Sponda Plc’s INTERIM REPORT January-September 2011
3 November 2011 at 8:30 am
Sponda Plc’s interim report January-September 2011
Sponda Plc’s total revenue in January-September 2011 was EUR 183.3 million (30 September 2010: EUR 173.6 million). Net operating income after property maintenance costs and direct costs for funds increased by over 4%, totaling EUR 131.8 million (126.2) for the period. Sponda’s operating profit was EUR 154.6 (133.2) million. The economic occupancy rate of Sponda’s properties was at the same level as the previous quarter, or at 88.2%.
Result of operations and financial position January-September 2011 (compared with the same period in 2010)
— Total revenue increased by approximately 6% from the reference period to EUR 183.3 (173.6) million.
— Net operating income increased by over 4%, totalling EUR 131.8 (126.2) million.
— Operating profit improved to EUR 154.6 (133.2) million. The operating profit includes a fair value change of EUR 32.9 (11.1) million.
— Cash flow from operations per share was EUR 0.27 (0.28).
— The fair value of the investment properties amounted to EUR 3,128.8 (2,795.9) million.
— Net assets per share totalled EUR 3.93 (3.63).
— The economic occupancy rate was 88.2% (87.4%).
— The prospects for the remainder of 2011 were changed slightly with regards to vacancy rates.
— Financial income and expenses amounted to EUR -55.2 (-45.1) million. Financial expenses include EUR 5.7 million of unrealised change in the fair value of cap options. Excluding the change in fair value of cap options, financial income and expenses totalled EUR -49.5 million.
Result of operations and financial position July-September 2011 (compared with
the same period in 2010)
— Total revenue was EUR 63.1 (57.7) million.
— Net operating income was EUR 47.3 (42.8) million.
— Operating profit improved to EUR 47.1 (40.2) million. The operating profit includes a fair value change of EUR 4.6 (1.1) million.
— Cash flow from operations per share was EUR 0.09 (0.09).
— Financial income and expenses amounted to EUR -22.9 (-13.8) million. Financial expenses include EUR 4.5 million of unrealised change in the fair value of cap options. Excluding the change in fair value of cap options, financial income and expenses totalled EUR -18.5 million.
Key figures according to EPRA Best Practices Recommendations
CEO Kari Inkinen
Sponda’s total revenue and net operating income increased as expected in comparison with the same period last year. This is due to both an increase in the size of the property portfolio and, in particular, an increase in rent rates for prime properties. The economic occupancy rate remained at the previous quarter’s level. We corrected our estimates for the remainder of the year, and we expect the occupancy rate to stay at the current level for the rest of the year.
Two Sponda’s property development projects will be completed at the end of 2011. The Zeppelin shopping centre expansion project in Oulu will be completed on schedule in early November. The shopping centre is fully occupied. The second project set to be completed on schedule by the end of this year is an office and retail property in Tampere’s central business district. The property is nearly fully occupied. Both projects will meet Sponda’s target profit margin of 15% for property development projects.
Uncertainty in the global economy, particularly in the eurozone, is being reflected in the Finnish economy and in businesses operating in Finland. Demand for business properties has been fairly active, but companies tend to spend more time deliberating on the decision to move. Location is increasingly important in property decisions, which is reflected in both occupancy rates and rental levels. While rent rates for office and retail properties in the central business districts of Helsinki and Tampere have continued to rise, rental levels have remained stagnant in secondary areas.
Sponda’s strategy is to grow profitably in Finland and Russia. Growth and profitability are sought through property purchases and property development. The objective is, particularly under the prevailing conditions of economic uncertainty, to finance this growth at least partly through property sales. The company aims to sell office and logistics properties that are not in line with its strategy.
Business conditions – Finland
Developments in the global economy have a delayed effect on property markets. The continued uncertainty over Europe’s economic problems has resulted in businesses taking a waiting stance on the property market. This uncertainty has thus far had limited effects on property markets. Nevertheless, we expect that the positive trends in rental rates will level off during the fourth quarter. Properties in seconday locations will face a weakened market position in the coming years due to the development of new properties as well as relatively high vacancy rates. The gap between better and weaker areas will grow as long as the prevailing economic conditions continue.
The Finnish economy is still expected to grow, albeit slower than originally forecast. Finnish GDP is estimated to grow by approximately 3% this year. Inflation is estimated to be slightly above 3% in 2011. The relatively positive conditions in the Finnish economy, compared to many other European countries, will keep Finland attractive to investors. According to estimates by KTI Kiinteistötieto Oy, the transaction volume in January-September 2011 was EUR 1.3 billion, compared to EUR 2.4 billion in 2010. The availability of financing is becoming compromised due to the prevailing economic conditions and tighter restrictions (Basel III) and terms of financing are also becoming tighter.
Business conditions – Russia
The Russian economy is estimated to grow by over 4% in 2011. Economic growth is supported particularly by increases in the price of oil and other commodities.
Development in the property markets has been positive. Vacancy rates for office properties in Moscow are expected to decline. There is a lack of office premises, particularly good A class premises, which has also resulted in rising rental levels. According to an estimate by Cushman & Wakefield, present lease agreements for prime properties in Moscow are agreed at prices in excess of USD 1,000/m²/ month. The office properties being built at the moment will be completed in 2012-2013, after which there is no significant construction of new buildings in sight in the Moscow central area. The vacancy rate of office premises is expected to be approximately 13%.
The yield requirements for properties in Moscow are declining, with the average yield requirement for office properties being 8-10%. On the transaction markets, international investors have concluded their first trades since the start of the financial crisis.
In St. Petersburg, market changes have been more moderate, and rises in prices and rent prices have not been observed yet.
Operations and property assets January – September 2011
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 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 from all of Sponda’s property assets totalled EUR 131.8 (126.2) million in January-September. Office and retail premises accounted for 52% of this, shopping centres for 18%, logistics premises for 16%, Russia for 11% and the Real Estate Funds unit for 3%.
On 30 September 2011, Sponda had a total of 202 properties, with an aggregate leasable area of approximately 1.5 million m². Of this, some 52% is office and retail premises, 10% shopping centres and 35% logistics premises. 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 the third quarter of 2011, the fair value of Sponda’s properties was assessed internally for both Finland and Russia. The change in fair value of the properties in January-September 2011 was EUR 31.3 (8.2) million and in July-September alone EUR 3.3 (-0.3) million. The positive change in the value was mainly due to changes in market rent prices and development gains on property development projects. The changes in fair values are itemised in the table Valuation gains/losses on fair value assessment.
The economic occupancy rates by type of property and geographical area were as follows:
The occupancy rate of the Shopping Centres unit declined from the second quarter by approximately 0.8 percentage points. This was, as in the previous quarter, because the office tenant in Citycenter moved to another Sponda’s office property. Sponda’s properties are categorised according to their main use, and hence the entire Citycenter belongs to shopping centres.
Sponda expects the vacancy rates of its investment properties to continue remain at the current levels until the end of 2011. This adjustment to previous expectations is due to weaker economic conditions in Finland and internationally.
Net operating income in 2011 is expected to increase by over 4% in comparison with 2010. This expected increase is based on a predicted fall in vacancy rates, the completion of property development projects during the year and property acquisitions.
Risks and uncertainty factors in the near future
Sponda believes that the key risks and uncertainty factors in the current financial period arise from the possibility of the economy growing at a slower rate than expected and relate to a decline in economic occupancy rates and a fall in rental income resulting from the insolvency of tenants.
The Finnish economy is still showing positive development, but uncertainty in the global economy may have a negative impact on the Finnish economy, the operation of companies and therefore the vacancy rates of business premises.
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.
3 November 2011
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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