Lumo Kodit Oyj

Good afternoon, ladies and gentlemen, and welcome to Koyamo's first quarter's results news conference. My name is Maija Hongas, and I'm manager of investor relations here at Koyamo. Today's presenters will be Jani Nieminen, our CEO, and Erik Hjelt, the CFO. After the presentation, we will have some time for questions, and first we'll be taking the questions from the conference call line, and after that from the chat. Please enjoy, and let's get started. The stage is yours, Jani.

Good afternoon, everybody. Nice to be here. The sun is shining here in Helsinki. We are providing some color on our Q1 figures. To start with, it is to say that actually the year has started along with our expectations and there has been an impact because of COVID-19 to the operating environment. Temporary both for example like for like growth and the occupancy have been impacted but as we have been estimating sufficient vaccination level seems to be reached by the summer and a lot of good estimates already that after the sufficient vaccination level will be reached things are getting back to normal urbanization will proceed and for example students will move back to university cities. So drivers for long-term demand for rental apartments are still valid. We do have a really strong pipeline for our future growth and actually today our fair value of investment properties is for the first time more than 7 billion euros. So we are well in line with our strategy and we have a good starting point proceed our operations this year and heading towards age two when we think that after sufficient vaccination level things are getting back to normal. So we are keeping our outlook 2021 the same. Getting a bit deeper with the general operating environment there is a lot of estimates that the economic environment will be improving after sufficient vaccination level, means that GDP growth is improving, businesses are improving, people are starting to travel. We have seen a slight increase and there will be, according to estimate, a slight increase with prices of old dwellings and as well with rental apartment rents, Latest estimates show that there's an increase of startups concerning block of flats, but it seems that mainly they are because of build-to-sell projects, which were postponed and canceled last year. They are picking up speed again for home buyers. Here in Finland, it's easy to say that vaccination coverage is proceeding nicely. We had a figure on the chart 30.9% but as by yesterday it was already 35.4% and still a bit higher today. In the market we do see that there's still a lot of foreign interest towards our residential market. Quite aggressive buyers trying to get residential rental apartment portfolios that has an impact already towards our valuation and valuation yields as well. And I think that provides the color that COVID-19 only has a temporary impact to the operating environment. Long-term drivers for demand are still valid. The development of household sizes, an increasing number of one and two person households will continue. And as well, the urbanization, as soon as people are able to move and travel, students moving back to university studies, doing their studies in a normal manner in place, that will provide a lot of long-term demand We have seen during the last decade that there's been a change in people's values towards ownership, increasing number of households living in rental apartments in all the big cities. Today, already more households living in rental apartments than in owner-occupied homes in three big cities, Helsinki, Turku and Tampere. And if we provide some color on what's been happening in the market during the last decade already, because of the urbanization, there's an average need to provide 35,000 apartments a year. Last decade in Finland, in the big picture, we've been able to provide enough homes on average, but sadly, most often in wrong places. If we look at the chart on left hand lower corner, Actually here in capital region, in Helsinki region, the population growth has been strong and not enough new apartments have been provided here. Only during now, the last two years, enough apartments have been provided to the market. And on the other hand, last year, because of COVID-19, urbanization didn't continue in a normal manner. and that created a situation temporarily that there's less of demand towards a bigger supply. But Finland, especially capital region, needs that more than 40% of all the new apartments should be completed to Helsinki region. One thing we can see here as well is that the highest volumes in residential startups were 2017 and 2018 and now we've been coming down a bit all the time. So that means that the number of completed apartments in the total market are going a bit down all the time. Provide some color on our key figures. Even throughout COVID-19, and a bit challenging period of operating environment we've been able to grow our total revenue we've been and two aspects there of course we've been able to complete new apartments and then increase rents on the net rental income side last winter was cold and provided a lot of snow compared to previous year and compared to so-called normal winter and that created more maintenance expenses compared to last corresponding period it was 2.3 million euros and for example extra heating was 1.6 million euros compared to last year corresponding period. FFO level was impacted of course by the a bit lower net rental income as I provided color then on the other hand the loan portfolio was as well bigger this year. Fair value of investment properties, 7.1 billion euros today. We've been investing a lot in the market. On the other hand, of course, there was a positive impact and change in fair values. Mostly our investment, gross investment 68 million euros are new development projects. New development project investments were 58.8 million euros profit excluding changes in value 33.6 million euros 13.2 percent better than last year and then of course profit before taxes 177 million euros was really strong and it that included a net gain in fair values of 143.5 million euros For Koyama it's all the time important that we are able to grow using multiple sources. So we are providing new homes based on our own land, we are buying projects from construction companies, we are able to convert buildings into apartments and then we are buying portfolios if we find suitable according to our parameters. At the end of Q1, we had more than 2,600 apartments under construction. All the projects are located in Helsinki region, along with excellent microlocation, along public transportation and services. All the projects are providing the net initial yield of around 4% or above 4%. All the projects have a fixed price with the construction company. So even though if we would see an increase with the construction cost in the market, we wouldn't be impacted with our projects. Metropolia case, the zoning is proceeding. The first project zoning has been completed at the end of last year. For example, the new and old chemistry around Hietalähden Torri and then Arkadian Katu. The rest of the project zoning is proceeding this year and hopefully will be finished later this year. Metropolia case will provide another 1,000 units in city center Helsinki. And if we look at the estimated timing of completions, this year mainly our project will be completed during H2. So latter part of the year. And actually the renting concerning new projects has been proceeding in a normal manner. For 2021, we are reaching an even higher number, completing more than 1,700 apartments. So a really strong pipeline there. For us, it's always been important that we are creating good experience, excellent experience for our customers. We are providing a lot of services for customers entering LUMO world. We are providing services to customers living in LUMO apartments. LUMO Web Store already provided more than 23,000 rental agreements. We have created a couple of new services, for example, how to tender electricity contracts and move and installation services for existing tenants. An important service has been myLUMO. More than about roughly three out of four of our customers using myLUMO services. Actually what it means 1300 daily users with myLUMO service. Then to provide some color on LUMO customers. Here a couple of charge, a bit different angles. So, mainly 1- and 2-person households, more than 75% actually, 1- and 2-person households, that's good to connect with the megatrends, increasing number of 1- and 2-person households in Finland. That's visible here in Koyamo as well. Then on the other hand, the age groups, what we have seen last year is that a lot of customers under 25 years are renting the apartments, but as well terminating the tenant agreement in the same apartment. A bit more than one year ago, we had only 8.5% customers below 25 years. So actually, the amount of younger clients has been increasing, but during this COVID-19 period, many of those customers have been a bit worried moving in, moving out, moving to their parents, moving back to the university city, moving away from the university cities. And that's created a rotation which is not normal. Another thing that's been happening, of course, during this a bit more challenging period of time is that families with a single parent seeking for a more affordable home in the market and then in some scale as well those people working in service industries being without a permanent job at the moment. Those kind of phenomena we have seen in the market. Sustainability plays an important role for Koyama all the time. We published a sustainability report in March. As well, we published our green finance framework, linking our sustainability targets with investments and how we are financing them. Of course, we were proud to receive a recognition as the most equal listed company in Finland. and for us it's important that we are committed to complying with the US, UN sustainability development goals as well aiming carbon neutral energy in our properties by 2030. Now I would pass the word to Erika. Thank you.

Thank you Jani and good afternoon everybody from my side as well. On page 13, our total revenue grew 1.5 million euros, and there's two drivers behind that. One is our like-for-like growth was 0.2%, and I will come back to this like-for-like figure later. And the other driver there was completed apartments during the Q1 this year. 45 apartments were completed, but of course, for the top line plays a role. Apartments completed during Q2, Q3 and Q4 last year, more than 400 apartments. Net rental income. down by 0.5 million euros, total revenue up 1.5 as mentioned, and maintenance cost were up by 2.3 million euros compared to last year's Q1, and there was of course the biggest driver, cold winter and higher snowfall, so the heating was up by 1.6 million euros, taking snow from one place to another was quite costly, so up by 0.3 million euros, and then cleaning was elevated 0.4 million euros, and this higher cleaning cost was related to COVID-19, so people spent more time at their home, so that required more cleaning. Page 14, profit before taxes excluding change in fair value, investment properties up by 3.9 million euros, so net rental income negative 0.5 as mentioned, SGA expensive 0.2. 9 million euros so we get some savings thanks to our own activities and of course this COVID-19 plays a role as well there because we were not able to travel and people worked remotely. Finance expense is done by 3.6 million euros and biggest drivers there was again in value of investments, positive figure 2.2 million euros, unrealized change in fair value of derivatives, positive figure 3 million euros, and interest expenses, bigger 1.3 million euros because of the bigger loan portfolio what we have in our balance sheet. Profiting on fair value of investment properties, 143.5 million euros, and biggest contributor there was the yield compression. So the valuation yields came down by 10 basis points, contributing 130.8 million euros for the value chains. Ending restrictions contributed 12 million euros, and development gained a little more than 2 million euros. Of course, on a negative figure in that, The valuation line is monetization investments 1.8 million euros. FFO down 1.8 million euros, so net rental income, negative figure 0.5. SGA expenses, a positive figure, 0.9 million euros. Financial expenses, a negative figure there, 1.7 million euros, driven by the bigger loan portfolio, what we had as mentioned earlier. And then some additional cash taxes because of our disposal during Q1, 0.3 million euros. Page 15, financial occupancy rate. So, of course, the market situation plays a role here. As Jani mentioned, we've been able to make new lease agreements in a normal manner, and the tenant turnover is elevated, and here the second wave of COVID-19, of course, plays a role, because again, students were not able to move to the where they study and travelers were not able to come to the country or travel inside the company. As Jani mentioned, we expect those impacts to be temporary. So like for like rental growth, most likely, in H1 is going to be moderate, but after the sufficient vaccination level, what we expect to be there during the summer, the second half of this year, the occupancy rate should be improving as the like for like rental growth. page 16. So the impact of rents and water charges was a positive figure, 2% here. So we've been able to increase the rents pretty much in a normal manner. And it's good to note that more than 40% of the annual rental increases are coming through during the first quarter of a year. So we are proceeding there pretty much as planned. And the impact of occupancy rate is point 1.4 million euros in negative. Then we have 0.4% negative impact for other items. And this is actually a group of several smaller items. So we have in some of our residential buildings, there are some commercial premises there where the occupancy rate of course impacted by this COVID-19 and some other leased premises as well. And some rent fee periods given in those commercial premises, sauna fees were down slightly, as well as car parking fees. So all this was included in these other impacts. But in total, for luck, growth was moderate as anticipated. Investments proceeding according to strategy 68 million euros most of that our development investments 1.8 million euro of course included as a modernization investment and in that figure. Then modernization investments and repairs put together up by 0.1 million euros repairs down by 0.2 million euros and modernization investments up by 0.2 3 million euros. And the big picture going forward hasn't really changed, so we expect modernization, investments and repairs put together to be between 60 and 70 million euros going forward. Page 18, value of investment properties, 7.1 billion euros. up by 209 million euros from the year end, investments 68 million euros, and then changing fair value of investment properties 143 million euros. On the right-hand side, we still have 2,123 apartments, where we have restrictions regarding the valuation, and these restrictions will gradually end by 2024, and there's going to be an uplift in total in value around 140 and 160 million euros, and the impact here is back-weighted. PACE19, we have a view for our development pipeline. On the left-hand side, Colium apartments, a little more than 2,600 in total, already €460 million invested, and €221 million to be completed, these ongoing developments. These binding agreements providing us a little less than 1,000 apartments, 222 million euros, and it's good to know that these are fixed price turnkey projects, all these. So whatever happens for investment doesn't have any impact for these figures. Metropolia case, as Jani mentioned, two first rezoning in place. already and remaining expected to be in place during this year. And this other right-hand side column covers Pure Land, providing us 1,200 apartments, and then plots an existing building, whether it is a demolished existing building or a new one there, providing 700 apartments, so net increase there 400 apartments, because there's 300 apartments in those buildings. We estimate that investments in developments this year is going to be between 370 and 420 million euros. Equity ratio and loan-to-value, we have set the target for equity ratio to be above 40 and loan-to-value to be below 50. We have quite sizable buffer against these levels and these figures, balance sheet figures, of course, supports our growth going forward. And EPRA NRV improved ending 17.55 at the end of Q1. Page 22, we have very strong financial key figures, more than half of the portfolio already from the bond market, €3 billion in total interest-bearing liabilities. We have an average fixed interest rate period of four and a half years, as well as average loan maturity of four and a half years, and our hedging ratio is 90%, so we are very well hedged against any potential change seen in market interest in environment. Average interest rate 1.8, that's including the cost of derivatives, that's actually a rounding, so the third decimal changed there, so nothing changed in the loan portfolio as such. And in this year and 2022 and 2023, we don't have any major maturing loans in our portfolio. Page 23, strategic targets towards 2023. Annual growth of total revenue, I will come back to that later. So, annual investments well in line with our target, and as I said, we estimate that the investments this year is going to be between 370 and 420 million euros FF4 against total revenue 28.4. It's good to know that according to IFRIC 21, we booked all property taxes in our Q1 figures. The total amount of property taxes is 11.4 million euros. So if that were allocated, the portion of property taxes for Q2, Q3 and Q4 was around 8.1 million euros. 5 million euros, and if we then add this to the actual FFO for Q1, the FFO against total revenue would have been 37.2, so well in line with our strategy target. Net promoter score 21, some decrease there. Actually we measure this net promoter score from four different points. New customers, leaving customers and our customer service center. And this is ongoing thing and nothing actually changed there. What caused this change in the net promoter score was this survey what we do quarterly. and we asked our existing tenants the specific questions, and there was a drop in this recommendation question, but all questions related to customer satisfaction was pretty much unchanged. So how we interpreted this is actually that people are simply tired of this COVID-19, so they have to spend more time at their home and they wait to be able to move towards a normal life, if you like. Our outlook for 2021. This is unchanged. So we estimate that the top line growth is going to be between three and five percent. And there are, of course, a couple of assumptions behind this outlook. First of all, we estimate that the number of apartments to be completed this year is going to be according to the schedule Jani already mentioned. And the old development projects are proceeding without any delays and all projects that are on the marketing phase are selling in a normal manner. So we think that that is proceeding as planned. And rent increases is of course something that we are going to do in a normal manner, and more than 40% this year's rental increases already made. And then we, as estimated earlier, we estimate that the like-for-like rental growth for the first half of this year is going to be muted, and back of a sufficient vaccination level second half of this year will have a positive impact. And based on all estimates from authorities, the estimates are that the sufficient vaccination level is going to be reached during this summer. And then what happens after that? So students will move to those places where they really want to study. So they want to move to those places. International students will move to Finland. business travelers will be there again, tourism hopefully is going to pick up as well and gradually the urbanization is going to be there as well. These students, they most likely is going to be the first movers and they want to go to those places where they actually study as soon as possible and it's going to have a big impact for the total market, so some of those those apartments that are currently vacant will be taken by those students and of course there is going to be impact for our portfolio as well because we have some portion of students. So that might happen actually quite fast. Our outlook for FFO 150 to 163 million euros And if you look then the midpoint of that range, there are several assumptions behind that. So we estimate that the total revenue is going to be according to those lines I just described, that the normal weather from here on is going to be no disposal this year, so no additional cash taxes, additional financing according to those development projects as they go. And of course, we estimate that we can achieve some cost savings, especially regarding repairs and SDA expenses. So, these are assumptions behind the midpoint of that FFO range. Page 26, dividend policy, nothing changed there. So, the 60% of the FFO will be paid as dividend, providing that the equity ratios about this, 40% level and we have, as mentioned, quite sizable buffer against those levels. And that's at this respect to Jani.

Thank you, Erik. And as to summarize, of course, for Koyama, it's important that we are a long term player. Our operations are meant to provide business for several decades. So we do follow the megatrends and we have expected and do expect that the impact of COVID-19 pandemic will be temporary and the big drivers creating demand long term urbanization and the development of household sizes will continue as they have been developing before COVID-19. So that creates our operational environment in the long term. We are in a good position. We've been operating quite systematically. We have been able to grow our turnover and the fair value of our investment properties. We have a really strong pipeline providing new homes in Helsinki region. And as it seems, our expectation concerning the vaccination level sufficient level will be reached by the summer is proceeding as we've been hoping and expecting. And I think we are in a good position to go forward. Thank you. And now please, Maija.

Thank you, Janne, and thank you, Erik. Now it's time for the questions, so we will be taking those first from the conference call line. So please, operator, we're ready.

Thank you. If you wish to ask an audio question, please press 01 on your telephone keypad. If you wish to cancel from the polling process, do so by pressing 02 to cancel. Once again, please press 01 on your telephone keypad if you wish to ask an audio question. There will be a brief pause to ask Rachel questions to be registered. Our first question comes from Ansi Kevin-Niemi from SEB. Please go ahead.

Hi, guys. Thanks for taking my questions. I have a couple of them. First of all, starting with the fair value gains. Yield compression was the main source of most of the gains. Could you talk a little bit about that? What kind of properties? Which cities? Did you see the yield compression or was it just across the board?

Well, it was pretty much across the board, but it was slightly waiting for other places than Helsinki center. So Turku and Tampere, there we saw the decrease of yield requirements and then areas around city center area here in Helsinki.

Okay, thanks. Then on the guidance and revenue growth of three to five percent. In a way, what has been baked in in terms of like-for-like growth and new apartments that will come to the market in the next few quarters? So what's the volume growth and what's the like-for-like growth contribution to the guidance?

So what comes to like for like, so we estimate that the first half of this year, the like for like top line growth is going to be moderate and on back of the sufficient vaccination level is going to be higher on the second half of this year. And then what comes to the completion of new apartments. So we have penciled in pretty much the schedule, what's in the presentation. Uh, page, uh, page 10. And as discussed, so all these development process, they have proceeding according to the plans and the selling side, so marketing side is as well going in a normal matter. And by saying normal matter, I mean how they went before the COVID-19. So even there is more supply in the market, it looks like that there's still a lot of demands towards these new apartments.

Okay, thanks for that. That was the third question that I have. So let's skip that and let's move to the fourth. Just making sure the harsh winter conditions, cold weather combined, it was roughly 2 million in cost terms, extra cost in Q1, right?

Correct. 2.3 million euros.

Okay, great. That's all for me. Thank you.

Our next question comes from Svante Krofos from Nordea. Please go ahead.

Yes, hi. Svante from Nordea. I hope you can hear me. Yes, good afternoon. I have a couple of questions. The first one actually is... I should have asked this already a quarter ago, but I ask it now still. In your property valuation assumptions, you lowered the occupancy rate assumption for Helsinki region from 98 to 97 and a half. I think it was in Q4 last year. Could you elaborate on that?

Jani, hi Anssi, Sante. We had a discussion with the valuation authority and it seemed that there was a right timing to make a slight change in the occupational level there. Nothing big there.

Is it related to the high amount of completions in the Helsinki area of new rental apartments?

I think it was a normal kind of business running through the numbers and estimates for a longer term demand and supply.

Okay, thank you. And then a question to Erik. I missed when you split up the like for like rental growth. So the rental increases were 2% impact of occupancy rate was minus 1.4. And what was the other impact? What did that...

That's a combination of several minor things. So, there are sauna fees, parking space fees. We have some commercial premises and some other premises. So, occupancy in those. So, it's a combination of several small items.

Okay, thank you. And then perhaps more broader questions. Have you seen any change in the demand for what kind of apartments? I mean, we have heard stories about people wanting to perhaps seek for a bit bigger apartments if they start to work more from home. I know that your target is mainly one and two person families, but have you seen any trend of this increased demand outside of the metropolitan areas?

Actually, we are tracking all the new tenant agreements all the time on daily basis and nothing big going on there. One could argue that a slight change of people renting two-bedroom apartments, those are typically a household of two persons. but it's only 180 apartments more than last year. So nothing big there.

Okay, thank you. And then lastly, on transactions and your valuation, was there any single deal that impacted your valuation in a material way? There was at least that one, YIT and Åland's Bank cancelled quite a big chunk, and then I guess there is another deal pending, but are there any major transactions that have impacted your valuation yield?

Of course, at the end of the day, that's something that's decided by the valuation agent. What they provided information last year was that they felt that there was not sufficient data from the market, so not enough deals. And they've been collecting, of course, data throughout the last 12 months and piece by piece that picture has been completing and as we've been providing information that we have seen quite aggressive yields we have seen portfolios both with the three and mid figure now we see that that international players are willing to pay three and a low figure and that has had an impact towards evaluation yields as well

If I may add, so it's not only one or two transactions, so it's a whole bunch of transactions, so brokers are following what's happening in the market, and there's already evidence from several transactions completed, and there's some additional discussions ongoing, but they are not taken into this account, so it's a bigger picture what those brokers and these valuators were looking.

Okay, thanks, that's all from me.

Thank you. Our next question comes from Celine Huynh from Barclays. Please go ahead.

Hi, thank you for the presentation. My question is more for Erik. Can you explain again why your net promoter score has declined so materially?

So, we are... Do you know the net promoter score as such? So it's calculated, we simply ask the customers that how likely is it that you recommend the company or its services for your friend or your peer in scale 1 to 10 and then we take out numbers 8 and 9 and we calculate the portion of higher numbers and the portion of lower numbers. So the figure can be anything, minus 100 to 100 and we've been able to move towards our target 40% and now there is a drop in this Q1 in Net Promoter Score and we calculate this figure from four different points. So we ask these questions from new customers, from leaving customers and from those who use our customer service center. This is an ongoing thing and nothing changed there. Actually, the result has been quite stable. And what changed during the Q4 was that once every quarter, we ask from existing tenants the same question. And in this Q1 survey, there was a drop in this part of this Net Promoter Score. But as I said, only this question, how likely is that your recommendation, there was a change, but all questions related to customer satisfaction was pretty much on the same level or many of those actually improved during the Q1. So how we see this outcome is pretty much that it's COVID-19 related. So people are simply tired to be at home and tired of this COVID-19 and that's why they are they are unsatisfied in a way, and then they are waiting the vaccination level to be sufficient and the restriction to be removed. So this is how actually it works.

Right. Thank you very much.

Thank you. Just as a quick reminder, if you wish to ask an audio question, please press 01 on your telephone keypad. Once again, that's 01 on your telephone keypad if you wish to ask an audio question. Our next question comes from Eric Granstrom from Carnegie. Please go ahead.

Thank you very much. Good afternoon, gentlemen. I only have two questions left after following through the Q&A. Could you explain a little bit about the development of the vacancy rate in Q1 versus Q4? Because it obviously increased and increased almost one and a half percentage points. What exactly is this due to? Is it because of completion of apartments or is it because of cancellation of contracts that happened earlier in 2020? Or did something actually happen in Q1 versus Q4?

question if I provide some broader color on issue and then if needed can provide more detailed color so actually what we provided from 2020 was the full year occupancy level and then now Q1 figure will then develop after we move forward this year what's been happening during the winter was that the second wave of COVID-19 kicked in and that has had an impact to the market and we've seen that even though we've been actually renting the apartments quite in a normal manner we have seen more people moving out so terminating tenant agreements some of those agreements have been done by students and even though they already had moved back to their parents, they had kept the apartment, but as the second wave kicked in, they terminated the tenant agreement. And then on the other hand, as I said, we have seen in small scale that, for example, single parent households have been moving out in order to find a bit cheaper, a bit more affordable solution. But as Erik provided color, The renting of new development projects has been proceeding in a normal manner. No problems there.

Thank you. And then my final question is, what have you seen so far in Q2? I mean, we are a month and a half about into the quarter, and you mentioned that you expect like-for-like to be, as you put it, moderate. In the first half of the year, it was basically zero in Q1. What have you seen so far? Do you actually see like-for-like trending up, or is this something that you're still waiting for?

So we estimate that the like-for-like rental growth for the first half of this year is going to be moderate. And on back of the sufficient vaccination, what we expected to be there during the summer, the like-for-like top line growth is going to be accelerated the second half of this year.

But so far, Q2 has developed exactly as Q1.

As mentioned, we estimate that the first half of this year, the like-for-like rental growth is going to be moderate.

Okay, good. Thank you very much. Those were my questions.

Thank you. There appears to be no further questions, so I'll hand over back to the speakers.

Thank you very much. And it seems we don't have any questions from the chat. So I thank you very much for participating in our event today. And we will be publishing our Q2 report on 19th of August. So hopefully we will meet then again. Thank you very much and have a nice day.