Sponda Plc FINANCIAL STATEMENTS Bulletin 1 January – 31 December 2014
Financial Statements Bulletin
5 February 2015 at 8:30
Sponda Plc Financial Statements Bulletin 1 January – 31 December 2014
JANUARY-DECEMBER 2014 IN BRIEF (compared with 1 January – 31 December 2013)
— Total revenue was EUR 246.7 (264.3) million. The decline was primarily due to properties sold in 2014.
— Net operating income was EUR 176.0 (190.9) million.
— Operating profit was EUR 151.7 (153.0) million. This includes a fair value change of EUR -0.2 (-14.2) million.
— Cash flow from operations per share was EUR 0.37 (0.40).
— The fair value of the investment properties amounted to EUR 3,142.1 (3,253.3) million.
— Net assets per share totalled EUR 4.65 (4.64).
— The economic occupancy rate was 87.0% (87.9%).
— The Board proposes to the Annual General Meeting that a dividend of EUR 0.19 per share be paid.
OCTOBER-DECEMBER 2014 IN BRIEF (compared with 1 October – 31 December 2013)
— Total revenue was EUR 57.3 (65.3) million.
— Net operating income was EUR 40.4 (47.4) million.
— Operating profit was EUR 32.9 (29.5) million. The operating profit includes a fair value change of EUR 1.6 (-12.7) million.
— Cash flow from operations per share was EUR 0.09 (0.10).
KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS
PRESIDENT AND CEO KARI INKINEN
In 2014 Sponda’s core business was stable. We made significant progress with sales in line with our revised strategy, as well as with investments.
We implemented the strategy by selling our shares in three real estate funds, approximately half of our logistics property portfolio and the majority of our properties in Turku. Rental operations achieved good results and we managed to maintain the occupancy rate almost at the level of year-end 2013 in spite of the difficult market situation. The occupancy rate increased particularly in the autumn and the latter part of the year.
The fourth-quarter result of the associated company Certeum Oy was negative, primarily due to changes in the fair value of properties and derivatives. Nevertheless, the company’s cash flow from operations, which is important for Sponda, was good. Sponda’s share of the cash flow from operations, excluding start-up costs, was approximately EUR 4.5 million.
Sponda’s property development projects are progressing on schedule and within budget. Two new construction projects and two extensive refurbishment projects will be completed this year. Pre-letting has progressed very well for the projects and they will bring a valuable addition to Sponda’s total revenue and property portfolio.
Sponda’s share of Certeum Oy’s result for the period 1 October – 31 December 2014 is EUR -3.5 million. Sponda’s share includes a change in the fair value of investment properties of EUR -5.8 million and an unrealised change in the fair value of derivatives amounting to EUR -2.7 million. Non-recurring start-up costs amounted to EUR 1.2 million. Sponda’s share of Certeum Oy’s cash flow from operations excluding the aforementioned items was EUR 4.5 million.
BUSINESS CONDITIONS – FINLAND
The Finnish GDP grew by 0.1% in 2014 (Finnish Ministry of Finance, December 2014). GDP took a turn to slight growth in the third quarter of 2014, mainly due to an increase in net exports. The Finnish Ministry of Finance forecasts GDP growth of 0.9% for 2015. The growth forecast is based on exports as well as moderate growth in private consumption and an increase in private investment.
The property transaction volume increased to approximately EUR 4.2 billion in 2014 (KTI Property Information). The fourth-quarter volume exceeded EUR 1.0 billion. The previous period with an equal property transaction volume was 2008 with a volume of EUR 4.15 billion. International investors were the buyers in 35% of the transactions, and six of the buyers were new to the Finnish market.
New construction activity picked up slightly compared to 2013. According to KTI Property Information, approximately 85,000 m² of new office premises were completed in the Helsinki metropolitan area by the end of September, which is almost equal to the total amount of new office space added in all of 2013 (88,000 m2).
The volume of vacant office premises turned to an increase in the second half of the year due to the weak economic situation. According to Catella, the average vacancy rate stood at 12.5% at the end of 2014, compared to 12.4% a year earlier. The vacancy rate in Helsinki’s central business district turned to a decline of 1.1 percentage points in the second half of the year. At the end of 2014, the vacancy rate in Helsinki’s central business district was 7.8%.
BUSINESS CONDITIONS – RUSSIA
According to a World Bank forecast, Russian GDP grew by 0.7% in 2014. The World Bank forecasts Russian GDP growth of -2.9% in 2015. The reasons for the contraction of the economy are geopolitical tension, sanctions and the decrease in oil prices. The forecasts involve significant uncertainty due to the economic situation in Russia.
The substantial decline in the value of the rouble and the resulting increase in uncertainty led to a decrease in the number of property transactions in Russia in the fourth quarter. According to preliminary data from CBRE, the fourth-quarter volume was below USD 0.1 billion. The full-year volume was approximately USD 3.5 billion. The transaction volume fell by half compared to 2013, when the volume was approximately USD 7 billion.
Preliminary information from CBRE indicates that the average vacancy rate for office premises in Moscow increased to 16% at the end of the year. At the end of the year, the vacancy rate for Class A office space was approximately 26%, while the vacancy rate for Class B office space was approximately 12%. Some 1.4 million m2 of new office space was completed in Moscow during the year. The previous period in which an equally high volume of new office space was completed was 2008. More than half of the new office space completed is Class A space.
Weakened demand and the large volume of newly constructed premises create upward pressure on vacancy rates and downward pressure on rents.
OPERATIONS AND PROPERTY ASSETS 1 JANUARY – 31 DECEMBER 2014
At the end of 2014, an external consultant assessed the values of Sponda’s investment properties in Finland (Catella Property Oy) and in Russia (CB Richard Ellis). The change in fair value of the investment properties in 2014 was EUR -3.9 (-16.1) million for the full year and EUR 1.5 (-10.1) million for October-December. The value of Sponda’s properties in Finland developed favourably primarily due to a decrease in yield requirements. The negative change in fair value of properties in Russia was attributable to changes in yield requirements and market rents. The changes in fair values are itemised in the table “Valuation gains/losses on fair value assessment”.
Valuation gains/losses on fair value assessment
Sponda has determined the fair values of its investment properties at the end of 2014 in accordance with the company’s established accounting principles. At the end of 2014, Catella Property Oy assessed the fair values of Sponda’s investment properties in Finland and CB Richard Ellis in Russia. A more than usual amount of uncertainty is related to the valuation due to the economic situation in Russia, sanctions and strong fluctuations in the rate of the rouble. Especially the lack of comparable sales, changes to lease agreements agreed on with tenants and the rouble becoming increasingly common as the contract currency, have increased uncertainty.
Sponda calculates the growth in net rental yield for its properties according to EPRA Best Practices Recommendations by using a like-for-like net rental growth formula based on a comparable property portfolio owned by the company for two years. Like-for-like net rental growth was -3.0% (0.5%) for office premises, 3.2% (-0.5%) for shopping centres, -11.3% (-6.3%) for logistics premises and -10.7% (1.1%) for properties in Russia. All of Sponda’s lease agreements in Finland are tied to the cost of living index.
The economic occupancy rates by type of property and geographical area were as follows:
*) From the beginning of 2014, office and retail premises and shopping centres located in the same investment property have been divided into their respective segments for part of the investment properties. The properties were previously classified according to their primary use. The change applied to approximately ten properties, and its effect was -1.2 percentage points for office properties and 3.6 percentage points for shopping centre properties at the time the change was made.
DIVESTMENTS AND INVESTMENTS
*) Includes sales costs
Property development investments were mainly directed to the construction of office buildings in Ilmala and Lassila.
RISKS AND UNCERTAINTY FACTORS IN THE NEAR FUTURE
Sponda estimates that the risks and uncertainty factors in the current financial year are primarily related to the development of the Finnish and Russian economies.
In Russia, these risks are related to the decline of tenants’ solvency and a decrease in the economic occupancy rate. The depreciation of the Russian rouble may cause tenant insolvency and a decrease in property values. The operations in Russia present a foreign exchange risk to Sponda. Changes in exchange rates may cause exchange rate losses that have a negative impact on the company’s financial result. The uncertain situation in the Russian market may slow down the sale of Sponda’s properties in Russia in 2015.
The weak development of the Finnish economy may cause a decline in net operating income and tenant insolvency.
For Sponda’s property development projects, the key risk is related to the degree of success in leasing premises.
EVENTS AFTER THE PERIOD
In its meeting held on 22 January 2015, the Shareholders’ Nomination Board of Sponda Plc has decided to propose to the Annual General Meeting to be held on 16 March 2015 that the Board of Directors will consist of seven members, and that the current members Kaj-Gustaf Bergh, Christian Elfving, Paul Hartwall, Juha Laaksonen, Leena Laitinen, Arja Talma and Raimo Valo be re-elected.
The Nomination Board proposes to the Annual General Meeting that the annual remuneration payable to the members of the Board to be elected at the Annual General Meeting for the term until the close of the Annual General Meeting in 2016 be as follows: EUR 66,000 for the Chairman, EUR 40,000 for the Deputy Chairman, and EUR 33,000 for each member. The Nomination Board further proposes that additional compensation of EUR 1,000 be paid to the Chairman of the Board for each meeting attended and EUR 600 be paid to members of the Board for each meeting attended. 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 fixed annual remuneration be paid in Sponda Plc shares purchased from the market. The shares will be purchased within two weeks from the release of the interim report for the period 1 January – 31 March 2015. The Nomination Board further proposes that travel costs be reimbursed in accordance with the principles approved by the Finnish Tax Administration.
Sponda’s Board of Directors will incorporate the proposals into the Annual General Meeting notice, which will be published later.
The Shareholders’ Nomination Board consisted of the three largest shareholders on 30 September 2014:
Oy Palsk Ab, Kaj-Gustaf Bergh;
Mutual Pension Fund Varma, Pekka Pajamo; and
HC Fastigheter Holding Oy Ab, Ole Johansson.
PROSPECTS FOR 2015
Sponda provides prospects for 2015 with regard to the development of the company’s net operating income and, instead of economic occupancy rate, EPRA Earnings. EPRA Earnings shows operative result, a number which is of importance for Sponda.
Net operating income
Sponda estimates that the net operating income for 2015 will amount to EUR 158-168 million. The estimate is based on the company’s view of property sales to be completed and the development of rental operations during the year.
Sponda estimates that company adjusted EPRA Earnings in 2015 will amount to EUR 95-105 million. This outlook is based on the development of net operating income and the company’s estimate of the development of financial expenses.
ANNUAL GENERAL MEETING AND DIVIDEND
The Board of Directors of Sponda Plc is convening the Annual General Meeting on 16 March 2015 and proposes to the Annual General Meeting that a dividend of EUR 0.19 per share be paid.
5 February 2015
Board of Directors
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 Planning and IR, tel. +358 20 431 3454 or +358 40
NASDAQ OMX Helsinki