Sponda Plc’s interim report January–June 2013 Sponda

Sponda Plc                       Interim report 2 August 2013, 8:34 a.m.

Sponda Plc’s interim report January–June 2013

JANUARY–JUNE 2013 IN BRIEF (compared with 1 January – 30 June 2012)

• Total revenue was EUR 133.2 (132.3) million.
• Net operating income was EUR 94.0 (94.6) million.
• Operating profit was EUR 79.4 (93.0) million. This includes a fair value change of EUR -2.2 (8.8) million.
• Cash flow from operations per share was EUR 0.19 (0.18).
• The fair value of the investment properties amounted to EUR 3,266.5 (3,233.9) million.
• Net assets per share totalled EUR 4.43 (4.22).
• The economic occupancy rate was 88.3% (88.9%).
• The prospects remain unchanged.
• Net financing costs for the period totalled EUR -28.8 (-29.8) million. Financial income and expenses include EUR 0.5 (2.5) million in unrealised change in the fair value of derivatives. Excluding the aforementioned change in fair value, financial income and expenses totalled EUR -29.3 (-32.3) million.

APRIL–JUNE 2013 IN BRIEF (compared with 1 April – 30 June 2012)

• Total revenue was EUR 67.2 (66.2) million.
• Net operating income was EUR 48.6 (48.5) million.
• Operating profit was EUR 34.6 (49.3) million. This includes a fair value change of EUR -7.7 (6.0) million.
• Cash flow from operations per share was EUR 0.10 (0.10).
• Financial income and expenses amounted to EUR -15.3 (-15.7) million. Financial income and expenses include EUR -0.5 (-0.2) million in unrealised change in the fair value of derivatives. Excluding the aforementioned change in fair value, financial income and expenses totalled EUR -14.8 (-15.5) million.  

KEY FIGURES

KEY FIGURES ACCORDING TO EPRA BEST PRACTICES RECOMMENDATIONS

PRESIDENT AND CEO KARI INKINEN

Sponda’s result for the second quarter of 2013 was stable and strong. The Group’s economic occupancy rate increased again. This is a good achievement under the prevailing market conditions, where the economy is in recession and rental demand is low. The occupancy rate for office premises in Helsinki district developed positively, showing an 0.4%-points increase compared to the first quarter of 2013 (89.6%). While the economic occupancy rate for logistics properties remains a challenge for Sponda, the second quarter saw a decrease in vacancy rates in that segment as well. The demand for logistics premises is affected by the very low level of Finnish exports.

Property values in Helsinki’s central business district remained stable. Downward pressure on property values is directed more to the secondary areas of the Helsinki metropolitan area, where an increase in yield requirements combined with a fall in market rents and rising vacancy rates have resulted in declining property values. In this time of low interest rates, we expect that the values of prime properties will remain stable in the future. Property values in Moscow were negatively affected in the second quarter by implemented increase in land taxes.

We remain active with regard to the Ratina shopping centre project in Tampere. While the pre-letting has yet to reach a level that supports the investment decision, our goal is to start the project in the coming autumn. The start of construction of the Ratina shopping centre will be announced when the investment decision has been made.

BUSINESS CONDITIONS – FINLAND

The Finnish economy did not grow in the first quarter of 2013. The Finnish Ministry of Finance has revised its growth forecasts for 2013 and 2014. According to the new forecasts, Finnish GDP will contract by 0.4% in 2013 and increase by 1.2% in 2014. The forecast indicates that the turn to moderate growth will take place in the second half of 2013. The downgrades to the forecasts are due to the prolonged eurozone crisis, a decline in manufacturing and exports and a weaker outlook for private consumption.

The property transaction volume in the first quarter of the year was only slightly over EUR 0.3 billion. The second quarter was also relatively slow. According to a preliminary estimate by KTI Property Information, the transaction volume for the first six months of the year was approximately EUR 0.78 billion, which means that the total transaction volume for 2013 is likely to be the lowest since the turn of the century.

Over 100,000m² of new office space will be completed in the Helsinki metropolitan area in 2013, after which new construction is expected to slow down. Under the prevailing economic conditions, the new office space is expected to increase vacancy rates and lead to downward pressure on market rents. According to KTI Property Information, vacancy rates in the Helsinki metropolitan area have increased particularly in Espoo and Vantaa.

BUSINESS CONDITIONS – RUSSIA

According to the Bank of Finland, Russian GDP grew by 3.4% in 2012. With slower growth in early 2013, many forecasts indicate that total GDP growth in Russia for the year will be under 3%. The slowing down of economic growth is mainly due to decreasing oil prices and the uncertain global economic outlook. Private consumption continues to grow.

The Russian property transaction market was active in the first half of 2013. Thanks to a few major transactions, the first quarter volume rose to above USD 2 billion. The total volume for 2013 is expected to be at the same level as in the previous year. (CB Richard Ellis)

According to CB Richard Ellis, the average vacancy rate for office premises in Moscow decreased slightly in 2012. In 2013, the vacancy rate for Class A office space is expected to remain at current levels, with vacancy rates for Class B office premises declining slightly. Over 800,000m² of new office space is set to be completed in 2013, which represents a substantial increase from the approximate figure of 500 000m² seen in 2012. Market rents are also expected to remain largely unchanged.

OPERATIONS AND PROPERTY ASSETS 1 JANUARY – 30 JUNE 2013

Net operating income from all of Sponda’s property assets totalled EUR 94.0 (94.6) million in January–June 2013 and EUR 48.6 (48.5) million in April–June. Of this total, office and retail premises accounted for 55%, shopping centres for 17%, logistics premises for 13%, Russia for 12% and the Real Estate Funds unit for 3%.

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 calculations are based on market observations.

At the end of June 2013, an external consultant assessed the fair value of Sponda’s investment properties for both Finland and Russia. The fair value of investment properties was assessed in Finland by Catella Property Oy and in Russia by CB Richard Ellis. The change in fair value of the investment properties in January – June was EUR -4.2 (4.7) million and in April – June alone EUR -9.3 (3.7) million. The negative change in fair value was mainly due to changes in yield requirements in Finland outside the Helsinki central business district, as well as exchange rate fluctuations and changes in maintenance costs in Russia. The changes in fair values are itemised in the table “Valuation gains/losses on fair value assessment”.

Valuation gains/losses on fair value assessment

RENTAL OPERATIONS

Sponda calculates the growth in 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 0.8% (8.0%) for office and retail premises, -0.5% (-10.0%) for shopping centres, -9.5% (0.4%) for logistics premises and -1.4% (8.9%) 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:

INVESTMENTS AND DIVESTMENTS

Property transactions

M€

Investments in property maintenance and property development

M€

Investments and divestments in total

M€

Property development investments were mainly directed to preparatory work on the Ratina shopping centre project and the development of an office property in Ruoholahti, which was completed in April 2013.

CASH FLOW AND FINANCING

Sponda’s equity ratio on 30 June 2013 stood at 38.9% (38.4%) and the gearing ratio was 134.4% (136.4%). Interest-bearing debt amounted to EUR 1,827.6 (1,844.9) million and the average maturity of loans was 2.1 (2.8) years. The average interest rate was 3.3% (3.6%) including interest derivatives. Fixed-rate and interest-hedged loans accounted for 68% (74%) of the loan portfolio. The average interest-bearing period of the entire debt portfolio was 1.5 (2.0) years. The interest cover ratio, which describes the company’s solvency, was 2.9 (2.6).

Sponda applies hedge accounting to those interest derivatives that meet the criteria for hedge accounting. Changes in the fair value of interest derivatives that fall under hedge accounting are recognised in equity on the balance sheet. Changes in the fair value of other interest derivatives and currency options are recorded on the income statement.

Sponda Group’s debt portfolio on 30 June 2013 comprised EUR 675 million in syndicated loans, EUR 324 million in bonds, EUR 269 million in issued commercial papers, and EUR 460 million in loans from financial institutions. Sponda had EUR 410 million in unused credit limits. Sponda Group had mortgaged loans of EUR 141.0 million, or 4.1% of the consolidated balance sheet.

In June 2013, Sponda signed an agreement on the five-year extension of a mortgaged loan of EUR 85 million with Helaba (Landesbank Hessen Thüringen Girozentrale). The agreement extends the loan, which was originally set to mature in spring 2014, until spring 2018. The margin on the loan corresponds with current market levels and the key covenants (equity ratio and interest cover ratio) are in line with the company’s other financial covenants.

On 27 June 2013, Sponda redeemed the remaining EUR 92.8 million of a hybrid bond, originally EUR 130 million in total, issued in 2008 in accordance with the terms and conditions of the hybrid bond. The bond was originally issued on 27 June 2008. After this transaction, the company’s only outstanding hybrid loan is the EUR 95 million hybrid bond issued on 5 December 2012.

EVENTS AFTER THE END OF THE PERIOD

In July 2013, Sponda sold the Business Center NRC and Inform Future office buildings, located in St. Petersburg’s central business district, to Russian asset management companies NRC-Management and IF-Management for a total of EUR 9.9 million. The properties were sold at a price that was slightly higher than the first quarter 2013 fair value valuation.

PROSPECTS FOR 2013

Sponda expects the vacancy rates of its investment properties at year’s end 2013 to be largely unchanged from the end of 2012. The estimate is based on leases already signed and forecast changes in rental agreements.

Comparable net operating income (excluding disposals) in 2013 is expected to increase slightly from 2012. This increase is based on rising rent levels for business premises in Helsinki’s central business district and the completion of property development projects.

2 August 2013 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 Communications and IR, tel. +358 20-431 3454 or +358 40-527 4462.

Distribution: NASDAQ OMX Helsinki Media www.sponda.fi