LEG Immobilien SE

XETRA:LEG

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining the LEG Q3 2019 Conference Call. [Operator Instructions]I would now like to turn the conference over to Mr. Burkhard Sawazki, Head of Investor Relations. Please go ahead.

[Burkhard Sawazki]

Thank you. Good morning, everyone. This is Burkhard Sawazki. I'm glad you could join us for our Q3 earnings call. Our Management Board members, Lars Von Lackum and Volker Wiegel, will guide you through our presentation and give more insights on LEG's 9 months figures and our business outlook. As usual, this will be followed by a Q&A session. With this, I'll hand over to Lars Von Lackum.

[Lars von Lackum, CEO & Chairman of the Management Board]

Thanks, Burkhard. Good morning, ladies and gentlemen, and welcome to our Q3 earnings call. Volker and I, as the new management team, are pleased with the good set of results we released this morning. The numbers show us on track to reach our full year targets. The positive outlook for the current fiscal year also includes further attractive capital growth with another expected valuation uplift of around 3% in Q4. We are seeing positive momentum for our external growth strategy with the acquisition of around 5,700 units year-to-date. Additionally, we are working on several smaller deals, and we hope that there is more to come. As a result, we can raise our FFO I outlook for 2020. This also includes positive FFO effects from a planned early refinancing of loans with the volume of around EUR 340 million. We will elaborate further on these topics later during this call.Let me now briefly summarize the key operating and financial results of the first 9 months. Our like-for-like rents for the entire portfolio grew by 2.9%, with a strong like-for-like growth of the free financed units of 3.7%, which is, as you know, a much better proxy of the underlying dynamics of our operating business. The occupancy level is flat with a stable vacancy rate on a yearly basis of 3.6%. In the current quarter, we expect to reduce vacancy and to end that with a low like-for-like vacancy level of around 3.3% at the end of the fiscal year, which is the same level as last year. Our investments into the quality of our portfolio rose significantly by 7.7% to EUR 21.88 per square meter in the first 3 quarters.Coming to the financials. Our FFO I increased by 7% year-on-year or by 6.7% on a per share basis. The key growth drivers, namely sound rental growth and margin expansion, remain intact. The pro forma NAV per share, i.e., the NAV including a simulated conversion of the 2014/2021 convertible, which was completed by the end of Q3, increased by 7.6% year-to-date to EUR 100.52 per share. Taking into account the dividend payout, the NAV-based total return for our shareholders even amounted to 11.4% over the same period.Due to the full conversion of the 2014/2021 convertible, the only diluted number of shares have increased by 9.2% to around 69 million shares. Although we are just putting the money to work, we will propose to distribute a higher dividend per share of EUR 3.60 for 2019. Accordingly, this corresponds to an increase of the planned total dividend payout of more than 11%. With that, I hand over to Volker for some more insight on the operating result.

[Volker Wiegel, COO & Member of Management Board]

Thank you, Lars, and good morning to everyone from my side. Coming to Slide 6, where we provide an overview of our operating performance. Overall, the in-place rent in the LEG portfolio rose by 2.9% on a like-for-like basis. The free financed units, which currently account for 75% of our portfolio, grew by as much as 3.7% like-for-like, continuing the very positive growth trend.We realized the strongest increase in the high-growth segments with a plus of 3.3%. The stable markets also showed good dynamics with plus 3%. Both market segments also benefited from our enhanced modernization program. In the purple market, where our modernization activities are less pronounced, rents rose still by 2.2%. The like-for-like EPRA vacancy was stable on a yearly basis at 3.6% despite higher investments, which tends to trigger some higher tenant turnover. In our orange markets, we saw a very positive development to a very low vacancy level of only 1.9%. Hence, our properties in these markets are fully let. There are some larger increase in our higher-yielding segments. As we already pointed out in our last call, a major part of this development is attributable to one single location, Duisburg. We made some organizational adjustments here and we have already seen some decent progress and view this as only a temporary effect. Over the last quarter, vacancy in Duisburg has already dropped by some 40 basis points, showing that we are moving into the right direction. We expect an overall stable like-for-like occupancy level for the year as a whole with a sequential decline in the fourth quarter.Coming now to Slide 7. The positive rent development in our markets is based on the strong performance of important locations. As usual, we provide some further breakdown. In our high-growth markets, Monheim continues to be the top performer with a double-digit increase of the average rent of plus 10.4% year-on-year. As we have discussed in the past, Monheim is the most important location for our investment program. Monheim, ideally located between the 2 hotspot cities, Cologne and D?sseldorf, is an extremely exciting sub-market for us. We are the largest landlord there with more than 3,300 units, and we are improving a whole district in this town. Cologne is another market which was doing extremely well with an average rent growth of plus 5.4% or nearly 8% for the nonrestricted part. In D?sseldorf, we expect the positive growth impetus from a new Mietspiegel that is expected to be released soon. In the stable markets, our 2 single largest locations, Dortmund and M?nchengladbach, are our growth engines with a rent growth of plus 3.5% and plus 3.4%, respectively. Dortmund was a beneficiary from both the CapEx program and a new Mietspiegel released in the first quarter. In the free financed parts, rents even grew by 4.6% in Dortmund. In our purple markets, we saw again the strongest growth in Duisburg with an increase of plus 4% like-for-like. In Bochum, where we own around 1,600 units, we also realized a strong growth of 3.7%. On the following Slide #8, you'll find more details on our investments. Overall, the investments into our portfolio rose by around 7.7% year-on-year to EUR 21.88 per square meters. This development was mainly driven by higher value-enhancing CapEx measures. Accordingly, the capitalization ratio rose to a level of 70%. For the fourth quarter of 2019, we expect this trend to continue. For the traditionally strong seasonality in the fourth quarter, our investment guidance of EUR 30 to EUR 32 per square meters remains unchanged. This is expected to be accompanied with a CapEx ratio in excess of 70%. For our modernization measures, our return target for yield on costs of some 5.5% to 6% basically remains unchanged, but there will may be some adjustments on the time line. We always have differentiated price models in our settlements, but we intend to have an even stronger emphasis on affordability for sitting tenants of an apartment in the future. This is a key element of our dedicated corporate social responsibility strategy. We are therefore going to capture the reversionary potential from some of our investments, at least partially with the future tenants turnover. With this, I hand back to Lars for some more insights on the financials.

[Lars von Lackum, CEO & Chairman of the Management Board]

Thank you, Volker. First, please have a look at the overview chart with the financial highlights on Slide #10. The numbers once again demonstrate that LEG's margin expansion story is well on track with further noticeable improvements across all P&L lines. We were able to cope with the slightly dampening effects from the regulatory side and also with cost inflation. The adjusted net rental and lease income rose by 7.9%, and therefore, considerably stronger than net cold rent. This results in an adjusted NRI margin of 79.6%, equating to a margin expansion of 180 basis points year-on-year. This clearly underscores the efficiency gains we are still achieving. Moreover, on the overhead level, we kept our costs stable despite substantial inflation for wages and also other cost items. Hence, our adjusted EBITDA even improved by 8% year-on-year. For the financial year 2019, I can confirm our EBITDA margin target of around 73% despite some higher expected maintenance and admin costs in the final quarter as part of the natural seasonality of our business. Our ongoing process optimization will drive the EBITDA margin further, clearly underlining our leading position in terms of cash flow profitability.On Slide 11, you find the calculation of the FFO, our key financial performance indicator. In line with our planning, FFO increased noticeably by 7% to EUR 259.1 million in the first 9 months, driven by the mentioned positive development of the recurring NOI and the EBITDA. Additionally, thanks to further decreasing average cost of debt, we could keep cash interest expenses flat despite the increase in the debt volume. Consequently, our interest coverage ratio, that is adjusted EBITDA to cash interest expenses, improved further, reaching a high level of around 570%. In light of the development of the interest rates over the last couple of months, we anticipate further tailwind on our numbers from that side. In the first 9 months, we have seen an earnings burden from higher tax charges. However, we assume the cash taxes for the year as a whole will presumably be below that level in absolute terms. This is mainly due to the early refinancing and the tax deductibility of the associated prepayment fees in Q4.On Slide 14, we prepared the calculation of the pro forma NAV. As you know, the pro forma numbers simulate the effect from the full conversion of the 2014/2021 convertible, which was nearly completed at end of Q3. The eventual 100% conversion was settled at the beginning of October. The pro forma NAV increased by 7.6% to EUR 100.52 at the end of Q3. Adjusted for the dividend payment, which amounted to EUR 3.53 per share, the NAV-based total return amounted to 11.4% year-to-date. This was, of course, primarily driven by the positive impact from our interim portfolio reevaluation. As discussed in the past, one of limitations of this metric is that it does not capture the value of LEG's highly value-generating services business as an important value component of our business model. Our current portfolio yield stands at 5.3%, equating to a per square meter value of EUR 1,295. We still observe a noticeable gap between our IFRS values and transaction prices, although price momentum is decelerating. On the back of our current status of discussion with our appraiser, we can guide for another valuation uplift of around 3% at year-end.Coming to Slide 16 and 17. After the almost completed conversion of the convertible, our LTV decreased further to a low level of 36.3% at end of Q3. As the lion's share of our acquisitions will be consolidated towards the end of the year, the gearing ratio will increase accordingly. However, with our strong balance sheet, I still see potential that we have a decent firepower for further external growth beyond the 5,700 units, which we have acquired year-to-date and some smaller deals, which we are currently working on.Coming to our financing structure at end of Q3 on Slide 18. The only significant change is, again, the conversion of the convertible into equity with a respective impact on our debt maturities. At the end of Q3, our average cost of debt stood at 1.64% with an average remaining maturity of 7.3 years. We intend to exploit the current market environment for further extension of the maturity profile and further reduction of the interest costs. I will get back to this in a minute.At this point, I would like to add a few more words on our acquisitions as the key incremental growth driver. Until today, we have signed several deals adding to a total acquisition volume of around 5,700 units. We have prepared an overview chart with the main metrics, which you can find on Slide 21. The average initial rental yield amounts to 4.6%. The yield looks somewhat lower than our current average portfolio yield. However, firstly, we bought a higher share of assets in the orange and green markets compared to our existing portfolio; and secondly, the acquired assets have an above-average quality. Our acquisitions include some 200 new built apartments as a contribution in easing of the shortage in the housing market. Our growth strategy in the area of housing development is based on 2 pillars: The extension of our own development pipeline, currently, we are in the construction phase of a smaller project in Hilden near D?sseldorf; and simultaneously, also on the acquisition of newly developed projects. A key element of our updated growth strategy is the broadening of the regional scope. This decision clearly added growth momentum to our business. Year-to-date, we have already boarded approximately 2,600 units outside of NRW, predominantly in Lower Saxony and in Bremen. This clearly underpins our sourcing capabilities also outside of our core region.On the earnings side, you will see the impact from our acquisitions starting in 2020. Transfer of ownership for most of the deals will become effective in January. The annualized earnings impact of the deals is around EUR 13 million to EUR 14 million. Taking into consideration the largest sale of 2,700 noncore assets, there still remains a positive net effect of some EUR 6 million to EUR 7 million. And the year is not yet over. We are currently in negotiations for further predominantly smaller deals. Due to the timing differences with regards to the transfer of ownership, a minor net negative earnings effect from our acquisitions and disposals in the current fiscal year 2019 will persist. We intend to remain in growth mode also going forward. With our current balance sheet, we are well-equipped for further external growth. You can assume that we have a firepower for further acquisitions of at least some EUR 400 million also after the closing of the deals we have acquired. We clearly aim to stick to our conservative financial profile with a target LTV of 40% to 43% and also a net debt-to-EBITDA ratio of 11 to 11.5x as the more limiting factor. Another element of the strengthening of our FFO will be the early refinancing of loans with a total volume of some EUR 340 million. Interest rates are, of course, at an ultra-low level, but we have also seen a tremendous decline of the credit spreads in the unsecured market year-to-date. We are going to take advantage of this development, and we are going to return to the bond market soon. We expect a net positive annual FFO effect from the early refinancing of around EUR 7 million and onetime costs of around EUR 27 million. The exact volumes and tranches have not yet been decided as the refinancing is embedded into comprehensive measures, including the financing of our acquisitions.Apart from generating attractive cash returns, our business model also includes a very decent capital growth. After a valuation uplift of 5.1% with our interim valuation in Q2, we expect another valuation uplift of around 3% in the final quarter, and therefore, a total revaluation gain of around 8% in the financial year 2019. We expect that both major value drivers, the rent performance and a further compression of the discount rate, will contribute to this positive development. LEG has a very good reputation and high credibility in the market as a reliable landlord, acting with a high sense of responsibility. This is extremely helpful for us in the current political environment. We are going to reinforce our social commitment further. We have decided to set up a tenant foundation with a capital of EUR 16 million with the key objective to help tenants solve their social issues. Moreover, we have taken the decision for a smoothening of our rent growth path, i.e., some slight downward adjustments of our growth assumptions in the coming years. As already mentioned, this includes the voluntary reduction of modernization yields, if affordability of the sitting tenants is an issue, or a more conservative approach on the rent potential from rent payables. The impact on our rental growth outlook is maybe around 20 to 30 basis points.As usual, I would like to conclude our presentation with the financial outlook. We reiterate our earnings growth targets for 2019. Despite the mentioned short-term drag from disposals, we are very confident that we can reach the lower end to midpoint of our FFO target range. For 2020, we can raise our FFO targets from EUR 356 million to EUR 364 million to EUR 370 million to EUR 380 million. The main drivers for this are the positive effects from our acquisitions and also from the planned early refinancing. As described, we have slightly adjusted our organic rent growth assumptions, which does not change the overall still very strong fundamental picture of our asset class. For 2019, we expect a very solid growth of around 3%. As a reminder, some 25% of our portfolio are still rent-restricted. For 2020, we expect a stable underlying rent growth of around 3%. Due to a negative effect from the refinancing of a subsidized portfolio, which triggers the rent reduction of around 20 bps, this corresponds to a reported figure of around 2.8%. As already pointed out, the planned dividend proposal to the AGM will be a rising dividend of EUR 3.60 despite the increase of the fully diluted number of shares by 9.2%. Accordingly, the dividend payout ratio will slightly exceed the 70% level. For 2020, we expect to return to our long-term payout target of 70% of our FFO.Ladies and gentlemen, thank you for your attention. With that, I would like to open up the call for your question.

[Operator]

[Operator Instructions] The first question comes from the line with Marc Mozzi with Bank of America.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

Just wanted to clarify my understanding of why you've been cutting your rental growth in 2020 by 60 bps, because it's 40 to 60 bps. So if I understand correctly, you've got 20 bps, which is going to be voluntary reduction. And there's a 20 bps, which is linked to refinancing of subsidized units. I'm not sure exactly if I understand how that works. If you can just come back a little bit on that. And why another 20 bps on top of this? That would be my first question.The other question I wanted to raise is why did you choose to go for a full conversion of your convertible bond and not trying to have a mixed approach, being buying back part of the convertible bond and getting the rest potentially converted as it was suggested by your previous CFO? And on that topic, where are you in the process of recruiting a new CFO? Are you in line with the timing you've been setting in your recent press release?And the final one will be, should we expect another 1,300 units acquired by the end of this year? And if I understand correctly, your target for the full year is 7,000 units? Just adding a bit of color on that.And the final one, I'm sorry. Why don't we have an update -- why do we have not anymore a 2021 guidance? What has been the reason behind removing this guidance?

[Lars von Lackum, CEO & Chairman of the Management Board]

Thank you, Marc, for your questions. So starting with the first question with regard to the rental growth, which we have guided for. So honestly, I don't arrive at the 60 bps you're starting with, but I'm starting with 50 bps at midpoint. I think just 30 bps are coming from our decision to take care of our very good reputation in the market. We want to secure this position also going forward. You know that in North Rhine-Westphalia, and I've heard it from the Prime Minister Monday latest, that the rent reduction approaches in Berlin are considered unconstitutional. We do not see it in North Rhine-Westphalia currently, but as good corporate citizens, I think we are well advised to just take care of sustaining our profitability going forward and for long term. So therefore, we think we are well advised to behave as good corporate citizens and just reduce our rental growth by those 20 to 30 bps. Looking at the subsidized units, you might be aware that some of the subsidized units, which we are owning, come also with subsidized loans, all free loans which are attached to subsidized units. If you are able to do refinancing at a lower cost, you are not allowed to have this improvement being -- adding to your profitability, but you need to determine its positive advantage through to the tenants. So therefore, you are just forced to reduce the rents for the sitting tenants. And that's the impact of 20 bps, which means that on our operations, we certainly are quite comfortable with guiding for 3% rental growth next year. But we have an impact of another 20 bps of this early repayment of loans.With regard to the conversion of the convertible, I think we have tried to guide the market strongly over the last months that we are considering a full conversion. You know that we have started with looking into different options from paying back the full amount to different mix-and-match options until the full conversion. But we also then started to, for example, not show the FFO per share anymore in our figures in order to just prepare the market that we are also considering a full conversion. From our perspective, it was the right way of doing it in order to strengthen our balance sheet, which is now certainly being reflected in the low LTV of 36.3%. That's also enabling us now, going forward, to take advantage of acquisitions. And with regard to that, you also were mentioning another question with regard to the 7,000 units. That's certainly something which we are striving for. Whether we are making this will heavily depend on one bigger deal which we are currently working on. Whether we will be able to execute this in 2019 or 2020 is still to be seen, but we are working hard. And therefore, that's something we are trying to achieve.Our guidance for 2021, we have removed it based on the political headwind which we have seen. There has been a lot of changes over the last months. And we think that we can strongly guide you on the 2020 figures, but we think a 2-year guidance in the current political environment is something which comes quite with a lot of uncertainty. And that's something we do not want to continue.

[Operator]

The next question comes from the line of Charles Boissier with UBS.

[Charles Boissier, Director and Property Analyst]

I have 3 questions, please. So the first one is, on the one hand, your LTV is now 36% and possibly more coming from lower -- coming lower from revaluation. And then on the other hand, you're trading at NAV discount, and actually, if we hear you, it seems like you're saying, "Our value per square meter is really low at EUR 1,295. We have the persistent noticeable discounted transaction values. We have the value-add services." So it seems like you're seeing a lot of value on top of the NAV, let's say. So how do you think about acquisition versus share buyback, actually, in this environment? And is there a price that we should start thinking that share buyback might make more sense?And then on a related topic, so it seems like your largest acquisition this year was in Bremen, which seems to be widely seen as a one market where there is a contingent risk from the rent freeze given the local government said it's a good idea and they are assessing it. How do you think about that risk? And who did you buy from, if you can tell us? How much did you pay there? And then just looking forward, I think you mentioned some smaller deals you're working on, and then you mentioned also one large potential acquisition, if I heard correctly on the last question. Just interested in the locations, if you can share.And then finally, I think somewhere, you mentioned lower momentum on revaluation, and I just was wondering if you could elaborate on that and perhaps tell us more about this 3% between the different buckets between high-growth, stable and high-yield.

[Lars von Lackum, CEO & Chairman of the Management Board]

Okay. Thanks, Charles for your questions. So starting with your first question with regard to acquisitions, where there a valuation of a share buyback? So you can be absolutely sure that certainly we are following very closely the share price development of our own share. And certainly, whenever we do acquisitions, we are focused on creating value for our shareholders. And certainly, if you are in a special situation, so where you have a discount of 25% on your NAV, this might be something to be considered. Looking at our current share price and our current NAV, I think there are enough acquisition options on the table, which we can take advantage of. But -- and once again, be reassured that we are certainly trying to create value with each and every deal and also are making share buybacks also part of our understanding of creating value for shareholders. Therefore, it's something which also needs to be considered.With regard to Bremen, so Bremen also has a left-pledged green government. And we have very carefully, and certainly before we were buying into Bremen, evaluated the political landscape there. Looking at the coalition agreement, you certainly find there a sentence that the rental regulation, which have been put in place in Berlin, will be considered also in Bremen but after it has been implemented in Berlin. Looking at the current situation, I'm absolutely confident that the current Berlin regulation will be decided to be unconstitutional. So therefore, we do not see a risk that Bremen is focusing closely the Berlin regulation. Additionally, the ownership ratio in Bremen is not comparable to the one in Berlin. You know that the Berlin ownership ratio stands at around 18%. Bremen is around 14%. So therefore, also from this perspective, we thought that Bremen is a solid place to invest in. You asked where we have bought the portfolio from. So it was a private investor. It's a group doing different stuff. It's doing project development, and it's owning hotels but also residential. And we bought from this private investor, which is based in Hanover.The next question was with regard to the larger deal which we are looking at. So the larger deal we are looking at is more a North Rhine-Westphalia and Rhineland-Palatinate mix portfolio. Whether we will do a deal on this one remains to be seen. We are in negotiations, but no decision yet. Last question was with regard to the lower momentum on revaluation. I think revaluation of 8% is a good reflection of what we are currently seeing. I think on a regular basis, you did not only hear it from myself but also from Eckhard, we just have a certain time lag while we are looking into the numbers. Additionally, you should take into consideration that compared to some of the competitors, we are not including the capitalized investments into this revaluation, and therefore, I think we are quite confident that you will see additional revaluation. And the second part of the question was with regards how do we see a split of the H2 valuation across the different markets. There are no major differences honestly, Charles, with regard to the different markets. It is evenly split across the market segments. And we can see at overall market segments, there's valuation uplift.

[Operator]

The next question comes from the line of Andre Remke with Baader Bank.

[Andre Remke, Co]

Three quick questions. First, starting with the intended refinancing. What are the comparable financing costs or maturities which you are about to refinance? This is the first question. Starting with that, please.

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. Thank you, Andre, for the question. So the current assumption is that the refinancing will work at around 1.25%, and then you end up with the numbers which we have already stated. So we will have a prepayment fee of around EUR 27 million, and we are expecting a positive net effect on the FFO of around EUR 7 million per year.

[Andre Remke, Co]

Okay. Perfect. Then a guidance for -- on your guidance for the next year, you increased it by roughly EUR 15 million. You mentioned EUR 7 million from refi. Additional EUR 6 million, EUR 7 million from the acquisitions, so far, ends up with EUR 13 million, EUR 14 million. But probably, the rent -- revised rent assumptions should have a negative impact. So what is the missing point of the equation?

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. So the negative impact from this reduction which we are seeing on the like-for-like rent growth, it's just the EUR 2 million bottom line. And once again, also to be very clear, it is not away forever. It is just being postponed in time until we will do a catch-up then with the next reletting of the portfolio. So certainly, we will have an impact from the organic rent growth, and we certainly also had an impact from the acquisitions we did in 2018, especially the [ UNO ] package from VIVAWEST, which will have an influence of around EUR 5 million. So this is why we were able to raise the FFO guidance.

[Andre Remke, Co]

Okay. And this was not included in the previous guidance?

[Lars von Lackum, CEO & Chairman of the Management Board]

Exactly.

[Andre Remke, Co]

Okay. And once again, on your expansion plans outside North Rhine-Westphalia. As you highlighted, so far, 2,800 units. What -- where do you see further opportunities here? Is it mainly focused on smaller portfolios so after observing the market for -- now for months?

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. We have been approached with bigger portfolios also outside of North Rhine-Westphalia, but some came at a price which we were not willing to pay. So therefore, as always, we try to be very prudent with regards to our acquisition criteria. So we turned down those. And we are now sticking to some smaller portfolios until year-end, with the one exception of this bigger portfolio, which is a bit more south. And the portfolios we are looking into are certainly mainly still North Rhine-Westphalia but also the adjacencies, Lower Saxony, Bremen, Hesse and Rhineland-Palatinate.

[Andre Remke, Co]

So from today's perspective, it could take a bit longer to reach a meaningful size in some regions? So it's the right reading, what I said?

[Lars von Lackum, CEO & Chairman of the Management Board]

At least it will take some time until we will reach Munich, if you ask this, Andre. But certainly, I think we at least were able to show that we are able to, within a few months, have now a solid footprint in Oldenburg. So we were already the owner of around 400 units there. Together with the 900 which we are acquiring, we have now 1,300 there. Also in Bremen, we have a footprint which enables us to have our workforces now being based in Bremen, around 7 people doing the work for us. And this is certainly something we want to continue going forward. But certainly, it's not something -- but you can't expect that we are buying tens of thousands of units, then we would just make the market and the prices which we would be willing to pay are not in a range where we would want to be. So therefore, we try to be prudent, but you can still expect further growth outside of North Rhine-Westphalia also in 2020.

[Andre Remke, Co]

Okay. And so a very last question on the reduced like-for-like rent guidance. Does this also already include the expected prolongation of the Mietspiegel reference period? And if not, what could be an effect here? Could you remind me on that?

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. We have already included the extension of the reference period as well as the validity period of the Mietspiegel. So that's something which we also already tried to anticipate in those figures.

[Andre Remke, Co]

And what is the separated effect? Could you tell us in terms of bps, roughly?

[Lars von Lackum, CEO & Chairman of the Management Board]

It was -- it was a lower double-digit bps effect for us on a yearly basis.

[Operator]

The next question comes from the line of Kai Klose with Berenberg.

[Kai Malte Klose, Analyst]

I've got a question on Page 22 on the 9 months report. Could you indicate why is the net income from other services compared to last year was considerably lower? And maybe you could also give an indication how that may evolve in 2020, the service activity -- income from service activities? Then a question on the adjustments you made in this -- your calculation on Page 11 for nonrecurring project costs, which was EUR 4.8 million in Q3. What can we expect for the full year and maybe already -- then maybe you could also say for 2020? And the last question would be regarding your margin expansion in the next year. Is it mainly coming -- does it mainly refer to the enlarged portfolio? Or does it also include some further cost savings measurements to see profitability rising?

[Lars von Lackum, CEO & Chairman of the Management Board]

Okay. Thank you, Kai, for your question. So with regard to the net income services, you might be aware that we are also including there the profits which we are earning from the biomass plant, which we are owning in the southern part of North Rhine-Westphalia. And due to some revisionary work, which needed to be done on this plant, we need to just reduce the amount of energy being produced there, so therefore, profitability has been negatively impacted. And that's an effect which you can see in the numbers for this year.Then the next question was on the noncurrent costs currently standing at around EUR 4.8 million on Page 11 of the quarterly report. We are coming back on this question in a second. And last question was on the margin expansion. And as your second question kept us quite busy. Perhaps you are just so kind and just repeat the third question for us.

[Kai Malte Klose, Analyst]

Yes. On page -- 2020, you mentioned that the EBIT margin -- EBITDA margin for 2020 is to extend by about 100 bps to 30 -- 74%. I was asking -- is it mainly because of the enlarged portfolio size and/or also due to some further cost savings -- cost-saving measures?

[Lars von Lackum, CEO & Chairman of the Management Board]

No. It's -- okay. That's an easy one, which I can immediately answer. So certainly, we try to be very cost-disciplined. And therefore, what we are not doing also with the expansion into other territories is that we are doing it that the cost of a lower EBITDA margin. So therefore, also, with regards to the portfolio I just mentioned in Bremen and in Oldenburg, we've certainly made sure that we were very focused on keeping the EBITDA margin up on those acquisitions. And that's something where we wanted to be very focused on. With the -- yes?

[Kai Malte Klose, Analyst]

Just to understand -- I'm trying to just understand. You, are indicating a somewhat lower like-for-like cost. You mentioned quite a high cost inflation in 9 months. Still expecting the margin to improve in 2020? Just want to get some handle on how it then works.

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. So certainly, this needs a lot of cost discipline and then not only the management functions but across the organization. And that's something which we are certainly being very focused on, and that's something which we will execute also in 2020. So I hope you always got the impression of Eckhard. And that certainly is something we are still benefiting from, that we have an organization, which has always a very close eye on the cost development. And we will certainly execute on this going forward.Okay. With -- yes?

[Kai Malte Klose, Analyst]

Yes. Sorry, please.

[Lars von Lackum, CEO & Chairman of the Management Board]

No, go ahead. You had another question?

[Kai Malte Klose, Analyst]

Yes. Last one, yes, on the service -- income from service activities in 2020. I understood that it was temporarily lower in this year or kind of a onetime -- one of the reasons lower for this year? Next year, what could we roughly expect?

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. So it will return to the previous year's numbers. So that's something where we also see an improvement next year from. Yes? Okay. So getting back to your question with regard to the noncurrent costs. So I wasn't being able to reconcile this now immediately to the one -- to the further onetime cost, but I think that's something which you are looking into. This number will be strongly inflated for the full year due to the -- our commitment to just have a second tenant foundation. So you will find there a number of EUR 16 million coming from the tenant foundation. So the number will be substantially higher compared to the current number you are seeing in our reports. So that's something which you should take into consideration going forward. The other effects are mainly coming from some project costs at year-end, which will be around EUR 4 million, which also then additionally will impact the number. So if we look at the OTC effect, that's something where we currently stand at around EUR 11.7 million. But this number will then substantially increase by this around EUR 20 million, which I just tried to explain and coming, on one hand side, from the foundation of the -- tenant foundation, and on the other hand side, from additional project costs.

[Operator]

The next question comes from the line of Jonathan Kownator from Goldman Sachs.

[Jonathan Sacha Kownator, Financial Analyst]

I just wanted to come back on 2 topics, the first one, development. If you can update us on the progress here and perhaps also explain with a bit more color why you're buying now from developers as well. I mean you said you want to have more stock, but obviously, the returns may not be the same. So it would be good to understand the rationale here perhaps in more detail. And the second point, just going back to services. Is this an area -- I mean, you've pointed out to improvements coming in. Is this an area where you're developing additional services? How you're planning to develop that income stream going forward would be helpful.

[Lars von Lackum, CEO & Chairman of the Management Board]

Thanks, Jonathan, for your questions. Certainly happy to answer those. So with regards to development, I think that we made some good progress with regards to the densification projects. So we were able to start with the architectural competition for the bigger -- which we have in Cologne, those 400 units, which will come to an end most probably in December. So I think everything is in place there. We have the staff onboard to run those projects. At the same time, we do a second exercise, once again looking -- relooking into the different densification projects we have already identified. You know that the number stands there at around 1,000 units. But we are feeling confident that we will be, in the second round, identifying some more plots where we can do densification projects.

[Jonathan Sacha Kownator, Financial Analyst]

And do you have a -- sorry, do you have any feeling that from a planning perspective or order to source additional land? And how is that progressing? Is it improving? Is it still complicated, slower than you're expecting? If you can give a bit on color on that, that would be helpful as well.

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. Yes, certainly. Getting to the second part, so buying plots of land, this is proving unfortunately extremely difficult. So while all politicians, I think, in Germany have understood that only additional buildings will help with the current shortage of supply, it just takes them quite a lot of time to get decisions being made. So that's something which I think I have overestimated at the beginning of the year. Currently, I think we are quite advanced with the project and the first ability to buy land in Cologne in order to then realize a project of around 100 units. So -- but looking at the number, it's much lower than I initially anticipated, and it takes more time than initially anticipated. Therefore, we have taken the decision to also look into some further growth options, which is buying new buildings from the one or the other developer. And I think looking at the numbers, which we are presenting on Slide #21, it's not something where we should be worried about or you should be worried about. So it's something where we feel very comfortable with. It's a price of EUR 2,576 per square meter. So looking at the price which you normally have in order to buy land and then to build, I think it's really at the low end, which you can imagine. The rent multiple is something where we see certainly positive progress. And as rents develop strongly for those locations like Dortmund and Bielefeld as well, we are confident to really have something in our portfolio which is adding value. So that's something where we want to progress as additional value can be generated from those new buildings.

[Jonathan Sacha Kownator, Financial Analyst]

Okay. So effectively, strong rent growth expectations for these projects?

[Lars von Lackum, CEO & Chairman of the Management Board]

Exactly. Exactly. And honestly, look, that's quite a low per square meter price which we have paid. So it's also that we are quite confident that going forward, we will see positive revaluation gains on those developments.

[Jonathan Sacha Kownator, Financial Analyst]

So what kind of rents are these developments attracting?

[Lars von Lackum, CEO & Chairman of the Management Board]

That's a broad range, honestly, depends on what you are looking into. So some of them certainly have a smaller commercial part being included in, but also those flats come at a price between EUR 10 to EUR 16 per square meter.The second question was with regards to services. I think we have explained on this also in earlier calls. And we have started with adding an energy project -- product for our customers, which is giving them a benefit of onetime payment, lower cost and the energy provider being based in the region, et cetera, et cetera. So we have now also started as of November with the second product, which is a gas product, which is offering an even higher onetime payment. So with energy, you get a EUR 50 onetime payment. With gas, you get an EUR 80 onetime payment. So we are feeling quite comfortable that the pickup rate, which has been around 60% for the energy product, we will also see quite a high pickup rate for the gas product going forward.Looking into new products, it's certainly something we are doing. There are products like insurance as well as financing, which might be the next best products because those come with quite a high intermediate margin but with a low brand awareness. So that's something which we are looking into, and certainly, we are planning to come with those products then in 2020.

[Jonathan Sacha Kownator, Financial Analyst]

So what kind of -- I mean, what kind of expectations do you have from a, I don't know, margin development, pricing development? I mean, how significant -- more significant could that be? Or what types of growth are you expecting there overall?

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. So compared to earlier times, so we try to do it quite agile. So instead of just putting down numbers and business cases and then following up on those, we try to test how different projects work and being picked up with our clients. Therefore, I'm not able to state at this stage precise numbers, but giving you just the indication that the pickup rate on the first product we are offering to new customers was 60%. This can build up quickly. So I think as soon as we have 2 or 3 products out and have a better view on the pickup rate and which customers are really sticking to the product, I think I'm also able to then give you numbers. But it's more a test-and-fail approach than the original or earlier times on doing a business case and following those going forward.

[Operator]

The next question comes from the line of Thomas Rothaeusler with Jefferies.

[Thomas Rothaeusler, Equity Analyst]

I have one question, actually, on your recent acquisitions. Maybe you can provide us a more detailed picture on what's the reversionary potential, or internally, what's the upside potential do you expect given the lower yielding starting point you have? I mean 4 -- you have 4.6% average gross yield and even 3.8% gross yield for the newly built.

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. Very happy. Thanks, Thomas, for the question. So the current acquisitions come at a lower average rent per square meter than the rent per square meter we have in our own portfolio. I already, I think, pointed out that the portfolio which we have bought is more weighted towards growth and stable markets where we have seen strong pickup of the asking rents. So therefore, the current rent which we are seeing per square meter for the complete portfolio is around 4 -- EUR 5.46, so which certainly comes with a stronger reversion potential, which we want to then realize going forward. That's something where we see quite a lot of benefit, and that's something we want to realize then.

[Operator]

[Operator Instructions] The next question comes from the line of Robert Woerdeman with Kempen.

[Robert Woerdeman, Research Analyst]

This is Robert, Kempen. Lots of discussions on growing outside North Rhine-Westphalia. Whilst we like the fact that you're being acquisition cost-conscious, but could we, for instance, foresee you going outside North Rhine-Westphalia with M&A, especially considering that there might be some mispricing in the listed German resi names?

[Lars von Lackum, CEO & Chairman of the Management Board]

You sound that you have also a second question, Robert. Do you also want to go ahead with it? Or do you want me to answer the first question?

[Robert Woerdeman, Research Analyst]

Yes. All right. Okay. The second question is a little bit nitty-gritty, but the 20 to 30 basis points lower rental growth rate as a social aspect of being a good landlord, will that affect the appraiser's view on the portfolio, i.e., how will that take be taken into account? That was it. Sorry.

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. Okay. No problem. But you sounded like having a longer list of questions.

[Robert Woerdeman, Research Analyst]

There's been sufficient questions already asked.

[Lars von Lackum, CEO & Chairman of the Management Board]

Okay. Thank you, Robert. So I'll try with the first one, so outside North Rhine-Westphalia and corporate M&A. So as usual, I think we are well advised as management to look into all options which give us growth opportunities but to stay very prudent with regards to our acquisition criteria. This is also including corporate M&A. So that's something we do not want to rule out. But compared to portfolios, you certainly need to tick more boxes. So you certainly need to look at the how do you integrate. And M&A integration, as you know much better than myself having looked probably in more M&As than I have, it is a challenge to realize all the promised synergies from M&A if you are doing one. So therefore, certainly it's something we are looking into, but it's not something we are making part of our base case. So currently, nothing on the table which we have seen which is so attractive and more attractive than adding more portfolios of a potential size.Second question, 20 to 30 basis points and the lower growth rate and how it translates in our valuation. Honestly, it will not be having an impact on our valuation because it's certainly a discounted cash flow model we are applying. So therefore, the reletting of the portfolio is driving more the value of the portfolio than the reduction of the now sitting tenants in rents of around 20 to 30 bps. So it's not something which will impact negatively our valuation going forward.

[Robert Woerdeman, Research Analyst]

Okay. Just to clarify, I mean, because the total rental sum going forward with the growth deceleration, that should affect your values in general, isn't it?

[Lars von Lackum, CEO & Chairman of the Management Board]

Yes. Certainly, if you would have the assumption that you would be never able to recover this amount. But from our perspective, we are just speeding down a bit with regards to applying higher rents after modernizations or reletting or doing increases according to the Mietspiegel for sitting tenants. But certainly, we have this potential as soon as we are reletting the flats. So therefore, as this is the assumption that we can realize at a later stage in the DTS model, then certainly, valuation uplift will then come. Certainly for some years, you see it, but the majority of it is then still folding into the valuation later on.

[Operator]

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

[Burkhard Sawazki]

Ladies and gentlemen, thank you for your participation. As you know, the IR team and I are available also after the call for your questions, so please feel free to give us a call or send us an e-mail. Thank you, and goodbye.

[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.