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

Hello, everybody, and welcome to the results presentation of NEPI Rockcastle for the first half year of 2022. First, let me express, I would have preferred to be physically with you this week in Johannesburg and Cape Town. But unfortunately, just before my flight, I was tested COVID positive, so I needed to stay in Europe. But let's go right away into the presentation and start actually with the highlights of this half year 2022. So we saw a very strong recovery of the turnovers of our retailer in the first 6 months. In the first half, you remember by around end of February, most of restrictions, COVID restrictions were lifted and we already saw that our turnovers were coming back to the level of the very good year 2019. In the second quarter, then actually, we were also a little bit surprised by the very positive further turnover growth of our retailers double-digit, which leads at the end by the end of June to an 8% increase of turnovers for the first half of this year in comparison to 2019. Now as a result of this, our operational results, especially our NOI has been growing by 4.3% against the first half of 2019 were main drivers here, obviously, the fact that we didn't need to give any substantial discounts to our retailers in the first place. And secondly, the good turnovers obviously led us well to a higher turnover rent and overage rent. So on the income side, it was a very positive first half year 2022. Vacancy dropped again from 4% to 3.4% in comparison to the end of 2021. Reason here that there is still quite a bullish retailers market, which are ready to come to our regions. We have new retailers, international retailers that are eager to come to Central Eastern Europe as, for example, Primark or a brand like Lefties, which is an Inditex brand. Property valuation due to the fact that our operations went so well were lifted by the appraisers by EUR 59 million. Now in all of this together, of course, leads to the fact that we would like to raise our guidance to 33% growth for until the end of the year. Reason here is that already until half year we are exceeding actually our prognosis, number one; and number two, it's an approximate number because obviously, we also see some risks, and we come to this later until the year-end. Our guidance in the beginning of the year, 24% growth was quite conservative, and we see now here a chance to move this up to 33% as a target for us as a team. Now let me talk about a little bit the key figures. Well, that obviously also relates to better distributable earnings. So we are moving up in comparison to the first half year 2021 by 30% to EUR 0.2283 per share. I think this is already going again into the right direction when we compare this to the first quarter of 2019, our NOI has been increasing to almost EUR 200 million, which is actually a 4.3% plus versus 2019 if we compare this like-for-like because you remember that we disposed the Romanian office buildings during this period of time. Collection rate by the end of June at 96%. But I can tell you, we are now already in August. Obviously, we are now already far above the 97%. So I think, very good collection, which is also related to the fact that our retailers obviously are making good money and are ready to pay their bills. EUR 2,300 per square meter also the efficiency, let's say, per square meter in our portfolio is coming back to the levels and even above of 2019. The only factor that where we are still behind, let's say, the best times is our footfall. So footfall is still 12% below '19, increasing by 30% to 2021, but still not there, we would like it to be. But -- and I think Marek will tell you more about it in a minute. It's actually moving up month by month, and we are closing the gap. From a balance sheet perspective, as said, valuation went up. So our investment property value stands now at EUR 5.9 million. EPRA share, EUR 6.64, also 2% up. And our loan-to-value is still in the very low 30s. So 31.3% with a lot of liquidity on the balance sheet and most of our assets unencumbered, 91%, which gives us a lot of headroom also for the future. The maturity of our debt. Well, you all have noticed that in the beginning of the year, we have refinanced our EUR 500 million green bond. I think at a very good moment leading to the fact that -- we have now 1 year more of maturity. And also, the pricing, obviously, at that moment of time, that was a perfect moment actually to move into the market because I think we have all seen what has happened over the last couple of weeks and months on the interest rate side. And the rest actually is hedged until 2024. So very safe on that side. And our occupancy asset also improved from 96% to 96.6%. Now if we move further, we come to the operational part. And here, I'm glad to hand over to my colleague, Marek Noetzel, who was recently appointed as the Chief Operating Officer of NEPI Rockcastle. Marek, your stage.

Thank you, Rudi. Good morning, everybody. It's as always, both pleasure and privilege to be here. Rudi hope you will get well very soon. And it's a pleasure because we have a very good set of results to present. So it's actually a very good presentation to do. So let me take you through some numbers, and let's break down what H2 -- H1 2022 was for NEPI Rockcastle. Of course, it all starts with turnovers, and we can proudly say that first half of 2022 was very strong. It was 8% over the levels of 2019, which I think is exceptional. But more importantly, if you look at the evolution of turnovers and we moved from Q1, which was very close in terms of turnover to result of 2019, which already was a good sign for us because we need to remember Q1 was in 2022 was still a period where we had some restrictions. We didn't have a full lockdown, but in various geographies, we had to wear masks indoor, leisure elements were closed in Slovakia, we had to show the proof of vaccination, et cetera, et cetera. So the footfalls lagged behind and yet we did manage to get to minus 1 percentage. But once the restrictions were lifted, you can see how nice it jumped to plus 16% Q2 2022 to Q2 in 2019. Even if you adjust for inflation, this is above inflationary environment, which is very good and sets the tone hopefully for the future. And on average, this is plus 8%. And Q2 actually being 16% over Q2 2019 is the best quarter in terms of operations, turnovers of our tenancy and our history because 2019 was the best retail year in CEE. So it is a very high benchmark and we are above that bar. Looking at some statistics to break it down and show you where the growth is coming from. As Rudi mentioned, the footfall, which is represented by the orange bar, it's slowly but surely catching up with the green one, which represents 2019 footfall. So we are not quite there yet. But if we look at the jump from minus 24% January to January, to close to minus 7% in June and July because we do have numbers for July, that we can see it gradually coming to where it should be, which is 19%. At the same time, the turnover, they have reached 2019 levels in February. And since then, we are very high above 2019 benchmark, which is very good information. And this is June cut off, but the data we got for July for about 65% of reporting turnovers show the growth July 2022 to July 2019 in the range of 20%, still very strong month. We still need to collect the data for the rest of our portfolio, of course, but we expect that month to be as well above 19%. And looking at the footfall, we believe we entered Q3 very strongly. And on top of that, it's very important to see how the basket increased. I mean, we are, as you can see, 27% above 2019 levels. Again, even if you adjust for inflation, this is a huge jump with fewer customers, we do much better turnovers. So adding each million of visitors with that basket increase will add a lot of new turnover to our tenants. So we are very optimistic looking forward. Of course, the question is what happens in July, August and until the end of the year, we all know the winter is coming to Europe and it's going to -- the utilities go up, the interest rates go up. So naturally, one would expect that disposable income of our customers will decrease. But at the same time, we need to remember that as per the latest statistics in CEE, the indexation of wages or the increase of wages is similar to the inflation. So actually, the disposable income is not eaten by inflation. It may change, may not, but so far, this has been the case. The reason for that is that the labor market is very strong. We still record the lowest ever unemployment in the region we operate in. So actually, this is driving the inflation of employment cost. If you add on top of that the policy of our governments, which aim on kind of setting of the -- or helping the customers with their utilities prices by capping the price of the gas or actually subsidizing the cost of electricity, heating and gas that should help as well to maintain the disposable income and the footfall in our shopping centers. Last but not least, Polish government, again, been very proactive. You might have heard they have introduced the law by which each person with the mortgage in Polish [indiscernible] can apply for 4 months interest rate and capital rate free period 4 months this year and 4 months next year. I mean for the banking sector, it's a huge problem because that means [ EUR 30 ] billion , that's huge. But that means that money stays with customers some of them smarter, they probably will pay back the debt. But some of them will not, and they will -- well, what can they do with the cash, saving the bank or they will go for shopping. We don't know. But what we do know is that there is some fiscal stimulus to offset the effect of higher cost of living. How would that translate into our operations, Hard to say. But definitely, we should not only look at the cost part of our leading, but as well what our governments are doing to support customers going further. And if you think about elections next year in Poland, et cetera, then you can connect all the dots. When we break down the turnover per category, I think this is a very interesting slide. What it shows is the difference between H1 '21 versus '19. This is the bar. All of them in negative territory, whereas this side shows '22 say, dark bars show the difference between '22 and '19. You can see all the categories are positive in 2022 except for entertainment and fashion, but very importantly, fashion is almost where it was in 2019, and fashion represents as much as 45% of the reported turnover. So we can see this tenants are back to good shape and we can see improvement month after month. And when we speak about entertainment, this is very important because it was minus 73%. You would all remember entertainment was the first to lock down and the last to reopen. So these guys really went through tough times. They were at minus 73%, and they are now at minus 17%. And if you look at Q2 only, the same category, it's minus 6.5%. So we can see how quickly it is catching up and movies and rest of brands are really performing very well, which, again, makes us very happy because we can see there is none of these categories that would be a headache for us. They're all healthy, having good business, some challenges ahead, but we'll manage them, as we always do. Now looking at leasing. Rudi mentioned leasing on group level. This graph shows the leasing activity and our EPRA retail vacancy. You can see the gradually improving from over 4% to as low as 3.2%. And we can see looking at what we have in negotiations that it should decrease further. So hopefully, we can report even better results at the end of the year. And I think it's not as important. I mean, how many leases we have signed, but what is important is that by midyear, we have signed 70% of leases expiring in 2022. And as we speak today, it's about 80%. So 80% of expiring leases has been already signed. At the beginning of the year, it was 7.4% of gross income. We are now down to 2.2% that we need to still sign by the end of the year. But again, we see no risks on delivering as budgeted. Half of the leases are renewals, half our new leases. And I think, again, this is the statistic which proves how active our teams are in not simply prolonging the agreements as they are, but actually finding for better, smarter, more efficient solution by replacing tenants, rightsizing them, merging the units, changing the tenant mix so that we keep on being competitive. The tenant mix is attractive and we focus on tenants who are the best-in-class and they have the best sales densities. So that it then translates into our NOIs. Our retail environment is stable. I mean looking at top 9, 10 tenants, these are all corporates, international, and we do a lot of transactions with them as we speak. But even if we sum all of them, they represent only 24.3%. And none of them actually is in any difficulty. I mean, if you extend the list further, you will see these are healthy set of tenants. So we are very happy to host them and the occupancy cost ratio, we are close to where we were in 2019. The number for H1 2022 is 13.3% versus whole year '19 11.9%, but -- of course, H1 are historically a bit weaker in terms of performance, or should we annualize that number, should we get the turnover that we historically do in H2, 13.3% should drop to somewhere around 12%, which is very healthy statistic. And again, composition of our tenants, this hasn't historically changed. It has always been Type A, Type B international tenants. And as you will see on the following slides, we keep on developing them and with them in our geography. When it comes to agreements as they are, there are lots of questions about have agreements changed? No, they haven't strategically changed their all bankable, investable. They are all in euros, triple-net et cetera, et cetera. So there was no change. We haven't seen the change through pandemic and now we keep on signing same agreements. What has changed is that tenants and landlords are interested to not necessarily sign anything more than 10 years because retail market is changing so much that we end up sometimes locked for too long with tenants who no longer perform. We would wish them to. So it gives us a bit more flexibility. And when it comes to expiry profile, as I said, 80% of the work done, so 2.2% to be done. Next 3 years, we're going to be busy, but we are busy every year. It's never walk in the park. But looking at the negotiations as they go and the mood and the operations of our tenants, we don't really see any material risk on not delivering what we promised to do. Our leasing status. I mean we are always proud to say how much we do with the leading retailers in the world. So we, again, opened beautiful Zara. We signed more half-price reserves of this world. We continue to do so. We have strengthened our leasing capabilities. We have newly named Leasing Director for West portfolio. And all of that is aimed at having constant contact with the tenants. So we need to make sure that none of the negotiations in one of the country gets unnoticed by the leasing manager in the country. We always need to communicate, and I think we are successful so far, all those negotiations are being held on, say, HQ level so we can do really good deals, and we can transact quickly because having -- managing over 50 shopping centers makes us relevant to all the tenants. And you can see that in the leasing progress as we go. And again, you had very proud to, for example, the first footlocker in Romania, JD entered the market, and we were one of the first that JD Sports spoken to opening again Zara, et cetera, will open Verizon Primark in Bonarka and we are close to agree on another deal and more to come. So it's a healthy set of tenants, but not only that, we can see new brands coming. You might have heard about Uniqlo operating in Warsaw, and they will do more, which is a long-weighted entry to the market. And more importantly, it was based on their e-commerce experience in Poland. So what they say is that they saw so much e-commerce going to Poland through the platform that they said we need to open a physical store because it makes all the sense. This is kind of an answer to the question how e-commerce and online and off-line worlds work together. This is exactly how the decisions are made, and we are very happy to see them. So we can see more new tenants to the market, which is always good because that helps us to keep the tenant mix refreshed and always competitive. And let me look at the story in City Park Zara. That's what you want to do, this kind of quality of the stores in portfolio. So you are very busy pushing our tenants to reinvent themselves not just put some CapEx, renovate and get the best you can. And this is like an amazing story. I mean, just mind blowing. Now when it comes to our omnichannel, we always communicated the initiatives we do. So without repeating ourselves maybe a bit of an update. Last time, we have informed you about launching our omnichannel spot loyalty app. It's now running in 50% of our shopping centers and very soon, 100% will be covered. We are implementing as we speak. So far, it has been very successful. You can see 400,000 receipts registered in the application, and that recorded almost EUR 70 million sales. And of course, this is a very important tool because that keeps our customers loyal to us. But of course, with that comes as well, a lot of the data that we can gather and then the more data we have about our customers the better because, of course, we can make all our decisions on marketing, on leasing based on the data we have, knowing what our clients are looking for, and we are closer to our customers than ever before. We as well launched our online marketplace. Again, this is -- in Bulgaria for now, we have intentions to develop it further. It's very interesting to see how it develops. It's a learning curve for us and we learn a lot, and it's again about getting the data and made, let's say, more scientific-driven decision than just intuition. Intuition is important, but a little bit of data helps a lot. And we will continue developing those tools because we can see that at not high cost and a little bit of dedication, there is a lot of data that we can make a very good use of. So stay tuned and the more is to come. And with that being said, I'm happy to introduce Eliza to the stage. Eliza Predoiu, stage is yours. Thank you.

Thank you, Marek. Good morning, everybody. For those of you that may not know me, I'm Eliza Predoiu, the CFO of NEPI Rockcastle since the beginning of the year. And today, I will speak about 3 main topics in my final section. My main one is going to be about distributable earnings and dividends. Because in dividend, we concentrate everything that we do in our business. And as Rudiger and Marek mentioned earlier, we have a very good set of results that we are very proud to share today with you. My second topic is going to be about liquidity because liquidity provides for the safety of our operations. And for the trust that we are a good business that is what we invest in because this is one of the reasons for which we are here to build a trust in our business that is in good hands with us. My third topic is going to be about the property valuation and the upward valuation trend that we enjoyed in the last 12 months, starting from the second part of 2021 and up until now. Let me show you the most important chart and slide of the day, which relates to the distributable earnings. And you will see a simple graph, showing how we progressed element by element from H1 2021 distributable earnings to the current period distributable earnings. So let me go a bit into details. In -- is it working? Yes, it does. In H1 2021, we distributed EUR 0.1764 dividend. Then in terms of operations, this element contributed now with 40.7% growth relative to H1 2021. We extracted more value from our properties, plus we didn't grant concessions to the tenants. There is also a small element of growth coming from the improvement of the funding terms from the bond issue that we had at the beginning of the year and that Rudiger mentioned. And then we have this element of decrease of 11.7%, which comes from 2 factors: corporate income taxes and administrative expenses. And I will give a bit more details of any of the 2 factors. First, the corporate income taxes. Now the majority of our portfolio matured. The financial losses that we incurred at the beginning of the development stages have been utilized. So most of our properties now reached stable taxable profits. We became a business profitable, not only from the distribution point of view, but also from the taxable point of view. And this is the reason for which we have higher corporate income taxes, and this is how it's going to stay for the future. Then in the administrative expenses is the second factor contributed to this element of decrease, we incurred some structural changes. We are now living -- we moved from some COVID-19 hard times to some inflationary pressures hard times, and the labor cost increases. We needed to adapt so that to preserve our competitive advantage. Then we need to strengthen and to build some other capabilities in the company in the area of ESG, procurement and digital and technology, so that to sharpen our profile and to become competitive and stay competitive in the market. And third, our business is going through a transformation in the way that we internalized the property management and other support functions in 40% of our portfolio generating a bit more administrative expenses but optimizing the NOI because this extra administrative expenses are going to overcompensate for third-party fees that are now rendering the property management in 40% of our portfolio. So long story short, the story says that this year, adding the growth points together with the decreased points, we are able to distribute to you 29.4% distributable earnings higher than in H1 2021. I will move to my other slide, which doesn't bring an element of novelty but it benchmarks the distributable earnings relative to H1 2019. This slide is important for us because 2019 was our best year. And we, as management, we compare on how we progress relative to our best year. 2019 is our best performance year. And there are also some elements of growth and some elements of minus that I will discuss about. In terms of operation, we managed to bridge the gap relative to 2019, and this is shown here in the first part of the chart. There have been, nevertheless, some decisions that contributed to weather very well the COVID-19 pandemic. And I will discuss about this decision that has now contributed to 14.6% decrease in the distributable earnings relative to 2019. So what we decided to do was to keep a higher level of liquidity during these 2 years of COVID. And what the actions have been was that we disposed of the Romanian office portfolio and the Serbian properties, and we didn't reinvest the money. So that to keep higher level of liquidity. We issued the bond in the middle of the pandemic in June 2020, and that bond was issued at good commercial price in the context but significantly higher than what we used to have in our portfolio. Third, in the same COVID-19 pandemic times, we had listed securities that became very volatile and didn't generate any kind of dividend, and we also decided to dispose of them. So these 3 measures together contributed to weather very well and wisely the COVID-19 pandemic times, nevertheless, dragging the dividend by [ 14.6 ]. And the other element of decrease that I also mentioned earlier, relates to the corporate income taxes and the administrative expenses. So indeed, we are 21% lower than '19. We are bridging the gap in the area of the operation. And we are also envisaging to bridge the gap in the medium term in all the other elements that I mentioned before. So in short, the good news is that we distribute 29.4% higher distributable earnings relative to last year and is going to have a 100% payout with the calendar to be communicated to you as soon as we will relocate to Netherlands. I will take also this opportunity to thank you for the support of the -- on the relocation of our parent company from the Isle of Man to the Netherlands. I will move to my second topic that I announced at the beginning, which relates to liquidity and funding. And I want to highlight where we stand in relation to the 3 pillars of the finance strategy. Our LTV is still prudent at 31.3%, below our threshold of 35%. The liquidity is strong at EUR 1.1 billion. We have EUR 450 million in cash and the revolving facility of over EUR 600 million. And we are a BBB investment-grade credit rating company by S&P and Fitch, with S&P reaffirming their rating this year. The remaining debt term is close to 5 years. And considering the current times, we have a cost of debt of 2.4%, which is going to stay stable for the upcoming 2 years because all the variable interest rate is fully hedged. On the next slide, I have 3 key messages that I want to convey to you. The first one is that at the beginning of the year, we issued that EUR 500 million green bond securing the current year and the upcoming year with no significant debt maturities. Then the majority of our portfolio is unpledged, which will offer us a lot of flexibility in the current times to blend in unsecured with secured funding, so that to make the company grow forward. And third, we maintained the revolving facility that are existing now in the portfolio of EUR 620 million to offer us buffer liquidity and to take advantage of them when the opportunity may arise. In short, after 2 years of COVID, we, NEPI Rockcastle is very safe from a liquidity point of view. Then also linked to the liquidity is the fact that we generate cash flow from operating activities supporting our distributable earnings. We are going to distribute in nominal terms, EUR 139 million. And is everything backed by our operating activities. The difference between the 2 relates to the way in which we account for some expenses relative to the cash settlement and nothing else. As relating to the declaration of dividends, as I mentioned earlier, we will -- I mean we are going to declare it when the relocation is going to be completed with a 100% payout ratio and the necessary announcements are going to follow in the market. This is only to revise and substantiate once again that we are a solvable company with good an income assets and a good, consolidated coverage ratio, this one being the main covenants under our significant unsecured debt. And now I will move to my third topic, which relates to the valuation of the property. We incurred EUR 59 million uplift in our valuation. I will remind you that in 2020, we incurred a significant decrease of EUR 340 million. We recovered EUR 25 million last year. We continue to recover close to EUR 60 million this year, which means that we are 25% in the closing the gap approach. The good news is that the valuation is driven by -- mainly driven by the performance of our property with only a substantial change in the valuation yield of 5 basis points. And the other good news is that these valuations show once again by external parties, how solid our business is and how high-quality property portfolio we have. This is everything on my final section. And as I committed to you in February, I will report twice a year on our ESG approach, which became an important point and the long-term priority on our agenda as Board. We have a few achievements since February up until now that I'm very proud to share with you, and there are also some action points that we envisage to take in the remaining of this year and in 2023. So let me start with the achievements. The first one is in relation to our carbon footprint and the optimization of our energy consumption. We will deploy EUR 37 million in photovoltaic plants. 10 out of them are going to be installed by the end of this year, with the remaining one being installed by the end of 2023. And this is the first achievement. The second one is that we progress with certifying and green certifying our properties, confirming their resource efficiencies. At the end of December '21, we have been a 70% certification. Now we are at 85%, and we envisage to be 100% green certified by the end of this year. The third point is that we improved our Sustainalytics rating from 11.4 last year to 10.5. This equates with almost a negligible ESG risk from the point of view of Sustainalytics. And we are in top 15 companies in our category. So with these 3 achievements in mind, we are looking ahead on defining and establishing a timeline for our decarbonization map. This one is working only on the right side, okay. On strengthening the data collection in relation to ESG and rolling out the renewable energy solutions in our portfolio. What we also did so far is that we strengthened our internal capabilities by having Head of the ESG department, by having a Head of Property Management, by implementing KPIs at the level of the executive members and the operational members related to ESG and by revising the environmental strategy. The key message that I want to leave with you is that ESG is at early stages. We progress in this direction, and we will report to you what are the achievements and the progress that we want to undertake. With that being said, being green today, I will hand it over to Rudiger to tell you about the way forward. Rudiger, over to you. Yes, you are back.

Okay. Very good. Very good. Thank you. Thank you, Eliza. Yes, looking a little bit ahead of where NEPI Rockcastle will move to over time, at least over the next 6 months up to, let's say, 2025. I think first, we need to look a little bit at the macroeconomics. And there, we still see obviously that our region, Central Eastern Europe is still outperforming when it comes to expected private consumption, the rest of Western Europe. What we currently obviously also see that recession is a little bit on the footstep generally in Europe, due to the crisis that we currently see that are upcoming actually in the energy sector to the fact of inflation and obviously having a war next door. And that is also affecting GDP growth of the major countries we are operating in. So growth also in our region has been slowing down a bit, not at the level as it has been expected, let's say, some 3 months ago. That's true. But at the same time, we believe and we see and you can easily compare, let's say, our growth in the first half of the year with the ones of our peers in Western Europe, and I think you will see quite a big difference that showcases one more time how strong actually these emerging markets are and will be also in the near future. But as said, inflation has been, let's say, the next big topic for us after we came out of the COVID crisis. And one has to say that the inflation within the jurisdictions we are operating in, which is the blue line on the lower part of the slide, we are on an average of 13.4%, while the rest of Europe is still somewhere slightly below 10%. So inflation in our regions have been even more aggressive as we have seen it in the rest of Europe. But what are the -- so we were looking at mainly one of the main drivers here and how do they affect actually -- could they affect the purchasing power of our clients and then obviously affect our business. And transportation and then everything around electricity, gas is, other drivers for sure and also food and beverage. So obviously, if our customers have to spend triple as much in this winter to pay their bills, to heat their houses or less than this could had an impact. And that's why we are monitoring this very closely. But as Marek said, so far, our growth of turnover have by far outpaced actually inflation. But let's see how this will evolve over the next couple of months. Looking ahead, of course, what are our some of our targets, we will still leverage and Marek described it in the negotiations with our tenants as well. This very strong position that NEPI Rockcastle has within the region. And there are still a lot of asset management activities that we have budgeted that need to be fulfilled until the end of the year, which will be a driver of our future growth in DPS. Consolidating our base, meaning actually that the M&A market on retail real estate assets is currently, let me say, opening up the last 2 years, there were hardly transactions within Central Eastern Europe. This is currently a little bit in a change mode also obviously has to do with the current market circumstances of rising interest rates. So there are more words now open to discuss. And our M&A team with Anchor heading it is very active at the moment to look at assets that are accretive to our portfolio and that reach, let's say, our quality standards or even above. And I hope we will be able to say more concrete about this in the near future. Delivering on our development pipeline. Yes, with our development pipeline, I think we already paving the way forward to have this company grow. And as you can see, we currently have EUR 665 million on the way, which will contribute in the future for the growth of our NOI and distribution to our investors. And we have categorized it here and those that are already under construction and then the ones where we have already secured the plots, but where we are currently in the permitting and pre-leasing phase to bring these assets to the market. And we should -- this pipeline should be completed actually until Q4 2025 but in different stages. Let me run you through this a little bit more in detail, Promenada, Bucharest, of course, our top class asset in Bucharest where we are currently under construction. We go 7 stories down into the ground in order to do the car park at the very moment. We are in time, in budget currently, we will add, in total, 58,000 square meters of retail and offices to this building, and then we will be close to 100,000 square meters in Sector 1 in Bucharest, which is, by the way, the richest part of town. And it's as well ongoing construction. Let me move over to Promenada, Craiova, the greenfield development in Romania, city of 300,000 inhabitants with very little, let's say, or limited retail offer, where we are currently constructing a 64,000 square meter scheme which is supposed to open by 2023. Now here, what we saw is that -- and we said it before, also Marek explained that the demand of retailers is actually very positive. And we saw this also as well here in Craiova, where we found out that we could not really allocate, let's say, all the demand or the retailers into the 64,000 square meter scheme. And we have just recently decided last week, together with the investment committee that we will spend another EUR 21 million on building a 10,000 square meter retail park right next to the asset on the plot that we have already acquired. And therefore, we are very happy that we can even make this asset stronger within its catchment area with this additional 10,000 square meters. So that's in progress. And we are very confident that we will deliver the project by the end of next year, together with the opening already of the retail park. That's the plan. And for now, we are on track. Now if we move on Bonarka City Center, a redevelopment, you know that we do invest as well a lot into our already operating income-producing assets in order to protect not only protect them, but also to improve actually our NOI situations in these assets. Bonarka is our flagship currently in Poland, where we are very eager to push the asset more into the market, make it and modernize it. And it's a long-term project. It will only end by the Q4 of 2024. Reason here simply is we are -- it's an operation on an open heart because we can only actually do construction works in the nighttime because in the daytime, we keep it free just for trading and to make sure that our tenants are not disturbed during the trading hours. Vulcan Residence, the residence project that we have on the way in Bucharest. We are now in the seventh story actually. So construction is on track on time. We are on budget. When it comes to the sales process, we are as well in budget. So we have sold as many apartments as we thought we would in the beginning. So we are on track here. Obviously, the new situation on interest rates has slowed down a little bit the sales process in comparison to what we saw in the very beginning, but we feel very confident that we will deliver the market -- the project in time and on budget by the end of 2023. Now moving on to those that we have actually in more -- still in the permitting and planning phase -- so Promenada Plovdiv, city, which is the second biggest city in Bulgaria. By the way, our 2 assets, Serdika and Paradise in Sofia, in the capital of Bulgaria are just extremely well performing. So the country is for us, interesting to grow. And this plot here has been acquired years ago is the top plot actually in town. And here, we are currently planning a 57,000 square meter shopping center. We are very close, I think, to the final permitting and I hope. Of course, also, we need to look into construction prices and so forth in the future. But in principle, I think we could start construction here in the beginning of next year if then circumstances are there where we believe they are profitable for us. Galati, I don't know, but most of you most likely know that we already are operating a shopping center, which is totally dominating the town of Galati in Romania, which is in the northern part of the city. And we have acquired a plot in the south part of the city because there was a high demand by retailers for a retail park. So we are currently here in the process of getting the zoning and the permitting for a 30,000 square meter retail part. And actually, we have already like 80% of retailers that agreed terms and would like to move in. So another way for us to grow in the future if we talk about what is the way forward. Galeria Wolomin, so it's not only the big, let's say, investments. It's also taking care of our smaller assets like Wolomin, which is close to the capital of Poland, Warsaw. And actually, when you look at the right-hand side of the picture, that's where naturally, we do an extension. It's not a big extension. It's a EUR 5 million investment where we bring in 3 more tenants. But I think that's just to show that we are taking care of our assets. And if there is potential to grow and if there is demand in the market, we are already here to supply this to our clients. And then I think photovoltaic, that's kind of a new business we have been moving in, if I may say this because it's not only as Eliza mentioned, a EUR 37 million investment into decarbonizing our footprint. It is also quite a profitable business, obviously, looking at current energy prices, that is a combination, actually, on one side, to decarbonize our portfolio, especially here in Romania, but at the same time, to generate additional income for our shareholders. And we are now planning to roll this out across the portfolio, but it's different from country to country because of regulations as an example or weather conditions. So we are now looking into country to country on where can we generate energy ourselves and actually sell this energy out as well. So and a focus for 2022, at least until the year-end, of course, we have now raised our expectation on the DEPS until the end of the year to 33%. That's something that is, of course, for us a target, that's something for the whole team to work hard for. So that's set, and we are confident to get there. Execute on our development pipeline, that's well underway. I have a little doubt that this -- that we will have any hiccups here at least until the end of the year, well, until 2025 until completion, for example, of Promenada, of course, this is still a way to go. But currently, it's on track. Actively looking, as I said, with our M&A team into the market, hopefully, some more news in the future on how we can grow our business but also acquiring additional income. And then we have our ESG strategy and Eliza mentioned it. It becomes a vital part within our thinking. It's not just something to add on because we need to do it because of our regulators. I think we need to have it in our, let's say, NRP blood. And that's what we're implementing now together with our teams, and you saw it that we have also discussed this widely within the company and also make people responsible and adding actually this to their OCRs. And of course, Eliza mentioned it to maintain, let's say, the safety of our balance sheet, I think this will -- has always been, I think, a remarkable work from NEPI Rockcastle, and we don't see here any change to this. We will stay prudent and will guarantee safety for our investors. So I think that's also important in this -- also next turbulent times that we're moving in currently in Europe. And with this, I'm very happy to invite you in the room via your telephone via the webcast to give us some questions and we'll do our very best together with the team to answer those questions. So feel free to come up with questions. Thank you, first of all, for bearing with us listening to us. And now we are happy to answer your questions. Thank you so much.

I think the first question would be for Marek. Can you explain the rental uplifts that you're securing on the lease renewals and the new leases? And then I'll go to the second one.

Sure. I was expecting that as one of the first questions. Yes, I mean, when we talk about the so-called base rental uplift by which we understand same tenant in the same physical unit or different tenant but the same unit physically, we talk of at least the expected indexation over inflation and very often slightly more than that. But I think it's as well very important to understand that, that you might have seen 50% of leasing, actually comes from new leasing, which means that -- and this is actually what is value creating and what enhances our rental uplift because we can see much more growth potential in relocating tenants, rightsizing them, putting new ones. I mean, just prolonging is easy, but there's more to win if we are more active, so to say. But if I were to answer your question straight, that would be inflation plus a little bit on average.

Just a quick question, on the base rent, relative to the OCRs. Would you say that you were under rented on the base rental to start off with? Or you're testing your model for...

As you saw for H1, we are at 13.3% OCR. And if we continue to see the trend line, we should go to around 12%. And to us, anything below 15%, we are on the safe side of the equation, I would say. So you might have say so, but you need to, of course, look per category, per country, per tenant. So you can't say that we are, as a group, under-rented because that would be overstatement. But generally, definitely, we are not over-rented, we need to play with some of the tenants, we need to change them, we need to improve, of course, as always. But generally, we are -- we don't see any material risk over there with any of our tenants.

And then just with regards to the guidance that you've -- the revised guidance that you've given for 2022, you are talking of a softer second half, but you've increased guidance. So how conservative are you in that guidance? Or can you just explain why one is going up, one is going down?

Rudiger, would you like to start, and I will give more color?

Yes. Sure. Sure. No, I think our guidance at the beginning of the year was 24%, was quite conservative. And you have seen what the performance has been now over the first half. And it's foreseeable that we should actually be able to optimize this and get to this 33%. There are obviously risks in the market, which we have tried to, let's say, incorporate into this 33%, as we said, purchasing power inflation, then also our nonrecoverable costs. But we feel confident at the moment that we could reach this approximately 33%. And it has to do also with the fact that, obviously, we had foreseen maybe a longer period of COVID impact. I think, and we all hope, that this part now of crisis is really coming to an end. We don't see at the moment that even though infection rates are still pretty high in Europe, we don't see that governments are actively coming back to measures that are affecting our business. And therefore, and hopefully, this won't be over the next 6 months. But I think with the traction that we currently have, which does not last only until the 30th of June, but as Marek said, we also saw a very good trend now in July and August. It also seems to go in the right direction. And then, of course, you have only a couple of months left to year-end. And if then let's say, obviously, the best months of the year always November, December, if we should then be able there to stabilize, let's say, on the levels of 2019, we should be able to reach this 33% growth. If this answers your question.

Just a question on the possible bankruptcy by Cineworld, which owns, I think, Cinema City. Just a question around the potential impact on your business. How much of your rental there are? And what maybe contingency plans you guys have?

That was question #2 on my list that would be asked today, the big elephant in the room. But the elephant is not that big actually because our exposure to Cinema City because this is the brand they operate in our geography is immaterial because they deliver just below 1.5% of gross income. So it's, of course, in administration now. So we need to see what the future brings. But I think looking per property, and we, of course, looked at each property where we operate with Cinema City, should worse comes to worst, we don't see material risk of not being able to replace the tenant because the market is competitive. I mean, just based on Craiova, we have 3 cinemas who are just queuing there to enter. The market in CEE is still under saturated. So should worse comes to worst, we don't see that as an issue. And secondly, I think it's important to understand that the problems of Cinema City are not originating from, let's say, an operational level because you look at others and you look at our numbers and the figures, the entertainment as such do, this is a very good set of numbers. If you read what Cineworld actually what they have announced, there are some other problems they need to face. And I think in their whole portfolio, actually, CEE portfolio is due in the Crown actually because it's very profitable and has been historically. So we do have plan, of course, if worse comes to worst. But even if we need to close for whatever reason, it's below 1.5% of gross income. So I think it's manageable both, but immaterial as well.

You were working on a last-mile delivery solution out of the shopping centers. How far have you progressed on discovery on how you would implement something like that? And with the cinema space just feed into that to create another opportunity, instead of developing out warehousing space or integrating them into your shopping center, you could use some of the space. I'm trying to get your thinking around that.

I mean, so on the last mile, I think we are in this [indiscernible] Bulgaria. Now when I'm looking at Marius because this is where we exercise, and I can see Marius, who would want to add on that.

So we are in Bulgaria, we are expanding our marketplace project. So we are delivering from the tenants to the customers. So combining the tenants from the shopping centers and delivering to customers. And it's going just well. And on the cinema turning in the logistics, I think it's a matter of opportunity. But generally, cinemas are placed in the shopping center somewhere where it's difficult to access is in the logistics part. So we are thinking about the solutions, but I don't think that cinema themselves as a space could, at the moment, present an opportunity. We could turn it into some other things, maybe not in logistics. But if Marek wants to add...

No. No, I just fully agree on that.

Maybe let me add on to your question that, for us, this entertainment part of cinema is a vital part in general of our branch in [indiscernible] of the entertainment, meaning food and beverage all comes together. I think there will be no replacement in a sense that we would not replace, let's say, a cinema with a cinema. First of all, they are a custom build for cinemas because of the height. And secondly, as I said, it's an important part, an important offer that we give to our clients, the whole entertainment part. So we will definitely, I think, stick to this. And as you can see, this is an industry that went through very harsh times. Now this tenant has problems beyond, let's say, as Marek said, the operational part. They have just been growing too fast, over leveraging themselves and now it's lost the cascade, which made it very expensive for them. So there are other reasons, I think. But even as said, even if this should affect us, we would replace it most likely again with cinemas. And by the way, as this was not totally unexpected because there were already, let's say, rumors in the market, first cause of competitors already reached us for certain locations whether we would consider them. So as Marek said, it's unfortunate. We don't like to see this obviously to have one of our bigger clients to get into this kind of trouble, but we are here to deal with the circumstances, and I have no doubt that our leasing team will take care of it. But let's see now what actually the administrator is planning to do with this company might be, there'll also be a takeover. By the way, the competitors of them have been doing very good business when you look at the numbers. And now we have the new blockbusters coming in autumn. So we also believe that this minus that we still see on turnovers in our entertainment area that we still can catch up until the end of the year to make this more positive.

It's a very good point because if you add on that, the cinema that we are most exposed in Poland, which is Helios, the public part of public group and they just posted their results, and they said that Q2 2022 for the cinema arm of the business was best Q2 in their history. So they really come back in the same INC, the biggest cinema in the world, they said they are very happy with their results, which proves it's not a cinema industry problems. The problems are elsewhere. Of course, COVID didn't help, but, yes, I mean, we don't feel the cinema as industries is any sort of problem. No more questions from audience.

Then shall we move to the phone question, if there are any?

We go to the phone questions.

Thank you. We have no questions from the conference call. We can go over to webcast questions.

Hello. A question for Marek. How do you expect to see higher utility costs impacting your margin? Can you recover all the higher cost from tenants? And how sustainable do you think the current OCR is?

I mean, this is why we always make sure that our OCR is healthy because we need to be able to recover with tenants. We never recover 100% of the increase because various tenants [indiscernible] and there are some vacancy, et cetera, but we recover most of it. And we did, of course, stress testing to test the various scenario as what happens if. And I think that with the performance of our tenants, we can recover, we can keep the same rate of recoverability at what we projected. But if the costs go over the roof, which I don't think will be the case like they will quadruple next year, I mean, the electricity cost, which will not happen, then we all will seem to have a problem. It will be a cross-business problem because companies will have to stop their operations. But I don't think this is the base case scenario. The numbers that you see for that year already includes the increase of the utilities for 2022. So it's in the number already. So we will grow the utilities next year, will increase from already quite high base of 2022. So we will look what Marius and the finance team reporting team on various scenarios. And we try to model the future. And I think we are well prepared to weather that storm should that come.

And just to add, we are hedged on our utility cost till next year, Q1, Q2. So we don't expect any changes until the end of the year and first part of next year. That's on top.