TAG AG CFO Thiel: "Wir sind in Polen schon zweitgrößter Vermieter" - Börsenradio to go

They have a clear impact on us. In fairness, in the past we profited a lot from them. Now we also see rising financing costs in the results. But we can, with our rental and sales business, currently compensate for a large part of the rising costs. Rental business declined 7% compared to the prior period. If you add sales business, it is 11%, so a growing sales business, especially in Poland, which is not so capital-intensive. Financing is mainly done through buyer down payments, which helps us in the current environment to still generate rising results.

It is the same in Germany. The system is relatively similar. That means a buyer purchases during the construction phase and makes down payments. That helps us to use these buyer down payments, so we don't have to finance it through bank loans, for example. The buyer pays along with construction progress. It is no different than in Germany. But we don't have this business in Germany. We do no construction activity in Poland. We recommend that because we see much better returns, much more growth also in the market. So despite the difficult interest rate environment, we see rising sales figures in Poland. But compared to the market environment in Germany, if you look at what building contractors are reporting, it is going in the other direction. That shows that the Polish market is also much more affordable.

The quality is certainly not worse than in Germany. But of course what has driven construction costs in Germany is many, many regulations, including in the energy sector, which have simply driven up costs. Today, in comparison, to build on a plot in Germany at under 5500 euros per square meter is almost impossible. In Poland, I can build for 2500 euros per square meter. That shows the differences. And also in Poland, salaries have risen significantly, so people can afford it. In Poland, we focus very much on the big cities. In Germany, we have a business model that you also confirmed. Only in Warsaw? No, in all big cities. So demand is robust. And apartments in Poland tend to be a bit smaller. For example, 50 square meters, different sizes. But for 200,000 euros, the total construction cost is a bit over 100,000 euros for an apartment in Warsaw, the capital. That is affordable for many. I think that makes the difference. Apartments in Poland are simply still much more affordable than in Germany. Yes, even in prime locations they have become very expensive.

We have to distinguish. In the German business, overall we have an average interest rate of 2.3%. If we take out new loans for our German rental business, we are at just over 4%. That is a clear increase. In Poland, we finance our rental stock through the business model: once the sales business, and our rental properties are essentially financed through intercompany loans. That means we have raised money here in Germany, for example at 4%, and used it to build in Poland. We are also in the process of financing locally with banks. The interest rate remains in euros, perhaps one tick higher, the result maybe closer to 5%. If we were to finance in zloty, they would be significantly higher. The 6% is roughly 9 or 10%. So we are very interested in using our German financing capacity, and that is of course a competitive advantage we have. As for the sales business, as I said, financing needs are very low; most goes through buyer down payments. If we finance something, like buying land, maybe 8 to 10 percent. So the financing requirement is very low, and the rest is covered by the Polish zloty. Exactly, that is an advantage.

Yes, it is indeed complete. The processes were of course not simple. We already had a company in Poland, Vantage Development, which we bought at the end of 2019. That was a team of just over 100 employees. With Robic, almost 500 employees were added. The two companies were merged into one organization over the course of 2022. Fortunately, we also kept the management team that wanted to stay. That is very important because we need people who know the local market very well. Now we have a very large platform in Poland that allows us to sell apartments, build them, and also build apartments for our own portfolio. To give you some numbers: with 2,300 apartments that we have in the rental market, we are already the second largest rental in Germany? That sounds odd, but it's normal. The market is fragmented. We also have apartments under construction, and we sell in Poland. I think this year, if you extrapolate, we will sell between 3,500 and 4,000 apartments. That makes us probably the largest seller market in Poland. Of course, compared to your 500 or 86,000 units in Germany, it looks relatively small.

In the Polish context, of course we only have 2,300 apartments completed; another 1,000 are under construction. The square meter rent is twice as high as in Germany. In Germany, we rent for about 5.50 euros; in Poland, because it is new construction and in big cities, it is more like 12 to 13 euros per square meter, and the apartments are a bit smaller. So that makes for interesting math. That means when we have everything completed that is now under construction, the under 200 apartments, that will be the same rents as almost 7,000 apartments in Germany. And we want to have 10,000 in the next five years. So that will then produce the same cash flow as about 20,000 apartments in Germany. So Poland is on the way to generating increasingly significant rental income step by step. In Germany, we are clearly in the affordable segment. That is different from Poland. In Poland, we are more in the mid to upper segment. In Germany, affordable housing for rent at just over 5.50 euros, and that is something that is still very much in demand in this environment. The strategy is that we focus on B or C locations. If we look at our largest locations, these are cities like... Strategy has been very successful.

The seller market is clearly totally difficult. I have to say, it is a somewhat strange situation. Operationally, the rental business is going very well, so you don't have to worry. If I want to rent out my apartment, almost anywhere, if it is in decent condition, you will find tenants. The operational side is good for everyone. That is also important. If you forget that when you are active in other real estate segments, like offices, you would have to think much more about how to set up the business model for the coming years. So the product we have, affordable housing, will develop operationally well. Now comes the topic of interest rates. It is relatively simple: nowadays, a bank loan costs 4% for 10 years. A year and a half or two years ago, it was still below 1%. And that puts pressure on prices. I think the whole industry has struggled a bit, maybe recognizing reality. But that now also leads to valuation losses, and that led to many potential buyers who know that in the medium and long term renting apartments will still work very well in Germany, they are just standing on the sidelines, saying the risk that prices will go through the roof overnight is perhaps manageable. They don't feel the pressure, so they just wait. That will not change tomorrow, but it will probably be a topic for the whole year 2023. Eventually, prices will reach a level. We are seeing that prices have already fallen in the last year; our portfolio has depreciated by 13%. There will probably be more. But we are not waiting. As soon as one starts buying, others will follow. But perhaps the price decline is already accounted for.

Yes, probably. And it is also true that we are coming out of 10 years of low interest rates, almost never had depreciation. The last write-down for us was in the last six months, probably 10 years ago. I have been CFO for 9 years, and the write-down was the first time. But that is perfectly normal. Real estate prices can also fall in Germany; we haven't seen that in the last 10-15 years, so we have to get used to it. To give you a few more numbers correctly: the group result was negative at roughly 304 million euros after a profit of over 300 million a year ago. The FFO 2, which includes the Polish business, was 112 million euros or 64 cents per share.

We currently have a leverage ratio of 47%. The good thing is that despite the valuation losses, we have been able to keep it relatively constant. Let's see where the LTV was at the beginning of the year; it was about 46.5%. So from 46.5 to 47, not much has happened because we also sold properties. In Germany in the past full year, we sold 2,000 apartments and generated liquidity from that. We were willing to sell at a price discount. So we didn't just look at how properties are valued on the books, but also said if you accept a 10% valuation discount or selling loss, then maybe that is the new book value six months later when the property valuation also adjusts. So it makes sense to do such transactions. That is not everyone's strategy. As we said earlier, in such an environment it is important to generate selling quality to at least keep the debt level stable. And we have an LTV of 45%; that is still, I would say, almost achieved. Then you also have to look at cash ratios; compared to debt, we have very good values. And that is actually important: the ongoing business generates enough cash to cover debt repayments and equalization. How much more debt do you have ahead of you? Well, we have 3.5 billion euros in debt. But that is not something you should give away because the portfolio value is clearly over 7 billion. So we are not really focused on the absolute amount we want to reduce further; it is more important to look at the maturity profile for the next two to three years. There should be nothing that scares us, and that is currently the case. I think we have done a lot. We also said in the quarterly results that we had almost 900 million euros in unsecured liabilities, meaning bonds and financing, and we have fixed that. That was a real feat of strength.

We will continue to sell in Germany. The good thing is that the mandatory program we had set ourselves, if you go back a year, was about 250 million in sales. We have now achieved that. So now we can look at the sales market without pressure and be somewhat more optimistic. But we know the overall environment of high interest rates, financing markets, bond markets. For a company like ours, it simply makes sense to continue selling and building up, but we should not expect large transactions. However, the sales business in Poland is very promising because it allows us to start new projects in a capital-efficient manner. Land purchases, if you look at land acquisitions, of course also give 10% profits in the future, but these allow us to continue to buy large projects and generate attractive income from the fees we receive for management in Germany. So we will definitely see more, but that is not our entire sales business in Poland, which is already running wonderfully. The whole business is an opportunity for us to grow in a capital-efficient way.

Many thanks.