Lumo Kodit Oyj (LUMO) Earnings Call Transcript & Summary

My name is Maija Hongas. I'm Manager, Investor Relations, here at Kojamo. And today's presenters will be Jani Nieminen, CEO; and Erik Hjelt, CFO. [Operator Instructions] It is also possible to ask questions at the webcast with the chat function. And after the news conference, we have also reserved time for media for interviews. But let's get started. Please, Jani?

Thank you, and good morning, everyone. It's nice to be here and provide some color on what's been going on last year and as well what's going on in the future. Today, we have on the agenda, of course, the summary of 2019. The year 2019 was in line with our expectations, and I'm happy to provide our results. We've been able to create profitable growth, and our strong operating performance is really reflected to all our key figures. Typically, I would say that it's better to analyze our kind of business on the whole year level than one quarter at a time. Our strategy has proved to be strong and we have updated our strategy targets to 2023. Our pipeline for new development projects at the moment is very strong, and we are able to grow our business from various sources. We have received a lot of feedback from investors, and we started applying a similar validation methodology as our international peers, and that resulted in a net gain in our fair values. And then if we look at the operating environment, of course, it's important to note is that overall, the operating environment is really positive for Kojamo. Urbanization is a big megatrend and that creates a lot of demand for new apartments in the bigger cities. According to the latest estimates, population will grow in all Kojamo's focus areas. So the biggest growth cities and regions in Finland. Of course, especially Helsinki, Tampere and Turku regions are the regions where people are moving the most and will be the biggest winners in urban setting Finland. And of course, the most of the newer partners will be needed in Helsinki region. As we provided estimates last year, the number of new building startups has been coming down, and it's returning to the so-called normal level, and mostly the new building projects are focusing in bigger cities. It seems that the level would be roughly the same in Helsinki still, but the difference is between the biggest growth centers and the rest of the Finland are growing all the time. There has been more supply in the market in 2018, '19 and still this year, but there are already some concerns, concerning whether there are -- there's enough supply to back up the urbanization in Finland during 2021. In the bigger cities, we see that for rental apartments, there's a big need, and both the rents and housing prices will still keep on rising, and there's a long-term demand for new homes. As the urbanization is by far the biggest megatrend creating the demand in Finland. Of course, there are several other things going on at the same time. The development of household size is continuing. So I mean, that the number of 1-person, 2-person households is still increasing, and that creates a lot of demand for smaller apartments, studios and 1-bedroom apartment. And another trend is that people seem to value more and more the micro location and the services combined with the living. And at the same time, people value more and more the freedom of the rental apartments, and that seems to create more demand towards rental apartments. And already, in the bigger cities like Helsinki, Turku and Tampere, half of the population, half of the households live in rental apartments roughly. In Helsinki actually more households live in rental apartments than in owner-occupied apartments. And the trend seems to be clear: The amount of households live in rental apartments is still increasing in all the biggest growth centers. Last year was a really good year for us. Even though there was more supply in the market, we were able both to create like-for-like growth in rents and to improve our occupancy. 2018, the occupancy level was 97%, and last year, 97.2%. And if we look at the allocation, 72% -- 73% of our housing assets are located in Helsinki region. And if we combine Helsinki, Tampere and Turku regions, a bit more than 87% of all our assets are located in these 3 biggest growth regions. To wrap up some bigger numbers, of course, it's easy to say that the year 2019 was in line with our expectations, and we were able to create strong, profitable growth. Our total revenue increased 4.6%, and at the same time, the net rental income was increasing by 5.7%. The like-for-like growth with our turnover was 2.5% compared to last year, 2.4%. And funds from operations, EUR 140.7 million, was 20.9% better than last year. Of course, we have to keep in mind that there are 2 aspects we were able to create like-for-like growth also with a net rental income, but there was some differences between lower in taxes paid compared to 2018 on the net level, roughly EUR 10 million. Today, the fair value of investment properties is EUR 6.3 billion, and we invested roughly EUR 260 million last year, mainly on new building projects, but we did buy 260 apartments as well. Profit, excluding changes in value, was 6% better than last year. It actually means EUR 9 million, and we then had a net gain in fair values of EUR 872.4 million. And that results a profit before taxes EUR 1,031 million last year. So I would say, a really strong year and in line with our expectations. And part of the strategy has been that we are growing, and we are creating profitable growth. At the end of last year, we had 1,316 apartments under construction. And of that, 1,260 in Helsinki region. So we have been actually able to increase the number of apartments under construction in Helsinki region because 2018, we had 850 apartments under construction in Helsinki region. And at the same time, after a reverse tender process competition, we made 2 agreements with construction companies called SRV and Hausia providing a bit more than 900 new apartments in Helsinki region in the future. In the strategy, we are able to grow from various sources. We are combining new development projects, but we are as well buying existing portfolios. Last year, we bought 260 apartments; in 2018, 1,049 apartments. So actually, on average, we are well in line with our strategy. Here are the projects under construction at the year-end. And of course, we have to keep in mind that we do believe that as well as last year, it's possible that during this year, we are able to find new building projects and make agreement with construction companies of projects that might be completed already this year as -- like we did last year with SRV and Hausia agreement providing already 2 completed projects. Just as a reminder of SRV and Hausia deals providing 905 apartments here in Helsinki region along with really, really good micro locations cases along with the public transportation, mainly studios and 1-bedroom apartments. The average size of apartment in this portfolio is roughly 45 square meters. We have completed 1 project under construction and still 816 apartments coming in the future. And of course, these projects will be added in our numbers concerning how many apartment under constructions when these projects are starting. Providing added value for our customers is an important aspect for us and a really big part of our strategy. We are combining a lot of technology data and customer understanding in order to create easier and effortless living and added value for our customers. Whether it's a customer entering Lumo world, it should be easy and effortless. You are able to use webstore and rent the apartment 24/7. We are providing a lot of benefits. But as well those existing customers, it should be easy and effortless and a feeling of real added value. So most of our customers today use an application called My Lumo. They are able to take care of their daily matters, whether it's rent or defect report or even some services. And actually, during the last 6, 7 months, we've been collecting a lot of data concerning what's going on in Finland, in micro locations, and concerning the deeper cost of understanding: What are the real preferences in different customer segments? And in the future, this will provide us new concepts, and we will keep on creating new services for our customers and specified customer segments. So in the heart of Lumo is to provide easy and effortless living and added value for our customers. And as you noticed, on the right-hand side, already last year, half of all the new agreements came from webstore. Here in Helsinki region, actually 60% of all the new tenants are entering all that from the webstore. At this point, I will pass it to our CFO, Erik. Please.

Well, thank you, Jani, and good morning, everybody, from my side as well. So Page 14, our total revenue increased by 4.6%, and our like-for-like rental growth was 2.7%, and out of that, 2.5% was due to the increase in rents and 0.2% was increases in other charges, mainly water charges. So the total revenue growth was EUR 16.5 million, and our main contributor for that growth was completed apartments, EUR 10.5 million; acquired apartments, EUR 3.3 million; and rent increase is roughly EUR 10 million. On the negative side, of course, a disposed asset, and there was an impact of minus EUR 8 million. If you then look at profit before taxes without change in the fair value of investment properties, the growth there was EUR 9 million, and the main contributor there, net rental income increased EUR 13.3 million. SG&A expenses moved sideways, and the financial expenses growth was EUR 3.7 million, and that growth was mainly because of the growth of underlying loan portfolio, but there was small negative figure for fair value change in interest derivatives. We do apply hedge accounting, but a smaller part of the change in fair value [indiscernible] taxes coming to the P&L as well; that was EUR 2 million. And IFRS 16 was an impact for EUR 2.5 million for financial expenses. This change in fair value investment properties, EUR 872 million, includes the impact of the change in valuation technique, roughly EUR 800 million. And I'll come back to that later. Page 15, the net rental income and FFO increased. So the -- high margin growth to 65.9%, and the net rental income increase was EUR 13.3 million. The increase in net rental income was bigger than the growth of the top line. The maintenance expenses grows 1.6%, and the repairs, EUR 1.5 million. Main drivers for the slight growth in maintenance expenses was the rough weather at the Q1 last year and then the fact that the property tax's growth by EUR 0.6 million compared to corresponding period. One note regarding the Q4 -- we made during the Q4, the repairs was EUR 3.5 million bigger than in the corresponding period. And the reasons behind that was we met many small repairs. But on top of that, we had the opportunity to make a couple of sizable repair project that we decided to took -- make those during the Q4. It's good to note that other than difference from our international PSP booked repairs on top of net rental income, that makes a fluctuation on a quarterly basis, but because our international PS they mainly capitalize on repairs. So that makes an impact for 1 quarter's figures. But in the big picture, that doesn't change basically anything. FFO growth was a little more than 20%. And main contributors there was of course net rental income growth, EUR 13.3 million; others, EUR 1.9 million. And good to note that during the corresponding period, we paid taxes - EUR 13.5 million because of the disposal of assets. And 2019, the impact for taxes for disposing assets was EUR 4.4 million. Occupancy rate increased 0.2%; tenant turnover, slightly below 30%; and the internal turnover was 7%. Page 17, the investments, EUR 260 million. Euro-wise, development investments was EUR 110 million -- EUR 83 million; acquisitions, EUR 44 million; and modernization investments, EUR 30 million; and disposal, EUR 26 million. Modernization investments and repairs put together, EUR 67.6 million. And as has been said during the Q4, the repairs was slightly higher than in corresponding period. Going forward, we expect modernization investments and repairs put together being between EUR 60 million and EUR 70 million. Fair value investment properties, close to EUR 6.3 billion. The growth was almost EUR 1.2 billion. Development investments and acquisition contributed EUR 227 million. IFRS 16 had an impact of EUR 61 million, and then the change of fair value on investment properties, EUR 872 million. We applied this new valuation technique, yield-based valuation technique, for those apartments that are -- before this change, they were valued based on transaction prices and this so-called old yield-based valuation technique. We still have roughly 3,000 apartments where we have restrictions on regarding the valuation. So they are currently in our books based on original acquisition cost. And those restrictions requiring valuation will end gradually by the end of 2025, and the impact for those ending restrictions will be more than EUR 80,000 per apartment. And then roughly 30% of those restrictions will end this year, 30% in 2024, and the remaining part, spread equally for the other years. On Page 19, our land bank, if you like. So the plots means pure land. We are able to build 1,200 apartments on that land, and they are already in our balance sheet, those properties. Plots and existing residential buildings means that we own the land, and there is a cash flow from building on that land. And the idea is to demolish those buildings and build a new one there. So the net impact is going to be around 400 apartments. And conversions, mainly Metropolia case and a property called Eerik VII, and the idea is to convert them into residential purposes, and in this Metropolia case, the new planning, we have filed in the applications for changing the plans. In the lower part of this page shows these off-balance sheet items. So we have agreements for new constructions providing almost 1,000 apartments. And on the top of that, we have an agreement to buy land, and then there's more than 1,000 apartments that we can build on that land. It's good to know that 99% of all that is located in Helsinki region. And at the end of Q4, we have 1,316 apartments under construction. Already invested EUR 167 million; to be invested, EUR 148 million, to finalize those ongoing projects. We still have the equity ratio target and loan-to-value unchanged. So equity ratio target to be above 40%, and loan-to-value will be below 50%. We have now very, very strong figures for equity ratio, and loan-to-value, quite sizable buffer, I guess, this target level. So that means that we have the capability to grow it even further. And our EPRA NAV growth to 15.49% at the end of Q4. We had EUR 2.6 billion loans. Half of that is from the bond market and other half mainly from the Nordic banks. Very strong financial key figures, almost 5 years fixed average interest rate period and average maturity in our loan portfolio. Average interest rate, including the cost of derivatives, 1.8%. And the hedging ratio at the end of Q4 was 88%. On top of all this, we have a commercial paper program, EUR 250 million. Outstanding commercial paper at the end of Q4 was EUR 50 million. And we have EUR 300 million credit lines committed and in place. And no major refinancing is in coming -- next coming couple of years. And then the change in valuation technique. So we started to apply the same valuation technique as all business premises players are applying in Europe and in Finland as well. And most of the resi players in Europe is applying this discounted cash flow technique to value the properties. So we wanted to be more comparable with our international peers, and after the IPO, we received a lot of feedback from international investors that they had it slightly difficult to compare our figures because we are applying the different valuation technique, and now we decided to start to apply the same valuation technique as international peers. It's important for us to have an internationally recognized external valuator partner in this process, and going forward, Jones Lang LaSalle is our partner there. And this new valuation technique get into force at the end of last year. And the yield requirements in capital region in this new valuation technique was 3.84%; other regions in Finland, 5.05%; and group total of 4.25%. It's good to note that we didn't change this yield requirements at the end of last year because we released the range for the impact early November, and we felt it's not right to change the yield in such a short period. So we didn't change them, and the valuation calculations was made applying same yield requirements as we made [ very many ] calculation that was -- the range was released during November. And now back to Jani.

Thank you, Erik. Of course, one piece of new news is that we have a new strategy period until 2023. Our strategy has proved to be strong, and we will continue in a big picture to implement it as well in the future. But in order to provide new color, our Board of Director has approved an updated strategy and target and focal points until 2023. We seek strong growth with optimized financing and profitable business through leading operating models. So basically, the big picture is still the same. But of course, some new aspects as well. The megatrends is still the same: urbanization creating a lot of new demand for new homes in the biggest cities. And so that provides the opportunity to invest and grow our business with new investments. On the other hand, these other megatrends are as well important, but in my eyes it's more than how we should conduct our business, which kind of concepts we should create, what kind of homes we should build. The population is aging, the apartment sizes are getting smaller. We have to be able to use more and more new technologies and digitalization. Individuality is an important thing for people, but at the same time, they feel the need of sense of community. And of course, environment and sustainable development is an important aspect for us. Our mission, we create better urban housing, actually means that it's not only about 4 walls and ceilings. It's how we connect to the city, the urban living, how we create services. We want to be the property market frontrunner and the #1 choice of the customer. Actually, one of the biggest reasons behind the webstore, we are not choosing the customer, the customer is really choosing us. And the strategic focal points, I will come back later in deeper to those, but 1 big strength for our company and our people is that we have the ability to really focus on our focal points and take them to our daily operations. That's the real strength in Kojamo. Our people really work on these focal points. The values are in place. They were made with our employees a couple of years ago, and they're really present in our company, and I'm really, really happy. It's not often that you find a value in a company that strives for success. Actually, it really sounds better in Finnish: [Foreign Language] it really describes our world and the courage to change. We are creating a lot of new things. These strategic focal points, if we take them one by one, they have been present already. But of course, this provides a new color when they are listed here. We want to deliver the best customer experience. Actually, it means easy, effortless living, but a sense of added value. That will back up our ability to create like-for-like growth and might back up some new businesses as well. Operational excellence. We have the saying that it's good to do things right but it's better to do the right things right and then efficiently. We are combining technology. We are ready to grow. And we have the platform ready, mainly the business models ready. But of course, we want to be the leading company and create even better business models. The personnel is important for us. We operate with our own people. So all the most value-adding processes are handled by our own people. We want to be known as a company where there's a corporate culture of dynamic and effective atmosphere. We want to keep well our people and ensure that the competitiveness keeps on going, and we learn the right things for tomorrow. We are focusing on what we should know tomorrow and next year. The strong growth, we are able to grow from different sources. It seems that our concept is strong, and we are able to create a strong like-for-like growth. We are able to provide new development projects, either based on our own land or by buying from construction companies. We have the ability to convert premises into apartments. We will keep on buying existing portfolios and apartment buildings. So actually, we are combining all the aspects at all times. Responsibility and sustainable development. That's something that's always been present here, and ESG matters are a part of our DNA and daily operations. Digitalization, we've been focusing on that already, but it's something that's connected to everything. And we will keep on focusing on digitalization, whether it's the services or the properties, like we today apply artificial intelligence in order to optimize the heating. But it's as well how our business is operated. What's the experience for our employees, how they are providing more value easier, how we are using more and more data in order to be excellent in the business. So it's actually a really big thing, and that's why we wanted to highlight it. The new KPIs for 2020-2023, basically providing still the same strategy and the same future. So we will keep on focusing on growth. We have the ability to grow without asking any new equity. We are combining these different sources, and the annual growth of total revenue, the target is between 4% and 5% a year. So actually that provides still the story that we are ready, willing and able to grow. The annual investments are between EUR 200 million and EUR 400 million. Of course, we are financially really strong, and if we would find a bigger opportunity, we are ready to move fast. But we are not growing at any quarter as we've been saying already, as we've been providing the results. We have increased the requirement of FFO against total revenue. It should be more than 36%. It used to be more than 32%. And the third angle is that our financial figures are strong, and it's the way we handle the risks. So we still want to keep the loan-to-value under 50% and the equity ratio above 40%. And of course, the customer is really important for us, and still, the net promoter score target is 40%. So it's still the same kind of setup of different angles but providing the same story that we are still growing and creating profitable growth. Looking forward the outlook and of course then the dividend policy, we estimate that during this year, the revenue will increase between 2% and 6%, and the FFO will be between EUR 142 million and EUR 156 million. So this is how it looks at this point of time. And then the Board of Directors proposes to the Annual General Meeting a dividend of EUR 0.35 per share, and that's well in line with our dividend policy. The dividend policy has been that we -- the dividend will be 60% of the FFO provided that the equity ratio -- sorry, I said wrong. It's EUR 0.34 per share. But the dividend policy is 60% of the FFO provided that EBIT ratio is more than 40%. And to wrap it up, last year, we are really happy. No surprises in line with our expectations, and with our strategy, we were able to create strong like-for-like growth of 2.7%. We were able to improve the occupancy, and we were able to strengthen our pipeline for new development projects. And of course, we provided some new color concerning our strategy. At this point, I thank you, and move it back to Maija.

Thank you. Now we have time for questions, and let's take first questions from here. Let's start with Anssi.

Anssi Kiviniemi from SEB. A couple of questions from my side. First of all, you were highlighting for a strong pipeline in new projects. Were you referring to units under construction? Or were you referring to something that is beyond that?

I was referring what's going on. So the number of apartments under construction combined with the actual knowledge of the 2 deals made with Hausia and SRV. So still 816 apartments already coming. And of course, we are under discussion with all the construction company, but that's business as usual.

Good. On your new strategy, I didn't see a word Finland in the strategy. So does it mean that you're open to other markets? Or is Finland still the place you want to be?

I would say that neither the old strategy had the word Finland. So there are no changes. We are still here in Finland, focusing in Finland and the growth centers in Finland.

That's pretty clear. Then on perhaps the transaction market, we are still waiting the pipeline to fill in. So what's the transaction market like currently?

There's been a lot of interest towards the Finnish resi market as we all know. We've been scanning several portfolios. We were able to buy 260 apartments, basically off-market deals last year. We were really happy. We are scanning the market all the time, and I see no problem why we shouldn't be able to keep on track with our strategy. We've been saying that on average we are trying to find 500 apartments of existing apartments from the market. So that's doable.

Then the last one, could you please give the fair value gain from the valuation method change? You didn't highlight it in the report.

I think we highlighted it in the report actually. It's approximately EUR 800 million.

Okay. Approximately.

Yes.

Svante Krokfors, Nordea. First question is about the strategy. You used to have volume targets also. Now you don't have regarding number of apartments and the value of -- does that mean that you could also consider selling apartments or portfolios if that comes?

Actually, we have already provided color. That disposal part of the strategy has been in a big picture completed, and we have been successful in focusing to the main growth centers. I think that we have the ability to combine different approaches. And as last year, it was visible that some of the investors are worried if you provide exact figures, that this should be 500 apartments, and we are flexible. If we find more than 1,000 apartments to buy, we will buy. If we find suitable new building projects more, we move to that. So we are combining. We are optimizing the situation. But we are creating growth and the growth becomes visible in the total turnover growth.

So I assume the answer is that you are not considering selling anything even if somebody would pay a good price?

As I said, the disposal part in the big picture is over. But of course, we are a rational, professional investor. And also in the future, it might be sensible to sell some of the properties as we invest more in order to improve the average quality of the portfolio in some location.

Okay. And second question, about the dividend. Might be the wrong forum to ask the question, but given that your balance sheet has strengthened very much, you paid basically the very low end of your dividend policy. Do you have any comments on that?

I think that the dividend policy is in place, and the [ instructions ] from the Board of Directors is in line with the dividend policy. Our numbers are strong and provide headroom for us to move on if we find something that's appealing.

[indiscernible], Handelsbanken. Did I understand correctly: You're not having on the growth target, kind of the old 38,000 apartments is now withdrawn? So it's more of annual investments that you are targeting for?

We wanted to provide new kind of color, but as we are growing, we will hit the number 38,000 as well. Probably some more in the future as well.

Had the leverage target -- you remain kind of on the below-50 level on the leverage target, and that creates some uncertainty as the buffer is so wide currently if, for example, looking from the rating agency perspective, which they highlighted. Can you estimate something or give us some kind of color on the level of the current LTV, kind of 40, 40.5, whether that's a good proxy when looking ahead? Or how you're thinking now for the coming investments?

We haven't changed the target for LTV and equity ratio. And Moody's has actually commented that these value chains and the impact of value chain is credit positive, but they were not ready to change the rating. Yes, our figure currently is very strong, and that gives us a buffer for our levels, what's required by the rating agency for the current rating. We are very pleased with the current rating. It's a good combination actually, this equity ratio and loan-to-value targets. What we think that plays for equity investors and what we think that the finance providers would like to see, and this current rating, what we have in place is Baa2, stable outlook from Moody's. That seems to underline the fact that it plays for debt finance providers as well. We are happy with these figures. Yes, we have a buffer. And then for us, it means that we have, from that angle as well, capacity to growth if we find something suitable to acquire.