SATO Corporation Interim Report 1 January–31 March 2024: Waiting mode in rental housing market

3 May 2024

SATO Corporation, Interim Report 3 May 2024 at 9:00 am

Summary for 1 January–31 March 2024 (1 January–31 March 2023)

The economic occupancy rate was 94.9% (95.0).
Net sales totalled EUR 74.7 million (70.9).
Net rental income was EUR 43.7 million (40.8).
Profit before taxes was EUR 19.6 million (-32.1).
The unrealised change in the fair value of investment properties included in the result was EUR 1.7 million (-46.9).
Housing investments amounted to EUR 12.8 million (46.2).
Invested capital at the end of the review period was EUR 4,807.5 million (4,822.4).
Return on invested capital was 3.0% (-1.4).
Equity was EUR 2,538.7 million (2,453.6), or EUR 29.91 per share (43.34).
Earnings per share were EUR 0.23 (-0.46).
A total of 92 rental apartments (135) were completed. Renovation of 56 rental homes (72) was completed.
A total of 257 rental homes (1,192) are under construction.
The rental housing market is in a waiting mode due to housing allowance changes and a major decline in new construction.

President and CEO Antti Aarnio:

- Inflation has continued to slow down in Finland and the entire euro area. The European Central Bank is expected to cut key interest rates later this year. The high interest rate level is still keeping consumers in a waiting mode, resulting in a persistently very low number of both old and new homes sold.

- During the period under review, SATO’s occupancy rate was 94.9% (95.0). The slight decline is due to the intense competition still prevailing in the market.

- Due to the competitive situation, it has not been possible to transfer the higher maintenance and interest costs in full to apartment rents. Going forward, rents may be pushed up by the continuous strong migration boosting demand for housing, the high living costs and the major decline in the volume of new housing construction. Housing allowance changes effective from 1 April 2024 may increase demand for rental apartments with lower rents.

- There has been a major decrease in the number of new housing construction commenced in Finland, but there will still be a large number of new apartments completed this year.

- In February, the construction of 92 new SATO rental homes in Pataljoonantie, Rykmentinpuisto, Tuusula and the renovation of 56 SATO rental homes in Hämeentie, Kallio, Helsinki, was completed.

- In March, we released an extensive upgrade of our digital OmaSATO service where residents can manage housing-related matters online. The revamp aims to make it easier for residents to take care of as many things as possible directly on OmaSATO.

- Based on a precontract concluded on 30 November 2020, SATO Corporation and Senate Properties signed the final contract on a property transaction concerning an upcoming block area of residential buildings in the Viikki district of Helsinki on 7 March 2024. The local detailed plan concerning the block area was confirmed on 1 February 2024. Located at Maakaarenkuja 2, the plot has residential building rights for around 300–‍350 new apartments.

- In line with our decision made in October 2022, we will still not be launching any construction projects of new apartments.

- We at SATO will be investing in clean energy and installing solar power systems in more and more of our home buildings. Solar power systems will be installed in three new properties completed this year, which will contribute towards our target of being carbon neutral in terms of energy used by our properties by the end of 2030. Use of clean energy will also be promoted by adding electric car charging points to our new and newly renovated buildings. At year-end 2023, SATO buildings had more than 1,200 charging points.

- SATO was ranked sixth in Finland’s Best Workplaces 2024 listing published by Great Place to Work Finland in March. Being ranked higher than the year before is proof of the sustained efforts made at SATO to develop aspects such as the employee experience and managerial work as well as to promote the wellbeing of employees.

- The subscription period of SATO Corporation’s rights offering expired on 14 February 2024. In the offering, a total of 28,279,377 new shares were subscribed for, which corresponds to approximately 99.90% of the new shares offered. The offering generated gross proceeds of around EUR 200 million for the company.

- On 28 February, we signed a EUR 150 million sustainability linked loan facility with LGIM. The secured facility has a tenor of 12 years.

- On 6 March, SATO Corporation repurchased notes amounting to EUR 50 million of its outstanding EUR 350 million notes due in February 2028.

- I would like to thank SATO personnel for an excellent workplace atmosphere and for their contributions to the continuous development of our residents’ comfort and housing.

Operating environment

During the period under review, the substantial supply of rental housing and the economic uncertainty still remained key factors affecting SATO’s operating environment. Uncertainty is increased by the recession, the worsened employment situation and the tight interest rate policy of the European Central Bank (ECB). Geopolitical challenges, such as the war in Ukraine, global tensions and trade policy decisions and sanctions imposed, affect our operating environment. Headline inflation has continued to decline, but core inflation has still remained above the ECB target. Price increases have slowed, except for services, which are still showing higher prices accelerating inflation.

In Finland, economic confidence figures have declined, despite a clear slowdown in inflation. Business confidence has declined in all main industries. The confidence of construction enterprises in particular has declined further, and construction volumes concerning new construction have fallen to the lowest level ever recorded by Statistics Finland, which may lead from the current oversupply to a future housing shortage in growth centres.

Consumer confidence in the economy has remained low, and this is reflected in consumer caution. The employment situation has worsened and the number of unemployed persons increased year on year.

According to the Bank of Finland interim forecast of 15 March 2024, Finland’s gross domestic product (GDP) will decrease by 0.5% this year. The economy is projected to begin to gradually bounce back from the recession towards the end of the year, with GDP growth at 1.7% expected for 2025.

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 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.

The development of wage earners' incomes, 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 an owner-occupied apartment may be considering a rental apartment as a housing option.

Rental housing providers are, however, still competing for good tenants, which results in rent revisions remaining moderate. 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–31 MARCH 2024 (1 JANUARY–31 MARCH 2023)

Net sales and profit

In January–March 2024, SATO Corporation’s consolidated net sales totalled EUR 74.7 million (70.9).

Operating profit was EUR 34.9 million (-17.1). Operating profit without the change in the fair value of investment properties was EUR 33.1 million (29.8). The unrealised change in fair value through profit or loss was EUR 1.7 million (-46.9).

Net financing expenses totalled EUR -15.3 million (-15.0).

Profit before taxes was EUR 19.6 million (-32.1). Cash flow from operations (free cash flow after taxes excluding changes in fair value) in January–March amounted to EUR 25.5 million (1.7).

Earnings per share were EUR 0.23 (-0.46).

Financial position and financing

The consolidated balance sheet total at the end of March was EUR 5,304.9 million (5,369.5). Equity totalled EUR 2,538.7 million (2,453.6). Equity per share was EUR 29.91 (43.34).

The Group’s equity ratio at the end of March was 47.9% (45.7). EUR 325.0 million in new long-term financing was drawn and the solvency ratio at the end of March was 39.4% (41.6).

The Group’s annualised return on equity was 2.5% (-4.2). Return on invested capital was 3.0% (-1.4).

Interest-bearing liabilities at the end of March totalled EUR 2,268.7 million (2,368.8), of which loans on market terms amounted to EUR 2,158.0 million (2,233.3). The average loan interest rate was 3.6% (2.6). Net financing expenses totalled EUR -15.3 million (-15.0).

The calculated impact of changes in the market value of interest hedging on equity was EUR 1.2 million (-3.1).

The proportion of loans without asset-based securities was 72.2% (90.0) of all loans. At the end of March, unencumbered assets accounted for 75.4% (89.7) 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 74.7 million (70.9). On average, the economic occupancy rate of apartments was 94.9% (95.0) and the external tenant turnover 28.9% (25.3).

At the end of the reporting period, the average monthly rent of SATO rental homes was EUR 18.21 per m2 (17.99).

Net rental income from apartments totalled EUR 43.7 million (40.8).

Investment properties

On 31 March 2024, SATO owned a total of 25,560 homes (25,389). The reporting period saw the completion of 92 (135) rental homes. The number of divested rental apartments was 0 (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 4,914.5 million (5,044.8). The change in the value of investment properties, including investments and divestments during the reporting period, was EUR 28.9 million (0.7).

The value of properties funded with ARAVA loans or interest-subsidised loans would be EUR 250 million higher when valuated with the income value method.

At the end of March, the commuting zone of the Helsinki Metropolitan Area accounted for around 86.9% and Tampere and Turku together made up around 13.1% 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 12.8 million (46.2). The Helsinki Metropolitan Area represented 96.6% of all investments during the period under review. New apartments accounted for 48.5% of the total. On 31 March 2024, there were binding purchase agreements to a total of EUR 10.2 million (86.2).

During the reporting period, 0 rental homes (3) were divested. Their total value amounted to EUR 0 million (0.5).

The book value of the plot reserve owned at the end of March totalled EUR 62.1 million (48.1). The value of new plots acquired by the end of March totalled EUR 18.4 million (0.0).

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.

A total of 92 rental homes (135) were completed for SATO. A total of 257 rental homes (1,192) were under construction on 31 March 2024.

A total of EUR 5.0 million (7.0) was spent on repairing apartments and improving their quality.

Personnel

At the end of March, the Group had 319 employees (329), of whom 289 had a permanent employment contract (301). The average number of personnel in January–March was 319 (324).

Annual General Meeting on 21 March 2024

The number of members of the Board of Directors of SATO Corporation was confirmed to be six. The Annual General Meeting re-elected Erik Selin as Chair of the Board. Esa Lager, Tarja Pääkkönen, Sharam Rahi and Timo Stenius will also continue as Board members. Ming Eng was elected to the Board as a new member.

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

The Annual General Meeting adopted the financial statements of 31 December 2023. The Annual General Meeting decided that no dividends be distributed by SATO Corporation for the financial period ended on 31 December 2023.

The Annual General Meeting authorised the Board of Directors to decide on the issuance of shares in one or several tranches as specified in the notice of the Annual General Meeting.

The number of shares issued under the authorisation may be a maximum of 8,517,460 shares. The maximum number of shares corresponds to approximately 10% of all registered shares in the company after the completion of the share issue carried out in early 2024.

The Board of Directors decides on all the conditions of the share issue. The authorization concerns both the issuance of new shares as well as the transfer of own shares held by the company. The issuance of shares may be carried out in deviation from the shareholders’ pre-emptive right by way of a directed issue.

The authorisation is valid until the end of the next Annual General Meeting but, but in any case, no later than 30 June 2025, and revokes the authorization granted by the Extraordinary General Meeting on 11 December 2023.

Organisation of the Board of Directors

At its organisational meeting on 21 March 2024, the company’s Board of Directors elected from among its number Esa Lager to serve as Deputy Chair.

Erik Selin was appointed by the Board to chair the HR and Remuneration Committee and Tarja Pääkkönen and Ming Eng to serve as Committee members.

Events after the review period

Due to reduction in work and in order to achieve savings in a challenging operating environment, the company has initiated change negotiations concerning a large part of the company's organization.

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 are 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 an EUR 2.0 billion Euro Medium Term Notes (EMTN) Programme, under which SATO has issued bonds in the total amount of EUR 700 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 60,3% (68.6) 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.

In Finland, economic confidence figures have declined, despite a significant slowdown in inflation. Business confidence has declined in all main industries. The confidence of construction enterprises in particular has declined further, and construction volumes concerning new construction have fallen to the lowest level ever recorded by Statistics Finland, which may lead from the current oversupply to a future housing shortage in growth centres.

The Statistics Finland report published in March shows that construction costs in the first months of the year have remained at the same level year on year. In line with the decision made in October 2022, SATO will still refrain from launching any newbuild construction projects.

Consumer confidence in the economy has remained low, and this is reflected in consumer caution. The employment situation has worsened and the number of unemployed persons increased year on year.

Urbanisation, income development, increasing housing needs of households and lower interest rates as well as the decrease in new housing production will increase housing demand from late 2024 onwards. The housing allowance policy changes may steer consumers towards looking for more affordable housing. Some of those looking for an owner-occupied apartment may now also consider a rental apartment as an option.

Rental housing providers are 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.

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.

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 31 March 2024

For more information, please contact:

Antti Aarnio, President and CEO, p. +358 201 34 4200
Markku Honkasalo, CFO, p. +358 201 34 4226

www.sato.fi/en

ENCLOSURES

Interim Report 1 January to 31 March 2024
Interim Report presentation 1 January to 31 March 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 more than 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. www.sato.fi/en.

Attachments