Sponda - Interim report (Q1 and Q3)

Sponda Plc’s interim report January–September 2014

Sponda Plc                        Interim report 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
     (3,264.7) million.
  -- 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

                                 7-9/2014  7-9/2013  1-9/2014  1-9/201  1-12/201                             3         3
Total revenue, M€                    63.2      65.7     189.4    198.9     264.3
Net operating income, M€             46.2      49.5     135.6    143.5     190.9
Operating profit, M€                 42.2      44.1     118.8    123.5     153.0
Earnings per share, €                0.07      0.07      0.20     0.19      0.34
Cash flow from operations per        0.11      0.11      0.28     0.30      0.40
 share, €                                                                       
Equity per share, €                                      4.63     4.50      4.64
Equity ratio, %                                          40.1     39.4      40.7
Interest cover ratio                                      3.3      3.0       3.1



KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS

                                          7-9/14  7-9/13  1-9/14  1-9/13  1-12/1
                                                                               3
EPRA Earnings, M€                           26.7    30.0    78.4    83.8   111.5
EPRA Earnings per share, €                  0.09    0.11    0.28    0.30    0.39
EPRA NAV/ (net asset per share), €                          5.39    5.25    5.29
EPRA NNNAV/share, €                                         4.50            4.52
EPRA Net Initial Yield (NIY), %                             5.58    6.37    5.84
EPRA, “topped-up” NIY, %                                    5.59    6.37    5.84
EPRA Cost Ratio (including direct                                          16.27
 vacancy costs), %                                                              
EPRA Cost Ratio (excluding direct                                          11.37
 vacancy costs), %                                                              



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, modernisation
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. 

CERTEUM

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

M€

                                          7-9/14  7-9/13  1-9/14  1-9/13  1-12/1
                                                                               3
Changes in yield requirements (Finland)      0.0     0.0     3.3    -5.7    -5.0
Changes in yield requirements (Russia)       0.0     0.0     0.0     0.0     0.0
Development gains on property                1.9     0.0     1.9     2.2     2.2
 development projects                                                           
Modernisation investments                  -11.5    -5.2   -27.7   -14.8   -22.6
Change in market rents and maintenance      11.1     6.3    26.5    16.2    22.1
 costs (Finland)                                                                
Change in market rents and maintenance      -8.2     1.1   -15.1    -0.9    -7.1
 costs (Russia)                                                                 
Change in currency exchange rates            4.1    -3.9     5.7    -3.1    -5.7
Investment properties, total                -2.6    -1.7    -5.3    -6.0   -16.1
Real estate funds                            0.7    -1.2    -1.9    -3.7    -8.8
Realised share of fund profits               2.0     3.6     5.5     8.1    10.7
Group, total                                 0.1     0.7    -1.8    -1.5   -14.2



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 3.8% (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
follows: 

Type of property               30.9.14  30.6.14  31.3.14  31.12.13  30.9.13
Office properties, %            88.3*)   87.9*)   88.2*)      90.1     89.6
Shopping centres                89.3*)   90.4*)   92.9*)      89.0     90.8
Logistics, %                      65.6     71.9     71.7      75.2     75.6
Russia, %                         89.4     89.0     88.4      96.0     96.1
Total property portfolio, %       86.5     85.7     86.2      87.9     88.0
Geographical area              30.9.14  30.6.14  31.3.14  31.12.13  30.9.13
Helsinki business district, %     88.3     89.4     89.4      88.1     88.5
Helsinki Metropolitan Area, %     83.2     82.2     82.8      84.9     84.8
Turku, Tampere, Oulu, %           92.2     90.4     92.9      94.7     94.9
Russia, %                         89.4     89.0     88.4      96.0     96.1
Total property portfolio, %       86.5     85.7     86.2      87.9     88.0



*) 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

Divestments M€

                             1.7.-      1.7.-      1.1.-      1.1.-       1.1.-
                         30.9.2014  30.9.2013  30.9.2014  30.9.2013  31.12.2013
Properties sold                                                                
Selling price                225.1        9.9      232.1       18.6        33.1
Profit/loss on sale*           0.0       -0.2        0.6        0.2         0.8
Balance sheet value          225.1        9.7      231.5       18.0        31.9
*) Includes sales costs                                                        



Investments M€

                                1.7.-      1.7.-      1.1.-     1.1.-      1.1.-
                            30.9.2014  30.9.2013  30.9.2014  30.9.201  31.12.201
                                                                    3          3
Properties acquired             -65.0       -3.1      -65.0      -3.1       -3.1
Maintenance investments         -11.5       -5.2      -27.7     -14.7      -22.6
Property development             -4.4       -1.3      -13.0      -9.4      -14.0
 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. 





4.11.2014
Sponda Plc
Board of Directors





Additional information:
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. 







Distribution:
NASDAQ OMX Helsinki
Media
www.sponda.fi

Attachments:

Interim report Q3 2014.pdf