2012/13. Preliminary announcement of financial statements. Frederikssund, Denmark. Company announcement no. 9/ April 2013

Transcription

1 PHOTO: SILLEBROEN, shopping centre Frederikssund, Denmark TK Development A/S CVR NO Company announcement no. 9/ April 2013 Preliminary announcement of financial statements 2012/13 financial statements 2012/13 Tk Development A/S 1/65

2 Table of contents Page 3 Summary 6 Consolidated financial highlights and key ratios 7 Adjusted strategy and market focus 9 Results for 2012/13 and outlook for 2013/14 19 Market conditions 22 Business concept and knowledge resources 26 Property development 31 Asset management 37 Discontinuing activities 38 Financial targets 39 Risk issues 45 Shareholders 49 Corporate governance 52 Statutory annual corporate social responsibility statement 53 The Supervisory Board 57 The Executive Board 58 Statement by the Supervisory and Executive Boards on the Annual Report 59 Independent auditor s report 60 Consolidated financial statements 65 Company information 2/65 Tk Development A/S Financial statements 2012/13 Table of contents

3 Summary Results for 2012/13 TK Development recorded results of DKK million before tax for the 2012/13 financial year, compared to DKK 14.3 million for the year before. Results were negatively affected by value adjustments of investment properties and the impairment of projects, totalling DKK million. This performance reflects the recent results estimate of about DKK -300 million. The impairment itself does not impact the cash flow position. Excluding value adjustments/impairment, the results before tax amount to DKK -0.3 million. Based exclusively on the activities targeted by the Group s future strategy and market focus, the results before tax and value adjustments/impairment amount to DKK 9.2 million. In the 2012/13 financial year, deferred tax assets were written down by an amount of DKK million, a substantial portion of which is attributable to the Group s Danish tax asset. In June 2012, a Bill proposing changes to the rules for tax loss carryforwards was passed. For TK Development, this has considerably lengthened the time horizon for utilizing tax losses, and thus significantly increased the uncertainty relating to utilization of the tax asset. On the basis of the changed rules, TK Development identified a need to impair the Group s Danish tax asset by DKK million, which was already recognized in Q1 2012/13 and thus forms part of the total writedown for impairment. The results after tax amounted to DKK million, against DKK 27.0 million in 2011/12. Consolidated equity totalled DKK 1,389.7 million at 31 January 2013, corresponding to a solvency ratio of 34.7 %. Management considers the results for the year to be highly unsatisfactory. Review of sales strategy In December 2012, Management decided to review the Group s sales strategy. TK Development had long experienced an unsatisfactory market response to its efforts to sell completed projects and investment properties due to sluggish demand. The lack of completed project sales means a substantial portion of the Group s financial resources is tied up in completed projects. This in turn causes difficulties in allocating the capital necessary for securing progress in new projects to be executed on the land in the Group s portfolio. In order to harness the long-term, substantial development potential believed by Management to be inherent in several of the Group s projects, it was decided to revise the sales strategy with a view to realizing faster sales. The changed sales strategy consists of the following elements: Completing the sale of selected, completed projects and investment properties, even at reduced prices. Downsizing the portfolio of land by selling selected plots that are not essential to TK Development s future strategy. Making several writedowns for impairment of the Group s projects, distributed as shown below, which led to substantially negative results in the 2012/13 financial year. Freeing up cash resources through sales, enabling the Group to strengthen its financial platform. Procuring financial resources through sales to regenerate momentum and to realize the substantial development potential inherent in several of the Group s projects. The changed sales strategy involves writedowns for the impairment of projects, investment properties and the portfolio of land totalling DKK million, distributed among the following main groups: Impairment of the project portfolio as a consequence of the decision to realize project sales as described above, a total of DKK million. Impairment of the project portfolio, including the decision to sell land, due in part to the difficult market conditions in the residential segment in Poland, a total of DKK million. Other impairment based on market conditions and a longer time horizon for developing and maturing individual projects than previously anticipated, a total of DKK 67.0 million. Summary financial statements 2012/13 Tk Development A/S 3/65

4 SUMMARY Regardless of the difficult market conditions, Management finds it highly unsatisfactory having to make the writedowns for impairment described above. 2012, the retail park was handed over to the Swedish property company Nordika Fastigheter AB for a price of SEK 110 million. Adjusted strategy and market focus Concurrently with the decision to change the sales strategy, Management initiated a review of the Group s business areas for the purpose of assessing its future market platform, including the countries in which the Group will continue to operate, and the possibility of trimming costs further. As described in company announcement no. 6/2013 of 11 March 2013, Management has now completed this review and adopted a changed strategy consisting of the following elements: In addition to its primary business area, Property Development, TK Development will have a secondary business area, Asset Management, to consist of owning, operating, running in, maturing and optimizing completed projects for a medium-long operating period. Asset management will be performed on TK Development s own books or for third parties. TK Development has chosen a market focus that targets the countries expected to contribute with longterm, profitable operations in future: Denmark, Sweden, Poland and the Czech Republic. TK Development will phase out its activities in Finland, Germany, the Baltic States and Russia. The Group s portfolio of projects not initiated (plots of land) will be reduced over a two-year period to about DKK 0.5 billion. Over a two-year period, the balance sheet will be adjusted so as to ensure a solvency ratio of about 40 %. Overheads will be reduced by around 20 %, with half of the reduction deriving from the discontinuation of activities in several countries. Internal and external reporting will be changed to create a better overview and highlight values and value generation in the Group s business areas. It is Management s belief that once implemented, these measures will enable the Group to generate satisfactory returns for its shareholders in future. Property development In the Swedish town of Gävle, TK Development has developed a retail park of about 8,300 m². Construction of the retail park was completed in October In November In July 2012, TK Development entered into a conditional agreement with Heitman regarding the sale of two Polish projects amounting to a total project value of EUR 95 million. The sale comprises a 70 % stake in the Group s Galeria Tarnovia shopping centre in Tarnów and a new development project in Jelenia Góra. TK Development realized a minor profit on the completion of this sale and freed up cash resources. In addition, future profits will be generated in the form of fee income from the jointly owned company established for developing, letting and managing the construction of the development project. This sale was completed at the end of The Group s ownership interests in the projects have been reclassified as Investment properties and Investment properties under construction, respectively. The first phase of the Group s project in Bielany, Poland, has been completed. The total project area comprises about 56,200 m², primarily housing consisting of 900-1,000 units, with 136 being built in the first phase. The sluggishness of the Polish residential market has affected the sales process, with sales agreements having been signed for about 69 % of the units in the first phase. The Group s project portfolio in the property development area comprised 452,000 m² at 31 January 2013 (31 January 2012: 635,000 m²). Asset management The total portfolio of own properties under asset management, which thus generates cash flow, comprised 138,250 m² and amounted to DKK 1,932.1 million at 31 January 2013, of which investment properties accounted for DKK million. The annual net rent from the current leases corresponds to a return on the carrying amount of 6.7 %. Based on full occupancy, the return on the carrying amount is expected to reach 7.9 %. The operation of these properties is generally proceeding satisfactorily, and overall the footfall and revenue in the centres are developing positively. Market conditions The main challenge currently facing the property sector is the difficult access to financing. Uncertainty on the inter- 4/65 Tk Development A/S Financial statements 2012/13 Summary

5 SUMMARY national financial markets continues to adversely affect the property sector, leading to consistently long decision-making processes among financing sources, tenants and investors alike. The Group will make the startup of major new projects contingent on obtaining either full or partial financing for them and on freeing up cash resources from the sale of several major completed projects. Financial issues At the forthcoming Annual General Meeting, the Supervisory Board will request authorization to carry out a capital increase with gross proceeds of about DKK million. The capital increase will help generate the cash resources required to underpin future operations and project flow, and thus long-term earnings. The capital increase has been discussed with the Group s major shareholders, who, together with a few major private and institutional investors, have given conditional subscription and underwriting commitments for the total capital increase. The Group s main banker has indicated its preparedness to prolong TK Development s credit facilities subject to specific conditions being met, which includes reducing the operating credit limit by DKK 50 million. The prolongation is expected to be formally accepted immediately after publication of TK Development s Annual Report 2012/13. to credit institutions, including project finance loans granted by a number of the Company s major shareholders and members of Management. Outlook for 2013/14 Management anticipates positive results before tax for the continuing activities for the 2013/14 financial year. The timing and progress of the phase-out of the discontinuing activities are subject to major uncertainty, and the results of these activities are therefore not included in the outlook for next year. As mentioned above, Management has revised the sales strategy for the Group s projects and chosen to accept reduced prices for selected project sales. Thus, Management considers it important for the Group to sell some of its completed projects and plots of land in the 2013/14 financial year. The expectations mentioned in this announcement, including earnings expectations, are naturally subject to risks and uncertainties, which may result in deviations from the expected results. Various factors may impact on expectations, as outlined in the section Risk issues, particularly the valuation of the Group s project portfolio. Further information is available from Frede Clausen, President and CEO, on tel Of the total project credits outstanding at 31 January 2013, credits worth DKK 1.5 billion are due to mature in the 2013/14 financial year, including continuing repayment obligations on individual project credits of about DKK 80 million. After the reporting date, agreements regarding the refinancing of DKK 0.2 billion have been made. Moreover, the Group s main banker and other credit institutions have indicated their preparedness to prolong existing credit facilities. When final commitments in this respect have been received, credit facilities of DKK 1.1 billion will have been prolonged, and credit facilities of DKK 0.3 billion will be due to mature in 2013/14. The Group depends on being able to continue obtaining either a prolongation or alternative financing of the project credits not expected to be repaid upon project sales. The Group is in ongoing dialogue with the relevant credit institutions, and Management anticipates being able to either prolong or refinance these project credits. Some of the proceeds from the capital increase or the cash freed up on the sale of major completed projects will help reduce the debt Summary financial statements 2012/13 Tk Development A/S 5/65

6 Consolidated financial highlights and key ratios DKKm 2008/ / / / /13 FINANCIAL HIGHLIGHTS: Net revenue 1, , Value adjustment of investment properties, net Gross profit/loss Operating profit/loss (EBIT) Financing, etc Profit/loss before tax and writedowns, etc. 98,7 53,8 48,2-1,2-0,3 Profit/loss before tax Profit/loss for the year Balance sheet total 3, , , , ,009.3 Property, plant and equipment of which investment properties/investment properties under construction Total project portfolio 2, , , , ,030.9 Contract work in progress Equity 1, , , , ,389.7 Cash flows from operating activities Net interest-bearing debt, end of year 1, , , , ,206.1 KEY RATIOS: Return on equity (ROE) 10.5 % 1.6 % 4.3 % 1.4 % % EBIT margin 18.8 % 4.2 % 21.1 % 18.2 % % Solvency ratio (based on equity) 39.5 % 36.4 % 40.4 % 40.4 % 34.7 % Equity value in DKK per share Price/book value (P/BV) Number of shares, end of year 28,043,810 28,043,810 42,065,715 42,065,715 42,065,715 Average numbers of shares, adjusted 28,043,810 28,043,810 35,095,222 42,065,715 42,065,715 Earnings per share (EPS) in DKK Dividend in DKK per share Listed price in DKK per share KEY RATIOS ADJUSTED for warrants: Return on equity (ROE) 10.5 % 1.6 % 4.3 % 1.4 % % Solvency ratio (based on equity) 39.5 % 36.4 % 40.4 % 40.4 % 34.7 % Equity value in DKK per share Diluted earnings per share (EPS-D) in DKK The calculation of key ratios was based on the 2010 guidelines issued by the Danish Society of Financial Analysts. 6/65 Tk Development A/S Financial statements 2012/13 Consolidated financial highlights and key ratios

7 Adjusted strategy and market focus In connection with presenting its Interim Report for Q1-Q3 2012/13 in December 2012, TK Development announced that the Company s Management would initiate a review of the Group s business areas for the purpose of assessing its future market platform, including the countries in which the Group will continue to operate, and the possibility of trimming costs further. Initiatives to restore a viable business model In Management s opinion, attractive earnings can be generated by implementing development projects when taking into account the new levels of determining variables in property development: Land prices, construction costs, occupancy level and investors return requirements. As described in company announcement no. 6/2013 of 11 March 2013, this review has now been completed, and at a board meeting on 11 March 2013, i.e. after the reporting date, the Supervisory Board adopted the revised strategy and business model outlined below. The Group s mission will be the same The Group s mission The overall mission of TK Development is to create added value by developing real property. The Group operates in the property development and services environments, and specializes in being the creative and result-oriented link between tenants and investors. Adjusted strategy In addition to its primary business area, property development, the Group will have a constant portfolio of completed projects that it will run in/mature to optimize the project value. At times, this secondary business area may represent a vast balance sheet total and significantly affect the Group s results. The two business areas comprise: Property development Developing projects from the conceptual phase through to project completion, based on one of several models: a) Sold projects Forward funding Forward purchase b) Projects with partners c) On TK Development s own books based on a high degree of confidence in the letting and sales potential d) Services for third parties. Asset management Owning, operating, maturing and optimizing completed projects for a medium-long operating period whose length matches the potential for generating sufficient added value. Asset management will be performed on TK Development s own books and also for third parties. Management is also of the opinion that asset management activities can yield attractive earnings in future, with the maturing of own projects playing a particularly vital role for obtaining optimum selling prices. However, the current challenging market conditions, combined with the Group s own circumstances, require calibrating a number of factors with a view to enhancing the Group s ability to create value and thus to restore a viable business model as well as an attractive investment case for the Group s shareholders. Management has decided to implement the following adaptations: 1. Focusing on the countries that are expected to contribute with long-term, profitable operations in future: Denmark, Sweden, Poland and the Czech Republic. 2. Phasing out the activities in Finland, Germany, the Baltic States and Russia. The phase-out with the resulting closure of offices and dismissal of employees will be carried out as soon as possible, but while taking into account that all the countries in question have projects that need to be handled optimally so as to avoid an unnecessary erosion of values. 3. Reducing the portfolio of projects not initiated (plots of land) over a two-year period from the current level of DKK 1.1 billion to a level of DKK 0.5 billion. 4. Reducing overheads by about 20 %, with half of the reduction deriving from the discontinuation of activities in Germany, the Baltic States and Finland. The aim is to increase the solvency ratio to a level of about 40 %. As part of fulfilling this target, TK Development will strive to secure cheaper financing for the Group. At the forthcoming Annual General Meeting, the Supervisory Board will request authorization to carry out a capital increase with gross proceeds of about DKK million. Management Commentary financial statements 2012/13 Tk Development A/S 7/65

8 ADJUSTED STRATEGY AND MARKET FOCUS Changes to internal and external reporting Management has decided to change the Group s internal and external reporting to create a better overview and highlight values and value generation in the Group s business areas. The business segments will be structured as follows: Property development activities Asset management activities Discontinuing activities. The reporting will be based on property development and asset management activities, which will be the two main future business segments. The activities being phased out will be termed discontinuing activities, and will be considered a separate segment for reporting purposes. The management commentary in this announcement uses this segmentation. Where will the Group be in two years? The transformation process to implement the resolved initiatives is expected to take two years, after which the Group is assumed to be in the following position: The remaining activities will be limited to Denmark, Sweden, Poland and the Czech Republic. The portfolio of projects not initiated (plots of land) will have been reduced from about DKK 1.1 billion to about DKK 500 million. The balance sheet will have been adjusted, with a solvency ratio of about 40 %. Financing costs will have been normalized as a result of the initiatives implemented. A platform for normalized earnings will have been established. The changes to reporting will have provided a better overview of the Group s activities, values, value creation and expected development. Organizational focus on segments and risks To underpin the segmentation chosen, it has been decided to organize the business activities so as to best ensure management focus on both property development and asset management activities. The Group will strengthen its risk management by striving only to initiate projects based on a strict awareness that the expected earnings will match the project s complexity, completion time, tied-up capital and other use of resources. The portfolio composition and the size of individual projects relative to the balance sheet total and the Company s equity are other significant elements in the Group s risk management system. 8/65 Tk Development A/S Financial statements 2012/13 Management Commentary

9 Results for 2012/13 and outlook for 2013/14 TK Development recorded results of DKK million before tax, which reflects the recent results estimate of about DKK -300 million before tax. Results after tax amounted to DKK million. In the 2011/12 financial year, TK Development recorded a profit of DKK 14.3 million before tax and DKK 27.0 million after tax. At the beginning of the financial year, TK Development anticipated positive results before tax for 2012/13, and Management considers the realized results highly unsatisfactory. Results were negatively affected by value adjustments of investment properties and the impairment of projects, totalling DKK million. The value adjustments and impairment losses themselves do not impact the cash flow position. Excluding value adjustments/impairment, the results before tax amount to DKK -0.3 million. Based exclusively on the activities targeted by the Group s future strategy and market focus, the results before tax and value adjustments/impairment amount to DKK 9.2 million. The balance sheet total amounted to DKK 4,009.3 million at 31 January 2013 against DKK 4,639.5 million at 31 January Consolidated equity totalled DKK 1,389.7 million, and the solvency ratio stood at 34.7 %. The results for 2012/13 and the balance sheet total at 31 January 2013 broken down by the new segments adopted by the Supervisory Board appear from the tables below. The results and balance sheet total for each segment, including a more detailed account of the elements of the individual business areas/segments, are described on pages The Property Development segment is described on pages The description includes information about the development potential of TK Development s project portfolio, including an outline of the individual development projects. The Asset Management segment is described on pages The description contains information about TK Development s own properties under asset management, including an outline of the operation and customer influx for the individual projects. The Discontinuing activities are described on page 37, which provide more details about TK Development s properties and projects in the countries where Management has decided to phase out activities. Therefore, the financial review below contains a description of the results and balance sheet total at group level only. RESUlTS 2012/13 (DKKm) Profit/loss 2012/13 Property Development Asset Management Discontinuing Activities Unallocated Revenue Gross profit/loss Costs Operating profit/loss Financing, net Profit/loss before tax and writedowns, etc. -0,3 44,1 70,0-9,5-104,9 Profit/loss before tax Tax on profit/loss for the year Profit/loss for the year The balance sheet structure appears from the next page. Management Commentary financial statements 2012/13 Tk Development A/S 9/65

10 RESULTS FOR 2012/13 AND OUTLOOK FOR 2013/14 Balance sheet structure at 31 January 2013 (DKKm) Balance sheet 31 Jan 2013 Property Development Asset Management Discontinuing Activities Unallocated Assets Investment properties Investment properties under construction Other non-current assets Projects in progress or completed 3, , , Receivables Deposits in blocked and escrow accounts, etc ,1 Cash and cash equivalents Assets 4, , , Equity and liabilities Equity 1, Credit institutions 2, , Other liabilities Equity and liabilities 4, , , Solvency ratio 34.7 % 44.1 % 33.9 % 55.1 % % Accounting policies The consolidated financial statements and parent financial statements for 2012/13 for the Group and TK Development A/S, respectively, are presented in compliance with the International Financial Reporting Standards (IFRS), as adopted by the EU, and in accordance with Danish disclosure requirements for annual reports of listed companies. The consolidated financial statements and parent financial statements for 2012/13 have been presented in accordance with the financial reporting standards (IFRS/IAS) and IFRIC interpretations applicable for financial years beginning at 1 February The implementation of amended financial reporting standards and interpretations entering into force in 2012/13 has not impacted recognition and measurement in the consolidated financial statements and thus has no effect on the earnings per share and the diluted earnings per share. The accounting policies have been consistently applied compared to the 2011/12 financial year. The consolidated financial statements and parent financial statements are presented in DKK million, unless otherwise stated. DKK is the presentation currency for the Group s activities and the functional currency of the Parent Company. Income statement Revenue The revenue for 2012/13 totalled DKK million against DKK million in 2011/12. The revenue stems from the sale of projects, rental and fee income, etc. Overview of handed-over projects Q1 2012/13 Handover of a minor project in Aarhus, Denmark, which included a supermarket for Rema1000. Q2 2012/13 Handover of the final and second phase of a retail park in Kristianstad, Sweden. In addition to an existing building of about 4,500 m², which was handed over to the investor in April 2011, the total project comprises an extension of about 1,700 m², sold to the same investor. The fully-let extension was completed and handed over to the investor in May Completion of a 9,950 m² extension to the Futurum Hradec Králové shopping centre in the Czech Republic, owned 10/65 Tk Development A/S Financial statements 2012/13 Management Commentary

11 RESULTS FOR 2012/13 AND OUTLOOK FOR 2013/14 by a joint venture between GE Capital, Heitman and TK Development in which TK Development has a 20 % ownership interest. The newly built premises opened as scheduled on 10 May TK Development has received fees from the jointly owned company for letting and construction management. Q3 2012/13 Completion and handover of a minor retail project in Viborg, Denmark, tenanted by Harald Nyborg. The project has been sold to private investors. Q4 2012/13 Sale and handover of an 8,300 m 2 retail park in the Swedish town of Gävle. Following completion of construction in October 2012, the retail park was handed over in November 2012 to the Swedish property company Nordika Fastigheter AB for a price of SEK 110 million. The current occupancy rate is 94 % (Q1-Q3 2012/13: 94 %), and lease agreements have been concluded with Rusta, Jysk, Stadium Outlet and Ö&B. Moreover, TK Development has an option to buy a plot of land for developing additional retail park premises of about 15,800 m². Completion of conditional agreement with Heitman regarding the sale of two Polish projects: the Group s Galeria Tarnovia shopping centre in Tarnów and a new development project in Jelenia Góra. The agreement means that Heitman has acquired a 70 % shareholding in the two Polish projects. Reference is made to the following page for a further description of the agreement. Gross margin The gross margin for the 2012/13 financial year amounted to DKK million against DKK million in 2011/12. The gross margin derives from the operation of the Group s completed projects, the operation and value adjustment of the Group s investment properties, profits on handed-over projects and impairment of the project portfolio. The gross margin was negatively affected by value adjustments of investment properties and writedowns for the impairment of projects totalling DKK million, of which DKK 16.6 million relates to Q4 2012/13. At the end of December 2012, as announced in TK Development s Interim Report for Q1-Q3 2012/13, Management decided to revise the Group s sales strategy with a view to realizing faster sales. The Group had long experienced an unsatisfactory market response to its efforts to sell completed projects and investment properties due to sluggish demand. The lack of completed project sales means a substantial portion of the Group s financial resources is tied up in completed projects. This in turn causes difficulties in allocating the capital necessary for securing progress in new projects to be executed on the land in the Group s portfolio. In order to harness the long-term, substantial development potential believed by Management to be inherent in several of the Group s projects, it was decided in December 2012 to revise the sales strategy with a view to realizing faster sales. The changed sales strategy consists of the following elements: Completing the sale of selected, completed projects and investment properties, even at reduced prices. Downsizing the portfolio of land by selling selected plots that are not essential to TK Development s future strategy. Making several writedowns for impairment of the Group s projects, distributed as shown below, which led to substantially negative results in the 2012/13 financial year. Freeing up cash resources through sales, enabling the Group to strengthen its financial platform. Procuring financial resources through sales to regenerate momentum and to realize the substantial development potential inherent in several of the Group s projects. The changed sales strategy involves writedowns for the impairment of projects, investment properties and plots of land totalling DKK million, distributed among the following main groups: Impairment of the project portfolio as a consequence of the decision to realize project sales as described above, a total of DKK million, of which DKK 37.8 million is attributable to investment properties. Impairment of the project portfolio, including the decision to sell land, due in part to the difficult market conditions in the residential segment in Poland, a total of DKK million. Other impairment based on market conditions and a longer time horizon for developing and maturing individual projects than previously anticipated, a total of DKK 67.0 million. Impairment in Q4 2012/13 relates mainly to discontinuing activities, including the Group s German investment properties. Impairment of the project portfolio as a consequence of the deci- Management Commentary financial statements 2012/13 Tk Development A/S 11/65

12 RESULTS FOR 2012/13 AND OUTLOOK FOR 2013/14 agreement with Heitman regarding the sale of two Polish projects In July 2012, TK Development entered into a conditional agreement with Heitman regarding the sale of two Polish projects amounting to a total project value of EUR 95 million. The sale comprises the Group s Galeria Tarnovia shopping centre in Tarnów and a new development project in Jelenia Góra. The agreement was finally completed in December The agreement means that Heitman has acquired a 70 % shareholding in the two Polish projects. TK Development realized a minor profit on the completion of this sale and freed up cash resources. In addition, future profits will be generated in the form of fee income from the jointly owned company established for developing, letting and managing the construction of the development project. Galeria Tarnovia, shopping centre, Tarnów, Poland The selling price for the Galeria Tarnovia shopping centre is in the EUR 40 million range. The current debt financing of the project will be maintained, and Heitman will make equity financing available to the company in proportion to its ownership interest. As a result of the sale, TK Development will generate a minor profit on the project and free up cash resources. Shopping centre, Jelenia Góra, Poland TK Development has bought a plot of land in Jelenia Góra and has an option on additional land for the development of a shopping centre of about 24,000 m². The project will comprise a supermarket of about 2,200 m² and retail, restaurant and service premises totalling about 21,800 m². The local plan for the area is in place and the letting of premises has started. Construction is expected to commence in 2013, and the shopping centre is scheduled to open in Heitman has taken over a 70% stake in the project at its current stage of development, and in future the project, including construction, will be developed in cooperation with Heitman. The total project value is expected to be in the EUR 55 million range. The partnership will allow more efficient use of the Group s resources and improve its equity allocation, in that Heitman - upon the fulfilment of the conditions - will make equity financing available in proportion to its ownership interest. The agreement involves further maturing Galeria Tarnovia as well as running in and maturing the shopping centre in Jelenia Góra following its opening, scheduled for The intention is to subsequently resell the projects. According to the parties agreement, a resale may take place after a three-year period following conclusion of the agreement. The agreement will give Heitman a preferential return, while TK Development will be entitled to a performance-based share of any additional proceeds on the resale of the projects. In addition, TK Development will generate fee income from the jointly owned company established for developing, letting and managing the construction of the development project. The overall agreement with Heitman falls in line with the Group s business model, according to which TK Development wishes to enter into partnerships regarding completed properties and new development projects, and thus to improve the allocation of the Company s equity, diversify risks and better utilize the Group s development competencies. TK Development s ownership interests in the projects will be reclassified as Investment properties and Investment properties under construction, respectively. 12/65 Tk Development A/S Financial statements 2012/13 Management Commentary

13 RESULTS FOR 2012/13 AND OUTLOOK FOR 2013/14 sion on project sales amounts to DKK million, of which DKK 37.8 million is attributable to investment properties; see below. The remaining portion of writedowns for impairment relates in part to the Group s Czech Fashion Arena Outlet Center project in Prague. In order to secure future operations, project flow and earnings, Management has attached great importance to realizing projects and simultaneously freeing up cash resources to strengthen the Group s financial platform. Management has therefore revised the Group s sales strategy with a view to realizing faster sales and consequently accepting project sales at reduced prices. The writedowns for impairment have been made on this basis. Impairment of the project portfolio, including the decision to sell land, due in part to the difficult market conditions in the residential segment in Poland, amounts to DKK million. This impairment is primarily a consequence of Management s decision to attempt reducing the portfolio of land by means of selling selected plots. Management wishes to reduce the Group s risk attaching to the Polish residential project in Bielany, Warsaw, which is expected to have an unsatisfactorily long time horizon in the current challenging market. Thus, Management has decided to attempt selling some of this land. It is assessed that the sale of land without project execution will entail a loss relative to the carrying amount, and this loss has been included in the valuation of the impairment made. A minor part of the writedowns for impairment relates to the lower selling prices of residential units than anticipated in the first phase of the project and is a consequence of the sluggish market as well as the price adjustments resulting from the large supply of new housing for sale, among other factors. Other impairment based on market conditions and a longer development and maturing horizon for individual projects than previously anticipated amounts to DKK 67 million and is partly attributable to the Group s stake in Ringsted Outlet. Despite steadily increasing revenue and footfall at Ringsted Outlet, Management has had to acknowledge that the continued difficult market conditions partly due to consistently long decision-making processes among tenants have delayed the running-in and maturing of the outlet centre. Regardless of the difficult market conditions, Management finds it highly unsatisfactory having to make the writedowns for impairment described above. Concurrently with the decision to change the sales strategy, Management initiated a review of the Group s business areas for the purpose of assessing its future market platform, including the countries in which the Group will continue to operate, and the possibility of trimming costs further. Management has now completed this review, and at a board meeting on 11 March 2013, i.e. after the reporting date, the Supervisory Board adopted a revised strategy and business model, which is outlined above. It is Management s belief that once implemented, these measures will enable the Group to generate satisfactory returns for its shareholders in future. The value adjustment of the Group s investment properties amounted to DKK million against DKK 36.7 million in 2011/12. DKK million of this value adjustment relates to the Czech investment property Futurum Hradec Králové, including the extension of the same property completed in May Futurum Hradec Králové is owned in a joint venture with GE Capital and Heitman. The joint venture has decided to attempt selling the property. Based on the ongoing sales process, Management has chosen to change the valuation of the property, recognizing the negative value adjustment in the second quarter of 2012/13. The scope of housing projects launched in Warsaw is now diminishing, and over time the supply of housing is expected to stabilize. It remains difficult for individual buyers to obtain satisfactory home purchase loans because the banks require high borrower equity. Therefore, buyers are showing a preference for lower-priced areas to obtain more floor space. For this reason, Management has chosen to prioritize another of the Group s residential projects in a lower-priced area of Warsaw. The startup of the remaining part of the Bielany project will be postponed until market conditions have improved. The value adjustment of the German investment properties amounts to DKK million, which relates mainly to ongoing sales negotiations, as Management considers it essential to downscale the German activities with particular reference to the adjusted strategy and market focus. Staff costs and other external expenses Staff costs and other external expenses amounted to DKK 99.4 million for the year under review against DKK million in 2011/12, a reduction of about 22 %. Staff costs amounted to DKK 69.2 million against DKK 92.9 million the year before, a decline of about 25 %. The number of employees totalled 112 at 31 January 2013, including employees working at operational shopping centres. Other external expenses amounted to DKK 30.2 million, a 13 % reduction compared to 2011/12. Management Commentary financial statements 2012/13 Tk Development A/S 13/65

14 RESULTS FOR 2012/13 AND OUTLOOK FOR 2013/14 In connection with the adjustment of the Group s strategy and market focus, see above, Management has trimmed costs so as to reduce overheads by a further 20%, half of which will derive from the discontinuation of the Group s activities in Germany, Finland and the Baltic States. Development in costs: / / / / / /14 (E) Costs, DKKm Costs (2008/09 = Index 100) /15 (E) Financing TK Development realized net financing expenses of DKK 87.4 million against DKK 83.6 million in 2011/12. Tax on profit/loss for the year Tax on the results for the year amounts to DKK million, which includes impairment of the Group s deferred tax assets totalling DKK million. A substantial portion of this impairment is attributable to the Group s Danish tax asset as a result of changed tax rules; see under Deferred tax assets below. Development in results 1,500 1, on the impairment test made, Management has found no indications of impairment of goodwill. Investment properties and investment properties under construction TK Development s investment properties consist of: Futurum Hradec Králové, shopping centre, the Czech Republic (a 20 % interest). Galeria Tarnovia, shopping centre, Tarnów, Poland (a 30 % interest). German investment properties. The total value of the Group s investment properties amounted to DKK million against DKK million at 31 January DKK million of the value at 31 January 2013 is attributable to the Group s German investment properties, which are described in more detail in the section Discontinuing activities below. The two remaining investment properties belong to the asset management segment and are described in more detail under that heading. The Czech investment property, the Futurum Hradec Králové shopping centre, is owned in a joint venture with GE Capital and Heitman. TK Development has access to a performance-based share of the value adjustments on the property, which has been included in the carrying amount. The joint venture has decided to attempt selling the property and has initiated the sales process. As in the previous quarters, the valuation as at 31 January 2013 has been made on the basis of the ongoing sales process. The valuation at 31 January 2013 resulted in a negative value adjustment of DKK 24.3 million, which was recognized in the second quarter of 2012/ / / / / /13 Revevue, DKKm Operating profit/loss, DKKm Balance sheet The Group s balance sheet total amounts to DKK 4,009.3 million, which is a decline of DKK million compared to 31 January 2012, equal to 13.6 %. An extension of the Futurum Hradec Králové shopping centre, comprising about 9,950 m², has been built. Construction progressed according to plan, and the extension opened as scheduled on 10 May At the beginning of the financial year, the extension was classified under Investment properties under construction, but was transferred to Investment properties in the second quarter of 2012/13 following the completion of construction and the opening of the extension. Thus, the extension is included in the above-mentioned carrying amount. Goodwill Goodwill is unchanged compared to 31 January 2012, amounting to DKK 33.3 million at the reporting date. The goodwill relates to the Group s activities in Poland and the Czech Republic in Euro Mall Holding A/S, a subgroup of TK Development. Based TK Development s 30 % ownership interest in Galeria Tarnovia has been valued at fair value based on completion of the sale to Heitman of 70 % of the property in December 2012; see above. TK Development s investment properties under construction consist of the Group s ownership interest in the Jelenia Góra 14/65 Tk Development A/S Financial statements 2012/13 Management Commentary

15 RESULTS FOR 2012/13 AND OUTLOOK FOR 2013/14 development project in Poland. TK Development has bought a plot of land in Jelenia Góra and has an option on additional land for the development of a shopping centre of about 24,000 m². The project will comprise a supermarket of about 2,200 m² and retail, restaurant and service premises totalling about 21,800 m². The local plan for the area is in place and the letting of premises has started. Construction is expected to commence in 2013, and the shopping centre is scheduled to open in In December 2012, 70 % of the project was handed over to Heitman, see above, and in this connection the Group s 30 % ownership interest was classified as an Investment property under construction. No value adjustment of the investment property was made at 31 January 2013, as the parties are awaiting final permits for the project and further clarification of the building phase, including the timing of construction startup, construction period, etc. Deferred tax assets Deferred tax assets were recorded at DKK million in the balance sheet against DKK million at 31 January In the 2012/13 financial year, deferred tax assets were written down by DKK million. A substantial portion of this amount is attributable to the reduction of the Group s Danish tax asset resulting from changed rules for tax loss carryforwards. In June 2012, a Danish Bill proposing changes to the rules for tax loss carryforwards was passed. This means that only 60 % of losses from previous income tax years in excess of DKK 7.5 million are deductible from the year s taxable income. For TK Development, this has considerably lengthened the time horizon for utilizing tax losses and significantly increased the uncertainty relating to utilization of the tax asset. On the basis of the changed rules, TK Development identified a need to impair the Group s Danish tax asset by DKK million, which was already recognized in Q1 2012/13 and thus forms part of the total impairment of the Group s deferred tax assets. The valuation of the tax assets is based on existing budgets and profit forecasts for a five-year period. For the first three years, budgets are based on an evaluation of specific projects in the Group s project portfolio. The valuation for the next two years is based on specific projects in the project portfolio with a longer time horizon than three years as well as various project opportunities. Due to the substantial uncertainties attaching to these valuations, provisions have been made for the risk that projects are postponed or not implemented and the risk that project profits fall below expectations. A change in the conditions and assumptions for budgets and profit forecasts, including time estimates, could result in the value of the tax assets being lower than that computed at 31 January 2013, which could have an adverse effect on the Group s results of operations and financial position. Project portfolio The total project portfolio came to DKK 3,030.9 million against DKK 3,498.1 million at 31 January The decline amounts to DKK million and derives from an increase in the project portfolio related to the Group s projects in progress and completed during the period coupled with a decline resulting from the sale of projects and writedowns for impairment made; see above. Total prepayments based on forward-funding agreements were DKK million at 31 January 2013, compared to DKK million at 31 January Forward funding increased mainly due to the accumulated forward funding and prepayments on projects in progress. At 31 January 2013, forward funding represented 91.1 % of the gross carrying amount of sold projects. The Group s total portfolio of completed projects and investment properties amounted to DKK 2,132 million at 31 January 2013 (31 January 2012: DKK 2,394 million), and the Group s net interest-bearing debt amounted to DKK 2,206 million (31 January 2012: DKK 2,245 million). 2, % 1, % 1, % 88 % 94 % Net interest-bearing debt, DKKm Debt relative to projects Investment properties and completed projects, DKKm Receivables Total receivables amounted to DKK million, a decline of DKK 21.3 million from 31 January 2012 that relates mainly to contract work in progress and other receivables. Cash and cash equivalents Cash and cash equivalents amounted to DKK 31.2 million against DKK 55.1 million at 31 January The Group s total cash resources, see note 35 in the Annual Report, came to DKK 70,1 million against DKK million at 31 January Management Commentary financial statements 2012/13 Tk Development A/S 15/65

16 RESULTS FOR 2012/13 AND OUTLOOK FOR 2013/14 Equity The Group s equity came to DKK 1,389.7 million against DKK 1,876.4 million at 31 January million). The negative cash flows result from a reduction of payables to credit institutions coupled with the financing raised for project investments. Since 31 January 2012, equity has partly been affected by the results for the period and positive market-value adjustments after tax of DKK 5.7 million related to foreign subsidiaries and hedging instruments. The solvency ratio amounts to 34.7 %. Equity and solvency ratio 2,000 1,500 1, % 36.4 % 40.4 % 59 % 40.4 % 34.7 % Financial issues At the forthcoming Annual General Meeting, the Supervisory Board will request authorization to carry out a capital increase with gross proceeds of about DKK million. The capital increase will help generate the cash resources required to underpin future operations and project flow, and thus long-term earnings. The capital increase has been discussed with the Group s major shareholders, who, together with a few major private and institutional investors, have given conditional subscription and underwriting commitments for the total capital increase. The more specific terms and conditions governing the capital increase have not yet been determined. The terms and conditions will be described in detail in the prospectus to be published in connection with the capital increase Jan Jan Jan Jan Jan 13 Equity, DKKm Solvency ratio Non-current liabilities The Group s non-current liabilities represented DKK million against DKK million at 31 January The decline is primarily attributable to debt owing to credit institutions. Current liabilities The Group s current liabilities represented DKK 2,478.6 million against DKK 2,567.4 million at 31 January The decline is primarily attributable to payables to credit institutions and trade payables. The Group s short-term debt to credit institutions consists of operating and project credits. TK Development has entered into a general agreement with the Group s main banker about both types of credit. The agreement and the associated conditions are renegotiated once a year, and Management expects the agreement to continue; see below. The Group s main banker has indicated its preparedness to prolong TK Development s credit facilities subject to specific conditions being met, which includes reducing the operating credit limit by DKK 50 million. The prolongation is expected to be formally accepted immediately after publication of TK Development s Annual Report 2012/13. Cash flow statement The Group s cash flows from operating activities were positive in the amount of DKK 45.6 million (2011/12: DKK million). This amount is a combined result of a reduction of funds tied up in projects due to project sales, new project investments, interest and tax paid, as well as other operating items. The Group s cash flows from investing activities were positive in the amount of DKK 6.4 million (2011/12: DKK 9.8 million), which is primarily a combined result of additional investments in the extension of the Group s Czech investment property completed in May 2012 and the sale of a minor investment property in Germany. The cash flows from financing activities for the year were negative in the amount of DKK 76.2 million (2011/12: DKK 32.3 In addition, the Group has entered into project-financing agreements with various banks in Denmark and abroad. Project credits are usually granted with different terms to maturity, depending on the specific project. During the year under review, the Group was in continuous dialogue with a few credit institutions regarding the postponement of repayment obligations on project credits until one or more of the major completed projects have been sold, and agreements regarding the postponement of such repayments have now fallen into place. Of the total project credits outstanding at 31 January 2013, credits worth DKK 1.5 billion are due to mature in the 2013/14 financial year, including continuing repayment obligations on individual project credits of about DKK 80 million. After the re- 16/65 Tk Development A/S Financial statements 2012/13 Management Commentary

17 RESULTS FOR 2012/13 AND OUTLOOK FOR 2013/14 porting date, agreements regarding the refinancing of DKK 0.2 billion have been made. Moreover, the Group s main banker and other credit institutions have indicated their preparedness to prolong existing credit facilities. When final commitments in this respect have been received, credit facilities of DKK 1.1 billion will have been prolonged, and credit facilities of DKK 0.3 billion will be due to mature in 2013/14. The Group depends on being able to continue obtaining either a prolongation or alternative financing of the project credits not expected to be repaid upon project sales. The Group is in ongoing dialogue with the relevant credit institutions, and Management anticipates being able to either prolong or refinance these project credits. Some of the proceeds from the capital increase or the cash freed up on the sale of major completed projects will help reduce the debt to credit institutions, including project finance loans of DKK 68.5 million granted by a number of the Company s major shareholders and members of Management. Transactions with related parties No major or unusual transactions were made with related parties in the first six months of the 2012/13 financial year. In the third quarter of 2012/13 related parties granted the Group a loan of DKK 10 million for project financing. In the fourth quarter of 2012/13, TK Development entered into an agreement regarding partial financing of the Group s shopping centre project in Esbjerg, BROEN, via an overall financing package to be provided by a number of major shareholders in the Company, including members of Management and other related parties; see NASDAQ OMX Copenhagen A/S definition of this term. For disclosures about transactions with related parties according to IFRS, please see note 36 in the Annual Report. Parent Company, TK Development A/S In 2012/13, TK Development A/S, the Parent Company, realized results before tax of DKK million against DKK million in 2011/12. The results after tax amounted to DKK million against DKK million the year before. Tax on the results for 2012/13 was materially affected by the impairment of the Company s deferred tax assets due to the changed rules for tax loss carryforwards adopted in June The results include income from investments in group enterprises in the amount of DKK million against DKK 73.9 million the year before. In addition, earnings consist mainly of net financing income from loans to subsidiaries. In 2012/13, TK Development made writedowns for impairment of investments in group enterprises in the amount of DKK million (2011/12: DKK 0.0 million). Accumulated impairment relating to investments in group enterprises amounted to DKK million at 31 January 2013 (31 January 2012: DKK million). At 31 January 2013, the balance sheet total amounted to DKK 2,058.6 million, a decline of DKK million over the year before. Equity totalled DKK 1,868.6 million at 31 January 2013, a decline of DKK million relative to 31 January This decline is mainly attributable to the profit recorded for the year. Outlook for 2013/14 Management anticipates positive results before tax for the continuing activities for the 2013/14 financial year. The timing and progress of the discontinuation of activities are subject to major uncertainty, and the results of the discontinuation are therefore not included in the outlook for next year. As mentioned above, Management has revised the sales strategy for the Group s projects and chosen to accept reduced prices for selected project sales. Thus, Management considers it important for the Group to sell some of its completed projects and plots of land in the 2013/14 financial year. The expectations mentioned in this announcement, including earnings expectations, are naturally subject to risks and uncertainties, which may result in deviations from the expected results. Various factors may impact on expectations, as outlined in the section Risk issues, particularly the valuation of the Group s project portfolio. Subsequent events After the reporting date, TK Development has sold one of the Group s minor German investment properties to a German investor. Other than those mentioned in the management commentary, no major events of relevance to the Company have occurred after the reporting date. The Supervisory Board The Supervisory Board is currently composed of six members. The Supervisory Board members have elected Niels Roth as Chairman and Torsten Erik Rasmussen as Deputy Chairman. At the Annual General Meeting, the Supervisory Board will propose that the Supervisory Board should remain composed of six members. Torsten Erik Rasmussen, Jens Erik Christensen and Jesper Jarlbæk will not stand for re-election at the forthcoming Annual General Meeting. The remaining Supervisory Board members are prepared to stand for re-election, and moreover the Supervisory Board proposes that Arne Gerlyng-Hansen, CEO of Harald Nyborg A/S, Morten Astrup, founding partner and CIO of Storm Capital Management Ltd., London, and Kim Management Commentary financial statements 2012/13 Tk Development A/S 17/65

18 RESULTS FOR 2012/13 AND OUTLOOK FOR 2013/14 Mikkelsen, CEO of Strategic Capital ApS, be elected to take the vacant seats on the Supervisory Board. The new members recommended for approval at the Annual General Meeting represent major shareholders of TK Development. Arne Gerlyng-Hansen is a member of the legal profession and has been the CEO of Harald Nyborg A/S since He is also on the supervisory board of Dava 1 ApS, a major shareholder of TK Development. Arne Gerlyng-Hansen has core competencies in retail trade, legal affairs, management and business development, qualifications considered particularly important by the Supervisory Board when nominating him as a candidate. Arne Gerlyng-Hansen will be considered an independent member of the Supervisory Board. Morten Astrup is the founding partner and CIO of Storm Capital Management Ltd. and deputy chairman of the supervisory board of Storm Real Estate ASA, a major shareholder of TK Development. Morten Astrup has core competencies in real estate investment, financing and business development, qualifications considered particularly important by the Supervisory Board when nominating him as a candidate. Morten Astrup will be considered an independent member of the Supervisory Board. Kim Mikkelsen has a financial background and is the CEO of Strategic Capital ApS, a major shareholder of TK Development. Kim Mikkelsen has core competencies in financial affairs, investment and management, qualifications considered particularly important by the Supervisory Board when nominating him as a candidate. Kim Mikkelsen will be considered an independent member of the Supervisory Board. Dividends The Supervisory Board recommends to the Annual General Meeting that no dividends be distributed for the 2012/13 financial year. The full Annual Report is downloadable from TK Development s website, as from 30 April /65 Tk Development A/S Financial statements 2012/13 Management Commentary

19 Market conditions The Group has operated under difficult market conditions in recent years, resulting in protracted decision-making processes among financing sources, tenants and investors alike. The Danish market in particular has been affected by prolonged uncertainty, and continues to be so, partly because of a weakened financial sector. In Management s opinion, there are no indications of a significant improvement during the period to come. The market conditions in TK Development s markets and the impact of the financial crisis on land prices, construction costs, rental levels, prices for completed properties and access to financing, have not changed significantly during the past months. The above-mentioned variables have stabilized at a new price level, and new projects are expected to be sold at the profits realized before the crisis, thus generating a gross margin of % measured on the basis of project cost. However, a low profit is expected to be realized on projects already completed. The access to project financing remains difficult and is currently the greatest challenge facing the property sector. The financial sector is weakened and has sharpened its focus on credit risks, and at the same time new rules have imposed stricter capital requirements on banks. This means that credit institutions remain reluctant to provide loans to finance real property, with a resulting negative effect for the property sector, and thus TK Development as well. TK Development is dependent on its ability to continue obtaining either full or partial project financing, either from credit institutions or from investors in the form of forward funding, and on freeing up substantial cash resources from the sale of several major completed projects. In the letting market for retail property, tenants continue to focus on location. TK Development is experiencing a good amount of interest in prime-location projects, and several strong national and international retail chains are expanding, although decision-making processes are protracted in light of the unrest on international financial markets. The rental level is expected to remain fairly stable in the period ahead. However, the rental level for secondary locations is expected to be under pressure. In the residential segment in Warsaw, Poland, demand is sluggish and prices have realigned due to the large supply of new housing for sale, among other factors. The scope of housing projects launched in Warsaw is now diminishing, and over time the supply of housing is expected to stabilize. Therefore, in the opinion of Management, housing development in Poland will become attractive again, particularly in the Warsaw area. The macroeconomic indicators in the form of GDP, private consumption and unemployment are showing moderate growth expectations in all the Group s markets. The Group has a strong platform in its continuing markets and focuses on exploiting the unrealized potential on all markets through existing retailer and investor networks. With special emphasis on the retail segment, the Group consistently strives to strengthen the project portfolio in each of its markets and to ensure satisfactory progress of its existing projects and new project opportunities. The Management of TK Development has long experienced an unsatisfactory market response to the Group s efforts to sell completed projects and investment properties due to sluggish demand. Despite this trend, 2012 saw cautious investor optimism and increased interest in investing in selected segments of retail projects, with quality and location being key factors in the investment decision. However, the decision-making processes continue to be lengthy, in part because of the investors requirement for lower project risk. Institutional investors need options for placing their funds, and this paves the way for setting up partnerships with such investors for the purpose of cooperating on the execution of new projects. These opportunities fall in line with the Group s business model, according to which TK Development wishes to enter into partnerships regarding completed properties and new development projects, and thus to improve the allocation of the Company s equity, diversify risks and better utilize the Group s development competencies. DEnmark Economic growth in Denmark remains low, and a high growth rate is not foreseen in the near future. In recent years, the unemployment rate has been fairly stable and is expected to remain at an unchanged level in the years to come. The Danish market has been affected by prolonged uncertainty, and continues to be so, partly because of the weakened financial sector. Thus, access to project financing remains difficult and is the greatest challenge facing the property sector. In Denmark, TK Development focuses on the retail segment, which is also expected to remain the primary segment in the years ahead. The main emphasis will be on establishing district and shopping centres in cities and medium-sized towns, and TK Development is working on several project opportunities within this area. Another interest area will be the office market in major towns and cities. Management Commentary financial statements 2012/13 Tk Development A/S 19/65

20 MARKET CONDITIONS Investors continue to show reasonable interest in the Group s retail, office and residential projects at attractive locations in major towns and cities. At the same time, investor interest in secondary towns is waning. Location and quality are the two key determinants of investment decisions. The Group can obtain satisfactory selling prices for prime-location properties where the risk of vacancies is relatively limited, while selling prices for properties in secondary locations are under pressure. Institutional investors and other professional investors need options for placing their funds. This paves the way for setting up new project partnerships with these investors with a view to cooperation on project execution. In the retail letting market, tenants also focus on the right location. Both supermarket chains and retail chains are still willing to expand if the location is right, although their decision-making processes are protracted. The rental level for primary locations is expected to be fairly stable, whereas the rental level for secondary locations is under pressure. for retail chains to expand in cities, particularly Stockholm and Gothenburg, but also in other major towns in Sweden. Stockholm continues to record high annual population growth. This results in a demand for new retail establishments and retail store extensions, as concerns both retail parks and shopping centres. Both local and international investors are showing mounting interest, particularly in prime locations, and the selling prices for such projects are on the rise. Sweden is considered to be the most transparent and interesting market in the Nordic region, and given the continued retail expansion, the Swedish market is highly interesting for TK Development. TK Development intends to focus on developing prime-location superstores and shopping centres in major towns and cities, with Stockholm and Gothenburg being the primary areas of interest. Denmark startup in e 2014e GDP (% yr./yr.) Private consumption (% yr./yr.) Unemployment (%) (Source: Nordea, March 2013) After a period of low activity, the office market is picking up, with projects in major towns and cities attracting greater interest. Projects in prime locations, such as those in the Group s waterfront areas, appeal to tenants and investors alike, and the Group expects to create interesting projects in the years to come. Examples of such projects include the Group s locations at Amerika Plads in Copenhagen and Stuhrs Brygge in Aalborg. Sweden The Swedish market is characterized by the strong Swedish economy and high purchasing power, although the growth rate in 2012 was lower than the year before. Real earnings have risen sharply in the past few years, and increased growth and higher private consumption are forecast for the years ahead. As in previous years, TK Development will focus on the retail segment in Sweden. Retail chains are interested in attractive rental premises, although tenants decision-making processes are also protracted in the Swedish market. New foreign retail chains continue to expand. Project location continues to be the paramount consideration for tenants, and the trend is clearly Sweden startup in e 2014e GDP (% yr./yr.) Private consumption (% yr./yr.) Unemployment (%) (Source: Nordea, March 2013) Poland The Group has a well-developed network of contacts with many local and international retail chains looking to expand into Central Europe. In addition, the Group works closely with investors, including international investment funds, looking to invest in Central European property projects. The outlook for the Polish market remains positive, even though the macroeconomic indicators show a weaker growth trend than in previous years. Strong national and international retail chains still wish to expand, with location being the key focus as in the Group s other markets. Generally, prime-location retail premises in major towns and cities are in high demand, while tenants want to vacate their secondary-location premises. Although it is still possible to pre-let planned shopping centres in attractive locations, the letting process is longer due to tenants protracted decision-making. As the market for shopping centres matures, new development options are expected to arise, also making projects to extend and/or revitalize existing centres attractive. 20/65 Tk Development A/S Financial statements 2012/13 Management Commentary

21 MARKET CONDITIONS Investors focus chiefly on major towns and cities in Poland and continue to show reasonable interest in prime-location projects or in projects with development potential. Poland - startup e 2014e GDP (% yr./yr.) Private consumption (% yr./yr.) Unemployment (%) (Source: Nordea, March 2013) Czech Republic - startup e 2014e GDP (% yr./yr.) Private consumption (% yr./yr.) Unemployment (%) (Source: The European Commission, European Economic Forecasts, Winter 2013) The Group s business platform also includes the residential market in Poland. There are still opportunities for developing and selling attractive housing, particularly in the Warsaw area. Warsaw continues to develop and bolster its position as Poland s commercial hub, resulting in a constant demand for more and newer dwellings. Numerous opportunities exist for executing projects in attractive locations. The market remains challenging as a large number of new residential buildings are still being constructed in Poland, including in Warsaw, and the supply of housing for sale, whether already constructed or under construction, is high. The price level has been declining slightly over a period, but is expected to remain fairly stable for small residential units in Warsaw in the time ahead, as the scope of residential projects launched in Warsaw is now diminishing. Thus, the supply of housing is expected to stabilize over time. Buyers are showing a preference for lower-priced areas to obtain more floor space. Czech Republic The economic situation in the Czech Republic is characterized by low growth and declining private consumption. A slight recovery is foreseen in the near future, and investors are once more showing interest in real property investments. International funds focus on major projects, while local investors are showing interest in minor projects. TK Development focuses on the retail segment and still experiences reasonable demand for leases in attractive projects. The continuing trend is for the establishment of retail projects in town centres or close to traffic hubs. The expectation for the years to come is for more new shopping centres to be established and for existing centres to be revitalized/and or extended. Supermarket chains are also expected to continue expanding. TK Development will concentrate on projects in medium-sized towns and in cities. Management Commentary financial statements 2012/13 Tk Development A/S 21/65

22 Business concept and knowledge resources The Group s mission The overall mission of TK Development is to create added value by developing real property. The Group operates in the property development and services environments, and specializes in being the creative and result-oriented link between tenants and investors. Fundamental values TK Development bases its operations on a number of fundamental values that are the Group s hallmarks. They define the framework for the actions of TK Development s employees and the values that TK Development wants to signal. Good business sense Being result-oriented Innovation and creativity Being trustworthy Keeping it simple Commitment Strategy for business unit Property development Developing projects from the conceptual phase through to project completion, based on one of several models: Sold projects (forward funding / forward purchase) Projects with partners On TK Development s own books based on a high degree of confidence in the letting and sales potential Services for third parties. Strategy for business unit - Asset management Owning, operating, maturing and optimizing completed projects for a medium-long operating period that matches the potential for adding value both for the Group and for third parties. Business concept The Group s primary business area is the development of real property, termed property development, and the Group s secondary business area is asset management. Property development The Group has strong networks forged on the basis of long-standing, close business relationships with tenants and investors, and regularly enters into contracts with these business partners. The Group is predominantly a knowledge-based service provider and has specialized in being the productive and creative liaison between tenants, investors, architects, construction companies and other business partners. TK Development wants to be the preferred property development partner in the retail segment, with the interaction with customers, tenants and investors being based on know-how and mutual confidence. In collaboration with tenants and investors, TK Development plans and arranges the construction of new buildings, and the expansion and conversion of real property based on tenant needs and investor requirements. The Group develops the projects, which involves letting the premises, managing construction and concluding contracts with construction companies and subcontractors for the execution of the building works. In terms of segments, the Group focuses on the development of shopping centres, superstores and corporate headquarters and related mixed and multifunctional projects as well as housing in Poland. The retail segment will continue to be the Group s most important segment in the years ahead based on continued expansion of its already extensive network of contacts. Architects Engineers Option/purchase of site Investors Finished project Shopping centres DK SE PL CZ Tenant requirements Tenants Stores/superstores High-street properties Investor requirements Public authorities Project management Letting Sales Offices Mixed Residential Contractors Subcontractors 22/65 Tk Development A/S Financial statements 2012/13 Management Commentary

23 BUSINESS CONCEPT AND KNOWLEDGE RESOURCES The Group s primary focus is real property development, which may be based on several models: For the Group s own account, with or without advance project sales, where the Group can either finance the projects on its own books or procure staged financing from the buyer in step with project completion, also termed forward funding. Together with business partners during the construction period. Services for third parties. Customer relations The Group s principal customers consist of tenants and investors. TK Development continuously strives to create new, improved services to make the Group an even more attractive business partner. Tenants Over the years, TK Development has built close partnership relations with a large number of companies, including in particular retail chains looking to set up new stores. The Group has gained in-depth knowledge of tenant needs and requirements. From this platform, TK Development can develop retail solutions that meet tenants requirements for design and location. In addition, the numerous close relations with a wide range of retail chains mean that the Group is always able to put together an attractive retail mix that boosts individual tenants revenue. Investors TK Development has also built close relations with a number of Danish and foreign property investors. The Group has in-depth knowledge of investor needs and requirements. Among other things, TK Development offers standardized, international contracts and a problem-free process from initiation to delivery. Over the years, the Group has sold projects to a range of Danish and foreign banks, investment funds, pension funds and private companies. Project and risk management New projects are initiated based on a careful assessment of their earnings potential viewed in light of project complexity, completion time, tied-up capital, including balance sheet and cash flow impact, and other use of resources. The assessment includes deliberations about project location, regulatory matters, pre-letting, construction matters and market conditions. Limiting risks A number of management tools contribute to ensuring a satisfactory project process. Construction is typically not initiated until satisfactory pre-construction letting has been achieved for at least 60 % of the project. If the project is sold, construction will not be initiated until the Group anticipates being able to meet such investor requirements as would allow final completion of the project sale. Meeting these requirements typically falls within the Group s sphere of competencies. Forward funding TK Development aims to secure the sale of projects at an early stage, and the Group considers it important to expand investor commitment by having the investors fund the project during The diagram below illustrates the Group s funds tied up in projects, in scenarios both with and without forward funding. Project implementation without Funds tied up (DKK) forward funding Project implementation based on forward funding Project progress Site purchase Development phase Construction start Construction period Handing-over Management Commentary financial statements 2012/13 Tk Development A/S 23/65

24 BUSINESS CONCEPT AND KNOWLEDGE RESOURCES the construction process (forward funding) where possible. Forward-funding agreements with investors are usually concluded before construction startup, thus ensuring that the funds tied up in the Group s projects are kept at an absolute minimum, which also reduces the balance sheet total and minimizes the risk. Green building The Group is experiencing increasing demand for green buildings from both tenants and investors. TK Development offers to construct green buildings as and when requested by the Group s customers. Several of the Group s projects have been constructed as green buildings and certified according to the BREEAM standards or equivalent. Asset Management Asset management is TK Development s secondary business area. This business area consists of owning, operating, running in, maturing and optimizing completed projects for a medium-long operating period whose length matches the potential for adding value for both the Group and third parties. In relation to new projects, the Group can choose to initiate projects with a view to construction and subsequent startup and maturing over a short span of years, with such projects typically being classified as investment properties. This is a natural consequence of the changed risk picture, including in particular the change in investor behaviour, which means that the development process for some projects is not optimally finalized until they have been matured and run in. The portfolio of investment properties generated by this element will ensure both a positive operating margin and a positive cash flow, viewed in isolation. After the maturing process, the project returns can be even better documented and higher prices obtained. Investment properties can be developed either for the Group s own account or in project development joint ventures with co-investors that wish to participate in both the construction and maturing phases. By entering into joint ventures, the Group will achieve more effective placement of its equity financing of projects under development, better risk spread, and more efficient use of the Group s staff resources and competencies. The Group owns a few investment properties and a number of completed projects. These properties and projects fall into the Group s asset management segment. Knowledge resources TK Development develops projects of a high standard. Together with the employees knowledge and qualifications, the Group s close relations with tenants and investors play an essential role in minimizing the risks of individual projects. This combination is the prerequisite for developing projects that generate satisfaction for tenants and investors alike, as well as satisfactory earnings for the Group on individual projects. Employees The employees knowledge and competencies are essential to TK Development s value creation, and TK Development continuously strives to secure the best match between employees competencies and the specific job requirements of the property development business. The Group s employees work within individual, specialized areas: project developers, letting managers, legal and financial project controllers, and engineers. Education To raise the employees level of expertise to an even higher level and thus reinforce TK Development s value creation, the Group has continuous focus on training and education. The aim is to strengthen the Group in the development phases that are critical to maximizing the value of each individual project. In addition to improving the Group s knowledge resources, education helps cement TK Development s position as an attractive workplace for both existing and future employees. Project organization TK Development believes it is important to give employees an inspiring workplace where individual projects afford them the opportunity to accumulate knowledge and experience that can be passed on throughout the organization and thus continuously improve the Group s collective know-how and skills. In order to ensure a high degree of quality in all services provided by the Group to tenants and investors - as well as efficient progress and quick decisions in the development of individual projects - the Group s staff is anchored in a matrix organization as follows: Project groups Interdisciplinary competencies Sale and rental Controlling Project management/ Construction management Finance and accounting /65 Tk Development A/S Financial statements 2012/13 Management Commentary

25 BUSINESS CONCEPT AND KNOWLEDGE RESOURCES The matrix organization means that all the Group s peak competencies, covering the progress of a project from blueprint to completion, exist in the project group that carries through the individual project from A to Z. Organization, management and employees TK Development s organization and management structure are based on branch offices managed by divisional managers (senior vice presidents). The Group s international management team consists of the above-mentioned group of persons, as well as functional managers in the individual countries. The Group s management structure (excluding discontinuing activities) is shown below: Frede Clausen President and CEO Organizational focus on segments To underpin the segmentation chosen, it has been decided to organize the business activities so as to best ensure management focus on both property development and asset management activities. The members of the Executive Board attempt as far as possible to focus primarily on their own individual business areas, while taking into account that the Executive Board members are jointly responsible for the day-to-day management of the overall business activities. TK Development has several years experience in asset management and performs asset management services for third parties. The Company will increase its focus on asset management, including utilization of the Group s competencies and employee know-how to ensure continued progress in maturing the completed projects. Breakdown of the Group s employees At 31 January 2013, the Group employed a total of 112 persons, broken down as follows: Robert Andersen Executive Vice President Accounting, Finances and Controlling Other countries 11 Czech Republic 14 Sweden 15 Group/services 10 Poland 25 Denmark Sweden Poland Czech Republic Shopping centre management 16 Denmark 21 Erik Godtfredsen Dan Fæster Zygmunt Chyla Rostislav Novák Group functions and related services include management, accounting and finances, and other staff functions. 8,300 m 2 retail park, Gävle, Sweden The retail park was completed in October 2012 and was handed over to Nordika Fastigheter AB in November The selling price amounted to SEK 110 million. Management Commentary financial statements 2012/13 Tk Development A/S 25/65

26 Property development The Group s primary business area is the development of real property, termed property development. Strategy for business unit Property development Developing projects from the conceptual phase through to project completion, based on one of several models: Sold projects (forward funding / forward purchase) Projects with partners On TK Development s own books based on a high degree of confidence in the letting and sales potential Services for third parties. Property development Countries: DK, SE, PL, CZ Revenue 2012/13: DKK million Gross profit/loss 2012/13: DKK million Profit/loss before tax and impairment, etc.: DKK 44.1 million Balance sheet total, 31 Jan 2013: DKK 1,284.5 million In its property development segment, TK Development focuses on executing existing projects in the portfolio, as well as on securing satisfactory pre-construction letting or sales. In addition, the Group is continuing its work on new project opportunities. The Group will make the startup of major new projects contingent on obtaining either full or partial financing for them and on freeing up cash resources from the sale of one or more major completed projects. In 2012/13, the gross margin for property development amounted to DKK million, of which DKK million represents impairment losses on projects; see the description under Results for 2012/13 and outlook for 2013/14 above. The Group s retail projects on which construction is already ongoing or about to start are still attracting a good amount of interest from tenants. During the period under review, the Group also concluded lease agreements for several of these projects. 452,000 m² at 31 January 2013, of which sold projects accounted for 7,000 m² and remaining projects for 445,000 m². The project portfolio had a total development potential of 635,000 m² at 31 January The development in the Group s project portfolio is outlined below: (DKKm) 31 Jan Jan Jan 2013 Sold Completed In progress Not initiated Total Remaining Completed In progress Not initiated Total 1,064 1,224 1,137 Net project portfolio 1,090 1,251 1,175 Forward funding Gross project portfolio 1,374 1,544 1,545 Forward funding in % of gross carrying amount of sold projects 91.6 % 91.6 % 91.1 % Table 1 The Group uses forward funding to reduce the funds tied up in the portfolio of sold projects. The rise in forward funding since 31 January 2012 results mainly from an accumulation of forward funding and prepayments relating to projects in progress. The decline in the carrying amount of remaining projects is primarily attributable to the writedowns for impairment of the Group s project portfolio made during the period under review; see above. Uncertainty on the international financial markets continues to affect the property sector negatively, leading to consistently long decision-making processes among financing sources, tenants and investors alike; see under Market conditions. Against this background, the Group has postponed the expected construction start dates for several projects relative to the most recent estimates in the Interim Report for Q1-Q3 2012/13, and has decided against initiating certain projects. The development potential of the project portfolio represented 26/65 Tk Development A/S Financial statements 2012/13 Management Commentary

27 Property development The development potential is shown below in square metres: m² ( 000) 31 Jan Jan Jan 2013 Sold Completed In progress Not initiated Total Remaining Completed In progress Not initiated Total Total project portfolio Number of projects Table 2 As appears from above, the development potential of the Group s project portfolio in square metres has declined substantially since 31 January This decline should be viewed in light of the Group s market focus, including the high priority attached to projects on the continuing markets. In the 2012/13 financial year, Management chose not to launch a number of projects that it did not expect to generate satisfactory earnings in relation to use of resources, capital tied up, etc. Moreover, as mentioned above, Management aims to reduce the portfolio of projects not initiated (plots of land) over a two-year period. Several of these projects will be discontinued through land sales and will therefore no longer be included in the development potential in terms of square metres. Geographical segmentation of the development potential in square metres: Denmark Completed projects Residential park, Bielany, Warsaw, Poland TK Development owns a tract of land in Warsaw allowing for the construction of about 56,200 m², distributed on 900-1,000 residential units. The plan is to build the project in four phases. Construction of the first phase, consisting of 136 units, started in mid-2011 and was completed in January The pre-completion sale of the units started in spring 2011, but sluggish demand in the Polish residential market has affected the sales process. So far, sales agreements for about 69 % of the units in the first phase have been signed (Q1-Q3 2012/13: 52 %). The residential units are being sold as owner-occupied apartments to private users, and Management expects the remaining units to be sold in the course of the 2013/14 financial year. The market remains challenging as a large number of new residential buildings are still being constructed in Poland, including in Warsaw, and the supply of housing for sale, whether already constructed or under construction, is high. The price level has been declining slightly over a period, but is expected to remain fairly stable for small residential units in Warsaw in the time ahead, as the scope of residential projects launched in Warsaw is now diminishing. Thus, the supply of housing is expected to stabilize over time. Buyers are showing a preference for lower-priced areas to obtain more floor space. Management has therefore chosen to prioritize another of the Group s residential projects in a lower-priced area of Warsaw. Management has decided to attempt selling some of the land for the Bielany residential project, and the startup of the remaining part of the project will be postponed until market conditions have improved. Projects in progress Amerika Plads, underground car park, Copenhagen, Denmark Kommanditaktieselskabet Danlink Udvikling (DLU), which is owned 50/50 by Udviklingsselskabet By og Havn I/S and TK Development, owns three projects at Amerika Plads: lot A, lot C and an underground car park. Part of the underground car park in the Amerika Plads area has been built. The Group expects to sell the total parking facility upon final completion. Czech Republic Sweden Poland Vasevej, Birkerød, Denmark TK Development owns a property of about 3,000 m² at Vasevej in Birkerød, rented by SuperBest. The project consists of a refurbishment of the existing property and a minor extension comprising a few stores and dwellings. The combined project is expected to comprise about 3,400 m². Retail park, Enebyängen, Danderyd, Sweden In the municipality of Danderyd near Stockholm, TK Develop- Management Commentary financial statements 2012/13 Tk Development A/S 27/65

28 PROPERTY Development Project outline The outline below lists the key projects in the portfolio in the property development segment. TKD s Construction Opening/ TKD s share ownership start/expected expected Project City/town Country Segment of area (m 2 ) interest construction start opening Completed Residential park, Bielany, phase I Warsaw PL Residential/services 7, % Mid-2011 Early 2013 In progress Amerika Plads, underground car park Copenhagen DK Car park 16, % 2004 Continuously Vasevej Birkerød DK Mixed 3, % - - Retail park, Enebyängen, phase II Danderyd SE Retail 1, % Autumn 2012 March 2013 Not initiated BROEN, shopping centre Esbjerg DK Retail 29, % Mid Østre Teglgade Copenhagen DK Office/residential 32,700 1) 100 % Continuously Continuously Amerika Plads, lot C Copenhagen DK Mixed 6, % Amerika Plads, lot A Copenhagen DK Office 5, % Aarhus South, phase II Aarhus DK Retail 2, % Ejby Industrivej Copenhagen DK Office 12, % - - Østre Havn/Stuhrs Brygge Aalborg DK Mixed 36,000 1) 50 % Continuously Continuously Retail park, Marsvej Randers DK Retail 10, % Development of town centre Køge DK Mixed 27, % 2013 Continuously Farum Bytorv, extension Farum DK Retail 8, % The Kulan commercial district Gothenburg SE Mixed 45, % Retail park, Barkarby Gate Stockholm SE Retail 20, % End-2013 End-2014 Retail park, Söderhamn Söderhamn SE Retail 10, % Retail park, Gävle, phase II Gävle SE Retail 15, % Continuously Continuously Shopping centre, Jelenia Góra Jelenia Góra PL Retail 7, % Residential park, Bielany, remaining phases Warsaw PL Residential/services 31, % Continuously Continuously Bytom Retail Park Bytom PL Retail 25, % Continuously Continuously Shopping centre, Frýdek Místek Frýdek Místek CZ Retail 14, % Most Retail Park, phase II Most CZ Retail 2, % - - Property development, total floor space approx. 373,000 1) Share of profit on development amounts to 70 %. 28/65 Tk Development A/S Financial statements 2012/13 Management Commentary

29 PROPERTY DEVELOPMENT ment handed over the first 13,000 m² phase of the retail park to an investor in 2010/11. Construction of the second phase of about 1,800 m², which is fully let (Q1-Q3 2012/13: 100 %) and tenanted by Plantagen, was completed in march 2013, and the retail park was handed over to the investor after the reporting date. The total project has been sold to the German investment fund Commerz Real on the basis of forward funding. Projects not initiated BROEN, shopping centre, Esbjerg, Denmark In Esbjerg, Denmark, TK Development has bought a plot earmarked for a shopping centre project, BROEN, of about 29,800 m², to be built on the railway land at Esbjerg station. The shopping centre is expected to comprise about 70 stores. The current occupancy rate is 75 % (Q1-Q3 2012/13: 75 %), with tenants including H&M, Kvickly, Aldi, Imerco, Skoringen, Sport-Master, Bahne, Panduro Hobby, Kong Kaffe and Gina Tricot. The fitness facilities have been let to Fitness World. The startup of construction has been postponed and is now scheduled for mid-2013, rather than early 2013 as most recently announced. The opening is scheduled for TK Development is currently working on the planning, design, startup and sale of the project. Østre Teglgade, Copenhagen, Denmark TK Development owns an attractively located project area at Teglholmen of about 32,700 m². Current plans involve establishing a church and possibly a residential care facility. Discussions are also being held with several interested parties regarding the construction of residential property in the project area. Amerika Plads, lots A and C, Copenhagen, Denmark Kommanditaktieselskabet Danlink Udvikling (DLU), which is owned 50/50 by Udviklingsselskabet By og Havn I/S and TK Development, owns three projects at Amerika Plads: lot A, lot C and an underground car park. A building complex with about 11,800 m² of office space is to be built on lot A, and a building complex with about 13,000 m² of commercial and residential space on lot C. Construction will take place as the space is let. Østre Havn/Stuhrs Brygge, Aalborg, Denmark In the area previously occupied by Aalborg Shipyard at Stuhrs Brygge, TK Development is developing a business and residential park of about 72,000 m² through a company jointly owned with Frederikshavn Maritime Erhvervspark on a 50/50 basis. The area was acquired by the jointly owned company, with payment being effected for the development rights acquired in step with the development and execution of specific projects. A new local plan comprising 31,000 m² of housing, offices and parking facilities has been launched. Retail park, Marsvej, Randers, Denmark In October 2010, the Group took over a plot of land on Marsvej in Randers, intended for a retail development project of 10,000 m². Letting has been initiated, and there is a satisfactory level of interest among potential tenants. Development of town centre, Køge, Denmark TK Development is working on a potential project in Køge. In February 2012, Køge Kyst and TK Development entered into a conditional agreement under which TK Development is to buy land for constructing a project of about 27,500 m². The project, to be built immediately next to Køge Station and the town centre shopping area, comprises retail stores of about 12,000 m 2, public service facilities of about 8,500 m 2 including a town hall and rehabilitation centre, residential premises of about 3,600 m² and office/fitness facilities of about 3,400 m² as well as a 14,000 m² underground car park. The local plan for the area is to be changed, and a new one expected to be finally adopted in mid TK Development expects to enter into an agreement with Køge Municipality regarding its takeover of both town hall and rehabilitation centre. Letting of the retail premises has started, and potential tenants are showing a good amount of interest in the project. Farum Bytorv, extension, Farum, Denmark In Farum, TK Development has made a winning bid for an extension of Farum Bytorv by about stores, a total of about 8,000 m². Furesø Municipality and TK Development have entered into a conditional purchase agreement about this extension. A new local plan for the area is to be drawn up. This process is under way, and the local plan is expected to be adopted in mid The Kulan commercial district, shopping centre and service/ commercial space, Gothenburg, Sweden TK Development and the Swedish housing developer JM AB have entered into a cooperation agreement with SKF Sverige AB to develop SKF s former factory area in the old part of Gothenburg. The contemplated project comprises a total floor space of about 75,000 m²: 30,000 m² for a shopping centre, 15,000 m² for services/commercial use and 30,000 m² for housing. TK Development will be in charge of developing the 45,000 m² for a shopping centre, services and commercial facilities, while JM AB will have responsibility for the 30,000 m² of housing. The local plan is being drawn up and is expected to be approved Management Commentary financial statements 2012/13 Tk Development A/S 29/65

30 PROPERTY DEVELOPMENT in The project is being discussed with potential tenants, and several lease agreements have been concluded. Retail park, Barkarby Gate, Stockholm, Sweden In Barkarby in the northwestern part of Stockholm, TK Development has an option on an area for the development of a 20,000 m² retail park. The retail park is expected to consist of units, of which 9-10 units will be retail stores. The current occupancy rate is 70 %, and lease agreements have been concluded with major tenants such as XXL, Clas Ohlson, Blomsterlandet and a fitness chain. The local plan is in place, and the project is currently being discussed with potential investors. Construction is expected to start in late 2013, with the opening scheduled for late Shopping centre, Frýdek Místek, Czech Republic In the Czech town of Frýdek Místek, TK Development has an option to buy a plot of land for building a 14,800 m² shopping centre, consisting of about 60 stores. The current occupancy rate is 75 % (Q1-Q3 2012/13: 68 %). Lease agreements have been concluded with such tenants as Billa, Intersport, H&M, NewYorker and Euronics. Construction is expected to start in the course of 2013, with the opening scheduled for Retail park, phase II, Gävle, Sweden In 2012/13, TK Development sold and handed over an 8,300 m² retail park in the Swedish town of Gävle to the Swedish property company Nordika Fastigheter AB. Moreover, TK Development has an option to buy a plot of land for developing additional retail park premises of about 15,800 m². Shopping centre, Jelenia Góra, Poland TK Development has bought a plot of land in Jelenia Góra and has an option on additional land for the development of a shopping centre of about 24,000 m². The project comprises a supermarket of about 2,200 m² and retail, restaurant and service premises totalling about 21,800 m². The local plan for the area is in place and the letting of premises has started. Construction is expected to commence in 2013, and the shopping centre is scheduled to open in As mentioned above, an agreement has been made with Heitman regarding its takeover of 70 % of the project. The sale was finally completed in December TK Development will receive fee income from the jointly owned company established for developing, letting and managing the construction of the project. Residential park, Bielany, Warsaw, Poland Reference is made to Completed projects above. Bytom Retail Park, Bytom, Poland TK Development intends to develop a retail park with total leasable space of about 25,800 m² on its site at the Plejada shopping centre in Bytom, which is centrally located in the Katowice region. Construction of the project will be phased in step with letting. Letting efforts are ongoing, and construction will be started as space is let. 30/65 Tk Development A/S Financial statements 2012/13 Management Commentary

31 Asset management The Group s secondary business area is asset management, which consists of owning, operating, running in, maturing and optimizing completed projects for a medium-long operating period whose length matches the potential for adding value both for the Group and for third parties. Strategy for business unit - Asset management Owning, operating, maturing and optimizing completed projects for a medium-long operating period that matches the potential for adding value both for the Group and for third parties. The Group s own properties under asset management comprise the following nine properties: Country Type Ownership interest Floor space m 2 Investment properties Futurum Hradec Králové CZ Shopping centre 20 % 28,250 Galeria Tarnovia, Tarnów PL Shopping centre 30 % 16,500 Other completed projects Sillebroen, Frederikssund DK Shopping centre 100 % 25,000 Fashion Arena Outlet Center, Prague CZ Outlet centre 75 % 25,000 Galeria Sandecja, Nowy Sącz PL Shopping centre 100 % 17,300 Ringsted Outlet DK Outlet centre 50 % 13,200 Most Retail Park CZ Retail park 100 % 6,400 Aabenraa DK Retail park 100 % 4,200 Brønderslev DK Shopping-street property 100 % 2,400 Total 138,250 In 2012/13, the gross margin for asset management amounted to DKK million, of which DKK million represents impairment losses on projects; see the description under Results for 2012/13 and outlook for 2013/14 above. Although these properties have been classified under asset management, TK Development will focus on selling them in whole or in part, as their sale will substantially strengthen the Group s financial platform. Therefore, the process of selling a number of the Group s completed projects continues. Management anticipates being able to conclude final sales agreements for one or more of these properties within a short period of time. The total portfolio of properties under asset management amounted to DKK 1,932.1 million at 31 January 2013, of which investment properties accounted for DKK million. The operation of these properties, which largely consist of shopping centres, is generally proceeding satisfactorily. The annual net rent from the current leases corresponds to a return on the carrying amount of 6.7 %. Based on full occupancy, the return on the carrying amount is expected to reach 7.9 %. Asset management Countries: DK, SE, PL, CZ Revenue 2012/13: DKK million Gross profit/loss 2012/13: DKK million Profit/loss before tax and impairment, etc.: DKK 70.0 million Number of employees at centres, 31 Jan 2013: 12 Balance sheet total, 31 Jan 2013: DKK 2,100.7 million Breakdown of own properties under asset management by country (carrying amount): Denmark Poland Czech Republic Management Commentary financial statements 2012/13 Tk Development A/S 31/65

32 Asset Management On balance, the Group s shopping and outlet centres recorded growth in footfall and revenue. In 2012, the Group s six centres had close to 16 million visitors. Development in footfall (2010=index 100): The development of the individual centres appears from pages Generally, TK Development s properties have a satisfactory letting status, and the current occupancy rates are: Futurum Hradec Králové Galeria Tarnovia, Tarnów Sillebroen, Frederikssund Fashion Arena Outlet Center, Prague Galeria Sandecja, Nowy Sącz Ringsted Outlet Most Retail Park Development in occupancy rates: 100 % Aabenraa, retail park Brønderslev, shopping-street property 80 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % 60 % 40 % Dec 2011 April 2012 July 2012 Dec 2012 April 2013 Futurum Hradec Králové Galeria Tarnovia, Tarnów Fashion Arena Outlet Center, Prague Sillebroen, Frederikssund Ringsted Outlet Most Retail Park Aabenraa, retail park Brønderslev, shoppingstreet property 32/65 Tk Development A/S Financial statements 2012/13 Management Commentary

33 Asset Management Futurum Hradec Králové, shopping centre, Czech Republic relative to This increase covers a period when modernization of the existing centre caused revenue to drop, followed by a period of increased revenue when the extension opened in May Major tenants: Cinestar, Tommy Hilfiger, H&M, New Yorker, Adidas, Reserved, Intersport, Takko Fashion, Foot Locker, Gant, C & A, Lindex, Datart. Opening november 2000/May 2012 Leasable area 28,250 m² Occupancy rate 100 % (Q1-Q3 2012/13: 100 %) Footfall million The extension of the shopping centre, now comprising (2010=index 100) stores, opened on 10 May The existing shopping centre was modernized concurrently with the construction of the extension. The shopping centre is fully let and recorded a satisfactory occupancy rate, operating profit and customer influx throughout the year. The shopping centre had a footfall of 60 more than 5.6 million in 2012, and revenue increased by 24 % 40 Revenue Footfall Galeria Tarnovia, shopping centre, Tarnów, Poland After the conditional agreement with Heitman was signed in December 2012, the Group s ownership interest of the shopping centre is 30 %. Major tenants: H&M, New Yorker, Euro RTV AGD, Reserved, Deichmann, Douglas, Rossman, Stradivarius, Takko Fashion, Simply Market. Opening november 2009 Leasable area 16,500 m², including a 2,000 m² supermarket Occupancy rate 96 % (Q1-Q3 2012/13: 96 %) Footfall million The shopping centre continues to have a satisfactory influx (2010=index 100) of customers and to perform well. In December 2011, Simply Market replaced the previous supermarket operator. This replacement has contributed to the progress recorded by the shopping centre in the course of The number of visi tors slightly exceeded 1.8 million in 2012, compared to just 60 over 1.7 million in The revenue for the shopping centre increased by 4 % relative to Revenue Footfall Management Commentary financial statements 2012/13 Tk Development A/S 33/65

34 Asset Management Sillebroen, shopping centre, Frederikssund, Denmark March 2013, Gina Tricot opened an outlet in the shopping centre, and Signal has signed a lease agreement for an outlet due to open in May Negotiations with tenants for several of the remaining rental units are ongoing. The centre is still being run in and matured, and continued efforts are being made to position the centre on the market. TK Development s focus is on strengthening occupancy and boosting revenue in the centre. Major tenants: Kvickly, Fakta, H&M, Fona, Gina Tricot, Matas, Sport- Master, Frederikssund Isenkram, Deichmann, Vero Moda, Vila, Opening march 2010 Wagner. Leasable area 25,000 m², including 5,000 m² supermarket units Occupancy rate 91 % (Q1-Q3 2012/13: 90 %) Footfall million (2010=index 100) Sillebroen continues to perform well with a satisfactory influx of customers. In the continuing difficult economic climate with subdued private consumption, in 2012 the shopping centre man aged to maintain both annual footfall and revenue on a par with More than 3 million customers visited the shopping cen- 60 tre in A number of tenants were replaced during the year. In 40 Revenue Footfall Fashion Arena Outlet Center, Prague, Czech Republic second phase, the outlet centre has recorded a highly positive development in footfall and revenue. The footfall slightly exceeded 2.2 million in 2012 compared to just over 1.9 million in 2011, and the outlet centre s revenue increased by 24 % relative to Major tenants: Tommy Hilfiger, Nike, Adidas, Benetton, Tom Tailor, Ecco, Gant, Lacoste, Levi Strauss & Co., Esprit. Opening november 2007/October 2010 Leasable area 25,000 m² Occupancy rate 96 % (Q1-Q3 2012/13: 94 %) Footfall million In Prague, the Group has developed a 25,000 m² factory outlet centre in a joint venture with an international collaboration partner. The first phase opened in 2007, and the second and last phase opened in October In recent years, the Fashion Arena Outlet Center has truly distinguished itself as one of the outlet centres with the highest attraction value in Central Europe. Since the opening of the Revenue (2010=index 100) Footfall 34/65 Tk Development A/S Financial statements 2012/13 Management Commentary

35 Asset Management Galeria Sandecja, shopping centre, Nowy Sącz, Poland cluding attractive bargains for customers, has also contributed to the increased revenue. TK Development continues its efforts to optimize the centre and is exploring various initiatives to help improve operations, footfall and occupancy. Major tenants: Carrefour, H&M, New Yorker, Reserved, Deichmann, Douglas, Camaieu, Carry, Euro RTV AGD. Opening october 2009 Leasable area 17,300 m², including a 5,000 m² hypermarket Occupancy rate 96 % (Q1-Q3 2012/13: 96 %) Footfall million The operation of Galeria Sandecja is still proceeding satisfactorily. The shopping centre had a footfall of almost 2.4 million in 2012, slightly (2010=index 100) below last year s figure. Nevertheless, the shopping centre s revenue 100 rose by about 14 % in 2012 compared to Generally, revenue has 80 improved month by month over the year compared to the year before. The revenue generated by electronics and footwear has shown a particularly positive trend. Moreover, the focus on marketing activities, in Revenue Footfall Ringsted Outlet, Ringsted, Denmark recorded the highest number of visitors and the highest revenue since its opening more than 1.1 million visitors and a 25 % growth in revenue. However, this should be viewed in light of the centre s relatively low revenue the year before. Several tenants were replaced during the year under review. Mango and Reebok made a strategic decision to discontinue their Scandinavian outlet activities and thus moved out of Ringsted Outlet. At the same time, agreements have been made with new tenants, and with four new retail stores opening in spring Opening march 2008 Leasable area 13,200 m² Occupancy rate 61 % (Q1-Q3 2012/13: 59 %) Footfall million Ringsted Outlet has been developed in a 50/50 joint venture with Miller Developments, a Scottish factory outlet developer, and consists of a factory outlet centre and restaurant facilities, with a total floor space of 13,200 m² and about 1,000 parking spaces. Ringsted Outlet is Denmark s only genuine outlet village, true to the original outlet concept. After a long running-in period, Ringsted Outlet is now beginning to show its real potential. Despite the difficult letting situation and intensified competition in the Danish retail trade sector, in 2012 Ringsted Outlet 2013 Sparkz, Jackpot, Saint Tropez and Superdry the shopping centre is anticipated to continue its progress in Major tenants: Hugo Boss, Nike, Puma, Diesel, G-Star Raw, Redgreen, Ticket to Heaven, McDonald s, Superdry, Le Creuset, Levi s, Sparkz, Jackpot Revenue (2010=index 100) Footfall Management Commentary financial statements 2012/13 Tk Development A/S 35/65

36 Asset Management Most Retail Park, Czech Republic TK Development is developing an 8,400 m² retail park in the Czech town of Most, to be built in phases. The first phase of 6,400 m² opened in April Occupancy in the retail park has improved, and the current occupancy rate for the first phase has increased from 84 % at the beginning of the year to the current figure of 91 % (Q1-Q3 2012/13: 91 %). One vacant rental unit remains, and efforts are being made to let this unit. Management believes the vacant rental unit should be let before the project can be sold. Retail park, Aabenraa, Denmark TK Development has built a retail park of approx. 4,200 m² in Aabenraa. The retail park opened in September 2009 and is fully let (Q1-Q3 2012/13: 100 %), and the tenants include jem & fix, Biva, T. Hansen and Sport24. Shopping-street property, Brønderslev, Denmark After handing over the Føtex supermarket to Dansk Supermarked in the Group s project at Østergade, Brønderslev, in a previous financial year, the Group has taken over the previous 2,400 m² Føtex property. Following the conclusion of lease agreements with Deichmann and Intersport, these retailers opened for business at the beginning of In addition, a lease agreement for about 1,200 m² has been signed with Fitness World, which opened in November The current occupancy rate is 93 % (Q1-Q3 2012/13: 93 %). 36/65 Tk Development A/S Financial statements 2012/13 Management Commentary

37 Discontinuing activities As described above, Management has chosen a market focus that targets the countries expected to contribute with longterm, profitable operations in future: Denmark, Sweden, Poland and the Czech Republic. Consequently, Management has also decided to phase out the Group s activities in Finland, Germany, the Baltic States and Russia. The phase-out, which will result in office closures and employee dismissals, will be carried out as soon as possible, while taking into account that all the countries in question have projects that need to be handled so as to retain as much of the value of the existing portfolio as possible. Discontinuing activities Countries: DE, FI, LT, LV, RUS Revenue 2012/13: DKK 14.4 million Gross profit/loss 2012/13: DKK million Profit/loss before tax and impairment, etc.: DKK -9.5 million No. of employees, 31 Jan 2013: 11 Balance sheet total, 31 Jan 2013: DKK million The results of the discontinuing activities before tax amounted to DKK million in 2012/13 and have been impacted by value adjustments of DKK million on the German investment properties, primarily related to ongoing sales negotiations where Management considers it essential to downscale the German activities. Moreover, the results have been affected by the impairment of a few projects. Germany Following the sale of an investment property in December 2012, the Group now has four investment properties left in Germany, a combined commercial and residential rental property in Lüdenscheid in western Germany and three residential rental properties on the outskirts of Berlin. After the reporting date, yet another residential rental property has been sold, and the Group is negotiating with investors about the sale of one of the remaining properties. The Group has generally recorded higher rent levels for the German residential rental properties as tenants have been replaced. The value of these properties totalled DKK million at 31 January The valuation of the properties is based on (i) a return requirement of 6.5 % p.a. calculated on the basis of a discounted cash-flow model over a ten-year period and (ii) recognition of the terminal value in year ten. In the cases where sales negotiations are ongoing with potential investors, these negotiations form the basis for the valuation. In addition to these investment properties, the Group owns a share of a minor shopping centre and a few plots of land. Finland The Group s activities in Finland are fairly limited and, apart from a few project opportunities, comprise the projects listed below. City/ Project town Segment Area (m²) Pirkkala Retail Park, phase II Tammerfors Retail 5,400 Kaarina Retail Park Turku Retail 6,600 Efforts will be made to phase out the activities in the course of the current financial year, and the branch office is expected to close in 2013/14. BaltiC STATES The Group s Baltic activities comprise the following projects: City/ Project country Segment Area (m²) DomusPro Retail Park Vilnius (LT) Retail 11,300 Milgravja Street Riga (LV) Residential 10,400 Ulmana Retail Park Riga (LV) Retail 12,500 DomusPro Retail Park, Vilnius, Lithuania TK Development owns a plot of land in Vilnius reserved for building an 11,300 m² retail park. Constructive dialogue has been established with potential tenants, and binding lease agreements have been signed for about 53 % of the premises (Q1-Q3 2012/13: about 50 %). TK Development intends to execute this project to best harness its inherent values. Startup of the construction project, possibly in phases, is scheduled for spring Negotiations with potential investors for the project are ongoing. Efforts will be made to phase out the remaining activities in the course of the current financial year. Russia The Group owns a minor project in Moscow, consisting of Scandinavian-style dwellings that are used for rental, mainly to international company employees stationed in Moscow. Efforts will be made to sell the project as soon as possible. Management Commentary financial statements 2012/13 Tk Development A/S 37/65

38 Financial targets To provide for sufficient future financial resources, Management has adopted a liquidity target for the whole Group; see below. In addition, Management has adopted a solvency target for the whole Group corresponding to a solvency ratio of minimum 30 %, calculated as the ratio of equity to total assets. Covenants related to credit facilities The Group has given its main banker an undertaking to comply with a solvency ratio covenant of minimum 30 % at group level, measured in connection with the presentation of interim and annual reports. Liquidity covenant The Group has used covenants for quite some years. In short, the liquidity covenant expresses that the Group s cash resources to enable the Group to cover liabilities requiring substantial liquidity - must at any time correspond to the fixed costs for the next six-month period, excluding funds received as proceeds from projects sold, but including project liabilities materializing within the next six months. The covenant represents a liquidity target for the whole Group and a commitment to the Group s main banker. The covenant must be calculated and met before projects requiring liquidity can be acquired and initiated. The covenant is expressed as follows: L + K > E + O + R, where: L = The TK Development Group s free cash resources in the form of deposits with banks and the value of listed Danish government and mortgage bonds with a term to maturity of less than five years. K = The TK Development Group s amounts available on committed operating credit facilities from time to time. E = The planned impact on cash resources from the projects which the TK Development Group is obliged to complete within six months, including the new/expanded project, taking into account committed project credit facilities from financial institutions and forward funding. O = The TK Development Group s cash non-project-related capacity costs for the following six months less management fees falling due within six months. In addition, preagreed project fees from final and binding agreements with project investors falling due within six months are to be set off against the amount. R = Interest accruing on the TK Development Group s operating credit facilities for the following six months. The Group s solvency and liquidity covenants were both met during the year under review. Residential Park, Bielany, Warsaw, Poland First phase consisting of 136 apartments was completed in January of the apartments have been sold. 38/65 Tk Development A/S Financial statements 2012/13 Management Commentary

39 Risk issues RISK MANAGEMENT In connection with determining TK Development s strategy and overall goals, the Supervisory and Executive Boards have identified the most significant business risks and seek continuously to ensure efficient risk management. In connection with its strategy adjustment, see above, the Group has further strengthened its risk management by striving only to initiate projects based on a strict awareness that the expected earnings will match the project s complexity, completion time, tiedup capital and other use of resources. The situation on the financial markets means that the Group has a consistently strong focus on financial management, with particular emphasis on managing and optimizing loans and strengthening the financial platform. The fact that a number of completed projects have not been sold means a substantial portion of the Group s financial resources is tied up in these projects. This has made it difficult to allocate the necessary capital to securing the progress of new projects. Therefore, in December 2012 Management decided to revise the Group s sales strategy with a view to realizing faster sales. The sale of several completed projects will free up the cash resources that are essential for strengthening the Group s financial platform. Moreover, financial resources will be secured to regenerate momentum and thus to realize the substantial development potential inherent in several of the Group s projects. Another core element of the Group s risk management is the solvency and liquidity targets adopted for the Group. The Supervisory Board regularly considers issues relating to the project portfolio, properties, market conditions, financing, IT and staffing as part of its broader assessment of potential risks and scarcity factors. Reports to the Supervisory Board are submitted on an ongoing basis with respect to the Group s risk issues, which also constitute an important element in the decision-making basis for all major projects. Management s opinion, there are no indications of a significant improvement during the period to come. The financial and economic crisis has resulted in a prolonged period of lower demand for real property and development projects. The prices of essential property development variables land prices, construction costs, occupancy level and investors return requirements have stabilized at a new level, and Management believes that attractive earnings can be generated in future by implementing development projects, when taking into account the new price levels. Economic and financial trends on the individual markets will materially affect TK Development s ability to realize its strategy, and a worsening of these trends may have a material adverse effect on the Group s future development, results of operations, cash flows and financial position. The most important risks for the Group, apart from general risks, are described below. Financial risks Financing and liquidity risks The access to project financing remains difficult and is currently the greatest challenge facing the property sector. The volatility on the international financial markets and the weakened financial sector still make credit institutions reluctant to provide loans to finance real property. This has a negative impact on the property sector, and thus on TK Development. TK Development is dependent on its ability to continue obtaining either full or partial financing for existing and new projects, either from credit institutions or from investors in the form of forward funding, and on freeing up substantial cash resources from the sale of a few major completed projects. Having sufficient cash resources is essential for the Group. In order to complete the development of its planned projects and thereby achieve the expected results, the Group must have or must be able to procure sufficient cash resources to cover the costs and deposits required for the projects, the capacity costs and other obligations. Risk issues in general Property market conditions in the countries in which the Group operates have in recent years been affected by the financial and economic crisis, which has resulted in lower prices on property and reduced access to financing. The Danish market in particular has been affected by prolonged uncertainty, and continues to be so, partly because of a weakened financial sector. In At the forthcoming Annual General Meeting, the Supervisory Board will request authorization to carry out a capital increase with gross proceeds of about DKK million. The capital increase will help generate the cash resources required to underpin future operations and project flow, and thus long-term earnings. The capital increase has been discussed with the Group s major shareholders, who, together with a few major Management Commentary financial statements 2012/13 Tk Development A/S 39/65

40 RISK ISSUES private and institutional investors, have given conditional subscription and underwriting commitments for the total capital increase. The more specific terms and conditions governing the capital increase have not yet been determined. The terms and conditions will be described in detail in the prospectus to be published in connection with the capital increase. The Group s short-term debt to credit institutions consists of operating and project credits. TK Development has entered into a general agreement with the Group s main banker about both types of credit. The agreement and conditions are renegotiated on an annual basis. TK Development depends on this cooperation continuing, and Management believes that the agreement will fall into place. The Group s main banker has indicated its preparedness to prolong TK Development s credit facilities subject to specific conditions being met, which includes reducing the operating credit limit by DKK 50 million. The prolongation is expected to be formally accepted immediately after publication of TK Development s Annual Report 2012/13. The Group has undertaken towards its main banker to comply with certain conditions (liquidity and solvency covenants). The conditions may, among other things, restrict opportunities to launch new business activities and in case the conditions are not complied with, the credit facilities may be terminated. In addition, the Group has entered into project-financing agreements with various banks in Denmark and abroad. Project credits are usually granted with different terms to maturity, depending on the specific project. During the year under review, the Group was in continuous dialogue with a few credit institutions regarding the postponement of repayment obligations on project credits until one or more of the major completed projects have been sold, and agreements regarding the postponement of such repayments have now fallen into place. Moreover, agreements to prolong major project credits were concluded during the past year. Of the total project credits outstanding at 31 January 2013, credits worth DKK 1.5 billion are due to mature in the 2013/14 financial year, including continuing repayment obligations on individual project credits of about DKK 80 million. After the reporting date, agreements regarding the refinancing of DKK 0.2 billion have been made. Moreover, the Group s main banker and other credit institutions have indicated their preparedness to prolong existing credit facilities. When final commitments in this respect have been received, credit facilities of DKK 1.1 billion will have been prolonged, and credit facilities of DKK 0.3 billion will be due to mature in 2013/14. The Group depends on being able to continue obtaining either a prolongation or alternative financing of the project credits not expected to be repaid upon project sales. The Group is in ongoing dialogue with the relevant credit institutions, and Management anticipates being able to either prolong or refinance these project credits. Some of the proceeds from the capital increase or the cash freed up on the sale of major completed projects will help reduce the debt to credit institutions, including project finance loans of DKK 68.5 million granted by a number of the Company s major shareholders and members of Management. A number of loan agreements contain provisions on cross default, which means that default on a loan under a loan agreement may be considered default of a number of other loan agreements. Sillebroen, shopping centre, Frederikssund, Denmark A number of tenants were replaced during the year. Here the opening of Gina Tricot in March Ihitatatem fugit mo to ea nisquissero corem volupta conest, aut qui audanda am eum ellab id. 40/65 Tk Development A/S Financial statements 2012/13 Management Commentary

41 RISK ISSUES Many of the Group s loan agreements contain provisions giving the banks a discretionary option to terminate the agreement. In such cases, maintaining financing depends on the bank s subjective assessment of the quality and profitability of the facility in question, as well as the value of the security provided by the Group. If the Group fails to meet its commitments under such agreements with its banks, the agreements risk being terminated. In all probability, TK Development will not have adequate capital resources to meet substantial repayment demands. If the Group is unable to obtain sufficient funding in future, or if such funding cannot be obtained on viable terms, it could have a material adverse effect on the Group s future performance, results of operations, cash flows and financial position. Interest-rate risks The main part of the Group s interest-bearing debt consists of floating-rate loans. Accordingly, increasing interest rates will push up the Group s interest expenses. An interest-rate fluctuation of 1 % will have a direct impact of about DKK 15 million on TK Development. In addition, rising interest rates would, all other things being equal, affect investor return requirements and by extension real property prices. Currency risks TK Development s Danish subsidiaries operate almost exclusively in DKK, while the foreign subsidiaries generally operate in their local currency or alternatively EUR. As far as possible, the Group attempts to minimize the currency risk by concluding related agreements in the same currency. For instance, it aims to conclude purchase and sales agreements, construction contracts and financing agreements regarding a single project in the same currency. Currency fluctuations may materially affect the Group s future development, results of operations, cash flows and financial position. The most important currency risks are assessed to relate mainly to foreign subsidiaries net results, intercompany balances and foreign-exchange adjustments of the Group s investments in foreign subsidiaries. Credit risks TK Development is primarily exposed to credit risks in relation to the risk of losses on receivables from customers. TK Development aims to reduce credit risks as much as possible, in part by obtaining security, primarily from tenants, and in part by postponing the handover of projects to investors until they have paid the purchase price. Generally, TK Development does not experience losses on receivables related to the sale of projects. Business risks Property prices and rental income The Group is affected by price fluctuations in the various property markets in which it operates, as well as by general economic trends. Part of the Group s project portfolio and some of its investment properties have thus been under earnings pressure during the financial and economic crisis. Rent levels for part of the project portfolio have also been under pressure. Such fluctuations particularly affect the value of the Group s portfolio of land, ongoing and completed projects, investment properties, and the potential for developing new projects. Falling prices on land and property and falling rent levels may have an adverse effect on the Group. Investment properties and completed projects The Group s investment properties and completed projects are essentially subject to the same risks, primarily risks related to rental conditions and property prices, and their value may decline substantially relative to the carrying amount in the balance sheet. Portfolio of land After the reporting date, the Group adopted a strategy aimed at reducing the portfolio of projects not initiated (plots of land) over a two-year period from the current level of DKK 1.1 billion to a level of DKK 0.5 billion. The portfolio can be reduced by initiating development projects or selling plots of land. The risk exists that land will be sold at a value lower than its carrying amount. If planned projects cannot be executed on acquired sites, it may be necessary to make writedowns for impairment, which could have a material adverse effect on the Group. Discontinuing activities After the reporting date, the Group has decided to phase out its activities in Finland, Germany, the Baltic States and Russia. The phase-out, with resulting office closures and employee dismissals, will be carried out as soon as possible and will take into account that all the countries in question have projects that need to be handled so as to retain as much of the value of the existing portfolio as possible. The risk exists that these activities may be phased out at a value lower than their carrying amount. Agreements with tenants Moreover, there is a letting risk attaching to those of the Group s leases that expire while the Group owns the underlying investment properties/completed projects. If the Group fails to renew these agreements, fails to enter into new leases, or if the agreements can be entered into only on less favourable Management Commentary financial statements 2012/13 Tk Development A/S 41/65

42 RISK ISSUES terms and conditions, it could have a material adverse effect on the Group. Part of the Group s rental income from tenants includes a revenue-based share. The Group s total rental income under these lease agreements depends partly on the tenant s ability to maintain a certain amount of revenue in the relevant premises. The share of such revenue-based rent may vary considerably depending on the nature of the brand, the store and the products. Failure by the tenant to generate sufficient revenue to trigger the revenue-based share of the overall rental income could have a material adverse effect on the Group. Development activities TK Development s primary business area is property development, and the Group functions as the creative liaison between tenants, investors, architects, construction companies and other business partners in connection with development of property projects. Projects are only initiated after a careful assessment of their earnings potential viewed in light of project complexity, completion time, tied-up capital, and other use of resources. Where agreements with investors and contractors, for example, have not been brought into alignment, the Group assumes an extra project development risk in that that it may have to rectify defects or other matters that the contractor is either not obliged or not able to address. Several years back, TK Development adopted a strategy of executing a number of projects for its own account with a view to changing the Group s project portfolio from projects requiring cash flow to projects generating cash flow. Not all of these projects, now completed, have been sold. This means the Group has a substantial portion of its financial resources tied up in completed projects. The Group depends on selling several of its major completed projects to free up the capital required to secure progress in its new projects. Agreements with investors The Group s customers on the investment side are private individuals, property companies and institutional investors. To the extent possible, the Group seeks to reduce its working capital and risks relating to ongoing projects by applying forward funding from investors, which means that one or more investors undertake to provide funding as project construction progresses. Before construction starts, the investor and the Group come to an agreement on a well-defined project. The investor has a liquidity commitment throughout the construction period and is consulted on major decisions. These principles ensure that the Group s risks from construction startup are largely limited to the letting risk attaching to any remaining unlet premises and the risk of construction budget overruns. In agreements with institutional investors, the overriding risk relates to the Group s ability to deliver on time and in accordance with specifications. Even though a sales agreement regarding a project has been concluded, a number of major risks may still be attached to the project, which could lead to termination of a sales agreement on account of breach by one of the parties. In cases where a sales agreement is concluded before all lease agreements in the project have been finalized, the Group undertakes a calculated risk that the remaining premises cannot be let on terms and conditions that ensure a satisfactory return. The Group also assumes a counterparty risk, including with respect to, but not limited to, tenants and investors. For such sold projects, construction will not be initiated until the Group expects to be able to meet the requirements from the investor which finalize the project sale. Meeting these requirements typically falls within the Group s sphere of competencies. If the sale nevertheless cannot be completed, it could have a material adverse effect on the Group s future performance, results of operations, cash flows and financial position. Regulatory approvals The Group s future earnings depend on the inflow of new projects and consequently on the future availability of new building sites and authority approvals (planning legislation, local development plans, planning permission, etc.) concerning the location, size and use of a property. Changes in local plans or other factors that make obtaining planning permission difficult or restrict the supply of building sites may have a material adverse effect on the Group. Compliance with time schedules The Group bases its individual projects on overall and detailed time schedules. Time is a crucial factor in complying with agreements concluded with tenants and investors and a significant factor in ensuring that the individual projects progress according to plan and, accordingly, that the Group generates the earnings expected. Postponing an individual project may, for instance, mean that lease agreements lapse, tenants become entitled to compensation and, ultimately, that an investor is no longer under an obligation to buy the project. 42/65 Tk Development A/S Financial statements 2012/13 Management Commentary

43 RISK ISSUES Staff matters The knowledge, experience and network of key employees constitute some of the Group s greatest competencies, and are thus key prerequisites for the Group s ability to carry on a profitable business. Accordingly, ensuring these employees long-term commitment is a vital parameter for the Group. TK Development constantly aims to ensure the satisfaction of its employees and wants to be an appealing employer that can retain and attract new well-qualified staff. Environmental conditions TK Development is keenly aware that the public eye is sharply focused on environmental optimization throughout the construction process. Public concerns include the reduction of CO 2 emissions and the sustainability of building projects. When the Group acquires sites for its projects, the land is examined to determine any contamination. If a plot of land is contaminated, the Group will clean up the land for its intended use before starting construction or refrain from buying the relevant plot. When developing projects, the Group strives to achieve an optimum balance between environmental and social concerns while also generating revenue for the Group. The choice of materials, design, energy consumption and environmental impact all form part of such considerations. The Group aims to complete projects without causing unnecessary environmental impact. TK Development cooperates with tenants and investors to establish appropriate environmental solutions when developing and implementing new projects. For instance, the Group seeks to create finished projects with low energy consumption and a good indoor climate that will provide a comfortable working environment for future employees. Third-party agreements A major portion of the Group s business consists of concluding agreements with development partners, investors, tenants and contractors for property development projects. In addition, several cooperation agreements with business partners contain provisions stipulating that the Group has an obligation to inject capital into jointly owned companies or otherwise contribute to their financing. If the Group fails to meet such obligations, including due to a lack of liquidity, the Group may be bought out by the relevant company at a reduced price or the Group s ownership interest may be diluted. Insurance risks The Group reviews its overall insurance plan at least once a year, and Management believes the Group has necessary and adequate insurance against all relevant and usual risks. The Group is not insured against loss, damage or injury caused by natural disasters (including floods, earthquakes, etc.), wars, terrorist attacks, etc. Tax matters for the Group Deferred tax assets A deferred tax asset of DKK million is recognized in the balance sheet at 31 January The tax asset relates mainly to tax loss carryforwards in the various subsidiaries. Valuation is based on the existing rules for carrying forward losses and joint taxation or group contributions and the assumption that each subsidiary is a going concern. A change in the conditions and assumptions for carrying forward losses and joint taxation/ group contributions could result in the value of the tax assets being lower than that computed at 31 January Management has performed the valuation of the tax asset on the basis of available budgets and profit forecasts for a fiveyear period. For the first three years, budgets are based on an evaluation of specific projects in the Group s project portfolio. For the following two years, the profit forecasts are based on specific projects in the project portfolio with a longer time horizon than three years as well as various project opportunities. This includes making provision for the risk that projects are not implemented and the risk that project profits fall below expectations. A change in the conditions and assumptions for budgets and profit forecasts, including time estimates, could result in the value of the tax assets being lower than that computed at 31 January 2013, which could have a material adverse effect on the Group s results of operations and financial position. Joint taxation The Group has been jointly taxed with its German subsidiaries for a number of years. The retaxation balance in respect of the jointly taxed German companies amounted to DKK million at 31 January Full retaxation would trigger a tax charge of DKK 97.4 million at 31 January Tax has not been provided on the retaxation balance, because Management does not plan to make changes in the Group that would result in full or partial retaxation. If Management takes a different view, this could have a significant adverse effect on the Group s future performance, results of operations, cash flows and financial position. Management Commentary financial statements 2012/13 Tk Development A/S 43/65

44 RISK ISSUES Legal risks TK Development constantly enters into agreements with a range of contracting parties, such as investors, contractors, tenants, etc. These agreements involve opportunities and risks that are assessed and identified prior to contract conclusion. From time to time, the Group is involved in disputes and lawsuits. The Group is not a party to any lawsuits that, either individually or collectively, are expected to materially affect the Group s earnings. Senior Vice President indicted by the Polish police In June 2006, the Senior Vice President in charge of the Group s Polish branch office was detained, taken into custody and charged by the Polish police with irregularities related to obtaining regulatory approval (zoning permission) for the Polish Galeria Biala shopping centre project in Bialystok. In November 2006, the Senior Vice President was released on bail. The Polish prosecution service has indicted the Senior Vice President, and the case is currently being tried. During the entire process, Group Management has been unable to find any irregularities in connection with the project, and still fails to comprehend that the Senior Vice President could be involved in the alleged practices. If, contrary to Management s expectations, the Senior Vice President is convicted, this might damage the Group s reputation and thus adversely affect its activities and earnings. Litigation TK Development is currently party to the following lawsuit/arbitration case that is of relevance due to its scope: In the summer of 2002, De Samvirkende Købmænd, a trade association of grocery retailers, filed a complaint with the Nature Protection Board of Appeal (Naturklagenævnet) in respect of the City of Copenhagen s approval of the layout of the Field s department store. In particular, the claim asserted that the Field s department store is not one department store, but that it consists of several individual stores. The Nature Protection Board of Appeal made its decision in the matter on 19 December 2003, after which the department store layout was approved. De Samvirkende Købmænd subsequently took out a writ against the Nature Protection Board of Appeal before the Danish High Court. At the beginning of 2011, the High Court gave judgment in favour of De Samvirkende Købmænd. Neither the owner of the centre nor any company in the TK Development Group is a direct party to the case, but the High Court s judgment may have the effect that the Field s department store will have to be redesigned following negotiations with the relevant municipalities, and in that connection it cannot be ruled out that a claim may be made against the Group. As a result of the judgment, the owner of Field s may have to incur the financial burden of causing the necessary changes to the building layout. Regardless of the judgment, Management still believes the risk of this case to be negligible. Futurum Hradec Králové, shopping centre, Czech Republic In May 2013 the extension of the centre opened. The centre now comprises 110 stores and is fully let. 44/65 Tk Development A/S Financial Årsregnskabsmeddelelse statements 2012/ /13 Management Management Commentary Commentary

45 Shareholders Share information Stock exchange nasdaq OMX Copenhagen Index SmallCap Share capital DKK 630,985,725 Share denomination DKK 15 Number of shares 42,065,715 Share classes one Number of votes per share one Bearer security Yes Voting right restrictions no Share transfer restrictions no ISIN code DK Shareholders and their holdings The number of registered shareholders decreased from 7,928 at the beginning of the year to 7,396 at the end of the year. The registered shareholders represented % of the share capital at 31 January 2013 (31 January 2012: %). Shareholder composition at 31 January 2013: The table below shows a breakdown of shares held by the Supervisory Board and Executive Board. Change for Number of Direct and indirect ownership shares *) Supervisory Board: Ownership the year in and voting number of interest in % shares Niels Roth 703, % 0 Torsten Erik Rasmussen 89, % 0 Per Søndergaard Pedersen 279, % 0 Jesper Jarlbæk 56, % 0 Jens Erik Christensen 37, % 0 Peter Thorsen 415, % 415,190 Executive Board: Frede Clausen 243, % 0 Robert Andersen 115, % 0 Total 1,940, % 415,190 *) The holdings include all shares held by all members of the entire household as well as companies controlled by the above-named persons. Pension funds 9.00 % Supervisory and Executive Boards 4.61 % Other major shareholders % Foreign shareholders 9.29 % Other registered shareholders % Non-registered shareholders 8.38 % Banks, insurance companies and unit trusts 7.17 % Share price development On 31 January 2013, TK Development A/S shares were listed at a price of DKK 12.5 per share with a nominal value of DKK 15, equal to a market value of DKK 526 million. The price of TK Development A/S shares developed as follows during the year under review: The table below shows the ownership structure of TK Development A/S as of today, as reported to NASDAQ OMX Copenhagen A/S pursuant to section 29 of the Danish Securities Trading Act. Ownership Shareholders holding more than 5 % and voting of the total share capital interest in % February 2012 March April May June July August September October November December January Storm Real Estate ASA, 100 New Bond Street, London W1S 1SP, United Kingdom % Dava 1 ApS, c/o Kurt Daell, Lysagervej 25, 2920 Charlottenlund, Denmark % Strategic Capital ApS, Islands Brygge 79 C, 2300 Copenhagen S, Denmark 9.52 % Share price development ( = Index 100) Volume of trading, DKKm Volume of trading During the year under review, the share was traded on 249 days, with a total trading volume of DKK 154 million against DKK 181 million the year before. 4,628 trades were completed (2011/12: 7,660 trades), covering a total of 11,382,365 shares (2011/12: 10,343,972 shares). Management Commentary financial statements 2012/13 Tk Development A/S 45/65

46 SHAREHOLDERS Capital and share structure TK Development A/S shares are not divided into several share classes, and no shares are subject to special rights or restrictions. Each share confers one vote on the holder. TK Development s Articles of Association contain no restrictions governing share ownership, the number of shares that a shareholder may hold or share transferability. As all shareholders thus have equal rights, the Supervisory Board believes that the share structure chosen is the most appropriate one. The Company s Management reviews the Group s capital structure on a regular basis, as well as the need for any adjustments. Management s overall aim is to provide a capital structure that supports the Group s earnings potential, while at the same time ensuring the best possible relation between equity and loan capital and thus maximizing the return for the Company s shareholders. In order to strengthen the Group s financial platform, the Supervisory Board will request authorization at the forthcoming Annual General Meeting to carry out a capital increase with gross proceeds of about DKK million. Shareholders agreements Management is not aware of any shareholders agreements that have been concluded between TK Development A/S shareholders. Rules regarding alterations to the Company s Articles of Association The Articles of Association of TK Development A/S can only be altered following a resolution adopted at a General Meeting in compliance with the Danish Companies Act. Requests for the inclusion of a specific proposal in the agenda of the Annual General Meeting shall be submitted in writing by shareholders to the Supervisory Board. If the request is submitted no later than six weeks before the date of the General Meeting, the shareholder is entitled to have the proposal included in the agenda. If the Supervisory Board receives the request later than six weeks before the Annual General Meeting, the Supervisory Board will determine whether the request has been made sufficiently early to permit its inclusion in the agenda. At a General Meeting, resolutions can only be adopted in respect of business included in the agenda and any proposed amendments. If proposals to alter the Articles of Association are to be considered at a General Meeting, the essentials of such proposals must be stated in the convening notice. A resolution to alter the Company s Articles of Association is subject to the proposal being adopted by at least two-thirds of the votes cast as well as of the voting stock represented at the General Meeting. Share-based incentive schemes 2010 scheme In June 2010, the Supervisory Board granted 100,000 warrants to the Executive Board and 294,000 warrants to other executive staff members, a total of 394,000 warrants. As a consequence of the capital reduction and capital increase implemented in August 2010, where the subscription price for the newly issued shares was lower than the market value of the shares, the Supervisory Board resolved to adjust the number of warrants allocated and the subscription price for exercising the warrants. There was a total of 446,315 active warrants at the reporting date. Under the three-year warrant scheme, warrants can be exercised at the earliest two years after the grant date, and any shares subscribed for are subject to an additional lock-up period of up to two years. Warrants comprised by the incentive scheme may be exercised within three six-week windows, of which only one window remains, viz. the six weeks following publication of the preliminary announcement of financial statements for the 2012/13 financial year. The subscription price per share of nominally DKK 15, before any deduction for dividends, has been fixed at DKK 26.3 in the last exercise window. The Group s total expenses for the incentive scheme amount to DKK 1.9 million, being charged to the income statement over a period of 22 months scheme In June 2011, the Supervisory Board granted 125,000 warrants to the Executive Board and 375,000 warrants to other executive staff members, a total of 500,000 warrants. There was a total of 484,000 active warrants at the reporting date. Under the four-year warrant scheme, warrants can be exercised at the earliest three years after the grant date, and any shares subscribed for are subject to an additional lock-up period of up to two years. Warrants comprised by the incentive scheme may be exercised during three six-week windows. These six-week windows are placed thus: following publication of the preliminary announcement of financial statements for the 2013/14 financial year (from 46/65 Tk Development A/S Financial statements 2012/13 Management Commentary

47 Shareholders around 30 April 2014); following publication of the interim report for the sixmonth period ending 31 July 2014 (from around 30 September 2014); and following publication of the preliminary announcement of financial statements for the 2014/15 financial year (from around 30 April 2015). The subscription price per share of nominally DKK 15, before any deduction for dividends, has been fixed at DKK 28.0 in the first exercise window, DKK 28.9 in the second window and DKK 30.2 in the third window. The Group s total expenses for the incentive scheme amount to DKK 2.0 million, being charged to the income statement over a period of 35 months. Number of Number of warrants warrants 2010 scheme 2011 scheme Extraordinary General Meetings are held following a resolution by the shareholders in General Meeting or the Supervisory Board or at the request of the auditors of TK Development A/S or at the written request of shareholders holding not less than 5 % of the total share capital. All business transacted at General Meetings, with the exception of alterations to the Articles of Association or a resolution to dissolve the Company, is decided by a simple majority of votes unless otherwise provided by current legislation; see Article 6 of the Company s Articles of Association. Registered shares All shares are registered in book-entry form in accounts maintained in the computer system of VP Securities A/S, Weidekampsgade 14, PO Box 4040, 2300 Copenhagen S, Denmark, and must be held and managed through a Danish bank or other institution authorized to be registered as the custodian of the shares. The shares must be issued to named holders and may not be transferred to bearer. Supervisory Board 0 0 Executive Board: Frede Clausen 57,515 62,500 Robert Andersen 57,515 62,500 Other executive staff 331, ,000 Total 446, ,000 Dividends and dividend policy TK Development s long-term policy is to distribute a portion of the year s profit as dividends or alternatively via a share repurchase programme. This will always be done with due regard for the Group s capital structure, solvency, cash resources and investment plans. Annual General Meeting The General Meeting of shareholders is the supreme authority in all corporate matters of TK Development A/S, subject to the limitations provided by Danish law and TK Development A/S Articles of Association. The Annual General Meeting must be held in the municipality where TK Development A/S registered office is located sufficiently early to permit compliance with the Company s applicable time limits for the holding of General Meetings and the filing of Annual Reports. General Meetings are convened by the Supervisory Board. The Annual General Meeting will be held at 3 p.m. on 22 May 2013 at Aalborg Kongres & Kultur Center, Radiosalen, Aalborg. The Supervisory Board s powers Powers to issue new shares The Supervisory Board is authorized to increase the Company s share capital by one or more issues during the period ending on 30 June 2014 by up to nominally DKK 8,000,000, without any pre-emptive rights for the Company s existing shareholders. Moreover, the Supervisory Board is authorized to increase the Company s share capital by one or more issues during the period ending on 30 June 2015 by up to nominally DKK 7,500,000, without any pre-emptive rights for the Company s existing shareholders. This authorization is to be used for implementing the capital increases resulting from the exercise of warrants under the existing incentive schemes. Accordingly, the overall authorization for the Supervisory Board to subscribe for capital will amount to 2.4 % of the Company s share capital. The outstanding warrants following the adjustment as a result of the capital reduction and capital increase implemented in August 2010 amount to nominally DKK 6,694,725 and nominally DKK 7,260,000, respectively. Treasury shares At the Annual General Meeting on 25 May 2010, the Supervisory Board was authorized, on behalf of the Company, to acquire treasury shares having a nominal value of not more than 10 % of the share capital in order to optimize the Group s capital structure. The authorization is valid for a period of five years from the adoption of the resolution at the Annual General Meeting. Management Commentary financial statements 2012/13 Tk Development A/S 47/65

48 Shareholders Rules on insider trading TK Development s Management and employees are only allowed to trade in the Company s shares during the six-week period after the publication of annual and quarterly reports and any other comprehensive announcements of financial results. If Management or employees are in possession of inside information that may influence the pricing of TK Development s shares, they may not trade in the shares even during the sixweek period. The Company keeps a register of the shares held by insiders, including any changes in their portfolios, and discloses this information in accordance with existing legislation. Investor relations TK Development aims to keep its shareholders and investors up-to-date on all relevant matters. The Company s website, includes all company announcements issued for the past five years, updated share prices and information about the Group s projects in progress. When investor presentations are published in connection with the announcement of annual and half-year financial results, they are also made available at the Company s website. Moreover, there is a direct link from TK Development A/S website to the NASDAQ OMX Copenhagen A/S website ( which contains further information about the TK Development A/S share. Reference is also made to the description of Corporate Governance at the Company s website, FINANCIAL CALENDAR Annual Report 2012/13 30 April 2013 Annual General Meeting 22 May 2013 Interim Report Q1 2013/14 25 June 2013 Interim Report Q1-Q2 2013/14 26 September 2013 Interim Report Q1-Q3 2013/14 18 December 2013 Preliminary announcement of financial statements 2013/14 24 April 2014 Annual Report 2013/14 1 May 2014 Annual General Meeting 26 May 2014 Company announcements No. Date 3 2 Feb 2012 Information about the leading employees and their closely related parties transactions with TK Development A/S shares and related securities 4 26 Apr 2012 Preliminary announcement of financial statements 2011/ May 2012 Notice convening the Annual General Meeting of TK Development A/S 6 23 May 2012 Proposal for TK Development s Supervisory Board to have seven members in future 7 24 May 2012 Annual General Meeting of TK Development A/S on 24 May Jun 2012 Information about the leading employees and their closely related parties transactions with TK Development A/S shares and related securities 9 6 Jun 2012 Information about the leading employees and their closely related parties transactions with TK Development A/S shares and related securities 10 6 Jun 2012 Information about the leading employees and their closely related parties transactions with TK Development A/S shares and related securities Jun 2012 Interim Report Q1 2012/ Jul 2012 TK development concludes a conditional agreement with Heitman concerning the sale of two Polish projects at a total project value of EUR 95 million Jul 2012 Information about the leading employees and their closely related parties transactions with TK Development A/S shares and related securities Jul 2012 Major shareholder announcement Sep 2012 Interim Report Q1-Q2 2012/ Oct 2012 TK Development sells retail park in Gävle, Sweden Dec 2012 Interim Report Q1-Q3 2012/ Jan 2013 Information about the leading employees and their closely related parties transactions with TK Development A/S shares and related securities 2 9 Jan 2013 Information about the leading employees and their closely related parties transactions with TK Development A/S shares and related securities 3 21 Jan 2013 Information about the leading employees and their closely related parties transactions with TK Development A/S shares and related securities 4 24 Jan 2013 Financial calendar 48/65 Tk Development A/S Financial statements 2012/13 Management Commentary

49 Corporate governance TK Development s Supervisory and Executive Boards continue to focus on the recommendations for corporate governance, and the Supervisory Board reassesses its policies for compliance with the recommendations at least once a year. In a few areas, the Company does not comply with the recommendations, but instead provides an explanation of its reasons for not complying with a specific recommendation. The Supervisory Board is of the opinion that TK Development A/S lives up to the existing Recommendations on Corporate Governance. A detailed review of the Supervisory Board s policies for compliance with the recommendations issued by the Committee on Corporate Governance is available at com/cg_2012_13 The Committee recommendations not followed are listed below: Corporate social responsibility In light of the Company s size and activities and the Group s operating markets, the Supervisory Board has decided not to adopt policies for corporate social responsibility. The Board will regularly assess the need for policies in this area. Diversity The limited size of the organization and its division into units operating in different countries with relatively few employees in each country mean that the Group is largely compelled to focus on knowledge, competencies and experience when recruiting and promoting employees. The Supervisory Board acknowledges the importance of the diversity of the Company s Management and staff and is naturally alert to providing equal opportunities to both genders. For the reasons set out above, TK Development has so far chosen not to establish specific guidelines and objectives for diversity, but after the reporting date the Company has adopted a policy to ensure the diversity of its Management and staff, including a policy to increase the share of women at other managerial levels in the Group. Age limit Setting an age limit for the members of the Supervisory Board has so far not been considered appropriate by TK Development, as talents, expertise and experience are weighted higher than an age criterion. However, to comply with the existing recommendations, Management has decided to recommend for adoption at the Annual General Meeting on 22 May 2013 that the Company s Articles of Association should introduce an age limit of 70 for Supervisory Board members. Audit committee The Supervisory Board believes that auditing is an issue that concerns all board members. For this reason, and given the complexity of the accounting procedures and the size of the Supervisory Board, it has been considered appropriate not to set up an actual audit committee, but to let all board members function jointly as the audit committee. Nomination committee The Supervisory Board has decided not to establish a nomination committee because, given its size, the Supervisory Board finds that these tasks are best handled by the Board as a whole. Content of remuneration policy So far, the Supervisory Board has decided not to set limits for how high a portion of the total remuneration may be constituted of variable components, as the amount of bonus will only be paid if a minimum 8 % return on equity is achieved. Until further notice, the amount of bonus is expected to account for a minor portion only relative to the fixed pay elements. As bonus is only paid if a minimum 8 % return on equity is achieved for an individual financial year, the Supervisory board assesses that the remuneration policy ensures constant alignment between the interests of the Executive Board and the shareholders. It has therefore been found unnecessary to establish criteria ensuring that the vesting period for variable pay elements, wholly or in part, is longer than one financial year. The Supervisory Board Composition and rules regarding appointments and replacements According to the Articles of Association, the Supervisory Board must be composed of not less than four nor more than seven members. The Supervisory Board is currently composed of six members elected by the General Meeting. Management considers the composition of the Supervisory Board to be appropriate relative to the Company s current activities and requirements. In Management s opinion, the current Supervisory Board members have the financial, strategic and commercial expertise required by an international business such as TK Development. The members of the Supervisory Board are elected at the General Meeting of shareholders to serve for a term of one year at a time. Retiring Supervisory Board members are eligible for re-election. The Supervisory Board s competencies cover a wide spectrum, including strategic management, international relations, capital structure, the property sector, the retail trade, risk assess- Management Commentary financial statements 2012/13 Tk Development A/S 49/65

50 corporate governance ment and control, investor relations, business development as well as accounting and financial expertise. The professional qualifications of the Supervisory Board members are listed individually under the heading The Supervisory Board. The Supervisory Board considers all its members, with two exceptions, to be independent of the Company. Torsten Erik Rasmussen is not considered independent as he has held a seat on the Supervisory Board for more than 12 years, and Per Søndergaard Pedersen is not considered independent because he was previously a member of the Company s Executive Board. Self-evaluation Once a year the Supervisory Board systematically evaluates its work and competencies with a view to continuously improving and streamlining its work. The Chairman is in charge of this internal evaluation of the Supervisory Board. To date, the Supervisory Board has chosen to conduct a qualitative evaluation in the form of interviews and open, constructive dialogue with all members present at the same time. The evaluation is based on a predetermined list of subjects, including communication and collaboration, results achieved compared to targets set, short- and long-term composition of the Supervisory Board, and the competencies of its members as well as any need for knowledge and skills development. Other relevant issues are considered on an ad-hoc basis. The mutual confidence of the members in each other automatically leads to a free exchange of opinions, and each member is encouraged to take an active part in discussions. If desired by any member or the Chairman, the members can be interviewed individually on any specific subject. The self-evaluation has promoted the further development of the Group s strategy, including sharper focus on risk management and on improving communication with the market. After the reporting date, this has for instance translated into a decision to change the Group s internal and external reporting. Number of Supervisory Board meetings The Supervisory Board held seven board meetings in the 2012/13 financial year. Remuneration of the Supervisory Board The members of the Supervisory Board are paid a fixed fee and are not covered by the Company s bonus and incentive schemes. No separate fee is paid for audit committee work as all Supervisory Board members sit on this committee. The remuneration payable to Supervisory Board members consists of a basic fee. The Chairman is paid three times the basic fee, while the Deputy Chairman is paid twice the basic fee. As part of the cost cuts implemented by the Group in January 2012, the Supervisory Board accepted a 20 % fee reduction, with the basic fee amounting to DKK 200,000 in 2012/13. Together with its proposal for adoption of the Annual Report for 2012/13, the Supervisory Board will recommend that the Annual General Meeting adopt a further extraordinary 20 % reduction of the basic fee, which will thus be fixed at DKK 160,000 for 2013/14. Remuneration of the Executive Board Remuneration policy Every year the Supervisory Board assesses and determines the remuneration payable to the Executive Board members, based on the recommendation of the Chairman and Deputy Chairman. The overall pay package and its composition are determined by the results achieved, the Executive Board s competencies and the Supervisory Board s wish to ensure that the Company can continue to attract, retain and motivate qualified executives. In this connection, the Supervisory Board takes the Company s situation and general development into account. Every year, the Supervisory Board reviews the remuneration payable to the Executive Board by comparing it to that payable to executive boards of other comparable companies with international activities. The Executive Board s remuneration consists of a fixed and a variable portion. The variable remuneration consists of a shortterm and a long-term incentive scheme. The overall pay package consists of a fixed salary, bonus, defined-contribution pension of 2 % of the basic salary and other benefits, including a company-provided car, telephone, IT solution and newspaper, as well as health insurance and warrants. The remuneration policy appears from the Company s website, Remuneration The remuneration of the Executive Board in 2012/13 was based on the guidelines adopted at the General Meeting in As part of the cost cuts implemented by the Group in January 2012, the remuneration of the Executive Board was reduced by 20 % for a 24-month period starting on 1 February Warrants were not granted to the Executive Board in The remuneration of each individual member of the Executive Board appears from the Group s Annual Report. The remuneration for 2013/14 will also be based on the guidelines adopted 50/65 Tk Development A/S Financial statements 2012/13 Management Commentary

51 corporate governance at the General Meeting in 2011, as no changes have been made to these guidelines. However, a new two-year agreement has been made with the Executive Board, according to which a further 20 % of the Executive Board s fixed annual remuneration will not be paid on an ongoing basis, which will equal a 36 % reduction compared to the remuneration paid in the 2011/12 financial year, which will apply to the period from 1 May 2013 to 30 April During that period, the reduced fixed annual salary will amount to DKK 2.7 million for Frede Clausen and DKK 2.1 million for Robert Andersen. Up to two-thirds of the remuneration withheld during the two-year period will nevertheless be paid when the Group meets specific operational targets, fixed as part of the previously described two-year transformation process that consists of realizing the initiatives adopted under the revised strategy. Warrants will not be granted to the Executive Board in 2013 either. Retention and severance programmes Under the Executive Board s service agreements, the individual Executive Board member may give notice of termination no later than three months after the occurrence of an extraordinary event (change of control), such termination to take effect 12 months after notice has been given. The Executive Board member may demand to be released from his or her duties during the period of notice, with the usual remuneration being payable during such period. Internal audit At least once a year, the Supervisory Board takes a position on the adequacy of internal control and risk management systems. Based on the company s size, complexity and accounting department organization, the Supervisory Board has so far assessed that internal audits have been unnecessary. Audit committee The Supervisory Board believes that auditing is an issue that concerns all board members. For this reason, and given the complexity of the accounting procedures, it has been considered appropriate not to set up an actual audit committee, but to let all board members function jointly as the audit committee. The terms of reference of the audit committee have been laid down, and, basically, four meetings are held each year. The Company website contains information about the most important activities during the year, the number of audit committee meetings held and the terms of reference of the audit committee. Statutory Annual Corporate Governance Statement TK Development has chosen to present its Statutory Annual Corporate Governance Statement on its website instead of in the management commentary. The Corporate Governance Statement is available at www. tk-development.com/cgs_12_13 The Executive Board members are not subject to any other special severance terms. The term of notice for Executive Board members is 12 months on the part of the Company and six months on the part of the member. It is company policy to ensure that Executive Board members have an incentive to work dedicatedly in the interests of the Company and its shareholders in the event of a merger, takeover bid or other extraordinary situations. Against this background, the Supervisory Board may decide, on the basis of a specific assessment, to pay a retention bonus whereby Executive Board members receive a special consideration, however, not exceeding 12 months fixed salary, for example in the event that the Company merges with another company or if another company takes over all the Company s activities, subject to the General Meeting s approval. Management Commentary financial statements 2012/13 Tk Development A/S 51/65

52 Statutory annual corporate social responsibility statement In addition to carrying on profitable business activities, TK Development intends to adhere to and expand the Group s ethical, social and environmental responsibilities as a business corporation. TK Development fundamentally endorses the UN s ten social responsibility principles, but has not acceded to the UN Global Compact. The Group only carries on activities in countries that have already incorporated human rights, labour standards and anti-corruption principles into their national legislation. The Supervisory Board has not introduced any policies that integrate corporate social responsibility into the Company s strategy and activities. Reference is also made to CSR_2012_13 Barkarby Gate, Stockholm, Sweden Development of a 20,000 m 2 retail park. The current occupancy rate is 70 %. Opening is scheduled for late /65 Tk Development A/S Financial statements 2012/13 Management Commentary

53 The Supervisory Board NAME TOOK OFFICE END OF TERM BIRTHDAY 1) INDEPENDENCE Niels Roth (Chairman) 2007 May 2013 July 1957 Independent Torsten Erik Rasmussen (Deputy Chairman) 1998 May 2013 June 1944 Not independent 2) Per Søndergaard Pedersen 2002 May 2013 March 1954 Not independent 3) Jesper Jarlbæk 2006 May 2013 March 1956 Independent Jens Erik Christensen 2010 May 2013 February 1950 Independent Peter Thorsen 2012 May 2013 March 1966 Independent 1) See section in the Recommendations on Corporate Governance prepared by NASDAQ OMX Copenhagen A/S. 2) Has held a seat on the Supervisory Board for more than 12 years. 3) Was previously a member of the Company s Executive Board. Management Commentary financial statements 2012/13 Tk Development A/S 53/65

54 THE SUPERVISORY BOARD Niels Roth Chairman of the Supervisory Board Born July 1957 Joined the supervisory board 2007 End of term May 2013 Torsten Erik Rasmussen Deputy Chairman Born June 1944 Joined the supervisory board 1998 End of term May 2013 Education 1983 MSc (Economics). Employment CEO of Carnegie Bank, and Group Head of Investment Banking in the Carnegie Group ( ) Member of the Danish Securities Council Chairman of the Danish Securities Dealers Association. Education Commercial education, Dalhoff Larsen & Horneman A/S, Denmark National service with the Royal Life Guards, discharged from military service as first lieutenant (R) in MBA, IMEDE, Lausanne, Switzerland International Senior Managers Program, Harvard Business School, USA. Special competencies Financial markets, capital structure, investment, accounting, investor relations. Executive board member Zira Invest II ApS; Zira Invest III ApS. Supervisory board chairman Fast Ejendom Holding A/S; Foreningen Fast Ejendom Dansk Ejendomsportefølje f.m.b.a.; Friheden Invest A/S; NPC A/S. Supervisory board member A/S Rådhusparken; A/S Sadolinparken; Arvid Nilssons Fond; FFH Invest A/S; Investeringsforeningen SmallCap Danmark (Deputy Chairman); Porteføljeselskab A/S (Deputy Chairman); Realdania; SmallCap Danmark A/S (Deputy Chairman). Board committees and other posts None. Employment Head of department and later director of Northern Soft- & Hardwood Co. Ltd., Congo Executive secretary, LEGO System A/S, Denmark Finance manager, LEGOLAND A/S, Denmark Logistics manager, LEGO System A/S, Denmark Assistant manager (logistics), LEGO System A/S, Denmark President and CEO, LEGO Overseas A/S, Denmark Manager and member of Group Management, LEGO A/S, Denmark. Special competencies Strategic management, international relations, accounting and finances. Executive board member Morgan Management ApS. Supervisory board chairman Acadia Pharmaceuticals A/S; Ball ApS; Ball Holding ApS; Ball Invest ApS; CPD Invest ApS; Oase Outdoors ApS. Supervisory board member Acadia Pharmaceuticals Inc., USA; Morgan Invest ApS; Schur International Holding A/S; Vola A/S; Vola Ejendomme ApS; Vola Holding A/S. Board committees and other posts Chairman of the Acadia Pharmaceuticals Inc. s Corporate Governance Committee, USA; Member of the Acadia Pharmaceuticals Inc. s Compensation Committee, USA. 54/65 Tk Development A/S Financial statements 2012/13 Management Commentary

55 THE SUPERVISORY BOARD Per Søndergaard Pedersen Jesper Jarlbæk Born March 1954 Joined the supervisory board 2002 End of term May 2013 Born March 1956 Joined the supervisory board 2006 End of term May 2013 Education Trained with Sparekassen Nordjylland (Spar Nord Bank). Employment Head of the business department at Sparekassen Nordjylland headquarters, Østeraa branch Regional manager, Sparekassen Nordjylland, Hasseris branch CEO, TK Development A/S. Special competencies Retail trade, property sector, financial markets, business development, investor relations. Executive board member A.S.P. Ejendom ApS; J.A. Plastindustri Holding A/S; PSP Holding ApS; PSPSH Holding ApS; Radioanalyzer ApS. Supervisory board chairman AG I A/S; Arne Andersen A/S; Athene Group A/S; Bjørk & Maigård Holding ApS; Business Institute A/S; Conscensia A/S; Conscensia Holding A/S; dansk boligstål a/s; EIPE Holding A/S; Exportakademiet Holding ApS; GLC Management Invest ApS; Global Car Leasing A/S; Ib Andersen A/S; Ib Andersen A/S Øst; Ib Andersen Ventilation A/S; J.A. Plastindustri A/S; JMI Ejendomme A/S; JMI Gruppen A/S; K/S Asschenfeldt, Dietrich-Bonhoeffer-Strasse, Waren; Lindgaard A/S Rådgivende Ingeniører F.R.I.; Nowaco A/S; Nybolig Jan Milvertz A/S; Restaurant Fusion A/S. Supervisory board member Arkitekterne Bjørk & Maigård ApS; Ejendomsmægleraktieselskabet Thorkild Kristensen; Ejendomsmægleraktieselskabet Thorkild Kristensen Bolig; Ejendomsmægleraktieselskabet Thorkild Kristensen, Blokhus; Ejendomsmægleraktieselskabet Thorkild Kristensen Erhverv; Emidan A/S; Fan Milk International A/S; Fonden Musikkens Hus i Nordjylland; Investeringsforeningen SmallCap Danmark; J.A. Plastindustri Holding A/S; JMI Investering A/S; JMI Projekt A/S; K/S Danske Dagligvarebutikker; Ladegaard A/S; Marius A/S; PL Holding Aalborg A/S; P L Invest, Aalborg ApS; Porteføljeselskab A/S; Sjællandske Ejendomme A/S; Skandia Kalk International Trading A/S; SmallCap Danmark A/S; Wahlberg VVS A/S. Education 1981 Trained as a state-authorized public accountant Licence placed in inactive status. Employment Served with Arthur Andersen (most recently as managing partner) Deloitte (executive vice president). Special competencies International management, risk assessment and control, accounting and finance. Executive board member Earlbrook Holdings Ltd. A/S; SCSK 2272 ApS; Timpco ApS. Supervisory board chairman Advis A/S; Altius Invest A/S; Basico Consulting A/S; Basico Consulting International ApS; Catacap Management ApS; Groupcare A/S; Groupcare Holding A/S; Jaws A/S; Julie Sandlau China ApS; Sanderman Pte. Ltd., Singapore; Spoing A/S; Valuemaker A/S. Supervisory board member a-solutions a/s; Bang & Olufsen a/s; Earlbrook Holdings Ltd. A/S; Københavns Privathospital A/S; Polaris III Invest Fonden; ShowMe A/S; Økonomiforum ApS. Board committees and other posts Business Angels Copenhagen (Chairman); DVCA, Danish Venture Capital and Private Equity Association (Deputy Chairman); Sailing Denmark (member); Chairman of the audit committee, Bang & Olufsen a/s. Board committees and other posts None. Management Commentary financial statements 2012/13 Tk Development A/S 55/65

56 THE SUPERVISORY BOARD Jens Erik Christensen PETER Thorsen Born Febuary 1950 Joined the supervisory board 2010 End of term May 2013 Born March 1966 Joined the supervisory board 2012 End of term May 2013 Education 1975 MSc (Actuarial Science). Employment Baltica Forsikring Chief Operating Officer of Danica Liv & Pension CEO of Codan Forsikring A/S Managing Director of EMEA, the RS&A Group CEO of Codan. Special competencies Property sector, financial markets, international relations, business development. Executive board member Sapere Aude ApS. Supervisory board chairman Alpha Holding A/S; ApS Harbro Komplementar-48; Behandlingsvejviseren A/S; Core Strategy Consultants A/S; Dansk Merchant Capital A/S; Ecsact A/S; K/S Habro-Reading, Travelodge; Mediaxes A/S; Scandinavian Private Equity A/S; Skandia A/S; Skandia Link Livsforsikring A/S; Skandia Liv A/S; Skandia Liv A A/S; TA Management A/S; Vördur tryggingar hf. Supervisory board member Alpha Insurance A/S; Andersen & Martini A/S; BankNordik A/S (Deputy Chairman); Hugin Expert A/S (Deputy Chairman); Mbox A/S; Nemi Forsikring AS; Nordic Corporate Investments A/S; P/F Trygd; Skandia Asset Management Fondsmæglerselskab A/S; Your Pension Management A/S. Board committees and other posts Chairman of Dansk Vejforening (Danish Road Association); Chairman of the audit committee, Andersen & Martini A/S; Member of the audit committee, Skandia Liv A/S; Member of the Danish Government s infrastructure commission. Education 1992 MSc (Business Administration and Auditing). Employment Accountant, More Stevens Marketing Manager, Group CFO & International Controller, KEW Industri A/S Finance Manager, Electrolux Hvidevarer A/S Finance Manager, Marwi International A/S (Incentive A/S) CEO, Basta Group A/S CEO, Bison A/S CEO, Louis Poulsen Lighting A/S Group Chief Executive, Targetti Poulsen CEO, EBP Ejendomme A/S, EBP Holding A/S, Kirk & Thorsen A/S, Kirk & Thorsen Invest A/S and Modulex Holding ApS. Special competencies Strategic management, accounting and finances, business development. Executive board member EBP Holding A/S; EBP Ejendomme A/S; Kirk & Thorsen A/S; Kirk & Thorsen Invest A/S; Modulex Holding ApS. Supervisory board chairman Biblioteksmedier A/S; Ejendomsselskabet Smedetoften 12 A/S; Invest Marts A/S; Megatherm Energi Invest A/S; Modulex A/S; PFP A/S; Procom A/S; Ravn Arkitektur A/S; Scan Auto & Dybbroe Group A/S; SD Group A/S; VT1 Holding A/S. Supervisory board member Careitec A/S; Careitec Holding A/S; Claus Heede Holding A/S; EBP Holding A/S; Kirk & Thorsen A/S; Kirk & Thorsen Invest A/S; Ny Droob ApS; Rotation A/S; Starco Europe A/S; Viborg Storcenter A/S. Board committees and other posts Member of the Executive Committee, Sct. Maria Hospice. 56/65 Tk Development A/S Financial statements 2012/13 Management Commentary

57 The Executive Board Frede Clausen President and CEO Born July 1959 Member of the Executive Board since 1992 Executive board member Frede Clausen Holding ApS. Supervisory board chairman Ahlgade A/S*; Ringsted Outlet Center P/S*; SPV Ringsted ApS*; Udviklingsselskabet Nordkranen A/S* Supervisory board member Euro Mall Luxembourg JV s.à.r.l.*; Euro Mall Ventures s.à r.l.*; Kommanditaktieselskabet Danlink-Udvikling*; Komplementarselskabet DLU ApS*; K/S Købmagergade 59, st.; Palma Ejendomme A/S; Hotel den Gamle Skibssmedie ApS. Board committees and other posts None. Robert Andersen Executive Vice President Born April 1965 Member of the Executive Board since 2002 Executive board member Ringsted Outlet Center P/S*; Palma Ejendomme A/S; Hotel den Gamle Skibssmedie ApS. Supervisory board chairman None. Supervisory board member Ahlgade A/S*; Kommanditaktieselskabet Danlink-Udvikling*; Kommanditaktieselskabet Østre Havn*; Komplementarselskabet DLU ApS*; Ringsted Outlet Center P/S*; SPV Ringsted ApS*; Udviklingsselskabet Nordkranen A/S*; Østre Havn Aalborg ApS*; Palma Ejendomme A/S; Hotel den Gamle Skibssmedie ApS. Board committees and other posts None. *) The companies form part of the TK Development Group and are partly owned, directly or indirectly, by TK Development A/S. Management Commentary financial statements 2012/13 Tk Development A/S 57/65