Citycon Oyj

OMXH:CTY1S

Earnings Call Transcript 2019-Q1

[Mikko Pohjala, Director of IR & Communications]

Good morning, everyone, and welcome to Citycon's Q1 2019 Results Audiocast. Earlier today, we published our interim report for the January-March 2019 period. All material is available on Citycon's website under Investors. My name is Mikko Pohjala. I'm Citycon's IR and Communications Director. And with me here in Stockholm, I have our CEO, Scott Ball; CFO and Executive Vice President, Eero Sihvonen; as well as our Chief Operating Officer, Henrica Ginström. Scott will start the audiocast with a summary of the first quarter of 2019, together with some operational figures of the quarter. This will be followed by Eero's review of the financial figures of the quarter. Scott will then conclude the presentation by giving some key focus areas for the rest of the year. After the audiocast, you will have chance to ask questions from us. Scott, please go ahead.

[F. Scott Ball, Chief Executive Officer]

Thank you, Mikko, and good morning, everyone. I'm pleased to present the Q1 2019 results. I will go through a short summary of January through March 2019 and the key highlights of the quarter. I will share a few words about our new organization, after which I will present the operational figures for the quarter. This will be followed by a more comprehensive financial overview by Eero, and I will conclude by saying a few remarks about our priorities going forward. Some of the highlights of the first quarter include our EPRA EPS, excluding the onetime cost related to the management change, amounted to EUR 0.207, while the reported EPRA EPS amounted to EUR 0.201, including the onetime cost related to organizational changes. Our administrative expenses, excluding the one-off cost, declined significantly year-on-year. We had a solid operational start to the year. We are very pleased that the overall leasing spread was positive in all 3 of our largest markets: Sweden, Norway and Finland. Occupancy also remained strong at 95.9%. Total tenant sales and footfall both showed growth. In mid-April, our flagship asset, Iso Omena in Finland, received recognition from the International Council of Shopping Centres. Iso Omena was awarded the best large shopping center extension project in Europe by ICSC, and I'll get back to this later in the presentation. During the quarter, a reverse split was carried out on our share at a ratio of 5:1. And as a result, all our share-based figures have changed accordingly.Our guidance for 2019 remains unchanged. We already adjusted our guidance for EPRA EPS during the quarter in March to reflect its new number of shares due to the reverse split. We continue to guide the market towards an EPRA EPS of EUR 0.775 to EUR 0.875.During Q1 2019, we implemented our new organization structure. The aim of this restructure is to improve asset level focus and remove boundaries between countries and functions. The ultimate goal is to intensify focus on asset management as well as improve G&A efficiency.Starting with the shopping center management organization, we made changes which increased accountability at the asset level by change in reporting lines. This will mean full P&L responsibility for our center managers and will incentivize our personnel to even further intensify their efforts to maximize the value of each asset. As it relates to the leasing function, we have separated leasing and specialty leasing into their own respective business units. We now have one Head of Leasing leading all countries, and the company will speak with one voice. At the same time, we have a new Head of Special Leasing with the aim of dramatically intensifying our efforts in the common area leasing and media sales. Within the operations team, we have formed a completely new function and team whose aim is to harmonize processes and standards across our operating countries. In addition, the team has centralized purchasing that take advantage of our Pan-Nordic reach. A few words about our specialty leasing business and why we believe there is so much potential. We welcome over 170 million visitors to our assets. This provides a great opportunity to significantly increase our revenue from our common areas. Specialty leasing is currently a EUR 6 million business, which represents less than 2.5% of our NRI. In the U.S. mall business, this number is closer to 8%. Specialty leasing encompasses media sales and specialty leasing. Media sales include all advertising sales in our shopping centers, be it our own media sales or sales via a partner. Specialty leasing or common area leasing would include kiosks and stands in the middle of our centers as well as parking lots. Over half of our specialty leasing sales come from Finland today where there is still opportunity to improve these results dramatically.Further, with this centralized effort, we have the opportunity to translate this success to Sweden and Norway, and our large footfall numbers provide a great starting point for capitalizing on this traffic.We have made great progress in reshaping our portfolio. And as of today, our value is now more concentrated in our largest assets. Our top 7 assets, including the likes of Iso Omena and Myyrmanni in Finland, Liljeholmen and Kista Galleria in Sweden, Oasen and Herkules in Norway and Rocca al Mare in Estonia, make up approximately 50% of the value of our portfolio. These assets are not only the biggest, but are located in the largest and fastest-growing urban markets. This concentration of value demonstrates our focus on owning the best assets in great cities with a focus on transportation. We will exploit these opportunities in each of these assets for further densification.As I mentioned last quarter, Iso Omena has been a success story for us and is a perfect example of where we will be in the future. This shopping center ticks all the boxes that we believe are important for a successful shopping center: urban location, population growth, public transportation, dominant size and opportunities for densification. This flagship asset has a tremendous footfall of 20 million visitors, and the population of the city is projected to grow by 16% in 2030.Iso Omena, like most of our shopping centers, is located at a public transportation hub. The new western metro opened in 2017 and is integrated into our asset, and the station is used by 30,000 people on a daily basis. Iso Omena is also an excellent example of our strategy of offering more than retail only. The non-retail income is almost 40% of the NRI, and the asset has a wide range of grocery and services. Groceries alone account for 25% of the GLA. Iso Omena has been recognized externally for its vision of what successful shopping centers will look like in the future. Last year, the center was awarded as the best shopping center in Finland and continues to be acknowledged in the industry. Just last week, Iso Omena captured another award as it received recognition from the ICSC, which recognized it as the best large shopping center expansion project in Europe. We are very proud of this accomplishment, which is also an acknowledgment of our development capabilities. Iso Omena is the first shopping center in Finland to receive an ICSC award. The success of the center is also visible in the number of visitors and tenant sales in 2018, which both increased dramatically. There's further opportunity to capitalize on this tremendous footfall as sales should follow the significant growth in traffic of plus 74%. Looking at our portfolio operating metrics, we saw gains in sales and footfall for the quarter. Our like-for-like net rental income was relatively stable and ahead of our internal plan. The total net rental income development grew by 0.6%. Eero will present a more detailed bridge later.Our core properties performance was about 1% better than our noncore, which makes up approximately 10% of the value of the company.Occupancy at our shopping centers remained strong at 95.9%. Average rent of lease started increased significantly from EUR 22.5 in 2018 to EUR 27.2 in the first quarter of 2019. As noted previously, we realized positive leasing spreads during the quarter in Sweden, Norway and Finland. I will now hand this over to Eero to go through the financial figures of Q1 in more detail.

[Eero T. Sihvonen, Executive VP & CFO]

Thank you, Scott. We -- like Scott mentioned, we had a solid quarter and Q1 was a good beginning to the year 2019. We had one change in our reporting practices. And as the same as most -- probably most other publicly quoted companies in real estate, we started to comply with the new IFRS 16 so-called leases standard, and it may basically mean that we will have to record and basically report all our leased properties and leased assets as if we did own them, and it has certain impacts on our numbers, and I will describe them in more detail as we go.Net rental income for the quarter, as mentioned, ended up at EUR 53.6 million, which is 0.6% higher than 1 year ago. Earnings were EUR 35.8 million, and I will show in a while an exact bridge what caused these changes in earnings.EPRA NAV did grow, highlighting some of the positive things that happened during the quarter. And EPRA NAV per share at the end of Q1 was EUR 12.98 compared to EUR 12.95 at the end of last quarter. As mentioned, net rental income remained quite stable. IFRS 16, the new leases standard, actually had a positive impact of approximately EUR 1.8 million. The remaining part of other is due to the currencies. And on the currencies, on average, weaker SEK and NOK, on the other hand, had a negative impact of EUR 600,000. That means that the total impact of the so-called other was positive EUR 1.2 million.On the other hand, our disposals naturally reduced net rental income compared to last year due to the noncore disposals taking place during the year. And as a result of all of the changes, we had a fairly neutral albeit slightly higher net rental income at EUR 53.6 million.Then on the next page, we are showing the adjusted EPRA earnings, and we had EPRA earnings growth on an adjusted basis. And on a reported basis, it was slightly below previous year's level, but can be shown that on a comparable basis, we actually did have earnings growth during the quarter. And comparable adjusted earnings for the quarter were EUR 36.7 million compared to EUR 36.1 million 1 year ago and EUR 35.8 million, which was the reported actual earnings for the quarter.And the bridge consists of restructuring expenses, and restructuring expenses were EUR 1.1 million and relate mostly to the management changes and then the buildup cost of the new organization. IFRS 16 on earnings level had an impact of EUR 1.4 million. And naturally, the disposals had an impact as well as did the currencies, and the impact of currencies was negative EUR 600,000. So adjusted EPRA earnings growth among the positive messages for the quarter.Then turning over to fair value changes. During the quarter, we had EUR 17.6 million fair value losses before Kista. And if we include 50% of Kista, then we had an EUR 18.7 million loss for the property values for the quarter.IFRS 16 has a negative impact. And IFRS 16 cost -- the leases standard cost EUR 1.5 million loss. And apart from that, approximately half of the loss came from slightly higher yield requirement. Our yield requirements, on average, were higher by approximately 2 basis points and -- but when rounded stayed at 5.3%. Mentioned already that EPRA NAV, net asset value increased, improved. And you can see the bridge here, and the main reason behind was a translation reserve, i.e., positive currencies, but naturally everything starts from the EPRA earnings that were approximately EUR 0.20 for the quarter. So positive earnings, positive currency translation due to the fact that despite the average currencies were weaker than last year, actually, the end-of-quarter Norwegian krone exchange rate was higher than it was at the end of 2018. And consequently, we had a translation gain of approximately EUR 14 million that can be seen in our income statement, other comprehensive income. And as a result, NAV increased and was EUR 12.98.We had no new financing transactions during the quarter. And therefore, the average maturity of the loan portfolio was 1 quarter less, and that was the main reason why the average maturity now is just a notch below 5 years at 4.8 years, but still on a nice fairly long level.We continue to be predominantly fixed, i.e., close to 92% of our debt portfolio is based on fixed rate of interest, meaning that we will certainly not be among the company's first hit if and when the interest rates start increasing. We have a very high unencumbered asset pool, and most of our financing is unsecured. Actually, 95.2% of our financing is unsecured, which is another clear strength. And we continue to have essentially all of our revolving credit facilities undrawn. And as a consequence, we have like more than EUR 560 million of liquidity buffer in our usage.The cost of debt continues to be clearly substantially below last year's level. And the weighted average interest rate, including our margins and swaps, was 2.38%, which is approximately 40 basis points lower than 1 year ago and mainly relates to the buyback of last year when we bought back like EUR 300 million of our most expensive 3.75% bond maturing in 2020. Loan to value stayed at the same level. So loan to value was flat compared to previous quarter at 48.7%. We continue to have ample headroom under all of our financial covenants.Then turning over to my final slide, i.e., outlook 2019. We continue to be nicely within our outlook ranges. And as per previous practice, we will most probably reduce the ranges in Q2. And we will continue with the same end-of-the-year ranges, meaning that we did not change anything in the guidance, apart from the technical change that now, of course, everything will be based on the new number of shares following the reversed split. And EPRA EPS continues -- EPRA EPS guidance continues to be exactly the same, EUR 0.775 to EUR 0.875, so exactly the same.That was everything I had to say. Back to you, Scott.

[F. Scott Ball, Chief Executive Officer]

Thanks, Eero. Before I share some thoughts on the company's focus for the rest of the year, I wanted to provide a brief update on our development projects.We are in the process of developing Lippulaiva in the Helsinki metropolitan area. This shopping center will have a new west line metro station inside, much like Iso Omena. Construction is ramping up as we have begun the foundation work. We are very excited about the project and enjoy a strong relationship with the city of Espoo and the metro. This project will have many of the components that are contained in Iso Omena. We will also have the ability to build around 400 residential units on top of the shopping center, which, if we choose to do it, will enable us to create a whole new community in this thriving market.Our repositioning project in Kista Galleria is progressing as planned. In the vacant Åhléns department store box, we have cleared space for 3 large tenants. Recently, we announced that ICA will open a new store in Kista Galleria. We are excited to offer clearly more necessity-based services in the center as Lidl and ICA will both open this summer. This change will increase the share of groceries to 14% of the GLA. In addition, H&M's new concept, Afound, opened in January, and it took a vacant space on the second level in the center.The refurbishment of the food court has also started, and the area will be rebranded as M.E.E.T., as we have in Iso Omena. This is much needed for this food court, which serves 6,000 meals every day. The facelift of the common areas will also start during the summer to make the layout of the center more refreshed. This repositioning and renovation is the start of several new opportunities we have at this asset, which already welcomes 18 million visitors each year. We also have a lot of potential in our development pipeline. We have 4 uncommitted development projects in various stages of planning and zoning within Sweden and Norway. Furthest advanced is Liljeholmen, which provides the densification opportunities we have discussed, including a significant residential component. All of these assets tick the boxes that we believe are important for successful shopping center now and in the future: urban, population growth, public transportation, dominant size and opportunities for densification. To conclude, I'd like to reinforce our commitment to the priorities which we discussed earlier in February. In the current retail environment, we must intensify our focus on maximizing the value of our assets. During the first quarter, we took the first steps on this front and implemented the new organization. Our team is very excited about the broader leadership that has been created and the increased accountability. With this clearer organization, we are better able to focus on all parts of the business as well as finding synergies from our Pan-Nordic reach. Strengthening the balance sheet remains a priority for us. And at the moment, we have several discussions regarding potential disposals. We will continue to recycle capital going forward as we will focus on reinvesting in the densification of our best assets.We remain focused on being good stewards of capital and to ensure that capital is used efficiently for these projects where it provides the best return. It is abundantly clear that we have a great number of embedded growth opportunities with the existing portfolio. Iso Omena's recognition from ICSC is a great acknowledgment of our development capabilities as well as our strategy of offering convenience-based shopping in urban transportation hubs. With that, I'd like to thank you and hand this back over to Mikko.

[Mikko Pohjala, Director of IR & Communications]

Many thanks, Eero and Scott. Now we have time for your questions. And before we go to the audio line, we have received some questions online. So we can take those first.And we have 3 questions from Ari Järvinen from Danske Bank, and I'll take these one by one. And the first question is, considering targeted noncore asset divestments, do you see potential to make larger transactions? Or do you rather expect smaller transactions?

[F. Scott Ball, Chief Executive Officer]

I'm not sure I understand the question. Do we...

[Mikko Pohjala, Director of IR & Communications]

I guess whether there is potential to make portfolio transactions or would we prefer to make smaller transactions asset by asset? I think this is the question.

[F. Scott Ball, Chief Executive Officer]

Well, if you're talking about disposals, I think the idea is that we have a group of assets that we are marketing and we are focused on selling, provided that pricing is appropriate. We are not a distressed seller. The assets that we have in our portfolio all are cash flow positive, so they help us. But that being said, we are continuing to focus on the fact that we want to really concentrate our efforts on our best biggest assets, and we're going to reinvest in those assets. So as we sell some of our noncore, that money will be used to reinvest in these assets and provide further densification. We think that's where there's real upside in this portfolio. So I hope that answers the question.

[Mikko Pohjala, Director of IR & Communications]

The second question is probably more for Eero. So would you expect to see further cost savings in admin costs later this year as well?

[Eero T. Sihvonen, Executive VP & CFO]

Well, we are certainly working on exploring all alternatives and all avenues for cost saving. So -- but it's very difficult at this stage to commit on particular levels and particular cost savings. But yes, this is the overall aim of the company to reach cost savings.

[Mikko Pohjala, Director of IR & Communications]

And the final question regards IFRS 16 impact and whether we should expect similar quarterly impact later in 2019 as we saw in the first quarter.

[Eero T. Sihvonen, Executive VP & CFO]

This is a very short answer, yes.

[Mikko Pohjala, Director of IR & Communications]

Good. And then the next question comes from [ Christopher ], and he asks what is your view on the recent downgrade from Standard & Poor's and what will you do in order to stay in the investment grade?

[Eero T. Sihvonen, Executive VP & CFO]

I think that we are very firmly in that new category of BBB- which we received in S&P, and that's further confirmed by the fact that we have like a neutral outlook. So I don't think that there is anything to be afraid of for the -- in the current situation. We -- I will rather be concerned how can we make sure that in the long term, we can upgrade the company. I think that this is rather the question. But mostly, it was like gearing-related. So loan to value was the most important factor as it's a public document that they have circulated relating to this. But -- so the management is not currently at all concerned about the further downgrade by S&P because we are so firmly in that category.

[Mikko Pohjala, Director of IR & Communications]

Good. At this point, there are no further questions online and hence, we would turn to the audio line should there be any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Anssi Kiviniemi from SEB.

[Anssi Kiviniemi, Analyst]

I have one question and it's related to Sweden and Denmark. If we look at the like-for-like trend in those markets, we have seen about 5% growth in 2017, but then the trend has been all the time becoming closer to 0. And in Q1, it was, as a matter of fact, negative. So could you please elaborate a little bit on the factors behind this change? And it's quite a step change. And do you expect this kind of development continue? Or how should we read on this?

[Eero T. Sihvonen, Executive VP & CFO]

First of all, you should not read too much into one single first quarter number. So 3 months numbers are not like something that you should draw too many conclusions about. But it's true that in Sweden and Denmark, there has been a slight downward trend, but I think that, that was expected by everybody because we have been showing like 7%, 8% in Sweden. And long term, of course, that is not sustainable. But the message is not that we would be negative as such, and I think that this is not like a very representative number, this one single quarter.

[Henrica Ginström, Chief Operating Officer]

Yes, maybe I -- when it comes to the Q1, we had some positive one-offs last year in Q1. So that is the main reason for the negative number in Sweden. So we expect during the year a bit stronger number. So this is not very reflective of how we see the picture from an operational point of view.

[Anssi Kiviniemi, Analyst]

Okay. And could you remind us how big was the, let's say, positive one-off in Q1 2018?

[Henrica Ginström, Chief Operating Officer]

I don't think we comment on the one-offs. So -- but we will -- then in the Q2, you will probably see the effect of this better because, of course, it was in Q1. So in Q2, it's kind of -- does not impact in the same way as in Q1.

[Eero T. Sihvonen, Executive VP & CFO]

It's anything out of the ordinary to have one-offs. So every quarter, you have one-offs to the positive and negative, but we hear they were particularly large. So that was the describing factor.

[Operator]

And the next question comes from the line of Niko Levikari from ABN AMRO.

[Niko Levikari, Research Analyst]

Just a quick question regarding the Lippulaiva developer question. So could you provide any additional color on how the negotiations are going to find -- or who will be the next main developer for the site because I take it that Lehto is not going to go ahead going forward with this project as the main developer?

[F. Scott Ball, Chief Executive Officer]

Yes, sure, no problem. Yes, I think we've been pretty public that Lehto is not the contractor going forward. I can't speak specifically about who the contractors are that we are currently in conversation with. That being said, I can share with you that we fully anticipate to have this -- the general contractor selected by the end of June. And -- but in the interim, we are moving full speed ahead and are aggressively working on the foundation and are on track to deliver all of this in a timely basis.

[Operator]

[Operator Instructions] As there are no further questions, I'll hand back to the speakers.

[Mikko Pohjala, Director of IR & Communications]

Thank you very much. As there seem to be no further questions, I would like to thank everyone on the line for participating, and thank you for the good questions. Should you have any questions after this audiocast, please feel free to contact me or Eero. Thank you very much, and have a nice rest of the day.