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58 ANNUAL REPORT 2014Deutsche EuroShop MANAGEMENT REPORT Real estate market Transaction volumes rose again significantly by 30% (2013: 21%) to €39.8 billion (2013: €30.7 billion) according to figures from Jones Lang LaSalle, meaning that Germany’s commercial real estate investment market also continued to grow in 2014. Retail real estate accounted for just under 22% of transactions. Investments in German shopping centers came up to a total of €2.0 billion for the whole of 2014, which represented a 29% drop from the previous year. The main reason for this trend that runs counter to the overall market was not the lack of demand for shopping cent- ers as an investment class, but the lack of suit- able investment products. Core properties and large volume properties in particular were only offered infrequently in 2014. While German investors were predomi- nantly active in the retail property market in 2013, foreign buyers came out on top in 2014, making up 63% of the transaction volume. There was clear global interest in transactions of prestigious “trophy” properties. Most active among the foreign investors were the French who accounted for just under two-thirds of the purchase volume in the reporting year, fol- lowed by British investors who acted as buyers in 20% of the transactions. In view of the extremely high demand, top rents for shopping center investments in Germany continued to fall. According to Jones Lang LaSalle, they were down year-on-year by 20 basis points for top properties in the core segment at year-end with 4.50% (previous year: 4.70%). Share price performance The price of Deutsche EuroShop shares began 2014 at €31.83. Late January brought a slight drop in the share price, which reached €30.72 on 4 February 2014 – its low for the year. After this, the share price stabilised within a corridor between €31.00 and €33.00 and then rose out of this corridor in late March. The DES share reached €37.84 on 12 June 2014, marking not only its high for the year, but also a new all-time high. In the second half of the year, the share price fluctuated between €32.50 and €36.50 – consistent with the general market trend. The share price closed the year up at €36.20, which represented a gain of +17.7% including divi- dends (2013: +4.5%). Evaluation of the financial year The Executive Board of Deutsche EuroShop is satisfied with the past financial year. We have fully lived up to the forecasts published in the Annual Report 2013. Target revenue was between €198 million and €201 million and came in at €200.8 million (2013: €188.0 million) at the reporting date, which corresponds to an increase of 6.8%. Earnings before interest and taxes (EBIT) were forecast at between €174 million and €177 million, and actual EBIT was slightly above both the forecast range and the 2013 results at €177.5 million (previous year: €165.8 million), an improve- ment of 7.0%. We had expected earnings before taxes (EBT) excluding valuation gains/loss- es (including at-equity investments) of €120 to €123 million. EBT, at €125.0 million, also came in above the forecast range and only 4% below the previous year (2013: €129.2 mil- lion) which had included exceptional proceeds of €15.8 million from the sale of a property. Funds from operations (FFO) also exceeded ex- pectations, coming in at €2.23 per share (fore- cast: €2.14 to €2.18 per share). Deutsche EuroShop has therefore proven once again that it has an outstanding shopping center portfolio and is well positioned. Course of business Financial position Deutsche EuroShop can look back on another successful financial year. Revenue and profit ad- vanced significantly year-on-year. Net assets and financial structure remain solid. Revenue rose by 6.8% to €200.8 million, while consolidated profit came to €177.4 mil- lion (2013: €171.0). This increased earnings per share to €3.29 compared to €3.17 per share in 2013. Operating profit per share advanced 5.5% from €1.74 to €1.84. Valuation gains improved considerably in 2014 to €77.0 million, up from €56.0 million in 2013. In addition, the valuation gains/loss- es of the joint ventures consolidated at equity were higher year-on-year by €10.3 million and reached €12.7 million (2013: €2.4 million). Earnings before taxes rose by around 11%, from €113.4 million the previous year (after adjust- ments for the proceeds from the sale of Galeria Dominikanska) to €125.0 million. The EPRA net asset value per share rose by 8.4%, from €30.59 to €33.17. Revenue in the German retail trade (includ- ing online retailing) rose by a nominal 1.7% over the reporting year, while the revenues of the tenants in our German shopping centers only rose by 0.3%. At our foreign properties, the rev- enues of our tenants increased by 0.2%. Results of operations Consolidated revenue up 6.8% Consolidated revenue was up 6.8%, from €188.0 million to €200.8 million, in the finan- cial year. The Altmarkt-Galerie Dresden con- tributed significantly to growth in revenues for the first time over the entire year (2013: eight months). For most properties, the rise in revenue was largely due to index-related rental adjust- ments. The revenue increase in the Altmarkt- Galerie is largely related to consolidation. The Rhein-Neckar-Zentrum and the City-Arkaden Wuppertal were positively impacted through- out the year by the conclusion of various new rental contracts. A slight drop in revenue was reported only by the Forum Wetzlar and Her- old-Center Norderstedt, where a number of rental contracts were or are up for renewal in 2014/2015, which led to some rent losses as a result of renovations. Overall, comparable revenue rose by 2.3% (2.4% domestic, 1.0% international) on a like-for-like basis over the reporting year. Vacancy rate remains stable at under 1% As in previous years, the vacancy rate for re- tail spaces remained stable at under 1%. At €0.7 million (2013: €0.6 million) or 0.4% of reve- nue (2013: 0.3%), write-downs for rent losses once again remained at a very low level. Increase in property operating and administrative costs The property operating costs of €9.1 mil- lion (2013: €8.5 million) were €0.6 million above the prior year figure as were the prop- erty administrative costs which, at €9.9 mil- lion (2013: €9.3 million), came out €0.6 mil- lion higher than in 2013. The higher property operating costs can be primarily attributed to an increase in maintenance costs of €0.5 mil- lion. The higher property administrative costs were mainly driven by the inclusion of the Alt- markt-Galerie Dresden for the whole year and to the higher rental income that is the meas- urement basis for the property administration costs. Overall, however, the cost ratio remained constant at 9.5% of revenue (2013: 9.5%). REVENUE € million 2013 188.0 International Domestic 14.7 173.3 14.9 185.9 2014 200.8 Other operating income and expenses Other operating income came to €1.9 million, lower than the previous year’s level (€2.8 mil- lion), Other operating expenses fell €1.1 mil- lion to €6.2 million (2013: €7.3 million). The decrease in other operating income and expens- es was essentially due to one-off income and expenses in 2013. Net finance costs Net finance costs increased, up €5.7 million to €-39.8 million (2013: €-34.1 million). This can, however, essentially be attributed to the proceeds from the sales of the shares in Ilwro Sp.zo.o (Galeria Dominikanska) amounting to €15.8 million in 2013. Interest income (€0.3%) was slightly lower than in the previous year. Interest expense rose in net terms by €0.8 million to €58.6 million (2013: €57.8 million). The inclusion of the Altmarkt-Galerie Dresden for the entire year resulted in additional interest expense of €2.4 million, which is offset by interest savings of €1.7 million. Other financial expenses result- ing from the measurement of a swap decreased by €3.9 million to €0.6 million. Earnings from at-equity investments climbed considerably, up €8.1 million to €35.1 million (2013: €27.0 million). The improve- ment also reflects a noticeably higher hike in valuation gains, which were up €10.3 million year-on-year at €12.7 million (2013: €2.4 mil- lion), and more than made up for the loss of income the previous year when the Altmarkt- Galerie Dresden was only included for four months. The profit share for third-party sharehold- ers increased slightly by €0.2 million from €15.9 million to €16.1 million. Changes in valuation gains/losses Valuation gains were up €21.0 million year-on- year at €77.0 million (2013: €56.0 million). The average value of Group properties after ongoing investments advanced 3.0%; valua- tion gains came in at between 1.3% and 4.5%. Measurement of the portfolio properties led to measurement gains of €88.3 million. The share of valuation gains attributable to third- party shareholders amounted to €11.3 million in the reporting year (2013: €4.5 million). REVENUE € thousand 31.12.2014 31.12.2013 Difference Change in % Main-Taunus-Zentrum, Sulzbach 34,110 33,646 464 1.4 Altmarkt-Galerie, Dresden 25,190 16,129 9,061 56.2 A10 Center, Wildau 20,567 20,216 351 1.7 Rhein-Neckar-Zentrum, Viernheim 18,593 17,382 1,211 7.0 Herold-Center, Norderstedt 13,174 13,199 -25 -0.2 Billstedt-Center, Hamburg 11,457 11,366 91 0.8 Allee-Center, Hamm 10,388 10,194 194 1.9 City-Galerie, Wolfsburg 9,771 9,647 124 1.3 City-Arkaden, Wuppertal 9,617 9,016 601 6.7 Forum, Wetzlar 9,156 9,164 -8 -0.1 Rathaus-Center, Dessau 8,502 8,291 211 2.5 City-Point, Kassel 8,332 8,141 191 2.3 Stadt-Galerie, Hameln 7,081 6,891 190 2.8 Total domestic 185,939 173,282 12,657 7.3 Galeria Baltycka, Gdansk 14,639 14,489 150 1.0 Caspia 207 216 -9 -4.2 Total international 14,846 14,705 141 1.0 Overall total 200,785 187,987 12,798 6.8 € thousand 31.12.201431.12.2013 Difference Change in % Main-Taunus-Zentrum, Sulzbach 34,11033,6464641.4 Altmarkt-Galerie, Dresden 25,19016,1299,06156.2 A10 Center, Wildau 20,56720,2163511.7 Rhein-Neckar-Zentrum, Viernheim 18,59317,3821,2117.0 Herold-Center, Norderstedt 13,17413,199 -25 -0.2 Billstedt-Center, Hamburg 11,45711,366910.8 Allee-Center, Hamm 10,38810,1941941.9 City-Galerie, Wolfsburg 9,7719,6471241.3 City-Arkaden, Wuppertal 9,6179,0166016.7 Forum, Wetzlar 9,1569,164 -8 -0.1 Rathaus-Center, Dessau 8,5028,2912112.5 City-Point, Kassel 8,3328,1411912.3 Stadt-Galerie, Hameln 7,0816,8911902.8 Total domestic 185,939173,28212,6577.3 Galeria Baltycka, Gdansk 14,63914,4891501.0 Caspia 207216 -9 -4.2 Total international 14,84614,7051411.0 Overall total 200,785187,98712,7986.8