SATO Corporation’s Half-Year Report 1 January to 30 June

SATO Corporation, Half-Year Report 16 July 2024 at 9:00 am

Summary for 1 January to 30 June 2024 (1 January to 30 June 2023)

The economic occupancy rate was 95.1% (95.0).
Net sales totalled EUR 150.5 million (142.4).
Net rental income was EUR 101.1 million (93.4).
Profit before taxes was EUR 50.9 million (-101.2).
The unrealised change in the fair value of investment properties included in the result was EUR 6.8 million (-122.0).
Housing investments amounted to EUR 22.8 million (92.7).
Invested capital at the end of the review period was EUR 4,531.2 million (4,554.9).
Return on invested capital was 3.8% (-3.0).
Equity was EUR 2,564.7 million (2,400.9), or EUR 30.21 per share (42.41).
Earnings per share were EUR 0.53 (-1.51).
A total of 92 rental apartments were completed (648). Renovation of 56 rental homes (197) was completed.
A total of 257 rental apartments are under construction (679).
Profit from operations before depreciation improved year on year due to increased operational efficiency and savings measures.
The occupancy rate improved slightly as demand increased.

Summary for 1 April to 30 June 2024 (1 April to 30 June 2023)

The economic occupancy rate was 95.3% (95.0).
Net sales totalled EUR 75.8 million (71.5).
Net rental income was EUR 57.5 million (52.5).
Profit before taxes was EUR 31.4 million (-69.1).
The unrealised change in the fair value of investment properties included in the result was EUR 5.1 million (-75.1).
Housing investments amounted to EUR 10.0 million (46.5).
Earnings per share were EUR 0.30 (-1.05).
A total of 0 rental apartments were completed (513). Renovation of 0 rental homes (125) was completed.
A total of 257 rental apartments are under construction (679).

President and CEO Antti Aarnio:

- We improved our profit from operations before depreciation by increasing our operational efficiency and implementing savings measures. Profit from operations before depreciation was also affected positively by the higher occupancy rate.

- Demand for rental housing particularly in Helsinki is growing slightly, which is why our occupancy rate has improved year on year.

- Inflation is continuing to decline and was 1.9% in Finland in April. In the eurozone, inflation rose to 2.6% in May (YoY) from 2.4% in April and was slightly higher than forecasts. In its June meeting, the European Central Bank lowered the deposit facility rate by 0.25 percentage points and is likely to continue rate cuts this year.

- The renting of our latest rental apartments, the SATO homes to be completed at Peijinkuja 6, Finnoo, Espoo, in the autumn, started in May. The neighbouring building, Peijinkuja 10, will be completed in December 2024 and is, for the time being, our last property under construction.

- According to market research company Nepa, SATO is clearly the most recognised brand in its segment, that is, rental housing. According to the 2023 research summary, we were the first rental housing provider that came to mind for more than one in five respondents.

- Following the change negotiations completed in June, SATO’s organisation has been adjusted to reflect the current operating environment, with our fixed costs decreasing by about one million euros. Most of the savings will be realised in 2025.

- I would like to thank SATO staff members for their openness, expertise and persistence and for their contributions to the continuous development of our residents’ comfort and housing.

Operating environment

During the period under review, the continued abundant supply of rental housing and the economic uncertainty still remained key factors affecting SATO’s operating environment. Uncertainty is increased by the slow rate of economic growth, the increase in the number of unemployed jobseekers, the high interest rate level, and geopolitical risks.

Inflation continued its decline and was 1.9% in Finland and 2.4% in the euro area in April. In May, the inflation in the eurozone rose to 2.6%. The long decline enabled the European Central Bank to decide on a key interest rate cut in June, and the markets expect further rate cuts this year. Weak economic growth and the declining employment rate are keeping consumer confidence at a low level. Going forward, both the lower interest rate level and waning inflation will improve consumers’ purchasing power and the employment rate, and Finland is expected to see moderate economic growth.

Newbuild construction of homes is still declining. According to Statistics Finland, the volume of building permits for newbuilding granted in January–March 2024 was 20% lower than a year earlier. The prolonged decline in the building permits granted and building projects started is reflected in the number of completed dwellings. The newbuild construction volume of previous years, which exceeds the long-term housing demand, is, however, maintaining an oversupply of rental homes in the growth centres, albeit in Helsinki a slight downturn in the number of vacant rental homes was seen in April. The continued high level of housing supply has maintained intense competition for good tenants.

The urbanisation trend continues, and dense urban housing is becoming increasingly popular. There is demand for rental homes in growth centres close to good public transport connections and services. Among the major growth centres, the Helsinki Metropolitan Area (HMA), Tampere and Turku continue to enjoy strong growth, while Statistics Finland forecasts a downturn in the nationwide population trend in 2031. The HMA is projected to grow by more than 200,000 new residents by 2040. Almost 80% of HMA residents already live in households with one to two members, and the number of small households continues to grow. The proportion of immigrants is projected to increase in the HMA from the current 17% to 25% by 2030. The ageing population is moving to growth centres providing access to services and expects more and more housing-related services.

The demographic change coupled with the price development create a stable foundation for rental housing demand, especially in the HMA, Tampere and Turku. Migration to large growth centres has continued, and the HMA’s migration gain in 2023 was the highest in the 2000s: 23,500 persons. This is reflected in the demand for rental homes in growth centres.

Urbanisation, the income development of wage and salary earners, pent-up housing demand of households and lower interest rates together with the decrease in new housing production will increase housing demand towards the end of the year. The housing allowance policy changes may, however, steer consumers towards looking for more affordable housing. Some of those looking for a home to buy may be considering a rental home as a housing option.

Rental housing providers are still competing for good tenants, which results in rent increases remaining moderate. Going forward, higher maintenance and finance costs will be reflected in higher rent costs, while at the same time the supply of rental housing decreases.

REVIEW PERIOD 1 JANUARY TO 30 JUNE 2024 (1 JANUARY TO 30 JUNE 2023)

Net sales and profit

In January–June 2024, SATO Corporation’s consolidated net sales totalled EUR 150.5 million (142.4).

Operating profit was EUR 87.0 million (-68.6). Operating profit without the change in the fair value of investment properties was EUR 80.2 million (53.4). The unrealised change in fair value through profit or loss was EUR 6.8 million (-122.0).

Net financing expenses totalled EUR -36.1 million (-32.6).

Profit before taxes was EUR 50.9 million (-101.2). Cash flow from operations (free cash flow after taxes excluding changes in fair value) in January–June amounted to EUR 34.3 million (-9.6).

Earnings per share were EUR 0.53 (-1.51).

Financial position and financing

The consolidated balance sheet total at the end of June was EUR 5,027.6 million (5,091.9). Equity totalled EUR 2,564.7 million (2,400.9). Equity per share was EUR 30.21 (42.41).

The Group’s equity ratio at the end of June was 51.0% (47.2). EUR 325.0 million in new long-term financing was drawn and the solvency ratio at the end of June was 38.9% (42.0).

The Group’s annualised return on equity was 3.3% (-7.0). Return on invested capital was 3.8% (-3.0).

Interest-bearing liabilities at the end of June totalled EUR 1,966.5 million (2,153.9), of which loans on market terms amounted to EUR 1,856.8 million (2,019.8). The average loan interest rate was 4.0% (3.2%). Net financing expenses totalled EUR -36.1 million (-32.6).

The calculated impact of changes in the market value of interest hedging on equity was EUR 2.0 million (-2.6).

The proportion of loans without asset-based securities was 67.9% (87.9) of all loans. At the end of June, unencumbered assets accounted for 72.3% (89.8) of total assets.

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.

Rental income was EUR 150.5 million (142.4). On average, the economic occupancy rate of apartments was 95.1% (95.0) and the external tenant turnover 28.3% (26.1).

At the end of the reporting period, the average monthly rent of SATO rental homes was EUR 18.30 per m² (18.05).

Net rental income from apartments totalled EUR 101.1 million (93.4).

Investment properties

At 30 June 2024, SATO owned a total of 25,578 homes (25,143). The reporting period saw the completion of 92 (648) rental homes. The number of divested rental apartments was 1 (525).

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 came to a total of EUR 4,929.4 million (4,956.0). The change in the value of investment properties, including investments and divestments during the reporting period, was EUR 43.7 million (-88.2).

The value of properties funded with ARAVA loans or interest-subsidised loans would be EUR 245 million higher when valuated with the income value method.

At the end of June, the commuting zone of the Helsinki Metropolitan Area accounted for around 86.6% and Tampere and Turku together made up around 13.4% of the value of apartments.

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 3 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 apartments totalled EUR 22.8 million (92.7). The Helsinki Metropolitan Area represented 91.0% of all investments during the period under review. New apartments accounted for 44.8% of the total. At 30 June 2024, there were binding purchase agreements to a total of EUR 7.1 million (57.7).

During the reporting period, 1 rental homes (3) were divested in Finland. Their total value amounted to EUR 0.3 million (0.5).

The book value of the plot reserve owned at the end of June totalled EUR 58.4 million (48.2). The value of new plots acquired by the end of June totalled EUR 18.4 million (0.0).

Permitted building volume for around 1,300 homes is being developed for 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.

A total of 92 rental homes (648) were completed for SATO. A total of 257 rental homes (679) were under construction at 30 June 2024.

A total of EUR 9.5 (14.9) was spent on repairing apartments and improving their quality.

Personnel

At the end of June, the Group had 337 employees (358), of which 285 (294) had a permanent employment contract. The average number of personnel in January–June was 323 (332).

REVIEW PERIOD 1 APRIL TO 30 JUNE 2024 (1 APRIL TO 30 JUNE 2023)

Net sales and profit

In April–June 2024, SATO Corporation’s consolidated net sales totalled EUR 75.8 million (71.5).

Operating profit was EUR 52.2 million (-51.5). Operating profit without the change in the fair value of investment properties was EUR 47.1 million (23.6). The unrealised change in fair value through profit or loss was EUR 5.1 million (-75.1).

Net financing expenses totalled EUR -20.8 million (-17.6).

Profit before taxes was EUR 31.4 million (-69.1). Cash flow from operations (free cash flow after taxes excluding changes in fair value) in April–June amounted to EUR 8.8 million (-11.3).

Earnings per share were EUR 0.30 (-1.05).

Housing business

Rental income was EUR 75.8 million (71.5). On average, the economic occupancy rate of apartments was 95.3% (95.0) and the external tenant turnover 27.7% (26.4).

At the end of the reporting period, the average monthly rent of SATO rental homes was EUR 18.30 per m² (18.05).

Net rental income from apartments totalled EUR 57.5 million (52.5).

Investment properties

At 30 June 2024, SATO owned a total of 25,578 homes (25,143). The reporting period saw the completion of 0 (513) rental homes. The number of divested rental apartments was 1 (522).

Fair value

The value of properties funded with ARAVA loans or interest-subsidised loans would be EUR 245 million higher when valuated with the income value method.

At the end of June, the commuting zone of the Helsinki Metropolitan Area accounted for around 86.6% and Tampere and Turku together made up around 13.4% of the value of apartments.

Investments, divestments and property development

Investments in apartments totalled EUR 10.0 million (46.5). The Helsinki Metropolitan Area represented 83.8% of all investments during the period under review. New apartments accounted for 40.0% of the total. At 30 June 2024, there were binding purchase agreements to a total of EUR 7.1 million (57.7).

During the reporting period, 1 rental homes (0) were divested in Finland. Their total value amounted to EUR 0.3 million (0.0).

The book value of the plot reserve owned at the end of June totalled EUR 58.4 million (48.2). The value of new plots acquired by the end of June totalled EUR 18.4 million (0.0).

A total of 0 rental homes (513) were completed for SATO. A total of 257 rental homes (679) were under construction at 30 June 2024.

A total of EUR 4.6 (8.0) was spent on repairing apartments and improving their quality.

Personnel

At the end of June, the Group had 337 employees (358), of which 285 (294) had a permanent employment contract. The average number of personnel in April–June was 328 (340).

Events after the review period

There have been no material events after the review period.

Short-term 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.

SATO’s most significant risks relate to prolonged inflation and the resulting rise in interest rate level. The war in Ukraine has resulted in a surge in the prices of energy, food, materials and commodities and an elevated interest rate level. Higher living costs may have a negative effect on the purchasing power of consumers as well as on their capacity to perform their obligations. If the strong growth in the cost of financing and maintenance costs continues and the market situation does not provide an opportunity to transfer the higher costs into rents in full, this may have a negative impact on the fair value of investment assets and the company’s ability to perform its obligations or to finance its investments. This means new investments and major renovations may have to be postponed.

The highest risks in apartment rental are to do with cyclical movements and changes in supply and demand. The market risk may push the supply of rental homes higher than their demand. This would result in idle rental housing stock and pressure for rents to level off or fall, especially as regards old housing stock.

A decline in the housing market may have a negative effect on the market value of SATO’s housing stock. In line with its strategy, SATO has been focusing in its investments on growth centres and on renovating and repairing existing housing stock and, consequently, ensuring the rentability and value development of the apartments.

Changes in regulation by the authorities and in legislation and related uncertainty may have a significant impact on the reliability of the investment environment and, consequently, on SATO’s business. SATO monitors and anticipates these changes and calls attention to what it considers to be negative impacts of regulation.

The management of financial risks is steered by the Group’s treasury policy. Our risk management principles have been defined in the treasury policy adopted 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 long-term financing commitments. The company has in place a EUR 2.0 billion Euro Medium Term Notes (EMTN) Programme, under which SATO has issued bonds in the total amount of EUR 350 million.

The means for managing liquidity risk at SATO include cash assets, a bank account limit, EUR 600 million in committed credit facilities and a EUR 400 million commercial paper programme. 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 represent an interest rate risk which we manage by balancing the share of fixed- and floating-rate loans either by fixed-rate debt arrangements or interest rate derivatives. In accordance with our treasury policy, our aim is for fixed-rate loans, including interest rate derivatives, to account for more than 60% of our debt portfolio. At the end of the review period, the fixed rate portion of the loan portfolio after hedging was 52.7% (62.9) excluding short-term loans.

For a broader description of risks and risk management, see the Group’s website and Annual Report for 2023 at www.sato.fi/en.

Outlook

In the operating environment, SATO’s business activities are mainly affected by consumer confidence, development of purchasing power, rent and price development for apartments, competitive situation and interest rate level.

Weak economic growth and the declining employment rate are keeping consumer confidence at a low level. Going forward, both the lower interest rate level and waning inflation will improve consumers’ purchasing power and the employment rate, and Finland is expected to see moderate economic growth.

The urbanisation trend continues, and dense urban housing is becoming increasingly popular. There is demand for rental homes in growth centres close to good public transport connections and services.

Rental housing providers are, however, still competing for good tenants, which results in rent revisions remaining moderate. Going forward, higher maintenance and finance costs will be reflected in higher rent costs, while at the same time the supply of rental housing decreases.

In line with the decision made in October 2022, SATO will still refrain from launching any newbuild construction projects.

In line with its majority shareholder’s operating model, SATO Corporation will not publish guidance on its 2024 earnings. The parent company of Balder Finska Otas AB is Fastighets AB Balder, which is quoted on the Stockholm Stock Exchange.

SATO Corporation’s shareholders on 30 June 2024

Largest shareholders and their holdings

Balder Finska Otas AB (Fastighets AB Balder)	48,483,564	57.0%
Stichting Depositary APG Strategic Real Estate Pool	19,217,470	22.6%
Elo Mutual Pension Insurance Company	10,849,621	12.8%
State Pension Fund of Finland	4,194,300	4.9%
Valkila Erkka	385,000	0.5%
Tradeka Invest Ltd	189,750	0.2%
Research Foundation of the Pulmonary Diseases	180,000	0.2%
SATO Corporation	166,000	0.2%
Komulainen Pekka	159,825	0.2%
Entelä Tuula	151,500	0.2%
Others (119 shareholders)	1,085,414	1.3%

At 28 June 2024, SATO had 85,062,444 shares and 129 shareholders registered in the book-entry system. The share turnover rate was 0.0% for the period from 1 January to 30 June 2024.

For more information, please contact:

Antti Aarnio, President and CEO, phone: +358 201 34 4200
Markku Honkasalo, CFO, phone: +358 201 34 4226

www.sato.fi/en

ENCLOSURES

Half-Year Report 1 January to 30 June 2024
Half-Year Report presentation 1 January to 30 June 2024

DISTRIBUTION

Euronext Dublin, main media, www.sato.fi/en

SATO Corporation is an expert in sustainable rental housing and one of Finland’s largest rental housing providers. SATO owns around 25,000 rental homes in the Helsinki Metropolitan Area, Tampere and Turku.

SATO aims to provide an excellent customer experience and a comprehensive range of urban rental housing alternatives with good access to public transport and services. We promote sustainable development and work in open interaction with our stakeholders.

SATO invests profitably, sustainably and with a long-term view. We increase the value of our assets through investments, divestments and repairs.

Attachments

SATO Corporation’s Half-Year Report 1 January to 30 June 2024: Demand for rental homes is recovering

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