LEG Immobilien SE (LEG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the LEG conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Frank Kopfinger, Head of Investor Relations. Please go ahead.

Thank you, Timo, and good morning, everyone, from Düsseldorf. Welcome to our full year 2022 results call, and thank you for your participation. As you have seen, we published the core elements of our 2022 financials already yesterday night. We hope you also took notice of the full reporting set, which we published this morning and which you find on our web page. Please note that there is also a disclaimer, which you'll find on Page 3 of our presentation. We have in the call our entire management team with our CEO, Lars von Lackum; our CFO, Susanne Schroter; as well as our COO, Volker Wiegel, who will lead you through the presentation. But before we start, I would like to warn you. Unfortunately, today, we have a nationwide alert. That means that at 11:00, i.e. in the middle of our conference call, all public sirens will be activated and all mobile phones will send alert signal here in North Rhine-Westphalia. Also we are sitting in a brand-new building. We cannot exclude that the noise level at 11:00 will be too loud. Should this be the case, we would simply put you on mute for a minute, and this will be a maximum of 1 minute and unmute you when the sirens are silent. In a worst case, we will need to do this 3 times within 15 minutes within this call. Apologies for this in advance, but it is a statewide exercise. But now and without further ado, I hand it over to you, Lars.

Good morning, dear analysts and investors. We present to you today a set of numbers and initiatives reflecting 2 completely different worlds. On the one hand, we present to you a set of record numbers. I am proud regarding the achievement of our goals and the results underline again our outstanding operational strength. On the other hand, we clearly take note of the change to the interest rate level, which brings about a very quiet transaction market and with this low evidence on further price development. Therefore, we presented to you already in November, our new cash focused framework against the backdrop of a more challenging market environment. We recalibrated LEG's strategy to safeguard our balance sheet and still invest substantially into our portfolio. We reiterate our new mantra cash is king. Our new core KPI is AFFO internally and externally as long as the current market environment persists. We are fully aware that some of you will continue to focus on FFO I. We will certainly report that KPI, but not steer our business accordingly due to the accounting-driven nature of that number. Providing both numbers, i.e., full transparency allows you to make the choice for your preferred KPI. Slide 6 of today's presentation lies out that we delivered on all aspects of our business. We've generated record FFO I of EUR 482 million, a growth of almost 14% on a per share basis, a growth of 12%. One key driver was the successful integration of the Adler portfolio, which we bought at an attractive 5.1% gross yield and financed at 0.9% for a 9-year term. Already in the first year after acquisition, Wilhelmshaven, the by far biggest new location benefited from a 15% valuation uplift. FFO I was also driven by rent increases of 3.1%, i.e., slightly above our guidance of around 3%. Rent growth continuously gains momentum. Excluding the Adler portfolio, vacancy rate came down to 1.9%. Including the Adler portfolio, vacancy rate stands at 2.4% reflecting the potential for further vacancy reduction. Our successes are not only operational and financial ones, but also include ESG. Different investors look at different rating providers. We received significant upgrades from all major ESG rating agencies and are among the best-in-class. We received ESG rating updates from MSCI to AAA, a significant upgrade from Sustainalytics, the strong initial rating from CDP and submitted our documents to SBTi. You find the details of our ESG rating success story in the appendix. Obviously, we take ESG more than serious and provide you today with some groundbreaking innovations to decarbonize our business better, faster and more efficiently. Despite those record results and major innovation, we have decided together with the Supervisory Board to propose the suspension of the dividend for 2022 to the AGM in May. In November, we informed you that the dividend for 2022 is subject to further market development. As the uncertainty regarding the valuation of real estate persists, we have decided to keep cash in the company and to further strengthen our balance sheet. A debt finance payout just does not make sense when valuations declined in the second half of 2022 by 4%, i.e., in the middle of our guidance of 3% to 5%. To prepare for further adverse market developments, we are happy to share that most of the maturities in 2023 of just EUR 116 million have been successfully rolled forward. With a clear path of refinancing all our maturities until 2026, we are in a very good position in an admittedly challenging financing market. Additionally, we also worked on our development pipeline and canceled additional projects without causing any damage. The further reduction of our development pipeline is the key driver for the adjustment of the AFFO guidance range which now amounts to EUR 125 million to EUR 140 million. Slide 7 reflects our setup and positioning as a green solution provider. Reading from bottom to top. We do everything to defend our resilience setup, retaining the dividend, strengthens the balance sheet. Compared to a full payout, this is an improvement of 160 basis points to the LTV. Additionally, we possess a robust, well-diversified financing profile and a clear path to refinance the upcoming maturities until 2025. Finally, we shrunk our new development pipeline again and provide you with full details on Slide 31 of this presentation. On a quick note, we have full price certainty with regards to all acquired and projects in construction. Secondly, we are operating the leading platform for managing affordable residential real estate in Germany. Our operations benefit strongly from that low complexity, i.e., running a single set of mass processes for a regionally focused and homogeneous portfolio. Therefore, all operational KPIs screen strong. Finally, we consider for innovation to be key to efficiently decarbonate our assets. The 3 solutions accelerate decarbonisation at lower cost and offer substantial third-party business opportunities. On Slide 8, you'll find a short description of the 3 innovations, which we are promoting. All of them have in common that we cooperate with strong industrial as well as digital partners. In today's world, we are convinced that joining forces is essential to come up with relevant and significant innovative solutions. The first initiative is Renowate. The joint venture provides serial refurbishment and positions itself as a full service provider from planning, to execution and including the application for state subsidies. The fact that the new subsidies regime provides an additional 15% of subsidies for serial refurbishment proves that we are on the right track to tap a huge external market. Competition so far is minimal and not more than a handful of companies are currently active. The second initiative Seero.pro provides a digital solution for the new legal obligation to execute hydraulic balancing for the heating systems of bigger multifamily houses as of autumn 2023. The term set and the artificial intelligence for the steering software are developed together with one of the globally leading smart meter providers as well as a digital company builder. Those intelligence term sets will regulate the radiators more efficiently, reduce energy consumption substantially and save costs for all tenants sustainably. Just for LEG's portfolio, this approach reduces the cost of hydraulic balancing by EUR 30 million. On the third initiative, we joined forces with a global Air2Air Heat Pump provider, Mitsubishi Electric. This technology does not only enable the electrification of the heating systems but also forms the missing piece to reduce the CO2 footprint of buildings with lower energy efficiency as well as buildings with existing decentral heating systems quickly and efficiently. By applying an aid to our heat pump, we can upgrade the building from an energy efficiency class G to C even without any costly refurbishment. Just for LEG's portfolio, this approach reduces the cost of the decarbonisation path, which you can find again on Page 35 by around EUR 500 million until 2030. Volker will dive into that magic much deeper now, hoping that he's not carried away as the evangelist or sustainable innovation in LEG.

Well, thanks, Lars. No worries. I will keep my feet on the ground always working hard to make all our initiatives a real success. Before I update you on our excellent operational results, I would like to give you some more background on our 3 pillars of Magic sustainability. The first pillar is Renowate, a joint venture between the highly innovative Austrian construction company, Rhomberg and LEG. Founded on April 1, 2022, Renowate reshapes the construction industry. In the past, homeowners had to run from pillar to post to assemble the right measures to turn an existing building into a carbon-neutral home. Renowate offers all this as a one-stop shop. Renowate doesn't offer general constructor services ordered and tailored by the homeowner, but a solution to the homeowner's challenge to make his building carbon neutral. Based on digitized planning processes itself learning all algorithms and digital ecosystem covering all ages of the modernisation project, including tenant communication and subsidy management, Renowate aims to dramatically simplify modernisation projects and at the same time, cut costs significantly. In its year foundation, Renowate started and completed its first 2 projects with a total of 47 units with over 2,500 square meters. After a construction phase of roughly 10 weeks total greenhouse gas savings amounted to 88%. And if we were to install PV elements, we would be able to even reach the net-zero standard. With our approach, we qualify for the nearly introduced 15% subsidies granted by the state to accelerate the development and implementation of serial refurbishment in the market. Renowate continues to develop its own products with the aim of reducing renovation cost per square meter and increasing construction speed to further develop the core product, 1 piece of CO2 reduction. Renowate will introduce various IT portal solutions to simplify the construction process, both for tenants and other stakeholders. In 2023, Renowate plans to refurbish over 200 units in Germany to start first, third-party project and aims to put a foot in the Austrian market. And with this, let me now go to Slide 11 where the magic becomes reality, our Seero.pro initiative. One of the key problems with heat energy is that it is not efficiently used. Research of the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety shows that a considerable part of the generated heat energy estimates range up to 20% is wasted due to inefficient and insufficient controlling mechanisms in our buildings. An additional 5% to 10% is lost due to waste for behavior. Thus, roughly 30% of our energy consumption and residential buildings doesn't contribute to our comfort. They just cost money, pollute our atmosphere and our climate change. We address these 30% with our Seero.pro initiative. We addressed the significant potential by means of technology and best-in-class user experience. Our approach is based on 3 elements: first, inefficiencies. German heating systems work like many worldwide water-based. Since the early days of this technology, the need for an equal and balanced heat distribution is well known. Unfortunately, the process of hydraulic balancing a slow, highly complicated and with over EUR 500 per flat expense. Realistically speaking, the vast majority of multifamily homes in Germany has an inefficient wasteful heat distribution. Second, nighttime reductions. There's no need for a comfortably heated room if the tenant is not using it, is absent or sleeping. Only very few tenants reduce the target temperature at nighttime regularly. Third, peak temperature reductions. Common understanding is that a healthy and comfortable room temperature in winter time is generally between 17 and 21 degrees. Only certain circumstances call for higher room temperature. Nevertheless, many German homes are considerably warmer. This reduces comfort, increases energy consumption and comes with a higher price tag. With modern made in Germany technology, these levels can be tackled today. Together with the hidden German champion for heating control and hydraulic balancing and the best-in-class digital business builder, we are developing a purposeful solution. It is a system comprising a newly constructed smart thermostat designed for use in multifamily homes, connected by state-of-the-art IoT communications technology, doing the heavy lifting algorithm-wise. The tenant will save approximately 30% of energy. We expect the landlords to transfer these costs to the tenants as operating cost. The jointly developed product is globally unique and offers an incredible high carbon reduction per invested euro. As we see a significant third market potential for this product, we will present the product together with our partners next week on the ISH, the world's leading fare for heating, ventilation and air conditioning in Frankfurt. And let me now come to our third pillar, which will -- we believe will have a major effect on how we think about the energetic improvement of buildings in general. I'm now on Slide 12. An even greater level for efficient climate protection is in the housing industry is our large-scale rollout of Air2Air Heat Pumps. Let me explain why this is case. Almost all heating and LEG buildings and multifamily homes in Germany altogether comes from burning fossil fuels. In Germany's decarbonisation initiative calls for CO2 neutrality by 2045. Following the legislation, the main pillar in our efforts to reduce CO2 emissions is refurbishment. We have shown to Renowate that refurbishment can be thought differently. Unfortunately, this cannot be the only tool in our toolbox to meet the 1.5-degree celsius target. Many of our tenants cannot afford to pay the necessary target rent price for that type of product. Therefore, we have investigated other methods of quickly available and sustainable CO2 reductions. We asked ourselves if there's a way to stretch the time frame available to refurbish our buildings without sacrificing the 1.5-degree target while continuing to supply good terms for affordable and fair rents. The obvious solution is district heating if it utilizes excess heat. This can heat even low-performing buildings without emitting additional CO2 where this is not feasible in time, heat pumps operated with green electricity can be a great solution. Therefore, we partner with Mitsubishi Electric, world-class manufacturer and supplier for Air2Air Heat Pumps. These systems are widely known as multi-split air conditioning and in use worldwide. Production capacities are huge. The products have shown their reliability for decades now. Supplied with green electricity, the produced heat and cold in the summer is truly carbon-free. These systems can handle even our lowest performing buildings easily and right now. The great side effect of installing these systems is the good fit on an apartment level. A good portion of all multifamily homes have decentralized gas furnaces. Decarbonising these with district heating requires a time consuming and come with some renovation process. We would have to install new piping in the entire house. Pilot installations of multi-split units in 12 LEG apartments show the huge potential of that approach. They are installed within a single day and reduced the energy consumption as forecasted substantially. Together with Mitsubishi Electric, we aim to replace every failing decentral gas furnace by an Air2Air Heat Pump, ramping up our efforts will decarbonize a sizable portion of our portfolio until 2030. Despite of the necessary time for refurbishments to be phased into the usual building life cycle. The total savings for LNG amount to at least EUR 500 million until 2030. I hope you have been able to build a better understanding for these innovative solutions. Those do not only address the challenges of decarbonisation of our own stock, but open up business opportunities with third parties in Germany, in Europe and even globally. That's why we call it Magic. We, as LEG drive to turn challenges into opportunities. And now let me give you some background on our portfolio on Slide 13. Overall, the total number of units hardly changed compared to the previous year. Among the 1,412 units, we added 294 were nearly built. These are located in Bremen, Düsseldorf and Cologne. Some of the additions also relate to acquisitions signed before 2022. This includes the remainder of residential units bought from Adler in 2021 that joined our portfolio not before Q4. These numbers don't yet include the successful signing of 2 transactions that help to further optimize our asset base in September 2022 before the acquisition stopped. We signed an acquisition of around 370 attractive units located in Düsseldorf and Cologne with transfer of ownership in Q1 this year. The additions in the reporting year were offset by the disposal of 563 units. In total, we notarized 706 units into 2022, which we sold at book value. At the moment, we are in the marketing process with more than 5,000 units. Coming back to the standing portfolio. I'm now on Slide #14 to give an overview on the rent development. We really had a successful year with rents rising by 3.1% on a like-for-like basis, slightly above our guidance of around 3%. Rent table adjustments were the strongest driver and contributed 1.8%, while modernisation and reletting added another 1.3%. Despite this development, LEG remains the leading affordable landlord in Germany with average monthly rents of EUR 3.32 per square meter. And this also holds true for the free finance part of our portfolio, where rents grew at 3.7% to EUR 6.68 per square meter. In the current financial year, restricted rent will contribute to the rental growth given that 2023 is a year of cost rent adjustment. The increase of the 3-year CPI by 15% applied to administration costs and maintenance increases the rents in our restricted portfolio by 4.6%. That translates into 90 basis points for the LEG portfolio. Coming back to the free financed part of our assets, let me highlight that all our 3 market segments showed strong growth rates with a stable and higher-yielding markets, even surpassing the high-growth markets by 20 basis points. I would like to point to one location in each market of the free financed portfolio that showed particular strong improvement year-on-year. These were rising near to Düsseldorf at 4.6%, Bielefeld, a stable market with 6.3% and Duisburg, representing the higher-yielding segment was plus 5.4%. In terms of vacancy, we were able to make further progress despite the low vacancy rate in the previous year. As of December 31, '22, our vacancy rate was down by another 20 basis points year-on-year to 2.4%. And if you leave our 2022 acquisitions aside, we achieved a 1.9% vacancy rate. The first time in LEG's history marked below the 2% hurdle. To give you some color what this means for us as an organization. When I started as COO, with my team, what we can realistically achieve in terms of vacancy level, something below 2%, we've seen us completely out of box. Therefore, I promised to take a parity jump once we reach this target. So if you hear me back at the Q1 results in May, you know that I survived it. Coming to Slide #15 and the investments. On a per square meter basis, our investments decreased by 4.4% to EUR 40.61 year-on-year, reflecting our deliberate slowdown in spending against the backdrop of cost inflation and higher interest rates. This is also slightly below the most recent guidance we had provided in November '22. In a volatile environment, it is certainly key to quickly adjust to new situations. This is exactly what we did by reducing our projects and by renegotiating prices with our suppliers. In this context, it is certainly helpful that we are a flexible organization, and then we are free to choose external craftsman. We are not bound by contracted minimum volumes and are able to renegotiate especially in uncertain times. When it comes to energetic modernisation, however, we stick to our ESG commitment and continue to invest accordingly, as you can see from the green colored part of the bar. Let us now move to Slide #16 for a quick look at our services business. You can see that its FFO contribution increased again by 28%, reaching EUR 50 million in 2022. The strong contribution was made by TSP, our craftsman organization and ESP, the energy provider, but also a very innovative company when it comes to environmental solutions. The rollout of new services includes our innovative proptech company Youtilly, as well as LEG's facility management for gardening and cleaning services. For Youtilly, we completed our rollout for the entire LEG portfolio and now entering the third market to scale this platform quickly and efficiently. And with this, I'll hand over to Susanne for the financials.

Thank you, Volker. Good morning from my side. I will proceed with Slide 18 and the development of our P&L items. In 2022, net cold rent rose strongly by 17% or EUR 115.2 million to EUR 799.1 million. The contribution from that acquisition amounted to EUR 95.1 million and contributed 84% to the increase in our net cold rent in total. The impact from organic growth was EUR 20.1 million. Recurring net rental income increased by 15% or EUR 81 million to EUR 621 million. Besides the strong growth in net cold rent, the good performance in our services business, as highlighted by Volker, contributed to this development. The NOI margin climbed somewhat from 79% to 77.7%. The margin was negatively affected by a disproportional increase in allowances on rent receivables as well as some increases in relation to operating expenses and in personnel costs, which are partially related to the Adler portfolio we acquired. The Adler portfolio, as you know, came with lower margins as we previously explained. The allowances on rent receivables increased in particular due to the higher volume of operating costs not yet invoiced, and this is a precautionary function of booking provisions. A positive effect come from some decline in maintenance expenses, which benefited from the release of provisions and simultaneously lower increases in provisions. Net operating income amounted to EUR 413.5 million and was accordingly EUR 207.5 million lower than the recurring net operating income. This was mainly due to goodwill adjustments done in the first and second half of the year. The goodwill write-down affects both the net operating income as well as the administrative costs. In total, in the financial year 2022 and taking into account both line items, the goodwill amortization was roughly EUR 300 million thereof roughly EUR 100 million in first half of the year and roughly EUR 200 million in the second half of the year. As was explained already in previous calls, the amortization is a result of the significant increase in interest rates and hence, increased capital cost. It has nothing to do with the performance of the portfolios. The goodwill write-down in H1 was associated with acquisitions made in previous years, where the write-down on the second half was associated with the recent Adler acquisition. We have now written down our complete goodwill. Nothing is left on our balance sheet. Another point we also highlighted before, the purchase price allocation regarding the Adler transaction was only completed in Q4 2022 so that the impairment test that led to the goodwill write-down could only be finalized at year-end. The adjusted EBITDA increased by 16.9% to EUR 598.7 million in financial year 2022. While the NOI margin declined slightly, the adjusted EBITDA margin remained stable at 74.9% and therefore met our guidance. Recurring administrative costs increased less than the net cold rent and hence offset the negative margin effects in the net operating income. The FFO I reached EUR 482 million, which corresponds to an increase of 13.9%. The increase in financial debt and the resulting interest cost had a slightly negative impact on the FFO I margin in comparison to last year. For the detailed drivers of the FFO I development, let us now move to next slide on the FFO bridge. I'm now on Slide 19. In 2022, acquisitions contributed to EUR 60.5 million and the organic rental growth, EUR 20.1 million to the increase in FFO from 423.1 million to EUR 482 million. A decline in maintenance expenses of EUR 23.2 million as well as an increase in others of EUR 9.1 million had a meaningful positive impact. Others benefited among others, from the good performance of our services business. Negative effects of the FFO development came in particular from higher operating costs in an amount of EUR 25.3 million, which is mainly driven by higher allowances on rent receivables as mentioned before, as well as staff and non-staff costs. Cash interest cost increased by EUR 26.6 million. The majority is driven by bond issuances we did in 2021 as well as for the acquisitions of the Adler portfolio in early 2022. Slide 20 provides an overview of the revaluation of our portfolio. For the first 6 months of the year 2022, we reported a valuation uplift of our properties of 6.1%. For the second half of the year, we recorded a valuation decline of 4%, which is fully in line with the 3% to 5% we guided at our Q3 results. In total, we had still a valuation uplift of our assets of 1.9% in 2022. Including CapEx, the value increased by 3.8%. Our efforts in the higher-yielding market recorded the highest uplift in fiscal year 2022 with 3%, followed by the high-growth markets with 2.1% and the stable markets was 1%. In the second half of the year, the high-yielding asset segment showed the highest resilience against the unfavorable market environment. This is mainly driven by a particularly favorable development of the value of our assets in Wilhelmshaven. The uplift in absolute numbers was EUR 751 million. In terms of value drivers, it was the discount rate, which drove the uplift. The average object specific discount rate at year-end remained at 3.7%, flat over H1 based on the low transaction evidence. Negative effects came from inflation-based costs assumptions. Potential valuation effect will only come through gradually over time based on the current standard valuation methodology. And there is, therefore, high uncertainty due to very low transaction activity. In terms of allocation of capital revaluation gains, EUR 382 million and CapEx drove EUR 369 million of the uplift. Page 21 provides a valuation overview of the portfolio. As a result of the valuation decline in H2, the gross yield of the portfolio increased slightly to 4.2% in comparison to 4.1% reported for the last period. The corresponding in-place rent multiple is 23.9. The total gross asset value amounted to EUR 19.5 million, including leasehold land and assets under construction, the IAS 40 gross asset value is EUR 20.2 billion. The gross value per share is EUR 1,789 per square meter on average, ranging from EUR 1,227 per square meter in the high-yielding market to EUR 2,508 per square meter in the high-growth market. Let's now move to Slide 22 and our financial profile. In comparison to our 9-month reporting, the chart on the left side with our maturity profile has not really changed. As of year-end 2022, we had maturities of EUR 116 million for the current fiscal year 2023. However, as of today, we have already addressed the majority of these EUR 116 million. In 2024, we have liabilities with a volume of around EUR 1 billion. I will come to our financing strategy in a minute. Average debt maturity stands currently at 6.5 years after 7.5 years at year-end 2021. Average interest cost amount to 1.26%, 10 basis points up to the level of the year-end 2021. The interest in hedging rate remains unchanged at 94%. Our loan-to-value increased from 42.1% to 43.9%. The valuation decline for the second half of 2022 triggered an increase of the LTV above our self-set target of 43%. However, we do not expect an impact from this moderate increase on our ability to refinance. Net debt-to-EBITDA as of year-end 2022 was 14.9x. We are in a comfortable position with regards to our bond covenants. That means we can digest a drop in valuations of more than 25% based on today's values before we hit our tightest bond covenant. We have cash on hand of around EUR 400 million, including short-term deposits. We have undrawn credit lines with a volume of EUR 600 million as well as our commercial paper program with a volume of another EUR 600 million in place. Let me now come to our financing strategy until 2026. I'm now on Slide 23. We believe we are in a good starting position to tackle this task in the coming years. As I just said, for 2023, we already refinanced the majority of our maturing debt. Therefore, there should be a little longer an area of concern for you. For the coming years, we need to refinance roughly EUR 1 billion in 2024 and in 2025. We are in the fortunate position that we have always had a well diversified financing mix. And thanks to our regular activity in the secured bank loan market, we have a very strong relationship with a large group of banks. Roughly half of the maturities for both years are secured loans. We would expect them to roll over, but the terms will, of course, have to reflect the new interest rate environment. For 2024, the other half is a EUR 500 million bond, which will mature in January of next year. We expect to address this bond by repaying a portion and refinancing the rest with a mix of debt instrument. We have already working -- been working on this and as well as the loans due in 2024, and we will provide a regular update on this progress. For 2025, in addition to the secured loans, our older convertible is due. We expect to apply a strategy similar to the 2024 straight bond. To sum up, the absolute numbers we need to refinance are manageable. We can rely on our strong secured debt network, and we have access to a broad range of private and public capital markets products. With this, we do not depend on bond markets for the next year, and we do not rely on disposals to refinance our short and midterm maturities. With this, I hand over to Lars, who will provide you an update on our guidance.

Thanks, Susanne. I'm now on Slide 25. We achieved all our main financial goals as well as our ESG targets. Just a few words with regards to the ESG achievements. Firstly, the absolute CO2 reduction from our refurbishment activities amounted to more than 4,000 tons of CO2. Secondly, despite the challenging years of COVID, the trust index among our employees increased substantially to now 73%. Thirdly, LEG's Sustainalytics rating has been once again improved to now just 6.7. 2022 has been a very successful year for us, and we are convinced that we will also successfully maneuver through these challenging times with our resilient setup. Finally, let's have a look at Slide 26 and our guidance for 2023. We presented this guidance to you already in November, but made 2 adaptations. We increased our AFFO guidance range to EUR 125 million to EUR 140 million, mainly driven by, again, reducing our new development pipeline. Additionally, the positive revision is due to the suspension of the dividend for 2022 as it reduces interest costs. We removed the conditionality from our 2023 dividend guidance as we feel very comfortable with our cash-focused KPI, AFFO and the derived new dividend policy. Additionally, we are not dependent on disposals due to the refinancing of the majority of our 2023 maturities and the clear strategy for all maturities until the end of 2025. Please take note that our top priority remains the protection of our balance sheet. We will defend our conservative setup with all self-helping tools if market conditions required. Due to the high uncertainty in the market, we are convinced that the suspension of the 2022 dividend is a necessity and a major milestone in this respect. Before I open the line for your questions, let me thank Susanne for her great work in LEG over the course of the last 3 years. The strength of LEG's balance sheet is her and her team's most visible success. In the name of the Supervisory and Management Board, I wish her all the best for her start in London. With this, I hand it back to Frank.

Thanks, Lars. And before we begin the Q&A session, let me allow again for 2 remarks. First, this is just a reminder and for the late joiners. We are going to have a statewide alert today in North Rhine-Westphalia, which means that at 11:00 CET all public sirens will be activated. We cannot exclude that the noise level at the 11:00 will be too loud. And in this case, we would simply put you on mute for a maximum of 1 minute and unmute you when the sirens are silent. This could happen 3 times in a row within 15 minutes. Again, apologies for this in advance. This is a statewide exercise. And as a second remark to all in the Q&A line before we start the Q&A, you may ask as many questions as you wish, but please ask them one after the other. And with this, I would hand it over to Timo to guide us through the Q&A session.

[Operator Instructions] The first question is from the line of Thomas Neuhold with Kepler Cheuvreux.

So my first question would be on the CapEx outlook. I was wondering if you can elaborate if you think in the medium term, there is more potential for further reductions if interest rates go up higher. And if you can give us an indication what is the minimum CapEx level you need to spend without jeopardizing your operational development and your 2 reduction targets?

Thomas, thanks. I will take this question. For the time being, we feel comfortable with the EUR 35 for this year. We are very flexible, as we pointed out in our presentation that we can adjust on market developments. We have high inflationary tendencies. We also have a high demand for our product, which reduces the need to invest into the product because it's a very tight market. But at the same time, as you said, we have also the necessity to follow our CO2 reduction part. We laid out various initiatives to cut the cost per ton of CO2 reduction and work on these measures and all this will then fit into our revised or new CapEx strategy for the time being. It's a bit too early to say what is the minimum requirement and how this will look out in 2024. We will give you then an update on in November, how this figure will look like, but be assured that we look at every euro we spend and aim to reduce it.

The next question is on financing costs. Can you give us an indication at which financing costs you were able to roll forward the debt due in 2023 and what your spot financing costs for secured financing, depending on the maturity would be now?

Yes. Thomas, of course. So firstly, on the 2023 maturities, a portion we repaid, so we didn't refinance them. Only a very small loan we rolled and that was done for a 10-year at 3.63%. And I would also assume that in the current environment, and we haven't done a recent print but we obviously get indications on a daily basis from banks as well as brokers. Secured 5 years probably at a spread of around 120 basis points, 110, 120 and unsecured same maturity between 180 and 200.

And my last question is a technical question on the portfolio valuation. I've seen that your net initial yield increased 40 basis points from 3.2% to 3.6%, whereas the gross yield remained relatively stable at 4.2% year-on-year. Can you please explain the difference in this development?

Thomas, I think you're referring to the EPRA net initial, right? I need to know that because the EPRA numbers are a bit different. I will get back to you after the call, if that's okay.

The next question is from the line of Charles Boissier with UBS.

First, on disposal, you mentioned you're in the process for more than 5,000 units. So having sold 156 units in Q4. What makes you confident you will dispose 5,000 units this year? And what are you changing, if anything, in terms of price, location, lot size to be more successful with disposals this year?

Yes. Thanks a lot for the question, Charles. So we will not change anything. And once again, so it's not the promise to sell 5,000. It is just the portfolio we currently bring to the market. Certainly, we are focused still on the lower quality assets. We have in our portfolios or portfolios which just do not fit regionally like the one we have put for sale bought from Adler last year in Eastern Germany. So that is what we bring to the market. But once again, transaction market is very silent. You might also heard that from brokers active in the market, assumption is that not more than a couple of hundred million of euros trading volume in the first 2 months of 2023. So therefore, we will not change our approach, but stick to it and certainly work very hard to sell those assets we want to dispose of.

Okay. Very clear. And what you mean by lower quality, can you comment what are the criteria? Is it in terms of EPC rating, locations, what are the criteria when you identify the lower quality portion of your portfolio?

Those are assets we have in our books with lower efficiency classes in locations where we do not see the affordability being given if we invest further into that asset, for example. And certainly, there are other players which might look differently at that certain location, and therefore, we try to dispose of those.

And I have a second question on credit rating. So based on Moody's report, the potential factor for downgrade would be LTV rises and remains above 45%. Do you expect LTV may temporary rise above that overall at H1 that possibly could be the case in value a little further from here? And how much time would you have to bring LTV back to below 45%?

Look, first of all, I think we are operating in a very uncertain environment. I cannot give you any guidance on valuation outlook for H1 yet. And of course, where the LTV will end up as much a function of value go in the future. So unfortunately, I don't have the crystal ball there. I think we are, of course, as usual, in close dialogue with Moody's. I think we've shown that we are very, very focused on doing everything to optimize our balance sheet. We have paid back some of our debt. We will -- we are planning to repay more over the course of the year. And we have announced the dividend cut as well to preserve cash and optimize our balance sheet. So I think Moody's is hopefully acknowledging the efforts we are making, I cannot comment on the stance that they will be taken. So I think we should continue that discussion after the H1 numbers when we see more clearly the LTV and valuations are headed.

Okay. And a question on valuation . Would it be possible in the future to also provide the valuation split not just between high-growth, high-yield market, et cetera, but also by EPC rating. It seems that some of the values are saying that the value erosion from the energetically weaker assets is fast increasing, which justifies obviously, your strategy to significantly improve the rating for the lower quality asset or sell assets, as you just mentioned. But would it be possible to provide a bit of a sense of the value erosion you're seeing from those energetically weaker assets?

That's a good question, Charles. It's not how we are operating the model. So I think that would require more significant changes to our valuation methodology, which is something that I can't promise you right here. I think we take this away and we'll have a look at what we can do in that regard.

Okay. And finally, a clarification on dividend. My understanding is you have said now that you've suspended dividend for 2022, you are not looking to make any change to your guidance for 2023 and that it's confirmed on the basis of AFFO, but not subject to potential suspension.

Exactly. That's the right reading of our today's presentation.

The next question is from the line of Markus Kulessa with Bank of America.

First, I just wanted to come back to Charles' question on the progression of the disposals. Can you give us -- or maybe I missed it information on where you are year-to-date on the progression of these disposals? And are these really aimed within this year?

Yes, Markus. So we have disposed of around 50 units within the first weeks of 2023. Once again, I can reaffirm that we bring 5,000 units to the market. We are in different stage of negotiation process. It's very difficult to promise any numbers in a highly uncertain market environment. And I think I also gave you some numbers with regards to the complete market. So it's nothing which is a peculiar situation for LEG, but it is a market-wide phenomenon.

Okay. So 50 units in basically year-to-date?

Year-to-date.

Okay. Then I have a question on your guidance for like-for-like rental growth. So you guide 3.3 to 3.7. If I take this year's 3.1, and I would just add the 0.9 additional one-off impact from the CPI indexation [indiscernible] units, I would get to 4%. Is your guidance conservative? Or is the difference due to your lower modernisation CapEx?

Well, it's a mixture of both. It's conservative, and it also has an effect from lower CapEx. So we started very well in this year in terms of rent growth and see the dynamics, in particular, when we relet flats. You know that the rent tables have a significant lagging effect from all the effects we see in the new letting market. So -- and we are just 2 months and a week in this year. So we started well. I think it's conservative range. I expect to be more there on the upper end of the range, but we will clarify this and maybe short and sharpen this when we are further down the year.

Okay. You also, maybe the second year, not request, but what would be good. You did it in the past, you splitted the rent growth by reletting and modernisation separately, which would help now when you cut down the modernisation to we have to assess more of the pure relating impact if you can give some info in the next reporting. My last question, sorry, would be just on the Adler. if I understood well, you had the goodwill impairment of Adler. Maybe just come back on what was the driver behind it? And the goodwill was -- is it only due to a decline in asset values? And if yes, how much have the asset values decline for this portfolio versus your portfolio?

No. Look, I think that we tried to make this very clear already in the H1 publication as well as in Q3 that we were expecting this impairment. You know that we impaired all our goodwill, not only the Adler one, also the rest already in H1. And this is driven simply by the [indiscernible] impairment test, which was conducted as a result of the significant rise in interest rates, and as a result, a significantly increased weighted average cost of capital in our model, and that led to the impairment of all goodwill. The Adler goodwill would already have been impaired at H1 as well, had it already been there. The problem, it was not there yet, because from an accounting perspective, the purchase price allocation of the Adler acquisition, because the transaction happened so late in 2021, was only completed in Q4 of 2022, and we could, therefore, only impair that goodwill in the second half. So there is nothing to be read into with regards to valuation of the assets. It's just a reflection basically of the goodwill impairment test that we have to do as a result of higher interest rates.

Okay. And the Adler portfolio you bought, where you were happy with them, so they didn't decline more than the rest of your similar assets?

No, no. From a valuation perspective, not at all. I think Lars mentioned in his part, quite the opposite in Wilhelmshaven, we had the most significant increase actually in valuation over the year because we have got this at a very attractive valuation last year.

The next question is from the line of Thomas Rothaeusler with Deutsche Bank.

A few questions. The first 1 is actually on leverage. I mean, do you think sticking to the old 43% LTV target is reasonable or should it be much lower nowadays? I mean, especially with the risk of lower property values and much more expensive financing costs. Maybe some color on this from your point.

Yes, Thomas, of course. I think there's obviously a couple of elements to LTV that why is it relevant? I think, firstly, it is relevant clearly from a ratings perspective and from a covenant perspective. I think from that perspective, the 43% is something we are comfortable with. The other element is clearly financing costs. You're absolutely right. I think the higher the financing and interest costs are, the lower the LTV should be. Having said that, I find it very hard to say what exactly is the right number there because I'm lacking the transparency as to where rates will stabilize medium term. Clearly, if they were to be at the current level or go up further in the long run, that would have a significant impact on our FFO because we would have to do refinance at those levels over the next years. But this is an impact that only shows effect really, really slowly. That's because we've a very well diversified refinancing or very well staggered maturity profile such that we will only see the effect over time. And in the meantime, obviously, rates will come to a new normal, which will then determine where the right level of LTV should be.

Another question is, I mean, I'm not sure if you want to answer, but what likelihood would you attach to the need to offer a potential rights issue to strengthen the balance sheet, let's say, in the course of this year?

Thomas. I don't think that this makes any sense. So running scenarios in a situation like the 1 we are currently into with high uncertainty around is look, the world has so much changed over the course of the last 12 months, and it's going to change for the next 12 months, that I don't think that putting any likelihood to that makes any sense.

Okay. I understand. The next question is actually on your earnings guidance. I mean what are the key assumptions regarding refinancing?

Yes. So I think I tried to highlight that with our outlook on financing strategy in the presentation. So basically, for this year, we have more or less addressed the refinancing. And for next year, we are assuming to roll the loan maturities to repay a portion of the bond and to refinance the rest of the bond with a mix of different debt instruments. And this is kind of the assumptions that are underlying the earnings guidance as well.

Okay. And the last question is actually on BCP, the [indiscernible] deal. I mean, is it possible to get any pricing indications from your side? And were you involved in any decision-making here?

Yes. And Thomas, certainly no, we have not been involved and certainly it's all in the hands of the BCP Board. And we still and also are asking questions to get a clear understanding of the transaction, but unfortunately, have failed to do so. And up to now, that certainly we will follow up on that. And we have more light to be shed on that, happy to share that also with you.

The next question is from the line of [ Jon ] [indiscernible] from with Kempen.

I just had 1 left. On Slide 13, you mentioned that the average ticket size for disposals were at 50 to 60 units for 2022. Given your comments in the Q&A, is it fair to say that you're not expecting this to improve in the short term? And how does this relate to your target to sell up to 5,000 units?

[ Jon ] it's -- you're absolutely right to assume that the market has even now seen smaller ticket sizes than the 50 to 60 and that's even not the normal ticket size anymore. That's also the reason why we are now back to that very low transaction volume within the first 10 weeks of that year. And therefore, it will be certainly a huge difficulty to reach the 5,000. But once again, we do not try to reach the 5,000 if we are in the market with 5,000, and we will certainly optimize the results for our shareholders.

The next question is from the line of Simon Stippig with Warburg.

First question would be in regard to portfolio valuation. And I saw that in your stable market cluster, you had a negative outperformance in revaluation compared to the other clusters. Could you hint to any reasons for that?

No, there is no specific reason to that. You know that we are always looking at different clusters. It will also depend on what valuations have done in the previous month. There is nothing particular that we're taking out in those markets.

Okay. Great. And the second 1 would be in regard to capital allocation. Do you have -- are there any changes to your BCP stake? Or is there any further plans with it, and you're undertaking to maybe liquidate or get a cash inflow from this stake?

Simon, I think we still have all the options we've described during the last calls still on hand. And certainly, we will evaluate those going forward. And certainly, currently, we still wait for the decision of Adler, whether they want to dispose of the BCP share. We are not aware of that. And certainly, we are in close contact with BCP to clarify about and on their further strategy. And therefore, we certainly will evaluate all the options we have on hand to manage that exposure going forward.

Okay. And maybe a follow-up on that. Is there any impediment you're seeing in these options you're undertaking? Meaning, for example, you couldn't sell a stake into the open market, for example, in very small volumes.

Yes. So once again, Simon, we are looking at the different we have not decided to change our current exposure. But certainly, we will maximize the value of those optionality for our shareholders going forward on that share.

Okay. Maybe then to the next question. And what I just tried to understand, again, in your decision-making of suspending the dividend is based on the November -- on your November disclosure of figures and financial condition method by, for example, your unsecured term structure hasn't changed. The portfolio valuation is exactly in point in your guidance. The transaction market has been muted and still is and probably will take some time to pick up again. So just to understand your -- the background and also on the basis you have the 9 months 2022 disclosure in November towards making this decision now. Could you just please give me a little bit more insight into how that developed? Because either you're seeing a very dim future for German residential real estate and specifically in your portfolio because [indiscernible] are obviously still are potentially paying a dividend or you have other reasons which I would really appreciate and kindly ask you to answer.

Yes. Thanks a lot for that question, Simon. And unfortunately, the major reason for the decision being brought forward now, the suspension of the dividend for 2022 is driven by the high uncertainty in the current market. Interest rates have risen dramatically. And that is also the reason why we have a very silent transaction market. We have low visibility on the current valuation. So therefore, we just wanted to take whatever level we had at the on hand to strengthen our balance sheet for an upward market development. Whether that is going to happen, it is difficult to predict. Uncertainty is high, and therefore, we thought ourselves to be well advised to now strengthen the balance sheet and do that at the best interest for our shareholders.

The next question is from the line of [indiscernible] of Bank of America.

Just coming back on the asset value decline for 2023. I understand there's a lot of uncertainties and you can't really comment or give guidance on future evolution. But can you please comment on what you've seen so far this year?

Yes. So far, once again, we've been able to sell at book value. And that is what we can currently share. As soon as we are having a better view on the overall market and that will with our Q1 numbers, we certainly will share that in May with you. And for the time being, once again, it's very difficult to predict because transaction markets are so incredibly silent currently.

Okay. And my second question is coming back to the rights issue question. I understand that there is a lot of uncertainty still and you can't give any likelihood of it happening or not. But can you please tell us what could trigger such a transaction because you don't have a lot of refinancing needs. There is no liquidity issue, there's headroom under your covenants. So what could trigger it really?

Yes. So I think we also answered that question, on -- I think it's difficult to now run scenarios and say if that is happening, we are doing that. And for the current uncertain environment, I think we have now once again prepare to -- for in [ further ] market development. And by now suspending the dividend, strengthening the LTV, you've seen that the impact -- positive impact is 160 bps. So that's substantial. And therefore, we feel ourselves to be well prepared. Susanne has done a tremendous job working on the upcoming maturities and you also heard the upcoming maturities for 2023, all of that has been solved. We are already now looking and eying into 2024, and also for that year, but also for 2025, we have a clear path for refinancing. So therefore, from our perspective, we are well set. And now we just need to wait as how the further market development evolves over the coming months.

The next question is from the line of Jonathan Kownator with GS.

The first 1 on the organic rent growth going back to that question. What were the latest [ niche ] figure releases? What are you seeing on the ground for market rent growth? And I appreciate it takes a lot of time to trigger through your like-for-like rent growth. And also, can you give us perhaps the contribution you're expecting for CapEx in 2023? Because again, this close to 0.9% from last year make it perhaps a bit conservative. That's the first question.

Jonathan, I am happy to take the question. On the rent table, we see seasoned rent growth, it's always quite difficult. We have very many locations and the rent table adjustments is quite diverse. It's -- it varies from region to region and from location to location. What we see is a significant rent growth in asking rents for churn. We see, therefore, reletting double-digit rent growth. We expect this to roll over into the rent tables over the next years. We have seen that in the past that in times of high inflation with a time lag, these inflationary tendencies are reflected in the rent tables that takes some time, and there's some regulation and it needs to be fitted in there, but this is what we've seen in the past, and we have no indication that this will not happen in the future and at this time. On the question...

You -- sorry, sorry, are you able to be a bit more specific in terms of how the type of growth as you've seen, for instance, for they -- just needs to be released in 2023. You're seeing an acceleration on these metrics, but your guidance doesn't seem to be pointing to that. That's the question.

Well, Jonathan, I think the proxy for the rent development is better, the asking rent we see in the markets than what is in the each figure because the rent tables always reflect under the past and not the actual times. And even if rent tables come out today, they may have a cutoff date early last year and only reflects the tendencies and the market developments until this cutoff of date. So I don't really think that this helps to give you some real flavor going forward. But what we see is the real significant upward shift in asking rents despite lower investments into the flats when they churn. And on the CapEx, and it's a bit -- we -- I think we have some -- we always do some shift between CapEx, rent growth and rent table adjustment rent growth. We want to keep the flexibility to also be able to shift maybe so the one or the other modernization project into next year and have the effect from rent growth on the next year when we are in a position to compensate the missing rent growth due to maybe higher dynamics in churn-driven rent growth or from dynamics from rent tables. So we guide on the overall figures that we want to have the flexibility to have this. We do not guide on the split between the separate drivers to have the flexibility to make the most out of every euro we invest.

So perhaps to frame the question differently, out of the 3.1% that you had last year, can you remind us the contribution that each figure increases helped to that?

Yes, I can give you this. But I think I had it in my presentation. It was at 1.8% from rent table and 1.3% from modernization and reletting.

Okay. And so the 1.8% from rent table and then the 0.9% you described from a cost base, in effect the 0.9% is incremental to 1.8%, right? So that would be 2.7%?

Yes. For next April, we are using the same base.

Okay. All right. That's clear. Next question, sorry, on the subsidies and your investment going forward. Can you help us understand the new subsidies that have been introduced. I think you alluded to it during the presentation in serial modernization. What type of yield on costs that you're now able to achieve [ thanks ] to these subsidies on these projects?

Yes. So subsidies regime seems to be something very much in favor of German federal politicians. They love to change it on a regular basis, so which makes calculation as well as planning quite a stretch for companies. And currently, we feel comfortable that we are on the right path. I think with serial refurbishment, that's now gaining a 15% additional benefit of subsidies. And together with the worst performing buildings and subsidy of 10%, you can reach up to 25%. And that's certainly a major driver for us and Renowate. So therefore, we think we are on the absolute right path, and that certainly will help the yield going forward. As you know that we are starting at Renowate with a higher than the traditional modernization costs, but we are planning to bring that down going forward. And certainly, that subsidy of 50% will be a big lever also for that year. So for the time being, we stick to the former number, we, I think, shared with you that 5%. But certainly, we are trying to improve that going forward by scaling up Renowate and certainly benefiting from the serial refurbishment bonus and getting -- and being -- a subsidy and being received there.

Okay. Just to follow-up as the last question. Are you expecting more subsidies to come or more regulatory changes from the government? And are you expecting any further benefit from any European program that are currently discussed with heat pumps being also a key component of those as an answer to the U.S. [indiscernible] program?

Yes. Unfortunately, uncertainty around subsidies is as high as the uncertainty around the further valuation of residential assets. So there is still ongoing discussion whether our heat pumps be part of that subsidization program or not. And all of that is very unclear. So we just need to wait until the new publication of the GEG, which you might be aware, is under strong opposition by the liberal party because the proposed time line for changing fossil fuels being used in heating systems and to be replaced that as soon as 2024 has been pushed back. So we also need to wait how that discussion is evolving. And that certainly will then drive subsidies and also the decision on how high those subsidies are going to be going forward.

Okay. And no update on the previous plan from the government to introduce warm rents, is that's gone called, shall I say?

Yes. At least we are not aware that anyone at the current moment is really discussing that to any depth. So therefore, it seems to be off the table.

The next question is from the line of Andres Toome with Green Street.

I have few questions, and I'll go one by one. Firstly, on the disposals. I'm just wondering where are you seeing bids coming in for bigger portfolios at the moment?

Currently, we are not aware of any bids for bigger portfolios coming in.

So within your own disposal pool as well as you're trying to move more size, have you taken in bids? And where are these sort of reflecting the pricing?

Unfortunately, we have not received any bids for bigger portfolios, Andres.

Okay. Understood. And my second question follows up on the previous ones, just on the potential equity rights issues. Obviously, the LTV is above your internal target and presumably, it will go higher as more valuation declines come through. And as disposals are not really moving, I guess is the potential remedy through equity ones being discussed at least? And I suppose you don't really need 25% reported gross asset values to come down before you get into trouble. So where would be the level you would feel that it's time to bring in extra equity?

Yes. So at the current moment, once again, I'm only able to reiterate that the uncertainty around the future development of valuation is high. We do not have clear sight currently of what is going to happen in the market. You know that the supply is going to cease over the course of the next 2 years and no new, especially affordable housing will be created. At the same time, we have a strong inflow of people coming into Germany. All of that drives rents up. You have heard that from Volker now quite impressively that we are seeing asking rents rising as strongly as double digit. So therefore, from our perspective, there are also strong pushes up with regards to the pricing. At the same time, we have that strong interest rate development. Therefore, I think it is just premature to now discuss any scenarios. And we will observe the market. And once again, I think we have decided to strengthen our balance sheet as of today by the suspension of the dividend that we have done the utmost and to be prepared for also an adverse market development going forward.

And would you be able to give some color around discussions you might be having with credit rating agencies? Are there certain points where they feel more concerned about that at the moment?

Yes. We speak with Moody's on a very regular basis. We will also, of course, have another discussion with them now that the results have been published. You know that we have a negative outlook on our ratings since last year, reflecting the deteriorated operating environment. So I can't give you more color than what is in the rating report. I think they clearly monitor the situation just as we do. And we are, from LEG's perspective, doing everything we can to stabilize our balance sheet. We've made changes to our investment scheme. As you know, we have significantly reduced spend per square meter. We have now announced the cut of the dividend. We are working on redeeming debt rather than refinancing. We are not adding any incremental debt at all. So from that perspective, I think we've said that we are working hard to do what we can from our own sources to improve and stabilize the LTV.

My next question is just around environmental CapEx. You've presented quite a few measures in this report. Do you think these will reduce also the estimated cost of environmental CapEx and energetic refurbishments versus what you presented during, I think, it was back in 2021, when you had that dedicated ESG call? I suppose also the sort of the second half of that question is, what sort of yields on cost these measures provide and also the energetic refurbishment more holistically?

Yes. If you take a look at Page 34 and 35 of the presentation, we have once again shown you where we are currently standing with regard to reduce the CO2 footprint and market base. You see we are now standing at 28.3 kilogram, which certainly is a very substantial reduction versus the starting point in 2020 of 34. At the same time, and that's certainly a majority driven by the air to -- heat pumps and strategy we are now following, we've been able to reduce the total volume of investments from around EUR 1.4 billion to EUR 1.6 billion to now around EUR 1 billion. That is certainly a very strong impetus we are having there. And at the same time, that certainly will help to also work on the yields. We are certainly exploring how we can use that new strategy to also enlarge the contracting offer, we are having on hand via our [ 2 to ] company, ESP. And all of that certainly is meant to add substantially to our services FFO or AFFO contribution for the next years.

And on a project level, those new measures, are they sort of improving cost efficiencies? And what sort of yields on costs are you underwriting at the moment for energy refurbishments?

Yes. So there, once again, for the current projects, I think we are still at the 5% level. And going forward, that certainly is going to improve because the cost per tonne of CO2 is so strongly reduced and at the same time, once again, Andres, we try to bundle that offer of contracting to us, which certainly then improves services, FFO or AFFO contribution going forward.

My final question is just around the cost of bank financing as it stands today and as you're negotiating new terms for refinancing and adding new bank debt to refinance bonds. What sort of margins are you seeing? Have they expanded from sort of 3 months ago? and piece of bank criteria also for LTVs and ICRs is getting tighter?

Yes. So we are in ongoing discussions with banks. So I haven't received all the feedback on 1 secured piece that we are working on right now. So it's a little bit early to answer the question finally. But from the indications we've received more recently, I would say that 4-, 5-year as I said earlier in the call, for 5-year secured financing, we will probably have a margin of 110 to 120 basis points. You will remember like a year ago that would have been around 80. So there is a widening that we observed also in the bank market, which I don't think comes to us surprise. I think we are not so much with regards to our portfolio, but in general, we hear from the banks that clearly they focus more on ICR than they used to. I think that is something that clearly has been more part of discussions, but it's not a concern, particularly in our case. And lastly, I think the aspect that has become a more relevant part the discussion also with banks is ESG criteria. I think that is something that, interestingly, of course, you know some discussions with you, but also from the capital markets debt, we had a lot of discussions around that in the last few years and the banks are now catching up on that as well and that has also become a more relevant part of the discussion. But I think with all the strategic moves we are making on ESG-related topics as Volker and Lars have highlighted in the presentation, we feel also that we are in a very good position with regards to those questions.

The next question comes from Kai Klose from Berenberg.

On Page 40 of the presentation. First of all, could you maybe give a split again on the increase for the allowances on rental receivables. You mentioned that in your statements, but maybe a bit more how much was from provisions for not yet invoiced operating costs and how much came up newly in maybe Q4 or Q3 last year? And the second question would be on the increase of the nonrecurring special effects. I think that was just EUR 11.6 million as of 9 months. And now is it EUR 26.4 million. So what caused increase in Q4?

Okay. So firstly, on the provisions on receivables, basically, we have, in total, provisioned EUR 15 million in that space. We have followed, as in previous years, the guideline that we basically take the non-invoiced operating costs as a basis. That number has, of course, increased because we have higher make-whole payments that tenants will face as a result of the higher energy costs, which I guess has been much discussed. And in the past, we have provisioned 12.4% of that. And currently, we are doing 20%, and that's reason just of precautionary measures. We have discussed that very much in detail with our auditors as well. It's difficult to know whether this is the right or the wrong number. We feel it's a cautious approach, but clearly, we have not had experience in the past with a similar situation where we had tenants that were faced with such an inflationary environment and as such, also such a high increase in operating costs. Then the second question on net recurring special effects in the admin department, I would need to get back to you on that. I don't have the details in front of me right now. Frank will relate it back to you after the call.

And maybe a very quick follow-up on the other services, which you mentioned had a contribution of EUR 50 million to the FFO from EUR 39 million the year before. Was there a bit of a catch-up from somewhat lower contributions in '21 and 20 -- sorry, in 2021 due to COVID or can we expect similar uplift, similar development for '23 in terms of contribution from these activities?

No, I think that I wouldn't write this forward. I think the Services business is in nature, very different from our normal recurring rental business. As Volker said in his part of the presentation, the majority of those EUR 50 million came from our subsidiary ESP as well as TSP, the small maintenance company and the energy services company and especially on the energy services side, the business is more volatile because it's a very nature of the business. So I wouldn't predict that the number will increase by the same amount in 2023.

The next question is from the line of Andre Remke with Baader Bank.

Just 1 question last is on disposals. Do you consider to intensify the privatization business of units? And if not, which I assume, is it the fact that it seems to be too difficult to build this business up? Or do you believe that private investors are, let's say, not really interested to buy or in the times because, in general, I assume that margins could be more attractive and simply the fact that the lot sizes you're dealing at the moment are coming very close to a kind of privatization business? That's the reason why I'm asking.

Thanks a lot for the question, Andre. So we have full team of 4 people doing privatizations for us in the market. Unfortunately, exactly those households, which are interested in buying flat from us, are those highly impacted by the changed lending behavior of secured banks in Germany. Because now the demand for equity has raised substantially. At the same time, interest rates have also raised substantially. So exactly those people are currently having difficulties to gain the necessary bank financing in order to enable them to then really buy into flat. So therefore, from our perspective, the chance to really speed that up and do bigger number of privatization is small, so therefore, we do not want to invest more resources into privatization. Certainly, that might be instead of the 100 you've seen last year and 150 this year, but it is not -- nothing where we really see now hundreds of units is being privatized.

Okay. That's clear. Then probably a second question on -- and the last question on to Volker, probably on the heat pumps initiative. There are large discussions on the availability of those heating systems Germany-wider -- German-wide. You mentioned the strategic partnership with Mitsubishi and that plan rollout this year. So is the availability for LEG due to the partnerships already secured? Or is it more kind of hope that you get the assistance?

We don't sell hope usually, it's secured and it's an air-to-air heat pump. It's not an air-to-water pump. So the market for these heating systems it's much, much, much broader, and it's a worldwide produced system that is just has not yet been used for the German residential market, and we are the first pioneer to use it for this, and we have great experiences with our 12 apartments that its cost wise, energy-efficient wise and also from a tenant acceptance perspective, a product that we are very, very confident to roll out and that we think it's just the first who use it for this kind of purpose and are very comfortable to scale it up and to use it significantly and it's a secured production pipeline.

The next question is from the line of Paul May with Barclays.

Hopefully slightly different to the previous ones. Just wondered on Page 164, deep, dig and deep into the accounts. The values assumption seems very strange given the discount rates on the valuations have come in by 22 basis points, seeing sort of a lowering of the discount rate there and cap rates have also compressed by 12 basis points over 2022. This is despite the 300 to 400 basis points increase in the cost of money. Can you just explain, particularly on the discount rate, how that's a logical? And I've got a second question on something else...

Yes, Paul. Thanks for the question. I -- we are still looking for the page because we are referring to the annual report, and we are in a room here, so trying to locate the page. But I can on high level answer that for sure. So basically, the discount rates that we use for our center valuation methodology, and that is kind of market standard that is also what CBRE does, JLL does, all our peers are doing. This is not a weighted average cost of capital model. It's an IRR model. So basically, the discount rates are determined based on the return requirements really of someone who is owning a property. And therefore, the reflection of the interest rate is not one for one. So it's much more -- and we try to explain that in the past. It's much more driven by transaction multiples, but also by assumptions around cost, assumptions around rent increases and things like that. And then basically, by that, you come up with internally required rate of return, and that is your discount rate. We do that on a market-by-market basis, so very regional, and it is dependent also on what we see, as I said, in the transaction market also in terms of offer prices for property, if there was a lack of liquidity in the market. And you know that this will take time to reflect the interest rate environment. I think historically, from previous cycles, it has, on average, taken around 12 months for interest rate increases to actually reflect in the discount rate of valuation models. And that's exactly what is happening here. I think there was 1 particularity here which is that in the higher-yielding market, the discount rate has improved more than it has in other markets and is actually, currently is a little bit lower than in other markets, and that is due to the reason that we had the strong valuation uplift in Wilhelmshaven.

Just to try and understand how you believe that it's -- given the change in the cost of capital, there's a lower IRR requirement for investors at this point in time. It just seems quite strange. And as you mentioned relative to transactions that have been happening, I mean, Europe-based data would indicate Germany apartment prices are down 15%, 15% from the peak in March. Is that not a more relevant metric given that there's transactions that are happening versus asking prices, which are arguably being kept artificially too high as a metric?

Well, Paul, I mean, Lars, I think had tried to explain as well that the disposals we have actually made happening at book value. So I think this is the most relevant transaction experience for us actually. I mean we've had these discussions with our valuers at CBRE as well. And we are looking at assets not as in a portfolio context, but we are looking on our properties on an asset-by-asset basis. And in the asset-by-asset market, and that's, I think, the same in other regions as well, but very -- clearly, it is the case in Germany. It's individual families, private people, are buying a house that has not only the, maybe the same approach that a large investor has, but they are buying those properties for a different number of reasons. Albeit they want to put money in a safe place rather than in the bank where inflation might eat it up. It could be that they are very regionally attached to a property because they have lived next to it or things like that. So this market is not acting in the same way as an institutional investor market, and that's how we value properties one by one. And if we see transactional evidence, then we don't see a reason to deviate from what we see. And again, this is the standard approach, how property is valued in the German residential market by ourselves, by our peers and by the big appraisers, and I don't think we would want to or could change that overnight.

Okay. I think I have a bit different view on that thing. The second question I have is on the remuneration change in the policy. I appreciate you did this in Q3. I think specifically, you said at Q3 that you wouldn't benefit from a reduction in CapEx. However, looking at the target numbers and your AFFO guidance, which was increased today due to the lowering of the CapEx, it looks like you're going to get paid relatively well for on the new policy versus what would have happened if you'd maintain your old policy. Just checking how that reduction in CapEx is benefiting you as a management team.

Yes. So -- and the proposal -- and obviously proposable to the AGM will be to adjusted for 2 metrics. Metric one will be FFO per share being replaced by AFFO per share. And the second 1 will be the adjusted EBITDA margin instead of the net rental income target we had up to now. And that was derived from intense discussions with the majority and the major shareholders of that company. They have been in favor of those 2 metrics. So there was an intense discussion and therefore, and Supervisory Board came up with that proposal. And so we wait and see what AGM is going to take as a decision in May 2023 on that.

But just specifically on the target values per AFFO, EUR 1.50 seems to be quite materially below the guidance of EUR 1.69 to EUR 1.88 you've given for AFFO. And that guidance has increased because CapEx has come down. And as I say, at Q3, you specifically said you would not benefit by reducing CapEx in terms of how you were paid. Just wondering how to reconcile all of those various things because it looks like you are getting benefited by reducing CapEx?

Yes. And the investment per square meter target has been discussed with investors, it was not something investors thought well advised to include into the STI targets, so that would have been excluded and therefore, Supervisory Board has decided to now stick to those 2 financial targets.

Okay. I mean our conversations with investors would suggest otherwise, but that's fine.

The next question is from the line of Manuel Martin with ODDO.

Just 1 follow-up question on the dividend guidance for 2023. As you explained before, the dividend guidance does not include the term subject to further market development anymore. So it seems that LEG is really determined to pay a dividend of 100% AFFO. On the other hand, the market uncertainties are high. It's difficult for you to predict where the valuations could go to. So what makes you confident to be able to pay dividend in 2023 compared to 2022?

Yes. Thanks a lot for the question, Manuel. So that is -- I think we have now taken all the measures we have at hand. You heard from Susanne, I think now a few times, that we are well prepared with regards to refinancing. We are strengthening our balance sheet by suspending the dividend. So therefore, we have the confidence that what we are operationally earning and then can also be spent next year. And that is why we have removed that subject to close and from the dividend for 2023 because we are very convinced that if we are sticking to the strategy now and we have set out, which is a very much cash focused one, we will be able to pay a dividend as of -- for 2023 in 2024.

The next question is from the line of Neeraj Kumar with Barclays.

So my question is around your refinancing plans. If I may ask, how much incremental secured debt that you can take on while complying with your bond covenants? And given the compression between secured and unsecured margins since Q3, does the unsecured market look attractive to you now?

Yes. Thank you. Very good questions. I think the first one, it depends a bit on how valuation evolve as well, clearly. But we are comfortable that we can take incremental secured debt of over EUR 1 billion at this point in time. But as I said, we are not looking to do that much incremental debt. The plan is to do small portion of incremental secured debt, but other than that, mostly roll existing secured debt. I think you're right that definitely, the spread between secured and unsecured markets has narrowed. And by the commentary I made around various different debt instruments, I wanted to do something and leave the door open for unsecured instruments as well. I think there is obviously the plans for private placement, things like that, that could take place. Again, we need to monitor the market very closely, but you can be assured that we are looking at all available options and will put together a mix of instruments that will best suit our needs.

The next question is from the line of Rob Jones with BNP Paribas.

Yes, it's Rob Jones. Apologies my question has actually just been asked by Paul May, so I'll pass at this stage.

The next question is from the line of [ Paul Ru ] with [indiscernible].

Just 2 on my side. The first one, coming back on the dividend. As I understand it more -- is more linked to the liquidity on the investment market than the AFFO. So for 2023, if the liquidity doesn't come back this year, basically, can we expect the same policy? Or you are confident that even if the liquidity doesn't come back, you will be able to pay dividend next year? That's my first question.

Yes. Thanks a lot for the question, Paul. So very happy to reaffirm that we are planning to pay the 100% of the AFFO in 2024 for 2023. That is the operational liquidity, we are having at hand at the end of this year. So therefore, we are willing to pay that out. And certainly, depending on the disposals, we are able to execute also a certain share of the net disposal income, we would add to that, but that's also something we will look at over the course of the next month.

Okay. And just another question to come back on the change of your remuneration policy. Can we have this year, for example, an increase in your package where you are cutting the dividend or it's not possible?

I think that is being included in the long-term incentive where you can see that this is being dependent not only on the share price, but also on the total shareholder return. And you will see from the compensation we have received this year for the last year in the LTI that we have not reached our targets there, so that has been substantially being reduced due to the lower total shareholder return to shareholders. So that is aligned between our shareholders and the management team.

There are no further questions, and I hand back to Frank Kopfinger for closing comments.

Yes, thank you. And obviously, our windows have been as strong as our balance sheet, and we stated also on calls with this call. So thanks for your questions. And as always, should you have further questions, then please do not hesitate and contact us. Otherwise, we are looking forward to seeing you at the upcoming roadshows and conferences. Please note that our next scheduled reporting event is on the May 10, when we report our Q1 figures. 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.