Good morning, ladies and gentlemen, and welcome to the TAG Immobilien AG conference call. Interim report on the second quarter of 2019. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. Let me now turn the floor over to your host. Martin, to you.
Yeah. Thank you very much. Good morning, everybody. This is Martin from TAG. Welcome to our half year 2019 earnings call. Thanks very much for dialing in. I'm sure you all had a chance to download the presentation that we published on our website this morning. Let's go through the presentation. As always, afterwards, of course, we have enough time to answer your questions. Let's start with page number four with the highlights slide. Starting with the FFO development, which was, from our point of view, very positive in the second quarter and increased by EUR 1.3 million. If you compare the first half of 2019 with the first half of 2018, it was an increase in absolute terms and on a per share basis of more than 13%. Like-for-like rental growth also looks nice.
3.0% total like-for-like rental growth due to vacancy reduction and 2.5% basis like-for-like rental growth. Looking at occupancy in the residential units as well as total portfolio, the second quarter results were on a stable basis compared to the first quarter. We'll come back to more details on vacancy and like-for-like rental growth later. The NAV increased strongly. This was mainly the result of the half-year valuation that we carried out, as also in the past. In the last year, we had the half-year valuation. The full portfolio was valued by CBRE, and we ended up with a total valuation gain of EUR 211 million. This equals a 4.4% semi-annual uplift. The valuation levels are now at nearly EUR 1,000 per sq m and looking at an increase at 6.2%. Quick comment on acquisitions. Already now, nearly 1,000 units acquired in the first half at what we think are attractive multiples.
Looking at the disposal side, just disposals from the ongoing disposal business. A total of 149 units were disposed. Total selling price, a little bit more than EUR 5 million. Most like for profit. Let's turn to page number six, the income statement. Looking at the main developments here, first of all, you see quite some increase in net rental income quarter-over-quarter. This is, of course, on the one side due to higher rent, but the main effect was from cost savings that we had in the second quarter of 2019 compared to the first quarter. As always, there's a little bit of seasonality, a little bit of swing, depending on the timing of, for example, insurance costs or from other expenses from property management costs. Generally, the trend is quite clear that we get more and more cost-efficient.
That according to, or in line with reduced vacancy rates, the cost basis is reduced quarter-on-quarter. That's clearly the long-term cost perspective we observe. Therefore, net rental income was increased quarter-on-quarter by nearly EUR 1 million. On the other side, the second main driver of the results, at least when you look at cash numbers, was the improved net financial results. Those have been reduced if you look at the net financial results in the second quarter 2019 compared to the first quarter 2019, which was lower. EUR 19.6 million compared to EUR 12.3 million. The only reason for this reduction net financial result was a valuation effect from the equity component of our convertible bonds. If you look at cash metrics, that's the one which is relevant for FFO, the net financial result quarter-on-quarter improved by EUR 0.4 million.
If you want to make it very simple and you want to analyze the FFO development quarter-on-quarter, a total improvement of the FFO of EUR 1.3 million. Main reasons, firstly, the increase or the improvement in net financial income, mainly due to cost savings of EUR 0.9 million and then EUR 0.4 million financing costs. I'm on page number seven. We show the EBITDA, FFO, and AFFO calculation. I already mentioned the main drivers of the EBITDA, so the higher net financial income. The main driver of the FFO, this was additionally the improved net financial results. Important to point out as well that we also improved our AFFO quarter-on-quarter, now EUR 26 million compared to EUR 24.3 million in the previous quarter.
We are definitely in line also with our CapEx targets, with our maintenance targets, and as you will see, an improvement in the AFFO throughout the whole year. Coming to page number 8, the balance sheet. I have to mention that we issued a new promissory note, a new Schuldscheindarlehen in June 2019. Honestly, a little bit opportunistic. We simply wanted to use the very attractive interest rate environment and replaced via private placement, EUR 102 million with an average maturity of nearly 6 years. UT average coupon, the complete fixed rate coupon was 1.18%. Looking on page number 9, we are seeing the NAV calculation.
Worth to point out that the NAV growth, if we exclude the dividend payment, which led to a reduction of the NAV of EUR 0.75 and was nearly 4% in the first half of 2019. The very positive evaluation results, of course, contributed to this strong development. Therefore, the NAV now is at EUR 18.59 compared to EUR 17.32 at the beginning of the year. On page number 10, we see the financing structure, including now new promissory notes with two maturities, five and seven years. It's important to look at the right side of the slide, that we still have further refinancing potential. Looking at the bank loans that are maturing or where the interest terms are ending in the next two and a half years, they still add up to more than EUR 380 million.
If you look at the composition of these bank loans, they are between 2.1% and 3.6% per annum. That's, of course, clearly much higher than current financing conditions. For example, current financing conditions for 10-year bank loans, more secured, are perhaps around 1% or perhaps even slightly lower, having in mind that the swap rate for 10 years is already negative today. Therefore, we expect a further reduction in the average cost of debt, which was already down to 1.8% at the end of the second quarter. That compares to 1.9% average cost of debt at the end of the year. This is still combined with loan maturities, which are now on average 7.5 years for the two financial debts.
On pages 11 and 12, you see the development of the average cost of debts, of the loan-to-value, ICR, net financial debt to EVTR, and net financial debt in EUR per sq m. I think you know this very positive development from the last quarters. Therefore, I will not comment on that in detail. We are clearly, you see, well below our LTV target of approximately 50%. LTV was down now to 46.2%. Of course, LTV is always a reflection of the current valuation. We feel very comfortable with an LTV of 46% based on a still moderate valuation of even a little bit less than EUR 1,000 per sq m. Let's wait how the development of LTV, how the development of the valuation results will continue in the next quarters.
At one point in time, it's also necessary to redefine the LTV target if simply the valuation result has strongly reduced the LTV, but there's nothing to expect to come very shortly in the next weeks. I'm now moving to page number 15. Where you see more details on the rental growth and the CapEx allocation in the first half of 2019. First, looking at the like-for-like rental growth. Again, show a year very positive development in terms of like-for-like rental growth was up 2% compared to 2.8% in the prior financial year, and is based down in a basic like-for-like rental growth of 2.5% and a contribution from vacant reduction of 0.5%. In further analyzing the basic like-for-like rental growth of 2.5%, you can see the details on the bottom left of the slide number 15.
Single numbers of 1.3% rent increases from existing tenants and 1.1% from tenant turnover. Only a slight contribution, just 0.1% modernization surcharge for existing tenants. You see our CapEx strategy has absolutely unchanged. Still the very largest part of our CapEx was the rent reduction and not for the modernization surcharge for existing tenants. Top regions, you see more detail in the appendix on page 6. When we look at like-for-like rental growth, was once again the Berlin region, which is in our case in completely the Berlin with a basis like-for-like rental growth of 3.3% and a total like-for-like rental growth of 5%. Interestingly, again, with a basis like-for-like rental growth of 3.5% and a total like-for-like rental growth of 3.8%. A very interesting number and still continuing the positive trend in that data from last year.
We achieved here a 3.5% annual like-for-like rental growth without any effects from vacancy reduction. The bottom of page number 15 on the right side shows you the allocation of maintenance and CapEx by region, and you can see that the Chemnitz region, including the city of Plauen, is the region where we currently invest most of our CapEx. Not far away from that, and we are planning here more in the next one or two financial years, is the Berlin regions. These two regions are clearly the focus of our investments currently. Moving on to page number 16. We see the development of the vacancy rates in the first half of 2016. Vacancy rates increased a little bit at the beginning of the year. You know that from the first quarter they were stable.
In the second quarter, we already had a slight reduction in July 2019 to 5.1%. With regard to our targets so for the year end, we expect a further reduction by approximately 50 basis points. We should end up somewhere between 4.6% and 4.7% vacancy rate in the residential units. Again, in the appendix on page number 26, you see a more detailed picture per region. The top regions in terms of vacancy reduction were the regions Berlin and Chemnitz, and in the Rostock region, so in the northeastern part of Germany, there is even a quite strong increase in vacancy rate, but this is not the trend. This is the outcome of new acquisitions that we had in 2019. Where it took, honestly, longer than expected until we had fully integrated it in our property management system since 2019.
We're very confident that we will see also in the Rostock region, increased action in the next quarters. Now on page 18, we see the acquisitions from the first half of 2019. All in all, we acquired 1,000 units in four transactions. If you look at the average multiples that we paid, and it was effectively 11.8x. This equals a 8.5% cost yield. Looking in the pipeline for perhaps upcoming acquisitions, we should expect that this cost yield is perhaps more moving towards 8% or even below 8%, and the average cost yield last year was around 8%. Of course, we see price increases also in our regions, and there was 8.5% cost yield in the first half. Was that something more exceptional? Of course, you know that we are price disciplined, and we should move more towards the 8% or even below that.
Vacancy rate on average in this portfolio was really 11%. All the acquisitions were in Eastern Germany. All the acquisitions were in locations where we already are, especially in Halle and also in the meantime, in Karl-Marx-Stadt, where we own a larger number of units. Therefore, we were very happy to close this. Also, we signed this acquisition. Closing is in most cases at the end of the third or fourth quarter. 1,000 units in the first half. If you compare that with the financial year 2018, I think we are quite on the same way. We acquired 2,700 units in the full financial year 2018. In the first half of 2018, the number was quite small, 200 units. Therefore, I think we're on a continuous successful way regarding our acquisitions. Let's move on to page number 20.
We'll see the results of the semi-annual valuation done by CBRE. Again, the full portfolio was valued by CBRE, and the result was quite comparable to the last result from the half-year valuation or from the second half valuation of 2018. EUR 211 million semi-annual uplift. This equals a 4.4% uplift. Looking at this, the main part, and that's also nothing unusual, is coming from yield compression, 77%. The in-place yield is now down from 6.5% to 6.3%, and that's also important to point out once again, the 6.3% is really based also on the current rented means, including or taking into account a vacancy rate of, in the full portfolio, 5.6%. Also operational performance was again a very nice driver of the valuation result with a share of 3.2%.
Operational outperformance means in this case, we are better in terms of vacancy reduction, better in terms of rent development than assumed by the valuers last valuation. Looking at the values now in the total, I already mentioned nearly EUR 1,000 per sq m, in-place yield of 6.3%. That looks still really moderate. Therefore, we are very optimistic that we will see further uplift in next valuation. Next valuation will come as in the previous year at year-end 2019. On page 21, you see further valuation details. The region with the strongest valuation uplift was, not surprisingly, Berlin, which is again in our case, completely Berlin commuter belt with EUR 48 million valuation gain. This was specifically mainly from yield compression and the Berlin region with the lowest valuation result. That's also not surprisingly, because Gera, but still with a positive valuation contribution of EUR 4 million.
Finally on page 23, some words on our guidance for the financial year 2019. With that, the guidance now unchanged, it's still at EUR 155 million. If you look at the half year results, we have an FFO of approximately EUR 18 million, we annualize that. We're already above our guidance, this easy calculation would lead to an FFO, an annual FFO of EUR 160 million. Therefore the guidance is perhaps more on the conservative side, but also we have to have in mind that we have the closing of some disposals now in the next weeks to come. Disposals that we signed already last year and at the acquisition that we presented today, have a closing at the end of the third quarter or even at the end of the fourth quarter.
The contribution to FFO of the acquisition is perhaps only a very small part in 2019. All in all, it's clear that we are very optimistic concerning the achievement of our guidance. That's it from my side. A quick overview regarding the half-year results. Now I'm of course happy to take your questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press Nine followed by the Star key on your telephone keypad. If you'd like to withdraw your question, please press Nine Star again. Please press Nine Star now if you'd like to raise a question. Okay. First up, we have Andre Remke, who's calling from Baader Bank. Over to you.
Good morning, Martin. Two questions. Regarding your planned disposal program in South Central, you mentioned it. Is it completely on plan? The original target of 2,100 units, when will be the closing of the 700 units from last year? Will it be the 1st of July or kind of different indication here? The remaining part, could we expect this in several smaller deals or in one larger deal? What is your impression? It is at the moment more difficult to sell such units? These are the questions.
Yeah. Thanks for the question. Well, you're correct. The disposal assumed the guidance fixed were the 2,100 units. The 719 units that we signed last year, the closing will be at the end of August. We've got a remaining block of approximately 1,300, 1,400 units, which we're selling really in small parts. If you want so, we are here behind what we assume for the guidance, which is not really a problem. We're selling that in small parts. Let's say a little bit difficulty for this disposal. We have here a lot of big locations. Therefore the original idea to sell this in one block was simply difficult. Therefore we're doing this in small tranches, and we are very confident that we will sell that successfully in 2019 and perhaps in 2020.
Therefore perhaps what we assume for purpose of guidance as disposal in 2019, the 2,100 units was a little bit large, but it would not be a material difference. Part of these 2,100 units, perhaps some four or 500 units will be sold then in the financial year 2020.
In other words, also from that side, this will be more supportive for the guidance for this year.
Yeah. You're correct.
Yeah. A follow-up question on that. You mentioned you need to go into smaller deals. Has you changed your approach here? What is the reason here? Is it pricing or interest in larger blocks?
Simply a question of pricing. When we brought the portfolio to the market, of course there was interest there, we've seen from potential investors that they said, well, the portfolio that we had in the market was very diversified. Honestly, this was the background why we sold also this or why we want to sell this portfolio because we have some smaller locations in smaller cities where we think perhaps today everything's okay, but in the future, potentially, perhaps it's more difficult in this region to do the successful business. Therefore, we changed our plan and say, okay, perhaps more local buyers are our target. Sizes of 50 to 100 units are more appropriate, and that's what we're doing right now.
At the end, the price expectations are still the same.
Yeah.
In comparison to the start of your thoughts to sell these properties.
Yeah. We don't expect any losses compared to our book value. That's very clear, no?
Okay. Again, you also mentioned in your presentation on the acquisition side, you are still expecting a similar size to last year, more or less.
Yeah. That's, once again, we have no official acquisition target. Still unchanged. Last year we had approximately 3,000 units. This should be a good estimate. Whether it is then the fourth quarter of 2019 with some larger units or the first quarter of 2020, that's difficult to predict. We are confident that we end up in similar sizes. Let's say it like this. If you look at the acquisitions that we're doing, for example, the first half, this will be also more typical. For example, we are talking here about smaller sizes now, 400, 500 units. That's in the meanwhile a typical acquisition size.
Okay, perfect. Yes, last question on the proceeds from the Schuldscheindarlehen . Is there a short-term concrete use of the proceeds? The concept of the question is to acquire too much cash on your balance sheet.
Yeah. Therefore, the finance acquisition that we signed right now with the Sozialen Berlin, and of course, there's some money left. If you want so, we increased a little bit the share of unsecured financing by initiating Sozialen Berlin.
Okay. Understood. Thank you very much. That's from my side.
Yeah. Thanks.
Thank you. Your next question comes from Thomas Neuhold, who's calling from . Over to you.
Good morning. Thank you for taking my questions. Actually I only have two. First, I was wondering if you can give us your view on the regulatory risk in your business. I know you don't have a big exposure to the Berlin city itself, but you have assets in federal state. You have a left-wing government. What are the political trends there? Are those governments thinking about implementing also their own rent regulation? What is your view on this and potentially, but I think it's maybe a little too early, what impact this regulatory risk has on your acquisition and CapEx strategy?
Yeah. Thank you for the question, Thomas. First of all, to make very clear, the current discussion and current proposals around regulation have no impact on our strategy. I think that's the important point to find out or the good news. I mean, our strategy was not to investment in the very large cities in Germany, like Berlin, Hamburg, Munich, and so on. It goes not to modernization projects for existing tenants. Both are from our point of view, really the center of any thoughts about new regulations. Therefore, a TAG strategy is something that also in a world with tighter regulation will be a successful strategy. Therefore, keeping that in mind, from there on, it's just more or less a private opinion. I would personally be surprised if this whole discussion that we have currently in Germany will go off the table without any results.
I personally would not expect something extreme like we currently see in Berlin, with a total rent freeze for the next five years. Leaving aside the debate whether this is in line with the law or not. That we have something around, perhaps new municipal regulations, that we have perhaps some additional rent caps in large cities. Without having any concrete resolution in mind, I think the risk is clearly there. And then again, that's not really our business, not really our investment focus. Therefore, we are, in this regard, really not in a position where we have big concerns that new regulation hits us.
Okay, understood. Last question is on page six, you mentioned that the personal expenses are going up a little bit because you're carrying out more caretaker and craftsman services internally. Can you remind us what is currently the share of these internal craftsmen and caretaker services? What the cost savings roughly are versus market source services and what are your long-term targets? How much you want to do internally, and what do you still want to outsource externally?
Well, the last part of it is clearly the caretaker service. We have currently approximately 50,000 units, which is managed with our own caretakers, and this should be increased to approximately 90% of the portfolio. Where we have just a smaller number of units, that it makes no sense to do this with internal caretakers, but the strategy is very clear to do the very largest part of the portfolio with internal caretakers. I think we have also details there in the annual report. For example, regarding the FFO contribution from the caretaker service. Yes, clearly it's positive. If we talk here about, let's say EUR 400,000, EUR 500,000 per year positive FFO contribution, which is of course a nice number. The main aspect of our internal caretaker service is improving the quality.
Especially if you think about the properties that we buy with higher vacancy rates, that have been managed before in regions where it's really important to have good services for tenants, then the caretaker, who is basically the person that the tenant sees most often, is really an important person. Therefore, improving the quality of the caretaker service, that's the main argument. Then the second argument, but really the second, is the internal or general cost savings.
Okay, thank you.
Thanks. The next question comes from Georg Bamberger, who's calling from Bank of America. Over to you.
Yeah, good morning. I wonder why there is such a high rent in Greifswald of more than EUR 9 per square meter. Is it something special with the units you bought there?
Good question, Georg. This is a kind of student apartment, which is required there. It's not in the sense of fully managed student apartment house, but the rooms that we end up there are very small, and the typical tenant there are students. Therefore, it's a product that completely fits the students, and therefore the per square meter rent is nearly double to what we have normally.
Okay, thank you.
Thanks. Next up, we have Manuel Martin, calling from ODDO BHF. Over to you.
Manuel Martin. Good morning. One question, Martin. As you plan for the second half year, more spending or more rental expenses to decrease vacancy and could this affect the FFO in half year two?
No, not really. The investment are now over the last, I would say, 2 years stable. If you put together maintenance and CapEx, we are around EUR 19. The investments that we are doing basically right now or that we did in the first quarter and second quarter will then lead to vacancy reduction in the third and fourth quarter. It's not the case that we need to increase the investments strongly to achieve any kind of vacancy reduction. You should expect it more or less in line in the next 2 quarters.
Okay, thank you.
Thank you. The next question comes from Kai Klose, who's calling from Berenberg. Over to you.
Yes, hello, good morning. Two questions. The first one is, could you indicate what is the current modernization rate based on the current rate structure, which I think will have to change following the issuance of the promissory note? The second question, if I understood you correctly, that in future you are planning to spend more on particularly in the Berlin region. I was wondering, given the fact that there you have more or less the lowest vacancy rate in the portfolio, that you are aiming for these properties for higher rents? Are you planning to, let's say, do a bit more new construction? Why are you not spending more on a rent basis in regions where the vacancy rate is actually fully available? Thank you.
Thank you for the question, Kai Klose. First of all, regarding the amortization rate, of course, in the unsecured financing that's zero. Regarding the bank loans, that's between 2.5% and 3% per annum. Currently, for us, it's absolutely okay if we have a new bank loan to have even a higher amortization rate of up to 3%, because, look, as you talked with cash flows that we repay with our debt, and if we have zero interest rates, it makes sense to pay a little bit quicker than perhaps two or three years ago. 2.5% to 3% in the bank loans, that's the current amortization rate. Yes, it's true that the Berlin region will be one of the regions, perhaps the region in South Central, where we have the high share of our CapEx and be more concrete location will be Brandenburg an der Havel.
Within this Brandenburg an der Havel portfolio, there's one quarter of the city, which is called Görden. Perhaps you remember that because we've been there at our capital market day, where we had in some streets, or still have high vacancy rates. It is around 10% vacancy rates in Berlin. It's of course, an average of, simplifying a little bit more, 15% in Brandenburg an der Havel, and perhaps 1% or 2% in locations like now in Eberswalde or Strausberg. Therefore, we really now targeting locations and quarters of the city where we still have high vacancy rate. In this case, Brandenburg an der Havel is from our point of view, a very promising point to invest.
Okay. Maybe a quick follow-up on the amortization rate. When you're talking about the EUR 380 million of refinancing of bank loans coming due over time, what are the amortization rate there in new mortgage loans, which you have planned? Are you aiming for a lower one or is it going to be up because rates just to get an indication?
Yeah, let's say it like this. For us, a 3% amortization rate is absolutely no problem if we achieve then really nice financing conditions regarding, of course, interest rates, regarding covenant structure. That's something that we quite often agreed with retail banks. The current cash flow is not really the problem. Therefore, the very simple idea of repaying perhaps a little bit more early in times of interest rates are low, that's what we do right now.
All right.
That's it.
If anybody else would like to ask a question, please press nine star now. Okay, we have another question from Andres Toome. He's calling from Green Street Advisors. Over to you.
Hi. Good morning from my side. I have one question regarding valuation. Is there any particular reason why regions such as Chemnitz and Salzgitter show less dynamic valuation growth versus last year? Also, do you expect these regions to pick up in the year-end valuation?
Yeah. Thanks a lot for the question. Well, also for the second half of the year, we have expected similar valuation guidance. It means just a moderate increase in Gera and Salzgitter. We are very satisfied with the development in these two regions, especially with the Salzgitter region. If you remember what I said about the micro-accidental growth that increased strongly in Salzgitter and is in the meanwhile without this introduction of 3.5%. This was definitely a positive development and also the collection vacancy rate was very strong. Gera is a more challenging market as here, but also here we have very sound underlying fundamentals. To be very honest, Salzgitter and Gera, that's a region or these are cities where transaction volumes are definitely lower and where, especially institutional investors are not that much invested there.
For example, this is the case in our Berlin portfolio or in our Dresden portfolio. Therefore, it should be very natural that also in the next years, this is more a place for, let's say, professional investors, real estate companies like we are there to invest long-term and want to achieve an attractive cash flow, which we're having right now.
Thank you. Just to follow up on that, what are you seeing in terms of the transaction market? Is the transaction activity picking up or a bit more subdued versus the last year in these less liquid locations?
The trend is more that it's picking up. We see more and more transactions in Salzgitter and also in Gera. That's really a general trend looking at our locations, which are mainly B or C locations, that liquidity or that transactions are picking up, but of course, they're still lower than in a location like Hamburg or Berlin.
Thank you very much.
Okay, Mr. Thiel, it looks like we have no more questions today.
Okay. Thank you very much, all, for dialing into our call. As always, if you have any questions left, feel free to contact Dominique from the IR department or myself. Thank you very much again, and have a nice day. Bye-bye from Hamburg.