TAG Immobilien AG

XETRA:TEG

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the TAG Immobilien AG Q1 Statement 2020. [Operator Instructions] Let me now turn the floor over to your host. Mr. Martin Thiel.

[Martin Thiel, CFO & Member of Management Board]

Yes. Many thanks, and good morning, everybody. This is Martin from TAG. Good to hear again. Very much welcome to our Q1 conference call. And today, what are the topics we want to discuss with you. Of course, the Q1 results, but perhaps even more interesting in these days is the impact of the COVID-19 crisis on our business. And additionally, we want to report on the development of our business in Poland as well in the presentation that you hopefully have in front of you, which is also available on our website. So let's start with Page #4. That's the highlight slide for the first quarter 2020. Looking at the operational performance, which refers totally to the German portfolio, the vacancy rate in the residential units is up by 30 basis points from 4.6% at the beginning of the year to 4.9%. That's the development which is not unusual for the first quarter. We'll come to that a little bit later. Like-for-like rental growth, including vacancy reduction, basically stable and positive at 2.3% compared to 2.4% in the financial year 2019. Quite strong increase in FFO and by EUR 2.8 million quarter-on-quarter, now at EUR 42 million, and that translates into EUR 0.29 per share. Looking at the EPRA NAV and LTV, as expected, no major changes in the first quarter as we had no valuation in the first quarter. So the EPRA NAV or now called EPRA NTA, net tangible assets, so without any goodwill, without any intangible assets, at EUR 20.23. LTV at 44.6% compared to 44.8% at year-end 2019 sort basically unchanged. Positive news from our side regarding acquisitions. So we were able to acquire in Germany 865 units in the first quarter, an attractive nearly 8% gross yield. And also Poland looks very positive in this regard. We were able to secure land banks and projects of more than 1,100 units in the first quarter, mainly in Poznan as our second location in Poland after Wroclaw. Looking on the disposal side. In Germany, this is not really a material business that we have there, 48 units disposed. Poland was also in this regard successful with 205 units in the first quarter of 2020, which is an exceptional good number for our first quarter of our developer. That's, let's say, a quite normal picture from Q1, and I think definitely good numbers.And now the next slide on Page #5, where we'll take a look at the COVID-19 business update. Putting that more generally, the good news is that we see really limited impact from the current COVID-19 crisis. But let's start with how we behave in this environment. Of course, as a big landlord, like other companies, we have definitely a responsibility not only for our employees, also for our clients, for our tenants. So therefore, we voluntarily decided since the middle of March 2020 to stay away from any rent increases on the basis of adjustments to local competitive rents. So that means ongoing rent increases from the local niche figures has been paused since March 2020. And for us, this is clear it's, on one side, a commitment and a sign that we show to our tenants in these days which we consider to be something which is sensible; on the other side, of course, we see this as a kind of temporary situation. So therefore, yes, it's very clear, at some point in time, we have to get back to normal. And that this is also something that happens now in June or July that we go back to a kind of normal mode, so therefore, we don't expect any material effect on our like-for-like rental growth for the full year. Also, we're doing no terminations due to loss of income caused by the corona crisis. That's clear. That's also more or less what the law already says. And we have no evictions of inhabited apartments right now. Increased social engagement for nonprofit organizations is something which is also very important for us in these days. That's basically nothing new. You know that we are in locations where we really have a big focus on what we call neighborhood development. So the social engagement has always been part of our business, but we clearly increased that now and in the last weeks. And then coming to the numbers. And we think it's really good news to show you that the vacancy rates are stable and that we have no material impact on rent payments. So for example, looking at the vacancy rates, in the course of the first month of the year, we started at 4.9% in January in our residential units, which is by far the highest share of our portfolio. We've been stable in March and April and basically also stable in May, so 5.0% is the vacancy rate at the beginning of May 2020.Looking at rent receivables, they are basically on the same level compared to the month before, so no material increase. And the deferral of net rent so far has been really limited, which was just 0.4% of our tenants in the total residential units asked us for rent holiday and are currently not paying the rent. And looking at the commercial units, which is a small size of our portfolio, it's approximately 8.5% of the total commercial tenants who asked us for a rent holiday and are not paying the rents. Looking at the absolute amounts, you see this, this is a quite manageable amount. So it's approximately EUR 100,000 per month that we currently have suspended or deferred regarding the rent for residential units and approximately EUR 70,000 per month for the commercial units. So this is really a limited number. And so far, we don't expect any changes in that, especially not any increases in the coming weeks. Looking at the next slide. Of course, in these days, liquidity position and maturities is something important to look at. You see also in the balance sheet that we have enough cash, that we have unchanged 3 years before, EUR 120 million of credit lines fully undrawn. But for us, it's absolutely not a problem and absolutely as planned that we pay out the dividend, which is, by the way, tax free, again, after the AGM on the 22nd of May 2020 of EUR 0.82 per share. Also good news that we were able to do bank loan refinancings in March and April 2020. So this was something that basically happened right in the middle of the crisis. And that was something where we, of course, have been proud of that our banks are still fully committed to us and also the conditions were very favorable. So looking at the terms, EUR 143 million, new bank loans in 5 contracts with different German banks, with an average interest rate of 1.17% for 10-year maturity on average. That's, of course, definitely positive for us and reduces our average cost of debt. There are no major upcoming maturities in the next 2 months. So what we have in 2020 as maturities is EUR 65 million all in all, taking into account the bank loans, corporate bonds and some commercial papers. And for 2021, that's EUR 46 million basically or the most part of it is bank loans, so that puts us in a very stable financial and liquidity position. Looking at our business in Poland. Also here, we have definitely positive development. So the business in Poland has not been materially affected. The most important news is that the construction sites are still running, and I will come back to that a little bit later more in detail that we want to build up a pipeline of 8,000 to 10,000 residential units in Poland. And therefore, the construction sites are important for us so that we stay in our plans, and that's so far without any delays. Of course, the second quarter shows so far reduced sales from apartments. So in the first quarter, as I've said, we sold 205 units in Poland, that was in January and February, approximately 80 to 90 units per month on average, whereas in March and April, we have seen this to a number of around 30 units. But this is something that we consider to be temporary, and that's more something that is then linked to restrictions that we have in Poland as well as in Germany. So people at the moment simply are not leaving their houses if they don't have to. Visiting apartment and construction site for them is, of course, I think not that easy. It has been in January and February. But as the situation turns also in Poland, not only in Germany, more and more positive, we expect that the Q presales will be back on a level that we expected. So this should be clearly something temporary. Also important, the acquisition processes for new land banks and projects continue. A lot of that is done also from Germany, but the largest part is done from our colleagues at Vantage Development in Poland. So therefore, the current travel bans, so that means that borders between Germany and Poland are not open. This was not that important as we have a good team in Poland who's been responsible for the acquisition processes, and that continues. So this is an update from the -- regarding the impact from the COVID-19 crisis. And again, we think good news is that we are really stable and this business model is, as we expected, also very resilient.Then looking into our financial statements for the first quarter, and I'm now on Page 8 of the presentation. First of all, you see here detailed list on Page #8 regarding the P&L from Germany and the new P&L, the ones from Poland. We do this for -- to give you here full transparency, how the effects are. And of course, the effect from Poland in the first quarter is limited. So the numbers are small, but perhaps interesting to see the effect here in detail. So commenting on the development on the first quarter, generally, a very positive development with increased net rents, a slightly decreased net rental income, but this is something which is in the first quarter not that unusual. We had here higher maintenance costs. We had temporarily higher costs of vacant real estate. So therefore, it is basically in plan. Looking at the net income from sales results in Poland, you see that we have here a negative result of 700,000 units. But don't be confused, we don't assume that we have here sales losses. This is the effect of the purchase price allocation that we have to do in our consolidated financial statements on TAG level. So EUR 1.6 million additional cost of goods sold were implemented here. This EUR 1.6 million is a net number, so after deferred taxes. So looking at the local P&L in Poland, the net income from sales has been positive. That was a result or a net income positive of EUR 1.5 million. So this is really purely something, if you want so, technical or accounting-wise a negative result.We have no portfolio valuation results in the first quarter, as usual. So the next portfolio valuation will done at the half year. So we'll do this again twice this year. And looking into potential effects from this portfolio valuation at the end of the first half, I mean, we have not really final results so far, but for us, it is very clear that we expect a very similar result as we had in the second half of 2019 or in the first half of 2019. So looking at the absolute amount we had in the last 2 half years, around EUR 200 million valuation gain. If you ask me, well, what is a good estimate for that, perhaps a similar number should be something that we also expect. But please understand that this is more or less a preliminary thought on that. Very clear is we don't see in the market here any negative effect on purchase prices from the COVID-19 crisis. So therefore, when we talk with our value of security, the positive trend that we have seen in German residential and especially in the B and C locations where we are in, should also continue for the first half of 2020. Very clear, the second half of 2020 has more uncertainties. But if you look what we see today in the market, do we expect here a material negative development? No, that's definitely not the case. But of course, everything, and I think that's true for every business, depends on the further development of the COVID-19 crisis. I'm commenting on the net financial results, an increase or an improvement of EUR 500,000 quarter-on-quarter due to cheaper refinancings and also the tax effect -- so the cash tax effect was more positive than in the fourth quarter of 2019, so with approximately EUR 1.4 million reduced taxes. I'm now on Page #9, which shows the overview of the EBITDA, FFO and AFFO calculation. And important to explain how we calculate FFO I and FFO II in 2020. So looking at the FFO I, this is an FFO I that is purely generated by our German business. Also, this is the old TAG, so purely the German business, so therefore, FFO I in 2020 is completely comparable with FFO from 2019. And all the results from our business in Poland, which is mainly Vantage Development, is included in FFO II. So you see on the left side in the FFO II calculation, that, of course, on the one side, as in the past, the net income from sales in Germany are included in FFO II, that knew the results from operations in Poland is included and contributes to FFO II. And how we calculate this result from operations in Poland is shown on the right side of Slide #9, that basically the net income from Poland after minorities without any effects from the purchase price allocation. And if necessary, this was not the case in Q1. If there are any deferred taxes and if there are any larger one-offs, we would exclude them. So the idea behind that is that, a, the result from Poland is completely included in FFO II; and b, this result is a cash result from disposals. So looking then at the developments in the first quarter of 2020. I already said, a strong increase in FFO by EUR 2.8 million. Also the AFFO increased from EUR 19.4 million to EUR 21.3 million, an improved EBITDA, adjusted margin and looking at the results from operation in Poland. Now after the effect from the purchase price allocation, this was then already a positive result of EUR 100,000 for the first quarter of 2020. On Page 10, you see the balance sheet development. Just one small comment on that. For the first time, now we have a goodwill in our balance sheet from the purchase price allocation of Vantage. This purchase price allocation is still preliminary. But for now, we have a goodwill of around EUR 18 million, so not really a significant large number but just something to point out because it's also important for the recalculation that you see on the next page, on Page #11. We have 2 calculations on the left side. As EPRA announced new calculation way, the EPRA, if you look at it exactly, net tangible assets value in euro per share, that excludes not only the goodwill but also other intangible assets, other tangible assets. That's basically IT software, which is not really a huge number. And that leads then on a fully diluted basis, to an NAV of EUR 20.23. And also the old definition from 2019, would lead to an EPRA NAV per share and fully diluted of EUR 20.37. So that's not really a material difference, but the main difference is now the goodwill that we have in our balance sheet. Then I'm coming to Page #12, the financing structure. You see here the full maturity profile, and that includes all the debt that we have now taken over from Vantage, from our business in Poland. This debt is not really significant when looking at the amount for the total bank loans at the end of the first quarter, have just been EUR 6 million, and the bonds at Vantage issued in the past amounted to EUR 24 million of EUR 30 million of debt. And comparing debt with the cash that Vantage had under the balance sheet of the first quarter, which was EUR 46 million, that leads then to the fact that we have a positive net debt in Poland that is coming into our balance sheet now at the end of the first quarter. As already said, LTV -- on our LTV target of 44.6% was the exact number. And there's still the refinancing potential. So when I refer to maturities, when looking at the effects from the COVID-19 impact, this is something different compared to the refinancing potential as we have substantially bank loans where not the maturities are in 2020 or '21, but we have bank loans where the interest terms are ending. And we are then, from our side, able to reset it. We are able to cancel the contracts if we want. And that's, of course, something that we are planning in this environment with still lower interest rates. So still EUR 294 million of German bank loans maturing in the next -- up to 3 years, and that should give us additional financing cost savings. Then let's go to Page #15, where we show the development of rental growth and also the CapEx that we spent. We had increased CapEx in the first quarter. So analyzing that, we have been at EUR 16.80. You see this on the top right of Page #15, that adds up to total investments including the maintenance cost of EUR 23.6 per square meter, that's more in the financial year 2019, EUR 20.4, similar number. But you should not expect that we have for the full year really a material increase compared to 2019. So the full year numbers should be something perhaps a little bit below the current level, so it means that the CapEx strategy is unchanged. So we're not changing that to any large material modernization project, especially not for existing tenants. But we're doing more modernizations regarding vacancy reduction. You know already from the last financial year that we did a lot in the Chemnitz region. And as announced already in the last call, we are doing now more in the Berlin region, and there the focus is on the 3,000 units that we have in Brandenburg an der Havel, which is part of the Berlin region where we started already at the end of last year but more material in the first quarter, amortization program to reduce vacancy. Like-for-like rental growth was in total at 2.3%. That compares very well with the financial year 2019. And also the like-for-like rent growth without vacancy reduction was stable at 1.9%. And as I said, for now, we don't expect here really a material impact on the fact that we voluntarily suspended rent increases for now as we assume that this is something that is temporary and perhaps already in the third quarter, we will come back to a more stable and more normal. But for now, we thought that's something that we have to do as part of our social responsibility for our tenants. Then turning to Page #16, vacancy rate development. Well, it's not unusual for the first quarter that we have an increase in vacancy rate. Generally, the increase at all wasn't very strong, had increase of 30 basis points between January and March. So if you compare that with the financial year 2019 and 2018, you'll see, yes, also in these years, there have been increases, 20 basis points in the first quarter of 2019. Also 30 basis points likely in 2020 -- in 2018. So for what reason ever, there's a kind of seasonality in that.And looking into our region, yes, of course, we have in Berlin and Chemnitz some modernization programs, plus the seasonality. Plus what we really see as an effect, and that's true, especially for a region like Rostock that we have in this region, quite a lot of apartments that we rent out to students. So Greifswald, for example, is a pretty big university of Rostock, where we have, of course, in this regard, an impact from the COVID-19 as many students are now not hiring their -- renting their apartments. So therefore, that's not really material, but as explained in this region, a certain increase of vacancy rates. But as I said, this is nothing unusual for this type of figures. Then I'm now on Page #18, a quick comment on our acquisitions in Germany in the first quarter 2020. First of all, of us, very good to see that acquisitions are still working. And yes, of course, looking for -- if you want a more technical perspective, it's difficult to do due diligence processes in these days, but that still works. So we were able to sign in January and March contract for 865 units. Closing has already taken place, so in the end of March and the end of April, so these acquisitions will contribute to the FFO from the second quarter onwards. And the gross yields that we achieved was still very attractive at nearly 8%. And looking into our acquisition pipeline for the full year 2020, we're optimistic, so we see portfolios on the market that are interesting for us. Of course, difficult to give you a concrete guidance, but we should at least achieve what we have done in the last year or even before, so therefore, also acquisition markets are still open. If you ask me, well, do we see an impact from the COVID-19 crisis on portfolios on the market? No, not really, so we don't see any forced -- we don't see any drops in purchase prices, which is then on the other side, of course, good news for operation. It's more or less an ongoing process, but also this should be good news that these markets are not closed. Then I'm on Page #20. And you see here from Page #20 onwards, some slides regarding our business in Poland. Some of that, some of the content you already know. So the strategic rationale to start with this of our Poland extension is very clear. We want to build up here in a very promising market, which is the residential for rent market in Poland, a portfolio of 8,000 to 10,000 letting units in the next 3 to 5 years. We're doing this in the large cities in Poland. So far, we have 2 locations here, which are Poznan and Wroclaw. Other locations in the western part of Poland are also very promising, and we are working here on concrete acquisitions. And perhaps in the second quarter, we can already report here on concurrent further acquisitions in other locations. Looking at our plans, as you see here on the bottom of Page #20, a summary of what we are planning and what we have on current projects. So the total projects that we want to have in the build-to-hold projects until the end of 2024 is at least 8,600 units. And looking at the build-to-sell projects, this number should add up to 4,600 units that we want to build and to sell in this time. Out of this total volume of 13,200 units, you see it on the very right side, 5,700 units are current projects. That means we have already acquired the land banks or secured or these projects are already under construction. And 7,500 units are planned projects. But planned projects, to the very large part, doesn't mean that this is something far away. These are really concrete projects we are working on. And we clearly expect that in the course of potentially 2020, we can really announce more concrete about these acquisitions. So it's not far away pipeline. This is something that should be very, very close. Looking then at the midterm effect, and you can see this on Page #20 on the bottom left, looking at the build-to-hold project, we should achieve an estimated EBITDA contribution from the letting panel between EUR 30 million and EUR 35 million out of this 80 -- sorry, 8,600 units. And from the build-to-sell projects, the total EBITDA contribution from sales will be between EUR 50 million and EUR 55 million. So you should expect in next year's year-on-year stronger cash flow from our activities in Poland. How are we achieving this? You see this on 21 that, of course, a big part of that is Vantage Development, that's the company that we acquired last year when we signed a contract. The closing was in January this year. We're very happy with our acquisitions so far. First of all, first good news is that the whole team is still on board. It's [indiscernible] around 100 employees in different departments. And not only the CEO, Edward Laufer; and CFO, Dariusz Pawlukowicz, are still on board. Also, as I said, the whole team in the different departments is still with us. And that's, of course, something that is very positive that we really can build up our portfolio on the knowledge of these people. And looking at the results from Vantage for the financial year 2019, that's shown on 21 on the right side. The numbers were even a little bit better than expected. So Vantage achieved revenues from sales of EUR 84 million, an EBITDA of nearly EUR 14 million. The net income after taxes after interest costs, which is really the cash result of EUR 11.3 million. So this was something that was definitely positive for us after the close. Then on Page 22, you'll see more details on our build-to-hold pipeline, further details on the number of project, stages and so on. But what is most interesting is on the bottom left of Page 22. How do we expect or at what point of time do we expect that projects are completed and when rent starts. I see that we will expect and have the first rent toward the end of the financial year 2021. So we expect that we have around 500 units, which are currently already under construction then in 2021 ready, then rented out. And then the number year-over-year increases up to the 8,600 units that I already mentioned, which should then be finished more or less towards year-end 2024 or at the beginning of 2025. Page 23, on the next slide, you see basically the same structure for the build-to-sell pipeline. The time line of sales shows you that in 2020, we will have, again, strong sales results and strong cash inflows from Vantage via the disposed unit. And this disposal business in Poland is something that we clearly want to continue. So if we look mid to long term in our business of Poland, of course, the large part of the cash flows will come from the residential for rent business, but this residential for sale business or disposal business will always be a part of our business in Poland. You see here how we expect that to translate into cash over the years. On 24, some words on our financing strategy. First of all, for 2020, the financing needs are quite moderate. As I said, Vantage has in its own balance sheet, a strong cash position of more than EUR 46 million. And clearly, we expect strong cash inflows in 2020 from the disposals. So therefore, what we currently are planning is that we will downstream to Vantage up to EUR 50 million for further projects. And I think that's important. This financing, if needed of up to EUR 450 million is then really for new acquisition. So put it the other way around, the existing projects at Vantage for 2020 are fully financed, so there's no need. But of course, as I said, the plan is to acquire further land banks or acquire other projects. And therefore, we expect up to EUR 50 million that we will give via shareholder loan from TAG to Vantage in Poland. So there's not really a material size that is needed. Mid to long term, so from 2021 onwards, the financing needs will be between EUR 150 million to EUR 200 million. So that's something that we have to finance, and we have 2 ways to do that. That's on the one side, similar to what we do here in Germany, secured financing advantage level by mortgage and bank loans. And as a second option, and that's clearly attractive to do that. And we have the possibility of unsecured financing at TAG Holding that will, for example, via corporate bonds or promissory notes as we did in the past. Yes, of course, we have a certain foreign exchange risk. And for now, we are not under pressure to do something right now, but we are currently working on our strategy. When we look at the historical developments between the euro and the Polish zloty, that has been very stable over the last 3 to 5 years. So the idea behind it is to have more hedging strategy, which is not a full hedge of the full complete foreign exchanges. We don't think this is necessary. But of course, we want to do something that really prevented from suffering unexpected peaks in the exchange rate or unexpected losses. And this is something that we want to implement from 2021 onwards. And then some final comments on Page #26. That's the guidance slide. Looking at the German guidance for the financial year 2020, the guidance is unchanged. So therefore, we're clearly committed and clearly confirm our FFO guidance between EUR 168 million and EUR 170 million. We also confirm the dividend guidance for the financial year 2020 then paid out at the AGM in 2021 of EUR 0.87 per share. Now is the guidance that we give on the business in Poland. And as I said, the business in Poland for 2020 is solely the disposal business. We expect here sales revenues between EUR 80 million and EUR 85 million. And the results from operations, that's exactly the result that I explained to some before of around EUR 10 million for 2020. This will then be part of EUR 10 million of our FFO II. And if you divide that to the current number of shares, that translates into value per share of EUR 0.07. From 2021 onwards, Poland will then contribute FFO I of TAG. But as pointed out, for 2020, we will have, on one side, some cash flows. But on the other side, only an FFO II contribution from our business in Poland. Yes, that's it from my side so far. So assuming that, again, first, perhaps the most important news for today, we don't see really any impact from the COVID-19 crisis on our business. So everything is running more or less as expected. Q1 was a good quarter. But with an FFO that it increased quarter-on-quarter by nearly EUR 3 million. And the business in Poland is already successful in the first quarter and is something that we regard as very promising for the next year. Thank you very much so far. And of course, now we're happy to take your questions.

[Operator]

[Operator Instructions] First to raise the question is Mr. Thomas Neuhold from Kepler Cheuvreux.

[Thomas Neuhold, Head of Research of Austria]

Actually, I only have 2 on the Polish business. Firstly, strategy-wise, you plan to increase the number of units quite strong in next year in Poland, leading also to quite high CapEx requirements. What impact will this have on your capital recycling strategy in Germany and also your acquisition policy in Germany? Do you plan to slow down the acquisitions in Germany a little bit and try to focus on Poland? Or do you plan to increase also the disposals in Germany in order to fund the expansion in Poland or to increase the debt of the company a little bit? That was the first question.

[Martin Thiel, CFO & Member of Management Board]

Yes. Thank you very much, Thomas. To say this very clearly, Poland is something additional. So there are no plans to sell assets in Germany and take this as financing for new acquisitions in Poland. I mean the German market is, a, as you know that from the past that it's very competitive. So therefore, do we expect significant, large transactions in the market in Germany, that's perhaps nothing that is really realistic. But again, as I said, we're still optimistic that we are able to deliver for 2020 on similar acquisition sizes than in 2019, 2018 and perhaps a little bit more. But that's one side. And this German acquisitions, on the other side, will be also financed via disposals in Germany but really in sizes like you know from us from the past. And then the second, a new external growth opportunity is in Poland, where we see really, of course, also competitive market but not really comparable to what we see in Germany, especially not in this institutional residential for rent sector that we are now entering as perhaps one of the first institutional landlords in Poland. So therefore, we definitely have enough financial power to do acquisitions in Germany on top of that, what we do in Germany. And again, if you look at absolute volumes that are necessary, so it's up to around EUR 50 million for 2020; and then annually, around EUR 150 million, perhaps up to EUR 200 million from 2021 onwards. This is something that based on the current GAV of EUR 5.4 billion should be absolutely manageable for us.

[Thomas Neuhold, Head of Research of Austria]

And the second question is on the build-to-hold pipeline in Poland. The average rent levels seemed relatively high than EUR 11. I know the apartment size is not that big, so we're talking about total rent of maybe EUR 450 to EUR 550 per apartment per month, but still you have quite ambitious rollout land, and you will bring roughly, I would say, 1,000 to 1,500 new apartments to midsized Polish cities. Do you think there's a risk that you might not be able to rent out the apartment at this price?

[Martin Thiel, CFO & Member of Management Board]

Well, the prices that we are putting into our business plan are really prices that we currently see in the market and also currently see with the Vantage product. So that perhaps interesting to know that Vantage already in the past sold around 30% of its apartment to people who rented the apartment out afterwards. So these were the mostly private people who bought 3, 5 or a little bit more apartments and rented it out. So at the rent level of EUR 10 or EUR 11 per square meter is something that we already observed in the market, so there's not pure assumptions and, of course, not only with Vantage apartments, also with other apartments that we observe in the markets of Wroclaw and Poznan. And compared to our German portfolio, I mean, this is clearly higher. You know that our average trend in Germany is EUR 5.40. But it's, first of all, a different product. So in Poland, we're talking about newly constructed apartment; and secondly, importantly, we are really talking about the large cities. So perhaps except Warsaw, we're talking about then all other cities that have then 600,000, 800,000 people living there, like Wroclaw, like Poznan. And the apartment size is smaller than in Germany. So whereas in our German portfolio, we have, on average, EUR 60 to EUR 65 per square meter; in Poland, in the rental apartment, we're talking about sizes of perhaps 40 to 45 square meters, that's different.And we see the demand in the market. So we were very optimistic that we're able to do this. And again, it's not concentrated only on one location like Wroclaw. We have already entered the second location, Poznan. And a third or fourth location will follow quite soon. So it should be also a very well-diversified approach.

[Operator]

The next question comes from Mr. Sander Bunck from Barclays.

[Sander Bunck, Vice President of Real Estate Equity Research]

Martin, 2 or 3 questions from my side, and I'll ask them one by one. The first question is a bit back on the funding strategy for Poland and how you expect to do that going forward. And appreciate the outlay in itself is not too high. But yes, just kind of thinking about -- because in total you look at least for the whole pipeline to EUR 600 million, which is more than 10% of the existing portfolio. So are you just fully using your further valuation growth to lever up again and get those proceeds? Yes. So kind of how are you thinking about that?

[Martin Thiel, CFO & Member of Management Board]

Yes. Thank you for the questions, Sander. For us, it's clear that also equity is at a certain point in time an option. That has nothing to -- there's surely nothing to think about that in the short term. So we've seen that the financing needs for 2020 in Poland are very limited, so therefore, there's not equity for our business in Poland needed. But yes, of course, if we are realizing that's a clear plan, also that the pipeline in Poland in the next years, that is a clear option for us. So using valuation gains in Germany to keep the LTV on that level only is perhaps nothing that is in line with our thoughts of how, let's say, stable financing structure should be.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. Perfect. That's very clear. The other question I had is on your potential rating. I was wondering if you had since in the last couple of months, if you've had contact with your rating agency, and what they're kind of saying about the current rating, and then if there's any potential for improvement. Or is it more expected to be stable going forward?

[Martin Thiel, CFO & Member of Management Board]

Well, first of all, the rating should be definitely something stable. In these times, of course, it's difficult to think about upgrades. Would that be something realistic? I don't know. We have clearly -- had clearly expectations that we are very well positioned between our Baa3 rating at Moody's, that the trend was clearly through more towards an upgrade. And perhaps this is still something that is realistic. We have no detailed discussions so far with the agency in the last weeks. We will do this in summer again as planned. Of course, Moody's has received, as it is common, after each quarter and after each full year, our cash forecast, our business plan. So this was all, from my point of view, very well received. And we have definitely not received any negative comments on our business, whether this is the German or the Polish business. So therefore, if you ask me if we feel very well positioned, it would have been Baa3. And perhaps in a world where there the COVID-19 crisis is not that dominant today, the trend should be clearly more towards an upgrade.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. And the development business in Poland is not having an impact on that potential rating, i.e., they do not require you to have a lower LTV to compensate for a slightly higher development risk that you eventually take on?

[Martin Thiel, CFO & Member of Management Board]

No, that's not the case.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. Perfect. And then very last question, just on the rental growth. How do you -- I don't know because this question has been asked previous times as well. But how do you think about that going forward? Do you still kind of expect 2% base rate plus 50 basis points from vacancy reduction and modernization? Is that kind of the ongoing run rate? Or is that something that ultimately is just going to trend more towards the 1.5%, 2%?

[Martin Thiel, CFO & Member of Management Board]

No. That's not the case that we are expecting mid to long term a lower like-for-like rental growth. Therefore, really the underlying fundamentals should change. I mean if you ask us, well, what you see regarding vacancy rate developments. I mean it's clear that staying on the level that we had at the beginning of the year in these times is very good news from our point of view. But clearly, we expected already that we had a reduced vacancy rate at the end of the first quarter, but that's not really a material difference. So therefore, yes, potentially, we have some delays in vacancy rate reduction during the course of financial year 2020 as a result of the COVID-19 crisis, but that's nothing that is -- that we consider as something that is mid- to long term a case. So what we see in our markets is also, in this time, a very good demand, a very healthy demand. And we feel very well positioned even in a time where we have perhaps tougher times in terms of higher unemployment rates and so on because we really offer affordable housing, the best per meter rent of EUR 5.40, and that should be something that is also very much search from potential tenants in the future.

[Operator]

The next questioner is Mr. Kai Klose from Berenberg.

[Kai Malte Klose, Analyst]

I've got 3 questions, if I may. The first one is on Page 28 of the presentation in the appendix. You had in -- just quickly, in all locations an increase in vacancy rates. Was that expected? Or is it something which was maybe not because kind of required but somewhat more than you expected to see? Second question would be on the acquisitions you did in Germany on Page '18. Could you maybe elaborate a bit more on the seller of those 2 portfolios? And what do you expect -- or how quickly you expect these properties to be upgraded? And then the third question would be, we had a lower cash tax rate if I see that correctly in the FFO calculation. Is it something which we should expect for the remainder of the year? Or was it something specific for the first quarter?

[Martin Thiel, CFO & Member of Management Board]

Yes. Thanks for the question, Kai. To start with the third question, you should expect similar cash taxes in the second, third and fourth quarter because the cash tax expense in the fourth quarter of 2019 was higher than normal. So therefore, what we have today in our books, also in the first quarter, that's something that from our point of view makes sense to pencil in into our model for the remaining part of the year. Answering the question regarding vacancy rate, yes, that's basically something that we expected for the first quarter, so it's not unusual, as I said, that we have kind of seasonality for what reason ever, a lot of people are leaving the apartments in January and February. That has been the case also in the last 2 years, as you see from our chart. So that's not really a surprise for us. As I said, perhaps the only impact from COVID-19 was in some regions where we have a higher proportion of students. The main example here was the Rostock region where we, in fact, really had an increase in vacancy rate by 80 basis points. And here, we are not offering, let's say, 100% student homes, but we offer apartments that are -- a lot of them are used by students. And therefore, as universities are shut we saw here and the one that's only unexpected increase. But generally, that's not really far behind our plans, just to put it like this. And then commenting on the acquisition, the type of seller, well, there's not one special type of seller in the market where we're buying from. I would say, as I think or as I also said in the past calls, there are perhaps 2 types of sellers. And in this regard, these were more local sellers who are very well familiar with the market, but perhaps what is lacking to some extent is the financial power to modernize apartments. And you have to do this, in many cases, in a first step from equity, as a listed company, not the problem. So they are being very optimistic that we can improve vacancy rates, increase rents quite soon. And we're really able to do the modernizations and refinance that then afterwards with our banks when we have increased cash flow. The second type of seller, which is not the case, is the more institutional seller with a lot of financial power but not that, let's say, locally in the market. And this combination is something that we consider to be really advantage of our structure, so we're acting very decentralized, very locally, but with the financial power of a listed company.

[Kai Malte Klose, Analyst]

I see. And last question would be on Page 10, on the balance sheet. Just to clarify, the real estate inventory, which went up quite strongly, you mentioned -- had a footnote on the right-hand side. Is it coming from the -- or does this reflect Vantage Development activities? Or is it from the consolidation of Vantage as a corporate?

[Martin Thiel, CFO & Member of Management Board]

That's from the consolidation as Vantage as a corporate.

[Operator]

Thank you. Mr. Thiel, there are no further questions at the moment.

[Martin Thiel, CFO & Member of Management Board]

Okay. Thank you very much from our side that you joined our call. As always, if there are any questions left, please be free to contact us. I'm happy to hear you at least in the next days and weeks via virtual conferences. Stay all healthy, and have a good day. Thank you very much.