Kojamo Plc

Good afternoon and welcome. This is Koyamos Q1 results news conference and I'm Niina Sakt from Investor Relations. Today we have CEO Jani Nieminen and CFO Erik Hjelk presenting the first three months figures. They will also update you on the market situation. You can send us questions via chat throughout their presentation. And in the Q&A, we also take questions from the phone lines. In case you want to ask the question yourself, you should click the hand sign on the screen and then just wait for your turn. But now let's kick off the presentation with Jani Nieminen.

Thank you, Nina, and good afternoon on my behalf as well. Yes, we will provide a summary concerning what's been going on during Q1. Then CEO Erkki Elt will provide a bit more detailed color concerning the financial development and our outlook. I will cover the operational environment and the most important KPIs. To start with a summary, we were able to increase total revenue, net rental income and profit before taxes during the first quarter of the year. Occupancy increased slightly from the comparison period and the tenant turnover remained at last year's level. You're good to know that at the same time that there are still a large number of previously started properties which have been completed to the market that will continue still a bit and that creates typical seasonality. throughout the market so in the typical seasonality occupancies tend to go down towards the summer and then they pick up speed during the hectic summer period when we make most likely the highest number of new tenant agreements that's throughout the market and then occupancies start to improve towards the latter part of the year At the same time we do know that we've been pushing rents a bit more because we know that after this completion there will be no more new supply coming to the market and the demand supply balance will be changing looking forward. FFO decreased due to financial expenses increase and maintenance expenses. One reason in maintenance expenses is the extremely cold weather during last winter. Concerning the fair value of investment properties, no significant changes there. Basically, all the parameters remain the same. Our saving program is proceeding as planned. No surprises there. We are happy all the measures have been done and we are achieving our targets there. And as prior said, our balance sheet has remained strong. Financing figures are good. liquidity situation is very good and good to keep in mind that at the moment all our maturing loans 2024 2025 are already covered moving forward to the operational environment There's the big picture, the global picture, and then what's going on here in Finland. In the big picture, it's easy to say that the outlook for the global economy is improving. On the other hand, the Finnish economy is not expected to grow this year. At the same time, inflation has slowed down in Finland. And yes, the estimates are that the growth will be existing here in Finland 2025 again so looking forward a bit better outlook this year not significant growth. The employment situation predicted to decrease slightly. One impact is construction business. We will see a very low number of new residential startups here in Finland, and actually no signs today that it would pick up speed. Market expects that ECB would start rate cuts in June, and Fed in autumn. Remains to be seen what's going to happen. But as I said, inflation now slowed down here in Finland, so cost impacts looking forward are lower. Housing market quiet. Estimates are that the prices of old block of flats would stay flat. It looks that they are coming slowly down, but the transactions are on a low level there. Throughout the market, estimates are that rents would pick up a bit more speed this year than 2023. official estimates are that they would be increased this year by two percent. We've been increasing the rents on significantly higher level throughout the first period of this year and most likely it's been impacting the occupancy improvement Big picture on the rental market is still the same that all the megatrends are still valid. Urbanization is continuing. All the big cities are growing. Especially in Helsinki and Turku regions, the population growth has been more than doubled last year. It seems to be continuing this year as well. Most of the population growth is due to immigration and that typically increases especially the demand for rental housing. At the same time, this is backed by the data that still, whenever we receive new official data from all the big cities, what's the portion of households living in rental apartments, that portion is always increasing. And as prior said, in cities like Helsinki, Tampere, Turku, More than half of the households already live in rental apartments. And looking forward, population growth will continue in all the big cities. We will still have an increasing number of small households, and this put together will create long-term demand for rental homes. At the same time, as said, the number of residential startups plummeted last year. and there's no turn for the better in sight yet. Actually, I do believe that volumes will stay on quite low level next year as well. If we look at the paragraph on page seven on the bottom right hand corner, this year the estimate is that only 2000 non-subsidized block of flats would be started and if we compare that figure to prior years when it used to be 20 000 or about 20 000 so it's only a handful of projects to be started and when I talk with the construction company CEOs it seems to be that even that number might be a bit optimistic. So looking forward, even still today, we do have a lot of supply in the market. It seems obvious that we are heading for a shortage in the housing market during the next couple of years. Moving to page eight and our key figures, as said, we were able to increase our total revenue still a combination of three angles we have been able to increase the rents able to slightly improve the occupancy and the third angle is the completions during last year and the first part of this year so the number of apartments been increasing The net rental income 60.6 million euros improvement 1.9 percent against comparison period there is good to keep in mind that yes there was a 4.3 million increase in maintenance cost basically two key elements there a very hard winter providing additional heating costs a bit more than 2 million euros and then property taxes a bit more than 1 million euros increase there. FFO 25.5 million euros was impacted by increased financial expenses and of course this maintenance increase as well. Fair value of investment property is 8.1 billion euros. No significant changes there. Of course two projects have been completed. changes in valuation parameters actually if we look at the profit loss before taxes it's good to keep in mind that this time the change in fair value of investment properties was 11 million euros positive comparison period it was 9 million negative so only slight changes in valuation as said we did make a decision already 2022 that we are not starting new development projects and we're still on that path and that's very visible if we look at the gross investment figure so saving program is proceeding as planned now only 8.4 million euros as total gross investments New developments were 5.3 million euros and modernization investments 3.2 million euros Profit excluding changes in value 28.3 million euros On page nine, a couple of words concerning ongoing development projects. Actually, today we should say ongoing development project. So we do have only one ongoing project at the moment, which will be completed at the end of June, 113 apartments. It's kind of a historical moment. If I look at my career here in the company, In July, we will have no apartments under construction. And that's not typical for a company like Koyama, but the same applies throughout the market. So as said, we will most likely be heading towards a shortage looking forward. The cost of completing this remaining project is 5.3 million euros. And as such, the project is proceeding as planned. No surprises there. So basically, as we are completing the last project, we are focusing on existing portfolio. And our way to provide added value for LUMO customers is to combine apartments, common spaces and services, whether the services are physical or digital. It doesn't matter. It makes a combination. I'm happy to say that the net promoter score was 51. and today already 87 percent of our customers use digital MyLumos services, so that number seems to be still increasing. Some of the services are, we call it basic functions, always included. There are some fixed customer benefits and there are available services as options for the customers. They use them when they will. So that's how we create added value and that creates the possibility to have premium in the rent levels. Koyama has been always a company where we are proud to say that sustainability is a part of the company DNA and we are committed to the carbon neutral energy use in our properties by 2030. We are proceeding really nicely. Today, since we launched the program, already half of the reduction done. GEIGAR 14.4 percent during that period since 2019. This year already the reduction has been 13.2 percent. So we are still proceeding really nicely. We use only carbon neutral electricity in all our buildings. think this issue the sustainability and how to reach the targets is a combination of four angles is the way we help to change the customer and consumer behavior on the other hand it seems that consumer behavior behavior is changing throughout the world but we will help our tenants then how we utilize technology, for example, our AI system in how to optimize heating and sell that data to service providers like district heating companies. Then, of course, an important role is what are our partners capable to do? and a significant impact of course comes from district heating service providers and then our own measures whether they are geothermal heating solutions next to zero energy buildings or for example solar panels so that's the combination how we we're going to reach our targets at this point I would Let Erik continue with the financial details. Thank you.

Thank you, Jani, and good afternoon, everybody from my side as well. So page 13, the top line growth was 5.1 million euros, and the like for like top line growth was 1.6%, and the increase in rents and water charges contributed 1%, the improving occupancy contributed 0.7%, and other topics, negative 0.1%. Completed apartments, meaning 2023 and first quarter of 2024, completed apartments contributed 4.2 million euros for the top line growth. Net rental income growth was 1.1 million euros. Revenue growth, of course, 5.1 million euros, positive. And maintenance expenses, negative 4.3 million euros. And the biggest negative item there was, compared to the compression period, was heating, 2.2 million euros, because of the harsh winter here in Finland in the first quarter this year. Property taxes grew 1.1 million euros and growth of the portfolio cost 0.8 million euros growth in maintenance expenses and repairs down 0.3 million euros. Page 14, if you look at profit excluding the change in fair value, investment properties came down by 4.7 million euros, and net rental income, positive side, 1.1 million euros. SEA expenses decreased 0.8 million euros. Finance expenses increased 5.8 million euros, given the fact that the new financing is more expensive than than the expired one. And then, of course, the cost of financing is higher in the general terms as well. On the right-hand side, if we look at FFO, so NetRent and Lincoln again contributed 1.1 million euros Exchange expenses decreased 0.8. Finance expenses on FFO calculations grew 6.3 million euros. And the difference compared to profit before taxes is explained by the unreal exchange in fair value of derivatives. And cash taxes decreased 1.2 million euros. Page 15, I think Jani already covered this topic, so slight increase in occupancy from compensation period. And like for rental income growth, we already covered, so page 17. So as part of the saving program for time being, we are not starting any new developments or modernization investments. Ongoing process of this one ongoing project will be completed by the end of June. 5.3 million euros to be invested in order to complete that one. The investments for during the first quarter of this year, so development 7.5 million euros, more investments 0.5 million euros and capitalized borrowing cost 0.4 million euros. So down clearly by last year and previous years, according to our saving plan. So the monetization investments first quarter point 5 million euros and repairs point 6.0 million euros, both in line with our saving program. Page 18, the change in fair value investment properties, 11.1 million euros. The improved net rental income cost, 7.9 million euros, positive impact for the values. And other items, 3.3 million euros. There are positive and negative sides on the positive sides. and there was ending restrictions causing the uplift in the values. And then, of course, on a negative is money spent for monetization investments and impact of aging. But in a net impact, positive 3.3 million euros. We still have 737 apartments where we have restriction regarding valuation, and those restrictions will end by the end of this year. and an uplift in value will be between 50 and 70 million euros. And page 19 equity ratio loan-to-value moved sideways and we still have quite sizable buffer against this 50% loan-to-value level that is by Moody's hurdle for PAA2 rating. This buffer is actually around 900 million euros and that's if only value yield changes 55 basis points in yield requirements. Page 20, as Jani already mentioned, all loan maturities in 2024 and 2025 covered. So our capex need is very, very limited in line with our saving program, so we don't need any additional financing. And then, of course, it's a question of refinancing maturing loans, and as I said, 24 and 25 maturing loans are all covered. In January, we issued a 200 million euros bond in private placement mode, and in March, 250 million euros secure term load facility as well. 425 million euros syndicated loan we made last year was undrawn at the end of Q1. So we had 675 million euros undrawn loan facilities in place. We had 94 million euros cash and cash equivalents and 30 million euros financial assets. And given the fact that the capex needs is quite limited, so the FFO is used to pay back loans as well. So if you put all these together, that means that 2024 and 2025 maturing loans are covered. Financial key figures, very strong hedging ratio 94, average interest rate 2.6%, and that's including the cost of derivatives. Then page 23, our outlook, slightly specified. Now we estimate that the top line growth is going to be between four and seven percent. And that's due to the Q1 result and how we see the operating environment. Completed apartments will contribute three percent for top line growth compared to last year. Now we estimate that the FFO this year is going to be between 152 to 164 million euros. Of course, this range for FFO guidance echoes the range for topline growth, and we took slightly down both sides of the FFO guidance on back of the elevated maintenance expenses due to the cold winter during Q1, so roughly 2 million euros. And then if you look what's background behind this FFO guidance, so we penciled in 4% inflation impact for all cost items. We penciled in the saving program, it's proceeding as planned. And the impact of saving program in total, we penciled in that 24 and 25 material loans are covered. And we penciled in that supply-demand balance is going to improve towards the year end. So these are the background for slightly specified outlook. Page 24, our strategic targets. So, top line growth, 4.7%. Still quite strong in line with our target to grow top line, 4-5%. Annual investments, 8.4 million euros. And that's, of course, the outcome of the decision earlier made that no new developments will be started for the time being. FFO against total revenue 22.5%. It's good to note that the whole year's property taxes are book tax or expense in Q1, 15.2 million euros in total. That of course explains why typically the Q1 FFO against total revenue is lower than the whole year figure. Loan-to-value equity ratio strong as already mentioned and net promoter score could result 51 there as well. And now back to Jani.

Thank you, Erik. As a summary, total revenue, net income and profit before taxes increased. So in that sense, a good solid Q1. No material changes in fair value of investment properties. All the parameters stayed the same. We were able to slightly increase and improve the occupancy. this seasonal variation as mentioned in my eyes it seems that here in Finland the data concerning residential startups is always estimates. And as we provided already information, when it started to go down in our eyes that we don't believe in official estimates, this year it seems that the estimates concerning 2022 started figures were quite correct, and still that year, quite many projects were started but it seems that more than anticipated projects were started during the latter part of the year and because of that still now 2024 comes supply to the market. a bit more than estimated last year but as said the number of new ready startups has been now very low 2023 and 2024 so looking forward we will see a very, very limited number of new complexes. The same phenomena will go through the market as now happening to Kojamo, that the last project will be completed in June. So that will provide a situation still that there is a lot of supply in the market, some pressure towards the occupancies throughout the market, at least until the summer but then things will change and as there will be no more supply coming to the market the urbanization and population growth in all the big cities will start to eat up the supply from the market and we will be heading towards a housing shortage balance sheet and financial figures remain strong, as Erik provided details, and the liquidity situation is very good. So in that sense, on the financial side, as all those 2023-2024 are covered, we are in a good position and able to follow what's going to happen in the financial market. Thank you.

So now we can have some questions and let's take questions from the phone line and the microphones are all muted now, so please unmute the microphone before speaking. So first we have John Wong from Kempen.

Hi, good afternoon. Thank you for the presentation. You mentioned that rent increases were at a higher level than in recent years. At the same time, vacancy is largely unchanged compared to Q1 last year, which I would say from a historical perspective is still a rather high number. So what gives you comfort to raise rents more than previously?

I would say that We based our pricing on the knowledge that there wouldn't be as much new completions coming to the market during the first part of the year. Now it seems that there has been a bit more than anticipated completions towards the market. And we do know that after these existing projects will be completed to the market, then there will be no new supply coming to the market. and the demand is growing. So the demand supply balance will change radically. So it's like an optimizing game. You can either focus during Q1 on increasing the occupancy, without increasing the pricing, or you can start increasing the pricing and get a slightly moderate improvement in the occupancy. So that's the balancing game. But then looking forward, we know that throughout the market, the supply will go down.

Okay, that's clear. And like you said, it's an optimization game, of course. So at what points do you consider occupancy improvement more important than rental growth, for example? So do I read in your comments that essentially in H2, you're seeing less rent increases and more occupancy improvements driving like-for-like rents?

I would assume that latter part of the year, the bigger improvement will come throughout the occupancy. But during the same time, we will continue to increase the rents.

Okay, that's clear. And just on your last comment also on the development completions being higher than expected, is there any risk that 23 development starts were underestimated as well, which would lead to more completions than 25 and delay recovery even further?

I don't believe in that, because all the construction companies have been providing quite challenging figures from year 2023, so it's quite a public knowledge today that a very, very limited number of projects have been started last year.

Okay, that's clear. Thank you. That's it from my side.

Thank you, John. So next we'll take some chat questions and there's a question about the saving program. Did you see any impacts already in Q1 in the profit and loss statements?

There are already impacts in Q1 P&L due to the saving program. Of course, if you look at the whole year figure, compared to last year's figures, the impact is going to be much but there's already impact in Q1. The thing is that we penciled in the inflation 4% for all expense items, and during Q1 already both repairs and SDA expenses came down from last year. So yes, there is already impact in Q1.

Okay. Then there's a question about valuation. Can you remind us when you next time appraise the properties? Will it be the entire portfolio? And how valid do you think the current net initial yield is? Is it appropriate to see that the yields will decline when there's little to no transactions being done?

Yes, we do the valuation on quarterly basis, always in the same manner, always throughout the whole portfolio. So it's always done in the same manner. So full valuation. And yes, we do believe that the valuation is done in a proper manner and the yield requirements are solid. It seems that, yes, the transaction volumes have been muted. but on the other hand there seems to be now a bit increasing number of appetite in the market so let's see what's going to happen in the market looking forward I think that in a way market is waiting for the ECB decisions but if they come out as estimated it will have a positive impact

Okay. Will you look at any divestments this year?

Remains to be seen. We are in a good position. We have all the loans covered. Our figures are solid. So we are not in a position that we must sell something. But as prior said, we may end up selling something if we feel that the pricing is rational.

Okay. There's a question about the average funding cost, which was 2.6% at the end of the quarter. It increased a bit. So was it due to the new loans or was the June maturing bonds still included in the calculation?

So it's because of the new financing. That's why it increases. So when we withdraw new financing, that increased the average cost of financing. That was the reason behind that.

Okay. And about the liquidity, have you been recently in dialogue with Moody's?

Not recently. Year end we had a discussion with Moody's and we update them for liquidity, for example, every quarter. And next one discussion will be after our Q1 results are released. So quite soon an update how our figures look like.

Okay. Then, have you analyzed the need to speed up renovation pace due to EU's energy performance buildings directive?

That's, of course, a topic we follow. And as we've been saying, energy angle has always been included in all our modernization investments. So in that sense, it's not going to change. We haven't found any other reason to focus on the issue at the moment.

Okay. And the final question from here about rent increases. We talked about them already, but when do you expect bigger rent increases to be possible? What's the view?

I would estimate that if we think about the whole market, most likely 2025, because many landlords still apply such an approach that they increase the rent once a year in the beginning of the year. So most of the decisions for this year have been made in the market level. I think the market will improve during the summer and looking forward. So those players who have capabilities to adjust the rents on a monthly basis start reacting already this year.

Okay, clear. So that was the final question. Thanks for sending them and thanks for joining us. So next report is out on August 15th. And hope to see you then. Wish you all a lovely summer.