SATO Corporation's Interim Report 1 Jan-31 Mar 2018: SATO's occupancy rate strong

SATO Corporation, Interim Report, 8th May 2018 at 8 am

Summary for the period 1 January-31 March 2018 (1 January-31 March 2017)

• Net sales were EUR 72.0 (68.1) million.
• Profit before taxes was EUR 47.1 (59.2) million.
• Earnings per share were EUR 0.66 (0.84).
• The change in the fair value of rental apartments included in the result was EUR 17.1 (32.3) million.
• Equity was EUR 1,421.2 (1,303.5) million, or EUR 25.10 (23.02) per share.
• Investments in rental apartments were EUR 18.3 (26.4) million.
• A total of 15 (315) rental apartments were acquired or completed.
• The occupancy rate in Finland was 97.3 (96.1) per cent.
• A total of 1,021 rental apartments are under construction.

CEO Saku Sipola:

- Our positive performance continued in the first quarter of the year. The economic occupancy rate was 97.3 percent (Q1/2017 96,1 %) and the external tenant turnover decreased, standing at 27.1 percent (Q1/2017 28,5 %). We have continued to actively promote our Customer First strategy and systematically engage our partners to operate in accordance with our Customer First model.

- In February, we announced that we will build 239 new rental apartments in Herttoniemi and Kalasatama, two of Helsinki's strongly developing areas. In accordance with our strategy, we will continue to grow in our main operating areas and our goal is to offer new rental apartments near good public transport connections and diverse services. At Laivalahdenkaari 1 in Herttoniemi, 143 SATO rental homes will be built and Capellan puistotie in Kalasatama will be the location of 96 new SATO rental homes.

- During the review period, we sold all the shares in SATO HotelHome Ltd to Majoituspalvelu Forenom Oy. HotelHome presented us with an interesting business area, but it remained relatively small. Growing and developing the activities would have required major investments. We compared a number of options and decided that the best solution was to find a new owner for our HotelHome activities - one specialising in shorter-term accommodation services. SATO will maintain ownership of the buildings used by HotelHome and they will be rented by Forenom under long-term lease agreements. I believe that our co-operation with Forenom will grow in the future.

Operating environment

The Finnish economy continues to grow. This growth has spread to all sectors of the economy, but uncertainties related to the macroeconomy have increased. Inflation is muted following the acceleration at the beginning of the year. The loose monetary policy of the European Central Bank is maintaining short-term benchmark interest rates at an exceptionally low level. The confidence of consumers in their own finances and Finland's economy has remained at an all-time high and consumers' assessment of employment development is optimistic.

Demand for rental apartments has remained good and urbanisation continues to be strong. According to the Confederation of Finnish Construction Industries, housing construction has been brisk in SATO's main operating areas, where construction costs are also high. High costs combined with expectations of rising interest rates may lead to pressure to increase rents or reduce the attractiveness of housing investments.

REVIEW PERIOD 1 January-31 March 2018 (1 January-31 March 2017)

Net sales and profit

Between January and March 2018, consolidated net sales were EUR 72.0 (68.1) million, representing a change of 5.7 per cent from the reference period.  This growth is largely based on the improvement in the occupancy rate.

Operating profit was EUR 57.9 (70.9) million. The operating profit without the fair value change of investment properties was EUR 40.9 (38.7) million. The change in fair value was EUR 17.1 (32.3) million.

Profit before taxes was EUR 47.1 (59.2) million. Cash flow from operations (free cash flow after taxes excluding the change in fair value) between January and March amounted to EUR 13.2 (19.8) million.

Financial position and financing

The consolidated balance sheet totalled EUR 3,719.0 (3,561.9) million at the end of March. Equity was EUR 1,421.2 (1,303.5) million. Equity per share was EUR 25.10 (23.02).

The Group's equity ratio was 38.2 (36.6) per cent at the end of March. EUR 109.3 million of new long-term financing was withdrawn and the solvency ratio was 51.6 (53.4) per cent at the end of March.

The Group's annualised return on equity was 10.5 (14.9) per cent. Return on investment was 6.9 (8.9) per cent.

Interest-bearing liabilities at the end of March totalled EUR 1,919.5 (1,905.7) million, of which loans subject to market terms accounted for EUR 1,544.7 (1,437.1) million. The average loan interest rate was 2.1 (2.5) per cent. Net financing costs totalled EUR -10.9 (-11.7) million.

The calculated impact of changes in the market value of interest hedging on equity was EUR 2.6 (4.7) million.

Housing business
Our housing business includes rental activities, customer service, housing, lifecycle management and maintenance. Effective rental activities and electronic channels 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.

 
During the review period, rental income increased by 5.7 per cent to EUR 72.0 (68.1) million. The economic occupancy rate of apartments in Finland was 97.3 (96.1) per cent on average, and the external tenant turnover was 27.1 (28.5) per cent. The occupancy rate was at a good level during the first quarter. External tenant turnover decreased compared to the previous quarter. The good occupancy rate and the decrease in external tenant turnover were affected by measures based on the Customer First strategy, such as the closer integration of the partner network in SATO's customer processes, which was begun during the review period.   

The average monthly rent of SATO's rental apartments in Finland at the end of the review period was EUR 16.67 (16.54) per m2. Rent increases remained moderate.

Net rental income for apartments was EUR 47.5 (43.1) million, representing a change of 10.2 per cent from the reference period.

Housing stock

 
On 31 March 2018, SATO owned a total of 25,769 (25,499) apartments. Altogether, 15 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner-occupants was 39. 

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 rental apartments in Finland and St. Petersburg were EUR 3,605.3 (3,414.2) million, of which St. Petersburg housing stock accounted for EUR 116.8 (137.3) million. The change in value of the St. Petersburg housing stock is largely the result of a change in the value of the rouble. The change in the value of housing stock, including the rental apartments acquired and divested during the review period, was EUR 40.5 (31.0) million.

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

Investments, divestments and property development
Investment activities are used to manage the housing portfolio and prepare the ground for growth. Since 2000, SATO has invested more than EUR 2.0 billion in non-subsidised rental apartments. SATO acquires and builds entire rental buildings and single rental apartments. Property development allows for new investments in rental apartments in Finland. The rental potential and value of rental apartments owned by SATO are developed through renovation activities.

Investments in rental apartments were EUR 18.3 (26.4) million. Investments in the Helsinki metropolitan area represented 93 per cent and investments in new apartments represented 65 per cent of all investments in the review period. On 31 March 2018, binding purchase agreements in Finland totalled EUR 133.9 (107.5) million.

During the review period, 6 (117) rental apartments were divested in Finland. Their total value was EUR 0.6 (28.4) million.

The book value of plot reserves totalled EUR 50.7 (62.6) million at the end of March. The value of new plots acquired by the end of March totalled EUR 0.0 (0.0) million.

The permitted building volume for about 2,200 apartments is being developed for the plots in the company's housing portfolio. This allows SATO to utilise existing infrastructure, create a denser urban structure and thus bring more customers closer to services and public transport connections.

In Finland, a total of 15 (298) rental apartments and 0 (57) apartments for sale were completed. On 31 March 2018, a total of 1,021 (1,392) rental apartments and 73 (0) owner-occupied apartments were under construction. The reporting principle for apartments under construction as of the start of 2018 has changed. In addition to an investment decision, a signed agreement on building works and a valid construction permit are required. Earlier, apartments under construction included all apartments for which an investment decision had been made.

A total of EUR 9.1 (8.8) million was spent on repairing apartments and improving their quality.

At the end of March, 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 92.2 (87.8) per cent on average. For the time being, SATO will refrain from making new investment decisions in Russia.

Personnel

At the end of March, the Group employed 207 (186) people, of whom 195 (171) had a permanent employment contract. The average number of personnel was 209 (181) between January and March.

Changes to the Group structure

Some changes took place in the Group structure during the quarter. The following mergers were registered on 1 January 2018: SATOkoti 15 Oy, SATOkoti 16 Oy, Sato VK 16 Oy, Sato VK 17 Oy, Suomen Satokodit 16 Oy, Sato VK 17 Oy, Suomen Vuokrakodit 1 Oy and Vatrotalot 4 Oy merged with SatoAsunnot Oy and SVK Yhtymä Oy merged with SATO Corporation.

Annual General Meeting on 23 March 2018

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

Audit firm Deloitte Oy were selected as the company's auditor.

The Annual General Meeting decided that SATO Corporation will distribute EUR 0.50 per share in dividends for the financial period ending on 31 December 2017, a total of EUR 28.311.533,50. The date of record for dividend distribution was 27 March 2018 and the dividends were paid on 5 April 2018.

Organisation of the Board of Directors

At its constitutive meeting on 23 March 2018, the company's Board of Directors elected Jukka Hienonen as Deputy Chairman of the Board of Directors from among its members.

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

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

Events after the review period

Construction on SATO's 75th anniversary project began on Atlantinkatu in Helsinki's Jätkäsaari in April 2018. The project's first-rate plan and the outline for its implementation are the result of an international architectural design competition. The project will include Hitas owner-occupied apartments and non-subsidised rental apartments, totalling 179 apartments in all. The contractor for the site is Fira Oy.

Risks and business 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. In its risk management, SATO's goal is to utilise the available opportunities and to limit the negative impacts of risk factors.

The most significant risks in the renting of apartments are related to economic cycles and fluctuations in demand. A clear weakening in the housing market could have a negative impact on the market value of SATO's housing portfolio. In accordance with its strategy, SATO focuses its investments in growth centres, ensuring the rental potential of its apartments.

Changes in official regulations and legislation and uncertainty stemming from them can have a significant impact on the reliability of the investment environment and thus on SATO's business.

The management of financial risks is steered by the Group's financial policy. The goal of liquidity risk management is to ensure the Group's financing in all situations. SATO has cash assets, credit facilities and a continuous cash flow, which are sufficient to cover anticipated financing needs. The Group's interest rate risk is managed in accordance with the financial policy by ensuring that at least 60 per cent of all loans are fixed-rate loans.

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

A more detailed description of risks and risk management is available in the Group's annual report for 2017 and on the website www.sato.fi.

Outlook

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

The Finnish economy is expected to continue its solid growth path, and general confidence is estimated to be higher than on average. Interest rates are expected to remain low in 2018, which will have a positive impact on SATO's financing costs. Long-term interest rates are expected to rise.

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

According to estimates by Pellervo Economic Research (PTT), prices and rents will continue to rise, demand for owner-occupied apartments will grow, and the picking up of housing sales will somewhat alleviate the pressure on the rental market.

The historically high rate of housing construction is expected to decrease slightly in the coming years.

According to the Bank of Finland's forecast, steady growth in the global economy and the loose financing conditions will support the positive development of the eurozone in the near future, even though this growth outlook is 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 public finances outlook.

Serious threats, such as an increase in protectionism and geopolitical tensions, are casting a shadow on the global economic outlook. The risk of weaker financial performance will also increase due to possible global corrections in asset prices and the deceleration of the reform rate in both China and the eurozone, while the volume of debt remains large.

SATO's net rental income rate is expected to remain at the 2017 level.** **

**SATO Corporation's shareholders on 19 April 2018         **

Largest shareholders and their holdings 

||||
|:- | ----------:| -----:|
|   | pcs | % |
| · Balder Finska Otas AB | 30,485,686 | 53.7% |
| · Stichting Depositary APG Strategic Real Estate Pool | 12,811,647 | 22.6% |
| · Elo Mutual Pension Insurance Company | 7,233,081 | 12.7% |
| · The State Pension Fund | 2,796,200 | 4.9% |
| · The Finnish Construction Trade Union | 619,300 | 1.1% |
| · Valkila Erkka | 390,000 | 0.7% |
| · The Unemployment Fund of the Construction Sector | 330,000 | 0.6% |
| · Hengityssairauksien tutkimussäätiö | 227,000 | 0.4% |
| · Rausanne Oy | 194,920 | 0.3% |
| · Entelä Tuula | 179,000 | 0.3% |
| · Others (109 shareholders) | 1,516,233  | 2.7% |

On 19 April 2018, SATO had 56,783,067 shares and 119 shareholders registered in the book-entry system. The share turnover rate was 0.00 per cent for the period 1 January-19 April 2018.

For more information:

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

ATTACHMENTS

Interim Report 1 Jan-31 Mar 2018
Interim Report presentation 1 Jan-31 Mar 2018

*SATO is one of Finland's leading rental housing providers. SATO aims to offer a comprehensive choice of rental housing and an excellent customer experience. At year-end 2017 SATO owned around 25,800 apartments in Finland's largest growth centres and in St. Petersburg.

We promote sustainable development and initiative through our operations and work in open interaction with our stakeholders to generate added value. We operate profitably and with a long-term view. We increase the value of our housing stock through investments, divestments and repairs.*

The SATO Group's net sales in 2017 were EUR 280 million, operating profit EUR 231 million and profit before taxes EUR 185 million. The value of SATO's investment assets is roughly EUR 3.6 billion.