LEG Immobilien SE

and good morning everyone from Düsseldorf. Welcome to our call for our Q1 2025 results and thank you for your participation. We have in the call as always our entire management team with our CEO Lars von Lackum, our CFO Katrin Kuehling as well as our COO Volker Wiegel. You find the presentation document as well as the quarterly report and documents within the IR section of our homepage. Please note that there is also a disclaimer which you find on page 3 of our presentation. And without further ado, I hand it over to you, Lars.

Thank you, Frank. A very good morning to all of you. We are well on track for our guidance which offers a 7% bottom line growth. Cash generation from our core business continues to rise. We grow in our core product. The integration of BCP is well on track. This portfolio and the organic growth supported our strong net cold rent increase of more than 7%, enabled us to further improve margins, and boosted AFFO by 28%. The strong AFFO level is partly affected by a slettish investment level compared to Q1 2024. Therefore, after the integration of BCP, we will increase investments for this portfolio in the year. We reiterate our investment guidance for the full year of at least €35 per square metre. We reaffirm our guidance of an increase of the like-for-like rents in the range of 3.4% to 3.6%, i.e. of more than 4% for our free finance portfolio. The rent increase in Q1 amounts to 3.5%. because we execute rent increases as swiftly as possible after the publication of a new rent table and therefore depend on its publication. Our LTV increased slightly to 48.4% because of a technical accounting effect, first time full consideration of BCP. Therefore, we stick to our existing sales program of around 3,000 units, including assets at the low end of the quality spectrum, as well as new built units. Additionally, we put the eastern German units of BCP up for sale, bringing our disposal program to around 5,000 units. Despite geopolitical tensions and macroeconomic risks, transaction activity in the German residential market is robust. The stable cash flows of the asset class and an expected value increase of 0.5% to 1% in H1 2025 attracts continued interest from domestic and international investors. We therefore expect further progress on our disposal program. As you can see on page 7, BCP is operationally and financially fully integrated. After establishing the intended tax-efficient structure, we executed the tender offer and the delisting from the Australian Stock Exchange. we successfully refinanced two-thirds of BCP's financings. Focus currently is on streamlining the legal structure. The first-time consolidation of BCP supported our strong rental growth by around 12 million euros. The BCP portfolio will be neutral to AFFO in 2025 as we will now ramp up investments into this specific portfolio. And with this, I hand it over to Volko with an update on our operations. Thank you, Lars.

I'm now on slide nine with an update on our disposal program. After the disposal of roughly 2,500 units in 2024, with corresponding disposal proceeds of 255 million euros, we sold another roughly 1,500 units in Q1 with proceeds of 125 million euros. We strive to sell more assets, at least at book value, to improve our LTV towards 45%. We are currently marketing around 5,000 units. These units include the 3,000 mentioned earlier in the year and additionally all our assets in Eastern Germany, most of those in Magdeburg, Halle and Leipzig. The transaction market is robust and there is continued interest in German residential due to its low risk profile. On slide 10, you find more detail on our in-place rent growth in Q1 of 3% or 3.5% on our free finance portfolio. Despite the comparably slow start into the year, we confirm our guidance of an increase of 3.4% to 3.6% for the full year or more than 4% for the free finance part. In executing rent increases, we are, quite naturally, as Lars already pointed out, somewhat dependent on the publication of those rent tables. And this year, quite a number of rent tables will be published in the following month. The average in-place rent per square meter now amounts to €6.87 per square meter. Half of the rent increase was attributable to rent table increases and half to modernization and relating effects. The next cost rent adjustment on our rent-restricted units, which make up 17% of our portfolio, a slightly lower number because of the BCP acquisition, will take place next year. In 2028, roughly half of all our rent-restricted units will come off restriction and will provide us a meaningful rent increase potential. Current difference between in-place and market rent amounts to more than 50%. More details on that topic can be found on page 32 of the presentation in the appendix. On page 11, we provide more details on the split of capex and maintenance investments. Adjusted investments per square meter in the first quarter reached €7.51, corresponding to a minor decline of 0.9%. While this development is lower than the run rate required to meet our guidance of at least 35 euros per square meter, we reiterate our investment guidance. Having just gained full control of the BCP portfolio at the beginning of the year, the increase of investment just took a few weeks, but will already show up in our Q2 numbers. And with this, I hand it over to Catherine.

Thank you, Volker, and good morning to everyone also from my side. I will start with slide 13 and the development of our operating KPIs in the first three months. Net cold rent grew by 7.2% of 15.4 million euros to 229.5 million euros. This was also driven by the integration of BCP, which contributed 12.3 million euros. Another 7.1 million euros came from the 3% like-for-like growth of the standing portfolio while disposals had an opposite effect of 4 million euros. Our rent increase has indeed been passed on in full to the other earning positions. The recurring net operating income showed an increase of 8.7%, reaching 186 million euros. Its margin improved further by 110 bps to 81%. The adjusted EBITDA rose by 10% to 173.4 million euros. The EBITDA margin improved by 200 basis points to 75.6%, well in line with our guidance of 76% for our financial year 2025. AFFO increased by a strong 28.2% to 62.3 million euros. Please turn to the next slide where we will have a closer look at the AFFO drivers below the EBITDA line. On the net cash interest, we saw a moderate increase of 2.8 million euros. Both our maintenance and CAPEX spendings were nearly flat year on year and somewhat behind the annual run rate. Although we plan to spread our investments evenly throughout the year, we must allow for a short ramp-up phase concerning the BCP portfolio, as Volker already pointed out. Subsidies were also still very low at 3 million euros in the first quarter. As I already mentioned during our last earnings call, we expect an inflow of 20 to 25 million euros for the full year. Coming to slide 15 and LEG's financial profile at the end of the first quarter. As you see, not too much changed on our profile and on our KPIs. In Q1, we refinanced roughly two-thirds of the more expensive BCP financing and secured one-third of their financing, which came at attractive yields. The outcome is an almost unchanged average interest cost at 1.55%, and an average maturity of 5.6 years for the group, also already including our €3 million sub-benchmark bond issuance in January 2025. We have all our 2025 maturities addressed, and we can still rely on a very strong liquidity position. At the end of March, we had around €830 million of cash and cash equivalents. plus undrawn revolving credit facilities adding up to €750 million, plus an unused commercial paper program of €600 million. You have certainly noticed that the LTV has risen by 50 bps compared to year-end 2024 to 48.4%. This is driven by the full consolidation of BCP into our numbers. We continue to stand by our mid-term target of 45%, and our ongoing and enhanced disposal program will further support this. As usual, we provide important financing KPIs and bond covenants in the appendix on slide 38. Our ICR has slightly further improved to a strong 4.4 times, and all the other bond covenants are also in dark green territory. And with this, I hand it over to Lars for the final remarks.

Thank you, Kathleen. We had a strong start into the year and are fully on track to deliver a bottom-line growth of 7% supported by BCP and further progress on our operational performance. We stick to our mid-term LTV target of 45%. The expectation of a value increase of 0.5% to 1% and a continuation of our portfolio management exercise, i.e. selling assets at the low end of our asset base, at least at book value, will contribute accordingly. While cash generation of our operational business remains strong, interest costs remain low. With a clean balance sheet, we are convinced to steer smoothly through a period of increased market volatility. Overall, we are happy to confirm each item of our guidance for this year. With this, I hand it over back to Frank.

Thanks, Lars. And with this, we begin the Q&A session, and I hand it over to you, Valentina.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the 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. Questioners on the phone are requested to disable the loudspeaker mode and eventually turn off the volume from the webcast while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Marius Pastou from Berchlein. Please go ahead.

Good morning. Thank you for taking my questions. So two questions from my side. Firstly, what drove the decision to sell BCP's East Germany portfolio? And it's a bit of a background to the deal. Are you structuring this as one larger disposal or will this be split up into multiple ones? And then secondly, can you maybe give us an update on the development land plots you acquired as part of the BCP deal and any policies that have been announced by the new coalition government adding a bit more confidence for you to move back into development? Thank you.

Good morning, Marius, and thanks for your questions. So with regards to the portfolio in Eastern Germany, so certainly with regards to our LTV, additional acquisitions are currently nothing which we are looking into. Therefore, we do not think that we can scale up quickly enough to really make this a sizable new office for us in Leipzig. So therefore, the decision we're growing that it makes sense to sell and dispose all our Eastern German assets, this which we are currently marketing, certainly and as always, we are willing to bring that as a full portfolio, but we will maximize our value for shareholders. So therefore, we are also happy if we get better bids on single parts of the portfolio to then split it apart. But we are also willing to dispose it as a full Eastern German portfolio. With regards to the lend plots, there are two lend plots which we have acquired. One is in Grafenberg and the other one is in Gersheim. So apologies for the names which are so close to each other. The one in Grafenberg, that is certainly something which is development to sell. Average sales price per unit will be above 7,000 euros per square meter. That's definitely not a product which fits LEG. So therefore, we will sell the plot. Currently, we do some demolishment on the plot. And as soon as this has been finalized, which is most probably the case, in Q3, we will then start to market that plot and bring it to the market. The second one, and that's the bigger one in Gerritsheim, we are currently in first talks with the city, and there currently is not a building permission there, so therefore we started negotiations with the city of Dusseldorf, and we currently look into whether there is a possibility for us to do the development ourselves. But if there is someone being very willing to buy it from us, we would also look into an option of disposing that unit. If you look and make reference to the current coalition agreement, yes, there are some references being made to enable more building activity in the market. Honestly, due to the financial limitations, We do not see any stronger push. Certainly there will be some reductions with regards to requirements, like the building type E will be implemented, which might have a slight impact and reduces the cost per square meter to be built. We do not foresee any substantial subsidies. So it is all about the building permission, which you can agree with the city, We are in talks, but it's still too early to finally say whether we stick to that plot or whether we bring that to the market.

Thank you very much. Thank you.

The next question comes from Thomas Neuhold from Kepler-Chevreau. Please go ahead.

Good morning. Thanks a lot for the presentation and taking my questions. I always want to have two. The first one is on your revelation guidance. Firstly, thanks a lot for that. I was just wondering if there is no major change in interest rates going forward. What do you think will happen to yields? Do you expect a further yield expansion to happen in the midterm? Or do you think that yields will stabilize and the rental growth will feed into the regulation gains in the midterm? And the second question is on PCB. I was wondering if you can provide us with an update on the size and timing of potential synergies. Thank you.

Yeah. Good morning, Thomas, and thanks for your question. So with regards to the revaluation and the guidance which we've given to you, I think it holds true what we've disclosed already with our numbers for H2 2024. So we've seen the turning point. and we are now seeing a continuous movement into positive territory. As you might remember, the guidance we gave for H2 2024 was 0% to 0.5%, and finally we ended up with 0.4%. Now we are seeing that trend to continue, and now we expect 0.5% to 1% for H1 2025, and that's a continuous positive momentum which is building up. However, for this year, Thomas, our expectation is that the rent growth will be stronger than the growth of the nominal values. So, therefore, from our perspective, we are expecting a bit of a yield widening until the end of 2025. Your second question was – I'm sorry, I forgot –

An update on the size and timing of potential synergies with BCP.

I think, and that is what you can conclude from what we've done, I think we had all hands on deck to really do a seamless integration of the BCP portfolio. And I think we are quite proud that this very difficult structure of the company within Israel enlisting many legislations where those entities are currently being domiciled. We are working hard and have done so over the last month. to get that on the one hand side operationally integrated, fully refinanced, but also with regards to full acquisition executed as quickly as possible. So that is, I think, quite substantial progress. With regards to synergies, as you know, we always promise that we are working on those and continuously we'll certainly make sure that those will get executed on within 2025, 2026. but it will just take time. As soon as we have done that, Thomas, you will also see a positive contribution to AFFO, and therefore we stick to our current assessment that there will be a neutral impact on AFFO from the acquisition of BCP in 2025. Thanks a lot.

The next question comes from Jonathan Conator from Golden Sox. Please go ahead.

Good morning. Thank you for taking my questions on the like-like rain growth. Could you elaborate how essentially you're going from 3.5% to 4%? What are the key drivers of that, what you see going forward for the evolution of like-like? Thank you.

Jonathan, yeah, the key drivers are rentables on the one hand. We have a very number, a couple of rentables that are just published or will be published in the next weeks so we have for example in Cologne or Münster they were just published at the beginning of this quarter so we will now execute on these and that's the main driver and the second driver of course are relating effects and we have some substantial modernizations which will kick in in Q4.

Okay, Q4. Okay. And so what is the current sort of yield on cost you expect on these modernizations? Please.

Jonathan, can you repeat?

I think we are still struggling to understand your questions.

Sorry, I was just asking what was the yield on cost you were achieving on this modernization that you're expecting to kick in in Q4, please?

It's still around that yield on cost of around 5%. Okay, very clear.

Thank you.

Thank you. The next question comes from Veronique Mertens from Van Lanshot Camping. Please go ahead.

Good morning all. Thank you for taking my question. I'm just wondering... Obviously, the rent regulation framework is now extended by a few years, which means that rental growth will be kept for a few more years. And we've seen that peers have started to focus also on businesses either in different geographies or different business lines to still accelerate top line growth. And you already mentioned that because of also your balance sheet, it's difficult to maybe grow externally. So wondering if you are exploring other options to also seek this acceleration in top line growth at the moment.

Yes, so Veronique, with regards to the rent growth and the rent regulation, I think everyone is being aware that we currently have seen an extension of the rental break until 2028, end of 2028. That's certainly something which we've always included in our forecast. For this year, 2025, we are expecting a like-for-like rental growth in our free finance portfolio of about 4%. We currently do not foresee any additional new builds coming to the market which really make a difference to that undersupply, especially in the type of product which we are currently offering today. So from our perspective, the shortage of affordable living in the German market will continue, and therefore, from our perspective, also our net rental growth will be quite stable also for the years to come.

Okay, but my question was more for instance looking at, indeed, third-party management or acceleration of development pipelines is not something that you're looking into right now.

Yeah, so from our perspective, Veronique, we are not looking into third-party business. You know that we are believers into having a very clean, easy to understand balance sheet. So we are not looking and envisioning any third-party business from our end. And certainly what we do is try to maximize the value out of the assets which we hold on our balance sheet. And there I think you were able to see that the net cold rent increases over the last years increased substantially. Now we are envisaging an above 4% for the free finance part of our portfolio. This is what we consider to be quite a dynamic rent increase for the type of assets which we are currently owning.

Okay, that's clear. Thank you very much.

The next question comes from Manuel Marten from OdoBHF. Please go ahead.

Thank you, ladies and gentlemen. Just two questions from my side. The first question is further up on the disposal of the Eastern German properties. If I understand that well, this includes also Leipzig. And given that Leipzig is actually a city with a bright future, maybe you can give me some pros and cons on the decision of disclosing also Leipzig, because in theory it could be the possibility to build up the hub by purchasing more portfolios in Leipzig. That would be the first question.

Good morning, Manuel. I'm very happy to once again give you a bit more colour on our decisions to dispose of the eastern part of the portfolio. So if you look into the current portfolio, it's around 880 units which we own in Leipzig. That is below the threshold of the 1,000 which we normally set ourselves. Yes, Leipzig is a city which has developed and most probably will also in the future develop positively. From our perspective, however, it is of incredible huge importance to have an ultra-low-cost platform to manage our assets. Operationally, Leipzig is unfortunately quite far apart from all the other assets which we are managing. Certainly, we were willing to include Halle and Magdeburg, but that's still quite a driving distance, as you know. So therefore, from our perspective, it was nothing which we could come close to the margins which we are earning with other portfolios. So therefore, that was driving our decisions to dispose of Leipzig as well as of the other assets in the Eastern German markets.

Okay, I understand. Thanks. Second and last question from my side is a little question on the P&L. There was an item, other income, which drove a bit the operating earnings. I think it was plus 129 million euros. Maybe a short sentence on what's standing behind the other income in that case.

That's accounting.

That's Catherine.

The 129 is the lucky buy or bad will that we have from the temporary purchase price allocation. We will finalize it by the end of the year with our financial year figures for 2025. But this is what we currently have in the figures, and according to IFIS, you have to then put it through the profit and loss, and that's why it's another income.

Of course, it's not clear. All right. Thanks. Thank you very much.

The next question comes from Paul May from Barclays. Please go ahead.

At the time of the BCP transactions, and you mentioned financial expense synergies, there was a recent bond issue with a big higher coupon. What a political. Yeah. Can you unmute here, Nick? You can have it. I will do so in a second. Is that any better?

Not really. Maybe if you talk louder, otherwise we take it off.

Let's try that. Is that any better? So it's on the road at the moment. Just a couple of questions. I think when you acquired BCP, you mentioned financial synergies or financial expense synergies. But I think your recent bond cost of debt, and I think you recently also provided intercompany loans to BCP at coupons that are lower than your marginal costs. So just wondered, at a group level, are you still comfortable that you'll achieve financial expense synergies?

Yes. So whatever we assumed in our business case, that was bang in line with what we were able to reach with regards to the financial synergies being realized. So that was also the reason why we paid so quickly back whatever there was out there being held by BCP. For example, the Sheckle denominated bonds and others. And that was also the reason why we came out with that 300 million euro bond. in January and all of that certainly partly being used to refinance the higher interest rate of the BCP fund.

And the lower coupons that you offered on a fixed rate to BCP, how does that sort of reconcile with your higher cost to LEG? I'm just trying to understand that.

So the intra-group loan situation I think shouldn't be a worry to you because whatever there is, it's a 100% owned entity and therefore that is something which most probably shouldn't be your worry. We are financing the company on a group level and then we are handing down those loans into the different entities.

Perfect. And then second question on the rental growth in your stable markets then came through 90 basis points higher than in your high growth markets. And yet valuation yields in your stable markets are 110 bits higher than in the high growth markets. I just wondered how long do we consider the high growth to be high growth when the growth is not higher in the stable markets? And how does that support the lower yield in those high growth markets if the growth is not as strong as elsewhere?

So certainly it's a very good question and honestly Paul, that is the impact of the rental break and I think a topic which we've discussed on a very regular basis with you and many other investors, the rental break certainly has an impact and that impact is being reflected in unfortunately a lower rental growth for those markets. Is that the underlying market trend? Certainly not. So with regards to Cologne, Dusseldorf and many other cities where we have assets, the market dynamics are certainly not properly reflected with those new lettings, and that is part of the problem. And as this is to continue going forward, we are definitely of the opinion that there is not more new bills to come to the market. because that is certainly limiting prospects for project developers and those investors investing into new units because they are currently quite afraid that those new regulations will also hit them if they are creating newly assets for that market.

Cool. Perfect. Makes sense. Apologies for the background noise and poor reception, but thank you very much. Thanks a lot for your questions, Paul.

As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question comes from Mark Mozzi from Bank of America. Please go ahead.

Thank you very much. Very good morning, all. I just wanted to come back on your gap between the IPHAI LTV at 52% and your reported LTV at 48%. I understood that that was entirely due to you saying allocating cash or cash equivalent into receivables, which is not considered as cash effectively in the calculation of the IPR-RTV on everyone else, by the way, including us. And my question are the following. Number one, those deposits have been reduced from $600 million December 24 to 350, Q125. And the gap between the two calculations hasn't moved, still 4 percentage points.

Why?

Number two, have you been able to investigate why you're the only company, at least I know, recognizing deposit or cash equivalent into receivables and not in the line as such called cash on cash equivalent? Thank you very much.

You just have to take into consideration that this is how this measure is being taken. We account our cash and cash equivalents. according to IFRS. And I mean, I'm really happy to invite you to discuss when we discuss with our auditor. But our auditor says that this is cash and cash equivalents and short-term deposits don't belong here. And that's why we can't put them in here. So that's with regard to how we classify cash and cash equivalents. With regards to the figure, yeah, it is different because a lot of things changed. I mean, you just picked out one single thing where you pointed out correctly that we reduced the short-term deposits, but also in Q1 changed a lot due to the BCP integration. So it's not just one single effect we also had. obviously a little higher debt position. And we also had, of course, more assets due to the BCP integration. I can just continue to iterate. We focus and we steer on our LTVs. If you take the LTV of the APRA and you correct the short-term deposits and you look how they account for debt positions, for example, they just take nominal values, not financial accounting values. So I end up below 50% on that one. But yeah, happy to discuss this now every call with you.

Well, I'm fine, but the only following follow-up question on your first point, which is the one from the street, actually. I'm just reflecting what the street is asking me every single day and I have absolutely no clue as why your auditors specifically, which are a very famous one, part of the big five, if I'm correct, are recognizing something which is anywhere else not recognizing as receivable. So the question is, what is so specific about what are the specifics or so specific to those short-term deposits that makes your accounting recognize it as receivable, not as cash on cash equivalent. That's the only thing we're trying to understand. Is it because it's a structured product? Is it because it's in the SPV? You don't consolidate it directly? Is it cash in the hand of your tenant, from your tenant, because it's a deposit from your tenant? I just wanted to understand what are the specifics of those deposits of those 350 million euros.

So not to confuse anyone, this is a really short-term definition. This is no money from the tenants, so not to confuse anyone. And in terms of the specific definition, let's just take it offline, and we are happy to provide you with more information on that one.

Super. Thank you very much.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Frank Koffinger for any closing remarks.

Yes, thanks, Valentina, and thanks for all your questions. And as always, should you have further questions, then please do not hesitate and contact us. Otherwise, please note that our next scheduled reporting event is on the 7th of August when we report our half-year results. And with this, we close the call and we wish you all the best and hope to see you soon on one of the upcoming roadshows and conferences. Thank you and goodbye, everybody.