SATO Corporation’s Interim Report 1 January to 31 March 2022: SATO’s result remained on stable level in challenging market environment

12 May 2022

SATO Corporation, Interim report 12 May 2022 at 9:00 am

Summary for 1 January to 31 March 2022 (1 January to 31 March 2021)

The economic occupancy rate in Finland was 94.6% (94.8).
Net sales totalled EUR 74.7 million (74.0).
Net rental income was EUR 44.4 million (44.9).
Profit before taxes was EUR 106.8 million (56.2).
The change in the fair value of investment properties included in the result was EUR 82.6 million (31.6).
Housing investments amounted to EUR 23.7 million (16.9).
Invested capital at the end of the review period was EUR 4,593.7 million (4,379.8).
Return on invested capital was EUR 10.4% (6.1).
Equity was EUR 2,417.1 million (2,179.0), or EUR 42.70 per share (38.49).
Earnings per share were EUR 1.50 (0.79).
A total of 0 rental apartments (0) were acquired or completed.
A total of 1,100 (561) new rental apartments, 0 owner-occupied apartments (71) and 52 FlexHomes (0) are under construction.

President and CEO Antti Aarnio:

– During the reporting period, SATO’s occupancy rate was 94.6% (94.8). In the Helsinki Metropolitan Area in particular, the continued high level of housing supply has sustained intense competition between rental housing providers. SATO is investing strongly in its presence at SATO-owned properties and in developing personal service for customers.
– There are slight signs of the record-high rate of construction slowing. According to Statistics Finland, the number of building permits issued in November–January decreased by 15% year on year.
– The war in Ukraine has increased uncertainty relating to the development of the economy. The impacts of the war are reflected particularly in the surge in energy and materials prices and in the accelerating inflation.
– SATO’s House Expert model is now fully deployed in the Helsinki Metropolitan Area, Tampere and Turku. With the House Expert model, SATO aims to improve the customer service in the daily lives of its residents.
– The renovation of an apartment building started in Castréninkatu, Kallio, Helsinki in February and it is estimated to take around 18 months. SATO repairs its properties in accordance with the lifecycle principle and, when renovating properties, energy efficiency is also improved. The aim is to improve energy efficiency by around 30% compared to the pre-renovation level.
– Events after the review period: SATO sold 2 009 rental apartments mainly in Lahti, Jyväskylä and Oulu region to Heimstaden. The divestment implements the SATO strategy to focus housing investments on the Helsinki Metropolitan area and its commuter area along the main railway line as well as on Tampere and Turku and their surrounding municipalities.
– I would like to thank SATO employees for their great work to ensure customer satisfaction and the comfort of our residents.

Operating environment

Over the reporting period, SATO’s operating environment was affected by the war in Ukraine, accelerating inflation and the continued high level of rental housing supply, particularly in the Helsinki Metropolitan Area.

The first months of the year saw rapid economic growth as COVID-19 restrictions were lifted. Russia’s attack on Ukraine in late February transformed the economic outlook. The biggest impacts are related to the surge in energy and materials prices and challenges in supply chains, which were already visible in the end of the year 2021. According to a Bank of Finland analysis of 11 March 2022, the war in Ukraine is increasing uncertainty over the outlook for Finland’s economy and will slow economic growth. The analysis projects that Finland’s economic growth will slow to 0.5%–2% in the current year. The uncertainty has resulted in a major decline in consumer confidence. According to the consumer confidence indicator published by Statistics Finland on 28 March 2022, consumers’ expectations concerning their own finances and especially the Finnish economy were very pessimistic.

Inflation has continued to accelerate in early 2022. According to preliminary Eurostat data published on 1 April 2022, inflation in March was expected to be 7.5% in the euro area and 5.6% in Finland. The main component pushing prices up has been the surge in energy prices, which has accelerated after Russia's attack on Ukraine. The accelerating inflation has raised the overall interest rate level, and central banks have tightened their monetary policy to curb price increases. The US Federal Reserve approved its first interest rate hike in March, and the European Central Bank (ECB) announced it would scale down its securities purchase programme. Contrary to previous forecasts, inflation is anticipated to remain at a high level during 2022.

The continued high level of housing supply particularly in the Helsinki Metropolitan Area has maintained intense competition for good tenants between rental housing providers, which was reflected over the reporting period in SATO’s business as a decline in the economic occupancy rate and in a slight decrease in average rents year on year. However, with COVID-19 restrictions lifted and service-sector employment improving, demand for centrally located homes started to grow towards the end of the reporting period. There are slight signs of slowing in the record-high rate of construction that has been seen for a long period of time. According to Statistics Finland, the number of building permits issued in November–January decreased by 15% year on year.

Despite the economic uncertainty, there is demand for rental homes and the urbanisation trend continues. Dense urban housing with good access to public transport is becoming increasingly popular in Finland. The Helsinki Metropolitan Area (HMA), Tampere and Turku continue to enjoy strong growth, while at the same time Statistics Finland forecasts a downturn in the nationwide population trend in 2031. The HMA is projected to grow by more than 200,000 new residents by 2040. Almost 80% of HMA residents already live in households with one to two members, and the proportion of small households continues to grow. The proportion of immigrants is projected to increase in the HMA from the current 17% to 25% by 2030. The ageing population is moving to growth centres providing access to services and expects more and more housing-related services.

The demographic change and the price development of owner-occupied homes create a stable foundation for demand for rental housing, especially in the HMA, Tampere and Turku. Outside growth centres, the real prices of homes are declining, which makes home ownership in a growth centre even more challenging for people coming from those areas.

REVIEW PERIOD 1 January to 31 March 2022 (1 January to 31 March 2021)

Net sales and profit

In January–March 2022, SATO Corporation’s consolidated net sales totalled EUR 74.7 million (74.0).

Operating profit was EUR 117.9 million (67.9). Operating profit without the change in the fair value of investment properties was EUR 35.3 million (36.3). The change in fair value was EUR 82.6 million (31.6).

Net financing costs totalled EUR -11.1 million (EUR -11.8) million.

Profit before taxes was EUR 106.8 million (56.2). Cash earnings (free cash flow after taxes excluding changes in fair value) in January–March amounted to EUR 25.8 million (21.3).

Earnings per share were EUR 1.50 (0.79).

Financial position and financing

The consolidated balance sheet total at the end of March was EUR 5,183.0 million (4,972.6). Equity totalled EUR 2,417.1 million (2,179.0). Equity per share was EUR 42.70 (38.49).

The Group’s equity ratio at the end of March was 46.6% (43.8). EUR 0.0 million in new long-term financing was drawn and the solvency ratio at the end of March was 41.9% (43.4).

The Group’s annualised return on equity was 14.3% (8.2). Return on invested capital was 10.4% (6.1).

Interest-bearing liabilities at the end of March totalled EUR 2,176.6 million (2,200.9), of which loans on market terms amounted to EUR 2,008.3 million (1,995.1). The average loan interest rate was EUR 1.8% (1.8). Net financing costs totalled EUR -11.1 million
( -11.8).

The calculated impact of changes in the market value of interest hedging on equity was EUR 16.9 million (6.8).

The proportion of loans without asset-based securities was 83.5% (82.5) of all loans. At the end of March, unencumbered assets accounted for 88.1% (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 74.7 million (74.0). On average, the economic occupancy rate of apartments in Finland was 94.6% (94.8) and the external tenant turnover 26.2% (31.6).

The average monthly rent of SATO rental homes in Finland was EUR 17.44 per m2 (17.50).

Net rental income from apartments totalled EUR 44.4 million (44.9).

Investment properties

On 31 March 2022, SATO owned a total of 26,771 homes (26,714). The reporting period saw the completion of 0 (0) new rental homes. The number of divested rental apartments and part-ownership apartments redeemed by residents totalled 7.

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 lifecycle plans and repair need specifications.

At the end of March, the fair value of investment properties came to a total of EUR 5,129.1 million (4,804.5). The change in the value of investment properties, including investments and divestments during the review period, was EUR 96.3 million (51.0).

At the end of March, the commuting zone of the Helsinki Metropolitan Area accounted for around 83%, Tampere and Turku together made up around 11%, Jyväskylä and Oulu around 4% and St Petersburg around 2% of the value of apartments.

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 3 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 23.7 million (16.9). The Helsinki Metropolitan Area represented 82.4% of all investments during the reporting period. New apartments accounted for 66.3% of the total. In addition, on 31 March 2022, there were binding purchase agreements to a total of EUR 131.3 million (76.8) in Finland.

SATO repairs its properties in accordance with the lifecycle principle and, when renovating properties, energy efficiency is also improved. The aim is to improve energy efficiency by around 30% compared to the pre-renovation level. In February saw the commencement of the renovation of an apartment building in Castréninkatu, Kallio, Helsinki, which is estimated to take around 18 months. The renovation will involve the full refurbishment of the kitchens, bathrooms and other living areas of the apartments. In addition, the property’s staircases and corridors will be painted and the water and drain pipes as well as electrical and building automation and control systems will be replaced. The natural ventilation of the apartment building will be replaced by centralised supply and exhaust ventilation with heat recovery. The building’s apartment distribution will change, and the renovated building will feature 95 homes, which is five more than before the project. The exteriors and roof of the building already underwent refurbishment in 2016.

The renovation of a total of 300 rental homes in Helsinki Kontula and Pihlajamäki was completed during the review period. On 31 March 2022, there were 382 rental homes undergoing renovation in Helsinki and Vantaa and 13 units undergoing repurposing from office space to homes in Turku.

During the reporting period, 7 (5) rental homes were divested in Finland. Their total value was EUR 2.6 million (0.9).

The book value of the plot reserve owned at the end of March totalled EUR 42.7 million (67.1). The value of new plots acquired by the end of March totalled EUR 0.0 million (4.4).

Permitted building volume for around 1,700 homes is being developed for 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, 0 rental apartments (0), 0 owner-occupied (0) and 0 FlexHomes (0) were completed. On 31 March 2022, a total of 1,100 rental homes (561), 0 owner-occupied homes (71) and 52 FlexHomes (0) were under construction. FlexHome is a short-term ownership concept that enables home ownership with a small initial capital outlay and a five-year part-ownership period.

A total of EUR 16.3 million (14.0) was spent on repairing apartments and improving their quality.

At the end of March, SATO had a total 522 apartments (533) in St Petersburg. The economic occupancy rate of rental homes in St Petersburg averaged 98.2% (95.0). SATO will refrain from making new investment decisions in Russia. Apartments in St Petersburg account for 2% of the fair value of SATO apartments and 2% of the total of SATO apartments.

Personnel

At the end of March, the Group had 322 employees (249), of whom 295 had a permanent employment contract (234). The average number of personnel in January–March was 321 (244).

Annual General Meeting on 24 March 2022

A decision was made to set the number of members of the Board of Directors of SATO Corporation at six. The Annual General Meeting re-elected Erik Selin as Chairman of the Board. Esa Lager, Tarja Pääkkönen, Sharam Rahi, Johannus (Hans) Spikker and Timo Stenius will also continue as Board members.

The audit firm Deloitte Ltd was appointed as the auditor. Deloitte Ltd has announced that the Key audit partner will be Aleksi Martamo, Authorised Public Accountant (APA).

The Annual General Meeting decided to adopt the financial statements of 31 December 2021, and SATO Corporation will distribute EUR 0.50 per share in dividends for the financial period ended on 31 December 2021.

Organisation of the Board of Directors

At its constitutive meeting on 24 March 2022, the company’s Board of Directors elected from among its number Esa Lager to serve as Deputy Chairman.

The Board appointed Erik Selin to chair the Nomination and Remuneration Committee and Tarja Pääkkönen and Johannus (Hans) Spikker to serve as Committee members.

Events after the review period

On 22 April 2022, SATO Group companies signed an agreement on the divestment of 2,009 rental homes to Swedish real estate investor Heimstaden. Transaction was closed 25 April 2022. The properties sold in this transaction are located in Hämeenlinna, Jyväskylä, Lahti, Oulu, Vihti and Ylöjärvi. The lease agreements will be transferred to the buyer as they are in the transaction.

The divestment implements the SATO strategy to focus housing investments on the Helsinki Metropolitan area and its commuter area along the main railway line as well as on Tampere and Turku and their surrounding municipalities. The properties sold are mostly located outside the growth centres covered by the strategy.

Short-term 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 war in Ukraine is a short-term risk affecting the operating environment, the duration and impacts of which on the Finnish economy are difficult to estimate. The war’s biggest impacts have been seen in energy, food and materials prices as well as supply chains. An increase in energy, food and consumer goods prices may slow economic growth, considerably increase the interest rate level, and have a negative effect on the purchasing power of consumers as well as on their capacity to fulfil their obligations. Such a decline in the economy or economic activity may have an adverse effect on the financial performance or activities, finance costs or value of SATO-owned properties.

The highest risks in apartment rental are to do with cyclical movements and changes in supply and demand. The market risk may push the supply of rental homes higher than their demand. This would result in idle rental housing stock and pressure for the rent level to level off or fall, especially as regards old housing stock.

A decline in the housing market may have a negative effect on the market value of SATO’s housing stock. In line with its refined strategy, SATO has been focusing in its investments on growth centres and on renovating and repairing existing housing stock and, consequently, ensuring the rentability and value development of the apartments.

Changes in regulation by the authorities and in legislation and related uncertainty may have a significant impact on the reliability of the investment environment and, consequently, 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 adopted 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. In 2019, the company established an EUR 1.5 billion Euro Medium Term Notes (EMTN) Programme under which SATO has issued bonds in the total amount of EUR 1,050.0 million.

The means for managing the liquidity risk at SATO include cash assets, a bank account limit, EUR 700 million in committed credit facilities and a EUR 400 million 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 fixed rate debt arrangements or interest rate derivatives. In accordance with our treasury policy, our aim is for fixed-rate loans, including interest rate derivatives, to account for more than 60% of our debt portfolio.

SATO currently has 522 apartments in St Petersburg. Investments in Russia commenced in 2007. The last investment decision was made in 2013 and the property was completed in 2016. 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, with related hedging options examined in accordance with our treasury policy. SATO will refrain from making new investments in Russia. Following the start of the war in Ukraine, the company has looked into opportunities to exit the business in Russia. According to the explorations, a speedy exit is not possible, which is why SATO will continue to rent out the homes in St Petersburg for the time being. It is expected that the operating environment in Russia will be highly uncertain for a long period of time and could result in disruptions to SATO's business activities in Russia and with parties related to Russia, the ability to make payments to its suppliers, employees and authorities as well as to receive payments from its customers, which could, therefore, have a material adverse effect on SATO's business in Russia and even result in SATO limiting or ceasing its operations in Russia and with parties related to Russia for a long period of time. Should the war in Ukraine be prolonged, carrying out business in Russia may have negative impacts on the company’s reputation and may hamper business in Finland or have adverse effects on the company’s ability to access finance in the market, which may have an adverse effect on the financial performance or activities, finance costs or value of SATO-owned properties.

For a broader description of risks and risk management, see the Group’s website and Annual Report for 2021 at www.sato.fi/en.

Outlook

In the operating environment, SATO’s business activities are mainly affected by the urbanisation trend, competitive situation, interest rate level, consumer confidence, the development of purchasing power, rent and price development for apartments, and housing policies. The war in Ukraine that broke out in February and the resulting acceleration of inflation have brought a great deal of uncertainty to the economic outlook.

The continued high level of housing supply particularly in the Helsinki Metropolitan Area has maintained intense competition for good tenants between rental housing providers. However, with COVID-19 restrictions lifted and service-sector employment improving, demand for centrally located homes started to grow towards the end of the reporting period. There are signs of slowing in the record-high rate of construction that has been seen for a long period of time.

With the increased choice available for those looking for a home, the role of a successful customer experience has become even more important. SATO is investing strongly in increasing its presence close to customers and in digital services.

SATO Corporation’s shareholders on 31 March 2022

For media enquiries please contact:
Antti Aarnio, President and CEO, phone: +358 201 34 4200
Markku Honkasalo, CFO, phone: +358 201 34 4226
www.sato.fi/en

ATTACHMENTS

Interim Report 1 January to 31 March 2022
Interim Report presentation 1 January to 31 March 2022

DISTRIBUTION
NASDAQ Helsinki Ltd, Euronext Dublin, main media, www.sato.fi/en

SATO Corporation is an expert in sustainable rental housing and one of Finland’s largest rental housing providers. SATO owns around 25,000 rental homes in the Helsinki Metropolitan Area, Tampere and Turku.

SATO aims to provide an excellent customer experience and a comprehensive range of urban rental housing alternatives with good access to public transport and services. We promote sustainable development and work in open interaction with our stakeholders. SATO invests profitably, sustainably and with a long-term view. We increase the value of our assets through investments, divestments and repairs.

In 2021, SATO Group’s net sales totalled EUR 298.3 million, operating profit EUR 304.5 million and profit before taxes EUR 259.4 million. The value of SATO’s investment properties is around EUR 5 billion.

Attachments