Ladies and gentlemen, welcome to the publication of the annual report 2023 conference call. I'm Moritz, the conference call operator. I would like to remind you that all participants will be in a listen-only mode, and the conference is being recorded. The presentation will be followed by a question and answer 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's my pleasure to hand over to Martin Thiel, CFO. Please go ahead, sir.
Yeah, many thanks, and good morning all. This is Martin from TAG. Many thanks for dialing in to our full year 2023 conference call. As always, I will try to give you a short presentation, point out the main messages from our side, and then afterwards, of course, we have plenty of time to discuss the results. So let's start with page number 4, which is a comprehensive summary of the, from our point of view, main messages we want to give you today. Firstly, we have achieved our FFO I guidance, so FFO I came out basically exactly in the middle of the guidance range at around EUR 172 million. This corresponds to a reduction of 9% year-on-year, but this reduction is purely due to higher financing costs.
So analyzing this a little bit more in detail, the EBITDA, so the operational results, was even better than in the previous year. On the one side, in Germany, a little bit lower EBITDA due to disposals that we had, not only in 2023, but also in 2022. But the Polish EBITDA from the rental business kicked in now stronger, so therefore, operationally, in terms of EBITDA, we've been better than in the previous year. But also the German portfolio performed quite well. Just to give some highlights, the vacancy rate in the residential units was down to 4.0%, so down by 50 basis points in the course of the year, and we achieved a total like-for-like rental growth in Germany of 2.3%.
Secondly, we have updated our FFO II guidance due to a very strong sales result in Poland. So FFO II came out at EUR 255.6 million. This is even more than last year, so a 3% increase year-on-year, and also quite significantly above the guidance that we've given, which was between EUR 240 million and EUR 246 million. The EBITDA from our sales business in Poland reached more than EUR 100 million, and the adjusted net income from this Polish sales business came out at EUR 82.8 million, compared to EUR 59.3 million in the previous years. So a quite strong increase in our sales result in Poland, and even a little bit better than we expected. So Poland in general performed very well. You'll see this in the third point of the slide.
The rental portfolio in Poland comprises, in the meanwhile, at year-end 2023, 2,400 finished units, so units under operation. Further, 1,400 units are under construction. Like-for-like rental growth was still at 11%, which is, from our point of view, very strong, and the vacancy rate for the units which were in operation for more than one year, was down to a very low 2.2%. But even more impressive was the sales result from our point of view. We sold in Poland nearly 3,600 units last year, and looking at the total sales volume, that increased to nearly EUR 480 million in 2023, compared to EUR 265 million at, in the financial year, 2022.
So a very strong increase, not only in sales numbers, but also in sales, sales prices. I will come back to that a little bit later in more detail. Of course, very interesting in this results call is for sure the valuation result. So we recorded another valuation loss of 4.1% in the second half, but this valuation loss was already much lower than the loss that we have recorded in the first half, which was 7.4%. So we clearly see that valuation losses are slowing down, that we are reaching that the bottom of the valuation levels in Germany. We have recorded in the last 18 months, already 16% of the valuation. In absolute amounts, that's EUR 1.1 billion.
So therefore, we've done already a lot, and therefore we expect not really material valuation losses in the course of 2024, but I will come back to this also a little bit later. Disposals in Germany were quite successful in 2023, so nearly 1,400 units sold, total sales volume of more than EUR 213 million, and net cash proceeds, so that means after repayment of respective bank loans, of nearly EUR 190 million. The average gross yield of the units sold in Germany stood at 4.3%. And despite the quite significant valuation losses we recorded in the course of 2023, and as point number 5, and I think this is also a very important point for today, the LTV was stable.
So we started in the year with 46.7%, at year-end 2023, came out at 47.0%, and I think this is definitely a good message. So we were able to keep the leverage stable with the measures that we have taken. So on one side, the good operation business, clearly strong sales result in Poland, but also the successful disposals in Germany helped in this regard. And also the dividend suspension for in financial year 2023 was something that helped us in keeping the LTV at that level. Looking forward, I think we are not too far away from our LTV target. We will also discuss this on the following slide.
Also important to mention, net debt to EBITDA and the ICR stand at strong 9.3 times and 6.0 times. So also the cash numbers, when we look at average metrics, are in very good shape. Coming to the next slide, I mean, we have discussed already some of the main numbers. Go through it in details, but just pointing at the FFO per share metrics. The FFO I came out as guided at EUR 0.98 per share, and FFO II, and this is something I want to highlight, came out at EUR 1.46. So if you compare this EUR 1.46 with yesterday's closing price for the shares, which were around EUR 12.30, it's a 12% FFO II yield. And this is something we want to point out again.
So please also look at FFO II when analyzing our results, because FFO II also includes a recurring business, recurring earnings, which is coming from our sales business in Poland. So this is in the meanwhile, and has also been in last year, an important part of our sales result and our overall results. Coming to slide number 6, just want to show you, if you look at the column with the fourth quarter results, that as expected, this was very strong in Poland. You know, that this has a seasonality to sales business, so we are recognizing the profit in the P&L on the very last day, meaning when we hand over the apartments to our customers, and this is to the very largest part, always in the fourth quarter of the year.
In the fourth quarter of 2023, we had revenues from sale of properties in Poland of EUR 296 million, and the adjusted net income from Poland was EUR 54.8 million, so EUR 82.8 million the full year, and out of that, EUR 54.8 million alone in the fourth quarter. We have handed over 2,300 units in Poland, so as expected, this quarter was very strong for the sales result. Going a bit more into the details, I want to continue on page 9. It shows the EBITDA, FFO, and AFFO calculation. I already mentioned that the EBITDA increased year-on-year by nearly EUR 3 million, so the decline in FFO I of 9% was really completely due to higher financing costs.
But perhaps you've already seen our guidance for the next year. We expect a stable FFO I in 2024. Why is that? This negative impact from higher interest costs that we had in 2023 will not be that strong in the course of 2024, because we have repaid a lot of debt, and we've especially repaid the bridge loan from the ROBYG financing, from the ROBYG acquisition, in the course of financial year 2023. So this was, of course, for us, a quite strong relief for our earnings and our financing costs, and therefore FFO I in 2024, which I think in this environment is already a success, will be stable. The FF-, sorry, the AFFO was reduced by EUR 17 million.
This is absolutely in line with the FFO I reduction, so that means the total CapEx that we spent in financial year 2023 was nearly unchanged compared to the previous year. Page 10 shows the EPRA NTA calculation. We saw a reduction of the EPRA NTA, but by 12%, but this was purely the result of the portfolio devaluation. You see this here in the charts or on the slide on the right side, that a little bit more than EUR 4 per share was the impact from the portfolio valuation. The business itself, so the net profit that we achieved contributed to EUR 1.7 per share to the, to the NTA. Page 11 shows the financing structure, and I want to mention two things.
First of all, when we look at financings that are maturing in the course of 2024, 2025, and you see this on the slide, the average interest cost of these maturing financing are still at around 3% in 2024, 2.8% in 2025. So it means if you're going for refinancing today and with our banks, we are perhaps at around 4% or even lower in these days for a new bank loan. Yes, we will have higher interest costs afterwards, but the step up that we see is not that material.
So we can digest refinancing in these days in a world with high interest rates because the loans that we are currently refinancing already have a coupon which is in a range where the difference to the new coupon is not that huge. So therefore, we expect, as already said, for 2024, and also as a small outlook for 2025, not too much pressure coming from the interest rate side on our results. And one word on our LTV target. As I said, we're quite proud that we managed to keep the LTV stable at 47%, which would be already good results. The LTV target stands at 45%, and we're not too far away. And what do I mean by saying this?
We know that from our ongoing business, so from the cash that we generate from the German business as well as from the Polish business, especially from Polish sales business, we've got a natural deleveraging. If we keep it in the balance sheet, and that's what we propose, again, to our shareholder, not to pay dividend, but to keep the cash in the balance sheet, then we are from, as a result or as an impact from this operational result, already at our LTV target or perhaps even slightly lower. And then, of course, it depends on the valuation result in 2024, if we see then, an adverse impact. But on the other side, we will also continue to sell assets in Germany.
It's clear that the official program has ended, so that we have completed the EUR 250 million sales program in the course of 2023. And the purpose of this program was to repay the ROBYG bridge financing. So this is done, but that does not mean that we stop selling assets in Germany. So we can be sure that we're also active on this market. So therefore, I think it's reasonable that we will also have some disposals in Germany in the course of 2024, and this helps us then to keep the LTV or to move the LTV perhaps quite soon towards the LTV target. This is perhaps also something that you should take away for today.
Coming to page 13, I already mentioned that we saw an increase in the like-for-like rental growth when it comes to the, what we call, basis like-for-like rental growth. So that means the rent increases from existing tenants, from tenant turnover and from the modernization surcharge. So that was 1.8% compared to 1.5%, including the impact from vacancy reduction. We were at 2.3%. That's a little bit lower than the previous year, where the impact from vacancy reduction, because of higher vacancy rates at that time, that we could reduce, was a little bit higher. Top right of slide 13 shows your total investment, so that's maintenance and CapEx together. So we have not reduced our investments in the last 2 years.
So we are at around 25 EUR per square meter, which we are spending, currently, which breaks down into roughly 7 EUR per square meter maintenance and 17 EUR per square meter CapEx. So it means we continue to invest in our portfolio. We are especially continuing to invest in modernization projects for more energy efficiency. So this is clear, something that we have on the, agenda, and we will continue to do this. Page number 14 shows the vacancy rate development. As already expected from our side, we saw a very strong fourth quarter, so by the reduction of 60 basis points from September to 4.0%. So overall, that's a 50 basis points reduction year-on-year, even a little bit better than expected.
That shows us that also in our secondary locations, the demand for affordable housing in Germany continues to be very strong. Page number 15 shows the portfolio valuation, and this is, of course, an important slide. First of all, I already said we have developed the portfolio in the last 18 months by around 16%. I think that should be quite in line with valuations that other peers have already done. If you look at the valuation metrics, we are now at a gross yield of 6.3% and a price per square meter at 1,000 EUR and 1,060 EUR. A 6.3% gross yield, that's a gross yield, if you look at the chart, that we already had or some years back.
So we are valuation-wise, looking at the gross yield now back at the levels of 2018, and that gives us really comfort. So 6.3% gross yield in this interest environment, where a potential investor is financing an acquisition with a bank loan at 4% or even lower, that clearly creates a positive cash flow. And therefore, we are very optimistic that we are reaching a kind of bottom regarding valuations. Yes, it's true, we expect some further valuation declines in the course of 2024. I mean, to be honest, the bit rounded number of 20% total valuation decline from peak to trough is, from our point of view, still valid.
So overall, in the course of 2024, we will see from our expectations of today, a quite strongly reduced valuation result in sense of lower valuation losses in 2024. And that's good news because that helps us, of course, to, to work on our leverage. Already I mentioned some ideas, some potential developments on our LTV. So we are clearly now more on the way that leverage is coming down as we see valuation declines bottoming out. Let's look a little bit more into Poland. On page 17, you see the portfolio data for our rental portfolio, and as I said, the rental growth was quite strong, so year on year, 11%. Like-for-like rental growth and the vacancy rate was down at 2.2%.
Looking at the in-place yields or the valuation gross yield, that stands at 5.9%. We are convinced that we will here see also further improvements in the, in the coming years. So therefore, the DDI investment idea of our rental business in Poland is still valid. We're building such portfolios at a 7%-8% gross yield. We achieve a good like-for-like, strong like-for-like rental growth, and we will also see valuation improvements. Now, we are already below 6%, and we are quite optimistic that this number will, will go down so that we will see further valuation improvements in Poland in the following years. Page number 18 shows the development of the Polish rental business in terms of number of units. Important is to say that we started new investments. So we are growing here again in Poland.
You know, for quite a time, we stopped new rental projects as, first of all, refinancing was more important. But now, as we have a lot of liquidity in the balance sheet, especially in Poland, we are growing again. So the first projects have already started in the fourth quarter of 2023, 430 units. These are two projects, one in Gdańsk and one in Wrocław. Further, potentially 1,000 units or more to be constructed will start in the course of 2024. So we are growing again in Poland. We have the possibility to invest, on one side, from the cash flow, from the cash surplus that we achieve with the sales business, which is between EUR 50 million and EUR 60 million per year.
And secondly, and that's also a message we want to highlight today, from refinancing the existing rental portfolio. So we have just signed the first mortgage secured, larger refinancing of our portfolio, of our rental portfolio in Poland with a loan of EUR 90 million, and this is something that, of course, then gives us additional liquidity to build new rental projects. And further refinancings for the rental portfolio we follow. We have financed these rental portfolio in the first step with TAG shareholder loans. Now we're doing step-by-step the refinancing, releasing cash that we can use for further investments. So therefore, the important use is we are growing the rental portfolio in Poland again. Page number 19 gives you more insights into the sales result.
As I already mentioned, we have strongly increased the number of units sold in Poland, 3,600 units in 2023, compared to 2,400 in the previous year. But also important to say, it was not only increase in number of units, also sales prices in Poland increased quite significantly. So we saw sales prices increases in the market, in our portfolio between 15% and 20%. And if you look at the slide and compare the fourth quarter of 2023 with the fourth quarter of 2022, you will realize in both quarters, we've sold roughly the same number of units. So 715 at the end of 2022, 709 at the end of 2023.
And if you look at the sales volume, that was EUR 110 million in the fourth quarter of 2023, compared to EUR 76 million one year ago. So that shows that based on the roughly same number of units, as sales prices have increased quite strongly, the sales volume is increasing really materially. Page 20 shows you the revenue recognition. As I already said at the beginning, not unusual, always the fourth quarter in our business in Poland is the strongest quarter. It's here, the apartments are handed over. But again, please have in mind, this is something which is purely a P&L impact. The cash flow already starts earlier, because when we sell an apartment, then from that point of, in time, the customer pays the purchase price by installments.
A final comment on page number, on page number 22, which shows the guidance for financial year 2024. We leave all the guidances unchanged, so we are guiding for a stable FFO I in 2024, in a range of EUR 170 million-EUR 174 million. We're guiding for roughly 9% reduction in FFO II, which is coming from an expected lower Polish sales result. But please have in mind, this is an outcome or reflection, as already described in the last earnings call, from lower sales numbers in Poland in 2022, which will lead to lower handovers in 2024. So that means the strong sales numbers from 2023 will then contribute to the results two years later when the constructions are finished in 2025.
So therefore, it's a one-time reduction in our sales result. Stronger results will follow from 2025 onwards. One final comment on the dividend. Here, the proposal to the AGM will be unchanged, as already communicated with the Q3 results last year. We are proposing to our shareholders to suspend the dividend once again, and on a potential dividend for the financial year 2024, we will decide or make a proposal or give guidance more towards the end of the year, and this is depending on market conditions. And I mean, clearly, we see that now, valuations are bottoming. I think there should also be some signs on the horizon that the lettings markets could be better in the course of the year.
So these are all good signs, but let's wait for that in a first step and then decide on a dividend more towards the end of the year. For now, we feel comfortable that we keep the cash on the balance sheet. It's on the one side for the leveraging, and on the second side, and this is again important, we use this cash to grow the portfolio in Poland, which from our side, gives our shareholders an attractive opportunity to grow in a fast-growing market. That's it from my side, with the highlights for the full years 2023. Thank you so far for your listening, and of course, now I'm happy to take your questions.
Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from John Vuong from Kempen. Please go ahead.
Hi, good morning. Thank you for taking my questions. You mentioned that you expect that you get to a target at 45% LTV, through retained earnings. Additionally, you also are looking at disposals in Germany, I suppose at a bit more of an opportunistic pace. Taking this all together, what would you say that is a reasonable LTV to, to target by year-end?
Yeah. Good morning, John. Well, if I continue my quite simple calculation, as I said, we have the natural deleveraging process from the ongoing results. We keep the cash in the balance sheet because we're not paying a dividend. So this alone brings us already below the LTV target, so below 45%. Then of course, it depends on any valuation results that you pencil in into the model. But let's stay with the 20% total value decline from peak to trough for a moment, so another 4% value decline in the course of 2020-2024. Please don't take this as an explicit guidance, but just to give you a range where we would expect the valuation result. Then we would need disposals in Germany, which are roughly half the size of 2023.
So net cash proceeds of around EUR 100 million to be at a 45% LTV. That's, that's something that we have in our head, and so I think it's a, it's a good chance that in the course of 2024, we get to the LTV target or very close to that.
Okay, that's very clear. On those disposals, are there any ongoing negotiations, or is this based on your feel that the investment market is opening up?
Yeah, we are always on the market with portfolios and unchanged with smaller portfolios. And it's really difficult to predict further developments in investment market. But, you know, at the moment, our perception is more people are positive on that, for reasons that are understandable. So all the companies have devalued their portfolios, so that means perhaps a new price level is possible for transactions at then the new book value. Interest rates are really now visible coming down, although this is slightly, inflation is coming down. So for quite a while, we are now in an environment where, you know, all the factors that you need to put in the model are more and more clear. So that's a positive, but let's see how this develops.
If you ask me, do we see already really material data points in the market? I mean, everyone will give you this answer, no, this is not the case, but let's be optimistic for 2024. We are reactive on the disposal market. I already mentioned that, yes, we have completed our disposal program, but clearly, we will continue to sell, but perhaps a little bit more on an opportunistic basis. Yeah, it's not necessary for the purpose of any refinancings to sell at any price, so we can be a little bit more optimistic/disciplined.
Okay, that's very clear. Then moving on to Poland, how do you see like-for-like rental growth there? Because looking at slide 36, the growth on new stock is low single digits or even negative for Wrocław. Well, your cities and where your assets in that specific city on the operation for more than a year are already close to market rents.
Yeah, I mean, it's-- we would not be surprised if you see in 2024, a slowing down of the like-for-like rental growth. It should be very natural. We have seen extreme strong rental growth in the last two years. So 20% in 2022, more than 10% in 2023. So, I mean, we know that there's a pre the war in the Ukraine, we had like-for-like rental growth in this market segment, so new constructed apartments in the larger cities in Poland, which was perhaps 3%-5% per annum. That should be also a reasonable mid-term rate, at least assuming that also inflation is coming down in Poland. So therefore, we don't see this as a negative if after so strong years, the rental growth is perhaps, yeah, stabilizing.
We're absolutely convinced that mid to long term, we will see here in Poland, because the demand is so strong, a really good and attractive rental growth over time.
Okay, that's clear. Thank you. That's it from my side.
The next question comes from Thomas Neuhold, from Kepler Cheuvreux. Please go ahead.
Good morning. Thank you very much for the presentation, and thank you my questions. I have three of them, and I suggest that take them one by one. Firstly, most important question for me is your capital allocation policy. I understand that you still have a cautious stance given the high uncertainties you still have. But on the other hand, you're talking about a stabilization of prices potentially this year, stable financing costs, ongoing rental growth at 12%, FFO to yield of your stock. So I was wondering, what are the key criteria for you to at least start to repay dividends, or is also a share buyback something you potentially might consider given your valuation currently?
Yeah. Good morning, Thomas. Perhaps I try to explain how we think about cash flows in the company. On the one side, we've got the Polish cash flow, which is producing a cash surplus from a safe business of EUR 50 million-EUR 60 million. So as discussed, we use this as equity for new rental projects in Poland, and on top of that is coming some financing, for example, from refinancing of existing Polish portfolios or perhaps currently also financing for apartments under construction. So that enables us really step-by-step, based on cash flows that we create on our own, to grow the rental portfolio in Poland. And we think that makes sense to continue that, also in the interest of our shareholders, because this really creates attractive returns.
And second, on the second side, clearly we have the cash flow from the German business, the FFO of roughly EUR 170 million. I mean, in previous years, with a payout ratio of 75% of FFO, that's the cash that we keep currently in the balance sheet, which is a total amount of EUR 120 million-EUR 130 million. And what's the situation right now? I mean, we have unsecured debt that is coming due, not in large sizes this year. So it's, for example, EUR 60 million promissory note, but we think in the current environment, it's simply better to keep the cash from the German business in the balance sheet, take this cash, repay such unsecured debt, and continue by doing this.
If we are in an environment where transaction markets are more open, where it's not a big issue to sell a portfolio, you know, for EUR 50-60 million, where a private placement of a promissory note of EUR 50-60 million works again, or where we can do a private placement of a bond of perhaps EUR 100 million. So, you know, we're not dreaming of the old world, where everything was for free. Yeah, that's already another environment. So then we can also be, you know, more, more, how should I say it? Generous also with our cash flows in Germany and say, "Okay, the ongoing refinancing, that's not anymore an issue. We don't need to be conservative anymore." So then we have the cash in the balance sheet to pay a dividend again.
The signs are good for 2024, but as we said in the last call, we will wait with any comments on that until we give the guidance for the next year, which is then in November this year, the case.
Okay, understood. My second question is on page 34 in the presentation. You mentioned that you're growing the Polish portfolio. However, if I compare 2023 figures to the figures you stated in the nine-month report, it seems that the build-to-hold portfolio declined by almost 10% in terms of SQM, and also in terms of potential units in operation, under construction or possible future units. Did you shift a part of that portfolio to the build-to-sell portfolio? Were there any other changes compared to nine months figures?
Yeah, that's quite regularly happening. So we, of course, always think about our pipeline. Okay, which land banks or potential future units are should be for sale, which for rent. We are quite flexible in this regard, which is good. At the moment, this business is running very well. So therefore, it's absolutely important to have the land bank in place to be ready for the strong demand that we see in the market. So therefore, we shift in between the two segments. But we clearly have earmarked also a land bank for the build-to-hold business. We can also tell you that we continue to invest in new land bank, so for the build-to-hold business as well as for the build-to-sell business.
We have, of course, enough to sell for the next two or three years. But, you know, in this business, you already today need to look into potential sales in three years. You need to acquire something that you can then develop, where you can then get the zoning, get the building permits, and so on, and to sell it in two or three years. That's a continuous process.
Thanks. My last question is if you can give us indication what your spot financing costs for secured and unsecured lending, let's say, for 7-10 years financing currently would be if you talk to the banks?
Well, for secured financing, we know this very well. So for German secured financing, that's that makes a difference. I would say for 7-10 years, we're perhaps at 120-130 basis points, depending on the portfolio. We can also give you now more indications for a Polish portfolio, as we are now in the first refinancing processes, and we have also, to some extent, already completed that. Here, the margins are more in the region of around 200 basis points. And when it comes to unsecured financing, it's extremely difficult for us to predict because we have not really outstanding corporate bonds trading. So there's just one 125 million corporate bond, which is listed, but it was a private placement held by one investor.
So therefore, we have not really, you know, exact curve where we can derive from our financing costs.
Okay, understood. Thank you very much.
Next question comes from Thomas Rothaeusler from Deutsche Bank AG. Please go ahead.
Hi, morning, everybody. A few questions. The first is on mortgage lending overall. I mean, considering some of the German mortgage banks currently in trouble, do you sense any limitations with regards to access to mortgage lending? Or, did you see any deterioration of financing terms there? I think you just referred to 200 basis point spreads for mortgage lending.
Yeah. Good morning, Thomas. Again, this 200 basis points, this is mortgage financing in Poland.
Oh, sorry. Oh, okay. Okay. Maybe you can provide us the terms for Germany. Okay.
Sorry if it was a bit hard and difficult to understand, but just to make this just once again clear. Two hundred basis points spread, that's for Poland, so Polish portfolio. In Germany, margins have not really increased over the last two years, perhaps slightly. I gave this indication 120, 130 basis points, which is very much comparable to margins that we had two years ago. Clearly, mid swap rates are meanwhile higher. Then your question regarding willingness to finance. This willingness to finance is, from our observation, really still there.
Um, yeah.
And even with one of the banks, without mentioning any name that has been in the press, we just completed a refinancing some weeks back. So if it comes to a situation that we have then currently, so a portfolio or a bank loan is maturing, it's a financing that we had in the books for 7 or 10 years. We have amortized the bank loan. The development of the portfolio was good. Then asking the bank if the bank is willing to refinance the portfolio, the answer is a very clear yes, and we are also, of course, always approaching other banks, so the willingness to finance is absolutely there.
I think there's one factor which is perhaps new for some investors, whereas two years back, we discussed with banks when it comes to the loan amount, LTVs. Today, the much more important figure is the debt service cover ratio, and that's more limiting the bank loan. But in our portfolio, as you know, we have high-yielding properties. So therefore, all in all, we get at least the old loan amount. And perhaps you've seen in the past presentations, that we are not only able to renew the existing loan amount, we also, we've also been able to increase the bank loan afterwards because we have the high-yielding properties, we have a good debt service cover ratio.
This is perhaps for some portfolios in the lower-yielding segment different, so therefore, but in this segment, the increase in loan is not that much possible compared to our portfolio.
Okay. Actually, on that background, just wondering, I mean, how would you assess the need to get back to investment grade credit rating level, you know? How important is it for you and by when, to get the better access back there, maybe, you know? And maybe how could the path look like for you to get back to investment grade level?
Yeah, perhaps two comments on that. First of all, the good thing is, if you look at our numbers, we are already on investment grade level. I mean, you know that we are still investment grade at S&P, so triple B minus, but with a negative outlook, so they still need to target to get it back to a stable outlook. And at Moody's we are at Ba1, so non-investment grade with a stable outlook, and here, clearly the target is to get back to investment grade. If you look at the numbers, again, LTV, net debt to EBITDA, ICR, and if you compare that with other real estate companies, on the same rating level, I mean, we are better, or with higher-rated companies, we are at least on that level.
So, you know, it's not something where we are now under pressure to reduce the LTV or to, to improve the net debt to EBITDA. That's already there. I think the difficult situation in these days is also for rating agency, and I, I think also this is getting better. Uncertainty around valuation, around transaction market, I mean, you, you know, all of this. So a rating agency clearly wants to get more confident at, and I hope that we are very close to that, and then a positive rating actually should follow. So I mean, of course, it's not up to me to, to guide to any rating actions, but we are, I'd say we are optimistic that we see here good developments in the course of 2024.
And then, as a second comment on that, a rating, investment grade rating is, of course, something that we want to keep or to achieve in the sense of Moody's, but we don't need it for any refinancing processes in the course of this year or next year. So getting back investment grade rating from both agencies, getting also back the possibility to issue, for example, corporate bonds, that would, of course, enable us in the future possibilities for further growth, but it's not necessary for refinancing. I think this is already a good situation in today's world.
Okay. The last question is actually on your FFO. You made aware of the high relevance of FFO II for your business. Just wondering what your thoughts are on reporting a group FFO, maybe, as one of your peers does?
Sorry, Thomas, it was a little bit hard to understand for me. Can you repeat the question?
It's like on your FFO, you know, you highlighted the relevance of FFO2-
Mm-hmm.
in your business. I mean, just wondering what your thoughts are on reporting a group FFO, including-
Yeah.
-the FFO2.
Yeah, I know that, and our company is including that in one figure. For now, we prefer to, you know, clearly show the two different income streams that we have. Rental business on the one side, and then the sales business on the other side. And the thing that I wanted to point out also in this presentation is, yes, these are two different income streams, but we have two different income streams. You know, from time to time, reading some reports, where then people look at TAG's FFO I yield, and only looking at FFO I yields, it's also important really to have in mind we have a second income stream which is recurring, which is the Polish sales business, which then feeds into our FFO II. We prefer to have that separate, because then it's more clear.
But the point is more just to make clear this income stream is there, it is recurring.
Mm-hmm. Okay, thank you.
The next question comes from Kai Klose, from Berenberg. Please go ahead.
Yes, sir. Good morning. I've got three quick questions, if I may. The first one is on page 17. You mentioned that you took up a EUR 19 million loan for the Polish portfolio, if I understood that correctly. Could you indicate which portfolio was given as collateral from your side? Second question would be on the valuation uplift. You point out there on EUR 13.7 million for Poland. Just understand, is this a like-for-like number or is it, or not? So is it comparable to the German portfolio? And the last question would be on page 9, regarding the cash taxes. I know it's a small number, but it went up from, I think, EUR 0.5 for 2022 to EUR 2.2 or EUR 2.5 for 2023.
Not a small increase, but could you explain what caused the rise? Thank you.
Yeah. Good morning, Kai. I'll start with the questions on the Polish rental portfolio. First of all, the refinancing, we provided the investor with mortgages on projects in Wrocław and Poznań, and these were projects that were already finished. And then that was the start of the refinancing. As I said, we are also in negotiations with other banks regarding further refinancing. And in these negotiations, it's not only about already finished projects or already stabilized projects, we're also talking with banks about financing the construction process. And the portfolio, the fair value uplift, this 5% increase refers to the full portfolio.
If you compare this 5% valuation uplift with indications of it's with the numbers that we stated for the total sales market, where we said the price increase was 15%-20%, you can ask the question: Why is that lower by what we observe in our valuations in Poland? Once we have finished the apartments, it's not in on day one that we get the full valuation uplift, basically, to the, to the market yield. So the values are here. It's a little bit more conservative, that we want to see that the units are rented out, that are for a longer time on the market, that we have really a stabilized and growing rental cash flow, and then valuation uplifts will come.
So I think there's a good chance that we see more valuation uplifts in the course of 2024. The third question regarding the tax increase, I would say the tax in our tax expense for 2022 was just ordinarily low. 2023, we're on a more normalized level. We know that we're guiding also another slight increase by another EUR 2-3 million for 2024. So that should be more a normalized level that we had in 2023 and that we expect in 2024. But nothing special behind it.
Many thanks. Just a very quick follow-up, if I may. Regarding taking up financing in Poland, you mentioned the spread for taking up collaterals and for taking up debt in Poland. Is there a material difference between a collateralized portfolio as a kind of rental portfolio and the debts you took up now, which, if I understand it correctly, also will finally partially finance your construction activities?
Sorry, for start understanding, can you repeat the last part of the question, Kai?
The question was, the EUR 90 million you took up-
Yeah.
If I understand correctly, is also partly to be used for construction activities. So it's not only on the rental portfolio. Is this-
No, so sorry. Let me make this more clear. This, this EUR 90 million was completely for finished units.
Ah.
We are in discussion with banks, also for financing the construction work.
Ah.
I think this is the background of the question: What is the margin there?
Yes.
That could be slightly higher, but it, we're not talking about something completely different. Yeah, just to give you a rough estimate, perhaps we go more towards the 230-240 basis points margin. So it's not a complete different world. And perhaps we can communicate something here in the course of 2024 already.
Understood. Thanks so much.
The next question comes from Simon Stippig, from Warburg Research. Please go ahead.
Hi, good morning. Can you hear me well?
Yeah. Good morning, Simon.
Perfect. Thanks. Also my first question is in regard to the mortgage. You constructed with banks in Poland the amount of PLN 90 million. In the last conference call, if I recall correctly, you mentioned PLN 140 million, and now you also said that you're in constructive talks and negotiations with banks to increase that amount. I just wonder, is that amount of PLN 140 million still valid, or is it lower, or is it higher? And then also, I wonder that you closed it in March only, and we talked about it in November. Is there any reason why it took so long? And also here, the LTV on the PLN 90 million on the portfolio then would be only at 36%.
Is that then something you take into consideration as a valid LTV for the portfolio, or is it rather that you are in these discussions and you want to increase your LTV to EUR 140 million?
Yeah. Yeah, good morning, Simon. This one hundred and forty million is still valid. I think perhaps it will come out even a little bit higher. And this ninety million, it's not on the total rental portfolio, so we've not put a mortgage on every single asset. It's a part of the portfolio that we've refinanced, and the LTV was even slightly above 50% that we achieved. So when I remember guiding in the third quarter, we had a portfolio of around two hundred and eighty million, and we said, well, 50% LTV, that leads to one hundred and forty million of bank loans. So this number is still valid, and we're confident that we get even more bank loans on that.
So, this is unchanged, and it even looks a little bit better than we originally assumed. But then the question, why did it take so long? It's similar to Germany. I mean, bank loans or mortgage-secured financing takes some time. Banks are asking a lot of questions also, you know, regarding energy efficiency and collecting a lot of data. In the end, and that's important, the outcome is still very positive. So it takes a month to get the financing then finally done, but we finally made it, and this is also something that will happen in the course of 2024 again. So yes, we need to be patient in this type of financing, but still the outcome, the terms are very attractive.
Just, I can look it up, but the WIBOR, what was your all-in cost combined with the WIBOR?
This is.
19 million total. Yeah.
Yeah, this is a financing in Euro. So it's not a zloty-based loan.
Okay.
It's a fixed rate, 5-year loan in euro.
Okay, and your all-in cost?
That's slightly below 5%.
Okay, great. And then I wonder, your shareholder loan into Poland, how high is that now in total?
Before the refinance or any repay, potential repayments from this loan, we are at around EUR 300 million. So basically, that's—we have a EUR 300 million rental portfolio finally constructed or under operation, and that was financed by a TAG shareholder loan. So simplifying a little bit, but this was the reason for the shareholder loan, and we are now refinancing that step by step.
Okay. And, of the EUR 90 million, will you return something into Germany or will you keep it in Poland to construct a new - I know you talked about the growth, but maybe-
Yeah
... there is more. You have a tap on the, or an additional mortgage on another portfolio, potentially of EUR 50-60 million, and then you keep the EUR 50-60 million in Poland, or you bring the EUR 90 million now back to Germany, or the full amount?
No, no. It's very clear. We want to grow the portfolio in Poland again, yeah. And then in Germany, we've got a good liquidity position in the meanwhile. So therefore, let's see how this develops over time. And, you know, when I talk about repayment of shareholder loans, always, there's always a tax impact on them, that how we do this. But looking from the cash flow perspective or when you ask us where should the money be invested, it's a clear task now to grow the portfolio in Poland again.
Okay, great. Thank you. And, maybe just one more in regard to refinancing. I know that in 2024 and 2025, step up is lower, and I think it's very manageable. But if I look into 2026, then there's this convertible EUR 470 million, the coupon is just 63 basis points. What's your approach, or do you have looked into it a little bit and you have a plan to refinance it, maybe also reduce the whole, potential refinancing amount of EUR 470 million? That would be, some additional insight into your planning there, would be very helpful.
Yeah, this, this EUR 470 million convertible bond is indeed the last major financing we have ahead of us, and it's already good news. So if you look in the maturity profile, everything else is mortgage-secured financing in Germany, where we, we've just discussed this, we have broad access and get even higher loan amounts afterwards. Smaller promissory notes, one privately placed corporate bond, smaller bonds in Poland, that's it. So the EUR 470 million is the only material maturity. Second good news is, it's still two and a half years to go. And as I said, the coupon is really low, so 0.625%, so it makes sense to use this a little bit more.
It's also clear we will not wait until the very last date with refinancing that convertible bond. I mean, the strike price is at EUR 32 or EUR 33. So, we need to take into account that we need to repay it. But that's perhaps more something for, I would say, for next year. And let's see, I mean, if we just discussed our potential path back to investment-grade rating, then we have also more financing opportunities. But even if this not happens, I mean, we have just proven in the last 18 months that we have repaid nearly EUR 1 billion of unsecured debt, if necessary, with the help of disposals and so on. So I'm not concerned about this maturity. It's more a question of how is this most efficiently done.
Just maybe one last one in regard to your supervisory board changes. I know it's a supervisory board, but could you also comment on the need for this?
Yeah, there was one background, which was, if you want a little bit more also from the coming from the former side. Many institutional investors, as well as proxy advisors, require that the share of women in the supervisory board is more than 30%, not only in the total supervisory board, where we fulfilled this already, but also for shareholder representatives. And if you look at the shareholder representatives in the current supervisory board, we have a share of women of 25%.
So therefore, we were very happy that Philipp Wagner, one of our supervisory board members for more than 10 years, said, "Okay, I'm offering my resignation to next AGM, that you can replace my seat with a woman." So this was one argument, and then, I mean, supervisory board ran the process, and the outcome was that we identified, or supervisory board identified Gabriela Grygiel as a new member of the supervisory board. And she's not only a woman, she's really an expert in the Polish residential market.... And she's been, for example, on the ROBYG Supervisory Board for some years. She's already as an advisor, active in the, in the Polish real estate market.
That's also, from our point of view, a helpful, you know, competence in the supervisory board, to get here even more knowledge than today in the supervisory board. So this was then basically the second reason for that change.
Okay, great. Thank you very much.
The next question comes from Manuel Martin from ODDO BHF. Please go ahead.
Thank you. Two questions from my side, please. One question would be regarding the devaluations. So, we have seen a clear deceleration in the devaluation momentum. Could you give us some color, maybe on a regional split, or how these property devaluations evolved? Or was it across the board? Maybe you can give us some words on that, please.
Yeah. Good morning, Manuel. It's not really fair to say that you see extreme different developments. So it's in general, really across the portfolio. What we realize, a little bit, and that would be good news for us, that the more high-yielding properties are perhaps more and more less hit by devaluations. I mentioned that during the presentation. I mean, we have already now a growth yield in the portfolio of 6.3%. Take into account, that's another slight valuation decline in 2024. We're at 6.5% or even higher. That's already a very reasonable growth yield if you finance such potential acquisitions with bank loans up 4%. So therefore, there's a slightly more positive development in the higher-yielding segment, I would say.
Mm-hmm. Okay, I see. And on the way how the valuation was done, maybe you can give us a bit of flavor there, because I can imagine that there were not a lot of data points in the market when it comes to transactions. So how was the valuation concluded?
Yeah, but that was not much different compared to the last two or three evaluations. I mean, the transaction market is quite muted now for quite a while, so this was nothing new. And I mean, what also gives us comfort, if you look in transactions that we've done in the course of 2023, penciling in a further just slight valuation decline, 2024, then we are really very, very close, or at levels where we've sold assets. So where we see some liquidity, and that should also be a good proof that we're really now reaching the bottom already.
Okay. My second question would be, regarding rental growth. Can you give us some maybe on what you are feeling or what you are seeing or anticipating in terms of rent tables to come, and how could this affect the rental growth in Germany, especially in your portfolio? Because for the time being, the rental growth in the TAG portfolio seems to be a bit slower than versus peers. Maybe you can give us some light there.
Yeah, if you look in the guidance that we've given, which is also in the annual report and was already in the Q3 figures, you see that we are already indicating a higher like-for-like rental growth. So an increase by 30-40 basis points, which is then to a very largest part coming from rent increases for, for example, for existing tenants. So that means we're assuming, and we're seeing that rents are increasing on back of higher index figures or simply higher reletting rents that we can achieve. So yes, clearly, we see this trend also in our markets. And then if you do a comparison within the peer group, again, it's always important to analyze that really in detail.
You know, that we have not this huge modernization programs, at least not in the size that some peers have. Therefore, the modernization rental growth from modernization is very naturally lower, but we are also spending less. Secondly, we are also not including, you know, any new construction apartment in that rental growth figure. Therefore, if you look at the pure, like-for-like rental growth, without any impact from these two elements, the difference is not that huge.
Mm. Okay. And for the rental tables, any view on that? What do you think about that?
Yeah, as I said, we expect a higher rental growth, so that is increasing, and that also means that rent tables that come out, and you know, that we have not two or three very important rent tables that determine the whole rental growth of the group, as the portfolio is quite diversified. But from the upcoming rent tables, we clearly expect a stronger increase compared to previous years.
Mm. Okay, thank you very much.
The next question comes from Marco Schmidt, from ODDO BHF. Please go ahead.
Yes, good morning. Thanks for taking the questions. I have a couple. First of all, on valuation, you said some weeks ago, I think in an interview with Reuters, valuation could decline up to 30% from peak. So from today's perspective, you'd rather see again the 20% decline, when I understood that, right? Maybe you could clarify this again, and then I have a couple of others.
... Yeah, Marcus, good morning, and thanks for asking this question. I did not change my view, but the 30% validity decline, that was just Reuters headline, which was honestly very misleading, because that's not what I said. So also in this interview, if you look then in the interview or in other quotes, I already indicated towards the 20%, and that's basically unchanged. Please take away the message that we've seen by far the highest part of devaluations already. What I said in this interview is that, of course, a balance sheet, and in this context, I refer to financial covenants, also need to be ready for anything that goes towards 30%. So what I simply wanted to say, that our covenants are really so comfortable that we could digest even higher devaluations, but we're not expecting that again.
So therefore, this headline in the Reuters interview was unfortunately very misleading. There's no change in our view.
Yeah, I think everybody focused on the headline there more than maybe the text itself. And I, I think you had a slide in your, in your deck where you said we have material headroom in, in terms of covenants. So, this is good to know now. Then again, on the disposal proceeds in 2024, I was a bit late to the call. I understood you aim for EUR 100 million net proceeds this year. Is that right, or is that, is that wrong?
Yeah, that's correct. And again, I mean, we have not, you know, just an official disposal program like before, where we exactly promised that, or what we've, that was the former program. But if you ask us what is a reasonable amount that we expect in the course of 2024, and also something that could then fit into our target to bring the LTV back towards our LTV target of 45%, then EUR 100 million of net cash is the right number.
Okay. Then, then, in the meantime, maybe a bit more positive question maybe from me. I mean, in terms of rental growth in, in Germany, how would you see the structural rental growth evolving here as part of your valuation model? Is, is this in your appraisals now a component which is more positive for the valuation? At, at, at least I did not see any changes to the market rent parameters as part of your valuation, in the annual report. Maybe word how you see long-term, rental growth changing here, this would be also helpful.
Yeah, this would definitely help. And also with this number, it's not the case that, you know, a rental changes from one day to another, it's long-term assumptions. But, I mean, it's very clear that we'll see stronger rental growth in Germany in 2024, 2025 than in the past. I mean, you know, all this, the headlines about new constructed apartment numbers going down again. Germany seeing still immigration and so on and so on. And then also this will kick into the valuation. So this may be a positive for valuation. So once we are in a stable interest rate environment, where we at already are, and it's not necessary, interest rates are going down to get further valuation results, also, then the operational performance will help us to grow the value.
So I mean, I'm not planning for that in 2024, but that's quite quickly thereafter, we can see value increases simply on the back of better operational performance.
So medium term, I think is maybe the right phrase here. Okay. And then two questions left, and one is on funding. I think you said that certain troubled lenders provide funding to TAG. So could you just explain again how our refinancing discussions are ongoing generally with bank debt providers now, and if you see more anxiety, and if extension discussions have become more difficult? And secondly, how are your discussions with the promissory note lenders for the smaller refinancing in 2024 and the larger refi in 2025 with that one investor? And any concerns on your side that this could become a challenge, or are you yeah relaxed for the time being?
No, we have no concerns because, for example, for the promissory notes, and also if necessary for next year, for the corporate bonds, yeah, we will repay this. So, I mean, at a certain price, you can of course do everything, but, we don't think that given our current rating situation, this is really an attractive source of financing for us. So, whether this is with the help from disposals, or also with, as in the past, with new bank financings, I mean, we will simply repay it. That's our base assumption, and that's definitely not a concern. And when it comes to bank lending, the willingness of giving us new bank loans is, I would say, absolutely unchanged.
So I commented a bit earlier in the call that, yes, the processes take longer. Banks are collecting more data, especially when it comes to energy efficiency of the portfolio. That's in the meanwhile an important part of their financing process. But I cannot remember any situation in the last two years, so since we had this changed interest rate environment, where we had problems in getting financing for our portfolio. And as I also said before, really helpful for us is that we have a portfolio that is a higher-yielding portfolio. So that means that the cash metrics, especially the debt service cover ratio, always looks good, and that enables us to get really still significant bank loan amounts, and this is, of course, for us, a good situation.
Just in this respect, could you say what the unencumbered asset position is right now? I could not find it in the documents.
We have unencumbered assets in total of around EUR 1.3 billion-EUR 1.4 billion, and the largest part of that is our Polish portfolio, but as in Germany, we have unencumbered assets left.
... Okay, good. And finally, on the rating, I mean, you said, or spoke of a path back to IG. So, has the rating agency signaled to you that you would likely receive an IG rating again? I mean, you have one at S&P with a negative outlook, and there will be a one with Moody's. If you achieve the company-defined LTV below 45%, would this be enough for both agencies, or would there be more required to get to the IG or stable, a clear IG rating for both agencies?
First of all, a rating agency would never say, but it's very likely that you get back to a certain rating stage. So they're more, you know, talking between the lines. And between the lines, the signs that we, or the signals that we receive are clearly positive. And that's what I already said some minutes back. Important is the LTV is already where it should be for investment-grade rating. The net debt to EBITDA is already on that level. The ICR is already there. So number-wise, we are already there. Liquidity is not an issue. Refinancings are done. I mean, we've proven that the Polish business is running well. So no more. It's more debate about the overall environment in Germany.
But I think also now with the release of the full year figures of all German residential companies, there should be more, you know, positive sentiment in the market that we have now really reached relation-wise, a kind of bottom. And this, of course, is something which is positive from a view of a rating agency.
So, both agencies have an issue a little bit with the fact that the Polish business is a development business. I think that is what I read in the past. Is that still the reason why they don't want to provide higher ratings? Because number-wise, you said you are there with both agencies, basically, but something is keeping them away, obviously. I mean, the sentiment is obviously not the best. That is understood, and they will be cautious on this side. But you said, okay, if that sentiment. I want to rephrase. If that sentiment will improve a little in 2024, so nothing could stop you from receiving higher ratings. Is this what you said? Is this a base case for you then?
Yeah, basically, yes. And let me just to make that clearer, as of today, there's not really a concern about our Polish business. That was different in the course of 2022. I mean, remember the time when interest rates picked up, where we saw, for example, amongst German developers, all the sales numbers going more close to zero. And, of course, was also then something where rating agencies looked at and asked us, "Well, is this happening in Poland as well?" It did not happen. So the Polish market really turned out to be very resilient, also in 2022, even on a lower number clearly. But people bought apartments, so the market was always there. We saw the strong increase in 2023.
In the meanwhile, I think both rating agencies see this as something, something positive.
In the meantime, I mean, I read that wording sometimes still, you know, a partly developing business, TAG, and I think that is what they take on the negative side. But obviously, the performance there is quite strong, so maybe they can be convinced at one point that it's not a headwind, really, and then you will get your higher ratings. That is how I think about it, maybe. But let's see. That was very helpful for me, so thank you very much.
The next question comes from Stephanie Dossmann from Jefferies. Please go ahead.
Hello, everyone, thank you for taking my questions. Actually, most of them have been answered earlier. But, coming back on disposals in Germany, could you give us a bit more color on what kind of discount to appraisal values, or at what kind of gross yield you achieve those? And how confident are you going forward? Who are the buyers? I remember that half of the transaction market in recent years was driven by listed players. So I was wondering about the profile of the buyers. And, maybe a second question on your housing development business in Poland. What kind of... Because you said prices were up 15%-20% currently, but, what is your expectation going forward on prices, development, and margins, please?
Yeah, good morning, Stephanie. Better start with the second question about expectation for price increases of disposals and/or apartment sales in Poland. I think in our business plan, we have a price increase between 3%-4%. As of today, this looks rather conservative, because what happens in the market in Poland, more apartments are sold in each quarter than new apartments are coming to the market. So that clearly leads then to increasing prices. Many developers, and also we, are not so much concentrating, you know, on the numbers of unit sales. We're concentrating more on optimizing prices. If the number of units sold is a bit lower, that's not an issue, as long as you can increase the prices, because the sales volume is higher. So therefore, our business plan assumption of 3%-4% should be definitely achieved.
Perhaps we see even more. And then commenting on the German transaction market, as in the past, we don't see one specific buyer group that we want to point out. And when I remember or look into our disposals in the last 18 months, so in this first disposal program, it was really a group of buyers, really different kind of buyers, from a municipal housing company to a family office, to a private equity company, to companies who are doing privatization business. And I would say-...
Each of these buyers has then identified for him a certain price level, where he said, "Okay, that makes, that makes already sense, and according to my business plan, I can achieve a reasonable return." Again, when I look in our portfolio relation, I simply can confirm this, yeah, 6.3% gross yield, and that, that's already a very reasonable, reasonable, reasonable valuation level. The assets that we sold were at a lower gross yield, so we had a gross yield on average, which was around four point three percent, I think. That's also a success. Yeah, selling in this interest environment at such levels is not easy, but again, the transaction market is not completely dry.
So you can do transactions. I mean, the last deals are clearly missing, but for us, in our size, if we sell here EUR 20-30 million a quarter or whatever, that really nicely adds up to amount that really helps us, for example, in our target of reducing the LTV further.
Maybe just to follow up on the 4.3%, could you give us some color on the breakdown by cities or what was the bulk of it?
I mean, there was one, one transaction also public, because the buyer had a press release that was in the, it's a wider Berlin commuter belt portfolio. So that should be, I should say, typical transaction, that, that, that we did. But also, I mean, in, in fact, that's then also a mix. Yeah, we also sold some non-core assets to a more local buyer. So again, it's, it's what not one special asset type, not one special buyer, group. You really need to look into every potential pocket in these days. And then again, it's not completely dry. We're still doing transactions, we're still doing transaction sizes that, that are enough for us.
So, we can continue in this environment, but of course, it would be great if the transaction market opens more, so that we can do even more than in the last months.
Thank you. And I know 30% is not your case, your base case for valuation decline, peak to trough. And I understand that it was rather a question of, you know, prepare your balance sheet just in case. But what could be the worst case? I mean, what could be the drivers to see more devaluation going forward on, I mean, more than 20% peak to trough?
First of all, again, we don't expect this. So, and we talk about-
Yeah. I know, I know.
Potential worst-case scenarios we don't expect. It will definitely not come from the operational side, and not from the fact that we have too many apartments in Germany. Yeah, this will be definitely supportive. And again, I mean, we had just this discussion some minutes back, this will then lead to growing mismatch between supply and demand on one side, to growing values. And then it's very simple, okay, a massive increase in interest rates. I mean, clearly this isn't something which is not helpful for valuations. But is this a realistic scenario? We don't have this as a base case.
Mm-hmm. Sure. Thank you.
The next question comes from Daniela Lungu, from First Sentier Investors. Please go ahead.
Yes, thank you. I have a follow-up on what you mentioned about bank lending and what the banks are doing in terms of collecting more data, especially energy-related. I thought that was quite an interesting comment, and I wonder whether you would be able to give us a little bit more color on that, in particular as to what I would be interested in. Do they have a specific threshold, for example, in terms of energy rating, where they wouldn't even consider providing lending? Do they make some adjustments in terms of CapEx required to bring some portfolios to an energy rating that would be, you know, sufficient for them to provide lending? Are they considering different interest rates, depending on the energy, again, efficiency of portfolio?
I mean, any, any color that you could provide in terms of that due diligence, call it, related to the energy rating that the banks are presumably doing, would be, would be great.
Yeah. Yeah, we want Daniela, and of course, happy to do so. First of all, I cannot really comment on any situations where one needs to refinance a portfolio with very low energy efficiency classes, because we simply, in fact, do not really have them in the portfolio. Perhaps you maybe remember that less than 3%, or perhaps today, even less than 2% of our portfolio is located in the two lowest energy efficiency classes, and maybe two-thirds is located in the three highest energy efficiency classes A to C. And I cannot really comment whether there are financing issues in these situations, but what I can comment on is that basically, banks are requiring more and more a strategy also for their portfolio that they're financing how energy efficiency is improved.
It's not, you cannot see this in the sense of that they give us hard covenants, but they clearly expect a plan from us. And we say, "Okay, in the next 10 years, so for the next duration of the loan, we're going to invest a certain amount, because this is also in line with our general decarbonization plan." And that's, of course, something the banks are very interested in. This is the development that started, I would say, about 2 or 3 years ago, and now it's more and more paced, because also they need to demonstrate towards the regulator and towards their shareholders, that they are improving their credit loan book, and they want to have simply, you know, a path and a confirmed path from our side.
This is not really a burden for us because, you know, we are anyway investing in the portfolio to reduce CO2 emissions, and this is completely in line with the bank expectations. This is something which is newer in these days, compared to two or three years ago.
Okay, thank you.
It seems there are no further questions at this time. I would hand back to Martin Thiel for any closing remarks.
Yeah. Many thanks all for this call and many thanks for the questions. If there's anything left, so please feel free to contact D ominique Mann from our IR department or myself. Many thanks for listening to the call. Hope to see you soon, perhaps on our roadshows or upcoming conferences, or then at the latest in our next conference call. Have a good day, and bye-bye.
Ladies and gentlemen, the conference is now concluded and you may disconnect. Thank you for joining and have a pleasant day. Goodbye.