Kojamo Oyj

OMXH:KOJAMO

Earnings Call Transcript 2023-Q3

[Niina Saarto, executive]

Good morning, and welcome to Kojamo's Q3 Results News Conference. My name is Niina Saarto. I'm responsible for Investor Relations. Today, we have CEO, Jani Nieminen; and CFO, Erik Hjelt, who will present the third quarter's result. And after their presentation, as before, we have a Q&A. We start taking questions from the conference call line and then thereafter we take chat questions.

But now let's get started. I would like to invite Jani over here. Welcome.

[Jani Nieminen, executive]

Thank you, Niina. Good morning, everybody. Nice to be here once again providing information and color concerning our operations. To start by, I think this time it's good to provide some kind of summary first and then dig a bit deeper into the numbers. It's easy to say that our Q3 figures are solid and our position is actually really strong in an uncertain market. We've been creating profitable growth. And as the rental market turned positive during the summer as we estimated, it had a positive impact as well in the occupancy during Q3 in our figures. Our financial position is strong and it actually protects us against the impacts of changes in the financial market. So for example, the average cost of debt has been quite steady because of the high hedging ratio we use. So as our financing expenses are quite well hedged, these expenses will not increase in line with the market interest increases.

For the time being, we want to focus actually to ensure our strong position and we will not make any new investments. Of course we are scanning and analyzing the market very actively and if we find something appealing enough, we are ready, willing and able to move fast. I do believe that construction companies will have challenges in order to start new build-to-sell projects. Home buyers are getting more and more careful and actually construction volumes looking forward next 18 months will come to a lower level. Then moving forward to the operational environment. Yes, visibility is limited. Global economy has been clouded. Financial market been different because of the inflation, war in Ukraine. Inflation figures are quite high. At the same time, it's good to keep in mind that here in Kojamo, the general inflation doesn't have a straight impact as inflation figures here have been now estimated to be 6.5%. Actually our maintenance increase was 2.46% if we compare euro per square meter per month.

So as a strong big player, we are able to offset quite actually many parts of the inflation. On the other hand, so far actually the employment rate here in Finland has continued to increase so that helps us a lot. Looking at the volumes, we collect the official estimates concerning residential start-ups. They are now roughly 40,000 apartments here in Finland for this year. We don't believe that those numbers are reached this year. We already said that information a couple of times this year and it remains to be seen. But most likely the figures for example, nonsubsidized block of flats will be below 20,000 apartments this year and the figures next year are lower than expected. On the cost side, actually construction cost increases seem to be leveling off. But on the other hand as construction companies are a bit struggling in order with build-to-sell projects, they would still like to have the prices of the cost increases with the product and now the market is in that sense a bit struggling.

Home prices still increasing, modest increases there as well as the rent levels throughout the country. Then moving forward. For us, it's important that actually all the megatrends creating long-term demand for rental apartments are still solid. Actually picking up a couple of figures here. Now the latest statistics are in use for 2021 on the lower right-hand corner providing the information of households living in rental apartments and actually throughout all the big cities, the number of households living in rental apartments or the portion of households living in rental apartments has been increasing once again and that's expected to continue. On the other hand, people have been wondering what's going to happen here in Finland after COVID-19. And now the latest estimates concerning population forecast have been provided in September and actually the population forecast, the estimates were increased in all the major parts of Finland where Kojamo operates.

So the big cities like Helsinki, Oulu, Turku, Tampere, Jyvaskyla and in general Capital region. So in that sense, the outlook and megatrend creating demand is really solid. And yes, we do have still an increasing number of small house and households, 1 and 2-person households, and that typically means that they prefer living in rental apartments. As said, for 5 years here in Finland the construction volumes have been on the higher level, well above 40,000 apartments a year. Without COVID-19 kicking in, that wouldn't have been a problem. But as COVID-19 kicked in in the market, that created a temporary setback concerning urbanization and some challenges in the rental market. On the other hand, at the moment construction volumes are coming down and I would assume that we are next year on the levels matching the prior levels between 2015 and '16. So somewhere 33,000, 36,000 apartments a year will be the start-ups next year.

Moving forward to our figures. As said, we did make a solid performance. Our numbers are strong. We created profitable growth, see actually better stronger numbers than expected by others. Our total revenue increased by 4.6%, net rental income increased 5.5% and funds from the operations increased 4.8%. A couple of details from there. If we think about the net rental income, a strong increase there. On the other hand, yes, there was increases concerning maintenance. Total maintenance increase was EUR 4.4 million and a couple of details there. Most impacts creating cost increases were electricity and property taxes. On the other hand, we were able to create some savings concerning repairs. Fair value of investment properties today EUR 8.9 billion. Of course we've been creating growth by investing in new homes, in new buildings. That's visible there. Gross investments EUR 416.5 million. Actually now this year, quite a nice balance there.

In a big picture, half of the gross investments are new development projects and half of the investments are acquisitions this year. Profit, excluding changes in fair value, EUR 137.7 million. There the increase was 4.4%. And then profit before taxes, including the positive changes in fair values of investment properties, EUR 248.6 million, a really good strong number there. And then it's on the other hand good to keep in mind that this year, the positive impacts in fair values have been mostly development gains as we are completing projects. Last year there was a bigger positive impact because of changes in those profit requirements. We still have more than 2,000 apartments under construction. All the projects are proceeding in a normal manner. They are fixed price projects, turnkey projects. No problems there. It's been quite an active year. We've been completing 1,100 apartments to the rental market.

We've been quite successful there with new buildings. And as said, now for time being we are not investing in new projects. But on the other hand, we know that the existing project pipeline is still quite strong creating growth for us. Our projects are located in excellent micro locations. Development gains are actually quite strong, roughly 30% that either you can think creates added value as a positive impact in fair values. On the other hand, if something would change in the market, that creates protection for Kojamo. As said, this year completed already 1,100 apartments. Still a bit more than 100 apartments to be completed this year. Next year a bit more than 1,500 apartments to be completed in Helsinki region mainly. Yes, we do have 1 project under construction in Tampere and 1 in Turku as well. A couple of words concerning Lumo One, the tallest rental apartment building in Finland.

I would say that Lumo One is a unique case here in Finland providing exceptional added value for our customers combining apartments, common spaces and services in a very unique way. All the apartments have been completed now. Customers have been moving in the building and actually the occupancy has been high from the start. And an important factor is that it seems that our customers are really, really satisfied with this type of living; building on top of a shopping center, basically on top of a subway line, providing a unique opportunity to use urban living services nearby you. And I would say that Lumo One is in a way a top example how we create actually easily best living for our customers. Our approach is not providing only walls, ceilings and floors; but combining apartments, communal spaces, services provided physically, services provided digitally, additional services to apartments and that way creating added value for our customers. I would call it easy effortless living.

And now if Erik would provide a bit more detailed color. Thank you.

[Erik Hjelt, executive]

Thank you, Jani. And Good morning, everybody, from my side as well. It's great to be discussing our solid figures. And if we start with the total revenue and net rental income so the total revenue growth year-to-date EUR 13.4 million and EUR 7.3 million during the Q3. Like-for-like growth slightly improved, but still a negative territory 0.1%. Rent increases and water charges increases positive figure 2.2% and occupancy rate negative 2.4%. I come to this occupancy rate figures later. And other items 0.1%. So the growth mainly came from the growing property portfolio. So we acquired almost 1,000 apartments during the summer and then we have completed 1,100 apartments year-to-date and then of course Q4 last year completed almost 500 apartments and these are now contributing for the top line growth. Net rental income growth was actually stronger than top line growth 5.5% growth was EUR 10.9 million and Q3 EUR 6 million.

Maintenance expenses year-to-date up EUR 4.4 million and there of course it's good to note that the underlying portfolio grew during the year. Biggest items that grow during the year-to-date: electricity, EUR 1.4 million; property taxes, EUR 0.7 million; heating EUR 0.5 million. Other lines pretty much in line to the corresponding period. Of course inflation is an important figure. But if you look our maintenance expenses so euro per square meter per month, the growth was less than 2.5% and so that's more important figure in our cost side than the inflation figure as such. Repairs down EUR 1.9 million. If you look at the change in fair value in investment properties, we kept all valuation parameters unchanged and the reason there is pretty simple so there's no transactions in the market completed during Q3. So the latest portfolio transaction we saw in the market late summer, they were still made in quite high prices.

And since there are no reference transaction in the market so we kept the valuation parameters unchanged. So the positive impact for valuation, EUR 35.8 million during Q3 was mainly to the development gains. So 95% of that actually out of our development gains. Only 1 property came out of the ending restrictions. So that covers the remaining part of the change in fair value of investment properties. FFO up by EUR 5.5 million, of course net rental income contributed there. SGA expenses up by EUR 2.3 million from corresponding period and then last year actually we got some savings because of the COVID-19 and if you look the previous year 2020 SGA expenses so we are pretty much in line with those figures. Finance expenses up by EUR 2.3 million, loan portfolio underlying and then cash taxes up by EUR 0.4 million. Occupancy rate 91.7% and at the end of H1 it was 91.5% so improvement there.

It's good to note that this is actually a year-to-date figure and to get 0.2% improvement in year-to-date figure, that means if you do the math, that during Q3 the occupancy rate must have been 100 basis points higher than in Q2. And then in CEO's comments, the spot occupancy rate at the end of September was almost 93%. So this actually are the figures behind the headline here that the occupancy rate improved in third quarter. At the same time, the tenant turnover came down 1.8%. I think we already covered this like-for-like rental question. So investments EUR 416 million. Acquisition of investment properties for this portfolio acquisition during the summer and ongoing developments covers mostly at EUR 404 million. Modernization investments grew 9.6% so repairs down EUR 1.9 million and modernization investments up by EUR 4.9 million. Value of investment properties almost EUR 8.9 million, acquisitions covered EUR 404 million as already mentioned and profit on fair value investment properties EUR 110 million year-to-date.

We still have 1,774 apartments where we have restrictions regarding the valuation and those valuations will gradually end by 2024 providing EUR 110 million, EUR 120 million uplift in values and that's back-weighted the end of restrictions. Apartments under construction 2012 apartments, little more than EUR 300 million already invested. EUR 192 million to be invested in order to complete these ongoing developments. We estimate that the investments in development projects this year will amount to EUR 270 million to EUR 300 million. The total amount slightly down because 1 project was postponed and so pretty much untapped compared to H1. And as Jani mentioned, for time being we will not make any new investment decisions. It's slightly foggy there so we want to monitor the market and get the clear picture where the market is heading. We are ready when the opportunities comes and we are able to acquire or start new developments when we find suitable project.

But at the time being, we will not make any new investment decisions. Equity ratio and loan-to-value, strong figures there. Our loan-to-value below 40% and that's very strong and that gives a significant buffer against our Baa2 stable outlook rating from Moody's and we have set the target to have the loan-to-value below 50% and equity ratio above 40% and our current rating is pretty much anchored into these levels. So we have a solid strong balance sheet. And of course if you look out in the market, it's good to have buffers against these levels. Per share figures EPRA NRV, very strong EUR 22.63 and healthy growth there as well. It's very important for us and for investors of course that our financial key figures are very strong. So thanks to our very high hedging ratio 92% and the rising interest rate didn't increase our finance cost. Actually EUR 1.7 billion the average cost of financing including cost of derivatives and actually during the summer it came slightly down from EUR 1.8 billion.

And we don't have any material new financing needs in the short term. And our cash position is very strong so cash and cash equivalents and financial assets in total EUR 161 million. On top of that, we have EUR 300 million committed unused credit lines in place. And after the reporting period, we make a new EUR 100 million loan unsecured with OP Bank 6 years maturity. So it's on top of these figures. So our cash position is very strong and no material refinancing needs in short term. And of course that means that -- having a high hedging ratio and strong cash position and no maturing loans in the short term, that means that what has happened in the interest rate environment doesn't have an impact in our figures given our position. It's not a coincident where we are right now. So this has been the strategy of the company for very long time already.

Strategic targets, our KPIs actual year-to-date in line with our strategic targets. Top line growth 4.6%. Annual investments little more than EUR 400 million. Profitability, FFO against total revenue more than 39%. And of course, the whole year's property tax is already booked in Q1 so that has a -- is going to have a positive impact going forward as well. And then loan-to-value and equity ratio, strong figures there. Net Promoter Score 44. So the customer interface, we are satisfied with that figure to be in line with our target. Outlook, we have slightly specified our outlook remaining part of this year. So top line growth now we estimate that it's going to be between 5% and 6% and that assumptions there are that we estimate that like-for-like growth wise, the increase in rents awarded charge more than 2%. Of course remaining part of the year is quite short.

Slight improvement in occupancy. We know the amount of completed apartments and of course this impact of the acquisition during the summer. So as I said, they are all included in this slightly specified top line growth. And now we estimate that the FFO is going to be between EUR 156 million and EUR 164 million and that of course reflects the specific top line growth estimate. And the main factor for the remaining part of the year is what is the weather going to be like. So if it's going to be very cold and lot of snow, of course that will increase the cost. But otherwise, all cost increases are included or already specified in FFO guidance. Dividend policy unchanged so 60% of the FFO provided that the group's equity ratio is 40% or above 40%.

And now back to Jani.

[Jani Nieminen, executive]

Thank you, Erik. In a way to summarize, Kojamo's been for a long time a company with a strategy and we've been proceeding quite systematically our things and now figures are solid, stable development continued. There was a total revenue growth and, as Erik provided color, actually the net rental income growth was stronger and FFO increased as well. The situation in the rental market we expected that to improve by the summer. It seems that after COVID-19, it took a bit longer for example here in Capital region before people started moving towards the big cities and towards Helsinki region. For example, students started renting the apartments in the middle of July. Typically that starts happening third week of June. But as things started happening according to our estimates, July was good, August was good, September was good in the number of new tenant agreements.

On the other hand if we combine the estimates now that the number of new start-ups in the construction business are coming down for this year and next year, that actually means that starting 2024 less new supply is coming to the market and that creates a situation where we do see urbanization continuing, people moving towards the bigger cities. On the other hand, a bit less new supply coming to the market. So that provides actually quite a positive outlook if we look a bit further for rental market. On the other hand, as I said, we've been quite systematic with our strategy whether it's operational business, whether it's investing or financing. In financing for us, really important that we have access to multiple sources of financing. We've been quite systematic in keeping the hedging ratio in a higher level. And now we are really happy that our balance sheet is strong. We still have access for different sources of financing. And as the hedging ratio is high, there are no impacts in our interest level so far. And looking forward, as Erik provided color, no near-term big financial needs.

At this point, I would like to thank you and let's move to Q&A.

[Niina Saarto, executive]

Thank you, Jani, and thank you, Erik, for the presentation. We are now ready to take questions from the conference call line first.

[Operator]

[Operator Instructions] Please state your name and company.

[Svante Krokfors, analyst]

Svante Krokfors from Nordea. Quite a solid result and good to hear that the occupancy rate is improving again closer to 93%. Obviously we can try to estimate what it is as a spot every quarter. But how low was the, let's say, spot rate at the lowest during this year?

[Jani Nieminen, executive]

We've been not publishing spot levels. But as you mentioned and thanks for the question, Svante, you are able to calculate and get it to the right ballpark. We did say that we hit the bottom during the summer.

[Svante Krokfors, analyst]

And when looking at your valuation metrics, you...

[Jani Nieminen, executive]

Erik will provide a bit additional color there.

[Erik Hjelt, executive]

So if you do the math so based on our year-to-date figures, so you can calculate that Q3 occupancy rate was 92.1% and there was an improvement obviously from Q2.

[Svante Krokfors, analyst]

And in your valuation metrics, you have an assumption of roughly 97%. What kind of time frame do you expect you to reach, I guess 97% is what you strive for in the long term?

[Jani Nieminen, executive]

Yes. That is good to keep in mind that the occupancy level is 1 aspect and that's for the next 10 years so long target. On the other hand, there has been an adjustment in Helsinki region. So actually all the apartments vacant are held vacant for the next 12 months. So it's handled in 2 aspects all the time.

[Svante Krokfors, analyst]

Okay. And then on for example heating costs, I mean 99% I guess is district heating. We have seen some differences in the raises there and you said that EUR 0.5 million was the impact in Q3. But could you give some guidance of heating and perhaps other costs also? I mean there has been some discussion about the property tax also going up, but I guess that is only a bit more than EUR 10 million annually. But could you give some color on the cost especially heating?

[Erik Hjelt, executive]

Yes. We have this so-called district heating system here in Finland in place and that district heating is provided mostly powered by companies owned by municipalities and each of them, they have their own pricing depending how they produce the heat actually and they have a different way of communicating the increases in the pricing. So some of these companies, they have sent their new pricing for next 12 months and some of companies next 3 or 4 months. So it's a mixed picture there. So what we know so far is that the highest increase is around 30% and the lowest is 0.

So if you try to estimate what is the average increase in heating, it's around 15% next year. Weather plays a big role there so whether it's mild weather or cold weather is going to play a role there. And the heating is somewhere between 25%, 27% of total maintenance costs. And then since we have this system that we are able to increase the rents once a year sending a letter to our customers and the maximum rent increase is index plus 5%. So there's not a direct link for the increased heating cost and the rents, but there is a mechanism in place that we are able to pass the cost increases to the tenants.

[Svante Krokfors, analyst]

And then looking at repair expenses, they are down year-on-year even if your property portfolio has grown quite significantly. So could you elaborate a bit around that?

[Erik Hjelt, executive]

So since there's different way to book things. For example [indiscernible]; they capitalize all modernization investments, they capitalize all repairs and they actually capitalize a big chunk of maintenance expenses as well. So it's good to look repairs and amortization investments together and that's how we reported in our presentation and that actually grew during year-to-date so we've been still taking care of our portfolio. Of course bigger news on the portfolio is new or renovated properties so there's less to do there, less money to be spent. But in general, we've still been taking care of the properties.

[Svante Krokfors, analyst]

And then regarding your debt portfolio, what is the availability of funding? We know what the credit market looks like, but I mean you have a bond maturing next year EUR 200 million. What's your thought about that? I guess looking at that you have increased your share of bond finance quite significant. My assumption is that there will not be an issue in refinancing that with the bank debt if the credit market remains difficult.

[Erik Hjelt, executive]

For us it's always been important to have access for different social financing so bond market and bank financing and local commercial paper market. And this EUR 100 million bank loan we made with OP, that of course underlines the fact that we are able to get financing from banks and the terms there was quite attractive. The thing is that actually we have this EUR 160 million cash at the end of Q3, we made on top of that this EUR 100 million loan and we have EUR 300 million committed credit lines in place. We have commercial paper program and only EUR 30 million outstanding commercial papers. So based on all these facts so we don't anticipate any difficulties whatsoever to refinance maturing loans from banks or nobody knows actually where the bond market is after the summer 2023. But whatever the situation is there, we are able to -- we estimate that we are able to finance easily maturing loans or maturing bonds from banks.

[Svante Krokfors, analyst]

And then you also said that you refrain from making new investments. What needs to change before you pick up that again? Does it have more to do with the residential market or has it more to do with the credit market?

[Jani Nieminen, executive]

I would say it's a combination of uncertainty and the fogginess in the market. As said, we've been estimating throughout this year that construction volumes will start coming down. Now we see that happening in the market. We see home buyers getting more and more careful and less new apartments sold for home buyers from build-to-sell projects. So far still construction companies would love to price their products according to the increase of the cost side. We do believe that with a bit of patience, we will see some better opportunities in the market. On the other hand, of course yes, we know that the price of new money at the moment has increased if we would tap the market and we see that the rental market has been improving a bit. Our pipeline at the moment, as said, providing a bit more than 2,000 apartment is solid for 2022, 2023. We are in no rush to invest more at the moment. We are patient and we can wait a bit and look for a better opportunity.

[Svante Krokfors, analyst]

And does the fact that you refrain from making new investments, are you still open to make opportunistic acquisitions or is that also on hold?

[Jani Nieminen, executive]

All I would say if it's attractive enough. We were able to move quite fast once COVID-19 kicked in. It's good to keep in mind that we are ready and able when we are willing.

[Svante Krokfors, analyst]

And then the last question, I don't know if you want to answer it. But I guess you still have the authorization of EUR 1 extra dividend. Is that still in place until the end of this year? Do you want to comment it in any way?

[Jani Nieminen, executive]

I think the decision is in place. No further comments on that.

[Operator]

Please state your name and company.

[Andres Toome, analyst]

This is Andres Toome from Green Street Advisors. My first question is about the occupancy rate. Is it fair to assume that in Helsinki, the spot occupancy is around 91% and also the sequential quarter-over-quarter increase has been around 100 basis points on the spot figure?

[Erik Hjelt, executive]

So in total portfolio, the increase quarter from Q2 to Q3 was around 100 basis points. And the spot at the end of September, as mentioned in the CEO's report, was close to 93%. But we haven't disclosed area occupancy rates spot.

[Andres Toome, analyst]

Okay. And maybe you can perhaps give a bit of color in terms of leasing success after September so in October, how has that been?

[Jani Nieminen, executive]

Thank you for the question. As I provided color; July was really strong, August was really strong, September was really strong and as well October seems to be quite a good one. So the market has been quite positive at the moment.

[Andres Toome, analyst]

And then in terms of your capital allocation direction, it sounds a bit mixed in terms of just cutting back on development perhaps a bit, but also being on the lookout for any sort of distressed opportunities in the market. How should we think about it in terms of where you're heading? Also looking at your source of uses for 2023 did seem okay because you do have quite a lot of unutilized facilities, but there's also a bigger debt maturity coming in 2024. Just looking at the share price as well, obviously the cost of capital would actually suggest that you should be selling not expanding at this stage.

[Erik Hjelt, executive]

Of course all loans and bonds, they mature at some point. So if you look, yes, we have 2025 and 2026 maturing loans as well. So it's ongoing thing in this type of business of course. For us it's important and the thinking behind all these topics we've been discussing, the reason is that we want to be in a strong position whatever happens in interest rate environment and investment environment. We have strong buffers against whatever happens in the balance sheet side. We don't anticipate any major changes there, but we have buffers and we are in a strong cash position and that's exactly the place we want to be. And in that regard, we are totally different from many peer companies. And we want to follow what happens in the market. In the long run of course we want to grow, but this type of environment of course, we want to be slightly cautious on the cautious side and look where the interest rates are actually heading and what opportunities there will be in the market. o we want to be in a situation that we are able to make decisions and we are able to grab the opportunities in the market.

So we are not that concerned what is going to happen in 2024 in the interest rate environment. And I'm old enough that I've been around in this business when the interest rates were quite high and inflation was quite high and it's totally possible to do profitable real estate business even in that type of environment. Of course the shift from the low interest environment to the higher interest environment may be painful for some players. But given our position so of course if the cost of new debt is much, much higher what it currently is, that will gradually increase your average cost of financing. But we have many years to offset that by increasing the rents and taking care of the cost side. So our thinking is that we want to be in a strong position, we want to keep everything in control and we want to keep our options open. And yes, 2024 I'm confident that we are able to refinance those maturing loans and then we have access for additional financing if we think that is the right time to do something and acquire something appealing.

[Andres Toome, analyst]

And in terms of the access to the credit market, can you give a bit of color on the facility you signed in October? What is the interest rate on that bank facility?

[Erik Hjelt, executive]

So it is EUR 100 million, 6 years maturity, unsecured and the margin there is below 2%.

[Operator]

[Operator Instructions] The next question comes from John Vuong from Kempen.

[John Vuong, analyst]

Can you provide a bit more color on your value growth? I mean yield requirements are up everywhere and rental growth still [ screams ] a bit muted in Finland. So it feels a bit counterintuitive that values are up in your portfolio.

[Jani Nieminen, executive]

I couldn't actually hear, John, throughout the question. So it was a combination of the acquisition and rental market, was it?

[John Vuong, analyst]

No, sorry. It was about value growth. I mean you reported positive value growth during this quarter. But looking at yield requirements everywhere, they're essentially up looking at how other European property companies are reporting. And rental growth in Finland still screams a bit muted in residential so it all feels a bit counterintuitive to me that the values are up in your portfolio.

[Jani Nieminen, executive]

Okay. As mentioned, basically 95% of the value growth or the positive impact in changes of fair value came from development gains. If you have ongoing projects providing development gains north of 30%, once you complete them they will have a positive impact. We've been making quite strong deals throughout last year's compared to the market. That's basically the story there. And then we've been increasing the rents in a normal manner throughout last 2 years. So now the market is improving and occupancy is improving. That typically will have a positive impact put together.

[John Vuong, analyst]

Sure. But does that imply that also your like-for-like portfolio is essentially flat and not trending downwards?

[Jani Nieminen, executive]

Yes, it's good to keep in mind that like-for-like is the last 12 months against the prior 12 months so it's not providing an immediate impact. But looking forward if positive things keep on changing, it will have a positive impact.

[Erik Hjelt, executive]

And when it comes to the valuation or valuation parameters, of course it's very, very important to be consistent there. So when we discussed about and evidenced yield compression in our portfolio and we communicated that very clearly that first, we wanted to see evidence from the market that where the yields are heading and then when there was enough evidence from the market, we made the changes in yields downwards at that time. So there's no evidence. So you need to follow that same path when times changes. So we don't know where the requirements are heading. So there's no evidence in the market so far. So we need to wait and see where they are heading if they are changing. In the latest transaction, we've seen in the market late summer that pricing was still very, very high according to our view. So it's important to be consistent with your parameters.

And then as a general comment of course, yield requirement is only 1 parameter in the valuation. There is top line growth and cost side as well. And if the interest rates are high and inflation is higher and especially if the rate inflation is going to be there. So most likely in that type of environment, the rent increases will be higher and that is going to have an impact for values as well. So it's a combination of all these things. And again of course it's clear, but it's good to keep in mind that that valuation is based on 10 years cash flows discounted. So you need to look at it in a bit longer run. So this is the facts behind the thinking that we didn't change our valuation parameters. And of course Jones Lang LaSalle being the external expert gave their report as well and they fully share our view that no changes are required when there's no evidence from the market.

[John Vuong, analyst]

Okay. That's clear. So that also implies that you're expecting market trend of growth to move towards CPI again in say the coming years potentially?

[Jani Nieminen, executive]

I would say as I said prior, yes, he's a bit older, but I've been around for a couple of years already as well since mid '90s in resi business doing this business with yield requirements well above 8%, with rent increases well about 8% or 9%. So I think in that sense, experience provides a bit wider view on things than a couple of months. We've been trying to be systematic and prudent throughout the years, whether it's financing, whether it's investments, whether it's yield requirements. And in the long run if interest levels inflation keeps on a higher level, yes, that will mean higher rent increases as well.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers.

[Niina Saarto, executive]

Thank you. We do have some questions in the chat. I think most of these themes have been covered more or less. But about the energy costs, can you comment how long the duration is for the electricity hedging?

[Erik Hjelt, executive]

For the next 12 months pretty much 85% hedged and -- for next 12 months so after that around 60% hedged.

[Niina Saarto, executive]

Okay, clear. And maybe you could refresh what is the expectation for Kojamo's own starts in 2023?

[Jani Nieminen, executive]

Own starts meaning new development projects. We did have the figure how many projects already started this year, can't recall -- 437 apartments started this year already and, as said, at the moment for time being we are not making any new investment decisions. Most probably it's only 6, 7 weeks left of this year so we will keep that situation. On the other hand, as said, we do have more than 2,000 apartments under construction providing growth for this year and we are completing more than 1,500 apartments next year. So that will provide growth as well.

[Niina Saarto, executive]

And final question is how do you consider the importance of dividends versus lowering your debt?

[Jani Nieminen, executive]

Dividend policy is part of the Board's decision-making. We've been happy with the dividend policy. It provides decent dividends for the shareholders and actually leaving 40% of the FFO inside the company to back up the growth. Our financial figures are really strong. We do have a significant buffer, whether it's loan-to-value or equity ratio. And on the other hand, loan maturities are still quite long and hedging ratio is high and there's no major needs for new financing. So we are in quite a secure spot there at the moment. So we don't feel that we are in a position that we should sell something or make changes in the dividend policy because of the balance sheet problem. We don't have one.

[Niina Saarto, executive]

Okay. And that was all. Thank you for the questions and thank you for joining us today. We will meet then next year. And now I wish you a lovely autumn. Thank you. Bye-bye.