Sponda Plc's 2005 Financial Statements Bulletin

 Highlights (comparison year January-December 2004):

 

 

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

 

 

"Competition in Sponda's core property investment market, the Helsinki Metropolitan Area, has intensified in recent years and for this reason the company reviewed its strategy in 2005. Sponda's new strategy is to seek growth and profitability in the years ahead mainly through property development coupled with expansion into Russia and the Baltic countries.

 

In property development Sponda will exploit the potential offered by the land and building rights it already owns. The company has set a property investment target of roughly EUR 50 million for 2006, and EUR 190 million over the next three years. The largest development project is the City-Center complex in the heart of Helsinki.

 

The company is studying the property investment opportunities presented by Russia and the Baltic countries. The emphasis will be on the retail and logistics property markets in and around Moscow and St. Petersburg. The plan is to start investments during 2006. The total volume of investments committed to projects in Russia and the Baltics may not exceed 10 - 20 % of the total value of the company's property portfolio.

 

In Finland, Sponda will also expand outside the Helsinki Metropolitan Area as a partner in real estate investment funds, where the company will take responsibility for managing the properties acquired by these funds. In January 2006 Sponda established a real estate fund with JER Europe Fund II Holdings S.Á.R.L.. Sponda's holding in the fund is 20 %."

 

Internationalization of the Finnish real estate market is continuing. Foreign investors are seeking investment prospects in other parts of Finland in addition to the Helsinki Metropolitan Area, especially in growth centres. Modern logistics properties in central locations are also attracting investors. Property yield requirements declined last year by between 0.2 % and 0.75 % due to low interest rates, the varying willingness of different players to take risks, and the fact that investment demand exceeds supply.

 

The office vacancy rate no longer increased in the Helsinki Metropolitan Area. Rent levels in modern office premises rose slightly but the differences in rent levels grew because demand for old office premises was still low. The vacancy rate of office premises is expected to decline in 2006, with demand focusing above all on modern premises. The vacancy rate of retail premises continued to be low. However, the completion of new shopping malls such as Jumbo in Vantaa and Sello in Espoo will increase the vacancy rate of older premises, at least temporarily. Rent levels for retail premises in the centre of Helsinki rose slightly, and this trend is forecast to continue. Similarly, the vacancy rate of logistics premises was low as well. Demand was lively for premises in this category, particularly for larger, modern facilities. Rent levels increase somewhat in the case of new premises and especially in the area around the Helsinki-Vantaa airport. A total of roughly 120,000 m2 of new logistics facilities have been, or are being, completed, which is increasing the vacancy rate in this segment.

 

The net rental income from Sponda's investment properties totalled EUR 77.5 million in 2005 (31 December 2004: EUR 74.4 million). Offices and retail premises accounted for 70 % and logistics properties for 30 % of this total. Net rental income was distributed by geographical area as follows: Helsinki Business District 50 %, Helsinki Metropolitan Area 19 %, logistics properties in the Helsinki Metropolitan Area 22 % and the Rest of Finland 9 %. The quarterly economic occupancy rates were as follows:

 

 

Total cash flow derived from leasing agreements amounted to EUR 461 (474) million on 31 December 2005 and the average length of the agreements was 4.3 (4.6) years. Sponda signed 181 agreements during the year, 47 of which were renewals (41,000 m²) and 134 (41,000 m²) new agreements, making a total of approximately 82,000 m². Sponda's largest customer sectors are retail (26 % of total rental income), banking and investment (18 %), and telecommunications and media (11 %). The average length of the new agreements is 4 years. Sponda's leasing contracts expire as follows:

 

 

 

Sponda Group has 87 investment properties. The aggregate leasable area of these properties is approximately 840,000 m², roughly half of which covers office and retail properties and half 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 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.

 

Sponda purchased a logistics and office property at Ruosilantie 16 in the Konala district of Helsinki for EUR 28.4 million. 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 financial year the comparable market value of Sponda's property portfolio had grown by EUR 15.6 million (31 December 2004: -24.1), i.e. by 1.3 (-1.9) % to EUR 1,259.7 million (31 December 2004: 1,221.5). Capital expenditure during the period allocated to property maintenance and improvements in quality levels amounted to EUR 20.7 (26.7) million. The result of measurement at fair value, less maintenance investments, was EUR -5.1 (-50.8) million. The market value of Sponda's property portfolio was positively affected by its new leasing contracts, improved cost-efficiency in property maintenance, and a reduction in yield requirements. On the other hand, the decrease in rent levels in Espoo and the outskirts of Helsinki had a negative impact on the values.

 

 

 

The economic occupancy rate in office and retail premises and logistics facilities stayed at the previous year's level, standing at 86.2 % (31 Dec. 2004: 86.1 %). Several important new contracts were signed during the year including Miestentie in Espoo; and in Helsinki, Lönnrotinkatu 13 and Korkeavuorenkatu 35 and 37. The economic occupancy rate increased in the Havis Business Center and the Upseerin Avec office complex. The quarterly economic occupancy rates for office and retail premises in 2005 were as follows:

 

 

 

The market value of Sponda's offices and retail premises was EUR 966.4 million at the end of the year. The Kiinteistö Oy Karjala Kauppakeskus in the town of Lappeenranta was sold for EUR 7.2 million during the year. No new properties were purchased. The comparable change in the market value of the property portfolio was EUR 4.6 million or 0.5 %. The increase in market value was due to new leasing contracts and, in the case of certain properties, a decrease in yield requirements. Rental levels for office properties remained stable especially in Helsinki city centre but declined slightly in Espoo and the outskirts of Helsinki.

 

Certain leasing contracts in Helsinki city centre are due to expire during the first six months of 2006 and consequently the economic occupancy rate will decrease. However, the economic occupancy rate is expected to take a positive direction again by the end of the year.

 

The economic occupancy rate of Sponda's logistics properties remained at the same level as at the end of 2004, 91.9 % (31 Dec. 2004: 92.0 %). Most vacant premises are offices located adjacent to warehouse or production premises. Important leasing contracts signed by Sponda in 2005 included Ruosilantie 14, Vantaan Köysikuja and Olarinluoma 14. The quarterly economic occupancy rate of Sponda's logistics premises in 2005 developed as followed:   

 

 

The market value of Sponda's logistics proeprties at the close of the year amounted to EUR 252.3 (209.5) million. The real estate company Kiinteistö Oy Ruosilantie 16 was purchased for EUR 28.4 million. No properties were sold. The comparable change in the market value compared to the same figure in 2004 was EUR 11.0 million, or 5.3 %. The increase was principally attributable to a decrease in property yield requirements. The valuation of Ruosilantie 16 based on market yield requirements raised the value of this property by EUR 9 million. Rent levels in the logistics properties were stable during 2005.

 

The economic occupancy rate of the logistics properties is expected to remain at the 2005 level.

 

Sponda established two new business units in 2005: Property Development and New Business Areas. The purpose of the first is to modernize Sponda's existing property portfolio and exploit the company's non-developed sites.

 

Helsinki City Council has considered the City-Center rezoning plan and its endorsement is expected in spring 2006. Under this plan extension work on this office and retail complex in the heart of Helsinki will be started in summer 2006. Investments in 2006 are expected to amount to some EUR 20-25 million of the EUR 110 million total for this project, which is scheduled for completion in 2010. Renovation of the City-Center's office premises were completed in 2005 and at the moment roughly 6,000 m2 of the total 10,000 m2 are leased.

 

Sponda is planning to build a new logistics building at the Honkatalo property in Hakkila, Vantaa. This site has building rights of 47,000 m², and the first stage will cover 10,000 m² of this amount. The plan is to start construction work on this project during 2006.

 

The other business unit set up during 2006, New Business Areas, concentrates on new geographical markets in Russia and the Baltic countries, and on managing the assets of new real estate investment funds. Sponda is currently assessing a number of investment opportunities in retail and logistics premises in the St. Petersburg and Moscow regions.

 

The assets management business will start in 2006 when Sponda begins to manage a real estate fund set up jointly in Finland by Sponda and JER Europe Fund II. The target size of the fund is EUR 150-400 million and Sponda's holding in the fund is 20 %.

 

Sponda's net cash flow from operations in the period totalled EUR 46.5 (31 Dec. 2004: 41.4) million. Net cash flow from investing activities was EUR -43.9 (-20.2) million and after financing activities EUR -3.5 (-22.3) million.

 

Financial income and expenses came to EUR -26.3 (-26.6) million. Spondan equity ratio was 45 (47) % and gearing was 107 (99) %. Interest-bearing debt amounted to EUR 615.7 (581.5) million, the average maturity of Sponda's loans was 3.2 (3.7) years and the average interest rate was 4.2 (4.3) %. Sponda hedges its floating rate exposure through interest rate swaps. Fixed-rate and secured loans accounted for 75.6 % of the total debt portfolio. The average interest-bearing period of the whole debt portfolio was 2.1 (2.6) years. Interest rate swaps are treated in the financial statements applying IFRS hedge accounting principles.

 

The debt portfolio consists of three domestic bond programmes totalling EUR 300 million, as well as a syndicated credit facility of EUR 250 million, and commercial papers amounting to EUR 66.5 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.

 

On 8 April 2005 Sponda Plc issued EUR 100 million in notes for the purpose of financing future investments and developing the company's capital structure. The 1/2005 and 2/2005 notes were subscribed as follows: notes with fixed coupon (1/2005) EUR 20.0 million and notes with floating rate (2/2005) EUR 80.0 million. The bonds were targeted at domestic institutional investors. The annual coupon of notes 1/2005 was confirmed at 3.75 % and the coupon of the floating rate notes 2/2005 was confirmed to be the six-month Euribor rate plus 60 bps. The notes mature on 8 April 2010.

 

Sponda owns properties in Finland. The company's activities do no involve exchange rate risks. Demand for business premises depends on the economic conditions in each market segment. Demand for offices grows if companies are increasing staff levels and new companies are established, whereas the success of Sponda's retail tenants depends on the purchasing power of residents in their respective areas. Sponda manages customer risk by spreading the customer base and varying the length of its leasing contracts. An important aspect of customer risk management is knowing each customer's business and monitoring information on customers. At the end of 2005 Sponda had 633 customers and 1,070 separate leasing contracts. Rents are increased twice a year either in relation to changes in the cost-of-living index or based on a percentage increase stipulated in the leasing contract. Leasing contracts include rent in advance in proportion to the risk in each case. Increases in maintenance and repair costs, and particularly building costs, affect Sponda's total costs and, in the case of large projects, also the return on investment. In 2005 the value of non-amortized tenant improvements in Sponda's balance sheet totalled EUR 16.3 million.

 

The main environmental impacts caused by property investment activities relate to land use, the energy consumed by the properties, waste disposal for the properties and the quality of the built-up environment around them. Sponda's environmentally sound operations are steered by lifecycle analysis. The company includes its financial, social and environmental responsibilities in all its business operations and decision-making processes.

 

Sponda Group had 54 (50) employees on average during the financial year which included 51 (45) in the parent company Sponda Plc. At the end of December Sponda had 54 (50) employees, 51 (45) of whom were employed in the parent company. Sponda has personnel only in Finland.

 

All Sponda employees are included in the company's incentive bonus scheme, under which bonuses are indexed to the company's targets. The Board of Directors has decided to prepare the share-based incentive scheme for ensuring the long-term commitment of its top management. The incentive scheme will be effective from 1 January 2006.

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

The average price of the Sponda share between January and December was EUR 7.93. The highest quotation on the Helsinki Stock Exchange was EUR 9.34 and the lowest was EUR 6.81. The closing price on 31 December 2005 was EUR 7.95 and the market capitalization was EUR 630 million.

 

376,000 new shares were subscribed during the period after C warrants under the 2000 convertible bond were exercised. A corresponding increase in the share capital, totalling EUR 376,000, was recorded in the Trade Register as follows: on 29 June 2005 (312,000 shares), on 19 August 2005 (3,000 shares) and on 27 September 2005 (61,000 shares). Following this increase Sponda's share capital amounts to EUR 79,204,275 divided between 79,204,275 shares. Altogether 103,000 share remain unconverted under the convertible bond loan.

 

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's share capital on 31 December 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 2005 was Kari Kolu, and since 1 June 2005 Kari Inkinen. The Board has no permanent committees.

 

All the Board members are independent of the company and five of the six members are also independent of the company's principal shareholders.

 

The Nomination Committee of the shareholders prepared a proposal for candidate members of the Board of Directors and their compensation. The members represented the three principal shareholders, which on 1 December 2005 were:

 

 

The Nomination Committee submitted its proposal to the Board of Directors. The Committee proposes that the number of members of the Board of Directors be confirmed as six and that of the existing members Tuula Entelä, Maija-Liisa Friman, Harri Pynnä, Anssi Soila and Jarmo Väisänen be re-elected and that Timo Korvenpää be elected as a new member.

 

The Annual General Meeting confirms the fees paid to the Board members for one year at a time. The Nomination Committee proposes to the Board members that the following fees be paid in 2006 (figures in brackets are fees paid in 2005):

 

- to the chairman, a monthly fee of EUR 3,520 (3,350)

- to the deputy chairman a monthly fee of 2,100 (2,000)

- to the other members a monthly fee of 1,840 (1,750)

- a separate fee of EUR 500 (500) to each member for attendance at Board meetings.

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.

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.

 

Sponda Plc and JER Europe Fund II Holdings S.Á.R.L. signed an agreement for the establishment of a real estate fund. The fund will invest principally in office and retail properties in Finland's mid-sized towns and cities. Sponda holds a 20 % stake in the fund, which has a target size of EUR 150-400 million. Sponda will be responsible for providing management services both to the fund and the properties it acquires.

 

On 13 January 2005 Sponda purchased an office building at Kalkkipellontie 6 for EUR 11.2 million. The building has a total leasable area of 8,800 m2 and the site has unused building rights totalling 3,450 m2.

 

Sari Aitokallio was Sponda's Chief Financial Officer until 31 January 2006 and Lea Jokinen was Senior Vice President, Logistics Properties until 26 January 2006. Robert Öhman joins Sponda as its new Chief Financial Officer from Vattenfall Oy on 20 March 2006. Pasi Viitaniemi became Senior Vice President, Logistics Properties on 26 January 2006.

In 2006 the result of leasing operations and cash flow from operating activities are expected to remain at last year's level. Investments in property development will increase Sponda's property portfolio. The economic occupancy rate of the company's investment properties will decrease slightly in the first half of 2006 due to the expiry of several large leasing agreements. However, the economic occupancy rate is forecast to improve towards the end of the year compared to the situation at the end of 2005.

 

 

Sponda Plc's Board of Directors has decided to convene the Annual General Meeting on Wednesday, 29 March 2006, starting at 2.00 pm and proposes a dividend of EUR 0.50 per share. The Board further proposes 10 April 2006 as the dividend payment date.