LEG Immobilien SE

XETRA:LEG

Earnings Call Analysis

Strategic Adaptation Amidst Challenging Times

Amidst a challenging environment with historically high-interest rates affecting the transaction market, the company has disposed of approximately 1,600 units for EUR 130 million, at book value. They've innovated by creating ventures such as Renowate and Utilities anti-carbo, which tackle digital and ecological opportunities. They have adapted swiftly to the new interest rate scenario, maintaining transaction discipline and focusing on rent increases set to continue in 2024, with like-for-like rent growth projected between 3.2% to 3.4%. Cost control remains tight despite inflation, with investment spending dropping by 9% per square meter. The company is leveraging new subsidization laws for further savings and has refinanced debt, pushing maturities to mid-2025. These endeavors have led to an increased guidance for the Adjusted Funds From Operations (AFFO) by approximately 10%. They also anticipate FFO I to be between EUR 440 million to EUR 470 million, although it is not their main financial metric.

Navigating Uncertainty with a Cash-Focused Strategy

In a volatile economic landscape marked by heightened geopolitical risks, rising interest rates, and real estate value reassessments, the company has adopted a cash-focused business approach, designating AFFO (Adjusted Funds From Operations) as its key performance indicator. This strategy isn't just a short-term fix; it's the guiding principle for the foreseeable future, emphasizing liquidity and financial stability over all else. Despite the challenges, the company has demonstrated operational strength, projecting to hit the upper end of the EUR 165 million to EUR 180 million AFFO guidance for the full year.

Operational Excellence Fueling Growth

The company's performance has been robust, with a significant increase in AFFO (over 50%) and a boosted operating cash flow (over 18%) largely due to a substantial 4% growth in net cold rent and a record low vacancy rate of just 2.4%. This operational efficiency is further evidenced by proactive financial management, including the successful refinancing of 2024 maturities, bringing the average interest rate on the debt book to a manageable 1.65%.

Disciplined Asset Management Amid Market Pressure

In the face of a real estate environment not conducive to aggressive deals, the company has sold around 1,600 residential units along with commercial non-core assets totaling around EUR 130 million, a testament to its disciplined approach to asset management and value preservation. Furthermore, there is an expectation of a 4% to 6% devaluation in residential asset values for the second half of 2023.

Ambitious AFFO Growth and Cost Management for the Next Year

Looking ahead to the next year, the company anticipates further AFFO growth, aiming for EUR 180 million to EUR 200 million. This growth is expected despite disciplined restrictions on maintenance and capital expenditures, aligning with the current economic climate and reflecting a strategy anchored in cost control and efficient capital allocation.

Strategic Investments and Cost-Efficiency Balance

While facing a challenging market environment, the company is making strategic bets in ventures that present both ecological and economic potential such as Renowate and Utilities Anti-carbo. Through an intelligent investment strategy and operational focus on rental increases, the company aims to maintain a mindful balance between cost-efficiency and continued growth in light of the cessation in the construction market for affordable German residential properties.

Financial Resilience Amidst Market Headwinds

The company has outlined plans to navigate significant market headwinds, mainly due to increased net cash interest costs. Nevertheless, strategies such as freezing operating and admin cost bases and leveraging subsidy regimes are anticipated to drive a forecasted FFO I (Funds from Operations I) in the range of EUR 440 million to EUR 470 million.

Healthy Financial Performance and Revenue Growth

With the company's net cold rent up by 4.5% to EUR 623.5 million driven predominantly by organic growth, financial health remains strong. Despite a slight decline in the NOI (Net Operating Income) margin due to increased operating expenses, the AFFO has surged impressively by 54% to EUR 176.9 million. Looking forward, the company braces for a constructive full-year 2023 AFFO at the higher end of its guidance.

A Strong and Thoughtful Refinancing Approach

Following strategic refinancing moves, the company is well-positioned for future, with a low average interest rate, improved liquidity, and reduced financial constraints, allowing for significant headroom for additional secured financing. The efforts have resulted in a current LTV (Loan to Value) of 46.8%, up from 43.9% at year-end. These shrewd financial maneuvers afford continued operational agility and affirm the company's commitment to solid financial stewardship.

Maintaining Guidances and Setting Sights on Future Growth

For 2023, the company affirms its commitment to reaching the upper end of its AFFO guidance of EUR 165 million to EUR 180 million, with an adjusted EBITDA margin guidance of 80% and a rent growth guidance of 3.8% to 4%. Investments are being strategically cut to EUR 32 per square meter to better optimize cash generation. The company's executives express confidence in their ability to increase AFFO to EUR 180 million to EUR 200 million in 2024, despite the challenging economic environment and the need for recalibrations if necessary.

Commitment to Sustainable Growth

ESG (Environmental, Social, and Governance) considerations remain a priority, with the company setting new targets focused on CO2 reduction alongside their economic pursuits. Even against the backdrop of scaled investment levels, the firm's commitment to sustainable and responsible business practices is unwavering, underpinning its approach to future growth and innovation.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the LEG conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session.[Operator's Instructions]. I would like to turn over the conference to Mr. Frank Kopfinger, Head of Investor Relations. Please go ahead.

[Frank Kopfinger, executive]

Thank you, Maria, and good morning, everyone, from Dusseldorf. Welcome to our 9 months 2023 results call, and thank you for your participation. We have on the call, as always, our entire management team with our CEO, Lars von Lackum; our CFO, Kathrin Köhling as well as our COO, Volker Wiegel. You find the presentation document as well as the quarterly report within the IR section of our home page. Please note that there is also a disclaimer, which you'll find on Page 3 of our presentation. And without further ado, I hand it over to you, Lars, for the presentation.

[Lars Von Lackum, executive]

Thank you, Frank, and good morning also from my side. As always, I will kick off today's presentation by summarizing the key highlights. Afterwards, Volker and Kathrin will provide you with more details on operations and financials. We continue to operate in an environment of substantially increased geopolitical risks, prolonged uncertainty regarding the new sustainable interest rate level as well as the new valuation level for real estate assets. Therefore, we are convinced that the cash-focused steering of our business is the superior strategy to manage this volatile and challenging environment. Cash remains our North Star, not only for the remainder of 2023, but also for the coming year, so we stick to AFFO as our leading KPI. The macro environment for German affordable residential is characterized on the supply side by a strong rise of cancellations of residential construction projects. According to the monthly IPO survey published in October, 22.2% of companies reported canceled projects. Even 48.7% of companies are complaining about a lack of construction orders. In comparison, a year ago, only 18.7% of companies were affected by a lack of orders. As that does not exist any quick fix on the supply side, and is Germany expects further strong immigration by skilled workers as well as refugees for the full year 2023 at the same time, demand for affordable living has increased and will increase further. In this environment, we successfully leveraged the outstanding strength of our platform to deliver on our ambitious operational and AFFO targets. Already after 9 months, we generated an increase of the AFFO by more than 50% and increased the operating cash flow by more than 18%. The AFFO stands at EUR 176.9 million. For the full year, we expect the AFFO to come in at the upper end of the EUR 165 million to EUR 180 million guidance range. As always, the last quarter will be impacted by a higher level of CapEx spending. As the investments will be fully funded by the generated cash, we expect to keep at least the current AFFO level. Internal cash generation is driven by strong operations. For most, the net code rent grew on a like-for-like basis by a strong 4%. On a reported basis, net code rent grew even by 4.5% as growth from new build units more than offset the effect from disposals. Although having reached already a record occupancy rate by mid of the year, vacancy rate was successfully reduced by another 20 bps to just 2.4%. Not only Volker and his time, but also Kathrin and her team did a tremendous job in the current environment. We already refinanced our 2024 maturities and are now fully financed until mid of 2025. In 2025, we plan to again just roll forward the secured part of our debt book. The remaining EUR 400 million of debt are attributable to the convertible bond, which makes September 1, 2025, i.e., in almost 2 years from now. As of today, our debt book carries an average maturity of 6.6 years with an average interest rate of just 1.65%. As of September 30, our LTV stands at 46.8%, an increase of around 290 bps, driven by the revaluation of our asset base for mid of 2023. Although the LTV currently is above our internal target, this had no effect on our ability to refinance, as just described, and we do not expect any impact in the near future. We adapted our LTV target to the current market environment and align this now completely with Moody's rating methodology. To restore the form of Baa1 rating, we need to bring the LTV to below 45%, which we consider to be a medium-term target due to the low transaction volumes currently. To keep our LTV under control, we enforced our disposal activities successfully. Over the first 9 months, we managed to sell around 1,600 residential units as well as some commercial noncore units for a total of around EUR 130 million. Overall, the transaction prices meet our book value, continuously matching book values and transactions give us all the confidence to remain very disciplined and to keep us away from distributing shareholder value to third parties by force volume or structured deals. Transfer ownership is expected to take place over the coming months and cash realized accordingly. With just 6 weeks of business activity to go until year-end, we also provide you with our valuation expectations for our residential assets. For the second half of 2023, we expect, as of today, a further devaluation in the order of 4% to 6%. Compared to H1 value decline of 7.4%, pressure on pricing is losing momentum, especially as our portfolio runs already at a 4.6% gross yield. Further rent increases in H2 devaluations will shift our portfolio gross yield move into the 5% region, which provides an attractive spread over the risk-free interest rate. Based on our portfolio split, we expect a higher share of devaluation to weigh on the high-growth markets, which currently bear a gross yield of 3.9%. Inversely, the assets in the high-yielding markets will be less impacted as those already show a gross yield of 6% as of today. Looking ahead, which due to the higher-than-normal geopolitical risk comes with more uncertainty than in the past, we expect our very resilient business model and highly performing platform to increase the rate of cash conversion. Therefore, we feel comfortable to provide you with a fully quantified guidance of our core KPIs for 2024. For next year, we expect the AFFO to grow further to EUR 180 million to EUR 200 million. This is driven by -- again, increased rent growth momentum, i.e., an expectation that rents will grow by 3.2% to 3.4%. That growth will not come on the back of an increase in spending, even the opposite. We will remain very disciplined on all our maintenance and CapEx activities. From our perspective, the current market environment just does not allow for a more aggressive approach on spending. Once the macro situation improves, we will recalibrate our spending activity and our flexible setup will allow for it. Finally, let me highlight another very positive result, the approval of our targets by SBTI. Being the first company in the market to have received that approval, we hope this approval gives you all the confidence that we, while being tough on spending volumes are very serious about our decarbonization part. Therefore, we continue to optimize not only the financial return on every euro being spent, but also the CO2 reduction impact. So we continue to work on smart and innovative solutions like the air-to-air heat pump or the termite technology. Please follow me to Slide 7, so that I can provide you with a short review of our strategic setup introduced to you by November last year. As you might remember, we introduced our cash is king strategy exactly a year ago. We anticipated the now a very visible and not less dramatic shift of the market and focused the entire company purely on cash generation. By doing this, we introduced the AFFO as our core KPI. We are convinced that this was and still is the best way to reflect cash generation. At the same time, we picked that KPI to allow analysts and investors likewise to model that figure accordingly. We identified 4 key levers to increase cash generation and delivered on all of them reliably. Firstly, we strengthened the operational performance by increasing rents rigorously. We upgraded our guidance over the course of the year due to better market dynamics and continue to see a strong increase of 3.8% to 4% for the full year 2023. We are also on track to deliver on our reduced investment ambition of EUR 35 per square meter. Additionally, we are on track with our ambition to cut costs wherever we see potential. Secondly, we put our entire new development platform into runoff. It was very clear to us already back in November that we will not start any new development projects. At the same time, we started to work hard to cancel all plants, but not yet started development projects. Having had more success in canceling unprofitable project than initially assumed, we increased our AFFO guidance at H1 by EUR 17 million to EUR 20 million. Thirdly, we promised to become and by now are a net seller in the market. Year-to-date, we disposed around 1,600 units as well as noncore commercial units for a total of around EUR 130 million. We did that in smaller direct transactions but matching book values. And finally, we continued our innovation journey. We see substantial business opportunities in our industry to provide green one-stop shop solutions to third parties by leveraging our extensive know-how. In the meantime, we found it Renowate, Utilities anti-carbo all of them promising ventures which address digital and Eglological, but foremost economic opportunities. We continue to optimize our spending going forward, but will certainly stick to invest in those growth areas. And with this, I come to Slide 8. Without any doubt, times remain challenging. There are parameters, which we have in our hands, but unfortunately, there are others which are beyond our insulins. For the latter part, we all witnessed an historic increase in interest rates, which drive out the transaction markets, including affordable German residential. That market has not yet opened again, and we will not take a bet on when this is going to happen. Therefore, we pulled all levers to adapt the organization as quickly as possible to a higher for longer interest rate environment with a nonexisting transaction market. By doing so, we created the freedom to keep our discipline with regards to all transactions, i.e., neither doing structures, no voluminous deals, but stick to smaller transactions at book value. Operationally, our focus was on delivering on rent increases, and we will continue to execute on this accordingly in 2024. In 2023, we benefited from the cost trend adjustment for our subsidized units with 80 bps out of the 4% reached in the first 9 months. As the net cost rent adjustment will take place in 2026, the like-for-like rent growth of 3.2% to 3.4% in 2024 really presents an additional 20 bps of rent growth. We will keep costs under strict control. Therefore, and despite a still quite substantial inflation rate, we expect only a moderate cost development. On the investment side, we continue to bring down our spending on a square meter basis to EUR 32. This translates into a savings of another 9% in nominal and certainly into a double-digit saving in real terms. To make that ambitious target work, we will make use of the newly implemented subsidization regime following the GG legislation. Due to the successful refinancings in 2023, we faced the next maturities mid of 2025. This provides us with substantial freedom to further optimize our debt book going forward. With all those measures, we continue to strengthen cash generation. All of that translates into a guidance for the AFFO by around 10% more comparing midpoints of both guidance. Again, this is a cash-driven figure. We do not steer our business based on the much more accounting-driven KPI, FFO 1 anymore. On the next slide, we provide you with our AFFO bridge. I am now on Slide 9 of the presentation. There, we provide a bridge from our current 2023 AFFO guidance to the 2024 AFFO guidance. In 2024, we need to offset 2 major headwinds: Firstly, higher net cash interest costs; and secondly, the one-off profit from the forward sale of green electricity, more than offsetting the headwinds will come from increasing net code rents, freezing the operating as well as admin cost base, saving on maintenance costs by another round of cost cutting, leveraging the subsidization regime. While we do neither focus nor steer the company on FFO 1, we added a highly preliminary and indicative number for the. We expect the FFO I in the range of EUR 440 million to EUR 470 million. Please take a note that the FFO 1 is not part of our official guidance. With this, I conclude my presentation and hand it over to Volker for more details on our operational successes.

[Volker Wiegel, executive]

Thanks, Lars, and good morning to all of you. I will start on Slide 11 with our transactions year-to-date. On a reported basis, i.e., transfer of ownership has taken place already, we disposed year-to-date 831 units for around EUR 50 million. However, this number somewhat disguises our disposal efforts as it does not reflect the transaction signed but not yet closed. As of today, we additionally signed disposals for roughly 800 units. Transfer of ownership will take place over the coming months and will then be reflected in our balance sheet. Including the disposal of some noncore commercial units, we will generate another EUR 18 million of disposal proceeds. All assets sold were part of our 5,000 units portfolio and considered noncore. The relatively low disposal price per unit underlines that we remain focused in selling assets in regions with subdued structural development potential or assets and weak technical conditions. Overall, we sold around 1,600 units for about EUR 130 million. Total transaction volume equals the book value of the disposed assets. We show our full commitment to not waste shareholder capital by that very disciplined sales approach. That makes life more difficult for our sales team, but safeguard every single euro of value for our shareholders. I'm now coming to Slide 12. With our like-for-like rent growth of 4% in the first 9 months of the year, we are at the upper end of our guidance. While our like-for-like rent growth at half year already reached 4.3%, we clearly stated already back then that this was purely timing effects regarding the implementation of rent increases, and we are not steering rent growth on a quarterly basis. The in-place rent for our entire portfolio stood at EUR 6.55 per square meter at the end of Q3 2020. The rent increase of 4% is below the inflation rate of the last quarter and also below many of the newly agreed wage increases by workers unions in the German market. To shed some more light on the affordability of living in Germany, we have included a chart in the appendix of our Q3 presentation. In a nutshell, LEG offers a more affordable product in the market. Rent table increases contributed 1.8 percentage points to the total rent increase of 4%. Modernization measures in relating make up for 1.4 percentage points. The cost rent adjustments for our 32,000 rent-restricted units contributed 80 basis points. The cost rent increase, which is at least partially CPI-linked and can only be implemented every 3 years translates into an increase of 5.5%. On a like-for-like basis, the in-place rent for the free finance part of our portfolio increased by 3.7% to EUR 6.87 per square meter. The strongest rent increase with 4% was executed in our stable markets, followed by the high-growth markets with 3.9% and the higher-yielding markets with 3.1%. The rent increase for the free finance units was positively impacted by dynamic rent table increases in locations with a bigger number of LEG units located there. This includes Ki with an increase of 15.6%, Monster with an increase of 13.3% and Dortmund with an increase of 5.8%. You might want to spend a second on Slide 35 in the appendix. We provide you with an informative overview of expected new rent tables for our top locations to be published by the municipalities sometime between today and end of next year. Some studies will finally change the type of rent table from a simple to a more scientific-based qualified rent table. As an example, PAM, a city in West failure has released for the first time a qualified rent table. Due to the 3,800 units we hold there, it is a relevant location to us in our higher-yielding markets. The rent table showed an increase in the mid-tier segment of the rent table at 26%. While we are happy to see the market development much better reflected in the qualified rent table, please do not assume that this headline number is anywhere close to the rent increases being executed by LEG as we certainly have developed rents also in the past by using a group of comparative apartments. You can see on Slide 13 that we decreased our spending significantly in the first 9 months of the year. The adjusted investment per square meter declined by 22.6% to EUR 2.32 per square meter. This corresponds to a total savings of roughly EUR 70 million and was the main driver for the strong improvement of our AFFO. Adjusted investments, among others, do not include new construction activities on capitalized subsidies received as well as internal profits in connection with investments, reflecting our cash-focused steering approach. The new construction costs remained at around EUR 20 million, which is close to the previous year's level. When it comes to the development of adjusted CapEx and adjusted maintenance, there is no change in the trend compared to the first half of the year. Adjusted CapEx per square meter, the larger part of our investments declined by 40%, while adjusted maintenance per square meter increased by roughly 25%. This adverse development is a pre-accounting effect as the capitalization ratio declined significantly from 74% to 57%. Due to our new cash focus hearing approach, we gave up steering on the capitalization ratio as it led to higher spending. After 9 months, our investments are still below the guided level of EUR 35 per square meter. As always, investments will pick up significantly in Q4, i.e., reached a level of roughly EUR 13 per square meter, while the average level per quarter has been only EUR 7.50, so far. Payouts for investments are driven by the completion of work and a higher share of those completions are expected to taller. Therefore, AFFO in Q4 will be much lower compared to the previous quarter. And with this, I hand it over to Kathrin.

[Kathrin Köhling, executive]

Thank you, Volker, and good morning to everyone also from my side. I will continue with the development of our key P&L items on Slide 15. In the first 9 months of the reporting year, net cold rent was up 4.5% to EUR 623.5 million. This was mainly driven by our strong organic growth, which contributes 85% of the EUR 26.9 million increase. The remainder is net effect from additions to our portfolio, especially new build, less disposals. The recurring net operating income was slightly positive and increased by 1% to EUR 516.9 million. The prior year figure of EUR 511.7 million has been adjusted to the calculation method that we have applied since the beginning of the year. Maintenance expenses for externally procured services as well as own work capitalized are therefore no longer included, but are considered further down in the P&L in the FFO 1 and AFFO. On this basis, the NOI margin declined by 290 bps year-on-year, in line with the first half figures, this is mainly due to higher operating expenses. These account for EUR 11.6 million and include higher nontransferrable operating and heating costs such as CO2 costs that cannot be charged to our tenants. With an adjusted EBITDA margin of 81.4%, we are well on track to meet our full year target of 80%. This reflects our steady pursuit of efficiency in both operating and admin divisions. Furthermore, the line item recurring other services contributed EUR 11.7 million, driven by our forward sale of green electricity. Finally, the AFFO, our most important KPI developed strongly with an increase of 54% to EUR 176.9 million. Obviously, we must consider this number against the background of the still low level of investments. catching up on our full year investment target of EUR 35 per square meter will surely be reflected in a considerable lower AFFO for the fourth quarter of 2023 as Volker also explained. All in all, this will lead to a full year 2023 AFFO at the upper end of our guidance range of EUR 165 million to EUR 180 million. Now please turn to Slide 16, where we have prepared a more granular overview of the AFFO drivers of the reporting period. Just to sum up, the positive effects in the first 9 months clearly came from our sustainable organic growth, reduced investments and the forward sale of green electricity. This was partly offset by higher operating expenses and higher interest expenses. Moving to Slide 17, which gives an overview of the current portfolio valuation. As always, there was no revaluation in the third quarter. Therefore, the gross yield of the residential portfolio stands nearly unchanged at a sound 4.6%. This translates into a multiple of 21.5%. The net initial yield based on the EPRA definition is 3.7%. The gross asset value per square meter for residential properties is EUR 1,677 on average, ranging from EUR 2,299 per square meter in the high-growth markets, down to EUR 1,166 in the higher-yielding markets. Certainly, interest in our outlook for the portfolio valuation as at end of December is much higher than on current numbers. However, it is currently not easy to come up with the guidance as the transaction markets do remain very challenging. Nevertheless, having looked at the market intensively over the past few months and discussed a lot with our appraiser, CBRE, we now feel comfortable to provide you with the forecast for the H2 valuation of our assets. As of today, we expect a further devaluation in the range of 4% to 6% for the second half of 2023. This reflects our expectation that the downward momentum eases somewhat. We certainly must differentiate between market segments here. In our higher-yielding markets, the current gross yield of 6% of a sufficient spread towards the 10-year German bond yield. We therefore assume that the pressure will be more on the high-growth market segment and anticipate stronger devaluations in these areas. I am now on Slide 18 to provide an update on our refinancing. Another important topic and my top priority since taking over as the CFO as of April 1. Numbers on the slide are pro forma, meaning they already include all of the refinancing we signed as of today. If you look at the bar chart on the left, you immediately noticed that we are now through with all the maturities for next year, except for the small amount of EUR 30 million. We redeemed our EUR 500 million bond, which was originally due in January 2024, early at the end of October. The next maturities of secured financings are now upcoming in May 2025, 1.5 years from now, followed by the convertible due in September 2025. All in all, we agreed on financing for over EUR 900 million at a blended 3.89% for 8 years. We used a mix of roughly 90% secured financing and around 10% unsecured debt. The latter is the EUR 100 million tap of the 2031 sustainable bond, which was already executed in July. As a result, the average interest cost amount to 1.65%, 39 bps up on 9 months 2022 with average debt maturities of 6.6 years as of November, making it roughly comparable to 9 months 2022. Thus, our average interest costs are only rising slowly and remain clearly manageable. Another positive outcome of our refinancing activities is the release of secured assets with a total book value of more than EUR 760 million, following repayment of around EUR 185 million of loans. Taking all refinancings into account, this provides a headroom of more than EUR 1 billion on additional secured financing. We could bear a valuation decline of more than 25% until the unencumbered asset test is reached. At the reporting date, we had a cash position of EUR 326 million, including short-term deposits. We extended our revolving credit facility by another 3 years until October 2026 at unchanged conditions and added an additional RCF of EUR 75 million. Furthermore, as another financial cushion, there is still our commercial paper program of EUR 600 million. Our interest hedging rate of around 94% is unchanged compared to both financial year 2022 and Q2 2023. Our LTV at September 30, 2023, increased to 46.8% from 43.9% as at year-end 2022. This was driven mainly by the devaluation effects in our property portfolio. We have now set a new medium-term target level for the LTV to better reflect the changed market environment and aligned with Moody's rating methodology. It has been said medium term at 45%. Our cash altering approach will certainly help to reduce the LTV number, so watch disposals. But let me reaffirm we would either sell assets at substantial discounts nor would we rush into structured deals with an asymmetric risk return profile. In terms of further refinancing, I want to highlight that we are not dependent on bond markets in the short to midterm. Hence, the recent rating downgrade to mood by Moody's has no consequences so far. Our existing bonds are not affected as they don't have step-up clauses. And finally, with the BAA2 rating LEG is well positioned within the investment-grade rating. And with this, I hand it over to Lars for the outlook.

[Lars Von Lackum, executive]

Thank you, Kathrin. I'm now on Slide 20. For 2023, as of today, we expect to reach the upper end of our guidance range for the AFFO of EUR 165 million to EUR 180 million. We confirm our adjusted EBITDA margin guidance of 80%, our rent growth guidance of 3.8% to 4% as well as the investment target of EUR 35 per square meter. As just explained by Kathrin, we adjust our medium-term target level for the LTV to 45% in the medium term. All other parts of our guidance remain unchanged. Let me conclude today's presentation on Slide 21 with our 2024 guidance. As always, we provide you with a full-fledged guidance, although the geopolitical risks have increased substantially. However, convinced of the resilient nature of our business and excellence of our operations, we feel comfortable to share a set of numbers with you. For all of 2024, we will continue to follow our strategy of cash is king and AFFO remains our dominant steering metric. We expect AFFO to increase to EUR 180 million to EUR 200 million. This implies that we further increased the cash generation of our business by offsetting the negative effects from higher interest rates, the normalization of the profitability of our green electricity production capacity as well as general cost effects. We expect the EBITDA margin to decline to 77%. The decline results from the one-off gain of the forward sale of green electricity in 2023. We expect rents to grow by 3.2% to 3.4%, which represents a 20 bps increase on a like-for-like basis over 2023, which saw already the strongest rent increase in LG's history. We reduced investments further down to EUR 32 per square meter, a driver for further optimization of the cash generation of our business. Certainly, we will make use of the new subsidization regime. Those are unfortunately still uncertain when it comes to magnitude and timing, but we are confident to see a decision until year-end. Obviously, we stick to our new medium-term LTV target level for 2024 as well as our dividend policy. We also provide you with our new ESG targets. As you see for the short-term target, we continue to strive for a CO2 reduction of 4,000 tonnes. Despite bringing down our investment level, we do not give up on our decarbonization path. This is the effect from gradually substituting traditional refurbishment approaches by new technologies as well as nudging activities. We also provide you with a long-term target when it comes to our air-to-air heat pump initiative. We aim to install and commission 2,000 heat pumps by 2027 with in LNG, but also for third parties. This is a lower level than originally assumed when we introduced the initiative and aimed to install around 7,000 heat pumps by 2027. One reason is that we want to get a clearer picture on the local district heating planning before starting substantial investment activities ourselves. The other reason is that we continuously enlarge our toolbox when it comes to CO2 reduction. One of our latest tools, offering an even higher CO2 reduction per invested euro are the smart terms that uterus, where we made substantial progress. In a situation of limited financial means, we certainly allocated more money to that initiative. I hope these explanations bring some more insights regarding our guidance for 2024. And with this, I hand it over to Frank. The complete management team and I are happy to answer your questions now.

[Frank Kopfinger, executive]

Thank you, Lars. And with this, we begin the Q&A session, and I simply hand it over to you, Maria.

[Operator]

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator's Instructions]. The first question is from the line of Thomas Rothaeusler with Deutsche Bank.

[Thomas Rothaeusler, analyst]

One question actually on rental growth. I mean, you expect only a slight acceleration of rental growth for next year if we focus on the freehold space. I mean, one of your peers sounds much more update, I would say, actually referring to better rent table outcomes. Just wondering how you look at this wide gap between you and one of your peers? And also maybe more specifically, what is basically your expectation for rent table growth for next year?

[Lars Von Lackum, executive]

Well, Thomas, thanks. I take this question. I think if you look at peers, you always need to first look at how everyone does this calculation. We include in our rent growth guidance, only pure cash effects that we can execute next year, and we do not include any effects from new build buildings. So it's only based on a like-for-like basis, i.e., on the existing buildings as they stand today and what we expect to grow rents next year. So that's, I think, very important to keep in mind. And with regards to the rent growth, we expect the rent growth momentum to pick up once the rent tables -- new rent tables come in. If you look in the past, you always have the gap when inflation starts and it's reflected in the rent tables from 2 to 4 years, and we expect that this will also hold true for the future. So we are very positive on uptaking rent momentum in the future, but this will need some time.

[Thomas Rothaeusler, analyst]

Okay. I mean you referred to HAM as an example, which I think you said 26% plus as a result of, to understand first time detailed rent table. I mean, is this something we should expect in general for cities, which have to come up with a rent table for the first time.

[Lars Von Lackum, executive]

Well, Thomas, I think that's a very difficult question to ask because the qualified rental are based on more scientific-based calculations and they are made by experts there. And we have a view on the local markets, and we rent new -- well, when we have churn, we rent the plants at a higher price. So we expect that there is momentum in these markets and that there will be a substantial positive impact from new qualified rent tables, but we also need to keep in mind that we managed to increase rents sometimes above the rent table, the existing rent tables by using comparative apartments. And so yes, there is expected rent growth from these expected from the new qualified tables, which is significant, but it will not be the same percentage. We cannot increase our rent by the same percentage as we are already above the existing tables. Last one, again on rental growth.

[Thomas Rothaeusler, analyst]

I mean, if you look into next year, would you say there is more growth for your higher growth product versus the higher yielding? Or what is your view on that?

[Lars Von Lackum, executive]

Well, I think that the high-growth markets -- the name of the market the high-growth markets because we expect a higher growth there. So that's why we labeled the market as they are. But you see that the trend is in all 3 markets, more or less the same. In the first 9 months, we saw a very strong increase in the stable markets. So we see the pullover effect from the very tense high-growth markets where it's hard to find new flats and where the churn rate is lower and we see the spillover effect in the stable markets and also in the higher growth, higher-yielding markets. So yes, I think the -- overall, the rent growth in the high-growth markets will be the highest, but it will be in all markets and you always have to have in mind that in the high-growth markets, you have the mid-price premise.

[Operator]

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

[Jonathan Kownator, analyst]

Numbers question, sorry, but can you please help me reconcile your guidance for 2024? You're guiding to EUR 180 million to EUR 200 million AFFO. I know it's not part of your official guidance, but you're also guiding to EUR 440 million to EUR 470 million for FFO 1, right, which implies a CapEx of around, say, EUR 260 million to EUR 70 million. And you've also said that the capitalization ratio should be lower now that your CapEx is lower. If calculate that ratio implied by that guidance, that would mean around 76% of capitalized ratio, and that's based on EUR 347 million total maintenance and CapEx. So what am I missing here? Is the capitalization ratio assumed for next year higher at 76%? Or should the FFO 1 guidance be lower than at below EUR 440 million? Yes, that would be my first question, please.

[Lars Von Lackum, executive]

Yes, and thanks a lot for the question, Jonathan. So once again, so please -- what we tried to do was really just give you a bit of a flavor around the FFO 1 because we know that a lot of investors, a lot of analysts still look at the FFO 1. But once again, we do not give a guidance on that number. So that's definitely not a guidance. We are guiding on the AFFO Therefore, with regards to the capitalization ratio, that will be just the result of the decisions being taken on the ground on a day-to-day basis on where to spend the next euro. And that might certainly impact the capitalization ratio. And that is the reason why we will have and need that flexibility between the maintenance bucket and the CapEx bucket. What we can definitely tell you is that we make sure that finally, we will end up with a positive result on the AFFO and an increase of around 10%. What we cannot tell us if today is whether we will really meet that $440 to $470 because that is the flexibility which we have newly implemented and therefore, that will have some flexibility. And please also take into consideration that certainly, the subsidies being received still depend on the GEG and the BG, which is to follow that. And the subsidization regime has not been finally decided on. So therefore, that also might have an impact on the numbers which we are presenting as of today.

[Jonathan Kownator, analyst]

Okay. That's clear. Just to clarify, so that ratio is not something discretionary. I mean it depends on how much you can capitalize the subsidies. I mean how does that work exactly through is not on Tiestually? Or is it fully discretionary?

[Lars Von Lackum, executive]

No, it's not. So it always, it depends on certain investment thresholds you need to meet or not to meet. And then it will either be capitalized or not be capitalized. And as well, certainly with regards to the subsidization regimes, certainly, you will need to meet certain investment requirements until you will be entitled to apply for a certain subsidization. So all of that, therefore, just is more moving parts than in the past. And therefore, it is even more to give you any flavor around the FFF1.

[Jonathan Kownator, analyst]

Okay. Understood. So effectively, if that ratio comes back to last year, then that's the guidance. And then if it's more in line with next year, FFO 1 would be lower. Okay. Just on the margins for next year, just trying to understand the guidance as well. You're saying you're getting to 77%. So the difference between this year -- and last year -- sorry, the difference between 2024 and 2023 will only be the electricity part of one-off gains on electricity. There's no further impact to expect from what we've seen in 2023 on higher operating costs?

[Lars Von Lackum, executive]

No. So what our expectation for next year will be is that we keep a strong and strict view on all the costs and meaning that we try to freeze admin cost base, we try to freeze the operational cost base while at the same time -- and once again, that's unfortunate, but very lucky, I think, for this year, we have taken a brave decision in 2022 to presell all of that electricity at a very attractive price, but that is something which definitely will not be repeated in 2024. So we needed to pull out that part -- and I think it's already quite ambitious to make up for all the interest rate increase to make up for the inflation and all the other cost pressures and also to make up for the EUR 22 million, which we are expecting up to EUR 222 million from that forward sale of green and electricity, but still come up with an AFFO of plus 10%. The impact on the EBITDA margin to be precise, Jonathan, is exactly losing that additional profitability on the green electricity. That's the main driver there.

[Jonathan Kownator, analyst]

Okay. So you're effectively improving your margins by cutting some costs, but then there is also inflation elsewhere. So ultimately, you're expecting it to be flat?

[Lars Von Lackum, executive]

Exactly.

[Operator]

The next question is from the line of Marc Mozzi with Bank of America.

[Marc Louis Mozzi, analyst]

I have only one question, which is still around your strategy, which is cash is king. In that consideration on the basis of that consideration, why would you keep your dividend guidance unchanged and even think about distributing the proceed from disposals? Because if I try to make us square circle here, on one side, you have a 45% guidance LTV, which with another 10% capital value decline ahead will potentially force you to raise EUR 1.2 billion of equity on saving about EUR 200 million of dividend if it's the math I'm calculating, would mean a pretty substantial portion of that EUR 1.2 billion needed just to be at 45% loan to value if capital value were to be down 10%, assuming obviously no disposal, which so far has been the hard reality. Can you just help us having a view on what sort of dividend we should expect for this year?

[Lars Von Lackum, executive]

Yes. Very happy to do so. And once again, just to reaffirm, -- so what we did today, we reaffirm the current dividend policy mark. And what we didn't do is to say that we are paying out the dividend as of April or May next year. So once again, the decision will be taken March next year. As of today, we feel comfortable to say that we are prepared to run along the dividend policy because I think we made substantial progress while we're working along the lines of a clear cash steering for the complete organization. And therefore, that was what we reaffirmed today. That -- and that's -- for sure, we need and part of the proceeds coming from the sales in order to keep our LTV under control. And it's quite obvious that this is the only mean which really helps with regards to LTV. So therefore, please do not assume that we are talking a big share of the transaction proceeds being put into the dividend as of next year if we come to a decision in March 2024 for that.

[Marc Louis Mozzi, analyst]

Yes, I get that. But it's about EUR 200 million of savings. So I can't see where you might need EUR 1 billion class of equity, just to keep your LTV flat, you would take the option of paying a dividend. I'm just trying to -- while you've cut your dividend last year, so why not this year again, while capital value are continuing to decline the most likely they're going to continue to decline next year according to CBRE I'm sure you're aware of that we're all aware of that.

[Lars Von Lackum, executive]

Yes. Marc, I think I shared all our thinking around that as of today. So let's wait and see what happens over the course of next 5 months.

[Operator]

The next question is from the line of Andres Toome with Green Street.

[Andres Toome, analyst]

I guess I just had a follow-up on Marc's question as well and just coming to the fact that it's quite contradictory that you're still thinking about potentially paying a dividend, whereas your LTV clearly is on an upward trajectory. And then it doesn't really sound like you're going to ramp up disposals as you're sort of excluding big sales and then also structured sales. So what is the actual game plan here to keep the LTV under control? And maybe against that, what's the sort of next threshold from Moody's for downgrade? And where is it the threshold for -- on the LTV to fall into junk territory on Moody's paces.

[Lars Von Lackum, executive]

Yes. Thanks a lot for the question, Andres. I will shed some light on the disposals. Honestly, that's the only way we can keep LTV under control. And that just requires hard work, and I think Volker already outlined that during his presentation. So what we do is being in the market with our 5,000 units, which now certainly has been reduced a bit to around 3,500. And certainly, we will take another review of our portfolio at year-end and perhaps also add the one or the other asset again. And that is what we are working on, Andres. We are industries and try to really realize direct divestments on a regular basis. But if we do not are -- and are not able to agree on reasonable pricing on reasonable terms and conditions like yesterday night, we just unfortunately broke apart from a deal which was worth around EUR 20 million. Then it is just our decision to not do that if we are not able to reach book values and reasonable terms and conditions for our shareholders. And that is exactly how we will continue to work on it by just realizing small direct divestments.

[Kathrin Köhling, executive]

And maybe in terms of your question regarding Moody's, I mean, of course, we are not happy about the downgrade that just happened. But from what we understood from Moody's and from what you could read from the Moody's report about LEG, we are now in a pretty stable BAA2 rating. So they were quite upfront even in terms of further devaluation of up to 8% for this and next year combined. And then we will still be very, very stable in our BAA2 rating. So here, we feel quite comfortable given the current situation.

[Andres Toome, analyst]

And yes, my second question is just around the politics, maybe, certainly, there's been Horizon in AFG in Germany. So trying to also understand how does that going to affect immigration in your view as we're also seeing the coalition party sort of thinking a more anti-immigration stands as it comes to protecting their positioning in CFT.

[Lars Von Lackum, executive]

Yes. Andreas, it's difficult to read from the outside. You might have seen that the Minister President of the states met with the chancellor beginning of this week. -- there seem to be an agreement, at least with regards to financing of refugees coming to Germany, but that was pulled apart immediately afterwards by the Christian Democrats. So therefore, even between the 2 biggest democratic parties, the social democrats and the Christian Democrats that does not seem to be a joint view on how to handle the current migration into Germany. So therefore, it's quite difficult to predict how this will continue. I think all parties have understood that we need to have migration of skilled workers continuously into Germany. You know the number, which runs around 400,000 people migrating into Germany on a yearly basis. That seems to become a knowledge. And therefore, yes, that might impact the number of refugees coming into Germany, but I doubt that it will impact the number of skilled work is coming into Germany. And regardless whether the AFD gains more voting support in the German market or not.

[Operator]

The next question is from the line of Florent with Bank of America.

[Unknown Analyst]

Can you please explain why you changed the LTV medium-term target from 43% to 45%, please?

[Lars Von Lackum, executive]

Very happy to do so. So it was in the midst of the range being set by Moody's for us, and we are now going to the upper end.

[Unknown Analyst]

Okay. So this change to case was driven by Moody's downgrade.

[Lars Von Lackum, executive]

Yes. So it was not driven by Moody's downgrade, but it just tells you that while earlier on, having the 43% being well within the limits of Moody's rating methodology for a Baa1 rating, we are now going to the upper end of it and therefore, aligning it with also Moody's approach to rating LG within their credit rating spectrum.

[Unknown Analyst]

And therefore, should we understand that you're not aiming at going back to Baa1 over the medium to long term?

[Lars Von Lackum, executive]

No, you shouldn't read that from that. It is just adapting to the current situation where the transaction markets are once again very, very silent. Therefore, what we didn't want to do is to give you the impression that medium term, we can reach the 43% quickly.

[Operator]

The next question is from the line of Manuel Martin with ODDO BHF.

[Manuel Martin, analyst]

Sorry, I was on mute, excuse me. Two questions from my side, please. One question is a follow-up on divestments. What is your feeling on the divestment market? Are you still very far away the wide gap between the buyers and the sellers and what they think a fair price could be? Maybe you could give us some flavor on that, please?

[Lars Von Lackum, executive]

Yes. Very happy to do so, Emmanuel. So with regards to divestments, you've seen that there has been more movement at least on our end, and there has been more deals being really tapered. That is something which we can see in the market. So there is strong interest affordable living in Germany by family offices, smaller companies, et cetera. So it's not that you do not have regular talks. The pricing pressure that was something we also tried to share during this call from our perspective, is easing that downward pressure is easing. So it's less a discussion around pricing. But what we can see is a very tough negotiation on every part of the terms and conditions. And also there, I think you need to be careful to not agree on things you do not want to agree to you. So therefore, once again, so we are also willing to break apart if we are not able either to agree on the price or the terms and conditions, which we consider to be market standard in the German market.

[Manuel Martin, analyst]

Okay. I see. And also in that regard, when it comes to disposals, could share kind of yield range where you dispose your assets? Is that possible?

[Lars Von Lackum, executive]

Honestly, that's very difficult, Manuel because what we are doing, we are very much focused on the lower end of the spectrum, quality spectrum, but we are also willing to give access if we have direct incoming calls for higher-priced assets also in high-growth markets. It's been more single assets. But therefore, we have a wide range. Therefore, that range, I think, doesn't help you to really make up your mind manual. So you can still sell assets with a multiplier above 30, and that is possible. But at the same time, you also sometimes sell off with a multiple of 8 if you really have a noncore commercial asset, which just needs to be torn down. So that is the broad range of multiples I can offer, which I think is, as always, a broad spectrum of whatever quality you can have on your books.

[Manuel Martin, analyst]

Okay. I see. Last question from my side on the investments that you're doing in your portfolio. So you will decrease the investment next year from EUR 35 to EUR 32 per square meter. I think that's a, that seems to be the major driver for the increase in AFFO. If I calculate EUR 3 times 10 million square meters. And the similar headroom to the downside in the investment program. That means is 32 the end? Or is there still a bit of room to maneuver to the downside?

[Volker Wiegel, executive]

Well, Manuel, I can maybe shed some light on this. We think that the EUR 32 is a sweet spot in growing rents at the same time and keeping the cash discipline on the other hand. So these are both communicating tubes. You also have to take this into mind into account. And so of course, it could be lower, but it has no impact on the other goals and the 32 is the figure we aim to steer the investments for next year.

[Operator]

The next question is from the line of Paul May with Barclays.

[Paul May, analyst]

I've got a few moneys, which I'll come to at the end. But just -- I mean the main thing is transactions, valuation movements and leverage, which I think leverage is going up, continuing to go up, transactions are coming down. Those your selling tend to be at high yields I think average selling price, 58,000 implies somewhere around a 6% gross yield, probably 6% plus average gross yield on your disposals. So what gives you the confidence on the sort of various metrics that one, the transaction market will open up at sub-5% or around 5% gross yields, i.e., why is the valuation of 4% to 6% right when nobody knows. Nobody has any idea. CBRE have no idea on that. So what gives you confidence that is the right number that will unlock the transaction market when actually disposals are more coming in the 6 plus range, not the 5% sort of level on a gross yield basis, leverage continues to move higher. I think you'll be somewhere around 50 LTV, possibly knocking on the door of a further downgrade potentially, if you look at the sort of metrics that Moody's are looking at. And those sales, as I say, are seemingly quite difficult to come by other than a very high yield, which isn't the majority of your portfolio. So just trying to get an understanding as to how you reconcile everything and how you basically get out of this situation that you're in, which is leverage moving higher values coming down, transaction volume is not really being there other than that materially higher yield, which is quite punitive on an earnings basis.

[Lars Von Lackum, executive]

Yes, very happy to take that question, Paul. So we get out by hard work. So we certainly will increase rents. We will get down vacancy. So we will do operationally, whatever is possible, keep costs under control, be lower in spending in order to increase the cash conversion of the company. At the same time, I think we are also working hard on the transactions. That -- and you're rightly assuming so, it is hard work doing those transactions. Our assumption once again, and that is what we can see in the market, and we also realized those prices, it is a big difference of which type of assets we are selling our and that was always our intention to be with high yielding in the market, and that is exactly what we sold in majority, higher-yielding assets in the market. And therefore, from our perspective, and that is why -- because we are in the market every day with the assets, we are doing negotiations on an everyday basis. We have the confidence that at the current situation, we are seeing less pressure on prices, but more pressure on the terms on conditions, which gives us the feeling that we are seeing a bottoming out of the market, and that should enable normally then as a next step, more transactions being done really on the current level, which we assume to be around another -- after another devaluation of 4% to 6% of our assets.

[Paul May, analyst]

Just on that, as you say, you're selling high yielding, which is, I think, fair at 6 is a gross yield seems reasonable given the rental growth in the higher-yielding markets is not massively different to the other markets. I think you mentioned in the presentation, greater valuation decline in lower-yielding assets. I think that's a step change relative to what we've seen previously. I think the valuation decline has been broadly similar across the different yield ranges. So you're now saying that there is a sort of come point coming where lower-yielding assets are just not attractive to buyers, and therefore, the valuation decline is not going to be 4% to 6% there. It could be double digit there to get those yields higher, but you're comfortable that the 6%, the high-yielding markets are not going to see much valuation decline. Is that the right way to think about it? And then sort of allied to that, you say continuously, and I think you said all the way through the process. you will not sell below book value, book values are down, give or take, 18% from peak, if you assume your second half valuation decline probably more so in the high-growth markets. I mean, what is book value really other than an arbitrary number that somebody has chosen to guess at any given time, surely, the book value is the market value, which is the price you can sell. And if that price is 20% below what your theoretical book value is, but that's just the market price. You need to sell assets at the market price, not as a theoretical book value. in order to deleverage. I just want to understand all of those different dynamics. Obviously, your portfolio has a broader yield spread than maybe some of your peers.

[Kathrin Köhling, executive]

So maybe just to start off, you were saying that in the higher-yielding segments, we had a higher devaluation. So just to clarify. So in H1, our devaluation on the high-growth markets were much higher than on the stable and higher-yielding market. So we devaluate our high-growth objects by 9%, while in the stable markets only with 6.3% and then in the higher-yielding markets was 6.1%.

[Lars Von Lackum, executive]

And with regards to the second part, it's certainly a very difficult question. But from my perspective, as we do a mark-to-market with regards to IFRS, that should reflect the current market value. in declining in situations with declining prices. As you know, Paul, it's difficult to convince the one or the other to take a step and buy into assets. Currently, we feel that there is more interest in those assets. And therefore, we also gain more interest, and that is something which we then finally hopefully can paper in the one or the other deal until the year-end. We are including constructive talks with one or the other parties. So there are no portfolios to be signed until year-end. And that is something which gives us hope that with regards to the difference you are referring to between the accounted for numbers and the market values that is narrowing in now quickly.

[Paul May, analyst]

Okay. Sorry, just to finalize on the point just so I'm clear in my mind. You're saying you're selling higher yielding. So value decline is likely to be less there. You can't sell high growth or low-yielding it's not really high growth because the gross is the same, let's say, low-yielding assets because the valuation just doesn't make sense for buyers. So is it fair to say that you'll see a closing of that yield gap between your high yield and your high-growth markets? Is that kind of what you're expecting over the coming 12 months or so? Is that a fair assumption? Which just happened already a bit, as you say, and you expect that to accelerate.

[Lars Von Lackum, executive]

Exactly. So at least we expect this to happen within H2?

[Paul May, analyst]

Okay. A couple of my new show bits. Are you able to expand on the cash -- I think you mentioned your cash cost of interest at 3.89%. What's the all-in financing cost on those deals? Because I think a number of them are bonds that effectively have a payment in kind, built into them. So the coupon is low, but the all-in cost will be higher. I just wondered if you had a number there is the all-in financing cost.

[Kathrin Köhling, executive]

So the 3.89% is obviously the cash interest cost that go into the FFO 1 and the AFFO calculation. And the all-in yield on all the refinance that we did was 4.4%.

[Paul May, analyst]

The last one also, I think CapEx has been coming down. It's guided to come down further. I think only -- am I right in saying any 13% of your portfolio was grade -- was above Grade C from an EPC rating, I think as at the year-end, but maybe it might be in the half year, but I think it might be at the year-end last year. Obviously, you need to improve that, I'm assuming, moving forward. How does that reconcile with the lower spend year-on-year and moving forward versus the need to invest in sort of energetic modernization or the green or the sustainability or the improvement. I appreciate you've got your targets on sustainability. Those wonder how those things are reconciled. Is it just more of your spending is going into that investment and less into the traditional modernization, just to get a sense.

[Lars Von Lackum, executive]

And you already get yourself the answer for that. Policy for just taking that, but that's exactly the case. So we are not at all steering investments according to the EPC classes. So please be not so focused on EPC classes. They do not help anything because some of those EPCs are as old as 10 years. They differ very much. So there are some which are consumption-based some which are based on the building shell and the requirements of energy to be put into that. So therefore, what we do is certainly -- and as always, and to drive down the cabinization within -- or the cabin footprint is by really doing the smartest investment with the next EUR 3 into the measure which reduces CO2 the most. And that is why we always show that decarbonization path, which is CO2 per square meter. And therefore, we are so much about that innovation. And we are also willing to reallocate funds quickly if we see that there is a new option to bring down CO2 quicker by means which comes at a lower cost. So that is exactly what you were referring to, and that's certainly a huge help, especially for the buildings at the lower end of the EPC spectrum.

[Operator]

The next question is from the line of Neeraj Kumar with Barclays.

[Neeraj Kumar, analyst]

I have a bit of a direct question, which I think Paul and Marc were trying to ask indirectly. So my question is, would you consider a right issue if you were to feel that there is a risk of downgrade to PW3Moody's? And the reason I ask that question is because Moody's is already forecasting a 50% of debt-to-asset ratio, which is they don't get threshold to BAA3 rating.

[Lars Von Lackum, executive]

Thanks a lot for the question, Yuri. Look, we have just been downgraded to BAA2. We are very, very comfortably within that range. We do not, at the current moment, see any need to do anything about capital. We are working hard on the operational side. We are working hard on the refining side. We are working hard on the transaction side. So therefore, we are feeling very comfortable within that BAA2 range.

[Neeraj Kumar, analyst]

All right. And I think probably the second question is, are you considering getting rating from any other rating agency given you just stated that you are not happy with the downgrade.

[Lars Von Lackum, executive]

It's always -- that's an option. And you're right, but they currently do not consider that, that always comes with an additional cost. And I think we have very constructive dialogue with Moody's.

[Operator]

The next question is from the line of Robert Woerdeman with Kempen.

[Robert Woerdeman, analyst]

Just one follow-up question and just to check if I understood it correctly, I believe Kathrin mentioned something about an 8% write-down that's currently incorporated in Moody's assumption. Is that correct?

[Kathrin Köhling, executive]

If you read the Moody's report on our downgrade, then you read that they already anticipate a further 5% for this year and a 3% valuation decline for next year. This is not what we see, but this is what they see. And if this were to happen, they would still see us comfortably in the BAA2 range.

[Robert Woerdeman, analyst]

Okay. But another minus 3% for next year still screens quite conservatively right. So I guess you just mentioned that you're very comfortable still on the Ba2 level. But as you also mentioned that probably some write-downs on the lower yields is still necessary. Is it really that comfortable then?

[Kathrin Köhling, executive]

So we -- I mean we were hardly able to give you a guidance for this year. So we do not feel comfortable to give you a guidance for valuation development next year, sorry.

[Operator]

The next question is a follow-up question from Florent Egon with Bank of America.

[Unknown Analyst]

Just to follow up on the difference in yield between the cash yield and all-in costs of 3.9% and 4.4%. Can you please explain the gap again, please?

[Kathrin Köhling, executive]

Sure. Happy to reiterate. So we did refinancings of over EUR 900 million. Around 10% of those were on an unsecured basis, which was our sustainable 2031 bonds that had an all-in yield of 5.48% and a cash coupon of 0.75%. The other EUR 800 million were secured financings and we're obviously at a higher cash coupon of around 4.28%. So on average, this makes 4.4%.

[Unknown Analyst]

So the difference is really explained by the top.

[Kathrin Köhling, executive]

Yes.

[Operator]

The next question is a follow-up question from the line of Paul May with Barclays.

[Paul May, analyst]

Sorry, apologies for that. Just a follow-up from my colleague, Neeraj's question. And I think you mentioned a number of times through the presentation, the not wanting to do asymmetric structured deals in terms of a risk return profile for the buyer and seller. I just wondered, how do you considered raising capital and being the buyer of those asymmetric deals? Because you mentioned the buyer from what you're saying is getting a better deal than the seller. I just wondered if you had considered potentially trying to be the buyer of those deals?

[Lars Von Lackum, executive]

Okay. So you cannot see us, Paul, that you can see -- unfortunately, not the worried phase of Kathrin as the CFO. So I think as quickly as we make progress on the transactions in the direct market. And if we would have had enough free money, I definitely would feel tended to look into such transactions because they offer quite a decent return. So therefore, unfortunately, we cannot. But if we could, we would look into it.

[Operator]

The next question is a follow-up question from Jonathan Kownator with Goldman Sachs.

[Jonathan Kownator, analyst]

Sorry, just another number of questions at this time for full year '23. Obviously, going to EUR 35 CapEx and maintenance is still a substantial gap. I think you alluded to AFFO potentially being quite low for Q4. Just to understand the maintenance component of that. Are we talking about another close to EUR 50 million of maintenance, i.e., not quite exactly what you spent today, but close to that. And as a consequence, are we expecting effectively AFFO to be close to 0 for Q4, is that what we have to think about.

[Volker Wiegel, executive]

Jonathan, I have to disappoint you, but we see it on an AFFO basis. So we look at the investments as a total and not into the split of maintenance and CapEx.

[Operator]

There are no further questions at this time. I will now hand back over to Mr. Frank Kopfinger with any closing comments. Thank you.

[Frank Kopfinger, executive]

Thanks, Maria, and thank you all for your participation and your questions. And as always, should you have further questions, then please do not hesitate and contact us. Otherwise, please note that our next schedule reporting event will be on the March 11 next year when we report on our full year results. 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. And thank you, and goodbye, everybody.

[Operator]

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