TAG Immobilien AG (TEG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the TAG Immobilien AG publication of the Annual Report 2022. [Operator Instructions] I would now like to turn the conference over to Martin Thiel, CFO. Please go ahead, sir.

Good morning, and many thanks all for joining our conference call for the full year 2022 financial results. Yes, let's start with the presentation, which we have published on our website this morning. And I would like to draw your attention firstly to Page #4, where we show some operational highlights. Firstly, in 2022, we have achieved our FFO I and FFO II guidance. FFO I guidance purely refers at the moment to the German residential or rental business. Here, we really achieved a good result in our operational performance, like-for-like rental growth including vacancy reduction stood at 2.7%. Vacancy was reduced by 110 basis points to 4.4%. Both KPIs are above our targets, so we're very pleased how the operational business and our German portfolio ramp. But not only in Germany, saw a good development, also in Poland. We had really good success with our business there. So in 2022, the Polish business, in total, already contributed EUR 59 million of profit to our results and a EUR 59 million of profit in Poland then directed through into FFO II, and led to the overall FFO II number that we had achieved in this year, which was in the range of our guidance and stood at EUR 247.3 million. In meanwhile, the Polish business is at a self-funding stage, which would be definitely good news. So that means we are really receiving constantly positive cash inflows from our disposal business. We will analyze this later in more detail. And on the other side, as you know, we have decided to stop new residential for rent projects for the time being. And we're just finishing the projects that are under construction. So that means the CapEx needs in Poland are for 2023 and for 2024, when we finished the last project, very limited. And that should be good news that we are really now in a stage where Poland is self-funding and quite soon also producing positive cash flows. Outlook stays unchanged, but this announcement, so FFO I and FFO II guidance are confirmed. You know that we have already proposed to suspend the dividend for financial year 2022. And that would normally be paid out in the second quarter of this year. Also this stays unchanged. Let's look at the next slide. And 2022 was clearly a year where refinancing was on top of the agenda, especially after the acquisition of ROBYG at the beginning of 2022. We've done a lot in 2022, and we know that some of the measures have been hard for our shareholders, but in the end, we think we've made the right decisions. So starting with the rights issue that we did in July 2022 where we raised EUR 202 million, we proposed a set to suspend the dividend for financial year 2022 that saves us EUR 143 million. We are making progress on our asset disposal program in Germany. So in the course of 2022, we have sold 1,600 units out of which roughly 900 units in the fourth quarter alone, and we achieved from these disposals, net cash proceeds. So that means after repayment of bank loans of EUR 86 million. And we can tell you that also after the balance sheet date, so that means in January and February, we made further progress, so we will publish the details with the Q1 results, but you should assume that at least the run rate from the fourth quarter also continues in the beginning of 2023. And how are we doing this? So what sort of mix is possible that we're really selling assets in a size that are for us really already are material. Yes, we're also giving slighter discounts to book value when we sell the assets. So we're not talking here about massive discounts. But if you compare that with the book value in the course of 2022, I think overall, we sold around book value. If you look at the asset disposals, what we have signed in the first 2 weeks of 2023, we have given that an average discount of 5% to 10% to the last December book value. And we think this is something reasonable to do. So the disposal program -- we come back to financing needs in some minutes, is very limited. So therefore, having this done, giving a reasonable discount and then stopping the disposal program, which is already limited from our point of view, simply makes sense. As said, we have adjusted the CapEx program in Poland and already preserved a lot of cash. And also on the debt side, we've been quite active. Main financing source that for every term residential company is more secured bank loans that always was our largest source of financing. And with the refinancing that we did in the course of 2022, we raised additionally EUR 209 million of liquidity. In the unsecured market, we've been active in smaller sizes and some promissory notes in Germany, also the extension of corporate bonds in Poland that added up in total in smaller tranches to all in all, EUR 108 million. So in general, we have done a lot regarding refinancing leading to the fact that basically all maturities in financial year 2022 are addressed. And when we talk about outstanding refinancing issues, we are basically only talking about the final repayment of the now reduced bridge loan from the ROBYG acquisition that currently stands at EUR 250 million, and that should be a good position in which we are in the meanwhile. Yes, let's leave the highlights slide and go to Page #9. Just a few comments on the income statement that are important from our side. The net actual rent increased year-over-year by EUR 6.8 million due to the good like-for-like development in Germany and the Polish rental business made its first contribution, EUR 2.7 million. This number will increase in the course of 2023. And we can tell you that from 2023 onwards, we will also report FFO I in the sense that we divide here between the German and the Polish business. The sales results that you've seen in P&L is coming mostly from our newly acquired subsidiary, ROBYG. Please be aware, if you look at the sales results, which is currently -- which has been EUR 35.4 million is after impacts of the purchase price allocation. So with the acquisition of ROBYG, we have done a step-up in all the book values regarding also the for sales project. That means on our level accounting-wise, profits are lower, but the cash inflow is higher. We come back to that in a second. We comment on valuation results later because this is, of course, a great interest, specifically overall number already now recorded a slight valuation loss of 1.5% in financial year 2022, coming from the German portfolio. The Polish portfolio showed a slight valuation gain of EUR 33 million. Other things like personnel expenses like the net financial result and cash or like the cash taxes as far as the FFO I relevant stayed quite on the level of 2021 in the course of 2022. Coming to Page #10, you see details regarding the EBITDA, FFO and AFFO calculation. Just to mention that the EBITDA margin for the German business has increased from 68% in 2021 to 69.2% in financial year 2022. That means basically, we've achieved higher rental growth with the same cost base, which would be a good news. Looking at the AFFO, I mean the number is still not bad from my point of view, EUR 102.8 million is total AFFO that the German business achieved before any refinancing of the CapEx, and it is EUR 10 million roughly lower than in the previous year. Why is that? The difference is basically the modernization CapEx, where we spent EUR 18 million more in 2022 compared to 2021. And the reason for that is that we basically started now to do more regarding ESG CapEx. That means more modernization to bring our portfolio to climate neutrality. On the right side of Page #10, you see some details on the results in Poland. If we want to draw your attention, especially to the EBITDA adjusted that we achieved in Poland EUR 80.8 million, which is really a cash number. So this EUR 80.8 million is the EBITDA in Poland, leaving out any effects from purchase price allocation leaving out valuation results. So really cash that we generated in 2022, mainly from the sales business and we deducted cash taxes, minorities and interest costs, we arrived at the EUR 59 million that we already mentioned. So that shows that Poland in 2022 and really not the most easy market environment already delivered a quite strong cash contribution to our results. Page 11 shows the EPRA NTA development. We are now at EUR 20.74 per share. Main impact on the NTA reduction was the ROBYG goodwill that we had to exclude per definition from the EPRA NTA, the capital increase that we've done in summer which was below the NTA, clearly. And the portfolio relation in 2022 for the first time since many years, delivered a slight reduction to the EPRA NTA whereas in prior years, we always had here clearly a positive impact. Page #12 shows the refinancing. And again, from our point of view, when we talk about refinancing issues to be tackled in the future, we mainly talk about the EUR 250 million bridge loan from the ROBYG acquisition and knowing that we've been active in the acquisition program that we have also signed disposals after the balance sheet that we are in parallel working on further bank loans in Germany also on our unencumbered asset, we think it's very visible that we repay this bridge loan, hopefully quite soon. And then looking at the maturity profile in 2024, 2025, what is coming up is then, again, mortgage secured bank loans in Germany to the largest part, where we've clearly seen over the last months and quarters and basically over last year that this is a very stable financing source. So that means the first material Capital Market Day [indiscernible] that is coming in summer 2026, when the EUR 470 million convertible bond issue and that means we are really close to a situation where we're independent of capital market debt financing, and that should be a very good position for us. The LTV at year-end 2022 stands at 46.7%, so slightly above LTV target, mainly because of valuation losses we had to record in the fourth quarter of 2022. All the financial debt except to add this, that is due in 2023 will be, at least for the largest part, we paid now in March. So the [ EUR 115 million ] promissory notes, the Polish bonds, also, the bank loans that you see here have already been repaid or are now repaid. EUR 125 million corporate bond is due in June this year. So this financial debt of -- in total EUR 409 million that you see in the maturity profile is repaid quite quickly or has been repaid already. Page 14 shows the development of like-for-like rental growth. As I said, good results here in 2022 with a total like-for-like rental growth of 2.7% compared to 1.3%. Looking at the total investments per square meter, you see this on the top right of the slide, we increased our spending to EUR 24.6. If you include everything, some maintenance and CapEx from EUR 20.9 and the difference, as you can see here on this chart, is that the CapEx increase. And as I said here, the increase is -- impact CapEx for more energetic modernization but still the absolute level that we spend on the per square meter level that we spend is around close to EUR 25 should be still a very manageable and a very targeted approach. Page 15 shows the vacancy reduction in 2022, down by 110 basis points over the year. So we saw extremely healthy letting results, and we expect also in 2023 that this trend will continue, perhaps another 110 basis points -- it's too much to expect but we see simply strong demand for our properties in Germany at the moment, and that should be good news that the operational business in Germany is on a very good way. Coming to Slide #16, let's discuss the portfolio ratio results. In the second half of 2022, we recorded a valuation loss on the German portfolio of 5.5% after a valuation gain of 4% in the first half. So that brings us for the full year to a slight valuation loss of 1.5% compared to [ 9% ]. As said, the Polish portfolio saw valuation gains of EUR 33 million, so the reason for the overall valuation loss was due to the German portfolio. And within the German portfolio, due to yield expansion that we saw basically across all our regions. So there was not any region very much outstanding. It's still moderate, and we also expect that to be moderate. So the portfolio stands now at a gross yield of 5.4% or at a per square meter value of 1,200 units. And if you ask us, well, what's our outlook for 2023 that's, first of all, clearly say, we are not giving here an official guidance. But for example, what -- as we see when we currently sell in the market at a 5% or 10% discount of book value that we can generate liquidity for us. And I think discussions with other experts bring us also in a similar range. Perhaps this could be a valuation trend for the financial year 2023 as well. So 5% to 10% value reduction in the course of 2023. From our point of view, that could be a reasonable outlook, but that way what the actual results really deliver. And what does this mean? So for example, where does our LTV stands if we, for example, have a 10% valuation decline in the course of financial year 2023. Well, if we exclude in a first step, all the sales results or plan sales, the LTV would go up roughly by 200 basis points. But with the sales that we have already signed and that we are hopefully going to sign, there should not really be a big impact on the LTV. This scenario leaves out any dividend payment. It is clear, as we propose the suspension of dividend. So you see, even such a value reduction would not really materially hurt our LTV. It is the risk high that there is more valuation decline. I mean, clearly, we have a lot of uncertainty, but we simply see that there's extremely strong demand also for our product and looking at the current gross yield of 5.4% in a world with higher interest rates, our portfolio still delivers a reasonable cash flow here to a potential acquirer. So therefore, we feel very comfortably positioned with a high-yielding portfolio in a higher interest rate world, and it gives us a lot of confidence that we are very much protected against any stronger valuation losses, which we are not expecting. Coming to Poland, and I would like to continue on Page #19, with the sales business. We saw from our point of view, an extremely positive development. So as you can see in this chart, in the first quarter of 2022 in Poland, we sold 706 units. We saw a strong reduction in the course of the second and third quarter, but currently, sales numbers are simply picking up. So the fourth quarter was already the strongest quarter in the full year. And we can tell you that also in January and February, sales numbers have been increasing. So this trend in Poland of reduced sales has clearly reverted. Sales numbers are not only stable, they are increasing, and that shows us how much demand in this market is. And the outlook for 2023 should be quite positive when it comes to sales numbers. Also knowing that the Polish government is about to set up a program for first time homebuyers that should be implemented from July onwards that brings them basically the possibility for quite strongly subsidized loans, but it can take on a mortgage of around 2%. The market mortgage rate currently stands around perhaps 10%. So it's really an attractive program for first-time buyers of apartment and that refers to people under the age of 45 years. So from this program, to what extent ever we clearly expect an additional demand for our sales projects in Poland, which are besides that already on a good way. And you see that we had an extremely strong fourth quarter where we handed over more than 2,500 apartments and recognized strong sales revenues. So also this was a very good result from our team in Poland. Page 20 shows you for the first time in a quite detailed and table on our rental portfolio in Poland. We have now 1,153 units in operation in Poland or to be more specific, it was the number at year-end 2022. The actual number is around 2,200 units. So we have completed also other projects in January, February and March. Out of this 1,100 at the end of financial year 2022, 360 have been in the market for more than 1 year. Looking at the like-for-like rental growth that these units achieved this year north of 20%. So at the moment, Polish rental apartments see simply very strong demand. Vacancy rate is at a quite low level of 3.8%, which is then basically due to increased turnover that we have naturally in an unregulated market. And looking at the 773 residential units that are in operations for less than 1 year and to give more specific, most of these units are in operation since the end of the fourth quarter. This is also the reason why we still have a vacancy of 50% because we just basically started the letting processes. If you look at the rents that we achieved here and you see the numbers, these are roughly 30% higher than planned about 1 year ago. So I mean we're not pointing out for a sustainable like-for-like rental growth of more than 20% in Poland. So this number, mid- to long term, clearly has normalized. However, should remain that. But that give an impression how this product is searched for in the market, this institutional rental business in Poland, we're very much convinced will have great success in the future. Page 21 shows the development of the rental portfolio in Poland that we expect. As said, we have already completed another roughly 1,100 units in the first weeks of 2023. So we have currently roughly 2,300 apartments in the market. We will finish other projects in the course of financial year 2024, so that with the current pipeline, we end at 3,350 units. That's roughly 700 units less than what we communicated in the last conference call. The difference of the 700 units simply lies in the fact that we decided to sell part of the units that were originally dedicated for the resi for rent. So 700 units are now in the process of being sold, and this is also part of the reason why we simply increased our cash surplus in Poland, which was clearly our primary target. So as said, we have currently stopped new projects. But once we really are in a situation, where not only the Polish business where the cash surpluses from the sales business but where we are in a position to get simply also better access to financing, then we will restart the rental portfolio, but we will really or the build of the [ cut ] of the rental portfolio, but we will really do this step-by-step and very carefully, and it's really up to us when we do it. So we're not here under pressure timing-wise. 22, this page shows you some statistics about the Polish residential rental market. You see the strong rental growth that all locations where we are active as in on top of that was Warsaw with an increase in rents of around 34% on the right hand, which was 23%. So quite impressive numbers that you currently see in the Polish market. And we hope that we can give you more insights and interesting tour on our Capital Markets Day that we are hosting in Warsaw at the end of April. Guests have seen the final invitation that we have sent out yesterday evening, so it would be great if we can see many of you in Warsaw to discuss more interesting developments on Polish residential market. And finally, guidance, I can make it short, that's shown on Page 24 because we leave everything unchanged compared to the numbers that we have published in November last year. That's it from my side. Thank you so far for listening to the presentation. But of course, I'm now very happy to answer your questions.

[Operator Instructions] Our first question is from [ John Wang ] of Kempen.

I think in the press release, you mentioned about the disposal base for 2023. You mentioned that momentum from Q4 has carried well into the first 2 months. Could you provide a bit more color on this, Martin?

John, please understand that we cannot publish all the details yet because in some cases, we are already in the process of signing. As said, 900 units have been sold in the fourth quarter. The positive that we achieved even more in the first quarter of 2023, so that we get additional cash proceeds, which are north of that what we have achieved in the full year of 2022. So just to give you a dimension. I mean, we always said the purpose of the disposal program is to repay the bridge loan. So the bridge loan [ amount ] [ EUR 250 million], if we achieve half of that quite quickly with asset disposal proceeds and that take the remaining 50% or repay the remaining 50% by new bank loans, that's perhaps a very visible outcome. And if you ask us what happens with the disposal program once we repay the bridge loan, that's not then -- and I think this is also good news. There's no pressure on us to continue this disposal program. So if we look, as I said in the press release, more opportunistically in the market, but basically, we can stop that. So we think that's an advantage that we have in the current very difficult transaction market that we simply have a disposal program, which is from size limited. So we're very close to getting it done. Again, if you look at what we have sold in the fourth quarter, that's a good estimate and that's we achieved [ even a little bit more ] in the first quarter and we will come back with details in 2 months when we publish the Q1 figures.

Okay. That's clear. And maybe on rent multiples on the Q1 sales. Anything you could provide in terms of color there. Is it similar to what you've done in Q4?

Yes, it was a little bit more lower yielding assets. And so therefore, I mean, we're not specifically selling 1 type of assets. So our strategy always was to sell, or should I say it a little bit of everything. Looking at sales from the last weeks, these are more than assets with lower multiples, lower yields that we sold compared to what we have given as numbers for the full year 2022.

Maybe on Poland, the 22% like-for-like rental growth you posted in [ Wroclaw ] screen is rather impressive, but it's still a bit lower than the average rental growth at plus 27%. And looking at the average rent per square meter, it's also a bit lower. Could you maybe give a bit more color on that?

Yes. I mean the main reason for that is that in Wroclaw a larger part of the units that we have in the market for more than 1 year is more. It's not in the after, but it's more away from the city center. So what we have finished in the course of 2022, this is in a more central location of Wroclaw where we expect a stronger rental growth than compared to other apartments what we have in the market for more than 1 year. So perhaps a little bit due to this reason. But in general, we think the numbers are doing quite well.

Yes, that's definitely true. Maybe on the over market rental growth and -- how does this relate to affordability in Polish resi.

Yes. I mean, basically, we are slightly above inflation in Poland. Inflation rates in Poland are [ 15%, 16% ]. Like-for-like rental growth is 22%. So we are outperforming inflation. Salary growth in Poland is clearly in a double-digit number. We're benefiting from that because that makes the apartments, whether we talk about rental business, whether we talk about the sales business still affordable. And if we look in our own cost structure, yes, clearly also, we have to increase quite strongly the salaries for our people that are really doing a great job. But on the other side, looking at the absolute amount from a group level, this is still very manageable. So therefore, it's good to have this settled growth in Poland that keeps the apartments affordable. So we have not really seen a weakening of affordability ratios in Poland, not only in 2022, but also over the last years in total.

The next question is from Andres Toome of Green Street.

So my first question was around disposals. And just to get a better handle whether any of these disposals are, I guess, sold through [ SPVs ] and the buyer has also assumed the in-place debt .

Yes. This is the case. I mean, in some cases, we are selling or we've sold it to cash buyers, but also in other cases, the buyer clearly needs to take on debt. And it is clearly in this environment, I should say. In former times, once you signed portfolio disposal, it was clear, while [indiscernible] goes through nowadays still needs to wait for the closing, so that buyer has taken on all the debt that he needs for that, normally natural process. So therefore, as you see today, we are also a little bit careful in communicating the final numbers. But if the question is from the direction that all disposals that we signed after balance sheet needs are perhaps at risk because the closing is not coming now, that's not the case.

So what I meant mostly was whether the buyer was able to benefit from lower in-place debt you might have had in the SPVs versus taking on sort of new debt to finance it?

Yes. No, this is normally not a factor. So if we sell a full SPV, normally, there's always a change of control mechanism embedded. So therefore, we had an opportunity that the buyer has, but then it's up to the bank, whether it's decided to continue with the contract or not. So that's not really a selling argument that we have. And I think this is a normal situation that the bank loan is due if we sell an SPV.

Understood. And have you had any sort of recent discussions with credit rating agencies as well, given there's been some decent progress on liquidity front.

Yes. I mean, basically, a continuous dialogue with Moody's and S&P. I think they are very well aware of our good development that we really make progress on that. So in terms of further rating, I'm absolutely personally not concerned that something TAG specific leads to a more negative discussion. But I mean, we clearly need to be all aware of that it's also important how in general rating agencies look, for example, at the German residential market. So if they change the new to a more negative view, yes, of course, this can then again be for all companies, something that affects the rating. Do I expect this currently? No, that's not the case, but that's not really in our hands. So we do everything that we can. And I think here, we are on a very good way, and this is also seen by the rating agencies.

And my third question was around the refinancing interest rate. You sort of alluded to 3.2%, which sounds very tight against swap rates. So maybe you can give a bit of color around there, how does that all-in financing costs come about?

This was in -- all in the course of financial year 2022. And we had here maturities also at, for example, 5 years. So today, the refinancing rates would be higher. So if we look at current bank loans where we're in the process of negotiating that I would say margins are for 5 to 10 years, perhaps between 100 and 130 basis points. So on top of that comes the 5 or 10-year swap rate. So we hear more slightly north of 4% currently for really new incremental bank loans. But we also had times during the course of 2022, where we were able to simply use some bits of lower interest rates to get these bank loans done.

Okay. And my last question is just around the trajectory for vacancy. Obviously, it's -- there's been a lot of progress in 2022. And as you said, you won't expect as much for this year, but what's sort of your take for the full year? And how much are you seeing immigration benefiting locations?

Well, our guidance, if you remember, that [indiscernible] a reduction of further 30 to 50 basis points. But this was more a conservative one, so that will be achieved more. But once we have a vacancy rate of 4.4%, another 110 basis points reduction would have already bring to 3.3%, so once we get simply to a low vacancy rate, perhaps also reduction speed is a little bit lower, that the German is still benefiting also from the strong inflow of people from the Ukraine that really puts pressure, puts additional demand on the residential market. So I'm very sure when we report in the course of 2023, we will see again a good development in vacancy rates that as always, the first quarter will be a little bit weaker, but thereafter, and we simply see that this is on a very good way.

The next question is from Celine Soo-Huynh of Barclays.

Martin, can you hear me?

Yes, Celine.

I have 2 questions on Poland, please. First 1 being, can you confirm whether presale is for Poland currently and specifically for the units completing this year. Second part would be for the units -- all the units under construction. That will be my first question. And the second question, you reiterated the FFO II guidance that were published last year, and it was before all the announcements around the Polish government support for first-handbuyers. Is there any room for improvement this year or next? I guess, not on the volumes, but what about pricing and margins?

If we start with the last question. So yes, perhaps we can sell more in 2023 than what we originally expected. So I think the guidance for sales numbers in Poland for the full year 2023 is around 2,500, 2,600 units. So yes, perhaps we can do more, not only because as of now, we see better sales numbers, especially when this government program kicks in from the 1st of July onwards, that could be a driver. But if you need to be aware that there's a difference between the point in time we sell an apartment and the point in time that we realized the related revenue, which is always done when we hand over the apartment, so normally, an apartment that we sell in 2023 is handed over in 2024. So this is perhaps then more a driver for our earnings for 2024. And the presale ratio for everything that is handed over and -- or planned to be handed over in 2023 stood at year-end already at 75%. In the meanwhile, I don't have the actual numbers from February or from March, but I expect that this is more close to 80%. So this is compared also with previous years already a very good presale ratio. And for the assets, all assets under construction, I mean, clearly, the number is lower, but normally, we always have good visibility on at least 1 year in advance regarding the presale ratio. So if I look at that number compared to all the years before, and you know that we now for some years already active on the Polish market, we don't see here a decline in the presale ratio. So that gives us quite a lot of visibility towards our cash flows and towards our earnings in 2023, that's already clear.

The next question is from Kai Klose of Berenberg.

I've got 3 quick questions if I may. The first one is on Page 39 of the presentation, where you now refer more on the ICR, including sales results. And on Page 40, you show the ICR covenant. I just want to check in the ICR covenant includes the results from sales. So it's the 7.4x compared to 1.8x and not just the ICR from the rental business?

No. For the covenant, thanks for the question. It's the rental covenant, so the 5.6. That's relevant for the covenant. But still, I would say, a lot of headroom under this covenant.

And the second question, you mentioned it was about 5% to 10% on the sales -- portfolio sales, 5% to 10% discount. I just want to check, was this the latest unaffected value as of June '22 or December '21? Or was this the restated value or reduced value as of December '22.

So this refers to the reduced value or to the new value as of December 2022.

Okay. And 2 last questions. First one would be, could you indicate what was -- or if there was any specific reason for the quite strong reduction in vacancy rates in the Gera portfolio? I think it's on page 31 which decreased a little bit more than in other locations?

Yes. I mean, Gera has simply seen a good development. And there was not any specific impact, for example, from refugees from the Ukraine or these not more than in other regions. But Gera saw good development has also some larger companies like Amazon, have opened new factories or warehouses. And we simply provide for potential tenants and Gera good products. So we take also the largest landlord in Gera. And compared to the competition that we have into the market, I would say that we simply provide the best products here in the market. And also the team is doing a very good job. So I would say there's more overall market trend and we're very pleased that as we know that this is not the easiest location that we could show such a good progress here in 2022. And by the way, that still continues as of today.

Perfect. And last question would be regarding the total amount of maintenance CapEx spend, which was [ '22 -- ] in '22, a little bit more than in the 2 previous years. Is this reasonable to assume that in '23, we will be back to the 2021 use per square meter? Or is it the increase also driven by the higher construction costs?

I think it's reasonable to expect a similar level like 2022, so more towards the EUR 25. And there are clearly construction costs are higher and that has a certain impact. But I think the more material impact is that we're simply doing more now when it comes to modernization because of the need to bring the portfolio to climate neutrality. I mean this is, of course, a long-term project that have seen our decarbonization strategy and the specific amount that we've given 1 year ago. So we are on the way. We simply need to start, is not a plan now to reduce CapEx dramatically, but advantage is that looking at the overall amount, this is still something that's still manageable and comparing that with CapEx in Poland. Yes, in Poland, it's really a kind of material cash savings if we stop or reduce CapEx. But in Germany, we simply continue with our programs. And today, we simply do more because we do more for energetic modernization than in the prior year. So I would expect CapEx is always something a little bit cyclical, but it is in 2023, more towards the 2022 number than towards the 2021 number.

The next question is from Marios Pastou of Societe Generale.

Just to bring it back to the disposals you confirmed in Germany. So firstly, can you just confirm how many of the 900 units you're confirmed in the fourth quarter related to the say EUR 40 million of disposals which we used to close during the last quarter and how many of those were actually be new disposals .

Well, these were our complete new disposals and the EUR 40 million that we have communicated before, this has closed in the fourth quarter.

Okay. So the 900 units are in addition to those additionally agreed units?

Yes, you got it.

Okay. And then just to confirm how many of the 2,500 units you targeted for disposal this year still remain? And is there sort of a target dues for the bank?

As I said, just to give in a rough number, I mean, if we say we've continued in the first weeks of 2023 with a similar speed like in the fourth quarter, again, we will give you details of the Q1 number that would mean that we roughly have sold another 1,000 units. And so that means the remaining disposal program than perhaps at 1,500 units, which is already the manageable number. And again, if we see that the transaction market that's becoming more difficult, also an alternative for the last steps in our refinancing, which is the breakdown is there, which is the German [indiscernible] where we're working on, so -- but you should assume that the remaining disposal program is more in an amount of perhaps 1,500 units, just to give you a rough indication.

The next question is from Orlando Gemes of Fairwater Capital.

Thank you very much. I have probably 4 questions. Firstly, I'd like to address the debt. Could you clarify whether the promissory notes are pari passu with the convertible bonds and also with the Polish zloty corporate bonds, if they are also pari passu.

Yes. This is our pari passu. Sorry, Orlando, it was a little bit hard to understand. So these zloty bonds that we've issued or basically, it was an extension of an already issued zloty bond in the past. And also the promissory note that we issued in Germany were absolutely in line with what we have done in the past.

Sorry. So to clarify, they're all pari passu?

I'm not sure if I get your question right. So they're absolutely pari passu with all other unsecured debt. So there's not anything preferred or something like that or secured, that's not the case.

Okay. And for the promissory notes, there is a step-up of 50 basis points if you're downgraded below investment grade at S&P.

That's correct. And that's only true for the promissory notes. So looking in all our other financial debt, whether it is bank loans or convertible bonds or corporate bonds, there's no step up only in this promissory notes in Germany of in total, I think it's not the full EUR 85 million, it's only EUR 75 million, that would see a step-up of 50 basis points if we are not investment grade rated by S&P as well.

Okay. And it is now your assessment and your bank's assessment that it is cheaper to access debt through these markets rather than the corporate bond market?

Sorry, can you repeat this question?

It is your assessment and the assessment of your banks that it is now cheaper to access debt funding from promissory notes and from bank financing than from the corporate bond market.

Yes. That's clearly our assessment. I mean the corporate bond market is, at the moment, extremely difficult. So that's not our plan to go to this market at the moment. I mean, difficult to give you really a pricing because we have as you know, simply no outstanding larger benchmark corporate bonds. I mean the 2 corporate bonds that we have outstanding were basically private placements, each of them, EUR 125 million. So to give you an exact pricing that's extremely difficult, but comparing that to financing conditions that we achieve with these smaller promissory notes or very clearly with the bank loan that's for sure, more expensive.

Okay. Now I'd like to address in Poland. In terms of the total investment cost that build-to-hold and the build-to-sell portfolio, there's a meaningful difference of EUR 2,200 versus EUR 1,800. Could you address why that is?

Yes. It's clear. First of all, just also to make this clear, the total investment costs also include the land bank, so that's not only construction costs. It's really everything land bank, plus construction. And when it comes then to an apartment that we sell in Poland, in Poland, that's always sold without what we call fit out. So that means there's no floor in there. There are no doors in there. There is no bathroom. There is no kitchen. I mean, of course, no clear heating system and windows, but you sell basically a kind of shelf that's absolutely market standard in Poland. And if you rent an apartment, clearly, we need to bring all this in. So this EUR 400 per square meter difference is what we need to invest as a landlord simply to, again, put in the floor, bringing a kitchen, bring the bathroom and things that, that's the difference. Quality wise, it's not really different between our apartment that we sell or an apartment that we [indiscernible].

Okay. That's helpful. Then I'd just like to ask a question about your ABBA Strategy, the A and B cities. I was looking through the different regions. And when looking at a city like Dresden with an in-place yield of 4.6% and comparing that to Berlin at 4.5%, I'm wondering why that relationship is attractive to you. Why is Dresden attractive compared to Berlin when the yields are basically the same .

You know that our Berlin portfolio is a portfolio that completely consists of units that are in the Berlin commuter belts. So that's [indiscernible]. These are locations like [indiscernible] or like [indiscernible]. These are all the smaller cities that have a good, for example, public train connection to Berlin. So that's a good example of our ABBA Strategy. The Berlin [indiscernible], but our location within this area, the area is then more to the B location, which is they're not Berlin City Center, but something which is then more commuter belts. So therefore, we think that's very much in line with our strategy and I mean if you ask us, well it's 100 of the portfolio located in the key B location. I would say, well, that's a lot of units in this [indiscernible] in A location, but also have good to have a good mixture in this regard. But the overall strategy is absolutely unchanged and follow this ABBA approach.

Okay. But when looking at the portfolio in detail, if the region of Berlin is satellite cities, then when we look at something like Leipzig, Gera is a satellite city to Leipzig. So that actually means that in the Leipzig area, you have almost 2,000 apartments. So there's somewhat of an inconsistency in the way that the portfolio is broken down in that portfolio in that distribution. Finally, I'd like to come back to corporate governance, and this is something we've discussed in the past. But I just want to kind of get a clarification as to why TAG is a total stand-alone in not appointing a CEO. And I suppose I'd also like to note to have clarification is who is the final decision maker when it comes to strategy for this company.

First of all, Orlando, positive, good smiling about the comment to [indiscernible] Leipzig, so if you ask the people in Gera, they would strongly disagree with that. We would always say they're city on their own, which is the case, by the way. No, but [indiscernible]

Nice 5,000 people. So we're not talking about a big city here. So...

That's 100,000 people [indiscernible] Good. But coming back to your question about corporate governance. Well, this management structure is in place now since 9 years. So since November 2014, if I remember that correctly, basically as of today -- so basically as of today, it's a very simple structure with Claudia Hoyer, my colleague as COO, responsible for all the operational areas and me as a CFO, responsible for the typical CFO functions. And if ask who is doing the strategic decisions, well, in a 2 men or 2 people mentioned board, that's quite easy that it's up to us to do this, where remember strategic decisions like this investments in Poland, clearly, this is something that we discussed intensely between us. And of course, I mean, for such strategic decisions, we always need the consent of our Supervisory Board. It is always for our company. I know that it's unusual to have no CEO, but if you are, for example, our own people here at TAG, I think for no one, this is really a point. And we think that works quite well for many years. So therefore, no more is blanket.

Yes. I suppose I would argue, and I think we've seen that the world has changed a lot and what may have worked in an environment of low interest rates and increasing prices may require a different structure. And I think having 2 people who is already a very small number, but particularly in a world that this is as complicated as this as we've seen from a capital raise plus the impressive growth in your business in Poland, I think there's a real question of why this is loan structure and whether it is -- continues to be fit for purpose in this environment. So I think it's really worthy of consideration of whether you have enough senior people there.

The next question is from Simon Stippig of Warburg Research.

I have a couple of questions. First one would be in regard to the portfolio valuation. Could you give some more insight into the characteristics of the valuation, for example, the regional valuations, let's say, but you just mentioned commuter belts, but then also what you see in the cities. That would be helpful.

Simon. I can make this cut short. So we did not really see here significant differences between regions, also between type of assets. You know the discussion that potentially assets with a better energy efficiency rating performed better in these days and with a lower energy efficiency rating. I think clearly, mid- to long term, this must be the case. Have you seen this integration results 2022 already. No, that's not the case. I would personally also expect that in about that high interest rates, if we have good building producing higher yields in a reasonable or good location that should perform better than building that has a very low valuation yield. Did we already observe this in the 2022 valuation result? No, that's not the case. Obviously, a little bit surprising me that it was really throughout the portfolio very, very similar development that we've seen. So as always, of course, there are differences, but not really something material where I can today see well, this is a clear trend in the valuation.

Okay, great. But you also have the comparison between, let's say, suburbs of [indiscernible] and also you sold or the valuation within your cities? Just to make sure that you have actually this comparison not only in energy efficiency, et cetera, but also from cities to, let's say, maybe a yield expansion to suburbs.

After that, it was not really a big difference. And I'm just to give you an idea how we look at such valuation results. So if, for example, a certain location sees a valuation reduction of 3%. In another location, you see a valuation reduction of 4% or 5%. We don't start because it's 1 percentage point or 2 percentage point difference say, well, that's extremely different regulation development. So knowing that, of course, every valuation is an estimate offers a certain range. This is more or less for us a similar development. So perhaps one should not put too much effort into interpreting the last percentage point in valuation result. Again, this was very similar throughout the portfolio.

Okay. And then have you anything seen in that regard in your disposals?

Yes, there are different types of disposals that are doable. Give you just some examples, what has worked is selling really helps a kind of noncore asset portfolio to a local investor at high yield, that is something that works. What is also selling -- working as selling lower-yielding assets in a location like [indiscernible] to pre-equity buyer. What is also working is selling assets to companies that are doing the privatization business, because for them, if they take on that more expensive debt, it's not that a problem because they say, well, anyway you want to sell down the portfolio in the next 2 to 3 years. So that's the type of buyer not a new at 100%, but to the larger part where we're currently selling to.

Okay. And that will answer my next question, who is the buyer of the portfolio. So as I understood correctly, it's a local buyer and then a specialist buyer who would privatize apartments. But on top of that, any other buyers?

Yes, then let's take my [indiscernible] example. That's been a good product if, I don't know, 200 unit portfolio increasing a very low vacancy rate already at a low yield is then bought by with more equity like a family office. That's also something that we see. But again, I'm a little bit careful with saying this is very representative in the whole market because still our numbers in total are not really representative in talking about the market, but at least we can give to this observation.

Okay. Great. And then what you mentioned in regard to valuation, you said that if there is a 5% to 10% decline in valuation in the German portfolio and over 2023, then your LTV would raise by 200 basis points. Have you had -- or what's your best guess in regard to credit rating, how that would actually change? And then the consequences out of it for your debt and for your financing costs?

Well, that would be still in line with the limits that we've been given by the rating agencies and this increase would be without any disposal proceeds, just to make this clear. As we continue to sell and have signed something that should be then have an LTV reducing impact. So just to give you a rough number, if we complete the full disposal program and if we would see a 10% inflation decline, the LTV would largely remain unchanged.

Okay. Great. And just to confirm again, the pool or the remaining disposal program, not including your sales up until now during Q1 2023, it's 1,500 units. Is that right?

Yes.

Okay. Great. And then just 1 more thing in regard to the bonds. So you mentioned that you're in the process of paying back the bond especially corporate bond, EUR 125 million in volume. Could you give -- could you provide a bit more of insights in that regard, please?

Sorry, Simon. I'm not sure if I get your question right. The bond is due in the middle of June, I think, in [ 2023 ]. Currently not any plan to refinance that in the sense of that we then go to the bond market and issue a new corporate bond. So we simply put -- pay it back from cash at hand or also from basically refinancing from bank loans.

Okay. Great. And then last question on your presentation Slide 21, you're showing the buildup of the rental portfolio in Poland. And -- so I wonder at the H2 '23, you have no additional units. And is that a function out of your stopped investments into Poland?

No. I think it's more a function of the fact that we decided to sell the -- I mentioned the 700 units that originally have been in the process of being a rental product. So therefore, there was a small gap of [ someone ] in between where we do not finish rental projects as we have decided to sell this roughly 700 units.

The next question is from Rob Jones of BNP Paribas Exane.

Can you hear me okay?

Yes, good morning.

Great. Perfect. So 3 questions. One is on the potential for kind of Polish first-time buyer initiatives. I wonder if you've got any info in terms of the upper limit in terms of property value that, that policy or potential policy for first-time buyers might relate to, that x hundred thousand euros, et cetera. And then comparing that to your average selling price because I'm trying to take a view in terms of the percentage of your potential Polish assets that have been constructed and sold, how many of them might be eligible for a potential first-time buyer scheme. So that's question 1 of 3. The second 1 is around portfolio valuation. So on Slide 33, you give a breakdown in terms of the valuation details by location. On initial glance, it looks to me as if the regions with the lower in-place multiples, i.e. higher yielding have seen a large magnitude of capital value decline, i.e., the kind of thesis that high-yielding assets from a convexity perspective might not see as much in the way a value decline potentially is not the case so far, i.e., the kind of low-yielding prime product maybe as a relative outperformer on a capital value perspective. So just kind of a yes or no on that. And then the final one from my side is around a statement that you made during the call, which I think word for word you said corporate bond market extremely difficult. And I wonder if you could be very specific from your individual circumstances to say why you believe it's difficult, not kind of wider market commentary. But from your perspective, is it you've gone to the banks, and they've said, guys, you've got no chance of raising any unsecured or some sort of kind of company-specific highlight or disclosure that would really help me. Those are my 3 questions.

Thanks for the question, Rob. Start with the first one. This program that the government Polish government has now decided to implement. I mean, the final steps in the sense of that it passes the parliament need to be done, but that should be more technical. See that these subsidies are granted to buyers who buy for the first time an apartment who are below 45 years old and the maximum mortgage subsidized is PLN 600,000 zloty. PLN 600,000 zloty, that's roughly EUR 130,000. And that is, I would say, enough for 95% of our apartments. And I mean, we are selling in Poland a product, which is for the -- for the typical project, it's a smaller apartment of around 45, 50 square meters. So this very much fits to what we sell in the market. So that means we could really benefit from that. And let's see how this develops. But that should clearly be hopefully that strong contribution to our sales numbers. Again, yes, you're right, you can analyze the valuation results in very detail and say, well, this is perhaps 1 percentage per more 1 percentage less and would not really start reading a trend from these results. So again, knowing that evaluation is always an estimate, always rough range. If there's a percentage point more or percentage point less, I would not really start reading a trend. And if you ask us for a personal opinion, again, I would expect personally, that in the future buildings perform better with a higher energy efficiency ratio, which is good for us because you know that we have a high share of buildings already in the higher energy efficiency classes. And that also as we are in a world with higher interest rates, higher yielding assets should also vertically be something that's less vulnerable against valuation losses. So that's a general statement, again, that's not too much to put into -- also to read from these very specific numbers. And when I talk about difficult corporate bond markets, I mean -- and they do this very simple, if we look at where trading -- where bonds are trading from companies that are better rated like [ Infonobia ] or [indiscernible] or around town, I mean what would be a coupon that we currently need to pay the more towards 7%, 8%. So that basically stops then the discussion or do any plans of going to the corporate bond market. So that's more the conclusion that we draw from this, but it's not necessary for us. And that's also -- that's again worth pointing out when we finished the disposal program, which is not really needed in outsize, and what is coming up is mortgage secured bank financing in Germany also next year, there should always be a reliable financial service. And we have a strong cash flow from our own business. So not only for Germany, this is also true for Poland. So therefore, we are really very close to the situation or have basically -- we've already achieved it where we're not dependent on the corporate bond market. And yes, I mean, who knows how the development is. That's not in 2023, but in the next 1 or 2 years, perhaps margins are coming down, but interest rates are also coming a little bit down. And then that is, of course, a market that we would look -- or start looking again.

Does that answer your questions, Rob? It would appear, we have no further questions in the queue, and I would like to hand the conference back to Martin Thiel for some closing comments.

Yes. Many thanks for taking part in this call. As always, if we have any questions left, please feel free to contact us directly. And finally, again, hopefully, we see a lot of you at our Capital Markets Day in Warsaw in the end of April will be a good opportunity to present our team and our operations there. So looking forward to that. Have a nice day, and talk soon.

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