Sponda Plc’s interim report January-September 2014
4 November 2014 at 8:30 a.m.
Sponda Plc’s interim report January-September 2014
JANUARY-SEPTEMBER 2014 IN BRIEF (compared with 1 January – 30 September 2013)
— Total revenue was EUR 189.4 (198.9) million. The decline was primarily due
to the sale of properties and an increase in the vacancy rate.
— Net operating income was EUR 135.6 (143.5) million.
— Operating profit was EUR 118.8 (123.5) million. This includes a fair value
change of EUR -1.8 (-1.5) million.
— Cash flow from operations per share was EUR 0.28 (0.30).
— The fair value of the investment properties amounted to EUR 3,122.3
— Net assets per share totalled EUR 4.63 (4.50).
— The economic occupancy rate was 86.5% (88.0%).
— The prospects were revised.
JULY-SEPTEMBER 2014 IN BRIEF (compared with 1 July – 30 September 2013)
— Total revenue was EUR 63.2 (65.7) million.
— Net operating income was EUR 46.2 (49.5) million.
— Operating profit was EUR 42.2 (44.1) million. The operating profit includes
a fair value change of EUR 0.1 (0.7) million.
— Cash flow from operations per share was EUR 0.11 (0.11).
KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS
PRESIDENT AND CEO KARI INKINEN
At the end of September, we concluded the sales of the properties and real estate funds sold to Certeum. With the transaction, Sponda becomes a shareholder in Certeum with a holding of about 38%, which means the company expects to receive stable dividend income on its share. This was a significant strategic milestone, as the transaction represents a large part of the implementation of our strategy that was revised a year ago.
Property acquisitions and property development projects will increase Sponda’s cash flow from 2015 onwards. The company currently has two new property development projects under construction in Helsinki. They are both office properties and are located in Ilmala and Lassila. In addition, modernization investments on two entire properties will be completed in Helsinki, on Keskuskatu and in Ruoholahti. There are currently few newly developed properties under construction in the Helsinki market, and Sponda’s properties constitute a significant proportion of the total.
The Finnish transaction market has been active this year. Including the Certeum transaction, the total volume was estimated at the end of September to be slightly under EUR 3 billion. Demand exceeds supply particularly for properties in central Helsinki, which has resulted in a rise in property values this year.
On 30 September 2014, Sponda Plc concluded the sales of 12 logistics properties and its shares in the real estate funds Sponda Fund I, Sponda Fund II and Sponda Fund III to Certeum Ltd. The total debt-free sales price of the 12 logistics properties is EUR 216.7 million and their economic occupancy rate is about 80.2%. The average net yield is about 7.2%. The sales price of the shares in the real estate funds is EUR 77.2 million.
In conjunction with the transaction, Sponda became a Certeum shareholder and Sponda’s holding in Certeum will be about 38%, which amounts to approximately EUR 175 million. Sponda’s final holding in Certeum will be determined after the usual adjustments to the sales price have been made. Sponda has made a commitment not to sell its shares in Certeum before the Annual General Meeting of spring 2015. In line with its strategy, Sponda plans to reduce its ownership in Certeum in the future.
The transaction is described in more detail in the company’s stock exchange release published on 30 April 2014.
BUSINESS CONDITIONS – FINLAND
According to preliminary data from Statistics Finland, Finnish GDP volume grew by 0.2% in April-June compared to the first quarter. The year-on-year decrease was 0.1%.
The Finnish Ministry of Finance forecasts that the Finnish GDP will show no growth in 2014. The current GDP growth forecast for 2015 is 1.2%. The forecast attributes the expected GDP growth to a conservative increase in private consumption, a slight recovery in investment, and an increase in industrial and service production.
According to KTI Property Information, the property transaction volume for the first half of the year was approximately EUR 1.48 billion. The third-quarter volume was almost equal to that amount, approximately EUR 1.44 billion. This figure includes Certeum Oy’s transactions in excess of EUR 0.9 billion. There are many more property transactions pending. According to Catella, the full-year transaction volume will be approximately EUR 4 billion.
The weak economic situation is reflected in new construction activity. According to a forecast by KTI Property Information, only some 80,000 m² of new premises will be added to the Helsinki metropolitan area office property market in 2014. Of this total, approximately 55,000 m² was completed in the first half of the year.
In spite of the weak economic situation, the vacancy rates for office premises in the Helsinki metropolitan area decreased in the third quarter. According to Catella, the average vacancy rate stood at 12.1% at the end of June. The vacancy rate in Helsinki’s central business district continued to increase after the first quarter. After the first half of the year, the vacancy rate was 8.5%, an increase of 1.2 percentage points from the start of the year.
BUSINESS CONDITIONS – RUSSIA
According to the Bank of Finland, Russian GDP growth slowed down in 2013 and early 2014 as growth in domestic demand slowed down substantially. The Bank of Finland forecasts that full-year GDP growth for 2014 will slow down to zero due to increased uncertainty caused by the Ukrainian crisis, which particularly affects private investment. Although the price of oil is not expected to increase in 2015 and 2016, the Russian economy is estimated to recover gradually as the world economy picks up. The current forecasts for GDP growth are 0.5% for 2015 and 1.5% for 2016. The forecasts assume that the reactions of the financial markets related to the Ukrainian crisis are limited, and that sanctions will not be prolonged or expanded.
The Russian transaction market has remained relatively active. The volume of property transactions in the third quarter exceeded the volume for the first half of the year. The total volume for the year stood at approximately USD 3.2 billion at the end of September, which is substantially lower than the USD 4.8 billion reported for the corresponding period last year.
The preliminary information from CBRE indicates that the average vacancy rate for office premises in Moscow continued to increase in the third quarter. The increase of 0.6 percentage points saw the vacancy rate rise to 15.1%. The vacancy rate for Class A office space increased from 24% to 24.5%, while the vacancy rate for Class B office space increased from 12% to 12.3%. The increase in the vacancy rate was attributable to the weak economic situation and the completion of new property development projects. Nearly 0.5 million m2 of new office space was completed in Moscow in the third quarter. The full-year increase is expected to be 1.4 million m2.
OPERATIONS AND PROPERTY ASSETS 1 JANUARY – 30 SEPTEMBER 2014
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 least twice a year by external experts to ensure that the parameters and values used in the calculations are based on market observations.
At the end of September 2014, the fair value of Sponda’s properties was assessed internally for both Finland and Russia. The change in fair value of the investment properties was EUR -5.3 (-6.0) million in January-September and EUR -2.6 (-1.7) million in July-September. The most significant negative effect on fair value was attributable to changes in maintenance costs and market rents for properties in Russia. The change in currency exchange rates was positive in the third quarter as the USD strengthened against Euro. 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 3.8% (1.1%) for office premises, 7.0% (-1.8%) for shopping centres, -16.7% (-6.7%) for logistics properties and -14.2% (-0.6%) 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
*) From the beginning of 2014, office and retail premises and shopping centres located in the same investment property have been divided into their respective segments for part of the investment properties. The properties were previously classified according to their primary use. The change applied to approximately ten properties, and its effect was -1.2 percentage points for office properties and 3.6 percentage points for shopping centre properties at the time the change was made.
DIVESTMENTS AND INVESTMENTS
Property development investments were mainly directed to the construction of an office building in Ilmala.
RISKS AND UNCERTAINTY FACTORS IN THE NEAR FUTURE
Sponda estimates that the risks and uncertainty factors in the current financial year are caused by the weak development of the Finnish and Russian economies. These risks relate to a decline in economic occupancy rates and a fall in rental yield in both Finland and Russia, resulting from the insolvency of tenants.
For Sponda’s property development projects, the key risk is related to the degree of success in leasing premises.
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.
EVENTS AFTER THE PERIOD
In October 2014, Sponda signed an agreement with Swedbank AB (publ), Finnish Branch for a five-year unsecured loan of EUR 100 million. The loan was used in its entirety for partially refinancing an existing syndicated loan that matures in November 2015. The syndicated loan’s remaining principal before the repayment was EUR 330 million.
In October 2014, Sponda signed an agreement with Pohjola Bank plc for a five-year unsecured loan of EUR 100 million. The loan was used in its entirety for partially refinancing an existing syndicated loan that matures in November 2015. The syndicated loan’s remaining principal before the repayment was EUR 130 million.
PROSPECTS FOR 2014
Sponda provides prospects for 2014 with regard to the development of the economic occupancy rate and the company’s net operating income.
Economic occupancy rate
Sponda expects the economic occupancy rate of the Group’s properties in 2014 to decline slightly from 2013. Earlier Sponda estimated that the economic occupancy rate in 2014 will remain largely unchanged from 2013. The revised estimate is mainly based on bankruptcies and debt restructurings in the tenant base during the third quarter.
Net operating income
Sponda estimates that the net operating income will be EUR 175-180 million (Q2/2014: 175-183 million) at the end of 2014 (including the net operating income from the properties sold to Certeum for the period they were held). The estimate was revised based on the expected letting activities in the fourth quarter 2014 and on property transactions that could still affect Sponda’s net operating income.
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 Planning and IR, tel. +358 20-431 3454 or +358 40-527 4462.
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