Lumo Kodit Oyj

Good morning, ladies and gentlemen, and welcome to Kojamo's half-year report news conference. My name is Maija Hongas, and I'm manager of investor relations here at Kojamo. And I'm very pleased to see you all here after these very weird circumstances that have been on for a while now. Today's presenters will be familiar faces, CEO Jani Nieminen and CFO Erik Hjelt. And after the presentation, we have some time for questions. First, we will be taking questions here from the conference room, and after that from the conference call line. But without further delay, please Jani, the stage is yours.

Thank you. Hello everybody, nice to see you here in the conference room as well. I think the story is of course to pinpoint the cover page and the one building in the middle is Luma One Tower under construction at the moment on top of Redis shopping center. Then if we move forward towards the agenda, I would say that today we are presenting a solid H1 report, and in a big picture, if I wanted to highlight some aspects, I would say that all our essential operations have been running, all construction projects have been proceeding as planned, We have strong progress in development projects. Financially, we are strong and in a good position. COVID-19 has had a limited impact for us. And on the other hand, we see that urbanization will continue creating demand, and we are well in line with our strategy. As I mentioned, the impact of COVID-19 has been limited. Of course, one aspect is that there has been temporarily more supply in the market. We knew that a lot of new apartments will be completed in Finland during H1. because of the high volumes of construction work. But on the other hand, these special circumstances created a situation that, for example, most of the so-called Airbnb apartments were converted to long-term rental use. And at the same time, because of these circumstances, for example, students went back to their homes, either to their parents here in Finland or back to their home country. So that created temporarily a bit of unusual situation. So we've been operating in more challenging period of time. And on the other hand, now it seems that the situation here in Finland is relatively good. but on the other hand, of course, the antipatization of the so-called second wave has begun. Finland's GDP has significantly decreased, but on the other hand, compared to many other countries, it seems that the situation here in Finland is better. Of course, we have to keep in mind that Finland is a small export driven country, and the second wave of pandemic to Finland's export markets would hurt our economy. On the other hand, here in the property market, I would say that impacts of pandemic are expected to be temporary. and urbanization will continue. According to the latest estimates and forecast published in June this year, urbanization will continue, and the housing need by 2040 is 700,000 apartments here in Finland. And of course Helsinki region will be growing most, and there will be the biggest need for new apartments. In the operating environment, we already during last year saw that the construction volumes will be slowing down and number of new building permits granted will decrease and what's been happening this year, of course, combined with COVID-19 is that residential startups seems to be going down rapidly. And now the estimate is that only 28,000 apartments will be started this year. So the volume of new completed apartments in the market will go down during the next couple of years, 2021, 2022. And There we have to keep in mind at the same time that due to the urbanization, the need is to complete 35,000 apartments here in Finland to the biggest cities on average annually. So, Finland seems to be heading for a period of time where there is less supply in the market against a growing need because of the urbanization. Construction costs, The increase there seems to have leveled off. We were able to find really good opportunities during Q2 to buy new development projects from construction companies. Now what's happening in the housing market, it seems that the estimates concerning rent increases are still valid. On the other hand, it seems quite difficult at the moment to estimate what's going to happen with the housing trade. During the pandemic, there was a severe slowdown. After the summer vacation, it seems that people are buying homes a bit more, but on the other hand, typically this kind of uncertainty creates more demand towards the rental market, and people are less attracted to buy homes. Of course, as the forecast says, urbanization will continue, and by far the biggest need for new homes is in Helsinki region. So it's good to keep in mind that still the same big drivers are creating a lot of demand for new apartments in the biggest cities. Urbanization, and the development of household sizes. Actually, according to the latest forecast, the development of household sizes, so the number of one- and two-person households is still growing, and that creates actually more demand to create new homes than the population growth. At the same time, we have seen that people are increasingly attracted by the freedom provided by rental homes and the services we are able to arrange in rental homes. As I have been pointing out prior, it's good to notice that even typically people tend to think that Finland is a country with owner occupied apartments. Here in Helsinki, more households are living in rental apartments today than in owner occupied homes. And at the same time, close to half of the households in Turku and Tampere are today living in rental apartments. And the number of households living in rental apartments has been increasing annually. Occupancy is still on a good level, even though, of course, temporarily, the operating environment has been more challenging. For example, here in Helsinki region, as I said, a lot of new apartments have been completed during H1. At the same time, more supply came from so-called Airbnb apartments. and the students went to their parents. So it has not been the typical situation, but it seems that the impact is temporary. And to give some color on that issue, for example, Here in Koojaamu, we have been making more new rental agreements every month since April. And July was the highest number of new rental agreements this year. And if we take a look at the fair value of the housing portfolio, it's good to keep in mind that we've been focusing to the biggest cities and city areas here in Finland. 73.4% of the housing assets are located in Helsinki region. And if we combine Helsinki, Tampere and Turku regions, more than 87% of our housing assets are today located in these areas. The numbers show that it's been a really solid H1, providing profitable growth, and the net rental income increased more than total revenue. The like-for-like growth of the rents was 2.4%. The revenue grew with 3.2%, and at the same time, the net rental income increased by 6.2%. The funds from operation 71.5 million, the increase there was 7.6%. Fair value of the investment properties today, 6.5 billion euros. Of course, we have to keep in mind there that during Q4 last year, we made a valuation methodology change and the impact there was roughly 800 million euros. Gross investments during H1 was 179 million euros and there by far the biggest portion was new development projects and investments there 156.5 million euros. Profit excluding changes in value 77 million euros was 6.6% above the corresponding period And then we received a 48 million net gain in fair values compared to last year's 72.3 million euros and ended up profit before taxes 125.2 million euros. As I said, we were able to make quite good agreements concerning new development projects during H1 and at the end of H1 we had 2380 apartments under construction all located here in Helsinki region. We completed 201 apartments and it's good to keep in mind that as we have a really high number of apartments under construction we kept ourselves busy during Q2 and started 811 apartments. So we do have a really strong pipeline and a solid base for our growth strategy. A record high number of projects under construction combined with co-operation agreements providing more than 1,200 apartments, combined with so-called metropolia properties, where we have the zoning process ongoing and expected to be completed by 2020. So, a lot of new apartments are needed here in Helsinki region, and Koyama by far at the moment is the biggest player providing new homes and helping the urbanization. We have all our properties along with public transportation with good micro locations and of course the strong pipeline will come visible as growth starting by 2021 as the number of new completions will severely grow and next year we are completing more than 1200 apartments and then 2022 more than 1800 apartments will be completed. And of course, every day we still keep on working in order to try to find some new good projects. Digitalization has always been an important topic for Koyamo, and today Koyamo is a frontrunner thanks to online selling and Myeloma mobile services. At the same time, we do believe that there are still a lot of opportunities available in using technology and digital solutions. The digital roadmap will focus on creating even better customer experience, operative excellence, and efficient use of data and AI. So during the next years, we will be providing new solutions as well. We are not stopping with online selling and myeloma services. Today, of course, we are already providing a high quality customer experience and a lot of services. An easy access with online selling, a lot of services for a customer entering LumaWorld. On the other hand, we are providing a lot of services and taking good care of our existing tenants with a lot of and a wide scale of different services. A daily operation is to use MyLumo application where you are able to take care of all your problems ordering services and it's good to keep in mind that WebStore is not a pilot project. We are at the moment getting half of all new customers from the online selling. So at H1 over 18,000 new agreements there, today more than 19,000. We are on the level where we are able to do so-called A and B testing, a lot of new features in online selling and that's one aspect that will even be growing in the future. Sustainability has been a really important issue for us as well. It's part of our company's DNA. Now we have conducted a materiality analysis of sustainability, and we will publish our sustainability report later this year. At the same time, during the summer, we participated in Crespi for the first time, And as you see on the right-hand side, we have been quite successful in proceeding with our energy saving targets. At this point, I would pass the microphone and topics to our CFO, Erik. Please, Erik.

Thank you, Jani, and good morning everybody from my side as well. It's great to see people here even in the conference room this time. Page 17, if we start to look at the financial figures, so total revenue growth was 3.2% and the revenue growth was 5.9 million euros. Completed apartments contributed 3.3 million euros for the growth, acquisitions 0.2, 0.5 million euros disposal was a negative figure of course there 2 million euros and then rent increases 4.1 million euros the like for like growth was 2.4 percent If we then look at the profit from changing fair value of investment properties, 48.2 million euros, so two-thirds of that was contributed by the ending restrictions, and 20% for development gain. And we book modernization investments, money spent there as a negative figure in changing fair value of investment properties, that was 10.7 million euros. At the end of H1 we kept all major parameters, biggest one being the yield requirements unchanged, given the fact that in the market there hasn't been any transactions and we discussed a lot with the brokers and JLL and they said our view that now it's not the right time to change the yield requirements and we want to see transactions and hopefully at the second part of this year we will see some and then of course we can look at the yield requirements again but we estimate that the yield requirements will be flat given that the lack of acquisitions in the market. Net rental income, the growth there was 6.1 so bigger Stronger growth than the top line growth. The growth was 7.2 million euros. Total revenue contributed 5.9 million euros. Maintenance was 1.5 million euros lower than in corresponding periods, mainly thanks to the mild winter during the first quarter. And repairs was 0.2 million euros higher than in the corresponding period. Net net income margin, what we booked was 65.6, but it's good to keep in mind that we booked all property taxes in Q1, so if we adjust the NOI margin with the property taxes allocated for the second half of this year, so the margin is above 68%. FFO grew 5.1 million euros, net net income contributed 7.2 million euros, SGA expense is quite flat, so 0.3 million euros bigger than in corresponding period, financial expense is 1.5 million euros more, given the fact that the loan portfolio was much bigger than in corresponding period, and cash tax is 0.7 million euros higher than in corresponding period. Occupancy rate stood on quite a good level despite of the COVID-19, as Jani already described. Page 20, the gross investments, 179 million euros. little more than 166 million euros spent for development investments modernization investments 10.7 million euros and capitalized interest 1.5 million euros during the h1 there are no acquisitions actually we participate a1 bidding competition before the summer We were on the second round but the asking price went so high that we were not willing to pay that price and we dropped out from that bidding competition. The transaction hasn't been finalized yet so we don't know what the final outcome is going to be. ready to pay that price. Modernization investments and repairs moved sideways compared to the corresponding period. We estimate going forward that modernization investment and repairs put together is going to be somewhere between 60 and 70 million euros per year and 2020 we estimate to be on the lower end of that range. The value of investment properties, 6.5 billion euros. And as Jani mentioned, at the end of last year, we changed the valuation technique that contributed roughly 800 million euros positive impact for the value of the properties. change of the properties to value properties this year has been positive as well and we still have at the end of H1 2633 apartments where we still have restriction regarding the valuation of those properties and those restrictions will graduate by the end of 2024 And the uplift in the value on average is going to be 80 million euros per apartment. So that's a little more than 200 million euros altogether. And 15% of that will come through this year, 30% in 2024, and the rest is spread evenly for the other years. At the end of H1, we had 426 so-called VWO apartments, where we still have restrictions regarding the rents, and then those restrictions will end by the end of this year. Page 22, our strong pipeline, now looked from the euro. Point of view, if you like, so apartments under construction, almost 2400 apartments, more than 280 million euros already spent in those ongoing developments and little more than 300 million euros to be spent to complete those apartments. Then we have finding agreements, mainly cooperation agreements with SRV and Hausia, providing us 1,252 apartments and a little less than 270 million euros to be invested in those apartments. And then our land bank, right-hand side column, where we have pure land, we are able to build more than 1,000 apartments on that. We have plots where we have existing RECI building, and the idea is to demolish the existing building and build a new one, around 700 apartments to be to be built there and then these conversions biggest one being the metropolia case more than 1 000 apartments all these plots and real estate developments are located in helsinki region and we estimate that the whole year uh development investments are going to be somewhere between 320 and 370 million euros and and we end up to this 320 million euros a total figure for this year if we just make these these investments that are already ongoing but the idea is to start a couple new ones and and if we are able to proceed according to our plans so we will end up with this higher end of that range. So far we've been able to book on average 20% development gain when we are completing this development project and we estimate that on average the development process is going to be the same in all these projects that we currently have ongoing and in these cooperation agreements. And on top of that, the net initial yield in all these projects on average has been 4% or above that. So if you look at the future growth, that means that we are able to grow both for the value of the properties and the top line as well. So that gives very, very strong growth for us going forward. Equity ratio, page 23, and loan-to-value, we have set targets for loan-to-value to be below 50%, equity ratio to be above 40%, and we are well in line with these targets, and we have quite nice buffer actually against these targets levels, so we are able to grow without asking any new equity. EPRA-NAV 15.62, at the end of this year, the EPRA changed the guidelines for EPRA-NAV and we are going to adopt that at the end figures. But this is the old one, if you like, EPRA-NAV and the growth there was strong as well. Page 25. Our liquidity is on a good level. We tapped the Eurobond market in May and now of course our liquidities are on an unusual high level given the cash and cash equivalents, liquid final assets and unused credit facilities as well. But we decided to tap the market because we felt that it's better to make these financial agreements earlier rather than later given the strong development pipeline what we have and the uncertainties in the market. And that Eurobond was very successful, seven years maturity, three or four times oversubscribed, carrying a coupon of 1.875. Page 26, capital structure. Now the portion of bond financing is 54% and going forward we expect that portion to grow even more. We want to have bank financing in place as well. And given the growth of the company, of course, the Euro-wise, even that the bank financing can grow going forward as well. Hedging ratio at the end of H1, 87%. Average interest rate, one notch down, 1.7%. The coupon was slightly higher than on average in our portfolio, but we paid back 100 million euros bond. There the coupon was much higher and we paid back a couple of smaller bonds. bank loans where the margin was even higher than in these existing loans. And the average interest rate period and average loan period is healthy, close to five years. Page 27, strategic targets for 2023, couple notes there. One is that the average growth per year in a strategy for between 4 and 5%. Going forward, we estimate in the mid-term that the like-for-like growth is going to be somewhere between 2.1 and 2.5%. And if we then add these ongoing developments, which when completed, they start, of course, generate positive cash flow, and that will contribute very strongly for this top-line growth. And therefore, against total revenue, well in line with our target, but again, there is an impact for the fact that the property taxes was booked for the whole year in Q1. So if we allocate half of the property tax for the first half, this ratio is around 40%. Outlook. Top line, outlook slightly specified, as discussed earlier, we participated in that bidding competition for acquisitions and decided not to acquire that portfolio and we of course looked at the market but given the fact that more than half of the year has already passed us and even if we manage to acquire something that the impact for the top line is going to be quite limited for this year and that's why we slightly revised the top line guidance and we retained our FFO guidance so no changes there. We estimate the impact of COVID-19 for the outlooks. And I think the main takeaway here is that we expect that our operations will continue undisturbed for the most part. So we estimate no specific changes there having impact for our outlook. And now back to Jani.

dividend policy on page 31 no changes there objective is to be a stable dividend payer and annual dividend payment will be at least 60% of the FFO provided that equity ratio is 40% or more taking account of the company's financial position and Both the equation and financial position seems to be strong at the moment. To summarize what's been happening, I would say that it's quite obvious that we have been having a really solid H1 with profitable growth. And in our strategy, it's important to understand that we are able to grow from various sources. We are combining growth from new development projects. We are able to buy portfolios if we find a matching portfolio to our portfolio and the pricing is right. Then we are able to convert buildings into apartments, like the Metropolia case. We have been having a strong progress in property development. The pipeline is record high. and we are well in line with the strategy and in a good position to continue our operations. Thank you. At this point, I would pass it to Maija.

Thank you very much. Erik, please, would you join us to the stage? So now we can have some questions and we will start here from the conference room.

Hi, Anssi Kivinen from SCB. Thanks for the stick and for letting me ask questions. New rental contracts, you highlighted that July was a record for this year. What about year-over-year comparison? Because I would assume that July is a strong month altogether. So, how's that? And also, in Q2, the occupancy ratio was quite low. So, do you expect it to be the lowest point this year, or do you expect it to be in a similar level going forward?

Typically, it's good, of course, to understand that the more new agreements we do, the better the occupancy typically gets. It may take a period of time before they're valid. So the lowest point is probably over because we've been doing more and more new agreements all the time. And not to provide exact figures, but July this year was really good compared to many years.

Yeah, the second question, it's basically on the pipeline. Sorry if I missed it, but how much of the overall pipeline commitments and units under construction are in the capital region, in Helsinki region? And what's the situation in Metropolia development project? And could you give us some kind of indications on how many apartments will there be roughly altogether, just to figure out what's the potential of the project?

I recall right of course it is to say that all the projects under construction are located here in Helsinki region and actually it seems that the whole pipeline is located here in Helsinki region and the metropolia case it's an online ongoing zoning process we expect it to be ready this year of course it's not entirely in our hands, but we expect and hope that it should be totally ready this year. And the expectation there is 1,000 new apartments here in Helsinki region.

Yes, I'm Mark Kumolonen from OP Bank. How much would you say that this COVID-19, i.e. work-related immigration and students moving back to home affected your rental income in Q2?

I would say it's not easy to provide an exact figure. We are sure that it had an impact. because temporarily the market has been challenging and totally different. And of course, there's a combination that people were not able to continue urbanization to move from other cities to Helsinki. On the other hand, students leaving the rental apartments. And of course, at the end of the day, even though we've been quite successful running business from home offices, it's not entirely the same process.

Thanks. A second question. You highlighted that the supply of rental apartments have grown in Q2, mainly because of, you know, like these Airbnb apartments coming to the market. Has that affected rent level of new lease agreements?

Not here in Helsinki region, no.

Okay, thanks. That's all from me.

Okay, then we can move on to the question from the conference call line. So please, operator.

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. Our first question is from Svente Kroftes from Nordea. You may begin the question, sir.

Yes, good morning, and thank you for taking my questions. So the first question is regarding the like-for-like in Q2. I didn't find specifically a mentioning of that, but 2.4 in H1 and 2.6 in Q2. So is it fair to assume it was a bit lower, 2.2?

It was a bit lower. You're right, yeah. So the 2.4 is H1 for this year.

Yes, and you don't see any impact from the increased supply of Airbnb going forward?

How we see the market is that those apartments that were converted for

short-term lease to longer-term lease or airbnb apartments that has already happened okay that's clear then regarding the the valuation changes and the the april yield that you disclosed the april yield went down from four point twenty nine to four four point 22 roughly. Has that more to do with the timing of vacancies and so on?

It's pretty much the timing on the vacancies. So if you look at the figures for passing rents, there's a slight change there. So no material changes, actually.

Okay, then I think it's good that you told about the development gains that you have had on on your new developments, those appear to be quite encouraging. And you said that a yield of 4% or more, so then we should... It's easy to calculate that we get into the 3 to 3.5 valuation yield range. Is that correct to expect? I guess that is what you have guided also, that transactions have been made on new apartments in the capital region.

Well, if you just look... and use your Excel. So, 4% of net initial yield and 20% development gain gives you 3.2. So, in the ballpark, I think you are right. Okay, that's good.

Then, perhaps... There was a review of 2020 published, I think, yesterday, and there, they also suggested that people postpone their buying apartments and move more to rentals. Have you looked at that and do you agree with the conclusions there?

We've been providing views that people are increasingly interested in rental apartments for a period of time already. So, I guess it's the other way around. They are backing our story.

Okay. Fair enough. Okay, thank you very much for your taking my questions.

Thank you.

Thank you. Next, we have Emuna Elena from Barclay. You may begin your question next.

Hi, good morning. I just have two questions. The first one is about the guidance. What are the reasons behind a lower higher range for your total revenue increase guidance? And the second question would be on the pipeline. Can you confirm, because we might have heard it wrong, but do you expect to profit on costs from the development pipeline to be around 20% going forward? Thank you.

20% development gains also it's against the cost correct there and the reason as mentioned to do slightly to specify the top line guidance was that even if you manage to acquire a sizable portfolio this year the impact for the top line this year is limited given the fact that half of the already So, that was the reason why we slightly specified the top line guidance.

Thank you. Next question, we have Neil Green from J.P. Morgan. You may begin the question, sir.

Hey, good morning. Thank you for the presentation. Just one question on the balance sheet. I can see the average cost of debt at 1.7. There's not a huge amount of debt coming up for refinancing in the next few years, but I was wondering where your kind of marginal cost of debt is today, please, and if you see any opportunity to bring that 1.7% down over the coming few years as well.

So, the coupon in the latest Eurobond was 1.875. And the spread has came in after that. So, that's how the market at the moment seems.

Thank you. There are no further questions at this time. Please go ahead, Peter.

Thank you very much. We had from the chat function only one question, but that covered the Metropolia project that we already discussed. So, thank you very much for all of you participating. If you may switch the next slide, thank you. We are going to publish our interim report for Q3 on 5th of November. And earlier, we mentioned that we are planning to have a capital markets day this September, but unfortunately, due to the circumstances, we have decided to postpone that until next spring. I hope the weather is nice then, and you'll be able to see our properties, and hope the situation is much better then. But instead, we are going to arrange investors day, in a virtual format, 2nd of December. We'll be sending to save the dates soon, so let's see you there. Thank you very much.

Thank you.