LEG Immobilien
LEG Immobilien headquarters in Düsseldorf
LEG Immobilien's half-year results tell a remarkably similar story to those of larger rival Vonovia last week. Germany's second-largest listed residential landlord has rising rents, almost no vacancy and rising property values, yet its shares trade at barely more than one-third of reported net tangible asset value. The properties are performing considerably better than the capital invested in them — a discrepancy that is beginning to influence how LEG thinks about where to put its next euro.
Net basic rent rose 3.4% year-on-year to €473.4m in the first half, with like-for-like rents climbing 3.7% to €7.21/sqm and vacancy falling 20 basis points to just 2.3%. CEO Lars von Lackum could afford to be almost dismissive about the performance: "As always, the figures for a property owner are as dull as they are successful." The comparison with Vonovia is striking. Germany's largest residential landlord reported organic rental growth of 3.6% and exactly the same 2.3% vacancy rate, leaving two enormous but different portfolios producing remarkably similar evidence about the strength of Germany's underlying rental market.
LEG expects like-for-like rental growth of 3.8–4.0% for the full year. Cash earnings were weaker, with AFFO falling 12.7% to €110.5m as investment spending increased. Management expects that effect to unwind partly in the second half and maintained its €220–240m full-year guidance, which would represent a record.
Property rises, transactions stall
The balance sheet is also moving in the right direction. Loan-to-value fell 1.3 percentage points from year-end to 45.5%, close to LEG's 45% target, while its portfolio valuation increased 0.7% during the first half. Vonovia reported a comparable 1.1% increase excluding investment. But the transaction market offers a much less comfortable counterpoint. "Hopes were high, but expectations were dashed," von Lackum said of residential investment activity.
LEG completed or agreed sales of more than 1,000 apartments for around €78m during the first half, part of a disposal programme covering up to 5,000 units. Smaller transactions remain possible, but size has become the problem. "What works best is the sale of individual blocks of flats and smaller portfolios," von Lackum said. Larger packages are proving much harder to shift while uncertainty continues to deter buyers. Rising appraised values therefore coexist with a market in which demonstrating those values through substantial portfolio transactions remains difficult.
But for us, the most revealing part of LEG's results is that, for the first time in its history, the company is considering share buybacks alongside modernisation, renewable energy, selective acquisitions and further deleveraging as competing uses of capital. No buyback has been announced and LEG made no acquisitions during the first half. Von Lackum's rule is nevertheless wonderfully uncomplicated: "We invest our next available euro in precisely the measure that yields the highest return."
The arithmetic explains why buying back shares has entered the discussion. LEG reported EPRA net tangible asset value of €139.04 per share at the end of June, against a share price of around €53 following the results — a discount of roughly 62%. Buying another apartment portfolio must therefore compete for capital with the possibility of acquiring an interest in LEG's existing properties through its own shares at little more than one-third of reported NTA.
REFIRE: LEG adds another piece to the picture emerging from Vonovia's results and the latest GREIX transaction data. Germany's two largest listed landlords are reporting almost identical rental growth, negligible vacancy and rising appraised property values, while GREIX shows multi-family transaction prices falling 3.5% year-on-year. These measures are not directly comparable, but together they describe a residential market in which the properties themselves are performing considerably better than the markets in which exposure to them is bought and sold.
LEG's capital-allocation dilemma makes that disconnect unusually tangible. The company is not saying that repurchasing shares is necessarily the best investment available; it is saying that new investment must now compete against that alternative. Why buy another apartment building near book value if LEG can potentially buy exposure to its own portfolio at a 62% discount? That is a rather uncomfortable question for the German residential investment market — and one that rising rents alone cannot answer.