Principles governing the risk management system and internal control system

Deutsche EuroShop’s strategy is geared towards maintaining and sustainably increasing shareholders’ assets and generating sustainably high surplus liquidity from leasing real estate, thereby enabling the distribution of an appropriate and sustainable dividend. The focus of the risk management system is therefore on monitoring compliance with this strategy and, building on this, on the identification and assessment of risks and opportunities as well as the fundamental decision on how to manage these risks. Risk management ensures that risks are identified at an early stage and can then be evaluated, communicated promptly and mitigated. Monitoring and management of the risks identified form the focal point of the internal control system, which at Group level is essentially the responsibility of the Executive Board. The internal control system is an integral part of the risk management system.

Within the framework of its legal mandate for auditing the annual financial statements, the auditor checks whether the early warning system for risks is suitable for detecting at an early stage any risks or developments that might endanger the Company.

The risk analysis, as a continuous process, promptly identifies, evaluates and communicates the factors that may jeopardise the achievement of business targets. The process also includes management and control of the risks identified.

Risk analysis

Under existing service contracts, the Executive Board of Deutsche EuroShop AG is continuously briefed about the business performance of the shopping centers and the corresponding property companies. Financial statements and financial control reports are submitted on a quarterly basis for each shopping center, with medium-term corporate plans submitted annually. The Executive Board regularly reviews and analyses these reports, using the following information in particular to assess the level of risk:

1. Portfolio properties

• Trend in amounts outstanding
• Trend in occupancy rates
• Retail sales trend in the shopping centers
• Variance against projected income from the properties
• Observance of financial covenants in loan agreements

2. Centers under construction

• Pre-leasing levels
• Construction status
• Budget status
• Development of financial covenants in loan agreements and observance of disbursement conditions

Risks are identified by observing issues and changes that deviate from the original plans and budgets. The systematic analysis of economic data such as consumer confidence and retail sales trends is also incorporated into risk management. The activities of competitors are also monitored continually.

Risk inventory

The risks identified in the course of the risk analysis are summarised in a risk inventory and evaluated in terms of their potential loss amounts and likelihood of their occurrence in consideration of compensatory measures (from a net standpoint). The risk inventory is regularly examined and updated when necessary.

Furthermore, the Executive Board uses scenario-based simulations, in which the key planning parameters (including rent, cost, return and interest rate trends) are changed, to assess the way in which risk aggregation affects the Group’s continued existence. This analysis also allows for an evaluation to be carried out as regards which risks the Group can sustain.

The Executive Board reports on significant new risks and the scenario-based simulations in the Supervisory Board meetings. In the event of risks that jeopardise the continued existence of the Group, a report is issued immediately

Source: Annual Report 2023, page 144