SATO Corporation's Interim report 1 Jan–31 Mar 2020: Economic occupancy rate remained stable
8 May 2020
SATO Corporation, Interim report, 8th May 2020 at 9:00 am
Summary for 1 Jan–31 Mar 2020 (1 Jan–31 Mar 2019)
- The economic occupancy rate in Finland was 97.6 (98.1) %.
- Net sales were EUR 75.6 (73.1) million.
- Net rental income amounted to € 47.0 (43.5) million.
- Profit before taxes was EUR 34.5 (46.6) million.
- The change in the fair value of investment properties included in the result was EUR 4.8 (22.7) million.
- Housing investments amounted to € 27,3 (30,4) million.
- Invested capital at the end of review period was € 4,216.2 (3,572.1) million.
- Return on invested capital was 4.3 (6.5) per cent.
- Equity was EUR 2,081.3 (1,585.2) million, or EUR 36.76 (28.00) per share.
- Earnings per share were EUR 0.48 (0.65)****.
- A total of 211 (0) rental apartments were acquired or completed.
- A total of 848 rental apartments and 115 owner-occupied apartments are under construction.
CEO Sharam Rahi:
- The coronavirus pandemic has a significant effect on Finland´s economy, and the impact depends on the duration of the pandemic and the restrictions due to the pandemic. Nevertheless, SATO´s economic occupancy rate remained stable during the first quarter and was 97,6 per cent (98,1) in the review period.
- To minimize the business impacts of the pandemic, we have postponed the start of some of the new housing projects and launched a cost savings action program in order to ensure our future economic stability.
- During the review period we have especially focused on taking care of our customers´ safety in the middle of the coronavirus pandemic. In apartment showings and apartment inspections we have largely used digital means, and also communicated how to live safely in apartment buildings during the pandemic.
- In our customer service we have focused on advising our customers in matters related to rent payments and other financial issues in this challenging economic situation.
- Our personnel´s safety has also been in central role in our operation during the review period. Almost all of SATO´s personnel shifted to remote work in early stages of the pandemic, and we have limited apartment visits to only necessary situations, as well as tended to the needed protective equipment.
- The amount of SATO´s apartments continued to grow during the review period, and 211 new rental apartments was completed.
- During the review period, we launched the marketing of SATO´s first FlexHome, which will be completed in Tali, Helsinki. SATO FlexHome is a new concept for part-ownership that enables home ownership with a small initial capital outlay and a five-year part-ownership period.
- SATO´s financial structure was further improved, when SATO issued a EUR 300 million senior unsecured bond offered to European investors under its EMTN programme after the review period, on 7 April.
- Finally, I want to thank both my team and our personnel for the hard work in taking care of our customers and each other in these challenging circumstances.
The coronavirus pandemic which began to spread in early 2020 will have a significant effect on Finland´s economy. According to the forecast of the Bank of Finland, growth of the Finnish economy will decrease from 5 to 13 per cent this year. The negative impact of the pandemic is limited with support measures of the European Central Bank, European Union and the State of Finland. According to the Statistics Finland, the consumers´ pessimistic attitude towards Finland´s economy grew significantly when the restrictions came into effect.
Demand for rental apartments has remained good, and urbanisation continues to be strong.
REVIEW PERIOD 1 January–31 March 2020 (1 January–31 March 2019)
Net sales and profit
Between January and March 2020, consolidated net sales were EUR 75.6 (73.1) million.
Operating profit was EUR 45.5 (57.8) million. The operating profit without the change in the fair value of investment properties was EUR 40.7 (35.0) million. The change in fair value in profit and loss was EUR 4.8 (22.7) million. The change in fair value in profit and loss was negatively affected by the change in the value of the rouble.
Financial income and expenses totalled EUR -11.0 (-11.2) million.
Profit before taxes was EUR 34.5 (46.6) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between January and March amounted to EUR 29.3 (20,0) million.
Earnings per share was 0.48 (0.65) euros.
Financial position and financing
The consolidated balance sheet totalled EUR 4,802.0 (4,030.0) million at the end of March. Equity was EUR 2,081.3 (1,585.2) million. Equity per share was EUR 36.76 (28.00).
The Group's equity ratio was 43.3 (39.3) per cent at the end of March. EUR 0.4 million in new long-term financing was withdrawn and the solvency ratio was 44.0 (49.2) per cent at the end of March.
The Group’s annualised return on equity was 5.2 (9.4) per cent. Return on investment was 4.3 (6.5) per cent.
Interest-bearing liabilities at the end of March totalled EUR 2,135.0 (1,986.9) million, of which loans subject to market terms accounted for EUR 1,874.0 (1,659.3) million. The average loan interest rate was 1.7 (2.0) per cent. Net financing costs totalled EUR -11.0 (-11.2) million.
The calculated impact of changes in the market value of interest hedging on equity was EUR -1.6 (-6.1) million.
The proportion of loans without asset-based securities was 78.3 (66.4) per cent of all loans. At the end of March, the proportion of unencumbered assets was 82.2 (75.9) per cent of total assets.
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.
Rental income was EUR 75.6 (73.1) million. The economic occupancy rate of apartments in Finland was 97.6 (98.1) per cent on average, and the external tenant turnover was 28.1 (27.6) per cent.
The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.28 (16.94) per m2.
Net rental income from apartments stood at EUR 47.0 (43.5) million.
On 31 March 2020, SATO owned a total of 26,380 (25,879) apartments. During the review period, 211 (0) rental apartments were completed. The total number of divested rental apartments and part ownership apartments redeemed by the owner-occupants was 56.
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 March, the fair value of investment properties came to a total of EUR 4,689.1 (3,971.6) million. The change in the value of investment properties, including the rental apartments acquired and divested during the review period, was EUR 31.2 (96.5) million.
Of the value of apartments, the Helsinki metropolitan area accounted for some 83 per cent, Tampere and Turku made up 13 per cent, Jyväskylä and Oulu 2 per cent and St. Petersburg covered 2 per cent at the end of March.
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 27.3 (30.4) million. Investments in the Helsinki metropolitan area represented 94 per cent of all investments in the review period. Investments in new apartments represented 70 per cent of the investments. On 31 March 2020, binding purchase agreements in Finland totalled EUR 42.0 (40.9) million.
During the review period, 56 (14) rental apartments were divested in Finland. Their total value was EUR 2.4 (2.6) million.
The book value of plot reserves totalled EUR 57.1 (36.8) million at the end of March. The value of new plots acquired by the end of March totalled EUR 1.8 (0.0) million.
The permitted building volume for approximately 2,400 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 211 (0) rental apartments and 0 (0) owner-occupied apartments were completed. On 31 March 2020, a total of 848 (1,090) rental apartments and 115 (131) owner-occupied apartments were under construction.
A total of EUR 15.9 (14.1) million was spent on repairing apartments and improving their quality.
At the end of March, SATO owned 533 (534) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 91.1 (93.6) 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.
At the end of March, the Group employed 224 (219) people, of whom 211 (204) had a permanent employment contract. The average number of personnel was 224 (218) between January and March.
Annual General Meeting 2020
SATO Corporation’s board of directors has on 20 March 2020 made the decision to cancel the annual general meeting convened on 1 April 2020. SATO Corporation’s board of directors will make the decision to summon the annual general meeting at a later stage.
Events after the review period**
SATO Corporation issued a EUR 300 million senior unsecured bond offered to European investors under its EMTN programme on 7 April 2020.
On April 6 2020, SATO announced an option for its families-with-children residents to apply for food aid, if the family’s livelihood was impacted negatively by the coronavirus pandemic. The value of donated food aid gift cards exceeded EUR 50,000.
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 risk in the near future is the coronavirus pandemic, and its duration and effect on Finland´s economy and to SATO´s operating environment is difficult to estimate. To minimize the possible business impacts of the pandemic, the company has postponed the start of some of the new housing projects, and launched an action program concerning cost savings in order to ensure the future economic stability.
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, and a commercial paper programme. 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 60.7 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 2019 and on the website www.sato.fi.
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 coronavirus pandemic started in early 2020 will have a significant effect on Finland´s economy. According to the forecast of the Bank of Finland, the national economy will be reduced from 5 to 13 per cent this year. The negative impact of the pandemic is pursued to be limited with support measures of the European Central Bank, European Union and the State of Finland. According to the Statistics Finland, the consumer´s pessimistic attitude towards Finland´s economy grew significantly when restrictions came into effect.
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.
Still, 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.
**SATO Corporation's shareholders on 31 March 2020 **
On 31 March 2020, SATO had 56,783,067 shares and 120 shareholders registered in the book-entry system. The share turnover rate was 0.59 per cent for the period 1 January–31 March 2020.
**For more information, please contact: **
CEO Sharam Rahi, tel. +358 201 34 4001
CFO Markku Honkasalo, tel. +358 201 34 4226
NASDAQ Helsinki Ltd., main media, www.sato.fi
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 2019, SATO owned over 26 000 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.
SATO Group's net sales in 2019 were EUR 296 million, operating profit EUR 726 million and profit before taxes EUR 671 million. The value of SATO's investment assets is roughly EUR 4,7 billion.