SATO Corporation Interim Report 1 January to 30 September 2022: Positive occupancy rate growth continued

28 October 2022

SATO Corporation, Interim Report 28 October 2022 at 9:00 am

Summary for 1 January to 30 September 2022 (1 January to 30 September 2021)

The economic occupancy rate in Finland was 95.1% (94.7).
Net sales totalled EUR 219.8 million (223.2).
Net rental income was EUR 152.4 million (157.3).
Profit before taxes was EUR 182.9 million (211.7).
The unrealised change in the fair value of investment properties included in the result was EUR 43.2 million (114.4).
Housing investments amounted to EUR 122.1 million (116.9).
Invested capital at the end of the review period was EUR 4,650.7 million (4,479.8).
Return on invested capital was 6.3% (7.3).
Equity was EUR 2,507.4 million (2,310.7), or EUR 44.29 per share (40.82).
Earnings per share were EUR 2.58 (2.99).
A total of 192 rental apartments (41), 0 owner-occupied apartments (0) and 0 Flex Homes (0) were acquired or completed.
A total of 1,387 rental apartments (1,294), 0 owner-occupied apartments (71) and 52 FlexHomes (52) are under construction.
SATO invested in new rental homes in the Skanssi district of Turku. This is the first time in five years that SATO is investing in new homes in the city.
Despite the uncertainty in the market, SATO has succeeded in improving the occupancy rate.

Summary for 1 July to 30 September 2022 (1 July to 30 September 2021)

The economic occupancy rate in Finland was 95.6% (95.1).
Net sales totalled EUR 72.6 million (74.9).
Net rental income was EUR 54.0 million (57.3).
Profit before taxes was EUR 38.4 million (40.5).
The unrealised change in the fair value of investment properties included in the result was EUR 2.9 million (2.4).
Housing investments amounted to EUR 53.6 million (57.3).
Earnings per share were EUR 0.54 (0.57).
A total of 1 rental apartments (0), 0 owner-occupied apartments (0) and 0 Flex Homes (0) were acquired or completed.

President and CEO Antti Aarnio:

– During the period under review (1 July to 30 September 2022), SATO’s occupancy rate improved and was 95.6% (95.1). Demand for rental homes picked up from the early months of the year, and the higher occupancy rate has mainly been attributable to growth in service consumption and the consequent improvement in service-sector employment rate as well as to upper secondary education resuming contact teaching. Economic uncertainty and higher consumer prices and interest rates are also in part reflected in the rising demand for rental homes.
– In the Helsinki Metropolitan Area in particular, the continued high level of new housing production has sustained intense competition for good tenants. Due to the competitive situation, it has not been possible to transfer increasing maintenance costs in full to apartment rents.
– With the choice available for those looking for a home growing, a successful customer experience plays an important role. SATO is investing strongly in its operations in 24/7 digital services and in presence close to customers.
– In August, SATO signed a contract under which we buy an apartment building from builders Lujatalo constructed in Skanssi, Turku. The eight-storey building at the address Sorakatu 9 will have 77 new rental homes. This is the first time in five years that SATO is investing in new homes in the city. Construction started in August and the homes will be move-in ready in late October 2023.
– SATO is developing 257 new rental homes in the Finnoo district of Espoo, close to the new metro station. Construction started in August 2022 and the homes will be completed in stages during autumn 2024. Peijinkuja project is grounded in long-running development efforts where, together with the City of Espoo, we drafted a new local detailed plan for the terraced house property owned by SATO in the old Hannus area of detached houses that is now on its way to become the new Finnoo district of Espoo.
– In September, we published our Sustainability Programme for 2023−2026. The programme is themed on sustainable housing, wellbeing in communities and sustainable profitability. We aim to be a forerunner in sustainable rental housing. SATO’s new Sustainability Programme is based on an analysis, conducted with stakeholders, of the elements of sustainability that are perceived to be the most important. The Sustainability Programme and its targets will serve as guidance in both day-to-day decision-making and more long-term development efforts.
– I would like to thank SATO employees for their great work to develop customer satisfaction and the housing comfort of our residents.

Operating environment

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

Russia’s attack on Ukraine that started in February is still continuing and has made the economic outlook increasingly uncertain and accelerated inflation. Exceptionally high inflation has forced central banks to respond to the situation by making rapid interest rate hikes. In September, the European Central Bank (ECB) raised the key interest rates by 75 basis points to 1.25%. The previous hike took place in July and was 50 basis points. The war in Ukraine and the resulting uncertainty is eroding consumer confidence. Consumer confidence has remained at a very low level already since the spring and is dampening private consumption.

In particular the surge in energy and food prices coinciding with climbing interest rates will reverse economic growth towards the end of the year. According to the Bank of Finland forecast of 15 September 2022, Finland’s economy is projected to grow by 2.2% this year following a robust start to the current year but then decline to 0.3% next year. The outlook is highly uncertain, but the forecast anticipates that the upward trend in prices will subside in late 2023 and the economy will resume slow growth in 2024.

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 rental housing demand, 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 30 SEPTEMBER 2022 (1 JANUARY TO 30 SEPTEMBER 2021)

Net sales and profit

In January–September 2022, SATO Corporation’s consolidated net sales totalled EUR 219.8 million (223.2).

Operating profit was EUR 217.0 million (245.4). Operating profit without the change in the fair value of investment properties was EUR 173.8 million (130.9). The unrealised change in fair value through profit or loss was EUR 43.2 million (114,4).

Net financing expenses totalled EUR -34.1 million (-33.7).

Profit before taxes was EUR 182.9 million (211.7). Cash earnings (free cash flow after taxes excluding changes in fair value) in January–September amounted to EUR 116.3 million (74.7).

Earnings per share were EUR 2.58 (2.99).

Financial position and financing

The consolidated balance sheet total at the end of September was EUR 5,226.0 million (5,070.8). Equity totalled EUR 2,507.4 million (2,310.7). Equity per share was EUR 44.29 (40.82).

The Group’s equity ratio at the end of September was 48.0% (45.6). EUR 0.0 million in new long-term financing was drawn and the solvency ratio at the end of September was 40.0% (42.6).

The Group’s annualised return on equity was 8.0% (10.1). Return on invested capital was 6.3% (7.3).

Interest-bearing liabilities at the end of September totalled EUR 2,143.3 million (2,169.1), of which loans on market terms amounted to EUR 1,987.7 million (1,976.9). The average loan interest rate was 1.8% (1.7). Net financing costs totalled EUR -34.1 million (-33.7).

The calculated impact of changes in the market value of interest hedging on equity was EUR 46.2 million (10.9).

The proportion of loans without asset-based securities was 87.3% (86.2) of all loans. At the end of September, unencumbered assets accounted for 88.9% of total assets (87.5).

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 219.8 million (223.2). On average, the economic occupancy rate of apartments in Finland was 95.1% (94.7) and the external tenant turnover 28.4% (31.6).

At the end of the reporting period, the average monthly rent of SATO rental homes in Finland was EUR 17.80 per m2(17.46).

Net rental income from apartments totalled EUR 152.4 million (157.3).

Investment properties

On 30 September 2022, SATO owned a total of 24,947 homes (26,594). The reporting period saw the completion of 191 rental homes (41). The number of divested rental apartments and part-ownership apartments redeemed by residents totalled 2,018.

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 5,035.3 million (4,975.4). The change in the value of investment properties, including the rental apartments acquired and divested during the reporting period, was EUR 2.6 million (221.9).

At the end of September, the commuting zone of the Helsinki Metropolitan Area accounted for around 87%, Tampere and Turku together made up around 11% 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 apartments totalled EUR 122.1 million (116.9). The Helsinki Metropolitan Area represented 79% of all investments during the period under review. New apartments accounted for 61% of the total. In addition, on 30 September 2022, there were binding purchase agreements to a total of EUR 150.2 million (120.0) million in Finland.

During the reporting period, 2,018 (14) rental apartments were divested in Finland. Their total value amounted to EUR 208.8 million (2.8).

The book value of the plot reserve owned at the end of September totalled EUR 36.0 million (39.8). The value of new plots acquired by the end of September totalled EUR 9.1 million (15.3).

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, 191 rental homes (41) and 0 owner-occupied homes (0) and 0 FlexHomes (0) were completed. On 30 September 2022, a total of 1,387 rental homes (1,294) and 0 owner-occupied homes (71) as well as 52 FlexHomes (52) were under construction.

A total of EUR 56.1 million (67.6) was spent on repairing apartments and improving their quality.

At the end of September, SATO had a total of 522 (531) apartments in St Petersburg. The economic occupancy rate of rental homes in St Petersburg averaged 94.0% (95.6). Investments in Russia commenced in 2007. The last investment decision was made in 2013 and the property was completed in 2016. SATO has made a decision in principle to exit the business in Russia. The company is actively seeking a solution.

Personnel

At the end of September, the Group had a total of 325 employees (289), of whom 291 (265) had a permanent employment contract. The average number of personnel in January–September was 330 (268).

REVIEW PERIOD 1 JULY TO 30 SEPTEMBER 2022 (1 JULY TO 30 SEPTEMBER 2021)

Net sales and profit

In July–September 2022, SATO Corporation’s consolidated net sales totalled EUR 72.6 million (74.9).

Operating profit was EUR 50.2 million (51.4). Operating profit without the change in the fair value of investment properties was EUR 47.3 million (49.0). The unrealised change in fair value through profit or loss was EUR 2.9 million (2.4).

Net financing expenses totalled EUR -11.8 (million (-10.9).

Profit before taxes was EUR 38.4 million (40.5). Cash earnings (free cash flow after taxes excluding changes in fair value) in July–September amounted to EUR 31.7 million (36.2).

Earnings per share were EUR 0.54 (0.57).

Housing business

Rental income was EUR 72.6 million (74.9). On average, the economic occupancy rate of apartments in Finland was 95.6% (95.1) and the external tenant turnover 27.7% (30.6).

At the end of the reporting period, the average monthly rent of SATO rental homes in Finland was EUR 17.80 per m2 (17.46).

Net rental income from apartments totalled EUR 54.0 million (57.3).

Investment properties

On 30 September 2022, SATO owned a total of 24,947 homes (26,594). The reporting period saw the completion of 0 rental homes (0). The number of divested rental apartments and part-ownership apartments redeemed by residents totalled 3.

Fair value

At the end of September, the commuting zone of the Helsinki Metropolitan Area accounted for around 87%, Tampere and Turku together made up around 11% and St Petersburg around 2%.

Investments, divestments and property development

Investments in apartments totalled EUR 53.6 million (57.3). Helsinki Metropolitan Area represented 80% of all investments during the period under review. New apartments accounted for 63% of the total. In addition, on 30 September 2022, there were binding purchase agreements to a total of EUR 150.2 million (120.0).

In August, SATO signed a contract under which SATO buys an apartment building from builders Lujatalo constructed in Skanssi, Turku. The eight-storey building at the address Sorakatu 9 will have 77 new rental homes. This is the first time in five years that SATO is investing in new homes in the city. Construction started in August and the homes will be move-in ready in late October 2023.

SATO is developing 257 new rental homes in the Finnoo district of Espoo. Construction started in August 2022 and the homes will be completed in stages during autumn 2024.

During the reporting period, 3 (3) rental apartments were divested in Finland. Their total value amounted to EUR 0.5 million (0.8).

The book value of the plot reserve owned at the end of September totalled EUR 36.0 million (39.8). The value of new plots acquired by the end of September totalled EUR 9.1 million (0.0).

In Finland, 0 rental homes (0) and 0 owner-occupied homes (0) and 0 FlexHomes (0) were completed. On 30 September 2022, a total of 1,387 rental homes (1,294) and 0 owner-occupied homes (71) as well as 52 FlexHomes (52) were under construction.

A total of EUR 24.6 million (26.8) was spent on repairing apartments and improving their quality.

At the end of September, SATO had a total of 522 (531) apartments in St Petersburg. The economic occupancy rate of rental homes in St Petersburg averaged 93.6% (96.4). Investments in Russia commenced in 2007. The last investment decision was made in 2013 and the property was completed in 2016. SATO has made a decision in principle to exit the business in Russia. The company is actively seeking a solution.

Personnel

At the end of September, the Group had a total of 325 employees (289), of whom 291 (265) had a permanent employment contract. The average number of personnel in July–September was 333 (285).

Events after the review period

Due to increased construction, maintenance and financing costs, as well as the moderate rent development due to the competitive situation, SATO will not start new projects for the time being and postpones their start to the future.

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 the prices of energy, food and materials as well as in supply chains. The surge in prices has resulted in a rapid increase in the interest rate level. The increase in energy, food and consumer goods prices may slow economic growth, continue to considerably increase the interest rate level, and have a negative effect on the purchasing power of consumers as well as on their capacity to perform 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 rents 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 issued 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 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 represent 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. SATO has made a decision in principle to exit the business 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 has not been possible, which is why SATO will continue to rent out the homes in St Petersburg for the time being until an exit method is found. The company is actively seeking a solution. 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. 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 business in Russia. It may impact the ability of SATO to make payments to its suppliers, employees and authorities as well as 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, financial 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 consumer confidence, development of purchasing power, rent and price development for apartments, competitive situation and interest rate level.

The surge in energy prices has a direct impact on the company’s profitability, as it is currently not possible to transfer costs in full directly to rents due to the intense competitive situation.

The record-high rate of construction seen for a long period of time will slow due to the economic uncertainty. Sales volumes of both new and old homes have decreased. Statistics published by the Federation of Real Estate Agency in August show a decrease in sales volumes of new and old homes compared with the figures reported for the spring and early summer. The figure was down by 21% compared with July 2021. According to data released by Statistics Finland in August, there was a 35% year-on-year decrease in building permits granted and a 12% year-on-year decrease in building projects started in Q2 of 2022. The number of residential units to be completed, particularly in the Helsinki Metropolitan Area, will, however, remain at a high level during the rest of 2022 as well as throughout 2023, maintaining intense competition for tenants. The improved service-sector employment rate and the resumption of contact teaching in upper secondary education have resulted in demand for rental homes picking up, which is reflected in an improved occupancy rate. The economic uncertainty, pressure for interest rate hikes and increases in consumer prices have also been in part reflected in increased demand for rental homes.

The continued high level of housing supply particularly in the Helsinki Metropolitan Area has maintained intense competition for good tenants and was reflected over the period under review in SATO’s business as a slight decrease in average rents year on year. With greater choice available for those looking for a home, the role of a successful customer experience has become even more important. SATO is strongly invested in increasing its presence close to customers and in digital services.

SATO Corporation’s shareholders on 30 September 2022

On some displays the table unfortunately cuts out a bit. You can view the whole table by clicking it.

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

ENCLOSURES
Interim Report 1 January to 30 September 2022
Interim Report presentation 1 January to 30 September 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. www.sato.fi/en

Attachments