SATO Corporation's Interim Report 1 Jan–30 Sep 2021:Demand for rental homes have improved slightly from the early 2021

11 November 2021

SATO Corporation, Interim report, 11th November, 2021 at 9:00 am

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

The economic occupancy rate in Finland was 94.7% (97.0).
Net sales were EUR 223.2 (228.3) million.
Net rental income amounted to EUR 157.3 (166.9) million.
Profit before taxes was EUR 211.7 (102.8) million.
The change in the fair value of investment properties included in the result was EUR 114.4 (-7.0) million.
Housing investments amounted to EUR 116.9 (83.3) million.
Invested capital at the end of review period was EUR 4,479.8 (4,587.8) million.
Return on invested capital was 7.3% (4.2).
Equity was EUR 2,310.7 (2,135.4) million, or EUR 40.82 (37.72) per share.
Earnings per share were EUR 2.99 (1.44).
A total of 41 (608) rental apartments and 0 (63) owner-occupied apartments as well as 0 (36) FlexHome apartments were acquired or completed.
A total of 1,294 (451) rental apartments and 71 (16) owner-occupied apartments as well as 52 (0) FlexHome apartments are under construction.
The House Expert model was expanded to Tampere and Turku: a total of 45 House Experts were working for SATO at the end of the period under review.
The competitive situation between rental housing providers has intensified, and the role of a successful customer experience has become even more important due to the increased freedom of choice available to those looking for a home.

Summary for 1 Jul–30 Sep 2021 (1 Jul–30 Sep 2020)

The economic occupancy rate in Finland was 95.1% (96.5).
Net sales were EUR 74.9 (76.2) million.
Net rental income amounted to EUR 57.3 (60.3) million.
Profit before taxes was EUR 40.5 (26.5) million.
The change in the fair value of investment properties included in the result was EUR 2.4 (-13.6) million.
Housing investments amounted to EUR 57.3 (23.5) million.
Earnings per share were EUR 0.57 (0.37).
A total of 0 (0) rental apartments and 0 (0) owner-occupied apartments as well as 0 (0) FlexHome apartments were acquired or completed.

CEO Antti Aarnio:

– The demand for rental homes improved slightly. SATO’s occupancy rate increased moderately in comparison with the beginning of the year 2021 and was 95.1% (96.5) for the period under review (1 Jul–30 Sep 2021). Demand in the Helsinki Metropolitan Area started to recover in August. In Tampere, Turku and other growth centres, the demand for rental homes had already picked up during the summer.
– Construction of new homes still remains at a record-high level in the Helsinki Metropolitan Area, with higher investor demand being the key factor behind this. The supply of rental homes also remains high. The competitive situation between rental housing providers has intensified, and the role of a successful customer experience has become even more important due to the increased freedom of choice available to those looking for a home.
– The House Expert operating model was expanded further in the Helsinki Metropolitan area as well as in Tampere and Turku: A total of 45 House Experts were working for SATO at the end of the period under review. The aim is for SATO to have 60 House Experts by the end of the year. In the operating model launched in late 2019, SATO’s own House Experts are responsible for work inside the buildings, such as work relating to building technology within apartments and buildings. Our aim with the House Expert model is to provide an even better customer experience and more efficient maintenance.
– Our focus during the period under review was on reforming our customer services. The changes made will increase the efficiency of the day-to-day work of our customer service and rental services and will be seen by our customers as a smoother customer experience.
– SATO launched the construction of a timber apartment building property in Lupajantie, Mellunmäki, Helsinki. The two-storey buildings will provide 112 new rental homes.
– I would like to thank SATO employees for their great work in developing customer satisfaction and the housing comfort of our residents.

Operating environment

The Finnish economy has recovered at a fast pace from the COVID-19 crisis since spring 2021 now that the vaccine uptake rate has risen and restrictions have been relieved. Growth is also projected to continue in 2022, after which the pace of growth will slow. According to the September economic forecast of the Ministry of Finance, Finnish economic growth is expected to be 3.3% in 2021 and 2.9% in 2022. Uncertainties arising from the disease development, virus mutations and slow rise in vaccination coverage continue to add to the uncertainty of the forecast, however.

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 economic development, interest rates are expected to remain low for a longer time, which will have a positive impact on SATO’s financing costs. Future trends in inflation may affect interest rate levels.

The pandemic has slightly shifted the focus of demand for rental apartments to larger apartments and areas with lower rent levels. Behind both of these developments is the increase in teleworking: people need more space when they also use their home for working.
Despite the outbreak of the COVID-19 pandemic in 2020, there is demand for rental homes, and the urbanisation development, which has temporarily slowed during the pandemic, is projected to be strong again over the years ahead.

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

Net sales and profit

Between January and September 2021, consolidated net sales were EUR 223.2 (228.3) million.

Operating profit was EUR 245.4 (138.9) million. The operating profit without the change in the fair value of investment properties was EUR 130.9 (145.9) million. The change in fair value in profit and loss was EUR 114.4 (-7.0) million.

Financial income and expenses totalled EUR -33.7 (-36.1) million.

Profit before taxes was EUR 211.7 (102.8) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between January and September amounted to EUR 74.7 (95.7) million.

Earnings per share was 2.99 (1.44) euros.

Financial position and financing

The consolidated balance sheet totalled EUR 5,070.8 (5,172.0) million at the end of September. Equity was EUR 2,310.7 (2,135.4) million. Equity per share was EUR 40.82 (37.72).

The Group's equity ratio was 45.6% (41.3) at the end of September. EUR 7.0 million in new long-term financing was withdrawn and the solvency ratio was 42.6% (43.4) at the end of September.

The Group’s annualised return on equity was 10.1% (5.2). Return on investment was 7.3% (4.2).

Interest-bearing liabilities at the end of September totalled EUR 2,169.1 (2,452.4) million, of which loans subject to market terms accounted for EUR 1,976.9 (2,229.9) million. The average loan interest rate was 1.7% (1.9). Net financing costs totalled EUR -33.7
(-36.1) million.

The calculated impact of changes in the market value of interest hedging on equity was EUR 10.9 (-1.8) million.

The proportion of loans without asset-based securities was 86.2% (82.7) of all loans. At the end of September, the proportion of unencumbered assets was 87.5% (84.1) 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 223.2 (228.3) million. The economic occupancy rate of apartments in Finland was 94.7% (97.0) on average, and the external tenant turnover was 31.6% (31.8).

The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.46 (17.49) per m2.

Net rental income from apartments stood at EUR 157.3 (166.9) million.

Investment properties

On 30 September 2021, SATO owned a total of 26,594 (26,628) 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 165.

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 4,975.4 (4,713.4) million. The change in the value of investment properties, including the rental apartments acquired and divested during the review period, was EUR 221.9 (55.6) million.

Of the value of apartments, the Helsinki metropolitan area accounted for some 84%, Tampere and Turku made up 11%, Jyväskylä and Oulu 2% and St. Petersburg covered 3 % 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.

Housing investments stood at EUR 116.9 (83.3) million. Investments in the Helsinki metropolitan area represented 90 per cent of all investments in the review period. Investments in new apartments represented 46% of the investments. On 30 September 2021, binding purchase agreements in Finland totalled EUR 120.0 (54.4) million.

During the review period, 14 (65) rental apartments were divested in Finland. Their total value was EUR 2.8 (6.3) million.

The book value of plot reserves totalled EUR 39.8 (60.1) million at the end of September. The value of new plots acquired by the end of September totalled EUR 15.3 (1.8) million.

The permitted building volume for approximately 1,800 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 (63) owner-occupied apartments were completed as well as 0 (36) FlexHome apartments. On 30 September 2021, a total of 1,294 (451) rental apartments and 71 (16) owner-occupied apartments and 52 (0) FlexHome apartments were under construction.

A total of EUR 67.6 (45.7) million was spent on repairing apartments and improving their quality.

At the end of September, SATO owned 531 (533) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 95.6% (90.3) 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 289 (234) people, of whom 265 (217) had a permanent employment contract. The average number of personnel was 268 (226) between January and September. The increase in the number of personnel is mainly due to the expansion of the House Expert operating model.

REVIEW PERIOD 1 July – 30 September 2021 (1 July – 30 September 2020)

Net sales and profit

Between July and September 2021, consolidated net sales were EUR 74.9 (76.2) million.

Operating profit was EUR 51.4 (39.2) million. The operating profit without the change in the fair value of investment properties was EUR 49.0 (52.8) million. The change in fair value in profit and loss was EUR 2.4 (-13.6) million.

Financial income and expenses totalled EUR -10.9 (-12.7) million.

Profit before taxes was EUR 40.5 (26.5) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between July and September amounted to EUR 36.2 (36.6) million.

Earnings per share was 0.57 (0.37) euros.

Housing business

Rental income was EUR 74.9 (76.2) million. The economic occupancy rate of apartments in Finland was 95.1% (96.5) on average, and the external tenant turnover was 30.6% (35.9).

The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.46 (17.49) per m2.

Net rental income from apartments stood at EUR 57.3 (60.3) million.

Investment properties

On 30 September 2021, SATO owned a total of 26,594 (26,628) 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 124.

Fair value

Of the value of apartments, the Helsinki metropolitan area accounted for some 84%, Tampere and Turku made up 11%, Jyväskylä and Oulu 2% per cent and St. Petersburg covered 3% at the end of September.

Investments, divestments and property development

Investments in rental apartments stood at EUR 57.3 (23.5) million. Investments in the Helsinki metropolitan area represented 87% of all investments in the review period. Investments in new apartments represented 46% of the investments. On 30 September 2021, binding purchase agreements in Finland totalled EUR 120.0 (54.4) million.

Construction work of timber apartment buildings at Lupajantie Mellunmäki district of Helsinki began in the beginning of summer 2021. There will be 112 new non-subsidised rental homes in timber apartment buildings featuring two storeys. The design solutions employed in the Lupajantie buildings pay attention to energy efficiency and use construction solutions and materials that will last for decades. The homes and common areas feature efficient design, which helps to reduce the energy consumption and improve the carbon footprint of the buildings. The heat source for the buildings will be geothermal heat, which makes use of thermal 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. The property will also have solar panels. The homes will be move-in ready in May 2022.

During the review period, 3 (5) rental apartments were divested in Finland. Their total value was EUR 0.8 (0.8) million.

The book value of plot reserves totalled EUR 39.8 (60.1) million at the end of September. The value of new plots acquired by the end of September totalled EUR 0.0 (0.0) million.

In Finland, a total of 0 (0) rental apartments, 0 (0) owner-occupied apartments and 0 (0) FlexHome apartments were completed. On 30 September 2021, a total of 1,294 (451) rental apartments and 71 (16) owner-occupied apartments as well as 52 (0) FlexHomes were under construction.

A total of EUR 26.8 (11.9) million was spent on repairing apartments and improving their quality.

At the end of September, SATO owned 531 (533) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 96.4% (91.6) 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 289 (234) people, of whom 265 (217) had a permanent employment contract. The average number of personnel was 285 (226) between July and September. The increase in the number of personnel is mainly due to the expansion of the House Expert operating model.

Events after the review period

The credit rating agency Standard & Poor’s has affirmed SATO Corporation's BBB credit rating, but at the same time revised the rating outlook to negative from stable. The revise in the outlook is a direct consequence of the weakening of the outlook for the corresponding rating of Fastighets AB Balder, SATO's main owner.

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, growth in supply of rental homes 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 68.6%.

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.

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 and strong investor demand being the key factor behind this. Due to the low interest rate level and strong investor demand, the rate of housing construction is expected to remain at a high level.

Despite the outbreak of the COVID-19 pandemic in 2020, there is demand for rental homes, and the urbanisation development, which has temporarily slowed during the pandemic, is projected to be strong again over the years ahead. The pandemic has slightly shifted the focus of demand for rental apartments to larger apartments and areas with lower rent levels. Behind both of these developments is the increase in teleworking: people need more space when they also use their home for working. 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. Once the restrictions to contain the spread of the coronavirus are lifted, travel rates increase and students return to classrooms, the demand for rental apartments is expected to start growing.

As a consequence of the uncertainty caused by the pandemic, SATO’s external tenant turnover has grown compared to previous years. The competitive situation between rental housing providers has intensified, and the role of a successful customer experience has become even more important due to the increased freedom of choice available to those looking for a home.

SATO is investing strongly in increasing its presence close to customers and in digital services. These measures are expected to have a positive impact on the occupancy rate over the medium term.

SATO Corporation's shareholders on 30 September 2021

Further information
CEO Antti Aarnio, tel. +358 201 34 4200
CFO Markku Honkasalo, tel. +358 201 34 4226
www.sato.fi

**ATTACHMENTS
**Interim report 1 Jan–30 Sep 2021
Interim report presentation 1 Jan–30 Sep 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