Tag Immobilien Ag

Ladies and gentlemen, welcome to the TAG Publication of Interim Report Q3 2024 Conference Call. I would like to remind you that all participants will be listened only more than the conference is being recorded. The presentation will be followed by Q&A session. You can register for questions at any time by pressing star 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 is our pleasure to hand over to Martin Thiel, CFO. Please go ahead.

Yeah, many thanks and good morning all. Many thanks for dialing in for our conference call for the Q3 2024 results. Let's start right away with the presentation and I'm on number, slide number four, which shows the highlights of the third quarter 2024 and basically we wanted to discuss this slide five areas with you. Firstly, the operation and business for financial year 2024 is well on track. FFO1 was basically unchanged compared to previous year as expected. And the net income from sales in Poland was even a little bit better than expected. Quite strong increase by nearly 40% to 39 million euros. And that means also that we had a good development in the FFO too. Looking at operational business in Germany, I think we performed here very well. Quite strong increase in like-for-like venture growth in the German portfolio, now including the impact of vacancy reduction at 2.8% at 30 September 2024. If you compare it with the figure one year before, it was 60 basis points lower at 2.2. So good development, and also very good development in the vacancy rate in the German portfolio. We've given you today also the number. for the vacancy rate after the balance sheet date in October, because this is the first time in the TIG portfolio that we're below 4%, now at exactly 3.9%, coming from 4.6% one year ago. Second topic, we are now really ready to grow the Polish rental portfolio. As you know, we have successfully issued a corporate bond in August this year of 500 million. Therefore, currently we have a quite strong liquidity position of around 670 million, Basically, we have now everything we need to grow the portfolio. We have the liquid funds, we have the land bank, we have the team there, and we actually really now start a lot of projects. I will come back to that later. But just to give you an overview of the impact this Polish rental portfolio growth would have, we point out already here that once we have completed the 10,000 units at year-end 2028, and it will be around 8,000 units at year-end 2027, we expect a significant everyday growth in Poland. Up to 65 to 70 million should be the value in that time. And if you compare this increase that we expect in the next four years With the total rental EBITDA that we achieve currently, so from Germany and from Poland, the growth from the Polish rental portfolio alone would deliver a 25% increase in rental EBITDA. And on top of this, clearly we expect also for the future rental EBITDA growth in the German portfolio, so therefore the basis for strong growth in rental portfolio is now really there. Looking at the NTA and LCV development in the first nine months of 2024, I think we can also here deliver positive messages. First, the NTA is growing despite the portfolio devaluation that we had in the first half of 2024. So a growth to 18 euros and 61 cents per share. That's a 2% up. And we were able to reduce, despite the portfolio devaluation in the first half, the LCV to 46.1%. That means we are almost at our target level of around 45% already. If you ask us what we should expect for the full-year valuation, which will take place as always in December 2024, clearly we have no valuation results yet, but what we expect is a broadly stable valuation, so there should be something around zero, and that means the times, quarters in the last two years where we have seen quite significant devaluations in the German portfolio up to nearly 20% are now over and clearly this is good for further development that should then be positive in NTA and LCB. Fourth point and I think that is an important message for today and perhaps you have already seen our talk announcement yesterday evening, we are reinstating the dividend. We are proposing For the next AGM that will take place in May 2025, a dividend of 40 cents per share, this is based on a payout ratio of 40% of FFO1. And from our point of view, this 40% payout ratio, that should be also valid for the years thereafter, ensures a good mix between, on the one side, a sustainable basis for future dividends, as the FFO is expected to grow in the future, Secondly, we still have internal cash by using this payout ratio to fund the growth of the Polish builds, the whole business. And as a third point, a 40% payout ratio from our point of view is a good approach to continue the quite disciplined approach we had in terms of leverage in the past. Finally, we are also publishing the guidance for financial year 2025. Today, we predict basically a stable FFO1 in 2025. We will see, as already discussed, FFO growth in the future once the Polish portfolio is growing. But for now, we basically need to invest that we had the funds that we have taken on from the bond, which will deliver growth in the future. So FFO1 should be stable. But if you look at the net income from sales in Poland, we expect quite a significant increase by 31%, and that should also lead to an FFO growth to around $233 million to $243 million, so basically 8% year-on-year. On pages five and six, you see more details and numbers. I think I have already discussed most important developments, but let me add, as you see on page number five, the disposals that we have done in Germany so far. All in all, we sold 915 units in the first nine months of 2024. The closing has basically completely occurred as of today. Total selling price was around 81 million euros. Basically, we sold them around book value, so there was a slight loss of 1.8 million euros, which should not be material, and we achieved a gross yield of these disposals, or in the portfolios, to be sold of 5.2%. And now on page eight of the presentation, We've got some comments on details regarding the EBITDR, FFO, and AFFO development. If you compare the development quarter on quarter, the EBITDR from the rental business decreased slightly by 0.3 million, but this is more or less the effect of higher maintenance costs in the German portfolio in the third quarter of 2.4 million. So without that, clearly we have the underlying like-for-like rental growth from Germany plus the growth that is already there in the Polish portfolio So 2.4 million higher maintenance cost is a kind of slight burden in third quarter. But as already mentioned in the last calls, please look when analyzing maintenance and also capex expenses on a longer term basis. So from quarter to quarter, we have some seasonalities. We will see some pitches later that the total maintenance spending for financial year 2024 is very similar so far like in the years before. So, therefore, FFO1 is reduced also by €1 million. AFFO, if you look at the full nine months for 2024, is slightly up due to a little bit lower capex in the first nine months, but also here you should see a very comparable development to the previous year when we look then at the full year figures in March next year. Page number nine gives you more details on the NTA calculation. Again, good to see that despite the portfolio devaluation, we're still able to grow the NTA. Clearly, 2% is not significant, but assuming that we have now the period of devaluations in the German portfolio behind us, there should be definitely a lot of potential for further growth. We expect, by the way, in a Polish portfolio for 40 years, as in the previous year's evaluation gain, cannot really give you an exact guidance in terms of percentage, but the Polish market is still on a very good way, so therefore, as in the past, there should be a positive development coming from the Polish portfolio. Page number nine is an overview of the financing structure. After the issuance of the corporate bond that has a coupon of 4.25%, the average total financial debt or interest rate on total financial debt is now at 2.5%. As I've said, we are already quite close to our LTV target. 46.1% is the exact figure at the end of the third quarter. 45% is our LTV target. And if we follow the development over the last quarters, we will see that we have basically a very natural way to deliver because we are generating a lot of cash from rental business in Germany and in Poland. see the 40% payout ratio of FFO1 will not hurt this development. So, therefore, without any significant disposals, that's not needed to further leverage the balance sheet. And assuming that we have, let's say, zero valuation result at year end, we should be very close to the LTV target in December, and this is clearly, from our point of view, a good achievement. Page number 11 shows the maturity profile. if theoretically all the upcoming maturities until the year end 2025 are covered, but clearly our plan is also now to invest the liquid funds that we have, again it's 670 million in cash in the balance sheet as you want to grow the portfolio, so therefore you should assume that the upcoming bank loans are refinanced and any cash surplus is then really used to grow the Polish portfolio. On page number 13, we show more details on the like-for-like rental growth in the German portfolio that's on the bottom left of this page. I especially want to draw your attention to the development of what we call basis like-for-like rental growth. So that's the light blue color, which stood at 2.2% in the first nine months of 2024 compared to 1.8% one year ago and compared to 1.5% two years ago. So that clearly shows that the rents in our portfolio are growing even without the impact of vacancy reduction, which is always coming on top. And looking into the financial year 2025, perhaps you have seen in our interim report also the guidance that we've given for the like-for-like rental growth. We expect that the total like-for-like rental growth next year, so in 2025, should be between 2.5% and 3%, and you can assume that the basis like-for-like rental growth. That means the rental growth without vacancy reduction is something around 2.5%. So this positive trend that we've seen now over the last two to three years of growing grants without vacancy reduction, without larger capital programs, will continue in 2025. And on page 13, also on top right of the page, you see what I just mentioned. that on an annualized basis, maintenance and capex are quite similar. Again, capex a little bit reduced in the first nine months of 2024, but this is more due to the systemality, so at year end you should expect a very similar level like in the two years before. Page 14 shows the development of the rickings rate, and again, very happy that we are now for the first time below 4% And if we look into the financial year 2025, we expect a further reduction in vacancy rate. So therefore, this 3.9% vacancy rate that we currently have should not be the end of the development. So we expect that we get also closer towards the 3.5% in the course of 2025. Let's talk a little bit about the Polish portfolio. Firstly, let's start with the rental portfolio. That's on page number 16. The rental portfolio in the meanwhile comprises more than 3,000 units, so we have also finished some units in the course of the quarter. Vacancy rate is already down to 3.2% despite the fact that we have finished a lot of apartments in the last month. If you look at the apartments, by the way, that are since more than one year on the market, the vacancy rate for this apartment is already below 2%. Like-for-like rental growth is still on a very good level from our point of view, 3.7% year-on-year. As mentioned in the course before, clearly we had in the past three years even higher like-for-like rental growth, that it was more than 10% last year, more than 20% the years before. But please keep in mind that 2022 and 2023 were really exceptional strong years in terms of rental demand. A lot of people from the Ukraine came into Poland and so on. So therefore, we're still happy that we're able to achieve a good, good number in terms of like-for-like venture growth for Poland. By the way, the guidance for financial year 2025 in terms of venture growth in Poland stands between 3.0 and 3.5%. Page 17 shows you in more detail the expected development of the Polish build-to-hold portfolio. So we are currently at 3,000 units that are already completed and on the market. We expect another 200 to 300 come to the market at the year end. And as we right now started new projects and the construction time for such projects takes around two years, you will see that the main buildup of the portfolio is happening then or is finished in year end 2027. And then the final target is in year end 2028 to get at that point in time to the target of 10,000 units. By the way, these 8,000 units that we mark here to be finished at the end of 2027, these are really concrete, identified projects where we actually really start construction, where we actually are in the plan phase. So that's not, how should I say it, something only in an Excel spreadsheet. This is something that we really now turn into reality. On the table on the right side, we've given that in the past quite similar, and now we wanted to give that a little bit more detail. We give an outlook long-term for the net actual rent that we expect from the Polish portfolio and from the EBITDR. And this is what I already mentioned at the beginning of the presentation, that we expect a quite strong increase in the EBITDR for rental. If we end up at the 65 to 70 million EBITDR from the rental portfolio, then after financial year 2028, this alone would mean an increase in the rental EBITDR for the total portfolio of 25%. And again, for sure, something on top will come from further good development in the general portfolio. Let's move to the sales business. That's on pages 18 and 19. First of all, looking at sales numbers. Until we were open, and that is something that we have already indicated in the previous calls, we have lower sales numbers than in the year before. And honestly, 2023 was also a very strong and exceptional year. So therefore, new for 2024, we expect in numbers or in terms of units, sales between 2,000 and 2,200 apartments. Before, we've been more optimistic, up to 3,000 apartments. But if you look in the current development, and it's perhaps important to mention, if you look, for example, what we have sold in October this year, we've sold around 200 units. So on a monthly basis, that will lead to a run rate of already around 600 units per quarter if this development continues, and we're really optimistic. So therefore, we're giving, in terms of units, a guidance also for 2025, and we want to sell in Poland next year 2,800 units. But even if it's one thing, on the other side, it's even more important to look at the sales volume as prices in Poland have increased quite significantly. So still, year on year, we had a sales price increase between 10% and 15%, and therefore, for us, more deciding It's not the number of units sold, it's the sales volume. And the sales volume is indicated, so basically the cumulative sales prices in this dark blue color that you see on the bottom of the page, and that compensates a lot from the reduced number of units. Page 19 is more of something, I should say, technical, important for the profit realization in the balance sheet. As you know, we are realizing the profit in the balance sheet or in the P&L once we hand over the apartment. And this is mostly then due in the fourth quarter of every year. So therefore, also for the fourth quarter of 2024, we expect an increasing result from handovers and therefore increased revenues. And therefore, we feel very comfortable with reaching our guidance in the sales business for financial year 2024, as we already a little bit better than expected. Yeah, I already mentioned guidance. Page 21 shows the confirmed guidance for financial year 2024. So we confirm the FFO guidance, the FFO-1, FFO-2, and also the adjusted debt income from sales, polling guidance, and even indicate that we should achieve these three numbers At the upper end of the range, so the business is on the way for 2024. As already mentioned, new is the dividend guidance for financial year 2024 based on a paired ratio of 40% of FFO1, and this would translate into a rounded number of 40 cents per share that we want to propose to the AGM next year. And finally, on page number 22, the new guidance for financial year 2025. I already mentioned that briefly. Again, FFO1 slightly up by 1% at 172 to 176 million. Strong increase expected in the net income from sales in Poland, leading also to an 8% year-on-year increase in FFO2. And looking on the left side of the guidance slide at the guidance for the EBITDR, Also in the German business, we are able to grow the EBITDR from the rental business despite the disposals that we have realized that are now fully effective in 2025 in the past two years, and clearly the Polish rental portfolio is growing as we are now increasing the portfolio size. Further details on development, and perhaps also interesting, can be found on page number 23, where we show in FFO Bridge the difference between the expected FFO for 2024 and the expected FFO1 for 2025. So clearly, you're benefiting from the like-for-like rental growth in Germany and from additional rental growth from the growing rental portfolio. On the other side, we're losing rents from the disposals in Germany, which is an amount of around $4 million. We have some, but I think management cost inflation also in, for example, property management cost. And then on the other side, perhaps not surprising, also some higher financing costs. Yeah, that's it from my side and a quick overview on the results for third quarter of 2024. Thank you so far for listening, but I'm now, of course, very happy to take your questions.

We now begin the question and answer session. Anyone wish to ask a question may press star and 1 on the telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Anyone with a question may press star and 1 at this time. The first question is from John Wong with Lanshot Kempin. Please go ahead.

Hi, good morning, Morten. Thank you for taking my questions. On the 40% payout ratio, I understand that it should be a bit lower than previously, as you're not agreed and that you want to retain more earnings as you focus on growth. At the same time, it screens that you intend to distribute less than AFFO. Could you turn to our thoughts here? And it has been decided to be 40%, for example, based on AFFO.

Yeah, good morning, John. Sorry, the second part of the question was a bit hard to understand, but I tried to answer it as good as I could understand the question. So, indeed, it's a 40% pay-at-risk of FFO1. That means you're not paying out the full cash available from the rental business. So, even if you look at the AFFO, it's not the full AFFO that we pay out. So, there is something left in the company. In terms of rent business, that's not a super huge amount, but we think also to keep here something as a part in the balance sheet makes sense because if we put this on top to the cash surplus that we have from the sales business, which is really a free cash between 50 and 60 million euros a year, then we have really enough equity to grow the Polish rental portfolio in the future. So therefore, we tried to find a mix between, on the one side, paying out a reasonable and hopefully still attractive dividend to shareholder with a 40% payout ratio, and on the other side, ensure that we have not only enough cash, but also a solid equity position to fund further growth in the Polish rental portfolio.

Okay, thank you. So if I understand it correctly, the cash that you retain on the balance sheet will be fully focused on Poland and not on any opportunities that may arise in Germany.

Yeah, we're not that strict. So you should not expect a strategic huge acquisition in Germany. I mean, you should never say no, but that's not really on the agenda. But of course, As we have now a strong cash position, why should we not look at some opportunities? But this would be more something just to give you an idea, perhaps 20, 30 million portfolio, something around that in a location that we know very well that comes along with an attractive price. So we're not excluding acquisitions in Germany, but perhaps more opportunistic, perhaps a smaller size. When it comes really to the focus of capital allocation, That's clear. That's the rental portfolio in Poland.

Okay, that's clear. Thank you. And then maybe moving on to the build-to-fill business in Poland. The sales prices remain strong, but obviously it's fallen off the peak of plus 20% year on year. How do you see this trend of normalization going forward? And I think you mentioned you expected 2,800 units that you want to sell for 2025. Does that include any one-off impacts, for example, from subsidies?

No, this is without any impact, so we're not assuming that a new subsidy program, which is, by the way, still under discussion and we're not really betting on that this will come, needs to come, so that's really the current regime. So therefore, we are optimistic for Poland. Again, we have seen really strong price increases here in a not easy environment. Also in Poland, interest rates increased. So therefore, seeing such strong sales numbers in 2023 was very good to see. Seeing such strong price increases not too long ago, we talked about 20% increase, was good to see. So keeping that on that level. So coming to a normalization that... is more or less that slightly growing prices is already good to have. So we don't expect any downswing, we don't expect reduced prices. And as I also mentioned, the number of units is one target and clearly that's always an easy target, but for us, you know, price optimization is also important. So therefore, that the cash situation also in Polish safe business is very strong. So, therefore, we're not under pressure to sell as much as we can very quickly. So, we're looking also at optimizing pricing. And, again, yes, we are open. The sales numbers are lower than the year before and also lower than what we expected at the beginning of the year, but still, let's say, on a very reasonable and, if you look into 2025, optimistic or a level that makes us optimistic.

Okay. That's clear. Thank you. That's just from our side.

The next question is from Simon Stippig with Balmung Research. Please go ahead.

Hi, good morning. Thank you very much for the opportunity to ask a couple of questions. First one would be on page 23, your FFO bridge. I see you have reduced rents from disposals in Germany. Is that actually a phasing effect from this year or do you assume additional disposals?

Good morning, Simon. This is without any additional disposals. So this is really something also from disposals that occurred in 2023. So perhaps we lost then the rent in the course of 2024. So for example, if the closing was in the course of 2024, we had still some rents in the P&L. Now in 2025, it's completely gone. But this is without any disposals for 2025. And just to add this, if you ask us, are there any major disposal plans in the German portfolio, no, that's not the case.

Sure, that's all clear then. And the second one would be in regard to your portfolio. I see you have a very strong rental growth guidance for the next year, which is higher than the past year's. So given the current gross yields of your portfolio, what would be your expectation here? Is it flat yields or could you give any indication in that regard?

Honestly, we cannot really give a very concrete guidance for valuations in 2025. Two trends are clear. Rental growth is in a very good way, so stronger than in the past. So that supports valuations. If you look at the interest rate environment, hopefully that's now stable slash slightly going down. So this all points towards valuation growth, towards NAB growth. what quantum of debt we already see in 2025, or if you know it from the past, it takes another year until this comes into the variations. Let's see. So I'm hesitating to give a concrete guidance for 2025, but the trend should definitely be positive.

Okay, thank you. And then in regard to the dividend payout, just to follow up on the previous question, so Now you're paying out 40% of FFO. You're keeping something because it translates to 70% of AFFO. You're keeping some cash on the balance sheet, I understand. And on the same time, you probably delever just by revaluing the portfolio automatically with higher rental costs. But a part of that, as I understood in the past, you always mentioned that the Polish business is a self-financing business. So you finance that with your 50 to 60 million additional cash. And while you keep the guidance 2028 stable, you still say you invest in Poland. So if I add that together, either you have higher costs in your Polish business, cost inflation and development, or is your guidance 2028 probably a bit on the low end and do you expect to grow even stronger there?

I think it's important to keep something in the balance sheet also for opportunities and things that you perhaps have not today on the agenda in a positive sense so whether we talk about as discussed acquisitions in Germany or more growth that is possible in Poland and We're now reinstating the dividend at a 40% payout ratio, and I understand it was 75% until financial year 2021, but reinstating the dividend should be, from our point of view, something sustainable. So it would be a mistake, as we see it now, to go back to a very high payout ratio, which perhaps potentially works, looking at the current cash position, and we know that capital markets are very open today, but better do something on a sustainable basis, keep something in the balance sheet for opportunities that may come in the future and operate on this basis. That's the way we would prefer. It's not that we expect now higher costs or any other developments, especially in the Polish rental business, than before.

Okay, that's clear. And maybe one small follow-up in that regard. In regard to your prioritization of capital allocation, so is it number one that you invest in Poland, number two you would acquire units in Germany, and then number three is potentially also share buyback or special dividend in that regard? Or how can I understand that conceptually from your side?

If you're Put it in a simple way like this, it's not wrong. So, I mean, you know, the life in a company, in a day-to-day business never works that strict. But yes, again, we've got now a really good chance to grow the Polish rental portfolio in the future. And by the way, we also want to continue the Polish sales business. So we are also investing in a new land bank. So perhaps you've seen that if you look at the total number of potential units in the future, this number has increased as we have acquired a new land bank in Poland also in the first nine months. So this is not a business we should forget, but this is really self-funding. So Poland, yes, a preference. And again, Germany is not excluded. If you want, it's number two, but it's good to have these two markets. It's good really to look in both markets into opportunities. That's also an advantage of the diversification that we now have when looking to two countries.

Okay, great. And one quick last one, or a quick follow-up. So in regard to capital allocation, share buyback is actually not what you would actually consider.

Not as of today. I think we've got good growth opportunities and we should use the liquidity and financial funds that we have for that in the first place. But, you know, I mean, we've done that already some years ago. That's the larger share back. So the thinking of capital allocation that also potential share buyback can make sense is in our heads, but that's not really on the agenda as of today.

Okay, thank you. And a very, very quick last one in regard to the Polish rental business. In the BTH segment, you said that you have a guidance for 2025 and you show on the bridge a $6 million gap in rental growth for the next year. And is it valuable? What's the underlying figure of units you're assuming here for the next year in regard to the BTH business? And then also, I saw negative frontal growth in Lodge. Can you give some additional details to the underlying reasons for that? Thank you.

Regarding your first question, on page number 17, we indicate a set of development of the rental units in Poland. So you will see that the portfolio will increase by roughly 400 units next year. So that's then also clearly included in the guidance. So basically, the total increase in rents is coming from this 400 units more plus the more than 3% rental growth. And regarding the rent development in Łódź, it's indeed slightly negative, but we don't see this as a trend. So therefore, also, Łódź should contribute to a positive rental growth in 2025. We're in Poland in an unregulated market, so that's something we need to get used to, that perhaps in some projects, and Łódź is basically one project that we have finished now for a longer time, and that we have then also perhaps in one quarter a slightly reduced rents as the contracts are short term and but we are very sure that also in which we see a good rental development from 2025 onwards again.

Okay the units the additional units you would expect in H2 or H1 in the residential portfolio in Poland?

There's one project coming to the market at the very beginning of 2025, I remember well, and the second part is more the second half. So if you model that, if you put that in the middle of the year as an average, that would be a good estimate.

Okay, great. Thank you very much. Apologies for the extended questioning. No, my pleasure.

The next question is from Manuel Martin with Oddo. Please go ahead.

Thank you, Martin, for taking my questions. Two questions from my side. I hope it's not a repetition because I had some technical problems with my internet telephone. The first question would be on the potential valuation results of 2024. You said that, of course, you don't have any exact figures right now, but the potentially balance valuation result do refer to the H2 valuation or the full year valuation because I think for the first half year you had a devaluation of something like a bit more than 2% in the portfolio. So to have a zero valuation by the end of the year would imply some valuation gains in the second half of the year.

Yeah, Manuel, good morning, and thank you for the question. So I'm happy to confirm this broadly unchanged portfolio value refers to the second half valuation. So you're right. In the first half of 2024, we had a deviation of a little bit more than 2.5%. For the second half, we expect something at around zero.

Okay, understood. And my second question would be on Poland. Maybe a bit too distant the question right now, but would you consider also additional M&A in Poland? That means to enlarge your platform that you have there. Could there be potential targets?

That's also an option that we have. But as you know, in Poland, we are one of the first institutional landlords. So therefore, the number of potential acquisitions should be not that huge. But that's not necessary to grow the portfolio as you have this base case, the plan, how we can grow the portfolio from our own projects. but clearly we would look at that and let's see how this develops in the next one to three years because some of the investors that started some years ago with us in Poland potentially also seeking exit options in the future and clearly we would look at that. We would be a natural buyer for that. So clearly we would be involved in such initiatives. When it comes to the sales business, It's not a strategic goal to buy now the next development company because we have a very good platform, we have a good team there. If there's an opportunity to buy a company to get access to an attractive land bank, yes, we would look at that. So therefore M&A is definitely an option in Poland. but with this background, right? And again, good to have the potential to grow also from internal sources.

Okay, I see. Thank you very much.

As a reminder, if you wish to register for a question, please press star 1 on your telephone. There are no more questions at this time. I would now like to turn the conference back over to Martin Thiel for any closing remarks.

Yeah, thank you very much all for dialing in into our call and for your questions. As always, if there's anything else, please feel free to contact the IR department or myself. Thank you again for listening and hope to see you soon on the road or at our next conference call. Many thanks.

Ladies and gentlemen, the conference is now over. Thank you for your participation.