Lumo Kodit Oyj (LUMO) Earnings Call Transcript & Summary

Good morning, all. This is Kojamo's full year results news conference, and I am Niina Saarto, Treasury and Investor Relations Director. Today's presenters are CEO, Jani Nieminen and CFO, Erik Hjelt. Jani will start with the key figures, and he'll discuss the operating environment whereas Erik is going to dig deeper into the financial details, and he will go through the outlook for this year. You can send us questions throughout the presentation via chat. And also, in the Q&A, we take live questions from the phone line. [Operator Instructions] Now we can move on to presentation, and I would like to welcome Jani to start.

Thank you, Niina, and good morning, everybody. Nice to be here providing color on what's going on last year and how is the operational environment. I'll jump right to the Page number 4. I'll start by saying that we achieved actually a good result in a challenging operational environment. We were able to grow total revenues, net rental income and funds from operations. And although there still was a lot of supply in the market, we were able to increase the occupancy and decrease the customer turnover. Talking about valuation. Now the valuation yield is 4.4% at the end of 2023. There is good to keep in mind that during the last 15 months, we have actually increased the valuation yield requirement by 80 bps. That yield requirement change, if we take that as a separate thing, has had an impact of EUR 1.5 billion. On the other hand, at the end of last year, so Q4 figures, the yield requirement came up by 37 basis points, creating a negative impact. On the other hand, as we've been saying, we have several other parameters and as those parameters were looked and unchanged as well that had, on the other hand, a strong positive impact in valuation. We'll come back to more details in the valuation what's been done there and what the positive and negative impacts. So I don't dig in further now. Happy to say that the balance sheet has remained strong, and our financial figures are actually good and strong. After the review period, we issued a EUR 200 million private placement. So financial position at the moment really strong, and the saving program is proceeding according to our plans. Moving on Page 5 and operational environment, in a way, a 2-folded situation. On the other hand, global economy, uncertain still high interest rates, geopolitical tension globally casting shadows. On the other hand, positive signs in inflation slowing down, employment has remained high, and the rate cycle is estimated to be over and trade cuts are estimated to start during the first part of the year. If we look at the key industry figures, as I said a year ago, we will see a historically low number of new residential start-ups here in Finland, the numbers stayed well below 16,000 apartments. We still don't have the official latest figures, but it will be historically really low figure. Today, estimates are that for 2024, the number of residential start-ups would be a bit higher. Actually, we don't believe in that. There are no signs at the moment that construction volumes would pick up speed. This estimate is based on high hope that something positive might happen after the summer. And as now it seems there are no that kind of signs available that will of course, create the impact that we already know that for 18 months, only a very low number of projects have been started throughout the market, completions of new residential properties will come down and looking forward, there will be a time period when we see no completions throughout the resi market. In this kind of situation, it's been hard to provide actual data, what's been going on with the construction cost changes, data says that at least the increase has been leveled off, but as there's a very low number of started projects throughout the market. There's like no -- there's lack of data in the market. So hard to say where the pricing is going at the moment. Last year GDP slightly negative. Now the estimate is that we will see a slightly positive turn there for 2024. Unemployment is still on a low level and the inflation here in Finland is estimated to come down to 2%. Moving on Page 6. Easy to say that in rental home business, the underlying megatrends are still valid. We see that urbanization is ongoing. All the big cities are growing. Strongest population growth in the biggest city areas here in Finland is Helsinki region, Turku region and Tampere region. So basically, a so-called growth triangle, that creates all the time more demand for new homes. At the same time, we still have an increasing number of small households, meaning 1- and 2-person households. Housing trade, homebuyers have been really careful, actually, the economic uncertainty, rising interest rates on mortgages low consumer confidence has created a situation where the housing trade volumes are muted in the market, and it seems that people are more willing to rent the apartment than to take a housing loan. So that creates more demand towards rental homes. Even though in Finland we, on national level, see figures that more than 60% of the families living owner occupied homes, the story is still really different in the bigger cities. And whenever we see new statistics, there's always an increasing number of households living in rental apartments. Cities like Helsinki, Tampere, Turku actually more households live today in rental apartments than in owner-occupied homes. As said, we did see a historically low number of resi start-ups last year is a comparison on lower right-hand corner throughout the last decade. It will be the lowest figure. And as I mentioned, most likely same kind of figure 2024. It will create a situation where the rental market balance between supply and demand looking forward will change radically. There will be a market situation where in my eyes, throughout the market, vacancies will go down, and we will see higher rental increases. At the same time, construction companies are really struggling in order to find a way to sell the homes. As there is a lack of customers, they are not able to start building new homes, and hopefully, at some point, there is a new way of providing homes a bit more affordable. Home prices are a bit high at the moment, so the construction cost, the cost of the land, and this may create a situation where we may see a standstill for a bit longer time. On Page 8, a couple of words concerning the key figures. As said, a really good year in a challenging market. Total revenue grew by 7%. That's a combination of 3 angles. Of course, apartments completed 2022 and 2023, then '23 improvement in occupancy and rent increases and the third angle is the acquisition done during the summer of 2022 now provided revenues for the whole year. Net rental income improvement there, 6.1%, positive impact, of course, from the revenue growth. On the other hand, we did see an increase in maintenance expenses of EUR 13 million, EUR 13 million, 2 big things there. Heating provided an increase of EUR 4.1 million and property taxes EUR 1.7 million. Funds from operations, EUR 167.2 million improvement there for the comparison year, 4.1% to kind of positive impacts, of course, improvement in net rental income, then on the other hand, the tender offer we did during Q2 last year. Fair value of investment properties now EUR 8 billion, slightly coming down now, of course, 2 impacts. On the other hand, we still have ongoing projects, new development projects, increasing the fair value of investment properties. On the other hand, valuation impact was now at Q4 minus EUR 295.4 million as it was on the comparison year, EUR 682 million. So that's actually explains as well why now the profit before taxes was minus EUR 112 million as it was in a comparison year close to EUR 500 million on the negative territory. Gross investments EUR 190 million, mainly remaining ongoing new development projects, which provided EUR 160 million. And then on the other hand, modernization investments, which were EUR 31 million. Profit, excluding changes in value, EUR 183 million, improving 0.5%. And moving forward, as I said, we don't, for time being, make any new investment decisions, so we are proceeding with the ongoing projects. At the end of Q4, we had 354 apartments under construction and the cost of completing these projects was EUR 10 million. After that, we already completed at the end of January 1 one project, so 2 remaining projects. On the chart on the right-hand lower corner, there's 119 apartments to be completed at some point after 2025. That project has not been started and will not be started in the near future, but we do have an agreement with one construction company. So one day, it might happen, but not today. 2 remaining projects proceeding in a normal manner, no surprises there. We still have fixed prices, and we start marketing 6 months prior to completion of the project. On Page 10, a couple of words concerning the customer base and our offering. It's really important to keep in mind that our aim is to provide best possible living, provide added value for our customers by combining apartments, common spaces, services, whether they are physical or digital, we have to have a good understanding of our customers and their preferences. Here, if we look at the figures, we have a really nice match if we consider what kind of housing stock we have, what kind of customer base we have. So 1- and 2-bedroom apartments are 73% of the housing stock. On the other hand, 1- and 2-person households as a customer base are roughly 76% of the customer base. Then as we've been talking that we are helping people to move towards the biggest cities in order to start working. People in working age, so I would say between 26 and 64, of the customer base are 73.4%. Of course, we do have younger clients like students roughly a bit more than 10%. So there's a well-diversified customer base. On Page 11, some key figures concerning sustainability. For us, it's been always important that ESG sustainability is part of Kojamo's DNA, part of all our daily operations. Of course, we are committed to you and sustainability goals. And our target is that our property portfolio will be carbon free by 2030. We are proceeding well with that target. Actually, the carbon dioxide reduction was really strong last year, close to 17%. On the other hand, if you look at the figures on the right-hand upper corner, we talk about digital services, 86% of our customers use My Lumo services regularly. At the same time, Net Promoter Score 50 was really strong last year. Now if Erik would go further and dig a bit more detail.

Thank you, Jani, and good morning, everybody, from my side as well. So total revenue growth was 7% or EUR 28.9 million. And like-for-like top line growth was 1.9%. There we have rent and water charges contributing 1.4% growth and occupancy 0.6% growth. So completed apartments, and here, I mean 2022 completed apartment as well as 2023. Completed apartment contributed EUR 70 million whole year and during Q4, EUR 4 million for top line growth. Rents and occupancy improvement there contributed EUR 6.1 million whole year and EUR 1.4 million during Q4. And then acquisition, that one we made in summer '22 contributed whole year EUR 4.8 million. But during Q4, the impact was muted. Net rental income, maintenance expense is up by EUR 12.6 million whole year and Q4, EUR 3.1 million. Biggest growing items there, as Jani mentioned, heating EUR 4.1 million, credit loss is EUR 2.4 million, property taxes, EUR 1.7 million, water EUR 1.5 million and waste management EUR 0.9 million. If you look only Q4, it's worth noting that the winter -- starting of the winter was actually very, very cold here in Finland. And we estimate that the weather impact was almost EUR 1 million compared to so-called average weather during Q4. Page 14, left-hand side, profit before taxes. So I'll come back to this value changes later, but if you first look profit, excluding value changes, so S&G expenses up by EUR 2.5 million. And there the biggest growing items was personnel expense is EUR 1.2 million and ICT EUR 2.1 million. So we went live for our new solution and all those money spend there was expensed or included in our P&L. And it's good to note that the saving program as such is proceeding as planned, but the impact of the saving process program is coming through 2024. On the right-hand side, of course, FFO in SG%A expense is the same as in profit before taxes, but financial expenses in FFO calculations grew by EUR 8.8 million. Financial occupancy rate improvement 1 percentage points year-on-year 93. And during Q4, the occupancy rate was 94-ish. And then if you look tenant turnover, it declined by 1.6 percentage point. I think we already covered like-for-like. So Page 17, investments. As Jani mentioned, for the time being, we are not making any new investments and there are 3 ongoing projects, one completed already in January and one will be completed in Q2 and the last one in Q3. And in total, EUR 10 million to be invested in order to complete this ongoing developments. So EUR 190 million invested last year, all if they are all coming from the development and modernization investments. Repairs down by EUR 0.9 million and modernization investments, up by EUR 4.2 million. And then 2024 as part of this saving program, of course, these figures are going to be much lower level. Then Page 18, the fair value of investment properties. The whole year impact was negative EUR 295 million. And out of that, 4Q EUR 158 million. Actually, we have no comparable transactions in the market, and that's why the use requirements are based on overall evaluation. And at the end of Q4, we actually look all valuation parameters and other changes actually offset partly the negative impact of yield expansion. So if you start looking the whole path from Q4 2022 to up to end of 2023, so the yield expansion has been around 80 basis points and 43 in 2023 alone. And out of that 37 percentage points in Q4. So the impact of increase in net rental income contributed a positive figure EUR 306 million and change in other assumptions contributed EUR 181 million. So we increased the inflation assumption by 20 basis points, rent growth assumption by 40 basis points and expense growth assumption by 20 basis points. We added in our material, some additional figures regarding the valuation because we noticed that other companies or some companies are actually commenting different yield requirements, for example. So we wanted to make clear that everybody sees what is another parameters we use in our valuation. So it's good to keep in mind that all our yields they are based on net, is not across their net yield. And on average, if we first look net yield requirement for cash flows on average at the end of Q4, it was 4.4%. The exit capitalization rate was 4.55. And since we apply 2% inflation assumption, so cash flow discount rate was 6.4. As said, inflation assumption now 2% rent growth, 2.6% and expense increases, assumption in calculation 2.5%. Loan-to-value, we have set a target to be below -- have a low value below 50. And Moody's affirmed our BAA2 rating in December, 1 parameter day is, of course, loan-to-value at the end of Q4, the loan-to-value was 44.6%. And if we then look what buffer we have against this 50% level. So if only yield requirements changed, we have roughly EUR 900 million buffer against the 50% level that translates into 55 basis points. As seen in Q4 valuation, there are other parameters that plays important role that -- but this calculation was based only if requirements change. Page 20. Last year was actually we were quite active when it comes to the financing. So we rate in total financial arrangement for EUR 925 million. And we say that 2024 maturing loans are already covered and actually almost half of 2025 material loss as well. So this EUR 425 million syndicated loan, the second one, that's still undrawn. And in January, we made an additional EUR 200 million private placement bond issue. At the end of Q4, we had EUR 18 million cash and financial assets and we had EUR 275 million unused committed credit lines in place. So if you calculate this second syndicated loan still undrawn the private placement and the fact that the Board is proposing not to pay dividend and the saving program and the impact of those. So almost EUR 800 million to be used to refinance these maturing loans. And so that leaves roughly EUR 250 million to be in a position and already a 2025 maturing loans are covered as well. So we are in that regard, quite strong position. Financial key figures, quite strong interest-bearing liabilities in total, EUR 3.6 billion, hedging ratio north of 90 and average interest rate, including cost of derivatives, 2.4%. EPRA NRV 18.45% and then the change was due to the change in fair value on investment properties. Then Page 23, our outlook. So we estimate that the top line growth will be between 4% and 8% year-on-year. And we estimate that the FFO for 2024 is going to be EUR 154 million and EUR 166 million in that range. So if we first look at the assumptions behind this top line growth estimate. So completed apartments, so meaning 2023 completes and the one completed already in January and the 2 that will be completed later this year. That will bring us around 3% top line growth. And then, of course, the like-for-like rental growth last year was 1.9%, and we anticipate that the like-for-like rental growth 2024 is going to be stronger than that. So the rent increases and improvement in vacancy most likely is going to have a positive impact of top line growth on top of this 3% would come through the completed apartments. FFO guidance, of course, the range goes to top line growth guidance, then -- but if you look then at the midpoint of this FFO guidance. So there, we included in those figures. The cost inflation for this year, the impact of cost inflation this year saving program. And then the assumption that the remaining part of 2025 maturing loans will be refinanced this year and earlier rather than later. So all these are included in the midpoint of the FFO guidance, the range as such in guidance across the top line growth guidance. Page 24, our strategic targets. We are in a saving program more and for the time being, not starting any new investments, and that's our action plan for short term. However, we met all our strategic targets 2023. So the top line growth, 7%, investments, EUR 190 million. FFO, clearly above this 39% target, 37.8%, loan to value of 44.6% and equity ratio of 4.5 and Net Promoter Score, clearly north of the target, so 50. So as said, we met all our strategic targets despite the fact that now we are in this saving program more and including not making any new investments for time being. And now back to Jani.

Thank you, Erik. Yes. As a summary, it's easy to say that 2023 was a good year in a challenging market. We were able to increase total revenue, net rental income and funds from operations, balance sheet and financial key figures remain strong. As said, our saving program is proceeding as planned. We are not making any new investment decisions at the moment, but as the outlook provided information, we are still able to grow the total revenues. We do have the outlook there in place. Last year, we were able to improve the occupancy from previous year even though there was supply in the market. Now we know that population grows in all the big cities, at the same time, the supply coming from new build completions will go down radically. And looking forward, actually, the rental market will be improving all the time. Throughout the next couple of years, we most likely will see throughout the market, lower vacancies and higher rent increases. And I think the last remaining factor is that, yes, there has been valuation changes throughout the last 15 months. As said, now all the parameters were checked out, and there were some negative impacts, and on the other hand, positive impact. And at the end of Q4, now the valuation yield requirement is 4.4%. Looking forward, with a lot of confidence. Thank you. Now we are ready to move towards Q&A.

Thank you, Jani and Erik. Let's first start with the phone line questions. [Operator Instructions] So first question comes from Kempen, John Vuong.

On your top line guidance, you said developments were driving 3% top line growth. So that leaves essentially 1% to 5% on like-for-like rental growth, which is a rather wide range. Could you provide a bit more color on the split between occupancy gains and rental growth that you expect there?

So sorry for that the range is wide, but we tend to like wide tranches and try not to make -- provide any surprises there. But we do estimate that rent increases are going to be on a higher level this year. And we do expect the occupancy rate to improve this year as well. We, of course, know what the rent increases we have done year-to-date, and they are clearly on a higher level compared to last year. But as Jani mentioned, the supply-demand balance most likely will improve second half of this year and then the rent increases most likely it's going to be even higher in the second half of this year.

Okay. That's clear. And what gives you comfort that this would accelerate from the past quarters looking also occupancy specifically?

As said, we know that throughout the market, only a handful of new resi projects have been started during the last 18 months. So we will see completions in the market during Q1 and Q2. But then during the last 2 quarters of this year, there will be a limited number of really new supply coming to the market. At the same time, urbanization is ongoing. All the big cities have a population growth in place. So that creates demand for apartments, but at the same time, there's no new supply coming to the markets.

Okay. That's clear. And just to understand the underlying vacancy in Helsinki. Is there any skew towards a specific apartment type as in -- is there the difference in vacancy between the larger and the smaller apartments?

If we think about the rental supply overall, it's typically mainly 1 and 2 bedroom apartments, so studios and one-bedroom apartments. That's the biggest supply because throughout the market, most of 3 out of 4 customers are looking for either a studio one-bedroom apartment. And ever since we were past COVID-19, we saw that demand is still the same. People are looking for same kind of apartments, so studios and one-bedroom apartments and basically the same kind of micro locations. So COVID-19 did not change the demand in that sense. It's been more like that in certain areas, we have seen throughout the couple of last years, a lot of new supply coming to the market at the same time. So many projects started in the same micro location, and they are completed at the same time. So that creates like challenging situations with the new completed apartments and the surrounding older supply.

Okay. That's clear. So just to confirm, in your 8% plus vacancy in Helsinki, it's not per se skewed towards 2 bedroom apartments?

Of course, in our supply, the biggest part or portion of the rental apartments are one-bedroom apartments. But that's typical throughout the supply and selling.

Okay. That's fair. And just on your FFO guidance, given that you're also assuming that you're refinancing your 2025 bonds, do you take any gains from a bond repurchase into consideration in your FFO guidance?

Not in the guidance. No.

Next questions come from Andres Toome from Green Street.

So a couple of questions. First one, just like to understand the long-term incentive plan. So we've added credit trading into the plan, I guess, is the intention here to align the performance of the company more with credit investors going forward? And -- just also a question mark as to why there's no total shareholder return or NAV per share based metric included in the long-term incentive plan?

The thing is that the LTA is based on amount of shares. So if the payout ratio is, for example, 50%, so it translates into a certain amount of [indiscernible]. And then in 3 years' time, the share price plays a important role how much actually money-wise, that the management receives. So it's embedded in that system in that way. I mean what happens for this year.

But wouldn't it be beneficial to have those metrics also within the scheme itself to be more in line with equity investors rather than trade investors. And also, I guess, the targets around revenue and just earnings and not per share. So that sort of incentivizes the company maybe to grow without thinking about how the per share developments go.

The thinking behind these KPIs is that they are set those KPIs that most has a strongest impact for share price, how we see it. So top line growth, FFO, CO2 and investment grade rating. So these are the building blocks. These are the most important things that has an impact for share price going forward. And then there is an incentive for many team members that the share price goes up because the payout is linked to the -- as a number of shares. So that's the thinking behind these KPIs. Of course, each company can approach this from a different angle, but this is the thinking when the Board decided these KPIs.

Understood. And then my second question is around disposals. You have mentioned that you are sort of looking at moderate amount of disposals. Has there been any progress on that front or how is that going?

Yes, we've been saying that there's a possibility that during this year, we will make some disposals as a part of the saving program. On the other hand, as our figures show the balance sheet is strong and financial key figures are strong. So we are not in a point where we would do any kind of highly motivated sales or [indiscernible] sales. So we actually don't have to sell anything. We are following the market, scanning the market, we may end up selling something if the market acts reasonably. Throughout the end of last year we see that there was appetite in the market, but it was mainly very opportunistic appetite in the market, quite global offers. So why bother to go in that that kind of market to sell something if you don't have to. We will see where the market goes. There's still appetite towards the finished resi market. And I think looking forward, as I said, the interest rate hike is over. We will see most likely interest rates coming down, and that will have an impact towards the pricing as well. So we come back to that at some point of time.

Then we can move on to questions from the chat. There seems to be some which are not covered yet. You just explained the disposal situation, but if we think about your future acquisitions compared to what the construction companies are asking about their pricing, what kind of discount would you require before you make new acquisitions?

I think in a way, it's easy to say that today, we're not making any new investment decisions, most likely not tomorrow. Then it's a totally different question, what will be the new normal? I would say, as prior to that in my -- throughout the market, the acquisition cost, meaning the price of the land, the cost of the construction should come down most likely 20%. What is the required yield? It's too early to say. I hope that today, we've been able to provide color on yield requirement that it's not the only parameter in valuation. It's not the only parameter when you make investment decisions as important parameter is, for example, what is the estimate for future rental increases. So we have to find a new balance between all the parameters before we make any kind of comments on the yield requirements.

And then a question on valuation. You mentioned that the changes in inflation, rents and expense growth assumptions increased the fair values by EUR 182 million. Is this something you have to reverse when you go back to so-called normal expenses in repair and maintenance or is this sustainable level now?

So these assumptions that we apply today, they are assumptions for 10 years, and that's why we are not changing them every quarter. So it's a long-term view and to present inflation in the longer term is not that challenging or how would you like to say. But if we get savings that means in cash flows, so stronger cash flows, that, of course, comes through the valuation and the top line growth plays an important role. Of course, the actual maintenance expenses as well, but the top line growth is clearly a bigger component there. So those changes in actual cash flows are coming through the valuation as they occur.

A follow-up question of the same team. Rents and rent growth are increased and that seems to be reasonable. But could you explain the reasoning behind expectation for lower maintenance repairs and modernization expenses over the long term?

So actually, we look this growth for maintenance expenses from inflation point of view, and then they are still higher than inflation expectation. So one way to look at this is to use inflation there. But now we are applying higher growth rate in expenses compared to inflation. And the rent growth expectation is actually based on what we see that is going to happen in the market. And Jani already discussed, there's basically no new start-ups in Finland 2023, and we haven't seen any news so far 2024. And based on discussions with construction companies, many things have to change before they actually start new developments. So that will change radically the supply balance demands going forward. And that will be there most likely quite long because if construction companies are not starting new developments today it will -- something needs to happen. So that's come down and people are willing to take mortgages and so on and so forth. And that's not in the cards yet. So it will take time before the construction company start to think even new developments. And then it takes on average 18 months to complete a starting project. So that means actually that there's going to be quite a long time before there's coming new supply in the market. So this should be a positive for renting apartments on top of the urbanization and other things that are providing demand for rental apartments. So that's why we look this rental growth in order -- it's justify to have it on a higher level compared to expenses. Actually, if we look what most likely is going to happen in the market, rent growth assumption could have been even higher than this 2.6% on average what we apply today.

Thank you. Then moving to the FFO guidance. Was it so that it includes the recent bond issue made in January? And does it also include additional refinancing this year to cover the 2025 bond?

It does. It does. Yes.

Then, can you comment what would be the most significant risk for Kojamo this year?

I would say that typically, in this kind of situation companies should answer that refinancing, financing. On the other hand, we are in a good position there. All the financial needs for 2024 are covered, and we do have a solid plan how to cover the maturing loans 2025. We aim and our plan is to keep Kojamo as a strong company. We have a clear plan there. That plan is proceeding well. I would say that in a theoretical risk would be that something would happen in the rental market, but on the other hand, it's very hard to find a solution where construction volumes would pick up radically speed and provide a lot of new supply to the market. So it's always a risk, but on the other hand, it's not that probable that it will happen that the supply demand, supply balance would not be changing as we predict.

Thanks. Then this is about secured solvency ratio, which was 0.1 at the end of the year. Is it correct that it's not including the October syndicated loan? And if that would be included, it would have been 0.15?

So actually, we looked it from the angle that what is the portion of secured financing against total asset. And if we pencil-in the remaining EUR 425 million syndicated loan. So after that's drawn, we will be in 15 -- around 0.15%.

Yes. So the assumption was quite correct. And then on ESG topic, are you planning to launch any new group-wide initiatives this year?

I think we have quite solid targets there to be a carbon-neutral by 2030. We will keep that aim. Of course, sustainability and sustainable program and our target, we most likely will review those all this year, looking forward what's the strategy and where we are aiming. Of course, there are new reporting requirements coming that will have impact on how we collect data. And throughout that process, we will think that are there like new things where we should be setting targets or not, but it's a bit too early to answer.

Thank you. I think that was the last question we're going to take today. So thank you all for listening. Q1 report will be published on 8th of May. So let's meet you all then. Thank you. Bye-bye.