Summary: Citycon Oyj Primary Credit Analyst: Franck Delage, Paris (33) 1-4420-6778; franck.delage@spglobal.com Secondary Contact: Anton Geyze, Moscow (7) 495-783-4134; anton.geyze@spglobal.com Table Of Contents Rationale Outlook S&P Global Ratings' Base-Case Scenario Business Risk Financial Risk Liquidity Other Credit Considerations Ratings Score Snapshot Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 1
Summary: Citycon Oyj Business Risk: STRONG CORPORATE CREDIT RATING Vulnerable Excellent bbb+ bbb bbb Financial Risk: INTERMEDIATE BBB/Stable/A-2 Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Strong Stable rental income, supported by positive demographic and economic trends of the Nordic region and market stability, especially in Sweden and Norway. Leading market positions in its countries of operation, reflecting high footfall in Citycon's shopping centers and low vacancy rates over recent years despite relatively low barriers to entry in the Nordics. Relatively small asset portfolio compared with other higher-rated investment-grade companies and some tenant concentration. Challenging market conditions in Finland where 37% of Citycon's asset value is concentrated. Financial Risk: Intermediate Good interest coverage, with a ratio of EBITDA to interest exceeding 2.5x. Moderate debt leverage, with debt-to-debt and equity ratios lower than 50%. Track record of accessing unsecured funding in both the equity and debt capital markets. Largely unencumbered asset base, offsetting some lack of flexibility with regard to two joint-venture assets. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 2
Outlook: Stable S&P Global Ratings' stable outlook on Finland-based retail property investment company Citycon Oyj reflects our view of the company's resilient income from its retail property portfolio in Sweden and the growing share of its Norway-based assets. We think income from Sweden and Norway will likely enable the company to cope with weakening demand in Finland and the Baltics. We believe the company should maintain ratios of EBITDA interest coverage above 2.5x and debt to debt plus equity lower than 50% as part of its funding policy and disposals. Downside scenario We might take a negative rating action if the company shifted to a more aggressive financial policy with regard to debt leverage, or if its asset valuation was to drop significantly. This would likely result in ratios of debt to debt plus equity consistently above 50% and EBITDA interest coverage lower than 2.5x, in our opinion. We could also take a negative rating action if Citycon's assets were to perform significantly weaker than we currently expect. Upside scenario We might consider raising the ratings if the company's strategy of organic growth and gradual reduction in debt leverage resulted in ratios of debt to debt plus equity of less than 40% and EBITDA to interest of more than 3x on a sustainable basis. S&P Global Ratings' Base-Case Scenario Assumptions Like-for-like rental income growth between -1% and 1% over the next 12-24 months because of a low consumer price index and weakening demand in Finland and the Baltics, partly offset by positive indexation and stronger consumption trends in Sweden and Norway. No asset revaluation, apart from the positive effects of capital expenditures. About 100 million- 150 million asset disposals in 2016 ( 108 million already signed to date) and 250 million- 150 million in 2017 and 2018. An EBITDA interest coverage ratio close to 3x in the next three years. Debt to debt and equity slowly decreasing back to normal level (40%-45%) after the Sektor acquisition and still below 50%, broadly in line with the company's policy. Key Metrics 2015A 2016E 2017E EBITDA (mil. ) 172.8 196.8 204.9 EBITDA margin (%) 58.3 58-59 58-59 EBITDA interest coverage (x) 3.0 3.0-3.1 2.9-3.1 Debt/debt and equity (%) 47.9 46-47 45-47 Fully adjusted by S&P Global Ratings. A--Actual. E Estimate. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 3
Business Risk: Strong Citycon's strong business risk profile reflects our view of the company's 4.7 billion portfolio of resilient retail property assets, diversified across the Nordic region. The company benefits from strong operating fundamentals in Sweden (20% of the group's portfolio value as of March 31, 2016) and Norway (34%), which enjoys positive demographics (fast-growing populations, urbanization trend) and economic trends (higher than EU-average GDP growth, low unemployment, and sound consumer confidence). We also take a positive view of the retail property market's stability in the Nordic region thanks to secured lease structures and retailers that generally outperform the European average, by our estimates. We believe Citycon's rank as largest listed retail real estate investor in the Nordics and leading positions in its main markets will allow it to secure new international prime retailers and maintain high footfall in its shopping centers. We expect the company's low vacancy (below 5% over the past seven years) and tenant occupancy cost ratios (8.9% as of March 31, 2016) will likely continue supporting its stable revenues. Citycon's strengths also include its focus on the retail property segment, which we typically view as less volatile than office or logistics, and its low exposure to risky development activities, mainly consisting of renovation and the extension of existing assets for less than 15% of its total portfolio value. Mitigating these strengths are Citycon's smaller cash flow and portfolio size compared with other real estate peers that we rate at the 'BBB+' level, even though the portfolio's value grew by 42% following Sektor's acquisition in May 2015. In addition, we still take into account the rent concentration on a single retailer, Kesko, which could disproportionately affect Citycon's cash flow generation, although this share has significantly decreased, to approximately 6.2% as of May 31, 2016, from 15.4% on Dec. 31, 2014, as we anticipated. Moreover, regulatory barriers to entry (including limitations on the granting of building permits and land availability) are particularly low in the Nordics, and far less protective than in markets like France or Western Europe, for example. We therefore view the currently high shopping center density (ratio of retail space per inhabitant) and increasing competition, especially in Sweden, as a main concern over the long term. We believe these factors could create a risk of market saturation if economic conditions were to deteriorate suddenly and supply of new retail space was to outpace the demand. Finally, we view Citycon's performance as currently constrained by the weak macroeconomic conditions in Finland (37% of the company's reported asset value), namely weak GDP growth (0.4% in 2015, estimated at 0.7% in 2016) and rising unemployment (9.4% in 2015, estimated at 9.7% in 2016). We believe these pressures will weigh on Citycon's overall organic growth in 2016, although be progressively compensated by growing revenue contribution from the assets in Norway, bought in May 2015. Financial Risk: Intermediate Citycon exhibits strong debt protection metrics, in our view, with an interest coverage ratio that we expect to remain close to 3.0x over the next two years. We do not foresee any weakening, given the low share of floating rate debt (15%) and the relatively long-term debt duration (5.3 years as of March 31, 2016). WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 4
Our assessment of Citycon's financial risk profile also captures its leverage policy, targeting a loan-to-value ratio in the 40%-45% range (corresponding to an S&P Global Ratings' adjusted debt-to-debt and equity ratio of about 42%-47%). Although our ratio of debt-to-debt and equity has temporarily increased to 47.9% as of Dec. 31, 2015, from 41.4% as of Dec. 31, 2014, as result of the Sektor acquisition, we expect it to reduce progressively after the disposals of noncore assets and significant asset deliveries in 2016 and 2017. Moreover, we believe that a ratio of debt-to-debt and equity below 50% remains compatible with our current assessment of Citycon. We view positively Citycon's largely unencumbered asset base, which could provide additional liquidity in case of stress and offset the lack of flexibility with regard to two joint-venture assets (Kista and Iso Kristiina, together representing about 14.9% of Citycon's portfolio value). Liquidity: Adequate We currently assess Citycon's liquidity as adequate. In our opinion, liquidity sources will exceed uses by about 1.2x. For the next 12 months as of March 31, 2016, we forecast: Principal Liquidity Sources Funds from operations of 120 million- 130 million; 330 million in undrawn credit lines maturing in December 2019 and 2020 at the Citycon level; and Unrestricted cash balances of 24.3 million at the Citycon level as of March 31, 2015. Principal Liquidity Uses Debt maturities of about 156 million at the Citycon level, outstanding under its commercial paper program; and Planned capital expenditures of 220 million- 250 million. Other Credit Considerations Our comparable rating analysis constrains the rating on Citycon by one notch. This is because we believe the company's portfolio remains smaller (in terms of leasable area and market value) or less diverse than that of some peers that we assess in the same strong business risk category (such as Gecina, Icade, and Fonciere Des Regions, whose multi-segments portfolios are worth about 10 billion; and Klépierre, whose retail portfolio is worth 22.1 billion as of Dec 31, 2015). However, we believe Citycon's business risk profile remains stronger--in terms of the asset location and property segment--than that of peers we assess in the satisfactory business risk category (such as Mercialys, Atrium, Prologis European Properties Fund II, or Goodman European Logistics Fund). For these reasons, we view Citycon's business risk profile at the lower end of our strong category. Ratings Score Snapshot Corporate Credit Rating BBB/Stable/A-2 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 5
Business risk: Strong Country risk: Very low Industry risk: Low Competitive position: Strong Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: bbb+ Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral Liquidity: Adequate (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Negative (-1 notch) Related Criteria And Research Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014 Key Credit Factors For The Real Estate Industry, Nov. 19, 2013 Corporate Methodology, Nov. 19, 2013 Business And Financial Risk Matrix Business Risk Profile Financial Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b- Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 6
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