CEO's review, CEO F. Scott Ball:

At the half-way 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 6.2% in Q2 and 4.6% in Q1-Q2).  NRI improvement was driven by like-for-like tenant sales in Q2/2022, which were 8.8% above Q2/2021 and 5.4% above Q1-Q2/2019 pre-pandemic levels.  This performance reflects the quality and stability of Citycon´s grocery- / municipal-anchored centres, 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 tied to indexation, which is calculated at the end of the year.  Strong leasing activity also contributed to the outperformance in the first half of the year as retail occupancy grew to 95.0%.  Positive leasing spreads (+3%) translated to average rent per square meter continuing its positive trend and increased 1.0 EUR to 23.6 EUR/sq.m, year-to-date.

Phase I of Lippulaiva opened on March 31, 2022 and the retail is currently 94% leased.  Lippulaiva is the prototype of the direction of our portfolio, combining large grocery anchors (44% of total GLA), 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 centre begins operation by year-end. Just as importantly, the project is completely powered using geothermal energy generated on site, and has been recognized as the world´s first retail property to be awarded Smart Building’s Gold certificate.  In addition, the first residential towers at Lippulaiva will come online in late 2022.  Leasing of these residential 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 expect Lippulaiva to contribute EUR 9+ million of NRI in partial-year 2022 with the stabilized NRI estimated to be approximately EUR 21 million, including six rental residential buildings. 

As previously discussed, we have identified approximately EUR 300 million of potential building rights imbedded in our existing assets, which offer significant value creation potential with minimal capital expenditure.  We expect that approximately EUR 60 million of building rights will be realized in the next 12 months.  We have multiple ways to monetize the value of these rights (sell, joint venture, self develop) and, they enhance our grocery-anchored urban hubs, further solidifying these assets which are connected to transportation and are located in most densely populated cities in the Nordics.  Our current capital commitments consist of Lippulaiva residential units (EUR 47.9 million), Origo/Stockholm (EUR 62.9 million in 2024) and Herkules (no capex as land contributed to JV).  It is important to note that our limited construction commitments are at guaranteed fixed pricing.

Looking to the balance sheet, Citycon remains committed to maintaining its an investment grade rating.  During Q2 and subsequent to quarter end, we continued to reduce debt by repurchasing bonds in the open market for approx. EUR 54 million notional and EUR 50 million in cash.   These actions, combined with continued improvements in operating and fair value metrics, further stabilizes Citycon´s well laddered maturity profile and credit metrics.  Year-to-date, Citycon has now accretively repurchased EUR 79 million of notional bonds during 2022.  We have no significant maturities until October 2024, 100% of our debt is fixed, 100% of our assets unencumbered, and over EUR 533.8 million of liquidity, 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 change of investment properties.  Net fair value change of investment properties in Q2/2022 was EUR 8.0 million.  Fair values were negatively 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 18 months, at pricing that exceeded our book values.

Overall, the operating performance has been strong in the face of an inflationary environment.  With 92% of leases being indexed for inflation and occupancy cost at 8.8%, there is ample headroom for rent growth. As mentioned, this indexation is calculated at the end of each year so the bulk of the inflation impact on rents will be seen starting in 2023.  Given our tenant mix, our centres are also more resilient and less reliant on consumer discretionary spending than fashion-oriented centres.   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 by 2% on Direct operating profit, 5% on EPRA EPS and 2% on Adjusted EPRA EPS versus our initial 2022 guidance provided in February.

 

Source: Citycon's Interim Report Q2/2022