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SATO Corporation's interim report 1 January - 30 September 2014

Oct 23, 2014

The number of SATO's rental homes is increasing

• Profit before taxes was €123.7 (83.2) million.
• The change in the value of investment properties included in the profit was €47.7 (19.8) million.
• Shareholders' equity was €875.3 (742.8) million, €17.19 (14.59) per share.
• Return on equity was 15.5 (11.6)%.
• Investments in rental housing totalled €143.4 (88.2) million.
• The rental occupancy rate was 96.9 (97.6)%.

Operating environment
Outlook for the Finnish economy has worsened and consumer confidence decreased.

Despite the weak economic development, immigration and urbanisation are increasing the demand for rental apartments. Especially in the Helsinki Metropolitan Area and largest urban centres of growth, increased amount of small rental apartments are needed.

A low level of new construction of owner-occupied homes, low interest rates and a fairly good employment situation in the Helsinki Metropolitan Area all support a moderate increase in prices.

Economic growth in Russia has slowed.

President and CEO Erkka Valkila:
- Despite the weak financial environment, SATO's business, housing investment, is developing steadily, supported by the growing demand for rental apartments. In the last few years, we have increased our investments in rental apartments to respond to the challenge presented by an insufficient supply in the Helsinki Metropolitan Area.

- The number of our rental homes has increased by nearly 600 units in comparison to the reference period. At the end of the review period, SATO had also approximately 680 new rental apartments under construction. Our own building land inventory enables the continuous production of new homes and development of our portfolio structure.

Segments
In its financial reporting, the Group's rental housing is categorised into two segments, SATO and VATRO. Such segmentation increases the transparency of operations and reporting targeted at state-subsidised housing assets.

SATO business includes rental housing free of restrictions and entailing a shorter period of restriction, the construction of owner-occupied housing, as well as the business in St. Petersburg. VATRO business deals with rental housing with longer periods of restriction.

In accordance with the Group strategy, new investments are being targeted at SATO business, and the relative importance of VATRO business within the Group is declining.

Net sales and profit
The Group's net sales increased by 7.6 per cent in comparison to the reference period to stand at €236.0 million (€219.3 million 1 January – 30 September 2013). Of the net sales, rental income amounted to €181.8 (171.4) million.

Of the net sales €205.8 (190.0) million was earned from SATO business and €30.2 (29.3) million from VATRO business.

Operating profit for the review period was €152.9 (111.1) million.

The Group’s profit before taxes was €123.7 (83.2) million for the period under review. The change in the fair value of rental housing included in the profit was €47.7 (19.8) million. This includes the change in fair value of €-4.6 million for property in St. Petersburg, of which the effect of changes in exchange rates was €-9.2 million.

The share of profit before taxes of the SATO business was €118.0 (79.7) million, and in the VATRO business it was €5.7 (3.6) million.

Financial position and finance
The Group's total balance sheet at the end of the period under review was €2,748.0 (2,463.0) million. Shareholders' equity was €875.3 (742.8) million. Shareholders’ equity per share was €17.19 (14.59).

The Group's equity ratio was 31.9 (30.2) per cent.

The Group's return on equity proportioned on an annual level was 15.5 (11.6) per cent. Return on investment was 8.3 (6.8) per cent.

Interest-bearing liabilities at the end of the review period were €1,569.3 (1,426.8) million, of which market rate loans totalled €1,073.7 (970.5) million. At the end of the review period, the average interest rate for loans was 2.8 (2.8) per cent. Net financing expenses during the review period totalled €29.2 (27.9) million.

During the review period, new long-term financing was procured totalling €62.6 million, and in addition to this, contingent liabilities applied to shares in housing companies increased by €53.7 million. The loan to value (LTV) ratio without the VATRO segment was 56 (55) per cent at the end of the review period.

The computational effect of changes during the review period in the market value of interest rate hedges on shareholders' equity was €-15.0 (11.1) million and the effect on profit before taxes was €0.5 (0.6) million.

Rental housing
The development of the value of rental housing is of key importance to SATO. The housing portfolio is concentrated in areas where the demand for rental homes will grow in the long term. The allocation of repairs to properties is based on life-cycle planning and evaluations concerning the need for repair.

On 30 September 2014, SATO owned a total of 24,127 (23,564) homes, 20,043 (19,477) of which belonged to the SATO business and 4,084 (4,097) to the VATRO business. During the review period, the number of homes increased by 299.

The fair value of rental housing was €2,489.0 (2,183.8) million. During the review period, the fair value of the housing portfolio grew by €173.0 (95.8) million. The increase in value resulted from investments, development in market prices and the ending of restrictions on some properties.

Investments and divestments
Investment activities create a framework for growth. Since the turn of the millennium, SATO has invested a total of about €1.8 billion in rental housing. SATO acquires and commissions the construction of both complete rented buildings and individual rented apartments.

In the review period, the Group's investments in rental housing totalled €143.4 (88.2) million, the share of new construction investments of which was 72 per cent, totalling €103.3 (71.9) million. At the end of the review period, there were also binding contracts in Finland for acquisitions worth €63.5 (83.9) million.

The most significant investment was made in 126 privately financed rental homes in the Helsinki Metropolitan Area bought from ICECAPITAL Housing Fund I Ky. The value of the transaction was €23.1 million.

At the end of the review period, 677 (816) new rental housing units were under construction in Finland for ownership by the Group.

The sum used for renovating the housing stock and improving the quality of apartments was €28.6 (27.9) million.

During the financial period, 310 (231) rental homes were divested in Finland for a total of €19.7 (11.9) million. The divested homes were for the most part located outside SATO's targeted business area.

Renting
Efficient rental business secures rapid availability for people who need a home and a steady trend in cash flow for the Group. The rental service is mainly taken care of at SATO's rental offices.

Profit from rental income grew by 6.1 per cent and was €181.8 (171.4) million. The financial rental occupancy rate of homes in Finland averaged 96.9 (97.6) per cent, and occupant turnover averaged 37.3 (36.6) per cent.

The average monthly rent per square metre for SATO’s rented homes in Finland during the review period was €15.55 (14.74), and for shared ownership apartments it was €8.75 (9.54).

Net rental income from the housing stock was €111.6 (102.8) million. The net rental income percentage of the rental housing calculated on an annual level was 6.1 (6.2).

Property development
Property development creates a basis for SATO's investments in new rented homes and for the construction of owner-occupied homes in Finland. The rental attractiveness and value of owned rental housing is being developed through renovation activity.

The book value of the Group’s building land inventory at the end of the review period was €71.3 (93.3) million. During the review period, new land stock was acquired for a value of €2.8 (2.1) million.

By the end of September, 414 (178) rental and 127 (119) owner-occupied homes were completed in Finland. Under construction on 30 September 2014 were 677 (816) rental and 221 (416) owner-occupied homes.

During the review period, SATO made a preliminary agreement concerning the completion of approximately 200 rental properties in the vicinity of the metro centre in Niittykumpu, Espoo.

During the review period, a total of 178 (144) owner-occupied homes were sold. On 30 September 2014, completed owner-occupied homes unsold numbered 76 (44) and those under construction numbered 149 (292), with a total acquisition value of €104.3 (131.1) million. SATO’s owner-occupied homes are mostly sold only after completion in accordance with the SATO OwnerHome concept.

Business in St. Petersburg
The housing market in St. Petersburg is similar in volume to the entire Finnish housing market. SATO achieves growth by investing in rented homes in St. Petersburg. Properties are acquired at key locations in the city.

By the end of the review period, the value of the housing portfolio in St. Petersburg totalled €130.5 (101.9) million. At the end of the review period, binding contracts for acquisitions totalled €15.1 (35.8) million in value.

On 30 September 2014, SATO had in St. Petersburg a total of 313 (222) completed apartments and 217 (171) under construction.

The financial rental occupancy rate for rented homes averaged 93.4 (89.0) per cent.

Personnel
At the end of the review period, the Group employed 164 (148) people, of whom 154 were in a permanent employment relationship. During the review period, an average of 165 (150) members of staff were employed by the Group.

Near-term risks and factors of uncertainty
Slow economic growth is continuing, which is reflected in the housing and financial markets.

The change in the market prices of housing has an impact on the value of SATO's housing portfolio. A positive trend in the value of the housing and the rentability of the housing portfolio are secured by concentrating on the urban centres of growth.

New owner-occupied properties will be started based on market studies at each site.

The risks of housing investment in St. Petersburg are related to the development of market prices, fluctuations in the exchange rate and other changes taking place in the operating environment. The share of the Group's housing property in St. Petersburg is limited to 10 per cent of the total housing portfolio value. The current exposure is approximately 5 percent of the Group’s total housing portfolio.

Changes in interest rates affect SATO's profit and balance sheet as a change in interest costs and through differences in the market value of interest rate hedges. In accordance with the Group's financial policy, efforts will be made to keep the share of fixed-rate loans at over 60 per cent of all loans. The sufficiency of finance will be constantly monitored through liquidity forecasts.

Lawsuits and countersuits between the contracting parties are pending in connection with the implementation of and invoicing for a construction project called Asunto Oy Helsingin Tila. Also, a ruling has been applied for from the Supreme Administrative Court concerning the Group contribution to one SATO Group company.

A more extensive description of risks and risk management can be found in the 2013 Annual Report and on the company's website, www.sato.fi.

Outlook
Outlook for the Finnish national economy has weakened. The growth of the Russian economy has stopped, and uncertainty about the direction of economic development has increased.

According to forecasts, the interest rate level will remain low for a long time.

The demand for rental housing is expected to continue to be good in SATO's areas of operation and mainly be targeted at small homes. Rental activity is expected to develop positively and SATO’s net rental income will improve from the previous year.

Steady demand for rented homes is creating good prospects for continuing investments in SATO's areas of operation in Finland. Making new investment decisions regarding St. Petersburg depends on the development of the Russian operating environment.

SATO Corporation's shareholders 13 October 2014
The largest shareholders and their holdings:

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On 13 October 2014, the number of SATO shares was 51,001,842, and the number of shareholders subscribed in the book-entry system was 30. The turnover of shares during the review period amounted to 22.9 per cent.

*In June, SATO Corporation shareholder Mutual Pension Insurance Company Varma announced that it has sold 50 per cent of its SATO shares to the Dutch pension provider APG.

Key financial indicators, the Group

 

 

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Segment information

SATO’s investment in the housing business includes both privately financed and state-subsidised housing property, of which the latter is affected by restrictions set by housing legislation both at the company level and for individual properties. In its financial reporting, investment housing is categorised into two segments - SATO business and VATRO business. SATO business comprises privately financed housing as well as those housing units subject to state-subsidised and interest-subsidised credits for which property-specific restrictions will end during the period 2014-2025. The business and owner-occupied housing production in St. Petersburg also belong to SATO business. The VATRO business segment includes those housing units which are subject to longer-term restrictions under legislation on state-subsidised loans. These restrictions will end by approximately 2047.

 
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Additional information:
Erkka Valkila, President & CEO, tel. +358 201 34 4001, mobile +358 50 62 050
Esa Neuvonen, CFO, tel. +358 201 34 4005, mobile +358 40 5001 003
www.sato.fi

APPENDICES
Interim report 1 January – 30 September 2014
Interim report information 1 January – 30 September 2014