LEG Immobilien SE

XETRA:LEG

Earnings Call Analysis

Strong AFFO Growth Guidance with Increased Investments

In the first half of 2024, the company reported robust operational performance and lower vacancy rates. It raised its AFFO guidance to €190-€210 million, translating to a 10% increase year-on-year. Free finance rents grew by 3.6% in 2023 and are expected to rise by 3.8%-4% in 2024. The company made significant investments, raising refurbishment costs from €32 to €34 per square meter. With moderated devaluation at 1.6%, portfolio values are stabilizing, offering a 4.9% gross yield. The company aims to lower LTV to below 48% by year-end while boosting investments in commercial assets and refurbishments 【7:9†source】.

Operational and Financial Performance

The company reported robust operational performance, highlighting improvements across key financial metrics. Lars von Lackum revealed that the company is increasing its AFFO guidance from EUR 180 million to EUR 200 million, now expecting EUR 190 million to EUR 210 million. This is expected to result in a 10% increase in AFFO per share year-on-year. The vacancy rate has been reduced to a record low of 2.5%, illustrating effective asset and tenant management. Additionally, the company is bolstering investments in refurbishments, increasing from EUR 32 per square meter to EUR 34 per square meter, to further optimize operational outcomes.

Portfolio Developments and Rent Growth

The company has demonstrated a strong performance in growing its rental income. Free finance rents were increased by 3.6% in 2023 and are expected to rise between 3.8% and 4% this year. This growth reflects the company's proactive management and market dynamics. The devaluation cycle seems to be ending, with devaluations moderating to just 1.6%, slightly below the midpoint of their guidance range of 1% to 3%. The company's portfolio now offers a 4.9% gross yield, making it an attractive investment opportunity compared to the current 10-year bund yield of around 2.2%.

Disposal Strategy and Market Dynamics

Kathrin Kӧhling discussed the disposal strategy, noting that year-to-date disposals amount to over EUR 285 million, with an additional EUR 234 million expected by year-end. The company has successfully marketed non-core assets and new developments, achieving disposals at or above book value. The devaluation cycle moderating has led to improved market liquidity, allowing for more transactions and better prices. This strategic disposal approach supports financial stability and shareholder value maximization.

Financial Stability and Debt Management

The company's financial profile remains strong with no open maturities for 2024, and substantial progress in securing financing for 2025 maturities. With a cash position of over EUR 350 million and proceeds from disposals, the company is well-positioned to meet its debt obligations until September 2025. The average interest rate of the company's debt stands at 1.66%, with an average duration of 6 years. This ensures low financing costs and a manageable debt profile. The pro-forma LTV has slightly improved to 48.3% and is expected to decline further, targeting below 48% by year-end.

ESG Initiatives and Future Outlook

The company continues to excel in its ESG (Environmental, Social, Governance) initiatives, achieving strong ratings and recognition within the industry. Initiatives such as dekarbo and LEITWerk are paving the way for growth in green heating solutions and intragroup services respectively. These ventures, while still in their infancy with minimal financial impact, hold substantial growth opportunities. The company's commitment to decarbonization and sustainable practices highlights its forward-looking strategy and alignment with global environmental goals.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the LEG Q2 2024 Conference Call and Live Webcast. I am George, the Chorus Call operator. [Operator Instructions] and the conference is being recorded. [Operator Instructions]

At this time, it's my pleasure to hand over to Mr. Frank Kopfinger, Head of Investor Relations.

[Frank Kopfinger, executive]

Thank you, George, and good morning, everyone from Düsseldorf. Welcome to our H1 2024 results call, and thank you for your participation. We have in the call, as always, our entire management team with our CEO, Lars von Lackum; our CFO, Kathrin Kohling; 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 the 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. I will kick off today's presentation by summarizing the key highlights. Afterwards, Kathrin and Volker will provide you with more details on our strong operations and financials.

Let me start on Slide 6. We are well on track. We are well on track regarding our operational performance. We are well on track regarding our solid financing and balance sheet. We are well on track to generate higher income from our core product for our shareholders. Therefore, we increase our AFFO guidance from EUR 180 million to EUR 200 million to now EUR 190 million to EUR 210 million.

Taking the midpoint of the guidance into account, that translates into a strong 10% increase of the AFFO per share year-on-year. And to make it even better, we have at the same time increased the guidance on investments from EUR 32 to EUR 34 per square meter. We do this to further optimize our operational results. Therefore, we bolster our investments in refurbishments.

You can already observe one result in our H1 numbers, a reduction of the vacancy rate by another 10 basis points down to a record low of 2.5%. Additionally, as closing of the sale of the bigger commercial unit, disclosed to you with our Q3 numbers last year, did not happen, we decided on a substantial investment to retrofit the property and allow for reletting of the hotel already next year.

On operations, Volker will provide you with some more color, but I would like to emphasize the consistent progress we make in delivering on a higher rent growth. As the next cast in stone rent increase for our regulated units is due in 2026, focus is exclusively on the free finance rent increases.

We increased free finance rents in 2023 by 3.6% and expect that part of our portfolio to deliver this year 3.8% to 4%. Please take note that our number does not include any significant impact from new developments.

As rent increases are dependent on the publication of the local rent tables, please expect a substantial part to materialize in H2, while last year the biggest part was realized in Q2 and therefore distorts the H1 numbers slightly.

And we have even more good news for you today. The devaluation cycle seems to really come to an end. As expected, devaluations have moderated down to just 1.6%, even slightly below the midpoint of our guidance range of 1% to 3%.

By now, our portfolio offers a 4.9% gross yield. That is an attractive investment in comparison to the 10-year bund offering currently around 2.2%.

Assuming a conservative 60% secured financing at 3.8% for a 10-year period, residential assets give buyers a levered return of around 6.5%. That easy math is being made by more and more buyers and brings back liquidity in the transaction market. We have taken advantage of that situation and stringently worked on our disposal portfolio. Despite the German summer holidays, we added another EUR 75 million in disposals, which takes the year-to-date number to a strong EUR 285 million.

Additionally, I am happy to share that Kathrin and her team made progress in securing the financing for the company for the next 12 months. The majority of the 2025 maturities is covered by excess cash and incoming cash from disposals, so that there are no remaining maturities until September 2025.

Our debt book still looks appealing with financing costs as low as 1.66% and an average duration of 6 years. The pro-forma LTV is slightly lower than at the end of last year, now at 48.3%, and expected to decline further until end of this year to below 48%. This is still above our mid-term target of 45%, whereas we will stick to our Cash is King strategy and deliver on our sales program.

Finally, let me highlight the latest ESG rating update from Sustainalytics. We continue to score extremely strong within their global real estate coverage, by now listed as the number 6. We also made it into top positions of leading ESG indices, recognizing our ESG strategy, our ambition, as well as certainly our achievements so far.

Let me move on to Slide 7. We want to provide you with a short recap on the current status in the cycle and our management initiatives so far to address these challenges. I know that most of you are perfectly aware of the things presented on the slide. However, as core believers in the attractiveness of our core product, affordable living in Germany, we consider it important to put some things into perspective. The residential real estate industry, and with it, LEG as one of its leading companies, are just about to leave the most intense devaluation cycle since the Second World War behind. We reacted promptly, i.e., as soon as devaluations of our asset base became visible with establishing our Cash is King strategy in autumn 2022.

We adapted the steering of the company to safeguard our cash flows. Every euro of overspending would have either meant an additional euro of debt or an additional euro to be earned from disposals. Consequently, we gave up steering the organization according to the FFO I, but implemented AFFO as our new group-wide core KPI. We reduced our investment spending, put our development into runoff, and did not pay a dividend for the business year 2022.

The idea behind all of that was simple. We tried to preserve as much cash as possible, and so to avoid any drastic or dilutive measure.

Getting out of the downward trend of the current cycle, you see our company offering a clean balance sheet, no structural capital on board, no minorities absorbing management attention, and a strong cash position with a low-cost debt book.

The operating business can deliver consistently improving results, as it remained nearly unchanged in size compared to the beginning of the current cycle. Holding 2 assets and to manage these for a longer time is [ something ] incredible importance for the creation of shareholder value, especially in the case of residential assets.

We are committed to remain the leading asset holding company for affordable living in Germany. Therefore, most of our assets are and remain core. At the same time, we will live up to our shareholder value maximizing disposal strategy. We stick to our book value and market the lower and upper end of our book to keep our LTV under control.

Please consider this as a standard portfolio management exercise, quite comparable to the management of your accounts. Selling demanding assets and looking for opportunities to de-lever in a first step and to reinvest into our asset base or in more attractive assets at a later stage. We will certainly go for growth opportunities in our core product, if and when our financial KPIs allow that.

Additionally, we will continue to tap adjacent value pools. We currently offer value-added services like craftsman services, multimedia and energy, and plan to extend those in case of sufficient margins. Via our JVs, we offer decarbonization solutions not only internally, but to third parties guaranteeing real market demand.

All of that, folds into the graphs on Slide 8. We are so strongly convinced of our core product, affordable living in Germany, as it provides stability, stability, and once again stability. Therefore, we compare on that slide the reported like-for-like rent growth with the underlying volatility of the like-for-like growth for different players in different sectors of the real estate industry. It provides you with a risk-adjusted organic growth rate, leaving aside an organic growth as well as currency effects.

You will immediately note that our like-for-like organic growth on the upper left-hand chart since IPO is not leading across real estate asset classes. However, and that at least was kind of a surprise to me, over a decade we are well within the upper half of the selected group. It proves the historic attractiveness of our organic growth and given the structural supply-demand imbalance in the affordable residential market in Germany, growth dynamics are going to gain further momentum.

The real beauty of our business model lies in the stability of the top-line i.e., the incredibly low underlying volatility of the organic growth which we show on the lower left-hand chart. Many asset classes suffered, for example, during the COVID crisis or in the aftermath of Russia's unjustified attack on Ukraine. We did not. It is most probably fair to assume that COVID is only a 1 in 50 years event, so nothing to worry for now. However, we are of the opinion that you need to take that inherent risk into account, which is quite low for all the German residential players.

LEG sticks out substantially as we offer a portfolio with a high share of subsidized units, as we have avoided any major exposure to development, and finally, as we have stayed away from markets with low home ownership ratios and therefore volatile regulation like Berlin.

Putting both drivers into context, organic growth for the business and the underlying volatility, i.e., the underlying risk, the right-hand chart demonstrates clearly how well German residential players screen across different asset classes and regions. Certainly, we do not claim completeness for the exercise and therefore have added the analyzed companies in the footnote. However, we consider the result to be meaningful and a fair representation of the European real estate sector.

From our perspective, that risk-return comparison is equally important when discussing the new LTV level for German residential players and their cash flow growth profile.

LEG offers, amongst the resource stability, the best risk-return ratio, which we believe is of value as such in these volatile times, as we grow cash flow steadily at a low underlying volatility. This was, is, and will be the beauty of our business model.

Let me draw a first conclusion. We look confident into the future as we see values stabilizing. We expect an AFFO per share increase for 2024 of roughly 10%. We expect LTV by year-end to come further down to below 48%. Additional disposals will help us in this respect.

For more insights into our disposals, I hand it over to Volker who will give you an update on Slide 10.

[Volker Wiegel, executive]

Thank you, Lars, and good morning, everyone. Year-to-date, we sold more than EUR 285 million. However, as you might have already seen in the chart, only EUR 51 million have been transferred in the first half. We expect a total of EUR 234 million to be transferred until the end of the year and to receive the cash accordingly.

As we expect the market to drop over the coming month, we stay focused on maximizing shareholder value. Therefore, we will be actively marketing our sales portfolio, but we will not give up on price expectations. Intention is that we market our assets at or above book value. All those assets are non-core assets, i.e., either the low end of the quality spectrum, especially assets which require substantial investments, and new builds, as we are not the best operators for that kind of assets. We have done so and we continue to do so.

Lars already mentioned that we needed to cope with the cancellation of the commercial deal presented to you in Q3 2023. Reason for the reversal was that the buyer could not secure financing. The commercial asset is a mixed-use asset in Ratingen, close to Düsseldorf. It holds office and retail space, but also a business hotel, for which the contract ended mid of 2024. We immediately started to look for a new tenant for the hotel. Encouraged by the strong demand in the market, we decided to do the required investments ourselves. That is one driver for the higher investment spent in 2024.

On Slide 10, we have again prepared a timeline of the changes in our portfolio. Please take no wonder that the 7 additions you see on the slide as these are simply the result of conversion activity, i.e., converting office spaces into condominiums. By mid of next year, we will have finished what is left in our small pipeline of new construction. The remaining cash outflow for these projects amounts to just EUR 53 million, of which EUR 28 million are due in the second half of this year. This covers both construction on own land and acquisitions from third party developer.

Moving on to slide 12 in our rent growth guidance. As of 30 June 2024, our like-for-like rent growth was 2.9%. The number might look a bit lighter than expected, but no worries, we are well on track. In H1 2023, due to the release dates of the rent tables, we were able to execute, as I pointed out in that earnings call last August, an unusual high share of the 2023 rent increases already in the first half of the year, i.e., an increase of 4.3%. This established a relatively high comparative basis when it comes to the adjustments in the first half of 2024.

Therefore, I would like to emphasize that we are fully on track and remain confident in achieving our year-end guidance for the rent growth of 3.2% to 3.4%. This year, we expect another substantial part of the rent increases in H2 2024, as many rent tables have been published quite late or are a bit overdue.

The advantage of our portfolio being spread across more than 240 locations is that it creates opportunities for rent adjustments throughout the year. However, this momentum is not evenly distributed. So, always keep our full year guidance in mind. This is where we are steering at.

And with this, let us move to Slide 13. The 2.9% rent growth was nearly equally achieved by rent table adjustments and modernizations and re-lettings. As there's no rent adjustments for the 32,000 subsidized units of our portfolio this year, the rent increases of our free financed units reflect the strong underlying market dynamics. The average rent in the free financed units increased by 3.4% on a like-for-like basis in the first half of 2024.

Looking at our free market segments, we can see similar growth in the high growth and stable markets with 3.6%. The free financed rents in the higher yielding markets grew still by a strong 2.8% on average. For the full year, we expect the rent growth for our free financed portfolio to reach something between 3.8% and 4%, especially as for only 25,000 units of our portfolio, the rental break regulation applies.

One example for the outcome of the recently published rent tables is the one in Gütersloh. The rent table would allow for an increase of 13% if applied to a typical LEG apartment. We are closely monitoring the publication of new rent tables and provide an update on expected rent tables on Slide 36 in the appendix.

I'm now on Slide 14 for some additional details on our investments. In the first half, adjusted investments per square meter amounted to EUR 15.41. The year-on-year increase by 9.4% reflects our steering of investments to a more even distribution throughout the year.

Furthermore, with our focus on cash rather than on accounting, maintenance expenses increased disproportionately to CapEx. Hence, the adjusted capitalization ratio was furthered down 270 basis points on the previous year.

We have also raised our full-year investment guards by EUR 2 to €34 per square meter. There are 2 reasons for this. Firstly, there will be investments into the commercial assets in Ratingen to allow for a new hotel contract to be agreed.

Secondly, we have increased the refurbishment investments to allow for further vacancy reduction and maximization of the pricing per unit.

A final word on new construction on own land. Investment activities for these amount to EUR 6.8 million in the first half of 2024. They form part of the adjustments together with own work capitalized consolidation effects and subsidies.

Finally, a look at Slide 15 and our value-added services. All value-added services are supporting the operating business and driving innovation and have once again contributed substantially to the AFFO. Please keep in mind that the half-year figure cannot be extrapolated to the full year, as especially the energy business will ramp-up its investments in the second half of the year.

Before handing it over to Kathrin for the financials, let me provide you also with some more information on our latest initiatives and how we aim to drive the decarbonization of the sector further. We are proud to announce that our recently founded joint venture, dekarbo, is really taking off while we added a new business, LEITWerk.

You know that we are highly committed to deliver on our SBTi approved decarbonization part. While doing so, we focus on offering to third parties and implementing for our own assets green heating solutions. The joint venture dekarbo is operational since end of Q1 and together with them we are ramping up the rollout of air-to-air heat pumps for our own buildings. Without any marketing activities, dekarbo has already secured 2 orders from third parties and attracts increasing attention from professional landlords.

At the same time, we are proud to share that we have started LEITWerk, a new craftsman company exclusively focused on electricians for intragroup services. As both companies have just started, financial impact is small, but the size of the market holds substantial growth opportunities going forward.

And with this, I hand it over to Kathrin for a detailed view in the financials.

[Kathrin Köhling, executive]

Thank you, Volker, and good morning also from my side. I will now discuss the development of our key P&L items on Slide 17. The net cold rent increased by 3.3% to EUR 427.9 million in the first quarter of the reporting year. This growth was primarily driven by a 2.9% increase in in-place rent on a like-for-like basis.

Additionally, asset rotation in our portfolio contributed positively as we sold apartments with lower in-place rent levels and rented out newly built units. A slight and better than expected reduction in vacancy rates also positively impacted the net cold rent.

The recurring net operating income rose by 3.2% to EUR 350.2 million. The margin was virtually unchanged to the first half of 2023 and still stands at 81.8% as our costs, for example, personal expenses also increaseed.

While our NOI increased, our adjusted EBITDA declined by 3.4%. This is mainly due to a lower contribution from our green electricity production.

AFFO decreased overall by 7.5% year-over-year to EUR 109.7 million. Besides the green electricity effect, higher interest payments of EUR 4.9 million also contributed to the decline.

Overall, however, we see the interest rate development very manageable and interest expenses remain also below our original assumptions. We have a higher interest income than last year due to a higher than anticipated higher for longer interest rate, as well as due to more cash available, e.g. due to our disposal progress.

As of today, we already have net cash interest income of EUR 9.1 million compared to EUR 9.5 million in H1 for the entirety of last year, which is currently already close to EUR 6 million more year-to-date than last year.

Additionally, we have positive effects on interest expenses, e.g. from an early redemption of outstanding liabilities as well as a reduction of outstanding debt related to disposals.

I am now on Slide 18, and the AFFO bridge illustrates what I just explained. Starting from last year's AFFO of EUR 118.6 million, the increase in net cold rent had a positive effect of EUR 13.6 million. AFFO was reduced by EUR 7 million compared to last year as operating and administrative costs increased, e.g. due to higher personal costs following tariff increases for our employees.

Additionally, interest payments increased by EUR 4.9 million. One of the main effects, however, for the reduced AFFO compared to last year was, as mentioned before, the lower contribution from our electricity production.

You probably all remember that we sold last year's electricity production in a forward deal at peak prices, which led to an extraordinary good result in 2023.

The absence of the EUR 16.0 million positive contribution from our green electricity production business was the main driver in the others category.

Higher externally produced maintenance negatively impacted AFFO by EUR 2.6 million, while lower CapEx subsidies had a positive impact of EUR 6.7 million.

Slide 19 highlights the outcome of our half-year portfolio valuation. The devaluation pressure significantly eased in the first half of 2024, as indicated in our last call. Ultimately, the valuation decline of 1.6% was slightly below the midpoint of our indication of 1% to 3%.

The trend across our 3 market categories was similar with effects ranging from minus 1.4% in our stable markets to minus 1.8% in our higher-yielding markets. For the second half of the year, we expect a further stabilization of our property values.

It was for the first time that PwC provided the additional external valuation. As expected, cooperation worked very well during the process.

I am now on Slide 20, which provides you with an overview of our portfolio values. After the devaluation, the gross yield of our total portfolio amounts to now nearly 5%, which corresponds to a multiplier of 20.4x.

The net initial yield stands at 4%. With this, we feel quite comfortable with regards to the yield being offered by our portfolio.

The value per square meter for our total portfolio now amounts to roughly EUR 1,600.

Slide 21 shows our financial profile. As you know, at LEG, we focus on financial stability and strive for conservative and transparent financing structure. You know that we do not have any open maturities for 2024, and with the cash at hand, as well as the future net proceeds from disposals, signed as of today, we are fully covered until September 2025. Meanwhile, our average interest rate still stands at a low 1.66% with an average maturity of 6 years.

In Q2, we paid back secured loans with a volume of EUR 104 million from our cash position, reducing our overall financial debt and hence the corresponding interest burden.

The early redemption reduced the upcoming secured maturities due in 2025 to EUR 458 million.

Together with our convertible bond of EUR 400 million due in September 2025, we now have remaining maturities for next year of EUR 858 million.

Thereof, we do have, as mentioned, already 60% of our maturing debt covered with cash at hand, of more than EUR 350 million and future net proceeds of our disposals of close to EUR 170 million, adding up to more than EUR 0.5 billion of cash. Therefore, going forward, opportunistic refinancing solutions of the 2025 maturities continue to be our focus.

Given our cash-rich balance sheet and incoming cash from the disposals, we can continue to act on an opportunistic basis to secure attractive terms going forward.

For our refinancing, we will look, as usual, at all the options on the secured as well as on the unsecured side, upholding our diversified funding mix.

On a side note, you might have seen that there was an IAS 1 amendment which requires us now to allocate the convertible bonds into the short-term liabilities bucket. This is only a change in accounting convention as the contractual maturities do not change and there was no change to the instrument itself. The maturities remain until September 2025 and June 2028 respectively. You can find some more background information on Slide 30 in the appendix.

We are aware that our reported LTV of 49% is above our own mid-term target of 45%. The same holds true for the pro-forma LTV, which currently stands at 48.3%. However, despite the devaluation, this is already slightly below of what we had at the end of 2023, and we expect at year end to be below 48%. Therefore, we unmistakably want to reiterate that we are focusing on improving that number. We will use a major part of the sales proceeds to reduce our debt going forward. At the same time, we continue to closely monitor our other financing KPIs, such as the ICR.

Our ICR stands at a strong 4.3x, and like all the other bond covenants, is in dark green territory compared to any relevant threshold.

Now I hand back to Lars for some final remarks.

[Lars Von Lackum, executive]

Thank you, Kathrin. Let me just sum up on our guidance changes. On the back of ongoing strong operations and sales, a better net cash interest income, as well as lower net cash interest costs, and despite our conservatism, we increase our AFFO guidance to EUR 190 million to EUR 210 million. Taking the midpoint of the new range into account, this should result in a 10% increase of the AFFO per share year-on-year.

As our dividend policy is strictly linked to the AFFO, you should expect a similar development for the dividend. At the same time, we can also increase our investments to EUR 34 per square meter, which allows us to additionally invest into refurbishments and the commercial unit in Ratingen.

Finally, the broader market follows our expectation that values for affordable residential space are stabilizing in the second half of this year. At the same time, continuing our shareholder value maximizing sales approach will bring down LTV to below 48% already by end of this year.

With this optimistic outlook, I hand it over to Frank. The complete management team and I are happy to answer your questions.

[Frank Kopfinger, executive]

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

[Operator]

[Operator Instructions] Our first question comes from the line of Marios Pastou [ in ] Bernstein.

[Marios Pastou, analyst]

A couple of questions from my side. So firstly, on your disposals, you mentioned you've got more in the pipeline. You're seeing transactions slowly picking up across the wider market. Can you give any indications on your expectations for the remainder of the year based on your current discussions? Should we expect an acceleration of disposals, for example? And additionally, how many of units are currently earmarked for a potential disposal across your portfolio?

And then secondly, can you quantify the investment plans for the mixed-use scheme, the returns on offer, and how much of the increase in the CapEx plans by EUR 2 per meter this relates to?

[Lars Von Lackum, executive]

Marios, thanks a lot for your question. I will start with the disposals. We are still marketing around the 3,000 units which we have earmarked for disposal. And that is including the remaining new developments and also at the lower end assets where we think that additional investments are not worthwhile to be undertaken.

Expectation for the full year certainly is to make as much progress on those 3,000 as possible. Transaction markets, from our perspective, have opened up, so not only that we are seeing smaller companies, private individuals investing, but also more and more professional players returning, which enables, for example, also another sale on the new development side to an institutional investor.

How many of those will be? It's difficult to say, as always. So please do not expect that we will get rid of all the 3,000 by the end of the year. But I am very confident that we are making further progress. Look, we even made that progress for Q2, which already was a month of German summer holidays being included. And so therefore, also going forward, we are seeing more movement. And therefore, we'll see also additional disposals going forward.

[Volker Wiegel, executive]

And with regard to the investments into the commercial asset, Marios, it's the largest part of the additional investment, but it's a single digit million number. And on return, please bear with me that we cannot give you their precise figures as we are in the midst of negotiations with the potential tenant and don't want to distort here our positions.

[Operator]

Our next question comes from Rob Jones in BNP Paribas.

[Robert Jones, analyst]

I've just got 2 quick ones. One was on the disposals. Obviously, you highlighted the fact that one of your disposals didn't complete. I appreciate only, let's call it EUR 30 million, EUR 35 million turn the grand scheme of your portfolio. It's obviously immaterial. But just wanted to understand, given a i.e., kind of why that first transaction fell away and if it was, I don't know, seller -- sorry, buyer financing or whatever it might be, why not just go and try and sell the assets again, given, I guess you'd already decided we don't want to redevelop this hotel when the tenant vacates. We don't want to find a new tenant at the point you'd originally advertised the asset for sale.

And then just link to that around, I guess, reinvestment and the fact that obviously your CapEx per square meters is picking up and part of that is related to this asset. Do you have a split? I think this is almost identical to Marios' question. But in terms of how much of that extra CapEx is this hotel? Or a yield on cost? Or maybe you can say the yield on cost is in line with what we'd expect for refurbishment CapEx across our resi portfolio or just some sort of indicator to let us know that this is a good use of shareholders capital rather than just trying to sell the asset again, if that makes sense.

[Lars Von Lackum, executive]

Yes, thanks a lot for your questions. Rob and I will try another approach to that question which we heard from Marios. So first of all, the disposals really broke down because the buyer, although claiming to have already financing secured, he finally was not able to secure a financing. So that was the reason.

And why that happened? Certainly, we do not have insight into the negotiations between the buyer and its financing bank. So therefore, nothing else we can share on that. But finally, that was the reason why the buyer was not able to really pay those EUR 35 million.

Is that something which we are expecting for all the other disposals we are doing? Certainly not. So we are very keen on doing a know your customer exercise. Certainly, with most of the parties we do transactions, we know those and have met them and done business with them. So we are quite confident to see the remaining really coming in.

With regards to our decision now to do the reinvestments into that hotel complex. It is really a multitenant complex. So it includes commercial office, it includes retail and it includes that business hotel. That business hotel, and the current contract ended, as pointed out by Volker, mid of 2024. So the reason for us was, as we are not hotel experts, we've been a bit afraid of not finding a proper tenant for that property. However, after that sale broke down, there was plenty of interest. So that was not only one hotel chain being willing to really do a new contract. And that was something which we learned during the process. So therefore, for us it was quite visible that investing that single higher, single digit million number is worthwhile doing.

So now we are in the midst of with one of those interested tenants do that contract and then certainly at a later stage remarket it. So it's not something which we now consider to be cool. So we will do a remarketing at a later stage. But for the time being, we are now dedicated to first stabilize the asset and increase shareholder value for you and our shareholders now by doing that investment. So that was what happened and changed the thinking process behind doing the sale in Q3 2023, and now after the return of that asset, to do that additional investment.

[Operator]

Our next question comes from John Wong [ and ] Van Lanschot Kempen.

[Unknown Analyst]

You sold close to 3,000 units this year and you're also seeing valuations trough. I think you even briefly touched upon acquisitions and reinvestments when debt KPI's allow. I suppose your pro-forma leverage is still a bit higher than your mid-term guidance of 45%. So how should we think about these further disposals and use of proceeds going forward?

[Lars Von Lackum, executive]

Yes, thanks a lot John, for the question. So hopefully we make clear the first thing we will do is stabilize our LTV going forward. So, meaning that we really want to live up to our promise that the mid-term target needs to be at that 45% level. And that is first what we will do with any disposal proceeds which we can generate in the market.

Secondly, and that is something which we have already done now with the increase of the AFFO guidance on the one hand side, we have also decided to do a bit of a reinvestment into our properties. So those EUR 20 million around part of it and the substantial part being absorbed by that hotel, we are just talking around EUR 10 million being reinvested or a bit more into refurbishments. So that is something where you can see if you compare that to the EUR 17 billion we have on the balance sheet is less than 5 basis points. So it's really a low amount. But we think it is worthwhile because Volker and his team are doing a tremendous job by realizing higher ends and still managing the vacancy rate down.

Finally, and that's the promise we give here. We will not do any acquisitions which are not accretive to our shareholders. To get that across crystal clear, so we will not be attracted also not to bigger deals, smaller deals, whatsoever is out there in the market. Certainly, we'll look at each and everything which is being offered to us, but nothing really came up with a value which we would have thought worthwhile being presented to shareholders. But that certainly, now reaching the trough going forward might happen. Let's wait and see what's going to come to the market over the next months and years.

[Unknown Analyst]

And just as a follow-up on your LTV guidance for year end, I think you mentioned that you expected to drop below 48%. I suppose that includes retained earnings as well as further disposals that you expect to sign and close in H2. Does this take any expectation with regards to value changes into consideration?

[Kathrin Köhling, executive]

Okay, so to make it crystal clear, the below 48% at the end of the year, they include the disposals that we have signed off as of today and where we expect them to close until the end of the year. It's also including retained earnings, but without any more disposals. So if we do more disposals, we will -- it will definitely help our LTV towards the end of the year.

[Lars Von Lackum, executive]

And with regards to expectation on the stabilization of values, John, it is really what we expect, yes. We see the market stabilizing. We see how negotiations, and that's, I think, the best indication we can give you, that negotiations are now in the other way around. So most people are aware that they need to quickly decide on buying into assets because the values are recovering. So therefore, from our perspective, it's about a stabilization, and that is exactly what we expected, a stabilization of the values for H2 2024.

[Operator]

The next question comes from Paul May [ and ] Barclays.

[Paul May, analyst]

Three questions, I think, from me. Just wondered if you could provide a range of disposal yield, I think you kindly provided a 4.2% to 9.1% at the Q1, but haven't mentioned it today for the EUR 285 million of disposals year-to-date. So it'd be great if you can give a range or an average would be perfect, but a range would be acceptable on those disposal yield.

I think secondly, you highlight gross yield relative to the bund, but wouldn't a better comparison be an unleveraged free cash flow yield, which is about half of your gross yield, if you're looking at the bund, because the bund doesn't require any holding costs. Just wondering how you're thinking about that, particularly relative to your marginal cost of debt, which I think is still above your unlevered free cash flow yield.

And finally, I suppose a more sort of theoretical thing, but you mentioned that the V of LTV is stabilizing and the L is unlikely to increase because you're not over distributing, you're not increasing leverage to invest. So I'm a bit surprised why you're still focused on LTV and why that's a factor at 48%. Arguably, German resi is a solid investment, so 48% isn't necessarily an issue if the V is stabilizing. And so I wonder why you still actively selling, looking to reduce leverage? Is it simply that the cost of debt is actually the more prohibitive factor rather than the amount of debt at this stage?

[Lars Von Lackum, executive]

Thanks a lot for your questions, Paul. I try the first 2 ones, and Kathrin will then follow-up on the third one. So with regards to the range of the disposal yield, so once again, first the caveat. So due to the fact that we're really offering assets at the lower end of our quality spectrum, as well as new developments, certainly also the multipliers which we have been able to reach, and that's the net cold rent multiplier which we normally look at in the German market. So that is in that huge region or range of [ 9 to 33 ]. That was what we realized since last our last call.

With regards to our reference being made to gross yields, that is just, Paul, because we do not know the internal calculation of the one -- of the people buying into our assets. So we are not aware of how much they really want to spend per square meter, how they manage those assets, how they want to reposition that, et cetera. So therefore, that is the normal reference and the negotiation which we see if we sit next across buyers at the table, they are being focused on the gross yield. It's not a discussion on net yields.

And with that, I hand it over to Kathrin.

[Lars Von Lackum, executive]

Yes, thanks, Lars. So on your LTV question, yes, we are. The 48% is not too bad. However, we still have our mid-term target of 45%. So for us, it is -- first of all, it's important to get eventually back into the Baa1 rating category by Moody's. So this is one aspect.

And then on the other hand, given that the current refinancing rates are above our 1.66%, it's also important to look not only at the LTV, but also on other covenants such as ICR. So our ICR is super strong at 4.3% currently, but we really do want to keep it that way. So we are not only looking from an L perspective in terms of LTV, but also on impact on other metrics to just make sure that overall we are super stable and conservative in our financing.

[Paul May, analyst]

Just one follow-up, if I may, on the disposal. I think you mentioned selling the lower quality assets, and I think some of the recently developed, I think it's still that sort of bookends of the transaction market, what gives you and others and the valuers confidence that assets that aren't transacting, lower yielding, older assets that aren't transacting at the moment, what gives them confidence that the values are fine? If everyone's focused on the yield versus bund and you're selling the higher yielding assets, how can you be confident that the lower yielding assets are stabilized?

[Lars Von Lackum, executive]

Yes, so with regards especially to the lower yielding assets, I think more and more people are gaining the understanding that investments into the building shell might not be the answer to decarbonizing those assets. But the answer probably will be providing a green heating system which comes at a substantially lower cost and brings down emissions of those buildings substantially.

That is at the same time then bringing more interest for those assets and also with that more interest, more transactions and more understanding for valuators that that discussion around assets not being tradable anymore in the market is something which was most probably a made up story in the market, but it's nothing which we can really observe.

[Paul May, analyst]

Sorry, [ just on that ], I think you said yourself that you're selling high-yielding assets, so I think it is observable in the market that low-yielding isn't transacting? Or maybe I'm getting that wrong?

[Lars Von Lackum, executive]

Sorry, I was making reference to the higher-yielding part, so I'm sorry. And then -- it was me not listening closely enough, so apologies for doing that. And so with regard to the higher-yielding assets and the reference being made to that multiplier of [ 33 ], hopefully that shows you that also high quality assets with low yields are tradable again. So there is interest in those assets and that's -- I think also for quite obvious reasons because unfortunately there is no new product coming to the market anymore. So people are once again now of the opinion that most probably going forward, we see strong rent increases and we will also see at the top of the market those square meters values grow into value again. So therefore, apologies, that's the other end.

So also, with those lower-yielding assets, you see more and more people also being willing to pay quite low gross yields. Apologies once again to make that reference. And that is also, I think, hopefully comfort to you. And it's also institutional bias. It's not only private wealth which is willing to accept lower gross yields for those assets.

[Operator]

Our next question comes from Marc Mozzi [ and ] Bank of America.

[Marc Louis Mozzi, analyst]

I have essentially 2 questions from my side. The first one is on your LTV. You aiming at the 45% target medium term. I'd like to understand what medium terms mean for you in a number of years. Because if I do basic math concerning your current leverage, you will need about EUR 1.5 billion of additional disposals from where we are today to reach that 45% LTV, which if we look at the 3,000 units you have currently under for sale, that would be no more than EUR 500 million. And I'd like to understand how you're going to fill that gap. Is that going to be time? Is that going to be additional disposals in 2025 or probably another EUR 500 million? Or effectively if at some point you will need equity to fill that gap. I think it is probably the most valuable way and quickest way to sort that out. That would be my first question.

My second question would be, can you share with us any EPRA metric references around LTV net initial yield? And what is your net debt to EBITDA at the pro-forma, if you would like to share with us?

[Lars Von Lackum, executive]

Okay, thanks a lot, Marc, for your questions. So with regards to LTV and the mid-term, so as you know, we redefined our LTV target in autumn 2022, and we always said mid-term, that's not within the next 12 months. And that is still what we need to say. I think we have the worst behind us, and we are confident to see LTV not only being stabilized, but coming down. And I think the very good news about today's publication is that although we've seen another decline of values by 1.6%, you see the LTV still even slowly and slightly, but still coming down a bit to 48.3%. And therefore, yes, as already said, we are willing and dedicated to bring the LTV further down. Therefore, we will, if we are able to really market those 3,000 units, certainly and will be prepared to do more disposals in order to stabilize our balance sheet.

And if you don't mind, could you just perhaps repeat the second question? I think we were a bit confused on our end.

[Marc Louis Mozzi, analyst]

Yes, well, just to follow-up on the first one. So let's assume EUR 500 million, because 3,000 units, it's about EUR 500 million in quantum, if I'm correct, if I do math correctly. So probably you're going to do another EUR 500 million in '25, but that's not going to be enough to reach the 45% LTV. And that's going to be now nearly 3 years that you will be above your target of 40% or 45% LTV. That's what I'm just trying to reconcile. What means medium term? Is it 5 years? Is it 3 years? Because in 3 years, at the end of '25, you won't be there.

And my second question was, can you share with us EPRA calculation, so European Public Real Estate Association calculation for your loan-to-value and your net initial yield. And then the other question within that question -- in that second question is what is your net debt to EBITDA?

[Lars Von Lackum, executive]

Okay, now I think we have the second question crystal clear. Let me try another one on your first question. So with regards to the LTV mid-term, so once again, it's more than 12 months, and it's definitely less than 5 years, so somewhere in between. It certainly depends on the progress we can make on disposals, and I'm very happy sharing that we are willing to do additional disposals to keep LTV under control, meaning if the 3,000 units which we have earmarked for disposal we would also be willing to do additional disposals, yes? So the 3,000, whether it's really translating into EUR 500 million as always, and you know that depends on the quality of assets you are marketing. As there is still new developments being included, it might be more than the EUR 500 million you are expecting. But just to reiterate, we will work hard and we will continue that disposal program in order to have a rock-solid balance sheet.

[Kathrin Köhling, executive]

And with regard to your second question, so you find all the EPRA calculations in our normal reporting set. So if you look at Page 11, for example, you will find the EPRA net initial yield. And if you look at Page 17, you will find the EPRA LTV, which we give, of course, to you with every reporting set that we hand out.

With regards to your pro-forma net debt to EBITDA question, that would, of course, include an implicit guidance on EBITDA, which we are not giving out. So please be -- please understand that we can't give you a pro-forma number here, but of course, you can make your own calculations on that one.

Net debt to adjusted EBITDA currently stands at 13.7x, which you find in our IR presentation.

[Operator]

Our next question comes from Kai Klose [ and ] Berenberg.

[Kai Klose, analyst]

And just a quick one on Page 7 of that -- of the presentation where you have set the starting point on the 1st of January '22. If I remember correctly, just 1 month earlier, you had announced the acquisition of the Adler portfolio for EUR 1.3 billion as a accelerated growth strategy and different to peers who had not refinanced that with an equity injection. Just want to put that into perspective that maybe that was also maybe because of a reason that your LTV is now a little bit elevated.

Just -- and then coming to my questions, I have a question on Page 25 where you show subsidies and recognize in the P&L of EUR 7.4 million. Could you indicate what is the underlying amount of investments you did for which you got the subsidies?

[Lars Von Lackum, executive]

Quickly, the Page 25 and which line?

[Kathrin Köhling, executive]

So the EUR 7.4 million, I can take your question on subsidies. So as you know, subsidies is a new funding scheme for us, so it's also a new learning experience. And in this half -- in this H1 reporting, we first gave you kind of a guidance what we expect for the entirety of the year. So currently we are at EUR 7.4 million, as you said. We are expecting some -- a number something between EUR 20 million and EUR 25 million for the rest of the year. But this comes with definitely a higher risk than our normal revenues from rental income because of course there is some insecurity in it. So once we send out the applications, the process is out of our hands and we do not know when we get an answer.

And also, in terms of the timing and -- of the project and the final project costs, of course, this is also something that can change over time. But the -- in general, the EUR 7.4 million, we get those subsidies for existing units and for new-built units, for existing units for things such as Renowate or our dekarbo businesses, and on the new-built side for our new-built developments.

[Kai Klose, analyst]

But maybe the question in a different way. So you get subsidies, and what is the ratio of subsidies in comparison to your total investment volume into the portfolio?

[Kathrin Köhling, executive]

So if you take the EUR 7.4 million and you look at the total adjusted investments into our portfolio, we are at EUR 166.6 million, so EUR 7.4 million divided by that. If you go for the total number, because as I said, this also includes subsidies for new-built, so if you want to look at the total number also including that, then you would probably look at a number of around EUR 180 million something, adding up CapEx recurring and the maintenance part.

[Kai Klose, analyst]

Okay, we'll try to reconcile that. And the last question is on allowances on rent receivables, which came down year-on-year, but which is still about 1.8% of the rental income, the net cold rent. If I remember correctly, in H1 '21, we were just at around 1% -- 1.1%. Is the current level of 1.8% a level which you expect to stay there compared -- going forward? Or would you expect that to decrease to levels which we had in the time where we had lower heating costs and lower salary costs?

[Kathrin Köhling, executive]

So, Kai, we don't give out guidance on that one, so I'm sorry. But we are happy that we could reduce the number.

[Operator]

The next question comes from Manuel Martin with ODDO.

[Manuel Martin, analyst]

I have 2 questions, maybe one by one. The first question is on the rental growth. You indicated that you have an overview on Page 36 of the presentation. I had a quick look at that. Maybe you can give us some additional flavor on that, whether there are some more important rent tables coming up for you or less important rent tables coming up for you. And how does that work? I can see that they will come up in July, in August, et cetera. Are you going to send out letters for increasing rent immediately after publication of rental tables? So how does that work? Maybe you can give us some indication to the mechanic to assess a bit better the potential of like-for-like rent increase for the rest of the year.

[Volker Wiegel, executive]

Sure, Manuel, I can give you some flavor on the process. So with regard to the question which rent tables are of more importance or lesser importance, I think that's pretty easy. The more units we have in the respective communities, the more important the rent table is. And once it's published, we digest it and go through it. Sometimes the communities change the way they publish rent tables and the way they calculate rent tables, so it's not simply a 1-pager, sometimes a 50-page booklet, that we need to digest and to analyze and then we set up our systems, and transport it into our SAP IT system and do the calculations what it means for our tenants and then we decide whether we go immediately and then send it out or if we wait some time to maybe wait until the 15 month period is gone when we can again increase rents. So we do this on a case-by-case basis. But it takes some time between publication and sending out.

[Manuel Martin, analyst]

So might be fair to assume that, for example, Remscheid and Wuppertal, which are due in December '24, they might be a bit too late for this year then.

[Volker Wiegel, executive]

Yes, that's a fair assumption.

[Manuel Martin, analyst]

My second and last question is again on the LTV, just maybe to understand a bit more background. Suppose that you can reach your mid-term target of 45% LTV, maybe you drop even below, what could that mean in terms of debt financing? What could be the advantage for LEG there? Is that somehow quantifiable?

[Kathrin Köhling, executive]

So that's a good question because what we currently see in our bond spreads that our spreads are very comparable also compared to peers who have a better rating than us. So as you know, we have a Baa2 rating and it seems that also peers with a Baa1 rating pay the same spreads in terms of unsecured financing at the market currently. But first of all, you never know how things develop. So to be conservative and make sure to do also a conservative planning and to go back to that number.

And secondly, maybe if we come back to a Baa1 rating, we even get better spreads. So that's nothing that we can exclude. So yes, let's cross the bridge when we get there, but there are options for us out there.

[Operator]

Our next question comes from Neeraj Kumar [ and ] Barclays.

[Neeraj Kumar, analyst]

So my first question is in regards to the transaction market. As you mentioned the transaction market is opening up, I just wanted to check if some of your companies like BCP et cetera are also able to sell assets and if you are able to monetize that sake.

[Lars Von Lackum, executive]

Yes, thanks a lot for the question, Neeraj. So with regards to BCP, certainly we can only guide you at their disclosures. So we are not aware of any additional disposals of BCP up and above them to what they have disclosed.

[Neeraj Kumar, analyst]

Also, my second question is with regards to your bond spreads. Do you find them attractive enough to sort of issue bonds to pre-fund your debt maturities, or you're still looking for paying off the debt with disposal proceeds going forward? Also, when you think of coming to the bond market, are you looking at just spreads or the yields as a whole?

[Kathrin Köhling, executive]

Yes, so of course we are looking at the entire package, right? So, of course, the entire yield is also important. On the unsecured side, we are currently looking at spreads of [ 160 and 170 ]. So it's much more attractive than last year. But as I said, having 60% covered of the majorities for next year, we can act entirely opportunistically here. So let's have a look how things evolve on the secured side, on the unsecured side, on all the instruments out there, and then we will decide.

[Operator]

Our last question comes from Simon Stippig [ and ] Warburg Research.

[Simon Stippig, analyst]

My first one would be in regard to the analysis on Page 8. Thank you very much for that. In the presentation, Slide 8. And here you see that, not surprisingly, the volatility of the organic growth in German residential segment is very low. However, if I look into your shareholder returns in the form of dividends, they are quite volatile. So we saw the dividend cut and the level reset. Now we have a 10% increase. So the visibility is benign as you pay out AFFO 100%. And in addition, the larger part of all of your disposals, once you get to 45%. But here, in order to reduce volatility in the payouts to shareholders, is it possible that you provide a mid-term guidance on your disposal volume after you reach LTV target per annum, that would be quite helpful.

Second question would be, you mentioned you're undertaking no acquisitions that are not accretive to shareholders. And likewise, I assume that you would actually sell non-accretive assets or shareholding. So this leads me to the question about the status quo of your BCP stake. Do you consider that as accretive?

And last question, if I may, it's a quick one. Could you please give me some additional insights into your short-term deposits you show in the ATV calculation? And could you please remind me or clarify further if that was the reason for all the short-term deposits actually generated the additional investment income?

[Lars Von Lackum, executive]

Thanks a lot for your question, Simon. So I will try to address the first 3 ones and I'm happy to then pass to Kathrin. So with regards to disposal target mid-term, so unfortunately we will not be able to provide that as we are also not providing a target for this year. So we will, and that's our promise, do what we've done in the past. We will maximize shareholder value on our disposals and therefore we are also not willing to give a disposal target mid-term.

With regards to non-accretive acquisitions, yes, that's something which we have outlined as of today and hopefully also in the past. And sometimes you learn about acquisitions that they turn out to be different. As you rightly point out, with regards to BCP, our approach was different. Certainly, we tried to buy in completely into BCP, but due to the devaluation of the assets and the situation back at that time, we unfortunately were not able to execute on the call option which we had on the shares. So therefore, now backward-looking, certainly we would have positioned ourselves differently with regards to the BCP acquisition. So that's quite obvious.

Unfortunately, nothing new with regards to BCP and our position there. So we are in that minority position. And certainly, observe the status of Adler's position closely as well as their view on BCP going forward.

[Kathrin Köhling, executive]

And with regards to your last question on the short-term deposits, so if you are looking at our cash position, which is now currently for H1 at EUR 355.9 million. Of course, there's always a cash component to it, and then there's a short-term deposit component to it. So for H1, that one amounts to around EUR 130 million. This is just because it just does not make sense to have the cash just sitting there and not generating enough money.

So of course, we know when we need money, we know when we need more money, so we can plan accordingly, and we will always have a cash position, and then we will always have a short-term deposit position where we just generate more interest on. So that's just the rationale behind it, and that's why also the 2 amounts change over time because it depends on our internal planning.

[Simon Stippig, analyst]

One -- 2 follow-ups, if I may. On the last one, that's clear, the splits that you have cash and short-term deposits, just the characteristics of the deposit. Is it invested with 1 bank? Is it invested with multiple banks? And then here also, if you could give me the answer, if the short-term deposit generated the additional interest income. And then one follow-up for the first question. But could you at least say that AFFO is at the level of last year or this year in the mid-term at least?

[Lars Von Lackum, executive]

Apologies also for that one. So just doing the second, that's the first question, Simon. We will come up with our guidance as always for next year with our November numbers. So we are in the midst of planning. But certainly, you can trust that you are being invested into a company which certainly is striving to grow the AFFO per share on a yearly basis.

[Kathrin Köhling, executive]

And with regard to your first follow-up question, of course, I mean, we love diversified funding mix. So also on that one, you can be assured that we will have diversified mix here with different banks. And yes, it of course contributed partly to what we made in terms of interest income.

[Operator]

Ladies and gentlemen, there are no more questions. Back over to the management for any closing remarks.

[Frank Kopfinger, executive]

Yes, thank you, George, and thanks for all your questions. And as always, should you have further questions, then please do not hesitate and contact us. Otherwise, please note that our next scheduled reporting event is on the 8th of November when we report our 9-month result.

And with this, we close the call, and we wish you all the best and hope to see you soon on one of our upcoming roadshows or conferences. Thank you, and goodbye, everybody.