TAG Immobilien AG (TEG) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of TAG Immobilien AG regarding the publication of the annual report 2021. At our customer's request, this conference will be recorded. [Operator Instructions] I now hand you over to Martin Thiel, CFO, who will lead you through this conference. Please go ahead.

Yes. Many thanks, and good morning, all. This is Martin from TAG. Many thanks for dialing in into our full year 2021 conference call. And today, we've got not only prepared for you the numbers for the financial year 2021, but here we also want to discuss with you our new decarbonization strategy that we have published today and also talk a little bit more general about our strategy in Poland and in Germany. But let's start with Page #4, the highlights slide and it starts always with the operational performance of the German portfolio. Vacancy in our residential units came down by 30 basis points in the fourth quarter. This means we ended the year with 5.4% vacancy rate compared to 5.3% at the beginning of the year. Like-for-like rental growth, including and excluding changes in vacancy was roughly on the level of the financial year 2020. That means around 1.3% to 1.5%. FFO I came up at the upper end of our guidance, so we reached EUR 182 million. That's an increase by 5% in comparison to the previous year. And in terms of the FFO I per share guidance, a bit slightly, that means $0.01 above our guidance and ended with EUR 1.24, following our payout ratio of 75% of FFO 1. That means we will propose for the AGM in May this year to pay out a dividend per share of EUR 0.93. That's also $0.01 more than original guidance. We saw a strong increase in the EPRA NTA by 16% year-on-year. We ended up at EUR 25.54. And the LTV came down by roughly 90 basis points year-on-year. And here, we ended the year at around 43%. Looking at acquisitions and disposals in Germany. We signed no acquisitions in 2021. And in the disposal side, we had some noncore disposals, roughly 680 units that we signed with a quite substantial book profit before any revaluation effect around EUR 12 million. We received now at year-end, the second valuation for this year by CBRE and ended up with total valuation gain for the full year of more than EUR 500 million. That translates into a 10% value growth for our portfolio, out of which 9% is the effect from the annual valuation without any investments. That means we are now valued in our German portfolio at around EUR 1,200 per square meter or up 5.3% gross yield compared to EUR 1,100 per square meter at the end of the year and 5.7% gross yield at the beginning of the year. That should still be a level where further improvements are possible. Coming to the next slide and looking at our business in Poland. We are very pleased with the results for the financial year 2021. That means we have sold with our -- in 2021, existing subsidiary Vantage even a little bit more than expected. The results operation from Poland came out at EUR 6.7 million compared to EUR 9.1 million in the year before, but it was clear that we are now changing the business model from Vantage from a pure residential for sale business into a business where the residential for rent business is the largest part. So therefore, this reduction in earnings was absolutely planned. And as I said, it's even a bit more than we expected. In total pipeline, what it means, finished units, construct or units under construction and units and planning are now around 12,600 units and the GAV of the Polish portfolio at year-end is around EUR 350 million. Also in terms of acquisitions, that was a quite good year. That's at Vantage in Poland. So we acquired new landbanks and projects for potential more than 3,200 units. An update on our ROBYG acquisition. You know that we announced this acquisition shortly before Christmas. We have received in February antitrust clearance without any conditions. This was the only condition regarding the closing. So the closing is now expected to happen in 2 weeks at the 31st of March. The final purchase price for this transaction will be roughly in euros EUR 540 million. On the next page, we first of all see our unchanged FFO and dividend guidance for the financial year 2022. So we are still predicting a 5% increase, midpoint of the guidance for FFO I, which is still purely coming from our German business is EUR 190 million. That translates into EUR 1.30 per share and EUR 0.98 -- sorry, per share as a dividend. Plus new is our FFO II guidance. And we're guiding here in the midpoint EUR 215 million. Why are we publishing today FFO II guidance? And it is clear that still from our existing subsidiaries, that means Vantage and now new ROBYG, the largest part of earnings in 2022 is coming from disposals. So therefore, we thought it's absolutely useful and also necessary to give you here a better understanding on the results that we achieve on that. So if we take the midpoint of the guidance from FFO I and FFO II, there's a difference of around EUR 60 million, which is coming then from our business in Poland. Please be aware that in terms of the ROBYG acquisition, not the full year will be consolidated. So that means we have the earnings from ROBYG just from April onwards from the -- that means from the second to the fourth quarter this year. That translates, of course, also in a very strong increase in FFO II per share, so we expect that we achieve an FFO II per share of EUR 1.71 compared to EUR 1.29. Also this could be increased by more than 30% year-on-year. We are very happy and perhaps you've seen this also yesterday afternoon, yesterday evening that we have received a second investment credit rating now from S&P Global Ratings with a BBB- and stable outlook. And this is something additional to our already existing investment-grade rating from Moody's, which is Baa3 and a negative outlook. Coming to Page #8, it shows the EBITDA, FFO and AFFO development. I won't go here into too much details. Just to point out that not only the FFO I increased in financial year 2021 by roughly EUR 10 million, but also the AFFO increased quite strongly by roughly EUR 13 million, so 13%. So that means we are able to increase our earnings to increase our cash flows without a need to invest substantially more in terms of CapEx. Next slide. Page #9 shows the NTA development. As I said, a 16% increase year-on-year, of course, mainly driven by a, we think, very good valuation results. And if you take additionally into account the dividend that we have paid in financial year 2021, that's then in total 20% return, including this dividend. Coming to the next slide, Page #10, that shows you the financing structure. We have now an average maturity of the total financial debt of around 6.3 years. That's an average interest rate of 1.39%. Just for clarification, this 1.39% is not influenced by the bridge loan that we have in place to refinance the ROBYG acquisition as the bridge loan so far has not been used. The closing of this transaction, as I said, is now in 2 weeks at the end of March. So we have not used the bridge loan so far. So that means that this interest rate is really something if it wants a pure without any effect on the loan. Turning to Page #12. I wanted to give you, yes, just an update and perhaps some more general thoughts about where we stand in terms of our strategy. Today, we are active in 2 markets. We're active in Germany. You know this very well. And since 2 years, we're active in Poland. We think in today's environment, it's clear and advantage that we have these 2 markets and how should we describe these markets? I mean, Germany for us is clearly the basis. That's an extremely stable, extremely reliable, extremely predictable markets. We're very happy to operate in that. But on the other side, I mean, that's clear. We see increasing regulation. We see high competition when it comes to acquisitions. So therefore, a strong growth in external sizes and absolute amounts in Germany is really difficult. Is that a problem for us? No, not really. I mean we have still potential, and that's our strategy in Germany mainly to grow via active asset management, also to crystallize value via selective asset disposals. And so if you want to kind of way going forward in Germany is simply be disciplined regarding the capital, regarding investments, use the internal growth prospects from the existing portfolio. Yes, and then we are sure and convinced we will also have for the acquisitions in Germany, but this is then more on like upon opportunistic basis. Regarding the Polish market, our strategy is different. Here, external growth is much more important. And we have done now in December last year, a very important step for us when acquiring ROBYG, which, of course, then it's for us in addition to our existing subsidiary Vantage, a basis for really external growth in [ existing ] terms that we expect to come. Similar to Germany, Poland has extremely good fundamentals. So we see strongly rising demand for rental apartments. We see that people are looking for new construction apartments to have a better quality of life. We see undersupplied market environment, so clear housing shortage in Poland and a strong economy. So we are focusing on this product, newly constructed apartments. We are trying to deliver the right product for this growing residential for rent market. And therefore, based on the attractive yields that we see in the market, we're very convinced that the development in Poland will be very attractive. And contrary to Germany, where selling apartments is something -- yes, just more or less referring to noncore assets or in some cases, of course, regarding capital recycling plans to -- also to other assets, but in limited sizes. And probably, we are following 2 business model. Let us clearly say that the build-to-hold model is the clear focus, but we will also keep the build-to-sell model in the future. Page #13 shows you also some numbers and overview of our current Polish portfolio. So as of now, we have a quite significant pipeline with the potential to have over 20,000 letting units. That's our target to have in next 6 to 7 years, more than 20,000 residential for rent units in Poland. The total pipeline adds up to more than 38,000 units, so roughly 20,000 units or 21,000 units for the resi for rent and roughly 17,000 units for the residential for sale business. Page #14 shows you some ESG strategy essentials. First of all, we're very happy to announce that we have, in the meanwhile, also from MSCI, an increased rating. So we are rated AA in addition to Sustainalytics rating of 9.9. Both of them are what we think, really great scores. That's just -- yes, perhaps something that underpins how important these ESG activities are for us. Today, we are publishing and we'll come back to the -- in a second in more detail, our decarbonization strategy. That means how are we going forward to bring our portfolio to climate neutrality by 2020 -- by 2045. First of all, the advantage from our side is that we have a good starting point. So looking at the CO2 emissions per square meter per annum, we are at around 31.9 kilogram per annum. That's based on the data from 2019. We can tell you that we are publishing in April with our sustainability report the data for 2020. So the CO2 emissions will be a little bit lower. We should expect a number of 31.5 kilogram for 2020. Comparing that to peers, we are below average. We have a lot of very well maintained prefabricated buildings. In East Germany, did -- we have acquired in former years some state owned companies where we have access to this strategy. This enables us and puts us into a position where we, of course, need to invest, but the future CapEx that we need to bring the portfolio to climate neutrality is, yes, let's say, limited. On the right side, we've done a very simple calculation how the CapEx levels better evolve over the next, basically, 20 years. So we are currently of a CapEx level per square meter of EUR 13.30. And we expect that we need to increase this EUR 5.70 per square meter on average that brings us then to a total level for CapEx of around EUR 19 per square meter, which is, for us, absolutely manageable and also for our tenants something, where they need no concerns about -- yes, strong pressure for rising rents because we need to invest massively. That's not the case. Page #16 and 17 shows you more details on the German portfolio regarding rental growth. I already mentioned that we're here roughly on the leverage, like in the previous year, with -- you see this on Page #16, very similar investment needs. And regarding the vacancy reduction on Page #17. We ended up the year with a vacancy rate of 5.4%. Yes, we are very open. Originally, we wanted to get to 5.0%. So 40 basis points higher, the vacancy rate at the year-end that we expected. But yes, the first half or the first quarter of the year, we just see this increase on this Page #17 was more difficult during this time, if you remember that we had the lockdown. So therefore, the business was a little bit higher. Page #18 shows more details on the portfolio valuation. As I said, 10% total value growth, out of which 9% valuation result. The EUR 1,200 per square meter valuation level should be a level where we still have room to improve. Yes. And looking into 2022, of course, always difficult to guide further valuation gains, but we are convinced as we see this market in Germany, extremely competitive still that we will see further price increases. So therefore, the next valuation results to extent ever for 2020 in terms of a positive valuation result should already be in the cards. On Page #20, we give you an overview of our portfolio in Poland as it ends at year-end 2021. That means before the ROBYG acquisition, we have made quite some progress during the year. We have completed nearly 500 units as per year-end. Roughly 4,000 units are under construction, and we have an additionally more than 8,000 units of potential units landbank that brings us to a total pipeline of 12,500 units. Page #21 shows our rental units and on offer as of January this year. And we were very proud to announce that the first 3 projects in Wroclaw that we have rented out in the second half of 2021 have basically no vacancy rates. So what we see there is a great success in ranking demand. And also the first at this stage, I mean, this first stage, small project in Poznan showed strong demand. So already in the first 2 or 3 weeks, 21 out of 30 units have been rented out. So we know that this number of rented out apartments is still small, but let us say clearly everything that we see in the market in terms of rental demand. Here, our first experience make us absolutely comfortable that there's larger step that we make into the Polish market with the acquisition of ROBYG was absolutely right to do. Page #22 shows you then some details and numbers on the combined portfolio, Vantage and ROBYG. So the 12,600 units at Vantage plus the current pipeline of ROBYG, which is around 25,500 units now brings us to the total number that I already mentioned of 38,000 units that we -- or potential units that we have in Poland, out of which is that the largest part, it's designated for the residential for rent business. Talking a little bit more about ROBYG on Page 23. As you've seen already that ROBYG has published its annual results for 2021 already last week, and we're very happy that these numbers have been absolutely positive and excellent from our side. So strong growth in revenues, a strong growth in profit and sales, a strong growth in the net profit. So ROBYG, even in a difficult environment of the COVID-19 pandemic of cost inflation, regarding construction cost showed very, very strong results. As we said, more than 12,000 units from the current ROBYG pipeline is designated already for the build-to-hold pipeline. We will sit down with the ROBYG management now after the closing in more detail to make it here a more detailed plan, like especially regarding the timing, and we will come back to you with further details how the pipeline will build up into real resi for rent projects finished in the future and now [ it's ] related to the Q1 figures. As I already said, today, we are publishing our decarbonization strategy. Let me, first of all, start on Page #25 with our ESG strategy in general. I mean where are we here when we talk about the decarbonization strategy, very clearly, we are in the environment section of our ESG activities. And more specifically, if we look at Page 26, we have here in the third layer, climate and environment where we have embedded this decarbonization strategy. And perhaps just to clarify what does it mean if we talk about a climate-neutral portfolio. I mean in the meanwhile, it has -- there has been developed a kind of market standard amongst residential companies in Germany, not only listed, but really across the sector that's -- and the consensus for us that if you bring down the CO2 emissions per square meter to a level below 8 kilograms per square meter, that fulfills the 1.5% -- the 1.5 degrees climate gold. And that means that it's considered to be something which is climate-neutral. So this is basically the target, and you see this on Page #27, or the question, how do we bring our portfolio from the current level to 31.9 kilogram per square meter to below 8 or in our case, below 7 kilograms per square meter by year-end 2045. As I said, the status quo is definitely a good one. Looking, for example, at the energy certificates in our group, which is shown on the left side of Page #27, we see that more than 60% of our buildings in Germany already have an energy efficiency certificate of C or even better. And in the 2 lowest energy efficiency classes, G and H, the percentage is below 5%. So that's a quite good starting point and that leads into the effects that investments that we need to take in the future are something which is absolutely doable. Page 27 on the right side points out the path that we want to go to the targets that we have set. So by 2025, that means in a little bit more than 3 years, we want to reduce our CO2 emissions below 28 kilogram. By 2030, it should be already below 22 kilograms. And as I said, by 2045 at the latest, we want to have CO2 emissions below 7 kilograms per square meter. Page 28 shows you that how the investment volume is composed. So we expect as of today, that we need to invest roughly EUR 690 million, of course, not next year, within the next -- yes, more than 20 years until 2045 to reach this target of CO2 emissions. And we have given you here a quite detailed breakdown on which measures we need to take, and we have done here really extensive work together with an external adviser how to get there and how this investment volume is composed. I mean it's clear, we're talking here about investments for the next 20 years. There's always uncertainty, but perhaps it's good simply to keep the message, we have really a detailed plan. We have a good starting point and the investment volume, whatever the exact outcome that is in the future should be something which is manageable. And again, if you break that down on a per square meter basis, we're ending up now with a total CapEx in the future at net already from 2022, but 2023, 2024, you will see such levels of around EUR 19 per square meter, which is still a level for competitor in the peer group, which is below average, which we think is a good sign for our portfolio quality. Yes. And finally, on Page #30, again, our guidance for the financial year 2022, which is unchanged regarding the FFO I guidance. So we're still guiding for a 5% increase and new the FFO II guidance including the Polish business, again, including also our new subsidiary Vantage, but only from the second quarter onwards, where we guide an increase by more than 30% to the midpoint EUR 250 million. That's it from my side regarding the presentation. Thank you so far for listening to it. And of course, now I'm very happy to take your questions.

[Operator Instructions] The first question is from Thomas Rothaeusler of Deutsche Bank.

A couple of questions. Firstly, on the Russia Ukraine crisis. I mean, has this changed your risk perception on the Poland business expansion? And I mean, could this lead to an expansion of more skewed to Germany again maybe? That's the first one.

Yes. I mean, Thomas. I mean, no, this has not changed our view on Poland. I mean, first of all, it's clearly a tragedy what happens here regarding the war in the Ukraine. And the outcome is, of course, difficult to predict. But what are trends that we already observed. First of all, looking at potential negative effects, is it likely that we see problems not only in Poland, but there's also other [indiscernible] regarding supply changes, increasing prices for material. Yes, that should be likely. I mean, one needs to be realistic. Although today, we don't see here anything already in the market. So nothing that happens on the construction sites and so on. But depending on how long this will be the case, what is the exact outcome that could be then, of course, something negative. But what do we see on the other side, we see an extreme strong inflow from people from the Ukraine, not only into Germany, even more into Poland. So this morning, we have been announced that only 1.8 million people from the Ukraine came to Poland. And I mean it's difficult to say how many people will stay in Poland, but it's clear a large portion of that will stay in Poland as they are even before the war, more than 1 million Ukraine have been living in Poland. The language is quite similar. Culture is quite similar. So looking at mid- to long-term perspectives for the Polish residential market, perhaps as well for the German residential market, I mean, it's hard to say this -- having this more in mind, that's more something positive.

I mean, do you sense already maybe lower demand for build-to-sell product? Maybe on, I don't know, weaker consumer confidence or something like that or maybe also the local financing terms has changed massively? I don't know. But just to get a rough idea.

Yes. You don't see this already now in number, but I mean, the war started perhaps 3 weeks ago. And so it's still early. So that's not really something and a reliable comment that we can give on that. What would be the consequence if that happens. I mean this would be then, of course, something is important for our residential for rent market or product. What is clear -- I mean the demand for people for new constructed apartments, for living in an apartment has a better quality is there. And by the way, higher inflation, higher interest rates makes it then perhaps more difficult for people going to buy an apartment. Also this would be something positive for us. And when we break down our portfolio into residential for rent and residential for sale apartments just as a background, we are still quite flexible. In many cases, we are dividing, for example, larger projects because we say, well, perhaps 1,000 residential for rent units in one location. There's a little bit too much for the market, so better divide that. If we see that the demand is really then in the future, for example, even more from the residential for rent side, yes, we are, of course, flexible to do, that's in my example, all the 1,000 units as a residential for rent apartment. So here we are, I think, quite well positioned.

Okay. Another question is actually on the bridge loan. You plan to take out in the course of this year and you say by capital market transactions. I mean, is it possible that you elaborate on that? I think with the deal announcement, you referred to a, I think you said a strengthening of equity base and also potentially disposals. Maybe if we can get some update here.

Yes. But first of all, also to clarify the numbers. The bridge loan has a total volume or total potential volume of up to EUR 750 million. The purchase price for ROBYG, as I said, the final purchase price will be in euros around EUR 540 million, out of which EUR 70 million has been already paid from our side from existing cash at signing. So it means now when we have the closing in 2 weeks, we need to pay EUR 480 million. The remaining part of the bridge loan is for us there. I mean we simply wanted to have this as a kind of buffer. If we see some debt, for example, on in ROBYG level where banks take change of control clauses where we need an early repayment, it doesn't look like this is the case or if we need additional working capital for ROBYG in the next month, so this is the kind of buffer. So we're talking here perhaps in ROBYG numbers basically of a refinancing need in the course of 2022 of roughly -- yes, EUR 480 million to EUR 500 million. Yes. And what is also clear is a framework. I mean, we are very much committed to our investment grade rating or since yesterday to our investment grade ratings from Moody's and Standard & Poor's. We are also committed to our LTV target of 45%. I mean, the LTV at year-end was 43%. You should expect when we now have the closing, pay the purchase price that we passed the LTV target, but it should nothing be for the medium term. So that should be perhaps something for the other Q1 results. That's also for the Q2 results. And then we want to have it back very clearly on 45%. And it means that we, of course, look at a -- yes, a reasonable mix of equity and debt. And here, I mean, of course, we have the options on the table that should be then -- yes, more or less self-explanatory.

Okay. Maybe a last question on the ramp-up of the Polish business. What is roughly the CapEx level we should expect annually for the ramp-up in the next couple of years?

Yes, for the existing Vantage pipeline, the calculation was quite easy. So we expect it's roughly EUR 1 million -- sorry, EUR 1 billion for the residential for rent pipeline in 5 years that brought us to a CapEx level of around EUR 200 million. That's already the case. For OpEx, for 2022, the CapEx requirements will be lower as we still have a lot of inflows from cash from residential for sale business. But from 2023, perhaps already to some extent in 2022, we will, of course, also need to finance ROBYG investments. Yes. And if you know or you know that we are basically doubling now our residential for rental, it's from 10,000 to 20,000 knowing that the investment in locations that ROBYG has like Warsaw or like Gdansk, we acquired then at a little bit higher prices, but also, of course, lead to higher rents. In [ ROBYG ] numbers, we are in investments between, let's say, about EUR 400 million to EUR 500 million from '23 onwards. Still beside the potential financing that has come from TAG, I mean we have the possibility, and we're actively doing this. We have strong cash inflows from disposals. Yes. Please remember the quite significant pipeline that we have in the residential for sale business, which is nearly 17,000 units. So that means it's not necessary that we are financing the full CapEx requirements by TAG. There will be already strong cash flows from the existing business at ROBYG and at Vantage.

The next question is from Sander Bunck of Barclays.

Just a couple of questions, please. First one, and I'll do them one by one. First one, I was just -- if you can give a bit more clarity or guidance on how much your current households spends on energy costs relative to the overall rental?

Sander, well, I'll give you the number. The total rent without service charges in Germany is around EUR 5.50. The total service charges on average are something at, I would say, EUR 2.50 to EUR 3. So that brings our tenants to a total rent per square meter, including service charges of around EUR 8 to EUR 8.50. The heating portion of that is, of course, the largest part within the service charges, I can't give you exact numbers. But I would say it's clearly more than 10%, 50%.

Okay. And is it fair to assume that, that EUR 2.50 to EUR 3, is that to increase very significantly over the next 6 to 12 months?

Yes, it should be a realistic assumption. I mean we are all aware of the strong increases in energy prices, and that's something that increases the service charges. And the background of your question is brings that perhaps some of our tenants to affordability levels, where we then not anymore able to raise the rents. We're not that much concerned about this. Why is that the case? If you look at affordability ratios, that means what pay people from their net income after taxes for the total rent, including service charges, we know from our last housing report in East Germany, which is the last part of our portfolio, that those levels are between 20% and 25%. So there should be still room. But clearly, of course, it's not good to see for us and of course, not good to see for the tenants that we have higher energy prices. But we're not concerned that, that brings us [ somewhat ] to a certain cap.

Sure. Okay. And would you have any -- well, you say, contingency plans. But do you have any -- I think there was a pledge during Corona times that if people were in financial hardship, you would support them. Is that pledge still alive? Or is it a different situation?

What I would say, in general, we're supporting our tenants if they have promised to pay the rent. That could also refer to the situation where they have problems to pay the rent and tenancies, the total rent, including service charges because of increased energy prices. I mean, that's -- I would not say a day-to-day business, but that's something that we do now for the years that we're trying to find solutions with our tenants. So there are not any special programs in place to support tenants against increasing energy prices. I would say this is something that we're generally doing -- yes, every day in our portfolio.

Okay. Sure. And kind of second question I had was on the rent growth number. I mean, if you look at just at the trend over the last couple of years, then it is notable that there is just a slowdown, whether it is with or without a reduction in vacancy. How do you see -- and also basically in light of the previous question, how do you see that evolving over '22 and '23? And maybe not just for Germany, but also just the rental market, a bit more color on the rental market in Poland.

Yes. But for Germany, the guidance that we already issued in November for the total rental growth between 1.5% and 2% is absolutely unchanged. So if we are on the way and we're optimistic for 2022 that we can reduce vacancy, as you expected from us, that should be something which is -- yes, absolutely achievable. So that means a like-for-like rental growth without vacancy effects of around 1.5%. As we have achieved in this year should be something I would say normal, and then on top, some vacancy reductions, so that brings us to that number. And yes, let's see how this develops, but perhaps this is also a good estimate for now for the year 2023. In Poland, it's a little bit more difficult to predict. I mean we can look at some statistics from prior years, how rental growth developed in our product. And that's I think important to mention our product is new constructed apartments in the large cities in Poland with a good quality, where rental growth was between 2% and 4% per year, in line with increases of salaries, so affordability ratio is important, if not we can -- we don't see here something that changes the picture in the future. I mean we, of course, need to be careful with all the developments that happened in Poland. We just discussed this potential effects from the war. But again, thinking about the fact that a lot of people from Ukraine are coming to Poland, this should support the markets and it means, support our strategy even more. So we're optimistic that we see here a quite good rental growth in the future also in Poland.

Okay. Perfect. And very last question. Anything you can say in terms of valuation uplifts for the upcoming year or like how your discussions with the values are currently evolving? Are they continuing to say, look, yields are still compressing as you kind of highlighted in your opening remarks or probably more stable going forward?

I think for 2022, we are absolutely optimistic. And we see that's a good news for the valuation side. It's more difficult news for the acquisition side. We see prices here still increasing. I mean we are also following very closely transactions in the market. Everyone selling above book value. You know all this, so that we see valuation gains [ stopped ] in 2022. That should not be the case. We are a little bit warning investors, market participants that from now on, we see every year in Germany, then sure a double-digit valuation uplift that would not be something healthy. Perhaps we are then, I don't know, 20 -- towards the end of 2022, '23, more back on a normalized level. And if you ask as well, what is the normalized level, I mean, a valuation uplift of 3%, 4%, 5% annually year by year should be something very healthy. So we are, of course, in a market environment where prices have increased rapidly. That's not the end of the development, definitely not. But I mean, we are a little bit more careful with assumptions regarding valuation results in the next 4 to 5 years.

The next question is from Manuel Martin of ODDO BHF.

Basically, my questions have been asked. There's only one remaining. So a little one. It refers to Page 8 of the presentation of the FFO table. It's a detail. It's on the valuation result of the adjustment of EUR 525 million for full year 2021. In the P&L, I've seen a valuation gain of EUR 540 million, and there seems to me to be a discrepancy for me between these 2 numbers. Maybe you have an idea on that?

Manuel, we can, of course, clarify that. The difference refers to the valuation result in Poland. So you know that the FFO I that we calculated and that we are presenting is purely from the German business. And so therefore, when we start here on Page #8, within consolidated profit, that's the net income for Poland and then basically start with the net income from Germany and do some line assets that we add and subtract. That means the valuation result that we didn't subtract is only from Germany. So EUR 15 million difference. That's the valuation result that refers to the Polish business. Which is, by the way, if I just may add this, not a bad result. I mean EUR 15 million. That's an absolute amount, not really huge. But based on a year-end EUR 350 million GAV at the beginning of the year, I think it was EUR 115 million GAV. That's quite a strong valuation result already. So that's also the indication where values can go to in Poland.

The next question is from Marios Pastou of Societe Generale.

I've got a couple from my side. And so firstly, the slide where it mentioned the estimated future CapEx increases going to around EUR 19 a square meter. Can you give us any idea of kind of the time scale of where that's going to increase from your current EUR 13 a square meter level? Will it be between the next 2 to 3 years, for example?

Marios, perhaps 2022 is a year which is where we should see some already increased CapEx, but not already on the new level. But from 2023, 2024 onwards, that should be a level that you already have. It could also be the case that in general, we are in the first year is a little bit more careful. I mean we're, of course, doing the obvious things. So what does that mean if we do a modernization project for an apartment block, which is fully vacant, which happens from time to time. For example, when we acquire new portfolios, then we do perhaps a little bit more than previous years because we have a bit clear target now to bring our portfolio to climate neutrality. But is it the case that we start now with modernization programs throughout the portfolio extremely quickly? We know that's not the case. I mean, we simply also need to observe what happens from a technology perspective now and perhaps investments or CO2 reductions that we do in 5 years or 10 years are cheaper based on the technology that has developed over these years compared to today's prices. So therefore, this -- take that at an average for the total investments. It's -- we will increase our CapEx step by step. But of course, this is a level that you should expect -- yes, to start not only in the long term but also clearly in the next years.

Okay. Very helpful. And then just on the same topic with regards to subsidy programs. Is this something which has been factored into your wider ESG targets? And is there any concerns that changes to these programs beyond this year, for example, could maybe have an impact on the total investment potential?

Yes. Thanks for asking this question, Marios, and then I can clarify. We have assumed that the existing subsidy program, which is currently revised due to the BEG in Germany will be replaced by a similar program. So we have taken the subsidies from the -- yes, former BEG into our calculation. Is this a realistic assumption? We think, yes. I mean what is perhaps still a bit more under pressure in the future is subsidies for new constructed apartments. And that's not what we're doing. And perhaps projects that will benefit in the future from that even more subsidies, it is that's what we hear and see when some articles or when partitions elaborate on that. Projects that could benefit are projects where they modernize existing buildings. So -- and we see even more potential in this regard for more subsidies than a concern that we need to revise our plans dramatically because subsidies have been eliminated.

Okay. Very helpful. And just one final one, a very quick one from my side in terms of more detail on ROBYG. Did you mention that we should expect this with your first quarter results? Or is it likely we should see something before this in terms of more detailed time lines, et cetera, on the pipeline?

Yes, that's our target. We are publishing in the second half of May, our Q1 results. And then to give you also more details on -- yes, how we -- this pipeline of residential for rent units, the target of 20,000 units translates into finished units in 2022, 2023, 2024 onwards. It leads to give you a range. At the moment, I mean, of course, we are already in contact with the management teams of ROBYG and the Vantage. But I mean, we still have to respect the fact that the closing has not yet happened. So we can't do this also in more detail and we can publish that hopefully then with the Q1 figures.

[Operator Instructions] The next question is from Andre Remke of Baader Bank.

Martin, also from my side, a couple of questions. First, on your investment program of -- you mentioned EUR 690 million. Surely, it's for a long time period. But what -- in general, what cost increases are assumed here because it seems to be -- to become more cost-intensive, especially in these days to invest into refurbishments as everybody has to speed up now. So what is the basis here?

Yes. Andre, and of course, a very good question. I mean we have penciled in cost increase over the next 20 years, every year by 3%. So if we look at today's prices, I mean that's higher, but we have had the following assumption that we have ongoing cost increases. But on the other side, we have also, what I have mentioned before, technological improvement that perhaps make projects that today have a certain price in the future a little bit cheaper, although we have perhaps cost inflation for the material itself. So you know what I mean that we have more efficient techniques in the future to work with. So therefore, we saw a 3% cost inflation on average year by year for the now more than 20 years is a good assumption. I mean it's an estimate, clearly. I mean, you can also argue that that 4% is more valid or that's in 2%, but we thought -- we felt that 3% is a reasonable number.

Okay. And second question is on your acquisition. What is your -- will be your pro forma LTV after the purchase price payment? And what kind of goodwill do you expect from the acquisition?

Yes. But those is difficult to predict because we need to do the purchase price allocation and now after closing. So based on the values of the 31st of March, and the purchase price allocation means mainly that we need a full portfolio regulation of the ROBYG portfolio. So landbank projects under construction and so on. I mean we have always only some estimates. And we expect regarding the LTV that we see an increase from currently 43% perhaps to something between 48% and 50%, just to give you a rough guidance where we are. But again, it's difficult to present here an exact number because we don't know the exact values from the -- yes, property valuation as of the closing date.

And how could we see -- you have the LTV target of 45%, well the year only started. So you have a lot of time until year-end, but could we say that this your target to reach it within your range of 45% at year-end, this year or give you more time on that target? So what is your thinking at the moment?

Yes. I would say the case it should expect is that by year-end 2022, we are back on our LTV target. I mean, we'll be, of course, have some additional investments in 2022 to do with our Polish business. But as said, ROBYG has quite a strong cash inflow from disposals in 2022. I think nearly 90% of the apartments that are handed over 2022 have already been sold. So that's all on the way. That means for the ROBYG pipeline, yes, of course, we need to support the colleagues in Poland with the first residential brand project, but you shouldn't expect a massive cash inflows that we need into the ROBYG pipeline. And then just taking the -- yes, let's say, 48%, 49% estimate of the LTV, that's not really that far away from the LTV target. So therefore, I would expect that towards year-end 2022, we are already at the LTV level that we want to have.

Perfect. And the very last question on Page 20. No -- sorry, 23 on ROBYG's business overview. You divided the investment cost per square meter, EUR 2,300 for build-to-hold versus EUR 1,900 for build-to-sell. So there is an explanation for the delta of EUR 400 investment cost per square meter. It's based on future CapEx. Could you elaborate a bit on that? Because I assume that these are brand new buildings. So what is the [ time or ] reason for the delta EUR 400 per square meter?

Yes. Happy to clarify this. This EUR 1,900 per square meter and the EUR 2,300 square meter are the effective purchase price from a TAG view on this portfolio. So that means we have taken the purchase price for the shares plus the future CapEx from our business plan to finish this project, and then we end up with total investment cost. For example, for the residential for sale projects of EUR 2,300. On ROBYG level, so that means, what ROBYG really pays, that would be even lower. But we have taken here the view and wanted to present the number to you and to all investors. What is basically the purchase price for us for the ROBYG projects. And that means we are basically paying on our estimates, EUR 2,300 per square meter on average for one residential for rent apartment.

So the purchase price allocation is a value of the build-to-hold pipelines from [ them ]?

Yes, that's done for both pipelines. So also this EUR 1,900 per square meter for the to sell projects has this sort. So it's more an economic construction price based on TAG level.

The next question is from Tom Carstairs of Stifel.

Martin, I just had one question on the vacancy side of things. I appreciate you sort of commented briefly on that. But I wondered whether you could go into any more detail on specifically Leipzig, Rostock and Salzgitter?

Yes. Tom, I would say there's perhaps nothing specifically to comment the development in the last weeks or months. I mean, if you remember, the development and our communication during financial year 2021, we saw this increase by -- if I remember that correctly, 60, 70 basis points in the first quarter. And from there on, we were able to reduce vacancy. So I mean, we know always the first quarter is a weaker quarter in terms of vacancy reduction will be, for sure, again, also in 2022 the case. But this was, let's say, exceptionally weak back on the developments or back on the developments of the pandemic. So after that, I have nothing in my mind to say, okay, here we see some special developments. I don't know, in Salzgitter or in other regions. And again, we are optimistic for 2022 also supported by the fact that we really see now people from the Ukraine coming into Germany. I mean we -- first of all, of course, offering our help. We are already contacted cities to provide them with apartments if they need. And I mean, first of all, we are not thinking so much about our economic profit. But if you look into the mid to long term, I mean, for the people in Ukraine, that's a tragedy. But I think countries like Germany and Poland will benefit from the fact that people from this country are coming in and searching apartments.

Okay. That's helpful because that answers my second question. Just going then back to vacancy. I mean, in my head, I've got 4.8% to 5%, you're kind of maybe hoping you might achieve for 2021. Are we now thinking it's more likely to be that for 2022 or what?

Yes. 4.8% would mean a vacancy reduction of 50 basis points. That's a good estimate. So I think that's what we already also communicated with the full year results that we expect. The precise number was between 30 and 50 basis points of vacancy reduction. So starting with the 5.3% this year, that should be then a good range to for year-end.

The next question is from Simon Stippig of Warburg Research.

I have just one question left. It's on Page 44 of the presentation, where you see your TAG return on CapEx calculation for the year 2021. And if I look on the right side [indiscernible] your return on total investment decreased if I compare it to the year 2020. So maybe you can give some insights into that.

Yes, Simon. I mean what we are already doing today is that in large modernization measures that's shown on Page 44, which means we are not only modernizing apartments, but we are modernizing the full block. Did we do in more than in prior years? And more means that we look more on CO2 emission reductions. And that simply requires more CapEx. And that simply leads to lower returns, which does not necessarily mean that the returns are not attractive. But I think that's the fair point that we all need to accept that we still have reasonable, I think also attractive returns from such investments. But the goal to get the portfolio climate neutral and as for everyone comes in line also with the fact that we need to invest more. And of course, we get rent increases, but perhaps not in that extent that we had with modernization programs that we could do in the past. But yes, again, our investment program is very targeted. It's not a massive program that will not change the picture of TAG in terms of CapEx in general. So therefore, we are -- yes, very, very positive that we can really here still offer decent returns to our shareholders.

As there are no further questions, I hand back to the speaker for the conclusion.

Yes. Many thanks all for your time for listening in the call. As always, if you have questions, please feel free to contact Dominique from our department or myself. Happy to see you in the next 2 weeks within our road shows, and I hope to see you and talk to you soon again.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.