CEO's review, CEO F. Scott Ball:
Operational performance

Citycon continued to demonstrate strong performance amidst a challenging macroeconomic environment. Just as the company outperformed during the covid crisis, the stability of our business model continues to prove itself.

During the third quarter, like-for-like net rental income increased 3.4% and 5.2% year-to-date over the same periods last year. This improvement was driven by like-for-like tenant sales, which were 7.0% above YTD 2021. Footfall continued its positive development as like-for-like footfall Q3/2022 and YTD was 4.3% and 12.1% above the same periods last year, respectively.

Operational key figures have surpassed pre-covid, 2019 levels. Like-for-like tenant sales were 7.2% above YTD 2019 and average rent has increased EUR 0.8 compared to Q3/2019. This reflects the stability of Citycon´s grocery- and municipal-anchored centres that are connected to transportation hubs.

Our leasing activity remained strong in Q3 as we signed 21,000 square meters of new leases with a positive leasing spread of 1.7%. Retail occupancy at the quarter´s end was 94.9%. This is a testament to the attractiveness of our locations for our tenants to generate sales and operate profitably. This leasing activity contributed to retail occupancy remaining high and an average rent increase of EUR 1.0 to EUR 23.6 per sq.m. from the year end 2021.

Citycon will realize rental growth due to inflation in Q1/2023 with 92% of our leases indexed to inflation. In our markets inflation estimates are approximately 7-8%, which bodes well for growth in 2023.  It should be noted that our tenants have some of the lowest occupancy cost ratios in the retail space.  Inclusive of service charges, the average OCR of our portfolio is 9.0%, providing ample headroom for rent growth in a rising sales environment. Further, our limited reliance on fashion in favour of necessity-based goods and services, such as groceries, are less dependent on discretionary income

 With the completion of the retail phase of Lippulaiva (along with the recently announced opening of the metro station on December 3, 2022) and limited capital commitments in 2023, we anticipate that Citycon’s capital expenditures will be materially lower in 2023.  In addition to typical maintenance and tenant improvement capex, in 2023 we have only approximately EUR 8 million committed development capex at guaranteed, fixed pricing. We continue to make progress on creating development rights, requiring minimal capital. These reduced capital commitments increase operational free cash flow, providing additional support for the balance sheet.

Looking to our balance sheet, Citycon continues to recycle capital in order to strengthen its investment grade balance sheet and maintain flexibility.  In September, and subsequent to quarter end, we repurchased additional unsecured bonds at a discount in the open market for EUR 29.0 million notional. Year-to-date, Citycon has now repurchased EUR 108.3 million of notional bonds during 2022 by using approx. EUR 98.7 million of cash at an average yield of 4.9%.

During the quarter, Citycon registered two assets worth approximately EUR 125 million as ‘held for sale’.  These transactions are in due diligence and are expected to close late in Q4/2022 with the sale proceeds earmarked to pay down debt.  Excluding these assets, we have sold EUR 400 million of assets since 2021. Over the next 24 months, Citycon is targeting EUR 500 million of asset sales, inclusive of the two assets held for sale, and intends to use the proceeds to repay debt.  Net fair value gain of our investment properties was EUR 0.9 million in Q3 and year-to- date EUR 23.1 million, on the strength of indexation increases and building rights development, mainly at Trekanten where zoning was approved in the third quarter.

These actions, combined with continued strong operating metrics, reduced capex spend, and positive future growth driven by indexation, further stabilises Citycon´s well-laddered maturity profile and credit metrics. We have no significant maturities until October 2024, 95% of our consolidated debt is fixed, 100% of our assets are unencumbered, and we have over EUR 500 million of liquidity. As a result, Citycon is well positioned to continue to thrive despite near term disruption in the credit market.

The business model of urban hubs containing necessity retail and residential units in major markets attached to public transportation provides an attractive value proposition for all stakeholders. As a result of the solid quarter and the confidence we have in the business, we are reaffirming our guidance.

F. Scott Ball
Vice Chairman and Chief Executive Officer

 

Source: Citycon's Interim Report Q3/2022