Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the LEG Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by question- and- answer session. If you would like to ask a question, you may press star followed by one on your telephone keypad. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Mr. Frank Kopfinger, Head of Investor Relations. Please go ahead, sir.
Thank you, Operator, and good morning, everyone from Düsseldorf. Welcome to our H1 2022 Results Call, and thank you for your participation. We have in the call today, as always, our entire management team with our CEO, Lars von Lackum, our CFO, Susanne Schröter-Crossan, as well as our COO, Volker Wiegel. You'll find the presentation document as well as the H1 report within the IR section of our homepage. Please note that there is also a disclaimer which you'll find on page three of our presentation. Without further ado, I hand it over to you, Lars.
Thank you, Frank. Good morning also from my side. We had a strong start into the year and have been able to keep up that momentum. Therefore, we are very happy to present to you today a full stack of convincing financial numbers for the first half of 2022. Major drivers are the, again, improved operational performance and the contribution from last year's successful acquisitions. Therefore, FFO I per share is up by 9.2% in H1, and we are fully on track to reach our FFO I target in the range of EUR 475 million to EUR 490 million for the full year. Our operations reduced like-for-like vacancy to a record low of 2.2%. With that, we are not only literally, but factually fully rented out. However, demand for affordable housing continues to increase.
Higher interest rates have brought back many to the rental market who were about to buy a condo. We have seen a substantial increase in immigration to Germany, not only due to the horrible war in Ukraine, but also due to a more relaxed pandemic situation. Finally, higher inflation and the weaker economic outlook for Germany made people be more cautious, especially with regards to the share of the disposable income spent on rent. Like for like rental growth stands at 2.6%. Also, for that operational KPI, we are on track to reach our 3% target for this year as we will execute further rent increases in the second half of the year. We operate on the basis of a solid balance sheet with an LTV of 42.1%, i.e., clearly below our maximum level of 43%.
We continue to work on the disposal of up to 5,000 units. Based on the first interests collected, we are confident to reach book values. Given the fact that we did not exercise the BCP option and are highly selective with regards to acquisitions, we will become a net seller in 2022. Let me give you a bit more color on our decision with regards to the BCP option, which we communicated last week. We decided to not exercise the option on 63% of BCP at a share price of EUR 157 per share due September 30th. As we have pointed out already in our Q1 call, the capital market environment changed substantially since acquisition of the option back in December 2021.
Therefore, we ruled out paying a premium on NAV for the BCP shares while our own shares trade at a substantial discount to NAV. In case of an acquisition on our own and to safeguard our balance sheet, we would have been forced to raise equity. Obviously, that would have caused a substantial dilution to our shareholders and therefore was not a valid option to us. Nevertheless, we tried to get the BCP option back in the money by exploiting different opportunities. One of them was the search for a co-investor with substantially lower cost of capital and the appealing offer that LEG would take over the asset and property management of the newly formed joint venture. We worked with several international and national investors throughout the last months on that investment case.
Finally, we needed to realize that we could not identify any partner willing to exercise the option so that we decided to not pursue that opportunity any further. As we did not want to execute the option on our own and not together with a partner, we decided to cancel the option and inform Adler, BCP, and the capital market on the 3rd of August accordingly. The situation at BCP remains unchanged. BCP remains a listed entity in Israel, and we, as the majority of the listed minorities, are protected by special rights. We consider BCP to be a pure financial investment within our books, marked to market quarterly and representing less than 2% of our total gross asset value. Still, the stake offers optionality, and we will explore any kind of option if and when they come up.
To be crystal clear here, every option needs to generate additional value for our shareholders. As guided already in Q1, we saw another valuation uplift of just above 6%. That is a pure reflection of the transaction market until the end of March 2022, which has proven to be extremely dynamic. Our portfolio is now valued at around 1,800 EUR per sq m or a multiplier of 24.7x on the in-place rent. We consider that valuation to be very solid and resilient as the supply-demand imbalance for affordable housing in Germany is going to further increase. With minimum construction costs of 3,500 EUR per sq m, not including the cost of land, headroom between new and existing product is huge.
Therefore, rents for new products need to be at least twice as high as for the average apartment we currently have on our books. On the ESG side, we kicked off several initiatives to support our tenants throughout the current energy crisis, the crisis we consider having the potential to damage Germany's economy even stronger than the COVID crisis. The measures put in place range from energy-saving advice to offering voluntary increases of monthly prepayments, as well as to support tenants to receive social benefits. Additionally, as during the COVID crisis, we will help tenants with the offer of installment payments. We are also proud to announce that we successfully kicked off the first projects of our serial modernization company, RENOWATE. Together with our Energiesprong project, we have currently 157 units undergoing serial modernization. Finally, we further improved LEG's diversity profile within the Supervisory Board.
With the election of Mrs. Katrin Suder in the AGM in May, 1/3 of our Supervisory Board members are female. With a third female Board Members on the supervisory as well as on the Management Board, we fulfill already the new EU regulations on the diversity of Boards. With this short summary, I hand it over to Volker Wiegel now, who will guide you through our strong operating performance.
Thank you, Lars, and good morning, everybody, from my side. Let me start with slide number eight and a quick look at our portfolio. There are hardly any changes compared to Q1. Between April and June, transfer of ownership took place for 390 units that were acquired in late 2021 or early 2022. The majority are in the stable markets, for instance, in Dortmund. At the same time, we disposed of 104 units above book value. This clearly underpins that we became highly selective on acquisitions. We will keep our toes in the market and engage if and when opportunities arise. However, we have no pressure to reach a specific target. Therefore, we decided to cancel our acquisition targets for 2022. As things stand today, we will be a net seller in this year.
I'm now on slide number nine to give you an overview on the rent development. In comparison to June 2021, the in-place rent in our portfolio grew by 2.6% to EUR 6.26 on a like-for-like basis. Rent table adjustments contributed 1.4%, while modernizations and reletting added another 1.2%. Looking only at the free finance part of our assets, we see an increase of the in-place rent by 3.2% to EUR 6.65. We had a particularly strong growth in Bonn, which is in the high-growth market, with 5.8%, in Essen, a stable market city, with 4.3%, or in the purple market city of Duisburg, with 5%, just to mention one city out of the 3 market clusters.
You can conclude from the slide that the free-financed higher-yielding market segment developed nearly as strong as the high-growth market. The stable market showed a softer growth after several strong quarters. These fluctuations will even out over the year. You should not read anything into that volatility, as we are steering rent increases purely on an annual and not on a quarterly basis. Therefore, we can reassure you that in the second half of 2022, further rent increases will enable us to reach our target of 3% for the full year. This will be almost exclusively driven by the free-financed units. The contribution from the subsidized units will remain low, given that the next cost-rent adjustment will only take place in January 2023.
For those of you who want to dive deeper into the cost rent mechanism, we have tried to present the rather complex regulation in a simplified form on slide 24 in the appendix. The most important point is that there are two components of the rent, i.e. administration as well as maintenance costs, being linked to the CPI development over the three-year period from October 2019 to October 2022. Obviously, we will have to wait until November before we are able to calculate the actual effect on our subsidized units. Just to give you a rough first indication, at the three-year CPI development of 10%, which seems realistic as of today, would lead to a rent increase of 3.2% in the subsidized portfolio. Much on the net cold rent.
Normally, we do not discuss the additional ancillary costs which have to be paid by our tenants as these are purely pass-through items for LEG. However, we are aware that there are strong concerns in the market on rising energy bills for our customers. What can we, as a landlord, do? Let me be very precise here. No tenant needs to fear losing their home due to rising energy costs. We initiated a comprehensive set of measures ranging from an optimal energy-efficient adjustment of the heating systems to an advice and information campaign for our tenants that we are about to launch. Under the caption, Together We Master the Energy Crisis, we give our tenants advice, for example, regarding energy-saving behavior as well as financial state benefits.
We are very confident that state aid, but also the generally positive trend in incomes and pensions, and last but not least, the responsible behavior of our tenants will largely minimize payment defaults. Let us now move on to slide 10. I would like to highlight that we have reached a record low in vacancies with an EPRA rate of 2% on a like for like basis. We are now fully let with regards to the units that have been part of our portfolio since at least 12 months. If you look at the portfolio as a whole, EPRA vacancy stood at 2.9%, a slight increase by 20 basis points due to our acquisitions in late 2021.
Especially the portfolio we bought from Adler came with a higher vacancy rate, enabling us to generate additional value for our shareholders, as I'm very confident that we can increase the occupancy rate over the course of the next month, as we have done with all portfolios we hold for a while. After all, we have a very good track record. In the last 12 months, we were particularly successful in reducing the vacancy rate in large locations. In Düsseldorf, vacancy rates dropped by 80 basis points to 1.8%, or in Bielefeld by 110 basis points to 1.8%. All these figures are on a like for like basis. In the higher yielding markets, we could actually reduce the like for like vacancy in all of our larger locations.
For example, in Gelsenkirchen, the vacancy rate drops by 140 basis points to 5.5%. On the next slide, we present our value-added services. These include two new activities. Youtilly is a platform for property owners, facility service providers, and tenants. A revolutionary digital B2B2C platform for tendering, evaluating, and building facility services like gardening and cleaning. The company was consolidated as of first of May. Furthermore, there is the new LEG facility management that came with the acquisition of the Adler portfolio. It focuses on gardening and cleaning services. We consider this an activity to increase customer satisfaction rather than boosting FFO contribution, as margins for that type of service are just too small. All in all, the value-added service business contributed EUR 22 million to the FFO I in the first half of 2022.
In this context, let me remind you that some activities are not fully reflected in the FFO I, given the accounting effects on internal margins. Coming to slide number 12 and our investments. Overall, in absolute terms, our investments increased by 12.7% to around EUR 223 million year-over-year. However, on a per square meter basis and adjusted for new construction on owned land, capitalized owned services, and backlog from public safety measures for acquisitions, investments already decreased despite inflationary trends by 4.3% to EUR 18.31. In particular, we have reduced spending on turn costs. Still, we will continue our two large modernization projects in Wolfsburg and Göttingen, but will also adjust our spending there.
Given the current uncertain macroeconomic situation and increased financing costs, we have already reduced spending and are fully committed for the full year to spend less than EUR 46 per sq m, i.e., less than the guided range of EUR 46 to EUR 48 per sq m. In case of further cost increases, this also includes withdrawing, reducing, or postponing projects. However, when it comes to our ESG commitment for 2022, we are not going to cut any project at the expense of our ESG KPIs. We continue to work towards the envisaged reduction of 4,000 tons by year-end and are very confident to make that target this year. With this, I hand it over to Susanne for the financials.
Many thanks and, good morning, everyone. I will continue with slide 14 and the development of our key P&L items. In the first half of the current fiscal year, net cold rent rose strongly by 17% or EUR 58 million to EUR 396 million. Our acquisitions contributed more than 80% to the increase in our net cold rent. The adjusted net rental and lease income increased by 13% or EUR 36 million to EUR 311 million. The increase is once again driven by a higher net cold rent, but also by the continuous growth in our services business, as mentioned by Volker. The adjusted net rental and lease income margin declined from 81.3% - 78.5%. The margin decline is mainly driven by the acquisition of the Adler portfolio, which currently generates a lower margin.
This is in line with our expectations. In December, when we announced the deal, we explained that we are planning to increase the FFO I of the portfolio by over 30% until 2026, and we are fully on track to do so. Due to the more challenging environment we are operating in, we have also increased provisions on the not yet invoiced ancillary costs because our tenants will face significantly higher additional payments than in previous years. That is a purely precautionary measure. We increased provisions by almost EUR 5 million compared to the same period last year. Please also refer to slide 28 in the appendix. You will have noticed that the reported net rental and lease income was considerably lower than the adjusted net rental and lease income.
The reason is the regular half year impairment test, which we carried out for our five goodwill bearing cash generating units. Due to the strongly increased interest rates, we wrote down the goodwill of EUR 100 million completely. Out of the EUR 100 million, EUR 59 million were attributable to operations and therefore impacted net rental and lease income. The remaining EUR 41 million were recognized in the administrative expenses. I would like to point out that as of today, we expect to also write off the goodwill related to the portfolio acquisition from Adler, completed at the end of last year. As the purchase price allocation and thus the allocation of the goodwill to the cash generating units is only completed during the course of the year, a corresponding impairment test can only take place for the first time at the end of this year.
The write-down, we expect, has nothing to do with the performance of the portfolio, but is solely the result of the significant increase in interest rates and hence increased capital costs. The adjusted EBITDA grew by 13.5% to EUR 297 million. The fact that the adjusted EBITDA grew slightly more than the adjusted net rental and lease income underlines our cost discipline in the administrative functions. The adjusted EBITDA margin declined from 77.2% - 74.8%, again, mainly due to the Adler portfolio acquisition. We are on track for our financial year target of circa 75%. The FFO I amounted to EUR 241.4 million, which corresponds to an increase of 10.6%. On a per share basis, the FFO I increased by 9.2%.
For the detailed drivers of the FFO I development, let us now move to the next slide. Acquisitions contributed most to the increase in FFO I with EUR 37.7 million. This is followed by rent increases in the standing portfolio with EUR 9 million. Additionally, our biomass heating plant contributed EUR 1.1 million to the increase in FFO I, which is included in the item others. This business benefited from higher energy prices. Finally, lower cash taxes had a positive impact of EUR 0.5 million. The main opposite effect with increased cash interest cost of EUR 12 million. The higher costs are directly linked to the increased financing volume driven by our acquisitions from 2021 and the issuance of corporate bonds. The higher like for like operating costs are also a result of the portfolio growth. Slide 16 provides an update on valuation.
As you know, we conduct a detailed revaluation process of our full portfolio twice a year with the H1 and the full year results. Our external appraiser, CBRE, is also valuing the full portfolio twice a year. The outcome for the first half of the current fiscal year was an uplift of 6.1% in line with what we had indicated earlier this year. This corresponds to an absolute increase of roughly EUR 1.2 billion, including CapEx, the value of our properties increased by 7%. In terms of markets, the properties in our stable markets recorded the highest uplift with 6.5%, closely followed by the high growth markets with 6.3%. In the higher yielding markets, the valuation uplift amounted to 5.4%. The main value driver was yield compression.
The discount rate came down from 3.9% - 3.7%, which had an impact of around EUR 860 million. Rent performance contributed roughly EUR 460 million. In terms of capital composition, around 12%, or EUR 156 million came from our CapEx spending. In the second half of the year, we expect a stabilization of values at the current level. You are aware of our arguments, but we want to reiterate them. There is strong demand for affordable living and there is a lack of flats in the affordable segment. There is a meaningful decline in new construction while energy requirements increase and state subsidies decrease. There are significantly higher new construction costs due to a lack of building materials and labor and stronger inflation on both cost items.
Lastly, typically, there is long-term fixed rate financing contracts for housing in Germany. Let me proceed with slide 17. After the revaluation of our assets, the gross yield stands now at 4%. This corresponds to a decline of 20 basis points compared to the year-end 2021. The gross value per square meter is at EUR 1,828 per square meter on average, ranging from EUR 1,233 per square meter in the high yielding markets to EUR 2,575 per square meter in the high growth markets. Again, this is just a fraction of the minimum cost for new construction, which we currently see at around EUR 3,500 per square meter, excluding the cost of land.
Our total gross asset value amounts to EUR 20 billion, and for the entire IAS 40 portfolio, including the leasehold land values and assets under construction, the gross value is EUR 20.7 billion. Let's now move to slide 18. The bar chart on the left side shows our maturity profile. There you can see that there are no significant maturities for LEG until fiscal year 2024. The average debt maturity is now 7.1 years, and from a one year-on-year perspective, our average interest cost came down further by nine basis points to 1.15%. The solid and well balanced financial profile is also underlined by a hedging ratio of around 94%. Our net debt to EBITDA ratio stands currently at 14.6x.
Our LTV is at 42.1%, which means it is below our maximum threshold of 43%. In comparison to Q1 2022, where the LTV amounted to 43.1%, the valuation uplift had a positive effect, while the mark-to-market of our stake in BCP had a negative impact. The mark-to-market is based on BCP's share price at the Tel Aviv Stock Exchange and is required at each reporting date due to the treatment of the stake as a financial investment. With this, I hand it back to Lars for the guidance.
Thank you, Susanne. Based on our strong operating performance, we confirm our guidance for the FFO I in the range of EUR 475 million to EUR 490 million. We are also confident to reach a rental growth of 3% as well as an EBITDA margin of around 75% for the full year 2022. We made some adjustments to our guidance, driven by the changes of capital markets over the course of the last month. Firstly, we have spent and will spend less on our investments. As you saw, we have cut down spending by more than 4% on a per square meter basis. This means that we could already more than offset the price increases experienced for specific materials and services. The organization has a strong cost DNA, i.e., is used to turn every penny twice before it is spending it.
I am convinced that we will be able to identify further savings over the course of the year and therefore reduce our investment guidance to less than EUR 46 per square meter. The second adjustment is our acquisition guidance. We are highly selective with regards to any acquisition, but keep our eyes open to take advantage of opportunities to optimize our portfolio. Therefore, we have canceled the acquisition target of 7,000 units for 2022. At the same time, we confirm our target to sell up to 5,000 units. Therefore, you should expect us to become a net seller this year. In order to safeguard our FFO I target, which, as always, neither includes acquisitions nor sales, we will try to steer transfer of ownership for the sales to the end of this year. Overall, we are in a very good shape to weather the current challenges.
We have made strong progress in operations. We take utmost care of our cash flow. We act from a strong balance sheet. As usual, we will come up with a guidance on 2023 in November, and with that an update, but definitely not a complete revision of our strategy. I hope to have ended on an upper tone in these uncertain times. Now my colleagues and I are very much looking forward to taking your questions.
Thank you, Lars. With this, we begin the Q&A session, and I hand it over to you, Operator.
Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wish to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from the line of Thomas Neuhold from Kepler Cheuvreux. Please go ahead.
Good morning, everybody. Thank you very much for the presentation, and thank you for my questions. I have three, and I think it's the best to take them one by one. Firstly, I was wondering if you can give us an update on the recent trends in the investment market post-interest rate increases. In the second quarter, you mentioned that you were not able to find a partner for BCP. Has this to do with the change in the interest rate environment, or is it more related to BCP-related topics from your point of view?
Good morning, Thomas, and thanks for your question. With regards to the transaction market, honestly, one of the big changes we are seeing in the transaction markets is that the portfolios being traded are becoming much smaller. Regional focus is of utmost importance. The type of asset is of utmost importance, and all the other topics which a real estate guy considers to be of importance making an investment decision. While we were earlier on seeing trades also of big portfolios, we also as well and for our sales portfolio, we needed to cut down on size of those portfolios.
We initially thought that we are coming to the market with portfolios as big as 1,500 units, but needed to learn that the current sweet spot in the market seems to be in the range of between 100-500 units. Therefore, that is the reason why also from our perspective, the transaction market has slowed down substantially. It is the uncertainty in the current market which currently makes investors much more cautious with regards to taking a decision. That was definitely also a driver for some of the investors we were talking to with regards to the BCP option, that the current BCP investment was considered too big.
Ve ry clear. Second question is on cost inflation. Can you give us an indication what kind of cost inflation you're currently facing for your maintenance and modernization works?
Sure, Thomas. I can give you an update that's a bit hard to say in total because we have long-term contracts in place. We see we have some cost adjustments that are CPI- linked or on the construction index- linked, which is close to the double-digit figure. Where we renegotiate contracts, we start with this double-digit cost inflation figure and demand from our construction partners. We try to fix these agreements at a lower rate, but this depends very much on the type of construction and the region where we require these types of services.
Okay. Thank you. My last question is on this net 5,000 units disposals. Can you share your thoughts, what you will do with the proceeds? Do you plan to buy back shares or to reduce your debt position? What are the plans here?
Thomas, very happy to take the question. First of all, I think it's of huge importance to say that we have a sales target of up to 5,000. We do not see ourselves under any pressure to really get to that target within that year. It is something where we are opportunistically looking now at the interests we are collecting in the market, and we will definitely be willing and have been willing to resize our portfolios to just find the sweet spot and to maximize the value creation out of those sales. Next step will be what are we doing with those sales proceeds. First of all, certainly, and you know that, we will be very much focused on reaching our ESG targets.
That means that we are going to spend a substantial part on the modernization because we consider this to be in line and also generate substantial returns for our shareholders. Whether and what we are going to do with an additional free cash flow, that's depending on the situation then in the capital markets. Due to the high volatility, we will look at all options, but have not decided on a special thing like deleveraging, buying back shares, doing additional acquisitions or anything else.
Understood. Thank you very much.
Thanks.
Next question comes from the line of Marios Pastou from Société Générale. Please go ahead.
Good morning. Thank you for taking my questions and for the update. Couple of questions from my side or maybe do it one by one again. Maybe on the property values. You mentioned that you expect a stabilization going forward. I just wanted to kinda get an understanding of what's driven that kind of guidance. Is that feedback from your valuers? Is that what you're seeing in the current market when it comes to transactions? Any color you can provide here will be very helpful.
Yes, of course. Very happy to, Marios. I think it's a variety of different impacts. Lars has mentioned a few just now when he was talking about the transaction market. I think we have seen increasing uncertainty among investors. They are holding back. They want to obviously see clearer picture of how the market is evolving and what is happening with rates, with inflation, et cetera, before going in with a view basically. That's reflected in our guidance here as well. I think we've just finished obviously the cycle of doing the H1 or finalizing the H1 valuation. It's simply too early to be more specific on guidance for the full year.
That's why we are thinking that stabilization is sort of a reasonable expectation for the rest of the year.
Okay. Very helpful. Thank you. Just secondly on your own debt and leverage. We've seen the LTVs now come back in line with your target levels. On the net debt to EBITDA, which is a number you know increasingly being focused on, do you have any near- term targets which you hope to bring that level down to? Any guidance there will be very helpful.
Marios. We've never really had an official guidance on net debt to EBITDA, and that hasn't changed. While you correctly pointed out we are in line with our LTV expectation, I think it's clear that current market environment is not the right time to lever up further. I think we all in agreement on that. Therefore you can expect that we are working towards lower leverage in general, but we don't have a specific guidance for net debt to EBITDA.
Okay. Very helpful. Thank you very much.
The next question comes from the line of Thomas Rothäusler from Deutsche Bank. Please go ahead.
Hi. Morning, everybody. A couple of questions. The first one maybe on BCP. I mean, hasn't there been an option for you to renegotiate the terms of the deal? Also, why do you think the JV partners were reluctant to exercise the option?
Yes. Thanks, Thomas, for your question. With regards to the BCP option, you've known the terms. It was EUR 157 per share, and it was a timeframe until the end of September. You can be absolutely reassured that, as always, we try to bring that option back into the money. That means not only talking to national and international investors, but certainly also talking to Adler. Unfortunately, finally, 3rd of August, we needed to realize that on the one hand side, with regards to investors, but also on the other hand side, with regards to Adler, we could not find a solution to bring that option back into the money. Therefore, we dropped it. Once again, reiterating what I already said with regards to BCP, it is a highly attractive portfolio.
We attracted many, many national as well as international investors looking into the portfolio. Finally, the uncertainty in the market is currently quite high. That seems, from our perspective, to be the main driver for people not taking the final decision to work on that any further.
Second question on the disposal target, 5,000 units or up to 5,000 units. I mean, you say you're not under pressure to sell down stuff, but would you also be willing to accept prices below book value, or how do you look at this?
Yes, for sure we are not willing to accept prices below book value. As always, and you know us, Thomas, for many, many years, we are very conservative. I do not want to overpromise, but as always, certainly, we try to max out the interest we are getting from the market. That was also the reason why we rebuild the portfolios being brought to the market. Now we wait for the interest and, as soon as we have them, certainly happy to disclose at which prices we finally closed in.
As already made transparent during the presentation, we also will certainly try to have the transfer of ownership in a way that this is not impacting our 2022 guidance, so that we are still ending up in the range of EUR 475 million to EUR 490 million as an FFO I guidance for this year.
How far are you in this disposal process? Is it something more in the last quarter? I mean, we are now in the summer season and then. I mean, what would you say? I mean, when can we expect. If we can get any news on disposals, is it more, is it rather at the end of the year?
It will be at the end of the year, Thomas. Certainly now we ended summer break, you know that, but after summer break and the accumulation of capital looking for investment into German residential has not ceased. There are plenty of investors sitting on the fence at the sidelines now waiting for the perfect moment to re-enter. Our expectation is bringing those portfolios, either ourselves together with brokers, whomever, to the market by the end of the summer, and then over the course of the next months, certainly also taking advantage of the bigger get-togethers like the Expo in Munich, and we will get full transparency on market prices and also whether we have already identified the best way of marketing those assets to the market.
Okay. Another question on rental growth, maybe, you know, more regarding a longer term outlook, especially considering your comments on higher demand for rental apartments as people can't afford to buy anymore. Also maybe considering eventually tighter affordability levels, you know, and also considering the CapEx programs, which especially you, I think, plan to cut your program here. I mean, considering all these factors, I know a lot of moving parts, but what would be your best guess regarding longer- term rental growth?
Thomas. Once again, with regards to modernizations certainly we try to look into every modernization as always and to save money. What we definitely are not doing is bringing our ESG targets, especially the CO2 reduction at risk. Therefore, we are sticking to energetic modernizations, and we will also continue doing that, especially in light of the progress we are making with regards to serial modernizations. That means looking forward and also with regards to affordability of the rental payments. Once again, we currently are at an average rent of EUR 6.26 per square meter. That is really one of the most affordable products in the market. To substitute our product by anything which is cheaper is, in most markets, impossible.
Therefore, we do not expect anyone to now look for a cheaper apartment because there are just no cheaper apartments in the market. At the same time, and that's of huge importance, and we just also try to make that clear during the presentation. Our chancellor said, "You will never walk alone." Meant was, that those people, especially which are renting out with us, will get state subsidies in order to make up for the substantial increase of energy costs, as well as the normal cost of living, especially costs for food, et cetera. Therefore, from our perspective, there is no shrinkage in the affordability for the product which we are offering. It is even the reverse, and that is something which we are also seeing in the market. We see increased cost for labor.
The latest agreements with workers associations have shown agreements up to 6%. Therefore, that is making up for the additional inflation and also will bring about higher affordability of the rent. Therefore, in the midterm, our expectation is that partly the inflation will be reflected in higher rents because you also pointed it out, we will have people returning due to higher interest rates from the early on condo market now to the rental market. We will have additional immigration coming into Germany and many other factors. At the same time, no additional supply. Therefore, from our perspective, we are going to see also rent increases to the current degree or even higher for the coming years.
Okay. Maybe a last one on the new BEG subsidies, or subsidy measures which become effective, mid-August. Could we get your first take on the measures and what could be the impact on your modernization plans?
Hi, Thomas. Yes, sure. I think, firstly, we were a bit disappointed that there was another change yet to the regime on very short notice, which is very difficult for us to deal with because we obviously plan our investment program long term. There was a lot of planning required for the individual projects, and we basically have to start over on most of them. I think with regards to the medium- term implications, we will obviously now have to go back to the drawing board and redo most of our CapEx projects. Having said that, we obviously have used to some extent in the past the individual measures program in our approach to using subsidies.
That program is still intact and in place, and we continue to work on the proposals for using those subsidies. We expect that we will still have a meaningful amount that we can use in for the 2022 CapEx program under the individual measures approach.
Okay. Thank you.
The next question comes from the line of Marc Mozzi from Bank of America. Please go ahead.
Thank you very much. Very good morning, everyone. I have just one follow-up question on this BCP transaction. Should we read correctly that if you would have been agreed on a pricing and then therefore being able to find a JV partner, you would have effectively exercised this option? The related question would be to the first one, what sort of discounts on the price were you targeting? I would say you, LEG and potentially your JV partners. Can you give us a little bit of color, the reason why you haven't been able to conclude with your JV partner is because of the price only or is there another related reason around that to justify them not joining you for an acquisition?
Thank you.
Thank you for your questions, Marc. With regards to the BCP option, for us, certainly we try to do everything to bring back the option which we were holding back in the money. We bought it beginning December 2021, and the terms of the option was to buy at EUR 157 per share, and the timing was valid until September 30.
that was what we were offering to the market, and certainly due to the limitations we currently have, due to the share price in comparison to our NTA, so therefore, with the limitations not being able to get any additional equity on the market and also with the restriction on taking on new debt, coming from that, we were certainly looking for national or international co-investors being willing to take over the full 63% and then helping us to run that business and entrusting us with the asset and property management.
Unfortunately, that was not the case, and that was, from our perspective, very much driven, not by the quality of the portfolio or the optionality which that portfolio holds with very attractive development plots, but it was purely driven by the fact that the size of the investment currently doesn't fit the appetite of investors. You're absolutely right to assume that every investor at the current moment is certainly comparing the price being paid on a direct investment with what they can do on an indirect investment site. All the investors being willing or able to invest in a portfolio of the size of BCP certainly are not only direct investors, but indirect investors at the same time.
Therefore, you are right to assume that a certain discount on the price was something all of the investors expected, and that was certainly also in line with our expectation. The amount of discount was certainly different depending on the cost of capital of the respective investors we were talking to. Therefore, there is not the one discount we were talking to, but you can assume that this was certainly a discount of more than 10% on the agreed price. Finally, and that's your last question with regards to the reasons, it was those three reasons which I mentioned during the answer and why people stepped away. That is at least of what we have been made aware of, and we are not aware of any other reasons by investors.
If I understand you correctly, that's very clear. Thank you. If I just to make sure that I understand everything clear, it's all about pricing and the minimum targeted discount was 10%. Can we have a clue on what was the type of maximum discounts you've seen from some JV partners? Or do you think that those JV partners were saying, "Actually, the market, the equity market is right there, so the discount which is on your share price right now is absolutely valid, and this is the type of discount we would like to buy German Resi right now.
If we are certainly always trying to evaluate all options on the market, we certainly also spoke to very aggressive investors in the market like private equity investors with IRR requirements of above 20%. There, you can easily assume that those investors certainly have asked to at least get the current discount, which you see on our share also on the share price of BCP. That's, I think, the biggest discount which we heard of during the process we were running on marketing the BCP option.
That's brilliant. Thank you very much. That's it from me. Thank you.
The next question comes from the line of Andres Toome from Green Street. Please go ahead.
Hi, good morning. I have two questions. First one about operating margin pressure going into 2023. Just wondering, and you already provided some color on what you're seeing on maintenance expenses that are externally procured, but what sort of increases are you expecting in your own organization in terms of wage growth and so on? I guess bottom line being that is EBITDA margin going to come down next year, or are you able to mitigate that through just lower volume of maintenance, so your unit costs are higher, but you'll just cut down on the total volume?
Andres , thanks for question. We are currently building up our business plan for next year, and as usual, we come up with this in the context of the Q3 figures in November. Bear with us to be more precise than in early winter.
Fair enough. What would you expect in terms of sort of wage increases in your own organizations as you're seeing inflation just edging higher?
As I said, we will come up with this in a more comprehensive context than in November.
Okay. My second question is, once again, BCP option. You know, it sounds like based on what you saw in the negotiations, that actually asset values are down for German Residential, whereas sort of your disposal target is still looking at achieving book values. I guess as you mentioned, the ticket size is an important factor there. You know, can you give us a sense, I guess, where a JV partner potentially would have neared the deal with BCP, and just giving a sort of indication where they think actually values are today?
Thanks a lot for your question, Andres . With regards to ticket size, you're right. As soon as you seem to reach levels where you are talking to investors which are able to do direct as well as indirect investments, there currently seems to be an interest to renegotiate back on the price. What you cannot see certainly are anyone renegotiating on smaller portfolios, because those people normally have a different interest because they want to own real assets and not shares. Therefore, we do not see anyone doing renegotiations at that market. That is also something, and we try to explain that during the presentation, that we were resizing our portfolios we have brought to the market. One of the portfolios would have assumed to be at the size of 1,500. That was already too big.
We already seen and sensed that this is not the sweet spot in the market anymore. We resized it to a smaller size where we are now talking to pure direct investors, and there we are quite confident once again to reach book value. Once again, as we are not under pressure, if we learn that there are renegotiations happening, that we will once again resize that, also being willing to then sell off single multi-family houses if this is required, and maximizing the value.
Understood. W hat was your sense from those, negotiations around BCP? Where would, a potential deal, closed at what pricing level?
That's, as always, very difficult to tell, Andres , because I couldn't find a seller being willing to agree to sell at a certain price. Once again, the demand started from a discount on the share price level we have agreed on the option of around 10%. Certainly, it was not ending there, but that was the starting point because depending on the cost of capital and, with regards to private equity guys, you know of how their IRR requirements look like. There are people also being quite aggressive, having IRR targets also on German Residential of above 20%. You can easily conclude then you are coming to very high double-digit discounts on the earlier agreed price. That was the range where people were at least looking into the option.
At what price finally Adler would have agreed to it, I'm not able to say, because the deal has not been closed.
Understood. Thank you very much.
Thank you.
The next question comes from the line of Paul May from Barclays. Please go ahead.
Hi, team. Thanks for taking the questions. Got a few questions, a couple of points of clarification. I'm just struggling to reconcile something that you and your peers all highlighting that valuations are stable and inflation will drive rental growth and as such will drive valuations higher, that you're clearly below your maximum leverage, I think is the comment that you made. Obviously very confident on the leverage side of things, yet all the listed players now are looking to materially deleverage, arguably, in terms of looking to sell assets aggressively. Something doesn't either add up for me. I just wondered if you could provide the reconciliation or is it simply that you are concerned about valuations given, as you mentioned, you know, negotiations on BCP coming in quite materially below the book values?
Are you pushing for a lower LTV into the future? Are you simply saying that German RE doesn't work with financing cost at, say, 3.5% and leverage in the mid-40s? Just trying to get a sense as to kind of ultimately what has changed, 'cause on the one hand you're saying everything's fine, and then on the other hand, arguably you've completely changed the strategy. Just wondered how to reconcile those two things.
Yes. Thanks a lot for the question, Paul. I think when it comes to how we look at leverage and how we look at disposals in that context, the key priority at the moment is obviously preserving cash, not having any additional funding requirements and being able to continue to invest into our portfolio, working towards our CO2 emission reduction targets, et cetera. In order to be able to do that and not to have to rely on external financing markets, it obviously makes a lot of sense to take advantage of the big discrepancy we're currently seeing between how assets are traded in the private market and how our stock is currently traded in the public stock markets.
That doesn't mean that we have completely changed our strategy with regards to how we run the balance sheet of the company. It's just currently not the right time to grow. It's the right time to show the market the difference between asset values in the private market and the valuations of the stock in the public market.
Okay. Just on that, I think you mentioned obviously lot sizes of disposals or acquisitions, depending which way you want to look at it, have reduced considerably to sort of between 100 and I think 500 units, I think you mentioned. Even down to the extreme of selling individual assets. I imagine that will take quite some time to hit your 5,000 disposal target, significantly longer than you probably would've liked. I imagine significantly more conversations are being had and therefore could it be, you know, more costly to do transactions in that scenario?
No, it will have no impact on the cost being associated with the disposals, but you're right to assume, Paul, that it certainly will then take more time and certainly also more time than initially assumed. Once again, we do not need to sell, but therefore we will take the time to maximize the cash back from those sales.
Okay. Then just a couple of points on clarification. I think you mentioned in the presentation that you would've been forced to raise equity to acquire BCP. I seem to recall conversations quite clearly in previous conference calls that you wouldn't have to raise equity to acquire BCP. Sorry, I apologize. Maybe my memory is incorrect, but I thought you were quite clear you wouldn't have to raise equity, and now you're saying that you would've had to raise equity. Just to check.
With regards to doing that on our own, I think looking at the current situation in the market, we would have needed additional equity to fund it in order to not overstep any borders or make you aware or make you anxious about our capital structure. Therefore, that was the reference we made with regards to the need of additional equity for making the transaction work.
Okay. Cool. Thank you. Similarly, I think you mentioned obviously the government subsidizing households for sort of increased utility costs. I mean, to flow that through, 'cause you're still confident of rental growth, is effectively the government is happy to subsidize rental growth. Is that gonna be the situation? 'Cause I'd be surprised if they would be happy to subsidize utility costs, which meant that you could then raise rents. It seems a bit of a strange dynamic given the political situation around rent within Germany.
That's definitely not the argument. From our perspective, it is a very critical situation for the people with lower to mid-low income, and the energy costs have quadrupled, in some cases. Therefore, what we are seeing is that those people will be forced to pay another month or two months of cold rent and, but we are just passing further those costs. Therefore, it is not making rent increases more affordable, it is just helping people to not run into a situation of energy poverty. That's our demand.
Once again, listening to our chancellor who said, "You never walk alone," and seeing all of the discussions taking place at the current moment, we are very confident that that additional burden, which is to be carried, and rightly to be carried during that war between the Ukraine and European alliances now versus the Russian Federation, that definitely needs to be funded and helped by state subsidies.
Okay. I mean, could you similarly not increase rents as a sort of sign of goodwill for a similar thing, effectively helping out tenants? Is that not on the cards, is it you are still looking to increase rents to offset sort of inflationary pressure elsewhere?
We come up with our rent growth target in November. As you see, we have once again reaffirmed our target for this year, which is 3% and that is once again happy to reiterate 3%. That's something which we are expecting this year.
Thank you. Sorry, very last one, I think. On the comment around stable values over the second half, obviously, I think you mentioned pushing through additional rent increases in the second half. Are you effectively saying that you expect yield expansion? Stable values, if rents are increasing, just mathematically, you get yield expansion. Is that how best to think about it? Or do you think that it'll be stable yields and therefore rental growth will still drive valuations higher?
Look, I think I said quite clearly that it's currently too early to go into the details around how this will have an impact. Again, unfortunately, we will have to come back to you on that, in November when we have more clarity on how the market is performing in the second half.
Okay, cool. Thank you very much.
The next question comes from the line of Kai Klose from Berenberg. Please go ahead.
Yes, good morning. I've got two quick questions only, if I may. The first one is on page 14 of the first half report. We had EUR 5.5 million, a special one-off, in the recurring admin expenses. Although it's a positive one. Could you maybe give more color on that? We also had EUR 3.1 million, a special one-off in the rental income. May I have a bit more granularity on these two items? The second question would be on page 12 of the presentation, expecting a slightly lower maintenance and CapEx spending. In which of the three buckets do you expect to spend a little bit less? Will it be on CapEx, maintenance or new construction?
Kai, I will start with the second question. I'm referring to slide 12 of our presentation. We will have a slightly slower part in the turn cost spending and therefore have it in the CapEx part of box, as you see.
Thank you.
With regards to your first question, Kai, we will get back to you after the call.
Thank you.
The next question comes from the line of Manuel Martin from ODDO BHF. Please go ahead.
Yes. Thank you for taking my questions. I've two questions, one by one, if I may, please. The first question is the follow-up on the targeted rent growth for this year. I mean, you have elaborated that you're willing to reach your rent growth target of 3%. The rent growth drivers, where will that come from? Will that be mainly modernization or indexation? Maybe we could have a bit of flavor on that, on the driver.
Sure. Manuel, I'm happy to take this question. The rent growth drivers are from churn. If we see a substantial increase in new rents if we relet flats. We also have ongoing modernization projects which we need to finalize and which will then once they are finalized and calculated have only the impact on the rent. We also have additional increase from rent table adjustments. This will be from investments, from relettings and from rent table adjustments.
Okay. Any special driver there? I mean, the background of my question.
No. There's no special driver. We don't. We will have it pre-financed in part as we pointed out, that the subsidized part will only be due for adjustment next year. It's more or less the normal business. As we pointed, obviously a very strong demand for our product, which is reflected there in the low vacancy rate. We are also seeing, too, higher asking prices for new flats.
Okay. I see. Do you see any signs somewhere in the background of the politicians that could come up some headwinds if rents are increased? I mean, that does not concern only LEG, but also other landlords. Do you see there some streams in the political river which could indicate that?
The streams in the political river are sometimes difficult to see and to foreshadow. On the current coalition, they pointed out what their agenda is on the rent restrictions and rent increases. That's all reflected, and we see no additional pressure here. I think the main political target is now to minimize the effects on the energy prices and on inflation in Germany. We have inflationary trends all over the place. If you compare the price development with developments, for example, for wheat or for energy in particular, it's just at the ends of the. It's not driving inflation, it's more a limiting factor on inflation.
Okay. We let that river flow and come to the second question. On your investment program, you made clear that you decreased the investment program to below EUR 46 per square meter. That's a reduction on a per square meter basis. Is there a trend in LEG or target maybe to reduce the program also in absolute numbers on a year-on-year comparison, or is it just on a per square meter basis?
Well, that's per square meter because we increased the portfolios quite substantially. It's quite hard to decrease in absolute terms. That's the current situation that we are turning every penny not only twice as we always did in the past, but 3x . We are able there to reduce it a bit and we will come up with our plans for next year then in November for the other parts.
Okay. Thank you very much.
The next question comes from the line of Tom Carstairs from Stifel. Please go ahead.
Good morning. Just one question, please. Are you able to shed any light on the sale of his shareholding in the company by the Chairman of the Supervisory Board, please?
Thanks a lot for the question, Tom. Unfortunately, we are not. There is no legal obligation for our Members of the Board of the Supervisory Board to hold any shares. No internal requirements. We are only aware that that was a personal decision reallocating his personal wealth, so nothing to do with the strategy of LEG or any decisions being taken here within the company.
All right. Thank you very much.
The next question comes from the line of Simon Stippig from Warburg Research. Please go ahead.
Good morning. Thank you very much for taking my question. I have a couple of questions. First one would be in regard to BCP again. As you mentioned, you are holding the remaining stake of roughly 34%-35% as a financial investment. What do you intend doing by that? Will you keep it on the balance sheet, or are you trying to find a buyer for the full stake and sell it then? Or would you also be keen to sell in the market?
Thanks a lot for the question, Simon. After a failed transaction, so certainly it's before the next transaction, we will definitely look at all options with regards to that current shareholding. For the time being, it is considered to be a pure financial investment, but certainly we will now wait and see how Adler will react, what they are planning to do with their bigger share, and then certainly take our decision accordingly.
Okay, great. Thank you. Just in regard to the relative valuation, wouldn't it be interesting to sell it in the market and then pro rata buyback your own shares?
Once again, Simon, it depends on how the next steps will be within BCP. You can be rest assured, we will try to once again maximize out the value of that share. Once again, it is an Israeli listed company, whomever is going to buy into the 63% or if Adler is sticking to the 63% in order to get the majority or do a squeeze out, do a delisting of the company, you need our 35%. Therefore, we now wait and look at what's going to happen, and at the same time, certainly are in close contact with BCP to once again make sure that our understanding of the business is also being heard there. Then, hope certainly BCP is developing as successfully as in the past.
Okay, great. Understood. Two questions for to one topic. In regard to your disposals, what I understood that you're selling up to 5,000 units until the end of the year, although that could be delayed. First question would be, is there any process you can already talk about? You mentioned before that you assumed a timeline for that sale and that assumption, that working assumption is probably prolonged. What was your initial assumption in timeline?
The initial assumption was certainly that we would do a substantial part out of that 5,000 already within that year. That might, once again, in order to maximize value out of those sales, be a prolonged approach. Once again, let's wait and see. We have just resized it. We will bring it to the market end of August when everyone has been returned from its summer holiday. There is plenty of capital looking for direct investments. Let's wait and see how much we can do there. Giving an insight into that is unfortunately too early, Simon, but we certainly promise to be more precise during our presentation in November with our Q3 numbers.
Okay, that's very clear as well. One question regards to your revaluation of the portfolio. Have you revalued the full portfolio?
Yes, we have. We always revalue the full portfolio twice a year.
Okay, great. One additional question. As I understand, you're very comfortable with the balance sheet values. Your leverage is below the maximum LTV target of 43%. You have plenty of cash on the balance sheet, and I understand that you want to reach these ESG targets. I just wonder, why don't you turn more bullish on your own shares? Just the implied valuation, given what you said before, is just super attractive or should be super attractive with a very visible long-term view of recurring cash flows and stable balance sheet values. Can you comment on that?
Simon, we are super bullish with regards to the operations of our business. I think we are operating on the basis of the right strategy. Focus always is on optimizing our operations. You've seen that we reduced once again the like-for-like vacancy and increased rent, and we are absolutely confident to reach the 3%. We have been able, over the course of last 3 years, to more than double the FFO coming from the value-added business. Finally, with regards to portfolio optimization, we have just, due to changes in capital markets, turned to be much more conservative there. Therefore, hopefully, and that at least also we try to make sure during our presentation, that we are convinced that we do everything that the market fears of how big the current difference is between the underlying operational business and the current share price.
That's all we can do, so hopefully everyone listens in to that call and hears loud and clear how convinced we are that we are running a solid business and giving more opportunities to come over the course of next month.
Okay. That's all for me. Thank you for answering.
We have a follow-up question from the line of Marc Mozzi from Bank of America. Please go ahead.
Thank you very much. Just wanted to confirm one number. When you said, you were targeting 10% discount on NAV for investors and you were targeting at least 10% discount on the acquisition of BCP, are you talking about 10% on the net asset value, or 10% on the price of the option, i.e. EUR 157? Can you remind us what premium that EUR 157 was representing to the net asset value? Thank you.
Yes, very happy to do so. The last reported NAV has been EUR 144 per share. The price I was referring to was really a discount on the option price, which was an agreed EUR 157, so a 10% discount on the EUR 157.
Brilliant. Thank you very much.
There are no more questions at this time. I hand back to Frank Kopfinger for closing comments.
Thank you, and thank you for your questions. As always, should you have further questions, then, please do not hesitate and contact the LEG IR team, and we will come back also, Kai, to your question. Otherwise, we are looking forward to seeing you at upcoming roadshows or conferences. Please note that our next scheduled reporting event is on November 10th, and we report our nine-month result. With this, we close the call, and we wish you all the best and hope to see you soon. Thank you and goodbye, everybody.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.