Sponda Plc's interim report January-June 2005

 

 

- Total revenue increased to EUR 51.9 (50.1) million

- Operating profit improved to EUR 29.1 (16.5) million due to growth in the values of Sponda's investment properties

- Operating cash flow per share was EUR 0.29 (0.23)

- The market value of Sponda's property portfolio was EUR 1,245.9 (1,210.8) million

- Net income in the period was EUR 12.2 (13.1) million. Net income in 2004 was boosted by a change in deferred taxes, EUR 7 million, after the corporate tax rate was reduced from 29% to 26%.

- Earnings per share were EUR 0.15 (0.17).

 

Sponda adopted the IFRS reporting standards on 1 January 2005. This interim report has been prepared in accordance with the recognition and valuation principles of IFRS. All the figures presented in the report have been calculated according to IFRS.

 

The economic occupancy rate of Sponda's investment properties is expected to remain unchanged or to improve slightly by the end of 2005 and rent levels to stay stable. The value of the properties is expected to remain stable during 2005. Cash flow from operating activities is forecast to stay at the 2004 level.

 

 

"Sponda's short-term target is to icrease business volume and profitability. The property portfolio will be activated by exploiting Sponda's own land sites and building rights. Sponda's current development projects cover 360,000 m² of office, retail and logistics space. Development investments are currently estimated to total EUR 530 million, of which EUR 190 million is targeted to span the next three years.

 

Sponda will also seek growth and higher profitability by focusing efforts on active leasing with the aim of reducing vacant premises. Profitability will also be raised by making property management more efficient and by improving maintenance quality.

 

Sponda is actively seeking growth in new business areas in Russia and the Baltic states. The aim is to start investments on this front in 2006."

 

 

 

Growth in Finland's GDP is forecast to remain at slightly over 2% during 2005, based on the weaker than expected economic growth in the EU area and the paper industry dispute in Finland. Inflation in 2005 is estimated to be around 1.5%.

 

The vacancy rates of office, retail and logistics properties are estimated not to have changed during the first six months of the year. Rent levels likewise are estimated to have remained stable except in Espoo, where rent bids have fallen somewhat. Demand for retail and logistics premises is still good but growth in demand for office premises is yet to emerge.

 

Competition continues to be intense in the property investment market. Foreign investors are prepared to accept lower yields than has been usual in Finland. Property deals have been made in particular in properties with exceptionally long lease contracts for the Finnish market and therefore the yield requirements of these sales cannot be applied to all business premises.

 

The Ministry of Finance has extended by half a year the time allocated to the working group set up at the beginning of 2004 to consider alternatives for developing Finland's law on real estate mutual funds. The group is now scheduled to submit its final report on 30 November 2005.

 

 

Net operating income from Sponda's properties totalled EUR 38.8 million (30 June 2004: EUR 37.6 million), of which 67% was derived from office properties, 3% from retail premises and 30% from logistics facilities. Net operating income was divided by region as follows: Helsinki Business District 50%, Helsinki Metropolitan Area 19%, logistics properties in Helsinki Metropolitan Area 22% and rest of Finland 9%.

 

 

 

 

The occupancy rate of Sponda's properties remained stable in all sectors, amounting to 87.2% (31 March 2005: 87.8%). In office premises, the economic occupancy rate was at the same level as in the first quarter but declined slightly in retail and logistics premises. In retail premises the decrease was due to the sale of the fully leased Karjala shopping mall. The weaker occupancy rate in logistics premises was caused by the vacancy of a 7,000 m2 site in Olarinluoma, Espoo.

 

Aggregate cash flow from Sponda's portfolio of leasing contracts on 30 June 2005 was EUR 472 (30 June 2004: 420) million and the average length of the contracts was 4.5 (4.3) years. Altogether 103 contracts were signed during the reporting period, 26 (33,000 m2) of which were renewals and 77 (15,000 m2) new contracts, making a total of approximately 48,000 m2. Sponda's large customer sectors were retail (27% of total rental income), banking and investment (18%), and communications and media (11%). Sponda's existing leasing contracts expire as follows:

 

 

 

The economic occupancy rate of Sponda's office and logistics properties is expected to remain unchanged or to slightly improve during 2005. The economic occupancy rate of the retail premises could decline somewhat. Rent levels in 2005 are forecast to stay stable.

 

 

Sponda Group has 87 investment properties. The aggregate leasable area of these properties is approximately 840,000 m², 48% of which covers office properties, 2% retail properties and 50% logistics properties.

 

On 31 May 2005 Sponda sold the Kiinteistö Oy Karjalan Kauppakeskus shopping mall in Lappeenranta for EUR 7.2 million. This deal had no significant impact on Sponda's result. Sponda also sold retail premises in Tampere totalling EUR 0.8 million during the first six months of 2005, recording an overall profit of EUR 0.1 million on these transactions.

 

During the period Sponda purchased a logistics and office property at Ruosilantie 16 in the Konala district of Helsinki for EUR 28.4 million (including capital transfer tax). This property has a leasable area of 32,800 m2.

 

The market value of Sponda's investment properties is confirmed based on the company's own calculations in which Sponda applies the yield method based on cash flow analysis. This method is in compliance with the International Valuation Standard (IVS). At the end of the second quarter the comparable market value of Sponda's property portfolio had grown by EUR 4.7 (30 June 2004: -4.4) million, i.e. by 0.4 (-0.4) % to EUR 1.246 (30 June 2004: 1.211) billion. The market value of office properties decreased slightly (0.5%) but the market value of logistics properties increased (4.3%). The changes in market value were the result of lease contracts signed during the first six months. The same yield requirements were used in the calculation as in the previous period except for some office properties in Espoo where the yield requirements were slightly reduced. Investments in property maintenance and quality improvements during the period amounted to EUR 10.4 (12.0) million. Maintenance investments in 2005 are estimated to total 1.2 - 1.5% of the value of the property portfolio, which corresponds to depreciation under the previous accounting principles.

 

 

 

 

On 30 June 2005 Sponda owned unused and usable building rights totalling approximately 334,000 floor-m2. According to the current zoning plans this figure comprises approx. 30% (approx. 42,000 m2) of office space, the remaining 70% being designated as logistics premises. The value of the unused building rights at the close of the period amounted to EUR 34.5 million.

 

Renewal of the City-Centre complex, Sponda's largest development project, is progressing. All the office floors are now essentially renovated and Helsinki City Council has approved the underground zoning plan. The proposed zoning plan for the surface structures is expected to be put before the Council during autumn 2005. The project is sheduled for completion during 2010. The investment cost is approx. EUR 110 million and the rent yield at current rent levels is forecast to be roughly 8%. Approximately 15% of the investment has so far been completed.

 

Sponda is applying for zoning permission to use the site at Pohjantie 14 in Espoo for residential purposes. The plan required by this change is prepared and the rezoning process has started with completion expected at the end of 2005.

 

Sponda will begin building a new logistics facility at the Honkatalo property in Hakkila, Vantaa. The site, adjacent to Vanha Porvoontie road, has building rights totalling 47,000 m2, the first stage of which covers 10,000 m2. Marketing of the facility has started and building will begin during 2006.

 

 

Sponda's net cash flow from operations in the period totalled EUR 23.2 (30 June 2004: 15.9) million. Net cash flow from investing activities amounted to EUR -32.1 (24.6) million and from financing activities EUR 9.7 (-40.6) million.

 

Financing income and expenses came to EUR -12.9 (-13.0) million. Sponda's equity ratio was 43 (48) % and gearing was 114 (94) %. Interest-bearing debt amounted to EUR 630.0 (564.5) million, the average maturity of Sponda's loans was 3.6 (2.2) years and the average interest rate was 4.2 (4.6)%. The interest hedge level was 74%. The average interest-bearing period of the whole debt portfolio was 2.4 (3.0) years.

 

The debt portfolio consists of three domestic bond programmes totalling EUR 300 million, a syndicated credit facility of EUR 250 million, and commercial papers amounting to EUR 80 million. Liquidity is managed using flexible EUR 100 million credit limits and a EUR 150 million commercial paper programme. Sponda's loans are not mortgaged.

 

 

Sponda Group had 53 (50) employees on average during the period, which included 49 (45) in the parent company, Sponda Plc. At the end of June Sponda's workforce numbered 54 (51) employees, 50 (46) of whom were employed by the parent company. Sponda has personnel only in Finland.

 

All employees are included in an incentive bonus scheme indexed to the result of leasing activities.

 

 

Sponda Group comprises the parent company and its subsidiaries, all of which are wholly owned mutual property companies.

 

 

The average price of the Sponda share between January and June was EUR 7.54. The highest quotation of the Sponda share on the Helsinki Stock Exchange was EUR 8.82 and the lowest was EUR 6.81. The market capitalization of the company's share capital at the end of June was EUR 673 million.

 

312,000 new shares were subscribed on 10 June 2005 after C warrants under the 2000 convertible bond were exercised. A corresponding increase in the share capital, EUR 312,000 was recorded on the Trade Register on 29 June 2005. Following this increase Sponda's share capital amounts to EUR 79,140,275 divided into 79,140,275 shares.

 

The Annual General Meeting on 23 March 2005 authorized the Board of Directors to purchase the company's own shares. This authorization was not exercised during the reporting period.

 

The ownership structure of Sponda share capital on 30 June 2005 was as follows:

 

 

 

 

The members of the Board of Directors are Kaj-Gustaf Bergh, Tuula Entelä, Maija-Liisa Friman, Harri Pynnä, Anssi Soila and Jarmo Väisänen. The chairman of the Board is Anssi Soila and the deputy chairman is Jarmo Väisänen. Sponda's President and CEO between 1 January and 31 May was Kari Kolu, and since 1 June 2005 Kari Inkinen.

 

 

Sponda Plc's auditors are Sixten Nyman APA and the firm of authorized public accountants KPMG Oy Ab under the supervision of principal auditor Raija-Leena Hankonen APA. The deputy auditor is Fredrik Westerholm APA.

 

 

Sampo Bank is suing Sponda Plc in the Helsinki District Court for payment of additional interest totalling EUR 5.3 million for the period 17 December 2001 - 16 June 2004 based on a credit agreement. Sponda disputes the claim as groundless.

 

 

 

The economic occupancy rate of Sponda's investment properties is expected to remain unchanged or to improve slightly by the end of 2005 and rent levels to stay stable. The value of the properties is expected to remain stable during 2005. Cash flow from operating activities is forecast to stay at the 2004 level.

 

 

 

 

11 August 2005

Sponda Plc

Board of Directors