Everyone, welcome to Citycon's January, September 2019 results audio cast. Earlier today, we published our interim report for the January-June period, and all material is available on Citycon's website under Investors. My name is Mikko Pohjola, and I'm Citycon's IR and Communications Director. With me here in the room, I have our CEO, Scott Ball, and our CFO and Executive Vice President, Eero Sihvonen. 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. This will be followed by Eero's review of the financial figures. The presentation will be concluded by Scott's remarks on Citycon'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, Mikko. 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 Eero, and then I will conclude the audiocast 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, Iso Omena in particular. Net rental income year to date is 1.7% over 2018.
Like for like NRI increased by 0.4%, and direct operating profit increased by a similar margin. Solid leasing development in the three quarters of 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, Erik Lennhammar started as Citycon's new chief development officer and member of the management committee in August. He's a great addition to the development team, which 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 EUR 0.79 and EUR 0.82 for the full year 2019.
During Q3 2019, we held our Capital Markets Day on September 3rd in Stockholm. The day was attended by around 30 participants who joined the tours in Kista and Liljeholmen, 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 Citycon 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 Iso Omena, and the new service square by the city of Lahti, 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 in more detail later. Our repositioning in Kista is progressing. During August, the grocery store ICA opened in Kista. The new store looks great and has received a lot of praise from our visitors.
The home store Rusta will open in the former ICA space in the first quarter of 2020. ICA complements the grocery offering, along with Lidl, which opened in June. Together, these two with the H&M concept Afound, has completed the repositioning of the former department store Åhléns. All this work has increased the grocery share of GLA to 8%. We have also seen some encouraging signs on the center footfall, which has increased from the prior year after the opening. We continue to work on the food court refurbishment, and we expect to launch the meat concept in Kista in first quarter of 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 Iso Kristiina 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 Leppävaara development project, we are building a geothermal power plant that will provide energy to the shopping center. Citycon's sustainability efforts were also recognized during the quarter when MSCI reiterated Citycon's double A 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, Iso Omena in particular. Eero 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 occupancy at 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, Scott, and good morning, everybody. I will be presenting in more detail the results of Q3 2019, which as mentioned, was another solid quarter. I will start from Net Rental Income. Net Rental Income ended up at EUR 54.2 million, which is very close to previous year's Q3 level, actually 1.2% higher. There were certain things that did impact it positively and slightly negatively. We had lower credit losses, that did help the situation. If we turn over to Direct Operating Profit, Direct Operating Profit was also very close to previous year's level. Here, the comparison period in 2018 included lower than normal SG&A costs due to some corrections and due to some other timing impacts in 2018. Despite of that, as mentioned, the Direct Operating Profit was 0.3% over Q3 last year.
The EPRA earnings were EUR 35.5 million, which was EUR 3.6 million below last year's level. Here we had lower finance cost. We refinanced the company quite substantially during Q3 2018. As a result, we continue to enjoy lower finance cost. Taxes for the quarter were slightly higher. Joint venture results were also slightly lower. Particularly the foreign exchange, the weak Norwegian crown, and particularly the weak Swedish crown had an impact here. If we turn over to the first nine months, the total period, we can see that net rental income actually for the full period did grow quite substantially by EUR 2.8 million, i.e., 1.7%. Later on, I will show the more exact bridge of the net rental income.
Direct operating-wise, we were also EUR 1.9 million higher, particularly due to the net rental income, but also due to slightly higher other income, whereas SG&A this year was EUR 2 million 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&A, whereas much of 2018 restructuring happened late in Q4. EPRA earnings-wise, we ended up at EUR 110 million, which was 0.6% above last year. Also here, the foreign exchange had an impact of close to EUR 2 million. Here, EPRA earnings with normalized effects would have been even more above last year's level. Turning over to net rental income bridge, the more exact analysis, here you can see that the redevelopment projects contributed EUR 3.9 million, and particularly this relates to Mölndal that came online late last year.
Disposals, naturally, we disposed successfully certain non-core properties, and that naturally had a negative impact on net rental income as usual. As mentioned by Scott, we had a positive like-for-like development also in Finland and other places, so EUR 0.4 million. The total basket of others, including FX and FX impact on net rental income, was negative by EUR 1.9 million, and the impact of IFRS 16 was positive by EUR 5.3 million, as can be seen. Turning over to the next bridge, which is the EPRA NAV bridge. Here you can see that our EPRA NAV now stands at EUR 12.58, and the main components can be seen here. Naturally positive earnings, EUR 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 EUR 0.42.
The translation exposure, mainly the equity translation of our subsidiaries in Norway and Sweden resulted a negative EUR 0.09 and dividends, of course. As a result of all of this, EPRA NAV ended up at EUR 12.58. The fair value changes for the quarter. The total fair value changes for the quarter were EUR 17.9 million negative, and EUR 1.5 million of this relates to the IFRS 16 standard. Comparable figure would have been EUR 16.4, which is lower than Q3 last year. As can be seen, it splits between different regions, so that about EUR 13 million Finland, Estonia, Norway, close to zero, Finland, Sweden, and Denmark, minus EUR 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. 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. No major other changes either. Loan to value now was slightly higher than previous quarter at 49.6%, mainly as a result of valuations and also by foreign exchange. 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. The slight increase only relates to the timing and impact of slightly less or slightly more commercial paper.
Essentially the same, 2.39 at the end of the period. Loan to value, as mentioned, now 49.6% due to the slight changes in valuation and effects. I would also like to highlight slightly relating when we are discussing in the context of valuation interest rates. Something which is not, in our opinion, fully reflected yet in the property valuations is the fact that interest rates are historically at very low levels. Maybe a little bit less so in Norway, but particularly in euros and Swedish crowns. 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. Always 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.
We feel that this is a very powerful argument why actually, particularly the better cap rates in our portfolio should stay and actually should even improve. This is something which we think has not been filtered into the valuations yet. We feel that it's supportive. Turning over to the outlook, 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. We did narrow it from both sides. Also we increased the lower level and brought down also the upper level naturally. Now the range in direct operating profit is EUR 190-195, earnings EUR 141-146, and EPS guidance EUR 0.79-0.82.
Here, the change of the range has little bit to do with the weak Norwegian crown and particularly weak Swedish crown and everything else that has been happening, like the disposals and the impact of disposals. This is now the new updated guidance. As you can see, updated from both ends, lower and higher end. With this, I would like to hand it back over to Scott.
Thanks, Eero. 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 570 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 sq m 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, and we're exploring all of these depending on the location. Our new Chief Development Officer, Erik Lennhammar, and the development team are considering alternatives at each project. We are currently having discussions on all three execution options. Our development project in Leppävaara 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 Iso Omena, and we are confident it will become the new heart of the fast-growing area of Espoonlahti in 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. Leppävaara will have a significant residential component attached to the shopping center, and we have building rights for up to 31,000 sq m. This will include eight buildings with 450 apartments in total. We estimate that we will open Leppävaara Shopping Center in spring of 2022. Leppävaara 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 specialty leasing business. This is the operating team's immediate focus in order to bring added value to all stakeholders. With Erik Lennhammar 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'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 Mikko.
Many thanks, Eero and Scott, for the presentation. 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.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. Our first question comes from the line of Anssi Kivimäki from SEB. Please go ahead.
Yeah. Hi, it's Anssi Kivimäki from SEB. A couple of questions from my side. I will take them one by one, if that's okay.
Sure.
First question is on the balance sheet. You highlighted that strengthening of balance sheet is a key priority in near term. You have taken already measures to defend the investment-grade credit rating. Could you elaborate a little bit, what are these measures and what options do you have when you are thinking about this?
Maybe I will start. This is Eero. Yes, of course, the primary option is to sell non-core properties, and this is as the company has previously also communicated, and this will naturally continue. Of course, in theory, everybody knows what the other opportunities would be, but the company is not working on anything in particular. There was a particular question related to equity, and we are not, as management, aware of anything related to that.
Okay. Thanks. The second question is on fair value losses of EUR 18 million. You gave us the country split, and you highlighted that there has been a slight increase in yield requirements. Is there anything else in the fair value bookings in Q3?
Nothing particular, no.
No. I just want to reiterate something that Eero said in his presentation. I think fundamentally, if you look at the spread between cap rates and interest rates. It's at this historically wide level, and 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. I think history has proven it. I think the appraisers, quite frankly, are a little bit behind the curve in terms of understanding what's happening.
Okay, thanks. Two questions, last. 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.
I 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. There was an effect with FX, but there was not a negative impact on NRI that was a surprise to us.
Exactly. Furthermore, it was highlighted that we, yes, had slightly higher SG&A, but that was particularly due to the fact that the comparison period was clearly lower than normal.
Okay, thanks. 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, et cetera. Are we already seeing the effects or, if not, when will we see something material kicking in, so to speak?
Yeah. This is Scott. I think we're starting to see that. We're starting to see some signs of that in the third quarter. Frankly, we built that into our internal plan. We expect that to accelerate into the fourth quarter. I think 2020 is when we should really start to see this pop.
Okay, that's all from me. Thank you very much.
Thank you.
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? 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 Lippulaiva, where we have a significant amount of building rights. That also extends to some projects in Sweden, and also one or two properties in Norway where we have existing building rights. 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 2024, 2025. We have just, as I said, we have a new Chief Development Officer who has hit the ground running. We have a pipeline laid out that we discussed recently with our board, and I will tell you, this is a key focus for the company and for the board.
Okay. You said that you would look into potentially selling some of these rights as and when various permissions come through in the future. Is that correct?
Yeah, 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. 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.
I'm not very clear.
Just a small addition. This is Eero. We did sell one plot during Q3, and you can see the impact, EUR 2.9 million positive gain on sale in Q3.
Okay. Thank you very much.
Just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. The next question comes from the line of Jonathan Kalnitzer from Goldman Sachs. Please go ahead.
Hi. Good morning. Sorry to come back to this point, it seems a bit confusing to me. I'm talking about the de-leveraging again, how you're planning to achieve that. Obviously you have disposals, you've done already quite a few of those. How much more 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. 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. As Eero mentioned, there are other options that we are considering and have discussed with the board.
All right. Okay. It's too early to give clarity on these options?
Exactly.
All right. Thank you.
The next question comes from Nico Debackere from ABN AMRO. Please go ahead.
aspect. 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? Thirdly, could you just remind me when you are switching again the appraisals? Currently you have CBRE, when is the next rotation happening with that? Thank you.
I'm sorry, we didn't catch the first part of the first question. Could you repeat that first question again?
Sure. That was just, if we talk of hypothetically of potential JVs, what sort of assets could you be looking at in that scope?
I'll take the JV question.
Where could you potentially consider. Yeah.
Yeah, 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 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, the commercial paper is short-term, and it's maturing during 2019. Maybe, Nico, you meant the bond maturing in 2020.
Oh, yes. Sure.
Yeah. Okay.
We have not yet decided how that would be handled. Indeed, EUR 219 million is maturing in June 2020, and this is our most expensive bond. Refinancing that bond anyway will have a positive impact on our cost of debt. You might remember that we already bought back close to EUR 300 million of this bond in 2018. Most of this refinancing risk has already been taken care of. Planning is continuing, so no news yet on how exactly that will be refinanced. Nico, can you remind me of the last question? What again was the last question?
Okay. Sure. The last was about the appraisal rotations, because you obviously do it, was it every three years? If you can remind me off the top of your head, when is the next rotation happening with the appraisals?
Yeah. Actually, the change of appraisers is less formal compared to change of auditors, for example. We don't have an exact policy of when they will be rotated, and therefore, we don't have anything to announce right now regarding the appraisers.
Okay. Fair enough. Thank you.
Thank you.
Thanks.
As there are no further questions, I'll hand it back to the speakers.
Many thank you for the good questions. If there are any further questions after the call, 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.
Thank you.
Thanks, everybody.