Good morning everyone, and welcome to Citycon's first half year results audiocast. Last night we published our second quarter 2022 interim report, which as usual, you will find alongside all other results materials in the investors section of our website. My name is Sakari Järvelä. I'm the Vice President for Investor Relations at Citycon and will be hosting the call today. With me here in the call as usual, are our CEO, Mr. Scott Ball, and our CFO, Mr. Bret McLeod. We will start the presentation by Scott going through a summary of our business and operational highlights for the second quarter and the first half year. Following that, Brett will go through our financial result and our updated financial guidance for the full year 2022.
After the presentations, there will be a separate Q&A session, and we will be opening the line for questions from the audience. With that, I will pass on to Scott. Please go ahead.
Thank you, Sakari, and good morning everyone. We're pleased to present Citycon's results. I will start with the highlights from the quarter and the first half of the year. Bret will then review Citycon's financial results. At the halfway period of the year, the operating performance continues to demonstrate the strength and resilience of Citycon's portfolio. Like for like, net rental income increased 9.1% for the quarter and 6.1% year-to-date. Excluding one-time items, this equates to 6.2% for the quarter and 4.6% year-to-date. NRI improvement was driven by like for like tenant sales, which were 8.8 above Q2 2021 and 9% above 2019 pre-pandemic levels. This performance reflects the quality and stability of Citycon's grocery-anchored centers, which serve as last mile logistic hubs for customers and tenants.
Moving forward into 2023, these assets will continue to benefit from inflation as 92% of leases are directly tied to indexation, which is calculated at the end of the year, and another 5% have a turnover component. 97% of leases have some tie to indexation. Strong leasing activity also contributed to the outperformance in the first half of the year as retail occupancy grew to 95%. Positive leasing spreads of +3% translated to average rent per sq m continuing its positive trend and increased EUR 1 to EUR 23.6 per sq m on a year-to-date basis. Phase one of Lippulaiva opened on March 31st, and the retail component is now 94% leased. Lippulaiva is the prototype of the direction of our portfolio. It is 70% necessity-based, with 44% dedicated to grocery.
A wide range of private and municipal services, significant food and beverage, and great public transportation access as the brand new metro line attached to the center begins operation around the first of the year. Just as importantly, the project is completely powered using renewable energy, including geothermal energy generated on-site, and has been recognized as the world's first retail property to be awarded Smart Building Gold Certificate. In addition, the first residential towers at Lippulaiva will come online later this year. Leasing of these units has begun, and lease rates are outperforming our underwriting. Construction of the two pads, which were sold to Hausia, are near completion and will open at the end of the year, with sales at the condos reported to be very strong. In total, there will be 560 residential units as part of the final project.
As stated previously, we anticipate Lippulaiva to contribute EUR 9 million of NRI in partial year 2022, with stabilized NRI estimated to be EUR 21 million, including six rental residential buildings. As previously discussed, we have identified approximately EUR 300 million of potential building rights embedded in our existing assets, which offer significant value creation potential with minimal capital expenditure. We anticipate that approximately EUR 60 million of building rights will be realized over the next 12 months. We have multiple ways to monetize the value of these rights, including selling them, doing joint ventures, self-develop, and they enhance our grocery anchored hubs, further solidifying these assets, which are connected to transportation and are located in the most densely populated cities in the Nordics.
Our current outstanding capital commitments consist of Lippulaiva residential units of EUR 47.9 million, suburban Stockholm residential, which consists of EUR 62.9 million, which will be due in 2024, and Herkules, where there's no CapEx required as we contributed this land to a JV. It is important to note that this total of EUR 110 million of commitments are all at guaranteed fixed pricing of construction, so they are not impacted by inflation. As Bret will discuss in more detail later, Citycon remains committed to maintaining its investment grade rating. During Q2 and subsequent to quarter end, we continued to reduce debt by repurchasing bonds in the open market for approximately EUR 54 million notional or EUR 50 million in cash. Year-to-date, Citycon has now accretively repurchased EUR 79 million of notional bonds during 2022.
Importantly, we have no significant maturities until October 2024. 100% of our debt is fixed, 100% of our assets are unencumbered, and over EUR 533.8 million of liquidity is in place, including the full availability of our credit facility. Our operational metrics continue to positively impact asset values as our operating properties recorded a sixth consecutive quarter of uplift in net fair value. This net fair value change of investment properties in Q2 was EUR 8 million. Fair values were impacted by recently weaker SEK and NOK currency rates. EPRA NRV per share increased by 1.8% compared to Q2 2021.
Year-to-date, we have sold two assets for EUR 145 million and over EUR 400 million over the last eighteen months at pricing that exceeded our book values, further supporting our property valuations. Overall, the operating performance has been strong in the face of an inflationary environment. With 97% of leases benefiting from inflation and occupancy cost at 8.8%, there is ample headroom for rent growth. As mentioned, the indexation is calculated at the end of each year, so the bulk of this impact on rents from inflation will be seen starting in 2023. Given our tenant mix, our centers are also more resilient and less reliant on consumer discretionary spending than fashion-oriented centers. As evidenced by our operational outperformance during the pandemic, Citycon's portfolio is positioned to once again outperform in the current economic environment.
These factors, combined with strong results from Q2, have provided us the confidence to tighten and raise our guidance versus our initial 2022 guidance provided in February. I will now hand it over to Bret, who will give a more thorough review on our financial development and our guidance for the rest of the year.
Thanks, Scott, and good morning, everyone. As Scott said, it was a great quarter as we registered a clean beat to second quarter consensus estimates by nearly 5% on direct operating profit and nearly 6% on EPRA EPS. Looking at the details of our direct EPRA results for the quarter on Slide 9, we had very strong net rental income results both for the standing portfolio, which excludes six dispositions and includes Lippulaiva, and even for the total portfolio that includes disposition assets up 11.2% and 3.9% respectively. This strong performance flowed nicely to direct operating profit, where we were up 12.5% and 4.9% for the standing and total portfolios respectively.
As a result of this performance and the reduction in share count as a result of our strategic share repurchase late last year, standing EPRA EPS was up nearly 15% quarter- to- date, representing strong improvements in the entirety of our operations. Standing adjusted EPRA EPS was up nearly 6% against a challenging comp as we didn't issue our latest hybrid until June of 2021. Lastly, with our sixth consecutive quarter of operating property valuation increases, EPRA NRV per share was 1,187 or nearly 2% better than the same time last year. Moving to the half year results on Slide 10, the story remains consistent, led by strong year-to-date net rental income growth for the standing portfolio of 9% and up nearly 1% for the total portfolio, which again includes those disposed properties.
Year-to-date, direct operating profit was up 5.8% on the standing portfolio and 12.1% on EPRA EPS. For the standing portfolio, adjusted EPRA EPS was basically flat year-to-date due to the June 2021 hybrid issuance I mentioned. As Scott said, the most impressive figures of the first half of the year are in our like-for-like NRI growth, which you can see on Slide 11. In the quarter, like-for-like NRI growth was up 9.1% on the back of stable occupancy, strong leasing activity, positive leasing spreads, indexation, and the continued tailwinds from improving footfall and sales. I would note that even backing out one-time benefits that occurred in Norway in the quarter, we still registered a very strong 6.2% like-for-like growth in Q2.
Specifically, those one-time items in Norway contributed an incremental EUR 1.1 million of NRI in the quarter. These included a EUR 400 thousand reclassification of a parking contract termination fee from NRI to other operating expenses and having no impact on direct operating profit. Additionally, there was a positive EUR 700 ,000 of service charge and parking income reconciliation from Q4 2021 and Q1 2022, mainly a result of conservative accruals earlier this year. We don't anticipate any additional reconciliations in the remainder of the year. Looking closely at our three major markets, even excluding these one-time items I mentioned in Norway still grew like-for-like NRI at 14% in the quarter, driving the outperformance, followed by 5.4% in Sweden and Denmark and 3.5% in Finland and Estonia.
Looking closer at the quarter on Slide 12, as mentioned, like-for-like properties contributed an incremental EUR 3.4 million of NRI over the same period in 2021. We benefited from a full quarter of Lippulaiva, which contributed most of the incremental EUR 2.4 million of NRI from development and redevelopment projects in the quarter. This was offset by EUR 3.3 million in lost NRI from dispositions and a small amount due to weaker performance of our non-euro currencies. We saw nice improvements in direct administrative expenses in the quarter, primarily driven by lower IT expenses, lower marketing expenses, which is more of a timing issue as we believe that will be in line with our 2022 outlook, as well as improvements due to higher capitalized admin expenses.
These improvements were somewhat offset by the increase in management IFRS share-based compensation that we have discussed in previous quarters. Direct current and deferred taxes were impacted primarily as a result of better operating performance, particularly in Norway, and the fact that taxable profit in the quarter compared to a loss in the same period last year. For the full year NRI and EPRA earnings bridge on Slide 13, my quarterly comments are generally consistent, with divestments continuing to be the largest driver of our year-over-year total NRI change. On direct net financial expenses, we are ahead of the same time last year by EUR 1.7 million due to the repurchase of bonds in the first half of the year, offset somewhat by higher capitalized interest due to Lippulaiva's final push to open.
I would also note that as we continue to focus on operating efficiencies, we are narrowing the gap on direct administrative expenses as we move through the year compared to the same period last year. As noted in prior quarters, these remain higher to the same time last year due to the treatment of non-cash IFRS share-based compensation, as well as lower bonus salary and social costs from a COVID impacted 2021. On Slide 14, we are pleased to note we recorded our sixth consecutive quarter of valuation improvement on our operating portfolio. After factoring in non-captured CapEx, straight-lining, and IFRS 16 items, our net fair value increase for the quarter and year-to-date are EUR 8 million and EUR 22.2 million, respectively. I also note that our net fair value of like for like operating properties are back to pre-COVID levels.
As mentioned, EPRA NRV per share was up nearly 2% over Q2 2021. However, I would note that this figure was negatively impacted by FX changes in the quarter amounting to over EUR 112 million, primarily as a result of weakness in both the NOK and SEK. This impacted asset value and ultimately EPRA NRV by nearly EUR 0.67 per share. Excluding the FX impact, EPRA NRV would have been approximately EUR 12.50 per share. One other note is that we have made an adjustment to our EPRA NDV metric, and the correct figure is now reported in this audiocast presentation. Moving to Slide 15. We have consistently said, we are focused on continuing to both strengthen our overall portfolio and our investment grade balance sheet going forward while looking to generate appropriate risk-adjusted returns versus our cost of capital.
Given the recent dislocation in credit markets, one of the best ways to accomplish all of these goals is by continuing to repurchase our bonds using the net proceeds from non-core dispositions. During the quarter, we repurchased EUR 54 million of notional bonds for approximately EUR 50 million cash at an average discount of 6% using the net proceeds from our recent non-core Norwegian dispositions. Subsequent to quarter end, we repurchased an additional EUR 20 million notional for approximately EUR 17 million cash at an average discount of 16%. Interestingly, since June 29, our bond repurchases relative to the Norwegian asset sale yield were purchased accretively, allowing us to delever with a positive impact to earnings.
Year-to-date, we have repurchased EUR 79 million of notional bonds for cash proceeds of EUR 75 million at an average discount of 6%, improving both our credit metrics and reducing our interest expense. As we look to Slide 16, we continue to be focused on maintaining a strong and flexible investment grade balance sheet with ample liquidity. In addition to having no near-term maturities until October 2024, after making the decision to repay nearly all of our near-term debt late last year, we also have 100% fixed interest rates and a weighted average interest rate of 2.44%. Our maturity schedule is well-laddered, with no year having more than EUR 500 million of debt coming due. We maintain excellent liquidity with EUR 534 million available, including cash and the full EUR 500 million under our credit facility.
In addition, 100% of our assets are encumbered by mortgage debt, giving us multiple levers to pull. On Slide 17, our credit metrics clearly remain very stable. As noted when I discussed EPRA NRV, FX did slightly impact LTV this quarter. Excluding the impact of currency changes in the second quarter that I mentioned, our LTV would have been lower by approximately 60 basis points or 40.2% versus the 40.8% we recorded. The good news is that the euro has pulled back subsequent to quarter end, and we anticipate that those currency moves should normalize through the remainder of the year. Given our strong half-year operating results, we have elected to raise our guidance for the full year as illustrated on Slide 18. We have increased the low end of all our metrics, thus increasing all the midpoints as well.
These revisions result in midpoint increases for direct operating profit, EPRA EPS, and adjusted EPRA EPS relative to the initial guidance we provided in February of 2%, 5%, and 2% respectively. With that, we are now happy to take your questions.
Okay. Thank you, Scott, and thank you, Bret. Operator, can you turn on the audio line?
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. Please state your name and company before posing your question. We will now take our first question from Anssi Raussi from SEB.
Thanks.
Please go ahead. Your line is open.
Thank you. Hi guys. It's Anssi from SEB. I have a couple of questions, and the first one is that, how do you see your capital allocation in the future? Like, are you still planning to repurchase bonds even when you are planning to realize EUR 60 million of building rights during the next 12 months? That's the first one. Thanks.
Yeah, I think, Anssi, first of all, good morning. I think, you know, particularly as we continue to sell non-core assets, as Bret mentioned, we see a real opportunity given the dislocation in the credit markets for us to continue to delever and do it in a way that is actually accretive or not as dilutive as it might be normally. I think it's fair to say that, we are continuing to focus on that, and that will be an emphasis for us.
Okay. That's clear. Thanks. The second one actually is that, like, have you had any recent discussions regarding possible asset divestments, or is the market still active? How do you see the situation?
Yeah. It actually remains pretty active for the product type that we have. I think that, you know, it's interesting when you look at cap rate spreads between the different asset classes. I think retail has become even more attractive given what's happened in the bond market and the debt markets. We're seeing, and in fact, have discussions going on in each of the three major countries for smaller non-core asset dispositions. We're still, you know, we still anticipate seeing activity there and are having conversations from interested investors.
Okay. Thanks. I think that the last one from me is that, have you seen or heard yet any impacts of consumer confidence affecting your customers? Like, at least your occupancy ratio was at a high level.
Yeah. I think, you know, it's interesting. We haven't really seen a negative impact on the consumer. Again, you know, our product type is really geared more towards necessity-based items, you know, things that people have to buy. They still have to buy groceries. I would anticipate we would probably be the last to see that kind of impact. We haven't. It really hasn't impacted our consumer. As noted, our sales were pretty strong in Q2. We haven't seen the impact yet.
Yeah. I guess that the situation could affect smaller customers first, so.
Yeah. I think discretion.
Yeah.
Yeah. I think discretionary items will be the first to feel it, right? You know, you gotta buy groceries. For some of us, alcohol is a necessity, so you still gotta go buy your liquor. You still gotta go visit the municipal services, et cetera. Our footfall is up, our sales are up. You know.
Then OCRs remain low. I mean, that's the other thing as you look forward to. You know, obviously, looking next year, we get the benefit of indexation, obviously, when we set our inflation rates at the end of this year for 2023. I think the other thing for us, Anssi, is we're also pretty positive as we look forward with that trend for 2023 as well. Again, hopefully for Citycon and the types of necessity-based assets we have and the leases we have, we should be well-positioned.
Yeah. I think Bret makes a great point on the OCRs. I mean, we have low OCRs, so, you know, as inflation ramps up, there is still capacity from our tenants to be able to absorb higher rents.
Yeah. I agree with you. Thank you. That's all from me.
Thank you. We'll now take our next question from Neeraj Kumar. Please go ahead. Your line is open.
Morning, everyone. I'm Neeraj from Barclays. Thank you for taking my question. My first question is, can you please provide any guidance on how you're thinking about your credit ratings? I mean, do you plan to materially delever to protect the IG rating given that Moody's had changed the outlook to negative recently, and Fitch had downgraded to high yield before pulling the rating in April 2022?
Yeah. Thanks for the question. I would say a couple things. One, as Scott mentioned, we're committed to the investment grade rating. I would say, as I mentioned on the last quarter as it related to Fitch, I think there was a change in their methodology that linked us to, you know, our major shareholder, that we obviously disagreed with, and that was the reason why they're no longer rating us. I would say as far as Moody's, I think generally their negative comment, as we understand it was more of a macro outlook on overall real estate in Europe and the idea of rising interest rates. I guess from our perspective, as Scott mentioned, you know, 100% of our debt is fixed. Frankly, we feel quite good about that.
I would say, given the operational results that we've reported this morning and what I just mentioned regarding, you know, our outlook going forward, we feel very strong from an operational perspective. I would tell you that, you know, our status of investment grade, we're committed to it. We'll continue to, as Scott mentioned, look to potentially, you know, delever. I think we're comfortable with where we are today. I think as our operations continue to improve, we should be able to maintain that standing with both rating agencies.
Got it. What are your thoughts on buying back hybrids? Are there any restrictions around doing that?
Look, I would say certainly the hybrid market has been dislocated just as the general credit markets have been. As I would say, you know, for any investment we make, and I've said this a number of times on prior calls, we are always evaluating all of the options available to us, whether it's acquisitions, whether it's investing in our own properties, whether it's developing properties, whether it's repurchasing equity, repurchasing debt, and of course in that is repurchasing hybrid. We of course look at those things. Obviously, I reiterate what I just said is we're committed to investment grade, so we certainly wouldn't do anything that would jeopardize that status. It is certainly something we pay attention to, and we've been looking at the market, but nothing to report at this time.
I guess just as a reminder, our first hybrid doesn't come due until 2025.
Correct.
You know, we don't have any pressure there. But as Bret said, if the opportunity is appropriate and from an investment standpoint makes sense, we include that in our list of options in terms of where we would continue to invest proceeds from any sales of assets.
Got it. Thank you.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone keypad. We'll pause for a moment. It appears there is no further questions from our end. I'd like to turn the conference back to you for additional remarks.
Okay. I think it's then time to close the call today. We thank everyone for attending and for the great questions. It goes without saying that if you have any more questions, please do reach out. We're always happy to talk more about our results. We will be meeting many of you in the coming days and weeks, and so very much looking forward to that. Thank you for now and wishing you all a great day.
Thank you, everyone.