LEG Immobilien SE

Ladies and gentlemen, welcome to the LEG Immobilien Q3 2025 conference call and live webcast. I am Matilde, the course 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 Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Frank Kopsinger, Head of Investor Relations. Please go ahead.

Thank you, Mathilde, and good morning, everyone from Düsseldorf. Welcome to our call for our nine-month 2025 precise call, and thank you for your participation. We have in the call our entire management team with our CEO, Lars von Lackum, our CFO, Katrin Kuehling, as well as our COO, Volker Wiegel. You hopefully realize that we changed the format of the presentation slightly. You have now a more condensed section in the front part of the presentation and you have all information as in the path in the appendix. 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'll find on page two of our presentation. And without further ado, I hand it over to you, Lars.

Thank you, Frank, and welcome from my side as well. A brief overall comment and just repeating what Frank just said. All adjustments to our financial disclosure were made to present our financial updates in a sharper, more straightforward way and allow for a more focused discussion on the main levers of our business. You can still find all the details included in our financial disclosure so far in the new appendix of today's presentation. With this, I turn to the highlight slide. The key highlights and messages are certainly the following. After the first nine months, we are fully on track for our 2025 guidance, i.e., we aim for an AFFO growth of 10% this year. For 2026, we guide for an additional growth of 5% in AFFO. We stick to AFFO as our core KPI, i.e. cash generation remains our core principle in this environment. At the same time, we have included FFO1 as part of our guidance for 2026. We remain constructive on valuation and expect a positive valuation result of 1.5 to 2% for the second half of the year. Disposals remain one key lever to bring down our LTV to the target line of 45% in 2026. We have already sold more than 2,200 units for around €100 million so far and remain very positive to see signings until year-end based on the current state of our sales pipeline. The last highlight for this quarter is certainly Moody's. Moody's just recently confirmed our BAA2 rating and revised our rating outlook to positive. We regard this as a recognition of our efforts to protect our balance sheet via non-complex measures and the cash-focused steering of our group. Let me now move to slide 6 and our financial highlights for the nine months. We continue to show strong growth, which is driven by the seamless integration of the 9,000 units portfolio of BCP, as well as by organic growth. Our net cold rent grew dynamically by 6.8% or 44 million euros, respectively. Strong top line growth in combination with a tight cost control led to a strong EBITDA margin of 79.2% for the first nine months. Based on that, we feel comfortable to reach the increased guidance for the EBDA margin of 77%. The same holds for the AFFO, which we expect to come in between €215 and €225 million. We are aware that the 3.1% like-for-like rental growth looks a bit lighter than our target range of 3.4% to 3.6%. We are very confident that we will reach the target range for the full year in Q4, and Volker will give you some more details on the reasons in a minute. Let's move on to slide seven. For some of you, it might be a bit of a deja vu, as we have shown the same slide in our H1 core. We are of the opinion that this simple chart reflects our core KPIs and the thinking behind it in the most transparent way. We continue to believe in cash, i.e. cash remains king in the current environment. Therefore, AFFO remains our core KPI. At the same time, we never stop prioritizing profitability. Therefore, we are including FFO1 additionally in our guidance. The impact of the drastically rising state budget deficits and rising debt ratios to interest rates is more than uncertain. The response of national banks to these fiscal situations is equally unknown. The few green shoots seen in transaction markets might continue to grow, but substantial risks remain. In this environment, we do not want to organically start to lever up by increasing investments. We have decided to remain in a fully self-financed position. We continue to spend more than €35 per square metre, This is still one of the highest levels in LEG's history, excluding the peak years of 2020 to 2022. Therefore, we invest more than 40% of net rental income into our portfolio via maintenance or CapEx. We consider this to be significant, and those investments will support future rent growth. All of this is fully self-financed, and we do not need to take up additional debt. It is the most rational strategy to maneuver in this environment. We expect to achieve a further growth in cash generation, especially the 10% AFFO growth in 2025, and we guide for another 5% growth in AFFO in 2026. And with this, I hand it over to Volker for a detailed view on our operations.

Thank you Lars, and good morning to everyone also from my side. On slide 8, we provide more details on the rent growth per square meter realized in the first nine months of the year. In-place rent per square meter increased on a like-for-like basis by 3.1% to €6.99. The 3.1% can be broken down into 1.7% from rent-able increases while modernization and re-letting contributed 1.4%. The like-for-like rent growth was solely driven by the free financed units with an increase of 3.6%. At the end, we will have achieved also here our target of more than 4%. The like-for-like vacancy rate, according to IPRA definition, remained at a very low level of 2.5%. In 2026, we will have an adjustment of the cost rent again, and accordingly, rent growth will gain momentum. We expect also bigger locations to see rent table updates like Gelsenkirchen, Duisburg and Düsseldorf in Q1 or early Q2. You have the list as always in the appendix on slide 25. Let me now explain why we are so confident to reach our 2025 rental growth target of 3.4% to 3.6% despite having only reported a 3.1% increase as of Q3. Let's move to slide nine. You can see the rent increases we put through in each quarter in 2024 and 2025. In Q1 2024, we put through strong rent increases. This was also a function of underlying rent table publications, re-letting activity and modernization activity. After three quarters in 2024, we had implemented 87% of the rent increases realized until year end. Contrary, in Q4 2024, the rent increase put through was rather low. This year, rent increases are split more evenly throughout the quarters. This is mostly due to the publication date of new rent tables. Given the previous year pattern, we will have a significantly stronger Q4 than last year, which will get us into the target range. Slide 10 gives you more insight into our investments. Here, we are also fully on track for our per square meter goal of more than €35. Our total investments into the portfolio increased by 10% in the first nine months of the year. The absolute amount was roughly 292 million euros, which corresponds to 26.16 euros per square meter. The per square meter investments increased by 6%. The fact the portfolio size increased with the full takeover of the BCP led to a higher increase in absolute numbers than on a per square meter basis. The cap ratio remained unchanged. The recurring capex, which is relevant for the calculation of the AFFO, increased by 7%. The decline in new construction investments is decisive for the lower growth rate in comparison to the overall investments and adjusted capex, respectively. Let me briefly comment on disposal on the next slide. We are satisfied with the progress if we consider the transaction market's activity, especially for bigger portfolios and volumes, remain soft. In total, we did already sell around 2,200 units for around 190 million euros so far. All of them had been transacted at or above book value. We expect more to come in in coming weeks and expect transaction activity at our end to ramp up towards the end. Rest assured that once we sign bigger deals, we would inform you via a press release to keep you up to date. And with that, I hand over to Kathleen.

Thank you, Volker, and good morning from my side as well. Let me walk you through our AFFO development on slide 12. In the first nine months, the AFFO increased by 19.3% to €181.3 million. This was mainly driven by higher net called rents. whereas around 20 million euros were due to organic growth, the acquisition of BCP contributed another 37 million euros, offsetting the impact from disposals, which was 13 million euros. Furthermore, we saw positive contributions from our value-add business and remained very cost-disciplined in both operations and administration, which had a positive overall effect of 7.1 million euros year on year. While the average interest cost in our group remained low at 1.59%, net cash interest in absolute terms rose by 5.9 million euros as total debt has increased due to the consolidation of PCP and, of course, also due to the general rise in interest from new financing. On the investments, the rise in spending is in line with our guidance. In terms of subsidies for the full year, we still expect to come out at the lower end of our original guidance range of 20 to 25 million euros. In financial year 2026, subsidies should come down to around 10 million euros, also due to the fact that there will be no more new construction activities. For more details, we provide an AFFO table in the appendix on slide 16. Coming to slide 13 and LEG's financial key figures. Following the 400 million euro redemption of our convertible, which was due on September 1st, all our maturities for 2025 have been addressed. And the same applies to all of our debt maturing in 2026. This includes the 500 million euro straight bond, which represents roughly half of next year's maturities. As of today, we have a performer cash position of cash, cash equivalents, signed financing agreements, including prolongations, and disposal proceeds of well above €1 billion. This brings us well into 2027, when our next bond matures in November 2027. As usual, we present a detailed maturity profile for the next 10 years on slide 31. At the reporting date and after the redemption of the €400 million convertible bond, our liquidity position was 448 million euros. Furthermore, we had and still have undrawn revolving credit facilities of 750 million euros, as well as an unused commercial paper program of 600 million euros. Our average interest rate stood at 1.59%, nearly unchanged year on year, with an average maturity of 5.6 years. The LTV stood at 48.3%, given that the dividend payout of around 125 million euros took place in early July. Year on year, however, we stand at a minus 20 bps. We are now heading towards our LTV target of 45% set for next year. As usual, we provide important financing KPIs and bond covenants in the appendix on slide 32. Of course, the ICR is next to the LTV, a very important KPI for us. Our bond covenant ICR slightly increased quarter on quarter and now stands at a very strong 4.5 times. And all the other bond covenants are also with ample headroom. Very recently, Moody's confirmed our BA II rating and revised the outlook from stable to positive. And now I'd like to hand over to Lars for the guidance.

Thanks a lot, Catherine. Let me now come to our guidance for 2026. We expect the AFFO to grow by 5% on the back of a rent growth of 3.8% to 4%. So, rent growth is to increase by around 40 bps over 2025 and reflects the positive contribution from the cost-rent adjustment for our subsidized units. We expect the EBITDA margin to improve towards peak levels of 78% again. We continue to invest significantly into our portfolio. i.e. more than €35 per square metre, so quite in line with this year's investment. On LTV, we expect to reach our target of around 45% in 2026. This will be driven by a mix of further valuation effects as well as disposals. Certainly, faster disposals can shift the timeline forward by when we achieve the 45%. On this positive note, I come to the end of my presentation. We as a team are happy to answer your questions.

Thank you, Lars. And with this, we begin the Q&A session. And I hand it over to you, Mathilde, to guide us through the Q&A.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their 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 2. Questionnaires 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 1 at this time. The first question comes from the line of Marius Pastou from Bernstein. Please go ahead.

Hi, good morning. Thank you for the presentation and for taking my questions. So I've got two questions from my side. So firstly, given your renewed confidence in achieving planned disposals and expectations to reach your LTV target next year, what drove your decision to remain focused on AFFO as your key earnings KPI rather than revert back to an FFO1? And then secondly, on a similar topic, if I look at 2026 guidance, I see AFFO is up 5%. but FFO is flatter at 1%, even though your investment plans are stable year on year. So what is driving the difference between these two growth trajectories? Thank you.

Yeah, good morning, Marius, and thanks a lot for your questions. So just to start off, so why have we decided to stick to AFFO instead of making FFO one again, our core KPI? It is really the macro environment, especially the uncertainty around budget deficits from different states, including the German one. And I think we've seen during this year what the announcement of the new budgets being planned to be spent on infrastructure and defense did to the interest rate, especially long term. And those uncertainties are mainly the reason why we thought to be well advised to stick to our self-funded strategy, so remain focused on AFFO and keep cash as our core metric going forward. So that is why we were sticking to AFFO, although we are expecting substantial additional disposals in Q4. With regards to the difference FFO1 to AFFO, happy turnover to Catherine.

Yeah, so there is obviously a range that we are giving out for next year and it's And the numbers on the FFO side are much bigger than on the AFFO side. So let's see how the ranges play out next year. And also, please keep in mind that this year we were still doing new developments on own land, which ended up in the AFFO line and not in the FFO line. And as we are now done with our new developments, this will not take place next year.

Okay, very clear. Thank you. So there's no specific adjustment being made between the two numbers that is causing this difference?

No, we didn't change the KPI definition or anything else.

Okay. Thank you very much. Thank you.

The next question comes from the line of John Wong from Funland Shot Camping. Please go ahead.

Good morning. Thank you for taking my questions. Just on the like-for-like rental growth guidance, it comes in higher next year, which I understand to be coming from the cost-rent adjustment on subsidized apartments that happens every three years. Just try understanding the underlying trend of like-for-like. What's the impact of this adjustment to your like-for-like?

It's about 40 to 50 pips.

Okay, that's clear, thank you. And then just correct me if I'm wrong, but the 2026 AFFO and FFO guidance are excluding any disposals while the LTV guidance is including disposals. What's the rationale for this?

As always, John, we will have not included any disposals because as long as we have not signed those, it would be just guessing. So therefore, from our perspective, it's not worthwhile now including disposals which have not been signed. Certainly for 2025, also to be transparent, there will be no increase in really the transfer of ownership. So 2025 numbers will not be impacted by the additional sales expected for Q4 2025.

So the 45% LTV that you aim to achieve in 2026, that's excluding disposals?

No, it's including disposals, but those transfers of ownership signed in Q4, being transferred in 2026, certainly contributed to reduce LTV to 45%. Okay, clear. Thank you.

Thank you.

We now have a question from the line of Bart Gisin from Morgan Stanley. Please go ahead.

Yeah, hi, good morning. Thank you for the very clear kind of expiry profile and cost of your debt. Can I just ask, what is the cost of debt that you are assuming for 2026 in your guidance to get to this level of AFFO and FFO?

I'm happy to take your question. While I don't know how markets are developing next year, I can for sure tell you about the financing that we just did. So the financing where we already got the money, you already have in the 1.59%. The financing that are still outstanding and will come mostly in Q4 this year and Q1 next year are around 600 million and they are refinanced by 3.8%. to give you an idea around that. And for the remainder of the year, of course, we will continue our opportunistic refinancing approach. So there will be more financing to come, especially when we regard what 2027 has in the basket for us. But this will be totally dependent on market development.

But I assume, thank you for that, but I assume that given you provide a guidance for 2026, that implies a certain number that you've assumed what your debt will cost, right? And I appreciate that's with a range, but can you be explicit on what you think that number is to get to this range of FFO?

I already gave you the biggest part of it was the 600 million. And for the remainder, we of course have forward curves behind that. I hope you understand that I'm not giving out exact numbers on specific line items of our P&L. All right.

Thank you. Thank you, Bart.

As a reminder, if you wish to register for a question, please press star and one on your telephone. We now have a question from the line of Manuel Martin from OdoBHF. Please go ahead.

Thank you for taking my questions. Two questions from my side. Let's do that maybe one by one. The first one is on the upcoming disposals. Could you give us maybe some color on what could we expect in terms of how many disposals, where they are located, which quality, so that we have a bit of impression of what could come there. That would be the first question out of two.

Thank you. Morning, Manuel. Very happy to take that question. So certainly we are currently in the midst of selling the plot in Garethheim, Dusseldorf, which we've bought from BCP. We made progress there. We have now a preferred bidder with whom we will approach the city of Dusseldorf. And that's certainly a substantial part of the disposals to be expected. Secondly, with regards to the BCP portfolio in the eastern part of Germany, we made substantial progress across all three cities. So Halle, Leipzig and Magdeburg. We are in exclusivity there with different bidders and we are hopeful to also sell half of the portfolio within Q4. And then there are other portfolio disposals across the current earmarked 5,000 units portfolio, which we are currently marketing, that will also contribute. So overall expectation is that we are going to sign around 100 to 200 million euros of additional disposals in Q4, so until the end of this year.

okay okay it's clear um thanks uh second question the the other side of the metal um in in terms of of possible acquisitions uh do you see opportunities in the market or what's your feeling what what could come in in regard of acquisitions and what would be possible for energy given Given the high LTV, I could imagine that there might be also some constraints when it comes to acquisitions.

Definitely, especially as we strive firstly to get LTV down now to 45%. So that will only be a small portion. Currently, we are only looking into bolt-on acquisitions. in different locations, but it is nothing bigger than what we currently plan with regards to acquisitions. If there might be an overwhelming opportunity, that definitely will then include also equity. With our depressed share price, that might be quite a stretch. So our focus is currently on getting disposals done and perhaps realise the one or the other bolt on acquisition, but not on bigger acquisitions so far.

Okay, thank you very much. Thanks a lot.

Once again, to ask a question, please press star and 1 on your telephone. The next question comes from the line of Kai Klose from Bärenberg. Please go ahead.

Yes, very good morning. I've got one quick follow-up question. When you indicate the LTV to be around 45 by the end of next year, could you indicate where you expect the ICR to land?

Hey, Kai, thanks for your question. We are not giving out guidance for the ICR for next year, but, you know, we're looking at the 4.5 where we are currently standing at. It's super strong. It might decelerate a little bit, but we are well above any numbers that we should worry about. So that definitely will be a strong number next year as well for us.

Ladies and gentlemen, that was the last question. Sorry to interrupt. We have a last-minute registration coming from the line of Rob Jones from BNP Paribas. Please go ahead.

Great, thanks. Sorry, just two quick ones. Catherine, just on the guidance, AFFO versus FFO, I appreciate that the FFO guidance range for 26 is wider, but why is it wider than the FFO guidance? And then secondly, Lars, if I think about your assets that you've got marked for sale, I appreciate you're expected to make significant progress. uh in q4 this year with regards to some of those disposals but if i take the 5000 units and if you were able to sell them at your price expectations and let's imagine the asset values didn't move can we get down to 45 ltv or if you've got either more stuff to add that needs to be sold to that disposals program or is it a case that you know if asset manager up a couple of percent next year like they will be this year then actually you get to 45 ltv anyway Thank you very much.

Thanks a lot for your questions, Rob. I'll start with the second question. So with regards to the current assets, it is really that we, for the time being, we are sticking to those 5,000 units. But as we make transparent, we will do the full portfolio review over the coming two months. And then certainly we will earmark most probably additional units for sale. How much that will be, let's wait and see how that portfolio revision will look like. But it might be that we are then also being willing to offer additional units. For the time being, we are currently marketing those 5,000 units, and expectation is that we make strong progress on those within the next six weeks.

Hi, Rob. And with your first question on the wider guidance range on the FFO, This is, of course, due to the investments. And you know we are focusing on the AFFO. AFFO is also the basis for our dividend. So we really try to spend as much money as needed, but not a cent more. And therefore, the capitalization ratio can vary a little bit between the years and depending on what we are exactly doing. So it's much harder to say where we will land up with the FFO when you're focusing on the AFFO. And therefore, we have the wider guidance range.

Great. And yeah, thank you very much for all your interactions. Appreciate it.

We now have a question from the line of Jonathan Kovnatur from Goldman Sachs. Please go ahead.

Good morning. Thank you for taking my questions, just following up on some of the nitty-gritty accounting. But just on subsidies, I understand that the amount you're guiding to 10 million is going to be lower for 2026. You're also saying that you will have less work for your own balance sheet that you're doing. how we expected the owner capitalized to evolve and also if you can give perhaps a bit more context on the subsidies that would be helpful. Thank you.

Yeah, so to start off with the second part of the subsidies, Jonathan, with regards to subsidies, year is being impacted by new developments. As you know, we are finalizing new developments, and for those, certainly, subsidies become due as soon as you finalize that construction. So that will be lower next year and will certainly be in a happy wind, which we need to cope with. So for overall this year, that's something like 20 million euros, and it will be substantially lower next year. And that's with regards to 2026, certainly something which we need to cope with if we look into the subsidies on the one hand side, but also interest rates. Because you heard it from Catherine that with regards to the 600 million, which we are now drawing, that now kicks in. That's 3.8% instead of the current average yield of 1.6. And that's certainly something which also is a hat wind. And that is the reason why, in combination with the uncertainty around the capitalization rate, we've been opting for a wider range for the FFO1, 475 to 495.

And so just following up on that, your new development business, I think you've wind down essentially. So does that mean that the 10 million 2026, this is effectively the last year that you're getting these subsidies?

So for new developments, it's the last year that we are getting subsidies for new construction. But certainly with regards to all the work we are doing on the energetic side, with regards to, for example, changing heating systems from fossil-based to renewables, it certainly will have a subsidy impact. And that's something which we are expecting for next year to come.

And so maybe let me rephrase. So for 2026, the 10 million guidance you're giving, does that still include new development or then it's just about energetic modernization?

2026, no new developments. 2025, year of new developments, new developments with subsidies. Next year, no new developments anymore, Jonathan.

Okay, and so are we expecting also the ONWA capitalized to drop then in 2026?

I think you're making now reference to a line item which is not being impacted by the new developments, but it's stronger impacted by our craftsman services unit. So that is something which is not to be put in the same basket.

Okay, cool. I can talk later. Thank you.

Thanks a lot.

The next question comes from the line of Nico Hagemann from Deutsche Bank. Please go ahead.

Hi, thanks a lot for taking my question. In regard of the current selling of the Glasmacher Frittl in Düsseldorf, may I ask you to give us some color on that, so in terms of the competition of this deal?

The competition is incredibly high. It took us two rounds to finally decide for one consortium. And with that, we are now approaching the city of Dusseldorf. So therefore, even if the city would not agree to the current consortium, which we do not have any indication as of today, meetings still need to take place, there would be runners-up also with competitive pricing. So therefore, we are confident to find a way to sell that plot over the coming weeks.

Okay, thanks a lot.

Thanks a lot.

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

Yes, thank you and thanks for 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 5th of March next year when we report on our full 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 our upcoming roadshows and conferences. Thank you and goodbye everybody.

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