Kojamo Oyj (V4OC.F) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Kojamo's News Conference. I'm Niina Saarto from Investor Relations. Today, we have 2 speakers, our CEO, Reima Rytsola, starts with key highlights for the period and with the operating environment. And then CFO, Erik Hjelt, continues. We're going to hear more about the financial development. We have Q&A following the presentation, and then we take live questions and questions coming via chat.  Now let's go handing over to you.

Thank you, Niina, and very good afternoon on behalf of myself as well. We released an hour ago of our Q3 results, and happy to say that it was a solid quarter, even though the market conditions are still more or less challenging, even though kind of a bit improving.  I think the highlight, again, on this Q3 was the kind of recent occupancy rate. We had a very good performance and our occupancy rate raised in Q3 to 96.1%. We also, due to that fact, were able to kind of grow our revenues and net rental income. And also the leakage that we discussed last quarter in Q2 that net rental income didn't grow as much as revenue. We said at that time that we see it as a seasonal adjusted issues there, and it remains to be true. And this time, the net rental income grew in the same pace than revenues.  FFO decreased due to the fact that the financing costs are way higher than last year, and repair expenses are a bit higher than previous year. The balance sheet as such is in a strong shape. And we -- during the quarter, we closed the sale of close to 2,000 apartments to Apollo funds, and we kind of paid our debt for EUR 200 million and launched also the share buyback. The market as such is still, as I said in the very first sentences, is still kind of in a challenging mode, but I think we have a slight or minor signs of improvement, even though the kind of recovery has postponed already many times.  One very positive topic for Kojamo during the Q3 was as well the -- that Moody's affirmed the Baa2 rating for us, and that's very kind of an important factor for a company like Kojamo that its financing capabilities remain very solid.  We also started the strategy review. But as I said already in Q2 release that we expect that to be more of a revising of our current strategy or tuning the current strategy, not as such as a totally new strategy. Then if we talk about a little bit the operating environment. So the economical growth in Finland remains muted, even though there's slight optimism in different kind of forecasts. The global economy is more optimistic, and also the Eurozone. But in Finland, the unemployment has risen lately. And all in all, I would say that our equity story can't build on Finnish economic growth as such, but more of an operating environment in the context of supply and demand in the long run.  So as we can see here in this graph, so we can note that the residential start-ups are still very low in Finland, and especially the nonregulated or nonsubsidized apartment start-ups have stayed low level. And there's some kind of rumors or initiatives that the legislation will change in subsidized apartment buildings as well. So we see how it develops, but it probably will come down in the future as well. So in a sense that if we have kind of a basic need for 35,000 new apartments in Finland, and even though you might question that whether it's a correct one or should be 30,000 or 35,000, but still given the fact that our start-up -- new start-ups level has been less than 20,000 for 3 consecutive years now.  And even though there's some forecast that it will pick up in the next year, but it won't be significantly higher. So it's easy to say that it's definitely underneath the kind of constant need for apartments as such. And why the need is still there? So in the biggest cities, the population grows constantly, and the immigration is obviously a big factor of that. And the kind of a megatrend that is backing up the story -- equity story here in Kojamo is obviously the population growth.  One thing that has been in discussions that is why the supply-demand balance out taking so long. Probably the one reason is that even though immigration has grown a lot in the last 3 to 4 years in Finland. So the number of households hasn't increased at the same pace as population growth. So that has been one factor that has kind of slowed down the melting process of supply.  Kind of old story as such, which we have been explaining for quite a long time, but more than 97% of our portfolio is 7 biggest cities and the urbanization and the population growth overall is in big cities are supporting the Kojamo's portfolio locations. And here, we can see that it's kind of a very, very good fit for the urbanization process as such. Overall, I would say that this quarter, as I described it was solid. I think in, how would you say, if you take a comprehensive view of our results, so all the factors were performing as expected. As I said, the market conditions haven't eased up significantly, so the performance of our own has been good in Q3. So I would like to hand over to Erik now, and then we can go to Q&A.

Thank you, Reima, and good afternoon from my side as well. So Page 12, if you look at the total revenue first. So the total revenue grew EUR 4.8 million year-to-date compared to 3 quarters last year. And the Q3 growth was EUR 0.4 million compared to Q3 2024. The whole improvement actually came through because of the improved occupancy. It's good to keep in mind that because of the disposal we completed at the end of July, it has an impact on the top line of EUR 3.7 million. So we lost that, if you like, in a top-line growth way.  So net rental income year-to-date growth was EUR 3.2 million, and in Q3, it was positive of EUR 0.3 million. Maintenance expenses are pretty much flat in year-to-date and a EUR 0.8 million decrease during  Q3. Repairs year-to-date, up by EUR 1.5 million and EUR 1 million during Q3. If you then look at maintenance expenses,  there are positive or negative figures there. On the positive side, heating down by EUR 1.8 million, credit losses down by EUR 0.8 million, and electricity down by EUR 0.5 million. On the negative side, if you like, is water up by EUR 1.2 million and cleaning up by EUR 0.6 million. Both water and cleaning are impacted by the improved occupancy.  Page 13. On the right-hand side, we have FFO. So FFO declined by EUR 7.7 million year-to-date. and net rental income contributed EUR 3.2 million. SG expenses increased by EUR 0.7 million, and finance expenses on the FFO side grew by EUR 8.6 million. On the P&L side, the finance expenses growth was EUR 9.1 million. And current taxes were up by EUR 2.7 million. And in these current taxes, we are not including current taxes due to the disposal of assets.  So Page 14, we are extremely proud that we were still able to improve our occupancy. If you look year-to-date figures, so cumulative figures, so there, the growth is 2.9 percentage points, but more important is actually to look at what happened third quarter compared to the second quarter this year. So the third quarter figures were 96.1% and it was 94.4% in Q2. So there's an improvement of 1.7 percentage points that I would call quite an achievement in the current market position.  Tenant turnover is down by 2.4 percentage points. Main drivers there, of course, is that our Net Promoter Score is at the moment, all-time high. And then we have enhanced our interaction with our customers. So that, of course, plays a role in the financial occupancy rate angle as well.  Page 15, like-for-like rental income. In this type of turning point, I'm not even today, any good fan of this like-for-like calculation is prepared according to EPRA best practice recommendations, but figures it's backward-looking. So in this type of turnaround situation, it's not that representative of what's really going. But actually, if you look at our figures, they are improving exactly how we estimated. So now the impact of occupancy rate is visible in this figure is a positive 1.7% impact of rent and water charges down by 0.5% and others are negative 0.2%. So the total like-for-like rental income growth is positive 1.1%.  And then if you just do the math and look at our Q4 figures and the Q4 last year, that will be rebased in the calculation in our Q4 calculation this year. So the impact of the occupancy will improve further.  So Page 16, we completed the disposal of almost 2,000 apartments at the end of July, and we have one ongoing development, so 119 apartments in Helsinki region that will be completed early next year, and there's EUR 4.1 million to be invested in order to complete that ongoing project.  Repairs, we estimate that the repairs this year is going to be slightly above the last year figures, so a little more than EUR 24.1 million. And the modernization investments already clearly higher than last year, so now EUR 19 million year-to-date. Last year, it was EUR 4.1 million. And we estimate that the modernization investments the whole year is going to be around EUR 30 million, EUR 30 million. The increase in modernization investments is mainly due to the fact that we have started a couple of bigger modernization investment projects this year. Next page. So the value of investment properties, quite stable there. So we didn't change any valuation parameters. We didn't change the yield requirement or any other valuation parameters. The outcome in the valuation was negative EUR 16.4 million, almost all that came through because of the ongoing modernization investments. So on the P&L side, the money invested is a negative figure in the valuation. And then, of course, once these projects are completed, the outcome of this project will be booked when completed. Loan-to-value and equity ratio, quite strong figures there. And actually, our loan-to-value decreased by 2.5 percentage points on back of this -- the completed disposals and the fact that we paid back EUR 200 million of outstanding loans on back of this transaction as well. Page 19. So very important piece of information is that Moody's actually affirmed our Baa2 rating and they stabilized our outlook, and we are extremely pleased of that. And the thing is that the next financing arrangements will be to refinance 2027 maturing loans. So in that sense, our liquidity position is quite strong because we have EUR 240 million cash or finance assets put together and EUR 275 million committed, unused credit lines in place. And we've been active in financing other ways as well. So we actually refinanced 2 loans during the Q3. So EUR 100 million loan with OP Banking Group and EUR 75 million credit line with Danske Bank. Our equity per share and EPRA NRV moved sideways. So no major changes there. Page 22, we actually kept our outlook for this year unchanged. So we estimate that top-line growth is going to be 0 -- between 0% and 2% year-on-year. And then we estimate that our FFO this year is going to be EUR 135 million to EUR 141 million. If we take the midpoint of the revenue growth outlook, so there, we estimate that, of course, the occupancy has improved, moderate rent increases remaining part of this year, but the fact that we are still flexible when it comes to renting when apartments come vacant, and we try to find a new tenant. Then if you look at the midpoint of FFO guidance, so of course, the guidance as such is reflecting the range for revenue growth guidance. And in the midpoint of FFO guidance, we assume the average weather for the remaining part of this year that SG expenses and repairs broadly in line what we had in 2024 and no additional financing arrangement to be done end of -- during the end of this year. And now at this point, I hand it back to Reima.

Thanks, Erik. I think it's more or less time for a Q&A. But as we told that on the other hand, not uneventful quarter, but kind of a steady quarter, so to say. And obviously, the kind of highlights still the recent occupancy rate and ending on Q3 to 96.1%. So we are pleased on that. But happy to take the questions.

Okay. Thank you. Do we have a question from the audience?

Yes, I would like to ask. Franca Rucet from Inderes. First, I would like to ask about the occupancy rate increase, which have been significant, like you said. What have been the key actions? It seems like you didn't have to make significant rent concessions during the Q3. And like what have you changed during this year to achieve such a quick turnaround in this market situation?

Well, I think the kind of dynamic pricing is one of the key aspects. And then on the other hand, as we showed in one of our slides that our NPS is a record high level. So actually, our churn has come down as well. So we have been both kind of an attractive landlord to our existing tenants. So the churn has come down, and then we have been able to attract the new tenants. Of course, we have had to kind of reprice the rents in some cases of new tenants due to the fact that as yourself as well said that the market condition is not that good. But overall, I think it's -- we have -- which we told already Q2 that we have put quite a lot of effort on our sales operations and how does that process work, and also try to put focus on the customer experience as such. So that has paid off, I would say. I don't know if Erik has something to add on that.

Yes, I fully agree. And I think it's a combination of several things. So we are more flexible when it comes to rating. We have enhanced how we manage the actual operations, and we are more active meeting our customers, and we are more -- we have better staffed the evening hours and weekends, and we have established a special team in our service center to support the renting operations. So I would say it's a combination of several things that we've been doing.

And then I could ask about the transaction market. And in Finland, as you very well know, we struggle a bit with the capital shortage. But how have in your opinion now developed the interest of the foreign investors? Like how has their interest to the Finnish residential market developed this year?

I would say that it's picking up. And the one catalyst was obviously our deal in late July, which we closed late July. So and was it end of June when we signed, and yes, so end of June. So after that, there definitely have been kind of picking up the interest. But on the other hand, it's fair to say that it started on a very low level, the interest. So even though it has picked up, so it's not, how would I say, in very good shape, the transactional market as such. But I would say that it's improving.

Okay. Then let's move on to phone line questions. Do we have any? [Operator Instructions] The next question comes from Anssi Raussi from SEB.

A couple of questions, and I start with the occupancy and rent. So as you said, quite an improvement in Q3 regarding occupancy. So how should we think about your rents going forward? And is it like your next plan to start to implement some modest hikes there? Or what's your plan?

Yes. We do not guide any kind of target rents or rent levels as such. But obviously, we -- there's a, how would I say, embedded need for rent hikes from a landlord perspective, that's not news for anybody. But on the other hand, I think we need to be very, very kind of very sensitive with the market balance overall that we are not kind of pushing too high rent hikes to the market, which is not absorbing those. But definitely, that's given the occupancy rate has risen and we are more on a kind of a normalized level at the moment. So then we have a kind of better capabilities from our end to raise the rents as well.

And yes, maybe can you give us any comment on how your occupancy developed during the quarter? Like is this 96.1% a good estimate as your -- for your current run rate?

Yes. Well, as you can probably calculate throughout the end of June figure and so it was rising during the quarter going forward, so kind of a normal pattern or seasonal effect in occupancies is that they tend to come down a little bit in the latter part of the year. So we don't know that yet, but that's kind of a normal pattern, I would say.

And maybe finally, about your repair and maintenance expenses, like how would you describe your current levels? And of course, I'm thinking here about the next year, like is 2025 so-called normal level?

So we are not guiding next year at this point, but a general comment. So repairs most likely will remain roughly on the same level that is going to be this year, if you look next year, given the fact that repair seems to be on a decent level at the moment. And we haven't really decided what is going to be the monetization investment level. But most likely, we are going to start a couple of monetization investment project next year as well. So either remain on the current level or slightly up. But as said, we are not at this point guiding anything next year, but this is our current thoughts regarding repairs and monetization investments.

The next question comes from John Vuong from Van Lanschot Kempen.

So you've mentioned a couple of times that the market remains challenging. At the same time, occupancy is 96%, which you say is normalized. You're also mentioning that rental growth could perhaps be possible at these levels. So just how do you reconcile that with the challenging market?

You mean how do we view the market as such? Was that the question?

Yes. Just trying to understand what you mean by challenging, if you are saying that 96% is a normalized level for occupancy and that you could see rental growth.

Yes. Well, we don't know yet how will the -- what I meant that when we have a closer to normalized level in occupancy rate, so we are in better position to start pushing the rent hikes to the market. But as I said, at the moment, the market remains challenging, and there's still oversupply, especially in Helsinki and Vantaa area, which differs from city to city. So for example, Tampere and Turku, and Espoo are much better than the bigger cities, but we need to be kind of sensitive to how the market is absorbing the rent hikes as such. So that's why I didn't say that we are able to push significant rent hikes for the market. I said that, our own perspective, we are in a better position to start to kind of try that in the future, so to say. That's what I meant by the combined recent occupancy rate.

And when you say in Tampere and Turku, much better, what rental growth are you achieving over there?

Well, I don't know if we have disclosed the city-by-city rental growth, but I think the oversupply perspective, they are better, and that's why the kind of a market is absorbing a better rent hikes, whether they are in any city at the moment, very significant, so I wouldn't say so, but at least some kind of rent hikes are going through.

That's ahead of inflation?

Sorry?

Are those rent hikes ahead of inflation?

Yes. Well, it doesn't require much in Finland to be more than inflation. So if we have a 0.4% at the moment, forecasted inflation. So that's very low. And still, there are in Turku and Tampere as well, there are in some single apartments, there might be cases where the new tenant's rent is lower than the existing ones, but the market as such is absorbing better the minor rent hikes.

And just on the actions that you're taking to support leasing. You mentioned better service, having a bit more evening hours. How are you looking at that impacting your cost structure?

So actually, we've been more efficient when it comes to our operations. So the head count is pretty much the same as it was 12 months ago, and we are just more efficient here. So it really hasn't had any impact on the cost side.

The next question comes from Robert Phillips from Green Street.

I just had 2 questions, which I'll ask one at a time. So just firstly, could you give a little more color on the strategic review? I know it's still early days, but could you just share what the main areas of focus might be for this?

Yes. As you said, it's early days, even though I said that our balance sheet is in good shape and our loan-to-value is 42.2%, I think it was the latest figure. So it's in a strong shape. Still, we are more or less constrained by the cash flow, and that gives limitations for a strategic renewal as well, in a way. And that's why I said that it's more of a tuning of the existing strategy. What does it mean, then, of course, there are some operational focus points where we should focus more.  And as I said, the customer experience and operational excellence, which also the customer experience will be the key cornerstones of our strategy in the future as well. And we expect that to be a kind of an important factor in the future, at least in the long term, to be able to create a rent premium that we have satisfied customers. And then, of course, there are topics that we need to kind of go through, especially from a capital allocation point of view.

And then just could you also comment on the use of tenant incentives? Are you still seeing incentives being used to support leasing activity? Or have they started to ease slightly?

Well, we do see on the market several types of incentives, and whether they are 3 weeks, rent-free weeks, or a free month, or some kind of vouchers. So there are still some. Actually, our interpretation of the market and customer kind of behavior has been that, actually, the kind of correct rent price as such is more appealing from a tenant's point of view than different kinds of one-off incentives, so to say.

[Operator Instructions] The next question comes from Jonathan Kownator from Goldman Sachs.

Just to follow up on this pricing. I mean, obviously, you've talked about dynamic pricing. You've talked about the correct level of rent. Can you help us understand how you changed your pricing on average to be able to improve the occupancy level?

Sorry, can you repeat? How do we see the pricing? How much have we changed? Did you mean how much we have changed the pricing?

Yes, to improve occupancy, I mean, obviously, you've been very successful. And just keen to understand where the correct rent is versus what you were trying to charge before, and where a little bit less successful.

Yes. It obviously depends a lot on apartment by apartment, and some real estate is more challenging than others. But the new tenant's kind of rent levels have been something like 3% to 5% lower in some cases, and on average wise and then which comes to that our actual rent roll has decreased a little bit during the year. But we have been able to push small rent hikes for existing tenants as well during the same time. And on the other hand, there are some new tenants that we have been able to raise the rents as well.

The next question comes from Anssi Raussi from SEB.

Yes, one more from me. If I may continue on this capital allocation topic. So I understand that you have not finished your strategic work yet. But if we think about buybacks, dividends, and additional deleveraging, maybe to prepare for the growth at some point. So how does this go together? And what kind of, let's call it, pecking order you see here?

Thanks, Anssi. You pretty much described the elements of a capital allocation, and those are exactly the ones that we are trying to fit together, but we do not have any news for that at this stage. But as I have said earlier as well that we fully recognize how important the growth is from a value creation point of view, and we are definitely working hard to find our way back to the growth path as well.

Okay. But do you think that dividends should or could be part of your plans in the near future?

They could be, yes.

There are no more questions at this time. So I hand the conference back to the speakers.

Thank you. Very good questions. And when I look at the chat questions, I think we covered all topics already. So it's time to conclude. Thank you for joining us today. Our full-year results will be published 11th of February. Hope to see you all then. Thank you very much, and have a nice evening.

Thanks a lot.

Thank you. Bye.