708) (499) 34 - - (34) 0 (0) deferred tax on 2007 losses used in 2008 Holding Gondormar 4 16.50% (147) (231) (84) 24 38 14 38 - Other French companies 34.43% (2 143) (9 791) (7 648) - 3 371 0 0 3 371 unrecognized tax losses
TOTAL -126 140 -121 321 4 819 25 283 31 632 -4 389 146 21 039 10 593
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6. Exposure to risks and hedging strategy
Klépierre pays close attention to managing the financial risks inherent in its business activity and the financial instruments it uses. The Group identifies and regularly measures its exposure to the various sources of risk (interest rates, liquidity, foreign exchange, counterparties, equity markets, etc.) and defines applicable management policies if necessary.
6.1. Interest rate risk
A) Cash Flow Hedge rate risk
Recurrence of variable rate financing requirement In structural terms, variable rate debt represents a significant proportion of the Group’s borrowings (55.4% of debt at June 30, 2008, before hedging). It includes: bank loans (standard and mortgages), drawdowns on syndicated loans, commercial papers and the use of agreed overdrafts.
Identified risk An increase in the interest rate against which variable rate debts are indexed (primarily 3-month EURIBOR) could result in an increase in future interest rate expenses.
Measurement of risk exposure The first two of the following tables show the exposure of Klépierre’s income to an increasing interest rate, before and after hedging.
Change in financial Interest rate position before hedging expenses caused by a Amount (in millions of euros) 1% increase in interest rates
Gross position (variable rate debts and debts due in less than one year) 2 757 27.6 - Marketable securities -120 -1.2 Net position before hedging 2637 26.4
Change in financial Interest rate position after hedging expenses caused by a Amount (in millions of euros) 1% increase in interest rates
Gross position before hedging 2 757 27.6 - Net hedge -1990 -19.9 Gross position after hedging 767 7.7 - Marketable securities -120 -1.2 Net position after hedging 647 6.5
Given that changes in the fair value of Cash Flow Hedge swaps are recognized in the equity, the following table quantifies the likely impact of an increased interest rate on equity, based on the Klépierre Cash Flow Hedge swaps portfolio at the end of the period (including deferred swaps).
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Change in financial Fair Value of the Cash Flow Hedge expenses caused by a Fair Value (in millions of euros) 1% increase in interest rates Cash Flow Hedge swaps as of June 30, 2008 (notional: 2,690 million euros) 154 113.5 Cash Flow Hedge swaps as of December 31, 2007 (notional: 2,690 million euros) 80 89.8
Financial debt after hedging can be broken down as follows:
Average cost Total gross in millions of euros Fixed rate debt Variable rate debt of forecasted financial debt debt
Amount Rate Fixed part Amount Rate Fixed part Amount Rate 31/12/2006 3 159 4.22% 85% 570 4.27% 15% 3 729 4.23% 4.28% 31/12/2007 3 200 4.20% 70% 1 367 5.35% 30% 4 567 4.54% 4.65% 30/06/2008 4 202 4.36% 85% 767 4.47% 15% 4 969 4.38% 4.49%
Hedging strategy
Klépierre has set a target hedging rate of approximately 70%. This rate is defined as the proportion of fixed-rate debt (after hedging) to gross financial debts. As the previous table shows, this proportion was 85% as of June 30, 2008. In order to achieve its target level, Klépierre focuses on the use of swap agreements, allowing him to freeze the rate of financing to variable rates or the other way, to convert fixed rate financing into variable rate financing.
Klépierre can also cover its Cash Flow Hedge rate risk by limiting the variation around the benchmark index, for example by buying a cap on that index,.
Given its strategy and investment program, Klépierre is structurally a borrower, and the current finance plan allows for a debt increase by over 300 million euros per year in the coming years. Since the Group is not seeking to reduce the proportion of its short-term debts, it is likely that its short-term variable rate loans will be renewed and turned into in the medium-term loans. This is the reason why the Klépierre hedging strategy addresses both the long-term and short-term aspects of its borrowings. Generally, the term of the hedging instrument may exceed that of the hedged debt, on condition that Klépierre’s financing plan emphasizes the high probability of these debts being renewed.
B) Fair Value Hedge rate risk
Description of fixed rate indebtedness
The majority of Klépierre’s fixed rate borrowing currently consists of bond issues and two bilateral bank loans subscribed in 2004 by Klépierre and Klépierre Participations et Financements.
The main source of additional fixed rate debt is potentially the bond market or convertible bonds and other “equity-linked” products.
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Identified risk On its fixed rate indebtedness Klépierre is exposed to the fluctuations of the risk-free market interest rates, insofar as the fair value of fixed-rate debt increases when rates fall, and vice-versa. At any given time, Klépierre may also find itself in the position of needing to increase its fixed-rate debt at a future date (e.g.: to fund a planned acquisition). The Group would then be exposed to the risk of a change in interest rate prior to arrangement of the loan. Klépierre may then consider hedging against this risk, which is treated as a “cash flow hedge” risk under IFRS.
Measurement of risk exposure and hedging strategy
As of June 30, 2008, fixed rate debt totaled 2,212 million euros before hedging. The “Fair Value Hedge” strategy is calibrated to correspond to the overall hedge rate target. It is also based on the use of rate swaps allowing fixed rate payments to be swapped to variable rate payments. The “credit margin” component is not hedged.
The duration of “Fair Value Hedge” instruments is never longer than that of the debt hedged, since Klépierre wishes to obtain a very high level of “efficiency”, as defined by IAS 32/39.
C) Investment securities
As of June 30, 2008, Klépierre held investment securities in the value of 120.1 million euros. These investments are mainly composed of French money market open-end and mutual funds (SICAV-FCP) (102.3 million euros), Italian one-month deposit certificates (8.9 million euros) and Spanish one-week treasury bills (8.9 million euros).
These investments expose Klépierre to a moderate interest rate risk as a result of their temporary nature (cash investments) and the amounts involved.
D) Fair value of financial assets and liabilities
Under IFRS norms, financial debts are recognized in the balance sheet at amortized cost and not at fair value. The following table compares the fair values of debts with their nominal value. Fair values are drawn up according to the following principles: Variable rate bank debt: the fair value is equal to the nominal amount (unless there is a major credit event not reflected in the financial conditions of the debt); Fixed rate bank debt: the fair value is calculated solely on the basis of rate fluctuations (unless there is a major credit event not reflected in the financial conditions of the debt ); Bond issues (and convertibles, if applicable): market prices are used where available, in any other case, fair value is calculated on the basis of rate fluctuations and credit margin.
2008 2007
Change in FV caused Change in FV caused in millions of euros Face value Fair value by a 1% increase of Face value Fair value by a 1% increase of interest rates* interest rates* Fixed rate bond issues 1 900 1 761 51 1 900 1 829 62 Fixed rate bank loans 312 301 5 310 300 6 Variable rate bank loans 2 757 2757 - 2 357 2357 - Total 4969 4819 55 4567 4486 68 * drop in the fair value of the debt following a parallel shift in the rate curve
Derivatives are recognized in the balance sheet at their fair value. As of June 30, 2008, a 1% increase in rates would lead to an increase of 98 million euros in the value of the Group’s interest rate swaps (Cash Flow Hedge and Fair Value Hedge).
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On the asset side, non-consolidated securities are recognized as “securities available for sale”, and are therefore measured at their fair value. Given the activity of the concerned companies, it is estimated that the net book value is close to the fair value.
E) Measures and resources for managing interest rate exposure
Given the importance to Klépierre of managing interest rate risk, its management team is involved in all decisions concerning the hedging portfolio. The Financial Division uses IT systems to provide real-time tracking of market trends and calculate the market values of its financial instruments, including derivatives.
6.2. Liquidity risk
Klépierre focuses on refinancing its long-term activity and diversifying maturity dates and the Group’s financing sources, so as to facilitate renewals. Accordingly, bond issues represented 38.1% of financial debt as of June 30, 2008. The average duration of the debt is 4.9 years, and bank debt is spread across a range of financial products (club deals, mortgage loans, etc.) and various international scale counterparties.
Outstanding commercial paper (which represents the bulk of short-term financing) never exceeds the amount of the “back-up” line syndicated amongst several banks, which would enable immediate refinancing of this borrowing in the event of renewal problems in the market. Klépierre also had unused credit lines (including bank overdrafts) totaling 1,235 million euros as of June 30, 2008.
Generally speaking, the access to the financing of real-estate companies is facilitated by the security that their property assets offer to the lenders.
Some Klépierre financings (syndicated loans, bond issues, etc.) are accompanied by financial covenants. Failure to comply with these covenants may result in compulsory early repayment (cf. the note concerning financial liabilities). These covenants are based on the standard ratios applying to real estate companies, and the limits imposed leave Klépierre with sufficient flexibility to ensure that liquidity risk remains low. Bond issues (1,900 million euros) include a bearer option, of requesting early repayment in the event of a change of control that would change Klépierre’s rating to “non-investment grade”. Apart from this clause, no other financial covenant refers to Standard & Poor’s rating for Klépierre.
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Maximum amount of Contractual Impact of non- Level as of June 3, Principal Covenants the relevant finance limit compliance 2008 (€M) Klépierre financing "Loan to value" ≤ 52% 41.7% EBITDA / FFI ≥ 2,5 3.21
Secured debt / Revalued 3 550 ≤ 20% Default case 3.9% assets
Revalued asset value - ≥ 6000 M€ 10.7 group share
Secured debt / RNAV 1 900 ≤ 50% Default case 8.1%
Klémurs financing "Loan to value" ≤ 65% * 60.0% EBITDA / FFI ≥ 1,8 ** 2.49 Secured debt / Revalued 150 ≤ 20% Default case 9.1% assets Revalued asset value - ≥ 300 M€ 621.5 group share * 55% excluding subordinated loans ** 2 excluding financial expenses on subordinated loans 6.3. Currency risk
Klépierre’s business is mainly located in Euro zone countries. As of June 30, 2008, the only exceptions were the Czech Republic, Slovakia, Hungary and Poland.
In these countries, to date, the currency risk was not considered sufficiently important to be hedged by derivative instruments.
As acquisitions and their financing are carried out in euros, currency risk mainly concerned the commercial activity of subsidiaries.
Generally, rents are invoiced to tenants in euros and converted into the local currency on the invoicing date. Lessees have the choice of paying their rents in local currency or in euros (or in dollars for a small number of leases). The currency risk is therefore limited to the difference between the invoiced rent and the rent actually collected when the currency loses value towards the euro between the invoice date and the actual payment in local currency by the tenant.
At the same time, Klépierre ensures that lease payments from tenants do not represent an excessively high proportion of their revenue in order to avoid any worsening of their financial position in the event of a high increase in the value of the euro, which could increase the risk of default payments for Klépierre.
6.4. Counterparty risk
It only concerns investments carried out by the Group and the Group’s counterparties in derivative product transactions.
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Counterparty risk on investment securities
The counterparty risk on investments is limited by the type of products used:
UCITS managed by recognized institutions, and therefore concerning diversified signatures; government loans from countries where Klépierre is present (in the form of loan/borrowing); occasionally, certificates of deposit issued by leading banks.
Counterparty risk on hedging instruments
Klépierre gets involved in derivative instrument transactions only with world-class financial firms. Today, all swap contracts have an “AA” counterparty rating. Whatever the case, the Group would not accept to deal with a firm rated lower than A- by S&P or an equivalent agency.
6.5. Equity risk
Klépierre holds no equities other than its own shares (2,976,490 shares as of June 30, 2008), which are booked in equity at historic cost.
7. Finance and guarantee commitments
7.1. Reciprocal commitments
Reciprocal commitments correspond to reciprocal guarantees in the context of a property development contract or a sale before completion contract (payment guaranteed by the buyer and completion guaranteed by the developer).
June 30 December 31 June 30 in thousands of euros 2008 2007 2007
Guarantees within the context of a Property Development Contract / 331 193 297 541 142 390 Sale Before Completion Contract
Total 331 193 297 541 142 390
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7.2. Commitments given and received
June 30 December 31 June 30 in thousands of euros 2008 2007 2007 Commitments given - Security deposits on loans to employees 12 075 12 659 10 053 - Guarantees, deposits and mortgages 16 890 16 445 10 957 - Purchase commitments 709 918 999 286 486 885 Total 738 883 1 028 390 507 895 Commitments received - Deposits received as guarantee for the activity of real-estate management and 145 340 145 340 145 340 transactions - Sale commitments - 107 000 920 - Deposits received from tenants 64 559 62 595 52 195 - Other guarantees received 149 649 109 838 - Unutilised confirmed credit lines 1 235 000 630 000 158 500 Total 1 445 048 945 584 466 793
Purchase commitments Purchase commitments primarily correspond to preliminary purchase contracts for the construction of the Vallécas center in Madrid (113 million euros), the Claye Souilly shopping center (16 million euros), the Vanne city center mall (50.5 million euros) and the Montpellier Odysseum (17.7 million euros).
In 2007, Klémurs signed a preliminary purchase contract valued at 163.2 million euros for 88 "Défimode" shops and 42 other future projects, and is also committed to the acquisition of 15 retail assets located in retail parks at Avranches, Rochefort sur Mer and Messac (18.2 million euros). As of June 30, 2008, the balances yet to be paid were respectively 62.8 million euros and 1.5 million euros. In accordance with the terms of the original agreement, 10 units remain subject a promise for definitive acquisition, before December 31, 2008. During the fiscal year of 2009, 25 new shops now under development will be added.
In 2008, Klémurs signed a commitment to buy 23 King Jouet units at a total cost of 21.8 million euros.
Subject to various conditions, Klépierre has acquired the Place de l’Etoile center in Luxembourg (21,500 m² GLA, with a provisional opening date of 2011) at a cost of 215 million euros, of which 1million euro has been paid to this date.
In 2007, Klépierre gave a commitment under its partnership with Finiper to buy 50% of the Il Leone center in Lonato (15,987 m² GLA, and a 84 million euro share of the investment) and the Le Corti Venete center in Vérone (30,181 m² GLA and a 40.7 million euro share of the investment). The acquisitions were completed in Q1 of 2008.
A third center currently under construction will also be acquired when it opens in Q1 2009. The Vittuone center in the western suburbs of Milan covers 29,952 m² GLA and will involve an investment of 44.2 million euros (for a 50% stake).
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Earnout clauses also exist for some acquisitions. In accordance with Articles 32 and 34 of IFRS 3, the price adjustment applied to the cost of the business combination on the acquisition date must be recognized where adjustment is likely and can be reliably estimated on the balance sheet date.
The price paid for Sadyba (part of the Polish acquisitions made in 2005) is subject to an earnout clause. Klépierre does not fully own the land on which the center is built, but holds a lease with an expiry date of July 31st, 2021. An earnout will be paid to the seller if it obtains an extension or full ownership of the lease within a period of 10 years starting from July 2005.
Since the likelihood of the lease being extended or full ownership being obtained cannot be measured, this earnout is not booked.
Preliminary sale agreements A preliminary sale agreement was signed for the disposal of 41.62% of the Annecy building at a price of 37 million euros. Klépierre also agreed to sell to Cicobail (in the context of a finance lease agreement) the Cesson (77) property complex for 70 million euros. These transfers were completed in the first half of 2008.
Credit lines confirmed but not used: As of June 30, 2008, Klépierre had access to 1,235 million euros in credit lines confirmed but not used. This total was made up as follows: - 1,000 million euros line of credit available under the syndicated loan granted in 2007; - 150 million euros line of credit available under the syndicated loan granted in 2006; - 85 million euros of possible commercial paper issue (variance between the amount of the back-up line and the outstanding issued paper).
Other guarantees received
To our knowledge, we have not omitted any significant or potentially-significant off-balance sheet commitments as defined by the applicable accounting standards.
7.3. Guarantees
June 30 December 31 June 30 in thousands of euros 2008 2007 2007
Guaranteed debts 223 702 371 655 327 380
Total 223 702 371 655 327 380
In general terms, the Group finances its assets from equity or debt contracted by its parent company, rather than pledging its own assets. The details of those debts secured by pledges are as follows:
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NBV of the Loan amount Mortgage Pledge start Pledge expiry pledged as of June 30, amount date date asssets in the 2008 in thousands of euros corporate on tangible assets 515 289 K2 69 000 Metropoli 52 500 19/03/2008 15/01/2023 100 058 Vignate 81 347 Settimo 10 500 19/03/2008 15/01/2023 34 220 Roncadelle 27 000 19/03/2008 15/01/2023 87 050
Klecar Italia 111 593 331 500 30/06/2003 30/06/2015 206 795 17/10/2002 30/12/2014 SCI Rebecca 3 686 5 764 4 877 20/07/2000 31/072015
SCI LC 173 377 05/01/2000 02/01/2012 943 on long-term financial assets 0 TOTAL 515 289
7.4. Shareholders’ agreements
Shareholders’ agreements concerning Klécar France, Klécar Europe Sud, Solorec and Klécar Participations Italie The shareholders’ agreements between Klépierre and CNP Assurances and Ecureuil Vie were amended by a rider signed on December 30, 2004, in order to cancel the liquidity commitments given by Klépierre to its partners.
The agreement provides for the usual minority protections: pre-emptive share right, joint exit right and the decision-making process applying to investment or disinvestment. Each agreement contains two additional clauses:
- one in favor of Klépierre: an obligation for the minority shareholders to exit at the request of Klépierre in the event of Klécar’s assets being sold to a third party - the other in favor of the minority shareholders: a process enabling the latter to consider a range of exit scenarios in 2011, 2016 and 2017 (for the Italian companies) or 2010, 2014 and 2015 (for the other malls): - asset sharing or sale; - outright purchase of minority shareholdings by Klépierre (with no obligation for Klépierre); - sale to a third party with payment of a discount by Klépierre if the offer is less than the Revalued Net Asset Value.
Partners’ agreement between SNC Kléber la Pérouse and SCI Vendôme Commerces in respect of SCS Cecobil
Signed on October 25, 2007 following the transition of Cecobil to a general partnership, this agreement provides for the usual protections regarding the planned sale of equity shares to a third party (first refusal and total joint exit rights) and change of control of a partner.
Partners’ agreement between SNC Kléber la Pérouse and SCI Vendôme Commerces in respect of SCI Secovalde
Signed on October 25, 2007, this agreement provides for the usual protections regarding the planned sale of equity shares to a third party (first refusal and total joint exit rights) and change of control of a partner.
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Partners’ agreement between Klépierre, Klefin Italia, Finiper, Finiper Real Estate & Investment, Ipermontebello, Immobiliare Finiper et Cedro 99 in respect of Immobiliari Galerie Commerciali (IGC) and Clivia
A partners’ agreement was signed in 2002 during the acquisition of IGC shares by Klépierre.
Its main provisions – including those regarding Klépierre’s preemptive right – were restated in a new agreement that includes IGC and Clivia (owner of the Lonato, Verone and Vittuone malls).
It also includes a put (option to sell) in favor of Finiper, enabling the latter to sell its shares in IGC and/or Clivia to Klépierre. This 10-year put cannot be split for IGC (it must be exercised on all the shares held by Finiper), but may be split into two parts (each of 25%) for Clivia. Any refusal by Klépierre gives Finiper entitlement to a penalty.
Partners’ agreement between Klépierre Luxembourg and ISC Spa This agreement includes a put (option to sell) enabling the Finim Group the sale of its holding in the event that the investment committee adopts a resolution to realize the following transactions despite contrary votes of the representatives of Finim: - fund investment or disinvestment transactions relating to assets whose gross value is greater than 5% of the total value of fund assets or 20% of the value of a single property development owned by the fund; - a reduction of the holding maintained by Klépierre unit holders to below 50% in case no offer has been made to Finim to participate in this disengagement.
This agreement will be effective for an initial period of five years, after which it will be tacitly renewed for a further period of two years (and thereafter on the same two-year basis).
Preferential sale agreement between Progest, Kléber La Pérouse and certain associates of IPECI Under the terms of this preferential sale agreement of April 8, 2008, the associates of IPECI, which also hold stakes in several Progest group companies, must first propose the shares in theses holdings to Kléber La Pérouse and Progest. These two companies will, depending on the circumstances, have the right of first or second rank stock purchase right over those shares destined for transfer.
The agreement was signed for a period of 8 years, and is tacitly renewable for further periods of 2 years unless terminated 6 months prior to expiry of the period concerned.
7.5. Commitments on operating leases - Lessors
General description of the main clauses contained in the lessor’s lease agreement:
Shopping centers Lease agreement periods range from 5 years in Spain to 12 years in France (with 3-year periods), whilst Italy operates a mixed system that varies from 5 years to 12 years. The terms of fixing and indexing of rents are set determined in the agreement. Indexation enables the reappraisal of the minimum guaranteed rent. The indices used vary from country to country.
Indexation specific to each country
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In France, the index used is the quarterly French Cost-of-Construction Index (ICC). The indexing figure applied is that which corresponds to the “anniversary” quarter of the lease. Approximately 70% of Klépierre’s French leases are subject to application of the ICC for the second quarter of each year (published in October).
In Spain, the consumer price index (CPI) is recorded annually every January 1st. In Italy, the system is based on the consumer price indices (excluding tobacco) for working class and junior management (ISTAT). But implementation of the indexation system is more complex: depending on the lease, either the ISTAT is applied at 75%, or the full reference segment index is applied. In Portugal, the retained index is the consumer price index (CPI), excluding property.
The Consumer Price Index (CPI) is applied in Greece. The Eurostat IPCH eurozone index used in Central Europe, which is based on consumer prices in the EMU countries.
Guaranteed minimum rent and variable rent Appraised on a year-by-year basis, the rent payable is equivalent to a percentage of the revenue generated by the lessee during the calendar year concerned. The rate applied differs depending on business type. The total amount of this two-part rent (a fixed part + a variable part) can never be less than the Minimum Guaranteed Rent (MGR). The MGR is reappraised annually by application of the index. The variable part of the rent is equivalent to the difference between the revenue percentage fixed in the lease and the minimum guaranteed rent after indexation.
At lease renewal, all or part of the variable rent may be consolidated into the MGR, with the result that the variable part of the rent is often reduced to zero at the end of the lease (every 5 to 12 years, depending on the nature of the lease). It is also deducted annually from the indexation rise in MGR. The variable rent clause traditionally included in most existing French and Italian real estate leases has gradually been incorporated into other leases at the point of renewal or renegotiation.
Office buildings
100% of Klépierre’s office building property is located in France and therefore governed by French law. For commercial activities the following apply: articles L. 145-1 to L. 145-60 of the Commercial code and the non codified articles of n° 53-960 of September 30, 1953 (the “bylaw”). A certain number of these clauses are in the public domain. For example: contracts cannot be shorter than 9 years (regarding the lessor’s commitment), the right to renewal, the formal conditions to comply with in the event of cancellation, leave, renewal, and eviction, etc. Very exceptionally, leases derogatory from the status, of two years or more, can be settled. The most usual lease term is 9 years, during which only the lessee may terminate the lease at the end of each three-year period by sending a six-month prior notice by extrajudicial act. The parties may be exempt from this clause of three-year termination.
The rent is usually paid quarterly in advance and is indexed in full annually against the INSEE construction cost index. The rent may be progressive or constant, and may include rent-free periods, but is always determined at the point when the lease is signed and for its full term (apart from riders added during the lease term).
All charges, including property and office taxes, are usually met by the tenant, with the exception of works regulated by Article 606 of the Civil Code, which are usually paid for by the lessor.
For Professionals (lawyers, chartered accountants, architects, etc.) the status is not applicable. The minimum duration for such leases is six years, with the lessee free to terminate at any time by giving six months’ notice. These agreements do not include the right to renewal, but all the other conditions are based more closely on the provisions of commercial leases.
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The total amount of conditional rents recognized in income: the conditional rent is that portion of the total rent which is not a fixed amount, but is a variable amount based on a factor other than time (e.g. percentage of revenue, degree of use, price indices, market interest rates, etc.).
Minimum payments made under the lease are those payments which the lessee is, or may be, required to make during the term of the lease, excluding the conditional rent, the cost of services and taxes to be paid or refunded to the lessor.
As of June 30, 2008, the accumulated minimal future rents receivable pursuant to the non-cancellable operating lease agreements were as follows:
June in thousands of euros 2008 less than 1 year 563 999 between 1 and 5 years 988 313 more than 5 years 279 286
Total 1 831 598
7.6. Commitments on lease agreements - financing
Klépierre has a finance lease agreement for the office space located in Lille, rue Nationale,. This 18-year agreement expires on July 31, 2009. On the expiration date of the contractual term of the finance lease, lessee may elect to buy the building at his discretion. The reconciliation between the minimum future payments under the lease-financing agreement and the discounted value of the net minimal payments pursuant to the leases are presented as follows:
June 30, 2008 discounted minimum value of payments in thousands of euros payments less than 1 year 426 266 betwen 1 and 5 years 107 71 more than 5 years 00
Total minimum payments under the terms of the lease 533 337
Less financial charges -196
Discounted value of minimum payments 337 337
7.7. Retention commitments
The buildings and finance leases acquired as part of the Buffalo Grill transaction are covered by the tax status governed by Article 210 E of the French General Tax Code. The buildings concerned are protected by a retention commitment for five years from the date of acquisition.
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8. Compensations and employee benefits
8.1. Payroll expenses
As of June 30, 2008, the total amount of payroll expenses was 37.8 million euros. Fixed and variable salaries and wages plus incentives and profit sharing, totaled 26.5 million euros, pension- related expenses, retirement expenses and other staff benefits were 10.7 million euros and income tax, and similar compensation-related payments were 0.6 million euros. As of June 30, 2008, the Group employed a total of 1,038 people.
8.2. Retirement commitments
Post-employment plans with defined contributions
In France, the Klépierre group contributes to a number of national and inter-profession basic and supplementary pension organizations.
Fixed benefits post-employment plans
The still existing fixed benefit plans in France and in Italy are subject to independent actuarial assessments according to the projected unit credit methods in order to determine the expense corresponding to the rights acquired by employees and the outstanding benefits to be paid to pre-retirees and retirees. The demographical and financial assumptions used to estimate the discounted value of hedge bonds and assets for these plans take into consideration the economic conditions specific to the monetary zone under consideration. The fraction of actuarial variances to be amortized, after application of the treaty limit of 10% (corridor method) is calculated separately for each defined-benefit plan.
The provisions funded for fixed-benefit post-employment plans amounted 5.2 million euros as of June 30, 2008.
Klépierre has set up supplementary retirement plans by corporate agreement. Under the supplementary plans, employee beneficiaries will receive at the time of their retirement, additional income to their pensions (where applicable) paid by the national plans, according to the kind of plan they are entitled to.
In addition, the Group's staff benefits from treaty or contractual personal protection plans in various forms such as retirement gratuities.
In Italy, the plan in place for Ségécé Italia and Effe Kappa is a “Trattamento di Fine Rapporto” (TFR) type of plan. The amount due by the employer at the termination of the employment contract (resignation, dismissal, retirement) is calculated by the application of an annual coefficient for each year worked without this amount exceeding a certain threshold. As the corresponding liability is certain, it can be posted under other debts and not as a provision for contingencies. In Spain, a provision for retirement commitments can be funded in the case of a special clause in the collective agreement, but the staff of Spanish subsidiaries of the Klépierre group is not concerned.
The existing commitments for post-employment medical assistance plans are valued on the basis of an assumed increase of medical costs. These assumptions, based on historic observations, take into account the estimated future changes in the cost of medical services resulting both from the cost of medical benefits and inflation.
Reconciliation of assets and liabilities posted in the balance sheet
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in thousands of euros June 30, 2008
Surplus of obligations over the assets of financed schemes 6 610 Gross discounted value of obligations fully or partly financed by assets 8 934 Fair value of plan assets - 2 323 Discounted value of non financed liabilities 6 611 Not yet recognized costs in application of the provisions of IAS19 Cost of past services - 1 383 Actuarial net losses or gains 51
Net obligation recognized in the balance sheet for defined-benefits plans 5 279
Movements on the net liability / asset posted in the balance sheet
in thousands of euros June 30, 2008
Net obligation at the beginning of the period 4 799 Retirement expense recorded in income for the period 480 Contributions paid by Klépierre in income for the period Acquisition/Disposal Benefits paid to the beneficiaries of benefits non financed
Net obligation at the end of the period 5 279
Components of the retirement expense
in thousands of euros June 30, 2008 Cost of services rendered during the year 302 Financial cost 189 Expected yield from the plan’s assets - 44 Amortization of actuarial gains and losses - 10 Amortization of past services 43 Effect of plan reductions or wind up - Total recognized in "payroll expenses" 480
Other long-term benefits As of June 30, 2008, provisions to cover long-service awards and time-savings accounts totaled 1.9 million euros.
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Principal actuarial assumptions used for calculation in the balance sheet
Actuarial assumptions In percentage, as of January 1, 2008 France Discounting rate 4.20% Expected yield rate from plan assets 4.60% Expected yield rate from reimbursement rights n/a Future salary increase rate 2.65 % - 5.72 %
8.3. Stock options
At the beginning of the period, there were 2 stock option plans for Group executives and employees.
These are standard stock option plans, and are therefore not performance linked.
Only stock options granted after November 7, 2002 are booked according to IFRS in application of IFRS 1.
In accordance with IFRS 2, Klépierre appraised the market value of options on their grant date and recognizes a pro rata (proportionate) expense during the vesting period. This appraisal is made by a specialist third-party company. The model adopted complies with the basic assumptions of the Black & Scholes model, adapted to the specific characteristics of the options concerned (particularly dividends in discrete amounts and the possibility of exercising options from May 31, 2010 for the plan authorized in 2006 and from May 16, 2011 for the plan authorized in 2007).
The calculated expense also reflects the estimated population of beneficiaries at the end of each vesting period, because beneficiaries may lose their rights if they leave the Klépierre group during this period.
Plan authorized in 2007 429,122 options (after splitting the face value by 3) were granted under the stock option plan authorized by the Executive Board meeting on May 15, 2007. These options may be freely exercised between May 16, 2011 and May 15, 2015 included.
The expense recognized in the income statement for the first half of 2008 in respect of stock options was 534,000 euros. The unit value of stock options granted in 2007 was valued at 10.4 euros (after splitting the face value by 3). The key data used for the appraisal include an exercise price of 47.9 euros (after splitting the face value by 3), the share price on the grant date of 47.3 euros (after splitting the face value by 3), volatility of 21.2 %, a risk- free interest rate of 4.51% for an 8-year maturity period and a dividend of roughly 10% in 2007, followed by assumed growth calculated as a straight-line regression of the dividends for previous years.
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Plan 1 Plan 2 Date of General Meeting April 7, 2006 April 7, 2006 Date of Executive Board Meeting May 30, 2006 May 15, 2007 Total number of shares potentially subscribable or purchasable by (i) company officers (3) 135 000 99 000 (ii) the first ten employee recipients (1)(3) 123 000 141 000 Starting date of exercise of options May 31, 2010 May 16, 2011 Expiry date May 30, 2014 May 15, 2015 Subscription or purchase price (3) 30.50 47.96 Number of shares subscribed to at June 30, 2008 (3) 0 0 Subscription or purchase options of cancelled shares (3) 37 500 4 503 Outstanding subscription or purchase options at June 30, 2008 (1) (2) 547 500 424 783
(1) The number of employees shown may exceed ten where the number of options is identical, or less than ten wheer there are fewer than ten employees in a plan (2) Applies only to officers and the first 10 employee recipients (3) After face value divison in 2003 (for the plan suscripbed in January 24, 2003) and in 2007 (for other plans)
Options Number of Exercise price Number of options Number of Options outstanding at Date granted shares Exercise period (euros) (1) exercieed in H1 options cancelled reMayning at Stock options December 31, granted (1) 2008 in H1 2008 June 30, 2008 Executive Board 2007 Michel Clair May 30, 2006 (2) 45 000 May 31, 2010 to May 30, 2014 30.50 45 000 45 000 May 15, 2007 (2) 33 000 May 16, 2011 to May 15, 2015 47.96 33 000 33 000 Claude Lobjoie May 30, 2006 (2) 30 000 May 31, 2010 to May 30, 2014 30.50 30 000 30 000 May 15, 2007 (2) 15 000 May 16, 2011 to May 15, 2015 47.96 15 000 15 000
Jean Michel Gault May 30, 2006 (2) 30 000 May 31, 2010 to May 30, 2014 30.50 30 000 30 000 May 15, 2007 (2) 24 000 May 16, 2011 to May 15, 2015 47.96 24 000 24 000
Laurent Morel May 30, 2006 (2) 30 000 May 31, 2010 to May 30, 2014 30.50 30 000 30 000 May 15, 2007 (2) 27 000 May 16, 2011 to May 15, 2015 47.96 27 000 27 000
(1) After the face value division of 2007 (2) Resolution of the EGM of April 7, 2006 and restatement of the division of the face value by 3 in 2007
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9. Additional information
9.1. Disclosures of the fair value model
fair value June 30, 2008 fair December 31, 2007 June 30, 2008 restatements value model fair value model in thousands of euros
Lease income 329 071 329 071 597 178 Land expenses (real estate) -1 301 1 301 0 0 Non-recovered rental expenses -9 327 -9 327 -17 189 Building expenses (owner) -15 276 -15 276 -29 440
Net lease income 303 167 1 301 304 468 550 549
Management, administrative and related income 32 259 32 259 64 195 Other operating income 6 665 6 665 18 265 Change in the fair value of investment property 79 033 79 033 911 522 Survey and research costs -1 446 -1 446 -1 146 Payroll expense -37 740 -37 740 -64 810 Other general expenses -12 368 -12 368 -25 165 Depreciation and amortization allowance on investment property -105 025 104 276 -749 -1 475 Depreciation and amortization allowance on PPE -2 614 -2 614 -4 365 Provisions -197 -197 -2 663
Results of operations 182 701 184 610 367 311 1 444 907
Gains on the sale of investment property and equity interests 79 352 79 352 96 113 Net book value of investment property and equity investment sold -58 042 -18 594 -76 636 -85 873 Gains from the sale of investment property and equity investment securities 21 310 -18 594 2 716 10 240 Profit on the sale of short term assets 318 318 46
Net dividends and provisions on non-consolidated investments 26 26 549 Net cost of debt -91 386 -91 386 -162 931 Change in the fair value of financial instruments 17 17 0 Effect of discounting 1 335 1 335 726 Share in earnings of equity-method investees 466 1 726 2 192 5 456
Pre-tax earnings 114 787 167 742 282 529 1 298 993
Corporate income tax -15 443 -21 885 -37 328 18 681
Net income of consolidated entity 99 344 145 857 245 201 1 317 674 of which Group share 80 530 130 113 210 643 1 148 991 Minority interests 18 814 15 744 34 558 168 682
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fair value June 30, 2008 December 31, 2007 June 30, 2008 restatements fair value model fair value model in thousands of euros
Non-allocated goodwill 84 927 -8 761 76 166 75 892 Intangible assets 11 504 0 11 504 7 269 Tangible assets 41 086 0 41 086 41 340 Investment property 6 857 500 -6 847 771 9 729 13 128 Fair value of investment property 10 712 449 10 712 449 10 425 230 Fixed assets in progress 677 080 -207 155 469 925 190 507 Fair value of buildings held for sale 89 088 59 008 148 096 61 264 Equity method security 44 026 4 548 48 574 49 422 Non consolidated securities 324 0 324 512 Other non current assets 28 440 0 28 440 33 846 Interest rate swaps 156 953 0 156 953 84 011 Deferred tax assets 34 351 34 351 33 675
NON-CURRENT ASSETS 8 025 279 3 712 318 11 737 597 11 016 096 Inventory 11 580 11 580 11 684 Trade receivables and related accounts 75 271 75 271 57 287 Other receivables 281 341 -81 870 199 471 153 191 Tax receivables 63 398 0 63 398 49 645 Other debtors 217 943 -81 870 136 073 103 546 Cash and near cash 291 412 0 291 412 195 476
CURRENT ASSETS 659 604 -81 870 577 734 417 638
TOTAL ASSETS 8 684 883 3 630 448 12 315 331 11 433 734 0.000 Capital 199 457 199 457 193 890 Additional paid-in capital 960 429 960 429 835 187 Statutory reserves 19 389 19 389 18 466 Consolidated reserves 924 038 2 792 627 3 716 665 2 588 910 Treasury shares -95 466 0 -95 466 -96 168 Fair value of financial instruments 104 935 0 104 935 51 922 Fair value of investment property 2 792 627 2 792 627 1 828 969 Other consolidated reserves 914 569 0 914 569 804 187 Consolidated earnings 80 530 130 114 210 644 1 148 991 Shareholders' equity, group share 2 183 843 2 922 741 5 106 584 4 785 444 Minority interests 499 668 463 670 963 338 928 424 SHAREHOLDERS' EQUITY 2 683 511 3 386 411 6 069 922 5 713 868 Non-current financial liabilities 4 709 342 4 709 342 4 400 820 Long-term allowances 11 866 11 866 11 425 Interest rate swaps 1 760 1 760 7 731 Security deposits and guarantees 118 357 118 357 107 899 Deferred tax liabilities 201 395 244 037 445 432 438 653
NON-CURRENT LIABILITIES 5 042 720 244 037 5 286 757 4 966 528 CURRENT LIABILITIES 958 652 958 652 753 338
TOTAL LIABILITIES AND 8 684 883 3 630 448 12 315 331 11 433 734 SHAREHOLDERS' EQUITY
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Fair value refers to the amount for which an asset may be exchanged between properly informed, consenting parties acting under the conditions of normal competition.
The fair value is the most likely price (excluding transaction fees and expenses) that could be reasonably obtained on the market on the balance sheet date.
The fair value of Klépierre buildings is determined by third-party appraisers. Klépierre has entrusted the task of appraising the value of its holdings to a number of appraisers. Atisreal Expertise and Foncier Expertise are jointly responsible for appraising office property holdings.
The Group’s shopping centers are appraised by the following appraisers: - Retail Consulting Group Expertise (RCGE) appraises all French assets (with the exception of the Progest portfolio), approximately 50% of Spanish assets (the centers held by Klecar Foncier Espana and Klecar Foncier Vinaza) and all the Italian, Czech, Slovakian, Belgian, Portuguese and Greek portfolios - Cushman & Wakefield appraises the other half of the Spanish portfolio (the centers held by Klecar Foncier Iberica); - ICADE Expertise is responsible for appraising the Progest portfolio in France and all Polish and Hungarian assets; - Atisreal appraises the Cap Nord portfolio and shop premises. All appraisals are carried out in accordance with the principles of the Real Estate Appraisal Guidelines (Charte de l’Expertise en Evaluation Immobilière) and the “Barthès de Ruyter” COB/CNC working group recommendations. The market value is the value as appraised by the independent appraisers responsible for valuing the Group's holdings on June 30 and December 31 of each year, but excludes transfer duties and fees (fees are measured on the basis of a direct sale of the building, even though these costs can, in some cases, be reduced by selling the company that owns the asset).
Office buildings The appraisers use two approaches: the first involves a direct comparison with similar transactions completed in the market during the period, whilst the second involves capitalizing recognized revenue or estimated asset.
Analysis of this revenue identifies one of three scenarios depending on whether the lease income is substantially equal to, higher or lower than the market value.
Where lease income and market value substantially equal, the lease income used for the purpose of the appraisal is the actual lease income earned from the property. Where the lease income is higher than the market value, the appraisal uses the market value and takes into account the capital gain arising from the difference between the actual lease income and the market value.
Where lease income is lower than the market value, the appraisers take into account the remaining time before the lease will be reviewed and the rental amount will be aligned with the market rate. In accordance with the French decree of September 30, 1953, the rental amounts payable on properties used solely as office premises are automatically aligned with market rates when their leases come up for renewal.
The appraisers therefore worked on the assumption that the owners of such property would be able to align rents with market rates when the leases concerned come up for renewal, and have reflected the current occupancy circumstances in the form of a capital loss calculated as described above. The appraisers did not limit their approach to properties coming up for renewal in the forthcoming three years, on the grounds that the investors involved in current market transactions plan further ahead than three years.
Where lease income is higher than market value, the financial capital gain stated has been added to the calculated value, which is equal to the (5.5%) discounted value of the difference between the actual lease
- 76 - Semi-annual Report, June 2008
income and the market price until the expiration of the first firm period of the lease. In the third scenario, the capital loss has been deducted from the calculated value. This equates to the (5.5%) discounted value of the difference between the actual lease income and the market price until the lease expires.
Since December 31, 2005, appraisers have based their work on the rate of return (yield) rather than the capitalization rate. In other words, the rate used was that applied to the income calculated as described above in order to arrive to an appraised value inclusive of transfer duties. Previously, the rate used resulted in a valuation exclusive of transfer duties. The decision to use this rate is the result of observing the market from the point of view of transactions actually completed by investors. To arrive to the appraised value exclusive of transfer duties, the transfer duties and fees were deducted using a country-specific rate.
Shopping centers
To determine the fair market value of a shopping center, appraisers apply a yield rate to net annual lease income for leased-up premises, and to discounted net market price depending on the projected vacancy period for vacant properties. From this initial value obtained through capitalization of net lease income is deducted the discounted value of minimum guaranteed rent, charges on current vacant properties, non chargeable works to be carried out. In addition, a normative vacancy rate is defined for each asset. The discount rate used is equal to the yield rate applied to determine fair market value. Gross lease income includes minimum guaranteed rent, variable rent and the market price of any vacant premises. Net rent is determined by deducting all charges from the gross rent: management costs, non chargeable expenses, charges on provision for vacant premises and average losses over recognized outstanding rents for the last 5 years.
The yield rate is set by the appraiser based on defined parameters and especially: retail sales area, layout, competition, type and percentage of ownership, rental reversion and extension potential, and comparability with recent market transactions.
Through the structure of its portfolio and in a concern for savings and efficiency, Klepierre uses two methods to conduct its appraisals as the assets have specific valuation challenges. Accordingly, the assets appraised for the first time and assets whose last appraisal value is at most greater than 110% of the net carrying value (excluding deferred taxes) are subject to dual valuation: measurement based on return, as explained above, and measurement through the discounted future flows method. The second method determines the value of a real asset by the sum of discounted financial flows based on a discount rate defined by the appraiser. The appraiser estimates the expected overall revenues and expenses on the asset side then measures an “ultimate value” at the end of the analysis period (an average of 10 years). By comparing the market rental values and facial rental values, the appraiser takes into consideration the rental potential of the property asset while retaining the market rental values at the end of the leases after deducting costs incurred by these changes in tenant mix. Lastly, the appraiser discounts the expected cash flow in order to determine the actual value of the property asset. The retained discount rate takes into account the market risk-free rate (OAT 10 years) to which will be added a property market risk and liquidity premium, and lastly, a specific premium for the asset, depending on its location, characteristics and the tenant mix of each building.
9.2. Earnings per share
The basic earnings per share is calculated by dividing net income for the period attributable to ordinary shares by the weighted average number of ordinary shares in circulation during the year, excluding treasury shares.
- 77 - Semi-annual Report, June 2008
Mazars & Guérard Deloitte & Associés 61, rue Henri Regnault 185, avenue Charles-de-Gaulle 92400 Courbevoie 92200 Neuilly-sur-Seine
Klépierre Société Anonyme 21, Avenue Kléber 75016 PARIS
Statutory auditors’ report on the consolidated financial statements
Year ended 31 December 2007
Dear Shareholders,
Following our appointment as statutory auditors by your Annual General Meeting, we have audited the accompanying consolidated financial statements of Klépierre for the year ended 31 December 2007. The consolidated financial statements have been approved by the Management Board. Our role is to express an opinion on these financial statements, based on our audit.
I - OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS
We conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
3
In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities and of the financial position of the Group as at 31 December 2007 and of the results of its operations for the year then ended in accordance with IFRSs as adopted by the EU.
II - JUSTIFICATION OF ASSESSMENTS
In accordance with the requirements of Article L.823-9 of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we bring to your attention the following matters: • As indicated in Notes 2.5 and 9.1 to the consolidated financial statements, the real estate assets are assessed by independent real estate experts. Our procedures consisted in examining the valuation method used by these experts and to ensure ourselves that any possible impairment as well as the determination of the fair value of the buildings were performed on the basis of external assessments.
• As indicated in Note 2.7 to the consolidated financial statements, the Group uses certain estimates when monitoring the value of goodwill. Our procedures consisted in assessing the data and the assumptions on which these estimates are based, reviewing the calculations performed by your company, examining management approval procedures for these estimates and finally verifying that the notes to the financial statements give appropriate disclosures of the assumptions adopted by the Group.
• As indicated in Note 2.16 to the consolidated financial statements, your company recognises its derivative instruments using hedge accounting as set forth in IAS 39. We examined the classification and documentation criteria specific to this standard.
These assessments were made in the context of our audit of the consolidated financial statements taken as a whole, and therefore contributed to the opinion we formed which is expressed in the first part of this report.
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III – SPECIFIC VERIFICATIONS
In accordance with professional standards applicable in France, we also verified the information given in the Group’s management report. We have no matters to report as to its fair presentation and consistency with the consolidated financial statements.
Signed in Courbevoie and Neuilly-sur-Seine, 7 March 2008 The Statutory Auditors
MAZARS & GUÉRARD DELOITTE & ASSOCIÉS
Julien MARIN-PACHE Pascal COLIN Laure SILVESTRE-SIAZ
This is a free translation into English of the statutory auditors’ report issued in French and is provided solely for the convenience of English speaking users. The statutory auditors’ report includes information specifically required by French law in such reports, whether modified or not. This information is presented below the opinion on the consolidated financial statements and includes an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the consolidated financial statements. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
5 KLEPIERRE
Consolidated Financial Statements as of December 31, 2007 1. Significant events of fiscal year 2007 and prior exercise ...... 8
2. Accounting principles and methods...... 13
3. Scope of consolidation...... 31
4. Notes to the financial statements: Balance sheet ...... 38 4.1. Non-allocated goodwill ------38 4.2. Intangible assets ------38 4.3. Tangible assets------38 4.4. Investment property and fixed assets in progress ------39 4.5. Properties held for sale------41 4.6. Equity method securities------41 4.7. Non-consolidates securities------42 4.8. Non-consolidated securities ------42 4.9. Other non current assets------43 4.10. Inventories------43 4.11. Trade accounts and notes receivables------44 4.12. Other receivables------44 4.13. Cash and near cash ------45 4.14. Equity------46 4.15. Current and non-current financial liabilities------46 4.16. Interest rate hedging instruments ------50 4.17. Long-term and short-term allowances------52 4.18. Deferred taxes------53 4.19. Tax liabilities, staff benefits and other payables ------53 5. Notes to the financial statements: Income Statement ...... 54 5.1. Segment Income Statement as of December 31, 2007------54 5.2. Operating revenue ------56 5.3. Operating expenses ------58 5.4. Results of the sale of investment property and equity interests------59 5.5. Net cost of debt ------59 5.6. Corporate income tax ------60 6. Exposure to risks and hedging strategy ...... 64 6.1. Interest rate risk------64 6.2. Liquidity risk------67 6.3. Currency risk ------68 6.4. Counterparty risk------69 6.5. Equity risk------69 7. Financing and guarantee commitments ...... 69 7.1. Reciprocal commitments ------69 7.2. Commitments given and received------70 7.3. Guarantees ------71 7.4. Shareholders’ agreement ------72 7.5. Commitments on operating leases - Lessors ------73
- 2 - Annual report 2007 7.6. Commitments on lease agreements - financing------75 7.7. Holding commitments ------75 8. Compensations and employee benefits...... 75 8.1. Payroll expenses ------75 8.2. Retirement commitments------76 8.3. Stock options ------78 9. Additional information ...... 79 9.1. Disclosures on the fair-value model ------79 9.2. Earnings per share------83 9.3. Affiliated companies ------85 9.4. Compensation of Directors and Officers ------85 9.5. Post balance sheet date events ------85 9.6. Identity of the consolidating company ------85
- 3 - Annual report 2007 Income Statement as of December 31, 2007
December 31, December 31, December 31, In thousands of euros Notes 2007 2006 2005
Lease income 5.2 597 178 519 570 449 017 Land expenses (real estate) 5.3 -2 515 -2 598 -2 296 Non-recovered rental expenses 5.3 -17 189 -6 296 -5 240 Building expenses (owner) 5.3 -29 440 -30 990 -32 379
Net lease income 548 034 479 686 409 102
Management, administrative and related income 5.2 64 195 57 497 46 362 Other operating income 5.2 18 265 9 480 7 217 Survey and research costs -1 146 -1 124 -835 Payroll expense 8.1 -64 810 -59 938 -52 365 Other general expenses -25 165 -22 145 -19 040 Depreciation and amortization allowance on investment property 5.3 -169 297 -140 968 -125 535 Depreciation and amortization allowance on PPE 5.3 -4 365 -3 126 -4 587 Provisions 5.3 -2 663 12 -3 111
Results of operations 363 048 319 374 257 208
Gains on the sale of investment property and equity interests 5.4 96 113 122 459 163 831 Net book value of investment property and equity investment sold 5.4 -55 740 -91 399 -143 597 Results of the sale of investment property and equity interests 40 373 31 060 20 234
Profit on the sale of short term assets 46 1 490 129
Net dividends and provisions on non-consolidated investments 549 -161 -247 Net cost of debt 5.5 -162 931 -134 806 -112 700 Change in the fair value of financial instruments 055-40 Effect of discounting 726 -1 200 -1 330 Share in earnings of equity-method investees 2 634 671 557
Pre-tax earnings 244 445 216 483 163 811
Corporate income tax 5.6 -13 493 -22 016 -17 909
Net income of consolidated entity 230 952 194 467 145 902 of which Group share 197 712 164 534 120 449 Minority interests 33 239 29 933 25 453
Net income in share in euros 1,4 1,2 0,9 Net income fully diluted share in euros 1,4 1,2 0,9
- 4 - Annual report 2007 Balance sheet as of December 31, 2007 December 31, 2007 December 31, 2006 December 31, 2005 In thousands of euros Notes
Non-allocated goodwill 4.1 84 653 41 555 33 410 Intangible assets 4.2 7 269 7 478 6 033 Tangible assets 4.3 41 340 41 482 42 167 Investment property 4.4 6 670 090 5 930 744 5 487 725 Fixed assets in progress 4.4 463 983 207 825 107 692 Property held for sale 4.5 36 200 46 985 48 857 Equity method securities 4.6 46 600 3 023 2 877 Non-consolidated securities 4.8 512 585 609 Other non-current assets 4.9 33 846 17 104 18 743 Interest rate swaps 4.16 84 011 65 139 36 037 Deferred tax assets 4.18 33 675 26 275 33 417
NON-CURRENT ASSETS 7 502 179 6 388 195 5 817 567 Inventory 4.10 11 684 2 463 7 895 Trade accounts and notes receivable 4.11 57 287 46 159 42 437 Other receivables 4.12 215 688 264 364 207 788 Tax receivables 49 645 111 048 62 685 Other debtors 166 043 153 316 145 103 Cash and near cash 4.13 195 476 157 696 166 663
CURRENT ASSETS 480 135 470 682 424 783
TOTAL ASSETS 7 982 314 6 858 877 6 242 350
Capital 193 890 184 657 184 657 Additional paid-in capital 835 187 830 622 743 166 Statutory reserve 18 466 18 466 18 466 Consolidated reserves 756 275 756 865 813 021 Treasury shares -96 168 -30 823 -9 096 Fair value of financial instruments 51 922 39 734 -9 201 Other consolidated reserves 800 521 747 954 831 318 Consolidated earnings 197 712 164 534 120 449 Shareholders' equity, group share 2 001 530 1 955 144 1 879 759 Minority interests 480 502 436 961 424 829
SHAREHOLDERS' EQUITY 2 482 032 2 392 105 2 304 588 Non-current financial liabilities 4.15 4 400 820 3 680 254 2 633 906 Long-term allowances 4.17 11 425 8 572 7 579 Interest rate swaps 4.16 7 731 0 4 009 Security deposits and guarantees 107 899 93 900 81 338 Deferred tax liabilities 4.18 219 069 127 986 158 124
NON-CURRENT LIABILITIES 4 746 944 3 910 712 2 884 956 Current financial liabilities 4.15 439 195 281 441 789 941 Trade payables 62 991 61 772 55 790 Payables to fixed asset suppliers 8 354 13 017 21 579 Other liabilities 4.19 163 209 135 017 115 847 Social and tax liabilities 4.19 79 589 64 813 69 649 Short-term allowances 0 0 0 CURRENT LIABILITIES 753 338 556 060 1 052 806
TOTAL LIABILITIES AND 7 982 314 6 858 877 6 242 350 SHAREHOLDER'S EQUITY
- 5 - Annual report 2007 Consolidated cash flow statement as of December 31, 2007
31 December 31 December 31 December 2007 2006 2005 in thousands of €
Cash flow from operating activities
Net income from consolidated companies 230 951 194 467 145 902
Elimination of expenditure and income with no cash effect or not related to operating activities - Amortizations and provisions. 179 462 141 302 135 657 - Capital gains and losses on asset sales net of taxes and deferred taxes- 28 849 - 3 607 - 3 338
- Reclassification of financial interests and other items 191 156 142 079 122 544
Gross cash flow from consolidated companies 572 720 474 241 400 765 Paid Taxes - 28 505 - 79 349 - 46 612 Change in operating working capital requirements 72 379 - 1 633 8 158
Cash flow from operating activities 616 594 393 259 362 311
Cash flow from investment activities
Income from fixed assets sales 99 949 120 773 163 893 Acquisitions of intangible assets- 2 228 - 822 - Acquisitions of tangible assets- 856 - 1 461 - Acquisitions of investment properties- 362 016 - 671 972 - 479 378 Acquisitions of subsidiaries through deduction of acquired cash- 515 541 - 66 180 - 130 145
Change in loans and advance payments granted and other investments 1 055 2 925 24 335
Net cash flow from investment activities - 779 637 - 616 737 - 421 295
Cash flow from financing activities
Dividends paid to the parent company’s shareholders- 146 395 - 124 163 - 105 727 Dividends paid to minorities - 58 796 - 39 782 - 23 186
Dividends payable 59
Change in net position 82 21 105 -
Repayment of share premium -
Acquisitions/Sale of treasury shares- 65 394 - 19 869 1 826 New loans, financial debts and hedging instruments 1 432 914 1 918 290 590 238
Repayment of loans, financial debts and hedging instruments- 799 887 - 1 409 199 - 302 764 Financial interests paid - 167 114 - 115 260 - 113 020
Net cash flows from financing transactions 195 469 231 122 47 367
Currency fluctuations- 1 556 36 1 765
CHANGE IN CASH AND CASH EQUIVALENTS 30 870 7 680 - 9 852
Cash at beginning of fiscal year 62 697 55 017 64 869 Cash at close of fiscal period 93 567 62 697 55 017
- 6 - Annual report 2007 Statement of changes in consolidated equity as of December 31, 2007
Net Shareholders’ Additional Statutory Minority Capital Currency Other income/loss equity (group Total equity paid-capital reserve Treasury Change in interests translation consolidated Total for the year share) shares fair value in thousands of € reserves reserves
December 31,2005 184 657 743 166 18 466 -9 096 -9 201 0 831 318 813 021 120 449 1 879 759 424 829 2 304 588 Change in the capital of the consolidating company 87 456 - 87 456 - 87 456 - - Acquisitions and sale of treasury shares - 21 727 2 218 - 19 509 - 19 509 - 19 509 Transaction costs in capital - 1 855 - 1 855 - 1 855 - 1 855 Consolidated earnings for the year - 164 534 164 534 29 933 194 467 Assignment of earnings and dividends paid to the parent company’s - 3 714 - 3 714 - 120 449 - 124 163 - 124 163 shareholders Change in the fair value of financial instruments 48 935 48 935 48 935 48 935 Change in translation adjustment 6 651 6 651 6 651 42 6 693 Changes in accounting methods - - - Change in the scope of consolidation and % of interest - - 22 124 22 124 Dividends paid to minorities - - - 39 782 - 39 782 Repayments of equity to minorities ------Other movements 792 792 792 - 185 607 December 31,2006 184 657 830 622 18 466 -30 823 39 734 0 747 954 756 865 164 534 1 955 144 436 961 2 392 105
Change in the capital of the consolidating company 9 233 4 565 - 13 798 - 13 798 - - Acquisitions and sale of treasury shares - 65 345 - 345 - 65 690 - 65 690 - 65 690 Transaction costs in capital - - - Consolidated earnings for the year - 197 712 197 712 33 239 230 951 Assignment of earnings and dividends paid to the parent company’s 18 139 18 139 - 164 534 - 146 395 - 146 395 shareholders Change in the fair value of financial instruments 12 188 12 188 12 188 12 188 Change in translation adjustment 25 647 25 647 25 647 122 25 769 Changes in accounting methods - - - Change in the scope of consolidation and % of interest 19 073 19 073 19 073 38 272 57 345 Dividends paid to minorities - - - 28 796 - 28 796 Repayments of equity to minorities - - - Other movements 3 851 3 851 3 851 704 4 555 December 31,2007 193 890 835 187 18 466 -96 168 51 922 0 800 521 756 275 197 712 2 001 530 480 502 2 482 032
- 7 - Annual report 2007 1. Significant events of fiscal year 2007 and prior exercise
Fiscal year 2007
x Change in Klépierre group’s shopping center holdings
In Poland, on May 7, 2007 Klépierre acquired Polish shopping centers located in the downtown areas of Rybnik and Sosnowiec, and on July 27 acquired the one in downtown Lublin from Plaza Centers Europe (PCE), for a total of € 168 million. This transaction was made under the terms of the development agreement concluded with PCE in 2005, pertaining in particular to 3 shopping centers in Poland and 2 in the Czech Republic.
The centers, which were inaugurated in March and May 2007, are fully leased up. Rybnik Plaza offers gross leasable floor area (GLA) of 18 075 sq.m. and 81 retail outlets, Sosnowiec Plaza has 13 150 sq.m. GLA and 75 retail outlets, and Lublin has 26 100 sq.m. GLA and 91 retail outlets.
In Hungary, Klépierre paid € 14.2 million to acquire 11 566 sq.m. of office space located in the real estate complex within the Duna Plaza shopping center that the Group already owns. The primary aim of this transaction was to facilitate the completion of an extension project for the center, which currently has 224 retail outlets covering GLA of 36 040 sq.m. Klépierre also offered to acquire from Futureal Real Estate Holding Ltd. a shopping center project located within the last major real estate development deal in downtown Budapest. The project, covering 22 hectares and including 2 800 new apartments, is the largest service-oriented real estate development initiative in downtown Budapest, and includes 150 000 sq.m. of office space featuring a scientific R&D center and 10 000 sq.m. of public space surrounded by 20 000 sq.m. dedicated to public access leisure and recreation. The shopping center will cover 34 600 sq.m. of leasable area spread over 4 levels, one of which will be entirely devoted to food and entertainment/recreation. It will also include three levels of underground parking for 1 200 vehicles. After obtaining a definitive building permit, Klépierre acquired the real estate base and, in addition, signed a property development agreement with the seller to carry out the construction work on the related development. Ségécé Hungary is responsible for the lease-up phase. Work commenced in August, and delivery is scheduled for the third quarter of 2009. Klépierre estimates put the total investment at € 229 million, including interest expense carried until the completed project is open for business, including the € 111 million euro outlay to date. In Italy, the restructured Val Vibrata shopping center in Colonella, on the Adriatic coast, was inaugurated on April 19, 2007. In an enlarged and renovated mall, the range of retailers has expanded with the arrival of 20 new outlets, including Esprit and Camaieu.
In Portugal, Klépierre increased its equity interest from 50% to 100% in the Parque Nascente shopping center in Gondomar, when it paid 64.8 million euros in September to acquire the 50% stake held by Prédica.
In Greece, Klépierre paid 21 million euros to acquire the Carrefour Larissa shopping mall.
In France, Klépierre paid 116 million euros for interests in 13 shopping centers or retail facilities under the terms of an agreement entered into on December 21, 2006 with Mr. Henri Hermand. They represent total useable retail floor area of more than 88 000 sq.m., 36 000 sq.m. of which is the share that was sold. In completing this transaction, Klépierre has acquired a stake in a number of large shopping centers, including Creil Saint- Maximin, Tourville-la-Rivière near Rouen and Le Belvédère in Dieppe. Four plots of land are also part of the agreement. The projected use for the main one, located in Forbach (57), is the creation of a business park covering 42 000 sq.m. next to a shopping mall and hypermarket.
In July, Klépierre acquired the two Leclerc hypermarkets adjoining the existing Blagnac and Saint Orens malls in Toulouse, which it already owns.
- 8 - Annual report 2007 After 19 months of work, the extension of the Belair center in Rambouillet was inaugurated in May 2007. The hypermarket was expanded by 2 450 sq.m., while the size of the mall grew fourfold. The retail mall now has a total of 45 retail outlets (there were 25 in 2005), including 5 mid-sized units (with Zara and Darty).
Klépierre invested 33 million euros to transform the Cap Saran mall, located north of Orléans, which reopened its doors on October 17, 2007. After 11 months of work, shoppers at the center are discovering 35 new retailers that reflect current consumption patterns and preferences, particularly in the area of fashion.
The extension of the Iroise shopping center in Brest was inaugurated on October 25, allowing for the integration of several new and particularly dynamic retailers such as H&M and Darty. In addition, Klépierre inaugurated on September 4 the Champ de Mars shopping center in Angoulême. Developed by Ségécé, the downtown mall covers 15 500 sq.m. of retail floor area and includes a “city market” Monoprix, 3 mid-sized units, 36 retail outlets, and an array of restaurants and services. This shopping center represents an investment of 63 million euros.
Finally, Klépierre sold its 50% interest in the Cordeliers center in Poitiers for a total of 34.2 million euros in late November. The sale price exceeded the June 30, 2007 appraisal by 35%.
Retail segment: Klémurs pursues its development strategy
In March 2007, Klémurs acquired a portfolio of 14 assets integrated into business zones of the first rank, located on the outskirts of large metropolitan areas in France, for 37.2 million euros.
With this acquisition, Klémurs initiated the diversification of its portfolio, with the addition in particular of the Mondial Moquette retail outlets (58% of the investment in value terms).
The first stage in the development partnership with Buffalo Grill was carried out with the acquisition of 8 new restaurants for 16.8 million euros, bringing to 136 the number of Buffalo Grill restaurant properties owned outright (51) or via property finance leases (85).
At the end of December 2007, Klémurs acquired two Sephora retail outlet properties, located in the main shopping streets of Metz and Avignon, for an investment of 10.3 million euros.
Also at the end of 2007, Klémurs entered into a new partnership agreement with DéfiMode and the Vivarte group, under the terms of which Klémurs will become the owner of 112 outlets (99,000 sq.m.) in parallel to the acquisition by the Vivarte group of the clothing retailer’s operation. The investment, which will be finalized in two phases—87 existing assets will be acquired over the first quarter of 2008, and 25 under construction will be acquired at the latest on June 30, 2009—will total 153 million euros for expected net rents of 9.1 million euros, full year. This transaction is consistent with the Group’s strategy of developing real estate partnerships with major retailers.
Offices: four disposals and pursuit of the Sereinis project
Klépierre sold two office buildings located in Levallois-Perret (Front de Paris) and Rue de Turin (Paris, 8th arrondissement), as well as two minor assets (in Champlan-91 and a warehouse in Strasbourg) for a total amount of 74.7 million euros. These 4 assets contributed 0.4 million euros to rents in 2007. The related transactions were completed at a price that exceeded the latest appraisals by more than 11%.
Finally, construction work continued on the Sereinis building in Issy-les-Moulineaux, leading to capital expenditure of 14.6 million euros in 2007. The delivery of the building is maintained for late 2008, and the lease-up phase is expected to begin shortly.
- 9 - Annual report 2007 Full ownership of Ségécé strengthens Group cohesion
Klépierre acquired full ownership of Ségécé by purchasing the minority interests held by AXA Reim and BNP Paribas for 20 million euros (10%) and 30 million euros (15%), respectively.
Change in debt and debt financing terms
On Friday, September 21, 2007, Klépierre contracted a syndicated line of credit for 1 billion euros with five banks.
Launched for an initial amount of 800 million euros, this new syndicated loan has the following features:
Firm term of 7 years; Margin of between 0.45% and 0.55%, based on a Loan-To-Value grid (net debt/RNAV); Financial covenants, identical to those contracted with a banking syndicate in January 2006, pertaining primarily to the Loan-To-Value ratio (limited to 52%), EBITDA/interest expense (minimum 2.5), secured financing debt/RVAV ratio (limited to 20%). The banks participating in the loan are BNP Paribas (lead arranger), BECM (Crédit Mutuel), Cicobail (Caisse d’Epargne Group), Helaba and ING (co-arrangers).
In January 2008, Standard & Poor’s confirmed Klépierre’s rating: BBB+ positive outlook.
Dividend payment
On April 5, 2007, the shareholders at the general meeting determined a dividend of 3.2 euros per share (1.067 euro after the 3-for-1 stock split), up by 18.5%. The dividend was paid on April 13, 2007.
Stock split
Pursuant to the decision made by the shareholders at their annual general meeting on April 5, 2007, Klépierre performed a 3-for-1 stock split on September 3, 2007, bringing the unit price per share from 4.20 euros to 1.40 euros. As a result, the number of shares was simultaneously multiplied by 3 to reach 138,492,687 shares.
This transaction was preceded on August 31, 2007 by a capital increase via the capitalization of reserves in the amount of 9,232,845.80 euros, bringing the par value of the share from 4 euros to 4.20 euros.
Following these transactions, on September 3, 2007 the share capital of Klépierre was 193,889,761.80 euros, divided into 138,492,687 shares, each with a par value of 1.40 euro.
Fiscal year 2006
Change in Klépierre group’s shopping center holdings
- 10 - Annual report 2007 In France, the Place d’Armes shopping center located in downtown Valenciennes was inaugurated on April 18. For Klépierre, the investment was 51.8 million euros, for full-year rents of 4.6 million euros.
Featuring 16 000 sq.m. GLA over two levels, the Place d’Armes center offers 60 new retail outlets (FNAC, H&M, Match supermarket, Zara, Séphora).
The acquisition of the Toulouse Purpan shopping center comes after the completion of major renovation work on the mall and the Carrefour hypermarket. The new center covers 7 220 sq.m. of GLA and counts 32 retail outlets.
In addition, Klépierre raised its stake in the company that owns the Val d’Europe shopping center by 15% (64 046 sq.m. GLA), brining its total ownership to 55%.
In Italy, investments were primarily focused on the extension of existing centers, in particular with the Giussano shopping center (10.2 million euros), located to the northwest of Milan, and in Varese (€5.6 M).
Created in 1997, the Giussano shopping center was previously composed of a Carrefour hypermarket (14 000 sq.m.) and a 2 800 sq.m. mall. Now that the extension has been completed, the hypermarket covers 15 800 sq.m. and the size of the mall has been expanded to 8 200 sq.m., with 25 new retail anchors. There are three mid-sized units, including a Darty.
On January 5, 2006, Ségécé, a 75% subsidiary of Klépierre, acquired the outstanding capital of the Italian management company (PSG, which has since become Ségécé Italia), of which it previously owned 50%. The amount invested was 9.1 million euros.
In Spain, Klépierre acquired the Molina de Segura shopping center (Autonomus Community of Valence) on June 30, 2006. This 10 651 sq.m. mall features 79 retail outlets and a Supercor supermarket, as well as a 600- space parking lot. The total amount of the investment was 29.3 million euros, for estimated rents of 1.9 million euros.
In Portugal, Klépierre acquired the Braga shopping center (9 293 sq.m.) on December 28, 2006.
In the Czech Republic, Klépierre acquired the Novodvorska Plaza on June 29, 2006, located in the 4th district of Prague. Covering 26 000 sq.m., the center offers a Tesco (6 300 sq.m. GLA), around a hundred retail shops, an entertainment center composed of a Cinéma City and a bowling alley, as well as a parking for 870 vehicles. Klépierre invested 38.6 million euros.
Investment in the real estate of major retailers
Klémurs, an 84.1% subsidiary of Klépierre after the IPO (Initial Public Offering) carried out in December 2006, acquired ownership of 128 Buffalo Grill restaurant properties in France. The investment was 296.2 million euros (including transfer duties and acquisition fees), and constitutes the first step in the strategic partnership agreement between Klémurs and Buffalo Grill, which also calls for the involvement of Klémurs in the development of the brand in France and across Europe.
Office buildings: pursuit of divestment program and repositioning in acquisition
In accordance with its opportunistic investment policy for office properties, Klépierre both pursued its planned disposal program for mature assets and resumed its position as a buyer, making two acquisitions:
- The first covers 4 000 sq.m. and is located at 7 Rue Meyerbeer, in the heart of the central business district of Paris (Opéra). This prime location should ultimately generate genuine reversion potential.
- 11 - Annual report 2007 - The second involves the acquisition of an office building to be constructed in the ZAC Forum Seine in Issy- les-Moulineaux, in connection with the Property Development Contract (PDC). The building, which is scheduled for delivery at the end of 2008, will feature nearly 12 000 sq.m. of office space spread over 7 floors and more than 300 parking lots. The project is adjacent to another building owned by Klépierre, which is currently fully occupied by Steria.
These two transactions represent an investment of 112.9 million euros, including 67.0 million euros in 2006 and 45.9 million euros spread over 2007 and 2008 as par of the PDC of Issy-les-Moulineaux.
In addition, L’Espace Kléber, located at 25 Avenue Kléber (Paris, 16th arrondissement), is developing 9,866 sq.m. of useful weighted space and was taken up by the Crédit Suisse group (9 years firm), for two third of the total space, and by Veolia Environnement (5 years), for the remaining third.
The leases went into effect on February 1, 2006 and will generate annual revenue of 6.45 million euros.
In parallel, 4 office assets were sold (28 025 sq.m. in total) for 112.6 million euros. These assets contributed rents of 3.3 million euros in fiscal year 2006.
Change in debt financing terms
On January 31, 2006, Klépierre opened a line of credit for 1.5 billion euros, syndicated with 6 banks.
This credit facility was used to early refinance lines of credit expiring in 2006, 2007 and 2009, while also opening up new sources of financing.
In particular, Klépierre redeemed early the club deals it had set up in 2003 and 2004, which included a back-up line of 300 million euros due in March 2006, as well as medium-term lines that were fully drawn down, for a total of 750 million euros. The bridge loan that was set up in the second half of 2005, for up to 400 million euros and drawn down for 275 million euros, was also fully repaid. A new seven-year syndicated loan was contracted, with a back-up commercial paper facility of 300 million euros and a long-term line of credit for 1.2 billion euros. Its principal features are indicated below: • An initial margin of 0,35%, which is subject to adjustments based on a loan to value grid (ratio of net debt to revalued net assets); • Financing covenants that primarily concern the loan-to-value ratio (limited to 52%), the coverage of interest expense by EBITDA (minimum 2.5), and the secured financing to revalued net assets ratio (limited to 20%).
On February 28, 2006, Klépierre issued a 10-year bond, expiring on March 16, 2016, paying a coupon rate of 4.25%. The margin was set at 70bps above the 10-year swap rate. In response to the significant over-subscription, Klépierre decided to raise the face value of the bond to 700 million euros (versus the originally contemplated sum of €500 to 600 million). The bonds are listed on the Luxemburg Stock Exchange. Klépierre decided to use the proceeds to refinance bank loans expiring on 2006 and to meet the funding needs generated by its investment program.
Dividend payment
On April 7, 2006, the general meeting decided to set the dividend at 2.7 euros per share (0.9 euro after the 3-for- 1 stock split). The dividend was paid on April 13, 2006.
- 12 - Annual report 2007 2. Accounting principles and methods
Corporate reporting
Klépierre is a French law société anonyme (SA), subject to all the texts applicable to business corporation in France, and in particular the provisions of the commercial code. The company’s head office is located at 21 avenue Kléber in Paris.
On February 4, 2008, the Executive Board closed and authorized the publication of Klépierre S.A.’s consolidated financial statements for the period from January 1, 2007 to December 31, 2007 .
Klépierre shares are listed on Eurolist by Euronext Paris (Compartment A).
Principles of financial statement preparation
In accordance with European Regulation 1606/2002 dated July 19, 2002 on international accounting standards, the Klépierre Group consolidated financial statements for the year ended December 31, 2007 have been drawn up in conformity with IFRS rules, as adopted by the European Union and applicable as from that date.
The IFRS framework as adopted by the European Union includes the IFRS (International Financial Reporting Standards), the IAS (International Accounting Standards) and their interpretations (SIC and IFRIC).
The consolidated annual financial statements on December 31, 2007 are presented in the form of complete accounts including all the information required by the IFRS framework.
During the past fiscal year, the Group adopted the new standards and amendments to existing standards, as well as the new IFRIC interpretations described below. Adoption of these new standards and revised interpretations had no impact on the Group’s financial position or performance. However, it required additional notes to the consolidated financial statements: IFRS 7 Financial instruments: Disclosures IAS 1 Amendments – Presentation of financial statements IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of embedded derivatives IFRIC 10 Interim financial reporting and impairment
The main effects of these changes are as follows:
IFRS 7 Financial instruments – Disclosures
This standard stipulates that the notes to the financial statements should enable users to assess the significance of the financial instruments held by the Group as well as the nature and extent of risks arising from such instruments. The new disclosures required are to be included in the financial statements.
IAS 1 Presentation of financial statements
This amendment requires the Group to make additional disclosures that enable users of its financial statements to assess the objectives, policies and processes for managing capital.
- 13 - Annual report 2007 IFRIC 8 Scope of IFRS 2
This interpretation states that IFRS 2 applies to all transactions in which the entity cannot identify specifically some or all of the goods or services received, particularly in cases where equity instruments are issued, when the identifiable counterparty received by the entity appears to be less than the fair value of the equity instruments granted. This interpretation has no bearing on the Group’s financial position or performance.
IFRIC 9 Reassessment of embedded derivatives
IFRIC 9 requires an entity, when it becomes party to a contract, to assess whether any embedded derivatives contained in the contract must be separated, while subsequent reassessment is prohibited except where changes to the contract significantly modify cash flow. Given that the Group holds no embedded derivative requiring separation from a host contract, this interpretation has no impact on the Group’s financial position or performance.
IFRIC 10 Interim financial reporting and impairment
This interpretation states that an entity shall not reverse an impairment loss recognized in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost. Given that the Group has not recognized any such reversals, this interpretation has no impact on the Group’s financial position or performance.
Moreover, the Group has decided against early application of the following IFRS standards and interpretations:
IFRS 8 Operating segments IFRIC 11 IFRS 2 –Group and treasury share transactions
IFRS 8 Operating segments
This standard requires the Group to present specific information on its operating segments. It replaces the previous IFRS guidance on determining primary (business segment) and secondary reporting formats (geographic segments).
IFRIC 11 IFRS 2 – Group and treasury share transactions
This interpretation stipulates that the entity must account for any share-based payment arrangements granting its employees rights to its equity instruments must be accounted for as equity-settled transactions, whatever means the entity uses to settle the related obligation, whether the necessary instruments are purchased from third parties or provided by the entity’s shareholders.
- 14 - Annual report 2007 IFRS 1: Overview of methods for first-time adoption of IFRS in the financial statements at December 31, 2005
As a first-time adopter of IFRS standards at December 31, 2005, Klépierre applied the specific provisions of IFRS 1 relating to first-time adoption. For preparing the January 1, 2004 opening balance sheet, the retrospective application of the standards applicable at December 31, 2005 means the following:
- The assets and liabilities to be included in the opening balance sheet at January 1, 2005 are all assets and liabilities that meet the accounting definitions and criteria of IFRS, and only these. - The assets and liabilities are classified in accordance with IFRS. - The assets and liabilities are measured in accordance with IFRS. - The impact of adjustments is booked in equity at the beginning of the year. The impacts of first-time adoption of IFRS are detailed on page 137 in the 2005 reference document.
The IAS 32-39 standards on financial instruments are applied as from January 1, 2005 (with no comparative data, in accordance with paragraph 36 a of IFRS 1). The impacts of the application of IAS 32-39 are detailed in paragraph 10.5 of the notes to the consolidated financial statements included in the 2005 reference document.
As a first-time adopter at December 31, 2005, IFRS allows derogations from certain optional provisions: - Business combinations: non-restatement of business combinations that occurred prior to January 1, 2004 is allowed.
- Fair value or revaluation as presumed cost: the amount recorded in the January 1, 2003 opening balance sheet as a result of the revaluation of property, plant and equipment and investment property to fair value, following adoption of SIIC status, has been used as the presumed cost of those assets.
- Employee benefits: in the case of post-employment benefits under defined benefit plans, the Group has elected to apply the so-called “corridor” approach for posting actuarial gains and losses on the company’s commitments.
- Equity-settled transactions: only plans granted after November 7, 2002 and for which there were no vested rights at January 1, 2005 have been recognized in the accounts.
Compliance with accounting standards
The consolidated financial statements of Klépierre S.A. and all its subsidiaries were prepared in accordance with International Financial Reporting Standards (IFRS).
Consolidated financial statements – Basis of preparation
The consolidated financial statements include the financial statements of Klépierre S.A. and of its subsidiaries at December 31, 2007. The financial statements of subsidiaries are prepared using the same accounting period as that of the parent and consistent accounting methods.
Subsidiaries are consolidated as of the date on which they are acquired, which is the date on which the Group acquired a controlling interest; this accounting treatment prevails until the date on which this control ceases.
The Group’s consolidated financial statements are established according to the historical cost principle, with the exception of derivative financial instruments and financial assets that are being held for sale, which are measured and carried at their fair value. The carrying amount of assets and liabilities that are hedged according to a fair value hedge relationship, and which are otherwise measured at cost, is adjusted to reflect changes in fair
- 15 - Annual report 2007 value attributable to the risks being hedged. The consolidated financial statements are presented in euros, and all amounts rounded to the nearest thousandth unless otherwise indicated.
Summary of judgments and material estimates
In preparing these consolidated financial statements in accordance with IFRS, Group management was led to use estimates and make a number of realistic and reasonable assumptions. Some facts and circumstances may lead to changes in these estimates and assumptions, which would affect the value of the Group’s assets, liabilities, equity and earnings.
Use of estimates
The principal assumptions concerning future events and other sources of uncertainty linked to the use of estimates at year end for which there is a significant risk of material change in the net carrying amount of assets and liabilities in a subsequent year are presented below:
- Valuation of goodwill
The Group tests goodwill for impairment at least once a year. This requires estimating the value in use of the cash-generating units to which the goodwill is allocated. In order to determine their value in use, Klépierre has to make estimates on expected future cash flows from each cash-generating unit and also choose a pre-tax discount rate to calculate the current value of these cash flows.
- Investment property
The Group has its real estate assets appraised by third-party appraisers every half year according to the methods described in paragraph 9.1. The appraisers use assumptions as to future flows and rates that have a direct impact on the value of the buildings. The reference table IFR can be consulted on the Internet site of the European Commission : http://ec.europa.eu/internal_market/accounting/ias_fr.htm#adopted-commission.
2.1. Scope and method of consolidation
Consolidation scope
The consolidated financial statements cover all companies over which Klépierre has majority control, joint control or significant influence.
The calculation of the level of control takes account of potential voting rights that entitle their holders to additional votes if these rights can be exercised or converted immediately.
A subsidiary is consolidated from the date on which the Group obtains effective control.
The Group consolidates special purpose entities (SPEs) formed specifically to manage a transaction, even where the Group has no equity interest in the entity, provided that the substance of the relationship is controlled by the Group (the entity’s activities are conducted exclusively on behalf of the Group, and the Group has the decision- making and management powers). There are no special purpose entities in the Group.
Consolidation method
The Group’s consolidation method is not based solely on the extent of legal ownership of each entity: - Majority control: full consolidation. Control is presumed to exist when Klépierre holds more than half of the entity’s voting rights directly or indirectly. It is likewise presumed to exist when the parent has the power to direct the entity’s financial and operational policies, appoint, recall or convene the majority of the members of the board of directors or the equivalent management body.
- 16 - Annual report 2007 - Joint control: proportionate consolidation. Joint control exists only when the operational, strategic and financial decisions require unanimous consent of the controlling parties. That consent must take the form of a contractual agreement, e.g. articles of association, shareholders’ agreements and the like.
- Significant influence: equity method of accounting. Significant influence is the power to participate in an entity’s financial and operating policy decisions but not control or jointly control those policies. The Group is presumed to have significant influence if it directly or indirectly holds 20% or more of an entity’s voting rights. Equity-accounted shareholdings are initially recognized in the balance sheet at cost, plus or minus the share of the net position generated after the acquisition, and less impairment.
- No influence: non-consolidates company. The goodwill of equity-accounted companies is included in the carrying amount of “equity-accounted investments” and may not be amortized.
Inter-company transactions
Inter-company balances together with profits resulting from transactions between Group companies are eliminated. Since January 1, 2005, any internal margin on development fees incorporated into the cost price of capitalized assets or inventories by the companies that purchased them is eliminated.
Financial products billed to property development companies are listed among their inventories and recognized in the income statement.
2.2. Accounting for business combinations
According to IFRS 3, all business combinations covered by the standard must be accounted for using the purchase method.
A business combination is defined as the bringing together of separate entities or businesses into one reporting entity.
The acquirer must initially allocate the cost of the business combination by recognizing the identifiable assets, liabilities and contingent liabilities of the acquired business (except for non-current assets held for sale) at fair value at the acquisition date.
Goodwill is the difference between the price paid to acquire the consolidated companies’ securities and the acquirer’s interest in the net fair value of the identifiable assets and liabilities acquired .
On the acquisition date, the acquirer records positive goodwill as an asset. Negative goodwill is immediately recognized in the income statement.
Goodwill is no longer amortized, pursuant to IFRS 3 “business combinations.” However, it must be tested for impairment annually or more often if certain events or changed circumstances indicate possible impairment.
In this testing, goodwill is broken down by cash-generating unit (CGU), which is a homogeneous group of assets that generates identifiable cash flows.
Intangible assets are recognized separately from goodwill if they are identifiable, i.e. if they arise from contractual or other legal rights or if they are capable of being separated from the activities of the entity acquired and are expected to generated future economic benefits.
- 17 - Annual report 2007 Any adjustments to assets and liabilities recognized on a provisional basis must be made within 12 months of the acquisition date.
Recognition of the additional acquisition of securities in a controlled entity
The purchase of a minority interest by the parent is not treated as a business combination under IFRS 3. As a result, there are no specific accounting rules for this type of transaction. According to IAS 8.10, in the absence of a standard or an interpretation that specifically applies to a transaction, management must use its judgment in developing a relevant accounting policy. To account for such an acquisition of the minority interest in a previously controlled subsidiary, Klépierre’s approach is to recognize the purchased goodwill and to remeasure at fair value on the date of acquisition the additional portion of the net assets acquired. The previously held interest is not revalued.
2.3. Foreign currency translation
The consolidated financial statements are presented in euro, which is Klépierre’s functional and reporting currency. Each of the Group’s subsidiaries determines its functional currency, and all items in its financial statements are stated in that functional currency.
The Group’s foreign subsidiaries conduct certain transactions in a currency other than their functional currency. These transactions are initially recorded in the functional currency at the exchange rate on the date of the transaction.
On the balance sheet date, monetary assets and liabilities stated in foreign currency are translated into the functional currency at the closing exchange rate. Non-monetary items stated in foreign currency and carried at historical cost are translated using the exchange rate at the date of the initial transaction. Non-monetary items stated in foreign currency and carried at fair value are translated using the exchange rate that existed when the fair values were determined.
On the balance sheet date, the assets and liabilities of these subsidiaries are translated into Klépierre S.A.’s reporting currency, which is the euro, at the closing exchange rate. Their profit and loss accounts are translated at the average weighted exchange rate for the year. Any resulting translation differences are allocated directly to shareholders’ equity under a separate line item. In the event of the disposal of a foreign operation, the total accrued deferred exchange gain/loss on that foreign operation as recognized as a separate component of equity is recognized in the income statement.
2.4. Intangible assets
An intangible asset is a non-monetary asset without physical substance that must be identifiable and therefore separable from the acquired entity or arise from legal or contractual rights. It is controlled by the enterprise as a result of past events and future economic benefits are expected from it.
IAS 38 states that an intangible asset should be amortized over the best estimate of its known useful life. Intangible assets with no known useful life should not be amortized, but tested annually for impairment (IAS 36).
Assets classified as intangible assets with finite useful lives should be amortized on a straight-line basis over periods which reflect their expected useful life.
- 18 - Annual report 2007 2.5. Investment property
IAS 40 defines investment property as property held by the owner or by the lessee (under a finance lease) to earn rentals or for capital appreciation or both, rather than for: - use in the production or supply of goods or services or for administrative purposes; or - sale in the ordinary course of business (trading). Nearly all of Klépierre’s real estate assets meet the definition of “investment property.” Buildings occupied by the Group are recorded under “tangible assets”.
After initial recognition, investment property is measured: - either at fair value (with all changes in value recognized in the income statement); - or at cost pursuant to the methods prescribed by IAS 16, in which case the enterprise must disclose the fair value of investment property in the notes to the financial statements. On May 26, 2004 the Supervisory Board approved the adoption by Klépierre of the cost model as set forth in IAS 40.
To produce financial reporting that is both complete and comparable to the financial statements of key competitors applying the fair value model to their investment property, Klépierre is providing pro forma financial data restating its investment property on a fair value basis.
Cost model
Property, plant and equipment (PPE) is recorded at cost, including duties and fees, and is amortized using the components method.
Depreciation of such assets must reflect the consumption of economic benefits. It should be: - calculated on the basis of the depreciable amount, which is equal to the acquisition cost less the residual value of the assets; - spread over the useful life of the PPE components; when the different components have different useful lives, each component whose cost has a material impact on the total cost of the asset must be separately depreciated over its own useful life. After initial recognition, property, plant and equipment is measured at its cost, less any accumulated depreciation and any impairment losses. The depreciation charge is allocated over the useful life of the assets on a straight-line basis.
The depreciation period, the depreciation method used and the residual value of the assets must be reviewed at each balance sheet date.
In addition, property, plant and equipment is tested for impairment whenever there is evidence of a loss of value at June 30 or December 31. If that evidence is confirmed by testing, the new recoverable amount of the asset is compared to its net carrying amount and the impairment loss observed is recorded (see 2.7).
Gains or losses on the disposal of investment property are recorded under “Result of the sale of investment property and equity interests.”
Adoption of the cost model implies application of the components method. Klépierre has taken the option offered by IFRS 1 of recognizing as the initial cost of its buildings on its opening balance sheet the revalued amount at January 1, 2003 when SIIC status was adopted, this being their deemed market value at that date. The amounts were divided between land and buildings as required by the appraisers, i.e. based on: - land/building allocation rates for office property;
- 19 - Annual report 2007 - comparison with rebuilding costs for shopping centers. An age weighting coefficient was applied to the cost of rebuilding “as new” to which the cost of rebuilding was added.
Properties acquired after January 1, 2003, plus extensions and refurbishment work impacting revalued investment property, have been recognized in the balance sheet at their acquisition cost.
Components method
The components method is applied for the most part on the basis of recommendations by the Fédération des Sociétés Immobilières et Foncières (Federation of Property Companies – FSIF) on components and useful life:
- For properties developed by the subsidiaries themselves, assets are classified by component type and measured at their realizable value.
- For investment properties held in the portfolio, sometime for a long time, components are broken down into four categories: business premises, shopping centers, offices and residential properties.
Four components were identified for each of these assets types, in addition to the land: - Structure - Façades, waterproofing, roofing - Mechanical/Electrical/Plumbing (MEP) - Fittings Component classification is based on the historic and technical features of each property. For first-time application of the components method, the historic cost of property has been calculated based on the proportion of the revalued amount used as presumed cost at January 1, 2003 that is assigned to each component.
Offices Shopping centers Shops Useful life Share Useful life Share Useful life Share Of total of total of total Structures 60 years 60% 35-50 years 50% 30-40 years 50% Façades 30 years 15% 25 years 15% 15-25 years 15% MEP 20 years 15% 20 years 25% 10-20 years 25% Fittings 12 years 10% 10-15 years 10% 5-15 years 10%
All figures are based on an “as new” assumption. Klépierre has therefore calculated proportions for fittings, technical services and façades at January 1, 2003 using the useful lives shown in the above grid, calculated from the date of construction or latest general refurbishment of the property. The figure for structures is deduced from the figures for the other components and is amortized over the residual term set by the appraisers in 2003.
Purchase cost is divided up between land and buildings. The share allocated to buildings is amortized over the useful life of the structures.
Residual value is the current estimate of the amount the company would obtain (minus disposal costs) if the property were already of the age it will be and in the condition it will be in at the end of its useful life.
Given the useful lives assumed, the residual value of components is nil.
- 20 - Annual report 2007 2.6. Non-current assets held for sale
IFRS 5 on presentation and measurement applies to measured investment property using the cost model under IAS 40 whenever the asset is available for immediate sale and meets the conditions for classification as being held for sale. An impairment test is immediately run before any asset is classified as being held for sale.
The Klépierre Group has reclassified all property covered by a contract to sell (mandat de vente) in accordance with IFRS 5.
The accounting impact is as follows: - cost of sale is imputed to the lower of net carrying value and net fair value; - the properties concerned are presented separately on the face of the balance sheet; - amortization ceases.
2.7. Impairment of assets
IAS 36 applies to tangible and intangible assets, including goodwill. It requires assessing whether there is any indication that an asset may be impaired.
Such an indication might be: - a major decline in market value; - significant changes in the technological, economic or legal environment. For testing purposes, assets are grouped into cash-generating units (CGUs). These are standard of assets whose continued use generates cash inflows that are largely separate from those generated by other asset groups.
Assets must not be recognized at more than their recoverable amount.
Recoverable amount is the higher amount of an asset’s fair value less costs to sell and its value in use.
Value in use is the discounted present value of estimated future cash flows expected to arise from the planned use of an asset, and from its disposal at the end of its useful life.
An impairment loss should be recognized whenever recoverable amount is below carrying amount.
Under certain circumstances, the partial or total reversal of an impairment loss may subsequently be recognized in the income statement, but reversal of a non-allocated goodwill is prohibited.
The Klépierre Group considers each property and each shopping center as a CGU.
In addition, the Group’s goodwill mainly concerns Ségécé and its subsidiaries. Impairment tests are performed by an independent appraiser at least once a year and, if need be, updated whenever there is a significant event during the course of the year.
The tests run for Klépierre by Aon Accuracy rely on the range of valuations produced by the discounted cash flow (DCF) method over a period of 5 years. At the first stage of this method, the future cash flow that might be generated on the business portfolio of each company is estimated, without taking into account any direct or indirect financing costs. At the second stage, the value of the business portfolio, cash flows and probable value of the portfolio at the end of the forecast period (end value) are estimated and then discounted at an appropriate rate. The discount rate applied, which is based on the Capital Asset Pricing Model (CAPM), is the sum of the following three items: the risk-free interest rate, a general market risk premium (expected market risk premium multiplied by beta for the business portfolio), and a specific market risk premium (which takes into account the proportion of specific risk not already included in flows). At the third and final stage, the value of each
- 21 - Annual report 2007 company’s equity is obtained by deducting from the value of its business portfolio its net debt at the valuation date as well as the value of any minority interests at the same date.
2.8. Inventory
IAS 2 defines inventory as assets held for sale in the ordinary course of business, assets in the production process for sale , materials and supplies that are consumed in production (raw materials) or services.
An impairment must be recognized if the net realizable price (fair value net of exit cost) is less than booked cost.
2.9. Leases
Leases
IAS 17 defines a lease agreement by which the lessor transfers to the lessee the right to use an asset for a given period of time in exchange for a single payment or for a series of payments.
IAS 17 distinguishes two types of lease: - A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset to the lessee. Title to the asset may or may not eventually be transferred by the end of the lease term. - All other leases are classified as operating leases.
Accounting for stepped rents and rent-free periods
Lease income from the operating leases is recognized over the lease term on a straight-line basis.
Stepped rents and rent-free periods are accounted for over the life of the lease as an increase or decrease to lease income for the year.
The reference period selected is the first firm lease term.
Entry fees
Entry fees received by the lessor are recognized as supplementary rent.
Entry fees are part of the net amount exchanged between the lessor and the lessee under a lease agreement. As such, the accounting periods in which this net amount is to be recognized should not be affected by the form of the agreement and the payment schedule. Entry fees are spread over the first firm lease term.
Early termination indemnities
Tenants who terminate their leases prior to the expiration date are liable to an early termination charge.
Such a charge is imputed to the terminated contract and credited to income for the period in which it is recognized.
Eviction indemnities
When a lessor terminates a lease prior to the expiration date, he must pay the tenant an eviction indemnity.
- 22 - Annual report 2007 (i) Replacement of a tenant:
In cases in which paying an eviction indemnity enables to modify or to maintain asset performance (higher rent, and thus higher asset value), the revised version of IAS 16 allows for the indemnity to be capitalized as part of the cost of the asset, provided that this increase in value is confirmed by independent appraisers. Otherwise, the cost is expensed.
(ii) Renovation of a property requiring removal of resident tenants:
If eviction indemnities are paid in connection with major renovation or reconstruction work on a property requiring the prior removal of tenants, the cost is included among preliminary expenses and recognized as a supplementary component of total renovation costs.
Land and building leases: IAS 40 and IAS 17
Land and building leases are classified as operating or finance leases and treated in the same way as leases for other types of assets. However, since the useful life of land is usually undefined and, unless title is transferred to the lessee at the end of the lease term, substantially all the risks and rewards incident to ownership will not be transferred to the lessee (land leases are operating leases). Initial payments made in this respect therefore constitute pre-rents and are amortized over the term of the lease, in accordance with the pattern of benefits provided. Those benefits are determined by examining each individual agreement.
Under the components method set out in IAS 40, such initial payments are classified as prepaid expenses.
2.10. Trade accounts and other debtors
Trade accounts are recognized and measured at face value minus accruals for non-recoverable amounts. Doubtful debts are estimated when it is likely that the entire amount of receivable will not be recovered. Non recovable receivables are recognized in loss when they are identified as such.
2.11. Borrowing costs
The benchmark treatment under IAS 23 is to recognize construction-related borrowing costs as an expense in the period in which they are incurred.
The alternative treatment allowed is to include borrowing costs in the total cost of a qualifying asset if they are directly attributable to the acquisition, construction or production of that asset.
Klépierre has not opted for the benchmark treatment, and instead accounts for construction-related finance charges as part of the cost of the assets acquired. As a result, these charges are capitalized over the construction period.
2.12. Provisions and contingent liabilities
IAS 37 “Provisions, contingent liabilities and contingent assets” states that a provision should be recognized for any liability when it is probable or certain that an outflow of resources will be required to settle the obligation, without any at least equivalent consideration being expected from the creditor.
- 23 - Annual report 2007 IAS 37 requires that non-interest-bearing long-term liabilities be discounted.
2.13. Current and deferred taxes
Tax status for listed property investment companies
General features of SIIC tax status All listed property investment companies (SIICs) are entitled to the corporate tax exemption status introduced by article 11 of the 2003 Finance Act and implemented under the Decree of July 11 2003 provided that they are listed on a regulated French market, that they have share capital of at least 15 million euros and that their corporate purpose is either the purchase or construction of properties for rent, or direct or indirect investment in entities with the same corporate purpose. Once made, a decision to claim SIIC status is irrevocable. Subsidiaries subject to corporate income tax and at least 95% controlled by the Group may also claim SIIC status.
In return for tax exemption, companies must distribute 85% of their rental profits, 50% of their gains on disposal and 100% of the dividends paid to them by those of their subsidiaries that are subject to corporate income tax and have selected SIIC status.
Claiming SIIC status makes the entity concerned immediately subject to a 16.5% exit tax on unrealized gains on properties and on shares in partnerships not subject to corporate income tax. 25% of the exit tax falls due on December 15 of the year in which SIIC status is first claimed, with the balance payable over the three following years.
The annual general meeting of September 26, 2003 authorized Klépierre to opt into the new SIIC status, with retrospective effect to January 1, 2003.
Discounting exit tax liability The exit tax liability is discounted on the basis of its payment schedule. The liability is payable over 4 years commencing when SIIC status becomes applicable to the entity concerned.
Following initial recognition, the liability is discounted in the balance sheet and an interest expense is recognized in the income statement at each cut-off date. In this way, the liability can be reduced to its discounted present value. The basis for calculating the discount rate is the interest rate curve, plus the period of deferment, plus the Klépierre refinancing spread.
Corporate income tax on companies not eligible for SIIC status Since SIIC status was adopted in 2003, Klépierre S.A. recognizes SIICs that are exempt from property leasing and capital gains tax, and other companies that are subject to those taxes.
Corporate income tax on non-SIICs is calculated under French common law requirements.
French common law and deferred tax
Corporate income tax is calculated using the rules and rates applicable in each country in which Group companies are registered over the period to which the profit or loss applies.
Both current and future income taxes are offset if they originate within the same consolidated tax group, are subject to the same tax authority and if offsetting is allowed by law.
- 24 - Annual report 2007 Deferred taxes are recorded to reflect temporary differences between the carrying amounts of assets and liabilities in the balance sheet and their tax bases if they are expected to give rise to taxable income in future periods.
A deferred tax asset is recognized in case of tax losses carried forward under the likely assumption that the entity concerned will generate future taxable income against which those losses can be deducted.
Deferred tax assets and liabilities are measured using the liability method and the tax rate expected to apply when the asset will be realized or the liability settled, on the basis of the tax rates and tax regulations adopted, or that will be adopted, before the balance sheet date. The measurement of deferred tax assets and liabilities must reflect the tax consequences of the way in which the company expects to recover or settle the carrying amounts of its assets and liabilities at the balance sheet date.
All current and deferred tax is recognized as tax income or expense in the income statement. However, in the case of deferred tax recognized or settled since the acquisition or disposal of a subsidiary or equity-accounted affiliates, and of unrealized gains or losses on assets held for sale, the associated deferred taxes are taken to equity.
Deferred tax is calculated at local rates applicable at the balance sheet date. The main relevant rates are 34.43 % in France, 30% in Spain, 31.40% in Italy, 34% in Belgium, 25 % in Greece, 26.5% in Portugal, 19% in Poland, 20% in Hungary (excluding ordinary losses capitalized at 16%), 21% in the Czech Republic and 19% in Slovakia.
2.14. Treasury shares
All treasury shares held by the Group are recorded at acquisition cost and deducted from equity. Any gain arising on the disposal of treasury shares is immediately taken to equity so that disposal gains/losses do not impact net profit/loss for the period.
2.15. Distinction between liabilities and equity
The difference between liabilities and equity depends on whether the issuer is under an obligation to make a cash payment to the other party. Whether cash payment can be decided by the issuer or not is the crucial distinction between these two concepts.
2.16. Financial assets and liabilities
Financial assets include long-term financial investments assets and loans, current assets representing accounts receivable, financial securities and investments, including derivatives, and cash.
Financial liabilities include borrowings, other forms of financing and bank overdrafts, derivatives and accounts payable.
IAS 39 (Financial instruments: recognition and measurement) describes how financial assets and liabilities must be measured and recognized.
Measurement and recognition of financial assets
- 25 - Annual report 2007 Loans and receivables These include receivables from equity investments, other loans and receivables. They are recognized at amortized cost, which is calculated using the effective interest rate method. (the effective interest rate is the rate that exactly discounts estimated future cash flows to the net carrying amount of the financial instrument )
Assets held for sale These include equity investments.
Equity investments are the Group’s interest in non-consolidated companies.
Investments in equity instruments with no quoted price on an active market and whose fair value cannot be reliably measured must be carried at cost.
Cash and near cash
Cash and near cash include cash on bank accounts, short-term deposits maturing in under three months, money market funds and other investment securities.
Recognition and measurement of financial liabilities With the exception of derivatives, all loans and other financial liabilities are measured at amortized cost using the effective interest method. Recognition of liabilities at amortized cost Under IFRS, redemption premiums on bond issues and debt issuance expenses are deducted from the nominal value of the loans concerned and applied in the calculation of the effective interest rate. Application of the amortized cost method to liabilities hedged at fair value A gain or loss from the change in fair value of swaps used as fair value hedges will cause the carrying amount of the (effective portion of the) hedged item to be adjusted for the corresponding gain or loss with respect to the hedged risk. Since the characteristics of derivatives and items hedged at fair value are generally similar, any ineffectiveness carried to hedging profit or loss will be minimal.
If a swap is cancelled before the due date of the hedged liability, the amount of the debt adjustment will be amortized over the residual term, using the effective interest rate determined at the date the hedge ended.
Recognition and measurement of derivatives As parent company of the Group, Klépierre is responsible for almost all Group financing and has centralized management of interest rate and exchange risks. This financial policy has led Klépierre to put in place the facilities and associated hedging instruments needed by the Group.
Klépierre hedges its liabilities using derivatives and has consequently adopted hedge accounting as per IAS 39: – fair value hedges: hedges of the exposure to changes in fair value of balance sheet items, that are attributable to interest rate, credit or exchange risk (e.g. a fixed-rate liability); – cash flow hedges: hedges of the exposure to variability in cash flows, achieved by fixing the future cash flow on a variable-rate liability or asset.
Klépierre meets all IAS 39 hedge definition and effectiveness criteria.
The adoption of hedge accounting has the following consequences: – fair value hedges of existing assets and liabilities: the hedged portion of the asset/liability is accounted for at fair value on the balance sheet. The gain or loss from the change in fair value is recognized immediately in profit or loss. At the same time there is an opposite corresponding adjustment in the fair value of the hedging instrument, in line with its effectiveness;
– cash flow hedges: the portion of the gain or loss on the fair value of the hedging instrument that is determined to be an effective hedge is recognized directly in equity and recycled to the income statement when the hedged
- 26 - Annual report 2007 cash transaction affects profit or loss. The gain or loss from the change in value of the ineffective portion of the hedging instrument is recognized immediately in profit or loss.
Recognition date: trade or settlement IFRS seeks to reflect the time value of financial instruments as closely as possible by ensuring that, where possible, instruments with a deferred start date are recognized on the trade date, thus allowing calculation of the deferred start date. However, this principle cannot be applied at blanket level to all financial instruments; commercial papers, for example, are often renewed a few days before their due date. If they were recognized at their trade date, this would artificially extend the runoff between the renewal trade date on a paper and its effective start date. Klépierre applies the following rules: – Derivatives are recognized at their trade date and measurement takes account of deferred termination dates (if any). – Other financial instruments (especially liabilities) are recognized at settlement date.
Determination of fair value Financial assets and liabilities carried at fair value are measured either using listed price or valuation models that apply market criteria. The term "model" refers to mathematical methods based on generally accepted financial theories. For any given instrument, an active and so liquid market is any market on which transactions regularly take place and on which there is a reliable level of supply and demand, or on which transactions take place involving instruments that are very similar to the instrument being measured. Where prices are quoted on an active market, they are used to determine fair value. Such prices will thus be used to measure listed securities and derivatives traded on organized markets such as the futures or option markets. Most OTC (Over The Counter) derivatives, swaps, futures, caps, floors and simple options are traded on active markets. They are measured using generally accepted models (discounted cash flow, Black and Scholes, interpolation techniques) that are based on the market prices of such instruments or similar underlyings.
Tax treatment of changes in fair value For Klépierre:
– deferred tax will be calculated for Klépierre SA financial instruments recognized at fair value applying non- SIIC pro rata of financial profit/loss; – the financial instruments of foreign subsidiaries recognized at fair value will generate a deferred tax calculation at rates applicable in the country concerned.
2.17. Employee benefits
Employee benefits are recognized as set out in IAS 19, which applies to all payment for services rendered except share-based payment, which is covered by IFRS 2. All employee benefits, whether paid in cash or in kind, short or long-term must fall into one of the 4 main classifications: • short-term benefits such as salaries and wages, annual leave, profit-sharing, shares, company contributions to schemes; • post-employment benefits, such as (in France) supplementary bank pension payments or outside France private pension schemes; • other long-term benefits, including paid leave and seniority payments, some deferred compensation schemes paying out in monetary units; • compensation due to the termination of job contract severance pay.
Recognition and measurement depends on the classification into which the benefit falls
- 27 - Annual report 2007 Short-term benefits The company recognizes a loss when it uses services rendered by employees and in return pays agreed benefits to them.
Post-employment benefits In accordance with generally accepted principles, the Group distinguishes defined contribution and defined benefit plans.
Defined contribution plans do not give rise to any liability so far as the company is concerned and therefore are not provisioned. Contributions paid during the period are recognized as a loss.
Defined benefit plans do give rise to a liability so far as the company is concerned and must therefore be measured and provisioned.
The classification of a benefit into either of the above categories will depend on the economic basis of the benefit that will be used to decide whether the Group is required to provide the promised benefit to the employee under the terms of an agreement or an implicit obligation.
Post-employment benefits classified as defined benefit plans are calculated on an actuarial basis that takes account of demographic and financial factors.
The provision needed for the commitment will be determined on the basis of the actuarial assumptions adopted by the company and will apply the Projected Unit Credit Method. The value of hedging assets, if any (plan assets and redemption rights) will be deducted from the resulting figure.
The size of plan liabilities and the value of its hedging assets may change considerably from one period to another in line with changes in actuarial assumptions, and may give rise to actuarial gains/losses. The Group applies the corridor method to account for actuarial gains/losses on its commitments. Use of the corridor method means that as of the following financial year the proportion of actuarial gain/loss that is in excess of the higher of the following need not be recognized: 10% of the discounted gross value of the liability or 10% of the market value of the plan hedge asset at the end of the previous period.
Long-term benefits These are benefits, other than post-employment benefits or severance pay, that are not payable in their entirety within twelve months of the end of the financial year in which the employees concerned provided the services in question.
The actuarial method applied is similar to that used for post-employment defined benefits, except that actuarial gains/losses are recognized immediately and there is no corridor. Furthermore, any gain/loss resulting from change to the plan but deemed to apply to previous services is recognized immediately.
Compensation due upon termination of employment This severance pay is given to employees if their employment with the Group is terminated before they reach statutory retirement age or if they accept voluntary redundancy. Compensation due to the termination of the job contract that is payable more than twelve months after the balance sheet date is discounted.
2.18. Share-based payment
IFRS 2 provides that all share-based payment must be expensed when the goods or services given in return for these payments are used. For the Klépierre group, the standard applies primarily to the purchase of shares to meet the commitments arising from its employee stock option scheme. Pursuant to IFRS 1, only plans awarded after November 7, 2002
- 28 - Annual report 2007 whose rights were not acquired at January 1, 2005 need be recognized. As a result, Klépierre's 1999 stock option plan has not been restated. The exercise period for this particular plan ended on June 24, 2007.
2.19. Segment reporting
IAS 14 requires the reporting of financial information by line of business and geographical area in respect of primary and secondary segments. Segments are identified by analyzing risks and returns to then form homogenous segments. Lines of business and geographical segments must be reported if they account more than 10% of the total result, revenue or balance sheet total. If total revenue attributable to reportable segments is less than 75% of the total consolidated income, additional segments should be identified while dropping the threshold by 10% until 75% is reached. The following information should be disclosed for primary segments: segment income, pre-tax and pre-financial charge segment revenue, the carrying value of sector assets, sector liabilities and sector investments over the period. The following information should be disclosed for secondary segments: sector income, sector assets, and investments over the period. The Klépierre group discloses primary sector information on the Group under line of business and secondary sector information under geographical area. • Primary sector lines of business: shopping centers, retail properties and office properties
• Secondary sector geographical areas: France, Spain, Portugal, Italy, Greece, Hungary, Poland and "other" Europe
- 29 - Annual report 2007 - 30 - Annual report 2007 3. Scope of consolidation
Methods COMPANIES December % of interest % of holding 2007 (1)
December December December SIREN n° Head office December 2006 2007 2007 2006
SA Klépierre 780 152 914 Paris FC 100,00% 100,00% 100,00% 100,00% Office buildings
SAS Klépierre Finance 433 613 312 Paris FC 100,00% 100,00% 100,00% 100,00% SAS LP7 428 782 486 Paris FC 100,00% 100,00% 100,00% 100,00% SAS CB Pierre 343 146 932 Paris FC 100,00% 100,00% 100,00% 100,00% SNC Général Leclerc n°11 Levallois 381 986 363 Paris FC 100,00% 100,00% 100,00% 100,00% SNC Jardins des Princes 391 237 716 Paris FC 100,00% 100,00% 100,00% 100,00% SNC Barjac Victor 390 123 057 Paris FC 100,00% 100,00% 100,00% 100,00% Shopping malls - France
SNC Kléber La Perouse 388 724 361 Paris FC 100,00% 100,00% 100,00% 100,00% SAS KLE 1 389 217 746 Paris FC 100,00% 100,00% 100,00% 100,00% SNC SCOO 309 660 504 Paris FC 79,94% 79,94% 79,94% 79,94% SNC Angoumars 451 149 405 Paris FC 100,00% 100,00% 100,00% 100,00% SNC Klécar France 433 496 965 Paris FC 83,00% 83,00% 83,00% 83,00% SNC KC1 433 816 501 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC2 433 816 444 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC3 433 816 725 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC4 433 816 774 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC5 433 817 269 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC6 433 842 549 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC7 433 842 515 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC8 433 842 564 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC9 433 816 246 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC10 433 816 220 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC11 433 894 243 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC12 433 894 102 Paris FC 83,00% 83,00% 100,00% 100,00% SNC KC20 449 054 949 Paris FC 83,00% 83,00% 100,00% 100,00% SAS Centre Jaude Clermont 398 960 963 Paris FC 100,00% 100,00% 100,00% 100,00% SCS Klécar Europe Sud 428 864 268 Paris FC 83,00% 83,00% 83,00% 83,00% SC Solorec 320 217 391 Paris FC 80,00% 80,00% 80,00% 80,00% SNC Centre Bourse 300 985 462 Paris FC 100,00% 100,00% 100,00% 100,00% SCS Begles Arcins 404 357 535 Paris PC 50,00% 50,00% 50,00% 50,00% SCI Bègles Papin 449 389 956 Paris FC 100,00% 100,00% 100,00% 100,00% SNC Soccendre 319 814 075 Paris FC 100,00% 75,25% 100,00% 100,00% SCI Sécovalde 405 362 682 Paris FC 55,00% 55,00% 55,00% 55,00% SAS Cécoville 409 547 015 Paris FC 100,00% 100,00% 100,00% 100,00% SAS Poitiers Aliénor 410 245 757 Paris FC 100,00% 100,00% 100,00% 100,00% SNC Foncière Saint-Germain 378 668 875 Paris FC 100,00% 100,00% 100,00% 100,00% SAS Soaval 419 620 075 Paris PC 50,00% 37,50% 50,00% 50,00% SCA Klémurs 419 711 833 Paris FC 84,11% 84,11% 84,11% 84,11% SAS Cécobil 408 175 966 Paris PC 50,00% 50,00% 50,00% 50,00% SCI du Bassin Nord 422 733 402 La Plaine St Denis PC 50,00% 50,00% 50,00% 50,00% SNC Le Havre Vauban 420 307 704 Paris PC 50,00% 50,00% 50,00% 50,00% SNC Le Havre Lafayette 420 292 047 Paris PC 50,00% 50,00% 50,00% 50,00% SNC Sodevac 388 233 298 Paris FC 100,00% 100,00% 100,00% 100,00% SAS Odysseum Place de France 428 788 525 Paris PC 50,00% 50,00% 50,00% 50,00% SAS Klecar Participations Italy 442 229 175 Paris FC 83,00% 83,00% 83,00% 83,00% SNC Pasteur 398 967 232 Paris FC 100,00% 100,00% 100,00% 100,00% SAS Holding Gondomar 1 438 568 545 Paris FC 100,00% 100,00% 100,00% 100,00% SAS Holding Gondomar 3 438 570 129 Paris FC 100,00% 100,00% 100,00% 100,00% SAS Klépierre Participations et Financements 442 692 315 Paris FC 100,00% 100,00% 100,00% 100,00% SCI Combault 450 895 164 Paris FC 100,00% 100,00% 100,00% 100,00% SNC Klétransactions 479 087 942 Paris FC 100,00% 100,00% 100,00% 100,00% SCI La Plaine du Moulin à Vent 479 718 124 Paris PC 50,00% 50,00% 50,00% 50,00% SCI Beau Sevran Invest 441 648 714 Paris FC 83,00% 83,00% 100,00% 100,00% SAS PROGEST 330 574 625 Paris FC 100,00% - 100,00% - SCI La Rocade 319 524 070 Paris EM 38,00% - 38,00% - SCI l'Emperi 421 021 346 Paris EM 15,00% - 15,00% - SCI Girardin 339 293 532 Paris PC 33,40% - 33,40% - SC Boutiques St Maximin 314 866 484 Paris FC 42,50% - 42,50% - SARL Belvedere Invest 418 124 475 Paris FC 62,00% - 62,00% -
- 31 - Annual report 2007 Methods COMPANIES December % of interest % of holding 2007 (1)
December December December SIREN n° Head office December 2006 2007 2007 2006
SCI Haies Haute Pommeraie 437 731 664 Paris EM 43,00% - 43,00% - SCI Plateau des Haies 423 665 413 Paris FC 90,00% - 90,00% - SCI Halles Plérin 340 255 280 Joinville Le Pont EM 25,00% - 25,00% - SCI Boutiques d'Osny 339 797 607 Paris FC 38,26% - 67,00% - SCI Plateau de Plérin 329 393 805 Paris EM 25,00% - 25,00% - SCI la Rocade Ouest 319 658 399 Paris EM 36,73% - 36,73% - SARL Forving 442 692 539 Paris FC 90,00% - 90,00% - SCI du Plateau 382 949 873 Boulogne-Billancourt EM 17,76% - 26,50% - SA Rezé Sud 413 251 216 Rézé EM 15,00% - 15,00% - SCI Maximeuble 347 879 306 Paris FC 100,00% - 100,00% - SCI Saint Maximin Construction 347 879 405 Paris PC 50,00% - 50,00% - SCI Immobilière de la Pommeraie 348 268 996 Paris PC 50,00% - 50,00% - SCI Pommeraie Parc 350 236 337 Paris PC 50,00% - 50,00% - SCI Champs des Haies 351 335 914 Paris PC 50,00% - 50,00% - SCI La Rive 348 974 080 Paris FC 47,30% - 47,30% - SCI Rebecca 428 291 520 Paris FC 70,00% - 70,00% - SCI Aulnes developpement 448 080 861 Paris FC 25,50% - 50,00% - SARL Proreal 447 572 686 Paris FC 51,00% - 51,00% - SCI Sandri-Rome 423 680 917 Paris EM 15,00% - 15,00% - SCI La Roche Invest 448 055 798 Paris EM 32,50% - 32,50% - SCI Osny Invest 420 796 708 Paris FC 57,12% - 57,12% - SNC Parc de Coquelles 348 281 965 Paris PC 50,00% - 50,00% - SCI Sogegamar 950 591 792 Paris EM 33,12% - 33,12% - SCI Achères 2000 422 380 576 Paris EM 30,00% - 30,00% - SCI Le Mais 378 907 000 Paris FC 55,00% - 55,00% - SCI le Grand Pré 352 765 994 Paris PC 50,00% - 50,00% - SCI Champs de Mais 379 159 338 Paris EM 25,00% - 25,00% - SCI des Salines 394 253 959 Paris PC 50,00% - 50,00% - SCI les Bas Champs 394 253 710 Paris PC 50,00% - 50,00% - SCI Des dunes 394 253 819 Paris PC 50,00% - 50,00% - SCI la Française 394 253 264 Paris PC 50,00% - 50,00% - SCI LC 422 654 392 Paris FC 33,00% - 60,00% - SARL Société du bois des fenêtres 418 683 124 Vélizy Villacoublay EM 20,00% - 20,00% - SAS KLE PROJET 1 493 511 620 Paris FC 100,00% - 100,00% - SAS KLECAPNOR 494 808 603 Paris FC 84,11% - 100,00% - SNC CAP NORD 332 024 926 Lille FC 84,11% - 100,00% - SAS Vannes Coutume 495 178 055 Paris FC 100,00% - 100,00% - SAS KLE PROJET 2 479 506 345 Paris FC 100,00% - 100,00% - Société des Centre Toulousains 499 084 903 Paris FC 75,81% - 75,81% - SAS Holding Gondomar 2 438 567 265 Paris FC 100,00% - 100,00% - SAS Holding Gondomar 4 438 567 331 Paris FC 100,00% - 100,00% - SCI Noblespécialiste 389 308 339 Paris FC 75,81% - 100,00% - SNC La Marquayssonne 379 881 121 Paris FC 75,81% - 100,00% - SCI Restorens 380 667 790 Paris FC 75,81% - 100,00% - SNC Sodirev 377 807 367 Paris FC 75,81% - 100,00% - SCI Besançon Chalezeule 498 801 778 Paris FC 100,00% - 100,00% - Service Providers - France
SCS Ségécé 562 100 214 Paris FC 100,00% 75,00% 100,00% 75,00% SNC Klégestion 398 058 149 Paris FC 100,00% 100,00% 100,00% 100,00% SNC Ségécé Loisirs et Transactions 421 220 252 Paris FC 100,00% 75,00% 100,00% 100,00% SAS Klépierre Conseil 398 967 000 Paris FC 100,00% 100,00% 100,00% 100,00% SNC Galae 433 909 165 Paris FC 100,00% 87,25% 100,00% 100,00% Gie Klépierre Services 435 194 725 Paris FC 100,00% 87,75% 100,00% 100,00%
Shopping malls - International
SA Coimbra Belgium Brussels FC 100,00% 100,00% 100,00% 100,00% SA Cinémas de l'Esplanade Belgium Brussels FC 100,00% 100,00% 100,00% 100,00% SA Foncière de Louvain La Neuve Belgium Brussels FC 100,00% 100,00% 100,00% 100,00% SA Place de l'accueil Belgium Brussels FC 100,00% 100,00% 100,00% 100,00% SA Klecar Foncier Iberica Spain Madrid Alcobendas FC 83,00% 83,00% 100,00% 100,00% SA Klecar Foncier Espana Spain Madrid Alcobendas FC 83,00% 83,00% 100,00% 100,00%
- 32 - Annual report 2007 Methods COMPANIES December % of interest % of holding 2007 (1)
December December December SIREN n° Head office December 2006 2007 2007 2006
SA Klépierre Vinaza Spain Madrid Alcobendas FC 100,00% 100,00% 100,00% 100,00% SA Klépierre Vallecas Spain Madrid Alcobendas FC 100,00% 100,00% 100,00% 100,00% SA Klépierre Nea Efkarpia Greece Athens FC 83,00% 83,00% 100,00% 100,00% SA Klépierre Foncier Makedonia Greece Athens FC 83,01% 83,01% 100,00% 100,00% SA Klépierre Athinon A.E. Greece Athens FC 83,00% 83,00% 100,00% 100,00% SA Klépierre Peribola Patras Greece Athens FC 83,00% 83,00% 100,00% 100,00% Klépierre Larissa Greece Athens FC 100,00% - 100,00% - Sarl Szeged plaza Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl Szolnok plaza Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl Zalaegerszeg plaza Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl Nyiregyhaza Plaza Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% SA Duna Plaza Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl CSPL 2002 (Cespel) Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl GYR 2002 (Gyor) Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl Debrecen 2002 Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl Uj Alba 2002 Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl Miskolc 2002 Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl Kanizsa 2002 Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl KPSVR 2002 (Kaposvar) Hungary Budapest FC 100,00% 100,00% 100,00% 100,00% Sarl Duna Plaza Offices Hungary Budapest FC 100,00% - 100,00% - Klépierre Corvin Hungary Budapest FC 100,00% - 100,00% - Corvin Retail Hungary Budapest FC 100,00% - 100,00% - Srl Immobiliare Magnolia Italy Milan FC 85,00% 85,00% 85,00% 85,00% Spa ICD Italy Milan FC 85,00% 85,00% 85,00% 85,00% Spa IGC Italy Milan PC 50,00% 50,00% 50,00% 50,00% Srl Novate Italy Milan FC 85,00% 85,00% 85,00% 85,00% Spa Klecar Italia Italy Milan FC 83,00% 83,00% 100,00% 100,00% Spa Klefin Italia Italy Milan FC 100,00% 100,00% 100,00% 100,00% Galleria Commerciale Collegno Italy Milan FC 100,00% 100,00% 100,00% 100,00% Galleria Commerciale Serravalle Italy Milan FC 100,00% 100,00% 100,00% 100,00% Galleria Commerciale Assago Italy Milan FC 100,00% 100,00% 100,00% 100,00% Galleria Commerciale Klépierre Italy Milan FC 100,00% 100,00% 100,00% 100,00% Galleria Commerciale Cavallino Italy Milan FC 100,00% 100,00% 100,00% 100,00% Galleria Commerciale Solbiate Italy Milan FC 100,00% 100,00% 100,00% 100,00% Sarl Klépierre Météores Luxemburg Luxemburg FC 100,00% - 100,00% - SA Klépierre Luxembourg Luxemburg Luxemburg FC 100,00% - 100,00% - Besloten vennootschap Capucine BV Netherlands Amsterdam FC 100,00% 100,00% 100,00% 100,00% Klépierre Sadyba Poland Warsaw FC 100,00% 100,00% 100,00% 100,00% Klépierre Krakow Poland Warsaw FC 100,00% 100,00% 100,00% 100,00% Klépierre Poznan Poland Warsaw FC 100,00% 100,00% 100,00% 100,00% Ruda Slaska Plaza spzoo Poland Ruda Slaska-Wirek FC 100,00% 100,00% 100,00% 100,00% Sadyba Center SA Poland Warsaw FC 100,00% 100,00% 100,00% 100,00% Krakow spzoo Poland Cracovia FC 100,00% 100,00% 100,00% 100,00% Poznan SA Poland Cracovia FC 100,00% 100,00% 100,00% 100,00% Klépierre Poland Poland Warsaw FC 100,00% 100,00% 100,00% 100,00% Rybnick Plaza Sp.z.o.o. Poland Warsaw FC 100,00% - 100,00% - Sosnowiec Plaza Sp.z.o.o Poland Warsaw FC 100,00% - 100,00% - Klépierre Rybnik Poland Warsaw FC 100,00% - 100,00% - Klépierre Sosnowiec Poland Warsaw FC 100,00% - 100,00% - Movement Poland Sp.z.o.o Poland Warsaw FC 100,00% - 100,00% - Klépierre Lublin Poland Warsaw FC 100,00% - 100,00% - Klépierre Galeria Poznan Sp.z.o.o Poland Cracovia FC 100,00% - 100,00% - Klépierre Galeria Krakow Sp.z.o.o Poland Cracovia FC 100,00% - 100,00% - Klépierre Warsaw Sp.z.o.o Poland Warsaw FC 100,00% - 100,00% - SA Finascente Portugal Carnaxide FC 100,00% 50,00% 100,00% 50,00% SA Klélou-Immobiliare Portugal Carnaxide FC 100,00% 100,00% 100,00% 100,00% SA Klépierre Portugal SGPS SA Portugal Carnaxide FC 100,00% 100,00% 100,00% 100,00% SA Galeria Parque Nascente Portugal Lisboa FC 100,00% 50,00% 100,00% 50,00% SA Gondobrico Portugal Lisboa FC 100,00% 50,00% 100,00% 50,00% SA Klenor Imobiliaria Portugal Carnaxide FC 100,00% 100,00% 100,00% 100,00% SA Klétel Imobiliaria Portugal Carnaxide FC 100,00% 100,00% 100,00% 100,00% Kleminho Portugal Carnaxide FC 100,00% 100,00% 100,00% 100,00% SA Delcis Cr Czech Republic Prague FC 100,00% 100,00% 100,00% 100,00% Klépierre Cz Czech Republic Prague FC 100,00% 100,00% 100,00% 100,00% Bestes Czech Republic Prague FC 99,00% 99,00% 99,00% 99,00% Entertaimnent Plaza Czech Republic Prague FC 100,00% 100,00% 100,00% 100,00% Klépierre Novo Czech Republic Prague FC 100,00% 100,00% 100,00% 100,00% Akciova Spolocnost ARCOL Slovakia Bratislava FC 100,00% 100,00% 100,00% 100,00%
- 33 - Annual report 2007 Methods COMPANIES December % of interest % of holding 2007 (1)
December December December SIREN n° Head office December 2006 2007 2007 2006
Service providers - International
Ségécé Espana Spain Madrid Alcobendas FC 100,00% 75,00% 100,00% 100,00% SA Devimo Consult Belgium Brussels EM 35,00% 26,25% 35,00% 35,00% Srl Effe Kappa Italy Milan PC 50,00% 50,00% 50,00% 50,00% Ségécé Italia Italy Milan FC 100,00% 75,00% 100,00% 100,00% Ségécé Ceska Républika Czech Republic Prague FC 100,00% 75,00% 100,00% 100,00% SA Ségécé Portugal Portugal Carnaxide FC 100,00% 75,00% 100,00% 100,00% Ségécé Magyarorszag Hungary Budapest FC 100,00% 75,00% 100,00% 100,00% Ségécé Hellas Greece Athens FC 100,00% 75,01% 100,00% 100,00% Ségécé Polska Poland Warsaw FC 100,00% 75,50% 100,00% 100,00% Ségécé Slovensko Slovakia Bratislava FC 100,00% 75,00% 100,00% 100,00%
DeconsolidatedCompanies
SAS Opale (simplified merger [TUP]) 398 968 735 Paris NC - 100,00% - 100,00% SAS Socoseine 389 287 871 Paris NC - 93,75% - 100,00% SAS 5 Turin (simplified merger [TUP]) 398 969 014 Paris NC - 100,00% - 100,00% SAS Le Havre Tourneville (simplified merger [TUP]) 407 799 493 Paris NC - 100,00% - 100,00% SAS Le Havre Capelet (simplified merger [TUP]) 410 336 564 Paris NC - 100,00% - 100,00% AMC Prague Czech Republic Prague NC - 75,00% - 100,00% SNC Espace Cordeliers 421 101 882 Paris NC - 50,00% - 50,00%
(1) FC: Full consolidation PC: Proportionate consolidation EM: Equity method consolidation NC: Deconsolidated during the year
Equity interests in subsidiaries
The Group consolidated 195 companies at December 31, 2007 against 135 at December 31, 2006.
39 entries resulted from the acquisition of Progest group by Kléber La Pérouse. o 14 companies were fully consolidated: Progest, SC Boutiques Saint Maximim, SARL Belvédère Invest, SCI Plateau des Haies, SCI Boutiques d’Osny, SARL Forving, SCI Maximeuble, SCI La Rive, SCI Rebecca, SCI Aulnes Developpement, SARL Proreal, SCI Osny Invest, SCI Le Mais, and SCI LC.
o 11 companies were consolidated on a proportionate basis: SCI Girardin, SCI Saint Maximin Construction, SCI Immobilière de la Pommeraie, SCI Pommeraie Parc, SCI Champs des Haies, SNC Parc de Coquelles, SCI le Grand Pré, SCI des Salines, SCI les Bas Champs, SCI des Dunes, and SCI la Française.
o 14 companies were consolidated under the equity method: SCI La Rocade, SCI l’Empéri, SCI Haies Haute Pommeraie, SCI Halles Plérin, SCI Plateau de Plérin, SCI La Rocade Ouest, SCI du Plateau, SA Rézé Sud, SCI Sandri-Rome, SCI Sogegamar, SCI Achères 2000, SCI Champs de Mais, SCI La Roche Invest and SARL Bois des fenêtres. Goodwill on acquisition, €115.7 million, was fully assigned to property assets.
Nine Polish companies were fully consolidated. o Rybnik Plaza sp Z.o.o and Sosnowiec Plaza Plaza sp Z.o.o were acquired in 2007. As part of the reorganization of Polish structures, they transferred their malls to their parent company Klépierre Rybnik and Klépierre Sosnowiec at the end of 2007, and received equity interest
- 34 - Annual report 2007 securities from them in exchange. Rybnik Plaza sp Z.o.o and Sosnowiec Plaza sp Z.o.o are 99% owned by Capucine BV and 1% by LP7. o Klepierre Galeria Poznan and Klepierre Galeria Krakow hold the Poznan and Krakow centers received as a contribution from Poznan Plaza and Krakow plaza. They are 99.98% owned by Capucine BV.
o Klepierre Warsaw was also created during the reorganization of the Polish structures. It is a holding company that is 99.8% controlled by Capucine BV.
o Klépierre Lublin was fully created by Capucine BV which is the 100% owner. In the second quarter of 2007, Klépierre Lublin made an offer to buy 100% of the securities of Movement Poland, owner of the Lublin shopping mall. The Polish acquisitions generated overall goodwill on acquisition of €47.2 million fully assigned to property assets.
Three companies were fully consolidated following the acquisition, on June 11, 2007 of Galerie Larissa Thessalia in Greece. o Klépierre Larissa, owner of the mall, its parent, the Luxembourg company Klépierre Méteores, which is a subsidiary of Klépierre Luxembourg.
Goodwill on acquisition, €7.6 million, was fully assigned to property assets.
Acquisition of two companies in the context of the Porto Gondomar transaction.
o Klépierre's equity interests in the Gondobrico and Galeria Parque Nascente (held by Finascente) malls was increased from 50% to 100%. This transaction entailed the buyout of two companies: SA Holding Gondomar2 and SAS Holding Gondomar4 which hold respectively 50% of the securities of Finascente and Gondobrico. It also leads to a change of consolidation method for Finascente, Galeria Parque Nascente and Gondobrico which are now fully consolidated.
Goodwill on acquisition, €23.4 million, was fully assigned to property assets. A free revaluation of €19.4 million was first recorded in order to adjust the value of the initial investment.
Entry of five companies in the context of the Toulouse Mermoz transaction:
o Created and 75.81% owned by Klépierre SA, Société des Centers Toulousains bought SCI Noblespécialiste in Blagnac, SNC Sodirev, SNC La Marquayssonne, and SCI Restorens in Saint Orens de Gameville.
Goodwill on acquisition, €118.2 million, was assigned to property assets.
The acquisition of 14 commercial assets from the group Mitiska NV on March 29 2007 resulted in the consolidation of two French companies.
o Cap Nord, owner of the assets and its parent, Klécapnor, holding company created and 100% owned by Klémurs.
- 35 - Annual report 2007 Goodwill on acquisition, €24.8 million, was fully assigned to property assets. The two companies are fully consolidated.
Klé Projet 1 is fully consolidated for the first time.
o A 100% French subsidiary of Klépierre, Klé Projet 1 was created for the purpose of carrying different development projects. In June 2007, it acquired the Castorama store in Vannes.
Klé Projet 2 was fully consolidated in the context of an extension of the Givors mall.
o Klé Projet 2, 100% subsidiary of de Klé Projet 1, was created to acquire 100% of SCI Roseaux and SNC GSE GIER Services Entreprises, companies which operate the plots of land on which the future extension will be built. During the fourth quarter 2007, the entire assets and liabilities of the two subsidiaries were fully transferred into Klé Projet 2.
Goodwill on acquisition, €7.8 million, was fully assigned to property assets.
Creation of SAS Vannes Coutumes and SCI Besançon Chalezeule o SAS Vannes Coutumes is 99.97% owned by SAS Cécoville and by LP7; SCI Besançon Chalezeule is 100% owned by Klépierre. Their assets comprise ground floor retail outlets or isolated lots.
Three entries into the basis according to the full consolidation method in Hungary.
o Created at the beginning of the year, Duna Plaza Offices, a Hungarian company 100% owned by Klépierre Participations et Financements, acquired the offices located in the Duna Plaza shopping center which has been owned by the group since 2004.
o Klépierre Participation Financements owns 100% of Klépierre Corvin, an entity created in January 2007 with a view to buying 100% of the securities of the Hungarian company Corvin Retail owner of the land on which the Corvin mall will be built. Goodwill on acquisition, €104.6 million, was fully assigned to property assets.
Seven companies were removed from the scope of consolidation following mergers, total transfer of assets and liabilities, disposals or deconsolidations.
o Four companies merged with and into Klépierre, they include: SAS Opale, SAS 5 Turin, SAS Le Havre Capelet and SAS Le Havre Tourneville.
o AMC Prague was taken over by Segece Ceska Republica, with retroactive effect to January 1, 2007.
o Socoseine was deconsolidated as it has neither assets nor activity.
o Poitiers Aliénor sold its entire share (50%) in Espace Cordeliers outside the group.
Klépierre's interest percentage in Ségécé rose from 75% to 100% leading to the recognition of goodwill of €43.7 million.
o In September 2007, Klépierre bought 10% of Ségécé securities from Axa for €20 million; o In October 2007, Ségécé reduced its capital by €240,000 by cancelling the 15,000 equity shares held by BNP Paribas and giving it the sum of €30 million in return for the cancellation of its equity shares (15%).
Lastly, the company Hypernoble, acquired in the third quarter of 2007 by Holding Gondomar 1 was
- 36 - Annual report 2007 taken over by Holding Gondomar1. The goodwill determined prior to the merger, €112.5 million, was fully assigned to property assets.
The contribution of entities acquired during the year to main line items in the financial statements, which have a material impact on Group accounts, is analyzed as follows:
in thousands of €
investment net operating intangible fixed tangible fixed property and indebtedness Entity Country acquisition date lease income net earnings net fixed assets income/loss assets assets fixed assets in including bank progress overdrafts
Progest Group France 09-jan-07 7 187 4 256 4 538 - - 167 423 167 423 8 194 SNC CAP NORD France 29-mar-07 1 786 1 152 - 331 - - 39 277 39 277 2 482 Klepierre Larissa Greece 11-june-07 851 - 45 886 - - 23 676 23 676 - 324 Klépierre Météores Luxemburg 11-june-07 - - 12 - 262 - - - - - 4 Rybnick Plaza Sp.z.o.o. Poland 07-may-07 2 177 - 1 043 271 - - - - - 247 Sosnowiec Plaza Sp.z.o.o Poland 07-may-07 1 826 - 343 685 - - - - - 182 SA Holding Gondomar2 France 28-sept-07- 26 - 175 - - - 51 SAS Holding Gondomar4 France 28-sept-07- 10 - 17 - - - 163 SCI Noblespécialiste France 19-july-07 58 56 5 - 47 024 - 103 SNC Sodirev France 19-july-07 1 476 431 226 - 37 955 4 646 SNC La Marquayssonne France 19-july-07 - 17 20 - - 255 SCI Restorens France 19-july-07 43 32 - 13 52 504 488 Corvin Retail Hungary 30-july-07 - - - 141 508 - 404 Movement Poland Sp.Z.O.O Poland 27-july-07 2 494 - 1 419 - 225 - - 1 291
TOTAL 17 898 3 046 5 608 - - 509 367 230 376 12 786
In addition, the purchase price and the amount paid out for the equity interest securities in 2007 are: Amount paid in Amount paid in Purchase price of 2007 for Cash position on the 2007 for buyback of securities acquisition of acquisition date current accounts in thousands of € securities Progest 125 160 125 160 1 295 4 072 Corvin Retail 109 460 109 460 - - HyperNoble (Gondomar 1)* 43 304 43 304 170 44 SNC La Marquayssonne 39 150 39 150 117 305 SNC Sodirev 33 724 33 724 3 468 463 SCI Restorens 26 433 26 433 1 154 28 SA Holding Gondomar2 25 696 25 696 40 989 10 338 Cap Nord 24 160 24 160 5 208 591 SCI Noblespécialiste 23 595 23 595 1 989 153 Movement Poland Sp.Z.O.O 21 859 21 859 14 794 2 156 Klépierre Larissa 13 752 13 752 - 962 Rybnick Plaza Sp.z.o.o. 13 248 13 248 8 851 1 743 Sosnowiec Plaza Sp.z.o.o 11 271 11 271 15 532 1 699 SCI des Roseaux, GSE GIER Services Entreprises 9 415 9 415 132 539 (Kle Project 2)* Klépierre Météores 5 597 5 597 - 20 SAS Holding Gondomar4 608 608 5 644 1 175
* The assets and liabilities of SCI les Roseaux, GSE GIER Services Entreprises and Hypernoble were completely transferred in fiscal year 2007
- 37 - Annual report 2007 4. Notes to the financial statements: Balance sheet
4.1. Non-allocated goodwill
Acquisitions, new Reduction by Other 2005 2006 2007 businesses and disposals, retirement movements, December December December in thousands of € contributions of assets reclassification * Metropoli 913 913 913 * Vignate - 897 - 377 520 * Galeria Parque Nascente 1 713 1 713 1 713 * Ségécé Espana 11 977 11 977 11 977 * Ségécé 9 111 9 111 43 264 52 375 * Ségécé Magyarorszag 3 174 3 174 215 3 389 * Scoo 814 814 814 * ICD (Brescia) 909 909 909 * IGC 3 209 3 209 3 209 * Ségécé Italia 902 8 150 8 150 * Other differences 688 688 - 4 684
NET GOODWILL 33 410 41 555 43 479 -377 -4 84 653
Non-allocated goodwill amounted to €84.7 million on December 31, 2007, up by €43.1 million primarily due to the additional equity stake of 25% taken in Ségécé.
4.2. Intangible assets
Intangible assets mainly comprise software amortized over a straight line periods of one to four years.
Acquisitions, Reduction by Changes in Other 2005 2006 new businesses disposals, Allowances Currency 2007 consolidation movements, December December and retirement of for the period fluctuations December scope reclassification in thousands of € contributions assets Leasehold 460 461 461 Business concerns 1 531 2 023 - 76 - 390 - 39 - 817 701 Software 10 921 11 193 351 - 27 - 3 2 237 11 753 Other intangible assets 3 923 4 803 1 877 43 - 637 6 087
Total gross value 16 835 18 480 2 228 -103 0 -393 6 -1 217 19 001 Leasehold - - - Business concerns - - - Software - 7 872 - 8 742 - 1 838 3 37 1 108 - 9 432 Other intangible assets - 2 930 - 2 260 - 347 - 12 319 - 2 300
Total amortizations -10 802 -11 002 0 0 -2 185 3 25 1 427 - 11 732
INTANGIBLE ASSETS - NET VALUE 6 033 7 478 2 228 -103 -2 185 -390 31 210 7 269
4.3. Tangible assets
Tangible assets include two buildings in Paris operated by the Group: 21, rue La Pérouse and Espace Dumont D’Urville together with the equipment and furniture allocated for the operation.
- 38 - Annual report 2007 Acquisitions, Reduction by Changes in 2005 2006 new businesses disposals, Allowances for Currency Other movements, 2007 consolidation December December and retirement of the period fluctuations reclassification December scope in thousands of € contributions assets Land 23 030 23 030 23 030 Constructions and fixtures 17 683 17 683 17 683 Furniture and equipment 6 965 8 410 856 - 141 50 108 - 97 9 186 Total gross value 47 678 49 123 856 - 141 - 50 108 - 97 49 899 Constructions and fixtures- 1 994 - 2 655 - 664 - 3 319 Furniture and equipment- 3 517 - 4 986 98 - 1 291 - 5 - 105 1 049 - 5 240 Total amortizations- 5 511 - 7 641 - 98 - 1 955 - 5 - 105 1 049 - 8 559
Provision for impairment -
TANGIBLE ASSETS - NET VALUE 42 167 41 482 856 -43 -1 955 45 3 952 41 340
.
4.4. Investment property and fixed assets in progress
Reduction by Amortization Acquisitions, new Changes in 2005 2006 disposals, allowance and Currency Other movements, 2007 businesses and consolidation December December retirement of changes in fluctuations reclassification December contributions scope in thousands of € assets provisions Land 2 763 216 2 944 625 65 460 - 5 836 6 245 198 130 123 857 3 332 481 Constructions and fixtures 3 040 215 3 434 790 79 480 - 6 014 26 400 329 629 105 263 3 969 548 Total gross value 5 803 431 6 379 415 144 940 - 11 850 - 32 645 527 759 229 120 7 302 029 Constructions and fixtures- 308 650 - 438 963 977 - 153 964 - 2 088 - 19 618 7 352 - 606 304 Total amortizations - 308 650 - 438 963 - 977 - 153 964 - 2 088 - 19 618 7 352 - 606 304
Provision for impairment- 7 056 - 9 708 175 - 15 333 - 769 - 25 635 INVESTMENT PROPERTY - NET 5 487 725 5 930 744 144 940 -10 698 -169 297 29 788 508 141 236 472 6 670 090 VALUE
Investments for the year, excluding fixed assets in progress totalled €144.9 million.
In France, the principal operation concerns the finance lease acquisition of the Valence center for €49 million. Klémurs paid €16.8 million for the real-estate property of 8 Buffalo Grill restaurants located in Saint-Lô, Bar le Duc, Gien, Montauban, Morlaix, St Pierre les Elbeuf, Roncq – Lille and Dreux, raising the number of Buffalo Grill restaurants to 136, 51 in full ownership and 85 of them via finance lease agreements.
The other increases in assets concern the acquisitions of three Sephora shops including the two acquired by Klémurs (Metz: €6 million, Rennes: €5.3 million, Avignon : €4.4 million), of a cafeteria in Tourville (€3.4 million), of several plots of land for the Toulouse shopping centers (€2.6 million), of the land and the premises located rue du Méne (€2.3M), of a Feu Vert shop in Hérouville (€1.9 M), of two premises in Cholet (€1.6 million), of an earnout on the Givors land (€1.4 million), of three shopping premises in Besançon Chalezeule (€1million). Outside France, the most significant investments included: in Italy with the restructuring of the Varese center (€13.9 million) and in Hungary with the acquisition of land for the construction of a Corvin shopping center right in the heart of Budapest (€10 million).
The other investments concerned in Belgium, the development of the FNAC store in the Louvrain La Neuve mall (€4.6 million), in southern Italy, the restructuring of the Bari center (€3 million) and in Portugal, the acquisition of a Toy’s R’us store in Braga (€2.6 million).
Changes in the scope totalled €527.8 million and comprised the transactions below:
- 39 - Annual report 2007 - Progest and its subsidiaries, for which the assets distributed over 13 French sites represent total investment of €159.7 million including the goodwill on acquisition assigned to investment property;
- The Rybnik, Sosnowiec and Lublin malls for €164 million;
- The Restorens, Noblespécialiste and Sodirev malls for €55.6 million;
- Hypernoble for €56 million, Cap Nord for €38.4 million, Larissa Thessalia for €24 million, Duna Plaza Office for €13.3 million, Givors (Klé Projet 2) for €15.3 million.
Other movements and reclassification for €229.1 million, including:
- The impact of the consolidation method change for Galeria Parque Nascente and Gondobrico as well as the free revaluation of their assets and the assignment of goodwill which leads to an overall increase in investment property of €110.7 million;
- Commissionings for the year, from “fixed assets in progress” €190 million;
- A reduction of -€33.2 million after the reclassification of property held for sale under the item "buildings held for sale”;
- Various other movements for -€38 million: disposal of the Cordeliers mall in Poitiers, reclassification towards other balance sheet items especially inventories.
The “ Provision for impairment” line item includes a property provision of €16.0 million on shopping centers located in Poland, €5.2 million in the Czech Republic, €1.8 million in Italy and €1 million in Spain.
Reduction by Acquisitions, new Amortization Changes into 2005 2006 disposals, Currency Other movements, 2007 businesses and allowance and consolidation December December retirement of fluctuations reclassification December contributions provisions scope in thousands of € assets
FIXED ASSETS IN PROGRESS 107 692 207 825 212 496 -409 -3 625 238 191 -190 495 463 983
The increase in fixed assets in progress was due to ongoing constructions managed by the Group or supervised by third parties under Property Development Contracts (PDC):
In France: Odysseum in Montpellier (€34.5 million), Sereinis office buildings (€14.6 million), Extensions of the Claye- Souilly malls (€16.2 million), Cabestany (€13.1 million), Val d’Europe (€12.9 million), Rambouillet (€12.6 million), Saran (€15.2 million), Angoulême (€10.6 million), Combault (€5.7 million), Laon (€5.5 million), Grand Nîmes (€7.9 million), Cesson (€4.7 million), Jaude (€4.1 million), Vitrolles (€3.4 million), Vaulx-en-Velin (€2.5 million), Portet-sur-Garonne (€3.3 million) and Aubervilliers (€2 million).
Outside France: Vallecas (Spain for €5.9 million) and Corvin (Hungary for €4.6 million).
Entries in the scope of consolidation also had an impact on fixed assets in progress with Corvin Retail (€130.7 million), Noblespecialist and Restorens (€91.9 million) and Progest (€11 million).
At December 31, 2007, the net carrying amount of investment property by business and by geographic sector was as follows:
- 40 - Annual report 2007 Net carrying value of in thousands of euros investment property Shopping centers 5 749 612 France 2 864 676 Italy 874 614 Spain 734 324 Poland 389 594 Hungary 248 108 Belgium 154 178 Portugal 257 226 Czech Republic 141 698 Greece 70 820 Other 14 374 Shops 339 749 Office buildings 580 729 Total 6 670 090
4.5. Properties held for sale
Reduction by Acquisitions, new 2005 2006 disposals, Other movements, 2007 businesses and December December retirement of reclassification December contributions in thousands of € assets
BUILDINGS HELD FOR SALE 48 857 46 985 -43 984 33 199 36 200
The “other movements” line item includes reclassifications of the Hungarian malls Zalaegerszed and Csepel, and part of the Annecy mall (41.72%).
The “decreases” reflect the divestments of two office buildings, 5 Turin and Front de Paris, and of the Rheinfeld warehouse in Strasbourg.
4.6. Equity method securities
Investments in companies accounted for by the equity method December 31, 2005 2 877
Investments in companies accounted for by the equity method December 31, 2006 3 023
% of earnings from companies accounted for by the equity method for 2007 2 634 Dividends received from companies accounted for by the equity method- 630 Other movements 41 573
Investments in companies accounted for by the equity method December 31, 2006 46 600
The Group consolidated 15 companies under the equity method at December 31, 2007 against 1 at December 31, 2006.
The “Other movements” line item includes, for €41.8 M, the goodwill on acquisition of the 12 Progest subsidiaries consolidated under the equity method.
- 41 - Annual report 2007 4.7. Non-consolidates securities
Joint companies are consolidated on a proportionate basis.
2007 2006 2005 in thousands of € December December December
Share in the balance sheet of associate companies Current assets 7 554 15 531 24 393 Non current assets 193 189 183 707 180 677
Total assets 200 743 199 238 205 070 Current liabilities 112 186 122 182 117 281 Non current liabilities 88 557 77 056 87 789
Total liabilities 200 743 199 238 205 070
Share in the earnings of associate companies Income from regular business 23 840 26 265 25 267 Operating expenses - 10 602 - 11 106 - 9 178 Financial result - 5 012 - 5 355 - 5 237 Pre tax earning 8 228 9 803 10 852 Corporate Income tax 3 275 - 2 603 - 4 632
Net income 11 503 7 200 6 220
4.8. Non-consolidated securities
The "financial assets" line item comprises the securities below:
December 31, 2007 December 31, 2006 December 31, 2005
Earning for % of Gross value Net value of Earning for % of Gross value Net value of Net value of Equity Equity in thousands of € the period holding of securities securities the period holding of securities securities securities
Principal securities 1 650 475 1 442 404 493 SAS Sovaly 268 - 48 100% 572 220 308 - 41 100% 572 309 308 SARL Klépierre Trading 179 - 19 100% 199 160 SAS Socoseine 80 - 6 100% 99 19 SAS Nancy Bonsecours 76 - 18 100% 535 76 77 - 19 100% 535 95 75 SKF Spa 3 - 2 50% 245 - nc nc 50% 245 - - SAS Opave 100% 34 - 8 100% 90 - 24 SNC Pasteur 86
Other investment securities 58 37 228 181 116
Total 1 708 512 1 670 585 609
SA Sovaly is an entity with the purpose of developing the Gare de Lyon planning project.
- 42 - Annual report 2007 4.9. Other non current assets
The other non-current assets mainly include advances and loans granted to unconsolidated companies, and under equity-method or on a proportionate basis consolidated companies.
The residual value of the leased building (Lille), is considered as a finance-lease transaction recognized in non- current receivables.
Entries into 2005 2006 2007 scope of Increases Decreases Other December December December in thousands of € consolidation Finance lease fixed assets 2 107 1 905 - 226 1 679 Advance payments to non consolidated, under the equity method or proportionate 8 589 6 580 7 228 14 172 - 3 152 - 3 179 21 649 consolidation companies (A) Loans 31 19 245 753 - 661 1 357 Other long-term investments - - - Security deposits 7 812 8 544 25 1 399 - 875 7 9 100 Other long-term financial investments 204 56 5 1 023 - 22 1 062
TOTAL 18 743 17 104 7 503 17 347 -4 710 -3 397 33 846
(A) Itemized statement of advance payments:
Entries into 2005 2006 2007 basis of Increases Decreases Other December December December in thousands of € consolidation SCI du Bassin Nord 2 962 3 442 79 24 - 1 316 2 229 SA Soaval 1 443 1 514 - 1 514 - SAS Bègles d'Arcins 627 627 SCI La Roche Invest 12 512 326 12 838 SCI Plateau des Haies 572 572 SARL Forving 936 936 SCI La Rive 319 319 Other advance payments 4 184 1 624 5 401 1 581 - 1 662 - 2 816 4 128
Total 8 589 6 580 7 228 14 172 -3 152 -3 179 21 649
4.10. Inventories
As of December 31, 2007, inventories were comprised of lots acquired under the “estate agent” status.
2007 2006 2005 in thousands of € December December December
Group share 11 684 2 463 6 704 Share of external associates - - 1 191
Total 11 684 2 463 7 895
- 43 - Annual report 2007 4.11. Trade accounts and notes receivables
Trade accounts include the spreading effect of benefits granted to tenants of office property and shopping centers.
Rental Other 2007 2006 2005 in thousands of € activities activities December December December
Receivables 50 827 17 000 67 827 55 694 50 609 Provisions- 9 384 - 1 156 - 10 540 - 9 535 - 8 173 Total 41 443 15 844 57 287 46 159 42 437
4.12. Other receivables
2007 2006 2005 December December December in thousands of €
Tax receivables 49 645 111 048 62 685 - Corporation tax 8 622 4 378 1 327 - V.A.T. 41 023 106 670 61 358
Other debtors 166 043 153 316 145 103 - Calls for funds 78 828 68 389 59 812 - Down payments to suppliers 4 234 2 408 1 549 - Other deferred charges - 84 253 - Prepaid expenses 66 067 66 657 70 133 - Other 16 914 15 778 13 356
Total 215 688 264 364 207 788
- 44 - Annual report 2007 December 2007 by due date 2007 Less than More than in thousands of € December one year one year
Tax receivables 49 645 49 645 0 - Corporation tax 8 622 8 622 - V.A.T. 41 023 41 023
Other debtors 166 043 139 129 26 914 - Calls for funds 78 828 78 828 - - Down payments to suppliers 4 234 4 234 - - Other deferred charges - - - - Prepaid expenses 66 067 39 153 26 914 - Other 16 914 16 914 -
Total 215 688 188 774 26 914
The VAT item includes amounts pending refund from the local tax administration for recent acquisitions (or constructions in progress): Milan Assago (€7.8 million), Tor Vergata (€8 million). Note that the main VAT receivables outstanding as of December 31, 2007 were refunded over fiscal year 2007: Buffalo grill - Klémurs (€35.6 million), Toulouse Purpan and Rambouillet (€9 million), Vinaza (€4.6 million), and Braga (€6.2 million).
The main pre-lease payments under construction leases or long-term lease rights recognized as prepaid expense and amortized over the term of the lease agreement in accordance with benefits procured include: Oviedo for €10.2 million, Val d’Europe for €16.2 million and six malls with Klécar France for €19million.
4.13. Cash and near cash
2007 2006 2005 in thousands of € December December December
Near cash 56 504 52 084 41 858 - Treasury bills and certificates of deposit 6 804 8 903 9 603 - Other fixed revenue securities - - Money market investments 49 700 43 181 32 255 Cash 138 972 105 612 124 805
Total 195 476 157 696 166 663
They are comprised of money market open-end and mutual funds or SICAV-FCP in France, certificates of deposits in Italy for €3.4 million (one month maturity) and Spanish treasury bills for €3.4 million (maturity within one week).
The Group reported net cash of:
- 45 - Annual report 2007 2007 2006 2005 in thousands of € December December December Near cash 56 504 52 084 41 858 Cash 138 972 105 612 124 805 Gross cash and near cash 195 476 157 696 166 663 Bank overdraft 101 909 94 999 111 646 Net cash and near cash 93 567 62 697 55 017
4.14. Equity
Share capital:
Share capital at December 31, 2007 was 138,492,687 shares worth a nominal value of €1.40 each. It is fully paid. The shares are in registered or bearer form.
2007 2006 2005 Number of shares December December December Authorized ordinary shares worth €1.4 each* 138 492 687 46 164 229 46 164 229 refundable convertible preferential shares NA NA NA
Total 138 492 687 46 164 229 46 164 229
* Nominal value of €1.4 as of December 31, 2007, versus nominal value of €4.2 as of December 31, 2006
Treasury shares:
The Group used the authorizations granted by the ordinary general meetings to acquire shares of Klépierre S.A.
There was a total of 2,990,463 treasury shares as of December 31, 2007 (against 395,821 as of December 31, 2006) for an acquisition value of €96.2 million.
Capital gains on disposals of treasury shares were booked in equity for an amount of -€0.3 million as of December 31, 2007,+ €1.9 million at December 31, 2006 and +€2.1 million at December 31, 2005.
The acquisition cost of purchased securities as well as gains on the sale of securities were respectively debited from and credited to equity.
4.15. Current and non-current financial liabilities
Change in indebtedness The total amount of current and non-current financial liabilities totalled €4,840 million as of December 31, 2007.
Net financial debt totalled €4,652 million compared to €3,804 million as of December 31, 2006. Net financial debt corresponds to the difference between financial liabilities (excluding revaluation linked to the Fair Value Hedge) and cash and near cash.
- 46 - Annual report 2007 The increase of €848 million primarily corresponds to investment flows (€1,080 million) and the dividend payout (€148 million), partially offset by disposals (€109 million) and free cash flow for the year.
2007 2006 2005 in thousands of € December December December
NON CURRENT Bond issues net costs/premiums 1 880 378 1 885 596 1 220 845 Bond issues - Reclassification of share premiums and loan - 8 224 issue costs * Of which reevaluation linked to Fair Value Hedges- 7 701 228 28 189 Borrowings and debts from credit institutions over 1 year 2 362 682 1 668 921 1 294 394 Italy loan reclassification Sundry loans and financial debts 157 760 125 737 118 667 * Other loans 232 * Advance payments to the group and associates 157 760 125 505 118 667
Total of non current financial liabilities 4 400 820 3 680 254 2 633 906
CURRENT Borrowings and debts from credit institutions under 1 year 44 632 34 217 514 248 Accrued interests 66 943 61 743 38 460 * on bond issues 54 263 54 263 30 545 * on loans from credit institutions 4 445 3 104 2 565 * on advance payments to groups and associates 8 235 4 376 5 350 Bank overdrafts 101 909 94 999 111 646 Commercial paper 220 000 90 000 125 000 Sundry loans and financial debts 5 711 482 587 * Other loans - 154 277 * Advance payments to the group and associates 5 711 328 310
Total of current financial liabilities 439 195 281 441 789 941
Main financing
The Group’s main financing lines are as follows:
the table below provides the characteristics of three bond issues set up in 2001 (maturity 2008), 2004 (maturity 2011), and 2006 (maturity 2016). At December 31, 2007, Klépierre had total outstanding bonds of €1,900 million. Arrangement of a syndicated loan in January 2006: At December 31, 2007, the medium term facility of €1,200 million had been fully used. It matures on January 31, 2013; The commercial paper back-up line (€300 million) has not been used; A syndicated loan set up in September 2007 for up to €1,000 million, of which €450 million had been used as of December 31, 2007; A credit facility of €150 million set up in December 2006 by Klémurs and fully used as of December 31, 2007; A bilateral loan of €135 million set up in 2004 by Klépierre; A bilateral loan of €165 million set up in 2004 by Klépierre Participations et Financements; Borrowings on the Italian subsidiaries (mainly Klecar Italia: €114 million); Commercial paper for €220 million.
- 47 - Annual report 2007 Financing % holding/ Reference Maximum Repayment Amount Borrower Maturity date (in millions of €) Klépierre rate amount profile used
Bond issues Klépierre 100% 6,125% 10/07/2008 600 in fine 600 Klépierre 100% 4,625% 15/07/2011 600 in fine 600 Klépierre 100% 4,250% 16/03/2016 700 in fine 700 Borrowings from credit institutions
Klépierre (Tranche A: back-up line) 100% Euribor 31/01/2013 300 in fine - Klépierre (Tranche B) 100% Euribor 31/01/2013 1200 in fine 1 200 Syndicated loans Klépierre 100% Euribor 21/09/2014 1000 in fine 450 Klémurs 84,11% Euribor 12/12/2011 150 in fine 150 Klépierre 100% Fixed rate 22/03/2010 135 in fine 135 Klépierre Part. & Fints 100% Fixed rate 22/03/2010 165 in fine 165 Novate 85% E3m 15/12/2008 4 amortisable 4 Novate 85% E3m 31/01/2008 2 amortisable 2 Bilateral loans Magnolia 85% E3m 15/12/2008 1 amortisable 1 Magnolia 85% E3m 31/01/2008 0 amortisable 0 ICD 85% E6m 01/02/2008 7 in fine 7 Restorens 100% E3m 21/10/2011 1 in fine 1 Klécar Italia 83% E3m 30/06/2015 114 amortisable 114 Novate 85% E6m 15/10/2016 15 amortisable 15 Novate 85% E6m 15/12/2013 12 amortisable 12 ICD 85% E3m 10/05/2011 9 amortisable 9 Magnolia 85% E3m 15/07/2011 3 amortisable 3 Magnolia 85% E3m 15/01/2018 1 amortisable 1 Mortgage loans Hypernoble 100% E3m 14/12/2011 1 amortisable 1 Hypernoble 100% E3m 02/01/2012 1 amortisable 1 Sodirev 100% E3m 05/02/2012 4 amortisable 4 Sodirev 100% E3m 05/04/2010 1 amortisable 1 LC 33% E3m 02/01/2012 0 amortisable 0 Rebecca 70% E3m 30/07/2014 3 amortisable 3 Rebecca 70% E3m 31/07/2015 1 amortisable 1 IGC 50% E3m 01/08/2011 4 amortisable 4 IGC 50% E3m 31/07/2011 6 amortisable 6 IGC 50% E3m 24/07/2011 6 amortisable 6 IGC 50% E3m 12/03/2022 17 amortisable 17 Finance lease Cecoville 100% E3m 27/12/2019 48 amortisable 48 agreements Hypernoble 100% E3m 01/07/2008 1 amortisable 1 63% E3m Klémurs / Cap Nord 84,11% 37% fixed (1) 47 amortisable 47 rate Short-term line IGC 50% E3m 13/12/2007 4 in fine 4 Klépierre Finance 100% Eonia - 50 11 Overdrafts Klépierre 100% Eonia - 23 23 Commercial paper Klépierre 100% - - 300 in fine 220
TOTAL (2) 5 237 4 568
(1) Klémurs contracts (Buffalo Grill assets) and its Cap Nord subsidiary; residual average length of 4.3 years at December 31, 2007 (2.1 years taking into account the dates of early exercise of options) (2) the totals are calculated without the back-up line given that the maximum amount of the "commercial paper" line corresponds to the amount of the back-up line
Interests on the variable-rate financial instruments are revalued regularly at six months or less. Interests on the fixed-rate financial instruments are fixed until the instrument’s maturity date.
Financial covenants linked to financing and rating
In January 2008, Standard & Poor’s confirmed Klépierre’s rating of BBB+, and maintained the “positive” outlook. The rating agency then defined the goals below for Klépierre in order to retain the rating: EBITDA / Net financial costs included t 2.5 ; Net debt/Revalued net assets (loan to value) d 50% ; Gross cash flow/Net debt t 7%.
- 48 - Annual report 2007 In addition, Klépierre’s main credit agreements include the following clauses, failure to comply with them may result in demand for the early refund of the relevant financing: 9 For the syndicated loans and bilateral loans of Klépierre and Klépierre Participations et Financements: EBITDA / Net financial costs t 2.5 ; Secured financial debt/ Revalued net assets d 20%; Net debt/Revalued net assets (loan to value) d 52% ; Revalued asset group share t €5 billion. 9 For bond issues: Capping of asset-backed debts given as guarantee to third parties at 50% of the revalued net asset; Should there be a change of ownership of one third of the voting rights which would result in Standard and Poor’s rating falling below BBB-, investors would have a put that can force Klépierre to an early refund.
Breakdown of financial debts by maturity date
Breakdown of current and non-current financial liabilities:
Less than one From one to five More than Total in thousands of € year years five years
NON CURRENT Bonds issues net costs/premiums 1 880 378 591 901 596 543 691 934 * Of which reevaluation linked to Fair Value Hedges - 7 701 - 7 701 - - Borrowings and debts from credit institutions over 1 year 2 362 682 - 418 982 1 943 700 Borrowings 419 865 1 947 796 * NC +C issue costs - 4 979 - 883 - 4 096 Sundry loans and financial debts 157 760 - - 157 760 * Other loans - - - - * Advance payments to the group and associates 157 760 - 157 760
Total of non current financial liabilities 4 400 820 591 901 1 015 525 2 793 394
CURRENT Borrowings and debts from credit institutions under 1 year 44 632 44 632 - - Accrued interest 66 943 66 943 - - * on bond issues 54 263 54 263 - - * on loans from credit institutions 4 445 4 445 - - * on advance payments to groups and associates 8 235 8 235 - - Bank overdrafts 101 909 101 909 - - Commercial paper 220 000 220 000 - - Other - - Sundry loans and financial debts 5 711 5 711 - - * Other loans - - - - * Advance payments to the group and associates 5 711 5 711 - -
Total of current financial liabilities 439 195 439 195 - -
Financing amortization table (amounts used in millions of euros):
- 49 - Annual report 2007 Repayment year 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2017+ TOTAL 2008 bond issues 600------600 2011bond issues ---600------600 2016 bond issues ------700-700 2006 syndicated loan -----1200----1200 2007 syndicated loan ------450---450 Klémurs bank loan ---150------150 Klépierre bilateral --135------135 Klépierre Part. & Fints Bilateral --165------165 Klémurs & Cap Nord finance lease 81944322222 47 Subsidiary loans 38 20 20 22 12 12 10 98 9 24 266 Commercial paper 220------220 Overdrafts 34------34 TOTAL 900 39 324 776 15 1 214 463 100 710 26 4 567
The contractual flows including principal and interests (not discounted) by maturity date are as follows (in millions of euros):
Repayment year 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2017+ TOTAL 2008 bond issues 619------619 2011bond issues 282728615------698 2016 bond issues 30 30 30 30 30 30 30 30 706 - 944 2006 syndicated loan 56 56 56 56 56 1 206 - - - - 1 486 2007 syndicated loan 23 23 23 23 23 23 467 - - - 605 Klémurs bank loan 888157------181 Klépierre bilateral 55136------146 Klépierre Part. & Fints Bilateral 66166------178 Klémurs & Cap Nord finance lease112155442211 56 Subsidiary loans 50 32 31 32 21 20 18 102 11 26 343 Commercial paper 220------220 Overdrafts 34------34 TOTAL 1 090 208 483 918 134 1 283 517 134 718 27 5 510 Calculation on the basis of the interest rates as of 31 December 2007
As of December 31, 2006, the amortization table of these contractual flows was as follows (in millions of euros):
Repayment year 2 007 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2017+ TOTAL 2008 bond issues 37619------656 2011bond issues 28282828615------727 2016 bond issues 30 30 30 30 30 30 30 30 30 706 - 974 2006 syndicated loan 35 35 35 35 35 35 954 - - - - 1164 2007 syndicated loan ------0 Klémurs bank loan 6666149 ------173 Klépierre bilateral 555135------150 Klépierre Part. & Fints Bilateral 666166------184 Klémurs finance leases 912205432211- 59 Subsidiary loans 47 27 44 54 21 12 11 9 94 3 1 323 Commercial paper 90------90 Overdrafts 32------32 TOTAL 325 768 174 459 854 80 997 41 125 710 1 4 532 Calculation on the basis of the interest rates as of 31.12.06
4.16. Interest rate hedging instruments
Rate hedging portfolio
As part of its risk management policy (cf. corresponding section), Klépierre has underwritten swap agreements allowing it to pass from variable rate to fixed rate debt or inversely. Thanks to these instruments, Klépierre’s hedge rate, defined as the proportion of fixed rate debts after hedging in gross financial debt, stood at 70% as of December 31, 2007 and 79% as of January 2, 2008.
As of December 31, 2007, the Group’s swap contracts included:
- 50 - Annual report 2007 CASHFLOW HEDGING RELATIONSHIPS Fixed rate paying agent Amount (€ M) Maturity date Forward start date Klépierre 100 22/12/2008 no Klépierre 300 22/12/2009 no Klépierre 200 22/12/2010 no Klépierre 500 22/12/2011 no Klépierre 100 15/04/2012 no Klépierre 100 11/07/2012 no Klépierre 100 02/09/2012 no Klépierre 100 02/01/2011 02/01/2008 Klépierre 100 02/01/2013 02/01/2008 Klépierre 150 02/01/2015 02/01/2008 Klépierre 600 10/07/2015 10/07/2008 Klécar Italia 90 31/12/2010 no Klémurs 50 01/01/2014 no Klémurs 50 31/12/2014 31/12/2007 Klémurs 150 02/01/2015 02/01/2008 FAIR VALUE HEDGE RELATIONSHIPS Variable rate paying agent Amount (€ M) Maturity date Forward start date Klépierre 600 15/07/2011 no
Furthermore, the Italian company IGC (50%) contracted an amortizable tunnel (maturity date August 2009), whose notional amount on December 31, 2007 was €8.1 million. It was recorded as a trading instrument (change in value recognized in income).
Breakdown by maturity date
As of December 31, 2007, the breakdown of derivatives by maturity was as follows: in millions of euros Hedging relationship 2008 2009 2010 2011 2012 2013 2014 2015 Total Klépierre fixed rate paying agent Cashflow hedge 100 300 200 800 300 200 - 450 2350 .Of which spot start swaps 100 300 200 500 300 - - - 1400 .Of which forward start swaps - - - 300 - 200 - 450 950 Klépierre floating rate paying agent Fair value hedge - - - 600 - - - - 600 Klécar Italia fixed rate paying agent Cashflow hedge - - 90 - - - - - 90 Klépierre fixed rate paying agent Cashflow hedge ------100 150 250 .Of which spot start swaps ------100-100 .Of which forward start swaps ------150150 IGC (collar) Trading -4------4 Total 100 304 290 1400 300 200 100 600 3294 Corresponding contractual flows (interests) break down as follows (positive flows = payer flows): in millions of euros Hedging relationship 2008 2009 2010 2011 2012 2013 2014 2015 Total Spot start swaps Cashflow hedge -24 -22 -17 -14 -4 -1 - - -82 Forward start swaps Cashflow hedge -4 -6 -6 -5 -5 -5 -5 -2 -38 Spot start swaps Fair value hedge 4 4 4 3 - - - - 15 Collar Trading ------Total -24-24-19-16-9-6-5-2-105 Calculation on the basis of the interest rates as of 31 December 2007
- 51 - Annual report 2007 As of December 31, 2006, the breakdown of derivatives by maturity and the amortization table of the corresponding interest flows were as follows (in millions of euros): in millions of euros Hedging relationship 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total Klépierre fixed rate paying agent Cashflow hedge 100 300 200 500 300 - - 300 1700 .Of which spot start swaps 100 300 200 500 300 - - - 1400 .Of which forward start swaps ------300 300 Klépierre floating rate paying agentFair value hedge ----600----600 Klécar Italia fixed rate paying agent Cashflow hedge - - - 90 - - - - - 90 Klépierre fixed rate paying agentCashflow hedge ------100-100 .Of which forward start swaps ------100-100 IGC (collar) Trading - - 5 ------5 Total - 100 305 290 1100 300 - 100 300 2495 in millions of euros Hedging relationship 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total Spot start swaps Cashflow hedge -9 -9 -8 -6 -5 -1 - - - -38 Forward start swaps Cashflow hedge - - -1 -1 -1 -1 -1 - - -5 Spot start swaps Fair value hedge -2 -2 -1 -1 ------6 Collar Trading ------Total -11 -11 -10 -8 -6 -2 -1 - - -49 Calculation on the basis of the interest rates as of December 31, 2006.
Fair Value
As of December 31, 2007, unrealized capital gain on Klépierre’s portfolio of derivatives, calculated as the sum of their fair value excluding accrued interests, was €68.8 million. The full coupon fair value is recognized on the balance sheet for €84.0 million under assets and €7.7 million as liabilities. During the year, Klépierre’s derivatives recorded an increase in their fair value of €11.7 million. Derivatives Fair value net of Fair value change accrued interest as of in Counterparty December 31, 2007 2007 (€M) (€M) Cashflow hedge 79,8 18,7 Stockholders’ equity Fair value hedge -11,0 -7,0 Financial liabilities Trading 0,0 0,0 Income statement Total 68,8 11,7
4.17. Long-term and short-term allowances
Allowances Releases Releases Changes in 2005 2006 Other 2007 for the (provision (provision scope of December December movements December in thousands of € period used) not used) consolidation
NON CURRENT Provisions for human resource commitments. - - Defined-benefits scheme 3 415 4 166 633 - 1 1 4 799 - Post-employment medical assistance - - - - Early retirement and EAP 124 - - - Other long-term benefits 1 241 1 669 - 33 - 19 1 617 Other provisions for contingencies and losses 2 799 2 737 3 913 - 634 - 1 205 228 - 30 5 009 Total non current provisions 7 579 8 572 4 546 -634 -1 239 210 -30 11 425
- 52 - Annual report 2007 4.18. Deferred taxes
2005 2006 Change in 2007 Other changes in thousands of € December December Earnings December
Buildings- 154 269 - 123 484 25 925 - 105 163 - 202 722 Other items- 3 855 - 4 502 - 5 273 - 6 572 - 16 347 Total deferred tax liabilities -158 124 -127 986 20 652 -111 735 -219 069
2005 2006 Change in 2007 Other changes in thousands of € December December Earnings December
Buildings - Other items 33 417 26 275 3 839 3 561 33 675 Total deferred tax assets 33 417 26 275 3 839 3 561 33 675
NET POSITIONS -124 707 -101 711 24 491 -108 174 -185 394
“Other changes“ record the impact of:
- entries and changes to the scope of consolidation: Progest (- €40.8 million), Corvin Retail (- € 25.4 million), Gondomar (- €16.6 million), Hypernoble (- €8.7million), Cap Nord (- €4.9 million), Givors (- €4.2 million), Rybnik, Sosnowiec and Lublin (- €3.4 million) and Larissa (- €2.7 million).
- restatements on hedging instruments for -€2.4 million.
4.19. Tax liabilities, staff benefits and other payables
2007 2006 2005 in thousands of € December December December
Social and tax liabilities 79 589 64 813 69 649 Personnel and related accounts 15 138 13 570 11 540 Social security and other bodies 4 196 3 927 2 807 State * Corporation tax 40 436 35 988 46 253 * V.A.T. 10 732 7 310 7 556 Other taxes and duties 9 087 4 018 1 493
Other liabilities 163 209 135 017 115 847 Creditor customers 69 561 58 981 50 752 Deferred income 13 135 4 372 1 880 Other liabilities 80 513 71 664 63 215
Since 2006 and 2007, Klépierre SA has been subject to tax assessment by the tax authorities for financial years 2003 and 2004. The Group has funded under the item "Corporate income tax" a liability of €11.5 million corresponding to the notice received in December 2006 for financial year 2003 increased by the interests
- 53 - Annual report 2007 normally due on late payments. This notice, linked to the adoption of the SIIC status, is currently being contested by Klépierre. The notice received in May 2007 for financial year 2004 was accepted by Klépierre; this notice amounted to €33,000.
Advance payments received from tenants as advance payments for expenses are recorded in “Creditor customers” for €69.6 million.
The other liabilities are primarily comprised of funds corresponding to the management accounts of principals of Ségécé group with in return an amount equal to the cash on the asset side of the balance sheet. These funds amounted to €54.4 million on December 31, 2007.
5. Notes to the financial statements: Income Statement
5.1. Segment Income Statement as of December 31, 2007
Shopping centers
December 31, December 31, December 31, In million of euros 2007 2006 2005
Lease income 517,9 455,2 390,6 Other rental income 6,9 8,6 5,6 Lease income 524,8 463,8 396,1 Land expenses (real estate) - 2,3 - 2,3 - 2,0 Non-recovered rental expenses- 16,1 - 5,9 - 4,0 Building expenses (owner) - 27,1 - 28,6 - 30,1 Net lease income 479,3 427,1 360,0
Management, administrative and related income 63,3 56,2 45,9 Other operating income 14,2 6,7 5,5 Survey and research costs - 1,1 - 1,1 - 0,8 Payroll expense - 56,6 - 54,3 - 46,9 Other general expenses - 20,1 - 17,7 - 15,0 Depreciation and amortization allowance on investment property- 150,2 - 126,8 - 106,8 Depreciation and amortization allowance on PPE- 3,3 - 2,2 - 3,5 Provisions - 3,3 0,1 - 3,0
Results of operations, shopping center segment 322,1 287,8 235,3 Gains on the sale of investment property and equity interests 21,4 11,0 39,0 Net book value of investment property and equity investment sold - 1,3 - 7,5 - 36,3 Gains from the sale of investment property and equity investment securities 20,1 3,5 2,6 Gains on the sale of short term assets 1,2 5,2 0,6 Net book value of short term assets sold- 1,1 - 3,7 - 0,5 Profit on the sale of short term assets- 0,0 1,5 0,1 Share in earnings of equity-methodinvestees 2,6 0,7 0,6 Segment earnings, shopping center segment 345,0 293,5 238,7
- 54 - Annual report 2007 Shops December 31, December 31, December 31, In million of euros 2007 2006 2005
Lease income 23,5 2,9 Other rental income Lease income 23,5 2,9 - Land expenses (real estate) Non-recovered rental expenses Building expenses (owner) - 0,8 - 0,3 Net lease income 22,7 2,7 -
Management, administrative and related income 0,6 Other operating income 0,5 Survey and research costs - Payroll expense - 1,0 Other general expenses - 0,3 Depreciation and amortization allowance on investment property- 7,3 - 0,8 Depreciation and amortization allowance on PPE - Provisions -
Results of operations, retail segment 15,0 1,8 - Gains on the sale of investment property and equity interests Net book value of investment property and equity investment sold Gains from the sale of investment property and equity investment securities - - - Gains on the sale of short term assets Net book value of short term assets sold Profit on the sale of short term assets - - Share in earnings of equity-methodinvestees Segment earnings, retail segment 15,0 1,8 -
- 55 - Annual report 2007 Office buildings
December 31, December 31, December 31, In million of euros 2007 2006 2005
Lease income 48,8 52,8 52,9 Other rental income - - - Lease income 48,8 52,8 52,9 Land expenses (real estate) - 0,2 - 0,3 - 0,3 Non-recovered rental expenses - 1,1 - 0,4 - 1,2 Building expenses (owner) - 1,4 - 2,0 - 2,3 Net lease income 46,1 50,0 49,1
Management, administrative and related income 0,3 1,3 0,5 Other operating income 1,1 2,8 1,7 Survey and research costs - - - Payroll expense - 1,9 - 2,2 - 2,1 Other general expenses - 0,8 - 0,9 - 1,2 Depreciation and amortization allowance on investment property- 11,8 - 13,4 - 18,5 Depreciation and amortization allowance on PPE- 1,0 - 0,8 - 1,1 Provisions 0,1 - - 0,1
Results of operations, office segment 32,1 36,7 28,2
Gains on the sale of investment property and equity interests Net book value of investment property and equity investment sold Gains from the sale of investment property and equity investment securities 20,3 27,5 17,5 Gains on the sale of short term assets Net book value of short term assets sold - Profit on the sale of short term assets - - -
Segment earnings, office segment 52,4 64,2 45,8
Corporate
December 31, December 31, December 31, In million of euros 2007 2006 2005 Corporate and shared expenses - 6,2 - 7,0 - 6,3 Profit on sale of short-term assets - - - Net dividends and provisions on non-consolidated securities 0,5 - 0,2 - 0,2 Net cost of debt - 162,9 - 134,8 - 112,7 Change in the fair value of financial instruments - - - Effect of discounting 0,7 - 1,2 - 1,3 Pre-tax earnings 244,5 216,3 163,8 Corporate income tax - 13,5 - 22,0 - 17,9 Net income of consolidated entity 231,0 194,4 145,9
5.2. Operating revenue
Lease income comprises all the lease payments from office buildings, shopping centers and stores, together with other income similar to lease income such as parking rentals, termination indemnities and received entry fees .
Rental income is lease income excluding income from entry fees and other sundry income.
- 56 - Annual report 2007 The Group’s revenues comprise lease income and management and administration income received by the service provider companies.
The other operating income comprises re-invoicing of works to tenants and sundry income.
As of December 31, 2007, the amount of rental income stood at €590.2 million of which €517.9 million for shopping centers and €23.5 million for shops and €48.8 million for office buildings.
Management Lease income Total in millions of euros income Shopping centers 517,9 63,3 581,2 France 266,0 46,0 312,0 Italy 79,2 5,8 85,0 Spain 65,3 7,2 72,5 Hungary 29,8 1,2 31,1 Poland 27,0 0,5 27,5 Belgium 12,4 - 12,4 Portugal 15,7 1,8 17,4 Czech Republic 14,0 0,6 14,6 Greece 6,9 0,1 7,0 Other 1,6 0,0 1,6 Shops 23,5 0,6 24,1 Office buildings 48,8 0,3 49,1 Total 590,2 64,2 654,4
Revenues generated from business outside France accounted for 41.1 % of the Group’s business, compared to 42.4 % as of December 31, 2006.
In relation to December 31, 2006, rental income from Shopping centers increased by 13.8%. Slightly more than 60% of this increase, being €38.6 million, were derived from mergers and acquisitions with:
- the acquisitions carried out in 2007 for €26.0 million in particular: the Polish centers of Rybnik, Sosnowiec and Lublin for €7.9 million, Progest portfolio including equity interests in 9 French shopping malls with in particular €7.2 million, Leclerc superstores in Blagnac and Saint-Orens adjacent to the existing malls for €3.2 million;
- inaugurations during the year: opening of the Champ-de-Mars mall in Angoulême (+€2.2M), extensions of the Rambouillet, Orléans-Saran and Brest Iroise malls (+€2.2M in all).
Rental income from office buildings have shrunk by €4.0 million as a result of the disposals which occurred at the end of 2006 and early 2007.
In 2007, rental income from Klémurs shops totalled €23.5 million versus €2.9 million in 2006. €18.6 million of this figure is from the rental income of assets operated by Buffalo Grill, €3.1 million from Klémurs historic assets (Truffaut, BHV rue de Flandre and rue Candé in Rouen),and €1.8 million from the assets held by Cap Nord acquired on March 29, 2007.
Shopping center management income from the activities carried out by Ségécé and its subsidiaries in third-party management and development reached €64.2 million, up by 12.5 % compared to December 31, 2006. This
- 57 - Annual report 2007 increase can be primarily explained by the rise in the amount of development fees and an increase in the number of leasing mandates outside the group internationally.
5.3. Operating expenses
Land expenses correspond to amortizations and fees on construction lease.
Non-recovered rental expenses are mainly from expenses on vacant premises.
Building expenses are posted net of re-invoicing to tenants and only include the amounts at the owner’s expense. 2007 2006 2005 in thousands of € December December December OPERATING EXPENDITURE (excluding Corporate activities) -49 146 -39 884 -39 915 Land expenses (real estate) -2 515 -2 598 -2 296 * Office property businesses -248 -342 -290 * Shopping malls businesses -2 267 -2 256 -2 006 * Shop activities Unrecovered rental expenses -17 189 -6 296 -5 240 * Office property businesses -1 113 -428 -1 221 * Shopping malls businesses -16 066 -5 868 -4 019 * Shop activities -10 Building expenses -29 442 -30 990 -32 379 * Office property businesses -1 402 -2 151 -2 270 * Shopping malls businesses -27 254 -28 836 -30 109 * Shop activities -786 -3
DEPRECIATION AND AMORTIZATION ALLOWANCE -173 662 -144 094 -130 122 Depreciation and amortization allowance on investment property -169 297 -140 968 -125 535 Depreciation and amortization allowance on property, plant & equipment -4 365 -3 126 -4 587 Amortization of goodwill 0 0 0 Total -222 808 -183 978 -170 037
Amortizations and provisions for investment property rose by €29.7 million over December 31, 2006.
This change stems from:
- the full year impact on 2007 of the portfolio increase in 2006 with the Buffalo Grill restaurants (€6 million) and various other malls for a total amount of €3.7 million;
- portfolio increases in 2007 with Progest (€3.2 million), the Gondobrico and Parque Nascente Portuguese shopping centers (€2.2 million), the Polish centers of Rybnik, Sosnowiec and Lublin (€3.4 million), Blagnac and Saint-Orens (€1 million) and various other malls for a total amount of €1.9 million;
- disposals of office buildings in 2005 and 2006 resulted in a reduction of amortization allowance of €1.2 million;
- property provisions net of reversals. They include a property provision of €15.3 million versus €5.8 million as of December 31, 2006 and mostly correspond to provisions on shopping centers located in Poland and in the Czech Republic.
- 58 - Annual report 2007 5.4. Results of the sale of investment property and equity interests
Income from the sale totalled €40.4 million and includes:
- €20.3 million in investment property primarily from the sale of Front de Paris and Rue de Turin buildings for a total sum of € 73.8 million. Capital gains amounted respectively to €16.6 million and € 4.5 million. Various premises, including a warehouse (Rheinfeld) and parking lots were also sold to generate income of €1.3 million and a capital gain of €0.8 million.
- and €20.1 million in equity securities with the sale of all of the securities of Espace Cordeliers owner of the Les Cordeliers center in Poitiers.
5.5. Net cost of debt
The cost of debt rose to €162.9 million at December 31, 2007 versus € 134.8 million at December 31, 2006 reflecting the increase in debt for the period.
The main components of this change were as follows:
- Interests on bond issues rose by €6.2 million, due to the full year impact of the issue of March 2006, where the nominal amount was €700 million;
- Interests on loans from credit institutions rose by €46.8 million driven by the effect of the increase in outstanding (€1.7 billion in 2006 versus €2.4 billion at the end of 2007) and the strong tension on short term interest rates, in particular during the second half of 2007 due to the financial crises. The Euribor 3-month index rose from 3.08% on average in 2006 to 4.27% on average in 2007. In order to curb the impact of this interest rate environment on its financial costs, Klépierre reduced the duration of its drawdowns on syndicated loans from three months to one month in the second half of 2007, so as to benefit from the greater difference between the respective Euribor benchmark indices since the financial crisis;
- The impact of the interest rate increase was also limited by Klépierre’s hedging portfolio: therefore, income net of interests on swaps rose by €11.2 million, for a significantly identical outstanding (€50 million);
- The “transfer of financial charges” line item records the commissions and costs linked to new loans set up during the year ; it corresponded, in 2007, to the expenses of the euro syndicated loan signed on September 21, 2007 and in 2006 to the expenses of the syndicated credit signed on January 31 and the bond issue of March 16.
The recognized financial expenses represent €18.4 million over the 2007 period versus €7.7 million in 2006. They are broken down over the line items below:
- €16.0 million in the “interest on advance payment to partners” line item;
- €2.4 million in the “interest on loans from credit institutions” line item.
- 59 - Annual report 2007 2007 2006 2005 in thousands of € December December December Investment revenues Income from sale of securities 2 468 1 217 1 033 Net interest revenue on Swaps 14 456 3 211 - Net deferal of payments on swaps 535 516 - Interest on advance payment to partners 16 755 8 326 4 004 Sundry interests received 1 103 513 1 128 Other revenues and financial income 3 074 1 661 1 035 Currency translation income 9 797 1 099 6 640 Total 48 188 16 543 13 840
2007 2006 2005 in thousands of € December December December Financial expenses Interests on bond issues -96 044 -89 873 -65 644 Interests on loans from credit institutions -93 261 -48 849 -43 199 Other bank interests -2 309 -1 835 -1 400 Net interest expense on Swaps - - -2 228 Net deferal of payments on swaps -591 Interest on advance payment to partners -7 130 -5 330 -5 343 Other financial expenses -7 330 -10 707 -6 189 Transfer of financial charges 2 968 5 907 4 902 Currency translation losses -8 003 -662 -6 819 Allowance to provisions for other long-term investments -10 - -29 Total -211 119 -151 349 -126 540
Cost of indebtedness -162 931 -134 806 -112 700
5.6. Corporate income tax
2 2007 2006 2005 0 in thousands of € December December December 0 Current taxes payable- 37 982 - 64 756 - 26 464 Deferred tax 24 489 42 740 8 555 Total- 13 493 - 22 016 - 17 909
Klépierre identifies three income tax segments: - the SIIC segment that includes Klépierre and all eligible French real-estate affiliates. Some of these companies have elected for the common law tax status; - companies incorporated under French law; - foreign affiliates.
The tax expense for 2007 represents €13.5 million.
Expense on the SIIC segment, i.e., €8.4 million, analyzed as follows: - €2.6 million expense on the segment’s taxable earnings. These earnings are mainly connected to the financial business of the relevant companies; - a tax income linked to the tax audits and to tax credits of f €1.4 million.
- 60 - Annual report 2007 - a net expense of €4.6 million as provision for a tax of €7.5 million will also be paid for the entry of Cecobil in the SIIC plan on January 1, 2008 and less the reversals of provisions for deferred tax liabilities recognized by Cecobil for €2.9 million; - An expense of €2.6 million of deferred taxes mainly calculated on cash payment deferrals and the recognition of deficits on the balance sheet;
Other French companies not dependent on the SIIC segment recorded an expense of €8.1 million comprised of: - €2.6 million of income tax for the limited partners of Ségécé and Klécar Europe Sud; - €4.1 million representing the income expense actually due for the period by the segment’s entities; - a tax expense of €1.5 million of deferred taxes on the recognition of deficits, pensions and amortization restatements; - an extraordinary tax of €1.8 million recorded by Klécapnor for the revaluation of Capnord’s equity assets which will be included in the SIIC plan in 2008. In return, a provision for a deferred tax liability of €1.9 million was reversed by Capnord.
Foreign companies recorded a tax gain of €3.0 million comprised of: - €13.6 million of current tax, primarily in Italy (€8.4 million), Czech Republic (€1.7 million), and Poland (€1.1 million); - €7.1 million of expenses funded by the Italian companies ICD, Magnolia and Novate for the estimated tax liability due in 2008 for the contribution of their assets to an Italian common fund; - an extraordinary deferred tax gain of €12.9 million generated on the readjustment of the taxable base of the Polish malls of Krakow and Poznan; - an extraordinary deferred tax gain of €12.1 million on the reduced income tax rate in Italy, Czech Republic, Spain and Portugal; - €3.8 million of deferred tax expenses primarily calculated on allowances to restated amortization according to the component-based method; - €2.5 million of income from the capitalization of tax deficits.
Reconciliation between theoretical tax and actual tax as of December 31, 2007:
Non SIIC sector Foreign SIIC sector Total in thousands of € France companies tax-free taxable Total earnings earnings Pre-tax earnings and earnings from equity-method companies 196 256 - 46 957 149 299 63 059 29 453 241 811 Theoretical tax expense at 34.43% - 67 571 16 167 - 51 404 - 21 711 - 10 141 - 83 256
Exonerated earnings of the SIIC sector 71 059 71 059 71 059 Taxable sectors Impact of permanent time lags 10 463 - 21 093 - 10 630 16 578 28 464 34 412 Restatements of untaxed consolidations- 15 518 1 269 - 14 249 - 388 - 28 289 - 42 926 Impacts of non activated deficits- 210 - 1 240 - 1 450 - 2 158 - 6 299 - 9 907 Assignment of non activated deficits 1 425 634 2 059 932 7 896 10 887 Exit tax for LT capital gains special reserve - - Change of tax regime - - Discounting of deferred taxes following restructuring - - discounting rates and other taxes to present value 4 164 - 8 200 - 4 036 - 1 107 10 352 5 209 Rate differences outside France 264 264 - 251 1 016 1 029 Actual tax expense 3 812 - 12 199 - 8 387 - 8 105 2 999 - 13 493
Ordinary deficits are capitalized if their recovery is deemed probable:
- 61 - Annual report 2007 - 62 - Annual report 2007 Inventory of Inventory of Capitalized Change in Amounts Amounts non Change in OD Amounts capitalized Statutory tax rate ordinary deficits ordinary deficits deferred tax as capitalized Regularization capitalized as of capitalized as of Comments in 2007 as of Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 of Dec. 31, 2006 amounts Dec. 12, 2007 Dec. 31, 2007 Entities Portugal deficits deferrable over 6 years Finascente 26,50% (23) - 23 6 - - 6 - 0 0 Kleminho 26,50% (20) (567) (547) - 150 145 5 150 0 H1 (French company) 16,50% (4 204) (6 587) (2 383) 1 447 1 087 393 - 754 1 086 - H3 (French company) 16,50% (698) (841) (143) 240 139 24 - 125 139 - Spain - - deficits deferrable over 15 years KFI 30,00% (8 811) - 8 811 2 864 - - 2 643 - 221 - 0 0 KFE 30,00% (13 371) (13 139) 232 3 609 3 942 - 70 - 277 3 262 679 unrecognized losses prior to tax consolidation Vinaza 30,00% (1 500) (3 236) (1 736) 488 971 521 - 38 971 - Vallecas 30,00% (12 046) (16 632) (4 586) 3 915 4 990 1 376 - 301 4 990 - 0 Belgium - - unlimited deferral of ordinary losses Cinémas LLN 34,00% (2 181) (2 564) (383) 742 872 130 872 - 0 Coimbra 34,00% (4 368) (5 218) (850) 1 485 1 774 289 1 774 0 Foncière LLN 34,00% (4 623) (6 599) (1 976) - 2 244 - - 2 244 unrecognized tax losses Place de l'accueil 34,00% (133) (258) (125) 45 88 43 88 0 Hungary - - unlimited deferral of ordinary losses Klépierre Participations et Financements (French company) 33,00% (3 435) - 3 435 1 183 - - 1 134 - 49 0 - 0 Hungarian real-estate companies 16,00% (16 448) (13 204) 3 244 2 630 2 113 - 519 2 2 113 - 0 Czech Republic Czech holdings 21,00% (6 171) (6 171) 1 296 1 044 1 044 252 unrecognized tax losses Bestes 21,00% ------AMC Prague 21,00% (69) - 69 17 - - - 17 - - Greece - - deficits deferrable over 5 years Klepierre Larissa 25,00% - (4 928) (4 928) - 1 232 1 232 1 232 - Ségécé Hellas 25,00% ------KFM 25,00% (1 019) - 1 019 255 - - 255 0 - 0 Patras 25,00% (635) (492) 143 159 123 - 36 123 - 0 Efkarpia 25,00% (125) (56) 69 31 14 - 17 14 0 Athinon 25,00% (563) (896) (333) 141 224 83 224 - 0 Italy - yypy Assago 31,40% (760) - 760 239 - - 239 - - indefinitely deferrable Kléfin 27,50% (5 823) (7 333) (1 510) 1 921 2 017 415 - 320 2 016 0 Serravalle 31,40% (515) (534) (19) 192 168 6 - 30 168 - Galleria Commerciale Klépierre 31,40% (911) (749) 162 339 235 - 51 - 53 235 0 Collegno 31,40% (2 717) (3 069) (352) 1 012 964 111 - 159 964 0 Poland - deficits deferrable over 5 years Sadyba (real estate and holding) 19,00% (117) (4 843) (4 726) 22 920 898 920 0 Krakow (real estate and holdings) 19,00% (1 474) (3 919) (2 445) 280 745 56 336 409 unrecognized tax losses Ruda (real estate) 19,00% (790) (3 325) (2 535) 144 632 309 453 179 unrecognized tax losses Poznan (real estate and holding) 19,00% - (3 407) (3 407) 647 647 647 - Rybnick (real estate and holding) 19,00% - (1 659) (1 659) 315 282 282 33 unrecognized tax losses Sosnowiec (real estate and holding) 19,00% - (1 404) (1 404) 267 234 234 33 unrecognized tax losses Lublin (real estate and holding) 19,00% - (4 904) (4 904) 932 426 426 506 unrecognized tax losses Other Polish holdings 19,00% - (1 073) (1 073) 204 - 0 - 0 204 unrecognized tax losses Ségécé Poland 19,00% (702) (59) 643 147 0 - 122 - 25 - 0 - Netherlands - Capucine BV 25,50% (1 659) (1 715) (56) - 437 - - 437 holding: dividends and capital gains from sale of tax-free Luxemburg - Luxemburg holdings 20,00% (624) (624) - 125 - - 125 unrecognized tax losses France - unlimited deferral of ordinary losses Kléber La Pérouse 16,50% (1 850) (156) 1 694 637 26 - 280 - 332 25 0 Cap Nord 34,43% - (833) (833) - 287 - - 287 unrecognized tax losses Klécapnord 16,50% - (1 087) (1 087) - 179 179 179 - KLE Projet 2 16,50% - (1 558) (1 558) - 257 257 257 - H2 16,50% - (209) (209) - 34 34 34 - H4 16,50% - (147) (147) - 24 24 24 - Other French companies 34,43% (2 143) (2 143) - 738 - 738 unrecognized tax losses
TOTAL- 88 777 - 126 139 - 34 549 24 190 31 409 3 787 - 2 694 25 283 6 126
- 63 - Annual report 2007 6. Exposure to risks and hedging strategy
Klépierre is attentive to the management of the financial risks inherent in its activity and in the financial instruments that it uses. The Group identifies and regularly measures its exposure to the different sources of risks (rate, liquidity, foreign exchange, counterparty, equity markets) and defines the applicable management policies, where appropriate.
6.1. Interest rate risk
A) Cash Flow Hedge rate risk
Recurrence of floating rate financing requirement Variable rate debts structurally represent a significant portion of the Group’s debt (52% of debt on December 31, 2007, before hedging): they include bank loans (standard or mortgage), drawdowns from syndicated loans, commercial paper and the use of authorized overdrafts.
Identified risk An interest rate increase on which the variable rate debts are indexed (Euribor 3 months primarily) could lead to an increase of future interest rate expense.
Measurement of risk exposure: The two tables below measure the exposure of Klépierre’s income to an interest rate hike, before and after hedging.
Change in financial Interest rate position before hedging expenses caused Amount (in millions of euros) by a 1% increase in interest rates
Gross position (variable rate debts and debts under one year) 2 357 23,6 - Marketable securities -56 -0,6 Net position before hedging 2301 23,0
Change in financial Interest rate position after hedging expenses caused Amount (in millions of euros) by a 1% increase in interest rates
Gross position before hedging 2 357 23,6 - Net hedge -990 -9,9 Gross position after hedging 1 367 13,7 - Marketable securities -56 -0,6 Net position after hedging 1311 13,1
In addition, as the fair value changes of Cash Flow Hedge swap hedges are recognized in equity, the statement below assesses the probable impact of an interest rate hike on equity based on Klépierre's Cash Flow Hedge swaps portfolio at year end (including deferred swaps).
- 64 - Annual report 2007 Change in equity Fair value of the Cash flow Hedge rate caused by a 1% Fair Value (in millions of euros) increase in interest rates
Cash Flow Hedge Swaps as of December 31, 2007 (notional: €2,690 M) 80 89,8 Cash Flow Hedge Swaps as of Dec. 31, 2006 (notional: €1,890 M) 61 71,5
Financial debt after hedging breaks down as follows:
Average cost Total gross of the In millions of euros Fixed rate debts Floating rate debts financial debts projected debt Fixed Variable Amount Rates Amount Rates Amount Rates portion portion 31/12/2005 2 434 4,30% 74% 851 3,00% 26% 3 285 3,96% 4,09% 31/12/2006 3 159 4,22% 85% 570 4,27% 15% 3 729 4,23% 4,28% 31/12/2007 3 200 4,20% 70% 1 367 5,35% 30% 4 567 4,54% 4,65% The rates above are calculated, for the variable portion, on the basis of the market rates as of December 31, 2007. They do not include non-utilization commissions, spread of cash payments on swaps and spread of loan premiums and costs (hence the variance between the weighted average rate and the average cost of the projected debt).
First, given the particularly high interest rate levels at December 31, 2007 (impact of the financial crisis on liquidity at the end of the year) and second, the start on January 2, 2008 of several hedging instruments subscribed by Klépierre in 2007, it can be noticed that the projected average cost of the debt on January 2, 2008 stands at 4.35%.
Hedging strategy
Klépierre has set itself a target hedging rate of approximately 70%. This rate is defined as the proportion of fixed rate debts (after hedging) in gross financial debts. As shown by the table above, it was 70% on December 31, 2007. Given that Klépierre took advantage of the drop in interest rates to reinforce its hedging portfolio in the second half of 2007, the hedging rate was 79% on January 2, 2008.
To reach its key level, Klépierre primarily uses swap agreements, enabling the fixing of variable rate financing rates or inversely to convert fixed rate financings into variable rate financing.
Klépierre could also use its Cash Flow Hedge by limiting the possible variations of the reference index, for example by buying a cap on this index.
Considering its strategy and investment program, Klépierre is structurally a borrower; the current financing plan states a debt increase of more than €300 million per annum in coming years. Since the Group does not seek to reduce the proportion of its short-term debt, it is therefore highly probable that the short-term variable rate loans will be renewed in the medium term. That is why the Klépierre’s hedging strategy concerns both the long-term and short-term parts of its indebtedness.
Generally, the term of the hedging instrument can exceed that of hedged debts on condition that Klépierre’s financing plan underlines the highly probable aspect of renewing these debts.
B) Fair Value Hedge interest risk rate
- 65 - Annual report 2007 Description of fixed rate indebtedness
Today, Klépierre’s fixed rate indebtedness primarily corresponds to bond issues and two bilateral bank loans subscribed in 2004 by Klépierre and Klépierre Participations et Financements.
The principal sources of fixed rate additional debt may come from resorting again to the bond market or the convertible bonds and other “equity-linked” products.
Identified risk
On its fixed rate indebtedness, Klépierre is exposed to the fluctuations of the risk-free market interest rates, in so far as the fair value of fixed rate debts increases when the rates fall and inversely.
Furthermore, Klépierre may be in a position to know, at a given date, that it should raise the fixed rate debt at a later date (e.g.: scheduled acquisition). It would then be exposed to the risk of interest rate change before setting up the loan. Klépierre could then envisage hedging this risk – considered as a« cash flow hedge » risk under IFRS.
Measuring risk exposure and hedging strategy
As of December 31, 2007, debts subscribed at a fixed rate represent €2,210 million before hedging.
The “Fair Value Hedge” strategy is calibrated to reflect the objective of the overall hedge rate. It is also based on the use of rate swaps enabling the replacement of fixed rate payments by variable rate payments. The “credit margin” component is not hedged.
The duration of the “Fair Value Hedge” hedging instruments is never higher than the duration of the hedged debt, since Klépierre wishes to obtain very strong “efficiency” as defined by IAS 32/39.
C) Investment securities
As of December 31, 2007, Klépierre’s marketable securities represented € 56.5 million. They are mainly comprised of money market open-end and mutual funds or SICAV-FCP in France, as well as certificates of deposits in Italy for €3.4 million (one month maturity) and Spanish treasury bills for €3.4 million (maturity within one week).
These investments expose Klépierre to a moderate rate risk given their temporary nature (cash investments) and the amounts involved.
D) Fair value of financial assets and liabilities.
Under IFRS, financial debts are posted in the balance sheet at amortized cost and not at fair value.
The table below enables a comparison of the fair values of debts and their face value. Fair values are drawn up according to the following principles:
Variable rate bank debts : fair value equal to the nominal amount, unless major credit event not impacted on the financial conditions of the debt; Fixed rate bank debts: fair value calculated on the basis of the equal to the nominal amount, unless major credit event not impacted on the financial conditions of the debt;
- 66 - Annual report 2007 Bond issues (and convertible where applicable): utilization of market quotations if they are available, fair value calculated on the basis of rate changes and credit margin in the contrary case.
2007 2006
Change in FV Change in FV caused by a 1% caused by a 1% In millions of euros Face values Fair Value Face values Fair Value increase in increase in interest rates* interest rates* Fixed rate bond issues 1 900 1 829 62 1 900 1 898 81 Fixed rate bank loans 310 300 6 319 310 8 Variable rate bank loans 2 357 2357 - 1 510 1510 - Total 4567 4486 68 3729 3718 89 * drop in the fair value of the debt following a parallel shift of the rate curve
Derivative instruments are posted in the balance sheet at their fair value. As of December 31, 2007, a 1% increase in the rate curve would lead to a rise of €71.4 million in the value of the Group’s interest rate swaps (Cash Flow Hedge and Fair Value Hedge).
On the asset side, unconsolidated securities are classified in the category of securities “available for sale” and are therefore valued at their fair value. Given the activity of the concerned companies, it is estimated that the net book value is close to the fair value.
E) Measurements and resources for managing exposure
Given the importance of its rate risk management for Klépierre, general management is involved in any decision concerning the hedging portfolio. The Financial Division has IT tools enabling it to first, track market place trends in real time, and second to calculate the market values of its financial instruments including derivative instruments.
6.2. Liquidity risk
Klépierre focuses on refinancing its long-term activity and diversifying maturity dates and the Group’s financing sources, so as to facilitate renewals.
Accordingly, bond issues represented 41% of financial debts at December 31, 2007, the duration of the debt was brought to 5.4 years, and bank debt is spread out in different products (club deals, mortgage loans, etc.) and various international scale counterparties.
Outstanding commercial paper (representing the bulk of short-term financing) never exceeds the amount of the club deal « back-up » line with several banks and which would enable immediate refinancing of this outstanding in the event of renewal difficulty on this market.
Additionally, Klépierre had €669 million of unutilized credit lines (including bank overdrafts) on December 31, 2007.
Generally, access to the financing of real-estate companies is facilitated by the security received by lenders from their property assets.
Some Klépierre financings (club deals, bond issues) come with financial covenants which must be complied with under pain of the application of an early payability clause (c.f. also the note on financial liabilities). These
- 67 - Annual report 2007 agreements concern ratios monitored by standard tracking for property professionals and the imposed constraints that leave sufficient flexibility to Klépierre to maintain liquidity risk at a low level. Maximum amount of Contractual Impact of non Level as of Principal Covenants the relevant financing limit compliance December 31, 2007 (€ M) Klépierre financing "Loan to value" 52% 41,1% EBITDA /FFI 2,5 3,31
Secured debt / Revalued 2 800 20% Default case 2,6% assets
Revalued asset value €5 Million 10,04 group share
Secured debt / RNAV 1 900 50% Default case 5,3%
Klémurs financing "Loan to value" 55% * 46,8% EBITDA /FFI 2 ** 2,5 Secured debt / Revalued 150 20% Default case 10,4% assets Revalued asset value €300 M 457,2 group share
The bond issues (€1,900 million) include a bearer option, giving them the possibility of requesting early repayment in case of change of control that would change Klépierre’s rating into “non-investment grade”. Apart from this clause, no financial agreement refers to Standard & Poor’s rating for Klépierre.
6.3. Currency risk
Klépierre’s business is mainly located in Euro zone countries. As of December 31, 2007, the exceptions were the Czech Republic, Slovakia, Hungary and Poland.
In these countries, to date, the currency risk was not considered sufficiently important to be hedged by derivative instruments.
As acquisitions and their financing are carried out in euros, currency risk mainly concerned the commercial activity of subsidiaries.
Generally, rents are invoiced to lessees in euro with the conversion into local currency on the invoicing date. Lessees have the choice of paying their rents in local currency or in euros (or in dollars for some minority leases). Currency risk is therefore limited to the variance, if any, between the invoiced rent and the collected rent when the currency loses value towards the euro between the invoice date and the actual payment in local currency by the lessee.
At the same time, Klépierre makes sure that lease payments from tenants do not represent an overly large portion of their revenues so as to avoid, in case of a sharp increase in the value of the euro, a degradation of their financial situation which could increase the risk of default payments for Klépierre.
- 68 - Annual report 2007 6.4. Counterparty risk
Counterparty risk is limited by the fact that Klépierre is structurally a borrower. It only concerns investments carried out by the Group and the Group’s counterparties in derivative product transactions.
Counterparty risk on investment securities
Counterparty risk on investments is limited by the type of products used:
UCITS managed by recognized firms, and therefore concerning diversified signatures; government loans from countries where Klépierre is present (in the form of loan/borrowing); occasionally, certificates of deposit issued by leading banks.
Counterparty risk on hedging instruments
Klépierre gets involved in derivative instrument transactions only with world-class financial firms. Today, all swap contracts have an “AA” counterparty rating. Whatever the case, the Group would not accept to deal with a firm rated lower than A- by S&P or an equivalent agency.
6.5. Equity risk
Klépierre has no other shares in addition to its own shares (2,990,463 securities on December 31, 2007), which are booked in equity at historic cost.
7. Financing and guarantee commitments
7.1. Reciprocal commitments
Reciprocal commitments correspond to reciprocal guarantees in the context of a property development contract or a sale before completion contract (payment guaranteed by the buyer and completion guaranteed by the developer).
2007 2006 2005 in thousands of € December December December
Guarantee within the context of a Property Development Contract/Sale before completion 297 541 192 512 79 324 Total 297 541 192 512 79 324
- 69 - Annual report 2007 7.2. Commitments given and received
2007 2006 2005 in thousands of € December December December Commitments given - Security deposits on loans to employees 12 659 8 910 6 687 - Guarantees, deposits and mortgages 16 445 8 273 7 159 - Purchase commitments 999 286 568 886 562 462 Total 1 028 390 586 069 576 308 Commitments received - Deposits received as guarantee for the activity of real-estate management and transactions 145 340 120 340 120 340 - Sale Commitments 107 000 58 875 52 484 - Deposits received from tenants 62 595 53 638 46 780 - Other guarantees received 649 109 838 112 956 - Unutilised confirmed credit lines 630 000 467 000 306 757 Total 945 584 809 691 639 317
Purchase commitments
Purchase commitments primarily correspond to preliminary purchase contracts for the construction of the Vallécas (Madrid) center for €113 million, the Claye Souilly shopping center for €13.2 million, the Vanne city center mall for €50.5 million and the Montpellier Odysseum for €18.7 million. Klémurs signed a preliminary purchase contract for 88 "Défimode" outlets and 42 other forthcoming projects for € 163.2 million and also committed to the acquisition of 15 commercial assets located on three business zones (Avranches, Rochefort sur Mer and Messac) for €18.2 million.
Klépierre also acquired, under various conditions precedent, the Place de l’Etoile center in Luxemburg (21,500 m² GLA, projected opening in 2011) for an amount of €215 million (€1million paid out to date).
An agreement concerning the acquisition of a finance lease contract for the Cesson (77) shopping mall was signed for an amount of €70 million.
Klépierre also committed to acquiring in the context of its partnership with Finiper, 50% of the Il Leone centers in Lonato (15,987 m² GLA, €84 million of investment for its shares) and Le Corti Venete in Vérone (30,181 m² GLA, €40.7 million for its shares). The final acquisitions will take place on the first quarter 2008. A 3rd center under construction will also be acquired at its opening scheduled for the first quarter 2009: 29.952 m² GLA, located in Vittuone, on the western outskirt of Milan, for an investment of €44.2 million (50%). Lastly, an agreement subject to conditions precedent was also signed for the purpose of acquiring the Aqua Portimao shopping center in Portugal for €52.7 million in partnership with Generali (€0.5 million paid out). The commissioning is scheduled for 2010.
Furthermore, there are earnout clauses for some acquisitions. Pursuant to IFRS 3 and its articles 32 and 34, the price adjustment in the cost of the business combination on the acquisition date must be recognized if the adjustment is probable and can be reliably estimated on the balance sheet date.
In the context of the Polish acquisitions in 2005, the price paid for Sadyba, is subject to an earnout clause. Klépierre does not fully own the land for the center but holds a lease set to expire on July 31, 2021. An earnout will be paid to the seller if it obtains an extension or full ownership of the lease within a period of 10 years as from July 2005.
As the probability of the lease being extended or full ownership being obtained cannot be measured, this earnout was not booked.
- 70 - Annual report 2007 Preliminary sale agreements
A preliminary sale agreement was signed for 41.62% of the Annecy building for €37 million. Klépierre also agreed to transfer to Cicobail (in the context of a finance lease transfer agreement) the Cesson (77) property complex for €70 million.
Unutilized confirmed credit lines At December 31, 2007, Klépierre had €669 million of unutilized credit lines comprising the following: €630 million of confirmed credit lines: - €550 M of credit line available on the syndicated loan set up in 2007, - €80 million of possible commercial paper issue (variance between the amount of the back-up line and the outstanding issued paper), €39 million authorized under a partially used overdraft.
Other guarantees received
In the context of Vallécas, Klépierre had a security deposit of €110 million euros in the event of failure of the Madrid City Hall to obtain a building permit. The permit was obtained and the guarantees matured on June 30, 2007. To our knowledge, there is no omission of a material or potentially material off-balance sheet commitment according to applicable accounting standards.
7.3. Guarantees
2007 2006 2005 in thousands of € December December December
Guaranteed debts 371 655 386 424 619 319
Total 371 655 386 424 619 319
Secured debts mainly include: - mortgage on the shopping centers owned by Klécar Italia to hedge a €114.7 million bank loan; - security deposit given by Klépierre to hedge the €165 million debt of Klépierre Participations et Financement; - Klépierre also guaranteed finance lease payments for €48.3 million for the entire Cesson (77) property complex. Generally, the Group finances its assets by equity or debts contracted by the parent without pledging these assets.
The details of debts secured by pledges are as follows:
- 71 - Annual report 2007 Loan Social NBV Mortgage Pledge start Pledge due amount as of pledged amount date date in thousands of € of 31.12.07 assets on tangible assets 460 325 Novate 26 187 - Metropoli 61 975 16-apr-99 15-dec-13 85 473 - Vignate 28 000 19-dec-03 15-oct-16 61 791 08-sep-99 15-july-11 Immobiliare Magnolia 4 790 20 789 23 255 18-apr-03 15-jan-18 ICD 9 296 43 282 30-june-96 11-may-11 73 627 Klécar Italia 113 911 331 500 30-june-03 30-june-15 210 259 17-oct-02 30-dec-14 SCI Rebecca 3 923 5 764 4 976 20-july-00 31-july-15
SCI LC 173 377 05-jan-00 02-jan-12 944 on long-term financial assets 0 TOTAL 460 325
7.4. Shareholders’ agreement
Shareholders’ agreements concerning Klécar France, Klécar Europe Sud, Solorec and Klécar Participations Italie
The shareholders’ agreement binding Klépierre and CNP Assurances and Ecureuil Vie were amended by rider signed on December 30, 2004 in order to cancel the liquidity commitments of Klépierre towards its partners. The agreement provides for the usual minority protections: pre-emptive share right, joint exit right, decision process in case of investment or disinvestment. Each of the agreements contains two additional clauses: - one in favour of Klépierre: obligation of minorities to exit at the request of Klépierre in the event of the sale of Klécar’s assets to a third party; - the other in favour of minorities: process enabling the latter, in 2011, 2016 and 2017 for Italian companies and 2010, 2014 and 2015 for the other malls to consider different exit scenarios: - assets sharing or sale, - outright purchase by Klépierre of minority securities (no obligation for Klépierre), - sale to a third party with payment of a discount by Klépierre if the offer is less than the Revalued Net Asset.
Shareholders' agreement signed between SNC Kléber la Pérouse and SCI Vendôme Commerces on SCS Cecobil
Signed on October 25, 2007, this agreement, after the conversion of Cecobil into a general partnership, provides for the usual protections regarding the planned sale of equity shares to a third party (first refusal right and total joint exit right) and in the area of change of control of a partner.
Shareholders' agreement signed between SNC Kléber la Pérouse and SCI Vendôme Commerces on SCI Secovalde
- 72 - Annual report 2007 Signed on October 25, 2007, this agreement provides for the usual protections regarding the planned sale of equity shares to a third party (first refusal right and total joint exit right) and regarding the change of control of a partner.
Shareholder’s agreement signed by Klépierre, Klefin, Finiper, Finiper Real Estate & Investment, Ipermontebello, Immobiliare Finiper and Cedro 99 on Immobiliari Galerie Commerciali (IGC) and on Clivia
During the acquisition IGC shares by Klépierre, a shareholders’ agreement was signed in 2002.
Its main provisions – including those regarding Klépierre’s primitive right – were repeated in a new agreement which now concerns IGC and Clivia (owner of Lonato, Verone and Vittuone malls).
It also includes a PUT in favour of Finiper enabling the latter to sell to Klépierre the shares that it holds in IGC and/or Clivia. The PUT has a duration of 10 years and cannot be split on IGC (exercise of all the shares held by Finiper), but can on Clivia in two parts (25 % each). In case of refusal by Klépierre, an indemnity is owed to Finiper.
Agreement signed with Axa France Vie in case of disposal of equity shares constituting Ségécé’s capital
The AXA France Vie company transferred all the corporate shares that it had in the capital of Ségécé to Klépierre on September 5, 2007. This transfer resulted in the early termination of the shareholders’ agreement signed on November 7, 2003 for AXA France Vie.
7.5. Commitments on operating leases - Lessors
General description of the main clauses of the lessor’s lease agreement
Shopping centers
The agreement stipulates rental terms ranging from 5 years in Spain to 12 years in France (with three-year periods); Italy offering a mixed system of 5 to 12 years. The terms for fixing and indexing rents are determined in the contract.
Indexing allows re-pricing of the guaranteed minimum rent, by the application of a country-specific index.
Indexing specific to each country In France, the applicable index used is the ICC, the reference construction cost, published each quarter. The index retained and applied corresponds to that of the “anniversary” quarter of the lease. The ICC for the second quarter of each year (published in October) applies to about 70% of leases in Klépierre’s rental property in France.
In Spain, the consumer price index (IPC) is recorded annually every January 1.
In Italy, the system is based on the consumer price indices for working class and junior management (excluding tobacco) households (ISTAT). But implementing the index system is more complex: depending on the leases, we either apply the ISTAT at 75 %, or the reference segment index at 100 %.
- 73 - Annual report 2007 In Portugal, the retained index is the consumer price excluding property (IPC).
The Consumer Price Index (CPI) is applied in Greece.
In central Europe, the IPCH euro zone index, published by Eurostat, is based on the consumer price of the countries of the European monetary union.
Guaranteed minimal rent and variable rent Appraised year in and year out, rent corresponds to a percentage of the revenues earned by the lessee during the civil year under consideration. The applied rates differ depending on the activity carried out. This binary rent (fix + variable) cannot be less than the minimum guaranteed rent (MGR). The MGR is re-priced every year with the indexing rate. The variable rent corresponds to the variance between the percentage of the revenues as fixed in the lease and the minimum guaranteed rent after indexing.
At the renewal of the lease, consolidating all or part of the variable rent in the MGR becomes an issue. For example, the variable rent is often reduced to zero at the end of the lease (every 5 to 12 years, as the case may be). Each year, it is also deducted from the progression of MGR in the application of the invoicing.
The variable rent clause which is mainly found in the leases of historic French and Italian assets, has been gradually included in other leases whenever they come up for renewal or renegotiation.
Office buildings
100% of Klépierre’s property assets are located in France and therefore governed by French law.
For commercial activities the following apply: articles L. 145-1 to L. 145-60 of the Commercial code and the non codified articles of n° 53-960 of September 30, 1953 (the “bylaw”). A certain number of these clauses are in the public domain. For example: contracts cannot be shorter than 9 years (regarding the lessor’s commitment), the right to renewal, the formal conditions to comply with in the event of cancellation, leave, renewal, and eviction, etc.
Very exceptionally, leases exempted from the status, by no more than two years can be made compliant.
The term of the lease is often 9 years, only the lessee can terminate it at the end of each three-year period by sending a six-month prior notice by extrajudicial act. The parties may be exempted from this clause of three-year termination.
The rent is usually paid every quarter, a quarter early and is annually and totally indexed on the INSEE construction cost index. The rent may be progressive or gradual and may include rent-free periods but whatever the case, determined when the lease is signed and for the entire term (apart from riders during the lease).
All expenses including property taxes and taxes on offices are generally at the lessee’s expense, apart from the works regulated by article 606 of the Civil code which is usually at the lessor's expense.
For professionals (lawyers, chartered accountants, architects, etc.), the status is not applicable. The minimum duration is six year, and the lessee can leave at any time by giving six months prior notice. These agreements are not renewable. The other conditions are based more closely on the provisions of commercial leases.
The total amount of conditional rents recognized in income: the conditional rent refers to the part of payments made for the rental whose amount is not fixed but which is established on the basis of a factor other than time laps (e. g. percentage of revenues, degree of utilisation, price indices, market interest rate).
Under the lease, minimum payments refer to the payments which the lessee is, or can be, required to make during the term of the lease excluding the conditional rent, the cost of services and taxes to be paid or refunded to the lessor.
- 74 - Annual report 2007 At December 31, 2007, the accumulated minimal future rents receivable pursuant to the non-cancellable operating lease agreements were as follows:
2007 in thousands of euros December less than one year 563 646 between 1 and 5 years 1 030 472 more than 5 years 292 922 Total 1 887 040
7.6. Commitments on lease agreements - financing
Klépierre has a finance lease agreement for the office space located in Lille, rue Nationale. This contract is valid for 18 years until July 31, 2009. On the expiration date of the treaty term of the finance lease, the lessee may elect to buy the building at his discretion. The reconciliation between the minimal future payments under the lease-financing agreement and the discounted value of the net minimal payments pursuant to the leases are presented as follows:
December 31, 2007 minimal discounted value in thousands of € payments of payments less than one year 426 252 more than one year but at least five years 320 208 more than five years 0 0
Total minimum payments for the lease 746 460
Minus the amounts representing financial charges -286
Discounted value of minimal payments 460 460
7.7. Holding commitments
The buildings or finance lease acquired during the Buffalo Grill transaction are placed under the tax status of article 210 E of the French General Tax Code. Buildings are protected by a preservation commitment during five years as from their acquisition.
8. Compensations and employee benefits
8.1. Payroll expenses
The amount of payroll expenses amounted to €64.8 million at December 31, 2007.
- 75 - Annual report 2007 Fixed and variable salaries and wages, together with incentives and profit sharing, totalled €46.1 million, expenses related to retirement indemnities, retirement expenses and other staff benefit expenses at €17.7 million, and income tax, taxes and similar payments at €1.0 million.
The Group employed a total of 1,103 people as of December 31, 2007.
8.2. Retirement commitments
Post-employment plans with defined contributions
In France, Klépierre group contributes to different national and inter-professional basic and supplementary pension bodies.
Fixed benefits post-employment plans
The still existing fixed benefit plans in France and in Italy are subject to independent actuarial assessments according to the projected unit credit methods in order to determine the expense corresponding to the rights acquired by employees and the outstanding benefits to be paid to pre-retirees and retirees. The demographical and financial assumptions used to estimate the discounted value of hedge bonds and assets for these plans take into consideration the economic conditions specific to the monetary zone under consideration. The fraction of actuarial variances to be amortized, after application of the treaty limit of 10% (corridor method) is calculated separately for each defined-benefit plan.
The provisions funded for fixed-benefit post-employment plans amounted to €4.8 million at December 31, 2007.
Klépierre has set up supplementary retirement plans by corporate agreement. Under the supplementary plans, employee beneficiaries will receive at the time of their retirement, additional income to their pensions (where applicable) paid by the national plans, according to the kind of plan they are entitled to.
In addition, the Group's staff benefits from treaty or contractual personal protection plans in various forms such as retirement gratuities.
In Italy, the applicable plan in Ségécé Italia and Effe Kappa is a “Trattamento di Fine Rapporto” (TFR) type of plan. The amount due by the employer at the termination of the employment contract (resignation, dismissal, retirement) is calculated by the application of an annual coefficient for each year worked without this amount exceeding a certain threshold. As the corresponding liability is certain, it can be posted under other debts and not as a provision for contingencies.
In Spain, a provision for retirement commitments can be funded in the case of a special clause in the collective agreement, but the staff of Spanish subsidiaries of the Klépierre group is not concerned.
The existing commitments for post-employment medical assistance plans are valued by using the change assumptions for medical costs. These assumptions, based on historic observations, take into account the estimated future changes in the cost of medical services resulting both from the cost of medical benefits and inflation.
Reconciliation between assets and liabilities posted on the balance sheet
- 76 - Annual report 2007 In thousands of euros, as of December 31, 2007
Surplus of obligations over the assets of financed schemes 6 206 Gross discounted value of obligations fully or partly financed by assets 8 664 Fair value of the plan’s assets - 2 458 Discounted value of non financed liabilities 6 206 Not yet recognized costs in application of the provisions of IAS19 Cost of past services - 1 468 Actuarial net losses or gains 61
Net obligation recognized in the balance sheet for defined-benefits plans 4 799
Movements on the net liability / asset posted in the balance sheet
In thousands of euros, as of December 31, 2007
Net obligation at the beginning of the period 4 166 Retirement expense recorded in income for the period 633 Contributions paid by Klépierre in income for the period Acquisition/Disposal Benefits paid to the beneficiaries of benefits non financed Net obligation at the end of the period 4 799
Components of the retirement expense
In thousands of euros, as of December 31, 2007 Cost of services rendered during the year 460 Financial cost 285 Expected yield from the plan’s assets- 115 Amortization of actuarial gains and losses- 1 Amortization of past services 4 Effect of plan reductions or wind up Total recognized in "payroll expenses" 633
Other long-term benefits Provision for long-service awards and time-savings account totalled € 1.6 million at December 31, 2007.
Principal actuarial assumptions used for calculating on the balance sheet date
- 77 - Annual report 2007 In percentage, as of January 1, 2007 France Discounting rate 3,92 % / 4,11 % Expected yield rate from the plan’s assets 4,00% Expected yield rate from reimbursement rights˪ n/a Future salary increase rate 2,5 % - 5 %
8.3. Stock options
At the beginning of the period, there were 3 stock-option plans for Group executives and members of staff.
These are standard stock options, in other words, they are not subject to performance conditions.
Only stock options granted after November 7, 2002 are booked according to IFRS in application of IFRS 1.
In accordance with IFRS 2, Klépierre appraised the market value of options on their grant date and recognized a proportionate expense during the vesting period. The valuation is carried out by a third-party specialized company. The model retained respects the basic assumptions of the Black & Scholes model, adapted to the specific characteristics of options (in particular dividends in discrete amounts and the possibility of exercising as from May 31, 2010 for the plan authorized in 2006 and as from May 16, 2011 for the plan authorized in 2007).
The calculated expense also takes into account an estimate of the population of beneficiaries at the end of each vesting period, since a beneficiary may lose his rights if he leaves Klépierre group during this period.
Plan authorized in 2006
585,000 options (after splitting the face value by 3) were granted under the stock option plan authorized by the Executive Board of May 30, 2006.
These options may be freely exercised as from May 30 2010 and until May 30, 2014 included.
A total expense of €623 K was recognized in profit and loss in fiscal year 2007 for the stock option plans.
The unit value of stock options granted in 2006 was valued at €4.6 (after splitting the face value by 3). The main data taken into account for the valuation include an exercise price of €30.5 (after splitting the face value by 3), a share price on the grant date of €27.9 (after splitting the face value by 3), volatility of 21.5%, a risk-free interest rate of 4.1% for 8 years maturity and a dividend of €1 per share in 2006 then a growth assumption calculated from a straight-line regression on previous year dividends.
Plan authorized in 2007
429,122 options (after splitting the face value by 3) were granted under the stock option plan authorized by the Executive Board of May 15, 2007.
These options may be freely exercised as from May 16, 2011 and until May 15, 2015 included.
A total expense of €676 K was recognized in profit and loss in fiscal year 2007 for the stock option plans.
- 78 - Annual report 2007 The unit value of stock options granted in 2007 was valued at €10.4 (after splitting the face value by 3). The main data taken into account for the valuation include an exercise price of €47.9 (after splitting the face value by 3), a share price on the grant date of €47.3 (after splitting the face value by 3), volatility of 21.2 %, a risk-free interest rate of 4.51 % for 8 years maturity and a dividend of roughly 10% in 2007 then a growth assumption calculated from a straight-line regression on previous year dividends.
Plan N°1 Plan N°1 Plan N°2 Plan N°3 Date of the General Meeting 28-apr-1999 28-apr-1999 07-apr-2006 07-apr-2006 Date of Executive Board Meeting 24-june-1999 24-june-1999 30-may-2006 15-may-2007 Total number of shares potentially subscribable or purchasable by: (i) company executives (3) 148 530 67 509 135 000 99 000 (ii) the first ten employee allottees (1) (3) 0 225 030 123 000 141 000 Starting date of exercise of options 25-june-2004 25-june-2004 31-may-2010 16-may-2011 Expiry date 24-june-2007 24-june-2007 30-may-2014 15-may-2015 Subscription or purchase price (3) 12,22 9,44 30,50 47,96 Number of shares subscribed to at December 31, 2007 (3) 148 530 454 584 0 0 Subscription or purchase options of cancelled shares (3) 0 296 886 34 500 3 001 Outstanding subscription or purchase options as of December 31, 2007 (1) (2) 0 0 550 500 426 121 (1) The number of employees mentioned may exceed ten in the event of identical number of options, or may be lower than ten in case there are less than ten employees on a plan (2) Concern officers andthe first10 employee allottees alone (3) After dividing the face value in 2003 (for the plan suscripbed in january 24, 2003) and in 2007 (fot the other plans)
Number of Outstanding Number of Outstanding Exercise price Number of options Stocks options- Date granted alloted Exercise period options as of options cancelled options as of in euro n exercised in 2007 Executive Board options n 31.12.06 in 2007 31.12.07 Michel CLAIR June 24, 1999 o 54 012 June 25, 2004 to June 24, 2007 12,22 38 712 38 712 0 May 30, 2006 p 45 000 May 31, 2010 to May 30, 2014 30,50 45 000 45 000 May 15, 2007 p 33 000 May 16, 2011 to May 15, 2015 47,96 33 000 Claude LOBJOIE June 24, 1999 o 31 506 June 25, 2004 to June 24, 2007 12,22 16 815 16 815 0 May 30, 2006 p 30 000 May 31, 2010 to May 30, 2014 30,50 30 000 30 000 May 15, 2007 p 15 000 May 16, 2011 to May 15, 2015 47,96 15 000
Jean Michel GAULT May 30, 2006 p 30 000 May 31, 2010 to May 30, 2014 30,50 30 000 30 000 May 15, 2007 p 24 000 May 16, 2011 to May 15, 2015 47,96 24 000
Laurent MOREL May 30, 2006 p 30 000 May 31, 2010 to May 30, 2014 30,50 30 000 30 000 May 15, 2007 p 27 000 May 16, 2011 to May 15, 2015 47,96 27 000
nAfter dividing the face value in 2003 (for the plan suscripbed in january 24, 2003) and in 2007 (fot the other plans) oDecision of the EGM of April 28, 1999. pDecision of the EGM of April 7, 2006 and restatement of the division of the face value by 3 in 2007
The granting of stock options to management board members was decided by the Board of Directors of May 24, 2006 for plan n°2 and by that of May 15, 2007 for plan n°3.
9. Additional information
9.1. Disclosures on the fair-value model
- 79 - Annual report 2007 December 31, December 31, December 31, Fair value 2007 2006 2007 restatements fair value model fair value model In thousands of euros
Lease income 597 178 597 178 519 570 Land expenses (real estate) -2 515 2 515 0 2 Non-recovered rental expenses -17 189 -17 189 -6 296 Building expenses (owner) -29 440 -29 440 -31 018
Net lease income 548 034 2 515 550 549 482 258
Management, administrative and related income 64 195 64 195 57 497 Other operating income 18 265 18 265 9 480 Change in the fair value of investment property 911 522 911 522 998 230 Survey and research costs -1 146 -1 146 -1 124 Payroll expense -64 810 -64 810 -59 938 Other general expenses -25 165 -25 165 -22 145 Depreciation and amortization allowance on investment property -169 297 167 822 -1 475 -1 909 Depreciation and amortization allowance on PPE -4 365 -4 365 -3 126 Dotations aux amortissements des écarts d'acquisition 0 Provisions -2 663 -2 663 12
Results of operations 363 048 1 081 859 1 444 907 1 459 235
Gains on the sale of investment property and equity interests 96 113 96 113 122 459 Net book value of investment property and equity investment sold -55 740 -30 133 -85 873 -111 466 Results of the sale of investment property and equity interests 40 373 -30 133 10 240 10 993
Revenus sur cession d'actifs détenus à court terme Valeur nette comptable des actifs cédés Profit on the sale of short term assets 46 0 46 1 490
Net dividends and provisions on non-consolidated investments 549 549 -161 Net cost of debt -162 931 -162 931 -134 806 Change in the fair value of financial instruments 0 0 55 Effect of discounting 726 726 -1 200 Share in earnings of equity-method investees 2 634 2 822 5 456 671
Pre-tax earnings 244 445 1 054 548 1 298 993 1 336 277
Corporate income tax -13 493 32 174 18 681 -136 570
Net income of consolidated entity 230 952 1 086 722 1 317 674 1 199 707 of which Group share 197 712 951 279 1 148 991 1 036 657 Minority interests 33 239 135 443 168 682 163 050
- 80 - Annual report 2007 fair value December 31, 2007 December 31, 2006 December 31 2007 restatements fair value model fair value model in thousands of €
Non-allocated goodwill 84 653 -8 761 75 892 32 417 Intangible assets 7 269 0 7 269 7 478 Tangible assets 41 340 0 41 340 41 482 Investment property 6 670 090 -6 656 962 13 128 7 312 Fair value of investment property 10 425 230 10 425 230 8 382 413 Fixed assets in progress 463 983 -273 476 190 507 195 718 Fair value of buildings held for sale 36 200 25 064 61 264 63 213 Equity method security 46 600 2 822 49 422 3 023 Non consolidated securities 512 0 512 585 Other non current assets 33 846 0 33 846 17 104 Interest rate swaps 84 011 0 84 011 65 139 Deferred tax assets 33 675 33 675 26 275
NON CURRENT ASSETS 7 502 179 3 513 917 11 016 096 8 842 159 Inventory 11 684 11 684 2 463 Trade receivables and related accounts 57 287 57 287 46 159 Other receivables 215 688 -62 497 153 191 199 726 Tax receivables 49 645 49 645 111 048 Other debtors 166 043 -62 497 103 546 88 678 Cash and near cash 195 476 195 476 157 696
CURRENT ASSETS 480 135 -62 497 417 638 406 044
TOTAL ASSETS 7 982 314 3 451 420 11 433 734 9 248 203 0,000 Capital 193 890 193 890 184 657 Additional paid-in capital 835 187 835 187 830 622 Statutory reserves 18 466 18 466 18 466 Consolidated reserves 756 275 1 832 635 2 588 910 1 715 625 Treasury shares -96 168 -96 168 -30 823 Fair value of financial instruments 51 922 51 922 39 734 Fair value of investment property 1 828 969 1 828 969 955 729 Other consolidated reserves 800 521 3 666 804 187 750 985 Consolidated earnings 197 712 951 279 1 148 991 1 036 657 Shareholders' equity, group share 2 001 530 2 783 914 4 785 444 3 786 027 Minority interests 480 502 447 922 928 424 749 444 SHAREHOLDERS’ EQUITY 2 482 032 3 231 836 5 713 868 4 535 471 Non current financial liabilities 4 400 820 4 400 820 3 680 254 Long-term allowances 11 425 11 425 8 572 Interest rate swaps 7 731 7 731 0 Security deposits and guarantees 107 899 107 899 93 900 Deferred tax liabilities 219 069 219 584 438 653 373 946
NON CURRENT LIABILITIES 4 746 944 219 584 4 966 528 4 156 672 CURRENT LIABILITIES 753 338 753 338 556 060
TOTAL LIABILITIES AND 7 982 314 3 451 420 11 433 734 9 248 203 SHAREHOLDERS' EQUITY Fair value refers to the amount for which an asset may be exchanged between properly informed, consenting parties acting under the conditions of normal competition.
The fair value is the most probable price (excluding transactions fees and costs) that can be reasonably obtained on the market on the balance sheet date.
- 81 - Annual report 2007 The fair value of Klépierre buildings is determined by third-party appraisers.
Klépierre has entrusted the task of assessing the value of its holdings to various appraisers. Atisreal Expertise and Foncier Expertise are jointly responsible for appraising office property holdings. Appraisal of the shopping centers shall be conducted by the appraisers below: - Retail Consulting Group Expertise (RCGE) shall appraise all French assets excluding the Progest portfolio, approximately 50% of Spanish assets (centers held by Klécar Foncier Espana and Klecar Foncier Vinaza), as well as the full Italian, Czech, Slovakian, Belgian, Portuguese and Greek portfolios. - Cushman & Wakefield shall appraise the other half of the Spanish portfolio (centers held by Klecar Foncier Iberica) - ICADE Expertise is in charge of appraisals of the Progest portfolio for France as well as all appraisals of Polish and Hungarian assets. Assignments entrusted to appraisers are all carried out in accordance with the principles of the Real Estate Appraisal Guidelines (Charte de l’Expertise en Evaluation Immobilière) using the recommendations of COB/CNC “Barthès de Ruyter" working group.
The market value is the value determined by third-party appraisers who value the Group's holdings on June 30 and December 31 of each year excluding transfer duties and fees (the fees are assessed on the basis of the direct sale of the building, even if these costs can, in certain cases, be reduced when the company which owns the asset is sold).
Office buildings
The appraisers combine two approaches: the first entails a direct comparison with similar transactions completed in the market during the period, while the second involves capitalizing recognised revenue or estimated asset.
An analysis of these revenues reveals that one of three situations prevails: lease income is either substantially equal to, higher than or lower than market value.
If lease income and market value are substantially equal, the lease income used in the valuation is the actual lease income earned on the property. If lease income is higher than market value, the valuation uses market value and takes into account a capital gain calculated from the discounted value of the difference between actual lease income and market value.
If lease income is lower than market value, the appraisers considered the scheduled term of the corresponding lease, at which time the rental price will be aligned with going rates. Pursuant to the French decree of September 30, 1953, the rental prices of properties that are used solely as office premises are automatically aligned with market rates when the leases in question come up for renewal. Consequently, the appraisers worked on the assumption that the owners of such property would be able to align rents with market rates when the corresponding leases came up for renewal, and took into account the current conditions of occupation in the form of a capital loss calculated as before. The appraisers did not limit their approach to properties coming up for renewal in the three years to come, on the grounds that the investors participating in current market transactions make projections that extend beyond this three-year horizon. If lease income is higher than market value, the financial capital gain observed was added to the appraised value derived which is equal to the discounted value (at a rate of 5.5 %) of the difference between actual lease income and market price until expiry of the first firm period of the lease. In the third case, a capital loss was deducted from the derived value. It corresponds to the discounted value (at the rate of 5.5%) of the difference between actual lease income and market price until the lease expires. Since December 31, 2005, the appraiser has been reasoning on the basis of the rate of return (yield) and not on the basis of the capitalization rate. That is, the rate that was used is that applied to the income determined as before to derive an appraised value inclusive of transfer duties. Before, the rate used resulted in a valuation exclusive of transfer duties. The decision to use this rate results from an observation of the market, in the context
- 82 - Annual report 2007 of transactions actually completed by investors. To derive the appraised value exclusive of transfer duties, transfer duties and fees were deducted at the country-specific rate.
Shopping centers
To determine the fair market value of a shopping center, appraisers apply a yield rate to net annual lease income for leased-up premises, and to discounted net market price depending on the projected vacancy period for vacant properties. From this initial value obtained through capitalization of net lease income is deducted the discounted value of minimum guaranteed rent, charges on current vacant properties, non chargeable works to be carried out. In addition, a normative vacancy rate is defined for each asset. The discount rate used is equal to the yield rate applied to determine fair market value. Gross lease income includes minimum guaranteed rent, variable rent and the market price of any vacant premises. Net rent is determined by deducting all charges from the gross rent: management costs, non chargeable expenses, charges on provision for vacant premises and average losses over recognized outstanding rents for the last 5 years.
The yield rate is set by the appraiser based on defined parameters and especially: retail sales area, layout, competition, type and percentage of ownership, rental reversion and extension potential, and comparability with recent market transactions.
Through the structure of its portfolio and in a concern for savings and efficiency, Klepierre uses two methods to conduct its appraisals as the assets have specific valuation challenges. Accordingly, the assets appraised for the first time and assets whose last appraisal value is at most greater than 110% of the net carrying value (excluding deferred taxes) are subject to dual valuation: measurement based on return, as explained above, and measurement through the discounted future flows method. The second method determines the value of a real asset by the sum of discounted financial flows based on a discount rate defined by the appraiser. The appraiser estimates the expected overall revenues and expenses on the asset side then measures an “ultimate value” at the end of the analysis period (an average of 10 years). By comparing the market rental values and facial rental values, the appraiser takes into consideration the rental potential of the property asset while retaining the market rental values at the end of the leases after deducting costs incurred by these changes in tenant mix. Lastly, the appraiser discounts the expected cash flow in order to determine the actual value of the property asset. The retained discount rate takes into account the market risk-free rate (OAT 10 years) to which will be added a property market risk and liquidity premium, and lastly, a specific premium for the asset, depending on its location, characteristics and the tenant mix of each building.
9.2. Earnings per share
Basic earnings per share is computed by dividing the net income for the period attributable to ordinary shares by the weighted average number of current shares in the period, excluding treasury shares.
Diluted earnings per share is computed by dividing the net income for the period attributable to ordinary shares by the weighted average number of current shares in the year, excluding treasury shares adjusted to reflect the effects of the diluting options.
- 83 - Annual report 2007 December 31, 2007 December 31, 2006 December 31, 2005
Numerator Net income, group share (€K) a 197 712 164 534 120 449
Denominator Average weighted number of shares before diluting effect (1) b 136 998 849 137 536 323 137 896 395
Effect of dilutive options 0 0 0 Share purchase options Total potential dilutive effect c 00 0
Average weighted number of shares before diluting effect d=b+c 136 998 849 137 536 323 137 896 395
Group share of net income per undiluted share (in euros) a/b 1,4 1,2 0,9
Group share of net income per diluted share (in euros) a/d 1,4 1,2 0,9
(1) fiscal years 2006 and 2005 adjusted to reflect the nominal division
- 84 - Annual report 2007 9.3. Affiliated companies
As of December 31, 2007 the share of BNP Paribas in bank loans totalled €1,571 million, of which €1,257 million have been used. This equity interest must be compared to a total authorized amount of €3,036 million, of which €2,247 million have been used. These figures do not include the commercial paper back-up line (not drawn) of an amount of €300 million, and in which BNP Paribas has an interest of €150 million.
The transactions between affiliated parties were carried out under terms equivalent to those prevailing in the case of transactions subject to normal conditions of competition.
9.4. Compensation of Directors and Officers
The directors' fees paid to members of the Supervisory Board totalled €210,000.
The overall amount of compensations paid in 2007 to Executive Committee members was €2,059,000 .
9.5. Post balance sheet date events
In January 2008, Klépierre group reinforced its interest rate risk hedge for its future refinancing by subscribing 3 swap agreements for total notional amount of €300 million, of which €100 million were subscribed by Klémurs. These hedges expire in February and April 2015.
9.6. Identity of the consolidating company
As of December 31, 2007, Klépierre was fully consolidated by BNP Paribas group. BNP Paribas holds an equity stake of 50.16 % in Klépierre.
- 85 - Annual report 2007
Profit and loss statement
(All amounts in mill. NOK) Period figures Accumulated figures 2. quarter 08 2. quarter 07 30-6-2008 30-6-07 31-12-07 Operating income 582.4 519.8 1,154.0 1,100.3 2,217.5
Salary etc. 59.2 48.8 117.2 111.0 253.2 Other operating expenses 257.8 206.0 472.5 445.1 899.8 Project maintenance 2.6 13.1 12.8 34.3 59.9 Loss on bad debts 2.7 (2.2) 3.7 (2.2) 1.7 Depreciation 6.1 6.7 12.7 13.1 26.6 Total operating expenses 328.4 272.4 619.0 601.3 1,241.2 Adjustment of valut on investment property 199.7 277.1 365.9 413.3 1,088.2 Operating profit 453.7 524.5 900.9 912.3 2,064.5 Financial income 58.8 19.5 120.2 35.6 86.6 Financial expenses (220.8) (134.0) (425.5) (263.0) (594.9) Net finance (162.0) (114.5) (305.3) (227.4) (508.3) Profit before tax and minority interests 291.7 410.0 595.6 684.9 1,556.2 Tax (75.2) (115.6) (158.1) (183.3) (386.3) Profit before minority interets 216.5 294.4 437.6 501.6 1,169.9 Allocation: Majority 216.7 294.6 437.5 502.0 1,167.6 Minority (0.3) (0.2) (0.1) (0.5) (2.3) Balance (All amounts in mill. NOK) 30-6-08 30-6-07 31-12-07 Assets Fixed Assets Investment property 22,926.1 18,444.8 19,860.5 Projects and other fixed assets 1,078.8 1,397.8 1,841.7 Financial assets 109.4 81.9 90.8 Current Assets Receivables 1,132.4 342.0 1,309.0 Investments in shares etc. 1.5 0.7 1.5 Cash and bank deposits 575.5 213.0 759.4 Total assets 25,823.7 20,480.2 23,863.0 Debt and Equity Equity Paid equity 1,811.5 811.5 1,811.5 Other equity 6,701.8 5,516.4 6,358.4 Minority interest 5.9 1.1 5.8 Total equity 8,519.2 6,329.0 8,175.7 Debt Long term debt 14,018.9 10,006.1 12,340.8 Deffered tax 1,940.2 1,837.3 1,762.8 Short term liability and debt 1,345.3 2,307.9 1,583.7 Total Debt and Equity 25,823.7 20,480.2 23,863.0
Key figures 30-6-08 30-6-07 31-12-07 Share capital 0.3 0.3 0.3 Net interest bearing debt 13,377.4 11,287.2 11,328.3 Profit per share 14.4 18.7 43.7 Diluted profit per share 14.4 18.7 43.7 Number of shares outstanding 30,402.0 26,785.0 26,890.0
Reconsilation of equity (All amounts in mill. NOK) 30-6-08 30-6-07 31-12-07 Equity by the start of the period 8,175.7 6,108.0 6,324.0 Profit for the period 437.6 502.1 1,167.6 FX/other (94.1) (281.2) 684.1 Equity by the end of the period 8,519.2 6,328.9 8,175.7
Cash flow (All amounts in mill. NOK) 30-6-08 30-6-07 31-12-07 Cash by the start of the period 759.4 505.6 261.6 Cashflow from operations 213.6 270.2 348.9 Cashflow from investment activities (1,933.7) (799.2) (2,115.7) Cashflow from finance activities 1,536.2 752.5 2,264.6 Cash by the end of the period 575.5 729.1 759.4
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All amounts in mill. NOK Norway Business area Shopping Center Commercial Operation Development Total 30-6-08 30-6-07 30-6-08 30-6-07 30-6-08 30-6-07 30-6-08 30-6-07 Profit and loss statement: Operating revenues 328.5 288.2 36.1 24.1 67.4 44.9 432.1 357.2 Operating expenses (43.7) (41.2) (30.5) (25.9) (61.0) (34.4) (135.3) (101.5) Depreciation (0.3) (0.3) (2.2) (2.1) (0.1) (0.1) (2.5) (2.5) Operating profit 284.5 246.7 3.5 (3.9) 6.3 10.4 294.3 253.2
Denmark Business area Shopping Center Commercial Operation Development Total 30-6-08 30-6-07 30-6-08 30-6-07 30-6-08 30-6-07 30-6-08 30-6-07 Profit and loss statement: Operating revenues 166.5 140.2 41.4 46.1 4.2 4.2 212.1 190.5 Operating expenses (24.0) (24.9) (35.8) (30.7) (4.9) (4.9) (64.7) (60.5) Depreciation - - (1.5) (1.5) - - (1.5) (1.5) Operating profit 142.5 115.3 4.1 13.9 (0.7) - 145.9 128.5
Sweden Business area Shopping Center Commercial Operation Development Total 30-6-08 30-6-07 30-6-08 30-6-07 30-6-08 30-6-07 30-6-08 30-6-07 Profit and loss statement: Operating revenues 159.6 165.5 20.6 20.5 28.9 16.3 209.1 202.3 Operating expenses (48.5) (38.4) (23.0) (19.7) (28.8) (15.9) (100.3) (74.0) Depreciation (1.5) (1.4) (0.2) (0.2) (0.5) (0.2) (2.2) (1.8) Operating profit 109.6 125.7 (2.7) 0.6 (0.3) 0.2 106.6 126.5
Other Total Business area Operations eliminations and Group - administration Share of profits Total of all areas 30-6-08 30-6-07 30-6-08 30-6-07 30-6-08 30-6-07 30-6-08 30-6-07 Profit and loss statement: Operating revenues 271.7 297.4 19.4 19.1 9.7 34.0 1,154.0 1,100.5 Operating expenses (268.5) (292.9) (24.5) (25.1) - - (593.4) (554.0) Depreciation (4.3) (5.7) (2.3) (1.8) - - (12.8) (13.3) Operating profit (1.2) (1.2) (7.4) (7.8) 9.7 34.0 547.8 533.2
Reconciliation of quarterly and activity report 30-6-08 30-6-07 Operating profit in according with business report 547.8 533.2 Investment property fair value adjustments 365.9 413.3 Recorded expenses for maintenance projects (12.8) (34.3) Share of profit - - Operating profit in accordance with quarterly report 900.9 912.2
Note information
The quarterly report is prepared in accordance with IAS 34 - Interim Financial Reporting. The quarterly accounts report with comparative figures is prepared in accordance with current IFRS standards and interpretations. The accounting principles used to prepare the quarterly report are the same as the accounting principles used in preparing the 2006 annual financial statement. The group's annual financial statements may be obtained by contacting the company's main office at Aker Brygge, Oslo.
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All amounts in mill. NOK Norway Areas of activity Shopping Center Commercial operation Development Total 2. quarter 2. quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter Profit and loss statement: Operating revenues 162.2 144.8 18.4 12.3 26.9 20.5 207.6 177.6 Operating expenses (24.2) (25.0) (14.8) (12.3) (25.0) (17.2) (64.1) (54.5) Depreciation - (0.2) (1.1) (1.1) (0.0) (0.1) (1.1) (1.4) Operating profit 138.0 119.6 2.5 (1.1) 1.9 3.2 142.4 121.7
Denmark Areas of activity Shopping Center Commercial operation Development Total 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter
Profit and loss statement: Operating revenues 87.1 70.8 20.7 27.3 2.4 2.1 110.2 100.2 Operating expenses (14.6) (9.5) (18.8) (14.8) (2.3) (2.5) (35.7) (26.8) Depreciation - - (0.8) (0.7) - - (0.8) (0.7) Operating profit 72.5 61.3 1.1 11.8 0.1 (0.4) 73.7 72.7
Sweden Areas of activity Shopping Center Commercial operation Development Total 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter
Profit and loss statement: Operating revenues 80.9 82.3 10.1 9.7 16.0 8.9 107.1 100.9 Operating expenses (31.7) (22.6) (12.1) (9.3) (16.4) (8.8) (60.2) (40.7) Depreciation (0.7) (0.7) (0.1) (0.1) (0.2) (0.2) (1.1) (1.0) Operating profit 48.5 59.0 (2.0) 0.3 (0.6) (0.1) 45.8 59.2
Other Total Areas of activity Operations eliminations and Group - administration Share of profits Total of all areas 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter 2. Quarter
Profit and loss statement: Operating revenues 146.8 131.4 9.8 9.6 1.0 0.4 582.4 520.1 Operating expenses (149.1) (122.4) (10.7) (8.3) - (319.8) (252.7) Depreciation (1.9) (3.0) (1.2) (0.9) - (6.1) (7.0) Operating profit (4.3) 6.0 (2.1) 0.4 1.0 0.4 256.5 260.4
Reconciliation of quarterly and activity report 2. Quarter 2. Quarter Operating profit in according with business report 256.5 260.4 Investment property fair value adjustments 199.7 277.1 Recorded expenses for maintenance projects (2.6) (13.1) Share of profit - - Operating profit in accordance with quarterly report 453.6 524.4
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ERNST & YOUNG State authorized auditors Ernst &Young AS Christian Frederiks Pl. 6, NO-0154 Oslo Oslo Atrium, PO Box 20, NO-0051 Oslo
Foretaksregisteret NO 978 389387 MVA Telephone: +47 24 00 24 00 Fax: +47 24 00 24 01 www.ey.no Members of The Norwegian Auditing Association
To the Annual Shareholder’s Meeting of Steen & Strøm ASA
Auditor’s Report for 2007
We have audited the annual financial statements of Steen & Strøm for fiscal year 2007, which show a loss of NOK 94 192 000 for the parent company and a profit of NOK 1 169 939 000 for the Company. We have also audited the information in the yearly report concerning the annual fiscal statement, assumption of continued operation and the recommendation to cover the deficit. The fiscal year’s financial statements consist of the business report and the Company report. The business report consists of the profit and loss statement, the balance sheet, cash flows, presentation of equity changes and note information. The Company report consists of the profit and loss report, the balance sheet, statement of income and cash flow, statement of equity changes and note information. Simplified IFRS in accordance with The Accounting Act § 3.9 is used when preparing the parent company’s report. International Financial Reporting Standards as established by the EU are used when preparing the Company’s report. The annual report and yearly review are submitted by the company’s board and administrative director. Our task is to express our opinion on the yearly fiscal report and other information according to the requirements of the Norwegian Act on Auditing and Auditors.
We have conducted our audit in accordance with the Norwegian Act on Auditing and Auditors and auditing standards and practices accepted by the Norwegian Auditing Association. Those standards and practices require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any significant misinformation. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. To the extent required by law and auditing standards, an audit also comprises a review of the management of the Company’s financial affairs and its accounting and internal control systems. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, • the business statements have been prepared in accordance with law and regulations and present an accurate picture of the company’s financial position as of December 31, 2007 and the results of its operations and its cash flows and changes to equity in the fiscal year in accordance with simplified IFRS according to The Accounting Act § 3.9. • the Company statements have been prepared in accordance with law and regulations and present an accurate picture of the Company’s financial position as of December 31, 2007 and of the results of its operations and cash flows and changes in equity in the fiscal year in accordance with International Financial Reporting Standards as established by the EU. • the Company’s management has fulfilled its duty to properly register and document the accounting information as required by law and accounting standards, principles and practices generally accepted in Norway. • the information in the yearly report concerning the financial statements, the assumption of continued operation and the proposal to cover deficits is consistent with the yearly financial statements and comply with law and regulations.
Oslo, April 11, 2008 ERNST & YOUNG AS
[signature]
Asbjørn Ler State Authorized Public Accountant (Norway)
Annual Financial Statements Steen & Strøm Company
For the period from January 1 to December 31. in thousands of Norwegian Kroner.
Profit and Loss Statement Notes 2007 2006 2005 OPERATING INCOME AND EXPENSES Lease Income 2, 19 1,214,247 1,119,415 935,426 Other Operating Income 2, 19 1,003,273 890,870 700,184 Total Operating Income 2,19 2,217,520 2,010,285 1,635,610
Salary Expenses 3 253,158 211,685 158,757 Ordinary Depreciation 2, 8 26,604 22,158 18,148 Reported Project Expenses 20 59,904 102,509 11,490 Other Operating Expenses 2, 20, 21 901,521 848,648 713,951 Total Operating Expenses 1,241,187 1,184,999 902,346
Operational earning before fair value adjustments 976,333 825,285 733,264
Fair value adjustments on investment properties 9 1,088,201 936,792 836,408
Operational earning after fair value adjustments 2,064,534 1,762,078 1,569,672
FINANCIAL INCOME AND EXPENSES Interest income from companies in the same group -18 312 5,702 Other interest income 66,303 68,999 110,745 Other financial income 22 20,291 9,911 0 Depreciation of financial fixed assets 0 0 -4,571 Interest expenses 22 -588,605 -371,228 -256,883 Other financial expenses 22 -6,314 -9,843 -110,158 Net financial earning -508,343 -301,850 -255,165
Pre-tax earning 1,556,191 1,460,227 1,314,507
Tax Tax on ordinary result 17 386,252 375,746 341,640 Tax expenses 386,252 375,746 341,640
Net Income 1,169,939 1,084,482 972,867 of which Minority interests 2,334 1,680 2,406 Group share 1,167,605 1,082,802 970,461
Net income per share in NOK 6 43.42 40.43 36.23 Net income diluted share in NOK 6 43.42 40.43 36.23
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ASSETS as of December 31 Notes 2007 2006 2005 Assets Tangible fixed assets Investment properties Fixed assets in progress 8 19,860,504 18,077,067 13,042,062 9 1,763,896 1,001,323 1,829,929 Transportation and Machines 9 13,910 12,916 5,015 Fixtures, fittings, inventory, transportation and machines 9 63,890 69,800 47,800 Total tangible fixed assets 21,702,200 19,161,105 14,924,806
Financial fixed assets Investments in stocks and shares 10 890 655 729 Loans and other receivables 11 89,954 64,317 40,235 Total Financial fixed assets 90,844 64,972 40,964
Total Non Current Assets 21,793,044 19,226,077 14,965,770
Current Assets Trade receivable 13 176,228 140,489 103,802 Other receivables 10 1,132,782 196,697 237,182 Shares and other financial instruments 1,542 683 671 Cash and cash equivalents 14 759,354 261,611 505,643
Total Current Assets 2,069,906 599,479 847,298
TOTAL ASSETS 23,862,950 19,825,557 15,813,069
Investment Properties per Country
Denmark 4,948,732
Norway 9,350,690
Sweden 5,561,082
2 LIABILITIES AND EQUITY as of December 31. Notes 2007 2006 2005 EQUITY Owner’s equity: Company capital (30,402,116 shares at 1 NOK per 4, 5 30,402 share) 27,883 Own shares 4 -1,099 -1,099 -1,099 Share premium reserve 1,782,168 784,687 784,687 Total owners equity 1,811,472 811,472 811,472 Retained equity: Fair value reserves 4,049,670 3,050,165 2,375,675 Other reserves 2,308,801 2,458,817 1,936,365 Total reserves 6,358,471 5,508,983 4,312,040
Shareholders’ equity – group share 8,169,942 6,320,454 5,123,511
Minority Interests 5,790 3,531 6,852
Total Equity 8,175,732 6,323,985 5,130,363
Debt
Long term debt and long term liabilities
Pension plan liabilities 15 10,972 5,173 922 Debt to financial institutions 16 11,452,987 9,294,754 7,537,855 Bond loan 16 700,000 300,000 300,712 Other long-term liabilities 16 176,696 227,150 186,919 Deferred Tax 17 1,762,843 1,479,747 1,121,163 Total long term debt and long-term liabilities 14,103,498 11,306,824 9,147,571
Short-term debt and short-term liabilities Accounts payable 302,434 144,088 239,192 Taxes and duties payable 49,001 10,706 7,331 Payable tax 67,656 65,950 33,620 Debt to financial institutions 763,724 1,309,036 925,029 Other Short-term debt 400,905 664,970 329,962 Total Short-term debt and short-term liabilities 1,583,720 2,194,748 1,535,134
Total Debt 15,687,218 13,501,572 10,682,705
TOTAL EQUITY AND LIABILITIES 23,862,950 19,825,557 15,813,069
Mille-Marie Treschow Peter Ruzicka Christian Brinch Marius Varner Wenche Brunstad Riiser
3 Consolidated Overview of Changes in Equity
2006 Note Share Company Share Fair Value Other Hedge Foreign Total Minority Total Capital Owned Premium Reserve Equity Funds Currency Equity Shares Reserve Differences Equity 1.1.2006 27,883 (1,099) 784,687 2,591,675 1,745,308 (19,483) (5,460) 5,123,511 6,852 5,130,363 Hedge Fund Transactions 22 24,211 24,211 24,211 Paid Dividends Minority (5 001) (5 001) Equity Profit/Loss 674,491 381,220 27,091 1,082,802 1,680 1,084,482 Paid Dividends 7 (107,138) (107,138) (107,138) Foreign Currency (1,120) 198,188 197,068 197,068 Difference Equity 31.12.2006 27,883 (1,099) 784,687 3,266,165 2,018,271 4,728 219,819 6,320,454 3,530 6,323,985
2007 Note Share Company Share Fair Value Other Hedge Foreign Total Minority Total Capital Owned Premium Reserve Equity Funds Currency Equity Shares Reserve Differences Equity 31.12.2006 27,883 (1,099) 784,687 3,266,165 2,018,271 4,728 219,819 6,320,454 3,530 6,323,985 Share Issues 2,519 997,481 1,000,000 1,000,000 Hedge Fund Transactions 22 32,594 32,594 32,594 Paid Dividends Minority 0 0 Equity Profit/Loss 783,505 384,174 1,167,679 2,260 1,169,939 Paid Dividends 7 (107,138) (107,138) (107,138) Foreign Currency (243,647) (243,647) (243,647) Difference Equity 31.12.2007 30,402 (1,099) 1,782,168 4,049,670 2,295,307 37,322 (23,828) 8,169,942 5,790 8,175,733
Foreign Currency Differences are made up of the currency differences that result from translation of financial statements for the foreign subsidiaries. The Fair Value Reserve pertains to investment properties. When a property is reclassified as an investment property the fair market value amount that exceeds the previous book value is added to the fair value reserve. In addition, the fair value adjustments posted after taxes are added to this equity statement.
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Cash Flow Analysis for
Steen & Strøm Company Note 2007 2006 Net Profit 1,169,939 1,084,482 Tax for the year 17 386,252 375,746 Change in minority interest 2,334 2
Tax paid -65,512 -33,620
Loss from sale of fixed assets 0 0 Profit from sales of fixed assets 8, 9 -33,703 -13,140 Revenue from investments in other group companies 0 -312 Investment property fair value adjustments 9 -1,088,201 -936,792 Ordinary depreciation 8 26,604 22,158 Depreciation of fixed assets and current financial assets 0 0 Change in accounts receivable 13 -35,739 -36,687 Change in accounts payable 158,346 -95,105
Change to public duties 38,301 3,375 Change to other accruals 18 -209,716 114,110 Net cash flow from operational activities 348,905 484,217
Proceeds from the sale of tangible fixed assets 8, 9 112,959 17,343 Payments for purchase/manufacture of tangible fixed assets 8, 9 -2,179,800 -2,880,557 Proceeds from sale of shares 11 0 5,447 Proceeds/payments from loans 12 -25,641 -22,424 Sale of business’ 0 0
Purchase of business’ -23,200 0
Net cash flow from investment activities -2,115,682 -2 880,191
Proceeds from acquiring new long-term debt 16 3,489,207 2,535,869 Payments from repayment of short and long-term debt 16 -2,179,876 -690,783 Proceeds from acquiring short-term debt financing 16 1,068,400 400,000 Dividends 7 -107,138 -107,138 Net cash flow from financial activities 2,270,593 2,137,948
Net change to cash and cash equivalents 503,816 - 258,026
Effect of currency exchange rate fluctuations on cash - 6,073 13,995
Cash and cash equivalents at the beginning of the period 14 261,611 505,643 Cash and cash equivalents at the end of the period 14 759,354 261,611
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Accounting and consolidation principles
Note 1 Accounting and consolidation principles IAS 1 (change) – Presentation of financial report Steen & Strøm ASA is a public stock company registered – Capital information The change requires additional notification so that the in Norway. The company’s main office is located in users of the financial report will have the opportunity to Støperigt. 1, 0118 Oslo, Norway. evaluate the company’s goals, guidelines and processes for The financial report for the accounting period from January capital management. The company has implemented 1, 2007 through December 31, 2007 was approved by the changes to IAS 1, as of January 1, 2007. Steen & Strøm ASA Board on April 11, 2008.
IFRS 7 1.1 Basis for preparation of the annual financial report – Financial instruments: Disclosures Steen & Strøm ASA’s company financial report for fiscal year 2007 is prepared in accordance with IFRS and This standard took effect on January 1, 2007. This interpretations established by the International Accounting standard introduces new requirements when preparing Standards Board and which has been adopted by the EU financial instrument reports. The company implemented and which is obligatory for the fiscal year which began on this from its effective start date. January 1, 2007. The following interpretations have gone into effect and In accordance with stock exchange regulations, the were implemented as of January 1, 2007, but have no company’s profit and loss statement and balance sheet are impact on the company: presented with the corresponding numbers from the two previous annual financial reports. The cash flow statement IFRIC 8 is presented with the corresponding numbers for the – Scope of IFRS 2 previous year. The company has created a historic IFRIC 8 deals with the question of whether IFRS 2 financial report using the principles as a foundation, with share-based payment shall be used in transactions that the exception of the following report entries: deal with issuance of equity instruments where the • Financial instruments which are measured for fair company cannot identify the specific goods or services market value exceeding the result, loans and assets and received. The company will use IFRIC 8 as of January other financial liabilities which are reported at the 1, 2007.
amortized cost. • Investment properties are measured at market value. IFRIC 9 The company financial report is prepared by consistent – Reassessment of Embedded Derivatives accounting principles for similar transactions and events in IFRIC 9 requires that an entity assess whether an otherwise similar situations. embedded derivative is required to be separated from the host contract and accounted for as a derivative when 1.2 Changes to accounting principles the entity first becomes a party to the contract. The accounting principles used by the company coincide Subsequent reassessment is prohibited unless there is a with those used in earlier fiscal years with the exception of change in the terms of the contract that significantly the following: modifies the cash flows that otherwise would be required in accordance with the contract, in which case reassessment is required.
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IFRIC 10 IAS 1 (revised) – Interim financial reporting Depreciation loss on goodwill, investments in equity – Presentation of financial statements instruments and investments in financial assets carried-at- The revised standard brings changes to the statement structure, cost, which occur during a reporting period, may, in especially in the equity statement and introduces an equity accordance with IFRIC10, not be reversed at a later date. changes statement not coming from the transactions with the shareholders, “Statement of Total Recognized Income and Non-implemented IFRS or IFRIC interpretations that are Expenses.” The company will implement IAS 1 (R) as of issued but are not in effect: January 1, 2009.
Change to IFRS 2 IAS 23 (revised) Share based payment: profit requirements – Borrowing costs and cancellations The greatest change to IAS 23 (R) is that it will no longer be This change to IFRS 2 provides clearer guidance as to allowed to regularly itemize borrowing costs that related to a what the redemption requirements are and are not. In the qualifying asset. Balancing of borrowing costs will thereby be future, regulations will also be placed on null and void the only allowable solution. The company will implement IAS redemption rights which is the reason why conditions 23 (R) as of January 1, 2009. other than redemption requirements are not fulfilled. The company plans on putting the change into effect as of IAS 27 (revised) January 1, 2009. – Consolidated and separate financial statements Compared to the current IAS 27, the revised standard provides IFRS 3 (revised) more guidance in connection with recording changes of equity - Business combinations interest in subsidiaries and exiting subsidiaries. Furthermore, the In regard to IFRS 3, the revised standard adds various current rules will change in connection with dividing up losses changes and clarifications which pertain to using the between majority and minority so that the deficit will be placed acquisition method. Specific situations affected, among on the minority even if this is negative. The company plans to others, are goodwill through gradual acquisition, minority implement IAS 27 (R) as of January 1, 2010. interests, conditional fees and acquisition costs. The company plans to implement IFRS 3 (R) as of January 1, IFRIC 11 2010. – Group and treasury share transactions IFRIC 11 provides guidance as to how IFRS 2 share-based IFRS 8 payment are to be used through payment to the company’s own – Operating segments equity instruments or equity instruments that belong to other IFRS 8 replaces IAS 14 – Segment reporting. The companies in the group. The interpretation requires that an standard requires that the company use a leadership agreement regarding share-based payment, in which a company approach in order to identify the segments. In general, the receives goods and services as payment for the company’s equity information reported must be the information that the instruments, shall be accounted for as a share-based payment leadership uses internally to evaluate the segment results transaction that is calculated in equity, regardless of how the and to decide how resources shall be allocated to the equity instruments are acquired. The company will implement segments. IFRS 8 requires information about the basis IFRIC 11 as of January 2008. used in creating the segments and from which type of products and services each segment draws revenue. The company will implement IFRS 8 as of January 1, 2009.
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IFRIC 12 – Service concession arrangements the company owned by the Group, either directly or indirectly, IFRIC 12 deals with how private operators are to use and is normally achieved when the company owns more than existing IFRS standards to account for liabilities and 50% of the shares in the company. Minority interests are rights in the concession arrangement. The company will included in the company’s equity. The method of acquisition is implement this interpretation as of January 1, 2008. used by reviewing a report of the acquired entities. Companies that are purchased or sold throughout the course of the year are IFRIC 13 consolidated from the point in time in which control begins and – Customer loyalty programs until control ends. The interpretation deals with accounting for and Investments in associated companies over which the group has measuring how the loyalty programs work with their significant influence, yet not control, is accounted for customers in order to reward them for earlier purchases according to the equity method in the consolidated accounts. as well as to give incentives for future purchases. The Decisive influence is attained when the company has company will implement IFRIC 13 as of January 1, investments ranging between 20% and 50% of the company’s 2009. equity.
When the company’s percentage of loss exceeds investments in IFRIC 14 an associated company, the company’s balanced worth is – IAS 19 – the limit on a defined benefit asset, reduced to zero and future losses will not be calculated unless minimum funding requirements and their interaction the company has an obligation to cover this loss. The interpretation deals with limitations within Company accounts include jointly controlled business and balancing pension amounts where minimum amounts companies according to the gross method from the time that joint required by law or by contract are paid and exceed the control begins and until joint control ends. As part of the gross obligatory amount. The company will implement IFRIC method, a line-by-line account must be taken of jointly controlled 14 as of January 1, 2008. The company does not expect businesses in the company of assets, liabilities, income and the implementation of these changes listed above to take expenses. actual effect in the company accounting by the A jointly controlled business is one in which company has joint implementation date. control through a contracted agreement between the parties. A jointly controlled company includes the establishment of a 1.3 Currency used in presentation separate unit where each of the parties has its owner’s share and The company presents its report in Norwegian kroner where there is joint control. (NOK). This is also the functional currency used by the Additional investments are calculated in accordance with IAS 39. parent company. Subsidiary entities with a different Financial instruments: Profit calculation and Measurement where functional currency will be converted to the current rate detailed information is provided in note 1.20. on the balancing date for balancing items, and result Intra-group transactions and balances, including internal profit items will be converted to the transaction rate. The and unrealized profit and loss are eliminated. Unrealized profits difference after conversion will be put toward equity. from transactions with associated companies are eliminated by When selling foreign subsidiaries, the accumulated the company’s percentage in the associated company. conversion difference associated with the subsidiary will Correspondingly, unrealized losses are eliminated, but only to the be recognized. degree in which there are not any indications as to value loss on the possessions that are sold internally. 1.4 Principles of consolidation The company report includes Steen & Strøm ASA and companies over which Steen & Strøm ASA have decided influence. The company has decided influence when it’s able to exercise actual control over
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1.5 Cash and cash equivalents (i) Cash flow hedge Cash includes cash in the account and available funds. Changes in fair market value to a security instrument that satisfies the Cash equivalents are short-term liquid investments requirements for an effective cash flow security is entered into the which can be converted over to cash within 3 months accounts directly toward equity. The ineffective part of the hedge and to a known amount, and which contain low risk. instrument will be recognized on a continual basis.
1.6 Accounts receivable and other receivables If the cash flow hedge results in an asset or debt recorded, all Accounts receivable are recorded in the accounts at earlier profits and losses will be directly posted toward the equity original cost, less loss from a drop in the value. taken from equity and included in the initial measurement of the asset or debt. For other cash flow hedge, profits and losses will 1.7 Hedging be directly posted to the equity transferred to the result in the Before a hedge transaction can be completed, an same period in which the cash flow that constitutes the security assessment is made of whether a derivative should be is recognized. used for a) hedging of real value of an asset or debt b) When a hedge instrument ceases to be extremely effective, the hedging of future cash flow from an investment, debt hedge recording will likely end. In this case, the accumulated repayment or a future identified transaction. profits or losses from a hedge instrument that is calculated The company’s criteria for classifying a derivative as a directly toward equity, will be reversed when the hedged hedging instrument are as follows: (1) hedge is expected transaction actually takes place. to be effective because it counteracts changes in market If the hedged transaction is no longer expected to take place, the value or cash flows to an identified asset, a hedge earlier accumulated profits or losses on the hedge instrument that effectiveness is expected to be within the range of 80- have been calculated directly toward the equity, will be reversed 125%, (2) the effectiveness of the hedge is reliably and recognized. The portion of the hedge that is not effective is measurable, (3) that there be adequate documentation directly expensed. when entering into the hedge agreement that shows that (ii) Hedge of net investments outside the country the hedge is extremely effective, (4) for cash flow Fluctuations in currency rates present, both directly as well as hedge, the pending transactions have to be extremely indirectly, a financial risk for the company. Security is achieved likely, (5) the hedge is evaluated on a continual basis when assets and debts are gathered under the same currency in and has shown itself to be effective throughout the the various countries. Currency exposure mainly pertains to reporting periods for which the hedge is intended to equity shares connected to investments outside the country. last.
1.8 Tangible fixed assets
Tangible fixed assets, with the exception of investment properties, are valued at the cost price with accumulated depreciation and impairments deducted. When assets are sold or averted, the
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cost and accumulated depreciation are transferred in the (ii) The company as lessor income statement, as well as the income from the sale and any other losses or profits from the sale will be The company has not entered into any financial lease recognized. agreements. Buildings that are not classified as investment properties are valued at cost, less accumulated depreciations and Operational lease agreements write-downs. The company presents assets that are leased as fixed assets on The cost price for fixed assets is the purchase price, the balance sheet. Lease income is calculated with a linear including fees/taxes and direct purchase costs connected method during the lease period. Initial direct expenses incurred to preparing the fixed asset for use. Expenses incurred by establishing the lease agreement are placed on the value of the after the fixed asset is placed in service, such as repairs leased asset and will be expensed during the lease period in and maintenance, will be assessed on an ongoing basis. agreement with calculation of lease profits. Depreciation is calculated by using the linear method throughout the following period use: 1.10 Investment property Buildings 50 years An investment property consists of land and buildings that Cars and machines 3-5 years are leased or are purely for investment purposes. These Furniture and office equipment 5 years assets will no be used in the operational management of the company. The depreciation period and method will be assessed In agreement with IAS 40, Investment Property, investment yearly in order to insure that the period of time and properties are accounted for at fair market value, and changes in method used correspond to the financial realities for the the fair market value will be assessed in the period in which they fixed asset. The same applies to residual value. arise. Fair market value is evaluated at an estimated value in a New shopping centers under development are classified as transaction between independent parties, without deductions for a fixed asset in progress and are accounted for as any future transaction costs of a future sale. Fair market value is incurred costs related to the shopping center. A structure set at the presumed sale value on the day the balance is in development will be transferred to investment calculated. In order to calculate fair market value the company properties upon completion. has come up with a model for assessing value. The model has an earnings based approach, and is a DCF (Discounted Cash Flow) 1.9 Lease agreements model that begins with projections for the future net cash flow (i) The company as the lessee that the individual property is expected to generate. The company has not entered into any financial lease agreements.
Operational lease agreements
Lease agreements in which the most substantial risk factor is resting on the lessor, are classified as operational lease agreements. Lease payments are classified as an operational expense, and will be booked during the contract period.
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The following elements are used in projecting future net 1.11 Financial instruments cash flows: The company began using IAS 39, Financial Instruments: Lease income Recording and measurement of income on January 1, 2005. In Other income accordance with this, the financial instruments are classified in Total income the following categories: held until maturity, held for trading and available for sale. Financial instruments with regular or fixed Maintenance expenses cash flows and a fixed redemption date where the company has Owners share in the joint costs and marketing decided that investments shall be held until maturity and the Property tax and insurance company manages to keep the investments until maturity are Administration Investments necessary in order to reach approved lease classified as investments held until maturity. income Financial instruments that are held with the intention to Total expenses earn something on short-term price fluctuations, are classified as held for trading. Total income minus total expenses gives: Net cash flow All other financial instruments, with the exception of loans and receivables originally issued by the company, are classified as The profit requirements are established for each property available for sale. starting with a long-term risk-free interest rate with an Financial instruments that are held until maturity are included in additional risk adjustment. The risk adjustment is based financial fixed assets, if the redemption date is not within 12 on an assessment of a geographical relationship, months after the balance sheet date. Financial instruments in the location, center/property’s standard, the lessee's solidity group held for trading are classified as current assets, and and lease contract’s duration. Where comparable, actual financial instruments available for sale are presented as current transactions are completed, evaluated by the applicable assets if the governing board has decided to sell instruments profit requirements. within 12 months from the balance sheet date. Development of new shopping centers is recorded at cost All purchases and sales of financial instruments are entered into price until completed and reclassified as an investment the accounts on the day of the transaction. Transaction costs are property upon completion. Through further development included in the cost price. of the existing shopping centers, the existing shopping center and project is accounted for as an investment Financial instruments classified as available for sale and held for property. trading are entered into the accounts at fair market value which is Transfers to, or from, investment properties are done according to the market on balance day, without deductions from when and only when there are changes to the use of costs associated with sales. property use. Changes in value that arise as a result of Profits or losses as a result of changes in market value of reclassification of projects to investment properties are financial investments are classified as available for sale, will be assessed. entered into the accounts directly toward equity until the When an investment property is reclassified as an investment is actually disposed of. Then the accumulated profits operational asset, the fair market value at the date of or losses on the financial instruments that earlier are entered into reclassification will become the cost price of asset. the accounts toward equity will be reversed, and profits or losses will be recognized.
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Changes to market value of financial instruments (ii) Own shares classified as held for trading will be recognized and The face value of own shares is presented on the balance sheet presented in net financial income/expenses. Investments as a negative in the equity element. Purchase price in addition held for maturity are entered into the accounts as amortized costs. to the nominal value is recorded toward other equity. Profits or losses on transactions with own shares will not be recognized. 1.12 Provisions A provision is recorded when the company has a liability (iii) Equity transaction costs (legal or self-imposed) as a result of an earlier event. It’s Transaction costs associated with an equity transaction will be probable (more likely than not) that a financial decision applied directly toward the equity after tax deductions. Only will be made as a result of this liability and the size of the transaction costs directly related to equity transactions will be amount may be measured reliably. entered into the accounts directly toward equity.
If the effect is significant, the provision is calculated by discounting expected future cash flows with a pre-tax (iv) Other equity discount rate that reflects the markets pricing of the (a) Reserve for translation differences current value of money and, if relevant, risks specifically Translation differences occur in connection with currency associated with the liability. differences in the consolidation of foreign entities. Currency differences in monetary items (debt or receivables) 1.13 Equity that are actually a part of a company’s net investment in a (i) Debt and capital foreign entity are treated as translation differences. By selling a Financial instruments are classified as debt or equity in foreign entity, accumulated translation differences associated accordance with the underlying financial reality. with the entity are reversed and recognized in the same period as the profit or loss through the sale is accounted for. Interest, returns, profits and losses related to a financial (b) Hedge Fund instrument classified as a debt, will be presented as a cost A hedge fund includes the collected net change in market value or as revenue. Distribution to holders of financial of the cash flow security, until the secured cash flow occurs or instruments classified as equity, will be applied directly to is no longer expected to occur. equity. When rights and commitments associated with the (c) Fair value reserve way in which distributions from financial instruments take Fair value reserve consists of net changes in market value of place, depends on certain types of uncertain events in the the investment properties. In addition, it includes the future and is outside of both the issuer’s and holder’s accumulated net changes in market value of the financial control, the financial instrument will be classified as debt instrument classified as available for sale until investments are if the probability that the issuer must pay cash or other sold or where it is determined that the investment has no value. financial assets is not removed by the time of issuance. In that case, the financial instrument will be classified as equity.
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Interest revenue is recorded as income based on an effective 1.14 Minority interests interest-method as it accrues. Minority interests include the minority share of the The dividend is recorded as income when the shareholder’s right capitalized value of the subsidiaries, including the share to receive dividends is established by the general assembly. of identified excess value at the time of purchase of a subsidiary. Loss in a consolidated subsidiary that can be attributed Expenses to the minority interest may not exceed the minority’s In cases in which the company buys a lessee out of a lease share of equity in the consolidated subsidiary. Surplus contract, it will be recorded as an expense immediately. losses will be accounted for toward the majority interest share in the subsidiary to the degree that the minority is 1.16 Currency not committed and can take its share of the loss. If the Currency transactions subsidiary begins to show a profit, the majority’s share Transactions in foreign currency are converted to the currency at of the subsidiary’s equity shall be taken into account the time of the transaction. Monetary entries in foreign currency until the minority interest share from earlier losses is are converted to Norwegian kroner by making use of the rate on covered. the day of balancing. Non-monetary items which are measured at Through sale to the minority owner, the excess value a historic rate expressed in foreign currency are converted into amount for the minority is calculated. These are written Norwegian kroner by utilizing the rate of currency at the time of off and charged to the minority’s portion of the results. the transaction. Non-monetary items that are measured at market This includes that the majority’s profits through the sale value are converted at the rate of currency established at market be transferred to the majority’s share of equity over the value at the time of determination. Changes in the rate of period of depreciation. currency will be recognized on an ongoing basis throughout the 1.15 Principles for recording income accounting period.
Income is entered when it is likely that transactions will Foreign entities generate future financial advantages that will accrue to Assets and commitments in foreign businesses, including the company and the size of the amount can be goodwill and market value adjustments, which arise at the time estimated in a reliable fashion. Revenue is presented of consolidation, are translated to Norwegian kroner by using the less value added tax and discounts. currency rate on the day of balancing. Revenue and costs from Lease income from investment properties is recorded as foreign businesses are translated to Norwegian kroner by using income on a straight-line basis over the leasing period. Through the lessee’s termination of lease contracts, the the average rate. Differences in currency rates will be figured termination fee is recorded as income over the into the equity. The difference in translations that results from remaining leasing period, possibly until the premises is the translation of net investments in foreign businesses is taken over by a new lessee. Guarantee revenue is treated specified as a translation difference in equity. Translation in the same way. Project-related revenue is recognized differences in equity are recognized through the disposal of in accordance with the progress and when the project’s foreign business. result can be reliably estimated.
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1.17 Employee Benefits 1.18 Loans Benefit Plan Loan expenses are recognized when the loan expense occurs. The Group’s entities offer pensions to various that are Loan expenses are entered in the balance sheet to the degree that defined as benefit plans. Pension funds are assessed by these are directly related to purchasing, building or production of actuaries each year. The pension stipulations and a fixed asset. Loan expenses are posted to the balance sheet when expenses are established by using a linear accrual interest expenses run through the building period of the fixed formula. One linear accrual formula distributes accrual asset. Interest expenses are entered in the balance sheet until the of future pension benefits in a linear fashion over the fixed asset is ready for use. accrual period and considers the accrued pension rights Loans are accounted for based on the yield received; the net after for the employees throughout the course of a period of transaction expenses. The loans are then figured with amortized time as the year’s pension cost. Introduction of a new expenses by using effective interest, where the difference benefit plan or an improvement of the current benefit between net yield and the redemption value are recognized over plan entails changes to the pension liability. This is the loan period. expensed in a linear form until the effect of the change is earned. The introduction of new provisions or 1.19 Income tax changes to the existing provisions, that takes place Tax expenses consist of payable tax and change in deferred tax. retroactively so that the employees immediately have Deferred tax/tax asset is calculated on all differences between earned a paid-up policy (or a change to the paid-up accounting and tax values assets and debt with the exception of: policy) is recognized immediately. Profits or losses • deferred tax that occurs as a result of goodwill associated with reductions or termination of pension depreciations that are not tax deductible plans are recorded when they take place. Actuary profits • temporary differences related to investments in or losses are amortized over the remaining average the subsidiary or associated companies when the accrual time. The present value of the pension liabilities company decides when the temporary differences depends on a number of factors. Every change to the prerequisites affects the calculated pension liabilities will be reversed and when this is not expected to take and future pension costs. place in the foreseeable future. The pension liability is calculated on the basis of the Deferred tax advantage is determined when it’s likely that the current value of the expected cash flows. The discount company will have the sufficient tax surplus to make use of the rate is estimated upon the basis of the interest level of tax advantage. On every balance sheet date, the company Norwegian 10 year government bonds with an estimated evaluates non-reported deferred tax advantage and its determined addition for maturity. The company’s right to back value. The companies account for earlier non-determined payments of some or all earlier expenses associated with deferred tax advantage to the degree that it has become probable terminating a benefit plan is recognized when, and only that the company can make use of the deferred tax advantage. when, the back payments are certain. Likewise, the company will reduce deferred tax advantage to the degree that the company can no longer make use of the deferred Incentive agreements with the employees from the tax advantage. management group The company has incentive agreement for employees in the management group. See note 3.
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Deferred tax and deferred tax advantage is measured amount) is removed from the equity and included in the result. based on expected future tax rates for the entities in the If the fair value of a debt instrument classified as available for company where temporary differences have arisen. sale increases in a later period, and when the increase can be Deferred tax and deferred tax advantage is determined objectively associated with an event that took place after the regardless of when the differences will be reversed. depreciation was accounted for in the result, the depreciation Deferred tax and deferred tax advantage is figured at will be reversed over the result. Recognized depreciation for an face value and is classified as long-term liability investment in an equity instrument is not reversed over the (financial asset) on the balance sheet. result. Payable tax and deferred tax is directly entered toward the equity to the degree that this relates to the factors 1.21 Business areas that are reported directly toward the equity. Payable tax For the management group’s purpose, the company is organized and deferred tax/tax assets are measured against the tax rate that related to accumulated, non-distributed equity. into three different business areas in three countries. The business areas make up the basis for the primary segment 1.20 Asset depreciation reporting. Financial information concerning business areas is Depreciation of financial assets presented in note 2. Financial assets valued at the amortized cost, depreciate When reporting on the business areas, the sale revenue and when there is objective proof that it’s obvious that the expenses between the unlike business areas is figured as a gross instrument’s cash flow has been affected in a negative amount, not eliminated. direction because of one or several events that have arisen after the initial instrument report. The amount of 1.22 Contingent liabilities and assets depreciation is recognized. If the reason for the Contingent liabilities are not taken into account in the annual depreciation no longer applies at a later time period, and financial report. Information is given about substantial the lapse can objectively be associated with an event contingent liabilities with the exception of continent liabilities that takes place after the drop in value is taken into where the probability of liability is low. A contingent asset is not account, the earlier depreciation will be reversed. The reported in the annual financial report, but information is given reversal shall not have the result that the value entered if there is a likelihood that an asset will be ascribed to the in the balance sheet of the financial asset exceeds the company. amount for what the amortized cost would have been if In the case of any purchases of companies that include the drop in value had been noted at the time when the contingent liabilities, the liabilities will be recognized. depreciation is reversed. The reversal of previous depreciation is presented as revenue. Financial assets 1.23 Events after the balance sheet day classified as available for sale depreciate when there are New information after the balance sheet day about the objective indications that the asset has fallen in value. company’s financial position on the balance sheet day is taken The accumulated loss which is factored directly into the into consideration in the annual financial report. Events after the equity (the difference between the acquisition cost and balance sheet day that do not affect the company’s financial the ongoing market value less depreciation which earlier position on the balance sheet day, but that will affect the is factored into the result and any potential amortization company’s financial position in the future will be announced if they are substantial.
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1.24 Using estimates to create the annual financial assessed on an ongoing basis. statement Changes to the accounting estimates will be recorded for in the The board of directors has used estimates and period of time in which the changes occur. If the changes also assumptions that have affected assets, debts, revenue, pertain to future time periods the effect will be distributed over expenses and notification of potential liabilities. This current and future periods. See note 8 in addition. especially concerns assessment of investment properties. Future events may cause the estimates to change. Estimates and the underlying assumptions are
Rental income by country
Denmark
292 551
Norway
594 500 Sweden
327 196
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Note 2 Business areas – Operating revenue and operating results
The company’s activity is divided up into strategic The business area called Shopping Centers and projects mostly business areas that are organized separately. The different consists of purchasing, sales and operation of investment areas perform different activities, direct themselves properties, in addition to large property projects. toward various customer groups and have different risk The business area including commercial operations is in charge profiles. Steen & Strøm company is divided up into the following business areas: of leasing and central marketing of our shopping centers. a. Shopping centers and projects The area of development. Development stands for development b. Commercial operations of projects and properties. This takes place under their own c. Development direction as well as the direction of other clients. This is to be regarded as the company’s primary segment. Other activity includes operation of our shopping centers on In the financial reporting to the board of directors the behalf of our tenants (general costs and marketing). Additionally there is the business of the company’s administration and a business areas are presented both together and separately whole list of other businesses without significant activity. for Norway, Sweden and Denmark. This geographic Transactions between the different business areas are not subdivision is to be regarded as the company’s secondary eliminated, yet a gross amount for every business area is shown segment. The table shows primary and secondary in order to give an accurate picture of the activity. segments, as well as business areas which are divided up into geographic areas. The table also shows the connection between the segment reports and the company annual report.
17 NORWAY Areas of activity Shopping Centers & Commercial Operations Development Total Norway Projects 31.12.07 31.12.06 31.12.07 31.12.06 31.12.07 31.12.06 31.12.07 31.12.06 Account Totals Operating 591,012 542,769 20,230 13,391 55,764 13,680 667,006 569,839 revenue External Operation 3,488 2,658 37,460 35,934 44,118 31,705 85,066 70,297 Revenue Internal Operating -92,326 -83,367 -61,601 -65,293 -92,930 -36,610 -246,857 -185,271 Expenses Depreciation -507 -690 -4,067 -3,745 -154 -166 -4,728 -4,601 Operating Profit 501,667 461,370 -7,978 -19,714 6,798 8,608 500,487 450,265 Fixed Assets 9,573,827 7,988,546 8,936 10,724 4,166 4,314 9,586,929 8,003,584 Non-Allocated 708,791 303,678 Assets Long Term Debt 9,910,503 7,391,436 9,910,503 7,391,436 Invest this period 1,092,423 1,083,341 3,003 5,139 1,075 1,095,426 1,089,555
DENMARK Areas of activity Shopping Centers & Commercial Operations Development Total Denmark Projects 31.12.07 31.12.06 31.12.07 31.12.06 31.12.07 31.12.06 31.12.07 31.12.06 Account Totals Operating 289,856 278,532 89,315 55,228 379,171 333,760 revenue External Operation 2,695,000 2,932,000 10,545 9,343 8,322 6,173 21,562 18,448 Revenue Internal Operating -45,950 -65,979 -64,693 -55,484 -11,808 -8,481 - 122,451 -129,944 Expenses Depreciation -2,976 -2,536 -2,976 -2,536 Operating Profit 246,601 215,485 32,191 6,551 -3,486 -2,308 275,306 219,729 Fixed Assets 5,881,435 5,884,885 10,438 10,860 5,891,873 5,195,745 Non-Allocated 242,983 138,662 Assets Long Term Debt 3,609,918 3,283,374 3,609,918 3,283,374 Invest this period 522,194 289,457 4,916 3,339 527,110 292,796
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Sweden Areas of Activity Shopping Centers & Commercial Development Total Sweden Projects Operations 31-12-07 31-12-06 31-12-07 31-12-06 31-12-07 31-12-06 31-12-07 31-12-06 Account Totals Operating 327,196 292,524 327,196 292,524 Revenue-External Operating 41,838 37, 038 41,533 26,056 83,371 63,094 Revenue-Internal Operating -72,538 -62,684 -45,844 -40,600 -43,531 -24,938 -161,913 -128,222 Expenses Depreciation -2,856 -2,225 -575 -294 - 575 -294 -4,006 -2,814 Operating Profit 251,802 227, 615 -4,581 -3,857 -2,573 824 244,648 224,582
Fixed Assets 6,175,515 5,900,645 4,891 2,538 6,180,406 5,903,183 Non- allocated Assets Long Term Debt 2,607,183 2,474,499 2,607,183 2,474,499 Invested this 562,587 1,492,739 5,454 11,268 568,042 1,504,007 Period
Totals Areas of Activity Shopping Centers & Commercial Development Total Primary & Projects Operations Secondary Segments 31-12-07 31-12-06 31-12-07 31-12-06 31-12-07 31-12-06 31-12-07 31-12-06 Account Totals Operating Revenue- 1,208,064 1,113,825 109,545 68,619 55,764 13,680 1,373,373 1,196,123 External Operating 6,183 5,590 89,843 82,315 93,973 63,934 189,999 151,839 Revenue-Internal Operating -210,814 -212,030 -172,138 -161,378 -148,269 -70,029 -531,221 -443,436 Expenses Depreciation -3,363 -2,915 -7,618 -6,575 -729 -461 -11,710 -9,951 Operating 1,000,070 904,470 19,632 -17,019 739 7,124 1,020,441 894,575 Profit
Fixed Assets 21,630,776 19,074,076 24,265 24,122 4,166 4,314 21,659,208 19,102,512 Non- allocated 1,156,799 693,345 Assets Long Term Debt 16,127,604 13,149,309 16,127,604 13,149,309 Invested this 2,177,205 2,865,537 13,373 19,746 1,075 2,190,578 2,886,358 Period
19 Reconciliation of Company Accounting Areas of Operational Expenses, Company Prizes and Profit Additional Activity and Company Totals Activity Administration Shares Eliminations 31-12-07 31-12-06 31-12-07 31-12-06 31-12-07 31-12-06 31-12-07 31-12-06 Account Totals Operating Revenue- 808,754 794,109 1,690 6,913 33,703 13,140 2,217,520 2,010,285 External Operating Revenue- -227,634 -186,170 37,635 34,332 Internal Operating -561, 065 -573,051 -62,393 -43,845 312 -1,154,679 -1,060,020 Expenses Depreciation -11,000 -9,362 -3,894 -2,845 -26,604 -22,158 Operating 9,055 25,526 -26,962 -5,446 33,703 13,452 1,036,237 928,108 Profit
Fixed Assets 31,352 34,268 11,640 11,015 21,702,200 19,147,795 Non- allocated 3,951 -15,583 1,000,000 21,607,750 677,762 Assets Long Term Debt -3,788,621 -3,322,232 12,338,983 9,827,077 Invested this 6,845 -10,446 6,277 4,645 2,203,800 2,880,557 Period
Reconciliation between Company records and official accounting 31-12-07 31-12-06 Operating Profits according to the Activity Report 1,036,237 928,108 Fair Value Adjustments 1,088,201 936,792 Recorded Maintenance -59,904 -102,509 Other differences -312 Operating Profit in accordance with official accounting 2,064,534 1,762,079
20 Activity and Eliminations
Note 3 Salary Expenses, Total Employees, Remuneration etc.
Salary Expenses 2007 2006 2005 Salary and Honorariums 190,107 167,188 125,165 Employers Nat. Insurance Contributions 28,797 22,048 21,103 Pension Expenses 22,234 15,491 11,006 Other Benefits 12,020 6,958 1,483 Total 253,158 211,685 158,757
20072007 2006 2005
Total Employees The average of total employees in the company has been 364 Part 1 can pay up to a maximum of 60% of the annual (279 in 2006) in 2007. Total employees as of 31.12.07 was salary. Calculation of the bonus is based on equity income. 423. In 2008 this will be calculated according to the average annual equity income for 2005, 2006 and 2007. Remuneration to senior employees Part 2 is determined by individual assessment of the specific An incentive program has been set up for senior employees. co-worker. The maximum payment for this part is 15% of The system has two parts: the annual salary.
Employees per Country. Total 364
Denmark 69
Norway 158
Sweden 52
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Contributions to Senior Employees Board- Salaries Bonus Benefits Periodical Total 2007 honorarium Pension Expenses Remuneration Senior Employees
Olav Line, Company Supervisor * 2,770 5,000 183 494 8,448 Terje Daaland, Director of Economy. 1,646 1,803 157 163 3,770 Bjørn Tjaum, Financial Director 1,795 1,601 173 196 3,765
Nils Eivind Risvand, Legal Director. 1,278 1,023 12 139 2,451
Sigbjørn Hoem, Director of Shopping Centers Norway 1,383 1,046 163 166 2,758 Henrik Larsen, Director of Commercial Development 1,345 1,165 134 226 2,870 Søren Brogaard, Director of Shopping Ctrs Denmark 1,442 1,411 116 86 3,055
Wilner Andersson, Director of Shopping Ctrs Sweden 1,344 1,475 102 224 3,145
Karl Fredrik Lund, Marketing Director. 1,160 1,100 9 195 2,464
Board of Directors Peter A. Ruzicka, Chairman of the Board 260 260 Wenche Riiser Brunstad 210 210 Mille-Marie Treschow 210 210 Marius Varner 210 210 Christian Brich 210 210 Total Remuneration 1,100 14,163 15,625 1,050 1,889 33,827 2006
Contributions to Senior Employees Board- Salaries Bonus Natural- Periodical Total 2006 honorarium Benefits Pension Expenses Remuneration
2,055 918 162 233 3,368 Senior Employees Olav Line, Company Supervisor * Terje Daaland, Director of Economy 1,448 700 158 154 2,460 Bjørn Tjaum, Financial Director 1,640 808 116 72 2,636 Nils Eivind Risvand, Legal Director 1,100 524 7 70 1,701 Sigbjørn Hoem, Director of Shopping Centers Norway 1,240 585 144 206 2,175 Henrik Larsen, Director of Commercial Development 1,118 - 153 85 1,356 Søren Brogaard, Director of Shopping Centers 1,219 509 94 73 1,895 Denmark 977 466 46 252 1,741 Wilner Andersson, Director of Shopping Centers Sweden Karl Fredrik Lund, Marketing Director 962 200 10 66 1,238
Board of Directors Peter A. Ruzicka, Chairman of the Board 125 125 Nils Kloumann Selte 125 125 Wenche Riiser Brunstad 200 200 Mille-Marie Treschow 200 200 Marius Varner 200 200 Christian Brich 200 200
Total Remuneration 1,050 11,759 4,710 890 1,211 19,619 * Also includes an agreement of continued salary for 15 months after retirement. As of. 31.12.2007 there is TNOK 13,031 (15,353) including public fees set aside to cover payment of the company’s incentive program.
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Honorarium to Auditor for Accounting for 2007 Required Audit Tax Consultation Other Services beyond Audit
Parent company 788 951 0 Subsidiary in Norway 2,359 598 0 Foreign Subsidiary 913 185 0 Total 4,060 1,734 0
Note 4
Total Shares, Shareholders etc.
The parent company, Steen & Strøm ASAs has share capital Own Shares of 30,402,116- NOK divided between 30,402,116 shares As of 31.12.2007 the company owns 1,098,655 (1,098,655) priced at NOK 1- per share. There is only one class of shares of its own shares purchased at an average price of 107,10 NOK. in the company. As of 31.12.07 the company has 3 shareholders, none of which are foreigners.
Shareholders Total Shares Ownership Share Canica AS 26,784,569 88.10% Canica Retail AS 2,518,892 8.29% Steen & Strøm ASA 1,098,655 3.61% 30,402,116 100.00%
The company’s main shareholder - Stein Erik Hagen and related parties - bought out all the shareholders in 2007 and the company was delisted from Oslo Børs.
Note 5 Shares owned by Supervisors or Members of the Board of Directors
Mille-Marie Treschow (member of the Board) and Stein The company Manager and other Board Members do not Erik Hagen (organization member) are married and they own any shares. along with their business partners hold 29,303,461 shares equaling 100% of all outstanding shares in the company.
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Note 6 Earnings per Share
The base earnings per share are calculated in relation to the annual earnings that accrue on ordinary shares and weighted against the average outstanding ordinary shares. 2007 2006 2005
Annual earnings allocated to Shareholders 1,167,605 1,082,802 970,461
Weighted average of total outstanding shares (in thousands) Ordinary Shares issued as of January 1 27,883 27,883 27,883 Shares issued in 2007 2,519 Impact of company’s own shares (1,099) (1,099) (1,099) Average total of issued shares (in thousands) 26,890 26,785 26,785
Net income in share (NOK per share) 43.42 40.43 36.23 Net income diluted share (NOK per share) 43.42 40.43 36.23
In December 2007 Steen & Strøm ASA completed a capital expansion that totaled TNOK 1,000,000, of which TNOK 2,519 was increased shareholder capital.
Note 7 Distribution of Dividends
Dividends distributed for 2006 and 2005 totaled TNOK 107,138 (4.00 NOK per share). It has been suggested that no This suggestion will be placed before the voters at the dividends be distributed to shareholders for the 2007 fiscal General Assembly Meeting scheduled for May 2008. year.
24 Note 8 Investment Properties
Investment Properties are assessed at market value based There are no restrictions as to when investment properties on a DCE model. Investment assets are not subject to can be disposed of, or how the income and cash flow to the depreciation. All of the company’s investment assets are disposal items be used. shopping centers.
Balance Sheet 2 007 2006 2005 Opening balance 18,077,067 13,042,062 12,211,548 New acquisitions 61,200 2,281,100 0 Investments in existing investment properties 1,579,776 1,471,331 295,817 Sale (84,200) (14,200)
Reclassification of other permanent properties (309,394) Accounted for fair value adjustment 1,088,201 936,792 836,408 Transaction Differences (552,146) 345,782 (287,511) As of. 31.12 19,860,504 18,077,067 13,042,062
Specifications for recognized fair value adjustments: Adjustment to price index 482,658 150,892 181,605 Substantial Growth 190,280 (7,503) 49,900 Changes in discount rate 355,300 498,102 593,413 Assessed Maintenance 59,963 102,509 11,490 Profits by reclassifying projects to future properties 192,792 Recognized fair value adjustment for investment properties 1,088,201 936,792 836,408
This year’s rental income from investment properties was A yield adjustment was made however, for these TNOK 1,214,247 (1,119,415). Specific expenses related properties: Åsane Storsenter (Arken) and Fields and to leasing of permanent properties added up to TNOK Bruuns Galleri. The market value of Åsane Storsenter was adjusted on the basis of two external fair value appraisals. 270,716 (212,030). All the investment properties generate Other stipulated values are made based on their own rental income. models of this principle. See principle note. There were no changes made to the yield levels in 2007.
Reconciliation of funds for fair value reserves 2007 2006 2005 IB fund for fair value reserve 3,266,165 2,591,675 1,989,461 Changes in Value 1,088,201 936,792 836,408 Tax (304,696) (262,302) (234,194) UB funds for fair value reserve 4,049,670 3,266,165 2,591,675
The following average yield has been used as a guideline for calculating value of the investment properties:
Norwegian properties 6.43%
Swedish properties 6.17% Danish properties 6.00% Average 6.24%
25
Sensitivity
Overview of how the value of our investment properties is affected by changes in cash flow and yield.
Yield Value Change Changes in yield -0.50% Value as of 31.12.2007 5.71% 21,599,602 1,739,098
Changes in yield + 0.50% 6.21% 19,860,504 6.71% 18,380,586 (1,479,918)
Changes in Cash Flow Value Change Increased Cash Flow + 2% Increased Cash Flow + 1% 24,667 20,257,714 397,210 Value 31.12.2007 12,333 20,059,109 198,605
Decreased Cash Flow -1% 19,860,504 Decreased Cash Flow -2% (12,333) 19,661,899 (198,605) (24,667) 19,463,294 (397,210)
There are no official contract requirements to purchase, construct or develop investment properties. The company is however required to build 24.000 square meters of housing in connection with developing Hyllie in Malmø.
Note 9 Tangible Fixed Assets
2006 Inventory & Cars and Machines Total tangible Fixed assets in Tangible Fixed Assets progress Office Equipment Assets st Depreciation Expenses as of 1 January 1,839,929 154,380 8,799 2,003,108
Exchange adjustment 96,110 426 96,536 Purchases and reclassification -924,717 45,257 7,586 -871,874 Sale 3,019 3,019 st Depreciation as of 31 December 1,011,323 197,044 16,385 1,224,752 st Cumulative impairment loss as of 31 December 10,000 10,000 Cumulative depreciation as of 31st December 127,245 3,469 130,714 Carryover Value 31.12 1,001,323 69,800 12,916 1,084,038
Annual Depreciation 0 20,665 1,493 22,158
Depreciation Rate 10-20% 20%
Depreciation Plan Linear Linear
26
2007 Fixed assets in Inventory & Cars and Machines Total tangible Tangible Fixed Assets progress Office Equipt. Assets Depreciation Expenses as of 1st January 16,385 1,011,323 197,044 1,224,752 Cumulative impairment loss as of 1st January -10,000 -10,000 Exchange adjustment -1,100 -404 -48,725 -50,229 Purchases and reclassification 8,031 814,925 18,679 841,635 Sale -4,043 -2,800 -4,096 -10,939 Depreciation as of 31st December 19,969 1,764,723 210,527 1,995,219 st Cumulative impairment loss as of 31 December st -6,059 Cumulative depreciation as of 31 December -827 -146,638 -153,524 13,910 Carryover Value as of 31.12 1,763,896 63,890 1,841,695
3,813 Annual Depreciation 827 21,964 26,604
Depreciation Rate 10-20% 20% Depreciation Plan Linear Linear
Building Loan Interest Ongoing Building Contracts Tangible fixed assets include interest from building Steen & Strøm has several contracts for the building or loans in connection with construction of certain development of shopping centers. For the most part, these properties. The carryover of building loan interest are comprised of complete enterprise contracts. Completion contributed TNOK 20,178 (12,659). The interest rate dates for these contracts are the following: for building loan interest for 2007 was 5.0% (4.0%).
2007 2006 Within 1 year 1,452,677 971,112 1 to 2 years 1,037,441 394,049 More than 2 years 359,441 165,000 Total 2,849,559 1,530,161
Note 10 Other Receivables
Other receivables amounted to 1,000,000 TNOK in a This is an item equivalent that was made in connection receivable at Canica Retail AS. with share issues in the business in December 2007. The asset is interest bearing.
27
Note 11
Financial Investments (stock and shares)
2007 2006 Fresh Approach AS 0 0 Gummy Golf AS 603 655 Other shares 287 0 Total available (for sale) Investments 890 655
Total available (for sale) Investments
Fresh Approach AS and Gummy Golf AS are not stock listed. The fair value of Fresh Approach AS is believed to be 0
TNOK since the company has negative book value equity. The value of the other shares is valued at the expected
turnover value of the shares.
Note 12 Loans and other Receivables
2007 2006 Loan to Metro Senter Ans 12,320 12,320 Other Assets 77,634 51,997 Total Loan and other assets 89,954 64,317
Note 13 Trade Receivables
2007 2006 Trade Receivables 183,953 152,376 Provision for bad debt -7,725 -11,887 Total 176,228 140,489
There are no specific customers that contribute a major amount and thereby present a credit risk. Receivables are spread across a variety of branches in a variety of countries. The majority of the company’s rental agreements include deposits or bank guarantees that secure 3-6 months rental income. Below is the breakdown of trade receivables.
2007 2006 Provision for bad debt as of 31st December 2006 (11,887) (13,988)
Annual provision for bad debt (3,359) (536) Annual stated loss 1,179 899 Previously reversed provisions 3,519 4,561
Provision for bad debt as of 31st December 2007 (7,725) (11,887)
28 The unbiased evidence shows that the decline in value creates a loss disparity between the calculated value and net present value of future cash flow. The final stated losses for 2007 were 1,179 TNOK (899 TNOK in 2006).
Total No Decline < 30 days 30-60 days 60-90 days >90 days 2007 183,953 70,607 93,821 4,315 1,105 14,105 2006 152,376 96,543 40,259 381 350 14,843
Note 14 Cash and Cash Equivalents
In 2007 the company reached an average interest rate of The account dedicated to the withholding tax payment 3.86% (1.87%) on its cash and cash equivalents. in 2007 consisted of 4,093 (5,102 in 2006) TNOK.
Blocked bank deposits
Note 15
Pensions
Estimated values are used to calculate pension funds and The company has pension plans for each of its employees. to measure accrued liabilities. These estimates are The plans allow for specific future benefits. The main corrected each year in collaboration with the assessment condition is completion of 30 years of service. The plan of the fair value of the pension funds and the accurate yields 60% pension according to pension law 01.01 in the calculation of the size of liabilities year one turns 67 years old. Spousal and child benefits begin then also. All pension benefits are coordinated with anticipated benefits from national social security. As of 31.12.2007 the plan had 100 members.
Economical Assumptions 2007 2006 Discount Rate 4.70% 4.35% Expected salary increase 4.50% 4.50% Expected yield rate pension funds 5.75% 5.40% Expected pension increase 2.00% 1.50% Expected general increase 4.25% 4.25% Expected turnover 2.50% 2.50%
The actual assumptions are based on commonly used assumptions with the assurance that demographic factors are included.
29
Net Pension Cost 2007 2006 Present value of current year service cost 6,518 4,858 Interest cost on pension liability 1,629 1,287 Return on pension plan assets (1,633) (1,342) Actuarial gains losses/expected changes 82 928 Employer’s social costs 708 543 Net Pension Cost 7,304 6,275
Net Pension Liabilities 2007 2006 Net Pension Liabilities 42,056 38,281 Actual present value of benefit obligation 31.12 42,056 38,281
Actual value of pension premium funds 28,023 29,926 Estimated changes not included in profit/loss statement (4,359) (4,005) Employer’s social costs 1,298 823 Net Pension Liabilities 31.12 10,972 5,173
Reconciliation of growth in pension plan assets 2007 2006 Net Pension funds as of 1st January 5,097 922 Allocated Pension Costs 7,304 6,275 Premium payments etc. (1,429) (2,024) Net Balance of Pension Plan Assets 31.12 10,972 5,173
Pension plan assets dated 1.1.2007 do not match pension plan assets dated 31.12.2006 due to actuarial differences. The actual return on pension plan assets for 2006 was 1,961 TNOK. Scheduled payments to the company’s pension plan for 2008 were 2,135 (2,588 in 2006) TNOK. In addition to the benefit based pension plan, the company also has an OTP plan in Norway. Payment amounts for 2007 were 769 (391 in 2006) TNOK. In Denmark and Sweden there is a deposit-based program which received payments of 13,268 (6,706 in 2006) TNOK in 2007.
Total Centers per Country
Denmark 16
Norway 29
Sweden 9
30
Note 16
Long Term Interest Bearing Debt
Effective Interest Rate 2007 2006
Other long-term debt 5.50% 170,908 16,182 Bond loan 5.16% 700,000 300,000 Debt to Financial Institutions 5.80% 11,452,987 9,294,754 Total 12,323,895 9,610,936
Secured Liabilities: Secured debt 12,152,987 9,294,754
Book Value of mortgaged assets:
Land, buildings etc 17,909,400 16,054,298 Transport Vehicles. 13,910 12,916 Total Mortgaged Assets 17,923,310 16,067,214
Payment plan and breakdown of long term debt: 2007 2006
Between 1 to 2 years 289,654 456,679
Between 2 and 5 years 3,880,071 2,449,642 More than 5 years 8,154,170 6,704,615 Total 12,323,895 9,610,936
Short Term Interest Bearing Debt Short Term Interest Bearing Debt Effective Interest Rate 2007 2006 Certificate Loan 3.52% 700,000 800,000 Bond Loan 0 300,712 Other 1 year’s debt 5.80% 63,724 208,324 Total 763,724 1,309,036
Debt divided by currency
Swedish krona 21%
Norwegian krone 51%
Danish krone 8%
31
Mortgage
Secured Liabilities: Secured debt 63,724 208,324
Book Value of mortgaged assets: Land, buildings etc 17,923,310 16,067,214 Transport Vehicles. 13,910 12,916 Total mortgaged Assets 17,937,220 16,080,130
The company is exposed to changes in interest rate on loans based on the following re-pricing schedule taking into consideration fixed interest agreements, swap agreements and interest cap agreements;
2007 2006 6 months or less 7,947,319 6,377,972 6-12 months 1,234,100 1,150,800 1-5 years 2,158,200 1,605,200 Over 5 years 1,748,000 1,786,000 Total 13,087,619 10,919,972
Carrying Value of the Company’s loan in different currencies Exchange Rate 2007 2006 NOK (Norwegian Kroner) 100.0 6,777,064 5,565,301 SEK (Swedish Kroner) 84.55 2,759,798 2,054,745 DKK (Danish Kroner) 106.75 3,550,757 3,299,926 Total 13,087,619 10,919,972
The Company has the following unused loan options: 2007 2006 Overdraft Limit 38,716 52,001
In addition there is borrowing capacity for properties without current loans. As of 31.12.2007 these properties are: Torvbyen, Amanda, Åsane, Gulskogen, Slagenveien, Metro, Markedet and Familia.
Note 17 Tax
Taxes: 2007 2006 Payable taxes 63,917 65,950
Changes in deferred taxes 322,335 309,796
Taxes 386,252 375,746
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2007 2006
Annual Payable Tax 67,656 65,950 Total Payable Tax 67,656 65,950
2007 2006 Profit (loss) before taxes (including disposal activity) 1,556,191 1,460,227 Tax calculated at 28% of pre tax amount 283,818 408,864 Tax calculated at 25% of pre tax amount 135,532 0 Tax effects from non-recorded tax assets -21,153 -64,458 Non-taxable expenses 3,258 27,017 Other -361 4,323 Change in Tax Rate -14,842 0 Tax Expenses 386,252 375,746
Effective Tax Rate 24.8% 25.7%
Deferred Tax and Deferred Tax Assets: 2007 2006 Deferred Tax Assets Current Assets 7,309 1,502 Other fair value items 12,675 6,779 Loss carry forward 137,092 61,502 Other 154,789 12,194 Deferred Tax Assets – gross 311,863 81,978
Deferred Tax Liabilities Tangible Fixed Assets and Investment Properties 2,010,153 1,524,644 Profit and Loss Account 42,420 26,426 Other 21,866 10,655 Deferred Tax Liabilities – gross 2,074,439 1,561,725
Net Recognized Deferred Tax Liabilities 1,762,843 1,479,747
Overview of loss carry forward 2007 2006 No deadline 482,933 219,650 Deadline by the end of 2017 6,681 0 Total Presented Tax Loss 489,614 219,650
Deferred Tax that is held specifically against equity is the following: 2007 2006 Cash Flow Insurance 12,675 9,415 Total 12,675 9,415
Payment of dividends to the parent company shareholders does not impact payable or deferred tax.
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Note 18
Other Short Term Debt
2007 2006
Rent paid in advance (with balances). 115,763 220,003 Debt for the sale of gift cards 73,806 72,501 Ongoing expenses 53,750 61,812
Financial Instruments (36,547) 5,827
Salary Related Expenses 33,926 24,801 Interest 61,547 35,409 Purchase of Fields from TK Dev. - 106,990
Other 98,660 137,627 Total 400,905 664,970
Note 19 Specifics for Operating Income
2007 2006 2005 Rental Income - business 1,051,616 962,230 776,586 Rental Income - office 65,467 43,015 45,956 Rental Income - storage 18,795 12,735 11,449 Other Shopping Center Income 78,369 101,435 101,435 Total Rental Income 1,214,247 1,119,415 935,857 Income Operating Companies 741,408 671,009 541,496 Administration 199,388 150,954 113,474 Development 149,737 77,613 35,743 Other Operating Income 50,633 50,312 37,929 Gains/Profit 33,703 13,140 15,848 Eliminations etc -171,596 -72,158 -44,737 Total 2,217,520 2,010,285 1,635,610
Note 20 Specifics for Other Operating Expenses
2007 2006 2005
Site Rental 19,030 16,179 13,895 Building related maintenance 35,799 41,512 47,797 Group costs and marketing – Owners share 59,620 74,942 84, 864 Community fees, property tax and insurance 9,953 11,879 7,502 Administration and other honorariums 97,291 68,512 40,267 Group costs and marketing - operations 647,584 624,015 503,705 Other administrative expenses 30,535 14,624 22,252 Loss on receivables 1,709 -3,015 -6,331 Total 901,521 848,648 713,951
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Note 21 Lease Agreements
The company as the lessee - Operational Lease agreements
The company has several operational lease agreements for machines, offices and other facilities. Several of these lease agreements have extension options. The lease agreements do not have restrictions on the company’s dividend policies or financing options.
Lease Expenses consist of the following: Regular Lease Payments 2007 2006 2005 Cars 2,700 1,021 1,194 Machines 6,096 2,231 2,772 Buildings 19,030 16,179 13,895 Total 27,826 19,432 17,861
Future minimum lease agreements associated with non-cancelable agreements are due: 22,566 17,716 Within 1 year 51,359 52,112 1 to 5 years 19,488 14,982 After 5 years 93,413 84 ,810 Total
Lease Expenses are calculated based on agreements as of 31.12.2007. These are nominal amounts and the amounts remaining after 2007 will be adjusted according to the Consumer Price Index (KPI). The buildings that the company is leasing are again leased out to our lessees at our shopping centers. See Below.
The company as the lessor – operational lease agreements Carrying Value of Assets that are leased with operational lease agreements are as follows: 2007 2006 2006 2005 Buildings 19,860,504 18,077,067 13,042,062 Total 19,860,504 18,077,067 13,042,062
Future minimum lease payments associated with non-cancelable lease agreements are due as follows: 2007 20062006 Within 1 year 1,039,355 1,075,424 1 to 5 years 2,122,443 1,818,612 After 5 years 336,809 184,714 Total 3,498,607 3,078,751
These are nominal amounts and the amounts remaining after 2007 will be adjusted according to the Consumer Price Index (KPI).
35
The company’s lease agreements can be divided in the following main categories:
1) Fixed Lease
2) Fixed Lease + a percentage of share of turnover (sales) 3) Percentage of share of turnover (sales)
Average Norway Sweden Denmark The percentage of fixed lease agreements as of 31.12.2007 91.5% 93.5% 90.4% 88.2%
Financial Lease Agreements The company does not have any financial lease agreements.
Note 22 Financial Instruments – Financial Market Risk
Since Steen & Strøm is an international company it is exposed The company uses a variety of types of interest rate to interest rate and foreign exchange risks. The company uses derivatives to hedge itself from profit/loss deviations that a variety of financial instruments to reduce these risks in come as a result of changes in interest rates. accordance to the company’s strategy for interest and foreign As of 31.12.2007 the company had interest rate swap exchange exposure. The risk management guidelines were agreements totally in 4,098,000,000 NOK in which the applied. company receives a variable management rate of interest
and pays a fixed rate. In addition, the company has an Interest Rate Risk agreement equaling 1,650,000,000 DKK in which the Interest rate risk arises on current and somewhat long-term company pays a variable management rate and receives a liabilities due to the fact that portions of the company’s fixed rate. Interest rate swap agreements are used to hedge liabilities have a floating interest rate. The current Loan the company from profit/loss deviations that come as a Portfolio has a combination of floating and fixed interest result of changes in interest rates. There are no conditions rates. About 1/3 of the portfolio is the subject of the long-term on the hedged loans and interest swap agreements. The hedging. swaps meet IAS requirements and changes in fair value are
posted over to equity.
Types of leaseable space
Other Storage Offices
Stores
36
Overview of the company’s swap agreements: Start date End date Currency Amount Rate Increase/Decrease Value TNOK 12/30/2003 12/30/2008 DKK 200,000 3.58% 2,563 12/30/2003 12/30/2008 DKK 325,000 4.10% 3,062 4/28/2004 5/4/2009 DKK 400,000 3.76% 5,751 11/2/2004 11/2/2009 NOK 200,000 3.60% 7,617 1/2/2006 1/2/2013 DKK 200,000 4.50% (2,162) 1/4/2006 1/4/2016 DKK 300,000 2.50-4.50% (1,655) 2/6/2006 2/5/2016 NOK 200,000 4.00% 18,281 6/2/2006 1/1/2010 DKK 1,650,000 3.70% (27,637) 11/6/2006 11/7/2016 NOK 200,000 4.51% 12,444 11/6/2006 11/5/2011 NOK 300,000 3.75-4.75% (2,221) 12/27/2006 12/28/2015 SEK 150,000 3.99% 6,285 12/29/2006 12/29/2016 SEK 200,000 4.04% 8,965 1/1/2007 1/1/2014 SEK 300,000 3.50-4.50% 1,448 4/5/2007 4/7/2014 SEK 300,000 2.50-4.50% 5,124 9/29/2007 9/29/2012 SEK 200,000 4.00-5.00% 231 9/29/2007 9/29/2012 SEK 200,000 4.48% 751 12/28/2007 12/31/2012 DKK 523,000 4.49% 3,634 Total 42,481
The average effective rate on interest bearing loans was 4.56% (3.5% in 2006) for 2007. Initially the financial instruments and interest rate swap agreements that were in place as of December 31, 2007 were subject to a 1% general increase that will reduce the profits by 78,900 TNOK. In 2007 the company spent 4,805 (24,262 in 2006) TNOK on interest rate hedging.
Liquidity Risk The company’s strategy is to constantly maintain available cash, cash equivalents or other credit options that would be able to finance their operations and investments for the next 3 years in accordance with the company’s strategic plan for the same time frame.
37
Foreign Exchange Risk Changes in the currency rates create both direct and indirect risks for the company. Currency exposure is limited primarily to the equity parcels connected with the shopping centers in Sweden and Denmark. Hedging is obtained by using the local currency for assets and debt for the individual countries.
Long Term Receivables 2007 2006 SEK 459 459 DKK 41,642 28,418
Long Term Debt SEK 3,222,407 2,210,545 DKK 3,381,656 2,965,710
Exchange Rate on Balance Sheet SEK 84.55 91.12 DKK 106.75 110.49
Totals in Norwegian Kroner Long Term Receivables 44,841 0 Long Term Debt 6,334,463 5,291,062
Posted profits/loss on recognized currency items totaled TNOK 4,434 (-2,588 in 2006).
Establishing Fair Market Value The fair market value of financial assets classified as “available for sale” or “hold until maturity” are determined based on the For financial assets and debt posted at balance exchange rate on the balance date. sheet value, the fair value is calculated at the Interest rate swap agreements are added to the current value of the estimated cash flow, total fair market value. Fair value amounts discounted by interest owing on respective debt are obtained from financial institutions. and assets on the date of the balance sheet. The posted value of cash, cash equivalents, This value is approximately the same as fair and bank credit has a value approximately the market value. same as the fair market value since these Fair Market Value of ”hold until maturity” instruments have short-term maturity. investments are determined by using available The corresponding values are book values market prices from customer receivables and trade creditors approximating fair market value.
38
Note 23 Note 24 Related parties Litigations and damage claims
Steen & Strøm participates has ongoing cooperative Steen & Strøm-company was not involved in pending litigations business agreements with various companies within as of December 31, 2007. However, as of January 1, 2008, the company acquired all the shares in Hamar Storsenter AS. This Varner Gruppen through leasing agreements at shopping firm is involved in two litigations against tenants/former tenants centers. Board member Marius Varner is the at Hamar Storsenter. These litigations are handled completely by administrative director and significant owner in Varner an earlier owner of Hamar Storsenter AS. Nevertheless, it’s Gruppen. Varner Gruppen used to own 5.45% of shares in emphasized that Steen & Strøm company is part of a very large Steen & Strøm, but sold out during the course of 2007. agreement portfolio (mentioned below as lease agreements), and Lease agreements are entered into at market terms, and likely to lead to litigations. There are several such small total TNOK 81,878 (74,911 in 2006) in 2007. litigations currently, but none of the significant characters Steen & Strøm also has ongoing cooperative business demanding sales or further mention in the financial report. agreements with various companies within the Princess- ICA Norge AS has made a claim against Metro Senter ANS chain through leasing agreements at shopping centers. based on lost profit for ICA as a result of disadvantages in Stein Erik Hagen (deputy member) has large owner connection with the expansion of Metro Senter i Løren-skog. The claim is TNOK 22,000, and is rejected by Metro Senter interest in the chain. Lease agreements are entered into at ANS, where Steen & Strøm ASA have a 50% owner share. No market conditions and total TNOK 10,003 (10,551 in legal steps have been taken in the matter. Parts of a possible 2006) in 2007. claim will be assessed as passed onto contractor, NCC In 2007, Steen & Strøm sold IT services to Canica, where Construction AS. NCC Construction AS has continued to make the board’s chairman Peter A. Ruzicka works, and of a negotiation claim of for TNOK 8,000. The claim is rejected by which deputy member of the board, Stein Erik Hagen, is Metro Senter ANS. GE Real Estate (Sweden) AB has presented owner. Stein Erik Hagen and Mille-Marie Treschow with a damages claim of SEK 68 million against Steen & Strøm. The related parties own 100% of the shares in Steen & Strøm. claim is presented because the parties did not agree on an IT services are sold at market conditions, and come to agreement regarding purchase of the “Atollen” project in TNOK 156 (110 in 2006) in 2007. Mille-Marie Treschow Jönköping. GE maintains that Steen & Strøm supposedly broke (board member) and Stein Erik Hagen (deputy member) an agreement between parties and is demanding damages for are married, and have with related parties majority holding break of contract. Steen & Strøm has rejected the fact that there in the Jernia chain. The chain is the lessee at some of the was any contract above and beyond cooperative agreement that ended in 2006, and will therefore reject the claim. Steen & company’s shopping centers. The lease amount is fixed on Strøm Sweden has issue a claim against Sweco AB based on the market conditions and total TNOK 3,461 (3,054 in incorrect projection of refrigeration equipment at Kupolen i 2006) in 2007. Borlänge shopping center. The unit has an output of approximately 35 W pr. Square meter, compared to the expected /agreed upon 50W pr. square meter. Expenses for an upgrade to the acceptable level are estimated at TSEK 4,600. Sweco has not replied to Steen & Strøm’s claim besides via its insurance company and claimed that the claiming period was over.
39
Note 25 Events after balance date
In January, Steen & Strøm bought shares in Hamar Storsen- ter AS. The company owns Maxi Storsenter center and for an assessed value of TNOK 700,000.
Note 26 Overview of subsidiaries and equity interests of Steen & Strøm sueu
Steen & Strøm ASA pr. 31.12.07 Company Name Company Company’s Face Value Book Steen & Group’s location capital of shares value Strøm ASA’s Equity share Equity interest Amanda Storsenter AS Oslo 17 075 17 075 52 055 100.00% 100.00% Oasen Kjøpesenter AS Oslo 900 100.00% Arken Holding AS Oslo 200 200 392 795 100.00% 100.00% Åsane Storsenter DA Oslo I/A 49.90% Camato AS Oslo 1 428 1 428 0 100.00% 100.00% Steen & Strøm Eiendoms- Oslo 100 100.00% forvaltning AS Steen & Strøm Norges Største Oslo 100 100.00% Senterkjede AS Farmandstredet Eiendom AS Oslo 94 600 94 600 245 410 100.00% 100.00% Farmandstredet ANS Oslo I/A 100.00% Fayesgate 7 Eiendom AS Oslo 200 200 6 421 100.00% 100.00% Gulskogen Prosjekt & Eiendom AS Oslo 2 255 2 255 12 186 100.00% 100.00% Hovlandbanen AS Oslo 189 189 93 907 100.00% 100.00% Karl Johansgate 16 AS Oslo 2 979 2 979 192 185 100.00% 100.00% Lille Eiendom AS Oslo 100 100 114 66.00% 66.00% Løkketangen Torv AS Oslo 33 000 33 000 0 100.00% 100.00% Nerstranda AS Oslo 55 000 55 000 152 140 100.00% 100.00% Nordbyen Senterforening AS Oslo 130 130 190 69.20% 69.20% Norsk Automatdrift AS Oslo 100 100 26 101 100.00% 100.00% Norsk Kjøpesenterforvaltning AS Oslo 100 100 100 100.00% 100.00% Os Alle 3 AS Oslo 10 000 10 000 86 903 100.00% 100.00% Sjøsiden AS Oslo 2 616 2 616 48 114 100.00% 100.00% Skårer Stormarked AS Oslo 100 100 50 388 100.00% 100.00% SSI Lillestrøm Torv AS Oslo 39 655 39 655 146 912 100.00% 100.00% Steen & Strøm Senterservice AS Oslo 9 000 9 000 9 000 100.00% 100.00% Arken Drift AS Oslo 100 49.90% Buskerud Storsenterdrift AS Nedre Eiker 200 33.00% Down Town Drift AS Oslo 500 100.00% Farmanstredet Drift AS Oslo 100 100.00% Holmen Senterdrift AS Oslo 1 250 100.00% Krokstadelva Senterdrift AS Oslo 300 100.00% Kvadrat Drift AS Oslo 100 100.00%
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Steen & Strøm ASA pr. 31.12.07
Company Name Company Company’s Face Value Book Steen & Group’s location capital stock of shares value Strøm ASA’s equity share Equity interest Markedet Drift AS Oslo 200 100.00% Metro Drift AS Oslo 100 100.00% Metro Senter ANS Oslo I/A 555 375 50.00% 50.00% Mosseporten Drift AS Oslo 100 100.00%
Nerstranda Drift AS Oslo 100 100.00%
Os Alle Drift AS Oslo 100 100.00% Sjøsiden Drift AS Oslo 100 100.00% SSI Amanda Senterdrift AS Oslo 250 100.00%
SSI Gulskogen Senterdrift AS Oslo 100 100.00%
SSI Lillestrøm Senterdrift AS Oslo 100 100.00% SST Stavanger Drift AS Oslo 100 100.00% Tillertorget Drift AS Oslo 100 100.00%
Torvbyen Drift AS Oslo 100 38.00% Vinterbro Eiendomsdrift AS Oslo 1 850 100.00% Økern Sentrum Drift AS Oslo 100 100.00% Østfoldhallen Drift AS Oslo 250 100.00%
Senterdrift Åsane Senter AS Bergen 280 49.90% Stavanger Storsenter AS Oslo 700 350 155 161 100.00% 100.00% Steen & Strøm Arkaden AS Oslo 1 000 1 000 2 500 100.00% 100.00% Steen & Strøm Drammen AS Oslo 645 734 33 233 612 500 100.00% 100.00% Steen & Strøm Drift AS Oslo 529 529 445 100.00% 100.00% Steen & Strøm Invest AS Oslo 320 320 9 161 100.00% 100.00% Steen & Strøm Narvik AS Oslo 17 000 17 000 0 100.00% 100.00% Steen & Strøm Norge AS Oslo 4 000 4 000 0 100.00% 100.00% Stovner Senter Holding AS Oslo 66 055 66 055 115 512 100.00% 100.00% Stovner Senter AS Oslo 5 950 100.00%
Stovner Senterdrift AS Oslo 3 315 100.00% Torvbyen Senter AS Oslo 17 200 17 200 17 200 100.00% 100.00% Torvbyen Utvikling AS Oslo 100 100.00% Økern Holding AS Oslo 100 100 81 75.00% 75.00% Økern Sentrum Ans Oslo I/A 50.00% KS Markedet Oslo I/A 37 794 98.90% 100.00% KS Down Town Senter Oslo I/A 36 783 90.00% 100.00% KS Down Town Senter II Oslo I/A 151 90.00% 100.00% Gulskogen Senter ANS Oslo I/A 2 468 99.00% 100.00% Torvhjørnet Lillestrøm ANS Oslo I/A 406 1.00% 100.00% Vintebro Senter DA Oslo I/A 1 0.10% 100.00% Steen & Strøm Holding AS Danmark 110 000 110 000 1 032 070 100.00% 100.00% Anpartsselskabet af Danmark 130 100.00% 18. september 2007 Bruun’s Galleri ApS Danmark 130 100.00% Bryggen, Vejle A/S Danmark 550 100.00% Ejendomsselskabet Danmark 8 500 50.00% Klampenborgvej I/S
41
Steen & Strøm ASA pr. 31.12.07
Company Name Company Company Face Value Book Steen & Group’s location capital stock of shares value Strøm ASA’s equity share equity interest Entreprenørselskapet af Denmark 10 000 100.00% 10.04.2001 P/S Fields Copenhagen I/S Denmark 1 055 027 100.00% Field’s Eier I ApS Denmark 265 100.00% Field’s Eier II A/S Denmark 500 100.00% Prosjektselskabet af Denmark 125 100.00% 10.04.2001 ApS Steen & Strøm CenterDrift A/S Denmark 500 100.00% Steen & Strøm Denmark 500 100.00% Centerudvikling IV A/S Steen & Strøm Denmark 500 100.00% Centerudvikling V A/S Steen & Strøm Denmark 500 100.00% CenterUdvikling VI A/S Steen & Strøm Denmark 500 100.00% CenterUdvikling VII A/S Steen & Strøm Danmark A/S Denmark 1 000 100.00% Steen & Strøm Holding AB Sweden 1 500 1 500 1 760 349 100.00% 100.00% FAB CentrumInvest Sweden 650 100.00% Steen & Strøm Sverige AB Sweden 100 100.00% FAB Emporia AB Sweden 100 100.00% FAB Överby Köpcentrum Sweden 100 100.00% Detaljhandelshuset i Hyllinge AB Sweden 100 100.00% FAB Sollentuna Centrum Sweden 100 100.00% FAB Borlange Køpsentrum Sweden 100 100.00% FAB Marieberg Centrum Sweden 4 000 100.00% Västra Torp Mark AB Sweden 100 100.00% NorthMan i Sverige AB Sweden 400 100.00% FAB Centrum Västerort Sweden 100 100.00% FAB Viskaholm Sweden 100 100.00% FAB Uddevallatorpet Sweden 100 100.00% FAB Hageby Centrum Sweden 100 100.00% Mitt i City i Karlstad FAB Sweden 28 447 100.00% Fastighets AB Lantmäteribacken Sweden 500 100.00% FAB Allum Sweden 100 100.00%
Fab P Brodalen Sweden 100 100.00%
Partille Lexby AB Sweden 100 100.00% Fastighets AB P Åkanten Sverige 100 100.00% Fastighets AB P Porthälla Sweden 100 100.00%
Fastighets AB Mölndal Centrum Sweden 100 100.00%
Svenor AS Oslo 2 963 100.00% Total shares in subsidiaries 5 852 878
Total shares in associated/jointly controlled companies 555 375
42
EXHIBIT E
Klépierre Press Release of October 28, 2008 Regarding Results For Nine Months Ended September 30, 2008
REVENUES THROUGH SEPTEMBER 30, 2008: +12.2%
In millions of euros 3rd quarter 01.01.2008 01.01.2007 Change Change 2008 to to 2008/07 constant portfolio 09.30.2008 09.30.2007 (9 months)
Rents 166.3 491.2 434.0 13.2% 5.4% o/w Shopping centers 144.5 428.9 380.0 12.8% 5.2% o/w Retail properties 9.2 24.3 17.4 39.8% 8.4% o/w Office properties 12.6 38.0 36.6 3.8% 5.8%
Fee income 16.4 48.7 47.1 3.5% Total revenues (1) 182.7 539.9 481.1 12.2%
(1) The acquisition by Klépierre of a 56.1% equity interest in the company Steen & Strøm has been finalized on October 8, 2008 and has therefore no impact on the figures and data of Klépierre on September 30, 2008.
Business is in line with targets Although the economic situation and outlook deteriorated in Europe over the course of the 3rd quarter, Klépierre maintained a sustained level of business in line with targets. Revenues rose by 12.2% and rents by 13.2% (5.4% on a constant portfolio basis). The occupancy rate was stable over the period and remains above 98% in the shopping centers. The default rate is still low (less than 3%).
A resilient business model in a deteriorated environment Four factors explain the resilience of Klépierre’s business: the nature of its revenues, relying on long-term leases that include clauses calling for index-linked rent adjustments, a portfolio of assets that is diversified geographically and also in terms of retail formats, reasonable occupancy cost ratios, and management teams which have been dedicated for many years to up-keeping and increasing the value of the real estate portfolio.
The diversification strategy conducted by Klépierre since the early 2000s, and reaffirmed with the recent acquisition of Steen & Strøm in Scandinavia, enabled the Group to reinforce the regularity of the progression in its revenues while also taking full advantage of Europe’s strongest growth markets. The size of the portfolio, the multiplicity of its assets, and the diverse mix of countries should enable Klépierre to withstand the slowdown in consumer spending taking shape in Europe.
For immediate release – October 28, 2008 “Klépierre’s development strategy has always factored in the lessons learned from the economic slowdown that occurred in 1991/1993,” noted Michel Clair, Chairman of the Klépierre Executive Board. “By focusing our strategy on shopping centers starting in 1998, and by expanding it to include retail properties with Klémurs in 2006, we have clearly shown that we are determined to position Klépierre in assets that offer recurrent cash flows. If the vacancy rate is structurally low in the shopping centers, this is because the appeal of the locations for retailers is real. In several countries, including France, this appeal enables the retailers to progressively build a capital, the value of the business, which is established over a period that extends well beyond
loyalty in shopping centers. Moreover, the diversification we have built up is paying off today in a less buoyant environment: the inter-communal shopping centers are showing higher growth than the regional centers, and Central Europe is currently outperforming Southern Europe. It is this will of diversification that made our investment in Steen & Strøm, Scandinavia’s top operator in this segment, of strategic importance.”
Michel Clair also noted that “the favorable evolution of our business has not made us forget the crisis on the horizon and the need to remain selective in our investment choices while keeping to a disciplined financial policy. The acquisition of Steen & Strøm has been done accordingly and with the strong support of our main shareholder. The capital increase that we plan to carry out between now and the end of this year is a logical extension of this conservative stance, which strengthens the ability of Klépierre to stay within its financial ratios and attests to the confidence that we have in the development prospects of our Group.
SHOPPING CENTERS: ECONOMIC SLOWDOWN DOES NOT AFFECT THE RISE IN RENTS, WHICH REMAINS IN LINE WITH TARGETS
In the group’s portfolio, the business activity of the retailers resists over the first 8 months of the year
The change in the European economic situation and outlook during the 3rd quarter of 2008 had a mixed impact on the business activity of the retailers operating in malls owned by Klépierre, depending on their geographic location and the retail format of the malls. Activity was resilient over the first 8 months of the year, and in fact nearly matched the level of the prior corresponding period (-0.4%), despite a decrease by 1.3% over the July-August period. The differentials from one country to the next reflected the Group’s diversity: retailers’ revenues fell in the countries of Southern Europe (Portugal: -4.3%, Spain:-3.4%, Italy: -3.2%), were virtually flat in France (-0,7%), where the inter-communal shopping centers turned in better performances (+1.0%), and showed sustained growth in most of the countries of Central Europe (Poland: +11.7%, Hungary: +8.8%, Slovakia: +6.9%, Czech Republic: +3.5%), as well as in Belgium (Louvain-la-Neuve: +12.2%) and in Greece (+3.5%). Although it has no impact on Klépierre over the period under study, it is interesting to note that in Scandinavia, a new market for the Group, retail revenues rose by 1.7% for all of Steen & Strøm’s shopping centers: +1.0% in Norway, +3.7% in Sweden and +1.1% in Denmark.
Shopping center rents: +12.8% (+5.2% on a constant portfolio basis)
Shopping center rents came to 428.9 million euros through September 30, 2008, up by 12.8% compared with the same period in 2007. The main contributors in terms of countries were France (€219.0M€, 51.1%), Italy (€66.2M, 15.4%), Spain (€51.2M, 11.9%), Poland (€25.8M, 6.0%) and Hungary (€23.5M, 5.5%).
External growth contributed 7.6% of the rise in rents (+€29.4M): • the acquisitions made in 2007 contributed 24.8 million euros, primarily including the opening of the Angoulême center and the extensions of the Rambouillet and Orléans centers (+€6.2M), the acquisition of the Victor Hugo center in Valence (+€2.4M), the acquisition of the Leclerc hypermarkets in Blagnac and Saint-Orens (+€3.4M), the 3 Polish centers
For immediate release – October 28, 2008 (Rybnik, Sosnowiec and Lublin, +€5.8M), and the buyout of the remaining 50% interest it did not own in the Gondomar center in Porto (+€3.3M). • two centers in Italy, Lonato and Verona (+€4.5M) were acquired in the course of the 1st quarter of 2008, and the Pilzen center in the Czech Republic was acquired last July (+€1.1M). In total, the acquisitions made since the beginning of the year contributed 6.9 million euros to rents collected in the first 9 months of 2008. • finally, disposals made in 2007 (Poitiers) and in 2008 (Annecy) led to a loss of rents totaling 1.3 million euros and 1.0 million euros, respectively.
On a constant portfolio basis, the increase was 5.2%, reflecting: • index-linked adjustments, with an impact of +3.8% on the portfolio as a whole and +4.8% on French rents; • rental reversion, which remains sustained: 964 leases were renegotiated over the first 9 months of 2008, for an average rise of 13.3%, after 1 075 leases during the corresponding prior period in 2007, for an average rise of 12.0%.
Additional variable rents totaled 10.0 million euros, an increase of 1.4 million euros compared with the period ended September 30, 2007. They represent 2.3% of the total, a proportion that is stable over one year. France is still the number one contributor (€5.3M).
The financial occupancy rate was 98.1% on September 30, 2008, stable compared with September 30, 2007 (98.2%). The default rate was 2.9% through September 30, 2008, versus 1.9% one year earlier, reflecting limited deterioration but that concerned all countries.
RETAIL RENTS: SUSTAINED RISE IN RENTS, UP 8.4% ON À CONSTANT PORTFOLIO BASIS
Through September 30, 2008, retail property rents came to 24.3 million euros, of which 9.2 million euros in the 3rd quarter, an increase of 39.8% over the first 9 months of 2007.
Acquisitions carried out in 2008 had an impact of 5.5 million euros on consolidated rents, in particular due to the combined effects of the rollout of the Défi Mode–Vivarte agreement in April and the pursuit of acquisitions in connection with the agreement entered into with the Buffalo Grill chain of restaurants in 2006.
On a constant portfolio basis, rents rose by 8.4%, attributable to the impact of index-linked adjustments to minimum guaranteed rents (+4.9%) and the collection of 0.6 million euros in additional variable rents.
There were no past due unpaid invoices through September 30, 2008. The financial occupancy rate remained high at 99.6% (versus 100% a year earlier).
OFFICE RENTS: +5.8% ON À CONSTANT PORTFOLIO BASIS
Office property rents reached 38.0 million euros through September 30, 2008, up by 3.8% compared with the corresponding prior period ended September 30, 2007.
Disposals made last year led to a loss in rents of 0.7 million euros (-2.0%). On a constant portfolio basis, the increase in rents is 5.8% and reflects: • the impact of index-linked adjustments of +4.1% (€1.5M) • rental capital gains that resulted from lease renewals or relets contracted in 2007, +3.1% (€1.1M) •
For immediate release – October 28, 2008 the effect of vacancy, for -1.4% (€0.5M).
In all, 7 leases covering 2 685 sq.m. (2.4% of the office portfolio in terms of value) have been renegotiated since the beginning of this year, leading to reversion of their financial conditions of 22.6%, after factoring in the rent incentives granted.
The financial occupancy rate was 94.8% on September 30, 2008 (versus 99.6% one year earlier and 99.7% at year-end 2007) and currently includes 5 971 sq.m. being leased up in two buildings. FEE INCOME
Fee income is provided by service companies, and reached 48.7 million euros, an increase of 3.5% compared with September 30, 2007. Of the total, 75% was generated in France.
OUTLOOK
The outlook for growth in rents remains positive. It will factor in a robust organic growth model as well as to the pursuit of the development of a restrained number of shopping centers; to a lesser extent, the disposal program will have a negative impact on rents. The total amount of disposals completed through September 30, 2008 was 72.5 million euros, to which is added the sale on October 3 of this year of the Notre-Dame-des-Victoires office property in Paris for 64.9 million euros.
For the Group, the highlight of 2008 will undoubtedly turn out to be the acquisition this past October 8, by Klépierre and ABP Pension Fund of Steen & Strøm, for 2.7 billion euros. Following this transaction, Klépierre owns 56.1% of the equity capital of Steen & Strøm, and is present in 13 European countries. In light of existing debt, the investment led to an outlay by Klépierre of 601 million euros.
After the acquisition of Steen & Strøm, the Group has 553 million euros of unused credit lines, before factoring in the proceeds of the planned capital increase. The Group’s next significant financing due date will not come until 2011.
Upcoming publications:
January 28, 2009 2008 revenues February 9, 2009 2008 annual earnings
For all additional information, please contact:
KLEPIERRE KEIMA COMMUNICATION Caroline FINTZ Emmanuel DOVERGNE Tel: 01 40 67 57 92 / [email protected] Tel: 01 56 43 44 63 / [email protected] Soline ROULON Alix HERIARD DUBREUIL (Media) Tel: 01 40 67 57 39 / [email protected] Tel: 01 56 43 44 62 / [email protected]
For immediate release – October 28, 2008
APPENDICES TO PRESS RELEASE OF OCTOBER 28, 2008
TOTAL SHARE RENTS IFRS % In €M September 30, 2008 September 30, 2007 2008/2007 Shopping centers France 219,0 196,0 11,7% on a constant portfolio basis 200,3 189,6 5,6% Spain 51,2 48,7 5,2% on a constant portfolio basis 50,7 48,7 4,2% Italy 66,2 59,4 11,4% on a constant portfolio basis 61,2 59,4 3,0% Hungary 23,5 22,1 6,5% on a constant portfolio basis 22,9 22,1 3,6% Poland 25,8 18,0 43,2% on a constant portfolio basis 20,0 18,0 11,0% Others 43,2 35,9 20,5% on a constant portfolio basis 37,9 35,9 5,8% Total 428,9 380,0 12,8% o/w constant portfolio basis 393,0 373,7 5,2% Retail Constant portolio basis 18,9 17,4 8,4% Acquisitions 5,5 0,0 Disposals 0,0 0,0 Total 24,3 17,4 39,8% Offices Constant portfolio basis 37,93 35,85 5,8% Acquisitions 0,00 0,00 Disposals 0,03 0,53 Surfaces under works 0,02 0,20 Total 38,0 36,6 3,8% TOTAL OF RENTS 491,2 434,0 13,2% o/w constant portfolio basis 449,8 426,9 5,4%
FEES TOTAL SHARE % In €M September 30, 2008 September 30, 2007 2008/2007 Shopping centers 46,2 46,3 -0,1% Retail properties 2,5 0,6 336,8% Offices 0,0 0,2 -100,0% Total 48,7 47,1 3,5%
For immediate release – October 28, 2008
GROUP SHARE RENTS IFRS % In €M September 30, 2008 September 30, 2007 2008/2007 Shopping centers France 183,9 164,0 12,2% on a constant portfolio basis 167,2 158,3 5,6% Spain 42,8 40,7 5,3% on a constant portfolio basis 42,3 40,7 4,1% Italy 60,5 53,9 12,3% on a constant portfolio basis 55,6 53,9 3,1% Hungary 23,5 22,1 6,5% on a constant portfolio basis 22,9 22,1 3,6% Poland 25,8 18,0 43,2% on a constant portfolio basis 20,0 18,0 11,0% Others 42,4 35,1 20,9% on a constant portfolio basis 37,1 35,1 5,8% Total 378,9 333,6 13,6% o/w constant portfolio basis 345,0 328,0 5,2% Retail properties Constant portolio basis 15,9 14,6 8,4% Acquisitions 4,6 0,0 Disposals 0,0 0,0 Total 20,5 14,6 39,8% Offices Constant portfolio basis 37,93 35,85 5,8% Acquisitions Disposals 0,03 0,53 Surfaces under works 0,02 0,20 Total 38,0 36,6 3,8% TOTAL OF RENTS 437,4 384,8 13,6% o/w constant portfolio basis 398,8 378,5 5,4%
FEES GROUP SHARE % In €M September 30, 2008 September 30, 2007 2008/2007 Shopping centers 46,2 39,7 16,3% Retail properties 2,5 0,5 376,6% Offices 0,0 0,2 Total 48,7 40,5 20,4%
For immediate release – October 28, 2008
A – QUARTERLY BUSINESS REVIEW BY SEGMENT
I – Shopping center segment
1 – Update on consumption
1.1. Economic environment8
In the third quarter, the global economy entered a pocket of turbulence that has rendered the outlook for growth uncertain. After being relatively spared in the early part of the year, growth in Europe is also expected to become significantly weaker than was previously forecast. For the Euro Area, growth of 1.3% is now forecast for the full year 2008 (down from 1.7% before the summer9). For countries where Klépierre has operations, growth remains strong in Central Europe (Slovakia: +7.4%, Poland: +5.2%, Czech Republic: +4.0% and Hungary: +1.9%) and in Greece (+3.2%). Less sustained in other countries, it is nonetheless expected to remain in positive territory, except for Italy (- 0.1%): France (+0.8%), Spain (+1.4%), Belgium (+1.4%), and Portugal (+0.6%). In the months ahead, government intervention aimed at supporting banks should stabilize the capital markets. In parallel, recent declines in the price of energy and other basic commodities could boost household consumption.
1.2. Aggregate change in revenues, January–August 2008
For the July–August aggregate, total revenues provided by Klépierre-owned malls dropped by 1.3%. The countries of Central Europe (+7.8% on average) and Belgium (+15.1%) continued to show strength, in contrast to other countries, where sales revenue fell (Portugal and Italy in particular). For the first 8 months of the year, retail revenues were virtually flat (-0.4%), showing a slight decline versus the satisfactory levels observed last year (through first 8 months of 2007 +3.8% versus 2006). However, results were mixed overall. Central Europe remains robust (Poland: +11.7%, Hungary: +8.8%, Slovakia: +6.9% and the Czech Republic: +3.5%). Belgium (Louvain-la-Neuve: +12.2%) and Greece (+3.5%) also turned in good performances. In other countries, however, mall revenues declined: France (-0.7%), Portugal (-4.3%), Spain (-3.4%) and Italy (-4.3%). If Tor Vergata and Romanina, which are facing intense competitive pressures in the suburbs of Rome, are excluded, the fall in revenues for Italy shrinks to 1.9%. The Beauty/Health and Culture/Gifts/Recreation segments showed improvement, up by +2.2% and +0.2%, respectively. Revenues for other key retail segments declined: Personal Products (-0.7%), Restaurants (-0.8%) and Household Equipment (- 8.1%), which in fact contributes less to global revenues.
1.3. France – wrap-up for the first three quarters of 200810
Revenues from Klépierre-owned malls were down by 0.9% in the month of September, partly attributable to adverse calendar conditions (an additional open day, but one less Saturday than last year). This month had little impact on the year-to-date total since January, which shows a slight decline of 0.7% (but with respect to the high level for the same comparative period in 2007, 9 months 2007/9 months 2006: +3.7%).
Business continues to be driven by the inter-communal centers, where revenues were up by 1.0%. Revenue from downtown shopping centers is down (-1.5%). Although most facilities reported a rise in revenue, regional centers also showed a decline for the period (- 1.7%), attributable in particular to Créteil Soleil after the BHV store closed (property not owned by Klépierre). The Beauty/Health and Personal Products segments reported higher revenues (+2.6% and +1.0%, respectively). Conversely, Culture/Gifts/Recreation and Restaurants showed a decline of 1.2%.
2 – Rental business
Shopping center rents amounted to 428.9 million euros through September 30, 2008, an increase of 12.8% (+48.8 M€) compared with the total through September 30, 2007.
On a constant portfolio basis, growth was 5.2%, driven in particular by France (+5.6%).
2.1. France For immediate release – October 28, 2008 Shopping center rents in France came to 219.0 million euros, an increase of 11.7% (+€23M) on a current portfolio basis.
On a constant portfolio basis, the increase was 5.6%, attributable to:
8 Source: IMF forecasts: October 2008. 9 OECD forecasts, end of May 2008. 10 Excluding Angoulême Champ de Mars, Rambouillet, Orléans Saran and the Laon and Nîmes extensions.
- Index-linked adjustments to guaranteed rents of +4.8% on average for all holdings. It should be noted that most leases (84% of all leases in terms of value) got a boost as of January 1, 2008 from the French ICC cost of construction index for the 2nd quarter of 2007, which was up by +5.05%. The remainder is still almost exclusively based on the same index for the 1st quarter of 2007 (+1.7%), because the 1st quarter 2008 index (+8.1%) published in July 2008 will not impact rental invoices until the 4th quarter of 2008, retroactive to January 1st, - Changes in tenant mix and lease renewals, which enhanced the rental value of the portfolio: rents showed the positive impact of transactions completed over the first 3 quarters of 2008 (18 lease-ups for €0.8M, 128 relets and 100 renewals, up by +18% and +21%, respectively).
On a current portfolio basis, rents were also boosted by the following factors and events: - The acquisition in July 2007 of Leclerc hypermarkets and additional lots in the Blagnac and Saint Orens centers, with an impact of 3.4 million euros on rents recorded through September 30, 2008, - The first portions of the extensions already open in the malls of these facilities contributed 0.8 million euros to rents for the period through September 30, 2008, - The opening in September 2007 of the Angoulême Champ de Mars mall (+€2.6M), - The acquisition in December 2007 of the Valence Victor Hugo mall (+€2.4M), - The opening in October 2007 of the Orléans Saran extension (+€2.2M), - The opening in June 2007 of the Rambouillet extension (+€1.3M).
Additional variable rents came to 5.3 million euros, a decline of 0.2 million euros compared with figures through September 30, 2007. This decline is primarily due to the inclusion of a portion of these variable rents in MGR11 due to the impact of annual index-linked adjustments in rent.
The financial occupancy rate was 98.9% on September 30, 2008, versus 98.8% on September 30, 2007. Unpaid past due amounts12 came to 1.1% of rents recorded through September 30, 2008, compared with 0.7% through September 30, 2007.
The average occupancy cost ratio13 is 9.8%.
2.2. Spain
Through September 30, 2008, consolidated rents from Spanish properties came to 51.2 million euros, an increase of 5.2% (€2.6M).
The change in current portfolio terms is due mainly to rents collected (€383K) for 14 shops located across from the checkout counters of the Carrefour hypermarket in the Vallecas center acquired in November 2007. The mall itself covers more than 45 000 sq.m. Adjacent to the hypermarket, it will not open until November 2008.
On a constant portfolio basis, the rise was 4.2%. The impact of index-linked rent adjustments was 3.9%, contributing an additional 1.8 million euros to rents.
On the rental management level, since the beginning of 2008 212 leases have been renewed, for an increase of +5.7%; 66 relets to new tenants were signed (+9.0%); and 13 lease-ups on vacant premises were completed for additional rents of 343 thousand euros (principally, Los Llanos and Valladolid 2 Alfafar).
The default rate was 2.5% on September 30, 2008, an increase over September 30, 2007 (1.5%) that is primarily attributable to one tenant—the cinema Abaco—with operations in 4 centers. Excluding this tenant, the default rate would be 1.6%, which is stable compared with the same period in 2007.
The financial occupancy rate is de 96.2%, compared with 97.0% through September 30, 2007.
For immediate release – October 28, 2008
11 Minimun Guaranteed Rents. 12 An unpaid past due invoice (rents, utility provisions, land taxes, VAT included) is defined as any invoice for which payment is not received on the due date, included in reporting of the first month on which it is observed. 13 This ratio is defined as rents excluding taxes plus expenses excluding taxes over revenues excluding taxes. It remains at a reasonable level and ensures rental reversion over the short and medium terms.
2.3. Italy
Consolidated rents from Italian properties totaled 66.2 million euros through September 30, 2008, an increase of +11.4%.
External growth comes from the acquisition of Lonato and Verona in February and from the extension of the Bari mall in April.
On a constant portfolio basis, Italian rents are up by 3.0%, of which 2.3% attributable to index-linked adjustments.
In terms of rental management: - 45 leases were renewed in the Italian portfolio, for a rental gain of +31.8%, notably at Rondinelle-Brescia as part of the lease renewal campaign that began last February, - 38 relets to new tenants were also completed, generating a rental capital gain of +25.1% (including 8 at Rondinelle-Brescia), - 16 leases were signed with new tenants for guaranteed rent of 518 thousand euros (including 3 at Romanina).
The financial occupancy rate on September 30, 2008 was 98.3%, an improvement over September 30, 2007 (97.9%).
The default rate was 4.9% on September 30, 2008, an increase over the period ended September 30, 2007 (3.2%) that is attributable in particular to Capodrise, Tor Vergata and Romanina. The current economic climate, to which centers facing intense competitive pressures are more sensitive, is behind the rise.
2.4. Hungary
Through September 30, 2008, consolidated rents provided by Hungarian properties came to 23.5 million euros (versus €22.1M through September 30, 2007), an increase of +6.5% on a current portfolio basis.
On a constant portfolio basis, the rise in rents came to +3.6%. Other than the impact of index-linked rent adjustments (+2.5%), growth is mainly driven by the Duna, Miskolc and Szeged malls. The restructurings carried out in 2006 and, above all, in 2007, are bearing fruit.
This increase is primarily attributable to the inclusion in the portfolio of the Duna Plaza offices acquired on May 18, 2007 (+€0.4M).
Rental management is suffering in a difficult economic environment: restructurings are under way, and some centers are facing heightened competition.
Since January 1, 2008, 44 lease-ups have been completed for contractual MGR of 0.5 million euros, and 251 leases were signed with new tenants or renewed with old ones, for financial terms and conditions down by –1.8% (-0.1 M€).
The financial occupancy rate is 97.0%, stable versus the period ended September 30, 2007 (97.2%).
The default rate rose to 7.0%, primarily due to late payment on electrical margin re-invoicing. A target of 5% for defaults has been set for the end of 2008.
2.5. Portugal
In the Portuguese portfolio, consolidated rents amounted to 13.9 million euros through September 30, 2008, an increase of +31.6% that is attributable to the acquisition of full ownership of the Parque Nascente shopping center in Gondomar (in September 2007, the shares held by the co-owner were acquired) and the acquisition in mid-February 2007 of the mid-sized retail unit Toys ‘R Us in the Braga center.
On a constant portfolio basis, rents showed a slight decline (-€42K). The impact of index-linked rent adjustments (+2.5%) was only partly offset by the adverse impact of vacancies and lease renegotiations in 2007.
In 2008, 16 changes in tenant mix and 5 lease renewals were completed, with an improvement of financial terms and conditions of 3.7% and 0.2%, respectively.
For immediate release – October 28, 2008 On January 1, 2008, Sonae-Continente acquired control over the Carrefour hypermarkets in Portugal. The shopping centers owned by Klépierre are now getting a boost from the leading retailer in the Portuguese market. Temporarily, however, the shopping malls are suffering as consumers make the necessary adjustment to this new configuration.
The financial occupancy rate was 93.3%, lower than that observed on September 30, 2007 (96.9%) due to difficult competitive positioning in Portugal. The financial occupancy rate observed for the Parque Nascente center was partly offset by the full-year impact of the opening of Media Markt in July 2007. A retail restructuring effort will result in the late 2009 opening of a mid-sized retail unit under the Primark banner (3 700 sq.m.), which will serve as a genuine source of differentiation for the center.
2.6. Czech Republic – Slovakia
Consolidated rents totaled 13.6 million euros through September 30, 2008, an increase of 20.1% (€2.3M).
External growth reflects the impact of the Pilzen center acquired on July 31, 2008 with effect from June 30, generating 1 million euros in rents for the quarter.
On a constant portfolio basis, growth was +10.6% (2.6% of which is related to index-linked adjustments), resulting primarily from the performance of the Novy Smichov center, which is currently renewing leases.
There have been 26 relets to new tenants, up by +8.1% (+€81K); 11 leases renewed for a +43.6% increase in contractual MGR (€301K); and 2 lease-ups completed (+€20K) in the Czech Republic since the beginning of this year. The Danubia center in Slovakia reported 3 relets to new tenants and 2 renewals, which resulted in rental gains of +24.5% (€23K) and +3.7% (€2K), respectively.
The financial occupancy rate in the Czech Republic is relatively stable: 96.0% through September 30, 2008 versus 97.0% on September 30, 2007. Vacancies primarily concern Novo Plaza, which is currently undergoing retail restructuring. By the end of 2008, a mid- sized C&A unit will open.
In Slovakia, the financial occupancy rate improved, going from 92.8% to 97.9% between September 30, 2007 and September 30, 2008. This improvement is due to the arrival in the 1st quarter of 2008 of Colosseum (ready-to-wear fashion), which leased 401 sq.m., and 5 lease changes that were completed in the first two quarters of 2008.
The default rate decreased in the Czech Republic, going from 9.4% through September 30, 2007 to 6% through September 2008. It was stable for the Danubia center in Slovakia at 20.4% at the end of the 3rd quarter of 2008, compared with 20.9% for the corresponding prior period in 2007. Three lease disputes (313 K€) currently pending account for half of all unpaid past due rents.
2.7. Greece
Consolidated rents came to 6.0 million euros through September 30, 2008, a rise of +22% that is primarily attributable to the acquisition of Larissa in June 2007 (+€893K in additional rents).
On a constant portfolio basis, the increase is 3.4%. The impact of index-linked rent adjustments (+4.3%) was partly offset by the impact of the financial vacancy at the Athinon center (which improved very recently with the arrival of Sprider in the 3rd quarter of 2008).
Since the beginning of the year, 7 changes in tenant mix (with no rental gain) and 3 lease renewals with a rise in contractual MGR of +9% (€12K) were completed.
The financial occupancy rate for all holdings in Greece was 99.1% on September 30, 2008, compared with 98.0% one year earlier.
The default rate was 11.7% on September 30, 2008, up sharply compared with the rate of 2.8% on September 30, 2007. This increase is partly related to a temporary late rental payment on the part of the cinemas in the Macedonia and Larissa shopping centers (€703K) and to a dispute related to the recently completed restructuring of Larissa.
2.8. Belgium
Rents for the Esplanade center in Louvain-la-Neuve amounted to 9.7 million euros through September 30, 2008, an increase of +8.4%. Of the increase, 2.2% reflects index-linked rent adjustments, but most of the rise is attributable to lease-ups carried out in 2007, particularly the street-front premises at Rue Charlemagne, and a change in tenant mix with the arrival of FNAC in September 2007. Since the beginning of this year, Belgium has seen 8 changes in tenant mix, up by +17.5% (for a rental gain of €62K).
For immediate release – October 28, 2008 The financial occupancy rate went from 98.5% in 2007 to 99.3% in 2008, reflecting the impact of the completion of lease-up for the Rue Charlemagne property.
The default rate was 8.3% on September 30, 2008, reflecting a dispute with UGC, the tenant leasing the movie theater space. It stopped operating the business before the lease expired in the 4th quarter 2007. Excluding this tenant, the default rate would be 2.4%, compared with 4.0% on September 30, 2007.
2.9. Poland
Consolidated rents came to 25.8 million euros through September 30, 2008, up by 43.2% on a current portfolio basis (€7.8M).
External growth represents 5.8 million euros, and pertains to the acquisitions of Rybnik Plaza and Sosnowiec Plaza (May 7, 2007), as well as to the Lublin Plaza purchase on July 27, 2007.
On a constant portfolio basis, growth was 11% (the impact of the index-linked rent adjustment was 2.7%).
The performance of the Polish portfolio is attributable to additional variable rents, which amounted to 1.6 million euros through September, as well as to rental upside applicable to the entire portfolio except the Krakow mall, which is facing intense competition.
The restructuring done in 2007 at the Ruda center, involving the ground floor level and the supermarket, generated a 40% increase through September 30, 2008 in rents compared with the same period in 2007.
Since January 2008, there have been 7 lease-ups for annual contractual rents of 373 thousand euros, as well as 25 changes in tenant mix (up 15.9%) and 18 leases renewed, down by 3.7% compared with previous conditions.
The default rate was 4.9%, which is sharply lower than the rate of 7.7% recorded for the period ended September 30, 2007, which was penalized by the restructurings of Krakow and Ruda.
The financial occupancy rate for the Polish portfolio of shopping centers was 97.9% on September 30, 2008, up from September 30, 2007 (96.0%).
2.10. Outlook
In France, rents will get a boost in the 4th quarter from the full opening of the extension of the Toulouse Saint Orens mall, as well as the retail parks in La Roche-sur-Yon and in Sénart (Maisonnément). Leases to be renewed between now and the end of this year represent a global volume of 14.2 million euros, or 4.5% of the rental base for French shopping center properties.
For international holdings, the 3rd quarter of this year saw the opening of mid-sized retail units at Athinon in Greece (Sprider, 2 060 sq.m.) and at Ruda Slaska in Poland (Kappahl, 900 sq.m.). In the 4th quarter of 2008, the inauguration of the new shopping center in Vallecas is scheduled for November 12, 2008.
The other restructuring projects that were announced will also be completed before the end of 2008, generating rental invoices this year. These include the opening of the C&A store (730 sq.m.) at Novo Plaza (Czech Republic) and the second phase of the restructuring of Duna Plaza (Hungary), which entails the replacement of four movie theaters with two mid-sized retail outlets, Intersport and Vögele (total floor area of 1 970 sq.m.).
2008 is also a year of renewal campaigns involving leases on properties located primarily in the following countries:
- In the Czech Republic, the pursuit of lease renewals for the Novy Smichov center is planned. Through September 30, 2008, 9 leases were renewed for reversion of +44.5% (+€297K rental gain) and 4 more leases will be either renewed or the premises will be let to other tenants by the end of this year, for an expected increase of more than 25%, - In Spain, 16 renewals were signed in 2008 at the Meridiano center in Tenerife, for an increase of 20% (+€111.4K). There are 4 leases that remain to be renewed before the end of 2008, for an expected increase of about 5%, - In Italy, leases still to be renewed this year are concentrated in the Le Rondinelle center. Through the end of September 2008, 24 leases were renewed for an upside of 39.5% (+€717.6K), and 9 leases will come up for renewal before the end of 2008, for total MGR of 975 000 euros. Rental upside of 30% is expected, - In Hungary, where renewal campaigns between now and the end of this year concern the Miskolc (leases: €252K, +9% expected) and Debrecen (leases: €720, +11% expected) centers.
The acquisition of Steen & Strøm on October 8, 2008 will make a significant contribution to the rise in rents expected in the 4th quarter. This acquisition will be fully consolidated.
For immediate release – October 28, 2008 3 - Development
3.1. Acquisition of Steen & Strom
On October 8, 2008, Klépierre and Dutch investor ABP Pension Fund together acquired Steen & Strøm ASA, the largest shopping center owner, developer and manager in Scandinavia, for a total investment of around 2.7 billion euros. Klépierre now owns a 56.1% stake in Steen & Strøm, to ABP’s 43.9%.
This transaction makes Klépierre the leading player in Scandinavia, with a portfolio of 30 existing shopping centers in Norway (18 shopping centers with total GLA of 507 000 sq.m.), in Sweden (9 shopping centers with total GLA of 295 000 sq.m.) and in Denmark (3 shopping centers with total GLA of 165 000 sq.m.) and a pipeline of several development projects, estimated to be worth more than 1 billion euros including 500 million euros in committed projects.
This investment enables Klépierre to diversify its portfolio of real estate assets, its revenues and its development pipeline, and makes Scandinavia the second most significant area of operation for the group in terms of rents collected, behind France. In light of existing debt, Klépierre made a payment on this investment of approximately 601 million euros.
3.2. Investments made in the 3rd quarter (excluding Steen & Strom)
Klépierre invested 188.5 million euros in shopping centers over the course of the 3rd quarter of 2008, bringing to 535.9 million euros the amount spent on investments since the beginning of this year. Of this total, 473 million euros were invested in committed projects, including 152 million euros for its own developments and 321 million euros for commitments made by third parties or acquisitions.
In France, investment outlay for the quarter (€90.9M) mainly concerned: - The Gare Saint-Lazare project for 23.2 million euros, with the SNCF concession deal finalized in July, - The Montpellier Odysseum shopping center (€7.1M), - the Aubervilliers shopping center (€6M), on which work has begun, - the retail park Maisonément in Sénart (€4.3M), inaugurated on October 22 - Several extensions (€47.9M), including those currently being carried out at Saint-Orens (opening scheduled for November), Blagnac, Val d’Europe, Villejuif (inaugurated on September 4), Clermont Jaude (inaugurated on October 9), Nîmes and Bègles Goutte d’Eau (€2.3M).
At the international level, where outlay on investments came to 97.6 million euros, the highlight of the quarter was the acquisition of the Pilzen center in the Czech Republic (€61.4M). The projects involving Vallecas in Spain (inauguration planned for November 12), Corvin in Hungary and the extension of Seriate in Italy were pursued in accordance with plans and explain most of the additional outlay.
3.3. Investments planned for the 4th quarter of 2008
The Drancy Avenir shopping center was acquired for 70.8 million euros on October 3, 2008, as part of an asset swap (an office property at 46 rue Notre-Dame-des-Victoires).
In addition, this final quarter of the year will be eventful, particularly with the delivery and opening to the public of numerous committed projects.
Also in France, the opening of the following extensions: Saint-Orens, Clermont Jaude and Nîmes, as well as the retail parks in Vannes, La Roche sur Yon and Maisonément in Cesson. Projects opening abroad include Vallecas and the Seriate extension. Projects that were initiated some time ago and that will be entering into the construction phase include the Lomme center and the extension of the Noisy le Grand center.
Klépierre was awarded several competitive bids that should lead to finalized agreements, such as the one in Cahors, where it will develop a retail park covering 11 000 sq.m. GLA.
Finally, Klépierre is expected to submit a buy offer on the retail property occupied by BHV in Créteil, which would increase its hold in this major regional center.
3.4. Disposals
For immediate release – October 28, 2008 Since the beginning of the year 2008, Klépierre has decided to dispose of 2 assets for a global amount of €62,8 M (net seller price), which represents a premium of 6.5% over the consolidated appraised values.
Two assets in its shopping center portfolio were sold: the Paul Doumer mall in Caen was sold on September 23, 2008, and an indivisible share (41.62%) of ownership in the Courier mall in Annecy on March 31, 2008. These two assets contributed 1.9 million euros in rents for the period ended September 30, 2008.
Klépierre also sold, on June 23, 2008, its 35% participation in Devimo.
II – Retail segment
1 – Rental business
In the 3rd quarter of 2008, rents from the retail segment totaled 9.2 million euros. This brings to 24.3 million euros total rents through September 30, 2008, an increase of +39.8% on a current portfolio basis (+€6.9M).
The 8.4% increase on a constant portfolio basis is attributable to:
- The increase in minimum guaranteed rents pegged to the French cost of construction index for the 2nd quarter of 2008 (+5.05%), which applied to 95% of the leases in value terms as of January 1, 2008, with an impact of +4.9%,
- The collection of 0.6 million euros in additional variable rents on the Buffalo Grill restaurant properties (based on restaurant revenues for 2007).
On a current portfolio basis, rents were boosted by the following factors and events:
- The acquisition on April 30 of ownership of 77 retail properties, including 67 floating the Défi Mode banner, located in the retail activity areas of mid-sized provincial cities in France, for an impact of 2.6 million euros on rents,
- the acquisition in April of 14 retail assets located in the facilities of Avranches, Messac and Rochefort, for a contribution to rents of 0.5 million euros,
- The acquisition in December 2007 of the ownership of two Sephora store properties, in Metz and in Avignon, for an impact on rents of 0.4 million euros,
- The impact of 8 Buffalo Grill restaurants acquired in late 2007 and of 15 restaurants acquired in June 2008, for a global amount of 1.3 million euros,
- The impact over one quarter of the consolidation of Cap Nord, a company that was acquired on March 29, 2007, whose real estate assets include in particular the retail outlets of Mondial Moquette: 0.6 million euros.
Through September 30, 2008, 70% of total rents were provided by Buffalo Grill, compared with 83% through September 30, 2007. With 10% of consolidated rents, the Vivarte group becomes the second largest retail tenant. This improved balance in the rental base will be pursued in the 4th quarter based on planned acquisitions.
The financial occupancy rate is de 99.6% through September 30, 2008, compared with 100% on September 30, 2007.
Although BHV vacated the premises it occupied on Avenue de Flandre in July 2008, it will continue to pay rent until December 31, 2008. The property should be relet to new tenants over the course of the 2nd quarter of 2009.
There were no relets or lease renewals pending in the 3rd quarter of 2008.
There were no instances of past unpaid rents due through September 30, 2008.
The average occupancy cost ratio14 of tenants is 9.1%, stable over the period. For immediate release – October 28, 2008
2 - Development
14 Defined as the ratio of rents excluding taxes plus expenses excluding taxes to tenant revenues excluding taxes.
In the course of the 3rd quarter of 2008, Klémurs exercised two options on finance leases in connection with the partnership it initiated with Buffalo Grill in 2006: the number of Buffalo Grill assets owned outright by Klémurs is now 74 out of a total of 151.
Klémurs intends to invest more than 40 million euros in the course of the 4th quarter of 2008, particularly in connection with the outsourcing agreements previously negotiated with major nationwide retailers:
- Défi Mode–Vivarte agreement: Klémurs will acquire ownership of 12 Défi Mode retail properties for a total of 18.0 million euros. These assets will generate net rents of 1.1 million euros on an annual basis. In addition, 6 new Défi Mode retail outlets that were not covered in the agreement and that are owned by their developer DB Invest will be acquired for 4.7 million euros. These assets will contribute 0.4 million euros to rents per annum,
- Two Buffalo Grill restaurant properties (Achères and Ancenis) acquired on a future as-is basis will be delivered in the month of November, and will generate net annual rent of 0.2 million euros, for an investment amounting to 2.8 million euros (including 0.4 million euros outlaid in the 4th quarter of 2008).
III – Office segment
1 – Rental business
Rents
Rents came to 38.0 million euros through September 30, 2008, an increase of 1.4 million euros (which is +3.8% compared with September 30, 2007). Building disposals that were completed in the course of 2007 led to a loss in rents of 0.7 million euros, offset by an increase in rents of 2.1 million euros on a constant portfolio basis.
Rents increased by 5.8%, from 35.9 million euros through September 30, 2007 to 38.0 million euros through September 30, 2008.
This increase is attributable to the following factors and events:
- Index-linked rent adjustment produced 1.5 million euros in additional revenues over 2007 (+4.1%),
- Renewals or relets on leases signed in 2007 produced 1.1 million euros in additional rents (+3.1%),
- Loss of lease income due to the vacancies in some buildings (Neuilly-sur-Seine – 192, avenue Charles de Gaulle and Paris 8th – 36, rue Marbeuf freed up on June 30, 2008) led to a 0.5 million euro decrease in rents (-1.4%).
Rental management
A total of 7 leases have been signed since the beginning of the year. They include 1 renewal, 3 new leases and 3 additional clauses, and represent 1.4 million euros in rents on a full-year basis. These newly signed leases cover weighted useful floor area15 of 2 685 sq.m. Their financial terms and conditions are up by 22.6% compared with the previous lease terms, after deducting rent holiday incentives granted to tenants.
The most significant transaction involved 1 097 sq.m. located in the building at 192, Avenue Charles de Gaulle in Neuilly-sur-Seine, which were leased to a tenant already present at this address.
Through September 30, 2008, the lease portfolio represents global rental space worth 56.7 million euros, whose lease terms (exit option and end of lease) are presented in the table just below:
For immediate release – October 28, 2008
15 Floor area is given in weighted sq.m. U.P. = Different types of floor area (Offices, Archive storage – Parking – Employee restaurants) are weighted according to a coefficient to arrive at a price per sq.m. of office space for the whole.
Lease schedules (€M) As a As a Year By date of next exit percentage By lease end percentage option of the total date of the total (%) (%) 2009 12.0 21.3% 3.8 6.8% 2010 16.9 30.2% 0.7 1.2% 2011 22.0 39.3% 8.0 14.2% 2012 0.0 0.1% 5.1 9.2% 2013 0.0 0.0% 13.0 23.2% 2014 0.0 0.0% 4.0 7.1% 2015 5.0 8.9% 10.3 18.4% 2016 0.1 0.2% 5.2 9.4% 2017+ 0.0 0.0% 5.9 10.5% Total rents 56.0 100.0% 56.0 100.0%
The financial occupancy rate on September 30, 2008 was 94.8% (compared with 99.6% on September 30, 2007 and 99.7% on December 31, 2007). For immediate release – October 28, 2008
This decrease is due to the change in tenant mix after renovation work was done on the Neuilly-sur-Seine – 192, avenue Charles de Gaulle property. To date, 4 547 sq.m. of space has been leased-up in this building. In addition, 1 424 sq.m. of space was freed up in July in the building at 36, Rue Marbeuf in Paris (8th arrondissement).
Property management
The renovation work carried out on several floors as well as in the lobby of the building at 192, Avenue Charles de Gaulle in Neuilly-sur-Seine was completed for a total amount of 1.9 million euros. The general enhancement of floor area occupied by tenant Monte Paschi in the building at 7, Rue Meyerbeer in Paris (9th arrondissement) was completed for a total of 1.3 million euros.
2 – Development
Built in accordance with high environmental quality standards (Haute Qualité Environnementale - HQE®), the “Le Séreinis” building in Issy-les-Moulineaux will be delivered in early 2009. Throughout 2008, Klépierre invested 19.1 million euros in this project, out of a total of 68.2 million euros outlaid since the outset. The building is currently being leased up.
3 – Divestment
On October 3, 2008, Klépierre sold the building at 46, rue Notre-Dame des Victoires in Paris (2nd arrondissement) for a net seller’s price of 64.9 million euros, as part of an asset swap. This disposal was made for more than 5.9% over the last appraised value on December 31, 2007.
B – FINANCING POLICY
E Financing policy
1 – Financing Resources
Change in debt and available resources
Klépierre’s consolidated net debt on September 30, 2008 totaled 5 034 million euros, compared with 4 992 million euros on June 30, 2008 and 4 652 million euros on December 31, 2007.16
The increase in debt during the third quarter of 2008 stems primarily from investment outflows (212 million euros), which were partially offset by asset disposals (28 million euros) and free cash flow for the period.
On October 8, 2008, the acquisition by Klépierre of a 56.1% equity interest in Steen & Strøm led to the outlay of 601 million euros, entirely financed by drawing down on Klépierre’s existing financings. The existing debt of Steen & Strøm will be added to Klépierre’s own indebtedness thereafter; it amounted to €1.860 billion on June 30, 2008.
After the acquisition of Steen & Strøm, lines of credit available for the new group came to around 553 million euros, versus 1 235 million euros for Klépierre alone on June 30, 2008. This change is the result of the principal changes since June 30, 2008 that are indicated below:
• A 600 million euro bond due July 10, 2008 was refinanced.
• Two mortgage loans were contracted in early July 2008 in Italy, for a total amount of 125.75 million euros.
• About 601 million euros were paid out on October 8, 2008, corresponding to the group’s share in the acquisition price for Steen & Strøm,
• On October 7, 2008, a new bilateral credit agreement was entered into with BNP Paribas for 400 million euros (unused after the acquisition).
For immediate release – October 28, 2008 • Available lines of credit for the financing of Steen & Strøm (102 million euros on June 30, 2008) were integrated.
The rest includes diverse inflows from operations (rents for the third and fourth quarters) and diverse investment- related expenditures.
16 Excluding the marking to market of debt related to the Fair Value Hedge swap
In addition, Klépierre had announced as soon as late July 2008 that it intended to raise additional equity of 250 to 300 million euros, the net proceeds of which would be put toward the refinancing of a portion of the lines of credit used to finance the acquisition of Steen & Strøm.
Structure and due date of the debt
For the group, the breakdown by type of financing after the acquisition de Steen & Strøm remains balanced (see graph).
In the past, Steen & Strøm has mainly financed its growth via mortgage loans, which accounted for around 82% of its financing on June 30, 2008. The rest was in the form of bilateral bank loans and two bond issues.
All of this debt was raised at floating rates, stated in local currencies as protection against the currency risk, and generally with longer maturities than Klépierre’s debt (9.4 years on June 30, 2008).
As a result, the average duration of the group’s debt was 6.2 years on October 9, 2008, compared with 4.9 years on average for Klépierre on June 30, 2008, prior to the acquisition of Steen & Strøm.
Financings breakdown post acquisition of Steen & Strøm (Utilizations - in millions of euros)
FinancialCommercial leases papers Bilateral bank 4% 4% Syndicated loans loans 8% 41%
Mortage loans
24% Bond issues 19%
Situation on October 9, 2008
The group’s next significant financing due date will not come until 2011.
Financings breakdown by due date post acquisition of Steen & Strøm (Autorizations - in millions of euros) 2000 1 535 1 527 1500 1 027 427 1000 87 331 724 500 15 45 240 109 0 3 24 69 75 308 35 231 136 46 131 764 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2017 2018+ Steen&Strøm Klépierre
2- Hedging interest-rate risk
In the course of the third quarter of 2008, Klépierre reduced its exposure to the risk of interest rate fluctuations by For immediate release – October 28, 2008 increasing the share of its fixed-rate debt from 85% to 98% of its total debt. New swap agreements were entered into in August 2008, for a total notional amount of 800 million euros. The purpose of these swaps was to hedge in advance the debt raised to finance investments planned for year-end 2008, in particular the acquisition of Steen & Strøm. In October, Klépierre also extended the duration of its hedge by entering into deferred start swaps (forward swaps) totaling 200 million euros, which will increase by 2 years existing swaps whose end date is December 2009.
On June 30, 2008, 33% of Steen & Strøm’s debt was hedged. Post acquisition, Steen & Strøm began to reinforce its interest rate hedge, bringing it to around 60% in the short term, market conditions permitting.
On October 24, 2008, new swap agreements entered into by Steen & Strøm capitalizing on windows of easing in local interest rates, had already increased its hedge ratio to 43% of total debt.
On October 9, 2008, after the acquisition of Steen & Strøm, the proportion of Klépierre’s fixed-rate or fixed-rate hedged debt to total financing debt was 76%. Adjusting this data to reflect the hedges entered into by Steen & Strøm between October 9 and 24, 2008, the percentage rises to 78%.
The average duration of fixed rate debt (post hedge) is 4.3 years for an average fixed rate of 4% (excluding credit spread).
Interest-rate hedge profile (Average annual amounts of swaps, collars or fixed-rate debts - M€) 7000 6000 5000 4000 3000 2000 1000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 S&S Klépierre
Situation on October 24, 2008
3- Cost of debt
The historic cost of Klépierre’s debt (ratio of interest expense to average financing debt) over the first three quarters of 2008 was 4.4%, compared with 4.3% on June 30, 2008.
For information, the average cost of the debt of Steen & Strøm over the first half of 2008 was 5.6%, to be assessed in light of high short-term rates in Norway. In the future, it should benefit from its decision to reinforce its interest-rate hedge since the acquisition by Klépierre.
For immediate release – October 28, 2008
SCHEDULE 1
Klépierre Shopping Center Holdings as of September 30, 2008
FRANCE DATE % OWNED RENOVATION/ OF TOTAL RENTAL BY REGION CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION GLA GLA KLEPIERRE Illzach (Mulhouse), Ile 1 ALSACE Napoléon 68 1978 R/E 1999 2001 Carrefour, 57 units 31,852 10,278 83% 2 ALSACE Strasbourg, La Vigie 67 1990 R 1996 1990 Conforama, 5 units 16,205 16,205 37.50% 3 AQUITAINE Bègles, Rives d’Arcins 33 1995 1996 Carrefour, 88 units 63,206 46,379 50% 4 AQUITAINE Bordeaux, Saint-Christoly 33 1985 R 1999/2004 1995 Monoprix, 29 units 8,751 8,678 100% 5 AQUITAINE Libourne, Verdet 33 1973 2001 Carrefour, 14 units 19,195 2,648 83% 6 AQUITAINE Lormont, Rive Droite 33 1973 R 1997 2002 Carrefour, 24 units 29,851 1,794 83% 7 AUVERGNE Clermont-Ferrand, Jaude 63 1980 R 1990 1990 Fnac, 75 units 23,620 16,986 100% 8 AUVERGNE Moulins 3 1978 2001 Carrefour, 21 units 16,615 1,360 83% 9 BASSE-NORMANDIE Caen, Paul Doumer 14 1988 R/E 2004 1994 Fnac, 18 units 5,736 5,736 100% Condé-sur-Sarthe 10 BASSE-NORMANDIE (Alençon) 61 1972 R 1999 2001 Carrefour, 30 units 15,301 3,918 83% 11 BASSE-NORMANDIE Hérouville, Saint-Clair 14 1976 R/E 1995 2001 Carrefour, 80 units 40,469 10,107 83% 12 BOURGOGNE Beaune, Saint-Jacques 21 1975 2003 Champion, 23 units 10,000 3,722 83% 13 BOURGOGNE Marzy (Nevers) 58 1969 R 1999 2001 Carrefour, 38 units 24,172 7,842 83% Quétigny (Dijon),Grand E 1992- R/E 14 BOURGOGNE Quétigny 21 1968 2005 2001 Carrefour, 70 units 46,568 12,701 83% 15 BRETAGNE Brest, Iroise 29 1969 R/E 2007 2001 Carrefour, 49 units 35,988 10,918 83% 16 BRETAGNE Guingamp 22 1974 2001 Carrefour, 10 units 11,836 1,532 83% 17 BRETAGNE Langueux (Saint-Brieuc) 22 1973 R/E 1998 2001 Carrefour, 31 units 24,128 5,987 83% 18 BRETAGNE Lorient, K2 56 1981 2001 Carrefour, 26 units 19,840 4,545 83% 19 BRETAGNE Paimpol 22 1978 2001 Carrefour, 8 units 10,349 1,587 83% 20 BRETAGNE Quimper, Kerdrezec 29 1978 2002 Carrefour, 41 units 23,710 7,714 83% 21 BRETAGNE Rennes Colombia 35 1986 2005 Inno, 72 units 19,176 12,532 100% 22 BRETAGNE Vannes, Le Fourchêne 56 1969 2002 Carrefour, 53 units 26,000 11,478 83% 23 CENTRE Bourges 18 1969 2001 Carrefour, 19 units 21,834 1,660 83% 24 CENTRE Chartres, La Madeleine 28 1967 2001 Carrefour, 15 units 22,239 7,053 83% 25 CENTRE Châteauroux 36 1995 2001 Carrefour, 18 units 18,901 3,473 83% Saran (Orléans), Cap 26 CENTRE Saran 45 1971 R/E 2007 2001 Carrefour, 44 units 26,600 7,451 83% 27 CENTRE Tours, Galerie Nationale 37 1990 1990 Fnac, 34 units 8,266 8,132 100% CHAMPAGNE- 28 ARDENNES Cernay (Reims) 51 1981 2001 Carrefour, 31 units 18,120 1,400 83% CHAMPAGNE- Charleville-Mézières, La 29 ARDENNES Croisette 8 1985 2001 Carrefour, 20 units 14,325 2,596 83% CHAMPAGNE- Reims (Tinqueux), Mont 30 ARDENNES Saint-Pierre 51 1969 2004 Carrefour, 20 units 29,000 5,764 83% CHAMPAGNE- Saint-André-les-Vergers 31 ARDENNES (Troyes) 10 1975 2001 Carrefour, 28 units 13,000 890 83% 32 HAUTE-NORMANDIE Guichainville (Évreux) 27 1970 2001 Carrefour, 16 units 20,900 1,956 83% 33 HAUTE-NORMANDIE Le Havre, Espace Coty 76 1999 2000 Monoprix, 82 units 27,000 18,163 50% 34 ILE-DE-FRANCE Athis-Mons 91 1971 R 1999 2001 Carrefour, 24 units 26,498 3,623 83% Boulogne-Billancourt,Les Passages de l’Hôtel de 35 ILE-DE-FRANCE Ville 92 2001 2001 Inno, 56 units 23,110 23,110 50% 36 ILE-DE-FRANCE Champs-sur-Marne 77 1981 2001 Carrefour, 20 units 14,748 1,753 83%
1-1
37 ILE-DE-FRANCE Claye-Souilly 77 1992 2001 Carrefour, 83 units 48,152 20,241 83% 38 ILE-DE-FRANCE Créteil, Créteil Soleil 94 1974 R/E 2000 1991 Carrefour, 233 units 125,500 73,066 80% 39 ILE-DE-FRANCE Flins-sur-Seine 78 1973 2001 Carrefour, 17 units 41,191 1,646 83% Marne-la-Vallée, Val 40 ILE-DE-FRANCE d’Europe 77 2000 E 2003 2000 Auchan, 135 units 64,759 54,960 55% 41 ILE-DE-FRANCE Melun, Boissénart 77 1977 R 1996/E 2005 1995 Auchan, 55 units 34,500 11,372 100% R/E 42 ILE-DE-FRANCE Montesson 78 1973 1985/1999/2005 2001 Carrefour, 62 units 40,276 10,772 83% 43 ILE-DE-FRANCE Noisy-le-Grand, Arcades 93 1978 R 1992 1995 Carrefour, 132 units 53,346 38,662 79.94% Paris 6e, Marché Saint- 44 ILE-DE-FRANCE Germain 75 1995 1998 Gap, 22 units 3,164 3,162 100% 45 ILE-DE-FRANCE Pontault-Combault 77 1993 R/E 1993 2001 Carrefour, 70 units 38,774 25,442 83% 46 ILE-DE-FRANCE Rambouillet, Bel Air 78 1976 R/E 2007 2001 Carrefour, 45 units 22,400 10,216 83% 47 ILE-DE-FRANCE Sartrouville, Le Plateau 78 1976 E 1999 2001 Carrefour, 35 units 25,274 5,469 83% 48 ILE-DE-FRANCE Sevran, Beau Sevran 93 1973 2003 Carrefour, 98 units 43,809 26,020 83% 49 ILE-DE-FRANCE Stains 93 1972 2001 Carrefour, 22 units 20,120 1,892 83% 50 ILE-DE-FRANCE Villejuif 94 1980 2001 Carrefour, 20 units 13,871 1,564 83% 51 ILE-DE-FRANCE Villiers-en-Bière 77 1990 R 2005 2001 Carrefour, 90 units 65,849 30,436 83% LANGUEDOC- 52 ROUSSILLON Claira (Perpignan) 66 1983 R/E 1997 2002 Carrefour, 31 units 24,985 2,866 83% LANGUEDOC- 53 ROUSSILLON Lattes, Grand Sud 34 1986 R/E 1993 2002 Carrefour, 66 units 37,650 14,080 83% LANGUEDOC- Nîmes Ouest, Grand 54 ROUSSILLON Nîmes 30 1981 R 1997 2001 Carrefour, 29 units 19,834 2,866 83% LANGUEDOC- Nîmes Sud, Porte de 55 ROUSSILLON Camargue 30 1980 2002 Carrefour, 22 units 19,655 1,785 83% LANGUEDOC- Saint-Jean-de-Védas 56 ROUSSILLON (Montpellier) 34 1986 2001 Carrefour, 28 units 16,442 2,341 83% 57 LORRAINE Jeuxey (Épinal) 88 1983 2001 Carrefour, 12 units 21,209 1,917 83% 58 MIDI-PYRENEES Portet-sur-Garonne 31 1972 R/E 1990 2001 Carrefour, 109 units 60,600 24,066 83% 59 MIDI-PYRENEES Toulouse, Blagnac 31 1993 2004 Leclerc, 80 units 19,300 19,206 79.94% 60 MIDI-PYRENEES Toulouse, Saint-Orens 31 1991 2004 Leclerc, 58 units 47,000 11,581 79.94% 61 MIDI-PYRENEES Toulouse, Purpan 31 1991 2006 Carrefour, 36 units 23,600 7,598 83% NORD-PAS-DE- 62 CALAIS Aire-sur-la-Lys, Val de Lys 62 1977 2001 Carrefour, 20 units 11,899 2,362 83% NORD-PAS-DE- Auchy-les-Mines, Porte de 63 CALAIS Flandres 62 1993 2001 Carrefour, 17 units 8,681 1,333 83% NORD-PAS-DE- Aulnoy-les-Valenciennes, 64 CALAIS La Briquette 59 1972 2001 Carrefour, 27 units 20,456 5,293 83% NORD-PAS-DE- 65 CALAIS Calais, Mivoix 62 1973 2001 Carrefour, 22 units 17,576 4,311 83% NORD-PAS-DE- 66 CALAIS Denain, Jean Bart 59 1979 2003 Carrefour, 22 units 13,006 387 83% NORD-PAS-DE- Douai, Flers-en- 67 CALAIS Escrebieux 59 1983 2002 Carrefour, 40 units 27,606 7,238 83% NORD-PAS-DE- 68 CALAIS Fourmies 59 1985 2001 Carrefour, 16 units 11,000 1,795 83% NORD-PAS-DE- 69 CALAIS Hazebrouck 59 1983 2001 Carrefour, 16 units 8,799 1,306 83% NORD-PAS-DE- 70 CALAIS Lomme 59 1984 2001 Carrefour, 34 units 30,204 7,384 83% NORD-PAS-DE- 71 CALAIS Saint-Martin-au-Laërt 62 1991 2001 Carrefour, 11 units 8,452 943 83% NORD-PAS-DE- Valenciennes, Place 72 CALAIS d’Armes 59 2006 2006 Match, 47 units 16,200 15,665 100% 73 PACA Aix-les-Milles, La Pioline 13 1971 R 1997 2001 Carrefour, 33 units 32,617 4,713 83% 74 PACA Antibes 6 1973 2001 Carrefour, 32 units 28,949 4,152 83% Châteauneuf-les- 75 PACA Martigues 13 1973 2001 Carrefour, 20 units 20,831 11,780 83%
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Nouvelles 76 PACA Marseille, Bourse 13 1977 R1991/R1997 1990 Galeries,55 units 29,245 17,282 100% 77 PACA Marseille, Le Merlan 13 1976 R 2006 2003 Carrefour, 54 units 32,330 7,085 100% 78 PACA Nice, Lingostière 6 1978 R 1998 2001 Carrefour, 49 units 35,000 7,190 83% 79 PACA Orange 84 1986 R 1996 2001 Carrefour, 33 units 18,086 3,983 83% 80 PACA Puget-sur-Argens 83 1991 2001 Carrefour, 43 units 20,000 738 83% Trans-en-Provence 81 PACA (Draguignan) 83 1970 R 1993 2001 Carrefour, 28 units 15,926 3,771 83% 82 PACA Vitrolles, Grand Vitrolles 13 1970 2001 Carrefour, 84 units 61,111 24,156 83% 83 PAYS DE LA LOIRE Angers, Saint-Serge 49 1969 E 2006 2001 Carrefour, 28 units 19,319 5,019 83% 84 PAYS DE LA LOIRE Cholet 49 1970 2001 Carrefour, 25 units 12,225 2,268 83% 85 PAYS DE LA LOIRE La Roche-sur-Yon 85 1973 2001 Carrefour, 5 units 9,114 476 83% 86 PAYS DE LA LOIRE Le Mans, Centre Sud 72 1968 2003 Carrefour, 18 units 37,920 1,984 83% 87 PAYS DE LA LOIRE Nantes, La Beaujoire 44 1972 2001 Carrefour, 33 units 28,662 3,642 83% 88 PAYS DE LA LOIRE Saint-Herblain (Nantes) 44 1969 2001 Carrefour, 9 units 15,067 644 83% 89 PICARDIE Amiens 80 1973 2001 Carrefour, 24 units 20,434 3,258 83% 90 PICARDIE Château-Thierry 2 1972 2001 Carrefour, 21 units 11,102 644 83% 91 PICARDIE Laon 2 1990 2001 Carrefour, 29 units 15,136 3,056 83% 92 PICARDIE Venette (Compiègne) 60 1974 2001 Carrefour, 34 units 28,476 5,101 83% POITOU- 93 CHARENTES Angoulins 17 1973 2002 Carrefour, 30 units 23,679 4,084 83% POITOU- Angoulême, Champ de 94 CHARENTES Mars 16 2007 2007 Monoprix, 40 units 15,878 15,878 100% 95 RHONE-ALPES Annecy, Courier 74 2001 2001 Monoprix, 40 units 19,393 13,581 57.4% 96 RHONE-ALPES Bassens (Chambéry) 73 1969 E 1996 2001 Carrefour, 24 units 19,749 2,456 83% Bourg-en-Bresse, Site de 97 RHONE-ALPES Brou 1 1977 2003 Carrefour, 27 units 17,000 2,293 83% 98 RHONE-ALPES Échirolles (Grenoble) 38 1969 R/E 1997 2001 Carrefour, 33 units 28,905 4,695 83% 99 RHONE-ALPES Écully, Grand Ouest 69 1972 R 1997 2001 Carrefour, 78 units 46,078 13,379 83% 100 RHONE-ALPES Givors, Deux Vallées 69 1976 2001 Carrefour, 38 units 32,528 19,557 83% 101 RHONE-ALPES Meylan (Grenoble) 38 1972 2001 Carrefour, 12 units 19,751 1,586 83% 102 RHONE-ALPES Saint-Égrève (Grenoble) 38 1986 R 2006 2001 Carrefour, 22 units 19,260 3,050 83% 103 RHONE-ALPES Valence, Victor Hugo 26 1994 2007 Fnac, 39 boutiques 12,674 10,431 100% Vaux-en-Velin, Les Sept 104 RHONE-ALPES Chemins 69 1988 2001 Carrefour, 35 units 22,772 3,875 83% 105 RHONE-ALPES Vénissieux 69 1966 R/E 2000 2002 Carrefour, 25 units 35,913 2,991 83% SPAIN % OWNED RENOVATION/ DATE OF TOTAL RENTAL BY REGION CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION GLA GLA KLEPIERRE 106 Andalousie Algeciras I, Los Barrios 1980 2001 Carrefour, 31 units 16,852 1,748 83% 107 Andalousie Alméría 1987 2000 Carrefour, 26 units 15,346 990 83% 108 Andalousie Córdoba- Zahira 1977 2000 Carrefour, 17 units 10,608 944 83% La Linea de la 109 Andalousie Concepción, Gran Sur 1991 R/E 2007 2000 Carrefour, 61 units 31,530 7,457 83% 110 Andalousie Granada 1990 2000 Carrefour, 32 units 19,642 2,024 83% 111 Andalousie Huelva 1985 2000 Carrefour, 23 units 16,490 1,602 83% Jerez de la Frontera, 112 Andalousie Jerez Norte 1997 2000 Carrefour, 46 units 23,886 6,950 83% Jerez de la Frontera, 113 Andalousie Jerez Sur 1989 2000 Carrefour, 35 units 24,169 3,330 83% 114 Andalousie Lucena 2002 2003 Carrefour, 17 units 10,000 784 83% 115 Andalousie Málaga I, Alameda 1987 2000 Carrefour, 38 units 22,171 7,550 83% 116 Andalousie Málaga II, Los Patios 1975 R 2004 2001 Carrefour, 57 units 28,302 4,350 83%
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117 Andalousie Séville I, San Pablo 1979 2000 Carrefour, 35 units 21,180 2,404 83% 118 Andalousie Séville II, San Juan 1985 2001 Carrefour, 48 units 16,000 4,223 83% 119 Andalousie Séville III, Macarena 1992 2000 Carrefour, 30 units 18,363 1,883 83% 120 Andalousie Séville IV, Dos Hermanas 1993 2000 Carrefour, 22 units 15,744 1,465 83% 121 Andalousie Séville V, Montequinto 1999 2003 Carrefour, 18 units 11,000 879 83% 122 Aragon Saragosse I, Augusta 1995 2000 Carrefour, 114 units 54,501 24,476 83% 123 Aragon Saragosse II, Actur 1990 2000 Carrefour, 31 units 27,192 5,085 83% 124 Asturies Albacete, Los Llanos 1990 2003 Carrefour, 42 units 19,724 5,479 83% 125 Asturies Lugones, Azabache 1977 2003 Carrefour, 38 units 16,600 4,304 83% Carrefour, Yelmo 126 Asturies Oviedo, Los Prados 2002 2003 Cineplex,87 units 39,200 24,579 83% Palma de Mallorca, 127 Baléares General Riera 1977 2000 Carrefour, 25 units 15,134 592 83% Santa Cruz de Tenerife, Carrefour, Yelmo 128 Canaries Meridiano 2003 2003 Cineplex,117 units 44,650 27,243 83% 129 Cantabrique Santander, El Alisal 2004 2004 Carrefour, 37 units 25,338 14,463 83% 130 Cantabrique Santander, Peñacastillo 1982 2001 Carrefour, 59 units 19,000 10,203 83% 131 Cantabrique Torrelavega 1996 2000 Carrefour, 16 units 18,697 901 83% 132 Castille León León 1990 2003 Carrefour, 26 units 13,012 2,466 83% 133 Castille León Salamanca 1989 2002 Carrefour, 15 units 16,534 794 83% 134 Castille León Valladolid I, Parquesol 1981 2002 Carrefour, 32 units 20,200 3,221 83% 135 Castille León Valladolid II 1995 2000 Carrefour, 22 units 24,133 3,388 83% 136 Catalogne Cabrera del Mar, Cabrera 1980 2001 Carrefour, 32 units 27,582 5,965 83% 137 Catalogne Lerida 1986 2000 Carrefour, 18 units 12,935 471 83% 138 Catalogne Reus 1991 R 2004 2000 Carrefour, 27 units 19,315 2,932 83% 139 Catalogne Tarragona 1975 2000 Carrefour, 20 units 22,661 1,199 83% 140 Estrémadure Badajoz, Granadilla 1990 2000 Carrefour, 20 units 19,386 889 83% 141 Estrémadure Badajoz, Merida 1992 2000 Carrefour, 20 units 13,927 1,048 83% 142 Estrémadure Badajoz, Valverde 1996 2000 Carrefour, 30 units 17,599 2,095 83% Badajoz, Villanueva de la 143 Estrémadure Serena 1995 2000 Carrefour, 14 units 9,095 647 83% 144 Estrémadure Cáceres 1993 2000 Carrefour, 17 units 18,967 1,436 83% 145 Estrémadure Cáceres, Plasencia 1998 2000 Carrefour, 13 units 10,979 815 83% 146 Galice Lugo 1993 2000 Carrefour, 22 units 19,874 1,410 83% 147 Galice Orense 1995 2003 Carrefour, 21 units 10,539 1,034 83% 148 Galice Pontevedra 1998 2003 Carrefour, 21 units 10,600 1,094 83% 149 Madrid Alcalá de Henares 2001 2001 Carrefour, 26 units 9,600 1,667 83% 150 Madrid Alcobendas 1982 2000 Carrefour, 49 units 25,632 3,570 83% El Pinar de Las Rozas, El 151 Madrid Pinar 1981 2000 Carrefour, 38 units 24,779 2,177 83% 152 Madrid Los Angeles 1992 2004 Carrefour, 50 units 17,782 6,956 83% 153 Madrid Móstoles 1992 2000 Carrefour, 33 units 19,552 2,601 83% Pozuelo, Ciudad de la 154 Madrid Imagen 1995 2000 Carrefour, 27 units 20,278 1,936 83% Rivas Vaciamadrid, 155 Madrid Parque Rivas 1999 2002 Carrefour, 26 units 31,744 1,522 83% San Sebastian de los 156 Madrid Reyes 2001 2001 Carrefour, 24 units 12,600 1,455 83% 157 Murcie Cartagena II, Alfonso XIII 1988 2000 Carrefour, 23 units 25,665 1,129 83% Molina de Segura, Vega 158 Murcie Plaza 2005 2006 Supercor, 96 units 16,043 10,666 100% 159 Murcie Murcia II, Zaraiche 1985 2000 Carrefour, 27 units 22,400 1,645 83% 160 Pays basque Bilbao II, Sestao 1994 2000 Carrefour, 24 units 24,738 1,325 83%
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161 Pays basque Oiartzun, San Sebastian 1979 2000 Carrefour, 19 units 19,132 745 83% Carrefour, 40 units 162 Valence Alfafar 1976 2000 dont Conforama 32,070 7,024 83% Alicante, Puerta de Carrefour, Yelmo 163 Valence Alicante 2002 2002 Cineplex,83 units 34,500 20,812 83% 164 Valence Alzira 1991 2000 Carrefour, 25 units 30,232 1,031 83% 165 Valence Benidorm 1989 2000 Carrefour, 25 units 17,979 1,627 83% 166 Valence Campanar 1987 2000 Carrefour, 35 units 23,979 2,502 83% 167 Valence Castellón 1985 2000 Carrefour, 25 units 15,356 820 83% 168 Valence Elche 1983 2000 Carrefour, 18 units 14,167 798 83% 169 Valence Elda-Petrel, Alicante 1989 2001 Carrefour, 33 units 13,000 3,427 83% 170 Valence Gandía 1994 2000 Carrefour, 25 units 17,594 1,460 83% 171 Valence Paterna 1979 2002 Carrefour, 22 units 11,486 1,016 83% 172 Valence Sagunto 1989 2000 Carrefour, 15 units 12,130 981 83% 173 Valence Torrevieja 1994 2000 Carrefour, 21 units 16,129 1,094 83% 174 Valence Villarreal 1995 2000 Carrefour, 18 units 14,800 905 83% 175 Valence Vinaroz 2003 2003 Carrefour, 15 units 10,000 868 100% ITALY DATE % OWNED RENOVATION/ OF TOTAL RENTAL BY REGION CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION GLA GLA KLEPIERRE Citta S. Angelo, Pescara 176 Abruzzes Nord 1995 2002 IPER, 42 units 25,810 11,237 83% 177 Abruzzes Colonnella, Val Vibrata 2000 R/E 2007 2002 IPER, 53 units 27,358 15,728 50% 178 Basilicate Matera 1999 2003 Carrefour, 8 units 10,088 1,637 85% Capodrise, I Giardini deI 179 Campanie Sole 1992 2002 Carrefour, 22 units 18,545 6,327 83% Savignagno s. Rubincone,Romagna 180 Émilie-Romagne Center 1992 2002 IPER, 58 units 32,864 13,090 50% 181 Latium Rome, La Romanina 1992 2002 Carrefour, 95 units 33,926 15,022 83% 182 Latium Rome, Tor Vergata 2004 2005 Carrefour, 65 units 25,793 11,704 100% 183 Lombardie Assago (Milan) 2004 E 2005 2005 Carrefour, 95 units 47,624 24,857 100% 184 Lombardie Brembate (Bergame) 1977 2002 IPER, 17 units 12,855 2,084 50% 185 Lombardie Cremone, Cremona Due 1985 2002 IPER, 32 units 14,779 6,067 50% 186 Lombardie Giussano, Gran Giussano 1997 E 2006 2002 Carrefour, 44 units 19,098 8,206 83% 187 Lombardie Grandate 1999 2002 IPER, 16 units 10,076 2,316 50% Montebello Della 188 Lombardie Battaglia,Montebello 1974 E 2005 2002 IPER, 56 units 33,107 16,748 50% 189 Lombardie Novate, Metropoli 1999 1999 Ipercoop, 80 units 27,374 16,594 85% Paderno Dugnano, R/E 1995 R 190 Lombardie Brianza 1975 2006 2002 Carrefour, 70 units 36,126 15,361 83% 191 Lombardie Roncadelle, Le Rondinelle 1996 1998 Auchan, 77 units 32,095 13,657 85% 192 Lombardie Seriate, Alle Valli 1990 R/E 2001 2002 IPER, 36 units 26,948 7,233 50% 193 Lombardie Settimo Milanese, Settimo 1995 2003 1999 Coop, 31 units 11,107 9,744 85% 194 Lombardie Solbiate, Le Bettule 2002 R 2006 2005 IPER, 22 units 17,321 4,257 100% 195 Lombardie Varese, Belforte 1988 E 2006 2002 IPER, 35 units 23,554 7,732 50% 196 Lombardie Vignate, Acquario Center 2002 2003 Ipercoop, 56 units 35,918 20,067 85% 197 Lombardie Lonato, Il Leone di Lonato 2007 2008 Iper, 111 units 45,229 30,169 50% 198 Marches Pesaro, Rossini Center 2000 2002 IPER, 35 units 20,151 8,601 50% 199 Piémont Burolo (Turin) 1995 2002 Carrefour, 11 units 10,475 968 83% 200 Piémont Collegno, La Certosa 2003 2003 Carrefour, 37 units 19,484 6,190 100% 201 Piémont Moncalieri (Turin) 1998 R/E 2000 2002 Carrefour, 29 units 12,795 7,324 83%
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Serravalle Scrivia, 202 Piémont Serravalle 2003 2004 IPER, 28 units 19,067 8,027 100% 203 Piémont Turin, Montecucco 1989 2002 Carrefour, 11 units 9,669 1,122 83% 204 Piémont Vercelli 1987 2002 Carrefour, 23 units 12,534 1,746 83% E 2002 E 2007- 205 Pouilles Bari 1997 2008 2003 Carrefour, 20 units 16,535 3,912 100% 206 Pouilles Lecce, Cavallino 2001 2005 Carrefour, 27 units 17,388 5,806 100% 207 Toscane Massa, Mare e Monti 1995 R 2007 2002 Carrefour, 41 units 17,465 7,213 83% 208 Vénétie Thiene (Vincenzo) 1993 2002 Carrefour, 37 units 20,947 5,707 83% 209 Vénétie Verona 2006 2008 Iper, 64 units 28,396 15,698 50% HUNGARY DATE % OWNED RENOVATION/ OF TOTAL RENTAL BY CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION GLA GLA KLEPIERRE Match, Cinema City, 210 Budapest, Csepel Plaza 1997 2004 66 units 13,624 13,624 100% Match, Palace 211 Budapest, Duna Plaza 1996 R 2002 2004 Cinema,177 units 37,098 37,098 100% Debrecen, Debrecen Match, Cinema City, 212 Plaza 1999 2004 70 units 14,644 14,644 100% Match, Cinema City, 213 Gyor, Gyor Plaza 1998 2004 72 units 15,295 15,295 100% Match, Palace 214 Kaposvar, Kaposvar Plaza 2000 2004 Cinema, 47 units 8,311 8,311 100% Match, Cinema City, 215 Miskolc, Miskolc Plaza 2000 2004 89 units 14,738 14,738 100% Nagykanizsa, Kanizsa CBA, Palace 216 Plaza 2000 2004 Cinema, 37 units 7,566 7,566 100% Palace Cinema, 217 Nyiregyhaza, Nyir Plaza 2000 2004 CBA, 71 units 13,777 13,777 100% CBA, Cinema City, 218 Szeged, Szeged Plaza 2000 2004 83 units 15,580 15,580 100% Székesfehérvar, Alba Cinema City, 75 219 Plaza 1999 2004 units 15,189 15,189 100% Cinema City, 36 220 Szolnok, Szolnok Plaza 2001 2004 units 6,921 6,921 100% Cinema City, Tempo Supermarket, 46 221 Zalaegerszeg, Zala Plaza 2001 2004 units 7,418 7,418 100% PORTUGAL DATE % OWNED RENOVATION/ OF TOTAL RENTAL BY CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION GLA GLA KLEPIERRE 222 Braga, Minho center 1996 2006 Carrefour, 68 units 30,531 9,604 100% Leroy Merlin, Cinema Gondomar, Parque Lusomundo,152 223 Nascente 2003 2003/2007 units 63,501 46,754 100% 224 Loures 2002 2002 Carrefour, 70 units 36,000 17,369 100% 225 Telheiras 1990 2003 Carrefour, 33 units 40,888 13,617 100% 226 Villa Nova de Gaïa 1990 2003 Carrefour, 35 units 21,909 5,178 100%
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POLAND DATE % OWNED RENOVATION/ OF TOTAL RENTAL BY CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION GLA GLA KLEPIERRE Carrefour, Cinema City,Fantasy Park, 227 Krakow, Krakow Plaza 2001 2005 143 units 30,441 30,441 100% Stokrotka, Cinema City,Fantasy Park, 228 Lublin, Lublin Plaza 2007 2007 105 units 23,691 23,691 100% Piotr & Pawel, Cinema City,Fantasy Park, 229 Poznan, Poznan Plaza 2005 2005 139 units 29,453 29,453 100% Carrefour, Cinema Ruda Slaska, Ruda City, Fantasy Park, 230 Slaska Plaza 2001 2005 58 units 14,412 14,412 100% Stokrotka, Cinema City,Fantasy Park, 231 Rybnik, Rybnik Plaza 2007 2007 74 units 18,057 18,057 100% Sosnowiec, Sosnowiec 232 Plaza 2007 2007 Stokrotka, 69 units 13,157 13,157 100% Carrefour, Cinema Warszawa, Sadyba Best City,Fantasy Park, 233 Mall 2000 2005 111 units 27,360 27,360 100% BELGIUM DATE % OWNED RENOVATION/ OF TOTAL RENTAL BY CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION GLA GLA KLEPIERRE Louvain-la-Neuve, Delhaize, UGC, 132 234 L’Esplanade 2005 2005 units 57119 56,432 100% SLOVAKIA DATE RENOVATION/ OF TOTAL RENTAL % OWNED BY CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION SCU SCU KLEPIERRE 235 Bratislava, Danubia 2000 2001 Carrefour, 46 units 26,114 12,314 100% CZECH REPUBLIC DATE % OWNED RENOVATION/ OF TOTAL RENTAL BY CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION SCU SCU KLEPIERRE Tesco, Palace 236 Prague, Novy Smichov 2001 2003 Cinema,149 units 57,107 38,379 100% Tesco, Cinema City, Prague, Novodvorska Fantasy Park, 115 237 Plaza 2006 2006 units 26,635 26,635 99% GREECE DATE % OWNED RENOVATION/ OF TOTAL RENTAL BY CITY/CENTER DEPT FOUNDED EXPANSION ACQUISITION COMPOSITION SCU SCU KLEPIERRE 238 Athènes, Athinon 2002 2003 Carrefour, 13 units 11,709 1,609 83% 239 Patras 2002 2003 Carrefour, 25 units 16,790 8,040 83% Carrefour, Ster Century Cinema, 240 Larissa 1994 E 2002 2007 Bowling, 27 units 26,714 13,129 100% 241 Thessalonique, Efkarpia 1995 2003 Carrefour, 15 units 12,212 802 83% Carrefour, Ster Century Cinema, 242 Thessalonique, Makedonia 2000 R 2005 2001 Bowling, 34 units 27,487 14,437 83%
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SCHEDULE 2
Retail Property Holdings (Klémurs) as of September 30, 2008
COMMERCIAL ASSETS AS OF 09/30/2008 Retailer Region Assets GLA ALSACE 3 Buffalo Grill restaurants 1 601
AQUITAINE 3 Buffalo Grill restaurants 2 111
AUVERGNE 1 Buffalo Grill restaurant 635
BASSE NORMANDIE 2 Buffalo Grill restaurants 1 212
BOURGOGNE 4 Buffalo Grill restaurants 1 943
BRETAGNE 10 Buffalo Grill restaurants 5 053
CENTRE 7 Buffalo Grill restaurants 3 492
CHAMPAGNE ARDENNE 4 Buffalo Grill restaurants 2 067
FRANCHE COMTE 4 Buffalo Grill restaurants 2 166
HAUTE NORMANDIE 5 Buffalo Grill restaurants 2 812 BUFFALO GRILL ILE-DE-FRANCE 37 Buffalo Grill restaurants 22 603
LANGUEDOC ROUSSILLON 5 Buffalo Grill restaurants 2 623
LORRAINE 10 Buffalo Grill restaurants 5 374
MIDI PYRENEES 4 Buffalo Grill restaurants 2 030
NORD PAS DE CALAIS 15 Buffalo Grill restaurants 8 750
PACA 6 Buffalo Grill restaurants 3 346
PAYS DE LA LOIRE 8 Buffalo Grill restaurants 4 280
PICARDIE 8 Buffalo Grill restaurants 4 642
POITOU CHARENTES 2 Buffalo Grill restaurants 964
RHONE ALPES 13 Buffalo Grill restaurants 7 344
151 Buffalo Grill restaurants 85 047
AQUITAINE 7 DEFI MODE shops 7 107
4 DEFI MODE shops AUVERGNE 2 other retail shops 5 559
BASSE NORMANDIE 1 DEFI MODE shop 1 037
BOURGOGNE 9 DEFI MODE shops 8 806
BRETAGNE 1 DEFI MODE shop 748
4 DEFI MODE shops CENTRE 1 King Jouet shop 5 453
4 DEFI MODE shops CHAMPAGNE ARDENNE 2 other retail shops 5 745 DEFI MODE / VIVARTE FRANCHE-COMTE 3 DEFI MODE shops 3 028 HAUTE NORMANDIE 2 DEFI MODE shops 2 053 ILE-DE-FRANCE 1 DEFI MODE shop 1 155
LANGUEDOC ROUSSILLON 3 DEFI MODE shops 3 070
LIMOUSIN 2 DEFI MODE shops 1 767
LORRAINE 8 DEFI MODE shops 8 217
7 DEFI MODE shops MIDI PYRENEES 4 other retail shops 10 782
NORD-PAS-DE-CALAIS 1 DEFI MODE shop 1 038
5 DEFI MODE shops PAYS DE LA LOIRE 1 Chausséa shop 4 966
PICARDIE 3 DEFI MODE shops 2 962
RHONE-ALPES 2 DEFI MODE shops 2 251
67 DEFI MODE shops 75 742
10 other retail shops KLECAPNOR Assets - 11 Mondial Moquette shops - 3 Heytens shops - 2 King Jouet shops France entière - 10 various retails shops 26 assets 20 231
Diversified Assets Rochefort-sur-Mer, Avranches et Various retail shops such as La Halle, Messac Gémo, Leader Price and malin Plaisir 14 assets 13 752
BHV Flandre Paris BHV shops 1 asset 7 752
Truffaut Paris Truffaut shop 1asset 3 606
Rouen Candé Rouen Various rue de Champmeslé retailer shops enseignes 8 assets 2 848
Sephora Avignon-Metz Sephora shops 2 assets 1 177
280 assets 210 155
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SCHEDULE 3
Klépierre Office Property Holdings as of September 30, 2008
City Address Description Surface
7-story building with 2 underground levels. In the heart of the financial district facing the PARIS 2nd 46, rue Notre-Dame des Victoires* 7,995 m² stock exchange. Completed in 1991. It offers high quality, unique technical features. Prestigious real estate complex comprised of three buildings in sandstone (pierre de taille). 23/25, rue de Marignan / 38 rue PARIS 8th Completely restructured in 1999. This building 8,489 m² Marbeuf has high-end features (air conditioning, floating floors, 2 parking levels). 7-story building with 4 underground levels PARIS 8th 36 rue Marbeuf built in the 1970s (air conditioning, 2 parking 3,326 m² levels). Acquired in 2001. Haussman-style building in the center of the PARIS 9th 7, rue Meyerbeer Opéra area, with 2 underground levels, used 4,189 m² for commercial and office purposes. Real estate complex comprised of two 5- and 7- story buildings with 2 underground levels. PARIS 15th 141, rue de Javel 5,969 m² Paris Central Completed in 1993, it is entirely air- Business District conditioned. Building built in 1969 and renovated in 1995. (CBD) PARIS 15th 43, quai de Grenelle 12,433 m² Entirely air-conditioned. 7-story building with 4 underground levels, and a shared subsidized staff cantine PARIS 15th 1 bd Victor - Le Barjac 7,317 m² completed in 1993. It has good quality technical features. Acquired in 2001. Building delivered end of 1998. Proximity to PARIS 16th 18/20, rue La Pérouse the Arc de Triomphe, this building has top rate 3,251 m² technical features. Very attractive 5 story building with 3 PARIS 16th 21, rue La Pérouse 2,076 m² underground levels. Entirely rebuilt in 1999. This building was restructured in 1999 and is located 150 m from the Etoile. With its 8 PARIS 16th 23/25, avenue Kléber 9,851 m² stories and 5 underground levels, it has high quality features. Close to the Etoile, this 5-story building with 1 PARIS 16th 21, avenue Kléber underground level built in 1900 was partially 1,933 m² rebuilt in 1999. Building constructed in 1990. It includes 7 Other Paris PARIS 12th 5 bis, bd Diderot stories with 2 underground levels. Air 7,028 m² conditioning system installed in 1999. Real estate complex comprised of 2 buildings 9/9 bis, rue Henri Martin - Les of 2 and 6 stories with 2 underground levels. BOULOGNE 92 3,702 m² Jardins des Princes Built in 1996, this building is entirely air- conditioned. Acquired in 2001. ISSY-LES- 2 buildings with 7 stories and 4 underground 46, rue Camille Desmoulins - ZAC MOULINEAUX levels. Delivered on 16/12/2002 and on 17,038 m² Forum Seine 92 08/06/2004. Jointly held 9-story building (Immeuble en LA DEFENSE Collines de l’Arche indivision) (30.44%) with 4 underground 2,572 m² 92 Suburbs levels, built in 1990. 100 m from the hôtel de ville, this 7 story LEVALLOIS 92 11/11 bis, place du Général Leclerc building with 4 underground levels was 5,833 m² completed in 1997. Building constructed in 1992. It has 7 stories LEVALLOIS 92 105, rue Anatole France with 4 underground levels. Air-conditioned. 3,127 m² Jointly held (En indivision) (50%). Recently built prestigious real estate complex NEUILLY 92 192, avenue Charles de Gaulle featuring modern equipment in co-ownership 13,670 m² at one corner of the Neuilly Bridge.
3-1
Registered Office of the Company
KLEPIERRE 21, avenue Kléber 75116 Paris, France
Legal Advisers
To the Company as to French and U.S. law
Cleary Gottlieb Steen & Hamilton LLP 12, rue de Tilsitt 75008 Paris, France
To the Underwriter as to French and U.S. law
Linklaters LLP 25, rue de Marignan 75008 Paris, France
Statutory Auditors
To the Company
Deloitte & Associés Mazars & Guérard 185, Avenue Charles de Gaulle 61, rue Henri Regnault 92200 Neuilly sur Seine 92075 La Défense Cedex France France