Sponda Plc’s INTERIM REPORT January-September 2015
Sponda Plc
Interim report
3 November 2015 at 8:30 a.m.
Sponda Plc’s interim report January-September 2015
JANUARY-SEPTEMBER 2015 IN BRIEF (compared with 1 January – 30 September 2014)
— Total revenue was EUR 173.3 (189.4) million. The decline was primarily due
to properties sold in 2014.
— Net operating income was EUR 124.4 (135.6) million. The decline was due to
the aforementioned disposals.
— Operating profit was EUR 130.3 (118.8) million. This includes a fair value
change of EUR 12.9 (-1.8) million.
— Cash flow from operations per share was EUR 0.29 (0.28).
— The fair value of the investment properties amounted to EUR 3,161.4
(3,122.3) million.
— Net assets per share totalled EUR 4.71 (4.63).
— The economic occupancy rate was 86.2% (86.5%).
— The prospects were revised.
JULY-SEPTEMBER 2015 IN BRIEF (compared with 1 July – 30 September 2014)
— Total revenue was EUR 56.7 (63.2) million.
— Net operating income was EUR 42.2 (46.2) million.
— Operating profit was EUR 38.3 (42.2) million. This includes a fair value
change of EUR 0.5 (0.1) million.
— Cash flow from operations per share was EUR 0.10 (0.11).
KEY FIGURES
| 7-9/2015 | 7-9/2014 | 1-9/2015 | 1-9/2014 | 1-12/2014 | |
| Total revenue, M€ | 56.7 | 63.2 | 173.3 | 189.4 | 246.7 |
| Net operating income, M€ | 42.2 | 46.2 | 124.4 | 135.6 | 176.0 |
| Operating profit, M€ | 38.3 | 42.2 | 130.3 | 118.8 | 151.7 |
| Earnings per share, € | 0.06 | 0.07 | 0.23 | 0.20 | 0.24 |
| Cash flow from operations per share, € | 0.10 | 0.11 | 0.29 | 0.28 | 0.37 |
| Equity per share, € | 4.71 | 4.63 | 4.65 | ||
| Equity ratio*, % | 41.4 | 40.0 | 41.0 | ||
| Interest cover ratio | 3.4 | 3.3 | 3.3 |
*) The figure for 1-9/2014 has been adjusted as a result of the adoption of the IFRIC 21 Levies interpretation.
KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS
| 7-9/2015 | 7-9/2014 | 1-9/2015 | 1-9/2014 | 1-12/2014 | |
| EPRA Earnings, M€ | 27.4 | 26.7 | 78.7 | 78.4 | 101.6 |
| EPRA Earnings per share, € | 0.10 | 0.09 | 0.28 | 0.28 | 0.36 |
| Company adjusted Earnings, M€ | 29.1 | 28.6 | 82.5 | 82.2 | 108.7 |
| Company adjusted Earnings per share, € | 0.10 | 0.10 | 0.29 | 0.29 | 0.38 |
| EPRA NAV/share, € | 5.58 | 5.39 | 5.45 | ||
| EPRA NNNAV/share, € | 4.57 | 4.50 | 4.49 | ||
| EPRA Net Initial Yield (NIY), % | 5.39 | 5.58 | 5.18 | ||
| EPRA “topped-up” NIY, % | 5.40 | 5.59 | 5.19 | ||
| EPRA Vacancy rate, % | 13.76 | 13.49 | 12.96 | ||
| EPRA Cost Ratio (including direct vacancy costs), % | 17.26 | ||||
| EPRA Cost Ratio (excluding direct vacancy costs), % | 11.96 |
PRESIDENT AND CEO KARI INKINEN
Our rental operations continued to be stable in the third quarter. Both net operating income and the occupancy rate were at a good level in spite of the disposal of properties and the challenging market situation.
We currently have two property development projects in the construction phase. The office building in Helsinki’s Ilmala district will be completed at the end of this year, while the Ratina shopping centre in Tampere will be completed in summer 2018. The projects are on schedule and I believe that we will achieve the target development margins set for them, which is 15% for both projects.
The implementation of our strategy is progressing according to plan. In October we signed an agreement concerning the sale of the Certeum shares held by Sponda. Sponda’s holding is 37.9% of Certeum’s share capital. The consideration to be received by Sponda is approximately EUR 190 million and the profit on the sale will be approximately EUR 7 million. The sale is expected to be completed by 16 December. The transaction market is currently very active in Finland, and this will support our strategic disposal program in Finland.
DEFERRED TAX LIABILITIES
As a consequence of dissolving an unnecessary sub-group, originating from a portfolio transaction in 2006, and from changes in the acquisition cost of shares, the amount of deferred taxes is expected to change significantly. The amount of deferred taxes is affected, among other things, by the fair value development of properties and for this reason the exact amount of change in deferred taxes for the financial statements 2015 cannot be predicted accurately. The current estimate is that the reduction of deferred tax liability in the financial statements for the year 2015 will be approximately EUR 110-130 million.
BUSINESS CONDITIONS – FINLAND
According to preliminary data from Statistics Finland, Finnish GDP grew by 0.2% in April-June compared to the first quarter. The year-on-year increase was 0.1%. The Finnish Ministry of Finance forecasts that the economic trend will take a slightly more positive turn in the second half of the year, and predicts that Finnish GDP will grow by 0.2% this year. The slow growth is based on net exports and the growth of private consumption. In 2016, Finnish GDP is expected to increase by 1.3%, particularly due to the positive development of investments.
The transaction market remained active in the third quarter with a volume of EUR 1.4 billion according to KTI Property Information. The transaction volume for the year is already at EUR 4.07 billion, which means that last year’s total of EUR 4.34 billion will be exceeded. Foreign buyers account for slightly less than one third of the transactions. Approximately 54% of the transactions were made in the Helsinki metropolitan area.
The vacancy rate for office premises in the Helsinki metropolitan area has increased due to the weak economic situation, increased efficiency in the use of office space and new construction. According to Catella, the vacancy rate for office premises was 13.4% midway through the year.
Approximately 59,000 m2 of new office space was completed in the Helsinki metropolitan area by the end of August, with the same amount currently under construction. Business premises construction is seeing strong growth with projects such as the Redi and Tripla shopping centres.
BUSINESS CONDITIONS – RUSSIA
According to the Bank of Finland, Russian GDP will decline by approximately 4% in 2015. Oil prices, which are expected to increase slightly in the coming years after the steep decline seen in 2014, will continue to weigh down the Russian economy next year. The prevailing uncertainty is reducing investments and consumption is negatively affected by the rapidly increased prices. Tensions in eastern Ukraine, sanctions and the unclear prospects concerning the development of economic and trade restrictions are still causing uncertainty.
The transaction market saw a substantial increase in activity compared to the previous quarter, with the volume growing by 42.5%. According to CBRE, the volume in the third quarter was approximately USD 0.9 billion, and the total volume for the year was approximately USD 2 billion at the end of September. In spite of the increase in activity, the volume is approximately 30% lower than in the previous year. Offices represented 54% of the volume, while international buyers accounted for 27% of the transaction volume.
Preliminary information from CBRE indicates that the average vacancy rate for office premises in Moscow continued to increase in the third quarter and was estimated to be 17.6%. The vacancy rate for Class A office space was 26.8%, while the vacancy rate for Class B office space was 13.6%.
Some 0.24 million m2 of new office space was completed in Moscow in the third quarter. Several construction projects have been delayed and the total construction volume for the year is now expected to be 0.8 million m2, which is nearly half of the estimates made at the start of the year.
OPERATIONS AND PROPERTY ASSETS 1 JANUARY – 30 SEPTEMBER 2015
At the end of September 2015, the fair value of Sponda’s investment properties was assessed internally for both Finland and Russia. The change in fair value of the investment properties in January-September was EUR 12.9 (-1.8) million and in July-September alone EUR 0.5 (0.1) million. The value of Sponda’s properties in Finland developed favourably, particularly for properties in Helsinki’s central business district, primarily due to an increase in market rents. Positive value changes were also booked for property development projects. The negative change in the fair value of properties in Russia was attributable to exchange rate fluctuations. The changes in fair values are itemised in the table “Valuation gains/losses on fair value assessment”.
Valuation gains/losses on fair value assessment
M€
| 7-9/15 | 7-9/14 | 1-9/15 | 1-9/14 | 1-12/14 | |
| Changes in yield requirements (Finland) | 0.0 | 0.0 | 32.2 | 3.3 | 15.7 |
| Changes in yield requirements (Russia) | 0.0 | 0.0 | -7.4 | 0.0 | -10.0 |
| Development gains on property development projects | 6.7 | 1.9 | 9.7 | 1.9 | 5.5 |
| Modernisation investments | -6.8 | -11.5 | -27.5 | -27.7 | -42.0 |
| Change in market rents and maintenance costs (Finland) | 1.9 | 11.1 | 20.4 | 26.5 | 40.3 |
| Change in market rents and maintenance costs (Russia) | 1.0 | -8.2 | -14.3 | -15.1 | -19.3 |
| Change in currency exchange rates | -2.4 | 4.1 | -0.2 | 5.7 | 5.9 |
| Investment properties, total | 0.5 | -2.6 | 12.9 | -5.3 | -3.9 |
| Real estate funds | 0.0 | 0.7 | 0.0 | -1.9 | -1.8 |
| Realised share of fund profits | 0.0 | 2.0 | 0.0 | 5.5 | 5.5 |
| Group, total | 0.5 | 0.1 | 12.9 | -1.8 | -0.2 |
Goodwill recognised in connection with the Kapiteeli acquisition will be amortised against the property development margin of the Ratina project. The amortisation is shown in the income statement under “Amortisation of goodwill”. Goodwill, EUR 12 million in total, will be amortised in its entirety during the project.
Sponda has determined the fair values of its investment properties in accordance with the company’s established accounting principles. A higher than usual level of uncertainty is related to the valuation due to the economic situation in Russia, sanctions and strong fluctuations in the rate of the rouble. Especially the lack of comparable sales, changes to lease agreements agreed upon with tenants and the rouble becoming increasingly common as the contract currency have increased uncertainty.
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 3.7% (3.8%) for office premises, 1.7% (7.0%) for shopping centres, 16.2% (-16.7%) for logistics premises and -6.9% (-14.2%) for properties in Russia. The like-for-like figure for Russia is adjusted for changes in exchange rates to better reflect the true change. 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:
| Type of property | 30.9.2015 | 30.6.2015 | 31.3.2015 | 31.12.2014 | 30.9.2014 |
| Office properties, % | 88.0 | 88.1 | 87.9 | 88.5 | 88.3 |
| Shopping centres | 90.6 | 89.8 | 90.3 | 91.2 | 89.3 |
| Logistics, % | 67.8 | 68.6 | 68.5 | 64.9 | 65.6 |
| Russia, % | 82.3 | 84.5 | 90.1 | 90.4 | 89.4 |
| Total property portfolio, % | 86.2 | 86.3 | 86.8 | 87.0 | 86.5 |
| Geographical area | 30.9.2015 | 30.6.2015 | 31.3.2015 | 31.12.2014 | 30.9.2014 |
| Helsinki business district, % | 89.3 | 88.3 | 88.2 | 89.3 | 88.3 |
| Helsinki Metropolitan Area, % | 83.5 | 83.7 | 83.6 | 83.1 | 83.2 |
| Turku, Tampere, Oulu, % | 91.1 | 92.3 | 92.9 | 93.2 | 92.2 |
| Russia, % | 82.3 | 84.5 | 90.1 | 90.4 | 89.4 |
| Total property portfolio, % | 86.2 | 86.3 | 86.8 | 87.0 | 86.5 |
The decline in the occupancy rate in Russia was influenced by the sale of two fully occupied properties at the end of June 2015.
DIVESTMENTS AND INVESTMENTS
Divestments M€
| 1.7.- 30.9.2015 | 1.7.- 30.9.2014 | 1.1.- 30.9.2015 | 1.1.- 30.9.2014 | 1.1.- 31.12.2014 | |
| Properties sold | |||||
| Selling price | 0.0 | 225.1 | 56.4 | 232.1 | 237.2 |
| Profit/loss on sale* | 0.0 | 0.0 | -1.4 | 0.6 | 0.6 |
| Balance sheet value | 0.0 | 225.1 | 57.8 | 231.5 | 236.6 |
*) Includes transaction costs
Investments M€
| 1.7.- 30.9.2015 | 1.7.- 30.9.2014 | 1.1.- 30.9.2015 | 1.1.- 30.9.2014 | 1.1.- 31.12.2014 | |
| Properties acquired | 0.0 | -65.0 | 0.0 | -65.0 | -65.0 |
| Maintenance investments | -6.8 | -11.5 | -27.5 | -27.7 | -42.0 |
| Property development investments | -14.2 | -4.4 | -39.8 | -13.0 | -22.0 |
Property development investments were mainly directed to the construction of office buildings in Ilmala and Lassila in Helsinki, as well as the construction of the Ratina shopping centre in Tampere.
RISKS AND UNCERTAINTY FACTORS IN THE NEAR FUTURE
Sponda estimates that the risks and uncertainty factors in the current financial year are primarily related to the development of the Finnish and Russian economies.
In Russia, these risks are related to the decline of tenants’ solvency and a decrease in the economic occupancy rate. The depreciation of the Russian rouble 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 2015.
The weak 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 2015
Sponda provides prospects for 2015 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 2015 will amount to EUR 160-166 (previously 158-168) million. The estimate is based on the company’s view of property sales to be completed and the development of rental operations during the year.
Adjusted EPRA Earnings
Sponda estimates that company adjusted EPRA Earnings in 2015 will amount to EUR 97-103 (previously 95-105) million. This outlook is based on the development of net operating income and the company’s estimate of the development of financial expenses.
EVENTS AFTER THE PERIOD
On 14 October 2015, Sponda announced that it has signed a sale and purchase agreement concerning the sale of all of its shares in Certeum Ltd to Tungsten Investment S.à r.l., a company affiliated to Blackstone Real Estate Partners Europe IV. The consideration to be received by Sponda is approximately EUR 190 million and the profit on the sale will be approximately EUR 7 million. The purchase price is subject to customary adjustments. The sale is expected to be completed by 16 December 2015 and the completion is conditional upon approval being obtained from the competition authorities.
As an integral part of Sponda’s strategy, Sponda co-founded Certeum in 2014 together with Varma Mutual Pension Insurance Company, the State Pension Fund, Sponda Fund I, Sponda Fund II and Sponda Fund III. Certeum specialises in logistics and industrial properties. Sponda announced its plan to reduce its ownership in Certeum when the company was first founded, and the agreed transaction is in line with Sponda’s previous announcement and strategy.
Sponda signed a EUR 80 million syndicated credit limit agreement with three banks on 2 November 2015. The syndicated credit limit has a maturity of 5 years. The terms of the agreement correspond to the terms of Sponda’s other loans. The key covenants of the loan are linked to the equity ratio and interest cover ratio. The credit arrangement is unsecured. The primary creditors arranging the syndicated credit limit were Pohjola Bank Plc, Nordea Bank Finland Plc and Danske Bank. Pohjola Bank was the coordinator for the arrangement and will also act as the agent for the syndicated credit limit.
3.11.2015
Sponda Plc
Board of Directors
Additional information:
Kari Inkinen, President and CEO, tel. +358 20 431 3311 or +358 400 402 653 and Pia Arrhenius, SVP, Corporate Planning and IR, tel. +358 20 431 3454 or +358 40 527 4462.
Distribution:
NASDAQ OMX Helsinki
Media
www.sponda.fi
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