Citycon Oyj

OMXH:CTY1S

Earnings Call Transcript 2021-Q3

[Laura Jauhiainen, Vice President of Strategy & Investor Relations]

Good morning, everyone, and welcome to Citycon's Q3 2021 result audiocast. We've, this morning, published our Q3 results, and those can be as usually found from our web page under the Investors section. My name is Laura Jauhiainen, I'm the Vice President of Strategy and Investor Relations at Citycon. Today, with me, as usual, I have our CEO, Mr. Scott Ball; and our CFO and Executive Vice President, Eero Sihvonen; and also as a newcomer, today, we have our new CFO-elect, Bret McLeod. We start with the presentation, which will be given by the gentlemen. And after the presentation, there is a chance to ask questions in the Q&A section. So Scott, please go ahead.

[F. Scott Ball, CEO & Director]

Thank you, Laura. Good morning, everyone. Today, we're pleased to present Citycon's Q3 results. I will start with some highlights from the quarter, then Eero will review Citycon's financial results where we stand after the first 9 months of the year. I will conclude the presentation with an update on our portfolio and our capital recycling activities. Q3 was another solid quarter for Citycon, both from an operational perspective and in terms of our focus on the recycling of capital. As we previously noted, the impact on our performance from COVID-19 was relatively muted compared to peers. As a result, we have seen slight growth on a quarter-over-quarter basis as well as year-over-year, and we are fast approaching 2019 levels. NRI for the period was EUR 51.3 million, which, excluding divestments, was plus 0.4% over Q3 2020 levels and a 1% increase over Q2 of this year. Furthermore, NRI adjusted for divestments is already close to pre-COVID 2019 levels at minus 1.5%. The operating profit is similarly ahead of Q2 and 2020 levels standing at EUR 44.7 million in Q3. This is the third consecutive quarter of quarter-over-quarter NRI growth. EPRA earnings were impacted by divestments and decreased slightly to EUR 32.5 million. On the operational side, the key metrics continued on a solid path. Our year-to-date nonadjusted rent collection stands currently at 96%. And as throughout the pandemic, our rent collection rate has been the best in the sector, which is a reflection of our focus on necessity-based retail hubs in top Nordic locations. Leasing continued to be healthy as we signed over 40,000 square meters of new leases during the quarter. Specialty leasing, in particular, has shown significant growth at plus 67% recently as the tenant interest and pop-ups and common area leasing has dramatically picked up as the economy recovers. Also, tenant sales continued its positive development as year-to-date like-for-like sales were 2.2% ahead of the previous year level and only minus 1.4% below the pre-COVID levels of 2019. We see this trend improving further with like-for-like sales in Q3, 6.2% ahead of last -- excuse me, ahead of the pre-COVID period in 2019. As a result of our year-to-date results, we are confident in tightening our full year guidance and now anticipate EPRA EPS to be in the range of EUR 0.683 EUR 0.723 for the full year 2021. I'm also pleased to announce that we have agreed to divest Columbus shopping center in Finland for a gross price of EUR 106.2 million, which is EUR 10 million above our Q4 2020 valuation and reflects a 4.95% cap. Columbus is a great example of Citycon's ability to create additional value through active asset management and leasing where we recently added a third grocery store. The buyer is getting a great asset with very stable NRI. As noted in our release, we plan to use a portion of the Columbus proceeds to repurchase our own shares. I will give more details on the Columbus disposal and potential share buyback later in the presentation. On the financing side, we utilized our available liquidity and redeemed our 2022 notes with an outstanding nominal amount of 1.6 -- excuse me, EUR 161.7 million. Following the redemption, we do not have significant debt maturities before 2024, which gives us greater financial flexibility and the ability to pursue our long-term strategic goals of moving further towards owning and developing mixed-use urban hubs. During the pandemic, the Nordics have proven to be a safe haven, and now the recovery of the macroeconomics has clearly picked up. This gives us a good starting point for the rest of the year and moving into 2022. During recent months, businesses and households in the Nordics have begun to normalize production and consumption patterns. Following the high vaccination rates and relatively low COVID case numbers, the governments were able to lift most restrictions. These steps have given a lift for consumer confidence, which should be good for our portfolio moving forward. Our tenant mix of municipal and grocery-anchored tenants brings resilience to the portfolio, which has positioned us well throughout the pandemic. Over 35% of our GRI comes from stable necessity tenants, and only 5% of our GRI is turnover based. I would also highlight that 92% of our leases are tied to indexation, providing protection against potential inflation. In addition to grocery tenants, municipality and health care tenants are a strategic focus for Citycon. This gives us several benefits. First, we benefit from the high credit worthiness of our public sector tenants, which improved the certainty of cash flows and further support the resilience of our assets. Secondly, lease periods for public tenants are usually longer, between 10 and 20 years. And thirdly, public tenants also represent an integral part of our densification strategy as they drive footfall to our locations. Tenant sales developed positively during the first 9 months of 2021 with a 4% increase in grocery sales and a 2% increase in like-for-like tenant sales. And as mentioned, our like-for-like tenant sales were 6.2% ahead of pre-COVID Q3 2019 for the quarter. Once again, it's worth noting that we are seeing like-for-like tenant sales approaching pre-COVID levels, which we believe sets us apart from the peer group and is a testament to our strategy of owning necessity-based retail in growing locations with access to excellent public transportation. Weekly footfall is around the same level as last year, but average spending has continued to stay high, compensating for less traffic. Tenant demand for our shopping centers continue to be demonstrated by strong leasing activity as the number of leases signed is significantly higher than even last year. During Q3, we continue to see progress with 41,000 square meters of leases signed. In Q3, the retail occupancy rate, excluding Kista, was at 93.7%. We have experienced approximately a 1% loss of occupancy over the last 18 months or during the COVID period, but we have been able to manage to hold our rent levels. Specialty leasing, in particular, has shown significant growth recently as the economy recovers. During the year, we have done almost 1,800 specialty leasing deals. And the income from specialty leasing not only doubled compared to 2020, but also exceeds our pre-COVID levels in 2019. Specialty leasing offers us not only additional income and new GLA, but also serves as an important way to find tomorrow's new tenants. It enables us to introduce and pilot niche concepts and gives us flexibility. I would also add that it's an early indicator of where the business is heading because it happens to snap back faster than normal leasing. I will now hand it over to Eero, who will give a more thorough review on our financial development.

[Eero T. Sihvonen, Executive VP & CFO]

Thank you, Scott. Starting my review on Page 10, Q3 financials. And like Scott mentioned, we had a good solid quarter, which was in line with our expectations, a quarter where we had strong collections, probably among the best-in-class, and also net rental income which was over previous quarter and also over Q1. So third consecutive quarter of net rental income growth.And also adjusting with disposals that we conducted this year, approximately EUR 2.1 million impact on net rental income, we were -- net rental income basis also above Q3 2020 and also, on a quarterly basis, showed a modest positive like-for-like growth. So overall, a good quarter. Adjusted EPRA EPS was below, and it was below mainly and essentially due to the fact that we issued a new hybrid bond. Then having a look at the first 9 months, i.e., Q1 to Q4 -- Q3 2021. And in this comparison, we will have to bear in mind that we are partly comparing the performance to non-COVID period because Q1 in 2020 was still before the COVID, which in this part of the world, really started to impact the results for the 2 last weeks of March 2020. And also, we had the impact of disposals, so which was approximately EUR 3.8 million, and I will review those numbers more in detail later on in the presentation when we look at the net rental income bridges. Turning over to the impact of currencies. We had strong Norwegian krone and strong Swedish krona for most of the period. Although during Q3, the currencies were fairly stable. But actually, Norwegian krone strengthened quite significantly after Q3, i.e., early October. And the impact on -- of currencies to net rental income was a positive EUR 3.8 million for the first 9 months. Then turning over to the net rental income bridge, which I already promised. And again, here, one needs to bear in mind that partly comparing to non-COVID period, i.e. Q1 2020, and here, of course, there was a negative impact of these disposals, mainly the Swedish properties that we sold early 2021. The impact of like-for-like was negative EUR 3.4 million, but again, partly comparing to non-COVID and the impact of the currencies and other, was EUR 4.4 million. And the portion of currencies from this total was EUR 3.8 million. So this was the full net rental income bridge compared to the previous year. Then the portfolio valuations. And for the full period, we still have a positive valuation result by EUR 5.9 million for the first 9 months in total. The result for Q3 was negative EUR 18.5 million, whereas the standing portfolio valuation was stable and actually slightly positive for the quarter. We had 2 special cases, i.e., the Lippulaiva CapEx estimate was slightly adjusted upwards having to do with the estimation of project costs and COVID impacts. And of course, the fact that we now have made a decision to build the 2 final residential towers ourselves and take them to our own balance sheet has an impact as well as, of course, the situation of generally escalating costs related to construction and others. But in overall comparison, a fairly modest change. And additionally, we had a so-called IFRS 16-related reconciliation in Norway that actually related to the original acquisition and certain asset in Norway, and that related -- or that cost of EUR 5.5 million adjustment, one-off, and both of these were naturally one-off. And as a result, the investment properties had a modest negative revaluation of EUR 18.5 million for the quarter. But as said, the total for the full 9 months period is still positive EUR 5.9 million. Then the EPRA NRV bridge. And as per EPRA definitions, we have changed the main metric that we follow from NAV to net replacement value, i.e., net RV. We, of course, give disclosure of the all EPRA NAV KPIs, but the main metric is net rental -- net replacement value. And NRV has improved from the beginning of the year due to the reasons explained here. Then turning over to another important part of our Q3 results, i.e., the main financing metrics. Not a lot happened during the quarter, but actually, we initiated quite major improvements that will be visible in Q4 results, and they have to do with the loan repayments redemptions. And all of our main KPIs remained in very good shape for the quarter. And more specifically, the changes initiated can be seen on this Page 17, i.e., we use the so-called make-whole provision of our bond agreement related to 2022 remaining bonds. And as a result, in -- at the end of September, these bonds were still outstanding, but where the maturity was changed to '21 due to the fact that we have -- we had sent the notice of redemption. And still, we had EUR 285 million of liquid money market funds, which on -- partially on 19th of October, we used towards a redemption of this EUR 162 million bond. So the bond has already been redeemed, repaid, and also EUR 60 million of the EUR 70 million commercial paper has been repaid. So this means that our debt maturity structure looks very good right now, and we don't have any net maturities whatsoever. The next maturity is only EUR 79 million in late '23. And in more detail, the financing key figures can be seen on this page. You can see that we had an available liquidity of EUR 832 million. And having repaid, redeemed the bond and most of the commercial paper, we still have a very comfortable EUR 590 million left, i.e., the liquidity position is still extremely good. And we had, at the end of Q3, we had EUR 832 million. But that said, even this EUR 590 million is a very, very solid number. So liquidity situation remains to be extremely good. Then the final topic of my presentation is the outlook. And following the stable quarter that was in line with our expectation, we have narrowed the guidance. And the new guidance is, in terms of direct operating profit, EUR 7 million, i.e., EUR 173 million to EUR 180 million. And also the EPRA earnings per share guidance, which was EUR 0.5 has been -- or the band was EUR 0.5 has been now narrowed to EUR 0.04, i.e. EUR 0.683 to EUR 0.723. And similarly, also the adjusted EPRA earnings guidance has been narrowed to EUR 0.558 to EUR 0.598. And here, of course, it's good to mention that the adjusted EPRA earnings for the low band was the same already before our issuance of the -- or the band was basically the same already before issuance of the new hybrid. So the issuance of the new hybrid is the reason -- main reason why we did not lift the lower band, but rather narrowed it by reducing the higher band. Back to you, Scott.

[F. Scott Ball, CEO & Director]

Thank you, Eero. As previously mentioned, our capital recycling continues with the divestment of Columbus, a noncore asset located in the Helsinki metropolitan area at a gross price of EUR 106.2 million, which is EUR 10 million or plus 10% above our Q4 2020 valuation and 20% above our Q4 2019 level. The divestment of the asset was signed on October and is scheduled to close during the last quarter of 2021. Columbus demonstrates our asset management skills. The tenant mix has been optimized by increasing the share of groceries up to 65% with active leasing, while at the same time reducing the share of fashion down to 6%. Tightening of cap rates and increasing valuations also validate demand for high-quality Nordic real estate assets. It is evident from -- that the Nordic real estate transaction market is active. We will continue monitoring the market and progress our accretive asset recycling initiatives to strengthen the balance sheet and to provide flexibility to the strategic transformation we are undergoing. We are planning to use part of the proceeds from the Columbus divestment for share repurchase. We continue to sell assets at pricing that is a premium to NRV, and buying back shares at an approximately 40% discount seems like a wise investment. I think it's worth noting that Europe is lagging the U.S. equity market in terms of recognition of the value of the necessity-based retail. As you can see, U.S. equity markets are assigning a premium to grocery or necessity-based retail, which is similar to Citycon's portfolio. This is evident in the cap rates of grocery-anchored compared to other fashion-oriented retail. The U.S. market is recognizing this distinction within the retail sector with lower cap rates and higher valuations. The gap is widening as cap rate estimates have fallen more for necessity-based retail compared to traditional one with spreads between the 2 ranging from 80 to 210 bps. In the EU, this distinction is currently being made by investors investing directly in assets, as evidenced by the assets that we've been able to sell at pricing above book, but is not yet recognized by equity investors. We believe at some point, this will correct itself. Summarizing the quarter. We had Q-over-Q and Y-over-Y growth in operational performance. NRI, excluding divestments, is nearly back to pre-pandemic levels. As a highlight for the quarter, Columbus was sold above book value at 4.95%, and we are planning on using some of the proceeds to repurchase shares, which are heavily discounted in relation to NRV. We continue to take steps to strengthen our balance sheet, and there are no material near-term maturities before 2024. As Eero mentioned, we had a third straight quarter where the standing portfolio showed valuation gains, though this quarter, those were offset by 2 different one-off adjustments. Lippulaiva is coming online in 2022 with necessity-based focus, direct connection to the metro and significant municipality tenant exposure, along with 8 residential towers. Speaking of Lippulaiva, we would like to welcome you to meet us at our Capital Markets Day, which will be held on the 16th of November. The event is planned as a hybrid event with both physical and virtual participation made possible. The physical event will be held in Lippulaiva with an asset tour of the project in its ongoing construction as well as Iso Omena. Finally, I want to acknowledge that this is Eero's last earning call with Citycon. He, more than any other individual, has had the largest impact on this company. I want to thank him for his leadership, his wise counsel and, most importantly, his friendship, which will carry on. You will see him at the Capital Markets Day and the Lippulaiva grand opening as he continues in his advisory role with us. Thank you, Eero.

[Eero T. Sihvonen, Executive VP & CFO]

Thank you. Now we will all start crying here. But I would also like to thank all the listeners and the investor community and analysts for a very good cooperation over these 16 years or more than 60 quarterly or annual reviews. And I'm sure that our paths will still cross many times, if nowhere else, at least at this Lippulaiva Capital Markets Day and why I certainly do hope that as many as possible of you can join. And also in general, I think that our paths will still cross many, many times. But again, thank you, Scott, for your kind words. Thank you, everybody. There and like the Swedes say, [Foreign Language], it has been an enjoyable journey, and life will continue. And my successor, Bret McLeod, is already here in this room as well. We have been managing the things together with him for a couple of months already. So the CFO-ship of Citycon will be in the capable hands of Mr. Bret McLeod from the beginning of the year. And as said, still after that, I will remain 6 months as a senior adviser. But back to you, Laura.

[Laura Jauhiainen, Vice President of Strategy & Investor Relations]

Thank you, Scott and Eero for the presentation and all the remarks afterwards. So now it's the time for the Q&A. So we welcome any questions you might have. So we will turn the line on. Operator, please go ahead.

[Operator]

[Operator Instructions] We have a first question from Anssi Kiviniemi from SEB.

[Anssi Kiviniemi, Analyst]

This is Anssi from SEB. I have basically 3 themes I would like to go through or I will go through the questions one by one, if that's okay. If we first start of the operational performance. I mean when we look at the like-for-like rents and footfall development and occupancy, it's kind of indicates a great amount of stability. But could you perhaps give us a little bit more flavor on, are there any differences in the portfolio, how they are performing? I mean, are there clear differences between the strong core shopping centers that you have and perhaps the noncore assets? Kind of any flavor would be helpful.

[F. Scott Ball, CEO & Director]

Yes. Very good question. First of all, Anssi, I think that if we were to dive under the high-level numbers, you would see, not surprisingly, that we have winners and losers in our tenant base. As we've talked about previously, the categories of grocery, pharmacy, alcohol, sporting goods, home furnishings, those are all categories that have performed quite well throughout the COVID period. I would say that fashion and food and beverage and entertainment were the categories that struggled through COVID. I would say food and beverage has bounced back and is back strongly to pre-COVID levels. Specialty leasing, as mentioned on the call, has strongly rebounded. And that's an interesting one to look at only because it will snap back faster because those are smaller deals that are done very quickly. I mean you literally could get somebody set up in a couple of days, unlike an in-line space deal where it takes 3 to 6 months to construct. So I think that's a very important early indicator for us. I would say fashion is -- we're seeing some rebound in the fashion tenants. As it relates to the assets themselves, again, I think that most of our assets have again held up quite well. I think if you were to look at where we might have underperformance, it would be those assets that are closer to or rely upon office workers immediately surrounding it. Kista is probably the most glaring example of that. That being said, now the restrictions have lifted, we are seeing more people come back to the office. And the way we can see that is really because the train stations dump right into our property. So we see that footfall happening in terms of the office workers in the morning. You can stand and watch who's coming off the train. And so we're seeing that rebound. It's still not to kind of pre-pandemic levels, but it's clearly getting -- it's clearly improving. Also a little more clarity -- a little more information, I guess, footfall right now is tracking about where it was last year, which is still, call it, 10% off of 2019 in the pre-COVID period. But again, average purchases have caused that -- have caused sales to basically rebound all the way back to 2019 levels. So footfall hasn't fully recovered, but sales has. And hopefully, if we could maintain that average purchase with footfall recovering fully, that could be pretty meaningful for us, but that remains to be seen at this point.

[Anssi Kiviniemi, Analyst]

Okay. Second theme is the Columbus disposal. I mean when we look at the deal, are there any building permits included in the deal? Or is there a significant planning, permitting potential in the shopping center region? How do you see that? And also kind of what were the crucial elements to get the deal done? How did the negotiations go? And the kind of final question on that is that you're still targeting to be a net seller of assets. Could you just confirm this?

[F. Scott Ball, CEO & Director]

Yes. So on Columbus, it's interesting, per your question, there is no building -- there are no building rights associated with it that were sold as part of the transaction. We have kind of executed on all of that. And you may recall, we actually sold a plot maybe 2 years ago. I might be off on the timing, but I think I'm close. So we sold a plot of land there a couple of years ago. It was part of a larger plot of land, and there was a buyer who was buying it to build residential. So I think the property will benefit from that and the new buyers will benefit from that. That being said, in our mind, we had kind of done what we can do with the asset. We added, as mentioned, a third grocery there. And we really feel like we've really maxed out and really created real value in the asset. So therefore, from a life cycle standpoint, it was -- there was not much else for us to do. And it's, as mentioned, a noncore asset in our portfolio. So we were able to -- this was an off-market deal. We did not shop it. I think you might recall that in previous calls, I mentioned that we had been -- we have had reverse inquiries on properties. This was one of those. And I think it truly demonstrates the value that we have in the portfolio. And I will tell you, even though we're selling it at a 4.95, it was not an easy decision for us to sell it because I think it's a great asset, and I think the buyer is getting something that's really stable, and they're not going to have to worry about it. This is -- and I should note, the buyer also has land nearby where they're doing other things as well. So it made sense for them, which is why I think they approached us in the first place. But I think this was a great transaction for both sides. And I think it also, again, just continues to reaffirm that you take this, along with the 3 assets we sold in Sweden earlier this year at pricing that was above book, and I think we keep banging the drum that our NAV is maybe, if anything, understated. And so that's the reason why as we look at use of proceeds, the idea of buying shares seems very attractive to us. To your last question about being a net seller, I think that we will continue to look at -- as we've said in the past, we're going to be very deliberate about transactions. We are not a seller at any price. And I think we have hopefully demonstrated that over the last few years here. If we can achieve pricing that we think is appropriate, then we will be a seller. If not, then we are very happy and comfortable with the portfolio we own. That being said, we are seeing the transaction market pick up, and we have had other inquiries about other properties. So I would anticipate that there may be further dispositions in the future. Hopefully, that answers your question.

[Anssi Kiviniemi, Analyst]

Yes, it did. And the last thing is essentially Lippulaiva. I mean now there was some project bookings and CapEx increases, I can very much understand the fact that all of the value chains are stretched and a lot of issues in construction sites also. So kind of no need to go through there. But if we look at the larger scheme of things, if we look at the construction, if we look at the leasing ramp-up, is everything going according to plans and kind of the big picture is very much unchanged?

[F. Scott Ball, CEO & Director]

Yes, it's a great question. I would say, at a high level, yes, we have leased or out for signature about 80% of the project. So we are in really good shape, what -- about 6 months out. And we're having good activity on the remaining portion of it. So we feel really good about where that's going to happen -- I mean where that's going to end. The metros is on schedule at this point, which is a great, great news for us. You may recall, at Iso Omena, we were -- we had a bit of an issue where it was delayed, but this is scheduled to be on time, and they're doing their testing right now. So we feel really good about that. I hope you can make it to Capital Markets Day so you can see the project because you'll see the 6 of the 8 towers, residential towers are under construction. We've topped off the tallest one at 14 stories, and they look amazing. And from a construction cost standpoint, we think we've kind of recognized the impact because of the COVID related and, as you probably know, there are issues in terms of material cost that have also been impacted. The good news is we're almost done. So we really shouldn't -- there shouldn't be much further impact on that front. So we feel like we're in pretty good shape here and excited for you to see it.

[Anssi Kiviniemi, Analyst]

Yes, definitely, I'm going to be at the CMD. And due to the fact that I will be at the Capital Markets Day, I'm not going to say goodbye to Eero as we're going to see him quite soon.

[F. Scott Ball, CEO & Director]

Yes, we'll raise a glass of something to -- in Eero's honor when we're together. So...

[Anssi Kiviniemi, Analyst]

Let's do that.

[Operator]

We have no more questions for the moment. [Operator Instructions] No more question. [Operator Instructions] Speakers, we have no more question.

[Laura Jauhiainen, Vice President of Strategy & Investor Relations]

Okay. So thank you, Anssi, for the 3 questions. And thank you for everyone else for listening in. As usual, if you have any more questions, please feel free to reach out to any one of us. And otherwise, we thank you for the participation, and wish you a very good day. Thank you.

[F. Scott Ball, CEO & Director]

Thank you, everybody.

[Eero T. Sihvonen, Executive VP & CFO]

Thank you.