LEG Immobilien SE (LEG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the LEG Conference Call for the Full Year 2021 Results. Throughout today's recorded presentation, all participants will be in a listen-only mode. Presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Frank Kopfinger, Head of Investor Relations. Please go ahead.

Thank you, Stuart, and good morning, everyone, from Dusseldorf. Welcome to our full year 2021 results call, and thank you for your participation. We have on the call today our entire management team with our CEO, Lars von Lackum; our CFO, Susanne Schroter; as well as our COO, Volker Wiegel. You'll find the presentation document as well as the Annual Report within the IR section of our home page. Please note that there is also a disclaimer, which you'll find on Page 3 of our presentation. And without further ado, I hand it over to you, Lars.

Thank you, Frank. Good morning, everyone, and thank you for joining our call today. Before we present to you our financial results for 2021, let me first comment on the current political environment, which clearly overshadows everything. We all became witnesses of a war, none of us has ever expected. The Western Ukrainian border and the Eastern German border are only separated by 600 kilometers. It takes another 400 kilometers from the Eastern German border to reach the first LEG locations, i.e., LEG is only 1,000 kilometers away from a country in war. We, as LEG, feel the need to support Ukrainian refugees. The number of refugees is expected to rise to a total number of 4 million to 5 million, the by far highest since the second world war in Europe. Therefore, we are actively offering flats to refugees. Additionally, via our foundation Your Home Helps, we are providing EUR500,000 to equip the flats. Residential companies have a high social responsibility. At LEG, we have an even higher responsibility being focused on affordable housing. We proudly live up to that responsibility. Under the impression of the horrible pictures reaching us, it is difficult to address the economic impact of the current war on our financial situation. Still, for the time being, we have not seen any change in the demand for affordable German residential real estate, due to the rise in inflation and the still low yield environment, we currently do not expect to change there. Even more in line with previous years, we expect a further value increase in 2022. The biggest threat for the German economy and our tenants comes from the strong rising energy costs. Please keep in mind that those costs are purely being passed through by us. Additionally, with a share of 22% of subsidized flats and the German government offering additional financial adds, including a new subsidy, the Energiegeld, we consider LEG to be well protected. Also, when it comes to inflation, our robust business model, our strong financing structure with long maturities and relatively small exposure towards long-tail development business makes us well positioned in a difficult macroeconomic and political environment. As Susanne and Volker will run you through the details of our operational and financial success later, I would like to point out a few of our key points and flag our latest ESG achievements on Slide 6. I think it is fair to say that 2021 was an extraordinary year for us, while accelerating our positive momentum and achieving record numbers financially. We reached an FFO I of EUR423.1 million, which represents another record result. This result is driven by the operational improvements executed by our outstanding platform. We grew our portfolio by 22,000 units as we could opportunistically acquire a major portfolio last year. With this, we outgrew our own external growth ambition by more than 200%, combining more than 3 years of regular growth ambition in a single business year. We financed all of that by debt at very attractive terms. The average duration was extended while the average interest costs were reduced. Still, we remained within our LTV target of 43%. On top of that, we secured an attractive growth option for 2022 with a direct holding in BCP and an option to acquire a further 63%. We feel comfortable to propose an attractive dividend of EUR4.07, which is an increase of almost 8% over last year. I hope you share our positive view on this strong set of results, and I want to thank all our colleagues who made this success possible. Let me highlight 2 points on the ESG side. Firstly, the Supervisory Board reflected on the comments received by investors and analysts regarding management's remuneration system. Therefore, the Board proposes to the next AGM in May, a couple of changes. As announced with the Adler transaction, the Board has voluntarily decided to waive its entitlement. Logically, the Board now proposes to completely remove the transaction bonus from the remuneration system. As growth for the sake of growing has never been a driver of our decision making, the Board proposes additionally in the STI to shift from an absolute FFO I to an FFO 1 per share metric. As an even stronger alignment of interest, the Board proposes that 25% of the LTI component has to be reinvested into own shares over the public market. Certainly, this comes on top of the existing requirement that one annual fixed salary needs to be invested into own shares. You'll find an updated illustration of our management compensation scheme on Page 31 of the presentation. Secondly, we are happy to share the results of a study conducted together with the renown Wuppertal Institute in Germany. In that study, we analyzed the total life cycle CO2 costs of a new build home versus the CO2 costs for energetic refurbishment, including the complete life cycle costs. I will provide you with a sneak preview of the key findings at the end of our presentation. And surprisingly, the study came to the conclusion that the energetic refurbishment of existing stock is beneficial compared to new buildings looking at the complete CO2 footprint, i.e., considering also CO2 costs for the building materials. Ferrous cement still in the majority of the cases in Germany. I move now to Slide 7. We wanted to provide you with the one page on our current -- on our core momentum KPIs, excuse me. We believe that LEG is well on track with regards to all of them. We offer growth, which comes from our target markets in and outside of our home market, North Rhine-Westphalia. At the same time, we expand the Services segment contributing strongly to our bottom line, even outpacing the profit growth of the Group. Additionally, we improved our operational KPIs significantly. We increased rent in our free financed units by a strong 3.9%, while we brought down the like-for-like vacancy rate to only 2.3%. This further improved our EBITDA margin by another 50 bps to now 74.9%. This leads to an attractive bottom line and return profile for our investors differentiating us clearly from most of our peers. We grew our FFO 1 base by more than 10%, increased our FFO 1 per share by more than 7%, proposed to increase our dividend by almost 8%. On top, we expect to continue that strong momentum and grow the FFO 1 in 2022 by at least 12% simply looking at the lower end of our guidance range. We hope that you appreciate the strong momentum reached last year and to be reached this year, both on a stand-alone basis but also in sector context. Let me now provide you with an update on 2 major acquisitions. I am now on Slide 8. You know that we executed 2 bigger transactions at the end of last year with Adler. On the one hand, we acquired 15,400 units. On the other hand, we bought directly into BCP and at the same time, secured an option providing us with a road to majority for another 12,100 units in Germany. Let me first comment on the portfolio integration. We onboarded 15,400 units at the end of 2021. Just to reiterate, the Adler portfolio alone represents more than 2 years of our typical annual growth ambition and represents a major integration effort for our platform. However, I can summarize that our IT platform scaled easily, our processes were rolled out quickly and by the efforts of more than 200 operational colleagues know-how transferred to new staff worked perfectly. By year-end, we established already our new subsidiary in Northern Germany in Bremen. From there, our operations will cover our entire Northern German portfolio with a total of approximately 18,000 units. Additionally, our foundation, Your Home Helps, is already present in the biggest location in Wilhelmshaven with own staff and cooperates also with local charity organizations. Overall, we can say that the integration and the business plans are well on track. Let us now move on to BCP. As of today, we bought a participation of 6.8% by year-end from Adler directly and another 27.7% from Israeli minority investors. As we continue to buy shares in the market, the number is a bit higher than the one published early December. In total, we already own a direct stage of 34.5% as of today. The combined acquisition price was EUR370 million, translating into a discount against the reported NAV as of Q3 2021 of 3%. The option to acquire an additional 63% of BCP expires at the end of September 2022. We have almost another 7 months until we need to exercise the call option. This leaves us with sufficient time to complete due diligence and to take into consideration the current volatile capital market environment. The 12,100 units of BCP would allow us to outgrow our own growth ambition again significantly. Another 7,000 units will therefore not come on top of BCP if we exercise the option. Let's now move to Slide 9 with an overview slide of our 2021 acquisitions. Our 2021 acquisitions allowed us to evolve from a regional player with strong focus on North Rhine-Westphalia to a German white player with a focus on the West, Northwest and Southwestern Germany. We followed our expansion road map by first entering into orange and green markets and then expanding via higher-yielding additions exactly as laid out in the past. For the nearly 22,000 units, we paid EUR2.15 billion at a net code rent multiplier of 22.5x. This compares against our own portfolio with a net code rent multiplier of 23.9x. The acquisitions allowed us to further roll out our target operating model to new locations. We expect an FFO contribution in 2022 of around EUR50 million from the newly acquired units. With this, I hand over to Volker, who will provide you with more details on our operations.

Thank you, Lars, and good morning, everybody, from my side. Let me start with an overview of our portfolio transactions. In 2021, we were able to add nearly 22,000 units to our portfolio, mainly in Q4, and hence, with a very limited impact on numbers like net code rent EBITDA or FFO 1. At year-end, our residential portfolio comprised of more than 166,000 units. The number of roughly 22,000 units differ slightly from the 21,900 acquired units Lars mentioned earlier, as we also converted commercial space into residential space or splitted larger flats. In 2021, we sold roughly 300 units as part of our normal sales program. As you will see later, we might sell a higher number this year, partly due to cleanups in the acquired portfolios. Let's now move to Slide 12. As you know, our 166,200 units are well balanced in terms of their market category. 30% are located in high-growth and higher-yielding markets and 40% in stable markets. The acquisitions made in 2021 increased the share of units outside our home market, NRW to 20% in comparison to 8% at the end of 2020. As Lars said rightly, in 2021, we made the step from a regional player to a German player. Let's continue on Slide 13, which shows the development of the in-place rents in our portfolio. For the fiscal year 2021, we guided just from the beginning, a 3% like-for-like increase in in-place rents with 3.2%, we finally exceeded this target. The in-place rent of our portfolio amounts now to EUR6.13. Some catch-up effects from the postponement of rent increases, amidst the first corona wave in 2020 contributed to the strong outcome. We started again with first rent increases in Q4 2020. Hence, the increase in the in-place rent in fiscal year 2021 was as expected, slightly lower than in the 9-month period. The 3.2% in-place rent increased splits into a contribution of 1.9% from rent table adjustments and into a contribution of 1.3% from modernization and reletting. We were able to increase rents for free financed units by a very strong 3.9%. The free finance units account for 78% of our portfolio. There were no cost rent adjustments for the rent-restricted units in 2021. Hence, the in-place rent for this kind of units only increased by 0.5%. In 2023, there will be the next adjustment of cost rent. Within the category of free finance units, the stable market recorded the highest increase with 4.3%, followed by the high-growth markets of 3.9% and the higher-yielding markets with 3.3%. Coming now to Slide 14. This slide summarizes our residential portfolio. I would like to highlight again the very positive development on the vacancy rate. On a like-for-like basis, it dropped by another 14 bps to 2.3%. All 3 market categories contributed to the decline. It is the strong demand for affordable housing, our exposure to attractive regions and our strong customer orientation that has supported the positive vacancy development over the last year. However, you should have in mind that the Adler portfolio with its relatively high vacancy rate as part of our financial year 2021 reporting. It is, by nature, not part of the like-for-like calculation for 2021, but will be part of the calculation at year-end 2022. One remark with regard to the number of units in GAV and the percentage change year-on-year. Some of you may recognize that the change year-on-year does not fit the number we presented back then for 2020. This is due to the regional extension and market developments because of which we reallocated some cities to other market categories. Let's now move to Slide 15 for our service business. Our value-added services grew strongly in 2021. The FFO contribution increased from EUR31 million to EUR39 million. Overall, the services benefits from our growing portfolio. Additionally, the first time full year consolidation of LWS Plus had a part result of our service portfolio. With the acquisition of the Adler portfolio, our pool of services extended. We took over a facility management company, which provides gardening and house cleaning services. Now with the foot in the door here, we might leverage these kind of services to other regions. In addition, we recently launched our youtilly platform. Youtilly is a digital B2B2C platform, managing the gardening and house cleaning services between the owner of the properties, the service provider and the tenant. We plan to process all our gardening and house cleaning services through this platform from beginning of next year and to open this platform to the entire market. For 2022, we expect another slight increase in the value-add business. Please do not extrapolate the strong development of our services into the future. We benefited in 2021 from the first year consolidation of LWS Plus. Growth this year will be, therefore, more moderate compared to the past. Now on Slide 16, which provides an overview of our investments. For full year 2021, we forecasted adjusted investment of EUR40 to EUR42 per square meter and came in close with EUR42.50 per square meter. The adjusted investments per square meter increased moderately by 3.7%. In absolute terms, our total investments, including, for example, our development projects on owned land and own work capitalized amounted to EUR452 million. This corresponds to an increase of 16%. Both value-enhancing adjusted CapEx and maintenance grew by 10%. Out of this EUR452 million, as usual, the bulk of investments relates to CapEx spending, which is 3x higher than the maintenance costs. The roughly EUR300 million CapEx spending relates to 2 main building blocks: churn costs and energetic modernization. In line with our forecast, we spent EUR110 million to improve the energy efficiency of 3.5% of all our units. The increase in new construction and others from EUR18 million to EUR45 million is mainly driven by an increase of new construction on our own land. Given our plans to do more new construction, this number will further increase. Although we increased our new development activities, we believe our exposure there is still small in absolute and relative numbers when compared in sector context. While inflation is certainly a topic going forward, we believe that in cooperation with modular construction companies, we can keep costs under control. As a reminder, our new construction plans also include the acquisition of turnkey projects from developers. These investments are not part of our CapEx calculation but part of our acquisition portfolio. And with this, I hand it over to Susanne.

Many thanks, Volker. I will start my presentation on Slide 18, which shows the development of our key P&L items. Thanks to our strong top line growth and our continued focus on efficiency, our margins continue to improve in 2021. We achieved our EBITDA margin target of roughly 75%. As we explained in the Q3 call and is the case every year, there is a traditional catch-up effect in several cost positions at year-end, including higher maintenance, seasonality from our energy business as well as some cost effects due to a normalizing cost position following the reopening after the lockdown situation. Hence, the margins were lower in financial year 2021 compared to the numbers at the end of the 9-month period. In 2021, net cold rent rose by 9% to EUR684 million. Roughly 2/3 of the increase is related to portfolio growth and 1/3 to organic growth. The recurring net rental and lease income, i.e., the net rental and lease income adjusted for special effects outpaced the top line growth and increased by 9.5% to EUR540 million. The margin improved by 40 basis points to 79%, driven by economies of scale effects considering our portfolio growth and thanks to a strong performance of our services business. EBITDA grew by 9.7% to EUR512 million. The EBITDA margin reached a level of 74.9%, which corresponds to an increase of 50 basis points. Our FFO I went up by 10.4% and amounted to EUR423.1 million. FFO 1 did not only reach the upper end of our guidance range of EUR410 million to EUR420 million, as previously indicated, but exceeded it. For detailed drivers of our FFO 1 expansion, please turn to the next slide. With EUR23 million, the highest contribution to our FFO I came from acquisitions in 2020 that showed the full impact in 2021, followed by rent increases with a contribution of EUR22 million. The third biggest positive driver were lower like-for-like maintenance costs, which contributed EUR5 million. Higher administrative costs and higher net cash interest had an opposite effect. These higher costs are directly linked to our growing portfolio. Additionally, the admin costs show some normalization effects as we could better fill open job positions following the reopening after COVID. On Slide 20, you find an overview of our valuation effects for the first fiscal -- for the full fiscal year 2021. We conduct a detailed revaluation process twice a year with the H1 and the full year report. With our H1 report, we presented a valuation uplift of 7.5% and indicated another uplift of 4% to 5% for H2. The outcome of the fiscal year 2021 was a strong uplift of 12.8%, which corresponds to roughly EUR1.9 million. Including CapEx, the value of our properties increased by 15%. In terms of markets, the properties in our high-growth markets recorded the strongest increase with a 15.7% increase. The 2 other markets also saw strong results. The main value driver was yield compression. The discount rate came down from 4.5% to 3.9%, which had an impact of EUR1.84 billion. Rent performance contributed roughly EUR350 million. In terms of capital composition, around 15% or EUR325 million came from our CapEx spending. We feel very comfortable with our valuation levels, which as usual have been confirmed by CBRE as our external appraiser. In the appendix to our presentation, there is a slide which shows the comparison of ours and CBRE's methodology. For the first half of 2022, we expect further revaluation gains. Demand for our project affordable housing remains very strong. Now we are coming to Slide 21. Our portfolio still offers an attractive gross yield, which amounts to 4.2%. That means in place a multiple at 23.9x. The gross value per square meter stood at EUR1,706 at year-end. The total gross assets amount to roughly EUR18.7 billion, including leasehold land value and assets under construction the gross asset value is roughly EUR19.1 billion. As you have seen earlier on our acquisition charts, the acquired assets in 2021 are mainly located in high-growth and purple markets. The reason why the number of residential units in our high-growth markets, nevertheless, increased by only 3,500 is that we did some adjustments to cities and their market category, as mentioned by Volker. Bielefeld a city with more than 3,000 units was previously considered a high-growth market and now belongs to the stable market. Overall, we have, therefore, a balanced portfolio. On Slide 22, we come to the financial profile. Our average financing cost and duration at year-end were influenced by the EUR1.4 billion short-term bridge financing that we had in place for the Adler portfolio acquisition. Since we have already fully refinanced and repaid it at the beginning of January, we focus today on the average maturity and interest cost after the refinancing to better reflect the current status quo. Regarding LTV, there is no difference between the bridge financing and the refinancing via bonds. It stood at 42.8%. The increase of roughly 5 percentage points is a result of our strong portfolio growth of approximately 15%, which was purely debt financed. Reclassifying some short-term deposits as cash, the LTV would be 42.4%. For accounting reasons, these deposits are not treated as cash and therefore, not reflected in our LTV calculation. Despite the strong portfolio growth and the fact that we did not issue any new equity, we remain below our target of 43%. Net debt to EBITDA, defined as the average net debt of the last 4 quarters divided by our adjusted EBITDA was 12.6x. However, the contribution from the 2021 acquisition was very small, given the transfer of ownership was predominantly in the fourth quarter or at year-end. On this metric, we will only benefit from the full earnings power of that portfolio by year-end 2022. On an adjusted basis, i.e., taking the EUR1.5 billion bond issue to refinance the bridge already into account, the average debt maturity stands at 7.5 years, which compares to 7.4 years a year ago with no significant maturities until 2024. The average interest cost on an adjusted basis are comparatively low with 1.16% in comparison to 1.33% at the end of last year. Let me now provide you on Slide 23 with some insights on our balance sheet positions as this is a focus for most of you. The chart shows you our starting LTV position and where we expect to end the year 2022, assuming no further growth from here. As we just saw in the previous slide, the starting position is an LTV of 42.8% at year-end. This reflects the 22,000 units acquired last year as well as the bridge loan from the Adler transaction. We now reflect the full 34.4 million of BCP, we have acquired and consider them as a simple portfolio acquisition. And if we also adjust for our short-term deposits, which are not reflected in the accounting definition of LTV. That results in a current pro forma LTV of 43.1%. The refinancing of the bridge loan via bonds has no effect on the LTV, as mentioned before. We ignore here the unrealized gains of our BCP stake or the BCP option to keep things simple. If we consider now a scenario where we decide not to grow beyond the units that we have already signed year-to-date, LTV will be impacted until year end as follows: First, we intend to depose of up to 5,000 units. We already flagged 1,500 to 2,000 at the time of the Adler acquisition with 1,300 coming from Adler and effectively the remainder from our annual strategic asset disposal program. We are currently identifying further units within our portfolio, which allow us to further improve the management of our locations and exploit efficiency potential, but clearly allow us also to benefit from the high demand for German residential portfolio. We expect to close those disposals within 2022, and the sale will positively impact LTV. We also continue to remain very constructive of the German residential market, given its huge supply and demand imbalance, especially in the affordable living segment. Therefore, we expect further revaluation gains. The ongoing investment in our portfolio through the roughly 500 units we've already signed, plus our new headquarter, we acquired year-to-date, and our new development pipeline will lead to cash outflows and therefore, have the opposite effect on our LTV. Lastly, there will be a bigger inflow and outflow position from our operational cash but certainly also outflows from our CapEx investments as well as our dividend. Taking all these aspects into consideration, we currently expect an LTV of circa 41% at year-end, well below our maximum threshold of 43% despite having acquired 22,000 units over 3 years' worth of our typical growth ambition financed with debt and getting a foot in the door at BCP. This leaves us in a very comfortable position in light of the currently uncertain macro and capital markets environment. And with this, back to Lars for our outlook.

Thank you, Susanne. Before I walk you through our guidance, let me provide you with a sneak review on Slide 25 about the study which LEG performed together with a renowned Wuppertal Institute. We analyzed the life cycle CO2 footprint of a new building versus the refurbishment of an existing building. We will publish the study shortly, but I thought it is worth providing with some first results, especially that it has wider implications against the background of what we currently see with gas and energy prices. The study showed that if you take the carbon costs for the construction of new buildings into account, then the approach of refurbishment does only produce half of the carbon emissions than that of a new build. This might sound trivial for you, but many ESG ratings and questionnaires often look exclusively at day 1 CO2 costs. We believe they completely miss out on the total cost perspective. The study supports our view that new development clearly has a social value as it provides support to the supply-demand imbalance, but it comes at an environmental cost. From an environmental perspective, the refurbishment of existing stock is the right strategy. At LEG, we are actively working on new solutions for the entire sector. The processes and the way refurbishments are executed today is too costly. It simply requires too much time and requires too many specific craftsmen. We have one specific test area to gain experience with the Dutch [indiscernible] principle. But beyond this, we are also working on solutions to industrialize the process completely. As we have shown in our ESG agenda last year, the energetic refurbishment contributes around 30% towards our path to climate neutrality until 2045. We want to actively accelerate the process and with this, the impact on our climate path. The study also reaffirmed that fossil gas needs to be replaced. The current developments of global energy prices confirm that the path towards the electrification of the heating systems, EG via heat pumps will even need to accelerate in order to bring down dependency on fossil energy sources. Let's now move to our guidance for 2022 on Slide 26. The guidance is effectively unchanged from what we presented when we published the portfolio acquisition at 1st of December. We expect an FFO I in the range of EUR475 million to EUR490 million at an EBITDA margin of around 75%. Like-for-like rental growth should be around 3%, and we expect a maximum LTV of around 43%. The investment per square meter is expected to be EUR46 to EUR48 per square meter. As highlighted before, the increase reflects the 2 major refurbishment projects in Wolfsburg and Gottingen, which we acquired from Adler. Our acquisition ambition remains unchanged at 7,000 units. However, as I said at the beginning, if we exercise the BCP option, we should expect -- you should expect further acquisitions only on an opportunistic basis. What is new and has already been highlighted by Susanne is our disposal guidance of up to 5,000 units, which allows us to sell down nonstrategic units, taking advantage of strong demand for our asset class and to ensure efficient operations. Finally, our ESG targets are unchanged and are as always quantifiable, measurable and easy for you to benchmark us against. They are part of our remuneration system, which you'll find on Slide 31 of the presentation. And with this, I come to the end of our presentation. My colleagues and I are very happy to take your questions.

Thanks Lars. And with this we begin the Q&A session. Over to you Stuart.

Thank you, Frank. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] First question is from the line of Jonathan Kownator from Goldman Sachs.

I have 2 questions, please, or 2 topics that I'd be keen to address. The first one on the investment environment. You're highlighting a higher guidance for 2022. Obviously, the environment currently may push you to accelerate investments into your portfolio. So where is that number going to go going forward, the euro per square meter. Do you have the ability to speed up the investment environment? And what is the evolution from the government? Do you expect subsidies to come? How is the government framework developing? Do you have any news from that perspective? That's the first question, please. The second question relates to acquisitions and to Adler. Thank you for providing the color on the LTV evolution. Could you please clarify whether if you were to exercise the option for Adler, would you need to sell potentially even further than 5,000 units? Or would you potentially need to find additional funding beyond that, i.e., hybrid or equity?

Thanks a lot for your questions, Jonathan. I will kick it off with the first one. With regards to investments. So indication is that we are expecting EUR46 to EUR48 to be spent on a per square meter in 2022. That is our current guidance, and we stick to that. You know that we are already having stepped up a bit on that number due to the acquisition from Adler and the huge projects we have taken over there in the cities of Wolfsburg and Gottingen. It is not that you can go up and above that level easily because, as you know, we have quite a lack of craftsman in the market. We have a lack of material you have planning to do. So therefore, from the current perspective, it is not that we are planning this year to go up and above that number. With regards to the second part of that question with regards to the evolution of the government side. And you might have seen that at the end of January, suddenly, there was a stop with regards to the subsidies being paid for modernization measures and that stop has already been revised very quickly a few days afterwards and due to the pressure coming from certainly the real estate industry, but as well the tenant associations and many others in the market. So for 2022, the system has been put in place again and it is funded by -- with EUR9.5 billion. So quite a substantial amount. So we are also planning to take advantage of that system going forward. And with regards to the second question, I'll hand it over to Susanne.

Yes. Thank you, Lars. So on the financing of a potential exercise of the option for BCP, I think you have to understand we are 2 weeks into a war in Europe, and that has led to a lot of volatility clearly in the capital markets, and there is still a lot of uncertainty about the direction of the developments and where this whole situation is headed. So everything we can say today is from today's perspective, so it may obviously be subject to change. You are aware that we've always been very focused on a very sound capital structure that allows us to grow from a position of strength. As and when we decide to exercise the option, we will, of course, evaluate all options available to the financing. You can expect that as with the last transaction, we will have a bridge financing in place to start with. And we can then consider various instruments in dependence on situation in capital markets, share price development, but clearly also depending on the timing of such transactions because you're also aware that we are generally positive on valuations to continue to benefit from the lack of supply of affordable housing in Germany.

All right. Just perhaps one follow-up. Have you got any visibility on the new system from the government in terms of the subsidies. And also -- so if I understand correctly for now, we need to think that this EUR46 to EUR48 level in terms of investments in the portfolio could actually go down because it's not necessarily sustainable given these 2 large projects?

Yes. So it will be sustainable, Jonathan, for the first year. So please don't expect to see a lower level over the course of the next 3 years. That is what we have already included in our plans. With regards to the new subsidy regime, the new subsidy regime will most probably be driven by a focus on CO2 per square meter emission in the different buildings. It is expected at the beginning of January 2023. And how exactly that will look like and still is unclear, and we certainly can see that there will be a strong push towards electrification of the heating systems. We think that we are well prepared for that. You know that we have a daughter company, ESP, which exactly helps us to take care of such solutions, regardless whether we talk NP Central solutions via solar energy being produced on the roof and then being transferred into green heating with the help of heat pumps or whether we talk centralized solutions. And we think that -- from that perspective, we are well also prepared for that new subsidy regime, which most probably is expected as is beginning of 2023.

Next question is from the line of Charles Boissier from UBS.

Just one question from my side. You obviously mentioned about the green heating. I just was wondering with the rising heating costs, could you comment on the cost on top of net cold rent for your tenants? So basically like the [indiscernible] question, what are these costs this year in euro per square meter for the tenants, especially for units where there's not been the energetic modernization and the green heating yet just to understand for them in terms of the affordability.

Sure, Charles. Happy to take the question. Well, it depends, as you said, on the heating systems per square meters, it's between EUR0.50 and EUR1.50 depending on the heating system. So this is where the prices were last year and depending on the development of the energy prices for this year, these prices vary. So it's about -- given the square meter -- average square meter size of our units is about EUR65 per month per unit on average.

Right. So you would say this is not significant enough to create a debate in terms of the much bigger increase and rent affordability. Is it too marginal, you would say?

Well, first of all, you need to bear in mind that it's a pass-through item. So it's not part of the Mietspiegel and rent table discussions. It's something that needs -- is borne by the tenant, irrespective of where the unit is located. So that's the first thing to keep in mind. I would not say that it's marginal for our tenants because as we are more focused on the affordable living side, I think increases there in heating costs also has a hit on the personal balance sheet of our tenants. So that's something we should consider and be cautious there. But I think that it would not have a huge impact on our side or not a significant impact on our side. Given that first, the government started already to subsidize rising energy costs before the wall with a new Energiegeld as Lars pointed out. And secondly, we have very strong relations with the local municipalities and to tackle their individual problems of tenants if they are not able to pay rents to get additional subsidies. Thirdly, we would have also installment payments for rents if tenants would not be able to pay increased heating costs. We were very successful in the first corona lockdown to tackle social problems of our tenants and to come up with very limited rent deductions there, as you know. So we are very comfortable to also handle their increases in energy prices. And fourth, as you know, about 1/4 of our portfolio is rent restricted and the tenants there benefit from social welfare, which is also borne by the state. And this also comprises the energy costs.

Next question is from the line of Marios Pastou from Societe Generale.

I got a couple of questions from my side. And firstly, just to cover off portfolio valuation. So I think in the first half of this year, you mentioned that it will be broadly in line with previous years. And I just wanted to see if there was maybe any guidance you can give in terms of where we should look in terms of growth, considering the first half of last year was very positive. And then secondly, just going back on to your acquisitions. I suppose just maybe a bit more of an update on BCP and the potential option there. You've increased your stake marginally through minorities. And I just wanted to check what the next steps are for additional information as the ongoing due diligence is happening? Is it the results? Is it the result of the KPMG forensic review on the wider Adler group? Maybe just a bit more color on how you could see events playing out over the coming months.

Thank you for all your questions, Mario. So first, on the valuation point, we don't provide guidance on valuation for the first half or for the full year 2020. We will give a little bit more color with our Q1 results, as you know. I think you picked up correctly from what we said that we expect, however, valuation to be roughly in line with previous years, also in the first half of this year. I think if you remember our discussion last summer, we had one special effect included last year in -- which is obviously a one-off where we had one large modernization projects, which contributed EUR100 million roughly by itself to valuation uplift. So that's obviously not going to repeat. But other than that, similar to previous years, I think it's a good indication for the first half.

With regards to the second question, Marios, and the acquisition of BCP, so we are still in the midst of the due diligence. So certainly, every additional data point helps regardless whether we talk data points with regards to BCP or Adler. So certainly, we will use the time frame, which we have agreed to in the auction until September to gather as much data as required to really feel comfortable to buy into BCP. Once again, we are impressed of the quality of the portfolio. We think it has quite outstanding development plots here in Dusseldorf.

Next question is from the line of Christopher Fremantle from Morgan Stanley.

I had two questions. The first was just on the EUR500 million of disposals -- sorry, the 5,000 units of disposals that you were guiding to. Should we expect you to sell assets at a rent multiple that's in line with your overall portfolio? Or are you looking to sell some of the perhaps dryer, perhaps lower-yielding assets in your portfolio? I'd be interested just if you could comment on that in broad terms, please? And then the second question, I'm just interested to understand how the profitability of your modernization CapEx is currently looking. What is the blended gross rental yield on your modernization CapEx going forward, please? And can you just comment when you're talking about that, how you think a world of higher commodity price inflation, higher construction costs feed into that, what that really means for the profitability of your modernization CapEx, please?

Yes. Thanks for your question, Christopher. I will kick it off with the first one. So with regards to the 5,000 disposal. So part of that, you already know quite well and because it's the 1,500-unit portfolio, which we have selected from the acquisition from the Adler portfolio of those 15,400 units, which we have bought into. Most of this is in Eastern Germany. So as we bought that at a substantially lower multiple than our own book so also, please don't expect that -- and certainly, we will try to, but it will be quite difficult to reach the same multiple on that part of the portfolio. With regards to the remaining one, we will definitely make a selection, which enables us to increase efficiency operations. So therefore I cannot disclose more than that. Please just have an understanding for that. We are in the midst of the selection process. And -- but certainly, I promise to get back on a quarterly basis to give you an update on the disposals, which we are going to make. Before I hand over to Susanne, only a quick remark with regards to the inflation and the increases of costs with regards to construction. We are quite happy that we have not built up a substantial exposure towards the development business. And that certainly helps very much. As you know, our focus has been on own lands and doing redensification and has been on buying projects from developers. So we are very, very well protected on that end. General construction companies take the cost risk. So we have no exposure towards increasing costs on that end. And certainly, we have all the flexibility to scale up to the 1,000 at the current moment where we are seeing material cost increases to also be a bit more conservative while buying into new projects. And with regards to the modernization part, I hand it over to Susanne.

Yes. So to follow on, on that, we continue to target a yield on cost of around 5% for our modernization CapEx project. There's obviously an annual selection process and in the selection and the configuration of the projects, we target that [Audio Gap] the CapEx will always be only recouped over a number of years, not just in the first year because we will benefit with relettings and the further development over the years from a CapEx project. You alluded also to higher costs. We, so far, have only had a very minor impact on the cost from inflation because we operate with general contractors where we have long-term contracts in place, which protect us from short-term price changes. Clearly, that is something to be mindful of in the medium to longer term. But for now, we haven't seen a significant impact here from rising prices.

Next question is from the line of Marc Mozzi from BofA.

I have two questions from my side, please. Another one, can you have some color about what are your underlying assumption of your target of 41% growth to value because I think it does take into account how much you expect capital values to increase or asset valuation at least. Number two, what is the pickup of your strict alternative you're assuming over a year? Can we have some color on that, please?

Okay. Thank you, Marc, for your question. So as I already said, we're obviously not providing detailed guidance on revaluation gains. So I won't be able to disclose exactly what we have assumed. I think what we can say here is though that we have been conservative in our assumptions because you know from us that we are always prudent in the way we look at our financials and our capital structure. So if you take the last year's revaluation gains and deduct a small buffer, I think then you get to something that can be the assumptions here. It's fair to say. If you look at the sale of the units, I think Lars has just alluded to what sort of price indication you can perhaps add to that. I think he's commented on the Eastern German portfolio that would come at lower than average or likely lower than average multiples for LEG and then also a new additional program that we are still in the process of figuring out. I think other than that, we've only assumed, as I tried to explain in my speech earlier, the acquisitions we've already signed year-to-date, which is a unit number of just around 500 units and no further growth, except just the usual spending we have from operations. With regards to the dividend, we've -- we are planning to offer a scrip dividend as in previous years. And you can look at the previous year's participation, which was always around 1/3, which I think is also a base case assumption for this year. But obviously, we would be very pleased if it was higher.

Okay. Very clear. My second question is around, do you have a MAC clause in your -- in the potential -- any option you have with BCP? And what could be the trigger for you to raise it? Because we can definitely say that disruption of Ukrainian war can fit into that Material Adverse Clause.

Yes. Thanks for the question, Marc. No, there's no MAC clause. We have a firm tender commitment from them. So if we are getting into the market with a tender offer, they are obliged to also put those 63% for sale. And therefore, we have all the optionality to either do that tender offer or not do that. So we are not forced in any way to buy into the 63%, but it's just at our discretion to take that decision or not.

What could be the reason why you would not raise it? [ Or is it something ] that you would go for it?

Yes. So as already stated, Marc, we are in the midst of due diligence. And currently, we have not identified any red flags. We still take the opportunity to wait a bit longer, gather more data on the company itself, gather more data on Adler. And as soon as we feel comfortable, certainly, our intention is to then exercise the option. If nothing has come up, up to now, it hasn't. We are once again quite convinced that it is a beautiful portfolio with a strong development angle and certainly of interest to us. But certainly, wanting to just take the opportunity to look a bit deeper into the company.

And the final question for me would be around, have you done the math behind the increase in rents? It costs your tenants when you do a monetization. And how much it's going to help them to save on their energy bill and what is the net effect, if any?

Yes. So Marc, certainly, we do that, and we do that on a regular basis due to the current CO2 costs, which are a big part of the energy costs. Unfortunately, in most of the cases, it is not the case that it is in any way neutral with regard to the warm rent. So unfortunately, the increase of rent normally is higher than what they can save due to less usage of energy. But with rising energy prices and with a higher CO2 tax, certainly, going forward, that will be -- come more to a neutral level, but it will take a few years. And if we are really sticking to the current CO2 tax price path.

Next question is from the line of Kai Klose from Berenberg.

Maybe, can I ask three quick questions? First one, could you indicate how much you spent in '21 on new developments or, let's say, in the acquisition of newly built properties from developers? And what would be the number, what about your expectation for 2022? Second question, on the CapEx spending into the existing portfolio, what was the split by sub-regions to say? Are those high-growth markets, stable markets and higher-yielding markets? And the last question would be, could you indicate the split of the like-for-like rental growth of the free financed apartment, if this was in any way different to the whole portfolio?

Okay, Kai. So with regard to the first question, we will try to find that number quickly, but certainly was a low million amount. The colleagues will quickly look at that. And with regards to the CapEx spending, I will hand it over to Susanne.

Yes. I think, Kai, we will also be happy to provide you with the details later. I think we don't have the numbers in front of us, so we are looking them up as we speak and we'll revert on that point.

And unfortunately, we missed on your third question. So if you could quickly repeat that for us, please, Kai.

It was regarding the like-for-like rental growth on Page 13, where you show the like-for-like rental growth of the entire portfolio of 3.2% and the split between rent table and modernization. I was just interested what is the split of the like-for-like rental growth of the free financed units of 3.9%. Was it in any way materially different to the 3.2% for the whole portfolio?

Well, I think you know well, on a percentage or pro rata basis, it's the same, yes, because you have -- on the restricted units, you don't have any rent or any substantial rent increases at all. So that 0.5%, we only achieve there if there's no rent table adjustments. So the rent table increases [Audio Gap] in the free refinanced units, and so you can do the math and do it pro rata basis with 3.9% and split it pro rata, and then you get the figures for free refinanced part.

And just to come back to your first question, Kai, before your leave us, at least that I can deliver now. So it's EUR14 million, which we have spent in new developments.

Next question is from the line of Thomas Rothaeusler from Deutsche Bank.

Two questions. One on the rent growth outlook. I mean you got roughly 2% from rent tables and 1.3% from modernization last year. I mean, what can we expect this year and going further? I mean, given higher CapEx spending, I think it should be more for modernizations. And also on rent tables, in my view, it could be that we get a lower number going forward, especially referring the longer reference period. Would you share that? Or what is your expectation with this regard?

Well, Thomas, let me take the question. We guided on the roughly 3% rent increase for this year. And we don't give any guidance on the split. We have our planning there internally, but we also need to react on fluctuation and on market developments. And so it's not really possible to give you an exact guidance there. And next year, we will also have the rent adjustment from the subsidized rents, but would provide you with an update on the rent guidance for next year at year-end, in Q4, as we always do it. And so far, we are very, yes, convinced to deliver on the rent growth ambitions for this year as we guided.

Okay. The second question I have is on the elections in North Rhine-Westphalia, which are, I think, they happen in May. Maybe you could provide a bit color on this, maybe recent callings. And what if the conservatives would not make it again. I mean any relevant impact for you?

Yes. So thanks so much for the question, Thomas. Currently, it seems to be a draw between the big two parties, SPD and CDU, both coming in at the latest polls at around 29%. And it looks as if a two-party coalition would not be possible. So neither for the SPD nor for the conservative, the CDU. It looks like a three-party coalition, so FDP and the Greens, together with SPD or the conservative parties. Certainly, there are plenty of rumors that the FDP and the Greens are being forced into a coalition with the SPD like on the federal level. But at the same time, you know about the very strong relations between the conservatives and the liberals in North Rhine-Westphalia. So also, there are a lot of rumors that this most probably is not going to break and then most probably the Greens need to decide to step into a government with those two parties. So that is the latest market gossip here out of Dusseldorf with regards to the outcome of the elections here, regardless, I think, who is going to win, and you see how pragmatic the SPD-led government together with the liberals and the Green Party works. You've seen the decisions over the course of the last two weeks with regards to delivering weapons into a country in war which has not happened since the second world war. You've seen how flexible the Green Party behaved as there are discussions in the market with regards to still buying Russian gas or not perhaps instead prolonging the usage of nuclear power here in Germany. So all of that, once again, gives us comfort that also with an SPD-led government, we will have not much [ to sea of ] change with regards to the markets in North Rhine-Westphalia.

Next question is from the line of [ Jack Quinn ] from Kempen.

Just two more questions. On the first one, again, on BCP. Please confirm that in your current FFO guidance for 2022, there's 0 contribution from BCP. Also, as you indicate there that you're going to take your time, will you change the dividend policy at BCP, also, for example, if you decide not to execute, which seems unlikely, but let's say if -- that you don't want to be stuck with the non-yielding assets? So that would be the first one. And then could you maybe split on the valuation increase? I think Slide 20 suggest that it was 40 basis points of yield compression on the value uplift in total. Could you maybe confirm the split in percentage points between yield compression and rent growth?

Okay, Jack. With regards to your first question with regards to BCP, yes, very happy to confirm there is 0 contribution included in our FFO 1 guidance for 2022. At the same time, looking now and thinking about changing the BCP dividend policy or our intention to do so in case we would not exercise the option, I think it's a bit premature. So once again, we are looking into the company. We are convinced it's great assets. So just let's wait, let us gather more data with regards to the company, and then we will come up with a decision. And then if we would not exercise the option, certainly, we will also let you know of how we will then treat those 35% of an exposure towards BCP.

And with regards to your second question, roughly 16% comes from the rent performance and the rest comes from the adjustment in the discount rate.

60% or 16%?

16%.

Next question comes from the line of Paul May from Barclays.

Just a couple of questions on the loan-to-value slide, if I may. There's been a clarification. Is BCP, the 34%, is that still included in the V rather than sort of proportion across the two? I'm just wondering if you're including the 5,000 disposals that haven't yet been exercised, but excluding the 7,000 acquisitions that haven't yet been exercised. Just wondering what would be the LTV if you were to exercise on those 7,000 units. And also at that point, I imagine you would then proportionally consolidate the BCP, which would obviously push the LTV slightly higher assuming it's in the V at the moment. On the guidance then from an earnings point of view, just to be clear, sorry, did you mention there's nothing from BCP. So the 34% holding that you have at the moment that has been purchased, that's not included in the FFO guidance, just to be clear on that. And then finally, on the scrip dividend, I just wonder what the thought process is of offering a scrip dividend, not necessarily thinking about raising equity separately. Obviously, a scrip dividend is effectively an issuance of equity. Just wonder what the thought process there is, given where the share price is relative to your NAV? And then, sorry, the final one, just more broadly, obviously, the consumers are facing or your tenants are facing a lot of inflationary pressures at the moment. I think the majority of their sort of CPI bucket is growing at a considerable rate. I just wondered whether they can also continue to adopt or take on increases in rents as well to the same extent as they have in the past or whether you feel you're going to face sort of greater pressure on increasing rents moving forward, whether post modernization or just generally like-for-like.

Okay. Thanks a lot for the questions. Let me start with the LTV slide. So first, to clarify, BCP is currently included in both the L and the V. So we've just reflected it in both sides just proportionately. I can confirm though that it's not included in FFO. We treat this as financial instruments, so it's not proportionally included. And obviously, we haven't decided on whether we're going to exercise the option yet or not. And as long as we are in the current status quo, we plan to keep it that way. With regards to disposals and acquisitions, I mean, this scenario here clearly represents the scenario where we don't grow beyond the already acquired circa 500 units year-to-date. And if we take the disposals, I mean it's difficult to say, as I said before, we haven't configurated the portfolio as yet. But that's why we can't comment on a single standalone impact here. I think when you think about further acquisitions without disposals and without revaluation, then you have the starting point where we are today of 42.8% that you need to consider before looking at whatever is required in terms of further financing instruments.

Then with regard to the question, the scrip dividend, certainly, the feedback we received by investors has been very positive over the course of the last years. So therefore, we certainly want to offer investors, in our shares, the opportunity to also convert dividends into shares once again. So that's for sure. And the last question with regards to inflation, yes, certainly, we are very aware that increases are hitting our tenants, and we are very careful. So for 1/5 of our portfolio, as you know, our tenants receive state subsidies, they are benefiting from social welfare. A lot of our tenants additionally are entitled to additional state subsidies. So even if they are paying a free financed rent, they get the state subsidy, which is called the Wohngeld. But still, that is all a concern for us. Therefore, we are very actively lobbying for additional help, especially for our tenants. And as I already said, one of those state subsidies has freshly been decided on the Energiegeld, and we are very happy that this has been decided by the current coalition, that means quite a substantial payment. So it's EUR135 for a single person household, increased to EUR175 for two persons and then increased for another EUR35 for any additional person living in a certain household. All of that certainly makes up for a substantial hit. And also you should know that state subsidies or some of them like the Wohngeld now also have an inflationary adaptation clause so that this will be revised on a regular basis in order to make up for that higher inflationary environment we are currently in.

Sorry, just a quick follow-up on the scrip. So you mentioned around -- I'm sure shareholders do quite like it, given where the share price is trading relative to NAV. Just it was more a thought on the -- how do you view issuing a scrip dividend versus raising equity, which arguably, they are exactly the same thing. I appreciate there's some slight cost differential to doing that. So I just wondered more sort of strategically. I'm sorry, just one other that came to mind completely separately, was the Adler portfolio positively revalued in FY '21? And would you expect the BCP portfolio to have received a positive valuation as at year-end because I think you're not reflecting any potential valuation in your LTV? And I'm just asking because I think the rental yield on the residential assets, I think it was 4.3% on the BCP portfolio as of Q3. So not materially different to where your portfolio is at 4.2%. I just wonder what your thoughts are on that revaluation.

Yes. So thanks for the follow-up question on the scrip dividend, Paul. Yes. So certainly, there is a difference. And so while offering a scrip dividend, we are offering certainly the opportunity for existing shareholders to take advantage of the dividend payment and that's, once again, what we received as a feedback, Paul, there are investors out there strongly considering German residential to be an asset class to be invested in. And luckily, there are also additional people, which think that we are doing a good job. So therefore, looking, for example, at the reduction of vacancy rate, we have made quite a lot of progress on the operational side. So that's certainly something we want to offer. Then with regards to the BCP revaluation, you might also be not too surprised, but certainly, that's the data point which we also would like to gather. So I'm not able to disclose how much BCP will do as a revaluation in Q4. But hopefully, with the publication of the full year number at the end, hopefully, of March or beginning of April, whenever those numbers are due, then we will have more clarity also on the revaluation of those assets, but that's something, certainly, which we are also looking to get more clarity on with the publication of those figures.

Next question is from the line of Manuel Martin from Oddo BHF.

Two questions, maybe one by one. The first question is...

Sorry to interrupt you. It is very hard to understand you. Could you speak up a bit, please?

Is it better now? Hello, can you hear me?

Very hard. We will give our very best. So otherwise, it's...

Maybe like this, better?

Yes, that's great.

Okay. The world changes, if I take off my headset. That's great.

That works perfectly for us. Now you seem to have lost us, Manuel.

Can you hear me?

Now, we hear you again.

First question is a follow-up question on your investment program. As far as I understood, your cost risk there seems to be limited and the development companies take the risk, as far as understood. Do you see any risks coming from material shortages, for example, in the market that you could see some delays in your refurbishment? Do you hear something in the market there? That would be the first question.

Well, Manuel, maybe to take this question, while we -- it is sometimes a problem that it's harder to get the material. So far, we hadn't large delays and have good relations with our suppliers. And -- but we need to spend more time on managing these suppliers and to find the right supplies at the right size, yes. So obviously, I have not a crystal ball how all these terrible actions in Ukraine will might impact this, but for the time being, we see this as a challenge but have it under control and manage it.

Okay. My second and last question would be on the Ukraine, maybe also difficult to answer, but do you see an impact from the Ukraine crisis on the transaction market, i.e., is it harder to make transactions right now? Is sellers unwilling to sell? Do they wait? Or what's sitting in the market there?

Yes. So very happy to give you an update there. So certainly, it's also after two weeks now in that new situation, we have not seen any impact. So demand is incredibly strong. So regardless whether we talk international or national investors, we have seen closing of transactions with both parts of the investor spectrum. So that seems to be unchanged. Certainly, whether new bigger portfolios come to the market, that's a big question mark. We have seen the first portfolio by now at around 3,000 to 5,000 units coming to the market, that's very much driven by MIPIM, which is going to take place next week in Cannes. So that's always one of those crystallization points, where you can see how much material is coming to the market. But there seems to be already a lot of portfolios now sitting there waiting to be marketed. Whether they come now within the next weeks or whether that's going to be postponed for a few weeks in order to wait for the development in the Ukraine, I think it's a bit too early to say. Our expectation is that it will not impact the market. As far as we know, it hasn't, up to now.

Next question is from the line of Thomas Martin from HSBC.

Most of my questions have been answered already, but just maybe a follow-up on your CapEx and particularly when we look at the CapEx adjusted FFO 1, which has been flat over from 2020-21. Although you had roughly EUR40 million more FFO 1 at the end of the day, you had maybe more or less the same number, higher CapEx. Generally, when we talk about measuring the profitability of your story, your business case, how important is the AFFO, the CapEx adjusted FFO for you? And on that, how does that influence your dividend payout policy at the end, because you just -- you still stick to your policy of paying out 70% of your FFO 1. But when CapEx on the other side is increasing more and more in the coming years because of the energy transition and also inflation, how do you see that number? How important is the CapEx adjusted FFO for you?

Yes. So as all the KPIs, we also take that into consideration, Thomas. So it's not that we are taking that off. So therefore, from our perspective, we want to stick to the 70% payout ratio on the FFO 1 for the time being, that is also something which is, from our perspective, a comfortable position. As you know, a lot of competitors have stopped to provide that number to the market, but looking at the dividend, which we are going to offer, which will be around EUR300 million, if you deduct EUR100 million for the scrip dividend, you deduct EUR100 million of the AFFO, the negative liquidity would be EUR100 million, which then needs financing, but that's, from our perspective, quite a manageable amount also in the current environment.

We have a follow-up question from Christopher Fremantle from Morgan Stanley.

I just had one further question, which is just on the option to invest in BCP and to further spend and further lever up effectively into yield compression, which I think you're suggesting is going to continue in 2022. The question is, how are you judging the decision to proceed, relative to where your share price is, and the alternative use of cash, which is to buy back stock? I mean, I know we are in volatile times for the share price -- for all share prices, but I do ask, just given the discount to NAV is now very wide. The gross rental yield on your existing portfolio implied at current share price is in the high 4s. I mean, is that something that you would consider as an alternative if the shares remained at their current levels?

Yes. I think it would be stupid to say it's not part of our consideration, Christopher. Certainly, it is. From our perspective, once again, BCP is an outstanding opportunity to grow our business. We think it will, and does offer quite a lot of additional valuation upside and certainly valuation gains for our investors. So therefore, we are taking that into consideration. And certainly, therefore, we have also not decided yet on whether we are going to exercise the option or not. So therefore, that's certainly part of what we take into consideration while looking at the option.

Next question is from the line of Tom Carstairs from Stifel.

Question following up on the subsidy side of things. I appreciate what you said about your expectations for a new subsidy in 2023. But in a hypothetical situation, if there was no new subsidy, how would that impact your investment plans in terms of the way you're looking at the energy efficiency levels that you'd be targeting on your investments?

Yes, Tom, it certainly would impact then the yields, which we would be able to earn on that. So as you know, currently, the subsidization regime is quite generous with regards to doing more with regards to modernization and might it be on the shell of the building or by providing green heating. I strongly doubt that we are not going to see a modernization subsidization regime as of 2023 because you know that 2/3 of our market is in the hands of private landlords, meaning persons just owning a single multifamily house or two, et cetera. They will definitely not be able to financially afford a modernization of those buildings. So therefore, if we really, as a country, want to reach 2045 climate neutrality, we need additional subsidies. And that's, therefore, from our perspective, currently, not our base case assumption for the new subsidization regime. Certainly, it will change in the focus away from the energy efficiency towards a much more intelligent approach of CO2 emissions per square meter, which definitely is a better approach. So therefore, we are quite hopeful to see substantial money flowing into that subsidization regime at the beginning of 2023.

Okay. Appreciate that. I guess I appreciate what you're saying on the yield side of things. But I guess I was also getting at, would it change your actual view to the way you look at the levels of energy efficiency that you're targeting within individual units?

Sorry, I didn't want to catch you short, so please go ahead.

No, no, no, that's the question.

Yes. So certainly, we would then, once again, look at the amount of money we want to spend, as always, I think you're well advised if the external conditions change, then you certainly need to revise your investment plans. And that certainly would be something we would be willing to do. But certainly, on the other hand side, as we have the push towards climate neutrality and the legal obligation to reach that 2045, you certainly will not be able to prolong that forever.

Okay. And then the second question, going back to energy prices and Mietspiegel table, I appreciate, obviously, again, everything that you said about warm rent versus cold rent and therefore, energy prices sort of aren't a consideration or shouldn't be a consideration for the cold rent. But my understanding on Mietspiegel table calculations kind of always been there's the element of the -- what's going on in the market in terms of rents, but there's also that negotiation, should we say, factor and sort of political, maybe, considerations that goes into things. And in that sense, could you not see an impact potentially on Mietspiegel table from consideration for the impact on tenants from the higher gross rent that they're going to need to pay?

Tom, happy to take the question -- follow-up question on the rent table discussions on the impact of energy prices, where we will have more qualified rent tables, which will follow a more sophisticated approach, more shadowing or mirroring the real market developments on the rent levels for the cold rents in Germany. So I know there is always some pressure from local politicians to have there maybe also other factors and negotiating factors in the rent table discussions, but I won't see there any big impact from the energy price developments. And we also have significantly increased our presence in these rent table commissions as large landlords in the respective municipalities. And so we also weigh in our arguments. And so far, we see there a very constructive and good discussion on -- in order to set up and to modernize the rent tables.

Next question is from the line of Simon Stippig from Warburg Research.

First of all, I want to emphasize that I think it's very positive signaling that you changed the compensation scheme to relative values. I think that's really positive to all stakeholders. And then my question is, first of all, in regard to your smaller development pipeline, could you please indicate the construction costs without the land price?

Yes. Very happy to do so, Simon. As always, it depends on the quality you are building. So currently, it's between EUR3,200 to EUR3,400 per square meter, excluding the land cost.

Great. That helps. And then I have a question in regards to the BCP option again. I mean there were a lot of answered questions already. But I mean, I just wonder if there are also all options on the table in regard to your already acquired stake at around EUR146 per share. So there is a very nice return you already made on those shares. So is there a lockup that you have signed for this stage?

Yes. So perhaps just to revise the numbers a bit, so the current average amount we have bought at is EUR139 per share. And as always, all options are on the table as long as we have not taken the decision to buy or use -- make use of the call option. Until then, all options are on the table.

Okay. And just a follow-up on that. So there is no lockup period on your initially purchased share stake of 31%.

No lockup. No.

Okay. And then maybe one more question in regards to the option. So I just wonder how you view -- I mean, in regard to the FFO yield, is it for you an accretion only on -- you mentioned before the revaluation of the portfolio. So is your focus more on the BCP portfolio and portfolio revaluation instead of FFO yield just because if I look into FFO yield, last 12 months of BCP, then at the option [ strike ], it would be around 2% and does not change materially to FFO 2. So just to understand your view on accretion and dilutive effects in that regard.

Yes, Simon, so from our perspective, we clearly focus on the portfolio. So we look at the assets. We think it's a very strong portfolio, where we see a lot of potential for synergies by including it into LEG and integrating it into LEG. So it's -- we don't look at it as a financial investment, but really as an asset acquisition. I hope that answers your question. Partly, I just wonder then, I mean, where would you see -- because just the capital side, it is very compressed, so where would you see material synergies. I mean, notwithstanding in regards to [indiscernible] I think it's very obvious that there are a lot of synergies to be set free. Just in regard to the BCP share and additional share in regard to profitability, historically of that company, that would be very interesting if you see that on the financing side, more on the topline side and an overlap of the portfolio. Could you maybe give a little bit more color, so I can understand the reasoning behind that?

Yes, Simon. So apologies, but please, just let us do the decision whether we exercise the option or not. And then I promise we'll come up with a few pretty comprehensive slides being prepared by our IR guys giving you all those answers, which you have just asked. And certainly, those are exactly those points, which we are currently focusing on. And we will definitely disclose that as soon as we will have or might have taken the decision to execute the option.

We have a follow-up question from the line of Marc Mozzi from BofA.

Follow-up question is essentially around your marginal cost of debt right now. Do you have any indication of what are the current state of the negotiations you have with your banks to refinance your bridge loan?

So Marc, we've already refinanced the bridge loan thankfully, just in the beginning of January. So we are safe on that front. I think otherwise, what is happening with public markets and in the bond market, you can look at the screens and clearly, there's a lot of volatility at the moment. When you look at secured financing, the indications we've received recently are still stable, so we haven't seen a spillover of the volatility in capital markets into the bank loan market yet.

And in terms of -- on the bond market, do you have any indication to provide us?

Look, it fluctuates on a daily basis. So it's very difficult. I think the best indication is just to look at where the secondaries are trading in our existing bonds.

So you would agree that 200 bps is a new spread right now for real estate?

Certainly not 200, but clearly, events like the current events are leading to a more volatile market, which leads also to higher spreads, yes.

There are no further questions at this time. And I would like to hand back to Frank Kopfinger for closing comments.

Thank you [Technical Difficulty] and thanks for your questions. And as always, should you have further questions, then please do not hesitate and contact us. Otherwise, please note that our next scheduled reporting event is on May 11 when we report our Q1 results. And with this, we close the call, and we wish you all the best and hope to see you soon. Thank you, and goodbye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.