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

SATO has over 24,000 rental properties Rental income grew 6 per cent

Summary for the period 1 January - 30 June 2014 (1 January - 30 June 2013)

• Profit before taxes was €96.7 (58.2) million.
• The difference in the value of investment properties was €42.9 (19.4) million.
• The net worth of the Group was €859.5 (723.1) million.
• Return on equity was 18.4 (12.4)%.
• Investments in housing totalled €100.8 (60.1) million.
• The rental occupancy rate was 96.5 (97.4)%.

Operating environment
Outlook in the Finnish economy is still uncertain, and consumer confidence has remained at a lower-than-average level for a long time. Weakened purchasing power is restraining consumption.

In the Helsinki Metropolitan Area and largest urban centres of growth, the demand for affordable rented homes exceeds supply. The rental of large homes has slowed.

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

Uncertainty in the Russian operating environment continues.

President and CEO Erkka Valkila:
- Our rental operations have developed positively from the first quarter. Property value development has also continued to be positive, thanks to the good location of SATO's rental housing. Approximately 80 per cent of our housing portfolio is located in the Helsinki Metropolitan Area.

- We will continue to invest in Finland and St. Petersburg in order to increase our supply of rental housing. We are however monitoring the development of the political and economic situation in Russia before making new procurements in St. Petersburg.

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

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

In accordance with 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 14.9 per cent in comparison to the reference period to stand at €158.6 million (€138.0 million 1 January – 30 June 2013). Of the net sales, rental income amounted to €120.5 (113.5) million.

Of the net sales, €138.5 (118.5) million was earned from SATO business and €20.1 (19.5) million from VATRO business.

Operating profit for the review period was €116.1 (76.7) million.

The Group's profit before taxes was €96.7 (58.2) million for the period under review. The change in the fair value of investment properties included in the profit was €42.9 (19.4) million. This includes the change in value of property in St. Petersburg amounting to €1.3 million.

The share of profit before taxes of the SATO business was €92.8 (56.5) million and of the VATRO business it was €3.9 (1.7) million.

Financial position and finance
The Group's balance sheet total at the end of the period under review was €2,718.3 (2,462.2) million. Shareholders’ equity was €860.7 (724.2) million. The net worth was €859.5 (723.1) million, which is €16.91 (14.22) per share.

The Group's equity ratio was 31.7 (29.4) per cent.

The Group's return on equity proportioned on an annual level was 18.4 (12.4) per cent. Return on investment was 9.5 (7.1) per cent.

Interest-bearing liabilities at the end of the review period were €1,567.3 (1,438.8) million, of which market rate loans totalled €1,083,6 (973.9) million. At the end of the review period, the average interest rate for loans was 2.7 (2.8) per cent. Net financing expenses during the review period totalled €19.4 (18.5) 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 €35.0 million. At the end of the review period, the loan to value ratio without the VATRO segment was 56 per cent.

The computational effect of changes during the review period in the market value of interest rate hedges on shareholders' equity was -€9.3 (10.8) million and the effect on profit before taxes was €0.3 (0.5) million.

Investment properties
The development of the value of investment housing is of key importance to SATO. The housing portfolio is concentrated in areas in which 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 June 2014, SATO owned a total of 24,061 (23,660) homes, 19,977 (19,572) of which belonged to the SATO business and 4,084 (4,088) to the VATRO business. During the review period, the number of homes increased by 233.

The fair value of investment housing was €2,443 (2,164) million. During the review period, the fair value of the housing portfolio grew by €127 (76) 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 investment housing totalled €100.8 (60.1) million, the share of new construction investments of which was 67 per cent, totalling €67.1 (41.6) million. At the end of the review period, there were also binding contracts in Finland for acquisitions worth €82.6 (77.4) million.

The most significant investment was 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, 672 (595) 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 €17.6 (18.8) million.

During the financial period, 276 (95) rental homes were divested in Finland for a total of €17.5 (3.8) million. The divested homes were for the most part located outside SATO's targeted business area.

In April, SATO and VVO sold the shares that they jointly owned in Suomen Asumisoikeus Oy to Asuntosäätiön Asumisoikeus Oy.

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 6.2 per cent and was €120.5 (113.5) million. The financial rental occupancy rate of homes in Finland averaged 96.5 (97.4) per cent and occupant turnover averaged 38.0 (37.3) per cent. The fall in the occupancy rate resulted from increased occupant turnover.

The average monthly rent per square metre for SATO's rented homes in Finland during the review period was €15.54 (14.71), and for shared ownership apartments it was €9.54 (9.57). To improve customer experience, the speed of the broadband connection included in the rent was increased during the review period.

Net rental income from the housing stock was €73.1 (66.5) 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 €76.2 (93.7) million. During the review period, new plots were acquired to a value of €2.8 (2.0) million.

By the end of June, 384 (136) investment properties and 79 (75) owner-occupied properties have been completed in Finland. Under construction on 30 June 2014 were 672 (595) investment properties and 247 (374) owner-occupied homes.

During the review period, SATO, Ilmarinen and Hartela agreed with Fortum on a survey concerning the conversion of the Fortum tower building located in Espoo's Keilaniemi into residential use.

In addition, a preliminary agreement was made 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 146 (96) owner-occupied homes were sold. On 30 June 2014, completed owner-occupied homes unsold numbered 94 (74) and those under construction numbered 140 (223), with a total acquisition value of €105.0 (109.0) 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 €130.3 (98.1) million. At the end of the review period, binding contracts for acquisitions totalled €22.3 (20.0) million in value.

In June, SATO purchased 74 business-class rental properties under construction from NCC on the island of Petrogradskaya. The properties are estimated to be due for completion and ready for rental by the end of 2016. The value of the transaction was approximately €16.7 million.

On 30 June 2014, SATO had in St. Petersburg a total of 237 (222) completed apartments and 293 (95) under construction.

The financial rental occupancy rate for rented homes averaged 96.0 (88.1) per cent.

Personnel
At the end of the review period, the Group employed 158 (152) people, of whom 152 were in a permanent employment relationship. During the review period, an average of 161 (150) members of staff were employed by the Group.

During summer 2014, SATO offers a summer work placement to a total of 28 young people.

Near-term risks and factors of uncertainty
General economic uncertainty 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 housing assets 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 proportion of the Group's housing property located in St. Petersburg is restricted to 10 per cent.

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 50–80 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 at the company's website, www.sato.fi.

Outlook
Economic uncertainty continues and forecasts show little growth in the Finnish economy. Growth in the Russian economy is expected to slow down.

The interest rate is expected to remain low throughout 2014.

The demand for rental housing is expected to continue to be good in SATO's areas of operation, but will mainly be targeted at small homes. Rental activity is expected to develop positively and SATO's net rental income is expected to improve from the previous year. Steady demand for rented homes is creating good prospects for continuing investments. Making new investment decisions regarding St. Petersburg depends on the development of the Russian operating environment.

SATO Corporation's shareholders 25 July 2014
The largest shareholders and their holdings:

|||
| - | ------ |
| Varma Mutual Pension Insurance Company | 22.8%  |
| APG Asset Management NV* | 22.8% |
| Ilmarinen Mutual Pension Insurance Company  | 16.1%  |
| Suomi Mutual Life Assurance Company | 14.8%  |
| Elo Mutual Pension Insurance Company | 12.9%  |
| LocalTapiola Group | 4.8%  |
| Pohjola Insurance Ltd | 2.7%  |
| Others | 3.1%  |

On 25 July 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 Varma announced that it has sold 50 per cent of its SATO shares to the Dutch pension provider APG.

Key financial indicators, the Group

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.

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

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