Sponda Plc’s INTERIM REPORT January-March 2016

Sponda Plc                            
Interim Report
4 May 2016 at 8:30

Sponda Plc’s interim report January-March 2016

JANUARY-MARCH 2016 IN BRIEF (compared with 1 January – 31 March 2015)

  — Total revenue increased to EUR 59.3 (57.2) million, primarily due to a property transaction completed in February 2016.
  — Net operating income increased by more than 6% and totalled EUR 42.1 (39.6) million.
  — Operating profit was EUR 46.7 (27.6) million. This includes a fair value change of EUR -2.0 (-9.9) million.
  — Cash flow from operations per share was EUR 0.12 (0.08). 
  — The fair value of the investment properties amounted to EUR 3,702.5 (3,136.1) million.
  — Net assets (NAV) per share totalled EUR 4.95 (4.50).
  — The economic occupancy rate was 88.7% (86.8%).

KEY FIGURES

KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS

PRESIDENT AND CEO KARI INKINEN

The first quarter of 2016 was exceptionally eventful for Sponda. In conjunction with the publication of our result for 2015, we announced the year’s largest property transaction in the Finnish market as we acquired six properties in the Forum block located in Helsinki’s central business district. The acquisition was completed at the end of February and we have also completed the integration of the properties into Sponda as planned.

In March, we carried out a rights offering of approximately EUR 220 million as part of the financing of the Forum acquisition. The offering was fully subscribed for and the net proceeds were used entirely for the repayment of the short-term bridge loan raised for the acquisition.

Sponda currently has one active property development project underway, the Ratina shopping centre in Tampere. The project is progressing according to plan, as is the pre-letting of the property. The property will be completed in spring 2018.

FORUM PROPERTY ACQUISITION

In February 2016, Sponda announced it is acquiring six properties in the Forum block in Helsinki. The transaction was completed on 29 February 2016 and the debt-free price was EUR 576 million. The details of the acquisition are discussed in stock exchange releases published on 4 February and 29 February.

The Forum block’s five office properties and one retail property are an excellent fit with Sponda’s strategy of focusing its property portfolio on Helsinki’s central business district. The properties were allocated to Sponda’s Office Properties and Shopping Centres segments according to their use. As a result, the Office Properties segment grew from approximately EUR 2.0 billion to approximately EUR 2.2 billion, while the Shopping Centres segment grew from approximately EUR 0.7 billion to approximately EUR 1.1 billion.

Sponda financed the acquisition with its existing cash funds and a short-term bridge loan of approximately EUR 325 million. The company also carried out a rights offering in March 2016. More information is provided in the section “Rights offering”.

BUSINESS CONDITIONS – FINLAND

According to preliminary data from Statistics Finland, Finnish GDP grew by 0.1% in October-December compared to the preceding quarter. The year-on-year increase was 0.6%. The full-year GDP growth rate for 2015 was 0.5%.

The Finnish Ministry of Finance predicts GDP growth of 0.9% for 2016. The most significant factor underlying this growth continues to be private consumption, which is predicted to grow by approximately one per cent, and investments, which are predicted to grow by 5.2%. Exports are predicted to grow by 1.3% and imports by 2.6%.

In the first quarter, the property transaction market maintained the good level of activity seen last year. According to KTI Property Information, the transaction volume for the first quarter amounted to EUR 1.77 billion, which is the second-highest first quarter volume in the past ten years. International investors accounted for 24% of property acquisitions. By far, the largest transaction in the first quarter was for the Forum block, with Sponda as the buyer at a debt-free price of approximately EUR 576 million. The level of activity in the property transaction market is expected to remain high in 2016.

According to Jones Lang LaSalle, the office property market in central Helsinki remained unchanged in the first quarter. The net rental level for prime office space remained at EUR 306/m²/year and the yield requirement remained at 4.75%.

GROUP RESULT IN JANUARY-MARCH 2016

Sponda Group’s result for the period was EUR 26.7 (11.3) million, while the result before taxes was EUR 33.7 (15.0) million and operating profit was EUR 46.7 (27.6) million.

Net operating income for the period was EUR 42.1 (39.6) million. The increase in net operating income is primarily attributable to the Forum property acquisition and completed property development projects. Net operating income was reduced by property divestments made last year. The effect of the Forum acquisition is included in the consolidated figures for one month. Marketing and administration expenses remained at the previous year’s level, at EUR 5.7 (5.8) million.

During the period, the Group recognised gains on divestments of EUR 12.7 (-0.5) million, primarily related to the sale of land associated with a property development project. The change in the fair value of the investment properties was EUR -2.0 (-9.9) million. In the corresponding period in 2015, the Group’s share of Certeum’s result recognised in consolidated profit amounted to EUR 3.6 million.

Financial income and expenses totalled EUR -13.0 (-12.6) million. The increase in expenses is related to loan arrangements pertaining to the Forum acquisition.

According to IFRIC 21 the company recognizes a liability in the balance sheet when the obligating event occurs. The company periodises real estate taxes in the profit and loss statement during the financial year.

PROPERTY ASSETS 1 JANUARY – 31 MARCH 2016

At the end of March 2016, the fair value of Sponda’s investment properties was assessed internally. The change in the fair value of the investment properties in January-March 2016 was EUR -2.0 (-9.9) million. The value of Sponda’s properties in Finland developed favourably due to an increase in market rents, especially with regard to Central Business District properties. Other factors contributing to the increase in fair value included the development margin of property development. The negative change in the fair value of properties was associated with the valuation of properties located in Russia. These changes were primarily attributable to exchange rate fluctuations and the resulting decrease in cash flow.

Valuation gains/losses on fair value assessment

M€

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 0.7% (0.7%) for office premises, 2.7% (0.5%) for shopping centres, -3.8% (15.5%) for logistics premises and -8.8% (-7.2%) 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:

DIVESTMENTS AND INVESTMENTS

Divestments M€

*) Includes sales costs

Investments M€

Property development investments were mainly directed to the construction of the Ratina shopping centre.

RISKS AND UNCERTAINTY FACTORS IN THE NEAR FUTURE

Sponda estimates that the risks and uncertainty factors in the current financial year are related to the development of the Finnish and Russian economies.

In Russia, these risks are related to the depreciation of the Russian rouble, which 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 2016.

The slow positive 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 2016

Sponda provides prospects for 2016 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 2016 will amount to EUR 175-190 million. The estimate is based on the company’s view of property acquisitions and divestments to be completed and the development of rental operations during the year.

Adjusted EPRA Earnings

Sponda estimates that company adjusted EPRA Earnings in 2016 will amount to EUR 94-110 million. This outlook is based on the development of net operating income and the company’s estimate of the development of financial expenses.

4 May 2016
Sponda Plc
Board of Directors

Additional information:
Kari Inkinen, President and CEO, tel. +358 20 431 3311 or +358 400 402 653,
Pia Arrhenius, SVP, Corporate Planning and IR, tel. +358 20 431 3454
or +358 40 527 4462,
Niklas Nylander, CFO, tel. +358 20 431 3480 or +358 40 754 5961.

Distribution:
NASDAQ OMX Helsinki
Media
www.sponda.fi

Release attachment: