SATO Corporation's Interim Report 1 Jan-30 Sep 2018: SATO launches new digital OmaSATO service for its customers

6 November 2018

SATO Corporation, Interim Report, 6th Nov 2018 at 9:00 am

Summary for 1 Jan-30 Sep 2018 (1 Jan-30 Sep 2017)

Net sales stood at EUR 217.2 (208.2) million.
Profit before taxes stood at EUR 184.6 (130.9) million.
Earnings per share were EUR 2.60 (1.85).
The change in the fair value of investment properties included in the result was EUR 86.6 (46.2) million.
Equity was EUR 1,533.7 (1,366.6) million, or EUR 27.09 (24.14) per share.
Investments in rental apartments stood at EUR 96.5 (121.7) million.
A total of 403 (802) rental apartments were acquired or completed.
The occupancy rate in Finland was 97.7 (96.6) per cent.
A total of 873 rental apartments are under construction.

Summary for 1 Jul-30 Sep 2018 (1 July-30 Sep 2017)

Net sales stood at EUR 73.1 (70.6) million.
Profit before taxes stood at EUR 54.3 (54.5) million.
Earnings per share were EUR 0.77 (0.77).
The change in the fair value of investment properties included in the result was EUR 19.2 (24.3) million.
Equity was EUR 1,533.7 (1,366.6) million, or EUR 27.09 (24.14) per share.
Investments in rental apartments stood at EUR 31.5 (59.1) million.
A total of 173 (297) rental apartments were acquired or completed.
The occupancy rate in Finland was 98.2 (97.2) per cent.
A total of 873 rental apartments are under construction.

CEO Saku Sipola:

- Our positive development continued in the third quarter of the year. Our economic occupancy rate rose to an excellent level of 98.2 per cent (Q3/2017 97.2%). Behind this positive development is the active implementation of the Customer First strategy, such as enhancing rental activities, engaging our maintenance partners and improving our customer communication.

- In August, we launched a new digital OmaSATO service, which brings all the home related services within easy reach of our customers, any time, any place. Our Customer First strategy requires us to serve our residents more flexibly, efficiently and personally than ever before and the digital OmaSATO complements our already existing traditional customer service channels. OmaSATO has met with a positive initial reaction and has thousands of registered users. OmaSATO is continuously updated and next we will add new services related to communality.

- Different cultures and communality were the themes for the SATO event held for our entire personnel in September. We discussed the differences and similarities between various cultures and how they interact in daily life. Through the personal stories and practical examples heard at the SATO event, we gained new insight for increasing communality in our buildings and neighbourhoods. The themes were closely related to SATO's Customer First strategy and our vision of supporting people's well-being. Our competent and inspiring partners were Monik Oy, Helsinki Urban Art and StudioKoti's neighbour team, which is responsible for coordinating communality.

- We are delighted to have taken part in the City Living event at the Asuntomessut housing fair, held in Jätkäsaari, Helsinki in September. In the opening event, we called on political parties to make the price of housing one of their themes for the next parliamentary elections. Urbanisation currently holds a key role in terms of Finland's economy and development, but at the same time, new areas in cities are expensive. This costliness means that the size of apartments is falling to better meet urban residents' ability to pay. Sustainable urbanisation is not possible to build without a sufficient range of housing for different income brackets, nor will a sufficient range of apartments be created without long-term, sustainable city planning and housing policies.

- In September, SATO Corporation and the Finnish branch of Nordea Bank AB (publ) signed a loan agreement without asset-backed securities worth EUR 100 million. The agreement follows on from loans previously agreed with, for example, OP, Aktia, Swedbank and the European Investment Bank (EIB).

Operating environment

Finland's economy is continuing its solid growth path, but uncertainties related to the macroeconomy have increased. Inflation has been increasing owing to the rise in raw material prices, while underlying inflation remains muted. 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 a high level, 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 Jan-30 Sep 2018 (1 Jan-30 Sep 2017)

Net sales and profit

Between January and September 2018, consolidated net sales were EUR 217.2 (208.2) million, showing a change of 4.3 per cent from the reference period. This growth is largely based on the improvement in the occupancy rate.

Operating profit was EUR 216.3 (165.7) million. The operating profit without the change in the fair value of investment properties was EUR 129.7 (119.5) million. The change in fair value was EUR 86.6 (46.2) million.

Profit before taxes was EUR 184.6 (130.9) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) amounted to EUR 68.1 (64.3) million between January and September.

Financial position and financing

The consolidated balance sheet totalled EUR 3,872.5 (3,645.9) million at the end of September. Equity was EUR 1,533.7 (1,366.6) million. Equity per share was EUR 27.09 (24.14).

The Group's equity ratio was 39.6 (37.5) per cent at the end of September. EUR 206.7 million of new long-term financing was withdrawn and the solvency ratio was 50.8 (52.7) per cent at the end of September.

The Group's annualised return on equity was 13.3 (10.6) per cent. Return on investment was 8.4 (6.8) per cent.

Interest-bearing liabilities at the end of September totalled EUR 1,972.9 (1,921.8) million, of which commercial loans subject to market terms accounted for EUR 1,609.7 (1,511.8) million. The average loan interest rate was 2.1 (2.3) per cent. Net financing costs totalled EUR 31.7 (34.8) million.

The calculated impact of changes in the market value of interest hedging on equity was EUR 5.1 (10.7) million.

Housing business
Our housing business includes rental activities, customer service, 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 4.3 per cent to EUR 217.2 (208.2) million. The economic occupancy rate of apartments in Finland was 97.7 (96.6) per cent on average, and the external tenant turnover was 29.8 (28.9) per cent. The occupancy rate rose during the review period to an excellent level, partly thanks to the measures in line with the Customer First strategy. External tenant turnover rose slightly compared with the previous quarter as a result of renovations that began during the review period.

The average monthly rent of SATO's rental apartments in Finland at the end of the review period was EUR 16.77 (16.65) per m2. Rent increases remained moderate.

Net rental income for apartments was EUR 150.3 (139.5) million representing a change of 7.7 per cent from the reference period.

Investment properties

On 30 September 2018, SATO owned a total of 26,029 (25,731) apartments. Altogether, 403 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner-occupants was 84.

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 September, the fair value of investment properties in Finland and St. Petersburg was EUR 3,809.1 (3,581.8) million, of which St. Petersburg investment properties accounted for EUR 108.8 (121.4) million. The change in value of the St. Petersburg investment assets 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 176.7 (95.7) million. In addition to investments and divestments, the change in value was affected by the development of market prices, as well as changes in the return requirement on certain residential properties and business and office 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 September.

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 96.5 (121.7) million. Investments in the Helsinki metropolitan area represented 92 per cent and investments in new apartments represented 67 per cent of all investments in the review period. On 30 September 2018, binding purchase agreements in Finland totalled EUR 125.2 (87.5) million.

During the review period, 84(281) rental apartments were divested in Finland. Their total value was EUR 10.8 (44.6) million.

The book value of plot reserves totalled EUR 40.4 (55.8) million at the end of September. The value of new plots acquired by the end of September totalled EUR 19.9 (0.0) million.

The permitted building volume for about 2,300 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 403 (635) rental apartments and 0 (57) apartments for sale were completed. On 30 September 2018, a total of 873 (912) rental apartments and 131 (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 33.5 (31.2) million was spent on repairing apartments and improving their quality.

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 92.5 (88.3) per cent on average. For the time being, SATO will refrain from making new investment decisions in Russia.

Personnel

At the end of September, the Group employed 210 (211) people, of whom 193 (198) had a permanent employment contract. The average number of personnel was 214 (203) between January and September.

PERIOD 1 Jul-30 Sep 2018 (1 July-30 Sep 2017)

Net sales and profit

Between July and September 2018, consolidated net sales were EUR 73.1 (70.6) million, showing a change of 3.5 per cent from the reference period. This growth is largely based on the improvement in the occupancy rate.

Operating profit was EUR 64.5 (65.9) million. The operating profit without the change in the fair value of investment properties was EUR 45.2 (41.7) million. The change in fair value was EUR 19.2 (24.3) million.

Profit before taxes was EUR 54.3 (54.5) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) amounted to EUR 26.4 (29.5) million between July and September.

Housing business

During the review period, rental income increased by 3.5 per cent to EUR 73.1 (70.6) million. The economic occupancy rate of apartments in Finland was 98.2 (97.2) per cent on average, and the external tenant turnover was 32.7 (26.7) per cent. The occupancy rate rose during the review period to an excellent level, partly thanks to the measures in line with the Customer First strategy. External tenant turnover rose slightly compared with the previous quarter as a result of renovations that began during the review period.

The average monthly rent of SATO's rental apartments in Finland at the end of the review period was EUR 16.77 (16.65) per m2. Rent increases remained moderate.

Net rental income for apartments was EUR 52.3 (51.0) million, representing a change of 2.5 per cent from the reference period.

Investment properties

On 30 September 2018, SATO owned a total of 26,029 (25,731) apartments. Altogether, 173 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner-occupants was 60.

Fair value

Investments, divestments and property development

Investments in rental apartments stood at EUR 31.5 (59.1) million. Investments in the Helsinki metropolitan area represented 85 per cent and investments in new apartments represented 57 per cent of all investments in the review period. On 30 September 2018, binding purchase agreements in Finland totalled EUR 125.2 (87.5) million.

During the review period, 60 (53) rental apartments were divested in Finland. Their total value was EUR 7.3(5.4) million.

The book value of plot reserves totalled EUR 40.4 (55.8) million at the end of September. The value of new plots acquired by the end of September totalled EUR 19.9 (0.0) million.

In Finland, a total of 173 (147) rental apartments and 0 (0) apartments for sale were completed. On 30 September 2018, a total of 873 (912) rental apartments and 131 (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 13.4 (11.3) million was spent on repairing apartments and improving their quality.

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 92.4 (89.8) per cent on average. For the time being, SATO will refrain from making new investment decisions in Russia.

Personnel

At the end of September, the Group employed 210 (211) people, of whom 193 (198) had a permanent employment contract. The average number of personnel was 217 (213) between July and September.

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, but growth is expected to slow down and general confidence is estimated to remain 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 during the year 2019.

Continuing urbanisation provides good long-term conditions for continued investments at SATO's main operating areas 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 in the coming years.

According to the Bank of Finland's forecast, global economic growth will slow down. Loose financing conditions will support the positive development of the eurozone, 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 29 Oct 2018 **

Largest shareholders and their holdings

||||
|:- | ----------:| -----:|
| | pcs | % |
| · Balder Finska Otas AB (Fastighets AB Balder) | 30,882,806 | 54.4% |
| · 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% |
| · Hengityssairauksien tutkimussäätiö | 227,000 | 0.4% |
| · Rausanne Oy | 194,920 | 0.3% |
| · Entelä Tuula | 179,000 | 0.3% |
| · SATO Corporation | 160,000 | 0.3% |
| · Others (108 shareholders) | 1,289,113 | 2.3% |

On 29 October 2018, SATO had 56,783,067 shares and 118 shareholders registered in the book-entry system. The share turnover rate was 0.7 per cent for the period 1 January-29 Oct 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 Sep 2018
Interim Report presentation 1 Jan-31 Sep 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 was roughly EUR 3.6 billion.

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