Good morning, ladies and gentlemen, and welcome to Kojamo's Interim Report, January-September 2019 News Conference. My name is Maija Hongas, and I'm Manager Investor Relations here at Kojamo. Today's presenters will be CEO Jani Nieminen and CFO Erik Hjelt. After the presentation, we have some time for questions. First, we take questions here from the conference room, and after that, from the conference call line. You have also the opportunity to ask questions from the webcast chat function. Let's get started. Please, Jani, the stage is yours.
Thank you. First of all, good morning, everybody. I'm happy to provide some color on how Kojamo is doing. Today, as usual, we will cover the summary of the first nine months, and then our CFO, Erik Hjelt, will provide some information concerning the actual numbers. Then we have some specifications concerning the outlook for this year. Of course, at first, it's good to notice that this year is really in line with our expectations, and our strong operative performance is quite visible in all the key performance indicators. On the other hand, we've been really successful on how to create more pipeline for the future, so there's an increase in the new building project pipeline. If you look at the summary, the general operating environment is still positive for us. Of course, the urbanization is the biggest factor creating demand for new rental homes.
According to the latest estimate by Statistics Finland, all the regions where we operate, so the growth centers in Finland, are expected to grow by 2030, and that creates a lot of demand for new homes in these areas. Of course, still, the Helsinki region, the capital region, is growing the fastest and the most, and will be the biggest winner. All our focus areas are expected to grow, and that, of course, creates demand for new rental homes. What we see in the market was, as I assumed, that the estimate concerning the number of new building permits is slightly coming down, and it seems that the building volume is returning to so-called normal level and concentrating to growth centers.
The construction cost increase seems to be leveling off, as we estimated, and it seems that there's a steady increase concerning both the housing prices and the rents here in the capital area. My estimate is that, as there are some slight changes in the market, we expect that the construction companies will provide us some projects during the next 12 months. That will be adding on to our pipeline for new construction projects. No big changes here. Of course, still, a big question is that the number of small households here in Finland is increasing all the time, and especially the number of one-person households, and that creates a lot of demand for small apartments.
We also see that more and more those kinds of people who could be able to buy the apartment, especially the millennials, are choosing not to buy their own occupied apartment and choosing to rent the apartment. It's important how we are able to create easy and effortless living because it seems that there's a big change in people's values towards the ownership. They wanted the freedom and easy and effortless life. As the urbanization continues, it's visible in all the figures that the number of households living in rental apartments is increasing in all the biggest cities. If we compare the figures 2018 against 2017, we see that still there's an increase in all the biggest cities, in Helsinki, and an even bigger change in Turku and Tampere.
In all these three big cities, basically half of the households today live in rental apartments, and this portion seems to be increasing all the time. Operationally, a really strong year. No surprises, we've been able to provide profitable growth, as we expect in our strategy. The total revenue has grown with 4.7%, and on the other hand, the net rental income with 7.6%. We do have a like-for-like growth of 2.8%, and if we compare that to previous year at the same time, then it was 2%. We've been able to create a good like-for-like growth and, at the same time, improve the occupancy. FFO is still doing really nicely compared to last year, but of course, we have to keep in mind that it's a combination of increasing net rental income, and on the other hand, slightly there was more paid taxes last year.
That has an impact, which now is leveling off towards the end of the year. The fair value of investment properties, according to our strategy, we've been able to invest and grow today EUR 5.4 billion, and the gross investment side EUR 175.6 million. Actually, the investments concerning new building projects and modernization investments will be investing more. We haven't been buying a big portfolio so far, only 117 apartments, but we've been investing in new development projects and modernization investments. Profit excluding changes in value, 7.5% better than a year before, so a really strong operative performance. Profit before taxes, even though, of course, there's a big positive change in fair values this year as well, but it was even bigger a year ago.
Today, 68% of the value of our assets located in the Helsinki region, and if we combine Helsinki with Turku and Tampere, it's more than 83.5% today. Last time, we were discussing about the financial occupancy rate in different areas, and it's nice to provide some color that we've been able to increase the occupancy rate in all the areas except Lahti. Lahti region, still there, the number is roughly the same as the last time. Today, the overall figure is 97.1%, so a good improvement during Q3. We are satisfied with this figure because we are combining, of course, all the time financial occupancy rate and our ability to create like-for-like growth. We have, at the moment, roughly 1,200 apartments under construction, and of them, 95% here in the Helsinki region.
We were really satisfied with our reverse tender offering process, which provided two agreements and will provide more than 900 new apartments here in the Helsinki region. Of course, those projects are not yet all visible in our figures concerning the number of apartments under construction, but it creates a really solid pipeline for our growth, and we are able to combine different sources for our growth. Building new apartments, converting premises to apartments, buying portfolios, so we are using multiple sources at all times. We do believe that it's important to be able to create added value for the customers and create high-quality customer experience. The customer values easy and effortless living, and it's in our mission how to create better urban living. We will keep on focusing on how to create better services, whether they are digital services and easy access services.
On the other hand, as well, new kinds of services related to the living in the premises, like maybe a dog-walking service, which we are launching at the moment. A lot of different kinds of services, and actually, quite many people are using these services today. I'm really happy that we are receiving a new CDO, Ms. Katri Harras-Salonen, from January with her experience. I think we are even more confident on providing new kinds of digitalized services. Of course, today, Lumo Web Store plays an important role in our business. Today, more than 14,000 agreements already through the Lumo Web Store. Half of all the new clients today are coming from the Web Store here in the Helsinki region. Actually, more than 60% of new tenants are coming through the Web Store.
We are still in a growing phase concerning these digitalized services and experience how to get the apartment easy and effortlessly, so you actually are able to rent the apartment 24/7, for example, with your mobile phone. People seem to value this kind of service a lot. We have to keep in mind that a great deal of the demand for new homes comes from the fact that people are moving inside Finland towards the biggest growth centers. Now, we are providing an easy access to the apartment. You do not have to travel in order to see the apartment, fill in any application. You just rent it from the Lumo Web Store. To provide some color on what is going on concerning those 1,200 apartments under construction today, only one project actually outside the Helsinki region, and it is located in Turku, one of the biggest growth centers in Finland.
We are growing there where the demand is the highest. As I said, we expect to find new projects as well. Some new projects might come from construction companies and might be ready even next year. A good example was that the agreements with SRV and Hausia provided already two projects completed this year. The estimate is that this is an ongoing pipeline, and now we're adding more than 900 apartments with these two agreements. It's important to notice that they're really nicely located along the public transportation, along the subway, the train stations, and it meets the demand quite nicely. We have to keep in mind that the average size of the portfolio is roughly 45 sq m. Now, I would pass for Erik to provide some deeper color concerning numbers. Please, Erik.
Thank you, Jani. Good morning, everybody, from my side as well.
Our figures came out strongly, and the total revenue increased by 4.7%. The main driver there behind this growth was like-for-like growth, 2.8%, and 2.4% came from the increase in rents and 0.4% in improved occupancy rate. Other biggest contributor for the top-line growth was completed apartments, EUR 7.9 million. Of course, that includes apartments completed this year and after the Q3 last year. Profit before taxes, if we first exclude change in fair value, investment profit is growth 7.5%. That's EUR 8.3 million, and main contributor there, net rental income growth by 31, EUR 3.2 million, extra expensive flat, and then financial expenses, negative figure, EUR 4.3 million. There's EUR 3.3 million change in fair value of interest rate derivatives. We apply hedge accounting, but smaller impact will come through the P&L as well.
Of course, it's good to note that IFRS 16 had a minus EUR 1.8 million negative impact for financial expenses, but of course, a positive impact on the maintenance cost side. If we look at the change in fair value, investment profit is EUR 71 million. That's a healthy amount, but it is slightly smaller than in corresponding period. That's why the change in profit before taxes, including change in fair value of investment profits, was slightly negative. Main part of that change in fair values during Q3 came from the change in market prices. Only a minor part came from the ending restrictions. During the Q4, the portion of ending restrictions is going to be much bigger than in previous quarters this year. Net rental income grows 7.6%. That's growing.
Net rental income is growing with a faster pace than top line, and that pushed our net rental income margin to 66.8% year to date. During the Q3, the margin was even higher. Maintenance expenses increased EUR 1.4 million, that's a 2.1% increase in maintenance expenses. Two reasons there, heating EUR 0.9 million increase, mainly during the first three months in this year, and then property taxes up by EUR 0.6 million. Repairs, EUR 2 million less than corresponding period, that's a 7.7% minus figure there. We achieved some savings there, and some projects have been postponed. Funds from operations increased almost 30%. It's good to note that during the corresponding period in the first quarter last year, we paid EUR 13.5 million cash taxes because of the disposal of a sizable portfolio.
This year's figures during Q4, we booked EUR 4.4 million cash taxes because of the disposal completed Q3 this year. Other contributors for the FFO growth was, of course, net rental income growth, EUR 13.2 million. We have slightly narrowed the range what comes to guidance for FFO this year. The midpoint of that guidance is based on assumptions that the weather is going to be on average in the remaining part of this year and that the repairs are going to be on a higher level than in the corresponding period as well as earlier this year. Occupancy rate improvement there, 0.3% improvement compared to previous year and 0.2% compared to the H1 figure. Healthy growth there, and tenant turnover remained roughly on the previous level. Gross investments, EUR 175 million. There's development investments, EUR 123.8 million, and acquisitions, EUR 30.2 million, and modernization investments, EUR 21.6 million.
We have acquired 117 apartments, completed 710 apartments year to date, and there are three apartments demolished or altered. On the divestment side, we have completed divestment of 482 apartments, and the price there was EUR 24.3 million. Modernization investments and repairs up by 10%, higher level than in corresponding period, and we estimate those to be between EUR 60 million-EUR 68 million this whole year, depending on one or two projects, whether we start them or not at the end of this year. The value of investment properties increased in line with the strategy. Here, again, it's good to note that on last Friday, we disclosed the range for the impact of changing in valuation technique, and these figures, of course, prepared applying the old valuation technique. Fair value investment properties up by a little more than EUR 280 million year to date.
IFRS 16 contributed EUR 60 million, developments EUR 175 million, changing fair value of investment properties EUR 71 million, and disposals EUR 24.3 million. On the right side of this page, we see the number of apartments under each valuation technique that we currently apply. The change in valuation technique that comes into force at the end of this year will have an impact for those apartments that are currently valued on the transaction-based valuation technique and yield-based valuation technique. These apartments put together that have an impact when we change the valuation technique to yield-based valuation technique. We estimated that regardless of this change in valuation technique, the uplift in values when restrictions ends going forward is going to be in the same range as we have estimated earlier, between EUR 250 million and EUR 300 million, put them all together.
Our pipelines on the upper part of this page shows what we currently have in our balance sheet. Plots means the poor land. There we have a potential for 1,200 apartments, plots and existing residential buildings. The idea there is to demolish them and to build a new one. There across 700 apartments, currently there's 300 apartments, so the net impact is going to be 400 apartments. Then conversions, roughly 1,200 apartments, and then the biggest portion by far is the Metropolia case. They are in the rezoning phase. No news there, but it seems to take some time before we get the new zoning in place, but that is coming slowly but steadily, and we are very thrilled to get those started when the zoning is in place. The lower part of this picture, they are off-balance sheet items if you like.
This EUR 236.3 million giving roughly 1,033 apartments covering SRV portfolio, covering Hausia portfolio, and two other properties. It's good to note that 99% of this whole pipeline is located in the Helsinki region. This is extremely well located, taking into account the strategy of the company. Equity ratio and loan to value, we have the target to have equity ratio of about 40% and loan to value below 50%, and we are well in line with these targets. EPRA NAV per share improved as well as equity per share. Just one note that this is, of course, based on the old, if you like, valuation technique. Our capital structure, no excitement there, so we haven't made any new arrangement there. Half of the portfolio from bond market, half from Nordic banks and local commercial paper market.
We have EUR 250 million commercial paper program, EUR 50 million currently outstanding, and EUR 300 million credit line in place. Financial key figures, unchanged if you like, average interest rate 1.8%, including cost of derivatives, and we are again there quite conservative. The hedging ratio was 90% at the end of Q3. No major refinancing needs in coming next two or three years. Finally, the change in valuation technique. Last Friday, we disclosed a range for the impact of this change. We have prepared, of course, our own calculations, and we have discussed with Jones Lang LaSalle that has been appointed partner regarding the valuation and is going to give an external valuator's report when we start to apply this new valuation technique.
We estimate that the impact for the shift of the valuation technique is going to be between EUR 760 million and EUR 840 million at the end of Q3. If we take the midpoint of this range, that is going to have roughly in the ballpark a 5% impact for equity ratio, positive impact, and roughly 7% impact for loan to value, positive impact there as well. Now back to Jani.
Thank you, Erik. Yeah, it's easy to say that we are progressing toward our strategy goals well on the way. The strategy has been all the time a combination of different aspects. There's a growth target of us being a EUR 6 billion company by the end of 2021, and roughly it means 38,000 apartments. The story behind there has been that we are aiming to build roughly 1,000 new apartments a year.
Actually, the pipeline is really solid and might be in place already, but we will keep on working. We've been saying that the other part comes that on average we are buying 500 apartments from the market. Actually, last year we bought more than 1,000 units from the market. We were ahead of the strategy. Even though we haven't been buying a bit more than 100 apartments this year, we are well in line with our strategy. It's easy to put in Excel that you are buying each year exactly 500 apartments, but real life goes in such a manner that sometimes you are able to buy 1,000 and sometimes a bit less. We are able to buy whenever we find a portfolio matching our parameters. It's a combination of, of course, pricing, but the micro-location, the average size of the apartment, the technical condition of the building.
We are combining all the parameters. As I said prior, we are able to use multiple sources in order to grow. If we find new development projects more than estimated, we are increasing the amount of new building projects. The other part of the strategy says that we are actually growing in order to be even more profitable. The aim has been that we want to keep the FFO against turnover above 32%, and actually today it's 37.9%. We are investing in order to be even more profitable. The third aspect is how we handle the risk. We want to keep the loan to value under 50%, today it's 46.7%, and the equity ratio above 40%, today 42%. It's been a well-balanced strategy, and we've been able to grow with all the strategic parameters.
Of course, we do not forget the customer, and there is a target that by the end of 2021, the NPS will be 40. We have been doing some specifications concerning the outlook for this year. Actually, the revenue increase outlook is that it will increase by 3%-5%, so no changes there on year. The FFO range will be EUR 137 million-EUR 145 million, excluding one-off items. Previously, it was EUR 134 million-EUR 144 million, so a bit more narrow by EUR 1 million upwards. The third part was that prior we estimated that we would all put together invest roughly EUR 300 million, and that would require a sizable portfolio deal. Today, we expect that we are not making a sizable portfolio deal by the end of this year. The amount of investments will be approximately between EUR 190 million and EUR 210 million. That is what we have been doing with our specified outlook.
Now, I guess we are ready to move forward. No changes in the dividend policy, so still the same. Dividend will be at least 60% of the FFO, provided that the equity ratio is 40% or more. If we put all together and summarize what's been happening, as Erik said on the finance side, no surprises on the operative performance, no surprises. A really strong operating performance. We've been able to create both like-for-like growth, improve the occupancy level, and we've been able to actually increase the pipeline for new development projects. The growth seems solid. Thank you. Now, Maija.
Thank you, Jani, and thank you, Erik. Now we have some time for questions. First, we'll take questions from the conference room.
Ms. Wantikropos, Nordea. First, a question regarding the apartments within rent restrictions. I calculate that your valuation yield will decline by some 70 basis points.
Shouldn't that impact also the valuation of the apartments coming out of the restrictions where you have a guidance of EUR 250 million-EUR 300 million potential increase in value?
There's actually two things that this is behind the fact that we estimate that the range is going to remain unchanged. One is that the new valuation technique will be applied for those apartments that still have restrictions but are valued based on yield-based valuation technique. The amount of apartments coming out of restrictions and have an impact for valuation restrictions is going to be smaller going forward. Of course, this shift in valuation technique will have an impact for the amount of value change when each apartment restriction ends. Combine these two things.
Okay, that's clear. Another question also regarding the balance sheet. Your loan to value will decline 7 percentage points and equity ratio increase 5.
How will you use this? Could you consider extra dividends, or will you focus more on perhaps growing faster?
It's good to note that we haven't given any other releases regarding this value change, so it remains to be seen. We have now a new Chairman of the Board, and of course, he started a strategy process. It remains to be seen what is going to be the outcome, and of course, we come out as soon as if there's something to be told going forward.
Regarding potential portfolios in the market, which you obviously haven't found, is it only that the prices continue to increase, or is that the only reason you haven't got anything, or are the locations?
Actually, as I mentioned, for us, it's a combination of all the elements.
The pricing, the location, the micro-location, the average size of the apartments inside the property, technical condition. There have not been that many portfolios available. We are scanning the market all the time, and we are ready to move fast if we find it suitable. On the other hand, we have been able to find new means for our growth, like the reverse tender offering process. We are scanning all the possibilities all the time.
Thank you. Final question regarding the supply in the market. A lot of apartments that have been built in order to be bought by consumers have been transferred into rental apartments, and international investors are keen to be here. Do you see any risk of oversupply, or is it just a regional thing? You have to be in the right place.
I think we have already seen the offering peaking last year and this year.
At least in our numbers, it's quite visible that we are not suffering. Of course, there has been some micro-location challenges with new construction projects for all the players in the market. On the other hand, we've been doing quite nicely. It seems that there will be still a lot of new apartments coming to the market this year and the first half of next year, but it's not changing the market. There's a lot of demand for new rental apartments.
Your best guess for the like-for-like development is what we have seen in the last quarter?
Like we've been estimating prior, we still believe that roughly 2.5.
Okay, thank you.
I'm Siggi Niemi from SEB. I already cleaned the table, but I have one follow-up. You're now investing into acquired apartments less.
Is one factor that you believe that during the next 12 months, the market will be more favorable for buying portfolios?
It's not easy to see the future, but we've been focusing on how to create profitable growth. For example, these announced deals with SRV and Hausia, the net initially was four for 1,000 new apartments in the Helsinki region. We were quite happy with those transactions made. We are scanning all the potential in the market. It seems that the construction increase is leveling off. There might be some projects coming available. We have always provided the information that we pay the fair price and the right price for portfolios.
Perhaps a second question. We have seen many construction companies struggling in these markets with low profitability and project postponements, limited amount of employees, etc. A lot of issues.
How do you handle the situation when you choose a construction company to construct a property for you? How does that process work for you? Have you changed the process in some way in the last, let's say, one year?
Of course, we've been following the market closely. As I said already in the beginning of this year, my estimate is that the volume of construction work is basically coming down from the reason that it's not healthy for the construction companies that all the resources are in use and they are not able to make money. The subcontractor chain, the full capacity is in use. We use tender processes when we buy projects from construction companies. Of course, we follow and evaluate the risks connected to the construction companies. We've been able to do okay.
We do have a really capable team here in Kojamo on both evaluating the projects and, on the other hand, the companies providing those projects.
Thank you.
Hi, it's Erik Hjelt from Intres. A couple of questions from me as well. Regarding the new valuation technique, what kind of impact, if any, did it have on the terms of your existing loan facilities and the linked financial covenants? Is there more headroom now?
There's clearly more headroom there. Very clear, indeed. Of course, to add that is that we don't know how, for example, rating agencies will look at this. Our assumption is that they're going to see this as a credit positive, and this gives more headroom for the company. They haven't given any releases yet, and we haven't given any additional releases. The financial targets for the company remain the same.
As discussed earlier, of course, if the outcome of the strategy process is something else, we are going to give releases. That work is ongoing, so we do not have any results there yet. Clearly, it gives us quite nice headroom actually regarding the current loan facilities we have in place.
Sounds great. For Jani, I know I asked this already three months ago, but could you provide us with any kind of update on the loan services in terms of the revenue and profitability development during the last three months?
Actually, we are not providing any color number-wise. We have been piloting new services launching. We will launch some new services for piloting even this year, by the end of this year. Actually, it is a combination. Most often, I get the question that, are we able to create extra revenue outside the paid rents?
On the other hand, I guess one proof of the concept is that we are able to create 2.8% like-for-like growth. We are quite happy with the current level that we are able to increase the occupancy level and increase the like-for-like growth. It's an element backing the like-for-like growth.
The Lumo revenue, is it following a trend? Is it accelerating, staying the same, or decelerating at the growth rate?
As I said, at the moment, the like-for-like growth was 2.8%, and we estimate to be able to keep it roughly on 2.5% level. Of course, in the future, we do believe that we are able to create revenues from the services, but today it's not on the table.
Okay, thank you.
Jussi Nikkanen, Handelsbanken.
You have a very positive challenge with the strategy goals when achieving the targets well ahead the 2021, with the portfolio increasing to EUR 6 billion rather nicely now in estimated in here in 2019. Do you still continue with investments as earlier stated and you're saying, and whether you have a down-level target for your leverage, for example, as you're having 50% upper limit, whether you have a lower limit for the leverage?
As Erik provided color, we do have the existing strategy in place, and we keep on working on that one at the moment. Of course, with the new chairman, we are in a strategy process and thinking about what's going to happen after 2021 because life will keep on going. Probably the demand is still there, and that means that we are providing more new homes. Erik.
One comment there to add.
Yes, we are, after this value strategy, if it's in the range what we're given, we are already above this EUR 6 billion. But we have actually told that the EUR 6 billion target is without any change in the fair value of investment properties. This EUR 300 million on average per year to be invested for development process acquisition is still there.
How do you see the foreign investor interest currently in the Finnish housing market, as it has been rather strong previously during the last two years?
Yeah, of course, we have seen a lot of interest towards the Finnish housing market. I think there's no big changes there. The interest levels are low. Real estate is interesting for investors, and Finland is a good operating environment.
Can I also ask a question about sustainability?
You slightly suffer from the carbon dioxide emissions through the Helsinki energy fueling, having rather large coal-fueled operations currently. What are your plans to have an input in there to decrease the emissions?
I think, of course, this Helsinki question will be decided by the city of Helsinki. They've been providing quite positive views on that one by the mayor. For us as a company, these types of questions are part of our company DNA, and we try on a daily basis to work on these kinds of matters. We've been, for example, providing lean heat systems, so artificial intelligence on how to combine outside temperature with the room temperature and the weather forecast, how to really optimize the heating and the amount of energy we use. For example, the electricity we use in our properties today is carbon-free.
Okay, let's move on to the questions from the conference call line, please.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Just as a reminder, that was 01 on your telephone keypad. As there are no questions, I'll hand it back to the speakers.
Okay, thank you. We have a couple of questions from the chat function. They are touching the same subject that we have been already discussing, but I'm going to ask them anyway. First of all, to what extent are you considering to amend your financial policy or targets following the significantly lower LTV expected at the end of this year based on the new valuation technique?
I think Erik provided the same color.
I think we already covered that, but just to repeat myself, actually, is that we have not set any new financial targets for the company. This 40% equity ratio and 50% loan to value is still there. Of course, this change in fair values is going to give a larger headroom against these targets, and the strategy process is ongoing. We need to be patient there and look what the outcome is going to be. The growth target for the company to invest roughly EUR 300 million per year, that remains the same. Of course, the company is looking for the growth, but the 2021 is approaching, and the strategy process is prudent to have at this stage. We will give you more color when the strategy process is finalized.
Yeah, and to continue with the same subject, the new valuation approach will lower LTV by approximately 6-6.5 percentage points according to my calculations, which will improve the ratio towards 40% targets stipulated by Moody's for an upgrade. On the back of the lower LTV, will Kojamo use this headroom to increase leverage and enable further growth, or will your targets improve the credit profile in the eyes of Moody's and strive for a better rating, which would improve financial costs markedly?
We have not changed the financial targets, but most likely rating agencies will look at this as a credit positive, but that is another thing.
Okay, thank you very much for the questions and for coming here today. Our next report will be the full year report, which will be published.