Lumo Kodit Oyj

Good morning, ladies and gentlemen, and welcome to Koyamo's Q1 results audio cast. Due to the coronavirus pandemic, we are not hosting this time a news conference at Koyamo's head office, but instead we are happy to present our results with this audio cast. Today's presenters are CEO Jani Nieminen and CFO Erik Hjelte. After the presentation, we have some time for questions. We start with the questions from the conference call line And after that, it is also possible to ask questions with the chat function in the audio cast, and we will be taking those after the conference call line questions. But without further delay, let's get started. Please, Jani, you can start.

Good morning, everybody. Jani Niemann here. Today we are providing information in a bit different circumstances, and I'm sitting alone here in my office room having a headset. it would be so much nicer to present our Q1 in front of real people. But anyway, our strong Q1 is reflected to all our key figures. We've been able to continue profitable growth, and our pipeline for new building projects is really strong. During this COVID-19 pandemic, all our essential operations are still ongoing, and our strong capability to provide digitalized services has made it possible for us to serve our clients and keep on renting our apartments. We are well in line with our strategy and we have specified the outlook for in 2020. I was just checking out whether I have the authority to change the slides, of course. Let's move forward and see what's been going on. I would like to start with providing some information about the impact of the COVID-19 pandemic. As I said, all operations here are ongoing. We made a smooth transition. remote working actually our people started working from home offices the 16th of march we are able to provide services for example call center is operated from home offices we are providing a lot of information and access to customer questions with myeloma services we are able to keep on renting our apartments with our web store, we have used, I guess, a bit even more technology in order to rent the apartments and help our customers. Examples like using video streams in order to check out the apartments and to create a marketing video. And if we look at the customer side, so far there has been no increasing needs for rent payment arrangement. And it seems that also April and May rents are paid in normal manner. But of course we have made it possible if needed in the future to create some payment arrangements if needed. In order to keep our people and our customers safe and sound, We restricted the common spaces use and postponed non-urgent maintenance and repair visits to inhabited apartments. Of course, we tried to proceed with the repairs outside these apartments in a normal manner. But in order to help this pandemic situation, there are no no saunas at the moment for example for a tenant and we increase some cleaning in elevators in and lobbies on on construction side the construction of new apartments and our development projects continues normally for now and financially we are able to continue our operative actions and and growth in a normal manner If we then move forward, what's been going on during Q1, I would say that to start with, urbanization is still the important megatrend and creates demand for new apartments, and that is expected to continue, and the significance of largest growth centers will increase. The pandemic will dampen economic activity, and Finland's GDP is estimated to decrease. There is exceptional uncertainty in estimating future development of it. We provided some scenarios provided by authorities at the moment. But I would say that typically, downturn in economy and decreasing consumer confidence has had an impact to housing trade. So home buyers buying own occupied homes, and that has created typically more demand towards rental apartments. And we estimate that long-term demand for rental apartments continues and may even grow a bit. The number of new building permits was reducing already before COVID-19 pandemic and residential startups are estimated to contract by several thousand units until 2021. It seems that construction companies are postponing projects as home buyers are more careful and on the other hand, it seems that construction companies are having a bit harder times with financing their projects. The increase of construction costs has leveled off, and I estimate that the new situation will provide a situation where construction companies are providing more projects for us. At the moment, it's really difficult to estimate the development of prices of dwellings, so what's going to be happening with the housing market and people buying their homes, but I would say that estimates concerning rents seem still valid. In the longer term, urbanization, keeps the demand high for rental apartments, especially, of course, Helsinki region, as the biggest growth centers, plays an important role. The number of households living in rental apartments has been increasing in all the big cities, and we estimate that that trend will continue. Of course, I would say it's a combination of even more things, providing an impact on the other hand we already seen that people are increasingly attracted by the freedom provided by the rental housing and on the other hand the development of household sizes so i mean the number of households of one and two person is typically creating a lot of demand for rental homes and now during the current pandemic it's estimated that housing trade will slow down and even further increase the popularity of rental apartments. We've been focused our operations in the seven biggest growth centers here in Finland and at the moment we have 73.1% of our assets located in Helsinki region and if we combine the three biggest growth areas, so Helsinki region, Tampere region and Turku region, it's today 87.5% of our housing assets located in these three regions together. The final occupancy rate 96.9% during Q1 was actually the same as last year during Q1, so there's typically some changes throughout the year. And then if we look at the key figures, I would say that we've been able to keep on providing profitable growth. The revenue grew with 4.6% and our like-for-like growth was 2.9%. Last year Q1 like-for-like growth was 2.6, so a really strong like-for-like growth. We were able to increase our net rental income by 10.2%. And it's important to notice that even though the number of apartments has been growing, our maintenance expenses were actually €0.8 million lower than last year. Funds from operations, €29.4 million. There was an increase of 11.8%, and of course, the strong net rental income growth provided a solid FFO growth as well. Today, the fair value of investment properties is 6.4 billion euros, and gross investments, 62.1 million euros, is mainly new development projects, so amount of new development project there is 58.5 million, and the rest is basically modernization investments. The strong operative result, 29.7 is 4.1% higher than last year, and profit before taxes includes a net gain, in fair values of 22 million euros compared to last year's 10.4 million euros. So, I would say a really solid and strong beginning for this year. We have a really strong pipeline for new development projects, and at the end of Q1 1655, 51 apartments under construction, all located here in Helsinki region. And we started construction of 454 apartments, and made an agreement with SRV, providing another 676 apartments in Helsinki region. And actually, if we compare the number of apartments under construction, at the end of Q1, all those projects are located in Helsinki region, as last year of 1,280 apartments of that in Helsinki region was located 1,010 apartments. And it's good to keep in mind that in order to grow, we are able to combine different sources like building new apartments, converting buildings into residential use and by buying existing apartments. In addition to projects under construction, we have existing agreements providing an additional 1,305 apartments here in Helsinki region, and we signed an agreement with SRV in March, including the highest rental tower building to be constructed in Finland. And actually the construction work has been started during April, and the tower will be named LUMO 1. The zoning process of Metropolia development project is currently ongoing and expected to be completed in 2020. we estimate that the Metropolia case will provide another 1,000 apartments here in Helsinki city center area. And if we look at our projects under construction, and on the other hand, the binding pre-agreements, all the projects in our strong pipeline are located nicely along the public transportation And Metropolia case will provide 1,000 new apartments in the city center, Helsinki. And of course, I love talking about how we create services and combine technology. And as we believe in providing added value for our customers, we will continue creating new services and concepts for our customers. We've been already successful in combining technology and services, but for the future, we are actually at the moment developing Koyomo's next digital roadmap. And of course, there are several aspects in order to create digital roadmap. To mention some, of course, one would be customer experience and serviceification, then scalability and employee experience, digitalization of properties and services, AI and knowledge management, and enabling technology and IT architecture. And at this point, I would transfer to our CFO, Erkki Aalt.

Well, thank you, Jani. And good morning, everyone, from my side as well. So, page 15, the total revenue growth was 4.2 million euros, and then like-for-life growth was 2.9, and that contributed 2.6 million euros for the top-line growth. We are gradually moving towards separate water charges, that contributes quite nicely to the like-for-life top-line growth as well, and we expect like-for-like growth to be between 2.1% and 2.5% going forward. Completed apartments contributed 1.6 million euros for the top line growth. We completed 119 apartments during Q1 this year. But of course, the completions last year after Q1 2019, 755. contributed as well, but then we sold 520 apartments last year, so the net contributes for top line growth. Profit before taxes includes the profit for changing fair value investment properties, 22 million euros, two-thirds of that is coming through the ending restrictions, and one-third is coming mainly through the fact that we updated cash flows in the calculation, and we kept the yield requirements unchanged when we made these valuations at the end of Q1. The profit excluding changing fair value investment properties grew 1.1 million euros, so net rental income contributed 5.2 million euros. SGA expenses was 0.9 million euros higher than in corresponding period. mainly through the marketing activities. So we had a lot of activities during Q1, and that will, of course, balance going forward this year. Financial expenses was 3.2 million euros higher than in corresponding periods. Most of that difference comes through the change in valuation, so mainly no cash flow generating items there. Page 17. Net rental income margin was 58.9%. but it's good to know that the full year property taxes was booked according to current requirements in Q1 11.6 million euros and if we calculate that as allocated for different quarters so that have 8.7 million euros of other quarters part of the property taxes is roughly nine percent NOE margin. So maintenance expenses was down by 0.8 million euros. And there are several items behind that. One that was increased was property taxes. So the increase there was 0.8 million euros. But then again, we get savings when it comes to the heating and taking from one place to another, so thanks to my Twitter, we got 1.4 million euros savings in heating and 0.7 million euros savings regarding the snow work, if you like. FFO growth was 11.8%. 3.1 million euros, so net rental income 5.2 contributed. The biggest part of the growth, SGX expenses was 0.9 negative, and cash taxes was 1 million euros higher than in corresponding period, giving that a higher result compared to corresponding period. Page 17, occupancy rate. on the same level as in the corresponding period. And page 18, so 62.1 million euros, gross investments, roughly 60 million euros, through development investments, and 1.5 million euros through modernisation investments. Modernisation investments and repairs were slightly down both, 2.2 million euros repairs and 1.1 million euros monetization investments. We make only necessary works what comes to entering apartments given the COVID-19 epidemic and that of course plays a role there why we got some savings there. Going forward, we expect to manage investment repairs put together between 60 and 70 million euros. Phase 19, fair value investment properties grow by 83.4 million euros, so developments contributed 62.1 million euros, change in fare value 22 million euros, and we disposed a couple of apartments, disposal was 1.5 million euros. At the end of Q1, we still had 2,876 apartments where we still have restrictions regarding valuation, and those restrictions will end gradually by the end of 2024, And the impact of these ending restrictions is estimated to be somewhere between 230 and 240 million euros. 25% of that will crystallize this year, 30% in 2024, and the remaining part will be spread evenly between the other years. Page 20. The left-hand side column shows ongoing development activities, so apartments under construction, 1651 apartments, €205 million already invested, and almost €200 million to be invested to complete these ongoing development projects. The mid-column shows these binding agreements, mainly agreements made between Kojaama and SRP and Hausia. providing 1305 apartments and 331 million euros to be invested there. And the right-hand column shows our land back, if you like, so pure land, with existing residential buildings, where the idea is to demolish them and build a new one there, and then these conversions, mainly in the Metropolia case. We expect the total amount of development investments this year to be between 300 and 360 million euros. 300 million is pretty much what we already invested and what it takes to complete ongoing development activities. And then 360 million euros requires a couple of new processes to be started. this year, and 99% of the land bank is located in Helsinki region. Page 21, we have some nice pictures of projects under construction. They are all in Helsinki region, quite nice buildings. Actually, we are thrilled to be able to finalise them and get them into the market. Page 22, equity ratio and loan-to-value figures, very strong. Very nice buffer against our target levels. There's a target on equity ratios, 40% to be above that, and LTV to be below 50%. Page 23, so EPR and AV per share improved nicely. as well as equity per share, and of course, if you compare the figure to the year end, it's good to know that at the end of Q1 this year, the dividend was already out of this calculation, so that, of course, plays a role there. Phase 25, our financing. We have a versatile capital structure. half of the financing coming from the bond market, other half mainly from the Nordic banks and commercial paper program as well. Strong financial key figures average interest rate including the cost of derivatives 1.8 and the average interest the fixed interest rate period and an average loan maturity just below five years and no major refinancing needs in a couple of next coming years. This 309 maturing this year covers outstanding commercial papers, as well as 100 million euros bond that will be maturing later this month. We have the cash to pay that, so that is nicely covered already. Page 25. At the end of Q1, we had cash and cash equivalents, almost 240 million euros, and liquid financial assets of 70 million euros. And we had 300 million euros committed unused credit lines in place. So the cash situation of the company is in a good level. We made some agreements during the period and after the period, so we agreed with 75 million euros, 5.5 years loan with OP Corporate Bank. We made a 50 million euros agreement with Danske Bank and we signed a loan agreement with the European Investment Bank of 34 million euros. So even the market has been quite challenging, but we've been able to make all financing agreements we wanted to make. And we increased the issuance of commercial paper to be on the safe side, if you like. So we wanted to increase the gas amount of the company when this COVID-19 kicked in. And the normal level, if you like, is close to 50 million euros. And we put an EMTN program in place, 2.5 billion euros. And that covers the financing needs for the whole strategy period. And on top of that, the refinancing of the two outstanding euro bonds that we matured in 2024 and 2023. Page 26, strategic targets. They are now unchanged, so these were released in our annual account. One note there is that FFO per total revenue at the end of Q1 was below this level, but there we include the whole year's property taxes. So if we allocate that for the Whole year, we are at the end of Q1, we were nicely above this target level, what comes to FFO against total revenue as well. Page 28, our outlook for this year, slightly specified, so we kept the outlook for top line to be between, unchanged to be between 2% and 6%, and we specified our FFO guidance to 146 to 158 million euros. The previous one was 142 to 156 million euros. So, these specifications actually... The background for this is that we had a quite strong Q1, and we expect that the prices of the company going forward to be on quite close to normal levels. And we expect the weather later this year to be on a normal level. And of course, we include the apartments to be completed later this year. And now I will hand it back to Jani.

All right. There are some effects, and I would say to wrap it up, we think that we are nicely able to continue our operations and growth despite of COVID-19 pandemic. So digitalization and our capability to provide services from remote offices is strong. customer behavior we haven't seen any big changes there the demand will remain strong and we will keep on continuing investing according to our strategy a slight risk there if COVID virus will have an impact on construction sites there might be some small delays, but at the moment we don't see any of that happening. Financially, we are in a strong position and are able to keep on investing. The dividend policy is still the same. payment strategy is to pay at least 60% of FFO, provided that the equity ratio is 40% or more, taking account the company's financial position, which is at the moment strong. And to summarise, I would say that the year began strongly, and actually according to our expectations, the like-for-like growth of 2.9% was really strong, and we were able to strengthen the pipeline for new development projects, new building projects, and we are in a good position in order to continue our operations and growth despite of COVID-19 pandemic. And at this point, I will forward to Maja and we'll start with Q&A. Do we have Maya online?

Yes, apparently it seemed that my microphone was not working, but now it is. So thank you very much. Let's continue with the questions. And we will first be taking questions from the conference call line. So please, operator, we are ready for the questions.

Thank you. Ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. So, question number one from Ante Kiniamik from SEB. You may proceed now.

Yeah, hi, guys. It's Ante from SEB. I have three questions, so I will take them one by one if that's okay. First of all, what is your approach to rental increases in this market? We have seen many announcements on concessions for tenants in their rental payments. So how do you approach this? And was it that you highlighted previously in the call that you expect like for like rental growth to be about 2.5% in the near future? Or did I misunderstood something? Thanks.

Yanni here, I guess I will take this one. As I said, our customers have been paying the rents in a normal manner, and I said that we do believe that the rent development will still be as estimated prior, so increases in the market slightly below two persons here in capital region. And on the other hand, we do believe that we are able to increase the rents this year as planned. So I would say the rent increase and like-for-like growth, as Erik mentioned, we've been collecting more charges concerning water consumption and that creates like-for-like growth as well. So, I would say 2.9 is a really strong number, but in the long run, I would say, of course, at the end of the day, all the customers will be already paying the separate water charges. So, the like-for-like growth most probably will be between 2.1 or 2.2 to 2.5 as estimated before.

Okay, thanks. Then the second question on repair and maintenance expenses. They were low in Q1. Should we expect this trend to continue also in Q2, Q3, Q4? And then again, should we expect some kind of ramp up of repair expenses and maintenance costs in 2021?

I would say, as Erik provided information, we have avoided to enter apartments with tenants living inside. And so only urgent needs have been handled. On the other hand, of course, we tried to proceed with all the repairs outside the apartments as planned. At this point, we do believe that, as Erik provided the information, mainly we are able to do all the repairs outside the apartments as planned, but of course we are following the situation all the time, whether there are any delays or needs to postpone some of the projects. So it's a bit early to provide the total information, we have to follow the situation. In a big picture, I don't believe that there will be a significant impact, in any case, for 2021.

Okay, thanks. Then the last question, it's on the transaction market. We have seen very little of public announcements and transactions happening in the market. But how's the activity, so to speak, behind the scenes? So have you been offered more or less portfolios, or what's the situation? And what is your ambition, meaning that you have currently pretty strong pipeline in historic terms in your own development going forward. So how do you look at the portfolio acquisitions going forward?

Thanks. Thank you. for the question and as I mentioned of course it's important for us that we are able to grow using multiple sources so new building projects converting premises into apartments and by buying existing portfolios and we are scanning all the possibilities all times so I think I provided the information that I do believe that more development projects will be provided for us. So we are scanning probably more projects this year than typically. On the other hand, of course, we are scanning the market all the time in order to buy portfolios. I would say during the last month, special circumstances, so probably The bigger investors have been following what's really happening in Finland, and we've been having restrictions in order to move around here in Finland, so it's hard to estimate what will happen throughout this year. But we are scanning, and if we find a portfolio suitable for us, of course we are able to move fast. But in the big picture, I would estimate that the transaction market will be slower this year.

Okay, that's fair. That's all for me. Thank you very much.

Thank you. Our next question is from Swantic Business from Nordea. You may now proceed.

Yes, good morning, and thank you for taking my question. I have one left. after Anssi's question, and that goes to Erik. Do you want to comment something on the loan availability, cost of debt in bank financing and bond financing? How has that developed? I think you have commented a bit on that earlier at least.

Well, banks seem to be quite selective and in our case we haven't had any difficulties to get the financing we wanted and the margins in those transactions we made is clearly below what we have on average in our portfolio. But the bond market has it's been really a roller coaster. So at the beginning of this year, in our case, Bank estimated that the spread would be somewhere around 100 basis points. And when this COVID-19 started, the estimates were close to 300 and then now the market is already has opened and it's improving so we might be somewhere there in between so there has been quite significant changes but again it's good to keep in mind that the interest rates are still on extremely low levels also these levels are quite doable for for a company like that but but the changes has been been uh quite a large actually first upwards and then gradually improved okay thank you that's very helpful that's all from me thank you thank you our next question is from music nick cannon from henderson you may now proceed

Thank you for taking my questions. I have three, actually. How do you see the valuation yields to develop during this year or next year?

At this point, our yields stayed the same, and we received no information that there would be pressure to make changes in the yield requirements.

Okay, then kind of two questions relate basically to your rating, and there is kind of Moody struggling with, or I don't know whether he's struggling, but still kind of the excess offer that you're having in the financial target of the LPAV below 50, and now when we know what happened last year with the fair value changes, is there some thoughts that you might you might revise down the LTV target based on the valuation change you made last year?

I think Erik will provide information for this one.

Yes, when we made this change evaluation technique at the end of last year, Moody released a comment and they saw this as a credit positive thing and they didn't change the rating, as they usually don't do in this type of situation, but they really wanted to communicate that they saw this as a credit positive. And we didn't change our financial targets and we still feel that these targets are quite suitable for the large resi company here in Finland. We have quite sizable buffer against these levels currently. So, as Jani mentioned, we haven't seen any changes in yield requirements in the market, and brokers are not commenting, actually, they are not at the moment forcing any changes there, but the view is, of course, quite short there. And a couple of weeks ago, Moody's released a comment regarding Koyama as well, and they state that the company is in good shape, that the key figures are strong, and they maintain their current rating, PAA2, with a stable outlook. Of course, later this year, not that far away we are going to have an annual meeting with Moody's and discuss through the situation but we have quite strong KPIs and we haven't changed them and given the estimates for long-term demand driven by the urbanization here so we think that the strategy to grow here is still valid, and our key figures gives a good background for us for that growth, so we have the equity, if you like, already in place for additional growth, and now we have access for different sources of financing as well.

Referring to the same report, Muudis, that came out, key metrics that they highly evaluate, which is kind of an unencumbered assets. They seem to struggle heavily with the understanding the Finnish kind of pledged asset status. Could that be something that you could assist with key metrics with unencumbered assets in the future in order to let them understand better your pledged asset situation?

Actually, in our case we haven't had any difficulties and we think that Moody's understand very well our position. When we applied for the first public rating more than two years ago, then we discussed about this portion of unincorporated assets and it was very clear for us and for Moody's that the target level is to be above 60% of what comes to an unincorporated asset. And we had a fast towards that, and we are already above that level. So, it's non-topic in our case anymore.

But as they kind of calculate the figure of the pledged assets, it's roughly almost a billion above your actually asset edges. when looking at the outcome in the Moody's report. So, somewhat a misunderstanding there could be. I don't know, kind of just looking at the figures, but... Not the question as such.

But thank you for the answer. As I said, it's not an issue for us, because Moody's seems to be quite satisfied with our current situation regarding the portion of unincorporated assets.

okay thank you all right our next question is from oliver brothers from common sec you may now begin hello thank you very much for the presentation um i just have a question on the flexibility arrangements that you discussed um for tenants as a result of coronavirus can you comment a little bit further about what sort of arrangements these are and what kind of uptake you expect on them. Thank you.

Yeah, I think we had a similar question in the chat as well, so I covered the whole topic. As I mentioned prior, we haven't seen any changes there. Actually, the rents have been coming in in a normal manner, but we have prepared ourselves in case that the economic situation is getting worse, and some of our customers as well might get unemployed. And in that case, the tenant might end up in a situation that it will take some weeks or even a couple of months in order to get the decisions concerning subsidies. So, we are able to make payment agreements for that period, when the tenant is waiting for the subsidy decision. But so far, we haven't seen significant pressure there. It's been business as usual.

Okay, thank you. So that would be, to clarify, a rent waiver, if a decision was pending on a government subsidy for a tenant that was made unemployed.

Yeah. Yeah, of course, there are several subsidies available, like unemployment subsidy, which the individual is able to get. And then, of course, At the end of the day, we do have a housing allowance system in Finland.

Okay, thank you very much.

Very clear. There are no further questions at this time. Please go ahead, speakers.

Okay, thank you very much. We had one question from the chat, but Jani already answered that. So now we have no further questions. Thank you very much for all of you to participating our audio cast today. Before you go, I would like to remind you that our half year report from January, June 2020 will be published on 20th of August. And also to let you know that we are planning to held our first Capital Markets Day in Helsinki on 29th of September, if the circumstances permit. So please save the date. We will provide more information later. But thank you very much. Enjoy the beautiful spring day and hopefully we will see you again. Thank you very much.