Financing and capital structure
Hannu Linnoinen
Executive Vice President, CFO
Project margin %
Risk level
~20%
Construction Taking agreed Temporary
Development projects Developer-contracted projects Ownership of developer-contracted projects Longer term Construction ~ 15% ~10%
Project type’s effect on return, risk and financing
=> Cashflow positive Development costs Low financing requirement Development costs Development and construction financing Development costs Project and co-financing needed
End-investor’s market know-how
• End-investor yield-% => sales value • Own investor sales
Management of project capital
• Project financing (debt capital) • SRV’s own investment capacity • Co-investors
• Investment vehicles
• Refinancing during operating period
Efficient construction
• Eur/m2, construction costs,
quality & implementation time • Scalable business model
Rent revenue management
• Eur/m2
• Tenant leasing
• Strong retailing know-how
• Shopping centre management in Russia
Own project development
• Acquisition of plots, zoning • Concepts and business expertise • Target market Finland and Russia
SRV
Approach
SRV
Approach
Relationship banking & equity level target
Group’s core financing is based on long term relationships with highly rated
banks at unified terms
- All relationships banks have strong credit rating (S&P: AA- to A-; Moody’s: AA3 to A3)
- SRV follows a common Group borrowing policy with standard financial covenants - 100 M€ committed revolving credit facility is underwritten by relationship banks
and matures in December 2015. Previous revolving credit was also refinanced in 6/2012 with current relationship banks
Equity level target at least 30%
- The financial covenant for SRV's loans is equity ratio, which is also reported to for developer contracting projects as a ratio based on percentage of completion
Debt maturity structure and financing reserves
Debt maturity structure 31.12.2012
- Short term debt consists of commercial paper issued and maturing loans from financial institutions. Commercial paper issued is fully covered by standby
facilities
- Long term debt consist of housing loans (20+ yr maturities) and loans from
financial institutions
Long term financing reserves support
liquidity
- Standby committed financial reserves are 100 M€ syndicated loan maturing in December 2015 and 22,3 M€ current account limits
- Additional financial capacity available by refinancing cashflow generating projects
Financing reserves & liquidity reserves 2009-Q3/2013
Financing reserves 148 M€ (Q3/13)
- Financing reserves consist of cash and undrawn committed loan facities and limits
- Committed facilities are preferred reserves. Therefore SRV has limited investment counterparty risks and in a lean treasury organisation
Financial liquidity risk in domestic
developer contracting is low
- Construction costs of domestic
development projects (36 M€ Q3/13) are covered by undrawn committed project loans and sales receivables (42 M€
Q3/13)
- SRV’s liquidity is not adversely affected in case of slow down of housing sales
Finance structure and hybrid bond issue
The share of non-interest bearing debt
as a financing source has increased
- Scalable subcontractor based business model has limitations on the use of supplier credits
Hybrid bond has been used to support
equity to assets and gearing ratios
- SRV issued a 45 M€ domestic hybrid bond 28.12.2012
- The bond has no set maturity date but the company may exercise an early redemption option after four years
SRV Model and its effect on financial ratios
A. SRV has a comparable equity ratio than its peer group companies, but
gearing is not comparable with peers
- SRV’s equity to assets ratio was 39.3% (IFRS, Q3/2013) and POC-% 40,4% - SRV’s gearing ratio was 103 (Q3/2013)
B. SRV’s equity ratio and gearing is affected by following factors
1. SRV’s strategy to increase developer contracting in housing construction in Finland
2. Effects of SRV’s business model on gearing and liquidity 3. Investments in development projects especially in Russia
1. SRV’s strategy is to increase developer contracting in housing construction
in Finland
• SRV is among TOP-5 housing construction companies in Finland.
- IFRS standard for revenue recognition for developer contracting lowers the equity ratio and increases the gearing, since also the sold inventory is reported on SRV’s balance sheet
• SRV secures the financing of the construction of housing developer contracting
utilizing housing corporation loans
- SRV finances the construction of its development projects with upto 70% housing corporation loans, which are most cost efficient long term financing available
- 70% loan level reduces financial risk in case of housing sales downturn, since the loan covers most of the construction costs
- Completion of own production has therefore only a limited effect on on SRV’s liquidity
- Securing of liquidity with high level of housing loans increases the gearing during construction
2. Effects of SRV’s scalable business model on gearing and liquidity
• Project management contracting model reduces non-interest bearing current
liabilities on balance sheet
- 1) employment related liabilities, 2) trade payables, 3) advance payments and 4) other
current liabilities are lower than those of SRV’s peer group’s
- SRV uses extensively small enterprises in subcontracting
• SRV has a policy to abstain from fixed price traditional contracting. These contracts
are awarded with fixed payment schedule
• In project management contracting construction bids are often requested with
preliminary plans. This affects the payment schedules and reduces advances as a financing source
3. Investments in development projects (mainly in Russia)
• SRV’s capital employed in International operations was 172 M€ (Q3/13) and mainly in
Russia. Local financing sources prior construction phase are very limited. Since
development times are long in Russia, Group’s financial resources can be tied up for a long time in development, construction and ownership phases
•
Financing for developer contracting projects is secured by sales process, project
loans and use of general liquidity reserves
•
Domestic developer contracting
- Housing developments for consumer sales are financed with housing loans from domestic relationship banks. SRV’s policy is to use 70% LTV in these projects - For other developments under construction either a project loan is arranged or
construction is financed with SRV’s financing reserves
•
International developer contracting especially in Russia
- Local project loan is prefered financing for Russian projects. Project loans have long maturities covering also operations time
› Project loan for Pearl Plaza is 95 M€, Okhta Mall –loan target is 160 M€. SRV does not guarantee these loans. Project loans in associated companies are not consolidated on SRV’s balance sheet
- Co-investors and Investment vehicles provide equity investment capacity
- Construction of smaller developments may be also financed with SRV’s financial reserves
Re m ai ni ng ca pi ta l a nd p ro fit Construction 2007-2009 & 2011-12 Operating period 2010 -Construction financing 0 -> 35.9 M€ Russian bank refinancing SRV (50%) SRV (50%) 35.9 -> 1.7 M€ SRV’s capital employed in Etmia Re pa ym en t o f SR V’ s l oa n an d in te re st
•
Etmia construction was
fully financed by SRV
with interest bearing
secured loans
•
SRV owns 50% of Etmia
•
After successfully
leasing out the
premises local project
financing was arranged
•
Refinancing enabled
SRV to release most of
capital tied in Etmia
EXIT
2014?
SRV (50%)
NOI 4 M€ p.a.
Case Etmia: SRV’s financing and subsequent refinancing
1XX M€ Re pa ym en t o f pa rt o f i nv es te d ca pi ta l Construction 2011-2013 Operating period 8/2013 -Project loan 95M€ Refinancing xx/201x ? 22 M€ EXIT 201? Re m ai ni ng ca pi ta l a nd p ro fit SR V’ s f ee fo r 1 20 M € pr oj ec t m an ag em en t co nt ra ct s
•
Investment value 140 M€
•
Project term loan 95 M€
•
SRV’s investment 22 M€
•
The value of Pearl Plaza
increases with operating
cashflow
•
Capital tied can be
reduced during operating
period by refinancing the
project loan
Case Pearl Plaza; co-investor & project loan
Russia Invest – investment vehicle developed by SRV
• Investment company Russia Invest
- Co-investor concept developed by SRV
- Russia Invest will invest in SRV’s development projects in Moscow and St. Petersburg
- SRV will be in charge of project development and acts as a project management contractor - Partners’ investment commitments 95.5 M€:
› SRV, Ilmarinen, Sponda 26 M€, each › Etera 12.5 M€ › Onvest 5.0 M€
- Development projects will be funded by project-specific bank loans, the whole investment can rise up to 300 M€
- St. Petersburg’s Okhta Mall is the company’s first investment, ca. 50 M€
Russia Invest Max 95.5 M€ Okhta Mall ca. 50 M€ 55% Investment vehicle Investments in Russia Project loans Moscow & St. Petersburg focus 6%
Case Okhta Mall; SRV’s co-investor partnership & project loan
Construction 2013-2016 Operating period Q1 2016 -Project Loan (LOI) 160M€ Refinancing xx/201x ? SRV (60%) EXIT 201? SRV (60%) Re m ai ni ng ca pi ta l a nd p ro fit XXX M€ SR V’ s f ee fo r 1 60 + M € pr oj ec t m an ag em en t co nt ra ct s•
Investment value 250 M€
•
Project term loan 160 M€
•
Shareholders’ investment
90 M€
•
SRV’s commitment during
construction is 44 M€,
which is covered by cash
flows from project
mana-gement agreements and
the sale of the holding)
•
Capital tied can be
reduced during operating
period by refinancing the
project loan
Russia Invest SRV 55% 45% Sale of the holding (Q2 13) Re pa ym en t o f pa rt o f i nv es te d ca pi ta lConstruction period Operating period Exit Yr Target SRV Yr 1 Yr 2 Yr n NOI % Okhta Mall 8/2013 - Q1/2016 Q1/2016 -> 33 M€ 60 % over 25% let *) Pearl Plaza 8/2013 -> 18 M€ 50 % 100% let/reserved Etmia 2010 (& 2012) -> 2014 ? 4.2 M€ 50 % fully let Pearl Plaza II 2014 ? 2015 ? 50 %
over 30% let *), no investment decision made
Mitishi 2014 ? 2015 ? 25% **)
ca. 30% let *), investor negotiations on-going *) preliminary lease agreements
**) current ownership
The illustration is based on estimation of the Okhta Mall shopping centre project
- The purpose of the illustration is to describe the timing of financial results and it is
Life cycle of selected SRV’s projects in Russia
LOI signed for 160 M€ project loan
95 M€ project loan
33 M€ refinancing SRV’s financing for construction
