Good morning everyone, welcome to Citycon's Q4 2018 and Full Year 2018 Results Audio Cast. Today we've published our financial statements release as well as the financial statements for 2018. Additionally, Citycon's corporate governance statement was also published this morning. All material is available on Citycon's website under Investors. My name is Mikko Pohjala, and I'm Citycon's IR and communications director. With me here in Espoo, I have our new CEO, Scott Ball, as well as our CFO and Executive Vice President, Eero Sihvonen. Scott will start the audio cast by talking about his first impressions as Citycon's new CEO, as well as a brief overview of 2018, followed by Eero's review of the operative and financial figures of the year. Scott will conclude the presentation by talking about some of Citycon's key focus areas for the upcoming year.
After the audio cast, you will have the chance to ask questions from Scott and Eero. Scott, please go ahead.
Thank you, Mikko, good morning everyone. My name is Scott Ball, and as you may know, I joined Citycon as CEO effective January 1st of this year. I'm pleased to present the Q4 and 2018 full year results. Before we get to the results, I thought it might be appropriate to provide a brief overview about my background. Before joining Citycon, I was the founder of Lazar Advisors, a private real estate advisory firm with clients including a private equity real estate firm, retail real estate developers, and retailer clients. Prior to this, I helped co-found Starwood Retail Partners in the U.S., a six billion dollar private retail real estate company. I spent the first 20 years of my career learning the business at The Rouse Company, where I was involved in mixed-use projects and dealt with local municipalities.
During my career, I've held numerous positions in the retail real estate industry, and altogether I have three decades of leadership and hands-on experience in retail real estate. I'm looking forward to applying this U.S. experience in a Nordic context. I should add that my wife and I will reside full-time in Stockholm, and we are looking forward to immersing ourselves in the Nordic lifestyle. I also would like to take this opportunity to say a few words about my early analysis of Citycon. I joined the company in mid-November and had a six-week head start before taking over as CEO. During this time, I've had the opportunity to familiarize myself with the assets, the organization, and the people.
My predecessor, Marcel, was very helpful in ensuring a smooth transition, and he, along with Jurn, the previous COO, did a great job over the last several years of transforming Citycon into a true Pan-Nordic company. In general, I find the overall quality of the assets strong, and I'm excited to do more with these great properties. I've been impressed by the amazing real estate we have and firmly believe they are some of the best sites in the Nordics. I also have had the privilege of meeting almost everyone in the field and at the regional offices in Helsinki, Stockholm, and Oslo. The team here at Citycon is very talented and truly one of the company's key strengths. Specifically, I'd like to extend my gratitude to Eero and Henrica for their support over the last few weeks.
Eero is an exceptional CFO, and Henrica is bringing a high level of energy and enthusiasm in her new role as the Chief Operating Officer. I am fortunate to be surrounded by such tremendous talent. Later in this presentation, I'll share some additional thoughts on how we are reshaping the organization. Our EPRA EPS, excluding one-time costs related to the management change, amounted to EUR 0.1639. The one-off costs related to the management change amounted to approximately EUR 2.4 million. Therefore, the reported EPRA EPS amounted to EUR 0.1612, including this one-time charge. Planned divestments impacted our EPRA EPS, and in addition, currencies had a negative impact. We were pleased that our administrative expenses, excluding the one-off cost, declined significantly year-over-year. Overall, Citycon's operating results were consistent with our plan. The pro forma like-for-like NRI grew by 1%, driven by Iso Omena.
Occupancy rates improved slightly, particularly in Finland and Estonia. Overall leasing spreads were stable but improved compared to the previous year. During the last quarter of the year, we disposed the Sampokeskus shopping center, and we were pleased to open our newest shopping center in Gothenburg, Sweden in September, which is a good demonstration at our capital recycling actions. 2018 was the first full calendar year since the extension of Iso Omena opened, and we are very pleased that the footfall increased significantly to 20 million visitors from 11.5 the year before. In line with these results, the board's dividend proposal to the annual shareholder meeting is EUR 0.13, which corresponds to roughly an 80% payout ratio of EPRA EPS. The company has made significant progress in transforming the portfolio.
In 2011, Citycon had 78 shopping centers with an average size of EUR 32 million, while at the end of 2018, the respective figures were 41 and 115. Our vision is to focus on multifunctional assets that are located in top-tier markets with transportation hubs in growing urban areas. With this emphasis on recycling capital, our value is now more concentrated in our largest assets. Our top five assets, including the likes of Iso Omena in Finland, Liljeholmen and Kista Galleria in Sweden, Oasen in Norway, and Rocca al Mare in Estonia, make up almost 40% of the value of our portfolio. These assets are not only our largest but are located in the largest and fastest-growing markets.
This concentration of value demonstrates our focus on owning the best assets in great cities with a focus on transportation hubs. Perhaps the best example of this is Iso Omena, the extension of which was opened in phases during 2018 and 2017, with 2018 being the first full calendar year when the extension was open and the metro running. As mentioned before, the outcome is impressive. Footfall increased to 20 million from the previous year's 11.5 million. Sales of our tenants increased 17% to EUR 315 million, while same-store sales increased by 7%. This impressive footfall provides future opportunity for us to convert more of this traffic into tenant sales going forward. We believe this strategy of blending transportation, city services, food and beverage, retail, and entertainment makes us part of the fabric of the neighborhood in these urban communities. We continued this recycling of capital in 2018.
During the year, we divested five assets for a total of EUR 96 million. Conversely, we acquired the remaining part of Strædet in Denmark and 50% of Mölndal Galleria from our JV partner. We used EUR 67 million in acquisitions during the year. I will now hand this over to Eero to go through the 2018 figures in more detail, and will be back afterward to share a few thoughts on our plans for 2019.
Thank you, Scott. I will go through the 2018, first the operational performance and then the financial performance. To start with 2018, the last quarter was solid operationally and financially, actually, most of our operational KPIs improved slightly, also financially, Q4 was better than last year. The economies in our three main markets developed positively. There was a healthy inflation in all of our three main markets, and that is important in the sense that we can expect positive indexation in the beginning of next year. Also, GDP growth was positive in all of our main markets, or actually all of our markets. Turning over to the like-for-like net rental income and analyzing a little bit of the components and the overall achievements.
Like-for-like net rental income for the year was flat, which is a good achievement in today's markets, the so-called pro forma like-for-like actually increased, improved by 1%. By pro forma like-for-like, as you may recall, we mean Iso Omena and Buskerud also included in the like-for-like numbers for the time that they were open in a comparable shape and form, which is since Q2 this year. Iso Omena, by the way, will be in our like-for-like pool, normal like-for-like pool, next year. From that angle, we will not present the pro forma in 2019. Like mentioned, non-cores are overrepresented in our like-for-like pool, on page 10, you can see the reconciliation of different performances, can be seen that particularly in Finland, the non-cores have been weighing the like-for-like performance.
As you can see, next year, when Iso Omena is fully in line, also the Finland and Estonia like-for-like performance is expected to be better. Already now, there has been a clear improvement in like-for-like performance, so like-for-like is better than a year ago. Overall sales were up 4%, footfall was up 7%, and also like-for-like, both sales and footfall developed well and were flat for the full year. As mentioned, flat is a good achievement in today's market situation. Going forward on page 12, the occupancy development.
Occupancy did improve during last quarter, actually the occupancy, when you look at the last quarter situation, is now on the best level since 2015, so actually a quite good performance, and particularly improved in Finland and Estonia due to the lease-ups as detailed in our presentation or our financial statements release, but also naturally due to the fact that we did sell a few properties with higher vacancy. The average rent stayed flat compared to last year, but actually when cleaned from the impact of foreign exchange rates, the average rent increased by EUR 0.6 , so actually also the development of average rents was positive. Leasing spreads also developed positively in the sense that they were clearly better than last year and essentially flat. Also here it can be said that flat performance in leasing spreads in the current markets, including the non-cores, is a good achievement.
As mentioned, the trend is clearly improving. Going further to the financial overview and Q4 financials. EPRA earnings for the quarter were 34.2 compared to 33.8 last year. The Q4 on EPRA earnings level was better than a year ago, even though we had EUR 2.4 million restructuring costs in our earnings in 2018. These restructuring costs relate to the management changes, and they are one-off non-recurring costs. Also, net rental income was flat compared to previous year, which is also, again, a good achievement considering the fact that substantial disposals took place. In a while, I will come back to the net rental income bridge. In order to give you more information, we have also now highlighted the EPS and earnings before and after restructuring costs. Here, the EPRA EPS including essentially everything, was EUR 0.038, and excluding the one-time cost, it was EUR 0.041.
The full year financials. EPS for the full year was 16.1, this is essentially EUR 0.01 less than last year. Excluding the one-time costs, EPS was 16.4, that shows that the last quarter indeed was good in the sense that we came out closer to the high end of the range, and we were guiding the markets that the range for the EPS is 15.75- 16.75. Excluding the one-time costs, we were closer to the top end of the range. Here, some other highlights I would like to mention. We had a very tight cost control for the full year, despite the EUR 2.4 million extraordinary costs, our SG&A fixed costs ended up lower than previous year. Turning over to the net rental income bridge, which I already promised.
We had the effect of disposals, about EUR 16 million, which was partly offset by redevelopment projects. The already committed to acquisitions of the last stage of Strædet, and particularly Mölndal, they added to the net rental income. We had a negative impact from the currencies. Both Swedish krona and Norwegian krona were weak during the quarter. On EPRA EPS level, they had close to EUR 0.005 impact, EUR 0.004 to be exact, and on net rental income, they had a negative EUR 4.7 million impact. I already referred to a tight cost control, and it had an impact on the EPRA Cost Ratio, which continued on a reducing trend, and we had an EPRA Cost Ratio for the year of 17.1%, i.e., clearly better than last year.
On the subject of fair value changes for the full year, we had fair values changes losses of EUR 72.5 million, excluding Kista Galleria and including 50% of Kista Galleria, that was EUR 81 million, and for the last quarter, EUR - 18 million before and EUR - 21 million including. Average yield requirement stayed the same, which is a little bit like incidental because there were underlying changes, and we also did sell some properties. By and large, the average yield requirement stayed the same. There were some slight widenings of the cap rates here and there by five or 10 basis points during the quarter. Reiterating our main financing targets. We are above five years average term of our loan portfolio. We are substantially fixed rate in our debt portfolio, like 92% fixed.
We will not be among the companies that will be most hurt if and when the interest rates would start to increase. We still have mostly unencumbered asset base and mostly unsecured debt, 95% unsecured. We still have a very substantial liquidity buffer, i.e., more than EUR 500 million. Our loan-to-value is currently 48.7%. EPRA Net Asset Value developed as can be seen on page 20, and earnings naturally had a positive impact, and the indirect result, EUR - 0.14. By indirect results, we mainly mean the valuation impact. NAV ended up at EUR 259 for the year. Commenting on the cost of debt, we had a substantially reduced cost of debt, substantially lower weighted average interest rate and cost. Due largely to the refinancing exercise that we did in the beginning of September, end of August last year.
As a result, we are now 40 basis points lower in our weighted average interest cost, i.e. 2.35% at the end of last year. Some additional information about how we are going to treat the so-called IFRS 16. IFRS 16 is the leasing standard, and it's going to impact our numbers as it's going to impact the numbers of most other real estate companies as well. In the sense that nothing changes in the way how we treat the leases where we act as a lessor, but where we are a lessee, there is a slightly changed treatment due to the IFRS changes, and this is effective from the beginning of 2019. Essentially, we have in Norway a couple of so-called rented centers. We have leasehold land mainly in Sweden, and then we have leased machinery, mainly waste presses in all of our countries.
The main impact will come in Norway due to the rented centers and in Sweden due to the leasehold land. The overall estimate is going to be somewhat like EUR 5 million better net rental income. The balance sheet will have those changes as specified here due to the different treatment of interest-bearing liabilities and investment properties. Commenting the outlook for 2019. We have tried to slightly clarify the way how we present the guidance. Now we give the guidance as a specified exact range and hope that it is clear to everybody. The direct operating profit is expected to be within EUR 188-EUR 206, earnings between EUR 138-EUR 156. EPS we expect to be between EUR 0.155-EUR 0.175. Naturally, we will be specifying the guidance as the year goes on. This ends my part. Back to you, Scott.
All right. Thanks, Eero. Before I discuss the company's areas of focus in 2019, I want to provide a brief update on our development projects. As previously mentioned, we opened Mölndal Galleria in Gothenburg in September of 2018. We've been encouraged with its early success and are confident it will become an urban hub in the growing city of Mölndal. We are also in the process of developing Leppävaara in the Helsinki metropolitan area. As you may know, we terminated negotiations with our former contractor in October. We are currently negotiating with potential construction partners and are undergoing an exercise to value engineer the project. We will provide an update on this once the exercise is complete. Finally, I'd like to share some thoughts on the priorities we've set for the organization in 2019.
In the current retail environment, we must intensify our focus on maximizing value at each of our assets. We are taking steps to ensure that our operating team has the necessary resources in place in order for senior management to spend more time in our properties and to ensure we execute our strategy and business plans. We have already identified asset management improvement actions, and changes within the organization have already begun. These improvements will provide consistency across our portfolio and enable us to take advantage of our Pan-Nordic scale. We are also providing significant concentration of effort on growing specific units of our business. We remain focused on being good stewards of capital and to ensure that capital is used efficiently for those projects where it provides the best return. I was pleasantly surprised to see the number of embedded growth opportunities within the existing portfolio.
Whether it be to add residential at Liljeholmen in Columbus or an office at Rocca, there are many of these opportunities available for us to exploit. Lastly, strengthening the balance sheet remains a priority for the company. As a result, we will continue to recycle capital going forward in order to focus on the best assets in the largest and fastest-growing cities. I can assure you that this team is energized by these opportunities in front of us and eager to take on all challenges. With that, I'd like to thank you and hand this back over to Mikko.
Thank you, Scott and Eero, for the overview. Now we would have time for your questions, and we will turn to the audio line for any audience questions.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Our first question comes from the line of Ari Halonen of Danske Bank. Please go ahead. Your line is open.
Yes. It's Ari Halonen, Danske Bank. A few questions. First, just checking that the maintenance costs on the Q4 seem to be down quite a bit year-on-year. If so, was there something specific like impact on the Q4 compared to earlier levels in the Q4 maintenance?
Nothing unusual took place during Q4. There are naturally some variation between quarters and timing issues have an impact, but nothing worth mentioning.
Should we expect maintenance costs to be higher in the Q1? We are having lots of snowfall and a fairly cold winter at the moment.
I think that the short answer is yes, but not in a way that should impact the magnitude of the numbers.
I think the good news is it is in the first quarter, right? You have the ability to manage the cost through the rest of the year, much better that it happens in the first quarter.
Just checking that, is it the right way to assume that the direct EBIT reported was EUR 44.1? If we adjust it for the extra costs, then wouldn't that be EUR 46.5, the adjusted? That the EUR 2.4 million one-off item is quite directly comparable at the EBIT level as well.
Yes. The direct administrative expense is EUR 10 million, which is mentioned here, includes the EUR 2.4...
Okay
Meaning that it is comparable.
It's burdened there.
So that it is comparable, yes.
Okay. basically, the EUR 44.1 million EBIT is burdened by the extra cost?
Yes.
Okay. finally, the finance costs came down to EUR 11.4 million in the Q4, even if the LTV remained above the targets. Is this a sustainable level going forward?
Yeah. As mentioned, finance costs are substantially lower, that is a result of paying back EUR 300 million of our most expensive bond in September. this is the main reason why it is so much lower.
Okay. Thank you. That's all from me.
Thank you. Our next question comes from the line of Ari Pakkala of Nordea. Please go ahead. Your line is open.
Yes. Good morning. I have a couple of questions. The EUR 7.7 million negative impact from associates and joint ventures, what was that related to?
It's related to valuation items, mainly fair values in these companies. It's not operational performance, but it's a valuation, like fair values.
Okay, thanks. One question passed to Scott. Could you give some concrete examples of how you intend to improve the value of the assets?
Well, I think as I mentioned in my earlier comments, we're going to be very focused on the asset management of the assets and making sure that we're devoting the resources and spending the time in the assets. I also alluded to the fact there are specific business units that we're going to be focused on. I think especially leasing, which is kind of common area leasing and advertising, things like that. We're going to assign somebody to be a leader of that effort within our company. That position did not exist previously. There's a lot of opportunity within that for us to make big strides in terms of financial performance at the assets. We are also restructuring our leasing efforts so that we will have a single head of leasing for the entire company.
The idea being that we take advantage of our scale and the fact that we don't allow ourselves to be kind of divided and conquered by the retailers. We get the opportunity to have a single conversation with them. We also are in the process of assigning a head of purchasing. The way the purchasing has worked previously, it was either at the asset level or by country. We will have somebody who will be responsible for global purchasing, again, with the idea that we will take advantage of our scale and therefore should achieve better pricing. Those are just a few examples. There's a number of initiatives we've got. Again, 30 days in, but we have hit the ground running, and these changes are already being implemented as we speak on the phone today.
Okay. One more question regarding the non-core assets. Will you put some resources or efforts to turn the performance of these, or will you be more focused on trying to divest the weakest non-core assets?
Yeah. It's a very good question, actually. We will continue our efforts to work on fine-tuning our portfolio, and we'll be very deliberate and very disciplined in terms of the sales process. We will focus on continuing to fine-tune the portfolio, but we are not distressed sellers. If we have the right opportunity, we will sell the assets that don't fit our "core" qualifications. That being said, these assets are going to be attended to as if we are going to be long-term holders of these assets. We will continue to focus our asset management attention on these assets and make sure that they are getting the proper care. The last thing you want to have happen is to say you're going to sell an asset and then people forget about it and don't focus on it.
It's a point of emphasis within our organization in 2019 that we are going to dedicate the resources to make sure we are taking very good care of these assets and operating them as if we are long-term holders of these assets.
Okay, thanks. That's all for me.
Thank you. Once again, if there are any further questions on the line, please dial zero one on your telephone keypads now. As there are no further questions at this time, I'll hand back to our speakers for the closing comments.
Thank you. As there seem to be no further questions, I would like to thank everyone on the line for participating and thank you for the good questions as well. Should you have any further questions after this webcast, please feel free to reach out to me or Eero for questions. Thank you