Citycon Oyj's Interim Report for 1 January-30 September 2023: Compounding operational growth continued
Citycon Oyj Interim Report 1 November 2023 at 21:00 hrs
CITYCON RESULTS SUMMARY:
FINANCIAL & KEY PERFORMANCE INDICATORS
Like-for-Like (‘LFL’) Net Rental Income
Excludes acquisitions, dispositions, development, and closed assets (Torvbyen)
- Q1-Q3/2023, increased 6.9 % (comparable FX) vs. Q1-Q3/2022
- Q3/2023, increased 7.0 % (comparable FX) vs. Q3/2022
Q2/2022 was positively impacted by several one-time benefits resulting in difficult year-to-date 2023 comparisons. Excl. these one-time items:
- Q1-Q3/2023, increased 7.6 % (comparable FX) vs. Q1-Q3/2022
Standing Net Rental Income
Excl. four assets disposed in Norway in 2022
- Q1-Q3/2023, increased 5.3 % (comparable FX) vs. Q1-Q3/2022
- Q3/2023, increased 4.9 % (comparable FX) vs. Q3/2022
In addition to the Q2/2022 one-time items mentioned above, Q1-Q3/2023 was further impacted by the closing of Torvbyen in Norway. Excl. the adverse impact of these two combined items:
- Q1-Q3/2023, increased 7.6 % (comparable FX) vs. Q1-Q3/2022
FX-rate impact to total NRI was EUR -8.8 million in Q1-Q3/2023
KPI’s
- Q1-Q3/2023 LFL tenant sales +4.1 %
- +9.3 % vs. Q1-Q3/2019 (pre-pandemic)
- Q1-Q3/2023 LFL footfall +1.9 %
- Q3/2023 retail occupancy 95.6 %
- +10 bps vs. Q2/2023
- +70 bps increase from Q3/2022
- Q3/2023 collections were 98 %
- Q2/2023 improved to 98 % from 97 %
- Q1-Q3/2023 average rent per sqm increased EUR 1.4 to EUR 23.8 (comparable FX)
- Q1-Q3/2023 positive leasing spread of 0.9%
- Q3/2023 9.4 % LFL occupancy cost ratio
BALANCE SHEET
Liability Management
- Replacement and extension of EUR 650 million credit facility in April 2023, incl. EUR 250 million term loan
- Q1-Q3/2023 total notional bond and hybrid repurchases of EUR 236 million for EUR 212 million cash
- Updated its EUR 400 million Commercial Paper programme into green format, and issued its first Green Commercial Paper
- the first ever Green Commercial Paper issued in the Finnish market
- Advanced negotiations ongoing for approx. EUR 90 million secured loan
Fair Value
- Q1-Q3/2023 net fair value change was essentially flat at EUR -5.7 million.
- Q1-Q3/2023 fair value of investment properties decreased by EUR 49.7 million (-1.2%) mostly due to changes in FX rates.
- Excl. changes in FX rates, fair value of investment properties increased by EUR 52.1 million (+1.3%).
KEY FIGURES:
| Standing portfolio key figures 1) | |||||||
| Q3/2023 | Q3/2022 | % | FX Adjusted Q3/2022 |
FX Adjusted % 4) |
|||
| Net rental income | MEUR | 48.4 | 48.8 | -1.0 % | 46.1 | 4.9 % | |
| Direct operating profit 2) | MEUR | 42.7 | 41.9 | 1.9 % | 39.5 | 8.1 % | |
| EPRA based key figures 2) | |||||||
| EPRA Earnings | MEUR | 29.0 | 28.0 | 3.6 % | 26.0 | 11.6 % | |
| Adjusted EPRA Earnings 3) | MEUR | 21.8 | 20.4 | 7.3 % | 18.3 | 19.1 % | |
| EPRA Earnings per share (basic) | EUR | 0.173 | 0.167 | 3.6 % | 0.155 | 11.6 % | |
| Adjusted EPRA Earnings per share (basic) 3) | EUR | 0.130 | 0.121 | 7.3 % | 0.109 | 19.1 % | |
| Q1-Q3 /2023 |
Q1-Q3 /2022 |
% | FX Adjusted Q1-Q3/2022 |
FX Adjusted % 4) |
Q1-Q4/2022 | ||
| Net rental income | MEUR | 145.1 | 145.9 | -0.5 % | 137.8 | 5.3 % | 195.1 |
| Direct operating profit 2) | MEUR | 123.2 | 123.8 | -0.5 % | 116.7 | 5.6 % | 166.2 |
| EPRA based key figures 2) | |||||||
| EPRA Earnings | MEUR | 81.0 | 83.8 | -3.4 % | 78.3 | 3.3 % | 113.6 |
| Adjusted EPRA Earnings 3) | MEUR | 59.2 | 60.9 | -2.9 % | 55.5 | 6.6 % | 83.1 |
| EPRA Earnings per share (basic) | EUR | 0.482 | 0.499 | -3.4 % | 0.466 | 3.3 % | 0.676 |
| Adjusted EPRA Earnings per share (basic) 3) | EUR | 0.352 | 0.363 | -2.9 % | 0.330 | 6.6 % | 0.495 |
1) Standing portfolio key figures include only income and expenses from investment properties that were on group balance sheet on 30 September 2023. The portfolio is the same in the reporting period and in the comparison period, hence the numbers are comparable. Lippulaiva (opened on the 31st of March 2022) is included in the standing portfolio.
2) Citycon presents alternative performance measures according to the European Securities and Markets Authority (ESMA) guidelines. More information is presented in Basis of Preparation and Accounting Policies in the notes to the accounts.
3) The key figure includes hybrid bond coupons and amortized fees.
4) Change from previous year (comparable exchange rates). Change-% is calculated from exact figures.
| Citycon Group key figures 1) | Q3/2023 | Q3/2022 | % | FX Adjusted Q3/2022 |
FX Adjusted % 2) |
||
| Net rental income | MEUR | 48.4 | 50.6 | -4.4 % | 47.7 | 1.4 % | |
| Like-for-like net rental income development |
% | 7.0 % | 3.4 % | - | - | - | |
| Direct operating profit 3) | MEUR | 42.7 | 43.7 | -2.2 % | 41.1 | 4.0 % | |
| IFRS Earnings per share (basic) 4) | EUR | -0.32 | 0.09 | - | 0.07 | - | |
| Fair value of investment properties | MEUR | 3990.3 | 4094.3 | -2.5 % | - | - | |
| Loan to Value (LTV) 3) | % | 43.9 | 41.7 | 5.3 % | - | - | |
| EPRA based key figures 3) | |||||||
| EPRA Earnings | MEUR | 29.1 | 29.8 | -2.6 % | 27.6 | 5.3 % | |
| Adjusted EPRA Earnings 5) | MEUR | 21.8 | 22.1 | -1.3 % | 19.9 | 9.7 % | |
| EPRA Earnings per share (basic) | EUR | 0.173 | 0.177 | -2.6 % | 0.164 | 5.3 % | |
| Adjusted EPRA Earnings per share (basic) 5) | EUR | 0.130 | 0.132 | -1.3 % | 0.118 | 9.7 % | |
| EPRA NRV per share 6) | EUR | 10.43 | 11.68 | -10.7 % | - | - | |
| Q1-Q3 /2023 |
Q1-Q3 /2022 |
% | FX Adjusted Q1-Q3/2022 |
FX Adjusted % 2) |
Q1-Q4/2022 | ||
| Net rental income | MEUR | 145.1 | 152.4 | -4.8 % | 143.6 | 1.0 % | 203.6 |
| Like-for-like net rental income development |
% | 6.9 % | 5.2 % | - | - | - | 6.6 % |
| Direct operating profit 3) | MEUR | 123.1 | 130.1 | -5.4 % | 122.3 | 0.7 % | 175.2 |
| IFRS Earnings per share (basic) 4) | EUR | 0.18 | 0.35 | -48.7 % | 0.32 | -44.0 % | -0.15 |
| Fair value of investment properties | MEUR | 3990.3 | 4094.3 | -2.5 % | - | - | 4040.1 |
| Loan to Value (LTV) 3) | % | 43.9 | 41.7 | 5.3 % | - | - | 41.4 |
| EPRA based key figures 3) | |||||||
| EPRA Earnings | MEUR | 80.9 | 90.1 | -10.2 % | 84.0 | -3.7 % | 122.6 |
| Adjusted EPRA Earnings 5) | MEUR | 59.1 | 67.3 | -12.1 % | 61.2 | -3.3 % | 92.1 |
| EPRA Earnings per share (basic) | EUR | 0.482 | 0.536 | -10.2 % | 0.500 | -3.7 % | 0.730 |
| Adjusted EPRA Earnings per share (basic) 5) | EUR | 0.352 | 0.400 | -12.1 % | 0.364 | -3.3 % | 0.548 |
| EPRA NRV per share 6) | EUR | 10.43 | 11.68 | -10.7 % | - | - | 11.01 |
1) The numbers include the sale of four investments properties during the previous year.
2) Change from previous year (comparable exchange rates). Change-% is calculated from exact figures.
3) Citycon presents alternative performance measures according to the European Securities and Markets Authority (ESMA) guidelines. More information is presented in Basis of Preparation and Accounting Policies in the notes to the accounts.
4) The key figure includes hybrid bond coupons, amortized fees and gains and expenses on hybrid bond repayments.
5) The key figure includes hybrid bond coupons and amortized fees.
6) The effect of currency rates to EPRA NRV/share was EUR -0.35.
CEO F. SCOTT BALL:
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.
OUTLOOK FOR THE YEAR 2023 (specified)
| Current outlook for 2023with year-end 2022 FX rates | Previous outlook for 2023with year-end 2022 FX rates | Projected negative FX impact for FY2023 |
||
| Direct operating profit | MEUR | 174–182 | 174–192 | -10 |
| EPRA Earnings per share (basic) | EUR | 0.69–0.78 | 0.69–0.81 | -0.08 |
| Adjusted EPRA Earnings per share (basic) | EUR | 0.51–0.60 | 0.51–0.63 | -0.08 |
The outlook assumes that there are no major changes in macroeconomic factors and that there will not be another wave of COVID-19 with restrictions resulting in significant store closures and no major disruptions from the war in Ukraine. These estimates are based on the existing property portfolio as well as year-end 2022 estimates of inflation, EUR–SEK and EUR–NOK exchange rates, and interest rates.
Given exchange rates have recently been subject to extraordinary volatility, estimated FX impact for the full year 2023 is provided as an additional information for further transparency and clarification. Potential negative FX impact for FY2023 is based on the assumption that EUR–SEK and EUR–NOK exchange rates stay at the level of September 2023.
AUDIOCAST
Citycon's investor, analyst and press conference call and live audiocasting will be held on Thursday, 2 November 2023 at 10 am EET. The audiocast can be participated by calling in and following live at this website: https://citycon.videosync.fi/q3-2023
Questions for the management can be presented by phone. To ask questions, join the teleconference by registering on the following link: http://palvelu.flik.fi/teleconference/?id=10010529
After the registration you will be provided with phone numbers and a conference ID to access the conference. To ask a question, press *5 on your telephone keypad to enter the queue.
The audiocast will be recorded and it will be available afterwards on Citycon’s website.
CITYCON OYJ
For further information, please contact:
Bret McLeod
Chief Financial Officer
Tel. +46 73 326 8455
[email protected]
Sakari Järvelä
VP, Corporate Finance and Investor Relations
Telephone +358 50 387 8180
[email protected]
Citycon is a leading owner, manager and developer of mixed-use real estate featuring modern, necessity-based retail with residential, office and municipal service spaces that enhance the communities in which they operate. Citycon is committed to sustainable property management in the Nordic region with assets that total approximately EUR 4.2 billion. Our centres are located in urban hubs in the heart of vibrant communities with direct connections to public transport and anchored by grocery, healthcare and other services that cater to the everyday needs of customers.
Citycon has investment-grade credit rating from Standard & Poor's (BBB-). Citycon’s shares are listed on Nasdaq Helsinki Ltd.
www.citycon.com