Sponda Plc’s INTERIM REPORT January-March 2014
30 April 2014 at 8:46 a.m. (EET)
Sponda Plc’s interim report January-March 2014
JANUARY-MARCH 2014 IN BRIEF (compared with 1 January – 31 March 2013)
— Total revenue was EUR 63.5 (66.0) million.
— Net operating income was EUR 44.0 (45.4) million. The decline was due to
properties sold in 2013 and a decrease in occupancy rate.
— Operating profit was EUR 31.7 (44.8) million. This includes a fair value
change of EUR -6.7 (5.5) million.
— Cash flow from operations per share was EUR 0.09 (0.09).
— The fair value of the investment properties amounted to EUR 3,253.4
— Net assets per share totalled EUR 4.49 (4.38).
— The economic occupancy rate was 86.2% (88.2%).
— The prospects for 2014 have been adjusted with respect to the transaction
published after the reporting period on 30 April 2014.
KEY FIGURES 1-3/2014 1-3/2013 1-12/2013
Total revenue, M€ 63.5 66.0 264.3
Net operating income, M€ 44.0 45.4 190.9
Operating profit, M€ 31.7 44.8 153.0
Earnings per share, € 0.04 0.07 0.34
Cash flow from operations per share, € 0.09 0.09 0.40
Equity per share, € 4.49 4.38 4.64
Equity ratio, % 39.7 40.8 40.7
Interest cover ratio 3.1 2.9 3.1
KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS
1-3/2014 1-3/2013 1-12/2013
EPRA Earnings, M€ 25.3 26.3 111.5
EPRA Earnings per share, € 0.09 0.09 0.39
EPRA NAV/share, € 5.18 5.09 5.29
EPRA NNNAV/share, € 4.37 4.52
EPRA Net Initial Yield (NIY), % 5.64 6.64 5.84
EPRA, “topped-up” NIY, % 5.65 6.65 5.84
EPRA Cost Ratio (including direct vacancy costs), % 16.27
EPRA Cost Ratio (excluding direct vacancy costs), % 11.37
PRESIDENT AND CEO KARI INKINEN
After the reporting period we published our intention to sell 12 logistics properties and property funds, or properties owned by the funds. This is a big step towards executing Sponda’s strategy which was published in autumn last year. It is good for the Finnish property market that we can, at the same time, create a new operator for the market: a logistics and industrial property investment company called Certeum Oy. Sponda will be a minority shareholder in Certeum with a share of 38% at most.
Our revenue and net operating income declined compared to the corresponding period last year. This decline was primarily due to property sales and a decrease in occupancy rate. The forecasts of positive development for the Finnish economy in 2014 have been adjusted slightly downward, and this is also reflected in the rental operations for Sponda’s properties. Office properties are doing well, particularly in central Helsinki. The low consumer demand and the structural change in retail sector have increased the amount of vacant retail premises on the market. Rental levels have remained stable in both sectors.
The largest negative change was in the Russia Business Unit. The weakened economic situation in Russia has affected Sponda’s net operating income faster than expected. Decline was due to the increase in Moscow’s property tax and increase in Ducat II’s vacant space.
Our property development operations are proceeding according to plan. The construction of a 15,000 m² office building for Sweco in Helsinki’s Ilmala district started on schedule. In addition, we are preparing to start construction on a new office building with a floor area of approximately 4,600 m² in Helsinki’s Lassila district. The building’s main tenant will be Kone Elevators Finland, with construction set to begin in summer 2014.
BUSINESS CONDITIONS – FINLAND
According to an estimate published in April 2014 by the Finnish Ministry of Finance, Finnish GDP declined by 1.4% in 2013. GDP is expected to bottom out and take a turn to growth of 0.5% in 2014. This growth forecast is based on increasing foreign trade. Private consumption is not expected to increase in 2014 due to the subdued development of purchasing power, the labour market situation and weak future outlook. The unemployment rate is expected to increase and average at approximately 8.4% in 2014.
The transaction market, which picked up in activity in late 2013, remained active in early 2014. According to KTI Property Information, the transaction volume for the first quarter of 2014 amounted to EUR 0.63 billion. The last time the transaction volume exceeded EUR 0.5 billion during a quarter was in 2008. Foreign buyers accounted for approximately 60% of the transactions in the first quarter. The largest property transactions in the first quarter included Sanoma Group’s head office Sanomatalo and printing facility Sanomala.
According to Jones Lang LaSalle, the rental level of prime office properties in Helsinki did not change during the first quarter of the year. The yield requirement for prime office properties, however, decreased by 0.1 percentage points to 5.1% according to JLL.
BUSINESS CONDITIONS – RUSSIA
Russian GDP growth slowed down more than expected in 2013. According to a Bank of Finland estimate, Russian GDP grew only by 1.3% in 2013, with growth in domestic demand slowing down significantly. Growth is expected to slow down further in 2014. The growth forecast is only 0.5% due to reasons including the postponement of investment caused by the events in Crimea.
In the first quarter, the transaction market was substantially slower than in the corresponding period last year. According to CB Richard Ellis, property transactions were made for slightly less than USD 0.6 billion, compared to approximately USD 2.5 billion a year earlier. According to CBRE, yield requirements did not change in the first quarter.
CBRE estimates that the average vacancy rate for office premises in Moscow increased by one percentage point to 13% in the first quarter. The vacancy rate for Class B office space remained unchanged, but the vacancy rate for Class A office space increased due to a high volume of new construction.
For the most part, rental levels remained at the levels seen at the turn of the year. Only the lower end of the rental range for Class A prime office space decreased somewhat.
In the first quarter, some 210,000 m² of new office space was completed. Of this, approximately 130,000 m² is Class A office space and approximately 80,000 m² is Class B office space.
PROPERTY ASSETS 1 JANUARY – 31 MARCH 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 March 2014, the fair value of Sponda’s properties was assessed internally for both Finland and Russia. The change in fair value of the investment properties was EUR -8.5 (5.0) million. The negative change in fair value in the first quarter was mainly attributable to changes in maintenance costs in Russia. The changes in fair values are itemised in the table “Valuation gains/losses on fair value assessment”.
Valuation gains/losses on fair value assessment
1-3/14 1-3/13 1-12/13
Changes in yield requirements (Finland) 0.0 0.0 -5.0
Changes in yield requirements (Russia) 0.0 0.0 0.0
Development gains on property development projects 0.0 0.2 2.2
Modernisation investments -5.4 -4.6 -22.6
Change in market rents and maintenance costs (Finland) 5.4 4.7 22.1
Change in market rents and maintenance costs (Russia) -7.2 1.3 -7.1
Change in currency exchange rates -1.2 3.3 -5.7
Investment properties, total -8.5 5.0 -16.1
Real estate funds 0.1 -1.9 -8.8
Realised share of fund profits 1.7 2.4 10.7
Group, total -6.7 5.5 -14.2
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 1.1% (1.5%) for office premises, 2.1% (0.4%) for shopping centres, 2.9% (-16.2%) for logistics premises and -13.2% (-1.3%) 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:
Type of property 31.3.2014 31.12.2013 30.9.2013 30.6.2013 31.3.2013
Office properties, % 88.2) 90.1 89.6 89.6 89.2 Shopping centres 92.9) 89.0 90.8 91.1 94.1
Logistics, % 71.7 75.2 75.6 75.7 74.8
Russia, % 88.4 96.0 96.1 97.9 96.8
Total property portfolio, % 86.2 87.9 88.0 88.3 88.2
Geographical area 31.3.2014 31.12.2013 30.9.2013 30.6.2013 31.3.2013
Helsinki business district, % 89.4 88.1 88.5 87.9 89.0
Helsinki Metropolitan Area, % 82.8 84.9 84.8 84.9 84.3
Turku, Tampere, Oulu, % 92.9 94.7 94.9 95.9 96.3
Russia, % 88.4 96.0 96.1 97.9 96.8
Total property portfolio, % 86.2 87.9 88.0 88.3 88.2
*) 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 retail 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
Sponda Plc has signed a letter of intent for the sale of 12 logistics properties to a new logistics and industrial property investment company, Certeum Oy, for EUR 216.7 million. The total debt-free sale price of the properties is equal to their combined fair value calculated in the first quarter of 2014.
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 SF I, SF II and SF III, or all property companies owned by the three funds. The total value of the properties to be acquired is approximately EUR 920 million. 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 fair value of the equity invested by Sponda in the funds stood at EUR 74.8 million at the end of March 2014. Sponda estimates that the sale price will exceed the fair value by approximately EUR 2.6 million.
The transaction is described in more detail in the company’s stock exchange release sent today 30 April 2014 at 8.45 am.
PROSPECTS FOR 2014
As a result of the arrangement, Sponda is adjusting its prospects for 2014 with respect to the development of net operating income. The economic occupancy rate forecast remains unchanged.
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
According to the previously stated outlook, net operating income (excluding disposals) in 2014 was expected to be at the same level as in 2013. Upon the conclusion of the arrangement, 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). The adjustment to the prospects is primarily based on the completion of the sale of 12 logistics properties and holdings in real estate funds at the end of September 2014.
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 Planning and IR, tel. +358 20-431 3454 or +358 40 527 4462.
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