Lumo Kodit Oyj

Good morning, ladies and gentlemen, and warm welcome to Koyamo's first quarter results news conference. My name is Niina Saito and I'm Group Treasurer and Head of Investor Relations. Today, CEO Jani Nieminen and CFO Erik Hjelt will tell you about Q1 events. And after their presentation, we will have time for questions. We will first take questions from live audience here. then from the phone line and finally from the chat. But let's get started and let's welcome Jani.

Hi, thank you, Nina. Nice to be here and providing color on what's been going on here in Koyama during Q1 this year. To start providing some color and wrap up in the big picture, I would say, of course, rental market has been affected by tighter COVID-19 restrictions introduced late last year. Restrictions were lifted in March, and this will be having a positive impact towards rental apartment markets and urbanization here in Finland. Russian attack to Ukraine has had no direct impact to Koyama operations. All the development projects, ongoing projects, have been proceeding in the normal manner as planned. Of course, we have seen in the market cost increases concerning construction business, some availability problems concerning materials, but they have not been impacting our business. Our figures, Q1, a solid performance, operations have been remained stable, financial position is really strong. So I would say we've been able to proceed according to our strategy. We've been able to actually increase our top line rents, increasing total revenues, net rental incomes and FFO. Now we see the rental apartment market improving as COVID-19 restrictions have been lifted, as I said, and towards the year end things are going to get even better. Moving to the operational environment on page four, the reopening of the economy and recovering demand of services will support the private consumption, creating growth and urbanization. Of course, the war in Ukraine and related sanctions are estimated to slow down a bit Finland's economic growth, and prices are expected to increase due to inflation. but activities among consumers, individuals, have been witnessed here in Helsinki streets. People are moving a lot, using restaurants, meeting, having fun. Residential start-up numbers seem to be increasing towards the year end last year. Now it's clear that estimates have been brought a bit down, so the number of new residential start-ups is declining. I would actually say that our estimates are lower in the market than the official estimates. Construction companies have been having problems with increasing construction costs. On the other hand we see increasing interest levels, increasing uncertainty among home buyers and that may create an impact that actually more built-to-sell projects will be either postponed or canceled in the market. Not enough information concerning construction cost increases this year. Of course, it's easy to say that some material cost we have witnessed rapid increases, severe increases. On the other hand, we have to keep in mind two things. All Koyama construction projects, new development projects, are based on fixed prices. They are turnkey projects, so no impacts to our ongoing projects. On the other hand, according to construction companies and statistics it's good to keep in mind that actually of apartment prices roughly 30% are material costs and of that 30% of material cost some 20% are materials like rebars, steels, windows and wood structures. So at the end of the day the cost increases concerning these certain materials will have a limited impact to the overall construction cost increases. Moving to page five, the operational environment. We firmly believe that all the long-term trends drivers for demand of new rental apartments in the biggest cities are still valid. urbanization will continue. As economy is improving and society is opening, we have witnessed already the increasing number of work opportunities. Students are moving back to university cities and urbanization will pick up speed. Actually estimate, for example, here in capital region is that 14,000 people increase will be happening this year here in Helsinki region. On the other hand, what we see in the market is that if we combine uncertainty related to the war in Ukraine inflation, interest levels, construction costs that may have an impact for homebuyers. They will start postponing the decision making buying homes and as I said that might have a severe impact in build to sell projects with construction companies, bringing volumes in the total market down and actually create the situation where the relative attractiveness of rental apartments will increase compared to owner occupied homes. We do see a lot of interest still from international players towards Finnish residential market, actually a couple of quite big transactions have been completed, buyers have been international players and coming back to what I said and society opening rental apartment market improving, yes during Q1 the occupancy level was not as good as we would hope, on the other hand our focus has been quite systematic approach concerning pricing still improving our net rental income and top line growth increasing the rents in a normal manner now what we have seen after restrictions been lifted April if we compare the amount of new tenant agreements with the last year April the improvement has been 17% now during May, during the first 11 days, the actual growth compared to comparison period is about 20%. So a number of new tenant agreements is actually increasing quite rapidly. The old thing is still valid. As urbanization continues, the number of households living in rental apartments in all the big cities will be increasing in the future as well. Helsinki, Turku, Tampere, today half of the households live in rental apartments, actually more households living in rental apartments than in owner occupied homes. And as been previously said, the number of small households is still increasing here in Finland, there we see no impact because of Covid-19. A lot of color already provided concerning slide six. As I said construction cost increases have been present, some challenges with raw materials On the other hand, limited impact and things like rebars would, at the end of the day, they are bulk. Construction companies will be able to find new solutions with logistics. Our estimate is that this kind of cost increase impact will be temporary. On the other hand, of course, inflation and cost increases concerning, for example, energy. will have an impact in construction cost, population growth will start picking up speed here in capital region again as I said and what we will follow closely is that If construction volumes and when they start coming down a bit, projects typically will be first postponed, then construction companies will start figuring whether to cancel those projects and that situation may open possibilities for companies like Koyamo with a really strong financial position. Moving forward to page 7 and our key figures, they are really solid. We've been able to actually increase the total revenue by 2.4%, increase basically based on units completed last year after Q1 and this year, providing growth. Net net rental income increased 2.8% strong result. There are of course some details to be provided by CFO Erik Hjelt, things like electricity cost increasing slightly, real estate taxes increased slightly, some cost savings concerning for example renovations. Funds from operations FFO improving 3.6%, strong figure. today the fair value of investment properties 8.4 billion euros increase there basically based on our investments we are still growing according to our strategy across the investments close to 49 million basically new development projects. still happy to say that operationally we are really strong, profit excluding changes in fair value improved by 4.1 percent and then at the end of the day profit before taxes 63 million euros. There is good to be keep in mind that actually changes in fair value last year 143.5 million, this year now a strong figure 28 million euros, but still less amount than comparison year. For us as a company it's all the time been important that we are able to grow using multiple sources. At the moment it's been about how to optimize new development projects, we've been able to actually increase the amount and keep it in a good level. Now, 2,566 apartments under construction, mainly all the projects located here in Helsinki region, one project in Tampere, one project in Turku. But we still keep in mind that Koyamo is able to convert buildings into apartments. We have started first project concerning so-called metropolia case. We will be scanning portfolios available if and when we find something appealing enough to buy. We are buying portfolios still, but this strong project pipeline is now providing good growth, strong growth. As I said, all the construction projects are based on fixed prices, turnkey projects. Projects under construction providing the net initial yield around 4% or above 4% actually means that development gains are really strong, north of 30%. And as we are completing this year close to 1300 apartments, next year 1700 apartments, we are achieving those development gains after completion of the projects. We still have binding agreements with construction companies providing additional 600 apartments and then the metropolia case is proceeding and the last zoning part will be completed by the end of this year. So the growth path is really strong still. Lumo is providing easily best living and actually it means that it's not only floors, walls and ceilings, but providing additional value for our customers. How to make things easy and effortless? Combining apartments, communal spaces, services, both digital and physical, additional services like you are able to get a dishwasher that's been appreciated a lot we are still on a path to create new services now the latest services introduced to our residents been related to sustainability our clients today are able to make a carbon footprint test digitally using myeloma we launch a service to our customers to join climate actions they are able to buy carbon free district heating all the time it's been a question that the esg is a part of our company dna a part of all our operations Now, for the first time, we will provide a Green Deal demolition. The old shopping centre in Puotila will be demolished and replaced with apartments and business premises. We will start a project providing geothermal heating for seven of our properties. And in the big picture today, close to 100 properties already use renewable energy in heating. now if Eric would continue providing more detailed cover please

Thank you, Jani. And good morning, everybody, from my side as well. So page 13, our total revenue growth was 2.3 million euros from the corresponding period. And the like-for-like growth was flat is negative 0.2%. There's actually two different parts of that story. So the increases in rents and water charges was a positive 2.2%. so we've been increasing the rents pretty much in a normal manner, if you like, and the declining occupancy rate was a negative impact, 2.6%, other parts a positive 0.1%. So the total revenue growth was mainly driven by the bigger property portfolio, so Q1 we completed 270 apartments, and of course for revenue growth contributes as well those apartments that we have completed Q2, Q3 and Q4 last year, more than 1,200 apartments. Net rental income growth was 1.5 million euros, maintenance expenses up 1.3 million euros, electricity up by 0.7 million euros, property taxes 0.3 million euros, and cleaning and water together 0.3 million euros. All other items were pretty much in line with the corresponding period. Repairs decreased 0.5 million euros. Page 14. If we first look at the profit on fair value investment properties. So, the main contributor there was the ending restrictions, covering roughly 44.0% of the positive impact in fair values. and development gains 66% of the positive change in fair value. We kept yield requirements unchanged during Q1, and the development gain, as Jani mentioned, was north of 30%. FFO growth there was 1 million euros, of course net rental income contributed 1.5 million euros, SGA expenses up by 0.3 million euros and financial expenses in FFO calculations 0.3 million euros and cash tax is a negative figure there, so it's a positive thing of course, so down by 0.4 million euros. As Jani mentioned, our financial occupancy rate was impacted by the restrictions regarding COVID, and now after all these restrictions have been removed, we expect to see a positive trend in the occupancy rate. Of course, the change quarter to quarter was negative, but not 2% as can be calculated here, given the fact that the 2021 figure is the whole year figure, and of course, the 2022 figure in this slide is only one quarter's figure. Page 16, I think we already covered, that's for rental income, and for us it's important to increase the rents and water charges normal manner and this is something we've been doing this year as well page 17 investments so gross investments mainly covered by development projects 46 million euros modernization investments 1.6 million euros and capitalized borrowing cost 1.2 million euros. Modernization investment repairs flat is, so repairs down 5.5 million euros and modernization investments 0.2 million euros. The value of investment properties 8.4 billion euros and we still have 1854 apartments where we have restrictions regarding the valuation and the uplift in there will be somewhere around 120 to 130 million euros when this restrictions ends, and they will end gradually by 2024. And more than half of that uplift will come 2024. Page 19, Euro-wise, our ongoing developments and land bank. So on the column on the left-hand side, apartments under construction, 388 million euros already invested and 257 million euros to invest in order to complete these ongoing developments, providing 2,566 apartments. By the agreements, we have apartments for 636 million euros, a number of apartments and 123 million euros to be invested in order to finalize these. Metropolia developments, 1,000 apartments, 77 of these apartments already included those figures that Jani showed, what is the estimated completion of ongoing developments, and in this case, of course, conversion. But otherwise, Metropolia is not included in those figures. And the actual land bank providing us 1,500 apartments. In that land bank, we have both pure land and those land where we have existing building. And the idea there is to demolish existing building and build a new one. And there is roughly 250 apartments on those land. Almost all of these apartments are the construction and building apartments are located in Helsinki region. We have one project ongoing in Tampere and one in Turku. We took slightly down our estimate of investments in development this year. Now we estimated that it will amount to 280 to 330 million euros. And the reason this slight change there is that there were a couple of projects where the zoning and building permission project takes slightly more time than originally estimated. So it's pretty much a timing. And then it's good to know that already during Q2, we have started two new projects. One is Luoteslinne and Nihtisilta, so in Espoo. And all these apartments under construction and under these binding agreements, we have the net initial yield, 4% and the development gain north of 30%. Page 20, our equity ratio and loan-to-value, so we have a target to have equity ratio above 40% and loan-to-value below 50%, and we have quite sizable buffer against these levels. When you look at our equity ratio, it's good to note that at 31st of March we made the new bond, and so the bond and the cash is included in a balance sheet, and of course that is visible in equity ratio, but loan to value, you can see that the change was quite limited there, so very, very strong figures there. Page 21, ERPA NRV, flat is there as well, 21.9, and if you look what happened during Q1, so of course the dividend decision was made already, during Q1 and that has a negative impact for 93.9 million euros profit for the period positive figure there 50.4 million euros and then the fair value reserve so the meaning that the derivatives because of the increased interest rates were up by 28 million euros so if you put all this together that kept our FRI NRV flattish. In this type of interested environment, it's important to have a strong financial position, I think, and that's exactly what we have. So at the end of Q1, we have cash and cash equivalents, 478 million euros. We had financial assets, 104 million euros. So in total, 582 million euros. On top of that, we had 300 million euros committed credit lines unused, and we don't have any major maturing refinancing needs in the next two years to come. And our average cost of financing, including cost of derivatives, 1.8%, and the fixed interest rate period, four years. And our hedging ratio is actually very, very high, so 93%. So in our case, we have a strong balance sheet. We are really cash rich, and we have very, very high hedging ratio, so our financing position is very, very strong. Page 23, a couple notes regarding strategic targets, so FFO against total revenue 29.1, there it's good to know that because of FF21, the property taxes for whole year is booked in in Q1, the amount is 11.7 million euros, so that means that uh the part of property taxes allocated to q2 q3 and q4 is 8.8 million euros on the if you calculate that in so that means that the ffo against total revenue was nine percent higher than than what we've shown here so pretty much in line actually we are above this this target level other note here is that net promoter score In 1938 we changed how we calculate the net promoter score because previously we showed different net promoter score as such and the digital net promoter score and now we have combined these two. So in this new calculation, we have the net promoter score for incoming customers, for existing customers and leaving customers, and in each part included the digital part of our operations. If we calculated this in an old way, if you like, so there was no major changes during the Q1. outlook for this year unchanged so we estimate that the total revenue will increase by 3-6% year on year and that FFO will amount between 153 to 165 million euros and if you look at the The higher end of the top line growth outlook 6%, so there is two parts behind that. One is that half of that growth will come through the like for like rent and water charges increases between 2.1 and 2.5% and some improvement in occupancy and half of that growth will come through the completed apartments and as Jani mentioned all our ongoing development projects are proceeding as planned. And this FFO range reflects the top line range. In FFO we have estimated that the weather is going to be normal remaining part of this year. Some impact on inflation and some impact of cost savings that we are able to achieve. Page 26, our dividend policy, nothing changed there. So 60% FFO annually paid as dividend. And now back to Jani.

I guess before Q&A it's good to in a way summarize and as I said all the key figures solid the financial position at the moment really strong we are ready able willing to move forward according to our strategy in spite of a challenging environment all the ongoing projects have been proceeding as planned good to keep in mind there that we do have fixed prices turnkey projects for all the ongoing projects as well those binding agreements providing additional 600 apartments so looking forward we do believe that we are getting those strong development gains cost increases are not impacting those projects As restrictions have been lifted in March, we have witnessed a lot of positive signs, as I said. We have seen an increasing number of new tenant agreements. And yes, we did read this morning that KTI provided information concerning rental apartment markets and supply in the market. There it's good to keep in mind that this data is based on a survey made in March Those providing information then looked backwards, what's been happening in January, February, beginning of March, now we're leaving May. Actually, supply from the market in April in the commercial portals, for example in Helsinki, dropped down more than 10%. So it seems that a lot of activities in rental market at the moment Urbanization will continue, students are moving back to university cities, and probably summer will be quite hectic, providing a growing number of tenant agreements. Thank you. Now if we move to Q&A.

Yes, thank you, Jani and Erik. We could take first questions from the audience. Go ahead.

A couple of questions if I may. First, regarding the consumer confidence is quite poor currently and inflation is high and wage increase is quite limited. So, given this squeeze on the consumers, how do you view the possibilities to raise rents in the two to two and a half percent range that you target? And yes, that's the first one.

I think that's good to keep in mind that the total market is about people finding homes. And this uncertainty and increase of living expenses or maintenance costs is as well impacting owner-occupied homes directly, and increasing interest rate levels will be impacting home buyers. And typically, if we look backwards at what's been going on in history, uncertainty in consumer confidence will impact home buyers and actually increase the relative attractiveness of rental apartments. So yes, we do believe that we are able to increase the rents as we have been planning.

Thank you, and could you remind us about the rent increase terms that you have, how much is indexed and how much can you raise rents above the index level?

Yeah, so in all our rental agreements we apply a clause that we are able to increase the rents once a year with index plus maximum 5%. It actually means that we are pricing all the apartments one by one and all the customers are receiving an individual letter.

Thank you and given the inflation it has many impacts but what kind of impacts does it have on your operations and maintenance and repair?

What we've seen so far is that the cost of electricity has gone up, and that of course plays a role if you look at maintenance costs. Then heating is included in the rents, so heating costs will have an impact. Those prices have gone up slightly as well, but more important in our figures is what is the weather. So the impact of the weather and taking snow from one place to another seems to be quite expensive, so weather factor is more important for us than the price factor when it comes to heating. Otherwise, yes, we've seen inflation, price has gone up slightly, but we've been able to offset part of those increases by being a big buyer in the market.

and then that that's uh so the impact has already discussed in in our figures has been quite limited so far okay thank you and then regarding the the occupancy rate rate which is at unprecedentedly low levels what do you really believe is is the impact from covid 19 and how much much is the impact from from increased supply in the market uh

The biggest driver by far is COVID-19 impacting urbanisation. As a net result, actually, Helsinki has been shrinking during COVID-19, so people moving away from Helsinki. And at the same time, as we've been providing information all the time, we did know that new supply was coming to the market. And without COVID-19, it wouldn't have been a problem. On the other hand, we have said all the time that the impact is temporary, urbanization will continue, and then of course, depending on what kind of player you are, what's your strategy, puts the ball game to a certain level. Our focus has been that we are able to increase the rents all the time, systematically, we've been able to do this. And as we now provided information, actually, as we've been providing all the time information that we firmly believe that as soon as COVID-19 is passing by, restrictions are removed, Activities will start again. Job opportunities will be available. People using services creates demand for services, so people start moving back to big cities, universities, now asking students to come back. That will start happening, so demand side will be coming back. So, our focus is long-term game, not short-term temporary impacts.

Thanks, that's very clear. You haven't communicated anything about your review of the non-core portfolio, 3600, I guess you will not... comment it here either, but what I've heard, there's been a number of portfolios quite large in the market and at least I haven't heard of any of those having closed. So what's the investor demand? How has that developed?

Yes, it's still an ongoing process, so we're not providing color. As I said, a couple of transactions have been completed. A portfolio consisting roughly 2000 apartments disposal project was completed by a foreign investor. So it seems that there's still a lot of demand in the market.

Thanks. And the last one, Erik, you mentioned that the higher end of the top line, sorry, if our growth guidance assumes somewhat higher occupancy rate, can you be more specific on that?

So if you calculate the six percent, so if half of that is coming through according to your estimate because of completed apartments and half so three percent of of like for like growth in total and if we estimate that increases in rents and water charges will provide the growth for like for like 2.1 to 2.5 so the slight increases occupancy will cover the difference between three and this 2.1 2.5 okay thank you that's all for me

Okay, do we have no more questions from here? So next we can take questions from the phone line. Operator, we are ready.

Thank you. Ladies and gentlemen, if you 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. Thank you. We have a question from John from Kenton. Please go ahead.

Hi. Good morning. Thank you for taking questions. Perhaps on the, what's it called, the month coming back to Helsinki from the restrictions being lifted at the beginning of March, we're now well into May. What are you seeing in your overall inquiry numbers?

Thank you for the question. As I provided color, we have been following the market and our operations on a daily basis, typically. April against last year April, the increase of new terminal agreements was 17%. Now, during the first 11 days of May, against a comparison period of time the increase is about 20 percent so it seems that that the market is picking up speed and what we have seen is that that in commercial portals during april for example in helsinki the supply decreased more than 10 percent okay those numbers are a bit more comforting uh given that it's quite

significant. Any changes in terms of the average rent levels you're asking for these same apartments?

So we we still been able to increase the rents in a normal manner provided in a life-for-life figure so top line growth has been 2.2.

Okay that's clear and perhaps on the delay in zoning You mentioned that 30 million of CapEx is being delayed now. It feels like the delay in zoning is a bit of a recurring theme. Is this you being too optimistic on timing or would you say that there's more unforeseen case specific issues here?

Actually, the situation hasn't changed if you look today and compared to a couple of years ago. So the question is that when we make our estimates so we pencil in each project in the schedule. This is the time that we estimate that we are able to start each project and there of course we take into account that zoning might take this and that long or getting a billing permission will take one or two months or three months and if those are postponed somewhat so that of course have a impact for investments made this year because we are now estimate the investments for 2022. So if we originally estimated that a project is started in May and now it looks that it will be postponed six or seven months, so that means that the amount of investments this year for that project is going to be very very limited. And this is actually what is over. So yes, the zoning is unfortunately taking longer than we would like to see, but it's a question of each project that we put them on the calendar when we think that one project can be started. And if that is postponed for that point for a couple of months, then it might end to be started next year, or can be started this year, but the investment for that project this year is going down, so this is, as you mentioned, so this is ongoing thing, and lucky enough, some projects are started or completed earlier than anticipated in our estimates.

Okay, that's very clear, and then just one last question on the development starts that are coming down across the market. How does the Helsinki region compare to the other regions you're looking at?

I think that the impact goes throughout all the cities. It's related to a couple of things. I think at the end of the day now, construction companies are facing difficulties in pricing the product. and facing the situation that home buyers are a bit more careful with their decision making. And this construction cost impact goes throughout the country.

Okay, so not that Helsinki region is seeing more, or actually,

less development starts than initially planned relative to, for example... I think all the players still find Helsinki region attractive as a market, but now they are facing challenges in how to estimate the cost side and do the pricing concerning the projects. The visibility has been a bit limited because of Russian attack to Ukraine.

Okay, that's helpful. Thank you.

Thank you. The next question comes from Jonathan Carnator from Goldman Sachs. Please go ahead.

Hi, thank you for taking my question. I appreciate it's been talked about quite a bit already this morning. I just wanted to come back to the occupancy and perhaps understand a bit better, I guess, longer term, not in the next month, but obviously the drop from peak from 97.2% in 2019 is obviously very significant. So do you think half of that has become structural, i.e. you're highlighting that there's been more supply recently and appreciate the environment is obviously changing, but what I'm trying to think about is long-term, are we thinking that these levels of 97% are achievable again in the short term, given the recovery that you're seeing. Are you seeing any concentrated vacancies in specific areas which have changed in terms of attractiveness or anything around that? I mean, obviously these things happen. So just trying to get a bit of color on that gap and whether that occupancy shortfall is across your portfolio or specifically located. Thank you.

Thank you for the question. Of course, the tricky part is what do we mean with short period of time? I would say that as we've been commenting the market all the time, yes, one could argue that there's a lot of supply in the market. But as I've been saying, due to COVID-19 and lack of urbanization, there's actually been a lack of demand in the market. And now as restrictions have been lifted, the demand is picking up speed. At the end of the day, the total amount of available rental apartments in the market and capital region is limited. It's not a question of tens of thousands of apartments, but a handful of thousands of apartments. So, as people are moving back to Helsinki region in order to start working or starting to study in the universities or other places, that supply will be observed by the market. and sooner or later here in Helsinki region, the occupancy levels will be reaching 97 again. In our eyes, as we've been commenting and I've been providing information all the time, occupancy plays an important role, but at the end of the day, it would be too easy to buy occupancy. you just start lowering the rents and stop making money. It's about being consistent with your strategy and providing additional value and finding efficiencies in your processes and once the market normalizes as it now seems to be happening, you are actually in a better shape than ever.

Okay, thank you. Thank you. Ladies and gentlemen, if you wish to ask questions, please press 01 on your telephone too bad. Thank you. There are no further questions at this time. Dear speakers, back to you.

Thank you. We have some questions in the chat. So first question is, about the occupancy rate. Have you thought about giving up rent increases in order to improve occupancy rate if it keeps going downward?

I think we've been providing quite sufficient color on that topic and we will keep on being systematic with our strategy. Now we do believe that as estimated, things are getting better as restrictions have been lifted and market will be normalizing. So we will continue with our strategy.

Okay. Then there's a question concerning your comment. You highlighted that the growth in new rental agreements has been quite rapid during Q2 compared to last year. Is it possible to comment how has the financial occupancy rate developed during Q2?

Typically, we only comment on the standing quarter report. We're not providing exact information on ongoing quarters. But as we've been saying that there are positive signs and it's typical that once you start creating increasing number with new tenant agreements. There's a slight delay once they step into a fourth, providing improvement with the occupancy.

Good. And one more question. Did the negative occupancy rate development in Helsinki region focus on some specific location or age group, or was it more general development?

I would say it's been more general development.

Okay, thanks. It seems we don't have more questions. So... Thank you all for joining us today. It's been a pleasure to host this event. Koyamo's half-year financial report will be published on 18th of August. Hope to see you then. Thank you and have a great summer.