For the same reason, Kojamo is only in growth centers, and that’s a good thing.
Yes, they are sold, but liquidity and appreciation potential are on a completely different level in other areas. In that trio, you can easily put an apartment building’s worth of units on the market without significantly compromising on prices; this does not apply to many other places (of course, good micro-locations can also be found in other cities if you have local knowledge). You can generate that construction-period appreciation on paper anywhere, but in fewer places can you realize it in a reasonable time if needed, which is what I referred to as “Excel money.”
Building a house and maintaining it does not cost significantly more whether it’s done in Tampere or Kuopio, assuming, of course, that it’s on leased land. The same analogy does not apply here as it does to average Joes’ real estate investing, where you have to go to “remote villages” to get the best rental yields. Instead, when building new homes, it’s precisely advisable to aim for the growth triangle where higher rents bring a higher rental yield. This, of course, is not easy in practice, as everyone wants to build in the growth triangle, meaning the competition for plots is very tough. Toivo initially seems to have played this game quite well, and success in this will be absolutely critical going forward for the company to be a good investment.
I agree, but fortunately, the CEO spoke about this very cautiously and emphasized piloting rather than large initial investments. Here, a slight dig was noticeable specifically towards Lehto, as the CEO referred to Finnish construction companies historically going into Sweden overconfidently and returning with their noses bleeding. Learning from this, Toivo would start with small-scale piloting in Sweden.
14 Likes
The charts show prices for old apartment properties, and Toivo’s goal is to build new ones. The situation is completely different for new apartments in good locations in many places.
For example, Oulu’s area is almost 4,000 square kilometers. Prices are not rising 15-20 kilometers away from the city, but in and near the city center, there has been an increase in both new and old properties. And plots of land are easily found in good growth areas.
It’s time to worry if Toivo starts targeting Kotka, Kokkola, or Joensuu, as growth won’t sustain there.
The concept itself is quite interesting, but the valuation multiples don’t quite hit the mark yet. The offering will surely be fully subscribed these days, but for a longer-term portfolio, the locations and feasibility of those 1400 apartments should still be clarified.
The company already has nearly 400 apartments under construction, so the pace is indeed fast. On the other hand, the rentable area of apartments has decreased from last year, and the total rentable area has remained the same. I personally would like a clearer presentation from Toivo about what they currently have in their portfolio, what is under construction, and what the next starting projects are. Is quality still available in the land supply?
4 Likes
“In the Rakennuslehti article, it is mentioned, among other things, that Markus Myllymäki led Lehto’s housing construction for 7 years.”
This claim does not seem to be true. To my understanding, Myllymäki has never led Lehto’s housing construction. He may have held a “director” title, but almost half of construction companies’ employees today are either directors or managers.
Given past history, I wouldn’t dare to get involved with this pricing. You pay 100 for properties VALUED at 50, along with a promise of fairytale growth from people who have previously taken the company public and cashed out at the peak. Of course, astronomical valuations are paid for some technology companies, but this doesn’t seem to be based on technological superiority either.
6 Likes
That was a bit of an overstatement again…
My point was, why fight a big megatrend unnecessarily? There might be some individual good locations, but why would a small company even bother to spread its operations across too many different locations when it can focus on just a couple? Especially if the goal is to benefit from “micro-locations,” which requires local knowledge, it’s good to concentrate resources in places where there are the most potential acquisition targets and the market is liquid.
I would still consider Oulu just about a reasonable location, but I’m sure there’s enough business for Toivo in the Helsinki Metropolitan Area-Turku-Tampere region. I was more referring to these “tier 2” places like Kouvola, Kotka, Joensuu, Pori, Mikkeli, Varkaus, Kuopio, Kajaani, etc. etc. etc. (not to mention even smaller places). I would stay away from these.
This is a completely different matter. For Hoivatilat, there is certainly good business where the population is aging. This business, in any case, was not based on the appreciation of real estate.
7 Likes
Hoivatilat builds a rather different kind of property portfolio. They made a profit when regions filled with new, often private, care services, and many municipalities decided to build new daycare centers instead of renovating old ones, to attract new residents. In elderly care services, there is still demand in many cities for over a decade, as the number of people over 75 increases in growing areas.
An elderly care home might still be profitable in Konnevesi for the next twenty years, but trendy A±energy class mini-homes probably won’t be.
6 Likes
In my view, Toivo’s core business is to solve the problem of housing costs being too high relative to income. They achieve this through their unique control of the entire value chain, which presumably allows them to keep costs lower than a model where the value chain is not as extensively controlled in-house. This enables them to offer more competitive rents and gradually erode the market shares of other operators. Because they build themselves and intend to own the properties long-term, the construction is surely done well, and decisions are made with a “long game” mindset.
I find this to be the most interesting aspect of the company, and I would assume that predictability would also be better through this approach. A question mark is how the popularity of rental housing versus owner-occupied housing will develop in the long run. Additionally, I understand that the supply of rental apartments has significantly improved, at least in the Helsinki metropolitan area, recently relative to demand, and rent levels have generally started a slight decline. If this trend continues, it would certainly lead to weakening rental income in the future.
I consider the Sweden opening a good additional option, and in my opinion, the CEO communicated in the interview that they are not going there to conquer the market with bravado, but rather to calmly test how their business model could work in Sweden first. If it proves successful, they will expand the operation. This could be a good value creator in the future.
13 Likes
Yes, the CEO (toimitusjohtaja) is the chairman’s (puheenjohtaja) son.
3 Likes
Yes, the CEO is the chairman’s son.
Has the Chairman of the Board appeared in any interviews regarding this Toivo share issue yet?
There seems to be so much skepticism in the air regarding his sales during his time at Lehto, so wouldn’t it be relevant for him to also come forward and explain how investors should view the Toivo share issue given that background. If he thinks everything was completely above board, then there shouldn’t be any problem. If, on the other hand, he prefers to stay in the shadows, one can draw their own conclusions from that as well.
5 Likes
These stock sale cases are a bit tricky. How can a high-ranking executive sell large amounts of shares without acting against the company? I’ve been thinking that the company’s second-in-command should perhaps have resigned first before making substantial stock sales. On the other hand, in his defense, one could say that there was one person above him in the company’s operational management.
2 Likes
Now is the “cheap” subscription price of only €2.10 per share 
8 Likes
Correction made to Rakennuslehti’s article: "Markus Myllymäki was the Commercial Director of Lehto’s housing business.*
Does anyone know what his actual area of responsibility was?
2 Likes
There’s been a lot of talk about Toivo’s unique business model, based on managing the entire value chain. Can someone explain why other players aren’t using this great and lucrative model if it’s possible to get higher margins with it? To my ears, real estate development and management, etc., additional activities instead of just renting, don’t sound very complicated, so one would think others would have figured this out too.
17 Likes
My understanding is that Toivo’s innovation is to turn a construction company (or a developer) into a defensive bond stock, which could result in juicy multiples for early owners.
Simplified, Toivo’s model combines two businesses, typically held by different operators: developer contracting and residential property investment. I don’t think Toivo could be a market leader in either separately (due to its short history). Residential property development (Finnish: asuntogryndaus) in Finland’s major cities, in particular, seems to be profitable. Outside the stock exchange, there are many residential developers (Finnish: asuntogrynderit) that are performing very well. Most of these are too small for the stock exchange, and construction companies generally do not seem to be the most attractive investment targets on the stock exchange. When a developer sells completed apartments to customers, Toivo takes the best properties onto its own balance sheet. Annually, Toivo might sell a certain portion of its properties, thus realizing development margin (Finnish: kehityskate) and investing in new development projects. The end result is a company generating reliable returns that, thanks to the development margin, is able to grow faster than other real estate investment companies. And if the construction industry faces tough times, Toivo at least has a pile of decent rental apartments on its balance sheet. This aims for cyclical resilience and perhaps the status of a “bond stock.”
16 Likes
Considering it’s a very traditional and competitive industry, I find it very difficult to believe that Toivo could have invented any kind of philosopher’s stone.
Lehto was also hyped before listing, and for a couple of years after, for its exceptionally high EBIT margin of =>10%, but as soon as they started moving into the league of bigger competitors, they crashed back to earth and even below.
All major construction companies act as developers (gryndaa), develop their own housing projects, and do everything Toivo does, with the exception of leaving apartments as investments on their own balance sheets. Then we can look at what those real estate investors and funds produce/earn annually…
If this hybrid of developing and real estate investing were some key to success, wouldn’t Yits, Skanskas, NCCs, SRVs, and others who have been in the business for decades have done it too? The construction and real estate investment industry is simply as much of a commodity as it can be, so I will only believe in a groundbreaking innovation when there is concrete evidence of it.
16 Likes
I believe scalability and sub-optimization somewhat limit this. Land acquisition, planning, construction, and management require various expertise, meaning a different person (or versatile experts) is needed for each task, and the personnel risk increases. On paper, it seems better to outsource some parts.
Among listed peers, Ovaro has filled its portfolios with a mixed bag of old, used, and renovation-needing properties. So, participation in the construction phase is missing. Don’t they have some property development underway now too?
Kojamo, on the other hand, seems to acquire properties directly from construction companies, rather than acquiring or developing land themselves? This way, they can focus on construction and leasing.
I would say that in Toivo’s case, the risk increases when involved in everything, but if successful, the reward can also be bigger. The offering materials are still mostly unread, so I can’t yet comment on my own participation.
10 Likes
This seems to be a bit of a long answer this time, so I should start with a disclaimer that pretty much everything I’ve written below is more or less speculation. So, take it with a grain of salt, but I do believe, based on my own residential investment experiences, that Toivo has a highly potential operating model, especially in the current economic environment.
I don’t see any reasons why the company couldn’t achieve very good returns and growth; for such a small company, there are enormous opportunities in our rather inefficient housing market. However, everything hinges on whether the necessary expertise for success can be found within this particular company. The biggest problem with this case, in my opinion, is that there isn’t much long-term evidence, so we have to rely more or less on talk and the management’s track record in their previous positions. I haven’t yet decided whether to participate in the offering.
In this regard, I don’t think the comparison quite hit the mark. While Lehto, in order to grow, was forced, so to speak, to engage in increasingly larger projects and expand into different types of properties, Toivo should have no such similar need or temptation. It’s good to remember that if Toivo builds, say, “only” €40 million worth of properties each year and retains them on its own balance sheet, the company’s size and value will grow due to increasing rental income and an appreciation of nearly €10 million. Thus, the annual construction volume does not necessarily need to grow at all, but the company’s value can still increase.
Toivo’s average development margin, i.e., the increase in value during construction, has been 28%, hence the nearly €10 million. Such an appreciation in value is completely realistic in the growth triangle, as long as the focus is on the best projects, which Toivo, as a small company, has every opportunity to do. The company is so small that it doesn’t need to branch out into the housing market for a long, long time to grow strongly. But of course, there’s always the risk for every company that management might not resist branching out.
If I’ve understood correctly, Toivo is fundamentally a pure investment company, and it should be viewed as such. However, they apparently have in-house expertise that allows them to also pocket the margins that normally go to developers, and in this way, they differ from, for example, Kojamo and residential funds.
For Toivo, development and real estate development is apparently just a way to acquire investment properties as cheaply as possible in areas they are interested in, so it’s not logical to compare the company to traditional developers. Development doesn’t require large organizations and fixed costs if/when the construction volume is relatively moderate and there’s no need to significantly increase it; this can be handled relatively cost-effectively if the expertise is there. And thanks to their Lehto background, we can assume that the expertise indeed exists, as long as the focus remains on what they genuinely excel at and they don’t start branching out.
As I understand it, Toivo does not need to significantly scale up real estate development/development beyond its current level; instead, the company can (and should primarily) focus on picking only the best opportunities from the housing market and thereby reliably grow its balance sheet year after year. This is a completely different situation from growth-seeking developers, who have to run faster and faster and build more and more houses every single year for their revenue and company value to grow. The houses built in previous years are now just a memory, or in fact, are even an expense in the form of warranty repairs. In Toivo’s model, every house built is at least partially still on the balance sheet, bringing in revenue.
YIT has been involved in residential investing for a couple of years now with a relatively similar operating model to Toivo, though they have Ålandsbanken’s funds as a partner in this.
However, in the case of the companies you mentioned, I think it’s worth considering the scale. Construction companies need significant amounts of capital for their basic business alone, as construction is a very capital-intensive business; companies constantly have money tied up in their unfinished development projects. In such a situation, it can be a very high hurdle to permanently tie up capital in investment projects that, even if perfectly successful, only increase the company’s value relatively little (because the companies’ construction operations are already so large) and at the same time, in bad scenarios, could restrict the execution of the companies’ core business (ties up capital).
Thus, it is practically very difficult for a large construction company operating in an already capital-intensive business to grow significantly relative to its size in another, even more capital-intensive business, i.e., residential investing. This likely runs into limitations in the ability to obtain financing, which is perhaps why YIT, too, has ended up playing only a minority owner role in its investment activities, with the majority of the necessary long-term committed capital coming from a partner.
Based on this, I would estimate that instead of construction companies possibly copying Toivo’s operating model, it would be much more likely for large investment companies like Kojamo to do so. For them, establishing their own small development team would be no expense at all, but in this matter, the scale is a bit problematic. For an in-house development team to have any pre-decimal significance for Kojamo, it would require somewhat larger investments, and the company’s management would then have to consider whether such an investment, directed outside their core business and expertise, makes sense in terms of risk/reward. For a large company, it’s not worth sweating over a few million, whereas in Toivo’s case, this would already bring quite nice returns to owners 
32 Likes
Thanks for the great insight! At least my own vision of the company became more attractive, so I definitely need to look into it further. Regarding capital intensity, it’s worth noting that in the earthmoving sector, at least, construction companies have significantly optimized their balance sheets over the last ten years:
- Companies have largely divested equipment and now rent/lease office containers, workstations, specialized tools, etc., from Cramo and Ramirent.
- Capital-intensive equipment (like trucks) is moved within the group to a separate company, which then leases it out to projects.
- Construction companies have shed their own workforce, leaving mainly site management and other supervisors and support organizations (HR, finance), with the rest of the work done by subcontractors.
This way, the balance sheet is reduced, and many expenses become cash flow-impacted instead of balance sheet items.
This, in hindsight rather off-topic, could be linked to Toivo by saying that even traditional construction companies are moving towards becoming expert and investment organizations.
4 Likes
An excellent post (as your posts always are @ollikohan 
). It was so long that I’ll have to see if I can reply at length when I’m at a computer sometime, I can’t be bothered to write a long reply on my phone.
It would be interesting to see the calculation of the development profit and margin for the properties, the percentages do look high for some of the properties on their website. Especially since Toivo doesn’t build these themselves but apparently has them built under contract where the executing construction company takes an 8-10% sales margin for themselves.
The stated value of the property portfolio certainly cannot be achieved from the net rental income with any reasonable yield requirement, so these apparently rely purely on the valuation of an external appraiser.
8 Likes
The CEO’s account of their operations’ rationale convinced me. The part where he talks about cutting the cake reveals the reasons why I, as a future owner of Toivo, intend to participate.
If even regular residential property investors can make their operations profitable, then compared to that, Toivo can do extremely good business.
Normally, a residential property investor loses out to Toivo in these areas, among others:
-The investment property is built on leased land.
-The construction company has maximized its own profit in construction.
-The construction company has its own sellers or uses an agent.
-The construction company chooses the cheapest option for property management. Some of these property managers do not handle complaints because they have not included a separate billing clause for it in the contract. This way, both the construction company and the property manager win, as neither handles the matter. Naturally, the property owner is the loser.
-In older apartments, when repairs are decided upon, both long-term resident owners and profit-seeking investors are involved in the decision-making. Their interests are easily in conflict.
Not all of these examples apply to Kojamo, for example. With Kojamo’s purchase volumes, at least the selling costs are eliminated.
Considering these examples, if one thinks that Toivo builds for itself the most profitable entity over a 50-year period and manages the company itself according to its own goals, then I strongly believe in the equation. There is also the constant opportunity to check what the current market’s yield is and what these older properties yield. If it is possible to build new ones with a better yield than the yield of older ones calculated at market price, then sell from that end and build new ones. Others do not have this opportunity; others can only compare existing properties to the yield expectation at which new ones can be purchased.
In itself, this should be a very boring and predictable company, so for many investors, such a company might not feel appealing. However, I see this as a stable company that grows every quarter, and all growth always brings more operating profit.
11 Likes