Sponda Plc’s INTERIM REPORT January-June 2014

Sponda Plc                        
Interim report
1 August 2014 at 8:30 a.m.  

Sponda Plc’s interim report January-June 2014

JANUARY-JUNE 2014 IN BRIEF (compared with 1 January – 30 June 2013)

— Total revenue was EUR 126.1 (133.2) million. The decline was primarily due to the sale of properties and an increase in the vacancy rate.
— Net operating income was EUR 89.4 (94.0) million.
— Operating profit was EUR 76.6 (79.4) million. This includes a fair value change of EUR -1.8 (-2.2) million.
— Cash flow from operations per share was EUR 0.17 (0.19).
— The fair value of the investment properties amounted to EUR 3,269.0 (3,266.5) million. This includes properties classified as held for sale for EUR 216.7 million.
— Net assets per share totalled EUR 4.56 (4.43).
— The economic occupancy rate was 85.7% (88.3%).
— The prospects remain unchanged.

APRIL-JUNE 2014 IN BRIEF (compared with 1 April – 30 June 2013)

— Total revenue was EUR 62.6 (67.2) million.
— Net operating income was EUR 45.5 (48.6) million.
— Operating profit was EUR 44.9 (34.6) million. The operating profit includes a fair value change of EUR 4.8 (-7.7) million.
— Cash flow from operations per share was EUR 0.08 (0.10).

  PRESIDENT AND CEO KARI INKINEN 

The implementation of Sponda’s strategy progressed well in the second quarter. At the end of April, we announced the sale of 12 logistics properties and shares in real estate funds to Certeum, a new logistics and industrial property investment company. The transaction is part of a broader arrangement in which

Certeum acquires Sponda’s properties and real estate funds as well as 22 logistics and industrial properties from Varma Mutual Pension Insurance Company. The key owners of Certeum will be Varma, Sponda and the State Pension Fund. The aim is to conclude the transaction by the end of September 2014. 

In addition to strategic property sales, Sponda purchased an office property located in central Tampere from UBS Real Estate Kapitalanlagegesellschaft mbH for EUR 63.7 million in July. The property was completed approximately five years ago and is almost fully occupied. The acquisition supports Sponda’s growth in Tampere and increases cash flow of the company. 

The economic situation in Finland remains challenging. The long-awaited turn in the economy has yet to materialise, although there have been tentative signs of recovery in industry. The vacancy rate of Sponda’s properties reflects the cautious stance businesses have taken, as well as the continued recession of the Finnish economy. We nevertheless remain confident in our operational activity and will keep our outlook regarding the economic occupancy rate unchanged. 

Property development operations will continue to provide a valuable contribution to the company’s growth. We are on schedule and on budget in the construction of our ongoing projects. The construction of an office building for Sweco in Helsinki’s Ilmala district has started. In addition, we began construction in June on a new office building with a floor area of approximately 4,600 m² in Helsinki’s Lassila district. The property will be completed in June 2015. 

CERTEUM 

On 30 April 2014, Sponda signed a letter of intent for the sale of 12 logistics properties to Certeum Oy, a new logistics and industrial property investment company for EUR 216.7 million. 

The transaction is part of a broader arrangement in which Sponda and Varma Mutual Pension Insurance Company, Sponda Fund I (SF I), Sponda Fund II (SF II) and Sponda Fund III (SF III) have agreed on establishing a new company specialising in investments in logistics and industrial properties, with the

newly established company acquiring 12 logistics properties from Sponda, 22 logistics and industrial properties from Varma, as well as the shares in the real estate funds SF I, SF II and SF III. The total value of the properties to

be acquired is approximately EUR 920 million. After the sale is concluded, the key shareholders of Certeum will be Varma Mutual Pension Insurance Company, Sponda Plc and the State Pension Fund. As part of the broader arrangement, Sponda will become a minority shareholder in the new company with an estimated holding of 38% at most. The aim is to conclude the transaction by 30 September 2014. 

The transaction is described in more detail in the company’s stock exchange release published on 30 April 2014. 

BUSINESS CONDITIONS – FINLAND 

The Finnish economy remained in recession in the first quarter of 2014. According to preliminary data from Statistics Finland, Finnish GDP volume decreased by 0.4% compared to the previous quarter and by 0.6% year-on-year. 

The Finnish Ministry of Finance has reduced its growth forecast for 2014. According to the forecast, Finnish GDP will grow by 0.2% in 2014. The slight growth is believed to be attributable to export growth and a slight recovery in private consumption. According to the forecast, exports will contract by 0.5% this year before taking a positive turn to reach growth of 4.6% next year due to the recovery of international trade and stronger economic growth in Finland’s key export markets. The Finnish Ministry of Finance forecasts that the GDP growth rate for 2015 is to be 1.4%. 

The property transaction volume in the first quarter of the year was EUR 0.63 billion. Transaction activity continued at a similar level in the second quarter. According to a preliminary estimate by KTI Property Information, the transaction volume for the first half of the year was approximately EUR 1.3 billion. At this rate, the transaction volume for the full year 2014 will exceed the previous year. 

New construction activity has slowed down due to the weak economic situation. According to KTI Property Information, only some 52,000 m² of new premises will be added to the Helsinki metropolitan area office property market in 2014. 

The weak economic situation and increased efficiency in the use of space resulted in higher vacancy rates for office premises in the Helsinki metropolitan area last winter. The situation deteriorated in Helsinki and Vantaa, and improved slightly in Espoo. However, vacancy rates are the highest in Espoo at approximately 24% in March according to KTI Property Information. 

BUSINESS CONDITIONS – RUSSIA 

According to the Bank of Finland, Russian GDP grew only by 1.3% in 2013 because growth in domestic demand slowing down significantly. Growth is expected to slow down to 0.5% in 2014 due to decreased investment, the slowing down of consumption growth and slow export growth. The Bank of Finland estimates that, in 2015, growth is expected to recover slightly due to slow growth in investment, imports and exports, as well as consumption remaining at a moderate level. The forecasts are based on the assumption that the effects of the situation in Crimea-Ukraine will remain limited. 

In the first half of the year, the transaction market was substantially slower than in the corresponding period last year. According to preliminary information from CB Richard Ellis, property transactions were made for approximately USD 1.6 billion, compared to approximately USD 3.7 billion a year earlier. 

The preliminary information from CBRE indicates that the average vacancy rate for office premises in Moscow increased by 1.5 percentage points to 14.5% in the second quarter. Vacancy rates increased for both Class A and Class B office space due to extensive new construction and weak demand. 

The deterioration of the economic situation and increased vacancy rates have created downward pressure on rental levels. Estimates indicate that as much as 1.4 million m² of new space will be completed in the office market in Moscow in 2014, of which approximately 530,000 m² was completed in the first half of the year. 

PROPERTY ASSETS 1 JANUARY – 30 JUNE 2014 

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 the calculations are based on market observations. 

At the end of June 2014, an external valuator assessed the fair value of Sponda’s properties for both Finland and Russia. The fair value of investment properties was assessed in Finland by Catella Property Oy and in Russia by CB Richard Ellis. The change in fair value of the investment properties was EUR

-2.8 (-4.2) million in January-June and EUR 5.7 (-9.3) million in April-June. The positive change in the fair value of properties located in Finland in April-June was mainly attributable to changes in yield requirements in Helsinki’s central business district. The positive change in fair value in Russia was the result of changes in currency exchange rates. The changes in fair values are itemised in the table “Valuation gains/losses on fair value assessment”. 

Valuation gains/losses on fair value assessment 

  RENTAL OPERATIONS 

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 5.3% (0.8%) for office premises, 8.5% (-0.5%) for shopping centres, -5.2% (-9.5%) for logistics premises and -15.8% (-1.4%) 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.  

RISKS AND UNCERTAINTY FACTORS IN THE NEAR FUTURE 

Sponda estimates that the risks and uncertainty factors in the current financial year are caused by the weak development of the Finnish and Russian economies. 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 Finnish economy is predicted to take a turn to conservative growth in 2014. However, positive economic development is reflected in the property rental market with a delay of approximately one year, which means that the economic situation may still have a negative effect on the vacancy rates of Sponda’s properties in 2014. 

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. 

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. 

EVENTS AFTER THE PERIOD 

In July 2014, Sponda announced it was acquiring an office property located in central Tampere, at Åkerlundinkatu 11 A-D, from UBS Real Estate Kapitalanlegegesellschaft mbH for EUR 63.7 million. The net initial yield for the property is approximately 7%.  The property transaction strengthens Sponda’s strategic property ownership in the Tampere city centre. 

The size of the property is approximately 20,000 m² and it consists of four office buildings completed in 2008-2009. The buildings also have indoor parking for 308 cars. The property is almost fully occupied (occupancy rate 97%). 

PROSPECTS FOR 2014 

Sponda provides prospects for 2014 with regard to the development of the economic occupancy rate and the company’s net operating income. 

Economic occupancy rate 

Sponda expects the economic occupancy rate of the Group’s properties at year-end 2014 to be at the same level as at the end of 2013. This estimate is based on the slow positive development of the Finnish economy as well as current information on expiring leases. 

Net operating income 

Upon the conclusion of the transaction to sell logistics properties and real estate funds to Certeum, which is estimated to take place at the end of September 2014, Sponda expects net operating income for 2014 to amount to EUR 175-183 million (including the net operating income of the properties being sold for the period they are under Sponda’s ownership). This outlook is based on the changes to Sponda’s net operating income caused by the completion of the forthcoming property transactions.  

1.8.2014
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 Planning and IR, tel. +358 20-431 3454 or +358 40-527 4462.

Distribution:
NASDAQ OMX Helsinki
Media
www.sponda.fi

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