Good morning, everyone, and welcome to Citycon's January to September 2018 results audio cast. Today, we've published our interim report for the January-September 2018 period. The report, as well as the audio cast presentation, are both 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 CEO, Marcel Kokkeel, and our CFO and Executive Vice President, Eero Sihvonen. Marcel and Eero will walk you through the main events in terms of operations and financials for the January-September period. After the presentation, you will have the chance to ask questions. Marcel, please go ahead.
Yeah. Thank you, Mikko, good morning, everybody. Happy to present the company results over the third quarter. Let's go to the summary year to date, specifically Q3. EPRA earnings per share EUR 0.1230, well on track with our guidance that we have set earlier in the year. The earnings have been impacted by the divestments that we did in 2017, EUR 325 million, early 2018, another EUR 80 million. The currency worked against us. Both NOK and SEK weakened compared to last year, that also had a negative impact of EUR 4.2 million compared to last year. A significant decline in admin expenses, 40% down. The operational development, we call solid. If you look at the pro forma like-for-like, the NRI grew by 0.8%, that is including Iso Omena in Buskerud, the smaller shopping center in Norway that we redeveloped.
Occupancy still at a high level of 96%, a clear improvement in Finland, mildly down in Sweden and Norway. Now there is a positive trend in the leasing spread. Overall, a mildly positive 0.2% today. Mölndal, a new shopping center that we opened in Göteborg area. Happy with that new investment, we have good expectations. I have some slides to this. We successfully issued a EUR 300 million bond. We've been happy with the de-risking of the EUR 500 million bond that is expiring in 2020, at the same time, we reduced the average cost of debt. There is pressure on the non-core property fair values. For the quarter, we had a EUR 23 million value decline, this is actually in line with a global trend that shows increased market yields for assets in secondary towns, this is where it comes from.
In Norway, the declining values are due to widening yields, whereas the cash flow remains stable. In Finland, there's also pressure on the income in these secondary assets due to increased competition. Loan-to-value up to 48.2% due to the value decline and debt to cover the 50% acquisition of NCC's part in the shopping center of Mölndal. We specify the guidance towards EUR 0.1575 and EUR 0.1675 a share. Let's go to a new shopping center that we opened only three, four weeks ago, by the end of September. Nice shopping center, modern, in the heart of a growing city. We opened with a leasing percentage of 90%, after the opening, we signed another three leases, accounting for another 1,000 square meters. Good feedback from customers also very successful first weeks for tenants.
The expectation is that this shopping center and Mölndal will get direct rail connection with the Göteborg Airport. That will also improve the accessibility and the strength of the whole area. In the next slide, you see some numbers showing that we want to invest in growing cities and growing areas. Göteborg, fastly growing, and within Göteborg, Mölndal is one of the fast-growing areas with 6,000 new homes in the direct catchment of our center and with lots of new offices. One of the large office is occupied by SCA. That's a large international company that produces hygiene and forest products, and one of the famous brands is Libero. It's a large office that they have actually next to our shopping center. With the completion of Mölndal, full focus on Lippulaiva. Working on finalizing the concept, commercial concept construction.
In the meantime, we almost finished the rock blasting in time, and we are about to start the foundation. The next slide tells you something about new competition. You read a lot, and you hear a lot about new shopping centers in the Helsinki area. Maybe this is not the place and time to talk about other people's investments, I think it's fair to say that it's going to be busy in the eastern part of Helsinki with two major new centers coming online, and actually one opened only three weeks ago, already. To put it in a perspective, and what does it mean for Citycon? The bulk of our portfolio is on the other part of the city, the western part of Helsinki, especially Iso Omena, our flagship, but also the newly Poliva are established in the western part of Helsinki called Espoo.
This western part has a balanced, competitive environment compared to the eastern part and shows stronger population growth with much higher average income, almost 50% higher than the eastern part. This to put it in a perspective. Helsinki competition is growing, but it's mostly focusing on the eastern part. Opportunities for further developments. We have a attractive pipeline that we have planned, but still uncommitted. All quality assets at prime locations and within our existing portfolio. We can build on our urban mixed use philosophy. It's more than retail only. After the completion of Iso Omena and Mölndal recently, it's fair to assume that the expected CapEx will be approx. EUR 100 million per annum for the coming years. Still working on a bonus, the resi potential.
These urban developments have huge resi potential, and for all these developments, we are working on this and that has not been incorporated in our valuation so far. One of the examples is in Bergen, and our shopping center, Oasen. We are working on a mixed-use shopping center with more resi, more offices. There will be a new tramline connection just in front of our center. Area is fastly growing, this is just one example of our development and extensions of existing shopping centers to make them even stronger and more urban. Same for Liljeholmen, well known to most of you.
We made nice progress last quarter with our developments and negotiation with municipality, and the program is to increase by, let's say, 17,000, 18,000 sq m, and less than half of it will be retail, cinema, leisure, but there will also be culture, healthcare, library, offices, and we are having discussions with a hotel. A new example, another example of a strong urban development that will further increase the strength of our center. Let's go to the operational performance. The pro forma like-for-like, as I said already on the first page, ended at a 0.8%, including Iso Omena and Buskerud. The like-for-like portfolio, that's indicated with the pink bars, represents 59% of the total portfolio. In terms of fair value. Finland, and that's excluding Iso Omena, would show up 38% or would represent 38%, which is not representative for the strength of the portfolio.
The non-core assets are overrepresented in the like-for-like portfolio. 96% of the non-core assets are in the like-for-like, whilst the core assets are in for 55%. The reason is simple, as we have been developing those assets, those core assets, to further improve the quality and the cash flows. The pro forma like-for-like, on this slide, you can see how the assets in the core like-for-like are outperforming the assets in the non-core. Especially in Finland, but also in Norway, there is a big performance gap between the core and the non-core. Look at Finland, 2.6% in the core and -4.9%, close to 5% in the non-core. Going forward, as we execute on our divestment strategy of selling non-core assets, we will see improvements of our like-for-like numbers as the core becomes a bigger piece of the like-for-like pool, and the redevelopments will be added.
This is the transition that we have been managing over the last couple of years and that we will continue. Overall sales and footfall, 4% up the sales and the footfall plus 7%. If you look at the like-for-like, and that is again excluding Iso Omena, we end up with a flat footfall development on a company basis and 1% up if you talk about the tenant sales. The occupancy, the next slide, remained at a good level, hovering around 96%. Leasing spread in Finland and Estonia is very much impacted, I repeat that, by some non-core properties hindered by overstored local markets. This is why the leasing spread in Finland still shows a negative. Eero, time to hand over, and then I will get back to you with some final slides.
Thank you, Marcel. I will go through the Q3 financials starting from page 17. First of all, I would like to mention that during the quarter, we did combine two previous clusters, so to say, regions. Now Estonia and Finland are reported as one segment, compared to previously having Estonia as a separate segment. The reasons are obvious. Estonia was quite small as an independent segment following the split of the former Baltics and Denmark earlier, and we earlier already combined Denmark with Sweden. For your convenience, this quarterly report still includes certain figures for the former Estonia segment as well. Going forward, we will report Finland and Estonia as one cluster. Q3 quarterly financials on page 17 show net rental income, which is 8.6% below last year.
This is obviously and naturally mainly due to the fact that we sold a quite substantial non-core portfolio late last year, i.e., in November. We sold a substantial approximately EUR 165 million worth of portfolio. That is the main reason for the slightly lower net rental income, which I will come more in detail back to in a while. We did have clear savings in SG&A. In admin costs on a quarterly level were actually 22% lower than last year, which contributed to the fact that direct operating profit reduced less than net rental income. Direct operating profit was down by 7.5%, whilst the earnings were EUR 36.8 for the quarter, which is 6.4% below last year. Here we did achieve savings not only in admin costs, but also in finance costs, which were 7.4% below last year. Moving on to first nine months monthly figures.
Here you can see that net rental income is 7.7% below last year. Also, again, mainly due to the disposals of non-cores that again took place quite late in the year, helped improved by redevelopments coming online, acquisitions coming online, slightly penalized by negative FX, as I will mention in a while in more detail. For the first nine months, our cost saving exercises did perform quite well. SG&A costs on a first nine months basis are down 14%, or EUR 3 million, compared to last year, i.e., the savings there are quite substantial. We did achieve 5.6% lower finance cost. Those factors led to EPRA earnings being 7.8% below last year. I promised to have a more exact net rental income bridge, and here it comes. Basically, acquisitions, in particular the Strædet acquisition in Denmark, increased net rental income by EUR 3.1 million.
Redevelopment projects as a net impact had a EUR 3.1 million impact. Disposals, a negative impact of EUR 14.4 million. This was something that we knew that is going to happen. Like mentioned, the major disposals happened late in last year. We have had a negative impact of EUR 4.4 million coming mainly from the currencies. Whilst the Norwegian kroner has improved or increased since year-end, it actually now at the end of September was 3.8% higher, stronger than year-end. Still, the average Norwegian exchange rate compared to last year is clearly below, i.e., approximately 3.7% below the average last year, whilst the Swedish kroner has been even weaker. Basically, average is about 6.7% lower. Compared to end of last year, the balance sheet exchange rate, the spot exchange rate, was EUR 4.7 million below.
The impact on net rental income from currencies has been EUR 4.2 million lower, and on EPS, it's close to EUR 0.005 impact on EPS. We are talking about a quite sizable FX impact. Going forward, next item being the fair value changes. We had a negative EUR 20.7 million investment properties negative valuation coming mainly from Finland, Estonia, EUR 14.6 million. In Norway, EUR 6.7 million negative. This mainly reflects the slight revaluation downwards of our certain non-core properties in Finland and in Norway, whilst Sweden and Denmark were flat for the quarter. The average yield requirement remains the same as previous quarter without Kista 5.4% and with Kista 5.3%. There are slight widenings in non-core centers, the overall widening was so small that it's still within the previous quarter's average level.
Net asset value is close to previous quarter's level and not far from year-end, actually EUR 0.05 below end of last year. We have, of course, had the positive earnings, which has been compensated negatively by the indirect result, i.e. mainly fair value losses. Also during this quarter, we had the negative bond buyback cost approximately EUR 20 million, which has an impact, and others. As an overall result, EUR 2.66 single NAV. Actually, the triple net NAV increased contrary to the single NAV. The main reason here is the secondary market value of our bonds. Following the general widening on bond markets of bond spreads and interest rate increases, the impact of the bond prices was EUR 0.10 for the full year, for the first nine months on the triple net NAV.
Something we are particularly proud of, and that's being the successful refinancing that took place during the quarter, during third quarter. As Marcel mentioned, we were successful in de-risking the EUR 500 million bond, the benchmark bond that we have maturing in 2020, our nearest upcoming maturity, we used to have EUR 500 million. We were successful in issuing a long 8-year bond back in August at 2.375% coupon. We used more or less exactly all of the proceeds to buy back 2020 bonds. We did that at the price of 106.96 approximately. That resulted in the tender expenses of EUR 20.8 million, i.e. EUR 281 plus EUR 21 corresponds to EUR 300 million. As a result, of course, we booked this one-off cost in our Q3 financial items.
Going forward, this substantially and greatly reduces our average cost of debt by 42 basis points, to be exact, everything that we did in Q3. As a result, our average cost of debt is now 2.36%, meaning that we will be saving more than EUR 8 million on an annual basis in interest cost, meaning close to EUR 0.01 in earnings, which is quite substantial. Probably even more important is that we don't have any short-term upcoming maturities, the next maturity is now only, I would say, only EUR 219 million in 2020. The same KPIs can be found in the financing key figures tables. The average cost of debt, we used to have 2.78% at the end of last year. Now it's 2.36%, i.e. substantial reduction in cost of debt. Also, the average loan maturity has been extended to 5.2 years.
We are more than 90% fixed, we are not among the real estate companies that will be first hit by the future potential raises in interest rates. We are very conservative in that regard. Relating to the loan-to-value during the quarter, we bought the remaining 50% stake of Mölndal Galleria for approximately EUR 60 million. That was the main reason behind the slightly higher loan-to-value, i.e. 48.2%. We still remain committed to bringing it down. You may notice that we did transfer close to EUR 100 million of properties under properties held for sale during the quarter. We expect and hope to transact these and some of the transactions still during the year, bringing down the leverage. The last point from financial presentation is the outlook, we basically narrowed the guidance within existing ranges.
We are now guiding the markets that our EPS is expected to be EUR 0.1575 to EUR 0.1675, i.e., a EUR 0.01 range, and we feel that it is fit to narrow the range now to EUR 0.01. Calculating backwards then to EPRA earnings, that will result also narrower, similar guidance in that respect. If you make the calculations, you will see that we have now produced EUR 109 million earnings, and we are guiding that the last quarter earnings would be somewhere between EUR 31 million and EUR 40 million. In terms of EPS, something like EUR 0.0345 to EUR 0.0445. Very realistic guidance. This is all from me, so back to you, Marcel.
Yes. Thank you, Eero. To put all this in a strategic context, ladies and gentlemen, how to go forward? Well, our management targets and priorities remains to be focused on two elements, improve portfolio quality and improve the balance sheet. It goes without saying that active development of our core assets remain to be a key component as recycling of capital is. We are in several disposals negotiations at the moment, and we would expect to close some transactions before year-end. If you talk about the portfolio improvement, we want to create mixed-use community malls with retail and services that drive people to the centers on a daily basis. The word is convenience, daily convenience. We do that by proactive leasing and redevelopment of our best centers, only our best centers in capital cities or number 2 cities.
Today, the share of the non-retail part is 29%, and we want to improve and increase this number just to make our cash flow more diverse and online resilient and reflecting the urban nature of our properties. If you look at Iso Omena, which is a showcase of what we want to achieve with all kind of municipality services, healthcare, blood banks, X-ray services, entertainment, what have you. We have 37% of the income derived from non-retail. This is where we want to be in the future. That is talking about portfolio improvement. If we talk about balance sheet improvement, yes, capital recycling in 2017, I repeat, EUR 320 million. Early this year, EUR 80 million, and more to come. EUR 200 million-EUR 400 million in the next few years. That is what we have stated before. Again, we expect some transaction to be closed before year-end in the coming months.
We are still on a journey to improve the quality of the portfolio and the company. I know it takes time, complete investment, and returns that might kick in later. However, we are convinced that the route that we have chosen is the right one. We want to own larger and high-quality urban assets in a concentrated portfolio, meaning capital cities, number 2 cities in the countries we operate in. This focus will enhance the quality of the company, will lower SG&A and maintenance CapEx, and hence, it will enhance future cash flows. With this, I would like to hand over to the operator.
Thank you, Marcel, for the presentation. Now we have time for your questions. Let we turn to the operator and audio line for questions.
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press zero and then one on your telephone keypad now. The first question is from Ari Arvonen from Danske Bank. Please go ahead, your line is open.
Yes, hello, it's Ari from Danske. A few questions. First, starting with the CapEx. You mentioned about EUR 100 million on annual basis. Is this then assuming that the Lippulaiva works will start next year?
Yeah. It's including Lippulaiva. Again, today we have Lippulaiva as the only larger development ongoing, and we are working on it already, and we will continue to do that. The EUR 100 million for the coming years is including Lippulaiva.
Okay, thanks. On the admin costs, they're declining quite rapidly. Do you see room for further cuts, or how do you see that playing out?
We are now at a very good level internationally. I mean that the development has been quite positive. I don't think it's proper to promise much more. I think that going forward, of course, if we would dispose properties, we would make sure that also the admin cost would reduce in the same pace.
Okay. On the rent levels in Finland, there's a big increase in supply in Helsinki region. One big mall opened, the next one next year, Tripla. You are basically saying that on the western part, like Iso Omena, there are no signs of pressures on rental negotiations, given that those increases are other part of the city.
Yeah, this is exactly why we want to include that slide. The answer is yes, I confirm that the western part is not impacted as we have seen it so far, and we don't expect that this part will be impacted. By the way, there's a very fast growth, high growth in new residential being built in the area.
Yeah, that can be seen. Finally, a little bit smaller one, but what is the status of Koskikeskus in Tampere? The Ratina is now open, and it's right beside your mall. Have you experienced some changes in tenants or downside pressures on the rents there?
Well, it would be almost arrogant to say that we would be immune for a new 55,000 sq m of mall next to us. That's not true. There is an impact. Of course, there is an impact. If you look at the footfall, by the way, the footfall decline is marginal, only a couple of %. From that point of view, we don't see the impact. We feel that we have the strongest location. Koskikeskus is certainly part of the city center, the very heart of the city center of Tampere. Tampere is growing. Infrastructure around the Koskikeskus has improved and will further improve. There is an impact, of course. If there is 55,000 sq m next to you, there is an impact.
Okay, finally, on the Koskikeskus, do you see any need for remodeling or refurbishing? You've done some work there, do you expect to continue as it is now?
Well, I think that's what we do for a living. You need to position yourselves and with a face to the customer and taking into account competition. Koskikeskus is well-positioned, has an historical place in the very heart of the city. City is growing, we are going to focus more on the word urban and make it even more urban with more food and beverage, and daily convenience.
Okay, thank you. That's all from me.
As a reminder, if you have any further questions, please press zero and one on your telephone keypad now. The next question is from the line of Nicoletta De-Cunha from ABN AMRO. Please go ahead. Your line is open.
Thank you very much. Good morning, guys, and thank you for the presentation. My question is regarding the transaction market in Finland, and more relating to the non-core assets, because I noticed that obviously you mentioned in the presentation that you have disposition negotiations ongoing, but any update there, given that it just went out this morning, in the case of Old Harbour. Just how are you doing with the rest of your disposals in the Finnish market? Thank you.
Yeah, we are multitasking. Whilst being in this presentation, I also saw the news that Itis was sold. It shows that there is trade even for those large animals in quite a competitive environment on the eastern part. We are focusing on the more non-urban assets. As we have shown last year, there is a market. It's not easy, but we have proven that we are able to sell sizable numbers, portfolios, or assets at book, or even slightly above. That's the history, and we will continue doing that. I cannot commit to any kind of specific timeline. That would be unwise. I repeat what I stated in the presentation. We are in serious processes, and we expect to finalize some deals successfully before year-end.
Okay. Thank you.
There are currently no further questions registered. I'll hand the call back to the speaker. Please go ahead.
As there are no further questions, I would like to thank everyone for participating, and thank you for the good questions. Should you have any questions after the audio cast, please be in touch with me or Eero. Thank you very much.