LEG Immobilien SE (LEG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Francie, your Chorus Call operator. Welcome, and thank you for joining the LEG Conference Call. [Operator Instructions] Being my pleasure to turn the conference over to Mr. Frank Kopfinger, Head of Investor Relations. Please go ahead.

Thank you, Francie, and good morning, everyone, from Dusseldorf. Welcome to our full year 2023 results call, and thank you for your participation. We have on the call our entire management team with our CEO, Lars von Lackum; our CFO, Kathrin Köhling as well as our COO, Volker Wiegel. You 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, and good morning also from my side. I will kick off today's presentation by summarizing the key highlights. Afterwards, Kathrin and Volker will provide you with more details on our strong operations and financials. Let me start on Slide 6. In 2023, we harvested the fruits of our strategy shift announced in November 2022. The focus was on cash generation and preservation to make us weatherproof for different adverse scenarios for LEG and the residential industry in 2023. Today, I am proud to say that our cash-is-king strategy fully paid out. We have not only reached an AFFO of EUR 181.2 million, which is substantially above our initial guidance range of EUR 110 million to EUR 125 million, at the same time, we delivered on our investment guidance of EUR 35 per square meter as well as on our EBITDA margin of 80.6%. Therefore, we are convinced that based on a resilient business model and the right business setup of the company, LEG can resume dividend payments for 2023. Together with the Supervisory Board, we will propose a dividend of EUR 2.45 per share to the Annual General Meeting in May. This is in line with our dividend policy, representing 100% of the AFFO while keeping net proceeds from disposals of around EUR 55 million to strengthen the company's balance sheet. We consider this proposal to be a balanced approach between a cash return for our shareholders and capital preservation to strengthen the balance sheet at the same time. I would also like to focus your interest on some further highlights. Firstly, our business model is one of the most robust in European real estate. As a provider of affordable housing in Germany, we benefit from the strongly increasing demand for our product and the outstanding performance of our platform, allowing to manage our asset base most efficiently. The results are reflected in another decline of the vacancy rate to a once again a record low of 2.4%. At the same time, rents on a like-for-like basis increased by 4%. This includes an 80 bps contribution from the cost rent adjustment for our subsidized units. Our cash geared steering and our excellent operations ensured the generation of a strong operating cash flow of EUR 447.9 million, a strong increase of 15.1% compared to 2022. Secondly, in the second half of 2023, we saw another devaluation of our outstanding assets of 4.9%. This is in line with the guidance given in last November of 4% to 6%. For the full year 2023, the devaluation amounts to 11.9%. Taking into account the expected rent increases for 2024, our portfolio is approaching an attractive gross yield of around 5% from a very resilient business model. However, devaluation impacted LTV and increased it to 48.4%. This is above our midterm target of 45% and as a management team, we are committed to bring it back to its target level in the midterm. For the time being, we consider LEG to be well positioned due to our excellent operating platform, securing substantial cash generation as well as a robust financing structure taken care of by Kathrin and her team. Thirdly, we made good progress on our ESG strategy. As the first residential company, our targets got approved by SBTI. We kept our focus firmly on striving to develop efficient decarbonization tools. In 2023, we saved around 8,700 tonnes of CO2. Accordingly, we reduced our CO2 footprint further down to 27.3 kilograms CO2 per square meter on a market-based standard. In comparison to our midterm goals, we are ahead on our track for climate neutrality in 2045. You might want to spend a second to look at a short update on our ESG achievements, which we included in the appendix. Finally, we confirm our guidance for 2024. We continue to expect an AFFO in the range of EUR 180 million to EUR 200 million, which represents an increase by around 5%. Let me move on to Slide 7, highlighting some details of our steering as well as the growth drivers for our business going forward. In late 2022, our priority was to shift to a sustainable steering of our business, reflecting the normalization of interest rates and waiving a finally goodbye to a negative or 0 interest rate environment. Certainly, we still do not possess a crystal ball. We cannot anticipate and therefore, do not bet on certain interest rate scenarios. Instead, we focus exclusively on our business and adjusted to the current interest rate environment accordingly. This is exactly what we did in November 2022, and we are of the opinion that 2023 proved this to be right. Adjustments made to the company's set up are straightforward. In the first step, we focused everyone in the group on cash generation to secure funding of all costs and investments as well as enabling to resume the dividend. Most of our cash flows is reinvested into our portfolio ensuring and growing rental income. Independent from the LTV level, be it at the current 48.4% or our midterm target of 45%, we generate sufficient cash to cover total costs and cater for an attractive dividend. In the new market environment, the focus is exclusively on cash flows. We operate a fully self-funded organization without adding additional debt or being forced to sell assets, i.e., to shrink. In the second step, we assure agility to be able to shift gears whenever there are opportunities from a growth and return perspective. Cash inflows will benefit from several drivers. Firstly, the structural supply-demand imbalance will persist. There is no quick fix available for the structural deficiencies. Based on the study published by [indiscernible], the sector intelligence specialists and consultancy start of German residential developments crushed by around 75% in Q4 2023. Therefore, not expecting a pickup of state subsidies for new developments and a higher for longer interest rate environment in 2 to 3 years, the completion of new developments might shrink at the same dimension. Due to the low transaction volumes, we have seen and expect more insolvencies of German developers as well as construction companies. The loss of that knowhow and capital will contribute to less and less units coming to the market putting more pressure on the demand for existing apartments. The market will remain very tight for years and that might bring about some serious social implications. We have provided further details on market expectations from various sources in the appendix. The widening supply-demand imbalance will put ongoing pressure on rents and with a time lag on rent tables. It is hard to quantify the effects for the near to midterm. However, the effects will gradually surface with each and every new rent table being disclosed. Additionally, LEG will benefit in the midterm from some extra growth drivers. In 2026, the next cost rent adjustment for our subsidized units is due. In 2028, nearly half of our subsidized units will get off restriction. We provide you with further details in the slides in the appendix. Furthermore, we benefit from a very high collection rate of more than 99% within our core business. As various crisis in the recent past, like COVID and last year's energy crisis, have proven that ratio stays nearly unchanged. So our income stream will grow substantially over the past years, and it is foremost very safe. From our perspective, the growth component of the core business possesses an extremely high predictability, which is not entirely appreciated by investors in general. Finally, we will decisively open new income streams. Since we have begun our ESG journey in 2021, we have actively positioned [indiscernible] of the industry. An industry, which has not renovate our series refurbishment JV with Dekarbo, our air-to-air heat pump JV and Termios, our smart thermostat JV, we will offer efficient decarbonization solutions to third parties. Operating in a very fragmented market, most asset holders are lacking the technical know-how to decarbonize in line with regulation. We offer them efficient plug-in solutions. This will create additional growth beyond the traditional core business. At the same time, we work hard to keep cash outflows under control. With our 2023 results, we have proven that we can manage our cash outflows and to mitigate substantial headwinds, especially a higher for longer interest rate environment. Interest costs will only rise gradually and the starting base looks favorable. We still benefit from a low average interest rate of our debt book of 1.58% with an average maturity of 6.2 years. Due to the progress made last year, there are no refinancings left over in 2024, and we are done until mid-2025. At the same time, we increased our RCF further to now EUR 750 million, completely undrawn and with benefit from a high cash level of more than EUR 400 million. Therefore, we did the utmost to protect our financing structure from adverse events, but also to improve and keep flexibility overall. Additionally, we strictly adjusted our investment spending. This was not only for the sake of cash savings, but shifting our investment approach to optimize rental growth and in parallel to improve the CO2 yield, i.e., the amount of CO2 saved per euro spent. Putting this all together, Ceteris paribus, this model allows us to generate positive cash flows reflected in the AFFO metric. We provide you with full transparency on our cash generation capability. We will stay away from any major minorities, which we need to -- which need to be set. We abstain from complexity within the company requiring taking intragroup cash flows into account. As this model is boringly simple and ultra-transparent, we decided to resume a dividend payment in 2024 for 2023. The proposed EUR 2.45 dividend per share represents 100% of the AFFO. We retained around EUR 55 million net proceeds from disposals to strengthen the company's capital base. We propose to offer a scrip dividend again as that element benefits all existing shareholders. With this, the expected liquidity effect of around EUR 120 million to EUR 130 million is small in group context. The payout has no material effect on the cash generation and cost absorbing potential of the group and is also minor with regards to its LTV impact. Transaction markets have unfortunately been quietly all year long. Transaction volume in the German residential space saw [indiscernible] of EUR 5 billion of transactions, the lowest level since 2010. In 2023, we saw the return of family offices and Northern American investors, leading at least to some activity in the market. We see first small green shoots of improving interest at the beginning of this year, but admittedly coming from very low levels. Ultimately, there are some indications that local and smart moneys is already back. Once the transaction market opens, we can certainly increase our disposals, but we do not want to provide you with disposal targets. As of today, we are quite confident that we can realize more disposals than last year. However, just to reiterate, we do not need to support cash generation by selling assets. Proceeds from disposals purely serve 3 purposes. They support the capital base, help to add to the potential dividend and to recycle capital for reinvestments at more attractive terms. With this, I leave you with my views on our set up and prospects, and I had it over to Volker.

Thanks Lars, and good morning to all of you. I will start on Slide 9 with LEG's portfolio transactions in 2023. Despite a very challenging residential real estate market, we managed to sell a total of around 2,000 units for total proceeds of EUR 155 million. A little bit more than half of it in realty terms, i.e., EUR 18 million saw the transfer of ownership already in 2023, and our cash flow was fully reflected in our numbers. Those represent circa 1,300 units and led to net proceeds of EUR 55 million, as Lars already mentioned. The remainder, i.e., EUR 75 million representing about 700 residential units and some commercial units will have the transfer of ownership in 2024. This means that we have already realized a similar disposal value for 2024 than in 2023. All those disposals have been executed at book values as we do not want to give away shareholder value to the buyer. As a reminder, the bulk of our properties earmarked for sale is in the higher yielding category. We are talking about assets in region since with subdued structural development potential all assets in weak technical conditions. The waterfall chart shows divestments of 1,409 units. The difference between the 1,409 units and roughly 1,300 units, which left our portfolio due to transfer of ownership is due to reclassification from residential to commercial assets, merging of residential units and also due to tearing down one multi-family building in Gelsenkirchen supported by subsidies from the state of North Rhine-Westphalia. The majority of the slightly above 900 additions to the portfolio are finished new construction projects. The remaining cash outflow for new construction until end of 2025 is around EUR million. Beyond 2025, there's nothing left in our new construction pipeline. To approach also institutional investors with a stronger appetite for new development projects and high energy efficiency, we started to market also some newly finished developments in the market. Demand for this shows to be healthy. I'm not coming to Slide 10. The like-for-like rent growth in the reporting period was 4% and exceeded the initially given guidance of 3.3% to 3.7%. And reached the upper end of the latest indication of 3.8% to 4%. The in-place rent for our entire portfolio was EUR 6.58 per square meters at the end of the financial year 2023. The average of the asking rent our core market North Rhine-Westphalia end of 2023 were EUR 8.33 per square meters, i.e., 27% above our in-place rent. The 4% like-for-like rent growth comprises of 1.7% from rent table increases, 1.5% from modernization and reletting. And finally, 0.8% from the cost rent adjustment. About 20% of 32,000 units of LEG's residential units are subsidized, i.e., rent restricted units. For these units, the rent can be increased every 3 years in 2023 by 5.7% on average. Until 2028, roughly 20,000 units will run out of rent restriction and offer accordingly significant rent increase potential of around 50%. You find additional information on the subsidized units and the cost rent adjustments in the appendix. Talking about the structure of LEG's portfolio, I would like to remind you considering regulatory headlines of even more strict rent-increase regulations in the so-called tight markets that LEG owns only 25,000 free financed units in these tight markets which represent only 15% of LEG's entire portfolio. With regard to our 3 market categories in the free finance portfolio, rents increased by 3.9% in each in the high growth and stable markets and 2.8% in the higher-yielding markets. For the future, we expect a similar development of the rent in the 3 market segments. The rent increase for the free financed units was positively impacted by dynamic rent table increases in locations with a bigger number of LEG units located there. This includes Bergkamen with an increase of 14.8%, Castrop-Rauxel with an increase of 18.1% and Krefeld with an increase of 10.2%. You might want to spend a second on Slide 35 in the appendix. We provide you there with an informative overview of expected new rent tables for our top locations to be published by the municipalities sometime between today and end of this year. I'm now on Slide 11. Adjusted investments per square meter amounted to EUR 35, fully in line with our guidance. As part of our cash-is-king strategy, we reduced adjusted investments by 13.8%. This move supported our cash generation by roughly EUR 60 million. The shift of AFFO steering led to a decline in the capitalization ratio from 75% to 59% and accordingly to an increase in maintenance expenses. This, again, has a negative impact on the FFO 1, but overall, a positive impact on AFFO, which is, as Lars commented on our core KPI as a very good cash proxy. In comparison to 2021, when we saw the peak in per square meter investments of EUR 42.50, we have meanwhile reduced investments by EUR 7 per square meter or 18% in nominal terms. In real terms, i.e., taking construction price inflation into account, reduction is in the magnitude of 30%. In the current financial year, we will reduce investments further to EUR 32 per square meter, which implies further savings of around EUR 30 million. Thus the reduction in investments have a negative impact on our rent growth. In 2021 and 2022, the contribution from reletting and modernization to the increase in place rent was 1.3%. In 2023, even 1.5%. So there's no negative effect on rent. Additionally, we significantly exceeded our CO2 reduction target of 4,000 tonnes in 2023. We managed to reduce our CO2 emissions by 8,700 tonnes per annum. A significant contribution came from our nudging program, i.e., influencing our tenant [seating] behavior. With our smart thermostat developed, produced and distributed by Termios, and the air-to-air heatpump, we have other products in our pipeline, which support our target to efficiently improve the CO2 savings per investment euro. We strive for smart and efficient solutions and are less of the opinions to do more of what we as a sector did for the last 10 years, i.e., traditionally modernize buildings. This is why we position ourselves as a solution provider for the decarbonization. On Slide 12, you can see our most relevant operating value-added service companies. Our B&O Plan, which, as you know, generated significant profits is not included here. After an extraordinary strong year 2022 with an AFFO of EUR 36 million, the AFFO declined to EUR 27 million. This is mainly because of our 100% subsidiary, ESP, which was negatively affected from the volatility in the energy markets and from higher investments. The results from our multimedia business remained stable and our joint venture of TechnikService Plus managed to increase its AFFO. For the current financial year, we expect an AFFO contribution of these value-added services in about the same magnitude as in 2023. From 2025 onwards, we would expect bigger contributions from Termios to our services results. And with this, I hand it over to Kathrin.

Thank you, Volker, and good morning to everyone also from my side. Let's start it off with the development of our key P&L items on Slide 14. In the reporting year, net core rent was up 4.4% to EUR 834.3 million. This was mostly driven by our strong organic growth. Net additions to our portfolio, meaning new build apartments, less disposals contributed for [indiscernible]. The recurring net operating income rose by 3.5% to EUR 683.8 million. On this basis, the NOI margin declined by 60 bps year-on-year to 82%. This was largely driven by higher operating expenses. Those include nontransferable operating and heating costs such as CO2 taxes that cannot be charged to our tenants. Please note that the prior year figure of EUR 660.4 million was adjusted to the calculation method that we have applied since the beginning of the reporting year. The adjusted EBITDA margin came out at 80.6%, well in line with our guidance. In addition to higher net operating income, our decision on the forward sale of green energy proved beneficial and translated into EUR 20.7 million, which is included in the item net income from other services. Finally, the AFFO, our most important KPI increased by 66.5% to EUR 181.2 million and therefore came out above the upper end of our guidance range. Please turn to the next slide for the AFFO driver. The strongest AFFO driver was, of course, the reduction in investment spending by roughly EUR 60 million, as Volker already mentioned. The rise in net code rent as well as the forward sale of green energy also drove AFFO. This was partly offset by higher operating and admin expenses of EUR 20 million and higher interest expenses of EUR 18 million. Let's now move to Slide 16 for the portfolio valuation. At LEG, we were the first to come forward with the guidance for H2 2023 following a thorough market analysis and intense discussions with our external appraiser, CBRE. With valuation adjustments of minus 4.9%, we came out virtually at the midpoint of our forecast of minus 4% to minus 6%. As anticipated, devaluation lost momentum after a strong depreciation of minus 7.4% in the first half. For the reporting year as a whole, this equates to minus 11.9%. From the peak in H1 2022 to year-end 2023, devaluation effects add up to around minus 15.5%. Like in the first half of 2023, devaluation was strongest in the high-growth markets. Our higher-yielding market properties proved to be more resistant to the higher interest rate environment. The valuation process took place against the background of a very subdued transaction market. With only EUR 5.2 billion, the volume on the residential transaction market was on record low since the year 2010 and also 60% lower than in the year 2022. This only allows indirect conclusions to be drawn about the fair price level. In our DCF model, the object specific discount rate is now 4.7% after 3.7% in the previous year, reflecting the market development. As you can see from Slide 17, we came out at a gross yield of 4.8% for the residential portfolio. We expect rental growth to push this further towards 5% until year-end 2024 and with this, we are back at attractive yield levels ranging from 6.2% in higher-yielding markets to 4.0% in our high-growth markets, especially the higher-yielding markets offer a very attractive spread towards the 10-year German bond yield. The gross asset value per square meter for our residential properties now stands EUR 1,619 on average ranging from EUR 2,207 per square meter in the high-growth markets, down to EUR 1,129 in the higher-yielding markets. The net initial yield, based on the EPRA definition, was 3.8% at year-end 2023. Since the reporting year, this EPRA metric refers to our portfolio as a whole, not only to our residential units. The numbers of the comparative period were adjusted accordingly. Now please turn to Slide #18 for the financing profile. Thanks to our early refinancing measures in 2023 and also more recently at the beginning of the year, we are now clear of maturities until mid-2025. The remaining secured maturities in 2025 amount to EUR 564 million, and will be rolled forward or refinanced. Our convertible of EUR 400 million is only due on September 1, 2025. On the liquidity side, our cash at hand, including short-term deposits amounts to EUR 405.5 millio. Following an early prolongation of our syndicated RCF of EUR 600 million in autumn last year, for another 3 years, we could also add 2 additional working capital lines of EUR 75 million each. This results in a total of EUR 750 million of undrawn facilities. Obviously, we are not going to use the RCF for refinancing, but I believe it is reassuring to see that in theory, cash and RCF combined would cover all our maturities until 2026. Furthermore, as another financial caution, there is still our commercial paper program of EUR 600 million. The chart on the left-hand side shows the distribution of maturities for the next 10 years, which remains very balanced. Together with our average interest cost at year-end 2023 of 1.58% and our average debt maturity of 6.2 years, we have a strong financing structure in place. Our interest hedging rate of around 94% was virtually unchanged compared to the previous year. The most important financing KPI is, of course, our LTV. As a result of the devaluation of our property portfolio, our LTV on December 31, 2023, increased to 48.4% compared to 43.9% as of year-end 2022. In November 2023, we set a new medium-term target level for the LTV of 45% to better reflect the changed market environment. We have confirmed this medium-term LTV target with our guidance, and we will steer the company strictly according to this metric. The LTV target was also aligned with Moody's rating methodology. In the meantime, with our current Baa2 rating with a stable outlook, we are still well positioned as investment grade. We also feel comfortable with regards to our bond covenants even with further devaluation if this were to take place. The unencumbered asset ratio as well as the covenant LTV, which are the tightest covenants could still bear a valuation decline of around 23% to 24%. And with this, I hand it over to Lars for the outlook.

Thank you, Kathrin, and I am now on Slide 20. For 2023, we delivered in almost all aspects on our promises. You see beats or upper entertainments of the respective ranges, all but one, the LTV. This metric remains work in progress. As laid out, we have no immediate concern due to our robust cash flow generation. Potential disposals will certainly help to improve the LTV, and we are working hard on those. We remain, however, committed to our disciplined approach. It might not be the smartest idea to push disposals at the current market level, i.e., so close to the trough. With these remarks, let me conclude with our 2024 guidance on the next slide. Overall, our 2024 guidance remains unchanged. We confirm all our targets and aim for further improvement of the AFFO to EUR 180 million to EUR 200 million. At midpoint, this suggests a 5% increase of the 2023 result. Key driver is rent growth as well as a further reduction in investments as we continue to deploy the capital more efficiently. And with this, I hand it over to Frank. The complete management team and I are happy to answer your questions now.

Thank you, Lars. And with this, we begin the Q&A session, and I hand it over to you, Francie, to guide us through the Q&A.

[Operator Instructions] And our first question today comes from Thomas Neuhold.

I have 2, which are, to a certain extent, interlinked, so I'll ask them at once. The first question is on your midterm 45% LTV target. In '23, you had a negative of EUR 48, you pay out the dividend now, and there's a risk that there will be more relation losses in 2024. So I think there's a risk that your LTV might be rather at 50% and then 45% at end of this year if we don't manage to do enough disposals. So I'm wondering if you could give us an update on the visibility for your disposal pipeline and your view on dividend sustainability if valuations dropped more than expected or if you manage to sell less apartments than expected? And I was wondering this 45% LTV target in the midterm, what is your definition of midterm in years? And the second question is regarding the revaluation outlook. Is there any view on the potential revaluation result in 2024 you can and want to share with us?

Thomas, thanks a lot for your questions. So perhaps to start with the disposals and the visibility we currently have. So while the first 2 months as usual are not the strongest in our market, I'm very much looking forward to meet them. So as you know, we have met them now this week, we are already in exclusivity with regards to some portfolios even now reaching the number of 1,000 units. So that's still not signed, but we are in negotiations. All of that on the lower quality assets shows of really more incoming calls, more incoming interest with regards to disposals. At the same time, not only at the lower end of the quality spectrum, but also at the upper end of the quality spectrum, we get incoming calls now from all equity buyers, like pension funds as well as family offices, meaning with regards to the new developments, which we have already finalized or which we are currently about to finalize until mid of 2025. Those both from our perspective, is a very healthy sign for the current interest in that residential product. I think we have extensively elaborated on the supply-demand imbalance, which we are seeing in the market and that our expectation is that the supply/demand imbalance will also widen over the coming years. Therefore, from our perspective, disposals will pick up this year. And from our perspective also, and that falls now into your second question with regards to revaluation, it will bring about more demand, more transactions and less revaluation of our assets, meaning devaluation in 2024. From our perspective, 2023 was the famous [indiscernible] for the residential industry, but we are seeing now the values being bottoming out. With regards to the third part of your question, what does midterm exactly mean? So midterm does not mean within the next 12 months, yes. So also to be once again, very clear on that one, it is not that we expect the midterm target on the LTV level of 45% to be reached until the -- until the end of 2024. But with enough headwind and tailwind from our perspective, we can reach that midterm. And once again, we are committed as a management team to reach that 45% LTV target midterm.

The next question comes from Thomas Rothaeusler from Deutsche Bank.

A few questions. The first one is on rental growth. I mean, if I look at your guidance, still looks rather muted given the underlying trends, I would say. Do you also refer to stronger rent tables? Is there any chance for you to up your guidance? Or maybe putting in other words, maybe you can provide some color on underlying rental growth and the reason for your cautious guidance? That's the first one.

Thanks, Thomas. I'm happy to take the question on the rental growth. Well, as you know, we are just about -- just a little more than 2 months away in the year. We see the very good dynamics in the rent table developments. We also -- you should bear in mind that we have about 20% of the subsidized units. So if you look at the rent growth from free financed units, this picks up from 3.6% in last year to about 4% this year. So this then translates into lower rent growth overall due to the subsidized units of about 20%. And this is a more than 10% uptake in rent growth in the free financed units. So we clearly see their dynamic and are very convinced that we will deliver on these results. But if rent tables come out stronger than expected, then we may also update the guidance, but we are just about to...

The second question is on transaction markets. I mean, you referred to disposals as a source of capital development or reinvestment. On that background, just wondering if you were able to see attractive acquisition opportunities, distressed situations...

Thanks, Thomas, for the question. Yes, currently, we are not seeing any [forced] selling within the market. But due to the situation that certainly values were falling, that project developers are dependent on doing sales, and that's not happening to the extent they are expecting it. I do not also want to exclude that over the coming months that we are going to see attractive growth opportunities. At least as always, you can also rely that we are not only being focused on selling assets on the weaker end or also newly developed assets, but that we are also exploring growth options. So if there might be something coming up, we will definitely try to also get hold of those.

And the third, the last question is actually on property value. If you say -- are you referred to the potential bottoming out? What would you say is the likelihood that we could see out of flat values this year?

From our perspective and hopefully that the reinstatement of the dividend proves that we have a positive view on 2024 versus 2023. That does not mean that values might not fall again, but definitely not to the extent they have fallen in 2023. And that is already something which you can conclude from the 2 half years of devaluation, which we've shown, 7.4%, 4.9%, all of that pointing to an easing of that devaluation. So really, the [indiscernible] was 2023 and 2024 from our perspective, holds a lot of opportunities also with regards to doing transactions in the markets, especially delivering on our sales targets.

The next question comes from Rob Jones from BNP Paribas.

I've got 3, if I may. So one, Lars, you mentioned scrip divi benefits to all shareholders. And I think you're guiding to a scrip alternative to continue to be offered to shareholders going forward. In a scenario, imagine where it's just you and me that are shareholders of LEG, if you take a scrip, and I don't, I get the benefit of the fact that cash on the balance sheet is greater because you've not taken a cash divi, but I lose out in future years because your -- the share count goes up and therefore, my earnings per share decreases. So I wasn't quite 100% sure how the scrip divi benefits all shareholders and why it makes sense to continue to offer a scrip alternative going forward? That was the first question.

Good morning, Rob, also to you. And certainly, that's a brilliant question as always, Rob. As you know, that we can discuss that back and forth for ages. So once again, our perspective on that point is that, as usual, we are offering the scrip dividend to all existing shareholders. So it is into their decision, whether they want to take that scrip or whether they want to opt for the cash. If they go for the cash, they are certainly not benefiting from the positive development of LEG share price going forward. But that is something which lies in the hands of each and every shareholder. So therefore, from our perspective, it is a very fair offering. And certainly, we hope that a lot of investors are going for the scrip dividend. In the past, normally, we've seen a pickup of around 30%, but our expectation certainly, especially at that low share price might be that we are going to see even a higher pickup rate well above that 30%.

Okay. Very clear. The second one was on Slide 15, the AFFO bridge for '23 forward sale of green electricity, Kathrin, you mentioned, was just under EUR 21 million for the year. Do you have any visibility in terms of what that could be for 2024? I'm assuming less given it's a major component of your AFFO for the year.

So Rob, yes. So as you can see, the -- that was really one-off. So taking the decision back in October 2022 was to presale all of the green electricity production through 2023 in the market. That was really at those ultra-high electricity prices. And therefore, unfortunately, it will be close to 0 for this year because this year, we have not taken the option to presell, but we are bound to the current market and the market price development and the market price certainly is much lower compared to the price we have been able to generate with that forward sale in October 2022. So we are talking EUR 475 in comparison to the current EUR 85. So that's the spread. And therefore, unfortunately, it is really a zero-impact one-off from that sale of green electricity.

Okay. Great. And then third and final, I have got 4, but in the interest of time, I'll ask the fourth one to Frank later. Just back on the LTV again. So obviously, you previously in the past, targeted 43%. That increased to 45% now given the alignment with your -- how your rating agencies think about LTV. You mentioned obviously that the 48% where we are today is comfortably within the threshold of a Baa2 Moody's rating. So slightly playing devil's advocate, a point in time where we're expecting asset values to trough in 2024. And therefore, as you mentioned, maybe it isn't necessarily right to be aggressively looking to sell assets at potentially the bottom of the market. Why not increase your LTV target from 45% to 48%, given it's within the thresholds of Baa2?

Thanks, Rob. As you know, we came up with the 45% because ultimately, we strive to get back to a Baa1 rating. And this is still our target, though it may be midterm and not short term, as Lars pointed out. But for the time being, we feel super stable in our -- with our current Baa2 rating. And as you know, Moody's also said that they expect a further devaluation. So if there were a further devaluation to take place this year of another around 3%, this would still be included in our rating, and we would still be very comfortable in our Baa2 rating with a stable outlook.

Our next question is from Pierre-Emmanuel Clouard from Jefferies. We will then continue with the next question, which is from Marc Mozzi for Bank of America.

I have only 2 questions from my side. The first one is in regards to your next to come convertible bond, September 2025, EUR 400 million, which is out of the money, if I understand it correctly. What are the options you right now have to consider and to take on board to address this clearing event?

Yes, sure. Happy to take your first question, Marc, on the convertible bond. So as you know, it's not due until September next year. So we do still have quite some time. How do we address it? So we could either use another convertible bond or we could go for secured or unsecured financing. So all these options are open to us, and we will look opportunistically over the year whatever makes more sense, maybe next year so that we will clear this convertible bond. But as you know, it has a super low coupon. So for the time being, as long as we keep it, it's also in the best interest of our shareholders because it has very low interest rates to pay.

And that goes well with my second question, which is -- sort of marginal cost of capital are you facing right now, which is on an unsecured market bond and credit market and when we are on the secured market sort of pricing should we assess here?

So on the -- you were asking for the pricing on the secured and unsecured market, right? The line was a little bit...

Absolutely.

Okay. So on the secured side, we still see 120 bps spread. So it's pretty much the same. I've been telling you all year around. And we are still looking at 120 bps. We just signed something for around 120 bps. So that's still what we are looking on the secured side. The unsecured side is still a little bit more expensive. So on a 10-year basis, we are currently looking at around a spread of 180 bps, but this is obviously much lower than what I told you last year. So spreads are coming in, spreads are getting tighter. This rounds on -- for a coupon of around 4.3%, 4.4% currently.

Our next question is from Neeraj Kumar from Barclays.

I have a couple of questions. So the first one is, given you're paying dividend for this year, is it fair to say that you have -- you see no need of -- or sort of any intention of equity raise at least for this year?

I would have been surprised to not get that question from you this time. So as always, I think it makes sense to constantly evaluate all options. But certainly, currently, we are not having an intention to do a capital raise. We are in constant dialogue certainly with all our shareholders. And certainly, we will consider their feedback. We are very proud that we have those excellent operations producing cash. We are proud that we've been able to take advantage of the transaction market, selling 2,000 units, all of that contributing positively. So now expecting bottoming out of the market. So let's wait whether we are going to see any growth opportunities, which might bring us back to the market. But for the time being, we are not evaluating a capital increase.

Got it. And the second question is, can you please comment on the BCP if you have any developments on that side to share?

I would love to do so, Neeraj, Unfortunately, the process has fallen silent. So we are not aware that any acquisition -- sales activities are going on. So unfortunately, nothing new to add to that point of BCP.

Our next question is from Manuel Martin from ODDO BHF.

One question from my side. It's concerning your CapEx spending, a bit maybe 2 aspects here. One aspect is the decarbonization path. With your current CapEx spending and your budgets, do you feel that you are right on track on the decarbonization path? Or are you temporarily underspending? That would be one aspect. And the other aspect would be, looking forward from today, what could be your feeling in terms of spending? Would you increase -- tend to increase your EUR 30 per square meter? Or would you keep that stable? That's it.

Manuel, thanks for your questions. I think -- well, we feel very comfortable with our spendings to be on track on our CO2 reduction part. As we pointed out in the presentation, we shift the spendings from traditional modernization to smarter measures, and we have their new innovations in the pipeline. So I may only point out to the thermostats, we are currently developing a really cutting-edge technology. And if we bring it to the market, it will save us 25% to 30% of CO2 per unit with very low investment. So we feel comfortable with our spendings in terms of CO2 reduction port. And with regard to the second question, we feel comfortable with the current amount we spend, and we will look how we develop this in the future, but this we will do on a year-on-year basis. And for the time being, we are comfortable.

The next question comes from Paul May from Barclays.

Got a couple of questions. I appreciate there's been a lot of focus on LTV, but I think your biggest concern is probably your ICR eventually. Is that fair to say? Because I think the marginal cost of debt that you mentioned -- if you had that cost of debt today, you would be in breach of your ICR. So I'm just wondering how you would be managing that moving forward? Shall we take it one at a time or all now?

Yes, this would be highly appreciated as always. Good morning, Paul, yes, certainly, you're right. If we would need to refinance everything at day 1, then certainly ICR would become a problem. But as you know, we have an average maturity of 6.2 years. So therefore, the current cost -- average cost of capital is at 1.58%. So -- and that is not going to increase until mid of 2025 or not substantially because there is not much to be refinanced. So therefore, from our perspective, we will just, as always, take care of that by increasing rents accordingly and reducing vacancy. So it's all on the shoulders of Volker. But I'm absolutely sure that while we have done so much progress with the operational platform over the course of last year, we will also do so going forward.

Okay. Second one on the transaction market. I think you mentioned that all of your disposals are in the higher-yielding segment. We've heard from others that, that's kind of where there's some transactional activity. Otherwise, there's not much else available, certainly nothing at lower yields. Is that still the case that we're looking at sort of a 6% plus gross yield as where the transaction market is? And in which case, how are you confident that your lower-yielding assets are correctly valued if the only transaction market is above 6?

Yes. So with regard to transaction markets, and you can easily conclude from the EUR 155 million which we've been able to transact at with 2,000 units, that's really at the lower end of our quality spectrum and therefore, at a gross yield at around what you were mentioning. That is what is working in the market. And hopefully, we will always make clear that while in the current market environment, people are striving for higher yields and certainly then taking benefit that they can take out leverage with the current cost of debt. However, and that was the second part we tried to describe now during the presentation, what we are seeing is that also there is more interest and renewed interest of pension funds and all equity buyers at really the upper end of the quality spectrum, meaning that we are seeing people willing to also transact at much lower gross yields 3% to 4% with regards to also new products. So all of that is now new in the market, but we are confident to also see transactions also with regards to our own newly contracted portfolio over the course of this year.

Okay. So the just right -- the lower yielding is more at the newer assets. Is that right -- sorry, from what you're saying?

Exactly. Exactly. So actually with those which are going for that KFW 55 standard, which then very often is something which are those pension funds are looking for.

Cool. And then just final one, just following on from Neeraj's second question around [indiscernible]. But just to ask it in a slightly different way, I think you mentioned throughout that you're confident that the transaction market is starting to open up tending to be, say, at higher yields apart from those new assets that are there. You're focused on deleveraging the business. Why not use equity to grow and invest if you think that we're kind of at the bottom of the market, there'll probably be some quite attractive opportunities to invest and buy assets, considering it sounds like everyone else is looking to sell as well. I was just wondering what your thoughts are on there in terms of changing the narrative and changing the thought process rather than focus on disposals, disposals and shrinking?

Yes. So Paul, and also this, we tried at least to give you a hint at during the presentation. This is exactly what we are doing. So we are looking for interesting growth opportunities and if we are seeing something which would help us to grow the AFFO per share, then certainly, we would bring that to the attention of our shareholders if we would need additional capital. But certainly, and first of all, we would recycle the capital which we are generating from the sales of assets and which we are then not using to deleverage, but to then reinvest into the one or the other growth opportunity.

The next question is from Simon Stippig from Warburg Research.

First one would be in regard to the TechnikService business. You mentioned that you see growth in 2025 and beyond and flat for this year, EUR 27 million around. Could you please indicate what the driver is then starting in 2025? And I will ask my second question after you answered.

Sure, Simon, drivers for 2025 are a more stable energy markets we expect so that we can make their additional margin as we did in the past, which was distorted due to the volatility and second will be then that we expect first results from our thermostat business.

Great. And the -- for example, in NIM cost in [indiscernible] that would -- the run off of it, that would not impact you negatively or positively in this year or positively maybe in the next year?

Well, there is no positive effect from this, but only a slight negative effect. So we see this not as a major negative effect.

Great. And second one would be in regard to rent growth, more specifically, the rent table in Wilhelmshaven. It would be great if you could tell me your expectations in that regard? Or -- and if you don't have any expectations specifically to the rent table, what your market -- what your broader market expectation is in Wilhelmshaven?

Well, it's the first rent table that will be published in Wilhelmshaven, and we are a major landlord in Wilhelmshaven. We are participating in all expert rounds initiated by the municipality. So we have the expectation that the rent table will reflect a fair view on the rent situation in Wilhelmshaven, but as it's not yet published, we don't know yet.

Okay. Or differently asked. Could you remind me of your vacancy rate in that market?

I think it's about the highest vacancy rate we have in a single market. It's at the upper end of a single-digit number.

Okay. And then maybe a follow-up in that regard is your expectations about this market when you bought Adler and eady bought that part from Adler real estate. Is that net or outperformed or actually underperformed?

No, it's net. We are on track to fulfill our business plan there.

And then one last one. In regard to the scrip dividend, as we know, your own shares, will you choose the scrip dividend or cash?

I can only talk from ourselves. But when I look here in the round, I think we will all go for the scrip dividend because we strongly believe in what we are doing here.

Great. And if I may, one follow-up in regard to what Paul just asked in regard to the equity ratio and you answered. Do I understand correctly that if you see great opportunities and you need capital for an accretive acquisition on AFFO basis, then you would actually approach the market with the capital you have until 2025?

First of all, I think we need to identify the growth opportunity. Second, we will recycle capital, which we have generated from sales of assets in the market. And if we are then really needing additional capital, then certainly, one of the options might be getting back to the market. But -- and that's very important, Simon, write that down, please. We have no intention of doing a capital raise at the current moment.

Our next question is from Bart Gysens from Morgan Stanley.

Following up on that capital raise point, you're very clear on that. But of course, you're offering a scrip alternative to the dividend. And the take-up ratio of that scrip dividend can be influenced quite dramatically by where you strike the price of the scrip. I appreciate you haven't provided that color yet that comes with the prospectus. But can you give us any indication on targeted take-up of the scrip and kind of what likely discount to the share price that you will offer for the scrip alternative?

Yes. So happy to do so. So all our technical information will be most likely published with our invitation to our AGM. So this will be in April. So there, you will get all the information you need. In the past, we usually had a pickup rate of around 30%. So this is something that we also expect this year around. And -- or in the past, we usually offered a discount of 3%. So this is something you can take into consideration for your information. And everything around which price will it be. Most likely, we will have June 6 as the date where we will derive the [VWAP] of the day, and then we will have the scrip price. But this will all come in a final version when the technical information will be published together with the invitation for our AGM in April.

But is it fair to say that you will get an indication of what your first half revaluation will be of the portfolio and that, therefore, this is by no means a commitment to 3% discount to the share price and that you could set it at a different price if you sort of want to do?

We will for sure say what will be the discount with the invitation to the AGM and then we offer the technical information. And then you can be assured that it will be 3% or it will be different. With regards to the valuation of our portfolio, as you know, we usually come up with our first ideas in May. So when we come back to this ground, I think it's in the middle of May, it's on May 15th, then we will most likely have a first idea also on potential further devaluation or not a devaluation for our portfolio for the first half.

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

Thanks, Francie, and thanks for all your questions. And as always, should you have any further opening questions like Rob, then please do not hesitate and contact us. Otherwise, please note that our next scheduled reporting event is on May 15, and we will report our Q1 results. And with this, we close the call, and we wish you all the best and hope to see you soon on one of our upcoming roadshows end conferences. Thank you, and goodbye, everybody.

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