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SATO Corporation's interim report 1 January - 30 September 2017: SATO's occupancy rate continued its strong growth

Oct 31, 2017

SATO Corporation, Interim report, 31st October 2017 at 8:00 a.m.

Summary of 1 January 2017 - 30 September 2017 (1 January 2016 - 30 September 2016)
• Profit before taxes was EUR 130.0 (172.9) million.
• Earnings per share were EUR 1.83 (2.57).
• The change in the fair value of rental apartments included in the result was EUR 48.2 (101.5) million.
• Equity was EUR 1,367.1 (1,206.6) million, or EUR 24.14 (21.31) per share.
• Return on equity was 10.6 (16.7) per cent.
• Return on investment was 6.8 (9.5) per cent.
• Net sales were EUR 208.2 (194.8) million.
• Investments in rental apartments were EUR 121.7 (508.8) million.
• A total of 802 (3,061) rental apartments were acquired or completed.
• The occupancy rate in Finland was 96.6 (95.3) per cent.
• A total of 1,151 rental apartments are under construction.

Summary of 1 July - 30 September 2017 (1 July - 30 September 2016)
• Profit before taxes was EUR 54.8 (64.0) million.
• Earnings per share were EUR 0.77 (0.90).
• The change in the fair value of rental apartments included in the result was EUR 24.3 (38.5) million.
• Net sales were EUR 70.6 (68.3) million.
• Investments in rental apartments were EUR 59.1 (64.0) million.
• A total of 297 (776) rental apartments were acquired or completed.
• The occupancy rate in Finland was 97.2 (96.0) per cent.
• A total of 1,151 rental apartments are under construction.

Operating environment

The Finnish economy grows rapidly, and it is estimated that growth will be approximately 3 per cent in the near future. Growth has spread to all areas of economy. However, inflation has returned to a low level after being higher at the beginning of the year. The light financial policy from central banks continues to keep the short-term reference rates at an exceptionally low level. Economic growth and expectations of inflation will probably cause the European Central Bank to apply a stricter financial policy in the near future. Longer-term rates are expected to increase first. Consumer trust in their own finances and in the Finnish economy has remained at a record high level, and consumers are optimistic about the development of employment.

Demand for rental apartments has remained high, as urbanisation continues to be strong. According to the Confederation of Finnish Construction Industries, housing construction is at a record high level in SATO's main operating areas, where construction-related costs are also high. These high costs, combined with expectations of higher interest rates, may result in an increase in rents or a decrease in general interest in housing investments.

The activity in the real estate investment market is record high (KTI). The number of apartments purchased by investors has remained high, and consumers also picked up the pace during the beginning of the year. This has been reflected in the considerable increase in loan applications, among other aspects.

The Russian economy is expected to grow slightly.

CEO Saku Sipola:

– The occupancy rate continued to increase, from 96.6 per cent in June to 97.6 per cent in September. This was supported by a decrease in the external tenant turnover rate. Improvements in our customer service on several fronts, in line with our "Customer first" strategy, have contributed to the positive development of the figures. To continue our progress, we have implemented "Customer first" service model deeper into our partnerships. A good example of this is the bidding process carried out during the review period for maintenance companies. One of the key criteria for selecting partners was the ability of maintenance companies to implement the service model in the everyday lives of tenants.

– For the strategy period 2017-2020 we have set as a target that 60 per cent or more of our assets shall be unencumbered. We were already able to reach this goal during the third quarter of 2017. During the review period, the continued changes in the financing structure were boosted by the EUR 100 million loan agreement signed with Swedbank without any asset-based security. Previously similar loan agreements were signed with OP Corporate Bank, Aktia and EIB. At the same time, our company's solvency ratio decreased. This, together with the changes in the financing structure, will give us more opportunities to use diverse funding base.

– The success of urbanisation is a significant factor in terms of Finland's competitiveness. During the review period, we accelerated urbanisation, for example, in areas planned together with the City of Vantaa in Martinlaakso, Vantaa, by starting the construction of 288 new rental apartments in Raiviosuonmäki, by opening 110 new rental apartments in Kukinkuja, and by beginning the completion work on 68 apartments in our StudioHome in Raikukuja. At the same time, a design competition is ongoing in cooperation with the City of Helsinki, VR Group, the Finnish Association of Architects and SATO. The aim of the competition is to develop new apartments alongside the Jokeri Light Rail Line in Helsinki. In Espoo, plans for development projects proceeded in Niittykumpu, Suomenoja and Soukka. In Turku and Tampere, we are negotiating with the cities over complementary planning projects to be launched later this autumn and next spring.

– The SATO StudioHome to be completed this December in Martinlaakso, Vantaa, has raised significant interest, and we received more than 700 apartment applications. We believe that, through its functional design and shared facilities, the SATO StudioHome offers an excellent alternative for an increasing demand for small apartments in an environment with a high cost of construction. We have invited representatives of cities, media and active social media parties in November to see our StudioHome project and share our thoughts on communality.

– An increase in property tax, changes in district heating rates, stricter taxes on energy and also an increase in the price of water have significantly raised property maintenance costs since 2014. For SATO, costs have increased almost 40 %. If a similar trend continues, there will be more pressure to increase rents and the housing market may become less attractive to investors.

REVIEW PERIOD 1 JANUARY 2017 - 30 SEPTEMBER 2017 (1 JANUARY 2016 - 30 SEPTEMBER 2016)

Net sales and profit

In January-September, consolidated net sales were EUR 208.2 (194.8) million, showing a change of 6.9 per cent from the reference period. This growth was mainly based on the positive development of the occupancy rate and the apartments acquired.

Operating profit was EUR 164.8 (208.0) million. Operating profit without the change in the fair value of investment apartments was EUR 116.7 (106.4) million. The change in fair value was EUR 48.2 (101.5) million. The increase in fair value was mainly driven by an increase in the prices of apartments in SATO's operating areas and the deregulation of some properties from restrictions regarding state subsidised housing property. Changes in the exchange rate of the Russian rouble had a positive effect on the operating profit in the first quarter, but a negative effect in the second quarter and a slightly negative effect in the third quarter.

Profit before taxes was EUR 130.0 (172.9) million. Income taxes for the period amounted to EUR -26.2 (-35.2) million, including the change in deferred taxes. Cash flow from operations (free cash flow after taxes excluding the change in fair value) in January-September amounted to EUR 63.5 (58.1) million.

Financial position and financing

The consolidated balance sheet total was EUR 3,646.3 (3,540.6) million at the end of September. Equity was EUR 1,367.1 (1,206.6) million. Equity per share was EUR 24.14 (21,31).

At the end of September, the Group's equity ratio was 37.5 (34.1) per cent. The goal is to have an equity ratio of at least 35 per cent. EUR 174.1 million of new long-term financing was withdrawn during the review period, and the solvency ratio was 52.7 (55.2) per cent at the end of September. The improvement in key figures representing the equity ratio and the solvency ratio is based on an increase in the value of housing assets and the extended positive profit development. On 8 March 2017, SATO's Annual General Meeting decided that no dividends be paid for 2016.

The Group's annualised return on equity was 10.6 (16.7) per cent. The return on investment was 6.8 (9.5) per cent.

Interest-bearing liabilities at the end of September totalled EUR 1,921.8 (1,971.6) million, of which loans subject to market terms accounted for EUR 1,511.8 (1,469.5) million. The average interest rate was 2.3 (2.6) per cent. Net financing costs totalled EUR -34.8 (-35.1) million.

The calculated impact on equity of changes in the market value of interest hedging was EUR 10.7
(-12.4) 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 30 September 2017, SATO owned a total of 25,731 (25,681) apartments. A total of 802 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner occupants was 322. In September, SATO purchased 150 rental apartments from Veritas Pension Insurance. The properties have central locations in Espoo, Vantaa and Turku.

The fair value of rental apartments was EUR 3,508.8 (3,335.7) million at the end of September. From the beginning of 2017, the change in the value of investment apartments was EUR 125.5 million, including rental apartments acquired and divested during the review period.

Of the value of apartments, the Helsinki metropolitan area accounted for approximately 80 percent, Tampere and Turku made up 13 percent, Jyväskylä and Oulu represented 4 per cent, and St Petersburg covered 3 percent at the end of September.

Investments and divestments

Investment activities prepare the ground for growth. Since year 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 were EUR 121.7 (508.8) million. Investments in the Helsinki metropolitan area represented 83 (66) per cent. New apartments accounted for 62 (21) per cent of all investments.

On 30 September 2017, binding apartment purchase agreements in Finland totalled EUR 87.5 (125.7) million.

During the review period, 281 (662) rental apartments were divested in Finland. Their total value was EUR 44.6 (31.4) million.

__Rental activities __

Effective rental activities provide home-seekers with quick access to a home and the Group with a steadily developing 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.

Following the apartments acquired and the increase in the occupancy rate, rental income increased by 6.9 per cent to EUR 208.2 (194.8) million. The economic occupancy rate of apartments in Finland was 96.6 (95.3) per cent on average, and the external tenant turnover rate was 28.9 (33.7) per cent. SATO has changed its reporting practices and reports external tenant turnover instead of total tenant turnover. External tenant turnover reflects better the customer loyalty and its impact on SATO's business. During the past 12 months, the decrease in the turnover rate and the increase in the occupancy rate have been affected by activities carried out in accordance with the "Customer first" strategy programme, closer communication with customers, improved quality and more effective rental activities.

The average rent per square metre of SATO's rental apartments in Finland was EUR 16.65 (16.25) per m2 per month at the end of the review period. The average rent increased by investments in small apartments in growth centres. Rent increases remained moderate.

Net rental income from apartments was EUR 139.5 (126.1) million, and the net rental income rate was 5.6 (5.8) per cent at an annual level.

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 55.8 (65.4) million at the end of September. The value of new plots acquired by the end of September totalled EUR 0.0 (13.5) million.

The permitted building volume for 2,350 apartments is being developed for the plots of the company's own stock of buildings. 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 635 (421) rental apartments and 57 (0) apartments for sale were completed. On 30 September 2017, a total of 1151 (1428) rental apartments and 0 (76) owner-occupied apartments were under construction.

A total of EUR 31.2 (30.4) million was spent on repairing apartments and improving their quality.

In January-September, 26 (95) new apartments were sold. At the end of the review period, 1 (6) completed apartments and 0 (8) apartments under construction remained unsold. The total purchase value of these unsold apartments amounted to EUR 0.7 (6.1) million. SATO has made a strategic decision to discontinue the production of owner-occupied apartments and focus on business operations related to rental apartments.

Business operations in St Petersburg

At the end of September, SATO's housing assets in St Petersburg totalled EUR 121.4 (116.9) million. The total amount of binding apartment purchase agreements was EUR 0.0 (0.0) million.

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

The economic occupancy rate of rental apartments was 88.3 (80.0) 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 September, the Group employed 211 (170) people, of whom 198 (157) were full-time employees. The average number of personnel was 203 (170) in January-September. The number of personnel has increased remarkably due to the implementation of Customer first model and the transfer of customer interface from partners to SATO.

PERIOD 1 JULY - 30 SEPTEMBER 2017 (1 JULY - 30 SEPTEMBER 2016)

Net sales and profit

In July-September, consolidated net sales were EUR 70.6 (68.3) million, showing a change of 3.3 per cent from the reference period.

Operating profit was EUR 66.3 (76.1) million. Operating profit without the change in the fair value of investment apartments was EUR 42.0 (37.6) million. The change in fair value was EUR 24.3 (38.5) million. This positive development was mainly driven by an increase in the prices of apartments in SATO's operating areas and the deregulation of some properties from restrictions regarding state subsidised housing property. Changes in the exchange rate of the Russian rouble had a slightly negative impact on the value of housing assets in St Petersburg.

Profit before taxes was EUR 54.8 (64.0) million. Cash flow from operations (free cash flow after taxes excluding the change in fair value) in July-September amounted to EUR 29.8 (23.3) million.

__Housing assets and fair value __

On 30 September 2017, SATO owned a total of 25,731 (25,681) apartments. A total of 297 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner occupants was 53.

The fair value of rental apartments was EUR 3,508.8 (3,335.7) million at the end of September. From the beginning of the third quarter of 2017, the change in the value of investment apartments was EUR 78.2 million, including rental apartments acquired and divested during the review period.

__Investments and divestments __

Investments in rental apartments were EUR 59.1 (64.0) million. Investments in the Helsinki metropolitan area represented 92 per cent. New apartments accounted for 45 per cent of all investments.

On 30 September 2017, binding apartment purchase agreements in Finland totalled EUR 87.5 (125.7) million.

During the review period, 53 (534) rental apartments were divested in Finland. Their total value was EUR 5.4 (19.2) million.

__Rental activities __

Following the apartments acquired and the increase in the occupancy rate, rental income increased by 3.3 per cent to EUR 70.6 (68.3) million. The economic occupancy rate of apartments in Finland was 97.2 (96.0) per cent on average, and the external tenant turnover rate was 26.6 (35.3) per cent.

The average rent of SATO's rental apartments in Finland was EUR 16.65 (16.25) per m2 per month at the end of September. Net rental income from apartments was EUR 51.0 (44.7) million, and the net rental income was 6.0 (5.7) per cent at an annual level.

__Property development __

The book value of owned plot reserves totalled EUR 55.8 (65.4) million at the end of September. The value of new plots acquired by the end of September totalled EUR 0.0 (4.0) million.

The permitted building volume for 2350 apartments is being developed for the plots of the company's own stock of buildings.

In Finland, a total of 147 (323) rental apartments and 0 (0) apartments for sale were completed. On 30 September 2017, 1,151 (1,428) rental apartments and 0 (76) owner-occupied apartments were under construction.

A total of EUR 11.3 (11.0) million was spent on repairing apartments and improving their quality.

In July-September, 5 (19) new apartments were sold. At the end of the period, a total of 1 (6) completed apartments and 0 (8) apartments under construction remained unsold. The total purchase value of these unsold apartments amounted to EUR 0.7 (6.1) million.

Business operations in St Petersburg

At the end of September, SATO's housing assets in St Petersburg totalled EUR 121.4 (116.9) million. The total amount of binding apartment purchase agreements was EUR 0.0 (0.0) million.

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

The economic occupancy rate of rental apartments in St Petersburg was 89.8 (83.7) per cent on average.

Personnel

At the end of September, the Group employed 211 (170) people, of whom 198 (157) were full-time employees. The average number of personnel in July-September was 213 (173).

Events after the review period

Upon assignment from SATO, Finnish Tenants and the City of Espoo, Pellervo Economic Research PTT conducted a survey called Asumisen tuet vuokralaisen näkökulmasta ("Housing Subsidies from tenant's point of view") to extensively clarify questions related to housing subsidies, particularly from the consumers' point of view. The survey was published on 26 October 2017.

On 30 October, the Board of Directors of SATO made an investment decision to start construction in Atlantinkatu, Helsinki. This is a plot SATO received from the City of Helsinki for its 75th anniversary.

A design from SATO, Skanska and ALA Architects was selected for the next round in the Helsinki High-Rise architectural competition on 5 October 2017. The aim of the competition, which emphasises quality, is to find a design and developer for a high-rise area in central Pasila. SATO considers the development of central Pasila to offer significant means to respond to the challenges in urbanisation in Helsinki by using various urban development and housing solutions.

__Future risks and uncertainties __

The most significant risks in the rental of apartments are related to economic cycles, demographic factors and resulting fluctuations in demand. The positive development of the value of SATO's housing assets and possibility to rent the apartments are managed by focusing on growth centres.

Changes in energy-efficiency and environmental requirements may increase the repair costs of apartments owned by SATO.

Risks in housing investments in St Petersburg are associated with the operating environment and exchange rate risks. Approximately 4 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.

The management of the financing risk is defined in the Group's financing policy. 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 35per cent.

Economic growth and expectations of inflation will probably cause the European Central Bank to apply a stricter financial policy in the near future. Longer-term rates are expected to increase first. The high cost of construction, combined with expectations of higher interest rates, will result in an increase in rents or a decrease in general interest towards housing investments.

A more detailed description of SATO's 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 its growth, and general confidence is estimated to be higher than on average. Interest rates are expected to remain low in 2017, which will have a positive impact on SATO's financing costs. Longer rates are expected to increase.

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.

Continuing urbanisation provides 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 stronger 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 acceleration of housing sales will alleviate the pressure in the rental market.

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

__SATO Corporation's shareholders on 16 October 2017 __

Largest shareholders and their holdings

Suurimmat osakkeenomistajat 161017 ENG

On 16 October 2017, SATO had 56,783,067 shares and 110 shareholders registered in the book-entry system. The share turnover rate was 0.13 per cent for the period 1 January - 16 October 2017.

__More information: __

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