Sonae Sierra’s Consolidated Net Profit in the third quarter of 2008 was a negative result of €18.1 million compared with a positive consolidated net profit of €206.6 million euros in the same period of last year. To note, however, that the share of the Consolidated Net Profit attributable to Equity holders generated a revenue of €5.5 million.
This variation in Net Profit is mainly driven by Indirect Net Profits that were adversely affected by two successive increases (in the second and third quarters of this year) in market capitalization yields in Europe, namely in Portugal and Spain.
Over the last few years, the Company has its property appraised by an independent evaluator bi-annually (June and December). With the creation of the new Sierra Portugal Fund (58% of which is placed with international investors), Sonae Sierra has committed itself to evaluate the Fund’s property every quarter. Thus, this is the first time the Company has recorded the fluctuations in value of a part of its assets in September. If it weren’t for this change in criteria, the Company’s Consolidated Net Profit without the impact of the September properties evaluation would have reached € 16 million in September 30th 2008.
In the same period Sonae Sierra’s Direct Results reached €50.5, compared to the €64.3 million in the same period of 2007. This reduction is basically explained by increased Net Financial Costs.
Therefore, the Company’s Net Operating Margin reached €133.6 million, a considerable increase of 20% compared to the same period of last year, due to the growth of the portfolio under operation (openings and acquisition which took place in 2007 and 2008) and the organic growth of the existing portfolio.
The big shift in the Company’s Results happened at the level of Indirect Results. In this area, the Company booked a loss of €68.6 million at the end of the third quarter of 2008, whereas it had booked a gain of €142.3 million in the same period of 2007. This Indirect Result has two main components.
In the first (Gains Realized on Investments), the Company shows a profit, in the period, of €17.2 million – corresponding basically to the gains made on the sale of positions to third party investors in the Sierra Portugal Fund.
The second component (Value Created on Investments) corresponds to changes in value, on the basis of independent valuations carried out this quarter, of the properties in the portfolio. In this component, the Company booked in the period a loss of €96.6 million.
The market value of the investment properties are being affected by the negative climate now prevailing in the properties markets of most of the developed countries where the Company operates. This context led to an upwards shift of the capitalization yields applied in the valuations carried out on assets in those countries, this increase implying a reduction in the value of the corresponding property.
The losses in Value Created on Investments were mitigated however by valuation gains in Brazil, a market that was not affected by the crisis and where yields went down.
As stated above, this is the first time the Company has recorded the fluctuations in value of a part of its assets in September.
Accordingly, the following assets were valued in this quarter:
ArrabidaShopping, Centro Colombo, CC Continente de Portimão, CC Modelo de Albufeira, Centro Vasco da Gama, GaiaShopping, LoureShopping, Rio Sul, SerraShopping, ViaCatarina e 8ª Avenida em Portugal, Grancasa, Max Center, La Farga, Valle Real, Zubiarte and Plaza Mayor Shopping in Spain, Freccia Rossa in Italy and Alexa in Germany.
In the case of Sonae Sierra, the exclusive effect of the variation in the yields led to a reduction in the value of the Investment Properties of 4.5%, which amounted to €163.3 million. The biggest losses occurred in Portugal (loss of €99.3 million) and Spain (loss of €56 million), the other European countries had a total loss of €19.7 million whereas Brazil recorded a gain of €11.7 million.
In terms of yield variation in the portfolio, these numbers translate an average yield increase of 28 basis points in Portugal, 52 basis points in Spain, and an average yield reduction in Brazil of 48 basis points.
This potential loss of €163.3 million, resultant from the increased yield, was strongly mitigated by a favourable evolution in at operating level. The combined effect of changes in the projections of rents, key money, other net income and maintenance and capital expnditures, led to an increase in the value of the properties of €78.4 million. Therefore, the net effect of the variation in the investment properties valuation was negative in €84.9 million.
To note that, on a like-for-like basis, the rents booked by the Company, grew in the period by 4.7% versus the same period of 2007.
Value Metrics
The Company measures its performance, in a first instance, on the basis of changes in Net Asset Value (NAV) plus dividends distributed. In this period, the Company decided to calculate its NAV on the basis of the guidelines published in 2007 by INREV (European Association for Investors in Non-listed Real Estate Vehicles), an association of which the Company is a member.
On the basis of this methodology, the NAV of Sonae Sierra, as of the 30th September 2008, was €1.671 billion.
Further to this, the Company uses a second set of value metrics, the Net Operating Income (NOI) generated by its service activities. In the third quarter of 2008, the figures were:
The activities Asset Management and Property Management show a positive performance, the former with increased results, basically as a consequence of the increase of the portfolio under management.
The Developments activity shows a loss of €39.9 million – this compares with a gain of €10 million in the same period of 2007. Under this activity, we book both project development services and margins accrued in projects under development held by Sierra Developments. The negative result in the period has to do with this second component. The Company adjusted down the estimates for value created until inauguration in a number of projects. As a consequence, the Company cancelled margins accrued in previous periods relating to those projects.
Portfolio under development
Sonae Sierra’s growth and expansion strategy continues, as the Company continued to develop, in the third quarter of 2008, a total of 17 shopping centres, and 13 new projects are in different stages of completion in Portugal, Spain, Italy, Germany, Greece, Romania and Brazil, with a total GLA of one million m2.
In Brazil, a Sonae Sierra currently owns 9 shopping centres under operation, and four projects in the development stage. Manauara Shopping, in Manaus, scheduled to be inaugurated in the Spring of 2009, Boulevard Londrina, located in the city of Londrina, Paraná state, which represents an investment of €53 million, and is scheduled to be inaugurated in the Fall of 2010, and Uberlândia Shopping, located in Uberlândia, west of the Minas state, also scheduled to be inaugurated in 2010, representing an investment of €43.5 million. Finally, the 13th shopping centre in Brazil, Goiânia Shopping, located in the city of Goiânia, in the Goiás state, represents an investment of €123 million, and is scheduled to be inaugurated in 2011.
In Portugal, Sonae Sierra presented three new developments of future Shopping and Leisure Centres: LeiriaShopping (Leiria), Maia Jardim (Maia) and Centro Bordalo (Caldas da Rainha), representing a total investment of €212 million and the creation of 3,000 new jobs.
In Spain, Sonae Sierra inaugurated Shopping and Leisure Centre Plaza Mayor, in Malaga, representing an investment of €58 million, with more than 18,800 m2 of Gross Lettable Area (GLA).
New placement of the Sierra Portugal Fund
During the third quarter, Sonae Sierra concluded a new placement of the Sierra Portugal Fund (SPF), with the investment being made by an additional fund managed by Aberdeen Property Investors. The gross combined investment from these investors is over €55 million, which corresponds to a participation of about 18% of the SPF. With this new placement, Sonae Sierra reduced its position in the SPF to about 42%.
National and International Awards
Alexa, the first shopping centre developed by Sonae Sierra in Germany, has just been distinguished with the "Silver Award" at the prestigious ICSC Solal Marketing Awards 2008 in the category "Grand Opening, Anniversary, Refurbishment or Extension", an International Council of Shopping Centres (ICSC) award. Meanwhile, Sonae Sierra itself has also been distinguished by RLI magazine - Retail & Leisure International - with the "RLI Developer of the Year" award, at the Global RLI Awards 2008, the annual awards of this prestigious British publication. Nationally, the "Jornal Construir" newspaper has also awarded Sonae Sierra, at the "Construir 2007" awards, with the "Best Real Estate Developer" prize.
Sonae Sierra’s Consolidated Profit and Loss Account, and Consolidated Balance Sheet
Sonae Sierra’s Consolidated Profit and Loss Account, and Consolidated Balance Sheet by business
Sonae Sierra, http://www.sonaesierra.com/, is an international shopping centre specialist, with a passion for bringing innovation and excitement to the shopping and leisure centre industry. The Company owns 50 Shopping Centres in Portugal, Spain, Italy, Germany, Greece, Romania and Brazil, with a total Gross Lettable Area (GLA) of more than 1.9 million m2. Sonae Sierra has 15 projects under development and 13 new projects in different phases of completion in Portugal, Spain, Italy, Germany, Greece, Romania and Brazil with a total GLA of 1,2 million m2. In 2007, its centres welcomed more than 410 million visits.