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Edited Transcript of LEGn.DE earnings conference call or presentation 7-Aug-20 8:00am GMT

Q2 2020 LEG Immobilien AG Earnings Call

Duesseldorf Aug 10, 2020 (Thomson StreetEvents) -- Edited Transcript of LEG Immobilien AG earnings conference call or presentation Friday, August 7, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Kopfinger

LEG Immobilien AG - Head of IR

* Lars von Lackum

LEG Immobilien AG - CEO & Chairman of the Management Board

* Susanne Schroter-Crossan

LEG Immobilien AG - CFO & Member of Management Board

* Volker Wiegel

LEG Immobilien AG - COO & Member of Management Board

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Conference Call Participants

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* Andres Toome

Green Street Advisors, LLC, Research Division - Senior Associate

* Charles Boissier

UBS Investment Bank, Research Division - Director and Property 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

* Simon Stippig

Warburg Research GmbH - Analyst

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Presentation

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Frank Kopfinger, LEG Immobilien AG - Head of IR [1]

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Thank you, Hailey, and good morning, everyone, from Düsseldorf. So welcome to our Q2 2020 results call. It's a pleasure to present to you for the first time our complete management team. I'm here with our CEO, Lars von Lackum; our new CFO, Susanne Schroter; as well as our COO, Volker Wiegel.

As you probably saw yesterday, we published our reporting documents already late in the afternoon. Due to technical issues, which were not within our control, some financials had been already released, and we decided to then publish our full reporting set ahead of the scheduled date. We want to apologize for this, and I personally hope you draw the right conclusion, which is LEG is well prepared even the day before the reporting date.

And with this, let's go to the presentation. As usual, our management team will lead you now through the slides before we will then open it up for your questions. You'll find the presentation document as well as the quarterly report within the IR section of our home page. Please note also that there is a disclaimer, which you'll find on Page 2 of our 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 [2]

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Thanks a lot, Frank, and good morning, everyone, and welcome from my side to our first half 2020 earnings call. Today, we will present to you our figures for the first time as the newly completed management team. It is a great pleasure to have now Susanne as our new CFO and Board, and she joins me today with Volker on the call.

Despite the COVID-19 crisis, we have used the first half of the year to execute successfully along our strategy. Certainly, COVID-19 continue to be the main macroeconomic driver. However, our business model proved once again to be resilient. I want to express my gratitude to all my colleagues who continue to serve our customers, introduced new initiatives to help our tenants and their families during those difficult times and quickly adapted to new, mainly digital processes.

We also did a significant step to grow outside of North Rhine-Westphalia via 2 major portfolio acquisitions. Meanwhile, we opportunistically looked into an acquisition of TAG, but dropped the deal quickly due to our strict price discipline. I will address all of those topics in more detail and lead you through our thinking and doing within today's presentation.

Before we dive deeper into those points, let me just run you through a short summary for H1 on Slide 4. In Q2, we continued to deliver a strong financial performance in line with our Q1 results. Our FFO I for the first half of the year increased by almost 14% to around EUR 195 million. Organic rental growth as well as strong net effects from last year's acquisitions drive the increase. Therefore, we are well on track to achieve our FFO I full year target. After the acquisition of 7,500 units in June, we now expect the FFO I in 2020 to end up in the upper half of our EUR 370 million to EUR 380 million range.

These acquisitions follow our strategy to grow our asset base outside of North Rhine-Westphalia in order to enlarge our footprint. By now, 8% of our units are located outside of our home state, but all of them in Germany. The acquisition is already fully financed via successful placement of equity and the convertible bond with a total volume of EUR 823 million.

Taking the acquisition as well as the upcoming dividend payment in Q3 into account, our LTV stands at around 40%. This leaves us in a comfortable position to take advantage of further growth opportunities over the rest of the year. Let me please also briefly mention the increase of the NAV of around 11% to EUR 117.23 per share. Please take note that this is the NAV pre-dividend payment. Including a full cash dividend payment, the increase would amount to around 8% and a per share value of EUR 113.63. This was driven by the strong profit for H1 as well as valuation uplift on our portfolio of 5%. This once again underlines the resilience of German residential real estate as an asset class and falls in line with our guidance given in Q1.

On ESG, we made some further progress. We improved our energy offering to clients, and by now can offer green electricity to around 98% of our tenants. We also signed more than 200 new rental contracts with system critical workers like nurses and firefighters, offering a 20% discount on the net cold rent as our contribution to society. This measure has been part of our 10-point paper published in March and being well received by the immediate beneficiaries, but also by -- in many politicians and tenant association.

On Slide 5, the picture on the left-hand side of the slide depicts our strategy as defined last year. We have shown it to you in the past, and you can find it also in our corporate presentation. The first pillar represents our core business, which we strive to optimize continuously. Therefore, we have a close focus on using the potential for further rent increases but always taking into account the paying ability of our tenants, which limits increases somewhat. While doing so, we are dedicated to increase customer satisfaction by improvements of our service quality. As we have and then the future will extend our margins further, we enhance efficiency of our platform by process optimization and further digitalization.

In the second pillar, we have summarized the strategic elements to expand the value chain going forward. Part of it is the addition and extension of our value-added services, which so far especially include multimedia, energy and repair services. Additionally, we have decided to realize project developments, mainly in the form of densification projects. At the same time, we are also willing to buy into new products, bringing us to a total volume of around 500 units per annum as of 2023.

The third pillar reflects our growth ambitions. As explained in the past, we have a clear focus. Firstly, we continue to focus on the asset class in which we possess a competitive advantage and have established a highly efficient platform. We focus on affordable living. We benefit from a trend towards market segmentation. You see some of our peers engaging in high-quality development activities or in residential real estate with a significantly higher average rent level. Both of those activities need a very different servicing platform and target a different tenant structure with different requirements. Therefore, we are the natural buyer of those affordable living assets, which strategical financial investors decide to dispose of.

In the past, we have bought exactly this type of assets from Vonovia, Covivio or VIVAWEST and have done so this year from Deutsche Wohnen. Secondly, we focus on Germany, and North Rhine-Westphalia is and will always be our home turf. We are committed to add units in North Rhine-Westphalia as they immediately add to scale, independent of the size of the acquired portfolio. We are also one of the preferred partners for local communities as we have been successful in helping communities to revitalize districts like in Monheim, for example.

Thirdly, however, we also expand into adjacent German states with a conservative approach. We only enter via high growth and stable markets according to our cluster definition. This comes with lower yields but also with less risk. Additionally, we require having at least 1,000 units per location to enable us to employ own staff on the ground. Both requirements limit our risks. Once we are more familiar with the new locations, we will also go for higher-yielding markets as we have proven to be able to earn decent yields in those more challenging markets for our shareholders as well.

Our clear top priority and plan A strategy for growth is via the acquisition of portfolios like the ones signed in June. At the same time, we engaged opportunistically in M&A discussions with TAG. This would have allowed us to accelerate our strategy to grow in our asset class of affordable living outside of North Rhine-Westphalia and to expand our addressable market significantly. We would have complemented each other regionally, i.e., we would have established a German-wide platform and realized efficiency gains by implementation of smart integrated processes and tools.

As very often in life, everything boils down to price. And at the end, we were not willing to pay the requested price, so consequently dropped the deal. I trust that you take this as a strong sign of price discipline on our end. Let me be very, very clear. We engage with TAG on a purely opportunistic basis as we consider it our duty to explore all potential opportunities. However, M&A will not become a fourth pillar or integral part of our strategy.

The price discipline shown is identical to the one we apply for all our portfolio acquisitions. In our financial year 2019 presentation, we showed you our deal funnel, i.e., that from around 100,000 units offered, we only and finally acquired 6%. Rest assured, we acquire portfolios only if they add value to investors and offer potential for further valuation uplift.

We see significant growth potential for LEG on a stand-alone basis by pursuing our plan A strategy and by focusing purely on our asset class of affordable living.

With this, I come to Slide 6. On that slide, you'll find all the details of the 2 portfolios, which we acquired in June. Both transactions allow us to grow outside of North Rhine-Westphalia and are completely in line with our strategic agenda. As disclosed, the sale of portfolio #1 was Deutsche Wohnen and of portfolio #2, a private person. In both cases, we were considered the natural buyer for those assets. It was important for the seller to transfer the assets to a professional manager, preserving the good tenant relationship. Roughly 1/3 of portfolio #1 is subsidized and therefore, fits well to our overall portfolio, which still includes around 1/4 of subsidized assets. Overall, we paid EUR 767 million, translating into a rent multiple of 21.9x. This compares well to our own portfolio, i.e., taking a mix of 55% in high-growth markets and 45% in stable markets into account. The like-for-like own portfolio would come at a multiple of 22.5x.

The acquired portfolios offer additional upside via rent increases, modernizations and subsidized units coming off restriction over the next 10 years. For further details on the last point, please also see Slide 34.

On Slide 7, we show you the regional distribution of the newly acquired entities. With the 2 acquisitions signed in June, we will add 5 new locations outside of North Rhine-Westphalia to our platform. As already stated, we entered new markets outside of North Rhine-Westphalia only via green and orange markets. Additionally, we stick to a minimum number of entities per location of 1,000 in order to be able to put own staff on the ground and manage the assets ourselves.

By then, we will run 8 offices outside of North Rhine-Westphalia and serve around 12,000 units, representing around 8% of our entire asset base.

All of those new offices are depicted on the chart will offer access to highly attractive regions with a strong economic setup in our major university cities in Germany.

On the following Slide 8, we illustrate the growth of our market reach following our recent acquisitions. This slide illustrates the development of our addressable market. Just 1 year ago, we were exclusively focused on North Rhine-Westphalia, the market with almost 20 million inhabitants and 9 million households. Via several acquisitions, we grew our market to 25 million inhabitants and 12 million households. Adding the neighboring districts of all those locations, we -- where we own and manage assets, our addressable market would even grow by around 80%.

The extended reach allows us to exploit opportunities within our acquisition pipeline better. While we were somehow limited in the past, we can now consider the acquisition of portfolios, which are regionally spread across different German states. It should also help us to keep our growth momentum continuously adding scale to our platform.

On Slide 9, we show the development of our portfolio over time, as there is normally a timing difference of a few months between notarization and transfer of ownership for bigger portfolios. The graph should give you an indication from which quarter on the last deals would contribute to our earnings. We learned from conversations with you that there have been difficulties to track the development of our portfolio given the described time lag. We hope you find the illustration helpful, and we will update that slide going forward.

As you might have noticed on Slide 6, the smaller portfolio #2 contributes as of August 1, while the bigger portfolio #1 is expected to be transferred as of November 1. This will leave us with around 145,000 units at the end of the year, excluding possible additional acquisitions or disposals from July 1.

Finally, let me give you an update on the effects from the COVID-19 pandemic on Slide 10. We continue to benefit from a very resilient business model, i.e., all effects so far have proven to be manageable. The most noticeable effect is on the like-for-like rental growth. We suspended all Mietspiegel rent increases following this publication of our 10-point paper, including measures in favor of tenants and employees by mid-March. We resumed those increases in the third quarter, becoming effective in Q4 after the notification period.

As already indicated in Q1, the effect on the like-for-like rental growth amounts to 20 bps, and we can confirm exactly that number. Additionally, we postponed some modernization projects, which will bring down the like-for-like rental growth by another 30 bps. As things normalize in Germany, we now want to increase our investments to benefit from the lower VAT, but also availability of craftsmen capacities.

In terms of liquidity effect and rent deferrals, numbers continue to remain at an extremely low level. Far less than 1% of our tenants asked for deferral with a liquidity effect of well below EUR 1 million. Our operating performance continued to improve further. We saw new lettings quickly improving from the lows in March, and they are back to normal. At the same time, we experienced a continuously lower level of cancellations. We have capped capital and financing markets. At the peak of the crisis, we approached credit markets and secured financings at attractive terms.

In June, we tapped capital markets with a successful placement of equity and the convertible bond to finance our acquisitions. As an organization, we were able to adapt quickly to the new environment. We introduced self-service viewing process for prospective tenants and enabled our employees to work from home. I am of the core belief that the figures reported today are proof of how successful we were in navigating through those challenging times.

With this, I will hand over to Volker, who will offer you some insights into the operational development in H1.

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [3]

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Thank you, Lars, and good morning, everybody, from my side. Let us first move to Slide 12 for an overview of our operating performance. Overall, the in-place rent in the LEG portfolio rose by 2.6% on a like-for-like basis. Our free-financed units, which account for 75% of the portfolio, contributed 2.9%. In January, as in every third year, we adjusted on the cost rent of our subsidized units. This led to a like-for-like rent increase of 1.6% for the restricted part of our portfolio.

Looking at our portfolio as a whole, we can see that the growth momentum in the commuter belt areas continues. Actually, like-for-like growth in these areas, which we define as green or stable markets, was 3% or 20 basis points higher than in the growth market. In both segments, we have also been very active about our modernization program. In the higher-yielding markets, where modernization activities were less pronounced, we still saw an average increase in rents of 1.9% year-on-year. In the free-financed part of the LEG portfolio, the strongest increase was also in the stable markets with plus 3.4% in like-for-like, followed by the high-growth markets with plus 3.3% and the purple market, plus 1.9%. At the same time, the occupancy rate for the total portfolio rose by 30 bps year-on-year. This translates into a like-for-like EPRA vacancy rate of 3.3% at the end of June.

In our high-growth markets, mostly all of our units were fully ledged, i.e., the overall occupancy rate amounted to 98.2% like-for-like. The lowest vacancy rates were in Münster with 0.5%, Cologne with 0.8% and Gutersloh in Westphalia with 0.7%, all on a like-for-like basis. The vacancy rate in the stable markets was down by 20 basis points to 3.3%.

In the higher-yielding markets, we could even reduce the vacancy rate by 70 basis points year-on-year. Besides the COVID-19 effect, this is also due to the successful organizational measures we have implemented in these areas to further improve operational efficiency. For the portfolio as a whole, we still expect a further slight decrease of the vacancy rate at year-end 2020. However, this guidance is subject to unforeseeable consequences from the further development of the COVID-19 crisis.

Coming to Slide 13. The like-for-like rent per square meter for the overall portfolio at the end of June amounted to EUR 5.90 or EUR 7.27 for the free-financed units. Let me give you a few examples out of the free-financed portfolio on a like-for-like basis.

In our high-growth markets, Cologne was the top performer with a rent increase of 7.2% year-on-year, to an average of EUR 7.25 per square meter each month. In Monheim, the most important location for our modernization programs, free-financed rents increased by 5.8% to EUR 6.57 per square meter.

In the stable markets, our 5 largest location all recorded rent growth of above 4%. In Bochum, for example, the free-financed units increased rents by 4.9%, in Essen by [4.5]% and in Dortmund by 4%, all on a like-for-like basis. Now the average monthly rent per square meter is still below EUR 6 in all of these cities.

In the purple markets, we saw the strongest growth in Recklinghausen with 3.2% and in Duisburg with 2.4%. On the same slide, we have put together what Lars already -- has already referred to. We adjusted our like-for-like rental growth guidance for 2020 down to 2.3%. This will be driven by a 20 basis points reduction due to the suspension of rent increases according to the Mietspiegel from mid-March until the end of June.

We restarted those rent increases from July onwards, and they will contribute to rent growth from Q4 onwards. Additionally, we see a 30 basis points impact from the postponement of modernization projects. We restarted those as well, which is why we feel comfortable with our 2.3% guidance.

On the following Slide 14, you'll find more details on the investments. Overall, the investments into our portfolio increased by more than 36% to around EUR 160 million. On a square meter basis and excluding new construction, we spent EUR 17.65, the bulk of which was for modernization measures with the majority going into energy efficiency measures. At the same time, we continued our strategy of value-enhancing investments in relettings. Those turn cost initiatives proved to be successful in respect to bringing down vacancy periods and speeding up the reletting. The increase of those spendings in combination with broadly stable maintenance expenditures resulted in a capitalization ratio of 76.7%.

Recognizing and living up to our obligation to contribute to a carbon-neutral industry by 2050, we continue to modernize 3% of our portfolio per year to improve the energy efficiency of our assets. This is and clearly stays one of the ESG targets we have set ourselves. At the same time, we are clearly aware of our responsibility towards our customers, and we therefore carefully balance potential rent increases from modernization, adoption to climate change and the affordability for our tenants. All of this is part of our strategy.

And with this, I would like to hand over to Susanne for more insight into the financials.

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Susanne Schroter-Crossan, LEG Immobilien AG - CFO & Member of Management Board [4]

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Thank you, Volker. It's a pleasure to present to you for the first time today, and I look forward to hopefully meeting you in person very soon. Let me provide you with some more details on our H1 financials. Please have a look at Slide 16, which shows the development of the key P&L items. The numbers demonstrate further noticeable margin improvement across all P&L lines.

Our net cold rent increased by 5.3% to EUR 308 million. This was driven by rent increases as well as by new units we added to the portfolio last year. Please be aware that we had a bigger disposal last year, which affects the year-on-year comparison. The adjusted net rental and lease income outpaced the top line growth and rose by 6.4% to EUR 246.6 million. As a result, the margin increased to 18.1%, driven by scale effects due to a bigger portfolio.

The EBITDA grew by 8% to EUR 235.2 million, and we could increase our EBITDA margin by 190 basis points to 60 -- sorry, to 76.4%. We benefit from reduced admin costs also due to reduced expenses during the COVID-19-related lockdown as well as from positive effects of other services.

For the full year, we continue to expect an EBITDA margin of around 74%, as some of those H1 effects will normalize in the second half of the year. Our FFO I grew strongly by almost 14% to EUR 194.6 million, which puts us well on track for our financial year guidance.

For detailed drivers of our FFO I expansion, please turn to the next slide. The biggest driver of our FFO I increase compared to H1 2019 is the contribution from last year's acquisitions. We added approximately 7,000 units within the last 12 months, as you saw on Slide 9, that Lars has presented to you earlier. There were some offsetting effects from disposals as we saw the major portfolio last year. However, on a net basis, we grew our asset base and had a positive FFO contribution.

The second biggest driver were rent increases, which contributed EUR 8.5 million. We also saw some support from reduced net cash tax payments as one additional large group company benefits from a German trade tax reduction for corporate residential landlords. The minority effect comes from a full takeover of our energy services company, where we bought the outstanding 49% last year.

Now let us move to Slide 18. Our NAV increased by 11.2% to EUR 117.23 in H1. The 2 key drivers are a higher result from valuation as well as the profit contribution. Adjusted for our upcoming dividend of EUR 3.60 per share, the dividend-adjusted NAV stands at EUR 113.63. This is an increase of roughly 8% over year-end 2019. Since we consider to also offer a scrip dividend to our shareholders after the AGM, subject to the acceptance ratio, we might see a small positive impact on the dividend-adjusted NAV.

For more details on the valuation of our portfolio, let us have a look at Slide 19. In the first half of 2020, the revaluation gains amounted to EUR 593 million, which is an uplift of 5.0% over the year-end level 2019. We continue to feel very comfortable with our valuation levels, which of course, have been confirmed by CBRE as our external appraiser. The value drivers were more or less equally split between a lower discount rate, which came down from 4.8% to 4.7% as well as the rent performance. In terms of capital composition, around 15% of the valuation uplift comes from our CapEx spending, which amounted to about EUR 120 million.

Looking at our different market clusters, we saw the strongest value momentum in the stable markets with an average revaluation gain of 5.4%. However, we also saw strong increases in our high-growth and higher-yielding markets. We see 2 most important factors driving that valuation uplift, the scarcity of the affordable housing product and the unchanged high demand for this type of product. They seem to be hardly affected by the COVID-19 pandemic.

To give you some more details, in our high-growth markets, Düsseldorf was up by 7.2%. 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 is the development in Dortmund, our largest single market. The assets in Dortmund has experienced a further increase of 5.8% during the first half of 2020 after the values already rose by 11% in 2019.

On Slide 20, we have, as usual, put together the valuation metrics broken down by the different markets. I would like to reiterate that we feel very comfortable with our asset profile. Our assets still offer an attractive gross yield of 4.8% in a negative interest rate environment. The gross value per square meter amounts to EUR 1,427 at the end of June, which translates into an in-place rent multiple of 20.7x and compares well against the market multiple of 16.4x.

Now I'm coming to our financing structure on Slide 21. As you see, we are well positioned and maintain our conservative financial profile. We successfully raised EUR 823 million via a capital increase and a convertible bond at the end of June, primarily to fund our most recent acquisition of circa 7,500 units. At the reporting date, we have an LTV of 34.4%. This takes into account the cash we raised for the recently acquired portfolio, which will transfer to our ownership in the third and fourth quarter. Adjusted for these acquisitions as well as for the upcoming dividend payment, the LTV is around 40%. And this is well within our 40% to 43% LTV target range, and we therefore remain well placed to finance further growth. We also improved our maturity profile in the first half of 2020. After the placement of the new convertible, our average maturity increased to 8 years, and our average interest rate is 1.35%.

We now have no material maturities until 2023. Lastly, we increased also our RCF to EUR 400 million. This provides us with sufficient flexibility to deal with any unexpected capital markets turmoil, but also to take advantage of potential growth opportunities.

And with this, back to Lars for our outlook.

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

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Thank you, Susanne. Let me briefly summarize along the pillars of our strategy. Firstly, operations have performed extremely well despite the challenges from the COVID-19 pandemic. The impact on our numbers so far is minimal. Secondly, we have been able to extend our value-added services so that we can confirm to reach at least an FFO I contribution of EUR 23 million for the full year 2020. Additionally, we see a healthy pipeline for new developments and some reasonably priced building parts. Thirdly, we did a major step in growing our platform outside North Rhine-Westphalia with 2 major acquisitions in the second quarter. This follows our strategy to focus on affordable living assets in Germany and to remain a pure play. Lastly, after successful financings with a total volume of more than EUR 1 billion in Q2, we are well positioned to capture further growth opportunities if they arise. Rest assured, we remain as price disciplined as we have been in the past. Overall, we are pleased to confirm our narrowed guidance outlook, i.e., to reach the upper half of our EUR 370 million to EUR 380 million guidance range.

In respect to operational drivers, we expect a like-for-like rental growth of around 2.3% for the year, as explained by Volker earlier. We continue to see a slightly lower vacancy at the end of the year. We will increase our investments to EUR 38 to EUR 40 per square meter in order to take advantage of the reduced VAT as well as available craftsmen capacities in the markets. With the acquisition of 7,500 units, we already met our full year ambition. As of today, we have visibility of some further portfolios, but for most of them, we are very early in the process and therefore, it is just too early to assign probabilities or give further details. We remain fully committed to all aspects of ESG and 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. We are also working on the new ESG standards like TCFD in order to allow for a better insight into our ESG framework and reporting.

The upcoming AGM will hopefully approve our new compensation scheme, which will also reflect ESG criteria. With this, I conclude our presentation, and all of us will be very happy to take your questions.

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Frank Kopfinger, LEG Immobilien AG - Head of IR [6]

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Thanks, Lars. And with this, we begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is 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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The first one is on CapEx. So you're increasing your investment to EUR 38 to EUR 40, and you mentioned lower VAT and also availability of craftsmen. So is it possible to just quantify what the impact would be? Because just looking back 2018, '19, I think the contribution of CapEx to like-for-like has been kind of stable to 80 basis points. So do you think it's -- given you're spending quite a bit more and given what you're saying in terms of the opportunity to get better price, is it going to be a bigger boost in 2021? And could you quantify it?

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

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Thanks a lot for your question, Charles. Yes. So we have decided to increase now CapEx, and there are 2 aspects to it. First of all, you've heard about the VAT reduction in Germany kicking in, so -- and there is a 3% reduction until the end of the year. At the same time, we definitely see that construction capacity in the market is now better available compared to the situation before the crisis, and that just drives us to take advantage of the situation. Assumption for the full year is in line with what -- your assumptions are around 80% will be spent on CapEx. A majority of it will be energy efficiency measures, like in the past, certainly trying to catch up there and just also follow-up on our ESG targets. At the same time, I think we are also well advised to behave like that as one of the very few industries not being impacted strongly by the COVID crisis and the pandemic. I think it is also our obligation as part of society to now increase investments in order to stabilize the situation in Germany and just help people to find employment and stay in employment.

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

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Okay. Two more questions, please. The second one is you mentioned a new compensation structure with ESG targets. I think also the weights have changed and some criteria removed going through the AGM resolution. I just was wondering, so in terms of the short-term incentives, FFO I, rental income and ESG, are the first 2 in euromillion? Or are the FFO I per share and rental income in euro per square meter? And in terms of the ESG, it says key nonfinancial targets. Just was wondering what exactly is the target and if it's changing over time.

And then lastly, on the tax transaction, you mentioned you would be willing to talk a bit more about it. I just was wondering, would you look at it again if it meets your price discipline? And what will it take?

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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 start with the last question while colleagues try to find out about the details of the incentive structure. So TAG, very happy. So it was really that we've seen a chance to opportunistically grow our portfolio outside of North Rhine-Westphalia much bigger compared to certainly what we are currently doing and still considered to be out than a strategy to buy into bigger portfolios. TAG, for us, was an opportunity. They are running also affordable assets. And you heard it, I think, also today, our focus is on this affordable asset base. We do not want to venture into higher-priced assets as well as we do not venture outside of Germany. So therefore, we consider this to be an opportunity worthwhile to be looked at. But very often, unfortunately, the exchange price, we could not agree exactly on the price. So therefore, as in negotiations very often, you need to learn how far your partner is willing to share upcoming synergies, might it be operational or financing synergies between the 2 partners.

Unfortunately, from our perspective, there was just not enough beef into the deal remaining for our shareholders. So therefore, we decided to drop the deal because we could not agree on the exchange ratio. So that was the basis for our decision then to drop the transaction. And therefore, from our perspective, it is very important to just underline that certainly opportunistically, we will always look into M&A, but that's not part of our strategy. So it's not a fourth pillar. We do not have dedicated resources doing research on it on a daily basis. So therefore, that's something which we are not doing.

And with regard to the payment -- the short-term component of the new proposed structure, we will have FFO I as well as the resulting rent and leasing results as a basis for the STI, and that's around 80%. The -- both numbers will be total numbers, not per share numbers and the ESG target is a 20% amount. That will definitely include the different aspects of it. So it will include the modernization program, it will include the social elements, which we are currently running. And you heard about it like the social aspects and the cooperation we have with many charities in order to stabilize our buildings and certainly some governance targets. But the criteria will be agreed within Supervisory Board in beforehand the compensation period, and then certainly communicated to management in order to be the part of the STI then for the year.

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

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Okay. So the first driver, 80% in euromillion basically is [very strong].

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

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Exactly.

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Operator [8]

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The next question is from Andres Toome of Green Street Advisors.

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Andres Toome, Green Street Advisors, LLC, Research Division - Senior Associate [9]

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I was hoping you can add some color on like-for-like rent growth expectations beyond 2020 for the whole portfolio or perhaps in the context of underwriting new acquisitions. Should we expect a run rate closer to 2% per annum over the next 5 years versus the 3% per annum historically?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [10]

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Yes. Thanks a lot for the question, Andres. Yes, that's certainly something we try to lay out in detail on Page 13 just to make you aware that the impact we are seeing this year are really 50 bps from COVID-19 and 20 bps being derived from the prepayment of some subsidized loans at the end of 2019. So all of it are especially effects. And certainly, our expectation is not that we are going to see those also for the next years. So therefore, our expectation for the next years with regards to the like-for-like rent growth will be higher compared to the 2.3%. And as always, we will come up with a guidance on the like-for-like rental growth, but also on the other numbers in Q3.

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Andres Toome, Green Street Advisors, LLC, Research Division - Senior Associate [11]

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And my second question is about using the convertible bond as a financing source, do you think it's a good idea, given historically, kind of a bigger economic dilution from convertible issues in German residential sector as share prices typically have climbed higher? And kind of assuming you still have a positive outlook for the sector going forward as well.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [12]

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Okay. Thanks a lot, Andres. So certainly, we've taken all that into consideration. But from our perspective, looking into the financing options we had on the table and certainly, we were looking into straight debt and other options as well, we consider the convertible to be the right instrument for the current situation. It enables us to take advantage certainly of a lower coupon for the next years. I hope you noticed that we really try to fit it in very nicely into our maturity structure, so we deliberately decided for quite a long-lasting convertible. And that's been our thinking why we have decided for the convertible this year.

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Andres Toome, Green Street Advisors, LLC, Research Division - Senior Associate [13]

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Fair enough. And can you give us a sense what would have been kind of opportunity cost for vanilla debt at the time? What would have been the coupon on that?

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

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So it would be, Andres, between 1.2% to 1.3%.

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Operator [15]

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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 [16]

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Just got a couple of questions for me. Just going back to a couple of points Charles highlighted. With the increasing CapEx that's more than sort of doubled since 2016 on a square meter basis and obviously, like-for-like rental growth has slowed quite materially. Appreciate this year is driven by sort of one-off effects, and you expect that to sort of slightly increase back to sort of 3% level going forward. Are there any other factors that we should be aware of? I mean do you think that the CapEx spend is going to continue to improve NOI margins? I think you mentioned about energy efficiency coming through. So just trying to get a feeling for whether we should expect continued improvement in margins going forward. I'm coming to my others after that. Let's just go one at a time.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [17]

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Thanks a lot. It makes it much easier for me, Paul. So with regards to margins, certainly, the EBITDA margin, and you've seen it, has increased substantially within the first half year and now to 76.4%. And then certainly, also going forward, we will be very closely focusing on additional margin expansion. From our perspective, it is worthwhile spending, especially in the current situation, more. Definitely, unfortunately, it's not immediately being reflected in higher like-for-like rental growth, but while already making some reference to Andres' questions -- question, I think we are absolutely convinced that as of next year, you will also once again see a return to a higher like-for-like rent growth. So at the same time, and Volker already raised the point that we are certainly seeing that we are able to speed up the letting process, all those aspects at least lead us to the core belief that we are well advised to currently spend those EUR 38 to EUR 40 per square meter. And we definitely will also give you an indication in Q3, how we are looking at it, investment-wise going forward.

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Paul J. May, Barclays Bank PLC, Research Division - Analyst [18]

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Sounds good. And then a couple of sort of linked questions. You've obviously increased your FFO I guidance on an absolute level. But am I right that this implies flat to a slight reduction in FFO I per share once you've adjusted for the new share issuance in June, both on a weighted average and then on -- if you were to [buy on an annual basis] on that? Is that correct?

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

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Yes, it is correct, Paul. And you're absolutely right to assume because we took the decision to convert the outstanding convertible in 2019. And we now had this small capital increase at the beginning -- mid of this year. So therefore, while we are seeing a strong increase in the FFO I and the delay until we are seeing the full impact from the acquired portfolios, it will just take a few months until you also see a positive impact on the FFO I per share growth.

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Paul J. May, Barclays Bank PLC, Research Division - Analyst [20]

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Okay. And then sort of linked to that, when it comes to the short-term incentive, you've highlighted on an absolute measure rather than on a per share measure. What made the sort of Board think that was the appropriate focus given you get a slight misalignment of interest? As you say, you're increasing it by 1, but decreasing FFO I per share, which obviously is what shareholders are rewarded for. Just wondering what the thought process was to come to those absolute incentive drivers.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [21]

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Yes. Thanks a lot, Paul. So as always, compensation structure lies in the responsibility of the Supervisory Board. But I can definitely give you a bit of insight there. So certainly, the Supervisory Board will always take into consideration how the growth has been realized. So therefore, if we need additional capital to grow, that this is definitely something which will be taken into consideration while measuring the success of management. So therefore, I understand your question, but that's something which is also being reflected in the incentivization of Management Board also going forward.

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Paul J. May, Barclays Bank PLC, Research Division - Analyst [22]

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Okay. And just on the final one, just on that. Does the decision around the convertible, which arguably increases FFO I on the millions of pounds basis and then eventually sort of has an impact on a per share basis once the shares convert, which given the metrics it looks likely that they will. Again, does that sort of seems again a slight sort of oddity with the incentive scheme, but it's probably sort of all in the rounding and just one of those things? I just wondered if you -- if that does affect any decision-making. Or it simply was just focusing on the lower coupon that's being the main driver of that decision.

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

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Yes. So definitely, what I can guarantee, Paul, what we're not doing is that we try to maximize our payout and not taking into consideration the investor interest. So certainly, we are absolutely aligned with our investors and their interest. And that's the first element and the exclusive element we are focusing on. Whether we are earning more money or not is not a part of our decision. So therefore, what we've done is we've exclusively focused looking at the different financing options at the time and decided from our perspective for the one which contributes the highest value for our shareholders. And that's regardless whether this would be the best for our Management Board compensation.

However, and that's certainly the intention of the compensation scheme, to have a strong alignment between the measures being in place, and the STI and LTI and targets in place and the targets we try to achieve for our investors. So -- and as we have an alignment there, we can guarantee that we have decided to provide option at the time to maximize value for our shareholders.

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Paul J. May, Barclays Bank PLC, Research Division - Analyst [24]

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Sounds great. And I'm sorry, just last one on a certain topic. Obviously, you got strong valuation growth coming through, which is great to see. And just wondered how much of that was driven by either your acquisitions or other acquisitions and transactions in the market. How much of it is just an improvement in lower interest rates and other things coming through and things getting comfortable with that higher multiple? And do you see that a continuation of those valuation increases coming through? And sort of finally, linked to that, does that affect your sort of expansion strategy at all? Are you willing to pay sort of premiums to existing values to get that growth or that expansion coming through? Just trying to understand, again, the strategy, the thought process around the expansion and how that is impacted by valuations.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [25]

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Yes. Paul, so we try to show you while giving you a lot of detail on the 2 portfolios we have just bought into that if you look at it like-for-like with our own portfolio, that we've not been willing to pay any strategic premium to enter new markets. And we are also certainly not willing to buy into portfolios or buy into additional assets into our home turf, North Rhine-Westphalia, while adding strategic premium. So that's something what we tried to lay out in detail on Slide 9, where you -- apologies, on Slide -- give me a second, on Slide #6. And there, you can see that if you look like-for-like at what we currently have on our books, we would arrive at a multiple of 22.5x while we now bought in a portfolio of 21.9x.

And from our perspective, those portfolio we have bought into really offer substantial valuation uplift for our shareholders. They are partly subsidized. So you can see also on Page 34 then how those assets will get off of restriction over the next 10 years. From our perspective, there are substantial rent increases being possible. And certainly, those assets offer modernization potential. And that's not only holding true for the portfolio, which we have bought from the private person, but also for the Deutsche Wohnen portfolio, also offering additional valuation and therefore, also going forward valuation uplift for our investors and shareholders.

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Operator [26]

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The next question is from Kai Klose of Berenberg.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [27]

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I just have 3 short questions. The first one, what was again the FFO contribution from other services or from value-add services? And what kind of value would you assign to these activities in the upcoming change of the NAV definition, probably latest by year-end? Second question is your target to invest to modernize about 3% of the portfolio to improve the CO2 emissions, et cetera. How much has already been modernized during the first 6 months? And the second -- and the last question would be, you mentioned on Page 6 that the new acquisitions also offer potential for modernizations or for rent increases after modernizations. Could you give a bit more color how much you're going to spend? And what kind of uplift we could expect?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [28]

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Yes. So on the first question, in the first half of the year, we realized around EUR 13.6 million from our services activities. You know, Kai, that most of it is multimedia, it's repair services and energy services. So for the full year, we are expecting a value of at least EUR 23 million for the services business. With regards to the modernization measures, so the 3% is a target we most probably will achieve for that year. I'm unfortunately not able to tell you of how much of those modernization measures we have already finalized. So therefore, that's a number we will deliver after the call. So Frank will get back to you or someone from the Investor Relations team. So that's of importance.

With regards to modernizations in the new portfolios, we will spend some EUR 20 to EUR 30 per square meter on modernizations within the next 2 to 5 years. And that certainly will come with a quite substantial return. You know that we are striving for yield on cost for modernizations of around 5%, not all of it being realized at the beginning because there, we always try to also take into consideration the paying ability of our tenants. So that's something where a lot of the value will then also be realized by reletting. And that's what we are going to strive for also in that portfolio.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [29]

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And what kind of -- what would be the value for the services segment you think could be assigned by year-end?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [30]

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Yes. Apologies, Kai. I skipped that answer. As you have seen, we have decided to not disclose the new NAV metrics according to EPRA definition. And our reading is that we want to understand a bit better, EPRA definition, one to participate in the different workshops being set up before we finally come out with numbers. So therefore, certainly, we do internal calculations, but we have a very restrictive look at those intangibles, which you cannot find in our IFRS statements. So most probably we tend to the current reading that you will not see a value being assigned to those intangibles, but that we are more sticking to those numbers, which we are disclosing in our IFRS numbers.

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Operator [31]

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(Operator Instructions) The next question is from 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 [32]

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I have 3 small questions. The first one is your, [call it, selling] tax in H1. Is it something we should expect for the rest of the year and for the coming years? That's my number one.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [33]

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Thanks a lot for your question, Marc. But perhaps we can do it one by one, and it just makes it easier for me. So the taxation, in fact, yes, that's something which you can expect for the full year. It's being derived that we have 1 bigger property holding company, which until end of last year was also offering services, so not being entitled to make use of this extended trade tax deduction. That's what we are now applying and therefore, yes, that's an effect, which certainly was positive and will be positive for the full year.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [34]

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And is it something which will effectively continue over the coming years, I guess?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [35]

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Exactly. We'll now be continue -- will now continue also for the coming years, yes.

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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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Okay. My second question is about your Slide 34 on your restricted rent. I am right to understand that if you have an upside potential of EUR 9.7 million over the next 5 years, I should have basically EUR 10 million divided by 5, every single year additional rental contribution? That's the way we should look at it?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [37]

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Yes. You're referring to Page 34, I assume.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [38]

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Yes.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [39]

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So what we want to show is certainly that there is a substantial difference between what we have as an in-place rent for those assets and the market rent. As you're aware, Marc, you cannot realize the full potential day 1 as those assets get off restriction. Because certainly, there are limitations in place depending on whether we are talking about a tensed rental markets where you can increase rents by 15% over the 3-year period or whether we talk about more relaxed market where we can increase by 20%. So therefore, it normally takes a few years until you will be able to catch up the full potential.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [40]

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Okay. And the final one, just to clarify, the difference between the 4.7% gross initial yield on Page 19 and the 4.8%, Page 20, how should I read that? I'm a bit confused here between the Page 19 and Page 20. Because on Page 19, you're stating that adjustment of discount rates from 4.8% to 4.7%, and then we've got a gross yield of 4.8%. Is that pure coincidence?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [41]

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That's pure coincidence. Yes, absolutely right. Yes. Apologies if we have not made it transparent. So the one is referring to the discount rate we have applied in our model, in the DCF model to arrive at the values for the assets. And the other one, exactly, as you stated, is 4.8% is the gross yield we are running on the book. Yes.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [42]

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And how much is gross yield has moved between December '19, therefore? Is this 4.8%? Well, maybe you can come back to me outside, just call, better.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [43]

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Yes. So we'll get back to you on this one, Marc.

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Operator [44]

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The next question is from Simon Stippig of Warburg Research.

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Simon Stippig, Warburg Research GmbH - Analyst [45]

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I have a quick or first question about vacancy and especially in the higher-yielding markets that was reduced by 70 basis points. And you mentioned that some efficiency measures were implemented. Could you give a little bit more color? And then also, is that being possible to be expanded into the whole portfolio?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [46]

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Yes. So during your question, as you can easily assume, and thanks for it, Simon. I was looking strongly at Volker. And as you can easily assume, he definitely wants to take the question. Perhaps a quick word because we came across that one also last year. We did some certainly restructuring on the operations. And if you are doing restructurings on the organizational side, so certainly, you do restaffing. All this has taken place last year. So the new structure is in place, the new people are in place. And once again, I think Volker's being proven right by his decision for the new structure and by doing a new staffing, we now see kicking in also lower vacancy rates. And with that, I hand over to Volker.

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [47]

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Yes. Thanks, Lars, and thanks, Simon, for the question. What we basically did, we applied a complexity measure for the entire portfolio and weighted the complexity of each unit and restaff persons accordingly to the complexity of the local market, i.e., we staffed a higher number of people to those markets which require additional work and less on those markets where things are more easy, the rent market stands. And therefore, we even organized the entire organization and this is, I think, the main driver what -- and helps us to better exploit the potential from all markets on a more efficient way.

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Simon Stippig, Warburg Research GmbH - Analyst [48]

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Okay. Great. And just one question. So in that regard, would you say that your structural vacancy has changed? Or what would be your structural vacancy of the portfolio?

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [49]

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Well, the structural vacancy of the portfolio, what we strive is 2.8% for the overall portfolio as a mixture of the high growth and the purple markets. And we aim to achieve over time.

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Simon Stippig, Warburg Research GmbH - Analyst [50]

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Okay. Great. And maybe just one additional question to the vacancy rate. How much -- how many basis points are actually due to capital expenditure projects?

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [51]

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Well, I think that it's still very difficult to differentiate the EBIT drivers. It's a mixture of these drivers that result in what we deliver today.

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Simon Stippig, Warburg Research GmbH - Analyst [52]

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Okay. So there's not a specific number that you say, okay, you have maybe 30 basis points of vacant units where you're currently applying capital expenditure assets on?

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Volker Wiegel, LEG Immobilien AG - COO & Member of Management Board [53]

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No. That's -- yes. Okay.

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Simon Stippig, Warburg Research GmbH - Analyst [54]

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Okay. And maybe the second question is your LTV guidance for the end of the year is between 40% and 43%. Right now, pro forma, we're at 40%. And would that actually include any revaluation either for full year 2020 revaluation? Or is that -- I assume it's excluding revaluation.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [55]

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Yes. Exactly, Simon. You're absolutely right to assume so. So it's not including any revaluation for H2. And being active in the market, we see very strong demand for assets in the market. So transaction multiples rising. So also for H2, we expect then further increase also of our assets for H2.

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Simon Stippig, Warburg Research GmbH - Analyst [56]

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Okay. And do you -- could you already give a little bit of more color to the revaluation expectation?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [57]

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I would love to, Simon. It's very early days. So I think we just came out with a 5% for the first half year. Once again, being active in the market, there is plenty of demand, also fresh demand, fresh capital. I think by now, everyone is being aware of how resilient German residential has behaved during the pandemic. Therefore, it's no surprise that a lot of pension funds, but also sovereign funds are eyeing to buy into residential assets. And therefore, from our perspective, we're also expecting a valuation uplift for the second half.

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Simon Stippig, Warburg Research GmbH - Analyst [58]

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Okay. Great. And maybe one last one. Could you just define more, explain your priority that includes a geographical focus in your strategy? Or is it at all a priority? Because in past times, you have really confined and now for sure you expand to adjacent areas. But just to understand a little bit more the thinking behind it.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [59]

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Yes. So very happy to give you an insight there, Simon. We are certainly striving for if we are now venturing outside of North Rhine-Westphalia. And once again, North Rhine-Westphalia is also -- always our top priority because we are the market leader here. We can source also smaller deals can onboard those assets with nearly no additional incremental cost. So therefore, that's always #1 priority for us.

If we are looking then outside of North Rhine-Westphalia, then we are building substantial exposure by sticking to a minimum number of 1,000, enabling us to put own people on the ground. And if we are deciding for new markets, we stick to our cluster definition of high growth and stable markets. From our perspective, certainly, those at the beginning come with lower yields but certainly with less risk. So that's why we have decided for Hannover, for Brunswick or the Rhine-Neckar district. Those are very wealthy and very well-developing cities. But also from there on, then, we want to take advantage of then buying also into higher-yielding assets and markets. Because we have proven that, especially in North Rhine-Westphalia, we can manage also assets in those more difficult cities excellently in favor of our investors. So that's our current thinking.

Certainly, we will restrict ourselves, and that's a big difference perhaps to others. While we are now entering new markets, we will not establish the full-fledged structure in those markets. But we will start with offices being focused on running the operations, but we will not, at the same time, extend the organization in a way that we have a full-fledged standing own regional hub there. But certainly, we will steer it out of our North Rhine-Westphalia platform, so then safeguarding the EBITDA margin. That's the current thinking we are having by entering in new markets, which are the adjacent states to North Rhine-Westphalia.

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Simon Stippig, Warburg Research GmbH - Analyst [60]

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Okay. And maybe 2 more to that part of the question. Just one thing, was the TAG acquisition and the Deutsche Wohnen acquisition, was it mutually exclusive?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [61]

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So if you don't mind, I don't want to answer that one.

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Simon Stippig, Warburg Research GmbH - Analyst [62]

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Okay. Okay. No problem. Just in regard to TAG acquisition, I was really surprised that you would actually look into that and in combining the 2 companies just because I think you had a really clearly defined geographical focus. And it seems more that now you would actually also acquire if the price is right, but go far -- vertically integrate into the development business that was actually located in Poland but as well as into the really broader German market within the TAG portfolio. So I would really like to get a little bit of more of an impression what really the -- I know you explained it already, but just to -- I still didn't really catch the point of -- the rational for it. I would be really thankful if you could give me a little bit more of an insight there.

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [63]

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Yes, definitely. And very happy to take your questions. Thanks a lot, Simon. So from our perspective, it was worthwhile looking into the TAG transaction. Because TAG is the only main competitor, which has an even lower per share -- per square meter average rent than ourselves. So the assets from our perspective are also granting affordable living to the tenants. So that was the overall driver for looking into the portfolio.

At the same time, the TAG platform has a size, which -- where we thought, okay, there are processes and tools, which we might bring to a joint platform which might enable additional operational synergies. And therefore, from our perspective, it made sense to look into it. Yes, you're right to refer to the policy exposure of the business, but this would have been less than 1% of the joined assets. So therefore, from our perspective, it would have not diluted the pure-play cut of the joined entity.

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Simon Stippig, Warburg Research GmbH - Analyst [64]

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Okay. Great. And then just maybe also to have one question surrounding the incentive plan because you mentioned it's aligned. I just wonder if it's quantitatively aligned somehow. Because you mentioned that it will be taking into account how the financing is actually done for further growth. Is there really a quantitative element into aligning the interest between the shareholders and the management?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [65]

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Yes, there is, Simon. And if you don't mind, I think it would be much easier to refer you there to also Frank and the Investor Relations team, and they will very happily run you through some of the details then and give you insight in how the compensation works for those KPIs.

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Simon Stippig, Warburg Research GmbH - Analyst [66]

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I was more referring to per share basis because you mentioned that before, but I will come back to them.

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Operator [67]

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We have a follow-up question from Kai Klose of Berenberg.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [68]

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Yes. Sorry, I forgot one question. It's regarding Page 6 and Page 20. How can I reconcile -- you mentioned there the LEG like-for-like portfolio on a like-for-like basis, coming up with EUR 1,664 per square meter. First, how can I reconcile that with the portfolio overview you show on Page 20? And just out of curiosity, why do you include for this comparison on Page 6 only -- why do you refer only to the high growth and stable markets and not the entire LEG portfolio?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [69]

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Yes. What we've done, Kai, was that looking at the split of the portfolio we have bought into, 55% is high growth and 45% is stable. So therefore, we took the same weighting, which you'll find on Page 20, taking into consideration just at 55% of the high-growth markets with a gross yield of 4% and -- 45% of the gross yield for the stable market, 5.2% on a per square meter basis, the EUR 2,000 or around EUR 2,000 on Page 20 for the high-growth market and EUR 1,264 for the stable markets in order to arrive at this blended amount like-for-like comparison would then be the EUR 1,664 being weighted; 55%, EUR 1,992; and 45% with EUR 1,264. And that's how we derived this line, which is the LEG like-for-like basis.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [70]

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Yes. Yes, I see that. But why for this comparison, you have not included the entire -- the higher-yielding market?

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Lars von Lackum, LEG Immobilien AG - CEO & Chairman of the Management Board [71]

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Because it would be quite different, yes. So buying into high-yielding markets certainly comes at different per square meter costs. So therefore, that's why we have excluded it. And unfortunately, certainly looking now into Hannover or Brunswick, which are both high-growth markets, you will just not be able to buy in any of those markets if you would just be willing to pay EUR 1,000 per square meter. So therefore, we excluded the higher-yielding part and just try to like-for-like from comparison on the high growth and stable markets.

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Operator [72]

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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, LEG Immobilien AG - Head of IR [73]

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Yes. Thank you, and thanks for your questions, and we will clearly come back to your opening questions. And as always, should you have further questions, then please do not hesitate and give us a call or write us an e-mail. Otherwise, please note that our next scheduled reporting event is the 12th of November, where we report our Q3 result. And with this, we close the call and we wish you all the best and hope to see you soon. Thanks and goodbye.