Challenging market environment – focus on actions to improve decreased occupancy

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SATO Corporation, Interim report 12 May, 2021 at 9:00 a.m.

Summary for 1 Jan–31 Mar 2021 (1 Jan–31 Mar 2020)

  • The economic occupancy rate in Finland was 94.8 (97.6) %.

  • Net sales were EUR 74.0 (75.6) million.

  • Net rental income amounted to EUR 44.9 (47.0) million.

  • Profit before taxes was EUR 56.2 (34.5) million.

  • The change in the fair value of investment properties included in the result was EUR 31.6 (4.8) million.

  • Housing investments amounted to EUR 16.9 (27.3) million.

  • Invested capital at the end of the review period was 4,379.8 (4,216.2) million.

  • Return on invested capital was 6.1 (4.3) %.

  • Equity was EUR 2,179.2 (2,081.3) million, or EUR 38.48 (36.76) per share.

  • Earnings per share were EUR 0.79 (0.48).

  • A total of 0 (211) rental apartments were acquired or completed.

  • A total of 561 rental apartments and 71 owner-occupied apartments are under construction.

  • SATO’s own House Experts are a presence in the day-to-day lives of more than 13,000 residents in the Helsinki metropolitan area.

CEO Antti Aarnio:

  • During the period under review, SATO’s occupancy rate fell to 94.8 (97.6) per cent. The weakened occupancy rate can be attributed largely to the general uncertainty caused by the coronavirus pandemic, the increased offering of rental housing, and decreased willingness of customers to promote us all of which increased the tenant turnover.

  • In accordance with our Customer First development programme, we focused on adapting our organisation and our service processes to respond to our customers’ needs even better. SATO’s own House Experts are a presence in the day-to-day lives of more than 13,000 residents in the Helsinki metropolitan area. During the end of the year 2019 SATO launched a maintenance model where its own building superintendents, SATO House Experts, took on some of the duties of SATO’s maintenance partners.

  • In order to maintain profitability, the company has streamlined its sales and marketing measures and focused on cost-efficiency improvements.

  • Construction was started on the Wise Mobility City Block in Helsinki’s Oulunkylä district during the review period.

  • Once again, I wish to thank SATO employees for their commendable work and for doing everything they could to ensure the comfort of our residents, also during this uncertain and challenging time.

Operating environment

The recovery of Finland’s economy from the Covid-19 crisis will be slow in the beginning of the year, but economic growth is expected to pick up in the second half of the year as the vaccination rate increases and the relieving of restrictions can begin. According to the projection made by the Bank of Finland in March, Finland’s economy will grow 2.6 per cent in 2021. The projection forecasts that economic recovery will continue in 2022. The evolution of the coronavirus situation will continue to spawn major uncertainty with regard to economic development.

Efforts are being made to limit the negative impact of the pandemic on Finland’s economy through support measures adopted by the European Central Bank, the European Union and the State of Finland.

The pandemic has slightly shifted the focus of demand for rental apartments to larger apartments and areas with lower rent levels. Behind both of these developments is the increase in teleworking: people need more space when they also use their home for working.

In recent years, the rental housing markets in major cities have been characterised by sharp growth in supply. The growth largely stems from the brisk production of rental housing.

As a result of the coronavirus pandemic, previously short-term rental apartments were offered for longer rental periods, which boosted supply in some cities, even to a considerable degree. However, demand for rental apartments was partly negatively affected by upper secondary schools and universities switching to remote teaching.

Despite the coronavirus pandemic that erupted in 2020, there is demand for rental apartments, and the urbanisation trend continues to be strong.

REVIEW PERIOD 1 January–31 March 2021 (1 January–31 March 2020)

Net sales and profit

Between January and March 2021, consolidated net sales were EUR 74.0 (75.6) million.

Operating profit was EUR 67.9 (45.5) million. The operating profit without the change in the fair value of investment properties was EUR 36.3 (40.7) million. The change in fair value was EUR 31.6 (4.8) million.

Financial income and expenses totalled EUR -11.8 (-11.0) million.

Profit before taxes was EUR 56.2 (34.5) million. Cash flow from operations (free cash flow after taxes excluding changes in fair value) between January and March amounted to EUR 21.3 (29.3) million.

Earnings per share were EUR 0.79 (0.48).

Financial position and financing

The consolidated balance sheet totalled EUR 4,972.6 (4,802.0) million at the end of March. Equity was EUR 2,179.0 (2,081.3) million. Equity per share was EUR 38.49 (36.76).

The Group’s equity ratio was 43.8 (43.3) per cent at the end of March. EUR 0.0 million in new long-term financing was withdrawn and the solvency ratio was 43.4 (44.0) per cent at the end of March.

The Group’s annualised return on equity was 8.2 (5.2) per cent. Return on invested capital was 6.1 (4.3) per cent.

Interest-bearing liabilities at the end of March totalled EUR 2,200.9 (2,135.0) million, of which loans subject to market terms accounted for EUR 1,995.1 (1,874.0) million. The average loan interest rate was 1.8 (1.7) per cent. Net financing costs totalled EUR -11.8 (-11.0) million.

The calculated impact of changes in the market value of interest hedging on equity was EUR 6.8 (-1.6) million.

The proportion of loans without asset-based securities was 82.5 (78.3) per cent of all loans. At the end of March, the proportion of unencumbered assets was 84.1 (82.2) per cent 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 74.0 (75.6) million. The economic occupancy rate of apartments in Finland was 94.8 (97.6) per cent on average, and the external tenant turnover was 31.6 (28.1) per cent.

The average monthly rent of SATO’s rental apartments in Finland at the end of the review period was EUR 17.50 (17.28) per m2.

Net rental income from apartments stood at EUR 44.9 (47.0) million.

Investment properties

On 31 March 2021, SATO owned a total of 26,714 (26,380) apartments. Altogether 0 (211) rental apartments were completed during the review period. The total number of divested rental apartments and shared ownership apartments redeemed by the owner-occupants was 5.

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 March, the fair value of investment properties came to a total of EUR 4,804.5 (4,689.1) million. The change in the value of investment properties, including the rental apartments acquired and divested during the review period, was EUR 51.0 (31.2) million.

Of the value of apartments, the Helsinki metropolitan area accounted for some 85 per cent, Tampere and Turku made up 11 per cent, Jyväskylä and Oulu 2 per cent and St. Petersburg covered 2 per cent at the end of March.

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 16.9 (27.3) million. Investments in the Helsinki metropolitan area represented 92 per cent of all investments in the review period. Investments in new apartments represented 40.8 per cent of the investments. On 31 March 2021, binding purchase agreements in Finland totalled EUR 76.8 (42.0) million.

During the period under review, construction was begun on the Wise Mobility City Block planned by SATO and located in Helsinki’s Oulunkylä district on Maaherrantie. The block, located at the junction of the Raide-Jokeri tramline and the main railway, will see the construction of altogether around 500 rental, owner-occupied and part ownership apartments over the next few years. Construction work will begin with three apartment buildings, consisting of altogether 222 rental homes of different sizes. The property will be completed in spring 2023. Geothermal heating was chosen as the heat source, which will reduce CO2 emissions. A further benefit of geothermal heating is that it can also be used to cool the building. A solar power system producing renewable energy is also in the works for the property. All of the parking spaces will be equipped for charging electric vehicles. The buildings will be carbon neutral in terms of in-use energy, when renewable electricity is used alongside geothermal heating. Later, a SATO FlexHome will also be erected on the block. FlexHome is a short-term ownership concept that enables home ownership with a small initial capital outlay and a five-year part-ownership period.

During the review period, 5 (56) rental apartments were divested in Finland. Their total value was EUR 0.9 (2.4) million.

The book value of plot reserves totalled EUR 67.1 (57.1) million at the end of March. The value of new plots acquired by the end of March totalled EUR 4.4 (1.8) million.

The permitted building volume for about 2,150 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, 0 (211) rental and 0 (0) owner-occupied apartments were completed. On 31 March 2021, a total of 561 (848) rental apartments and 71 (115) owner-occupied apartments were under construction.

A total of EUR 14.0 (15.9) million was spent on repairing apartments and improving their quality.

At the end of March, SATO owned 533 (533) apartments in St. Petersburg. The economic occupancy rate of rental apartments in St. Petersburg was 95.0 (91.1) 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 March, the Group employed 249 (224) people, of whom 234 (211) had a permanent employment contract. The average number of personnel was 244 (224) between January and March.

Annual General Meeting on 25 March 2021

The Board of Directors of SATO Corporation was confirmed to consist of six members.

The Annual General Meeting elected Erik Selin as Chairman of the Board. Sharam Rahi was elected as a new member of the Board. Current members Esa Lager, Tarja Pääkkönen, Johannus (Hans) Spikker and Timo Stenius will continue as Board members.

Audit firm Deloitte Oy were selected as the company’s auditor. Deloitte Oy has announced that APA Eero Lumme will act as the auditor in charge.

The Annual General Meeting decided to approve the financial statements on 31 December 2020 and that SATO Corporation will distribute EUR 0.50 per share in dividends for the financial period ending on 31 December 2020.

The Annual General Meeting decided that the total of 6,000 shares in SATO Corporation’s joint account in Euroclear Finland Oy will come to SATO Corporation and that the provisions applying to treasury shares held by the company will apply to them.

Organisation of the Board of Directors

At its constitutive meeting on 25 March 2021, the company’s Board of Directors elected Esa Lager as Deputy Chairman of the Board of Directors from among its members.

The Board of Directors elected Erik Selin as Chairman of the Nomination and Remuneration Committee, and Tarja Pääkkönen and Hans Spikker as its 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 risk in the immediate future is the coronavirus pandemic, whose duration and impact on the Finnish economy are difficult to estimate. A prolonged pandemic may have a major negative impact on economic growth, and on business activity, employment and work productivity in Finland. Such economic or business deterioration, as well as quarantines or other restrictive measures, may have an adverse impact on the financial result or operations of SATO’s properties, not to mention on financing costs or values.

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 focuses 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, as well as the uncertainty stemming from them, may 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 treasury 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.

The means for managing the liquidity risk at SATO include cash assets, a bank account limit, committed credit facilities, and a 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 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. At the end of the review period, the share of fixed rate loans of the debt portfolio was 70.9 per cent.

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 2020 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, the general competitive situation and interest rates.

The Covid-19 pandemic that started in early 2020 has had a major impact on the Finnish economy. In early 2021, the recovery of Finland’s economy will be slow due to the weakened pandemic situation, but economic growth is expected to pick up in the second half of the year as the vaccination rate increases and the relieving of restrictions can begin. According to the projection made by the Bank of Finland in March, Finland’s economy will grow 2.6 per cent in 2021. The projection forecasts that economic recovery will continue in 2022. The evolution of the coronavirus situation and delays in vaccinations will continue to spawn major uncertainty with regard to economic development.

Efforts are being made to limit the negative impact of the pandemic on Finland’s economy through support measures adopted by the European Central Bank, the European Union and the State of Finland. Due to Europe’s weak economic development, interest rates are expected to remain low for a longer time, which will have a positive impact on SATO’s financing costs.

In recent years, the rental housing markets in major cities have been characterised by sharp growth in supply. The growth largely stems from the brisk production of rental housing. Due to the low interest rate level and strong investor demand, the rate of housing construction is expected to remain at a high level.

During the Covid-19 pandemic, previously short-term rental apartments were offered for longer rental periods, which boosted supply in some cities, even to a considerable degree. However, demand for rental apartments was partly negatively affected by upper secondary schools and universities switching to remote teaching. Once the restrictions to contain the spread of the coronavirus have been relieved, travel rates increase and students return to classrooms, the demand for rental apartments is expected to start growing.

As a consequence of the uncertainty caused by the pandemic, SATO’s external tenant turnover has grown and the economic occupancy rate weakened compared to the previous year. In order to maintain profitability, the company has streamlined its sales and marketing measures and focused on cost-efficiency improvement measures. SATO is investing strongly in increasing its customer presence and developing digital services. These measures are expected to have a positive impact on the occupancy rate in the medium term.

SATO Corporation’s shareholders on 31 March 2021

Largest shareholders and their holdings

no. of shares

%

Balder Finska Otas Ab (Fastighets Ab Balder)

31,696,745

55.8%

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%

Valkila Erkka

390,000

0.7%

Hengityssairauksien tutkimussäätiö

227,000

0.4%

SATO Corporation

160,000

0.3%

Entelä Tuula

159,000

0.3%

Heinonen Erkki

156,684

0.3%

Tradeka-invest Ltd

126,500

0.2%

Others (110 shareholders)

1,020,210

1.8%

On 31 March 2021, SATO had 56,783,067 shares and 120 shareholders registered in the book-entry system. The share turnover rate was 0.04 per cent for the period 1 January–31 March 2021.

Further information
CEO Antti Aarnio, tel. +358 201 34 4200
CFO Markku Honkasalo, tel. +358 201 34 4226
www.sato.fi

ATTACHMENTS

Interim Report 1 Jan–31 Mar 2021
Interim Report presentation 1 Jan–31 Mar 2021

DISTRIBUTION
NASDAQ Helsinki Ltd., Euronext Dublin, main media, www.sato.fi

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 2020, SATO owned close to 26,800 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.

SATO Group’s net sales in 2020 were EUR 303.4 million, operating profit EUR 179.6 million and profit before taxes EUR 129.5 million. The value of SATO’s investment properties is roughly EUR 4.8 billion.

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