SATO Corporation's Half year financial report 1 Jan-30 Jun 2018: SATO's key figures improved

18 July 2018

SATO Corporation, Half year financial report, 18th July 2018 at 3:00 pm

Summary for the period 1 January-30 June 2018 (1 January-30 June 2017)

Net sales were EUR 144.2 (137.6) million.
Profit before taxes was EUR 130.3 (76.4) million.
Earnings per share were EUR 1.84 (1.08).
The change in the fair value of investment properties included in the result was EUR 67.4 (21.9) million.
Equity was EUR 1,486.3 (1,321.9) million, or EUR 26.25 (23.35) per share.
Investments in rental apartments were EUR 65.0 (62.6) million.
A total of 230 (488) rental apartments were acquired or completed.
The occupancy rate in Finland was 97.5 (96.3) per cent.
A total of 852 rental apartments are under construction.

Summary for the period 1 April-30 June 2018 (1 April-30 June 2017)

Net sales were EUR 72.2 (69.5) million.
Profit before taxes was EUR 83.2 (17.2) million.
Earnings per share were EUR 1.18 (0.24).
The change in the fair value of investment properties included in the result was EUR 50.3 (-10.4) million.
Equity was EUR 1,486.3 (1,321.9) million, or EUR 26.25 (23.35) per share.
Investments in rental apartments were EUR 46.7 (36.2) million.
A total of 215 (190) rental apartments were acquired or completed.
The occupancy rate in Finland was 97.6 (96.5) per cent.
A total of 852 rental apartments are under construction.

CEO Saku Sipola:

- Activities based on the Customer First strategy are showing good results, and key figures continued to improve. Our economic occupancy rate rose to a good level of 97.5 per cent (H1/2017 96.3%) and the external tenant turnover decreased, standing at 28.3 per cent (H1/2017 30.0%). The increase in the occupancy rate and the decrease in external tenant turnover were affected by activities based on the Customer First strategy, such as enhancing rental activities, engaging our maintenance partners and improving our customer communication.

- We continued to advance our investments during the review period. In May, we announced that we will build 179 new homes in Jätkäsaari, Helsinki. The site will include 147 non-subsidised rental apartments and 32 family-sized Hitas owner-occupied apartments. It is SATO's 75th anniversary project, and its first-rate plan and the outline for its implementation are the result of an international architectural design competition that was held in 2015. In June, we made an investment decision concerning a demolition and rebuilding project at a prime site on Amiraalinkatu in Helsinki's Katajanokka district, as well as decisions to launch new housing investments on Majurinkatu in Espoo's Vermonniitty and at the Hitas-site Wanda in Verkkosaari, in Helsinki's Kalasatama area. A total of 216 homes will be completed in Katajanokka, Vermonniitty and Kalasatama.

- We expanded the communality format introduced at StudioHome to our other buildings. Our vision - "In thriving cities people enjoy a high level of well-being" - is a cornerstone of our Customer First strategy. A sense of security and social relationships have a major impact on our well-being, and we believe that through operating models that promote communality we can improve the well-being of our 50,000 customers.

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. Problems relating especially to Italy have raised concerns that a euro crisis could flare up again. Inflation has 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-30 June 2018 (1 January-30 June 2017)

Net sales and profit

Between January and June 2018, consolidated net sales were EUR 144.2 (137.6) million, representing a change of 4.8 per cent from the reference period. This growth is largely based on the improvement in the occupancy rate.

Operating profit was EUR 151.8 (99.8) million. The operating profit without the fair value change of investment properties was EUR 84.4 (77.9) million. The change in fair value was EUR 67.4 (21.9) million.

Profit before taxes was EUR 130.3 (76.4) million. Cash flow from operations (free cash flow after taxes excluding the change in fair value) between January and June amounted to EUR 41.7 (34.9) million.

Financial position and financing

The consolidated balance sheet totalled EUR 3,829.9 (3,565.6) million at the end of June. Equity was EUR 1,486.3 (1,321.9) million. Equity per share was EUR 26.25 (23.35).

The Group's equity ratio was 38.8 (37.1) per cent at the end of June. EUR 139.5 million of new long-term financing was withdrawn and the solvency ratio was 51.4 (53.1) per cent at the end of June.

The Group's annualised return on equity was 14.4 (9.5) per cent. Return on investment was 8.9 (6.2) per cent.

Interest-bearing liabilities at the end of June totalled EUR 1,973.3 (1,895.1) million, of which loans subject to market terms accounted for EUR 1,601.2 (1,461.5) million. The average loan interest rate was 2.1 (2.3) per cent. Net financing costs totalled EUR -21.5 (-23.4) million.

The calculated impact of changes in the market value of interest hedging on equity was EUR 0.9 (9.5) million.

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

During the review period, rental income increased by 4.8 per cent to EUR 144.2 (137.6) million. The economic occupancy rate of apartments in Finland was 97.5 (96.3) per cent on average, and the external tenant turnover was 28.3 (30.0) per cent. The already strong occupancy rate of the beginning of the year rose to an excellent level during the review period. External tenant turnover remained at the same good level as in the first quarter. Measures based on the Customer First strategy were continued on all fronts, and especially the development measures implemented in rental activities had a positive impact on the occupancy rate during the review period.

The average monthly rent of SATO's rental apartments in Finland at the end of the review period was EUR 16.75 (16.61) per m2. Rent increases remained moderate.

Net rental income for apartments was EUR 98.0 (88.5) million, representing a change of 10.7 per cent from the reference period.

Investment properties

On 30 June 2018, SATO owned a total of 25,966 (25,487) apartments. Altogether, 230 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner-occupants was 24.

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 June, the fair value of investment properties in Finland and St. Petersburg was EUR 3,767.9 (3,505.5) million, of which St. Petersburg housing stock accounted for EUR 112.9 (122.9) 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 investment properties, including the rental apartments acquired and divested during the review period, was EUR 135.4 (19.3) million. In addition to investments and divestments, the change in value was affected by the development of market prices and some changes in yields for residential and non-residential properties.

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 June.

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 65.0 (62.6) million. Investments in the Helsinki metropolitan area represented 96 per cent and investments in new apartments represented 72 per cent of all investments during the review period. On 30 June 2018, binding purchase agreements in Finland totalled EUR 109.2 (79.3) million.

During the review period, 24 (269) rental apartments were divested in Finland. Their total value was EUR 3.5 (39.2) million.

The book value of plot reserves totalled EUR 48.2 (57.9) million at the end of June. The value of new plots acquired in Helsinki's Jätkäsaari and Verkkosaari districts, and Espoo's Niittykumpu district by the end of June totalled EUR 19.3 (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 230 (488) rental apartments and 0 (57) apartments for sale were completed. On 30 June 2018, a total of 852 (867) rental apartments and 73 (0) owner-occupied apartments were under construction.

A total of EUR 20.1 (22.2) million was spent on repairing apartments and improving their quality.

At the end of June, 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 92.5 (87.6) per cent on average. For the time being, SATO will refrain from making new investment decisions in Russia.

Personnel

At the end of June, the Group employed 230 (217) people, of whom 196 (196) had a permanent employment contract. The average number of personnel was 214 (197) between January and June.

Period 1 April-30 June 2018 (1 April-30 June 2017)

Net sales and profit

Between April and June 2018, consolidated net sales were EUR 72.2 (69.5) million, representing a change of 3.8 per cent from the reference period.

Operating profit was EUR 93.9 (28.8) million. The operating profit without the fair value change of investment properties was EUR 43.5 (39.2) million. The change in fair value was EUR 50.3 (-10.4) million.

Profit before taxes was EUR 83.2 (17.2) million. Cash flow from operations (free cash flow after taxes excluding the change in fair value) between April and June amounted to EUR 28.5 (15.0) million.

Housing business

During the review period, rental income increased by 3.8 per cent to EUR 72.2 (69.5) million. The economic occupancy rate of apartments in Finland was 97.6 (96.5) per cent on average, and the external tenant turnover was 29.4 (31.5) per cent.

The average monthly rent of SATO's rental apartments in Finland at the end of the review period was EUR 16.75 (16.61) per m2. Rent increases remained moderate.

Net rental income for apartments was EUR 50.5 (45.4) million, representing a change of 11.4 per cent from the reference period.

Investment properties

Fair value

Investments, divestments and property development

Investments in rental apartments were EUR 46.7 (36.2) million. Investments in the Helsinki metropolitan area represented 98 per cent and investments in new apartments represented 75 per cent of all investments during the review period. On 30 June 2018, binding purchase agreements in Finland totalled EUR 109.2 (79.3) million.

During the review period, 18 (152) rental apartments were divested in Finland. Their total value was EUR 2.8 (11.4) million.

In Finland, a total of 215 (190) rental apartments and 0 (0) apartments for sale were completed.

A total of EUR 10.9 (10.2) million was spent on repairing apartments and improving their quality.

Personnel

At the end of June, the Group employed 230 (217) people, of whom 196 (196) had a permanent employment contract. The average number of personnel was 219 (212) between April and June.

Events after the review period

There are no significant events following the review period.

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. Problems relating especially to Italy have raised concerns that a euro crisis could flare up again.

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 10 July 2018 **

Largest shareholders and their holdings

||||
|:- | ----------:| -----:|
| | pcs | % |
| · Balder Finska Otas AB | 30,547,806 | 53.8% |
| · 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 (107 shareholders) | 1,454,113 | 2.6% |

On 10 July 2018, SATO had 56,783,067 shares and 117 shareholders registered in the book-entry system. The share turnover rate was 0.11 per cent for the period 1 January -10 July 2018.

For more information:

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

ATTACHMENTS

Half year financial report 1 January 2018 - 30 June 2018
Half year financial report presentation 1 January 2018 - 30 June 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 3.8 billion.

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