SATO Corporation's Interim Report 1 Jan–30 Sep 2020: SATO House Expert model extends in the capital area

5 November 2020

SATO Corporation, Interim report, 5th November at 9:00 am

Summary for 1 Jan–30 Sep 2020 (1 Jan–30 Sep 2019)

The economic occupancy rate in Finland was 97.0 (98.1) %.
Net sales were EUR 228.3 (220.5) million.
Net rental income amounted to € 166.9 (153.5) million.
Profit before taxes was EUR 102.8 (149.8) million.
The change in the fair value of investment properties included in the result was EUR -7.0 (64.2) million.
Housing investments amounted to € 83.3 (110.2) million.
Invested capital at the end of review period was € 4,587.8 (3,688.5) million.
Return on invested capital was 4.2 (7.2) per cent.
Equity was EUR 2,135.4 (1.630,9) million, or EUR 37.72 (28.81) per share.
Earnings per share were EUR 1.44 (2.10).
A total of 608 (0) rental apartments were acquired or completed.
A total of 451 rental apartments and 16 owner-occupied apartments are under construction.

Summary for 1 Jul–30 Sep 2020 (1 Jul–30 Sep 2019)

The economic occupancy rate in Finland was 96.5 (98.3) %.
Net sales were EUR 76.2 (74.0) million.
Net rental income amounted to € 60.3 (56.3) million.
Profit before taxes was EUR 26.5 (64.3) million.
The change in the fair value of investment properties included in the result was EUR -13.6 (25.0) million.
Housing investments amounted to € 23.5(64.3) million.
Earnings per share were EUR 0.37 (0.91).
A total of 0 (0) rental apartments were acquired or completed.

CEO Sharam Rahi:

- Despite the COVID-19 pandemic, SATO’s occupancy rate decreased only moderately and stood at 96.5 per cent (98.3%) during the review period. The declining in the occupancy rate was primarily due to the general uncertainty caused by the coronavirus pandemic, increased supply of rental housing, and a slightly decreased customer satisfaction.

- During the review period, we focused on improving customer satisfaction by strengthening our Customer First programme. Eleven new employees started working in our Rental Housing Business in an updated Service Manager role. We also started a recruiting process for nine SATO House Experts. We aim at providing even better services to our tenants and be closer to their everyday lives.

- Savings measures launched as part of COVID-19 risk management were reflected in the positive development of net rental income.

- In September, SATO issued the first green bond under its Euro Medium Term Note (EMTN) programme. The cash proceeds received from the EUR 350 million unsecured bond will be used to finance and/or refinance Eligible Green Assets as per SATO’s Green Finance Framework.

- I wish to thank SATO’s employees once again for their excellent work to guarantee tenant comfort in this uncertain and challenging environment.

Operating environment

The coronavirus pandemic which began to spread in early 2020 will have a significant effect on Finland’s economy. According to the Bank of Finland, the economic outlook is still very uncertain. According to the current estimates the worst period has already been passed. Still, the recession has been so deep that the recovery will take a long time. The Finnish economy will decline around 5 per cent this year and grow mildly in 2021. European Central Bank, European Union and the State of Finland aim at limiting the negative impact of the pandemic by support measures. According to Statistics Finland, consumers still have pessimistic attitude towards Finland’s economic growth. Expectations also on own economy are moderate.

Demand for rental apartments has remained good, and urbanisation continues to be strong.

REVIEW PERIOD 1 Jan–30 Sep 2020 (1 Jan–30 Sep 2019)

Net sales and profit

Between January and September 2020, consolidated net sales were EUR 228.3 (220.5) million.

Operating profit was EUR 138.9 (194.5) million. The operating profit without the change in the fair value of investment properties was EUR 145.9 (130.3) million. The change in fair value in profit and loss was EUR -7.0 (64.2) million. The change in fair value was negatively affected mainly by the exchange rate of the rouble.

Financial income and expenses totalled EUR -36.1 (-44.6) million.

Profit before taxes was EUR 102.8 (149.8) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between January and September amounted to EUR 95.7 (64.9) million.

Earnings per share was 1.44 (2.10) euros.

Financial position and financing

The consolidated balance sheet totalled EUR 5,172.0 (4,171.6) million at the end of September. Equity was EUR 2,135.4 (1,630.9) million. Equity per share was EUR 37.72 (28.81).

The Group's equity ratio was 41.3 (39.1) per cent at the end of September. EUR 770.3 million in new long-term financing was withdrawn and the solvency ratio was 43.4 (49.3) per cent at the end of September.

The Group’s annualised return on equity was 5.2 (10.0) per cent. Return on investment was 4.2 (7.2) per cent.

Interest-bearing liabilities at the end of September totalled EUR 2,452.4 (2,057.6) million, of which loans subject to market terms accounted for EUR 2,229.9 (1,770.0) million. The average loan interest rate was 1.9 (1.8) per cent. Net financing costs totalled EUR -36.1 (-44.6) million.

The calculated impact of changes in the market value of interest hedging on equity was EUR -1.8 (-14.4) million.

The proportion of loans without asset-based securities was 82.7 (75.1) per cent of all loans. At the end of September, the proportion of unencumbered assets was 84.1 (80.4) per cent of total assets.

**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.

Rental income was EUR 228.3 (220.5) million. The economic occupancy rate of apartments in Finland was 97.0 (98.1) per cent on average, and the external tenant turnover was 31.8 (29.1) per cent.

The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.49 (17.11) per m2.

Net rental income from apartments stood at EUR 166.9 (153.5) million.

Investment properties

On 30 September 2020, SATO owned a total of 26,628 (25,844) apartments. During the review period, 608 (0) rental apartments were completed. The total number of divested rental apartments and part ownership apartments redeemed by the owner-occupants was 110.

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 4,713.4 (4,102.4) million. The change in the value of investment properties, including the rental apartments acquired and divested during the review period, was EUR 55.6 (227.3) million.

Of the value of apartments, the Helsinki metropolitan area accounted for some 85 per cent, Tampere and Turku made up 11 per cent, Jyväskylä and Oulu 2 per cent and St. Petersburg covered 2 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 83.3 (110.2) million. Investments in the Helsinki metropolitan area represented 95 per cent of all investments in the review period. Investments in new apartments represented 57 per cent of the investments. On 30 September 2020, binding purchase agreements in Finland totalled EUR 54.4 (72.0) million.

During the review period, 65 (25) rental apartments were divested in Finland. Their total value was EUR 6.3 (4.5) million.

The book value of plot reserves totalled EUR 60.1 (35.7) million at the end of September. The value of new plots acquired by the end of September totalled EUR 1.8 (6.2) million.

The permitted building volume for approximately 2,200 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 608 (0) rental apartments and 99 (0) owner-occupied apartments were completed. On 30 September 2020, a total of 451 (1,090) rental apartments and 16 (131) owner-occupied apartments were under construction.

A total of EUR 45.7 (46.7) million was spent on repairing apartments and improving their quality.

At the end of September, SATO owned 533 (534) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 90.3 (92.4) 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 234 (224) people, of whom 217 (204) had a permanent employment contract. The average number of personnel was 226 (221) between January and September.

Period 1 Jul–30 Sep 2020 (1 Jul–30 Sep 2019)

Net sales and profit

Between July and September 2020, consolidated net sales were EUR 76.2 (74.0) million.

Operating profit was EUR 39.2 (75.1) million. The operating profit without the change in the fair value of investment properties was EUR 52.8 (50.1) million. The change in fair value in profit and loss was EUR -13.6 (25.0) million.

Financial income and expenses totalled EUR -12.7 (-10.8) million.

Profit before taxes was EUR 26.5 (64.3) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between April and September amounted to EUR 36.6 (33.6) million.

Earnings per share was 0.37 (0.91) euros.

**Housing business
**

Rental income was EUR 76.2 (74.0) million. The economic occupancy rate of apartments in Finland was 96.5 (98.3) per cent on average, and the external tenant turnover was 35.9 (31.5) per cent.

Net rental income from apartments stood at EUR 60.3 (56.3) million.

Investment properties

On 30 September 2020, SATO owned a total of 26,628 (25,844) apartments. During the review period, 0 (0) rental apartments were completed. The total number of divested rental apartments and part ownership apartments redeemed by the owner-occupants was 5.

Investments, divestments and property development

Investments in rental apartments stood at EUR 23.5 (33.0) million. Investments in the Helsinki metropolitan area represented 92 per cent of all investments in the review period. Investments in new apartments represented 65 per cent of the investments. On 30 September 2020, binding purchase agreements in Finland totalled EUR 54.4 (72.0) million.

During the review period, 5 (4) rental apartments were divested in Finland. Their total value was EUR 0.8 (0.5) million.

The book value of plot reserves totalled EUR 60.1 (35.7) million at the end of September. The value of new plots acquired by the end of September totalled EUR 0.0 (2.5) million.

In Finland, a total of 0 (0) rental apartments and 0 (0) owner-occupied apartments were completed. On 30 September 2020, a total of 451 (1,090) rental apartments and 16 (131) owner-occupied apartments were under construction.

A total of EUR 11.9 (15.1) million was spent on repairing apartments and improving their quality.

At the end of September, SATO owned 533 (534) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 91.6 (91.9) 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 234 (224) people, of whom 217 (204) had a permanent employment contract. The average number of personnel was 232 (223) between July and September.

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 risk in the immediate future is the coronavirus pandemic, whose duration and impact on the Finnish economy are difficult to estimate. A prolonged coronavirus pandemic may have a major negative impact on economic growth, and on business activity, employment and work productivity in Finland. Such economic or business deterioration, as well as quarantines or other restrictive measures may have an adverse impact on the financial result or operations of investment properties held by SATO, not to mention on financing costs or values of those. To minimise the negative business impacts of the coronavirus pandemic, the company has launched a cost-saving programme to secure future stability, in addition to reinforcing its sales and marketing measures.

All in all, 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 74.9 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.

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.

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.

Starts in residential construction have remained at a good level, but the number of residential construction permits applied for residential buildings has fallen dramatically, due to which also the historically high rate of housing construction is expected to decrease in the coming years. This will also slow down growth in the rental housing supply.

**SATO Corporation's shareholders on 30 September 2020 **

Largest shareholders and their holdings

On 30 September 2020, SATO had 56,783,067 shares and 121 shareholders registered in the book-entry system. The share turnover rate was 0.75 per cent for the period 1 January–30 September 2020.

Further information
CEO Sharam Rahi, tel. +358 201 34 4001
CFO Markku Honkasalo, tel. +358 201 34 4226
www.sato.fi

ATTACHMENTS

Interim Report 1 Jan–30 Sep 2020
Interim Report presentation 1 Jan–30 Sep 2020

DISTRIBUTION
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.

Attachments