LEG Immobilien SE

XETRA:LEG

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I am Harmony, your conference call operator. Welcome, and thank you for joining the LEG conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Frank Kopfinger, Head of Investor Relations. Please go ahead.

[Frank Kopfinger, executive]

Thank you, Harmony, and good morning, everyone, from Düsseldorf. Welcome to our H1 2023 results call, and thank you for your participation. We have in the call our entire management team with our CEO, Lars von Lackum; our CFO, Kathrin Köhling; as well as our COO Volker Wiegel. You'll find the presentation document as well as the quarterly report within the IR section of our homepage. Please note that there is also a disclaimer, which you'll find on Page 3 of our presentation. And without further ado, I hand it over to you, Lars.

[Lars Von Lackum, executive]

Thank you, Frank, and good morning also from my side. Let me kick off today's presentation by summarizing the key highlights. Afterwards, Kathrin and Volker will provide you with more details on financials and operations.

In the first half of 2023, we continue to benefit operationally from the strong dynamics in the German housing market. We increased our rents on a like-for-like basis by a strong 4.3%. On a reported basis, net cold rent grew even by 4.6% as growth from new build units more than offset the effect from disposals.

Vacancy rate came also further down by 10 bps to 2.6%. Because of our new steering approach, cash generation increased strongly, and we achieved an AFFO of EUR 118.6 million, an increase of almost 50%. This is driven by overall strong financial results, which held up well against headwinds from higher operating costs and interest rates.

Additionally, AFFO is driven by a substantial cutback of CapEx spending. As announced already by the end of June, we increased the guidance for the AFFO to EUR 165 million to EUR 180 million. I will give you some more explanations for the drivers of that adjustment in a minute. For the first half of 2023, we wrote down our portfolio by 7.4%. This comes on top of a devaluation of the portfolio of 4% in the second half of 2022. As always, we reacted swiftly to the new environment, including the valuation of our assets.

The devaluation in H1 leads to a higher decline of the NTA of 11%, bringing it to now around EUR 136 per share. The decline of the NTA is due to the write-down of the assets and additionally driven by a reduction of the deferred taxes. The deferred taxes need to be resolved in the case of the write-down of the asset values, so a pure accounting effect.

With the new valuation, the gross yield for our portfolio now stands at 4.6% or in German real estate terms at a multiplier of 21.6. The portfolio holds a 200 bps spread over the German 10-year bond and further rent increases will create additional headroom.

The devaluation increases the LTV to 46.6%, bringing that KPI above our midterm target. However, that increase has no effect whatsoever on our ability to refinancing -- refinance our upcoming maturities. Kathrin and her team have done a tremendous job in the last couple of months and signed already more than EUR 500 million of new mainly secured financings. Our funds already cover more than the upcoming 2024 bond maturities.

Next, on Kathrin's plate is the rollover of the remaining 2024 secured maturities. As it is simple bread and butter business, we will tackle that over the coming months as those mature only from June 2024 onwards, and we will update you accordingly.

We further disposed units from our sales program in an otherwise still very quiet market. We sold almost 700 units in H1 at book value. We continue to behave very disciplined and do not seek to add complexity to our balance sheet by asymmetric transactions. While our disposal progress is impacted by the low transaction activity, we stay disciplined and will not rush into deals, which we might get within the next 24 months.

Due to our cash-focused steering approach, we run LEG close to cash-neutral and strictly control our gross debt position. We stay very confident on the mid- to long-term outlook for our asset class of affordable living in Germany, and therefore, we'll carefully evaluate all options without taking forced actions.

On the ESG side, we are very proud to have had the chance to host Vice Chancellor, Robert Habeck, at one of our Renowate sites. Volker gave the Minister and in-depth insight into our cutting-edge approach of serial modernization. It is good to see that political interest is picking up regarding innovators and solution providers like Renowate.

In this respect, we are making also further progress with one of our other e-initiatives. Our new joint venture, called seero.io, is about to start its pre-series production of AI-based thermostats. It is also worth mentioning that we continued our efforts with regards to our application with SBTi and expect our CO2 targets to be validated until the end of August.

And with this, let me provide you with some more background on our guidance increase.

I am now on Slide 7. End of June, we increased our 2023 guidance for our AFFO target from EUR 125 million to EUR 140 million to a higher range of EUR 165 million to EUR 180 million. Timing of the announcement was driven exclusively by our interim internal forecast, which we finalized by then. The guidance is driven by 2 bigger items and one smaller effect, though also a very important one.

Firstly, and starting with the smallest contribution, we increased our rental growth guidance. We experienced that rent increases gain momentum, and we expect this development to continue due to the widening supply-demand imbalance. Therefore, we increased guidance on our like-for-like rental growth from 3.3% to 3.7% to 3.8% to 4%. This increase is AFFO by around EUR 3 million.

Secondly, we received legal clarity on the treatment for the sale of self-produced green power. We've sold all our 2023 green electricity production in a forward sale in autumn 2022 and locked in peak energy prices. At the same time, the German government implemented an excessive margin tax. For our original guidance, we plan conservatively and allow for a high share of profits to be taxed. After we received clarity by external lawyers on the application of this tax, we were able to reassess the tax burden. Due to this reassessment, we were able to increase AFFO by between EUR 19 million to EUR 22 million.

Lastly, we were able to further reduce our new development pipeline. While originally obligated to build by commitments given to communities or other partners, we had to include those projects into our plan. After extensive and partly very difficult renegotiations, we were able to cancel some smaller projects. This reduces the CapEx by between EUR 17 million to EUR 20 million and hence, improves the AFFO accordingly.

As of today, the new development pipeline amounts to a total investment volume of just EUR 130 million and will be completed in less than 2.5 years. You can find the respective details on Page 31 in the appendix.

We are convinced that all 3 drivers have been optimized in the best interest of our shareholders. We consistently go the extra mile to capture the rent growth momentum, to quickly grasp opportunities by selling green electricity at peak prices, if and when markets allow for it. and to strictly cancel projects in agreement with communities and other partners if returns do not cover capital costs. With this, I hand it over to Volker for the operational highlights.

[Volker Wiegel, executive]

Thanks, Lars, and good morning to all of you. I will start on Slide 9 with changes within our portfolio. In the first half of the year, our portfolio size declined by 150 units to a total of roughly 167,000 units. While we added 516 new units to our portfolio, 666 units were sold out of our portfolio. The additions to our portfolio comprised in Q1, mainly of a larger portfolio in NRW in the cities of Düsseldorf and Cologne, as well as the completion of a new development project.

In Q2, the new additions came nearly solely from completed new development projects. As already explained in the Q1 call, the portfolio deal with assets in Düsseldorf and Cologne was already signed in September last year, i.e., before we stopped our acquisition activities. The divestments include 3 larger transactions. Nowadays, these count is larger deals. In total, these 3 deals have a volume of around 440 units. The remainder were several smaller ticket sales of non-core assets, mainly in Eastern Germany. All these assets were sold at total book value of around EUR 39 million.

Additionally, we signed contracts for around 170 units, which left our portfolio as of 1st of July or will be leaving our portfolio in the next couple of weeks. Our message is still the same as in the previous month. We opt for the selective disposal approach to preserve the value of our assets. That makes life more difficult for our sales team but safeguard every single euro of shareholder value.

I'm now coming to Slide 10. At the end of the first half of the business year, the in-place rent of our entire portfolio on a like-for-like basis stood at EUR 6.52 per square meter and hence, 4.3% higher in comparison to H1 2022. Rent table increases contributed 2.1%, modernization measures and re-letting 1.4%. The cost rent adjustment for our 32,000 rent-restricted units contributed 80 basis points to that strong increase. We can adjust the cost rent for the rent-restricted units every 3 years based on the development of the CPI. 2023. So this year is one of the years in which we can execute such an increase. On average, the in-place rent for these units increased by 5.4%.

For the free financed part of our portfolio, the in-place rent increased by 4% on a like-for-like basis to EUR 6.83 per square meter. Rent growth was the highest in the stable markets with 4.5%, followed by the high-growth markets of 3.9% and the higher-yielding markets was 3.5%. Although the reported 4.3% rent growth is higher than our new guidance range of 3.8% to 4%, please take note that this output performance will come down as it is simply a temporary effect.

In the first half of the year, we have simply put through more of the rent table increases. Accordingly, the growth rate will come down [ towards ] the guidance range.

On Slide 11, you can see that we invested significantly less in the first half of the current fiscal year. Our adjusted investments declined by 23% in total as well as on a per square meter basis. Adjusted investments, among others, do not include new construction activities on our own land, own work capitalized, as well as internal profits and connections with investments.

The new construction costs remains with roughly EUR 10 million on previous year's level. With regards to the development of adjusted CapEx and adjusted maintenance, the trend is unchanged in comparison to Q1. Adjusted CapEx per square meter, the bigger part of our investments declined by 39%, while adjusted maintenance per square meter increased by roughly 20%. This reverse development is owed to our new cash-focused steering approach.

Consequently, the capitalization ratio declined from 73% to 58%. As explained previously, the focus on maximization of the capitalization rate led to higher spendings whereas the new steering incentivizes the minimization of spendings. Our core focus in the new market environment.

Although investment levels were EUR 14 (sic) [ EUR 14.08 ] per square meter in H1 remains well below the proportional share of our EUR 35 per square meter is the full year's guidance, we confirm our target of an investment of EUR 35 per square meter in 2023.

Payouts for investments are driven by the completion of work. And as in previous years, a higher share of those completions are being expected in H2. Therefore, I'm happy to reiterate that we are fully committed to invest into our assets to modernize and decarbonize plan.

On the next slide, you can see the performance of our value-added services. Since 2013, the contribution from our value-added services has grown steadily to FFO I of EUR 50 million in 2022. We have decided to adapt the reporting regarding our service business also to our new steering KPI AFFO.

After 6 months in 2023, this business fell short of the comparable previous year AFFO. The main reason for that is a decline of the contribution of our subsidiary, EnergieService Plus. While this company benefited in 2022 from the volatility in the energy markets, there's now an adverse effect. Additionally, ESP's AFFO will, particularly in H2, be affected by ramp-up investments in connection with our air-to-air heat pump initiative. In total, our value-added services will likely not reach the results from 2022. And with this, I hand over to Kathrin.

[Kathrin Köhling, executive]

Thank you, Volker, and good morning also from my side. I will continue with the development of our key P&L items on Slide 14. In the first half of the reporting year, net cold rent rose by 4.6% to EUR 414 million. This was, of course, mainly driven by our strong organic growth. Of the EUR 18 million increase in net cold rent, EUR 15 million or 83% were generated organically. Additions came from acquisitions and new build units exceeding disposals.

The recurring net operating income following a 3.9% decline in Q1, turned slightly positive again and increased by 0.8% to EUR 339.4 million. The prior year figure of EUR 336.7 million has been adjusted to the calculation method that we have implied since the beginning of the year. Maintenance expenses for externally procured services, as well as own work capitalized are therefore no longer included, but are considered further down the P&L in the FFO and AFFO.

On this basis, the NOI margin declined by 310 bps year-on-year, reflecting higher operating expenses like CO2 costs that cannot be charged to our tenants as well as the volatility on the energy markets that had an impact on our service company, ESP.

The adjusted EBITDA margin saw a much smaller decline. At 80.9%, it is well on track to meet our recently increased full year target of 80%. This also reflects our relentless cost discipline, although however, we had to accept some higher costs for insurances. A strong positive contribution to EBITDA came from our own green electricity production that benefited from higher electricity prices and higher production and showed a positive effect of EUR 12 million.

Finally, the AFFO, our most important KPI developed strongly with an increase of 49% to EUR 118.6 million. This number seems high compared to our full year target of EUR 165 million to EUR 180 million. However, you must consider the increase in investments in the second half to reach our target of EUR 35 per square meter, as Volker explained earlier.

We have prepared a detailed overview of the AFFO drivers on Slide #15. Just to sum up, the positive effects in H1 clearly came from our sustainable organic growth, reduced investments and the forward sales of green electricity. On the other hand, we had to cope with higher operating expenses, mainly relating to heating costs and volatile energy markets and of course, higher interest expenses.

Now let us move to Slide 16 for the portfolio revaluation. Overall, the remeasurement made as at end of June led to a devaluation of 7.4% for the first half. This was mainly driven by the increase of the discount rate to 4.3% after 3.7% at year-end 2022. These are average numbers for the total portfolio.

We also provide a detailed table with valuation parameters by market in our quarterly report on Page 29, if you wish to get a more detailed view.

Our high-growth markets were the most affected with a devaluation of 9%. The devaluation in the stable and higher-yielding markets, however, were limited to 6.3% or 6.1%, respectively. On the following slide, we provide an overview of portfolio values by market. The gross asset value for the residential portfolio now stands at EUR 1,666 per square meter, ranging from EUR 2,293 per square meter in the high-growth markets, down to just EUR 1,158 in the higher-yielding markets.

On yield, the gross yield of the residential portfolio increased to 4.6%, following the revaluation compared to 4.2% at year-end 2022. We understand that the EPRA net initial yield is also an important indicator for many investors. And therefore, for the first time, we are publishing a detailed table with the interim report. You will find it in the Q2 report on Page 11.

The EPRA NIY as of 30th June was 3.6%. In line with EPRA best practices, we also adopted our calculation. We now include the entire portfolio in the calculation instead of just the residential portfolio. Finally, to anticipate one of your most urgent questions, unfortunately, I cannot give an outlook for the property valuation in the second half. We are just 7 weeks in H2, and there is still very high uncertainty on the development of interest rates and still hardly any transaction evidence. We certainly continue to monitor and analyze the market very closely and discuss our observations internally as well as with external experts.

Conservative as we are at LEG, we prefer to wait with the guidance, especially as we expected a devaluation for H1 at a mid-single-digit percent rate ending up at the upper end of that guidance is 7.4%.

Let us move to Slide 18 and our financial profile. As of 30th of June, average interest costs amounted to 1.4%, 25 basis points up year-on-year. The interest hedging rate remained high at 94%. The average debt maturity was 6.1 years after 7.1 years, 12 months earlier. Following the devaluation of the property portfolio, our LTV reached 46.6% at the reporting date after 43.9% at the end of December. Our LTV midterm target level remains unchanged at 43%. And let me emphasize, the 43% level is explicitly a midterm target. This is not a short-term goal.

As I will elaborate on in a minute, we have excellent access to financing, be it on the secured as well as the unsecured side. Looking at the maturity profile, it is evident that our financing mix is diversified, which is a strong plus and offers optionality going forward. Thanks to our regular activities in the secured bank loan market, we have long-standing relationships with a large number of commercial banks. We also remain in a comfortable position with regards to our bond covenants i.e., we can digest the drop in valuations of more than 20% based on today's value before we hit our tight bond covenant, the unencumbered asset test. After our financing activities to date in our bond repayment, we will still have red -- headroom of close to EUR 1 billion on additional secured financing. Net debt-to-EBITDA was 14x as end of June.

At the reporting date, we had a cash position of EUR 411 million, including short-term deposits. Furthermore, we have undrawn credit lines of EUR 600 million and our commercial paper program of another EUR 600 million.

All in all, our financial situation is very solid. And with this overview, I would like to turn to Slide 19 for details on the refinancing. As of today, I am pleased to say that we have already covered both the 2023 maturities and the 2024 EUR 500 million bond maturity, as well as some first secured loan maturities in 2024. We signed secured loans amounting to more than EUR 400 million at an average interest rate of 4.19% and an average maturity of 7.8 years. Furthermore, on July 10, we issued another EUR 100 million tranche of our 2031 sustainable bond. All cash proceeds from these financings will be received in H2.

In terms of further refinancing, I want to highlight that we are not dependent on bond markets in the short to midterm. Regarding disposals, growth obviously would help to reduce LTV back towards our midterm target. However, we do neither see the need to sell assets at substantial discounts nor rush into structure deals with an asymmetric risk return profile. At the same time, we remain extremely disciplined and execute our new cash flow steering approach consequently within the organization. And with this, I hand over to Lars for the outlook. Thanks, Kathrin.

[Lars Von Lackum, executive]

Finally, let's have a brief look at Slide 20 and our guidance for 2023. In a nutshell. After a good start into 2023, we confirm our recently increased guidance. We expect an AFFO of EUR 165 million to EUR 180 million. This is based on an 80% adjusted EBITDA margin, which benefits from the higher rental income as well as the special effects from the sale of green energy. We confirm our investment spending into the standing portfolio of around EUR 35 per square meter.

We stick to our medium-term LTV target of 43% and take that very serious. To reach this, we will continue to work hard to make further progress on our 5,000 units disposal program. We also confirm our ESG targets, and given our various initiatives, we are on track here. With this, we come to the end of the presentation, and I'll hand it back to Frank.

[Frank Kopfinger, executive]

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

[Operator]

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] Your first question comes from Charles Boissier from UBS.

[Charles Boissier, analyst]

First, I will not ask you about H2 valuations. But more generally, now that you values have come down a combined 11% since the peak. How far are we -- do you think to a clearing price for deals to start resurfacing?

[Lars Von Lackum, executive]

Yes. Charles, it's Lars, and thanks a lot for the question. unfortunately, it is very difficult to say. So I think Kathrin during her presentation made clear that already the 7.4% has been at the upper end of what we expected for H1. In that very silent transaction market, it is very difficult to find the clearing price.

So therefore -- and you've seen that we have not been able to sell more than [ 150 ] units in Q2 which certainly is below what we have planned to do and realize it is very difficult to say. Also with regards to our sales ambitions there and offering lower prices is not helping the market. So we do not see that interest is picking up. If you are giving signs to the market that you are willing to also negotiate on lower prices. So therefore, it is incredibly difficult to say.

Once again, and Charles it's not that we do not want to give you clearer guidance, but it is just impossible. After 7 weeks, and that has been heavily impacted because Germans tend to go and start their summer holidays earlier than people in the U.K. And so we've been now in July at ultra low transaction volumes for the market and we cannot give you, as of today, any sight with regards to H2 valuation or with any indication for the transaction market to pick up.

[Charles Boissier, analyst]

Very clear. And my second question is still related to disposal. Apologies for it. So when -- I remember in Q1, you mentioned you had increased the number of people doing disposals, to make sure that you identify every chance that is there in the market. And at the same time, you had also mentioned you are not looking to do structured deals, and you were very focused on 5,000 units and selling us close to book value as possible.

So today, you're reemphasizing, sorry, that you're focusing on those 5,000 units. And I'm just wondering has your approach to disposal change in any way in the last few months?

[Lars Von Lackum, executive]

Yes. So I think it keeps us awake day and night. And we are working as hard as possible with everyone to get the sales done. Unfortunately, we needed to learn that volatility in the market is extremely high. So as long as you do not really have a signature in front of the notary, you cannot rely even on people, which we thought are very conservative, reliable players in the market.

So we've seen people withdrawing from deals shortly before notary meetings. So that unfortunately leads to the fact that we are doing everything to get the 5,000 done. But once again, I think we have done whatever was possible and we could really do. We have improved on rent growth. We have improved in vacancy. We were cutting down on CapEx, and we were cutting down on the new development pipeline. Is that enough? That's probably not yet, but we will thrive and try to do and get done more in H2 with regards to disposals.

[Charles Boissier, analyst]

And maybe just as a follow-up, have you received unsolicited bid on the rest of the portfolio which you are not marketing. So like the 5,000, you need the 3% of your portfolio. Have you received bids on the 97% remaining or not?

[Lars Von Lackum, executive]

No, we haven't. So, Charles, no one approached us saying, okay, we would be willing to buy all of Düsseldorf, Cologne, Aachen and Bielefeld or anything else. So that incoming call, I didn't receive yet.

[Operator]

Your next question comes from Marc Mozzi from Bank of America.

[Marc Louis Mozzi, analyst]

I have only 2 questions. The first one is as capital values are going down. And you're not making any disposals. Therefore, your LTV is going up. If we continue on that trend, you're going to be very, very soon at 50% plus, and it doesn't seem you're going to have a lot of leeway to make these large disposals. So my question is what are your plans to keep your LTV under control. And more specifically, what is your reading of things from to that perspective on maintaining your dividend policy for this year despite the guidance because that's going to help. And do you have any further headroom to cut your CapEx, especially from the development side? And if that the case by how much would that be? That's my first question.

[Lars Von Lackum, executive]

Marc, thanks for your question. So I think you ended your question with a part of my response, which certainly is cutting CapEx certainly is something which we are evaluating very, very hard. And we are working on that very, very hard. So you've seen that Volker and the team have been able in H1 to cut down CapEx by 23%.

That already is quite a stretch, especially taking into consideration that we have inflation on the material cost, as you know, still double digit. So I think don't underestimate of how hard we try to get that reduced. And we have already indicated that also for next year, we will try once again to find a way to reduce CapEx in a double-digit percentage amount. And that exactly is what we will try to do next year.

Whether it will be in the same region like this year and mostly not, but we will try. And please don't underestimate the inflation impact. We try to give you a bit of a flavor on Page 30, where you can see a comparison between the nominal investments and the real investment and if you rebase that 2013 today's spending would be at around EUR 21 per square meter. That certainly is one of the major focus areas for management currently.

Second one, yes, you are right. For the first 6 months, we have not been able to come close to the 5,000 of our disposal program. But there are still 5 months to go. So please just give us more time to work on that. We are in close discussions with one or the other willing party to buy. Those parties are very often family offices and smaller companies and others. And there -- we still are hopeful that by the end of this year, we will be able to show the better part -- or a higher share of the sales program to have been executed. That's certainly the second part.

And with regards to dividends to follow up on that one, I think it is just too early. So just please wait. We need to see how values developed in H2. How sales develop in H2. And as of today, I think I can reaffirm that we think we are well advised to stick to our new dividend policy of 100% of AFFO to be paid and also share -- and still to be defined out of the disposals. But as of today, I think it's a bit too early to now talk about the dividend.

[Marc Louis Mozzi, analyst]

That's a very comprehensive answer. And then my second question is around your refinancing schedule. There is 2 years, actually, there is '24 it seems that everything is under control. But my question on '24 is, are you aiming at eventually using your RCF to fund the still remaining gap we are -- we can see today, I think which is still EUR 100 million? Because I'm not exactly sure how you're going to do your refinancing on '24. You have issued new bonds for EUR 500 million, if I'm correct. And then you still have EUR 500 million of secured loans to be refinanced? And how do you going to refinance those unsecured loans? That's my first -- the first question.

So are you going to use RCF to fund that gap?

And the second one is about the convertible bond in 2025. What is your plan on that respect? Because it's not in the money, obviously. So there is no way you're going to turn it into equity. But can you call it earlier in '24? Can you use this opportunity to call this convertible loan to raise equity at the same time, as usually the combination of those that make a nice package?

[Kathrin Köhling, executive]

Happy, Marc, to take your questions on the financing. So as you know, for -- in 2024, the maturities that we have are our EUR 500 million bond, which is due in January. And then we have around EUR 400 million of secured financing, which is due in June 2024. So we do not need the RCF to cover our 2024 bond. The EUR 500 million bond is well covered by our existing cash position of EUR 500 million, which you just mentioned, plus the cash proceeds from the outlined new financings that -- where we will receive the cash in H2.

So this comes additionally to our EUR 400 million cash position. And the financings that we did were on the unsecured side, our bond tap of around EUR 100 million and the secured financing of more than EUR 400 million. So that is 2024.

And then in 2025, you were asking for the convertible, which is due in September 2025. I hope you understand that for us, this is still a little bit time away. For right now, we concentrate on rolling forward our maturities in June 2024 on the secured side. And then in next year, we will be prepared for the bond convertible and how we will refinance that.

[Operator]

Your next question comes from Thomas Rothaeusler from Deutsche Bank.

[Thomas Rothaeusler, analyst]

Two questions actually. The first is on property valuation. You've seen a markdown somewhat above your listed peers so far. So there seems no benefit for higher-yielding assets. Actually some argue to be better off with higher-yielding product compared to lower-yielding and yield expansion environment. Could you share your view on this point? And maybe also what's the view here from your appraiser? And also on the outlook for the rest of the year, I mean if you listen to one of your peers, they basically referred to first signs of stabilization. Would you agree on this?

[Lars Von Lackum, executive]

With regards to H1 valuation, perhaps we together have a quick look at Page 16 of the presentation. There, you can see that the value decline is not equally spread across the 3 different markets. And we certainly see a higher decline of values in the high-growth markets, which I think is not a big surprise to anyone because -- gross yields there, certainly have been quite depressed. And therefore, we certainly now add a gross yield of 3.8% and still have a bit of a headroom versus the 10-year bond whether that is all remains to be seen, while higher-yielding markets with a gross yield of 6% now have quite a substantial spread to that.

How that is going to develop in H2? Once again, apologies, Thomas. It's not that we do not want to give you further insights. But due to the summer season in Germany, July has been an incredibly, incredibly low transaction activity month. We do not have further insights. This is what we can currently share with you. And from us, as always, we try to give you a better feeling for the market in November. But now 7 weeks into H2 and with the summer season on top, we do not have a better sight on how the development will be for the remaining year.

[Thomas Rothaeusler, analyst]

Okay. The second question actually is on rental growth. I mean, you show accelerating dynamics, especially for rent table now at, I think, 2.1%. Could you provide any view for the next 12 months? Could this be could this be much higher than the 2% level, what we currently...

[Volker Wiegel, executive]

Well, Thomas, I take your question. For the next 12 months a bit too early. We give you guidance in November for 2024. What we have seen in the past and what we are confident to see also in the future is that inflation has an effect on rent tables, but that there is a lagging effect and we expect, of course, that the dynamic positive trend continues.

[Operator]

Your next question comes from Paul May from Barclays.

[Paul May, analyst]

I'll go one at a time, it's easier. Given what you know now, and I appreciate you haven't given guidance for 2024 on like-for-like rental growth. But is that expected to slow given the smaller investment volume and smaller impact from the cost rent increases?

[Volker Wiegel, executive]

Paul, in 2024, we will come up with in November. Of course, the effect from the cost rent will not be there in 2024 and all the other items are too early to comment on.

[Paul May, analyst]

Okay. Sorry to [ bring labor ] on the deleveraging plans, but I think you sort of noted a limited transactions, not prepared to sell at discounts, although arguably sales have been at discounts to previous sort of peak book values. No asymmetric deals, values potentially likely to further decline from here. So I'm just wondering -- what is the plan to deleverage?

[Lars Von Lackum, executive]

Yes. So with regards to deleveraging, I think, first of all, it's reduction of CapEx. And so currently, we are working on the plan for CapEx next year. Certainly, intention will be to once again reduce the investments into the standing assets. So once again, a double-digit percentage amount. And that is certainly something which we have at our hands and certainly try to execute very consequently also in 2024.

Secondly, once again, there are still 5 months to go with regards to transactions. July, once again, has been impacted by the summer season, has been an incredibly low activity months with regards to transactions. You might have seen already the broker reports, which have shown that those months are only comparable to 2009 with regards to the volume of residential assets being traded. So a volume of around EUR 300 million with regards to the residential side. So therefore, we certainly are working hard to get more sales done. That will be the second part, and that is what we are currently striving to execute on.

[Paul May, analyst]

On the third one. Is the one-offs in the AFFO, will those be included in management compensation?

[Lars Von Lackum, executive]

Thanks a lot for that question, Paul. So like with the transaction bonus in 2021 where management waived their bonus. And certainly, we will have a look at that together with the Supervisory Board at end of this year. I think -- and that's most important for the STI, it shows that we are doing the right things for shareholders. We are cutting down new developments. We are cutting down not only on the CapEx but also on the new developments. We are striving to increase the rent growth. And thirdly, and that, I think, has been a very brave decision, and perhaps you just want to also reconcile with your colleagues covering utilities, we've taken the decision in October 2022 to presell all the green electricity and been able to, I think, realize a very substantial additional share for our FFO in 2023.

[Paul May, analyst]

A quick one, hopefully. You mentioned on the bond tap the EUR 100 million at 0.75%, I think it is from memory. What principal amount does that relate to? Because I'm assuming you speak to our credit colleagues that, that would have been an issue at a lower principal amount. So the all-in cost would be somewhere around 5%. Is that fair to say if you include the effective yield to maturity?

[Kathrin Köhling, executive]

Yes. So this was -- we got a cash proceed of around EUR 70 million for this -- and this amounts to an all-in yield of 5.448%. And the coupon is, as you know, 0.75% now for the next year.

[Paul May, analyst]

And in terms of an accounting point of view, is that additional cash cost, which is quite substantial. Is that going to be amortized through the life of the bond? Or is that a cash cost at the end of the bond, which just gets excluded from your calculations of FFO and AFFO?

[Kathrin Köhling, executive]

This will be amortized over the years until 2031.

[Paul May, analyst]

Perfect. And then sorry, this is possibly quite technical and one that could be taken off-line. Looking at your valuation table, I think discount rates have moved up 60 basis points over the half and cap rates have moved up 30 basis points. If I look at the sensitivity table, in the full year results, that would imply for those 2 things about a 17-ish percent value decline, 16%, 17% value decline, which has then been slightly offset by the couple of percent increase in market rents over the half. It's obviously double what you've actually reported. Just wondering -- where am I reading it wrong? Or where was the sensitivity table not appropriate? What's the other factor that I should be considering?

[Lars Von Lackum, executive]

Well, that's really a technical question, if you -- we apologize. But certainly, we will definitely come back to that after the call.

[Operator]

The next question comes from Neeraj Kumar from Barclays.

[Neeraj Kumar, analyst]

I have a couple of questions. So first one, do you think the increase in LTV is likely to trigger an imminent downgrade from Moody's? And if that may have an impact on your refinancing abilities in near to medium term?

[Kathrin Köhling, executive]

So happy to take this question, Neeraj. As you know, Moody's is supporting our full dividend suspension and our cash flow-based steering. However, I haven't talked to them yet with regards to our new numbers that came out only today and especially our drop in valuation of 7.4%. They expected 10% for LEG in total for 2023. So I would expect them to look at us more closely now.

However, it is difficult to say under which circumstances we could see a downgrade in our rating as the rating is not only based on quantitative KPIs, but also on qualitative KPIs. And you were asking about the cost of a potential downgrade. So if we were to be downgraded, on the secured side, there would be no increase in cost whatsoever. So neither on the existing debt nor on new debt. Of course, spreads for new unsecured financing would increase, but however, with regards to our existing financings, there wouldn't be any step-up in our bonds either.

[Neeraj Kumar, analyst]

That's helpful. My second question is your unencumbered asset ratio is around 157% and any further valuation decline is likely to affect that negatively. And that ratio may also deteriorate if you are to take incremental secured debt, as you say, you are not reliant on the bond market in medium term. So I just wanted to hear your thoughts, how you're sort of looking at that ratio? And how does that impact your plans?

[Kathrin Köhling, executive]

So as you know, the unencumbered asset ratio is driven by several factors. There is not only the pure uptake of secured financing, but also shifting financing from unsecured to secured financing improves the headroom as well as the roll forward of existing secured financing in case you do it with a lower LTV. So with regards to what we have now up to do is the EUR 500 million bond in January. I already took out of the unencumbered asset ratio. So we still have a headroom of around EUR 1 billion. So then we have the EUR 400 million secured financing next year, which we will just roll over.

So there will be no impact on the unencumbered asset ratio. It may even improve if we if we leverage those assets higher. And then in 2025, we will again have EUR 500 million of secured financing to refinance, which will not have an impact on the -- or even a positive impact on the unencumbered asset ratio. And we have the EUR 400 million convertible. And here you can see with our headroom of being around EUR 1 billion to EUR 400 million are well doable. So however, we want to tackle the financing questions around the convertible, we will have headroom of doing so.

[Neeraj Kumar, analyst]

That's helpful. As -- Probably the last question. As you say, in your sort of press release that the share price development and suspension of dividend has demanded a lot from shareholders in recent months. Will it be fair to inflict any further pain in terms of rights issuance or so to deleverage?

[Lars Von Lackum, executive]

Yes. So honestly, I think we are well underway. Currently, we do not look into anything close to an equity raise. So therefore, that's not on the table of Management Board at the current moment.

[Operator]

Your next question comes from Manuel Martin from ODDO BHF.

[Manuel Martin, analyst]

Just 2 questions. It's regarding the rent. Could you give us some flavor or background information on the churn rate of your tenants in your portfolio? What is the churn rate? And how has that evolved? And how could that evolve in the future?

[Volker Wiegel, executive]

We have a churn rate of 9.5% roughly in the portfolio, and we expect this to stabilize.

[Manuel Martin, analyst]

Okay. And the second question would be on the like-for-like rental growth. Apologies, but could you remind me, please, on the factor which is going to reduce the like-for-like rental growth until year-end. Because for now, you're above your guidance. And I think you mentioned it in the call, but I didn't catch it. Maybe you can give me some help there, please.

[Volker Wiegel, executive]

So Martin, I try. [indiscernible] Yes, we -- it's simply a technicality reason that we did very much in the first half. And as we did in last year, some rent increases, rent table increases in the second half. We have then a higher year-end figure in 2022, but we will have not the same raises in the second half 2023 than we did in 2022.

So we were a bit more front loaded in this year to increase rent tables than in last year. And as we have on the like-for-like basis, now you compare June '23, with June '22. And they are not included the rent increases we did in second half of 2022. So we have a higher figure at -- to compare with at the end of this year with the last 12 months.

[Operator]

Next question comes from Andres Toome from Green Street.

[Andres Toome, analyst]

Just a couple of questions. Firstly, I'm just wondering, I'm looking at the Euro 5-year swap rate, and it's been quite stable for the better part of this year at around 3%, more or less. So presumably, that financing costs are quite visible for buyers at this point. So I'm just wondering the large discounts you sort of speak to make deals happen. Are these just realistic market pricing based on where rates are today? And I guess -- are you then making a big interest rate bet yourselves as you say you don't want to sell and then later perhaps to get selling at too low price?

[Lars Von Lackum, executive]

Andres, perhaps it was a misunderstanding. It's not that we do not want to sell. Currently, we unfortunately are not able to attract enough interest and not only interest, but really people finally willing to sign the contract. So we are doing everything to get our 5,000 units being sold. But unfortunately, interest currently is very low and transaction activity also is very low. So it's not the only ones being impacted negatively. It's not just us, but the complete market. And certainly, we try to do the utmost to get it sold.

[Andres Toome, analyst]

So does that mean at the moment, there is no one at the market willing to buy at any price. Is that the way I should read it?

[Lars Von Lackum, executive]

So at least we are offering whatever size of portfolio you can imagine. So the complete portfolio, fractions of it, a couple of thousands and down to really doing privatizations. And once again, it is currently very, very difficult and people are not convinced that at the current market price, they have already seen the bottom. So people willing to buy are reluctant to already commit additional capital. And at the same time, there are enough sellers in the market. So that just leads to the situation where you see buyers or potential buyers not willing to commit too quickly to new deals.

[Andres Toome, analyst]

Okay. Understood. And I guess that's somewhat of an indication as well to the weakness of the market and therefore, for the reported valuations to come. So how are, I guess, rating agencies and creditors viewing increasing LTV, if it surpasses 50% mark? Is that going to create some headwinds in terms of refinancing as well, as you said, at the moment, it hasn't. But is that around the corner, then if that were to happen?

[Lars Von Lackum, executive]

Yes, Andres. So yes, certainly, I think it is to be expected that the rating agencies are looking at us more closely. You know that their expectation was a value decline of peak to trough. And we've now written down 4% in H2 last year, 7.4% in H1 this year.

At the same time, I think -- and that was what Kathrin tried to explain, that will not impact -- has not and will not impact our ability to secure enough financing on the secured side. I think it is quite impressive with what Kathrin and her team has realized over the course of the last month. And that was all with commercial banks. We had long-standing relations with. We are very comfortable and feeling very comfortable that we get the remaining EUR 400 million of secured financings being due starting June 2024 going forward to be rolled forward. And therefore, that will have not -- no impact whatsoever on our refinancing capabilities.

[Operator]

Your next question comes from Bart Gysens from Morgan Stanley.

[Bart Gysens, analyst]

I've got a question on the maintenance CapEx. I understand or I can get my head around how you're reducing regular CapEx and new construction, et cetera, how that works. But maintenance CapEx, can you help me understand kind of how far you can push it, you think? And to what extent that's sustainable? Or for how long you can put it -- push it to a lower level before you have to go higher again? Because we all remember some other listed German companies who pushed maintenance CapEx to levels that were unsustainable and therefore, that caused all kinds of issues longer term. So can you provide a bit of context around that, please?

[Volker Wiegel, executive]

Bart, I try to give you an explanation. I think you shouldn't too much concentrate on the split of maintenance CapEx and capitalized CapEx because that's in many parts, it's a pure accounting method. And then if you cross certain hurdles then you can capitalize it and if you are below it, then it's a pure maintenance. But if you look at the apartment, it looks more or less the same. So we, therefore, look at it as one. So that's why also capitalization rates came down because we concentrate on cash spending and on reducing cash spendings and focusing very much on sustainable re-letting processes and making best use of our asset base, and that's what we strive for.

And we can -- working to push it down the entire figure, as Lars pointed out in his presentation for next year. But we will then come up with new figures and the new guidance in November. But it's very hard to say what is the -- there is not the one number that we can give you.

[Bart Gysens, analyst]

But is that a sustainable move you think? So basically, are you pushing it lower now? And then that in a couple of years' time, that will go back up again? Or are you establishing a new baseline?

[Volker Wiegel, executive]

While we established a base line to run the asset portfolio on a sustainable basis and to be in a position to make use out of the -- to make use out of the asset base, the best use. And of course, the best years always depends on the market conditions and in low interest rates, volumes. It might make sense to invest more to generate attractive yields from additional modernization measures and so on and to make into -- from revaluations of the asset base, but -- in these times, it is purely focused on maintaining the asset base to run it on a sustainable basis.

[Operator]

There are no further questions at this time. I'll hand back to Frank Kopfinger for closing remarks.

[Frank Kopfinger, executive]

Yes, perfect. And thank you, and thanks for all your questions and your participation. And 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 November 9, when we report our Q3 results. And with this, we close the call, and we wish you all the best and hope to see you soon. Thank you, and goodbye, everybody.

[Operator]

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