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 a 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 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.
Thank you, Andre, and good morning everyone from Düsseldorf. Welcome to our Q3 2022 results call, and thank you for your participation. As you have seen, we published the core elements of our guidance 2022 as well as our new guidance 2023 yesterday night already. We hope you also took notice of the full reporting set, which we published this morning and which you'll find on our webpage. Please note that there is also a disclaimer which you'll find on page 3 of our presentation. We have today in the call our entire management team with our CEO, Lars von Lackum, our CFO, Susanne Schroeter-Crossan, as well as our COO, Volker Wiegel, who will lead you through the presentation. Without further ado, I hand it now over to you, Lars.
Thank you, Frank. Good morning also from my side. We are very happy to share our strong operational results with you today. However, as you might have already seen, we are also keen to share our view on the market environment and the recalibration of our business model to the current market environment. The key takeaways for you should be. Firstly, we continued our operational strength over the last nine months so that we confirm our guidance for the full year by narrowing it down to EUR 475 million-EUR 485 million. Secondly, we are proud of a strong set of financial figures, especially at FFO I per share, increasing by 11%. At the same time, like for like rental growth reached 3.2%, while vacancy rate has been reduced to just 2.1%.
Finally, we are proud to harvest the fruits of our numerous ESG initiatives. Our startup RENOWATE, which strives for not less than becoming a market leader for serial refurbishment, kicked off its first project. Some of you took the chance to visit the project in person already. As of today, the project is almost finished and RENOWATE even signed the first external order. Please keep in mind that all this happened just six months after founding the joint venture. We also achieved top scores within the employer survey, Great Place to Work, even improving our strong initial rating. We are among the best employers in Germany. Lastly, we made a significant improvement within our customer satisfaction survey, which made us gain quite some ground towards our 2024 target. However, there is still a lot of work ahead of us, but we are on track in this marathon.
Thirdly, you should take away from yesterday's announcement and today's disclosure that we draw a realistic picture of the market environment. However, we do not have a crystal ball, and we can only adjust to a scenario we currently consider most realistic. We can take neither tail risks nor chances into account. For H2, we expect a valuation decline of our asset base of 3%-5%. Transaction markets are currently in a sit and wait mood. Further development is hard to predict. A substantial supply of assets meets an uncertain investment sentiment as further development of interest rates is uncertain.
Fourthly, we adjusted our business model to an even more defensive setup. Cash generation will be in focus during this more challenging environment. For 2023, we shift to AFFO as our key KPI. We reduce CapEx spending and will also put dividend payment for the financial years 2022 and 2023, subject to the development of the market environment. We will prioritize the strengthening of our capital base over payouts. Let me now guide you through our analysis of the market and the reasons for recalibrating our business model. I am now on page 7. We are operating in a market that lacks new supply. Throughout the last decade, the German population grew by almost 4 million people, while new construction only added a little more than 2 million new units. This means that the structural deficit of the market got even worse throughout the last decade, and no government was able to tackle this problem, even in a zero interest rate environment.
We assess that the structural deficit today in the market is about 2 million units. The situation in the affordable segment is even worse. No new units have been added, while simultaneously higher inflation, ongoing immigration, and an upcoming recession will even increase the demand and the pressure on the affordable housing market. In parallel, the current existing pipeline will dry out. New projects will not come to the market due to high financing costs, higher material costs, and new building requirements that simply do not allow for the creation of affordable housing. From first January 2025, new buildings need to be built according to the Effizienzhaus 40. New buildings need to require 60% less energy than a new standard house. As always, the last efficiency gains are the costliest ones and require lots of energy technology. Same here. I would bet that if even anybody, only a tiny fraction amongst you lives already in these efficient units. However, this will be the minimum legal requirement for new buildings in Germany going forward.
Based on today's prices, the construction costs per square meter amount to EUR 5,000. This is far from being affordable for our tenants and far from being a mass solution. There is a strong rising demand for affordable products hitting a market which is already completely rented out and no additional supply of new product in sight. Our vacancy rate of 2.1% is a strong proof of that market development. While the supply-demand imbalance will increase, let me point out another important market driver for us, the interest rate environment which you find on slide 8. As you are all aware, the interest rate environment completely changed since the beginning of the year. The German Bund yield saw one of the sharpest increases in its history.
Our own 2032 bond issued at the end of last year with a coupon of 1% offers now a yield of around 6%. The new interest rate environment clearly affects our cost of capital. Our preferred instrument at current conditions would certainly be secured financings. As we always kept a balanced approach between unsecured and secured financings, we have an excellent access to all real estate financing banks in Germany. The sharp surge of interest rates and a high level of volatility of interest rate markets also put a harsh hold on transaction markets. Most of the bigger institutional investors are sitting on the sidelines, and buyers, as well as sellers, seem to wait for interest rates to stabilize.
Given all international central banks are in different phases of the tightening cycle and risk to over-tighten against a potential upcoming recession, markets are clearly far from being in an equilibrium in which investors have clarity and visibility on the new stable level of interest rates. However, we as a management team are convinced that more of the same is not the appropriate answer to the current challenges and consequently recalibrated LEG's business model to the new market environment. Slide 9 summarizes how we react and adapt the business model to the current challenges. We focus on the execution of all operational levers at hand. The main aim is to preserve cash for as long as the current challenging environment persists. Thereby, we increase the resilience of the group and have the opportunity to bolster capitalizations. Specifically, we identified four levers. Firstly, we strengthen operations.
With respect to cash inflows, we expect to increase rents like for like by 3.3%-3.7%. This will be the strongest rent increase in LEG's history. We have included 60 basis points from the cost rent adjustment for our subsidized units. First calculations indicate that the numbers seems to be too conservative and holds some upside. At the same time, we reduce our investment spending next year significantly. We started already this year to reduce our spending by canceling projects. This will continue so that we will have a substantially lower number of projects also going forward. Thereby, we reduce our investments to EUR 42 per square meter for this year and then again to EUR 35 per square meter for 2023. This represents savings of 26% for this year and 41% in real terms against the original 2022 level.
Additionally, we implement a cost-cutting program to take out more than EUR 10 million of our cost base in operational as well as in admin costs. Secondly, we confirm to run off our new development business. We already withdrew our new development targets in Q1 this year. Even further, we will now simply finish our existing pipeline, benefiting from the fact that most of our own and external projects are realized on fixed prices. Therefore, our pipeline will run off throughout the next three years. We have a total of EUR 263 million of remaining investments until 2025 ahead of us. You find more details on our development pipeline going forward in the appendix. This flexibility and the small exposure overall of the development business is one of the key difference of LEG versus all other listed peers.
Thirdly, we stopped our acquisitions and we will become a net seller. All members of our acquisition unit are now busy with working on our disposal pipeline. As of today, we sold around 400 units for a mid double-digit million euro amount. We are in the marketing process for more than 5,000 units and are still hopeful to sign some more disposals until the end of the year. Currently, we have visibility to reach a disposal volume for the full year of around EUR 100 million-EUR 200 million .
Fourthly, while we bring down our investments, we want to continue to focus on innovation within the group. Front-running innovative developments allows us to position ourselves as the solution provider for the industry and opens up third-party business in the mid to long term. By driving innovations, we can also smartly offset some of the lower investment spend and still stick to our CO2 reduction targets. Specifically, we expect that nudging of the customer towards less consumption of high heating will realize a substantial part of the CO2 savings, which we lose from a lower level of energetic modernizations. With a new steering towards a cash-driven model, we also shift our steering away from the FFO I to the AFFO, excuse me. This will lead to some changes in respect to KPIs. Our new main KPI will be AFFO. We expect AFFO to reach EUR 110 million-EUR 125 million for 2023. This compares in terms of FFO I to a range of EUR 425 million-EUR 440 million.
Please note that we will continue to report FFO I, but we will not steer the business accordingly. We consider FFO I to be the wrong steering and reporting figure in the current challenging environment. Volker will later explain the accounting effects which you should have in mind. In a nutshell, by shifting to AFFO as our core KPI, we give up focusing on accounting-driven FFO I contribution and instead put saving cash in the focus for everyone in the organization. Let's now move to slide 10 to give you some more insights into our new steering. Our new steering will come along with several changes, be it in our target setting or on the disclosure of numbers. To align internal steering and external communication, we focus on AFFO as our cash proxy figure.
FFO I served as a strong indicator for operational success in a low interest rate environment, which benefited the sector strongly. The current environment, however, requires a more holistic KPI, which also reflects cash outflows and the ability to generate cash. We consider AFFO to be a very easy KPI for you to model. Certainly, it will also be reflected within the update for our remuneration system, i.e. being based on an AFFO per share. With this, we will also set the foundation of the dividend payment on a new and sustainable basis, which reflects the current challenging market environment. We aim to pay out 100% of the AFFO as it reflects much better the free cash generation from our operating business. Additionally, we aim to pay out a part of the net proceeds from disposals.
Given the uncertain environment, we put both under the condition of further market development. To be a bit more precise here, we need to see how the transaction market and interest rates develop from here and where they stand once we need to make a decision. If the picture gets clearer, we are happy to take away that conditionality. We simply want to keep that option for now, as we do not want to make uncertain promises or promises that simply depend on the development of transaction markets. With this, I hand it over to Volker.
Thank you, Lars, and good morning, everybody, also from my side. Let me start with slide 12 and a quick look at our portfolio. Overall, the total number of units has hardly changed compared to Q2. We added 177 units while disposing of 47 units. These numbers don't include the successful signing of two transactions that help to further optimize our asset base. In September, we signed an acquisition of around 370 attractive units located in Düsseldorf and Cologne. Transfer is scheduled for January 2023. At the same time, we succeeded in selling around 340 units with some structural issues. A part came to us from the Adler acquisition and was earmarked for disposal. The sale will free up some internal capacity and helps to focus on the successful integration of the core Adler portfolio. We can confirm that the 405 units have been sold at around book value.
Coming back to the standing portfolio, I'm now on slide 13 to give you an overview on the rent development. In comparison to September 2021, the in-place rent in our portfolio grew strongly by 3.2% to EUR 6.32 on a like-for-like basis. Rent table adjustments contributed 2%, while modernization and reletting added another 1.2%. Looking only at the free finance part of our assets, we see an impressive increase of the in-place rent by 3.9% to EUR 6.73. Let me highlight that all three market segments contributed to this and with similar growth rates. Just to mention the locations in the free finance portfolio with the strongest improvement year-on-year.
These were Bonn in the high growth market with 6.6%, Bielefeld, a stable market with 6.3%, and Duisburg, representing the higher yielding segment with +5.5%. Therefore, we are well on track to reach our 3% rent growth target for the full year. This will be almost exclusively driven by the free financed units. Contribution from the subsidized units will remain low, given that the next cost rent adjustment will take place in January 2023. The regulation on the cost rent adjustment is quite complex. In a nutshell, there are two components of the rent, i.e. administration costs as well as maintenance costs that are linked to the three-year CPI development from October 2019 to October 2022. The final CPI figure is to be released tomorrow by the Federal Statistical Office.
Based on preliminary figures, CPI development was around 15%. In the guidance, we have calculated with a contribution of circa 60 basis points to the next year's rental growth on a portfolio basis. However, first calculations indicate some upside to that number, as Lars pointed out. Speaking of rent, we may also have a look at the ancillary costs that are not included in the cold rent. Against the backdrop of the extreme rise in energy costs, we have been supporting our customers in the last month through a comprehensive set of measures. Our approach is twofold. On the one hand, we focus on the reduction of energy consumption through an optimal adjustment of the heating systems and through a widespread information campaign for our tenants. On the other hand, we advise on financial support, like applying for housing subsidies or offering installment payments.
The largest support in financial terms, however, comes from the German government. You're certainly aware of the relief packages that have been presented in the past month. They include a Gas Price Brake as well as an Electricity Price Brake. The total volume of support adds up to more than EUR 200 billion. We are very confident that state aid, but also the general positive trend in incomes and pensions and the responsible behavior of our tenants will largely minimize payment defaults.
Let me now move on to slide 14. Our low vacancy rate, calculated by EPRA standards, already dropped further to 2.1% on a like-for-like basis. We are virtually fully let with regards to the units that have been part of our portfolio since at least 12 months. Looking at the portfolio as a whole, EPRA vacancy stood at 2.9%, a slight increase by 20 basis points, which reflects the portfolio bought from Adler. I'm convinced that we can increase the occupancy rate in this sub-portfolio over the coming months as we have an unmatched track record in managing higher yielding assets. In the last 12 months, we were particularly successful in reducing the vacancy rate in large locations.
In Düsseldorf, vacancy rate dropped by 18 basis points to 0.9%, and all of the top five locations in the stable market increased their occupancy rates by 15 basis points or even more. In the higher yielding markets, we achieved record low vacancy of 2.3% in Duisburg or 1.9% in Hamm. All these figures are on a like-for-like basis. All this underpins our very good operational position. The huge demand in the affordable sector helps keeping vacancies at record low levels and underpins what Lars said at the beginning about the severe supply-demand imbalance.
Coming to slide 15 and our investment approach. Overall, investments increased by 14.9% to around EUR 354 million year-on-year. This is well in line with the number of units in our portfolio that grew by 14.5%. However, looking at the investment per square meter, which is adjusted for new construction on owned land, acquisition backlog, and capitalized own services, the number decreased by 2.7%, reflecting of actions taken to deliberately slow down spendings against the backdrop of cost inflation and interest rate increases. In absolute numbers, investment per square meter was EUR 28.82 for the first nine months.
We already reduced our investment guidance to less than EUR 46 per square meter with the Q2 results. In view of high capital efficiency, we are about to further reduce our spending. As Lars already mentioned, we are now guiding for around EUR 42 per square meter for the full year 2022. However, when it comes to our ESG commitment for 2022, we are not going to cut any projects at the expense of our ESG KPIs. However, there's potential to do so. It is incredibly helpful that we run a flexible organization. Most of the modernization projects are being realized by external craftsmen. At the same time, we are not bound by contracted minimum volumes, so we can cancel as well as renegotiate prices and contracts quickly, a high option value in uncertain times.
Following the update on the nine-month number, let me provide you with an outlook for the future. Before we go further into detail, I would like to highlight one accounting effect which you can find on slide 16. As we shift from FFO I view towards the cash view being measured in AFFO, we will bring down our investment spending. This comes with cash savings, but it comes with a lower capitalization rate overall. Due to our lower spending, we expect that less investments qualify for capitalization, and as a result, the maintenance spend will increase. From an AFFO perspective, this shift of euro spend from CapEx to maintenance is neutral and has no effect, while the FFO I is negatively impacted by the higher maintenance figure. We illustrated this for our expected spending budgets for 2022 and 2023.
The lower spending level leads to saved cash of EUR 77 million, but at the same time, to around EUR 15 million higher maintenance costs. With this short explanation, let me walk you through our 2022 investment budget on the next slide. On slide 17, you see our investment program. In the past, we focused on adjusted CapEx and adjusted maintenance. This was the basis for our communication. We wanted to present the part that was really used for the refurbishment and improvement of our buildings. On that basis, we re-reduced our investment spending from EUR 42 per square meter to EUR 35 per square meter On the AFFO view, we take our entire investment spending into account and expect investments financed by subsidized loans or received subsidies. This includes new development and other items, especially from internalization of own services.
This is pretty much in line with the reported AFFO in the past, i.e., from this perspective, not much has changed. I just wanted to flag from cash outflow, i.e., an AFFO perspective, you need to take into account the entire CapEx spend. The new development part will run off, as Lars highlighted, and as you can see in the events. For 2023, we expect on the basis of EUR 35 per square meter, total investments in the existing stock of EUR 455 million-EUR 475 million, which are AFFO relevant. As maintenance is already reflected in the FFO I, the EUR 315 million-EUR 325 million of CapEx should bridge the gap towards the AFFO. I hope this gives you some more insight into our consideration. With this, I hand it over to Susanne.
Many thanks, Volker. I will proceed with slide 19 and the development of the key P&L items. In the first nine months of the fiscal year 2022, net cold rent rose strongly by 17% or EUR 86.9 million to EUR 596.6 million. Our net acquisitions contributed more than 80% to the increase in our net cold rent. The adjusted net rental and lease income increased by 14% or EUR 57 million to EUR 477 million. The increase is once again driven by higher net cold rents, but also by the continuous growth in our services business. The adjusted net rental and lease income margin declined from 82.4% to 79.9%.
The margin decline year to date was, as already explained in previous calls, driven by the acquisition of the Adler portfolio, which is currently generating a lower margin. We are going to increase the FFO I of the Adler portfolio by over 30% until 2026, as we communicated at the time, and accordingly expect an improvement of the margin. Besides, the higher provisioning for not yet invoiced operating costs impacted the margins as well. In the nine-month period, the adjusted net rental and lease income margin was 140 basis points above the level of the first half year. The positive margin development from H1 to the nine-month period was driven by a better maintenance cost ratio, as well as an increased positive contribution from what is shown in the FFO table as others.
The line item others includes positive contributions from our services, and here, in particular from our biomass power station due to the high energy costs. On the negative side, in absolute terms, the provisions on not yet invoiced operating costs increased further during Q3 by another EUR 3.9 million and now amounts to EUR 12.4 million. As explained in the Q2 call, one reason is that our tenants will face significantly higher additional payments, in particular from energy, than in previous years. As was also explained during our call in August, due to higher interest rates, a regular impairment test in Q2 led to a goodwill amortization of a total of EUR 100 million, of which EUR 59 million were attributable to operations impacting net rental and lease income, and EUR 41 million increasing admin expenses.
We continue to 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 this year, a corresponding impairment test can take place for the first time at the end of this year. The write-down has nothing to do with the performance of the portfolio, but is solely the result of a significant increase in interest rates and hence increased capital costs. The adjusted EBITDA increased by 14.5% to EUR 458.7 million in the nine-month period. The adjusted EBITDA margin declined from 78.6% to 76.9%.
Again, the margin improved by 210 basis points in comparison to the margin realized in the first half of this year. An ongoing strict cost discipline in the administrative function supported the positive drivers I just explained in connection with the adjusted net rental and lease income margin. With the positive development in the third quarter, we are fully on track for our financial year target of circa 75%. The FFO I reached EUR 374.3 million, which matches an increase of 12%. On a per share basis, the FFO I increased by 10.6%. For the detailed drivers of the FFO I development, let us now move to the next slide on the FFO bridge. In the nine-month period, acquisitions contributed with EUR 49.9 million most to the increase in FFO I.
The second highest positive impact came from rent increases in the spending portfolio with EUR 14.4 million. The block others contributed EUR 4.3 million, driven by our biomass heating plant. Finally, lower maintenance costs had a positive impact of EUR 2.5 million. Negative effects on the FFO development came in particular from rising cash interest costs of EUR 18.3 million. These higher costs are mainly 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 driven by the portfolio growth, but also by higher provisions for not yet invoiced operating costs.
On slide 21, we provide an overview of the valuation of our portfolio. As we did not revalue the portfolio in the third quarter, and as the number of units is basically unchanged versus H1, there are no major changes in comparison to our H1 reporting. For the first six months, we reported a revaluation uplift of 6.1%. The gross yield stood at 4.1% at the end of Q3, and the total gross asset value amounted to EUR 20.1 million. Including leasehold, land value, and assets under construction, the IAS 40 gross asset value is EUR 20.8 billion. The gross value per square meter is at EUR 1,839 on average, ranging from EUR 1,241 per square meter in the high-yield markets to EUR 2,591 per square meter in the high-growth markets.
Let's move to slide 22. On the left-hand side, you see that we have no significant maturities until fiscal year 2024. However, assuming no further disposals in our 2023 budget, we will need to raise further debt in 2023 to finance some of our obligations, for example, to finance some new construction projects which we can't stop. Of course, our disposal program bears the potential to generate funds and to offset this financing need. The average debt maturity is now 6.8 years. Our average interest costs of 1.26% are basically unchanged from a year ago. Overall, roughly 94% of our financial debt is fixed with regards to the interest rates we have to pay.
Our net debt to EBITDA stood at 15.2x at the end of Q3, and the LTV at 42.3%. I would like to highlight that we are in a comfortable position with regards to our bond covenant. We can digest a drop in valuations of more than 30% before we hit our tightest bond covenant. Besides our cash on hand of around EUR 450 million, we have undrawn credit lines with a volume of EUR 600 million, as well as our commercial paper program with a volume of another EUR 600 million in place. With this, I would like to hand back to Lars for the guidance of 2022 and 2023.
Thank you, Susanne. I am now on slide 24 with our guidance for 2022. Based on the business performance in the first nine months, we can confirm and specify our earnings targets for the financial year 2022. We narrow the forecast for the FFO I from previously EUR 475 million-EUR 490 million to EUR 475 million-EUR 485 million. Our goals for the like-for-like rent growth and the EBITDA margin remain at around 3% and roughly 75% respectively. With our half year figures, we already reduced the guidance for the investments per square meter from initially EUR 46-EUR 48 per square meter to below EUR 46 per square meter. Due to our spending discipline, we can specify this now and expect a level of roughly EUR 42 per square meter.
Our LTV will be influenced by factors which we have partially not in our hands, in particular valuation effects and portfolio disposals. In general, we stick to our target of maximum 43%. However, we cannot rule out to exceed that level depending on the market development. On a medium-term basis, we confirm our ambition of a maximum level of 43%. For the dividend in 2022, we confirm the 70% payout ratio, but subject to further market development. In case the market deteriorates further, we regard the dividend payout as a potential capital buffer within our framework. We are convinced that not to be well advised to pay out a record high dividend for the price of weakening the capital base of the group. With regards to acquisitions, we stated with our half year report that we are highly selective. As of October 1, we have stopped our acquisition activity completely. Finally, we confirm all our ESG targets for the current fiscal year.
Coming to the guidance for the next financial year on slide 25. We expect like-for-like rent growth to pick up even further, also driven by the cost rent adjustment and subsidized portfolio, and to reach between 3.3% and 3.7% at year-end 2023. For the AFFO, which will become the most important key figure, we forecast a range between EUR 110 million - EUR 125 million for 2023. For information purposes, this compares to an FFO I of EUR 425 million- EUR 440 million. FFO I is below market expectations due to several factors. One, the shift towards a cash view leads to higher maintenance expenses following a lower capitalization rate. Two, the conservative assumption of no further sales increases the financing volume at higher interest rates, which at the same time are being reflected in the non-fixed part of our financing. Three, the higher inflation drives higher costs from wages and materials. Four, the excess profit tax for power producers strongly impacts profitability of the biomass power plant.
We will certainly continue to report FFO I, but we will no longer provide our official guidance as AFFO will be our leading KPI. You will find an FFO I bridge in the appendix of the presentation. On profitability, we forecast an adjusted EBITDA margin of 78%. Please be aware that we adjust the EBITDA differently than in the past to align it with our internal steering of our operations. This number is adjusted for maintenance, internally procured and capitalized services, and non-recurring special effects.
As already mentioned, we are going to scale down our investments. Nevertheless, we will still spend around EUR 35 per square meter to maintain and improve the quality of our portfolio. Concerning gearing, we stick to an LTV of 43% as a medium-term target level. As dividend proposal for business year 2023, we intend to propose to pay out 100% of the AFFO plus a part of net proceeds from disposals. Like our 2022 dividend, we put it under the condition of the market environment for the time being. Once we face clearer skies, we are happy to remove this condition. Finally, new KPIs will be reflected in these, in the remuneration system. This will be proposed to the AGM 2024, together with the new ESG targets for STI and LTI. With this, I conclude our presentation, and we are happy to take your questions.
Thank you, Lars. With this, we begin the Q&A session, and we hand it over to you, Andre, to guide us through the Q&A.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone 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. The first question comes from the line of Rob Jones from BNP Paribas Exane. Please go ahead.
Morning, everybody. Just before I start, would you like all the questions at once or would you like them one by one?
Just one by one. Rob, you are very muted on our end. Maybe you can speak up a little bit.
Okay. Is that better, Frank?
Yeah, that's better. Thanks, Rob.
Fine. Okay. We'll do them one by one. Firstly on dividends, 2022 divvy, I appreciate you say subject to kind of further market condition developments. When I look at your guidance for -3% to -5% for capital values, doesn't that result in a scenario where aside from any material disposal in the next few weeks, which is gonna be challenging, your LTV is gonna be above that 43%? If that's the case, then why not just cut the dividend today rather than waiting another three months and then cutting it? That's my first question.
Thanks a lot, Rob, for your question. With regards to the LTV, you're rightly assuming that if we are really going to see a decline of valuations of 3%-5%, then certainly we would end up with an LTV above 45%. Still, we are very much uncertain with regards to further market development. Volatility and uncertainty has been not as high as during the last weeks, I think, within the last decade. It is very difficult to say what's going to happen over the course of the next weeks. We just want to take that into consideration of how the valuations are developing, but also take into consideration of how the transaction markets are behaving. There, once again, we also want to see how much of transactions are going really to happen and whether we can also benefit from perhaps a bit better situation. Currently, the situation is as described, very, very silent, so not much is going on there, and only very small portfolios being traded.
Okay. That's very clear. I've just got three more questions. One is, in terms of the, then the dividend policy from FY 2023 onwards, which by the way, I think from a sustainability perspective is very good in terms of your free cash flow. My query around it was obviously not only do we not know what disposals you might execute on any given year, but even if I forecast that correctly, we then don't know for the element that is in the AFFO payout of how much of that disposal proceeds that you are going to pay out as part of that overall dividend distribution, because obviously it depends on how much you wanna continue to be there for the business, et cetera. Obviously that I think potentially that leads to a scenario where we have less visibility on the dividend in magnitude, albeit the policy is very clear. Could we get a policy clarification, do you think at some point in the future in terms of the elements of the distribution that isn't linked to AFFO or do you think we'll have some uncertainty around that absolute level of distribution in future years?
Yeah. Thanks a lot for the second question, Rob. With regards to dividend 2023, you've seen it, so there is one stable element. We already said we want to be prepared and are prepared to propose to really pay 100% of the AFFO. Unfortunately, due to the high uncertainty in the market, and we do not even have visibility over the next eight weeks as we normally had and were able to give you really precise answer, it is very difficult to predict the next 12 months. Therefore, we did not feel comfortable to say, we are really dedicating ourselves to a certain share of the net proceeds. Certainly, if we get more visibility over the course of next year, and there is more transparency on that, we are also very happy to give you more transparency from our end of how much we would be willing to really share of the net proceeds we are realizing from transactions in the market.
Okay, that's very clear. Thanks a lot. I'll do the final two questions at once 'cause they're relatively short. In terms of incremental secured borrowing capacity, obviously you've got a figure in there on one of the slides. When I look at your 2024 unsecured and your 2025, I think early 2025, it comes to about EUR 900 million, which pretty much eats up the majority of that capacity for incremental secured if we see no decline in capital values. I'm just wondering if how you are thinking about that to what extent. Obviously, therefore, as a result, we either need the IG unsecured market to open up again or indeed asset disposals. A final question, and this is perhaps a more personal one.
If it causes offense, then I apologize, but it doesn't, I don't mean to, which is in the appendix on page 44, obviously as a result of your change in kind of key targets, and obviously moving towards an AFFO based model rather than an FFO, you're updating your compensation kind of KPIs to 2023-2026. I wonder if on this call you could commit to saying that if I was to back test whatever the new policy is based on previous years, that management compensation under the new model, if you were, say, looking at FY 2020 or FY 2019 or whatever it might be, that compensation won't go up as a result of the new policy, if that makes sense.
Yeah. Thanks, Rob. I'll take question three. Yes. So you've asked firstly for the incremental debt capacity. You're right, it's around EUR 1.4 billion, if we look at current asset values. If we have a valuation decrease of let's say 10%, which we are not forecasting as Lars said for this half year. Just to give you some perspective there, it goes down to around EUR 1 billion. I think when you look at our upcoming maturities in 2024, you have to differentiate. There is EUR 500 million of unsecured debt, which of course we could consider refinancing with secured debt. The other half is already secured debt. By refinancing that with new secured debt, we are not changing the capacity, right? Because it's already secured as of today. Therefore, it doesn't eat into that capacity. Therefore, we feel very comfortable that we have sufficient capacity on the secured debt side to address the upcoming redemptions.
Thank you.
With regards to the second question, Rob, certainly we are not in the position as a management board to define our own compensation. It's in the hands of the supervisory board. Discussions in the supervisory board are certainly in the way that they are very much interested to have a strong alignment between the development of the company and the management compensation. Just changing the numbers from the key KPI from FFO to AFFO will have no impact on the amount of money being paid to management board. Therefore, during the presentation, we pointed out one of the KPIs definitely will be the AFFO per share, but that certainly will be added by ESG criteria as you are used to. The supervisory board will make sure that management is equally focusing on growth of the company as well as ensuring that we are running a high quality asset base.
Thank you very much for answering all my questions. I really appreciate that. Thanks a lot.
The next question comes from the line of Bart Gysens from Morgan Stanley. Please go ahead.
Yeah. Hi, good morning. One follow-up question on the dividend questions that Rob just asked. Why do you wait till beginning of 2023 to change the dividend policy? Why not... I appreciate you've added some kind of clause that gives you a bit of leeway and maybe you'll go to zero when you actually announce the 2022 dividend early 2023. Why not change the dividend policy already for 2022?
Thanks a lot for the question, Bart. Because once again, the uncertainty in the market is really something we have not seen over the last decade. Therefore, we just want to see how the market is going to develop over the course of the first months also in 2023, before we then come out with the final dividend proposal for the AGM in 2024. Currently, we felt that would be too early in that very uncertain market situation.
You come up with a very detailed statement. You know, you clearly had the confidence to come up with a very detailed statement. You've clearly thought long and hard about it. Why not cut everything to zero now if you're cutting the dividend really to shore up the balance sheet? Why not go all the way?
Yeah.
You can always come back on that commitment.
Yeah. Because that, so much is currently happening in the market. Uncertainty is high. We do not know how investors' behavior will be after year-end. Our assessment is that we are not going to see opening up the transaction market over the course of the next eight weeks. Number of return transactions remains low, that already makes uncertainty with regards to valuation of the assets much more difficult, much higher than in the last years. Therefore, from our perspective, we are well advised to not rush into that decision now while we have all the time to take the decision in April when we send out the dividend proposal to the AGM.
All right, thank you.
The next question comes from the line of Thomas Rothäusler from Deutsche Bank. Please go ahead.
Hi. Morning, everybody. One question on financing, actually. I mean, it seems like everybody is going for secured financing now. What would you say is the appetite and also maybe the capacity of mortgage banks to do all that volumes, you know? Maybe we can get some view from you.
I think that I can obviously comment best on the discussions we are having with banks and their appetite for LEG. I can confirm that appetite to do business with LEG in the secured space continues to be strong. We have ongoing dialogue with banks, of course. I have the strong understanding that nothing has changed in their view on the company and generally speaking on the attractiveness of financing also German residential portfolios, especially if they are well managed.
Okay. Maybe another question on rental growth. I mean, if I look at your guidance for next year and adjust for cost trend impact, it is like, I think, roughly 2.9%, which is, yeah, roughly in line with the level you expect for this year. It seems like you're not that upbeat on market rental growth than one or some of your competitors. Maybe you can comment on that.
Sure. Happy to take this question. I think there are several factors that hinder more significant growth. You know that the tenants have a high burden of energy costs and inflation to bear. Rent tables adjust quite slowly to new market developments. I think we should also take this into consideration not to be too bullish on the rent growth with regards to the share that can be borne by the tenants and then to have more payment defaults at the other end. That wouldn't make sense in balance sheet way. On the other side, you also see that we decreased our investments for modernizations and for turn costs, which also might have a slowing impact on rent growth for our new lettings.
Okay. Do I get it right that, I mean, if we consider reduced investment, then rental growth for beyond 2023, let's say starting from 2024 should get another hit from lower returns from investments. Is that right?
Well, Thomas, we are now talking about 2023, and I think Lars pointed clearly out the difficulty to oversee the last eight weeks, the next eight weeks. I don't want to talk anything about 2024, but we see a very high demand in the market for a product which is very limited. I think in all economic senses, this should have an impact on prices if availability of product is low and demand is high.
Okay, thanks. Maybe a last one, on AFFO focus and also remuneration. I mean, isn't there a conflict? I mean, you are incentivized for lower investments to increase AFFO at the end of the day, but at the same time, you have to stick to the climate path targets.
Yes. Therefore, we make sure that we are being incentivized on both sides. Thomas, it's absolutely the right question. Certainly, the supervisory board will make sure in its proposal to the AGM that both sides are being taken into account. That, on the one hand side, we are staying committed to the CO₂ neutrality to be reached by 2045. The quality of the assets being run by the company, but also by maximizing AFFO per share via growth, but also via strict cost management.
Okay, 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. Starting with the FFO I bridge into 2023, and particularly on the interest expense component. Just gauging that chart and measuring it, feels like the interest expenses are going up about EUR 30 million next year. Obviously, I do appreciate the fact that there is 6% variable debt which is heading higher. As you mentioned, you would have for some part of the year higher just debt to refinance that January 2024 bond as well. I'm just wondering how much in there is also the fact that you have 5% of derivatives and any sort of re-hedging cost impact in 2023. In addition, how much capitalized interest are you losing in FFO I, interest expenses in next year, given you're cutting back on both modernization and new development?
Let me start with the additional interest next year. About half of that amount that you rightly pointed out is coming from additional incremental debt. If we are, of course, financing less because we make progress on disposals, then that portion will go down. The other half is about fifty-fifty between variable debt that you pointed out and the full year effect of financing that we did this year. Because that will also, of course, then apply for a full year for the first time and have an impact there as well.
There is no impact from capitalized interest or anything of the sort?
No. That is what I just said. About half comes from incremental debt, and then the other half is split 50/50 between the variable debt portion and the full year effect of 2022 refinancing and new financing.
Understood. Maybe turning to disposals, just trying to understand your sort of viewpoint of the transaction market today. Obviously, it's difficult, but it felt like you were pretty confident about closing some disposals just a month ago. I think one of your peers very recently also seemed very confident about closing a very large amount of disposals into the next year. Just trying to maybe put these pieces together.
Yes, Andres. With regards to what we have disclosed in August was that already we were under the impression that bigger transactions are not working in the current market, and that has proven right. We already needed to resize to 100-500 units per portfolio. Unfortunately, even those portfolios have proven to be too big for the market. We are now really down to selling off single multifamily houses. This is what is currently the sweet spot for the market. I think it is also a reflection that bigger institutional investors have left the market. They are really at the sidelines. Uncertainty with regards to the right interest rate level, and then also with regards to the pricing of transactions is incredibly high. Our assumption is that doing that, we will be able to add additional, transactions to what we have already been able to execute over the course of the last weeks. Hopefully ending up in the range of EUR 100 million-EUR 200 million. We do not think that we will be able to do more because the market is just too silent on bigger portfolios.
Understood. My final question comes to the investments you are planning. Obviously in recent years, it's been ramping up at a really rapid pace. If you just think about your total CapEx envelope. Just wondering, where do you see the sort of long-term sustainable CapEx expenditure per square meter in your portfolio?
Yeah. That's very difficult to answer, Andres. With regards to now the cost of capital being taken into consideration, we felt well advised to cut it down to EUR 35 per square meter . At the same time, that's of huge importance, we will invest into innovative solutions. That is an absolute necessity from our perspective, if you want to make sure to drive down the EUR-per-ton cost of CO2 reduction. Therefore, we will strongly work on cooperations like the one we founded with RENOWATE. That certainly has a direct implication of how much money we really need to invest into modernization. I think carving out the modernization part, we feel very comfortable that with regards to the maintenance part, which is being impacted now by a different capitalization rate, we are at a sustainable level. With regards to modernization, that will highly depend on the progress we are able to make on innovative solutions being driven forward and then hopefully scaling up over the next years.
Thank you. That's all from my end.
The next question comes from the line of Jonathan Kownator from Goldman Sachs. Please go ahead.
Hi, thank you for taking my question. First question, I just wanna go back to this AFFO and this long-term investment question. I mean, obviously, as you're highlighting, this is a very uncertain environment. You don't have visibility over eight weeks, yet you're changing the way you want to steer the business, the AFFO. Obviously, in the short to mid term, I'd say, the shortest way to drive AFFO up is to cut investments. You know, why don't you cut investment more? Or how do we understand how you steer that uncertain element of investments going forward, given that you're now looking at a KPI that is very easy to just improve whilst not investing at all, right? That is really my first question. I think it brings a lot of uncertainty into the investment outlook. Should we start by this one, and I'll go with the others afterwards. Thank you.
Yeah, very happy to take that one, Jonathan. Certainly you can improve the AFFO by saving. But as you know, and we have already included that in our guidance, we are planning to spend EUR 35 per square meter. Looking back into the history of LEG, you will see that the first years of LEG's history, we have started with payments around EUR 12-EUR 13 per square meter, which is barely the maintenance amount needed back at that time. I think we have done the right steps into the right direction to really increase quality of the portfolio and also generate additional value for our shareholders. At the same time, we are dedicated to walk along the CO2 reduction path, and we will make sure that we are going to reach those targets.
One of it, and you know that, is the nudging part. We spent money on a project already during the last winter, and this will now strongly contribute to CO2 reduction because people will just make less use of heating, and that helps us to then walk along the CO2 reduction path. In order to be able to do so, drive down the cost per ton of CO2 being reduced, we need more innovation. That is exactly what we are going to do. Therefore, you will be able to see the progress we are making on the quality of the portfolio directly in the CO2 reduction path.
Can I bounce back on that? I mean, obviously we visited a site on RENOWATE and appreciate all the innovation efforts. I mean, right now you're renovating a site for EUR 1,700 a square meter, which needs a lot of scaling up and a lot of investment to drive that cost down. Right now you're actually doing the opposite. You're cutting down investment. The abilities to achieve the synergies needed to get there, you know, somehow I struggle to see how you're going to achieve that. Again, how do you achieve these ESG targets, right, if you're not investing? Yeah, can you help us understand better how you, in details, propose to achieve that?
Yeah, very happy. For the next three years, a strong contribution will come from the nudging of consumers. Certainly, the current price environment with regards to high energy prices will do a substantial part of it, but also the information of tenants on a monthly basis with regards to peer consumption and many more information will also help. Therefore, we are quite confident to generate a reduction of around 15% of CO2 reduction via that nudging part. With regards to RENOWATE and the 1,700 you are rightly stating as a per square meter cost, I think the strongest proof that we are moving in the right direction is that already, and even with the current cost situation, we found a third party which was willing to contract with us on a first project.
I think that is proof that even at the current cost situation, you are able to find third parties being willing to go that route together with us. Certainly that will be not the final number we are striving for. We are still striving for EUR 1,000 per square meter, and I hope you did have the chance to talk to Andreas, who from our perspective, can in detail describe how we will make that progress towards the EUR 1,000 .
Maybe Jonathan, to add from my side, we will not cut down on the RENOWATE project for next year. As you learned on the site, we have there a 14 pilot project program and we are commencing this and we see the significant cost improvements from project to project, maybe even allowing to beat our cost reduction targets.
Just to be clear, you're trying to effectively reduce traditional modernization, right? You're hoping that your tenants achieve your green targets by reducing just their consumption, right? If I summarize.
Yeah. For the next three years, the 50% CO2 reduction will very much been driven by reduced consumption. At the same time, certainly we are working on those additional innovative solutions. One of it is RENOWATE, but we are quite confident to give you more insight into new approaches we are also working on during next year.
Sure. One final question to ask in the interest of timing. You're describing an environment which is obviously very constrained in terms of capacity, you're saying. Obviously, you're saying cost of capital is much higher, and therefore you have to reduce investments, all that, perfectly understandable. What do you think the government should do? Because clearly, you know, everyone is describing a slow system where everyone is pretty much stopping to invest because of cost of capital. Then at the federal level, there seems to be a clear issue, right? What do you think the government, you know, does and react? How do you think they react to the current situation?
Yeah. Thanks a lot for the question, Jonathan. If I would have wished for a question, then it would have been certainly that one. Because from my perspective, the government is already prioritizing the modernization of the existing stock strongly over subsidies for new buildings. I think that is absolutely the right way of doing it, because in a situation where you need hundreds of billions to make up for increased energy costs, it becomes very visible that if you want to drive down that number, the only option you are having is helping people to work on the existing asset stock. Therefore, I think we are pretty much in favor of what current government has done, increase subsidies to help people to work on the existing asset base to drive down CO2 emissions there.
You're expecting new subsidies for next year? I think that you had guided to that potentially or you had said that that would be the possibility, shall we say.
Yeah. Let's wait and see how the new situation will look like and the new subsidization regime. We are very confident that the number for new buildings will remain at EUR 1 billion. It will be a much, much higher number for the existing stock. Looking at the current discussions on the government level, we are quite confident that there is a subsidization regime being decided which will help us to work on our asset stock substantially.
Okay. Good. Thanks.
The next question comes from a line of Paul May for Barclays. Please go ahead.
Hi, Keith. Thanks for taking my calls. My question, sorry. First one, just a quick one. Would you be willing to sell assets at discounts to prior book values, obviously admitting that prior book values are probably wrong, you know, historic looking, and they may not reflect current market pricing. At book value, it just may be a discount to the prior book value. I just wondered how sort of committed you are to the disposals and reducing leverage through disposals. Thank you. I have a few more after that. Thanks.
Yeah. Thanks for your first question, Paul. I'm happy to take that. Certainly currently, we have sight that the market is a bit weaker, expectation from our end is 3%-5% of a value decrease. Certainly incentivization of the sales team is to get book value, so latest book value, which is the book value September 30, 2022. Certainly, we give them some leeway in order to be able to be in the market and do transactions. Therefore, we are willing to also include what we are seeing for this year. Due to the uncertainty with regards to next year, no additional leeway is being given.
Okay. Thank you for that. I see obviously you're reducing CapEx overall, but it appears sort of increasing maintenance CapEx suddenly quite materially versus FY 2021 levels, which is kind of before this whole sort of transition is happening. It's about up 30% versus FY 2021. Was that simply that FY 2021 was too low or that you are having to spend more in maintenance? Just trying to get an understanding as to whether the shift is a 30% more or it's just that FY 2021 was artificially too low, given the FFO focus.
Paul, that was only being driven by the changes of the capitalization rate. That is just an accounting effect. That has nothing to do with steering our business.
Okay. Next one on the RENOWATE business. Appreciate obviously the need to invest and to push the ESG factors forward. You know, even on a stabilized EUR 1,000 square meter, it doesn't feel like the RENOWATE business actually makes money. I think yield on cost is still significantly less than valuation yields. Arguably losing money on a capital basis. Is that still the right way to think about it? Do you feel that you will get additional rental growth to get a higher yield on cost on that EUR 1,000 square meter?
Yes. Excuse me. We were still discussing who is allowed to answer the question, Paul. It was certainly Volker Wiegel who is doing the business valuation. I step back. Apologies.
Okay. Maybe I start and Lars finishes then. Well, you should also think about RENOWATE as f irst, you need to think about is, of course, when we use it for our own stock, but also you should think about that we will offer it to third parties. We will provide a completely new solution for owners of buildings which we will be able to sell at significant margins. That's what our first indication is, from market testings that people we are talking to are willing to pay significantly higher prices than we are having costs for producing this kind of solution. In terms of using it for our own stock and our own properties, you need to think that we have some uncertainties on the subsidy regimes.
There are some initiatives going on that there will be an additional subsidy for serial renovations, so to bolster these innovative measures and modernization measures. We obviously, of course, as we focus on high capital discipline, focus also on value creation and want to make this business in a way to create value when we sell it to third parties by creating significant margins and also when we buy the solution for our own properties by calculating very thoroughly how to use this solution to create value.
Sorry, just following up on that. I mean, in terms of the returns, if you're charging then a margin, I suspect the returns for third parties would be even less. Just wondering what the attraction is for a third party. I'm just sort of trying to get an understanding as to the RENOWATE business. I appreciate that, as I say, the need to invest, but it seems to be CapEx being spent that's not gonna be return generating. Hopefully you can prove me wrong on that. Just trying to understand what would be the attraction to a third party. Thank you.
Well, the attraction to a third party is that we are selling an entirely new product which you can't really buy in the market. We are selling a part of CO2 reduction, yeah? You don't need technical experience, you don't need to bother for subsidies, you don't need to talk to your tenants. If you buy the solution, that's all included there. This is like you're buying, going to your car dealer and configuring a car. That's nothing you can buy in the market so far. That's what we are striving to offer to the market, that you buy part of CO2 reduction and modernization if you own a house, like you are going to a car dealer and buying a car.
Okay. Cool. Thank you very much. The final couple linked together. Obviously the focus on AFFO moving forward. I suppose the first question is do you think that's something that the industry will do, and how do you think you compare to your peers? Then the second point, sort of linked with the dividend, I think on my calculations, you're currently running at a roughly 2% dividend yield on a sort of base level, given the new dividend policy. I appreciate that it excludes the proceeds from disposals, and it'd be around about a 1% dividend yield if you were trading at NAV.
Given financing costs are gonna be somewhere, I mean, finger in the air, between 4% and 6%, inflation maybe on a stabilized basis, somewhere between 2% and 4%, I'm sort of trying to get at does it sort of make sense as a business with a 1% dividend yield at NAV, or are there other parties out there that may be looking at the space with a lower cost of capital that can probably generate a better return? Is that something you've considered in terms of ultimately putting the business up for sale, given those returns? Thank you.
Thanks a lot for the question, Paul. First of all, I think we once again need to underline that the AFFO from our perspective is the right KPI for the very uncertain market environment we are operating in. We do not say that this is the KPI we want to run our business according to for the next 20 years. That is definitely not what we wanted to get across today. Therefore, it is very difficult to say how peers will align their businesses to the very uncertain and difficult and challenging market environment. From our perspective, it is the right KPI to follow. It is the right KPI to steer the business to. Therefore, as we want to align all the people in LEG to be focused on cash generation, we think that AFFO is the right metric.
With regards to dividend, also there, that is the current thinking we are having on the dividend. We have put the dividend 2022, which is 70% of the FFO I, already subject to market development. The uncertainty for the next 12 months is incredibly high, so therefore we try to give you at least some indication how we think or how you should think about the dividend being paid by us. Dividend certainly might be lower if transaction markets are not opening up, but I think we can give you more transparency during 2023. For the time being, yes, if we would really end up with just 100% of AFFO being paid out. That would be a lower dividend yield. On the other hand side, I think it would definitely benefit the company and all the shareholders because we would operate on a very sound capitalization.
Sorry, just following up on that. I mean, if it's 100% of post-FFO, you're not generating any free cash flow. Is that the correct way to think about it? In terms of then bringing down leverage, if you're seeing values declining, as you said, mentioned sort of 3%-5%, potentially that could be more into next year, who knows? Is it purely on asset disposals, or are you also looking to, say, do a scrip dividend as part of the FFO payout? Just to try and get an understanding as to how basically do you reduce leverage when your free cash flow is zero?
Yeah. Yeah, you're absolutely right. If we are paying out 100% of the AFFO, this would be a good proxy for the operational cash flow, which we are generating. If we are paying that out, that certainly would not be available to reduce leverage. Leverage could then only be reduced by being successful in the sales market, which unfortunately holds quite a lot of uncertainties, and certainly would then depend on the net proceeds being paid out versus the net proceeds being used to deleverage. I think that also became clear from the presentation of Susanne that we are dedicated to then use net proceeds to delever. That is where we currently stand with our understanding there. Once again, we want in the mid-term to make sure to once again arrive at a 43% LTV for the company.
Sorry, this is the final one. Sorry, very last one. At what point does equity become either a requirement or an option to reduce leverage? You know, if liquidity is not there to sell assets, asset values are falling, leverage is increasing. At what point does equity become an option, or is it never an option, in your eyes?
Never say never, Paul, so therefore, I certainly will not be able to exclude it forever. But look at the numbers and set of numbers we have presented today. We feel comfortable with what we are planning for next year. We feel comfortable with the setup of the company. By also putting the dividend proposal for 2022 under condition, I think we are well prepared to also weather a more difficult market situation in 2023, especially at the beginning of 2023, if we would get into something like that.
Perfect. Thank you very much for answering all the questions and I think it's, you're doing the right thing. Let's see how it evolves over time. Thank you very much.
The next question comes from the line of Neeraj Kumar from Barclays. Please go ahead.
Hello. Morning, everyone. Thank you for taking my question. Yeah, Paul already asked some of my questions, but I would like to ask a few more along similar lines. You mentioned that you have 30% valuation decline headroom for your covenants. If I may ask, what sort of valuation decline headroom you have for your current IG credit rating from Moody's, like current rating level? What sort of valuation decline you can weather without impacting that?
Thanks for the question. I think that's extremely difficult to answer, to be honest. You know that Moody's is looking at a number of different parameters when they decide upon a ratings move. We are, of course, in very close discussions with them. On that basis, I'm unable to comment on what room they see in terms of valuation declines. We will have to continue the dialogue with them. I'm sure that they will appreciate our move to preserve cash within the company. We have a very comfortable liquidity position going into 2023. I think that's something that they will clearly focus on as well.
Okay. Thank you. We understand that, the-
Look, I think we currently have visibility on valuations at year-end. We have pointed out a number of times that we have very little visibility on the transaction market going into next year. At this point in time, we have no indication of what we will do when, because we have to monitor the market now, and we feel comfortable with the measures taken right now for what we can envisage at this point in time.
Got it. Probably, sorry, the last question around valuations. In terms of the portfolio of like, which is a bit different from your rest of peers in terms of not having any exposure to Berlin, do you see any difference in how the valuations might develop compared to Berlin? Is it gonna be same, similar or different? If you have any thoughts to share on that.
Look, I think we've given a clear indication on our expectation for valuation towards a year-end, -3% to -5%. This is relevant for our portfolio. I think I don't have a clear visibility on the Berlin market because as you rightly pointed out, we're not present in Berlin. I think that our portfolio is a good portfolio here and a good measure for this region, and that's all I can comment on.
Yeah, thank you. That's helpful. Probably two more questions on my side. The fourth one is on secured LTV, secured debt, basically. Do you see any change in the LTV or any of those metrics in your discussion with banks with, like, probably slight valuation decline? Are there any change in terms on how they're looking towards secured financing?
Not at this point in time. I think we see a very small increase in the spread that they are applying because they are just a little bit more cautious generally. We're talking five to ten basis points here, so a very marginal increase, and we haven't seen any other sort of changes with regards to LTV and so on that they are applying at this point in time.
Got it. Last question from my side. Do you have any developments on BCP to share on how you're thinking about it?
Yeah. Thank you a lot for your question, Neeraj. Unfortunately nothing new from our end. We are aware that there are discussions on the shareholdings of BCP in the market, but certainly we are not involved there. We are in constant contact with BCP's management, also with the board of BCP. We are under the impression that the board of BCP is really focusing exclusively on maximizing the position of BCP. They are not acting in any way just on behalf of a single shareholder. Nothing we can comment because we are not doing the day-to-day operations in the business.
Thank you. Thank you very much for taking all my questions. Thank you.
The next question comes from the line of Manuel Martin from Oddo BHF. Please go ahead.
Yes. Thank you, ladies and gentlemen for taking my question. Just two or three questions from my side. The first one is actually quite a small question. Your like for like rent growth guidance for 2022 is at 3.0%. Currently you're at 3.2%. Maybe you could shed some light on what could be the effects on Q4 to bring down the currently 3.2% to a 3.0%. That would be the first question.
Sure, Manuel. Happy to take this one. That's an effect of the Adler transaction, which we carried forward into our books at thirty-first of December 2021. On a like-for-like basis, the portfolio increases by the Adler transaction at year-end. As we have the smaller rent increase growth in the Adler portfolio compared to the core LEG portfolio due to the integration effects, this will bring down the number by this 0.2%.
Okay. I see. Second question is, unfortunately again on valuation. You're somehow guiding for a valuation loss in the property portfolio of 3%-5% in H2. Could you elaborate maybe a bit. Well, how you reach or how you come to this guidance? Is it based rather on data points that you see in the market, or does it come from the appraisers having a look at the interest rates and doing some changes in the WACC? That would be a second question.
Yes. Basically, it's the same as always. It's a mix of different factors. We obviously have a few prints in the transaction market. We have generally the market parameters and reports we are monitoring, and we are in regular discussion with our appraisers on the topic as well. Nothing different from previous evaluation cycles.
Okay. I see. The third question is actually a follow-up question on that. The lower valuation that you're going to have by year-end, does that bring LEG closer to potential transactions? Bringing you closer to some price expectations of potential buyers. Would that become more realistic?
Yeah. Thanks a lot, Manuel, for the question. Unfortunately, it is not that we are currently marketing at a level which no one wants to look at, but it is just the size which is not attractive to people. Therefore, if you want to do transactions, then you just need to sell single multi-family homes. There you find still buyers being willing to agree to close to the book value or at book value. Certainly those are not the ones doing big transactions. Therefore, liquidity in the market is quite low. Therefore, we certainly have indicated that overall volume, which we expect for this year, hopefully will reach a level between EUR 100 million to EUR 200 million.
The 3%-5% value decline is something we certainly take into consideration now while negotiating. Saying that if we would take that into consideration and would then approach the market with bigger portfolios, again, it is not the case that those bigger portfolios would then attract a lot of institutional interest or would then help to really transact bigger volumes.
Okay. Thank you very much.
The last question for today comes from the line of Simon Stippig from Warburg Research. Please go ahead.
Hello. Just, two short questions left by me. First one is, what's your spot rate currently on secured and unsecured financing?
Yeah. I give you the spread because the interest rate keeps moving. I think for secured you can calculate with 90-95 basis points on 5-year secured debt. In the unsecured market it's probably gonna be around 250 basis points spread over swaps.
Okay, great. Then the second question would be your guidance on the incremental debt, the 50% you mentioned before for the full year 2023 guidance. What's your assumptions on those 50% incremental refinancing debt of the roughly EUR 1 billion that comes up in regard to financing cost?
I think we've obviously done a simplified approach and have used basically the current spot financing cost that we are seeing in the market with the five-year maturity. Obviously, when we look at actually refinancing that maturity, we will take a more differentiated approach. We are currently thinking about a number of different instruments to use to combine to refinance that liability. We are not decided yet.
Okay. Thank you very much.
Perfect. Thanks, Simon. With this, we come to the end of the conference call. Thanks for all your questions. As always, should you have further questions, then please do not hesitate and contact us. Otherwise, we are looking forward to seeing you at the upcoming roadshows or conferences. Please note that our next scheduled reporting event is on March the 9th, when we report our full year figures. With this, we close the call, and we wish you all the best and hope to see you soon. Thank you and goodbye, everybody.
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