TAG Immobilien AG

XETRA:TEG

Earnings Call Analysis

TAG Immobilien Optimizes Portfolio and Debt Amid Growth

TAG Immobilien AG achieved considerable asset disposals, selling 262 units in Q3 and over 1,300 units in 9 months, generating EUR 181.5 million. This led to minimal change in their Loan-to-Value (LTV) ratio despite valuation losses in the German portfolio, primarily due to asset sales and 2022's dividend suspension. The LTV is expected to remain stable or slightly increase by the year's end. Polish operations have been robust with a 70% increase in units sold and significant price and rental growth. Guidance for 2024 indicates stable FFO I at EUR 170-174 million despite reduced asset handovers impacting FFO II, which is expected to decrease around 9% to EUR 217-223 million. A second dividend suspension is proposed for 2023, favoring reinvestment and debt repayment over shareholder payouts.

Bolstered Asset Disposal and Debt Reduction

The company successfully executed asset disposals in Germany, selling over 1,300 units within the first nine months of 2023, with net cash proceeds of EUR 181.5 million. Simultaneously, they tackled their unsecured debt, repaying nearly EUR 1 billion, including full repayment of the ROBYG bridge financing, demonstrating a robust financial maneuver in the current economic landscape.

Maintaining Solid Financial Metrics Amidst Challenges

Despite facing valuation losses on the German portfolio, the company's Loan-to-Value (LTV) ratio remained nearly unchanged, benefiting from the asset disposals and suspension of the 2022 dividend. The LTV is expected to stay stable or slightly increase by year-end 2023, supported by strong cash metrics and the performance of the Polish business. This highlights prudent financial management in turbulent times.

Robust Polish Market Performance

The Polish segment of the business stands out, marking a sturdy performance with approximately 2,900 units sold in the first nine months of 2023, indicating a lively demand in the region and contributing positively to the company's financial standing.

2024 Forecasts: Steady FFO I and a Temporary Dip in FFO II

The company anticipates stable Funds From Operations I (FFO I) in the range of EUR 170 million to EUR 174 million for 2024, owing to the growing EBITDA from Poland's rental business. However, FFO II is predicted to see a temporary drop of around 9% due to reduced apartment handovers, a lag effect from lower sales in 2022. But this slowdown aims to set the stage for a robust increase in FFO II from 2025 onwards.

Dividend Strategy Aligns With Balance Sheet Fortification

Reinforcing their conservative financial approach, the company plans to propose a second dividend suspension for the 2023 financial year at the next AGM. Their strategy focuses on retaining cash within the balance sheet in light of the current financial environment, a decision that could serve to bolster their liquidity position and reduce financial risk.

Mixed FFO Results Over Nine Months

The company witnessed a 9% decrease in FFO I, mainly due to higher financing costs, while FFO II registered a 6% increase, courtesy of better Polish sales performance. Keeping LTV stable during this period was achieved without the need for portfolio valuation, which portrays a picture of operational resilience.

German Operations: Modest Rental Growth and Decreased Vacancy

Operational performance in Germany saw like-for-like rental growth of 2.2%, exceeding the previous quarter's figures. The vacancy rates dropped to 4.4% post-balance sheet date in October, signaling a favorable trend in occupancy levels that may reflect an efficient asset management.

Challenges in Net Rental Income Amidst Positive Signs

Although the net actual rent increased quarter-on-quarter due to higher rents in Poland, a slight reduction in German rents was observed owing to asset disposals. Rising expenses from property management, influenced by maintenance costs and CO2 taxes, led to weaker net rental income compared to the previous year, highlighting an area requiring attention to optimize operational efficiency.

Earnings from Asset Sales Provide Mixed Results

The company realized a profit on German asset sales, which offset selling apartments below book value, and recorded a net income from sales in both Germany and Poland. With strong sales in Poland, the forecast foresees a continued uptrend in sales volumes and prices, signifying market strength and growth prospects.

Stable FFO Guidance for 2023 and Refinement for 2024

The company confirms its FFO guidance for 2023, maintaining the previously stated targets with the additional recommendation for dividend suspension at the next AGM. Supplementary comments on the guidance for 2024 include expectations of EBITDA growth, reinforcing the company's strategic planning for the future.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, welcome, and thank you for joining the TAG Immobilien AG publication of the interim report Q3 2023. [Operator Instructions]

I would now like to turn the conference over to Martin Thiel, CFO. Please go ahead.

[Martin Thiel, executive]

Many thanks, and good morning all. This is Martin from TAG. Many thanks for joining the call. And as always, I try to make the presentation rather comprehensive so that we have, afterwards, enough time for Q&A.

So let's start right away with the presentation on Page 4, where we show some highlights for the first 9 months of 2023. Let's go through it point by point. Firstly, we want to point out quite successful further asset disposals that we have done in Germany. So in the third quarter of 2023, we sold further 262 units. That leads us to a total disposal volume of more than 1,300 units in the 9-month period ending 30 September 2023, and we achieved net cash proceeds of EUR 181.5 million.

We sold at an average gross yield of 4.3%, so below our portfolio valuation. And please be aware that after the balance sheet date, we received EUR 91.2 million of cash. So this is not included in the cash at the end of the third quarter, but this transaction already closed at the end of October 2023.

Secondly, we had material repayments of unsecured debt in the first 9 months of 2023. And if we look a little bit broader on it and start with the middle of last year, that leads us to a total repayment of unsecured debt, including the ROBYG bridge financing, of nearly EUR 1 billion. And in this environment, this is, for sure, a good message because unsecured debt that's at the moment, definitely with the more difficult source of financing, so everything that we can repay in that direction is, for us, clearly a success. As mentioned, the ROBYG bridge financing is now repaid in full. We did this in October 2023, ahead of maturity.

Looking at financial metrics. The LTV is nearly unchanged compared to the year-end 2022. So we had just 20 basis points increase. And the reason why we can keep the LTV stable despite the valuation losses on the German portfolio is that we've been successfully selling assets in Germany. And of course, also the dividend suspension for financial year 2022 helped us. So that's, in this environment where we're still recording valuation losses, from our point of view, a good development.

And if you ask us for an outlook for year-end 2023, also at year-end, we expect, let's say, a stable or just slightly increasing LTV. Of course, this will depend on the valuation result at year-end. Let me come back to this in a minute. But we know already that we have the closing or have the closing of the transactions that I already mentioned in Germany. So this will lead to an LTV-reducing impact.

We know that the fourth quarter in Poland is always very strong. So even with expected further valuation losses at year-end, the LTV should stay on a level roughly where it is now. Hence, let me please point out that our cash metrics are still strong. So the ICR and the net financial debt to EBITDA with values of 6x and 10x should be at clearly above average if you compare this with other residential companies.

The Polish business remains very strong. In the first 9 months of 2023, we sold roughly 2,900 units compared to the previous year. That's an increase by around 70%. So we sold on a comparable basis, including ROBYG for the full year 2022, 1,700 units last year. And it's not only an increased number of units sold, we also observed strong price increases in the Polish market.

But not only on the sales market, also on the rental market, the development is very positive. Like-for-like rental growth at the end of the third quarter came out with more than 12%, and the vacancy rate in the total portfolio is 3.7% at the end of September 2023.

Today, we also published our new guidance for financial year 2024. We expect a stable development regarding FFO I. So FFO I should be still in the range between EUR 170 million and EUR 174 million, despite assets disposed in Germany, but what is helping us here is an increasing EBITDA contribution in 2024 from the growing Polish rental business.

Looking at FFO II, which includes sales results, and sales results in our company is mainly referring to Poland, we expect a temporary reduction of around 9% to EUR 217 million to EUR 223 million due to reduced handovers in 2024. And this is something more technical. As you know that the gain or the profit in the P&L is realized at the very last day when we hand over the apartment and as the construction time for sales apartments is roughly 18 minutes (sic) [ months ], basically, we see in 2024, the weaker sales result from 2022, which was a retail year because at that point in time, mortgage rates in Poland started to increase sharply.

So 2002 (sic) [ 2022 ], lower sales numbers leads to a lower result 18 months later in 2024. And that means on the other side, as you see in 2023, a strongly increasing number of sales. You should expect a strong increase in FFO II from 2025 onwards. So this is just something temporary and mainly, let's say, accounting-driven. The cash inflow of the sales is already earlier. So that's in line as construction progresses and not only at the last day.

And as a second point that's, of course, also very important to discuss. We're proposing to the next AGM a second dividend suspension, so a dividend suspension also for financial year 2023. We wanted to be clear at this point already now, wanted to be clear to our shareholders and to the market and looking at that more precisely, it's, first of all, a clear guidance, so what we want to propose to the AGM next year when we invite you to the AGM in March 2024.

And then, of course, the final decision will be taken at that point in time. And then it's, of course, subject to our shareholders to approve that within the AGM, but the Management Board as well as the Supervisory Board has, of course, discussed this already intensively now. And we think in this environment, it simply makes sense to suspend the dividend also for financial year 2023.

Looking at cash flows that we generate in Germany, from our point of view, it makes simple sense to keep the cash in the balance sheet and to repay debt, so to continue the successful deleveraging process that we've done in the last quarters. And looking at the cash flow that we're producing in Poland, especially from the sales business, we think the better decision is to keep this cash in Poland and to start new residential rent projects and also to reinvest this cash surplus into new land bank acquisitions for the sales business.

So as the Polish business is producing really attractive cash flows at the moment, we think reinvesting liquidity that is generated in Poland into this business is the right way to do. And again, in Germany, in this environment, we think the produced cash flow from our business here should be preserved in the balance sheet. This is clearly a more conservative approach, but we think in this environment with still very difficult transaction in capital markets, that's the right thing to do.

Let's go to the next page, some more details on the financial performance and the operational performance of the German portfolio. FFO I in the first 9 months 2023 is down roughly 9% compared to the previous year. The EBITDA from the rental business increased by a little bit more than 2%. But on the other side, as in the quarters before, higher financing costs have led to this reduction.

In contrast, the FFO II is up by 6%. So we have, in 2023, a better result from the Polish sales business compared to the previous year. Therefore, we see here, contrary to the development in FFO I, an increase in the result.

Not really major changes in the EPRA NTA and the LTV as we had no portfolio valuation at the end of the third quarter. So the usual development and improvement in EPRA NTA as well as an improvement in the LTV from the ongoing business.

Looking at the operational performance in Germany, like-for-like rental growth without vacancy reduction is better than in the previous quarter, so it increased to 1.8% from 1.6% and 1.5% in the financial year 2022. And including vacancy reduction, total like-for-like rental growth was at 2.2%.

Vacancy in our residential units was down to 4.6%. And perhaps you've already seen this in the press release that the vacancy rate in the German portfolio has fallen to 4.4% after balance sheet date in October. So that should be in a good development for the remaining part of the year.

Coming to the next slide where we present some highlights from the Polish business. The adjusted net income from sales in Poland was EUR 28 million at the end of the first 9 months of 2023 compared to a little bit more than EUR 11 million in the previous year, so that explains why FFO II is increasing year-on-year. We sold nearly 2,900 units, as already mentioned. So therefore, that's a clear sign of a very strong sales business in Poland, and we will look at the development quarter-on-quarter a little bit later. But the Polish sales business, again, is running very strong.

Page #8 shows some details on the P&L. The net actual rent increased quarter-on-quarter as a result of higher rents in Poland. We saw a slight rent reduction in Germany despite the like-for-like rental growth because we had some disposals that closed in the closing of the year, so therefore, that reduces rents.

Expenses from property management were higher quarter-on-quarter, as we already expected, higher maintenance costs in the third quarter. And we also had higher non-rechargeable costs, mainly coming from the CO2 taxes in Germany in the third quarter. So therefore, also the net rental income was weaker compared to the previous year. But year-over-year, we clearly see a positive development.

Looking at the net income from sales that contains 2 parts. That contains the sales result from Germany plus the sales result in Poland. By the way, if you want a detailed analysis of the P&L between Germany and Poland, please take a look at the -- in the appendix where we gave this split in the income statement. But let me explain how we record the net income from sales also from the German business.

So we have realized basically a profit, so a positive net income from sales in Germany in the P&L. And this is coming from 2 effects. First effect is that we also sold our own headquarter in Hamburg. And as far as we use it for our own purposes, this building has been accounted for at historical costs, so not at the fair value. Therefore, clearly, we achieved a book profit when we sold this building.

And secondly, if we sell apartments and between the signing and the closing, there's a balance sheet date. At the balance sheet date, we need to do a devaluation or in prior year's operation uplift to the purchase price. So for example, in the third quarter of 2023, when I look in the P&L, we see a valuation loss of EUR 6.2 million. This is simply the impact of selling apartments in Germany below book value. And as there is between the signing and the closing of balance sheet date, we need to record this valuation loss.

So to give you the picture, we can confirm what we have told in the past, we are currently selling apartments in Germany below book value. It's not a material discount. So compared to the beginning of the year, so to the December book value, the discount is, as already communicated before, around 10% compared to the half year book value. This discount is clearly getting smaller.

Besides this, there has been no portfolio valuation in the third quarter, and the next valuation will take place at year-end. Let me give you not a specific guidance, but perhaps a trend for year-end. So we have no results from the portfolio valuation yet. What we expect is a further valuation loss, but clearly lower than what we have seen in the first half. So in the first half of 2023, we recorded a loss of 7.4%. Too early to give you an exact range in percentage points, but the loss in the second half should be smaller than in the first half.

And if you ask us, well, is this then the end of the development? Or do we expect further valuation losses in 2024? We think that we have now have reached the kind of bottom when it comes to portfolio valuation losses. So we would be not surprised if we see further smaller valuation losses in the course of the first half of 2024.

And to look at that at a broader picture, so at the end -- or the middle of 2022, we hedged the all-time high regarding our valuations, and we recorded 5.5% loss in the second half of 2022, 7.4% in the first half of 2023. So in total, already 13%. So if in total, until the middle of next year, we get a valuation loss -- or record a valuation of around 20%. That would be, as of today, an expectation or a development that would not surprise us. So again, we can't give you any specific numbers for year-end, but that should be a kind of range where we expect valuation results to come in.

I think we can skip the next slide, #9, because it shows you all the details of the EBITDA, FFO development we've already discussed. On Page 9 -- sorry, on Page 10, you see the overview of the EPRA NTA development. The EPRA NTA is down 8% in the first 9 months due to the valuation loss we recorded in the first half of 2023.

Page 11 shows the financing structure. LTV, as already mentioned, stands at 46.9%, so above our LTV target of 45%. But as we already said, well, we expect that this LTV ratio should remain roughly on the same level. That's just slightly increased at year-end; and if we continue disposals in Germany, perhaps even in a smaller size than in 2023, also in 2024. And if the AGM follows our proposal to suspend the dividend, we can keep the cash, the LTV target of 45% should be not too far away.

So perhaps already in the course of 2024 with the help of a further dividend suspension, perhaps with some additional disposals in Germany. And knowing over the help of a good operational development in Germany and especially in Poland, the LTV target should be not too far away and perhaps reached next year.

Looking at the maturity profile, we still see in 2023 the bridge loan from the ROBYG acquisition of EUR 75 million, but as said, this is already repaid in full after the balance sheet date. And looking into the maturities 2024 and 2025, we think it's important to point out that we just have smaller amounts of unsecured debt that are becoming due. So precisely, this is in 2024, roughly EUR 80 million in Germany and in Poland; and in 2025, roughly EUR 210 million. And this is, of course, something which is an advantage in this environment where the secured financing is still broadly available and unsecured financing is the rather difficult and especially expensive debt.

Page #13 shows the development in like-for-like rental growth in Germany. So 2.2% was the total like-for-like rental growth. The guidance for this is still unchanged between 2.0% and 2.5%, so we are on a good way to achieve this guidance. And investments, meaning maintenance and CapEx together, you see this on the top right of the slide, were virtually unchanged compared to the previous year at around EUR 24 per square meter.

Page 14 shows the vacancy rate development in the Germany portfolio in the residential units. I already mentioned that we're down in October to 4.4%. And the guidance for the full year stands in the midpoint at 4.2%. So we are very optimistic that also in this regard, we are on a good way to achieve our guidance.

Let's talk a little bit about Poland again. Page 16 shows you details in the rental portfolio in Poland. As I already said, a very good development regarding the vacancy rate. So we started in the total portfolio with a vacancy rate of more than 35% as a lot of apartments have been finished towards year-end 2022 and also in the first month of 2023. As of now, the vacancy rate in the total portfolio is 3.7% only. And looking at the residential units, it's even smaller, it's just 1.5%, which is, for us, a big success, and the speed in which we rented out the apartments was much faster than expected.

Like-for-like rental growth still stands at 12.4%. We know that we had last year, even higher like-for-like rental growth by more than 20%, so this is a little bit normalizing, but definitely not unexpected. And compared to inflation rates in Poland, which are already down to around 8%, it's still a like-for-like rental growth that is even outpacing inflation. That shows us how strong the demand for our rental projects in Poland is.

Page #17 shows the development in sales numbers in Poland. And as already discussed, 2023, so far, is a very successful year. So you see on this slide the development. And I already mentioned that in the financial year 2022, we had weaker sales results clearly in a time where mortgage rates in Poland were increasing sharply. So therefore, it's good to see that sales volumes are up. And it's not only the number of units that is increasing, it's also the sales prices that are increasing throughout the market. So sales prices year-on-year at the end of the third quarter, according to our sales and also according to what we see in research, is roughly 15%, so 1-5 percent increase year-on-year.

Page #19 shows the FFO guidance for financial year 2023. The FFO I and FFO II guidance is fully confirmed today and is unchanged. And what is new, but we've already discussed this, is that we propose to suspend the dividend to the next AGM.

Coming to Page #20, let me explain some additional comments on the guidance for 2024. First of all, for the first time, we're giving also EBITDA guidances because we think that could be helpful for modeling purposes and also to make clear what operational results we are achieving in each part of the business. So in the rental business in Germany, the rental business in Poland and also important to point out the really strong results that, in general, our Polish sales business is producing, so therefore, a more detailed guidance for financial year 2024 with additional figures for -- or comparable figures for financial year 2023.

So we expect, in the rental business, a stable EBITDA, slight reduction in Germany, mainly because of disposals, and an increase in Poland that is then compensating this reduction. The sales business in Poland in 2024 will be -- will lead to a lower EBITDA compared to the previous year. That's, as I've already explained, more something technical. So accounting-wise, the number of handovers is smaller in 2024. So therefore, we have -- we are realizing less profit in 2024. But again, from 2024 onwards, based on the stronger sales numbers as of today, you should expect increasing results again, and that also translates this development into a somewhat lower adjusted net income from sales in Poland.

So the FFO I guidance for 2024 is exactly the same like 2023, so in the range between EUR 170 million and EUR 174 million. And also, on a per share basis, this is unchanged, EUR 0.98 per share. FFO II guidance, as already explained, 9% down for financial year 2024 to EUR 217 million to EUR 223 million. And regarding the dividend for financial year 2024, we're giving no guidance today. But clearly, we will come back to this, not in the next month, so you should expect no decisions on that before the third quarter next year, year-end 2024. So let's see how market conditions develop until we make a decision on the dividend for the financial year 2024.

In our final slide, Page 21, gives you more details regarding the FFO bridge between 2023 and 2024. As I said, we expect an unchanged FFO I compared in 2024 to 2023. Good rental growth in Germany. We expect a like-for-like rental growth between 2.2% and 2.7%, and the vacancy reduction -- a further vacancy reduction of around 30 basis points. Also good rent development in Poland, so additional EUR 7 million rent increase from Poland. By the way, if you put this together into one number for like-for-like rental growth, sort of additional rent in Poland plus the rental growth in Germany, you are in a like-for-like rental growth of close to 4.5%.

Clearly, we also reduced -- or losing rents from disposals in Germany. It's roughly EUR 6 million. Other positions are not so much changed. Let me point out that we expect a positive impact in the financial result as we have repaid the bridge loan now for the bridge loan in 2023. Until we repaid it, had interest costs of around EUR 8 million. So therefore, this is clearly a relief. And you know that we repaid that from disposals in Germany mainly and from the dividend suspension. So therefore, we expect a little bit better financing cost in 2024 compared to 2023.

That's it from my side as an overview of our Q3 results and the new guidance for the financial year 2024. Thank you so far, but of course, I'm now very happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Andres Toome from Green Street.

[Andres Toome, analyst]

Just firstly, on the operational side, could you give a bit more color perhaps in terms of the Mietspiegel prints you're seeing in TAG's locations? Certainly, other peers are showing accelerating range. Just wondering how you see it. And I suppose, like-for-like growth is expected to accelerate for the next year. And is that then mostly driven by increased indexation?

[Martin Thiel, executive]

Andres, this is indeed the case that we expect here higher like-for-like rental growth. If we look at the development more specifically, so I'm now excluding impacts from vacancy reduction, with 1.5% like-for-like rental growth in 2022, we have now roughly 1.8% in the first 9 months of 2022. And as I said, the guidance for the full year 2024 for the total like-for-like rental growth spans between 2.2% and 2.7%. So roughly 2.1%, 2.2% is what we expect from rental growth without vacancy reduction in 2024. So you clearly see that we expect here an increasing trend, and this is mainly coming from the Mietspiegel.

[Andres Toome, analyst]

And then secondly, around the Polish business on the build-to-sell side, how are you seeing the unit sales going into next year? Do you think it's going to come in at a similarly strong pace? Or do we expect a bit of deceleration because this year has been exceptionally strong? And then in terms of the pricing as well, you sort of noted that it's quite strong for the sales products. So can you give a bit of color around that and how are also gross margins trending in that business?

[Martin Thiel, executive]

Well, for 2024, we gave a guidance that we expect sales in Poland of at least 3,000 units. As of now, that seems to be really absolutely achievable, so because this is already the sales number that we achieved now in the first 9 months of 2023. So clearly, we saw an extremely strong development in the last month. And also the price increases that we've seen are, of course, very attractive for us.

But looking into the next 2 to 3 years, I mean what we are guiding as a kind of midterm sales volume is that we sell between 3,000 and 4,000 units a year. That should be achievable and that we are producing from the Polish sales business a net cash flow of around PLN 250 million. So that's roughly EUR 55 million and after land bank acquisitions that are needed. And that is still based on a gross margin which should be at least 25%, still even higher.

So we know that 2023 is an exceptional year. By the way, also 2021 has been an exceptional year. So perhaps we are positively surprised that 2024 is another exceptional period. But mid to long term, we expect more the numbers that I just mentioned.

[Andres Toome, analyst]

Understood. And then maybe you could speak a little bit about the financing road map in Poland as well. How are you thinking about that when it comes to financing the build-to-rent product? Are you able to sign mortgages against those? Or what was the sort of the broader game plan here?

[Martin Thiel, executive]

Yes, that's just in the process. So hopefully, we can then comment with the full year figures 2023 on already signed and closed mortgage-secured financing that we have taken on the rental properties in Poland. So, so far, the full rental portfolio in Poland has been financed via own cash or via TAG shareholder loans, and we try to replace this. And we are in very advanced negotiations with German and also Polish banks.

And if you ask us what are financing conditions in Poland or for a Polish portfolio compared to a German portfolio, if we do this in euro, margins are higher. So there's better difference of around 100 basis points. But that would still be, for us, a very reasonable and attractive financing as the growth in Poland is very strong.

So I expect that we get a 50% LTV on the existing portfolio. That would be something in the range of EUR 120 million to EUR 140 million of mortgage-secured financing in the next month. And again, it's not yet signed, but we are really in advanced negotiations.

[Andres Toome, analyst]

Great. And then final question just around the disposals you've done. Is the Berlin disposal that Round Hill announced also in the 1,300 units? Is that included?

[Martin Thiel, executive]

Yes, that's included.

[Operator]

Our next question comes from Thomas Neuhold from Kepler Cheuvreux.

[Thomas Neuhold, analyst]

I have 3. Firstly, on the dividend policy, I was wondering if the change of the payout is cyclical or structural in nature, meaning that you mentioned that the market uncertainty is obviously still high, it's still uncertain if prices and interest rates develop, but you also said that you want to invest more money in the Polish operations. So I was just wondering, going forward, if you see a stabilization of prices and interest rates in Germany, will you plan -- do you plan to return to the old payout ratio of 75%? Or could it be structured lower because you want to invest more money in the Polish operations?

[Martin Thiel, executive]

Thomas, first of all, if you look at cash flows in our company, we clearly separate cash flows in Germany and cash flows in Poland or, more precisely, cash flows that are coming from the rental business and cash flows that are coming from the sales business. In this business in the sense of a recurring business, recurring earnings, that's clearly Poland.

So what is produced as a positive cash flow from the sales business in Poland, that's the number that I mentioned, roughly, on average, EUR 55 million. That stays in Poland, and this is the basis, the equity for the next rental project in Poland. And if we then are able to pick on some additional financing in Poland, like discussed in the question before, that should enable us a good growth.

So that means on the other side, the rental cash flow is simply there, and that's coming from the German portfolio and also more and more from the Polish portfolio. And we know, and that was why this payout ratio was at 75%. At 75% FFO I is, in a typical year, roughly 100% of AFFO. So therefore, this should be also a sustainable payout ratio in the future. But clearly, I mean, in this environment, we need to look into dividend payments really from year-to-year.

So therefore, as of today, we simply need to pause the dividend payment. And for 2024, subject to market conditions, if we return already to the full payout ratio in full, if we do something in between, that's definitely not decided. We have even not discussed this because in the current environment, you need to look really quarter-by-quarter. But again, structurally, the old payout ratio would still fit.

[Thomas Neuhold, analyst]

Okay. Perfect. The next question is on Page 8. You mentioned that the revaluation loss of EUR 6.2 million in Q3 is related to upcoming disposals. What is the size of these disposals you signed already for Q4?

[Martin Thiel, executive]

This is mainly -- we gave the number for a net cash inflow that is realized after the balance sheet date. It was slightly about EUR 90 million. So the total purchase price of the disposals closed after the balance sheet date was a little bit more than EUR 100 million. So in a simple calculation, this is roughly 5% lower than the book value at June.

[Thomas Neuhold, analyst]

Understood. And my last question is on the financing cost in Germany. What kind of spreads banks are currently demanding for secured financing?

[Martin Thiel, executive]

For maturities between maybe 5 and 10 years, we are discussing spreads between 100 and 130 basis points.

[Operator]

Our next question comes from Marios Pastou from Societe Generale.

[Marios Pastou, analyst]

I've got 2 questions actually related to the rental operations in Poland. Maybe I'll ask them together because they're broadly related. So firstly, there seems to be a fair amount of progress being made on reducing the vacancy in Poland for completed units. For any newly completed units, are these leasing up quicker compared to your expectations? And therefore, should we be expecting any further valuation uplift to come on this basis?

And secondly, how quickly are these units being leased up versus your expectations in terms of speed, but also in terms of the rent levels that you're achieving versus your expectations set out on Slide 30?

[Martin Thiel, executive]

Marios, well, in our business plan, which was in place at the beginning of 2023, the underlying assumption was always that it takes up to 9 months to rent out a newly constructed residential building in full. We've seen in reality that this is less than 6 months. So that's, on average, it's a rough number, 3 months quicker than expected.

We expect, regarding the Polish portfolio, a valuation uplift at year-end. And this has, by the way, also been the case in the first half of 2023 and also in the second half of 2022. So whereas we saw valuation losses in Germany, in Poland, in the last valuations, we've seen valuation gains.

Also here, we have no indication. Clearly, in absolute amounts, that's then a smaller portfolio compared to Germany. So the valuation losses -- sorry, valuation gains we've recorded in the last half-year valuations were around EUR 15 million. That is a little bit more this year as we see prices even strongly increasing than before.

[Marios Pastou, analyst]

Okay, very clear. So if it's past the lease up by about 3 months, so in terms of the rent levels you're achieving, I think you meant you're still sticking to the EUR 12 to EUR 14. Is that still the case?

[Martin Thiel, executive]

Yes, for the locations where we're currently renting, so Wroclaw, Poznan, that's still absolutely achievable rent level. In Warsaw where we are about to start, hopefully, the first rental project quite soon, rent levels would be higher. So here, we would not talk about EUR 12 per square meter. That would be more EUR 14 to EUR 15 per square meter.

[Marios Pastou, analyst]

Okay, very clear. And just finally from my side, there seems to be a bit of an uplift on the average gross rental yields you're expecting on some stabilization of investment costs. Is that the construction cost coming down? Has there been a change in the projects coming through?

[Martin Thiel, executive]

Well, we know that in the projects that are now in the market, so what we present here on the rental portfolio Poland table, the realized gross yields have been around 7.5% on average. So before that, we've guided at least 7%. So now we broadened that range more to 7% to 8%. And construction costs have been as expected, but what is better than expected in our original business plan is the rent level.

[Operator]

Our next question comes from Andre Remke from Baader Bank.

[Andre Remke, analyst]

Some questions left. First, starting with the dividend. While your argument is well understood, I think, with strengthening the balance sheet and also the reinvestment in Poland sounds reasonable, but I'm still a bit surprised because I got the impression over the recent months that you reached a self-funding level. You, several times, mentioned this for the Polish activities. Is this not anymore the case? Or will you simply speed up the activities in Poland that you need the freed-up cash from the nonpaid dividends? What is your view on that?

[Martin Thiel, executive]

Andre, better can -- I'll try to clarify this. So the Polish business currently is not only self-funding, it's producing cash. And I already alluded to the sales business, the cash surplus we achieved there and also I mentioned that we are in the refinancing process for Polish rental properties. So that means we have a clear cash surplus. And theoretically, of course, there could be something that feeds the dividend to our shareholders.

So it could have been a decision to say, okay, we take the cash from Poland and use that for dividend payment to our shareholders. But we decided, at least for this year, no, this is not something that makes sense. We keep the cash surplus that is generated in Poland in Poland and reinvest that into new land bank acquisition for a currently very attractive sales business into new investments for the next rental project.

[Andre Remke, analyst]

Yes, okay. Okay. Then a question on your portfolio valuation. Thanks for your thoughts on the German portfolio. You mentioned a positive valuation in Poland. On Page 6, the gross asset value of the Polish portfolio declined by 3% quarter-on-quarter. Is there a special reason for that? Or is it only due to the zloty?

[Martin Thiel, executive]

That's, in fact, only due to the zloty. So ex -- this is a calculation that is based on the zloty exchange rate as of September 30. At that point in time, the zloty was a little bit weaker. It's now, as of today, more on the level of June. So this is also something -- I mean the numbers are not that huge, but we need to get used to that we do have a foreign currency impact in the JV and that's also in the NAV or LTV. Again, it will not be material simply from foreign currency translation.

[Andre Remke, analyst]

Okay. And you already referred to that, but I didn't catch it up. In the portfolio valuation in Poland for the first half, it was [indiscernible] correctly, EUR 15 million. What is your expectation for the second half, a higher -- potentially higher number or the similar number? You mentioned it already, but I didn't get...

[Martin Thiel, executive]

Yes. It should be higher. So that would be my expectation. But again, also here, we have no results, and we can't give you a specific guidance. But perhaps what is helpful on Page 16 in the table, we also show the in-place yield. So that means the current IFRS book value coming from June in relation to the current rent levels. And for example, the Wroclaw units are currently trading at a 6.1% in-place yield, and that should be clearly a number that could be improved. So anything more towards 5%, perhaps not in full at year-end, but now over the next quarters, should be a more realistic in-place yield or a market yield than 6.1%.

[Andre Remke, analyst]

Excellent. Very helpful. Then the last question is disposals. Do you implement or assume any disposals from the German business into your guidance next year? And probably more in general, how active you are in selling or defining properties to sell from the German portfolios? Especially to lower your LTV or to come back in the future into investment grade by Moody's, what is needed here? What is included in the guidance? And what is needed for ratings?

[Martin Thiel, executive]

The guidance is based on the portfolio in Germany as it is, so without any disposals and, of course, also without any acquisitions that we're currently not planning. So that's on the existing portfolio.

We have been not communicating official disposal program. And we have done this last year in connection with the rights issue in July 2022 when we said why we want to sell more than 2,000 units in Germany with net cash proceeds of at least EUR 250 million. That has now been achieved, and that was always the number or the amount that we needed to repay the ROBYG bridge facility in full. This has now been done. So that means we can now be more selective. We are not so much under enough pressure to sell, but clearly, we will continue to sell. But we are not guiding on a quarterly run rate. So you should expect some volatility between the quarters.

But just to give you an idea about our dimensions for 2024. So this year, 2023, net cash from disposals or purchase prices are around EUR 200 million that we should achieve perhaps something at around EUR 100 million next year. It could be a realistic estimate, and that would already help us very much to bring the LTV to the level, which is our target, to 45%.

Is that a hard expectation from the rating agencies? I would not say hard expectation. But clearly, everything that helps us to delever is very much welcome by the rating agency. And we expect that also the announcement that we made yesterday evening to propose a further dividend suspension will be clearly ratings supportive.

The good thing is that we have achieved already a lot regarding disposals. And therefore, we're not so much under pressure nor liquidity-wise, neither from the rating side to dispose a certain amount. But yes, we will continue to sell, and we will continue to be active, and you need to be active to sell something. So selling apartments is quite difficult, but liquidity is there in the smaller sizes that are sufficient for us.

[Andre Remke, analyst]

And how do you see the risks from S&P for a downgrade to non-investment grade? Because at least if I try to mind that this is still an investment-grade-rated, right?

[Martin Thiel, executive]

Yes, this is the case. So the rating at S&P is unchanged at BBB- with a negative outlook. That has been confirmed last time in April. So the normal cycle would be that the next rating committee would take place 1 year thereafter, so early next year. I mean we have good discussions with both rating agencies. I think both rating agencies see the material progress we have made. Again, we repaid EUR 1 billion of unsecured financing in the last 15 months. We've realized EUR 250 million of cash from disposals. Now a second dividend suspension, that should be all very supportive.

I mean, clearly, there's still a risk coming from the German markets in total. If rating agencies seek even more negative view, which I currently do not expect, but if that would be the case, that could put also our rating under pressure. But we don't see this at the moment. So at the moment, we expect that we are going more towards positive rating actions than any further negative actions.

[Andre Remke, analyst]

Regardless, there is a mismatch between Moody's and S&P in their views. So you...

[Martin Thiel, executive]

Yes. I mean the Moody's rating is now for a little bit more than 1 year below investment grade. Perhaps you've seen their last announcement, announcement also regarding us and the credit opinion is meanwhile published. We have not achieved a positive outlook. But if you look in the wording, you can clearly read, I think they expressed it in a way to say there's a kind of positive rating pressure, which is good.

So we should be on a way here at Moody's in a positive rating action. And we need to be patient here. We understand that in this environment, for rating agencies, it's difficult, whereas other German residential companies see negative rating actions here to give -- or to provide us with the positive rating actions. Let's be more patient, and let's see how the development is when we report the full year results in March next year.

[Operator]

Our next question comes from [ Peter Runboom ] from Van Lanschot Kempen.

[Unknown Analyst]

I've got a couple of questions on the FFO I guidance, specifically on the bridge that you showed in the presentation, if you can take them together, the questions. So first of all, how much capitalized interest is taken into account into this guidance? And secondly, what recurring tax rate should we take into account?

[Martin Thiel, executive]

Yes. Well, we got -- to start with the question for the tax rate for Poland, it's quite simple because here, we have no tax losses carried forward. And the tax rate is 19%, and that refers to the rental business as well as to the sales business. And for Germany, we already have seen increasing taxes in 2023. So that's already more than 2022. We expect a further increase by roughly EUR 4 million in the guidance 2024. So the tax rate is perhaps more in a range, 8% to 10% in the next, I would say, 2 to 3 years.

So as we are consuming tax losses carry forward, that should be a little bit more than in the past. So please take this as a rough indication that would be, today, something we expect. But as always, the details in German tax law are rather complicated. But perhaps this helps you as an indication.

And yes, we also have capitalized interest, and that mainly refers to the sales business where this is then basically reducing the gross margin from sales. So when we are constructing new apartments for the sales business, the interest cost that we use for that is capitalized in full and increases the book value of the apartment. And then when the apartment is handed over, we realize the profit. And therefore, there's not an interest cost that shows up, but a higher cost for the property and the lower gross margin.

So the amount of capitalized interest should be, 2024, roughly on a level of 2023. We're publishing this in our statements as a rough assumption. I think it's a number between EUR 10 million and EUR 12 million a year, which is going, in this context, as capitalized interest.

[Operator]

Our next question comes from Thomas Rothaeusler from Deutsche Bank.

[Thomas Rothaeusler, analyst]

A couple of questions. First is on the Polish residential market. I mean we hear about developers shy to start new projects because of stretched affordability. Maybe you can share your experience here. And also on politics, I mean, could you comment on the potential impact from a new government, especially on subsidies? Should we be aware of any specific risk here?

[Martin Thiel, executive]

Thomas, I'll start with the second question. In general, we welcome the change in the government. This should be a government that is even more supportive for the economy. You know that also huge amounts of subsidies from the European Union that are dedicated for Poland have been frozen because of the still existing government. So if this is now coming into Poland, that should help the economy, and that should -- will be a big driver or a good driver for the Polish economy next years.

But on the other side, did we have really, how should I say it, in a day-to-day business were negative experiences with the existing government? No, this was not the case. So this -- also this government understood to a certain extent how companies are working, and so the whole environment was good, therefore. What was very generous was, of course, the program for first-time buyers of apartments. I mean this 2% mortgage program clearly helped the market to recover and to speed up, but that's not driving the higher sales levels in full.

So as of today, we have roughly 50% of our buyers that are still buying in cash or equity, and 50% are taken on a mortgage. And out of this 50% mortgage buyers, there, roughly 1/3 is using this 2% mortgage program. So roughly 15% to 20% of our customers are using that. So that's clearly helping, but that's not, let's say, the only reason for the good development that we see in the market.

So to make the answer short, we expect here a more positive impact from the government change. And when it comes to affordability, also the salary levels in Poland developed quite good. So therefore, when it comes to affordability, still apartments are affordable in Poland. And this is also the reason why people in Poland are still buying despite still quite high mortgage level. I mean without this 2% mortgage program, the typical mortgage rates in Poland is still at 8% or 9%. And still, people are buying apartments because they can afford it.

So clearly, we've seen very strong price increases in the last months. So that should normalize a little bit, but we're not getting into a situation where the market is overheating or something like that. That will not be the case.

[Thomas Rothaeusler, analyst]

Okay. The second point is actually on your decision to suspend the dividend and to tap growth opportunities, so also in Poland, and also as I understand in the rental business. Is there any change here with regards to the ramp-up plan for rental apartments?

[Martin Thiel, executive]

No, this is unchanged. You still find in the appendix of our presentation, that's 2 scenarios that we have presented for the first time at our Capital Markets Day in April, how to ramp up the Polish rental business. So 2 scenarios, 1 scenario, purely equity-financed; another scenario with additional debt, that leads them to 6,600 or more than 10,000 units in the next 5 years. So these scenarios and hopefully more the second scenario with the 10,000-unit portfolio is still what we want to achieve in Poland in the rental business.

[Thomas Rothaeusler, analyst]

Okay. The last question is on disposals in Germany, I mean especially those up to the balance sheet date. Maybe I have missed it, but could you provide more color on what you have sold there?

[Martin Thiel, executive]

And what -- sorry, it was hard to understand, Thomas. What we sold in the third quarter was the question?

[Thomas Rothaeusler, analyst]

Yes. Actually, in the fourth quarter, beyond the balance sheet date.

[Martin Thiel, executive]

Okay. Now what we've been referring to the cash inflow after balance sheet date, that was from disposals where the signing was before the balance sheet date. So simply to give you an idea, okay, what part of cash has already -- or is not included in the balance sheet as of September 30 because the closing of the transactions signed in the third quarter was in the fourth quarter. But we have not announced today what we've already sold in the fourth quarter.

[Operator]

[Operator Instructions] Our next question comes from Simon Stippig from Warburg Research.

[Simon Stippig, analyst]

Thank you for giving a longer-term dividend guidance. Again, I think shareholders really deserve to get transparency there. But then on the shorter-term dividend suspension, I mean, I think it's a bit debatable because, I mean, you're speaking about net cash proceeds of EUR 200 million. Q3, there's -- or the trend is good at EUR 40 million in Q3, and net cash proceeds from this for the revaluations decelerating and actually positive signs in Poland, no material refinancings.

So that leads me to my question in regard to market conditions. But actually, do you expect to improve then or what you have to see in the capital markets and transaction market so you feel confident to pay out a dividend or at least the share of a dividend?

And then the second question to that is the cash for mortgage financing in Poland. You mentioned there's a cash share and there's a share of the shareholder loan from TAG. Can you give the split because there should be actually an additional cash inflow?

And maybe also one more question to that because you spoke about scenario 1 and scenario 2 in your Poland business and the ramp-up. And I wonder if that just mentioned mortgage financing is actually providing you more towards scenario 2 already. That would be great if you could answer those questions. And then I have 1 or 2 more, if I may.

[Martin Thiel, executive]

Yes, Simon. Well, first of all, you're right, what we expect from mortgage-secured financing in Poland is putting us clearly more towards scenario 2. So this is helpful. It's not yet finally decided which part of this mortgage financing we keep in Poland or which part will be used to repay shareholder loans from TAG. If that would be a 50%-50% split, so there would be EUR 60 million to EUR 70 million that are repaid in shareholder loans, and the remaining part is in -- stays in Poland. So that clearly is the first step in growing the rental portfolio further.

I mean we can discuss if the plan that we announced yesterday evening to further suspend the dividend is very conservative or conservative. We think it's appropriate because we have really done a lot in the past quarters to get more financial flexibility, to get more freedom. And now we are in a situation where in the next 2 years, no material unsecured financings are ahead of us. We've got a certain liquidity buffer now after all refinancings are complete.

So that's the -- at least that's how we behave a little bit more conservative and perhaps use the funds, the cash surplus to delever more and to bring the LTV back to the LTV target of 45% perhaps a little bit quicker. We think that's still appropriate. And they've seen how the development is at the end of 2024. Perhaps even if transaction market, capital markets are still not easy, we return to a dividend payment. But I want -- don't want to give here really any guidance for 2024.

At the moment, in this market environment, it's really best from our point of view to look quarter-by-quarter and decide then at a later point in time what is the appropriate dividend strategy for the future.

[Simon Stippig, analyst]

Okay. And maybe one follow-up here in regard to the ramp-up in Poland. If we are at scenario 2, then the EBITDA contribution, at what level would that be in, let's say, 2024 to 2025?

[Martin Thiel, executive]

You see in the slide in the presentation, in the appendix, the EBITDA contribution that we expect in the 2 scenarios. So I mean we've given a guidance for net actual rent that we expect then after the scenarios are completed. So that's on Page 31 of the presentation and the EBITDA margin. So you can calculate quite simply the EBITDA contribution.

Please be aware that if we start a rental project today, it takes even more than 18 months to complete it, so that's more 21 to 24 months because rental apartments in Poland are clearly delivered with a full fit-out, whereas the apartments in the sales business are delivered without any interiors or without a bathroom, without floors, without doors. So therefore, the construction time is a little bit longer.

So projects that we start today after 21, 24 months of construction, we then deliver first EBITDA contribution at the end of 2025. So there's always a certain time lag. But I mean, clearly, we are long-term investors. So therefore, we look here more into the next 4 to 5 years if we evaluate the rental business.

[Simon Stippig, analyst]

Okay. And for the year, maybe you mentioned it already, apologies for that, but for the year of 2024 in the rental business, how many additions do you see on average, I mean, or until H1? Because if I look into your guidance 2024 and I assume your EUR 11 million to EUR 13 million in contribution and I take your minimum level of margin, then I think it's quite conservative if I annualize your net rental contribution as of Q3. Is there any -- do you expect maybe less rental units to come into your portfolio for the next year, so they are rather flat? Or is it just very conservative? Or do you expect actually a higher cost?

[Martin Thiel, executive]

No, we have unchanged, 1,050 units roughly under construction. So in these units will be finished to the largest part in summer next year, so mostly in the second quarter, then we start renting out the apartments. And then as discussed before, it takes us some months until we have really fully rented it out. So we clearly have a higher number of apartments on the market middle of next year, so something at around 3,300 units.

But until it is rented out, that again takes some months. So for the portfolio, for the units that are finished in 2024, 2025 is in the first year with full EBITDA contribution, but perhaps we are surprised again in the rental process, in the new constructed apartment, if it's again faster than expected, then we would have even a little bit more in 2024 as an EBITDA contribution from Poland.

[Simon Stippig, analyst]

Okay. Great. And no material cost increases you're actually anticipating and you probably expect the same run rate in rental growth for the next year as you have perceived in 9 months 2023?

[Martin Thiel, executive]

Yes, regarding construction costs, I think we have here high visibility, so we should not see here any surprises. Construction costs in Poland are quite stable in the last quarters, which is good.

And regarding rental growth, I mean, as inflation in Poland is coming down, so it's currently at 8%, it has been 15%, 16% some quarters back, I think it's realistic that also the rental growth is coming a little bit down. But still, it should be on a good number. We had 12% this year or at the end of third quarter, get more than 20% last year. I mean please remember already at that time, we've been warning, this is not a kind of run rate that you should expect. But it will continue with the rental growth. It should be at or above inflation in Poland. I think that's very realistic.

[Simon Stippig, analyst]

Okay. That's clear. And if I may, 2 very, very quick and short questions. In regard to your maturities for the next year, are you already in the discussions, especially on the larger share of bank loans?

And then the second one, in your non-rechargeable ancillary expenses, you mentioned the increase is coming from CO2 taxes. Could you quantify that and then also mention if that is the run rate we can assume for the next years?

[Martin Thiel, executive]

Well, this number, this impact was around 1.5%, and the new and higher CO2 tax is incorporated in the guidance. So you see also in the FFO bridge higher maintenance and other property management costs in Germany of EUR 4 million. So part of that is also a higher CO2 tax in Germany.

And Simon, can you remind me of your first question?

[Simon Stippig, analyst]

The maturity for next year.

[Martin Thiel, executive]

So the short answer is yes. So you should expect when we publish the full year figures for 2023 in March that the latest until then, we have already refinanced a larger part of the maturities in 2024 because here, we are similar, like in Poland, in advanced negotiations with our German banks to do this ahead of maturity.

[Operator]

Our last question comes from Daniela Lungu from First Sentier Investors.

[Daniela Lungu, analyst]

Just one question to clarify, if you don't mind, about the rental growth in Poland. You may have already specified, and if I've missed it, apologies. But the 12% growth that you are quoting, just wanted to make sure that that's pure rent growth and doesn't include vacancy reduction?

[Martin Thiel, executive]

Daniela, yes, that's the case. So that's pure rent growth. That's without any impact from vacancy reduction.

[Operator]

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

[Martin Thiel, executive]

Good, Yamin. Thanks all for joining the call. As always, if there are any questions left, please feel free to contact our IR department or myself. Thank you for listening, and hope to see you soon on the road or in our next call. Many thanks, and have a good day.

[Operator]

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