CEO F. Scott Ball:
	Citycon operational performance Q3 2023

We continue to see strong performance in our business fundamentals as like-for-like tenant sales were 4.1% above Q1-Q3/2022 and 9.3% above Q1-Q3/2019 pre-pandemic levels. We also are seeing more customers in our centres as like-for-like footfall increased 1.9% compared to the previous year.  Retail occupancy is now at 95.6%, up 70 bps versus the same quarter last year. At the same time, average rent per square meter, with comparable FX rates, increased by 1.4 EUR/s.qm. (5.9% to 23.8 EUR per sq.m.) in Q1-Q3/2023. We continue to benefit from a low occupancy cost ratio of 9.4%, which together with increasing tenant sales and improving footfall, positions Citycon for continued compounding rent growth and service charge increases. Sales increases keeping pace with inflation were evident in our continued high collection rates of 98% in Q3/2023, with Q2/2023 collection improving to 98%. These metrics supported our underlying asset values where a net fair value gains are relatively flat year-to-date, reflecting the impact of compounding rent growth due to indexation linked leases (93% of our leases), offsetting pressure on increasing yields due to a higher interest rate environment.

The net effect of these strong KPI’s is that like-for-like net rental income grew 7.0% in the third quarter, in comparable FX. As previously noted, in the first three quarters of this year there has been adverse volatility of currencies (which is outside of our control), specifically the NOK and SEK are nearly twenty-year lows. However, these currencies began to strengthen in Q3, which, if that trend continues, should provide tailwinds to our operations. Each quarter we translate these currencies back to the euro for reporting purposes and more details on the impact of currency through Q1-Q3/2023 are included within the report. 

There are several factors
that continue to drive these results: our terrific assets, our strong local teams, the strength of our markets throughout the Nordics and continued strength of consumers, as evidenced by the high level of foot traffic in our assets, and the corresponding sales reported by our tenants. This is due, in part, to our business model, which focuses on necessity-based retail and essential services, addressing the every-day-needs of our communities. This type of retail promotes daily traffic to our properties, which is enhanced by locations in central urban areas adjacent to public rail/bus transportation hubs. Another driver of the consumer strength phenomenon is the average wage growth (5.5%) that has occurred in our markets due to inflation. As is typical in an inflationary environment, price increases work through the entire chain: wages, cost of goods/services, higher sales, and ultimately, for Citycon, higher rents.

As noted in the last quarter, we refinanced and expanded our credit facility in April from EUR 500 million to EUR 650 million, consisting of a EUR 400 million revolver and EUR 250 million term loan. Following this refinancing, our team has continued their disciplined capital allocation by using the proceeds to execute EUR 236 million bond repurchases for our bonds maturing in the near future, taking advantage of discounts and dislocation in secondary trading. Furthermore, we are currently in advanced negotiations for approx. EUR 90 million mortgage loan secured by one of our Swedish assets, providing evidence that the secured loan market is functioning well. This loan is expected to close in Q4/2023. Through these actions, we continue to mitigate the earnings impact of higher current market interest rates, while also improving our overall balance sheet. We are also seeing some “green shoots” in the bond market, which should give us further flexibility moving into 2024.

In addition to the new credit facility and term loan, we have disposed of EUR 266 million of non-core assets at approx. book value over the past 24 months, including EUR 120 million in December 2022, which is part of our planned EUR 500 million asset sale target. We are in active discussions with several potential buyers to complete the remaining EUR 380 million of the divestment target, with signed NDAs and advanced discussions on selling EUR 350 million of assets. With the additional flexibility of the new credit facility, we can be patient as Nordic transaction markets stabilize and we continue our asset management initiations to maximize values for further sales transactions.  Given the reports of significant amounts of investment capital waiting to be invested, we remain confident that we will meet our previously disclosed divestment target by the end of 2024.

As mentioned, the tenant mix of Citycon’s assets, which consists of municipal and grocery tenants, anchored by public transportation with indexation linked leases, sets us apart from our peer group.  This long-stated strategy has already demonstrated its strength and resilience throughout a variety of market conditions, which we continue to improve upon. The reopening of Myyrmanni centre in Finland, this week is our most recent example of commitment to this strategy. We have further improved the tenant mix to increase the share of necessity-based tenants by opening a new Lidl grocer and a 7,300 sq.m. Prisma hypermarket resulting in groceries representing over 60% of the total GLA. This is consistent with what we have achieved in many of our properties across the portfolio. These actions not only provide stability to revenue growth, it has the added benefit of improving the average credit profile of our tenant base. These asset management decisions remain aligned with, but separate from, the zoning work we are doing to achieve substantial additional building rights across the portfolio.

Our business is quite simple. We own quality real estate, provide the consumer the goods and services they require, and provide an environment that is convenient to access. When you layer in the dramatic impact of compounding rent growth, you have the recipe for success. The bottom line is that our business fundamentals are strong, and our assets continue to perform very well. There is a scarcity of the type of high-quality retail assets we own, we have a proven business model and all of the important metrics (sales, footfall, rents, occupancy, collections) continue to show sustained growth. For all of these reasons, we remain bullish on the prospects of the business moving forward.

F. Scott Ball
Vice Chairman and Chief Executive Officer


Source: Citycon's Interim Report Q3/2023