Ladies and gentlemen, welcome to the Vonovia Full Year Results 2024 Analyst and Investor Conference Call. I'm Moritz, the Chorus Call Operator. I would like to remind you that all participants will be in the 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 René. Please go ahead.
Thank you, Moritz, and welcome everybody to our earnings call. The speakers today are, once again, CEO Rolf Buch and CFO Philip Grosse. They will be happy to lead through today's presentation and then answer your questions. We have divided today's presentation in two sections, plus the appendix. First, the big picture overview of our business and the general environment in which we operate, and second, the full year 2024 update. Rolf will be starting off with a preface to put the last two weeks into context and provide a framework for our view on the consequences for our sector. With that, over to you, Rolf.
Thank you, Philip, and good afternoon also from my side. Allow me to start today's presentation with the following preface. This is actually on page three. Our earnings call today takes place in an environment and sentiment that is different than from two weeks ago. The situation is still very much in flow, and we believe there is limited visibility on the exact consequences, especially in the medium to longer term. Let me take back a step in describing what I think are the different phases in Vonovia's development. I think it is important to understand this evolution in order to appreciate the future potential. From my point of view, Vonovia has gone through two distinct phases and currently stands at the beginning of the third phase, which is return to growth.
For more than eight years after the IPO, we made use of the highly favorable interest rate environment and built a platform that delivers higher cash flows, better margin, and superior quality than any other platform, and where the assets are located in the right markets. Then came the war in Ukraine and the abrupt changes in interest rates that led to an increase in our cost of capital. We changed gears and went from offense to defense. This second phase was mainly about protecting our rating and balance sheet. Now, since Q3 last year, we are at the beginning of the third phase in Vonovia's evolution, where we can return to growth, but less capital-intensive. This means an acceleration on our non-rental everyday and leveraging our platform and scale to expand our service business in a less capital-intensive way.
In doing so, we will combine our growth ambitions with financial stability and capital discipline. However, the event of the last two weeks has now led to new uncertainty. The increase in bond yields appears to be primarily driven by the market's expectation of a massive increase in German bond issuance to finance the planned military and infrastructure investments. What is still unclear for me is how strong and sustainable the increase in bond yields will be at the end of the day. Given that the planned investments are expected to be made over 12 years, not nearly all funding will be required on day one, and the timing will largely depend on specific planning approvals, where we are specialists for in Germany, capacities, and others. It is simply too early to draw a definitive conclusion from recent events.
While bond yield levels have certainly not been the only driver for residential asset values, the actual impact of the recent event on property prices remains to be seen and cannot be reliably determined yet. Similarly, high bond yields for longer would lead to elevated financing costs, but we just do not know. On the flip side, the spending bill will include material positive elements that will support our efforts in terms of modernization and new construction, as we expect sustainable investments in climate protection, already announced, energy, and housing. Yes, new headwinds for the sector, but also opportunities, and both cannot be reliably estimated to form a clear view on what all this means for the sector, especially in the medium and long term. How do we react then?
The last three years have confirmed that we are well advised to refrain from knee-jerk reactions, but to continue to manage the business with a steady hand. Adjustments we made must be in a careful and deliberate manner. It was this level-headed approach that allows us to successfully navigate through the last crisis and protect our rating and soften the impact from declining values and higher financing costs. At this point, we do not see an immediate need for action, but we will, of course, monitor the situation very closely. We will carefully evaluate any potential measures, also in the light or medium or long-term impact on our business. The key priorities are clear. We will protect our rating, manage our debt KPIs, maintain overall capital discipline, and safeguard the long-term success and long-term growth of our business.
What has become less clear is the execution timing of certain non-rental growth initiatives. I'm thinking, for example, for potential stranded assets and development. Depending on how things evolve, we may decide to give priority to more capital-light initiatives. There are lessons learned during the last crisis that will now allow us to focus on what worked and reframe on what did not work. This was, for example, the abrupt disruption of the investment program. The next time, we will not do this again. Let me be clear. While it is too early to discuss any specific measure, we are prepared to take decisive action if and when it becomes necessary. Let me emphasize the following. In spite of a quite different phase I just described and in spite of the recent uncertainty, one thing is clear.
It was the right decision to build our business around the mega trends. Our market fundamentals have been getting stronger and stronger, and our operating business is more robust than it has ever been. We may face another period of uncertainty, but we can face it from a position of strength in knowing that our business is built on a rock-solid foundation. Let's take a closer look on the most recently available data on asset valuation and pricing. This is page five. The data suggests that value declines have stopped and prices have stabilized. For multifamily homes, this seems to have been the case somewhere towards the end of Q4. The third quarter was a minus 0.5, and the fourth quarter was basically zero.
For condos, which are always a little bit in advance, it appears that it has been somewhere in Q3, and prices have already been slightly growing recently. We saw -0.1% in Q3 and +0.9% in Q4. Of course, the valuation of our portfolios mirrors this development, and we have seen a slight gain in H2 in all three countries. Allow me one word on Sweden. We think that the faster return into positive territory is related to shorter financing terms in this country and rent growth of more than 6% as inflation finds its way into rent level faster because of the different regulation. Sure, none of this data includes the recent increase in bond yields, but we have seen in the past that bond yields are not the only factor that impacts valuation and prices in our sector.
On page five, you see that Q4 last year saw an increase in sentiment and optimism. Page six allows some data to support this. Transaction volumes in Q4 were the highest since Q1 2022. According to a survey by Ernst & Young Real Estate conducted in January this year, residential real estate is in the top focus for real estate investments this year, with the vast varieties of respondents expecting no change in pricing or even increase in the course of 2025. If you look at the volatility and the turbulence in the capital markets, it might be easy to forget what the situation in our underlying business looks like. Things actually could not be more different. During the last three years of higher inflation and higher interest rates, we have seen the supply-demand imbalance become much bigger.
While our residential sector is regulated in terms of how fast you can adjust the rent level to the wider market reality, it is a different one. The shortage of apartments simply trumps regulation. People are so desperate to find a rental apartment that they are prepared to sign an agreement that is not in line with the prevailing regulation, just so they get the upper hand versus a hundred others who are competing for the same rental contract. This drives regulated rent via the Mietspiegel system, but of course with a delay. This huge gap between market reality and our rents means that our rent growth for many years to come is rock solid. We already know today, and the speed at which we can catch up with the market rent is about 4% based on our current investment amount of about EUR 1 billion.
To the extent we increase that amount, the rent growth will be higher from 6%-7% operating yields on this investment. Before Philip gets to the 2024 highlights, let me close the big picture chapter with a look at our growth trajectory. I start with the rental business. You saw the strong markets we are in in the previous page. You also saw the huge gap between our rental levels and where the market is, giving us strong visibility on many years of extremely solid rental growth. Combined with the full occupancy and the full rent collection, this creates a rock solid, low-risk, and highly predictable rental segment that delivered more than 90% of our total EBITDA in 2024, and that will continue to be the main sources of earning contribution going forward.
In addition to that, we are preparing our non-rental business, and we presented the concept to you last November. As a reminder, we are talking about three categories: return to performance, accelerated tech-supported investment, and new business areas. Our ambition until 2028 is to close the rental EBITDA by 4% and the non-rental EBITDA by 30% for a combined total EBITDA growth of around 8%. In terms of EBIT, we aim to grow in the middle single-digit range. With this, I hand over to Philip.
Thanks, Rolf, and also a warm welcome from my side. Let's move to the second chapter, starting page nine. Here, the big picture again, we have been seeing that value decline has stopped and prices have stabilized in the last quarter of last year. In addition, transaction volumes are increasing, and there is certainly growing market optimism.
For Vonovia, we have successfully completed our disposal program for cash generation purposes and seem to have seen the end of the negative price correction for now. As a consequence, leverage is under control, and ratings remain in a good investment-grade territory. Our organic growth trajectory until 2028 remains unchanged. Here, as Rolf said, we aim to deliver about 4% CAGR for adjusted EBITDA rental, which is based on a billion investments. Here again, you know that we intend to ramp that up with an operating yield of 6%-7%, and that is positively impacting the rental as well as the value at EBITDA. Against that backdrop, we also expect the growth in our non-rental EBITDA to be much more dynamic, more in a magnitude of a 30% CAGR until 2028. All of that will translate into adjusted EBIT CAGR in the mid-single digit.
For highlights, 2024, 4.1% organic rent growth for upper end of guidance. Adjusted EBITDA, a bit softer, but again, top end of our guided range. Operating free cash flow much higher in 2024 as a result of our preference for cash generation over profitability. LTV came down fairly significantly, 150 basis points, and it is now on a pro forma basis at 45.8%, so almost where we want to be in terms of our target range for the 45%. EPRA NTA was down 3.4% year-on-year, now at EUR 45.23 per share. Finally, on the dividend as guided, we intend to propose EUR 1.22 in the upcoming AGM in May. This is an increase of 36% compared to last year. Let me update you on the disposal side.
Following more than EUR 4 billion in 2023, we delivered another EUR 3.8 billion in 2024 for a combined transaction volume of almost EUR 8 billion over the last two years. Most recently, you may have seen we sold our nursing business in Hamburg for EUR 380 million, significantly above book value, by the way. That more or less completes our disposal program that we have initiated for cash generation. That having said, what we are now going to focus on is selling the remaining non-core business of EUR 1.6 billion, which is still on our balance sheet. We have made our disposals at or above book value at the time, and we were proven right, I think, when we said we would not rush into it. I still recall quite a few market participants urging us at the beginning of the crisis to sell at all cost.
It's good that we have taken a far more balanced approach because, yeah, otherwise, I think the consequences would have been to the detriment of all shareholders. Moving to page 11, we have the familiar overview of EBITDA, EBIT, and operating free cash flow. A couple of comments to put this into context. Yeah, underlying operations and Rolf was alluding to it remain extremely favorable. Rents are growing. There is basically no vacancy, and we are collecting the full rent. On the other hand, we are seeing the drag from disposals on adjusted EBITDA rental that was slightly down because of a smaller portfolio and also more normalized cost levels for last year compared to 2023. Value-add segment is up fairly significantly year-on-year. That includes roughly EUR 60 million from a leasing agreement on our COEX network, something that unfortunately will not repeat itself in 2025.
Recurring sales volumes, development to sell, both saw higher volumes but also lower margins as a result of our focus on cash generation. The increase in adjusted EBIT attributable to minorities is due to the annualized impact from the two Apollo joint ventures we entered into mid-end of 2023. The increase in our adjusted net financial result is related to the higher refinancing cost and also here the full year effect of 2023 financings. The next line item, the increase is the result of increased disposal activities and finally the higher minorities in the operating free cash flow, again from the two Apollo JVs, the higher cash dividends. Moving to page 12, here we thought it might be helpful to put together all the different buckets that we include these days in our investment program.
You see that on the right-hand side of the page, we have the traditional categories you're all familiar with: optimized apartments, upgrade building, and development to hold or space creation. With the non-rental EBITDA growth initiatives, we are adding three additional categories, which are serial modernization, energy cube, and heat pump, as well as photovoltaic. These three are more industrialized, more tech-supported, and will allow us to ramp up our investment program from currently less than EUR 1 billion to the targeted EUR 2 billion by 2028. The target funding, to be very clear, for the investment program is 60% equity, and we will make sure that this is leverage neutral. Our good performance on the operating free cash flow certainly helps.
As a reminder, I made that point before, all of these initiatives have a yield on cost of around 6%-7%, so it is a highly profitable business for us. Page 13, I think I said it before, highly robust, like a clockwork, no surprises here. Let's go for the next page for the valuation update. Just some additional remarks on valuation: full year value decline minus 0.9% breaks down into 1.4 in H1 and plus 50 basis points in H2. Our portfolio is now valued at 23.2 x net core rent or a gross yield of 4.3%. This, by reference, represents a per square meter value of just under EUR 2,300, including the land. If you compare prices for condos, which are more in the direction of EUR 3,400 on new construction, even EUR 5,500, you see the big discrepancy, which in my view is supporting our valuation approach.
Moving to page 15 on the financial KPIs, pro forma cash position is currently EUR 3.8 billion, EUR 1.8 cash on hand, EUR 2 billion still to come based on signed disposals, and by the way, excluding the red blocker in the context of the nomination agreement. If I move to our pro forma LTV, 45.8%, only slightly above our target range. Here, assuming stable yields, LTV will decline organically as rent growth drives value growth. The direction of travel should be positive once market is finding its long-term equilibrium. Net debt to EBITDA is 14.5 x, basically in the middle of our target range, that again on a pro forma basis. Here, in light of our EBITDA growth initiatives, we should equally see that metric declining over time as well. ICR, 3.8x , above our internal threshold.
While this KPI is the most challenging of all the three, I'm still confident that we will be able to maintain it above our internal target threshold as well. Rating agencies, as you know, have maintained their rating and outlook on Vonovia, Moody's, and Fitch just very recently in mid-February. Page 16 is on the dividends. As I said, we will propose EUR 1.22 to the upcoming AGM. This is a 36% increase and marginally above consensus, but very much in line with the guidance we gave when we said we expect a dividend capacity of around EUR 1 billion for 2024. If you look at the dividend policy, there's an extra EUR 200 million of surplus liquidity, which we have, however, decided to retain and deploy towards the significantly increased investment program for 2025. I think this is a sensitive decision.
With regards to a potential script option this year, we will be making that decision as usual at the time of convening the AGM, which we expect to be in mid-April. Script option, just as a reminder, remains a year-by-year decision, and that is primarily based on share price level versus our net tangible asset value, but also on the other side, leverage and cash flow considerations. On a more general note, based on our dividend policy, we aim to pursue a progressive dividend policy with long-term dividend growth over time. Page 17 on guidance, we confirm both 2025 guidance and the 2028 medium-term objectives. There is one line item that I would like to clarify, as there was some confusion last time.
The objective 2028 now shows that rent growth of more than 4%, and this reflects our plans to ramp up our investment program from currently just under EUR 1 billion - EUR 2 billion by 2028. These higher investments, of course, lead to higher rent growth as a result of adding 8% of the investment amount minus maintenance cost to the rent. Against that backdrop, should gradually see a move towards 4.5% on our way to 2028. With that, back to you, Rolf, for wrapping it up.
Thank you, Philip. Before we go into the Q&A, let's summarize. Following the inflation-driven interest rate hike in the wake of the war in Ukraine, our residential market has shown clear signals of stabilization and normalization, with the values bottoming out and optimism returning to the sector. Vonovia's operating business remains rock solid, and we are confident in our ability to deliver on the 2025 guidance as well as the 2028 adjusted EBITDA goals and objectives. However, new uncertainty has emerged from the planned investment in military and infrastructure spending by the German government elect. The ramifications, both positive and negative, are still unclear at this point, and we carefully monitor the evolving situation. The last three years have confirmed that we are well advised to refrain from knee-jerk reactions, but to continue to manage the business with a steady hand.
Contrary to three years ago, we are much better prepared today and can draw from the lessons we learned over the last three years. The key priorities are clear: protect our rating, manage our debt KPIs, maintain overall capital discipline, but at the same time and with the same importance, safeguard the long-term success and the long-term stable growth of our business. With this, back to René.
Thank you, Rolf and Philip, and I hand it to our operator, Moritz, to open up the Q&A. Just one reminder to everybody, just like in previous calls, we are going to limit the amount of questions to two per person, and I kindly ask you that you honor this request. With that, Moritz, let's do the Q&A.
Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question today comes from Valerie Jacob from Bernstein. Please go ahead.
Hi, good morning. Thank you for taking my question. I have two questions. The first one is on the dividend. I think last year you came and you gave us a formula on how to think about the dividend, and this is the first year after this formula, and you have decided to pay a dividend which is lower than the results of the formula. I was just wondering, how shall we think about that? Is your objective purely to grow the dividend, and shall we forget about this formula? How do you think about that? That is my first question. My second question is, you mentioned that despite all the uncertainties, you think that there is no need for immediate reaction, and that you are monitoring what is happening. My question is, can you be more specific in terms of what you are monitoring?
Is it the response of the credit agency? Is it the sentiment from market participants on prices? If you could be a bit more specific, that would be helpful. Thank you.
Yeah, thanks, Valerie, on your first question on the dividend. No, we have a dividend policy in place, which is 50% of EBIT and surplus liquidity. At the same time, I think we are still in a more rough environment, if you will. If I look at the performance of operating free cash flow in the last three years, it obviously was highly impacted also by us prioritizing cash over profitability in order to delever the balance sheet. The basis for operating free cash flow, in my view, is not quite a sustainable one. Second, as we ramp up our investments going forward, I think it's prudent that, yeah, so to speak, shareholders have to live with only a 30% + increase in the dividend.
Actually, Valerie, what we have to manage, it's a lot of things we have to monitor. Of course, we are monitoring very closely the development of the interest rates, ours and the bonds. We also have to monitor, I think this is the most important task now, the outcome of the coalition agreements which are taking place in the moment, which means we have to understand how much money we get of the EUR 100 billion which is reserved for the environmental, which I think we will get a big part of it. This, of course, will drive our ability to finance even with higher interest rates. We have to pursue also to get a better understanding how the outflow of these EUR 500 billion will happen, because this is breaches and all these, and we have an approval process.
If today's approval process will apply, which is the same hassle we have with housing, this will take a very long time. There might be, and I think the government will be forced to revise the whole approval processes to speed it up, because otherwise the money will be spent somewhere in year 10 and 11. That is why I think this is to be monotone. Of course, we also have to look on the value development. Our assumption is still that increasing rents will be, with stable yields, lead to higher value growth. This might be different depending on the cost of capital. To make it short, we have to understand what the evolution of cost of capital is, not only on that on the equity side. We have to monitor our returns on the different investments, which we have to do.
If we find out that some investments are probably not as attractive with higher cost of capital and probably not significant higher returns, we will refrain from them. To be very clear, the most prominent, which is very easy to stop or to do slower, is what we call undeveloped assets or potential stranded assets. Maybe just buy a little bit later. In the development field, especially development to hold, we can start construction places a little bit later. I think this is the kind of prudence which we now will put to place. The cost of capital is the most important, which we have to monitor.
Thank you. If you could just maybe on the dividend, because I do not think I really understood the answer. I understand you want to be prudent, but how shall we think about next year? Would you think that the objective is to be prudent and grow the dividend? I know that networking capital is highly volatile, but you chose to include it in the formula. That is what I do not understand.
Yeah, Valerie, again, I think 2024 was very much characterized still by stabilizing our balance sheet. I think it's fair to assume when we ramp up our investment that the additional free liquidity, which adds up to the 50% of EBIT, is somewhat pressurized in a positive sense, because if we do more investments, coming back to Rolf's point, that means we are earning more than our cost of capital, and that by nature is then to the advantage of shareholders. That is what we have baked in the decision not to pay on top the full surplus liquidity, but only a portion of that, but still translating into a 36% increase year-on-year in terms of dividend per share.
Thank you.
The next question comes from Charles Boissier from UBS. Please go ahead.
Thank you for taking my question. I think a related question, but just to understand your flexibility of adjusting the new strategic plan around the cost of capital. Under what circumstances do you move back more radically to cash preservation in terms of investments, dividend, and disposals? Meaning going back to phase three from phase three to phase two, if I refer to your slide three.
To be very clear, in the growth initiatives, there are initiatives which really do not need any investment, so very asset-light. Of course, this is not impacted by the changing cost of capital, and we will continue to do so and even probably prioritize this. There are some activities, like for example, the heat pump or the serial modernization, which is relatively asset-light, so have a relatively high return and will be significant above our cost of capital, even if the cost of capital is going higher. This are, of course, we will continue as well, because this is a creative power shareholders. There are sectors like, as I've said, the development to hold and the potential stranded assets, especially in the case of development to hold.
The yield gap between the cost of capital and our returns is not very high, so this will be probably the first which will stop. For the potential undeveloped assets, it is actually easy. You can do it just a half year later, and that is why to be a little bit more prudent. If you have more clarity. The general rule is if we see our cost of capital rising, we will do less investments. This is, of course, taken, and as you know, these investments are discrete decisions, investment by case. This is building by building, modernization by modernization, and this actually can be very granular.
Okay, clear. My second question is on the future recent reports. I expect the EBITDA to net interest coverage to tighten from the current level, so basically deteriorate. I think you guide for ICR to be roughly stable. Could you give us a little bit of a direction for the ICR as to when exactly it stabilizes? Thank you.
Yeah, on the ICR side, stating the obvious, our average interest costs are now roughly 2%. If I look at the marginal cost of debt now with slightly changed parameters, it's up 30-40 basis points. We are currently at 4.3% roughly for a 10-year tenor. By that, you can see that it will take some time for our interest line to grow into the new financing environment. Given our staggered maturity profile, that only comes step by step. For this year, I expect kind of a flattish small pressure on ICR, but we will maintain that above our internal threshold of three and a half times, which, by the way, is at a big safety buffer vis-à-vis what the rating agencies are expecting. Just recently, Moody's has lowered their threshold on ICR.
There is quite a big discrepancy between our internal targets and what this rating is expecting from us for the current rating. In the years to follow, obviously, it depends on the development of the interest rate side. I think we should somewhat monitor the markets. Short to medium term, I have no pressure on that side.
Good, thank you.
The next question comes from Jonathan Kownator from Goldman Sachs. Please go ahead.
Good afternoon. A couple of questions on my end. The first one, please. Both kind of focus on growth, but you said, I mean, obviously, there's an uncertain environment regarding also government measures, but it would be really good to understand your current reading of things and how you've talked about the volume of investment, but also the understanding of how that EUR 100 billion could get spent and whether you get any other benefits from the infrastructure fund in general, where you see any impact in terms of subsidies, rental, business, and development. The second question is around growth and organic growth, essentially, including investments. If I look at slide 12 and 13, you've got a starting base of Mietspiegel this year of 2.8%. You can presumably think that that's going to stay stable or perhaps grow given the inflation over the last few years.
If you want to add as much as potentially EUR 2 billion of investments, say, not even that, but if you do EUR 2 billion at 6% or 6.5%, that's another 4% of rental growth versus the 2.8%. Obviously, I'm sure there's a bit of maintenance here, but the 4%-4.5% that you're highlighting seems a bit underwhelming versus that potential. Just wanted to understand if your assumption is very conservative or if there's a number of costs that you're not highlighting in there. Thank you.
No, I think for your second question, to be very clear, it might be conservative. Keep in mind that it has to be ramped up. The EUR 2 billion which you're doing in one year not necessarily shows up in rental growth in the year because this delay because we are investing. What is important, and that's why you can do your math yourself, it's 6%-7% or even 8% of yield on every euro which is invested and which adds mainly in the rent. This is a math. You can do EUR 1 billion more, and if you're in a fully steady state, then you can calculate the rental growth.
For the rent table itself, yes, you are right, there is a trend upwards, but as you know, the complex rental regulation in Germany, the 4% with EUR 1 billion is probably more or less the safe side to calculate with. Of course, if it is EUR 2 billion, then it is more, but this is mathematic. For the second thing, what we know for sure already is that EUR 35 billion of this package will be for housing, subsidies for housing. Of course, if we are building housing and we have one of the remaining house builders left in Germany, we will get out of this an amount of money. How it will be structured, is it a percentage per square meter? Is it an absolute amount per square meter? Is it a subsidy for land? Is it a subsidy for we do not know? It is not written, so it is not drafted.
In the moment, they are sitting together, forming this coalition negotiations. I think also it will be not the case that in the end of April, we know exactly, we know them some guidelines. Give you another example, our heat pump, which I think you have seen in the capital markets day, which is actually the structured heat pump. You know there was a subsidy which was given by the old government of 10% for this type of heat pump, and it was then a privileged situation because they had not enough budget that owners of buildings got 70% of subsidies, and we as a landlord only get 30%. The original plan was that everybody can get up to 70%. I assume now that there's more money there.
This might be an option, and at least we will lobby for it that everybody is treated equal, which I think is also an important factor. This means that the heat pumps will be subsidized not by 30% but by 70%. These are examples. Jonathan, I'm really sorry. I cannot give you an exact, but I just want to give you as much clarity as we have and how we think on it. Of course, if there are more subsidies in heat pumps and if we can get a higher return on heat pumps, we will do more heat pumps. This is obvious. If there are no subsidies for new construction and the cost of capital are going up, then we are doing less new construction. As simple as it is, it's individual decisions, so we can really optimize the decisions there.
Of course, we will speed up all the investment, all the growth programs which have no or very little investment, for example, property and asset management services, which actually comes with no investment. We want to speed up there. That is why I do not see a big change in the growth profiles. That is why we stick to the 2028 guidance. There might be a shift from more capital intensive to less capital intensive dependent on our cost of capital.
Very clear. Thank you.
Let me just add one thing. If we would not have invented the new growth strategy in Q3 last year, we should have invented it now, because it gives us the possibility to have a good mixture between more capital intensive and less capital intensive growth initiatives, which we can drive forward. We have actually 10 parts of driving growth forward and not only one.
Okay, very clear. Thank you.
The next question comes from Thomas Neuhold from Kepler Cheuvreux. Please go ahead.
Thank you very much for the presentation and taking my questions. I phoned for Philip and one for Rolf. The first one is on cash taxes, which went up quite substantially last year. I was wondering if you can split the cash taxes of EUR 235 million related to disposals and which related to the recurring business, and what do you think is your realistic long-term cash tax rate for your recurring business? The second question is on the development to sale business, page 27 of the presentation. As of when do you plan to reach this EUR 1 billion investment volume and the targeted 30% reduction average construction costs? Can you elaborate what measures you want to implement in order to bring down construction costs by 30%? Thank you.
Yes, on your first point on cash taxes, if you look at our operating free cash flow, the cash taxes we show there are basically the cash taxes related to our core business, so it does not include any non-core disposals. This is only, if you will, on rental value at development to sell and recurring sales. Why has this number gone up? Because we sold more than we did previously. That is true for our development business, but that is also true for our recurring sales business. You see that if you look at the respective volumes in both categories. On the profitability side, as I was alluding to, there was kind of a drag because we prioritize cash vis-à-vis profitability, so we have been accepting quite low gross margins. How to look at that going forward?
I mean, we certainly want to increase our privatization pace. That will go hand in hand also with higher tax payments on the development side, and that is slightly biting into your second question. I think the situation is that we have essentially sold everything which is under construction in order to generate liquidity. It will now require some pre-investments before we can actually generate additional EBITDA, which is why this year is less in the development space about selling project developments. It is more about selling defined land plots in order to generate some profitability and reduce our exposure somewhat in terms of land plots we have on the balance sheet. When is it when we move to the billion EUR? I think in terms of investment, quite soon. I mean, we have given the kickstart for 3,000 new developments this year. I think it is good timing.
With all capital discipline we have to apply, why is it good timing? Because very few other developers are currently developing. Our product will meet a market which will see by definition very little competing supply, and that is positive. How quick we are to actually adjust and move towards a 30% reduction in construction cost, I think a bit premature to give guidance on that point now. We are working very hard on various initiatives and hopefully also reiterating what Rolf said. There will be some political support on that end. There is an initiative called Gebäude Typ E, which is basically the political answer to also give some ingredients in order to reduce construction costs, and that would be helpful and accelerate that process to move to our target.
Thank you.
The next question comes from Bart Gysens from Morgan Stanley. Please go ahead.
Yeah, hi, good afternoon. Two questions for me, please. You state very clearly as priority number one that you want to protect the rating. Can I ask where are you the most concerned regarding your rating? Looks like your ICR is very much under control given you've turned out the debt so much. Given that the other metric that really mattered for the rating agencies is LTV, are you effectively saying you cannot exclude that valuations go down, say, 5%, taking the LTV to 60%, and therefore that would put pressure on the rating? Any color you could provide on that would be great. Secondly, you have decided to increase the dividend massively, right? 36%, not a surprise. You guided to that. Even if you haven't paid out everything you could have paid out, that's still a massive uplift.
Should we assume that if the uncertainty persists at the time you convene the AGM, that you will try to obtain a significant script take-up even if the stock continues to trade at a wide NAV discount? Thank you.
On your first question, I mean, you're completely right. I made that point many, many times. Preserving the rating is really paramount for us. If I look at the different stats, we have fairly comfortable headroom in terms of net debt to EBITDA under the rating metrics. We have very comfortable headroom. Also in terms of ICR, where it is a bit light, if you will, a bit pressured, is still on capital values. Yes, the risk, if you will, is that the increase we have seen in our financing terms, I was mentioning 30-40 basis points, which, by the way, is not a topic at all. It pretty much matches what we have assumed in our planning and medium-term planning.
If there are potentially any spillover effects on capital values, I think it's still too early to judge on if and if yes, to what extent there is a potential impact on the transaction market, but that is something we will observe. I think we made that point, we are not necessarily expecting that, but if that were to materialize, I think we have learned how we have to react to that in order to protect our balance sheet, and that is and will remain very much the priority. Now, on your second question on a potential script, we always decide that when convening the AGM, but if all things remain as they are today, I think you can assume that the likelihood of us opting for the script option is very, very high, and therefore also providing a constituent to strengthen our balance sheet.
Great. Thank you very much.
The next question comes from Veronique Mertens from Van Lanschot Kempen. Please go ahead.
Thank you. Two questions for me as well. First, maybe on the political discussions, I appreciate obviously lost a lot around the budget, but is there any update on the Mietpreisbremse, both in Berlin and on a federal level? Is it a topic that is still being discussed, and are there any updates on that? Secondly, one of the pillars is also the expansion of business areas. Also here, is there anything concrete? How serious are these options, as you also mentioned, that you might want to speed that part up? Thank you.
Thank you very much for the two words question. I think the Mietpreisbremse, the pre-agreement is that they will extend it for two years. The reading of not only us, but also the tenant association is that actually they are ready to accept that the Mietpreisbremse in its way does not work, does not fulfill what the politicians want. That is why I think I consider this a success. You know that to just stop the Mietpreisbremse would be probably very brutal. That is why I think they give themselves now a short period to redefine the Mietpreisbremse to adapt it better to the need. I think this is positive. Of course, this was a pre-agreement. We have to wait for the conditional agreement, which might change.
I think this reading, I'm pretty optimistic that Mietpreisbremse, Kappungsgrenze, and also the gap of two or three euros will be shortly redefined in the new government. This is something which I consider positive. The second is for the second Vonovia. This is what I mentioned. There is obviously, to be clear, I have now the chance to talk to some during my roadshows, which I normally do to visit you. I'm always mixing some meetings in there with people who are investing in long-term, so not in shares, but in direct investment, also sometimes coming from the infrastructure side, because people from the infrastructure side consider our cash flow profile is very similar to what they know from infrastructure. If you talk to these people, they have a different background, horizon. They are talking about five, 10 years.
This is for them relatively normal to talk about. Of course, they have a different view on our business. I think there is a huge potential where we can use our platform, our abilities to help also these people to get invested into German resi, because from the discussions you have with them, they all know that it's not easy just to go to Germany to buy a few housing and being invested in German resi. I think this is a big chance, which, by the way, just to be complete, is not completely covered in our business plan, as we always told you, because it's a business-to-business decision, and that's why it's very difficult to predict the cash flows, because it depends when you sign a contract. This is an upside.
As I mentioned before, we are doing more for less capital intensive. I think our priority at the moment is this, because this requires no capital.
Okay. Thank you very much.
Or very little capital.
The next question comes from Marc Mozzi from Bank of America. Please go ahead.
Thank you very much. Very good afternoon. First question from my side is trying to understand what is the bridge between your EUR 2 per share of EBT after minorities and your EUR 1.5 per share of your EPRA EPS? That's roughly EUR 400 million, a gap between the two. I know we're missing the taxes here. I know we don't have the depreciation, but it sounds a bit high for those two numbers. How should we think about this gap of EUR 0.50 or EUR 400 million?
Look, Marc, I think this is not for the call to talk about a bridge to a metric which does not form part of our key performance measures. Why does it not form part of our key performance measure? Because EPRA earnings are not a good reflection of our business model. It does not include development business. It does not include privatization business, and it is therefore not adequately mirroring our business. With that having said, if you are interested to better understand the deviation on top of what I have just said, let's take that offline. I think it is too technical for this call.
Thank you. On your Deutsche Wohnen share offer for the right blocker, is Apollo to benefit also from the fixed compensation scheme you're planning to give to investors which are not providing their share or not?
Yeah, look, if you're dominating a company, according to the German corporate law, you have to give shareholders two alternatives. That is either to exit Deutsche Wohnen, become a shareholder of Vonovia, and if they intend to maintain a shareholder in Deutsche Wohnen, which, by the way, long-term at least, once the appraisal proceedings have finished, typically is not the preferred choice of people. Then it's simply a dividend. In other words, shareholders have to decide, do they want to receive as a Vonovia shareholder, the Vonovia dividend? If they decide to maintain their shareholdership in Deutsche Wohnen, they will get an equivalent dividend on the Deutsche Wohnen side, which is being determined on the basis of the valuation approach, valuation opinion that has been discussed in the EGM earlier this year.
Brilliant. Thank you very much.
The next question comes from Paul May from Barclays. Please go ahead.
Hi guys. Thanks for taking my question. I'm just focusing on the cash taxes again. Apologies for that, but I find it interesting that you moved to a KPI that was free tax just at the point that your cash taxes materially increased. I'm sure it's coincidental, but just looking at your FFO, it's not the key metric you consider, but that's down about 15%-20% year-on-year. Likely, given higher financing costs, minorities costs, higher taxes and disposals, it is likely to be down again in 2025. I just wondered, when do you expect that measure to start to increase? Because it's a measure that a lot of investors and analysts still look at. It would be great to get some color on that.
Also linked to that, I think two of the key drivers of your adjusted EBITDA growth are your recurring sales and development to sell. Both of those businesses, if I'm correct, incur cash taxes. If you could just confirm that, that would be great. Is that something that you'd consider including in your KPIs, given it's driving your EBITDA? Apologies, last one. It's just a technical one, I guess. Can you provide some color on the additional EUR 90 million of non-recurring expenses year-on-year? I think they went to about EUR 240 million year-on-year. Just wondered if you could provide some additional color on that. That'd be great. Thank you.
Yeah, Paul, on the cash taxes, I mean, first, I can confirm that this number is highly dependent on our success in development business, but even more in the privatization business. In the privatization business, we are often privatizing condominiums, which we are holding on to for long. So they have been depreciated from a tax perspective. And if you look at our deferred tax liabilities in relation to gross asset value, you get a good estimate on how much that is. So that is very much impacting that. That having said, I mean, I think we provide that transparency, not in terms of our guidance, but in terms of our reporting, and that you explicitly see the cash taxes, which are assigned to our business, our core business, our four segments. You will see the development for the running year. Do not expect big surprises.
Cash taxes based on our planning will be inside 10% of EBITDA. No really massive change in terms of what we've seen 2023 towards 2024. On the Vonovia side, here, we have seen various impacts. I mean, they had a lot of transaction business, structuring the real estate transfer broker in terms of the Apollo JVs and other transactional business. That was accounting for the Vonovias. My clear expectation is that people hopefully not see a repetition of that high Vonovias in the running year. With our disposal program hopefully completed.
Sorry, just a quick follow-up. Apologies. Appreciate you taking a few follow-ups. Just on the taxes, I appreciate it's dependent on the success in the development to sell and the privatization business. That is a key part of your growth moving forward in your growth strategy to be successful in that part of the business. It certainly seems counterintuitive or at odds with shareholders that you get rewarded for the success of that business, but they don't reap the full reward because they also incur the cash taxes. I just wondered, is that still an appropriate metric to look at before taxes, or should it be appropriate now that you look post taxes for your KPIs as well? Is that not something that's considered in terms of changing that?
I think we have chosen EBT for a reason, and there's no intention to change KPIs. To be very clear, I mean, that transparency you are rightfully asking for is transparency via giving. I think far more important than looking at accounting taxes, which also include deferred taxes, non-cash taxes to a large amount, is really to focus on cash taxes. That is what we do on our operating free cash flow. Given the fact that cash taxes are highly dependent on our disposal success here, as I said, predominantly in our privatization business. That, again, here, it also somewhat depends on which entity is it you are essentially privatizing condominiums from. Whether there are some tax assets you can use is a number of there are a number of complications which make that difficult to guide.
Now, I think I've given you some good indication what to expect for this year. As I said, it's inside 10% of total EBITDA. That obviously is accounting for our best guess on successful execution of our disposal program, which is predominantly related 2023 to land slots in the development business and to condominiums later with a good increase. I think this is as much transparency I can give as of now.
Perfect. Thank you very much.
The next question comes from Manuel Martin from ODDO BHF. Please go ahead.
Thank you for taking my questions. Two questions. The first question is, given the many things that are going on in Europe and in the world, and in view that you're operating in three countries in Europe, it's Germany, Sweden, and Austria, currently, where would you feel more comfortable in your investments and divestment decisions, or where would you like to be active? Maybe you can give us some color on your regional strategy. First question. Second question is on the migration factor. We don't know what to expect from policy in terms of migration, whether a lot of migrants will leave Germany or not, or whether more migrants will come. Could you describe a bit the sensitivity of your portfolio when it comes to the factor of migration, if that's possible, of course? These are the two questions, please.
I start with the migration factor. If you look on Germany, and if you look where the immigrants, which we have illegal immigrants and legal immigrants, I think the agreement is clear that we need more legal immigrants. I refer to the illegal immigrants first. The illegal immigrants at the moment are not in the housing sector. They are living in camps, for example, in the big two airports. In Berlin, they are full of camps, which are temporary housing where these immigrants live. If they are approved to stay in Germany, then they can ask for housing allowance, and then they show up in our portfolio. I think the new government will be more rigid against these immigrants, but this will have no impact on our housing because just the camps will be smaller, hopefully.
If it comes to the legal immigrants, which we are also part in, because we are recruiting electricians from Colombia, which we say is legal immigrants, this has to be ramped up massively because otherwise it is no chance that we will deliver the EUR 500 billion spending because somebody has to produce the weapons, somebody has to produce the streets and the bridges and all these. There will be a massive need of workers in this country, otherwise the program will fail. I think everybody is aware of, and that is why we will see a legal framework for immigration here into Germany. This is, of course, a prognosis. I am not a politician who is negotiating at the moment, but I think this is highly shared.
If this program will happen and if we get the approval process in time, if we do not solve the labor force, we will have an issue. I can tell you from another job where I am in the supervisory board, where this is not highly paid labor, they are desperately looking for it. If they cannot provide housing, they will not provide employment. The immigrants which will come now with this program, this is one element which we really cannot judge, but it will put much pressure on this imbalance of supply and demand because what we see is the immigrants will go to the big cities as well. The legal immigrants. The first question, I forgot now.
Hello.
What we see is actually, to be very clear, we see in the moment that Sweden is in all KPIs a little bit better than the rest of the pack. That is why we are happy to have Sweden. From the stability of the cash flows, all the three countries are very similar, 100% stable, 100% rocket solid because they are all regulated markets and they have all massive imbalance of supply and demand. The problem of this imbalance in supply and demand is actually the same in all big European cities, and we are only in all these countries in the big cities.
Okay. Thank you.
Ladies and gentlemen, this was the last question for today. I would now like to turn the conference back over to René for any closing remarks.
Thank you, Moritz. And thanks, everybody, for dialing in and participating in this earnings call. Also, thank you for honoring our two question requests, at least for the most part. We will be on the road quite a bit, so hopefully we will have a chance to connect in the days and weeks to come. That concludes today's call. As always, stay safe, happy, and healthy, and speak soon. Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect. Thank you for joining and have a pleasant day. Goodbye.