Eurocommercial Properties N.V. (OTC:EUCMF) Q2 2022 Earnings Conference Call August 26, 2022 5:00 AM ET
Company Participants
Luca Lucaroni – Investor Relations Director
Evert Jan van Garderen – Chief Executive Officer
Peter Mills – Chief Investment Officer
Roberto Fraticelli – Chief Financial Officer
Conference Call Participants
Steven Boumans – ABN AMRO
Inna Maslova – Degroof Petercam
Operator
Hello and welcome to the Eurocommercial Half Year Results 2022. My name is Suzanne, and I will be your coordinator for today’s event. Please note this call is being recorded, and for the duration of the call your lines will be on listen-only. However, you have the opportunity to ask questions. [Operator Instructions]
I will now hand over to your host, Luca Lucaroni to begin today’s conference. Thank you.
Luca Lucaroni
Good morning, everyone, and thank you for joining us this morning. My name is Luca Lucaroni, Investor Relations Director of Eurocommercial. And I would like to inform you that on this call we have Evert Jan van Garderen, our CEO; Roberto Fraticelli, our CFO; and Peter Mills, our CIO to present Eurocommercial results for half year 2022.
Evert Jan van Garderen
Thank you, Luca for introducing us, and thank you also for accepting your new role as Investor Relations Director, a role that you’re combining with your position as Finance Director, Italy. After my introduction, Peter Mills will talk in more detail about the property portfolio and ESG, followed by Roberto Fraticelli, who will discuss in more detail the financial results.
I will start with an overview of the operations of Eurocommercial during the first 6 months of the financial year 2022. And we will finish this presentation with some closing remarks. We will then open the call for any questions and remarks you may have.
The operational performance of the company was particularly strong in the second quarter of 2022 compared to the first quarter, in which there was still some impact from the omicron variant of the COVID-19 virus on the company’s business. The diversification over four countries and the quality of the almost EUR 4 billion retail property portfolio in each of these countries have again been key to the performance of the company in the first 6 months of 2022.
After the sale of property in France, and on the basis of the external evaluations of the entire property portfolio, as for 30 June, the portfolio spread changed slightly compared to December 2021. Italy went up from 40% to 42% whereas Sweden and France went down with 2% each to 22% and 21%, respectively. Sweden due to currency movements and France due to the sales.
We have now 24 properties in our property portfolio, split between 45% allocated to our five flagship centers and 55% allocated to our suburban shopping centers focused on everyday goods and anchored by hypermarkets and supermarkets. 62% of the space in the shopping centers is dedicated to essential and everyday goods. Our five flagship centers have more exposure to discretionary retail due to their different function, but still have 42% exposure to essential and everyday retail.
Next to a good diversification over four countries. Our shopping centers are again well spread in those countries and all in wealthy areas, like for example northern Italy, or close to the Swiss border near Geneva, or in the wealthy catchment of Woluwe shopping in Brussels. And these slides provide the maps of the four countries showing where our 24 shopping centers are.
The sales in the first half of 2022 have been very strong compared to the pre-pandemic periods in 2019 with Belgium and France almost at the levels of 2019 and Italy already over its 2019 level. The star is Sweden, with 10% growth of the turnovers for the first 6 months of the calendar year, compared to 2019 for the first 6 months. We were very encouraged by the turnovers in our stores during the second quarter of 2022 compared to the 2019 levels. Each country showed strong growth so that the overall turnover growth of the shops reached 7.3% compared to the second quarter of 2019.
Next to star performance Sweden, we were very pleased to see the growth in Italy, 42% of our entire portfolio reaching 6.4% which is a remarkable score. We just received the turnover numbers for the month of July 2022 and the growth continues a 5.7% for the Group compared to July 2019. If we look at the various sectors and compare the turnovers for the second quarter of 2022, the same period in 2019 — sorry, compared to the same period in 2019, we see that all sectors have at least achieved their 2019 levels with some clear winners which are hypermarkets and supermarkets, the health and beauty sector, gifts and jewelry, sports, home goods and books and toys.
We are very pleased to see that the fashion and shoe sector and the food and beverage sector recovered so well as these sectors have suffered most trading restrictions during the COVID-19 period. As all our shopping centers were generally open since May 2021, we are now able again to report a like-for-like rental growth for the portfolio and the four countries, as we have always calculate these growth percentages on the basis of 12 month data.
We compare the [indiscernible] schedules as per 30 June 2021 with the [indiscernible] schedules as per 30 June 2022. So basically we compare two photographs. The reported figures include the impact of indexation, turnover and vacancies and the leasing activity, but excludes the impact of acquisitions, disposals development projects and COVID-19 rent concessions.
You will not be surprised to hear that the driver for the rental growth was the indexation. So, let us have a closer look at the indexation for 2022. Over the past years, the word indexation was hardly mentioned as the indexation was very low, and this component of rental growth was almost nonexistent. This has changed in the summer of 2021 when inflation started to appear affecting the indices to be used for the 2022 indexation, mostly the consumer price index.
Although the indexation differs among our countries, the average indexation for the entire portfolio is assessed at 3.6%. In Italy, indexation was the highest with 3.8%, followed by France and Sweden at 2.8%. For Belgium, it is more difficult to calculate indexation for 2022 as every month those leases which started in that particular month are indexed using the index for that month. In that case, we only know by the end of the year, what the indexation invoice and to be invoiced was.
The indexation is expected to contribute to the rental income for 2022 for an amount of EUR7 million. So far we have not received pushback from tenants on the indexation bill as you will see also later when we discuss the rent collection for the first half year of 2022. In principle, the company is a natural hedge against inflation, thanks to the indexation.
We are proud to be able to report that on 268 relettings and renewals last year at 301 renewals and relettings, but still also more than the 245 in 2019, an average rental uplift of 4.3% was achieved. These lease transactions reflect 13% of the minimum guaranteed rent of the portfolio and we were able to attract new tenants with our 94 new lettings achieving an uplift of 5.1%. These new deals were concluded on the normal lease conditions and lease term, so no short-term leases.
Low vacancy is usually a good indicator for the quality of the properties. Over the last 10 years, we have reported vacancy rates for our property portfolio ranging between 0.5% to 1.8% and we continue to do so. The average for the last 10 years was around 0.9%. The EPRA vacancy rate remained very low at 1.5% in June 2022 for the entire portfolio.
For France the rate, as expected, reduced to 2.4% as a result of new lettings, in particular, in our shopping center Les Atlantes in Tours. For Sweden, the rate increased to 2.2% due to our continuous work to keep the rent collection at 100% by replacing underperforming tenants by new ones. The Swedish vacancy level is expected to reduce again in the third quarter as a result of new lettings.
Now that turnovers have normalized and the rent concessions are not applicable anymore, we can also report the occupancy cost ratios for all countries and for the entire portfolio. The company has always been known for its low occupancy cost ratios and we are therefore pleased that we can report 9.2% as occupancy cost ratio for our portfolio as per 30 June 2022. This percentage is still one of the lowest in the industry and implies that the rents are affordable for our tenants. If we look back some years before the pandemic, we reported in 2015, for example, 1.8% for the portfolio and just before the pandemic started, we reported in 2019 8.9%. So our current overall OCR is almost at pre-pandemic levels.
During the COVID-19 period, the rent collection was certainly a very important metric, and key performance indicator, closely followed by investors and analysts. We can now conclude that this difficult period caused by lockdowns and restrictions, strongly affecting the business of many of our tenants is behind us. The rent collection is back to normal, which is evidenced by our rent collection at 96% of invoice rent for the first 6 months of 2022.
Please also bear in mind that we returned in most cases back to enforcing quarterly in advance and using direct debits to collect the rents, allowing monthly payments and payments in arrears to help struggling tenants is in principle history. 2022 has so far been another very active leasing year. We are still well-positioned to lease our retail space to attractive tenants under sustainable conditions at affordable rents.
Introducing new tenants and new concept of existing tenants will ensure that our shopping centers remain attractive for the customer and continue to have their purpose and stay relevant in their catchments. In Woluwe Shopping, in Belgium, several new premium international brands have established stores including Mango, Pandora, Xandres, and Guess. During the early part of this summer, Fnac opened a flagship store in the former 2,600 square meters AS Adventure unit, who themselves have successfully relocated to a smaller store.
In France, new merchandising has covered a broad range of sectors, including Dr. Martens, Naf Naf and Devred, Etrembières fashion, Bouygues Telecom, which is electrical, Comptoir de Mathilde, La Cure Gourmande and Palais des Thés, which is food and Krys Audition and Grand Optical in the health and beauty sector. In Tours, the French team managed to relet the space vacated by toys retailer PicWicToys to fashion retailers Bonobo and Mongo and to a gym operator, which reduced the vacancy rate in France.
International brands establishing in Italy continue to take space in our centers with recent examples including JD Sports, Nike, Adidas, Pepco, Starbucks [indiscernible] Pull & Bear and Bershka. If you’re at a leisure with the new 2,500 square meter food court, Fiordafood was recently opened adding nine new restaurants including Wagamama, Mexican restaurant Calavera and craft brewery restaurant Giusto Spirito.
In Sweden, new lettings included Cassels, Hemtex, Clas Ohlson, New Yorker, Rituals and Normal, the expanding Danish value retailer who have now established in six of our shopping centers. IKEA have successfully opened their new planning studio concept in Grand Samarkand, Ingelsta Shopping and Hallarna. Three new leases have been signed with the Bestseller group during the first half year and will open during the third quarter: two Vila stores in C4 and Hallarna and Only in Hallarna.
This is the moment to hand over to Peter Mills, who will discuss in more detail our property portfolio and will report on environmental, social and governance strategy and performance.
Peter Mills
Thank you, Evert Jan, and good morning. Overall, the valuations increased by 1.4% over 6 months, and by 2.2% over 12 months, with each of our four markets showing a positive increase over both periods. Generally these higher valuations resulted from stable or even marginally higher initial or exit yields depending on methodology, apply to higher net operating income generated from the rental uplift achieved from the renewal and reletting program and higher-than-anticipated rental indexation.
The overall EPRA net initial yield on the portfolio has increased to 5.3% due to the higher NOI, but also the sale of the much lower yielding office and residential property of Passage du Havre, in Central Paris. In their reporting, the value has identified strong property fundamentals, including low vacancy and a good outlook for income security and further growth supported by consistent tenant demand and rent affordability with our overall occupancy cost ratio remaining at its low, pre-pandemic level at around 9.2%.
We have again provided a valuation split separating our five flagship shopping centers with their broad international tenant base and representing around 45% of the portfolio. Located in their respective countries capital or main economic cities, they are significantly larger assets with an average individual total value of over EUR400 million and a lower yielding at around 5% overall.
The remaining 19, mainly suburban hypermarket anchored shopping centers have different and more defensive characteristics with over 60% of their floor space devoted to a broad range of essential and everyday retail, including groceries and a range of services supporting their more local communities. These assets comprising around 55% of the portfolio are also much smaller, with an average value of around EUR100 million and a high yielding at 5.5% overall.
Looking at our disposal program, we sold two low yielding properties in France during the first half of 2022, both transactions completing in March. Les Grands Hommes in Bordeaux was sold for a price of EUR22.5 million and our 50% ownership of the office and residential parts of Passage du Havre in Central Paris, was sold to our joint venture partner AXA for a price of EUR57 million. We will remain the asset manager and owner of 50% of the retail Gallery in the main building of Passage du Havre with this GLA of 14,000 square meters including the main anchor the Fnac and around 40 retail tenants.
These sales form the final parts of the company’s EUR200 million disposal program first announced 2 years ago in August 2020 and comprising our only three standalone retail parks, and three city center assets in France, leaving the company with a more homogeneous shopping center portfolio in its four markets.
On the project front, in addition to the new food court at Fiordaliso, which Evert Jan just referred to, we also completed a 1,600 square meter F&B development adjoining our Migros anchored shopping center at Shopping Etrembières in France. The two restaurants shown on the slide successfully opened in June, and are proving to be an ideal complement to the tenant mix and also provides a popular rooftop terrace with exceptional views over the nearby Alps.
During the COVID period, we generally scaled back extension projects so that today we only have one small, remaining ongoing commitment, which is in Sweden where we are completing the final phase of a project at Valbo located outside [indiscernible] the last of the seven Swedish shopping centers we acquired in 2018. The objective of the project has been to improve and broaden the tenant mix, upgrade the property to a modern standard, while improving customer flow by creating a single loop from a new main entrance.
The project has been executed in three phases due to the complexity of keeping the center open and in full operation during the works. The first two phases are completed and provided new stores for tenants including H&M, New Yorker, Normal, Hemtex, Rituals, Intersport and [indiscernible], while at the same time refurbishing the malls and public areas and upgrading the restaurants. The last committed phase is underway illustrated in the artist’s impression on the slide, and will provide the new entrance to the main car park new facade signage, and an additional seven shops already preleased, which will open next year.
The H&M at Valbo shown on the slide is the fifth full concept store that we have delivered for H&M in Sweden, where they have roughly doubled the size of their stores in our centers, taking them up to 3,000 square meters to provide their full assortment to include the very successful H&M home, health and beauty and more recently sport. It has been interesting to see that in three of these locations, H&M have already closed their older smaller city center units, leaving our shopping centers providing the only H&M store in catchment serving up to 300,000 people, very important as H&M dominate their home fashion market where they face more limited international competition.
The existing portfolio continues to present excellent opportunities for future extensions that have the potential to provide enhanced investment returns, while improving the commercial strength and market position of the shopping centers in their catchment. As extensions can also take considerable time to prepare and get planning consent, we have been continuing with the necessary and detailed project investigations and preparations, including planning pre-letting, markets and competition analysis and cost studies.
One example is here, Val Thoiry, located just outside Geneva in the wealthy and growing Pays de Gex region of France, where after various applications and appeals we finally achieved planning consent last December for an additional 23,000 square meters. And have started the pre-letting with signed leases to Primark and Decathlon, while Leroy Merlin will be relocating to a new 10,000 square meter store on an adjoining site we acquired, thereby releasing space for the gallery extension.
We are currently assessing the updated construction costs and the timing in order to take a decision on this project. At Woluwe Shopping in Brussels, a planning application for a 7,800 square meter retail extension and around 70 apartments above has recently been resubmitted. The planning journey has been delayed by a year following a public consultation exercise towards the end of last year, which has resulted in some modifications to the scheme in consultation with the municipality and the region.
The indications are that we should receive planning consent from the region during the first half of next year. There is considerable work still ahead, including detailed cost analysis and pre-letting, although we anticipate strong tenant demand for the retail extension at Woluwe, which is so well located in one of the wealthiest municipalities of Brussels, and it’s performing very well again, post-COVID and [indiscernible] Mango have been the latest retailers to open, further improving Woluwe’s diversified and largely international tenant mix.
Our ESG and business strategies remain carefully aligned so the business decisions can be approached with a long-term view in order to evaluate both their environmental and social economic impact, and the future demands and expectations of our customers, tenants and employees. Our approach is articulated around these three strategic pillars shown on the slide, be green, be engaged, and be responsible. Be green forms the foundations of our operation and provides us with the opportunity to make changes that will reduce our imprint and operational costs as we focus on the transition to a low carbon economy with the target to operate carbon neutral by 2030.
In order to reduce our carbon emissions, we have set reduction targets for our Scope 1 and Scope 2 emissions to achieve zero emissions by 2030. And to achieve this, we have developed a carbon pathway and we continue to improve the environmental quality of our shopping centers by implementing standards and technologies to improve energy and water efficiency and waste cycling. This includes reducing energy consumption, procuring renewable electricity and where possible generating energy on site through further solar panel installations, rock heating and groundwater heating and cooling.
In Sweden, we have completed solar panel installations on all seven shopping centers. And we’re now progressing rapidly in Italy, with the next installations due to commence shortly at Carosello and I Gigli. During 2022, we have continued to roll out our green lease documentation, following constructive collaboration with our tenants with whom we exchange ESB — ESG ambitions, targets and responsibilities.
As part of its environmental policy, the company uses the comprehensive range of environmental criteria incorporated in the BREEAM certification process in order to standardize and improve the sustainable quality of its buildings and their management. In February this year, we completed our initial certification program with all our 24 shopping centers being BREEAM certified, 3 years ahead of the original target date of 2025. 23 shopping centers received the scores very good or excellent.
During the first half of the year, our shopping centers in our four markets became a focus for their communities in the support of Ukraine, collecting money, clothes, food and medical and hygiene products in collaboration with United Nations, the Red Cross and other charitable organizations.
And I will now hand over to Roberto Fraticelli for the financial review.
Roberto Fraticelli
Thank you very much, Peter, and welcome everybody. Let’s look at our performance. This slide gives a quick overview of the most relevant financial data, income statement financial position and values and also per share. As you can see, both rental income and net property income increased significantly compared to H1 2021. And this is mainly due to the effect of the COVID-19 concessions, which were granted in 2021.
Net interest expenses were lower than 2021, mainly thanks to the sale program, which led to a reduction of the borrowings. These changes for [indiscernible] affected the direct investment results, as we will see later in more detail.
Moving to our financial position, property investments have not changed that much. The slower investment values caused by the sales and by a weaker Swedish krona have been partially compensated by the increases in the valuation that Peter mentioned. While you can see a substantial reduction in net borrowings due to the property sales as discussed before.
Their sales per share now shows how, and notwithstanding the 5.6% increase in the number of shares, values have held up pretty well. The significant uplift in the total investment results going up from EUR0.36 per share to EUR3.30 per share is attributable to an increase in both the direct and indirect results.
The positive increase in the indirect investment result is related to a EUR47 million positive revaluation of the properties compared to a EUR42 million, the valuation for the same period in 2021, by EUR72 million increase in the value of the derivatives compared to the same period last year. These values were partially offset by EUR32 million increase in deferred tax provision over the same period.
EPRA NTA and adjusted NAV reductions are mainly due to the accounting of the 2021 dividend, which was then paid in July 2022. If you look at the summary, this slide gives you a quick overview of the most important financial data, total nominal value of the net borrowings at 30 June decreased by over EUR150 million to EUR1.52 billion from the EUR1.68 billion at the 31st of December 2021. Thanks mainly still to the property sales and a weaker Swedish krona. As you can see, our loans are spread among more than 15 banks in different countries, Dutch, German and Italian bank shares still around 30 percentage.
What did we do this year? Well, in April, the company entered into a new 5-year loan of EUR66.5 million with ING to refinance two existing loans on the Curno Shopping Center in Italy. In June, the company entered into a new 3-year loan of EUR50 million with ABN AMRO bank to refinance an existing loan on the CremonaPo Shopping Center in Italy. And this new loans qualify as green loans as the relevant proceeds are used to refinance two green assets. And also sustainability linked loans since the margins are linked to sustainable KPIs.
In May 2022. the Italian joint venture Galleria Verde, which is 50% owned by Eurocommercial, signed a new 5-year mortgage loan of EUR21.5 million with Banca Popolare di Milano to finance the recently completed gallery extension at the Fiordaliso Shopping Center in Milan.
As a result of these actions, the average term of the loan book is now almost 4 years with most repayments were seen in the years ’25 and ’26. As you can see in ’23 and ’24 we have maturities respectively EUR176 million and EUR169 million. At the available resources at 30 June were EUR126 million in cash and EUR161 million in available facilities.
If we go to the hedging, the overall interest rate including margins at June was stable at 2%. This is also thanks to our conservative edging policy, as 84% of interest costs are hedged mostly by interest rate swaps, but also by a number of fixed interest coupon loans. The average interest rate swap hedging term is almost 6 years and an increase of 100 basis points in interest rates would therefore only cause a limited increase of around EUR2.5 million in interest expenses.
Now, I will start the loan to value ratio. On the basis of proportional consolidation at 30 June, after deducting purchases costs further decreased to 38.9% compared to December 2021, when it was 42.3%. We have therefore achieved our 40% loan to value ratio target. Please also remember that the Group covenant loan to value ratio agreed with the financing banks is 60%. For comparison purposes, our loan to value ratio adding back purchases costs at 30 June was 38% and our loan to value ratio adding that purchases cost and using the IFRS consolidated balance sheet was 36.5%.
Now a little reach on the NTA. Yes, this slide gives a quick look at the relative changes in EPRA NTA per share from the EUR40.1 at the end of 2021 to the current EUR39.5. The two major movements besides of course, the direct and indirect results are related to the dividend accrual of EUR150 per share, which was paid out in July, and the variants are to EUR2.1 related to the negative adjustments of the fair value of the financial instruments.
Last but not least, the direct result. The direct investment results for the 12 months to June increased significantly to EUR62.8 million compared to the EUR46.8 million for the same period in 2021. The main reason being the EUR10.8 million lower COVID-19 rent concessions to retailers and the EUR4.1 million lower bad debt provision.
Please remember the residual COVID-19 rent concessions feels to be a straight line in the future as a result of the application of the IFRS 16 amounts to EUR5.5 million. The higher net property income compared to 2021 is mainly related to high rental income from the properties. Also thanks to the indexation and the acquisitions of the remaining 50% share of Passage du Havre [ph] which more than compensated the loss of rents derived from the asset disposal program. Lastly, the decrease in net interest expenses is mainly related to the partial repayment of borrowings as a consequence of the disposal program.
Thank you very much and now back to Evert Jan.
Evert Jan van Garderen
Thank you, Roberto for presenting all the figures. Then I would like to make one closing remark about our direct investment results going forward. We have decided to provide guidance for the remaining period of this calendar year in respect of the direct investment result and also to give some color on the dividends.
Assuming no major COVID-19 related restrictions or further impact of the war in Ukraine and assuming no major deterioration of the macroeconomic environment, we expect the direct investment result for the year 2022 to be between EUR2.20 and EUR2.30 per share.
The direct investments result is the basis for the applicable dividend policy providing for a cash dividend payout ratio ranging between 65% to 85% but with a clear target of 75% of the direct investment per share.
An interim dividend will be payable in January 2023 and a final dividend payable in July 2023. According to the applicable dividend policy, the interim dividend is expected to be 40% of the total cash dividend paid in the previous financial year, which was EUR1.50 per share. So for January 2023, the interim dividend is expected to be EUR0.60 per share.
The last slide shows the dates of the next two company publications, the third quarter results and the 2022 year-end results. I would like to conclude this presentation with a statement that as management board, we’re truly thankful to all our teams in the various countries for their hard work and a continuing commitment to our company.
And I will now hand over to the operator for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Steven Boumans from ABN AMRO. Please go ahead.
Steven Boumans
Hi, good morning. And thank you for taking my questions. To start, I have two questions on extensions. First, in general, do you expect to announce new extensions that we have not heard before in H2? Or extensions not that economic anymore due to the increased development costs? And second relates to extensions, could you provide some ID or a range on total CapEx and expected yields and costs for Woluwe and Val Thoiry extensions.
Evert Jan van Garderen
Yes. Thank you, Steven, for your questions. I think in terms of your first part of the question, extensions in general to be announced, I think what we are doing anyhow, with most of our properties in the portfolio, is that we’re working on obtaining permits for future extensions and further developments. That is still ongoing and that, of course, is a much longer term approach. And on the other hand, of course, we mentioned two extensions in the presentation. Maybe Roberto, because that’s typically something which happens in Italy, where I think all properties are basically — yes, that we have possibility extension.
Roberto Fraticelli
Yes, that’s right, Steven. Yes, let’s say what we are doing is, of course, we are going through the application to obtain the building permits. Because you might remember in Italy, there is a double step that is the building permit, but it’s also the licenses. So that complicates a bit the situation not only for us, fortunately, but for everybody so that if you look at possible potential increasing competition, they all have to go through these steps. And let’s say the parts concerning the building permission, then it’s something which is usually done at a local level. While the license is something that goes to a regional level.
So what you have is we go back and forth between the region and the local municipalities in order to get an agreement, if you wish on what the future extensions can be. So that takes usually between 3 and 5 years. So we are proceeding, let’s say on all the — on all these extensions. At the moment, we have not signed anything binding. So we’re not committed to any of these extensions. And what we also do is, of course, as maybe Jan already mentioned, we also look at the costs and the potential yield. So those are items, which we always — are always taking into consideration when they’re making the final decision, okay, we’ll go for it. But that’s as mentioned, we are in the preparatory stage for an extension in most of our shopping centers in Italy.
Evert Jan van Garderen
Yes. And I think, Steven, probably, for Peter to comment on your second question about Woluwe and Val Thoiry which he already talked about in the presentation. And where we are there, I think, Peter …
Peter Mills
Woluwe is probably the most advanced and the one we’ve had the closest eye on. It’s our biggest assets and soon when we bought it, it was with the intention of doing this extension, it’s on land that came with the property. So it makes it very profitable. We’ve had a year delay on the planning. And there’s a lot of work being done on construction analysis at the moment and [indiscernible] as I mentioned, we’ve really yet to start and until we have a firm timetable on the planning, it’s a very difficult one to focus on.
But if we get our planning in the middle of, let’s say, by the latest middle of next year, we’ll proceed on the pre-letting, because the returns should, the objective is to be well above the investment yield on the properties. And on Woluwe we always targeted something between 7% and 8%. To give you some idea on the CapEx, it’s slightly smaller project now because we had to reduce one floor of the residential. So it’s reduced from 80 to 70 flats, but something in the order of 80 million on that one.
But Val Thoiry, it’s I would say, less certain, and it has various phases that we could look at, including just building the new Leroy Merlin alone. So I think that’s something we’ll perhaps park at the moment on cost and returns, but I’ve given you some sort of guidance on one way, which are figures we’ve mentioned before.
Steven Boumans
Okay. Just to be completely clear, so the yield and cost guidance broadly, that is unchanged even with the rise in construction materials, et cetera?
Peter Mills
Well, I think as a general guide, we would hope to be at least 2% or 3% above the return, the yield on the property. The costs are higher. We’re achieving good rents that EUR80 billion has yet to be completely verified, but something in that order. Starting with a 7 would be our minimum sort of expectation when there’s no land cost.
Steven Boumans
Yes. Okay. Completely clear. Thank you very much. And also one question, if I may, regarding the debt. Do you expect to change the balance sheet approach, like reducing maturities or changing the hedging ratio? That’s one. Two, what’s LTV level? Would you consider appropriate in today’s markets? And three, last, how do you expect the average cost of debt to develop for the rest of the year and later?
Evert Jan van Garderen
Okay. Well, thank you, Steven. That’s some forward-looking information you’re trying to get from us. But I hand over to Roberto, as he said, of course, always in the middle of what’s happening there. And the recent deals we’ve done, which we’re very pleased with, because we have locked in their margins, and of course, funding for the longer term. So that’s nice. But there’s always another loan there maturing, as we say. So, Roberto.
Roberto Fraticelli
What’s your exact question, Steven on the loans, sorry.
Steven Boumans
Yes, sure. So the first, do you expect to change your balance sheet approach? So maybe reducing maturities since that’s cheaper or a change in hedging ratio? The second is what LTV level would you consider appropriate, still the 40%? And then the average cost of debt where that will go?
Roberto Fraticelli
Yes. Now for concerns that the loans, let’s say, we — it’s always a hard negotiation with the banks. We try, of course, since we have — we are long-term investors, we try and go for long-term loans. So the policy hasn’t changed. But of course, the market is — changes sometimes. We used to get 15, 20-year loans. And this is no longer the case for quite some time, unfortunately. So when we are in negotiation with the banks, it really depends on the banks and what we can achieve. I mean, what we’re seeing at the moment is a preference for banks to go with loans between 3, 5, 7 years. I’d say those are the terms that they usually prefer to engage with. Of course, we try and go for longer terms and there are some differences in margins. Let’s say for concern, the period selected, but I think the main issue is if the bank really wants to go for the longer term or not.
For concerns, the loan to value ratio, we’re very happy with 40% because, of course, it’s nice that we achieved it. We’d love to keep it. Of course, you never know as you know, Steven, what the markets will do in the future. But let’s say for the moment, I think we’re happy and that’s also where we would like to stay. If I look at the average cost of debt, I mean, thanks to the fact that we have this 84% coverage hedging, then, as mentioned, we’re not expecting a lot of change. Of course, we’re looking with a lot of interest what’s happening today the Fed with interest rate markets. I mean, what you saw, of course, the main effect was in the market value of the financial derivatives which [indiscernible].
The average cost of debt we think it will increase, because of course, interest expense — interest rates are increasing. But the impact for the moment as we just said before should be quite limited. Is that a good answer to your three questions or …?
Steven Boumans
Yes, absolutely. Thank you very much. Much appreciate it.
Operator
The next question comes from Inna Maslova from Degroof Petercam. Please go ahead.
Inna Maslova
Hi, good morning, everyone and thank you for the presentation. Two questions from my side. The first one is on the indexation. So just to confirm the 3.6% that you have guided for, it’s the full indexation that you plan to secure over 2022. There is no rollover into 2023. And then the follow-on question to that is what would you expect it to be in 2023, given the partial renewal of leases at different terms? So that’s, I’ll start with this one.
Evert Jan van Garderen
Well, thank you, Inna for your very relevant questions about indexation, because that’s, of course, quite a topic nowadays. The easy part of your question I will start with, which is the indexation for 2022. Indeed, what we have put in the presentation also in the interim report, that is really what we expect for 2022. And to be honest, for three of the four countries, that’s already pretty secure that that is the indexation because it has been built and is still built when we do the quarterly rent billing to our tenants. So basically, we are collecting that.
Belgium, as you know, might be much better than we do. But Belgium is quite slightly different because there the indexation is depending on the month where lease have started. So we’re still of course, for example, in September, October, November, will then have to index with — index for that month. So that is still a bit uncertain. But I think for 2022 the picture is very clear and we are collecting it. Of course, we still have to also build the fourth quarter where there’s also some indexation involved, but so far as I said in my speech, not really pushed back. So we were quite happy getting this 2022 indexation.
But going forward it’s a different question. So first of all, there’s no sort of rollover effect what you mentioned. We’re really starting all over again, on the 1st of January 2023 with the indexation. And what will that be or what we can do for now is monitor, of course, the consumer price index in the various countries. And they vary, but are, of course, higher levels, much higher levels than what we saw for the indexation of 2022. It’s probably too early to tell what it will be because the index, for example, in Sweden to apply we know, somewhere mid November. Italy, we only know probably much later or better or whatever the end of December.
For France, we will know a bit more mid September, we expect because the second quarter indexation is relevant for some of the leases we have in our portfolio in France for the 1st January 2023. And then there’s also a part which is based on the third quarter index in France. And those two we don’t know yet. But mid September, I think we will know the second quarter. And there’s one other element which is already then known is that the French government has taken the decision that has now been approved in the Senate that for, let’s say, the micro companies, the small companies, they have limited the index at a cap of 3.5%, which is still I think not at all about the indexation number. But if for example, the index would go to 6% or 7% at least the small companies cannot be index more than the 3.5% which of course we understand to protect actually the smaller businesses. So this is in a nutshell, what we can say so far about 2023.
Inna Maslova
Thank you, Evert Jan. If I may, a couple of just clarifications. On the last point about the micro businesses, what would you estimate the impact to be for you? Let’s assume Of course, that’s the indexation go — goes beyond 3.5%. And a second question on the indexation, more on the discussion so far you’ve mentioned there has been no pushback on passing on the current levels of indexation. Do you see any potential difficulty certainly with rising energy costs as well, that this could be an issue going forward or over the course of 2023?
Evert Jan van Garderen
Yes, well, maybe first answer the question about the impact for us on our portfolio. Obviously, we don’t yet know what we’re going to miss, if we only have 3.5% and it is more if the index is higher than, of course, [indiscernible] an amount you don’t receive, which we don’t know. But what we do know, if we have a look at our portfolio and we take this group as small businesses, which of course, is also part of our portfolio in France, it is around 25% of our rent roll in France, which would then be this group, and therefore, we would then have a maximum of 3.5% indexation on the rent for those tenants. And the rest is subject to whatever it will be, and that we know in the coming months.
In terms of the pushback, yes, indeed, very small, but then we also have to be realistic. We’re all looking of course what will happen in the coming months in terms of indexation. And if you would see indexation 7%, 8%, maybe even higher, yes, then we have to see what the response is. Obviously, we have low occupancy cost ratio. So, there are many tenants who, in principle have low cost in terms of rent and service charges relatively to what is happening elsewhere in the industry.
I think it’s also a matter of what we will see consumer behavior, our tenants are in a position to pass on inflation, had the goods they have to buy at higher prices. Can they sell it at higher prices? So I think there’s — there are a lot of factors involved here and then we’ll see what happens. Last but not least, we cannot exclude it, there is no — there are no signs to that extent. But there could even be in other countries that governments or regulators, say okay, but this is extreme. So where therefore, again, we introduced a cap or a maximum, which may be just covers 2023, as is not that something will be there for a longer period. Or we may have to in some individual cases where indeed you have another extreme case that you say we have to sit down with the tenant to see whether we can find an amicable solution, but then you will get more and more back into sort of negotiations we had during the COVID-period with real lockdowns. I don’t see that happening. But again, it’s in the coming months, in particular an interesting [indiscernible] to see where we’re going.
Inna Maslova
Now, that’s very clear. Thank you, Evert Jan. And if I may, one more question, more specifically on your operations in Belgium in Woluwe. I saw that on the new lease signs, there was a negative reversion. And of course, looking at the OCR levels, they’re closer to 15%. So quite a bit above your average. How would you see perhaps looking for a comment on the sustainability of leases [indiscernible] in Woluwe? And also if you would expect any future adjustments as well on the rental levels, and if that could also be reflected in the valuation? Although I appreciate the fact that the indexation is a very big supportive factor here as well.
Evert Jan van Garderen
Yes, no, thank you, Inna. That is something which we reported on Woluwe. Well, let’s say we reported on Belgium, but there’s only one asset so that everybody knows is Woluwe. And there is a minus which we reported, which clearly has to do with the relettings we did and actually we sorted out what we call is a part in the middle of Woluwe is quite a nice part actually where there were two fashion retailers which were there already when we bought center which clearly had over rented units and we reshuffle them. And Peter maybe you want to make some comments there also in relation actually to the — the valuation of Woluwe.
Peter Mills
It was a one-off sort of game of musical chairs we did in what we call that part of the [indiscernible] part of the building, which was the change from AS Adventure going from a very large store, 2,500 square meters to do their normal assortment, their restaurant Belgium retailers. But to do the normal assortment, which I did in the [indiscernible] unit almost adjoining, so it was — and we put Fnac in the AS Adventure, which was actually an uplift in rent of some 60%. But if you take them all together that we had to the Mango and what was formerly the [indiscernible] — sorry, the [indiscernible]. If you take them all together, then there was an overall reduction of rent on those three transactions of some 10%. But a very strong improvement in the commercial mix of the of the center. So we took the view that it was something we definitely wanted to do and introduced Fnac there and introduce Mango albeit slightly lower rents.
If we actually look at the other 12, those are 3 lettings of the 15. If we look at the other 12 signed in Woluwe, we actually achieved an increase overall on those 12 relettings of 2.7%. So I would see it as a one-off commercial improvement and a decision to take a slight reduction on those significant lettings, but overall the pattern of the rental levels is still very stable in Woluwe. There’s good — very good, consistent tenant demand to be there.
And, yes, in terms of the OCR, the OCR is always going to be the highest. It’s because the rents are so much higher there than the remainder of our portfolio. This is a very strong international shopping center and it commands high rent and that tends to command slightly OCR, higher OCR. The only other comparable property we probably have is Passage in Paris where we probably see levels not far different. But they’re still, I think fairly normal in a property of that type. So that is why the OCR in Woluwe is slightly higher. Have I answered your question or is there a bit missing?
Inna Maslova
No, that was very clear. Thank you very much, Peter, and thank you for taking all my questions.
Operator
We currently have no questions coming through on the call. [Operator Instructions] The next question comes from Steven Boumans. Please go ahead.
Steven Boumans
Maybe one final question from me please on the investment markets. Could you please tell me if you’re looking at different assets or assets coming to the market and how [indiscernible] are developing versus, let’s say, a half a year ago?
Evert Jan van Garderen
Yes, well, Steven, you can imagine that have we just finished our disposal program of EUR200 million at the end of the first quarter. We have a strong balance sheet. Liquidity is very good. I think with the 24 properties we have now left, we’re well-positioned, very homogeneous portfolio. But I think, for us now to get very adventurous and again already looking into acquisitions, et cetera, is probably a bit too much given the circumstances. I mean, we cannot ignore what’s happening around us. I think we’re very well-positioned together with our tenants to navigate again through — I’m not [indiscernible] all, it will be difficult, but we see the clouds ahead of us. We all read the newspaper.
So I think it’s not the time to do anything spectacular and stick to your guns at the moment. So you will not see us do very, very new steps, etcetera. Certainly not in the coming months where I think all we want to do now is wait, how does indexation develops, what the consumer behavior will be in the coming months? It’s all over the place, of course, the discussion around energy prices etcetera, the war in Ukraine. So, I think we will and therefore I’m very glad where we are today also financially. We will first monitor and then see what is the best action or response.
Steven Boumans
Okay, clear. But do you have some view on where markets are developing in the past, let’s say 6 months?
Evert Jan van Garderen
Well, I think let’s say the markets where we are in, there was an easy activity, but its slowed down quite a lot. We know that some transactions were put on hold or even pulled. So yes, I think in that respect, we have to see what happens really, I mean, the holiday season is almost over whether in the second half. There will be further activity. But yes, I think a lot of parties will just see and wait. There’s one or two deals, Peter, I think where we may see some further activity.
Peter Mills
It was generalized statement, I think there has been more liquidity in the Nordics, where we’ve seen fairly strong recent activity at the end of last year, particularly going into the early part of this year was sales, which was — which has produced a lot of evidence, it has been fairly consistent liquidity in anything that touch groceries and the retail parts. But in terms of the future, I think the market is expecting an announcement of a big shopping center sale soon in Germany, which will — which has been a competitive open process, we understand and has bought a number of the larger institutions, which is obviously that’s been a bit of the market has perhaps been missing in the larger, the larger lot sizes. So we understand that there could be some transactions arising shortly, but — and I think that would give the market a lot of confidence if that happens.
Steven Boumans
Okay, completely clear. Thank you very much.
Operator
We have no further questions in the queue. I will now hand over to your host for the webcast questions.
Evert Jan van Garderen
Yes, thank you very much. We have a few questions also coming in via the webcast. I see that there are two questions which also relate to the rental situation on Woluwe in Belgium. I think we provided some color there on what happened to Woluwe, particularly Peter, and also on what kind of return in extensions we could expect. And I think [indiscernible] could talk a bit about Woluwe to the lesser extent because there we are again in the middle of obtaining quotes for construction and indexation for 2023. Again, I do hope that I explained what is the situation, it’s very difficult to assess now what it will be for 2023. But we will know much more I think by the time we publish our third quarter results. At least for France, I would then think we have some better view. And for Italy and Sweden, we have to wait until the end of the year, I’m afraid.
Let me see there is a question. And I will read it out to you. What do you expect for consumer confidence next year on your commercial results? Again, I think a difficult question because it’s all forward-looking and almost that you have to speculate how the consumer will behave. And the answer is we simply don’t know. Of course, we do know that there is a lot of, let’s say, low confidence at the moment, if we read the newspapers and the statistics. And it probably will depend which country you’re looking at, particularly how hard consumers are maybe hit in that country.
For example, due to energy prices, I think we clearly have differences in France, where it may be less dependent on the import, whereas Italy maybe is more dependent. But it’s also I think, probably not only about spending, but also maybe a shift in spending how we could clearly maybe see that, that consumers go for low price purchases, may decide to not buy the next television, or maybe furniture or other bigger items, which doesn’t necessarily mean that we therefore will be impacted. I think it’s also is important how we see this consumer maybe shift among certain categories. But I don’t think we can say much more. I don’t — go back to any feeling or any …
Peter Mills
I mean, we’ve been monitoring this course, as you can imagine, for quite some time now. And we’re looking at signs in the turnovers. But so far, turnovers have performed very well. And of course, with all these questions about what’s going to happen in the coming months, we are looking at consumer confidence has been going down, but how does that reflect on the — on our turnover [indiscernible], I agree fully whatever [indiscernible] needs to be seen.
Evert Jan van Garderen
Okay, are there more questions in the webcast? We have here a question. The direct investment is held for the first half year is EUR1.21 and the outlook was EUR22.30 [ph]. What is the difference in half year one against half year two? I think let’s say, of course, this is an outlook. It’s not that it’s carved in stone. But there are a few elements to consider when you look at the 6 months result and then the outlook for the full year. It’s not simply multiplying the first half year direct investment is sold by two to get to the year a number or a few effects, which I would like to highlight. First of all, we sold property in the first quarter. Okay, that’s also another, let’s say a major amount, but it was still a substantial amount. So we missed that income.
There’s also an effect of actually a better bad debt provision where we are now today than at year-end. So we have to or had to we could reverse some of the bad debt, which of course was a positive effect. Also, the Swedish kronor remains to be seen how that will work out, it’s quite volatile at the moment. It’s much weaker than at some time earlier in the year, but it can bounce back. But of course, we have a quarter of the portfolio in the Swedish kronor. So, when you prepare an outlook, you have to take these things into account and do some stress testing. And yes, then of course, we will also carefully look at the fourth quarter to be invoiced and see what is happening there. So, these are a few elements which we have to take into account in order to arrive at our outlook. I hope that answered the question.
Let me see. Okay, another question. Would you at some point consider buying back shares? It’s buying back shares is a theme which we have seen already for many years and it’s, of course, something always mentioned particularly when you look at share price and the net asset value of the share. And if there is a large discount, of course, always this question which comes up. But for now, we’re very happy with our balance sheets are better just explained on that, and also the sort of level we have in mind for the future.
So, yes, we rather stay cautious and we have, of course, our dividend policy now announced. We think still that the company is certainly attractive for those who are looking for yield, and therefore, a dividend. We can never exclude it buying back shares, we do have some authority to do so up to 10%. But for now, it’s not really on the agenda. Would we have a loan to value ratio of 20% or 25%? I think then we would have a different view. But for now, we stick to where we are.
Let me see. And then there is a question about footfall in July or August. Peter, can you maybe say something about that?
Peter Mills
Yes. I mean, its — we’ve got our footfall numbers slightly quicker than our turnover numbers, which we tend to get in the middle of the following month. So we’ve just been able to mention this morning that our July turnover anyway is the same as June roughly at 5.5% plus compared to the months of 2019 comparable months. Footfall in July and August has maintained the same rate. So just under 90%, very little variance between the countries. Actually, there’s been strong staycation, so the footfall is looking pretty settled. The Swedish numbers have been the strongest where — and that is sort of followed the turnovers numbers as well. And they have easily reached the pre-pandemic levels.
Perhaps the big change in the 7 weeks of say July and the first 3 weeks of August has been marked improvement in Woluwe, which we’ve seen, which very often is trading at the pre-pandemic levels on certain days. But overall, it’s around about 95%. So big improvement there. So there is no sort of indications of any slackening into football. In fact, it is — if anything, it’s slowly improving.
Evert Jan van Garderen
Okay. Well, I think we have answered that question as well. And I think that was the list is there. Or maybe, operator, is there a question you received meanwhile when we were discussing the webcast questions?
Operator
There are no further questions on the line.
Evert Jan van Garderen
Okay. Well, thank you very much. Then, I would like to thank everybody attending this conference call both via the webcast and on the call directly for their participation and their questions, which were very nice to have and hopefully we have answered them to full satisfaction or at least some satisfaction. And yes, let’s see what the coming months are going to bring also for the markets, certainly also Eurocommercial. I think we’re still well-positioned, but let’s see. So for now, I would like to thank everybody and say goodbye.
Roberto Fraticelli
Thanks.
Peter Mills
Thank you.
Operator
Thank you for joining today’s call. You may now disconnect your handset. Host please remain connected and await further instruction.
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