Sponda Plc FINANCIAL STATEMENTS Bulletin 1 January – 31 December 2012

Sponda Plc           
Financial Statements Bulletin
1 February 2013 at 8:30

Sponda Plc Financial Statements Bulletin 1 January – 31 December 2012

Result of operations and financial position 1 January – 31 December 2012 (compared with 1 January – 31 December 2011)

  — Total revenue was EUR 264.6 (248.2) million, representing a 6.6% increase on the reference period.
  — Net operating income increased by approximately 7%, totalling EUR 192.2 (179.4) million.
  — Operating profit was EUR 210.3 (209.6) million. This includes a fair value change of EUR 33.0 (39.6) million.
  — Cash flow from operations per share was EUR 0.40 (0.37). 
  — The fair value of the investment properties amounted to EUR 3,261.3 (3,165.7) million.
  — Net assets per share totalled EUR 4.27 (4.06).
  — The economic occupancy rate was 88.1% (88.2%).
  — Future prospects are provided with regard to the development of economic occupancy rates and net operating income for the current financial year.
  — Net financing costs for the period totalled EUR -58.8 (-75.6) million. Financial income and expenses include EUR 4.8 (-11.2) million in unrealised change in the fair value of derivatives. Excluding the aforementioned change in fair value, financial income and expenses totalled EUR -63.5 (-64.4) million.
  — The Board proposes to the Annual General Meeting that a dividend of 0.17 per share be paid.

Result of operations and financial position 1 October – 31 December 2012 (compared with 1 October – 31 December 2011)

  — Total revenue was EUR 66.4 (64.9) million.
  — Net operating income was EUR 47.4 (47.6) million.
  — Operating profit was EUR 69.5 (55.1) million. The operating profit includes a fair value change of EUR 21.3 (6.8) million.
  — Cash flow from operations per share was EUR 0.12 (0.10).
  — Financial income and expenses amounted to EUR -14.4 (-20.4) million. Financial income and expenses include EUR 0.7 (-3.7) million in unrealised change in the fair value of derivatives. Excluding the aforementioned change in fair value, financial income and expenses totalled EUR -15.1 (-16.7) million.

Key figures

Key figures according to EPRA Best Practices Recommendations

President and CEO Kari Inkinen

Sponda achieved a strong result in 2012. Total revenue and net operating income were the highest in the company’s history, and the economic occupancy rate of Sponda’s investment properties remained stable despite the economic conditions.

Our strategy is geared towards profitable growth. In 2012, we kept a close eye on market development and selected the focal points of our operations accordingly. We improved the quality of our property portfolio further in 2012 by selling properties for over EUR 60 million. Our equity ratio remained stable despite property development investments. As anticipated, the economic occupancy rate remained largely unchanged from the end of 2011 despite the challenging operating environment, thanks in no small part to our strengthened rental organisation.

The final phase of the Citycenter project has progressed according to plan, with the property now assigned to the portfolio of the Shopping Centres segment. The project will be fully completed in spring 2013 once the remaining tenant improvements are concluded. The Citycenter end of Keskuskatu will also be converted into a pedestrian street by the City of Helsinki in the summer.

Tenant negotiations for the Ratina shopping centre are well underway. We have raised our level of preparedness to begin construction and expect the project to start in summer 2013.

Business conditions – Finland

The growth prospects of the Finnish economy did not improve at the end of 2012 despite the stabilisation of the eurozone crisis. The Finnish Ministry of Finance adjusted its gross production forecasts to estimate a GDP decline of -0.1% for 2012 and growth of 0.5% for 2013. Finnish exports fell by 1.7% in 2012, but are expected to increase by 1% this year. Forecasts indicate that the growth rate of imports will be slightly below that of exports in 2013. Private consumption increased by 1.5% last year. This year, private consumption is expected to be weakened by the employment situation and tax increases. The unemployment rate in 2012 was approximately 7.7%.

Real estate transactions were largely focused on the Helsinki metropolitan area, with an emphasis on prime properties with steady cash flow. According to an estimate by KTI Property Information, the transaction volume for 2012 was EUR 2.1 billion, an increase of over 15% on the previous year (2011: EUR 1.8 billion). International investors represented slightly over 20% of the total transaction volume, down from the year before.

According to preliminary information from Catella Property Oy, the vacancy rates for office properties in the Helsinki metropolitan area have seen an expected increase in late 2012. The primary reasons for this are the weak economic conditions and the high rate of new construction. Vacancy rates in the Helsinki metropolitan area stood at 11% at the end of 2012, compared to 10.2% six months earlier. Vacancy rates also began to rise in central Helsinki in late 2012, reaching 4.8% at the end of the year.

Rental demand in Helsinki’s central business district was largely unchanged through the year-end, with rental levels reaching record highs of over EUR 370/m²/year at the upper end of the market. Rental levels in other key districts for office properties began to decline slightly. Rental levels are expected to remain stable in 2013.

Over 120,000 m² of new office space was completed in the Helsinki metropolitan area in 2012. A further 145,000 m² is currently under construction, most of which is scheduled for completion in 2013.

Business conditions – Russia

According to the Bank of Finland’s autumn forecast, Russian GDP growth slowed down to 3.7% in 2012. The current forecast for Russian economic growth in 2013 is also 3.7%. Import growth in 2013 is estimated at approximately 10%. Private consumption remains strong, but growth is expected to slow down.

The total transaction volume in the Russian property market in 2012 stood at approximately USD 7 billion. Cushman & Wakefield estimates that the average vacancy rate for office properties in Moscow was relatively stable throughout 2012 and stood at 11-12% at the end of the year. Vacancy rates are expected to remain stable in 2013. New office construction in 2013 is estimated at some 600,000 m².

Rental levels were unchanged. The rents for high-end office properties remained at approximately USD 1,200/m²/year. Rental levels were approximately USD 800/m² for Class A office space and USD 450/m²/year for Class B office space. Rents are expected to remain stable or increase slightly in 2013.

According to CB Richard Ellis, the market for office properties in St. Petersburg is showing a moderate positive change. The average vacancy rate declined slightly in 2012. The vacancy rates of Class A properties decreased and stood at approximately 13% in September 2012. The vacancy rates of Class B also fell slightly and stood at roughly 8% in September 2012.

Rents for Class A properties remained stable throughout 2012 despite the decline in vacancy rates. In Class B properties, the fall in vacancy rates contributed to a slight increase in rental levels. Some 200,000m² of new office space was completed in 2012, representing 10% of the market total.

Operations and property assets 1 January – 31 December 2012

Sponda owns, leases and develops business properties in the Helsinki metropolitan area and the largest cities in Finland, as well as in Russia. Sponda’s operations are organised into four business units: Investment Properties, Property Development, Russia, and Real Estate Funds. The Investment Properties unit is divided into three segments: Office and Retail Properties, Shopping Centres and Logistics Properties. The other segments are Property Development, Russia and Real Estate Funds.

Net operating income from all of Sponda’s property assets totalled EUR 192.2 (179.4) million in 2012. Of this total, office and retail premises accounted for 54%, shopping centres for 17%, logistics premises for 15%, Russia for 11% and the Real Estate Funds unit for 3%.

On 31 December 2012, Sponda had a total of 185 properties, with an aggregate leasable area of approximately 1.5 million m². Of this, some 53% is office and retail premises, 11% shopping centres and 33% logistics premises. Some 3% of the leasable area of the properties is located in Russia.

The fair values of Sponda’s investment properties are confirmed as a result of the company’s own cash flow-based yield value calculations. The assessment method complies with International Valuation Standards (IVS). The data used in the calculations of fair value is audited at least twice a year by external experts to ensure that the parameters and values used in calculations are based on market observations.

At the end of 2012, an external consultant assessed the values of Sponda’s investment properties in Finland and in Russia. The change in the fair value of investment properties in 2012 was EUR 24.9 (39.0) million for the full year and EUR 18.9 (7.7) million for October-December. The positive change in the value in Finland was mainly due to changes in yield requirements. The fair value of investment properties was assessed in Finland by Catella Property Oy and in Russia by CB Richard Ellis. The changes in fair values are itemised in the table Valuation gains/losses on fair value assessment.

Valuation gains/losses on fair value assessment

The changes in Sponda’s investment property assets were as follows:

Rental operations

The economic occupancy rates by type of property and geographical area were as
follows:

Investments and divestments

In 2012, Sponda sold properties for a total of EUR 61.8 million and recorded a profit of EUR 2.5 million on the sales transactions. The balance sheet value of the properties sold was EUR 59.3 million. Sales of properties in the fourth quarter totalled EUR 8.1 million, with a profit of EUR 0.8 million recorded on the sales transactions. During the period under review, Sponda bought properties for EUR 53.1 million. No properties were purchased in the final quarter of the year.

Investments in property maintenance in 2012 totalled EUR 28.4 million, with EUR 11.4 million of this in the fourth quarter. The company invested EUR 47.5 million in property development, of which EUR 24.5 million was invested in October-December. Property development investments were primarily directed to the modernisation of the Citycenter property in Helsinki’s central business district and the development of an office property in Ruoholahti.

Cash flow and financing

Sponda’s net cash flow from operations in the period under review totalled EUR 112.8 (99.2) million. Net cash flow from investing activities was EUR -75.3 (-222.9) million and the net cash flow from financing activities was EUR -34.4 (123.6) million. Net financing costs for the period totalled EUR -58.8 (-75.6) million. Financial income and expenses include EUR 4.8 (-11.2) million in unrealised change in the fair value of derivatives. Excluding the aforementioned change in fair value, financial income and expenses totalled EUR -63.5 (-64.4) million. Interest expenses of EUR 0.8 (3.6) million were capitalised.

Sponda’s equity ratio on 31 December 2012 was 40% (38%) and gearing was 122% (135%). As of the beginning of 2013, Sponda will change its accounting principles with regard to IAS 12 Income Taxes. The change will have a 1.3-1.5%-point positive effect on the Group’s equity ratio.

Interest-bearing debt amounted to EUR 1,736.2 (1,754.8) million and the average maturity of Sponda’s loans was 2.8 (3.1) years. The average interest rate was 3.4% (4.0%) including interest derivatives. Fixed-rate and interest-hedged loans accounted for 72% (77%) of the loan portfolio. The average interest-rate period of the entire debt portfolio was 1.9 (2.2) years. The interest cover ratio, which describes the company’s solvency, was 2.8 (2.7).

Sponda applies hedge accounting to those interest derivatives that meet the criteria for hedge accounting. Changes in the fair value of interest derivatives that fall under hedge accounting are recognised in equity on the balance sheet. Changes in the fair value of other interest derivatives and currency options are recorded on the income statement.

Sponda Group’s debt portfolio on 31 December 2012 comprised EUR 675 million in syndicated loans, EUR 326 million in bonds, EUR 251 million in issued commercial papers, and EUR 485 million in loans from financial institutions. Sponda had EUR 510 million in unused credit limits. Sponda Group had mortgaged loans of EUR 141.8 million, or 4.0% of the consolidated balance sheet.

Sponda issued a EUR 95 million hybrid bond in November 2012. The coupon rate of the bond is 6.75% per annum. The bond has no maturity, but the company may exercise a redemption option after five years. The settlement date of the bond was 5 December 2012.

A hybrid bond is an instrument that is subordinated to other debt obligations. It is treated as equity in the IFRS financial statements. A hybrid bond does not confer upon its holder the right to vote at shareholder meetings and does not dilute the holdings of the current shareholders.

In conjunction with the hybrid bond issue, Sponda completed a partial repurchase for its hybrid bond issued in 2008. Sponda repurchased a nominal amount of EUR 37.2 million in exchange for cash, which represents 28.6% of the original EUR 130 million notional amount issued in 2008. The repurchase price was 102% of the nominal amount.

After completing the repurchase, Sponda has two hybrid bonds outstanding. The first one, issued in 2008, amounts post-repurchase to EUR 92.8 million and is callable on 27 June 2013. The new hybrid bond, announced on 21 November 2012, amounts to EUR 95 million and the first call date is 5 December 2017.

The EUR 92.8 million hybrid bond callable in June 2013 has an effect on the Group’s equity ratio of approximately 2.5 percentage points.

Events after the end of the period

Sponda Plc’s Shareholders’ Nomination Board has decided to propose to the Annual General Meeting on 18 March 2013 that the number of members of the Board of Directors be confirmed as seven and that the current members, Klaus Cawén, Tuula Entelä, Arja Talma and Raimo Valo, be re-elected, with Kaj-Gustaf Bergh, Christian Elfving and Juha Laaksonen elected as new members.

The Nomination Board proposes to the Annual General Meeting that the members of the Board of Directors elected in the Annual General Meeting be paid the following annual remunerations for the term concluding at the 2014 Annual General Meeting: Chairman of the Board, EUR 60,000, Vice Chairman of the Board, EUR 36,000 and each member EUR 31,200. The Nomination Board further

proposes that all members of the Board of Directors be paid meeting fees as follows: Chairman of the Board, EUR 1,000 per meeting and members of the Board, EUR 600 per meeting. The Nomination Board proposes that members of the Board be paid EUR 600 per committee meeting and the Chairman of the Audit Committee EUR 1,000 per Audit Committee meeting. The Nomination Board proposes that 40% of the annual remuneration be paid in Sponda Plc shares acquired on the market. The shares will be acquired within two weeks of the date of publication of the interim report for the period 1 January-31 March 2013.

The three largest shareholders on 1 October 2012 were represented in the Nomination Board:

Solidium Oy, represented by Kaj-Gustaf Bergh, Oy Palsk Ab
Ilmarinen Mutual Pension Insurance Company, Timo Ritakallio
Varma Mutual Pension Insurance Company, Risto Murto.

Prospects

Sponda expects the vacancy rates of its investment properties at year’s end 2013 to be largely unchanged from the end of 2012. The estimate is based on the changes in rental agreements and leases already signed.

Comparable net operating income (excluding disposals) in 2013 is expected to increase slightly from 2012. Reasons for this expected increase are rising rent levels in Helsinki’s central business district and the completion of the company’s property development projects.

Risks and uncertainty factors in the near future

Sponda believes that the risks in the current financial year are largely unchanged from the previous year. The key risks and uncertainty factors arise from the ongoing European economic crisis. These risks relate to a decline in economic occupancy rates and a fall in rental income in both Finland and Russia, resulting from the insolvency of tenants.

The development of the Finnish economy will be particularly affected by the continuation of the public debt crisis in Europe. The slowing of growth may affect the operations of Finnish companies and thereby increase the vacancy rates of office properties.

For Sponda’s property development projects, the key risks are related to the degree of success in leasing premises and the potential increase in construction costs. Higher than expected vacancy rates in newly completed business premises would have an impact on the Group’s total vacancy rate and, as a result, have a negative effect on the Group’s net operating income.

The differences between Russian and Finnish legislation and the way the authorities operate in the two countries may cause additional risks for Sponda. The operations in Russia increase Sponda’s foreign exchange risk. Changes in exchange rates may cause exchange rate losses that have a negative impact on the company’s financial result.

Significant changes in market interest rates and margins may have a negative effect on Sponda’s financial result and contribute to slower growth in the property business.

Annual General Meeting and Dividend

The Board of Directors of Sponda Plc is convening the Annual General Meeting on 18 March 2013 and proposes to the Annual General Meeting that a dividend of EUR 0.17 per share be paid.

1 February 2013
Sponda Plc
Board of Directors

Additional information:
Kari Inkinen, President and CEO, tel. +358 20-431 3311 or +358 400-402 653,
CFO Erik Hjelt, tel. +358 20-431 3318 or +358 400-472 313 and
Pia Arrhenius, SVP, Corporate Communications and IR, tel. +358 20-431 3454 or +358 40-527 4462.

Distribution:
NASDAQ OMX Helsinki
Media
www.sponda.fi

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