Sponda Plc’s INTERIM REPORT January – March 2013
3 May 2013, 10:30 a.m.
Sponda Plc’s interim report January-March 2013
Result of operations and financial position 1 January – 31 March 2013 (compared
with 1 January – 31 March 2012)
— Total revenue was EUR 66.0 (66.0) million.
— Net operating income was EUR 45.4 (46.1) million. The decrease was due to higher maintenance costs resulting from the severe winter.
— Operating profit was EUR 44.8 (43.7) million. This includes a fair value change of EUR 5.5 (2.8) million.
— Cash flow from operations per share was EUR 0.09 (0.09).
— The fair value of the investment properties amounted to EUR 3,274.3 (3,177.4) million.
— Net assets per share totalled EUR 4.38 (4.17).
— The economic occupancy rate was 88.2% (88.4%).
— The prospects remain unchanged.
— Net financing costs for the period totalled EUR -13.5 (-14.0) million. Financial income and expenses include EUR 1.0 (2.7) million in unrealised change in the fair value of derivatives. Excluding the aforementioned change in fair value, financial income and expenses totalled EUR -14.5 (-16.7) million.
— Sponda has changed its accounting principles with regard to IAS 12 Income Taxes. The change took effect at the beginning of 2013. The change had a positive effect of approximately 1.5%-points on the Group’s equity ratio. The comparison figures for 2012 have been adjusted accordingly.
Key figures according to EPRA Best Practices Recommendations
President and CEO Kari Inkinen
Sponda’s result for the first quarter of 2013 was stable, with the exception of a seasonal increase in maintenance costs. The Group’s economic occupancy rate was in line with earlier forecasts. I am particularly pleased with the positive development in occupancy rates in Helsinki’s central business district and shopping centres. This supports our view of the importance of property locations. Our challenge remains the vacancy rate of logistics properties, which has increased from the beginning of the year. Finnish exports remained very low in the first quarter, which contributed to the slow demand for logistics premises.
Our aim is to reduce the proportion of logistics premises and non-strategic properties in our portfolio. Under the prevailing market conditions, the demand for properties for sale is low and transactions are slow to materialise. Nevertheless, I believe that our planned disposals will realise in 2013.
With the Citycenter and Ruoholahti projects now completed, Sponda does not have any property development projects with the exception of maintenance investments. We remain active with regard to the Ratina shopping centre project, and the first preliminary agreements have already been signed. Our goal is to begin the project during summer 2013. The start of construction of the Ratina shopping centre will be announced when the investment decision has been made.
Business conditions – Finland
The European economy continues to be plagued by uncertainty, and the effects are also reflected in the Finnish economy. The Finnish GDP contracted by 0.2% in 2012. The current forecasts indicate GDP growth of 0.4% in 2013. The predicted growth is based on the expectation of increased exports, which depends on Finnish export countries seeing positive economic development. The forecast inflation rate for 2012 is approximately 2.8%, with inflation expected to slow down to a rate of 2.1% in 2013. (Ministry of Finance)
The uncertainty in the global economy is reflected in the Finnish property market. The total transaction volume in 2012, EUR 2.1 billion, was only slightly higher than in the previous year (EUR 1.8 billion). According to a preliminary estimate by KTI Property Information, the transaction volume in the first quarter of 2013 was only EUR 0.3 billion, which is substantially lower than in the previous year(approximately EUR 0.5 billion).
Some 120,000m² of new office space was completed in the Helsinki metropolitan area in 2012. The vacancy rate rose to approximately 11% in the same period. The total amount of new office space completed in 2013 will be largely unchanged from 2012. As the current economic conditions do not support an increase in the demand for office premises, the vacancy rate is likely to continue rising. This will also lead to downward pressure on market rents.
Business conditions – Russia
The Russian GDP is estimated to have grown by 3.4% in 2012 and the growth rate is expected to slow down in 2013. The estimate is based on the decline in oil prices and slower growth in private consumption. (Ministry of Economy)
The total transaction volume in the Russian property market in 2012 stood at approximately USD 7 billion. The total volume in 2013 is predicted to be slightly lower.
The vacancy rate for office properties in Moscow decreased slightly in 2012, and this trend is expected to continue in 2013. The average vacancy rate currently stands at approximately 12%. Rental levels are expected to remain stable in 2013. The high-end rent for Class A office space is currently at approximately USD 1,200/m²/year.
Operations and property assets 1 January – 31 March 2013
Sponda owns, leases and develops business properties in the Helsinki metropolitan area and the largest cities in Finland, as well as in Russia. Sponda’s operations are organised into 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 45.4 (46.1) million in January-March 2013. Of this total, office and retail premises accounted for 54%, shopping centres for 17%, logistics premises for 13%, Russia for 13% and the Real Estate Funds unit for 3%.
On 31 March 2013, Sponda had a total of 185 properties, with an aggregate leasable area of approximately 1.5 million m². Of this, some 53% is office and retail premises, 11% shopping centres and 33% logistics premises. Some 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.
At the end of March 2013, the fair value of Sponda’s properties was assessed internally for both Finland and Russia. The change in fair value of the investment properties in January-March was EUR 5.0 (0.9) million. The positive change in the value in Finland was mainly due to successful renting and changes in market rents. In Russia, the main factor behind the positive change was exchange rate fluctuations. The changes in fair values are itemised in the table Valuation gains/losses on fair value assessment.
Valuation gains/losses on fair value assessment
The changes in Sponda’s investment portfolio assets were as follows:
Sponda calculates the growth in 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 1.5% (9.7%) for office and retail premises, 0.4% (-8.2%) for shopping centres, -16.2% (4.0%) for logistics premises and -1.3% (5.4%) for properties in Russia. The negative growth rate for logistics premises is due to an increased vacancy rate compared to January-March 2012. 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:
Investments and divestments
Sponda did not purchase or sell properties during the period under review.
Sponda’s investments totalled EUR 7.9 million in January-March 2013. Investments in property maintenance represented EUR 4.6 million and investments in property development EUR 3.4 million of this total. Property development investments were directed to the development of an office property in Ruoholahti, which was completed in April 2013.
Cash flow and financing
Sponda’s net cash flow from operations in the period under review totalled EUR 35.9 (31.6) million. Net cash flow from investing activities was EUR -15.6 (-10.3) million and the net cash flow from financing activities was EUR -28.9 (-16.1) million. Net financing costs for the period totalled EUR -13.5 (-14.0) million. Financial income and expenses include EUR 1.0 (2.7) million in unrealised change in the fair value of derivatives. Excluding the aforementioned change in fair value, financial income and expenses totalled EUR -14.5 (-16.7) million. Interest expenses of EUR 0.1 (0.1) million were capitalised.
Sponda’s equity ratio on 31 March 2013 stood at 40.8% (38.8%) and the gearing ratio was 122.1% (133.8%). Interest-bearing debt amounted to EUR 1,765.5 (1,787.0) million and the average maturity of loans was 2.4 (2.8) years. The average interest rate was 3.4% (3.7%) including interest derivatives. Fixed-rate and interest-hedged loans accounted for 70% (75%) of the loan portfolio. The average interest-bearing period of the entire debt portfolio was 1.7 (1.9) years. The interest cover ratio, which describes the company’s solvency, was 2.9 (2.6).
Sponda applies hedge accounting to those interest derivatives that meet the criteria for hedge accounting. Changes in the fair value of interest derivatives that fall under hedge accounting are recognised in equity on the balance sheet. Changes in the fair value of other interest derivatives and currency options are recorded on the income statement.
Sponda Group’s debt portfolio on 31 March 2013 comprised EUR 675 million in syndicated loans, EUR 328 million in bonds, EUR 289 million in issued commercial papers, and EUR 474 million in loans from financial institutions. Sponda had EUR 510 million in unused credit limits. Sponda Group had mortgaged loans of EUR 141.0 million, or 4.0% of the consolidated balance sheet.
Sponda has two hybrid bonds outstanding. The first one, issued in 2008, amounts to EUR 92.8 million and is callable on 27 June 2013. The new hybrid bond, issued on 21 November 2012, amounts to EUR 95 million and the first call date is 5 December 2017. The EUR 92.8 million hybrid bond callable in June 2013 has an effect on the Group’s equity ratio of approximately 2.5 percentage points.
Events after the end of the period
In April 2013, pursuant to Chapter 9, Section 5 of the Finnish Securities Markets Act, Ilmarinen announced that, as of 15 April 2013, its share of ownership of Sponda Plc fell below the 1/20 (5%) threshold and that its current share of ownership of Sponda Plc is 0%.
In April 2013, pursuant to Chapter 9, Section 5 of the Finnish Securities Markets Act, HC LPN Holding Oy Ab (Hartwall Capital Oy Ab) announced that, as of 15 April 2013, its share of ownership of Sponda Plc rose above the 1/20 (5%) threshold and that its current share of ownership of Sponda Plc is 9.56%.
Sponda expects the vacancy rates of its investment properties at year’s end 2013 to be largely unchanged from the end of 2012. The estimate is based on the leases already signed and forecast changes in rental agreements.
Comparable net operating income (excluding disposals) in 2013 is expected to increase slightly from 2012. This increase is based on rising rent levels for business premises in Helsinki’s central business district and the completion of property development projects.
Risks and uncertainty factors in the near future
Sponda believes that the risks in the current financial year will be largely unchanged from the previous year. The key risks and uncertainty factors arise from the ongoing European economic crisis. 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 development of the Finnish economy will be particularly affected by the continuation of the public debt crisis in Europe. The slowing of growth may affect the operations of Finnish companies and thereby increase the vacancy rates of office properties.
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.
Significant changes in market interest rates and margins may have a negative effect on Sponda’s financial result and contribute to slower growth in the
Capital Markets Day
Sponda will organise a Capital Markets Day for investors, analysts and journalists on 15 May 2013 in Helsinki. The main themes for the day will be, in addition to a company update, the Finnish economy and property sector financing in Finland. In addition to Sponda’s representatives, there will be guest speakers who will give their insight to the market. At the end of the day, participants will have an opportunity to visit Sponda’s properties, Citycenter and Fennia Block, in Helsinki.
3 May 2013
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.
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