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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. I'm Hailey, your Chorus Call operator. Welcome, and thank you for joining the LEG conference call. [Operator Instructions]I would now like to turn the conference over to Mr. Burkhard Sawazki, Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone. This is Burkhard Sawazki. I'm glad you could join us today for our Q3 earnings call. Our management board members, Thomas Hegel and Eckhard Schultz, will guide you through our presentation and give you more insights on LEG's 9 months results and our business outlook. As usual, this will be followed by a Q&A session. With this, I'll hand over to Thomas Hegel.
Thank you, Burkhard. Good morning, and thank you for joining us on our Q3 2018 earnings call. We released another set of very solid operating quarterly results, showing us on track to reach our full year earnings targets. We expect the continuation of this stable earnings growth path also in the years to come, which is also reflected in our first guidance for 2020, although we are also seeing certain headwinds which we take into account. Our asset class still enjoys some investor demand on a very broad basis, which is paving way for further capital growth. We can guide for another valuation uplift of around 4% in Q4. The expected year-end valuation is still below the price levels we are currently observing in transaction markets. In this context, it is also worth to mention that we currently see strong investor interest for our disposal program after we had just the kickoff of our marketing activities. Another recent highlight was the financing of our mid-sized portfolio deal and some early refinancings, with a total volume of EUR 480 million. We achieved a very strong result with the combination of secured and unsecured financing. That means 1.65% for a 2-point -- a 10.2-year average maturity despite the recent volatility we have seen in the bond market for corporate credit spreads. Let me now give you, as usual, a brief overview of the development of our key operating and financial performance indicators in the first 9 months of 2018. Our like-for-like rents grew by 2.7%, corresponding to rent growth of our free-financed portfolio, which is the very best proxy for the underlying performance of 3.4%. Supported by our mixed modernization program, we anticipate further positive momentum in Q4. We stick to our full year guidance to reach a like-for-like rent growth of 3%. Our like-for-like vacancy decreased 40 basis points to 3.7%. Also, for the full year 2018, we can guide for a further slight improvement of the like-for-like occupancy level.In comparison to last year, we invested significantly more money into the quality of our portfolio with EUR 20.40 per square meters. We stick to our full year target to spend around EUR 30 per square meter but with a further rising share of value-enhancing modernization CapEx in the final quarter. Coming to the financials. Our FFO I grew by 7% year-on-year also on a per share basis. Hence, we saw a more-than-proportionate earnings growth despite the higher maintenance costs. Our reported NAV at end of Q3 stands at EUR 90.21 per share, corresponding to an increase of 7.6% year-to-date. If you take into account the effect from the dividend payout of EUR 3.04 per share, the value for our shareholders climbs by 11.3% year-to-date. As mentioned, there is further capital growth ahead, with expected valuation uplift of our gross asset value of around 4% at year-end. Coming to Slide #6 with the usual breakdown of the operating development in our 3 market classes. Our like-for-like rent growth of 2.7% and the 3.4% for our prefinanced units, we're fully in line with our internal planning, and we see ourselves on track to reach our full year target of 3%. Hence, we expect a further slight growth acceleration in the final quarter also due to the support from implemented modernization measures. The like-for-like vacancy rate of our portfolio dropped by 40 basis points year-on-year to 3.7%. You can expect a slightly improved occupancy level also for the entire fiscal year, although we certainly have some higher tenant turnover in the one or the other asset due to modernization measures. But this is a natural part of our business. Looking at the development of our 3 market segments. The development in our different market clusters once again confirms that we are witnessing a very broad-based upswing in our markets with attractive momentum in several B-cities in -- especially in the commuter belt of economic centers. Actually, all the 3 different markets classes in our portfolio currently show a very similar development, with a like-for-like rent growth of between 2.5% and 2.8%. Thereof, 2.8% in higher-yielding segments, and also with a rising occupancy rate of between 30 and 50 basis points. Although there are, of course, very different base levels for this development. Slide 7. The positive development in our market segments is also based on the performance of important locations in our portfolio. In our high-growth markets, we saw again a very strong rent momentum in Gütersloh in the Westphalian region, with a growth of plus 6.2%. In Bielefeld, also in the Westphalian region, our rent increased by plus 3.7%. In Monheim, ideally located in commuting distance between the strong A-cities, Cologne and Düsseldorf, our rents grew by plus 3.6%.In our stable markets. We saw again a very decent growth on our important local market Mönchengladbach, with a growth of 3.3%. In our higher-yielding markets, we achieved a strong like-for-like rental growth of around 3.5% in the cities of Duisburg and Gelsenkirchen. These are very strong results, reflecting the positive spillover and catch-up effects in many of these markets, while also keeping in mind the positive effects of acquired portfolios after integration into the LEG platform. On Chart 8, you find our maintenance and CapEx spending in line with our strategy with -- and significantly more for CapEx and maintenance in the first 3 quarters in comparison to last year. We spent slightly more than EUR 20 per square meter in the first 9 months, corresponding to an increase of more than 50% on a yearly basis. This is mainly driven by a higher portion of larger modernization measures and of value-enhancing refurbishments of single apartments. Especially for the investments into the apartments, we saw a shift to more value-enhancing measures also in the course of the year. Accordingly, there is a significant rise of the CapEx ratio in comparison to last year. As we already pointed out in last calls, we estimate that the price effect amounts to some 6%, with the respective negative effect on maintenance expenses in our P&L. But this is reflected in our current FFO guidance. We stick to our investment guidance, where we are going to spend around EUR 30 per square meter this year or maybe slightly more. Accordingly, you can expect an overall strong seasonality in Q4, with the incremental part of the investments mainly coming from value-enhancing CapEx. You can expect a CapEx ratio of at least 70% for the entire fiscal year. With that, I'd like to hand over to Eckhard for more detailed insights on the financials.
Thank you, Thomas, and good morning also from my side. Let us now have a look at the financial key metrics on Slide 10. Our 9-month figures show us on track to reach our full year earnings targets. We continued to improve our operating margins despite higher maintenance expenses, including the mentioned price effect. Pre-maintenance costs, the adjusted EBITDA climbed by 5.9% and the FFO I by 7.9%. Or in other words, the EBITDA margin pre-maintenance costs improved by another 100 basis points year-on-year. This, once again, demonstrates that we continue to achieve substantial efficiency gains with our investment in the process optimization, including digitization. In Q4, we always see a certain seasonality on the cost side, especially for admin costs, but we can guide for an EBITDA margin of more than 72% for the entire fiscal year. Our previous indication was around 73%. Just a minor adjustment, which is mainly attributable to higher maintenance expenses. On Slide 12, you'll find the detailed overview of our FFO calculation. On the NOI level, the increase in staff costs is largely attributable to the hiring of additional craftsman, staff for management of our modernization program and also to some wage inflation. This cost item also contains some one-off expenses. Admin costs are, again, nearly flat. Hence, we were largely able to compensate for wage inflation and, for instance, for the increased regulatory requirements, such as rising costs for compliance, et cetera, which is a good result. Moreover, a further reduction of the interest expenses in spite of a rising debt volume also helps to improve our FFO. Coming to the NAV development on Slide 15. Here you find the calculation of our current reported NAV. As you know, after our interim revaluation in Q2, the next portfolio appraisal will take place in Q4. As of end of Q3, our reported NAV, excluding goodwill, stands at EUR 90.21 per share. This equates to a year-to-date performance of 7.6%. Including the dividend of EUR 3.04 per share paid out in May, our business model generated a total return for our shareholders of 11.3% year-to-date. There is further capital growth ahead. We are currently in advanced stages of our portfolio valuation, and we are now feeling quite comfortable to guide for another valuation uplift of around 4% or some EUR 390 million to EUR 410 million in Q4. I can add some more color on this during our business update. The current rental yield of the resi portfolio stands at 5.7%, a comparatively high level in comparison to what we are seeing currently in transaction markets. Additionally, also the value per square meter of around EUR 1,150 is still at a very low level also in absolute terms. It remains important to keep in mind that LEG's business also contains additional value components, such as the highly value-generating service business, which is not part of the NAV. Looking at our forecast for 2019. We believe that the service business can produce an FFO of around EUR 19 million. This implies without any growth in the years beyond, a potential value of this business of some EUR 4.60 to EUR 6.90 per share, depending on the discount rate.Coming to Charts 17 and 18. Our LTV as of end of Q3 stands at a still level of 42.7%. This ratio already includes the financial impact from the acquisition of around 3,750 units from VIVAWEST, which transfers ownership in Q4. At the current stage of the cycle, we view an LTV of 40% to 45% as appropriate for our business model. Currently, we have a firepower of around EUR 300 million to EUR 400 million for growth investments. The expected valuation uplift in Q4 will lead to a further decrease of the LTV, but we will definitely not become overly aggressive on gearing up the balance sheet. The following Slide 19 is a well-known overview of our financing structure. Including our short-term financing instruments, our average cost of debt stands at around 1.6% with an average remaining maturity of more than 7 years. In conjunction with the acquisition and some early refinancing, we are just in the process of successfully extending the average maturity profile while keeping the cost of debt stable. Hence, we are working on a rising visibility for our investors for a long-term secured stable earnings growth profile. With that, I will come to our business update with the summary of some major topics we are dealing with. As already mentioned, our guidance for the year-end valuation is a revaluation gain of around 4% or some EUR 390 million to EUR 410 million. As usual, we will provide you all the essential details with our next earnings release. But I can already add some more color on the broader picture. We expect that the capital growth will be driven by both yield compression and sustained positive outlook for future rent growth. Our industry is seeing some rising pressure in the current political landscape although the single discussed regulatory measures should not have a major impact on the underlying dynamics of our business. The development of the market rent is a relevant parameter for our revaluation model. The development, at least for the foreseeable future, should be largely unaffected by the regulatory changes. And therefore, it does not have an impact on current valuation. You can also expect that the general trend in the German resi market, the very attractive momentum in many B-cities, will also be reflected on the valuation side. In our next valuation update, we expect very positive momentum for capital growth, for instance, in cities such as Dortmund or Mönchengladbach. Structurally, there will always be certain lagging effect of the portfolio valuation relative to the development in the investment market. Although liquidity in the market is very low, it is, in my opinion, fair to assume that there will still be a decent gap between our reported IFRS value and the prices for portfolio deals which are currently observed in transaction markets. We aim to exploit the favorable market environment also with our disposal program as part of our capital recycling strategy. There was kickoff of our marketing activities and we received a very encouraging feedback. There's strong investor interest, and we are not selling our trophy assets. The portfolios mainly consist of noncore assets or of properties in peripheral areas with a lack of critical mass for efficient portfolio management for us. They are highly accretive for some investors, nonetheless. We have recently seen some changes in the financing environment with rising volatility of corporate credit spreads in the bond market. First of all, we are very happy that secured mortgage financing, where margins did not move at all, remains the core of our financing strategy. Actually, we even saw some further slightly decreasing margins from the one of the asset bank. For the financing of our acquisition, we decided for a combination of secured and unsecured financing. The spreads were around 60 bps for the secured part and some 110 bps for the unsecured part, still a very attractive level for a 10-year financing. We also decided to take advantage of the very favorable environment especially for secured financing with some early refinancings. We are just doing the final steps of the financing of a total volume of EUR 480 million at an average cost of debt of 1.65% and an average maturity of 10.2 years. This will help us to extend the pro forma maturity profile by roughly another 8 months. This underpins our clear strategy to maintain a long-secured maturity profile and an equity story with high visibility for stable future earnings growth. The refinancings will also contribute positively to our 2019 FFO numbers. With that, I will hand back to Thomas for the outlook.
Thank you, Eckhard. Let me conclude the Q3 presentation with a summary of our outlook for 2018 and 2019 and our first guidance for 2020. Including the mentioned sectors, we reiterate our FFO guidance for the years 2018 and 2019, which does not necessarily mean that you should expect the results at the upper end of the guidance ranges. In a still very favorable environment, we have to state that we are also facing certain headwinds. We are, for instance, calculating with the compounding effect from higher cost inflation on maintenance costs of some EUR 6 million in 2019. The anticipated broad mix of regulatory changes, although they are still very difficult to quantify, will also leave a certain dampening effect. Nevertheless, we expect a continuation of our robust earnings growth also in 2020. In numbers. We expect an FFO of EUR 315 million to EUR 323 million for 2018. For 2019, the EUR 338 million to EUR 344 million guidance also remains unchanged. The initial FFO guidance for 2020 is a range of EUR 356 to EUR 364 million. Owing to the rising risks on the regulatory side and for the timely execution of the modernization measures in current environments, we decided to slightly lower our assumptions for the rent growth in 2019. Maybe let me add a remark to the expected margin development. We are clearly striving for further expansion of our operating margins, and we are seeing good progress in improving our efficiency steadily. In 2019, however, there will be a negative one-off effect of EUR 4 million from our recent acquisition, which has a temporary smaller dilutive effect on our margin. As you know, our guidance does not include any effect from future acquisitions or disposals. Ladies and gentlemen, thank you for your attention. With that, I'd like to open up the call for your questions.
[Operator Instructions] The first question is from the line of Valerie Guezi of Exane.
I just have 2 questions. The first one is on your EBITDA margin. In the previous quarter, you flagged that you had some higher maintenance cost, but you seemed confident that you could still achieve your -- the margin you guided for. So I was just wondering if you could tell us, has anything happened in the last quarter that makes you less confident now? That's my first question. And my second question is on disposals, your disposal program. So you've started talking to investors. So I was wondering if you could give us some color what type of buyers are interested. And also, do you expect to sell at NAV? Or do you expect to sell at a substantial premium to your book value?
Yes, Valerie, this Eckhard speaking. Maybe to the question regarding the EBITDA margin. I think we flagged that we have calculated -- also in the previous calls, we have calculated with a cost inflation of around 3%, and now we're seeing more 5% to 5.6%. And we also said that this leads to the fact that it becomes increasingly difficult to reach the upper end of the guidance range, and the 73% for 2018 were related to the upper end of the guidance range. Therefore, I think that's nothing new and this is just basically in line what we said also in the previous earnings call. The 73% for 2019, as Thomas said, they are caused by this temporary effect, the one-off effect from the VIVAWEST transaction, the one-off payment of maintenance expenses, the CapEx effect of basically of EUR 4 million which we will remove in 2019. To the disposals, well, we have just started the kickoff process on EXPO REAL. As we said, we have received a very encouraging feedback. And we currently have started the negotiation process, therefore, we cannot disclose too much detail here. But certainly, we will not sell below NAV, and we currently see certainly also some headroom that the prices are above our currently stated [ outlets ], we'll use that, I think we can become more concrete. And if everything went well, I think the transfer of ownership could be maybe mid of 2019. So that's our current plan. But we cannot become too concrete due to the ongoing negotiation process.
The next question is from the line of Christopher Fremantle of Morgan Stanley.
I wonder if you could just give us or remind us of the CapEx assumptions that you're making for '19 and '20 in euro millions if possible, as well as on a per square meter basis. Whether those have changed at all as part of your guidance, that'd be helpful, please.
Yes. So basically, the CapEx assumptions remain unchanged and we have -- overall, we have guided for investment of around EUR 30 for 2019. Due to the cost inflation, there's a strong cost inflation expected, we have adjusted that slightly to EUR 32. So it was previously EUR 30, and I think that's a reflection of the price inflation. One important part, as you know, is our additional value-enhancing modernization program. These assumptions are basically unchanged, EUR 80 million. And also, the hurdle rates, the IRR 6%, is also unchanged for '19 and '20.
Your next question is from the line of Kai Klose of Berenberg.
I've got 2 quick questions. The first one is regarding the like-for-like for the full year, where you are confirming the 3%. Could you indicate where the uplift will come from, from 2.7% as of 9 months to 3%? Is this coming from new lettings or partially from CapEx, from the result from CapEx spending? I think we actually expect slightly higher costs. Could you maybe also indicate if the expected returns on CapEx and whether this spending has also somewhat changed or has somewhat reduced -- decreased?
Well, your first question, the slight acceleration of rental growth from 2.7% to 3% mainly comes from the impact of the modernization program, which will kick in, in Q4. So this is the impact of the EUR 80 million program where we do expect the acceleration. And the returns, I think I have said that the returns for the modernization program, the assumptions remain unchanged. And as we also have said in the call that we also have expanded into wakened apartments, where we have seen better chances now to let them and where we've seen in the past maybe not too attractive returns. And therefore, we have also shifted part of the budget into existing apartment into turn costs. We don't see in every case a significant rise in rents, but this has a positive impact on the occupancy levels in the midterm. So if that answers your question.
The next question is from the line of Jason Ball of ING.
I was just hoping you could maybe expand a bit on the regulatory impact of rental growth. It's taking down the 2019 guidance a bit, and how that squares with expectations for accelerated growth in 2020. Is that mainly sort of modernization? Or how do you see the sort of puts and takes there? And then the second question would be on the strong momentum that you referenced in the B market -- the B-cities, with further yield compression there. Can you maybe talk a bit more specifically about how the valuation gap in your portfolio has evolved between there and the market, and is there scope for regulatory impact on valuations sort of more in the medium to longer term?
Yes. So the -- so your first question, Jason, was about the impact of regulation, right. I think what we can state is that we have seen now a more regulatory headwind than we have discussed in the past. For example, the extension of the reference period, that was now the most recent proposal. We have discussed the reduction of the modernization cap from 11% to 8%. And what we are also seeing is some headwind. You know that we have -- we are in 160 different municipalities and that we have also -- we see also the headwind in the discussions when the Mietspiegels are derived. And every single measure, I think, does not have a significant impact. We said that while, approximately, the extension might have an impact of 10 basis points, but it's more or less a combination which led to the fact that we are now becoming a little bit more cautious on that. So it's a bundle of different measures which -- yes, which gives a little bit more defensive view I think regarding the rent regulation. And also, the discussions we have seen recently with the extension of the reference period by 2 years, that was not part of the coalition treaty, as you know. That was a proposal of the Social Democratic Party, and they're trying to position themselves more on the left wing part of the political spectrum. And we will have to see how the political situation will evolve in Germany, particularly after the announcement from Angela Merkel, I think. Will this have -- the regulatory environment, will this have an immediate impact on the valuation? No. Because the most important parameter for the valuation are the market trends for reletting, so that has a very indirect impact. So the in-place rental has only a very indirect impact on the reletting. And you know that it's even very difficult to forecast the impact of the regulatory changes on the Mietspiegel because most Mietspiegel are really a black box. But for the foreseeable future, I would not see a significant impact on our portfolio valuation. And the impact -- so your second question, sorry, was on the impact on -- of -- on B markets, right?
Yes, exactly. Maybe specifically sort of how the valuation gap that you've talked about in the past has kind of evolved in the wake of you're describing further yield compression in the market. Just sort of curious if you can update us on kind of how the portfolio valuation stands versus those -- that transactional evidence that you're seeing?
Yes. Well, I think as I said for the current valuation, which is expected to be finished in Q4, we cannot provide too much detail. I guided for the direction, that we've seen some stronger valuation uplift in the stable markets. I have mentioned Dortmund, Mönchengladbach, but also Essen is a good example. And what we are seeing is clearly that the momentum in the stable market, the valuation momentum is stronger than in the higher -- in the high-growth market. So we have seen a strong growth momentum in the high-growth markets in the previous years. And now the B markets actually are clearly accelerating with a double-digit valuation uplift for the full year in some markets. And that will be, I think, the third wave of the cycle. You know that our yield in the higher-yielding markets, currently it still stands at an extremely high level of 7.1%. And we are seeing also the [ lower ] effect to the higher-yielding markets that Thomas mentioned. Very encouraging rent development in Duisburg and Gelsenkirchen, for example, 2 prominent examples for higher-yielding markets with a the rental growth of approximately 3.5%, which will be also reflected, I think, in the current valuations. The gap between IFRS values and market values, transaction markets, I think it's getting increasingly difficult to answer that question given the low liquidity in the market. We and you know, by definition, they're a market where you should reflect the scenarios, the transaction markets where they are trapping -- they are lagging behind the transactional reality, particularly in dynamic markets we are currently seeing. For smaller deals, I would say the delta, the expected delta by the end of the year, will be still between 5% to 10%. That's my observation. But we are also seeing examples where transaction prices are 25% to 30% above our IFRS values. So -- and that's not a statement that we observe, that prices are still rising and that we believe that there will be still a decent gap between IFRS values and transaction prices by the end of the year.
Got it. Okay. That's very helpful. And just to clarify a comment that you made initially about the regulatory impact. Did I hear you say that, that would be somewhere around the neighborhood of 10 basis points on rental growth?
Well, this is only -- as I said, that's only an isolated view on the proposal of the expansion of the reference period from 4 to 6 years. But there is -- I think that's only one aspect. But the combination of different regulatory proposals, I think, led us to the reduction of the rent guidance for 2019. But one remark, we have reduced the guidance by 30 basis points, and this will have an annualized effect by maybe a maximum EUR 2 million, yes? So we are not talking about a completely different business model. And here, I think it's more a signal that we want to be very transparent, that we see -- that we are facing some headwind. But this headwind does not change the underlying business model and the fact that we have still a significant imbalance between demand and supply, which will remain, in our view, the most important driver for the rental growth. And if you look at our guidance for 2019 and 2020, I think that's a clear signal that we do expect further sound earnings growth for 2018. I think it's an FFO growth of 8% from '18 to '19 or 7%. And for 2020, we do expect an organic growth of 5%, plus the initial impact from the VIVAWEST deal, the EUR 5 million. I think that is clearly in line with our previous guidance, but it's just our intention here to be very transparent and to give you a clear view what we are currently seeing in the political discussion.
Your next question is from the line of Thomas Neuhold of Kepler Cheuvreux.
I have basically 2. The first is related to the cost inflation topic. I was wondering if you can provide us with more details for which cost items you currently see they're the biggest cost inflation. And that I was also wondering what kind of cost inflation you have built in your guidance for '19 and '20. And I was wondering if you think a higher share of insourcing activity could have a positive impact on cost inflation or not. And the second question is on your acquisition capabilities. Obviously, the investor market is getting stronger and stronger. What is your view on your possibility and capability to do acquisitions in the next couple of quarters?
So I can start with the cost inflation. As we said, so we have calculated in our previous business plans around 2.5%, 3% and what we are probably seeing is more 5.5% to 6%. And we have penciled in for our modernization CapEx and also for our maintenance some 5% for the next 2 years to take the scarcity of craftsmen we observe currently in the market to take that into consideration. So '19, '20, that's around 5% cost inflation for this. Can insourcing -- or could further insourcing reduce that cost inflation? Well, the market for craftsmen is an extremely liquid labor market and you have to pay competitive wages. And in our view, it does not really make a difference if you have insourced or outsourced the services, because even if you have insourced the craftsmen organization, you simply have to pay competitive prices; otherwise, people simply go away. So that is really -- it does not really make a structural difference. And so we feel quite happy with our decision. And we can maybe look at the insourcing, one or the other part of our maintenance budget maybe for term costs. But our strategic view on insourcing versus outsourcing is basically unchanged. That means that we want to keep our flexibility even if maybe an over-proportional level of CapEx spendings will be reduced in the future. So that's a [ breathing ] organization and we are quite happy with that. For the acquisition, well...
The acquisition capabilities, I'll take this question. First then, it's fair to say that competition has become fiercer over the last 2 years. And there is no real competition from larger management platforms and we see rising -- still we see rising prices. The market environment overall for acquisitions remains very tough. And as you know and as we have already discussed, there is very low supply in the market mainly consisting of smaller deals. And there is a huge competition for such smaller deals. And what's important to note that the competition comes from bidders with no return requirements. We are very happy that we were able to buy portfolios in such environments in 2017 and in 2018 with a noticeable positive impact on our numbers. Currently, we are still working on some smaller deals, but only on some smaller transactions. But this can always change very quickly, as you saw with the acquisition we announced with the VIVAWEST deal.
Yes. And maybe about the firepower, the capabilities, as we've said EUR 300 million to EUR 400 million. If you make the math, we have a current LTV of 42.7%. Our corridor is 40% to 45%, with the 45% we view as a maximum. With the calculation, if you do the math, we will return to some 41.1% after the revaluation in Q4. But we also have a clear commitment that we will not become overly aggressive here and that we will not lever up the balance sheet too aggressively.
[Operator Instructions] The next question is from the line of Mihail Tonchev of Kempen.
Two questions from me. On the cost inflation, so obviously, it's pushing the prices up. But is it also causing you to miss out on some projects that you would have liked to do given the labor market friction? And then the second question is really a follow-up on Jason's question on the like-for-like rental growth. So clearly, the trends are there are headwinds and the trend is a little bit lower than before. But then why are we seeing still an increase from 2019 to 2020 in terms of 3% to 3.2% for '19 and 3.2% to 3.4% for '20? Shouldn't the trend suggest that we should stabilize at around the 3% level? Or am I just looking at it wrong?
Well, the like-for-like rental growth guidance for 2020 is simply due to the fact that we have a rent adjustment for the rent-restricted units. The last rent adjustment was in 2017. So for 2020 is the next adjustment, this adjustment will depend on the CPI. And we have calculated now some 30 to 40 -- 30 basis points basically coming from that. Therefore, the guidance is higher then in 2019 where we will have no adjustment. And sorry, your third question, I'm not 100% clear that I understood right. Can you repeat that question, please?
Yes. I was just curious whether the cost inflation is causing you to take on less projects just to lack of availability. Or is it you're still doing all the projects, it's just the costs have gone up?
So we are doing the projects. So I think the pipeline, as that's mainly referring to our modernization program, I think we can do that, but we have only focus rising prices. And what we said, sometimes maybe it can come to a delay, so the timely execution against the backdrop of the scarcity of craftsmen is something that's ambitious to manage out, I would term it that way. But we are quite confident that we can do that.
[Operator Instructions] There are no further questions at this time. I hand back to Burkhard Sawazki for closing comments.
Ladies and gentlemen, thank you for your participation. As you know, the IR team and I are available also after the call to answer your questions. So please feel free to give us a call or send us an email. Thank you and goodbye.
Bye-bye.
Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.