Lumo Kodit Oyj

Good morning ladies and gentlemen and welcome to Koyamo's interim report of January-September's news conference. My name is Maija Hongas and I'm manager of investor relations here at Koyamo. I have a pleasure to welcome our CFO Erik Kelt and CEO Jani Nieminen to present our results in a second. But first of all, it's good to mention that after the presentation, we have time for questions. As we are able to host guests today as a live, we'll be taking the questions first from the room and after that from the conference call line. And final questions will be taken from the chat. But without further ado, the stage is yours, Jani.

Thank you, Maja. Good morning. Nice to be here and provide color on Koyamo's Q3 results. As we've been saying prior, this year has been in line with our expectations. COVID-19 pandemic has had a temporary impact to urbanization and rental apartment markets. We have seen that our occupancy is temporarily lower and because of that like for like growth has been flat. During the summer, Delta variant and so-called fourth wave of COVID-19 created uncertainty for sufficient vaccination level. As it now seems, this 80% vaccination level will be reached during the next couple of days or at least weeks. Already we have seen that rental apartment market has been returning back to basically normal in Turku and Tampere regions. Here in Helsinki region we have seen this impact of uncertainty, even though since August we have witnessed a rapid increase with open job opportunities and lack of workforce, especially in service industries. So, a positive indication that as soon as vaccination level will be reached, and this uncertainty level goes a bit down, urbanization will continue towards Helsinki region, and we do estimate that long-term megatrends creating demand for new rental apartments in the biggest cities are still valid. Moving towards the operational environment, it's easy to say that since last spring, Finnish economy has been recovering well, despite of pandemic. On the other hand, we witnessed during the summer a rapid increase concerning construction costs. Even though there has been this increase, construction volumes have been picking up speed. I mean the number of new residential startups. We have seen that there is an increasing number of build-to-sell projects. At this point, it's good to keep in mind that all projects under construction here in Koyamo have a fixed pricing, so this construction cost increase has no impact towards our net initial yields. In the market otherwise, what we've seen is that a lot of home buyers have been moving. There's an increase concerning old dwellings. Of course, big regional differences and micro location differences. We see that low interest rates and consumer confidence, high level, is backing up this home buying. On the other hand, what has been happening and we still estimate forward is that rents are still going up between 1.7 to 1.8 percent in the market. Moving to page Five, so as I said, we do believe that and estimate that long-term megatrends creating demand for rental apartments in the biggest cities are still valid. There will be an increasing number of small households, meaning one and two percent households, and they do typically live in rental apartments. Urbanization will continue according to MDI estimates done in the summer. What will happen here in Finland is that urbanization will continue in all three scenarios they provided. In the market otherwise, what we have seen is that there is still a lot of interest towards Finnish rental apartment market from international investors. There have been several transactions made this year, typically all done by international players, some ongoing portfolio processes, and it seems that the yields paid are quite aggressive. On the right-hand bottom side, we see that these megatrends creating the atmosphere and people's values towards rental apartments have been still the same. In all the big cities, the number of households living in rental apartments has been all the time increasing. For example, in Helsinki, Turku and Tampere, half of the households today live in rental apartments. Moving to page six, concerning the operational environment. As I said, COVID-19 has caused a discontinuity to urbanization, especially here in Helsinki region, where we see positive signs since August, job opportunities started picking up speed and there's a lack of working force. As soon as these restrictions will be removed and we have the sufficient vaccination level that is estimated to have a positive impact towards urbanization. There has been now a higher number of built-to-sell projects and construction volume seems to be picking up speed towards the end of this year. On the other hand, It's focusing towards the biggest cities and most important part there is that it seems that a bigger portion of those startups are really built to sell projects and estimates are that this increase in construction volumes seems to be leveling off next year. Of course, increasing construction costs and the amount of materials available could hurt the volumes in a short time as well and bring down the high volumes. Digging a bit deeper to our Q3 figures we are still providing profitable growth our total revenue grew by 1.8% to elements there. Most of all, important is that we are still completing a lot of apartments this year and last year. That provides growth. On the other hand, we have been quite systematic with our renting processes. So even though like for like growth was flat, we have been increasing our like for like rents by 2.1%. Net rental income 196.7 million was improved by 1.5 percent comparing the comparison period some comments there still valid the same reason so we did have a cold winter last winter with a lot of snow we have been having a higher intensity in cleaning because of COVID-19. On the other hand, we have slightly less repairs. FFO improved by 1.1%. The fair value of investment properties today, 7.6 billion euros, is because of our strong growth. combined with the positive change in fair values this year. Gross investments 258.1 million this year so far are mostly new development projects. The amount there invested is 228.9 million euros. As I said, we are still providing profitable growth, so profit excluding changes in fair value, 131.9 million euros was improved from corresponding period by 6.4 percent. And then profit before taxes, 616 million euros, there's of course the impact of changes in fair values of investment properties, that amount is 484.1 million euros. Moving to page eight. We are providing strong growth. We have been so far this year completing 820 apartments, started 818 apartments. At the moment we have 2,624 apartments under construction, all projects located here in Helsinki region. So we do have a really strong pipeline providing future growth. All the locations are here in Helsinki region at the moment having an excellent micro location, close to public transportation, close to services. The net initial yield still concerning our projects under development is either 4% or above 4%, so actually it means that we are still providing a really strong development gain as well as those projects will be completed. And even though there has been this cost increase all our projects do have fixed pricing as well the binding agreements with construction companies providing additional 800 apartments so the cost increase risk is carried by construction companies Moving to page 10 not much additional new color on so-called metropolia properties other than the first projects we are getting ready to start those projects hopefully later this year meaning Abrahaminka to one Agrikolankatu 1 and then the zoning should be completed concerning Albertinkatu 40 and Eerikinkatu 36, so called Kottoraisenkortteli. Then some small delays because of municipality decision making and the zoning process with a couple of projects, but by next year we hope that we are able to start most of the projects. Couple of words concerning our way of operating. We are providing additional value for our customers. We have the platform in place providing a lot of services. Customers still really happy with our way of providing customer experience. So actually, for example, the Net Promoter Score concerning our digital services is 63. and roughly 70% of our customers are using so-called MyLumo services, so mobile, digital services. You are able to take care of your daily issues, ordering services, and get a lot of information from us. What we have seen happening in a customer base is slight changes, Students were active in the market in the summer, so actually there's an increase of 1% points with customers below 25 years, and on the other hand, a 1% point increase with one-person households. On the other hand, a slight decrease concerning one-person, single-parent households, so one-person points there change downwards. Sustainability plays an important role for Koyama. We have always said that it's a part of our DNA. Sustainability work is proceeding nicely. Our Crespi score improved by seven points, and we earned three stars. We also achieved the highest A-level rating concerning public disclosure assessment, and EPRA gave us silver award concerning sustainability reporting. We are moving with our sustainability roadmap, providing by 2030 all our properties with zero carbon. Already today, we are using no carbon electricity in all our properties. At this point, I would pass the word to Erik. Please, Erik.

Thank you, Jani, and good morning everybody from my side as well. So page 14, our top line grew by 5.2 million euros year to date, and the growth during the Q3 was 1.8 million euros, and as Jani mentioned, the like for like. was flat but 2.1% positive impact for rents and what charges increases, occupancy rate minus 2% impact and then others minus 0.2%. So the growth was driven pretty much by the growth of the property portfolio. Entry and tally income grew 2.9 million euros, and the growth during the Q3 was actually 3.3 million euros. Maintenance year-to-date 3.9 million euros, higher than in corresponding period, but it's good to note that during Q1 the weather played a role there, so the heating and snow together was more than 2 million euros. higher than in corresponding periods and then COVID-19 related items so cleaning and water consumption more than 1 million euros higher than corresponding period. So maintenance cost during Q3 was actually flat and repairs 1.4 million euros lower than in corresponding periods. 15. So the profit excluding changing values up by 7.9 million euros and the whole year changing fair values positive figure 616 million euros during Q3. the increase was 17.9 million euros. We kept the yield requirements unchanged during Q3, and there was no ending restriction during Q3, so the positive impact was pretty much due to the development gain from the finalized developments. So, we are still above this budgeted 20%. development gain level. So FFO up by 1.2 million euros during Q3. FFO was 45 million euros, growth there 3 million euros. Net rental income contributed 2.9 million euros HCE expenses was 1.6 million euros lower than in corresponding periods. We achieved some savings due to the COVID-19. Financial expenses up by 2.7 million euros, and the reason behind that is that the loan portfolio is much bigger than in the corresponding period. Cash tax is reflecting, of course, the better result, so up 1.9 million euros from the corresponding period. The formula used the calculation was changed during the review period regarding the current taxes of disposals and of course comparison figures was adjusted respectively. Previously actually we excluding the loss and profit from sale on investment properties from the calculation but we included the cash taxes of the property disposals and we received feedback from the special international investors that it's not a balanced situation, that we should actually exclude both items, and that's what we changed now. And the timing for that change was good, because it has no material impact for comparison figures. Page 16, financial occupancy rate, as Jani mentioned. The uncertainty related to vaccination and removing existing restrictions was delayed, the migration towards the Helsinki region. We've already seen improvement in our occupancy rate figures in Turku and Tampere. I think we've already covered that like for like, so page 18. Our investments, €258.1 million, by far the biggest portion there. Our developments, modernisation investments, €7.7 million, and capitalised borrowing costs, €4.2 million. Repairs, €1.4 million less than in corresponding periods. Modernisation investments, €12.4 million less than in corresponding periods. That decline in modernization investments is pretty much a timing issue, so we haven't started any bigger projects during Q3 or Q2 actually, and that plays a role, so it's a pretty much timing question. Page 19, fair value investment properties. up by the year end 743.6 million euros, investments 262 million euros and profit on fair value of investment properties 484 million euros. We still have 2,127 apartments where we have restrictions regarding the valuation and those restrictions will gradually end by 2024 and there's going to be an uplift in value between 140 and 160 million euros and the ending restriction is back-weighted. So, we have already invested €411.9 million for apartments under construction, and €233 million to be invested to complete those ongoing developments, providing 2,624 apartments, binding agreements, €163.4 million to be invested to provide 796 apartments. On top of that, we have, of course, this metropolia portfolio and land and existing properties where the idea is to demolish existing properties and to build, replace it with a new one. We estimate that investments in developments project amount to about 350 to 380 million euros this year and all our ongoing developments and land bank located here in Helsinki region. Equity ratio and Alontu value, page 21, we have there very strong figures actually, and we are well in line with our strategic targets to have equity ratio above 40 and loan-to-value below 50%. Page 22 showing strong growth in EPRANRV 19.32 at the end of Q3. We have still quite strong capital financial key figures. Average cost of debt 1.8%, including cost of derivatives. Hedging ratio quite high, above 90%. Average interest rate and average loan maturities clearly above four years. We didn't make any new financial arrangement during Q3, and there's no need for additional financing this year, There's no refinancing needs for actually 2022 or beginning of 2023. There's one 200 million euros bond that will mature in 2023, but it's not time to do anything actually for that. So no major refinancing needs for a couple of years to come. We are quite cash rich, so cash and cash equivalents and financial assets together more than 380 million euros. Credit lines committed unused 300 million euros and commercial paper program 250 million euros, 50 million euros outstanding commercial papers at the end of Q3. Page 24, carbon notes regarding our strategic KPIs, so top line growth 1.8%, investments 258 million euros FFO against total revenue above 39%, so clearly above our... 36% target and we still have property taxes allocated in calculated already in this figure so the Q4 portion of whole years property taxes is 2.75 million euros. Loan to value equity ratio well in line with our target as already discussed. net promoter score 20. Here it's good to note that our digital NPS is 63 and it's not included in this figure. And although this NPS figure such as came down during this year, so the all questions regarding customer satisfaction has actually improved during this year. And then we have noted that this coming down of NPS is quite a universal phenomenon across the board. Page 26, our outlook unchanged, so we estimate that the top line growth will be between 2 and 4% and the FFO between 150 and 158 million euros. So there has been a delay in lifting COVID-19 restrictions affecting the rate of migration And that of course plays a role there for the top line and that's why we estimate that we will hit the low end of that top line range. Key consideration regarding FFO is of course top line development plays a role there. Weather during Q4 is going to play a role there. the timing of repair projects will play a role there, and we don't need any additional financing for the remaining part of this year. And it's good to keep in mind that there are some seasonalities regarding the maintenance cost, of course. They are mainly related to weather. Dividend policy, page 27, no changes there, so the dividend policy. is to pay at least 60 percent of FFO provided groups. Equity ratio is above 40 percent. Now, I hand it over to Jani. Thank you, Erik.

Thank you. Anyway, to summarize, It's easy to say that strategy-wise we have been still proceeding systematically creating growth and we do have a strong project portfolio creating future growth. Long-term trends creating demand for new rental apartments are still valid and we estimate that urbanization will continue in the future as well, creating this demand for new homes. And at this point I would pass it to Maija.

Thank you very much for the presentation. And now it's time for questions. And first we'll be taking questions here from the room.

Svante Krukfors, Nordea. A couple of questions. First, regarding relatively high level of completions and coming completions of new rental apartments. In the Helsinki area, a lot of built-to-sell properties. What kind of challenges do you see in being able to maintain the 2% to 2.5% rent increase?

You estimate that as soon this uncertainty concerning what's the right level of vaccination and whether restrictions will remain or will be removed will come down. People will be starting to move towards healthy gas. is already a lot of job opportunities available. So, we estimate that demand will be growing. On the other hand, even though there are more built-to-sell projects, as I said, in a customer base, what we have seen is that, for example, the number of one-person households moving to Lumo homes has been increasing. So, there is a strong underlying demand for rental apartments.

Okay, thank you. And then regarding your occupancy rate, it has been quite, before the pandemic, quite stable at around 97%. Is that still the the target long-term that you expect to stay at? I think in your valuation calculations, it's slightly higher. Do you have any comments on that?

To provide some color there, valuation-wise, there are estimates concerning occupancy with different estimates concerning different parts of Finland. We do believe that we are going back to our normal levels in the coming years. So, 97 is to be expected in the long run. On the other hand, as I said, we have already seen that things are back to so-called normal in Turku and Tampere.

Thanks. And then, you took down a bit the full year investment level from the previous 370 to 420, now 350 to 380. Does this relate in any way to the perhaps not immediately the cost inflation, but how do you also look at the current high cost level? Is that something that could postpone your decisions to make new investment decisions?

I would say that basically it can provide deeper color, but it's more a question of timing. These kind of situations with rapid cost increases have been happening before as well for example two to three years ago we provided information already then that when the market gets tough we are good we are able to find different solutions different approaches if needed we are still working on daily basis in order to find new projects and we do believe that we are still able to find new projects according to our parameters, even though we know that we are quite systematic and hard with our parameters.

Thanks. And I think Erik alluded to it, but the development gains you're achieving is still closer to 30 and 25 percent. Is that correct?

That's correct.

Last question regarding, I mean, you had a big value uplift in Q2. You said that there's some transactions possibly going on. Could you just specify a bit what were the transactions in Q2 that impacted you the most and what sort of portfolios are out in the market now?

As I said already after H1 there was a couple of transactions completed and we know that there are some ongoing processes without going to specify project by project what we have seen is that yields bait have been three and a really low figure.

Have you already seen yields starting with a two?

I guess that part remains to be seen, but hitting flat three has been happening already.

Okay, thank you. That's all from me.

Okay, then we will move to questions from the conference call line. So please, operator, we're ready.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name is announced, you can ask your questions. If you find your question is answered before it's your turn to speak, you can dial 02 to cancel. Our first question comes from the line of Celine Chitterine of Barclays. Please go ahead. Your line is open.

Good morning. I have two questions, one on occupancy. Can you break down the occupancy rate that you've disclosed? What was the like-for-like move? What is the vacancy due to new development? I just want to understand if your occupancy rate is improving on a like-for-like basis. And then my second question would be on the recent announcement. Any comments on the new large shareholder? Have you spoken to them? Do you know if they intend to do something differently in general strategy? Any comments? Thank you.

So the like-for-like growth was negative 0.1%, and there's three components actually included in that figure. So the increase in rents and water charges was a positive figure, 2.1%. the impact of occupancy was negative 2% and then other items was negative 0.2%. And your next question. Yes, we have received the flagging notification from the Heimstar that they currently hold a little more than 10% of the Coimbatore shares. And we discussed with them as with any shareholders.

Can you provide a bit of color on this? What was the discussion about?

Well, we discussed them with any other shareholders, so there's actually nothing more to be had at this point.

Okay, thank you.

Thank you. Our next question comes from the line of Erik Granström of Carnegie. Please go ahead, your line is open.

Thank you. Good morning. I also would like to talk a little bit about sort of what you see in the market. You keep mentioning the fact that there is quite substantial interest in the direct market for residential rentals with yields coming down towards three flat. You obviously have higher requirements than that on your books. Is Technically, how long do you think that the sort of lag between what we're seeing in the transactions market is going to trickle through into your numbers? And secondly, do you see a large difference in yield requirements in portfolios depending upon where these assets are located in Finland?

of course there's some differences between yields depending on the location and the age of the building concerning those portfolio transactions but in my eyes it seems that this range seems to be narrowing concerning valuation we do believe that our valuation has been done as always in a proper manner providing correct information. There is good to keep in mind that valuation is always done property by property specified yields. What we have seen in the market is that investors are willing to pay a portfolio premium valuation will be done next time at the end of this year by an outside expert. So we don't provide any guidance or any color of what might happen or what will not happen, but that part remains to be seen.

Okay, good. And then my final question was regarding the fact that you mentioned you had fixed contracts with your entrepreneur, basically the construction companies of your projects. But have you seen any of your contractors sort of run into financial issues due to cost increases? Because it's one thing to have the cost fixed. That works as long as the contractor is still around. But if a smaller contractor can't handle the the cost inflation and goes bankrupt, obviously, you're going to end up in quite a poor situation. Have you seen any situation like that at all?

No. All our projects are proceeding in normal manner. Of course, we are a professional buyer. We are following all construction companies continuously risk-wise. We do have good companions providing us new homes, so it seems everything is okay there.

Okay, thank you. My final question then regards like-for-like development. Given how you're guiding for the full year, it seems like like-for-like development in Q4 is going to be quite similar to Q3. And given your expectations for moving into next year, could you give some more guidance as to what you expect in terms of like for next year, given the scenario that you have for vaccination and Helsinki development in general?

So far, we haven't provided any guidance for 2022, but we've been providing information that mid to long term, we are able to provide like for like growth between 2.1 to 2.45 percent and that's still our estimate so that's a combination of both our capability to increase rents and then the positive impact when urbanization continues and occupancy increases okay that's clear enough thank you very much

Thank you. Our next question comes from the line of Anders Tolman of Green Street Advisors. Please go ahead, your line is open.

Hi, good morning. I was just wondering, maybe you can provide some more color on the rental market developments in general in Helsinki. What are you seeing in terms of leasing volumes at the moment as you've gone through the recent months? And I do recall that from previous quarter, you mentioned that the leasing volumes generally are higher than 2019 levels. I'm just wondering how kind of that leasing momentum will translate into occupancy going forward.

Thank you for the question. Yeah, we did provide color after H1 results that what we saw during July was record high number of new tenant agreements. Because it was true, we saw a lot of students moving towards university cities. leasing numbers have been quite strong this autumn, so we are quite happy and looking with a positive mindset towards future.

And at the moment then in autumn they are also above 2019 levels or how do they compare?

We are a bit above 2019 levels.

Okay, understood, thanks. And then my final question about Heimstaden as well. I'm just wondering, would the board of Koyamo even entertain an offer, if something were to put on the table, and also curious, has Heimstaden's move prompted a dialogue with any other interested party, essentially?

I would say that this type of questions concerning Koyamo shareholders for me as a company CEO, have been present throughout the years from different angles, and it's good to keep in mind that as Koyama CEO, I do not comment on questions relating to company's ownership, as it falls within the remit of the board. It also has never been our practice to generally comment on changes in a company's ownership. As a CEO, all the owners are always good ones, and we are always happy with our owners. and further questions concerning board decision-making should be provided to the chairman of the board.

Thank you, that's all from my end. Thank you. We currently have one further question in the queue, so if there are any further questions, please dial 01, not on your telephone keypads now. That next question comes from the line of Oliver Carruthers at Goldman Sachs. Please go ahead, your line is open. Good morning, Oliver Carruthers from Goldman Sachs.

So in your portfolio appraisal disclosure, there is a capital region market rental assumption of €19 per square metre. However, if I look today on your Lumo web store, I struggle to find anything less than €23 per square metre around Helsinki. And it seems like the average of what's available is much higher than this. Can you first comment on where the average in-place rents are today for your Helsinki region portfolio? And secondly, if you are right and migration to Helsinki does resurge over the next 12 months, how positive do you think this could be for the market rental impact? Thank you.

So, thanks for the question. So, it's actually a tricky one, because there's so huge variation. So, it depends which part of the Helsinki region you are, whether the building is a new one, an old one, whether you are on a first floor or on a top floor. So, we've seen rents in our portfolio in Helsinki region somewhere between 20 and highest is actually about 30 euros per square meter per month. So when we do renting and when we do look what are the rent increases every month, so we look, we price them apartment by apartment and we look what are the prices in the market and of course we are able to. to set the prices higher given the strong brand name and services and stuff like that. So it varies. It depends which property we are talking about.

But the in-place level for your portfolio today, are you able to give that disclosure?

So we need to look whether we are going to add some disclosures. We think that currently we are quite visible in our figures, but we need to discuss internally whether we should add something actually.

But then on the other hand, yes, it's good to keep in mind that all our tenant agreements include a clause which allows us to increase the rents once a year with index plus maximum 5% points. So we do have quite a good headroom to move with the rent levels if we see that markets are changing.

Okay, Claire, thank you.

Thank you. And currently, we have no further questions on the phone lines.

Thank you very much. Then we will continue with the questions from the chat. The first question we actually have already discussed regarding Heimstaden, but the next question is, the increased payable tax ratio, can you please comment on the payable tax in Q3? Also, what are the tax relating divestment adjustment in the FFO calculation?

We still estimate that the cash tax rate will be somewhere between 11% and 13% going forward, given the fact that we are able to use depreciation in our portfolio and we have quite large taxes there, so that's pretty much going forward. In the FFO calculation, the figures added in the calculation is related to how we changed how we calculate the FFO. So now, previously we excluded the profit and loss of sale of investment properties out of the FFO calculation, but we included the cash taxes due to the disposal of properties and we received a lot of feedback from international investors especially that it's not balanced, so we should exclude both items and that's what we changed and now it's visible in that calculation.

And then the final question, the occupancy rate in the Helsinki region of 93.6%. How does this stand versus market levels and how does the competitive landscape on rental levels hold up in the region?

We have to keep in mind that a lot of the supply is provided by individuals owning a couple or several apartments. They don't provide any information concerning occupancy levels. Comparing to big players, we are doing good and market seems to be improving. So, as I said, it seems that rents are still improving or increasing between 1.7 and 1.8 percent.

Thank you very much. Do we still, yeah, we have one additional question from the room, so we'll take that one next.

One final question regarding your, you mentioned that there's some yield narrowing between good and not so good locations. What's that the consequence of? Is it that you have a lot of international investors who have done a DD on Finland as a market and just don't get hold of any good portfolios and kind of want to look also outside the A locations?

Yeah, I think that's a typical impact when there's a lot of money looking for investment opportunities and on the other hand not enough opportunities available and hard competition, so that typically narrows down the range. If there's not enough portfolios available that could continue, so it's typical that buyers are looking for A class properties if they are not able to find they are moving to B then to C because as we know there is a lot of money in the world at the moment seeking for opportunities.

Okay. Thank you very much for participating in our event today. And our full year report will be published on the 17th of February. So we hope to see you all then. Thank you very much.