Sponda Plc’s INTERIM REPORT January-June 2015
Sponda Plc
Interim report
4 August 2015 at 8:30 a.m.
Sponda Plc’s interim report January-June 2015
JANUARY-JUNE 2015 IN BRIEF (compared with 1 January – 30 June 2014)
— Total revenue was EUR 116.6 (126.1) million. The decline was primarily due
to properties sold in 2014.
— Net operating income was EUR 82.1 (89.4) million. The decline was due to
aforementioned disposals.
— Operating profit was EUR 91.9 (76.6) million. This includes a fair value
change of EUR 12.4 (-1.8) million.
— Cash flow from operations per share was EUR 0.19 (0.17).
— The fair value of the investment properties amounted to EUR 3,143.2
(3,269.0) million.
— Net assets per share totalled EUR 4.65 (4.56).
— The economic occupancy rate was 86.3% (85.7%).
— The prospects remain unchanged.
APRIL-JUNE 2015 IN BRIEF (compared with 1 April – 30 June 2014)
— Total revenue was EUR 59.4 (62.6) million.
— Net operating income was EUR 42.5 (45.5) million.
— Operating profit was EUR 64.4 (44.9) million. This includes a fair value
change of EUR 22.3 (4.8) million.
— Cash flow from operations per share was EUR 0.11 (0.08).
KEY FIGURES
| 4-6/2015 | 4-6/2014 | 1-6/2015 | 1-6/201 4 | 1-12/201 4 | |
| Total revenue, M€ | 59.4 | 62.6 | 116.6 | 126.1 | 246.7 |
| Net operating income, M€ | 42.5 | 45.5 | 82.1 | 89.4 | 176.0 |
| Operating profit, M€ | 64.4 | 44.9 | 91.9 | 76.6 | 151.7 |
| Earnings per share, € | 0.14 | 0.09 | 0.17 | 0.13 | 0.24 |
| Cash flow from operations per share, € | 0.11 | 0.08 | 0.19 | 0.17 | 0.37 |
| Equity per share, € | 4.65 | 4.56 | 4.65 | ||
| Equity ratio*, % | 40.7 | 40.1 | 41.0 | ||
| Interest cover ratio | 3.4 | 3.2 | 3.3 |
*) The figure for 1-6/2014 has been adjusted as a result of the adoption of the IFRIC 21 Levies interpretation.
KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS
| 4-6/15 | 4-6/14 | 1-6/15 | 1-6/14 | 1-12/1 4 | |
| EPRA Earnings, M€ | 26.4 | 26.4 | 51.3 | 51.7 | 101.6 |
| EPRA Earnings per share, € | 0.09 | 0.09 | 0.18 | 0.18 | 0.36 |
| Company adjusted Earnings, M€ | 28.9 | 27.6 | 53.5 | 53.6 | 108.7 |
| Company adjusted Earnings per share, € | 0.10 | 0.10 | 0.19 | 0.19 | 0.38 |
| EPRA NAV/share, € | 5.47 | 5.31 | 5.45 | ||
| EPRA NNNAV/share, € | 4.50 | 4.44 | 4.49 | ||
| EPRA Net Initial Yield (NIY), % | 5.48 | 5.58 | 5.18 | ||
| EPRA “topped-up” NIY, % | 5.49 | 5.59 | 5.19 | ||
| EPRA Vacancy rate, % | 13.68 | 14.30 | 12.96 | ||
| EPRA Cost Ratio (including direct vacancy costs), | 17.26 | ||||
| EPRA Cost Ratio (excluding direct vacancy costs), % | 11.96 |
PRESIDENT AND CEO KARI INKINEN
Sponda’s rental operations were stable in the second quarter. Net operating income grew compared to the previous quarter in spite of the disposal of properties. The economic occupancy rate increased slightly, or remained stable, compared to the first quarter of the year in all of the Finnish segments, which is something we can be particularly pleased about.
We sold two properties in Moscow at the end of the second quarter of 2015. This was a significant accomplishment in the prevailing economic situation. Property sales at the end of the review period had a negative effect on the Group’s economic occupancy rate. Nevertheless, Sponda’s economic occupancy rate was more than half a percentage point higher than at the corresponding time last year.
The Lassila office property was completed on schedule at the end of June, and the first tenants have already moved in. The property has a total leasable area of 4,600 m2 and it was 65% leased at the time of completion. Sponda set up its first virtual lobby in the office building, which will allow us to gather experiences with regard to Sponda’s other properties.
We currently have two significant property development projects in the construction phase. The first of these, the office building in Helsinki’s Ilmala district, will be completed at the end of this year. The second is the Ratina shopping centre in Tampere, which will be completed in summer 2018.
BUSINESS CONDITIONS – FINLAND
The Finnish economy remained in recession in the first quarter of 2015. According to preliminary data from Statistics Finland, Finnish GDP decreased by 0.1% compared to the previous quarter and remained unchanged year-on-year. The Finnish Ministry of Finance has reduced its growth forecast for 2015. According to the forecast, Finnish GDP will grow by 0.3% in 2015. Exports are expected to grow by only 0.3% this year, but the rate of export growth is predicted to increase to 3.3% in 2016 as economic growth in the eurozone accelerates. The GDP growth rate for 2016 is forecast to be 1.4%.
The transaction market was very active in the second quarter of 2015 with a volume of approximately EUR 2.2 billion. The total transaction volume from the start of the year until the end of June was approximately EUR 2.6 billion. International investors accounted for 39% of the total volume. At this rate, the transaction volume for the full year 2015 will exceed the previous year’s level of EUR 4.3 billion.
New construction activity has been low due to the weak economic situation. According to KTI Property Information, approximately 100,000 m2 of office space was completed in the Helsinki metropolitan area in 2014, with 94,000 m2 under construction in spring 2015. Business premises construction will increase when work begins on two major shopping centres in Helsinki: Redi in Kalasatama and Tripla in Pasila. In Tampere, the construction of the Ratina shopping centre began in April.
The vacancy rates for office premises in the Helsinki metropolitan area increased last winter. At the end of March, the vacancy rate stood at approximately 13%. According to KTI Property Information, the situation deteriorated in Helsinki, remained unchanged in Vantaa and improved slightly in Espoo.
BUSINESS CONDITIONS – RUSSIA
According to the World Bank, Russian GDP grew by 0.6% in 2014. According to a World Bank forecast, Russian GDP declined by 2.2% in the first quarter of 2015, and the GDP growth forecast for the full year is -2.7%. The GDP growth forecast for 2016 is 0.7%. The forecast is based on a predicted slight increase in oil prices, which would support the appreciation of the rouble and a decrease in inflation.
Activity in transaction market picked up slightly compared to the first quarter. The volume in the second quarter was approximately USD 0.7 billion, and the total volume for the first half of the year was approximately USD 1.1 billion. This represents a year-on-year decline of 30%. Offices accounted for 71% of the total transaction volume, and 97% of the investments were in Moscow. International buyers accounted for approximately 30% of the total.
Preliminary information from CBRE indicates that the average vacancy rate for office premises in Moscow decreased slightly in the second quarter and stood at 17%. The vacancy rate for Class B office space was 14%, while the vacancy rate for Class A office space was 26%.
There were no major changes in rental levels in the second quarter. For some Class A office premises in central Moscow, rental levels declined by 5-7%. Rental levels remained unchanged for Class B office premises as well as Class A office premises outside the city centre.
Some 224,000 m2 of new office space was completed in the first half of the year. Of this total, 66% was Class A office space and 34% was Class B office space. CBRE predicts that the volume for the full year will be approximately 1.1 million square metres.
OPERATIONS AND PROPERTY ASSETS 1 JANUARY – 30 JUNE 2015
At the end of June 2015, 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 January-June was EUR 12.4 (-1.8) million and in April-June alone EUR 22.3 (4.8) million. 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
M€
| 4-6/15 | 4-6/14 | 1-6/15 | 1-6/14 | 1-12/1 4 | |
| Changes in yield requirements (Finland) | 32.2 | 3.3 | 32.2 | 3.3 | 15.7 |
| Changes in yield requirements (Russia) | -7.4 | 0.0 | -7.4 | 0.0 | -10.0 |
| Development gains on property development projects | 1.8 | 0.0 | 2.9 | 0.0 | 5.5 |
| Modernisation investments | -9.7 | -10.7 | -20.7 | -16.2 | -42.0 |
| Change in market rents and maintenance costs (Finland) | 9.2 | 10.0 | 18.4 | 15.4 | 40.3 |
| Change in market rents and maintenance costs (Russia) | -2.8 | 0.4 | -15.3 | -6.8 | -19.3 |
| Change in currency exchange rates | -1.1 | 2.7 | 2.2 | 1.5 | 5.9 |
| Investment properties, total | 22.3 | 5.7 | 12.4 | -2.8 | -3.9 |
| Real estate funds | 0.0 | -2.7 | 0.0 | -2.6 | -1.8 |
| Realised share of real estate fund profits | 0.0 | 1.9 | 0.0 | 3.5 | 5.5 |
| Group, total | 22.3 | 4.8 | 12.4 | -1.8 | -0.2 |
Sponda has determined the fair values of its investment properties in accordance with the company’s established accounting principles. A higher than usual level 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 upon with tenants and the rouble becoming increasingly common as the contract currency have increased uncertainty.
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 1.8% (5.3%) for office premises, 2.5% (8.5%) for shopping centres, 18.8% (-5.2%) for logistics premises and -4.6% (-15.8%) for properties in Russia. The like-for-like figure for Russia is adjusted for changes in exchange rates to better reflect the true change. 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 | 30.6.2015 | 31.3.2015 | 31.12.2014 | 30.9.2014 | 30.6.2014 |
| Office properties, % | 88.1 | 87.9 | 88.5 | 88.3 | 87.9 |
| Shopping centres, % | 89.8 | 90.3 | 91.2 | 89.3 | 90.4 |
| Logistics, % | 68.6 | 68.5 | 64.9 | 65.6 | 71.9 |
| Russia, % | 84.5 | 90.1 | 90.4 | 89.4 | 89.0 |
| Total property portfolio, % | 86.3 | 86.8 | 87.0 | 86.5 | 85.7 |
| Geographical area | 30.6.2015 | 31.3.2015 | 31.12.2014 | 30.9.2014 | 30.6.2014 |
| Helsinki business district, % | 88.3 | 88.2 | 89.3 | 88.3 | 89.4 |
| Helsinki Metropolitan Area, % | 83.7 | 83.6 | 83.1 | 83.2 | 82.2 |
| Turku, Tampere, Oulu, % | 92.3 | 92.9 | 93.2 | 92.2 | 90.4 |
| Russia, % | 84.5 | 90.1 | 90.4 | 89.4 | 89.0 |
| Total property portfolio, % | 86.3 | 86.8 | 87.0 | 86.5 | 85.7 |
The decline in the occupancy rate in Russia was influenced by the sale of two fully occupied properties at the end of June 2015.
DIVESTMENTS AND INVESTMENTS
Divestments M€
| 1.4.-30.6.2 015 | 1.4.-30.6.2 014 | 1.1.-30.6.2 015 | 1.1.-30.6.2 014 | 1.1.-31.12. 2014 | |
| Properties sold | |||||
| Selling price | 50.1 | 6.7 | 56.4 | 7.0 | 237.2 |
| Profit/loss on sale* | -1.1 | 0.5 | -1.4 | 0.6 | 0.6 |
| Balance sheet value | 51.2 | 6.2 | 57.8 | 6.4 | 236.6 |
*) Includes transaction costs
Investments M€
| 1.4.-30.6. 2015 | 1.4.-30.6. 2014 | 1.1.-30.6. 2015 | 1.1.-30.6 .2014 | 1.1.-31.12 .2014 | |
| Properties acquired | 0.0 | 0.0 | 0.0 | 0.0 | -65.0 |
| Maintenance investments | -9.7 | -10.7 | -20.7 | -16.2 | -42.0 |
| Property development investments | -14.7 | -5.2 | -25.5 | -8.5 | -22.0 |
Property development investments were mainly directed to the construction of office buildings in Ilmala and Lassila in Helsinki.
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.
PROSPECTS FOR 2015
Sponda provides prospects for 2015 with regard to the development of the company’s net operating income and adjusted EPRA Earnings.
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.
Adjusted EPRA Earnings
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.
4.8.2015
Sponda Plc
Board of Directors
Additional information:
Kari Inkinen, President and CEO, tel. +358 20 431 3311 or +358 400 402 653 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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