SATO Corporation's Half-Year Report 1 January–30 June 2021: Rental housing market remains challenging

16 July 2021

SATO Corporation, Half-year financial report, 16th July 2021 at 9:00 a.m.

Summary for 1 Jan–30 Jun 2021 (1 Jan–30 Jun 2020)

• The economic occupancy rate in Finland was 94.6 (97.2) %.
• Net sales were EUR 148.2 (152.1) million.
• Net rental income amounted to EUR 100.0 (106.6) million.
• Profit before taxes was EUR 171.2 (76.3) million.
• The change in the fair value of investment properties included in the result was EUR 112.0 (6.7) million.
• Housing investments amounted to EUR 59.6 (59.8) million.
• Invested capital at the end of review period was EUR 4,430.3 (4,335.0) million.
• Return on invested capital was 8.7 (4.7) per cent.
• Equity was EUR 2,274.5 (2,113.1) million, or EUR 40.17 (37.32) per share.
• Earnings per share were EUR 2.42 (1.07).
• A total of 41 (608) rental apartments were acquired or completed.
• A total of 1,035 rental apartments and 71 owner-occupied apartments as well as 52 Flexhomes are under construction.

Summary for 1 Apr–30 Jun 2021 (1 Apr–30 Jun 2020)

• The economic occupancy rate in Finland was 94.4 (96.9) %.
• Net sales were EUR 74.2 (76.5) million.
• Net rental income amounted to EUR 55.1 (59.6) million.
• Profit before taxes was EUR 115.1 (41.8) million.
• The change in the fair value of investment properties included in the result was EUR 80.4 (1.8) million.
• Housing investments amounted to EUR 42.7 (32.5) million.
• Earnings per share were EUR 1.63 (0.59).
• A total of 41 (397) rental apartments were acquired or completed.

CEO Antti Aarnio:

During the period under review, SATO’s occupancy rate fell to 94.6 (97.2) per cent. The weakened occupancy rate can be attributed largely to the general uncertainty caused by the coronavirus pandemic and the increased offering of rental housing.
In accordance with our Customer First development programme, we focused on adapting our organisation and our service processes to respond to our customers’ needs even better. SATO House Expert -model was also expanded to Turku and Tampere in addition to capital area. SATO’s own House Experts are a presence in the day-to-day lives of approximately 20,000 residents. During the end of the year 2019 SATO launched a maintenance model where its own building superintendents, SATO House Experts, took on some of the duties of SATO’s maintenance partners.
To ensure profitable growth, we are developing our plot reserves and building up new apartments in SATO’s main operational areas. In the end of the period under review, there was more than 1 000 apartments under construction.
During the review period, the construction of rental and part-ownership homes were begun on Hervantajärvi, Tampere.
I wish to thank SATO employees for their commendable work and for doing everything they could to ensure the comfort of our residents, also during this uncertain and challenging time.

Operating environment

According to the forecast of Ministry of Finance in May, the Finland's gross domestic product is expected to grow by 2.6% in 2021 and 2.5% in 2022. As the coronavirus pandemic situation will get better and vaccination coverage increases, economic growth will accelerate and normalize. On the other hand, the evolution of the coronavirus situation will continue to spawn major uncertainty in the economy.

Efforts are being made to limit the negative impact of the pandemic on Finland’s economy through support measures adopted by the European Central Bank, the European Union and the State of Finland.

In recent years, the rental housing markets in major cities have been characterised by sharp growth in supply. The growth largely stems from the brisk production of rental housing.

As a result of the coronavirus pandemic, previously short-term rental apartments were offered for longer rental periods, which boosted supply in some cities, even to a considerable degree. However, demand for rental apartments was partly negatively affected by upper secondary schools and universities switching to remote teaching.

Despite the coronavirus pandemic that erupted in 2020, there is demand for rental apartments, and the urbanisation trend continues to be strong.

REVIEW PERIOD 1 January–30 June 2021 (1 January–30 June 2020)

Net sales and profit

Between January and June 2021, consolidated net sales were EUR 148.2 (152.1) million.

Operating profit was EUR 194.0 (99.7) million. The operating profit without the change in the fair value of investment properties was EUR 82.0 (93.1) million. The change in fair value in profit and loss was EUR 112.0 (6.7) million.

Financial income and expenses totalled EUR -22.7 (-23.4) million.

Profit before taxes was EUR 171.2 (76.3) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between January and June amounted to EUR 38.5 (59.1) million.

Earnings per share was 2.42 (1.07) euros.

Financial position and financing

The consolidated balance sheet totalled EUR 5,012.9 (4,915.5) million at the end of June. Equity was EUR 2,274.5 (2,113.1) million. Equity per share was EUR 40.17 (37.32).

The Group's equity ratio was 45.4 (43.0) per cent at the end of June. EUR 7.0 million in new long-term financing was withdrawn and the solvency ratio was 42.8 (43.8) per cent at the end of June.

The Group’s annualised return on equity was 12.4 (5.8) per cent. Return on investment was 8.7 (4.7) per cent.

Interest-bearing liabilities at the end of June totalled EUR 2,155.7 (2,221.9) million, of which loans subject to market terms accounted for EUR 1,952.9 (1,992.8) million. The average loan interest rate was 1.7 (2.0) per cent. Net financing costs totalled EUR -22.7 (-23.4) million.

The calculated impact of changes in the market value of interest hedging on equity was EUR 9.1 (-3.1) million.

The proportion of loans without asset-based securities was 85.1 (80.6) per cent of all loans. At the end of June, the proportion of unencumbered assets was 86.9 (83.9) 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 148.2 (152.1) million. The economic occupancy rate of apartments in Finland was 94.6 (97.2) per cent on average, and the external tenant turnover was 32.3 (30.0) per cent.

The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.48 (17.44) per m2.

Net rental income from apartments stood at EUR 100.0 (106.6) million.

Investment properties

On 30 June 2021, SATO owned a total of 26,718 (26,767) apartments. During the review period, 41 (608) rental apartments were completed. The total number of divested rental apartments and part ownership apartments redeemed by the owner-occupants was 41.

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 June, the fair value of investment properties came to a total of EUR 4,916.4 (4,706.5) million. The change in the value of investment properties, including the rental apartments acquired and divested during the review period, was EUR 162.9 (48.6) 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 June.

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 59.6 (59.8) million. Investments in the Helsinki metropolitan area represented 92.7 per cent of all investments in the review period. Investments in new apartments represented 45.6 per cent of the investments. On 30 June 2021, binding purchase agreements in Finland totalled EUR 122.7 (58.5) million.

During the period under review, construction of rental and part-ownership homes was begun on Hervantajärvi, Tampere. SATO is developing nearly 200 rental and part-ownership homes in the up-and-coming Hervantajärvi area, close to the terminus of the soon-to-run Tampere Tramway. Construction began in June of the current year and the homes will be move-in ready in spring 2023. The design of the buildings caters for energy efficiency and sustainable building solutions that will last for decades to come. The choice of heating for the buildings is geothermal heat, which makes use of energy stored in the ground. Geothermal heat reduces carbon dioxide emissions and also has an additional advantage in that it may be used for cooling as well. A solar power system producing renewable energy will also be implemented as part of the project in rental home. FlexHome is a short-term ownership concept that enables home ownership with a small initial capital outlay and a five-year part-ownership period.

During the review period, 11 (61) rental apartments were divested in Finland. Their total value was EUR 2.5 (3.9) million.

The book value of plot reserves totalled EUR 32.5 (59.3) million at the end of June. The value of new plots acquired by the end of June totalled EUR 15.5 (1.8) 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 41 (608) rental apartments and 0 (99) owner-occupied apartments were completed. On 30 June 2021, a total of 1,035 (410) rental apartments and 71 (57) owner-occupied apartments as well as 52 (0) FlexHomes were under construction.

A total of EUR 40.8 (33.8) million was spent on repairing apartments and improving their quality.

At the end of June, SATO owned 532 (533) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 95.2 (89.7) 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 June, the Group employed 283 (224) people, of whom 248 (205) had a permanent employment contract. The average number of personnel was 259 (223) between January and June.

Period 1 April–30 June 2021 (1 April–30 June 2020)

Net sales and profit

Between April and June 2021, consolidated net sales were EUR 74.2 (76.5) million.

Operating profit was EUR 126.0 (54.3) million. The operating profit without the change in the fair value of investment properties was EUR 45.7 (52.4) million. The change in fair value in profit and loss was EUR 80.4 (1.8) million.

Financial income and expenses totalled EUR -11.0 (-12.4) million.

Profit before taxes was EUR 115.1 (41.8) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between January and June amounted to EUR 17.2 (29.8) million.

Earnings per share was 1.63 (0.59) euros.

Housing business

Rental income was EUR 74.2 (76.5) million. The economic occupancy rate of apartments in Finland was 94.4 (96.9) per cent on average, and the external tenant turnover was 33.5 (31.8) per cent.

The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.48 (17.44) per m2.

Net rental income from apartments stood at EUR 55.1 (59.6) million.

Investment properties

On 30 June 2021, SATO owned a total of 26,718 (26,767) apartments. During the review period, 41 (397) rental apartments were completed. The total number of divested rental apartments and part ownership apartments redeemed by the owner-occupants was 36.

Fair value

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 42.7 (32.5) million. Investments in the Helsinki metropolitan area represented 93.0 per cent of all investments in the review period. Investments in new apartments represented 47.5 per cent of the investments. On 30 June 2021, binding purchase agreements in Finland totalled EUR 122.7 (58.5) million.

During the review period, 6 (5) rental apartments were divested in Finland. Their total value was EUR 1.1 (1.5) million.

The book value of plot reserves totalled EUR 32.5 (59.3) million at the end of June. The value of new plots acquired by the end of June totalled EUR 15.5 (1.8) million.

In Finland, a total of 41 (397) rental apartments and 0 (99) owner-occupied apartments were completed. On 30 June 2021, a total of 1,035 (410) rental apartments and 71 (57) owner-occupied apartments as well as 52 (0) FlexHomes were under construction.

A total of EUR 29.8 (17.9) million was spent on repairing apartments and improving their quality.

At the end of June, SATO owned 532 (533) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 95.4 (88.2) 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 June, the Group employed 283 (224) people, of whom 248 (205) had a permanent employment contract. The average number of personnel was 273 (222) between April and June.

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 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 SATO’s properties, not to mention on financing costs or values.

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 focuses 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, as well as the uncertainty stemming from them, may 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 treasury 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 the debt portfolio was 69.7 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 2020 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, the general competitive situation and interest rates.

The Covid-19 pandemic that started in early 2020 has had a major impact on the Finnish economy. As the coronavirus pandemic situation will get better and vaccination coverage increases, economic growth will accelerate and normalize. According to the forecast of Ministry of Finance in May, the Finland's gross domestic product is expected to grow by 2.6% in 2021 and 2.5% in 2022. On the other hand, the evolution of the coronavirus situation will continue to spawn major uncertainty in the economy.

Efforts are being made to limit the negative impact of the pandemic on Finland’s economy through support measures adopted by the European Central Bank, the European Union and the State of Finland. 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.

In recent years, the rental housing markets in major cities have been characterised by sharp growth in supply. The growth largely stems from the brisk production of rental housing. Due to the low interest rate level and strong investor demand, the rate of housing construction is expected to remain at a high level.

During the Covid-19 pandemic, previously short-term rental apartments were offered for longer rental periods, which boosted supply in some cities, even to a considerable degree. However, demand for rental apartments was partly negatively affected by upper secondary schools and universities switching to remote teaching. Once the restrictions to contain the spread of the coronavirus have been relieved, travel rates increase and students return to classrooms, the demand for rental apartments in SATO’s main operational areas are expected to start growing.

As a consequence of the uncertainty caused by the pandemic, SATO’s external tenant turnover has grown and the economic occupancy rate weakened compared to the previous year. In order to maintain profitability, the company has streamlined its sales and marketing measures and focused on cost-efficiency improvement measures. SATO is investing strongly in increasing its customer presence and developing digital services. These measures are expected to have a positive impact on the occupancy rate in the medium term.

SATO Corporation's shareholders on 30 June 2021

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

ATTACHMENTS

Half-Year report 1 Jan–30 Jun 2021
Half-Year report presentation 1 Jan–30 Jun 2021

DISTRIBUTION
NASDAQ Helsinki Ltd., Euronext Dublin, 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 2020, SATO owned close to 26,800 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 2020 were EUR 303.4 million, operating profit EUR 179.6 million and profit before taxes EUR 129.5 million. The value of SATO's investment properties is roughly EUR 4.8 billion.

Attachments