SATO increased the supply of residential housing in the Helsinki Metropolitan Area

SATO Corporation’s interim report, 1 January – 30 September 2015

Summary of 1 January – 30 September 2015 (1 January – 30 September 2014)

• Profit before taxes stood at EUR 102.5 (123.7) million.
• The change in the fair value of rental homes included in the result was EUR 26.4 (47.7) million.
• Shareholders’ equity stood at EUR 948.0 (874.1) million, or EUR 18.65 (17.19) per share.
• The return on equity was 11.8% (15.5%).

• Rental income amounted to EUR 187.8 (181.8) million.
• Investments in rental homes stood at EUR 195.0 (143.4) million.
• A total of 960 (603) rental homes were acquired or completed.
• The occupancy rate was 96.6% (96.9%).

Summary of 1 July – 30 September 2015 (1 July – 30 September 2014)

• Profit before taxes stood at EUR 9.4 (27.1) million.
• The change in the fair value of rental homes included in the result was EUR -18.3 (4.8) million, of which St. Petersburg represented EUR -17.5 million.

• Rental income amounted to EUR 62.8 (61.3) million.
• Investments in rental homes stood at EUR 98.9 (42.6) million.
• The occupancy rate was 96.7% (97.8%).

Operating environment
Economic growth in Finland has been modest for a long time. Consumer confidence continued to be below long term average.

Decreasing oil prices have kept the general level of inflation low. Interest rates have remained exceptionally low.

The supply of rental homes has increased in SATO’s operating areas, thus intensifying competition. As a result of the increased competition and weak development of purchasing power, rent increases are more modest than before.

The prices of owner-occupied housing have continued to develop positively in the Helsinki Metropolitan Area, but elsewhere in the country, the prices have decreased slightly.
The Russian economy has declined markedly in 2015, and the exchange rate of the rouble fluctuates considerably.

Erkka Valkila, President and CEO:
- SATO has invested strongly in new rental homes in the new housing areas in the Helsinki Metropolitan Area. This year, a total of about one thousand homes have been completed for or acquired by SATO, most of them in Helsinki or Espoo. The high number of completed homes has increased vacancy; however underlying occupancy rate has remained stable.

- Urbanisation is expected to intensify in Finland. This and the increasing immigration are adding to the pressure to have more rental homes, particularly in the Helsinki Metropolitan Area. Our view is that the demand for small rental homes will exceed the forecasts in the coming years. Therefore the need to simplify the administrative process of construction and zoning is urgent.

- We will continue to invest in rental homes, and in order to secure our future growth, we have broadened our funding base. In September, we successfully issued our first unsecured bond directed at international investors.

Review period 1 January – 30 September 2015 (1 January – 30 September 2014)

Net sales and profit
The Group’s net sales increased in January–September by 3.7 percent year-on-year and totalled EUR 244.8 (236.0) million. Of the net sales, rental income accounted for EUR 187.8 (181.8) million.

The operating profit was EUR 130.5 (152.9) million.

Profit before taxes stood at EUR 102.5 (123.7) million. The result was affected by a cost provision of EUR 4.3 million made on the basis of a decision by the Court of Appeal on the construction of Asunto Oy Helsingin Tila. The change in the fair value of rental homes included in the result was EUR 26.4 (47.7) million. The decreased change is mainly due to the weaker development of housing prices than in the reference period.

Financial position and financing
The consolidated balance sheet totalled EUR 3,034.4 (2,748.0) million at the end of September. Equity was EUR 948.0 (874.1) million. Equity per share was EUR 18.65 (17.19).

The Group’s equity ratio was 31.2 (31.9) percent at the end of September.

The Group’s annual return on equity was 11.8 (15.5) percent. The return on investment was 6.7 (8.3) percent.

Interest-bearing liabilities at the end of September totalled EUR 1,777.9 (1,569.2) million, of which market based loans accounted for EUR 1,450.3 (1,193.8) million. The average interest rate was 2.4 (2.8) percent. Net financing costs totalled EUR 28.1 (29.2) million.

EUR 464.2 million of new long-term financing was acquired during the review period. The loan-to-value (LTV) ratio was 57 (56) percent at the end of September. In September, SATO issued a EUR 300 million unsecured bond offered to European investors. The bond has a maturity of five years, and it has a fixed coupon of 2.25 percent. The bond received a credit rating of Baa3 from Moody’s, and it is listed on the Irish stock exchange.

The calculated impact on equity of changes in the market value of interest hedging was EUR 3.6 (-12.8) million.

Housing assets and fair value
The development of the value of rental homes is a key factor for SATO. Its housing assets are located in areas where the demand for rental homes will increase in the long term. The allocation of building repairs is based on life-cycle plans and repair-need specifications.

On 30 September 2015, SATO owned a total of 23,992 (24,127) homes. A total of 960 rental homes were acquired or completed. The total number of divested rental homes and shared ownership homes redeemed by the owner-occupants was 1,141.

The fair value of rental homes was EUR 2,697.1 (2,489.0) million at the end of September. Change in the value of investment assets was EUR 169.1 (173.0) million.

Of the value of homes, the Helsinki region accounted for some 80 percent, Tampere, Turku, Oulu and Jyväskylä made up 16 percent, and St. Petersburg covered 4 percent at the end of September.

Investments and divestments
Investment activities prepare the ground for growth. Since 2000, SATO has invested a total of EUR 2.0 billion in rental homes. SATO acquires and builds entire rental buildings and single rental homes.

Investments in rental homes stood at EUR 195.0 (143.4) million. Investments in the Helsinki Metropolitan Area represented 80 percent of all investments in the early part of the year, and investments in new homes represented 47 percent. The most significant single investment was the acquisition of 379 rental homes from ICECAPITAL Housing Fund I Ky in August. Most of these homes are located in the Helsinki Metropolitan Area. The total contract price was EUR 68 million.

On 30 September 2015, binding purchase agreements in Finland totalled EUR 112.4 (63.5) million.

During the reporting period, 1,078 (310) rental homes with a total value of EUR 59.7 (19.7) million were divested in Finland. The biggest individual transaction was the sale of 760 rental homes financed by state-subsidised loans to the Y Foundation. The divested homes were mainly located outside SATO’s primary operating area.

Rental activities
Effective rental activities provide homeseekers with quick access to a home and the Group with a steadily increasing cash flow. Rental services are mainly offered by SATO’s rental offices. In addition, web-based initiatives produce an excellent match between customers’ needs and homes available.

Rental income increased by 3.3 percent to EUR 187.8 (181.8) million. The economic occupancy rate of homes in Finland was 96.6 (96.9) percent on average, and the rental home turnover rate was 40.5 (37.3) percent.

The average rent per square metre was EUR 16.14 (15.55) per month in SATO’s rental homes in Finland and EUR 8.69 (8.75) per month in shared ownership homes during the review period.

Net rental income from homes stood at EUR 118.3 (113.9) million, and the net rental income rate was 6.0 (6.4) percent on an annual level.

Property development
Property development allows for new investments in rental homes in Finland. The rental capacity and value of rental homes owned by SATO are developed through renovation activities.

The book value of owned plot reserves totalled EUR 68.0 (71.3) million at the end of September. The value of new plots acquired by the end of September totalled EUR 3.8 (2.8) million.

A permitted building volume for 800–1,000 flats is being developed for the building plots of our own housing stock.

In Finland, a total of 392 (414) rental homes and 99 (127) homes for sale were completed. On 30 September 2015, a total of 968 (677) rental homes and 130 (221) owner-occupied homes were under construction.

A total of EUR 36.2 (28.5) million was spent on repairing homes and improving the quality of homes.

A total of 97 (178) owner-occupied homes were sold in January–September. At the end of the review period, a total of 29 (76) completed homes and 78 (149) homes under construction remained unsold. The total purchase value of these unsold homes amounted to EUR 54.7 (104.3) million. SATO mainly sells its owner-occupied homes after completion.

Business operations in St. Petersburg
The housing market in St. Petersburg corresponds to that of the whole of Finland in terms of volume. SATO is following its growth strategy by investing in rental homes in St. Petersburg. Homes are acquired in central locations in the city.

At the end of September, housing assets in St. Petersburg totalled EUR 115.3 (130.3) million. The total amount of binding purchase agreements was EUR 3.5 (15.1) million.

On 30 September 2015, SATO owned 376 (313) completed and 154 (217) homes under construction in St. Petersburg.

The economic occupancy rate of rental homes was 86.1 (93.4) percent on average.

Review period 1 July – 30 September 2015 (1 July – 30 September 2014)

Net sales and profit
The Group’s net sales decreased in July–September by 10.4 percent year-on-year and totalled EUR 69.3 (77.3) million. Of the net sales, rental income accounted for EUR 62.8 (61.3) million.

The operating profit was EUR 18.7 (36.8) million.

Profit before taxes was EUR 9.4 (27.1) million. The change in the fair value of rental homes included in the result was EUR -18.3 (4.8) million, of which St. Petersburg represented EUR -17.5 million.

Housing assets and fair value
The number of homes decreased by 364 in July-September. Change in the value of investment assets was EUR 44.2 (45.6) million.

Investments in rental homes totalled EUR 98.9 (42.6) million. A total of 776 (34) homes were divested in Finland at a total value of EUR 40.3 (2.2) million.

Rental activities
Rental income increased by 2.4 percent to EUR 62.8 (61.3) million. The economic occupancy rate of homes in Finland was 96.7 (97.8) percent on average, and the rental home turnover rate was 40.8 (35.9) percent.

Net rental income from homes was EUR 39.9 (36.4) million.

Property development
No new building plots were acquired in July-September (0).

In Finland, a total of 33 (0) rental homes and 0 (78) homes for sale were completed.

A total of EUR 10.1 (10.9) million was spent on repairing homes and improving the quality of homes. A total of 21 (31) owner-occupied homes were sold in July–September.

Business operations in St. Petersburg
In July–September, the value of housing assets in St. Petersburg decreased by EUR 17.5 (6.4) million as a result of changes in the exchange rate of the rouble and the development of housing prices. No new acquisitions were made.

A total of 63 new rental homes were completed during the review period.

The economic occupancy rate of rental homes was 76.6 (88.9) percent on average. The decrease in occupancy rate was mainly due to the completion of a new site towards the end of the period.

Other developments

Corporate responsibility
GRESB (the Global Real Estate Sustainability Benchmark) has assessed the corporate responsibility programme of SATO and rated it in the highest class: Green Star.
In its benchmark group, consisting of twenty European housing investors, SATO was ranked third. Globally, SATO was ranked fifth of the 59 participating housing investors.

President and CEO
Saku Sipola was appointed the new President and CEO of SATO in June. He will assume his new position on 16th of November 2015.

Erkka Valkila, the current President and CEO of SATO, will retire in late 2015.

Personnel
At the end of September, the Group employed 172 (164) people, of whom 160 (154) were full-time employees. The average number of personnel in July–September was 170 (168).

Legal proceedings
On the basis of the decision of the Court of Appeal, the company has made a cost provision regarding the completion of the Asunto Oy Helsingin Tila building project, reducing the profit for the review period. The company has applied for leave to appeal to the Supreme Court.

Future risks and uncertainties
The economy continues to grow slowly, which is reflected in the housing and financing markets.

The change in the market value of homes affects the value of SATO’s housing assets. The positive development of the value of housing assets and the rental capacity of homes are secured by focusing on growth centres.

Risks in housing investment activities in St. Petersburg are associated with the development of the market value of homes, fluctuations in exchange rates and other changes in the operating environment. St. Petersburg is limited to a maximum of 10 percent of the Group’s housing assets. The current value of housing assets in St. Petersburg accounts for 4 percent of the Group’s entire housing assets.

Changes in interest rates affect SATO’s profit and balance sheet through changes in interest expenses and the market value of interest hedging. In accordance with the Group’s financing policy, at least 60 percent of all loans are fixed-rate loans. The adequacy of financing is monitored using a rolling liquidity estimate.

A more detailed description of risks and risk management is available in the Group’s 2014 annual report and on the company's website at www.sato.fi.

Outlook
Finnish economic growth and the general climate of confidence are expected to remain weak. In the operating environment, SATO’s business operations are mainly affected by consumer confidence, the rent and price development of homes, and the interest rate.

The demand for rental homes is expected to remain good in SATO’s areas of operation, focusing mainly on small homes. Some 80 percent of SATO’s housing assets are located in the Helsinki region, where the rent and price development is more stable than in other regions. SATO’s product range responds to the demand for small homes, with the average area of homes being 57 square metres.

Increasing urbanisation and immigration offer good potential for continued investments in Finland. Owing to good demand and new investments, SATO’s net rental income will improve from the year before. However, the increases in rents will be lower than in the previous years.

Interest rates are estimated to remain low, which will have a positive impact on SATO’s business operations.

The Russian economy is expected to weaken. Due to the unstable economic and political situation in Russia, SATO is refraining from making new investment decisions in Russia for the time being. 

SATO Corporation’s shareholders on 12 October 2015
Largest shareholders and their holdings

Key figures, Group

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

APPENDICES
Interim report 1 January – 30 September 2015
Interim report information 1 January – 30 September 2015