Sponda Plc’s INTERIM REPORT January-June 2011
5 August 2011 at 8.40 am
Sponda Plc’s interim report January-June 2011
Sponda Plc’s total revenue in the first six months of 2011 was EUR 120.2 million (30 June 2010: EUR 115.9 million). Net operating income after property maintenance costs and direct costs for funds increased to EUR 84.5 (83.4) million. Sponda’s operating profit was EUR 107.4 (93.0) million. The economic occupancy rate of Sponda’s property portfolio remained at the previous quarter’s level, at 88.2% (87.3%).
Result of operations and financial position January-June 2011 (compared with the same period in 2010)
— Total revenue increased by approximately 4% from the reference period to EUR 120.2 (115.9) million.
— Net operating income was EUR 84.5 (83.4) million.
— Operating profit improved to EUR 107.4 (93.0) million. The operating profit includes a fair value change of EUR 28.3 (10.0) million, and profit from the sale of Ovenia’s shares of EUR 7.8 million.
— Cash flow from operations per share was EUR 0.18 (0.19).
— The fair value of the investment properties amounted to EUR 3,098.5 (2,798.0) million.
— Net assets per share totalled EUR 3.92 (3.55).
— -The economic occupancy rate was 88.2% (87.3%).
— The prospects for 2011 remained unchanged, guidance on net operating income growth was specified.
Result of operations and financial position April-June 2011 (compared with the same period in 2010)
— Total revenue was EUR 61.6 (58.3) million.
— Net operating income was EUR 44.9 (43.0) million.
— Operating profit improved to EUR 70.0 (56.7) million. The operating profit includes a fair value change of EUR 25.2 (10.1) million.
— Cash flow from operations per share was EUR 0.11 (0.11).
Key figures according to EPRA Best Practices Recommendations
CEO Kari Inkinen
Sponda’s net operating income increased in comparison with both the previous quarter and the previous year. Growth is expected to continue until the end of the year. Maintenance expenses returned to normal levels after an increase in the early part of the year. The vacancy rate remained at the previous quarter’s level, but we believe we can reduce it further by the end of 2011.
The fair value change of our investment properties in the second quarter was EUR 26.2 million, primarily due to increased market rents and a decline in yield requirements. The increase in property valuation was particularly pronounced in Russia.
Demand for business properties in the Helsinki central business district has been active, and rents have increased relatively rapidly. Companies are interested in higher-quality business premises than before. However, the increased demand is still relatively vulnerable to any difficulties in the euro area and in the exports and imports sector in Finland.
Sponda’s strategy continues to be geared towards profitable growth. This means that in Finland our focus is on property development projects and development of our property portfolio by selling properties in non-strategic areas and by continuing to acquire prime properties. In addition, we will invest 1-2% of the value of our property portfolio in the maintenance and modernisation of our strategic properties. In Russia, too, we are looking for potential acquisition targets primarily among office and retail properties. Our target is still to invest 10-20% of the company’s balance sheet total in Russia. However, we will take the unstable nature of the Russian market into account, and we have not yet set a specific deadline to our investments.
Business conditions – Finland
Finnish GDP is estimated to grow by slightly less than 4% this year. The growth is related primarily to industrial production and construction volume growth. Inflation is estimated to be 3.5-4.0% in 2011.
Rents for office properties have increased particularly in the centre of Helsinki and other prime locations. The prime rents of logistics properties have increased moderately. According to KTI Property Information Ltd, the rents for office space in the Helsinki central business area have increased by over 6%. In the outskirts of the Helsinki metropolitan area, high vacancy rates prevent increases in rents.
The Finnish economy continues to develop positively, and this is also reflected in the business property market. However, the uncertainty in the global economy may have a negative impact on the Finnish economy and on the operation of companies and therefore the vacancy rates of business premises.
Business conditions – Russia
The Russian economy is estimated to grow by over 4% in 2011. Economic growth is supported particularly by increases in the price of oil and other commodities.
The property market has also developed positively. The vacancy rate of office premises in Moscow is expected to decline, since there is a lack of good A class office premises in particular. This has also lead to an increase in rents. According to an estimate by Cushman & Wakefield, present lease agreements for prime properties in Moscow are agreed at prices in excess off USD 1000/m²/year. The office properties being built at the moment will be completed in 2012-2013, after which there is no significant construction of new buildings in sight in the Moscow central area. The vacancy rate of office premises is expected to be at the level of 13%.
The yield requirements for properties in Moscow are declining, the average present yield requirement for office properties being 9-10.5%. The transaction market is still awaiting foreign investors, as almost all property deals are made among local market participants.
In St. Petersburg, market changes have been moderate, and rises in prices and rents have not been observed yet.
Operations and property assets January – June 2011
Sponda owns, leases and develops business properties in the Helsinki metropolitan area and the largest cities in Finland, and in Russia. Sponda’s operations are organized in 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 84.5 (83.4) million in January-June. Office and retail premises accounted for 52%, shopping centres for 18%, logistics premises for 16%, Russia for 11% and the Real Estate Funds unit for 3%.
On 30 June 2011, Sponda had a total of 202 properties, with an aggregate leasable area of approximately 1.5 million m². Of this, some 52% is office and retail premises, 9% shopping centres and 36% logistics premises. 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 a minimum, twice annually by external experts to ensure that the parameters and values used in calculations are based on market observations.
An external consultant assessed the fair value of Sponda’s properties at the end of the second quarter of 2011. The change in fair value of the properties in January-June 2011 was EUR 27.9 (8.5) million and in April-June alone EUR 26.2 (9.7) million. The positive change in the value was mainly due to changes in market rents and a reduction in yield requirements. The changes in fair values are itemised in the table Valuation gains/losses on fair value assessment. The fair value of investment properties is assessed in Finland by Catella Property Oy and in Russia by CB Richard Ellis. The statements of the property assessments conducted in Finland and Russia are available on Sponda’s website at www.sponda.fi >Investors>Performance.
The economic occupancy rates by type of property and geographical area were as
The occupancy rate of the Shopping Centres unit declined from the first quarter
by approximately 3 percentage points. This was because an office tenant in City-Center moved to another Sponda office property located elsewhere. Sponda’s properties are categorised according to their main use, and hence the entire City-Center belongs to shopping centres.
Sponda’s share and shareholders
The weighted average price of Sponda’s share in January-June 2011 was EUR 3.90. The highest quotation on NASDAQ OMX Helsinki Ltd was EUR 4.12 and the lowest EUR 3.51. Turnover during the year totalled 58.9 million shares or EUR 229.7 million. The closing price of the share on 30.06.11 was EUR 4.01 and the market capitalisation of the company’s share capital was EUR 1,089.2 million.
The Annual General Meeting on 16.03.11 authorised the Board of Directors to purchasethe company’s own shares. The authorisation is valid until the next Annual General Meeting.Sponda’s Board of Directors decided to pay a part of the purchase price of Fennia quarterthrough an issue of 5,500,000 new shares in Sponda directed to Suomi Mutual basedon the share issue. Suomi Mutual subscribed for all the shares at a subscriptionprice of EUR 4.00 per share. New shares were incorporated in the book-entry system and became subject to public trading on the official list of Nasdaq OMX Helsinki Ltd on 6 May 2011.
Sponda issued the following flagging notices in January-June 2011:
Solidium Oy announced that its holding of shares represented 14.89 % of the total number of shares and votes in Sponda Plc.
Sponda expects the vacancy rates of its investment properties to continue falling in 2011. This assessment is based the 2011 growth forecasts for the Finnish economy and increased demand for properties in prime locations.
Net operating income in 2011 is expected to increase by over 4% in comparison with 2010. This expected increase is based on the predicted fall in vacancy rates, the completion of property development projects during the year and property acquisitions.
Risks and uncertainty factors in the near future
Sponda believes that the key risks and uncertainty factors in the current financial period arise from the possibility of the economy growing at a slower rate than expected and relate to a decline in economic occupancy rates and a fall in rental income resulting from the insolvency of tenants.
The Finnish economy continues to develop positively, and this is reflected in the business property market. However, the uncertainty in the global economy may have an impact on the Finnish economy and on the operation of companies and therefore increase the vacancy rates of business premises.
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.
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.
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