Lumo Kodit Oyj (LUMO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Kojamo's Full Year Results News conference. My name is Maija Hongas, and I'm Manager of Investor Relations here at Kojamo. Today's presenters will be Jani Nieminen, CEO; and Erik Hjelt, CFO. After the presentation, we have some time for questions. And first, we will be taking the questions from the conference call line. And after that, from the chat. Thanks for joining us today, and let's get started. Please, Jani.

Good morning, everyone. Nice to be here. Sun is shining here in Finland today, amount of light is increasing on daily basis. Today, I'm providing color on our full year report. And I would say compared to many countries, of course, COVID-19 impact has been limited here in Finland compared to many countries. But on the other hand, of course, it has had an impact in the housing market as well. We have been able to run all of our operations quite a normal manner, and we've been able to proceed with our strategy, strengthening our new development pipeline, publishing our digital road map, publishing our sustainability program. According to the estimates, urbanization will continue after sufficient vaccination coverage will be achieved here in Finland. So I think we are proceeding with our strategy, providing profitable growth as planned, and there will be a long-term demand for new homes here in Finland. We provide some color on the operating environment. Of course, a big mega trend creating long-term demand for new homes is urbanization, which has been slower throughout the pandemic. But on the other hand, according to the estimates, after the pandemic is over, urbanization will continue here in Finland, creating demand in the bigger cities and still the same estimates that roughly 35,000 apartments should be completed on an annual basis in the biggest cities. Of course, still Helsinki Metropolia's area will be the most growing part of Finland. It seems that according to the latest figures, the number of started apartments last year decreased less than expected. And I would say that after summer, the demand for owner-occupied apartments was recovering, and it seems that financing has been a bit better available for construction companies. So they have been able to recover from the drop providing owner-occupied homes. The supply-demand balance in rental apartment market last year was different. As we've been providing information, of course, we knew that a lot of apartments were completed last year. On the other hand, as COVID-19 kicked in, many apartments which were used for short-term leasing were converted into long-term rental apartments and at the same time, for example, a lot of students started remote studies, went back to their parents' homes, went back to their home countries. So I would say there was new supply coming to the market, but a bigger impact because of lack of demand or change in the demand as students were moving out. As I said, urbanization will continue, and we see that this impact has been temporary. Latest figures are not available concerning the estimates of rental increases, but we do believe that they will keep on the same level, so roughly a bit more than 1% a year in the market. And this year, the latest estimate is that roughly 31,000 apartments will be starting the construction here in Finland. Of that, roughly 11,000 rental -- sorry, market-based apartment buildings, there -- the decrease will be roughly 5,000 apartments compared to last year. Keeping in mind the big trends behind the demand, urbanization, development of household sizes. So the number of small households, 1- and 2-person households will be increasing still. And there is still a change in people's values, especially with the millennials that they tend to value the freedom of rental apartments and not that anxious to take the housing loan, even though we have seen that housing trade has been a bit more active and the media provides information that a lot of home buyers available that. But on the other hand, we see that not that many homes for sale. What we have been seeing all the time is that the number of households living in rental apartments has been and is still increasing in all the big cities. And for example, in Helsinki, Turku and Tampere, actually more households today live in rental apartments than in owner-occupied homes. Most of our housing assets are located here in Helsinki region, roughly 74%. On the other hand, if we combine Helsinki, Turku and Tampere regions, it's roughly 88% of our assets located in the 3 biggest growth centers in Finland. On the other hand, as I said, last year has been a bit more challenging renting apartments in the market. On the other hand, we have been able to keep the occupancy rate on a good level despite of the pandemic. We've been able to still improve our processes and make new tenant agreements on a fairly good level. On the other hand, of course, we have seen the impact of COVID-19, hitting the tenant turnover. Students leaving homes back to their parents or single parent -- families moving out. So that has had an impact towards the occupancy. To provide some color on numbers, I would say, last year, roughly 3,000 new agreements done by clients under 25 years. At the same time, a bit more than 2,000 rental agreements terminated by tenants under 25 year. So there have been a lot of turnover with the youngest clients last year. To wrap up the biggest numbers and the most important KPIs. We did have a solid year last year providing profitable growth. Total revenue increased 2.3%; net rental income, 4.2%; growth and funds from operations grew by 7.7%. To provide a bit more color on total revenue growth, of course, it's a combination of completed apartments during 2019 and '20 and the rental rent increases done last year. On the other hand, we've been able to increase the net rental income. There are a couple of aspects. On the other hand, we did have a so-called mild weather last year here in Finland, so a bit less heating costs. And on the other hand, less need to remove the snow. On the other hand, people did spend a lot more time in their home. So we saw an increase in water consumption and cleaning of the properties. Gross investments last year, EUR 371 million. Of course, there, the most important part was new development projects close to EUR 370 million. On the other hand, an important figure, of course, profit, excluding changes in value, grew by 4.2%, EUR 165 million. And then we had a net gain in fair values, a bit more than EUR 225 million, a good, solid number last year. Of course, we have to keep in mind that during the comparison year, we did adopt a yield-based valuation methodology, and that year, it had a positive impact of roughly EUR 800 million. For us, it's important that we are able to grow by using multiple sources. To provide some color on the new development pipeline, we started last year the construction of more than 1,800 apartments. We did make several important agreements with construction companies. To pick, a couple of those agreements done with SRV during March provides 676 apartments and another agreement with construction company, less, but in June provides close to 400 apartments. We have been able to still increase the number of apartments under construction, now more than 2,600 apartments, all located in Helsinki region. So a really strong pipeline providing growth where Finland is growing. So the population is growing. Then we still have co-operation agreements providing roughly 1,000 apartments. And in addition to that, the so-called Metropolia properties case, the zoning is proceeding. The first 2 properties, the zoning was completed at the end of last year. And of course, our aim is that the construction of first properties or buildings will be started during this year. And then our state of mind is such that the 1 building prior used to be the main building for University of Technology will be sold as a hotel project. The strong pipeline here in Helsinki region is matching all the most important parameters when we consider our investments. So the location, micro location, sizes of the apartments, services available, new buildings, and of course, the net rental yield being 4% or above 4%, and the additional development gains received from those projects. The strong pipeline will provide also an increasing number of completed apartments starting this year, and as visible here on Page 11, close to 1,300 apartments will be completed this year, then more than 1,600 apartments, 2022. And already, we know a pipeline to be completed goals to 700 apartments, year 2023. And still, we are working every day in order to find new projects. For us, it's always been important that we are able to provide added value for our customers. Services for new customers entering the Lumo world as well the services during the tenancy period. To provide some new color, of course, for example, My Lumo services has been accepted and used on a fairly good level by our tenants. 75% of our tenants are using My Lumo application, on regular basis, more than 1,300 daily users. We've been providing a couple of new services like electricity tendering, move and installation services, and then, for example, installation of washing machines and cleaning services for moving out. We've been also piloting direct payments from customers as they use the services. So the first, cash flows been entering last year. This year, of course, our aim is to increase the amount of services and create services that will generate cash flows as well. On the right-hand side, an increasing number of agreements done online. Of course, today, more than 21,000 apartments rented from Lumo webstore. On the other hand, I guess, during this period of time, the most important piece of news is that we've been able to increase the number of new tenant agreements last year compared to comparison year. Sustainability has always been an important factor for us. We argue that it's a part of our company DNA. We published our sustainability program in the beginning of December. Our key commitments are United Nations Sustainable Development Goals as well carbon neutral energy in our properties by 2030. In a couple of weeks, we'll be launching our sustainability report as part of annual report. We've been providing a lot of new information in Board of Directors' report and financial statements, so I think we have reached now a better level for opening information concerning sustainability. Now I would ask Erik to provide some deeper color on the numbers.

Thank you, Jani, and good morning, everybody, from my side as well. We were able to provide solid set of numbers, and total revenue growth was EUR 8.6 million. And then like-for-like rental growth contributed 1.2%. And there, we have rent increases and water charges, positive 2.1% and the occupancy rate negative 0.9%. And the remaining part of the total revenue of cost was contributed by the net of completed apartments last year and at the end of 2019 as well as acquired and disposed apartments. Profit before taxes without change in fair value of investment properties grow EUR 6.7 million. And the profit on fair value of investment properties was EUR 225.8 million. And roughly half of that is due to the increase in cash flows and a little less than 40% is coming through because of the ending restrictions. A little more than 10% was from the development gains from the development process completed last year. We kept yield requirements at the end of last year unchanged as anticipated. Net rental income growth, EUR 10.3 million. Biggest contributor there, of course, total revenue growth of EUR 8.6 million. Maintenance cost was EUR 0.6 million, less than in the corresponding period. There was a couple of items move in different directions. So on the positive side, mild winter heating EUR 2.4 million, less than in corresponding period. And then we transported snow last year. So that was EUR 1 million less than in corresponding period. On the opposite direction move to water expenses, was higher EUR 0.9 million; cleaning, higher EUR 1.2 million and waste, EUR 0.7 million. And these are mainly because of the COVID-19. So people spent more time at home. So that's why this part of our maintenance expenses was elevated last year. Repairs was EUR 1.1 million, less than in corresponding periods. And net rental income margin 67.1% and that was higher than in corresponding period, where we had 65.9%. FFO growth was EUR 10.8 million. Net rental income contributed EUR 10.3 million. SG&A expenses was EUR 0.3 million, less than in corresponding period. There was a slight impact because of the COVID-19. Obviously, we spend less time at the office, so there was some savings related to that. Financial cost was up EUR 4.5 million due to the fact that the loan portfolio is much bigger than in the corresponding periods. And cash taxes was less, EUR 3 million due to the fact that in corresponding period, there was disposal of assets, and that led to paid cash taxes. Financial occupancy rate maintaining a good level, as Jani already discussed. And gross investments, EUR 371.2 million, EUR 331.3 million on development investments; acquisitions, EUR 12.8 million and modernization investments, EUR 27.1 million. And modernization investments and repairs put together, EUR 62.9 million, EUR 1.1 million savings when comes to repairs and EUR 3.6 million when it comes to modernization investment. And going forward, we still expect the modernization investment and repairs put together to be between EUR 60 million and EUR 70 million per year. Value of investment properties. Growth was almost 10%. The biggest contributors there, of course, the developments as well as the profit on change in fair value of investment properties. At the end of last year, we still had 2,275 apartments where there are restrictions regarding the valuation. And those restrictions will end gradually end by 2024, and there will be an uplift in values between EUR 150 million and EUR 170 million. And then those uplifts will be upgraded. Our development pipeline and our land bank, if you like, from euro point of view, sort of at our side, we have apartments under construction, EUR 370 million already invested and EUR 262.9 million to be invested in order to complete those ongoing developments. 200 -- in mid-column, EUR 214 million the cost of these apartments, almost 1,000 apartments. And the right-hand side column, this is our land bank, if you like, so pure land, Metropolia cases as well as those properties where the idea is to demolish existing building and then build a new one. We estimate that the total amount of investments in developments this year is going to be somewhere between EUR 370 million and EUR 420 million, and all these ongoing developments as well as the land bank located in Helsinki region. Equity ratio and loan-to-value, strong figures there as well. We have quite sizable buffer against our target levels to be -- have equity ratio above 40% and loan-to-value to be below 50%. So we have the leeway to grow the company further. Equity per share growth there as well as EPRA NAV. The EPRA NAV going forward, we are going to report. NRV in -- on a financial, we saw all these 3 new EPRA NAV metric stuff, but we feel that NRV illustrates best Kojamo's business, and Kojamo will use this one as a primary indicator of net assets going forward. We have quite strong financial key figures, almost EUR 3 billion loan portfolio, 57% of that form the bond market, average interest rate including cost of derivatives 1.8%, and the average loan maturity and average fixed interest rate period of 4.5 years. The hedging ratio is quite high, 91% at the end of last year, and we have a credit lines committed, unused, EUR 300 million. Cash and cash equivalents of the financial assets, more than EUR 300 million and no major maturing loans in couple of coming years. Strategic KPIs, strong figures there as well. Total revenue already discussed. Annual investment on the high end of our strategic target range, close to EUR 400 million, FFO against total revenue close to 40%, loan-to-value active ratio on the strong side as well as a good NPS figure 36. Then the outlook for this year. So we estimate that the top line growth is going to be between 3% and 5% year-on-year, and that is coming through the like-for-like rental growth as well as number of apartments to be completed this year. This estimate does not include any potential acquisitions. We are still actively look for acquisitions to acquire apartments, but it's not included in these estimates. Of course, we are not doctors, but this outlook is based on assumption that the sufficient vaccination coverage will be achieved in summer and migration will gradually recover to pre-pandemic levels thereafter. But still, the fact is, of course, that the vaccination is not going to happen overnight. So the development of the like-for-like rental income, most likely is going to be moderate during the first half of this year because of the COVID-19. We estimate that the FFO this year is going to be between EUR 150 million and 162 -- EUR 163 million. And there are couple of assumptions in the midpoint of that range. So first of all, the midpoint of that range based on the assumption that the weather is going to be normal this year. The repair project is going to proceed as planned. SG&A expenses are going to be in the pullback on the same level as last year. And no disposal, meaning no additional taxes to be paid. And then the financing of the ongoing developments, EUR 370 million, EUR 420 million this year. So these are the assumptions of the midpoint of this FFO range. And the Board proposal for dividends EUR 0.37 per share. And of course, that finally will be decided by the AGM later. And now back to Jani.

Thank you, Erik. I think as to summarize, we did have a solid year 2020. We created sustainable growth. We've been able to increase total revenue, net rental income and FFO. For us, it's important that we are able to grow profitable, use multiple sources, so creating new development projects where we succeeded last year, exceptionally good. Then of course, we are able to convert buildings into apartments, the Metropolia case will be coming, and then we are able to make acquisitions when we find suitable portfolios according to our parameters. So we do have a solid and strong foundation for our future growth. We do see that in the short term, the operating environment is still challenging. But on the other hand, we expect the urbanization to continue even stronger after COVID-19 pandemic. And of course, it's dependent on the sufficient vaccination coverage. But with these words, I think we are ready to pass it to Maija. Thank you.

Thank you, Jani, and Erik. So we are now ready for the questions, and we'll start with the conference call line. So please, operator, we are ready.

[Operator Instructions] Our first question comes from the line of Anssi Kiviniemi from SEB.

It's Anssi from SEB. I have a couple of them. First one is related to rental trends. What kind of changes are you seeing in new contracts, then on turnover and in customer retention when we got closer to the end of the year? And also, what kind of trends do you see in these lines when we enter into 2021? That's the first one.

Yes. If I pick that one. Thank you, Anssi, for the question. As I provided color, we saw already in March that many students terminated the rental agreements. And actually, that kept ongoing throughout the year. So we saw that many younger clients did rent the apartment, but a couple of months later terminated that rental agreement. So I guess one of the reasons behind there was that the decision that all the universities started only remote studies in the autumn. And some of the students did hope that they were -- would be able to do the studies in a normal manner and meet all the new friends. Towards the later part of the year, we saw a small increase with tenant agreements terminated by single-parent families. When we look at what's been happening with our client changing from one Lumo apartment to another Lumo apartment, a bigger portion of clients have been actually moving towards a slightly more expensive apartment. And typically, it seems that they are still moving inside the same city between the same age class of buildings, in many cases actually from a similar-sized apartment to a similar-sized apartment. So nothing radical, but the tenant turnover has been high as we provided color.

Okay. Then the next one is on fair value changes and especially in Q4. I mean market rents probably contributed to the fair value gain. But how much did of the total figure come from restrictions ending?

Would you take that, Erik?

Sure. During the Q4, the uplift in value that came through because of ending restriction was approximately EUR 35 million, EUR 3-5 million.

And could you also split the rest, where did the kind of fair value gains come from?

So in Q4, a little less than EUR 9 million was a development gain and almost EUR 120 million was increased cash flows.

Okay. That's clear...

That if you go, of course, in that calculation was modernization investments, that was EUR 7 million during Q4.

Then on supply-demand balance when we enter into 2021, I understand that the good picture is quite blurry still, but how do you see 2021 compared to 2020 in terms of market balance?

We expect that a bit less, new our apartments will be completed to the market than last year. But I would say that, by far, a bigger question is when we reach the sufficient level with vaccination and the urbanization will continue in the normal level, and students will come back to do the studies in a normal manner. So I think the demand side is there. It's ready to move towards the bigger cities, and that will have, by far, a bigger impact.

Okay. And you have had a lot of apartments basically come into the market during the coronavirus period, kind of -- has the COVID impacted the new apartment rent levels? So what are your strategies on that side?

The projects we completed last year, actually the renting did succeed very nicely as we provided color during the investment -- Investors Day. So I think one change there has been due to COVID-19 that most of the new tenants have moved in from the same city or close to these new development projects. So less people coming from other cities.

Okay. Then the last, let's say, a housekeeping question is on Q1, the cost and winter conditions, they supported the result in 2020. Will there be a setback in Q1 as the weather is how it is? And what's the magnitude of the potential cost increase?

This morning when I drove to the office, we had here minus 20 degrees centigrade. So it's rather cold. So it's early -- too early to estimate what is going to be the impact and what is going to be impact for the whole year. But as we speak, it's rather cold here.

Our next question comes from the line of Svante Krokfors from Nordea.

Svante from Nordea. Yes, a couple of questions left after Anssi. The first one is on top line guidance appears a bit cautious given an assumption of around 2% rental growth. Do you expect rental headwinds? Or is it mainly owing to the timing of completions of new apartments in 2021?

It's actually a combination of several things. As mentioned, of course, we estimate the like-for-like rental growth to be moderate during the first half of this year given the COVID-19 and the estimates when the sufficient vaccination coverage will be reached. And so that plays a role there as well. And it's good to note, of course, that the guidance is given without any impact of potential acquisitions. We are still actively looking for acquisitions, but it's not included in this guidance. When it comes to the timing of completions, there's no change there.

Okay. And then the EUR 130 million fair value change. You said that almost EUR 100 million was owing to cash flow. That's quite a lot, some around EUR 4 million probably. But what's the source of that?