Sponda Plc’s INTERIM REPORT January-March 2015
5 May 2015 at 8:30 a.m.
Sponda Plc’s interim report January-March 2015
JANUARY-MARCH 2015 IN BRIEF (compared with 1 January – 31 March 2014)
— Total revenue was EUR 57.2 (63.5) million. The decline was primarily due to
properties sold in 2014.
— Net operating income was EUR 39.6 (44.0) million.
— Operating profit was EUR 27.6 (31.7) million. This includes a fair value
change of EUR -9.9 (-6.7) million.
— Cash flow from operations per share was EUR 0.08 (0.09).
— The fair value of the investment properties amounted to EUR 3,147.4
— Net assets per share totalled EUR 4.50 (4.49).
— The economic occupancy rate was 86.8% (86.2%).
|Total revenue, M€||57.2||63.5||246.7|
|Net operating income, M€||39.6||44.0||176.0|
|Operating profit, M€||27.6||31.7||151.7|
|Earnings per share, €||0.04||0.04||0.24|
|Cash flow from operations per share, €||0.08||0.09||0.37|
|Equity per share, €||4.50||4.49||4.65|
|Equity ratio*, %||39.8||39.6||41.0|
|Interest cover ratio||3.5||3.1||3.3|
*) The figure for 1-3/2014 has been adjusted as a result of the adoption of the
IFRIC 21 Levies interpretation.
KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS
|EPRA Earnings, M€||24.9||25.3||101.6|
|EPRA Earnings per share, €||0.09||0.09||0.36|
|Company adjusted Earnings, M€||24.6||26.0||108.7|
|Company adjusted Earnings per share, €||0.09||0.09||0.38|
|EPRA NAV/share, €||5.30||5.18||5.45|
|EPRA NNNAV/share, €||4.34||4.37||4.49|
|EPRA Net Initial Yield (NIY), %||5.44||5.64||5.18|
|EPRA “topped-up” NIY, %||5.45||5.65||5.19|
|EPRA Vacancy rate, %||13.19||13.79||12.96|
|EPRA Cost Ratio (including direct vacancy costs),|
|EPRA Cost Ratio (excluding direct vacancy costs),|
PRESIDENT AND CEO KARI INKINEN
As expected, the first quarter of 2015 was stable. The Group’s economic occupancy rate was more than half a percentage point higher than at the corresponding time last year. The change in fair value of Sponda’s properties was EUR -9.9 million. This was mainly due to a fall in market rents for properties in Russia.
The Ruoholahti office building was completed in March. The property is almost fully occupied. Sponda’s remaining three development projects are progressing on schedule and within budget. In March, we decided to start construction on the Ratina shopping centre in Tampere. Comprised of three buildings, the shopping centre will be a versatile hub for recreation and entertainment in Tampere. Construction has already begun and the shopping centre will be completed in spring 2018.
BUSINESS CONDITIONS – FINLAND
According to preliminary data from Statistics Finland, Finnish GDP declined by 0.2% in October-December compared to the preceding quarter. The full-year GDP growth rate for 2014 was -0.1%.
According to the spring forecast by the Finnish Ministry of Finance, GDP will grow by 0.5% in 2015. Exports are expected to grow faster than imports. Private consumption is predicted to grow by 0.5%, while the unemployment rate is expected to rise to 8.8%.
According to KTI Property Information, the transaction volume for the first quarter of 2015 amounted to EUR 0.46 billion, which is slightly over one third of the previous quarter’s volume. International investors accounted for 39% of the total. Share of the residential portfolios was the highest in terms of both units and volume. The transaction market is expected to remain active as in 2014.
According to Jones Lang LaSalle, the rental market in central Helsinki remained unchanged in the first quarter. The net rental level for prime office space was approximately EUR 300/m²/year and the yield requirement was approximately 5.0%.
BUSINESS CONDITIONS – RUSSIA
According to a Bank of Finland forecast, Russian GDP grew by 0.6% in 2014. Forecasts indicate that the Russian GDP will decline by 4% in 2015. The reasons for this expected contraction of the Russian economy include the fall in oil price, a decline in private investment, lower private consumption due to rapid inflation, declining domestic demand, lower imports, the weakness of the rouble and declining export revenue.
The investment market remained subdued in January-March, as in the preceding quarter. According to preliminary data from CBRE, the volume was approximately USD 0.4 billion, which is 25% higher than in the fourth quarter of 2014. Moscow accounted for 96% of this volume, and St. Petersburg for 4%. Approximately 88% of the volume is from office premises transactions and only 9% for retail premises transactions.
The preliminary information from CBRE indicates that the average vacancy rate for office premises in Moscow increased to 17% in the first quarter. At the end of March, the vacancy rate for Class A office space was 27.4%, while the vacancy rate for Class B office space was 13.6%. Decreased demand and the massive volume of newly constructed premises create upward pressure on vacancy rates and downward pressure on rents.
Some 1.4 million m² of new office space was completed in Moscow in 2014. According to information from CBRE, the rate of new construction will be similar in 2015.
OPERATIONS AND PROPERTY ASSETS 1 JANUARY – 31 MARCH 2015
At the end of March 2015, the fair value of Sponda’s investment properties was assessed internally for both Finland and Russia. No changes were made to yield requirements in the internal assessment. The change in fair value of the investment properties was EUR -9.9 (-6.7) million. The value of Sponda’s properties in Finland were stable after maintenance investments. The negative change in the fair value of properties in Russia was attributable to a decline in 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
|Changes in yield requirements (Finland)||0.0||0.0||15.7|
|Changes in yield requirements (Russia)||0.0||0.0||-10.0|
|Development gains on property development projects||1.1||0.0||5.5|
|Change in market rents and maintenance costs (Finland)||9.2||5.4||40.3|
|Change in market rents and maintenance costs (Russia)||-12.5||-7.2||-19.3|
|Change in currency exchange rates||3.3||-1.2||5.9|
|Investment properties, total||-9.9||-8.5||-3.9|
|Real estate funds||0.0||0.1||-1.8|
|Realised share of real estate fund profits||0.0||1.7||5.5|
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.
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 0.7% (1.1%) for office premises, 0.5% (2.1%) for shopping centres, 15.5% (2.9%) for logistics premises and -7.2% (-13.2%) for properties in Russia. The like-for-like for Russia is adjusted for changes in exchange rate 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||31.3.15||31.12.14||30.9.14||30.6.14||31.3.14|
|Office properties, %||87.9||88.5||88.3||87.9||88.2|
|Shopping centres, %||90.3||91.2||89.3||90.4||92.9|
|Total property portfolio, %||86.8||87.0||86.5||85.7||86.2|
DIVESTMENTS AND INVESTMENTS
|Helsinki business district, %||88.2||89.3||88.3||89.4||89.4|
|Helsinki Metropolitan Area, %||83.6||83.1||83.2||82.2||82.8|
|Turku, Tampere, Oulu, %||92.9||93.2||92.2||90.4||92.9|
|Total property portfolio, %||86.8||87.0||86.5||85.7||86.2|
|Profit/loss on sale*)||-0.3||0.1||0.6|
|Balance sheet value||6.6||0.2||236.6|
*) Includes transaction costs
Property development investments were mainly directed to the construction of office buildings in Ilmala and Lassila in Helsinki.
The balance sheet value of Sponda’s property development portfolio stood at EUR 145.0 million at the end of March 2015. Of this total, EUR 49.8 million was in undeveloped land sites and the remaining EUR 95.2 million was tied up in property development projects in progress. The value of unused building rights is presented in the assets of the segment concerned for investment properties that have a building, and as part of the Property Development segment for building rights for unbuilt land.
Sponda’s property development operations comprise new construction projects and the refurbishment of existing properties. During the review period, the Property Development unit had invested a total of EUR 10.8 million. The investments were primarily directed to the construction of office buildings in Ilmalanrinne and Lassila.
In March 2015, Sponda made the decision to develop the Ratina shopping centre in Tampere. Ratina will be Tampere’s largest and most upscale shopping centre, situated in a unique location in the heart of the city. Comprised of three buildings, the shopping centre will be a versatile hub for recreation and entertainment in Tampere.
The construction of the Ratina shopping centre began in April 2015 with excavation work on the new Valo-Ratina building, and the shopping centre is estimated to be completed in spring 2018. The complex comprises a total of approximately 53,000 m² of retail and service premises with more than 150 businesses. The project’s total investment, including the land value, is estimated at approximately EUR 240 million, with some EUR 40 million invested to date. The project’s target development margin is 15% and the estimated net yield on cost is 7.5%. The shopping centre’s pre-let rate is approximately 30%.
Sponda is constructing a three-building office complex in Ilmala, Helsinki for use by Sweco. The project is expected to be completed in December 2015. The project’s investment size is approximately EUR 57 million and the office complex is fully pre-let.
In addition, Sponda started construction in June 2014 on a new office building with a floor area of approximately 4,600 m² in Helsinki’s Lassila district. The total investment of the project will be approximately EUR 10.6 million. The building’s main tenant will be Kone Elevators Finland and the project is set to be completed in June 2015. The property is approximately 50% pre-let.
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.
EVENTS AFTER THE PERIOD
In April, Sponda signed a loan agreement with Danske Bank Plc for a five-year unsecured loan of EUR 115 million. The agreement extends the loan, which was originally set to mature in July 2015, until April 2020. The latest drawdown date of the loan is in July 2015.
The margin on the loan corresponds with current market levels. The most important covenants (equity ratio and interest cover ratio) of the arrangement are the same as those of Sponda’s other loans.
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.
5 May 2015
Board of Directors
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.
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