LEG Immobilien SE: Cash-focused strategy pays off – AFFO growth outperforms forecast
· Strong increase in earnings: AFFO improves to EUR 181.2 million (+66.5 %)
· Convincing operating performance: Like-for-like vacancy rate now just at 2.4 % (-30 bps);
like-for-like rent rises by 4.0 % to average of EUR 6.58/sqm
· Dividend proposal: EUR 2.45 per share
· Declining devaluation pressure: from 7.4 % in first half to just 4.9 % in second half of 2023
· Solid financing structure: LTV of 48.4 % and equity ratio of 38.8 %
· Forecast for 2024 confirmed: AFFO expected between EUR 180 million and EUR 200 million
· Carbon footprint reduced by around 4 % to 27.3 CO[2]e kg/sqm
Despite the challenging environment for the housing sector, LEG Immobilien SE has performed very successfully in the 2023 financial year. The company even outperformed the forecast for its key earnings indicator, AFFO, which it had already raised in the course of 2023. The main factors driving this were a strong rental result, a significantly higher net cold rent, a strict cost discipline and a positive one-off effect from the forward sale of green power. The outstanding operational performance and the ongoing rise in demand for affordable housing promise a crisis-proof, reliable, long-term business model.
Lars von Lackum, CEO of LEG Immobilien SE, says: “LEG’s cash-focused business strategy is paying off. In some cases, we have even outperformed our ambitious financial goals for the 2023 financial year – thanks to an outstanding rental result and our strong cost discipline. LEG is emerging from 2023, a year of crisis in the housing industry, stronger than before. Management and Supervisory Board will propose a dividend of EUR 2.45 per share for the 2023 financial year to the Annual General Meeting in May to allow our shareholders to participate from the company’s good business performance. We anticipate further earnings’ growth and increased transaction activity on the property markets during the 2024 financial year.
*Key performance indicators on target or better*
The like-for-like *vacancy rate* was down by a further 30 basis points year-on-year to *2.4 %*.
Like-for-like *rent* rose by *4.0 %*. The forecast for the full year has been between 3.8 % and 4.0 % (like-for-like). *Average net cold rent* per square metre is thus currently* EUR 6.58 (like-for-like) *or around EUR 420 for an average LEG apartment of roughly 63 sqm. LEG is therefore still clearly focused on the “affordable housing” segment for people on low to medium incomes.
*AFFO* *improved by 66.5 % to EUR 181.2 million* (2022: EUR 108.8 million). This reflects the free cash flow and allows the company’s management to preserve capital and liquidity in the current phase of elevated interest rates and high inflation. By contrast, FFO I is widely used in the sector but is largely accounting-driven, as it benefits from high capitalized expenditures. Given LEG’s strict cost discipline and thus its lower capitalisation rate, FFO I declined slightly to EUR 453.9 million in 2023 financial year (2022: EUR 482.0 million).
The positive development in AFFO is therefore also an indicator of the effectiveness of the changes made to LEG’s business strategy in November 2022, which is characterised by systematic cash management.
Consequently, the company is focused on key investment projects. As a result, *investment expenditures declined* by *13.8 %* year-on-year to *EUR 35.01/sqm* despite countervailing inflation (2022: EUR 40.61/m²).
*Attractive dividend proposal of EUR 2.45*
Following the suspension of the dividend for the 2022 financial year, Management and Supervisory Board will propose *a dividend of EUR 2.45 per share* at the Annual General Meeting on 23 May 2024. This is equivalent to a distribution of 100 % of AFFO and thus in line with the dividend policy resolved in November 2022. However, the company will refrain from the distribution of a portion of its net sales proceeds as AFFO per share was initially expected lower at EUR 1.50 for the 2023 financial year. The dividend will again be *offered in cash and shares*. The dividend yield amounts to 3.1 % based on the closing price for 2023.
*NTA per share of EUR 126.57 – Devaluation pressure declining significantly*
*EPRA NTA per share* amounted to *EUR 126.57* as of 31 December 2023 (31 December 2022: EUR 153.52 per share). The main reason for the decline in NTA is the devaluation of the portfolio by 11.9 %. As the company anticipated, *devaluation pressure declined significantly in the second half of 2023: *After a drop of 7.4 % in the first half of 2023, devaluation amounted to just *4.9 % in the second half of 2023. *Given the high interest rate level, the devaluation hit growth markets (demographically and economically strong, high-priced locations) harder than stable markets and higher yielding markets.
*LEG assumes that the valuation level will gradually stabilise over the course of 2024*. As usual, the next revaluation of LEG’s residential portfolio will take place as of 30 June 2024. The *gross yield* of the total property portfolio amounted to *4.8 %* as at the end of the year (2022: 4.2 %).
Despite the reluctance to buy on the residential market in 2023, LEG succeeded in notarising or concluding *sales of a total of c. 2,000 apartments and several commercial units* for around EUR 155 million, and *at book value* on average. Transfer of ownership is not scheduled until 2024 in some cases. Ownership was transferred for 1,316 units with proceeds of EUR 80.3 million and net disposal proceeds of EUR 55.2 million in 2023. Overall, LEG’s *sales programme* comprises *more than 5,000 units*. As a result of its measures to conserve liquidity, the company will refuse to sell properties below book value moving forward as well. The company also refrains from the sale of minority interests in sub-portfolios.
*Refinancing until mid-2025 already completed*
In the current challenging market phase, LEG benefits from its good access to all participants on the financial market. All the liabilities maturing in the 2023 financial year, the bond of EUR 500 million that was due in January 2024, and all other covered financing arrangements have already been refinanced. As a result, *no further financing* is due to mature *before the middle of 2025*.
A*verage financing costs* are currently at *1.58 %* with an *average maturity *of *6.2 years* (31 December 2022: 1.26 %; 6.5 years). The company has a *solid Baa2 investment grade rating with a stable outlook*.
*Net debt* in relation to property assets (*loan-to-value (LTV)*) amounted to *48.4 %* as of 31 December 2023 (31 December 2022: 43.9 %). The medium-term target for LTV is a maximum of 45 %.
At *38.8 %*, the company also has a *high equity ratio* compared to many other industries. LEG’s statement of financial position is resilient as well: investment property accounts for 94.2 % of total assets, and the company does not recognise any goodwill.
*Outlook for 2024 confirmed – Cash-focused strategy to continue*
LEG is optimistic for the future. Thanks to its cash-focused strategy, the company feels excellently prepared for the new normal of higher interest rates. The stabilisation of interest rates and the foreseeable opening of the transaction markets are good news for the industry and for LEG as well. In addition, the demand for affordable housing continues to rise.
Considering this, LEG is confirming the positive outlook for 2024 published in November 2023. The company is forecasting an *AFFO of between EUR 180 million and EUR 200 million* for 2024. These figures do not reflect the effects of further possible portfolio acquisitions or disposals.
In 2024 as well, LEG will stand by its dividend policy of distributing 100 % of AFFO and a share of its net disposal proceeds to shareholders.
The company expects a *rental growth* of *between 3.2 % and 3.4 %* in 2024, which is higher than the rent growth for 2023 excluding the extraordinary effect from rent increases in the subsidised property portfolio. This had an impact of 80 basis points in the past financial year but are not due again until 2026.
LEG is planning to *invest* approximately *EUR 32.00/sqm* in 2024. This is less again than in 2023 and the high-spending years at the start of the decade, but also much higher than in the first years after the IPO, and it is enough to uphold capital discipline and preserve property values. For investment in energy-efficiency improvements in particular, LEG wants to take advantage of the broader options available for government financing subsidies.
As was decided in conjunction with the strategy review in November 2022, the company’s small but capital-intensive project development business will be quickly run-off. Work is currently ongoing to complete the three projects already initiated. The remaining business volume will amount to only slightly more than EUR 82 million by 2025. LEG’s last remaining new construction project will also be completed by then.
LEG’s own *start-ups and joint ventures* for the digitalisation and decarbonisation of its portfolio and the housing industry at large have been making rapid progress: from serial renovation by RENOWATE to the installation of air-to-air heat pumps by dekarbo to Youtilly, the property maintenance services platform.
However, especially the progress made by *termios* in recent months has been substantial. With its smart *thermostat solution termios Pro*, the joint venture offers a particularly efficient option for climate protection in the housing sector. Installing the AI-based and certified system entails a one-time cost of just a few hundred euros per apartment. This enables legally sound hydraulic balancing and the continuous performance optimisation of existing, water-based heating systems. In turn, this allows *carbon emissions to be reduced by up to 30 %*. The installation and trial of the first models of the thermostat in LEG buildings has been ongoing since the start of the year, and the project is arousing a great deal of interest from other housing companies.
LEG once more reduced its *own carbon footprint by around 4 % to 27.3 CO[2]e kg/sqm* in 2023. LEG has again defined individual and clearly measurable targets for the three sustainability dimensions of environmental, social and governance for the 2024 financial year. It is also currently working to update its ESG agenda, which will be presented in spring 2024.
*Key Figures*
*Lars von Lackum* explains: “The peak of the property crisis is already over for LEG. Thanks to our cash-focused strategy, we have successfully prepared the company for the new normal of higher interest rates. We intend to continue this path in 2024 as well. We will further enhance our operating earnings power and retain our strict cost discipline. The basis for our fundamentally sound business model is the persistently high demand for affordable housing.”
*About LEG*
With around 167,000 rental apartments accommodating some 500,000 residents, LEG SE is a leading listed housing company in Germany. The company maintains eight branches and is also represented at select locations with personal local contacts. From its core business of renting and leasing, LEG SE generated revenue of around €1.241 billion in fiscal year 2023, with an average rent of 6.58€/sqm (l-f-l). With a share of around one-fifth of social housing and its ongoing commitment to efficient climate protection in the housing industry, including the establishment of green, digital start-ups for the smart control of existing heating systems (termios), the installation and maintenance of highly efficient air-to-air heat pumps (dekarbo) and digital, serial full refurbishment (RENOWATE), LEG emphasises its sustainable commitment in various areas.
*Investor Relations contact:
*Frank Kopfinger
Tel. +49 211 45 68-550
e-mail: frank.kopfinger@leg-se.com
*Press contact:
*Sabine Jeschke
Tel. +49 211 45 68-325
e-mail: sabine.jeschke@leg-wohnen.de
Disclaimer
This publication is neither a solicitation to buy nor an offer to sell securities.
To the extent that we express forecasts or expectations or make forward-looking statements in this document, these statements can entail known and unknown risks and uncertainties. These statements reflect the intentions, opinions or current expectations and assumptions of LEG Immobilien SE. The forward-looking statements are based on current planning, estimates and forecasts, which LEG Immobilien SE has made to the best of its knowledge, but that are not a statement on their future accuracy. Actual results and developments can therefore differ materially from the expectations and assumptions expressed.