Good morning, everyone. Welcome to Citycon's Q1 2018 results audio cast. Today we've published our interim report for the January-March period of 2018. The interim report, as well as the audio cast presentation, are available on our website under Investors. My name is Mikko Pohjala. I'm the Head of Investor Relations, and here with me today, I have our CEO, Marcel Kokkeel, as well as Eero Sihvonen, our CFO and Executive Vice President. Marcel and Eero will briefly go through the first quarter in terms of operation performance as well as financial figures. After which, you will have the chance to ask questions. Marcel, please go ahead.
Thank you, Mikko Pohjala. Good morning, everybody. Let's go immediately to the highlights of Q1 2018. EPRA earnings per share, EUR 0.041. On track, I would say, taking into account the substantial divestment of EUR 325 million last year. That impacted EPS. So did FX, the currency. Strict cost management in all levels of the organization. That resulted in a 10% lower admin expenses compared to 2017 Q1. Good operational developments. We've seen a positive leasing spread of +1.9%. We call the operational performance in Sweden strong. In Norway, we call it solid. We've seen a positive development in Finland. Finland is really picking up. We've seen slight improvement in occupancy rates up to 96.1%. Very much driven by Finland. We feel upbeat about Finland. We've seen flat leasing spread, improved like-for-like NRI, tenant sales, numbers, footfall. They're all positive.
Extremely positive, the outstanding operating performance in Iso Omena. A very strong footfall and very strong tenant sales also on a like-for-like basis. I will get back to that later in the presentation. We have further recycled our capital and improved our portfolio quality. We have sold the Kockum Intimates shopping center, a smaller shopping center in Stockholm. After some value-enhancing investments and actions, we have decided to divest this property. That transaction was completed in Q1 above book value. After the quarter, by the way, we have sold Kuopio in Finland, one of the last properties out of the so-called supermarkets and shop portfolio. The guidance for 2018 unchanged, meaning between EUR 0.155 and EUR 0.175 per share. Let's go back in time, the next slide. We have been working on a huge transition of our portfolio. The statement is, less is more.
In 2011, we had a total portfolio of EUR 2.5 billion. At that time, we had 78 properties within our portfolio. Today, we have a EUR 4.5 billion property portfolio with 43 properties. Hence, the average size and quality of the portfolio increased. That allows us to have a more efficient and more focused operation and organization also. With the sale of Kuopio, we have divested actually almost all non-shopping centers that we used to have in our portfolio.
EUR 4.5 billion.
42 properties we used to have in 2011. Today, we have only one non shopping center retail property left. A tremendous improvement if it comes to operations, but also fundamentally, the property quality portfolio increased. The like-for-like NRI grew by 0.8%, and the overall NRI/GRI ratio also improved up to 87.9%. Please bear in mind that the total NRI or the total like-for-like NRI is 65% of our total portfolio. In Finland, this number is 47%, so less than half. Of course, the reason is Iso Omena and Lippulaiva. Both centers, specifically Iso Omena, is still out of our like-for-like. As of Q2, we're going to present you comparisons on a like-for-like basis for both, for Iso Omena. Also bear in mind that the currency had a negative impact on NRI, EUR 1.8 million, and the divestments also had a negative impact of EUR 12.1 million.
Well, look at Sweden. We talked about strong improvement of NRI, 7.6%. Norway 1% and Finland still negative, but the decline was eased by improvement of occupancy and leasing spread. The overall sales +7%, footfall +8%. On a like-for-like basis, I would say stable development. I would like to ask special attention for the black column on the left-hand side, that indicates the overall growth in the like-for-like tenant sales. That's actually driven by Iso Omena. Apart from that, also in our pure like-for-like portfolio here in Finland, we've seen a 3% positive. A number that is clearly more positive than we have ever shown the last three, four years. Estonia, very much driven by extreme competition that came to the market and by roads constructions at Rocca al Mare, and this road construction will be finished before summer. Outstanding performance, Iso Omena.
I think this is the right statement after the metro opened by the end of last year. Footfall doubled. Actually, we targeted a footfall of 14.5 million up to 15 million this year. We are expecting a footfall of 17 million or even higher than that. That indicates a very strong basis for growth, as we have seen already, if you look at the tenant sales, +44%, and on a like-for-like basis, +13%. Retail occupancy remains at a very high level of 98%. Overall, the occupancy improved in our portfolio slightly, 96.1% is the number right now. Special attention for the leasing spread. A clear improvement here, positive over Q1 2018. In Finland, the leasing spread was stable actually for the first time since 2014.
It might be early days to forecast for the full year, we feel upbeat, we are very pleased with the development during this quarter. We see encouraging signs in Finland due to the positive economic environment, due to the improved property fundamentals in our portfolio. Look at occupancy, 0.6% increase. Average rent, nice growth. If you look at the NRI, I think it is fair to say that we have seen the bottom and that we can go north. Would like to summarize, then hand over to Eero. Good operational development. Also in Finland, showing improvements actually in all operating KPIs. Lower NRI and EPRA earnings, but very much impacted by the divestments in 2017, divestment of EUR 325 million. The guidance we keep unchanged. Eero.
Thank you, Marcel. I will continue from page 13, i.e., Q1 financials. As you can see, as was mentioned already by Marcel, our net rental income was down by 5.8% and ended at EUR 53.3 million. Actually, more than half of this reduction was due to the currencies and the impact of lower, weak Norwegian crown and SEK. Swedish crown was EUR 1.8 million. Basically, on the basis of same FX rates, our net rental income for the quarter would correspond to something like EUR 55.1 million, which was a good achievement taking into account that we improved the quality of our portfolio by selling about EUR 325 million of non-core properties. Due to the fact that this is a Q1, we will not in great detail go through the income statement. You can find that in the appendix on page 26.
I will just note a few highlights from there. You will be able to see that the credit losses were again very modest and actually reduced our previous year, especially in Finland, the development was good. We also had gains on sale for the quarter. This is of course a question we receive often. Are you forced to sell at a discount? At least in this case, not so. Kermit and disposal took place at a gain, and this gain of EUR 3 million is booked in Q1 numbers. Also, the admin costs developed very positively, i.e., about 10% lower admin costs at that EUR 600,000 less. Lower financing costs by EUR 1 million. These will partly compensate for the slightly lower net rental income. As a result, EPRA earnings were EUR 36 million and EPRA EPS EUR 0.041.
Again, basically reflecting a stable FX rate, our EPRA EPS would have been very close to EUR 0.043, which was the EPS one year ago during the first quarter, which again is a good achievement. Turning over to page 14, i.e., the net rental income bridge. Here you can see the components, as mentioned already, disposals reduced the net rental income by EUR 4.1 million, i.e., this was the impact of selling the portfolio of weak non-core assets, whilst the redevelopment projects, Iso Omena in particular, increased net rental income by EUR 1.4 million. Acquisitions, the one transaction that we had basically increased by EUR 1 million. Like mentioned, net rental FX and also a bit other impacts, other items impacted net rental income by EUR 1.9 million. This is the full net rental income bridge.
We had the impact of particularly weak Swedish krona and Norwegian krona. The next page includes all the details thereof. The executive summary is that compared to Q1 2017, the impact on net rental income level was EUR 1.8 million less than net rental income in 2018 as a result on EPRA EPS basis like EUR 0.17 on a quarterly EPRA EPS compared to previous year. We had a fairly stable translation result over the quarter. In the other comprehensive income, there is only EUR 400,000 change. Fair values. Fair values in Finland, there was a loss of EUR 13.6 million recorded. In Norway EUR 3.7 million, Sweden plus Denmark, a strong gain of EUR 12.8 million. Estonia, slight reduction, EUR 3.5 million. Overall, EUR 7.9 million negative result.
Of course in Finland, the situation still did reflect the more difficult competition situation outside Helsinki and the development in a few non-core properties. Otherwise, value development also in Finland was quite stable. In Norway, the slight reduction reflects the slightly wider yields and slightly lower market rents in non-Oslo properties. Also there, the development was quite stable. In Sweden, the strong leasing and the strong markets in general continued to produce gains in fair values. NAV, EPRA net asset values remained actually exactly stable, so same EUR 2.71 as at year-end. Here you can see the bridge where, like mentioned, the changes were very minor. We had positive impact from EPRA earnings. We had a slightly negative impact from indirect result, i.e. fair values and deferred taxes. Otherwise pretty stable.
Triple net NAV came up slightly mainly due to the slight positive revaluation of the value of interest rate swaps and currency swaps. Moving over to the LTV. Also LTV remained very stable over the quarter, 10 basis points up, i.e., 46.88%. This does not yet include the impact of Kuopio, which was sold after the period, but does include the impact of Åkerlund disposal. Of course, also here the negative FX rates do have an impact. The company still remains committed to the 40%-45% loan to value, and we intend to bring it back to this level. Turning over to the guidance. The guidance, we are in line with our previous guidance. Of course now when a couple of properties have been either already sold or we have agreed the sale, we have included the impact of those in our guidance.
Of course, we have updated the most recent FX rates. Still we are nicely within the guidance and did not specify the guidance and that follows our previous practice. Also last year, we narrowed the guidance and specified the guidance only at Q2, and this is the same thing that we intend to do this year as well. This was all from me. Back to you, Marcel.
Thanks, Eero. Looking forward, looking ahead, the success of Iso Omena really encourages us to further recycle the capital and to reinvest the proceeds in high quality assets in urban environments and to develop them. I've been in Mölndal in Göteborg this week, and the mall is about to open in September. It will be a modern mall in the heart of a growing city center in Mölndal, Göteborg. Outstanding connectivity with direct and indirect catchment and great architecture, state-of-the-art interior design and tenant mix. Lippulaiva, we have almost completed now demolition, and we are in the phase of excavation of the land. The leasing is at the solid level already of 60%, even before starting the construction. Some words about Kista.
We are in the stage of repositioning and re-tenanting, and we want to add grocery offer to the center, make it more daily, add more services, food, and beverage as we did already over the last couple of years, and we will continue that track. We will make use of the momentum and we will upgrade the look and feel of the center, call it a facelift. We're going to make the center up to date, so it's well prepared to cater the daily needs for workers, for the residents in this fast growing area around the center. Of course, that comes with a pain. In 2018 and 2019, we're going to touch more than 20% of the GLA, and therefore, we have taken it already out of the like-for-like before. The total investment is, let's say EUR 25 million, and Citycon's part is half of it.
The Kista case really shows that we are preparing our centers for a future in which the center is more online resilient. Our mission is to provide urban convenience in the heart of communities. So mixed-use community malls. With commerce, retail, combined with services. Today, 55% of our income is already online resilient. By proactive leasing, we aim to increase this number by another 10% going forward. Here, I think Citycon has something special in our business model. Daily convenience, lots of non-retail, daily services that help people to organize their daily lives and daily routines. Strategic focus areas for 2018, further capital recycling. For the coming years, we intend to divest another 5%-10% of the portfolio, and we will use the money for leverage reduction and to invest in core asset developments or investments. Then operational excellence.
Focus on online resilience is core of our strategy, and of course, maintain strict cost management as we have shown in Q1. Last but not least, I want to repeat that, get the loan to value below 45%. Having said that all, I would like to hand over to Mikko.
Thank you for the presentation, Eero and Marcel. We have good time for questions, I would like to turn to the audio line for questions from the audience.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. If you find it is answered before it is your turn to speak, you can dial 02 to cancel. Our first question comes from Robin Nyberg of Carnegie. Please go ahead, your line is open.
Hello, guys. I have two questions. First of all, regarding the Lippulaiva project, when do you expect to start the development of the project? Could you also comment on why it has been postponed here a couple of times? That is the first one.
Okay. I am not aware of the fact that we have postponed it, to be honest. We intend to start the construction in September, October, and that is according to plan. I do not know why you talk about delay.
Yeah, the reason is that I'm looking at Lehto's comments, and it was supposed to start
Oh, okay
already earlier, but that's clear.
Yeah.
Okay?
It's nothing to do with our internal planning, so it's more technical to it. I cannot comment to Lehto's communication. We are on track.
Sure. Okay. Thank you. Also, could you briefly go through the supply-demand situation per country? I think earlier you have said that you have had some headwinds in Baltics and Finland, are those headwinds starting to ease as demand seems to be picking up?
Well, definitely in Finland. If you look at footfall and sales, we show positive numbers, I'm really very happy because even without Iso Omena, we can show those numbers. As you know, we have shown quarter after quarter, unfortunately, negative numbers. Certainly, these positive numbers are leading indicators for growth in NRI going forward. That's Finland. You talked about Baltics. Baltics, very competitive environment. New shopping centers, large shopping centers came to the market. We have great locations. We have great assets. In Kristiine, we have started already a refurbishment and upgrade, also driven by re-tenanting, that impacts the numbers. We also have similar plans for Rocca al Mare going forward. As I already shared with you, Rocca al Mare also suffers right now temporarily from road construction works that is hampering the accessibility of the center. That will come to an end soon.
All right. Thank you very much.
Thank you. Our next question comes from Erik Stoltz of JP Morgan. Please go ahead. Your line is open.
Yes, thank you. Good morning. Just two questions maybe from my side. First of all, can you tell us a little bit about where the investment demand for the centers that you have sold recently is coming from?
Well, the local heroes for the EUR 20 million-EUR 30 million shopping centers. Local shopping centers tend to be bought by local or regional investors. If you look at larger centers, we talk about funds, most of them regional funds. As we have shown last year, we have sold EUR 165 million property portfolio in Finland, scattered all over the place, to Cerberus, so international, more opportunistic-driven investors.
Okay. Yeah, that's all right.
For three, Kuopio, the buyer was a real estate fund established by institutional Finnish money, so local real estate fund.
Okay. That's clear. Thank you. Maybe some of the next question is maybe partly been answered. If you look at the positive things that you see in Finland, is that especially in Helsinki or also outside of Helsinki?
Well, I might recall that our Finnish portfolio consists of Iso Omena as the largest-
center by far in the portfolio, but not yet in like-for-like. Lippulaiva out of like-for-like. The like-for-like numbers that we presented today are very much driven by the non-Helsinki shopping centers. You see a growth there. I think that's answering your question. We see growth all over the place, more positive numbers. If you add the extreme positive performance of Iso Omena, I think we can feel upbeat about the Finnish performance going forward.
All right. Excellent. Thank you very much.
Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. As I say that, there is one further question coming through. That is from Tobias Kaj of ABG. Please go ahead. Your line is open.
Thank you. I have a question regarding the Iso Omena and if there are still any big or any major discounts for tenants or if the income we see now is the long-term income, let's say.
We do not see lots of discounts. When you lease a shopping center, many times you have step-up rents. If the center performs well, you see growth. This is definitely the case in Iso Omena. Let's not talk about discounts here.
Should we expect that income in the next few quarters will increase from Iso Omena, or do we already see those higher levels?
Yes
Okay, thank you. One more question. Can I just ask how you define online resilient parts of the shopping centers?
Well, fashion, by definition, is quite sensitive, quite vulnerable if you think about online. The same for shoes and these kind of categories. Our portfolio is very much based on daily convenience. We have 17% of our income driven by groceries. Now, I won't say that groceries are not bought online at all. If you look at the numbers of the grocery companies, they talk about 2%, 3% of the total sales driven by online. That's a low number, and that's what we call resilient. If you look at services and offices, if we talk about offices, we talk about healthcare. We have a lot of healthcare in our centers. Actually, it's one of our core focus areas for our leasing teams. It's a new category. It's even a new competence that we have developed in our organization, and I think we are ahead of the crowd.
Lots of healthcare, lots of municipality services we add to our shopping centers. Cafes and restaurants, you cannot drink a cup of coffee online. Here in Iso Omena, if I might use Iso Omena again as an example, we have 25% of the number of shops, number of premises in cafes and restaurants, food and beverage, and entertainment. That is what we call online resilient. The same with wellness, gyms. It's a definition based on logic, based on experience, and based on the way customers behave.
Okay. Thank you for taking my questions.
Thank you once again. If there are any further questions, please dial zero one on your telephone keypads now. Okay, there seem to be no further questions at this time, so I'll hand back to our speakers for the closing comments.
Thank you. As said, there seems to be no further questions, we would like to thank everyone for participating as well as for the good questions. Should you have any questions after this audio cast, please feel free to be in touch with me or Eero or Marcel. We wish you all a very nice rest of the week. Thank you