2017-10-31 07:00:00 CET
2017-10-31 07:00:45 CET
REGULATED INFORMATION
SATO Oyj - Interim report (Q1 and Q3)
SATO Corporation's interim report 1 January - 30 September 2017: SATO's occupancy rate continued its strong growth
SATO Corporation, Interim report, 31st October 2017 at 8:00 a.m.
Summary of 1 January 2017 - 30 September 2017 (1 January 2016 - 30 September
2016)
* Profit before taxes was EUR 130.0 (172.9) million.
* Earnings per share were EUR 1.83 (2.57).
* The change in the fair value of rental apartments included in the result was
EUR 48.2 (101.5) million.
* Equity was EUR 1,367.1 (1,206.6) million, or EUR 24.14 (21.31) per share.
* Return on equity was 10.6 (16.7) per cent.
* Return on investment was 6.8 (9.5) per cent.
* Net sales were EUR 208.2 (194.8) million.
* Investments in rental apartments were EUR 121.7 (508.8) million.
* A total of 802 (3,061) rental apartments were acquired or completed.
* The occupancy rate in Finland was 96.6 (95.3) per cent.
* A total of 1,151 rental apartments are under construction.
Summary of 1 July - 30 September 2017 (1 July - 30 September 2016)
* Profit before taxes was EUR 54.8 (64.0) million.
* Earnings per share were EUR 0.77 (0.90).
* The change in the fair value of rental apartments included in the result was
EUR 24.3 (38.5) million.
* Net sales were EUR 70.6 (68.3) million.
* Investments in rental apartments were EUR 59.1 (64.0) million.
* A total of 297 (776) rental apartments were acquired or completed.
* The occupancy rate in Finland was 97.2 (96.0) per cent.
* A total of 1,151 rental apartments are under construction.
Operating environment
The Finnish economy grows rapidly, and it is estimated that growth will be
approximately 3 per cent in the near future. Growth has spread to all areas of
economy. However, inflation has returned to a low level after being higher at
the beginning of the year. The light financial policy from central banks
continues to keep the short-term reference rates at an exceptionally low level.
Economic growth and expectations of inflation will probably cause the European
Central Bank to apply a stricter financial policy in the near future. Longer-
term rates are expected to increase first. Consumer trust in their own finances
and in the Finnish economy has remained at a record high level, and consumers
are optimistic about the development of employment.
Demand for rental apartments has remained high, as urbanisation continues to be
strong. According to the Confederation of Finnish Construction Industries,
housing construction is at a record high level in SATO's main operating areas,
where construction-related costs are also high. These high costs, combined with
expectations of higher interest rates, may result in an increase in rents or a
decrease in general interest in housing investments.
The activity in the real estate investment market is record high (KTI). The
number of apartments purchased by investors has remained high, and consumers
also picked up the pace during the beginning of the year. This has been
reflected in the considerable increase in loan applications, among other
aspects.
The Russian economy is expected to grow slightly.
CEO Saku Sipola:
- The occupancy rate continued to increase, from 96.6 per cent in June to 97.6
per cent in September. This was supported by a decrease in the external tenant
turnover rate. Improvements in our customer service on several fronts, in line
with our "Customer first" strategy, have contributed to the positive development
of the figures. To continue our progress, we have implemented "Customer first"
service model deeper into our partnerships. A good example of this is the
bidding process carried out during the review period for maintenance companies.
One of the key criteria for selecting partners was the ability of maintenance
companies to implement the service model in the everyday lives of tenants.
- For the strategy period 2017-2020 we have set as a target that 60 per cent or
more of our assets shall be unencumbered. We were already able to reach this
goal during the third quarter of 2017. During the review period, the continued
changes in the financing structure were boosted by the EUR 100 million loan
agreement signed with Swedbank without any asset-based security. Previously
similar loan agreements were signed with OP Corporate Bank, Aktia and EIB. At
the same time, our company's solvency ratio decreased. This, together with the
changes in the financing structure, will give us more opportunities to use
diverse funding base.
- The success of urbanisation is a significant factor in terms of Finland's
competitiveness. During the review period, we accelerated urbanisation, for
example, in areas planned together with the City of Vantaa in Martinlaakso,
Vantaa, by starting the construction of 288 new rental apartments in
Raiviosuonmäki, by opening 110 new rental apartments in Kukinkuja, and by
beginning the completion work on 68 apartments in our StudioHome in Raikukuja.
At the same time, a design competition is ongoing in cooperation with the City
of Helsinki, VR Group, the Finnish Association of Architects and SATO. The aim
of the competition is to develop new apartments alongside the Jokeri Light Rail
Line in Helsinki. In Espoo, plans for development projects proceeded in
Niittykumpu, Suomenoja and Soukka. In Turku and Tampere, we are negotiating with
the cities over complementary planning projects to be launched later this autumn
and next spring.
- The SATO StudioHome to be completed this December in Martinlaakso, Vantaa, has
raised significant interest, and we received more than 700 apartment
applications. We believe that, through its functional design and shared
facilities, the SATO StudioHome offers an excellent alternative for an
increasing demand for small apartments in an environment with a high cost of
construction. We have invited representatives of cities, media and active social
media parties in November to see our StudioHome project and share our thoughts
on communality.
- An increase in property tax, changes in district heating rates, stricter taxes
on energy and also an increase in the price of water have significantly raised
property maintenance costs since 2014. For SATO, costs have increased almost 40
%. If a similar trend continues, there will be more pressure to increase rents
and the housing market may become less attractive to investors.
REVIEW PERIOD 1 JANUARY 2017 - 30 SEPTEMBER 2017 (1 JANUARY 2016 - 30 SEPTEMBER
2016)
Net sales and profit
In January-September, consolidated net sales were EUR 208.2 (194.8) million,
showing a change of 6.9 per cent from the reference period. This growth was
mainly based on the positive development of the occupancy rate and the
apartments acquired.
Operating profit was EUR 164.8 (208.0) million. Operating profit without the
change in the fair value of investment apartments was EUR 116.7 (106.4) million.
The change in fair value was EUR 48.2 (101.5) million. The increase in fair
value was mainly driven by an increase in the prices of apartments in SATO's
operating areas and the deregulation of some properties from restrictions
regarding state subsidised housing property. Changes in the exchange rate of the
Russian rouble had a positive effect on the operating profit in the first
quarter, but a negative effect in the second quarter and a slightly negative
effect in the third quarter.
Profit before taxes was EUR 130.0 (172.9) million. Income taxes for the period
amounted to EUR -26.2 (-35.2) million, including the change in deferred taxes.
Cash flow from operations (free cash flow after taxes excluding the change in
fair value) in January-September amounted to EUR 63.5 (58.1) million.
Financial position and financing
The consolidated balance sheet total was EUR 3,646.3 (3,540.6) million at the
end of September. Equity was EUR 1,367.1 (1,206.6) million. Equity per share was
EUR 24.14 (21,31).
At the end of September, the Group's equity ratio was 37.5 (34.1) per cent. The
goal is to have an equity ratio of at least 35 per cent. EUR 174.1 million of
new long-term financing was withdrawn during the review period, and the solvency
ratio was 52.7 (55.2) per cent at the end of September. The improvement in key
figures representing the equity ratio and the solvency ratio is based on an
increase in the value of housing assets and the extended positive profit
development. On 8 March 2017, SATO's Annual General Meeting decided that no
dividends be paid for 2016.
The Group's annualised return on equity was 10.6 (16.7) per cent. The return on
investment was 6.8 (9.5) per cent.
Interest-bearing liabilities at the end of September totalled EUR 1,921.8
(1,971.6) million, of which loans subject to market terms accounted for EUR
1,511.8 (1,469.5) million. The average interest rate was 2.3 (2.6) per cent. Net
financing costs totalled EUR -34.8 (-35.1) million.
The calculated impact on equity of changes in the market value of interest
hedging was EUR 10.7
(-12.4) million.
Housing assets and fair value
The development of the value of rental apartments is a key factor for SATO. Its
housing assets are located in areas and apartment sizes, demand for which will
increase in the long term. The allocation of building repairs is based on
lifecycle plans and repair need specifications.
On 30 September 2017, SATO owned a total of 25,731 (25,681) apartments. A total
of 802 rental apartments were acquired or completed. The total number of
divested rental apartments and shared ownership apartments redeemed by the owner
occupants was 322. In September, SATO purchased 150 rental apartments from
Veritas Pension Insurance. The properties have central locations in Espoo,
Vantaa and Turku.
The fair value of rental apartments was EUR 3,508.8 (3,335.7) million at the end
of September. From the beginning of 2017, the change in the value of investment
apartments was EUR 125.5 million, including rental apartments acquired and
divested during the review period.
Of the value of apartments, the Helsinki metropolitan area accounted for
approximately 80 percent, Tampere and Turku made up 13 percent, Jyväskylä and
Oulu represented 4 per cent, and St Petersburg covered 3 percent at the end of
September.
Investments and divestments
Investment activities prepare the ground for growth. Since year 2000, SATO has
invested more than EUR 2.0 billion in non-subsidised rental apartments. SATO
acquires and builds entire rental buildings and single rental apartments.
Investments in rental apartments were EUR 121.7 (508.8) million. Investments in
the Helsinki metropolitan area represented 83 (66) per cent. New apartments
accounted for 62 (21) per cent of all investments.
On 30 September 2017, binding apartment purchase agreements in Finland totalled
EUR 87.5 (125.7) million.
During the review period, 281 (662) rental apartments were divested in Finland.
Their total value was EUR 44.6 (31.4) million.
Rental activities
Effective rental activities provide home-seekers with quick access to a home and
the Group with a steadily developing cash flow. Rental services are mainly
offered by SATO's rental offices. In addition, SATO's electronic channels make
finding a home easy for customers.
Following the apartments acquired and the increase in the occupancy rate, rental
income increased by 6.9 per cent to EUR 208.2 (194.8) million. The economic
occupancy rate of apartments in Finland was 96.6 (95.3) per cent on average, and
the external tenant turnover rate was 28.9 (33.7) per cent. SATO has changed its
reporting practices and reports external tenant turnover instead of total tenant
turnover. External tenant turnover reflects better the customer loyalty and its
impact on SATO's business. During the past 12 months, the decrease in the
turnover rate and the increase in the occupancy rate have been affected by
activities carried out in accordance with the "Customer first" strategy
programme, closer communication with customers, improved quality and more
effective rental activities.
The average rent per square metre of SATO's rental apartments in Finland was EUR
16.65 (16.25) per m(2) per month at the end of the review period. The average
rent increased by investments in small apartments in growth centres. Rent
increases remained moderate.
Net rental income from apartments was EUR 139.5 (126.1) million, and the net
rental income rate was 5.6 (5.8) per cent at an annual level.
Property development
Property development allows for new investments in rental apartments in Finland.
The rental capacity and value of rental apartments owned by SATO are developed
through renovation activities.
The book value of owned plot reserves totalled EUR 55.8 (65.4) million at the
end of September. The value of new plots acquired by the end of September
totalled EUR 0.0 (13.5) million.
The permitted building volume for 2,350 apartments is being developed for the
plots of the company's own stock of buildings. As a result, SATO can make use of
the existing infrastructure, and it allows for a denser urban structure and,
thereby, serves to ensure the availability of services.
In Finland, a total of 635 (421) rental apartments and 57 (0) apartments for
sale were completed. On 30 September 2017, a total of 1151 (1428) rental
apartments and 0 (76) owner-occupied apartments were under construction.
A total of EUR 31.2 (30.4) million was spent on repairing apartments and
improving their quality.
In January-September, 26 (95) new apartments were sold. At the end of the review
period, 1 (6) completed apartments and 0 (8) apartments under construction
remained unsold. The total purchase value of these unsold apartments amounted to
EUR 0.7 (6.1) million. SATO has made a strategic decision to discontinue the
production of owner-occupied apartments and focus on business operations related
to rental apartments.
Business operations in St Petersburg
At the end of September, SATO's housing assets in St Petersburg totalled EUR
121.4 (116.9) million. The total amount of binding apartment purchase agreements
was EUR 0.0 (0.0) million.
At the end of September, SATO owned 534 (534) completed apartments and 0 (0)
apartments under construction in St Petersburg.
The economic occupancy rate of rental apartments was 88.3 (80.0) per cent on
average. The increase in the occupancy rate from the previous year was mainly
attributable to the positive development of the occupancy rate in the newest
buildings.
For the time being, SATO will refrain from making new investment decisions in
Russia.
Personnel
At the end of September, the Group employed 211 (170) people, of whom 198 (157)
were full-time employees. The average number of personnel was 203 (170) in
January-September. The number of personnel has increased remarkably due to the
implementation of Customer first model and the transfer of customer interface
from partners to SATO.
PERIOD 1 JULY - 30 SEPTEMBER 2017 (1 JULY - 30 SEPTEMBER 2016)
Net sales and profit
In July-September, consolidated net sales were EUR 70.6 (68.3) million, showing
a change of 3.3 per cent from the reference period.
Operating profit was EUR 66.3 (76.1) million. Operating profit without the
change in the fair value of investment apartments was EUR 42.0 (37.6) million.
The change in fair value was EUR 24.3 (38.5) million. This positive development
was mainly driven by an increase in the prices of apartments in SATO's operating
areas and the deregulation of some properties from restrictions regarding state
subsidised housing property. Changes in the exchange rate of the Russian rouble
had a slightly negative impact on the value of housing assets in St Petersburg.
Profit before taxes was EUR 54.8 (64.0) million. Cash flow from operations (free
cash flow after taxes excluding the change in fair value) in July-September
amounted to EUR 29.8 (23.3) million.
Housing assets and fair value
On 30 September 2017, SATO owned a total of 25,731 (25,681) apartments. A total
of 297 rental apartments were acquired or completed. The total number of
divested rental apartments and shared ownership apartments redeemed by the owner
occupants was 53.
The fair value of rental apartments was EUR 3,508.8 (3,335.7) million at the end
of September. From the beginning of the third quarter of 2017, the change in the
value of investment apartments was EUR 78.2 million, including rental apartments
acquired and divested during the review period.
Investments and divestments
Investments in rental apartments were EUR 59.1 (64.0) million. Investments in
the Helsinki metropolitan area represented 92 per cent. New apartments accounted
for 45 per cent of all investments.
On 30 September 2017, binding apartment purchase agreements in Finland totalled
EUR 87.5 (125.7) million.
During the review period, 53 (534) rental apartments were divested in Finland.
Their total value was EUR 5.4 (19.2) million.
Rental activities
Following the apartments acquired and the increase in the occupancy rate, rental
income increased by 3.3 per cent to EUR 70.6 (68.3) million. The economic
occupancy rate of apartments in Finland was 97.2 (96.0) per cent on average, and
the external tenant turnover rate was 26.6 (35.3) per cent.
The average rent of SATO's rental apartments in Finland was EUR 16.65 (16.25)
per m(2) per month at the end of September. Net rental income from apartments
was EUR 51.0 (44.7) million, and the net rental income was 6.0 (5.7) per cent at
an annual level.
Property development
The book value of owned plot reserves totalled EUR 55.8 (65.4) million at the
end of September. The value of new plots acquired by the end of September
totalled EUR 0.0 (4.0) million.
The permitted building volume for 2350 apartments is being developed for the
plots of the company's own stock of buildings.
In Finland, a total of 147 (323) rental apartments and 0 (0) apartments for sale
were completed. On 30 September 2017, 1,151 (1,428) rental apartments and 0 (76)
owner-occupied apartments were under construction.
A total of EUR 11.3 (11.0) million was spent on repairing apartments and
improving their quality.
In July-September, 5 (19) new apartments were sold. At the end of the period, a
total of 1 (6) completed apartments and 0 (8) apartments under construction
remained unsold. The total purchase value of these unsold apartments amounted to
EUR 0.7 (6.1) million.
Business operations in St Petersburg
At the end of September, SATO's housing assets in St Petersburg totalled EUR
121.4 (116.9) million. The total amount of binding apartment purchase agreements
was EUR 0.0 (0.0) million.
At the end of September, SATO owned 534 (534) completed apartments and 0 (0)
apartments under construction in St Petersburg.
The economic occupancy rate of rental apartments in St Petersburg was 89.8
(83.7) per cent on average.
Personnel
At the end of September, the Group employed 211 (170) people, of whom 198 (157)
were full-time employees. The average number of personnel in July-September was
213 (173).
Events after the review period
Upon assignment from SATO, Finnish Tenants and the City of Espoo, Pellervo
Economic Research PTT conducted a survey called Asumisen tuet vuokralaisen
näkökulmasta ("Housing Subsidies from tenant's point of view") to extensively
clarify questions related to housing subsidies, particularly from the consumers'
point of view. The survey was published on 26 October 2017.
On 30 October, the Board of Directors of SATO made an investment decision to
start construction in Atlantinkatu, Helsinki. This is a plot SATO received from
the City of Helsinki for its 75th anniversary.
A design from SATO, Skanska and ALA Architects was selected for the next round
in the Helsinki High-Rise architectural competition on 5 October 2017. The aim
of the competition, which emphasises quality, is to find a design and developer
for a high-rise area in central Pasila. SATO considers the development of
central Pasila to offer significant means to respond to the challenges in
urbanisation in Helsinki by using various urban development and housing
solutions.
Future risks and uncertainties
The most significant risks in the rental of apartments are related to economic
cycles, demographic factors and resulting fluctuations in demand. The positive
development of the value of SATO's housing assets and possibility to rent the
apartments are managed by focusing on growth centres.
Changes in energy-efficiency and environmental requirements may increase the
repair costs of apartments owned by SATO.
Risks in housing investments in St Petersburg are associated with the operating
environment and exchange rate risks. Approximately 4 per cent of SATO's housing
assets are located in St Petersburg. For the time being, SATO will refrain from
making new investment decisions in Russia.
The management of the financing risk is defined in the Group's financing policy.
In accordance with the Group's financing policy, the aim is to ensure that at
least 60 per cent of all loans are fixed-rate loans. The Group has set an equity
ratio target of at least 35per cent.
Economic growth and expectations of inflation will probably cause the European
Central Bank to apply a stricter financial policy in the near future. Longer-
term rates are expected to increase first. The high cost of construction,
combined with expectations of higher interest rates, will result in an increase
in rents or a decrease in general interest towards housing investments.
A more detailed description of SATO's risks and risk management is available in
the Group's annual report for 2016 and on the company's website at www.sato.fi.
Outlook
In the operating environment, SATO's business activities are mainly affected by
consumer confidence, the development of purchasing power, the rent and price
development for apartments, general competition and interest rates.
The Finnish economy is expected to continue its growth, and general confidence
is estimated to be higher than on average. Interest rates are expected to remain
low in 2017, which will have a positive impact on SATO's financing costs. Longer
rates are expected to increase.
According to the Bank of Finland, steady growth in the global economy and the
light financing conditions will support the positive development of the eurozone
in the near future, even though these expectations are shadowed by the
uncertainties related to Brexit, other political events that may slow down
economic growth, and concerns related to the state of the banking sector in
certain countries in the eurozone and to the outlook on public economy.
Continuing urbanisation provides good long-term conditions for continued
investments in Finland. Net immigration is expected to be the highest form of
population increase in SATO's operating areas. Some 80 per cent of SATO's
housing assets are located in the Helsinki metropolitan area, where price
development is expected to be stronger than in the rest of Finland.
According to estimates of Pellervo Economic Research PTT, prices and rents will
continue to increase, demand for owner occupied apartments will grow higher, and
the acceleration of housing sales will alleviate the pressure in the rental
market.
It will take several years to fulfil the estimated lack of 20,000 apartments in
the Helsinki metropolitan area and 3,000 apartments in Tampere. There is
constant demand for new housing investments. According to the Technical Research
Centre of Finland (VTT), Finland will require 25,000-30,000 new apartments every
year in its growth centres by 2040.
The Russian economy is expected to develop slowly.
SATO's net rental income percentage is expected to remain at the 2016 level.
SATO Corporation's shareholders on 16 October 2017
Largest shareholders and their holdings
shares %
· Balder Finska Otas AB (owner: Fastighets Ab Balder, 100 %) 30,485,686 53.7 %
· Stichting Depositary APG Strategic Real Estate Pool
(owner: Stichting Pensioenfonds ABP, >95 %; 12,811,647 22.6 %
manager: APG Asset Management NV)
· Elo Mutual Pension Insurance Company 7,233,081 12.7 %
· The State Pension Fund 2,796,200 4.9 %
· The Finnish Construction Trade Union 619,300 1.1 %
· Valkila Erkka 390,000 0.7 %
· Unemployment Fund of the Construction Sector 330,000 0.6 %
· The Research Foundation of the Pulmonary Diseases 227,000 0.4 %
· Rausanne Oy 194,920 0.3 %
· Entelä Tuula 179,000 0.3 %
· Others (100 shareholders) 1,516,233 2.7 %
On 16 October 2017, SATO had 56,783,067 shares and 110 shareholders registered
in the book-entry system. The share turnover rate was 0.13 per cent for the
period 1 January - 16 October 2017.
More information:
Saku Sipola, President and CEO, tel. +358 201 34 4001
Markku Honkasalo, CFO, tel. +358 201 34 4226
www.sato.fi
APPENDICES
Interim report 1 January - 30 September 2017
Interim report presentation 1 January - 30 September 2017
SATO is one of Finland's leading lessors of rental apartments. SATO aims to
offer full options for rental housing and an excellent customer experience. At
the end of 2016, SATO owned a total of 25,300 rental apartments in Finland's
largest growth centres and in St Petersburg.
We contribute to sustainable development and initiative through our operations,
and engage in open interaction with our stakeholders in order to produce added
value. We operate over the long term and profitably. We increase the value of
housing assets through investments and divestments and through our repair
activities.
SATO Group's net sales in 2016 were EUR 263.0 million* in accordance with the
new reporting practices, its operating profit was EUR 267.2 million and its
profit before taxes was EUR 219.4 million. The value of SATO's investment assets
is EUR 3.5 billion.
*Net sales have been adjusted in accordance with the new reporting practices.
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