Orava Asuinkiinteistörahasto Oyj - Interim report (Q1 and Q3)

Orava Residential REIT 1 January – 30 September report

Orava Resicential Real Estate Investment Trust plc

Interim Report 7 November 2014 8:00 a.m.





Orava Residential REIT 1 January - 30 September report

1 July - 30 September 2014

-      Revenue: EUR 4.4 million (1 July - 30 September 2013: EUR 2.7 million).

-      Comprehensive profit: EUR 1.9 million (EUR 2.1 million)

-      Earnings per share: EUR 0.42 (EUR 1.43)

-      Economic occupancy rate: 89.7%

-      Gross rental yield: 7.0%

-      Net rental yield: 4.0%

-      Profit from sales and changes in value: EUR 2.6 million (EUR 1.9 million)

-      Total dividends distributed during the period under review: EUR 0.28 per
share (EUR 0.27 per share) 

1 January - 30 September 2014

-      Revenue: EUR 12.8 million (1 January - 30 September 2013: EUR 4.7
million). 

-      Comprehensive profit: EUR 6.7 million (EUR 2.9 million)

-      Earnings per share: EUR 1.55 (EUR 1.97)

-      Economic occupancy rate: 88.2% (95.0%)

-      Gross rental yield: 6.7% (8.1%)

-      Net rental yield: 4.1% (4.7 %)

-      Profit from sales and changes in value: EUR 8.2 million (EUR 2.6 million)

-      Total dividends distributed during the period under review: EUR 0.84 per
share (EUR 0.81 per share) 

The net asset value per share of Orava Residential Real Estate Investment Trust
plc ("Orava Residential REIT") increased to EUR 12.50 (+8,3 %) from EUR 11.54
at the beginning of the year. The company has continued growing, and the value
of its investment properties totalled EUR 121.6 million (31 December 2013: EUR
79.2 million) at the end of the period. 

CEO's comments:"Orava Residential REIT's financial result for the period under review was in
accordance with its objectives. During the third quarter, the company decided
on acquisitions that increased the fair value of its investment properties over
EUR 120 million. 

The price development for apartments remained modest in 2014 due to the
prolonged generally poor economic situation. On the other hand, the prevailing
market situation offered wholesale buyers an opportunity to make favourable
acquisitions. In the third quarter an acquisition of 54 apartments was
completed and a binding agreement of acquisition of 59 apartments was made.
These apartments are located in 7 different properties, and the total debt-free
purchase price was EUR 15.0 million. The fair value of the investment
properties owned by the Residential REIT rose to EUR 121.6 million by the end
of September. 

The apartment sales, which were below the target level in the first half of the
year, improved during the third quarter and especially, after the period under
review, in October. In addition to the apartment sales, the selling of lots
added to the total investment property sales, which amounted to EUR 5.5 million
from the beginning of the year to the end of October. 

The economic occupancy rate decreased from the previous quarter's rate of 92,7
% to 89.7 % in the third quarter (1 July - 30 September 2014). The decrease was
primarily caused by the impact of both apartments in buildings completed in
June and apartments acquired without tenants in July. 

In the third quarter, maintenance and repair costs of investment properties
rose compared with the previous quarter mainly due to seasonal fluctuations. 

The number of Orava Residential REIT shareholders continued to grow and
amounted to approximately 5,200 in October. Trading in the company's shares on
the Helsinki Stock Exchange has continued to be lively; the average daily
turnover in January-September 2014 was approximately EUR 251,000. In August and
September, the company issued 274,806 new shares in directed issues. The new
shares do not entitle holders to dividend payments in 2014. 

The company estimates that it has favourable preconditions for maintaining good
profitability and exceeding the targeted total return of 10% on shareholders'
equity in 2014."

Operating environment

National economy

The growth in the Finnish gross domestic product over the current year is
forecasted to amount to -0.4% - 0.0%, and over next year to +0.6% - +1.2%. The
growth in private consumption, which has a key impact on the housing market, is
forecasted to be approximately -0.3% - +0.3% over the current year, and +0.2% -
+1.0% over 2015. The level of market interest rates in the euro area has
continued to fall, and short-term rates are also expected to remain at less
than 2% for the next five to six years. The estimate is based on the most
recent economic forecasts by 15 parties drawing up forecasts on the Finnish
economy and the market interest rate expectations calculated on the basis of
the euro interest rate curve published by the European Central Bank. 

The strengthening of the housing market as a result of overall economic
activity picking up seems to have been postponed and will remain somewhat
weaker in 2015 than forecasted previously. 

Demand in the housing market

During July-September 2014, households drew down EUR 3.8 billion in new
mortgages, or 3% less than a year previously according to statistics from the
Bank of Finland. The euro-denominated mortgage base totalled EUR 89.4 billion
at the end of June, and the annual growth in the mortgage base amounted to
1.7%. 

According to the Etuovi.com marketing service, the average marketing period for
old apartments in the country overall fell from 119 days in June to 112 days in
September, while it was 122 days in September in the previous year. 

The demand for apartments has continued to be weak.

Supply in the housing market

According to Statistics Finland, building permits for apartment blocks were
granted for 1,162 apartments in August, which was 13% more than a year
previously. Correspondingly, in January-August, a total of 12,136 building
permits were granted for apartment block apartments, or 25% more than a year
previously. The annual change in the sliding annual sum of building permits
granted for apartment blocks was +15%. 

The three-month change in the housing construction volume index, which
describes the value of on-going new construction, was +18% in August, and the
change year-on-year was -11%. 

Supply in the housing market is still at a low level, even though some signs of
a potential recovery can be seen. 

Prices, rents and return in the housing market

In the second quarter of 2014, the rents of non-subsidised apartments increased
by 3.3% year-on-year. The change in the prices of apartments during the third
quarter was -1.0% compared with the situation a year previously. The ratio of
housing prices to rents is slightly below the long-term average; the ratio
calculated from the square metre prices of the third quarter and rents of the
second quarter was 15.8. The 40-year average for the ratio of square metre
prices to annual rents in Finland is 16.7. 

We continue to expect housing prices throughout the country to start rising
slightly during the next 12 months and the growth rate in rents for
non-subsidised apartments to remain approximately the same if the market
interest rate expectations and economic forecasts prove to be accurate with
regard to their essential components affecting the housing market. 

Rental operations

Over the period under review, occupancy rates in rental operations were at a
lower level year-on-year. The primary reason for this was the acquisitions made
at the end of 2013 and subsequently, where the share of apartments acquired
without tenants was higher than in the comparison period.  In addition, the
prolonged generally poor economic situation has made letting slightly more
difficult. All new apartments acquired during the third quartal are located in
Helsinki, Tampere and Turku metropolitan areas. 

The economic occupancy rate for the third quarter was 89.7 %, while it was 88.2
% for the entire January-September period. 

At the end of the period, the company had a total of 1,081 residential
apartments (2013: 660) and a total of 1,103 apartments. There were 963 leases
at the end of the period, and 43 apartments were for sale (2013: 32). The
figures exclude the 59 new apartments that became rentable in October. 

                         1.1.-30.9.2014        1.1.-30.9.2013

Gross rental yield,%            6.7                     8.1

Net rental yield,%              4.1                     4.7

Economic occupancy rate, %     88.2                    95.0

Operational occupancy rate, %  88.8                    93.9

Tenant turnover/month, %        2.2                     2.2

Approximately 24 leases of the entire lease base for residential apartments
were agreements valid for a fixed term. A total of 172 agreements were
terminated during the period (2013: 83). 

Acquisitions

Acquisitions implemented or agreed during the third quarter



                           Debt-free      Company

                         purchase price   loan        Shares    Apartments

Time           Property  (EUR million)  (EUR million) (qty)      (qty)

30 Sep 2014   Apartments      13.5        10.8          -          59

          from 6 properties

          (Espoo, Kirkkonummi,

          Järvenpää, Tampere, Lempäälä and Raisio)



30 Sep 2014   A property in    1.5          -        114,806       54

              Kotka

TOTAL                         15.0        10.8       114,806      113

Through a binding agreement concluded on 30 September 2014, the company
acquired 59 apartments from Skanska at a debt-free price of EUR 13.5 million.
The transaction was implemented on 29 October 2014. The apartments acquired are
new and located in Espoo (4), Kirkkonummi (14), Järvenpää (8), Tampere (3),
Lempäälä (17) and Raisio (13). The apartments were acquired without tenants. 

Through a transaction concluded on 30 September 2014, the company acquired 54
apartments located in Kotka from A. Ahlström Real Estate Ltd at a debt-free
purchase price totalling EUR 1.45 million. The transaction was funded by a
directed issue allocated to A. Ahlström Real Estate Ltd, where A. Ahlström Real
Estate subscribed for 114,806 new shares issued by the company. The
subscription price of the new shares was EUR 12.63, which was based on the
weighted average price over the five stock exchange trading days preceding the
start of the subscription period. The new shares do not entitle holders to
dividends paid during 2014. 

Apartment sales

During the period under review, the company sold a total of 21 residential
apartments from nine different housing companies. The debt-free selling prices
of the apartments totalled EUR 2.0 million. Under the challenging market
conditions, the total number of apartment sales is lagging behind the
objective. The brokerage fees for the sales amounted to EUR 93 thousand. 

In accordance with the company's investment strategy, the company attempts to
sell apartments at 10% of the value of investment properties on the company's
opening balance sheet annually so that apartments released from rental use are
sold one by one. 

Investment properties on 30 September 2014

The fair value of investment properties at the end of the period totalled EUR
121.6 million (31 December 2013: EUR 79.2 million). Orava Residential REIT had
a total of 1,162 apartments on 30 September 2014 (31 December 2013: 791) with
an aggregate leasable surface area of approximately 72,726 m2 (31 December
2013: 50,129 m2). The apartments were located at 60 different housing
companies; in 15 of the cases, the company's holding is 100%. More detailed
information on the investment properties is provided in the tables section. 

Age and regional distributions of the investment portfolio (EUR at fair values)

                       30.9.2014      30.9.2013

Newer (since 1990)        61%            23%

Older (before 1990)       39%            77%



Helsinki region           43%            34%

Large cities              24%            17%

Rest of Finland           33%            48%

The values of the apartments owned by the REIT are measured at fair value at
least on a monthly basis, and are published at least on a quarterly basis, and
always when a change in the REIT's economic situation requires it, or when
changes in the condition of the real estate have a material impact on the value
of the holdings of the REIT. A more detailed account of the apartment price
measurement model is presented in the 2013 financial statements. 

Consolidated profit for the period

Consolidated revenue for the period totalled EUR 12.8 million (2013: EUR 4.7
million). The revenue was divided into income from ordinary operations of EUR
4.5 million (2013: EUR 2.2 million) and capital gains of EUR 8.2 million (2013:
EUR 2.6 million).  Income from ordinary operations includes rental income,
compensation for use and other income. Capital gains are made up of profit from
sales of investment properties less sales commissions for sold apartments, as
well as the change in the fair value of apartments. 

Operating expenses totalled EUR 4.6 million (2013: EUR 1.5 million), of which
maintenance costs and annual repairs accounted for EUR 1.8 million (2013: EUR
0.9 million) and the allocated performance-based management fee accounted for
EUR 1.6 million. The increase in expenses results from the increase in the
investment portfolio. 

Operating profit amounted to EUR 8.2million (2013: EUR 3.3 million)

Financial income and expenses amounted to EUR -1.2 million (2013: EUR -471
thousand) and taxes for the period totalled EUR 28 thousand (2013: EUR 35
thousand). 

Profit for the period amounted to EUR 7.0 million (2013: EUR 2.8 million).
Comprehensive income items totalled EUR -281 thousand (2013: EUR 150 thousand)
and comprehensive profit for the period amounted to EUR 6,7 million (2013: EUR
2,9 million). 

Major events 1 July - 30 September 2014

On 6 August 2014, Orava Residential REIT signed a second convertible bond of
EUR 1 million with the hedge fund UB View in accordance with the terms and
conditions of the previous bond (26 June 2014). The 80,000 new shares allocated
by Orava Residential REIT to itself in the charge-free share issue on 7 August
2014 were recorded in the Trade Register on 15 August 2014. After the share
issue, the number of the company's shares totalled 4,813,317. 

On 29 September 2014, Orava Residential REIT signed a convertible bond of EUR 1
million with the hedge fund UB View in accordance with the terms and conditions
of the previous bond (26 June 2014). 

Through a binding agreement concluded on 30 September 2014, the company
acquired 58 apartments from Skanska at a debt-free price of EUR 13.5 million.
The apartments acquired are new and located in Espoo, Kirkkonummi, Järvenpää,
Tampere, Lempäälä and Raisio. The apartments were acquired without tenants. 

Through a transaction concluded on 30 September 2014, the company acquired 54
apartments located in Kotka from A. Ahlström Real Estate Ltd at a debt-free
purchase price totalling EUR 1.45 million. The transaction was funded with a
directed issue allocated to A. Ahlström Real Estate Ltd, where A. Ahlström Real
Estate subscribed for 114,806 new shares issued by the company. The
subscription price of the new shares was EUR 12.63, which was based on the
weighted average price over the five stock exchange trading days preceding the
start of the subscription period. In addition, the company allocated a
charge-free share issue of 80,000 shares to itself. The new shares do not
entitle holders to dividends paid during 2014. 

Under the terms and conditions of the convertible bonds concluded by the
company, the company had assigned a total of 157,590 of its shares in
conversions of the convertible bond by 30 September 2014. After these
conversions, the company owned 102,410 treasury shares. 

Events after the financial period

The 114,806 shares allocated by Orava Residential REIT to A. Ahlström Real
Estate Ltd in connection with the property acquisition on 30 September 2014 and
the 80,000 new shares allocated to the company itself in a charge-free share
issue were recorded in the Trade Register on 8 October 2014. After the share
issues, the number of the company's shares totals 5,008,123. NASDAQ OMX
Helsinki ("the Helsinki Stock Exchange") approved the listing application
concerning the issued shares of Orava Residential REIT. The shares were
admitted to trading on 10 October 2014. The trading code of the shares on the
main list of the Helsinki Stock Exchange is OREIT0114. 

The shares assigned by the company are recognised under the company's equity
items in accordance with the convertible bond agreements concluded in June and
August. The increase in share capital was EUR 1.6 million, in addition to which
the reserve for invested unrestricted equity was increased by EUR 0.4 million.
After the increases, the company's share capital equals EUR 49,057,130.00.
After the registration of the new shares in October the NAV calculated with the
end of September figures was EUR 12.27 per share. 

The transaction concerning 59 apartments agreed with Skanska Rakennus Oy in
September 2014 was paid according to plan on 29 October 2014. The apartments
purchased are located in six new properties: AsOy Espoon Albert (4 apartments),
AsOy Kirkkonummen Tammi (14), AsOy Järvenpään Saundi (8), AsOy Härmälänrannan
Nalle (3), ASsOy Lempäälän Tikanhovi (17) and AsOy Raision Valonsäde (13). The
apartments were without tenants at the time of the acquisition. 

Future outlook

Orava Residential REIT estimates that it has the prerequisites for maintaining
good profitability in 2014 and exceeding the targeted total return of 10% on
shareholders' equity. However, the financial result for the fourth quarter is
expected to remain lower than that for the third quarter. 

The value of the apartments in the investment portfolio is expected to fall
slightly during the remainder of the year and start to rise moderately next
year as a result of the forecasted overall strengthening of economic
development. Rental income is estimated to remain approximately at the level of
the third quarter during the remainder of the year. The profit impact of the
acquisition of properties is expected to decrease towards the end of the year,
as it is anticipated that the total number of acquisitions will decline
somewhat compared with the first three quarters of the year. The ratio of
maintenance and repair costs to the value of investment assets is likely to
remain around the level it has been during 2014. 

The company also estimates that it has the prerequisites for increasing its
business operations and maintaining good profitability in 2015. 

Helsinki, 6 November 2014



Orava Residential Real Estate Investment Trust plc

Board of Directors



Additional information:

Pekka Peiponen, CEO, tel. +358 (0)10 420 3104

Veli-Matti Salmenkylä, CFO and administrative director, tel. +358 (0)10 420 3102



Appendix:

Interim Report 1 January - 30 September 2014

Rules for real estate investment operations

Attachments:

OravaInvestmentRules.pdf

OravaInterimReport_Q3_2014.pdf