Vonovia SE (OTCPK:VNNVF) Q2 2022 Earnings Conference Call August 3, 2022 8:00 AM ET
Company Participants
Rene Hoffmann – Head, IR
Rolf Buch – Chairman & CEO
Philip Grosse – CFO
Conference Call Participants
Charles Boissier – UBS
Andres Toome – Green Street Advisors
Marc Mozzi – Bank of America Merrill Lynch
Manuel Martin – ODDO BHF
Sander Bunck – Barclays Bank
Bart Gysens – Morgan Stanley
Thomas Rothaeusler – Deutsche Bank
Kai Klose – Berenberg
Marios Pastou – Societe Generale
Operator
Good day, and welcome to the Vonovia SE H1 2022 Analyst and Investor Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to Rene. Please go ahead.
Rene Hoffmann
Thank you, Ellie, and welcome also from our side. In line with tradition, your hosts today are once again, CEO, Rolf Buch; and CFO, Philip Grosse. You’ve probably already downloaded today’s presentation. In case you have not, you will find it on our website under latest publications. So Rolf and Philip will now present the half year results and also give a general business update. And of course, they will be happy to answer your questions afterwards.
With that, let me hand it over to Rolf.
Rolf Buch
Thank you, Rene. We have structured today’s presentation actually in 2 parts: the half year results and a general business update. Before we go through both sections in greater detail, let me start with a highlight for both chapters on Page 2. The H1 results. The bottom line is we had yet another quarter with steady delivery on operational and financial performance, and we have made good progress in capital allocation. Our operating business and our overall financial performance are fully in line with the expectations. Organic rent growth was up by 3.4%, vacancy rate at a record low at 2.2%. And I am probably optimistic that we will see the 1.0% in the — during the end of the year.
The adjusted EBITDA — so 1 point something, so not 1.0%. And the EBITDA was up by 37%, group FFO by 36% and of course, driven by the inclusion of Deutsche Wohnen in our numbers. Group FFO per share was up by 5.5%. As indicated in our Q1 results, we did a valuation of about 3/4 of our portfolio. The total value growth in the first half year was €3.8 billion, which is a 5.2% on a like-for-like basis. That number breaks down in €3.2 billion from performance and yield compression and €0.6 billion from investments. Our EPRA NTA grew by 3.4% to €64.89 on a pro forma basis. Adjusted for the deferred tax effect for moving more assets into the sale cluster, so reported EPRA NTA number is €62.54.
LTV came down into our comfort zone of 43.3%, and the net debt-to-EBITDA increased to 15.2x as expected and indicated in Q1. And finally, on the results, our SPI is well on track with very good process especially in the CO2 reduction and customer satisfaction. On the basis of what we think is a very solid result in very turbulent times, we are clearly sticking to our guidance for 2022 and remain very optimistic about our prospects going forward.
Coming to the business update. We spoke quite a bit about the new environment with increased cost of capital in our Q1 call. Since then, we have made good progress on various initiatives. First, we have specified our leverage policy, which are following debt KPI targets. LTV corridor remains 40% to 45%, but we are committed to go to the lower end. And the net debt-to-EBITDA should be between 14 and 15x. Second, we have run a detailed analysis of our portfolio and identified additional assets for sale. We have added 6,000 units to our recurring sales channels where we sell individual apartments. The total fair value here is now €5.5 billion. We have also identified 12,000 noncore assets with a fair value of €1.2 billion.
And we have defined a new sales cluster, recurring sales multifamily homes, where we look to sell 23,000 apartments as single buildings or smaller clusters. The assets in these clusters are outside urban quarters, so there is less density and they have an in-place or target rent that reflects a cost yield of less than 3.5%. This sales channel will bring steady sales contribution similar to recurring sales just with a different product. The focus will be more on cash conversion, not only on optimizing gross margins. The fair value of this cluster is €6.3 billion. Combined, we have €13 billion of fair values in these 3 sales clusters. And this is before potential joint venture structures and the possible sale of the nursing home business by Deutsche Wohnen.
Clearly, we will not sell the €13 billion of fair value in the next year. Instead, this will be a more constant cash generation over the medium term. But it is clear. They will be sold and they will be sold as fast as possible. While the proceeds from the condo sales are recycled in the investment program, the proceeds from the multifamily home and the noncore sales will be reinvested in the goal of maximizing IR. Currently, the options for reinvestment include debt redemption, portfolio investments, value-adds and space creation and our own shares. Our investment decision will be made based on available funding with a view towards our leverage targets and this objective of growing shareholder value.
With this, let me hand over to Philip who presents you the H1 results in very much detail.
Philip Grosse
Thank you, Rolf. And let’s move to Page 4. As you can see, high absolute growth in EBITDA and FFO, and that was, of course, mainly driven by the inclusion of Deutsche Wohnen, which was not part of H1 2021 numbers. But on a stand-alone basis, we saw growth as well. That is 9.5% for total segment revenue and roughly 4% for adjusted EBITDA total. Once we have completed the integration, we will show the Deutsche Wohnen contribution in the relevant segments. Until then, as communicated before, we will show Deutsche Wohnen as a separate segment.
For the Rental segment, you get a rough estimate if you combine the EBITDA rental and the EBITDA from Deutsche Wohnen on a pro forma basis, and that does not even include the synergies yet. And while the combined volume cannot be seen in the individual EBITDA segments yet, it is very visible. In the interest rate payments, they are higher because of the higher absolute debt volume as a result of acquiring Deutsche Wohnen. The increase in taxes was driven by larger sales volume, while cash taxes on the operating business that is without disposals remained pretty low and represents only about 1/3 of the current income factor. If you put it all together, you get to group FFO per share of €1.34. That is an increase of 5.5%. When we adjust this for minorities for dividend purposes, we look at €1.28 per share, up 2.4% from last year.
Let’s take a closer look on the different segments and start with the Rental segment on Page 5. Rental alone operated on a slightly smaller portfolio volume, roughly 6,000 units less in H1 2022 compared to the prior year. On that basis, we still saw increased rental revenue, which was offset by higher operating expenses. It is important to keep in mind here that we have built precautionary COVID-related provisions at the outset of COVID in H1 2021. It then turned out that we did not need any of them, and we were able to fully reverse these provisions, which obviously had a positive roughly €10 million impact on OpEx.
And this is also a good reminder about the resilience of our rent collection, which is something where at least some of you seem to have your doubts in the current environment of higher energy prices. And finally, you don’t really see any meaningful synergies in this number yet as 2022 is the integration year. At the end of the day, all of this resulted in a flat EBITDA contribution. Nonetheless, we were able to continue our progress on adjusted EBITDA operations margin, which now stands at 79%, up 70 basis points from year-end 2021.
Moving on to Page 6 for the operating KPIs. Organic rent growth as Rolf said, was at 3.4%. Vacancy remains at record low levels. We are at 2.4% for Vonovia and even lower at 2.2% if we include Deutsche Wohnen. This low vacancy is yet another indicator that the gap between supply and demand is widening, not shrinking. And that, of course, provides a very positive backdrop for our business. And finally, maintenance was in line with the prior year. As we have announced in Q1, we are revisiting our capitalized maintenance policy. And for the full year, you should see a positive impact that is a reduction on this number.
Before we move on to the next segment, let me give you an update on what we see in the new rent indices Mietspiegel that are coming out. This is on Page 7. We had shown in Q1 that there were numerous Mietspiegels that came out substantially higher compared to the previous versions. This trend seems to continue in Q2, although the volume of our portfolio was very small as those Mietspiegels were in smaller allocations. Nonetheless, the general upward trend appears to be intact and should not come as a surprise given the underlying mechanics that we explained in detail in Q1.
On the right-hand side, we want to give some transparency on how many units are actually eligible for Mietspiegel increases. From the total German portfolio of around 490,000 apartments, you need to deduct restricted units, units with an inflation-linked contract, vacant units and units where the rental contract is younger than 15 months because that is the minimum time you need to wait between 2 rent increases. That gets you to almost 380,000 apartments that are generally eligible for Mietspiegel increases. In light, however, of our modernization and reletting activities in the past, not all units are immediately available for Mietspiegel increases. And here, it is probably fair to say that based on current rent levels, roughly 260,000 are available in the near term, and the remainder is more in the medium term for index-driven rental uplift.
Let’s continue on Page 8 with the Value-add segment. The story here, very similar to what we said in Q1. We saw continued growth both in internal and external revenue, but the main challenges remain for now. We have a substantial shortage on labor capacity, and that means we cannot do the amount of work with internal resources that we have originally budgeted for, and we need to rely more on subcontractors which are more expensive than in sourcing. This problem is compounded by an increased absence ratio due to COVID illness and quarantine. The result of all of that is that the EBITDA contribution was essentially flat on a year-on-year comparison.
Our Recurring Sales volume in H1 was lower than in the prior year, but the fair value step-up was 5 percentage points higher at around 44%. We are continuing to see healthy demand for this product, but volumes are currently lower, reflecting also the more cautious stance some buyers are taking in light of the more challenging financing environment. Overall, we believe that this is still very manageable, and we stick to our target of selling around 3,300 units this year. Driven by the lower volume, the EBITDA contribution was down 11%. And as a consequence, so was the cash contribution was €236 million. Cash conversion was basically unchanged at almost 90%.
Page 10 for the Development segment. Here, EBITDA contribution was €85 million, more than double the amount of the prior year. This was partly driven by a larger to-sell project that we completed in the first quarter. But not only was the volume higher, we also saw higher margins with an average of 20% for to-sell. As we indicated in Q1, we are in the process of shifting most of the to-hold developments into to-sell developments. You do not see the impact right away as there’s still a bit of an overhang from some legacy projects, but please do expect the contribution from development-to-hold to become smaller in the context of our revised capital allocation strategy. Irrespective of to-hold versus to-sell, we continue to look to complete around 3,500 new units this year.
Next is our H1 valuation on Page 11. Yes, as announced and in line with previous years, we did a half year valuation, which included about 3/4 of our portfolio. The valuation results were reviewed by CBRE and Jones Lang LaSalle plus Savills in Sweden. Total value growth was €3.8 billion, of which €3.2 billion came from performance and yield compression. On a like-for-like basis, this reflects 5.2% or in my view, more relevant, 4.8% if you ignore the capitalized investments. You can see the valuation KPIs on the right-hand side.
On Page 12, you see how the valuation breaks down across the different regional markets. I don’t want to go through this in greater detail, but just point out that on a per square meter basis, which seems to be a very adequate comparable. Our valuation is still very low if you compare to market data, including replacement cost.
Let’s look at the next page for that in a bit more detail. On the left-hand side, you have Vonovia’s reported fair values versus Q2 market prices for condominiums and for new constructions. The market prices are broken down into the lowest third, the average and the top third. And whatever comp you look at, our values appear rather defensive compared to where the overall market is. On the right-hand side, we have actually taken this a step further and backed out the implied value of our building, both in our books and as suggested by the current equity valuation. We start with the lowest 1/3 of the average sales price for new constructions in the market.
Given data availability, we are limiting this to 10 of the largest cities across Germany and get to just under €7,000 per square meter. Our assumed average developer margin is 20%, and our estimate average construction costs are in between €3,500 to €4,000. This gets us to a residual land value of around €1,700 per square meter. And when we compare this to our fair values, it leaves about €1,500 of value for the building. So about 40% of construction costs. And when we look at the implied equity valuation, it reflects only about €500 for the building value, which is about 15% of construction costs.
So while there is obviously a lot of concern around future values in a higher interest rate environment and while nobody has kind of the magic crystal ball to tell us their values will actually go, we continue to believe that our values are defensive, especially when you consider the market fundamentals with an ever-increasing supply-demand imbalance. At least for our affordable product, which satisfies a very fundamental need for which there is no substitute.
To provide a bit more context on valuation, let’s move to Page 14. Clearly, transaction volumes are much lower these days as buyers are turning cautious in adjusting to the new financing environment. However, prices are holding up as potential sellers do not seem to be forced or even prepared to sell for less. We believe this is largely attributable to the characteristics of the German market. Residential real estate financing is long term and rates are usually fixed for a longer period of time, typically beyond 10 years and including an element of amortization.
The equity contribution is high compared to most other countries. And clearly, repurchase costs are also high with around 8% of the sales price. And finally, there is usually no capital gain tax if owners hold the asset for at least 10 years in the private segment. All of this contributes to an environment where owners are usually not impacted by higher rates right away. At the same time, they are in a much better position when they refinance their assets compared to the original financing. Because of the amortization on the one hand and the increased values on the other, the relative terms are more favorable than at the beginning.
At the same time, the free cash flow has been increasing from growing rents, leaving more funding available to refinance at higher rates. All of these factors make it less likely that higher rates will lead to fire sales on a larger scale just because rates have gone up. And if owners are not forced to sell, it appears unlikely that they will offload their assets at lower prices. This notion is also largely reflected in market reports by real estate experts. But it seems to be consensus that price increases are unlikely to continue in the higher rate environment. Most experts do point to market fundamentals and do not expect material price corrections.
Looking at market transactions, we observed between April and July, prices have not softened and continue to be made comfortably above where our fair values are. One final comment on the flip side of the softer demand is the acquisition market. You have an even higher number of people now pushing demand in the rental market. Households that we’re looking to buy until recently and now sometimes find themselves financially unable to do so are joining what is already a long line of people who are competing for the small number of vacant apartments left in urban areas that kind of support us of Rolf’s commentary at the beginning that we will, towards the end of the year will slightly see vacancy rate below 2%.
Let’s move on to EPRA NTA. We have accounted for the higher cost of capital and the specifics of our participation in Adler in our balance sheet. This led to write-offs on our equity participations in Adler in quarterback. Combined with the FFO contribution and dividend impact, this gets us to a pro forma NTA of just shy of €65 per share, up 3.4% year-to-date. From a total return perspective, so dividend plus NTA per share growth, we are looking at 7.2% for H1. The reported EPRA NTA is €62.54 per share, and therefore, basically unchanged from year-end as a result of our new portfolio clustering.
We will get to that on Page 26 in more detail, but what you see here is that because of a larger sales portfolio, we are adding back less deferred taxes. This is because our NTA only includes deferred taxes for our long-term home portfolio, and that has decreased from 92% to 83% for our total portfolio. So it’s a pure technical adjustment.
Let’s turn to financing on Page 16. KPIs have not changed. As you can see on the lower right-hand side, and that should be expected as our well-balanced long-term maturity profile is the best hedge against rising rates. All remaining financing needs for 2022 are fully covered, so no risk on that front. For 2023 and 2024, we will get to our options a little later in the second part of this presentation.
Moving on to Page 17. For our debt KPIs. Here, as Rolf mentioned, we have defined the following leverage targets for ourselves. LTV towards the lower end of the 40% to 45% range. Net debt-to-EBITDA between 14 to 15x. In terms of actuals, we are at 43.3% on the LTV, so down both from year-end 2021, but also compared to Q1 this year. Net debt-to-EBITDA increased to 15.2x. And this is, as a reminder, mainly a function of how the number is being calculated. We look at the average debt of the last 12 months in relation to the EBITDA over the period.
And because of the Deutsche Wohnen transaction, we are currently still replacing lower debt volumes with higher bonds as we move along, and we expect this KPI to move to just under 16x before it starts to come down as we add no new debt, grow the EBITDA and have additional positive effects from asset disposals and corresponding deleveraging.
So much on the H1 results for now, over to Rolf to start the second part of today’s presentation on the business update.
Rolf Buch
So before we go to the capital allocation side of things, it’s — let me say a few words about energy prices and possible consequences for us. We noticed quite a lot of concerns in the market that the high energy prices will lead to painful increase in bad debt as investors fear a large part of tenants in Germany will not be able to afford the higher prices. While I can understand the concern, I think it fails to recognize the reality on the count and also the lessons we learned during the COVID crisis.
First of all, and very important, this is not a landlord tenant develop — dilemma. About 50% of the people in Germany live in their own homes and are impacted by higher energy prices just as much as tenants. Equally, there are tenants who pay their energy prices directly to the provider and not by the ancillary expenses. So this is a bigger social issue, which impacts everyone. And that is how the government is looking at it. There are various plans and initiatives underway and the general direction appears very clear. The government has rightfully determined to help out consequences who are struggling by offering them subsidies, increasing housing benefit and other measures.
For the mass majority of tenant, the higher energy bill will clearly be a burden. It will be annoying, and it will mean that they will probably have to cut back on something else. But it will not be an existential financial crisis. And we have seen during COVID that the payment morale is extremely high, it should actually not come as a surprise in light with a tight housing market. Of course, this should not lead us to forget that there will be a group of tenants for whom the higher energy bill will be a serious financial problem. But the point is subsidies, benefits and individual solutions like we found during COVID in form of deferred payments, of installment payments will go a long way to prevent problems on the larger scale.
Our clear expectation is that whilst the energy crisis is mainly a social challenge and serious for certain households, it is very unlikely to turn into a material financial problem for landlord. We also feel well positioned with our portfolio. Our share of energy inefficient building is much lower than the German average. We only have 12% in the lowest energy classes compared to 30% for Germany as a whole. And of course, the problem with higher energy cost is greater in buildings that are not energy efficient. This is, of course, another confirmation for our climate path with a high refurbishment rate. I’m convinced that over time, it will be an increasing competitive advantage to own a portfolio that is much more energy efficient than the market standard.
On Page 20, we give you an overview of the different action items we already have implemented or what we are working currently on. To be clear, the current environment, we have committed to do no additional debt and to fund all our investments organically as Philip has said already. We are in the process of switching most of our development-to-hold projects to development to sell so that we can realize the cash gain opposed to recording a noncash book gain on our balance sheet.
As we still show a few slides later, we have analyzed our portfolio in the context of our revised capital allocation strategy and identified a total of €13 billion of fair value in the 3 market sales clusters that we intend to sell over time. After many years of general CapEx spendings above market standard, we are adjusting our capitalized maintenance policy. We confirm our commitment not to pursue portfolio acquisitions in this changed environment. And we are revising our capital allocation policy in light of the elevated cost of capital. We are assessing the feasibility of potential joint venture structures to enable direct investment in part of our portfolio, and we intend to monetize our platform and roll out service business to third parties.
And this is back to Philip.
Philip Grosse
Thanks. Let’s move to Page 21. Our financial framework is based on our belief that we need to have clearly defined boundaries within which we can operate to maximize our financial performance. We considered our main responsibility as management to ensure the long-term sustainability of company performance and to deliver sustainable earnings and value growth by increasing our key KPIs, namely group FFO and NTA on a per share basis.
And in order not to jeopardize this, there needs to be a sound leverage policy in place that determines the limitations of our capital structure. And for us, that is primarily an LTV target towards the lower end of 40% to 45% and net to EBITDA target between 14 to 15x. These target levels are well within the bond and rating covenants and safeguard our eligibility to refinance at comparatively attractive terms in the secured lending market. So on this basic — on this basis, we stick to our dividend policy, and seek to reallocate any remaining funds to wherever we expect to achieve the maximum financial and nonfinancial performance.
Page 23 looks a bit crowded, and it’s probably not the easiest to present in an audio call, but it does include the 5 relevant layers that we see for an efficient capital allocation. It shows how funding in this environment will come from the free cash flow after dividend payments plus proceeds from disposals. Neither new equity, no new debt are viable options in this market. The funding message is shown even more clearly on Page 23. In this context, I want to remind you that all of our remaining financing needs for 2022 are already fully covered.
For the €4.2 billion maturities in 2023 and the €3.6 billion in 2024, we do see 3 basic options. If we were to fully refinancing everything at today’s terms, we would expect around 2.5% for secured and slightly more than 3.5% for unsecured debt. Both is an 8-year tenor. We estimate our headroom for secured financing to be around €8 billion. So it would probably be sufficient to cover the full debt volume that matures in the coming 2 years. The second option would be a full repayment of debt due in 2023 and 2024 with the proceeds that we generate through disposals. And of course, the third option is a combination of the first 2.
There’s still some time to go until we need to start to make these decisions, and we will reserve the flexibility to do whatever makes most sense at the appropriate time. But to be very clear, any larger disposal will obviously go hand-in-hand with at least proportionate reduction in debt based on our financial framework.
On Page 24, we show you an overview of the different investment options as we see them. There is, of course, our operating business with the rental and value-add segments and space creation. We estimate the annual investment volume to be around €1.5 billion. And especially the portfolio investments for our rental business are close to our heart because not only they do make economic sense, but they also safeguard the long-term quality and attractiveness of our portfolio. Other alternatives are, of course, a share buyback for which the maximum annual volume is 10% of the outstanding shares based on German corporate law.
And last but not least, another option is to redeem maturing debt beyond our financial framework and depending on the refinancing schedule. Here too, we will be making the final investment decision at the time and based on available funding, our leverage targets and shareholder value growth.
You will probably remember Page 25 from our Q1 call. We are showing it again to remind you that the internal rate of return are very attractive and demonstrate that we earn more than our cost of capital with our portfolio investments also in light of the changed environment.
With that, back to Rolf.
Rolf Buch
Thank you, Philip. We touched on this a couple of times before on previous slides, but let me give you more details on the new portfolio clustering. This is Page 26. First, we have added another 6,000 units to the recurring sales cluster, which we call condo, where we sell individual apartments. The total number of these units in this cluster is now 30,000 units with a fair value of €5.5 billion. Of course, the whole Austrian portfolio follows the same logic. We sell apartments that will become vacant. So if you include this, it is another additional €3 billion of fair value in individual condo sales. The proceeds from this well-established and very stable sales channels will go towards organic funding of our portfolio investments.
Second, we have identified 12,000 noncore units that we want to sell opportunistically. The fair value is here, €1.2 billion. And third, and this is a new cluster. We have identified 23,000 apartments with a fair value of €6.3 billion, where we are looking to sell entire buildings or small clusters of buildings over time in a steady flow that focus on cash conversion. All the unit of this recurring sales MFR cluster are located outside the urban quarters. So in less density and they have an in-place or target and it reflect a gross yield of less than 3.5%. Proceeds from the noncore and the recurring sales channel will be used for reallocation as Philip described of capital into investments that deliver in the end higher IRRs and shareholder returns.
We presented our idea in business, Page 27. We presented our idea of trying to set up joint venture structures already in our Q1 numbers in May, and most of you will have seen press articles on the subject last week. I know you will be — you will ask, but we will not be commenting of these articles. What I can confirm is, however, is that we have continued to work on potential joint venture structures in an effort to benefit from ongoing strong demand for our product, while we seek to continue to leverage our operating platform. In the current market environment and in the context of our efforts to identify the best alternative to access and recycle capital, we think it is prudent to make sure we do the right deals at the right time.
For potential joint venture transaction, this means we need to identify and agree with the right long-term partners for Vonovia. We are still in an early stage, but remain confident that we may be able to negotiate transactions away from public market valuations in light of the nature of relationship, the investor profiles, and the aligned interests. At the end of the day, we only seek to do transaction to the extent that they are value accretive to our shareholders and consistent with our overall strategy. So let me be clear. We are seriously exploiting joint venture structures as a possible opportunity, but we are in no way under pressure to do a transaction. Having said this, we believe that they are at the right terms, joint venture partnership can be very accretive to our shareholders and supportive for our strategy.
Coming to capital allocation on Page 28. Whether it is through potential joint venture structure or asset disposal, if we free up capital, the question is what is the best allocation. And if you add up also some — as Philip has mentioned and I have mentioned, there is a significant amount of money, which has to be reallocated. You know I’m an engineer and I like to rely on data to guide my decisions. When I joined this company in 2013, I was quite impressed with the industry. I joined from a sector that is all about EBITDA and contribution margins.
In real estate, I learned at this time, we have 2 return elements, yield and growth. This is how we looked at our portfolio management to decide which noncore assets we wanted to sell. And that is how we classified acquisitions to see if they are a good addition to our portfolio. Most of you will remember the matrixes you see on the left-hand side of Page 28. It was these kind of analysis that we used for our decision-making and that we shared with you in our earning calls. If you look at the things today, the logic of this chart still applies as a helpful guide. You have the yield dimension and the growth dimension. The WACC has shifted. And as a consequence, part of our portfolio has dropped below the line. This is exemption our recurring sales cluster, the multifamily homes.
The capital allocation decision that we will need to address is very similar to its acquisition criteria back in the past. The objective at the acquisition was to grow FFO and per share by assuming a 50% debt, 50% equity financing. Now it is the other way around. Through capital reallocation, we look to strike the best balance between staying with the target ranges on our leverage metrics while driving cost through investment that will deliver additional EBITDA and share buybacks. And you can see very clearly that in the moment, as a given share price, the share buybacks are the most attractive investment.
And finally, before we come to the guidance, a quick note on recent perception study. First of all, a big thank you to all of you who took the time and participate to give us very insight feedback. As a fair summary of the study, it is why we enjoyed continued broad-based support from our shareholder basis. The large areas of concern are capital allocation and leverage. Of course, this is not exactly a surprise but very good to see confirmed in our comprehensive survey. Given the various actions we have implemented and to continue and work on, I think we clearly show you that we care about your feedback.
And this is back to Philip on the guidance.
Philip Grosse
Yes. Thank you. Our last slide today is the guidance, and I can be brief here because it’s unchanged from Q1. And in light of the turmoil in capital markets, this is hopefully considered a good thing. We remain very optimistic about the fundamentals of our business. Clearly, much of the perception around the sector is less about fundamentals currently as there is a high level of uncertainty from rising rates and increasing inflation. But at the end of the day, it is the fundamental discount. Our product satisfies the basic need. Replacement costs are growing at a rapid pace. And new supply is going down while demand is increasing, growing supply/demand even further off balance.
And on that happy note, back to Rene for the Q&A.
Rene Hoffmann
Thank you, Philip. Thank you, Rolf. Ellie, can you kindly open up the Q&A for us?
Question-and-Answer Session
Operator
[Operator Instructions]. And we’ll go ahead and take our first question from Charles Boissier with UBS.
Charles Boissier
Three questions from my side. First, you hinted at the start of the call that the €13 billion disposal plan will take time. You also referred to prudent buyers due to the financing environment. What is your base case of time horizon for the €13 million and for the deleveraging target? And…
Rolf Buch
To be very — Charles, can we do one by one because otherwise I forgot the question. So to be very clear, in the past, in the old world, we never had an acquisition target. And that’s why we are not putting — we are not doing the same mistake now by putting a sales target. These €13 billion plus healthcare plus joint ventures will happen. So it’s not opportunistic. They will — we will be sold. The question on how fast we are selling it will be very much dependent on market environment. So we are not doing some fire sales here. And then, of course, the consequence of how fast we will reallocate the capital. But we are not doing the mistake to give you via call now a selling target like we never had an acquisition target. And to be very in your interest because a company with a target is coming under pressure to deliver, and this is not good for the price in both directions.
Charles Boissier
Sure. That’s actually why I want…
Rolf Buch
So [indiscernible] you, if somebody comes to buy the whole portfolio today, we will probably have an issue because it doesn’t make sense to put money on the bank account. But if somebody comes and would buy a few billions, we will probably do.
Charles Boissier
Okay, very clear. Have you discussed the time line with the Board? And just relating to what you mentioned as well. So zooming on the €5.5 billion of recurring sales, which basically most of it you already added 24,000 units. So now you’re adding 6,000 units. Historically, since IPO, you’ve always been selling at a typical rate of 2,500 units per year. What’s your view on that pace being a good indicator for the future? And then when you mentioned about cash conversion other than optimizing the…
Rolf Buch
Can we do cash conversion — yes, okay. No, no, all right.
Charles Boissier
Okay. It was kind of related, but sorry, I don’t want to…
Rolf Buch
So I think we have announced that we will go on speed up a little bit, so to I think 3,300 is the new guidance. So you can see that also you can speed up a little bit upon those sales. With the condo sales, it’s just more work to be done because we have to work for every apartment. So this is just also a question of capacity, while the MFR sales is much easier. So you’re doing a transaction for one on a few buildings. So you have, of course, per transaction and much higher volume. So — but it is fair for the condo sales that we will stick with the 3,500 units. The guidance is 3.3.
Philip Grosse
And just to add, Charles, on investments. Charles, on the cash conversion, to be very clear, the privatization business, which is the disposal of condominiums at the current pace and without including a scrip dividend is sufficient to cover our financing needs for our investment program organically. And that means what comes on top of it in widening the recurring sales segment for multifamily homes actually comes on top and provides additional flexibility next to joint venture structure, next to potential disposal decided by Deutsche Wohnen management on the nursing, and next to the noncore on reallocation optionalities, deleveraging reinvestments, all that we have discussed.
Charles Boissier
That’s very clear. Just to build on what Rolf mentioned about the suite and 12,000 units pay off. So that’s — at least for that bucket of condo sales, that’s 9 years, right, just to. And then, of course, as you mentioned, more opportunistic on the other buckets. My second question was just to quantify the proceeds from disposal.
Rolf Buch
Just to underline your analysis. The condo sales, we are actually — this is our saving account to make sure that independent on the capital market, we can finance our investment, especially in efficiency buildings and optimize apartment, right? So that’s why this 2 buckets you have to look together. We have a climate path. We want to invest highly accretive investments in energy efficiency. And for this, we are using the condo sales as a saving account. The other recurring sales is actually as Philip describes available for other capital allocation, including share buybacks.
Charles Boissier
Right. Okay. Okay. Then just on what you mentioned about the significant amount of money to be reallocated to the investment options such as buyback. I guess if we do in a very simplistic way, the €13 billion deleveraging, that would bring LTV below 40%. Can we assume that, that leaves the room for the absorption such as the share buyback as opposed to having made an assumption that the valuation of the LTV will come down given you were quite confident on the future path of values?
Rolf Buch
So I think — and I think Philip mentioned it very correctly. First of all, let’s get the money on the bank account. And then we decide dependent on the situation which we have in this moment, how we reallocate the money. So how much we put on debt repayment, how much we put on share buyback, how much we put probably on alternative investments, which are possible. But I am in the favor of getting the money on the bank account first and then to speculate what we do with the money. And that’s why I think this is the way we go forward. Situation might change. And so that’s why don’t let us speculate about something which we cannot answer because we don’t know the future.
Charles Boissier
Sure. So lastly, from my side, if we look at the German news in recent months and weeks, there’s been a few headlines, just wanted to pick your brain on a few of them. The rent cap in Dresden and Leipzig, I guess, what you were mentioning in the past was Berlin was a bit of a special situation. So just wanted to hear your view on the developments in those cities. And then 2 other things. So in Berlin, the maximum housing burden of 30%. What is your view as well, given that now Berlin is about 25% of your portfolio, so quite material? And then I think just a few days ago, the lower — the proposal for lower reimbursement on the BEG, also given your capital allocation.
Rolf Buch
So first of all, rent cap in Leipzig and Dresden, I’m not aware of. There is no serious debate because a city and even a state cannot cap — enforce a rent cap, I think this is done so. This might be very person generating a signal, but it’s not a debate. And I think it is completely out of range since constitutional court’s decision. The next was the 30% cap in Berlin. This is actually not an issue. You are aware that Deutsche Wohnen had it before. This was not an issue for Deutsche Wohnen, and that’s why it’s also not an issue for the small portfolio, which will — we had in addition.
And then the third question is the BEG. I think it is — to be very clear, it is not the best political governance, which you have seen to change the model from one day to the other. So this means, of course, some planning has to be done — redone. In the end, we are — this has not a material impact on our business under the reserves that we have to do with replanning. We are coming back, which I think is politically not the wisest decision to do individual actions and not the whole building. But in the end, we will scope business and we will live with it. So it’s not — it has no impact on — should not have any impact on your actual slide presentation or actual simulation of Vonovia.
Operator
And we’ll now move to our next question from Andres Toome with Green Street.
Andres Toome
Firstly, I have two questions. I’ll go one by one. And firstly, I’m just wondering, you are showing a quite high Mietspiegel prints again in your presentation. Just wondering now we’re sort of in the second half of the year, how are you thinking about organic rent growth coming through? Do you think it’s going to accelerate towards the end of this year? And sort of what should we expect for next year? Are we looking at a 4% to 5% like-for-like growth just on the back that you are saying that organic growth should accelerate with inflation?
Philip Grosse
I think the basic notion here is that we see a good upward trend in how the Mietspiegel evolves. That has less of an impact for the running year because once that is published, it has to be implemented and there’s a time lag of 4 months in between. And then as a reminder, and there’s a rule of thumb, roughly or slightly above 50% of our apartments are eligible for rental uplifts right away based on current rent levels. So it only affects a portion. The more is more — but the remainder is more medium-term oriented.
How all of this will translate into the coming years? I don’t want to speculate now. We haven’t given any official guidance. What will be paramount next year, obviously are big Mietspiegel, if you will, which will be published, for instance, in Berlin. That is very important for our business. But for us, important that we see the right direction in what has been published and which should not come as a surprise given how market has or markets have developed. And it is also supporting our notion that if everything gets more expensive, so that — so ultimately, that’s housing.
Rolf Buch
But to be very clear, as Mietspiegel as you know, is looking 6 years backwards. So this increasing Mietspiegel is not a result of inflation. This will come later. This increase is a result of the increasing imbalance between supply and demand in the last years. So this is just — and I know from the Anglo-Saxon word, you have to accept the development of rent in the German system, it has a long delay. So what we see in this Mietspiegel, these are some smaller cities, but we will see next year the big cities. You will see the imbalance which we have generated in the last years in this country. So the inflation impact we will see even with the delay in a few years. This is just the way how the Mietspiegel is captured. So this is not reflecting the inflation element. This will come in addition to the imbalance between supply and demand in a few years from now.
Andres Toome
Understood. And then my second question is about operating expenses. I’m just wondering what sort of pressure are you seeing going into 2023? And I do appreciate that there might be obviously some synergies from Deutsche Wohnen kicking in, but what are you budgeting for operating costs on a like-for-like basis?
Rolf Buch
So to be very clear, we are not giving you a guidance for ’23. But I think there was in the Q1 presentation, a simulation. It shows that actually the cost, if you are running a business with 80% margin, the cost remaining is not really a big issue. So even if cost is growing by 5%, 8%, 10%, it doesn’t harm your business because you have these high margins. So that’s why cost inflation on our own cost structures will probably be less an issue because of just of this nature. And the big part of the cost is passed through anyway.
Andres Toome
Yes, of course, the energy and utility costs. And then I guess following up on that, what percentage of your tenants are actually paying energy costs through Vonovia? And I appreciate it’s a pass-through.
Rolf Buch
I have said that roughly a little bit more than 50% of heating system, we have gas heating systems. So this gives you an indication because this is central heating. The rest is either district heating or is individual heating where the tenant has his own relationship with energy provider. So this is probably not exactly the answer, but this is the best and I don’t know the exact answer. Yes, and we have not disclosed it before.
Andres Toome
Good. And then my follow-up question, just you mentioned the capital maintenance policy is about the change. Can you give us some color on that insofar as what is actually changing in that policy? Is it just accounting basis where you are shifting sort of how do you [indiscernible]?
Rolf Buch
It’s not accounting basis. We came from an environment where maintenance was only done if it’s really necessary. This was before 2013. Then we enjoyed a very nice time with very low cost of capital, and we probably over maintained. We probably did some things which has probably less to do with maintenance, but we are doing probably nice new gardens. We are doing nice new entrance stores. We are doing a lot of nice investments, which actually made the buildings more attractive, which is not really maintenance. And we put it under maintenance. So in the moment, if the capital now is getting more expensive, what we are doing is we are doing now more maintenance, which is necessary maintenance, but we are probably saving some money by doing nice gardens.
Philip Grosse
And that is to add, nothing you can expect to see in the P&L because this is the portion of maintenance where we do not save. But in terms of the capitalized maintenance, which obviously also has a cash element because we have to pay for it, that is the one we are focusing on and which will come down.
Rolf Buch
I think we already mentioned it in the calls. We always mentioned in the calls that we are a little bit overspending in maintenance because we want to prepare the future. And now the future is there, and that’s why we have to stop the overspending.
Operator
We’ll take our next question from Marc Mozzi with Bank of America.
Marc Mozzi
My first question will be around the impact from the tax, which you have been reclassified from deferred tax liabilities into a proper tax element probably because of the nearly €9 billion of new asset sales you’ve put in your cluster for disposals. Should we assume that we will see the same impact on the triggering of higher taxes when you will sell the nursing homes business and when you will set up the structures?
Philip Grosse
I mean, first of all, just to reiterate what we’ve seen in terms of EPRA NTA is the technical impact of the entire deferred tax liabilities, which we do not add back. And that is for our entire €13 billion portion of the portfolio, we have clustered medium to longer term for to-sell. And that assumes no tax structuring whatsoever, which is unrealistic. We have tax loss carried forward. So in my judgment, not 25% tax burden, but more 15% tax burden is the more realistic assumption. And we have further optionality by also making provisions according to German tax laws to even reduce that further. So very, very — it’s important, very, very conservative assumption, which is a technical impact on the EPRA NTA definition, but which is overstating the tax impact I do actually expect. Is that answering sufficiently your question, Marc?
Marc Mozzi
My question was even more simple than that is, should we expect the same technical effect from the disposal of the nursing homes and the JV structures?
Philip Grosse
Yes. Nothing remains to be decided by Deutsche Wohnen management. But yes, textbook values are below the current book values. So there will be a tax impact on joint venture structure. There is not going to be the tax impact because we are not selling the assets. We are selling the company holding the assets. And against that backdrop, no deferred tax liabilities are being triggered. By the way, also no real estate transfer tax is being triggered. And you will basically see accounting-wise that on the asset side, you have the cash proceeds and on the liability side, you add the minority stake and the respective equity contribution.
Rolf Buch
So Marc, to sum it up, the assumption which you see in the figure is the assumption that we have no tax department and that we are not doing our homework on the tax side. If you look in reality, how much tax we — in reality pay on cash tax, you see that, obviously, we have a tax department, and we have an optimization of tax. But I will never ever put this in a written form.
Marc Mozzi
No, no, that’s not my point. I’m sure you’re optimizing your tax payment, but it was just this technical effect, which is removing deferred tax liabilities from the NTA. That’s what I wanted to know if we should expect the same impact — yes, but just expect to see if we expect — we should expect the same impact going forward.
Rolf Buch
Yes.
Marc Mozzi
Okay. So that was my first question. My second question is I think just a follow-up on Charles’ question, I think this is what is the most relevant right now. You’re now adding to — or you’re committing to deleverage and you’re committing to reallocate part of the proceed in an appropriate manner, i.e., paying down debt, engaging in new modernization CapEx and share buyback. What level of assurance could you give us that you will take the right measure in an appropriate timing with the right execution for the market to close that gap between your net asset value and your share price? Because everything we’ve been discussing right now it seems to be not so convincing the market. And what could you say that could reassure investors that actually things will be done quickly, will be executed at a book value and you will reallocate cash appropriately, i.e., deleveraging potentially on short-term share buyback at this level?
Rolf Buch
So Marc, you know us now for a lot of years and you know Philip for a lot of years. Normally, we intend to do what we have said. Of course, this is real estate. So sometimes it takes a little bit longer than the CEO would like to have it. But this is reality. We need structuring. We need to do it carefully. We need to do it properly. But I think in this presentation, if you declare €13 billion for sale, and as I said, we will sell it as fast as possible without giving you a selling target because this would increase — or this would reduce the results for our shareholders. So that’s why I think as acquisitions, we did it as fast as possible. So now we will do the disposal as fast as possible. So this is the answer. So in the end, it comes down if shareholders believe that the management is doing what they are telling.
Marc Mozzi
Great. And my final question is back on the impact on the inflation. Do you have any way for us to assess what is the proportion of the Mietspiegel, which is effectively benefiting from the higher inflation? I heard from one of your competitors saying about 1/3 of the Mietspiegel is effectively reflecting inflation on construction on different things. Is that something we should rely on?
Philip Grosse
Look, I mean, reiterating what Rolf said, the Mietspiegel is looking 6 years back. So by definition, the inflation will though only feed in with 1.6 per year. So it will take a bit of time that the cost increases we see are actually being translated in the underlying mechanics of the Mietspiegel. Again, that having said, the fundamentals in the underlying market has been very positive. And even without specifically the inflation, the outcome of more recent rent in support this very positive underlying trend. And that makes us confident moving into 2023. This is not us giving the new guidance on like-for-like rental growth and embedded organic rent growth. But based on the outcomes we have seen and will see throughout the running year. We will do the math and we’ll provide proper guidance as you would expect with our outlook for 2023.
Rolf Buch
But Marc, an additional remark, and this is not us. It is ImmoScout, which is the biggest platform for rental business to find apartments, have said that they have seen an increase by 20% in the base city for demand for rental apartments due to the fact, and this is what they are saying. I cannot verify it, due to the fact that a lot of people are not buying apartments anymore, but going for rent now because of the increased interest rates. This means there is a significant part of people and demand coming to a market where these people are very power — economically very powerful because they intended to buy the apartment. So these people will push up rent levels in the city because they are ready to go really to the maximum. So this has an impact on rental tables.
We don’t know how big this will be, and nobody can simulate us. But this is the same what we see now that the constant pay years imbalance between supply and demand drives the rent much bigger. And this is the next element. So that’s why it is actually too complex to simulate exactly what the rent table will go. But all the things which we are seeing is that we will see a lot of positive pressure on rent tables in the future. It should not come as a surprise.
Operator
We’ll take our next question from Sander Bunck with Barclays.
Sander Bunck
I have a couple of questions as well. Firstly, is on the valuations in the book. And I think in the presentation, you provided a lot of compelling arguments as to why valuations are still pretty conservative and why there should be no impact at all. At the same time, we obviously see that transaction volumes have dried up in Q2 and valuers are definitely being more cautious, particularly towards the lower yielding part of the market and citing that there’s potential for yield expansion there. So with that in mind, can you just say anything about what you would expect for how valuers to evolve in the remainder of this year and thereafter, i.e. are you basically saying that given the arguments that you gave valuers can never decline? Or are there circumstances where you would see that portfolio values could be affected? That would be the first one.
Philip Grosse
Sander, we don’t have the crystal ball ourselves. We can judge on the transactional evidence we see in the market. And the transactional evidence we see in the market is supporting the valuation uplift we have recognized. And also more recently, we have not seen evidence which puts the question mark to current valuation. That having said, how the situation evolves moving further into 2022 and beyond, we don’t know. What we know is that the fundamentals are supportive for valuers to hold up. This mirrors for the affordable segment pretty much what most of the experts in the market are equally same. And yes, typically, if there is huge supply-demand imbalance, it is from an economic perspective, very tough to argue that this is a driver to drive down prices. But ultimately, we don’t know.
Rolf Buch
And it’s not us who makes the market, right? So we have only a small portion of the market.
Sander Bunck
Okay. That is understood. And I guess that leads to my second question. And obviously, to your point, you’re only a small part of the market. But today, you basically announced that €13 billion is up for sale. That’s probably partially driven by the fact that Deutsche Wohnen get integrated, but also there’s a step-up within the existing portfolio as well you’re looking into JV structures. Are you basically saying today, given the amount of comments that you’ve made about looking in the best interest of shareholders debt, you will not be selling at discounts in order to get those sales across the line?
Rolf Buch
Let me do — actually, this is the same. We are coming in the same debate just the other way around with acquisition targets, right? And so we said we have clear . And I think the same picture also applies the other way round. So 50-50 financing, not dilutive for our shareholders. So I don’t — and this is exactly why we are not giving you a target. We want to come — we don’t want to come under pressure. And in this time, you need to be cool and to get the best what you can get out of it. And I — and as you have seen with Philip and myself, we believe that the value which we have in the book is conservative.
Okay. And to be honest, we have no need. So the point is that this was very important in the Q1. We made sure that we don’t need the capital market anymore. To be very clear, we can stick here and do nothing and this company will go the right way. We have a management team, we will do something, and this is what we are announcing. But we don’t need the capital market anymore. We don’t need equity. We don’t need that. We need some secured debt, but that’s it. So based on this, we are now optimizing. But this is in the position of strength. This is not out of the position of weakness. And this is very important because putting ourselves in a position of weakness with these biggest mistake we can do. And that’s why we are not giving a sales target. But I think I’d be very clear, if somebody comes and buys a big portfolio, we will sell.
This is also a maximum which we can sell because in the end, if everything would happen, we would have too much cash, and we cannot reallocate it. So there is a maximum ceiling, which we can reallocate and we will not sell more than we can reallocate because having money on the bank account is inflation time not a good moment.
Sander Bunck
No. That is understood. Okay. And kind of to the last question I had, kind of related to that. I mean, obviously, the disposals are done from a position of strength. Yet, at the same time, there’s a clear desire it seems to sell assets because if there is a big buyer that comes by portfolio, then you would sell. There is obviously one other alternative and that is just stepping down the dividend for the time being and especially also considering that you say like equity is not an option. But at the same time, 50% of the dividend gets issued as shares at the moment, so there is effectively a small equity issuance every year. So would it make sense to cut down on the dividend for the time being to kind of accelerate to limit the potential impact for disposals? Or is the dividend not for negotiation?
Philip Grosse
To be very clear, the dividend is not for negotiation. And we have restructured the organic funding in a way by stepping up recurring sales that we can finance without any additional debt, all investments in our existing business, and that is excluding going forward, the contribution of the scrip dividend. In 2022, in the current environment, it’s kind of an exception to the rule because we have been issuing equity at a steep discount, but that is because from one day to the other, you cannot change the system. But now we have changed the system. And obviously, we are not talking on the one hand about the opportunity of buyback subject to respective asset disposals at the same time, not denying the notion of additional scrip dividends. That doesn’t make any sense whatsoever.
To be very clear, we have set no more equity for this price. Yes, that’s it.
Sander Bunck
Yes. Okay. So — but that does mean if — just to be clear, next time, if say the share price, hopefully not, but if the share price stays the same over the next 12 months, then there would still be a scrip alternative? Or would that be ruled out at that point in time?
Rolf Buch
It’s not decided, but what I have said is to issue equity and it’s a kind of issue equity at this moment would be the wrong message. No more equity at this price. If we are back to 17, then we will make issues of equity but not for this.
Operator
We’ll take our next question from Marios Pastou with Societe Generale.
Marios Pastou
I just got one question remaining actually. And I just wanted to discuss in a bit more detail why the new cluster of sales, the multifamily sits within the recurring sales unit. I think it was mentioned a few times on the call that the disposals will be done as quickly as possible in some cases. So could there be some years where there is a number of units being done in one go, which then flows into the group FFO? Or will this follow a similar pattern where a certain number of units are being sold similar to the condominium business?
Rolf Buch
But to be also very clear in the condominium business, we are also doing sometimes package deals. So this is nothing unusual. So this — I think we will see in the same way. So the condominium in general, are sold apartment by apartment or 2 apartments, 3 apartments. Of course, the buildings are in the same — in its way, of course, more built because it’s a full building. And of course, if somebody comes and buy it in a bigger package, this will be still recurring because this is lag in the condo business.
Operator
We’ll move on to our next question from Thomas Rothaeusler with Deutsche Bank.
Thomas Rothaeusler
I have one question on investment markets, maybe to start with. I mean I listen to you, you sound rather optimistic that there is ample demand for your assets, which you plan to dispose. I mean, how do you see the current appetite, I mean, for residential investments? And who are the potential buyers? Maybe you can provide a bit of a color.
Rolf Buch
I just look on our half year figures. So you have seen that margins and the development to sell is going up. The margins and the apartments just for condominium disposal is going up. So this is data which happened. So this is not discussable anymore. This is reality. We still see a lot of people which are probably different than the one which we have seen in the past, which are people who are doing — now buying more with equity and for them, it doesn’t matter. We are seeing a lot of people who are saying, “This is inflation.”
You have to keep in mind, Germany is mad of inflation. Some people are mad of unemployment. We are mad of inflation in this country here because we have seen 2x family has lost everything because of inflation. So people still understand that asset is an inflation protection. So there’s a lot of arguments to buy assets. And that’s why we still see a market there. Probably the number of satisfaction is less, but this also has because there is a shift from people who have built high leverage, and now there’s more people who have to go buy with more equity. So I’m not concerned.
Thomas Rothaeusler
Okay. And maybe a second question on…
Rolf Buch
And the [indiscernible] which is, I think it’s important to understand the nature of this multifamily homes in recurring is its buildings, which are actually standing alone. This is not in the cut. So this is one building in the middle of Munich. So this is one building in the middle of Dusseldorf. So lease buildings is extremely easy to operate. So you cannot do anything. This is optimized. This is fully and you can see it in the average rent. This is much higher than our average. This is very simple to operate. Every dentist can operate this building. And these people need to spend money somewhere.
Thomas Rothaeusler
Right. So well, you are upbeat in the smaller bracket class. But if we look into portfolio deals or portfolio transactions, would you say there’s less appetite than previously?
Rolf Buch
These are — to be honest, what I was talking is individual buildings. So this is what we have. The question before was, would you do portfolio transaction? Yes, we will do portfolio transaction. But in the end, it’s — we are selling building by building. And there’s a lot of market for it.
Thomas Rothaeusler
Okay. The second question is likely…
Rolf Buch
To be also honest, it’s a joint venture structures. I just know one thing. I think what I got from the debate with potential people and partners. They all understand to own resi assets in Germany, it’s an issue if you don’t have a platform. They all understand that Vonovia is the biggest acquisition machine. So these are people who know to acquire. So if you want to have a portfolio and to build up a portfolio together with a partner, Vonovia is the best. They all know that our cost structure is far away from anybody else in the market. They know that there is a professional management team with a fully digitalized platform and high customer satisfaction. And they all know that they will get from nobody else energy-efficient buildings in this magnitude.
So what I have experienced there is for the people who unfortunately cannot buy shares for different reasons. For them, it’s a treat to partner with us. And there is still a lot of hunger to invest in German resi.
Thomas Rothaeusler
Okay. My second question is actually on higher energy costs and the potential rent moratorium, which you said to support. I mean, what could be the consequences for you? I mean for example, what’s the portion of tenants who…
Rolf Buch
Sorry, we are not supporting the rent moratorium. What we are doing is actually a hardship. We are supporting the hardship element for tenants, which we will not immediately kick out of the partner because they cannot pay the balance between their prepayments and the remaining payments, which is actually that we like to improve it. We will probably give them a few months to pay back this amount. So we are not saying the rent has to be capped because of the energy, which — and nobody is asking for it, actually. So — and as I said, this is not a tenant landlord issue. This is an issue for everybody in Germany who is middle or low income and look on all the pensioners who live in their own apartments with their pension, they cannot afford it.
So — and if the German government, and I think they are very afraid about the yellow vest. So they will do everything not to have a yellow vest phenomenon. If you are seeing Mrs. Baerbock, our Minister of Foreign Affairs, she actually said the highest fear is that we get social conflicts in Germany. So the German politicians are aware that they have an issue there. And that’s why they will do something against it. They have done it in a way which was probably not so optimal because they are also paid [indiscernible] €300 for energy cost, which is probably not necessary. But they will find ways to compensate it. But this is not a tenant landlord issue.
Thomas Rothaeusler
What would be the portion of tenants who might fall under this moratorium? Do you have a rough idea?
Rolf Buch
Actually, there is no rent moratorium, and there will not be a rent moratorium. There’s a hardship clause and — so then — and this is offered by Vonovia. But let’s look on the figures. 55% is gas heating systems, which is probably half of our portfolio. Then there is a portion in this, which is actually people who get welfare. So by automatism, the state pays the higher energy cost. So this is just — they don’t care about it. Then there is a portion of people who will get, won’t get, which is another [indiscernible] welfare and this will be increased.
Then there is a portion of people who will get these subsidies for the compensation. The issue is, anyway, not in a B and A class building because there is no energy issue there because it’s only a very low energy bill. And even if the low energy double, it’s not an issue. So the issue is in the low quality buildings where people are living with high income because if they have a lower income, they are covered by the social warfare system. So I don’t know exactly, but I doubt that there’s a lot of people with the middle income or high income in a low-quality building.
Thomas Rothaeusler
Actually, one more question on higher energy costs and the impact on housing costs overall. I think you recently indicated to 1 to 2 monthly rents as additional burden. What would it be currently based on the current gas price level?
Rolf Buch
No, this was a norm — so this is [indiscernible] protection in the future. But you are referring here actually to mark which I did to politicians to put some — to get them aware of the problem. This is probably not the average number for Vonovia’s portfolio, right? So keep in mind, we have a relatively good energetic optimized portfolio. So the issue of Vonovia is smaller than for others anyway. And there also positive effect, the modernization arguments is gone. So in a few years before, people were complaining because the modernization increase was higher than the savings. This is gone. They welcome energetic modernization now because for them, it makes sense.
Thomas Rothaeusler
Maybe last question on actually rental growth and modernization. I mean if you look at the modernization driven rent growth was down to 1.7% versus 2% previously I mean, despite unchanged investments. What is the driver here?
Rolf Buch
But this is also including now Deutsche Wohnen. And I think 6,000 [indiscernible]. So there we have to go more in detail, you probably have to go this [indiscernible].
Operator
And we’ll now take our next question from Kai Klose with Berenberg.
Kai Klose
I’ve got two quick questions. The first one is on the [indiscernible] impairment test on quarterback. I think you mentioned that briefly during the presentation. May can give a bit more color on that. And the second question would be on Page 11 of the first half report. I was just curious to understand why the adjusted EBITDA margin of Deutsche Wohnen was quite materially lower compared to the one-off Vonovia stand-alone.
Philip Grosse
Yes. On quarterback, that’s fairly mechanical. We have higher cost of capital. We had to adjust the risk-free interest rate by roughly 1 percentage point. And the increase in the interest rate was a trigger for an impairment test, and that resulted in the write-off. But as a site notion, that additional or that write-off is essentially wiping off the additional equity we have allocated to the quarterback at equity participation in the context of the purchase price allocation when acquiring Deutsche Wohnen. Second…
Rolf Buch
Second for the EBIT margin, I’m probably doing it because it’s . It’s a relatively rough thing. We have not seen — we don’t have the synergies in ’22. So Deutsche Wohnen is still operating in their way. And that’s why the margin in Deutsche Wohnen is smaller than on Vonovia. This is where the synergies will come from.
Operator
We’ll now move to our next question from Manuel Martin with ODDO BHF.
Manuel Martin
Two questions from my side, please. The first one is on the nursing business of Deutsche Wohnen. I know it’s up to the management of Deutsche Wohnen to decide, but maybe you heard some words on how is it going. Maybe you could give us some sense — some flavor if there’s interest in the market or if it’s very early stage. That would be the first question.
Philip Grosse
From an operational perspective, I can say everything is going according to plan. I think that we are now speculating on a disposal decision to be taken by the Management Board of Deutsche Wohnen. It’s not for this call here.
Manuel Martin
Okay. Second and last question. As you are one of the largest developers in Germany or the largest developer, — maybe you could give us some flavor on how is it going on your construction side. Is the concrete missing? Or is everything fine? Maybe you could give us an update on that on an outlook.
Rolf Buch
To be very clear, everything is missing. Labor is missing, material is missing. So there’s issues on all the side. For us, it is less relevant because we are the biggest, and that’s why a construction company probably is kicking us out last and also coming to us last if they want to renegotiate prices because they know we are a long-term solid player. It is fair to say that the assumption that the number of new construction units in 2023 and ’24 will go down in comparison to today’s numbers, it’s a very fair assumption.
And we will see also a lot of developers coming into serious problems because the model which a normal small developer is doing, selling the buildings before it was constructed. This model is that. So I think it’s a fair assumption that we have seen in ’21 and probably ’22 because there is a delay. So no developer stops a building if it’s under construction. So that’s why ’21 and ’22, we will see the highest construction numbers for a few years. This is my assumption. ’23 will go down.
Yes. This is market. This is not necessarily Vonovia Buwog and Deutsche Wohnen, but this is market. The market will go down.
Operator
We’ll take our next question from Bart Gysens with Morgan Stanley.
Bart Gysens
I appreciate this has been a very long call already, but I just wanted to make sure I’m clear on something. The guidance slide, Slide 30, suggests a rising dividend in euros per share for the medium term. And this comes with the backdrop of gradually rising average financing cost and earnings dilutive disposals. I appreciate you said in the release this morning that disposals would happen, and I quote, over a fairly long period of time. But just overall on the same page here, you’re basically saying that there’s only so much deleverage you intend to do and any excess cash flow will go back — going to buy back through investments.
So basically, am I right in saying you are effectively evolving the business model, how you fund your investments, and that’s mainly going to be how you use your disposal proceeds, but that you’re not actually going to delever that much, right? Because it looks like you’re deleveraging only a little bit. You have a huge disposal target. But frankly, that’s just a way to fund your normal course of business.
Rolf Buch
No, no, no. To be very clear, we have really said the disposal target is to — is only the condo sales. We need to finance our investments. The rest of the disposal has to be reallocated. And to be very clear, we have — because it has to be decided in which portion has to be reallocated, has to depend then on the moment where we are doing the reallocation decision. But I think it is fair that it will be a mixture of share buybacks and debt repayment.
Bart Gysens
But with rising dividend per share?
Philip Grosse
If you do the math and assume based on the reversal of the acquisition criteria that we do 50% debt redemption and 50% investment, noting that asset disposals in the scale we have put out are also a function of our deteriorated cost of equity. Then, yes, in fact, you will see FFO per share growth.
Rolf Buch
So in the moment to be there, but this is mathematic. If I buy back shares for €30 or €33, it is highly accretive on a per share basis.
Bart Gysens
But it’s basically buybacks, right? You’re saying if we sell a lot of assets, we’re going to buy back stock or not going to delever?
Rolf Buch
No, what I’m saying it’s a mixture of delever and buyback stock.
Bart Gysens
But if you do 50-50, that’s not really deleveraging, is it? If you have 45% or 43% LTV, then it’s your kind of [indiscernible] ratio or the same.
Rolf Buch
No. Bart, I’ll tell you, it’s relatively easy, and you can do the math. To go from 43% to 40%, it’s not a long way to go. We are committed to come to the lower end of 40, right? This is what is a commitment. We have not said we want to go to 35% because there’s a lot of reasons why we don’t need to go to 35%. So we have said — and this is why we started business in the morning saying, this is our target. It’s 40% to 45% to the lower end. And this is what will happen. And then we will have — if you add on what everything what we have said on disposal, this will be a lot. And you can do the quantum, if we would sell everything next year, we will have a serious issue because we have too much cash. So this is theoretical because — so that’s why we have to find the right balance on the speed of disposal where we can reallocate because we have a maximum reallocation, which is the number of shares we can buy back and the number of debt which we can pay back because to buy back debt doesn’t make sense. So we only cannot refinance that.
Operator
And we’ll now take our last question from Marc Mozzi with Bank of America.
Marc Mozzi
No, so everything has been answered.
Operator
And with that, I would like to hand the call back over to our speakers for any additional or closing remark.
Rene Hoffmann
All right. Thanks, Ellie. Thanks, everybody, for joining what was actually a pretty long call. As a reminder, 9 months results 2022 will come out on November 4. Until then, as always, we’ll do an quite a bit of investor outreach, including the number of conferences. So hopefully, we’ll get to touch space in the coming weeks and months. A list of events, including our Capital Markets Day is on Page 57 of today’s presentation and, of course, always online on our website. We’re looking forward to continuing the dialogue. I’m sure there’s going to be more question as you flow through the material. And if that is the case, please don’t hesitate to reach out. That’s it from us for today. Stay happy and healthy, and have a great day, everyone.
Operator
And with that, that does conclude today’s call. Thank you for your participation. You may now disconnect.
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