Ladies and gentlemen, welcome to the Vonovia SE full year results 2023 analyst and investor conference call and live webcast. I am Sandra, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a 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 Rene. Please go ahead. Ladies and gentlemen, welcome to the Vonovia SE full year results 2023 analyst and investor-
Sorry, Sandra. Sorry, Sandra.
Okay, I wasn't sure.
No, no. Thank you. Welcome, everybody, to our call. You will all have a chance, have had a chance to download the presentation. If not, you'll find it, as always, on our website. Rolf and Philip will now present the results, and of course, we'll allow for enough Q&A at the end of the call. There's a few things to unpack, but I'm confident that after this call, you will agree that it is not complicated, only more transparent, and all the ingredients are there. With that, let me hand you over to Rolf.
So thank you very much, Rene. Welcome also from my side. Before we jump into the presentation, I would like to start with a preface on page 4 to frame the discussion and to put things into context. As you probably remember, in our earnings call in May 2022, at the beginning of a different time for our sector and for Vonovia, we made several adjustments, and they all had a common theme. We would prioritize cash generation over profitability to strengthen our balance sheet. Of course, this decision does not come for free. The decision was to sell assets and develop for example, in the development to sell activity without a margin. So now we cannot complain that the margin is missing.
We have been successful with our cash generation for a total amount of EUR 5 billion in 2023, but this cash generation has come at the expense of earnings growth. It was the right decision to take, even though it was clear that the non-rental segment, the value add, the recurring sales, and the development to sell, would be underperforming as a consequence of our preference for liquidity over profitability. So it should not come to you and to us as a surprise that the total adjusted EBITDA and the Group FFO are below prior year numbers. The largest segment by far, the rental segment, continues to perform strongly and is increasingly supported by the relevant long-term mega trends.
Given the rule-based nature of our markets, stronger rents take some time to materialize, but it is obvious that the rental segment has a rock solid and a visible upward trajectory. The gross value decline since peak values in June 2022 is more than 21%. This has been mitigated by accretive modernization projects and rent growth to a net effect of 14%. This magnitude of value losses puts pressure on our LTV, but thanks to our disposal efforts, our pro forma LTV stands at 46.7, instead of almost 51, which would be the number if you would assume no disposals in 2023. Don't get me wrong, 46.7 is still too high, and our work is not yet done. But it should be evident that we are willing and able to fight in a meaningful way against the trend.
So 2023 was not easy, and the financial results will not be ranked high in Vonovia's history book. But we did faithfully execute on the key priorities, which we have set in summer 2022, and we will continue on this path until our debt KPIs are safely backed back in the right ranges to protect our current rating, and for us to be able to think about playing offense again. With this, let me start with the actual presentation, and that begins with the highlights on page 5. First, the 2023 result. Organic rent growth was 3.8%, and there is an additional irrevocable rent increase claim of 1.8% that will be implemented after 2023. There will be more color on this number later in the presentation. So all going well in the rental segment.
Impacted by the underperformance of the other segments, total adjusted EBITDA was down 4% and Group FFO was down 9.3%. The total value decline in 2023 was 10.8%, of which 6.6 came in H1 and another 4.2 in H2, negatively, of course, impacting the EPRA NTA. So total sales volume in 2023 was EUR 4 billion, and of which EUR 3.3 billion are already recorded in the 2023 account. We will propose a dividend of EUR 0.90 for the financial year 2023 to our AGM in May. As was the case in the last 7 years, we will offer you shareholders the choice between cash and scrip. Second, leverage and funding, and financing. Our LTV pro forma of all disposals in 2023 was 46.7%.
The pro forma net debt to EBITDA was 4.15 times, and the ICR was 4 times. We hold a total of EUR 900 million secured loans last year and raised EUR 2.5 billion in new secured and unsecured bank loans. We also extended our current cash flow facility at unchanged terms. And finally, to wrap up the 2023 highlights, we are excited to report that the internal investigation into the fraud allegations against former employees has been completed. It confirms our initial assessment that this had no material impact on Vonovia, and that there are no indication that tenants suffered any damage. We are now examining to take legal actions for damages against involved party, and we will be very resolute about it, believe me.
Moving to the right side on page 4, and starting with our outlook on 2024, it is obvious to us that the value decline is losing steam. And while the transaction market remains still challenging, we are seeing signs of improvement and believe that there is a good chance for a turnaround of the course in 2024. I'm happy to confirm our disposal target for 2024 of EUR 3 billion. This is an internal target we have set ourselves to stabilize our LTV, and it exceeds what rating agency expect from us to protect our current rating. Disposals could include not only plain vanilla asset deals, but also other type of transactions. As we said before, we do not see any chances for another copycat of the Apollo structured venture, and this view has not changed.
However, we explicitly do not rule out other intelligent transactions to the extent that they are beneficial to our shareholders. We are very pleased with the two non-euro bond transactions we have done at the beginning of this year, which gave us an arbitrage over the euro market and allowed us to further diversify our funding sources. There is a more detailed guidance page later in the presentation, but I do want to mention our rent growth guidance for this year, which is 3.4%-3.6% organic rent growth, and more than 2% of additional rent increases claim that will be implemented later, after 2024. There have been a lot of discussions around Group FFO before and after minorities, about cash flow versus earning numbers and much more.
At the end of the day, and at the end of a long discussion over years with you, one thing has become now crystal clear to us: Group FFO is no longer the right metric to run the business. We have therefore decided to discontinue Group FFO as a, and to start reporting one clean earnings metric and one clean cash flow metric side, starting in Q1 2024. The Adjusted EBT and the operating free cash flow will allow shareholders to better understand and measure Vonovia's earnings and cash flow generation, which is more important today than it was ever before. Of course, without a Group FFO, there is no longer a basis for our current dividend policy. We have therefore also implemented a new dividend policy.
We intend to pay 50% of adjusted EBT, plus surplus liquidity from operating free cash flow after accounting for the equity contribution to our yielding investment program. Shareholders shall be offered the choice between cash and scrip dividend. The new policy is robust across the cycle and prevents dividend payout, backed by yield compression. It is much more resilient to adverse macro environments and assures a fully organically funded dividend that adequate accounts for all leakage and proper investment funding. So now let's go down to the individual charts on 2023. Let's start with the 2023 performance review on page 6, which was the most relevant last years, our disposals. At the end of the year, we have come to a total of EUR 4 billion, which is twice the amount we have originally guided.
EUR 3.3 billion of that are already recorded in the 2023 financial accounts. With that, we have been by far the most active player, accounting for more than half of the transaction activities in the German market. Our disposal success in 2023 gives us confidence that we continue that we can continue on our path. We will do so with the same patience as we try to sell the right assets, in the right deal structure, to the right owners, at the right time of point, point in time. And with this, over to Philip.
Thanks, Rolf, and also warm welcome from my side. Let's move to page 7, the segment overview. Rolf already gave you the punchline. Our rental EBITDA was up 6.6%, but the other segments underperformed also as a result to our decision to prioritize cash over earnings. If you look at the four-year average between 2019 and 2022, the non-rental segments accounted for 18% of the total EBITDA. In 2023, that number was only 8%. Put it differently, our earnings in the non-rental segments were down EUR 200 million, compared to a more normal level we have seen in prior years. Of course, you are right when you think that this was not purely driven by our decision to focus on liquidity. Clearly, the market environment played a role, but this environment is changing.
Our investment program is increasing, so is our green energy generation capacity, and this is supportive of our value add business. Condominiums, as you know, have increasingly scarcity value, and the numbers we are seeing are clearly moving in the right direction. The development to sell segment provides us the ability to build a product that is desperately needed. Probably still not a walk in the park in 2024, but here too, it is obvious to us that the widening of the supply-demand imbalance will support this business medium term and help it return to a more normalized level, with a growing contribution towards profitability in the foreseeable future. Page 8 is to acquaint you with two changes we have made to EBITDA reporting. If you look at our 2023 annual report, this is the reporting structure you will find.
The page before was an apple-to-apple comparison to our guidance in 2022 reporting. So what, what are the changes? First, the nursing business has been classified as discontinued operations, as Deutsche Wohnen expects the majority of the business, to be precise, around 2/3, to be sold in 2024. As a consequence, nursing is no longer reported as a management segment, but outside of the core segments. A small part of the asset portfolio, with a segment revenue of EUR 23 million and the remaining EUR 300 million of fair value, for which the disposal is not expected within the current year. That was reclassified into the rental segment. And second, the earnings contribution from development to hold has been excluded from the development segment.
All earnings contribution from development to hold, which accounted for roughly EUR 15 million in the last year, are recognized in the valuation result and therefore outside of the adjusted EBITDA. This change ensures alignment with the IFRS standard on fair value measurement of investment properties. As a consequence, the consolidation line item now only includes intra-group profit losses in relation to our value-add business. In my view, it makes things easier to digest as intra-group profits between two segments as it relates to the development business are not any longer accounted for in the EBITDA number. Now, let's run through the different segments and start with rental on page nine. While the portfolio was marginally smaller than in 2022, rental revenue was up 2.1%.
On the expense side, maintenance well under control, with -4%, and the synergies from Deutsche Wohnen transaction helped us to cut operating expenses fairly significantly by almost 13%, and that was the key driver to operational profitability. Our EBITDA operations margin in Germany is now close to 81%, and the cost per unit is down to EUR 318. On to the key operating figures, and that is on page 10. Year-on-year, organic rent growth in 2023 was at 3.8%, and you can see how the market-driven rent growth has more than doubled. This shows how market rents are actually picking up. The low fluctuation rate has two sides to it. Low fluctuation is a good indicator because it confirms tenant satisfaction, which is a positive, at least in the long run.
At the same time, low turnover is not exactly helpful in the context of rent growth from reletting. So unfortunately, the direction of travel is currently not in our favor because it impacts the speed at which we can capture the rental upside. The fluctuation in 2023 was just shy of 8%. This is the lowest level we have ever recorded. To put it into context, fluctuation was around 11% at the time of the IPO, a very substantial difference. Vacancy rate, 2% unchanged compared to the last year, but also, unsurprising, I would add, as the imbalance between supply and demand keeps shifting even more in favor of those who have the supply. Rent collection remains extremely high, and we also view that as a reliable indicator for affordability.
To be clear, these numbers include not just the net cold rent, but also all the ancillary costs and including heating costs. As a side note, the number of tenants who reach out to us in the context of our hardship management has been steadily declining since 2021, which is another good indicator that actual affordability differs from the public narrative. Let me say a few more words on affordability because it, yeah, remains to seem to be a concern among some investors. Facts actually do tell a very different story from the public narrative, which keeps suggesting that rents are becoming unaffordable. We put together some data, and for those who are interested, have a look at page 66 in the appendix.
In which either way, whatever way you, you look at it, rents in our portfolio remain very affordable, especially compared to most metropolitan areas outside Germany. Of course, there are always exceptions, and some people do struggle, but for those cases, we have our hardship management. Here too, however, the number of tenants applying for is coming down, as mentioned. Finally, maintenance. You can see how we have been managing capitalized maintenance downward with a view towards optimizing our liquidity. Moving on to page eleven, on the EBITDA from value-add. The EBITDA decline is largely driven by the challenges in our craftsman organization, as a direct result of our reduced investment volume. Further pressure came from increased cost for material and energy.
Compared to the four-year average between 2019 and 2022, the Adjusted EBITDA in 2023 was down 27%, so you get an idea about the catch-up potential in a more normalized environment. The reorganization process, by the way, for our craftsman organization is well underway, and we will get this back on track in the running year. Increasing investment volumes at attractive returns are, of course, a helpful ingredient. On the positive side, external revenue was up and mostly driven by energy and photovoltaic installations. You might be interested in page 45 in the appendix, where you can see our PV targets. We are well underway and have now brought forward our target of 300 megawatt peak already by 2026. This will be a higher capacity than the 190-megawatt peak in Germany's largest solar plant in Brandenburg.
So quite a sizable number. Page twelve, for recurring sales. We sold 1,590 units in that business with a Fair Value Step-up of 33%. 40% of that volume, interestingly, came in Q4 alone, which is probably indicative of the positive momentum we have in this segment. We are definitely seeing more interest in this product as condos, I mentioned that before, have a scarcity value. EBITDA contribution in 2023 was more than 40% below the average of the previous four years. A simple back of the envelope calculation suggests some EUR 50 million of more EBITDA if we manage to come back to the level of around 2,500 units per year at normalized margins.
For now, however, we focus on this segment on cash generation over price optimization, so not so much a topic for the running year in terms of additional profitability. Finally, the development segment on page 13. As I pointed out earlier, development to hold is no longer part of this segment, but recognized in the valuation result and therefore outside the adjusted EBITDA. In a market where you have a shortage of the product, development continues to be a very attractive business. After all, we had a gross margin of almost 14% last year. The main problem really was the very low volume. Given the market fundamentals, however, we also see this segment making a return in a more normal environment. The planned special depreciation law and the KfW help to buy schemes are expected to provide further support on the demand side. Page 14 on valuation.
And here, judging by the conversations we have had in recent weeks and months, this might be one of the most anticipated slides of the deck. I'm not sure the outcome is very surprising, though. In line with our expectations, the value decline is slowing down. After H1 with 6.6%, we saw another 4.2% in H2 for a combined value decline of 2.8% in 2023. This puts the portfolio at a forty, s orry, a 24.2x net cold rent multiple or 4.1% gross yield. Those numbers are, of course, on the basis of rent levels today, not tomorrow, further down the road.
To show you what I, what I mean, if you, if you take the 4% gross yield in our German portfolio, that is essentially based on an in-place rent, total in-place rent of EUR 2.8 billion. If you take comparable market rent from Empirica Value AG in terms of long-term upside, this is almost EUR 900 million higher, that translates into a long-term reversionary yield of almost 5.5%. If you look at the chart on the lower left-hand side, you see how the gross value declined since peak in June 2022, now comes to 21.2%. Rolf already mentioned that rent growth and creative modernization investments have seen a net impact or has resulted in a net impact of 40% in our book.
For those who view this more in terms of yields and discount rates, we have seen about 70 basis points of yield expansion and around 90 basis points increase in the discount rate, the latter better capturing the higher market rent growth trajectory. On page 15, we have put together some clippings from market observers to support that view that we have of a stabilizing environment and an improving sentiment in the residential market. I think no point in reading them out, but the tonality of all of them is pretty clear: things are, well, slowly getting better. Page 16, the NDA is probably not so much a focal point as it used to be, but of course, still a relevant KPI to us.
Year on year, we saw a decline of 18.5% per share, mostly driven by the value decline of our investment properties, and that puts the shares at a discount of 43%. If I look at last night's closing price, looking at today's price, it has even expanded further. Let's talk about our investment program, and that is on page 17. As you are aware, our Yielding Investment Program includes three buckets: Optimized Apartment, this is apartment renovations after tenant churn; Upgrade Building, this is investments in decarbonization and building modernization; and Space Creation, this is new construction for our own portfolio. Space Creation is largely on hold, as you know, as we are essentially only finishing the projects that had already been started.
This will require, in the running year, another spending of roughly EUR 300 million, so slightly less than last year. The focus for the time being is clearly on the other two. Our optimized apartment investments deliver net initial yields of around 10% and the main problem we hear is really that fluctuation is so low, we are not getting back as many optimized apartment opportunities as we would like to see. Upgrade building is important not just for the overall quality of our assets and their capital values, but also for the climate path. We see high single digits and low double-digit IRRs for our projects, and in the case of heat pumps, even net initial yields of around 10%. With regards to development to sell, to be clear, this is not included in our investment program.
We manage development to sell as a self-financing entity for, it's around EUR 3.5 billion capital stock. What does that mean? New projects must be funded from proceeds from development disposals, and this also applies to the around EUR 700 million to be invested in 2024 to finish projects currently underway. Page 18 is the well-known page on our debt structure. There's one number I keep repeating. The average interest rate is still at 1.7% from almost 7-year tenor, compared to 1.5% at the end of 2022. Unsurprisingly, this number is increasing, but I think it's worth mentioning that it is increasing less, far less rapidly than most people anticipated. So here it pays off that we have a balanced and long-term maturity profile.
The table on the left-hand side of page 19 shows the debt KPIs as reported for the end of 2023 for LTV, net debt to EBITDA. We have also included them on a pro forma basis for the impact of the disposals we have signed, but which have not yet seen closing. On that basis, LTV was at 46.7% and net debt to EBITDA at 15.3 times. On the right-hand side, you see the bond covenants, our latest KPIs and the headroom we have, all very comforting. Debt KPIs, though, remain at elevated levels, but are under control. As Rolf mentioned, we will continue to focus on cash generations through disposals to move quickly back into our comfort zone and our target ranges.
Page 20, a bit more detail on the financing side and our activities last year, where we have rolled over EUR 900 million with existing lenders. We have signed 1.1 billion new secured loans and another EUR 800 million unsecured loans, and that for an average interest rate inside 4%. In addition, we agreed to EUR 600 million bridge to capital markets and extended our revolving credit facility slash commercial paper program by 2 years, and that in unchanged terms. We've been also very active in 2024. You probably have seen the two non-euro bond issuance.
We consider that not only good for diversification of funding sources, but we have also been able to make a nice arbitrage of 30 basis points for the sterling and 10 basis points for the Swiss franc, and then obviously after accounting for the cost for the currency hedge. All in all, we have seen risk premia in the unsecured market clearly moving in the right direction. Important, our pro forma cash position, that is EUR 3.2 billion, and that is essentially EUR 1.4 billion cash on hand at the end of 2023. There's another EUR 0.9 billion of loans which have been signed but still undrawn, and there is another EUR 900 million disposals signed but not closed yet as of early March 2022.
And by that numbers, you implicitly see that we have also made some progress in the first months on the disposal side. What is important that this cash volume is sufficient to cover all our unsecured maturities until Q3 2025, and I remain very focused to cover the remaining maturities in 2025 anytime soon. Let's move to page 21 for the guidance. The story of this page is that we delivered in a challenging environment. Strong performance in the rental segment, however, was not enough to fully compensate the decline in the non-rental segments. Higher interest costs and higher taxes due to sales put further pressure on the Group FFO. Organic rent growth was 3.8%, and there are another 1.8 of additional rent increase claims with implementation after 2023.
Recurring sales were well below the prior year, but Q4 was encouraging, as I said, with 40% of the total volume in 2023. Last but not least, also the SPI gets sometimes overlooked in light of the other guidance numbers, but a 111%, primarily driven by lower primary energy needs for new construction and higher share of senior-friendly apartment conversion. Yeah, and last but not least, better performance on CO2 reduction based on updated energy performance certificates. That clearly is a positive in terms of outcome. Let me give you some context also around our dividend proposals for 2023, and that is on page 22. Clearly, there is probably nothing as controversial as the dividend.
Wide range of expectations and preferences among our shareholder base, and it ranges between no dividends to full dividend and anything in between. It is equally clear, though, that the no dividend camp is smaller compared to last year. We, and you know that, consider the dividend really as a key cornerstone to our equity story, and that is really also, given the robustness of our rental cash flows, and especially in more challenging times, long-term reliability is an asset. But while the preference for a dividend payment has increased in recent months, part of our investment base still remain concerned about leverage, and we clearly take note of this. And as you know, and I think as we have pointed out, very clearly, capital discipline also remains very, very much of a priority for us in 2024.
Against that backdrop, what we have decided as a management board, and that is backed by the supervisory board, is to propose a dividend of EUR 0.90 to our upcoming shareholders meeting in May this year. So up 6% compared to last year and similar to previous years, previous 7 years, actually, already, the scrip option will be available to our shareholders. But again, make no mistake, the current environment remains challenging, but conditions have improved, and that is evident in rent growth, in development inflation, interest rates, and, also transaction market. A full cut, therefore, does not appear to be warranted and would be very contradictory in light of the clearly improved environment. Similarly, the full dividend would send the wrong message about capital allocation and capital discipline.
The anticipated cash out will be around EUR 400 million, and that is assuming prior years take up ratios on the, on the scrip, and I consider the economic impact of the cash portion to be very manageable in light of our capital structure. Let's move to page 23. You're all familiar with the background. Following the fraud allegations against former employees, we have mandated the law firm Hengeler Mueller and Deloitte to carry out an internal investigation. We are extremely pleased to be able to report to you that today, that this internal investigation has now been completed. It was very extensive. During the forensic analysis, a large set of data has been evaluated that included several million emails and included hundreds of individual business processes.
This was followed by numerous individual interviews and expert sessions to further support the analysis and to gain a broader understanding of the facts. As an injured party, we have also recently been granted access to the prosecutor's file, 8,000 pages in total, and we have included that information obtained by law enforcement also in our analysis. The investigation has confirmed our initial assessment, that Vonovia is the injured party, not a defendant. Most of the misconduct took place several years ago and ended in 2022. The two main suspects left Vonovia in 2019 and 2022, respectively. The misconduct was limited to a small number of former employees at technical operations level and subcontractors in the context of heating systems.
The contracts that are currently the subject of the investigations only amount to approximately 50 basis points of Vonovia's total order volume. In nominal terms, you're talking about an amount that is de minimis, in my view, and the actual damage will only be a fraction of those 50 basis points. Last but not least, there are no indications, and that is very important as a message, that tenants have suffered any damage from these fraudulent actions. Let me be very clear here, we have demonstrated zero tolerance policy regarding such misconduct. It's the tone of the top which counts. So first, personnel-related actions have been taken, and none of the accused persons are still working for Vonovia. Second, business relationships with the accused subcontractors, as you would expect, have been terminated in full.
Third, while there is no doubt about the functionality and the effectiveness of our internal control system, we have further refined our systems and controls in place to monitor the relationship with subcontractors, is to even better protect Vonovia against such criminal conduct. But I'm afraid the truth is that there's never a 100% guaranteed protection against criminals acting in collusion. Fourth, we are in the process of further strengthening our ordering process by making it even more system-based. And last but not least, we are reviewing legal action for damages, damages against involved parties. We have, for those who are interested, provided a bit more information on our homepage. If you have further questions, don't be hesitant to reach out to Rene and his team. And with that, back to you, Rolf.
Thank you, Philip. This takes us to the second part of today's presentation, and it starts with our disposal targets of this year and the market assessment on page 26. We said in our nine months call, our goal for this year is to sell EUR 3 billion in 2024. This target is more ambitious than what rating agency expect from us to safeguard our current rating. Primarily, these disposals are expected to come from different packets of assets that are meant to be sold anyway. So the non-core, the development to sell, the recurring sale, and the nursing. Please note that the fair value amounts shown on the different baskets are based on our portfolio clusters, especially the MFR and the recurring sales buckets are, by far, definition, quite long term. So please do not confuse these amounts with an overall sales target for whatever period.
The point of this chart is to show that we have various buckets with different products and enough assets to make us confident that we can achieve EUR 3 billion in this year. In addition to these five buckets, we are also looking at additional opportunistic disposals opportunities on the remaining portfolio. This should include, but not only plain vanilla asset deals, but also other type of transaction. As we said before, we do not see any chance for another copycat of the Apollo structured JV, and we have explained why, and this view has not changed. However, we explicitly do not rule out other intelligent transactions to the extent that they are beneficial to our shareholders. We can all agree that selling EUR 3 billion will not be a walk in the park.
However, the transaction market is improving, and the main reasons that make us confident are shown on the left-hand side. Better macro backdrop, accelerating rental costs, initial interest rate shock of buyers is wearing off. Reservation numbers for condos are improving and are back on the level before the crisis. Interest and engagement, including foreign money, are improving. And of course, our own track record and M&A expertise, and not to forget, the supply-demand gap is widening, and we own an increasing scale asset type. The chart on the right-hand side is interesting. This is JLL research data, and it only includes JLL-affiliated transactions. But given JLL's meaningful role in the market, it is probably safe to assume that the general trend overall is not so different.
So while the number of large transactions has declined by around 50% and more, this number of small deals below the general order scheme has fallen only by 22, and therefore much less than the larger headline transactions. Of course, the overall, overall volume was lower than in the past, but this market is still vivid. Allow me to explain the organic renting costs in connection with the additional rent increase claim. This is page 27. The local comparable rent, the OVM in Germany, is determined by the Mietspiegel in most locations. It defines the rent level in EUR per sq m that landlords are allowed to charge for the specific apartment. The timing for implementation of this rent cost, in accordance with the OVM, is subject to the Kappungsgrenze. This is a maximum increase of 15% or 20% in some markets over 3 years.
The recent allocation in OVM costs now has created a bow wave of rent costs that comes with a delayed implementation. We call this additional irrevocable rent increase claim. This is a staggered rent increase that is guaranteed by law and linked to each specific apartment and tenant. The relevant maximum Mietspiegel figure OVM level is already marked in our SAP operating system, and the remaining step-up will be automatically implemented immediately after the restriction period has elapsed. Please note that the reported percentage value of the additional irrevocable rent increase claim refers to the total cumulative value of the representative point in time that will be realized in the subsequent year. For the end of 2023, this number was 1.8%, and we expect it to grow to more than 2% by the end of this year. With this, back to Philip.
Yeah, Rolf already gave a sneak preview, if you will, on the new KPIs that we will introduce starting this year. We are now on page 28, by the way, on the presentation. Let me give you some additional context to our decision and that point, which has been usually discussed in the run-up to today's call. We made certain adjustments in response to the changed environment, including a revised capital allocation, a stronger focus on cash flow generation and the implementation of the joint venture structures.
As a direct consequence of these actions, it has become very clear to us that our leading financial KPI, the Group FFO, is no longer adequate to manage the business or to reliably manage our performance. Group FFO used to be the best proxy for recurring cash earnings, but at the end of the day, it's a hybrid metric that has both earnings and cash flow elements. The most striking examples are that it excludes the cash flow benefit from recurring sales, and that it excludes the cash flow element from the development to sell business. And last but not least, also the cash leakage from capitalized maintenance. We have therefore decided to retire the Group FFO and replace it with the adjusted EBT to measure earnings.
and with the Operating Free Cash Flow as a new KPI to measure liquidity generation from our core business to fund investments, but also distribution to shareholders. On the next slide, I will give a bit more color on that. Moving to page 29, here we show you the Group FFO and the new Adjusted EBT in a side-by-side comparison. And as you can see, they are both based on the Adjusted EBITDA, so the starting point has not changed. The difference in the Adjusted EBT compared to the Group FFO is highlighted in gray, and it basically includes three line items. First, the adjusted net financial result. This is essentially the same as previous FFO interest expenses, but has, in my view, the big advantage that you can fully reconcile that number to our IFRS numbers.
So it's more transparency, which hopefully resides in more, robustness, credibility of the number. Depreciation, is the adjusted EBT, is an earnings number. We do not account for depreciation to the extent it relates to the impairment charges from VNTR. To be very clear here, of course, the asset base will continue to be valued at fair value, like in the past. And the last item, consolidation. Since the development segment now only includes, development to sell earnings, there is no need to show any consolidation effect in this line item. Again, I think it's, it's increased transparency. The only element left is the deduction of intragroup profit, or the addition of intragroup losses, from, the value add segment.
I clearly consider the adjusted EBT superior to the FFO measure, because it's a transparent non-GAAP measure that allows full reconciliation with our IFRS, IFRS numbers, and it's the most adequate metric to determine enterprise value. As you can see in the 2022 and 2023 numbers, the adjusted EBT is not radically different from the group FFO, but the calculation provides a better measurement of our recurring earnings capacity across different segments. You can also put it slightly different. What we are essentially doing is swapping depreciation with income taxes, and if you make the math, the EBT is structurally roughly EUR 100 million higher than our discontinued group FFO. To be also very clear, we give guidance on the tax.
You see that later in the slide deck, 3%-5%, that translates into roughly EUR 130 million of cash taxes for our operational business. On top, you certainly will see some additional taxes, predominantly driven by recurring sales, which we do not guide, as it's entirely depending on the volume and the type of assets and, the type of company in which that asset is being held, we actually do sell. So more challenging to give precise numbers on that. Page 30, we show how to calculate the operating free cash flow. This is a new metric, and so far, that we had no internal KPI to measure the full cash flow performance of our core business. Again, this is, in my view, a very significant step to increase transparency.
In the last 18 months, we had a lot of discussions around what is it actually, what our business is producing in terms of cash. So you can consider that one lesson learned from the crisis. How is, is that calculated? The operating free cash flow is based on the adjusted EBT, and it accounts for the depreciation. This is a reversal of the non-cash effect that we have in, in the adjusted EBT. Capitalized maintenance, that as a reminder, the maintenance that is capitalized under IFRS is, not part, of the EBT, but also not part of the investment program, because that does not come along with any yield. Cash taxes, to the extent they relate to our core business, is being deducted, and the book value of the sold assets in recurring sales.
To be clear, this refers to recurring sales only. It does not include non-core or other disposals. So the benefit from the disposals in Dresden last year, or to Berlin in 2022, or the JVs with Apollo, sales to CBRE, all of that would not be rightfully included in this calculation, because we want to measure the recurring cash flow. Net working capital changes, that is predominantly development to sell. I was mentioning before the recycling of inventories. So what we invest, we want to see to be financed by proceeds from disposals. And last but not least, also the cash dividend paid to minorities, and that, to be very clear, includes the joint ventures we have done with long-term insurance money managed by Apollo.
The letter, for those who are interested, I expect to account for roughly EUR 100 million in 2024, and that obviously is for both joint ventures. Again, the introduction of the operating free cash flow is a major improvement, especially in the current environment, because in contrast to the Group FFO, it includes the full impact in cash terms from our recurring sales and development to sell business, and the cash leakage from the capitalized maintenance and minorities. So it really measures the recurring organic cash flow generation before utilizing that for yielding investments and distribution to shareholders. And to be very clear, going forward, this will form part of our regular reporting package. I also would like to hint you to page 40 in the appendix.
There is an overview of the new KPI, including historic numbers. It probably also gives you a better grip, because part of the dividend is also based on that metric, how to make the math. When you carefully listen and look at the disclosure, I think we've basically given most of the ingredients to have a very firm grip already today on our expectation of the operating free cash flow for 2024. Now, let's move to page 31. That is the guidance for 2024. We had already given you a first indication with 9-month figures, and hopefully, you will find the data and information on this page helpful in forming your estimate for the current year.
Now, 2024 rental revenue will suffer from asset disposals of 2023 and 2024, but it will benefit from the rent growth. On balance, we expect it to come out at around EUR 3.3 billion, so comparable to last year. We estimate the organic rent growth to be between 3.4% and 3.6%. Rolf already mentioned that. And the additional rent increase claim will grow to a total of more than 2% by the end of this year. Adjusted EBITDA, we do see that in the range in between EUR 2.55 billion and EUR 2.65 billion, and the adjusted EBT between EUR 1.7 billion and EUR 1.8 billion. As always, we also have calibrated the new target for the SPI to come out at an overall target level of 100%.
In addition to the guidance for these KPIs, I would also like to give you some additional context and color around the 2024 guidance, and that are also many ingredients for getting the better grip I was mentioning before on the operating free cash flow. As mentioned before, we target at least EUR 3 billion of gross proceeds from asset disposals. Yielding investments will be around EUR 1 billion for our optimized apartments, upgrade building and space creation programs. The latter is accounting for roughly EUR 300 million. Development to sell, which was cash flow negative in the last year, we do expect to be cash flow positive, and with that, also the development of the net working capital to be cash flow positive.
Recurring sales, we actually do expect that this will overcompensate the cash leakage from capitalized maintenance, with capitalized maintenance expected to be slightly above 2023. And as a side note, actually also overcompensate the cash leakage if you were to account for the additional tax from recurring sales. And finally, cash taxes for the rental and value-add segments, they are expected to be broadly in line with 2023, so that would be around 3%-5% of rental income. If you take the midpoint, it's roughly EUR 130 million. And, yeah, to complete the picture, and I mentioned it before, with the Apollo JVs, expect roughly EUR 100 million increase in dividends to minorities.
And, with that, I think you, you have a very good set of guidance to also form a view on our expected cash generation for the running year. And with that, back to Rolf.
One consequence of the new KPIs, that we need a new basis of the dividend policy. We have sent the FFO on retirement, so this I like very much. So I know that the view on our dividend varies quite a lot these days, but I want to say loud and clear that Vonovia considers a sustainable dividend based on a highly robust operating business, to be a key element of our general equity story. Our new dividend policy for 2024 and beyond is: we intend to pay 50% of the adjusted EBT, plus surplus liquidity from operating free cash flow, after accounting for the equity contribution to our yielding investment program. To minimize volatility, the surplus cash will be calculated on a 3-year average. Shareholders shall be offered a choice between cash and scrip dividend.
We believe this policy has several advantages. The target payout ratio based on Adjusted EBT is expected to result in a very robust dividend to allow adequate returns from the core business, plus additional benefit that surplus liquidity is returned to shareholders in the case it cannot be allocated to sufficient yielding investments. The new policy is robust across the cycle and prevents dividend payout backed by yield compression. It is much more resilient to adverse macro environment and assures a fully organically funded dividend from liquidity that accurately accounts for all cash leakage and proper investment funding. Before we go to the Q&A, let me wrap up our presentation by quickly repeating what are the key points. We faithfully executed on our promises, and that has a negative and positive consequence.
The promise was to focus on liquidity and to sell assets to work against the value chain decline. The negative consequence is that earning in the non-rental segment took a hit and underperformed. The positive consequence is that we have generated a total cash flow of almost EUR 5 billion. That enabled us to mitigate the pressure on our balance sheet that has been subject to a cross-value decline of more than 21%. As a consequence of this disposal, our LTV is 46.7, instead of those or too close to 51, if we would not have done it. Our working on stabilizing the balance sheet is not done yet, and we have more work to do in 2024, until our debt KPIs are safely back in the right range to protect our current rating. But this happens in a gradually improving environment.
What is equally important is that we take comfort in not knowing that our rental business is stronger than ever, and that the non-rental segments are starting to come back. So we were early in terms of adjusting to the new environment, and we will definitely be among the first ones to turn the corner when the market has transitioned into a more normal environment. With this, back to Rene.
Thank you, all. Thank you, Philip. Sandra, can you open up the Q&A for us, please?
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the 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. Questions on the phone are requested to use only handsets and eventually turn off the volume of the webcast. Anyone with a question may press star and one at this time. The first question comes from Charles Boissier from UBS. Please go ahead.
Yes, good afternoon. I have four questions. First on dividend. Given what you mentioned, that development to sell cash flow and net working capital are expected to be positive, is it right to summarize that the surplus liquidity will not contribute in a negative way to the dividend? And that basically the 50% EBT should be considered as a floor for the dividend in 2024? Thank you.
Clear, yes. The 50% of EBT is 50% of EBT, irrespective of the development of the surplus liquidity. So based on our guidance, you can expect, if you take the midpoint, EUR 850 million of dividend, divided by our current stock count of 814, that is, a per share dividend, roughly 20% above this year's proposal. And if you make the math with all the ingredients I've given, and the kind of 3-year averaging you do, and you have all the ingredients on the on page 14, you will also quickly realize, that is, that it is very likely that you will see some excess liquidity which will in addition return to shareholders with the dividend next year.
Okay, thank you, very clear. And relating to it, and linking to the topic of debt. So on slide 40, you show 60% equity contribution for the investment program. I mean, is it fair to deduce that you consider 40% LTV to be the right leverage for the company in the long term?
It's a good point you're raising. Look, we want to be on the conservative side in terms of funding the investment program. And obviously, you should not look at yielding investments with a 100% equity contribution, but you should look at yielding investments with an appropriate capital structure embedded. And here we have opted for the conservative end of our LTV target of 40%-45%, and that's why implicitly assume that of yielding investments, 60% will be funded by equity, or in other words, by our generated liquidity.
Clear. Thank you. And still on the topic of debt, you mentioned the importance of the debt KPIs that continue going into the right direction. But one of them that's been deteriorating is the ICR, going from 5.5x to 4x, within the year, and your sizable debt maturity in 2025, so it may be further under pressure. Where do you see the ICR actually troughing on your projections?
If things move according to plan, it's troughing this year. We have seen certainly the biggest hit last year. But there will be only little movement expected this year. So let's call it in a range of 30-40 basis points in that area. And given that we are looking to improve EBITDA and expect better contribution to EBITDA, in particular, also delivered by the non-rental segments, that obviously will help that KPI. Which is why, even on the basis of a more mediocre medium-term outlook, I do expect that number to stabilize.
Okay, very clear. Finally, on disposals, Rolf mentioned doing other intelligent transactions, I think was the term. Is it possible to provide example of the type of structure that you would be contemplating? And still on disposal, if I may, on nursing home, I think you moved to the piecemeal approach, and with the 20% negative evaluation you've just taken there in healthcare. What is your expectation for disposal of this portfolio? How much volume do you expect to sell from the nursing portfolio this year? Thank you.
So take for nursing first. It is Deutsche Wohnen who is responsible and took the decision, so that's why we are more talking here as a shareholder. I think Philip has given you a guidance a little bit on this, that he says actually one third of it will probably not be sold, as we understood, this year. But the rest will be probably sold. Coming to your other question, I don't know the structure. I just wanted to make sure that a copycat of the Apollo is excluded, and we have done it before. But just to sell assets for assets against cash is probably also a little bit not intelligent enough. You know, our joint ventures, you know different structures that we are talking in Sweden.
That's why I think we just want to be clear that nobody thinks that we only sell individual assets for individual cash.
Let me, let me just add on the 200, roughly EUR 200 million of additional disposals we did year to date. There included is also a bit sold by Deutsche Wohnen, in the nursing space, accounting for 5, sorry, for EUR 50 million. So it's a small package, but that piecemeal approach is, is progressing.
Great. Thank you very much.
The next question comes from Jonathan Kownator from Goldman Sachs. Please go ahead.
Hi, good afternoon, thank you for taking my question. If you come back on organic growth, please, I just wanted to double check something. So you've guided a slightly lower amount of 3.4-3.6% next year, but obviously you have this additional 2% that you're talking about. So to help us understand how this is going to go forward from there, given what you have told us, so that 2%, is it fair to assume that that's effectively gonna be captured over three years post 2024? And is that gonna be added to organic growth, so 0.66 effectively, or 0.6, added to whatever organic growth would be from 2024 onwards? And also, that effectively, because you're increasing modernization CapEx, how is the modernization component going to increase?
Have you reached a trough effectively in 2024, or do you expect that number could continue to fluctuate downwards before it goes upwards? That's the first question. Thank you.
Which are basically two questions. Thanks, Jonathan. Look, on the last point first, if I look at the guidance of 3.4%-3.6%, rough numbers assume a 50/50 split between market rent growth and investment-driven growth a nd yeah, that gives you a good indication for investments that always comes with a certain delay in the numbers because it takes time to execute. On your first question, at additional rent growth, that really relates to the so-called Kappungsgrenze. It's legislation we have in Germany, that you cannot increase the rent by more than 20% over a three-year time horizon, respectively, 15% in tight markets.
And therefore, that additional 2% is really going to be realized over the three-year time horizon. But to be also very clear, in each and every year, in the organic rent growth, is a certain portion of that delayed implementation. Yeah. We also had that, additional rental growth, rental growth claims, last year, and part of that is now being moved into realized also cash effective.
Okay. Sorry, just to had a slight question on the- s orry, on the operating cash flow. I know you're not—you haven't given any new guidance, but just to clarify, so I'm just going back to the last slide 40, apologies. But, so the development to sell the working capital, which was quite negative in 2023, I don't know if you can explain that, but, so that should be, y ou said that should be positive now, or at least zero. I think you've provided dividend paid to JV minorities, that's gonna be EUR 100 million higher. Now, just one quick question also about taxes. So just to understand how we should think about the taxes for the recurring sales business. Are they included in your operating cash flow?
Are they not included in your operating cash flow? Yeah, those would be the questions. Thank you.
Yeah. Taking again your last question first. I mean, all cash taxes, which refer to our core business, are included in the operating free cash flow. So the cash taxes on recurring sales, but also the cash taxes on development to sell, form part of that. But let me perhaps take the opportunity to actually run you through that page 40, because that's, I think it's important. And looking at the run-up to this call, I think it requires some clarification, if you will. Now, the EBT, as you know, we've been guiding for 2024, so that's really the starting point.
You can certainly expect that the depreciation is a fairly firm number, because it's on VA and TA, so that will not really change. We have been guiding that capitalized maintenance, and again, I'm on page 40 in the slide deck, that this will moderately increase. On cash taxes, I have said 3%-5% on our operations, which is translating at a midpoint, roughly at EUR 130 million. And we were hinting towards the pickup in recurring sales, which translates into more cash we will generate. Let me give you one additional guidance.
If I look at what we expect from recurring sales, and I also include the cash taxes for recurring sales, that will still be more than what we spent on capitalized maintenance. So you can in your mind, you can kind of looking at the three items, put a zero to that. And yeah, development to sell, you rightly summarized that, that was cash flow negative last year. We expect that to be cash flow positive this year. And in terms of dividends, last year, you have not yet seen the impact really, of the Apollo JVs, and that for the next year is increasing to a number, let's call it EUR 150 million.
Plus EUR 100 million roughly, which I expect for dividend payments to Apollo based on the EUR 2 billion of equity we have been receiving.
Okay, thanks. So sorry, just maybe one last clarification. So you've got there EUR 124 million of cash taxes for 2023. But if you look at the taxes for the group income taxes from your FFO previously, so that was EUR 118 million. Can you perhaps just clarify the difference on that, please?
I need to follow up on that. I don't have the bridge on top of my head.
Okay, but is there, like, a main reason for that, or?
Not that I know.
Okay.
But Jonathan, just to help you, because you also argued why the, the development to sell working capital should, should be at least zero, if not possible, positive. I think, Jonathan, this is clear that we stopped the development projects and we didn't start new projects. So that's why we were in a phase where we investing more than selling. Now, we are coming to a phase where we are selling more than investing, because just it took a time. So that, that's why it's obvious that cash flow from the development to sell will be positive in the future, because there's nothing new or not enough new coming in the pipeline and more is sold. So relatively easy.
Okay, very clear. Perhaps one thing then, just on the operating cash flow. I mean, we've been through quite very clear detail. I think that's helpful. If you're able, in the future, to provide a guidance on operating free cash flow, I think that would help everyone. And appreciate there's a few moving parts in that, but maybe you can just use a range wide enough to help us. I think that would certainly help.
Yes.
Thank you.
Just to give you, just to give you one answer to this, actually, because we are looking on the cash flow on the, the three months, three years average, looking backwards, the cash of the existing year, which we are running, which are the only unknown, is relatively less relevant. That's why we are looking on the three years average, that everybody can actually do the prognosis. But we take-- we appreciate your point. This is probably new. It was also new for us, and it will become very usual, and you will see that it is more predictable than the old at 70% of FFO.
Very clear. Thank you very much.
The next question comes from Bart Gysens, from Morgan Stanley. Please go ahead.
Yeah, hi. Rolf, you stated that the valuation decline is losing steam, and Philip, you talked about the clearly improved environment. I just want to dig a bit deeper into that, what the basis for that is, right? Because the net initial yield on your portfolio is only 3.1%. We see no major deals in the open market. Some of your peers are preparing the market for potentially more capital value declines, suggesting that maybe we're only halfway through the correction. We see Peach Property selling EUR 440 million at a net initial yield, double at 6% in North Rhine-Westphalia. Maybe that's a different quality, but and maybe they're a distressed seller, but of course, you're competing with that, right? Buyers can buy those assets as well.
So, can you just provide a little bit more color on what your basis is to be so confident that we're turning the corner, and that therefore you then can pay a dividend, should pay a dividend, increase the dividend, rather than actually, you know, go for the prudent approach and deleverage first? Thank you.
So we know the Peach portfolio very well, because in essence, partly, it was owned by Deutsche Annington in the past. So let me give you an example. This is probably, if you compare our average and probably our best portfolios, it would be like comparing South Chicago with New York, Manhattan. So in Essen, and we have talked about this, this is a city with the biggest split in quality. In the south of Essen, you have really good portfolio, while in the north of Essen, there's buildings where I would assume, to be very clear, it's difficult to sell for any price. So, and probably you, you're invited, and we will guide you through the parts of Essen in the north, which is close to a no-go area.
So that's why the difference is very big, and that's why I think applying yields and comparing it to average portfolios, you ignore completely the quality of the portfolio. And of course, yes, there are buyers which are only and purely looking for yield, and these buyers are buying our non-core. We have also in our non-core portfolio, we have yields in the same magnitude. So yes, these people are buying assets, and they know that we are—they will have probably issues in the future. And there are others who have understood that real estate is not only the initial yield, but there's also a cost element in it, and a safety element, and no maintenance, and refurbished, and ESG criteria, and these assets come for a different price.
So a nd another remark for distressed assets, which is very important to understand, there is a reason where you have to be very cautious. Because if you want to buy distressed assets, you are assuming that you'd give a big-- that you'll get a big discount to the book value. If you do so, you have to be very sure that the seller will not go into bankruptcy in the next 10 years. Because it is clear that the insolvency administrator, according to German law, has the right to reverse the transaction, if you are buying below book value. And this means that you can find yourself without the assets, because he can reverse it. But on the other hand, the money you have paid will be part of the insolvency estate.
So, and this is very difficult to win, or nearly impossible to win against it. And so this, I think, is one big reason why you see it is so difficult to sell distressed assets before insolvency. So what we will see, we have to see the insolvency first, and then the opportunity comes. In jumping into an insolvency before insolvency case, even if this is a stable player, you are risking to lose everything, and everybody who is an intelligent buyer has to acknowledge it. So with Vonovia, this is not an issue.
That's why we can sell our non-core. But for all the other players, it's an enormous issue, and that's why we as Vonovia, we would not go to buy this type of asset because the risk for the next 10 years is not calculable. So that's why I advise everybody who wants to buy this asset, to be very sure who is the seller.
Okay. That, that's clear. Thank you. My other question was on your guidance. You, you're moving away from FFO to an adjusted EBT guidance. And look, Group FFO was suboptimal for a variety of reasons, but partly because it was pre-minorities. And we've been asking—many people have been asking for a post minorities number, right, as minorities are going up. But now you're again guiding, mainly you're providing some color around it, but again, the EBT number is pre-tax, pre-minorities. Why not just provide a cleaner bottom line number, after tax, after minorities, like so many other companies? Thank you.
Look, but I actually don't know how I can be even more transparent than I've been. Because I think what accounting-wise is the minority portion on EBT, I mean, we will report that as part of our disclosure, but what is the value add really, for guidance? I mean, this is the portion of profitability accounted towards minorities for Deutsche Wohnen, which has no cash impact, as you know, because we're not paying a dividend. So essentially, I mean, expect that number as part of our package, but in terms of guidance, I think what is happening on the cash side is far more important.
And if there's something we have learned in the last 18 months, that is, that cash counts. And here, I've been very explicit, in saying, that roughly EUR 150 million is cash effective, what we are paying to minorities, and the large chunk of that, two-thirds, is for the benefit of the insurance money managed by Apollo.
Okay, thank you.
The next question comes from Rob Jones, from BNP Paribas. Please go ahead.
Thank you very much. Can you hear me okay?
Loud and clear.
Great. So I've got a question on the divvy, and let me start with that, actually. So on the dividend, I think slide 40 is helpful, to be fair, in terms of an explanation of how to compute it. I don't have the figures in front of me in terms of what the surplus liquidity from recurring operations would have been in 2022 and 2021. Briefly, from looking at my financial model, I have it around 0.
So my question, I guess, is w hy have a dividend calculation that has so many variables in it to come up with a surplus liquidity component, rather than just saying, "Let's just pay 50% of EBT?" Because actually, the surplus liquidity on my numbers, and I may be wrong, in looking backwards, has actually been relatively limited as a percentage of the overall, distribution paid.
Look, yeah, yeah. I mean, first of all, this 50% of EBT, I mean, if you make an apple for apple comparison, and kind of translate that into the old group FFO and dividend post minority, we are essentially reducing the payout ratio from previously 70% to 60%. Yeah. And why is that? Because, and we made that point very loud and clear in the presentation, I think we need to ensure that the dividend policy works across cycles. And that the attitude that part of the dividend is actually being paid, benefiting from yield compression, cannot form part of a long-term dividend policy.
But that 50% of EBT, that is set, and that is a very clear guided number, where I would have the expectation that we will, at some stage, play offense again, as Rolf said, and being able to focus on the growth element again. And then I think our business with the structural embedded rental growth should also provide the backing for structural growing dividends as it relates to the 50% of EBT. Now, the other portion, I understand it's difficult. I understand it's kind of academic. I equally would like to highlight that this is very disciplined in terms of capital allocation. I mean, this is all what we are focusing on for so long.
Now, what we are essentially saying is, if there are good investment opportunities for us to spend money in modernizing our standing portfolio, which by definition need to have better returns than our cost of capital, I think then it's in your very much interest that we do that. But vice versa, if for whatever reason, we do not find these investment opportunities, there is no reason to sit on the cash and not return it to shareholders. And this is essentially what we are doing with that metric, that we tie that to actually our investment behavior and the cash generation we actually achieve. And if things develop in a way how we hope they develop, there is surplus liquidity.
If not, this element is not for distribution. Now, with your math you did, based on your model, I would come out with a similar result, that looking back, last three years, there is not a lot of cash generation in these very distressed years, we have seen.
Okay, very clear. I have some more questions, but in the interest of time, I'll ask offline. Thank you very much.
The next question comes from Marc Mozzi from Bank of America. Please, go ahead.
Good afternoon, everyone. Thank you very much. I have essentially three questions from my side. The first one is just a clarification. It looks like there is two type of net debt to EBITDA calculation between your annual report at 16.5 times and your presentation at 15. Which one is the one we should consider as the correct one, and what is the difference between the two numbers, please?
The one is based on a year-end, and the other one is the average. So that's the difference between the two.
Average of what, if I may?
The average debt. Yeah, one in one calculation-
Okay, okay, okay, okay. No, I get it.
Yep.
Okay. Okay, okay. So the lowest one is the one where it's an average net debt between the beginning and the end of the period, or the highest one?
Sorry, I think it's vice versa. I think it's vice versa.
Okay.
Yeah.
Yeah. You started at 43, you ended up at 14. Okay. A slight, small follow-up on the question from Bob, because I have exactly the same, meaning what is the justification from your valuers that your assets are worth 23% more than LEG one, 16% more than the one of Grand City, and 35% more than the one of TAG? I thought German residential was relatively standardized in terms of product, and if we just think about LEG, where there is no risk of bankruptcy or anything comparable here, as we, as you, as you mentioned, Rolf, what is your-- What is the justification from your valuer of this 20% plus or 25% difference in valuation between you and them?
Marc, again, this is comparing South Chicago with Manhattan. So of course, the assets, the specific assets in the same city, we have the same value than our peers. The mixture of cities and location is different. So Munich, of course, has a completely different yield than Gelsenkirchen. So if you have more Munich and more Frankfurt, and especially more Berlin, you have a different mix. So this is clear, asset by asset. So if there's one building standing beside the other, with the same technical con- structure, it will have the same value. It's clear, and you can see it by portfolios if you look deeper by city by city. Taking this into account, our portfolio is the best energetic portfolio which you have at the moment in Germany, in the listed environment.
So this also plays a role, because a renovated building, even if it's standing beside a non-renovated, and we have this in our own portfolio, has a different value, which is normal. It has a higher rent, it has a better CO2 emission. So saying that buildings in Germany are the same, ignores just If you look on our ESG criteria, and looking at an A category and an F category, an F category has a completely different value than an E category. A newly built building has a completely different value. I can tell you, we have built buildings in Berlin which are EUR 6,000-7,000 per square meter. And there's others which are very low, because they have to be low, because there's probably no buyer, nobody wants to have. So that's why, Mark, I don't get your question.
The assumption that all buildings in Germany are all the same, and have all the same situation, and the same location, this is not what you—I don't think you don't, you mean it, because this is just not the assumption we can have.
No, I just wanted to make sure that it was just about land value, that which explains the 20% difference or 25% difference between your main.
It's very simple. It's a mixture of the buildings, and if you look on the detailed portfolio on a lower level, you will find the same values. It's the same value. You cannot say that this building is a different valuation than the other. This is the charm of having all more or less the same valuers. It's completely comparable.
Okay. I think it's clear. And final question for me is it's again about the dividend. I'm still a bit puzzled about why you need to pay a dividend while you have so much refinancing need ahead of you, and your cost of debt is what? 4.5% marginal cost of debt, especially for the unsecured side, while you're gonna pay a dividend yield of 3.5%. And specifically, my question is around why paying out as a dividend your excess liquidity, and not focusing it on paying down debt, which is more expensive than your dividend?
Mark, by all fairness, once again, I mean, we are comparing the EUR 40 billion debt book with a EUR 400 million cash out, which is underlying our dividend proposal for this year. So it makes a difference, but a very manageable difference in terms of managing our debt structure. I think what is far, far more important, managing the debt structure is our commitment, and I think we have repeatedly said that on continuing to focus on on disposals, and that three billion target that we aim that we aim to achieve. Now, on the funding side, I think things look still slightly better than you suggested.
We have the situation that spreads in the unsecured market at around 160 basis points. So, that means interest payments inside 4.5%. If I look at the secured market, we are still below 4%. And the funding gap, you keep mentioning that, Mark, but I don't actually know what you're referring to. Because, I mean, we have put the details on one of the slides in the deck. We have EUR 3.2 billion of cash, if you include the undrawn credit facilities.
And by the way, just recently entered into one with an insurance company for 15 years at around 4% for EUR 150 million, which is also undrawn. So if you include undrawn credit facilities, if you include the cash from disposals we signed, but which will see closing only this year, we have covered all unsecured financial liabilities as and including Q3 2025. I mean, this is 80 months ahead. Now, I also made the point that we will not stop.
I mean, I'm now moving into focusing on the, on the remaining quarter of 2025, and I also made clear, I think in, in previous discussions, that it is and remains a priority for me, that I, I really want to have addressed upcoming maturities, ideally 80 months ahead of schedule, and that's what we are doing. So I mean, I can address financial liabilities 4 years ahead of schedule, but I think sometimes or at some stage, it will become ineffective.
Okay. Well, I think everyone appreciate that, no one is running the company with zero cash on the balance sheet. So, I would say part of the EUR 3 billion is for running costs, and we can't finance as well a real estate portfolio with RCF, which is just a toxic bridge loan.
Sorry, undrawn is not the RCF. Undrawn is not the RCF, yeah? So if you put that on top, we basically have EUR 6.2 billion of cash position. So I think that's kind of a comfortable position, yeah?
Thank you very much. I appreciate your input. Thank you. Have a good day.
The next question comes from Paul May from Barclays. Please go ahead.
Hello, guys. I've just got a couple of questions to start with on the cash flow side, apologies for laboring on this. The first one, regarding Deutsche Wohnen, which I think you don't exclude the minority interest in the cash flow. Am I right, legally, you can't extract cash from Deutsche Wohnen without paying a dividend? And if that's right, should you not exclude all cash from operating metrics within Deutsche Wohnen in your cash flow, because it's not actually cash to Vonovia? That's the first one. Second one is still on that as well. Why is it you're assuming a 60% equity contribution for your investment program? I assume that this is all cash outflow, as in it's a 100% cash outflow.
Why are you not assuming 100%, or are you just automatically assuming that you'll be leveraging up to pay for your investment program? That's the first couple on the cash flow. Thank you.
Let me again start with the second one. I mean, it's basically for the same reason why we are running that business, not with 100% equity. Because if I do yielding investments, I account for them, and they will add to my investment properties. And if I were to do 100% equity financing, I'm deleveraging the balance sheet. So I think to look at the conservative side and to apply the 60% equity ratio for, again, yielding investments, is right. And I actually I'm not aware of anyone who is doing investments in real estate who think that 100% equity application is the right approach.
On your first point, look, I mean, on Deutsche Wohnen, we actually still do have an upstream loan of some EUR 300 million. So legally, you can access the cash, but it has to be at market terms, which is the case. So we are paying Deutsche Wohnen for that cash, essentially, or Euribor, plus I think it's a 60% margin.
The alternative to loans, which is always a bit tricky and requires additional disclosure in the kind of governance setup we have, is a dividend. And that, yes, you have some cash leakage of 12%. That is truly the case. But to draw the conclusion that 100% of the cash is not available of Deutsche Wohnen, I think is overstretching it. If at all, you can deduct that 12%-13%.
Okay. Just to follow up on those two, I understood this to be a cash flow metric, not a kind of quasi investment metric. So when you're investing in the investment pipeline, it is cash. Is that fair? That it is a cash outflow, and therefore, this should be looked on a cash basis. And then on the Deutsche Wohnen, you mentioned the loan that you've extracted. I mean, that's a temporary extraction of cash, isn't it? Because as you say, you do have to pay that back, and that comes with an interest cost. So is it right to say the only way to exclude or extract cash cleanly from Deutsche Wohnen is through a dividend payment by Deutsche Wohnen?
Yes, but also, you are assuming that Deutsche Wohnen cannot consume the cash because all the investment is also consolidated. There's a lot of investment of o r part of the investment we are doing is actually, in reality, Deutsche Wohnen. So I don't think that Deutsche Wohnen is more cash flow positive than Vonovia. It's the same.
Okay. Just following up on the new metrics, new KPIs, I understand that the compensation profile or your LTIP profile is gonna be adjusted as well. Can you give a guidance on a fully like-for-like, all else equal basis, where the management will get paid more, less, or the same, all else equal under the old policy and KPIs and under the new policy and KPIs? Thank you.
So I can answer your question very simple, because we have suffered a significant downturn in the FFO per share. So the LTIs, which are up and running, are not in the money in the moment, which is normal, especially if it comes to NTA per share and FFO per share. So this question—and they are not in the money, either with FFO or with EBT, because as Philip mentioned, they are running in the same logic. So this change has no impact at all on the LTIPS.
Okay, so-
Even if they would. So this is exactly what our Supervisory Board did. So it's exactly all equal. This was the question, but the additional information doesn't matter because not in the money at all.
Okay. Just the last couple ones, should be quite quick. The slide you show, which is quite interesting on the affordability, I think interestingly, though, you show average German earnings versus your portfolio. My understanding always was that the people occupying your portfolio were not average German earnings, but were significantly lower income profiles. Is that still the case, or have, has the income profile of your tenants increased?
No, I think it is very close to the average. Probably it is very, very slightly lower, but what we have seen is we have a better. And this is again, back to the nature of the question before about the portfolio. I think our tenant mix has a better earnings profile than our peers and especially than the municipality companies. Because we have more renovated buildings, we have more. This is a consequence of ten years of optimized apartment. So, this is why the rent is higher, and that's why, of course, the selection of more, of people, which has a much bigger earning power, is probably higher. So we have some analysis. It's very difficult for us because we don't know exactly the salaries, because they only have to declare it at the beginning, and so that's why we cannot give you the analysis.
Otherwise, we would have done it. But our assumption is, and our feeling is, if you go more to macro, that we are covering more or less the average, of the German population.
Okay. One thing you should say, that, that comes through in your better quality portfolio and better rental growth that you've sort of guided to and been able to achieve over the years. Just on the final one, t here's obviously a lot of talk about gross yields, but are they not, to some extent, completely irrelevant, given the 55%-60% cash flow leakage, I think, based on your numbers, that comes through from your gross rent down to your kind of FFO or, or free cash flow? And so FFO yield is, I think, sub 2%, on the, on the portfolio, and that's with marginal cost of debt- that's with current cost of debt.
And if you were to apply marginal cost of debt, I think you mentioned somewhere around 4 to 4 and a bit, depending on whether it's secured or unsecured, I think your FFO would be negative on, on that basis, if you were to apply that to the EUR 40 billion debt book. So why is there still this focus on gross yields when it really actually is completely an irrelevant number?
No, no, but if, h elp me, so you are comparing now the FFO or the EBT in the future-
So-
To the full cost value, but then you are completely ignoring that the part is debt, so you can only compare the NTA to the FFO or the EBT. Right? So otherwise, you're comparing something which doesn't belong together.
No, no, no. I appreciate that, and if you work it through to your NTA, your NTA yield is very low on a free cash flow basis. And I think we need to look at this, as you say, free cash flow is king in terms of within the business. You know, you've come around to the idea, similarly to LEG, came around to the idea about a year ago, that free cash flow is what matters and not FFO and not any of the other metrics that we were looking at. And therefore, on a free cash flow basis, the free cash flow yield on German residential is very, very low. Irrespective almost as to what the gross yield is.
So this focus on this gross yield number that is 50-60% higher than, or sorry, it's more than 100% higher than the operating free cash flow. The operating free cash flow is about 50-60% lower than your revenue. Why is there this focus? Why do the valuers focus on it? Why do you focus on it? Why does anyone talk about gross yield when it is-
Why are you not looking on page 43? Because I think we have it here. So this is based on fair values and NTA on the left side, and based on implied, which is actually market cap. So I learned in the US that the NTA concept doesn't exist in the US, and in the US, it's relatively easy. What we call NTA is for them, actually, market cap, and what they call—what we call GAV is for them, market cap plus debt.
So, if you apply this on the left side, on the right side, you see that the operating free cash flow, which is actually exactly what we would like to deliver you, which is the cash flow, which is ready for reinvestment or distribution on the implied is 6.1, and on the, if you calculate it European way, on the NTA, it's 3.7.
So, just to be clear, you're saying that you should trade at market cap, so your values are overstated? Because if you're comparing what you can raise at market cap versus what you can invest, I assume you'll be investing at gross asset value and therefore NTA, not at market cap. Or are you saying actually that the market cap is where the value of the business is?
So my job is as a management team, we are not responsible for the stock price. So that's why indirectly, we are not responsible for the magnitude of the market cap. We just have to do a good job that the market cap is going up. So that's why I didn't want to apply if market cap is right or wrong. I just wanted to give you the figure, which are based on page 43.
Paul, if I may add, I think we're always circling around the same topic. I mean, you can, if you look at today's rent levels, whatever measure you take, it's not a sustainable yield. Full stop. Yeah. But there are investors in the market who are looking at real estate with a more longer term time horizon. And for them, they focus on other topics. They focus on the reversionary yield you can expect long term, set beyond more in the region of 5.5%. They look at the price delta you can capture between condominiums and existing stock, which typically is around 30%.
They look at the value in comparison to replacement cost, where current stock is trading at basically a fraction of replacement cost. So they simply take a different approach. And if that is to be for an investor who wants to see a decent return in 1-3 years' time, real estate is not the right asset class to invest into. But there are many others who take a different view, who take a kind of longer term perspective, and who are deviating from the concept of a net initial yield to the concept of an internal rate of return. And they come to different conclusions.
I mean, we can discuss that kind of forth and back, yeah? But this is different judgment. But what we are capturing in our valuation is that transaction activity, which is happening, and here we certainly have the situation that people are not looking one-sided at yields, but two-sided also on the growth element.
Which is, I explained to you, is embedded already in the, in the legal framework, so the rent growth will come.
So-
On today's rent is probably just misleading, because you know that the rent will be higher in year two and year three and year five and year ten.
Yeah. I mean, just on that, I think what's clear from my conversations with market participants is, the majority of the transaction market outside of the new units that you've sold, say, to CBRE, is broadly in a 6-6.5+ gross yield environment. So to say investors are looking at a 4% and buying that and being happy with a very low free cash flow yield, I don't think is evident in the market. Brings to an earlier question, that transaction market is at much higher gross yields, and I think you're guiding to your non-core, which is a much higher yield. You're guiding to your nursing homes business to sell that, which is again, at a much higher yield as well. So I think we're still struggling, and it's feeding off a couple of the other questions as well.
What is the evidence in the market that justifies your valuations where they are? Because from all other conversations that I've had, it doesn't seem to be evident that there is justification at these, at these valuations.
To be very clear, we have sold some big transactions, but we have also sold a lot of smaller transactions.
Mm.
In this transaction, there was multipliers of 50, so an initial yield of 2%. Should we apply this and argue that all our whole portfolio should be at 2 initial yields? No, because it depends on location, and it depends on the building. In our portfolio, our own portfolio has valuation of 2% and 8%. Which is normal, because the difference is very different. To argue that there is a German average in yield, yes, you can argue, and if somebody wants to have a German average, the task of my salespeople is to find assets which are less than the German average and sell it for the German average, and then everybody's happy. So yes, if somebody assumes the German average is 6, then I like to sell my 8% yielding for 6. This would be a great deal.
So, if people are ready to ignore that there's a difference in the building substance and in locations, this is easy, and then it's a lucky sell. And in reality, if we are selling portfolios, we are packaging the portfolios the way that we adapt to the need of the investor. And there are some investors who want to have a 6%, there's other wanted 4%. What you cannot get is a quality of 4% for a yield of 6%. So I can build you a portfolio, whatever yield you want, between 8% and 2%, but the quality will be according to this, and this is reflected in our individual evaluation.
If the world would be easy saying there is one average, then it would be easy, then we don't need an evaluation department, we don't need evaluators, and we just put the yield on it, and that's it. But Germany is not Germany, and the buildings is not the same. So this comes back to the old question, and that's why, yes, in the moment, we see there is a stronger group of people, because banks are only looking in financing for the initial yield, which are very much focused on the cash, on cash yield in the beginning, and they get some portfolios. And there's others, for example, which has something to do with tax advantages for the-- to transfer to the next generation. These people don't care about the yield at all.
They care that they save 50% in inheritance tax on the investment. So for them, the yield is definitive anyway. So this is very different group of people. So if I would want to pass on a building to my son, I would buy a building for 2% yield in Munich, because I am sure that in the next 30 years, the value will be higher. And I don't care about the initial yield, and even if I've financed at this 4%, it's ever better than paying the inheritance tax. Another one who is dependent on being financed by a bank, that's 4%, and the bank is saying, "We need the interest rate coverage, and that's why you need to deliver a yield of 6%." And yes, he buys a building for 6%. That's a different building.
But if you were to contain the market or put it into various segments, would it be fair to say that the majority of the transactions are above the 6% rather than over 2%?
No, I would say the majority of the smaller transactions, what we have seen in the JLL slide, are in the low yielding, because-
Across the market as a whole, is the question. So if you're trying to sell EUR 3 billion of assets next year, I appreciate part of that will be the nursing home, but if you're trying to sell, say, EUR 2 billion of residential assets next year, do you expect those to go closer to 2% or closer to 6% as a yield?
The majority will definitely not be as close to 6. It will be much lower. And this depends a little bit on the customers, but we will sell for 2% as well, what we have done also last year.
Okay. And when you do sell these assets, will you give guidance, will you give color as to what the gross yield was when you sell assets from portfolios?
Uh, yes.
I mean, what you can mark as a rule is that we will not sell below book value. Yeah. So all disposals will be around book values, and you will see the progress as we progress into the year, we are very focused on it, and we will report on how we manage to move towards our EUR 3 billion target we have set ourselves for the given year.
But sorry, just so you will give guidance or will give color on yields or just versus book value? Because if you—obviously, if you sell 8% value stuff, that's, okay, a very different earnings impact to selling 2%, but both would be at book value.
Paul, we can take that offline, and we can, we can really go around circles. You're not believing the transactions are happening. We are telling you transactions are happening. You can talk to Jones Lang LaSalle, you can talk to CBRE, look at the statistics. There are smaller deals which are getting done, and that is across the spectrum. Otherwise, we would have not be able to actually value our books in the way we do. You're right in saying the transaction volumes have come down. That is clearly the case, in particular for bigger transactions, but smaller transactions do take place, and across segments, across yields, and across our own disposal efforts, and you can believe it or not, but that is what's happening.
Cool. I do speak to the JLL guys and the CBRE guys-
Yeah.
For what it's worth, but, thank you.
In the interest of time, please limit yourself to three questions only. The next question comes from Valérie Jacob, from Société Générale. Please go ahead.
Yes. Hello, hi. Most of my questions have been answered, but, I just wanted to ask you a follow-up question on the, ICR. If I look at page 19 of your presentation, you see that if interest go up 120%, you're in breach which is a cost of debt of 3.7%, which is, you know, below your current spot, cost, financing cost s o I know there is gonna be, some growth in EBITDA, but you mentioned presentation that on the rental part, there is a cap.
Earlier you said that you think that ICR is dropping this year, so I just wanted to make sure I understood that correctly, that you think that you're going to generate enough growth in your non-rental segment in order for the ICR to stay above 4% for the next five years.
That's our medium-term outlook confirmed, yes.
So even next year, and so for the next five years, you're confident you're not gonna be below four times?
I was saying that I expect to drop that ICR number this year. It's gonna be below four times, but not significantly below four times. And I was saying that, as of next year, I-
Okay, so the target is 2024. Okay, that's what I misunderstood.
Yeah.
Okay, perfect. Thank you. Also, I just wanted to ask a question on the disposal of the nursing. Can you give us some color on why there is only, you know, 70% of the portfolio that's being sold? Is it because, you know, some of it you operate or is there a specific reason why you're not selling everything at once? Thank you.
So, no, I think this is what the responsibility for the sale of the nursing home is, of course, in the Deutsche Wohnen management. So this is what we hear from them, and that is their, actually, their guidance, how much they think they will be able to sell, because we always sell for book value and that's why there is of course, a limit.
The next question comes from Pierre-Emmanuel Clouard from Jefferies. Please go ahead.
Yes, good afternoon. Thank you for taking my question. So, two question on my side then. The first one, just coming back on various question on the ICR. Maybe can you give us more detail on the interest coverage ratio, per Moody's calculation, please?
Not on top of my head.
Okay. And should-
Let me-
Okay, and should we expect another 30 basis points cut for the Moody's calculation as well?
Sorry, say that again?
Should we expect also a 30 BPS below 2023 levels in terms of-
I said I don't have-
Okay.
Now, the calculations of all rating agencies off the top of my head. But,
Right.
In more general terms, I mean, unsurprisingly, and Moody's also mentioned that, the rating is deeply positioned. Yeah, there's no doubt about it. But the focus of the agencies is much more on leverage ratios. The ICR is not so much a focus point. It will become a focus point as of next year, if we're not able to grow again in terms of EBITDA. But here, as we said, I do expect that 8% of total EBITDA contribution assigned to the non-rental segments, that this will increase fairly significantly in the short term.
Okay. And, maybe just can you confirm that the ICR, looking at Moody's calculation, is above three times, or not?
On our calculation?
On Moody's calculation.
Well, again, I don't have-
Okay, so you don't know. Okay.
Uh,
Uh, okay.
We need to take that offline.
Okay. Maybe the second one is on the non-controlling interest for our 2024. So I understand that the one, that EUR 100 million, should increase on the dividend paid, following Apollo deals. But can you also give us a view on the level expected on your recurring non-controlling interest for 2024, on top of the EUR 84 million that you published in 2023?
Yeah, you will see that as part of our reporting package. As I said before, I think relevant is really what is flowing away to minorities in terms of cash. Here, we've been fairly explicit in terms of guidance with the EUR 140 million-EUR 150 million. What accounting-wise is contributed to the minorities is what you can see in our ongoing reporting, but it's nothing we are guiding for.
All right. Thank you very much.
The next question comes from Véronique Meertens from Van Lanschot Kempen. Please, go ahead.
Thank you for taking my questions. Maybe in the interest of time, I'll stick to one question. Just to follow up on the disposal plan. I think at Q3 you mentioned that you were targeting EUR 3 billion of newly signed disposals, but now I see it in the slide as a gross proceed.
T o return to the Eurobond market if terms and interest remains as compelling as it is currently.
All right. That's all from me. Thank you.
The next question comes from Simon Stippig from Warburg Research. Please go ahead.
Hi, great. Thanks for taking my questions, sorry for long call. First one is, what I'm missing about in regard to your capital allocation, your dividend policies for potential share buyback in the future, or is that actually ruled completely out? If not so, going forward, what would determine that, buying back shares? And I know that you have the Scrip Dividend, so you actually issuing some shares, but, going forward, in the future, you potentially also might want to buy back some shares. That would be my first question.
Yeah, I think the way how we formulated the dividend policy is that excess cash is actually being returned to investors, which we cannot invest. For now, all the big disposals are really to retire debt and reduce leverage. If at one stage, and currently the tone of the call is not giving the indication, there's a more positive stance towards our sector, and we have excess cash, and we don't have good investment opportunities, I think it's our philosophy that we are not sitting on cash, and a share buyback is one of the options. So we are not, by definition, ruling that out, to the contrary.
But I think at the moment it is clear, and I think we've made clear, that we have to come back to the comfort zone and the LTV, like all the others in the market. That's why share buyback is the problem, not short-term an option.
Sure, that's clear. And second question would be, in regard to the KPIs, what I'm missing is, your per share KPI. Would you then use EBT per share and operating free cash flow per share? And then also, in regard to comparability, your slide deck is, I think, 76 slides long. Would it be possible that you show FFO Group in the appendix, going forward, and then also or at least show the, the variables one would need, actually to facilitate a comparability over time and also to see the, the track record?
So we take notes that we will reduce the slide deck, probably more in appendix, and you don't have to read all the appendix. To say the driving factor for EBIT, EBIT, EBT per share will be, of course, an important figure. And ideally, if you want BK, you can do calculations of free cash flow per share as well, because it's just dividing. But from us, for managing the company, EBT per share is an important figure, like FFO per share as well.
Yeah, and though I disappoint you on the second portion, I mean, we discontinued the Group FFO, and that means there is no shadow reporting on the Group FFO going forward.
Okay. Okay, thank you.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Rene for closing remarks. Thank you.
All right. I shall keep them very brief. The call has been long enough. Thanks, everyone, for joining. We'll be on the road, financial calendar on page 74 and online. We're looking forward to continuing this dialogue. That's it from us for today. As always, stay safe, happy and healthy, and speak soon. Bye.
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