Sponda Plc’s INTERIM REPORT JANUARY-SEPTEMBER 2017
Sponda Plc
Stock Exchange Release
November 2, 2017 at 08:30 a.m.
Sponda Plc’s INTERIM REPORT JANUARY-SEPTEMBER 2017:
JANUARY-SEPTEMBER 2017 IN BRIEF (compared with 1 January-30 September 2016)
- Total revenue increased to EUR 197.1 (193.2) million.
- Net operating income totalled EUR 145.5 (143.8) million.
- Operating profit was EUR 106.3 (132.8) million. This includes a fair value change of EUR -19.4 (-7.0) million.
- Cash flow from operations per share was EUR 0.25 (0.31).
- The fair value of the investment properties amounted to EUR 3,857.3 (3,692.7) million.
- Net assets (NAV) per share totalled EUR 5.19 (5.05).
- The economic occupancy rate was 88.5 (89.3)%.
JULY-SEPTEMBER 2017 IN BRIEF (compared with 1 July-30 September 2016)
- Total revenue was EUR 64.1 (66.3) million.
- Net operating income totalled EUR 48.9 (51.5) million.
- Operating profit was EUR 34.5 (37.2) million. This includes a fair value change of EUR 1.3 (-10.0) million.
- Cash flow from operations per share was EUR 0.06 (0.10).
KEY FIGURES
| 7-9/2017 | 7-9/2016 | 1-9/2017 | 1-9/2016 | 1-12/2016 | |
| Total revenue, M€ | 64.1 | 66.3 | 197.1 | 193.2 | 259.0 |
| Net operating income, M€ | 48.9 | 51.5 | 145.5 | 143.8 | 190.9 |
| Operating profit, M€ | 34.5 | 37.2 | 106.3 | 132.8 | 206.7 |
| Earnings per share, € | 0.05 | 0.05 | 0.19 | 0.23 | 0.41 |
| Cash flow from operations per share, € | 0.06 | 0.10 | 0.25 | 0.31 | 0.40 |
| Equity per share, € | 5.19 | 5.05 | 5.16 | ||
| Equity ratio, % | 46.8 | 47.2 | 47.4 |
KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS
| 7-9/2017 | 7-9/2016 | 1-9/2017 | 1-9/2016 | 1-12/2016 | |
| EPRA Earnings, M€ | 21.0 | 31.0 | 79.1 | 84.9 | 113.1 |
| EPRA Earnings per share, € | 0.06 | 0.09 | 0.23 | 0.26 | 0.35 |
| Company adjusted EPRA Earnings, M€ | 21.3 | 32.2 | 81.1 | 87.1 | 113.7 |
| Company adjusted EPRA Earnings per share, € | 0.06 | 0.09 | 0.24 | 0.27 | 0.35 |
| EPRA NAV/share, € | 5.49 | 5.38 | 5.49 | ||
| EPRA NNNAV/share, € | 5.14 | 4.97 | 5.07 | ||
| EPRA Net Initial Yield (NIY), % | 5.23 | 5.53 | 5.29 | ||
| EPRA “topped-up” NIY, % | 5.25 | 5.55 | 5.31 | ||
| EPRA Vacancy rate, % | 11.49 | 10.73 | 10.38 | ||
| EPRA Cost Ratio (including direct vacancy costs), % | 16.36 | ||||
| EPRA Cost Ratio (excluding direct vacancy costs), % | 12.40 |
PRESIDENT AND CEO KARI INKINEN
On 5 June 2017, Polar Bidco S.à r.l. (a corporation owned by funds advised by affiliates of The Blackstone Group L.P.) announced a tender offer to purchase all shares in Sponda. The initially announced offer price was EUR 5.19 per share, representing a premium of approximately 20% on the share price at the time. Sponda’s Board of Directors unanimously recommended that the shareholders accept the tender offer and decided, on the basis of the authorisation previously granted to it, to distribute a dividend of EUR 0.12 per share, which was deducted from the price offered for each share. On 8 August 2017, Polar Bidco S.à r.l. announced that it has acquired 98.80% of Sponda’s shares. For the remainder of the shares, a redemption procedure has commenced and, subsequently, Sponda has applied for delisting of its shares.
At the end of September, Sponda’s net operating income grew as anticipated and maintenance expenses increased mainly due to an increase in property taxes. The economic occupancy rate fell slightly, being 88.5% at the end of September. The most significant negative changes were seen in Sponda’s non-strategic properties and office properties outside Helsinki’s central business district.
Property development projects progressed as planned and on schedule. The building and letting of Ratina is progressing as planned. The pre-let rate currently stands at 74% for the shopping centre and 61% for the project as a whole, including two office properties in the area. The construction of an office and retail complex in the Tikkurila district of Vantaa is also progressing on schedule. The pre-let rate is 65%.
BUSINESS CONDITIONS
Economic growth in Finland exceeded forecasts and it is expected to remain strong throughout the remainder of the year. Growth forecasts have been adjusted upwards and, according to the Ministry of Finance’s new forecast, the Finnish GDP will grow by 2.9% in 2017. Economic growth has a firmer foundation now that the positive development of private consumption and investments is complemented by stronger export growth. The rapid improvement of the economy also has a positive impact on employment. According to Statistics Finland, the unemployment rate was 7.5% at the end of August.
According to the Consumer Survey published by Statistics Finland, confidence among consumers in their own economic situation and the Finnish economy remains high. Consumer prices have risen during the first half of the year but, according to the Ministry of Finance, the increase in prices is slower than usual. According to Statistics Finland, inflation was 0.8 per cent at the end of September.
GROUP RESULT IN JANUARY-SEPTEMBER 2017
Sponda Group’s result for January-September was EUR 68.8 (77.3) million, while the result before taxes was EUR 69.2 (94.7) million and operating profit was EUR 106.3 (132.8) million.
Net operating profit increased by 1.2% to EUR 145.5 (143.8) million. The year-on-year increase was due to the Forum property acquisition, the effect of which is included in the comparison figures starting from March 2016. Items that had a negative effect on the development of net operating income included property sales, particularly in Russia, and the negative development of the net operating income of a like-for-like portfolio, totalling EUR -1.2 million. Marketing and administration expenses and other operating income and expenses totalled EUR 26.9 (16.0) million. Marketing and administration expenses totalled EUR 19.7 (16.4) million. The increase is mainly due to the termination of the company’s share-based incentive schemes. Other operating income and expenses include approximately EUR 7 million of external consultancy fees relating to the public tender offer for all shares in Sponda.
During the period, the Group recognised profit on sales of EUR 10.9 (14.3) million from the sales of investment and trading properties. The change in fair value of the investment properties was negative, EUR -19.4 (-7.0) million, mainly due to the effect of increased property tax on the values. The Group’s result was weighed down by amortisation of goodwill amounting to EUR 3.7 (2.1) million. The item is related to the Ratina project and will be written off once the project is completed.
Financial income and expenses for the period totalled EUR -37.1 (-38.1) million. The net amount of financial income and expenses was positively affected by the prices of the funding sources used as well as capitalised interest expenses, while the amount of interest-bearing liabilities had a negative effect on the net amount.
In accordance with IFRIC 21, the company recognises a liability in the balance sheet when the obligating event occurs. The company periodises real estate taxes in the profit and loss statement on the basis of the passage of time.
PROPERTY ASSETS 1 JANUARY-30 SEPTEMBER 2017
At the end of September 2017, Sponda had a total of 165 leasable properties, with an aggregate leasable area of approximately 1.2 million m². Of this total, approximately 70% is office premises, 17% shopping centres and 11% logistics premises. Approximately 1% of the leasable area 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 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 2017, the fair value of Sponda’s investment properties was assessed internally for both Finland and Russia. The fair value of the investment properties totalled EUR 3.9 billion at the end of September 2017. The change in the fair value of the investment properties in the third quarter was EUR 1.3 (-10.0) million. No changes were made to the yield requirements. The value of Sponda’s properties in Finland developed favourably, primarily due to an increase in market rents and the property development margin. The negative change in the fair value was mainly attributable to exchange rate changes in Russia.
Valuation gains/losses on fair value assessment
| M€ | 7-9/2017 | 7-9/2016 | 1-9/2017 | 1-9/2016 | 1-12/2016 |
| Changes in yield requirements (Finland) | 0.0 | 0.0 | 15.2 | 17.1 | 60.1 |
| Changes in yield requirements (Russia) | 0.0 | 0.0 | 0.0 | -4.1 | -4.1 |
| Development gains on property development projects | 5.1 | 1.5 | 10.5 | 5.4 | 7.4 |
| Modernisation investments | -9.2 | -7.4 | -27.7 | -19.9 | -31.0 |
| Change in market rents and maintenance costs (Finland) | 7.6 | -3.6 | -2.0 | 10.0 | 12.6 |
| Change in market rents and maintenance costs (Russia) | 0.3 | -0.4 | -12.7 | -11.1 | -14.1 |
| Change in currency exchange rates | -2.5 | -0.1 | -2.8 | -2.5 | -2.1 |
| Investment properties, total | 1.3 | -10.0 | -19.4 | -5.0 | 28.7 |
| Real estate funds | 0.0 | 0.0 | 0.0 | -2.0 | -2.0 |
| Realised share of fund profits | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Group, total | 1.3 | -10.0 | -19.4 | -7.0 | 26.7 |
RENTAL OPERATIONS
Sponda calculates the growth in net rental income for its properties during the review period 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. For January-September, like-for-like net rental growth was 0.1% (0.6%) for office properties and -4.5% (4.7%) for shopping centres. Like-for-like net rental incomes were reduced by higher maintenance expenses due to an increase in property taxes.
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:
| % | 30.9.2017 | 30.6.2017 | 31.3.2017 | 31.12.2016 | 30.9.2016 |
| Office Properties | 88.2 | 89.0 | 89.0 | 89.2 | 88.8 |
| Helsinki business district | 92.1 | 92.8 | 92.6 | 91.8 | 91.5 |
| Ruoholahti | 82.2 | 82.6 | 82.7 | 85.0 | 85.0 |
| Rest of the metropolitan area | 85.8 | 87.3 | 87.2 | 87.5 | 86.1 |
| Tampere | 91.5 | 91.9 | 93.3 | 93.4 | 95.9 |
| Rest of Finland | 74.2 | 76.4 | 78.0 | 78.2 | 78.0 |
| Shopping Centres | 93.9 | 93.5 | 92.6 | 93.5 | 93.2 |
| Helsinki business district | 93.7 | 93.1 | 91.9 | 92.4 | 92.4 |
| Other | 94.1 | 94.1 | 93.8 | 95.4 | 94.5 |
| Non-Strategic Holdings | 69.8 | 72.6 | 77.0 | 79.9 | 79.8 |
| Logistics properties | 68.3 | 71.3 | 74.2 | 74.0 | 72.8 |
| Russia | 71.3 | 73.9 | 79.5 | 84.8 | 85.3 |
| Total property portfolio | 88.5 | 89.1 | 89.1 | 89.6 | 89.3 |
DIVESTMENTS AND INVESTMENTS
Sponda is continuing to actively manage its property portfolio and sell non-strategic properties. Investment properties were sold for EUR 10.7 million in January-September. Office properties were sold for EUR 2.2 million, and logistics properties under the Non-Strategic Holdings segment were sold for EUR 8.3 million. In addition, trading properties were sold for EUR 8.9 million.
Property development investments were mainly directed to the construction of the Ratina shopping centre and an office and retail complex in Vantaa’s Tikkurila district.
Divestments
| M€ | 1.7.- 30.9.2017 | 1.7.- 30.9.2016 | 1.1.- 30.9.2017 | 1.1.- 30.9.2016 | 1.1.- 31.12.2016 |
| Disposals of investment properties | |||||
| Selling price | 1.0 | 19.3 | 10.7 | 27.6 | 36.7 |
| Profit/loss on sale *) | 0.4 | 0.9 | 3.4 | 0.9 | 0.8 |
| Balance sheet value | 0.6 | 18.4 | 7.4 | 26.7 | 35.9 |
*) Includes sales costs
Investments
| M€ | 1.7.- 30.9.2017 | 1.7.- 30.9.2016 | 1.1.- 30.9.2017 | 1.1.- 30.9.2016 | 1.1.- 31.12.2016 |
| Properties acquired | -12.5 | – | -12.5 | -589.5 | -590.5 |
| Modernisation investments | -9.2 | -7.4 | -27.7 | -19.9 | -31.0 |
| Property development investments | -25.7 | -16.8 | -71.4 | -41.1 | -60.9 |
| Investments, total | -47.5 | -24.2 | -111.7 | -650.5 | -682.4 |
SPONDA’S SHARE AND SHAREHOLDERS
Issued shares and share capital
At the end of September 2017, Sponda Plc’s share capital amounted to EUR 111,030,185 and the number of issued shares was 339,690,554.
Trading in Sponda’s shares
The weighted average price of the Sponda share in the third quarter was EUR 5.07. The highest quotation was EUR 5.32 and the lowest EUR 4.96. Turnover during the period totalled some 288 million shares, or approximately EUR 1,460 million. The closing price of the share on 29 September 2017 was EUR 5.06 and the market capitalisation of the company’s share capital was EUR 1,726 million.
Board authorisations
The Annual General Meeting on 20 March 2017 authorised the Board of Directors to purchase the company’s own shares. The authorisation is valid until the next Annual General Meeting. The authorisation was not exercised during the review period.The Annual General Meeting also authorised the Board of Directors to decide on a share issue and on the issuance of special rights conferring entitlement to the shares referred to in Chapter 10, Section 1 of the Finnish Companies Act in accordance with the proposal of the Board of Directors. The authorisation is valid until the next Annual General Meeting. The authorisation was not exercised during the review period.The Annual General Meeting authorised the Board of Directors to decide, at its discretion, on the payment of dividend in no more than two tranches based on the annual accounts adopted for the financial year 2016. The maximum amount of dividend to be distributed on the basis of the authorisation is EUR 0.12 per share. The authorisation is valid until the next Annual General Meeting. The authorisation was exercised in full during the review period.
Treasury shares
Sponda did not own any treasury shares during the review period.
Polar Bidco S.à r.l. tender offer for all shares in Sponda
On 5 June 2017, Polar Bidco S.à r.l., a corporation owned by funds advised by affiliates of The Blackstone Group L.P., and Sponda Plc signed a combination agreement. In accordance with the agreement, Polar Bidco made a voluntary public tender offer, recommended by Sponda’s Board of Directors, to purchase all issued and outstanding shares in Sponda. Following the subsequent tender offer period, Polar Bidco S.à r.l. announced on 8 August 2017 that it has acquired 98.80% of all shares in Sponda. Polar Bidco S.à r.l. has commenced redemption proceedings in respect of minority shares in Sponda by initiating arbitration proceedings in accordance with the Finnish Companies Act in order to obtain ownership of all the shares in Sponda.
Dividend
On 5 June 2017, the Board of Directors of Sponda Plc decided, on the basis of the authorisation granted to it by the Annual General Meeting held on 20 March 2017, on the payment of a dividend amounting to the maximum amount in accordance with the authorisation. A dividend of EUR 0.12 per share was paid to shareholders entered in the company’s shareholder register maintained by Euroclear Finland Ltd on the dividend record date, 7 June 2017. The dividend payment date was 14 June 2017.
In accordance with the terms and conditions of the tender offer for all the issued and outstanding shares in Sponda as announced by Polar Bidco S.à r.l., the payment of dividend reduced the offer price payable for each share.
Shareholders
On 30 September 2017, Sponda had altogether 1,125 shareholders (30 June 2017: 8,866). The five largest shareholders are
| Shareholder | Number of shares | % of shares | |
| 1 | Polar Bidco S.à r.l. | 275,684,247 | 81.16 |
| 2 | Euroclear Bank Sa/Nv | 61,440,375 | 18.09 |
| 3 | I.A. von Julins STB | 595,000 | 0.18 |
| 4 | Skandinaviska Enskilda Banken AB | 374,123 | 0.11 |
| 5 | Nordea Bank Ab (Publ), Finnish Branch | 285,893 | 0.08 |
| Total | 338,379,638 | 99.62 |
Flagging notices
The following flagging notices were issued during the review period:
- Stock Exchange Release 6 July 2017: The holding of Polar Bidco S.à r.l. in Sponda Plc’s shares is 15.18% (51,570,566 shares).
- Stock Exchange Release 20 July 2017: The holding of Mercator Invest Ab in Sponda Plc’s shares is 0% (0 shares).
- Stock Exchange Release 20 July 2017: The holding of Polar Bidco S.à r.l. in Sponda Plc’s shares is 96.78% (328,748,635 shares).
- Stock Exchange Release 21 July 2017: The holding of Hartwall Capital Oy Ab in Sponda Plc’s shares is 0% (0 shares).
- Stock Exchange Release 21 July 2017: The holding of Varma Mutual Pension Insurance Company in Sponda Plc’s shares is 0% (0 shares).
EXTRAORDINARY GENERAL MEETING
The Extraordinary General Meeting of Sponda Plc was held on 4 September 2017. The Extraordinary General Meeting decided to confirm the number of the members of the company’s Board of Directors as seven ordinary members. In addition, it was decided that Outi Henriksson continues as a member of the Board of Directors. Leif Andersson, Jean-Francois Bossy, Andrew Lax, Svein Erik Lilleland, James Seppälä and Michael Swank were elected as members of the Board of Directors. The Extraordinary General Meeting decided that the remuneration payable to Outi Henriksson and Svein Erik Lilleland be EUR 2,750 per month each for the term that expires at the closing of the Annual General Meeting in 2018, and that no remuneration be paid to the other Board members for the term that expires at the closing of the Annual General Meeting in 2018.
The Extraordinary General Meeting decided to disband the Shareholders’ Nomination Board of the company.
RISKS AND UNCERTAINTY FACTORS IN THE NEAR FUTURE
Sponda estimates that the risks and uncertainty factors for 2017 are mainly related to the following areas:
Change in demand for space, caused by reasons such as technological development, may have a negative impact on the development of occupancy rate and net operating income.
Statutory requirements related to the strengthening of banks’ solvency may lead to reduced availability of bank financing. Uncertainty about the development of the world economy and interest rates may limit the availability of other debt financing.
In Russia, the risks are mainly related to the development of the Russian economy and its impact on the sale of Sponda’s properties in Russia in 2017.
PROSPECTS FOR 2017
Sponda provides prospects for 2017 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 2017 will amount to EUR 182-192 million. This estimate is based on property sales in 2016 and estimated sales in 2017. The development of net operating income will also be affected by the increase in property taxes in 2017 as well as one large property being vacated for renovation.
Adjusted EPRA Earnings
Sponda estimates that company adjusted EPRA Earnings in 2017 will amount to EUR 106-116 million. This estimate is based on property sales in 2016 and estimated sales in 2017. The development of net operating income will also be affected by the increase in property taxes in 2017 as well as one large property being vacated for renovation.
EVENTS AFTER THE PERIOD
On 28 October, Sponda announced that it will restructure the group’s financing. Sponda’s group companies signed senior secured facilities agreements for approximately EUR 1.6 billion in total. More details on the refinancing can be found from the company’s website www.sponda.fi -> newsroom -> stock exchange releases.
2 November 2017
Sponda Plc
Board of Directors
Additional information:
Kari Inkinen, President and CEO, tel. +358 20 431 3311 or +358 400 402 653,
Pia Arrhenius, SVP, Corporate Planning and IR, tel. +358 20 431 3454 or +358 40 527 4462
Niklas Nylander, CFO, tel. +358 20 431 3480 or +358 40 754 5961
Distribution:
NASDAQ OMX Helsinki
Media
www.sponda.fi
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