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DES GB2014 D

ANNUAL REPORT 2014 63ANNUAL REPORT 2014 Deutsche EuroShop MANAGEMENT REPORT Market and sector risks There has been a structural change in retail trade in recent years, caused by shifts in de- mand patterns and new product formats. The greatest success has been enjoyed by large-scale retail operations that are able to offer custom- ers a wide range of goods. Thanks to its busi- ness model, Deutsche EuroShop is in a position to benefit from this development, especially as the experience aspect of shopping has gained in importance and a trend towards shopping as a recreational and lifestyle activity has be- come apparent. Revenue in the stationary retail sector (incl. online retailing) saw nominal growth of 1.7% in 2014 and 1.4% in real terms (2013: +1.4% nominal, +0.1% real). The German Retail Fed- eration (HDE) predicts nominal retail sales growth of 1.5% to €466.2 billion in 2015. The Internet and online retailing are now established components of our economy. Stationary retailers need to address the is- sues and challenges that this situation has creat- ed. The growth and success of e-commerce will result in a gradual structural change within sta- tionary retail as retailers respond with different pricing models, special promotional offers and particularly by building up their own online presence. However, in the medium term, re- tailers will need to reconsider their network of locations. Properties in prime locations could benefit from this development. Online retail advanced 17% to €39 billion in 2014. The German Retail Federation an- ticipates a 12% rise to €43.6 billion during the current year. We minimise market and sector risks by closely monitoring the market and by concluding long-term contracts with tenants with strong credit ratings in all retail segments. Deutsche EuroShop AG cannot fully dodge long-term trends such as the growing impact of online retailing on stationary retail. Past experience has demonstrated that by locat- ing our shopping centers in prime locations and by ensuring broad sector diversification within the centers, we can achieve commer- cial success even during periods of stagnation. Provided that stationary retailers review their networks in response to the rise of online re- tailing and focus on strong locations, our prime shopping center locations could emerge even stronger from the structural changes. Risk of rent loss It is possible that tenants may be unable to meet their obligations under existing leases or that the previous rents may no longer be obtained in the case of new and follow-on rentals. As a result, income would turn out to be less than budgeted, and distributions to shareholders might have to be reduced. If the rental income for a property company is no longer sufficient to meet its interest and repayment obligations, this could lead to the loss of the entire prop- were no longer able to pay what would then be considerably higher rents denominated in a foreign currency. Financing and interest rate risks We minimise the interest rate risk for new property financing as far as possible by enter- ing into long-term loans with fixed-interest periods of up to 20 years. There is a risk that refinancing may only be available at higher in- terest rates than before. The interest rate level is materially determined by the underlying mac- roeconomic conditions and therefore cannot be predicted by us. The possibility cannot be completely ex- cluded that, due for example to a deterioration in the Company’s results of operations, banks may not be prepared to provide refinancing or to extend credit lines. We monitor the interest rate environment closely so as to be able to re- act appropriately to interest rate changes with alternative financing concepts or hedging if necessary. With average interest rates at 3.76% (2013: 3.88%), this does not currently repre- sent a significant risk within the Group, partic- ularly as the most recent refinancing was con- cluded at lower interest rates than the original financing and the present average interest rate. Deutsche EuroShop AG uses derivatives that qualify for hedge accounting to hedge in- terest rate risks. These interest rate swap trans- actions transform variable interest rates into fixed interest rates. An interest rate swap is an effective hedge if the principal amounts, ma- turities, repricing or repayment dates, interest payment and principal repayment dates, and the basis of calculation used to determine the interest rates are identical for the hedge and the underlying transaction and the party to the contract fulfils the contract. Interest swaps and the underlying transaction are reported as one item in the consolidated financial statements. Financial instruments are not subject to liquid- ity or other risks. The Company counters the risk of default by stringently examining its contract partners. A test of effectiveness for the hedges described is implemented regularly. Risk of damage The property companies bear the risk of total or partial destruction of the properties. The erty. Tenants’ revenue trends and the accounts receivable trends are regularly analysed in this respect, and measures to find new tenants are initiated at an early stage if there are signs of any negative developments. The tenants provide corresponding secu- rity deposits against the risk of default. In ad- dition, write-downs are recognised in the ac- counts in individual cases. Cost risk Expenditure on current maintenance or invest- ment projects can turn out higher than budg- eted on the basis of experience. We minimise risks from cost overruns in current investment projects by taking cost models for all identifi- able risks into account in our calculations as a precautionary measure at the planning stage. In addition, construction contracts are only awarded on a fixed-price basis to general con- tractors with strong credit ratings. During the building phase, professional project manage- ment is assured by the companies we commis- sion. However, it is impossible to completely avoid cost overruns in ongoing construction projects in individual cases. Valuation risk The value of a property is essentially deter- mined by its capitalised earnings value, which in turn depends on factors such as the level of annual rental income, the underlying location risk, the evolution of long-term capital market rates and the general condition of the proper- ty. A reduction in rental income or a deterio- ration of the location risk necessarily results in a lower capitalised earnings value. The ap- preciation of the properties is therefore also significantly influenced by a variety of macro- economic or regional factors as well as develop- ments specific to the property that can neither be foreseen nor influenced by the Company. The factors described are taken into account in the annual market valuations of our portfolio properties by independent appraisers. Changes in value are recognised in the income statement of the consolidated financial statements in ac- cordance with the requirements of IAS 40 and may thus increase the volatility of the consoli- dated profit. Currency risk Deutsche EuroShop AG’s activities are limited exclusively to the European economic area. Manageable currency risks arise in the case of the Eastern European investment compa- nies. These risks are not hedged because this is purely an issue of translation at the reporting date and is therefore not associated with any cash flow risks. The currency risk from oper- ations is largely hedged by linking rents and loan liabilities to the euro. A risk could arise if the Hungarian forint or the Polish zloty were to plummet against the euro such that tenants insurance payouts due in such a case might be insufficient to compensate fully for the dam- age. It is conceivable that insurance cover is not sufficient for all theoretically possible losses or that the insurers may refuse to provide com- pensation. IT risk Deutsche EuroShop’s information system is based on a centrally managed network solu- tion. Corrective and preventive maintenance of the system is carried out by an external ser- vice provider. A virus protection concept and permanent monitoring of data traffic with re- spect to hidden and dangerous content are de- signed to protect against external attacks. All data relevant to operations is backed up on a daily basis. In the event of a hardware or soft- ware failure in our system, all data can be re- produced at short notice. Personnel risk Given the small number of employees of Deutsche EuroShop AG, the Company is de- pendent on individual persons in key posi- tions. The departure of these key staff would lead to a loss of expertise, and the recruitment and induction of new replacement personnel could temporarily impair day-to-day business. Legal risk The concept for our business model is based on the current legal situation, administrative opinion and court decisions, all of which may change at any time, however. The Company is not aware of any current legal risks that could have a material impact on its financial position and results of operations. Evaluation of the overall risk position On the basis of the monitoring system described, Deutsche EuroShop has taken ap- propriate steps to identify developments that could jeopardise its continued existence at an early stage and to counteract them. The Execu- tive Board is not aware of any risks that could jeopardise the continued existence of the Com- pany. Remuneration report The remuneration rules of Deutsche Euro- Shop AG were last reviewed by the Supervi- sory Board in 2010 and amended to comply with the Gesetz zur Angemessenheit der Vor- standsvergütung (VorstAG – German Act on the Appropriateness of Executive Board Remu- neration) and the Corporate Governance Code. weighting of 60% in the basis of calculation, that of the previous financial year at 30% and that of the financial year before that at 10%. Mr Böge receives 0.5% of the calculation basis as a bonus and Mr Borkers receives 0.2% The bonus is limited to 150% of the basic annual remu- neration. The non-performance-related basic annual remuneration is €300 thousand for Mr Böge and €168 thousand for Mr Borkers. In addi- tion, Mr Böge is expected to receive a bonus of €450 thousand and Mr Borkers €241 thousand for financial year 2014. The final amount of the bonus will only be available after approval of the consolidated financial statements by the Supervisory Board; the bonus will be paid fol- lowing approval. Should the results of operations and net assets of the Company deteriorate during the Remuneration system for the Executive Board Remuneration for the Executive Board is set by the Supervisory Board. The remuneration system provides for a non-performance-re- lated basic annual remuneration component based on the individual Executive Board mem- ber’s duties, a performance-related remunera- tion component, and non-cash benefits in the form of a company car and contributions to a pension scheme. As a performance-related remuneration component, the bonus is dependent on the long-term performance of the Company. It is based on the weighted average over the finan- cial year and the two previous financial years. Group EBT (excluding valuation gains/losses) for the financial year is taken into account at a term of the respective employment contracts to such an extent that further payment of this remuneration becomes unreasonable, the rules of section 87 (2) of the AktG will apply. The Supervisory Board shall decide at its own dis- cretion on the extent to which such remunera- tion shall be reduced. In the event that the employment contract is terminated prematurely by the Company without any good cause, the members of the Executive Board shall be entitled to a settle- ment in the amount of the annual remunera- tion outstanding up to the end of the agreed contractual term, but limited to an amount equivalent to a maximum of two annual re- munerations (basic annual remuneration plus bonus). For the measurement of the annual re- muneration amount, the average annual remu- neration for the previous financial year and the Stadt-Galerie, Passau

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