Sponda Plc’s INTERIM REPORT January-September 2013
1 November 2013 at 8:30 a.m.
Sponda Plc’s interim report January-September 2013
JANUARY-SEPTEMBER 2013 IN BRIEF (compared with 1 January – 30 September 2012)
— Total revenue was EUR 198.9 (198.2) million.
— Net operating income was EUR 143.5 (144.8) million.
— Operating profit was EUR 123.5 (141.0) million. This includes a fair value change of EUR -1.5 (11.7) million.
— Cash flow from operations per share was EUR 0.30 (0.28).
— The fair value of the investment properties amounted to EUR 3,264.7 (3,213.9) million.
— Net assets per share totalled EUR 4.50 (4.29).
— The economic occupancy rate was 88.0% (88.0%).
— Net financing costs for the period totalled EUR -43.9 (-44.4) million. Financial income and expenses include EUR 0.2 (4.1) million in unrealized change in the fair value of derivatives. Excluding the aforementioned change in fair value, financial income and expenses totalled EUR -44.1 (-48.5) million.
— The prospects are defined with regard to the development of the vacancy rate.
— New strategy was published 3 September 2013.
JULY-SEPTEMBER 2013 IN BRIEF (compared with 1 July – 30 September 2012)
— Total revenue was EUR 65.7 (66.0) million.
— Net operating income was EUR 49.5 (50.2) million.
— Operating profit was EUR 44.1 (48.1) million. This includes a fair value change of EUR 0.7 (2.9) million.
— Cash flow from operations per share was EUR 0.11 (0.10).
— Financial income and expenses amounted to EUR -15.1 (-14.6) million. Financial income and expenses include EUR -0.3 (1.5) million in unrealized change in the fair value of derivatives. Excluding the aforementioned change in fair value, financial income and expenses totalled EUR -14.8 (-16.2) million.
SPONDA PLC’S STRATEGY
On 3 September 2013, the Board of Directors of Sponda Plc confirmed the company’s new strategy. The main goals of the strategy are simplification of the business structure, more focused property ownership and profitable growth.
Focal points for growth will be office properties, shopping centres and property development serving these segments. As for areas, Sponda will focus on prime areas in the Helsinki Metropolitan Area, particularly in the central business district and Ruoholahti, as well as Tampere.
The most significant change to Sponda’s current strategy is that Sponda is planning to exit both the Russian market and the Real Estate Funds business in the next 3-5 years. In addition, the company is planning to sell its entire logistics property portfolio as well as property ownership in Turku.
In order to make operations clearer, the name of the Office and Retail Properties segment was changed to Office Properties segment.
Sponda is planning to exit the Russian business operations in 3-5 years’ time. This means that no new investments will be made in the region and current properties, most of which are located in Moscow, will be sold when market conditions allow.
In the Real Estate Funds business unit, no new real estate funds will be established. Those existing funds in which Sponda has minority holding will be managed as before until the end of the term of each fund. Depending on the fund, the term will end between 2014 and 2019.
The capital to be released will be invested in Sponda’s main markets in Helsinki and Tampere. Investment objects include both property development projects and office and shopping centre properties.
The company’s long-term goals for equity ratio and dividends also remained unchanged:
– The Group’s goal is to attain a 40% equity ratio.
– The company aims to pay a stable dividend. The dividend is approximately
50% of the operational cash earnings per share for the financial period, taking into account, however, the economic situation and the company’s development needs.
PRESIDENT AND CEO KARI INKINEN
The estimated contraction of the Finnish economy in 2013 is reflected in the development of Sponda’s vacancy rates. This is most clearly apparent in logistics properties, which are facing weakened rental prospects for the remainder of the year due to the development of the economy. On a positive note, latest market forecasts indicate that the Finnish economy has bottomed out and slow economic growth will resume during the rest of the year (Nordea).
Our 7% increase in cash flow per share (EUR 0.02) and maintaining a stable vacancy rate are good achievements under the current market conditions. The demand for office premises has remained good in Sponda’s main markets, namely Helsinki’s central business district and Ruoholahti. In spite of the difficult rental market, the overall occupancy rate for Sponda’s office properties was on a par with the corresponding period in 2012, at 89.6%. The occupancy rate for office premises in Helsinki’s central business district improved by 0.6%-points compared to the previous quarter, and the comparable rental levels for Sponda’s office properties increased overall by 1.1%.
Sponda published its new strategy at the beginning of September. The strategy had a very positive reception and measures to implement it have begun. The time horizon for the implementation of the strategy is 3-5 years in order to get the best possible result.
Pre-letting for the Ratina shopping centre project has progressed. The decision to invest has not yet been made but our aim is to start the project during this year. The start of construction of the Ratina shopping centre in Tampere will be announced when the investment decision has been made.
BUSINESS CONDITIONS – FINLAND
According to the forecast published by the Finnish Ministry of Finance this autumn, Finnish GDP will decline by approximately 0.5% in 2013. The economy is expected to bottom out and take a turn to slow growth in late 2013. The forecast of 1.2% GDP growth for 2014 is based on exports and domestic consumption increasing. The current forecast for GDP growth in 2015 is 2.0%. The turn to growth is supported by eurozone recovery, an increase in export demand and interest rates remaining low.
According to KTI Property Information, the third quarter of 2013 was the slowest of the year in terms of transaction volume (EUR 0.32 billion). The total property transaction volume for the first three quarters of the year stood at EUR 1.12 billion. The majority of the transactions took place in the Helsinki metropolitan area. The full year transaction volume for 2013 looks to be one of the lowest since the turn of the century. A special characteristic of this year’s transaction market is the popularity of housing portfolios and nursing home properties, which represented 45% of the total transaction volume at the end of September.
The vacancy rate for office premises in the Helsinki metropolitan area has continued to increase. According to Catella Property Oy, the total quantity of vacant office space at the end of June 2013 stood at nearly a million square metres, or approximately 11.5% of the total stock. There were substantial regional differences. In Helsinki, the vacancy rate was approximately 9.8%, while in Espoo it was 17.2%.
Market rent levels have generally declined slightly in 2013 while vacancy rates have increased. Rental levels have only remained stable in Helsinki city centre this year.
New construction activity, which has been high in recent years, is slowing down. According to KTI Property Information, the total floor area of new office projects started in 2013 stood at only 14,000m² by the midpoint of the year.
The Finnish government has proposed to cut the corporate tax rate to 20% from 24.5% from the beginning of 2014. If the legislative proposal is approved, it will have the effect of reducing Sponda’s deferred taxes.
BUSINESS CONDITIONS – RUSSIA
According to the Bank of Finland, Russian GDP growth has slowed down to a level that is below expectations. The GDP growth rate for 2013 is forecast to be 1.8%. Growth has been slowed down by a contraction of both the public economy and investments by state-owned companies. While oil prices are expected to decrease slightly during the forecast period, GDP growth is forecast to be 3.3% in 2014 and 3.2% in 2015. Economic growth in the coming years will be based on export growth, investments and higher purchasing power.
Activity in the Russian transaction market was high. The transaction volume at the end of the third quarter stood at USD 4.8 billion, which is 46% higher than in the corresponding period in 2012. Retail and office properties represented 85% of the total volume (CB Richard Ellis).
According to CB Richard Ellis, the average vacancy rate for office premises in Moscow stood at approximately 11% in mid-2013. At the end of 2013, the vacancy rate for Class A office space is expected to remain at current levels, with vacancy rates for Class B office premises declining slightly. Market rents for office premises did not change during the first half of the year, and they are expected to remain unchanged during the remainder of the year. Some 341,000m² of new office space was completed by the end of June. The forecast for the full year is 860,000m².
OPERATIONS AND PROPERTY ASSETS 1 JANUARY – 30 SEPTEMBER 2013
At the end of September 2013, the fair value of Sponda’s properties was assessed internally for both Finland and Russia. The change in fair value of the investment properties in January-September was EUR -6.0 (6.0) million and in July-September 2013 alone EUR -1.7 (1.4) million. The negative change in fair value in the third quarter was attributable to exchange rate fluctuations 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
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% (5.6%) for office
premises, -1.8% (-8.8%) for shopping centres, -6.7% (-0.1%) for logistics
premises and -0.6% (7.8%) 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
INVESTMENTS AND DIVESTMENTS
Property development investments were mainly directed to preparatory work on the Ratina shopping centre project and the development of an office property in Ruoholahti, which was completed in April 2013.
EVENTS AFTER THE END OF THE PERIOD
Sponda issued a EUR 150 million senior unsecured bond in October 2013. The five-year bond matures on 9 October 2018 and carries fixed annual coupon at the rate of 3.375 per cent. The proceeds from the bond offering were used to repay existing debt.
PROSPECTS FOR 2013
Sponda is defining its estimate of the development of the vacancy rate in 2013. Sponda now estimates that the vacancy rate for the Group as a whole will remain unchanged or increase slightly in 2013 compared to the level at the end of 2012. Previously, Sponda estimated the vacancy rate for its investment properties at year’s end 2013 to be largely unchanged from the end of 2012. The revision of the prospects is based on weaker-than-expected development in the leasing of logistics premises in late 2013. Due to the prolonged recession of the Finnish economy.
Comparable net operating income (excluding disposals) in 2013 is expected to increase slightly from 2012. This increase is based on rising rental levels for business premises in Helsinki’s central business district and the completion of property development projects.
1 November 2013
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 Communications and IR, tel. +358 20-431 3454 or
+358 40-527 4462.
NASDAQ OMX Helsinki