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SATO Corporation's Interim report 1 Jan–30 Sep 2019: Over 1,000 rental apartments under construction

Oct 25, 2019

SATO Corporation, Interim report, 25th October 2019 at 9:00 am

Summary for 1 Jan–30 Sep 2019 (1 Jan–30 Sep 2018)

  • Net sales were EUR 220.5 (217.2) million.

  • Profit before taxes was EUR 149.8 (182.8) million.

  • Earnings per share were EUR 2.10 (2.58)****.

  • The change in the fair value of investment properties included in the result was EUR 64.2 (86.6) million.

  • Equity was EUR 1,630.9 (1,520.2) million, or EUR 28.81 (26.85) per share.

  • Investments in rental apartments were EUR 110.2 (96.5) million.

  • A total of 0 (403) rental apartments were acquired or completed.

  • The occupancy rate in Finland was 98.1 (97.7) per cent.

  • A total of 1,090 rental apartments and 131 owner-occupied apartments are under construction.

                   
Summary for 1 Jul–30 Sep 2019 (1 Jul–30 Sep 2018)

  • Net sales were EUR 74.0 (73.1) million.

  • Profit before taxes was EUR 64.3 (56.0) million.

  • Earnings per share were EUR 0.91 (0.79).

  • The change in the fair value of investment properties included in the result was EUR 25.0 (19.2) million.

  • Equity was EUR 1,630.9 (1,520.2) million, or EUR 28.81 (26.85) per share.

  • Investments in rental apartments were EUR 33.0 (31.5) million.

  • A total of 0 (173) rental apartments were acquired or completed.

  • The occupancy rate in Finland was 98.3 (98.2) per cent.

  • A total of 1,090 rental apartments and 131 owner-occupied apartments are under construction.

CEO Sharam Rahi:

- SATO’s economic occupancy rate improved further and was 98.3 per cent (98.2%) during the review period and cumulatively from the beginning of the year 98.1 percent (97.7%). This development builds on long-term work that has been performed throughout our organisation to advance our Customer First strategy. We are continuing to develop areas impacting customer satisfaction, in particular. During the review period, we announced a service model in which we will take on some of our current maintenance partners’ tasks to bring us closer to the customer. In upcoming years, we will recruit up to 60 new residential caretakers, of which the first five will start their work in December.

- Developing the districts and growth is a key part of achieving our vision: In thriving cities people enjoy a high level of well-being. We have been closely involved in developing Hakunila, among others, and we wish to continue to improve the district in future. During the review period, SATO, YIT, M2-Kodit and As Oy Hiirakkokuja 6 have signed a cooperation agreement on the planning of new apartments and a shared parking facility for the Hiirakkokuja area.

- In September, the credit rating agency Standard and Poor’s gave SATO a BBB credit rating with a stable outlook. At the same time, we ended our co-operation with our earlier credit rating agency Moody’s.

- During the review period, we released our sustainability programme for the years 2019–2022. The programme accentuates carbon-neutral cities and the well-being of residents and neighbourhoods. SATO’s long-term sustainability work was spotlighted in September’s Global Real Estate Sustainability Benchmark (GRESB) comparison, in which we took part for the fifth time, maintaining our four-star rating.

- During the review period, we introduced the revamped online service, in which we focused on the uniformity of the customer experience and on improving online customer service. The online service includes the SATO website, the Find a Home service for home seekers, and OmaSATO, a digital service for residents.

Operating environment

Finland’s economic growth is slowing, and the economic forecasts are being adjusted downward. Growth is projected to fall well below two per cent in 2019. Europe’s weak economic development and the resulting loose monetary policy of the European Central Bank is maintaining short-term interest rates at an exceptionally low level. The consumer´s confidence in Finnish economic development has weakened further. Consumers’ assessment of the current situation and near future of their personal finances has slightly improved but has remained modest. (Source: Statistics Finland)

Demand for rental apartments has remained good, and urbanisation continues to be strong. In construction, the number of new construction permits has fallen dramatically but the number of completed apartments is still on the rise.

REVIEW PERIOD 1 January–30 September 2019 (1 January–30 September 2018)

Net sales and profit

Between January and September 2019, consolidated net sales were EUR 220.5 (217.2) million, showing a change of 1.5 per cent from the reference period. Growth is based on an improvement in the economic occupancy rate and rent development.

Operating profit was EUR 194.5 (214.5) million. The operating profit without the change in the fair value of investment properties was EUR 130.3 (127.9) million. The change in fair value was EUR 64.2 (86.6) million. The adoption of the IFRS 16 Leases standard improved the review period’s operating profit by EUR 2.2 million. The Group applies IFRS 16 using the modified retrospective approach, without the restatement of comparative information.

Financial income and expenses totalled EUR -44.6 (-31.7) million. The adoption of the IFRS 16 standard increased the review period’s financial expenses by EUR 2.3 million. The financial expenses include a one off cost of MEUR 11.8 due to the repurchase of outstanding bonds with maturity in year 2020 and 2021.

Profit before taxes was EUR 149.8 (182.8) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between January and September amounted to EUR 64.9 (68.5) million.

Financial position and financing

The consolidated balance sheet totalled EUR 4,171.6 (3,872.8) million at the end of September. Equity was EUR 1,630.9 (1,520,2) million. Equity per share was EUR 28.81 (26.85).

The Group's equity ratio was 39.1 (39.3) per cent at the end of September. The adoption of IFRS 16 reduced the equity ratio by 0.5 percentage points. EUR 620.1 million in new long-term financing was withdrawn and the solvency ratio was 49.3 (50.8) per cent at the end of September. The strengthening of the equity ratio and the solvency ratio is the result of a rise in the value of investment properties and a long period of good earnings performance.

The Group’s annualised return on equity was 10.0 (13.3) per cent. Return on investment was 7.2 (8.4) per cent.

Interest-bearing liabilities at the end of September totalled EUR 2,057.6 (1,972.9) million, of which loans subject to market terms accounted for EUR 1,770.0 (1,609.7) million. The average loan interest rate was 1.8 (2.1) per cent. Net financing costs totalled EUR -44.6 (-31.7) million, of which the impact of the adoption of the IFRS 16 standard was EUR -2.3 million. The average maturity of loans was 4.2 (4.0) years.

The calculated impact of changes in the market value of interest hedging on equity was EUR -14.4 (5.1) million.

Housing business
Our housing business includes rental activities, customer service, lifecycle management and maintenance. Effective rental activities and digital services provide home-seekers with quick access to a home, and the Group with a steadily increasing cash flow. High-quality maintenance operations ensure the comfort of residents and that the apartments stay in good condition and maintain their value. We serve our customers in daily housing issues through our customer-oriented service organisation.

Due to an improved economic occupancy rate, rental income rose by 1.5 per cent and was EUR 220.5 (217.2) million. The economic occupancy rate of apartments in Finland was 98.1 (97.7) per cent on average, and the external tenant turnover was 29.5 (29.8) per cent. The rise in the economic occupancy rate was, above all, the result of measures based on the Customer First strategy.

The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.12 (16.77) per m2.

Net rental income from apartments stood at EUR 153.5 (148.6) million, and the net rental income rate was 5.3 (5.4) per cent.

Investment properties

On 30 September 2019, SATO owned a total of 25,844 (26,029) apartments. During the review period rental apartments were not acquired or completed.  The total number of divested rental apartments and shared ownership apartments redeemed by the owner-occupants was 25. 

Fair value

The development of the value of rental apartments is a key factor for SATO. Its housing stock is concentrated in areas and apartment sizes which are expected to be the focus, in the long term, of increasing rental apartment demand. The allocation of building repairs is based on life-cycle plans and repair need specifications.

At the end of September, the fair value of investment properties came to a total of EUR 4,102.4 (3,809.1) million. The change in the value of investment properties, including the rental apartments acquired and divested during the review period, was EUR 227.3 (176.7) million. In addition to investments and divestments, the change in value was affected by the development of market prices and change in the value of the rouble.

Of the value of apartments, the Helsinki metropolitan area accounted for some 80 per cent, Tampere and Turku made up 14 per cent, Jyväskylä and Oulu 3 per cent and St. Petersburg covered 3 per cent at the end of September.

Investments, divestments and property development

Investment activities are used to manage the housing portfolio and prepare the ground for growth. Since 2000, SATO has invested more than EUR 2.0 billion in non-subsidised rental apartments. SATO acquires and builds entire rental buildings and single rental apartments. Property development allows for new investments in rental apartments in Finland. The rental potential and value of rental apartments owned by SATO are developed through renovation activities.

Investments in rental apartments stood at EUR 110.2 (96.5) million. Investments in the Helsinki metropolitan area represented 93 per cent of all investments in the review period. Investments in new apartments represented 68 per cent of the investments. On 30 September 2019, binding purchase agreements in Finland totalled EUR 72.0 (125.2) million.

During the review period, 25 (84) rental apartments were divested in Finland. Their total value was EUR 4.5 (10.8) million.

The book value of plot reserves totalled EUR 35.7 (40.4) million at the end of September. The value of new plots acquired by the end of September totalled EUR 6.2 (19.9) million.

The permitted building volume for approximately 2,900 apartments is being developed for the plots in the company’s housing portfolio. This allows SATO to utilise existing infrastructure, create a denser urban structure and thus bring more customers closer to services and public transport connections.

In Finland, a total of 0 (403) rental apartments and 0 (0) owner-occupied apartments  were completed. On 30 September 2019, a total of 1,090 (873) rental apartments and 131 (131) owner-occupied apartments were under construction.

A total of EUR 46.7 (33.6) million was spent on repairing apartments and improving their quality.

At the end of September, SATO owned 534 (534) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 92.4 (92.5) per cent on average. For the time being, SATO will refrain from making new investment decisions in Russia. The share of investments in Russia is limited to a maximum of 10 per cent of the Group’s housing assets.

Personnel

At the end of September, the Group employed 224 (210) people, of whom 204 (193) had a permanent employment contract. The average number of personnel was 221 (214) between January and September.

Period 1 July–30 September 2019 (1 July–30 September 2018)

Net sales and profit

Between July and September 2019, consolidated net sales were EUR 74.0 (73.1) million, showing a change of 1.3 per cent from the reference period.

Operating profit was EUR 75.1 (66.2) million. The operating profit without the change in the fair value of investment properties was EUR 50.1 (46.9) million. The change in fair value was EUR 25.0 (19.2) million.

Financial income and expenses totalled EUR -10.8 (-10.2) million. The adoption of the IFRS 16 standard increased the review period’s financial expenses by EUR 0.8 million.

Profit before taxes was EUR 64.3 (56.0) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between July and September amounted to EUR 33.6 (26.8) million.

During the review period, the credit rating agency Standard and Poor’s gave SATO a BBB credit rating with a stable outlook.

Housing business

Due to an improved economic occupancy rate, rental income rose by 1.3 per cent and was EUR 74.0 (73,1) million. The economic occupancy rate of apartments in Finland was 98.3 (98.2) per cent on average, and the external tenant turnover was 32.2 (32.7) per cent.

The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.12 (16.77) per m2.

Net rental income from apartments stood at EUR 56.3 (54.0) million, and the net rental income rate was 5.8 (5.8) per cent.

During the review period, SATO announced a service model in which the company will take on some of maintenance partners’ tasks to bring SATO closer to the customer. In upcoming years, the company will recruit up to 60 new residential caretakers, of which the first five will start their work in December.

Investment properties

On 30 September 2019, SATO owned a total of 25,844 (26,029) apartments. During the review period rental apartments were not acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner-occupants was 4. 

At the end of September, the fair value of investment properties came to a total of EUR 4,102.4 (3,809.1) million. The change in the value of investment properties, including the rental apartments acquired and divested during the review period, was EUR 64.1 (41.5) million.

Of the value of apartments, the Helsinki metropolitan area accounted for some 80 per cent, Tampere and Turku made up 14 per cent, Jyväskylä and Oulu 3 per cent and St. Petersburg covered 3 per cent at the end of September.

Investments, divestments and property development

Investments in rental apartments stood at EUR 33.0 (31.5) million. Investments in the Helsinki metropolitan area represented 91 per cent of all investments in the review period. Investments in new apartments represented 60 per cent of the investments.

During the review period 4 (60) rental apartments were divested in Finland. Their total value was EUR 0.5 (7.3) million.

The book value of plot reserves totalled EUR 35.7 (40.4) million at the end of September. The value of new plots acquired by the end of September totalled EUR 2.5 (0) million.

The permitted building volume for approximately 2,900 (2,300) apartments is being developed for the plots in the company’s housing portfolio.

In Finland, a total of 0 (173) rental apartments and 0 (0) apartments for sale were completed. On 30 September 2019, a total of 1,090 (873) rental apartments and 131 (131) owner-occupied apartments were under construction.

A total of EUR 15.1 (13.4) million was spent on repairing apartments and improving their quality.

Personnel

At the end of September, the Group employed 224 (210) people, of whom 204 (193) had a permanent employment contract. The average number of personnel was 223 (217) between July and September.

SATO Corporation’s CEO until 31 August 2019 was Saku Sipola. On 29 August, SATO Corporation’s Board of Directors appointed Sharam Rahi, 46, as the President and CEO of SATO, starting from 1 September 2019. Mr. Rahi will act as President and CEO until a permanent CEO is appointed. Mr. Rahi is the Vice CEO at Fastighets AB Balder, the main owner of SATO.

Events after the review period

There are no significant events following the review period.

Future risks and uncertainties

Risk management is used to ensure that risks impacting the company’s business are identified, managed and monitored. The main risks of SATO’s business are risks related to the business environment and financial risks.

The most significant risks in the renting of apartments are related to economic cycles and fluctuations in demand. A clear weakening in the housing market could have a negative impact on the market value of SATO’s housing portfolio. In accordance with its strategy, SATO focusses its investments on growth centres, thus ensuring the rental potential of its apartments and the development of their value.

Changes in official regulations and legislation and uncertainty stemming from them can have a significant impact on the reliability of the investment environment and thus on SATO’s business. SATO monitors and anticipates these changes and also calls attention to what it considers to be negative impacts of regulation.

The management of financial risks is steered by the Group’s financial policy. Our risk management principles have been defined in the treasury policy approved by SATO’s Board of Directors. Our most significant financial risks relate to liquidity, refinancing and interest rates. We manage our liquidity and refinancing risks by diversifying the financing sources and maturity of our loan portfolio, and by holding sufficient liquidity reserves in the form of committed credit facilities and other financing commitments.

The means for managing the liquidity risk at SATO include cash assets, a bank account limit, committed credit facilities of EUR 400 million, and a commercial paper programme of EUR 400 million. We increase the amount of reserves as the funding requirements grow. Our objective is to keep the liquidity requirements of the next 12 months covered by committed agreements.

Floating rate loans form an interest rate risk which we manage by balancing the share of fixed and floating rate loans either by issuing fixed rate loans or by interest rate hedges. At the end of the review period the share of fixed rate loans of debt portfolio was 65.3 per cent.

There are risks related to the business environment in our St. Petersburg operations, including currency risk. The consolidation of foreign currency-denominated assets in the consolidated financial statements also involves a translation risk. Possibilities of hedging the translation risk are evaluated in accordance with our treasury policy. For the time being, SATO will refrain from making new investments in Russia.

A more detailed description of risks and risk management is available in the Group’s annual report for 2018 and on the website www.sato.fi.

Outlook

In the operating environment, SATO’s business activities are mainly affected by consumer confidence, the development of purchasing power, rent and price development for apartments, general competitive situation and interest rates.

The Finnish economy is expected to continue its growth path, but growth is projected to slow down clearly. Due to weakened economic growth, the increase in the employment rate has stalled and is expected to fall slightly. Due to Europe’s weak economic development, interest rates are expected to remain low for a longer time, which will have a positive impact on SATO’s financing costs.

Continuous urbanisation provides good long-term conditions for sustained investments in SATO’s main operating areas in Finland. The share of net migration in population increase is expected to be the highest in SATO’s operating areas. Some 80 per cent of SATO’s housing stock is located in the Helsinki metropolitan area, where price development is expected to be more positive than in the rest of Finland.

The number of construction permits applied for has fallen dramatically, due to which the historically high rate of housing construction is expected to decrease in the coming years.

According to the Bank of Finland’s forecast, global economic growth will slow down as a result of the trade war and China’s weakened economic development. The eurozone’s growth outlook is overshadowed by the uncertainties related to the Brexit negotiations, other political events that may slow down economic growth, and concerns related to the state of the banking sector and public finances outlook in certain countries in the eurozone.

The slowing down of global economic growth and Europe’s growth outlook will negatively impact Finland’s economic outlook and growth is expected to slow significantly.

**SATO Corporation's shareholders on 30 September 2019         **

Omistajat Q3 2019 ENG

On 30 September 2019, SATO had 56,783,067 shares and 117 shareholders registered in the book-entry system. The share turnover rate was 0.04 per cent for the period 1 January–30 September 2019.

For more information, please contact:

CEO Sharam Rahi, tel. +358 201 34 4000
CFO Markku Honkasalo, tel. +358 201 34 4226

www.sato.fi

ATTACHMENTS

Interim Report 1 January – 30 September 2019
Interim Report presentation 1 January – 30 September 2019

SATO is one of Finland's leading rental housing providers. SATO aims to offer a comprehensive choice of rental housing and an excellent customer experience. At year-end 2018 SATO owned around 25,900 apartments in Finland's largest growth centres and in St. Petersburg.

We promote sustainable development and initiative through our operations and work in open interaction with our stakeholders to generate added value. We operate profitably and with a long-term view. We increase the value of our housing stock through investments, divestments and repairs.

The SATO Group's net sales in 2018 were EUR 290 million, operating profit EUR 273 million and profit before taxes EUR 231 million. The value of SATO's investment properties was roughly EUR 3.9 billion.

Attachments