Lumo Kodit Oyj (LUMO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Kojamo's Interim Report of January-September's News conference. My name is Maija Hongas, and I'm Manager of Investor Relations here at Kojamo. I have a pleasure to welcome our CFO, Erik Hjelt, and CEO, Jani Nieminen, to present our results in a second. But first of all, it's good to mention that after the presentation, we have time for questions. As we are able to host guests today as live, we'll be taking the questions first from the room and after that from the conference call line. And final questions will be taken from the chat. But without further ado, the stage is your, Jani.

Good morning. Nice to be here and provide color on Kojamo's Q3 results, as we've been saying prior, this year has been in line with our expectations. COVID-19 pandemic has had a temporary impact to urbanization and rental apartment markets. We have seen that our occupancy is temporarily lower. And because of that, like-for-like growth has been flat. During the summer, Delta variant and so-called fourth wave of COVID-19 created uncertainty for sufficient vaccination level. As it now seems, this 80% vaccination level will be reached during the next couple of days or at least weeks. Already, we have seen that rental apartment market has been returning back to basically normal in Turku and Tampere regions. Here in Helsinki region, we have seen this impact of uncertainty even though since August we have witnessed a rapid increase with open job opportunities and lack of workforce, especially in service industries, so a positive indication that as soon as vaccination level will be reached and this uncertainty level goes a bit down, urbanization will continue towards Helsinki region, and we do estimate that long-term mega-trends creating demand for new rental apartments in the biggest cities are still valid. Moving towards the operational environment, it's easy to say that since last spring, Finnish economy has been recovering well despite of pandemic. And on the other hand, we witnessed during the summer, a rapid increase concerning construction cost, even though there has been this increased construction volumes have been picking up speed. So I mean, the number of new residential start-ups. And we have seen that there is an increasing number of build-to-sell projects. At this point, it's good to keep in mind that all projects under construction here in Kojamo have a fixed pricing. So this construction cost increase has no impact towards our net initial yields. In the market, otherwise, what we've seen is that a lot of homebuyers have been moving. There is an increase concerning all dwellings, of course, big regional differences, and micro-location differences. We see that low-interest rates and consumer confidence high-level is backing up this home buying. On the other hand, what has been happening and we still estimate forward is that rents are still going up between 1.7% to 1.8% in the market. Moving to Page 5. So as I said, we do believe that and estimate that long-term mega-trends creating demand for rental apartments in the biggest cities are still valid. There will be an increasing number of small households, meaning one and two person households, and they do typically live in rental apartments. Urbanization will continue according to MDI estimates done in the summer. What will happen here in Finland is that urbanization will continue in all three scenarios they provided. In the market, otherwise, what we have seen is that there is still a lot of interest towards Finnish rental apartment market from international investors. There have been several transactions made this year, typically all done by international players, some ongoing portfolio processes, and it seems that the yields paid are quite aggressive. And on the right-hand bottom side, we see that this megatrend is creating the atmosphere and people's values towards rental apartments have been still same. So in all the big cities, the number of households living in rental apartments has been all the time increasing. And for example, in Helsinki, Turku, and Tampere, half of the households today live in rental apartments. Moving to Page 6, concerning the operational environment, as I said, COVID-19 has caused a discontinuity to urbanization, especially here in Helsinki region, where we see positive signs since August, those job opportunities they started picking up speed, and there's a lack of working force, and as soon as these restrictions will be removed, and we have this sufficient vaccination level that is estimated to have a positive impact towards urbanization. There has been now a higher number of build-to-sell projects and construction volume seems to be picking up speed towards the end of this year. On the other hand, its focusing towards the biggest cities, and most important part there is that it seems that a bigger portion of those start-ups are really build-to-sell projects and estimates are that this increase in construction volumes seems to be leveling off next year. Of course, increasing construction costs and the amount of materials available could hurt the volumes in a short time as well and bring down the high volumes. Digging a bit deeper to our Q3 figures. We are still providing profitable growth. Our total revenue grew by 1.8%. Two elements there, most of all, important is that we are still completing a lot of apartments this year than last year. That provides growth. On the other hand, we have been quite systematic with our renting processes. So even though like-for-like growth was flat, we have been increasing our like-for-like rents by 2.1%. Net rental income EUR 196.7 million was improved by 1.5% comparing the comparison period. Some comments there still valid the same reason. So we did have a cold winter last winter with a lot of snow. We have been having a higher intensity in cleaning because of COVID-19. On the other hand, we have slightly less repairs. FFO improved by 1.1%. The fair value of investment properties today is EUR 7.6 billion is because of our strong growth combined with the positive change in fair values this year. Gross investments EUR 258.1 million this year, so far, are mostly new development projects. The amount there invested is EUR 228.9 million. As I said, we are still providing profitable growth. So profit excluding changes in fair value, EUR 131.9 million was improved from corresponding period by 6.4%. And then profit before tax is EUR 616 million. There's, of course, the impact of changes in fair values of investment properties, that amount is EUR 484.1 million. Moving to Page 8, we are providing strong growth. We have been so far this year, completing 820 apartments, started 818 apartments. At the moment, we have 2,624 apartments under construction. All projects located here in Helsinki region. So we do have a really strong pipeline providing future growth. All the locations are here in Helsinki region at the moment, having an excellent micro-location, close to public transportation, close to services. The net initial yields still concerning our projects under development is either 4% or above 4%. So actually, it means that we are still providing a really strong development gain as well as those projects will be completed. And even though there has been this cost increase, all our projects do have fixed pricing as well, the binding agreements with construction companies providing additional 800 apartments. So the cost increase risk is carried by construction companies. Moving to Page 10. Not much additional new color on so-called Metropolia properties other than the first projects we are getting ready to start those projects hopefully later this year, meaning Abrahaminkatu 1, Agricolankatu 1, and then the zoning should be completed, concerning Albertinkatu 40, and Eerikinkatu 36, so so-called, then some small delays because of municipality decision-making and the zoning process with a couple of projects. By next year, we hope that we are able to start most of the projects. A couple of words concerning our way of operating. We are providing additional value for our customers. We have the platform in place, providing a lot of services. Customers still really happy with our way of providing customer experience. So actually, for example, the Net Promoter Score concerning our digital services is 63 and roughly 70% of our customers are using so-called [ Myeloma ] services. So mobile, digital services, you are able to take care of your daily issues, ordering services, and get a lot of information from us. What we have seen happening in a customer base is slight changes. Students were active in the market in the summer. So actually, there's an increase of 1percent point with customers below 25 years. And on the other hand, a 1percent point increase with one person households. On the other hand, a slight decrease concerning one person, single-parent households. So 1 percent points there changed downwards. Sustainability plays an important role for Kojamo. We have always said that it's a part of our DNA. Sustainability work is proceeding nicely. Our GRESB score improved by seven points, and we earned three stars. We also achieved the highest A level rating concerning public disclosure assessment, and EPRA gave us Silver award concerning sustainability reporting. We are moving with our sustainability road map, providing by 2030, all our properties with zero carbon. Already today, we are using no carbon electricity in all our properties. At this point, I would pass the word to Erik. Please, Erik.

Thank you, Jani, and good morning, everybody, from my side as well. So Page 14, our top line grew by EUR 5.2 million year-to-date. And the growth in -- during the Q3 was EUR 1.8 million. And as Jani mentioned, the like-for-like was flat, but 2.1% positive impact for rents and what charges increases, occupancy rate, minus 2% impact and then others minus 0.2%. So the growth was driven pretty much by the growth of the property portfolio. Net rental income grew EUR 2.9 million, and the growth during the Q3 was actually EUR 3.3 million. Maintenance, year-to-date, EUR 3.9 million higher than in corresponding period. But it's good to note that during Q1, the weather played a role there. So the heating as now together was more than EUR 2 million higher than in corresponding periods and then COVID-19 related items, so cleaning and water consumption of more than EUR 1 million higher than corresponding period. So maintenance cost during Q3 was actually flat. And repairs, EUR 1.4 million lower than in corresponding period. Page 15. So the profit, excluding changing values, up by EUR 7.9 million. And the whole year change in fair values, Pacific, EUR616 million. During Q3, the increase was EUR 17.9 million. We kept yield environments unchanged during Q3, and there was no ending restriction during Q3. So the positive impact was pretty much due to the development gain from the finalized developments. So we are still above this budgeted 20% development gain level. So FFO up by EUR 1.2 million during Q3. FFO was EUR 45 million growth there, EUR 3 million. Net rental income contributed EUR 2.9 million. SG&A expenses was EUR 1.6 million lower than in corresponding periods. We achieved some savings during the COVID-19. Financial expenses, up by EUR 2.7 million. And the reason behind that is that the loan portfolio is much bigger than in the corresponding period. Cash taxes reflecting, of course, the better result, so up EUR 1.9 million from the corresponding period. The formula used the calculation was changed during the review period regarding the current taxes of disposals. And of course, comparison figures was adjusted, respectively. Previously, actually, we excluding the loss and profit from sale on investment properties from the calculation, but we included the cash taxes on the property disposals, and we received feedback from the special international investors that it's not balance situation that we should actually exclude both items, and that's what we changed now. And the timing for that change was good because it has no material impact for comparison figures. Page 16. Financial occupancy rate, as Jani mentioned, the uncertainty is related to vaccination and removing existing restrictions was delayed in the -- my question towards the Helsinki region, we already seen improvement in our occupancy rate figures in Turku and Tampere. I think we already covered that like-for-like. So Page 18, our investments, EUR 258.1 million, by far, the biggest portion there are developments. Modernization investments, EUR 7.7 million, and capitalized borrowing cost of EUR 4.2 million. Repairs, EUR 1.4 million less than in corresponding periods, modernization investments at EUR 12.4 million, less than in corresponding periods. That's a decline in modernization investments is pretty much a timing issue. So we haven't started any bigger projects during Q3 or Q2 actually, and that plays a role. So it's a pretty much timing question. Page 19. Fair value investment properties, up by the year-end, EUR 743.6 million, investments EUR 260 million, and profit on fair value of investor properties EUR 484 million. We still have 2,127 apartments where we have restrictions regarding evaluation, and those restrictions will gradually end by 2024, and there's going to be an uplift in value between EUR 140 million and EUR 160 million. And the ending restriction is back weighted. Page '20. So we have already invested EUR 411.9 million for apartments under construction and EUR 233 million to be invested to complete those ongoing developments, providing 2,624 apartments, filing agreements, EUR 163.4 million to be invested to provide 796 apartments. And top of that, we have, of course, this Metropolia portfolio and land, and existing properties where the idea is to demolish existing properties and to build -- replace it with a new one. We estimate that the investments in development projects amount to about EUR 350 million to EUR 380 million this year. And all our ongoing developments and land bank located in Helsinki region. Equity ratio and lot of value, Page 21. We have there very strong figures actually. And we are well in line with our strategic targets to have equity ratio above 40% and a lot value below 50%. Page 22, showing strong growth in EPRA NAV, 19.32% at the end of Q3. We have still quite strong capital financial key figures. Average cost of debt 1.8% including cost of derivatives. Hedging ratio quite high, above 90%. Average interest rate and average loan maturities clearly above four years. We didn't make any new financial arrangement during Q3, and there's no need for additional financing this year. Now there's no refinancing needs for actually 2022, or beginning of 2023. There's one EUR 200 million bond that will mature in 2023, but it's not time to do anything actually for that. So no major refinancing needs for a couple years to come. We are quite cash rich. So cash and cash equivalents and financial assets together more than EUR 380 million. Credit lines committed unused EUR 300 million and commercial program EUR 250 million, EUR 50 million outstanding commercial papers at the end of Q3. Page 24, cover notes regarding our strategic KPIs. So top line growth 1.8%, investments, EUR 258 million, FFO against total revenue above 39%, so clearly, above our 36% target. And we still have property taxes allocated -- calculated already in these figures. So the Q4 portion of whole year's property taxes is EUR 2.75 million. Loan-to-value equity ratio, well in line with our target, as already discussed, Net Promoter Score 20. Here it's good to note that our digital NPS is 63, and it's not included in this figure. And although this NPS figure such has come down during this year, so the all questions regarding customer satisfaction has actually improved during this year. And then we have noted that this coming down of NPS is quite universal phenomenon across the board. Page 26, our outlook unchanged. So we estimate that top line growth will be between 2% and 4% and FFO between EUR 150 million and EUR 158 million. So there has been a delay in lifting COVID-19 restrictions affecting the rate of migration. And that, of course, plays a role there for the top line, and that's why we estimate that we will hit the lower end of that top line range. Key consideration regarding FFO is, of course, top line development plays a role there. Weather during Q4 is going to be -- play a role there. Repair, the timing of repair projects will play a role there. And we don't need any additional financing for remaining part of this year. And it's good to keep in mind that there are some seasonalities regarding the maintenance cost. Of course, they are mainly related together. Dividend policy, Page 27, no changes there. So the dividend policy is to pay at least 60% of FFO provided group's equity ratio is above 40%. Now, I hand it over to Jani.

Thank you, Eric. In a way, to summarize, it's easy to say that strategy-wise, we have been still proceeding systematically, creating growth. And we do have a strong project portfolio, creating future growth. Long-term trends creating demand for new rental apartments are still valid, and we estimate that urbanization will continue in the future as well, creating this demand for new homes. And at this point, I would pass it to Maija.

Thank you very much for the presentation. And now it's time for questions. And first, we'll be taking questions here from the room.

A couple of questions. First, regarding relatively high level of completions of and coming completions of new rental apartments in the Helsinki area, a lot of build-to-sell properties. Do you see -- what kind of challenges do you see in being able to maintain the 2% to 2.5% rent increase?

I would say, we do estimate that as soon this uncertainty concerning what's the right level of vaccination and whether restrictions will remain or will be removed, will come down. People will be starting to move towards Helsinki as there is already a lot of job alternatives available. So we estimate that demand will be growing. On the other hand, even though there are more build-to-sell projects, as I said, in a customer base, what we have seen that, for example, the number of one person households moving to Lumo Homes has been increasing. So there is a strong underlying demand for rental apartments.

Okay. And then regarding your occupancy rate, it has been quite -- before the pandemic, quite stable at around 97%. Is that still the target long-term that you expect to stay at? I think your -- in your valuation calculations, it's slightly higher. Do you have any comments on that?

To provide some color there, valuation-wise, there are estimates concerning occupancy with different estimates concerning different parts of Finland. We do believe that we are going back to our normal levels in the coming years. So 97% is to be expected in the long run. On the other hand, as I said, we have already seen that things are back to so-called normal in Turku and Tampere.

Thanks, and then you took down a bit the full year investment level from the previous EUR 370 million to EUR 420 million, now EUR 350 to EUR 308 million. Does this relate in any way to the -- perhaps not immediately, the cost inflation? But how do you also look at the current high cost level? Is that something that could postpone your decisions to make new investment decisions?

I would say that basically, Erik can provide deeper color, but it's more a question of timing. These kind of situations with rapid cost increases have been happening before as well. For example, two to three years ago, we provided information already then that when the market gets tough, we are good. We are able to find different solutions, different approaches., if needed. We are still working on a daily basis in order to find new projects and we do believe that we are still able to find new projects according to our parameters, even though we know that we are quite systematic and hard with our parameters.

Thanks. And I think Erik alluded to it, but the development gains you're achieving is still closer to 30% and 25%, is that correct?

That's correct.

There was a last question regarding -- I mean, you had a big value uplift in Q2. You say that there's some transactions possibly going on. Could you just specify a bit what were the transactions in Q2 that impacted you the most? And what sort of portfolios are out in the market now?

As I said, already after H1, there was a couple of transactions completed, and we know that there are some ongoing processes without going to specify project by project, what we have seen is that yields have been three and a really low figure.

Have you already seen yields starting with a two?

I guess that part remains to be seen, but hitting flat three has been happening already.

Okay. Thank you. That's all for me.

And then we will move to questions from the conference call line. So please, operator. We're ready.

[Operator Instructions] Our first question comes from the line of Celine Huynh of Barclays.

I have two questions, one on occupancy. Can you break down the occupancy rate that you've disclosed? What was the like-for-like move? And what is the vacancy due to new development? I just want to understand if your occupancy rate is improving on a like-for-like basis? And then my second question, on the recent announcement. Any comments on the new large shareholder? Have you spoken to them? Do you know if they intend to do something differently in terms of stay? Any color on really?

So the like-for-like growth was negative 0.1%. And there's three components actually included in that figure. So the increase in rents and water charges was a positive figure 2.1%. The impact of occupancy was negative 2%. And then other items was negative 0.2%. And your next question, yes. Yes, we have received the flagging notification from the Heimstaden that they currently hold a little more than 10% of the Kojamo's shares, and we discuss with them as with any shareholders.

Can you provide a bit of color on it? What was the discussion about?

Well, we discussed with them -- we discussed them with any other shareholders. So there's actually nothing more to be at at this point.

Our next question comes from the line of Erik Granstrom of Carnegie.

Thank you. I also would like to talk a little bit about sort of what you're seeing in the market. You keep mentioning the fact that there is quite substantial interest in the direct market for residential rentals with yields coming down towards 3% flat. You obviously have higher requirements than that on your books is, technically, how long do you think that the sort of lag between what we're seeing in the transactions market is going to trickle through into your numbers? And secondly, do you see a large difference in yield requirements in portfolios depending upon where these assets are located in Finland?

Of course, there are some differences between yields depending on the location and the age of the building concerning those portfolio transactions. But in my eyes, it seems that this range seems to be narrowing. Concerning valuation, we do believe that our valuation has been done, as always, in appropriate manner, providing correct information. There, it's good to keep in mind that valuation is always done property-by-property specified deals. What we have seen in the market is that investors are willing to pay a portfolio premium. Valuation will be done next time at the end of this year by an outside expert. So we don't provide any guidance or any color of what might happen or what will not happen, but that part remains to be seen.

Okay. Good. And then my final question was regarding the fact that you mentioned you had fixed contracts with your entrepreneur -- the -- basically the construction companies of your projects. But have you seen any of your contractors run into financial issues due to cost increases? Because it's one thing to have the cost fixed, that works as long as the contractor is still around. But if a smaller contractor can't handle the cost inflation and goes bankrupt, obviously, you're going to end up in a, quite a core, situation. Have you seen any situation like that at all?

No. All our projects are proceeding in a normal manner. Of course, we are a professional buyer. We are following all construction companies continuously. Risk wise, we do have good companies providing us new home. So it seems everything is okay there.

Okay. And my final question then regards like-for-like development. Given how you're guiding for the full year, it seems like like-for-like development in Q4 is going to be quite similar to Q3. And given your expectations for moving into next year, could you give some more guidance as to what you expect in terms of like-for-like for next year, given the scenario that you have for vaccination and housing key development in general?

So far, we haven't provided any guidance for 2022, but we've been providing information that mid-to-long term, we are able to provide like-for-like growth between 2.1% to 2.45%, and that's still our estimate. So that's a combination of both our capability to increase rents and then the positive impact when urbanization continues and occupancy increases.

Our next question comes from the line of Andres Toome of Green Street Advisors.

I was just wondering, maybe you can provide some more color on the rental market development in general in Helsinki. What are you seeing in terms of leasing volumes at the moment as you've gone through the recent months? And as you'll recall that from previous quarter, you mentioned that the rental volumes generally are higher than 2019 levels. I'm just wondering how kind of that leasing momentum will translate into your occupancy going forward.

Yes. Thank you for the question. Yes, we did provide color of the H1 results that what we saw during July was record high number of new tenant agreements because it was true. We saw a lot of students moving towards the university cities. Leasing numbers have been quite strong this autumn. So we are quite happy and looking with a positive mindset towards future.

And at the moment, and in autumn, they are also above 2019 levels? Or how do they compare?

They are a bit above 2019 levels.

Okay. Understood. And then my final question about Heimstaden as well. I'm just wondering would the Board of Kojamo even entertain an offer if something were to put on the table? And also curious, has Heimstaden's move prompted a dialogue with any other interested parties essentially?

I would say that this type of questions concerning Kojamo's shareholders for me as a company CEO have been present throughout years from different angles, and it's good to keep in mind that as Kojamo's CEO, I do not comment on questions relating to company's ownership as it falls within the remit of the Board, which also has been never been our practice to generate comment on changes in the company's ownership. So as a CEO, all the owners are always good ones, and we are always happy with our owners. And further questions concerning board decision-making should be provided to the Board or the Chairman of the Board.

We currently have one further question in the queue. [Operator Instructions] Our next question comes from the line of Oliver Carruthers at Goldman Sachs.

So in your portfolio appraisal disclosure, there is a capital region market rental assumption of EUR 19 per square meter. However, I look today on your Lumo webstore, I struggled to find anything less than EUR 23 per square meter around Helsinki. And it seems like the average of what's available is much higher than this. Can you first comment on where the average in-place rents are today for your Helsinki region portfolio? And secondly, if you are right and migration to Helsinki does resurge over the next 12 months, how positive do you think this could be for the market rental impact?

So thanks for the question. So it's actually a tricky one because there's so huge variation. So it depends which part of the Helsinki region you are, whether the building is a new one, an old one, whether you are on a first floor or on top four. So we've seen rents in our portfolio in Helsinki region somewhere between EUR 20 and high is actually above EUR 30 per square meter per month. So when we do renting and when we do look what are the rent increases every month, so we look -- we price them apartment by apartment. And we look what are the prices in the market. And of course, we are able to set the prices higher given the strong brand name and services and stuff like that. So it varies. It depends which property we are talking about.

But the in-place level for your portfolio today, are you able to give that disclosure?

So we need to look whether we are going to add some disclosures. So we think that currently, we are quite visible in our figures, but we need to discuss internally whether we should add something actually.

Yes. But then on the other hand, yes, it's good to keep in mind that all our tenant agreements include a clause with -- which allows us to increase the rents once a year with index plus maximum 5 percent points. So we do have quite a good headroom to move with the rent levels if we see that markets are changing.

And currently, we have no further questions on the phone lines.

Thank you very much. Then we will continue with the questions from the chat. The first question, we actually have already discussed regarding Heimstaden. But the next question is the increased payable tax ratio, can you please comment on the payable tax in Q3? Also, what are the tax relating divestment adjustment in the FFO calculation?

We still estimate that the cash tax rate will be somewhere between 11a% and 13% going forward given the fact that we are able to use depreciation in our portfolio, and we have quite large tax there. So that's pretty much going forward. In the FFO calculation, the figures added in the calculation is related to how we change the -- how we calculate the FFO. So now previously, we excluded the profit and loss of sale of investment properties out of the FFO calculation, but we included the cash taxes due to the disposal of properties. And we received a lot of feedback from international investors, especially that it's not balanced, so we should exclude both items, and that's what we changed and now it's visible in that calculation.

And then the final question, the occupancy rate in the Helsinki region of a 93.6%, how does this stand versus market levels? And how does the competitive landscape on rental levels hold up in the region?

We have to keep in mind that a lot of the supply is provided by individuals owning a couple or several apartments. They don't provide any information concerning occupancy levels. Comparing to big players, we are doing good. And market seems to be improving. So as I said, it seems that rents are still improving or increasing between 1.7%, 1.8%.

Thank you very much. Do we still -- yes, we have one additional question from the room, so we'll take that one next.

One final question regarding your -- you mentioned that there's some yield narrowing between good and not-so-good locations. What's that the consequence of it? Is it that you have a lot of international investors who have done a DD on Finland as a market and just don't get hold of any good portfolios and kind of want to look also outside the locations?

Yes. I think that's a typical impact when there is a lot of money, looking for investment opportunities. And on the other hand, not enough opportunities available, and hard competition. So that typically narrows down the range.

Do you expect that to continue?

If there's not enough portfolios available that could continue. So it's typical that buyers are looking for A class properties. If they are not able to find, they're moving to B, then to C because as we know, there's a lot of money in the world at the moment, seeking for opportunities.

Okay. Thank you very much for participating in our event today. And our full year report will be published on the 17th of February. So we hope to see you all then. Thank you very much.