Good morning, everyone from Düsseldorf. Welcome to our nine-month results call, and thank you for your participation. We have in the call today 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 quarterly 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 now over to you, Lars.
Thank you, Frank. Good morning everyone from my side, and thank you for joining our call today. The first nine months of this year have been, again, a very strong period for our company. Let me just highlight the most important points up front. First, we are well on track for a record result in 2021, and about to reach the upper end of our FFO I guidance level of EUR 410 million-EUR 420 million. Today's strong set of results makes us even more confident to reach that target. Second, we deliver consistently on our promises. We continued our growth path organically by reaching a solid 3.3% rental growth and low 2.6% like-for-like vacancy rate. Externally by achieving our 7,000 units acquisition target for 2021 already as of today.
Third, we can offer you more growth with our FFO I guidance for 2022, as we expect to reach EUR 450 million-EUR 460 million next year. This represents another increase of around 8%, taking the midpoint of the new range into account. Fourth, we also increased our new construction targets. We doubled our target from 500 units - 1,000 units per annum as of 2026. Growth will be driven by a new cooperation with Goldbeck, one of the leading serial modular construction companies in Europe. Fifth, we operate in a very attractive market with increasing demand from national as well as international investors. Therefore, we expect another valuation uplift of our gross asset value of 4%-5% for the second half of this year.
Page six of our presentation summarizes the results of the first nine months of 2021. As Volker and Susanne will run you through the details of our operational and financial success story later, I would like to point out our latest ESG achievement. End of last week, we proudly announced an upgrade by Sustainalytics. With our new rating score of 7.8, we are now comfortably within the negligible risk category and among the top 1% of companies within the Sustainalytics coverage of more than 14,000 companies worldwide. We are in 8th place among their global real estate coverage of more than 1,000 companies. This highlights the successful implementation of our ESG strategy and motivates us to keep the momentum high.
Let me now give you a brief overview and share some insights into our acquisitions, as those will certainly be a key driver for our continued growth in 2022. I move now to slide seven. We achieved our goal of adding 7,000 units this year already as of today. Additionally, we have further opportunities in our acquisition pipeline. A bigger deal with around 15,000 units, which you are all aware of, but also some smaller portfolios which fit well into our growth strategy. The acquired 6,900 units follow our strategy to expand outside North Rhine-Westphalia with market entries via high growth and stable markets. They allow us to open new locations with Kiel in Schleswig-Holstein with 2,300 units, and to improve significantly our footprint in the Rhine-Neckar region and in the region around Hanover and Brunswick in Lower Saxony.
The purchase price for those assets amounted to, in total, around EUR 900 million. The assets come with a rent multiple of 26, which compares well against our own valuation for those markets. In the first year, we expect an FFO one contribution from the acquired assets of around EUR 20 million. Please note that transfer of ownership for the majority of the 6,900 units will take place in Q4, for most even as of December 31st. With those acquisitions, we laid the foundation to tap the full market potential outside North Rhine-Westphalia. As you know, we are currently in negotiations with a peer to acquire a portfolio of 15,000 units. This would allow us to expand outside NRW and significantly improve our footprint in our target markets, Schleswig-Holstein, Lower Saxony, and Bremen.
At the same time, we would diversify our portfolio into the higher yielding market cluster. We are currently undertaking a full-fledged due diligence, i.e., a technical due diligence on the assets, as well as a detailed financial, tax, and legal due diligence. As always, major findings of the due diligence will be either reflected in the contractual agreement or the acquisition price for the portfolio. We currently expect to finalize the due diligence within the coming weeks. Assuming a successful agreement with the seller, transfer of ownership for the assets should take place by the end of the year. As the due diligence is still ongoing, I would ask you for your understanding that we cannot provide more details to the potential transactions at this point in time. However, I can assure you that we will update you once we conclude the negotiations.
Therefore, I cannot answer questions to this topic today. Only one closing remark with regards to the potential transaction. The management team has waived the transaction bonus for that deal unanimously. Certainly, it is the responsibility of management to engage with potential sellers and explore such opportunities. However, this transaction, if it proceeds, is not motivated by any personal financial incentive. Therefore, we also entered into discussions with the supervisory board to generally amend the management's compensation scheme in this respect, and plan to propose to the next AGM in May 2022 to vote on such amended compensation scheme. Page eight illustrates our increased growth ambitions for our development activities. As promised in 2019, we are happy to announce that we have been successful in securing 500 newly constructed units annually from 2023.
Those come either from re-densification projects on our own land or from turnkey projects which we bought from different developers. Due to the strong progress made by our development unit within the last two years, we have the confidence to double the number of new build units and increase our target to 1,000 units annually by 2026. An increase of our development activities now is more than logical. Firstly, the political focus on new build activities has risen substantially. We expect the new government to increase their new build targets to 400,000 units per year, of which 100,000 units annually will be social housing. Additionally, the supply gap will widen even further. To make up for Germany's demographic challenges, immigration needs to speed up substantially. Current expert estimates see the need for an additional immigration of 400,000 per annum.
Finally, we expect the focus on energy efficient buildings to bring additional momentum into the development market. To address the substantial supply gap, the new government has already indicated to streamline building permission processes and promote serial modular construction as a key building block for further supply. Having built the skills over the course of the last years and recognizing the increasing supply gap, we have decided to increase our development activities. Therefore, we entered into a cooperation with Goldbeck, a European champion in the field of serial modular construction. The cooperation allows us to provide another 500 units per year from 2026 onwards. Those units will be built with lower construction costs and target our core market of affordable living. With this, I come to the end of my presentation.
I hand over to Volker, who will give you an overview of our portfolio and the operational successes achieved within the first nine months of this year.
Thank you, Lars, and good morning, everybody, from my side. Let me start with an overview of our portfolio on slide 10. At the end of the reporting period, our portfolio consisted of 145,700 units, with 32% in the high growth markets, 39% of our units are located in the stable markets, and 29% in the higher-yielding markets. Our footprint is well balanced. In Q3 2021, we could slightly increase our share of units outside of North Rhine-Westphalia to around 12,800 units or 9%. By the end of the year, and thanks to our acquisitions so far, this number will grow to over 10%. For further details on acquisitions, let us move to the next slide.
As you can see, we are now heading above the 150,000 units level with the integration of two larger portfolios in Q4. Both are located outside of North Rhine-Westphalia, around 2,200 units in the Rhine-Neckar region bought from Deutsche Wohnen and around 2,250 units in the northern German city of Kiel. The figures on this slide refer exclusively to the date of transfer of ownership. As most transfers are planned for the end of Q4, you should not expect any material impact on the full year 2021 numbers. To allow you to reconcile our geographical expansion over the course of the last year and a half, we've provided some more details on the locations of our acquisitions in the box on the right-hand side of the slide. Disposals remain at a very low level.
As of Q3, we disposed of around 300 units with transfer of ownership within this year. Coming to slide 12 and the rent development. In the last 12 months, rents on a like-for-like basis grew by 3.3%. Please keep in mind that the baseline in the previous year was comparatively low. From end of March 2020, we suspended rent increases on a voluntary basis to support our tenants during the first lockdown. First rent increases took effect in 2020, not before Q4. Therefore, the Q3 rent developments cannot be extrapolated to the full year as it refers to an artificially low rent in the previous year. Instead, for 2021, we stick to our target of a like-for-like rent increase of 3%.
From the slide, you can see that the free-financed units, which account for 76% of the portfolio, were up 4.1% on a like-for-like basis. The strongest increase was in the stable markets. With +4.3%, they even outperformed the high growth markets by 10 basis points, reflecting the dynamic situation in the commuter belt areas. The free-financed units in the higher yielding markets as well showed a strong increase of the like-for-like rent of 3.6%. The average in-place rent for our free-financed units was EUR 6.52 per sq m and month at the end of September 2021. This underlines our focus on an affordable product. Even more so when looking at our subsidized units that represent 24% of the portfolio.
In this rent restricted part of our properties, the in-place rents were EUR 4.92 on average. Let us now move on to slide 13. From this page, we present the EPRA vacancy by market. The strong vacancy decline continues. This holds true for all three market segments and almost all our locations. We realized the highest momentum again in the higher yielding markets. Our largest location in this market is Gelsenkirchen, where vacancy came down by 175 basis points. Many other of our locations in the purple markets also showed an improvement of the occupancy rate, reflecting the new target operating model implemented in 2019. The strong demand for affordable housing and our exposure to attractive regions certainly help keeping vacancies low. Another driver is keeping a constant eye on customer satisfaction. Our services also pay tribute to this.
Coming to slide 14 and our investments. Overall, our investments increased by more than 17% to EUR 308.5 million and in line with our planning. Adjusted for new construction, acquisition backlog, and safety measures, and capitalized own services, total investments were EUR 309 million or EUR 29.36 million per sq m. As usual, the bulk of investment relates to CapEx, which account for EUR 209 million. The other half of the column shows the modernization. This mainly represents our spending for energy efficient modernization. The first nine months, we completed energy and energetic measures for about 2,500 units and are well on track to reach our 2021 target to refurbish 3% of our units.
The lower half of the column represents turn costs for renovating bathrooms, floors, or technical installations before re-letting an apartment. These measures allow for rent increases and improve the satisfaction of the future customers. A thorough renovation also saves us many small repairs in the future. Overall, we are broadly in line with our EUR 40 - 42 EUR per sq m guidance, investment guidance for 2021. With this, I hand it over to Susanne.
Thank you, Volker. Before I start with the financials, I wanted to continue on the investments and give you a brief overview of our 2022 investment program. Next year's investment program represents the first time that we structurally reflect our ESG strategy. That means a shift from a pure rent increase focus to an optimization of both rental as well as carbon yields, i.e., the effect we generate on the efficiency improvements and on the carbon reduction. However, to be clear, the majority of the CapEx projects which will be completed in 2022 have been planned in 2020 and in the first half of this year prior to the implementation of our ESG strategy. That means that they were selected and planned under the old regime. The first full effect of the changes to our planning process will therefore only be visible from 2023 onwards.
With this, let me guide you through the numbers. For 2022, we expect to spend EUR 430 million-EUR 455 million in total or EUR 44-EUR 46 per sq m in CapEx and maintenance. Like in 2021, we expect again to invest around EUR 110 million into energy efficiency improvements, for example, refurbishment projects, but also heating system improvements. This is in line with what we showed you in the context of our ESG agenda. We have given you also an example around the effect of BEG subsidies. This is a real world example from a specific project which we are going to undertake in Osnabrück. The project was aimed at energy improvement from the start.
The numbers show that only a small increase in total investments is needed to meet the technical requirements for receiving BEG subsidies. The receipt of the subsidies not only increases the profitability of the investment, but also generates additional carbon savings of around 5 tons per year. We therefore aim to apply for subsidies whenever they help us to improve the financial or carbon yield of a project. For 2022, we only expect BEG subsidies in the order of EUR 1 million-EUR 2 million. This is due to the fact that I mentioned earlier, that those projects which complete in 2022 have been initiated by the investment programs of the previous years. This will change going forward, and based on projects already planned now, we expect about EUR 18 million of subsidies for 2023.
With this, let me now move to the 9-month financials on slide 17. This slide shows the development of our key P&L items. Our good performance continued into Q3. Accordingly, we have been able to improve our KPIs and expand our margins across all P&L lines. Our net cold rent increased by 9.7% to close to EUR 510 million. Roughly two-thirds of the increase is related to portfolio growth and 1/3 to organic growth. The recurring net rental and lease income outpaced the top line growth and rose by 11.6% to EUR 420 million. As a result, the margin increased to 82.4%, driven by scale effects due to a bigger portfolio and due to the strong performance of our services business.
Our EBITDA grew by 11.2% to EUR 401 million, and we could improve our EBITDA margin by 110 basis points to 78.6%. For the full year, we continue to expect an EBITDA margin of around 75%. Like last year, the margin in our fourth quarter will be weaker than in the previous quarters. Traditionally, there is a catch-up effect in several cost positions at year-end, including higher maintenance, seasonality from our energy business, as well as some cost effects due to a normalizing personnel and other cost position following the reopening after the lockdown situation. Our FFO I grew strongly by 12.6% to EUR 334 million, which puts us well on track for achieving the upper end of our financial year guidance.
For detailed drivers of our FFO I expansion, please turn to the next slide. The biggest driver of our FFO I increase compared to the nine-month period in 2020 is the contribution from acquisitions with EUR 21.4 million. The second biggest driver were rent increases, which contributed EUR 16.8 million. The third biggest positive driver were lower operating costs, which contributed EUR 6.9 million. Higher admin costs and higher net cash interest had the opposite effect. Both effects on the cost side are directly linked to our growth, as well as the before mentioned normalizing of some admin cost positions, as we could better fill open job positions following the end of the lockdown. On slide 19, we have, as usual, put together the key valuation metrics broken down by our three market segments.
Following the revaluation of our entire portfolio at the end of H1 2022, we will complete the next full revaluation at financial year end 2021. As Lars pointed out at the beginning, we would expect a valuation uplift of 4%-5% of our gross asset value for the second half of 2021. Our assets still offer an attractive growth yield of 4.4% on average in a negative interest rate environment. This compares to an in-place rent multiple of 22.9x. The gross value per sq m amounts to EUR 1,655 at the end of the third quarter.
As you have seen earlier, on our acquisition chart, we have recently acquired mostly in the orange markets, which reflects our expansion outside North Rhine-Westphalia that focuses on high growth and stable markets as a first step, as well as opportunities. We would like to reiterate, though, that we continue to feel very comfortable with all our three market segments and the respective asset profiles. I'm now coming to slide 20 with an update on our financial profile. As at the end of Q3, our LTV stood at 38% and is slightly higher in comparison to the end of Q2, and in a year ago, given our acquisition activity. On a pro forma basis, taking the acquisitions into account, which will transfer in Q4, the pro forma LTV stands at around 41.5%.
Net debt to Adjusted EBITDA at the end of the reporting period was at 12.2x. With the two corporate bond issues and the early redemption of the EUR 200 million mortgage loan in H1, we have reduced our interest costs to an average 1.23% from 1.35% a year ago. The average debt maturity stands at 7.4 years. When it comes to potentially larger portfolio acquisitions and the corresponding financing, we will aim at maintaining our defensive capital structure in order to keep flexibility for further growth while taking into account the market environment for different products. Now back to Lars for our outlook.
Thank you, Susanne. I am now on slide 22. We are well on track in every respect. Therefore, we can confirm all our financial targets for 2021. We are still aiming for the upper end of the range of EUR 410 million-EUR 420 million. On a YoY basis, this suggests an increase of around 10%. I can also confirm like-for-like rental growth of around 3% and a further increase of the EBITDA margin to roughly 75%. We also remain very focused on our conservative balance sheet structure and maintain our LTV target set at a maximum of 43%. As we have shown, we already achieved our acquisition target of 7,000 units. There is a chance that we will do more as our pipeline is filled with one bigger and some additional smaller deals.
For 2022, we expect FFO I to further increase to a range of EUR 450 million-EUR 460 million. This represents an increase of over 8%, if I simply take the midpoint of the guidance against the upper end of this year's guidance. Growth will be driven by an ongoing healthy demand for our product, the 3% rent increase expectation, as well as the contributions from the successful acquisitions in 2021. Please note that the guidance does not reflect any pending acquisitions from 2021, i.e. neither the acquisition of this 15,000 units portfolio nor the acquisition of the smaller portfolios in our pipeline. The guidance also does not include the acquisition of the 7,000 units, which we aim for in 2022.
We also introduce our new ESG targets, which will be directly linked to Management Board's compensation scheme and which will be reflected also in the incentive schemes of our Senior Management Team. Again, all targets are measurable, quantifiable, and auditable with limited assurance by our external auditors. On the environmental side, we continue to aim for a 10% CO2 reduction within the next four years, and for 2022, for a reduction of 4,000 tons of CO2 from energetic modernization measures. On the social side, we now anchored our customer satisfaction index ambition of 70% until 2025 into our target system. For 2022, we aim to hold our employee feedback at a strong level of 66% for the Trust Index. On the governance aspect, we again link our target to the Sustainalytics rating, which reflects very well the governance aspect of our business.
We want to confirm our strong rating with Sustainalytics by remaining in the negligible risk category also for 2022. With this, I come to the end of my presentation, and I would like to open the call for questions and answers. My colleagues and I are happy to take your questions.
Thanks, Lars. With this, we begin the Q&A session, and I hand it over to you, Emma.
Thank you. Ladies and gentlemen, at this time, we will begin with the Q&A session. If you'd like to ask a question, you may press star followed by one on your telephone keypad. If you wish to remove yourself from the question queue, you may press star followed by two. If you have a question, please press star followed by one at this time. One moment for the first question, please. The first question comes from the line of Marc Mozzi with Bank of America. Please go ahead.
Thank you. Very good morning, all. I have essentially two questions around your acquisition. Sorry. Essentially, on the 7,000 units you've been acquiring this year, what sort of yield should we assess for this portfolio? As a consequence, what sort of yield should we also expect from the 2022 acquisition if any gap here outside of the natural market yield compression if there is one? That would be my first question. Number two, in terms of pipeline of acquisition, can you give us a quantum of how many units you're currently reviewing? Because you said that you potentially gonna do more than 7,000 this year and you'll target 7,000 next year.
I'm just trying to understand if currently as well, you're reviewing some portfolios that potentially could be sold by Vonovia and Deutsche Wohnen. The final one, sorry, again, on acquisition, and that's gonna be on Adler, is just to clarify one, two numbers. From Adler communication, there are two numbers on the street. One which is EUR 1,500 million of GAV and then a deal, a transaction which is EUR 800 million. I just wanted to clarify what in your view is the difference between those two, those two numbers. Thank you.
Good morning, Marc, and thanks a lot for your questions. I will start with the first question with regards to the 7,000 units which we have acquired this year. They came at a multiple of 26, which translates then in a yield of 3.8%. We just try to give you a bit of a detail on how much of an FFO impact we are expecting in year one. Year one, we are expecting around EUR 20 million of FFO. That's a bit less than you would normally expect, which is also quite normal because assets which we acquire certainly come with a bit of a backload with regards to maintenance, but also with a chance of doing modernizations.
Therefore, that is what we have acquired this year, and that's pretty much in line if you just compare where those assets are being situated. Most of that is orange markets. That's very much in line with our own book. Second question was of how much do we currently have in the pipeline. Pipeline currently looks very strong. We currently are looking at around 18,000 units, out of which the 15,000 units you are already aware of. They are, as always, in different stages. But we are also confident to close the one or the other deal, either this year or early next year.
Not all of those 3,000 units, but that is still in line with our 7,000 units acquisition target then for next year. Final question was on the two different numbers which have been communicated. Unfortunately, I'm only able to give you more clarity on the first number. The portfolio GAV number, which we have pre-agreed, is the EUR 1.5 billion. The EUR 800 million is something which comes from the other side, and you should ask the question there, seems to be the number they are expecting as a cash flow impact on their numbers, but certainly we are not able to give you any details on. The only number we are aware of is the EUR 1.5 billion.
That's brilliant. Thank you very much, Lars.
Thanks for your questions, Marc.
The next question comes from line of Christopher Fremantle with Morgan Stanley. Please go ahead.
Hi, yeah, good morning. I just had two more technical questions on the development and on the subsidies. On the development, can you just talk a little bit about the financials for the development, either the profit on cost that you have been generating and expect to generate or the yield on cost that you are underwriting for those developments, please? Just so we can get a clearer idea of the value creation from that activity. If you can just explain where that comes in your accounts, please, that would be great. Similarly on the subsidies, where and how are we likely to see that sort of come through? Is it simply netted off against the CapEx in your accounts, or is it treated differently? Thanks very much indeed.
Yes. Good morning, Chris, and thanks for your question. I will kick it off with the answer to your first question with regards to development. The cooperation which we have just started with GOLDBECK will come at a yield on cost a bit lower compared to what we currently buy in the market. The assumption is that we will arrive at around 3.5% in the first project, which we are about to realize. That's a project in Euskirchen, and we are planning to realize around 250 units there, and that will be something which is going on now. We are kicking off the project now and hopefully closing the project by 2025.
Recognition will be among our operations, so all the numbers will be included there, regardless whether we talk personnel or material costs. Due to the small size of our development unit, we do not see the need to show it in a different segment, and so we will include it in our operational statements there.
Okay. Chris, on the second question on subsidies. In terms of the investment numbers, we are guiding these indeed on numbers net of subsidies received. For the investment program going forward, the numbers are sort of after a deduction of the subsidies. From a pure accounting perspective, the subsidies will also represent deferred income. I guess given the small magnitude I mentioned of EUR 1 million-EUR 2 million expected for 2022, you don't see any meaningful impact in the guidance as yet. It will become more relevant in the following years only.
Thank you.
Thank you.
Next question comes from the line of Jaap Kuin with Van Lanschot Kempen. Please go ahead.
Hi, good morning. Yeah, I'd like to start off with another question on acquisitions versus CapEx. Obviously you had the 3.8 gross yield, and I think you also stated in the presentation 4%-5% yield on CapEx. Could you compare and contrast the expected total returns or IRR that you see for acquisitions versus CapEx, and what is actually the ongoing case for doing acquisitions in a further compression environment? Thanks.
Yes. Thanks a lot for your question, Jaap. Certainly that is just year one, so that's not the target yield which we're having on those acquisitions which we are making. As already explained, normally we do modernizations, we see rent potential, we see potential to decrease the vacancy rate. So all of that certainly then translates in a higher rate than the 3.8%, which is just the day one acquisition yields which we have just disclosed with the 3.8%. So that is certainly something which gives us all the confidence to buy still into the market, because we are matching certainly the CapEx yield, which we are seeing there.
Yeah. Thanks. Could I tempt you to put some numbers on that for IRR? What's your target for acquisitions versus CapEx in, let's say, a 10-year timeframe?
We don't do 10 years. We do five years. Certainly, the portfolios we are acquiring then grow into the value over the course of the next years and, once again, meet then the CapEx yields which you have just mentioned.
All right. I guess my second question is, given the strong yield compression in the market, I think, and also I think others agree that the relevance of LTV is actually decreasing and the relevance of net debt to Adjusted EBITDA is increasing. Obviously you still guide for a LTV target for next year, and no doubt the EUR 1.5 billion or 90% of that EUR 1.5 billion will fit into that 43% upper end. Still, you would probably see a meaningful increase in net debt to Adjusted EBITDA. Could you maybe share your thoughts on that balance and how you treat your equity requirements for potentially funding a, let's say, random EUR 1.5 billion acquisition in light of net debt to Adjusted EBITDA? Thanks.
With regard to the LTV, you know our target, the 43%, and we are willing to also do whatever gives us the freedom to work on our balance sheet. Therefore, we have not decreased that number. With regard to the statement which Susanne already gave, you've seen that we are well below the upper threshold which we have given to the market, which is 13.5 times with regard to net debt to Adjusted EBITDA. Also there, we have some headroom. Therefore, as always, if we have a bigger transaction, we will look at the different options we have on the table, and then we make our decision.
For the time being, currently, we see quite a lot of headroom on the debt side, but also other instruments are available. We will make the decision if we get there.
All right. Thank you very much.
The next question comes from the line of Andres Toome with Green Street Advisors. Please go ahead.
Hi, good morning. I guess my question is kind of a follow-up to the previous one as well. I'm just looking at your CapEx spend and, you know, it's been increasing at a pretty brisk pace over the years, and one can only assume it will go higher if there's more need for energetic investments. So I'm just wondering how are you going to finance that? Just looking at your guidance for 2022, your CapEx is pretty much in line with your FFO guidance already. How are you thinking about it then? Are you just going to need to use debt for that? And also given that you have pretty aggressive, I guess, acquisition development ambitions, coming back to the previous question, do you think you need to raise any equity?
Yeah. Thanks for the question. I think, you're right that we anticipate to grow further in the next year. I think Lars has mentioned that we will look at a combination of LTV and net debt to Adjusted EBITDA when making our decisions on financing. I think you are aware we have all authorizations required to be in a position to do equity as and when we think it's needed. Also in terms of financing, we have all other instruments available. We have a close dialogue with our lending banks for secured bank debt. We also have, of course, access to the debt markets with our Debt Issuance Programme. We have a commercial paper program.
I think in terms of funding sources, we have all options available, and we will make the decisions on a one-by-one basis, taking into account the acquisitions we will complete and also further growth opportunities we see in the market. We can't say more on that at this point.
Fair enough. I guess looking at how LEG shares are trading in the kind of public markets imply cost of capital, it seems to be weak given the sustained discounts. How does that kind of factor into your thinking about external growth and you know, the need to maybe bring in more capital?
Yes. I think Susanne and myself, we have given you all the transparency with what we currently think about it. I think the share is not traded at a level where it should trade. You see our strong numbers operationally. We are on a very good growth path. We still have the hope that with your help, the market learns quickly of how strong LEG has performed, and so that the share trades up again.
Don't you think that maybe the public market is signaling that you should be instead maybe pulling back on your external growth ambitions here?
No, I don't see so. Don't see that as a sign.
Thanks very much. That's all from my end.
Thank you.
Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star followed by one at this time. The next question comes from the line of Thomas Neuhold with Deutsche Bank. Please go ahead.
Hi. Good morning, everybody. A couple of questions. One on the 7,000 acquisitions you've signed this year. Is it possible that you provide a bit more color on operational upside, you know, rent reversion, vacancy, maybe what's the portion of subsidized units?
Yeah. Thomas, thank you for your question. With regards to the assets which we have acquired, you have seen that the two bigger portfolios we have bought was one portfolio in Kiel with around 2,300 units and one in the Rhine-Neckar region. As stated last time, both portfolios come, and none of those assets have been modernized. They give us substantial upside with regard to modernization. But at the same time, especially if you look at the Kiel portfolio, we are quite confident that we are also able, because the former owner was not one bigger company, but was a private owner, that we have substantial upside with regard to vacancy reduction, but also rent upside.
That is what we can disclose on those. Once again, if you compare it to the complete portfolio, we are running a smaller part, so it's not moving the needle so that you will see it in a way that we are increasing our like-for-like rent growth by 10 basis points or 20 basis points. Certainly it will contribute nicely, and it will bring up the high end, the yield as already described quickly into the range, which is very, very attractive from our perspective.
Okay, thanks. Maybe one question on ESG and energy investments, especially with regards to appraisal values. I mean, at a certain point, do you expect this to lead to any premium valuations and how do appraisers look at this currently? Are you in discussions with them currently on the topic?
Yes, Thomas. It definitely has a positive impact on valuation. You know, when we do our valuation, we look also in addition to the quality of the investment, also at technical scores and things like that. Obviously if we renovate buildings to a higher standard, that will be reflected positively in the valuation.
Maybe a last question on your dividend capacity and coverage. In considering increasing CapEx, you just upped your modernization budget for next year by 10%. Maybe you can provide an update on how you look at dividend capacity, maybe taking cash flow as a starting point and then also taking into account annual debt amortization, etc.. Just to get a rough picture on how you look at it, that would be helpful.
Yeah. As you know, Thomas, unfortunately, we are a cash-poor industry. I would love to tell you otherwise, but you are just too long into the industry, as you don't know that. Our dividend payment rate, we want to keep stable at 70% of the FFO I. Certainly taking into consideration that we are benefiting in the future from stronger benefiting from the BEG law. You heard the numbers there, quite small at the beginning, but we are quite confident that we can take advantage of those payments from the state in order to enable more modernization so that we can also smoothen the effect on the cash flow.
Okay. Thank you.
The next question comes from the line of Rob Jones with Exane. Please go ahead.
Good morning, all. Three questions or topics from me, one on ESG, another on guidance FY 2022, and a third on politics. On the ESG topic on slide 22, you highlight that obviously you've now got or will have going forwards, those clear ESG targets linked to your compensation scheme. I just wanted to understand regarding the 10% reduction on a CO2 per square meter basis, how ambitious is that by 2025? And what is the base year? Second on the customer satisfaction, I think you said you wanted to improve that to 70%. Just wanted to understand what that was today. And thirdly, from an ESG perspective, what percentage of the comp is linked to these ESG targets?
On the FFO question and the politics question, if you end up buying the ADLER portfolio by the end of this year, obviously we'll get the full benefit of that in FY 2022. Could you give any sort of color in terms of the contribution to overall group FFO that you expect it to make in FY 2022? Is, say, EUR 40 million a reasonable expectation? Finally on the politics question, obviously we've got the coalition press conference, I think it's this evening. Any sort of comment from your side in terms of what you expect?
Do we think we could see a positive update, or is it going to be a follow-up of the initial reaction in terms of how to deal with rising COVID cases, etc., rather than necessarily a wider update on how those talks are progressing? Thank you.
Yeah. Hi, Rob, and thanks for your question. Hopefully I got them all. If I miss anything, just please feel free to interrupt. First one was on ESG and the targets. The 10% CO2 reduction, which we have promised, certainly is based on this year now until 2025, and it is in line with the ESG strategy and the CO2 reduction path, which we have disclosed, in June. That certainly will help us to be then climate neutral by 2045. It's exactly with our promises there. The ESG targets, so which part of it is this 10% reduction target, is 20% of the compensation of management. The second question was with regards to guidance and the impact from-
Just briefly on the customer satisfaction point, target 70, what is it today?
Sorry. The customer satisfaction index is something which we are calculating based on a customer survey which we are doing on a yearly basis. That is something which we certainly try to improve over the course of the next years, trying to reach a top level amongst the peers in the industry.
Okay.
Second question was with regard to guidance. Rob, please understand that we are still in the midst of a due diligence. Normally that's a point in time where we would normally not disclose that we have started to work on a certain project. Therefore, I just ask for your understanding that for the time being, we would not like to share any numbers because otherwise, we later on, perhaps we learn more about the portfolio and then we need to revise it. Therefore, please, we really promise to get back to you as soon as we have a result on that.
Sure. No problem.
Third, politics. It is really fascinating how disciplined those people which are involved in the negotiations are. It is really difficult to get an outside-in view into where current negotiations stand. You might have heard that some of the points, and we also try to raise those points, which from our perspective are more than clear now. Higher ambitions with regards to building targets in Germany. 400,000 seems to be something the current coalition has already agreed on, out of which 100,000 will be new developments in the social housing sphere. That is such a result which is being quite transparent. On the other topics, they are very silent.
And of how the evaluation of the current rent regulation will look like, and which measures they are really planning to do, it is difficult to get an outside reading. I doubt that you will get a lot of clarity as of today. Most probably it will take another 2 weeks-3 weeks until we get more clarity around rent regulation and the current thoughts of the new coalition on that topic.
Very clear. I really appreciate those responses. Thank you.
Thank you.
Next question comes from the line of Eleanor Sheridan with Barclays. Please go ahead.
Hi. Morning. Thanks for the presentation. Two questions from me, one on compensation and one on BEG subsidies. Firstly, could you clarify the changes to the transaction-based compensation scheme that you mentioned? On the BEG, could you explain what the criteria is for a property to be eligible? Give a sense of how much of your portfolio is currently eligible for those schemes, and how much you'd expect to spend to make more properties eligible on top of what you already plan to.
Thank you Eleanor for your questions. With regards to compensation scheme for the current transaction with its peer on the bigger portfolio, the Management Board has already decided that there will be no transaction bonus. That you can be absolutely secure that there is no financial interest of the Management Board in doing the transaction. At the same time, we are in current discussion with Supervisory Board on adapting the Management Board's compensation scheme, and that certainly needs to be proposed to the next AGM, which is taking place in May 2022. We are currently discussing to just delete the transaction bonus for transactions going forward.
Coming to your second question on the BEG subsidies, there is a relatively detailed catalog of different criteria that you need to meet to be able to apply for the subsidies. They are categorized into different categories. There are subsidies of 20% or 40% or 45%, depending on what technical criteria you achieve. And that is then sort of translated into an energy efficiency standard. It sounds quite complicated. I think we had a detailed slide on that in our ESG presentation, which we published in June, which is also on the website where you will find more details on that.
I think for the portfolio that is eligible, any sort of part of the portfolio which is still able to be optimized energetically and that is a majority of our portfolio, we could conduct measures and projects that would be eligible for the BEG subsidies. The question is rather more how much of energetic refurbishment we are able and willing to do per annum as a limiting factor rather than the eligibility within the portfolio.
Great. Thanks very much.
Next question comes from the line of Marios Pastou with Société Générale. Please go ahead.
Hi. Good morning. Thank you for taking my question. Just one left from my side. It's on slide 8, and it refers to the new construction pipeline. Would it possibly give a bit more detail on how the cooperation agreement with GOLDBECK will actually work? Also a bit more detail on the underlying yield on cost you're assuming for both that portion of the new construction pipeline, and also the existing 500 units from 2023, and the updated assumptions there will be helpful.
Yeah. Marios, thanks a lot for your question. The construction cooperation with GOLDBECK, we have just signed. GOLDBECK is the company which has, I think from our perspective in Europe, an incredible excellence with regards to serial and modular construction. They are currently being focused more on logistics and other asset classes. They have started first project into residential, but those are very few. The joint interest of both cooperation partners is to do more construction, serial modular construction, in the residential space. The target is to have 500 units being built as of 2026 on a regular basis. Target rent would be pre-financed then between EUR 9-EUR 11. That's a level which you will not be able to reach with the traditional construction.
Certainly this would then really be affordable living with regards to a new development in the German market. That is what the partners have agreed to strive for. With regards to the first project which we have identified, it's the one already being mentioned in Euskirchen. Certainly that's the first project. As always, with a theory of product, you have ramp up costs, you have costs of doing the cooperation, etc.. Our hope certainly is that from the level which we will reach there, and we will also be able to increase the yield on cost on further projects which we will then build together.
That's something which is still to be seen and be proven, and we are confident that we can reach that, because the partner has a lot of excellence in doing that. With regards to the 500 units which are existent, they come in at a slightly lower yield, so at around 3.3% on a regular basis. With regard to the margin which we are paying then from the developers which we are buying from. So that's for the turnkey projects we are buying. Certainly the projects which we are building on our own land, they certainly come at a much higher margin because certainly you do not have to pay for the land and the building plot.
Very helpful. Thank you very much for that.
Thank you for your question, Marios.
The next question is a follow-up question from Mr. Marc Mozzi of Bank of America. Please go ahead.
Yes, thank you. Sorry, just a follow-up question on your funding, especially in the context of the Adler deal in regard to your convertible bonds, which are one of them in the money. On that, I would like just you to remind us how you're considering these convertible bonds, because you've got two of them for nearly EUR 1 billion into your funding of the Adler transaction. Thank you.
The existing convertibles will remain outstanding. They have no relevance in the context of the funding of the transaction. As said before, with regards to financing of potential transactions we are completing, we have all options available. We look at all options of financing and will take the decision as and when we have the need to fund.
Okay. Thank you very much. Very clear.
There are no further questions at this time. I would like to hand back to Frank Kopfinger for closing comments.
Yes. Thank you, and thanks for your questions. As always, should you have further questions, then please do not hesitate and contact us. Otherwise, please note that our next scheduled reporting event is on March 10 when we report our full year 2021 result. With this we close the call, and we wish you all the best and hope to see you soon. Thank you and goodbye.