Vonovia SE (VNA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the Vonovia Interim Results for the 9 months 2022 Analyst and Investor Call. [Operator Instructions] It's my pleasure, and I would now like to turn the conference over to Rene. Please go ahead.

Thank you very much, Francie, and welcome, everybody, to our earnings call for the first 9 months of this year. Your hosts today are once again, CEO, Rolf; and CFO, Philip Grosse. I assume you have already downloaded today's presentation. But in case you have not, you will find it on our website under the latest publication. So Rolf Buch will now present the results and also give a general business update. Of course, we'll be very happy to answer your questions afterwards. With that, over to you.

Thank you, Rene. So I have 6 points of highlights. First, our operational performance remained strong in Q3. I realize that the interest of many of you live elsewhere at this point. But I really believe that we cannot overemphasize how important it is to run a business with a long-term operational stability, and that is why these numbers matter. Organic rent growth was 3.3% and vacancy remained at a low -- record low level of 2.1% for the group. And rent collection remains at a very high level. I'm also very pleased to see that our customer satisfaction keeps increasing. We measure customer satisfaction through an independent third party every quarter and the most recent results were better than ever before.  Operationally, Q3 was not only fully in line with our pre-crisis expectations. On a stand-alone basis, it also was stronger operationally than each of the first quarters before. Operating expenses were down 7% compared to Q2 and 8.5% better than Q1. EBITDA rental was 2.1% higher than Q2 and 4.4% stronger than Q1. So there is momentum on our side. And while the macroeconomic headwind continues, we can face them standing on a very solid operating basis. At the end of the day, the group FFO was up 35% in absolute terms, driven by the inclusion of Deutsche Wohnen and 4.2% per share. Second highlight, our final guidance 22. We confirm the guidance for top line, EBITDA and group FFO, all of which were defined before the macro environment turned difficult from the Ukraine war, higher inflation and higher interest rates. On rental growth, we had at least 3.3%, and we are now slightly upgrading that to 3.4%. We think that we will not quite be able to meet the initial 3,300 unit sales volumes for recurring sales by year-end. The appetite for this product has not vanished, but the demand is lower and transactions are taking longer. On the positive side, pricing is holding up very nicely here. In fact, Q3 saw the highest margin this year. So we are increasing our guidance from around 30% to more than 35% for the fair value step-up. This probably drives some confusion because people think the value decrease is going down, but you cannot see this on this figure. And finally, we are reducing our investment program from '22 again as a result of very different cost of capital; and third, integration of Deutsche Wohnen. The indication process is close to be finished. And starting January next year, the financial and operational systems and processes will be indicated in [ Virtuans ] operations and financials were run on Vonovia’s platform. The bottom-up synergy analysis that we have now completed not only confirms the EUR 105 million EBITDA acts that we have guided, but also yield another EUR 30 million of synergies that will be realized mainly in the value-add segment. This basically concludes integration as far as all reporting is concerned. So starting with the full year, I expect that you will see the Deutsche Bund numbers fully integrated into the group reporting. So in line what we have said at the time of the acquisition, we have fully integrated, but for DUCs company within only 1 year, harmonizing the operational and financial systems, processes and reporting sectors.  First highlight, valuation. We remain confident that our subsector will not experience any large value losses. As value seen have mostly peaked and moved largely sideway on limited transaction evidence, we saw no valuation uplift in Q3. The condo market was stable, and we believe that this was driven by the larger transaction volume in this segment. Volume in the multifamily home segment were considerably lower, which makes the data less reliable at this point. For the year-end regulation, we continue to monitor the markets. To be clear, smart for creations are not unusual and can always occur not just on a single market basis, but also in the portfolio. So I cannot rule out a small decline by year-end, but I certainly do not anticipate anything even close to what some of the better systems seems to be afraid of. At this point, it is still more a normal preparation since values are no longer going up through the population is happening around the 0 line and may end up in a very low single digit and value decline in Q2. The guidance for '23. Q3 is usually the quarter where we also give you the initial guidance or the guidance for the following year. This year, it is not different. And while things are no longer as predictable as they were 12 or 18 months ago, our underlying business gives us the trends and the confidence to present what we think is a very robust guidance for '23. This is particularly the case if you put this into the context of the market turmoil and the general uncertainty. We do expect growth for our top line and the adjusted EBITDA for '23 as well. And this is in spite of a smaller portfolio volume going into '23 and further disposals that we expect throughout the year. So growing top line and EBITDA on that basis means that we clearly believe that the business will continue to perform well, and it will not be impacted too much by higher inflation or challenges in rent connection.  For group FFO '23, we expect to come out slightly below our estimates for '22. I emphasize slightly here, but I do want to caution that at this point, we will probably not be able to fully compensate higher interest expenses and especially taxes as a result of the accelerated disposal program. Turning to investments. We again reduced investment program compared to '22 and now expect to invest around EUR 850 million for modernization and base cation. To be very clear here, we had an initial guidance of EUR 2.1 billion to EUR 2.5 billion for '22 when we gave the first guidance in March this year, especially to reflect the much bigger portfolio, including Deutsche Wohnen. That was an equivalent of 2.3% of gross asset value more or less in line with the previous year. For '23, we now have cut that by more than 60% to 0.9% of gross asset value. So I think this shows how we can and how we do adjust to the changed environment. And if you consider that we are growing the rents a bit faster than expected in '22 and yet again, faster than '23. Also, we are investing much less. This gives to show that the market rent growth is moving in the right direction.  And finally, number six, our free cash flow. Last, but certainly not least for the page, we are estimating the free cash flow for '23 to be around EUR 2.8 billion. This is a combination of EUR 1.3 billion cash on hand that we expect to start '23 list plus another EUR 1.5 billion free cash flow from our operating business and proceeds from noncore and MFR disposals. The estimated EUR 2.8 billion is after dividend payments and before any potential proceeds from joint venture partnerships or the disposals of Deutsche Wohnen nursing business. One final word to lease joint venture structures. The process is ongoing, and we are in discussions with potential partners. We understand the strategic review process at Deutsche Wohnen regarding the nursing home business is at a similar stage. But please do understand that we will not negotiate and there's potential partners under the surveillance of the public. So you will hear from us results when we are ready to sell it. Let me now hand over to Philip, he will start with the segment results.

Thank you, Rolf. And moving to Page 5, please. As you can see on the page, the high absolute growth in EBITDA and FFO was, of course, mainly driven by the inclusion of Deutsche Woman. But also, if you look on a stand-alone basis, you can see nice growth as well, 5.6% for segment revenues, 2.6% for adjusted EBITDA total. With year-end numbers, we will show the Deutsche Bonin contribution in the relevant segments today. And to that extent, for the last time, you will have to show Deutsche Bolin as a separate segment again. For the Rental segment, you get a rough estimate if you combine the EBITDAR rental and the EBITDA from Deutsche Wohnen on a pro forma basis, and that does not include much in terms of synergies yet. While the combined volume cannot be seen in the individual  EBITDAR segment, it's obviously very visible in the interest rate payments. They are higher because of the absolute debt volume as a result of acquiring Deutsche Bohlen. The increases you see in taxes was driven by the additional taxes of Deutsche Wohnen as well. as by the very high EBITDA contribution this year in our Development segment. If I look at the tax margin that that remained broadly stable in a year-on-year comparison. If you put it all together, you get to a group FFO per share of almost EUR 2, which is an increase of 4.2%. And the adjusted for minorities for dividend purposes, we look at an increase of 1.1% from last year. Let's take a closer look at the different segments, and let me start with the Rental segment on Page 6. Vonovia stand-alone operators on a slightly smaller portfolio volume of roughly 4,000 fewer units in the 9 months for the 2022 compared to the prior year. On that basis, we still saw increased rental revenue, which was offset by higher operating expenses. And it's important to keep in mind here that we have built in precautionary COVID-related provisions at the outset of coated in 2020. In 2021, it turned out that we did not need any of them, and we were able to fully reverse this provision. This obviously had a positive impact on OpEx, roughly EUR 9 million. And finally, you don't really see any meaningful synergies in these numbers yet at 2022 is the integration year. At the end of the day, all of this resulted in a marginally higher EBITDA contribution. In terms of margin, we continue to run at a high level with 78.7% as of Q3 2022. What is interesting is that if you look at the 3 quarters individually, you see that Q3 rental EBITDA was the strongest 2.1% better than Q2 and 4.4% higher than Q1. So there's very good momentum. This is largely driven by lower operating expenses. And that, by the way, even includes a single-digit precautionary provision for energy-related payment defaults.  Moving on to Page 7 for the operating KPIs. As you can see, organic rent growth was 3.3%, slightly below the prior year, but this comparison is always a bit off because you have different underlying rent indices in odd years and even years. The comparable 2022 number for market rent growth was, by the way, 0.6%. Vacancy, as mentioned by Rolf, reached a new record level with 2.2% or 2.1% if you receive Deutsche Wohnen. In Germany, our vacancy rate is already below 2%. On Page 8, I would like to give you an update on what we have seen in terms of new rent indices. As you will be aware by now, if he is dominated more by the smaller locations for us, but the trends we see from Q1 and Q2 continues. But the fourth cities shown in the chart puts another 7 smaller locations. The new rent indices were quite a bit higher. But to be clear, this is a theoretical uplift we could get, but prior to screening the local portfolios for the eligibility at this point in time. And as we have shown in Q2, there will always be a good chunk of assets to which the rent index does not apply because they have been recently modernized or relevant above the respective levels of the rent indices.  For 2023, we expect the more meaningful rent indices for our portfolio, including Berlin, Dresden [ Botner ]. So this is going to be a very relevant year for the non-investment driven rent growth. And with that, back to Rolf.

And for the last time, one page about Deutsche Wohnen indication on Page 9, we are progressing nicely in the indication of Deutsche Wohnen, and they are coming on to the final stretch. At January 1, '23, we will have all the operational financial systems and processes indicated. Our recent bought up Deutsche Wohnen synergies, as I already mentioned, confirmed our initial assessment of EUR 105 million EBITDA synergies and identified an additional EUR 30 million, mostly in the value-add segment, and we aim to realize beyond '22. This basically concludes the integration. So starting with the full year, I expect that you will see the Virtual number fully integrated into the group reporting. This will also be the way of how we manage the operational business.  What that means is that in line what we have said and promised in the time of the acquisition, we have fully integrated a full-fledged tax company with only 1 year, harmonizing operational in financial systems, OSCs and computing structures. And this without any noise in a very political important city of Bern.  Let's move to Page 10. Let's continue with the value-add segment. The story here is very similar to the last quarter. We saw a continued growth both in external and internal revenues, but the main challenge remains. We have a substantial labor shortage. That means we cannot do an amount of work which initially internal sources that we have initially planned. If we need to rely more on subcontractors, which are more expensive than in-sourcing. This problem is compounded by the increased absence ratio due to COVID illness and quarantine. The reward of all this is the EBITDA contribution was both basically flat at EUR 160 million.  To Page 11. Our occurring sales volume in the first 9 months '22 was lower than in the prior year period, but the fair value step-up was more than 4% points higher at around 44%. We continue to see demand for this product, but volumes are clearly lower, reflecting the more cautious stance some buyers are taking in line of the more challenging financing environment. Nonetheless, we did sell 458 individual units at a 44% fair value step-up in Q3 alone. Driven by the lower volumes, the EBITDA contribution was slightly down by only 1%. Finally, what is important is the cash conversion was similar to the prior year period at 87%, resulting in EUR 330 million of free cash flow, which is of course -- which, of course, makes Philip happy. And we will switch over to Philip.

This is Philip Grosse again. Moving to Page 12 on the Development segment. As you can see, EBITDA contribution was coming out at EUR 113 million. This is an uplift of 40% above the prior year level. And that was especially driven by the development to sell, including a larger project that we have completed and talked about already in the first quarter. But not only was the volume higher, we also saw higher margins with an average of more than 20% for that itself.  Development to hold is still pretty high. But as we have indicated before, we are in the process of shifting most of the to hold developments into to sell. Of course, you do not see the impact right away as there's still a bit of an overhang from some legacy projects. But please do expect the contribution from development to hold to become smaller in the context of our revised capital allocation strategy and also in our balance sheet, we will correspondingly see a shift from the investment properties to our working capital.  Let's move on to EPRA NTA on Page 13. We did not have a valuation uplift in the third quarter. And as a consequence, the NTA also did not change much. A short reminder, the deferred taxes in the NTA calculation relate to our hold portfolio only. So lower deferred tax volume compared to year-end 2021 is the result of our increased sales portfolio. Adjusting for this technical effect, the NTA per share would have been up 4% roughly. Please note that also the purchase price allocation of the Deutsche Wohnen acquisition under IFRS has now been finalized, and this led to small changes in some of the life items for 2021. Let me say a few more words on valuation. So moving on to Page 14. As Rolf said, we remain confident that our subsector will not experience any larger value losses. Values seem to have mostly peaked and has been moving sideways on very limited transactional evidence though. As a consequence, we saw no valuation uplift in Q3. As also indicated in the chart, it's a rather heterogeneous picture across different markets. In Berlin and Dodman, for example, we have seen value still pushing higher for condos. All in all, this data is based on thin market evidence and for year-end valuation, we will continue to monitor the markets. At the end of the day, small fluctuations can always occur, not just on a single market basis, but also in the portfolio. What that means is we may see a small decline by year-end, but we certainly do not anticipate anything even close to what some market participants are expecting. But since values are no longer going up, this fluctuation is happening around the 0 line, and it may end up in a low single-digit percentage value decline for Q4. Some of the reasons why we still don't anticipate major value declines are shown on the top right-hand side of the page, most of you will remember this from our Capital Markets Day that we had a longer version of this that we believe that especially the traditional conservative financing, the capital gains tax and the high transaction costs provides some resilience to our subsector. This is obviously in addition to the accelerating supply demand imbalance we observe.  Let's turn to financing on Page 15. Two things to highlight on this page. First, as you know, remaining maturities for this year are already covered for no issues in 2022. Second, you have probably seen that Moody's put our rating down by a notch to Baa1 with a stable outlook. So Moody's rating is now harmonized with our S&P rating. The rationale for Moody's decision is not so much company specific, but largely based on their view on the German resi sector, including the expectation of a 10% loss in value by year-end 2023. But I think it's also important to note that Moody's concerned that, a, our liquidity is adequate b, that we have good access to debt capital with a well-spread maturity profile, a good level of unencumbered assets and well diversified funding sources and c, that we maintain sufficient headroom in terms of covenants. I don't expect the new rating, by the way, to have any impact on our financing terms, and that is because the market has been focusing on S&P's BBB+ rating and pricing our bonds anyway.  Moving on to Page 16 for all of those KPIs, LTV slightly above 43%, essentially unchanged vis-a-vis Q2, and net debt to EBITDA is up 0.2x. This small increase as a reminder in the multiple is a function of the underlying calculation methodology, which looks at the average debt over the last 5 quarters. And while the EBITDA has gone up, we also replaced a remunerator 1 quarter with a lower debt for quarter with higher debt. Starting next year, you will see that KPI moving towards our target range of 14 to 15x given the envisaged deleveraging of almost EUR 3 billion of gross debt. Moving on to Page 17. Here, we show the upcoming maturities quarter-by-quarter for 2023 and 2024 as well as the breakdown between bonds and secured financing. And as you can see, even on a quarterly basis, it's a pretty even profile. Now to be very clear, we are trying to keep maximum flexibility and we will not commit to anything specific yet, but it's probably fair to say that we will put a stronger focus on refinancing in the secured markets with marginal cost of debt currently between 4% to 4.5% and hence, 200 basis points cheaper than in the unsecured market. We are in advanced discussions with the different lenders, and I do expect to see good progress over the coming months, so well ahead of the respective maturities. On the bond side, we want to repay the vast majority of upcoming maturities in 2023 through funding that we generate from reducing our investment program and selling assets. The magnitude, of course, depends on how much cash we can reallocate at the end of the day. But as you will see on the next page, we are quite confident that we are talking about very meaningful volumes.  So on Page 18, we want to give you an idea as to what the different action items mean in terms of freeing up cash. To begin this, it's probably worthwhile to point out that we are expecting to begin the new year with a cost positive cash balance of about EUR 1.3 billion. A sort of housekeeping remark, I will add that we also have a EUR 3 billion undrawn revolving credit facility in commercial paper program. Now in terms of our expectation of actual free cash flow generation, the chart uses the year-end 2022 cash on hand as a starting point. And then we have the estimated FFO for 2023. On top of that, there is recurring sales cash flow to the extent it is not already included in the FFO. And this is something people often tend to forget. The FFO includes the EBITDA contribution only. The actual free cash flow generation is much higher, usually around 90% of sales volume. Then we deduct capitalized maintenance.  And the next block is new and something that we have not done in the past, we are including a specific expectation in terms of disposals both from asset sales as well as cash recycling from development to sell. And this, to be very clear, does not include any assumptions for potential JV partnerships or a potential disposal of Deutsche Bundestag business. I'm sure you will ask me a dose question on more details regarding these disposals, but please do not expect me to add much more to what you can see on this page.  The next block is portfolio investments, which are substantially lower than we had originally planned for. So all in all, our expectation is to have free cash in excess of EUR 4 billion. Adjusting for the dividend payment as per our dividend policy, we get to roughly EUR 2.8 billion, and this is remarkably close to the unsecured maturities following you in the coming year. We have already pointed out that we have reduced our investment program on Page 19. I want to put this into context. For 2022, we estimate a volume of EUR 1.35 billion and for 2023, a volume of EUR 850 million. If you look at where we have started originally with a midpoint guidance of EUR 2.3 billion for 2022, and we gave the first guidance in March this year and compare this what we are guiding for 2023, there is a 60% plus reduction. And if you put this on a relative basis, such as the investment volume over gross asset value, we are going down from 2.3% in 2022 to 0.9% for the initial guidance of 2023. To me, that is a very, very strong message that we can and do adjust to the changed environment.  So we are stepping on the brake hard for now, but we are not doing anything stupid here. Projects under value will be completed. There is no point in leaving things half finished. We are also finalizing the preparation of those projects that are being -- that are now being put on hold to make sure that we are able to react quickly once things change to the better again. You will probably ask me that the reduced investment program means in terms of rent growth and our climate path. We will answer the rent growth question with the guidance, and to the climate part, as Rolf mentioned initially, it now really pays off that we are well ahead of the broader market given past investments. So we tend to force to undershoot for a limited period of time. So cutting back in 2023 will clearly not jeopardize our long-term goal of climate neutral by 2045. After the guidance and starting with 2022 on Page 20. Top line rental income adjusted EBITDA and Group FFO are all unchanged. Our business is running smoothly, and we are sticking to all line items here. Rent growth, as mentioned before, is slightly up. We now expect 3.4% for recurring sales. We are taking down the volume a bit from 3,300 to now 3,000 units given that we have sold about 1,700 during the first 9 months, you can see that we will need to pick up the pace in Q4 and the fact that we are guiding 3,000 should be understood as a sign of confidence that we can close that gap in Q4. All this is coming at a better margin than we have originally anticipated and we are increasing our guidance for the dealer step up from roughly 30% to more than 35%. And in my view, this is probably quite on the conservative side, and I would not be surprised if we come out closer to 40% and to 45%. The dividend guidance is also unchanged, in line with the FFO guidance and that, as a reminder, 70% of our group FFO post minorities to be precise. We had already mentioned the investment program several times. So here, we guide EUR 800 million to EUR 900 million for building inter-apartment modernization and roughly EUR 500 million for new construction. The former is a bit lower, the latter a bit higher. The reason is simply that some of the construction projects cannot be switched as quickly and in some cases, it still makes sense to take the lead construction onto our balance sheet. And finally, we are ahead on the SPI, so please expect this one to come out better than initially guided.  Page 21 is for our initial 2023 guidance. And here, even in a more challenging market environment, we continue to have a high degree of confidence in our business to put together what we think is a pretty robust guidance in a very uncertain environment. You can see the individual KPIs, and I probably don't have to go through them one by one. But what I want to point out, though, is even though our portfolio is smaller going into 2023 and is expected to shrink even further as we move through the year because of disposals, our top line and EBITDA continues to grow. This is also a strong indication of our conviction that inflation will continue to have a very manageable impact on our cost structure and that we do not anticipate a material change in our rent collection.  Similarly, even though we are making large cuts to our investment program for 2022 and 2023, the organic rent growth is accelerating. So we are overcompensating lower investment driven rent growth through higher market rent growth. This higher market rent growth is exactly the trajectory that we have been talking about for some time now. We are not just yet committing to a hard number, but we expect rent growth in 2023 to be higher than 2022. For the FFO, we do not think that we can fully compensate the higher interest rate and taxes from accelerated disposals as well as the sharp reduction in our tax deductible capital spending. So we are guiding for an FFO slightly, but only slightly below 2022. And this also depends quite a bit on disposals versus refinancing. So we don't want to be more specific than this for now. And with that, for some closing remarks, back to Rolf.

Thank you, Philip. Let me quickly conclude the presentation before we go to Q&A. First and foremost, I want to underline that the basis of our operating business is probably stronger than ever. Supply/demand imbalance is shifting even more in our favor. Germany is seeing a similar number of refugees as it did in 2015. On top of it, we are bound to see the increase in labor immigration and the government is taking steps to pass a more modern immigration law to support it. At the same time, new construction volumes are getting lower and lower. This has crisis written all over it, and it would not be surprised -- I would not be surprised if the government reacts with more ambitious systems to make this crisis a little bit less deep. So there might come opportunities.  The impact of the supply/demand imbalance is obviously in the accelerated trend growth. Don't forget, next year's niche period will not really be impacted much by inflation yet, because the 6 years look back period, but we are already seeing better rental growth momentum. If you look on our guidance for '23, you see that we are able to overcompensate the new meaningful chunk of disposals from '22 plus additional disposals we expect to make in '23. We believe our EBITDA will still grow, and this shows how inflation is manageable in our cost structure and how and collection will stay at a very high level. So operationally, our business is very much intact and estimated to deliver case in 2 as well.  Of course,  the large environment is currently challenging. Cost of capital is high. Financial conditions are tough, and there is a high degree of uncertainty, which we even recognize if we talk to you. But we are adjusting to this challenging environment. We have ramped up our disposal efforts and we are strengthening our free cash flow through significant reductions in our investment programs. This will give us options because results are usually never good if selling is your only option. We may see a small value decline in the magnitude of a lower single-digit percentage number in the fourth quarter. I don't think this would surprise many people. And if so, I would probably -- this will be a positive surprise. -- this kind of environment that may be expected. But that is as far higher from massive value declines that some market participants here. Make no mistake, we continue to feel that it is important to free up capital and to reallocate it towards paying down debt. But we want to do so from a position of strength and with alternatives in order to achieve the best outcome.

All right. Thank you very much Rolf and Philip. And Francie before I hand over to you for the Q&A, one small favor to ask in this kind of setting, it's always difficult if you ask several questions all at once. So you can ask as many questions as you want, but ideally, we'll go through them one by one. That will make it a bit easier on our end to answer them. So let's get things started Francie and take the first question.

[Operator Instructions] One moment for the first question, please. We have the first question from Charles Boissier from UBS.

So I will do one by one. The first one on guidance. So for like-for-like 2023, you mentioned it will be higher than 2022. And you also had mentioned that there will be some important Mietspiegel prints in 2023, so Berlin, document, et cetera. I just was wondering what variations could those Mietspiegel bring to your 2023 like-for-like? And I know I said just one question, but on a related basis, as the senator for housing in Berlin on the gas, you mentioned just very recently that there will be this moratorium for the state-owned housing companies in Berlin not to increase rents in 2023. So just what is your confidence level in being able to pass the full Mietspiegel for Berlin there locally that environment?

So yes, there is a debate of the government because they have a reelection in Berlin because old election was declared or will be most only declared not be well. So this shows a little bit of some issues, which we have in this part of Germany. But anyhow, so because of the election, the government says that they want to have the municipality companies not to increase the rent during the year '23. From my understanding, the Mietspiegel will be done with the data on '21 and '22. So this is clear. And also the rules of the Mietspiegel says that this kind of rent will then normally has to be excluded from the Mietspiegel because this is a public decision and not a free market.  But it's very interesting. What happens as well. The government has declared that these companies are not able to not increase events. They have to be recapitalized by the state. So we are coming now to a situation that the public landlord has to be recapitalized because their balance sheet is over. So I think this is also a strong message to politicians that probably, it is the end of pushing more efforts and asking for more effort from the landlords. In this context, I would like to add that the last program also proceeds liquidity hubs help given to some East German rental companies already because they need it. So Vonovia as far we for using this liquidity house because we don't need it. But it's just showing what we are always saying, don't only look on the listed sector but look on the whole sector. And as long as in the regulated market as long as you are better than the average, you are doing well. And the average is now getting into problems. And so this, I think, is the end of more regulation.

I think the first is, if I got to drive is about composition of our like-for-like rental growth guidance for next year. Here, we will see a sharp increase, roughly a doubling in the noninvestment driven market rent growth. And as mentioned, that is largely positively impacted by rent and disease in very relevant markets for us. What I can also add is that for the investment-driven like-for-like rental growth, there is obviously an impact by reducing the investment volume at the same time that impact is not that pronounced given that we are completing what we have started and kind of are still benefiting from past investments.

And Philip, you mentioned you were expecting some questions on Page 18 with the disposal bucket. I just was wondering, so if it's not joint venture and nursing and also you have the recurring sell already in one of the box. So by deduction, it's probably the noncore of recurring sales from the multifamily homes. And I just was wondering about that latter element, the multifamily home record -- so essentially, what I think Rolf was saying is selling to the local dentist because it's a big bucket within the EUR 13 billion program. I think EUR 6.3 billion. So what's your initial -- what was the initial reception from potential investor on that disposal program?

To give a bit more granularity, once again on Page 18. On recurring sales, this is really about our combo business, and that is reflecting what we have been guiding for next year, 3,000 to 3,500 units per store. When I move to asset disposals and development to sell, that is a combination of asset disposals, which form part of our noncore business as well as multifamily homes. I think the interesting bit here is that our target investors we sell to is kind of a very different investor universe. In the noncore it, you have a lot of product which is interesting for state-owned housing companies, which continue to have good appetite to expand their housing stock. In multifamily homes, I think it's still too early to say. Markets are difficult, but we have just started to prepare for the first unit. So this is not much to add at this stage and to guide -- or to provide more details as to the split of noncore versus multifamily homes. These allow us to have some flexibility here. I think the key message is what we are guiding for in terms of free cash flow, obviously, we have a plan as to how we want to achieve that. But even if we were to experience more difficulties in some of the elements, we have other elements to replace busted our joint venture partnerships and even more important, in my view, the nursing business. So all in all, I feel very confident that we deliver on the targets we have repeatedly announced of delevering our balance sheet by roughly EUR 3 billion next year.

And to be very precise, the EUR 2.8 billion does not include any joint venture disposals and the nursing home disposal. This would technically come on top.

The next question is from Andres Toome from Green Street.

I'm just wondering about the 2023 guidance and maybe you can unpack a little bit the adjusted EBITDA total figure and that we're seeing here, how much of disposals, does this assume -- is it fair to assume the same sort of volume that you have in the free cash flow bridge that you presented on the slides.

I mean in the EBITDA, you have the contribution of our recurring sales business, that 3,000 to 3,500 units -- so it's slightly more conservative assumptions when it comes to the margin above book value, where we have set ourselves the goal of realizing at least 20%, 25%. Is that answering your question? The other disposal proceeds when it comes to non-core or multifamily homes do not form part of our adjusted EBITDA outside our KPIs by which we steer our company from an operational perspective.

And what I meant was the rent roll that you would lose from disposals that you're sort of alluding to in that free cash flow bridge?

This is, of course, included. So you cannot plan a key free cash flow without including the rent which you're losing if you're disposing in the EBITDA. This is included.

And then maybe diving a bit deeper in terms of the EBITDA rental side, what's your expectation there in terms of sort of more organic basis? Obviously, you do get the boost from Deutsche Wohnen synergies as well. But how are you budgeting that excluding that sort of component in terms of are you expecting like-for-like growth insofar as the rental rate increases will offset any sort of operating expense headwinds.

What we are saying here, I think as was said, is we are seeing a faster rental growth than this year. Of course, the composition of this rental growth is less investment-driven and more organic brand widen. And this compensates actually some inflation, which we cannot compensate and this is why the EBITDA becomes higher.

And it's also compensating the rental income we lose by increasing disposals and the respective impact that has.

And then my next question is around just thinking about dividend as well. And you did sort of mention that obviously, the transaction market is quite difficult at the moment. If truly disposals don't come through, is that sort of the next lever for you to use to sort of balance your cash flow needs?

So we cannot hear you very clear, but I think the question was around the dividend policy?

Yes, around the dividend. Can you hear me better now?

Yes, a little bit.

Yes, so the question was if the disposals don't come through, as you sort of alluded that transaction market is quite difficult. Would the next lever for you be to reduce the dividend to have a better cash flow position?

So I think we have said that the dividend several times as our dividend policy is well known, and it has not changed. So to repeat, we are paying around 70% of the group FFO and post minorities to be precise. And to be more formal, the Management Board and Supervisory Board will make a proposal in the end of Q1, beginning Q2 to the AGM. And formally, the ATMs on the shareholders decide the dividend. But I repeat, our dividend policy has not changed, and this is around 70% of FFO.

And please also recognize that what we have planned for and what is underlying the guidance is essentially only a portion of various processes we have initiated which will free up cash. So again, that is excluding joint venture partnerships, and that is excluding nursing. And against that backdrop, I do feel very confident that we are able to free up some of the capital deployed. And against that backdrop, there is more need at this stage to speculate about the dividend. So we are very clear now the dividend, 70% of FFO post minorities is what we are planning for.

And then my final question is around the RCF and commercial paper program you indicated around 3 billion. How much is that actually assigned RCF versus commercial paper that you have to sort of go and tap on an ongoing basis, if you want to bring in any money on that side.

I look always at 2 in conjunction that means I either use the RCF or use the commercial data program, both has a size of EUR 3 billion individually, but I would never ever use the 2 at the same time. And to complete on that, I mean the RCF is underwritten for 2 years, has an option for us to extend. So I feel very comfortable with that instant access to liquidity is for whatever reason needed.

The next question comes from Marc Mozzi from Bank of America.

I have 3 questions from my side. The first one is about your recurring sales. Just wanted to understand how you can set a higher level of recurring sales next year while you're not going to achieve more than 3,000 this year? And what sort of assumption do you assess here? And how do you get to that 3,300 and not less -- so that's my first question.

So Marc, I think the guidance for this year is 300 the next -- the guidance for next year is between 30,000 and 3,500. So we think that we will put more efforts, but keep in mind that we have reduced actually the step up significantly. So we are here, at least 35 this year and because of the nongrowing values, of course, that's why we think this will be a little bit less step up. So that's why we are very confident that we will need more or less the figure of this year with a smaller step-up figure.  -- and this is -- and again, what you have seen in the valuation part, you see that the condo sales is a very robust business, which is very stable. To be more precise, the condo sales, we are selling to people who need an apartment in the city. And if you look on what we are selling here, this is probably a very not cheap, but a very price [ ritic ], saying what we are selling in the big cities as individual apartments for people who want to live there. So this is a completely different market.

Okay. On development to sell, we haven't much discussed about it, but it looks like that most of our house builder have seen volume at operating recently. What sort of color can you give us in terms of sell rate you expect for next year? And a related question to development is in your bridge, Philip, on Slide 18, do you take on board the change in working capital requirement needed for those developments and the development cost needed for the development to hold which, according to my numbers, should we reach those cumulated about EUR 700 million.

Yes. On your last question, I mean we are basically shifting capital, which form part of our investment properties into the inventories. So that is scheduled already deployed. And if I talk about the cash recycling in the development to sell, that is the net effect of the investment required for our development to sell and the proceeds, we are going to achieve by disposing the finished product to investors. And what you can see on Page 18, as part of the box asset disposals and development to sell is for development to sell the net effect of the 2.

But Marc, again, here, the big part of the development to sell is individual apartments because this is a history of bog, as you know. And individual apartments, we are attacking here actually a market in the big cities where people need to get to the imbalance of supply and demand is steel playing directly into our favor...

Okay. And the third one for me is just about what sort of cost inflation assumption do you have on your cost base and particularly for labor cost?

I cannot disclose it to you because then we would probably disclose to our unions what is our negotiation position. but it is very comfortable to say. So you know that in Germany, in the moment, we have the date of the times EUR 3,000, which we can pay this out social cost directly to the people. And the debate is this -- so you can do it over 24 months, but you can do it shorter. So this gives us this year a very good way to compensate, especially the lower income people. The there's very little additional cost because we don't have to pay any social charges on this, and they don't have to pay any social cents. So that is completely included, we are very confident that we will meet inflation problem. And again, in our business, inflation is not a big issue because if you're operating with above 80% margins the point of inflation, which is especially labor cost burden is not so meaningful.

Okay. And maybe a final one on your market rental growth. So you said it's going to double next year. So we're talking about 2%. We've had basic Smart, EUR 800 million CapEx plus time whatever yield of 5% that we made another 1.2% of additional rent. So we're still at kind of a 3.5% organic rental growth next year. But what about 2024, 2025? Are you going to see the 2% market trend continuing to grow as this is about a moving average here? -- as indexation calculation?

To be very clear, I'm doing just a math... The niche figure is covering the last 6 years. So in your question is actually what will be the mix figure in the year, 24 and 25 -- so the next mix figures. And because they are covering about 6 years, the last 2, 6 years will fall out in the next and the most recent 6 years of -- the most season 2 years are coming in. So by definition, the momentum will grow and not go slower because we have seen significant higher rents in the last 2 years. And what we see also now is a significant higher end because of the higher cost of construction. So the momentum is a long-term momentum, and this has all to do with the 6 years average. Brian.

The next question is from...

Let me add one thing. Before the next question, let me add one thing. What you see here, what we have now taken the decision to reduce massively the new construction. This is not Vonovia is not the only one who's doing it. Everybody is doing it. So we will see a massive, a massive reduction in new portfolios coming to the market. And this means that the imbalance between supply and demand will get much worse. And this needs a political reaction. It is just a question when it will happen. But something has to happen. We are running in the social catastrophe in Germany. Don't quote here, we are not doing anything because homeless people will go up. A lot of other things will happen and the government will not accept it. So they need to be an action. And at the moment, we see the German government be able to react very quickly. But we cannot predict anything on this at so we have nothing in our budget and in our guidance, but something will happen...

The next question is from Jonathan Kownator from Goldman Sachs.

I just want to continue on the theme that you had just mentioned. You are saying that Germany is running into a social catastrophe because effectively, there is no supply available anymore, and there's no one adding new supply. What is the solution here that you think is acceptable for Germany? Because effectively, the regulation right now and the cap on rent is actually breaking the system, right? So you said you can't add more regulation. But how do you think the government is thinking about it? Because obviously, either they have to sensitize massively new housing or they have to remove or lighting this regulation one way or another. How do you think they're going to lead on that? And how are they thinking about it?

So I'm -- we are talking with the government about the magic triangle. So we have 3 components. One is the construction cost and related to the financing cost to. So the cost that you need to get your construction and your interest rates covered. So the second is the subsidy and the service event. And it is clear for everybody that you can fix 2 of the triangle, so 2 components, but the third is resulting. If you want to fix all 3, as a result will be no more construction. It's very simple. It's mathematic. And now the debate is -- and we have to go through this debate that probably now the gap is so big that optimizing only one is probably not enough. So we have to talk about rental cost. We have to call about more subsidies and we have to talk about less cost because the conditions we have to produce and the standard has to be reduced.  All we have to do them together.

Is there -- I mean the one really talked about that, but I just want to try to understand if politically, there is a scenario whereby -- actually, because the problem here is that just rents have been kept artificially low to help on wages. But is there a scenario where inflation helps increase wages at a country level. And ultimately, the rents would be slightly deregulated or allowed to increase a bit more so that you can actually build more appreciate also that they maybe not even enough as you're highlighting, but it's the one where usually people have the opposite view, but ultimately, that would be almost the easiest because on the other 2, the government has to pay a lot of money, right?

So to be very clear, I cannot predict in this car what can will do. What I can predict that this will come -- we are coming to 200,000 new construction and not 400. And having the power versus a big setting in casing, I think the government cannot lay back and do nothing. And there is, of course, an argument, which is that if the disposal income is going up, and we are always saying 30% of the disposable income should be not exceeded to spend rent. Nobody is saying that less than 30% is a good target. So I think if the disposable income is increasing, there's also more room for the people to pay for higher rents. But it's not viable if we talk about this publicly.

If I may, just another question. Just coming back to the value-add business. Obviously, it was pretty flat year-on-year. You've talked about higher cost. It needs still to be rolled to Deutsche Wohnen. So how are you expecting this business to develop into next year? Are we expecting a flat contribution? How fast can you relate to Deutsche Boden? Or are you seeing actually even increasing cost, which means that, that contribution to the big decline?

To be very clear, the problem of the value-add business or no problem, but the challenge they are facing is that they have a fixed price with the rental business for the full year and cost inflation and availability of the cost inflation was going up. So it has to be covered by value add, plus the availability of people and subcontractors were difficult because it was very difficult to find construction capacity. Probably in the next year, first of all, we are doing less investment, which actually will increase the internal percentage of internal work, which is helpful. And secondly, if what I assume is right and we will have much less construction in the next year because everybody is doing the same what we are doing, the pressure and the availability of [ Casten ] will go down. So this will definitely help the value add business...

The next question comes from Marios Pastou from Societe Generale.

The first question really is on valuation expectations for the portfolio. I mean we've had Moody's stating or including in their numbers, a 10% value decline to come next year. You've got a share price that is pricing and meaningful discounts to the underlying property values. But then we've also had positive comments from yourselves that you're expecting a low single-digit percentage decline to come in the latter part of this year. How do we bridge the different gaps? And is that confidence based on your discussion with your external valuers, I suppose, is my first question.

I mean, obviously, we are validating our views with our external appraisals, but they are facing, if you all, the same difficulties of very little transactional evidence. And if you look at the data points and I'm basically repeating what we said beforehand, and I look at the rate point, we see in the low single-digit percentage area decline for multifamily homes, if that were to be concerned that there is a TBC with additional transactional evidence, which will feed into our systems throughout the year, we may end up in a small value decline. That is certainly a possibility. But again, for now, transaction data are very thin. I think for me, the more important question really is on valuation, what midterm outlook we should expect. And here, the story no one wants to hear renamed that the supply-demand imbalance and what we've talked about is accelerating and is becoming dramatic, which is positive -- typically not a negative surprising. And second, the huge, huge gap between replacement cost and the valuation of our standing assets. But I think medium term, there will be support. But yes, short term, there will be fluctuation. People have to adjust to the changed environment. And with all of that, some changes to the valuation of our investment properties, we cannot exclude for now.

And then just on to Slide 18. Sorry, a question on this particular slide. If we're looking at the bridge towards the free cash flow, how should we think about it? And this probably follows on from a previous question as well, thinking of no asset disposals to come in a more difficult environment or a difficult market. How would that bridge then look? Or to put it this way, how much of that free cash flow generation is purely from asset sales?

That's probably because discussion is coming very often. So we are giving here you a slide where we are saying that this management team is committed to have under the explanation, but Philip is doing a cash free cash flow of EUR 2.8 billion after dividend payment. So this is a commitment like our commitment of the rental cost, like our commitment on FFO. And you normally, you know that we and the management team are normally doing guidance, which we can fulfill. So -- and of course, some place feel where we are playing, we can do a little bit more noncore, we can do a little bit more multifamily homes. So there's a lot of pillars which we have to play. But in the end, we will feel very comfortable that we will deliver the EUR 2.8 billion free cash flow on the assumptions laid out on Page 18. So please, we will not give you more disclosure, especially breaking it down because this gives us also a little bit of flexibility to react because keep in mind, we are here in a business-to-business relationship. We are discussing these people, which partly are probably on this call -- so to discuss my sales strategy with the public will harm my price. It's not a B2C business. It's a B2B business. And that's why Les and I apologize for not being so precise. But this, I think, is the interest of all our shareholders. But there is a firm commitment of this management team that we will deliver EUR 2.8 billion free cash flow at the end of '23, which will be used for as FINDEP has delevering.

The next question is from Rob Jones from Exane.

It's Rob Jones from BNP Paribas. I'm just going to follow up on Marios’ point on Slide 18. I appreciate your comments, Rolf. But I get my role around and I measure the height of those bars because that's what we do as analysts and your asset disposals and development to sell column implicitly is about 2.1 billion. Now if we assume that EUR 0.6 billion is the development sell disposals, for example, we get to about 1.5% for asset disposals on that chart that is to scale. And to be clear, you're saying that, that figure, which then ultimately then drive a big element of your EUR 2.8 billion free cash flow post the divi, that figure is excluding Deutsche Wohnen and any JVs, which would be further upside from a free cash flow -- that's correct, right?

Yes. Exactly. So this is without TVs and without nursing home. And to be also very clear, we are in good discussions. But if I put a guidance for Giles or nursing homes in a official document -- in that because then the other side on the table will say you have promised it. So now you have to deliver and then we cannot negotiate. That's why we have done guidance ours under the assumption that JV and nursing home will not happen. Having said this, it is not our objective that GB and North in Rome will not happen. We want to do both, but we have not put this into guidance. Philip and myself, we are working hard that it will happen. But just to make clear that the guidance is not including it.

Second question, back to Slide 17. Bullet point 3 in that top left-hand side, you say advanced discussions to sizable secured financing. Now I wrote some product side is the day, and I'm thinking about your capacity to take on more secured borrowing. Now when we look at your unencumbered asset ratio, I think from memory is about 163, covenants at 125. You obviously don't want to get to the point where you're very close to your covenant bridge. But of course, asset value declines obviously pushed down that UAR percentage figure. Do you have a figure you can give me in terms of, say, for example, a 10% decline in the value of the portfolio leads to an x percentage move on the UAR -- and the reason why I'm asking is because on our numbers, we get to a position where you don't have a huge capacity to take on more secured borrowing because you end up closer to this covenant in the event of portfolio value decline despite the fact that obviously, today, theoretically, there is a greater ability to take on more secured financing. And of course, part of that would be used to refinance some of the bond portfolio in the next 24 months.

Yes, this is again assuming things we don't assume. If I look at our current ratio, there is sufficient headroom to roughly increase the secured debt volume by EUR 8 billion. That having said, by no means I have the ambition to move up the secured debt book in that magnitude. We will always want to have the flexibility to play around with different markets and don't just focus on what market. All of that having said, -- in terms of priorities for the remaining refinancing we will undertake for the upcoming maturities in 2023, yes, the focus, the priority is on the secured financing that has not been misunderstood that there is no unsecured financing going to happen. And this is simply obviously, because of the delta in refinancing rates, but that will not shift us anywhere close to being at risk of reaching the covenants.

And that Philip leads me on to my final question, which is when you're obviously planning to largely redeem rather than refi the unsecured over the next 2 financial years, obviously, aside from the point you've just made around unfavorable cost of that relative to secure. And I think you said it was about 200 bps cheaper for secured versus unsecured. And obviously, we obviously need to overlay your deleveraging intentions, which you've made clear to us at the moment. But when you speak to the various different debt capital markets teams across the investment banks and your kind of banking counterparts, is there actually an element of a lack of unsecured debt availability that's driving part of your decision-making process to largely redeem the unsecured, where possible rather than refinance it. It's not purely about cost of debt and indeed, ultimate appetite to delever the business from a gross debt perspective.

Is very clear and rigorous now. It is not at all a question of appetite. To the contrary, I'm actually getting inbound calls from big institutional investors on the debt side who have appetite. But what I simply have to recognize is that in the 10-year center, we are talking about an incredibly risk spread of 350 basis points, that is so far off compared to other sectors in terms of risk premium that this is currently not a very attractive proposal for us. And on the other side, I have a banking market, which is looking for new business and who wants to expand relationships and who's telling me it's not 350 basis points, it's 100 basis to 120 basis points. So that's a very, very different proposal. So again, it's not at all about our ability not to refinance in the debt market. But currently, they are not overly attractive to us.

The next question is from Manuel Martin from ODDO BHF.

Just one question from my side. On your investment program, we have seen that you have been downscaling our investment over time. Adjusting to the respective environment, now for 2023, we have arrived to approximately EUR 850 million planned investment program. Is there a possibility for you to further downscale that program if things become more difficult? And what could be the headroom to the downside?

So to be very clear, what we have done is actually, we are more or less in -- not completely but more or less. We will not start new construction, and we will not start new modernization if they are not already announced. Of course, theoretically, you can stop also modernization, which are already announced but not started. And you can also stop construction, which we probably have started to prepare the land or things like this. So there is actually more room to reduce, but this would mean then this would cost -- come with a cost. So that's why we would probably not go for it. But this is for '23. So if we continue this route in '24, of course, investment will be much lower in '24. But the reason is very simple. And I think Philip has declared, it's the cost of capital and actually the cost of debt is at the moment a magnitude that it doesn't make sense to confirm new investments for the future, although in the context that we will see a change in construction costs that we will most probably see changes in subsidies. So I think it is what we are doing the same, but some investors are doing at the moment, we are keeping our duty. And this means delever in our case. And we will see and then we will see in summer next year and March next year, what is the new situation, and then we will make our plan for 24.

The next question is from Sander Bunck from Barclays.

First one is on the -- kind of following up on the privatization sales. I would have actually thought that there was scope to further increase the privatization sales given that you've obviously added the Deutsche Wohnen portfolio to your existing pipeline. Now it looks to be more in line with kind of what you've done over the last couple of years and margins have actually lower than what was historically achieved with Deutsche Wohnen. Is it -- why -- is it effectively kind of a lot more of a cautious stance on both the volume and the margin? Or is it just 1 of the 2?

No, no. I think we are probably with the new guidance, we are a little bit cautious about the margins. I admit this. But in the past, we were selling based and the margin was calculate based on our book value, and the book value was always lagging a little bit behind. So in times where the values are increasing fast, we actually always have this time gap. So that's why we ask our sales team to achieve a higher margin. Now the argument is the time gap is because the market is flat, the time gap is gone. So we are coming back to what we were used in the past was 20%, normally 20% uplift on fair value. So we are now at 25% because we still think that the market can reserve, but this is how we reason part, it was now above 30% because we added 10% because of this time delay. And I think now the time delays over because we have flat markets. So that's why 2025, I think, is a good number.

And is there scope to accelerate the privatization business to accelerate that further and accept even lower margins? Or is that not really possible?

It would be possible but this is not what we are trying to do at the moment. But this will be, for example, on mitigants selling something else.

Is to say, in order to properly play this market and to also optimize outcome, you basically have to play around the privatization stock multiple times what you actually envisage for the given year. And second, typically, it is are you optimizing if you sell a vacant department and obviously, vacancy is nothing we can influence impact. And given the situation we have described, vacancy is going down. Tenant churn is going down, and that kind of also has an impact on that business. So theoretically, yes. But in terms of what we look to achieve with that business for now, I think it's a bit guidance. And to that respect, also a nice cash contribution you can expect for the next year.

Fair enough. And also understood regarding the vacancy is just with the tenant churn of 8% per annum means that roughly 8% of the apartment is on vacant per annum. I appreciate that not all of them can be privatized, but even if it's just half of that, there should be scope for significant acceleration. And I guess that...

Let's not discuss again. And I think I understand that you want to detail split of how much we are doing with condos, how much we are doing with multifamily or how much we're doing this noncore. And we have said, give us a little bit of freedom to deliver the EUR 2.8 billion, and we can probably shift a little bit between these different packets -- and as that I'm probably asking us is for this again and again, give us some premium and I've explained why because we are in business-to-business relationships -- we don't want to destroy value for our shareholders.

And very quickly, lastly, just to confirm, basically, organic growth going up on the back of strong icicles. -- but inorganic growth is going down slightly because of lower maintenance spend. The 3.3% to 3.5% kind of that's currently being guided to mention. That is -- you believe that is sustainable in the medium term, it could even go up in the kind of medium term? Or is that what should we kind of assume there?

I think I have said that we see a momentum. So it's a 7-year average. So this is not going up and down because this is technically just the average of the 6 years. This is a good advantage of the German mix. So we see a momentum of going up. So that's why, yes, we see a momentum of going up, and this will continue. And then the inflation impact will come in, in the year, just technically speaking, in the year '22 and '25. So this is the average of 6. This is not a guess. It's just because of this model, how the mix figure is working, momentum is a long-term momentum.

The next question comes from Thomas Neuhold from Kepler Cheuvreux.

Firstly, I have a follow-up on the lower investment program. You mentioned you will revisit the CapEx for 2025 next year. But you also mentioned that your long-term CO2 reduction targets are not at risk. I was wondering for how many years could you keep a lower CapEx program in place not to put the long-term target at risk and you also have this 2030 CO2 reduction target of achieving less than 25 kilos of CO2 density per square meter. Is this reachable if you cut your CapEx program for a couple of years? Or do you need to respend on modernization rather sooner than later to…

So now I'm actually getting much more in the detail. The modernization spend that we are having is, of course, not only one fits or it's -- as you know, it's probably one more on the heating systems and one more in the building. The building is expensive. The system is relatively cheap. So there is a low price for reduction of CO2 by investing in heating systems, and there's a high investment per CO2 savings in the buildings. So what we can even do in this 2030 target, we will probably -- for example, we are not stopping any replacement or heating systems by iPump next year even. So that's why we are still spending some money. We are just adjusting a little bit more to the more efficient CO2 reduction spending. So that's I'm not afraid at all my climate to the past and this a target there. So let's try to answer your question. In the next few years, there is no issue. If you ask me about the next 15 years, one they have to continue to spend also in the building substance. But this is not a question of a few years.

And the next question is, I was wondering, do you see also potential to cut your maintenance expenses? Or are you already at a very efficient level.

No, we are spending a little bit more than normally should be used because the times are very good. We have cut a little bit in the maintenance. But I think this is nothing -- this is some of if you're doing a guidance, you always have some positions of reserves as well.

Okay. And my last question is you mentioned that the cost of secured financing is up to 4% to 4.5% and for unsecured even additional 200 basis points. I was wondering if the cost of debt stays at these levels, what is from your perspective, approved sustainable LTV or net debt-to-EBITDA ratio level to run your business in the long run? And what you're seeing here potentially the time frame is for you to reach these new levers then...

I think asking about future interest level, it's like asking about future stock price. Look, I do see stability in the risk margin on the banking side, and there have been some newly interest introduced capital buffers on the banking side, which impacts pricing. -- that has made margins a bit more expensive, which is why they moved to roughly 100 to 120 basis points. On the capital market side, the kind of risk premium is difficult to understand in comparison to other sectors and how operates to our ability to actually take interest rates are moving is, I think, subject to many, many variables. So very, very tough to make a forecast on that. But in terms of our capital structure and our financing velocity, I think it's been very clear in that we have 3 leading bet KPIs. All of them need to remain in the guided range, which is 40% to 45% LTV, which is 14 to 15x net debt-to-EBITDA and which is -- and by keeping these that KPI is in the given range we secure that we maintain our current still very good investment-grade rating of BBB+ by Moody's and S&P, respectively. And that is going to the key focus. But it also means that depending on how things evolve, different that KBR is increase in relevance. The long term, it has been LTV. That's just the towards net debt to EBITDA. And I think it's fair to say, given the refinancing rates are exciting, that ICR is shifting more and more in our focus.

The next question is from Simon Stippig from Warburg Research.

My first question would be in regard to capital allocation. And I see you're doing changes to the investment program. And obviously, you also intend to pay a dividend, nothing changed on the dividend policy. And now my question is, what do you plan to do with the EUR 2.8 billion? I assume that you want to pay back or pay down debt, especially on the unsecured side. But then what determines, for example, an investment into your own shares? And also going forward in the medium term, if you potentially sell larger chunks from your asset disposal multifamily homes noncore. And also on the JV side, just to understand your thinking around that, I guess, an 8% dividend yield is quite attractive even if I compare it right now to the secured running 10-year bond? Yes, that's my first question.

I think we talked about this once we have the luxury to have the discussion. For now, our focus is very much on deleveraging the balance sheet. We have given a target of EUR 3 billion that requires some proceeds from disposals as we have discussed. If there are additional buckets of money to spend at the appropriate time, we will decide based on the market environment and the situation we are facing at the appropriate time what is the best user proceeds.

And do you intend in regard to the dividend, do you still intend to also offer shareholders a scrip dividend?

I think this is very unlikely from today's perspective, given that our stock is trading, and I think we have balanced our investments in a way that the scrip dividend is not needed in terms of equity support. So this is highly dilutive. That's what's going to happen next year.

And one more in regard to Deutsche Bahn and I just wonder the remaining Deutsche Wohnen shares, will they be listed on a keep will they be ongoing to be listed on the stock market? Or is it still the view that this is a very cheap equity to you?

So you know that we -- and we had this debate for a long time. There is a real estate transfer tax law, which actually are with us to buy more shares from Gorgon. We can do, but this will be very expensive. And the strategy, what happens with the Deutsche Loan, we are only a shareholder. So we have to ask this question to Dutton management. But we, as a shareholder, we are happy with how it is.

Okay. And maybe just one last one in regard to Sweden. Your strategic view of growing the Swedish business for the longer term, of course, not in the medium term, but in the longer term, they have one country segment in Sweden. Is that -- is it still the current view? Or could you also imagine to make changes to the capital allocation in regard to the Swedish portfolio?

No. I think we are very happy with the Swedish portfolio. As you -- we have discussed several times, the Swedish portfolio because of the different rental regime in Sweden will react faster to market changes. So for example, next year in Sweden, we will see a significant faster growth of rent -- because they are negotiating based on the rent every year. So that's why you will see there a little bit different mechanic. But in the longer view, Sweden is very similar to the German business and the Austrian business. And so we feel comfortable in all these 3 markets. [indiscernible] is an imbalance waiting list in Stockholm, there's waiting with more than 1,000 people for one apartment. So the imbalance of supply and demand, which is one of our fundamental driver in our strategy is the same in Sweden and in Germany.

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

Excellent. Thank you very much, Francie, and thanks, everyone else, for joining this call today. We have quite a few investor outreach events coming up in the form of road shows and conferences. We're hoping to see many of you in the coming days and weeks, and you will find a list of events. If you do want to participate on Page 49 of that presentation and of course, the most up-to-date version is always online. As always, in case of any questions after this call or down the road, please do reach out to me or my colleagues. And with that, that's it from us for today. They say happy and healthy and see you next time.

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