Source: SATO Oyj
ET

SATO Corporation's half year financial report 1 January 2017-30 June 2017: Customer focus boosts occupancy rate increase

SATO Corporation, Half year financial report, 16th August 2017 at 8:00 a.m.

Summary of 1 January 2017-30 June 2017 (1 January 2016-30 June 2016)

  • Profit before taxes stood at EUR 75.2 (108.9) million.
  • Earnings per share were EUR 1.06 (1.66).
  • The change in the fair value of rental apartments included in the result was EUR 23.9 (63.0) million.
  • Equity was EUR 1,322.1 (1,155.8) million, or EUR 23.35 (20.41) per share.
  • Return on equity was 9.3 (16.1) per cent.
  • Return on investment was 6.1 (9.1) per cent.
  • Net sales stood at EUR 137.6 (126.5) million.
  • Investments in rental apartments stood at EUR 62.6 (444.8) million.
  • A total of 505 (2,412) rental apartments were acquired or completed.
  • The occupancy rate in Finland was 96.3 (94.9) per cent.
  • A total of 1,298 rental homes are under construction.

Summary of 1 April 2017-30 June 2017 (1 April 2016-30 June 2016)

  • Profit before taxes stood at EUR 16.6 (45.6) million.
  • Earnings per share were EUR 0.23 (0.68).
  • The change in the fair value of rental apartments included in the result was EUR -8.4 (23.1) million.
  • Net sales stood at EUR 69.5 (65.4) million.
  • Investments in rental apartments stood at EUR 36.2 (407.6) million.
  • A total of 190 (2,182) rental apartments were acquired or completed.
  • The occupancy rate in Finland was 96.5 (95.1) per cent.
  • A total of 1,298 rental homes are under construction.

Operating environment

The Finnish economy has resumed growth. Near-term growth outlooks have been adjusted upwards, to more than 2 per cent. The growth is mainly based on private consumption and investments in construction. However, investments in production machinery and equipment have also increased, and exports have picked up, which facilitates economic growth and supports growth expectations. Inflation has shown signs of acceleration, but the central banks' loose monetary policy is keeping short reference rates at an unusually low level. Longer rates are expected to increase. Consumer trust in the economy has remained at a record high, and consumers are optimistic about the development of employment.

Demand for rental apartments has remained high. Housing construction is active in SATO's main areas of operation. Many developing residential areas are being built in the Helsinki metropolitan area, such as Kalasatama and Jätkäsaari in Helsinki, Niittykumpu in Espoo, and Tikkurila and Martinlaakso in Vantaa. Härmälänranta is being built in Tampere and the Kakola area in Turku, among other sites. Due to the high number of new apartments to be completed, the rental apartment market is in balance in many places and the rents have increased moderately.

There is more activity in the real estate investment market than ever before (KTI). The number of apartments purchased by investors has remained high, and consumers also picked up the pace during the first half of the year. This was evident in the increase in loan applications, among other aspects.

The Russian economy is expected to resume moderate growth. 

CEO Saku Sipola:

-In the first half of 2017, our personnel succeeded in implementing our customer-driven strategy. This reflected in the continuous increase in the economic occupancy rate. The economic occupancy rate was 96,3 (94.9) for the review period.

- The review period marked a good start for the new customer service organisation, which was created in the "Customer first" development programme.  More than 30 new customer service professionals, together with experienced SATO employees, have adopted an energetic, in-depth approach to further improving customer service, which was also enhanced by the reorganisation of our customer service centre, in addition to training provided for SATO employees.

- Changes in the exchange rate for the Russian ruble had a negative impact in fair value of investment properties and thus also in the profitability in the second quarter.

- SATO implemented its goal of changing its financial structure towards unsecured financing by signing an agreement on a seven-year unsecured loan of EUR 100 million with OP Corporate Bank on 29 May 2017. With regard to its key conditions, this bilateral bank loan is in line with our outstanding unsecured bonds and with our chosen direction. This financing agreement is a continuation of our earlier loans with Aktia and EIP. After the review period, on 4 August 2017, SATO Corporation and Swedbank signed an agreement on an unsecured loan of EUR 100 million. This strengthened the change in our financial structure further.

- In June, SATO completed the Find a Home project, which was the first phase of the implementation of our digital services. The project created a digital service platform for home-seekers and a strong technological foundation for the further development of digital services.

- The results of the first SATO Pulssi resident panel survey were published in June. The survey examined the most important features of a rental home, with responses from 178 SATO residents. In their opinion, location, price and condition of the home are the most important qualities in choosing rental home. The mobile customer panel helps us further deepen our resident insight. We also wanted to provide our customers with a channel that would enable them to affect the development of their living environments. In addition, the panel provides with quick research information that supports our business development.

REVIEW PERIOD 1 January 2017-30 June 2017 (1 January 2016-30 June 2016)

Net sales and profit

In January-June 2017, consolidated net sales stood at EUR 137.6 (126.5) million, showing a change of 8.8 per cent from the reference period. The growth was mainly due to the favourable development of the occupancy rate.

The operating profit was EUR 98.6 (131.8) million. The operating profit without the change in fair value of rental apartments was EUR 74.7 (68.8) million. The change in fair value amounted to EUR 23.9 (63.0) million. The positive development was mainly driven by an increase in the prices of apartments in SATO's target areas and the deregulation of some sites. The exchange rate for the Russian ruble had a positive effect in the first quarter, but a negative effect in the second quarter.

Profit before taxes was EUR 75.2 (108.9) million. Cash flow from operations (free cash flow after taxes excluding change in fair value) in January-June amounted to EUR 33.7 (34.7) million.

Financial position and financing

The consolidated balance sheet total was EUR 3,565.7 (3,498.3) million at the end of June. Equity was EUR 1,322.1 (1,155.8) million. Equity per share was EUR 23.35 (20.41).

The Group's equity ratio was 37.1 (33.0) per cent at the end of June as the minimum target is an equity ratio of 35 per cent. EUR 54.2 million of new long-term financing was withdrawn during the review period and the solvency ratio was 53.1 (56.1) per cent at the end of June. The improvement in key figures reflecting the equity ratio and solvency ratio was due to an increase in value of investment properties and a long-term good progress in profitability. SATO's annual general meeting 8 March 2017 decided not to distribute any dividend for year 2016.

The Group's annual return on equity was 9.3 (16.1) per cent. The return on investment was 6.1 (9.1) per cent.

Interest-bearing liabilities at the end of June totalled EUR 1,895.1 (1,998.4) million, of which loans subject to market terms accounted for EUR 1461.5 (1518.0) million. The average interest rate was 2.3 (2.5) per cent. Net financing costs totalled EUR 23.4 (22.9) million.

The calculated impact of changes in the market value of interest hedging on equity was EUR 9.5 (-12.1) million.

Housing assets and fair value

On 30 June 2017, SATO owned a total of 25,487 (25,437) apartments. A total of 505 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner occupants was 269.

The fair value of rental apartments was EUR 3,430.5 (3,248.6) million at the end of June. The change in the value of investment assets, including the rental apartments acquired and divested during the review period, was EUR 47.2 (495.7) million.

Of the value of apartments, the Helsinki metropolitan area accounted for some 79 per cent, Tampere and Turku made up 13 per cent, Jyväskylä and Oulu 4 per cent and St Petersburg covered 4 per cent at the end of June.

Investments and divestments

Investments in rental apartments stood at EUR 62.6 (444.8) million, investments in the Helsinki region represented 83 per cent. New apartments accounted for 75 per cent of all investments.

On 30 June 2017, binding purchase agreements in Finland totalled EUR 79.3 (163.4) million.

During the review period, 269 (128) rental apartments were divested in Finland. Their total value was EUR 39.2 (12.2) million.

Rental activities

Following the apartments acquired and the increase in the occupancy rate, rental income increased by 8.8 per cent to EUR 137.6 (126.5) million. The economic occupancy rate of apartments in Finland was 96.3 (94.9) per cent on average, and the tenant turnover rate was 38.5 (40.8) per cent. During the past 12 months, the decrease in the tenant turnover rate and the increase in the occupancy rate have been driven by activities carried out in accordance with the "Customer first" strategy programme, closer and better quality communications with customers, and more effective rental activities.

The average rent of SATO's rental apartments in Finland was EUR 16.61 (16.12) per m2 per month at the end of the review period. The average rent is increased by investments in small apartments in growth centres. Rent increases remained moderate.

Net rental income from apartments stood at EUR 88.5 (81.4) million, and the net rental income rate was 5.4 (5.7) per cent on an annual level.

Property development

The book value of owned plot reserves totalled EUR 57.8 (64.0) million at the end of June. The value of new plots acquired by the end of June totalled EUR 0.0 (9.6) million.

The permitted building volume for around 2,350 apartments is being developed for the plots of the company's own stock of buildings. As a result, SATO can utilise the existing infrastructure, and it allows for a denser urban structure and, thereby, serves to ensure the availability of services.

In Finland, a total of 488 (98) rental homes and 57 (0) homes for sale were completed. On 30 June 2017, a total of 1,298 (1,446) rental and 0 (76) owner-occupied homes were under construction.

A total of EUR 19.0 (19.4) million was spent on repairing apartments and improving their quality.

A total of 21 (76) new apartments were sold in January-June. At the end of the review period, a total of 6 (13) completed apartments and 0 (19) apartments under construction remained unsold. The total purchase value of these unsold apartments amounted to EUR 4.0 (13.7) million. SATO has made a strategic decision to discontinue its production of owner-occupied apartments and focus on business operations related to rental apartments.

Business operations in St Petersburg

At the end of June, housing assets in St Petersburg totalled EUR 122.9 (118.7) million. The total amount of binding purchase agreements was EUR 0.0 (0.0) million.

At the end of June, SATO owned 534 (460) completed and 0 (74) homes under construction in St Petersburg.

The economic occupancy rate of rental apartments was 87.6 (79.8) per cent on average. The increase in the occupancy rate from the previous year was mainly attributable to the positive development of the occupancy rate in the newest buildings.

For the time being, SATO will refrain from making new investment decisions in Russia.

Personnel

At the end of June, the Group employed 217 (166) people, of whom 197 (154) had a permanent contract of employment. The average number of personnel was 197 (165) in January-June.


PERIOD 1 April 2017-30 June 2017 (1 April 2016-30 June 2016)

Net sales and profit

In April-June 2017, consolidated net sales stood at EUR 69.5 (65.4) million, showing a change of 6.3 per cent from the reference period.

The operating profit was EUR 28.3 (58.9) million. The operating profit without the change in fair value of rental apartments was EUR 36.6 (35.7) million. The change in fair value amounted to EUR -8.4 (23.2) million. The change in fair value was negative mainly due to negative development of ruble exchange rate.

Profit before taxes was EUR 16.6 (45.6) million. Cash flow from operations (free cash flow after taxes excluding change in fair value) in April-June amounted to EUR 14.5 (13.8) million.

Housing assets and fair value

On 30 June 2017, SATO owned a total of 25,487 (25,437) apartments. A total of 190 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner occupants was 152. 

The fair value of rental apartments was EUR 3,430.5 (3,248.6) million at the end of June. The change in the value of investment assets, including the rental apartments acquired and divested during the review period, was EUR 16.3 (425.2) million.

Of the value of homes, the Helsinki metropolitan area accounted for some 79 per cent, Tampere and Turku made up 13 per cent, Jyväskylä and Oulu 4 per cent and St Petersburg covered 4 per cent at the end of June.

Investments and divestments

Investments in rental apartments stood at EUR 36.2 (407.6) million, Investments in the Helsinki region represented 82 per cent. New apartments accounted for 75 per cent of all investments.

On 30 June 2017, binding purchase agreements in Finland totalled EUR 79.3 (163.4) million.

During the review period, 152 (62) rental apartments were divested in Finland. Their total value was EUR 10.1 (5.7) million.

Rental activities

Following the apartments acquired and the increase in the occupancy rate in 2016, rental income increased by 6.3 per cent to EUR 69.5 (65.4) million. The economic occupancy rate of apartments in Finland was 96.5 (95.1) per cent on average, and the rental apartment turnover rate was 39.9 (40.6) per cent.

The average rent of SATO's rental apartments in Finland was EUR 16.61 (16.12) per m2 per month at the end of the first half of the year.

Net rental income from apartments stood at EUR 45.4 (43.2) million, and the net rental income rate was 5.4 (6.0) per cent on an annual level.

Property development

The book value of owned plot reserves totalled EUR 57.8 (64.0) million at the end of June. The value of new plots acquired by the end of June totalled EUR 0.0 (5.7) million.

The permitted building volume for around 2,350 apartments is being developed for the plots of the company's own stock of buildings.

In Finland, a total of 190 (66) rental homes and 0 (0) homes for sale were completed. On 30 June 2017, a total of 1,298 (1,446) rental and 0 (76) owner-occupied homes were under construction.

A total of EUR 10.2 (14.3) million was spent on repairing apartments and improving their quality.

A total of 3 (20) new apartments were sold in April-June. At the end of the period, a total of 6 (13) completed apartments and 0 (19) apartments under construction remained unsold. The total purchase value of these unsold apartments amounted to EUR 4.0 (13.7) million.

Business operations in St Petersburg

At the end of June, housing assets in St Petersburg totalled EUR 122.9 (118.7) million. The total amount of binding purchase agreements was EUR 0.0 (0.0) million.

At the end of June, SATO owned 534 (460) completed and 0 (74) homes under construction in St Petersburg.

The economic occupancy rate of rental apartments was 87.5 (82.6) per cent on average.

Personnel

At the end of June, the Group employed 217 (166) people, of whom 197 (154) had a permanent contract of employment. The average number of personnel was 212 (164) in April-June.

Events after the review period

On 4 August 2017, SATO Corporation and Swedbank signed an agreement on an unsecured loan of EUR 100 million. Unsecured loan is a loan without any asset-based security.

Future risks and uncertainties

The most significant risks in the rental of apartments are related to economic cycles and fluctuations in demand. The positive development of the value of SATO's housing assets and its rental capacity of apartments are secured by focusing on growth centres.

Changes in energy efficiency and environmental requirements may increase the repair costs of SATO's investment apartments.

Risks in housing investments in St Petersburg are associated with the operating environment and currency risks. About four per cent of SATO's housing assets are located in St Petersburg. For the time being, SATO will refrain from making new investment decisions in Russia.

In accordance with the Group's financing policy, the aim is to ensure that at least 60 per cent of all loans are fixed-rate loans. The Group has set an equity ratio target of at least 35 per cent.

A more detailed description of risks and risk management is available in the Group's annual report for 2016 and on the company's website at www.sato.fi.

Outlook

In the operating environment, SATO's business activities are mainly influenced by consumer confidence, the development of purchasing power, the rent and price development for apartments, general competition and interest rates.

The Finnish economy is expected to continue with its slow growth, and general confidence is estimated to be higher than on average. Interest rates are expected to remain low in 2017, which will have a positive impact on SATO's financing costs. Long term interest rates are expected to increase.

According to the Bank of Finland, steady growth in the global economy and the light financing conditions will support the positive development of the eurozone in the near future, even though these expectations are 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 outlook on public economy. 

Growing urbanisation provides good long-term conditions for continued investments in Finland. Net immigration is expected to be the highest form of population increase in SATO's operating areas. Some 80 per cent of SATO's housing assets are located in the Helsinki metropolitan area, where price development is expected to be more positive than in the rest of Finland.

According to estimates of Pellervo Economic Research (PTT), prices and rents will continue to increase, demand for owner occupied apartments will grow higher, and the accelerating of housing sales will decrease the pressure in the rental market.

SATO's net rental income is expected to remain at the 2016 level.

It will take several years to fulfil the estimated lack of 20,000 apartments in the Helsinki Metropolitan Area and 3,000 apartments in Tampere. There is constant demand for new housing investments. According to VTT Technical Research Centre of Finland, Finland will require 25,000-30,000 new apartments every year in its growth centres by 2040.

The Russian economy is expected to develop slowly.

SATO Corporation's shareholders on 1 August 2017

Largest shareholders and their holdings 

 
shares

%
· Balder Finska Otas AB (owner: Fastighets Ab Balder, 100%) 30,460,686 53.6%
· Stichting Depositary APG Strategic Real Estate Pool
  (owner: Stichting Pensioenfonds ABP, >95%;
  manager: APG Asset Management NV)
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%
· Unemployment Fund of the Construction Sector 330,000 0.6%
· The Research Foundation of the Pulmonary Diseases 227,000 0.4%
· Rausanne Oy 194,920 0.3%
· Entelä Tuula 179,000 0.3%
· Others (92 shareholders) 1,541,233 2.8%

On 1 August 2017, SATO had 56,783,067 shares and 102 shareholders registered in the book-entry system. The share turnover rate was 0.05 per cent for the period 1 January 2017- 1 August 2017.

Key figures, Group

Key financial indicators     1-6 /2017  1-6 /2016 1-12 /2016 1-12 /2015 1-12 /2014 1-12 /2013** 1-12 /2012**
Net sales, MEUR     137.6 126.5 262.7 249.4 243.2 229.5 212.7
Net rental income, MEUR    88.5 81.4 166.2 151.8 146.2 131.8 122.1
Net rental income, %    5.4% 5.7% 5.6% 6.0% 6.3% 6.2% 6.3%
Profit before taxes, MEUR    75.2 108.9 219.4 159.4 152.2 140.8 121.0
Balance sheet total, MEUR    3,565.7 3,498.3 3,562.2 2,979.6 2,801.6 2,596.0 2,360.0
Shareholders' equity, MEUR    1,322.1 1,155.8 1,252.6 993.2 892.3 823.0 693.0
Intrest bearing liabilities, MEUR    1,895.1 1,998.4 1,943.0 1,676.2 1,584.9 1,501.3 1,375.3
Return on invested capital, % (ROI)    6.1% 9.1% 9.1% 7.6% 7.7% 7.7% 7.7%
Return on equity, % (ROE)    9.3% 16.1% 15.6% 13.5% 14.0% 15.5% 13.5%
Equity ratio, %    37.1% 33.0% 35.2% 33.3% 31.8% 31.7% 29.4%
Personnel, average***    197 165 170 172 165 156 152
Personnel at the end of period    217 166 175 170 169 156 150
            
Key indicators per share            
Earnings per share, EUR    1.06 1.66 3.22 2.49 2.37 2.34 1.78
Equity per share, EUR ****    23.35 20.41 22.12 19.53 17.55 16.16 13.72
Number of shares, million *    56.6 56.6 56.6 50.8 50.8 50.8 50.8
            
Key figures according to EPRA recommendations and operational cash earnings         
EPRA Earnings, MEUR    37.5 33.1 69.5 64.5 65.1 62.7 44.4
EPRA Earnings per share, EUR    0.66 0.64 1.28 1.27 1.28 1.23 0.87
EPRA Net Asset Value, MEUR*****    1,582.2 1,419.6 1,517.5 1,227.8 1,120.3 1,006.9 900.5
EPRA Net Asset Value per share, EUR*****    27.94 25.07 26.80 24.15 22.04 19.80 17.71
Cash earnings, MEUR    33.7 34.7 86.2 78.1 72.9 66.1 61.6
Cash earnings per share, EUR    0.59 0.67 1.59 1.54 1.43 1.30 1.21
            
Quarter key financial indicators     Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016  
Net sales, MEUR    69.5 68.1 67.9 68.3 65.4 61.1  
Net rental income, MEUR    45.4 43.1 40.9 44.7 43.2 38.2  
Net rental income, %    5.4% 5.2% 5.1% 5.7% 6.0% 5.7%  
Operating profit, MEUR    28.3 70.3 59.3 76.1 58.9 72.9  
Profit and losses from changes of fair value    -8.4 32.3 22.7 38.5 23.2 39.8  
Net financing expenses, MEUR    -11.7 -11.7 -12.7 -12.1 -13.3 -9.6  
Profit before taxes, MEUR    16.6 58.6 46.5 64.0 45.6 63.3  
Earnings per share, EUR    0.23 0.83 0.66 0.90 0.68 0.99  
Average number of shares, million *    56.6 56.6 56.6 56.6 53.3 50.8  
Gross investments, MEUR    62.6 26.4 63.8 64.0 407.6 37.2  
as percentage of net sales    90.0% 38.8% 73.2% 88.3% 510.4 % 47.4%  
          
Key figures according to EPRA recommendations and operational cash earnings     
EPRA Earnings, MEUR    18.3 19.2 16.3 20.1 16.4 16.7  
EPRA Earnings per share, EUR    0.32 0.34 0.29 0.36 0.31 0.33  
Cash earnings, MEUR    14.5 19.2 27.7 24.0 13.8 21.0  
Cash earnings per share, EUR    0.26 0.34 0.49 0.42 0.27 0.41  
          
* The 160,000 shares held by the Group have been deducted from the number of shares.     
** Adoption of IAS 40 Investment properties -standard fair value model has been taken into account retrospectively in key figures. Retrospectively adjusted figures are unaudited.
*** Including summer trainees          
**** Equity excluding non-controlling interests          
***** Includes items valued at their carrying amount        

More information:
Saku Sipola, President and CEO, tel. +358 201 34 4001
Markku Honkasalo, CFO, tel. +358 201 34 4226
www.sato.fi

APPENDICES
Half year financial report 1 January 2017 - 30 June 2017
Half year financial report presentation 1 January 2017 - 30 June 2017

SATO is one of Finland's leading lessors of rental apartments. SATO aims to offer full options for rental housing and an excellent customer experience. At the end of 2016, SATO owned a total of 25,300 rental apartments in Finland's largest growth centres and in St Petersburg.

We contribute to sustainable development and initiative through our operations, and engage in open interaction with our stakeholders in order to produce added value. We operate over the long term and profitably. We increase the value of housing assets through investments and divestments and through our repair activities.

SATO Group's net sales in 2016 stood at EUR 263.0 million* in accordance with the new reporting practices, its operating profit stood at EUR 267.2 million and its profit before taxes was EUR 219.4 million. The value of SATO's investment assets is EUR 3.4 billion.

*Net sales have been adjusted in accordance with the new reporting practices.

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