Retail VastNed Annual report 2006 L Alkmaar Almelo Amersfoort Amsterdam Apeldoorn Arnhem Assen Baarn Bemmel Bennekom Bergen op Zoom Beverwijk Bilthoven Bodegraven oxmeer Boxtel Breda Brielle Brunssum Bussum Capelle a/d IJssel Coevorden Culemborg Dalfsen Dedemsvaart Delft Deventer Didam Dinteloord oetinchem Doorwerth Dordrecht Drachten Ede Eerbeek Eindhoven Elst Emmeloord Enschede Ermelo Geldermalsen Goes Goor Gouda Groesbeek roningen Haaksbergen Haarlem The Hague Hardenberg Harderwijk Harlingen Harmelen Heemstede Heerde Heerlen Helden-Panningen Helmond H s-hertogenbosch Hillegom Hilversum Hoensbroek Hoogeveen Hoogezand Hoorn Houten Joure Kerkrade Krimpen a/d IJssel Leek Leeuwarden Leide eidschendam Lelystad Leusden Maastricht Meppel Middelburg Middelharnis Mijdrecht Neede Nijkerk Nijmegen Oldenzaal Oosterhout Oss Oude Purmerend Renkum Ridderkerk Rijswijk Roden Roermond Roosendaal Rotterdam Scheveningen Schiedam Schoonhoven Schoorl Sittard Sliedrech Soest Stadskanaal St. Oedenrode Steenwijk Tiel Tilburg Uden Utrecht Vaassen Veenendaal Veghel Velp Venlo Venray Vianen Vlaardingen Voorb Since we see ourselves as a niche player, and we are trying to enter new markets without having to compete directly with the bigger players, we expect to be able to realise the same level of investment as last year. oorschoten Vriezenveen Wageningen Weesp Winschoten Winterswijk Woudenberg IJmuiden IJsselstein Zaandam Zeewolde Zeist Zierikzee Zoeter uidhorn Zundert Zutphen Zwolle E Alicante Badalona Barcelona Burgos Castellón de la Plana León Madrid Malaga Murcia F Agen Alençon A ngers Annecy Arras Besançon Boulogne-sur-Mer Bourges Brest Cannes Carcassonne Chambéry Charleville Mézières Chaumont Dax Dieppe Dijo unkirk Frouard Grenoble Laval Limoges Lyon Mâcon Nancy Nice Paris Plaisir Roanne Saint-Étienne Soissons Thoiry Thonon-les-Bains Toulon Tr alence Vichy B Aalst Aartselaar Andenne Ans Antwerp Balen Bastogne Beaumont Boechout Borgloon Bree Brugge Brussels Charleroi Chêne 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Lelystad Leusden Maastricht Meppel Middelburg Middelharnis Mijdrech Nijkerk Nijmegen Oldenzaal Oosterhout Oss Oudenbosch Purmerend Renkum Ridderkerk Rijswijk Roden Roermond Roosendaal Rotterdam Schev Schiedam Schoonhoven Schoorl Sittard Sliedrecht Sneek Soest Stadskanaal St. Oedenrode Steenwijk Tiel Tilburg Uden Utrecht Vaassen Veenen Veghel Velp Venlo Venray Vianen Vlaardingen Voorburg Voorschoten Vriezenveen Wageningen Weesp Winschoten Winterswijk Woudenberg IJmu Jsselstein Zaandam Zeewolde Zeist Zierikzee Zoetermeer Zuidhorn Zundert Zutphen Zwolle E Alicante Badalona Barcelona Burgos Castellón d lana León Madrid Malaga Murcia F Agen Alençon Amiens Angers Annecy Arras Besançon Boulogne-sur-Mer Bourges Brest Cannes Carcasson hambéry Charleville Mézières Chaumont Dax Dieppe Dijon Dunkirk Frouard Grenoble Laval Limoges Lyon Mâcon Nancy Nice Paris Plaisir Roanne tienne Soissons Thoiry Thonon-les-Bains Toulon Troyes Valence Vichy B Aalst Aartselaar Andenne Ans Antwerp Balen Bastogne Beaumont B orgloon Bree Brugge Brussels Charleroi Chêneé Diest Dilsen-Stokkem Flémalle Froyennes Genk Ghent Grivegnée Hasselt Heusden-Zolder Hobo ampenhout La Louvière Leopoldsburg Leuven LiÈge Malmédy Mechelen Merksem Messancy Moeskroen Mons Mortsel Olen Overpelt Philippeville cherpenheuvel Sint-Job-in- t-goor Tielt-Winge Tienen Turnhout Vilvoorde Waterloo Waver Wilrijk P Barcelos Braga Lisbon Porto NL Alkmaar mersfoort Amsterdam Apeldoorn Arnhem Assen Baarn Bemmel Bennekom Bergen op Zoom Beverwijk Bilthoven Bodegraven Boxmeer Boxtel Bred rielle Brunssum Bussum Capelle a/d IJssel Coevorden Culemborg Dalfsen Dedemsvaart Delft Deventer Didam Dinteloord Doetinchem Doorwert ordrecht Drachten Ede Eerbeek Eindhoven Elst Emmeloord Enschede Ermelo Geldermalsen Goes Goor Gouda Groesbeek Groningen Haaksberge aarlem The Hague Hardenberg Harderwijk Harlingen Harmelen Heemstede Heerde Heerlen Helden-Panningen Helmond Hengelo s-hertogenbosc illegom Hilversum Hoensbroek Hoogeveen Hoogezand Hoorn Houten Joure Kerkrade Krimpen a/d IJssel Leek Leeuwarden Leiden Leidschendam Le eusden Maastricht Meppel Middelburg Middelharnis Mijdrecht Neede Nijkerk Nijmegen Oldenzaal Oosterhout Oss Oudenbosch Purmerend Renk Ridderkerk Rijswijk Roden Roermond Roosendaal Rotterdam Scheveningen Schiedam Schoonhoven Schoorl Sittard Sliedrecht Sneek Soest Stad St. Oedenrode Steenwijk Tiel Tilburg Uden Utrecht Vaassen Veenendaal Veghel Velp Venlo Venray Vianen Vlaardingen Voorburg Voorschoten Vriezenveen Wageningen Weesp Winschoten Winterswijk Woudenberg IJmuiden IJsselstein Zaandam Zeewolde Zeist Zierikzee Zoetermeer Zuidhor Zundert Zutphen Zwolle E Alicante Badalona Barcelona Burgos Castellón de la Plana León Madrid Malaga Murcia F Agen Alençon Amiens Ang nnecy Arras Besançon Boulogne-sur-Mer Bourges Brest Cannes Carcassonne Chambéry Charleville Mézières Chaumont Dax Dieppe Dijon Dunki rouard Grenoble Laval Limoges Lyon Mâcon Nancy Nice Paris Plaisir Roanne Saint-Étienne Soissons Thoiry Thonon-les-Bains Toulon Troyes Va
Key figures 2006 2005 2004 2003 2002 Results (x 1 million) Gross rental income 110.7 106.8 119.5 128.9 123.6 Direct investment result 62.5 59.6 62.2 61.8 56.4 Indirect investment result 110.4 98.3 8.0 (21.1) (9.9) Investment result 172.9 157.9 70.2 40.7 46.5 Balance sheet (x 1 million) Investment properties 1,730.7 1,487.5 1,360.3 1,612.3 1,589.2 Equity 1,048.1 930.8 847.1 818.0 820.5 Equity VastNed Retail shareholders 977.7 862.5 778.7 757.2 763.5 Long-term liabilities 479.0 409.5 453.6 598.0 498.2 Average number of ordinary shares in issue 1) 16,892,880 16,851,120 16,585,999 15,980,734 15,487,896 Number of ordinary shares in issue (at year-end) 1) 16,876,183 16,903,156 16,746,189 16,146,747 15,645,964 Per share (x 1) Equity VastNed Retail shareholders at beginning of year (including dividend) 51.02 46.48 46.53 48.80 49.99 Final dividend previous financial year (2.47) (3.74) (4.24) (4.15) (4.01) Equity VastNed Retail shareholders at beginning of year (excluding dividend) 48.55 42.74 42.29 44.65 45.98 Direct investment result 3.70 3.54 3.75 3.87 3.65 Indirect investment result 6.53 5.83 0.48 (1.32) (0.64) Investment result 10.23 9.37 4.23 2.55 3.01 Other movements 0.25 (0.02) (0.02) (0.30) (0.19) Interim dividend (1.10) (1.07) Equity VastNed Retail shareholders at year-end 57.93 51.02 46.50 46.90 48.80 Share price (at year-end) 77.00 53.75 53.50 42.60 41.25 Dividend in cash 3.70 3.54 3.74 4.24 4.15 or in cash 3.30 2.54 2.40 2.45 2.65 and in shares charged to the share premium reserve 2) 1.55% 2.63% 4.00% 4.17% Dividend return expressed as a percentage of equity VastNed Retail shareholders at beginning of year (excluding dividend) 7.6 8.3 8.8 9.5 9.0 Ratio equity / investment properties (in %) 60.6 62.6 62.3 50.7 51.6 Ratio long-term loan capital / short-term loan capital (in %) 67/33 69/31 80/20 75/25 61/39 As from 2005, VastNed Retail publishes its figures based on IFRS. The key figures for 2004 have been adjusted accordingly. The key figures for 2002 and 2003 have not been adjusted. 1 Taking account of share buyback. 2 A percentage in shares yet to be determined to the charge of the share premium reserve.
VastNed Retail Annual Report 2006
VastNed Retail N.V. Max Euwelaan 1, 3062 MA Rotterdam PO box 4444, 3006 AK Rotterdam Telephone +31 10 24 24 300 Fax +31 10 24 24 333 www.vastned.nl info@vastned.nl Supervisory board W.J. Kolff, chairman* N.J. Westdijk MBA**, vice-chairman F.W. Mulder*** P.M. Verboom W. Nijman**** (until April 4, 2006) D. van den Bos (until April 4, 2006) R.K. Jacobson (until April 4, 2006) * Chairman supervisory board as from April 4, 2006 ** Chairman remuneration committee *** Chairman audit committee as from April 4, 2006 **** Chairman supervisory board until April 4, 2006 Board of management VastNed Management B.V. Represented by: R.A. van Gerrevink, CEO T.M. de Witte, CFO J. Pars, CIO Financial calender 2007 Tuesday April 3, 2007 General meeting of shareholders Thursday April 5, 2007 Ex final dividend trading Wednesday May 2, 2007 Payment date of final dividend Monday May 14, 2007 First three months result 2007 (before trading)* Friday August 10, 2007 Semi-annual results 2007 (before trading)* Monday August 13, 2007 Ex interim dividend trading Monday September 3, 2007 Payment date interim dividend Friday November 9, 2007 Nine months results 2007 (before trading)* Friday February 22, 2008 Annual results 2007 (before trading)* This is an English language version of the 2006 Dutch annual report. In case of inconsistencies, the latter shall prevail. * Followed by webcast via www.vastned.nl VastNed Retail share Quotation: Euronext Amsterdam and Euronext Paris ISIN: NL0000288918 Ticker: VASTN.NL
Annual Report 2006 VastNed Retail N.V.
Dear readers of this annual report, Preface CEO Reinier A. van Gerrevink In the 2005 report I wrote: Your fund is performing well! And so it has proved. Indeed, it is performing excellently. For the full year 2006, VastNed Retail has achieved a total return of almost 50%, which shows that investors in general and VastNed Retail shareholders in particular have regained full confidence in the fund. Our market capitalisation has meanwhile increased to over F 1.25 billion! Unfortunately, the fund s liquidity lags behind other new players on the Amsterdam stock exchange, and are we no longer included in the AMX index. The market has been far from easy, particularly on the investment side; the reason for this was the strong yield compression. Lower initial yields are often in eminent contrast to our relatively highly yielding property portfolio. On the one hand, we benefited from the described development, resulting in significant mark-ups of the existing property portfolio, on the other we do not want to get involved with today s market frenzy, by acquiring property with yields far below the portfolio s average. We have decided to continue investing in relatively small-scale retail property, high street shops and smaller shopping centres, and we have also been active in pipeline projects (in Roermond, Tongeren and Houten). We keep investigating opportunities in this area. We also invest more and more in our standing portfolio. Furthermore, we are actively seeking to invest in new markets; after extensive research we have decided to designate Turkey, Greece and Rumania as new markets. You may have read that we have meanwhile set our first steps into Turkey by acquiring the Elysium Shops shopping centre in the district of Şişli in Istanbul. This is our first investment outside the eurozone. Our reason for investing in Turkey is that in this big country yields are still relatively high, certainly compared to the rest of Europe. We have largely hedged the currency risks by means of an adequate loan structure. In terms of price per square metre, our first investment is modest. We have found that Turkey is a fast developing market in which, despite this difference in yield, international players are already (trying to) make an impact. Our intention is to invest approximately 10% of the invested capital in Turkey. We will be aiming for the typical VastNed product: high street shops and small to medium-sized shopping centres. Otherwise, we will continue to focus on our four core countries: the Netherlands, Belgium, France and Spain. Last year, we invested over F 220 million in these countries. The occupancy rate improved further,
and appraisals have once again led to sharp upward revaluations in the various countries totalling almost F 130 million. Only Belgium lags behind, which is partly due to Factory Shopping Messancy. While a great deal of effort has gone into trying to make the centre perform better, it remains problematic. A positive development was that we succeeded renewing the contract with Nike (a major tenant). Otherwise, business in Belgium is healthy. Various attempts have been made to expand the portfolio, which has resulted in the acquisition of the Tongeren pipeline project. In Belgium, too, there is serious yield compression; to our astonishment, projects are sometimes acquired on paper, almost blindly. In the Netherlands we are growing steadily; we have bid for various projects and are reasonably confident of success. In France we have bought various shops, some with vacancy, for which we have meanwhile found good tenants. Here, too, we are investigating various new opportunities. Growth in Spain is relatively the highest. We have built up over F 500 million in invested capital there. We have realised good results, both on the letting side as on the valuation side. For the time being, we will focus on various (re)development opportunities in Spain (expansion, refurbishment). Everything taken together, we achieved a limitedly higher direct investment result per share in 2006. Partly as a result of the revaluations, your fund s solvency is solid at over 60%; there is plenty of room for growth. We have endeavoured to give some of this back to our shareholders by buying back shares, but the share price development was such that we have limited that to just over 25,000 shares. We expect 2007 to be another good year, and we anticipate a further increase of the direct investment result per share. divestments), and the organisation has been further professionalised in many respects. Research has become a major element, as well as adequate and up-to-date information provision in the shape of all kinds of reports, which the board of management need in order to make quick decisions. We were delighted to win first prize for the best annual report from EPRA. In the same category, VastNed Offices/Industrial came third. Other nominees included CLS Holdings (2nd), Rodamco Europe (4th) and British Land (5th). This confirmed our sense that transparency in business and financial reporting is of crucial importance. All in all, 2006 was a very good year, and the outlook for 2007 is very positive. When making acquisitions, we are eager not to hurt the fine return that the present portfolio produces. We expect ongoing pressure on returns to continue this year, even though factors like the interest rate level(s) will undoubtedly start to affect them. However, the current global economic climate does not show any signs of that. Since we see ourselves as a niche player, and we are trying to enter new markets without directly competing with the bigger players, we expect to be able to realise the same level of investment as last year. Going forward, we will be using our new slogan Balanced Growth in European Property as our guideline. Yours sincerely, Reinier A. van Gerrevink, CEO Our shareholder base has become more international, with new shareholders joining from countries like Australia and Japan. Our regular visits to investors all over the world were one reason for that; another is the great interest for property funds in general. It does remain important to look for new opportunities to create additional value; the Dutch fiscal regime for fiscal investment institutions is expected to be liberalised somewhat (concerning property development), but the limitations remain considerable, which does not make a move towards property development easy. There is abundant core quality (asset selection and management including timely
Bilthoven The Hague Murcia Antwerp Arnhem Tiel Oosterhout Antwerp
The Hague Rotterdam Our shareholder base has become more international, with new shareholders joining from countries like Australia and Japan.
AFM Bevak CEO CFO CIO Code EPRA GPR IAS IFRS IRS IVBN SIIC US List of terms Authority for the Financial Markets (Belgian) investment company with fixed capital Chief Executive Officer Chief Financial Officer Chief Investment Officer The Dutch corporate governance code European Public Real Estate Association Global Property Research International Accounting Standards International Financial Reporting Standards Interest Rate Swap Association of institutional property investors Société d Investissements Immobiliers Cotées United States Definitions Average (financial) occupancy rate 100% less the average financial vacancy rate. Average (financial) vacancy rate The market rent applicable for a particular period of vacant properties, expressed as a percentage of the theoretical rental income for the same period. Gross rent Contractually agreed rent for a particular property, taking the effect of straightlining of lease incentives into account. Net initial yield Net rental income expressed as a percentage of the acquisition price (including transaction costs) of the respective investment property. Net rental income Gross rental income less net service charge expenses and operating expenses attributable to the respective period, such as maintenance costs, management expenses, insurance, letting costs and property tax. Net yield Net rental income expressed as a percentage of the market value of the respective investment property. Occupancy rate 100% less the vacancy rate. Theoretical annual rent The annual gross rent at a given time, excluding the effects of straightlining of lease incentives and such, plus the annual market rent of any vacant properties. Theoretical rental income The gross rent attributable to a particular period excluding the effects of straightlining of lease incentives and such, plus the market rent of any vacant properties applicable to the same period. Vacancy rate The annual market rent of unleased properties at a certain point in time expressed as a percentage of the theoretical annual rent at the same point in time. Gross rental income The gross rent recognised for a certain period after deduction of the effects of straightlining of lease incentives. Gross yield Theoretical annual rent expressed as a percentage of the market value of the property. Lease incentive Any compensation, temporary lease discount or expense for a lessee upon the conclusion or renewal of a lease agreement. Market rent The estimated amount for which a particular property may be leased at a given time by well-informed parties who are prepared to make a transaction, who are independent and who act prudently and free from duress. Market value The estimated amount for which a particular investment property might be traded between well-informed parties who are prepared to make a transaction, who are independent and who act prudently and free from duress.
Key figures Preface CEO 4 Profile and strategy 10 Report of the supervisory board 13 Introduction 13 Corporate governance supervisory board 13 Annual accounts 2006 15 Dividend and reservation policy 15 Dividend proposal 15 Composition of the supervisory board 16 Committees of the supervisory board 16 Changes on the supervisory board 16 Profile of the supervisory board 16 Retirement roster 17 Appointments 17 Personnel 17 Contents Report of the board of management 18 Economy and markets in general 18 Netherlands 25 Spain 26 France 27 Belgium 28 Property portfolio 29 Personnel and organisation 41 Sustainability 41 Risk management 41 Financial results 42 Dividend proposal 45 Outlook for 2007 45 The share and the stock exchange listing 46 Annual accounts 2006 49 Consolidated profit and loss account 50 Direct and indirect investment result 51 Consolidated balance sheet as per December 31 52 Consolidated statement of movements in equity 54 Consolidated cash flow statement 55 Notes to the consolidated annual accounts 56 Company balance sheet as per December 31 86 Company profit and loss account 87 Notes to the company annual accounts 87 Other information 90 Corporate governance 93 Risk management 108 Property portfolio 2006 113 Investment properties in operation 114 Other investment properties 132 Key figures property portfolio
Antwerp Amsterdam Profile and strategy History VastNed Retail N.V., founded in 1986, is a (closed-end) property investment company with variable capital which makes long-term investments in well-let individual retail properties, shopping centres and retail warehouses, primarily in the eurozone. The issuing and purchasing of shares takes place at the decision of the board of management, taking into account the margins and conditions set by the supervisory board. The shares have been listed on Euronext Amsterdam since November 9, 1987, and on Euronext Paris since December 20, 2004, and are included in the Amsterdam AScX index since March 2, 2007. VastNed Retail is part of the VastNed Group. Vision Investing in retail property is clearly linked to the retailers who run their business in these shops. This means that in the long run the rent is dependent on the retailer s profits. The retailer s success and the competitiveness of the location, therefore, are major factors in the long-term success of the retail property investor. Mission and strategic objective VastNed Retail offers private and institutional shareholders an investment product which is primarily focused on retail property. This offers investors the opportunity to profit from the dynamics of the retail markets, striving for a high total return. The total return consists of a combination of direct return based on rental income and indirect return based on value growth of the property portfolio. In the longer term, the objective is to achieve an increasing dividend per share through active management of the portfolio. 10
Profile and strategy Investment product and investment methodology VastNed Retail pursues its strategic objective by focusing on the following investment products and by using the following investment methodology: a mix of individual retail properties, shopping centres and retail warehouses, striving for a balanced investment mix. A ratio of high street shops of between 35% and 60%, of shopping centres of between 20% and 50% and of retail warehouses of between 10% and 30% is aimed for; focus on shopping areas and tenants who distinguish themselves through dynamism and competitiveness; a balanced risk return profile of the investments; focus on four core countries: the Netherlands, Spain, France and Belgium; striving to develop Turkey into a core country in the property portfolio with a desired volume of 10% of the total property portfolio in the near future; a detailed assessment of potential new markets. Currently, Turkey, Greece and Rumania are designated as new markets; aiming for sufficient critical mass in the core countries, so that local management disposes of a sufficient number of functionalities, and; focus on an optimum spread within the property portfolio, using the following spread criteria: countries, regions, cities, spreading in categories, number of properties, number of tenants, limitation of the size of the property and limitation of the size of individual tenants. Size At year-end 2006, VastNed Retail s property portfolio represented a value of F 1,731 million and at that time was composed as follows: 47% high street shops; 40% shopping centres; 8% retail warehouses; 5% other. Fiscal structure VastNed Retail qualifies as a fiscal investment institution as meant in Section 28 of the Dutch 1969 Corporate Income Tax Act. This means that no corporate income tax is due in the Netherlands. In view of its status as a fiscal investment institution, VastNed Retail does not engage in property development for third parties. In Belgium all investments have been incorporated in the property Bevak Intervest Retail, which is also exempt from income tax. The French property portfolio equally is exempted from corporate income tax under the locally applicable SIIC regime. For investment selection, an attractive fiscal climate is an important factor. The investments in Spain, Portugal and Turkey are subject to regular taxation. Financing policy The starting point is that the financing of the property portfolio with loan capital remains limited to approximately 40 to 45% of the market value of the property. This principle can temporarily be deviated from should interesting acquisition or sales opportunities present themselves, and provided the interest rate is at an acceptable level compared to the yield on the property. In this context VastNed Retail will always stay within the financing limits as meant in Section 28 of the Netherlands 1969 Corporate Income Tax Act. Also, a balance is aimed for between financing with short-term and long-term fixed interest periods. In prevailing circumstances interest derivatives can be used. In times when the VastNed Retail share price trades at a premium compared to net asset value, it may be attractive to issue new shares. The starting point for this is that the issuing of new shares will only take place if in the foreseeable future there are investment opportunities. Currency policy VastNed Retail aims to avoid currency risks by investing primarily in the eurozone. When currency risks do occur, their scope is limited by careful matching of the currencies of assets and liabilities on the one hand and income and expenditure on the other. Please refer to the chapter on risk management included elsewhere in this annual report. Dividend policy VastNed Retail s dividend policy is aimed at putting the direct investment result fully at the disposal of the shareholders. In order to comply with the fiscal conditions for fiscal investment institutions, at least the fiscal result must be paid out in cash. The dividend is placed at the shareholders disposal in the form of an interim dividend of 60% of the direct investment result for the first six months of the financial year, and a final dividend after conclusion of the financial year. Acquisition policy VastNed Retail pursues an active acquisition policy. New investment opportunities are constantly being assessed. Our policy is that acquisitions will only take place if the market conditions are favourable, if the risk return profile is balanced and if the capital ratios permit it. In this context, acquisition opportunities are constantly weighed against financial alternatives such as share buybacks. 11
Profile and strategy Risk management VastNed Retail pursues an active policy in the area of assessing and if necessary taking appropriate action regarding the risks that are associated with investing in property. In this context, a distinction is made between strategic risks, operational risks, financial risks, reporting risks and compliance risks. Organisation VastNed Retail pursues an active management of its property portfolio; in the countries in which it operates or will operate, fully-fledged local management is aimed for. With approximately 90 employees in total, VastNed Management in Rotterdam, VastNed Management España in Madrid, VastNed Management France in Paris, Intervest Retail and Intervest Offices, both in Antwerp, manage the investments of VastNed Retail and VastNed Offices/Industrial. VastNed Management has no profit objective, but facilitates the funds with directory board and management. A cost allocation agreement applies on the collaboration between VastNed Retail, VastNed Offices/Industrial and VastNed Management. Costs incurred are charged on, without mark-up for profit, based on causation. 67% of the shares in VastNed Management are held by VastNed Retail, and 33% by VastNed Offices/ Industrial. Independent management is the best condition for optimum leasing to creditworthy tenants and for guarding the state in which the properties are kept. Carrying out commercial and administrative management ourselves where possible makes for direct contact with the tenants and the property market, so that market developments can be alertly responded to and operating expenses can be responsibly controlled. Technical management is largely subcontracted to local specialists. By maintenance, renovation and sale of objects that no longer fit in with the property portfolio, an optimum state and value of the property is secured in relation to the return for shareholders. In this context, the aim is to build a dedicated management organisation in Turkey, in order to create the right conditions for the expansion of the Turkish property portfolio. The property markets in the various countries are subject to locally applicable legislation and regulations. A local network as well as specialised know-how in the area of financing and of local culture lead to a head start in terms of operating the property. VastNed Retail strives to undertake these efforts from within the country itself where possible. 12
Uden The Hague Report of the supervisory board Introduction The supervisory board of VastNed Retail held six regular meetings in 2006. The members of the board of management took part in these meetings. The supervisory board also met in the absence of the board of management, and there were also other meetings of the supervisory board. The topics discussed at these meetings included the state of affairs and risks in the property portfolio, the strategy and risks of the company as a whole, as well as aspects thereof, such as entering new markets, the financial results and their reporting in press releases, changes on the supervisory board, the structure of the supervisory board, the appointment of a new chairman of the supervisory board and a new chairman of the audit committee, the supervisory board s own functioning and the functioning of the board of management, the functioning of the external auditor, the supervisory board s remuneration and the remuneration of the board of management, corporate governance and the functioning of the subcommittees of the supervisory board, including the reporting by these committees. The supervisory board has been provided with sufficient information by the board of management at all times, so that the supervisory board was able to properly fulfil its supervisory role. None of the members of the board was frequently absent. Corporate governance supervisory board A major component of the corporate governance structure is the structure of the supervisory board as an organ of the company. Until April 4, 2006, its composition was the same as the composition of the supervisory boards of VastNed Offices/Industrial and VastNed Management. In the context of continuous improvement of the corporate governance structure of the company, it has been decided to separate the supervisory boards of VastNed Retail and VastNed Offices/Industrial. This entails that none of the supervisory directors of VastNed Retail will also be on the supervisory board of VastNed Offices/Industrial. This is to reinforce the independence of the supervisory board. 13
Bussum Capelle aan den IJssel Paris Doorwerth Alicante Rotterdam Turnhout Breda Houten 14
In the context of continuous improvement of the corporate governance structure of the company, it has been decided to separate the supervisory boards of VastNed Retail and VastNed Offices/Industrial. Annual accounts 2006 Madrid The annual report drawn up by the board of management includes the 2006 annual accounts audited by Deloitte Accountants B.V. We are in agreement with this report and with the 2006 annual accounts. We recommend that you adopt the annual accounts 2006 in the form as presented. Dividend and reservation policy In line with previous years, VastNed Retail will distribute the direct investment result fully to its shareholders. Part of the dividend can be paid out to the shareholders as stock dividend, charged to the share premium reserve. The supervisory board has granted the board of management the authority to buy back shares in the company in order to prevent dilution of the direct investment result per share, while at the same time guaranteeing the fiscally favourable character of the payout. Dividend proposal We are in agreement with the proposal of the board of management to distribute a final dividend per share of F 5.- nominal value as follows: 5% in cash on the priority shares; a payout on the ordinary shares, after deduction of the interim dividend of F 1.10, of F 2.60, of which: F 2.60 in cash less 15% dividend withholding tax, or F 2.20 in cash less 15% dividend withholding tax, plus a percentage in shares yet to be determined, depending on the share price, but approaching a cash equivalent of F 0.40, charged to the share premium reserve, without deduction of dividend tax. 15
Report of the supervisory board Composition of the supervisory board The supervisory board is composed as follows: W.J. Kolff, chairman N.J. Westdijk MBA, vice-chairman F.W. Mulder, member P.M. Verboom, member The curricula vitae of the supervisory board members are included in the chapter on corporate governance included elsewhere in this annual report. Committees of the supervisory board The supervisory board has three active committees. The audit committee and the remuneration committee each have two members. The selection and appointment committee is comprised of the chairman and the vice-chairman of the supervisory board. Audit committee During 2006, the composition of this committee changed due to the aforementioned separation of the supervisory board. Until April 4, 2006, the audit committee consisted of Mr R.K. Jacobson (chairman), Mr W. Nijman, Mr D. van den Bos and Mr F.W. Mulder. On April 4, 2006, Messrs Jacobson, Nijman and Van den Bos stepped down. Mr Mulder was appointed as chairman and Mr Verboom became a member. In 2006 the audit committee met on four occasions. It is the task of the audit committee to advise the supervisory board in the area of finance. Topics that were addressed included financial reporting, budgeting, the role of the external auditor, tax law, compliance (inter alia with the Authority for the Financial Markets), IFRS, interest rate and financing risks, letting risks, catastrophe and liability risks, debtor risks, internal control, IT systems, legal risks and the follow-up of recommendations of the external auditor as well as the findings of the audit by the external auditor. All audit committee reports have been made available to all members of the supervisory board and were discussed at the following meeting of the supervisory board. Remuneration committee Until April 4, 2006, the remuneration committee was comprised of Mr N.J. Westdijk (chairman), Mr F.W. Mulder and Mr W. Nijman. On that date, Messrs Mulder and Nijman stepped down and Mr W.J. Kolff joined the remuneration committee as a member. It is the task of the remuneration committee to advise the supervisory board in the area of the remuneration policy to be pursued for the directors. This committee met on four occasions in 2006. The remuneration committee has prepared the 2006 remuneration report, which will be discussed by the general meeting of shareholders on April 3, 2007. In this report the committee has formulated proposals for the remuneration of the individual directors. The document includes a report on the personal bonuses to be awarded to the directors in 2006. All members of the remuneration committee are also members of the supervisory board of VastNed Management. Coordination with the remuneration committee of VastNed Offices/Industrial takes place in the meetings of the supervisory board of VastNed Management, since the directors manage both funds and their remuneration reflects their activities for both funds. Selection and appointment committee As stated before, the selection and appointment committee is comprised of the chairman and the vice-chairman of the supervisory board. The supervisory board met four times for discussions in the area of selection and appointments. On behalf of the supervisory board, the selection and appointment committee made proposals to the holders of priority shares concerning appointments to the supervisory board, including proposals for the replacement of its member Mr F.W. Mulder, who will retire on April 3, 2007 in accordance with the retirement roster. Changes on the supervisory board The general meeting of shareholders reappointed Mr N.J. Westdijk effective from April 4, 2006, retaining his valuable expertise and experience for VastNed Retail. At the same meeting, Mr W.J. Kolff was appointed as a member of the supervisory board, which then appointed him as chairman, and Messrs Nijman, Van den Bos and Jacobson stepped down in connection with the aforementioned change of the structure of the supervisory board. Profile of the supervisory board The supervisory board profile guarantees that the supervisory board is composed properly, meaning that based on available knowledge and experience effective supervision can be exerted of the board of management of the company. This profile is available on the website of the company; copies can be obtained at the office of the company. The supervisory board certifies that all its members are independent as defined in the Dutch corporate governance code. 16
Report of the supervisory board Retirement roster The retirement roster for the next few years is as follows: F.W. Mulder, 2007 (not eligible for re-election) P.M. Verboom, 2008 (eligible for re-election) N.J. Westdijk, 2009 (eligible for re-election) W.J. Kolff, 2010 (eligible for re-election) The articles of association stipulate that a term of office is limited to three terms of four years. In this context it has been decided that Mr F.W. Mulder will not be available for reappointment at the general meeting of shareholders of April 3, 2007. Thus, VastNed Retail acts in accordance with best practice provision III.3.5 of the Code. Appointments In accordance with the retirement roster, Mr F.W. Mulder will step down. The supervisory board is grateful to Mr Mulder for his contributions to the supervisory board, which he joined in 1996. During this time, Mr Mulder has on many occasions provided the company and the supervisory board with his wise counsel. The Stichting Prioriteit will nominate Mr J.B.J.M. Hunfeld for membership of the supervisory board. The agenda of the general meeting of shareholders and the shareholders circular will in mid-march provide more extensive information about the appointment of the new member of the supervisory board. Personnel The supervisory board is grateful to the board of management and the company s employees for their efforts, loyalty and the results realised during the year under review. Rotterdam, February 22, 2007 For the supervisory board, W.J. Kolff, Chairman 17
The Hague Report of the board of management Economy and markets in general Economy The world economy s growth is on average over 1% above that of the eurozone. This is unlikely to change in the next few years. In recent years, economic growth recovered in the eurozone; the world economy had for some time been growing at over 3% per year. The economic recovery of the eurozone was fuelled by exports and has now gained more internal momentum, as consumers are tentatively beginning to join in. Economic growth in the eurozone has gained a more solid basis. At this stage of the economic cycle, an intermediate correction of economic growth might be expected, but there has been no sign of it. Despite increased short-term interest rates, growth forecasts for the world economy remain high. In view of the rapid economic developments in countries like China and India, any growth correction is likely to be mild, or may even fail to appear. Slow adaptation to the globalisation of the economy continues to affect the eurozone s growth potential. A desired social character is poised against competition and innovation in political discussions. Social unrest spilled out on to the streets of for instance France, but also during the elections in the Netherlands. In the other countries of the eurozone, too, both these themes continue to curry political discussion and affect the outcome of elections. There is no clear direction, though it is beginning to appear that the social character is now higher on the agenda. One issue that has gained momentum is sustainability of economic growth in the face of the supposed impact of climate change. The rise of the oil price is a negative factor, because higher energy prices hurt many. It is up to politics to turn sustainability into growth opportunities for the economy. Interest in the eurozone has gone up. The rise affected short-term interest more than long-term interest. This reveals the pattern of a flat to inverted interest rate curve, which traditionally precedes a slowdown of growth. Economic growth forecasts for the eurozone already factor this in. In view of the strength of the world economy, these growth forecasts are likely to be too pessimistic. 18
Report of the board of management The interest rate on government bonds with long durations has fallen dramatically since the early eighties. In recent years, the 10-year interest rate on government bonds has been around 4%. The European Central Bank (ECB) has committed itself to keeping inflation in the eurozone below 2%. Since the introduction of the euro, the ECB has built up a solid reputation in terms of this commitment by keeping inflation close to that 2%. Extrapolating this commitment into the future, there is little cause to expect that the 10-year interest rate in the eurozone will on average range very far from the aforementioned 4%. Due to the cyclical nature of the economy, the actual interest rate may temporarily be a little higher or lower, but it appears to be a realistic prediction that the 10-year interest rate will stay around 4%. Retail market The value growth of the property in Europe arises from the dynamics of supply and demand of investment properties. Demand outstrips supply. The majority of the value growth is due to the popularity of property investments among both private and institutional investors. Private equity, too, is interested in property. Direct returns on property portfolios tend to be higher than the costs of loan capital, making leverage of the returns possible. This would seem to support further value increases. When leverage opportunities fade due to rising interest rates, a major factor in the strong demand for property will be gone. However, a retail investment in a top location in the larger cities of Europe is in fact, in terms of return, a more attractive investment than government bonds. Rents at these locations rise by at least inflation, and there are always retailers who want to lease these locations. A retail property portfolio is also attractive because of the spreading. Initial yields of retail property mostly fell in 2006 in the periphery of Europe. This decrease was especially strong in countries in the north and east of Europe, but countries like France and Spain also profited. The decrease of initial yields in Germany was limited. The other European countries registered decreases of varying extent. Real growth of GDP (in %) Source: Consensus Forecasts 4 3 2 1 0 Eurozone World Total annual return (in %) Source: Global Property Research (GPR), Bloomberg 60 50 40 30 1996 1997 1998 1999 2000 GPR 250 Europe GPR 250 Netherlands VastNed Retail 2001 2002 2003 2004 2005 2006E 2007E 2008E The present value growth of retail property is much less the result of underlying trends in the retail market itself than of the popularity of property as an investment. For the retail property investor, the success of the retailer is ultimately the most important driver of long-term rent and value increases. Understanding retail trends therefore remains of the greatest importance. 20 10 0 1 year 3 years 5 years 7 years 19
Report of the board of management Next to the retailer s success, the major engines of the retail trade are economic growth and growth of disposable income per capita. If these factors are lacking, weak spots become visible in the retail landscape. Currently, the eurozone economy is in the recovery part of the cycle, and the retail trade can profit from improved income prospects among consumers. Dutch property funds Development premium (discount) (in %) In Europe s periphery, economic growth prospects are at a higher level, and there is more scope for improving the consumer s disposable income. VastNed Retail sees attractive opportunities for the retail trade and retail property in South-eastern Europe, including Turkey. Modernisation of the retail trade is a major theme in South-east European countries. New shopping centres replace local markets and dispersed shops. Existing central shopping streets change through redevelopment from old shops to modern retail properties where major retail chains can do business. In the countries of South-eastern Europe, a risk premium is available in terms of higher initial yields compared to the countries where VastNed Retail has operated for years. In Turkey, there is also high population growth, and the relatively young population is attractive for long-term economic growth. This distinguishes Turkey from the countries in which VastNed Retail currently invests, where ageing of the economy is a growing issue. Additionally, Istanbul is a metropolis in the same league as London and Paris, but retail development is lagging behind. For the time being, our preference within South-eastern Europe is currently for Turkey, and particularly Istanbul. 40 30 20 10 0-10 -20 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Modernisation of the retail trade structure is also ongoing in the eurozone, which offers opportunities to update the retail portfolio there too. The trends are: expansion of shopping centres at neighbourhood or district level, often through addition of anchors in the daily groceries segment and extension of choice in the fashion segment. Extension of choice is popular with consumers. Modernisation is also taking place in inner cities by creating larger retail units. Demand from the retail trade has been focused on large retail floor areas in order to be able to offer consumers a broad and deep assortment. Retail parks are also in the ascendant. These peripherally located often along a motorway retail parks are concentrations of large shops around a central parking facility. Daily grocery facilities are also increasingly establishing themselves in these retail parks. The market share of food discounters has been increasing for years. The old guard in the form of service supermarkets and hypermarkets have adjusted their prices and strategy in response to the 20
Report of the board of management economic decline. This appears to have halted the rise of the food discount shop for the time being. The battle now seems to focus on the strength of own brands versus top brands and discount brands. Consumers appear to have a great deal of confidence in the major supermarket chains own brands, as is evident from the increasing market share of these own brands. Fresh products from the service supermarkets also increasingly find favour with consumers. In other words, consumers appear to have found a new appreciation for the service supermarket. Vastned retail Industry spread total property portfolio (in %) Non-food 49% Food 16% Living and leisure 23% Other 12% 12% In the fashion sector, rapid and frequent collection renewal is crucial for retail formulas survival. Such a strategy enabled chains like H&M and Zara to flourish, as it took other retail formulas too long to adapt. A few years ago, H&M introduced special clothing lines designed by famous designers. They never fail to be a resounding success. It is an opportunity for consumers to buy designer clothes relatively cheaply. Others retail formulas have quickly picked up this trend. The underlying trend is that ordinary consumers also want design and are prepared to spend more to attain it. The growing trend of renting jewellery and other accessories illustrates this view. 23% 16% 49% The home decoration industry is also developing strongly. A large group of consumers has emerged who regularly put parts or all of the contents of their home up for sale on ebay or comparable websites, and subsequently replaces the sold items either through the same channel or from the regular retail trade. Some consumers have become serious and are now selling home products in their spare time. These small-scale supply operations have translated into a number of new home decoration retail formulas, such as leasing space in a megastore to small entrepreneurs who specialise in all kinds of home decoration products. Barriers for starting a business have been reduced, and the retail business is booming accordingly. Choice for the consumer has widened and all kinds of trends in the fields of design, but also of furniture and accessories manufactured on a micro scale have come within reach of the consumer. As a result, the home decoration market has become more competitive, and is forced to become more innovative. All this benefits the consumer. Risks The dollar weakened versus the euro in 2006. Little has changed in the situation of the government budget deficits and the trade balance in the United States, nor in the high level of consumer debt. 21
Zierikzee Arnhem Winterswijk The Hague 22
Amsterdam Investing in property in general is popular among investors due to the good diversification characteristics compared to investment in shares and bonds. 23