SATO Corporation Interim Report 1 January–30 September 2023: Rental housing market remains challenging

SATO Corporation, Interim Report 27 October 2023 at 9:00 am

*Summary for 1 January–30 September 2023 (1 January–30 September 2022) *

· *The economic occupancy rate was 94.9% (95.1).*
· *Net sales totalled EUR 214.9 million (219.8).*
· *Net rental income was EUR 148.5 million (152.4).*
· *Profit before taxes was EUR -94.2 million (182.9).*
· *The unrealised change in the fair value of investment properties included in the result was EUR -140.0 million (43.2).*
· *Housing investments amounted to EUR 122.5 million (122.1). *
· *Invested capital at the end of the review period was EUR 4,552.2 million (4,650.7). *
· *Return on invested capital was -1.2% (6.3). *
· *Equity was EUR 2,406.2 million (2,507.4), or EUR 42.50 (44.29) per share.*
· *Earnings per share were EUR -1.42 (2.58).*
· *A total of 861 apartments (192) were acquired and completed, of which 809 (192) were rental homes and 52 (0) were FlexHomes. Renovation of 388 rental homes (250) was completed.*
· *A total of 518 rental homes (1,387), 0 FlexHomes (52) and 213 renovation projects (500) are under construction.*

*Summary for 1 July–30 September 2023 (1 July–30 September 2022)*

· *The economic occupancy rate was 94.7% (95.6).*
· *Net sales totalled EUR 72.5 million (72.6).*
· *Net rental income was EUR 55.1 million (54.0). *
· *Profit before taxes was EUR 7.0 million (38.4).*
· *The unrealised change in the fair value of investment properties included in the result was EUR -18.0 million (2.9).*
· *Housing investments amounted to EUR 29.8 million (53.6). *
· *Earnings per share were EUR 0.10 (0.54). *
· *A total of 161 rental homes (1) were acquired and completed. 191 renovation projects (18) were completed. During the period under review, 161 new rental homes were completed in Raudikkokuja, Hakunila, Vantaa and, following full renovation, **108 homes were completed in Mechelininkatu, Etu-Töölö, Helsinki, and** 83 rental homes were completed in Raiviosuonmäki, Martinlaakso, Vantaa. *

*President and CEO Antti Aarnio:*· During the period under review, SATO’s occupancy rate was 94.7% (95.6). The decline is due to SATO’s high rate of new housing construction and the intense competition prevailing in the rental housing market. On the other hand, 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.
· There has been a significant decline in the volume of new housing construction projects commenced in the market, but there will still be a large number of new homes completed this year, maintaining intense competition for tenants. Due to the competitive situation, it has not been possible to transfer the higher maintenance and interest costs in full to apartment rents. The rising demand for housing, high living costs and significant decline in the volume of new housing construction may push rents up going forward.
· As the level of inflation and interest rates is projected to remain high, there may be upward pressure on the return requirement for real property. This may have a negative effect on the fair value of investment assets.
· The uncertainty in the financial markets and the higher interest rates are reflected in increased finance costs. Going forward, SATO’s large volume of unencumbered property assets enables the use of secured finance that is less expensive than unsecured finance. SATO is currently discussing with finance providers on secured loans to cover finance needs in 2024. The aim is to implement these arrangements before the turn of the year.
· During the period under review from 1 July to 30 September 2023, SATO completed 161 new rental homes in Raudikkokuja, Hakunila, Vantaa and, following full renovation, 191 rental homes in Mechelininkatu, Etu-Töölö, Helsinki, and in Raiviosuonmäki, Martinlaakso, Vantaa.
· The industry-wide volume of new construction projects commenced is at a historically low level, and the supply of new rental homes will decrease over the years ahead. This year will see the completion of a total of 978 new SATO rental homes. In addition, the full renovation of a total of 545 SATO homes will be completed this year.
· We will still not be launching new construction projects and have adapted our operations to reflect the general market situation.
· Launched in the spring, the installation of solar power systems in 15 residential buildings around the Helsinki Metropolitan Area, Tampere and Turku has been completed. We will continue our work to reach the SATO target of being carbon neutral in terms of in-use energy consumption by 2030.  
· SATO is strongly invested in increasing its presence close to customers and in digital services. We continued to build a consistent and seamless around-the-clock customer service experience.
· We participated for the ninth time in the Global Real Estate Sustainability Benchmark (GRESB) assessment and reached our aim of scoring three out of five stars.
· 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, a strong rate of new housing construction continued, particularly in the Helsinki Metropolitan Area. The level of inflation still remained high, despite having declined in Finland since the winter months mainly owing to the decrease in energy prices. Core inflation has, however, persisted at a high level and clearly above the two per cent target of the central banks. The European Central Bank still continued to hike the rates in September, but the market expects the interest rate peak to be reached during late 2023, and inflation is projected to slow to below two per cent in late 2024.

The high inflation has weakened consumers’ purchasing power and kept consumer confidence at a low level. According to the Bank of Finland’s September 2023 interim forecast, Finland’s GDP will contract by 0.2% in 2023. Recovery from the recession is projected to be slow, with the economy forecast to grow only by 0.2% in 2024. The improved employment rate is projected to dip slightly in 2024. As economic growth strengthens in 2025, the employment rate is also projected to take another upturn.

The economic uncertainty, persistently high interest rate level and increases in living costs have a strong impact on the number of new housing construction projects commenced. The Confederation of Finnish Construction Industries RT forecast of 26 September estimates that the volume of new housing construction projects commenced this year will only be around 16,000, whereas the figure in 2022 was still more than 37,000. Projects started in 2022 will still maintain the supply of new homes at a high level throughout 2023, especially in the Helsinki Metropolitan Area. Rental housing providers are competing for good tenants, which results in rent increases remaining moderate. Inflation increases maintenance and finance costs and, going forward, these will be reflected in higher rent costs while the supply of rental housing decreases.

Migration to large growth centres has continued and the Helsinki region’s migration gain in 2022 was 17,420 people. 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 are now also considering a rental home as a good option instead home ownership.

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. The Helsinki Metropolitan Area (HMA), Tampere and Turku are large urban regions continuing 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 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 and the price development create a stable foundation for rental housing demand, especially in the HMA, Tampere and Turku.

*REVIEW PERIOD 1 JANUARY–30 SEPTEMBER 2023 (1 JANUARY–30 SEPTEMBER 2022)*

*Net sales and profit*

In January–September 2023, SATO Corporation’s consolidated net sales totalled EUR 214.9 million (219.8).

Operating profit was EUR -42.8 million (217.0). Operating profit without the change in the fair value of investment properties was EUR 97.2 million (173.8). The unrealised change in fair value through profit or loss was EUR -140.0 million (43.2).

Net financing expenses totalled EUR -51.4 million (-34.1).

Profit before taxes was EUR -94.2 million (182.9). Cash earnings (free cash flow after taxes excluding changes in fair value) in January–September amounted to EUR 15.0 million (116.3).

Earnings per share were EUR -1.42 (2.58).

*Financial position and financing*The consolidated balance sheet total at the end of September was EUR 5,108.6 million (5,226.0). Equity totalled EUR 2,406.2 million (2,507.4). Equity per share was EUR 42.50 (44.29).

The Group’s equity ratio at the end of September was 47.1% (48.0). EUR 180.0 million in new long-term financing was drawn and the solvency ratio at the end of September was 41.9% (40.0).

The Group’s annualised return on equity was -4.4% (8.0). Return on invested capital was -1.2% (6.3).

Interest-bearing liabilities at the end of September totalled EUR 2,145.9 million (2,143.3), of which loans on market terms amounted to EUR 2,016.6 million (1,987.7). The average loan interest rate was 3.4% (1.8). Net financing expenses totalled EUR -51.4 million (-34.1).

The calculated impact of changes in the market value of interest hedging on equity was EUR -2.8 million (46.2).

The proportion of loans without asset-based securities was 88.1% (87.3) of all loans. At the end of September, unencumbered assets accounted for 89.9% (88.9) 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 214.9 million (219.8). On average, the economic occupancy rate of apartments was 94.9% (95.1) and the external tenant turnover 26.8% (28.4).

At the end of the reporting period, the average monthly rent of SATO rental homes was EUR 18.08 per m^2 (17.80).

Net rental income from apartments totalled EUR 148.5 million (152.4).

*Investment properties *On 30 September 2023, SATO owned a total of 25,301 homes (24,947). The reporting period saw the completion of 809 rental homes (191). The number of divested rental apartments and part-ownership apartments redeemed by residents totalled 528.

*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 September, the fair value of investment properties came to a total of EUR 4,970.9 million (5,035.3). The change in the value of investment properties, including the rental apartments acquired and divested during the reporting period, was EUR -73.3 million (2.6).

The value of properties funded with ARAVA loans or interest-subsidised loans would be EUR 280 million higher when valuated with income value method.

At the end of September, the commuting zone of the Helsinki Metropolitan Area accounted for around 87.4% and Tampere and Turku together made up around 12.6% 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. The rental potential and value of rental apartments owned by SATO are developed through renovation activities.

Investments in apartments totalled EUR 122.5 million (122.1). The Helsinki Metropolitan Area represented 88.9% of all investments during the period under review. New apartments accounted for 46.3% of the total. In addition, on 30 September 2023, there were binding purchase agreements to a total of EUR 33.5 million (150.2).

During the reporting period, 6 rental homes (2,018) were divested. Their total value amounted to EUR 1.0 million (208.8).

The book value of the plot reserve owned at the end of September totalled EUR 48.1 million (36.0). The value of new plots acquired by the end of September totalled EUR 0.0 million (9.1).

Permitted building volume for around 1,200 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.

During the period under review, 809 rental homes (191), 0 owner-occupied homes (0) and 52 FlexHomes (0) were completed. On 30 September 2023, a total of 518 rental homes (1,387), 0 owner-occupied homes (0) and 0 FlexHomes (52) were under construction. 213 renovation projects (500) were under construction.

A total of EUR 21.2 million (17.8) was spent on repairing apartments and improving their quality.

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 had no significant effect on SATO Corporation’s result.

*Personnel*

At the end of September, the Group had 331 employees (325), of whom 301 had a permanent employment contract (291). The average number of personnel in January–September was 336 (330).

*REVIEW PERIOD 1 JULY–30 SEPTEMBER 2023 (1 JULY–30 SEPTEMBER 2022)*

*Net sales and profit*In July–September 2023, SATO Corporation’s consolidated net sales totalled EUR 72.5 million (72.6).

Operating profit was EUR 25.8 million (50.2). Operating profit without the change in the fair value of investment properties was EUR 43.8 million (47.3). The unrealised change in fair value through profit or loss was EUR -18.0 million (2.9).

Net financing expenses totalled EUR -18.8 million (-11.8).

Profit before taxes was EUR 7.0 million (38.4). Cash earnings (free cash flow after taxes excluding changes in fair value) in July–September amounted to EUR 24.6 million (31.7).

Earnings per share were EUR 0.10 (0.54).

*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 72.5 million (72.6). On average, the economic occupancy rate of apartments was 94.7% (95.6) and the external tenant turnover 28.0% (27.7).

At the end of the reporting period, the average monthly rent of SATO rental homes was EUR 18.08 per m^2 (17.80).

Net rental income from apartments totalled EUR 55.1 million (54.0).

*Investment properties *On 30 September 2023, SATO owned a total of 25,301 homes (24,947). The reporting period saw the completion of 161 rental homes (0). The number of divested rental apartments and part-ownership apartments redeemed by residents totalled 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 September, the fair value of investment properties came to a total of EUR 4,970.9 million (5,035.3). The change in the value of investment properties, including the rental apartments acquired and divested during the reporting period, was EUR 15.0 million (58.6).

The value of properties funded with ARAVA loans or interest-subsidised loans would be EUR 280 million higher when valuated with income value method.

At the end of September, the commuting zone of the Helsinki Metropolitan Area accounted for around 87.4% and Tampere and Turku together made up around 12.6% 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. The rental potential and value of rental apartments owned by SATO are developed through renovation activities.

Investments in apartments totalled EUR 29.8 million (53.6). The Helsinki Metropolitan Area represented 91.1% of all investments during the period under review. New apartments accounted for 22.4% of the total. In addition, on 30 September 2023, there were binding purchase agreements to a total of EUR 33.5 million (150.2). Due to the market situation and higher costs, SATO decided in October 2022 that the company will not launch new construction projects for the time being.

SATO’s new rental homes by the Skanssi shopping centre in Turku are going to be completed in October. Sorakatu 9 is SATO’s first newbuild property in Turku in five years. The eight-storey building has a total of 77 rental homes of different sizes: 42 studios and 15 one-bedroom, 13 two-bedroom and 7 three-bedroom homes.

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

The book value of the plot reserve owned at the end of September totalled EUR 48.1 million (36.0). The value of new plots acquired by the end of September totalled EUR 0.0 million (1.4).

Permitted building volume for around 1,200 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.

During the period under review, 161 rental apartments (0), 0 owner-occupied homes (0) and 0 FlexHomes (0) were completed. On 30 September 2023, a total of 518 rental homes (1,387), 0 owner-occupied homes (0) and 0 FlexHomes (52) were under construction.

A total of EUR 6.2 million (6.5) was spent on repairing apartments and improving their quality.

*Personnel*At the end of September, the Group had 331 employees (325), of whom 301 had a permanent employment contract (291). The average number of personnel in July–September was 343 (333).

*Events after the review period*There are 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.

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, 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 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 as well as 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. The company has in place an EUR 2.0 billion Euro Medium Term Notes (EMTN) Programme, under which SATO has issued bonds in the total amount of EUR 750.0 million.

The means for managing liquidity risk at SATO include cash assets, a bank account limit, EUR 700.0 million in committed credit facilities and a EUR 400.0 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 63.0% (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, competitive situation and interest rate level. Inflation has remained high regardless of having become more moderate after the winter months, especially thanks to lower energy prices. Core inflation has, however, persisted at a high level and clearly above the two per cent target of the central banks. The European Central Bank still hiked interest rates in September, but the market expects the interest rate peak to be reached during late 2023. Inflation is projected to slow to below two per cent in late 2024.

Inflation has increased maintenance and finance costs and, due to the competitive situation, it has not been possible to transfer these costs in full to apartment rents. The uncertainty in the financial markets and the persistently high interest rates will be reflected in increased finance costs in the future, too. Going forward, SATO’s large volume of unencumbered property assets enables the use of less expensive secured finance.

Due to the market situation and higher costs, SATO decided in October 2022 that the company will not launch new construction projects for the time being. In addition to the 169 apartments to be completed in 2023, another 349 newbuild apartments will still be completed in 2024.

The persistently high inflation has weakened consumers’ purchasing power and kept consumer confidence at a low level. According to the Bank of Finland’s September 2023 interim forecast, Finland’s GDP will contract by 0.2% in 2023. Recovery from the recession will be slow, with the economy forecast to grow only by 0.2% in 2024. Having been growing for a long time, employment will dip slightly in 2024 but resume growth again in 2025 as economic growth strengthens.

The economic uncertainty, persistently high interest rate level and increases in living costs have a strong impact particularly on the number of new housing construction projects commenced. The Confederation of Finnish Construction Industries RT forecast of 26 September estimates that the volume of new housing construction projects commenced in 2023 will only be around 16,000, whereas the figure in 2022 was more than 37,000. Projects started in 2022 will still maintain the supply of new homes at a high level particularly in the Helsinki Metropolitan throughout 2023, which will mean competition for good tenants will be very intense and rent increases moderate. Going forward, maintenance and finance costs pushed up by inflation will be reflected in higher apartment rents as supply in the market declines.

The urbanisation trend continues and dense urban housing is becoming increasingly popular in Finland. There is demand for rental homes in growth centres close to good public transport connections and services. The economic uncertainty and the climbing home loan interest rates coupled with increasing energy and other costs also contributes towards growth in demand for rental housing. Some of those looking for a home to buy are now also considering 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 30 September 2023 *
Largest shareholders and their holdings Number of shares *%*
Balder Finska Otas AB (Fastighets AB Balder)
31,971,535 56.3%
Stichting Depositary APG Strategic Real Estate Pool
12,811,647 22.6%
Elo Mutual Pension Insurance Company
7,233,081 12.7%
State Pension Fund of Finland
2,796,200 4.9%
Valkila Erkka
385,000 0.7%
SATO Corporation
166,000 0.3%
Entelä Tuula
149,000 0.3%
Heinonen Erkki
146,684 0.3%
Tradeka Invest Ltd
126,500 0.2%
Research Foundation of the Pulmonary Diseases

120,000 0.2%
Others (119 shareholders) 877,420 1.5%

On 29 September 2023, SATO had 56,783,067 shares and 129 shareholders registered in the book-entry system. The share turnover rate was 0.02% for the period from 1 January to 30 September 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 30 September 2023
Interim Report presentation 1 January to 30 September 2023

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

*Attachments*

· Interim report 1 January - 30 September 2023
· Interim report presentation 1 January - 30 September 2023