Ladies and gentlemen, welcome to the LEG Immobilien Q3 2026 conference call. I am Lorenzo, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Karin Widenmann from LEG Investor Relations. Please go ahead.
Good morning, everyone, and welcome to our earnings call. As always, we have LEG's entire management team on the call. Our CEO, Lars von Lackum, our CFO, Kathrin Köhling, and our COO, Volker Wiegel. You will find the quarterly report as well as the presentation in the Investor Relations section of our website. Please also note there is a legal disclaimer on page two of the presentation. And with that, I would like to hand over to you, Lars.
Good morning, everyone, and thank you for joining our analyst and investor call today. Before I present our nine-month results, let me take you quickly back to autumn 2022. Back then, LEG proactively repositioned itself to cope with a new environment. Interest rates were rising, financing conditions were tightening, and the market was still valuing growth over resilience. We took a clear decision. We pivoted our strategy to a more resilient setup. We chose to operate the most efficient operational platform for affordable living in Germany. Strict capital allocation with a clear focus on maximizing shareholder value has been one of our key drivers. Striving for market-leading cost and investment discipline, we have reduced investments per square meter and refrained from large-scale modernization measures, taking a disciplined approach and carefully assessing what we actually need to spend to maintain or improve the quality of our portfolio.
We went off and exited our small new development pipeline. We see that the priorities of our sector are aligning ever more with the path we chose early on. Our disposal program is another strategic pillar, and we stick to disciplined selling at or above book value to maximize shareholder value. Furthermore, we remain highly selective on external growth, as demonstrated by the completion of the BCP acquisition on attractive terms in 2025. And we are opting for innovations, such as smart and cost-efficient energy solutions that benefit our tenants and the environment and our business. We apply strict discipline here as well, but more on that later. And finally, digitalization will make us even more efficient in both operations and administration.
For those who want to dive deeper into this topic, we have prepared an update on our digital agenda, which you can find in the appendix on slide 33. We have adapted our steering KPIs in line with our strategy. AFFO as the main KPI is also the basis for our dividend. We pay out the excess cash that we have earned. At the midpoint of our guidance, this implies an increase of around 4% from 2026 to 2027, a steady, measured continuation of our earnings trajectory. All in all, I am convinced that the strategy we have pursued since the end of 2022 is still the best and right approach in a challenging environment. Unfortunately, one can expect headwinds to persist beyond 2026. The mood across the sector remains cautious, as we all sensed at Expo Real.
Higher interest rates, macroeconomic uncertainties, and geopolitical risks continue to weigh on our sector and on the transaction market. That makes it all the more important to stay disciplined and on course with our strategy. Let's now have a closer view of our future capital allocation considerations on slide six of our presentation. Those of you who follow us regularly will recognize this chart from our half-year presentation. However, based on our conversations with investors, we are aware that future capital allocation is currently of utmost importance to the investment community. We therefore want to reiterate our message. The disciplined capital allocation I outlined a moment ago, together with our operating strength and disposal program, has put us in the position to choose from several options.
This optionality rests on a very solid balance sheet, an investment-grade rating upgraded to Baa1, a low average funding cost, and maturities covered well into 2027. Above all, we remain committed to maintaining our dividend policy of 100% of the AFFO, plus a share of net proceeds from disposals, and to our LTV ambition of around 45%. However, following the negative valuation expectation for H2 2026 and the lower-than-expected disposal volume in Q3, we no longer expect to reach the 45% mark within 2026, but we will pursue this ambition consistently over the coming years. Having gained additional financial flexibility by further executing our disposal program, our options include a further distribution to shareholders through share buybacks, given the significant discount at which our shares currently trade relative to EPRA NTA. Our options include reducing our LTV further below 45% and potentially organic and inorganic growth.
With financial flexibility, we will deploy capital where it generates the highest return for our shareholders. On slide seven, I want to shed some more light on our disposal activities. Our principle remains unchanged. We sell selectively, we protect value, and we do not sacrifice value for speed. With this disciplined approach, we have had year-to-date transfer of ownership, including foreseeable future transfers, in the amount of EUR 189 million, with net proceeds of EUR 175 million. Since 2022, we have completed disposals totaling around EUR 750 million. Importantly, these transactions have been executed in total at book value or better. That is the standard we set, and it remains the standard going forward. Admittedly, disposal activity measured in transferred units was subdued in the third quarter, amounting to only EUR 5 million.
There is no question that this reflects the challenging market environment, particularly the sharp rise in interest rates. Despite few transfers, demand for our offered portfolios is strong, with several well-advanced negotiations. Therefore, we continue to work on our disposal program of up to 5,000 units, but always on our terms. Disposal proceeds support deleveraging, allow us to sharpen the portfolio, and create opportunities to allocate capital in ways that enhance shareholder value, as outlined before. Our pricing discipline protects the intrinsic value of our assets. The objective is not to sell for the sake of selling. It is to improve the quality of our portfolio, increase our financial flexibility, and realize value for our shareholders. On the right-hand side of the slide, you see the details about the recently closed Glasmacherviertel deal, LEG's largest single transaction this year.
The land plot covers 193,000 sq m and will accommodate 1,600 to 1,800 homes. We acquired the land in early 2025 as part of the Brack Capital Properties transaction. In October, we finally sold it to a joint venture between Hines and Vastint under a call option agreed in March. The purchase price itself is subject to a non-disclosure agreement. The disposal price will be paid as planning progresses and development rights are established. The contract also includes an earn-out if the residential development exceeds the agreed threshold. Even if we are no longer involved in developments in this way, we contributed to strengthening housing construction in Düsseldorf and to creating urgently needed housing for the city and its residents. Slide eight covers our innovation strategy. Our startups provide the chance to reduce our internal modernization and maintenance spendings, and at the same time provide third-party business opportunities.
Our motto in respect to shareholder value creation is, "Scale proven solutions. Redirect capital when returns do not justify continuation." We scale what proves its return. We start where we see a clear operational advantage. We stop where the economics no longer justify further capital allocation. That is why the slide is structured around three decisions: stop, grow, and start. First, stop. RENOWATE is a joint venture between LEG and Austrian Rhomberg Bau GmbH, founded at the end of 2021. The joint venture specializes in the energy-efficient refurbishment and modernization of residential properties and offers customized solutions for housing companies in the German-speaking region. We tested the model. We assessed the alternatives. The conclusion is clear. The holistic refurbishment approach we at LEG also followed in the past is not the most efficient way with regards to capital allocation and energetic improvements. Selective CapEx earns more.
RENOWATE hasn't received orders from LEG since 2024. We have therefore initiated the exit and wind-down. This is not a retreat from innovation. It is capital discipline in practice. Second, grow. We are scaling three ventures where the concepts are proven. dekarbo offers a one-stop heat pump solution to replace gas floor heating. termios uses AI-based smart thermostats and has demonstrated energy savings of 15%, verified externally by Fraunhofer Institute. And Youtilly has built a services platform with around EUR 1.5 million of annual recurring revenue and access to approximately 400,000 units. These businesses combine recurring revenue with scalable CO2 reduction and digitalization. That is exactly the profile we are looking for. Solutions that improve the asset base, create value for tenants and shareholders, and can grow without a proportional increase in capital. Third start. StrangX addresses a very practical problem in our buildings: aging water pipe risers.
The solution uses a prefabricated module installed through core drilling with a shaft then closed. There is no asbestos exposure, no complete bathroom refurbishment. Tenants can remain in their homes. One riser can be completed in one day, and a patent was filed in 2026. The economic logic is compelling. Solve the riser, not the entire room. That means lower CapEx per unit, less disruption for tenants, and faster execution across the portfolio. The wind-down of RENOWATE has an impact on our financial targets. While it was not directly part of our guidance, management's long-term incentive includes an ESG target linked to the success of the Green Ventures. Cumulative results of EUR 20 million between 2025 and 2028 would have represented 100% target achievement. Without the expected contribution from RENOWATE, that level has become unlikely. The takeaway is straightforward. Innovation is not exempt from return discipline.
We stop what does not meet the hurdle, grow what has proven itself, and start what we see a scalable solution to a real portfolio need. I now come to slide nine and the highlights of the first nine months. Our strategy is what drives the results we are reporting today. The overall picture is strong. Operating momentum continues. AFFO is on track. The strength of our balance sheet has been recognized by the rating agencies with a rating upgrade, and we are presenting you a positive outlook for 2027. First, rents. Like-for-like rent growth reached 3.9%, including a positive contribution of 50 basis points from cost rent adjustments, which we are able to implement every three years. At half-year, we were slightly below our guidance of 3.8%-4%. We have gained momentum during Q3 and are now at the midpoint. Second, EPRA vacancy.
Vacancy stands at 2.5%, down by 20 basis points. Demand remains robust, and our ability to combine rent growth with lower vacancy underscores the underlying quality of the portfolio and the structural tailwinds of the German residential market. Third, AFFO. AFFO is increased by 4.9%, and we confirm our full-year guidance of EUR 220 million-EUR 240 million. In short, we are on track. Fourth, LTV. At 46.5%, LTV is down 180 basis points year-on-year and 30 basis points below year-end 2025. To be clear, 46.5% is not where we ultimately want to be, but it is down 180 basis points year-on-year, and the path there is intact. Compared with a half-year, it is slightly higher, reflecting the dividend payment in the third quarter. Around 45% will not be reached within 2026, following the expected H2 valuation and the subdued Q3 disposals.
It remains our clear ambition for the coming year. Fifth, valuation. This is neither a highlight for us nor for the market. As always, we want to be fully transparent. For the second half of 2026, we expect a negative valuation result of up to 1%. Please expect valuations in 2026 to be flat versus year-end 2025, reversing H1 valuation gains. Sixth, our guidance for 2027. We expect an AFFO of EUR 230 million-EUR 250 million. Measured from the midpoint of 2026 to midpoint of 2027, this represents again a growth of around 4%. Taken together, these six points show a business moving in the right direction. Stronger operations, a more resilient balance sheet, and visible earnings growth. That is the platform from which we enter 2027. Let me now come to the financial overview in more detail on slide 10.
The numbers confirm that we are on track for our 2026 guidance across all key metrics. Starting with the rents. Net cold rent reached EUR 712.4 million, an increase of 3.6% year-on-year. The adjusted EBITDA margin increased by 60 basis points to 79.8%. That is already above our full-year guidance of around 78%. FFO I amounted to EUR 370 million, broadly stable year-on-year. Our full-year guidance of EUR 475 million-EUR 495 million remains unchanged. AFFO came in at EUR 190.1 million, up 4.9% year-on-year. After nine months, we have already achieved more than 80% of the midpoint of our guidance range. We therefore confirm, rather than raise, our full-year AFFO guidance of EUR 220 million- EUR 240 million. Let me be transparent about why the fourth quarter will contribute less than the strong first three quarters.
The combination of rental growth, cost discipline, and growing value-add services translated into a stronger margin in the first nine months. We expect this margin to normalize over the full year, as the value-add business, especially the energy business, will lose some momentum in Q4. At the same time, we expect a slightly negative earnings contribution from our Green Ventures. Even so, higher interest costs have been more than compensated by like-for-like rent growth and the margin improvement. AFFO is growing, and guidance is confirmed. The key takeaway from our perspective is straightforward. Rent growth is strong, the margin has improved, AFFO is growing, and guidance is confirmed. We are executing with discipline today while creating a credible path for further earnings growth in 2027. With this, I hand it over to Volker for the operational highlights.
Thank you, Lars, and good morning, everyone. I will start with the rent development on slide 11. On a like-for-like basis, the average rent per square meter in our portfolio rose by nearly 3.9% year-on-year to EUR 7.29. This means we are comfortably on track to deliver on our rental guidance for full-year 2026. The free finance segment of our portfolio rose by a good 3.9% to EUR 7. 66 per square meter and month. Like-for-like growth was 3.8% in both the high-growth and the higher-yielding markets, and even 4% in the stable markets. This underlines the operating strength and resilience of our portfolio. As a result of the cost rent adjustment earlier this year, the rents in our subsidized portfolio were up 3.2%. Looking at the breakdown of drivers, rent tables contributed 1.8%, and modernization re-letting contributed 1.6 percentage points.
The cost rent adjustment earlier this year added a further 0.5 percentage points. As always, you will find the upcoming rent tables for top locations in the appendix. To give some color on the most recent ones, the new table for Düsseldorf implies an uplift of around 4% for a typical LEG apartment, and the table for Ratingen, just north of Düsseldorf, of 5.7%. On vacancies, the EPRA vacancy rate fell by another 20 basis points to a low level of 2.5%, reflecting strong demand for our assets and our ability to refurbish and re-let vacant apartments quickly. Let us now look beyond 2026 on slide 12. Since 2020, we have delivered average like-for-like rent growth of 3.3% per year, largely from our existing portfolios.
For 2027, we expect growth to temporarily normalize in a range of 2.9%-3.1%, which broadly corresponds to the long-term average before the steep price and wage inflation since 2022. But as early as 2028, we expect to see stronger momentum again, and this should be sustained. The reason is something specific to the LEG portfolio, the release of subsidized units from their restrictions in 2028. This affects around 16,000 units spread across all market segments. We plan to use the full rent increase potential within the legal rental cap limits of 15% or 20%, and we will execute this mostly in 2028. However, we have to take into account that the 2026 cost rent adjustments, as well as new lettings in 2026 and 2027, count towards the caps for the 2028 rent increases.
In total, you should expect an increase of more than 12% for these units in 2028, with additional spillover effects into 2029. Overall, this adds around 1 percentage point to the portfolio rent growth in 2028. Beyond 2028, subsidized units coming off restrictions remain a long-term growth lever until in-place rents eventually converge towards market rates. As a general principle, our rent setting, of course, always stays within legal limits and reconciles growth with tenant affordability. I want to stress this in particular, given the public debate on affordable housing, which will certainly intensify ahead of the upcoming state elections in North Rhine-Westphalia. Moving to slide 13. In the first nine months, adjusted investments amounted to EUR 292 million, or EUR 26.32 per square meter.
This is in line with the previous year and also with our full-year target, of which we have spent 75% by now. CapEx accounted for EUR 161.2 million, or EUR 14.52 per square meter, while maintenance expenses were EUR 131 million, or EUR 11.80 per square meter. The cap ratio of 55% was slightly down on the previous year's 57%. With that, I hand it over to you, Kathrin.
Thank you, Volker, and good morning, everyone, also from my side. Let's move to slide 14 and the AFFO bridge for the first nine months. AFFO increased to EUR 190.1 million from EUR 181.3 million. This improvement was achieved despite the increase in net cash interest. Let me take you through the individual movements. The largest positive driver was once again higher net cold rent, contributing EUR 24.7 million year-on-year. This is EUR 28.6 million of organic rent growth, partly offset by EUR 3.9 million disposal effect. This demonstrates the continued strength of our core portfolio. The operating and administrative result added a further EUR 2.5 million compared with the prior year period, providing an additional positive contribution to the bridge. On the other hand, higher net cash interest reduced AFFO by EUR 17.8 million. This reflects lower interest income and the gradual increase in refinancing costs.
Other effects were almost neutral at minus EUR 0.3 million. Investments were on prior year's level with a small negative impact of EUR 0.3 million. To close the bridge, strong organic rent growth and the improvement in the operating and administrative result more than compensated for higher net cash interest. Other effects and investments were broadly neutral. As a result, AFFO increased year -on -year to EUR 190.1 million in the first nine months. Let's turn to slide 15 and our financing structure. The key message is straightforward. Our balance sheet remains solid, liquidity is strong, and all maturities through the end of the third quarter of 2027 are already refinanced or covered. Lars mentioned it already, but I would like to repeat and emphasize that our cash-focused steering approach has been and still is the right way to operate.
The upgrade of our rating to Baa1 by Moody's is also good proof of this. Starting with loan-to-value. LTV stands at 46.5% compared with 48.3% at nine months 2025. That is an improvement of 180 basis points year -on -year and demonstrates the progress we have made in strengthening the balance sheet. Compared with the first half of the year, LTV is slightly higher, driven by the dividend payment. As Lars outlined, around 45% will not be reached within 2026, but we remain firmly committed to this ambition and will keep working towards it over the coming year. Just as importantly, we have secured 100% of the debt maturities falling due through the end of Q3 2027. The straight bond due in November 2027 with a volume of EUR 500 million is next on our agenda.
Of course, we are aware of the currently higher interest rate environment, and we also see this in our refinancing costs, which have increased compared to last year. Given the flexibility in instruments that we have, as of today, we have settled or signed refinancings of approximately EUR 1 billion in 2026, with an average duration of 8.4 years. Thereof, around 70% is already with fixed interest rates at an average interest rate of 4.0%. Given that we have ample time to address our next maturity, we are confident to continue with our opportunistic refinancing approach. Our average interest cost remains at 1.82%. In the current market environment, that continues to be a very competitive level and reflects the benefits of our long-dated financing structure. The average debt maturity is 5.4 years, providing a comfortable duration profile.
Our interest coverage ratio stands at 3.9x , which remains in very green territory. Liquidity is also robust at more than EUR 250 million as of nine months 2026. We prolonged our syndicated revolving credit facility, as you know, of EUR 750 million early. In summary, LTV has improved by 180 basis points year -on -year, our average funding costs remain low, and the maturity profile is covered through the end of Q3 2027. With more than EUR 250 million of liquidity and a EUR 750 million revolving credit facility, we retain substantial financial flexibility. We continue to refinance early and selectively on our own terms rather than under pressure. With that, I'll hand back to Lars.
Thank you, Kathrin. I will continue with slide 16 and the guidance for 2026. Our guidance for 2026 is unchanged and confirmed. The one change is our LTV. Following the negative valuation expectation for H2 2026 and the lower-than-expected disposal volume in Q3, we no longer expect to reach the 45% mark within 2026. It has become an ambition we will pursue consistently over the coming year. We are confident of all other targets and well on track. For the operating and financial KPIs, that means like-for-like rent growth of 3.8%-4%, AFFO in the range of EUR 220 million-EUR 240 million, FFO I in the range of EUR 475 million-EUR 495 million, an adjusted EBITDA margin of around 78%, and last but not least, investments of more than EUR 35 per square meter.
Our payout policy remains unchanged, and as always, the final dividend proposal of the supervisory and management boards will be communicated with the release of the full-year results. Let's now move to slide 17 and our guidance for 2027. Volker has already mentioned the normalization of the like-for-like rent growth in 2027. That should reach 2.9%-3.1%. For our core KPI, AFFO, we expect further growth to EUR 230 million-EUR 250 million, with the upper end representing a new high for the company. Calculated at midpoint, the year-on-year increase is roughly 4%. The FFO I will remain in the range of EUR 475 million-EUR 495 million. This reflects higher interest rates and a lower capitalization ratio. Total investments will stay at around current year's level, with around EUR 35 per square meter. We will remain efficient and keep the EBITDA margin stable at around 78%.
On LTV, we continue to pursue our around 45% ambition, subject to property values and the sales program. On sustainability, we target an 8,000-ton CO2 reduction in 2027. This also represents the STI ESG target in our remuneration system. Our LTI ESG target for the period of 2027-2030 is to double the proportion of rental units heated by electricity. And with that, I would like to open the floor for questions.
We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered in the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioner on the phone are requested to disable the loudspeaker mode while asking a question and eventually turn off the volume from the webcast. Anyone who has a question may press star and one at this time. The first question comes from the line of Andrew McCreath from Green Street. Please go ahead.
Yeah. Hi. Good morning. Thank you for taking my questions. I have two, please. My first question is on Grand City, who now hold 20%, and this, of course, can be increased to just shy of 30%, but they can also sell down at short notice, which I guess puts you in the position of either having a strategic shareholder or a potential overhang. My question here is, what engagement have you had with them, and have they asked for board representation? Also, does having a 20% holder in LEG change how you think about strategy and capital allocation?
Good morning, Andrew, and thanks for your question. First of all, I think you had the chance to talk to the management team of GCP yesterday with its publication of their Q3 numbers, and this is also what we noticed. I think we heard loud and clearly them confirming the strategy of LEG, and also, I think we are sharing the view that the current share price is not a proper reflection of the intrinsic value of the company. With regards to the notification, I think every one of us has been notified on October 20. We published that notification immediately. We also released our reading on that. For the time being, we understand that GCP considered its investment as a financial investment into LEG, and for the time being, this is what we know.
Like all our major shareholders and investors, we certainly will be on the road from now on, and certainly, we will also meet with GCP.
Okay, that is helpful. Thank you. My second question is around the LTV and disposal discipline. At 1 H, you were quite confident, if I remember correct, in reaching the LTV of around 45% by year-end, and three months later, it has moved to 2027 and become conditional on valuations and disposals. What really has changed here? Some more color would be helpful. Also, if buyers still will not notarize, what is plan B? Would you start to accept pricing below book, or move to a lower dividend payout? Thank you.
Yeah. With regards to the disposals, certainly we've been quite hopeful to have much more signings in Q3, which have not materialized. The problem is, you might be aware of that we had that expropriation discussion in Berlin. We had the elections there, and unfortunately, that was heavily weighing on the sentiment in the market. That was also something which was sensed during all the talks we held with investors over Expo Real, and finally ended up in a situation where people are saying, "As long as we do not see that federal law, which will prevent the states of doing expropriations, is really being decided on, we are not willing to notarize." As this is being held back, that has also hit us, and that is unfortunately now also being present in that EUR 5 million disposal volume of Q3.
Therefore, that brings us to a different sentiment with regards to the market and also the disposal activity, and with that, also with regards to us reaching our LTV target. As always, we try to share new insights with you immediately, and that is the bigger change we've seen. Also then, being translating into a valuation, which unfortunately will, in H2, most probably see the reversal of the valuation gains of H1 than in H2, and that's also certainly contributing to the fact that we are going to strive for reaching our LTV target next year.
Okay. That's very helpful and all clear. Thank you.
The next question comes from the line of Marios Pastou from Bernstein. Please go ahead.
Hi, good morning. Thank you for taking my questions. I have got two from my side as well. Just firstly on the guidance for this year, I appreciate your comments that Q4 will come in seasonally lower and that there will be some expenses to take into account there as well, stabilizing that growth. Given the point in time of the year, what is not giving the confidence really to point to which end of the guidance range you expect to be, or even tighten that a little further than previously provided? That is my first question.
Yeah. We try to give you the insights, Marios, we currently have. There will be an impact on the energy business. You know about energy prices and their volatility, and that is just much more difficult to predict than the results we normally earn on our core business. The second one is certainly the Green Ventures. You heard us that we are now winding down RENOWATE, and the wind-down also comes with uncertainty with regards to the wind-down cost. That is the reason why we have not been more specific and boiling down the current EUR 220 million- EUR 240 million AFFO guidance for this year.
Okay. Thank you very much. Then just on the rental growth, I think that is softer than anticipated for 2027. Can you just provide some further color on what has driven this? Is this affordability? Is this the rent tables not coming in as strong as you would hoped for? Can I just check, based on slide 12, does that mean you are pointing to somewhere around the 4% level for 2028 with that 1% contribution, or is there something else we need to be aware of there?
Well, Marios, it is a mixed bag which is coming in 2027, yeah? You mentioned all the main drivers. Its first and most importance is, I think, the absence of the contribution from the subsidized units, which put us 15 basis points or gave us tailwinds of 15 basis points this year. We want to be a bit more cautious given the elections in the state. We have really tough discussions in the Mietspiegel committees, which are in each and every municipality. It is taking longer, these discussions, as the parties involved there are taking more focused or more strict positions, so that also delays some rent tables. We also saw a bit the inflation coming down, which is also a bit then reflected there. So that is a mix of it.
With regard to 2028, we have, and that is for certain, the tailwind from the units coming off restrictions, which gives us about 1 percentage point of growth. On slide 12, what we have shown there, just do not use your ruler. We do not give a guidance for 2028 in 2026 for the rent growth. There is significant uncertainty with regards to all these Mietspiegel and what is coming up. But we see 2027 as a dip for one year and then going back to more stronger growth.
Okay, thank you. If the Mietspiegels come in as you are expecting, 2028, around the levels you are seeing in 2027, then can we just simply say that that range for 2027 will then, you are going to add that percentage contribution on and get somewhere around the 4%, or is it not that simple to make that judgment?
Unfortunately, it is not that simple.
Okay. Thank you.
The next question comes from the line of Véronique Meertens from Van Lanschot Kempen. Please go ahead.
Hey, good morning all. Thank you for taking my questions. First of all, for full year 2027, what do you exactly pencil in in terms of subsidies for your guidance?
For the next year, in terms of subsidies, we expect something up to EUR 7 million.
Okay, thank you. You mentioned the run rate yourself, obviously of 86% for your midpoint. However, your run rate for FFO I is actually significantly below that, even though you do not per se make a change in guidance for maintenance CapEx or CapEx for Q4. Is it fair to assume that full year FFO I is actually on the lower end of the guidance?
Intentionally, Véronique, we have not boiled it down neither to the lower end nor to the higher end. As of today, what we can say, we will end up within that range.
Okay. Lastly on your LTV. Already at full year 2023 results, it is when you set this target of 45% LTV, and since then you have actually, on that basis, had positive revaluations, if you take into account 2025 as well. What makes you... Is this actually a target? Is this an ambition? What are the discussions with the credit rating agencies, or as in, what did they base their upgrades on if there is not per se visibility on improvement of this metric? Also, is there any incentive, can you remind me, is there any incentive for management to actually lower this LTV or leverage? Because three years working towards targets seems rather long.
Yeah, thanks for the question, Véronique. As we have already stated, the 45% LTV is very important to us. It is an ambition that we have been striving for, I know, for quite a while now, but we are, and you can believe us, really working hard on that. Given that the environment is not as easy these days, we have had some backlashes, and also, while we were super confident in reaching it this year, we have now seen with the lower-than-expected transaction volume, and also with the even further rising interest rates in the second half of this year, that this is something where we need to postpone. That does not mean that it is not a clear ambition, and it does not mean that we are not working hard towards that. This is also something that we, of course, are communicating with our rating agency, Moody's.
But, also for three years already, the statement of refusing to sell below book values has been very persistent, and clearly, that has not worked in your favor of actual disposal volumes. How do you rhyme that statement of not selling below book values with the strong ambition to actually delever?
Véronique, I think we can show that on a year-on-year basis, we have consistently been able to increase our results and at the same time operate on a very stable balance sheet, being recognized with a very strong rating, Baa1, by our rating agency. From our perspective, there is no stress whatsoever to now burn money by not sticking to that very disciplined disposal program, which we have in place, and which says that we want to reach book value or sell above that. Therefore, from our perspective, there is no need to change that strategy.
Okay, that is clear. Just one remark from my side then. In my view, AFFO is not a metric for results. Your FFO I has actually been flat, and you are guiding for another flat year. So, in my view, this strategy has not per se led to increasing results, right?
I did not get the question, Véronique, so perhaps we just continue offline and just continue with some more questions. Thank you.
Okay. Thank you.
The next question comes from the line of Jonathan Kownator, sorry, from Goldman Sachs. Please go ahead.
Good morning. Thank you for taking my questions. Just on RENOWATE and the change there, just trying to understand essentially your profit from other services. Is that a line that is going to zero, or do you still have services that are going to contribute to that going forward? I think there was an offset for nine months, and there was no contribution from there. That is the first question. Second one, maybe to come back to the debate between FFO and AFFO. You are guiding to essentially a flat bracket, should we call it, at least for FFO next year, and growth in AFFO. Is the difference driven by lower maintenance CapEx or lower investment CapEx? If you could clarify that would be helpful. Maybe last question is credit spreads, what are you seeing in the market right now? Thank you.
Yeah. I think we will go on with the first and the third question, and then I will follow up with the second question.
Yeah. So, on the question about the Green Ventures, please keep in mind that this is a line that is only being added at the end of the year in our AFFO view, given that these are equity consolidated companies. As you are rightly pointing out, given that RENOWATE is not operating as we want it to be, it is obviously not contributing a positive contribution. So, we expect a low mid-single-digit million negative contribution from RENOWATE this year. On the other Green Ventures, termios and dekarbo, we are hoping, or we are expecting to reach the break-even point here. So, we are expecting something around zero this year.
What about going forward then? Should we expect a low single-digit contribution from these lines, essentially?
Yes. We are not guiding on exact levels on that. As you can assume, we wound down one business, and we are putting our emphasis on the other two. We are definitely expecting them to contribute positively next year.
Okay.
Then perhaps with regard to your second question, with regards to the difference of FFO and AFFO. As you know, we are steering cash. We are not steering accounting numbers. FFO I is just highly dependent on the capitalization ratio. From our perspective, that is not worthwhile steering, and we are expecting the capitalization rate to come down next year. Therefore, that has an impact on FFO I, and therefore, that is leading to the effect that FFO I stays flat while AFFO is increasing.
Okay, so what does that mean, prices of the capitalization ratio comes down? It means that it is more like maintenance investment as opposed to investments. Maintenance as opposed to investment CapEx. Is that the way to read it?
It means that we are not seeing investments in the way that we want them to be able to be capitalized or spend it. That is the difference. Therefore, as that rate will come down operationally, we are steering investments always with regards to the highest returns. Next year, we are of the opinion that some of those returns certainly do not lie with modernizations, which would be mainly capitalized, but some other spendings on our units, like refurbishments investments, which very often come with a much lower capitalization rate.
Okay. And these refurbs are still. Are they defensive in essence, or are they yield enhancing?
Certainly, they come with substantial returns. From our perspective, it is worthwhile doing it because it comes with the highest returns for our business.
Okay. Cool.
Thank you.
About credit spreads, sorry?
Credit spreads, depending on which market you are looking at. If you are looking at the unsecured side, we are currently seeing for an eight-year, we are seeing 180 basis points. But on the secured side, we are positively acknowledging that we are still looking at the same margin we have been looking for quite a while now, around 100-120 basis points for 8-10 years.
Would you be looking more at the secured market at this stage, or would you look at lower, perhaps, maturities?
Yeah. So, as you know, Jonathan, we are targeting this from a very opportunistic view. We will see which instruments make most sense for us once we are in a position that we want to refinance the EUR 500 million.
Okay. Thank you.
The next question comes from the line of Thomas Rothaeusler from Deutsche Bank. Please go ahead.
Hi, morning. Couple of questions. The first one is on your CapEx budget for next year, which I think you have kept roughly unchanged. Maybe you could comment on the expected returns, considering the higher cost of capital. The second one is on your 2027 outlook. I mean, what are your expectations regarding the non-rental business? Just a rough idea about the momentum would be helpful here. Last question is on the Grand City stake. I know they regard it as a financial stake, but thinking further beyond, theoretically, what would you see as the main rationale for a combination of both?
Thank you, Thomas, for the questions. I think the third question is clearly a question to be targeted at GCP. I think we have said whatever we can say. We will start conversations with all our investors starting from Monday next week. We will be a lot on the road, and we will then also talk to GCP. I think you have seen the disclosures. You have been on the call yesterday with GCP. Nothing to add from our perspective at that point.
Your second question is on the non-rental business. Rough outlook is more or less stable as this year.
On the CapEx budget, as you said, it is roughly unchanged, and we will just continue with putting our money where it makes the most sense. This may mean that we put money into refurbishment because we can increase rents, or that we will do stuff like exchanging heating, where we also have a positive impact on the CO2 side. For simple investments, we still calculate the same, so you just have the 60% of modernization share, and there you have the 8% that you can give to the tenants. So overall, it makes around 5%. So that is why we are very selectively looking on where we are actually doing that.
Okay, thank you.
The next question comes from the line of Neeraj Kumar from Barclays. Please go ahead.
Morning, everyone. My question is on your rating. I see Moody's have upgraded you, so congratulations for that. Thanks for reminding us and going back to 2022. That motivated me to look at Moody's reports back in 2022 as well. I see that they were expecting you to be having an ICR of 3.5x for you to be Baa1 rating at that point of time, and now they are happy for you to be Baa1 rated as long as you have ICR of 2.75x and above. Clearly, they have made it easier for you to be rated currently. I also see that they are forecasting your LTV to be higher than the downgrade threshold and ICR to be lower than the downgrade threshold. I mean, they have not provided the assumptions in terms of forecasting those metrics over there.
We will appreciate if you can provide more color on how you are expecting those metrics to develop over a period of time, and what actions are you willing to take to protect those ratings?
Yes. Thanks for the question. With regards to the Moody's thresholds, of course, you would have to ask Moody's about the threshold. With regards to our numbers, of course, we are aware that this is not easy, and we are not super deep into these numbers from a green perspective. But we are very positive that in this environment, we are developing on a very positive note, and we are also keeping this in mind also when we make decisions here in the management board, also with regards to. That is definitely something that we take into consideration. On the other hand, also please keep in mind that in all these years, we have been working with quite a good bond spread, also with a Baa2 rating, although we obviously are very, very happy about the Baa1 rating, and we will work very hard to keep it.
Thank you. Just to clarify on that front, given you plan to pay dividend next year, is it fair to say that you do not see any downside risk whatsoever on your current ratings?
Currently, we have no indication on the downside of the rating that we just got, I think it is a month ago, maybe one and a half.
Got it. Second question on your bonds. Given your current share price performance, is it fair to say that convertible bond issuance remains off the table?
As I already said before, we will look at all the instruments out there, then we will decide what makes most sense for us at that point in time.
Got it. Thank you very much.
The next question comes from the line of Paul May from Barclays. Please go ahead.
Hi, guys. Thanks for taking my questions. Two, maybe three from me. Just on the LTV target, obviously you missed that, and guidance now is for maybe we will get there in 2027. Obviously, you mentioned it is dependent on the market, but I just wonder if you do not get there in 2027, which of the following three things gives? Is it the dividend? Is it disposal pricing versus book, or is it the leverage target again? Just to check on that. On the operational side, you mentioned 2027 was a temporary normalization, and then you have got the 1% benefit coming in 2028 from subsidized units. But if we exclude that 1% benefit, it looks like the underlying business is settling at a lower level. But again, just be great to get your color on that in terms of what you see in the non-subsidized units into 2028.
You mentioned the EUR 20 million Green Ventures targets embedded in your KPIs that is not going to be achieved now because of exiting RENOWATE. Can you confirm that you are not going to be changing your KPIs or remuneration target, or will you look to change your KPI and remuneration targets as a result of the changing strategy? Thanks.
Yes. I start with the last question. Hopefully, I understood it correctly, Paul, and you please jump in if that was a misunderstanding. The KPI for the remuneration are being decided by the remuneration committee and then being approved by the supervisory board, and that's the midterm target which has been decided back a few years. Therefore, no change with regards to that KPI or the target level, only because we were now shutting down RENOWATE. If that was the question. With regard to your first question and the LTV, I will just try to reiterate. From our perspective, we try to maximize the shareholder value by sticking to a very disciplined disposal program.
At the same time, due to a lot of our investors being focused on dividends, we have a dividend policy in place, and we will come up with a decision on the dividend in February. Therefore, let's wait, and that is certainly the big caveat for the LTV target also for next year. Let's wait of how much disposals we can execute following that discipline with regards to price on the disposal side. Also, and that's certainly also a big impact how the valuation for our portfolio will develop next year. For that, Volker.
On the underlying rent, Paul, the dynamic is fully intact. We see high demand. We see rising rents. We have these discussions there in these rent table committees, which delay some Mietspiegel , but we expect that the overall trend remains fully intact. You mentioned in a side note that it's a one-off, the coming off from restrictions, the subsidized units. I think that needs to be a bit shaped down because it's not a one-off. There will be significant effects of these units coming off from restrictions. You have now a gap, a delta of about 70% between the sitting rent and the market rent for these units, and we can increase due to the German tenancy law by about 12% in total in the first step in 2028, so the rents.
There will be more of these effects until we've caught up to the market rents.
Just to follow up on that last point, are there any potential issues or discussions on a regulatory basis that could limit your ability to capture that rent after things come off subsidization? Is anything in the discussions that
There is nothing.
because obviously these are very low-income families typically.
Yeah, sure. But there is no real discussion around this. Of course, it is a political issue that these subsidized units, if they come off from restriction, that they need to be replaced, but there is no construction activity going on, as you know. So there is no discussion to limit these increases as there is no basis for it. But it is based, of course, this political discussion about rent regulation around, but not on this specific point.
Okay. Perfect. Sorry, can I sneak one last one in, if that is possible? Just wondering if you could give a guide on the absolute CapEx level. I appreciate for 2026 and 2027, I appreciate you mentioned on a square meter basis, I think 2026 is above EUR 35 and 2027 is around EUR 35. But just wondered if you could not give more absolute color on, even if it is a range, on both of those. But happy to take that offline if that is easier.
Yeah. If you do not mind, Paul, before we try to do it now, yeah, I think we follow up on that one offline, yeah.
Perfect. Great stuff. Thanks very much.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question comes from the line of Léo Mansour from IDMidCaps. Please go ahead.
Hello, can you hear me? Hello, can you hear me?
Léo, are you still there?
My question is more about the debt. Can you explain the debt?
It is impossible to hear you. Can you perhaps just move closer to?
Yeah, hello. Do you hear me better now?
No, unfortunately, it is not better. It is nearly impossible to hear you.
Okay, maybe I will take it offline.
Yeah, okay. Thank you.
The next question comes from the line of Nicolas Vaysselier from BNP Paribas. Please go ahead.
Hi, good morning. Thank you for taking my questions. I will have three questions, please. The first one, coming back on your AFFO guidance. If I look at recurring CapEx year-to-date, they are already down EUR 10 million versus the prior year, and your guidance implies it is going to be down another EUR 10 million next year. I am just wondering if this is a sustainable level of recurring CapEx, which I would have thought rather incompressible and necessary to maintain the value of the assets and the rent growth potential. Should we think of that level as sustainable for the next few years? My next two questions are actually related. The first one, the disposal pipelines in terms of units that you are highlighting implies quite a pickup in Q4. I just wanted to know if this number is underpinned by firm commitments.
Is it secured, or could that slip into 2027? Lastly, I just want a bit of clarification on your comment earlier on the disposal market and the low level of activities that you are seeing at LEG. You were referring to Berlin as waiting on the discussions, but I was wondering, does that apply to your program of privatization here? I am a bit surprised by this comment, given the size of the transaction is far from the institutional-like size that these expropriation measures are targeting, as well as the portfolio not being in Berlin either. Isn't the slowdown more related to the fact that financial conditions are just tough for prospective buyers from the cost of bank loans or even mortgages, also making the economics of owning versus renting increasingly more challenging for that kind of buyers?
Given that, if we shouldn't expect 2027 to remain a depressed year in terms of volumes. Thank you.
Yeah, thanks for your questions, Nicolas. Let me start with the disposal market. The disposal market, and especially our disposals, are not so much dependent on privatizations. The number of privatizations we do year by year is around 100 to 150, and that will also hold true for 2026. So, there is no change with regards to privatizations. The people we are currently talking to selling portfolios, smaller to mid-sized portfolios, they are certainly being afraid of expropriation discussions with regards to real estate in Berlin, regardless whether that is just a discussion in the state of Berlin or whether it is really happening in Germany. Therefore, those are people certainly not then owning more than 10,000 units, especially not after having bought from us. But it is the thing which is a heavy burden in the market, and unfortunately, is making disposals more difficult in the current environment.
With regards to the disposals we are showing on the slides, those are the ones being signed, so notarized deals. And certainly, we wait now for those to be transferred to the new owners. That sometimes depends in cases of the asset deals, certainly on the cities, but normally we are quite good in approximating, so normally those should happen, because we also have not seen communities to really step in and buy them instead of the buyer, which normally is not the case. Finally, with regards to the CapEx, we are not steering separately CapEx and maintenance. Coming a bit back to one of the answers given in this call a bit earlier, we do not make the effort of steering what is ending up in the P&L as an immediately expensed amount or what is capitalized.
Therefore, please do not be too focused on the split between the CapEx and the maintenance numbers. We will always make sure internally that we steer the capital which we are spending on whatever effort is being spent to those initiatives which are bearing the highest return. And please, don't be too focused on those CapEx numbers.
Okay, thank you. Have a good day.
Thank you.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Karin Widenmann for any closing remarks.
Thank you, Lorenzo, and thank you, everyone, for your participation. As always, should you have any further questions, please do not hesitate to contact us. Our next scheduled reporting event will take place on February 26th, when we will be presenting our full-year results. With this, we close the call, wish you a pleasant day ahead, and say goodbye for now.
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