Sponda Plc's Interim Report January-September 2006

 

 

 

 

Key figures	7-9/ 2006	7-9/ 2005	1-9/ 2006	1-9/ 2005	2005
Economic occupancy rate, %			88.2	87.2	87.7
Total revenue, Me	26.5	25.6	79.8	77.5	103.1
Net operating income, Me	20.3	19.9	60.9	58.7	77.5
Operating profit, Me	26.8	12.9	73.1	42.0	65.5
Earnings per share, e	0.18	0.05	0.48	0.21	0.37
Cash flow from operations/share, e	0.12	0.15	0.40	0.43	0.57
Net assets/share, e			7.28	7.04	7.25
Equity ratio, %			41	44	45
Gearing, %			121	111	107

 

 

Sponda forecasts that the company's result and the economic occupancy rate of its properties in 2006 will improve from last year. Cash flow from operations is expected to be on the same level as at the end of 2005. Reasons for this positive trend include the expansion of the property portfolio in all business units, the decline in property maintenance costs, and the picking up of demand in the leasing sector.

 

 

Investment activity in Finland's business premises sector remained strong. Finnish real estate consultants Catella Property Group estimate that investment volumes in 2006 will exceed EUR 5 billion. Finnish companies have sold their properties in Finland and diversified their investments abroad. International investors continued to show great interest in Finland's property market, and they accounted for more than 70 % of all property sales in January-August 2006.

 

Leasing activity in the office sector remained high, even though office vacancy rates rose slightly, reaching 8.5 % in the Helsinki Metropolitan Area. Demand focused mainly on new and modern premises and vacancy rates rose particularly in certain areas such as the outskirts of Helsinki. Rent levels remained stable in the Helsinki Metropolitan Area.

 

Demand was strong for retail premises. The vacancy rate in the Helsinki Metropolitan Area was 1.9 %, which means that retail premises are virtually fully leased. Rent levels remained stable.

 

Vacancy rates for logistics premises also remained low at 2.3 %. The completion of Vuosaari Harbour in 2008 is also stimulating the construction of logistics premises, and this is already having an impact outside the Helsinki Metropolitan Area, as far as Hämeenlinna and Lahti. No changes have taken place in rental levels.

 

 

Sponda owns, leases and develops business premises in Finland, mainly in the Helsinki Metropolitan Area. Sponda has divided its operations into four business units: Office and Retail Premises, Logistics, Property Development, and New Business Areas. New Business Areas comprises Sponda's real estate fund activities and business in Russia and the Baltic region.

 

Sponda recorded net operating income from its investment properties totalling EUR 60.9 million (58.7). Offices and retail premises accounted for 70 % of this, logistics properties for 29 %, and New Business Areas for 1 %. Net operating income was distributed by geographical area as follows: Helsinki Business District 48 %, Helsinki Metropolitan Area 22 %, logistics properties in the Helsinki Metropolitan Area 20 % and the Rest of Finland 10 %. The economic occupancy rates were as follows:

 

By type of property	30 Sept. 2006,%	30 June 2006, %	31 March 2006, %	31 Dec. 2005, %
Offices and retail	87.4	86.3	85.6	86.2
Logistics	90.1	92.5	92.3	91.9
Total property portfolio	88.2	88.0	87.5	87.7
By geographical area	30 Sept. 2006,%	30 June 2006, %	31 March 2006, %	31 Dec. 2005, %
Helsinki Business District	88.3	87.8	87.2	88.9
Helsinki Metropolitan Area	86.0	83.9	82.8	80.8
HMA, logistics	87.3	90.4	90.3	89.6
Rest of Finland	96.4	96.1	95.9	95.0
Total property portfolio	88.2	88.0	87.5	87.7

 

Total cash flow derived from leasing agreements on 30 September 2006 amounted to EUR 440 million (30 September 2005: 464) and the average length of the agreements was 4.2 years (4.4). Sponda signed 57 agreements during the third quarter, 16 of which were renewals (16 000 m²) and 41 (32 500 m²) new agreements. During the period 36 agreements (6 000 m²) expired. Sponda's largest customer sectors were retail (26 % of total rental income), banking and investment (17 %) and other services (12 %). Sponda's leasing contracts expire as follows:

 

Year of expiry	% of rental income
2006	3.5
2007	15.2
2008	14.8
2009	15.0
2010	9.3
2011	9.3
2012	20.6
Open-ended	12.3

 

 

 

Sponda Group has 97 investment properties with an aggregate leasable area of approximately 885,000 m². Roughly half of these consist of office and retail properties and the remainder are logistics properties.

 

The fair value of Sponda's investment properties is confirmed using the company's own calculations in which Sponda applies the yield method based on cash flow analysis. This method is in compliance with the International Valuation Standard (IVS). All the figures used in calculating the fair value of properties is examined at least once a year by an external expert, to ensure that the parameters and values used in the calculations are based on market observations.

 

During the January-September period, the comparable fair value of Sponda's property portfolio grew EUR 34.3 million, and at the end of the period stood at EUR 1,372.5 million (30 September 2005: 1,246.4). Capital expenditure during the period allocated to property maintenance and improvements in quality levels amounted to EUR 15.2 million.

 

During the third quarter the comparable value of Sponda's investment property grew EUR 14.7 million. Capital expenditure during the quarter allocated to property maintenance and improvements in quality levels amounted to EUR 5.8 million.

 

The fair value of Sponda's property portfolio was positively affected by the reduction in yield requirements and the new agreements signed. During the third quarter, yield requirements were reduced in certain office and retail properties in the Helsinki business district and in logistics properties in the Helsinki metropolitan area to match market levels. Rent levels remained stable throughout the property portfolio.

 

	Total	Office & Retail	Logistics	Property Develop-ment	New Business Areas
Operating income	79.8	56.8	22.1	0.1	0.8
Maintenance costs	-18.9	-14.0	-4.7	-0.1	-0.2
Net operating income	60.9	42.8	17.5	0.0	0.6
Fair value of investment properties at 1 Jan. 06	1,259.7	966.4	252.3	41.0	0.0
Purchases in 2006	68.1	28.7	19.1	20.3	0.0
Investments, property development	26.9	12.6	2.5	11.8	0.0
Other transfers between segments	-1.1	-2.5	-4.0	5.4
Sales in 2006	-0.2	0.0	-0.2	0.0	0.0
Fair value adjustment	19.1	10.1	9.0	0.0	0.0
Fair value of investment properties at 30 September 06	1,372.5	1,015.3	278.7	78.5	0.0
Change in fair value %	1.5	1.0	3.6	0.0	0.0
Annual net operating income / fair value at 30 September 2006	5.9 %	5.6 %	8.3 %	0.1 %	0.0 %
Yield requirement used in calculating fair value, %		6-8 %	8-11.5 %

 

 

During the January-September period Sponda purchased investment properties for altogether EUR 68.1 million. During the third quarter, purchase investments totalled EUR 17.4 million. Sponda sold property for a total of EUR 0.2 million during the January-September period.

 

Capital expenditure allocated to property maintenance and improvements in quality levels amounted to EUR 15.2 million in January-September and EUR 5.8 million in the third quarter. Sponda invested EUR 11.6 million in property development, EUR 2.0 million of this in the third quarter. Most of this went on the renovation work on the City-Center complex in the centre of Helsinki.

 

 

The economic occupancy rate continued to rise and at the end of the period stood at 87.4 % (30 June 2006: 86.3 %). The fair value of these properties was EUR 1,015.3 million (30 September 2005: 975.0), and the comparable change in fair value since the beginning of 2006 was EUR 10.1 million. The unit's total revenue, net operating income and operating profit were as follows:

 

Office and retail, M€	7-9/2006	7-9/2005	1-9/2006	1-9/2005	2005
Total revenue	19.2	18.2	56.8	55.2	73.5
Net operating income	14.8	14.0	42.8	41.2	54.5
Operating profit	13.6	8.2	48.3	17.4	36.7

 

During the third quarter Sponda did not purchase or sell office or retail property.

 

Capital expenditure on office and retail premises allocated to property maintenance and improvements in quality levels amounted to EUR 12.5 million at the end of September. Expenditure in the third quarter accounted for EUR 4.9 million.

 

 

The economic occupancy rate for logistics properties declined from the previous quarter to 90.1 % (92.5 %). This was due to premises of about 9,000 m² becoming empty in consequence of the tenant's bankruptcy. The comparable fair value of these properties at the end of September was EUR 278.7 million (30 September 2005: 271.4), and the comparable change in fair value since the beginning of 2006 was EUR 9.0 million.

 

Total revenue, net operating income and operating profit for logistics properties were as follows:

 

Logistics, M€	7-9/2006	7-9/2005	1-9/2006	1-9/2005	2005
Total revenue	7.0	7.4	22.1	22.3	29.6
Net operating income	5.5	5.9	17.5	17.5	23.0
Operating profit	13.7	4.8	24.9	25.3	30.5

 

In August Sponda purchased four logistics properties from Raskone Oy for EUR 16.4 million. The properties are located in Vantaa (5,500 m²), Oulu (6,400 m²), Kuusankoski (7,500 m²) and Mikkeli (1,500 m²). All these premises are fully leased and the average duration of the lease contracts is 10 years. The transaction also includes an undeveloped site in Vantaa with building rights totalling around 15,000 m².

 

Capital expenditure on logistics premises allocated to property maintenance and improvements in quality levels amounted to EUR 2.5 million at the end of September. Expenditure in the third quarter accounted for EUR 0.7 million of this.

 

 

The fair value of Sponda's entire property development portfolio at the end of September stood at EUR 78.5 million. Of this, unused building rights accounted for EUR 39.9 million (400,000 m²), while EUR 38.6 million was spent on developing properties and new purchases.

 

In July, the Port of Helsinki and Sponda embarked on negotiations concerning the construction of the logistics area at the Vuosaari Harbour. The negotiations were concluded on 16 October 2006. The overall investment in the project will come to just over EUR 100 million and investments will commence at the end of 2007. In all the leasable surface area of the new properties will amount to around 130,000 m². The project will be completed in stages, the first being warehouses and flow through terminals totalling 70,000 m², which will be ready by the end of 2008. Sponda intends to be the long-term owner of the new logistics centre and in this capacity will be responsible for the leasing and maintenance of the property.

 

In August 2006 Sponda embarked on negotiations with the Port of Helsinki concerning the construction of the gatehouse and passenger terminal at Vuosaari Harbour. The aim is to complete the negotiations during November. The project will be completed in two phases. In the first phase some 12,600 m² of the gatehouse will be constructed, as well as the passenger terminal (800 m²) and car park facilities for 300 cars. The overall investment for this phase will be around EUR 34 million, with the investments starting in early 2007. The buildings will be completed by the end of November 2008. In the second phase of the project, retail and office premises will be built in the gatehouse, altogether 4,500 m2, by 2014. The overall investment for the second phase is currently estimated at EUR 8 million. Sponda will be the long-term owner of the buildings and will be responsible for letting and maintaining the property.

 

New Business Areas 

 

The property portfolio held by the real estate fund JER Europe Fund II Holdings S.Á.R.L, in which Sponda has a 20 % holding, had a fair value of EUR 80 million at the end of the period. The equity invested by Sponda in the fund is included in the balance sheet under "Investments in real estate funds".

 

 

Sponda's net cash flow from operations in January-September 2006 totalled EUR 35.2 million (30 September 2005: 34.6). Net cash flow from investing activities was EUR -79.0 million (-37.0) and after financing activities EUR 43.6 million (1.4).

 

Financial incomes and expenses in January-September totalled EUR -22.1 million (-19.6) and in the third quarter EUR -7.7 million (-6.7). Sponda's equity ratio on 30 September 2006 was 41 % (30 September 2005: 44 %) and gearing was 121 % (111 %). Interest-bearing debt amounted to EUR 698.2 million (620.7), the average maturity of Sponda's loans was 3.2 years (3.4) and the average interest rate 4.2 % (4.2 %). Fixed-rate and secured loans accounted for 66.8 % of the total debt portfolio. The average interest-bearing period of the whole debt portfolio was 2.7 years (2.3).

 

Sponda's debt portfolio consists of three domestic bond programmes totalling EUR 300 million, as well as a syndicated credit facility totalling EUR 300 million, and commercial papers amounting to EUR 99 million. A fixed-interest bond of EUR 100 million matures in April 2007. Liquidity is managed using flexible EUR 100 million credit limits and a EUR 150 million commercial paper programme. Sponda's loans are not mortgaged.

 

 

Sponda's primary risks relate to its customers and financing. Sponda had 667 customers and 1116 separate leasing contracts at the end of the third quarter. A central aspect of customer risk management in Sponda is knowing each customer's business and monitoring information on customers. Sponda manages customer risk by spreading the customer base and varying the length of its leasing contracts. Rents are increased twice a year either in relation to changes in the cost-of-living index or based on a percentage increase stipulated in the leasing contract. Leasing contracts include rent in advance in proportion to the risk in each case. Sponda owns investment properties only in Finland and all its properties are fully insured.

 

The refinancing risk is reduced using credit agreements of varying durations. Fixed-rate loans and interest rate swaps are used to balance the interest rate risk arising from changes to market interest rates. At the end of September 66.8 % of Sponda's debt portfolio was hedged. The company had no foreign currency risk exposure. Sponda's creditors are protected by covenants attached to its financing agreements. These covenants apply, among other things, to the use of collateral, the equal status of the financiers, and various financial indicators.

 

The main environmental impacts caused by Sponda's property investment activities relate to land use, the energy consumed by the properties, waste disposal for the properties and the quality of the built-up environment around them. Sponda's environmentally sound operations are steered by lifecycle analysis. The company includes its financial, social and environmental responsibilities in all its business operations and decision-making processes. Factors taken account of in the properties Sponda owns include the choice of building materials, monitoring of energy consumption, reducing emissions produced by service access, and maintenance of the building's immediate vicinity.

 

 

Sponda Group had 56 employees on average between January and September 2006 (54 in January-September 2005), of whom 56 (50) worked for the parent company Sponda Plc. At the end of September Sponda had 58 (55) employees, of whom 58 (51) were employed in the parent company. Sponda has personnel only in Finland.

 

All Sponda employees are included in the company's incentive bonus scheme under which bonuses are indexed to the company's targets. Top management is covered by a long-term share-based incentive scheme which became effective from 1 January 2006. Any bonuses paid under this scheme, which is based on cash flow from operations per share and return on capital employed, is paid in shares. These shares carry a condition forbidding their disposal within two years of their acquisition. Bonuses are paid annually.

 

 

Sponda Group consists of the parent company and its mutual property companies, the latter being either wholly or majority owned.

 

 

The average price of the Sponda share between January and September was EUR 8.60. The highest quotation on the Helsinki Stock Exchange was EUR 9.50 and the lowest EUR 7.44. Altogether 31,406,417 Sponda shares were traded in the January-September period. The market capitalization of the company's share capital at the close of the period was EUR 673 million.

 

The Annual General Meeting held on 29 March 2006 authorized the Board of Directors to purchase the company's own shares. This authorization was not exercised during the reporting period.

 

The ownership structure of Sponda's share capital on 30 September 2006 was as follows:

 

	No. of shares	% of total
		%
The Finnish State (Ministry of Finance)	27,189 642	34.3
Private persons	4,802 719	6.1
Finnish institutions	3,566 264	4.5
Foreign institutions	43,748 650	55.1
No. of shares, total	79,307 275	100.0

 

 

Sponda's Board of Directors has six members: Tuula Entelä, Maija-Liisa Friman, Timo Korvenpää, Harri Pynnä, Anssi Soila and Jarmo Väisänen. The chairman of the Board is Anssi Soila and the deputy chairman is Jarmo Väisänen. Sponda's President and CEO is Kari Inkinen.

 

 

Sponda Plc's auditors are Sixten Nyman APA and the firm of authorized public accountants KPMG Oy Ab under the supervision of principal auditor Raija-Leena Hankonen APA. The deputy auditor is Riitta Pyykkö APA.

 

 

Sampo Bank is suing Sponda Plc in the Helsinki District Court for payment of additional interest totalling EUR 5.3 million for the period 17 December 2001 - 16 June 2004 based on a credit agreement. Sponda disputes the claim as groundless. The court has set the date for the case hearing on 17 November 2006.

 

 

In June Sponda and seven institutional investors established a logistics property fund, Sponda Real Estate Fund I Ky. Spondan has a 47 % holding in the fund and is responsible for providing management services for the fund and the properties. On 2 October 2006, Sponda Plc sold seven logistics properties to Sponda Real Estate Fund I Ky. The properties are located in Tampere, Turku and the Lahti region and have a fair value of around EUR 37 million. At the same time the other participating investors in the fund sold some of their properties to the fund, and its property portfolio has a combined value of about EUR 80 million. Selling the properties to the fund will not have a significant impact on Sponda's result.

 

On 5 October 2006 Sponda purchased the Salmisaari office premises in Ruoholahti, Helsinki from Realinvest Oy. The price of the property, EUR 10.4 million, will be paid on 30 June 2008. The property has a leasable area of 5,455 m².

 

In its meeting 2 November 2006, Sponda's Board of Directors confirmed the company's dividend policy, which states that the company pays a dividend of at least 80 % of the earnings per share or of the cash flow per share, taking into account, however, business development needs.

 

Sponda Plc and the Finnish government signed a binding agreement on 20 October 2006 under which Sponda will acquire the entire share capital of Finnish real estate investment company Kapiteeli Plc for approximately EUR 950 million. The enterprise value at closing is estimated to be approx. EUR 1.3 billion after the sale of the hotel portfolio which was completed 31 August 2006. The enterprise value of the office and retail portfolio is roughly EUR 1 billion with a net yield of approx. 7 %. The remainder, EUR 0.3 billion, is divided between the development and sales portfolios.

The new combined group will create a leading Nordic real estate company. The property portfolio is worth approximately EUR 2.6 billion with a total leasable area of approximately 2 million m².

Sponda has short-term loan facilities sufficient to fund the acquisition. Sponda expects to achieve an equity to total capitalization ratio of at least 33 % in the course of the next 12 months. In order to achieve this, the company will explore alternative options to reduce indebtedness including potential asset sales and raising additional equity through a rights issue, allowing existing investors to participate in the growth of the company.

The transaction is expected to close by end of 2006, subject to the approval of the Finnish Competition Authorities.

Prospects

Sponda forecasts that the company's result and the economic occupancy rate of its properties in 2006 will improve from last year. Cash flow from operations is expected to be on the same level as at the end of 2005. Reasons for this positive trend include the expansion of the property portfolio in all business units, the decline in property maintenance costs, and the picking up of demand in the leasing sector.

 

2 November 2006

Sponda Plc

Board of Directors

 

 

Further information: Kari Inkinen, President and CEO tel. +358 9 6805 8202 or +358 400 402 653 and

Robert Öhman, CFO, tel. +358 9 6805 8206 or +358 40 540 0741.

 

 

Distribution:

Helsinki Exchanges

Media

www.sponda.fi