Lumo Kodit Oyj (LUMO) Earnings Call Transcript

Good morning all, and welcome to Lumo Homes Half Year Results Webcast. I'm Niina Saarto. I'm Treasury and Investor Relations Director. Soon, we will hear the Q2 results. Our CEO, Reima Rytsola, giving also an update on the market as well as on the acquired portfolios leasing and how the integration to our platform has started. Then Interim CFO, Antti Syvanen, continues with financial development and outlook. Q&A follows the presentation, and there, we welcome both live questions and chat questions. So now we can start with the presentation.

Very good morning on behalf of myself as well, and welcome to this Lumo Q2 earnings release webcast. We had actually a strong quarter behind us and all the total revenue, net rental income and FFO grew strongly in second quarter. All in all, the kind of market conditions seem to improve, and I come back on a later stage a little bit more detailed on the market conditions. Our occupancy rate grew from last year's comparison point, even though the -- we acquired on 1st of April, the portfolio of 4,761 apartments, which occupancy was much lower, 83% on the date of 1st of April. But already during Q2, we managed to raise the occupancy from 83% to 89% on this acquired portfolio, and it was truly a success and the development has continued in very favorable terms since the end of June also. We also refinanced EUR 300 million of our acquisition financing with the bond issue in May. And all in all, our financial position remained stable. In June, we also signed EUR 500 million backstop facility agreement, which is very favorable terms in cost effective wise to us and enables us to kind of refinance the maturing bond not earlier than next spring. If I then start with the operating environment. So all in all, I think the first half of the year for Finnish economy has been very, very, good. And it's glad to see that finally, Finnish economy is leading the pack also in European context on growth terms in first half. The -- both the first quarter and the second quarter preliminary GDP figures are 0.9% growth in each quarter, which is strong compared to what it has been in previous muted years. So of course, the kind of geopolitical tensions and somewhat rising interest rates are giving some kind of clouds for the development. But so far, so good on Finnish economy-wise. And also, the kind of supply-demand balance seem to finally start to balancing out, especially if we look at the supplied rental apartments, which especially in Helsinki area in Helsinki, the amounts of offered apartments have declined meaningfully close to 20% from last year's comparison point or last 12 months' time. Year-to-date, the decline of supplied apartments have been even higher, but then we need to bear in mind that we always have a kind of a seasonal effect from year-end -- beginning of the year when we're coming to summertime, which is the kind of seasonally best time for landlords. But also, as I said that, for example, Helsinki, it's roughly 20% decline in apartments that are offered for rental. So it's meaningful in that sense. Also, the construction has been very muted this year. And even some of the forecasts seem to be that also the next year for residential construction will be even lower than this year. And at the moment, the latest forecast is 15,000 apartments. Still the -- especially the growth triangle, so to say, so Helsinki area, Tampere, Turku area is growing on population terms and even the household terms, even though the households haven't grown as -- number of households haven't grown as fast as population, and that has been probably the one thing that has kind of postponed the recovery of the rental market. But now it seems to be started that it has started from Helsinki area. And it's, of course, the most important area for us, especially Helsinki as a city, but Helsinki area overall. So 76% of our portfolio value is in Helsinki area. And in that growth triangle, close to 90% of our apartments are located in the growth triangle. So I would say that our portfolio is in good shape to kind of face the recovery that has started from the capital area. Then the -- as we already announced in February and the deal was closing in 1st of April, so we acquired 4,761 apartments. And the -- I think the only weak spot of the portfolio was that it has a very low occupancy at the time of acquisition or closing, and it was roughly 83%. But already during -- as I said already earlier, so already during the Q2, we were able to raise the occupancy from 83% to 89%, and the development has been very favorable since that either. So it looks good. And when we -- on the last Q1 earnings release, I said that we expect to reach with this portfolio, the stabilized occupancy rate, which we mean that roughly the same occupancy rate than we have in our legacy portfolio. So we expect to reach that probably not this year, but latest on during next year. But I have to revise that due to favorable development so that we already expect to reach that stabilized level already in Q3, so by the end of September, if this kind of a favorable development carries on like we do believe at the moment. All in all, I would say that we had a kind of a strong and solid quarter. We still have a -- we still have plenty of to do. It's very, very kind of promising that the markets seem to finally start recovering. Of course, there's still -- if you think about the kind of pricing power of a landlord, so it often comes a bit delayed since the supply-demand balance process, but we expect that we will see in latest in the next year, so kind of a growing pricing power for our landlords as well. For financial targets compared to our strategy, so it's, of course, early days. We have a first 6 months to go, but all in line, but definitely some work to do still, which is natural. Good time to remind that we -- in last spring on AGM, we revised our dividend policy where we said that we will distribute at least 20% of FFO to our shareholders, and it was optional either dividend or share buyback. And with the current trading of our share, it's probably more likely to the distribution via buybacks than with the dividend. But that's a bit of early days to say, but that's the thinking at the moment. Okay. And then I would like to hand over the word for Antti, who will carry on the financial development and outlook.

Yes. Hello, everybody, also from my side. My name is Antti Syvanen, and I'm the Interim CFO of Lumo. And I will be giving you the insights into the financials over the next 2 quarters until Tommi Valento, who has been appointed as CFO, will start next January. But let's go through the figures starting from the top line. The revenue and net rental income both increased. Total revenue up EUR 5.9 million or 2.6 percentages. As Reima mentioned, we have acquired a portfolio that gave us a revenue increase of EUR 14 million compared to last year. We have made some disposals in '25 and '26, which has had an effect to the net revenue roughly EUR 12 million. And in addition, we have had a higher occupancy rate compared to last year, which gave increased the revenue by EUR 2.8 million. Net rental income up EUR 6.0 million, 4.1% the main explanations and in revenue. In addition, we had a bit higher maintenance expenses, EUR 0.8 million compared to last year. Repair expenses were EUR 0.9 million less compared to last year. On Slide 14, profit before taxes and FFO both increased. Profit before taxes came up from a negative EUR 24 million last year into positive EUR 62.7 million. And if we exclude the changes in value, the increase was EUR 9.6 million. And of course, it was positively affected by the increase in total revenue, as I explained. In addition, we had a bit higher admin expenses compared to last year, EUR 2.5 million. The increased salaries and fees were EUR 1.3 million higher compared to last year. Total amount of financial expenses, they were EUR 2.3 million higher compared to last year. And FFO up EUR 2.8 million, 4.5% compared to last year and the same explanation standing profit, excluding changes in value. Next slide, occupancy rate. It has steadily increased actually from quarter 3 '24. It now stood at 95%. It was up 1.4% compared to last year, and it was also slightly up 0.2% compared to the year-end, even though we acquired the portfolio, which had a relatively low occupancy rate compared to our, so to say, legacy portfolio. Tenant turnover ratio has increased slightly, but it's still on a normal level, 14.5%. Nothing special there. Next slide, we have had a positive development in like-for-like rental income. It was up 2.7% compared to last year. Main driver was the impact of occupancy effect was 3.7%. We have slightly minus from the impacts of rents, especially rents and then water charges in total. And just as a reminder, when we calculate this like-for-like rental income, we are comparing past 12 months figures into previous 12-month figures, and it doesn't include the properties that we have acquired or disposed or completed within 2 years. So doesn't include the acquired portfolio as such. Next Slide 17. We have had strong progress in investments. That was mainly due to the acquisition of portfolio, which was made in April that had an effect of roughly EUR 900 million. We have sold 218 apartments that had an effect of EUR 21.5 million. And gross investments were totally up by roughly EUR 870 million. And maybe one comment here regarding to the accounting treatment of this portfolio acquisition. At the time when we acquired the portfolio, it was recognized as a cost according to the ruling of IFRS. So that's why the figure is slightly below EUR 900 million due to the fact of this booking of the premium of this deal. And later on, this premium that Varma paid, it was subsequently recognized as a profit -- profit on fair value of investment properties, roughly EUR 51 million. Modernization investments and repairs were up 6.3% or EUR 1.5 million. Slide #18, fair value of investment properties. They were EUR 8.5 million, up 7.5%. Once again, the main reason was the acquisition of this Jupiter portfolio that had an effect of EUR 900 million. On the negative side, we had the disposal last year of residential properties, which had an effect of roughly EUR 240 million. And we didn't change any parameters regarding the valuation. They were unchanged. In the second quarter, the change in the fair value of investment properties were EUR 34.1 million. And next slide, equity ratio and loan-to-value. They have both remained really strong. Equity ratio of 45%. Loan-to-value was a bit above our internal target, which is 45%. Now it was 45.1%, but we see already in the near future that it will go down this below 45%. And maybe one comment here that we still have a quite sizable headroom to all the financial agreement covenants. And for instance, the Moody's leverage is 50% and European Investment Bank's LTV limit is 60%. So there's a sizable buffer into the limits. Our financial position has remained strong. In May, we issued a EUR 300 million unsecured bond and the proceeds were used to refinance the so-called bridge loan. That was drawn in April, and we still have a plan to refinance this rest of the EUR 300 million with the long-term debt. And in June, we signed a EUR 500 million backstop facility agreement, which can be used if needed to refinance this EUR 500 million bond, which is maturing in spring '27. And of course, our intention is to refinance it in the debt capital markets. After the review period, we signed a EUR 100 million loan agreement with OP. The liquidity situation is very strong. We have unused committed credit facilities of EUR 275 million and then this unused backstop facility of EUR 500 million. And the distribution of group's loan maturities very well balanced. Then key figures per share. They both slightly came down, but didn't change significantly, slightly down. Equity per share now EUR 14.53, EPRA net tangible assets just below -- slightly below EUR 18 per share. And the reason was the dilution of shares. And finally, to the outlook. Outlook, we have specified the outlook both for the revenue and for the FFO in revenue, we have narrowed the guidance by raising the lower end by EUR 4 million and lowering the upper end by EUR 4 million. The guidance now is EUR 488 million to EUR 493 million. Still the midpoint of this revenue is unchanged is EUR 490.5 million based on our latest estimates. And in FFO, we have kept the low guidance limit unchanged, and we have lowered the upper guidance limit by EUR 5 million. The main reason for this is that the finance expenses has been a bit higher than we anticipated in, in our previous outlook. That's all from me. And now I welcome you here. And we have now the Q&A session.

Thank you. So we can now start the Q&A, and let's first take the online questions.

[Operator Instructions] The next question comes from Robert Phillips from Green Street.

I just had 2 questions, and I'll go one at a time. So you noted that occupancy in the Varma portfolio moved from 83% to 89% in the second quarter and will be stabilized in the coming year. And I was just wondering what kind of occupancy level you're targeting by year-end? And also how rents are tracking relative to the rest of the portfolio?

The line was very bad in the very beginning. So can you repeat the question? Apologies for that. I didn't get it.

Yes, of course. So you noted that occupancy in the Varma portfolio moved from 83% to 89%, and it's looking like it will be stabilized in the coming year. And I was just wondering what kind of occupancy level you're targeting by year-end?

Okay. Yes, thanks. Well, as I said that we talk about stabilized level for acquired portfolio and then we talk about kind of our own stabilized level. I have earlier said that with the market conditions like this, it's roughly somewhere between 96% to 97%, the kind of stabilized level. So around about that. We're not giving any guidance as such for our occupancy.

Perfect. And then you also flagged improvements in renting activity in the quarter. I was just wondering if you could give more color on what you're seeing in terms of performance and then also just whether that's translating into pricing power.

Yes. I think it has -- as I said already earlier, so it's -- of course, we do have a seasonal effect as well on the summertime is always more active on renting activities. But definitely, this year has been encouraging in a way that the activity has been probably even higher. So far -- and of course, we had a kind of extra vacant apartments in our portfolio as well due to the fact that we acquired a significant portfolio with relatively low occupancy. So -- but like we said already when we released the deal, so we said that we are confident that actually our leasing operations are capable of renting these apartments, and it appears to be so. Then your question of pricing power. So as I said earlier, so we haven't seen that much yet of a pricing power. It definitely hasn't gone worse, but no significant improvement yet, but it's natural that first comes the supply and demand balance and then you will see the pricing power. So we expect that pricing power will improve either end of this year or beginning of next year.

And then just on the regional performance, can you just elaborate a bit more on what you're seeing kind of on the ground?

On regional-wise, Helsinki is definitely leading the pack at the moment. So -- and I think it's natural that the majority of the new jobs are creating in Helsinki and in Helsinki area. In Helsinki -- inside the Helsinki area, the Espoo is kind of following the Helsinki trend. Vantaa is more of on a stable. So the situation hasn't improved as much as in Helsinki and Espoo. And that's, I think, mainly due to the fact that there have been quite a lot of foreign construction workers living in Vantaa traditionally and construction market hasn't improved that much, at least not in Helsinki area. There are some data center projects, but they are more of outside of a capital area. So the construction work -- amount of construction workers hasn't grown up so far. So that's why I think Vantaa is lacking Helsinki and Espoo, but the main volumes are obviously in Helsinki.

The next question comes from Anssi Raussi from SEB.

Yes. It's Anssi Raussi from SEB. A couple of questions left from me. First, about your campaigns, like could you talk about the impact of these campaigns on your reported financial occupancy rate and also average monthly rents like did your campaigns affect these lines? That's the first one.

I would say that, of course, there have been some boost for campaigns in Q2 figures as well. But so far, I think the -- especially the acquired portfolio, so we haven't had to kind of boost them with the campaigns. So -- in that respect, they, of course, have campaigns have played some kind of a role, but I would say that not that meaningful.

Okay. And if I continue on your reported financial occupancy. Do you have some apartments which are not listed on your website? Or is there something else which explains maybe a slight difference compared to the reported financial occupancy and the absolute occupancy?

Yes, we do have apartments that are not in a listed. So they are under kind of a major renovation, for example. So they are not listed there.

Okay. That's clear. And finally, on your refinancing, you mentioned -- and of course, you have this backstop financing in place, which is kind of an optionality right now. But you said that you still aim to use or tap the bond market at some point. But was it so that your timetable is early next year? Or are you already planning to use bond financing this year?

Yes. The backstop facility was basically taken to kind of secure the refinancing of a bond that is maturing next spring. And according to kind of Moody's rules or how the Moody's assess companies. So we should have refinanced that bond already this year. But now that we took the backstop facility, so we're actually able to carry until the next spring and still it's a long-term finance. So that's why I said that -- and given the fact that actually the maturing bond is -- the coupon is less than 2%. So the combination of cost of a backstop facility and the bond that is maturing on next spring. So the combined cost is cost effective in these market conditions.

The next question comes from John Vuong from van Lanschot Kempen.

Just following up on the Varma portfolio. It sounds like you're ahead of underwriting in terms of occupancy gains. But could you provide a bit more color on the incentives that you're providing? And to what extent these net effects are in line with your underwriting?

Yes. I think they are very much in line in underwriting. So that's why I think we are well in line with the business case on pricing terms and then well ahead with the occupancy as such. So all in all, I would say that the integration of our Varma portfolio has gone really well, even better than our own expectations.

Okay. That's clear. And just on your LTV, you mentioned that it's a bit ahead of your target. How do you see the trajectory towards a lower leverage from here?

Yes. We don't give that much of details in the future, but it was only slightly up of our internal target. So we expect that to come lower, but we don't give too detailed numbers as such.

You can't provide on how you see that this 45.1% goes towards, say, mid-40s or around that level basically?

Well, we -- as Antti said that we have -- we're not willing to give a kind of a detailed path for that, but we expect it to come underneath the 45%. So that's -- and that's why kind of we are relatively confident for that.

And also, as I mentioned, it's our internal target to have it below 45%. So we have a sizable buffer to all the leverage from Moody's and also from European Investment Bank.

Okay. And on the campaigns. Just to confirm, are these campaigns, so the incentives that you're providing, are these reflected in your ERVs in financial occupancy or parts of it in other lines like costs?

Sorry, John, the line was very bad in the beginning of your question. Can you repeat that again?

Yes, sorry. Just following up on the campaigns or incentives. Are these reflected in the ERVs in your financial occupancy? Or are there also parts of it reflected in other lines like costs?

They don't affect our occupancy as such, but they, of course, affected the revenue that we present.

Okay. So it's netted in your gross rental income?

Yes.

[Operator Instructions] The next question comes from Svante Krokfors from Nordea.