Board of Directors Report

Transcription

1 Board of Directors Report Operating environment Uncertainty in the world economy persisted in Finnish GDP decreased in the two last quarters of 2012 and Finland experienced an economic downturn. Consumer confidence in the economy was below the long-term average. The euro crisis and future solvency regulations for banks were reflected in companies operations, in the form of rising loan margins and shorter maturities. Challenges in the availability of financing were also reflected in the real estate sector, which is often evaluated within the financial sector as a single entity, despite the differences between its sub-areas. Companies own strong economic status and the stable outlook for the sector are greatly facilitating company financing. Availability of financing for VVO was good in 2012 and VVO maintained its status as an attractive investment for financing providers. Positive development in the economic status and the stable business outlook are enabling VVO to focus on both repair construction and the production of new sites. A general decrease in market interest rates during the financial year was apparent in the positive profit development of the VVO Non-subsidised business. The increase in State loan financing expenses put pressure on cost price rents. VVO State-subsidised met its profit target, thanks to improvements to operative efficiency. Demand for rental housing remained high in the communities where VVO has a presence. Investments in new sites were focused on areas where demand for new rental housing is guaranteed in the long term. In the Helsinki metropolitan area in particular, there is a need for an increased number of rental apartments. The production of State-subsidised rental apartments was on an exceptionally low level in At the same time, public discussion of housing policy increasingly revolved around boosting housing production. The housing legislation in force does not encourage State-subsidised housing production and does not attract new actors into the field. A general reform of housing legislation, providing more appropriate State-subsidies as well as placing limitations on the use of apartments and on revenue recognition, should be commenced as quickly as possible. Segment reporting VVO Group forms a financial entity that reports on its operations in two segments. The basis for the segment division is the profit distribution limitation defined by the Act on State-subsidised Housing Loans (ARAVA Act). The VVO Non-subsidised segment includes privately financed rental housing and state-subsidised housing subject to property-specific limitations, based on the ARAVA Act and state-subsidy extension limitations that will mainly expire in 2014 and by 2025 at the latest. The plot reserve included in inventories and the apartments for sale are also included in the VVO Non-subsidised segment. The VVO State-subsidised segment includes rental housing subject to longer-term property-specific limitations based on the ARAVA Act and interest subsidy legislation. The Group companies VVO Asunnot Oy and VVO Korkotukikiinteistöt Oy, subject to the profit distribution limitation specified in the ARAVA Act, are part of the VVO State-subsidised segment. These companies can pay their owner an eight per cent return on any own funds invested in them that have been confirmed by the Housing Finance and Development Centre of Finland (ARA). The return payable from the annual profits of the companies within the VVO State-subsidised segment totals approximately EUR 3 million, according to the basis for the return. Turnover and result The VVO Group had a turnover in 2012 of EUR (327.3) million. Turnover grew by 2.5 (-0.4) per cent on the previous year. This growth is attributable mainly to the increase in housing rental revenues (94.1) per cent of the turnover came from housing rentals and 2.3 (5.9) per cent from the sale of owner-occupied apartments and of plots originally intended for construction of owner-occupied apartments. VVO Non-subsidised segment recorded a turnover of EUR (173.9) million, and the VVO State-subsidised segment EUR (164.2) million. The Group posted an operating profit of EUR (105.7) million, representing 35.9 (32.3) per cent of turnover. Profit before taxes amounted to EUR 70.3 (55.8) million. The result includes EUR 5.0 (4.7) million in sales gains from fixed assets. Interest expenses and other financing expenses came to EUR 53.8 (51.5) million, showing an increase of 4.7 per cent on the previous year. Profit for the financial period was EUR 51.5 (44.8) million. The VVO Non-subsidised segment generated EUR 33.3 (24.4) million in prof- 4

2 its and the VVO State-subsidised segment EUR 18.4 (20.2) million. This improved profit was attributable to greater efficiency of operative activities, the growth in rental revenues and the decline in the interest rate level, which affected the result of the VVO Non-subsidised business. The result for the VVO State-subsidised business was burdened by a substantial increase in State loan interest rates. Solvency The consolidated balance sheet total was EUR 2,283.9 (2,252.2) million. Growth on the previous year amounted to 1.4 (3.1) per cent. The Group s shareholders equity rose to EUR (404.4) million. Return on equity (ROE) was 11.8 (11.2) per cent and return on investment (ROI) 5.9 (5.2) per cent. Equity per share as calculated with book values was EUR (54.63), and with fair values, EUR Equity ratio as calculated with book values was 20.0 (18.5) per cent, and with fair values, 38.9 per cent. The book value of rental apartments owned by VVO and business premises in the rental apartment buildings was EUR 1,949.5 million and the fair value EUR 3,120.0 million. The difference in values was EUR 1,170.5 million. The strategy sets a goal of 25 per cent for equity ratio in the VVO Nonsubsidised segment by At the end of the period, the VVO Nonsubsidised segment s equity ratio was 26.9 per cent. Financing Both the Group and the parent company had good financing and liquidity throughout the year. The Group s cash, cash in bank and securities stood at EUR (159.2) million at the end of the year. Credit limits and other loans that ensure liquidity amounted to EUR 0.0 (6.0) million at the end of the financial year. Of the EUR 80 million commercial paper programme, EUR 36.5 (45.5) million had been issued by year end. A total of EUR 61.4 (108.7) million in long-term loans was withdrawn during the year, and EUR 54.3 (61.7) million was made in repayments. VVO Group loans and interest rate hedges by loan group: EUR million Interest subsidy loans Annuity and mortgage loans Other real estate loans Loans for owner-occupied housing production Capital loans Credit limits Commercial papers Other debts Total 1, ,683.9 Market-based loans With fixed interest With floating rates Interest rate derivative agreements Interest swap options 28.0 Value of interest rate derivatives Degree of hedging, % The Group s entire loan stock is euro-denominated. Interest-bearing debt stood at EUR 1,664.3 (1,683.9) million at the end of the financial year. At year end, the Group had EUR (605.2) million in interest subsidy loans guaranteed by the state. The remaining maturity was 4.9 years for interest subsidy loans withdrawn before 2002, which amounted to EUR (269.2) million and 29.8 years for interest subsidy loans withdrawn later than that, which amounted to EUR (336.0) million. Interest costs from interest subsidy loans amounted to EUR 13.8 (12.7) million during the period, and the interest subsidy paid by the State to banks was EUR 1.1 (1.5) million. The remaining maturity of annuity loans with the current inflation is 21.4 years. The Group had a total of EUR (616.1) million in marketbased loans at year end. EUR (312.3) million of the loan capital was hedged. The average maturity of the hedging was 6.0 (3.0) years. Of the market-based loans, EUR (174.9) million was tied to a fixed rate. The remaining average maturity is 11.1 (10.8) years. The Group has EUR 3.2 (6.0) million in corporate loans related to unsold owner-occupied apartments and EUR 22.8 (22.7) million in loans related to the plot reserve. At year end, the Group had EUR 2.4 (2.4) million in subordinated loans. The average interest rate cost for the loans was 3.1 (3.1) per cent. The average interest rate on annuity loans for the non-profit housing stock rose to 4.3 per cent from 3.3 per cent a year earlier. Meanwhile the average interest rate on market-based loans, without hedging costs, was 2.4 (2.7) per cent, and with hedging costs, 3.3 (3.4) per cent. The average interest rate on interest subsidy loans in 2012 was 2.3 (2.4) per cent. An expense of EUR 2.4 million was recognised in the profit and loss account as negative change in the values of swaption contracts entered into during the financial year. 5

3 Maturity analysis The cash flow from loan instalments and interest rates based on the loan agreements were as follows on : Within Within Within Within Beyond EUR million 1 year 2 5 years 6 10 years years 15 years Mortgages Primary loans Third level loans Interest subsidy loans Other non-current loans Documentary loans 36.5 Annuity loans Total * ) * ) Company loans in construction of owner-occupied housing are not included in the table. Cash flow from operations (before change in working capital) grew by EUR 16.5 (3.1) million as a result of robust revenue development. The Group s financial position is stable, with a positive outlook. Customer management Demand for rental housing remained strong in all communities where VVO has a presence. As in previous years, the strongest demand was directed at smaller apartments. Three out of four applicants were looking for a oneroom or two-room apartment. The number of new rental apartment applications VVO received during the year was 49,263 (53,237). Due both to the significantly smaller quantity of new housing construction compared with the previous year, and to the procedure for recording applications received, the number of new applications decreased slightly on the previous year. The number of active applications (valid for three months) decreased by 1.3 per cent (an increase of 5.8 per cent) on the previous year. The occupancy rate of the apartments has remained high. The occupancy rate was 97.9 (98.3) per cent. Due to major renovations, there were 308 (170) vacant apartments during the period; this reduced the occupancy rate by 0.8 (0.4) percentage points. The number of apartments vacant due to renovations at the end of the period was 310 (206). Turnover decreased slightly on the previous year, to 25.8 (26.1) per cent. Turnover was mainly lowered by the decrease in internal exchanges. Rents were increased in March 2012 by 4.6 (3.6) per cent on average. The total growth in rent revenue during the period was 6.2 (5.4) per cent. The average rent for the full year was EUR (11.26) per sq.m per month. Average rent in apartments where rent can be freely determined, totalling 23,665 (the Market product group), was EUR (11.49) during the period. The corresponding figure for apartments leased for costprice rental, totalling 16,281 (the Cost-price product group), was EUR (10.92). The average period of tenancy remained high, at 5.8 (5.8) years. Despite the overall economic situation, the amount of rent receivables remained low. At the end of the period, the amount of rent receivables was 1.17 (1.11) per cent of rental operations turnover. During the period under review, real estate maintenance costs increased by 1.8 (5.3) per cent on the previous year. Rising energy prices increased the energy costs of properties, although the Group was able to enhance the energy efficiency of its housing stock through its own measures. Thanks to operational efficiency measures in maintenance, the maintenance costs of VVO s rental properties increased by less than the national average. The focus areas of the updated strategy were taken into account in business operations and the customer-oriented rental housing and building management process was further developed. An analysis of the effects of the product group approach (the Market and Cost-price product groups) on VVO s operating model was launched during the review period. Renovation of apartments was increased significantly, in order to ensure the apartments rentability. Renovation activities were also developed by introducing renovation procedures defined for product groups. Rental and building management services were handled by VVO s own personnel. During the review period, parking space rental was also transferred to the Group s own personnel. VVO was active in resident co-operation. Openness and the two-way communications in resident co-operation were improved by introducing a Facebook site for active residents. Residents opinions were polled through the annual customer satisfaction survey. The results had improved on the previous year. Residents willingness 6

4 to recommend VVO remained at a record-high level. No fewer than 92 (93) per cent had already recommended, or would be willing to recommend, VVO apartments to others. Investment and real estate management The total amount of rental apartments owned by VVO at the end of the period was 39,946 (39,741). The book value of rental apartments owned by VVO and business premises in the rental apartment buildings at year end was EUR 1,949.5 million and the fair value EUR 3,120.0 million. The difference between book value and fair value was EUR 1,170.5 million. An external evaluator has given a statement on the fair values on the closing date, 31 December 2012, of rental apartments owned by VVO and business premises in the rental apartment buildings. The evaluation procedure is explained in the accounting principles. The Group s fixed assets investments amounted to EUR 80.2 (106.5) million during the financial period. EUR 39.3 (83.7) million of these investments was allocated to new construction and EUR 40.9 (22.8) million to renovation costs. New construction investments include EUR 0.0 (0.9) million in transfers from current assets to non-current assets. Purchases of preexisting properties amounted to EUR 0.0 (11.2) million. Renovation operations were more extensive during the period under review than previously. Repair costs in all were EUR 70.8 (55.1) million, of which EUR 29.9 (32.3) million was recognised as expenses in the income statement. The share of major renovations was particularly highlighted in renovation activities. Vacating the apartments for the duration of renovations is not only a workplace and housing safety matter, but also a factor that contributes to the comfort of residents. A total of 421 new VVO apartments were completed during the period under review, with a combined purchase value of about EUR 66.5 million. 225 apartments in three sites, financed with interest subsidy loans guaranteed by the State, were completed for the VVO State-subsidised business 69 apartments in two privately financed sites and 127 apartments in two sites financed with the so-called intermediate model, i.e., short-term interest subsidy loans, were completed for the VVO Non-subsidised business. Of the apartments completed, 310 are in the Helsinki metropolitan area, 87 in Tampere and 24 in Hyvinkää. Ten new apartments were constructed in the sites renovated as additional construction work. At the end of the period under review, 551 apartments on ten sites were under construction. During the year, 228 (205) rental apartments were sold. A total of 23 (44) owner-occupied apartments were sold during the period. There was a total of 24 (47) unsold owner-occupied apartments at the end of the year, of which 20 (36) were rented. The plot reserve held by the Group was 150,000 floor sq.m at the beginning of the financial period and about 100,000 floor sq.m at its end. The reduction in the plot reserve owned was due to sales (32,000 floor sq.m) and project starts (18,000 floor sq.m). Personnel As regarding VVO personnel, the annual report period was a year of implementation for Investors in People (IIP) HR management development projects, launched in the previous year. A new VVO HR policy was adopted at the beginning of the year, which led to the establishment of good managerial practices, assertive leadership and a culture of participation in the organisation. The competence management model and the competence assessment procedure introduced in the previous year were further specified in accordance with strategic focuses. The importance of innovative thinking and continuous evaluation of procedures were highlighted in connection with VVO s strategy update. The significance of these was mainly reflected in the sharing of best practices through personnel training and in the involvement of the entire personnel in putting the strategy into practice. According to the annual personnel survey, the satisfaction of the employees with VVO as an employer was even higher than previously and clearly better than in external benchmark companies. At the end of 2012, VVO employed a total of 335 (338) people, of which 316 (326) were employed permanently and 19 (12) temporarily. The average number of personnel during the year was 343 (349). The average length of service was 10.3 (9.4) years. The personnel turnover in 2012 was 7.6 (6.8) per cent. The combined amount of salaries, wages and fees EUR 17.9 (17.0) million. Environmental impact In 2012, VVO used 412 GWh (390) heating energy; overall property electricity consumption was

5 (51.1) GWh, and overall water consumption was 3.6 (3.6) million cu.m. Temperature-adjusted heating energy consumption decreased by 2.2 per cent on 2011 (2.0 per cent). Total consumption of heating energy grew because the year was colder and wetter than previously. Growth in the total consumption of heating energy and the decrease in the carbon-free production of electric energy increased carbon dioxide emissions to approximately 79,000 (76,000) tonnes. VVO seeks to alleviate the environmental impacts of energy use by using carbon-neutral energy for property electricity. District heating is used in 99 per cent of VVO s properties. The rental property energy savings target set in the Rental Property Action Plan (VAETS) for 2016 (a decrease of 7.8 per cent compared with the level of 2009) has almost been achieved already and the overall property electricity savings target for 2016 (a decrease of 6 per cent) has already been exceeded. Improved energy efficiency was achieved through operating and maintenance policies. Risk management VVO risk management is based on the corporate governance guidelines and a risk survey conducted in connection with the strategy and annual planning process. Key risks are identified, their probability and impact are assessed, and means of risk management are determined. The major risks in customer management are a reduction in the financial utilisation rate and an increase in turnover. Economic fluctuations and shifts in demand are factors affecting these risks, both nationally and regionally. The financial utilisation rate of rental apartments, turnover, number of applicants and changes thereto are monitored by region on a monthly basis. VVO develops its rental housing operations and the renovation activities for apartments and properties and strengthens customer management. These measures are used to increase the utilisation rate and to decrease rental apartment turnover. The positive development in the value of the housing stock is based on focusing investments on growth centres, ensuring apartments rentability and the planned implementation of property renovation activities. Major fluctuations in market interest rates and margins may have a negative impact on the financial performance of VVO and slow down startups in new construction and repair investments. The interest rate risk on market-based loans is managed through variable interest rate tying and interest hedging. The interest rate of state-subsidised loans is tied to the Finnish CPI, which can cause large fluctuations in annual interest rate costs. Some loans have an interest rate ceiling that reduces the interest rate risk caused by increased inflation. In addition to price risk, the risk relating to the availability of financing may affect the company s operations. Correspondingly, investments with a long economic lifetime require long-term financing, and the risk relating to refinancing grows in tandem with shorter maturities. The availability risk is managed by increasing funding sources. The main risks associated with the properties are damage risks, such as water damage and fires. Damage risks are managed with appropriate preventive safety measures and by insuring properties against damage. VVO Group regularly reviews its insurance policies as part of overall risk management. The main insurance policies are property, liability, loss of profits, accident, travel and vehicle insurance. Risk management is discussed in further detail in VVO s online annual report. Internal auditing The company s internal auditing is an independent function with no operative responsibility. Internal auditing consists of one person. The services of an external partner were used for internal auditing. The job description, authorisations and responsibilities of internal auditing are defined in the operating instruction for internal auditing approved by the Board of Directors. Internal auditing is responsible for inspecting internal supervision and risk management. Group structure and changes thereto At the end of the financial period, the Group consisted, in addition to the parent company, of 163 (160) subsidiaries and 35 (35) affiliates. The Group s parent company is VVO-group plc, with the following fully owned subsidiaries: VVO Palvelut Oy, handling the internal and external invoicing of real estate operations; and companies that own rental apartments VVO Asunnot Oy, VVO Korkotukikiinteistöt Oy, VVO Vuokratalot Oy, VVO Vuokra-asunnot Oy and VVO Kodit Oy. VVO-group plc also has a holding of more than 50 per cent in 3 (3) limited liability companies or real es- 8

6 tate companies and a 50 per cent holding in Suomen Asumisoikeus Oy and SV Asunnot Oy. VVO Rakennuttaja Oy was merged with VVO Kodit Oy on 1 January The Group structure is divided into sub-groups as follows: Group structure Subsidiaries Affiliates VVO-group plc 1) 13 3 Parent companies of sub-groups VVO Asunnot Oy 26 2) 16 VVO Korkotukikiinteistöt Oy 3 5 VVO Kodit Oy 94 2) 12 VVO Vuokra-asunnot Oy 8 VVO Vuokratalot Oy 15 2) 7 Parking and maintenance companies 3 2 VVO Palvelut Oy 1 Total ) Includes the parent companies of the subgroups and other subsidiaries listed, excluding parking and maintenance companies. 2) 10 of the affiliates are subsidiaries in the remaining group. Events after the period under review The decision of an administrative court has been applied for regarding the recognition of one of VVO Group companies as a non-profit organisation. Future outlook In Finland, the growth in the economy will remain at the level of 1 to 2 per cent according to most forecasts. Consumers confidence in the future is at a low level. Unemployment is expected to increase, especially within the construction sector. In the rental housing market, too small a number of new apartments will be completed compared with housing demand, especially in the Helsinki metropolitan area. Demand will remain high and the rise in rent levels will continue. VVO s occupancy rate is predicted to increase slightly on the previous year. The level of interest rates is expected to remain exceptionally low, but both short-term and long-term interest rates are expected to enter a slightly upward trend during Tighter regulations imposed on banking are already apparent, mainly in prices and in the availability of financing for most companies. So far, this change has not been reflected in the financing of VVO s investments. Availability of bank loans is still expected to remain good. Preparations are underway to employing funding other than bank loans. The Group s performance is expected to remain robust, especially in the VVO Non-subsidised business. 9

7 Administration 2012 Board of Directors Chairman Riku Aalto, Chairman Deputy Chairman Risto Murto, Deputy CEO Tiina Heinonen, Administrative Director Mikko Pöyry, Development Director Auditor KPMG Oy Ab with APA Kai Salli as the principal auditor Olli Luukkainen Risto Murto Antti Rinne Jani Salenius Ann Selin KPMG Oy Ab was elected auditor, with APA Kai Salli as the principal auditor. Members Tomi Aimonen, Real Estate Manager Matti Harjuniemi, Chairman Olli Luukkainen, Chairman Antti Rinne, Chairman Jani Salenius, Finance Manager Ann Selin, Chairman Board committees Nomination Committee Jarkko Eloranta, Chairman Timo Ritakallio Petri Lindroos Hannu Tarvonen Remuneration Committee Riku Aalto, Chairman Risto Murto Ann Selin Audit Committee Riku Aalto, Chairman Tomi Aimonen Jani Salenius CEO Jani Nieminen Management Group Jani Nieminen, CEO Eero Saastamoinen, Business Director, Real Estate Juha Heino, Customer Director Raimo Vehkaluoto, CFO Annual General Meeting The Annual General Meeting was held on The following matters specified for the agenda of the Annual General Meeting in section 12 of the Articles of Association were presented and resolved: The financial statement and consolidated financial statement for 2011 were confirmed. A decision was taken to pay a dividend of EUR 0.60 per A share, totalling EUR 11,844,096.00, on 4 April The members of the Board of Directors and the CEO were discharged from liability for the financial year ending on A decision was taken to confirm the attendance allowance for Board meetings as EUR 600 per meeting and to set the following annual fees for the term beginning on : EUR 20,000 for the Chairman; EUR 11,000 for the Deputy Chairman; and EUR 8,000 for each of the members. The following persons were elected as members of the Board of Directors for the term beginning on : Riku Aalto, Chairman Tomi Aimonen Matti Harjuniemi In addition, the following business was discussed at the Annual General Meeting: Proposal of the company s Board of Directors dated : to authorise the Board to decide within one year of the AGM on one or several share issues and/or issuing a convertible bond as specified in chapter 10 section 1(2) of the Limited Liability Companies Act, with a maximum of 1,480,512 new A series shares in the company to be issued in the share issue or subscribed to with the convertible bond, and with a maximum of 600,978 A series shares currently held by the company itself to be transferred in a share issue. Proposal by the company s shareholders jointly holding per cent of company shares to the AGM concerning the Nomination Committee. The committee is for instance responsible for preparing a proposal on the members of the Board and their fees to the AGM. The term of the Nomination Committee lasts until the end of the next Annual General Meeting. The following persons were elected to the Nomination Committee: Jarkko Eloranta, Chairman, Trade Union for the Public and Welfare Sectors 10