Lumo Kodit Oyj

Good morning all. This is Koyamo's full year results news conference and I am Niina Saito, Treasury and Investor Relations Director. Today's presenters are CEO Jani Nieminen and CFO Erik Hjelt. Jani will start with the key figures and he'll discuss the operating environment, whereas Erik's gonna dig deeper into the financial figures and he'll go through the outlook for this year. You can send us questions throughout the presentation via chat and also in the Q&A we take live questions from the phone line. So if you wish to ask in person, there is a hand sign on the screen and when you click that, you'll be placed in the queue. It's good to note that before you speak, you should unmute the microphone. But now we can move on to presentation and I would like to welcome Jani to start.

Thank you, Nina. And good morning, everybody. Nice to be here providing color on what's going on last year and how is the operational environment. I'll jump right to the page number four and start by saying that we achieved actually a good result in a challenging operational environment. We were able to grow total revenues net rental incomes and funds from operations and although there still was a lot of supply in the market we were able to increase the occupancy and decrease the customer turnover talking about valuation now the valuation yield is 4.4 at the end of 2023 there is good to keep in mind that during The last 15 months, we have actually increased the valuation yield requirement by 80 bps. That yield requirement change, if we take that as a separate thing, has had an impact of 1.5 billion euros. On the other hand, at the end of last year, so Q4 figures, the yield requirement came up by 37 basis points creating a negative impact on the other hand as we've been saying several other parameters and as those parameters were looked at and changed as well that had on the other hand a strong positive impact in evaluation We'll come back to more detail in evaluation what's been done there and what are the positive and negative impacts, so I don't dig in further now. Happy to say that the balance sheet has remained strong and our financer figures are actually good and strong. After the review period, we issued a 200 million private placement So financial position at the moment really strong, and the saving program is proceeding according to our plans. Moving on page five, an operational environment. In a way, a bit two-folded situation. On the other hand, global economy uncertain, still high interest rates, geopolitical tension globally casting shadows. On the other hand, positive signs, inflation slowing down, employment has remained high and the rate cycle is estimated to be over and trade cuts are estimated to start during the first part of the year. If we look at the key industry figures, as I said a year ago, we will see a historically low number of new residential startups here in Finland. The numbers stayed well below 16,000 apartments. We still don't have the official latest figures, but it will be a historically really low figure. Today, estimates are that for 2024, the number of residential startups would be a bit higher. Actually, we don't believe in that. There are no signs at the moment that construction volumes would pick up speed. This estimate is based on high hopes that something positive might happen after the summer. But as now it seems, there are no that kind of signs available. That will, of course, create the impact that we already know that for 18 months only a very low number of projects have been started throughout the market. Completions of new resi properties will come down and end and looking forward there will be a time period when we see no completion throughout the resi market. In this kind of situation it's been hard to provide Actual data what's been going on with the construction cost changes. They just say that at least the increase has been leveled off but as there's a very low number of started projects throughout the market there's like no this lack of data in the market so hard to say that the pricing is going at the moment. Last year to be as likely to negative. Now the estimate is that we will see a Slightly positive turn there for 2024. Unemployment still on low level. Inflation here in Finland is estimated to come down to 2%. Moving on page 6. Easy to say that in rental home business the underlying megatrends are still valid. We see that urbanization is ongoing. All the big cities are growing. Strongest population growth in the biggest city areas here in Finland is Helsinki region, Turku region and Tampere region. So basically the so-called growth triangle that creates all the time more demand for new homes. At the same time, we still have an increasing number of small households meaning one or two person households housing trade home buyers have been really careful actually the economic uncertainty rising interest rates of mortgages low consumer confidence has created a situation where the housing trade volumes are muted in the market and it seems that people are more willing to rent the apartment than to take a housing loan. So that creates more demand towards the rental homes. Even though in Finland we on national level see figures that more than 60% of the Finns live in owner-occupied homes, the story is still really different in the biggest cities. And whenever we see new statistics, there's always an increasing number of households living in rental apartments. Cities like Helsinki, Tampere, Turku, actually more households live today in rental apartments than in owner-occupied homes. As said, we did see a historically low number of RACI startups last year. Here's a comparison on the lower right hand corner from the last decade. It will be the lowest figure and as I mentioned most likely same kind of figure 2024. It will create a situation where the rental market balance between supply and demand looking forward will change radically. There will be a market situation where, in my eyes, throughout the market, vacancies will go down and we will see higher rental increases. At the same time, construction companies are really struggling in order to find a way to sell homes. As there is a lack of customers, they are not able to start building new homes. Hopefully at some point there is a new way of providing homes bit more affordable. Home prices are a bit higher at the moment so the construction calls the cost of the land. And this may create a situation where we may see a standstill for a bit longer time. On page 8, a couple of words concerning the key figures. As said, a really good year in a challenging market. Total revenue grew by 7%. That's a combination of three angles. Of course, apartments completed 2022 and 2023. Then, 23, improvement in occupancy and rent increases. And the third angle is the acquisition done during the summer 2022 now provided revenues for the whole year. Net rental income improvement there, 6.1%. Positive impact, of course, from the revenue growth. On the other hand, we did see an increase in maintenance expenses of €13 million, so €1.3 million. two big things there. Heating provided an increase of €4.1 million and property taxes €1.7 million. Funds from operations €167.2 million. Improvement there, comparison year, 4.1%. Two kind of positive impacts, of course, improvement in net rental income. Then on the other hand, the tender offer we did during Q2 last year. Fair value of investment property is now €8 billion, slightly coming down now. Of course, to impact on the other hand, we still have ongoing projects, a new development project increasing the fair value of investment properties. On the other hand, valuation impact was now at Q4 minus 295.4 million euros as it was on the comparison year 682 million euros so that actually explains as well why now the profit before taxes was minus 112 million euros as it was in a comparison year close to 500 million euros on the negative territory. Gross investments 190 million euros mainly remaining ongoing the new development projects which provided 160 million euros and then on the other hand modernization investments which were 31 million euros profit excluding changes in value 183 million euros improving their 0.5 percent I'm moving forward said we don't for time being make any new investment issues and so we are proceeding with the ongoing projects. The end of you for we had 354 apartments under construction and a cost of completion leading these projects. It was 10 million euros. After that we already completed at the end of January one. one project, so two remaining projects. On the chart on the right hand lower corner, there's 119 apartments to be completed at some point after 2025. That project has not been started and will not be started in the near future, but we do have an agreement with one construction company. So one day it might happen, but not today. Two remaining projects proceeding in a normal manner, no surprises there. We still have fixed prices and we start marketing six months prior to completion of the project. On page 10, a couple of words concerning the customer base and our offering. It's really important to keep in mind that Our aim is to provide best possible living, provide added value for our customers by combining apartments, common spaces, services, whether they are physical or digital. We have to have a good understanding of our customers and their preferences. Here, if we look at the figures, we have a really nice match if we consider what kind of housing stock we have, what kind of customer base we have. So one and two bedroom apartments are 73% of the housing stock. On the other hand, one and two person households as a customer base are roughly 76% of the customer base. Then as we've been talking that we are helping people to move towards the biggest cities in order to start working. People in the working age, so I would say between 26 and 64 of the customer base are 73.4%. Of course, we do have younger clients like students, roughly a bit more than 10%. So there's a well diversified customer base. On page 11, some key figures concerning sustainability. For us, it's been always important that ESG sustainability is part of Guilherme's DNA, part of all our daily operations. Of course, we are committed to UN sustainability goals. And our target is that our property portfolio will be carbon free by 2030. We are proceeding well with that target, actually the carbon dioxide reduction was really strong last year, close to 17%. On the other hand, if you look at the figures on the right-hand upper corner, we talk about digital services, 86% of our customers use myeloma services regularly. At the same time, net promoter score 50 was really strong last year. Now if Erik would go further and dig a bit more detailed.

Thank you Jani and good morning everybody from my side as well. So total revenue growth was 7%, so 28.9 million euros, and top line growth was 1.9%. There we have rent and water charges contributing 1.4% growth and occupancy 0.6% growth. So completed apartments, and here I mean 2022 completed apartment as well as 2023, a completed apartment contributed 17 million euros whole year and during Q4 4 million euros for top line growth rents and occupancy improvement there contributed 6.1 million euros whole year and 1.4 million euros during four Q4 and then acquisition that one we made in summer 22 contributed whole year 4.8 million euros but during Q4 the impact was muted. Net rental income maintenance expenses up by 12.6 million euros a whole year and Q4 3.1 million euros Biggest growing items there, as Jani mentioned, heating, 4.1 million euros. Credit losses, 2.4 million euros. Property taxes, 1.7 million euros. Water, 1.5 million euros. And waste management, 0.9 million euros. If you look only Q4, it's worth noting that the winter, starting of the winter, was actually very, very cold here in Finland, and we estimate that the weather impact was almost 1 million euros compared to so-called average weather during Q4. Page 14, left-hand side, profit before taxes. So I'll come back to these value changes later, but if you first look profit excluding value changes, so STA expenses up by 2.5 million euros. And there the biggest growing item as far as personal expense is 1.2 million euros and ICT 2.1 million euros. So we went live for our ERP, a new solution and all those money spent there was expensed, including in our P&L. And it's good to know that the saving program as such is proceeding as planned, but the impact of the saving process program is coming through 2024. On the right-hand side, Of course, FFO in SGA expense is the same as in profit before taxes, but financial expenses in FFO calculations grew by 8.8 million euros. Financial occupancy rate improvement, one percentage points year on year. 93 and during q4 the occupancy rate was 94 is and then if you look tenant turnover it declined by 1.6 percentage point i think we already covered like for like so at 17 investments as i mentioned for time being we are not making any new investments And there are three ongoing projects, one completed already in January, and one will be completed in Q2, and the last one in Q3. And in total, 10 million euros to be invested in order to complete these ongoing developments. So 190 million euros invested last year, they are all coming from the developments and monetization investments. Repairs down by 0.9 million euros and modernization investments up by 4.2 million euros. And then 2024 as part of this saving program, of course, these figures are going to be much lower level. Then page 18, the fair value investment properties, the whole year impact was negative 295 million euros. and out of that, for Q4, 158 million euros. There actually were no comparable transactions in the market, and that's why the yield requirements are based on overall evaluation. And at the end of Q4, we actually looked at all valuation parameters, and other changes actually offset partly the negative impact of yield expansion. So if you start looking the whole path from Q4 2022 to up to end of 2023, so the yearly expansion has been around 80 basis points and 43 in 2023 alone, and out of that 37 basis points in Q4. So, the impact of increase in net rental income contributed a positive figure, €306 million, and change in other assumptions contributed €181 million. So, we increased inflation assumption by 20 basis points, rent growth assumption by 40 basis points, and expense growth assumption by 20 basis points. We added in our material some additional figures regarding evaluation because we noted that other companies or some companies are actually commenting different yield requirements, for example, so we wanted to make clear that that everybody sees what yield and other parameters we use in our valuation. So it's good to keep in mind that all our yields, they are based on net yield, not gross, they are net yield. And on average, if we first look at net yield requirement for cash flows, on average, at the end of Q4, it was 4.4%. The exit capitalization rate was 4.55%. And since we applied 2% inflation assumption, so cash flow discount rate was 6.4%. As said, inflation assumption now 2%, rent growth 2.8%. 6 and expense increase is assumption in calculation 2.5%. Loan-to-value, we have set the target to be below, have a loan value below 50. And Moody's affirmed our PAA2 rating in December. One parameter there is of course loan-to-value at the end of Q4. The loan to value was 44.6. And if you then look what buffer we have against this 50% level. So if only yield requirements changed, we have roughly 900 million euros buffer against this 50% level that translates into 55 basis points. As seen in Q4 valuation, there are other parameters that plays important role, but this calculation was based only if yield requirements change. Page 20. Last year was actually, we were quite active what comes to the financing, so we made in total financial arrangements for 925 million euros And we say that 2024 maturing loans are already covered and actually almost half of 2025 maturing loans as well. So this 425 million syndicated loan, the second one that's still undrawn and in January we made an additional 200 million euros private placement on the issue at the end of Q before we had 18 million euros cash and financial assets and we had 275 million euros unused committed credit lines in place so if you calculate this second syndicate it was still under on the private placement and the fact that the board is proposing not to pay dividend and the saving program and the impact of those so almost 800 million euros to be used to refinance these maturing loans. And so that leaves roughly 250 million euros to be in a position where already all 2025 maturing loans are covered as well. So we are in that regard quite strong position. Financial key figures quite strong. Interim liabilities in total 3.6 billion euros. Hedging ratio north of 90. and average interest rate including cost of derivatives 2.4 percent. APRA NRV 18.45 and the change was due to the change in fair value and investment properties. Then page 23, our outlook. So we estimate that the top line growth will be between four and eight percent year-on-year and we estimate that the ffo for 2024 is going to be 154 and 166 million euros in in that range so if we first look the the assumptions uh behind this stop-line growth estimate so complete departments so meaning 2023 complete this and the one completed already in January and the two one that will be completed later this year, that will bring us around 3% top line growth. And then, of course, the like-for-like rental growth last year was 1.9, and we anticipate that like-for-like rental growth 2024 is going to be stronger than that. So the rent increases and improvement in any vacancy most likely is going to have a positive impact of top-line growth on top of this 3% what comes through the completed apartments. FFO guidance, of course, the range echoes the top line growth guidance, but if you look then the midpoint of this FFO guidance, so there we included in those figures the cost inflation for this year, the impact of cost inflation this year, saving program, and then and the assumption that the remaining part of 2025 maturing loans will be refinanced this year and earlier rather than later. So all these are included in the midpoint of the FFO guidance. The range as such in guidance equals the top line growth guidance. Page 24, our strategic targets. We are in a saving program mode and for time being not starting any new investments. and that's our action plan for short term. However, we met all our strategy targets 2023. So, the top line growth at 7%, investments 190 million euros, FFO clearly above this 39% target, 37.8, loan-to-value 44.6, and equity ratio 44.5, and net promoter score clearly north of the target, so 50. So, as said, We met all our strategy targets, despite the fact that now we are in this saving program mode in the whole package, including not making any new investments for time being. And now back to Jani.

Thank you, Erik. Yeah, as a summary, it's easy to say that 2023 was a good year. in a challenging market. We were able to increase total revenue, net rental income, and funds from operations. Balance sheet and financial key figures remained strong. As said, our saving program is proceeding as planned. We are not making any new investment decisions at the moment, but as the outlook provided information, we are still able to grow the total revenues We do have the outlook there in place. Last year we were able to improve the occupancy from previous year even though there was supply in the market. Now we know that population growth in all the big cities at the same time the supply coming from new built completions will go down radically and looking forward actually the rental market will be improving all the time. Throughout the next couple of years, we most likely will see throughout the market lower vacancies and higher rent increases. And I think the last remaining factor is that, yes, there has been valuation changes throughout the last 15 months. As said, now all the parameters were checked out. And there were some negative impacts and on the other hand, positive impacts. And at the end of Q4, now the valuation yield requirement is 4.4. Looking forward with a lot of confidence. Thank you. Now we're ready to move towards Q&A.

Thank you, Janne and Erik. Let's first start with the phone line questions. And when you hear your name, can you please check that your microphone is unmuted? So first question comes from John Wong.

Hi, good morning. Thank you for taking my questions. On your top line guidance, you said developments were driving 3% top line growth, so that leaves essentially 1% to 5% on like-for-like rental growth, which is a rather wide range. Could you provide a bit more color on the split between occupancy gains and rental growth that you expect there?

So sorry for that, that the range is wider, but we tend to like wide ranges and try to not to make, provide any surprises there. But we do estimate that rent increases are going to be on a higher level this year. And we do expect the occupancy rate to improve this year as well. We of course know, what rent increases we have done yet to date, and they are clearly on a higher level compared to last year. But as Jani mentioned, the supply-demand balance most likely will improve second half of this year, and then the rent increases most likely is going to be even higher in the second half of this year.

Okay, that's clear. And what gives you comfort that this would accelerate from the past quarters, looking at also occupancy specifically?

As I said, we know that throughout the market only a handful of new RECI projects have been started during the last 18 months. So we will see completions in the market during Q1 and Q2. But then during the last two quarters of this year, there will be a limited number of really new supply coming to the market. At the same time, urbanization is ongoing. All the big cities have a population growth in place. So that creates demand for apartments. But at the same time, there's no new supply coming to the markets.

That's clear. And just to understand the underlying vacancy in Helsinki, is there any skew towards a specific apartment type? Is there a difference in vacancy between the larger and the smaller apartments?

If we think about the rental supply overall, it's typically mainly one- and two-bedroom apartments, so studios and one-bedroom apartments. that's the biggest supply because throughout the market most often three out of four customers are looking for either a studio or one bedroom apartment and ever since we were past COVID-19 we saw that demand is still the same people are looking for same kind of apartments so studios and one bedroom apartments and basically same kind of micro locations so COVID-19 did not change the demand in that sense. It's been more like that in certain areas we have seen throughout the couple of last years, a lot of new supply coming to the market at the same time. So many projects started in the same micro location and they are completed at the same time. So that creates like challenging situations. with no new completed apartments and the surrounding older supply.

OK, that's clear. So just to confirm it in your 8% plus vacancy in Helsinki, it's not per se skewed towards two bedroom apartments.

Of course, in our supply, the biggest part or portion of the rental apartment are one bedroom apartments. But that's typical throughout the supply and demand.

Okay, that's fair. And just on your FFO guidance, given that you're also assuming that you're refinancing your 2025 bonds, do you take any gains from a bond repurchase into consideration in your FFO guidance? Not in the guidance, no. Okay, that's clear. Thank you. That's it from my side.

Thank you, John. Next questions come from Andres Storme from Green Street. Go ahead.

Hi, good morning. So a couple of questions. First one, just trying to understand the long term incentive plan. So we've added credit trading into the plan. I guess it's the intention here to align the performance of the company more with credit investors going forward. Just also a question mark as to why there's no total shareholder return or NAV per share based metric included in the long-term incentive plan.

The thing is that the LTA is based on amount of shares. So, if the payout ratio is, for example, 50%, so it's translating a certain amount of shares. And then in three years' time, the share price plays an important role, how much actually money-wise that the management receives. So, it's embedded in that system, in that way. I mean, what happens for the share?

But would it be beneficial to have those metrics also within the scheme itself to be more in line with equity investors rather than credit investors? And also, I guess, you know, the targets around revenue and just earnings are not per share. So that sort of incentivizes the company maybe to grow without thinking about how the per share developments go.

Thinking behind these KPIs is that they are set those KPIs that most has a strongest impact for share price how we see it. So top line growth, FFO, CO2 and investment grade trading. So these are the building blocks. These are the most important. things that has a impact for share price going forward. And then there is an incentive for many team members that the share price goes up because the payout is linked to the asset as a number of shares. So that's the thinking behind these KPIs. Of course, each company can approach this from different angle, but this is the thinking when the board decided these KPIs.

Understood, thank you. And then my second question is around disposals. You have mentioned that you are sort of looking at moderate amount of disposals. Has there been any progress on that front or how's that going?

Yes, we've been saying that there's a possibility that during this year we will make some disposals as a part of the saving program. On the other hand, as our figures show the balance sheet is strong and financial key figures are strong so we are not in a place where we would do any kind of highly motivated sales or fire sales so we actually don't have to sell anything we are following the market scanning the market we may end up selling something if the market acts reasonably throughout the end of last year we see that there was appetite in the market but it was mainly very opportunistic uh appetite in the market quite low ball offers so why bother to go in that kind of market to sell something if you don't have to we will see where the market goes they're still appetite towards the Finnish resin market. And I think looking forward, as said, the interest rate hike is over. We will see most likely interest rates coming down and that will have an impact towards the pricing as well. But we come back to that at some point of time.

Thank you. That's all from me.

Thank you. Then we can move on to questions from the chat. There seems to be some which are not covered yet. You just explained the disposal situation, but if we think about future acquisitions, compared to what the construction companies are asking about their pricing, what kind of discount would you require before you make new acquisitions?

I think in a way it's easy to say that today we're not making any new investment decisions. Most likely not tomorrow. Then it's a tall totally different question what will be the new normal. I would say that's prior that in my throat the market that we see some cost meaning the price of the land the cost of the construction. should come down most likely 20 percent what is the required yield it's too early to say I hope that today we've been able to provide color on yield requirement that it's not the only parameter in valuation it's not the only parameter when you make investment decisions as important parameter is for example what is the estimate for future rental increases. So we have to find the new balance between all the parameters before we make any kind of comments on the yield requirements.

And then question on valuation. You mentioned that the changes in inflation, rents and expense growth assumptions increased the fair values by 182 million euros. Is this something you have to reverse when you go back to so-called normal expenses in repair and maintenance, or is this sustainable level now?

So these assumptions that we applied today, they are assumptions for 10 years and and that's why we are not changing them every quarter so it's a long-term view and to present inflation in in a long term is not that that challenging or how would you like to say but if we get savings that means in cash flows or stronger cash flows that of course comes through valuation and the top line growth plays a important role of course the actual maintenance expenses as well about the top line growth is clearly a bigger component there so those changes in actual cash flows are coming through the valuation as they occur thank you follow-up question

on the same team, rents and rent growth are increased and that seems to be reasonable, but could you explain the reasoning behind expectation for lower maintenance, repairs and modernization expenses over the long term?

So actually we look this growth for maintenance expenses from inflation point of view. And they are still higher than inflation expectation. So one way to look at this is to use inflation there. But now we are applying higher growth rate in expenses compared to inflation. And the rent growth expectation is actually based on what we see that is going to happen in the market. And Jani already discussed There's basically no new startups in Finland in 2023. And we haven't seen any news so far in 2024. And based on discussions with construction companies, many things have to change before they actually start new developments. So that will change radically the supply balance demands going forward. And that will be there most likely quite long. Because if construction companies are not starting new developments today, it will something needs to happen so so let's come down and and people are willing to take mortgages and so on and so forth and and that's not in the cards yet so it will take time before the construction companies start to think even new developments and then it takes on average 18 months to complete it a static project so that means actually that there's going to be quite long time before there's coming new supply in in the market so this should be uh positive for for uh renting apartments on top of the organization and other other uh things that are providing uh demand for for rental apartments so that's why we we we look this uh rental growth uh in order it's it's justified to have it on a higher level compared to expenses actually if we look what what most likely is going to happen the market rent growth assumption could have been even higher than this 2.6 on average, what we applied today.

Thank you. Then moving to the FFO guidance. Was it so that it includes the recent bond issue made in January? And does it also include additional refinancing this year to cover the 2025 bond?

It does, yeah. Thanks.

Then... Can you comment what would be the most significant risk for Koyamo this year?

I would say that typically in this kind of situation, companies should answer that refinancing, financing, On the other hand we are in a good position there. All the financial needs for 2024 are covered. And we do have a solid plan how to cover the maturing loans 2025. We aim and our plan is to keep Koyama as a strong company. We have a clear plan there. that plan is proceeding well. I would say that in a way theoretical risk would be that something would happen in a rental market, but on the other hand, it's very hard to find a solution where construction volume would pick up radically speed and provide a lot of new supply to the market. So it's always a risk, but on the other hand, it's not that probable that it will happen, that the supply-demand balance would not be changing as we predict.

Thanks. This is about secured solvency ratio, which was 0.1 at the end of the year. Is it correct that it's not including the October syndicated loan? And if that would be included, it would have been 0.15.

So actually, we looked at it from the... angle that what is the portion of secured financing against total asset and if we pencil in the remaining 425 million euros syndicated loans so after that's drawn we will be in in 15 round one five percent

Yes, so the assumption was quite correct. And then on ESG topic, are you planning to launch any new group-wide initiatives this year?

I think we have quite solid targets there to be a carbon neutral by 2030. We will keep that aim. Of course sustainability and sustainability program and our target. We most likely will review those. All this year looking forward what's the strategy and where we aiming. Of course there are new Rick boarding requirements coming that will have been backed on how we collect data. And throughout that process. We will think that are there like new things where we should be setting targets or not. But it's a bit too early to answer.

Thank you. I think that was the last question we're going to take today. So thank you all for listening. Q1 report will be published on 8th of May. So let's meet you all then. Thank you. Bye-bye.