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Edited Transcript of LEG.DE earnings conference call or presentation 9-Mar-20 9:00am GMT

Q4 2019 LEG Immobilien AG Earnings Call

Duesseldorf Mar 16, 2020 (Thomson StreetEvents) -- Edited Transcript of LEG Immobilien AG earnings conference call or presentation Monday, March 9, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Kopfinger

Deutsche Bank AG, Research Division - Research Analyst

* Lars Von Lackum

LEG Immobilien AG - CEO & Chairman of the Management Board

* Volker Wiegel

LEG Immobilien AG - COO & Member of Management Board

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Conference Call Participants

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* Charles Boissier

UBS Investment Bank, Research Division - Director and Property Analyst

* Georg Kanders

Bankhaus Lampe KG, Research Division - Investment Analyst

* Kai Malte Klose

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Marc Louis Baptiste Mozzi

BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team

* Paul J. May

Barclays Bank PLC, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining the LEG Conference Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Frank Kopfinger, Head of Investor Relations. Please go ahead.

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Frank Kopfinger, Deutsche Bank AG, Research Division - Research Analyst [2]

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Thank you and good morning, everyone from Düsseldorf and welcome to our 2019 results call.

I'm here with our CEO, Lars Von Lackum, as well as our COO, Volker Wiegel. As usual, they will lead you through the presentation, and we will then open it up for your questions. And as a reminder, you'll find the presentation document as well as the annual report within the IR section of our homepage. Please note that there is also a disclaimer, which you'll find on Page 2 of the presentation. And with this, I hand it over to you, Lars.

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [3]

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Good morning, ladies and gentlemen, and welcome from my side to our financial year 2019 earnings call. We are very pleased to report an overall strong set of results to you today. Let me start my presentation on Slide 4. We delivered on our financial targets, improved the quality of our balance sheet and had a good start to the year. We further grew our portfolio by adding 1,500 units to our platform and we already are in advanced negotiations with regard to another 1,200 units. As a result, we are happy to confirm our FFO I guidance range of EUR 370 million to EUR 380 million at midpoint, an increase of around 10% over the 2019 level. We are very much looking forward to work closely with Susanne Schröter-Crossan, our new CFO, who will join the company at the beginning of July. She will represent a strong contribution to our management team and especially allow me to focus even more on strategic projects.

Let me now briefly summarize the key financial and operating highlights of 2019. On the financials, we were able to grow our FFO I by more than 7% to EUR 341.3 million, leading to an improved EBITDA margin of 72.8%. This is the midpoint of our guidance for the FFO I and in line with our target of 73% for the EBITDA margin. Additionally, we strengthened our balance sheet by the conversion of our convertible 2014/2021 and a valuation uplift of 8.3% of our portfolio. With a gross asset value of EUR 1,353 per square meter, our assets offer an attractive gross yield of 5.1%. The LTV was reduced to 37.7% as we could significantly improve our financial profile. We extended the maturity of our debt to 8.1 years and reduced at the same time, our interest cost by 15 bps to 1.43%. For 2019, we proposed a dividend of EUR 3.60 to our shareholders.

Coming to the operational drivers. We continue to grow our portfolio by another 5,700 units. Following our strategy, the majority around 3,300 units, lie in our home state of North Rhine-Westphalia. For the first time, we expanded also into adjacent German states, especially Lower Saxony and Bremen.

Net cold rent increased by 4.6%, which is mainly driven by the like-for-like rental growth of 2.9%. The like-for-like vacancy rate dropped slightly to 3%. Secondly, this also reflects the tight supply situation in our markets. The FFO I from services saw a strong increase to EUR 23 million demonstrating that our strategy to expand the offering and improve the penetration is paying off. We also further improved our social and environmental footprint. Due to our modernization, we were able to reduce our carbon emissions by 5,400 tonnes per annum. One of the clear highlights in 2019 was the establishment of our new foundation "Your Home Helps", which we capitalized with EUR 16 million. This is a strong commitment to our social responsibility. The foundation collaborates with various renowned charities and will help tenants and their children from challenging background.

With this, I come to Slide 5. Our extended platform produces growing payouts for our shareholders. While on a unit basis, our portfolio remained stable with 134,000 units, to substantially improve the quality of our assets. On the one hand side, we acquired 5,700 units of which transfer of ownership for 2,200 units took place as of the 1st of January 2020. On the other hand side, we disposed of some 3,400 units which would have required a significantly high investment level into the future. In 2020, we could already sign the acquisition of 1,500 units in North Rhine-Westphalia and Rhineland-Palatinate. Additionally, we are in advanced negotiations for another 1,200 units, mostly outside of North Rhine-Westphalia.

In financial terms, our FFO I level grew by more than 7% to EUR 341.3 million. On a per share basis, this represents an increase of 4.6%. Roughly 2/3 of the increase was driven by the organic rental growth and 1/3 by acquisitions. Looking forward, our 2019 acquisitions as well as the benefit generated from refinancing some of our outstanding debt at the end of last year will contribute around EUR 7 million each into our FFO I growth in 2020. We expect 1,500 units acquired so far to contribute to FFO from the second half of the year. The higher FFO I base allowed us to increase the total payout to EUR 248 million. This represents an increase of 11% and even exceeds the FFO I growth. We decided for this increase to compensate existing shareholders for the dilution from the conversion of the 2014/2021 convertible. Overall, we are happy to propose a dividend per share of EUR 3.60, which translates into a payout ratio for the FFO I of 73%.

Moreover, we will ask the AGM to approve a script dividend for the first time, but we'll decide on the execution, depending on the development of capital markets.

I would like to take you to Slide 6 in order to spend a few words on our acquisition strategy. LEG remains focused, i.e., we remain focused in Germany and remain committed to our asset class of affordable housing. We stick to our home state of North Rhine-Westphalia, and we will always prefer acquisitions there to any new location outside of NRW. Those come with nearly no additional cost and increase the efficiency of our platform immediately. However, we continuously see our offers also for assets outside NRW and probably less some attractive deals on the table in the past. This and the lower regional focus of portfolios in the market are the reason that we started last year to acquire assets outside of NRW. At the same time, we reiterate that we are not planning to expand into international markets in order to avoid adding an extra layer of complexity to our organization. We believe that there is sufficient room for us to grow in Germany, even in NRW. While we are clearly the market leader in our home state, North Rhine-Westphalia, our market share is only low single digits. Whenever we enter new locations outside NRW, we need to have a minimum of 1,000 units so that we can deploy own staff and efficiently operate those locations. Additionally, as growth as such is not new to us, we have an efficient platform to onboard the new units to the portfolio. As you can see on Slide 6, we have been offered around 100,000 units last year, of which we ultimately acquired and closed 5,700 units. In January 2020, we signed another 1,500 units, which we had in our pipeline already last year, but unfortunately took us longer than expected to bring the deal to paper. Therefore, with a few weeks delay, we were able to meet our goal to acquire around 7,000 new units. While expanding in Germany, we remain highly selective and stick to our solid acquisition criteria. Our focus will remain on B and C cities and especially on affordable housing, which fits completely to our current portfolio and our current tenant structure. With this, I hand over to Volker, who will guide you through our portfolio and our operational highlights.

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [4]

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Thank you, Lars, and good morning also from my side. Let us now have a look at Slide 8, where we provide an overview of our operating performance. All-in-all, the in-place rent in the LEG portfolio rose by 2.9% on a like-for-like basis. Our free financed units which account for 75% of the portfolio grew by as much as 3.6% like-for-like, continuing the very positive growth trend. And again, and the strongest increase was in the high-growth segment with a plus of 3.3%. The stable markets follow close behind with plus 3.1%. This clearly reflects the sustainable growth momentum in the commuter belt areas. At the same time, both market segments also benefited from our modernization program. In the higher-yielding markets, modernization activities were less pronounced, and we only had a few new Mietspiegel in 2019. Nonetheless, rents and lease segments still rose by 2.1%. When you look at the free financed units in these markets only, the growth rates were even more compelling with 4.2% in the orange market, 3.9% in the green and 2.5% in purple markets. The occupancy rate for the total portfolio as at year-end was not better than expected. It could slightly reduce the like-for-like EPRA vacancy rate to 3%. In our orange markets, we are nearly fully [latched] with an overall occupancy rate of 98.4% like-for-like. The lowest vacancy rates are Munster with 0.8%, Cologne with 1%, and Gütersloh in Westphalia with 0.7%. The vacancy rate in the stable markets was down by 10 basis points.

Coming to the higher-yielding markets. We have seen a slight increase of 30 basis points in these markets. This compares to an increase of 60 basis points as of the end of last quarter and reflects that our organizational measures implemented in these markets to further improve operational efficiency are beginning to take effect. For the portfolio as a whole, we still expect a further slight decrease of the vacancy rates as at year-end 2020.

Let's move to Slide #9, where we show an analysis of the rent growth drivers. Mietspiegel adjustments in 2019 accounted for 1.2% out of the 2.9% rent growth overall. Modernization measures, like in the previous year, accounted for 0.8% and the effects from reletting were somewhat stronger than in 2018. You know that there was no cost rent adjustment in 2019. The positive rent development was due to our free financed units and especially to the strong performance of important locations.

Let me give you some examples always on a like-for-like basis. In our high-growth markets, Monheim was again the top-performing city with an increase of the average in-place rent of 7.7% year-on-year. Monheim is the most important location for our investment program. We are the largest landlord there with around 3,300 units. Close by in Cologne, the average rent growth was plus 4.5% or 6.5%, if we are looking solely at the free financed units. In Düsseldorf, we expect a positive growth impetus from a new Mietspiegel that was recently released. In the stable markets, the best-performing city was Bochum with rent growth of 4.6% or 5.8% -- 5.8% for the financed units. Until Q3 2019, Bochum was allocated to the higher-yielding segment. With the recent portfolio revaluation it was added to the stable markets and for good reasons.

Mönchengladbach as well continues to be a growth engine with plus 4.2% or 5.1% in the free finance units. In our purple markets, we saw again, the strongest growth in Duisburg with an increase of 3.9% like-for-like.

On the following Slide #10, you'll find more details on the investments. Overall, the investments into our portfolio rose by around 16.9% to EUR 295 million. On a square meter basis, this is still an increase of 15.3%. We spent nearly EUR 34 per square meters, the bulk of which was for value-enhancing CapEx measures. This resulted into a capitalization ratio of 70%. Geographically, the focus for modernization was on the cities of Monheim, Dortmund, Mönchengladbach and Munster. More than half of the CapEx was spent on orange markets, more than 1/3 in the green markets and the remainder in purple markets. When we looked at the rent growth drivers a few minutes ago, you could see that modernization continues to be an important driver even against the background of somewhat stricter regulation. We are taking up the challenge to carefully balance potential rent increases from modernization, the climate change, which means enhancing the energy efficiency of our portfolio and the affordability of our tenants. All this is part of our strategy.

On Slide 11, we show our FFO contribution from services. We are quite happy with the development. The FFO from services increased to EUR 23 million. The key operational driver came from our craftsmen services, which benefited from higher volumes and the growing number of employees to service the customers, but we saw also improvements from our multimedia offering which benefited from price adjustments. One of our key milestones was the acquisition of the outstanding 49% in ESP. This allows us now to fully consolidate this entity from 2020 onwards. We made also good progress with our cooperation with partners to market electricity and gas to our tenants. And with this, I hand back to Lars for more insight into the financials.

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [5]

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Thank you, Volker. At last, please have a look at the overview chart with financial highlights on Slide 13. The numbers once again demonstrate that LEG's margin expansion story is well on track with further noticeable improvements across all P&L lines. Our net cold rent increased by 4.6% to EUR 586.1 million. The adjusted net rental and lease income rose by 5.2%, even stronger than the net cold rent. Our adjusted NRI margin of 77.3% shows a margin expansion of 50 basis points of year-on-year. This clearly underscores the efficiency gains we are still able to realize. Moreover, on the overhead level, we kept our costs stable despite substantial inflation of wages and other cost items. Hence, our adjusted EBITDA margin improved by 50 bps year-on-year to 72.8%. This is in line with our margin target of around 73%, despite some higher maintenance and admin costs in the final quarter as part of the natural seasonality of our business. Our ongoing process optimization and the realization of further scale effects from our growing portfolio will continue to improve our EBITDA margin going further. Clearly, underlining our leading position in terms of cash flow profitability. For 2020, we aim for a further improvement of our EBITDA margin to around 74%.

On Slide 14, we present the calculation of the NAV. The NAV now reflects the full conversion of the 2014/2021 convertible, which was completed in Q4 2019. The NAV increased by 12.8% to EUR 105.39. Adjusted for the dividend payment, which amounted to EUR 3.53 per share, the NAV based total return amounted to 16.6%. This was primarily driven by the positive impact from an 8.3% uplift to the valuation of our portfolio. As discussed in the past, one of the limitations of this metric is that it does not capture the value of LEG's highly value-generating services business as an important value component of our business model. As Volker explained earlier, we are quite happy with the development of our service activities, which we believe adds up to EUR 8 per share is captured in the NAV calculation.

For more details on the valuation, please follow me to Slide 15. In 2020, the revaluation gains amounted to EUR 923.4 million, which was an uplift of 8.3% over the last year's level. It represents another 3.4% uplift in the second half of the year. We feel very comfortable with our valuation levels, which, again, has been confirmed by CBRE as our external appraiser. The most important driver for the 2019 valuation was the adjustment of the discount rate from 5.2% to 4.8%. The ongoing yield compression in our markets continues to feed through to the appraisal values. In terms of capital composition, around the 18% of the valuation uplift comes from our CapEx spending, which amounts to around EUR 202 million. In terms of markets, we saw the strongest value momentum in the high-growth markets with an average revaluation gain of 9.4%. There are 2 important value drivers. The scarcity of the affordable housing product and the unchanged high demand for this type of product are clearly the most relevant ones. However, there is also a technical component. Some price developments in growth markets, which we have witnessed in the past has become part of the data set for the Committee of Valuation Experts simply with a somewhat longer time lag. To give you some more detail. In our orange markets, Düsseldorf was up by 9.7% and Monheim, a city between Düsseldorf and Cologne by even more than 16%. There is also still a very strong momentum in many B cities, especially in those which are in commuting distance to A markets. An extremely positive example for this development is Dortmund. Our largest single market. The assets in Dortmund have experienced an impressive value appreciation. After a very strong value uplift of nearly 14% in 2018, our values rose once again by 11% in 2019. On Slide 16, we present the key valuation metrics broken down by markets. The other side of higher valuation levels are clearly declining yields. However, given where the risk-free yield, i.e., the German 10-year bond currently trades with a negative 80 bps, we regard our gross yield level of 5.1% to be very attractive. The gross value per square meter is now EUR 1,353 years, which translates into in-place rent multiple of 19.8x. This compares well against the market multiple of 17.5x. Taking our portfolio composition into account, we expect further valuation gains also in 2020. As usual, we will provide you with a more precise indication on valuation for the first half of the year with our Q1 results. Coming to our financing structure on Slide 17. After the conversion of the 2014/2021 convertible, the prepayment of some EUR 309 million of outstanding debt at the end of 2019, and the issuance of a dual tranche bond with a volume of EUR 800 million, we were able to significantly improve our financial profile. We reduced our healthy LTV by 300 bps to 37.7%, well below our 40% to 43% target range. We also extended the average maturity of our debt to 8.1 years. We repaid commercial paper of EUR 100 million early this year, which leaves us currently with no maturity until 2023. Due to the early repayment of debt in Q4 as well as the issuance of EUR 800 million of bonds, we significantly reduced our average interest costs by 15 bps to 1.43%. With respect to our second debt to EBITDA, we made some progress. We improved the respective ratio to 10.7x, which is well below our own maximum level of 11.5x. We believe it compares also favorable against our peers. Therefore, we are very pleased with our strong financial situation, putting us in an excellent position to capture further growth if and when attractive opportunities arise.

With this, let me now just provide you with some first remarks on the outlook for 2020 on Slide 19. As mentioned earlier, we had a good start to the year, and we are happy to confirm our 2020 guidance. On the acquisition side, we successfully continued our growth path. We signed a deal for another 1,500 units in North Rhine-Westphalia and Rhineland-Palatinate at the very beginning of the year. This was a slightly postponed portfolio bringing us to reach our 7,000 units targets, which we have set ourselves for 2019. Additionally, we are in advanced negotiations to acquire a bigger portfolio outside NRW allowing us to open up a new location. The charm of this portfolio is that it is a very concentrated portfolio, with all units being very close to each other in a key city location. We expect both deals to start adding to the FFO somewhere in the second half of this year. Based on these deals and the visibility on further potential transactions, we feel comfortable with our 7,000 units guidance, which we also confirm for 2020. Therefore, we reiterate our EUR 370 million to EUR 380 million FFO I target range for 2020. As we benefit from further scale effects and rental growth, we expect the EBITDA margin to further improve to around 74%. Additionally, we stick to our conservative balance sheet and expect the LTV to be at maximum of 43%, and we will return to our payout ratio of 70% of FFO I for 2020.

On the operations side, we expect a like-for-like rental growth of 2.8%. As pointed out already during the last call, this includes the effect from the early repayment of subsidized loans at the end of last year. We passed through a part of the lower interest costs to our tenants, representing a negative 20 bps effect on the rental growth. Given the ongoing and tight market situation, we expect the vacancy to slightly decrease and we stick to our investments of EUR 31 to EUR 33 per square meter. We also set ourselves targets along our ESG agenda. We continue to modernize 3% of our portfolio per annum to improve the energy efficiency of our assets. The new foundation plans to be fully staffed during the year with 8 employees. As a responsible landlord, we want to make a difference for our tenants and their families. To underline our full commitment to all ESG targets, there will be a proposal of a new compensation structure for the management team to the AGM this year. It will reflect ESG criteria within the STI and LTI plans of the management board. With this, I conclude our presentation and Volker and I will be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And the first question comes from the line of Charles Boissier of UBS.

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Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [2]

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I have 4 questions. The first 1 on external growth. So you mentioned 1,200 units in advanced negotiations outside of North Rhine-Westphalia. Is it possible to tell us the region and also the pricing relative to the pricing of your portfolio? And then just to be clear, I think the 7,000 units to be acquired in 2020 are on top of the 1,500 units signed in 2020 but negotiated in 2019. I just want to make sure these are not double counted, so to say. And then still on external growth, some peers are acquiring developers. And I just was wondering what you think about the strategy of acquiring small local developer, for example? And on that, apologies for several question on the external growth. But in the past, you were mentioning 250 units to be developed by 2023 per year. I think now somewhere in the report, you mentioned 500 units per year from 2023 onwards. So I just was wondering are you get to 500 units per year from 2020 to the onwards?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [3]

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Thanks a lot, Charles, for your questions. And I will just follow them from #1 to #4. And if I miss something, please feel free to just come up with another question. So the first 1 was with regards to the external growth and the 1,200 units, which we're currently looking at. Unfortunately, I'm not able to disclose the region. But once again, it will be in the adjacencies to North Rhine-Westphalia. It is a portfolio, which really gives us the ability to enter a market and then have a portfolio, which is highly efficient because all assets are very close to each other. With regards to pricing, and as always, there are the acquisition costs, which I can do nothing about. And certainly, we always are very much being focused on the acquisition criteria with regards to FFO, NAV and EBITDA margin. So this is also holding true for this portfolio meaning if we are adding it, it will most probably come at a spot trade with regard to gross yield, which is a bit below what you currently see in our books, that we make sure that within the next 3 to 5 years, we will arrive at a gross yield, which is in line with our current portfolio.

Looking at the second question, the 7,000 units. So definitely, the 7,000 units of last year, including the 1,500, which we have closed in -- within -- are signed in January, that was the first 7,000. We are committed to acquire another 7,000 within 2020. So the first 1 would be the 1,200, which would then be a part of this new 7,000, which we are starting to acquire in 2020. With regards to developers, I'm very happy to take this question. We have very much certainly looked into this question last year during the strategic review. But from our perspective, develop this, especially at a late-stage of the cycle we are in, come at quite a high cost. Their pipelines consist of end ground, which has been acquired very often, 6, 7 or even more years early on. And currently, those pipelines are valued at a current market price. From our perspective, it is not the right time to now acquire developers. And therefore, we will refrain also going forward from acquiring any developer. Instead, exactly as you pointed out, and this is bringing me to your fourth question is that we are still dedicated to realize densification projects on our own ground, meaning that until 2023, we are planning to generate around and complete around 250 units per year and with our own development force. Why are we now with 500? Because we are still willing to acquire around an additional 250 with developers, but we will have no development exposure on our own balance sheet, meaning also for the last year we acquired around 210 newly developed units. That's also an additional contribution we want to make to the market. So that brings us as of 2023 to around 500 units per year.

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Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [4]

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Okay. Apologies, just a few more. So you mentioned also new compensation structure for the board members, reflecting also ESG criteria. So I just was wondering, are the rest of the criteria unchanged, meaning, for example, for your long-term metric, you had relative total shareholder return and a relative share price? Or is it part of a broader overall of the compensation structure?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [5]

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Yes. So very happy to also take this question, Charles. So 40% will still be on the total shareholder return. 40% will still then depend on the development of the share price in comparison to the EPRA Germany, but 20%, we will now dedicate towards the ESG criteria.

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Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [6]

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Apologies for another 2 very quick questions. Non-staff operating costs of EUR 33 million versus EUR 10 million at 9 months, apologies if you mentioned, but what is driving the higher cost?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [7]

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The higher cost overall or the higher cost for full services?

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Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [8]

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Yes, for the non-staff operating costs.

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [9]

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Yes. So this was very much driven that, as you know, last year, that we have 2 board members leaving us. This was definitely part of the severance payments, which we have seen. And that's the major driver going forward.

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Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [10]

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Okay. And apologies, last one. And you mentioned you will classify some markets from a high-yield into stable like Lippe during the presentation. Also, I noticed on the other hand, a few high-growth markets were reclassified as stable. I just was quite interested to see that perhaps are some markets showing signs of slowing? Or what is driving this whole classification?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [11]

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Yes, reclassification was very much driven by the parameters, which we are looking at. And some of them are certainly forward-looking like the development of number of households, the development of income levels in certain regions. And that's certainly something which we take into consideration where we are and then selecting -- and certain cities to be part of the high-growth segment or the stable segments. And therefore, we've seen Bochum and Soest, for example, where from our perspective, they are more stable markets than according to the assessment which we have done and the allocation which we have done 4 years ago, which was in the high-growth market. On the other hand side, we certainly also have the other way around. For example, for Lippe and Bochum, and formerly higher-yielding markets, which we now moved into the stable part. That's very much depending on those forward-looking parameters, which are part of the market and selection -- and portfolio selection we are making.

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Operator [12]

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The next question is from Paul May of Barclays.

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Paul J. May, Barclays Bank PLC, Research Division - Analyst [13]

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Apologies, just started looking at this. The removal of the 2-year guidance. So removal of the 2021 guidance this time around, just wondering what the drivers were behind that? Is it just because of the transition of the business and the volume of acquisitions that you're doing? Or is it just a more complicated outlook going forward?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [14]

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Thanks a lot for your question. And we removed the 2-year guidance already with our last call and our core belief was that due to the market development out there, which I think can be seen in the capital markets as of today and due to different reasons, but also the development of our own company, which is more dynamic than in the past, it is not really making sense to present to you a 2-year forecast. So definitely, by the end of this year, we will present you with a forecast. For next year, that those elements just added to this core belief that a 2-year focus doesn't make too much sense and it's not really adding value to you as analysts with regards to our numbers that which we are providing.

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Paul J. May, Barclays Bank PLC, Research Division - Analyst [15]

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Okay. Just -- would that be -- looking to do that around Q3 than this year? Or would you aim to that a bit earlier?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [16]

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No, it's -- we want to stick to Q3, once again, we'll publishing then our -- forecast for next year.

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Operator [17]

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Your next question comes from the line of Georg Kanders of Bankhaus Lampe.

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Georg Kanders, Bankhaus Lampe KG, Research Division - Investment Analyst [18]

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I have 1 question regarding your low cash taxes in general. Will this persist for the current year? And the second question I have is on the FFO contribution from the services business. There was a strong improvement last year probably due to the inclusion of the energy business. Will this continue in a similar way in the current year?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [19]

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Thanks a lot Georg for your questions. I will take the first 1 and Volker will then follow-up on the services business. So with regard to the cash tax rate, I'm able to confirm that it will stay as low for this year as it was for last year.

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [20]

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And on -- then I take up the question on the FFO from services. The main driver was more feet on the ground from our craftsmen organization where we more internalized craftsmen services and so it can capture on these. And for this year, we expect it to be around the same level as last year. So no, not that big increase, as we've seen last year, but stable with a slight upward trend.

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Operator [21]

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

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [22]

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My first question will be around your CapEx because it seemed that you increased the volume of investment by 17%. While on the rental growth side, the contribution has remained stable. Can you just give us a little bit of color of why is the delay element? Or is it also -- or is it due to a mix effect?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [23]

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Marc, thanks for the question. And with regards to Capex, I think looking at the CapEx number, that's a complete number for all the investments which we have made while the other number you were referring to it's a like-for-like number. So it's not including the acquisitions we have made -- we made. And looking at the acquisitions we make, then certainly, by doing investments to this, especially this part of the portfolio, we want to increase the value quickly. And therefore, there is some allocation there. At same the time, please take into consideration that around EUR 5 million of the investments, which are sharing are coming from the developments, which we have made last year, especially a project which we are running in Hilden, a city close to Düsseldorf. And finally, unfortunately, we have quite a strong inflation in the market with regard to costs. And I think we gave you an indication that for this year, 2020, this will add up to around EUR 6 million to EUR 7 million, which we need to compensate for -- by realizing efficiencies, but that's also driving for those increases of the CapEx costs.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [24]

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Okay. Regarding your investment in new craftsmen, how is that -- should impact your cost structure going forward?

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [25]

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Well, it shouldn't impact -- have an impact on our cost structure because we have higher revenues than on the other side. So the -- on the...

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [26]

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Which will be translated in a higher contribution from your services business?

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [27]

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Yes.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [28]

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At a higher margin, which is at a higher margin?

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [29]

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Yes.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [30]

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Okay. And final 1 for me, if I may, would be, how should we assess the impact on your rental growth of your restricted unit that will come off restriction, typically in 2021, 2022? Because I can see here that you've got roughly 2,000 units coming off restriction for each year. That there is a big reductionary potential, if I'm looking at it correctly about 40%. Is that the way I should look at it? Meaning, that 0.5%, 0.7% of additional rental growth coming from those units coming off restriction? Or I'm missing something here?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [31]

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So thank you Marc for the question. So our expectation for the effect from the cost trend increases we are expecting for 2020 is around 0.4%. And that's part of the 3% guidance we gave for this year and deducting certainly the 20 basis points we were referring to due to the early refinancing action, which we have done at the end of last year, but this impact of 20 basis points due to the low interest credit costs, which we need to partly pass-through to our tenants.

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Operator [32]

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(Operator Instructions)

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

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [33]

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Just a quick question on Page 24 of the presentation. Could you maybe elaborate a bit more on the split of the EUR 29.5 million adjustments in nonrecurring and project costs where it come from? You mentioned you had some extraordinary costs for watering this (inaudible) portion something more in? Second question would be on the services business. You mentioned some time before, that there was an increase in the overall, but even the (inaudible) accreditation is down. Could it kind of, again, where it is booked, in which line item? And the last question would be on the portfolio spectrum, could you indicate how many units reported or classified from 1 top portfolio to the other?

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Lars Von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [34]

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Yes, thanks a lot, Kai, for your questions, very quick ones. And we have tried to catch up. I will start with question #1 and 3, and then the services question, once again, I will pass over to Volker. So first 1 was on Page 24 with regards to the effect from the project costs. Certainly, the outstanding -- the biggest share of -- was with regards to the capitalization of our new foundation, which is EUR 16.1 million, and which was the major driver. At the same time, we decided to also have additional projects being included there and by EUR 2.2 million. And also, it was driven by some severance payments, which we have made which is then adding up to the project cost, which has increased substantially in 2019. With regards to the portfolio, overall, we had a reclassification of 18,000 units between the markets. Certainly, this was partly driven that we skipped the other segments, which formally included all the assets, which we were owning outside of North Rhine-Westphalia. And most of that was going into the orange and green markets. And I think we already gave some examples then from markets, which were then reclassified like Bochum and Soest and which adds up to around 3,000 units from the high-growth market to the stable markets or Lippe and Bochum, another 4,000 units, which have been reclassified from the higher-yielding markets to the green market. So just to, once again, give you a few examples on what has really changed by now applying the new portfolio structure to our portfolio. And with that, I will hand over to Volker for the services business question.

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [35]

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Yes, Kai. The question is a bit a tricky one. I got it right, that the question is, where you can see the increase of the pick up from the EUR 16 million to the EUR 23 million and what line item you can consider this? This is right?

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [36]

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Correct. On Page 11, we saw EUR 23 million FFO contribution from services. But if I go to Page 24, I see, I think, EUR 6 million or so, down from EUR 7.8 million in other services. And yes, whether this is the decline and the page before we saw increase?

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [37]

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Yes. It's somewhere buried within these line items, and they are also other effects that makes it a little bit more and more difficult to crystallize the effect of the service items and where it comes from. We come back to you with this with a more thorough analysis to give you that insight, yes?

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Operator [38]

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And there are no more questions at this time. I hand back to Frank Kopfinger for closing comments.

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Frank Kopfinger, Deutsche Bank AG, Research Division - Research Analyst [39]

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Yes, thank you, everybody. Thanks for your participation and your questions. And as always, should you have any other questions, then please do not hesitate and give us a call or write us an email. Otherwise, please note that our next scheduled reporting event is the 11th of May when we report our Q1 result. And with this, we close the call, and we wish you all the best and hope to see you soon. Thank you, and goodbye.

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Operator [40]

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