Lumo Kodit Oyj (LUMO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Kojamo's Full Year Results News Conference. My name is Niina Saarto. I'm responsible for Investor Relations. Our CEO, Jani Nieminen; and CFO, Erik Hjelt, will shortly present last year's figures and also give outlook for this year. After their presentation, you will have a chance to ask questions. We will take first questions from the phone line and then from the chat. But now we can start. Jani, I would like to invite you over here.

Thank you, Niina. Good morning. I'll start by saying, it's always nice to be here, providing some color concerning Kojamo operations. Today, we start by providing a bit of color what's been going on last year, what's the operational environment and what's the summary in my eyes. Then Erik as the CFO, will provide a bit more detailed color concerning the financial development. Last year, I would say -- good starting point is that we actually had a really strong year with our strategic targets. All the key figures are really well in line with our strategic targets. Operationally, our numbers are solid, and we created profitable growth. On the other hand, it's easy to say that 2022 can be seen from 2 standpoints. On the other hand, as COVID-19 restrictions were lifted, urbanization continued during the summer, and that had a positive impact and a positive turn in the occupancy towards the year-end. On the other hand, of course, Russian innovation to Ukraine has had a negative impact to the operational environment. Inflation has been increasing. Interest levels have been increasing, and that has been impacting the operation. As we've been saying, we have been stopping temporarily our new investments. On the other hand, this new environment had as well as an impact on our valuation of investment properties. That is good to keep in mind that, actually, it's now based on environmental factors, not actual deals done in the market. In this environment, it's been really a positive and important thing that our balance sheet is strong. We have been using all time multiple sources for financing. Our hedging ratio has been high, and because of that, the impact of interest levels increasing, has been really limited. Then moving forward to the operational environment. It is to say that the big outlook in the global economy at the moment is blake and cloudy. Mild recession might come. On the other hand, here in Finland -- it's good to keep in mind that on the other hand, we see a really low consumer confidence. On the other hand, still, the employment situation remains really good. And on the other hand, I would say, it's good to keep in mind that, typically, when consumer confidence goes down, it has a really quick impact to housing sales, so owner-occupied market, and sooner or later, a positive impact towards rental homes and rental demand. If we look at the industry key figures, residential start-ups, there has been a rapid softening in the market. They've been sharply going down, the number of new startups. Still no exact figure from last year, but I would say, clearly below 40,000 apartments have been started last year. Official estimates still for this year, for residential start-ups, 36,000 apartments. I would say, I would be surprised if the first number will not be too -- So clearly below 30,000 apartments here in Finland will be started this year. And of course, that will have an impact towards the coming supplies turning 2024. Construction increases, cost increases have been leveling off. Of course, there are some materials still increasing like concrete. On the other hand, sharply falling volume should, and will impact this material cost and bring the construction cost down. But, as we've been seeing in the market, Kojamo is not investing in new construction cases, and neither are -- the construction company is actually starting any build-to-sell projects. Operational environment. We've been saying all the time throughout COV1D-9 that we see the temporary impact towards urbanization. Starting last year during the summer, we have seen that urbanization is continuing. And, actually, according to the latest estimates, the biggest cities had a positive net migration, actually, the top 10 cities which grew last year through net migration, where -- the places where Kojamo has rental apartments and where Kojamo invest, so capital region there, the biggest growing part of Finland then, Turku and Tampere as well. So mega trends still valid. Urbanization creating long-term demand in the market. On the other hand, we do see still an increasing number of small households, meaning 1 or 2 person households, and they tend to typically live in rental apartments. Even though they are not the latest statistic concerning 2022, it's been the same trend throughout the last 10 years, that the portion of households living in rental apartments have been increasing every year in the biggest cities. And it's good to keep in mind that, even though people tend to think that Finland is owner-occupied homes country in cities like Helsinki, Turku and Tampere, but actually more households live in rental apartments than in owner-occupied homes. As I said, urbanization -- talking about Page 7. Urbanization started to continue. I checked out the latest estimate from statistics Finland. So the pure net migration in Helsinki, Vantaa as per last year was 15,600 people. And so the population growth has been bigger. Residential start-ups volumes have been coming down and, actually will decrease this year. And if we look at the chart on the bottom left-hand corner, I tend to believe that we are going 10 years back in the time, meaning the volumes of 2013 or 2014, and that will have an impact in the residential markets turning 2024. A really limited new supply coming to the market starting 2024, and that will, of course, create the possibility to increase the rents, as the demand is growing and the supply is going down sharply in the market. Home buyers have been really careful according to the market information -- is down 80%. So basically, construction companies don't have the capability to start up any build-to-sell projects. Home buyers are really careful. They either stay put in their current home, but now the interest levels are increasing. And on the other hand -- and the owner of occupied buildings, the maintenance increases are facing the inhabitants during this spring, and that will create pressure in owner-occupied apartments. And in that sense, actually, rental apartments are becoming more and more competitive. As I said, our operational key figures were strong. We were able to create total revenue growth by 5.5%, ending up to EUR 413 million. That's a combination of 3 aspects. At the end of 2022, we were able to create positive like-for-like growth. We made an acquisition of 1,000 apartments roughly last year. And then, of course, we've been completing new apartments, both last year and 2021, and apartments completed 2021 have been providing revenues in the full year last year. And then, of course, close to 1,400 apartments completed last year created revenue growth. That provided a positive starting point for the net rental income, and there, the increase was 6.8%. So profitable growth. If we compare net rental margins, 2022, it was 67.8%, as the comparison year was 67%. Some aspects there, of course, maintenance cost increases there. Because of the electricity prices there, the impact was EUR 1.4 million; then heating EUR 1.3 million increase; and property tax is a bit more than EUR 0.5 million; and then some cost savings concerning repairs. And then, funds from operations, we were able to increase by 5%. Of course, we do have a slightly bigger loan portfolio, for example, there. Record high gross investments, EUR 501 million. It's a combination of new development projects that provided investments of EUR 270 million. Then, quite a large acquisition after some years. We were able to find a portfolio matching our parameters, and then, of course, modernization investments. So these are the 3 topics there. Fair value of investment property is now EUR 8.2 million -- EUR 8.2 billion. There, of course, a positive impact because of the gross investments of EUR 500 million. On the other hand, because of the inflation and interest level environment, there was a yield requirement change in the valuation, and that created a negative impact of EUR 682 million, and that's how we ended up with EUR 8.2 billion. Profit, excluding changes in value, strong performance there, EUR 182 million improvement by 5.2%. And then, because of these changes in value of investment properties, the profit before taxes is now EUR 500 million negative this year. There is good to keep in mind that a year ago, the comparison figure was EUR 1.1 billion positive. We've been following the market and proceeding with our strategy really consistently throughout the years. We were able to find a portfolio matching our parameters last year. So we acquired 985 apartments and completed 1,300 apartments. On the other hand, we already saw during the first part of the year, the change in operational environment were a bit more demanding with our parameters. And then, as we move towards this autumn, we stopped making new investment decisions. That's why we started 477 apartments last year. And today, we have under construction, 1,800 apartments. Concerning those 1,800 apartments under construction, it's good to keep in mind that we still have really good development gains. They vary between 15% and 20% as we complete those projects. All the projects are proceeding as planned. All the projects have fixed pricing and excellent micro locations. One project in Turku, one project in Tampere, and all the other projects located here in capital region. A couple of examples of buildings we've been completing and apartments we've been completing during Q4 last year. For example, Tenderinlenkki in Pasila, close to Mall Tripla [ building ] project, Vantaan Pyhtaankorventie close to airport, and then, Ruukkupolku in Myyrmaki. For us, it's been all the time important that, in our strategy, we want to be customers' #1 choice, and we do believe in creating added value for our customers by combining apartments, common spaces and services provided digitally or physically. We've been providing new services now. For example, our potential customers are helped by AI-based apartment agent that helps you to find a new home, a Lumo home, according to your parameters and your wishes. On the other hand, as we see this operational [ more or less ] strategy really important, we made some changes in the management team and management team responsibilities. We combined a new task for Chief Experience Officer taking care of customer experience, customer insight and data, so customer understanding, creating the concept of Lumo, and then combining that to marketing and communication. We will continue on creating new services for our customers and creating added value for our customers. And now as we move forward, Erik will join and provide more detailed color. Here is a good example what Kojamo can provide for our customers. A building -- Annankatu 5 building was originally built in 1885, totally renovated 2021. Completed. Sad to say that today no vacant apartments there, but the building is superb. Thank you.

Thank you, Jani, and good morning, everybody, from my side as well. So Page 14. Our top line growth was EUR 21.6 million, and the like-for-like rental growth turned positive during Q4, so 0.3%. Rents and water charges increases contributed 2.2% positive figure. Occupancy rate negative 1.9%, and other 0.1%. Last year, we acquired this portfolio June, and that contributed EUR 4 million for the top line last year. So the growth in top line came through pretty much, thanks to those completed apartments -- so 2022 completed apartments. And of course, second half of 2021, completed apartments later on there as well. Our net rental income growth was EUR 17.8 million. Maintenance expenses up by 6.2%, and main growing items there, as Jani already mentioned, electricity, heating, water and property taxes. If you look maintenance expenses euros per square meter per month, there the growth was 2.2%. So the growing portfolio of course, played a role there. And repairs were down EUR 2.2 million. So Page 15. If we first look the change in fair values, looking backwards, it's good to note that, during 2018 -- 2021, the profit in change in fair value on investment properties was EUR 2.8 billion, and now the loss, EUR 682 million. So the net is still positive, more than EUR 2.1 billion. In theory, the valuation should be made based on evidence from the market. In Finnish property market, there were no major transactions during Q4, and these adapted yields in the valuation is based on opinion of external valuator. And the yield expansion was 0.34%. And now the total portfolio yield is 3.97%. And that, of course, should reflect the current market conditions. If you look profit before taxes, excluding change in fair values, it's good to note that, on the financing expenses side, there was EUR 5.4 million positive impact because of our value changes. Then if you look, FFO up by EUR 7.6 million. Net rental income, of course, the biggest contributor there, EUR 17.10 million. SGA expenses up by EUR 5.8 million, financing expenses up by EUR 4.6 million on the FFO level. And then cash taxes down by EUR 2.8 million. SGA expenses, a couple of notes there. One is that, of course, when we compare the figures for 2021, there were some savings because of the COVID-19. Inflation plays a role there as well. And there, we had some one-off items, if you like, so some external experts used for some transactions. Of course, they [ leave ] us some costs. We test the external sales forces. That, of course, better role there. And then we are renewing our ERP system, and all this plays a role for SGA expenses last year. Finance expenses up because of the bigger loan portfolio of what we have in our balance sheet. Page 16. So our financial occupancy rate for the whole year, cumulative 92% at the end of September. Year-to-date figure was 91.7%. If you look only Q4, there the occupancy rate was already at 93%. And tenant turnover came down by -- at 2.2%, and that reflects on each side as well that -- the restrictions that ended last year. Like-for-like, I think we already covered. So Page 18. Gross investments, EUR 501.6 million. There, of course, the acquisition plays a role and those development process that we completed and that are still ongoing. If you look -- when I say as investments or repairs put together, the growth there is EUR 8.3 million. Repairs down EUR 2.2 million, as already mentioned, and modernization investments up by EUR 10.6 million. So we've been taking good care of all the properties what we have in our portfolio. For the time being, we will make no new investment decision to the uncertainty in the market. So we have a strong balance sheet and we like to keep it that way. And our ongoing project will be completed as agreed, and they are proceeding according to our plans. Page 19, fair value investment properties. Of course, there's these investments on the positive side and then the change in fair value on a negative side. On the right-hand side, we still have 1,680 apartments where we have restrictions regarding the valuation, and those restrictions will gradually end by 2024, and the uplift in the value will be somewhere between EUR 100 million and EUR 110 million. Page 20. If you look at these ongoing developments from the euro perspective, so EUR 293 million already invested and EUR 168 million to be invested in order to complete these ongoing developments. In total, 1,804 apartments, and that includes 119 apartments were under binding agreements. We estimate that the total investment in developments this year will be between EUR 160 million and EUR 190 million. Page 21. Of course, equity ratio and loan-to-value changed slightly because of the value change in property portfolio, but we still have quite sizable buffer against our targets. So the target is to have equity ratio above 40%, and loan-to-value to be below 50%. I feel, if you look only value perspective, so the buffer against this 50% loan-to-value level is EUR 1 billion. So as I said, we have a quite sizable buffer against those levels. A strong balance sheet there. EPRA NRV reflects, of course, the result at the end of last year, EUR 19.53 per share. Our financing position is strong. Our cash position includes EUR 119 million cash and cash equivalents, EUR 104 million financial assets. And on top of that, we have EUR 300 million committed unused credit lines in place. Average cost of financing, EUR 1.9 million, including the cost of derivatives, and the hedging ratio is still quite high, 84%. We don't have any major financing needs for next 12 months. And those maturing loans are pretty much already covered. And at December, we made actually new refinancing, EUR 50 million with Danske Bank unsecured 3 years with 2 -- 1-year extension options unsecured at that point of time. Our strategic KPIs, Page 24. Actually, all of them are in line with our targets. So top line growth, 5.5%; investments, more than EUR 500 million; FFO against total revenue, almost 39%. Loan-to-value, equity ratio is strong, as I said, and in line with our strategy, providing us a large buffer against our target levels, and Net Promoter Score, strong, 45. Then on Page -- next page, we have the outlook for 2023. So we estimate that the top line growth will be between 7% and 10%, and we estimate that the FFO will be between EUR 153 million and EUR 165 million. If you look first, the top line growth outlook, so to hit this 7%, so the lower end of that range, that is covered by increased rents and water charges in a normal manner, acquisitions completed 2022, now contributing top line for the whole year, completed developments 2022 and developments to be completed this year. And then, to get closer to this upper end of that range, of course, that then requires that we will improve our occupancy, and that's, of course, a target for the company. FFO level. That target -- that outlook reflects the top line growth outlook, and there are some, of course, assumptions. So if you look at the midpoint of that FFO range, that requires to have a normal weather for 2023, to increase the maintenance expenses by 10%, and to have repairs in line with figures in 2022. SGA expenses increased according to inflation, cash taxes to remain on the current level between 11% and 13%, and refinancing at the current pricing, current interest environment. So these are assumptions in the midpoint of the FFO target. And then, one additional note that this outlook doesn't take into account the potential premature funding on the Eurobond due 2024, because we don't know the timing on that. We don't know what is the price, when we will renew that one. Dividend policy. So the Board of Director proposes a dividend EUR 0.39 per share, and that's in line with the dividend policy of the company and growth for last year's figure. At this stage, back to Jani.

Thank you, Erik. As to summarize, I would say, as I said earlier, we did have a operationally strong year. We were able to create profitable growth. Both the total revenue and net rental income increased, as well the FFO. For us, it's been all the time important that our balance sheet is strong. And as our CFO, Erik said, there's a significant buffer in our LTV and equity ratio. In the market conditions, there has been a change, and there was a impact concerning the valuation, based on the estimated thinking concerning yield requirements. That's good to keep in mind that, actually, no transactions, so no data from the market. Looking forward in my eyes, it will mean that, in order to make new changes in the values, that would actually need some data from the market. For time being, we will not make any new investment decisions. Of course, all the ongoing projects are proceeding in a normal manner, and we are completing a lot of new homes this year. And it's good to keep in mind that, as housing start-ups have fallen sharply, there will be, looking forward, a really limited number of new supply coming to the residential market starting 2024. And as the supply will go down, that will, of course, provide the opportunities to increase rent levels throughout the market more than this year. Thank you.

So thank you, Jani, and thank you, Erik, for the presentation. We can now start the Q&A part. And as I said, we can take first questions coming from the phone line. Operator, we are ready here.

[Operator Instructions] The next question comes from [ Anssi Raussi ] from SEB.

I have a few questions and I go one by one, and the first one is about your development gains. And I think you mentioned that you're seeing development gains between 15% to 20%. So how do the dynamics and numbers work here? Because I think that you have mentioned that the development yield is around 4% or so. So could you open these numbers a bit?

Yes, I did say that development gains are still solid. They are between 15% to 20%. So they will kick in as we complete those projects. Valuation yields are below our investment yields. The investment yields have been starting by 4%. We've been always saying that they are around 4%, or above 4%. All the projects are located in Helsinki region, except 1 in Turku and 1 in Tampere. So location-wise, excellent micro locations.

So it's fair to assume that the investment yield is above 4%? And I think your capital region yield requirement was around 3.5%. So that's the math behind...

Yes.

This calculation?

And above.

And the next one about your capital allocation. Like, what kind of priorities you have in your capital allocation?

So we decided not to make any new investment decisions. So the investments will be made to complete these ongoing developments. And we haven't really decided when we start to make new developments because it's still unclear where the market is heading and what opportunities there will be. So the -- to complete these ongoing developments is the biggest portion of our spending money this year. And modernization investments and repairs, we estimate to be pretty much in line with what we saw last year's figures.

[Operator Instructions] The next question comes from Erik Granstrom from Carnegie.

I was somehow disconnected, I think, or at least everything was muted. I'm sorry if I'm repeating any of the questions because I can only hear the first part of the Q&A. But I would like to start off by asking, when you mentioned that external evaluators have looked at increasing interest rates rather than transactions, how do you think that they've gone about? Because it seems like they've been fairly even when it comes to the capital region versus the rest of Sweden. How has their thinking been in terms of increasing the yield requirements?

I do believe that they tend to think [ thoroughly ] -- think about different aspects, and now the impact has been starting from the core regions of Helsinki area, so City Centre, Helsinki starting.

And you also believe that they will not do any additional adjustments until you see evidence in the transactions market. Is that correct?

That's how I say this issue -- that now there has been some adjustments, and they have been based on estimates what's going in the market, but we don't have any actual data from the market. So in that sense, I do believe that, in order to make new changes, it would be good to have some kind of data from the market.

And then regarding your guidance, you mentioned that, in order to reach the upper end of the growth guidance, you would need to see some sort of adjustments to the vacancy, and I would assume then also like-for-like rental growth. What kind of numbers do you think that you need in order to reach that 10% for 2023 in terms of occupancy, but also in terms of like-for-like rental development?

If we -- look, these items I mentioned, so increase in rents and water charges, acquisitions made in 2022, completed apartments in 2022 and developments to be completed this year, this alone should take us to the lower end of that range. So improvement in occupancy rate will then take it towards the upper end of that range.

And in order to reach the 10%, what kind of occupancy do you think that you would need?

Well, if we hit 7% without any improvement in the occupancy, so that's -- I'll leave you to do the math.

And in terms -- what -- so far, what have you seen in terms of rent development for this year, in terms of renegotiations? And when you're looking at new leases, when you actually have new tenants moving in, can you say something about what the development has been like with the start of this year?

Yes. Throughout the market, I would say that we have seen in the market rent increases, not as hard as the inflation because there are still quite a lot of new supply in the market, because of the start-ups 2 years ago. Looking forward the year, we are following the market really closely. I would expect that going towards the year-end, and especially to 2024, we will see higher rent increases throughout the market, as there will be a really limited number of new supply. But as I said, throughout the market, rents are going up, not down.

And then also regarding your units under production, you have about 1,800. You will complete about 1,400 this year, and you started about 447, I believe, in '22. You seem to be a little bit still restrictive in terms of starting new projects. Should we expect units under production to continue to decline in 2023 as you complete projects, but do not start new ones? Or is this something that you expect to start new projects in the second half of this year?

At the moment, we don't see us starting new projects. We are not investing at the moment in new development projects.

So your units under production will then sort of fall with the completion of the ongoing production?

Yes, as it now [ is ]. But as Erik mentioned, of course, going forward, things may change. If the market provides exceptionally good opportunities, and we see that now the market is starting to change, then, of course, it's then time to think whether to start investing again. On the other hand, that will provide us capabilities to increase the rents in a normal manner -- in a new normal manner, as we will face an year out with a limited supply in the market.

Yes. And then, my final question was a little bit of a detail, but you did mention it in the presentation. Admin expenses, I think, increased by 35% year-over-year in Q4 alone. You mentioned some one-offs, but also that you're implementing a new ERP system that seems to have sort of boosted the expensive on an admin side. Is this more completed? Or should we expect sort of new ERP systems to cost you in '23 as well? I'm just trying to figure out what admin expenses we should expect for '23.

That process is ongoing. So we started last year and it's still ongoing. And that's included our FFO guidance, of course.

Please state your name and company.

Svante Krokfors from Nordea. Actually, most of the questions have been answered. I was cut off for some time. But a question about the hedging ratio came down somewhat in Q4. Could you elaborate a bit on how you reason around that going forward, and your hedging policy?

Actually, nothing changed really. So there is a EUR 200 million bond that will mature late this year, and that's now short term, and that's why it was left out of this hedging ratio calculation. So really nothing changed. That's the only reason why it came slightly down. But it still -- as said, it's still quite high.

Yes, it absolutely is. And regarding your -- I mean, you mentioned that -- or that the valuation is not based on reference deals. What kind of activity do you see among investors, especially nationally [ your ] side?

I would say that, at the moment, investors are following the market. No activity is there. We have not seen any transactions completed.

The next question comes from [ unavailable. ]

This is [ Dheeraj ] from Barclays. So my first question is, can you please help us understand what's your net debt to EBITDA levels?

That's a little more than 4% at the moment. And then, if you look, that figure is, of course, good to keep in mind that we still have developments -- ongoing developments. And of course, those -- they are -- first, we invest and then they start to generate the cash flow. But that's the level.

And my second question is somehow linked to this. So when I look at Moody's report, the downgrade threshold of 50% for effective leverage, it's linked to net debt-to-EBITDA being less than 12x, right? Do you think there could be some pressure on that if the net debt to EBITDA doesn't come down? And the threshold for downgrade might be lower?

So the Moody's current [ rating ] for us, we will [ double ] to the stable outlook. There are several figures, and some of these figures, in our case, are actually very strong. So the loan-to-value is very strong. Interest cover ratio is very strong. And -- so even the net debt-EBITDA, slightly elevated. It's just 1 figure. So they are not looking only 1 figure. So they're looking the whole company's position, and as said, so [ overall ] is still very strong.

A couple of more questions from my side. Do you have any LTV target in mind given that we are in the valuations decline. So clearly we have gone up from last reporting. Do you have any target on other side?

We have set a target for loan-to-value to be below 50%, and that's when we decided that, that's actually a combination of what we think that -- place for equity investors and what we think that [ debt ] finance providers would like to see. And as I said, our current public rating for Moody's is pretty much anchored to this level. So to be -- to have a loan value -- loan-to-value below 50%, and we have quite sizable buffer against that level.

And just the last question from my side. I mean -- am I audible?

Yes.

Please state your name and company.

The next question comes from the line ending 899.