Good morning all. Welcome. This is Lumo Homes' Third Quarter Result Webcast, and I'm Niina Saarto from Treasury and Investor Relations. Today, I have two gentlemen here with me, namely CEO Reima Rytsölä, and then we have Antti Syvänen, our Interim CFO. Following their presentation, we take questions over the phone lines in the Q&A. You can start sending chat questions. Without further ado, we can start the presentation. Thank you.
Thank you, Niina, and very good morning on behalf of myself as well. Glad to be here on our Q3 release. We had an operationally very strong quarter behind us. Our total revenue, net rental income, and FFO increased from the corresponding period. Our balance sheet remains strong and liquidity in very good position. I think the highlight of the Q3 was the improvement in occupancy rate. It was a very strong development. Both the market improved in Q3, but also our own performance, and we were able to raise the first nine months occupancy rate to 95.5%, and Q3 occupancy was 96.4%. A big part of this improvement was because of our acquired portfolio, which we did on 1st of April , and we were able to raise that portfolio occupancy to 96.8% in September.
This is very meaningful improvement when we bear in mind that actually when we took over the portfolio on 1st of April , the occupancy in that portfolio was 83%. Very good performance, and thanks to our team for that success. I come back a little bit later on the market conditions overall, but definitely, especially in capital region, the market has improved, and this supply of rental apartments has started to come gradually down. We also increased our yield requirements, which caused the fair value decline with 10 basis points, but also we did inclusion of acquired portfolio to our fair value method, and that gained more than EUR 100 million fair value gain and was offsetting this decline of fair values because of this yield requirement raise.
Antti will go more thoroughly through the details of fair value changes, but when we released the deal, the acquisition of 4,761 apartments, we said that if and when we will be able to raise the very low occupancy to a stabilized level, which we have done now, so we expect some fair value, or there's a potential some fair value gains, and this quarter illustrated that on the amount of more than EUR 100 million. Also very positive that Moody's affirmed our Baa2 credit rating with a stable outlook in September. During the autumn, we have continued to refinance our maturing bank loans and extending the maturity of our loan portfolio. We still have EUR 250 million of bridge facility to be refinanced, and we have earlier said that we will do it by the capital market transactions.
There is a chance as well that we refinance that portfolio with the bank loans and our kind of excessive cash during this end of this year. If we go to the operating environment, as already communicated on the last earnings release, the economic environment has definitely improved in Finland, especially in capital area, even though the unemployment hasn't come down yet. The number of employees or new jobs have increased in capital area, which has supported the rental market as well. On the supply side, the supply is very muted, and given the recent interest rate rise, which we have seen, I would say that it's, how would I say, preventing new startups even more than it used to do, so that the gap between the existing apartments price and kind of a replacement cost on new startup market, it has further widened.
We expect that new startups will be very muted this year, but also next year. As I said, the rental market conditions have improved, especially from a landlord's point of view, so that the oversupply has started to decline. As you can see here in this graph, especially on capital area, leading Helsinki and Espoo, but also in Vantaa. The supply has started to come down, and it's encouraging in a way. Of course, we still have a kind of a room to improve on market conditions, but it's definitely a good start and gives a kind of a signal that the market has started to stabilize. As I already said earlier, I think Helsinki is leading the kind of market stabilization, or Helsinki area, and it comes basically from population growth and also the household growth in capital area.
That development is backed up by the fact that actually new jobs are created at the moment in capital area. Just a kind reminder that why the capital area is so important for us. 76% of our asset value is located in Helsinki region, so that truly is dominating our portfolio. Like I said, the occupancy development of the portfolio that we acquired from Varma on the 1st of April, that development has been really kind of positive, and I'm really glad that overall the integration process has gone even more smoothly than we ourselves expected. I think it's a good illustration that our platform has a kind of a really good operational leverage and the kind of a close 4,761 apartments, which is representing roughly 12% of our balance sheet. Kind of, how would I say, fairly significant part of the portfolio.
That integration went really smoothly, and especially the, how would I say, digital sales and strong online conversion was illustrating our sales capacity, but also all the maintenance parts that we took over, so that has gone smoothly. That also illustrates, as we communicated already earlier, that actually asset quality is very good in that portfolio and attractive locations. It has been, so to say, easy to lease those vacant apartments, or easy and easy with these market conditions. Still, given the fact that we were able to raise the occupancy in this portfolio from 83% to 96.8% in a six months' time, I think it's a very good performance from our team. All in all, and I let Antti go more thoroughly through the figures. I think the mild disappointment of our Q3 results was the little bit declining NPS.
We had both the internal organizational changes in our housing organization and also the replacement of our partners in maintenance and cleaning in September, which caused, we expect, temporary decline in NPS, and we keep on working on better customer experience and expect to achieve that. On the strategic targets, well in line on revenue growth. As I said, customer satisfaction, we still have some work to do, as well as average annual growth of FFO per share, which is flat with the first nine months.
Having said that, I think it is worth of mentioning that actually the acquired portfolio was accretive on the first six months of its existence as a FFO per share. It was kind of a declining FFO per share of a first quarter before we had the portfolio. Loan-to-value is a little bit over our target, 45%, 46.1%, and that is mainly due to fair value decline in this quarter, which affected that figure.
On my side at the moment, I think this is all, and I let Antti to come on the stage. I will be back on Q&A part. Thank you.
Hello, everybody, also from my side. My name is Antti Syvänen. I am acting as interim CFO of Lumo until Tommi Valento will start in January. Let us walk through the financials in more detail, starting from the top line. January-September revenue increased by EUR 19.6 million, or 5.7%, mainly due to improved financial occupancy rate and, of course, the acquisition of Varma portfolio in April. The acquisition increased total revenue by EUR 29.4 million. On the other hand, the revenue was negatively affected by disposals made in 2025 and 2026 by roughly EUR 15 million. Net rental income increased EUR 15.8 million, or 6.8%, and the net rental income margin improved from 67.4% to 68.2%. The acquired portfolio supported this development, although higher heating expenses after the cold start of the year partly offset this benefit.
Moving on to the next slide. January-September FFO increased by EUR 4.8 million, or 4.6%, from EUR 106.1 million to EUR 110.9 million, driven by the acquisition of Varma portfolio. Total amount of financial income and expenses increased by EUR 9 million year-on-year due to higher interest rates. FFO per share remained on the same level compared to last year at EUR 0.43 per share. Profit before taxes, excluding fair value changes, increased EUR 12.2 million from EUR 110.9 million to EUR 123 million. Profit before taxes was a loss of EUR 25 million compared with the profit of EUR 9.1 million a year earlier. Higher yield requirements reduced the valuations. On the other hand, moving the acquired portfolio into the fair value model partly offset this decline. I will come back to this in more detail later on.
Occupancy rate, the cumulative financial occupancy rate for January through September was 95.5%, up 1.1 percentage points from 94.4% a year earlier, and the rate also increased from the first half of the year. The third quarter average was 96.4% compared with 96.1% a year earlier. The occupancy rate for the acquired portfolio rose to 96.8%, and this is the figure at the end of September. Tenant turnover ratio, excluding internal moves, rose slightly from 20.7% to 21.6%. Like-for-like rental income grew by 1.8% over the latest 12 months compared with the preceding 12 months, and the measure covers properties owned for two consecutive years. It separates the existing portfolio development from the acquisitions or from disposals. Improved occupancy contributed approximately 2.4% of the growth.
Rent and water charges, on the other hand, reduced the growth by approximately 0.7 percentage points, while other effects added approximately 0.1 percentage points. Investment, gross investment totaled a bit over EUR 880 million compared with EUR 27.7 million last year. The acquisition completed in April, of course, drives this increase. At the same time, we have sold 343 apartments during the review period, and the disposals include properties in Turku, Rovaniemi, Kerava, and 10 or few care properties. Modernization investments increased from EUR 19 million to EUR 21.3 million, and repairs were approximately on the same level compared to the year before. Fair value of investment properties was EUR 8.3 billion compared with EUR 7.6 billion a year earlier, and the 9.2% annual increase mainly reflects the larger portfolio.
As Reima mentioned, we have increased our yield requirements by 10 basis points. That was mainly due to the higher interest rate environment. That had a negative effect of EUR 209.7 million. On the other hand, we included the acquired portfolio into the fair value model, which had a positive impact of EUR 107.3 million. Equity ratio and loan-to-value. Equity ratio has remained solid. The equity ratio was 44.6% at the end of September, compared with the 45.6% a year earlier. Loan-to-value was a bit over our internal target of 45%. It was 46.1% compared to last year, 42.2%. We see this increase over 45% to be temporary. Our financial position has remained strong. Our reported liquidity was a bit over EUR 900 million at the end of September.
This includes roughly EUR 100 million of cash and financial assets, which we can use to refinance the remaining bridge loan. Then we have EUR 275 million of unused committed facilities, EUR 500 million of back-stop facility, and EUR 50 million undrawn term loan. As Reima mentioned, Moody's affirmed our Baa2 credit rating with a stable outlook in September. In August, we signed a EUR 100 million loan agreement with OP, refinancing EUR 75 million loan maturing in 2027. In September, we refinanced our EUR 50 million loan with SMBC, and at the same time increased its amount to EUR 100 million. The additional EUR 50 million term loan remained undrawn at the end of the review period.
After the review period, we refinanced a EUR 125 million syndicated loan, and as a result of the amendment, the maturity of the loan has been extended from October 2027 to early 2030, and it includes two one-year extension options. The average interest rate stood at 3.4% at the end of September. Key figures per share. They were both decreased due to the increased yield requirements. Equity per share down 3% from EUR 14.74 to EUR 14.30, EPRA NTA down 4.3% from EUR 18.40 to EUR 17.61. Finally, the outlook. The outlook for 2026 has been unchanged. We continue to expect that the 2026 total revenue is somewhere between EUR 488 million to EUR 493 million, FFO in between EUR 147 million to EUR 152 million.
Yes, that's all from the finance side.
Thank you. I guess we can now start Q&A. Do we have any questions over the phone lines? We can take them first.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from John Vuong from Van Lanschot Kempen. Please go ahead.
Hi, good morning. Thank you for taking my questions. You have done well by moving occupancy to stabilized levels at quite a rapid pace as you were aiming for. I was just wondering, what are the next steps from here? Is there scope for rental growth, or will it be a situation of slowly burning off the incentives?
Yeah, I think, well, of course, the rental growth is our aim, and we actually haven't done any incentives for a while now. The market, as we said, started to improve on summertime and even after the summertime. It's definitely, the eyes are more on a rental growth side. And we expect that kind of a pricing power will occur with some delay of a market improvement.
Maybe just following up on that, because if I look at your valuation parameters, I saw that there was a negative effect from expense growth assumptions. Could you provide a bit more color on that? Does that mean that you're seeing pressure on your operating margins?
Actually not. It was more of a changing the parameters for aging buildings and their CapEx requirements and expenses on those buildings. And that was the kind of a-- We wanted to, when we mirrored them, the parameters to our history of realized costs, so we wanted to match them, and that cost that roughly, was it EUR 30 million to EUR 40 million?
Yeah, EUR 32.5 million.
Okay, that's fair. Thank you. Lastly, you mentioned that you've written up the Varma portfolio by more than EUR 100 million just by changing the valuation methods. Just to confirm, is this valuation method now in line with the rest of your portfolio? Does that mean that you have made a good bargain purchase, or what does that mean for the rest of the portfolio assets in this market?
Well, I think, yeah, it does. The first question, it does mean that the valuation method is now in line with the rest of the portfolio. We obviously kind of look at that it's by definition as a fair value now with the given the assumptions that we have used. That come to that, as we said in the very early, that we expect that if we are able to show kind of our operative capabilities to be able to raise the very low occupancy. Given the discounted cash flow method, we expect that there's a potential for a fair value gain as well.
Okay, that's clear. Thank you.
The next question comes from Neeraj Kumar from Barclays. Please go ahead.
Morning, everyone. A few questions on my side. Firstly, on the valuation front, I see your largest shareholder, Heimstaden Bostad, marked down their Finnish portfolio by 4% in Q3 and over 6% in last one year. How do you compare your valuation movements compared to theirs, basically?
Well, we do not by any means link our valuations to Heimstaden method of evaluating their portfolio. That is the kind of a start. The reason why we actually raised the kind of a yield requirement was basically due to market's interest rate, how would I say, development, even though we look that as a long term as well. But given the fact that the interest rate market has risen significantly, we have not seen on an acquisition side, or we do not have any acquisition evidence as such, which is also another part of the valuation method. Even though we have not seen that, we decided together with JLL, who is assessing our fair value method, to raise the yield requirement by 10 basis points.
Got it. Thank you. My second question is regarding your LTV. You mentioned that the breach from your internal policy threshold of 45% is temporary. Can you help me understand how do you plan to bring it in line with your policy? Are you banking upon valuation gains to reach there? Or if you expect valuations to drop in further from here, how exactly do you plan to reach to 45% target?
We do not account any future fair value changes to reach that 45%, but it should naturally comes from the FFO that Lumo can generate. Basically, when we pay off loans, it will reach below 45% if no other changes happens in the valuation.
You mean, you looking to reduce the gross debt, whatever FFO comes, you are not paying dividend, and you are going to reduce the debt, is what you are saying?
Well, our policy is to either pay dividends or buy back shares, 20% or at most 20%, and the rest we can use to repay our loans. It would come after the dividend or paybacks, we should reach below 45% if no changes in valuation.
Got it. Now, coming on to the debt side, I see your average debt maturity is 2.5 years, and you have significant debt maturities coming up. I just wanted to understand what sort of margins and all are you expecting for your debt to be refinanced at?
Well, first of all, I think it is good to bear in mind that we already have arranged for EUR 500 million, the back-stop facility, which is against the bond maturing in spring 2027. We can also withdraw that facility as a collateralized funding. Even though it shows up there as the bond maturing on May 2027, we have already arrangement for that refinancing in place. Obviously, the current refinancing levels are much higher than six months ago. That is for sure, and we all can see that. That is why we try to maneuver as well as possible and to look as cost-effective funding as possible.
We are in a good position in a way that all the funding sources seem to be very much open for us, and the kind of bank funding appetite is even better than some months ago at the moment. That is why the bank funding is probably a bit more probable source than it was something like six months ago.
Got it. Lastly, I mean, good to see that Moody's affirmed your rating. I see you are below the downgrade thresholds when it comes to ICR, as you are at 2.3x compared to the downgrade thresholds of 2.5x. Given what we discussed about the financing environment, how do you expect your ICR to develop, say, over the next one year, and do you see a risk of downgrade on the Moody's front?
Well, we definitely not expect any downgrade from Moody's, and it is to say if the funding costs meaningfully increases, the ICR is under pressure. Having said that, I think Moody's will, according to meetings that we have had with them, Moody's are looking kind of more of a comprehensive picture with the financial policy as such. At least so far, they have been very convinced that our financial and funding policy are prudent. That is why we are not worried about that.
Got it. Probably last question linked to it. Do you have any insights on what kind of refinancing rate they are assuming for you guys, in terms of forecasting their ICR, et cetera?
Sorry, can you repeat the question?
I just wanted to understand how realistic the refinancing assumptions for Moody's might have been in September. As we know, the environment has changed significantly since then, so just wanted to understand what is the refinancing rate or margin Moody's is assuming, and are you able to refinance at those levels?
Well, I think the Moody's financing levels, not to remember the figures exactly, but probably given the timing of their report and development since that, so interest rates have risen, so I think they are probably a bit lower than the current market rates. But not to comment on specific targets, what we would have in our refinancing rates, but we think that we will be able to maneuver on the market so that we will, how would I say, get decent priced funding costs for our refinancings.
Got it. Thank you very much for answering all the questions.
Thank you.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers.
Okay, thank you. Actually, it seems that we have covered most of the chat questions here, maybe a couple. We discussed the valuation and the assumption changes. Was it a formal valuation, can you confirm, not just some internal adjustments made? Was it a normal formal valuation, and do you expect more yield changes at the end of the year?
Well, it was kind of a normal quarterly procedure that we fair value all of our assets, and JLL as an external assessor will kind of reevaluate our methodology. So, in a sense, if I understood correctly the wording formal, so it was in a sense formal valuation. Then, we are definitely not giving any guidance of our future yield requirements.
Okay, thank you. The last question is about the acquired portfolio occupancy. It reached 96.8% already, and you comment that it is stabilized occupancy rate level. Do you see any potential that it increases going forward?
To that occupancy increase and further? Well, of course, it is possible, but I think, and I have said earlier that given the current market conditions, and even though they are improving somewhat at the moment, to have a higher occupancy than 97%-98% range is probably not optimizing or maximizing your revenue anymore. In a sense, there is still room to improve, but much more limited room than it had some six months ago.
Yes, thank you. That was the last question, and we will publish the financial statements in February, on 18th of February to be specific. Thank you all for joining us today. I wish you all very good rest of the year. Bye-bye.
Thank you.