Good morning, and welcome to Citycon's Q2 Result Webcast. My name is Valtteri Piri, and I'm working as Legal and Investor Relations Manager here in Citycon. Today with me, we have our CEO, Henrica Ginström, and CFO, Sakari Järvelä. They will now present the key highlights from the first half of the year, and after that, we open the line for the questions. Henrica, please go ahead.
Thank you, Valtteri. And welcome also on my behalf to this Q2 webcast. The first half of the year was characterized again by strong underlying business performance. Like-for-like net rental income increased by 5.9%, and that was supported by both rent indexations and also strong performance in our core assets. Total net rental income grew a little bit more by 9.9%, and that was supported by the Kista acquisition, which was executed in February this year. EPRA earnings increased by 5.4%, following the strong net rental income development, and was slightly offset by the higher admin expenses due to the one-time reorganization costs and the increased financial expenses. Like-for-like tenant sales increased 2.6%. All our main retail segments continue to show strong sales growth, and retail occupancy landed at a solid 95.2%.
Strong operational performance is also supporting the development of our fair values. There were small upward yield revisions in a few of our prime assets, but these changes were more than offset by positive cash flow growth driven by the rent indexations. In general, I would say we see a stabilization in the valuations in the market. Average rents increased by 4.8%, compared to last year. Leasing spreads have remained flat on average, meaning that we've been able to push through the full indexation to our tenants. It's good to note that the occupancy cost ratio has remained at a modest level, and that is due to the fact that the tenant sales have increased in the same pace as rents. Because of the low OCR, we see more room for rental growth also going forward.
Occupancy increased by 30 basis points from the last quarter and has increased by 70 basis points compared to Q2 last year, and we continue to see good demand in our assets. Like-for-like net rental income development was strong throughout our Nordic portfolio. Our strategy to focus on everyday convenience with grocery and public service anchors works equally well in all of our markets. It's good to note that our like-for-like net rental income development has been above the average indexations, as we've been able to increase both occupancy, recovery rates, and also other income items, like, for example, specialty leasing and parking income. Like-for-like net rental income increased by 6.3% in Norway, which is currently the strongest market in our portfolio in terms of consumer spending and tenant demand. In Sweden, the net rental income increased by 10.7%.
The high increase was, however, partly due to some negative one-time items in the comparison period. Also in Finland and Estonia, we have strong growth figures. Following the Kista acquisition, approximately 21% of our net rental income is generated in Sweden, and Finland is still our biggest segment, with 37% share of the net rental income, followed by Norway with 28%. As mentioned, like-for-like tenant sales were up 2.6%, and this was due to strong performance, especially in Norway and in Finland. Consumer confidence is slowly improving also in Sweden, and our sales development was particularly impacted by Åkersberga Centrum, where we are doing relocations in the tenant mix.
And it's good to note that the average purchase continues to increase in our portfolio, and this is due to the fact that the commuter levels remain still low, but the buying customer continues to come and spend. And then to the balance sheet side, which is a key focus area for us. During the Q2 , we continued our actions to improve our credit maturity profile and liquidity buffer. Among them, we did the exchange for the 2024 hybrid for a new hybrid and a cash amount. We did an early redemption for the remaining amount of the bond maturing in October 2024, or so-called May call, and we also extended our revolving credit facility and term loan, as well as the Kista loan.
And all of these build on the actions we already took in Q1 and are very important steps in improving our credit profile, and Sakari will comment on this more in detail shortly. Divestments are a key element for de-risking our balance sheet. We are committed to our announced divestment target, and following the completion of the Kongssenteret divestment in May, the remaining target for this year is approximately EUR 350 million. We have several active ongoing discussions, and currently, we have three signed LOIs, of which two are in advanced negotiations and one in early stages. And we are working with and evaluating various different options, including direct asset sales, portfolio sales, and different joint venture structures to achieve our divestment target. And with that, I hand over to Sakari.
Thank you, Henrica, and welcome also on my behalf.
We're happy to report another operationally and financially solid quarter. As a headline number, our like-for-like net rental income grew 5.6% in the Q2, or 5.9% in the first half of the year. The full reported NRI growth, in turn, was 11.6% and 9.9% for the Q2 and the first half, respectively. The large difference between the reported and like-for-like arises mainly from the consolidation of Kista Galleria in February, which has now been in our ownership for the first full quarter. Kista contributed EUR 3.2 million of net rental income in the Q2 and EUR 4.3 million year to date. This impact, among some others, is adjusted for in the like-for-like NRI. Overall, there are three important items that affect comparability to last year, out of which Kista is one.
The second item is a EUR 2.4 million, one-off compensation payment we received due to an early termination of a lease agreement. This is reported as other operating income below NRI, but positively affecting direct operating profit and EPRA earnings. Thirdly, and as already discussed in detail in the Q1 webcast, we have been incurring one-time restructuring costs from G&A cost-cutting actions, as well as from the ongoing outsourcing and the account of the accounting functions. A total of EUR 6.9 million of such costs were booked in the first half of the year, and we expect only very minor restructuring cost for the rest of the year. As said, all these three effects impact the comparability to last year, so I would refer to the like-for-like NRI growth as the best indicator of the underlying operational performance.
On this slide, we show a more detailed breakdown of changes in the net rental income from last year to this year. Here we separate out the impact coming from Kista of EUR 3.2 million, as stated in the Q2, and EUR 4.2 million in the first half. If we further look at the first half, our like-for-like properties and redevelopment projects together added a total of EUR 5.9 million of NRI compared to last year. This is essentially the organic growth coming from our existing asset base. On the FX side, Swedish and Norwegian kroner strengthened slightly during the Q2, resulting in a minor positive NRI impact, but the FX impact in total is still negative, EUR 0.5 million for the first half. Similarly, we show the development of EPRA earnings on page eleven.
Looking at the first half graph, we show EUR 9.6 million positive NRI increase shown in the previous slide. The total administrative G&A costs were EUR 3 million higher compared to last year, but notably, this includes the EUR 6.8 million reorganization and one-time items. So from run rate perspective, at the end of the quarter, we're running our G&A clearly lower compared to last year and are in schedule to reach our target, which is G&A run rate of 10% of NRI by the end of this year. In this bridge, you can also see the positive impact from the EUR 2.4 million early termination compensation reported as other operating income. In terms of the financial expenses, we reported EUR 9.6 million increase compared to last year.
This is partly due to higher interest rates on the refinanced debt, but actually, approximately EUR 5 million of this increase is due to the Kista consolidation. This is both from including the refinanced term loan from the JV into our balance sheet, and also from no longer receiving interest income from the shareholder loans granted to the JV. Finally, regarding Kista, we benefit from no longer incurring the accounting loss recorded from the Kista JV last year, improving our earnings by EUR 2.5 million compared to last year. So to summarize these effects from Kista, it has affected our NRI positively by EUR 4.2 million, financial expense negatively by around EUR 5 million, and the JV result positively by EUR 2.5 million, leaving positive net effect of EUR 1.7 million for the earnings in the first half year.
The valuations, as Henrica mentioned, benefited from the high cash flow growth as we recorded a EUR 23 million fair value gain in the Q2. The valuation yields were largely stable, with minor upward revision for a couple of selected assets, but these were offset by higher market rents as rent indexation continued. Together with the positive EUR 46 million impact from consolidating Kista Galleria in the Q1 , the total change in the fair values was EUR 69 million positive in the first half. Following this, EPRA NRV increased to 9.25 cents per share, euros per share, up from 8.96 euros in the Q1 . The funding side of our business remained very busy as we continued to address our credit profile and refinance and extend our debt instruments.
The most important transaction in the quarter was the very successful exchange offer executed on one of our two hybrid bonds, which would have come to the first call in November of this year. Through this transaction, we effectively refinanced the hybrid bond by offering the existing holders the opportunity to exchange their bonds into a combination of a new hybrid bond and a 4.7% cash compensation amount. Our primary objective was to refinance a large, as large portion of the nominal as possible, so we were very pleased with over 90% of investors accepting the offer. The new bonds carry a coupon of 7.875%, and have the first call date in 2029.
The equity credit from these hybrid bonds is key for our investment grade rating, so this transaction was a very important step in demonstrating our commitment to retain the current rating, and also one of the reasons why we wanted to execute the exchange offer in good time ahead of the first call date. As already discussed in the Q1 presentation, we completed extensions of over EUR 850 million of loans at the beginning of the Q2, and also completed a make-whole early redemption process for the remaining outstanding amount of the October 2024 EUR bond. These can be seen on slide 19, where you see the impact of the loan extensions. The bulk of the maturities has now been pushed to the 2020s, 2027 and beyond, and we have cleared all maturities until September 2025.
We use CP market regularly, so that remains the short-term item. Our weighted average maturity stands at 3.2 years at quarter end, and our weighted average interest rate at 3.3%. We have strong liquidity, with EUR 459 million total liquidity available. The share of secured loans from our total debt remains relatively low at 26%, so we still have some further remaining capacity to access secured mortgage market if required. Our core credit metrics improved somewhat this quarter, with IFRS LTV standing at 47.6%. Generally, our leverage remains elevated, but we expect the core ratios to improve by year-end, following the successful execution of the divestments.
We are adjusting our financial guidance for the full year 2024 in light of the operational performance and other events that have taken place in the first half of the year. There have been changes to our forecast coming from the divestment of Kongssenteret, realized restructuring costs, and changed share count following the equity issue in February. Based on this information, we're narrowing the guidance ranges to the following: Direct Operating Profit is expected to be between EUR 185 million to EUR 195 million, EPRA EPS between EUR 0.62 and EUR 0.68, and Adjusted EPRA EPS between EUR 0.46 and EUR 0.52. With that, I can complete our presentation and open up for questions. Operator, please go ahead.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Simen Mortensen from DNB. Please go ahead.
Hi, guys. I have a few questions. One is on the direct financing cost in the quarter. If we look at that figure, it is, in percentage terms, a bit above 3.3%. It's close to 3.8%. And it increased quite significantly Q on Q as well, at 18.9 million euros. Are there any one-offs or anything you want to highlight in that cost line, please?
As mentioned, I mean, compared to last year, we consolidated in the Kista, which has, actually a relatively large impact of around 5% for the... in the first half. So it has comes from two effects. So one, we now have the Kista loan on our balance sheet, and that has an increased interest cost, obviously. And secondly, we used to have shareholder loans granted to the JV, which generated interest income to us, and that income is now also gone away as we consolidated. So it is from these two effects, mainly. Apart from then, the increased interest rate on the refinanced debt.
No special fees and anything boosting that figure, if I understand correctly?
Nothing meaningful.
Second question is on Kongssenteret, which you divested in the quarter, and just wondering about how much that has contributed to the Q2 results, and how much that have impacted rental figures during Q2?
Maybe the annual effect could be mentioned.
Right
... Sakari, of the, I cannot remember what is the exact-
Yeah
- amount for Q2.
Why don't we... Simen, I can take that offline to give you the exact number, but I think it is the impact for the full year is around EUR 1.4 million of NRI.
Yeah, and you also said you have three ongoing divestments. Two of them quite close to a settlement, if I understand and hearing everything correctly, in local markets. When do you think you are able to announce which shopping centers these are, and the prices on these?
Mm.
Can you also give a flavoring about anything on the price versus what you have had in the books so far?
As we mentioned, two are in advanced negotiations. We are actually in detailed DD processes on those, and now, of course, as you know, Nordics is on a summer break. But after the summer holidays, we expect to get those completed, and hopefully announce something in late August or in September. At this point of time, we don't want to comment on the pricing too much. But in line with Kongssenteret, we expect also these transactions not to be too far off from the book values.
... Thank you. Those are all my questions for now.
Thank you.
The next question comes from Venti Elief from Kempen. Please go ahead.
Hi, good morning. Thank you for taking my question. So just one question from me. Are there any obstacles in terms of turning the LOIs to an actual contract, or is it more or less just due diligence and the summer holidays that are in the way?
Sorry, I didn't get your question.
Is there anything that is an obstacle to turning the letter of intent into a contract, or is it just standard due diligence as such?
Yes. No, I, at this moment of time, we think it is mainly a process of due diligence.
Okay, thank you. That's clear. That's it from my side.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Othman El Iraki from Fidelity International. Please go ahead.
Yes. Hello, can you hear me?
Yes.
Yes.
Great. Thanks for the presentation, both. And just a quick one, sorry, if I missed it, just on this disposal. I know there's not a lot you can say, but just in terms of you know, potentially the quantum that we're talking about. 'Cause I've seen in the balance sheet that there is quite a quite a large actually item in the held for sale assets. So are those assets the one that are under LOI? Or if you can comment just on the you know, ballpark on the quantum we're talking about. Thank you.
Correct. So we have EUR 300 million in the held for sale, and the majority of that is those that we have under the LOI.
Okay. That's very clear. Okay. Thank you very much.
The next question comes from Neil Morgan, from RBC BlueBay Asset Management. Please go ahead.
Yeah, good morning, and thanks very much for the call. You said during the presentation that, you know, with your secured debt at only 26%, you've got capacity to add secured debt if required. I suppose I just wanted to ask whether that's whether any more secured debt is part of the plan, or whether actually the, you know, or plan A, whether plan A is simply to focus on the disposals, and therefore you should be able to de-lever the company that way, but not needing to actually raise more secured debt. Thank you.
Thank you for the question. I mean, of course, the divestments are the key priority for us right now, and they would also be a source of liquidity. Our next maturity is actually the Norwegian kroner bonds in September next year, which we start to tackle probably at the latter part of this year or early next. And we will review our liquidity at that point, and then see how the refinance will be carried out. But if, of course, if we receive liquidity from the divestments, I mean, those can be used. Then it's a separate question of how do we refinance the debt instruments further ahead.
But, I mean, it just gives us a lever to use secured market if that seems to be optimal at the time, but we'll make those decisions at the later stage.
Okay. Thank you.
The next question comes from Neeraj Kumar from Barclays. Please go ahead.
Good morning, Sakari. Can you please provide a bit more color on how your discussion with S&P is going on? And also, out of this EUR 3 million, EUR 350 million remaining disposals, what is the minimum amount you need to sell this year to be able to sustain your IG rating?
Thanks for the question. I mean, we're in constant dialogue with S&P as standard and maybe a little bit accelerated at this point, given that we want to know exactly where they are in their thinking, and we want them to know exactly where we are in terms of financial performance. It's hard for me to comment on anything more than that, but at this point, we feel that they're following very closely how our divestment plan is progressing and waiting for the results of that. And you had a second part of the question, which was?
Yeah, this is the same. Basically, out of EUR 350 million, do you have a sense of what's the minimum amount you need to do?
Right. I mean, if you look at S&P's forecast that they published for us in February, they include EUR 220 million of asset sales in that forecast which we believe is the base for retaining ratios at the investment grade level. So that is the number they're looking at.
Got it. That's helpful. Thank you.
Understanding.
Bye. That's clear. Thank you.
The next question comes from Simen Mortensen from DNB. Please go ahead.
Hi, one follow-up question from me. Sakari, maybe you can help me on this part, but can you just give us some description, just very shortly, on the direct share issue, and which goes to the board of directors, just the impact on that, and if it will impact, for instance, the admin cost in the company, and that's included in your guidance, or any flavoring on that, and just describe the settlement of that, new shares?
You mean the directed issue we executed in February?
Yeah, the one which also was press released yesterday.
Oh, oh, I see. Okay.
Yes.
Do you wanna-
No, you can say it.
Yeah, I mean, it is a... We changed into a format where the board compensation is actually paid in newly issued shares of the company, right? It's a very small amount in the scheme of our capitalization, and there's no major administrative costs coming from that affecting our G&A.
Okay. Thank you.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thank you all for joining the call and for all the questions, and we wish you a nice summer. Thank you.
Thank you very much.