Our centers buck the negative trend in the retail sector
Although retail sales in Germany fell by a nominal 1.6% overall, tenants in our German shopping centers generated revenue growth of 3.0% in a comparable space. If international properties are included in this comparison, then our tenants generated revenue growth of 3.8%.

Consolidated revenue up by 6.1%
Consolidated revenue was up by 6.1% from € 57.9 million to € 61.4 million in financial year 2004. For the first time, the newly opened shopping centers in Pécs, Hungary, and Hamburg, Germany, contributed to revenue. Significant growth in revenue was reported by the Rhein-Neckar-Zentrum, which was due in particular to the modernisation and expansion measures completed in the prior year. In contrast, Centro Commerciale Friuli in Udine, Italy, no longer contributed to revenue because this center was sold in H2 2004. The revenue generated by City-Arkaden in Wuppertal declined as the result of the insolvency of a major tenant and the resulting vacancy period required for renovation. A slight decline was also experienced by the shopping centers in Wolfsburg and Kassel. In all other properties, we generated higher rental income on the back of index-linked rental adjustments, step-up rental payments and overage. On the whole, the share of total revenue accounted for by overage rose from 1.8% in 2003 to 2.6% in the year under review.

Revenue 2004 € thousand	2004	2003	Veränderung	in %
Rhein-Neckar-Zentrum, Viernheim	15,745	14,778	967	6.5
Allee-Center, Hamm	8,894	8,824	71	0.8
City-Galerie, Wolfsburg	7,698	7,731	-34	-0.4
City-Arkaden, Wuppertal	7,381	7,685	-304	-4.0
Altmarkt-Galerie, Dresden	6,042	5,725	317	5.5
City-Point, Kassel	2,851	2,889	-38	-1.3
Phoenix-Center, Hamburg	1,550	0	1,550	-
Subtotal – Germany	50,160	47,631	2,528	5.3
Centro Commerciale Tuscia, Viterbo	2,693	2,554	139	5.4
Centro Commerciale Friuli, Udine	2,467	4,443	-1,976	-44.5
Shopping Etrembières, Annemasse	3,473	3,251	222	6.8
Árkád, Pécs	2,629	0	2,629	-
Subtotal – international	11,262	10,248	1,014	9.9
Total	61,421	57,879	3,542	6.1

Vacancy rate under 1%
As in the previous year the vacancy rate was under 1%. The need for write-downs from rent losses remained moderate at around € 1.0 million, or 1.6% of revenue, despite the increase over 2003 of 0.2 percentage points. A tenant who has since left Rhein-Neckar-Zentrum is the main source of these write-downs.

Results of operations

High other income due to sale
Other operating income was € 9.3 million – around € 8.3 million up on the previous year’s figure. The sale of the shopping center in Udine resulted in a one-time disposal gain of € 4.8 million. We recognised income of € 2.0 million from unrealised exchange rate gains from our Hungarian subsidiary (compared to exchange rate losses of € 2.2 million in the previous year). Income from the reversal of provisions increased by around € 1.0 million to € 1.1 million; income from the sale of money market fund shares rose by € 0.5 million to € 0.8 million.

Expenses up due to new construction projects
Other operating expenses rose by € 1.7 million to € 19.3 million. Expensed investment costs for shopping centers under construction were up by € 5.5 million on the previous year to € 7.8 million due in particular to the initial consolidation of properties in Hamburg and Klagenfurt. On the other hand, no unrealised exchange rate losses arose from the consolidation of the Group’s Hungarian subsidiary in contrast to the previous year, when this resulted in expenses in the amount of € 2.2 million. Maintenance expenses amounted to € 0.5 million – down € 2.2 million on the previous year’s figure.

Net interest expense deteriorates due to investments
Net interest expense dropped by € 3.3 million to € -25.3 million. There were two main reasons for this. For one, interest income declined substantially by around € 2.0 million to € 2.6 million due to increased investment activity and the resulting reduction in cash funds. Secondly, interest expenses grew by € 1.4 million to € 28.0 million due to the initial recognition of interest on debt arising from the Árkád Pécs and Phoenix-Center properties, both of which opened in the year under review.

Income from investments up thanks to Wroclaw
Income from investments developed satisfactorily, increasing by € 1.3 million over 2003 to
€ 4.8 million. The main factor here was the initial contribution to earnings by our Polish investee in Wroclaw.

Gains on measurements of financial investments and properties: € 8.0 million
Gains on fair value adjustments rose year-on-year by € 2.5 million from € 5.5 million to € 8.0 million. This was the result of changes in the fair values of the shopping centers held as investment properties, which are measured in accordance with IAS 40. The expenses of € 3.8 million associated with investments in these properties incurred in the year under review are deducted from this amount. At the same time, changes in the value of the investments in Main-Taunus-Zentrum and Galeria Dominikanska in Wroclaw, which must be recognised in accordance with IAS 39, were included in the gains on fair value adjustments. The changes in value resulting from the investments were calculated based on the current market values of the properties.

Independent appraisers
As in 2003, the market values of the properties as at 31 December 2004 were calculated with the assistance of independent appraisers (Feri Research GmbH and GfK Prisma Institut für Handels-, Stadt- und Regionalforschung) using the discounted cash flow method. In the discounted cash flow method, the market value corresponds to the cash value of future net income (rental income from the shopping center less management, administration and maintenance expenses). The rates used to discount the future net income on the valuation date (31 December 2004) were calculated by the experts for each property in light of the risk profile of each shopping center. The risk profiles are the result of a rating procedure that assesses each center using around 150 individual criteria.

11 out of 14 shopping centers appraised
With the exception of the centers that were under construction as at 31 December 2004 (Forum Wetzlar and City-Arkaden, Klagenfurt) and the Phoenix-Center in Hamburg, which did not open until the autumn of 2004, all of the shopping centers in our portfolio were appraised.

Write-downs on four properties in Germany
Write-downs totalling € 6.3 million were necessary on four properties in Germany because the experts identified higher macroeconomic site risks for these properties despite unchanged earnings estimates. The discount factor was raised to 6.53% from 6.30% in the previous year. These write-downs account for barely 1.0% of the overall fair value of these properties.

Reversals of write-downs totalling € 15.7 million
In contrast to the above write-downs, write-downs of two German and two international centers of around € 13.5 million were reversed; this figure corresponds to an average of 6.1% of the fair value. The reversals are due to the earnings outlook, which was rated as considerably better in some cases, and the macroeconomic site risks, which were estimated to be lower by the experts. This was also reflected in a lower discount factor (6.16% after 6.29% in the previous year).

The initial measurement of Árkád Pécs generated gains of € 2.2 million.

Investments also see measurement gain
Gains from the measurement of investments in accordance with IAS 39 amounted to € 2.4 million, which was the result in particular of the initial measurement of the investment in Galeria Dominikanska in Wroclaw.

A-rated portfolio
The results of the investment rating process did not change despite the above-mentioned changes in the discount factors. Árkád Pécs, which was measured for the first time, and Galeria Dominikanska, which is classed as an investment held as a financial instrument in accordance with IAS 39, each earned the rating of “very good” (A). On average Deutsche EuroShop’s real estate portfolio was again rated “very good” (A) by the appraisers.

Consolidated earnings up substantially
In the year under review, earnings before income and taxes (EBIT) increased by 25% from
€ 40.5 million to € 50.7 million, while EBT (earnings before taxes) grew by 37% from € 27.9 million to € 38.2 million. After deducting income tax of € 10.8 million (including € 8.1 million in deferred income tax), other taxes in the amount of € 1.0 million (mainly real property taxes) and minority interest, consolidated net income for the year was up 46% on the previous year (€ 19.0 million) at € 27.7 million.

Earnings per share (74% from operations, 26% from measurement gains)
Earnings per share amounted to € 1.78 compared to € 1.22 in the previous year. Of this amount, € 1.32 per share (74%) is attributable to operations (2003: € 0.93) and € 0.46 (26%) to gains on measurements of financial instruments and properties (2003: € 0.29).

 

Earnings per share in €

Dividend proposed: € 1.92 per share
The Executive Board will propose to the Annual General Meeting to be held in Hamburg on 23 June 2005 that a dividend of € 1.92 per share again be paid for financial year 2004.

Net assets

The Group’s total assets increased by € 130 million to € 1.37 billion in the year under review.

Structure of the balance sheet € million

Non-current assets up
In a year-on-year comparison, non-current assets rose overall by € 107.8 million to € 1,203.3 million. In the year under review investments totalling € 154.1 million and an increase in the fair values of properties and investments held as financial instruments of € 10.8 million stood in contrast to the decline in fair value of € 57.1 million due to the sale of Centro Commerciale Friuli.

Cash totals € 150 million
Receivables, including prepaid expenses, declined by € 26.3 million to € 16.7 million especially due to the scheduled repayment of a loan by Arkaden Pécs KG. This resulted in an increase in cash, including current financial instruments classified as current assets (mainly money market funds), of € 150.3 million, up € 48.3 million on the previous year.

Equity ratio almost 50%
Equity in the year under review decreased by around € 10.9 million to € 684.4 million. Of this decrease, € 3.8 million is attributable to the dividend distribution and a consolidation effect associated with the sale of the shopping center in Italy; the minority interest in the equity of our property holding companies declined by € 7.1 million. The equity ratio was 49.9% as at 31 December 2004, which is around six percentage points lower than in the previous year (56.1%).

€ 51.7 million in deferred taxes
€ 8.1 million of the net income for the year was allocated to deferred tax liabilities; they now amount to € 51.7 million compared to € 43.6 million in the previous year.

Bank loans and overdrafts higher due to investments
Current and non-current bank loans and overdrafts totalled € 604.3 million, an increase of
€ 122.8 million over the previous year. Of this amount, € 119.4 million alone is attributable to
additional loan payments associated with construction of the centers in Pécs, Hamburg, Wetzlar and Klagenfurt. Other current liabilities increased especially due to the increase in current provisions by € 9.9 million from € 19.9 million to € 29.8 million.

Financial position

The Group’s net liquidity increased by € 10.4 million to € 130.5 million in the year under review.

Of the € 64.7 million in net liquidity that is attributable to Deutsche EuroShop AG, € 30.0 million is earmarked for dividend distribution in June 2005.

The net liquidity of the subsidiaries amounted to € 65.8 million as at 31 December 2004. € 20 million is designated as collateral for the bank loan to a foreign subsidiary; otherwise these funds are used to finance investments. The remaining amount will be distributed in 2005 to Deutsche EuroShop AG and the minority shareholders of the fully consolidated subsidiaries.

All liquid funds are invested with a short-term horizon in term deposits and time deposits, as well as in current financial instruments (mainly money market funds).

Investments and financing

After the sale of a shopping center and the purchase of an investment in another shopping center in financial year 2004, Deutsche EuroShop’s portfolio still comprises 14 shopping centers in Germany, France, Italy, Austria, Poland and Hungary.

Portfolio optimisation in Italy
In order to optimise our portfolio, we sold the shopping center in Udine, Italy, in July 2004. Net funds of € 56.9 million accrued to the Deutsche EuroShop Group from the proceeds of the sale of € 62.0 million after deduction of Italian income tax and minority interest.

First investment in Austria
We re-invested a portion of the proceeds of the sale in August 2004 by acquiring a 50% interest in City-Arkaden in Klagenfurt, Austria. This property is currently being constructed in the capital of Carinthia state and is scheduled to open in spring 2006. This investment has enabled us to again secure a prime city-centre location for the Group for the long term. Our proportionate investment volume will amount to around € 74.9 million in spring 2006; € 44.7 million of this amount is financed by way of an existing long-term bank loan and € 30.1 million by equity.

Total investments of € 154 million
Investments in shopping centers under construction and completed in the year under review amounted to approximately € 154 million overall; € 119 million of this amount was financed by way of long-term bank loans and € 36 million from the Group’s own existing funds.

€ 1.2 billion in real property assets
The Deutsche EuroShop Group’s properties and investments in properties increased by
€ 107.8 million over the previous year and totalled € 1.2 billion as at 31 December 2004. Properties recognised at fair value in accordance with IAS 40 account for € 918.5 million of this amount, while € 183.1 million is attributable to properties under construction, including Phoenix-Center, which was not completed until the autumn of 2004 and is still recognised at cost, and € 101.7 million is accounted for by investments in two shopping centers. 87% of the Group’s assets were invested in Germany and 13% abroad.

Interest rates fixed for the long term
The debt assumed to finance real estate is mostly long term. Of the bank loans and overdrafts amounting to € 604.3 million, 91% are due after more than five years and are subject to an average effective interest rate of 5.66% as at 31 December 2004. A fixed effective interest rate of 5.54% has been agreed at least until 2013 for 71% of these liabilities.

Changes in liabilities € thousand

Net asset value increased
Based on the consolidated financial statements, the Group’s net asset value as at 31 December 2004 is € 686.8 million (€ 43.96 per share) compared to € 682.5 million (€ 43.68 per share) in the previous year.

Net Asset Value in T€	2004	2003
Non-current assets	1,203,251	1,095,444
Current assets	166,957	145,012
Total assets	1,370,208	1,240,456
Non-current liabilities	-597,662	-476,646
Current liabilities	-36,458	-24,923
Net assets	736,088	738,887
Minority interest	-49,271	-56,348
Net assets of Deutsche EuroShop = Net Asset Value	686,817	682,539
Net asset value per share in €	43.96	43.68