Sponda Plc’s INTERIM REPORT January-March 2011
6 May 2011 at 8.30 am
Sponda Plc’s interim report January-March 2011
Sponda Plc’s total revenue in the first quarter of 2011 was EUR 58.6 million (31 March 2010: EUR 57.6 million). Net operating income after property maintenance costs and direct costs for funds declined to EUR 39.6 (40.4) million. Higher than normal property maintenance costs due to the exceptionally heavy snowfall in the winter contributed to the decrease in net operating income. Sponda’s operating profit was EUR 37.4 (36.3) million.
Result of operations and financial position January-March 2011 (compared with the same period in 2010)
— Total revenue was EUR 58.6 (57.6) million.
— Net operating income was EUR 39.6 (40.4) million. Net operating income was
affected by the high property maintenance costs in the first quarter.
— Operating profit was EUR 37.4 (36.3) million, which includes a fair value
change of EUR 3.1 (-0.1) million.
— Cash flow from operations per share was EUR 0.07 (0.08).
— The fair value of investment properties amounted to EUR 2,916.0 (2,768.1)
— Net assets per share totalled EUR 3.82 (3.46).
— The economic occupancy rate was 88.2% (86.2%).
— The prospects for 2011 remain unchanged.
|Total revenue, M||58.6||57.6||232.1|
|Net operating income, M||39.6||40.4||168.7|
|Operating profit, M||37.4||36.3||216.2|
|Earnings per share,||0.06||0.04||0.40|
|Cash flow from operations per share,||0.07||0.08||0.37|
|Net assets per share,||3.82||3.46||3.86|
|Equity ratio, %||38||37||39|
Key figures according to EPRA Best Practices Recommendations
|EPRA Earnings, M||17.2||15.6||74.0|
|EPRA Earnings per share,||0.06||0.06||0.27|
|EPRA Net Initial Yield (NIY), %||6.58||N/A||6.37|
|EPRA, “topped-up” NIY, %||6.59||N/A||6.38|
CEO Kari Inkinen
The economic occupancy rate of Sponda’s properties continued to improve in the first quarter of 2011. The occupancy rate for logistics properties increased by two percentage points from the end of 2010. This positive development is primarily linked to the properties in Vantaa’s Hakkila district. The occupancy rate for Russian properties rose to 98.3% (31 December 2010: 96.4%), which means that the properties are practically fully occupied.
After the period under review, Sponda signed an agreement to purchase the Fennia Quarter located in Helsinki’s Central Business District. The newly acquired properties are an excellent strategic fit with Sponda’s CBD portfolio. The acquisition will have a positive impact on Sponda’s net assets per share and cash flow per share figures and further improve net operating income for 2011.
Active property development is part of Sponda’s strategy. In the first quarter of the year, work was completed on the construction of a new production facility and the renovation of office premises for Metso Automation in the Hakkila district of Vantaa. The project was completed on schedule and the company’s target profit margin of 15% for property development projects was exceeded.
The Zeppelin shopping centre expansion project in Oulu and the renovation of the Kauppa-Häme property in Tampere will both be completed in late 2011. The second phase of the company’s major development project in central Helsinki, the City-Center complex, will be completed on schedule in late summer. In August 2011, Sponda will begin work on the Kuntotalo office building in Ruoholahti. The project is scheduled for completion in April 2013.
We also expect to have the investment decision for the Ratina Shopping centre in Tampere before the summer holidays. This will allow work to begin on the project in late summer.
Business conditions – Finland
According to consensus forecasts, Finland’s GDP will grow approximately 4% in 2011. This growth is supported by increased volume in the Finnish manufacturing and construction sectors.
The property markets in Finland are showing positive signs in both property transactions and rental operations. According to estimates by KTI Kiinteistötieto Oy, the transaction volume in the first quarter of the year was approximately EUR 0.2 billion. While this total figure is similar to the previous year, it is clear that activity on the market has increased in terms of both the number of properties and the volume of buyers.
Rental levels for commercial properties in Helsinki are on the rise, with rents for office and retail space in the Central Business District, in particular, already showing an increase on 2010. Moderate growth is expected to continue throughout 2011. The vacancy rates for office properties began to decline in 2010 and this trend is expected to continue in 2011. The vacancy rates of retail properties are expected to remain low. Vacancy rates for logistics properties are also expected to decline during the year.
Business conditions – Russia
Forecasts suggest that the annual growth in the Russian economy will be slightly above 4% in 2011. Growth in Russia is driven by the increase in oil prices, falling unemployment and improved consumer confidence.
Property values have begun to increase slowly in Moscow. Jones Lang LaSalle estimates the vacancy rate of office properties in Moscow to be approximately 14%. There has been a moderate rise in rental levels, which is expected to continue in 2011.
In St Petersburg, the vacancy rate for office properties is 15-17% depending on location and quality. While rental levels on the whole have remained stable, the expectation is that they will increase moderately in the Central Business District.
Operations and property assets January – March 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 39.6 (40.4) million during the period. Office and retail premises accounted for 51% of this, shopping centres for 20%, logistics premises for 15%, Russia for 11% and the Real Estate Funds unit for 3%.
On 31 March 2011, Sponda had a total of 194 properties, with an aggregate leasable area of approximately 1.5 million m². Of this, some 50% is office and retail premises, 10% shopping centres and 37% logistics premises. Approximately 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 least twice a year by external valuers to ensure that the parameters and values used in calculations are based on market observations.
At the end of the first quarter of 2011, the values of Sponda’s investment properties were assessed internally within the company. The change in the fair value of the investment properties in January-March 2011 was EUR 3.1 (-0.1) million. The positive change in the fair value was primarily the result of changes in yield requirements in Finland due to longer lease agreements, while currency exchange rates had a negative impact on the fair values. The changes in fair values are itemised in the table Valuation gains/losses on fair value assessment.
Other significant events in the reporting period
Sponda sold its 45.1% share in Ovenia Oy, a provider of property management services, to funds managed by Vaaka Partners Ltd and to Ovenia’s current management. The parties agreed not to disclose the transaction price. Sponda records a profit of approximately EUR 7.8 million on the sale, which will be allocated to the second quarter of 2011.
Sponda was one of the founding shareholders of Ovenia and contributed strongly to the company’s development. As Ovenia grew and expanded its customer base, the current shareholders deemed it appropriate for Ovenia’s further development to divest their shares.
Sponda expects the vacancy rates of its investment properties to continue falling in 2011. This assessment is based on the 2011 growth forecasts for the Finnish economy and increased demand for properties in prime locations.
Net operating income in 2011 is expected to be higher than that of 2010. This is based on the predicted fall in vacancy rates and the completion of property development projects during the year.
Events after the end of the period
Sponda Plc signed an agreement on 4 April 2011 with Svenska Handelsbanken for an unsecured EUR 50 million credit limit for five years. The margin and conditions for the credit limit are the same as in the credit facility that Sponda signed on 1 November 2010. The key covenants of the loan are linked to the equity ratio and interest cover ratio. The loan is being used in its entirety to repay existing debts.
Sponda purchased the Fennia Quarter located in the Helsinki Central Business District from Suomi Mutual Life Assurance Company, with the purchase consisting of all the shares in six real estate companies and a portion of the shares in a company managing the Kaisaniemi metro hall. The Fennia Quarter has a total of approximately 25,500 m2 of office space and approximately 14,200 m2 of retail premises. On the date of closing the sale, the vacancy rate of this entity was approximately 9.7%. The net initial yield of the object is approximately 5.7%.
Sponda paid a total of EUR 122,000,000 to Suomi Mutual for the entity as the debt-free purchase price, of which EUR 100,000,000 less the net debt of the target has been paid in cash on signing the purchase agreement. In addition to the cash payment, Sponda’s Board of Directors decided to pay a part of the purchase price through an issue of 5,500,000 new shares in Sponda directed to Suomi Mutual based on the share issue authorisation given by Sponda’s Annual General Meeting of Shareholders on 16 March 2011.
Grounds for the purchase
One of Sponda’s key strengths is its property portfolio that is concentrated in the best locations in the Helsinki Metropolitan Area. The purchase of the Fennia Quarter supports Sponda’s strategy and strengthens the property portfolio of Sponda’s Investment Properties business unit. The major tenants in the entity are Finland’s Slot Machine Association, Finnkino and the City of Helsinki. The concluded purchase will have a positive impact on Sponda’s net assets per share and cash flow per share already in 2011. The company has estimated that Finland’s property market will see a positive turn during the ongoing year and the anticipated rise in rents in the central Helsinki area in particular will have a positive impact on the profitability of the Fennia Quarter in the future.
The title to the Fennia Quarter passed to Sponda in connection with signing the sale and purchase agreement and the entity will increase Sponda’s rental income from the beginning of May 2011. The purchase was concluded on normal market terms.
In addition to the cash payment, Sponda’s Board of Directors decided to issue 5,500,000 new shares in Sponda to Suomi Mutual through a directed issue based on the share issue authorisation given by Sponda’s Annual General Meeting of Shareholders on 16 March 2011. The share issue will be carried out against a contribution in kind. Suomi Mutual subscribed for all the shares at a subscription price of four euros (EUR 4.00) per share. This is the closing price of the share as at 29 March 2011 and exceeds the equity per share adjusted by dividends as at 31 December 2010 as well as the average price of Sponda’s shares adjusted by dividends in February 2011. Thus, the total value of the share consideration was EUR 22,000,000. Sponda’s Board of Directors believes that the subscription price per share determined in connection with the purchase is justified as part of the totality of the purchase of the Fennia Quarter.
On the aforementioned grounds, Sponda’s Board of Directors finds that there is a weighty financial reason for carrying out the share issue in deviation from the shareholders’ pre-emptive rights in connection with the purchase of the Fennia Quarter.
The shares issued to Suomi Mutual will entitle their holder to shareholder’s rights after the shares have been registered in the Finnish Trade Register and in Sponda’s shareholders’ register, on or about 5 May 2011. Sponda will file an application to NASDAQ OMX Helsinki Ltd for the admission of the new shares to public trading. The shares will be incorporated in the book-entry system and will become subject to public trading on the official list of NASDAQ OMX Helsinki Ltd on or about 6 May 2011. On 20 April 2011, the Finnish Financial Supervisory Authority granted to Sponda an exemption from the duty to publish a prospectus related to the listing of new shares.
The new shares to be issued to Suomi Mutual will represent approximately 1.94 per cent of all Sponda’s shares after the directed issue has been registered. After the registration, Sponda will have a total of 283,075,462 shares. The subscription price of the new shares will be credited to the invested unrestricted equity reserve and Sponda’s share capital will remain unchanged at EUR 111,030,185.
6 May 2011
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 Communications and IR, tel. +358 20-431 3454 or +358 40-527 4462.
NASDAQ OMX Helsinki