Citycon Oyj

Good morning everyone and welcome to Citicon's third quarter results audio cast. My name is Anni Torkko and I'm working as the investor relations manager here at Citicon. Last night we published our third quarter 2024 interim report and in this audio cast we will present the financial and operational key highlights from the results. The third quarter interim report is available on our website in the investors section. Together with me here in the audio call are our interim CEO, Mr. Scott Ball, and CFO, Mr. Sakari Järvelä. Sakari will start the presentations by going through the key highlights from our financial results. Following that, Scott will present a summary of our operational highlights and go through the financial guidance for full year 2024. After the presentations by Sakari and Scott, there will be a separate Q&A session, and we will open the line for questions from the audience. With that, I pass on to Sakari. Please go ahead.

Thanks, Anni, and great to have you here with us. We start this time with our financial results and are happy to report another operationally and financially solid quarter. Our full net rental income growth was 13.7% in the third quarter and 11.2% year-to-date. Apart from strong operational performance driven by rent indexation, the result was affected by consolidation of Shista Galleria earlier in the year and a couple of larger development projects coming online and starting to produce income. These are namely the renovation of Myrmanni Center in Helsinki and the completion of Litpulaiva residential towers. On like-for-like basis, the net rental income grew 5.2% in the first three quarters of the year. As also discussed in detail in the Q1 and Q2 results presentations, we have been incurring one-time restructuring costs during the year. The total for the first three quarters was 7.2 million euros. In the third quarter, we also recognized a positive one-time contribution in our net financial expense coming from a beneficial hedging transaction which improves the earnings for the quarter. For EPRA earnings, we report 12.1 percent increase for the quarter and 7.8 year-to-date. However, it is important to note that many of the one-time items I mentioned above do affect the direct comparability to last year. On slide four, we show a more detailed breakdown of changes in the net rental income from last year to this year. Here you can see Shista contributing 4 million of net rental income in the third quarter and 8.2 million year-to-date. If we further look at the first three quarters, our like-for-like properties and redevelopment projects together added a total of 8.7 million euros of rental income compared to last year. This is essentially the organic growth coming from our existing asset base. Divestments had a minor negative impact, but this is expected to increase going forward as we keep executing our current divestment pipeline. Taking the effects together, the total increase in NRI before changes in FX was a total of 16.2 million euros year-to-date. Swedish and Norwegian groaners weakened somewhat during the third quarter and also during the year, resulting in a minor negative impact on NRI. Similarly, here on page five, we show the development of EBRA earnings. Over the first three quarters of the year, looking at the lower graph, we saw the 16.2 million positive NRI increase discussed in the previous page. Over the first three quarters, the total G&A costs were 3.1 million euros higher compared to last year. But notably, this includes the already mentioned 7.2 million reorganization and one-time items. So from run rate perspective, at the end of the quarter, we are running our G&A clearly lower compared to last year, working towards reaching our target, which is G&A run rate of 10% of NRI by the end of the year. In terms of net financial expenses, for the first three quarters, we reported 12.9 million increase compared to last year. This is partly due to higher interest rates on the refinance debt, but the majority of the increase is actually due to the consolidation of sister Galleria to our balance sheet. The effect comes from both including the refinance term loan from the JV and from no longer receiving interest income from the shareholder loans granted to the JV. Notably, for Q3, the increase in financial expenses was only €3.3 million, shown in the upper graph, as we benefited from a currency hedge put in place earlier in the year. The valuations of our investment properties benefited from the high cash flow growth as we recorded a further 14.7 million fair value gain in the third quarter. The valuation yields were stable, so the fair value increase follows from higher market rents as rent indexation continued. The total year-to-date change in fair values was 84 million euros, including the positive 46 million impact from Schister Galleria, booked in the first quarter. We did not undertake any major financing transactions during the third quarter of the year, so there are no larger changes in our maturity structure compared to Q2. Our weighted average maturity stood at 2.9 years at the quarter end, and our weighted average interest rate at 3.3%. We have a very strong liquidity position with 508 million total liquidity available, following from a slightly elevated cash position after receiving the sales proceeds from the Treconten divestment at the last day of the quarter. The share of secured loans from our total debt remains relatively low at 26%, so we still have further remaining capacity to access secured loan market if desired. And very importantly, we are retaining our BBB-investment grade rating from Standard & Poor's. As we have consistently communicated, keeping our investment grade rating is a key target for us, and Scott will talk more about what we are doing to safeguard the current rating. Our core credit metrics improved somewhat this quarter, with IFRS LTV standing at 47.5%, slightly down from the previous quarter. Net debt to EBITDA declined by almost one full turn from 11.2 to 10.4, as proceeds from the trade content sale reduced our net debt. The interest cover ratio declined slightly in the quarter, and the average interest rate remained practically flat from the second quarter. This completes my review of the third quarter financial result, so I will now hand over to Scott.

Thank you, Sakari. Good morning, everyone. It's nice to be with you. As Sakari mentioned, operational performance accelerated in Q3, continuing the trend throughout the year, resulting in a 13.7 percent total NRI increase against Q3 2023, and an 11.2% year-to-date total NRI increase with comparable FX rates compared to the previous year. The strong operational result is due in part to an increase in average rent per square meter, which rose 4.1% to 24.7 euros per square meter versus 23.7 euros per square meter last year. These results also include the acquisition of 100% of Shista and the divestments of two assets during the year. Further, retail occupancy grew slightly to 95.1% versus 94.9% last year. Leasing activity in our properties remains strong with 109,000 square meters of new leases signed this year. New major tenants open during the year include two supermarkets, a 7,300 square meter Prisma Grocery in Mermani and a Silver Grocery in Roca Almari, a Gym Fitness in Roca Almari, and the first Nike concept store in the Helsinki suburban area at Iso Omana. On the back of our operational performance, we saw a 14.7 million fair value gain in Q3 and an 84 million fair value gain year-to-date. Our year-to-date EPRA EPS and adjusted EPRA EPS results were 47.6 cents and 38.6 cents, respectively, compared to the previous year. One-time items impacting these figures include the executed divestments at Concentrate and Tricontin, also the 48 million euro share issue, the delayed consolidation of Shista by one month, and the delay of Barkaby-Handover as we are about to divest of this residential property. In addition, we had 7.2 million euros of reorganization costs, including severance. Currencies also impacted the results, but were offset by 2.7 million euros of gain on our hedging of the NOC. Our commitment to the investment-grade credit rating and strengthening the balance sheet remain key priorities for Citicon as we make continued progress growing our funds from operations and deleveraging the company. Our divestment criteria includes selling retail assets that are not in the capital cities, as well as non-retail development and properties where we have maximized the assets value. During the third quarter, the company completed the second divestment of the year at Trikanten in Norway, resulting in year-to-date divestments of 145 million euros. Additionally, in October, Citicon announced that it has signed an agreement to divest of Barkaby in Sweden. Our remaining divestment pipeline contains 400 million euros under LOI or advanced negotiations. As a result, we are confident that we will exceed the previously announced divestment target of 380 million euros by year end and are on track to achieve the 950 million euros as of year end 2025. And as a reminder, divestment proceeds will be used to pay down debt and improve our overall debt metrics. Moving into Q4 2024, we will accelerate the operational actions that we committed to at the beginning of the year, which includes reducing expenses to offset the increase in finance cost. We have completed the consolidation of corporate functions to ESA OMNA and the outsourcing of our accounting. In addition, we are planning to decentralize day-to-day decision making to the country level in order to improve results and to provide full P&L accountability to the teams. We believe pushing decision making closer to our consumer will generate the results we believe our properties are capable of. While our operating performance is consistent with the best performers of our peer group, We believe we have the opportunity to further accelerate this performance. Specifically, our occupancy cost ratios, or OCRs, continue to remain stubbornly low at 9.4%, providing at least 200 basis points of headroom based upon a study that we commissioned from Savills. We believe the pre-mentioned moves will enable us to capture additional rents and make significant headway in increasing these OCRs. These actions will also reduce our corporate overhead and contribute to meeting our targeted run rate GNA of approximately 20 million euros moving into 2025. Lastly, capital expenses have been reduced from 96 million euros to approximately 40 million euros this year. This reduction in capital spending will continue into next year with planned spending to be approximately 20 million euros. As a result of these results and our conviction on the strength of the business, we are raising the bottom end of our guidance range for EPRA EPS and adjusted EPRA EPS. So as a result, our new ranges are EPRA EPS between 61 and 63 cents and adjusted EPRA EPS between 47 and 49 cents. Having spent the last month scrubbing these numbers with our team, I believe this is conservative, but provides room for potential variables over the remainder of the year, including the timing of divestments and possible fluctuations in currencies. In closing, CityCon owns true fortress-like assets that are irreplaceable. Our real estate is located within the largest capital cities and combined with bulletproof merchandising of necessity goods and municipal services. They continue to generate strong performance with room for outsized rent growth given how advanced our divestment pipeline is will allow us to substantially improve our debt metrics as we pay down debt with the proceeds from these sales. Moving forward, we will further solidify our balance sheet while generating more production out of our remaining assets, ultimately positioning us for sustainable growth. Thank you.

If you wish to ask a question, please dial 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial 6 on your telephone keypad. The next question comes from Rob Verde from Green Street. Please go ahead.

Morning chaps, thank you Scott for that and thank you for giving us a bit of detail on how you're looking at the disposals. Could you just flesh out a little bit more for me please? What kind of return hurdles are you looking at for those divestments and also which geographies? If you could just talk a little bit about where you see liquidity. And I'm thinking here is really about Finland and what's happened yesterday with the election. Do you think liquidity is a bit better now than it was? That's number A. And number B, just if you can talk a little bit about how you see the dividend and whether there is scope at all or to maybe reduce that a little bit just to ensure the balance sheet is a little stronger effectively. Thank you.

Thanks, Rob, for the questions. Appreciate it. I think as it relates to, if I miss one, catch me, but as it relates to geographies in terms of dispositions and what we're seeing in terms of liquidity in the marketplace, interestingly, I would say We would have said Norway was the most liquid probably earlier this year. However, we are seeing traction in the other countries, and specifically in Sweden, I would say. I think that, as I noted, we are truly focused on possible divestments of those assets that are not located in the capital cities. We think that given the quality of the assets that we have in the capital cities, and that's where the majority of the value of this company is located, that focusing our time and attention on those is much more important than maybe on the outlying areas. So I think you will see as we move through this pipeline between now and the end of the year, you're going to see assets that kind of fit that criteria as well as not just geography, but also in terms of the types of use. So as you know, I mean, we have built some residential. I think that given what we are seeing as far as liquidity, we might sell some of that residential that we've built and developed. trying to think of the last part. Oh, I think you also asked about hurdle rates. I think we're roughly around 8% is kind of where we look as we're looking at these dispositions. But more importantly, I think it's just really where do we want to spend our time and attention? And we really are focused on these capital city markets and our largest and best assets. And we think, as I mentioned, given the opportunity for outsized rent growth, given the low OCRs, we can really push that primarily through this idea that we push the decision-making back down to the country level and really drive performance that way. I think there was, oh, you also had a question, I believe, on the dividend. I think it's something that the board looks at every quarter. And there's nothing off the table there. This quarter, you saw that we are continuing the dividend that was announced, but we will continue to monitor that. And again, first and foremost, our priority is really maintaining that investment grade rating and doing what we need to do to keep that in place.

Nothing off the table. I love it. Thank you, Scott.

Yep.

The next question comes from Michael from BNP Paribas. Please go ahead.

Hi, guys. Thanks for the call. I have a few questions. So my first one would be the $41.9 million loss you announced this quarter on the sale of assets on the P&L. Is that related to the $112 million disposal which you guys did? Because that would imply a 27% haircut. And is that basically the But you said that sale was in line with book value. Granted, you did some caveats with the building rights. The next one is, I believe in your main market, Finland, there's a campy shopping center has been put on for market, and the sellers are looking at 6.5% to 7% net initial yield. Are you concerned that, given that's like the biggest shopping mall in the country and your asset seems to be at a five, low five handle net initial yield, that the valuations are not properly reflected within that region? The next one I would have is, could you, the residential asset acquisition which you've done, I know it's a forward agreement, I believe it was the 70 million purchase. and you thought you were going to be purchasing and selling in the same time at $60 million. Can you explain how much of that $10 million net loss is going to be cash? Basically, how much has already been prepaid? I'm just kind of curious to know what is your cash outflow from that acquisition and subsequent disposal? um my last um other questions was the fair value gain you reported here today how much of it was from the write-up of the keister galleria purchase you did from your minority person minority partner and then i know you had a board member a new addition and it just got me looking more into your board i think six of your board members have been flagged as independent, but the one of them is, say, Mrs. Popova. I see that she worked at G-City Europe for nine years and she's flagged as independent of the shareholder and the company. I'm just wondering why is that and if she actually owns any interest in, say, G-City, the main shareholder, because I guess that would be helpful. Thank you. Those are my questions.

Okay. Okay. Thank you, Michael. There was a lot of questions there. We'll tackle them in turn, but I'll start from the 41.9 million loss that we booked on equity, and I think it's a couple of important points here. It comes from the Trecanten sale, and it has, of course, many components on it. Part of it is, as we announced at the time of sale, we said it is in line. The gross sales price is close to the book value, excluding building rights. So obviously there was a large development project that we were planning, but we didn't really have the investment hurdle rates right now to justify that, which was one of the key reasons why we decided to sail. And that building right value then, of course, did not realize that was part of it.

So that building rate is 27% of the... of the actual asset.

It's just one part.

Let me finish, please. Yeah, it's just the one part. And also, I mean, we carry goodwill from the purchase of the sector from Norway, i.e. basically our full Norwegian business from 2015. And part of that goodwill, obviously, was allocated to Treconten. So that goodwill got written down as we sold the asset. And then, finally, there were some sort of adjustments on top of the gross purchase price that affected on discount mainly from the deferred capex. as the building was in some need of modernization capex, should we not undertake the development program that we had been planning? So there were some deductions made from the purchase price. So it's a combination of mainly those items. Then you asked on Compi, and I think Scott

Yeah, I would just say on Compy, listen, you know, I don't think it's any great secret that retail in downtown and city center Helsinki has struggled. I would also say that, you know, it's a fashion oriented asset, which is very different from the types of assets we own, which are more grocery anchored, as well as municipal services oriented. And then lastly, you know, geography, our properties are in the best demographics, if you will, of suburban Helsinki. So I'm not concerned that whatever price they're targeting for that specific asset in downtown Helsinki is going to get reflected in our values here.

And then the next you asked about the Barkerbu sale, there we had made a prepayment of close to 7 million euros already two years ago. The actual liquidity impact at the point of sale now is very, very small. It's basically some tenant investments that we had ongoing for the asset before taking it over. But it's not a meaningful effect now, basically just a sale and purchase. And then you asked on the fair value gain on Shista, that was 46 million recognized in Q1.

And lastly, on the board, you're adding your former CFO to the board. And I was just wondering, why is it that one of your board members who you flag as independent shareholder of the company and of the shareholders is someone who worked for GCT Europe for nine years? And just a bit more color to explain why that she is actually truly independent, given the ties to the main shareholder or strong ties.

Yeah, I mean, she worked for G-City many years ago, and then she's well past whatever the cutoff date is. I don't know how many years ago that was, but it's well in excess of whatever the cutoff is for qualifying as independent. Okay. Thank you. Yep.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Shubham Agrawal from BlackRock. Please go ahead.

Hey, hi, thanks for the presentation. I just have one question. If you can just give us a view and additional comment on perpetual bonds in your capital structure, that would be great. Thanks.

Sorry, could you repeat which bonds? Perpetual bonds. Right, right. I mean, there's not really that much we can say right now. I mean, in all honesty, since we did the exchange during Q2, on the first one of the hybrid bonds, we haven't really thought about them that much. I mean, they're a permanent part of our capital structure. We have the next one coming to... a reset in the early part of 26. It's still quite far away, so it's not something that we primarily worry about right now. But I mean, they are an integral part of our capital stack and will remain so.

Yeah, I think I would just add that, you know, we we executed on the hybrid and the exchange as one way to kind of deal with this. And others, you know, we're not alone in terms of how we dealt with this. So there is a path, if that's a path we decide to choose as we move forward.

Yeah. Okay. Thank you.

The next question comes from Neeraj Kumar from Barclays. Please go ahead. Neeraj Kumar Barclays, your line is now unmuted. Please go ahead.

Hello, am I audible?

Hello. Yeah, they're all audible.

Sorry. Yeah, I was saying, with regards to your hybrid cap stack, so as you go through this disposal program, which you're very comfortable to be able to execute, your hybrids are most likely going to be beyond 15% of your total assets, which is the threshold from S&P. So how do you think about those permanent part of your cap stack? Also, it's been long since S&P published last report on you guys and a lot of things have happened since then. So could you please give us a bit more color on how the talks are going on that side of things?

Sure. Thanks for the question. I mean, when it comes to the hybrid stack, I mean, of course, we will review our options within the S&P criteria. As you know, they allow 10 percent reduction per year and 25 percent in the lifetime. if we would see the capital or the hybrid stack becoming inefficient in a way, so part of it losing equity credit, I mean, we would potentially within that range could reduce, but it's not said that we would. I think that's something we would consider and we'll evaluate when the divestments happen. And the second question, sorry, was?

Just a bit more color on how your talks with SNP are going, because a lot has happened since they've published, so any color on when is the next review or anything of that sort?

Right. I mean, we are in frequent dialogue. We expect to talk to them, obviously, after these results. We don't really know when they intend to publish, but last year they published a note in December, so it's possible that they do the same this year, but we don't really know when they intend to say something.

Yeah, I would just say, you know, we spoke with them a few weeks ago, and in that conversation, I think, you know, we shared a bit of information about our divestment pipeline and what was coming down the pike in the near term, and I can't speak for them, but The feedback we got was that they – it provided some level of comfort for them that there is progress being made here and that they will continue to see traction as it relates to our efforts there.

Thank you very much, and good luck for the disposal.

Thank you very much. Appreciate it.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you everybody. We really appreciate you taking the time to follow us. As always, we are available for any questions you may have after the call. Again, I would just reiterate, you know, we have a lot of conviction around where the business is right now, which is why we were comfortable raising the bottom end of our guidance and look forward to chatting with you down the road here. Thank you.