Titanium - Looking for a second pillar of growth

Stocks
,
2112

On Net Yield

Financial leverage is a key driver of returns in real estate investing. And a risk. When comparing the returns of different real estate investments, it is essential to also consider the amount of financial leverage.

In December 2024, the net yield was 5.91%. The loan-to-value ratio was exactly 30%.

In June 2022, the loan-to-value ratio was 29.89%. That is almost the same as now in December 2024. The time points are therefore well suited as comparables.

In June 2022, the net yield was 5.44%, which is significantly weaker (almost 9%) than now in December 2024.

(In the longer run, before the interest rate/inflation shock, both Hoiva’s loan-to-value ratio and net yield decreased hand in hand. Slowly but surely.)

On Cash Flow.

Titanium held an investor day on 21.11.2022. The event can be viewed on Inderes TV. The then CEO, Tommi Santanen, spoke at the event.

Freely quoting from 33:14 onwards, Santanen states, among other things: “They are not guessing where interest rates are going, but interest rates are hedged after transactions, whereby the interest rate is chosen as fixed for years ahead, how much interest is paid.”

Furthermore, Titanium participated in the Financial Company Evening on 5.6.2023. There, Santanen repeated the above points in more concise terms. The event can be viewed on Inderes TV.

Interest rates are hedged with interest rate derivatives. Based on the above, therefore 100 percent. The average completion year of Hoiva’s properties is 2018.

It is therefore quite certain that Hoiva continues mainly with the fixed interest rate of the zero-interest rate era. (If Hoiva had to renew its entire loan portfolio at the then market rate in June 2024, when Hoiva reorganized its credits, something has gone terribly wrong.)

Performance-based management fees are no longer paid by Hoiva, so management fees have reached their minimum level.

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Comments on Hoiva’s cost of debt:

In 2022, Hoiva’s derivatives generated ~4m and interest expenses were 4m.

In 2023, derivatives were -1.5m and interest expenses were just under 10m.

2024 numbers are not yet available.

As I understand it, the derivatives are interest rate cap agreements, and they have been used to hedge the interest rate exposure. As far as I know, the loans are not fixed-rate, which the significant increase in interest expenses in '23 also reflects. My understanding is that the margin increased in the '24 refinancing due to clearly elevated financing costs across the entire sector (many funds have genuinely struggled even to arrange refinancing). I don’t know/remember how long these interest rate derivatives are still valid.

You probably mean that Hoiva’s relative fees have reached a minimum level? This is true, and currently the only fee charged is the management fee. In absolute terms, the fees will surely decrease as the queued redemptions are paid out.

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Does Titanium also get a transaction fee from potential property sales?

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This interest rate question isn’t quite 100% clear to me. Santanen, however, quite clearly stated that the interest rate is fixed. It’s possible, of course, that the interest rate changes and a derivative offsets the change. Or something. The essential thing, however, is whether the net cost of debt is fixed or not? And it’s quite difficult to dispute Santanen’s expertise, given how well he knew the company’s affairs.

Santanen also unequivocally stated that interest rates are hedged after the transaction. So, apparently there hasn’t been any single interest rate hedge that would have covered the entire loan position, but rather interest rate derivatives taken at different times and maturing at different times.

I wonder if the interest rate hedge has always been taken for, say, only five years? During a zero-interest rate period, when a possible interest rate change is only in one direction? But of course, what if the cost of hedging increases over time or something? But surely Hoiva’s properties were intended to be owned for much longer than five years, so why on earth would the hedge have been taken for only five years, for example? What would it have protected? The average completion year for Hoiva’s properties is 2018, and by 2023, would they have been in serious trouble regarding interest rate hedges?

But:

Does that mean that in 2022, Hoiva’s net cost of debt was indeed a round 0? I wonder because, at least with mortgages during the 0-interest rate period, a “fixed” interest rate was, to my understanding, something quite different from 0?

And does that mean that in 2023, Hoiva’s net cost of debt was either 8.5m or 11.5m?

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image
This is a screenshot from Hoiva’s 2023 P&L.

Sorry for the unclear writing. So, in 2023, derivatives resulted in a negative 1.5m and interest in a negative almost 10m.

I quickly made a table of Hoiva’s interest expenses (does not include derivatives):

image

Interest paid in 2022 was still very low, even though Euribor rose rapidly. This could be explained if they use 12-month Euribor and it kicked in at the right time before the autumn rise? In 2023, the interest rate then roughly rose to the level of Euribor + the company’s margin. Btw, 2020-2021 gives a good idea of the cost of the old financing package.

I’ll get back to the interest derivatives question tomorrow, once I’ve figured out how they work in practice :man_student:

@Valdem in principle yes, if they sell/buy, the fund manager is entitled to a transaction fee. However, based on our Excel, the company has not always taken these, but the transaction fees recognized in the financial statements are smaller than the calculated ones (2% of all purchases and sales). Of course, a disclaimer here: I might have calculated this incorrectly as not all parameters are available, and the fund does not report transaction fees on a separate line in the P&L.

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Are the financial statements of @Sauli_Vilen’s Hoiva and other funds available on Titanium’s website? I tried to look for them there some time ago, but I couldn’t find them.

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Do any real estate-related funds generally have financial statements available? Based on my brief research, they seem quite like black boxes.

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Yes, at least the financial statements of funds sold by OP to retail investors are available to everyone, starting from equity funds. Closed-end funds and funds aimed at professional investors are a separate matter.

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Hi,

They are not public (not from websites or the PRH). Very few have these publicly available; OP is a clear exception in its openness.

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They have indeed been found from Eq and Ålandsbanken, but with quite a significant delay and difficult to find on their websites.

Eq report for 2023: https://www.eq.fi/~/media/files/funds/tietoa/eq_rahastojen_tilinpaatos_2023.pdf?la=fi
You have to scroll all the way to the end for the Social & Commercial Real Estate Fund.

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Alright, I promised to get back to those interest rate hedges when I had time to delve into them :man_student: At the same time, I also managed to acquire Hoiva’s 2024 financial statements, which provide additional information on these matters.

So, Hoiva indeed uses interest rate cap agreements to hedge interest rate risk. These derivatives have two components. 1) is that the value of the derivatives changes with changes in the interest rate level (the more the interest rate is above the cap level, the more valuable the derivatives are, etc.) and 2) interest rate hedges, as their name suggests, limit the interest rate paid by the company to a certain level. Until 2023, the company had 2% interest rate cap derivatives, and during 2024, a large number of 2.5-3% agreements had appeared in the financial statements in addition to the old ones.

image

As can be seen from the picture, Titanium’s interest expenses shot up in 23-24 due to rising interest rates. The values of the derivatives rose sharply in 2022 (interest rates up), but fell in 23 & 24 as interest rates came down (at least, this is how I assume they work).

My guess is that interest income is the line where the benefit brought by interest rate hedges is visible. In other words, the bank pays you the difference between the market rate and your interest rate hedge. I’m not 100% sure about this, but I can’t really think of anything else that would have suddenly generated so much interest income (the fund’s cash at the end of the year was 5%, so cash interest income doesn’t explain this, although it certainly appears on that line).

The sharp increase in financing expenses in 2024 is explained, in my estimation, by at least a couple of things. 1) Hoiva renewed its financing package in 6/24 and stated then that this would incur one-off costs for the fund. The fund indeed recorded negative returns for June, and I roughly estimated on the back of a cigarette pack that the cost of the new financing package might have been around 2 MEUR (1% of the package size sounds quite reasonable, especially in that difficult market situation). In addition, the company has significantly increased its interest rate hedges during 2024, and these may also incur costs on this line.

Now to the main point: how well has Titanium hedged its debt portfolio? For 2020-2021, we see that the company’s margin is around 1.6%. The interest rate cap agreements were up to 2% Euribor, meaning that if interest rates rose, Titanium would have to pay 3.6% for its money if the entire portfolio was hedged. The company has stated that a large part of the portfolio is hedged, so this is well in line with the 4.1% paid. Net interest expenses rose sharply in 2024, but this is likely explained by the higher margin of the new package and one-off arrangement fees. In addition, those new 2.5-3% interest rate hedges have probably cost something, and the effectiveness of the old interest rate hedges has likely diminished (these are not eternal but typically 3-5 years long). Taking these into account, the 5% net interest rate in 2024 seems reasonable and correct.

In summary, if my calculations and conclusions are correct (note: they are not necessarily!), then this is well in line with my previous message (https://keskustelut.inderes.fi/t/titanium-kasvun-toista-tukijalkaa-etsimassa/257/2078?u=sauli_vilen). Due to interest rate hedges and a declining Euribor, it is difficult to see Hoiva having to pay more than 5% for its money in the coming years; in the best case, that interest rate will be closer to 4%. When the net yield approaches 6%, then that financial leverage works, albeit not as well as during the zero-interest rate party.

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In my opinion, that debt leverage works very poorly at the interest rate levels you mentioned and with a 6% yield, when management fees are also taken into account (2.95% of net asset value / 1.475% with maximum debt leverage).

For that debt leverage to work, in my opinion, it requires either an increase in property values or a very low interest rate level. The equation does not work with net rental income alone if money costs more than 4%.

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Titanium’s April sales figures were released. Sales were around zero and remain weak. For the last 6 months, net sales into funds have been a few million, which is a weak performance both absolutely and relatively. Considering the deferred redemptions of Hoiva and Asunto, that figure would be significantly in the red.

I am quite surprised by how quiet Titanium has been regarding communication over the last 6 months. The strategy was published in November (comments higher up in the thread), and a couple of newsworthy recruitments have been made in asset management. However, nothing else has been heard, and I, for one, have not noticed any changes in the company’s service offerings. Actually, the only slightly more visible change is that the company has started publishing various market overviews, with which it is likely trying to get its name out in the media. This is, of course, smart and something that should have been done years ago. I would have expected that 6 months after the strategy’s publication, the company would have at least launched a new product (fund of PE funds) and an updated service model. If this were a company whose communication had previously been very active, then one might put on a tinfoil hat and start speculating that the radio silence could mean M&A negotiations :mage: However, Titanium’s stock exchange communication has always been very cautious, and thus, the silence doesn’t necessarily mean anything at all :thinking:

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In the podcast on 02.05.2025, Sauli and Kasper discussed listed companies in the wealth management sector.

According to the podcast, at least two of the aforementioned companies have deficiencies in their distribution network as a problem to some extent. Most of the rest, I believe, compete for a small number of very cost-conscious and demanding institutional clients with a small sales team.

Titanium, on the other hand, has invested quite reasonably in its distribution network. Which would surely be able to sell more than just Hoivaa. However, no one seems to have given any value or appreciation to the sales pump.

If Titanium were to end up in any form of corporate restructuring, I would guess that the sales organization would be the driver or key issue.

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The key challenge for Titanium is the weak performance of its sales engine. Since Titanium’s fees come almost entirely from funds, net subscriptions to funds per salesperson are a good way to examine the company’s sales efficiency. Over the past 6 years, the level has varied between -0.5 MEUR in 2024 and 1.6 MEUR in 2021, with an average of 0.8 MEUR in net subscriptions per salesperson over the last 6 years. This level is very modest; for example, at UB, the corresponding figure without asset management sales is approximately 6 MEUR over the preceding six years. In reality, UB’s new sales per salesperson are even higher than this, as the company also sells a significant amount of other wealth management services that this 6 MEUR does not account for. For Alexandria, net subscriptions (including structured products and funds) have averaged the previously mentioned approximately 3 MEUR/year, which is also several times higher than Titanium. It’s worth noting that, in my estimation, Alexandria’s sales engine is still underperforming, and the company should have the ingredients to significantly increase its sales efficiency from that level.

It’s important to note regarding Titanium’s sales that historically, relatively low sales per salesperson have been acceptable because sales have largely focused on Hoiva (Care) (and to some extent, Baltia (Baltics)), and the fee structure in these funds is quite high. However, if lower-fee products are sold, then that sales per employee figure is certainly not sufficient; it needs to be pushed upwards.

I agree with this, but in light of the numbers, it doesn’t really seem capable. This remains somewhat of a mystery to me as to why this is the case. The best guess is that for the majority of its clients, Titanium is not a wealth manager, but a product house from which Hoiva (Care) (and Baltia (Baltics)) has been purchased. Hoiva and Baltia are unique products not available at every firm, and thus they have been able to differentiate themselves. Then, when trying to sell basic funds to the same client (whose main portfolio is usually with a bank/other wealth managers), which the client can buy elsewhere, this becomes much more difficult. This is why I have emphasized for years that Titanium should be able to shift more towards being a wealth manager, which would make it possible to increase its per-client earnings.

Without better evidence of sales, it’s quite difficult to put a very high price tag on that sales engine :thinking:

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Could the sales problem also be that Titanium’s product range is quite
 limited?
I was browsing through Finnish asset managers some time ago. Titanium indeed has Hoiva, Baltia, and Asunto, which were clearly their own, well-thought-out products where a lot of know-how was clearly involved, and the sales figures have been accordingly.

The rest of the offering is, in a word, dismal, or at least there’s a strong feeling that it was done completely haphazardly.
“Oh right, we’re asset managers, should we have some equity or bond funds?”
Equity funds, where the TER is ~2%, have subscription and redemption fees. Their history is quite short, so we won’t delve further into their performance. In the Growth Dividend fund, at least something “their own” is being tried, but when digging into other funds (equity and bond funds), ETFs are found as the largest investments. In other words, funds of funds with high fees.
In the bond fund (TER 1.2% p.a., 1% redemption, 1% subscription), the largest investments are iShares $ Treasury Bond 1-3yr UCITS ETF and Amundi Euro Government Bond 25+Y UCITS ETF. Both can be obtained from Nordnet with 0.07% fees. This just seems really, really lazy and a bit greedy.

The portfolio manager’s name cannot be found in any of the funds. Even in a market the size of Finland, portfolio management is quite personalized; a large portion of investors know Mika HeikkilĂ€, Petri Deryng, or Pasi Havia. In all of these, the portfolio manager is “Titanium Rahastoyhtiö Oy”. Would one want to make a minimum investment (20 thousand euros) in such a fund with the aforementioned specs?

AUMs are small in these funds (the largest just over €50M, the rest clearly smaller), and no wonder.

One would expect something like this from Alexandria, for example, but since the minimum subscription for all funds is 20 thousand euros, such a product range should then be sold to wealthier than average and perhaps also more informed investors.

I myself have invested in active funds (Proprius, PYN), but it wouldn’t even cross my mind to become a client of such a firm if the offering is this level. Titanium’s absolutely most interesting products are the aforementioned ones (Hoiva, Baltia, Asunto), but now that the rug has been pulled out from under them, the house otherwise seems quite hollow.

Okay, there’s also asset management (which also has redemption and subscription fees, really?) but if you’re offered pea-corn-pepper mix and spam as an appetizer (the caviar, i.e., real estate funds, fell on the floor, apologies for that, available again later), you’re hardly going to be eager to try the House Special for the main course afterwards.

These are just some perspectives from a potential client/private investor on Titanium’s offering.

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Good observations. But could it rather be that Titanium hasn’t really had much to sell in recent years, rather than the sales organization being inefficient?

After all, a basic equity fund is technically quite easy to set up. You need a good and catchy name for the fund and a laptop. There’s plenty of stuff to sell at the push of a button, and there are no limits or obstacles to buying and selling it.

The situation is different for real estate funds. Before anything happens, the property must be sold to the user, financing must be secured, and finally, there must be an organization capable of building/having the property built at a specified price. If the fund operator estimates that a potential real estate project to be built has too low a return, the project will not be undertaken, and the property will not be built. And then the sales organization also has nothing to sell. (A slightly worse option is surely to first sell and collect money from investors and then try to half-heartedly find some low-return target for the money?)

Towards the end of the zero-interest rate period, real estate yield requirements and thus net cash flows fell lower and lower. New players, such as new social/care funds, entered the field, competition across the entire spectrum of real estate investment was fierce, and returns were increasingly based on capital appreciation. For care properties, the icing on the cake was the social and healthcare sector issues (sotesotkut), such as procurement bans and the right of well-being services counties (hyvinvointialueet) to terminate lease agreements in certain cases.

After the biggest interest rate shock in decades (a century), when real estate funds have, for example, had to be closed, it has been easy for hindsight experts to criticize the concept of real estate funds in many ways. Although it is clear, of course, that a real estate fund conceived for an imagined eternal zero-interest rate period cannot be a success if market rates rise to around 5% in a few months. And there is no information on the duration of the interest rate hike cycle. Major problems will certainly arise, and adaptation will take time. (Mission impossible during the zero-interest rate period is probably to build a real estate fund that works in a sharp rise in interest rates and a high-interest rate environment: net cash flow should be just under 10%, debt leverage low, and cash reserves large.)

Luck or skill, who knows, in any case, in retrospect, Titanium handled the end of the zero-interest rate period’s real estate hype very elegantly. Titanium hardly engaged in real estate projects with low net cash flows. Not in residential, care, nor Baltic funds.

The problem is that this is probably why there hasn’t been more stuff for the sales organization to sell in recent years, and the results have been meager. But there would be synergy if someone else has goods but shortcomings in their distribution organization.

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Summaries of inspections conducted by FIN-FSA earlier this year had been published.
Of course, (less surprisingly) not much information comes out of them, other than regarding the comparables, that for Titanium the significance was minor vs. moderate for OP and Ålandsbanken. The summary for S-Pankki had already been released earlier, where the significance was major.

The overall significance of the inspection findings was minor.

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Oops! And it was supposed to be certain information that the houses would soon be empty shells. Their value has been increased year after year with baseless, gushing Excel money, and the overvaluation must be something like 50%.

Well, perhaps expectations like those mentioned above were, however, a bit “sensational and exaggerated”. Considering that the per-square-meter value of care properties has risen by an average of about 1.5% per year, even though the building stock has been renewed, net cash flow hovers around 6% with moderate loan leverage, and construction costs have risen by 19% during the inflation surge.

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The Financial Supervisory Authority only investigated the process and not the correct valuation of individual holdings, meaning the investor’s risk still exists


Edit:

If these real estate funds could sell at the value they are on the balance sheet, then no one would have closed their funds from withdrawals.

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