Citycon Oyj (CTY1S) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Citycon's Fourth Quarter and Full Year '24 Results Audiocast. My name is Anni Torkko, and I work as the Investor Relations Manager here at Citycon. Last night, we published our full year 2024 financial results, and I would like to direct you to the Investor Relations section of our website where you will find all results materials. Today, together with me in the call, I have our Interim CEO, Mr. Scott Ball; and our CFO, Mr. Eero Sihvonen. We will start by Scott going through our business and operational highlights. And after that, Eero will go through our financial results. After the presentation, we will open -- we will be opening the line for questions from the audience. Please, Scott?

Thanks, Anni. Good morning, everyone. Thank you for attending our full year 2024 financial results call. Citycon enjoyed strong growth in its operational business in '24, posting EUR 184 million in direct operating profit. On the back of this strong performance, total direct operating profit grew by 12% for the year, adjusted EPRA earnings by 12.1% and total net rental income by 10.3%, all measured with comparable FX compared to the same period 2023. Excluding divested assets and acquisitions like-for-like net rental income grew 4.6% compared to the same period in 2023 in comparable FX. These results are within the Q3 guidance with adjusted EPRA EPS slightly higher than guidance. Demand for space in our properties remains strong. The retail occupancy rate increased 20 basis points over the prior quarter to 95.3% and average rents increased 4.6% to EUR 25 per square meter. The company signed over 175,000 square meters of leases during 2024, a 33% increase over the 132,000 square meters leased in 2023. New tenant openings included a 7,300 square meter Prisma hypermarket in Myyrmanni, a 3,200 square meter Selver grocery store in Rocca al Mare, an 1,800 square meter fitness gym also at Rocca and the first Nike concept store in Finland at Iso Omena. In December, Citycon announced that it had signed a lease agreement with Terveystalo for an over 4,000 square meter medical center hospital in Trio. This further reinforces our tenant mix, which is over 20% grocery and 11% municipal services and health care. As noted in prior calls, the tenant portfolio is 82% non-fashion oriented. These large new deals further improve the strong credit profile of our tenant base and the quality of our grocery, municipal-anchored urban hubs and resulted in a rent collection rate of 99%. In 2024, Citycon completed important measures to restructure its operations, reduce expenses and improve its balance sheet. Actions to reduce costs included the outsourcing of accounting and decentralization of day-to-day decision-making to the individual countries. This includes all operations as well as our leasing efforts, which will be directed at the country level. There are new managing directors in place to drive the business for their respective countries, and each country also has a separate Board of Directors made up of Citycon Board members and senior management to provide oversight. These actions completed in 2024 provide for a reduction in G&A overhead to approximately EUR 23 million for 2025 onwards. Citycon also issued 2 new bonds during the year with outsized demand from the market as the bonds were 7x and 10x oversubscribed and further improved the debt maturity profile. The company also made the decision to suspend dividend payments and repay short-term debt to push out the average maturity schedule. In addition, the company significantly reduced capital expenditures for 2024 and planned further reductions in capital expenditures for 2025 amount to approximately EUR 21 million. Earlier this month, Citycon continued the process to delever and repaid EUR 150 million of its secured EUR 250 million term loan facility. The expansion in yields impacted the valuation of the portfolio during 2024, which was partially offset by realized rent growth occurring in our assets, resulting in an increase in the market rents used in the valuation models within all of our main markets. For the year, the book value of our assets decreased by EUR 74.6 million. As interest rates continue to decline, spreads should tighten, which should positively impact valuations for 2025. Eero will provide more detail on his financial review later on the call. As of January 1, the company had EUR 770 million of liquidity. Given the strong liquidity position, we are pacing asset sales in a manner that allows us to effectively deploy the cash generated. For 2024, we had asset disposals of EUR 354 million with proceeds continuing to be used to repay debt. Total divestments as of year-end 2024 reached EUR 475 million since the publication of our divestment target, resulting in a 50% completion of that EUR 950 million target by 2026. We anticipate another EUR 250 million divestments through 2025 and intend to hit our full divestment target in 2026. As we begin 2025, the company's operational results are among some of the best within the peer group. However, there is still room to further accelerate rent growth. The company's occupancy cost ratio is one of the lowest in the industry at 9.4%, and our tenants continue to experience sales growth, which provides Citycon ample headroom for compounding rent growth. In addition, our country team operating model is up and operating with separate Board oversight for each country. Taken together, these factors give us confidence that 2025 results will continue to build on the strong performance in 2024 and is reflected in our guidance. As a result, the guidance for 2025 EPRA EPS is in the range of EUR 0.41 to EUR 0.53 and EPRA EPS excluding hybrid interest is EUR 0.60 to EUR 0.72. Lastly, I want to welcome Mr. Oleg Zaslavsky to Citycon as the new CEO starting on the 1st of March. As a professional with 20 years of experience in the real estate sector, I am confident that he will bring fresh eyes and valuable expertise to Citycon and lead the company towards even greater financial and operational results. I, along with the rest of the Board of Directors, will be supporting Oleg during the transition period and moving forward. I want to also extend my thanks to everyone on the Citycon team for their hard work this past year. With that, I'd like to hand the call over to Eero to provide a financial overview.

Thank you, Scott, and it's great to be back, and I'm very pleased to be speaking to you again. First of all, there is a snapshot of the financials. I will review the main topics very briefly, and then they'll then go more in detail in each of those. Citycon had a strong year operationally. Our net rental income did grow by approximately EUR 20 million or 9.7% to EUR 214.7 million. Our EPRA earnings also improved to EUR 113 million, 3.1% improvement. In per share terms, EPRA EPS, there was a slight reduction due to the increased share count during the year. But also in terms of EPS, solid performance at EUR 0.62 per share. Our EPRA net replacement value, the reduction of that mainly reflects the changes in valuation items, and I will also come back to that in a while. The detailed net rental income bridge, I will mainly concentrate on the bottom part, i.e., the full year picture. And here, you can see that the main component of the increased improved net rental income relates to Kista. We -- early last year, we bought the remaining 50% of Kista in Stockholm, Sweden. And as a result, we fully consolidate the asset. And therefore, Kista net rental income fully is included. We had a positive like-for-like development quite significantly, like EUR 6.6 million, as Scott already mentioned, and redevelopments coming on stream impacted by approximately EUR 3 million. And as mentioned, the total net rental income for the year ended up at EUR 214.7 million. Similar analysis for the EPRA earnings. And as can be seen, net rental income for the full year increased by EUR 20 million -- EUR 20.1 million. We had an increase in financial income and expenses, mainly due to 2 factors. Number one, we also now consolidate the financing costs related to Kista. And even more importantly, of course, like everybody knows, interest costs have been increasing and our average cost of debt is somewhat higher. But nevertheless, the overall performance in terms of EPRA earnings was positive, i.e., we had a gross one from EUR 109.6 million to EUR 113.8 million. Then turning over to valuation. The full year property valuation reduction -- valuation loss was 74.6%, i.e., 1.9% of the total value. And we had a negative valuation in last quarter of EUR 158 million negative, and that had to do mainly with the wider yield requirements, wider so-called cap rates by approximately 20 basis points. And I have noticed already earlier during earlier years that when there are yield movements, the Nordic normally comes after U.K. and Central Europe. So like a stabilization of the yields came to this region a bit later -- or is coming a bit later. But anyway, the overall performance, 1.9% reduction, i.e., EUR 75 million is as mentioned here. Then we have had a lot of attention during '24 and the beginning of '25 in balance sheet improvement and substantial actions have been taken, like Scott already alluded to. We issued a new bond, this EUR 350 million bond, which now matures in 2030. That was issued very successfully in December. And since the end of the year, some actions that can't be seen here yet because they happened after the closing of the full year books, but we have already repaid EUR 150 million of this EUR 250 million term loan that can be seen under '27. We are also contemplating a bond tender of our nearest-term bond, EUR 350 million bond. We are contemplating to buy back or tender EUR 100 million of that bond. And the rationale, the reasons behind all of these activities is naturally to reduce the refinancing concentration that appears between '26 and '27 and to increase and lengthen the average -- the weighted average maturity of our debt portfolio. And we have been very successful in doing that so far. And now the weighted average maturity of our debt portfolio at year-end was 3.4 years. And weighted average interest rate also at the end of the year was 3.6%. The key credit metrics can be seen here, loan-to-value in terms of IFRS, the net debt to EBITDA, which can be seen here 9.3x; interest cover ratio, 2.7x, still ample headroom compared to our covenants and other metrics, but naturally somewhat lower due to the fact that interest rates have increased just like for every other company. And that concludes my part of the presentation. Back to you, Anni.

So we will be opening the line for questions.

[Operator Instructions] The next question comes from Simen Mortensen from DNB Markets.

I have one -- basically 2, 3 questions. One is on the leasing activity. On Page 8 in the report, you're stating the leasing activity with the leases started and ended. As I can look on my figures, it looks that you have 93,000 square meters ended for the year and 50,000 square meters ended in the quarter, representing basically 9.3% and 5.1% of the total gross lettable area, given the size of these terminations or ended leases. Could you please give us a bit of coloring on the leasing activity data here?

I'm sorry, Simen, I'm not sure I follow the question. Could you try that again for me?

The leasing activity on Page 8 in your report, it states that 200,000 square meters in leases started, but number of leases ended is 293,000, a very big gap in the number, difference between the started and ended leases compared to the size of the portfolio. Could you please give us a bit of color on that large deviation in the -- what will then be looked at as net leasing activity?

I think it's really a timing issue. We've got, as mentioned, we leased 175 -- 173,000 square meters of space. Not all of that comes online right away. It happens over a period of months. So I think this is simply an issue of when these leases actually kick in. As you saw, our occupancy actually increased slightly. And...

Yes. So they are not necessarily the same spaces. So it can happen that the impact of disposals or something...

So you've got some centers that are coming in and out of the portfolio at the same time. So there's a lot of moving parts that go into those numbers.

We will review this in detail, and we will answer you, but the overall leasing performance was very good.

Okay. Also in the EPRA earnings, just adjust for some one-offs admin costs and other restructuring costs, it seems, EUR 250 million. Just give us a bit of the impact of those, what to expect going forward? What we will see more of this in the quarters to come? And what accounting line were these cost charges in the P&L?

Yes. First of all, I would like to highlight that in '25, EPRA has changed the definitions of EPRA earnings. And now the standard, if you like, EPRA earnings already is after hybrid interest. So this will be different. So EPRA earnings will be including hybrid coupons and costs. But then the real question that you asked was about the restructuring. So of course, the company had quite substantial restructuring during '24, and we don't expect that to continue on the same level in '25.

Yes. I think, Simen, just to piggyback on that, we dramatically reduced our headcount. I think at the end of last year, we had something like 208 employees or slightly higher than that. And we currently have approximately 150 employees. So quite a significant reduction in the size of the workforce here. Obviously, associated with that are severance costs and other factors, which caused that expense to be higher in 2024. As mentioned in my comments earlier, we anticipate now that we've kind of got that behind us that the run rate for G&A would be something like EUR 23 million for 2025 and moving forward. So closer to about 10% of our NRI is where we're shooting for. Hopefully, that answers your question.

Yes, it does. It actually does. Last question from my side at the moment is the divestment target. If you can give any indication on which market we are looking to divest the most assets? What we have seen has not been that much sold assets in Finland recently. Is that to be expected going forward?

Yes. I think we're going to continue to do what we've done, which is sell "noncore assets." As mentioned, we had a pretty good year. We sold EUR 350 million -- over EUR 350 million in 2024. Those, as you rightfully note, were primarily located in Norway and also we sold a larger asset in Estonia. We do see the markets starting to open up more in Finland and anticipate that we would have a noncore asset in Finland that we are working on currently. And as mentioned, we anticipate based on our pipeline right now, about EUR 250 million of sales this year. We are still on target to hit the larger number, the EUR 950 million that we outlined previously. But I would point out that we are -- because of the strong liquidity position we have currently, we're trying to pace out these sales and be a bit more patient. We still anticipate hitting that in '26. But unlike where we had indicated previously, it would be the beginning of '26. It will be later in the year in '26. Again, we're trying to just be thoughtful about how much cash we're taking in and making sure we have everything lined up to deploy that cash effectively.

The next question comes from Othman El Iraki from Fidelity International.

I have 2 questions more on the fixed income side. Would you consider a new bond this year like you did last year, especially on the card? So that's my first question. And my second question is in regards to your S&P rating, given the pressure you have on the rating, are you still confident that you will be able to protect the investment-grade rating going forward, especially thinking about the ICR metric going forward?

Yes. As you have seen or you heard me saying, we have been very active on the refinancing front, and we are, of course, comparing the bond markets to other markets, including bank term loans and others. So it's likely that we will continue either issuing bonds or raising money via the bank loan markets. But whether we will choose the one or the other is too early to say. But this improvement of balance sheet will continue and the improvement of loan portfolio and extension of loan portfolio will continue. That's for sure. Then about rating, we fulfill most of the S&P metrics for an IG company, and we continue the discussions with them. And the discussions so far have been very constructive. But of course, there are no guarantees that this will be the case in future, but investment-grade ratings are very important to us, and we will continue to defend them. But it's, of course, their decision, whatever they will want to do with the rating. But I would like to remind you that the disposals are particularly conducted to improve the rating and improve the balance sheet. We stopped the dividend payments for '25, thereby strengthening the balance sheet. We have extended the weighted average maturity. We fulfill S&P metrics in weighted average maturity. The ICR, we don't have like an issue currently with the interest cover ratio. We fulfill very nicely the requirements for an IG rating. So this is the overall status.

[Operator Instructions] The next question comes from Robin Usson from Neuberger Berman.

I have a couple of questions for you this morning. First one on your asset disposal target of EUR 250 million for this year. I've noticed that your assets held for sale currently have decreased materially to only EUR 81 million. And actually, I noted in particular that the Swedish shopping centers are not held for sale anymore. So can you just maybe explain this? And then my second question relates to valuation. It's been, I think, 3 years in a row that your internal valuation in Q1 and Q3 -- Q1 to Q3 lead to positive revaluation during the year. And then the one in Q4 that is connected externally lead to a significant negative revaluation. So I'm just curious what isn't working internally? And are you going to try to do something to fix this?

So I will start by which -- or do you want to...

I mean the held for sale, aren't you...

Yes, the held for sale, sorry, yes. I nearly forgot the first question because I was concentrating on the second question. Held for sale reflects now 2 smaller assets. And the held-for-sale definition, it's like an accounting definition, which you need very strictly to go through with the auditors and you need to pass certain tests. And of course, from the company's point of view, it's not even very nice to show assets as held for sale because then it comes quite public and so on and so forth. But this should not be read as an indication that we are disposing less, of course, there are sometimes situations when an asset we don't want to continue the negotiations for whatever reasons or right now, it looks less likely than it looked at that point of time. But still -- and having said that, we have active negotiations. And as far as I can see right now, it looks pretty promising that we will be able to sell assets in accordance with our overall targets.

Yes. I think that's -- I would piggyback on that. That's exactly right. We actually exceeded the target we had set for ourselves in 2024. And given the fact that we see more liquidity in the market and more activity, I'm very confident in the EUR 250 million target that we have identified. And that's how we've kind of planned our year internally.

Yes. And then the other question. So the property markets or the valuation markets were more negative than we forecasted a year ago or the development was more negative, particularly the expansion of yields was bigger, like I said, on average, 20 basis points. And as you know, we do the quarterly valuations more or less ourselves, but we never touched the yields. And the positive valuation in '24 reflects the fact that our cash flows improved and our rents increased. So we were -- in our own valuations, we added those parameters, but the parameters that were updated at the end of the year were the yields. There was some minor adjustment of yields as well, like a widening of yields in Q2, if I remember, but more like a thorough review of the yields happened by the appraisers at year-end. So this is what impacted for '24 that there were in between increases and at the end of the year, a loss.

Yes. I think it just reflects the fact that our market rents continue to grow. And so each quarter, as Eero mentioned, when we do the internal review, we do not look at yields. We only look at the market rent component and then the appraisers opine if yields have moved over a certain level. And so we were relying on that from the appraisers for the first 3 quarters. Q4, the appraisers widen the yields more than we anticipated. However, as Eero mentioned earlier in the call, we seem to be -- in the Nordics here, we seem to be a bit behind the continent in terms of yield movement. And I suspect that the improvement in yields that you're seeing on the continent should find their way to the Nordics in 2025.

And if I can just squeeze in a third question maybe. You're not guiding for direct operating profit this year. Is there a reason why?

Well, we just think that the earnings or earnings per share is the one overall metric that covers it all. So there is no special wisdom otherwise in that. And we are, of course, going forward, also happy to discuss with you operating profit, but we thought that, that's like a more all-encompassing metric to guide markets. And we guide the markets both with and without the hybrid costs because we think that it's fair to show it in 2 ways.

Are you able to comment orally on the expectation of direct operating profit for 2025?

No, we have not done that, and it's probably too early. But overall, I would say that we are positive on '25.

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

I would just like to thank everybody for your time this morning. And I also want to wish the team at Citycon continued success. I'm very bullish on the direction of the company. And as I look at '25 and how we're guiding, it feels very, very positive. So I'm excited to see what the company does. And thank you all again for your time.