SATO Corporation’s Interim Report 1 January to 31 March 2023: Demand for rental homes growing in Helsinki Metropolitan Area

11 May 2023

SATO Corporation, Interim Report 11 May 2023 at 9:00 am

SATO Corporation’s Interim Report 1 January to 31 March 2023

Summary for 1 January to 31 March 2023 (1 January to 31 March 2022)

The economic occupancy rate in Finland was 95.0% (94.6).
Net sales totalled EUR 70.9 million (74.7).
Net rental income was EUR 40.8 million (44.4).
Profit before taxes was EUR -32.1 million (106.8).
The unrealised change in the fair value of investment properties included in the result was EUR -46.9 million (82.6).
Housing investments amounted to EUR 46.2 million (23.7).
Invested capital at the end of the review period was EUR 4,822.4 million (4,593.7).
Return on invested capital was -1.4% (10.4).
Equity was EUR 2,453.6 million (2,417.1), or EUR 43.34 per share (42.70).
Earnings per share were EUR -0.46 (1.50).
A total of 135 rental apartments (0), 0 owner-occupied apartments (0) and 0 FlexHomes (0) were acquired or completed.
A total of 1,192 rental apartments (1,100), 0 owner-occupied homes (0) and 0 FlexHomes (52) are under construction.
In February 135 SATO rental homes were completed in a 16-storey tower block in Vermonniitty, Espoo.
Despite the challenging competitive situation, SATO has succeeded in improving the occupancy rate.

President and CEO Antti Aarnio:

– We completed the divestment of our housing business in Russia on 14 April 2023. SATO had operated in St Petersburg since 2007 and owned 522 rental apartments. The transaction has no significant effect on SATO Corporation’s result.
– In January, SATO was awarded the 2023 Great Place To Work® certificate and was ranked at number ten in in the category for large enterprises among Finland’s best places to work. I am very proud and grateful about this recognition, as we in the entire organisation have made sustained efforts to develop our culture at SATO. A total of 85% of SATO employees find that SATO as a whole is a very good place to work.
– We decided in the autumn that we will not launch any new investments for the time being. The rationale behind our decision was the strong increase in construction and property maintenance costs as well as in financing costs while at the same time rent development remained moderate due to the market situation.
– In February 135 new SATO rental homes were completed in a 16-storey tower block in Vermonniitty, Espoo.
– During the period under review (1 January to 31 March 2023), SATO’s occupancy rate improved year on year and was 95.0% (94.6). After the coronavirus pandemic, demand for SATO rental homes has been picking up since spring 2022. The economic uncertainty and higher consumer prices and interest rates resulting from the war in Ukraine are also in part reflected in the rising demand for rental homes.
– In growth centres, the continued high level of new housing production has sustained intense competition for good tenants. Due to the competitive situation, it has not been possible to transfer the higher maintenance costs in full to apartment rents.
– Because the inflation and the interest rates seem to stay higher for a longer time than expected, the yields for real estate investments are under pressure to rise further. This in turn can have an impact on the fair value of the investment properties.
– I would like to thank SATO employees for their great work to develop customer satisfaction and the housing comfort of our residents.

Operating environment

Over the reporting period, SATO’s operating environment was affected by the war in Ukraine, the rise in costs due to inflation and the continued high level of rental housing supply.

The surge in energy prices brought on by the war in Ukraine pushed the Finnish economy into recession in late 2022. Even though an energy crisis was avoided, the economy’s weak performance has persisted due to protracted inflation and high interest rates. Since the turn of the year, energy prices have fallen and inflation has slowed down slightly, but underlying inflation has remained persistently at a high level and that is why central banks have continued their policy of tightening interest rates. Consumer confidence has remained weak and is reflected in consumer caution. According to the Bank of Finland’s interim forecast of 17 March, economic growth will remain very weak in 2023 and take a slight upturn in 2024. The favourable trend in the employment rate will level off due to the standstill in economic growth but is not projected to decline. The Bank of Finland projects inflation to be 4.6% in 2023 and to return to below 2% in 2024.

The economic uncertainty, high interest rate level and increases in living costs have affected the number of housing transactions. In the first months of the year, transaction volumes of both new and old homes have been exceptionally low. The record-low demand also has a strong impact on the number of housing construction projects commenced. The Confederation of Finnish Construction Industries RT forecast of 29 May projects that the volume of new housing construction will decline by almost a third this year to around 27,000 homes. Projects started in 2021 and in early 2022 will, however, still maintain the supply of new homes at a high level in the Helsinki Metropolitan throughout 2023. Competition for good tenants will remain intense and rent increases moderate. The cost level driven up by inflation is, however, creating pressure for rent increases in the future.

With greater choice available for those looking for a home, the role of a particularly successful customer experience has become even more important. SATO is strongly invested in increasing its presence close to customers and in digital services.

With the good employment situation continuing, migration to large growth centres has accelerated. The Helsinki region’s migration gain in 2022 was 17,420 people – the largest in the 2000s according to Statistics Finland preliminary data. This is reflected in the demand for rental homes in growth centres. The economic uncertainty and the climbing home loan interest rates coupled with increasing energy and other costs may also contribute towards growth in demand for rental housing. Some of those looking for a home to buy may now also consider a rental home as an option.

There is demand for rental homes in growth centres close to good public transport connections and services. The urbanisation trend continues, and dense urban housing with good access to public transport is becoming increasingly popular in Finland. The Helsinki Metropolitan Area (HMA), Tampere and Turku continue to enjoy strong growth, while at the same time 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 proportion 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 and the price development of owner-occupied homes create a stable foundation for rental housing demand, especially in the HMA, Tampere and Turku.

REVIEW PERIOD 1 JANUARY TO 31 MARCH 2023 (1 JANUARY TO 31 MARCH 2022)

Net sales and profit

In January–March 2023, SATO Corporation’s consolidated net sales totalled EUR 70.9 million (74.7).

Operating profit was EUR -17.1 million (117.9). Operating profit without the change in the fair value of investment properties was EUR 29.8 million (35.3). The unrealised change in fair value through profit or loss was EUR -46.9 million (82.6).

Net financing expenses totalled EUR -15.0 million (-11.1).

Profit before taxes was EUR -32.1 million (106.8). Cash earnings (free cash flow after taxes excluding changes in fair value) in January–March amounted to EUR 1.7 million (25.8).

Earnings per share were EUR -0.46 (1.50).

Financial position and financing

The consolidated balance sheet total at the end of March was EUR 5,369.5 million (5,183.0). Equity totalled EUR 2,453.6 million (2,417.1). Equity per share was EUR 43.34 (42.70).

The Group’s equity ratio at the end of March was 45.7% (46.6). EUR 130.0 million in new long-term financing was drawn and the solvency ratio at the end of March was 41.6% (41.9).

The Group’s annualised return on equity was -4.2% (14.3). Return on invested capital was -1.4% (10.4).

Interest-bearing liabilities at the end of March totalled EUR 2,368.8 million (2,176.6), of which loans on market terms amounted to EUR 2,233.3 million (2,008.3). The average loan interest rate was 2.6% (1.8). Net financing expenses totalled EUR -15.0 million (-11.1).

The calculated impact of changes in the market value of interest hedging on equity was EUR -3.1 million (16.9).

The proportion of loans without asset-based securities was 90.0% (83.5) of all loans. At the end of March, unencumbered assets accounted for 89.7% (88.1) 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 70.9 million (74.7). On average, the economic occupancy rate of apartments in Finland was 95.0% (94.6) and the external tenant turnover 25.3% (26.2).

At the end of the reporting period, the average monthly rent of SATO rental homes in Finland was EUR 17.99 per m2 (17.44).

Net rental income from apartments totalled EUR 40.8 million (44.4).

Investment properties

On 31 March 2023, SATO owned a total of 25,389 homes (26,771). The reporting period saw the completion of 135 rental homes (0). The number of divested rental apartments was 3.

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 5,044.8 million (5,129.1). The change in the value of investment properties, including the rental apartments acquired and divested during the reporting period, was EUR 0.7 million (96.3).

The value of properties funded with ARAVA loans or interest-subsidised loans would be EUR 294 million higher when valuated with income value method.

At the end of March, the commuting zone of the Helsinki Metropolitan Area accounted for around 87% and Tampere and Turku together made up around 12% and St Peterburg around 1% 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 46.2 million (23.7). The Helsinki Metropolitan Area represented 86.9% of all investments during the period under review. New apartments accounted for 59.4% of the total. In addition, on 31 March 2023 there were binding purchase agreements to a total of EUR 86.2 million (131.3) in Finland.

During the period under review, 3 rental homes (7) were divested in Finland. Their total value amounted to EUR 0.5 million (2.6).

The book value of the plot reserve owned at the end of March totalled EUR 48.1 million (42.7). The value of new plots acquired by the end of March totalled EUR 0.0 million (0.0).

Permitted building volume for around 1,400 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.

In Finland, 135 rental homes (0), 0 owner-occupied homes (0) and 0 FlexHomes (0) were completed. On 31 March 2023, a total of 1,192 rental homes (1,100), 0 owner-occupied homes (0) and 0 FlexHomes (52) were under construction.

A total of EUR 7.0 million (5.2) was spent on repairing apartments and improving their quality.

At the end of March, SATO had a total 522 apartments (522) in St Petersburg. The economic occupancy rate of rental homes in St Petersburg averaged 85.5 % (98.2). Investments in Russia commenced in 2007. The last investment decision was made in 2013 and the property was completed in 2016. Following the start of the war in Ukraine, SATO made a decision in principle to exit the business in Russia. SATO completed the divestment of the housing business in Russia on 14 April 2023 and SATO no longer has operations in Russia.

Personnel

At the end of March, the Group had 329 employees (322), of whom 301 had a permanent employment contract (295). The average number of personnel in January–March was 324 (321).

Annual General Meeting on 23 March 2023

A decision was made to set the number of members of the Board of Directors of SATO Corporation at six. The Annual General Meeting re-elected Erik Selin as Chairman of the Board. Esa Lager, Tarja Pääkkönen, Sharam Rahi, Johannus (Hans) Spikker and Timo Stenius will also continue as Board members.

The audit firm Deloitte Ltd was appointed as the auditor. Deloitte Ltd has announced that the Key Audit Partner will be Aleksi Martamo, Authorised Public Accountant (APA).

The Annual General Meeting decided to adopt the financial statements of 31 December 2022. The Annual General Meeting decided that SATO Corporation will not distribute any dividends for the financial period ended on 31 December 2022.

Organisation of the Board of Directors

At its constitutive meeting on 23 March 2023, the company’s Board of Directors elected from among its number Esa Lager to serve as Deputy Chairman.

The Board appointed Erik Selin to chair the Nomination and Remuneration Committee and Tarja Pääkkönen and Johannus (Hans) Spikker to serve as Committee members.

Events after the review period

SATO completed the divestment of the housing business in Russia on 14 April 2023. SATO had operated in St Petersburg since 2007 and owned 522 rental apartments. The transaction has no significant effect on SATO Corporation’s result.

On May, due to the current market of construction business, the company has started change negotiations with the organization of its investments business unit.

Laura Laamanen has been appointed Chief Commercial Officer and member of the Corporate Management Group at SATO Corporation effective 11 May 2023.

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.

The war in Ukraine is a short-term risk affecting the operating environment, the duration and impacts of which on the Finnish economy are difficult to estimate. The war’s biggest impacts have been seen in the prices of energy, food and materials as well as in supply chains. The surge in prices has resulted in a rapid increase in the interest rate level. The increase in price level may slow economic growth, continue to considerably increase the interest rate level, and have a negative effect on the purchasing power of consumers as well as on their capacity to perform their obligations. Such a decline in the economy or economic activity may have an adverse effect on the financial performance or activities, finance costs or value of SATO-owned properties.

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 refined 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 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 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 financing commitments. In 2019, the company issued an EUR 1.5 billion Euro Medium Term Notes (EMTN) Programme, under which SATO has issued bonds in the total amount of EUR 1,050.0 million.

The means for managing liquidity risk at SATO include cash assets, a bank account limit, EUR 700 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 68.6% (excluding short-term loans).

For a broader description of risks and risk management, see the Group’s website and Annual Report for 2022 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, the competitive situation and interest rate level.

With the good employment situation continuing, migration to large growth centres has accelerated. Helsinki region’s migration gain in 2022 was 17,420 people – the largest in the 2000s according to Statistics Finland preliminary data. This is reflected in the demand for rental homes in growth centres. The economic uncertainty and the climbing home loan interest rates coupled with increasing energy and other costs may also contribute towards growth in demand for rental housing. Some of those looking for a home to buy may now also consider a rental home as an option.

In line with its majority shareholder’s operating model, SATO Corporation will not publish guidance on its 2023 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 31 March 2023

For media enquiries 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

Interim Report 1 January to 31 March 2023
Interim Report presentation 1 January to 31 March 2023

DISTRIBUTION
NASDAQ Helsinki Ltd, 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.

In 2022, SATO Group’s net sales totalled EUR 291.2 million, operating profit EUR 198.9 million and profit before taxes EUR 151.9 million. The value of SATO’s investment properties is around EUR 5 billion. www.sato.fi/en_

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