Earnings Call: Q1 2021

May 12, 2021

Good afternoon, ladies and gentlemen, and welcome to Koyama's First Quarter's Results News Conference. My name is Maja Hongas, and I'm Manager of Investor Relations here at Koyama. Today's presenters will be Jani Nemenen, our CEO and Erik Held, the CFO. After the presentation, we will have some time for questions. And first, we'll be taking the questions from the conference call line and after that from the chat. Please enjoy and let's get started. Stegis Jorjani. Good afternoon, everybody. Nice to be here. Sun is shining here in Helsinki. We are providing some color on our Q1 figures. To start with, it's easy to say that actually the year has started along with our There has been an impact because of COVID-nineteen to the operating environment. Temporary both, for example, like for like growth and the occupancy have been impacted. But as we have been estimating, sufficient vaccination level seems to be reached by the summer and a lot of Good estimates already that after the sufficient vaccination level will be reached, things are getting back to normal, Urbanization will proceed. And for example, students will move back to university cities. So drivers for long term demand for rental apartments are still valid. We do have a really strong pipeline for our future growth. And actually today, our Fair value of investment properties is for the first time more than €7,000,000,000 So we are well in line with our strategy and we have a good starting point To proceed our operations this year and heading towards H2 when we think that after sufficient vaccination level, Things are getting back to normal. So we are keeping our outlook 2021 the same. Getting a bit deeper with the general operating environment, There is a lot of estimates that the economic environment will be improving after Vaccination level means that GDP growth is improving. Businesses are improving. People are starting to travel. We have seen a slight increase and there will be, according to estimate, a slight increase With prices of all dwellings and as well with rental apartment rents, Latest estimates show that there is an increase of start ups concerning Block of flats, but it seems that mainly they are because of build to sell projects, which were Postponed and canceled last year, they are picking up speed again for homebuyers. Here in Finland, it's easy to say that vaccination coverage is proceeding nicely. We had a figure on chart, 30.9%, but as by yesterday, it was already 35.4% and Still a bit higher today. In the market, we do see that there's still a lot of foreign Towards our valuation and valuation yields as well. And I think that provides the color that COVID-nineteen only has a temporary impact to the operating environment. Long term drivers for demand Are still valid. The development of household sizes and increasing number of 1% and 2% households We'll continue and as well the urbanization as soon as people are able to move and travel, Students moving back to university studies, doing their studies in a normal manner in place, that will provide a lot of Long term demand. We have seen during the last decade that there's been a change in people values towards ownership, Increasing number of households living in rental apartments in all the big cities. Today, already more households Living in rental apartments then in owner occupied homes in 3 big cities Helsinki, Turku and Tampere. And if we provide some color on what's been happening in the market during the last decade already, Because of the urbanization, there's an average need to provide 35,000 apartments a year. Last decade In Finland, in the big picture, we've been able to provide enough homes on average, But sadly, most often in wrong places. If we look at the chart on left hand lower corner, actually here in Capital Region, in Helsinki region, The population growth has been strong and not enough new apartments have been provided here. Only during now, over the last 2 years, enough apartments have been provided to the market. And on the other hand, last year, Because of COVID-nineteen, urbanization didn't continue in a normal manner. That created a situation temporary that there's Less of demand towards a bit bigger supply. But Finland, especially capital region, needs that more than 40% of all the new apartments should be completed to Helsinki region. One thing we can see here as well is that the highest volumes in residential start ups We're 2017 2018, and now we've been coming down a bit all the time. So that means that the number of completed apartments in the Total market are going a bit down all the time. To provide some color on our Key figures. Even throughout COVID-nineteen and period of operating environment, we've been able to grow our total revenue. We've been and two aspects there, of course, we've been able to complete new apartments and then increased rents. On the net rental income side, last winter It was cold and provided a lot of snow compared to previous year and compared to so called normal winter. That created more maintenance expenses compared to last corresponding period. It was 2 point €3,000,000 And for example, extra heating was €1,600,000 compared to last year corresponding period. FFO level was impacted, of course, by the a bit lower net rental income, as I provided color. Then on the other hand, the loan portfolio was as well bigger this year. Fair value of investment properties, €7,100,000,000 today. We've been investing a lot in the market. On the other hand, of course, there was a positive impact and change in Fair values, mostly our investment, gross investments, €68,000,000 are new development projects, New development project investments were €58,800,000 Profit excluding changes in value, €33,600,000 13.2% Better than last year. And then, of course, profit before taxes, €177,000,000 was really strong. And That included a net gain in fair values of €143,500,000 For Coyamo, it's All the time important that we are able to grow using multiple sources. So we are providing new homes based on our own land. We are buying projects from construction companies. We are able to convert buildings into apartments. And then we are buying portfolios If we find suitable according to our parameters. At the end of Q1, we had more than 2,600 apartments under construction. All the projects are located in Helsinki region, along with excellent Micro location along public transportation and services, all the projects are providing the net initial yield of Around 4% or above 4%, all the projects have a fixed price With the construction company, so even though if we would see an increase with the construction cost in the market, We wouldn't be impacted with our projects. Metropolia case, the zoning is proceeding. The first project zoning has been completed at the end of last year. For example, the new and old chemistry around Hietala Hanen Tore and then Arkad Liangkato. Rest of the project zoning is proceeding this year and hopefully Will be finished later this year. Metropolitan case will provide another 1,000 units in City Centre Helsinki. And if we look at the estimated timing of completions this year, mainly Our project will be completed during H2, so latter part of the year. Sorry. And actually, the renting concerning new projects has been proceeding in a normal manner. For 2021, we are reaching an even higher number, completing more than 1700 apartments. So a really strong pipeline there. For us, it's always been important that we are creating Good experience, excellent experience for our customers. We are providing a lot of services for customers Entering Luma World, we are providing services to customers living in Luma Apartments. Luma Web Store already provided more than 23,000 Rental agreements, we have created a couple of new services, for example, how to tender electricity contracts And move and installation services for existing tenants, an important service has been MyLuma. More than about roughly 3 out of 4 of our customers using Myeloma services, actually what it means, 1300 daily users with Myeloma Service. Then to provide some color on Luma customers. Here a couple of charts, A bit different angles. So mainly 1% and 2% households, more than 70 5% actually, 1% and 2% households. That's good to connect with the mega trends, Increasing number of 1% and 2% households in Finland. That's visible here in Coimao as well. Then on the other hand, The age groups, what we have seen last year is that a lot of customers under 25 years Renting the apartments, but as well, terminating the tenant agreement in the same apartment. A bit more than 1 year ago, we had only 8.5% Customers below 25 years. So actually, the amount of younger clients has been increasing. But During this COVID-nineteen period, many of those customers have been a bit Worried, moving in, moving out, moving to the parents, moving back to the university city, moving away from the university cities. And that's created a rotation, which is not normal. Another thing that's been happening, of course, During this a bit more challenging period of time is that families with a single parent Seeking for a more affordable home in the market. And then in some scale As well, those people working in service industries being without a permanent job at the moment, those kind of phenomenons we have seen in the market. Sustainability Plays an important role for Coiyama all the time. We published a sustainability report in March. As well, we published our Green Finance Framework linking our sustainability targets With investments and how we are financing them, of course, we were proud to receive Recognition as the most equal listed company in Finland. And for us, it's important that we are committed Complying with the U. S. U. S. Sustainability Development Goals as well aiming carbon neutral energy in our properties by 2,030. Now I would pass over to Erik. Thank you. Thank you, Jani, and good afternoon, everybody, from my side as well. On Page 13. Our total revenue grew €1,500,000 and there's 2 drivers behind that. One is our like for like growth was 0.2%, and I will come back to this like for like figure later. And the other driver there was completed apartments during the Q1 this year. 45 apartments were completed, but of course, for the top line, plays a role. Apartments completed During Q2, three and four last year, more than 400 Apartments. Net rental income, down by 0 point €5,000,000 total revenue up €1,500,000 as mentioned. And maintenance costs were up by €2,300,000 compared to last year's Q1. And there was, of course, the biggest driver, cold winter and higher snowfall. So the heating was up by €1,600,000 Taking snow from one place to another was quite Costly, so up by €300,000 And then cleaning was elevated €400,000 And this higher cleaning cost was related to COVID-nineteen. So we will spend more time at the home, so that required more cleaning. Page 14. Profit before taxes, excluding change in fair value, investment properties up By €3,900,000 so net rental income, negative €500,000 as mentioned. SG and A expenses, €900,000 So we get some savings, thanks to our own activities. And of course, this COVID-nineteen plays a role as well There because we were not able to travel and people worked remotely. Finance expenses down by €3,600,000 And I think it's drivers there was a gain in value of investments, positive figure, euros 2,200,000 unrealized change in fair value of derivatives, Positive EUR 3,000,000 and interest expenses, EUR 1,300,000 because of the bigger loan portfolio, what we have in our balance sheet. And profit in on fair value investment properties, EUR 143,500,000 and biggest contributor there was the yield compression. So the yields valuation yields came down by 10 basis points, contributing €130,800,000 for the value chains. And the restrictions contributed €12,000,000 and Development gained little more than €2,000,000 Of course, on a negative figure in that The valuation line is this monetization investments €1,800,000 FFO down €1,800,000 so net rental income negative figure €500,000 SGA €7,000,000 driven by the bigger loan portfolio, what we had, as mentioned earlier. And then some additional cash taxes because of our disposal During Q, €1,300,000 Page 15, financial occupancy rate. So of course, the market situation plays a role here. As Jani mentioned, We've been able to make new lease agreements in a normal manner, and the tenant turnover is elevated. And here, the 2nd wave of COVID-nineteen, of course, plays a role because, again, students were not able to move to the Place where they study and travelers were not able to come to the country or travel inside the company. As Jani mentioned, we expect those Impacts to be temporarily. So like for like rental growth, most likely in H1 is going to be moderate, but after the sufficient vaccination level, what we expect to be there during the summer, second half of this year, the occupancy rate should be improving as the like for like rental growth. Page 16. So the impact of rents and water charges was a positive figure, 2 percentage percent here. So we've been able to increase the rents pretty much in a normal manner, and it's good to note that more than 40% of the annual rental increases coming through During the Q1 of a year, so we are proceeding there pretty much As planned, the impact of occupancy rate is €1,400,000 negative. Then we have 0.4% negative impact for other items. And this is actually a group of Several smaller items. So we have in some of our residential buildings, there are some commercial premises There, the occupancy rate, of course, impacted by this COVID-nineteen and some other Leased premises as well. And some rent fee periods given in those commercial premises. Some of these were down slightly and as well as Car parking fees. So all this played was included in these other impacts. But in total, like for like, Growth was moderate as anticipated. Investments proceeding according to strategy, €68,000,000 most of that our development investments, €1,800,000 of course included as Then modernization, investments and repairs put together, up by €100,000 Repairs Down by €200,000 and amortization investments up by €300,000 And the big picture going forward hasn't really changed. So we expect amortization, investments and repairs put together to be between €60,000,000 €70,000,000 going forward. Page 18, Value of Investment Properties, euros 7,100,000,000 Up by €209,000,000 from the year end. Investments, euros 68,000,000 and then Change in fair value on investment properties, €143,000,000 On the right hand side, we still have 2,123 apartments where we have restrictions regarding the valuation. And these restrictions will gradually end by 2024. And there's going to be an uplift in total in value, around €140,000,000 to €160,000,000 And the impact here is back weighted. Page 19, we have a year wise view for our development pipeline. On left hand side, Colium, apartments, little more than EUR 2,600,000 in total, already EUR 460,000,000 invested and EUR 2 €21,000,000 to be completed these ongoing developments, this binding agreements providing So a little less than 1,000 apartments, euros 222,000,000 and it's good to know that these are fixed price turnkey projects, all this. So whatever happens for investment costs doesn't have any impact for these figures. Metropolitan case, as Jannie mentioned, 2 first Rezoning in place already and remaining expected to be in place during this year. And this other right hand side column covers Pure Land, providing us 1200 apartments And then plots and existing building, whether it is demolished, exiting building, I'll build a new one there, providing 700 apartments. So net increase there, 400 apartments because there's 300 apartments in that in those buildings. We estimate that investments in developments this year is going to be between €370,000,000 €420,000,000 €1,000,000 Equity ratio and loan to value, we have set the target for equity ratio to be above 40 and loan to value to be below 50. We have quite sizable buffer against these levels. And these figures balance sheet figures, of course, supports our growth going forward. And EPRA ENERV improved, ending EUR 17.55 at the end of Q1. Page 22, we have very strong financial key figures, more than half of the portfolio already From the bond market, euros 3,000,000,000 in total interest bearing liabilities. We have an average fixed interest rate period, 4.5 year as well as average loan maturity, 4.5 year. And our hedging ratio is 90%. So we are very well hedged against any potential change in market interest environment. Average interest rate, 1.8, that's including the cost of derivatives. That's actually a rounding. So the 3rd decimal changed there, so nothing changed in the loan portfolio as such. And in this year 2022 20222023, we don't have any major and Maturing Loans in our Portfolio. Page 23, strategic targets towards 2023. Annual growth of total revenue, I will come back to that later. So annual investments, well in line with our target. And I said we estimate that the investments this year is going to be between €370,000,000 €420,000,000. FFO against total revenue, 28 point It's good to know that according to IFRS twenty one, we booked all Property taxes in our Q1 figures. The total amount of property taxes is 11 point €4,000,000 So if that were allocated, the portion of property taxes for the quarters Q2, Q3 and Q4 was Around €8,500,000 And if we then add this to the actual FFO for Q1, The FFO against total revenue would have been 37.2 percent, so well in line with our strategic target. Net Promoter Score 21, some decrease there. Actually, we measure this Net Promoter Score from Four different points, new customers, leaving customers and our customer service center. And this is ongoing thing. And nothing actually changed there. What caused this change in Net Promoter Score was this A survey what we do quarterly, and we ask our existing tenants the Specific questions, and there was a drop in this recommendation question. But all questions related The customer satisfaction was pretty much unchanged. So how we interpret it is actually that people are simply tired this COVID-nineteen. So they have to spend more time at their home and they wait to be able to move towards a Normal life, if you like. Our outlook for 2021, This is unchanged. So we estimate that the top line growth is going to be between 3% 5%. And there are, of course, a couple of assumptions behind this outlook. First of all, we estimate that the number of apartments to be completed this year It's going to be according to the schedule Jannie already mentioned. And the old development projects are proceeding without any delays And all project that are on the marketing phase are selling in a normal manner. So we think that, that is proceeding as planned. And the rent increases is, of course, something that we are going to do a normal manner, more than 40% this year, said rental increases already made. And then we as estimated earlier, estimate that the like for like rental growth for the first half of this year is going to be muted and on back of a sufficient vaccination level, Second half of this year will be have a positive impact. And based on all estimates from authorities, The estimates are that the sufficient vaccination level is going to be reached during this summer. And then what happens after that, so students will move to those places where they really want to study, so They want to move those places. International students will move to Finland. Business travelers We'll be there again. Tourism, hopefully, is going to pick up as well, and gradually, the urbanization is going to be there as well. The students, they most likely is going to be the 1st movers, and they want to go to those places where they actually study as soon as possible. And it's going to have a big impact for the total market. So some of those apartments that are currently vacant will be taken by those Students. And of course, there's going to be impact for our portfolio as well because we have some portion of students. So that might Happened actually quite fast. Our outlook for FFO, €100 and €50,000,000 to €163,000,000 And if you look then the midpoint of that range, there are several assumptions behind that. So we estimate that the total revenue is going to be according to those lines I just described, That the normal weather from here on is going to be no disposal this year, so no additional cash taxes, Additional financing according to those development projects as they go. And of course, we estimate that we can achieve some cost Saving, especially regarding repairs and SGA expenses. So these are assumptions behind the midpoint of that FFO range. Page 26, dividend policy. Nothing changed there. So the 60% of the FFO will be paid As dividend, given the providing that the equity ratios about this 40% level and we have, as mentioned, quite sizable buffer against those levels. And that's at least, back to Jani. Thank you, Erik. As to summarize, of course, for Coimao, it's important that we are a long term player. Our operations are meant to provide business for several decades. So we do follow the megatrends, and we have expected and do expect that the impact of COVID-nineteen pandemic will be temporary and the big drivers for Big drivers creating demand, long term urbanization And the development of household sizes will continue as they have been developing before COVID-nineteen. So That creates our operational environment in long term. We are in a good position. We've been operating quite systematically. We have been able to grow our turnover and the fair value of our investment properties. We have a really strong pipeline Providing new homes in Helsinki region. And as it seems, Our expectation concerning the vaccination level be reached by sufficient level will be reached by the summer It's proceeding as we've been hoping and expecting, and I think we are in a good position to go forward. Thank you. And now please, Maja. Thank you, Jani, and thank you, Erik. Now it's time for the questions. So we will be taking those first from the conference call line. So please, operator, we're ready. Thank Our first question comes from Pansy I have a couple of them. First of all, starting with the fair value gains. Deal compression, that was the main source of most of So could you talk a little bit around that? What kind of properties, which cities? Did you see the year compression? Or was it just across the board? Hi, Asif. Well, it was pretty much across the board, but it was slightly weighted for other places than Helsinki So Turco and Tampere, there we saw the decrease of yield requirements and then Areas around city center area here in Helsinki. Okay. Thanks. Then on the guidance and revenue growth of 3% to 5%, In a way, what has been baked in, in terms of like for like growth and New apartments that will come to the market in the next few quarters. So what's the volume growth and what's The like for like growth contribution to the guidance. So what comes to like for like, so we estimate that the first Half of this year, the like for like top line growth is going to be moderate. And on back of the subsequent vaccination level, It's going to be higher on the second half of this year. And then what comes to the completion of new apartments, So we have penciled in pretty much the schedule, what's in the presentation, Page 10. And then as discussed, so all this development process, they have Proceeding according to the plans and the selling side, so marketing side is as well going In a normal matter, and by saying normal matter, I mean how they went before the COVID-nineteen. So Even there is more supply in the market, it looks like that there's still a lot of demands towards these new apartments. Okay. Thanks for that. That was the 3rd question that I have. So let's skip that and let's move to 4th. Just making sure, the harsh winter conditions, cold weather, combined, it was roughly EUR 2,000,000 In cost terms, extra cost in Q1, right? Correct, EUR 2,300,000. Okay, great. That's all for me. Thank you. Our next question comes from Sivanta Krogos from Nordea. Please go ahead. Yes. Hi, it's Matti from Nordea. I hope you can hear me. Yes. Yes. Good afternoon. I have a couple of questions. The first one actually I should have asked this already a quarter ago, but I ask it now still. In your property valuation assumptions, you lowered the Occupancy rate assumption for Helsinki region from 98% to 97.5%. I think it was in Q4 last year. Could you elaborate on that? Yes, Jani. Hi, Jansi, Sante. We had a discussion with the valuation authority, Jean Francois, and It seems that there was a right timing to slight make a slight change in the sequential level there. Nothing big there. Is it related to high amount of completions in the Helsinki area of new rental apartments? I think it was a normal kind of business running through the Numbers and the estimates for a longer term demand and supply. Okay. Thank you. And then Question to Erik. Can you I missed the when you split up the like for like rental growth. So the rental increases were 2% impact of occupancy rate, plus minus 1.4%. And what was the other impact? What did that Constitute of Mainly. That's a combination of several minor things. So there are sauna fees, parking space fees. There is we have some commercial premises and some other premises, so occupancy in those. It's a combination of several smaller items. Okay. Thank you. And then Perhaps a more broader questions. Have you seen any change in the demand For what kind of apartments? I mean, we have heard stories about people wanting to perhaps Seek for a bit bigger apartments if they start to work more from home. I know that your Target, this is mainly 12 person families. But have you seen any trend of this increased demand outside of the metropolitan areas? Actually, we are tracking all the new tenant agreements all the time on daily basis and Nothing big going on there. One could argue that a slight Change of people renting 2 bedroom apartments, those are typically households of 2 persons, But it's only 180 apartments more than last year. So nothing big there. Okay. Thank you. And then lastly, on transactions and your valuation. Was there any Single deal that impacted your valuation in a material way. There was at least that one YIT and Olaas Bank canceled quite a big chunk. And then I guess there is another deal pending. But are there any major transaction that have Of course, at the end of the day, that's something that's decided by the valuation agent And what they provided information last year was that they felt that there was not sufficient Data from the market, so not enough deals. And they've been collecting, of course, data throughout Last 12 months and piece by piece that picture has been completing and as we've been providing information that We have seen quite aggressive yields. We have seen portfolios both with a 3% and mid figure. Now it seems that international players are Willing to pay 3 and a low figure. And that has had an impact towards the valuation yields as well. If I may add, so It's not only 1 or 2 transactions. So it's a whole bunch of transactions. So brokers are following what's happening in the market. And they There's already evidence from several transaction completed and there are some additional discussions ongoing, but they are not taken into this So it's a bigger picture what those brokers and these valuators we are looking. Okay, thanks. That's all from me. Thank you. Our next question comes from Suneet Huynh from Barclays. Please go ahead. Hi, thank you for the presentation. My question is more for Erik. Can you explain again why your net promoter Do you know the net promoter score as such? So it's calculated. We simply ask the Customers, how likely is it that you recommend the company or its services for your Friend of our job here in scale 1 to 10, and then we take out numbers 89, and we take calculate the portion of higher numbers and a portion Of lower numbers. So it can be any the figure can be anything minus 100 to 100. And we've been able to move towards our Target 40%. And now there is a drop in this Q1 in Net Promoter Score. And we calculate This figure from 4 different points. So we ask these questions from new customers, from leaving customers and from Those who use our customer service center, this is an ongoing thing and nothing changed there. Actually, the result has been quite stable. What changed during the Q4 was that we once every quarter, we ask from existing Then Hans, the same question. And then this Q1 survey, there was a drop in this part of this At Promoter Score. But as I said, only this question, how likely is that your recommendation there was a change, But all questions related to customer satisfaction was pretty much on the same level or many of those actually improved during the Q1. So how we see this outcome is pretty much that it's COVID-nineteen related. So people are simply Tired to be at home and tired of this COVID-nineteen, and that's why they are unsatisfied in a way. And they are waiting the vaccination level to be sufficient and the restriction to be removed. So It's this is how actually it works. Right. Thank you very much. Thank you. Our next question comes from Erik Branstrom from Carnegie. Please go ahead. Thank you very much. Good afternoon, gentlemen. I only have two questions left after following through the Q and A. Could you explain a little bit about the development of the vacancy rate in Q1 versus Q4? Because It obviously increased and increased almost 1.5 percentage points. What exactly is this due to? Is it because of apartments or is it because of cancellation of contracts that happened earlier in 2020? Or did something actually happen in Q1 versus Q4. Thank you for the question. If I provide some broader color on issue and then if needed, Eric can provide more detailed color. So actually what we provided from 2020 was the full year occupancy level. And then now Q1 figure We'll then develop after we move forward this year. What's been happening during the winter was that The 2nd wave of COVID-nineteen kicked in and that has had an impact to the market. And we've seen that Even though we've been actually renting the apartments quite in a normal manner, we have seen more people moving out, So terminating tenant agreements. Some of those agreements have been done by students. And even though they already had moved back to their parents, they had kept the apartment. But as the second wave kicked in, they terminated the Tenant agreement. And then on the other hand, as I said, we have seen in small scale that, for example, single parent Households have been moving out in order to find a bit cheaper, a bit more affordable solution. But as Erik provided color, the renting of new development projects has been Proceeding in a normal manner. No problems there. Thank you. And then my final question is, what have you seen so far in Q2? I mean, we are 1 point Into the quarter, and you mentioned that you expect like for like to be, as you put it, moderate In the first half of the year, it was basically 0 in Q1. What have you seen so far? Do you actually see like for like Trending up or is this something that you're still waiting for? So we estimate that the like for like rental growth For the first half of this year, it's going to be moderate. And on back of the sufficient vaccination, what we expect it to be there during the summer, The like for like top line growth is going to be accelerated second half of this year. But so far, Q2 has developed exactly at Q1. As mentioned, we estimate that the 1st half of this year, the like for like rental growth to East is going to be moderate. Okay, good. Thank you very much. Those were my questions. Thank you. There appears to be no further questions. So I'll hand over back to the speakers. Thank you very much. And it seems we don't have any questions from the chat. So I thank you very much for participating in our event today. And we will be publishing our Q2 report on 19th August. So hopefully, we will meet then again. Thank you very much, and have a nice day.