Sponda Plc's half year financial report January-Ju

Sponda Plc                                                                      Stock Exchange Release      4 August 2017, 8:30

Sponda Plc's half year financial report January-June 2017 :

Sponda's year continues to be steady

JANUARY-JUNE 2017 IN BRIEF (compared with 1 January - 30 June 2016)

• Total revenue increased to EUR 133.0 (126.9) million.
• Net operating income totalled EUR 96.5 (92.3) million.
• Operating profit was EUR 71.8 (95.6) million. This includes a fair value change of EUR -20.7 (3.0) million.
• Cash flow from operations per share was EUR 0.19 (0.21).
• The fair value of the investment properties amounted to EUR 3,807.5 (3,713.2) million.
• Net assets (NAV) per share totalled EUR 5.13 (5.04).
• The economic occupancy rate was 89.1 (89.1)%.

APRIL-JUNE 2017 IN BRIEF (compared with 1 April - 30 June 2016)

• Total revenue was EUR 66.8 (67.6) million.
• Net operating income totalled EUR 50.2 (50.2) million.
• Operating profit was EUR 27.5 (48.8) million. This includes a fair value change of EUR -21.7 (5.0) million.
• Cash flow from operations per share was EUR 0.11 (0.09).

KEY FIGURES

KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS

PRESIDENT AND CEO KARI INKINEN

The second quarter of 2017 was a historic one for Sponda. At the beginning of June, Polar Bidco S.á r.l. (a corporation owned by funds advised by affiliates of The Blackstone Group LP) announced a tender offer to purchase all shares in Sponda. The 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, based on 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 18 July, Polar Bidco S.à r.l. announced the final result of the tender offer, according to which they held 96.59% of all shares in Sponda. The offer period was extended until today, 4 August 2017.

Sponda's operational activities continued in steady fashion. Net operating income grew as planned and maintenance expenses increased mainly due to an increase in property taxes. The economic occupancy rate remained unchanged at 89.1%.

Our property development projects progressed as planned and on schedule. Ratina's topping out ceremony was held in May and the property will open in less than a year. The pre-let rate currently stands at 53% for the project as a whole and 64% for the shopping centre. The construction of our office and retail complex in Vantaa's Tikkurila district is also progressing on schedule. The pre-let rate is 65%.

MOW Stargate, the latest addition to our unique Mothership of Work (MOW) concept, will open its doors in August. It will provide 300 inspiring workstations in Ruoholahti for MOW members new and old.  The staff and services of MOW Stargate are ready for the grand opening.

BUSINESS CONDITIONS

Economic growth in Finland exceeded forecasts during the first half of the year and it is expected to remain strong throughout the remainder of the year. The GDP growth forecasts have been adjusted upwards and according to the Ministry of Finance's forecast, the Finnish GDP will grow by 2.4% in 2017. Economic growth has a firmer foundation now that the positive development of private consumption and construction investments is complemented by stronger export and production investment growth. The rapid improvement of the economy also has a positive impact on employment. However, this impact has not yet been reflected in the unemployment rate, which is thought to be due to people in disguised unemployment becoming active jobseekers. According to Statistics Finland, the unemployment rate was 10.7% at the end of May.

According to the Consumer Survey published by Statistics Finland, confidence among consumers in their own economic situation and the Finnish economy remains high. The consumer confidence indicator was at 23.9 in June, compared to 14.9 in June 2016. Consumer prices have risen during the first half of the year but, according to the Ministry of Finance, the increase in prices was slower than usual. According to Statistics Finland, inflation was 0.7 per cent at the end of June.

Financial indicators

*) Forecast

The description of the business conditions was compiled using the following references: Ministry of Finance, Economic Survey, Summer 2017 (21 June 2017); Statistics Finland (27 June 2017, 13 July 2017, 14 July 2017); KTI Transaction information service: Property transactions in Finland 2017.

The transaction market (KTI)

It has continued to be a busy year in the Finnish property market. According to KTI Property Information's transaction monitoring, the transaction volume for the second quarter amounted to EUR 1.12 billion, which is below last year's record level (Q2/2016: EUR 2.39 billion) but high compared to the previous years. The cumulative volume for the first half of the year was EUR 2.22 billion (H1/2016: EUR 3.63 billion). Acquisitions by foreign players accounted for 47% of the volume.

Prime yields

According to Catella Property, the prime yields of office and retail properties continued to decline during the first half of the year. At the end of June, office properties had a prime yield of 4.3% (4.5%) and retail properties 4.5% (4.7%). The prime yields of office properties in the Helsinki metropolitan area ranged from 4.3% to 6.7% (4.5%-6.8%) and prime yields in Helsinki's central business district ranged from 4.3% to 5.5%. The prime yield of office properties in Tampere was 6.75% (6.75%).

Office property market

According to Catella, the vacancy rate for office premises in the Helsinki metropolitan area increased slightly during the first half of the year and was 14.0% (13.9%) at the end of June. The vacancy rate was 12.5% (11.6%) for Helsinki as a whole and 10.4% (14.0%) for the central business district. In Espoo, the vacancy rate was 19.5% (22.0%) and in Vantaa it was 14.8% (14.8%).

The rental levels for offices in the Helsinki metropolitan area increased slightly compared to the previous year. The average rental levels for office premises ranged from EUR 162 to 318 (162-312) per square metre per year. The average rent in Helsinki's central business district increased to EUR 318/m ² /year.

The vacancy rate of the office premises market in Tampere rose to 14.8% (13.6%). The rental levels were unchanged from the previous year at EUR 168-228/m ² /year.

Retail property market

The vacancy rate for retail premises in the Helsinki metropolitan area decreased to 4.2% (5.3%) during the first half of the year. The vacancy rate was 3.4% (4.0%) for Helsinki as a whole and 1.8% (2.3%) for the central business district. In Helsinki's central business district, the market rents for retail premises increased during the first half of the year and ranged from EUR 540 to 1,740 (540-1,680)/m ² /year.

In Tampere, the vacancy rate for retail premises was 5.3% (4.4%) at the turn of the year, while the corresponding figure for Oulu was 5.9% (4.9%). Rental levels per square metre per year varied from EUR 420 to 900 (420-900) in Tampere and from EUR 420 to 960 (480-1,020) in Oulu.

New construction

According to Catella, there is more than 155,000 m ² of new office space currently under construction in the Helsinki metropolitan area; the largest projects are located in Helsinki. The oversupply is reduced by old office premises being converted into homes and hotels. According to Catella, old office premises are being converted into homes at a rate of approximately 50,000 m ² per year. The Helsinki metropolitan area will also see a large amount of new retail space completed in the next few years. The total floor area currently under construction is 220,000 m ² , some of which will replace old retail space that has been demolished.

GROUP RESULT IN JANUARY-JUNE 2017

Sponda Group's result for January-June was EUR 49.6 (58.5) million. The result before taxes was EUR 47.5 (70.2) million and operating profit was EUR 71.8 (95.6).

Net operating income for the period was EUR 96.5 (92.3) million. The year-on-year increase in net operating income was due to the Forum property acquisition, the effect of which is included in the comparison figures starting from 1 March 2016. Items that had a negative effect on the development of net operating income included property sales and the net operating income of a comparable portfolio, totalling EUR -1.4 million. Marketing and administration expenses exceeded the previous year's level at EUR 12.2 (11.4) million due to the public tender offer for all shares in the company as well as other items. Other operating income and expenses amounted to EUR 0.1 (0.5) million.

During the period, the Group recognised profit on sales of EUR 10.4 (12.6) million from the sales of investment and trading properties. The change in fair value of the investment properties during the period was negative at EUR -20.7 (3.0) million mainly due to the impact of an increase in property taxes on the fair values of properties. The Group's result includes amortisation of goodwill amounting to EUR 2.3 (1.3) million. 

Financial income and expenses for the period totalled EUR -24.3 (-25.4) million. The net amount of financial income and expenses was favourably affected by the prices of the funding sources used as well as capitalised interest expenses, and they were negatively affected by the amount of interest-bearing liabilities.

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 based on the passage of time.

PROPERTY ASSETS 1 JANUARY - 30 JUNE 201 7

At the end of June 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 12% 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 June 2017, an external consultant audited the values of Sponda's investment properties in Finland (Catella Property Oy) and Russia (CB Richard Ellis). The fair value of the investment properties totalled EUR 3.8 billion at the end of June 2017. The change in the fair value of the investment properties in January-June was EUR -20.7 (3.0) million and in April-June alone EUR -21.7 (5.0) million. Yield requirements declined particularly for office and shopping centre properties in central Helsinki. The negative change in fair value in Finland was almost entirely attributable to an increase in property taxes. Yield requirements in Russia were not changed and the negative development was due to assumptions of decreasing rental levels.

Valuation gains/losses on fair value assessment

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-June, like-for-like net rental growth was 0.4% (0.9%) for office properties and -5.6% (6.0%) 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:

DIVESTMENTS AND INVESTMENTS

Sponda is continuing to actively manage its property portfolio and sell non-strategic properties. New investments and property development projects will be centralised in office and shopping centre properties in identified growth areas. Investment properties were sold for EUR 9.8 million during the first half of the year. 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

*) Includes sales costs

Investments

SPONDA'S SHARE AND SHAREHOLDERS

Issued shares and share capital

At the end of June 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 Sponda share is quoted on NASDAQ Helsinki Ltd. The weighted average price of the share in the second quarter was EUR 4.83. The highest quotation was EUR 5.25 and the lowest EUR 3.89. Turnover during the period totalled some 50 million shares, or approximately EUR 242 million. The closing price of the share on 30 June 2017 was EUR 5.07 and the market capitalisation of the company's share capital was EUR 1,499 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 based on 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. According to the agreement, Polar Bidco made a voluntary public tender offer to purchase all issued and outstanding shares in Sponda. The Board of Directors of Sponda unanimously recommended the shareholders to accept the tender offer. In the tender offer, Sponda shareholders will be offered a cash consideration of EUR 5.19 for each share in Sponda representing an aggregate equity purchase price of approximately EUR 1,763 million for Sponda shares. More detailed information on the tender offer is available on Sponda's website at http://sijoittajat.sponda.fi/fi-FI/tender-offer.

Dividend

On 5 June 2017, the Board of Directors of Sponda Plc decided, based on 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 June 2017, Sponda had altogether 8,866 shareholders (31 March 2017: 11,022) and its ownership structure by sector was as follows:

Sponda's 10 largest shareholders are:

Flagging notices

The following flagging notices were issued during and after the review period:

• Stock Exchange Release 7 June 2017: The holding of Polar Bidco S.à r.l. in Sponda Plc's shares is 7.50% (25,465,390 shares).
• Stock Exchange Release 8 June 2017: The holding of Polar Bidco S.à r.l. in Sponda Plc's shares is 11.77% (39,978,703 shares).
• 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).

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:

The slower than expected positive development of the Finnish economy may cause a decline in the occupancy rate and tenant insolvency . Also change in demand for space , caused by for example 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 weakening availability of bank financing . Uncertainty about the development of the world economy and interest rates may affect the pricing 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 17 July, Polar Bidco S.à r.l. announced the preliminary result of its tender offer to purchase all shares in Sponda Plc. The full release is available on the company website.

On 18 July, Polar Bidco S.à r.l. announced the final result of its tender offer to purchase all shares in Sponda Plc. The full release is available on the company website.

On 19 July, Polar Bidco S.à r.l. announced that it has supplemented the tender offer document dated 12 June 2017 regarding the tender offer. The full release is available on the company website.

4 August 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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