Thank you, Milto, and good morning, everyone, from Dusseldorf, also from my side. Welcome to our Q3 twenty twenty Results Call, and thank you for your participation. You have in the call our entire management team today with our CEO, Lars van Lakkum our CFO, Susanne Schroeder as well as our COO, Volker Wiegel. Also, we from the LNG side are together in the call.
We
sit separately in our individual offices. We would therefore ask you to limit your questions to two, and you can certainly rejoin the queue in case you still have open questions. You'll find the presentation document as well as the quarterly report within the IR section of our homepage. Please note also that there is a disclaimer, which you'll find on Page two of our presentation. And with this, I hand it over to you Lars.
Thank you, Frank. Good morning, everybody, also from my side. Let me start my presentation with our highlight chart on Slide four. We are very happy with our achievements after the three quarters of the year. We present to you today a record result when it comes to operating and financial performance, margins and momentum.
LG maneuvered successfully through the current crisis so far. We have proven to be resilient against the backdrop of what turns out to be the deepest and sharpest economic crisis of our lifetimes. The effects from COVID-nineteen on our business remain minimal. Therefore, we can once again raise our FFO one guidance for 2020. By now, we expect an FFO one at the upper end of our original range, I.
E. At around €380,000,000 For the next year, we expect an FFO one in the range of $410,000,000 to €420,000,000 I. E. Reflecting a growth in the range of eight to 10%. All of this is only achievable due to the strong performance of our employees.
As management team, we want to take the opportunity to thank all of our staff for this extraordinary performance and commitment in these challenging times. As you already know, we suspended rent increases for our tenants at the very beginning of the crisis and reintroduced those only to a reasonable extent. At the same time, the crisis represents a big challenge for companies and their employees, which found themselves working from home and trying to align private and professional lives at the kitchen table, or for those in the field found themselves bound to new processes and regulations. I am very proud to say that LG as an organization quickly adapted to all of those changes. Therefore, we as the management team decided to pay a bonus of around €1,100 to all of our 1,500 employees in order to recognize their contribution to the strong performance.
Having said that, let me just highlight some of our achievements. In the nine months of 2020, our FFO I rose to around two ninety seven million E. By almost 15%. This does not yet reflect the bigger portfolio of around 6,400 units, which we bought in June and for which transition of ownership takes place at the October.
At the same time, we stick to our conservative balance sheet with a pro form a LTV of around 40%. Like for like rental income grew by 2.3%, which is in line with our expectations. As always, I like to update you on some of our ESG achievements. EPRA recognized our ESG efforts with a gold award, and we have just today received an updated rating from Sustainalytics. That shows a substantial improvement of our score, putting us amongst the top 2% rating companies globally.
Moreover, we are on our way to establish our core carbon balance sheet. As of today, 80% of assets are included on the basis of real consumption data. The quality check of data is currently underway. Also, we initiated Germany's real world lab for serial modernization. There, we modernized 25 comparable buildings with different partners applying different technical approaches, all following the so called Energiesprung principle, which is supported by DINA, the German energy agency.
Certainly, we will update you on those and other ESG topics at the beginning of next year. Now I come to slide five to guide you through the COVID nineteen effects as we are in the middle of wave two here in Germany. As you can see, most things are unchanged. We already highlighted the 50 bps effect on rental growth at our H1 result. This number is unchanged and as you can see later as part of our guidance for 2020, we keep this figure unchanged.
The same also holds true for the effect from deferrals. Those remain minimal with less than 1% of our units being affected. Letting performance remained strong in Q3 and with a 50 bps reduction of the vacancy rate, we near the structural vacancy of our portfolio. Our liquidity position remains strong with in total €700,000,000 including cash as well as committed credit lines. This will allow us to counterbalance potential capital markets dislocations similar to the ones we saw in March.
At the same time, it offers enough liquidity to take advantage of growth opportunities in the market. Let me now update you on our strategy on slide six. This is our strategy house. You might remember that in Q2, we focused on the right pillar and reiterated our growth strategy in connection with the portfolio acquisitions, which we did in June. This time, I am happy to announce that we have made a major move forward in our pillar of our strategy, I.
E. By expanding our value chain. We acquired Fishbust Services, a general contractor that focuses on the steering of craftsmen in the refurbishment of vacant apartments. This acquisition will help us to capture smartly an additional and very profitable part of the value chain. Fischbach or LWS plus as we will call the entity after acquisition acts already as one of our main general contractors and provides excellent potential to scale up this business further.
We will integrate the business as a new pillar of our services business along with energy, multimedia and craftsman services. Volker will guide you later through the business plan and will provide further details on the rationale. Finally, I am also proud to announce on Slide seven that we were able to make two major steps forward with respect to the external recognition of our ESG efforts. We received an EPRA Gold Award, which is another improvement over last year and we improved our ESG rating from Sustainalytics being now amongst the top 2% of Sustainalytics global research universe and top 4% of the global real estate industry. We believe that this is in recognition of our strong focus on the topic and the substantial progress we made during the last month with integrating ESG throughout our organization.
As I said into in my introductory statement, there is more to come. It is for us not so much to be the as this transitional journey is a marathon and our journey has just started. Therefore, steps like my regular personal meetings with tenants to get direct feedback, the COVID nineteen bonus for our employees and a new mentoring program for female and diverse employees are as much part of this journey as large steps, like the development of our carbon balance sheet and our biomass plant, which offsets a of our carbon emissions. With this, I would like to hand over to Volker to lead you through our operational performance.
Thank you, Lars, and good morning, everybody, from my side. Before I give you an overview of our operational performance, let me provide you with some more information on our acquisition of Fischbach Services. The company conducts already 25% of the renovations of our vacant apartment. It is a small entity with roughly 25 employees, but it manages a network of 80 contractors on the basis of very efficient, highly digitalized processes and thus generating very attractive margins. With the acquisition, we do not only buy into those capacities, but we buy especially into the ability to scale this platform via our own business.
In the midterm, we expect Fischbach, which we will call, as Lars pointed out, LWS plus going forward, to conduct around 75% of our vacant apartment renovations. We could scale this up further, but we believe there's a real value in genuine competition among internal and external contractors, both with regard to quality of the work as well as with regard to prices paid for these services. The acquisition will reduce costs through the internalization of the very attractive margin for coordinating craftsman services, reduce the duration of vacancies and speed up the renting process. At the same time, it only adds a limited additional complexity to our platform given the small number of employees running this business. Due to group consolidation, the EBITDA generated by LWS Plus is not entirely visible in our group EBITDA figure.
We expect an EBITDA on group level of around €5,000,000 per year from 2021, which will contribute around 100 bps to our group margin level. Through the internalization of previously external margins, we will additionally benefit from positive cash effects. Let us now move on to Slide 10 for an overview of our operating performance. Overall, the in place rent in the LG portfolio rose by 2.3% on a like for like basis. This already anticipates the development we expect by year end 2020, which is driven by the voluntary suspension of rent increases in line with the Mietzpiegel rent table as well as the postponement of some of our modernization activities.
Nonetheless, Mietzpiegel adjustments are still the strongest driver and roughly contributed 90 basis points to the 2.3% rent increase in Q3. On this slide, you will note the ongoing momentum in the stable markets. With 2.6% rent increase like for like, we had the strongest growth in the commuter belt areas. They were up 30 basis points compared to the high growth markets. We saw a particular strong increase in our largest locations.
In Dortmund, rent growth was 3.1%, emerging Vladbach, 3% and in Essen, 2.9%, always on a like for like basis. Looking again at the portfolio as a whole, we can see a very positive trend regarding our vacancy rate. Besides the COVID-nineteen effect, this is also due to successful operating measures. Overall, the vacancy rate decreased by 50 basis points. All market segments contributed to this.
The strongest decrease was in the higher yielding markets with minus 110 basis points, which translates to a vacancy rate of 4.8%. The vacancy rate in Duseborg, our largest location in the segment, was 3.4% at the September. In the high growth markets, we continued to be nearly fully led with a vacancy rate of only 1.7%. The lowest vacancy rates were in Cologne with 0.8%, Munster with 1% and Rating near Dusseldorf with 1.1%, all on a like for like basis. Coming to Slide 11.
Like for like rents developed by 2.3% in our free finance units, which account for 75 of the portfolio. In our subsidized portfolio, we could adjust cost rents in January as in every year, leading to a like for like increase of 2% for these restricted units. The average in place rent for all segments reached €5.93 per square meter at the September. It was €6.31 for the refinanced units or EUR 4.89 for the subsidized units. On the right hand side, we show a breakdown of in place rent by market.
The average rent ranges from EUR 7.37 in the high growth markets to €5.94 or €5.71 in the stable and higher yielding markets, respectively. This clearly underlines our focus on an affordable product. On the other hand, even as a property owner in the affordable segment, we are indeed able to further increase rent. Let me give you a few examples. In the Rhine area, the development is still very dynamic.
Our average in place rents in Cologne rose by 4.2% to €7.17 or by 5% to €8.21 for the refinanced units only. In Dusseldorf and its neighboring city, Raattingen, rents in the free finance portfolio are also above EUR 8 per month and square meter. On the following Slide 12, you'll find more details on the investments during the nine months of 2020. Overall, the investments into our portfolio increased by around 35% to €263,000,000 On a square meter basis and excluding new construction, we spent €29 a large share of which went into energy efficiency measures. At the same time, we continued our strategy of value enhancing investments in relettings.
These turn cost initiatives mainly focus on new bathrooms and floors as well as technical improvements regarding heating or electronic installations. Through the increase of value enhancing spending, the capitalization ratio rose to 77.1% after seventy percent in the previous year. At the same time, these measures also help to offer more living comfort to our existing and prospective customers. On the following Slide 13, we provided a breakdown of our 2020 and 2021 property related expenditures. Keep in mind when comparing those numbers with our competitors that these figures include our total spendings in our properties.
As we and we provided you with some more insights. On one hand, you have the breakdown into maintenance and CapEx as you know it from our reporting. This breakdown strictly follows the treatment of these spendings in our P and L and balance sheet respectively, I. E, the part that is expensed in the P and L and the CapEx number, which is capitalized in our balance sheet. We believe that this is the most transparent way to show this.
We also provided a breakdown by types of expenditures. It should not be a big surprise that we have a high share of our expenditures being allocated to repair works via our TSP Craftsman unit. That is the nature of our business that we need to fix and repair things once they occur. But you should also see that energetic modernization is one of biggest items overall and the key item within our modernization expenditures. Unsurprisingly, this is the case for our 2020 spending as well as for our planned spending in 2021.
This reflects our commitment to improve our carbon footprint and is in line with our target to energy efficiently modernize 3% of our units per annum. Our investments into elevators is part of our huge elevator program, where we exchange or install around 900 lifts throughout our location since within the next couple of years. You also get a breakdown by markets. Also, here, it hopefully not surprisingly to see that the vast majority of our investments go into the green and orange markets. For 2021, we expect the investments to grow by another 5%, mainly reflecting the assumed inflation construction prices.
In order to allow for better comparison, we excluded the effects from new development as well as the backlog from acquisition as they play a smaller role in LG context. And with this, I would like to hand over to Susanna for more insight into the financials.
Thank you, Volker, and good morning, everyone. Let us start on Slide 15, which shows the development of our key P and L items. The numbers once again demonstrate further noticeable margin improvement across all P and L lines. Our net cold rent increased by 5.6% to €464,500,000 This is driven by both organic growth and acquisitions. Please keep in mind that we had a bigger disposal last year, which affects the year on year comparison.
The adjusted net rental and lease income outpaced the top line growth and rose by 7.5 to €376,300,000 As a result, the margin increased to 81%, driven by scale effects. The adjusted EBITDA grew by 9% to €360,200,000 and we could increase our EBITDA margin by two forty basis points to 77.5%. Please note that maintenance spend was at below average level for the nine months of twenty twenty and it will increase in Q4 due to seasonal effects, which you know from the past years. We will also see some cost increases, staff and non staff costs, following the integration of the latest acquisitions and the end of our hiring stop. Therefore, for the full year, we continue to expect an EBITDA margin of around 74%.
Our FFO I grew strongly by 14.5% to 296,700,000 On this basis, we can narrow our guidance for the financial year 2020 to around €380,000,000 For detailed drivers of our FFO expansion in the nine months, please turn to the next slide, Slide 16. The biggest driver of the FFO increase compared to the nine months 2019 is the contribution from last year's acquisition. A part of this was offset by a major disposal in the previous year. However, on a net basis, we grew our asset base and had a positive FFO contribution. The biggest driver were rent increases, which contributed €12,400,000 Furthermore, cash taxes decreased substantially by €8,000,000 This is due to effects from the sales program in 2019 and the fact that an additional group company now benefits from a German trade tax reduction for corporate residential property owners.
The minority effect comes from the full stake takeover of our energy services company ESP, where we bought the outstanding 49% last year. Now let us move to Slide 17 and the NAV. On a per share basis, our NAV increased by 9.3 to €115.21 in the nine months. The two key drivers are a higher result from the portfolio valuation we conducted for H1 as well as the profit contribution. Please keep in mind that the diluted share basis has increased given the fact that our €400,000,000 convertible issued in 2017, which is due in 2025, was in the money at the end of the third quarter and to a lesser extent due to the 1% capital increase for the scrip dividend.
On Slide 18, we show the key valuation metrics broken down by markets. I would like to reiterate that we feel very comfortable with our asset profile. Our assets still offer an attractive gross yield of 4.8% in a negative interest rate environment. The average gross value per square meter for our residential assets amounted to $14.40 euros at the September, which translates into an in place rent multiple of 20.7 times. We expect further potential for a valuation uplift at year end.
To give a rough indication, the uplift should be in the range of around 4% to 4.5% for the half, that would translate into a full year revaluation effect of 9% to 10%. On Slide 19, I would like to provide additional details and some examples to focus earlier presentation regarding our investments. We have prepared case studies of three modernization projects, which we finished in the recent years or are about to finalize. They relate to our three different market clusters, orange, green and purple, and represent different size categories ranging from very large to rather small. One project, which you might recognize as we refer to it a lot as Monheim.
It is a very successful case for the community, the tenants, but also for us. There, we modernized almost 2,000 units and spent €60,000,000 After the modernization, we increased the rents by 30% over a period of several years and reduced the energy demand of those buildings by 40%. Overall, we achieved a return of 5.3% on the entire investment and of over 8% we focus exclusively on the modernization costs. This should give you a good idea on the returns we try to achieve on our investments. As you also see, the yield overall depends on the individual project and the measures taken.
As pictures say more than words, we also attached some pictures on Slide 20, where you can see the difference of how it looked before and after the completed project. As you can see, the mayor of Munheim, Mr. Zimmerman, confirms the positive impact of our project. This highlights our close cooperation with communities to ensure the money we spend does not only benefit us to improve returns, but most importantly, improves the quality of life of our tenants. The next two slides provide you with similar details on two other modernization projects, which I will not discuss in detail on this call.
Please let us now move to Page 23 and our financing structure. As you see, we maintain our conservative financial profile. Following the successful financings in the first half of this year, we offered a scrip dividend to our shareholders for the time in the third quarter. The acceptance rate was 32.9%, which confirms our shareholders' support for our strategy. The scrip dividend had a positive cash effect of €84,600,000 corresponding to around €140,000,000 additional firepower for further growth.
716,000 new shares were issued, increasing the total number of LNG shares by about 1%. On the left hand side of the slide, we have updated our maturity profile. Our financing structure remains well balanced, and there are no maturities until financial year 2023. Our average interest cost is 1.35%, secured for an average debt maturity of seven point seven years. Liquidity remained strong with around €300,000,000 cash and RCFs of €400,000,000 at the October.
At the reporting date, we had an LTV of 36.4%. The pro form a LTV after full payment of the large portfolio acquisition announced in June, which completed at the October, it will be around 40%. Overall, our financial situation provides us the sufficient flexibility to deal with any unexpected capital market turmoil, but also allows us to take advantage of further growth opportunities. And now back to Lars for the outlook.
Thank you, Susanna. I am happy to present to you the updated guidance for 2020 and our new guidance for 2021, which both demonstrate that we are well on track. For 2020, we expect now an FFO one of EUR $380,000,000, which is at the top end of our range. Key drivers are contributions from last year's acquisitions, also adding to scale effects as well as rental growth. For all other KPIs, we kept our guidance for 2020 unchanged.
For 2021, we expect an FFO one in the range of EUR410 million to EUR420 million as we will fully benefit from this year's acquisitions as well as rental growth. Next year, we will return to our previous growth level. This is driven partly by some catch up effects from the suspended rent increases this year. We expect the EBITDA margin to increase to 75%. The major contribution will come from LW S plus but we will certainly also benefit from scale effects of a growing platform.
As Volker highlighted already, we plan to increase our investments by around 5% to EUR 40 to EUR 42 per square meter in order to capture some more rent potential and further improve the energy efficiency of our portfolio. We will not compromise on our conservative financial profile and target an LTV between 4043%. In respect to our growth, we expect a rental growth of around 3% for next year, which translates into 3.8% for the free finance part. Similar to this year, our ambition is again to acquire around 7,000 units. The financial impact from those acquisitions is not reflected in our guidance and provides further upside up and above our 2021 guidance.
We still have sight of enough growth opportunities in our market segment of affordable living. Some of our peers will continue to put their focus on other asset classes or venture into international markets. At the same time, we expect private owners to sell portfolios as they cannot manage them with the same efficiency as we can do. An additional catalyst will be the regulatory requirements for energy efficiency. Therefore, we see some supply, but I can assure you that we will pursue our selective acquisition approach along our acquisition criteria and with rigorous price discipline.
We feel very well positioned for the coming months as we expect further structural demand for our asset class. This is illustrated on Slide 28. We expect the Hanfur yield from bigger institutional investors to become even more severe. €675,000,000,000 of German bonds will mature within the next ten years. Investors in these treasuries will experience a shortfall of positive interest income of around €11,000,000,000.
This depicts only the situation in Germany. Therefore, those investors will have to make up their minds whether they reinvest into a negative yield in Bund or shift to other assets with a positive yield. We expect the demand side for German residential to remain strong. This will put further pressure on prices for portfolios, but at the same time provide positive backdrop for German residential stocks like LG. With this, I would like to wrap it up on my last slide, which is Slide 27.
We consider ourselves to be in a very favorable position. We are the only real German residential pure play. In comparison to all our peers, we do not engage in international markets, searching for cross border synergies, needing to cope with a diverse set of local regulations and strongly differing local accounting practices. At the same time, we do not add other risks, but simply focus on a single asset class, which is the affordable housing segment. We have a huge platform of almost 145,000 units at a gross yield of 4.8 at attractive valuations.
We are willing to capture growth opportunities, but only if and when they fit our acquisition criteria. We continue to follow our strategy from a financial position of strength with an LTV of around 40% and the remaining firepower of around 700,000,000. With this, I conclude our presentation. The entire team and I are now happy to take your questions. And with that, back to Frank.
Yes. Thanks, Lars. And with this, we begin our Q and A session. I will hand it over to you, Milto, for the instructions.
Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on the touch tone telephone. If you wish to remove yourself from a question queue, then you may press star followed by 2. If you're using speaker equipment today, please leave the handset before making your selections.
The question comes from the line of Thomas Rothschussler with Jefferies. Please proceed.
Hi, morning everybody. Actually one question on rental growth and especially the guidance you gave for next year, 3% despite actually no cost rent adjustment. Can you give us some color what you expect as key drivers? Is it Is it modernization driven? Or is it rent table driven?
Sure, Thomas. I'm happy to take this question. The main driver is the growth in re lettings. So that's a clear result of our initiative to focus more on the renovation of vacant apartments. So that is there the main driver, but also rent table contributes and also modernization, of course.
Okay. Maybe one follow-up on this, I mean, on CapEx returns. You showed some examples, which is very helpful. Just wondering what you expect ahead. Are there any regulation impacts we might be aware of which puts a higher hurdle on CapEx returns?
Or and also, what was actually the impact of the modernization cap which was introduced at the beginning of 2019, I think. Was there a meaningful impact from this?
Yes. Thank you, Thomas, for the question. Looking ahead, we plan and look at our investment projects in the same way that we used to in the past. I guess the examples have shown you that it's always very individual. I mean each project is different, and we analyze them all one by one.
We clearly have changed a little bit the shift in terms of how we prioritize and focus our investments already in the last year. Volker has highlighted that we have very high share going to energy efficiency, of course, and that is partly driven by regulation for sure. And at the same time, we focus on value add renovation in the apartments that have a substantial impact on the quality of living for our tenants. With regards to the impact of the modernization cap, this was introduced in 2019. We obviously have seen some limitations in terms of what we can put through in terms of immediate rent increases as a result.
However, as we also have a churn rate of around 11%, we obviously have then the opportunity to capture some of the additional investment and through rent increases in the context of new re lettings.
The
next question comes from the line of Jonathan Kownator with Goldman Sachs.
I have two questions actually. One, my favorite topic, as you know, if you can provide us an update on new developments, I. E, creation of new units. Number two, just coming back to your acquisition, just trying to understand how we should think about these €5,000,000 EBITDA contribution or 100 basis points margin. Is it a better return on your modernization that you're going to have?
Or are you going to report a sort of higher value add contribution? That would be helpful. Thank you.
Thanks a lot for your questions, Jonathan. I will just quickly follow-up on the on your question with regards to new development. And so the target we are still having is to acquire around two fifty units in the market and new products. And looks good also for this year, we have not signed deals up to now, but there are very strong site that we are going to do some deals until the end of the year. And some will be forward deals and some will be also of products, which are in production.
Our own pipeline has increased a bit. So we are currently standing at around 1,200 units. And you also know that as of 2023, we are planning to produce on a regular basis two fifty units. And that also seems to be possible based on the current pipeline we've been able to build. And with that, I hand over to Volker.
Yes. Thanks, Lars, and thanks, Jonathan, for your question on the Fischbach acquisition of this project management company and how to look on the return there. We pointed out €5,000,000 EBITDA for 2021. This doesn't fully reflect the contribution on a cash basis of Fischbach. We have here some pretty complicated consolidation effects, which are eliminated due to internal profit consolidation purposes.
And thus, on a cash basis, the margin generated by Fischbach or LWS plus is higher than the €5,000,000 and will also be scaled up on the when we scale up the platform to the 75% of the renovation activities as we try to do and to be there fully transparent. We if we were to include this to our EBITDA figure and would introduce total EBITDA as some of our peers do it, the effect would be triple from what we guided for the €5,000,000 once the company is fully ramped up, and we expect this to realize in the next four years. So that gives you maybe some more insight on the highly attractive margin that we can achieve there.
Okay. And so again, are you going to adapt your accounting to reflect that or to show this total EBITDA? Or are you going to keep it on a net basis?
No. We want to stick there to the IFRS figures. And I think that there's good reason why IFRS set up the accounting as they do, and we don't want to mingle there too much with the accounting.
All right. Okay. Fair enough. Thank you.
There are no further questions at this time. I hand back to Frank Kopfinger for closing comments. Thank you.
Yes, thank you, and thank you, everybody, for your participation. Obviously, it's a very busy reporting day. And as always, should you have further questions, then please do not hesitate and give us a call or write us an e mail. Otherwise, please note that our next scheduled reporting event is on March 10 when we report our full year results. And with this, we close the call, and we wish you all the best, and hope to see you soon.
Thank you, and goodbye.