Good morning, ladies and gentlemen, welcome to the TAG Immobilien AG conference call. Interim statement on the third quarter of 2019. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Martin Thiel.
Many thanks, good morning, everyone. This is Martin from TAG. Many thanks for dialing in to our Q3 earnings call. Today, we will discuss not only the figures for the first nine months of 2019, but also the new FFO and dividend guidance that we published together with these Q3 results. As always, as we go through the presentation, it is also available on our website and visible also via the webcast. Of course, afterwards, we have enough time to answer your questions. Let's start with page number four. That's the highlights slide showing the main developments in the third quarter of 2019. Looking at vacancy and like-for-like rental growth, the development is definitely positive, especially on the vacancy side. We had a good progress in the third quarter, a reduction by 30 basis points from 5.2% in the previous quarter to 4.9%.
We see clearly kicking in the results from our CapEx programs. I will come back to this a little bit later. In the total portfolio, that means including the commercial units and also the acquisitions that already closed this year. We compare the development for the financial year 2019 with the beginning of the year, we had a slight reduction as well from 5.3% to 5.2%. Total like-for-like rental growth, including the vacancy reduction effect, ended up at 2.7%, excluding vacancy reduction, we had 2.0%. Quite good, and for us, let's say, very normal values. FFO 1 increased again by EUR 400,000 to EUR 41.2 million after EUR 14.8 million in the previous quarter. Looking at the EPRA NAV and LTV, due to the fact that we had no portfolio valuation at the end of the third quarter, the developments are, let's call it, quite normal.
Slight increase in EPRA NAV per share, which stands now at €18.82, and a further reduction in LTV, which is now at 45.5%. Quick comment on our new guidance. I will come back to that later in more details. The new FFO guidance for 2020 stands at EUR 169 at the midpoint. That's a 9% increase year-on-year. The guidance for 2019 is unchanged. Looking at acquisitions and disposals, we acquired so far in the first nine months of 2019, 1,331 units. We will see more details later in the presentation. Looking at disposals, so far, we disposed approximately 300 units at a total selling price of €10 million, and that's net book profit from these disposals of €600,000. There's one comment on planned and realized disposals.
If you remember our guidance from last year, we assumed for purpose of the guidance 2019 that we will sell all in all 2,100 units. Out of which, 1,600 units were so-called non-core assets, and approximately 500 units was what we called ongoing disposals. What we already did regarding the non-core assets is that we sold already last year or signed already last year with closing this year, approximately 900 units, plus the additional nearly 300 units so far this year. On the non-core asset program, which comprised all in all, as announced last year, 1,600 units, we sold until now 1,200 units. That's basically done. There are 400 units left on the non-core side, and this will be done in the future, as we always said in the last calls.
In smaller steps, I think the main message should be that this is basically done. The 500 ongoing disposals, that's something where we decided to slow down the disposals. Why? Not because we saw a different development in the market. Simply, we have a lot of cash in the balance sheet, therefore it was not necessary to sell assets to finance new acquisitions as we did in the past. This is something that is, of course, clearly to continue in the future. We should move to page number six, where you see the income statements. Some comments on the development of the third quarter in comparison to the previous quarter. Net rent was stable or even slightly reduced, that's not a negative effect from rental development or from vacancy development.
The only reason was that we had a closing of disposals in the third quarter. This was one of the portfolios or some of the portfolios that I mentioned signed last year, but the closing then took place in the third quarter. Therefore, we had an offsetting effect or offsetting effects. On one side, of course, the positive like-for-like rental growth, and on the other side, the closing of disposals. Therefore, net rent was, let's call it, broadly stable. Even though net rent was broadly stable, the net rental income improved slightly. We had lower property managing costs, mainly resulting from lower vacancy costs, so therefore we had an improvement quarter on quarter by EUR 500,000. Good development in the net income from services that increased quarter on quarter by EUR 1 million.
If you compare the 9-month period 2019 and 2018 and look at the net income from services, that even increased by EUR 3 million. That shows you that our service business, that primarily is coming from multimedia and energy services and caretaker service, is still growing. Valuation results in Q3 was basically nil. As I said, the next valuation will follow at year-end 2019. Therefore, no effects in the third quarter. On a cost basis, personal expenses in quarter-on-quarter are broadly stable. If you compare the first 9 months 2019 with the first 9 months 2018, you've seen increase. This is then more or less corresponding with the fact that we have more internal services, mainly from caretaker, that then leads to higher revenues on one side and to higher personal expenses on the other side. Looking at the net financial results.
The net financial results contains also, to a larger part, non-cash effects from valuation of financial derivatives. This is mainly due to the equity component of our convertible bonds. Looking at the FFO-relevant financial result, cash after one-offs, we had a slight increase quarter on quarter, not because of higher refinancing costs or higher average cost of debt. The simple reason was that we issued a promissory note at the end of the third quarter. So the EUR 400,000 increase was mainly due to the effect that we simply had a little bit more cash on the balance sheet compared quarter on quarter. That led to higher interest costs. The income tax expense in the third quarter was EUR 6 million. This is to a very large part deferred taxes.
The cash tax expense, really current tax in the third quarter, was basically stable at approximately EUR 1.4 million after EUR 1.2 and EUR 1.3 million in the previous quarters. We think this is a good message that we're still able to present you with a very tax-efficient structure and not a strong increase in income taxes. Looking at the next page, we see the development of EBITDA, FFO and AFFO. I already commented on the FFO development quarter-on-quarter, the slight increase. Of course, a much stronger increase if you compare the first nine months 2019 with the first nine months of 2018. Here, the increase in FFO was 12%, so that should be a good development. It's not only the FFO that increases, also the AFFO saw a very nice development.
Looking at the AFFO before modernization CapEx, there was a strong increase by more than EUR 12 million, now ending up with EUR 110 million already for the first nine months. Looking at the AFFO in our definition, that means really after all CapEx, including the deduction of modernization CapEx, we ended up with EUR 74.6 million. This is an improvement year-on-year by more than 13%. On page number eight, you see the development of the balance sheet. That's just one comment here on the development of LTV. You see this on the right side. We had a reduction in LTV by 180 basis points. Of course, the main driver of this is the portfolio valuation. In other words, if you really want to keep it simple, even in a year without any valuation results, we're able to keep the LTV stable.
What we pay out for our dividends, that leads to reduction in this year, for example, 230 basis points and all other effects. This is mainly the ongoing results that in the first nine months already to an improvement of LTV of 200 basis points. fourth quarter will follow. That shows you that we are very well balanced. We are able to keep the LTV in line and don't need any valuation gains to do this. On page number nine, you see the development of the NAV. As I said, no valuation in the third quarter, we will have that at year-end. Still a strong increase in NAV.
If you exclude the dividend payment of EUR 0.75 that we did in May to our shareholders, the NAV growth already in the first nine months without the valuation effect in the fourth quarter that we expect, was already at 13%. Coming to page number 10, some comments on the financing structure. We achieved an additional reduction in our average cost of debt. That is now at 1.76%, still combined with a very long maturity of more than seven years for total financial debt. There's still refinancing potential left, EUR 331 million bank loans that are maturing or where the interest terms are ending with coupons still north of 2% or even 3%. We already did some refinancings in the third quarter and we're also working on the refinancings or the maturing bank loans clearly for 2019, but also for 2020.
Perhaps at year-end 2019 or in the first quarter of 2020, we can present you some refinancings that we already did. Of course, the conditions that we achieve for new bank loans are much lower than the 2.1%-3.5% from the maturing bank loans. Currently, perhaps a 10-year bank financing is achievable at around 100 or 110 basis points all in. I will jump over the next slides on page numbers 11 and 12. You see here the very positive development of cost of debt, LTV, ICR, net financial debt to EBITDA. That's something that we discussed in the last quarters very much, and you see that the development is still very positive. We should look at page number 15, where we give you an overview of the rental growth development and also our investments.
Starting with the investments on the top right of page 15. Total investments are still stable. If you annualize the Q3 figures, you end up, if you include really everything, that means maintenance and total CapEx, at EUR 19.80. That compares with the EUR 19.20 for the financial year 2018. Looking at the CapEx and maintenance allocation on the bottom right of page 15, you see that the largest part of our CapEx is, and was, in the Chemnitz region. We can clearly here now demonstrate the success of that CapEx program. For example, we now achieved in the first nine months of 2019 in this region a vacancy reduction by 120 basis points. If you look at the last presentation from the second quarter, this reduction was just 40 basis points, so an additional 80 basis points reduction in the third quarter.
That's what we already announced when you remember the calls that we had for the first and second quarter, that we're doing a lot of CapEx programs, especially in the Chemnitz region, and this clearly shows now a very positive effect. Some comments on like-for-like rent growth. That's on the left side. I already mentioned that, 2.7% total like-for-like rent growth, 2% like-for-like rent growth excluding vacancy reductions. That should be very normal for us. Important to mention, and that's shown in the small chart above these numbers, just 0.1% from the total like-for-like rent growth is coming from the modernization surcharge, which basically means modernization programs for existing tenants.
That means that we are still able to achieve effective like-for-like rental growth without big modernization programs for existing tenants, which is, as you know, heavily discussed in Germany, and also then leads to a very disciplined and very effective CapEx approach, because this means on the other side that the largest part of our CapEx is still, and also will in the future, go to vacancy reduction. Vacancy reduction is also shown on page number 16. Very positive trend in the third quarter, a reduction by 30 basis points, now up to 4.9% after 5.2%. If you look in our internal numbers for the month of October, we clearly see that the positive trend is continuing, therefore we should have also good development in the fourth quarter. I'm now on page number 18 on the acquisition slide for 2019.
359 units have been acquired or signed in the third quarter. That's what we're announcing today. The locations, Stralsund, Greifswald, Helmstedt all locations where we already are. Average vacancy of these newly acquired portfolios of 14.4%. If you look at the total numbers for 2019, so the total 1,300 units, the average vacancy rate of the acquired portfolios was at 11.1%, so that definitely provides us a further upside potential. We are quite proud that the acquisition multiple is still very attractive at 12.1 times the current rent. That means including the current vacancy reduction, and that leads to a 8.3% cross yield. Finally, but important, on pages number 20 and 21, the new FFO and dividend guidance. First of all, technically a comment. The FFO guidance for 2020 is based on the current portfolio as showed to you today.
For purpose of the guidance, no further acquisitions, no further disposals are included, just the portfolio as it is. We're announcing today a new FFO guidance of EUR 168 million-EUR 170 million. That translate into EUR 1.15 FFO per share. If you compare that with the guidance for the financial year 2019, that's a 9% increase. Consequently, we pay out 75% of FFO. That means that leads to a dividend per share of EUR 0.87 for the financial year 2020, then paid in 2021. That's also then a 9% increase. What are the main drivers for the guidance? That's presented on page number 21. All in all, a EUR 14 million increase in guidance, and the main driver is the expected improvement in net rental income.
That's mainly driven by our like-for-like rental growth that we already have and that we expect, and also from the closing of the already signed acquisitions. That means of the already announced acquisitions. Further positive impact come from a net income from services, so a little bit more than EUR 2.5 million. The net financial result will contribute to the positive development of FFO by EUR 2.3 million, offsetting higher personal expenses. That is on the one side, a cost effect through the expected wage growth that we penciled in, and also what I already mentioned, the increasing part of our own services. One thing is important to mention, we have a EUR 2.4 million positive effect from our redefinition of the FFO. We want to bring that in line with the largest part of our peer group.
That means if you look at the FFO calculation 2019 so far, we eliminated any new effects from the new accounting standard IFRS 16. We will change that from 2020 on, so that leads to a EUR 2.4 million improvement in the FFO number by changing that definition. There are some slightly other effects. We think good news is that the tax income is just slightly higher, or the tax expense is slightly higher than in the years before, so we can keep that in a, let's say moderate level. All in all, a EUR 14 million increase in FFO, 9% compared year-on-year. That should be good news for the guidance for 2020. That's it from my side so far. Many thanks for listening to the call, but of course, now we're very open to take your questions.
Ladies and gentlemen, if you have a question, please press the keys nine and star on your telephone keypad. If you want to cancel your question, press nine and star once again. Please press nine and star now to state your question. The first question comes from Kai Klose.
Hello?
Good morning, Kai.
Sorry. Good morning. It's Kai Klose from Berenberg. I've got two questions for me. Actually, three questions. The first one is on page six of the presentation. Could you indicate what was the reasons for this decrease in the expenses for property management in Q3 compared to Q2? I assume it might be a bit more regarding maintenance, but if there was anything special which was leading to the decrease. Secondly, on page 23, the increase in vacancy rates for Leipzig, Salzgitter, and Rostock. I mean, it's not significant, but how much of that's coming from maintenance or CapEx spendings? The third question would be on the full year guidance.
If I look into your full year guidance for FFO compared to the nine months, this would imply quite a strong fall in the Q4 FFO. Maybe could elaborate a bit more, is there any higher costs you would expect to occur in Q4? What might be the reason for the lower quarterly FFO compared to Q3? Thanks.
Yeah. Thanks for your question, Kai. First of all, your question regarding the reason for the reduction in expenses from property management. That's on the one side, also a slight effect from lower maintenance costs, but the main coming here from reduced vacancy costs. As we have reduced vacancy rates, not only in the third quarter but also in the second quarter, we are simply able to hand over a larger part of the service charges to tenants. This, what we call vacancy cost, is of course, an important part of our expenses from property management. Reduced vacancy cost was the main driver. It's correct, on page number 24, you can see there are also regions where we have increased vacancy rates. I would say in perhaps in all regions, that's a more temporary effect, but we have also individual reasons.
For example, in Rostock, we had larger acquisitions last year in Schwerin, and also part of the Rostock region. This is nothing unusual that in the first year when after an acquisition, the vacancy rate even increases because we have to take over the property management, we have to really implement our processes. Therefore, it takes some time and we are definitely convinced that we achieve further vacancy reduction also in the Rostock region. That's mainly from 2020 onwards. In the Hamburg region, that's a little bit difficult. That's nothing from, let's say, a market perspective. A simple reason that we have, especially in the Hamburg regions, problems with getting craftsmen for even basic things like doing modernization for the reletting, to get them quickly to work. This is something where we, of course, working on.
We don't expect a material effect, but in the Hamburg region, we had now for some months, simply the problem to have a quick reletting process because this work from external craftsmen was lead to some delays. This is also nothing where we expect a material trend to come out. In Salzgitter, yes, we had an increase in the vacancy rate, but this is also nothing that is really surprising for us. You know that we had a strong success in Salzgitter in the last years and been already below 5%. That's really a good level for Salzgitter. We should expect some swing in vacancy rates in 2019, 2020. Also here we are convinced that this is not a trend in Salzgitter. To the contrary, when we look in our current reporting, we already see here positive effects.
Your last question referred to the full year guidance 2019. You're right. If you put on top of the first nine months results, the Q3 results, you end up above our guidance. There's nothing that we concretely expect a strong increase in cost positions, but some positions are simply difficult to predict, and this is mainly maintenance, which is to some part manageable, but this is sometimes a timing effect. Secondly, income taxes is also hard to forecast as precisely. A swing in both positions of EUR 1 or 2 million is always possible. Therefore, we decided, as you also note percentage-wise, talking about material amounts, to stay with the current guidance for 2019 where it is.
Well, I understand that, but the guidance now implies for Q4 implicitly a 20% fall in the quarterly FFO. You mentioned there are just some smaller items, EUR 1 or 2 million. I just was curious if that's getting special which could lead to such a strong fall in Q4 as well?
As I said, nothing special. Of course, if we have a better view, for example, on income taxes, which is always something that we do during the year, let's say in our details, but it is an estimate. If we have more visibility on that, of course, this would then lead to the fact that we have in 2020 also a better starting point for the guidance. Again, there's nothing to say.
Okay, thanks. Okay, thanks so much.
The next question comes from Mihail Donchev.
Hi. Very good morning from sunny Amsterdam. Two questions from me. First off, the Thuringia elections, saw a very interesting polarized outcome. Given that 21% of your portfolio is in the region, can you maybe share any risks on your mind? Would you perhaps see the pace of yield compression slowing due to less transactions as people get a little cautious on the region potentially, or perhaps in the medium term, some thoughts on rent freezes as we saw in Berlin?
Good morning, Mihail, thanks for this question. First of all, it's completely correct that our highest exposure with approximately 20% is in Thuringia. We know it's absolutely normal thought that one looks at governments that are similar to the Berlin government, it was correct that we had in place until the election, the same government or same coalition as in Berlin. That means a coalition consisting of the party called The Left and the Social Democratic Party and The Greens. What has changed now after the election is that this coalition lost its majority. If you follow that thought, that would be good news. On the other side, we have to state clearly, I mean, we saw absolutely no reaction on investment markets or no really concrete discussions in a material size of important voices regarding things like adapting a similar rent freeze.
To the contrary, just to give an example, our contacts with the local politicians are quite good. I think they completely understand what is necessary in Thuringia regarding good property asset management. Therefore, the Minister President, so the President of the Federal State of Thuringia, also visited two times in the last two or three years our properties in Gera to inform himself about what we do regarding quarter management, regarding property management. Therefore, even before the elections, we were not concerned that we see a similar development as in Berlin. After the election, just looking at the outcome, perhaps this risk is even lower.
Well, that's encouraging. Second question, really a cleanup one. The dispositions, I know they were only EUR 10 million in value, but did you disclose the yield that these were done at/multiple?
Yeah. The multiple is quite high. That's comparable to our acquisitions, so that's around 13x rent. This is perhaps not surprising as we're talking here about non-core assets. What we sell is definitely from less quality than what we buy, especially looking at the locations. Non-core assets, which is, as I said, basically done. That means we are selling assets in smaller cities where we think for the long term, property management will be difficult.
That's all for me. Thank you.
One question comes from Charlotte Hommes.
Yes, good morning. This is Charlotte Hommes speaking. I would like to touch on the Berlin rent freeze again. As I understand, your rents in Berlin are so far below the ceiling that you will not have any impacts from that policy development. Is that correct? Did you do any impact calculations? Second part is, do you think it will hold up legally, the rent freeze?
Thanks for the question. First of all, it's absolutely correct that we are not affected by the Berlin rent freeze, but the main reason is that in the city of Berlin, we just own a little bit more than 300 units. If you look into our Berlin portfolio, which is approximately 10,000 units, the very largest part is in the federal state of Brandenburg around the city of Berlin. We talk about locations like Brandenburg an der Havel, or like Strausberg or Eberswalde or Nauen. The current rental freeze will be implemented in the federal state of Berlin. Therefore, also from a legal perspective or technically, that's nothing that will hit us. Then your second question, will it legally hold?
It's difficult to answer. As we're not really affected from this Berlin rent freeze, let's say, it's like this, we'll be more conservative with any comments on that. Just one thought. Yes, I think there are good arguments that it's legally not possible to do this. The question is, will this discussion stop in Berlin if it's legally not possible? Perhaps not. As I said, important for us is this Berlin rent freeze does not apply to our portfolio.
Thank you very much.
There are no further questions yet. Just as a reminder, if you have a question, please press nine and star on your telephone keypad. Mr. Thiel, it seems there are no more questions.
Thank you very much for dialing into our call. As always, if there are any further questions, please feel free to contact us. Happy to answer that anytime. Thank you very much and have a good day.