SATO Corporation, Half year financial report, 17th July 2019 at 9:00 am
Summary for 1 Jan–30 Jun 2019 (1 Jan–30 Jun 2018)
- Net sales were EUR 146.5 (144.2) million.
- Profit before taxes was EUR 85.5 (126.8) million.
- Earnings per share were EUR 1.20 (1.79).
- The change in the fair value of investment properties included in the result was EUR 39.2 (67.4) million.
- Equity was EUR 1,582.8 (1,471.4) million, or EUR 27.96 (25.99) per share.
- Investments in rental apartments were EUR 77.2 (65.0) million.
- A total of 0 (230) rental apartments were acquired or completed.
- The occupancy rate in Finland was 98.0 (97.5) per cent.
- A total of 1,090 rental apartments are under construction.
Summary for 1 Apr–30 Jun 2019 (1 Apr–30 Jun 2018)
- Net sales were EUR 73.4 (72.2) million.
- Profit before taxes was EUR 39.0 (85.1) million.
- Earnings per share were EUR 0.55 (1.21).
- The change in the fair value of investment properties included in the result was EUR 16.5 (50.3) million.
- Equity was EUR 1,582.8 (1,471.4) million, or EUR 27.96 (25.99) per share.
- Investments in rental apartments were EUR 46.8 (46.7) million.
- A total of 0 (215) rental apartments were acquired or completed.
- The occupancy rate in Finland was 98.0 (97.6) per cent.
- A total of 1,090 rental apartments are under construction.
CEO Saku Sipola:
- We continued the implementation of our Customer First strategy with good results during the first six months of the year. Customer satisfaction continued to improve and during the review period, our economic occupancy rate remained at a good level, 98.0 per cent (H1/2018 97.5%).
- During the review period, we established a Euro Medium Term Note (EMTN) programme, under which we issued EUR 350 million in unsecured bonds in May. The order book for the bonds was well oversubscribed, based on which we decided to increase the size of the bond issuance from a planned EUR 300 million to EUR 350 million. The cash proceedings were used to repurchase SATO’s EUR 300 million bonds issued in 2016 and EUR 300 million bonds issued in 2015. This operation improved the Group’s average maturity of the loan portfolio, decreased future finance costs and helped to manage the refinancing risk. The repurchase increased the company´s finance expences nonrecurringly by MEUR 11,8. The financing structure was also strengthened in May, as SATO Corporation and OP Corporate Bank plc agreed on a bilateral loan of EUR 150 million without asset-based securities. The financing agreement supports SATO’s target to further increase the share of loans without asset based securities in the financing structure.
- Communality is a part of our Customer First strategy and we have positive experiences of communality from StudioHome. We consider good neighbour relationships to be essential for the comfort and well-being of our residents. In June, for the first time, we organised backyard picnics for our residents in the Helsinki region, and in Turku and Tampere. The events took place in a total of 14 locations, and they were attended by hundreds of our residents. We were delighted to see, that the city of Vantaa as a major contributor participated in the event and enhanced communality.
Operating environment
Finland’s economic growth is slowing, and the economic forecasts are being adjusted downward. Growth is projected to fall well below two per cent in 2019. Europe’s weak economic development and the resulting loose monetary policy of the European Central Bank is maintaining short-term interest rates at an exceptionally low level. The confidence of consumers’ own economic situation now and in the future has declined and expectations concerning Finland’s economy in general were pessimistic.
Demand for rental apartments has remained good, and urbanisation continues to be strong. In construction, the number of new construction permits has fallen dramatically but the number of completed apartments is still on the rise.
REVIEW PERIOD 1 January–30 June 2019 (1 January–30 June 2018)
Net sales and profit
Between January and June 2019, consolidated net sales were EUR 146.5 (144.2) million, showing a change of 1.6 per cent from the reference period. Growth is based on an improvement in the economic occupancy rate and rent development.
Operating profit was EUR 119.4 (148.3) million. The operating profit without the change in the fair value of investment properties was EUR 80.2 (80.9) million. The change in fair value was EUR 39.2 (67.4) million. The adoption of the IFRS 16 Leases standard improved the review period’s operating profit by EUR 1.5 million. The Group applies IFRS 16 using the modified retrospective approach, without the restatement of comparative information.
Financial income and expenses totalled EUR -33.9 (-21.5) million. The adoption of the IFRS 16 standard increased the review period’s financial expenses by EUR 1.5 million. The financial expenses include a one off cost of MEUR 11.8 due to the repurchase of outstanding bonds with maturity in year 2020 and 2021.
Profit before taxes was EUR 85.5 (126.8) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between January and June amounted to EUR 30.4 (41.7) million.
Financial position and financing
The consolidated balance sheet totalled EUR 4,105.5 (3,830.6) million at the end of June. Equity was EUR 1,582.8 (1,471.4) million. Equity per share was EUR 27.96 (25.99).
The Group's equity ratio was 38.6 (38.4) per cent at the end of June. The adoption of IFRS 16 reduced the equity ratio by 0.5 percentage points. In December 2018, the Board of Directors updated the equity ratio target, raising it to 40 per cent from 35 per cent. EUR 545.1 million in new long-term financing was withdrawn and the solvency ratio was 49.9 (51.4) per cent at the end of June. The strengthening of the equity ratio and the solvency ratio is the result of a rise in the value of investment properties and a long period of good earnings performance.
The Group’s annualised return on equity was 8.6 (14.1) per cent. Return on investment was 6.7 (8.7) per cent.
Interest-bearing liabilities at the end of June totalled EUR 2,049.6 (1,973.3) million, of which loans subject to market terms accounted for EUR 1,755.0 (1,601.2) million. The average loan interest rate was 1.8 (2.1) per cent. Net financing costs totalled EUR –33.9 (–21.5) million, of which the impact of the adoption of the IFRS 16 standard was EUR –1.5 million. The average maturity of loans was 4.4 (4.1) years.
The calculated impact of changes in the market value of interest hedging on equity was EUR –11.2 (0.9) million.
Housing business
Our housing business includes rental activities, customer service, lifecycle management and maintenance. Effective rental activities and digital services provide home-seekers with quick access to a home, and the Group with a steadily increasing cash flow. High-quality maintenance operations ensure the comfort of residents and that the apartments stay in good condition and maintain their value. We serve our customers in daily housing issues through our customer-oriented service organisation.
Due to an improved economic occupancy rate, rental income rose by 1.6 per cent and was EUR 146.5 (144.2) million. The economic occupancy rate of apartments in Finland was 98.0 (97.5) per cent on average, and the external tenant turnover was 28.2 (28.3) per cent. The rise in the economic occupancy rate was, above all, the result of measures based on the Customer First strategy.
The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.06 (16.74) per m2.
Net rental income from apartments stood at EUR 97.2 (94.5) million, and the net rental income rate was 5.1 (5.2) per cent.
Investment properties
On 30 June 2019, SATO owned a total of 25,848 (25,966) apartments. Altogether 0 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner-occupants was 21.
Fair value
The development of the value of rental apartments is a key factor for SATO. Its housing stock is concentrated in areas and apartment sizes which are expected to be the focus, in the long term, of increasing rental apartment demand. The allocation of building repairs is based on life-cycle plans and repair need specifications.
At the end of June, the fair value of investment properties in Finland and St. Petersburg came to a total of EUR 4,038.2 (3,767.9) million. The change in the value of investment properties, including the rental apartments acquired and divested during the review period, was EUR 163.1 (135.4) million. In addition to investments and divestments, the change in value was affected by the development of market prices and change in the value of the rouble.
Of the value of apartments, the Helsinki metropolitan area accounted for some 80 per cent, Tampere and Turku made up 13 per cent, Jyväskylä and Oulu 4 per cent and St. Petersburg covered 3 per cent at the end of June.
Investments, divestments and property development
Investment activities are used to manage the housing portfolio and prepare the ground for growth. Since 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. Property development allows for new investments in rental apartments in Finland. The rental potential and value of rental apartments owned by SATO are developed through renovation activities.
Investments in rental apartments stood at EUR 77.2 (65.0) million. Investments in the Helsinki metropolitan area represented 94 per cent and investments in new apartments represented 72 per cent of all investments in the review period. On 30 June 2019, binding purchase agreements in Finland totalled EUR 79.6 (109.2) million.
During the review period, 21 (24) rental apartments were divested in Finland. Their total value was EUR 4.0 (3.5) million.
The book value of plot reserves totalled EUR 37.7 (48.2) million at the end of June. The value of new plots acquired by the end of June totalled EUR 0.0 (19.9) million.
The permitted building volume for approximately 2,700 apartments is being developed for the plots in the company’s housing portfolio. This allows SATO to utilise existing infrastructure, create a denser urban structure and thus bring more customers closer to services and public transport connections.
In Finland, a total of 0 (230) rental apartments and 0 (0) apartments for sale were completed. On 30 June 2019, a total of 1,090 (893) rental apartments and 131 (32) owner-occupied apartments were under construction.
A total of EUR 31.6 (20.1) million was spent on repairing apartments and improving their quality.
At the end of June, SATO owned 534 (534) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 92.8 (92.5) per cent on average. For the time being, SATO will refrain from making new investment decisions in Russia. The share of investments in Russia is limited to a maximum of 10 per cent of the Group’s housing assets.
Personnel
At the end of June, the Group employed 221 (230) people, of whom 202 (196) had a permanent employment contract. The average number of personnel was 219 (214) between January and June.
The company announced on June 25th that SATO Corporation's CEO Saku Sipola leaves the company on a date to be announced later, however, at the latest on 1st January 2020. SATO Corporation's Board of Directors has begun the search of a new CEO.
Period 1 April–30 June 2019 (1 April–30 June 2018)
Net sales and profit
Between April and June 2019, consolidated net sales were EUR 73.4 (72.2) million, showing a change of 1.7 per cent from the reference period.
Operating profit was EUR 61.6 (95.7) million. The operating profit without the change in the fair value of investment properties was EUR 45.1 (45.4) million. The change in fair value was EUR 16.5 (50.3) million.
Financial income and expenses totalled EUR –22.6 (–10.6) million. The adoption of the IFRS 16 standard increased the review period’s financial expenses by EUR 0.8 million. The financial expenses include a one off cost of MEUR 11.8 due to the repurchase of outstanding bonds with maturity in year 2020 and 2021.
Profit before taxes was EUR 39.0 (85.1) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between April and June amounted to EUR 10.4 (28.5) million.
Housing business
Due to an improved economic occupancy rate, rental income rose by 1.7 per cent and was EUR 73.4 (72.2) million. The economic occupancy rate of apartments in Finland was 98.0 (97.6) per cent on average, and the external tenant turnover was 28.8 (29.4) per cent.
The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.06 (16.74) per m2.
Net rental income from apartments stood at EUR 53.7 (52.4) million, and the net rental income rate was 5.6 (5.8) per cent.
Investment properties
On 30 June 2019, SATO owned a total of 25,848 (25,966) apartments. Altogether 0 rental apartments were acquired or completed. The total number of divested rental apartments and shared ownership apartments redeemed by the owner-occupants was 7.
At the end of June, the fair value of investment properties in Finland and St. Petersburg came to a total of EUR 4,038.2 (3,767.9) million. The change in the value of investment properties, including the rental apartments acquired and divested during the review period, was EUR 66.7 (98.5) million.
Of the value of apartments, the Helsinki metropolitan area accounted for some 80 per cent, Tampere and Turku made up 13 per cent, Jyväskylä and Oulu 4 per cent and St. Petersburg covered 3 per cent at the end of June.
Investments, divestments and property development
Investments in rental apartments stood at EUR 46.8 (46.7) million. Investments in the Helsinki metropolitan area represented 93 per cent and investments in new apartments represented 72 per cent of all investments in the review period.
During the review period, 7 (18) rental apartments were divested in Finland. Their total value was EUR 1.3 (2.8) million.
The book value of plot reserves totalled EUR 37.7 (48.2) million at the end of June. The value of new plots acquired by the end of June totalled EUR 0.0 (19.9) million.
The permitted building volume for approximately 2,700 apartments is being developed for the plots in the company’s housing portfolio.
In Finland, a total of 0 (215) rental apartments and 0 (0) apartments for sale were completed. On 30 June 2019, a total of 1,090 (893) rental apartments and 131 (32) owner-occupied apartments were under construction.
A total of EUR 17.5 (11.1) million was spent on repairing apartments and improving their quality.
Personnel
At the end of June, the Group employed 221 (230) people, of whom 202 (196) had a permanent employment contract. The average number of personnel was 220 (219) between April and June.
Annual General Meeting on 3 April 2019
The number of members of the Board of Directors was confirmed to be seven (7).
The Annual General Meeting elected Erik Selin to serve as Chairman of the Board. Members Marcus Hansson, Jukka Hienonen, Esa Lager, Tarja Pääkkönen, Johannus (Hans) Spikker and Timo Stenius were re-elected as members of the Board of Directors.
Deloitte Oy, the firm of authorized public accountants, was elected as the auditor. Deloitte Oy has notified that APA Eero Lumme will serve as the auditor with principal responsibility.
The Annual General Meeting resolved that EUR 0.50 per share be paid out in dividends by SATO Corporation for the financial period ending 31 December 2018. The record date for dividend distribution was April 5, 2019 and the dividend was paid on April 12, 2019.
Organisation of the Board of Directors
At its organizational meeting also held on 3 April 2019, the Board elected from among its number Jukka Hienonen to serve as Deputy Chairman.
Erik Selin was appointed by the Board to chair the Nomination and Remuneration Committee and Jukka Hienonen and Tarja Pääkkönen to serve as Committee members.
Marcus Hansson was appointed by the Board to chair the Audit Committee, while Esa Lager, Johannus (Hans) Spikker and Timo Stenius were appointed to serve as Committee members.
Events after the review period
There are no significant events following the review period.
Future risks and uncertainties
Risk management is used to ensure that risks impacting the company’s business are identified, managed and monitored. The main risks of SATO’s business are risks related to the business environment and financial risks.
The most significant risks in the renting of apartments are related to economic cycles and fluctuations in demand. A clear weakening in the housing market could have a negative impact on the market value of SATO’s housing portfolio. In accordance with its strategy, SATO focusses its investments on growth centres, thus ensuring the rental potential of its apartments and the development of their value.
Changes in official regulations and legislation and uncertainty stemming from them can have a significant impact on the reliability of the investment environment and thus on SATO’s business. SATO monitors and anticipates these changes and also calls attention to what it considers to be negative impacts of regulation.
The management of financial risks is steered by the Group’s financial policy. Our risk management principles have been defined in the treasury policy approved by SATO’s Board of Directors. Our most significant financial risks relate to liquidity, refinancing and interest rates. We manage our liquidity and refinancing risks by diversifying the financing sources and maturity of our loan portfolio, and by holding sufficient liquidity reserves in the form of committed credit facilities and other financing commitments. In addition, during the review period, we established a Euro Medium Term Note (EMTN) programme.
The means for managing the liquidity risk at SATO include cash assets, a bank account limit, committed credit facilities of EUR 400 million, and a commercial paper programme of EUR 400 million. We increase the amount of reserves as the funding requirements grow. Our objective is to keep the liquidity requirements of the next 12 months covered by committed agreements.
Floating rate loans form an interest rate risk which we manage by balancing the share of fixed and floating rate loans either by issuing fixed rate loans or by interest rate hedges. According to our treasury policy, our objective is to keep the ratio of fixed rate loans at over 60 per cent of debt portfolio after interest hedging.
There are risks related to the business environment in our St. Petersburg operations, including currency risk. The consolidation of foreign currency-denominated assets in the consolidated financial statements also involves a translation risk. Possibilities of hedging the translation risk are evaluated in accordance with our treasury policy. For the time being, SATO will refrain from making new investments in Russia.
A more detailed description of risks and risk management is available in the Group’s annual report for 2018 and on the website www.sato.fi.
Outlook
In the operating environment, SATO’s business activities are mainly affected by consumer confidence, the development of purchasing power, rent and price development for apartments, general competition and interest rates.
The Finnish economy is expected to continue its growth path, but growth is projected to slow down clearly. Due to Europe’s weak economic development, interest rates are expected to remain low in 2019, which will have a positive impact on SATO’s financing costs.
Continuous urbanisation provides good long-term conditions for sustained investments in SATO’s main operating areas in Finland. Net migration is expected to be the highest form of population increase in SATO’s operating areas. Some 80 per cent of SATO’s housing stock is located in the Helsinki metropolitan area, where price development is expected to be more positive than in the rest of Finland.
According to estimates by Pellervo Economic Research (PTT), prices and rents will continue to rise, demand for owner-occupied apartments will grow, and a pick-up in housing sales will somewhat alleviate the pressure on the rental market.
The number of construction permits applied for has fallen dramatically, due to which the historically high rate of housing construction is expected to decrease in the coming years.
According to the Bank of Finland’s forecast, global economic growth will slow down. Loose monetary policy will support the positive development of the eurozone, even though this growth outlook is overshadowed by the uncertainties related to the Brexit negotiations, 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 public finances outlook.
Serious threats, such as an increase in protectionism and geopolitical tensions, are casting a shadow on the global economic outlook. The risk of weaker financial performance will also increase due to possible global corrections in asset prices and the deceleration of the reform rate in both China and the eurozone, while the volume of debt remains large (Source: Bank of Finland).
SATO Corporation's shareholders on 30 June 2019
Largest shareholders and their holdings
pcs | % | |
| • Balder Finska Otas AB (Fastighets AB Balder) | 30,892,806 | 54.4% |
| • Stichting Depositary APG Strategic Real Estate Pool | 12,811,647 | 22.6% |
| • 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% |
| • Hengityssairauksien tutkimussäätiö | 227,000 | 0.4% |
| • Rausanne Oy | 194,920 | 0.3% |
| • Entelä Tuula | 179,000 | 0.3% |
| • SATO Corporation | 160,000 | 0.3% |
| • Others (106 shareholders) | 1,279,113 | 2.3% |
On 30 June 2019, SATO had 56,783,067 shares and 116 shareholders registered in the book-entry system. The share turnover rate was 0.04 per cent for the period 1 January–30 June 2019.
For more information:
CEO Saku Sipola, tel. +358 201 34 4001
CFO Markku Honkasalo, tel. +358 201 34 4226
ATTACHMENTS
Half-Year Report 1 Jan–30 Jun 2019
Half-Year Report presentation 1 Jan–30 Jun 2019
SATO is one of Finland's leading rental housing providers. SATO aims to offer a comprehensive choice of rental housing and an excellent customer experience. At year-end 2018 SATO owned around 25,900 apartments in Finland's largest growth centres and in St. Petersburg.
We promote sustainable development and initiative through our operations and work in open interaction with our stakeholders to generate added value. We operate profitably and with a long-term view. We increase the value of our housing stock through investments, divestments and repairs.
The SATO Group's net sales in 2018 were EUR 290 million, operating profit EUR 273 million and profit before taxes EUR 231 million. The value of SATO's investment properties was roughly EUR 3.9 billion.
Attachments
