Morning, everyone, and welcome to Citicorp's January 2019 results audiocast. Earlier today, we published our interim report for the January period, and all material is available on Citicorp's website under Investors. My name is Mick Bohelen, I'm Citicorp's IR and Communications Director. And with me here in the room, I have our CEO, Scott Bo and our CFO and Executive Vice President, E. R.
Sighmonen. As typically, Scott will start the audio cast with a summary of the quarter as well as going through the most important operational figures of the period. Then this will be followed by Eero's review of the financial figures. The presentation will be concluded by Scott's remarks on Citicom's key strategic focus areas as well as an update on our development projects. After the audio cast and the presentation, you will have the chance to ask questions from Eero and Scott.
Scott, please go ahead.
Thank you, Mico, and good morning, everyone. I'm pleased to present the January through September 2019 results. We will go through an overview of the reporting period and the key highlights of the first nine months. I will discuss a couple of key events of the quarter, after which I will present the operational figures for the first three quarters of the year. This will be followed by a more comprehensive financial overview from Arrow, and then I will conclude the autocast with a few remarks about our priorities going forward.
Some of the highlights of the first nine months of the year include net rental income continued to grow. We continue to see positive NRI development in the best assets, ESO Almina in particular. Net rental income year to date is 1.7% over 2018. Like for like NRI increased by 0.4. Direct operating profit increased by a similar margin.
Solid leasing development in the March 2019. Occupancy is at 95.3%, close to the prior year's level. Leasing spreads continue to be positive, particularly in Sweden and Norway. We were pleased that total tenant sales grew by 4% and the total footfall increased by 5%. Like for like tenant sales were stable and like for like footfall was up 1%.
Also, Eric Linhammer started as Citicom's new Chief Development Officer and member of the Management Committee in August. He's a great addition to the development team, is now focused on CityCon's densification and residential strategy. We have specified our guidance for 2019. After solid performance in January through September and including disposals in Finland, we are expecting EPRA EPS of between $0.79 and $0.82 for the full year 2019. During Q3 twenty nineteen, we held our Capital Markets Day on September 3 in Stockholm.
The day was attended by around 30 participants who joined the tours in Shista and Lilyholm followed by the presentations held by management. Our broader new management team discussed the strategic direction and key focus areas for the company. Our message that day was that Citicom has a very stable business model with a diversified tenant mix, which is less reliant on fashion. Our assets are located in dense urban areas with connections to transportation. 85 of our leases are linked to indexation, further enhancing the stability of our business model.
Also, we see the public sector tenant as growing in importance. We have several good examples of this, such as the Service Square by the city of Espoo in Issa Almina and the new Service Square by the city of Lotte, which will open later this year in our shopping center trio. In the near term, we aim to improve our performance by maximizing revenue and controlling cost. We see significant potential in our specialty leasing business on a pan Nordic scale. We have implemented a new organization, which has begun to harmonize our processes across The Nordics and thus improve cost control.
Our broader strategy is to become a mixed use urban developer and owner. And I will discuss this more detail later. Our repositioning in Shista is progressing. During August, the grocery store ECA opened in Shista. The new store looks great and has received a lot of praise from our visitors.
The home store Roosta will open in the former ECA space in the 2020. ECA complements the grocery offering along with Lidl, which opened in June. Together these two with the H and M concept AFOWN has completed the repositioning of the former department store Aileen's. All of this work has increased the grocery share of GLA to 8%. We have also seen some encouraging signs on center footfall, which has increased from the prior year after the opening.
Continue to work on the food court refurbishment and we expect to launch the meat concept in Shista in 2020. The food court is Sweden's largest and we are upgrading our presentation and offering with the rebranding. CityCon has also been a leader in sustainability. Our aim is to become carbon neutral by 2030 through reducing our energy consumption and producing more energy ourselves. It is an ambitious target and showcases our commitment to sustainability.
We have taken several steps to produce our own energy. By the end of the year, we will have installed solar panels in Niso Cristina in Finland and downtown in Norway. This brings the total number of solar panels to almost 6,400 in the whole portfolio. In addition, all electricity purchased by CityCon in 2018 was green electricity. In conjunction with our Leap Alava development project, we are building a geothermal power plant that will provide energy to the shopping center.
Citicom's sustainability efforts were also recognized during the quarter when MSCI reiterated Citicom's AA rating. Looking at our portfolio operating metrics, total footfall grew by 5% and total sales grew by 4%. On a like for like basis, footfall and tenant sales increased by 1%. Our like for like net rental income grew slightly while total net rental income grew by 1.7%. We had good NRI development in our best assets, ESA Omana in particular.
Era will discuss this in more detail later in the presentation. We were particularly pleased that like for like NRI development was positive in Finland. The occupancies of our shopping centers remained strong at 95.3%. We have a very stable business model with a resilient tenant mix and this is visible in the occupancy rate, which has been within 100 basis points during the past four years. During Q3, it remained in that range at 95.3%.
Leasing spreads were also positive during the quarter driven by Norway and Sweden. I will now hand over the presentation to Eero to go through the financial figures and reporting in more detail.
Thank you, Skost, and good morning, everybody. I will be presenting in more detail the results of Q3 twenty nineteen, which, as mentioned, was another solid quarter. I will start from net rental income. Net rental income ended up at €54,200,000 which is very close to previous year's Q3 level, actually 1.2% higher. And there were certain things that did impact it positively and slightly negatively.
We had lower credit losses and that did help the situation. And if we turn over to direct operating profit, direct operating profit was also very close to previous year's level. And here, the comparison period in 2018 included lower than normal SG corrections and due to some other timing impacts in 2018. But despite of that, as mentioned, the direct operating profit was 0.3% over Q3 last year. The EPRA earnings were €35,500,000 which was €3,600,000 below last year's level.
And here we had lower finance cost. We refinanced the company quite substantially at the during Q3 twenty eighteen. And as a result, we continue to enjoy lower finance cost. Taxes for the quarter were slightly higher and joint venture results were also slightly lower and particularly the foreign exchange, the weak Norwegian kroner and particularly the weak Swedish kroner had an impact here. If we then turn over to the first nine months, the total period, we can see that net rental income actually for the full period did grew quite substantially by €2,800,000 I.
E, 1.7%. And later on, I will show the more exact bridge of the net rental income. Direct operating wise, we were also 1,900,000.0 higher, particularly due to the net rental income, but also due to slightly higher other income, whereas SG and A this year was €2,000,000 higher compared to 2018 due to the restructuring costs and due to the fact that, like mentioned, Q3 in 2018 was a particularly low SG and A, whereas much restructuring was booked in, happened in late in like Q4. April earnings wise, we ended up at €110,000,000 which was 0.6% above last year. And also here, the foreign exchange had an impact of close to €2,000,000 So here, prior earnings with normalized FX would have been even more above last year's level.
Then turning over to net rental income bridge, the more exact analysis. And here you can see that the redevelopment projects contributed €3,900,000 and particularly this relates to MelnDal that came online late last year, whereas disposals naturally, we disposed successfully certain noncore properties and that naturally had a negative impact on net rental income as usual. And as mentioned by Scott, we had positive like for like development also in Finland and other places, so €400,000 whereas the total basket of others, including FX FX impact on net rental income was negative by €1,900,000 and the impact of IFRS 16 was positive by €5,300,000 as can be seen. Then turning over to the next bridge, which is the EPRA NAV bridge. And here you can see that our Netra EPRA NAV now stands at €12.58 and the main components can be seen here.
Naturally positive earnings, 0.62 was the main component. Different valuations and different other things happening under the heading of indirect result, mainly of course property valuations and deferred taxes were negative by €0.42 And also the translation exposure mainly the equity translation of our subsidiaries in Norway and Sweden resulted a negative €09 and dividends, of course. So that as a result of all of this, EPRA NAV ended up at €12.58 Then the fair value changes for the quarter. The total fair value changes for the quarter were €17,900,000 negative and €1,500,000 of this relates to the IFRS 16 standard. So comparable figure would have been 16,400,000.0 which is lower than Q3 last year.
And as can be seen, it splits between different regions, that about €13,000,000 Finland, Estonia, Norway close to zero Finland, Sweden and Denmark, minus 2.4%, whilst the average appraisal yield stayed approximately 5.3%, whilst there was a very slight increase of one or two basis points in the overall average yield requirement. Then turning over to main financing targets. You may recall that one quarter ago, our hedge ratio, I. E, the share of fixed rate in our financing portfolio slightly reduced to 52.5% due to the fact that June 20 bond turned short term. And therefore, this bond is now categorized not as a fixed rate, but rather as floating rate.
Investment grade ratings, of course, stayed the same and no major other changes either. And loan to value now was slightly higher than previous quarter at 90 sorry, 49,600,000.0 mainly as a result of valuations and also by foreign exchange. Then a more detailed breakdown of our interest bearing debt and the main components thereof. Weighted average interest rate stayed essentially the same, one or two notches, few notches above last quarter's situation, but essentially the same. So the slight increase only relates to the timing and impact of slightly less or slightly more commercial paper.
So essentially the same 2.39% at the end of the period. And loan to value, as mentioned, now 49.6% due to the slight changes in valuation and FX. I would also like to highlight slightly relating when we are discussing in the context of valuation interest rates. So something which is not, in our opinion, fully reflected yet in the property valuations is the fact that interest rates are historically at very, very low levels, maybe a little bit less so in Norway, but particularly in euros and Swedish crowns. And as a result, the spread between cap rates and interest rates has widened.
And now we are historically at a very wide spread between cap rates and interest rates. And all of us before, at least in the history, this has meant that one or the other has moved, I. E, either cap rates have compressed or interest rates have started to increase. So we feel that this is a very powerful argument why actually that particularly the better cap rates in our portfolio should stay and actually should even improve. And this is something which we have we think has not been filtered into the valuations yet and we feel that it's supportive.
Then turning over to the outlook. And here, I would like to highlight that we have reduced the ranges to lowest ever or the most narrow ever Q3 ranges and highlighting the fact that we are very confident about first of all, the business model, but also our last quarter outlook. And we did narrow it from both sides. So also, we increased the lower level and brought down also the upper level naturally. And now the range in direct operating profit is 190,000,000 to 195,000,000 earnings 141,000,000 €146,000,000 and EPS guidance €0.79 to €0.82 And here, the change of the range has little bit to do with the weaker Norwegian krone and particularly weaker Swedish krone and everything else that has been happening like the disposals and the impact of disposals.
But this is now the new updated guidance. And as you can see, both updated from both ends, lower and higher end. With this, I would like to hand it back over to Scott. Thanks, Dero.
I'd like to share a few thoughts with you on the company's focus for the rest of this year. As we discussed at the Capital Markets Day, we have significant opportunities to create further value through densification in the portfolio. We already have some residential exposure today with around five seventy apartments and the majority of those are located in Sweden. Looking at the potential in our portfolio offers based on current zoning processes, we could develop up to 320,000 square meters in the future. This could be either residential or office or even hotel depending on the market demand as well as the situation.
If we were to develop this potential as residential, it could mean up to 4,500 apartments. We have several alternatives to exploit this residential development opportunity. These include developing ourselves, JV ing with a partner or selling rights. It will depend on a specific situation. We're exploring all of these depending on the location.
Our new Chief Development Officer, Eric Linhammer, and the development team are considering alternatives at each project. We are currently having discussions on all three execution options. Our development project in Leap Alive is progressing in the Helsinki metropolitan area. We're very excited about this project. It will have many of the components that are contained in Issa Almina.
We are confident it will become the new heart of the fast growing area of Espelande and Espoo. Foundation works at the construction site are progressing as planned and the negotiations with the general contractor candidates have progressed well and we will soon be able to announce our construction partner. As mentioned before, at the Capital Markets Day, we talked a lot about mixed use development and our long term target of becoming a mixed use urban developer and owner. Leap Aliva will have a significant residential component attached to the shopping center, and we have building rights for up to 31,000 square meters. This will include eight buildings with four fifty apartments in total.
We estimate that we will open Leap Alive Shopping Center in 2022. Leap Alive is another example of the mixed use developments which will be the signature of CityCon in the future. To conclude, our strategic focus areas for the rest of this year include strengthening the balance sheet, which remains a priority for us. We will also look at capital recycling actions going forward at appropriate pricing levels. In the current retail environment, we continue to intensify our focus on maximizing the value of our assets as discussed earlier and in particular on growing the special leasing business.
This is the operating team's immediate focus in order to bring added value to all stakeholders. With Eric Linhammer now on board as our new Chief Development Officer, the team has begun to investigate residential and mixed use opportunities in the portfolio and how we can best exploit them. We are in various discussions in different countries, and we're pleased to see a lot of developer interest in our portfolio. This effort will continue to accelerate over the next several quarters. With that, I'd like to thank you and hand it back over to Mika.
Many thanks, Eero and Scott, for the presentation. And now we have time for questions, and we turn to the audio line for any potential questions from the investors and analysts. Operator, please go ahead.
Our first question comes from the line of Ansi Kibinemi from SEB. Please go ahead.
Yes. Hi, it's Ansi Kibinemi from SEB. A couple of questions from my side. I will take them one by one, if that's okay.
First
question is on the balance sheet. And you highlighted that strengthening of balance sheet is a key priority near term. You have taken already measures to defend the investment credit rating. So could you elaborate a little bit what are these measures and what options do you have when you're thinking about this?
Maybe I will start. This is Eero. Yes, of course, the primary option is to sell noncore properties, and this is, as the company has previously also communicated, and this will naturally continue. And of course, in theory, everybody knows what the other opportunities would be, but the company is not working on anything in particular in there was a particular question related to equity, and we are not, as management, aware of anything related to that.
Okay. Then the second question is on fair value losses of EUR 18,000,000. You gave us the country split, and you highlighted that there's a there has been a slight increase in yield requirements. So is there anything else in the fair value bookings in Q3?
Nothing particular, no. No. And I just want to reiterate something that Eero said in his presentation. Think fundamentally, if you look at the spread between cap rates and interest rates, it's at this historically wide level. You have to believe that it will return to a norm and one of two things is going to happen.
Our particular belief is that interest rates are not going to rise anytime soon. Therefore, that would lead you to believe that at least on the best assets, you'd start to see some sort of compression in cap rates. That is not being reflected by the appraisers today. It's something we feel strongly about, and I think history has kind of proven it. I think the appraisers, quite frankly, are a little bit behind the curve in terms of understanding what's happening.
Okay. Then two questions left. Compared to your expectations on Q3, did it go according to plans? I think that Eero highlighted that there was some particular negative impacts in net rental income at least.
No, don't think there was a negative impact on net rental income. I would say the quarter actually was slightly better than what we had in our internal plan. So there was an effect with FX, but there was not a negative impact on NRI that was a surprise to us.
Exactly. And furthermore, it was highlighted that we, yes, had slightly higher SG and A, but that was particularly due to the fact that the comparison period was clearly lower than normal.
Okay. Then the last is on rental income. In your strategic priorities, you aim to maximize the rental income and utilize the assets better, meaning the common areas, etcetera. Are we already seeing the effects? Or if not, when will we see something material kicking in, so to speak?
Yes. This is Scott. I think we're starting to see that. We started to see some signs of that in the third quarter. And frankly, we built that into our internal plan.
We expect that to accelerate into the fourth quarter. And then I think 2020 is is when we should really start to see this pop.
Okay. That's all from me. Thank you very much.
Thank you. And
the next question comes from the line of Oliver Carruthers from Goldman Sachs. Please go ahead.
Good morning. Oliver Carruthers here from Goldman Sachs. I just wondered if you could give some more color on Slide 21 on your potential gross building area, please. For the zoning rights, what stage are you currently at? Do you have any approvals in place?
And If not, particularly in Sweden and in Finland, what would be your timeline to getting zoning approvals for these residential units? Thank you.
Thanks, Oliver. This is Scott again. We're in various stages depending on the assets. We do have some building rights currently that we are beginning to take action on, particularly as mentioned in LipaLiva, where we have a significant amount of building rights. That also extends to some projects in Sweden and and also one or two properties in Norway where we have existing building rights.
Then we are also actively at work already on those locations where we know that we have capacity and we are working with the municipalities. As you are probably aware, it will depend on the location and the municipality in terms of how long it will take us to develop those and get those permitted. We have a high degree of confidence in those. This pipeline will stretch out over anywhere from starting now on some of these all the way through, say, to 2425. We have just as I said, we have a new Chief Development Officer who has hit the ground running, and we have a pipeline laid out that we discussed recently with our board.
I will tell you this is a key focus for the company and for the board.
You said that you would look into potentially selling some of these rights as and when various submissions come through in the future. Is that correct?
Yes. I think it depends on the asset. There are some locations where quite frankly it might be better for the asset for us to sell those rights off, but we are also building internally the capacity for us to do this work ourselves. It really is going to depend on an asset by asset basis.
Small addition, this is Eero. We did sell one plot during Q3 and you can see the €2,900,000 positive gain on sale in Q3.
Okay. Thank you very much.
The next question comes from the line of Jonathan Kalnadev from Goldman Sachs. Please go ahead.
Hi, good morning. Sorry to come back to this point, but it seems a bit confusing to me. I'm talking about the deleveraging again and how you're planning to achieve that. Because obviously, you have disposals, but you've done already quite a few of those. So how much more can you give in can you make in the current environment given the pricing that you're mentioning?
Talking about building rights, you're not necessarily looking to sell them in the short term. So what other options do you have beyond raising equity?
We have one asset that we moved to for sale. We do have something in the pipeline that we anticipate taking place soon which will contribute to that. But as Ero mentioned, are other options that we are considering and have discussed with the Board.
All right. Okay. And it's too early to give clarity on these options.
Exactly.
All right. Thank you.
And the next question comes from Nico Nevakuri from ABN AMRO.
And if we talk hypothetically of potential JVs, what sort of assets could you look at as a potential JV target? Second question, if I may, regarding the commercial paper that's maturing in 2020, Could this be potentially changed to bank loans? Or are you looking at alternative sources in terms of debt financing? Or are you just planning to roll it over with additional commercial paper? And thirdly, could you just remind me when you are switching again the appraisals?
Because currently, have CBRE, but when is the next rotation happening with that? Thank you.
Can you I'm sorry, we didn't catch the first part of the first question. So could you repeat that first question again?
Sure. So that was just if we talk of hypothetically potential JVs, what sort of assets could you be looking at in that scope?
So I'll take the JV question.
Could you potentially consider? Yes.
Yes, I'll take the JV question. When we talk about JVs, we're talking about potentially JV ing the densification effort. And there may be some locations where it makes sense for us to bring in a developer partner and do it together. Again, I would say that we are in the process of working through the portfolio on our strategy and trying to determine which one of our opportunities would make sense where we might want to do that. We have identified a couple of those.
I don't want to mention the specific properties just yet, but we it is an option for us on this densification effort. I'll let Eero take the subsequent questions.
Yes. The second question was about commercial paper maturing in 2020. Actually, commercial paper is short term, and it's maturing during 'nineteen. So maybe, Nico, you meant the bond maturing in 2020. Yes.
Yes. Okay. So we have not yet kind of decided how that would be handled. But indeed, $219,000,000 is maturing in June 2020, and this is our most expensive bond. So refinancing that bond anyway will have a positive impact on our cost of debt.
And you might remember that we already bought back like close to €300,000,000 of this bond in 2018. So most of this refinancing risk has already been taken care of. But planning is continuing, so no news yet on how exactly that will be refinanced. And Nico, can you remind me of the last question? What again was the last question?
Okay. Sure. The last was about the appraisal rotations. You obviously do it, is it every three years? So if you can remind me off the top of your head, when is the next rotation happening with the appraisals?
Yes. Actually, there's the change of appraisers is less formal compared to a change of auditors, for example. So we don't have like an exact policy of when they will be rotated. And therefore, we don't have anything to announce right now regarding the appraisers.
Fair enough. Thank you.
Thank you. Thanks.
There are no further questions, I will hand it back to the speakers.
Many thank you for the good questions. And if there are any further questions after the audiocast, please reach out to me or Eero then, and we're happy to help. Thank you for attending the call, and we wish you a very nice day. Thank you.
Thanks, everybody.