Vonovia SE (OTCPK:VNNVF) Q3 2022 Earnings Conference Call November 4, 2022 9:00 AM ET
Company Participants
Rene Hoffmann – Head, Investor Relations
Rolf Buch – Chairman and Chief Executive Officer
Philip Grosse – Chief Financial Officer
Conference Call Participants
Charles Boissier – UBS
Andres Toome – Green Street Advisors
Marc Mozzi – Bank of America Merrill Lynch
Marios Pastou – Societe Generale
Rob Jones – Exane
Manuel Martin – ODDO BHF
Sander Bunck – Barclays Bank
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining the Vonovia Interim Results for the Nine Months 2022 Analyst and Investor Call. [Operator Instructions] It’s my pleasure and I’d now like to turn the conference over to Rene. Please go ahead.
Rene Hoffmann
Thank you very much, Frankie, and welcome everybody to earnings call for the first nine months of this year. Your hosts today are once again, CEO, Rolf Buch; and CFO, Philip Grosse. I assume you’ve already downloaded today’s presentation. But in case you have not, you will find it on our website under latest publications. So Rolf and Philip will now present the results and also give a general business update. And of course, they will be very happy to answer your questions afterwards. With that, over to you Rolf.
Rolf Buch
Thank you, Rene. So I have six points of highlights. First, our operational performance remains strong in Q3. I realize that interest of many for you lies elsewhere at this point. But I really believe that we cannot overemphasize how important it is to run a business. There’s a long-term operational stability, and that is why these numbers matter. Organic rent costs were 3.3% and vacancy remained at the low — record low level of 2.1% positive. The rent collection remains at a very high level. I am also very pleased to see that our customer satisfaction keeps increasing. We measure customer satisfaction through an independent third party every quarter, and the most recent result was a better than ever before. Operationally, Q3 was not only fully in line with our pre-crisis expectations. On a standalone basis, it also was stronger operationally than each of the first quarter before. Operating expenses were down 7% compared to Q2 and 8.5% better than Q1 EBITDA rental was 2.1% higher than Q2 and 4.4% stronger than Q1. So there is momentum on our side and by the macroeconomic happening continues, we can face them standing on a very solid operating basis.
At the end of the day, the Group FFO was up 35% in absolute terms driven by the inclusion of Deutsche Wohnen and 4.2% per share. Second highlight, our final guidance ’22. We confirmed the guidance for top line EBITDA and Group FFO all of which were defined before the macroenvironment turns difficult on Ukraine war, higher inflation and higher interest rates. On rental costs we said at least frequently present and we announced right the upgrading that to 3.4%. We think that we will not quite be able to meet the initial 3,300-unit sales volumes for the current sales by year end. The appetite for this product has not vanished, but the demand is lower and transaction are taking longer.
On the positive side, pricing is holding up very nicely here. In fact, you’ll see some of the highest margin this year. So we are increasing our guidance on around 30% to more than 35% for the value –fair value steps up. This probably drives some confusion, because people think that value decrease is going down but you cannot use this figure and finally, we are reducing our investment program from ’22 again, as a result of very different cost of capital and such integration of Deutsche Wohnen. The integration process was closed to be finished and starting January next year the financial and operational system and processes will be integrated in Deutsche Wohnen operations and financials will run on the Vonovia SE platform. But in synergy analysis as we have now completed not only confirms the EUR 105 million EBITDA — that we have guided, but also yield other EUR 30 million of synergies that will be realized mainly in the value-add segment. This basically concludes integration as far as all the profit is concerned. So starting the fiscal year, I expect that you will see Deutsche Wohnen numbers fully integrated into group reporting. So, in line what we have said at the time of acquisition, we have fully integrated that the full Deutsche company is in only one year harmonizing the operational and financial systems, policies and supporting sectors.
Fourth highlight, valuation. We remain confident that our sub sector will not experience any large value loss and valuation has mostly peaked and moved laterally sideways on limited transaction evidence we saw no valuation uplift in Q3, the condo market was stable. And we believe that this was driven by the larger transaction volume in this segment, volume in the multifamily home segment were considerably lower, which makes the data less revival at this point. For the year end valuation, we continue to monitor the markets. To be clear, smart fluctuation are not unusual, that can always occur not just on a single market basis, but also in the portfolio. So I cannot rule out a small decline by yearend. But I certainly do not anticipate anything even close to what some of the participants seems to be afraid of. At this point, it is turn more on normal suppression, since values are no longer going up. So the preparation is happening around the zero line and may end up in a very low single digit and value decline in Q3. And guidance of ’23, Q3 is usually the quarter where we also give you the initial guidance for the following year. This year is not different. And while things are no longer as predictable as they were 12 or 18 months ago, our underlying business gives us the strength and the confidence to present what we think is a very robust guidance for ‘23. This is particular the case, if you put this into the context is a market turmoil and to general uncertainty. We do expect calls for our top line and adjusted EBITDA for ‘23 year. And this is in spite of a smaller portfolio volume going into ‘23 and further disposals that we expect throughout the year. So calling pipelines and EBITDA on that basis means that we clearly believe that the business will continue to perform well. And it will not be impacted too much by higher inflation, or challenges in that connection. But for ’23, we expect to come out slightly below our estimates for ‘22. I emphasize slightly here. But I do want to caution that at this point, we will probably not be able to fully compensate higher interest credit expense and especially taxes as a result of accelerated disposal.
Turning to investments, we again with US investment component compared to 722 and now expect to invest around EUR 850 million for modernization. And to be very clear here, we have an initial guidance of EUR 2.1 billion to EUR 2.5 billion for ‘22 when we gave the first guidance in March this year, especially to reflect a much bigger portfolio including Deutsche Wohnen. That was an equivalent of 2.3% across asset value more or less in line with the previous year. For ‘23, we now have cut that by more than 60% to 0.99% of cost asset value. So I think this shows how we can and how we do adjust to the change environment. And if you consider that we are growing the rent bit faster than expected in ‘22. And yet again faster in ’23 also we are investing much less this gives to show that the market controls are moving in the right direction.
And finally, number six, our free cash flow. Last but certainly not least from the page. We are estimating the free cash flow for ’23 to be around EUR 2.8 billion. This is a combination of EUR 1.3 billion cash on hand that we expect to start ’23 with plus and other EUR 1.5 billion free cash flow from our operating business, and proceeds from non-core and MSR disposals. The estimated EUR 2.8 billion is after dividend payments, and before any potential proceeds from joint venture partnerships, or the disposals of Deutsche Wohnen business. One final note to these joint venture structures, the process is ongoing, and we are in discussions with potential partners. We understand the strategic review process at Deutsche Wohnen regarding the nursing home business is at a similar stage. But please do understand that they will not negotiate these potential partners under the surveillance of the public. So you will hear from us results when we are ready to submit. Let me now hand over to Philip, he will start in a second.
Philip Grosse
Thank you, Rolf. And moving to page 5, please. As you can see on the page, the high absolute growth in EBITDA and SFO was, of course, mainly driven by the inclusion of Deutsche Wohnen. But also if you look on stand-alone basis, you can see nice growth as well 5.6% for segment revenues, 2.6% for adjusted EBITDA total. With yearend numbers, we will show the Deutsche Wohnen contribution in the relevant segments today. And, yes, so that extends for the last time, you will have to show Deutsche Wohnen as a separate segment. Again, for the rental segments, you get a rough estimate, if you combine the EBITDA rental and the EBITDA from Deutsche Wohnen on pro forma basis. And that does not include much in terms of synergy EPS. While the combined volume cannot be seen in the individual EBITDA segments, it’s obviously very visible in the interest rate payments, they are higher because of the absolute debt volume as a result of acquiring Deutsche Wohnen.
The increases you’ll see in taxes was driven by the additional taxes of Deutsche Wohnen as well is by the very high EBITDA contribution this year in our development segments. If I look at the tax margin that reminds — that it remains broadly stable in year-on-year comparison. If you put it all together, you get to a Group FFO per share of almost two years, which is an increase of 4.2%. When we adjust this for minorities in the building purposes, we look at an increase of 1.1% from last year.
Let’s take a closer look at the different segments. And let me start with the rental segment on page 6. The Vonovia stand-alone operated on a slightly smaller portfolio volume of roughly 4,000 fewer units in the nine months 2022 compared to the prior year. On debt basis, we still saw increased rental revenue, which was offset higher operating expenses. And it’s important to keep in mind here that we have built in pre-cautionary COVID related provisions at the outset of COVID in 2020, in 2021, it turns out that we did not meet any of them. And we were able to fully reverse these provisions. This obviously had a positive impact on OpEx, roughly EUR 9 million. And finally, we don’t really see any meaningful synergies in these numbers yet and 2022 is the integration year. At the end of the day, all of this resulted in a marginally higher EBITDA contribution. In terms of margin, we continue to run at a high level with 78.7% as of Q3 2022. What is interesting is that if you look at the three quarters individually, you see the Q3 rental EBITDA was the strongest 2.1% better than Q2, and 4.4% higher than Q1. So there’s very good momentum. This is largely driven by lower operating expenses. And that by the way, even improved a single digit precautionary provision for energy related payment before.
Moving on to page 7 for the operating KPIs. As you can see organic rent growth was 3.3% and slightly below the prior year, but this comparison is always a bit off. Because you have different underlying when indices in odd years and even years, the comparable 2022 number for market rent growth were by the way 0.6%. Vacancy, as mentioned by Rolf reached a new record level with 2.2%, or 2.1%, if you include Deutsche Wohnen. In Germany, our vacancy rate is already below 2%.
On page 8, I would like to give you an update on what we have seen in terms of new rent indices, if you will be aware by now, which is dominated more by the smaller location for us. But the trends we see from Q1 and Q2 continues. For the four cities is shown in the charts kept another seven small allocations, the new one index was quite a bit higher. But to be clear, this is a theoretical up list, we could get a prior to screening the multi portfolios for their eligibility at this point in time. And that we’ve showed in Q2 there always be a good chunk of assets to which the rent index does not apply, because they have been recently modernized or — above the respective levels of the rent indices.
For 2023, we expect the more meaningful rent indices for our portfolio including Berlin, Braunschweig, Potsdam, Nürnberg, Mietspiegel. So this is going to be very relevant year for the non-investment driven rentals and the net vector off. And the last time one page about Deutsche Wohnen integration on page nine. We are progressing nicely in the integration of Deutsche Wohnen and they are coming on to the time of search. By January 1, ‘23, we will have all the operational and financial systems and processes integrated. Our recent — synergies as I already mentioned, confirm our initial assessment of EUR 105 million EBITDA synergies and then additional EUR 30 million mostly in the value-add segment the end to realize beyond ‘24.
This basically concludes integration. So starting with a full year, I expect that you will see the Deutsche Wohnen number fully integrated into the group reporting. This will also be the way of how we manage operational business. What that mean is that in line but what we said and promised in the time of the acquisition, we are fully integrated, a full-fledged tax company, there’s only one year harmonizing operational and financial systems also sees and reporting structures, and this without any noise in a very politically important city.
Let’s move to page 10. Let’s continue with the value-add segments. The story here is very similar to the last quarter, we saw continued cost both in external and internal revenues. But the main challenge remains, you have a substantial labor shortage. That means we cannot do an amount of work which internal sources that we have initially planned, we need to rely more on subcontractors, which are more expensive than insourcing. This problem is compounded by the increase absence ratio due to COVID illness and counting. For the lack of all this is the EBITDA contribution was of course basically flat at EUR 160 million.
To page 11, our recurring sales volume in the first nine months 2022 was lower than the prior year period. But the fair value step up was more than four percentage points higher at around 44%. We continue to see demand for this product. But volumes are clearly lower reflecting the more cautious stance, some buyers are taking in line of some more challenging financing environment. Nonetheless, we did sell 458 individual units at a 44 fair value step up in Q3 alone, driven by the lower volumes, the EBITDA contribution was slightly down by only 1%. Finally, what is important, the cash conversion was similar to the prior year period at 87%, resulting in EUR 330 million of free cash flow which is of course makes full and happy and this is over to — this for me to setting again. Moving to page 12 on the development segments And as you can see EBITDA contribution was coming out at EUR 113. This is an uplift of 40% above the prior year level. And that was especially driven by the development to sell, including the larger projects that we have completed and talked about already in the first quarter. But not only was the volume higher, we also saw higher margins with an average of more than 20% project itself. Development as a whole is still pretty high. But as we have indicated before, we are in the process of shifting most of the holds developments into to sell. Of course, you do not see the impact right away, is there 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. And also, in our balance sheet, you will correspondingly see a shift from the investment properties to our working capital.
Let’s move on to EPRA NTA on page 13, we did not have a valuation uplift in the third quarter. And as a consequence, the NTA also did not change much. The short reminder that fee taxes in the NTA calculation relate to our whole portfolio only. So lower checks volume compared to yearend 2021 is the result of our increased sales portfolio. Adjusting for this technical effect, the NTA per share would have been up 4% roughly. Please note that also the purchase price allocation of the Deutsche Wohnen acquisition under IFRS has now been finalized. And this led to small changes in some of the items for 2021. Let me say a few more words on valuation.
So moving on to page 14. As Rolf said, we remain confident that our sub sector will not experience any larger value losses. Values seem to have mostly peaked and have been moving sideways on very limited transactional evidence though. As a consequence, we saw no valuation uplift in Q3. As also indicated in the charts, it’s rather hitting tedious picture across different markets. In Berlin and Dortmund, for example, we have seen value still pushing higher for condor. All-in-all, this data is based on thin market evidence. And so the end valuation we will continue to monitor the markets. At the end of the day, small fluctuations can always occur not just on a single market basis, but also in the portfolio. That means it’s, we may see a small decline by the end. But we certainly do not anticipate anything even close to what some market participants are expecting. But since values are no longer going up, that fluctuation is happening around the zero line. And it may end up in this low single digit percentage value decline for Q4.
Some of the reasons why we still don’t anticipate major value declines are shown on the top right-hand side of the page. Most of you will remember that from our capital markets day that we have a longer version of this, that we believe that especially the traditional conservative financing, the capital gains tax, and the high transaction costs provide some resilience to our sub sector. This is obviously in addition to the accelerating supply demand imbalance we observe.
Let’s turn to financing on page 15. Two things to highlight on this page first, as remaining maturity for this year are already covered, so no issues in 2022. Second, you’ve probably seen the Moody’s put our rating down by a notch to BAA1 with a stable outlook. So Moody’s rating is now harmonized with our S&P rating. The rationale for Moody’s decision is not so much company specific, but largely based on their view on the German revenue sector, including the expectation of a 10% loss in value by yearend 2023. But I think it’s also important to note that Moody’s confirmed that a, our liquidity is adequate, b, that we have good access to debt capital, with a well spread maturity profile, a good level of unencumbered assets and well diversified funding sources and c, that we maintain sufficient headroom in terms of covenants. I don’t expect the new rating, by the way to have any impact on our financing terms. And that is because the market has been focusing on S&P BBB plus rating in pricing our bonds anyways.
Moving on to page 16, for our debt KPIs, LTV slightly above 43%, essentially unchanged vis-à-vis Q2 and net debt/ EBITDA is up 0.2x. This small increase is a reminder, in the multiple is a function of the underlying calculation methodology, which looks at the average that in the last five quarters involved the EBITDA has gone up, we also replaced in the numerator, one quarter with a lower debt fourth quarter with higher debt. Starting next year, you will see that this KPI moving towards our target range of 40x to 50x given the envisaged deleveraging of almost EUR 3 billion of gross debt.
Moving on to page 17. Here, we show the upcoming maturities quarter by quarter for 2023, and 2024, as well as the breakdown between bonds and secure financing. And as you can see, even on a quarterly basis, it’s a pretty even profile. Now to be very clear, we are trying to keep maximum flexibility, and we will not commit to anything specific yet. But it’s probably fair to say that we will put a stronger focus on refinancing into secured markets with marginal cost of debt currently between 4% to 4.5% and hence 200 basis points cheaper than in the unsecured market. We are in advanced discussions with different lenders. And I do expect to see good progress over the coming months for well ahead of the respective maturities. On the bond side, we want to repay the vast majority of upcoming maturities in 2023 through funding that we generate from reducing our investment program and selling assets. The magnitude, of course, depends on how much cash we can reallocate at the end of the day. But as you will see on the next page reflect confidence that we are talking about very meaningful volumes.
So on page 18, we want to give you an idea as to what the different action items mean, in terms of freeing up cash. To begin with, it’s probably worthwhile to point out that we are expected to begin the new year with across product of cash balance of about EUR 1.3 billion. The sort of housekeeping remark I will add that we also have a EUR 3 billion undrawn revolving credit facility in commercial paper program. Now, in terms of all expectation of actual free cash flow generation, the chart uses the year end 2022 cash on hand as a starting point. And then we have the estimated taxes all for 2023. On top of that there is a recurring sales cash flow to the extent that is not already included in the FFO. And this is something people often tend to forget. The FFO includes the EBITDA contribution only, the extra free cash flow generation is much higher, usually around 90% of debt volume. Then we deduct capitalized maintenance. And the next block is new and some things that you have not done in the past. We are including a specific expectation in terms of disposals both from asset sales, as well as cash recycling, from development to sell. And this to be very clear, does not include any assumption for potential JV partnerships or a potential disposal of Deutsche Wohnen business. I’m sure you will ask me a dozen question on more details regarding these developments plus, please do not expect me to add much more to what you can see on this page. The next block is portfolio investments which are substantially lower than we bought when we had originally planned for. So all-in-all, our expectation is to have free cash in excess of EUR 4 billion, adjusting for the dividend payments as per our dividend policy to get to roughly EUR 2.8 billion and this is remarkably close to the unsecured maturity falling due in the coming year. We have already pointed out that we have reduced our investment program on page 19. I want to put this into context, for 2022, we estimate a volume of EUR 1.35 billion and for 2023 a volume of EUR 850 million. If you look at where we have started originally with a midpoint guidance of EUR 2.3 billion for 2022. And we gave the first guidance in March this year and compare this what we are guiding for 2023, there is a 60% plus reduction and if you put this on a relative basis, such as the investment volume of our gross asset value, we are going down from 2.3% in 2022 to 0.9% for the initial guidance of 2023.
To me, that is a very, very strong message that we can and do adjust to the changing environment. We are stepping on the brake hard for now that we are not doing anything stupid here. Projects underway will be completed, there is no point in leaving things half finished. We are also finalizing the preparation on those projects that are being — that are now being put on hold to make sure that we are able to react quickly once things change to the better again. You will probably ask me what the reduced investment program means in terms of rent growth and our climate task. We will answer the rent growth question for the guidance and to the climate part as well as mentioned initially, it now really pays off that we are well ahead of the broader markets given past investments, so we can afford to undershoot for a limited period of time. So cutting back in 2023, but clearly not jeopardize our long-term goal of becoming Climate Neutral by 2045.
On to the guidance and starting with 2022 on page 20. Top line rental income adjusted EBITDA and Group FFO are all unchanged. Our business is running smoothly and we are sticking to all line items here. Rent growth as mentioned before, is slightly up, we now expect 2.4% recurring sales, we are taking down the volume again from 300 to now 3,000 units given that we have sold about 1,700 during the first nine months, you can see that you will need to pick up the pace in Q4 and the fact that we are guided through 1000s should be understood as a sign of confidence that we can close this gap in Q4. All this is coming at a better margin than we have originally anticipated. And we are increasing our guidance for — step up from roughly 30% to more than 35%. As my view this is probably quite on the conservative side. And I would not be surprised if you come out closer to 40% than to 35%. The dividend guidance is also unchanged, in line with the FFO guidance and that as a reminder, 70% of our group FFO for minorities, to be precise.
We had already mentioned the investment program several times. So here we guide EUR 800 million to EUR 900 million for building rent apartment modernization and roughly EUR 500 million for new construction, pro forma is a bit newer, the latter a bit higher. The reason is simply that some of the construction projects cannot be switched as quickly and, in some cases, it still makes sense to take the new construction onto our balance sheet.
And finally, we are ahead on the SPI. So please expect this one to come out better than initially guided. Page 21 is for our initial 2023 guidance. And here even in a more challenging market environment, we continue to have a high degree of confidence in our business to put together what we think is a pretty robust guidance in a very uncertain environment. You can see the individual KPIs. They probably don’t have to go through them one by one. But I want to point out though is even though our portfolio is smaller going into 2023, it is expected to shrink even further, as we move through the year, because of disposals, our top line and EBITDA are continuing to grow. This is also a strong indication of our conviction that inflation will continue to have a very manageable impact on our cost structure and that we do not anticipate the material change in our rent collection. Similarly, even though we are making large cuts to our investment program for 2022 and 2023, the organic rents growth is accelerating. So, we are overcompensating lower investment current rents growth through higher market rent growth, as higher market rent growth is exactly the trajectory that we have been talking about for some time now. They are not just yet committing to a hot number, but we expect rent growth in 2023, to be higher than 2022. For the FFO, we do not think that we can fully compensate the higher interest rate and taxes from accelerated disposal, as well as the sharp reduction in our tax-deductible capital spending. So, we are guiding for FFO slightly, but only slightly in 2022. And this also depends quite a bit on disposals versus refinancing. So, we don’t want to be more specific than this for now. And to next for some clothing remarks back to Rolf.
Rolf Buch
Thank you, Philip. Let me quickly conclude the presentation before we go to A&A. First and foremost, I want to underline the basis of our operating business is probably stronger than ever. Supply demand imbalance is shifting even more in our favor. Germany is seeing a similar number of refugees, as it did in 2015. On top of it, we are bound to see an increase in labor inflation. And the government is taking steps to pass a more modern immigration law to support it. At the same time, new construction volumes are getting lower and lower. This has causes hit all over it. And it would not be surprised, I would not be surprised if the government reacts with more ambitious subsidies systems to make this crisis a little bit less steep. So there might come opportunities. The impact of supply demand imbalance is obviously in the accelerated [Inaudible]. Don’t forget, next year’s niche figure will not be – really be impacted much by inflation yet, because the six years look back period. But we are already seeing better rental costs momentum.
If you look on our guidance for ‘23, you’ll see that we are able to overcompensate the new meaningful chunk of disposals from ‘22 plus additional disposals we expect to make in ‘23. We believe our EBITDA will circle as this shows how inflation is manageable in our cost structure, and how rent collection will stay at a very high level. So operationally, our business is very much intact and estimated to deliver cost in ’23 as well. The natural environment is currently challenging. Cost of capital is high. Financial conditions are tough. And there is a high degree of uncertainty, which we even recognize as we talk today. But we are adjusting to this challenging environment, we have ramped up our disposal efforts, and we are strengthening our free cash flow. So significant reductions in our investment programs. This gives us options. Because results are usually never good. If you’re selling — if selling is your only option. You may see a small value decline in the magnitude of the lower single digit percentage number in the first quarter. I don’t think this will surprise many people. And if so, I would probably this will be a positive surprise. This kind of environment that may be expected. That is as far cry for massive value declines as some market participants fear. Make no mistake, we continue to feel that it is important to free up capital and to reallocated towards paying down debt.
But we want to do so from a position of strength and alternatives in order to achieve the best outcome. All right, thank you very much, a word from Philip. And, Frankie, before I hand over to you for the Q&A, one small favor to ask in this kind of setting is always difficult if you ask several questions all at once, so you can ask as many questions as you want. But ideally, we’ll go through them one by one that will make it a bit easier on our end to answer them. So let’s get things started, Frankie, and take the first questions.
Question-and-Answer Session
Operator
[Operator Instructions]
We have the first question from Charles Boissier from UBS.
Charles Boissier
Yes, hi, thank you for taking my questions. So I will do one by one. As the first one on guide on so for like for like 2023 you mentioned it will be higher than 2022. And you also had mentioned that there will be some important Mietspiegel prints in 2023. So Berlin, Dortmund et cetera. I just was wondering what variations could those Mietspiegel bring to your 2023? like for like? And I know I said just one question. But on a related basis. As the senate for housing in Berlin, on the Andreas Geisel, he mentioned, just very recently that there will be this moratorium on for the state-owned housing companies in Berlin, not to increase rents in 2023. So just what is your confidence level in being able to pass the full Mietspiegel for Berlin there locally [Inaudible]. Thank you.
Rolf Buch
So yes, there is a debate of the government because they have a reelection in Berlin, because the old election was declared or will be most probably declared, not be done. So this shows some issues which we have in this part of Germany. And but anyhow, so because of this election, the government says that they want to have the municipality companies not to increase rent during the year 23. For my understanding, the Mietspiegel, will be done as a data on ‘21 and ‘22. So this is clear. And also the rules of Mietspiegel says that this kind of rent, then normally has to be excluded from the Mietspiegel because it’s a public decision and not a free market. But it’s very interesting what happens as well. The government has declared that these companies are not able to not easily rent and they have to be recapitalized by the state. So we are coming now to a situation that less public landlord has to be recapitalized because their balance sheet is over. So I think this is also a strong message to politicians, that probably it is the end of pushing more efforts and asking for more effort from the landlord.
In this context, I would like to add the last problem also perceives the liquidity hubs have given to some East German rental companies already because they need it. So we know as far they are using this liquidity house because we don’t need it. That is just showing but you’re always saying don’t only look on the listed sector, or look on the whole sector. And as long as in the regulated market, as long as you are better than the average, you’re doing well. And the average is now getting into problems. And so, this I think is the end of more regulation.
But I think the first case is going to dry this is about composition of our like for like rental growth guidance for next year. Here we will see a sharp increase roughly a doubling in the non-investment driven market rent growth and as mentioned, it is largely positively impacted by rent indices and very relevant markets for us. What I can also add is that for the investment driven like for like rental growth, there is obviously an impact by reducing the investment volume at the same time that impact is not that pronounced given that we are completing, that we have started and kind of still benefiting from past investment.
Charles Boissier
Okay, very clear. And Philip, you mentioned you were expecting some questions on page 18 with the disposal bucket. And I just was wondering, so if it’s not joint venture on a nursing and also you have the recurring sale already in one of the boxes, so by deductions, probably the non-core recurring sales from the multifamily homes. And I just was wondering about that latter elements as a multi-family home recruit also so essentially what I think all while saying is selling to the local [Inaudible] because it’s a big bucket within the certain billion program, I think it’s EUR 6.3 billion. So what’s your initial — what was the initial reception from potential investor on that on that disposal program?
Philip Grosse
To give a bit more granularity, once again on page 18 on recurring sales, this is really about our condo business. And that is reflecting that we had been guiding for next year 3,000 to 3,500 units. When I moved to asset disposals and development to sell that as a combination of assets disposals, which form part of our non-core business, as well as multifamily house, I think the interesting bit here is that our target investors we sell to is kind of a very different investor universe. In the non-corporate, you have a lot of products, which is interesting for state owned housing companies, which continue to have good appetite to expand their housing stock.
In multifamily homes, I think it’s still too early to say markets are difficult. But we have just started to prepare for the first unit. So there is not much to add to this stage. And to guide or to provide more details as to the split of non-core versus multifamily homes, please allow us to have some flexibility here. And I think the key message is what we are guiding for in terms of a free cash flow. And obviously we have a plan as to how we want to achieve that. But even if we were to experience more difficulties in some of the elements, we have other elements to replace. But our joint venture partnerships, and even more important, in my view, the nursing business. So all-in- all, I feel very confident that we deliver on the targets we have repeated meet announced, of delivering our balance sheet by roughly EUR 3 billion next year.
Rolf Buch
But to be very precise, the EUR 2.8 billion does not include any conventional disposal, and the nursing home disposal, those will technically come on top.
Operator
The next question is from Andres Toome from Green Street.
Andres Toome
Hi, good afternoon. I’m just wondering about the 2023 guidance. And maybe you can unpack a little bit the adjusted EBITDA total figure that we’re seeing here, how much of disposals that this assumes, is it fair to assume the same sort of volume that you have in the free cash flow bridge, as you present it on the slides.
Philip Grosse
I mean, in the EBITDA, you have the contribution of our recurring sales business, that 3,000 to 3,500 units, so it’s slightly more conservative assumptions when it comes to the margin above book value, where we set ourselves the goal of realizing at least 20%, 25%. Is that answering your question?
Andres Toome
What I meant was –
Philip Grosse
The other disposal proceeds when it comes to non-core or multifamily homes do not form part of our adjusted EBITDA, outside our KPIs by which we steer our company from an operational perspective.
Andres Toome
Right. And what I meant was the rent roll that you would lose from disposals that you’re sort of alluding to in that free cash flow bridge.
Philip Grosse
This is of course included. So you cannot plan a key free cash flow without including as a vantage, you’re losing if you’re disposing in the EBITDA, this is included.
Andres Toome
Okay, thank you. And then maybe diving a bit deeper in terms of the EBITDA rental side. What’s your expectation there in terms of sort of more organic basis? Obviously, you do get the boost from Deutsche Wohnen synergies as well, but how are you budgeting that excluding that sort of component in terms of are you expecting like for like growth so far as the rental rate increases, will offset any sort of operating expense headwinds.
Philip Grosse
What we are saying here, I think as Rolf it was said we are seeing faster rental growth within this year. And of course, the composition of those rental growth is less investment present and more organic [Inaudible]. And this compensates, actually, some inflation actually you cannot compensate. And this why the EBITDA becomes higher.
Philip Grosse
And it’s also compensating the rental income we lose by increasing disposals and the respective impact that has.
Andres Toome
Okay, perfect. Thanks. That’s very clear. And then my next question is around just thinking about dividend as well and you did sort of mentioned that obviously, the transaction market is quite difficult at the moment, if truly disposals don’t come through, is that sort of the next lever for you to use to sort of balance your cash flow needs?
Rolf Buch
So I, we cannot hear you very clear, but I think the question was around dividend policy.
Andres Toome
Yes, around the dividend. Can you hear me better now?
Rolf Buch
Yes, a little bit.
Andres Toome
Yes, so the question was, if disposals don’t come through, as you sort of alluded that transaction market is quite difficult, would the next lever for you to reduce the dividend to have a better cash flow position.
Rolf Buch
So I think we have said that the dividend several times that our business policy is now known, and it has not changed. So to repeat, we have –we are paying around 70% of the Group FFO plus minorities to be precise. And to be more formal, the management board and supervisory board we’ll make a proposal in the end of Q1 beginning Q2 to the AGM and formally, the AGM as a shareholder decides the dividend. But I repeat our dividend policy, they have not changed and was around 70% of FFO.
Philip Grosse
And please also recognize that what we have planned for an audit underlying the guidance is essentially only a portion of various processes we have initiated, which will free up cash. So again, that is excluding joint venture partnerships, and that is excluding nursing. And against that backdrop, I do feel very confident that we are able to free up some of the capital deployed. And against that backdrop, there’s no need at this stage to speculate about the dividend. So we are very clear mow, the dividend is 70% of FFO post minorities is what we are planning for.
Andres Toome
Okay, understood. And then my final question is around the RCF and commercial paper program, you indicate around EUR 3 billion, how much is that actually assigned or set versus commercial paper that you have to sort of go and tap on an ongoing basis if you want to bring in any money on that side?
Philip Grosse
I look all these as two in conjunction. That means I either use the RCF or I use the commercial paper program. Both has a size of EUR 3 billion individually, but I never ever use the two at the same time into complete and that I mean the RCF is underwritten for two years as an option for us to extend, so I feel very comfortable that instant access to liquidity, if for whatever reason needed.
Operator
The next question comes from Marc Mozzi from Bank of America.
Marc Mozzi
Thank you very much. Very good afternoon to all. I have three questions from my side. The first one is about your recurring sales, just wanted to understand how you can set a higher level of recurring sales next year, while you’re not going to achieve more than 3,000 this year, and what sort of assumption do you assess here? And how do you get to that 3,300 and not a lot less? That’s my question.
Rolf Buch
So, Marc, I think, the guidance for this year is 3,000, the next — the guidance for next year is between 3,000 and 3,500. So, we think that we will put more efforts but keep in mind that we have reduced actually the step up significantly. So we are here as Philip said, at least 35 as this year. And because of some noncore values, of course, that’s why we think it will be a little bit less step up. So that’s where we are very confident that we will need more or less the figure of this year is a smaller step-up figure. And this is — and again what you have seen in the evaluation part, you see that the condo sales are a very robust business which is very stable, to be more precise, the condo sales we are selling to people who need an apartment in the city. And if you look on board, we are selling near this is probably a very not cheap at a very price realistic same what we are selling is the big cities as individual apartments for people who want to live there. So, this is a completely different market.
Marc Mozzi
Okay. And development to sell. We haven’t much discussed about it but looks like most of our house builder reps in volume that operating recently. What sort of color can you give us in terms of selling right, you expect for next year? And the related question to developments is in your bridge, Phillip on slide 18, do you take on board the changing working capital requirements needed for those developments and the development costs needed for the development to old bridge according to my membership with bridge post accumulated about EUR 700 million.
Philip Grosse
On your last question on, yes, we are basically shifting capital, which form part of our investment properties into the inventories. So, that is capital already deployed. And as I talk about the cash recycling in the development of sales, that is the net effect of the investment required for our development to sell. And the proceeds we are going to achieve by disposing the finished product to investors and what you can see on page 18 as part of the box as it disposes in development to sell for development to sell the net effect of the two.
Rolf Buch
But Marc again here the big part of the development to sell is individual apartments because this history of [Inaudible] as you know. And individual apartments we are attacking here actually a market in the big cities where people need to live so the imbalance of supply and demand has clear play directly into our favor.
Marc Mozzi
Okay, and the third one is the need just about what sort of cost inflation assumption do you have on your cost base and particularly for labor cost?
Rolf Buch
I cannot disclose it to you because then they would probably disclose to our unions, what is our negotiation position but it is never comfortable to say. So, you know that in Germany in the moment we have a debate of sort of payments EUR 3,000 that you can pay this out social cost directly to the people. And the debate is this so you can do it over 24 months, but you can do it shorter. So this gives us this year very good way to compensate specially with lower income people with this knowledge, there’s very little additional cost because they don’t have to pay any social charges on this. And they don’t have to pay any social charge. So that it’s completely included, we are very confident that we will need inflation. And again, in our business, inflation is not a big issue, because if you’re operating this, above 80% margin, the point of inflation, which is especially labor cost doesn’t — is not so meaningful.
Marc Mozzi
Okay, and maybe a final one. On your market rent — rental gross. So you said it’s been a double next year, so we are talking about 2%. If I do basic, smart, EUR 800 million capex plus time, or whenever a yield of 4% or 5%, that would mean another 1.2% of additional rent. So we’re still at a kind of 3.5% organic rental growth next year. But what about 2024 -2025? Are you going to see the 2% market trend continuing to grow as this is about a moving average here for the mix and calculation.
Rolf Buch
To be very clear, if I’m doing just a math, the mix finger is covering the last six years. So in the northern, your question is actually what will be the mix figure in the year ‘24, and ;25. So the next mix figure and because they are covering about six years. So last two six years we have fallout, and the next and the most recent six years of — the most recent two years are coming in. So by definition, the momentum will grow and not go slower, because we have seen significant higher rents in the last two years. And what we see also now is a significant higher rent because of the higher cost of construction. So the momentum is a long-term momentum. And this has all to do with the six years average.
Rolf Buch
Probably Marc, let me add one thing because into the question, let me add one thing, what you see what we have now taken the decision to, would use massively the new construction, this is not going to be as much as the only one who was doing it, everybody’s doing it. So we will see a massive reduction in new portfolios coming to the market. And this means that the imbalance between supply and demand will get much worse. And this needs a political reaction. It is just a question of when it will happen. But something has to happen, we are running in the social catastrophe in Germany, don’t quote me here. And if we are not doing anything, because the homeless people will go up, a lot of other things will happen. And the government will not accept it. So they need to be in action. And in the moment, we see the German government be able to act very quickly. But we cannot predict anything on this. So we have nothing in our budget and in our guidance, but something will happen.
Operator
Next question is from Jonathan Cownett from Goldman Sachs.
Unidentified Analyst
Thank you for taking my question. I just want to continue on the scene that you had just mentioned. You’re saying that Germany is running into social catastrophe because effectively, there is no supply available anymore. And there’s no one adding new supply. What is the solution here that you think is acceptable for Germany? Because effectively, the regulation right now and the cap on rent is actually breaking the system? Right. So you said you can’t add more regulation. But how do you think the government is thinking about it? Because obviously either they have to subsidize massively new housing, or they have to remove or lightens regulation one way or another? How do you think they’re going to, tell your math and how they can think about it?
Rolf Buch
So I’m, we are talking with the government about magic triangle. So there are three components. One is the construction cost and related to the financing costs too, so the cost which you need to get your construction and your interest rates covered. So the second is the subsidy and the service rent. And it’s clear for everybody that you can fix two of these triangles. So two components are to serve as resulting. If you want to fix all three, as a result, there’ll be no more construction. It’s very simple, it’s mathematic. And now the debate is, and we have to go through this debate. That commonly now the gap is so big, that optimizing only one is probably not enough. So we have to talk about ventricles, they have to call about more subsidies. And we have to talk about less cost, because the conditions we have to use and the standard has to be reduced. All three have to put together.
Unidentified Analyst
Is there I mean, no one really talks about that. But I just want to try to understand if politically, there’s a scenario whereby, actually because the problem here is that just rents have been kept artificially low to help on wages. But is there a scenario where inflation helps increase wages at a country level, and ultimately, the rents would be slightly deregulated or allowed to increase a bit more so that you can actually build more appreciate also that they maybe not even enough as you’re highlighting, basically, one way usually people have the opposite view. But ultimately, that will be almost the easiest, because on the other two the government has to pay a lot of money.
Rolf Buch
So to be very clear, I cannot predict and discover the government will do, what I can predict this will come that we are coming to 200,000 new constructions, and not 400. And having the problems as a big setting in living, I think the government cannot lay back and do nothing. And there is of course an argument, which is that if the disposable income is going up, and we always saying certain percent of the disposable income should be not exceeded to spend rent, nobody is saying that less than 30% is a good target. So I think if the disposable income is increasing, there’s also more room for the people to pay for higher rents. But it’s not viable to talk about this publicly.
Unidentified Analyst
Okay, thanks. Understood, if I may, just another question. And just coming back to the value-add business, obviously was pretty flat year-on-year, you’ve talked about higher costs, and it needs still to be rolled to Deutsche Wohnen. So how are we expecting this business to develop into next year? Are we expecting flat contribution? How fast can you write to Deutsche Wohnen or are you seeing actually even increasing cost which means that contribution little bit decline? Thank you.
Rolf Buch
To be very clear, the problem of the value- add business are not permanent but the challenge they are facing is that they have a fixed price with the rental business for the full year. And cost inflation and availability of — cost inflation was going up. So it has to be covered by value add, plus, the availability of people and subcontractors were difficult because it was very difficult to find construction capacity. Probably in the next year, first of all, we are doing less investment which actually will increase the internal percentage of internal work, which is helpful. And secondly, if what I assume is right, and we will have much less construction in the next year because everybody’s doing the same what we’re doing the pressure and availability of customers will go down. So this will definitely help the value-add business.
Operator
The next question comes from Marios Pastou from Societe Generale.
Marios Pastou
Hi, there. Good afternoon. Thank you for taking my question. So first question really is on valuation expectations for the portfolio. We’ve had Moody’s stating or including in their numbers a 10% value to decline to come next year. You’ve got a share price that is pricing in meaningful discounts to the underlying property values, but then we’ve also had positive comments from yourselves that you’re expecting a low single digit percentage decline to come in the latter part of this year. How do we bridge the different gaps and is that confidence based on your discussion with your external values? I suppose this is as my first question.
Philip Grosse
I mean, obviously, we are validating our views with our external appraisers, but they are facing with us all the same difficulties of very little transactional evidence. And if you look at the data points, and I’m basically repeating what we said beforehand, if I look at the data point, we see in the low single digit percentage area declined for multifamily home is that not to be concerned, but that is a TVC. With additional transactional evidence, which will feed into our systems throughout the year, we may end up in a small value decline. And that is certainly a possibility. But again, for now, transaction data are very thin. I think for me, the more important question really is on valuation what midterm outlooks we should expect and hear the story no one wants to hear remains that the supply demand imbalance and Rolf talked about is accelerating and is becoming dramatic, which is positive, typically not a negative surprising. And second, the huge, huge gap between replacement cost and the valuation of our standing asset, I think medium term there will be support. But yes, short term, there will be fluctuation, people have to adjust to the changing environment. And with all of that some changes to the valuation of our investment properties, we cannot exclude for now.
Marios Pastou
Okay, very clear. Thank you. And then just on to slide 18, sorry, a question on this particular slide. If we’re looking at the bridge, towards the free cash flow, how should we think about it? And it’s probably follows on from a previous question as well, thinking of no asset disposals to come in a more difficult environment or a difficult market, and how would that bridge then look? Or to put it this way, how much of our free cash flow generation is purely from asset sales?
Rolf Buch
So that’s probably because this question is coming very often. So we are given you slides, where we are saying that this management team is committed to have under the explanation that Philip is doing a cash free cash flow of EUR 2.8 billion after dividend payments. So this was a commitment, like our commitment over rental cost like our commitment on offer if all, or normally, you know that we as a management team, are normally doing guidance, which we can fulfill. So and of course, some players feel that they’re playing, we can do a little bit more this non-core, you can do a little bit more multifamily home. So there’s a lot of pillars which we have to play, but in the end, we will feel very comfortable that we will deliver the EUR 2.8 billion free cash flow and assumptions laid out in page 18. So please, we will not give you more disclosure, and especially breaking it down because this gives us also limited flexibility to react. Because keep in mind the idea in a business-to-business relationship, we are discussing the people, which probably are probably on this call. So to discuss myself strategy with the public will harm my price. It’s not a b2c business. It’s a b2b business. And that’s why please, and I apologize for not being so precise. But this, I think, is the interests of all our shareholders. But there is a firm commitment of this management team that we will deliver EUR 2.8 billion in cash flow at the end of’ 23, which will be used for as Philip has said in early.
Operator
The next question is from Rob Jones from Exane.
Rob Jones
Hi, [Inaudible] and I’m just going to follow up on Marios’ point on slide 18. I appreciate your comments Rolf, but I get my ruler out and I measure the height of those bars because that’s what we do as analysts and your asset disposals in development to sell column implicitly is about EUR 2.1 billion. Now if we assume that EUR 0.6 billion is the development sell disposes. For example, we get to about one and a half for asset disposals on that chart that is to scale. And to be clear, you’re saying that that figure which then ultimately then drive big elements of your EUR 2.8 billion free cash flow positivity, that figure is excluding Deutsche Wohnen. Any JVs, which would be further upside from a free cash flow perspective? That’s correct, right?
Rolf Buch
Yes, exactly. So it’s without JVs and without nursing home, and we also very clear, we are in good discussions. But if I put the guidance for release or nursing homes, in an official document, and that, because then the other side on the table will say you have promised it, so now you have to deliver and then we cannot negotiate. That’s why we have done guidance under the assumption that GV nursing home will not happen. Having said this it is not our objective, that GV and nursing home will not happen. We want to do both. But we have not put this into guidance.
Rob Jones
Fine, very clear.
Rolf Buch
Let me be very clear Philip and myself, we are working hard that it will happen. But just to make clear that the guidance is not including it.
Rob Jones
Of course, I understand that. Thank you. Second question back to slide 17. Bullet point three in that top left-hand side; you say advanced discussions to sizable secured financing. Now, I read some products about this other day, and I’m thinking about your capacity to take on more secured borrowing. Now when we look at your unencumbered asset ratio, I think from memory is about 163, covenants of 135, you obviously don’t want to get to the point where you’re very close to your covenant bridge. But of course, asset value declines obviously pushed down that UAR and percentage figure, do you have a figure you can give me in terms of say, for example, a 10% decline in the value of the portfolio leads to an X percentage move on the UAR. And the reason why I’m asking is because on our numbers, we get to a position where you don’t have a huge capacity to take on more secured borrowing because you end up closer to this covenant in the event of portfolio value decline. Despite the fact obviously today, theoretically, there is a greater ability to take on more secured financing. And of course, part of that would be used to refinance some of the bond portfolio the next 24 months.
Philip Grosse
Yes. This is again, it’s assuming things we don’t assume. If I look at our current ratio, there is sufficient headroom to roughly increase the secured debt volume by EUR 8 billion. Then having said, by no means I have the ambition to move up the secured debt book in that magnitude, we will always want to have the flexibility to play around with different markets. And don’t just focus on one market. All of that having said in terms of priority for the remaining refinancing we will undertake for the upcoming maturities in 2023. Yes, the focus the priority is on the secured financing. That is not being misunderstood that there is no unsecured financing going to happen. And this is simply obviously because of the Delta in refinancing rates that will not shift anywhere close to being at risk of breaching the covenant.
Rob Jones
And that Phillips leads me on to a perfect segue to my final question, which is when you’re obviously planning to largely redeem rather than refi the unsecured over the next two financial years, obviously, aside from the point you’ve just made around the unfavorable cost of that relative to unsecure and I think you said it’s about two and a bit cheaper for secured versus unsecured. And obviously, we obviously need to overlay your deleveraging intentions which you’ve made clear to us at the moment. But when you speak to the various different debt capital markets, teams across the investment banks and your kind of banking counterparts, is there actually an element of a lack of unsecured debt availability that’s driving part of your decision-making process to largely redeem the unsecured where possible rather than refinance and it’s not purely about cost of debt and indeed ultimate appetite to de-lever the business for grace that perspective.
Philip Grosse
It is very clear and there is no, it is not at all expression of appetite. To the contrary, I’m actually getting inbound calls from big institutional investors on the website who have appetite. But what I think we have to recognize is that in the 10-year tenure we are talking about an incredibly risk spreads of 350 basis points that is so far off compared to other sectors in terms of risk premium, that this is currently not a very attractive proposal for us. And on the other side, I have a banking market, which is looking for new business, and who wants to expand relationships, and who’s telling me it’s not really 50 basis points, it’s 100 bases to 120 basis points. So that’s a very, very different proposal. So again, it’s not at all about our ability not to refinance in the debt market, but currently there are not overly attractive to us.
Operator
The next question is from Manuel Martin from ODDO BHF.
Manuel Martin
Thank you, gentleman. Just one question from my side. On your investment program, we have seen that you have been downscaling your investment program over time adjusting to the respective environment. Now, for 2023, we have arrived to approximately EUR 850 million planned investment program. Is there a possibility for you to further downscale that program if things become more difficult and what could be the headroom to the downside.
Rolf Buch
So, to be very clear, what we have done is actually we are more or less in not completely but more or less we will not start new construction and we will not start new modernization if there not only be launched. Of course, theoretically, you can stop also modernization which are already announced but not started. And you can also stop construction, which we already have started to prepare the land or things like this, so there is actually more room to reduce, but this will mean that then this would cost — come visit cost. So that’s why we will probably not go for it. But this is for ‘23. So if we continue this – in ’24, of course, investment will be much lower in ‘24. But the reason is very simple. And I think Philip has cleared it. The cost of capital and actually the cost of debt at the moment and magnitude, it doesn’t make sense to confirm new investments for the future, although in the context that we will see a change in construction costs, then we will most probably see a changes in subsidies. So I think it is what we are doing the same but some investors are doing in the moment we are keeping our powder dry and this means de-lever in our case and we will see and then we will see in summer next year and not next year, what is the new situation and then we will make our plan for ‘24.
Manuel Martin
Okay, so not impossible that you must not reduce, you can reduce must not reduce depends on the situation, if I get that correctly.
Rolf Buch
Yes.
Operator
Next question is from Sander Bunck from Barclays.
Sander Bunck
Hi, good afternoon team and apologies for yet another question. First one is on the kind of following up on the privatization sales. I would have actually thought that it was scope to further increase the privatization sales given that you’ve obviously added the Deutsche Wohnen portfolio to your existing pipeline. Now it looks to be more in line with kind of what you’ve done over the last couple of years and margins have actually been lower than what was historically achieve with Deutsche Wohnen. Why — is it effectively kind of a lot more of a cautious stance on both the volume and the margin or is it just one of the two?
Philip Grosse
No, I think we are probably with the new guidance a little bit cautious about these adoptions, I admit that. But in the past, we were selling and based and the margin was calculate based on our book value. And the book value was always lagging a little bit behind. So in times while the values were increasing fast, we actually always have this time gap. So that’s why we asked our sales team to achieve a higher margin. Now the argument is the time gap is because the market is flat, the time gap is gone. So we are coming back to what we were used in the past was 20%, normally 20%, uplift on fair value. So we are now at 25% because we still think that the market and reserve have but this is how the reason it, it’s possible is more above 30%, because we added 10%, because of this time delay, but I think now the time delay is over, because we have flat markets. So that’s why 2025, I think is a good number.
Sander Bunck
Is that — is there scope to accelerate the privatization business to accelerate that further and accept even lower margins? Or is that not really possible?
Philip Grosse
It would be possible, but this is not what we’re trying to do at the moment. But this will be for example, on litigants, it’d be an easier selling something else. [Inaudible] in order to properly play this market and for all for optimal outcome, you basically have to play around the privatization stock multiple times what you actually envisage for the given year. And second, typically, it is value optimizing if you’re, if you sell a vacant apartment, and obviously, vacancy is nothing we can influence impact. And given the situation we have described, vacancy is going down, and tenure is going down. And that kind of also has an impact on their business. So theoretically, yes. But in terms of what we look to achieve with that business for now, I think it’s a good guidance in that respect, is nice cash contribution I think you expect for the next year.
Sander Bunck
Yes, fair enough. And also understood regarding the vacancy is just where return of 8% per annum mean roughly 8% of the apartments come vacant per annum. Appreciate that. Not all of them can be privatized. But even if it’s just half of that, there should be scope for significant acceleration. And I guess –
Rolf Buch
Let’s not discuss again, and I think I understand that you want the details that are how much we’re doing these condos, how much we’re doing with multifamily home, how much we’re doing this non-core. And we have said at least give us a little bit of freedom to deliver the EUR 2.8 billion. And we can probably shift a little bit between these different buckets. And that’s why I probably asking us is for this again, and again, give us some freedom. And I’ve explained why because we’re in business-to-business relationships. And that’s why — we don’t want to lose core value for our shareholders.
Sander Bunck
Understood. Okay, thank you, and very quickly. Lastly, just to confirm, basically organic growth going up on the back of strong Mietspiegel, but in organic growth going down slightly because of lower maintenance spend. The 3.5% kind of that’s currently being guided and mention that is you believe that it’s sustainable in the medium term, could even go up in the kind of medium term, or is that? What should we kind of assume there?
Rolf Buch
I think, well, I have said that we see a momentum, so it’s seven years out of it. So this is not going up and down because this is technically just the average of six years is a good advantage of general Mietspiegel. So we see as momentum of going up. So, yes, I guess, we see a momentum of going up and this will continue and then the inflation impact will come in the year just technically speaking in the year ’24 – ‘25. So, this is average of EPS, this is not a guess. This is just because of this model, how the mix is working momentum is a long-term momentum.
Operator
The next question comes from Tomas Nyholm from Kepler.
Unidentified Analyst
Good afternoon. Thank you for taking my questions. Firstly, a follow up on the low investment program. You mentioned that you will revisit the CapEx for 2025 for next year. But you also mentioned that your long term co2 reduction targets are not at risk. I was wondering for how many years could you keep the lower CapEx program in place not to put the long-term target at risk, and you also have this scientist strategy to reduction target of achieving less than 25 kilos of co2 intensity per square meter, is this reachable, if you cut, your CapEx program for a couple of years, or do you need to re spend on modernization rather sooner than later 10 or so.
Rolf Buch
So now I’m actually getting much more in the detail. The modernization standard we are having is, of course, not only one fits all, it’s, as you know, it’s probably one more on the heating systems and one more on the building, the building is expensive, to each institute and is relatively cheap. So there’s a low price for reduction of co2. By investing in heating systems, there’s a high investment per co2 saving in the buildings. So what we can even do, and this is a 2030 target, we will probably pull for example, we are not stopping any replacement of heating systems by heat pumps next year beginning, even so next fiver we will spend some money. And we are just adjusting a little bit more to the more efficient co2 reduction spending. So that’s I am not afraid at all that my climate pass, and its target plan. So that’s my answer your question in the next few years is no issue. If you ask me about the next 15 years, we one day have to continue to spend also in the building substance. But this is not a question of a few years.
Unidentified Analyst
Okay, good to hear. And the next question is, I was wondering, do you see also potential to cut your maintenance expenses, or you already at a very efficient level?
Rolf Buch
I don’t know, we are spending a little bit more than normally should be used because the times are very good. And we have covered a little bit in the maintenance. But I think this is nothing. This is some of the, if you’re doing a guidance, you always have some positions of reserves as well.
Unidentified Analyst
Okay. And my last question is, you mentioned that the cost of secured financing is up to 4% to 4.5% and for unsecured even additional 200 basis points. I was wondering if the cost of debt stays at these levels? What is from your perspective, a prudent or sustainable LTV or net activity ratio lever to run your business in the long run? And what you think potentially the timeframe is for you to reach this new level then?
Philip Grosse
I think as they are asking about the future interest level is like asking about future stock price. And, look, I do see stability in the risk margin on the banking side. And there have been some really interesting — introduced capital partners on the banking side, which impacts pricing that has made margins a bit more expensive, which is why they’ve moved to roughly 100 to 120 basis points. On the capital market side, the kinds of risk premium, yes, it’s difficult to understand in comparison to other sectors and health operate, our ability to actually take interest rates are moving is I think subject to many, many variables. So very, very tough to make a forecast on that. But in terms of our capital structure and our financing philosophy, I think we’ve been very clear in that we have three leading best KPIs all of them need to remain in the guide range, which is 40% to 45% LTV, which is 14 to 15 times net debt to EBITDA. And by keeping these debt KPIs in the given range, we secure that we maintain our current still very good investment grade rating of BBB plus by Moody’s and S&P respectively. And that is going to be for me some of the key focus but it also means that depending on how things evolve different debt KPIs increasing relevance. The longtime it has been LTV that shifted towards net debt to EBITDA and I think it’s fair to say given the refinancing rates I was citing that ICR shifting more and more in our focus.
Operator
The next question is from Simon [Inaudible]
Unidentified Analyst
Good afternoon team. My first question would be in regard to capital allocation. And you’re doing changes to the investment program. And obviously, you also intend to pay a dividend, nothing changed on the dividend policy. And now, my question is, what do you plan to do with the EUR 2.8 billion? I assume that you want to pay back or pay down debt, especially on the unsecured side. But then what determines, for example, investment into your own shares? I’m also going forward in the medium term, if you potentially sell larger chunks from your asset disposal, multifamily homes non-core, and also on the JV side, just to understand your thinking around that. I guess an 8% dividend yield is quite attractive, even if compared right now. And to the secured, running 10-year bond. Yes, that’s my first question.
Philip Grosse
I think we talked about this once we have the luxury to have discussion, for now our focus is very much on deleveraging the balance sheet. We have given the target of EUR 3 billion that requires some proceeds from disposal as we discussed, if there are additional buckets of money to spend at the appropriate time, we will decide based on the market environment and the situation we are facing at the appropriate time what is the best use of proceeds.
Unidentified Analyst
Okay, great. Thank you. Do you intend in regard to the dividend you still intend to also offer shareholders a dividend?
Philip Grosse
I think this is very unlikely, from today’s perspective, given our focus trading, and I think we have balanced our investments in a way that good dividend is needed at least not needed in terms of equity support, this is highly dilutive and that’s not going to happen next year.
Unidentified Analyst
Okay, and one more in regard to Deutsche Wohnen. And I just wonder the remaining Deutsche Wohnen share. So they be listed on a keep, will they be going to be listed on the stock market? Or is it still the view that this is a very cheap equity?
Rolf Buch
So you know that we and we had this debate for a long time there is real estate transfer tax law, which actually limits us to buy more shares from Deutsche Wohnen, we can do but this will be very expensive. And strategy, what happens with the Deutsche Wohnen, the only shareholder? So we have to ask this question Deutsche Wohnen management. But we as a shareholder, we are happy.
Unidentified Analyst
Okay, and maybe just one last one, we got to Sweden and your strategic few of growing the Swedish business for the longer term? Of course, not in the medium term, but in the longer term there have one country segment in Sweden. Is that still? It’s still the current view? Or could you also imagine to make changes to capital allocation in regard to the Swedish portfolio?
Rolf Buch
No, I think we are very happy with the Swedish portfolio as we have discussed several times, the Swedish portfolio because of the different rental regime in Sweden, they will react faster to market changes. For example, next year in Sweden, we will see a significant faster cost of rent, because they are negotiating based on the rent every year. So that’s why you will see the new with different mechanic, but in the longer view, Sweden and Belgium and also German business and the Austrian business. And so we feel comfortable in all these three markets.
And to be honest in Sweden, tenements, there is an imbalance in waiting list. In Stockholm, there’s waiting lists of more than 1,000 people for one department. So the imbalance of supply and demand which was one of our fundamental drivers in our strategy is the same in Sweden and Germany.
Operator
There are no further questions at this time. And I hand back to Rene for closing comments.
Rene Hoffmann
Excellent. Thank you very much, Frankie, and thanks everyone else for joining this call today. We have quite a few investor outreach events coming up as in the form of roadshows and conferences. We’re hoping to see many of you in the coming days and weeks and you will find a list of events, if you do want to participate in page 49 of this presentation. And of course, the most, up to date version is always online. As always, in case you have any questions after this call or down the road, please do reach out to me or my colleagues. And with that, that’s it from us for today. Stay happy and healthy. And see you next time.
Operator
Thank you very much. Ladies and gentlemen, the conference is now concluded. And you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.
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