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Edited Transcript of TLG.DE earnings conference call or presentation 12-Aug-19 8:00am GMT

Half Year 2019 TLG Immobilien AG Earnings Call

Berlin Aug 18, 2019 (Thomson StreetEvents) -- Edited Transcript of TLG Immobilien AG earnings conference call or presentation Monday, August 12, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Barak Bar-Hen

TLG Immobilien AG - Chairman of the Management Board & CEO

* Herrn Gerald Klinck

TLG Immobilien AG - CFO & Member of the Management Board

* Jürgen Overath

TLG Immobilien AG - COO & Member of the Management Board

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Conference Call Participants

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* Andre Remke

Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst

* 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

* Pierre Paren

BMO Capital Markets Equity Research - Analyst

* Thomas Neuhold

Kepler Cheuvreux, Research Division - Head of Research of Austria

* Thomas Rothaeusler

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day and welcome to the TLG Half Yearly Financial Report 2019 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Barak Bar-Hen, the CEO. Please go ahead, sir.

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [2]

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Good morning, everyone. My name is Barak Bar-Hen. I'm the lead CEO of TLG. I'm sitting here in Berlin with my colleagues on the management board, our CFO, Gerald Klinck; and our COO, Jürgen Overath. And I'm happy to do this first call.

As you know, I was appointed 2 months ago, so I had only one -- I think 1 month during this financial statement, but you already saw that the rhythm we're trying to hold here in the company. So that during that month, we had 2 main focuses, which is the valuation increase of EUR 400 million and an additional capital increase in amount of EUR 222 million, which basically brings us to a gross asset value of EUR 4.6 billion.

In the past 2 months, what I found is a great company with a very established portfolio, great heritage, great quality of people, which brings us to the next step. And the next step, of course, is expansion and growth. As I see it and I think my colleagues here and the Management Board will agree with me, we see 2 main engines, growth engines in the company. First engine is in internal, we have some value in our current portfolio. Our investment properties, which Gerald will later on describe, and basically what we're doing now is going property by property trying to secure our legal rights in each property and, of course, gain the value.

Again, on the asset management side, yes, we are 97% occupied. Yes, we have 6 years WALT. But at the end of the day, when we see a difference between the market trend and the current trend, then we have a potential there that's internal. And if we go now to our external engine growth, we are talking about expansion via acquisitions, via other measures, which we are now considering. We have a nice amount of money in our account around EUR 800 million, and we are ready to go.

So that's from my side. I will now hand over the presentation to Gerald Klinck, our CFO. Gerald, please.

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [3]

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Yes. Thanks, Barak. Also from my side, a warm welcome. So I think the presentation started now, it may help you, you see that on your screens. So I'm on Page 5 and give you some overview about our key highlights in the first half of the year.

So our operations are totally in line with expectations. Rental income increased year-on-year by 4.7%, that brings us to a 3% like-for-like growth or 3.3% coming from our strategic portfolio. EPRA vacancy rate, as Barak mentioned, is pretty low, we have here only 3% -- 3.1% to the 30th of June.

On the balance sheet, we have 3 major topics here. As we mentioned also, the revaluation is an ongoing regular revaluation every half year. So that kicked in with EUR 400 million. I'll come to that later. Secondly, we raised equity in the last quarter, that was almost EUR 222 million on capital increase. And also, we were able to fund EUR 600 million of the benchmark bonds in the first half of the year, which gives us a lot of headroom now regarding firepower on our balance sheet.

At the end, we have, sitting here, cash on our account and, let's say, for the next half of the year, we expect here EUR 800 million, which has to be -- actually to be invested in new acquisition of the portfolio.

Going now to Page 7, that gives you an overview of our portfolio. First of all, we want to increase transparency, that's what we promised and I hope we delivered it half year by half year. So we put in here another column, another asset class, which we call invest. So in line with our strategy to invest in our own assets, we carved them out to bring them here on a very transparent column.

So assets which were shown in the last quarter or last half year results in office and retail and which are all investments, we carved that out now and have here a column which gives us more transparency also in terms of our KPIs like in-place rental yield, vacancies and also WALT. So we were able now to move our strategic portfolio from EUR 3.7 billion last reported quarter up to EUR 4.2 billion now, and the overall portfolio now has increased by EUR 4.6 billion.

Maybe the circle -- the lower right-hand side shows now we have almost or close to 1/2 of our portfolios located in Berlin, and I would say a little bit more than 3/4 in our top locations in line with Dresden, Leipzig and the Rhine-Main area.

Moving to the next page, Page 8, which gives you also a little bit feeling where does the valuation come from, mainly driven by Berlin. It's the first thing. And secondly, more or less 50% coming from our development effect.

So as you see in office, we were able to increase by EUR 100 million and the invest as I mentioned, of EUR 290 million. In terms of the EUR 290 million, it's a situation that we also changed our methodology in terms of residuals. Value methodology, we were updating our cost and also rent day by day and also we achieved here other milestones in our investment, or investment properties, which brings us now to the situation that we swapped from, let's say, a DCF model for these assets towards residual valuation. That is the main driver from our investments.

Having said this, on Page 9, we also gave transparency of our 11 projects last time. Now we were updating our, as I mentioned, our cost and rents and also identified another property where we can invest in the future. So we are not talking about 11 anymore, it's 12. And also value, as you can see, if you add the revaluation at the DCF method and the residual value method together, which brings up to EUR 290 million, plus the future value which will come in the next years, then we are able to increase here the -- let's say, the value potential by almost EUR 210 million from EUR 820 million shown last time, now they're within a total of more than EUR 1 billion.

Maybe Jürgen can also give us here now some more detail on our projects and this will be our 4 projects. And Jürgen, please go ahead with some details on that.

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Jürgen Overath, TLG Immobilien AG - COO & Member of the Management Board [4]

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Thank you, Gerald. Also a warm welcome here from the engine room, [I also like how this engine room done]. Alexanderplatz on Page 10. The 2 strategic properties we need for this development is, on the one hand, the big building of the Alexanderstraße; and on the other hand, the building which is called the Hofbräuhaus, which is in the back part of the Alexanderstraße close to the Karl-Liebknecht-Straße.

And as we said in the valuation, here for the Alexanderplatz, we have the current status that we have a fully let-up building, and nearly no vacancy. We have a high demand from tenants who like to rent the building. And we also valuated this building as a building as it is. It is not valued as a development building today because the land acquisition, which is rooted in the urban construction contract that [abolished our contract] with the city is not completed yet. We are still in good negotiations with authorities and we think we will make also good next steps in the future, in the near future. And meanwhile, we are preparing the architectural competition, which is planned in 2019 to present the winning design in 2020.

On the next page, 11. We have the Wriezener Karree, which is for most of you also knew. The Wriezener Karree is in Friedrichshain-Kreuzberg near to the Ostbahnhof. Rental area here 30,000 square meter office and 1,500 square meter retail. Beginning of the year, we go -- we got the building permission and we are now preparing construction plans and the building permission letting process, and talks with potential tenants has already been started. And we start -- we lose just a small rent because this old warehouse, which is now there in place, is just let for events. And after finalization, we have the potential for EUR 11 million to EUR 12 million rent a year. Demolition of the old warehouse and start of construction is planned in 2020. Page 11 was that. And Page 12 is the development in Dresden, Annenhöfe. We hand over the -- we got and agreed building application with authority for 20,000 square meters rentable office space. We expect to get the building permission in 2019 to start with the construction in 2020. Today, it's an undeveloped land in one of the best location in Dresden. Letting process and talks with potential tenants has already been started. After finalization, we have a potential for EUR 3.5 million to EUR 4.5 million rental income per year. Start of construction is planned in 2020.

And now on Page 13, I come to a building which we already started with the construction. It's a NEO in Dresden-Neustadt. Construction started here 3 weeks ago around 13,000 square meters rental office area on undeveloped land plot in a good location of Dresden. It's perfect train connection. The letting process and talks with potential tenants has been already started. Due to that, we have 43% office already pre-letted to a very well-known company. After finalization, we have a potential for EUR 2 million to EUR 3 million rent a year.

On Page 14, the region Berlin, the market dynamic in Berlin is still on a very high level. 94% of the valuation uplift Gerald told you about before comes out of Berlin office and investment assets. Half of the Berlin valuation uplift stays on revaluation considering development effects. Market is still rising. We see ongoing new compression in the segment office.

On Page 15, development of the key matrix, as Gerald said before, increase of in-market -- in-place rent by EUR 12 million or 5.3%. Like-for-like rental growth EUR 6.6 million or 3%. Around 13% of this is increase is by invest. The top increase in Berlin EUR 1.1 million Alexanderstraße and EUR 0.9 million in the Kaiserin-Augusta-Allee.

Page 16, vacancy, as Gerald said, vacancy rate down to 3%. In Berlin, less than 1% unfortunately, because if we have now vacant space, we can here -- make good business. So we try always to get free space that we can let it to the market because there's a high demand, as I said before.

Page 17, the WALT. We had a stable WALT on a good level of 6 years. And as I said, unfortunately in Berlin also, we have space that's under rent, but we have to wait until the end of the contract before we can lift up the potential.

Having said this I'd, like to hand over to Gerald for the financials.

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [5]

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Thank you, Jürgen. So I'm on Page 19. FFO was driven by more or less a change in result from our letting activities, increased by 5.5%.

Next page gives you an overview of our EPRA NAV and how they -- how it develops in the last part of the year. 13.3% increase by -- up EUR 29.77 today. If you add the dividend also through these numbers, you end up with a total shareholder return for the first 6 months of the year or more than 17%, which I think is a good total shareholder return for the first of the half year.

So on Page 21, we updated here our overview regarding debt and profile. Obviously, we -- it is mainly driven by the new bonds, the EUR 600 million, which are maturing in 2026. So maturity profile is more than smooth. So for the next, let's say, 3 years, we had only some stuff to do. It's more or less secured debt, which you see here that we do not see really big challenges for us to refinance it.

On the lower left circle, you see that we were able now to balance out unsecured debt and secured debt, so diversification and balance of these instruments are our main focus. Also we were able to reduce secured debt by almost EUR 150 million to hit here our goals in terms of optimization of average cost of debt, concentration on core banks and also to increase unencumberance rate. We were able to increase that number from 30% to 40% more or less, and maybe you know these are some important requirements for Moody's as well.

Reduction of LTV, we're also down. And given that we had the valuation and the ABB in place, we were able to reduce it now down to less than 30%, we have 28.4% in terms of net LTV, which gives us a lot of headroom for further investment in the future. Average cost of debt also reduced slightly down to 1.74%. And the average weighted maturity of 5.8 years I think is not really a big change there.

Coming to the outlook page, that is Page 23. We will stick to our FFO guidance in terms of euro. For the year, it's EUR 140 million to EUR 143 million. Having said this, have in mind that we have now the bond in place through the second half of the year, so additional interest will kick into our FFO, but we are able to cover that by a little bit higher rent and also looking on, let's say, cost NAV platform, and also the change in secured to unsecured debt gives us also an impact that we can cover that.

So we stick to our euro guidance in terms of FFO. Euro per share that is technically decreasing because we have now the -- more shares, number of shares, almost 8.5 million from the ABB. So technically on an average methodology, we are slightly decreasing here. And we stick to our dividend guidance of 70% and also LTV, as mentioned before.

Maybe some words regarding our pipeline, that is Page 24. Pipeline is set up. We are a bit outstanding with the EUR 1.6 billion, also detailed-check of EUR 430 million (sic) [EUR 530 million], so more or less more than EUR 2 billion in the pipeline. As you know, and that is what Jürgen is also telling me, the pipeline is pipeline, not signed yet. When we are successful here on signing contracts, we will inform you shortly.

So we're more or less done with the presentation. Hope that you were able to follow us with our, let's say, key takeaways in that. And now we are very happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Charles Boissier from UBS.

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

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I have a question for Mr. Bar-Hen, the CEO. So in your introduction, you mentioned 2 growth engines, development and acquisitions. In term of asset classes and locations, the company is still in transition, I believe. What is your vision for how the portfolio will look like a few years from now both in terms of exposure by asset classes and locations?

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [3]

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Thank you, Charles, for the question. So yes, I basically spoke about the growth engine, external engine and expansions that we are holding. Look, when I came to the company and I started to review the portfolio, and again I started traveling property by property, I really found out a very good, solid portfolio in main locations mostly.

So the idea is not to take this portfolio downward but basically to have the same, more or less, asset class, which means, at the end of the day, we're talking about A locations -- or metropolitan of A locations. This is one. Secondly, we know we have competitors in the market, we know we are not alone in the market, but at the end of the day, when we're looking at about our reputation as a buyer, we're looking at our, let's say, strong financial situation, balance sheet, we are very good, let's say, position in the market to close these deals.

And also, we are looking for an edge in every deal. So if we will buy properties for 2%, that is not going to help anyone. So we are looking at, such as, for example, an additional building right, maybe some change, maybe sometimes other legal or tax advantages. So that's basically it. I hope I answered your question.

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

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Yes. And just to follow up on some elements. So in terms of the pipeline of acquisition, you mentioned A locations. What proportion of that is Berlin? And marginally, what exactly do you define by A location? Are we talking about the top 9 cities of, probably, Germany?

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [5]

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We are talking about the 9, 10 cities of Germany. Some -- let's say, some properties in the pipeline are in Berlin. We are -- which we are working on very hard to close. But yes, yes, we have Berlin properties in the portfolio, in the pipeline.

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

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Okay. And then just on the pipeline of projects, you mentioned the change of methodology. What exactly are the key milestones achieved on the 12 projects that brought you to bring forward the value creation into the current NAV? And then in Alexanderplatz, I think you mentioned that it's still value on this year's. Is it fair to assume you would switch to the residual value method once the land are acquired? And if so, when do you expect that to take place and how much uplift would there be at that point?

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [7]

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Okay. I will start with Alexanderplatz and then I will hand off to Jürgen for the rest of the projects. But in Alexanderstraße, although we have a pre-permit in place and we have our legal rights over there, this is a very, let's say, central project in Berlin. The -- all the eyes of the city are focused in this location, and therefore, we are acting very, very conservatively. We're acting very carefully and we're now discussing the projects with the different authorities from the political side to the administration side. And at this point, what we included is an assumption that the building stays as it is with the refurbishments, plus of course market rent. So we're now conservative, we are not including the full project in our valuation. So that's for Alexanderstraße, and I will now hand over to Jürgen regarding the rest of the projects.

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Jürgen Overath, TLG Immobilien AG - COO & Member of the Management Board [8]

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Yes. So [what] we achieved in the past is the Wriezener Karree, which I explained before, is that we got really good building pre-permission and -- which makes us comfortable that we can get in short time the building permission. We are now in the preparation of the construction plans and we are in talks with tenants also for this location, and so we feel very, very comfortable there.

And on the other hand, in Dresden, in Großenhainer Strasse, which call -- we called now NEO. This office building which is 43% let to 1 big very well-known company here in Germany. And so we also have there get some good steps and which makes us, from the one hand point, feel comfortable; on the other hand, which brings us the value in the project. And that's what -- how we go forward, we try to get a prebuilding permission that we have -- that was see that we are on the right way and then we work for the building permission, which stake depends on the size of the property, some more time or some less time. And so that's the job we have to do.

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Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [9]

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Okay. Apologies for many questions, but just one final follow-up for Gerald. Did I catch -- you mentioned that you may take value creation even if you don't have the building permit yet? Or do you always wait for the building permit?

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [10]

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Yes. As Jürgen mentioned, so when I understand your question correctly and correct me if I'm wrong, so we are looking here, let's say, for methodology if we cross some milestone or achieve that, maybe for example in Wriezener Karree, the prebuilding permission that is one key driver to change on the DCF model to our residual methodology. And more or less the main driver was -- of the valuation uplift came from Berlin especially from the Wriezener Karree.

And having this, we have here now our, let's say, rules in place when we change from DCF to the residual. And one major topic out of this is really to have the Berlin permission in our hands. And then we -- and as I think you'll be aware of this methodology, you look what will be the total value of your assets and then you deduct every cost, which a third party will have if he wants to acquire that plot of land and you have to deduct from your total value, and that will be then the market value for your asset. That's how it works and it is also in line with the value that was also discussed with us. And also our auditor, E&Y, had a clear look on that and we have the clear go also from their point of view.

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Operator [11]

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We will take our next question from Thomas Neuhold from Kepler Cheuvreux.

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Thomas Neuhold, Kepler Cheuvreux, Research Division - Head of Research of Austria [12]

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I only have 2 basically. My first one is on the EUR 800 million firepower. Can you please provide us more details, which portion of the capital you want to spend on acquisition and which portion is earmarked for own developments. And I was wondering if you can already provide us with more details on the timing of the CapEx of the 12 key projects you mentioned. How much you have to spend over the next 3 to 5 years if already possible. I know you're still like in building permits for some of the project. And the second question would be on the loan core portfolio. I was wondering if you can give us an update here where you stand in terms of the disposal process and when you think you will have finalized the exit from this portfolio.

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [13]

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Yes. Thomas, thanks for these questions. So starting with your first one. So what is the EUR 800 million, where does it come from. First of all, we have the EUR 600 million of bond proceeds. If you deduct more or less the big number EUR 150 million to repay the secured debt, you sit with EUR 450 million in the account and then you can add the ABB proceeds, and then you are in the ballpark of EUR 670 million. Knowing we have operational cash flow month-by-month and also the proceeds from our sales thing, we end up with more or less EUR 800 million at the end of the year, which is refinanced for acquisition.

The CapEx, which we want to use for our own investments in year 2019, is not as big as maybe you expected because we now started in Dresden, the first project. And this is, let's say, only a small proportion for 2019 to refinance that. All the remaining stuff is more or less ready to be invested for further acquisitions.

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Thomas Neuhold, Kepler Cheuvreux, Research Division - Head of Research of Austria [14]

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Okay. Understood. And looking at the development pipeline in more details, do you have an idea already what the CapEx could be next year and the year after if everything goes well as you planned?

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [15]

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That's a good question at that point of view. So we gave a little bit of transparency here regarding the first 3 years and 5 years at our last presentation. I think we -- you can expect from us an update on a little bit more details in terms of CapEx planning now for the Wriezener Karree and also the 2 projects. Alexanderstraße is a little bit away from today's point of view, but you can expect some updates when we are a little bit, let's say, closer to a better and stabilized planning process, then we'll come up with further information on that part.

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Thomas Neuhold, Kepler Cheuvreux, Research Division - Head of Research of Austria [16]

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Sounds good.

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [17]

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I just want to add -- this is Barak, I just wanted to add regarding the developments. We -- development is not going on the ground and start construction, development is basically start planning, start studies, see what's the best usage, then go with it with the authorities. Try to, let's say, secure legal rights. There's always discussions with the authorities. And at the end of the day, then you reach your legal rights, and when you do that, then you start basically further planning and take it to the next level.

So this kind of project takes time. I think we can all say it especially in Berlin when there's a lot of demand, authorities are very much involved in what is -- what should be the end product. So if we are talking about developments, we are not talking about all development in onetime and the usage of funds for onetime. This is really not the case. And we will -- like Gerald said, we are going to be transparent about it.

Now regarding the nonstrategic portfolio that you were just mentioning, so of course the first sale happened. I want to stress something, yes, it's nonstrategic but we don't have to sell it. We are going to sell it at the end of the day but it's not going to be -- it's not going to happen in a day or 2. We're not talking about a big amount, I think we are talking about EUR 300 million more or less as -- or EUR 4.6 million. So this is really less than 10%, so this is really not a big deal.

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Operator [18]

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We will now take our next question from Georg Kanders from Bankhaus Lampe.

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Georg Kanders, Bankhaus Lampe KG, Research Division - Investment Analyst [19]

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First, regarding the Alexanderplatz portfolio, when I look at the map, that seems that there is much land you have to buy additionally. And the second question is, is this only in public position that you are -- the additional lands you need? The second (sic) [third] question I have is as Alexanderplatz is only -- development is not yet fully included, am I right, from Page 9, to assume that most of the future value you have put here in the EUR 750 million, this comes then from Alexanderplatz?

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [20]

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Maybe for your last question here, yes, Alexanderplatz is a big elephant in the room, so you can assume that some part of that, of the EUR 750 million, is linked to Alexanderplatz. But having said this, we have in total here 12 projects now, and Alexanderplatz is a little bit less than 50% now of it. In the revaluation of the EUR 80 million, let's say EUR 60 million is the stake for the -- or it came out of the Alexanderplatz. So there's still some more way to go to realize the future value creation. And also for Alexanderplatz, yes, it's a big part of it. Your first question, I do not really get. So why does -- what do you think in terms of acquiring land, what -- can you be a little bit more precisely on that?

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Georg Kanders, Bankhaus Lampe KG, Research Division - Investment Analyst [21]

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You said you needed additional land for the Alexanderplatz development with what you have now.

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Jürgen Overath, TLG Immobilien AG - COO & Member of the Management Board [22]

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Yes. We have here -- for the Alexanderplatz, we have the [Strausberger's] contract, urban construction contract in place with [delinquent], which is still valued. And we also have this contract for the other development, which is behind the Alexanderstraße, called the Hotel H2 and H4 in Karl-Liebknecht-Straße. The same contract is valued -- still valued for the Alexanderstraße. And we have to -- not to acquire, we have to switch some land. So there's a difference. So we don't have to go on the road and ask somebody to do -- to sell us the land. So we have to handle this with this root in the contract. It takes time because we have to sit together with authorities.

And as Barak rightly said, we have to be careful. We have to be very polite with this. And it takes time, but we have time because we have now a fully let building with EUR 7 million rental income a year. I feel comfortable from the asset management point of view with that building. On the other hand, we try to deal this big elephant, as Gerald said, and this is planned for the next years and it's not tomorrow, not the day after tomorrow. So at the moment, we are still on the time line. And yes, we try to achieve the next steps and go forward further down the road.

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Georg Kanders, Bankhaus Lampe KG, Research Division - Investment Analyst [23]

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But the counterpart where you're negotiating with is only in the city of Berlin for -- this right or is there some...

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Jürgen Overath, TLG Immobilien AG - COO & Member of the Management Board [24]

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It's right. That's right, yes.

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Operator [25]

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(Operator Instructions) We will now take our next question from Kai Klose from Berenberg.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [26]

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I just have one question on Page 15 of the presentation. Could you indicate or give more details on the letting volumes in the first half? What was the split between these extensions and new lettings?

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [27]

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Can you repeat the question, please?

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [28]

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The question was if you could indicate what was the letting volumes in the first half and maybe you could also split that between lease extensions and new lettings.

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [29]

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Sorry, Kai, I didn't have this number in front of me. So I can't answer this question at the moment. I will come up with it.

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Operator [30]

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We will now take our next question from Thomas Rothaeusler from Jefferies.

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Thomas Rothaeusler, Jefferies LLC, Research Division - Equity Analyst [31]

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Just one question on development. What is actually the maximum exposure you target here?

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [32]

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Thomas, which -- what do you mean, in terms of over the 10 years or what?

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Thomas Rothaeusler, Jefferies LLC, Research Division - Equity Analyst [33]

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Yes. Let's say, the 12 projects you have in the pipeline, if you can realize, let's say, most of them the next, I don't know, 3 years or so. What is the maximum exposure you would take relative to the total portfolio size for development.

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [34]

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In 10 years' time, we have almost EUR 1.8 billion. So divide that on average by 10 years, you will end up with less than EUR 200 million, which is lower than 5% of our overall portfolio. And as you can imagine, we are in line also with expectations with rating agencies on that, so -- and to be honest, that's a reality at the moment. For the 12 projects, in the ballpark of less than 5% on average for our actual gross asset value.

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Thomas Rothaeusler, Jefferies LLC, Research Division - Equity Analyst [35]

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Okay. And one follow-up on the value uplift to EUR 400 million. Actually what I see is 72% is from invest, that's roughly EUR 300 million. Can you provide a rough idea how much is it per project actually?

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [36]

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EUR 200 million is coming off really on these residual methodology. And in total, it's in a ballpark EUR 290 million for the -- for all other 12 projects. So the split of the EUR 200 million is more or less mainly driven by -- so the Wriezener Karree here in Berlin. That's the main part out of it and all the others are -- let's say, from the other 6 residual methodologies on project, more or less than the rest. So you can assume that Wriezener Karree is more than 3/4 of the EUR 200 million and then the remaining piece is for the others.

And why is it? Wriezener Karree is very close to be realized and that's the reason why you can see it here in Berlin reflecting in the value of the plot. All the others we are working on and we are a little bit, let's say, far away from realization. And therefore, you have to calculate also a little bit, I would say, higher cost, for example, the financings as well. And that gives us not the full value of these projects right now. And these are the main reasons. But as I mentioned before, main part of the EUR 200 million came from Wriezener Karree.

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Operator [37]

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We will now take our next question from Pierre Paren from BMO.

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Pierre Paren, BMO Capital Markets Equity Research - Analyst [38]

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First question is on your development pipeline. So you've got 12 projects. When can we expect to have a bit more details for each individual project as in total cost, CapEx to invest for each project, yield on cost, different location, et cetera? Because -- well, you recorded already a bit of -- or a fairly big chunk on your development pipeline, so it would be maybe fair to give more -- a bit more info on this pipeline.

An associated question on that would be on the acquisition pipeline this time of EUR 2.2 billion. I'd like to know how confident you are to execute on this pipeline in the short, medium term and if you are planning actually to deliver entirely on this EUR 2.2 billion or if we could expect maybe that, at the end, you buy -- you finalize 50% of 20, or I don't know, like on the part of this pipeline.

And again maybe to add a bit more detail on the acquisition criteria. So you quote 4.5% yield, which is actually lower than your current in-place yield at 4.9%. And I feel like most or a good part of the project or acquisition are outside Berlin. So is it fair to say that you might dilute your Berlin exposure and dilute your current yield on offices. And if so, yes, if we can ask some views on vacancy targets in relation on this potential acquisition. And the third question will be on your firepower at EUR 800 million. What is a reasonable time line that you expect to deploy this capital entirely?

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Jürgen Overath, TLG Immobilien AG - COO & Member of the Management Board [39]

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Okay. I like to start with the development first, with the first question. Certain properties we need for 12 projects, 3 of them are just land, so we can start with the land earlier because we don't have to cancel lease contracts and we don't have to demolish buildings or something like that. So we started in Dresden with the Großenhainer Strasse at first. And here, due to the situation that we don't have a team in place in the past, which can handle it, we hired for this job here a development partner who does all the work for us. So we paid maybe a little bit more than we have to pay for the construction when we do it with the team and -- if organize it by ourselves, but we feel comfortable because the pricing is good and we also got a very early stage tenant and we got this 43% pre-letting at the beginning of the construction.

So we will show you more details with every presentation we do in the future. But we don't like to, right now, in figures, for example for construction cost, because when we write in the cost here in the presentation, we will not get a cheaper offer from the market outside because everybody knows what we are willing to pay. And it doesn't work, we so we have to be careful with it because we are in negotiation. We are in negotiation with a lot of realization partners for the Wriezener Karree and also for the other projects. But not too early, but early enough that we have the capacity from the market because capacity is a topic for the future, who gets the capacity for the building and the constructions.

And I also can answer a little bit the question we had before, from a colleague before. We cannot do all this construction on 1 day because we have running contracts, we have to cancel the contracts or agreements with the tenants. On the other hand, we need the capacity from the market, so we have here the situation that we start now with Großenhainer Strasse, then comes Annenhöfe in Dresden, then comes the Wriezener Karree. And we will update you with every presentation with figures when we finalize the contract with the partners to don't hamstring us in negotiations with partners. And for the acquisition part, I hand over to Barak.

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [40]

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Just to add on that point again on the development, what Jürgen just mentioned is that we identified the easiest -- well, you can call it easiest project we can basically execute in a relatively short time. It doesn't mean that we don't have more projects, but if we have a tenant for, I don't know, 6, 7 years from now then, again, a discussion will need to start with tenant if we a potential in the land, and this is not even included. So this is the first part.

Regarding the firepower, the EUR 800 million that we have in our account, we are working in parallel, in separate deals and we hope to close some deals in the near future. Again, I mentioned what Gerald said before, the fact that we have a pipeline, it doesn't mean that we need to execute the whole project. We're not working by ourselves. We have also competitors. We have also sellers in place. So I suggest that everybody will, let's say, have a little bit of patience. And hopefully, you can see something soon

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [41]

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Maybe some other comments to your criteria on acquisitions. First of all, we are looking for strategic fit and that means we are looking for office, we are looking in A cities and the metropolitan areas around that. That is our strategic fit. And also to have asset management things to do where we can create value and not hoping for yield compression. That's the first thing.

Secondly, obviously, yes, we look on FFO per share and NAV per share to grow the company. But FFO in -- and especially in office, that is not typically in the first year. If you have WALT of, let's say, 2, 3 years, you'll need a little bit of time that you can, let's say, create your value regarding asset management to change from actual rent to market rent. And therefore, we also look for an IRR unlevered, let us say, from our [WALT] plus the margins which we want to achieve.

And exactly your comment on if we are having about 5%. And this is not our target, but as you mentioned there and maybe the in-place rent yield is a little bit lower, that doesn't mean that we dilute our cash flows or the quality of our portfolio. We are very keen on IRR unlevered and also creating value for the company, for the shareholder, from today and also in the future. I hope that covers your questions.

And in terms of LTV, that is also has to link in, in that criteria. 45% we mentioned in our guidance sheet, that number is a little more or less coming from our lease rating. This is a critical model. After that, we have to step in discussion with them. Having said this, capital markets and also we, we do not want to be at that stage. We think that it's better to stay in the ballpark of 40% or lower. But maybe on a, let's say, short time frame, you can also see us maybe slightly higher LTV between 40% and 45%.

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Pierre Paren, BMO Capital Markets Equity Research - Analyst [42]

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Okay. I just missed one element. What is the unlevered IRR target for acquisition?

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [43]

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I didn't tell you my IRR, otherwise everybody knows outside what will be the [let] to apply, which we want to -- which we cannot say here. So -- but you can imagine that is based on a [WALT] plus margin, which we want to realize.

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Operator [44]

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(Operator Instructions) We will now take our next question from Andre Remke from Baader Bank.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [45]

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What is your general strategy or, let's say, opinion on M&A of - in general? Are you prefer to buy single assets or smaller portfolios or larger ones? Because you mentioned EUR 2.2 billion divided by 11 acquisition opportunities, so is there a wide range between single projects of, let's say, EUR 20 million and a portfolio deal of, let's say, EUR 1 billion? So any color on that would be helpful.

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [46]

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Okay. Again, it's Barak here. At the end of the day, it's not what we want to buy, it's also what is on the table, okay? So our preference is nice to have and we do, of course, prefer as bigger the better. But we are looking something about, let's say, at least EUR 20 million more or less. But then again, it's what's on the table. So of course, if we have projects today with 10% yield of EUR 500 million, all of them in Berlin of course, we would go for that, right? But this is not the case. So I can say we are looking at portfolios, we are looking at single assets, so there's really a -- the pipeline has a mix of things.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [47]

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But the statement is also bigger is better, right?

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [48]

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Well, the bigger the better, of course, depends on the product. So if the bigger, the better are in satellite city in the east of Germany, so of course, this is not a product we are looking for. So depending on the product, of course. The bigger, the better and, again, depends on the product.

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Andre Remke, Baader-Helvea Equity Research - Co-Head of Equity Research & Equity Analyst [49]

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Okay. Perfect. Then a question on your dividend guidance. Just to hear it from your side. The 70% on FFO, what does that mean after the increased number of shares? So would you theoretically also allow for a higher payout to keep the dividend at least stable? Or it's too early to talk about that?

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Herrn Gerald Klinck, TLG Immobilien AG - CFO & Member of the Management Board [50]

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Yes. Two times yes. So it's too early to discuss dividend guidance for 2020, for the 2019 year. I think we have to come a little bit closer to the end of the year. Let's assume that we will give you a little bit more detailed guidance in Q3. Is it possible to increase the payout ratio higher than 70%, why not? So you know our methodology. We want to check if we are able to fund the dividend out of our FFO. And also our ordinary CapEx, tenant improvement also has to be financed out of the FFO. And if then there is a headroom to increase a little bit to come also in line with these technical stuff, often an ABB, then we are also able to increase that. But it's a little bit too early to give you here really, let's say, a fixed guidance on that.

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Operator [51]

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(Operator Instructions) It appears there are no further questions at this time. I would like to turn the conference back to our hosts for any additional or closing remarks.

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Barak Bar-Hen, TLG Immobilien AG - Chairman of the Management Board & CEO [52]

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So thank you very much for your questions and hope we see us -- or hear us again for the Q3 numbers. And take care and bye-bye.

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Operator [53]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.