the important results achieved in the first six months of 2018 are adequately reflected in the progression made by the key performance indicators found in the Half-Year Report.
In this first part of the year our real estate portfolio has grown significantly thanks to the purchase of a strategic portfolio comprising four shopping centers and a retail park, from Eurocommercial Properties for €195.5 million. A transaction that we financed primarily through the €150 million capital increase we completed successfully on 18 April.
Today IGD is a reality with a real estate portfolio worth, based on independent appraisals at 30 June 2018, €2,428.8 million, an increase of 9% with respect to the appraisals at year-end 2107 which reflects the recently expanded perimeter.
How do we view this portfolio? Undoubtedly it holds a prominent position on the Italian market because of its size which amounts to about 94% of total fair value. It’s also a well balanced portfolio as Italian malls, at around 63%, are the most important asset class. That’s not all: following integration of the newly acquired portfolio, today IGD owns the malls that it operates in 16 shopping centers, which allows for increasingly more dynamic rethinking of the tenant mix thanks to an asset management that is even more connected and flexible. Lastly, the portfolio provides significant yields as demonstrated by the initial yield of 6.30% for malls, 6.21% for hypermarkets and 6.62% for the Romanian assets. These yields are possible because of the high financial occupancy rates which come to around 97% overall, despite the strategic vacancies that are going to be used for remodeling.
The results found in the Half-Year Report testify to the validity and efficacy of the choices made. The indicator which best summarizes our operations FFO, or Funds from Operations, amounted to €38.9 million in the first half, an increase of €7 million against the first half of 2017. This result reflects the contribution of core business EBITDA which was €5.6 million higher and an improvement of €1.5 million in financial expense, while the tax burden increased marginally by around €200 thousand.
Looking closer at these performances it’s possible to see that, on the one hand, the operating results reflect very solid growth, driven by an 8.4% increase in rental income, and improved profitability as shown by the EBITDA margin which reached 72.1%, versus 69.8% in the first half of 2017.
Careful financial management carried out through Asset Liability Management, made it possible, on the other hand, to reduce financial expense by €1.5 million, even though average debt was €20.7 million higher than the first half of 2017, with a cost of debt that fell by around 20 basis points. Today our financial structure is excellent, as testified by the Loan-to-Value of 46.4% and Interest Cover Ratio which has exceeded the 3X level, coming in at 3.44X.
The income statement for the first half of 2018 did not benefit, as it did in the same period of the prior year, from the positive impact of the “Writedowns and fair value adjustments” which reached €18.9 million versus a net negative impact of €2.6 million in the half that just ended. This is an amount that is immaterial with respect to a portfolio with a fair value of more than €2.4 billion which reflects the higher discount rates used by the appraisers in order to take into account the more uncertain global market conditions.
This factor alone prevented us from translating the progression made on an operating and financial level into a higher net profit which, at any rate, came to €34.8 million. Even though the fair value adjustment was €21.5 million lower than in first half 2017, at €14.1 milion, the drop in net profit was lower.
The 22% increase in FFO was above the high end of the guidance range announced in February of + 18-20% in FY 2018; in light of the results already achieved, without underestimating the challenges that could materialize in the last part of the year, we updated our guidance for FY 2017 and set a target for growth in FFO of at least 20%.
The stock market, which has rewarded us by allowing us to gather €150 million in fresh resources, still has yet to express the value of IGD’s real estate portfolio. At the end of June 2018 the EPRA Triple Net Asset Value per share came to €11.25 : a level which indicates a significant discount with respect to recent prices. Ample upside potential also exists with respect to the average consensus target price of the analysts covering the stock which currently is €9.51.
We believe that the convincing results for the first half and the upward revision of the FY 2018 FFO target improve the visibility of the results for FY 2018 which will allow us to deliver on the targets in the 2016-2018 Business Plan.
On 1 June shareholders appointed a new Board of Directors which already in these past weeks has begun working on the new Business Plan which will guide us through 2021.
I am very honored to have been appointed, once again, Chief Executive Officer for this new three-year term: I believe that this confirmation, along with that of the Chairman, Elio Gasperoni, are the expression of the shareholders’ appreciation of the work done up until now. I will try, therefore, to carry out my duties in a manner that is consistent with the serious and disciplined approach to operations that have characterized IGD over the years and maintaining the level of attention needed to face the risks and make the most of the opportunities that might materialize.
IGD’s Chief Executive Officer