Interim report 1 January-31 March 2017: Customer First strategy reflected in customer loyalty

SATO Corporation, Interim report, 27th April 2017 at 8:00 a.m.

Summary for the period 1 January-31 March 2017 (1 January-31 March 2016)

• Profit before taxes stood at EUR 58.6 (63.3) million.
• Earnings per share were EUR 0.83 (0.99).
• The change in the fair value of rental apartments included in the result was EUR 32.3 (39.8) million.
• Equity was EUR 1,304.2 (1,011.9) million, or EUR 23.03 (19.90) per share.
• Return on equity was 14.7 (20.1) per cent.
• Return on investment was 8.8 (10.4) per cent.
• Net sales stood at EUR 68.1 (61.1) million.
• Investments in rental apartments stood at EUR 26.4 (37.2) million.
• A total of 315 (32) rental apartments were acquired or completed.
• The occupancy rate in Finland was 96.1 (94.8) per cent.
• A total of 1,392 rental apartments are under construction.

Operating environment

The Finnish economy has turned towards growth. In the near future, growth is expected to be clearly above one per cent. This growth is mainly based on private consumption and building investments. Inflation has shown signs of acceleration, but, in particular, short-term interest rates remain at an unusually low level. Long-term interest rates are expected to rise. The confidence of consumers in the economy has strengthened further, and they are optimistic about the development of the unemployment situation.

Demand for rental apartments has remained high. Housing construction is active in SATOs main operating areas. In the Helsinki metropolitan area many developing residential areas are being built such as Kalasatama, Kruunuvuorenranta and Jätkäsaari in Helsinki, Niittykumpu in Espoo, and Tikkurila and Martinlaakso in Vantaa. Among others, the Härmälänranta area in Tampere and Kakola area in Turku are being developed. The high number of new apartments completed has balanced the rental apartment market in many places and rents have increased moderately.

There is more activity in the real estate investment market than ever before (KTI). The number of apartments purchased by investors has remained high, and consumers have also picked up the pace during the first quarter. This was reflected, for example, in the number of housing loans withdrawn in January 2017. The last time as many loans were withdrawn was in January 2012.

The Russian economy is expected to grow moderately.

CEO Saku Sipola:

• Our strong focus on customer service was seen as a decrease in resident turnover during the review period. We have been able to improve our customer loyalty. 
• SATO's revised strategy centres around the customer, and we are implementing our Customer First development programme that aims at improved customer service. SATO's customer service employees will ensure that a consistent service chain works within predefined time and the customer is well informed throughout the process. In addition, we will focus more closely on building management services that have previously been acquired from external service providers, and we will include the regular tasks of building managers in the job descriptions of SATO's service managers and directors. Through this change, SATO has recruited more than 30 customer service employees.
• We want to listen to our customers more closely, and develop and improve on the basis of feedback and research data. We opened SATO Pulssi, a mobile customer panel, with which our residents can have an impact on housing solutions and the development of related services.
• Strong urban development will continue in the future. Urbanisation is essential for the international success of Finland, as innovation, businesses and jobs are mainly created in urban environments. This sets a continuous demand for rental apartments and we continue investing in the Helsinki metropolitan area, Tampere and Turku.
• Rental activities have developed positively, and our occupancy rate improved clearly from the year before. The occupancy rate decreased slightly from the final quarter of 2016, as 463 new and renovated apartments became available for renting during the first quarter.

Net sales and profit

At the beginning of the year, the company changed its reporting practices so that net sales consist only of rental income. For further information on the changes, please see the note 1 in the interim report.

In January-March, consolidated net sales stood at EUR 68.1 (61.1) million, showing a change of 11.5 per cent from the reference period. Net sales have increased as a result of the larger number of apartments and positive development of occupancy rate.

Operating profit was EUR 70.3 (72.9) million. The operating profit without the change in the fair value was EUR 38.0 (33.1) million. At the beginning of the year, the change in value was EUR 32.3 (39.8) million, mainly because of the increase in apartment prices in SATO's operating areas, the discontinuation of specific restrictions and the increase in the value of the Russian rouble.

Profit before taxes was EUR 58.6 (63.3) million. Cash flow from operations (free cash flow after taxes excluding the change in fair value) in January-March amounted to EUR 19.2 (21.0) million.

Financial position and financing

The consolidated balance sheet totalled EUR 3,562.5 (3,287.1) million at the end of March. Equity was EUR 1,304.2 (1,011.9) million. Equity per share was EUR 23.03 (19.90).

The Group's equity ratio was 36.6 (30.8) per cent at the end of March. The increase in the equity ratio was due to value growth and good profitability in 2016. SATO's Annual General meeting decided not to pay dividend from profit 2016 in order to further improve investment capacity. The minimum target is an equity ratio of 35 per cent.

The Group's annualized return on equity was 14.7 (20.1) per cent. Return on investment was 8.8 (10.4) per cent.

Interest-bearing liabilities at the end of March totalled EUR 1,905.7 (1,946.1) million, of which loans subject to market terms accounted for EUR 1,437.1 (1,635.9) million. The average interest rate was 2.5 (2.5) per cent. Net financing costs totalled EUR -11.7 (-9.6) million.

EUR 52.0 million of new long-term financing was raised. The solvency ratio (debt-to-assets) was 53.4 (55.1) per cent at the end of March. Solvency ratio improved due to value growth and good profitability in 2016.

The calculated impact of changes in the market value of interest hedging on equity was EUR 4.7 (-6.6) million.

Housing assets and fair value

The development of the value of rental apartments is a key factor for SATO. Its housing assets are located in areas and apartment sizes, demand for which will increase in the long term. The allocation of building repairs is based on lifecycle plans and repair need specifications.

On 31 March 2017, SATO owned a total of 25,499 (23,365) apartments. A total of 315 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner occupants was 117. 

The fair value of rental apartments was EUR 3,414.2 (2,823.4) million at the end of March. The change in the value of investment assets, including the rental apartments acquired and divested during the review period, was EUR 31.0 (70.5) million.

Of the value of homes, the Helsinki metropolitan area accounted for some 79 per cent, Tampere and Turku made up 13 per cent, and St. Petersburg covered 4 per cent at the end of March.

Investments and divestments

Investment activities 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.

Investments in rental apartments stood at EUR 26.4 (37.2) million. Investments in the Helsinki metropolitan area represented 78 per cent and investments in new apartments represented 74 per cent of all investments in the review period.

On 31 March 2017, binding purchase agreements in Finland totalled EUR 107.5 (124.6) million.

During the review period, 117 (66) rental apartments were divested in Finland. Their total value was EUR 28.4 (7.3) million.

Rental activities

Effective rental activities provide home-seekers with quick access to a home and the Group with a steadily increasing cash flow. Rental services are mainly offered by SATO's rental offices. In addition, SATO's electronic channels make finding a home easy for customers.

Because of apartments acquired in 2016 and an improved occupancy rate, rental income increased by 11.5 per cent to EUR 68.1 (61.1) million. The economic occupancy rate of apartments in Finland was 96.1 (94.8) per cent on average, and the rental apartment turnover rate was 37.0 (40.6) per cent. During the past 12 months, the decrease in the turnover rate and the increase in the occupancy rate have been improved by activities carried out in accordance with the Customer First strategy programme, closer communications with customers, improved quality and more effective rental activities.

The average monthly rent of SATO's rental apartments at the end of the period was EUR 16.54 (16.06) per m2. The average rent is increased by investments in small apartments in growth centres. Rent increases remained moderate.

Net rental income from apartments stood at EUR 42.4 (37.9) million, and the net rental income rate was 5.2 (5.7) per cent.

Property development

Property development allows for new investments in rental apartments in Finland. The rental capacity and value of rental apartments owned by SATO are developed through renovation activities.

The book value of owned plot reserves totalled EUR 62.6 (57.0) million at the end of March. The value of new plots acquired by the end of March totalled EUR 0.0 (2.4) million.

The permitted building volume for about 2,050 apartments is being developed for the plots of the company's own stock. As a result, SATO can make use of the existing infrastructure, and it allows for a denser urban structure and, thereby, serves to ensure the availability of services.

In Finland, a total of 298 (32) rental apartments and 57 (0) apartments for sale were completed. On 31 March 2017, a total of 1,392 (1,172) rental apartments and 0 (76) owner occupied apartments were under construction.

A total of EUR 8.8 (8.2) million was spent on repairing apartments and improving their quality.

A total of 18 (48) new apartments were sold in January-March. At the end of the review period, a total of 9 (29) completed apartments and 0 (23) apartments under construction remained unsold. The total purchase value of these unsold apartments amounted to EUR 6.0 (25.8) million. SATO has made a strategic decision to give up its production of owner-occupied apartments and focus on business operations related to rental apartments.

Business operations in St. Petersburg

The housing market of St. Petersburg is of the same size as the Finnish housing market. The expansion of investment activities to St. Petersburg from 2007 has increased the opportunities for SATO's growth. Apartments are acquired in central locations in the city.

At the end of March, housing assets in St. Petersburg totalled EUR 137.3 (111.5) million. The total amount of binding purchase agreements was EUR 0.0 (1.1) million.

At the end of March, SATO owned 534 (460) completed apartments and 0 (74) apartments under construction in St. Petersburg.

The economic occupancy rate of rental apartments was 87.8 (77.0) per cent on average. The increase in the occupancy rate from the previous year was mainly attributable to the positive development of the occupancy rate in the newest buildings.

For the time being, SATO will refrain from making new investment decisions in Russia.

Personnel

At the end of March, the Group employed 186 (162) people, of whom 171 (152) had a permanent contract of employment. The average number of personnel was 181 (165) in January-March.

Annual General Meeting on 8 March 2017

The Board of Directors of SATO Corporation was confirmed to consist of seven members. The Annual General Meeting selected Erik Selin as the Chairman of the Board. Marcus Hansson, Jukka Hienonen, Esa Lager, Tarja Pääkkönen and Timo Stenius will continue as Board members. Hans Spikker was elected as a new member.

KPMG Oy Ab, authorised public accountants, will continue as the company's auditor.

The Annual General Meeting decided that SATO Corporation will pay no dividend for 2016.

Organisation of the Board of Directors

At its organisation meeting on 8 March 2017, the company's Board of Directors elected Jukka Hienonen as the Deputy Chairman of the Board of Directors from among its members.

The Board of Directors elected Erik Selin as the Chairman of the Nomination and Remuneration Committee, and Jukka Hienonen and Tarja Pääkkönen as its members.

The Board of Directors elected Marcus Hansson as the Chairman of the Audit Committee, and Esa Lager, Hans Spikker and Timo Stenius as its members.

Events after the review period

There are no significant events following the review period.

Future risks and uncertainties

The most significant risks in the renting of apartments are related to economic cycles and fluctuations in demand. The positive development of the value of SATO's housing assets and its rental capacity of apartments are secured by focusing on growth centres.

Changes in energy efficiency and environmental requirements may increase the repair costs of SATO's investment apartments.

Risks in housing investments in St. Petersburg are associated with the operating environment and currency risks. About four per cent of SATO's housing assets are located in St. Petersburg. For the time being, SATO will refrain from making new investment decisions in Russia.

In accordance with the Group's financing policy, the aim is to ensure that at least 60 per cent of all loans are fixed-rate loans. The Group has set an equity ratio target of at least 35 per cent.

A more detailed description of risks and risk management is available in the Group's annual report for 2016 and on the company's website at www.sato.fi.

Outlook

In the operating environment, SATO's business activities are mainly affected by consumer confidence, the development of purchasing power, the rent and price development for apartments, general competition and interest rates.

The Finnish economy is expected to continue with its slow growth, and general confidence is estimated to be higher than on average. Interest rate level is expected to remain low in 2017, which will have a positive impact on SATO's financing costs. Long-term interest rates are expected to rise.

According to the Bank of Finland, steady growth in the global economy and the light financing conditions will support the positive development of the eurozone in the near future, even though these expectations are shadowed by the uncertainties related to Brexit, other political events that may slow down economic growth, and concerns related to the state of the banking sector in certain countries in the eurozone and to the outlook on public economy. 

Increases in urbanisation provide good long-term conditions for continued investments in Finland. Net immigration is expected to be the highest form of population increase in SATO's operating areas. Some 80 per cent of SATO's housing assets are located in the Helsinki metropolitan area, where price development is expected to be more positive than in the rest of Finland.

According to estimates of Pellervo Economic Research (PTT), prices and rents will continue to increase, demand for owner occupied apartments will grow higher, and the accelerating of housing sales will alleviate the pressure in the rental market.

SATO's net rental income rate is expected to remain at the 2016 level.

It will take several years to fulfil the estimated lack of 20,000 apartments in the Helsinki Metropolitan Area and 3,000 apartments in Tampere. There is constant demand for new housing investments. According to the Technical Research Centre of Finland (VTT), Finland will require 25,000-30,000 new apartments every year in its growth centres by 2040.

The Russian economy is expected to develop slowly.

**SATO Corporation's shareholders on 10 April 2017         **

Largest shareholders and their holdings 

|||
|:- | -----:|
| · Balder Finska Otas AB (owner: Fastighets Ab Balder, 100%) | 53.6% |
| · Stichting Depositary APG Strategic Real Estate Pool   (owner: Stichting Pensioenfonds ABP, >95%;   manager: APG Asset Management NV) | 22.6% |
| · Elo Mutual Pension Insurance Company | 12.7% |
| · The State Pension Fund | 4.9% |
| · The Finnish Construction Trade Union | 1.1% |
| · Others (91 shareholders) | 5.1% |

On 10 April 2017, SATO had 56,783,067 shares and 96 shareholders registered in the book-entry system. The share turnover rate was 0.0 per cent for the period 1 January-10 April 2017.

Key figures, Group

||||||||||||
|:- | ---------:|:-------- | -----:|:----- |:----- | --------------------:| --------------------:| --------------------:| ------------------------:| ------------------------:|
| Key financial indicators | 1-3 /2017 || 1-3 /2016 ||| 1-12 /2016 | 1-12 /2015 | 1-12 /2014 | 1-12 /2013** | 1-12 /2012** |
| Net sales, MEUR | 68 || 61 ||| 263 | 249 | 243 | 229 | 213 |
| Net rental income, MEUR | 42 || 38 ||| 166 | 152 | 146 | 132 | 122 |
| Net rental income, % | 5.2 % || 5.7 % ||| 5.6 % | 6.0 % | 6.3 % | 6.2 % | 6.3 % |
| Profit before taxes, MEUR | 59 || 63 ||| 219 | 159 | 152 | 141 | 121 |
| Balance sheet total, MEUR | 3,563 || 3,287 ||| 3,562 | 2,980 | 2,802 | 2,596 | 2,360 |
| Shareholders' equity, MEUR | 1,304 || 1,012 ||| 1,253 | 993 | 892 | 823 | 693 |
| Intrest bearing liabilities, MEUR | 1,906 || 1,946 ||| 1,943 | 1,676 | 1,585 | 1,501 | 1,375 |
| Return on invested capital, % (ROI) | 8.8 % || 10.4 % ||| 9.1 % | 7.6 % | 7,7 % | 7.7 % | 7.7 % |
| Return on equity, % (ROE) | 14.7 % || 20.1 % ||| 15.6 % | 13.5 % | 14.0 % | 15.5 % | 13.5 % |
| Equity ratio, % | 36.6 % || 30.8 % ||| 35.2 % | 33.3 % | 31.8 % | 31.7 % | 29.4 % |
| Personnel, average*** | 181 || 165 ||| 170 | 172 | 165 | 156 | 152 |
| Personnel at the end of period | 186 || 162 ||| 175 | 170 | 169 | 156 | 150 |
|   |   ||   |||   |   |   |   |   |
| Key indicators per share |   ||   |||   |   |   |   |   |
| Earnings per share, EUR | 0.83 || 0.99 ||| 3.22 | 2.49 | 2.37 | 2.34 | 1.78 |
| Equity per share, EUR **** | 23.03 || 19.90 ||| 22.12 | 19.53 | 17.55 | 16.16 | 13.72 |
| Number of shares, million * | 56.6 || 50.8 ||| 56.6 | 50.8 | 50.8 | 50.8 | 50.8 |
|   |   ||   |||   |   |   |   |   |
| Key figures according to EPRA recommendations and operational cash earnings |   |   |||   ||||||
| EPRA Earnings, MEUR | 19.2 || 16.7 ||| 69.5 | 64.5 | 65.1 | 62.7 | 44.4 |
| EPRA Earnings per share, EUR | 0.34 || 0.33 ||| 1.28 | 1.27 | 1.28 | 1.23 | 0.87 |
| EPRA Net Asset Value, MEUR***** | 1,570.8 || 1,256.6 ||| 1,517.5 | 1,227.8 | 1,120.3 | 1,006.9 | 900.5 |
| EPRA Net Asset Value per share, EUR***** | 27.7 || 24.7 ||| 26.8 | 24.2 | 22.0 | 19.8 | 17.7 |
| Cash earnings, MEUR | 19.2 || 21.0 ||| 86.2 | 78.1 | 72.9 | 66.1 | 61.6 |
| Cash earnings per share, EUR | 0.34 || 0.41 ||| 1.59 | 1.54 | 1.43 | 1.30 | 1.21 |
|   |   ||   |||   |   |   |   |   |
| Quarter key financial indicators | Q1 2017 || Q4 2016 ||| Q3 2016 | Q2 2016 | Q1 2016 | ** ** | ** ** |
| Net sales, MEUR | 68.1 || 67.9 ||| 68.3 | 65.4 | 61.1 |   |   |
| Net rental income, MEUR | 42.4 || 40.8 ||| 44.6 | 43.0 | 37.9 |   |   |
| Net rental income, % | 5.2 % || 5.1 % ||| 5.7 % | 6.0 % | 5.7 % |   |   |
| Operating profit, MEUR | 70.3 || 59.3 ||| 76.1 | 58.9 | 72.9 |   |   |
| Profit and losses from changes of fair value | 32.3 || 22.7 ||| 38.5 | 23.2 | 39.8 |   |   |
| Net financing expenses, MEUR | -11.7 || -12.7 ||| -12.1 | -13.3 | -9.6 |   |   |
| Profit before taxes, MEUR | 58.6 || 46.5 ||| 64.0 | 45.6 | 63.3 |   |   |
| Earnings per share, EUR | 0.8 || 0.7 ||| 0.9 | 0.7 | 1.0 |   |   |
| Average number of shares, million * | 56.6 || 56.6 ||| 56.6 | 53.3 | 50.8 |   |   |
| Gross investments, MEUR | 26.4 || 63.8 ||| 64.0 | 407.6 | 37.2 |   |   |
|  as percentage of net sales | 38.8 % || 73.2 % ||| 88.3 % | 510.4 % | 47.4 % |   |   |
|   |   ||   |||   |   |   |   |   |
| Key figures according to EPRA recommendations and operational cash earnings |   ||   |||   |   |   |   |   |
| EPRA Earnings, MEUR | 19.2 || 16.3 ||| 20.1 | 16.4 | 16.7 |   |   |
| EPRA Earnings per share, EUR | 0.34 || 0.29 ||| 0.36 | 0.31 | 0.33 |   |   |
| Cash earnings, MEUR | 19.2 || 27.7 ||| 24.0 | 13.5 | 21.0 |   |   |
| Cash earnings per share, EUR | 0.34 || 0.49 ||| 0.42 | 0.25 | 0.41 |   |   |
|   |||||||||||
| * The 160,000 shares held by the Group have been deducted from the number of shares. |||||||||||
| ** Adoption of IAS 40 Investment properties -standard fair value model has been taken into account retrospectively in key figures. Retrospectively adjusted figures are unaudited. |||||||||||
| *** Including summer trainees |||||||||||
| **** Equity excluding non-controlling interests |||||||||||
| ***** Includes items valued at their carrying amount ||||   |||||||

Additional information:

Saku Sipola, President and CEO, tel. +358 201 34 4001
Markku Honkasalo, CFO, tel. +358 201 34 4226
www.sato.fi

APPENDICES

Interim report 1 January-31 March 2017
Interim report information 1 January-31 March 2017

SATO is one of Finland's leading lessors of rental apartments. SATO aims to offer full options for rental housing and an excellent customer experience. At the end of 2016, SATO owned a total of 25,300 rental apartments in Finland's largest growth centres and in St. Petersburg.

We contribute to sustainable development and initiative through our operations, and engage in open interaction with our stakeholders in order to produce added value. We operate over the long term and profitably. We increase the value of housing assets through investments and divestments and through our repair activities.

SATO Group's net sales in 2016 stood at EUR 263.0 million* in accordance with the new reporting practices, its operating profit stood at EUR 267.2 million and its profit before taxes was EUR 219.4 million. The value of SATO's investment assets is EUR 3.4 billion.

 *Net sales have been changed in accordance with the new reporting practices.