Citycon Oyj

OMXH:CTY1S

Earnings Call Transcript 2022-Q1

[Sakari Järvelä, executive]

Good morning, and welcome to Citycon's First Quarter Results Audiocast. Last night, we published our first 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, and I'm the Vice President for Investor Relations and Corporate Finance at Citycon, and I'll 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 first quarter. Following that, Bret will go through our financial results and our updated financial guidance for the full year 2022. After the presentations, there will be a separate Q&A session, so we will be opening the line for questions from the audience.

With that, I will pass on to Scott. Please go ahead.

[F. Ball, executive]

Thank you, Sakari. Good morning, everyone. After a strong conclusion to 2021, Citycon continued to demonstrate the strength of our strategy and portfolio during the fourth quarter of 2022. Like-for-like, net rental income increased 3.5% over the prior year. The average rent per square meter increased EUR 0.80 to EUR 23.4 per square meter, while retail occupancy moved up to 95.1%.

We continue to see very strong growth in both footfall and tenant sales, which increased dramatically compared to the previous year. Notably, tenant sales are already above the pre-pandemic levels, highlighting the speed of the recovery of Citycon's grocery and municipal-anchored centers. These operational improvements continue to positively impact asset values as our operating properties recorded a fifth consecutive quarter of uplift as total fair value change of investment properties in Q1 was EUR 24.6 million and a net fair value change of EUR 14.2 million. EPRA NRV per share has increased by 5.7% compared to the first quarter of last year. The strong operational figures reflect the stability of our necessity-based centers, which serve as a last-mile logistics hub for delivery of grocery, municipal and other services directly to the consumer.

With customers prioritizing convenience and accessibility, more and more tenants are leveraging their omnichannel strategies and utilizing their physical stores as the critical last-mile distribution point. Our excellent urban locations and the strongest and fastest-growing cities in the Nordics and the fact that all of our urban hubs have a direct connection to public transportation, offer attractive opportunities for tenants and irreplaceable convenience for customers.

Our strategy of creating mixed-use urban hubs with a focus on groceries and municipal services is paying operational dividends and driving traffic to our centers, highlighted by significant like-for-like growth in both footfall of plus 17% and tenant sales of plus 12% in the first quarter. Notably, like-for-like tenant sales are already above the 2019 pre-pandemic levels on the strength of spending in groceries, pharmacies, municipal and health care services.

As a result of the strength of sales, tenant demand for our centers has accelerated as evidenced by our strong leasing activity with over 48,000 square meters of signed leases during the first quarter, resulting in increased retail occupancy by 90 bps to 95.1%, coupled with the fact that our average rent level increased by EUR 0.80 per square meter to 23.4% compared to prior year.

Citycon's relatively low occupancy cost also offers the company ample headroom for rent growth, particularly as sales continue to increase. This continues to translate into strong leasing activity and stable cash flow. This stable cash flow, combined with the significant value creation potential for our development pipeline and an investment-grade balance sheet, provides an attractive risk-adjusted return proposition for all stakeholders.

As disclosed in February, we divested 2 additional noncore assets in Norway during the first quarter, with pricing above our NAV. This means we have now sold 6 noncore assets over the last 14 months at pricing that validates our increasing valuations. This also continues to demonstrate the large disconnect between pricing between the public and private markets.

We entered into a forward funding agreement to purchase a brand-new residential asset comprising of 200 apartments in Stockholm near our Kista and Jacobsberg centers. During and subsequent to the quarter, we continued to demonstrate our strategic capital allocation to strengthen the balance sheet as part of the divestment proceeds were used to repurchase approximately EUR 25 million of our bonds, which were maturing in October of '24. The repurchase is accretive to earnings, strengthens our maturity profile and reduces refinancing risk as we have no near-term maturities until late 2024.

The absolute highlight of the quarter was the grand opening of Phase 1 of Lippulaiva, our new mixed-use center that represents the future of convenient urban living. The pre-leasing rate was over 90% and necessity goods represent over 70% of Lippulaiva's 44,000 square meters of commercial leasable area. The metro construction is complete and will begin to operate by year-end. Also, 6 of the 8 residential towers are under construction with the first ones opening up later this year. We expect that the anticipated partial NRI contribution from Lippulaiva this year to be approximately EUR 8 million and the stabilized NRI to be approximately EUR 21 million.

Lippulaiva is the prototype of our strategy, a full-service, mixed-use urban hub with several large grocery anchors, a wide range of private and municipal services, direct connection to the metro and surrounded by 8 residential towers. Notably, grocery stores account for approximately 45% of the center. Lippulaiva is the ultimate in convenience, experience and atmosphere for consumers, and it will have an immediate impact on the community and consumers that surround it. Lippulaiva is expected to welcome approximately 8 million annual visitors.

I should also point out that we continue to make progress on the zoning of our additional building rights across our operating countries. These redevelopment opportunities provide significant organic growth potential, primarily in residential development close to our existing hubs and on land that we already own. This means that we anticipate having a steady flow of new residential buildings coming online every year over the next 5-plus years.

In total, we have identified 600,000 square meters in our development pipeline where just the building rights alone are worth approximately EUR 275 million. As announced earlier this week, Lippulaiva becomes the world's first center to be awarded Smart Building’s Gold certificate. In the Smart Building certification, Citycon is described as a forerunner for better understanding and realization of energy and sustainability goals with clear strategy, innovations, applications and solutions that push the market to think differently. It was also noted that the entire world should take note of what Citycon is doing and follow our lead. Lippulaiva is also the prototype of Citycon sustainability initiatives in action. The center is a pioneer in sustainable energy solutions and is carbon neutral in terms of energy consumption from day 1. The primary source of energy is the largest ever geothermal heating and cooling system built on a commercial building in Europe, combined with integrated solar panels and a smart electricity management solution.

Furthermore, we received additional recognition for our sustainability efforts as Citycon was recognized among the climate leaders in the Financial Times study for the second consecutive year. This acknowledgment provides evidence of the hard work done by Cityconnors to implement targeted measures to reduce greenhouse gas emissions. Citycon is the only finished real estate company included in the list and is in the top quarter of all European companies regardless of sector.

Finally, Lippulaiva is also an important milestone in realizing the potential in Citycon's robust development pipeline and marks the first time that Citycon has carried out its own rental housing production. The residential component of the project consists of 560 apartments, which will come online between late this year and early 2024. And we'll further diversify Citycon's portfolio and revenue streams while enhancing the underlying performance of the retail center.

As our results show, Citycon is well positioned for the anticipated inflationary environment. Our business model is inflation protected with 92% of our leases indexed to inflation and the types of goods and services that our centers sell are less dependent on discretionary income than traditional retail. Although Citycon's operations are not directly impacted by the war in Ukraine, there's the spillover effect of increasing energy cost. Citycon has a significant amount of on-site energy production and the vast majority of our electricity costs are hedged which provides further stability both for Citycon and its tenants going forward.

As a result of the strong quarter and the confidence we have in the business, we are tightening our guidance and raising the midpoint for direct operating profit, EPRA earnings per share and adjusted EPRA earnings, with Bret providing more details as part of his financial review. I will now hand it over to Bret.

[Bret McLeod, executive]

Thanks, Scott. Good morning, everyone. As Scott has described, it was a strong start to the year as evidenced by the performance of our key financial metrics noted on Slide 11. As you may have noticed in our first quarter interim report and as also shown here, we have included additional data to our reporting materials by including details on our standing operating portfolio. This group of assets excludes the 6 properties that have been disposed of since Q1 2021 and includes Lippulaiva's early operating contributions, which we think improves transparency and better reflects the underlying performance of our business.

Looking to our standing portfolio in Q1 2022 versus Q1 2021, we saw marked improvements in both gross rental income and net rental income, up 7.3% and 6.7%, respectively, versus the same time last year. Notably, like-for-like NRI was up 3.5% in the quarter, primarily on the strength of improved leasing activity and indexation. Direct operating profit for the standing portfolio was down slightly by 1%, mainly due to the exit of the Norwegian managed business and the accounting treatment of noncash IFRS share-based compensation. The combination of these factors was that EPRA earnings increased by EUR 700,000 or 2.8% and EPRA EPS increased nearly 8.9%, reflecting the accretive impact of our capital allocation activities and our strategic share repurchase last year at steep discounts to NRV.

Adjusted EPRA earnings and adjusted EPRA EPS were both lower due to the fact that we issued a hybrid bond in June of 2021, which was not reflected in our Q1 2021 results at the time. The combination of this improving operating performance contributed to our fifth consecutive quarter of operating property valuation changes. Notably, at EUR 12.24 per share, our NRV per share is nearly 6% higher than this time last year, which reflects again the cumulative increases in valuation and the impact of our accretive share repurchases from disposition proceeds at a 40% discount to NRV. I would also note that as of Q1, excluding Lippulaiva and Kista, our like-for-like properties are nearly back to pre-pandemic levels, trailing valuations by only EUR 12.7 million or approximately 0.3% behind year-end 2019 values.

Moving to Slide 12. We've produced our net rental income and EPRA earnings bridge comparing total results for Q1 2022 to Q1 2021. As mentioned, like-for-like NRI increased by EUR 1.3 million on the strength of better leasing activity and indexation. Redevelopment properties contributed EUR 1.4 million with that mainly coming from Lippulaiva. Although Phase I opened at the end of Q1 2022, we actually began collecting rent from tenants earlier. We're very pleased at the early results from Lippulaiva and continue to believe this will be an excellent contributor to our NRI and value for a long time to come. We also received a slight benefit of EUR 500,000 from positive FX rates, mainly via changes in NOK. And the 6 dispositions I previously mentioned were the main difference in comparing total changes in NRI as those properties contributed EUR 4.4 million of NRI in Q1 2021 that we no longer receive.

Looking for EPRA earnings. In addition to the NRI impact from asset sales, the quarter-over-quarter change was positively impacted by changes in direct net financial income and expenses of EUR 1.7 million. This is a result of the lower amount of debt due to bond buybacks and the issuance of the new hybrid in June 2021 as well as higher capitalized interest on development projects. As mentioned, direct administrative expenses impacted quarter-over-quarter EPRA earnings by EUR 3.1 million due to the exit of the Norwegian managed business and an increase due mainly to the accounting treatment of noncash IFRS share-based compensation.

Q1 2021 was also abnormally low from an SG&A perspective as it was right in the middle of the pandemic. Another item impacting EPRA earnings was a EUR 500,000 change in direct current and deferred taxes, resulting from a combination of the Norwegian asset disposals in Q1 2022 and FX gains in the parent company, which made a taxable profit in Q1 2022 compared to a loss in Q1 2021.

On Slide 13, we've noted our continued valuation improvements with net fair value up EUR 14.2 million in the quarter, building on the positive momentum we have seen over the last year. The valuation increase was driven mainly by improvements in Norway and Finland, although we continue to see strong investor demand across the Nordics as evidenced by the 6 asset sales we've done over the past year in all our major markets at strong cap rates and prices above book value. As noted, our EPRA NRV per share as a result of the valuation improvements and the accretive strategic share repurchases has climbed to EUR 12.24 per share, again, nearly 6% higher than the same time last year. And as mentioned, our like-for-like operating property values are essentially back to year-end 2019 levels.

Moving to our balance sheet overview on Slide 14. The operational and valuation improvements we have seen continues to strengthen our balance sheet and improve our corporate flexibility. We have over EUR 600 million in total available liquidity, including the full EUR 500 million under our credit facility. 100% of our assets are unencumbered, and we are investment-grade rated from S&P and Moody's. Most notably, we strategically paid off all of our near-term maturities last fall, and have a well-laddered maturity schedule with no significant near-term maturities until October of 2024. As Scott noted, we strategically repurchased EUR 25 million of our 2024 senior notes during and subsequent to the end of the first quarter, with cash on hand from our Norwegian dispositions. This permanently reduced debt and interest expense and reduced our refinancing risk.

On Slide 15, I'll note that all of our major credit metrics have either continued to improve or held steady and again, emphasize the stability of our balance sheet and capital structure. As a result of the strong start to the year, as Scott mentioned, we've increased the midpoint of direct operating profit up EUR 2 million. EPRA earnings per share and adjusted EPRA earnings per share by increasing the bottom end of the ranges we set on our fourth quarter call. This reflects our confidence in the underlying business and the stability and strength of our necessity-based urban hub strategy.

That concludes our prepared remarks, and we're happy to take your questions at this time.

[Sakari Järvelä, executive]

Okay. Thank you, Scott, and thank you, Bret, for presentations. We're then ready to move on to the Q&A and turn on the audio line. Operator, please go ahead.

[Operator]

[Operator Instructions] And our first question comes from the line of Markku Moilanen of OP Financial Group.

[Unknown Analyst]

This is Mark from OP. I have a few questions here. First of all, still regarding those admin expenses, which grew quite a lot year-on-year. Was there some one-off costs related to that? And how big was it?

[Bret McLeod, executive]

Well, I think we mentioned the IFRS share-based compensation was nearly about EUR 1 million. I think as I mentioned, COVID as you think of the impact of COVID in Q1 '21 and I think salaries and bonuses were abnormally low. So that was probably another EUR 1 million or so. There were also some higher consulting costs. And as I mentioned, the lower costs moved to other expenses due to exiting the managed business in Norway was probably about EUR 0.5 million. So that accounts for the full EUR 3 million.

[F. Ball, executive]

Yes. I would add to that, the IFRS accounting treatment is a noncash impact. So it was really the way that we had to account for it, which would be a one-off, and I would say the bonus payments at the beginning of the year are one-off as well. So we don't anticipate this being a problem going forward.

[Unknown Analyst]

Okay. That's clear. Then regarding this fair value changes, how much did -- or did the completion of Lippulaiva have positive effect on those? And can you give some estimate how big was the effect on Lippulaiva?

[Bret McLeod, executive]

Yes. Lippulaiva was actually basically neutral. No effect from Lippulaiva this quarter. As I think you've known in the last few quarters, there has been -- Lippulaiva -- as it was getting ready, we had taken some write-downs, but Lippulaiva was neutral in the valuation numbers this quarter.

[Unknown Analyst]

Okay. Well, are you expecting to write positive fair value changes on Lippulaiva going forward?

[F. Ball, executive]

No, I think the current valuation of Lippulaiva captures the -- our thinking on what the NRI production will be, which is approximately EUR 8 million this year and then going forward being approximately EUR 21 million. And I think most of that has been captured in the fair value already of Lippulaiva. There could be some potential uplift if we're able to improve the rents on the residential, but that remains to be seen.

[Unknown Analyst]

Okay. And then finally, are you worried about this inflation, which is growing month by month that it will start or it is already starting to erode consumers purchasing power that it will have negative effect on tenant sales later this year?

[F. Ball, executive]

Yes. As I said, I think the immediate impact of inflation is actually positive for us because of the indexation attached to our leases. I think the logical question is, does it, at some point, create pressure for the retailers in terms of their capacity to pay rent. As noted in our remarks, our OCRs are low compared to our peers. So we think we have plenty of headroom there and don't anticipate any issues. And so net-net, we think inflation is probably positive for us.

I guess the risk longer term could be with the consumer. Not to say we're completely insulated, but I do think we have some level of protection given our merchandise mix is primarily necessity-based. So I think if you look historically, when inflation hits, discretionary purchases are the first things that get impacted, people still need to buy groceries, et cetera. So we really aren't today anyway that concerned about it. If this is longer term, potentially, I guess there could be some issues. But we're -- again, we think we're probably the last ones to be impacted by this.

[Operator]

Our next question comes from the line of Helen Rodriguez at Mizuho.

[Helen Rodriguez, analyst]

Just a few questions. Your bond buyback, can you tell us at what level you did that and whether you would opportunistically buy back more bonds? That's question one. And second question is I think there was, I don't know, if Fitch changed the methodology on how it rated you to do with your payment. And on that, if you could give us some color on what went on there, please? And then thirdly, just talking about your -- not LTV, but your sort of leverage on an EBITDA basis If you have any targets for that and how you -- any thoughts around the dynamic of that metric, please?

[Bret McLeod, executive]

Sure. So happy to take those. I think on the first -- your first question about the level on the bond repurchases at the time, I believe it was around just south of [ 102, so 101, probably 0.8 ] for the purchases. Your question is, would we do more? I think certainly, as we go and think about capital allocation, we're always starting with a broad array of options to look at. Obviously, the option of acquiring, developing, repurchasing bonds, repurchasing shares. So as we looked at the options for that, we thought that, that was the best opportunities given the, I think, volatility in the credit markets and certainly in our bonds. We thought that was a good opportunity to reduce debt levels, which ties in a little bit to your third question, reduce debt levels and improve the balance sheet while also making a wise investment.

As far as the Fitch methodology, I think the general idea there was Fitch changed broadly their methodology to have a parent linkage, so linking to if there's a significant investor in a stock, Citycon having a large major shareholder that they would effectively change the methodology where you could no longer be independently rated. You had to be only 2 notches within the parent entity or the major shareholder entity. And so with that methodology that -- I think and Fitch noted in their last release before they quit their coverage that we were actually rated independently at BBB- credit which was the same credit that we've seen all along from them. But that because of the methodology, that would drop Citycon to BB+. So that was the issue there. Again, I think we felt quite comfortable that given the stand-alone nature of our business and our credit and our improving operations that were strong investment-grade credit, as noted by S&P and Moody's, and so that was the back and forth there.

On the net debt to EBITDA, our net debt to EBITDA is about 10x. I think certainly, from a target perspective, we feel comfortable where we are. As I said, we're rated investment grade by both of the major rating agencies. We feel comfortable where we are. We're below those levels. I believe the triggers are significantly higher, [ 12 and 12.5 ], respectively to go any lower. So I think we feel comfortable where we are. But certainly, obviously, as EBITDA grows and debt is paid down, that ratio should improve over time. So I think I captured all 3, but let me know if I missed anything.

[Operator]

Our next question comes from the line of Anssi Raussi of SEB.

[Anssi Raussi, analyst]

It's Anssi Raussi from SEB. And my first question is that actually, you touched on this a bit already, but are you thinking about using cash to deleverage your balance sheet further from now on as interest rates have been moving up, of course, increasing the cost of refinancing, thinking about that are you slowing down your share buybacks and prepare just in case? Of course, you don't have any significant maturities before 2024, but still.

[Bret McLeod, executive]

Right. That's a good question. Look, I think, it's certainly in a rising rate environment, and we've seen it even when we -- I mentioned the level we purchased the bonds at -- before our bonds at and they've trickled down, which you can imagine happens in a rising rate environment, bond prices will go down. So I think there's opportunities there. We'll continue to monitor it. I do think it's certainly, as I mentioned, of the levers to pull from a capital allocation strategy, repurchasing bonds is certainly interesting. So it will be something we continue to monitor.

[Anssi Raussi, analyst]

Yes. I wanted to make sure. And the second question would be that do you have any negotiations ongoing already, concrete plans regarding selling more assets in the near future? Or do you still go case by case if good offer comes?

[F. Ball, executive]

Yes. We've been -- we've been pretty diligent, I think, in our efforts relative to pruning the portfolio so that we sell the noncore assets, but we sell them at pricing that we think is fair. You may recall that from day 1 here, I've said that we would continue that process, but we would only do it when we got pricing that we thought was appropriate and that we were not a distressed seller by any means. And I think we've demonstrated that over the last several years. So we will continue that process.

We do see increased investor appetite for the types of product that we own, that being primarily grocery-anchored. And as I mentioned in the remarks, what is really interesting for us is that these investors, it's private capital clearly believes the NAV values that are attached to the properties and give us full credit for that versus the public market, which seems to discount that not just for us, but for our peers as well. So there is clearly a significant dislocation between the private and public markets in terms of pricing right now.

[Bret McLeod, executive]

I think the other thing I might add to is in the private market, I think there's a real desire to find inflation-protected assets. And given our asset base and the indexation we have, that sets, I think, us in part, maybe with lodging being the other area, but I think that's definitely attractive to private investors.

[Anssi Raussi, analyst]

Okay. Clear. And the last one from me is that about your contracts you have with your residential constructors, do you have to give up some of the development gains as the cost inflations probably causing problems to all constructors at least here in Finland? Asking because some constructors have been saying that they are negotiating with their customers about sharing the increased costs.

[F. Ball, executive]

We are fortunate that our contract pricing was fixed price. The other thing I would say is at least 4 of the 6 towers that we're doing ourselves, the construction is almost -- they both -- they've all 4 been topped off. So the construction is very far along. So most of that construction expense occurred before these guys started to see that kind of increase in pricing. So again -- but I think the biggest point I would make is that these were fixed price contracts, and therefore, we have protection.

[Operator]

Our next question comes from the line of Simen Mortensen of DNB Markets.

[Simen Mortensen, analyst]

I have three questions. My first question goes to -- I was a bit late into the call. You might have answered this already, but indirect other operating costs, which we see is an adjustment in the EPRA figures. It's a large figure in the IFRS results, EUR 14 million. Could you please elaborate a bit in detail what that was about?

[Bret McLeod, executive]

That's related to the asset sales in Norway where we took a goodwill write-down. So that's related to the -- those assets were purchased in the 2015 sector deal. And there was a significant amount of goodwill and then translation from currency and the goodwill. And so for IFRS rules, we have to take the write-down pro rata for the size of the assets of that portfolio. That's all that was.

[Simen Mortensen, analyst]

So that's all noncash flow.

[Bret McLeod, executive]

Pardon me?

[Simen Mortensen, analyst]

That's all the noncash flow then.

[Bret McLeod, executive]

Correct. Yes, indirect. Indirect. Indirect. That's right.

[Simen Mortensen, analyst]

Second question. Your hedging details, you say you have 100% hedging ratios with 4 years average duration. However, we're seeing rates moving a bit upwards there. And if you -- I was wondering if you could give us a bit more flavoring and coloring about the profile of that hedging portfolio and how it's set up with swaps then in fixed bonds, et cetera? So should we look at the bonds? Do you have -- how many swaps do you have? How's the weighted average in terms of what's hedged for '23, '24, etc.?

[Bret McLeod, executive]

Sure. Well, most of our -- in fact, I think all of our bonds are fixed price or fixed rate. So that's where the hedgings primarily come from. As we know, most of the bonds are also euro. I think the only bond we have outstanding is the NOK 80 million bond, again, is a fixed rate. So when we talk about 100% fixed for our interest rate, we're paying a fixed coupon, and that's the hedging we have in place right at the moment.

[Simen Mortensen, analyst]

So you don't use swaps or anything or any bank financing [indiscernible]?

[Bret McLeod, executive]

We've got on the Kista loan, which is off balance sheet. We do have a currency swap there as well.

[Simen Mortensen, analyst]

Okay. Last question. EPRA LTV, EPRA net debt figures, could you please elaborate how we think about that? Could we see any details on that? And [indiscernible] help us understand the risk about Kista bit more, why are you not? You show us EPRA -- NAV and EPRA yields and why not the EPRA debt structure?

[Bret McLeod, executive]

Yes, it's a good question. And actually, I think the ruling on the EPRA LTV, which has just come out recently, I believe, by the end of the year, and that needs to be included in our materials. So we would anticipate including it by the end of the year. But I would tell you that effectively, as you know, the main difference is really keeping the hybrids as 100% debt as opposed to right now, we treat it for IFRS, 100% equity. The rating agencies treat it 50-50, debt and equity. And that's why we note, I think, our rating agencies in our mind, and we've spoken to them, we'll continue to maintain their methodology. But as far as what our EPRA LTV would be if we were to include the hybrids as 100% debt, it would be around 56% LTV.

[Operator]

And we currently have one further question in the queue. [Operator Instructions] And our next person is Rob Virdee at Green Street.

[Rubinder Virdee, analyst]

A couple of questions. So the first one is, I see strong operational results and big tenant sales. I was just wondering what's really behind that? Is there anything one-off that's happening in this quarter? Or is it just the strength of the portfolio? And on to that is how much of your contracts have a turnover rent element to that?

[F. Ball, executive]

First of all, Rob, it's nice to hear your voice. Now the -- listen, the sales is really a result of, I think, primarily driven honestly by grocery. Grocery sales have continued to be very, very strong. I would also say that when you think about how we've continued to prune the portfolio and sell off noncore assets, obviously, that improves all of the operating metrics for the remaining portfolio. So I think we've done the right things there. So this is not a one-off. This is a trend that we're seeing and anticipate continuing to see. What was your second question?

[Rubinder Virdee, analyst]

The part of that is how much of your contracts have a turnover element to them?

[F. Ball, executive]

Very, very -- it's -- we have a very small amount of leases that are turnover based. We do have a fair amount that have a potential percentage rent to the extent that tenants outperform. So if we see inflation and sales improve in that respect, there's potential uplift there. But as far as purely turnover based, it's a very small -- I'm going to say, it's like 4% of our portfolio is tied to that.

[Rubinder Virdee, analyst]

Okay. And then the next question is on good execution at Lippulaiva. Obviously, it's the first residential development you've embarked upon. And I want to know what is the development yield you're expecting on those resi units? That's part 1. And part 2 is because this has been the first one and you anticipate rolling out across some of the other -- some of your other assets, I want to know some of the lessons you have learned from this? And the reason I ask that is, is it still the right -- in your mind, the right thing to do it yourselves in-house? Or is it right to find JV partners to do this with? And how has that evolved, if at all?

[F. Ball, executive]

Yes. I'll let Bret talk about the yield. But to answer your second question, I think that a couple of lessons learned. One is earlier in the process, we sold 2 of the parcels to another developer. And honestly, if I had it to do all over again, I would have held on to them. I think I gave away too much of the upside by selling those off. But at the time, we were looking at kind of demonstrating the value proposition for our parcels there as well as derisking the project a bit. But again, in hindsight, I would not have done that. I would have kept it and done it ourselves.

I think in this process, given the location, if we had more of these, I would continue to do them ourselves. I think the challenge may be that in a rising inflationary environment and interest rates moving up, the hurdles may be a little more difficult and the cost of capital may be more expensive. So it may behoove us on some of these future ones to look at potential JVs, and we are certainly open to that.

Our primary function right now is getting these zoning rights and building rights. We anticipate getting a couple more of our projects zone before the end of the year. And -- but once we get that, then we can make the determination -- the numbers will tell us whether we should do it ourselves or if we should partner up. And for that matter, potentially even sell those development rights if we think it's better to do that. But again, at this point, I would say what we're finding is that we were probably not aggressive enough on the underwriting of our rents based upon what we're hearing and what we're seeing in the market as it relates to the rents that we anticipate getting now for these residential buildings. But Bret, maybe you can answer the yield question?

[Bret McLeod, executive]

Yes, the yield question, it's around 4%. So what we're projecting on that for a yield for the residentials, Rob. And I think just building on Scott's point, I do think the development rights for us as we look through, again, for funding requirements, I think it is, as Scott pointed out, where raising rate -- rising rates are, it's an interesting way potentially for us to fund some of these. But at the end of the day, it's all to enhance the underlying necessity-based centers that we have in this residential around that, whether we own 100% or something less, right, it's all to increase the value of those underlying assets.

[Rubinder Virdee, analyst]

And just to add on, if I may. With a 4% development yield, obviously, exit cap rate is probably sub-3% on these. But your thought process is still to keep them to run them and to change the portfolio direction towards more mixed use. Has that changed at all?

[F. Ball, executive]

No. I think our feeling is we want to continue to diversify our income stream and control where we can control all of the value creation. I think these things are only going to get more valuable, honestly, as the metro opens and everything happens as we anticipate, I see this increasing the value of the retail asset as well as the residential assets. So in my mind, I'd like to collect the income along the way while it continues to increase in value.

[Bret McLeod, executive]

I think as we laid out in our Capital Markets Day, Rob, is as we look over the next, I think, it was 8 to 10 years, while it's an increasing part of our business, it's still max sort of the 15% to 20%. So it's a complementary tool and a diversification of our underlying business.

[Operator]

And as there are no further questions at this time, I'll hand back to our speakers for the closing comments.

[Sakari Järvelä, executive]

Okay. Thank you. So it's time to close the call today. We thank everyone for attending, for your interest and the great questions. It goes without saying that if you have any more questions, please feel free to reach out to us. We're always happy to help and discuss our business. But with that, we thank you for now and wishing you all a great day.

[F. Ball, executive]

Thanks, everybody.

[Bret McLeod, executive]

Thanks all.