Sponda Plc’s HALF YEAR FINANCIAL REPORT January-June 2016
Half year financial report
4 August 2016 at 8:30 a.m.
Sponda Plc’s half year financial report January-June 2016
JANUARY-JUNE 2016 IN BRIEF (compared with 1 January – 30 June 2015)
- Total revenue increased to EUR 126.9 (116.6) million, primarily due to a property transaction completed in February 2016.
- Net operating income increased by more than 12% and totalled EUR 92.3 (82.1) million.
- Operating profit was EUR 95.6 (91.9) million. This includes a fair value change of EUR 3.0 (12.4) million.
- Cash flow from operations per share was EUR 0.21 (0.19).
- The fair value of the investment properties amounted to EUR 3,713.2 (3,143.2) million.
- Net assets (NAV) per share totalled EUR 5.04 (4.65).
- The economic occupancy rate was 89.1% (86.3%).
- The prospects were revised.
APRIL-JUNE 2016 IN BRIEF (compared with 1 April – 30 June 2015)
- Total revenue was EUR 67.6 (59.4) million.
- Net operating income was EUR 50.2 (42.5) million.
- Operating profit was EUR 48.8 (64.4) million. This includes a fair value change of EUR 5.0 (22.3) million.
- Cash flow from operations per share was EUR 0.09 (0.11).
|Total revenue, M€||67.6||59.4||126.9||116.6||230.5|
|Net operating income, M€||50.2||42.5||92.3||82.1||165.7|
|Operating profit, M€||48.8||64.4||95.6||91.9||178.1|
|Earnings per share, €||0.09||0.14||0.18||0.17||0.78|
|Cash flow from operations per share, €||0.09||0.11||0.21||0.19||0.36|
|Equity per share, €||5.04||4.65||5.26|
|Equity ratio, %||46.3||40.7||46.2|
KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS
|EPRA Earnings, M€||33.1||26.4||53.9||51.3||232.0|
|EPRA Earnings per share, €||0.10||0.09||0.17||0.18||0.82|
|Company adjusted EPRA Earnings, M€||33.2||28.9||54.9||53.5||98.6|
|Company adjusted EPRA Earnings per share, €||0.10||0.10||0.17||0.19||0.35|
|EPRA NAV/share, €||5.35||5.47||5.60|
|EPRA NNNAV/share, €||4.96||4.50||5.15|
|EPRA Net Initial Yield (NIY), %||5.55||5.48||5.62|
|EPRA “topped-up” NIY, %||5.57||5.49||5.63|
|EPRA Vacancy rate, %||10.94||13.68||12.26|
|EPRA Cost Ratio (including direct vacancy costs), %||17.68|
|EPRA Cost Ratio (excluding direct vacancy costs), %||12.90|
PRESIDENT AND CEO KARI INKINEN
Sponda’s result for January-June 2016 result is strong considering the slow growth of the Finnish economy. The six properties acquired at the start of the year in Helsinki’s central business district have been integrated into Sponda, and we have achieved synergies from the acquisition; for example, in the form of lower property maintenance costs. I am also very pleased that our economic occupancy rate has increased compared to the end of March. We have improved the occupancy rate of both office properties and shopping centres following the Forum acquisition, which supports our strategy of focusing on prime areas in Helsinki and Tampere. We also improved the occupancy rate of our non-strategic logistics properties.
We finalised the sale of one shopping centre, Solnechniy I in Moscow, in July. After the sale, Sponda’s Russian property portfolio comprises two office properties in Moscow and one logistics property in St. Petersburg. We also sold a property located on Yliopistonkatu in Turku, Finland. Following this sale, Sponda owns no properties in Turku.
In June, we announced that we are starting the development of a new office and retail complex in Vantaa’s Tikkurila district. Excavation work has already begun and the project will be completed in spring 2018. The construction of the Ratina shopping centre in Tampere is also moving ahead on schedule, and pre-letting has progressed to the point where the pre-let rate for the property now stands at approximately 38%. The property will be completed in spring 2018.
BUSINESS CONDITIONS – FINLAND
According to preliminary data from Statistics Finland, Finland’s GDP grew by 0.6% compared to the preceding quarter. The Ministry of Finance has increased its 2016 growth forecast for the Finnish economy. According to the revised forecast, Finland’s GDP will grow by 1.4% in 2016. The growth is largely based on the favourable development of private consumption and investments. Exports are expected to grow by only 0.8% this year, but the rate of export growth is predicted to increase slightly next year. The forecast for GDP growth in 2017 is 1.0%. The forecast does not take into account the effects of Brexit.
The transaction market remained active in the second quarter with a volume of EUR 1.46 billion according to KTI Property Information. The volume for the first half of the year was EUR 3.63 billion. The property type with the highest trading activity was residential portfolios, with 38% of the total volume. The share of international buyers have come down and accounted for approximately 21% of the total.
The high vacancy rate of office properties in the Helsinki metropolitan area has led to a decrease in new construction. Nevertheless, new projects have been started during the first half of the year in locations including Kalasatama, Ilmala and Leppävaara areas. At the end of March, there were some 90,000 m² of new office space under construction. The amount of retail space currently under construction in the Helsinki metropolitan area is approximately 180,000 m².
The vacancy rates for office premises in the Helsinki metropolitan area decreased last winter but remain high. The vacancy rate was 18.3% in March. According to KTI Property Information, the situation improved in Helsinki and Espoo, while in Vantaa, the amount of vacant space increased. The vacancy rate for retail space in the Helsinki metropolitan area was 4.9% in March according to KTI Property Information.
GROUP RESULT IN JANUARY-JUNE 2016
Sponda Group’s result for January-June was EUR 58.5 (51.2) million, while the result before taxes was EUR 70.2 (68.1) million and operating profit was EUR 95.6 (91.9) million.
Net operating income for the period was EUR 92.3 (82.1) million. The increase in net operating income was primarily attributable to the Forum property acquisition and completed property development projects. Net operating income was reduced by property divestments made last year. The effect of the Forum acquisition is included in the consolidated figures starting from 1 March 2016. Marketing and administration expenses and other operating income and expenses amounted to EUR 11.0 (10.5) million, which represents an increase of EUR 0.5 million compared to the previous year. The increase was mainly attributable to the Forum acquisition and timing differences. The net operating income for the second quarter of 2016 amounted to EUR 50.2 (42.5) million, including the effect of the Forum acquisition for the full quarter.
During the period, the Group recognised profit on sales of EUR 12.6 (1.1) million, primarily from the sale of land in trading properties. The change in fair value of the investment properties was EUR 3.0 (12.4) million due to positive development in Finland. The Group’s result was weighed down by amortisation of goodwill amounting to EUR 1.3 (0.0) million. The result for the comparison period includes EUR 6.8 million attributable to the Group’s share of the result of Certeum Oy, an associated company that was divested in September 2015.
Financial income and expenses for the period totalled EUR -25.4 (-23.8) million. The increase in expenses is related to an unrealised change in the fair value of derivatives and loan arrangements pertaining to the Forum acquisition.
In accordance with IFRIC 21, the company recognises a liability in the balance sheet when the obligating event occurs. The company periodises real estate taxes in the profit and loss statement during the financial year.
PROPERTY ASSETS 1 JANUARY – 30 JUNE 2016
At the end of June 2016, 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 the fair value of the investment properties in January-June 2016 was EUR 3.0 (12.4) million and in April-June EUR 5.0 (22.3) million. The value of Sponda’s properties in Finland developed favourably primarily due to a decrease in yield requirements. Yield requirements decreased the most in office properties in Helsinki’s central business district and in the Shopping Centres -unit. Other factors contributing to the increase in fair value included the development margin of property development. The change in the fair value of the properties in Russia was negative. The change was mainly due to a decrease in market rents and an increase in the yield requirement.
Valuation gains/losses on fair value assessment
|Changes in yield requirements (Finland)||17.1||32.2||17.1||32.2||39.2|
|Changes in yield requirements (Russia)||-2.3||-7.4||-4.1||-7.4||-7.4|
|Development gains on property development projects||2.1||1.8||3.9||2.9||25.4|
|Change in market rents and maintenance costs (Finland)||5.4||9.2||13.7||18.4||30.2|
|Change in market rents and maintenance costs (Russia)||-9.6||-2.8||-10.7||-15.3||-26.8|
|Change in currency exchange rates||-0.2||-1.1||-2.4||2.2||0.3|
|Investment properties, total||7.0||22.3||5.0||12.4||23.2|
|Property investment companies||-2.0||0.0||-2.0||0.0||0.0|
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 0.9% (1.8%) for office premises, 6.0% (2.5%) for shopping centres, 7.1% (18.8%) for logistics premises and -2.9% (-4.6%) 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:
|Type of property||30.6.2016||31.3.2016||31.12.2015||30.9.2015||30.6.2015|
|Office properties, %||88.3||88.1||88.2||88.0||88.1|
|Shopping centres, %||94.2||93.8||91.3||90.6||89.8|
|Logistics properties, %||73.4||68.9||68.3||67.8||68.6|
|Total property portfolio, %||89.1||88.7||87.7||86.2||86.3|
|Helsinki business district, %||92.6||92.4||90.1||89.3||88.3|
|HelsinkiMetropolitan Area, %||86.1||85.3||85.7||83.5||83.7|
|Turku, Tampere, Oulu, %||89.9||89.4||90.8||91.1||92.3|
|Total property portfolio, %||89.1||88.7||87.7||86.2||86.3|
DIVESTMENTS AND INVESTMENTS
|Profit/loss on sale*||-0.2||-1.1||0.0||-1.4||-4.3|
|Balance sheet value||3.5||51.2||8.3||57.8||161.9|
*) Includes sales costs
|Property development investments||-12.3||-14.7||-24.3||-25.5||-65.2|
Property development investments were mainly directed to the construction of the Ratina shopping centre.
The balance sheet value of Sponda’s property development portfolio stood at EUR 149.4 million at the end of June 2016. Of this total, EUR 53.4 million was in undeveloped land sites and the remaining EUR 95.9 million was tied up in property development projects in progress. The value of unused building rights is presented in the assets of the segment concerned for investment properties that have a building, and as part of the Property Development segment for building rights for unbuilt land.
Sponda’s property development operations comprise new construction projects and the refurbishment of existing properties. At the end of the review period, the Property Development unit had invested a total of EUR 24.3 million, of which EUR 12.3 million was invested in April-June. The investments were primarily directed to the construction of the Ratina shopping centre.
The construction of the Ratina shopping centre in Tampere began in April 2015. The excavation, foundation and construction work on the Ratina shopping centre has progressed according to plan. The construction of the frame of the Valo-Ratina building will proceed with roofing work on the first section starting in August 2016 and work on building service systems beginning in September 2016. The shopping centre is expected to be completed in spring 2018. The complex comprises a total of approximately 53,000 m² of retail and service premises for more than 150 businesses. The project’s total investment, including the land value, is estimated at approximately EUR 240 million, with some EUR 73.3 million invested to date. The project’s target development margin is 15% and the estimated net yield on cost is 7.5%. The shopping centre’s signed and agreed lease agreements cover approximately 38% of the leasable area.
At the end of June, Sponda announced it will develop an office and retail complex at Tikkurila railway station in Vantaa. The construction of the six-storey office and retail property at Väritehtaankatu 8 will be implemented in two phases, the first of which began with excavation work in July 2016. The first phase will comprise a total of 9,500 m² of leasable space, half of which will be office space and the other half retail and service premises. The property will have indoor and outdoor parking for 210 cars. The plan for the project’s second phase involves the construction of approximately a further 4,000 m² of leasable business premises. The decision on commencing the second phase will be made later based on the occupancy rate. The investment size for the first phase is approximately EUR 31 million and the property is 57% pre-let. The project’s yield on cost is estimated at approximately 7.3%. The project will be completed in March 2018.
RISKS AND UNCERTAINTY FACTORS IN THE NEAR FUTURE
Sponda estimates that the risks and uncertainty factors in the current financial year are related to the development of the Finnish and Russian economies.
In Russia, these risks are related to the depreciation of the Russian rouble, which 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 2016.
The slow positive 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.
PROSPECTS FOR 2016
Sponda provides prospects for 2016 with regard to the development of the company’s net operating income and adjusted EPRA Earnings. Sponda is revising its prospects for 2016.
Net operating income
Sponda estimates that the net operating income for 2016 will amount to EUR 182-192 million (previously EUR 175-190 million). The change is primarily due to the development of the occupancy rate being more favourable than expected, as well as the timing of property sales in 2016.
Adjusted EPRA Earnings
Sponda estimates that company adjusted EPRA Earnings in 2016 will amount to EUR 102-114 million (previously EUR 94-110 million). The change is primarily due to the development of the occupancy rate being more favourable than expected, as well as the timing of property sales in 2016.
EVENTS AFTER THE PERIOD
In July 2016, Sponda sold the Solnechniy I shopping centre located in Moscow to LLC IT Development at a price of approximately USD 11 million, corresponding to the property’s fair value measurement at the end of June. The sale of the Solnechniy I shopping centre is a part of Sponda’s strategy to sell the properties it owns in Russia.
4 August 2016
Board of Directors
Kari Inkinen, President and CEO, tel. +358 20 431 3311 or +358 400 402 653,
Pia Arrhenius, SVP, Corporate Planning and IR, tel. +358 20 431 3454
or +358 40 527 4462
Niklas Nylander, CFO, tel. +358 20 431 3480 or +358 40 754 5961.
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