NEPI Rockcastle N.V. (NRP) Earnings Call Transcript & Summary

[Audio Gap] results presentation. Please note that this conference is being recorded. [Operator Instructions] Now I invite Alex Morar, CEO NEPI Rockcastle, to begin today's presentation. Thank you.

Good morning, everybody. Hi, this is Alex. Welcome again. We're broadcasting live from once again NEPI Rockcastle Studios. I'm here today with my exec team. First, I want to take an opportunity to welcome Rudi, Rudi Dany to our team. He's our new COO. I'll be presenting alongside with him. And Marek, whom you know, our exec; and Mirela, our CFO. So today's presentation will be structured in 5 sections. First, I'll provide a brief overview of our business. Rudi and Marek will provide details on our operations in this first half of '21. Mirela will cover the finance side of what's happened. And I'll close with a few more details on our corporate governance and way forward. As was said a minute ago, we will take the questions at the end of the presentation, either via phone, which we would prefer or the online written part. So with that, I'll begin our presentation. First, I want to say that it has been a good and recovering half of 2021. We have passed what, in my view, has been the toughest year in 2020 in NEPI Rockcastle's history. I think we have proven once again that our team is very capable of managing any situation. And with this occasion, I want to thank them once again for outstanding performance in the recent past. And hopefully, that will continue. So a few details. We are now in August. I can say that our restrictions or our lockdowns have ended in May. Additional restrictions in relations to cinemas or lockdowns of cinemas have ended in June. As we speak, we are operating all of our GLA, and the only restrictions that remain are a few related to capacity of cinemas and some entertainment or leisure areas. The turnovers of our group have improved significantly in this past few months, especially May and June, so the end of June has seen almost 2019 levels. Consequently, our NOI is picking up, and this is also, of course, linked to our strategy with our tenants. I'm happy to say that the consumer confidence is being restored. More and more people in the CEE are reverting to normal lifestyle, partly thanks to vaccination, partly thanks to the summer. I also want to mention that our strong tenant base, so our continued focus on quality tenants, having a large proportion of our tenants being large internationals, has helped us see through this tough period. And last but very importantly, our valuations have seen a small uptick in H1, which is a very encouraging sign given the broader macroeconomic circumstances of the CEE. With that, I'll go on to some figures. Here, you see the main achievements and figures of H1. We've decided to present this versus H1 2020 as well as H1 2019. So in all our internal discussions, 2019 has become the benchmark figure because 2020, we consider as a one-off or, let's say, unfavorable circumstance. And we are striving to reach 2019 levels, so that we can continue growth from those levels. What you see here, the EUR 17.64 distribution per share, this is still 10% lower than 2020 H1, but the main reason that you'll see a bridge of this calculation later on, the main reason is disposal of the offices. As you can see in the row below, the retail-related NOI actually shows an uptick in actual income collected. Yes, we are still 17% lower than '19, but the trend is very positive. The occupancy rate linked to our tenant quality is just 1% away from 2019 levels and very, very similar to 2020 levels. Keep in mind that H1 2021 has had almost exactly the same number of lockdown days as H1 2020, which is a very interesting figure to see. If you look at the bottom 2 rows of this slide, specifically the left 2 columns, bottom 2 columns or bottom 2 rows, you see that although our footfall is not much greater than H1 2020, which is directly linked to the lockdown days, which were similar, as I said, the turnovers that we achieved in H1 2021 are significantly higher than H1 2020. This will, of course, cascade through to our income levels and to the way we can negotiate with our tenants and all sorts of other financial-related aspects of the business. Moving on to some balance sheet figures. You see that in H1 '21, we are pretty much flat versus December 2020. This is still a significant decrease from December '19, which is mostly accounted for by the office disposal. NAV per share, relatively flat. LTV, I think this is a big achievement of ours, you can see has been maintained very low, very comfortable throughout this crisis period. Our unencumbered assets have actually increased to 91%, which positions us very well for the future, and the debt maturities have been well managed. Yes, that's it on this slide. And I'll move on to this bridge, which -- all I want to point out here is the proportion of the office disposal, how much it actually accounts for in the decrease, about 9.5%. And you have the other details that go from the EUR 19.6 to EUR 17.6, which is our current half year distribution. Moving on to what our current strategy is. What we've been doing today has clearly worked. We are continuing to do that. This is specifically the commitment to our current assets. Yes, we are focused on our asset base, the retail ecosystem, which we are an important part of. The asset management team is doing a good job on this in our view. And Rudi and Marek will speak more on this later. We are restarting some greenfield developments, which I'll talk about a bit later. I also want to highlight that throughout this period, we did not see -- we did not stop any of our committed developments. So we continued work on committed redevelopment, such as Bonarka and Zielona Gora and various CapEx on existing properties. And thirdly, we will, of course, continue to focus on a conservative balance sheet and having the right liquidity for our business, so we can take advantage of opportunities as they arise. Before I hand over to Rudi, I just want to show a couple of slides on the projects that we are starting this year. So you've heard us say this for many years. It's actually been several since we bought this land plot in Promenada. So we will begin finally the construction of Promenada. We have tenant interest. My colleagues will tell you how many leases we actually managed to sign this year. It's impressive. So before the end of the year, we'll start digging in the Promenada land plot. We've already commenced some site works there. We will also begin the greenfield development in Craiova land plot which we acquired a couple of years ago. We will continue our asset rotation strategy, the first step of which was the disposal of a couple of Serbian assets. We still retain the highest growth and most dominant asset over there in Novi Sad which we've built ourselves. And lastly, the residential projects which we have done a lot of work on permitting on in the past year will finally commence sales on September 13. So that's the highlight of new projects and initiatives for this year. And just one last thing to give you the liquidity position intro. So we're sitting on close to half -- sorry, we're sitting on almost EUR 1 billion in liquidity; a lot of cash and a lot of revolving facilities, which make our balance sheet more efficient. Mirela will speak more about it later. And the investment credit rating or the investment grade rating has been maintained, which is a big accomplishment of the company overall. Thank you, and I'll hand over to Rudi.

Thank you, Alex. Thank you. Well, hello, everybody. Well, I'm new to this company, just recently joined. So I will focus more on the major operational capabilities in this presentation. And as Alex said, those are actually quite promising, and we see an increase in turnovers over the last 6 months. Let me switch this, here, which, of course, has an effect, especially also on the support we need to give to tenants and that has decreased over the first half year. And I think the team has been doing a good job here on decreasing this by 25%, has obviously, as you stated already, an impact on our occupancy, very stable, 95.6% and also collection rate is improving. And when we look at actually the insolvencies, well, we haven't seen any major insolvencies and especially on the 20 most important tenants that we're working with, which approximately generate 38% of our total rental income. We haven't seen any major problems so far. So that's a positive sign. Now when we look at it a little bit more into detail on how this evolved over the first 6 months, you will see that the operating GLA that we had actually providing to our customers has been pretty low over these months. It's only 65%, 75%, 66% in the months of January, March and April. And only in February, we had also Poland coming to the market, but only for 1 month. And then I think you see the big jump. And that's what we are seeing as a very positive sign and as Alex stated. So since May, actually, we have 92% of our GLA operating and that has resulted in a turnover versus 2019 of 100%. So it means we are actually -- we have been back to 2019 with our turnovers in May. The difference here of the 92 % to the 100% is what Alex said. We did not open at that time at the very beginning of May, still all the cinemas and our entertainment part was still very heavily restricted or closed. And you see still this pattern that we see all over -- that we saw all over the time in the pandemic that the conversion rate between customers coming to the shopping centers and what they spend is quite enormous. So still 76% in May, spending 100 -- coming back to 100% on turnover, but then improving this in June from 85% to almost 100%, 97% in June. And what we see now and the numbers are not complete, but this trend seems to go forward also now in July. So these are, I think, quite promising numbers and really good results and helping all over in the business. So -- and that is also reflected in the, let's say, retailers' confidence in their own markets. And we see this in the leasing activities. So what I have been focusing on in the first days, obviously, okay, what are actually the expiries that we are coping with within 2021 and are we up to speed? And I think the team has been doing a really good job here. If you look at them, all the expiries they are -- have been already signed for this year, 72% and 81% in total, have been already agreed. Because you could imagine that in a crisis situation like this, there would be tenants that might say they would leave the assets. But as you see here, it's quite a strong leasing activity, and it gives us the confidence that we also, in the near future, will not see vacancy coming up more than we expect. And if you look at the expiry profile in total, when you look at only like 30.5% of rent coming up next year, I think this is really a very solid number, which the team will and we will be able to deal with. And at this moment, I think I'll hand over to Marek because we have quite this very strong confidence of retailers, and that is also reflected in what is my dear colleague now presenting to you. So it has been a pleasure. Thank you.

Good morning, everyone. Thank you, Rudi, and welcome again to the team. I'll take this opportunity to take us through what was our leasing activity in the first half of 2021 and why we stay fairly positive going further. So in this short presentation, we want to stress how the market is reacting and what is the -- what is our interaction with tenants, what is our strategy and what the numbers are. So if we start with the numbers, it's important to notice, we have signed close to 700 lease agreements, and those are new agreements and those are extensions. Now if you compare the numbers to the results of 2019, you would notice that we signed -- if we exclude new developments and refurbishments, which are non-like-for-like properties, then we look at around 250 new agreements signed, which is almost the same number of the leasing activity in 2019 H1, which proves the leasing market is strong. On top of that -- and that's around 140,000 square meters of GLA. So another interesting statistic looking at the vacancy, we started the year looking at retail only with around 5% of vacancy, which was roughly 100,000 square meters of GLA. And as of end of June, the number dropped to 80,000. So we went down from 5% to 4%. And when we reviewed the leasing activity and reviewed what are the targets for the other half of the year, we are -- we strongly believe that we can take the number even further down to around 3%. Of course, the time will show, but we stay fairly positive. And this is backed by the performance we see of our tenants after reopening. Those numbers were strong. Rudi was talking about it, I want to repeat, but that proves the market is strong. We continue -- if we see continuous improvement, the vacancy should drop even further. When we look at our tenants and what we do, you would remember, we always stress and Alex said that, that actually our tenant mix is our biggest selling point. I mean without our tenants, we don't have customers. So we are very active cooperating with tenants. We make sure we team up with those who are leaders in the market and who bring value to our shopping centers. So in this slide, you can see various leasings that happened during the course of first half of the year, and that includes signing Primark for Bonarka, signing Deichmann, HalfPrice, Samsung and some other brands. Some of you had an opportunity to see Bonarka actually in the -- at the beginning of redevelopment where we started redesigning Leroy Merlin part. We can report today all of that space is leased, and we are just fitting out and tenants will gradually open in their shopping center. When we talk about tenants, it's not only working with tenants that create our tenant base, but it's very important for us to bring new tenants to the market. And Primark is a great example. We signed Bonarka, but we are actively discussing other opportunities in the region. You would notice in the slides that we have signed and opened the first store of Sizeer in Bulgaria. We have signed the first store of JD Sports in Romania. We are talking to DM Drogerie in Mammut, in Pieštany but at the same time, because we have this close relation with DM Markt, we get to know tenant is interested in entering Poland. And as we speak, there are negotiations on a few locations in Poland already, and we are very happy to see actually tenants coming -- new tenants coming to the market, but we are very busy cross-border leasing and our teams make sure that we have all the latest information and we know where our tenants want to develop not only in countries but in all of our regions, so that we can benefit from that as a group. You would notice that we talk about new openings, but we talk also about rightsizing and that includes enlarging the units, but that means relocating, getting tenants to smaller locations. What we've observed doing those asset management initiatives is that actually productivity of tenants after those changes measured by turnover per square meter go up. And this is exactly where we want to be. We want to be the landlord for tenants with the latest concept, best performance in top quality properties in the region. So you would notice that Mohito House extended and enlarged their footprint in Alfa Bialystok, we have whole of LPP Group opening in Forum Liberec which was another redevelopment of shopping center. You would notice we've opened at the beginning of July, Helios, which is cinema in Poland. And we got a lot of questions, is it a good time to open cinemas. So just to give you some statistics for in July, this particular cinema in the city of Opole was the eighth in the whole portfolio of Helios and that's over 50 cinemas in the country, which proves that cinemas do have their place in the market, and customers are actually very happy to being able to come back to cinemas. And we actually -- given how much there has been said about entertainment, about cinemas would they survive or not, is the streaming going to kill that business or not, we wanted to bring some more color and statistics since now we are fully opened with entertainment to showcase what the actual numbers are. So when we look at June numbers, and that's quite remarkable when we look at Romanian cinemas' performance, June '21 compared to June '19, we see it's plus 24%. It's enormous number. And now when we look at Bulgaria it is plus 4%, again a great story. There are some countries, of course, where the numbers are negative, and that's Poland, Serbia, Slovakia, but I think it's important to note one thing. In those countries, there were still some restrictions. So it was like 50% of capacity of seats that cinemas could sell. There was no popcorn allowed, no colas allowed, mask-wearing obligation. So if we think that with capacity of 75%, those retailers did minus 4% or minus 9%, respectively, in Poland and Serbia. This still sends a strong message, and we stay fairly positive that entertainment will plays a huge role in us creating strategy going further. You noticed in the slide that there were generally most of the cinemas and entertainment opened end of May. It's important to notice as well when we analyze our footfalls, that entertainment was the first to get locked and the last to reopen. And what we observe with our footfall is that since the restrictions on entertainment are lifted that we get another wave of customers coming back to our shopping centers and seeking entertainment and proper shopping in our retail destinations. This makes us quite comfortable going further. Of course, we all are aware that delta variant is around the corner, but we believe that with vaccination and people actually customers learning to live with virus around, we are well positioned to deliver good results for the whole of 2021. With that being said, I'll hand over to Mirela. Thank you.

Thank you, Marek. Hi, everyone. Thank you for joining our presentation. I will start by presenting financial matters, and then continue to accounting valuation and, of course, address the dividend distribution at the end of this section. So in terms of financial strategy, as you know from the past, the focus of our financial policy has been to maintain adequate liquidity and generally, a safe balance sheet in terms of debt maturity, low LTV and access to funding. We have maintained our BBB credit ratings throughout pandemic period and our LTV and net debt-to-EBITDA are extremely prudent, especially when compared to the ratios that we see with our peers. Over the past years, we have successfully maintained the balance between profitability and prudence by keeping LTV between 28% and 33%. Of course, in June 2020, we had a decrease in asset values that resulted in a temporary LTV increase, but we have successfully reduced LTV and maintained it around 31% since August 2020. We also managed the net debt-to-EBITDA ratio closely. And as you can see from the chart, this is again very prudent. And we have increased the percentage of unencumbered assets from 83% to 91%, showing our commitment to deleveraging our portfolio. So in terms of liquidity, we closed H1 with almost EUR 1 billion in liquidity, and this increased to EUR 1.1 billion at the end of July. So this is split almost evenly between cash and committed revolving facilities. And obviously, the strong liquidity allows us to declare a cash dividend with a 100% payout ratio, again, reconfirming our confidence in the balance sheet. During the first half of the year, we had an intense funding activity, again, proving our excellent access to capital. We extended 2 revolving credit facilities in total amount of EUR 220 million and also added sustainability-linked clauses. And actually, all our RCFs now are sustainability linked and have extension options. We also increased the principle in one of the other revolving facilities by EUR 25 million. So we now have a total of EUR 570 million in RCFs, which are fully available. We concluded a new unsecured loan with the IFC. This was disbursed in July. So you won't see it on the June balance sheet. This marks a very good continuation of our cooperation with the IFC. This actually started in 2017 when they participated in our bond issue. We repaid 5 secured loans in Poland and Slovakia, again, bringing down secured debt ratio to 89% of total debt, and this excludes the revolving facilities, which, as I was saying, are currently fully available. And through all these activities, we cleared all debt maturities until December '22, when we have one secured loan expiry in Slovakia, quite small and then actually, the next largest maturity is in May '23 when we have the first bond, which is due. So as you can see from the chart here, we have completely derisked our debt maturity profile for almost 2 years going forward. On the debt covenants, we have significant headroom across all unsecured debt covenants. These apply to all revolving facilities and also bonds and, more recently, the IFC loan. And to address potential concerns about further asset evaluations, the yield expansion that would lead to a covenant breach is 700 basis points, which we believe is highly unlikely, especially since valuation yields have been very stable during the first half of the year. I will now move to concession accounting. And we have discussed this in the past, the accounting is actually the same as what we have done in June and December 2020. But I will just recap the basics because we have taken a different, much more prudent approach compared to our peers. So like other retail real estate companies, we granted concessions to out tenants to support them throughout the pandemic. And the applicable accounting treatment is driven by IFRS 16, which defines lease modifications as concessions contractually agreed and signed between the parties. We recognized in the income statement for the period, the expected impact of the concessions under negotiation as well as the impact of the government-mandated tenant relief in Poland, and this was done as soon as we had estimates before the lease agenda was signed. The total impact of the discounts for the first 6 months of 2021 is EUR 36.3 million, and this includes the estimates for those concessions where the lease agenda were not yet signed. And of this amount, EUR 36.1 million were recognized as a decrease in income in H1. So this leaves only about EUR 0.2 million to be deferred over approximately 3 years. So in other words, almost the entire impact of the concessions granted in 2021 was recognized in the same period. The total balance of concessions from 2020 and '21, subject to deferrals, is EUR 2.8 million, so quite small. And this will be straight lined over the remaining lease period, which is approximately 3 years. So this is, in any case, quite immaterial to our income statement. We included here on this slide, the breakdown of the tenant concessions by accounting method, and you will see this also in the -- in our financial statements. So the main difference is that concessions imposed by governments, which was the case for Poland, were recognized as a decrease in gross rental income and service charge, while concessions granted voluntarily were expensed and included in partial forgiveness of receivables. I will highlight once again that our accounting treatment is much more prudent compared to our peers, most of which have fully straight-lined the concessions impact and, therefore, they expect a much more significant impact spread over several years. So these differences in accounting treatment should be considered when comparing financial results and operational ratios. So in other words, our 2020 and 2021 ratios are technically more affected by the concessions granted, but we also expect that the ratios for the next years will have a much faster and stronger recovery. On the collection, this is actually one of the most important achievements of our team. There was significant progress made in finalizing tenant negotiations and in achieving this excellent collection rate. We have reached 88% at the end of June, and this increased to 94% in August. And we have also collected 99% of the revenues invoiced in 2020. So as you can see in the chart, the net tenant receivable balance is low and quite in line with previous years. And very important, the net expected credit losses are only around EUR 100,000, which is, again, highly immaterial. On valuation. All properties in the portfolio, as you know, are valued twice a year, and we have shown here the split between the appraisers mandate. And as noted in our financial statements, the value of the property portfolio increased by approximately 0.4% during H1, which is around EUR 25 million. This increase is directly attributable to NOI increases, so the good performance of the properties because yields have been quite stable in the past 6 months. We have here in the table also the variance of the values by country. And you can see that fair value gains apply to most countries in our portfolio. We are, therefore, quite hopeful that this upward valuation trend will continue in the second half of the year. Okay. I will now walk you through a couple of key reconciliations. We have here the EPRA NRV. As you can see, this is largely unchanged compared to December. And there are very small fluctuations caused generally by fair value gains, profit for the period and dividend payment, which are the usual factors. And then we have here a reconciliation between distributable earnings and cash flow from operating activities. And as you can see, the difference is very small. So this is to show that the distribution payment is fully supported by operating cash flows. Okay. Last but not least, probably the most expected slide in the presentation. The dividend declared for the first half of the year corresponds to 100% of the distributable earnings and will be paid in cash around -- actually on 16th September. This is in line with our existing distribution policy of distributing at least 90% of the earnings. And this significant distribution reconfirms the strength of our balance sheet, which is driven by our prudent financial policy. Very important, the LTV is estimated to remain below 33% after the dividend payment. So still very prudent. And I will now hand over to Alex for the final part of the presentation.

So thank you, Mirela, Marek, Rudi. I'll move to the few words on corporate governance. As you have seen in recent announcements, we have appointed George Aase as Chairman. And with this occasion, I would like to thank, on behalf of the team and the company, to Robert Emslie for all this contribution in the past years. We've also appointed 2 independent nonexecutive directors, Ana Maria Mihaescu and Jonathan Lurie and, very importantly, Rudi, Rudiger Dany. As I said at the beginning, he joined us actually at the beginning of July. So that's how he managed to know all those things for the presentation at the beginning, but he's effectively on the Board as of yesterday. The last bit that I want to touch on is the management succession planning, which we've had some calls with you about, and an announcement was put out quite a while ago. Mirela and I have approached the Board to implement a well-structured succession planning program. The Board has already commenced this. I am closely involved, and we are appointing a reputable headhunter that will assist us in this process. I am -- I will contribute to ensure a culture fit of the candidate into our team. And I am very confident that we will maintain the current culture focus on excellence and, most importantly, the strategy that this company has followed to date. The last thing that I want to mention on this is that yes, I remain very aligned with the company given my direct interest in the company's wellbeing and the relationships I've formed here. Moving on to the last and most exciting bits, the way forward, how we see the future. First, I would like to put everything into economic context. As I'm sure you are aware, the CEE is in -- as expected, in a strong position. The economic forecasts have kept getting revised upwards in the last couple of months. Recent numbers out in the last couple of days for the CEE indicate Romania with a growth of around 13% in Q2; Poland, around 11%; Hungary, around 17% or 18%. These are all very encouraging figures and indicative of a strong rebound. As you can see, the unemployment has remained very low throughout our region, while private consumption index is confirming the story that we've been saying for the last several years. Yes, so our countries are growing faster than the rest of Europe. And this is why we believe it's a good strategy to maintain our focus in these countries. On this slide, I just want to touch on the e-commerce aspect. So this is something that we keep very, very close tabs on. The message from this graph is that although the CEE has just as high of Internet usage penetration as Western Europe or other countries, the penetration of e-commerce or rather the degree to which Internet users actually purchase things online is still much lower in the CEE. And as we are working on our omnichannel strategy, we have the opportunity to grow both the online and the off-line together. So NEPI Rockcastle has a unique opportunity to make money out of that market. As far as long-term opportunities or opportunities for long-term growth, we will be focusing on our development pipeline, of which we have in excess of EUR 1 billion we believe in the continuation of our retail strategy as well as mixed-use developments. We, of course, will not be neglecting our existing portfolio, to the contrary we think that strengthening it and continuing to invest in it will ensure even further growth and improving yields on cost. In parallel, we have started an asset recycling strategy. So this is in line with what I've been saying that one of our focuses is to continuously improve the average quality of the portfolio. So that not only means adding things at the front end, but trying to dispose of the slower properties at the rear end. And that has started and will continue. On this slide, development projects, we just want to highlight the things that -- the main things that we are already working on. I mentioned at the beginning, Bonarka, Zielona Gora and the residential project. And the top 2 projects here under permitting, Promenada Bucharest and Craiova, those are under permitting and will commence construction this year. In closing, I would like to leave you with the general outlook. So I think the company is in an excellent position today, primarily due to the very strong customer base that we have attracted in the CEE. It's a clear recovery in terms of footfall and especially turnover, the quality of our assets and the strong balance sheet, which pretty much opens the door to any opportunities that we see fit in our sectors. So the asset management team will focus on growing this NOI. We're going to further develop properties. Omnichannel remains a focus. So we strongly believe that we need to attend to the customers' demand, and the customers are now demanding a multichannel approach to retail. And we have already deployed a number of projects, which are accommodating that. And of course, financial soundness of the business overall, which I think our numbers clearly confirm we have done well, and we will continue to do so as a company. Thank you. And with that, we shall go to the Q&A section.

[Operator Instructions] And we will take our first question from Inna Maslova from Bank Degroof.

I have a couple of questions, if I may. First, on the leasing activity you mentioned in the first half of the year related to renewals and new leases signed. If you could provide any indication on the level of rents, especially compared to previous levels and to the pre-COVID levels, that would be great. And perhaps I'll continue with my additional questions afterwards.

When we're preparing ourselves and thinking what could be the questions. This was one of the top. So thank you for that question. I think that we need to put this a bit into the context. So we are in the bumpy road. So it's not a time to actually maximize the rental income from the tenants because we are a long-term player. It's more about long-term sustainability. So what -- my general comment to that is and that we have had that question asked before is that our -- we have been always known for being very active asset managers. So we work with tenants, and we want to team with those who are top performers. And before COVID, we had tenants who were clearly over rented. OCRs were too high, not sustainable. And we -- whether it's pre-COVID, during COVID, after COVID, we will continue to see those underperformance, which we will have to deal with. But to answer the question directly, we don't -- we are signing or prolonging the agreements at very similar levels to where the leases -- the rentals were before expiry. So that's a good sign. We haven't noticed any major change of contractual details of the agreement. So they are still long-term, euro-denominated with service charges being reconciled, et cetera, et cetera. So we have not seen any changes here. And most importantly, the vacancy is going down, and we see this trend continuing. I hope that answers the question.

Yes, certainly. Ad then an additional question is -- from my side is related to the financial expenses and the cost of debt, given that in H1, there has been an increase, which had a stronger impact on your distributable earnings. In relation to what you would expect to have in the second half and, of course, keeping in mind that last year a green bond was issued at higher coupon levels than previously. If you could comment on the evolution that you would expect in relation to that and especially the cost of debt, that would be great.

On the cost of debt, we expect this to be fairly constant. Also now it's quite similar compared to 2020. On the evolution of financial expenses, indeed, in the first half of the year, we had higher expenses because we maintained quite a high level of liquidity, partly due to the bond last year and also the cost of keeping cash on account. We expect this to improve slightly in the second half of the year because part of the amounts should be invested in developments. So as Alex mentioned during the presentation, we expect to invest more and more in developments and maybe also in acquisitions if there are opportunities.

Okay. Great. And if I may, the last question is related to the portfolio rotation. I believe, Alex, has mentioned that there will be -- or well, we can expect more disposals on the side of the assets that are performing not in line with your standards or are -- yes, there are better opportunities in the market. I appreciate that this is a very sensitive topic to discuss especially from the perspective of competition. But is there any indication you could provide on the kind of the size of assets or the volume that you would be looking to achieve in disposals over the coming years? Anything in relation to that would be great.

Sure. So I'll take this one. We -- as we stand now, we are not, let's say, actively looking to divest from a further material amount of assets. We have one batch ongoing. But as you know, our portfolio, it does not include a lot of these assets that we would like to dispose. So the brief answer, this is not something to the tune of hundreds of millions. It's smaller things like the ones that we have just divested, and it will need to be coupled with the rate at which we reinvest this money either in our development pipeline or our potential acquisitions. Are there other questions on the phone or shall we go to the e-mail ones.

[Operator Instructions]

I suggest we...

And it appears that we do not have any further questions in the queue. I will go ahead and turn it back over to the speakers.

Thank you. Then I will go to the questions that we received by e-mail. The first one is what type of opportunities are you looking to pursue with this conservative balance sheet? And if possibly, please advise on the targeted initial yields on these opportunities?

So the types of opportunities are as per our presentation, development of our existing pipeline as well as acquisition of operating properties. The simple metric is the yields on these properties versus our cost of capital. And of course, we need to find these accretive. Otherwise, we don't do them. So that's the all-encompassing answer.

The second question is what drove the reduction in trade receivables? And will this unwind in the second half of the year? Actually, the trade receivables had a very small increase from EUR 36 million to EUR 43 million. But this EUR 43 million is quite in line with our usual balances. So obviously, we invoice quite a lot. So it's quite difficult to have a zero balance at all times. This balance, however, is very low and reflects the good collection that we had during the period. Then there is a question on CapEx. How much CapEx are you planning to spend for the rest of FY '21? This is a number that I think we've disclosed. It's EUR 110 million.

This includes development CapEx and not maintenance CapEx. Yes.

Yes. Yes. And perhaps what is the normalized CapEx for '22 and '23? I think this is -- it is quite early to tell at the moment. It really depends on how permitting for the other development projects proceeds in the next period. And yes, based on this, we see what we can start. Maybe something for Rudi and Marek. Is the current vacancy rate structural? Or can this be addressed over time?

Let me answer this. I think definitely, there is room for improvement. We have now a very stable occupancy. But obviously, at the moment where you are optimizing, let's say, your portfolio on the quality of assets, you will -- you have an improvement there. And then, of course, it's our leasing activities where we still believe that we have room for improvement here in the future. So getting closer to the 100% is obviously always a very important goal to achieve. But it leads actually to a little bit the other questions I've been reading of how will this evolve now over the second half of the year. And of course, it's very much related to whether we will see additional lockdowns, which we do not necessarily see, but still, you could have restrictions, trading restrictions to our assets. So there, we obviously look into a glass well how this will evolve. But looking at the current situation and the current numbers, I think we can be quite positive. And that is related and that's maybe also answering one of the questions through the concessions to the discounts, and I have said in the presentation that the team, I think, has been doing a great job already on reducing this by 25% for the first half of the year. Now we give this only short term, which means obviously that in May, June, that has dropped most of it. But looking now forward, there is obviously quite a chance to save some of these budget discounts for the rest half of the year. If so, the situation would proceed like it is at the very moment. That's true. And that's what we'll be looking for. But we are cautious also with our budgeting because we simply -- I think none of us really knows what the next autumn and winter will bring. But we are prepared for it and therefore, hopeful. Hope this answers your question also on the discount strategy.

Thank you. Will you consider buying back shares as a means of allocating capital or will most likely prefer a higher payout ratio going forward?

I'll take this one. So the simple answer is that we have better opportunities than buying back our shares at the moment. So given the current balance between cost of capital and yields on our opportunities, it's not likely we'll be buying back shares. And the payout ratio going forward is as we disclosed. So we like to keep it conservative. But given our current liquidity, I think it's adequate to pay out 100%. Next question.

Next one. How material is the risk of substantial write-downs of tenant receivables? Are you expecting to recover the EUR 46 million in tranches or bulks? And can you please provide timing of the potential cash flows? I don't think there is any substantial risk of write-downs here. We had also in the first half of the year, as I was saying, only about EUR 100,000 net movement in the expected credit losses. So we -- as you know, collection is going very, very well. We do expect this to recover slowly over the next period. Then the next question is from [ Toby Lochner ]. Can you please elaborate on your omni [ channel activities ]?