Citycon OYJ. Update to Discussion of Key Credit Factors. CREDIT OPINION 2 December Update. Summary Rating Rationale

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1 CREDIT OPINION Citycon OYJ Update to Discussion of Key Credit Factors Update Summary Rating Rationale RATINGS Citycon OYJ Domicile Finland Long Term Rating Baa1 Type LT Issuer Rating - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Analyst Contacts Roberto Pozzi VP-Sr Credit Officer roberto.pozzi@moodys.com Yulia Syerova Associate Analyst yulia.syerova@moodys.com Ramzi Kattan VP - Senior Analyst ramzi.kattan@moodys.com Mario Santangelo Associate Managing Director mario.santangelo@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA Citycon s Baa1 long term issuer rating primarily reflects (i) the high quality of its shopping centre portfolio and the company s good franchise value in the Nordics, (ii) its excellent geographic exposure to three strong economies in the Nordic region, good industry diversification and moderate tenant concentration, (iii) a moderate development pipeline, (iv) a good and further improving fixed charge coverage, (v) solid liquidity underpinned by a fully unencumbered asset bases and (vi) good access to capital despite presence of a dominant shareholder. The rating is mainly constrained by the company s (i) declining like-for-like rental growth, (ii) significant ongoing investments and (iii) somewhat elevated leverage at the current rating level when compared to similarly rated peers, although expected to improve. As of 30 September 2016, effective leverage as measured by gross debt to total assets stood at 44.1%, compared to 43.5% in 2015 and 39.0% in The company s fixed charge cover was 3.2x year-to-date as of 30 September 2016 compared to previous levels of 3.0x and 2.7x, respectively. A fully unencumbered asset base is a major strength underpinning the company s financial profile. Credit Strengths and Challenges High quality shopping centre portfolio but declining like for like rental growth Good franchise value in the Nordics shopping centre market Excellent geographic exposure, good industry diversification and moderate tenant concentration Moderate development pipeline Somewhat elevated leverage but expected to improve Good and further improving fixed charge coverage thanks to ongoing developments and acquisitions Solid liquidity underpinned by a fully unencumbered asset base and excellent debt maturity profile Good access to capital despite presence of dominant shareholder

2 Rating Outlook The stable outlook also reflects our expectation that Citycon s key debt metrics will improve over the next months, with fixed charge coverage trending towards 3.5x and effective leverage towards 40%. The stable outlook also factors in our expectations that the ongoing declining trend in the company s like-for-like growth will reverse and sustain occupancy levels. Factors that Could Lead to an Upgrade A meaningful recovery in like for like rental growth and sustained occupancy Effective leverage towards 35% Fixed charge cover sustained above 3.5x Solid liquidity Factors that Could Lead to a Downgrade A decline in occupancy levels and sustained negative rental growth Effective leverage sustained above 45% Fixed charge cover sustained below 2.75x Key Indicators Exhibit 1 Key indicators - Citycon OYJ [1] [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] Fixed Charges includes capitalized interests explained in Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations revised December Source: Moody's Financial Metrics Detailed Rating Considerations Citycon's long term issuer rating of Baa1 is in line with the grid indicated ratings based on latest historical financials and under our months Forward View. Key factors currently influencing the ratings and outlook include: This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 High quality shopping centre portfolio but declining like-for-like rental growth We have assigned Citycon an A score for the rating sub-factor Asset Quality in our scorecard to reflect the location of a majority of the company s assets in and around large metropolitan areas with high purchasing power, the portfolio s track record of consistently high occupancy and expectations that the company will be able to reverse the ongoing trend of declining like- for-like rental growth. Citycon owns and manages a portfolio of 55 retail properties in the Nordics, of which 24 located in Finland of which 11 in the Helsinki metropolitan area, 19 in Norway of which six in the Greater Oslo area, nine in Sweden of which eight in the Greater Stockholm area, two in Estonia and one in Denmark. The core of the company s portfolio includes 50 shopping centres accounting for around 96% of the value of the portfolio, with the remaining retail properties represented by supermarkets. Of the 55 properties, five are owned though joint ventures (including Kista Galleria and four properties in Norway), two are rented and one is held for sale. Citycon and the Canada Pension Plan Investment Board (CPPIB, unrated) jointly acquired the Kista Galleria shopping centre in Stockholm in 2012 for approximately 526 million. In 2015, Kista Galleria had 95,300 square meters of gross leasable area, an annual footfall of approximately 19 million visitors and annual retail sales of 216 million, down from 280 million in Kista Galleria is Citycon s largest shopping centre by GLA. After three years of moderate gains, occupancy decreased for the first time during 2016, although only slightly, to 96.0% at the end of September 2016 from 96.5% in June The near term outlook remains weak with both retail sales and footfall flat like-for-like, and negative at Kista. More negatively, Citycon s like-for-like net rents growth has been declining over the past three years; rental income grew by only +0.6% in the first nine months of 2016 (including Norway and Kista) compared to a positive 1.1% in 2015, 2.9% in 2014 and 4.6% in However, we note that the weak result in 2016 partly reflected redevelopments in the three largest properties in the Helsinki area (Iso Omena, Myyrmanni, lippulaiva), the effect of which we expect to be reversed over the next two years. Indeed, the company reported a 30% footfall increase since the opening of an extension at Iso Omena, one of its largest shopping centres. The current rating factors in our expectations that ongoing development investments between million per annum, divestments of million, mainly in Finland, as well as additional investments will further improve the quality of Citycon s portfolio, reduce its exposure to single assets, in particular Iso Omena ( million fair value in 2015) and to Finland whilst prudently increasing its exposure to stronger regions. More negatively, we note that with an average lease maturity of 3.4 years, Citycon is at the low end of the range within the peer group, although in line with the market standards in the Nordics. However, leases with anchor tenants have longer maturities. Excellent geographic exposure, good industry diversification and moderate tenant concentration We have assigned Citycon an A score to the rating sub-factor Diversity reflecting its excellent geographic exposure to three highly rated European economies, good industry diversification with a strong food/grocery anchor, moderate tenant concentration, more than offsetting some single asset concentration. Citycon s properties are located in three highly rated European countries with 36% of the portfolio s fair value in Finland (Aa1 stable), 29% in Norway (Aaa stable), 27% in Sweden (Aaa stable) and 7% split between Estonia (A1 stable) and Denmark (Aaa stable), as of 30 September The economic performance of the three Nordic countries is only loosely connected, as evidenced by the recent divergence of their GDP growth rates. While Finland is only slowly emerging from a period of negative growth, Sweden s economy continues to perform strongly both compared to Finland and to all other European countries. Norway has been affected by the sharp decline of oil and gas prices, but its economy is proving to be very resilient. Moody s expects modest but positive real GDP growth in Norway and Sweden of around 1.5% and 3% over the next two years, respectively, whilst we recently revised Finland s growth forecast to +0.5% from previously +1.0%. 3

4 Exhibit 2 Citycon s exposure to three highly rated countries is a key credit strength Assets fair value, % Source: Company data The company has one of the largest exposures to food/grocery shopping across Europe s comparable retail property companies, with 20% of its 2015 rental income, one of the highest across the peer group, as shown in Exhibit 3. Exhibit 3 We positively view Citycon s greater exposure to food/groceries sales % of total rental income [1] Split provided according to rental space, not total rental income [2] Groceries/Food includes cafes and restaurants. Source: Companies' data, Moody's We believe that food retail sales tend to be more stable and, everything else being equal, that this also tends to result in a more defensive business profile for retail property companies, particularly in light of the increasing market penetration of e-commerce in some retail segments. However, we also note that food retailing is highly consolidated in the Nordics, with a virtual oligopoly of three grocers in Sweden, which between them hold a market share of approximately 70%. Similarly, Finland s two main grocers have a combined market share of around 75%. While this high market concentration also contributes to stability, the bargaining power of retailers versus their landlords can be substantial. Citycon s tenant concentration is moderate with the largest five tenants generating 22% of 2015 rental income. The company s single largest tenants are Finnish retailers Kesko Oyi (unrated) and S-Group (unrated), which generated 8% and 5% of Citycon s rental income in 2015, respectively. 4

5 More negatively, Citycon s property portfolio suffers from significant single asset exposure, with Kista (100%) and Iso Omena representing around 13% and 9% of gross assets respectively, and the single largest ten properties representing 35% of gross assets, including 100% of Kista. Good franchise value in the Nordics shopping center market We have assigned Citycon an A score for the sub-factor Franchise Value to reflect its market position as the Nordics largest shopping centre owner and operator, in a sector where scale is a competitive advantage. The company is the largest listed property company in the Nordics and the 5th largest listed retail property company in Europe based on gross asset value. The acquisition of Sektor in mid-2015 has transformed Citycon from a local player in one main market (Finland) into a regional one, with strong market shares in each of its markets. Citycon is the largest retail property company in Finland, the second largest in Norway after Olav Thon (unrated) and the third largest in Sweden after Unibail-Rodamco (unrated) and Olav Thon. If Kista Galleria was fully consolidated, Sweden would represent a third of the company s GAV and boost its market position in the country. Moderate development pipeline Citycon has moderate exposure to new development activities, with committed investment capital expenditures of 5.9% of total assets as of 30 September 2016 (4.7% in 2015), mapping to A in our scorecard. Additionally, development activities mainly consist of low-risk redevelopments and extensions of existing properties rather than entirely new developments. This significantly reduces the company s exposure to development risk and the need to acquire and/or maintain expensive land banks. Somewhat elevated leverage but expected to improve At 30 September 2016, effective leverage, measured as gross debt to total assets, stood at 44.1%, up from 43.5% at the end of 2015 and 39% at the end of 2014, mapping to Baa in our scorecard. The increase in leverage over the past two years mainly reflects the acquisition of Sektor in 2015 and elevated investments following the buyout of Iso Omena construction joint venture partner in Q and unfavorable currency movements. During the first nine months of 2016, Citycon saw positive revaluation of 38.4 million, or less than 1% of the value of its portfolio, reflecting moderate but positive revaluations in Sweden and Norway more than offsetting small negative revaluations in Finland. We anticipate an improvement of the company s effective leverage towards 40% over the next months mainly driven by positive, albeit modest, like for like rent growth, and, to a lesser extent, development and acquisition gains. Around 57% of the company s debt was euro-denominated at the end of September 2016, 24% in Norwegian Krona and 19% in Swedish Krona (up from 13% in December 2015), thus creating a moderate degree of currency mismatch compared to the currency denomination of the company s assets, adding an element of volatility to its debt metrics. Gross debt amounted to 2.1 billion at the end of September 2016, of which 90% represented by fixed rate notes and a remainder by a mix of bank loans and commercial paper. Total assets amounted to 4.9 billion at the same date. Good and further improving fixed charge coverage thanks to ongoing developments and acquisitions The company s fixed charge coverage was 3.2x year-to date as of 30 September 2016, up from 3.0x in FY2015 and 2.7x in FY2014, mapping to A in our methodology scorecard. Citycon issued 350 million unsecured notes with a 10-year maturity with a coupon of 1.25% in August 2016, the lowest in the company s history and well below its average cost of debt of 2.9% in the first nine months of However, limited debt maturities over the next two years suggest that the potential to further reduce interest costs is limited near term. Nevertheless, we anticipate that Citycon s fixed charge coverage will improve towards 3.5x over the next two years, driven by ongoing developments and planned net investments generating additional EBITDA. The company continues to conservatively manage its interest rate exposure. As of 30 September 2016, 95% of its debt was fixed rate, with hedges mainly maturing in 2021 (most fixed until debt maturity). 5

6 Liquidity Analysis Solid liquidity underpinned by a fully unencumbered asset bases, and excellent debt maturity profile Citycon scores A for the rating sub-factor Debt Maturities under our months forward view and Ba for the sub-factor Liquidity reflecting the cap due to the the presence of MAC clauses in its debt arrangement. The company's immediate liquidity amounted to 557 million as of 30 September 2016, including 24 million of cash on balance sheet and 533 million under unused committed credit facilities. We expect these resources to more than cover the cash outflows anticipated over the next months. The revolving credit facilities mature between 2019 and 2021 and are subject to covenants, with currently ample headroom (including a minimum interest cover ratio of 1.8x). We note, however, that the facilities contain repeating material adverse change language which, in theory at least, could limit their availability. Also, Citycon s loan agreements have negative pledges that limit the amount of secured debt (excluding the debt of Kista Galleria) to 7.5% of total debt (no limit applies making the loans pari passu with the secured debt exceeding that limit). Citycon scores A for the rating sub-factor Unencumbered Asset, with a ratio of 97%, one of the highest ratio across the rated peer group, adding to the company s financial flexibility. However, we note that Kista Galleria is equity consolidated and partly financed through secured debt. Near term debt maturities are modest, with only commercial paper due in 2016 and modest loan maturities of 138 million in 2017, no debt maturing in The first sizeable maturity is represented by the 500 million notes due June The weighted average debt maturity was 5.8 years at the end of September 2016 (5.5 years in 2015), which is above Citycon s target of at least five years. Exhibit 4 Citycon s well spread and long dated debt maturities are another key credit strength Debt maturity as of September 30, 2016 Source: Company data Good access to capital despite presence of dominant shareholder We have assigned Citycon a Baa score to the sub-factor Access to capital to reflect its diversified funding sources and listed status, with a good track record in raising equity, with around 1.8 billion since However, the company has consistently traded below NAV over the past three years, and currently trades at a 27% discount to NAV as of 14 November Also weighing on our assessment is the presence of a dominant shareholder: Citycon is 43.4%-owned by GazitGlobe (unrated), a company based in Tel Aviv (Israel) and listed on the NYSE with a market cap of $1.8 billion, down from $2.3 billion in May

7 Founded in 1982 and controlled by Chaim Katzman, Gazit-Globe owns stakes in several other real estate property companies focused on urban, food-anchored shopping centres including Equity One Inc. (45.3%, Baa2 stable), First Capital Realty Inc. (45.4%, Baa2 stable), Atrium European Real Estate Ltd. (39.9%, unrated), Gazit-Globe Israel (Development) Ltd. (82.5%, unrated). Corporate Profile Citycon owns and manages a portfolio of 55 retail properties in the Nordics, of which 24 located in Finland, 19 in Norway, nine in Sweden, two in Estonia and one in Denmark. The core of the company s portfolio includes 50 shopping centres accounting for around 96% of the value of the portfolio, with the remaining retail properties represented by supermarkets. Of the 55 properties, five are owned through joint ventures (including Kista Galleria and four properties in Norway) two are rented and one is held for sale. With gross assets of 4.9 billion, Citycon generate an annualized rental income of 336 million in the twelve months to 30 September The company is the largest listed property company in the Nordics and the 5th largest listed retail property company in Europe based on gross asset value. Headquartered in Helsinki (Finland), Citycon is 43.5%-owned by GazitGlobe (unrated), a company based in Tel Aviv (Israel) and listed on the NYSE with a market cap of $1.8 billion, down from $2.3 billion in May Rating Methodology and Scorecard Factors Exhibit 5 Scorecard Factors - Citycon OYJ [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] As of 9/30/2016(L); [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. [4] Fixed Charges includes capitalized interests explained in Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations revised December Source: Moody s Financial Metrics 7

8 Peer Analysis Following the completion of the merger with Klépierre S.A. on 31 March 2015, Corio ceased to exist as a separate entity. Klépierre is a French REIT (SIIC) and one of the largest shopping centre property companies in Europe with a portfolio of approximately 160 shopping centers in 16 countries with a fair market value of EUR22.6 billion on 30 June Corio's A3/stable backed long term issuer rating reflects Klépierre's leading position as the largest pure-play pan-european retail REIT spanning 16 countries in Continental Europe. Klépierre benefits from the expertise and market reach of its largest shareholder, Simon Property Group, Inc. (rated (P)A3, Stable at the holding company level with its main subsidiary, Simon Property Group, L.P. rated A2, Stable), the largest REIT worldwide. This is particularly important in the retail sector where strong tenant relationships are key to successful leasing of shopping centres and in establishing the REIT's franchise. We view Klépierre's debt/assets ratio of approximately 41% (based on fair value) and fixed charge coverage of 4.9x as of H (all metrics include Moody's standard adjustments) as appropriate for the rating. Hammerson plc's Baa1/negative long term issuer rating reflects its position as a leading European retail real estate company with a very strong presence in the improving UK market. Its consistently high occupancy rates are underpinned by superior asset quality and tenant diversification. Hammerson is the only publicly quoted European company with significant exposure to outlet centres, a growing and resilient sector. Hammerson's development expertise allows the company to take advantage of a variety of opportunities to build and re-develop property in both the UK and France, which is a valuable expertise in the largely developed and tightly zoned European real estate market. The negative outlook reflects our view that the decision by the UK to leave the European Union will create a prolonged period of uncertainty, which could dampen the confidence of property rental and investment markets, potentially weakening the UK real estate sector's valuations and prospects for rental income growth. This weakness could make it more difficult for Hammerson to maintain its leverage below 40% (as measured by Moody's adjusted gross debt-to-total assets ratio), having deteriorated to approximately 39% as of 31 March 2016 (based on Moody's estimates) from 30% as of 30 June 2015, following the purchase of an Irish loan portfolio and the Grand Central shopping centre in Birmingham in September 2015 and January Wereldhave N.V.'s Baa1/stable long term issuer rating reflects its solid franchise in the convenience shopping centres business and a geographically well-diversified portfolio. An experienced management team with strong expertise both in retail and retail real estate has completed its strategic plan to transform the company's portfolio by selling non-core properties and increasing scale in key markets, while maintaining a solid balance sheet. Development activities are very limited and focused on very low-risk extensions, with an estimated investment below 3% of gross assets in three projects. Although we believe that the company could face headwinds over the next two years given a still mixed economic outlook in Europe and continued structural challenges (e-commerce competition), recent results are consistent with management's key strategic target of achieving 98% occupancy by

9 Exhibit 6 Peers - Rating Scorecard [1] [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody s Financial Metrics Ratings Exhibit 7 Category CITYCON OYJ Outlook Issuer Rating Senior Unsecured -Dom Curr Moody's Rating Stable Baa1 Baa1 CITYCON TREASURY B.V. Outlook 9 Stable

10 Bkd Senior Unsecured -Dom Curr Baa1 Source: Moody's Investors Service 10

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