Deutsche Wohnen Ag Ord

Good morning and welcome to the earnings call of Deutsche Warnung SE regarding the Q1 results of 2021, hosted by Mr. Michael Zahn, CEO, and Mr. Philipp Grosser, CFO. The presentation of the call is available on Deutsche Warnung's website in the investor relations section. For the duration of the call, you will be on listen only. However, at the end of the call, you will have the opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad and you'll be connected to an operator. I'm now handing you over to Mr. Michael Tsang, CEO, to begin today's conference. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to our Q1 earnings call. Thank you very much for dialing in. In a moment, Philip will take you in detail through the financials. Before that, I would like to give you a brief overview of the current overall situation and key developments as mentioned on page four of the presentation. Fortunately, we are currently seeing declining incidents, cases, and the pace of vaccination is picking up. We at Deutsche Wohn are also currently looking into setting up our own vaccination center at the company. In the meantime, We have made it possible that all employees can take a rapid test if necessary. We succeed in further mitigating the impact of the Corona crisis. We look with confidence at the year 2021. In line with our expectations, the first quarter was positive. All key performance indicators show solid developments. Turning to page 5 of the presentation, I am pleased to report that there is finally clarity with regard to the so-called Berlin rent cap since mid-April. As you know, the Federal Constitutional Court has declared the rent cap unconstitutional and void. Though Chevron welcomes the Court's swift decision, it provides legal certainty for all parties concerned. The responsible Berlin senators have repeatedly pointed out that the remaining amount must be paid in the event of a negative court ruling. Deutsche Wohn also emphasized this at an early stage. Also, Tenants have been able to prepare themselves for this. We know that this can be a challenge for some of them. That is why I would like to explicitly underline once again, we will implement a settlement of the outstanding balance with the greatest possible social responsibility. In the meantime, we have informed all tenants about how we will deal with the remaining amounts. We are very aware of the tense situation on the Berlin housing market, and we are also aware that many tenants have come under pressure, particularly as a result of the Corona crisis. Our promise is unconditional. No tenant of the Chevron will lose the apartment as a result of the Federal Constitutional Court's ruling. We offer numerous options for setting the remaining balance, taking into account the respective financial situation of the tenants.

We consider installment payments to be particularly useful. We offer variable terms so that the monthly amount does not become a burden. To put this into perspective, 80% of tenants to whom an additional claim is addressed pay less than 500 euros.

The average amount of additional claims for all affected tenants is 430 euros, not per month, but added up over the entire period. If it is not possible for tenants to pay in installments, we will offer other options, for example deferments. We seek a Fair balance of interest between all parties involves tenants, employees, and shareholders.

With our approach, we are acting fully in line with the biggest association which represents around 44% of Berlin's housing stock. The decision on the rent cap Thank you. promise to tenants continues to apply. It prevents financial overcharging.

In the event of a rent increase, no one has to pay more than 30% of their net household income for rent. We have also set ourselves the goal of creating more housing space in Metro. metropolitan areas. We are convinced that nationalized real estate companies, as some political actors are currently calling for, will not solve the challenges.

On the contrary, only reliable framework conditions and able investments

in the housing market that contribute to the solution. And the top priority, clearly, is new development. We are contributing to this with our stake in the quarterback platform and will build around 80,000 apartments in Berlin, Dresden, Munich, Frankfurt, and Stuttgart over the coming years. Around half of these are earmarked for Deutsche Wohnen's portfolio. All new buildings will be designed to be energy efficient and certified with sustainability standards. But that's not all. Deutsche Wohnen will also make its portfolio and administration climate neutral by 2040. After all, climate-friendly buildings make a significant contribution to climate protection. With clear milestones, we will provide transparency and inform you about progress in terms of climate neutrality on a regular basis. With this strategy, we are going well beyond what was agreed in the Paris Agreement and even beyond that what the German government recently demanded. We are starting today with a low CO2 footprint compared to the industry. We are well prepared. We will systematically increase the proportion of new buildings. We will continue to increase our efforts in the energetic renovation of buildings. Here, the political pressure to create the right framework conditions has increased after the judgment of the Federal Constitutional Court. This will, in my view, increase the acceptance of energetic renovations. Protecting the environment costs us a lot of money. I expect significantly greater efforts by the future government to provide incentives for saving simply CO2. There is no alternative to the production of electricity from renewable energy. In this area, too, we are strategically well positioned with our partners and will be able to take advantage of the opportunities that arise. We all know that the climate goals are decided in the cities. This is where I see the greatest challenges and of course the biggest opportunities. Our portfolio orientation therefore offers great opportunities in the future. That is my personal conviction. Based on this, we have realigned our portfolio over the past three years and we will continue to reorganize our portfolio over the next years. So summarized, in my view Deutsche Wohnen is in an excellent strategic position to continue and offer growth, make its contribution to society and thereby take into account the legitimate interest of all In this context, orientation toward ESG criteria is a key guiding principle of our actions. For this reason, we will also submit a new system for the executive board compensation to our shareholders for approval at the annual general meeting, a compensation system that includes an even stronger consideration of ESG targets with a significant share of the long-term variable compensation. And with this, I will hand over to my colleague.

Thank you, Michael, and a warm welcome also from my side. Yeah, it's after more than a year that today's results mark actually the first quarter where we are facing legal certainty again. The decision of the Constitutional Court on the Berlin rent freeze is in line with our expectations and guidance, and the new Berlin Rent Index provides a helpful and much needed instrument to shape rental contracts going forward. As a short general notice before starting with the financials, please note that the decision of the Constitutional Court is considered as a so-called value-revealing event. And for that reason, the Berlin rent freeze law is to be considered as if it has never existed. That is why the Q1 numbers already reflect previously agreed rents based on federal regulation, as well as subsequent claims vis-à-vis our tenants with regard to the Berlin rent freeze law. Let me start with page seven, our portfolio overview for the residential business. The average in-place rent of our portfolio is seven euros and 11 cents per square meter and month. And that is 40 cents or 6% above the level at year end 2020. And the strong increase obviously is because of the Berlin rent freeze which is not included anymore in Q1 numbers as just mentioned. In Berlin market, we see normalized rent levels of seven euros and nine cents, with re-letting rents of almost nine euros. Our reversionary potential is consequently back at levels of around 25%. The average value per square meter is unchanged at 2,700 euros per square meter, and that is translating into a gross yield of 3.2% and a reversionary yield of 4% respectively. Asking prices for multifamily homes continue to rise. In Q1, we have seen average prices of 3,400 euros. That represents a discount of around 25% to our fair values in Berlin of 2,850 euros. It remains to be seen as to how the decision of our highest court on the Berlin rent freeze will feed into the transaction market going forward. For the time being, there are no significant data points given that the decision has only been published a few weeks ago. As mentioned previously, I consider the Berlin market as one, if not the, most attractive market in Germany. Against this backdrop, I clearly expect further increases in property valuations. On page eight, you can see that like-for-like rental growth came out at 1.3% for the total portfolio. The like-for-like comparison is based on civil code rents only. The major driver of growth is driven by re-lettings, as we did not implement regular rent increases or modernization charges during the last 12 months in response to the corona pandemic. With the publication of the new Berlin Rent Index, we communicated to refrain from implementing rent increases in 2021. By doing that, we underline our social responsibility. Furthermore, we aim to contribute to an easing of the housing situation in Berlin, especially in times of the pandemic. The decision, though, will not have any impact on our guidance for 2021. Beyond 2021, I would expect that we return to a somewhat normalized rental growth of some 3% in the current regulatory setting, and that is mostly driven by investments in context of re-lettings and modernizations. Let's move to page nine, investments. While maintenance costs were stable at around 21 million euros, refurbishment investments reached 40 million euros. For refurbishments, there have been some time delays in necessary approval processes due to the ongoing corona pandemic. For new construction work, we have spent 54 million euros in Q1 and even more than 100 million euros, including the cost for the land plots. As you can see, we are clearly gaining pace here. Adding all up, we continue to expect total investments of 8 to 900 million euros in 2021, but most likely somewhat at the lower end of the guided range. Page 11, our letting business. Income from rents increased by 3.5% year on year to around 280 million euros. This was predominantly driven by considering rental claims in relation to the Berlin rent freeze law, which amount to overall some 20 million euros, and that is net of the expected rental loss. NOI came out at some 180 million euros so slightly above last year's level. The NOI margin also saw an increase to above 82%. Moving to page 12, our disposal business. As you can see, our privatization business continues to perform well. The average gross margin for privatization remains at levels of around 30%, though at the guided low volumes. Here, the average disposal price increased again by 14%. Condominiums in Greater Berlin reached levels of around 3,600 euros per square meter. For the institutional disposal business, the figure mainly includes one disposal to Digivu, a state-owned housing company. The transaction has been already signed end of 2019. However, the last 535 units had closing dates. in Q1 2021. If you look at the margin and the price per square meter, please consider that we are talking about a very challenging product in terms of technical quality and tenant structure. To our nursing and assisted living business on page 13, total EBITDA was at around 20 million euros, which is 5% down on a quarterly comparison, but on track to achieve the annual guidance of 70 million euros. While we had a positive impact of around 5 million euros on the operational EBDR from the compensation by long-term care insurance in connection with the COVID-19 situation, we do see the negative impact from last year's disposal on the EBDR resulting from the assets. To remind you, last year we sold 13 nursing facilities to improve the quality of our portfolio. Even if the situation with COVID-19 is improving and most of our residents have already been vaccinated, it will take some time to increase occupancy again. On page 14, we show the adjusted EBDR excluding disposals, which is 192 million euros. Our EBDR margin came out at around 82%, also positively impacted by the resetting of rent levels after the court ruling. The one-offs are mainly related to a 10 million Euro income resulting from the disposal of the ISARIA platform to quarterback to bundle our development activities under the leadership of the quarterback group as previously explained. If you look at the adjusted EBITDA including disposals, we have seen an increase of roughly 11% year on year thanks to the positive contribution of our disposal business, which has already been accounted for as part of the revaluation of our portfolio previously. Turning to page 15, FFO1 in the first quarter was slightly below €155 million. On a per share basis, FFO1 amounted to 45 cents, which is 13% higher compared to Q1 last year. I would, however, like to remind you that you can't annualize our Q1 results. Most notably, we had the positive 20 million euro impact on rental business following the court ruling on the Berlin rent freeze already incorporated in Q1. Adjusting for this item, you can see that we are fully in track to comfortably achieve our full year guidance of an FFO1 of around 545 million euros. On page 16, you can see the calculation of our APRA NTA, which has replaced the previously reported APRA NAV. The APRA NTA per share came out at 52 euros and 50 cents, so a percentage point higher than year end 2020 due to retained earnings. Not included in the computation of the APRA NTA are transaction costs of some six euros per share which some of our peers adjust for. We do not envisage a half year revaluation of our portfolio in 2021. After the court ruling in April, as I said before, there is still too little transactional evidence for a comprehensive revaluation of our Berlin stock. Against that backdrop, we envisage the next revaluation of our portfolio with year end numbers, which by the way, is also my preferred outcome within the boundaries of IFRS in an election year and all the political noise around it. Moving to page 17, our capital structure. As you have seen, we have recently been able to further diversify our debt structure through the introduction of a green finance framework and the placement of our first green bonds in April this year. This has widened our financing toolbox, especially with regards to the significant investments we need to undertake to achieve our ambitious target to become climate neutral already by the year 2040. The Euro 1 billion green bonds with an average coupon of only 90 basis points for an average term of 15 years is not included in the charts on that slide, given its closing in April. performer for the transaction, the average maturity of our debt financing increases to around seven and a half years. On top, all our funding needs for 2021 are fully addressed. LTV at the end of March 2021 was around 37%, so in the middle of our 35 to 40% comfort zone. Page 18 is just a summary of our 2021 guidance. We can keep it short. Nothing has changed, and we confirm our guidance. Just to remind you, the unconstitutionality of the Berlin Renfrew law was already included in our guidance, so therefore no need for adjustments as our base case has been confirmed by the court ruling. With that, Michael and myself conclude the presentation and open the floor for Q&A. Thank you.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. If you change your mind and wish to withdraw your question, please press star 2. And you will be advised when to ask your question. So once again, if you would now like to ask a question, please press star 1 on your telephone keypad. Thank you for your patience. Our first question this morning comes from the line of Thomas Rotheusler from Jefferies. Please go ahead.

Hi, morning. One question on rental growth outlook. I mean, I think you are still reluctant on rent increases this year, which I understand is COVID and political . On this background, what are your thoughts on rental growth beyond this year? I mean, do you see any chance for significant recovery next year?

Yeah, thanks so much for your question. As you rightly pointed out, in 2021, we have some recovery in rental growth given unconstitutionality of the Berlin rent freeze law. Further, we are still... in the Corona situation and we are in a sensitive year from a political perspective. And to provide an easing to the somewhat heated up situation in Berlin, we have taken the decision not to implement any rental increases, regular rental increases based on the rent index in 2021. Beyond 2021, it's, as I said, I would expect that we return to a somewhat normalized environment. Our base case is some 3% rental growth per annum in the current regulatory setting, and that is predominantly driven by re-lettings. I was mentioning that we do see the reversionary upside of around 25%. We have a tenant churn of 6% to 7%. So that is contributing roughly 1.5% to rental growth. I would add another 50 basis points or so given our modernizations we undertake, predominantly energetic modernizations, as Michael mentioned, for regular increases. I would expect going forward some linkage to inflation, all of that adding up to around 3%.

Okay. Maybe one question on the Berlin rent table. I know you're refraining from rent table adjustments anyway, but do you think this kind of provisional rent table will endure the next two years?

It remains to be seen. It is somewhat challenging from a legal perspective as No data has been collected for the computation of the rent index. So they have basically only done some kind of index adjustment. We on our side will accept and apply the outcome. Because as I said, in the current situation, I think it's for all stakeholders extremely important to have some kind of legal certainty and setting on the basis of which you can develop rents.

Okay, maybe the last one on carbon pricing. It seems there's just a decision on a 50% split between landlords and tenants. So far, tenants paid all. What would be the impact for you?

Thomas, what we hear is that a decision on that price point has not yet been agreed on the coalition partners. We consider it likely that there will be some kind of cost sharing between tenants and landlords as it relates to the carbon dioxide tax. Most likely that will apply as of 2022. If I look at today's numbers, 100% of the embedded carbon dioxide tax, which is currently being priced with 25 euros per ton is 4 million euros, respectively 6 million euros if you include district heating. So if for simplicity reason, you assume a 50-50% cost sharing, that is 3 million euros, but obviously with an upward trend given that carbon dioxide pricing will double in the next five years.

Okay, but it would not be relevant for your guidance.

I mean, 3 million euros is relevant. We are fighting for each and every euro. But I mean, what we are arguing a lot towards is that we are finding a solution in which, yes, landlords also participate in the cost sharing, but in a context of some kind of bonus malus system, which is benefiting landlords as Deutsche Wohnen, who have done a lot and a relatively high share of properties, which are, yeah, state of the art from an energetic perspective.

Thank you. Thank you very much. Our next question this morning comes from the line of Kai Klose from Berenberg. Please go ahead.

Yes, good morning. Two questions from my side. Could you just indicate the 8 million one-offs we had in the adjusted EBITDA calculation? Then I have a quick question on the disposals. It seems that you have not sold out of the small number of non-core units, but out of the core or core plus buckets today. Is this correct? And where do you see future condo sales coming from, from which subportfolio?

Yes, good morning, Kai. The one-off is a mix of two elements. I mean, this year, or this quarter, we actually had one-off income that is predominantly related to the disposal of the operating platform Esaria to quarterback, which was generating an income of 10 million euros. And we had someone on the expenses, predominantly in IT and communication, accounting for 2 million euros. On your second question, disposers, what you have seen in Q1 is essentially a legacy of disposals we have already signed some time ago. As I mentioned, one of that, some 500 units, is based on a disposal to DGVO, state-owned housing companies, state-owned housing company, and that, in fact, is stock in Berlin. And the second one is the disposal we have signed last year to LEG, and the small portion, the remaining portion, has seen closing in Q1 this year, and that is predominantly Cologne area, so equally Core Plus. But as I said, both in terms of product quality not the kind of product we are targeting strategically long-term.

Sorry, Kai.

Strategically, it's obvious. We present, I think, one year ago, our portfolio strategy and give you a guidance what we want to sell over the next years. And the biggest part was the so-called non-strategic portfolio. And if you're analyzing this, you can see, you will see that the biggest part of this is Berlin and western parts of Germany. And that means simply we have some stocks in Berlin where we think we should sell the market based on quality, based on neighborhood, based on perspective. On the other side, we want to focus our portfolio, as we said in the last call, to the top eight cities, mainly driven by new construction. And this is simply the goal also for the next year. So this year, I expect... further disposals in the western part and some disposals in Berlin.

Thank you. We now have a question from the line of Mark Mosey from Bank of America. Please go ahead.

Thank you. Very good morning to you both. Thank you for the question. Can you please share your views on the current political situation and debate around further regulation or stricter regulation at a federal level? And precisely, I would like you to tell us what you're thinking about a potential Green CDU coalition, what that could mean to the current Greens manifesto to regulate further the the residential market, and precisely on those two points, number one, calculating the Mitch Piggle over 20 years, is that feasible? How do you see that? And number two, how do you interpret the 7.5% maximum rental growth over three years? Does it include only modernization, or is it also including part of the market, underlying market rental growth? Just wanted to have your thoughts on that. Thank you.

Mark? First of all, we are simply in an election year. That means we have a lot of rumors and populistic discussions in Germany. And you are right, especially the left-wing parties like the Greens and also parts of the social democratic parties mainly. coming from the bigger cities, ask for tightening the market. What we should see is simply housing is a topic. And that means we have to offer to the political solutions. And I think it's a combination of how can we achieve our climate goals on the one hand side, on the other side, how can we pay? How can we... stabilize the situation for tenants and therefore I'm quite optimistic that we will see in the next legislation government which will offer a lot of incentives on the modernization side and we see this beginning in June but I see more first and second It's a little bit the same discussion as on the CO2 price. At the end, landlords, tenants, and the state have to divide the cost. So I would say today, yes, indeed, mainstream is highly, highly dominated by left-wing parties. So it's interesting to see what we will see from the conservatives, the program. But at the end, I think we should be optimistic. Yes, we can discuss cost risks on the one hand side, driven by CO2 and other things. On the other side, I think everybody has understood and has anticipated that Without the private sector, without bigger companies like Deutsche Wohn, we will not achieve our climate goals. And climate goals is a topic for us, but a special, I think, a good chance for the industry to come in an active role and be an active part in the further discussions.

Thank you.

Thank you very much. Ladies and gentlemen, as a reminder, if you are still wishing to ask a question, please now press star 1 on your telephone keypad. Thank you. And as one final reminder, if you are wishing to ask a question today, please now press star 1 on your telephone keypad. Thank you very much for your patience, everybody. There are no further questions coming in, so I'd like to thank everybody for joining today's conference call. The next earning call of Deutsche Wohnen will be on the 13th of August 2021. If any questions do come in in the meantime, please feel free to contact the IR team. Have a good day and bye bye. You may now replace your handsets.