Lumo Kodit Oyj (LUMO) Earnings Call Transcript & Summary

Good morning. Welcome. This is Kojamo's third quarter results webcast. I'm Niina Saarto from Investor Relations. Today's presenter is our interim CEO, Erik Hjelt. Erik's going to go through the results, and then, as usual, we have Q&A. You can send questions via chat [Operator Instructions] Now we can start the presentation, and over to you, Erik.

Thank you, Niina, and good morning, everybody. I'm excited to discuss about Kojamo's Q3 figures. Page 4. We have in a nutshell what happened during the Q3. And our total revenue and net rental income increased both actually by 3.1% from the corresponding period. Our financial occupancy rate decreased from a corresponding period, but the occupancy rate third quarter improved compared to second quarter. So our occupancy rate is not on a satisfactory level. But during the Q3, we moved into the right direction. There's still oversupply in the market but it turned to a decline. And that goes with all bigger cities, so Helsinki, Espoo, Vantaa, Turku and Tampere. Our FFO decreased to the increase in finance expenses and maintenance expenses. Our average cost of financing declined from the Q2, but it's still a higher level compared to the last year corresponding period. And maintenance expenses increased mainly because of the cold weather, especially during the first 4 quarters -- 4 months in this year. There was no significant change in fair values on investment properties during the Q3. Our saving program is proceeding according to plan, both cost items, so repairs and -- savings in repairs and SGA expenses as well as investments are all in line with our plan. And our balance sheet remains strong and our liquidity situation is good. And the next financing is about to refinance the 2026 maturing loans. If you then look at operating environment. So GDP growth in Finland is on a negative territory, inflation below the 2% target was set by the Central Bank, 1.8% is the estimate for inflation. So Finnish economy is constraining this year, but turn towards the growth has already begun here in Finland. So Page 6. If you look at the supply side, so estimates are that 17,000 new apartments will be started this year, and that's whole country and all unit types. And if you then look more important figure for us is nonsubsidized apartments. So the start-up is estimated to be only 2,000. It used to be about 20,000. So this 2,000, this is a very, very low figure. And discussions with the construction companies indicates that in the near future, they are not starting any major new projects. So that actually means that once this ongoing development is completed, there's not going to be any significant supply -- new supply into the market 2025, 2026. And as we know, that it takes roughly 18 months to complete a new development product, it can go as long as '27 before we see any meaningful new supply coming into the market. On the demand side, of course, these megatrends are still valid. So the development household size declining, unfortunately in Finland. Urbanization is there still. And the fact is that in the bigger cities, more than half of the households are living in rental apartments over occupied -- owner-occupied homes. Migration already quite strong here in Finland. So we are already on a level of pre-COVID-19 levels. So that -- the population growth in these growth areas is there already. And the immigration -- the migration is strong as well. So there are different estimates how many people are moving towards Finland, but it varies between 30,000 and 40,000 people moving, and most of them to the Helsinki region. So the demand side is strong, estimated to be strong going forward as well. Then if you look more detailed our financial figures. So total revenue growth, EUR 10.2 million year-to-date and then EUR 1.7 million during Q3 compared to comparison period. Biggest contributor for top line growth was completed apartments. So earlier this year and last year, completed apartment, EUR 11.9 million for year-to-date and EUR 3.5 million for Q3. And rents and occupancy was a negative impact of EUR 2.7 million year-to-date. I'll come to the like-for-like rental growth later. Net rental income grew EUR 6.8 million, EUR 2.6 million during Q3. The growth was mainly because of the cost side. Growth was mainly because of the increased maintenance expenses, EUR 6 million. The growth of the portfolio was impacted EUR 1.6 million; heating and water, EUR 4.2 million and as said, especially during the first 4 months in this year because of the harsh winter; and property taxes up by EUR 1.3 million. Net rental income margin remained stable, so 67.4%, same as in the corresponding period. Profit before taxes, if you look without value changes, so it's a negative EUR 20.3 million. Net rental income, as said, on a positive side. And financial expenses increased by EUR 29.5 million. It's increased, but it's good to keep in mind that in corresponding period, this was EUR 8.7 million profit from repurchase of the bonds. But if you were excluding that, so the financial expenses increased nevertheless. And SG&A expenses decreased by EUR 4.1 million. Then a couple of notes regarding FFO compared to profit before taxes. So FFO side, financial expenses was EUR 28.5 million, higher than in corresponding period. And cash tax is EUR 3.4 million, lower than in corresponding period. Financial occupancy rate, as said, declined from the corresponding period but improved during the Q3 compared to Q2. And there's still oversupply in the market and there's not that much tailwind yet for improving occupancy. But the improvement has come through because of our own activities. We also -- we have been doing some changes in -- especially in sales management and resources, better responding for the evening and weekend demand from the customer side, especially. Like-for-like growth. So impact of rent and water charge is positive 0.9%. Impact of occupancy rate, negative 0.9%. And then negative 0.4% other impacts. And that comes through because now we are more flexible when it comes to the pricing regarding to support -- the improvement of occupancy. So we have done some price reductions in those apartments that has been vacant very long time. And then we have some campaigns, so 1 month free period in those -- some of those apartments that has been vacant for quite some time. So in total, like-for-like rental growth was negative 0.4%. As part of the savings program, investment decreased significantly. So gross investments, EUR 21.6 million, almost EUR 140 million down from the corresponding period. We started about 1 new development product that's based on previous binding agreement. So back in the days, 119 apartments will be completed in Helsinki in the beginning of 2026, but no other ongoing developments. And for the time being, we don't do any new investment decisions. Modernization investments and repairs, both down according to the savings program, in total, EUR 22.7 million, EUR 4.7 million on the repair side and EUR 18 million on the modernization investment side. Fair values didn't change significantly at the end of Q3. We kept valuation parameters unchanged due to the fact that there was a limited amount of transactions in the market. In H1 valuation, we took into account all 3 -- actually all 3 transactions completed by the end of Q1 in the market, and they were all taken into account in the H1 valuation. There was a couple of smaller portfolios completed during Q3. And there, the pricing is pretty much in line with what we saw during the H1. And there's still 404 apartments coming out of the restrictions. And there will be an uplift in the value when those restrictions ends by the end of this year, between EUR 20 million and EUR 40 million. Loan-to-value and equity ratio strong, in line with the current public rating, Baa2. We have quite sizable buffer against the maximum level for loan-to-value of 50%. And actually, loan-to-value ratio, pretty much unchanged from H1 figures. Loan maturities '24 and '25, already covered. We have quite a strong cash position, roughly EUR 350 million. And the idea, of course, could use those that cash to pay back the bond maturing first quarter 2025. And then that means actually that the next financing need is actually to refinance the 2026 maturing loan. The average interest in our portfolio came down. It's now 3%. At the end of H1, it was 3.2%. And hedging ratio high at 93%. In autumn, Moody's confirmed our rating, Baa2 negative outlook. So that's a positive sign as well. EPRA NRV, EUR 18.34 per share. And then our outlook, we kept our outlook unchanged. So we estimate that the top line growth will be between 2% and 4% and the FFO will be between EUR 142 million to EUR 152 million. So unchanged outlook there. So at this point, happy to answer any questions there might be.

Okay. We can start from the phone line. [Operator Instructions] So first one on the line is Andres Toome from Green Street. Go ahead, Andres.

[Technical Difficulty]

It's a combination of price reductions in some apartments that have been vacant for quite long time and impact of some campaigns, so rent-free areas to support the renting.

[Technical Difficulty]

So it's a little bit challenging to say what is the market vacancy. It's improving clearly, not that much because there's still oversupply in the market. And as I said, during the Q3, our occupancy moved in the right direction. And since then, we've been making quite a nice amount of new lease agreement. So -- and this is -- there's still oversupply in the market, but we are moving in the right direction given the actions we've taken inside the company.

And my final question [indiscernible] construction at the moment. It still feels like there's quite a lot of completions to come in 2025. So do you think it's fair to say that actually the rental tension will get better only in '26? Or are you seeing anything that would suggest that it could actually happen in '25?

So in the market, the construction companies, they still have quite a large amount of unsold apartments. But they are, of course, meant to be sold for individuals. As we speak, there is some ongoing developments, but a big portion of that is actually social housing. And they are chasing the rules for social housing, and that's why all these social housing players try to start as many projects this year as possible. So even the social housing developments will come down next year. And the amount of non-subsidized rental apartment part of the market ongoing is actually quite low. And then if you take the estimates of the population growth in these growth areas and if you take the amount of startups and the ongoing projects, so there's a pretty clear view of what is going to be finalized the next year. So that indicates that we will be in equilibrium perhaps after the summer next year. And by that, I mean that the vacant apartments in portals will be on the -- roughly on the same level what we saw before COVID-19, that level.

Okay. Then next question comes from Celine Soo-Huynh from Barclays.

Erik, my first question is on disposals. So remember, when you announced the saving programs, you also said you could be looking at disposing as part of it. We are in November, so is it fair to assume that no disposals is happening this year? Also, if you could comment on the transaction market? And my second question is when do you think you can update the market on your search for a new CEO?

Thank you for the questions. So yes, we are looking at disposals still. We are not in a position that we have to sell anything, but our aim is to dispose a moderate amount of properties. A couple of smaller transactions are already almost signed, if I may say so. And it remains to be seen when we are able to complete them. And there are several ongoing discussions, but it's too early to say when something really be completed. But that's something we are working on. And then the CEO, the process started, recruitment started after the announcement last month -- early last month. And there is a headhunter involved in that process, and that's ongoing process. It remains to be seen when the candidate is there and how long it takes before the one can start here. And I'm agreed to take care of this position as long as needed, so when the new one is coming in.

Thank you, Celine. No further questions there. So I have a couple of questions here in the chat. So Erik, can you provide some color on the like-for-like assumption in this year's guidance?

In this guidance, in the midpoint of the guidance, the like-for-like assumption is in line what we've seen year-to-date.

Then about market -- rental market. Can you comment what type of rental incentives there are used?

So typically, there are rent-free period in the beginning of the lease agreement between 2 months, up to 1 month in our case. We've seen in the market some competitors offers even 2 months rent-free period. But in our case, typically it's from 2 weeks to 1 month.

Okay. Thanks. Then about financing. What are your plans for '26 maturities?

So our preference is clearly to return to the bond market. In our case, it's always been important we have access of different sources of financing. Of course, we look at all options. But our preference is clearly to return to the bond market. The market as such has moved into our direction. So swaps came down and spreads tightening, and the market seems to functioning very well. Perhaps for us, the sweet spot for timing-wise would be in Q1 next year. But that said, our preference is clearly to return to the bond market.

Thanks. And then the final question today. What do you see in transaction markets and foreign investor interest?

So the transaction market is really still muted. So the volumes are very, very low. When discussing with brokers, we got the impression that they are still international investors who are scanning the market. But for various reasons, those discussions haven't really lead to transactions. During Q3, we saw 3 smaller portfolio transactions in resi market in Finland. The sellers were mainly -- actually 2 out of 3 where we are open-end resi funds, and the buyers was private equity or fund type of international players.

Okay. Thank you. So that was all for today. Thank you all for joining. Our full year numbers will be released in February 13. So I hope to see you then. Now I wish you all a great week. Bye-bye.

Thank you. Bye.