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Sponda Plc’s INTERIM REPORT January – September 2010

Sponda Plc’s INTERIM REPORT January – September 2010

Sponda Plc
Interim Report
3 November 2010 at 8.30 am

Sponda Plc’s interim report January – September 2010

Sponda Plc’s total revenue in the January – September 2010 period was EUR 173.6 million (January – September 2009: EUR 178.9 million). Net operating income after property maintenance costs and direct costs for funds declined as forecast, to EUR 126.2 (132.7) million. The decline was due to the sale of properties, higher maintenance costs than had been estimated, and the rise in vacancy rates early in the year. Sponda’s operating profit was EUR 133.2 (-36.7) million.

The company’s total revenue was affected by the change in presentation in the income statement of the company’s share of real estate fund profits. This is now presented on the change in fair value line instead of under total revenue. The share of the profit in January – September was EUR 4.2 million and in July-September EUR 1.3 million. The figures for comparison have been adjusted accordingly.

Result of operations and financial position January – September 2010 (compared with same period in 2009)

Total revenue was EUR 173.6 (178.9) million. The decline was due to the sale of properties, higher maintenance costs than had been estimated, and the rise in vacancy rates early in the year.
Net operating income was EUR 126.2 (132.7) million.
Operating profit totalled EUR 133.2 (-36.7) million, which includes a change in the value of property of EUR 11.1 (-156.4) million.
The result after tax was EUR 66.2 (-88.0) million.
Earnings per share were EUR 0.22 (-0.45), which includes the impact of the interest on the hybrid bond, EUR 0.02/share.
Cash flow from operations per share was EUR 0.28 (0.41).
The fair value of the investment properties amounted to EUR 2,795.9 (2,768.8) million.
Net assets per share were EUR 3.63 (3.50).
Economic occupancy rate was 87.4 % (86.8 %).

Result of operations and financial position July – September 2010 (compared with same period in 2009)

Total revenue was EUR 57.7 (59.1) million.
Net operating income was EUR 42.8 (45.5) million.
Operating profit totalled EUR 40.2 (13.1) million, which includes a change in the value of property of EUR 1.1 (-29.7) million.
The result after tax was EUR 19.4 (-6.1) million.
Earnings per share were EUR 0.06 (-0.03), which includes the impact of the interest on the hybrid bond, EUR 0.01/share.
Cash flow from operations per share was EUR 0.09 (0.10).

Key figures

CEO Kari Inkinen

At present, the post-cyclical nature of the real estate sector can be seen
particularly in office premises, for which market vacancy rates rose during the
first six months of 2010 despite the recovery in the Finnish economy. Sponda’s
vacancy rates have fallen as forecast during 2010, which in my opinion is a
demonstration of the good location and quality of the company’s property
portfolio. At the end of the third quarter Sponda’s vacancy rates had fallen
slightly from the previous quarter to 12.6 %. Despite the slow developments in
the property market, we estimate that the value especially of prime properties
in the centre will start to rise.

In October we held the topping out ceremony for the office building being built
in the City-Center complex. The current construction phase will see the
completion of the office building in the inner court of the complex that is
leased to Evli Bank Plc and of the light shaft that brings natural light to all
floors in the shopping centre, with the retail premises around it. The project
is progressing on schedule and the current work will be completed in autumn
2011.

We are continuing our active management of the property portfolio. This means
that the company continues to sell properties that do not fit in with its
strategy and aims to obtain the optimal rental income from its existing
properties. In future we will be focusing increasingly on office and retail
properties and shopping centres and will reduce the proportion of logistics
properties in our portfolio. We are still working to reduce vacancy rates in our
properties.

Prospects

Sponda estimates that occupancy rates, which started to go up in the second
quarter, will continue to rise in the final quarter of 2010. This assessment is
based on the lease agreements that the company knows are expiring and on the
forecast growth in Finland’s economy in 2010.

Sponda estimates that net operating income in 2010 will be lower than in 2009.
The reasons for this decline are the sale of property in line with the company’s
strategy and the fall in occupancy rates that began in 2009 and continued in the
first quarter of 2010.

Confirmed losses of Sponda Kiinteistöt Oy

In July 2010 the Supreme Administrative Court ruled in favour of Sponda on the
deductibility of the confirmed losses of Sponda Kiinteistöt Oy. There is no
right of appeal against the ruling. The ruling will not have an impact on the
result for 2010.

Business conditions – Finland

The number of property transactions has picked up slightly in Finland after the
summer and, according to the Institute for Real Estate Economics (KTI), by the
end of September they had a total value in 2010 of about EUR 1.0 billion.

According to Catella Property Oy, vacancy rates for offices in the Helsinki
metropolitan area continue to rise until the end of June, to 12.8 % (31 December
2009: 12.3 %). They were rising less steeply than earlier in the year and are
expected to level off especially in the central business and Ruoholahti
districts of Helsinki.

The decline in rent levels for office premises ended during the spring and
summer of 2010. Rents are lower than before the financial crisis, but rents for
offices in the centre of Helsinki and in Ruoholahti, for example, and for retail
premises in the Helsinki metropolitan area have maintained their levels well.

Business conditions – Russia

According to the forecast by the Bank of Finland, economic growth in Russia is
expected to be around 5 % in 2011. Economic growth is boosted by rising oil
prices, the decline in unemployment and growing consumer confidence.

Vacancy rates are coming down gradually in the Moscow region. According to CBRE,
vacancy rates in Moscow are about 16 % but in St Petersburg about 30 %,
depending on the location and quality of the property. Rental levels have
remained stable.

Sponda’s operations and property portfolio January – September 2010

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 and management fees from all of Sponda’s property assets
totalled EUR 126.2 (132.7) million in the nine month period. Office and retail
premises accounted for 52 % of this, shopping centres for 19 %, logistics
premises for 15 %, Russia for 11 % and the Real Estate Funds unit for 3 %.

On 30 September 2010 Sponda had a total of 195 properties, with an aggregate
leasable area of about 1.5 million m². Of this some 52 % is office and retail
premises, 10 % shopping centres and 35 % 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 through the
company’s own cash flow based yield assessment calculation. The valuation method
complies with international valuation standards (IVS). The entire material used
in calculating the fair values of properties is examined at least twice a year
by an external expert, to ensure that the parameters and values used in the
calculation are based on market observations.

At the end of the third quarter of 2010 the values of Sponda’s investment
properties in Finland and Russia were assessed internally within the company.
The change in the fair value of the investment properties in January – September
was EUR 8.2 (-155.0) million and in July – September EUR -0.3 (-31.4) million.
The yield requirements for the investment properties were not altered during the
third quarter. In Russia the negative change in fair value, EUR -6.1 million,
resulted almost entirely from changes in currency exchange rates. The change in
fair value of the properties owned by the real estate funds was EUR -1.4 (-5.6)
million in January – September. The value of these properties was not assessed
in the July – September period. Realized gains by the real estate funds totalled
EUR 4.2 million in January – September and EUR 1.3 million in July – September.

Valuation gains/losses on assessing Sponda’s investment properties at fair value

The changes in Sponda’s investment property assets in the January – September
2010 period were as follows:

Leasing operations

Current developments in rents in Finland are reflected in the difference in
square metre rents between leases that have ended and those that have begun
during the period. The leases that were terminated or came into force in July –
September were as follows:

The leases that have begun and those that have ended may not be in the same
segments or apply to the same premises.

Sponda also calculates developments in the rental yield of its properties using
like-for-like rental growth for the property portfolio that Sponda has owned for
two years, in accordance with EPRA recommendations. This was -4.53 % for office
and retail properties, 3.93 % for shopping centres, -5.21 % for logistics
properties and -5.12 % for properties in Russia. Like-for-like rents in Russia
are calculated in roubles. All of Sponda’s leasing agreements in Finland are
linked to the cost of living index.

The economic occupancy rates by type of property and geographical area were as
follows:

Total cash flow derived from leasing agreements on 30 September 2010 was EUR
1,098 (1,062) million. Sponda had 2,002 clients and altogether 3,084 leasing
agreements. The company’s biggest tenants were the public sector (11.2 % of
rental income), Kesko Group (5.9 % of rental income), Sampo Bank Plc (3.9 % of
rental income) and HOK-Elanto (3.8 % of rental income). Sponda’s 10 largest
tenants generate about 32 % of the company’s total rental income. Sponda’s
tenants by sector were as follows:

The average length of all the leasing agreements was 4.7 (4.6) years. The
average length of leasing agreements was 5.3 years for office and retail
properties, 4.8 years for shopping centres and 3.6 years for logistics premises.
The lease agreements for Sponda’s property portfolio expire as follows:

Investments and divestments

Sponda sold investment properties during the January – September 2010 period for
a total value of EUR 33.0 million, with July – September accounting for EUR 22.3
million of this. Sponda sold trading properties in the January – September
period for EUR 10.1 million, and this figure includes capital gains. No
properties were purchased in the July – September period.

Investments in property maintenance totalled EUR 18.4 million in the January –
September period, with EUR 6.4 million of this being spent in the third quarter.
Altogether EUR 30.8 million had been invested in property development by the end
of September, with the third quarter accounting for EUR 12.8 million of this.
The property development investments were mainly allocated to the renovation of
the City-Center complex in the centre of Helsinki and the production plant being
built in Hakkila in Vantaa.

Office and Retail Properties

In January – September 2010 Sponda sold office and retail properties for EUR
23.2 million, with the third quarter accounting for EUR 14.2 million of this. No
properties were purchased during the period.

On 27 September 2010 sold an office building in Turku for some EUR 15 million.
The property, which has a leasable area of 7300 m², contains retail premises as
well as offices.

Shopping Centres

During January – September 2010 the segment purchased properties for EUR 0.5
million but made no major investments in property maintenance.

Logistics Properties

During January – September 2010 Sponda sold logistics property for EUR 4.7
million, with July – September accounting for EUR 4.4 million of this. No new
logistics properties were purchased. Capital expenditure on property maintenance
since the beginning of the year totalled EUR 1.7 million, with EUR 1.1 million
of this being spent in July – September.

Property Development

The balance sheet value of Sponda’s property development portfolio at the end of
September 2010 was EUR 233.6 million. Of this some EUR 84.9 million was in
undeveloped land sites and the remaining EUR 148.7 million was tied up in
property development projects in progress. Investments in property development
and acquisitions during January – September 2010 totalled EUR 30.3 million, and
most of this was for the City-Center project and for building the production
plant in Hakkila, Vantaa.

Sponda aims to obtain development gains of 15 % on the investment costs for
projects. Sponda’s property development business comprises new build projects
and refurbishment of existing properties.

In the City-Center project, progress was made on schedule in the construction of
the office building in the inner court of the complex. It is estimated that the
new office building and the new retail premises being built in the second phase
of the shopping centre will be completed in summer 2011. The entire City-Center
renovation project is expected to be completed in 2012 and the total investment
will be some EUR 125 million.

Sponda is building some 22,000 m² of production premises in Hakkila, Vantaa,
that is being leased in its entirety to Metso Automation. Sponda is also leasing
to Metso some 12,000 square metres of office and warehouse premises in the
adjacent Honkatalo office building, and these will be completely refurbished.
Sponda’s total investment is estimated at about EUR 40 million and the premises
should be ready at the beginning of 2011.

Sponda is developing the Ratina shopping centre in Tampere and carrying out
development projects in adjacent areas. A 55,000 m² shopping centre is planned
for the area, for which the total investment cost is estimated at EUR 200
million. The final decision about the investment has not been made.

Russia

The change in the third quarter in the fair value of the properties in Russia,
altogether EUR -6.1 million, was due almost entirely to changes in currency
exchange rates.

The typical length of a lease in Russia is 11 months. Sponda’s leasing
agreements in Russia also conform to this practice, apart from the Western
Realty (Ducat II) and OOO Adastra properties in Moscow and St Petersburg where
the leases are for longer periods than average. The average length of Sponda’s
leasing agreements in Russia on 30 September 2010 was 3.1 years, and the leasing
agreements expire as follows:

Sponda receives about half of its rental income in Russia in US dollars. About
half is in roubles, and much of this is tied to an agreed exchange rate for the
dollar or the euro. The company’s rouble risk is reduced because a major part of
the unit’s expenses is denominated in roubles. It is Sponda’s policy to hedge
the foreign currency denominated cash flow for the following six months in
Russia.

Real Estate Funds

Sponda is a minority holder in three real estate funds: First Top LuxCo, Sponda
Real Estate Fund I Ky and Sponda Real Estate Fund II Ky. Sponda is responsible
for managing the funds and their properties, and receives management fees. The
property portfolios owned by the funds were not assessed at fair value at the
end of September 2010.

As from the second quarter of 2010, Sponda’s share of fund profits is presented
in the consolidated income statement in the change in fair value item, instead
of under total revenue. The share of profits in the January – September period
was EUR 4.1 (4.3) million and in July – September EUR 1.2 (1.7) million. The
figures for comparison have been adjusted accordingly. The Real Estate Fund
segment’s total revenue, net operating income and operating profit were as
follows:

First Top LuxCo (Sponda’s holding 20 %) invests in office and retail properties
outside Finland’s largest cities. On 30 September 2010 the fund’s property
investments had a fair value of EUR 104.1 million.

Sponda Real Estate Fund I Ky (Sponda’s holding 46 %) invests in logistics sites
outside the Helsinki metropolitan area. At the end of September 2010 the
properties it owned had a fair value of EUR 185.5 million.

Sponda Real Estate Fund II Ky (Sponda’s holding 44 %) mainly invests in
logistics properties in medium sized towns in Finland. The fund has a target
size for its real estate investment of about EUR 200 million and the fair value
of its property portfolio on 30 September 2010 was EUR 104.8 million.

In addition to those mentioned above, Sponda is also responsible for managing
the property portfolio, with a value of about EUR 270 million, sold in March
2007 to Whitehall Street Real Estate Limited and Niam Nordic Investment Fund
III.

Cash flow and financing

Sponda’s net cash flow from operations in January – September 2010 totalled EUR
86.3 million (30 September 2009: EUR 70.3 million). Net cash flow from investing
activities was EUR -20.0 (-33.8) million and the net cash flow from financing
activities was EUR -60.9 (-20.1) million. Net financing costs in the period
totalled EUR -45.1 (-49.6) million. Interest expenses of EUR 3.5 (2.7) million
were capitalized.

Sponda’s equity ratio on 30 September 2010 was 38 % (30 September 2009: 37 %)
and gearing was 136 % (144 %). Interest-bearing debt amounted to EUR 1,580.3
(1,619.2) million and the average maturity of Sponda’s loans was 2.4 (2.6)
years. The average interest rate was 3.9 % (3.5 %) including interest
derivatives. Fixed-rate and interest-hedged loans accounted for 74 % (63 %) of
the loan portfolio. The average interest-bearing period of the whole debt
portfolio was 2.2 (1.5) years. The interest cover ratio, which describes the
company’s solvency, was 3.0 (2.6).

Sponda applies hedge accounting, according to which changes in the fair value of
interest rate swaps and interest rate options that meet the criteria for hedge
accounting are recognized in equity in the balance sheet. Changes in the fair
value of other interest rate derivatives and currency options are recognized in
the income statement.

Sponda Group’s debt portfolio on 30 September 2010 comprised syndicated loans
with a nominal value of EUR 635 million, EUR 250 million in bonds, EUR 62
million in issued commercial papers, and EUR 637 million in loans from financial
institutions. Sponda had EUR 375 million in unused credit limits. Sponda Group
had mortgaged loans of EUR 141.2 million, or 4.7 % of the consolidated balance
sheet.

On 1 November 2010 Sponda signed a EUR 550 million syndicated credit agreement
and a EUR 100 million credit limit facility.

The syndicated loan is for 5 years and its margin at the time of signing was 1.5
%. The syndicated credit agreement includes a loan of EUR 400 million and a
revolving credit facility of EUR 150 million. The loan is being used in its
entirety for repaying existing loans. The terms for the loans are similar to
those for Sponda’s other loans and the main covenants are linked to the equity
ratio and the interest coverage margin.

The EUR 100 million credit limit being renewed now, which functions as back-stop
facility for the commercial papers, is for 3 years.

Personnel

During the review period Sponda Group had on average 124 (135) employees, of
whom 112 (120) worked for parent company Sponda Plc. On 30 September 2010 Sponda
Group had altogether 120 (135) employees, of whom 108 (121) were employed in
parent company Sponda Plc. Sponda has personnel in Finland and in Russia.
Sponda’s sales and administration costs in the period totalled EUR 15.0 (16.1)
million.

Bonus and incentive schemes

Sponda has a bonus incentive scheme to which all employees belong, and which is
based on common targets for the company and on personal targets set for each
employee. Key factors affecting the bonus are profitability and how business
operations develop.

Sponda also has a long-term incentive scheme which comprises two one-year
earnings periods, which are the calendar years 2010 and 2011, and two three-year
earnings periods, which are the calendar years 20102012 and 20112013. The
earnings criteria for the scheme are linked to the cash flow per share and the
return on investment.

At present those in the scheme are the members of the company’s Executive Board,
in total seven people. More details of the incentive scheme are given in the
company’s stock exchange release dated 17 March 2010.

Group structure

Sponda Group comprises the parent company, the subsidiary Sponda Kiinteistöt Oy
(formerly Kapiteeli Oy), and the Group’s mutually owned property companies,
which are either wholly or majority owned by Sponda Plc or Sponda Kiinteistöt
Oy. Sponda Group also includes Sponda Russia Ltd and Sponda Asset Management Oy,
as well as their subsidiaries.

The Sponda share and shareholders

The weighted average price of the Sponda share in the January – September 2010
period was EUR 2.89. The highest quotation on NASDAQ OMX Helsinki Oy was EUR
3.57 and the lowest EUR 2.42. Turnover during the period totalled 98.8 million
shares, or EUR 285.4 million. The closing price of the share on 30 September
2010 was EUR 3.56, and the market capitalization of the company’s share capital
was EUR 988.2 million.

The Annual General Meeting on 17 March 2010 authorized the Board of Directors to
purchase the company’s own shares, and the authorization is in force until the
next AGM. The authorization was not exercised during the review period.

Sponda issued no flagging announcements in the July – September 2010 period.

On 30 September 2010 the company had altogether 9,733 shareholders, and its
ownership structure was as follows:

Board of Directors and auditors

Sponda’s Board of Directors has six members: Klaus Cawén, Tuula Entelä, Timo
Korvenpää, Lauri Ratia, Arja Talma and Erkki Virtanen. Lauri Ratia is its
chairman and Timo Korvenpää is vice chairman.

The Board of Directors assessed that of its members Klaus Cawén, Tuula Entelä,
Timo Korvenpää, Lauri Ratia and Arja Talma are independent of the company and of
major shareholders and Erkki Virtanen is independent of the company.

Sponda Plc’s auditors are APA Raija-Leena Hankonen and authorized public
accountants KPMG Oy Ab, with APA Kai Salli as principal auditor and APA Riitta
Pyykkkö as deputy auditor.

Committees of the Board of Directors

The following were members of the Audit Committee: Arja Talma, chairman, Timo
Korvenpää, vice chairman and Erkki Virtanen, ordinary member.

The following were members of the Structure and Remuneration Committee: Lauri
Ratia, chairman, Klaus Cawén, vice chairman, and Tuula Entelä, ordinary member.

Management

Sponda Plc’s president and chief executive officer is Kari Inkinen. The
Executive Board comprises the president and CEO, the CFO, the SVP Corporate
Communications and IR, and the heads of the business units, in total seven
persons.

Environmental responsibility

The real estate sector plays a key role in fighting climate change and ensuring
the wellbeing of the environment. Environmental expertise is one of Sponda’s
strategic priorities.

Sponda has set targets for 2010 that at a company level are related to reducing
energy consumption in the properties owned by Sponda, taking into account the
demands of environmentally responsible operations in all construction and in the
maintenance of properties, cutting environmental load, and creating a healthy,
attractive work environment for its clients.

WWF granted Sponda’s head office in Helsinki the right to use the Green Office
label. The office met the requirements for granting the label in the office
audit carried out by WWF in August 2010.

City-Center is currently Sponda’s biggest property development project. In the
construction of the office block being erected in the middle of the City-Center
complex, particular attention has been paid to energy efficiency and
environmentally benign solutions. The lighting of the office premises is with
energy-efficient LED lights. The use of LED technology on such a large scale in
office buildings is rare in the Nordic countries.

Sponda is aiming to obtain LEED certification for the City-Center office block.
LEED is one of the best known international environmental classification systems
for buildings, which aims to reduce the environmental impact during the
construction and use of a building and develop a healthier work environment.

Subsequent events

On 1 November 2010 Sponda signed a EUR 550 million syndicated credit agreement
and a EUR 100 million credit limit facility.

The EUR 100 million credit limit being renewed now, which functions as back-stop
facility for the commercial papers, is for 3 years.

Prospects

Sponda estimates that the rise in occupancy rates that began in the second
quarter will continue in the final quarter of 2010. This assessment is based on
the lease agreements that the company knows are expiring and on the forecast
growth in Finland’s economy in 2010.

The net operating income in 2010 is estimated to be lower than that in 2009. The
reasons for this decline are the sale of property in accordance with the
company’s strategy and the fall in occupancy rates that began in 2009 and
continued in the first quarter of 2010.

Risks and uncertainty factors in the near future

Sponda believes that the key risks and uncertainty factors in the current
financial period arise from slower than expected recovery in the economy, and
relate to a decline in economic occupancy rates and a loss of rental income
resulting from the insolvency of tenants.

Differences in legislation and official procedures in Russia compared to Finland
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 which have a negative impact on the company’s financial result. The
company hedges the currency denominated cash flow from Russia for the coming 6
months.

A rapid, sharp rise in market interest rates at the end of 2010 would increase
Sponda’s financial expenses, and would have a negative impact on the company’s
result.

Schedule for financial reporting in 2011

Sponda will publish its financial statements bulletin for 2010 on Thursday, 3
February 2011. The scheduled date for the Annual General Meeting is Wednesday,
16 March 2011. Interim reports will be published in 2011 on 6 May 2011, 5 August
2011 and 3 November 2011

3 November 2010
Sponda Plc
Board of Directors

Further information:
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.

Distribution:
NASDAQ OMX Helsinki
Media
www.sponda.fi

Sponda Plc

Consolidated income statement (IFRS)
M

Consolidated balance sheet (IFRS)
M

Consolidated statement of cash flows (IFRS)
M

Changes in Group shareholders’ equity
M

Notes to the consolidated financial statements

Accounting principles

This interim report has been prepared in accordance with IAS 34, Interim
Financial Reporting, applying the same accounting principles as those used for
the 2009 financial statements. Current IFRS standards and interpretations have
been applied when preparing the interim report.

The amended and revised standards and interpretations that came into effect at
the beginning of 2010 do not have a significant impact on the interim report or
the accounting principles.

The figures in the interim report are presented in millions of euros and have
been rounded to the nearest 0.1 million euro, so the total of the individual
figures may differ from the total amounts given.

The figures in the interim report have not been audited.

Income statement by segments
M

Direct and indirect result

The direct result represents the result from the Group’s core business. The
direct result is calculated by adjusting the figures in the consolidated income
statement for changes in the fair value of properties and financial instruments,
profit/loss on the sale of properties, amortization of goodwill and other such
income and expenses that the Company considers are indirect items.