Citycon Oyj

OMXH:CTY1S

Earnings Call Transcript 2018-Q1

[Mikko Pohjala, Head of Investor Relations]

Good morning, everyone, and welcome to Citycon's Q1 2018 Results Audiocast. Today, we've published our interim report for the January, March period of 2018. The interim report as well as the audiocast 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 operational performance as well as financial figures after which you will have the chance to ask questions.Marcel, please go ahead.

[Marcel Kokkeel, Chief Executive Officer]

Yes. Thank you, Mikko. Good morning, everybody. Let's go immediately to the highlights of Q1 2018. Well, EPRA earnings per share, EUR 0.041, well on track, I would say, taking into account the divestment -- substantial divestment of EUR 325 million last year that impacted EPS, and so did FX, the currency. Strict cost management in all levels of the organization and that resulted in a 10% lower admin expenses compared to 2017 Q1.Good operational developments. We've seen a positive leasing spread of plus 1.9%. And we call the operational performance in Sweden strong; in Norway, we call it solid; and we've seen a positive development in Finland. Finland is really picking up. We've seen slight improvement in occupancy rate, up to 96.1% and very much driven by Finland. So we feel upbeat about Finland, we've seen flat leasing spread, improved like-for-like NRI, tenant sales numbers, footfall, they’re all positive and extremely positive the outstanding operating performance in Iso Omena. Very strong footfall and very strong tenant sales also on a like-for-like basis, and I will get back to that later in the presentation.And then we have further recycle of capital and improved our portfolio quality. We have sold Åkermyntan shopping center, a smaller shopping center in Stockholm. After some value-enhancing investments and actions, we have decided to divest this property and that was completed -- that transaction was completed in Q1, above book value. And then we sold them -- after the quarter, by the way, we have sold Kuopio in Finland, one of the last properties out of the so-called supermarket 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 and the statement is less is more. In 2011, we had a portfolio -- total portfolio of EUR 2.5 billion, and 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 and that allows us to have a more efficient and more focused operation and organization also.And with the sale of Kuopio, we have divested actually almost all non-shopping centers that we used to have in our portfolio. 42 centers -- 42 properties we used to have in 2011; today, we have only one non-shopping center portfolio -- shopping center -- shopping -- retail property left. So a tremendous improvement if it comes to operations, but also the – fundamentally, the property quality portfolio increased.Then 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, and in Finland, this number is 47%, so less than half. And 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. And 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 4.1 million.Well, look at Sweden. We talk about strong improvement of NRI, 7.6%; and Norway, 1%; and Finland still negative, but the decline was eased by improvement of occupancy and leasing spread. The overall sales, plus 7%; footfall, plus 8%; and 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 and that indicates the overall growth in the like-for-like tenant sales, and that's actually driven by Iso Omena. But apart from that, also in our pure like-for-like portfolio here in Finland, we've seen a 3% positive. So a number that is clearly more positive than we have ever shown the last 3, 4 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 opens by the end of last year. Footfall doubled -- footfall doubled and actually we targeted a footfall of 14.5 million, up to 15 million this year, but we are expecting a footfall of 17 million, or even higher than that. And that indicates a very strong basis for growth. As we have seen already, if you look at the tenant sales, plus 44% and on the like-for-like basis, plus 13%. And 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. But special attention for the leasing spread, a clear improvement here, positive over Q1 [ 2018 ]. And in Finland, the leasing spread was stable actually for the first time since 2014. And it might be early days to forecast for the full year, but 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, but also due to the improved property fundamentals in our portfolio. Look at occupancy, 0.6% increase, average rent, nice growth. And if you look at the NRI, I think it's fair to say that we have seen the bottom and that we can go north.Would like to summarize and then hand over to Eero. Good operational development. Also in Finland, showing improvements actually in all operating KPIs. And then lower NRI and EPRA earnings, but very much impacted by the divestments in 2017, divestments of EUR 325 million. And the guidance, we keep unchanged. Eero?

[Eero Sihvonen, Executive VP & CFO]

Thank you, Marcel. I will continue from Page 13, i.e. Q1 financials. As you can see and 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, weaker Norwegian krona, SEK, Swedish krona was EUR 1.8 million. So 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 the 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 Q1, we will not, in a 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 over previous year. Especially, in Finland, the development was good. We also had gains on sale for the quarter. So this is of course a question we receive often. So are you forced to sell at a discount? So at least in this case, not sure if intermittent 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 EUR 600,000 less. Also, lower financing costs by EUR 1 million. So this will partly compensate for the slightly lower net rental income. And as a result, EPRA earnings were EUR 36 million and EPRA EPS EUR 0.041. And again, basically reflecting a stable FX rate, our EPRA EPS would have been very close to EUR 0.043, which was the EPS 1 year ago during the first quarter, which again is a good achievement.Then turning over to Page 14, i.e. the net rental income bridge. Here you can see the components, and 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 the net rental income by EUR 1.4 million. And acquisitions, the one transaction that we had, basically increased by EUR 1 million. And like mentioned, net rental, FX and also slight -- a bit other impacts -- other items impacted net rental income by EUR 1.9 million. So this is the full net rental income bridge.We had a particularly -- the impact of particularly weak Swedish krona and Norwegian krona, and the next page includes all the details thereof. And the executive summary is that compared to Q1 2017, the impact on net rental income level was EUR 1.8 million, lesser net rental income in 2018, as a result, on EPS -- EPRA EPS basis, like EUR 0.17. So on a quarterly EPRA EPS compared to previous year. We had a fairly stable translation result over the quarter. So in the other comprehensive income, there's only a EUR 400,000 change.Then fair values. And fair values in Finland, there was a loss of EUR 13.6 million recorded; in Norway, EUR 3.7 million; and Sweden plus Denmark, a strong gain of EUR 12.8 million; Estonia, slight reduction, EUR 3.5 million. So overall, EUR 7.9 million negative result. And of course, in Finland, the situation still did reflect the more difficult competition situation outside Helsinki and the development in a few noncore properties. So otherwise, value development also in Finland was quite stable. And in Norway, the slight reduction reflects the wider -- slightly wider yields and slightly lower market rents in non-Oslo properties, but also the development was quite stable. And in Sweden, the strong leasing and the strong markets in general continued to produce gains in fair values.NAV. Net EPRA, net asset values remained actually exactly stable, so same EUR 2.71 at year-end, and here you can see the bridge, but like mentioned, the changes were very minor. We had positive impact from EPRA earnings. We had slightly negative impact from indirect result, i.e. fair values and deferred taxes, but otherwise pretty stable. Triple net NAV came up slightly, mainly due to the slight positive revaluation of our -- the value of interest rate swaps and currency swaps.Then moving over to the LTV. And also LTV remained very stable over the quarter, 10 basis points up, i.e. 46.8%. And this does not yet include the impact of Kuopio, which was sold after the period, but does impact -- or does include the impact of Åkermyntan disposal. Of course, also here, the negative FX rates do have an impact and the company still remains committed to the 40% to 45% loan to value, and we intend to bring it back to this level.Then turning over to the guidance. The guidance, we are in line with our previous guidance. And of course, now when couple of properties have been either already sold or we have agreed the sale, we have included the impact of those in our guidance. And of course, we have updated the most recent FX rates, but still we are within -- 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.And this was all from me. Back to you, Marcel.

[Marcel Kokkeel, Chief Executive Officer]

Yes. 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. And I've been in Mölndal in Gothenburg 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, Gothenburg; 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 excavation -- in the phase of excavation of the land. The leasing is at a 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. So 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. And of course, it comes with pain. In 2018 and '19, 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. Its 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, and our mission is to provide urban convenience in the heart of communities. So mixed use, community malls, with commerce, retail, combined with services, and today, 55% of our income is already online resilient, and by proactive leasing we aim to increase this number by another 10% going forward. And 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% to 10% of the portfolio, and we will use the money for leverage reduction and to invest in core asset developments or investments.And 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. And 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.

[Mikko Pohjala, Head of Investor Relations]

Thank you for the presentation, Eero and Marcel. Now we have good time for your questions, so I would like to turn to the audio line for questions from the audience.

[Operator]

[Operator Instructions] Our first question comes from Robin Nyberg of Carnegie.

[Robin Nyberg, Financial Analyst]

I have 2 questions. First of all, regarding the Lippulaiva project, when do you expect to start the development of the project? And could you also comment on why it has been postponed here a couple of times? That's the first one.

[Marcel Kokkeel, Chief Executive Officer]

Okay. I'm 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. So I do not know why you talk about delay.

[Robin Nyberg, Financial Analyst]

Yes, the reason is that I'm looking at [ Lefto's ] comments and it was supposed to start already earlier, but that's clear. Okay.

[Marcel Kokkeel, Chief Executive Officer]

Yes, yes, yes. Nothing to do with our internal planning. So it's more technical too. And I cannot comment to Alecta's communication. We are on track.

[Robin Nyberg, Financial Analyst]

Sure. Okay. And 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, but are those headwinds starting to ease as demand seems to be picking up?

[Marcel Kokkeel, Chief Executive Officer]

Well, definitely in Finland, if you look at footfall and sales, we show positive numbers, and I'm really very happy, because even without Iso Omena, we can show those numbers. And as you know, we have shown quarter-after-quarter, unfortunately, negative numbers. So certainly, these positive numbers are leading indicators for higher -- for growth in NRI going forward. So that's Finland. You talked about Baltics. Baltics, very competitive environment. A new shopping center, large shopping center came to the market. We have great locations, we have great assets. In Kristiina, we are -- we have started already a refurbishment and upgrade, also driven by re-tenanting, and that impacts the numbers. And we also have similar plans for Rocca al Mare going forward. And as I already shared with you, Rocca al Mare also suffers right now, temporally, from road construction works that is hampering the accessibility of the center, but that will come to an end soon.

[Operator]

And our next question comes from Erik Salz of JPMorgan.

[Erik Salz, Analyst]

And it's 2 questions, maybe, from my side. First of all, can you tell us a little bit about where the investment amount for the centers that you have sold recently is coming from?

[Marcel Kokkeel, Chief Executive Officer]

Well, the local heroes for the [ 20 ] -- let's say, the [ EUR 20 million to 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, and as we have shown last year, we have sold a EUR 165 million property portfolio in Finland, scattered all over the place to Cerberus. So international, more opportunistic-driven investors.

[Eero Sihvonen, Executive VP & CFO]

The buyer was a real estate fund, established via institutional Finnish money, so local real estate fund.

[Erik Salz, Analyst]

Okay. That's clear. Maybe some of the next question is -- maybe partly been answered, but if you look at the positive things that you see in Finland, is that especially in Helsinki or also outside of Helsinki?

[Marcel Kokkeel, Chief Executive Officer]

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. So the like-for-like numbers that we presented today are very much driven by the non-Helsinki shopping centers. So you see growth there. I think that's -- answering your question, we see growth all over the place, more positive numbers. And if you add the positive -- the extreme positive performance of Iso Omena, I think we can feel upbeat about the Finnish performance going forward.

[Operator]

[Operator Instructions] There is one further question coming for you, that's from Tobias Kaj of ABG.

[Tobias Kaj, Research Analyst]

I have a question regarding the Iso Omena center. 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, so to say?

[Marcel Kokkeel, Chief Executive Officer]

We don't see lots of discounts. I mean, when you lease a shopping center, many times you have step-up rents. And if the center performs well, you see growth, and this is definitely the case in Iso Omena. So let's not talk about discounts here.

[Tobias Kaj, Research Analyst]

But should we expect that the income in the next few quarters will increase from Iso Omena? Or do we already see those higher levels?

[Marcel Kokkeel, Chief Executive Officer]

Yes.

[Tobias Kaj, Research Analyst]

Okay. And one more question, can I just ask how you define online resilient parts of the shopping centers?

[Marcel Kokkeel, Chief Executive Officer]

Well, fashion, by definition, is quite sensitive, quite vulnerable if you think about online, let's say, for shoes and these kind of categories, and our portfolio is very much based on daily convenience. So we have 17% of our income driven by groceries. Now I won't say that groceries are not bought online at all, but 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 health care. We have a lot of health care 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. So lots of health care, 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 our -- the number of shops, number of premises in the cafes and restaurants, food and beverage and entertainment. That is what we call online resilient. The same with wellness, gyms. So it's a definition based on logic, based on experience and based on the way customer behave.

[Operator]

[Operator Instructions] Okay. There seems to be no further questions at this time, so I hand back to our speakers for the closing comments.

[Mikko Pohjala, Head of Investor Relations]

Thank you. As said, there seems to be no further questions, so we would like to thank everyone for participating as well as for the good questions. But should you have any questions after this audiocast, 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.