Tag Immobilien Ag

Ladies and gentlemen, welcome and thank you for joining the TAG Immobilien AG publication of the Interim Report Q3 2023. Throughout today's presentation, all participants will be in listen-only mode. The presentation will be followed by a Q&A session. If you would like to ask a question, you may press star and 1 on your touch-tone telephone. Please press star key and 0 for operator assistance. I would now like to turn the conference over to Martin Thiel, CFO. Please go ahead.

Many thanks and good morning all. This is Martin from TRG. Many thanks for joining the call. As always, I try to make the presentation rather comprehensive so that we have afterwards enough time for Q&A. So let us start right away with the presentation on page four, where we show some highlights for the first nine months of 2023. Let us go through it point by point. Firstly, we want to point out quite successful further asset disposals that we have done in Germany. So in the third quarter of 2023, we sold further 262 units. That leads us to a total disposal volume of more than 1,300 units in the nine-month period ending 30 September 2023, and we achieved net cash proceeds of €181.5 million. We sold at an average gross yield of 4.3%, so below our portfolio valuation, and please be aware that after the balance sheet date, we received 91.2 million of cash, so this is not included in the cash at the end of the third quarter, but this transaction already closed at the end of October 2023. Secondly, we had material repayments of unsecured debt in the first nine months of 2023, If we look a little bit broader on it and start with the middle of last year, that leads us to a total repayment of unsecured debt, including the Robic Bridge financing of nearly 1 billion euros. And in this environment, this is for sure a good message because unsecured debt, that's at the moment, definitely the more difficult source of financing. So everything that we can repay in that direction is for us clearly a success. As mentioned, the aerobic bridge financing is now repaid in full. We did this in October 2023 ahead of maturity. Looking at financial metrics, the LTV is nearly unchanged compared to the year end 2022. So we had just 20 basis points increase. And the reason why we can keep the LTV stable despite devaluation losses on the German portfolio is that we've been successfully selling assets in Germany. And of course, also the dividend suspension for financial year 2022 helped us. So that's in this environment where we're still recording valuation losses from our point of view, a good development. And if you ask us for an outlook for year end 2023, also at year end, we expect, let's say, a stable or just slightly increasing LTV. Of course, this will depend on the valuation result at year-end. Let me come back to this in a minute. But we know already that we have the closing or had the closing of the transactions that are already mentioned in Germany. So this will lead to an LTV reducing impact. We know that the fourth quarter in Poland is always very strong. So even with expected further valuation losses at year-end, the LTV should stay on a level roughly where it is now. Then, let me please point out that our cash metrics are still strong. So the ICR and the net financial debt to EBITDA with values of six times and 10 times should be clearly above average if you compare this with other residential companies. The Polish business remains very strong. In the first nine months of 2023, we sold roughly 2,900 units compared to the previous year that increased by around 70%. So we sold on a comparable basis, including Robic for the full year 2022, 1,700 units last year. It is not only an increased number of units sold, we also observed strong price increases in the Polish market. But not only on the sales market, also on the rental market, the development is very positive. Like-for-like rental growth at the end of the third quarter came out with more than 12%. And the vacancy rate in the total portfolio is 3.7% at the end of September 2023. Today, we also published our new guidance for financial year 2024. We expect a stable development regarding FFO1, so FFO1 should be still in the range between 170 and 174 million euros, despite assets disposed in Germany, but what is happening here is an increasing EBITDR contribution in 2024 from the growing Polish rental business. Looking at FFO2, which includes sales results, and sales results in our company is mainly referring to Poland, we expect a temporary reduction of around 9% to 217 to 223 million due to reduced handovers in 2024. And this is something more technical. As you know that the gain or the profit in a P&L is realized at the very last day when we hand over the apartment. And as the construction time for a sales apartment is roughly 18 minutes, Basically, we see in 2024 the weaker sales result from 2022, which was a retail year because at that point in time, mortgage rates in Poland started to increase sharply. So 2002, lower sales numbers lead to a lower result 18 months later in 2024. And that means, on the other side, as we see in 2023, a strongly increasing number of sales. You should expect a strong increase in FFO2 from 2025 onwards. So this is just something temporary and mainly, let's say, accounting-driven. The cash inflow of the sales is already earlier. So that's in line as construction progresses and not only at the last day. And as a second point, And that's, of course, also very important to discuss. We're proposing to the next AGM a second dividend suspension, so a dividend suspension also for financial year 2023. We wanted to be clear at this point already now, wanted to be clear to our shareholders and to the market, Looking at that more precisely, it's first of all a clear guidance. So what we want to propose to the AGM next year when we invite to the AGM in March 2024, and then of course the final decision will be taken at that point in time. And then it's of course subject to our shareholders to approve that within the AGM, but the management board as well as the supervisory board has of course discussed this already intensively now and we think In this environment, it simply makes sense to suspend the dividend also for financial year 2023. Looking at cash flows that we generate in Germany, from our point of view, it makes simply sense to keep the cash in the balance sheet and to repay debt, so to continue the successful, the leveraging process that we've done in the last quarters. And looking at the cash flow that we're producing in Poland, especially from the sales business, we think the better decision is to keep this cash in Poland and to start new residential grant projects and also to reinvest this cash surplus into new land bank acquisitions for the sales business. So as the Polish business is producing really attractive cash flows at the moment. We think reinvesting liquidity that is generated in Poland into this business is the right way to do. And again, in Germany, in this environment, we think the produced cash flow from our business here should be preserved in a balance sheet. This is clearly a more conservative approach, but we think in this environment, we're still very difficult transaction in capital markets. That's the right thing to do. Let's go to the next page, some more details on the financial performance and the operational performance of the German portfolio. FFR1 in the first nine months, 2023, is down roughly 9% compared to the previous year. The EBITDR from the rental business increased by a bit more than 2%, but on the other side, as in the quarters before, higher financing costs have led to this reduction. In contrast, FFO2 is up by 6%, so we have in 2023 a better result from the Polish sales business compared to the previous year. Therefore, we see here, contrary to the development, an FFO1 increase in the result. Not really major changes in the APRA NTA and the LTV, as we had no portfolio valuation at the end of the third quarter. So the usual development and improvement in NTA as well as an improvement in the LTV from the ongoing business. Looking at operational performance in Germany, like for like rental growth without vacancy reduction is better than in the previous quarter. So it increased to 1.8% from 1.6% and 1.5% in financial year 2022. And including vacancy reduction total like for like rental growth was at 2.2%. Vacancy in our residential units was down to 4.6%, and perhaps you've already seen this in the press release, that the vacancy rate in the German portfolio has fallen to 4.4% after the balance sheet date in October, so that should be in a good development for the remaining part of the year. Coming to the next slide, where we present some highlights from the Polish business, the adjusted net income from Save Poland was 28 million at the end of the first nine months, 2023, compared to a little bit more than 11 million in the previous year, so that explains why FFO2 is increasing year on year. We sold nearly 2,900 units, as already mentioned, so therefore that's a clear sign of a very strong sales business in Poland, and we will look at the development quarter on quarter a little bit later, but the Polish sales business, again, is running very strong. Page number eight shows some details on the P&L. The net actual rent increased quarter-on-quarter as a result of higher rents in Poland. We saw a slightly rent reduction in Germany despite the like-for-like rate of growth because we had some disposals that closed in the course of the year, so therefore that reduces rents. Expenses from property management were higher quarter-on-quarter as we already expected, higher maintenance costs in the third quarter, and we also had higher non-rechargeable costs, mainly coming from CO2 taxes in Germany in the third quarter. So therefore, also the net rental income was weaker compared to the previous year, but year-on-year we clearly see a positive development. Looking at the net income from sales that contains two parts, that contains the sales results from Germany plus the sales results in Poland, By the way, if you want a detailed analysis of the P&L between Germany and Poland, please take a look in the appendix where we give this split in the income segment. But let me explain how we record the net income from sales also from the German business. So we have realized basically a profit, so a positive net income from sales in Germany in the P&L. And this is coming from two effects. First effect is that we also sold our own headquarter in Hamburg. And as far as usage for our own purposes, this building has been accounted for at historical cost, so not at a fair value. Therefore, clearly we achieved a book profit when we sold this building. And secondly, if we sell apartments, and between the signing and the closing there's a balance sheet date, at the balance sheet date, we need to do a devaluation or, in prior years, a valuation uplift to the purchase price. So, for example, in the third quarter of 2023, when I look in the P&L, we see a valuation loss of 6.2 million euros. This is simply the impact of selling apartments in Germany below book value and, as there is between the signing and the closing of the balance sheet date, we need to record this valuation loss. So to give it a picture, we can confirm what we have told in the past. We are currently selling apartments in Germany below book value. It's not a material discount, so compared to the beginning of the year, so to the December book value, the discount is, as already communicated before, around 10%. Compared to the half-year book value, this discount is clearly getting smaller. Beside this, there has been no weather portfolio valuation in the third quarter, and the next valuation will take place at year end. Let me give you not a specific guidance, but perhaps a trend for year end. So we have no results from the portfolio valuation yet. What we expect is a further valuation loss, but clearly lower than what we have seen in the first half. So in the first half of 2023, we recorded a loss of 7.4%. too early to give you an exact range in percentage points, but the loss in the second half should be smaller than in the first half. And if you ask us, well, is this then the end of the development or do we expect further valuation losses in 2024? We think that we have now perhaps reached that kind of bottom when it comes to portfolio valuation losses. So we would be not surprised if you see a further, perhaps smaller, valuation loss in the course of the first half of 2024. And to look at that at a broader picture, so at the end, or the middle of 2022, we had the all-time high regarding our valuations, and we recorded 5.5% loss in the second half of 2022, 7.4% in the first half of 2023, so in total already 13%. So if in total, until the middle of next year, we get a relation loss, we record a relation loss of around 20%, that would be, as of today, an expectation or a development that would not surprise us. So again, we can't give you any specific numbers for year-end, but there should be a kind of range where we expect relation results to come in. I think we can skip the next slide, number nine, because it shows you all the details of the EBITDR FFO development we've already discussed. On page nine, sorry, on page 10, you see the overview of the APRA NTA development. The APRA NTA is down 8% in the first nine months due to the violation loss we recorded in the first half of 2023. Page 11 shows the financing structure. LTV, as already mentioned, stands at 46.9%, so above our LTV target of 45%. But as we already said, well, we expect that this LTV ratio should remain roughly on the same level, but it's just slightly increased at year-end. And if we continue disposals in Germany, that's even in a smaller size than in 2023, also in 2024, And if the AGM follows our proposal to suspend the dividend and we can keep the cash, the RTV target of 45% should be not too far away. So perhaps already in the course of 2024, with the help of further dividend suspension, perhaps with some additional disposals in Germany and knowing or with the help of a good operational development in Germany and especially in Poland, the LTV target should be not too far away and perhaps reached next year. Looking at the maturity profile, you still see in 2023 the bridge loan from the Wobbic acquisition of 75 million, but as said, this is already repaid in full after the balance sheet date. And looking into the maturities 2024 and 2025, I think it's important to point out that we just have smaller amounts of unsecured debt that are becoming due. So precisely, this is in 2024, roughly 80 million in Germany and in Poland, and in 2025, roughly 210 million. And this is, of course, something which is an advantage in this environment where the secured financing is still broadly available and unsecured financing is the rather difficult and especially expensive debt. Page number 13 shows the development in like-for-like rental growth in Germany. So 2.2% was the total like-for-like rental growth. The guidance for this is still unchanged between 2.0 and 2.5, so we are on the good way to achieve this guidance. And investments, meaning maintenance and capex together, you see this on the top right of the slide. were virtually unchanged compared to the previous year at around 24 euros per square meter. Page 14 shows the vacancy rate development in the German portfolio in the residential units. I already mentioned that we're down in October to 4.4%, and the guidance for the full year stands in the midpoint at 4.2%, so we are very optimistic that also in this regard we are on a good way to achieve our guidance. Let's talk a little bit about Poland again. Page 16 shows you details in the rental portfolio in Poland. As I already said, a very good development regarding the vacancy rate. So we started in the total portfolio with a vacancy rate of more than 35% as a lot of apartments have been finished towards year end 2022 and also in the first month of 2023. As of now, the vacancy rate in the total portfolio is 3.7% only. And looking at residential units, it's even smaller. It's just 1.5%, which is, for us, a big success. And the speed in which we rented out the apartments was much faster than expected. Like-for-like rental growth still stands at 12.4%. We know that we had last year an even higher like-for-like rental growth by more than 20%. So this is a little bit normalizing, but definitely not unexpected. And compared to inflation rates in Poland, which are already down to around 8%, it's still a like-for-like rental growth that is even outpacing inflation that shows us how strong the demand for our rental projects in Poland is. Page number 17. It shows the development in sales numbers in Poland, and it's already discussed 2023 so far is a very successful year. So you see on this slide the development, and I already mentioned that in the financial year 2022 we had weaker sales results, clearly in a time where mortgage rates in Poland were increasing sharply. So therefore it's good to see that sales volumes are up. And it's not only the number of units that is increasing, it's also the sales prices that are increasing throughout the market. So sales prices year on year at the end of the third quarter, according to our sales and also according to what we see in research, is roughly a 15, so 1.5% increase year on year. Page number 19 shows the FFO guidance for financial year 2023. The FFO1 and FFO2 guidance is fully confirmed today and is unchanged. And what is new, but we've already discussed this, is that we propose to suspend the dividend to the next AGM. Coming to page number 20, let me explain some additional comments on the guidance for 2024. First of all, for the first time, we're giving also WDR guidances because we think that could be helpful for modeling purposes and also to make clear what operational results we are achieving in each part of the business, so in the rental business in Germany, the rental business in Poland, and also wanted to point out the really strong results that, in general, our Polish sales business is producing. So, therefore, a more detailed guidance for financial year 2024 with additional figures or comparable figures for financial year 2023. So, we expect in the rental business a stable EBITDA, slight reduction in Germany, mainly because of disposals, and an increase in Poland that is then compensating this reduction. The sales business in Poland in 2024 will lead to a lower EBITDR compared to the previous year. That's, as I've already explained, more something technical. So accounting-wise, the number of handovers is smaller in 2024. So therefore, we are realizing less profit in 2024. But again, from 2024 onwards, based on the stronger sales numbers as of today, you should expect increasing results again, and that also translates this development into a somewhat lower adjusted net income from sales in Poland. So the FFO1 guidance for 2024 is exactly the same like 2023, so in the range between 170 and 174 million euros, and also on a per share basis, this is unchanged, 98 cents per share. FFO2 guidance, as already explained, 9% down for financial year 2024 to 217 to 223 million euros. And regarding your dividend for financial year 2024, we're giving no guidance today, but clearly we will come back to this not in the next month. So you should expect no decisions on that before the third quarter next year, year end 2024. So let's see how market conditions develop until we make a decision on the dividend for the financial year 2024. In the final slide, page 21, gives you more details regarding the FFO bridge between 2023 and 2024. As I said, we expect an unchanged FFO 1 compared in 2024 to 2023. Good rental growth in Germany. We expect a like-for-like rental growth between 2.2% and 2.7% and a further vacancy reduction of around 30 basis points. Also good rent development in Poland, so additional 7 million rent increase from Poland. By the way, if you put this together into one number for like-for-like rental growth, so the additional rent in Poland plus the rental growth in Germany, you're in a like-for-like rental growth of close to 4.5%. Clearly, also the losing rents from disposals in Germany, it's roughly 6 million, other positions, are not so much changed. Let me point out that we expect a positive impact in the financial result as we have repaid the bridge loan now. So the bridge loan in 2023, until we repaid it, had interest costs of around 8 million euros. So therefore, this is clearly a relief And you know that we repaid that from disposals in Germany mainly and from the dividend suspension, so therefore we expect a little bit better financing costs in 2024 compared to 2023. That's it from my side. It's an overview of our QC results and the new guidance for the financial year 2024. Thank you so far, but of course I'm now very happy to take your questions.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star and 2. If you are using speaker equipment today, please take the handset before making your selections. Anyone who has a question may press star followed by 1 at this time. Our first question comes from Andres Tum from Green Street. Please go ahead.

Hi, good morning. Just firstly on the operational side, could you give a bit more color perhaps in terms of the Meach Beagle prints you're seeing in TAG locations? Certainly other peers are showing accelerating prints. Just wondering how you see it. And I suppose like-for-like growth is expected to accelerate for the next year. And is that then mostly driven by increased indexation.

Yeah, good morning, Anders. This is indeed the case that we expect here a higher like-for-like rental growth. If you look at the development more specifically, so I'm now excluding impacts from vacancy reduction with 1.5% like-for-like rental growth in 2022. We have now roughly 1.8% in the first nine months of 2022. And as I said, the guidance for the full year 2024 for the total acrylic rental growth spans between 2.2% and 2.7%. So roughly 2.1%, 2.2% is what we expect from rental growth without vacancy reduction in 2024. So you clearly see that we expect here an increasing trend. And this is mainly coming from the mid-speaker.

then secondly around the polish business on the build to sell side how are you seeing the uni sales going into next year do you think it's going to come in at a similarly strong pace or could we expect a bit of deceleration because this year has been exceptionally strong and then in terms of the pricing as well you sort of know that it's it's quite strong for the sales product so can you give bit of color around that and how are also cross margins trending in that business?

Well, for 2024, we gave a guidance that we expect sales in Poland of at least 3,000 units. As of now, that seems to be really absolutely achievable. So because this is already the sales number that we achieved now in the first nine months of 2023, So clearly we saw an extremely strong development in the last month. And also the price increases that we've seen are of course very attractive for us. But looking into the next two to three years, I mean, what we are guiding as a kind of mid-term sales volume is that we sell between 3,000 and 4,000 units a year. That should be achievable. And that we're producing from the Polish sales business a net cash flow of around 250 million zlotys, so that's roughly 55 million euros after land bank acquisitions that are needed. And that is still based on a gross margin that should be at least 25%, still even higher. So we know that 2023 is an exceptional year. By the way, also 2021 has been an exceptional year. So that's a positive surprise that 2024 is another exceptional year. But mid to long term, we expect more than numbers that I just mentioned.

Understood. And then maybe you can speak a little bit about the financing roadmap in Poland as well. How are you thinking about that when it comes to financing the built-to-rent product? Are you able to sign mortgages against those? Or what was sort of the broader game plan here?

Yeah, that's just in the process. So hopefully we can then comment with the fully figures 2023 on already signed and closed mortgage secured financing that we have taken on the rental properties in Poland. So, so far the full rental portfolio in Poland has been financed via own cash or via TAG shareholder loans. And we try to replace this and we are in very advanced negotiations with German and also Polish banks. And if you ask us what are financing conditions in Poland or for a Polish portfolio compared to a German portfolio, if we do this in Euro, margins are higher. So there's perhaps a difference of around 100 basis points, but that would still be for us a very reasonable and attractive financing as the growth in Poland is very strong. So I expect that we get a 50% LCV on existing portfolio. That would be something in a range of 120 to 140 million euros of mortgage secret financing in the next month. And again, it's not yet signed, but we are really in advanced negotiations.

And then a final question just around the disposals you've done. Is the Berlin disposal that Roundhill announced also in the 1,300 units, is that included? Yeah, that's included. Thank you.

Our next question comes from Thomas Neuholt from Kepler's Bureau. Please go ahead.

Yes, good morning. Thank you for the presentation and taking my questions. I have three. Firstly, on the dividend policy, I was wondering if the change of the payout is cyclical or structural in nature, meaning that you mentioned that the market uncertainty is obviously still high. It's still uncertain where prices and interest rates develop. But you also said that you want to reinvest more money in the Polish operation. So I was wondering, going forward, if you see a stabilization of prices and interest rates in Germany, Do you plan to return to the old payout ratio of 75% or could it be structured lower because you want to invest more money in the Polish operations?

Very good morning, Thomas. First of all, if you look at cash flows in our company, we clearly separate cash flows in Germany and cash flows in Poland, or more precisely, cash flows that are coming from the rental business and cash flows that are coming from the sales business. and his business in the sense of a recurring business, recurring earnings that's still in Poland. So what is produced as a positive cash flow from the safe business in Poland, that's the number that I mentioned, roughly on average 55 million euros, that stays in Poland and this is the basis, the equity for the next rental project in Poland. And if we then are able to pick on some additional financing in Poland, like discussed in the question before, that should enable us a good growth. So that means on the other side, the rental cash flow is simply there. And it's coming from the German portfolio and also more and more from the Polish portfolio. And we know, and that was why this payout ratio was at 75%, that 75% FFF01 is in a typical year roughly 100% of AFFO. So therefore, this should be also sustainable payout ratio in the future. But clearly, I mean, in this environment, we need to look into dividend payments really from year to year. So therefore, as of today, we simply need to put the dividend payment for 2024 subject to market conditions. If we return already to the full payout ratio in full, if we do something in between, that's definitely not decided. We have not discussed this because in the current environment, you need to look really quarter by quarter. But again, structurally, the old payout ratio would still fit.

Okay, perfect. Thank you. The next question is on page 8. You mentioned that the revelation loss of 6.2 million in Q3 is related to upcoming disposals. What is the size of these disposals designed already for Q4?

This is mainly We gave the number for the net cash inflow that is realized after the balance sheet date. It was slightly about 90 million. So the total purchase price of the disposals closed after the balance sheet date was a little bit more than 100 million. So in a simple calculation, this is roughly 5% lower than the book value at June.

Understood. And my last question is on the financing costs in Germany. what kind of spreads banks are currently demanding for secured financing?

For maturities between 5 and 10 years, we are discussing spreads between 100 and 130 basis points.

Thank you.

That's all for me. Our next question comes from Mario Spastu from Societe Generale. Please go ahead.

Hi, good morning. Thank you for taking my questions. I've got two questions actually related to the rental operations in Poland. Maybe I'll ask them together because they're broadly related. So firstly, there seems to be a fair amount of progress being made on reducing the vacancy in Poland for completed units. For any newly completed units, are these leasing up quicker compared to your expectations? And therefore, should we be expecting any further valuation uplifts to come on this basis? And secondly, how quickly are these units being leased up versus your expectations in terms of speed, but also in terms of the rent levels you're achieving versus your expectations set out on slide 30? Thank you.

Good morning, Marius. In our business plan, which was in place at the beginning of 2023, the underlying assumption was always that it takes up to nine months to rent out a newly constructed residential building in full. We have seen in reality that this is less than six months. So, on average, it is a rough number, three months quicker than expected. We expect, regarding the Polish portfolio, a valuation uplift at year end. And this has, by the way, also been the case in the first half of 2023 and also in the second half of 2022. So, whereas we saw valuation losses in Germany, in Poland, in the last relations, we've seen valuation gains. Also here we have no indication clearly in absolute amounts and that's then a smaller portfolio compared to Germany. Sort of relation losses, sorry, relation gains we've recorded in the last half year relations were around 15 million euros. That's a little bit modest this year as you see prices even stronger increasing than before.

Okay, very clear. So it's faster lease up by about three months. So in terms of the rent levels you're achieving, I think you mentioned you're still sticking to the 12 to 14 euros. Is that still the case?

Yeah, for the locations where we're currently renting, so Watzlaff, Poznan, that's still absolutely achievable rent level. And also where we're about to start, hopefully the first rental project quite soon, rent levels would be higher. So here we would not talk about 12 euros per square meter. It would be more 14 to 15 euros per square meter.

Okay, very good. And just finally from my side, there seems to be a bit of an uplift on the average rental yields you're expecting on some stabilization of investment costs. Is that the construction costs coming down? Or has there been a change in the projects coming through?

Well, we know that in the projects that are now on the market, so what we present here on the rental portfolio component table, the realized gross yields have been around 7.5% on average. So before that, we've guided at least 7%. So now we're promoting that range more to 7% to 8%. And construction costs have been as expected. But what is better than expected in our original business plan is the rent level.

Okay, that's very clear. Thank you.

Our first question comes from Andre Remke from Butterbank. Please go ahead.

Yeah, good morning, Martin. Some questions left. First, starting with the dividends. Well, your argument is well understood, I think, with sanctioning the balance sheet. um and also the reinvestment in poland sounds reasonable but i'm still a bit surprised because i got the impression over the recent months that you reach a self-funding level so several times mentioned this for the polish activities is this not anymore the case or will you simply speed up the activities in poland that you need to free up cash from the non-paid dividends what is your view on that

Good morning, Andrej. Perhaps I can try to clarify this. So the Polish business currently is not only self-funding, it's producing cash. I already alluded to the state business, the cash surplus we achieved there, and also I mentioned that we are in the refinancing process for Polish rental properties. So that means we have a clear cash surplus. And theoretically, of course, that could be something that feeds the dividend. to our shareholders. So it could have been a decision to say, okay, we take the cash from Poland and use that for a dividend payment to our shareholders. But we decided at least for this year, no, this is not something that makes sense. We keep the cash surplus that is generated in Poland, in Poland, and reinvest that into new land bank acquisition for a currently very attractive sales business into new investments for the next rental project.

Okay. I have a question on your portfolio valuation. Thanks for your thoughts on the German portfolio. You mentioned a positive valuation in Poland. On page 6, the gross asset value of the Polish portfolio declined by 3%, quarter on quarter. Is there a special reason for that or is it only due to the slotting?

That's, in fact, only due to the Zloty. So this is a calculation that is based on the Zloty exchange rate as of 13 September. At that point in time, the Zloty was a little bit weaker. It's now, as of today, more on the level of June. So this is also something, I mean, the numbers are not that huge, but we need to get used to that we here have a foreign currency impact in the GB and also in the NAV or LTV. Again, it will not be material simply from foreign currency translation.

Okay. And you already referred to that, but I didn't catch it up. In the portfolio valuation in Poland for the first half, it was, if I remember correctly, 15 million. What is your expectation for the second half? A higher, potentially higher number or the similar number? You mentioned it already, but I didn't get it.

It should be higher, so that would be my expectation. But again, also here we have no results and we can't give you specific guidance. But perhaps what is helpful on page 16 in the table, we also show the in-place yield. So that means the current IFRS book value coming from June in relation to the current rent levels. And for example, the Wroclaw units are currently trading at a 6.1% in place yield. And that should be clearly a number that could be improved. So anything more towards 5%, perhaps not in full at year end, but now over the next quarters should be more realistic. in place yield or market yield than 6.1%.

Excellent, very helpful. Then the last question on your disposals. Do you implement or assume any disposals from the German business into your guidance next year and probably more in general? how active you are in selling or defining properties to sell from the German portfolios, especially to Lowy or LTV or to come back in the future into investment grade by Moody's. What is needed here? What is included in the guidance and what is needed for ratings?

The guidance is based on a portfolio in Germany as it is, so without any disposals and of course also without any acquisitions that we are currently not planning. So that is on the existing portfolio. We are not communicating official disposal program and we have done this last year in connection with the rights issue in July 2022 when we said why we want to sell More than 2,000 units in Germany with net cash proceeds of at least 250 million. That has now been achieved and that was always the number or the amount that we needed to repay the Robic Bridge facility in full. This has now been done. So that means we can now be more selective. We are not so much under pressure to sell, but clearly we will continue to sell. But we are not guiding on a quarterly runway, so you should expect some volatility between the quarters. But just to give you an idea about our dimensions for 2024, so this year, 2023, net cash from disposals or purchase prices around $200 million that we should achieve, perhaps something at around $100 million next year, could be a realistic estimate. that would already help us very much to bring the LCV to the level which is our target, so 45%. Is that a hard expectation from the rating agencies? I would not say hard expectation, but clearly everything that helps us to deliver is very much welcomed by the rating agency. We expect that also the announcement that we made yesterday evening to propose a further dividend suspension will be clearly rating supportive. good thing is that we have achieved already a lot regarding disposals and therefore we're not so much under pressure nor liquidity wise either from the rating side to dispose a certain amount but yeah we will continue to to sell and we will continue to be active and you need to be active to sell something so selling apartments is quite difficult but liquidity is there in the smaller sizes that are sufficient for us

And how do you see the risks from S&P for a downgrade to non-investment grade? Because at least if I have right in mind that this is still an investment grade rating, right?

Yeah, this is the case. So the rating at S&P is unchanged at BBB- with a negative outlook. And that has been confirmed last time in April. So the normal cycle would be that the next rating committee would take place one year thereafter, so early next year. I mean, we have good discussions with both rating agencies. I think both rating agencies see the material progress we've made. Again, we've repaid $1 billion of unsecured financing in the last 15 months. We've realized $250 million of cash from disposals. Now a second dividend suspension. That should be all very supportive. I mean, clearly, there's a risk coming from German markets in total if rating agencies take an even more negative view, which I currently do not expect. But if that would be the case, that could put also our rating under pressure. But we don't see this at the moment. So at the moment, we expect that we are going more towards positive rating actions than any further negative actions.

regardless there is a mismatch between Moody's and the S&P in their views.

The Moody's rating is now for a little bit more than one year below investment grade. Perhaps you've seen their last announcement also regarding us and the credit opinion is meanwhile published. We have not achieved a positive outlook but if you look in the wording you can clearly read I think they express it in a way that they say there is a kind of positive rating pressure, which is good, so we should be on our way here at Moody's in a positive rating action and we need to be patient. We understand that in this environment for rating agencies it is difficult, whereas other German residential companies see negative rating actions here to give or to provide us with a positive rating action. Let's be more patient and let's see how the development is when we report the four-year results in March next year.

Excellent. Thank you very much. That's from my side.

Our next question comes from Peter Roonboom from Van Lanschot Kempten. Please go ahead.

Hi, Tim. Thanks for taking my question. I've got a couple of questions on the FFO1 guidance, specifically on the bridge that you showed in the presentation. If we can take them together, the questions. So first of all, how much capitalized interest is taken into account into this guidance? And secondly, what recurring tax rate should we take into account?

Good morning. I'll start with the question for the tax rate. For Poland, it's quite simple because here we have no tax losses carried forward and the tax rate is 19%. And that refers to the rental business as well as to the sales business. And for Germany, we already have seen increasing taxes in 2023. So that's already more than 2022. We expect a further increase by roughly 4 million in regard to 2024. So the tax rate is perhaps more in a range eight to 10% in the next, I would say, two to three years. So as we are consuming, tax losses carry forward, and that should be a little bit more than in the past. So please take this as a rough indication. That would be, as of today, something we expect, but as always, the details in German tax law are rather complicated. But perhaps this helps you as an indication. And yes, we also have capitalized interest, and that mainly refers to the sales business, where this is then basically reducing the gross margin from sales. So when we are constructing new apartments for the sales business, the interest cost that we use for that is capitalized in full and increases the book value of the apartment. And then when the apartment is handed over, we realize the profit, and therefore there's not an interest cost that shows up, but a higher cost for the property and a lower gross margin. So the amount of capitalized interest should be 2024, roughly on the level of 2023. We're publishing this in our statements as a rough assumption. I think it's a number between 10 and 12 million euros a year, which is going in this context as capitalized interest.

That's very clear. Thank you.

Our next question comes from Thomas Rotasler from Deutsche Bank. Please go ahead.

Hi, morning, everybody. A couple of questions. The first is on the Polish residential market. I mean, we hear about developers shy to start new projects because of stretched affordability. Maybe you can share your experience here and also on politics. I mean, could you comment on the potential impact from a new government, especially on subsidies? Should we be aware of any specific risk here?

Good morning, Thomas. I'll start with the second question. In general, we welcome the change in the government. This should be a government that is even more supportive for the economy. you know that also huge amounts of subsidies from the european union that are dedicated for poland have been frozen because of the still existing government so if this is now coming into poland that should help the economy and that should really be a big driver or good driver for the polish economy in the next next years um but on the other side Did we have really, how should I say it, in a day-to-day business very negative experiences with the existing government? No, this was not the case. So also this government understood to a certain extent how companies are working and so the whole environment was good, therefore. What was very generous was, of course, the program for first-time buyers of apartments. I mean, this 2% mortgage program clearly helped the market to recover and to speed up, but that's not driving the higher sales levels in full. So as of today, we have roughly 50% of our buyers that are still buying in cash or with equity, and 50% are taking on mortgage. And out of these 50% mortgage buyers, there are roughly one-third is using this 2% mortgage program. So roughly 15 to 20% of our customers are using that. So that's clearly helping, but that's not, let's say, the only reason for the good development that we see in the market. So to make the answer short, we expect here a more positive impact from the government change. And when it comes to affordability, Also, the salary levels in Poland developed quite good. So therefore, when it comes to affordability, still apartments are affordable in Poland. And this is also the reason why people in Poland are still buying despite still quite high mortgage level. I mean, without this 2% mortgage program, the typical mortgage rate in Poland is still at 8 or 9%. and still people are buying apartments because they can afford it. So clearly we've seen very strong price increases in the last month, so that should normalize a little bit, but we're not getting into a situation where the market is overheating or something like that. That will not be the case.

okay um the second point is actually on your decision to suspend the dividend and to tap growth opportunities also in poland and also as understand in the in the rental business say any change here with regards to the ramp up plan for for rental apartments

No, this is unchanged. You still find in the appendix of our presentation two scenarios that we have presented for the first time at our Capital Markets Day in April, how to ramp up the Polish rental business. So two scenarios, one scenario purely equity financed, another scenario with additional debt that leads then to 6,600 or more than 10,000 units in the next five years. These scenarios and hopefully more the second scenario with the 10,000-unit portfolio is still what we want to achieve in Poland in the rental business.

Okay. The last question is on disposals in Germany. I mean, especially those up to the balance sheet date. Maybe I've missed it, but could you provide more color on what you have sold there?

What we sold in the third quarter was the question?

Yeah, actually in the fourth quarter, you know, beyond the balance sheet date.

Okay, now what we've been referring to, the cash inflow after the balance sheet date, that was from disposals where the signing was before the balance sheet date. So, simply to give you an idea, okay, what part of cash has already It's not included in the balance sheet as of September 30 because the closing of the transaction signed in the third quarter was in the fourth quarter. But we have not announced today what we've already sold in the fourth quarter.

Ah, I see. Okay, great. Thank you.

As a reminder, if you wish to raise a further question, you may press star and 1. Our next question comes from Simon Stypek from Warbrook Research. Please go ahead.

Hi, good morning. Thank you for taking my question. Thank you for giving a longer-term dividend guidance. Again, I think shareholders really deserve to get transparency there. But then on the shorter-term dividend suspension, I think it's a bit debatable because you're speaking about net cash proceeds of $200 million Q3, the trend is good with 40 million. And Q3, and that cash proceeds from those photos, revaluations, decelerating, and actually positive signs in Poland, no material refinancing. So that leads me to my question in regard to market conditions. But actually, do you expect to improve then or what do you have to see in the capital markets and transaction markets so you feel confident to pay out a dividend or at least a share of a dividend? And then the second question to that is the cash for market financing in Poland. You mentioned there's a cash share and there's a share of your shareholder loan from GEG. Can you give the split because there should be actually an additional cash inflow? And maybe also one more question to that because you spoke about scenario one and scenario two in your Poland business and the ramp up. And I wonder if they just mentioned mortgage financing is actually providing you more towards scenario two already. That would be great if you could answer those questions. Then I have one or two more, if I may.

Good morning, Simon. First of all, you're right. What we expect from mortgage-equipped financing in Poland is putting us clearly more towards scenario two. This is helpful. It's not yet finally decided which part of this mortgage financing we keep in Poland which part will be used to repay shareholder loans from TAG. If that would be a 50-50% split, so there would be 60 to 70 million that are repaid in shareholder loans and the remaining part stays in Poland. So, that clearly is a first step in growing the rental portfolio further. I mean, we can discuss if the plan that we announced yesterday evening to further suspend the dividend is very conservative or conservative. We think it's appropriate because we've really done a lot in the past quarters to get more financial flexibility, to get more freedom, and now we're in a situation where in the next two years no material unsecured financing is ahead of us. We've got a certain liquidity buffer now after all refinancings are complete. So let's be, at least that's how we behave, a little bit more conservative and perhaps use the funds, the cash surplus to deliver more and to bring the LTV back to the LTV target of 45%, perhaps a little bit quicker. We think that's still appropriate. Let's see how the development is at the end of 2024, perhaps even if transaction markets, capital markets are still not easy to return to a dividend payment, but I don't want to give you really any guidance for 2024. At the moment, in this market environment, it's really best for us to look quarter by quarter and decide then at a later point in time what is the appropriate dividend strategy for the future.

Okay, thank you. And maybe one follow-up here in regard to the ramp-up in Poland. If we are at scenario two, then the EBITDA contribution, at what level would that be in, let's say, 2024 to 2025?

You see in the slide, in the presentation, in the appendix, the EBITDA contribution that we expect in two scenarios. So, I mean, we've given a guidance for a net actual rent that we expect then after the scenarios are completed, so that's on page 31 of the presentation, and the EBITDA margin, so you can calculate quite simply the EBITDA contribution. Please be aware that if we start a rental project today, It takes even more than 18 months to complete it. So that's more 21 to 24 months because rental apartments in Poland are clearly delivered with a full fit out, whereas the apartments in the sales business are delivered without any interiors or without a bathroom, without floors, without doors. So therefore the construction time is a little bit longer. So a project that we start today after 21, 24 months of construction, we then deliver first EBDR contribution at the end of 2025. So there's always a certain time lag, but I mean, clearly we are long-term investors, so therefore we look here more into the next four to five years if we evaluate the rental business.

Okay, thanks. And for the year, maybe you mentioned that already, apologies for that, but for the year, of 2024 in the rental business, how many additions do you see on average, I mean, or until H1? Because if I look into your guidance, 2024, and I assume you're 11 to 13 million in contribution and it takes your minimum level of margin, then I think it's quite conservative if I annualize your net rental contribution as of Q3. Is there any, do you expect maybe less rental units to come into your portfolio for the next year? So they are rather flat or is it just very conservative or do you expect actually a higher cost?

No, we have unchanged 1050 units roughly under construction. So in these units will be finished to the largest part in summer next year. So mostly in the second quarter, then we start renting out the apartments. And then, as discussed before, it takes us some months until we have really fully rented it out. So, we clearly have a higher number of apartments on the market in the middle of next year, so something around 3,300 units. But until it is rented out, that again takes some months. So, for the portfolio, for the units that are finished in 2024, 2025 is then the first year with full EBITDA contribution. Perhaps we are surprised again and the rental process in the new constructed apartments is again faster than expected, then we would have even a little bit more into those 24 as an EPDR contribution from Poland.

Okay, great. And now no material cost increases you're actually anticipating and you probably expect the same run rate and rental growth for the next year as you perceived in nine months 2023.

Yeah, regarding construction costs, I think we have here high visibility, so we should not see here any surprises. Construction costs in Poland are quite stable in the last quarters, which is good. And regarding rental growth, I mean, as inflation in Poland is coming down, so it's currently at 8%, it has been 15%, 16% some quarters back. I think it's realistic that also the rental growth is coming a little bit down, but Still, it should be on a good number. We had 12% this year. At the end of the third quarter, we had more than 20% last year. I mean, please remember, already at that time, we've been warning this is not a kind of runway that you should expect, but that we continue with our rental growth. It should be at or above inflation in Poland. I think that's very realistic.

Okay, that's clear. And if I may, two very, very quick and short questions. In regard to your maturities for the next year, are you already in the discussions, especially on the larger share of bank loans? And then the second one, in your non-rechargeable ancillary expenses, you mentioned the increases coming from CO2 taxes. Could you quantify that and then also mention if that is the run rate we can assume for the next years?

Mm-hmm. Well, this number, this impact was around 1.5% and the new and higher CO2 tax is incorporated in the guidance. So you see also in the FFO bridge and higher maintenance and other property management costs in Germany of 4 million. So part of that is also a higher CO2 tax in Germany. Simon, can you remind me of your first question?

The maturities for next year.

The short answer is yes. You should expect when we publish the full-year figures for 2023 in March that at the latest until then we have already refinanced a larger part of the maturities in 2024 because here we are similar like in Poland in advanced negotiations with our German banks to do this ahead of maturity.

Great. Thank you very much.

Our last question comes from Daniela Lung from First Centre Investor. Please go ahead.

Thank you. Good morning, Martin. Just one question to clarify, if you don't mind, about the rental growth in Poland. You may have already specified, and if I've missed it, apologies, But the 12% growth that you are quoting, just wanted to make sure that that's pure rent growth and doesn't include vacancy reduction.

Good morning, Danuta. Yes, that's the case. So that's pure rent growth. That's without any impact from vacancy reduction.

Thank you.

There are no further questions at this time. I hand back to Martin Thale for closing comments.

Good. Many thanks all for joining the call. As always, if there are any questions left, please feel free to contact our department or myself. Thank you for listening and hope to see you soon on the road or in our next call. Many thanks and have a good day.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.