Vonovia Se Ord

Ladies and gentlemen, welcome to the Vonovia full year results 2024 analyst and investor conference call. I'm Moritz, the chorus call operator. I would like to remind you that all participants will be in the listen-only mode and the conference is being recorded. The presentation will be followed by a question and answer session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to René. Please go ahead.

Thank you, Moritz, and welcome everybody to our earnings call. The speakers today are once again CEO Rolf Buch and CFO Philipp Grosse. They will be happy to lead through today's presentation and then answer your questions. We have divided today's presentation in two sections plus the appendix. First, the big picture overview of our business and the general environment in which we operate. and second, the full year 2024 update. Rolf will be starting off with a preface to put the last two weeks into context and provide a framework for a view on the consequences for our sector. And with that, over to you, Rolf.

Thank you, Philip, and good afternoon also from my side. Allow me to start today's presentation with the following preface. This is actually on page three. Our earning call today takes place in an environment and sentiment that is different than from two weeks ago. The situation is still very much in flow, and we believe there is limited visibility on the exact consequences, especially in the medium to longer term. But let me take back a step in describing what I think are the different phases in Vonovia's development. I think it is important to understand this evolution in order to appreciate the future potential. From my point of view, Vonovia has gone through two distinct phases and currently stands at the beginning of the third phase, which is return to growth. For more than eight years after the IPO, we made use of the highly favorable interest rate environment and built a platform that delivers higher cash flows, better margin, and superior quality than any other platform and where the assets are located in the right markets. Then came the war in Ukraine and the abrupt changes in interest rates that led to an increase in our cost of capital. We changed gears and went from offense to defense. This second phase was mainly about protecting our rating and balance sheet. Now, since Q3 last year, We are at the beginning of the third phase in Vonovia's evaluation, where we can return to growth, but less capital intensive. This means an acceleration on our non-rental EBITDA and leveraging our platform and scale to expand our service business in a less capital intensive way. In doing so, we will combine our growth ambitions with financial stability and capital discipline. However, The event of the last two weeks have now led to new uncertainty. The increase in Bund yields appears to be primarily driven by the market's expectation of a massive increase in German Bund issuance to finance the planned military and infrastructure investments. What is still unclear for me is how strong and sustainable the increase in Bund yield will be at the end of the day. Given that the planned investments are expected to be made over 12 years, not nearly all funding will be required on day one, and the timing will largely depend on specific planning approvals, where we are specialists for in Germany, capacities and others. It is simply too early to draw a definitive conclusion from recent events. While Bund Yield levels have certainly not the only driver for residential asset values, the actual impact of the recent event on property prices remain to be seen and cannot be reliably terminated yet. Similarly, high Bund Yields for long run would lead to elevated financing costs, but we just do not know. And on the flip side, the spending bill will include material positive elements that will support our efforts in terms of modernization and new construction, as we expect sustainable investments in climate protection already announced, energy and housing. So yes, new headwind for the sector, but also opportunities, and both cannot be reliably estimated to form a clear view on what all this means for the sector, especially in the medium and long term. So how do we react then? The last three years have confirmed that we are well advised to refrain from unique jerk reactions, but to continue to manage the business with a steady hand. And adjustments we made must be in a careful and deliberate manner. It was this level-headed approach that allows us to successfully navigate through the last crisis and protect our rating and soften the impact from declining values and higher financing costs. At this point, we do not see an immediate need for action, but we will, of course, monitor the situation very closely. And we will carefully evaluate any potential measures also in the light or medium or long-term impact on our business. The key priorities are clear. We will protect our rating manage our debt KPIs, maintain overall capital discipline, and safeguard the long-term success and long-term growth of our business. What has become less clear is the execution timing of certain non-rental growth initiatives. I'm thinking, for example, for potential stranded assets and development. Depending on how things evolve, we may decide to give priority to more capital-light initiatives. There are lessons learned during the last crisis that will now allow us to focus on what worked and reframe on what didn't work. And this was, for example, the abrupt disruption of the investment program. So the next time, we will not do this again. Let me be clear. While it is too early to discuss any specific measure, We are prepared to take decisive action if and when it becomes necessary. Let me emphasize the following. In spite of a quite different phase I just described, and in spite of the recent uncertainty, one thing is clear. It was the right decision to build our business around the megatrends. Our market fundamentals have been getting stronger and stronger, and our operating business is more robust than it has ever been. So we may face another period of uncertainty, but we can face it from a position of strength in knowing that our business is built on a rock-solid foundation. Let's take a closer look on the most recently available data on asset valuation and pricing. This is page five. The data suggests that value declines have stopped and prices have stabilized. For multifamily homes, this seems to have been the case somewhere towards the end of Q4. The third quarter was minus 0.5, and the fourth quarter was basically zero. For condos, which are always a little bit in advance, it appears that it has been somewhere in Q3, and prices have already been slightly growing recently. We saw minus 0.1% in Q3 and plus 0.9% in Q4. Of course, the valuation of our portfolios mirrors this development, and we have seen a slight gain in H2 in all three countries. Allow me one word on Sweden. We think that the faster return into positive territory is related to shorter financing terms in this country and rent growth of more than 6% as inflation finds its way into rent level faster because of the different regulations. Sure. None of this data includes the recent increase in bond yields, but we have seen in the past that bond yields are not the only factor that impact valuation and prices in our sector. On page five, you see that Q4 last year saw an increase in sentiment and optimism, and page six allows some data to support this. Transaction volumes in Q4 were the highest since Q1 2022. And according to a survey by Ernst & Young Real Estate conducted in January this year, residential real estate is in the top focus for real estate investments this year, with the vast priorities of respondents expecting no change in pricing or even increase in the course of 2025. If you look at the volatility and the turbulence in the capital market. It might be easy to forget the situation our underlying business looks like, since things actually couldn't be more different. During the last three years of higher inflation and higher interest rates, we have seen the supply-demand imbalance become much bigger. And while our residential sector is regulated in a term of how fast you can adjust the rent level to the wider market reality is a different one. The shortage of apartments simply trumps regulation. People are so desperate to find a rental apartment that they are prepared to sign an agreement that is not in line with the prevailing regulation just so they get the upper hand versus a hundred of others who are competing for the same rental contract. And this drives regulated rent via the Mead-Spiegel system, but of course with a delay. This huge gap between market reality and our rents means that our rent growth for many years to come is rocket solid. We already know today, and the speed at which we can catch up with the market trend is about 4% based on our current investment amount of about $1 billion. To the extent we increase that amount, the rent cost will be higher from 6% to 7% operating yields on this investment. Before Philip gets to the 2024 highlights, let me close the big picture chapter with a look at our growth trajectory. I start with the rental business. You saw the strong markets we are in in the previous page. You also saw the huge gap between our rental levels and where the market is, giving us strong visibility on many years of extremely solid rental costs. Combined with the full occupancy and the full rent collection, this creates a rocket solid low risk and highly predictable rental segment that delivered more than 90% of our total EBITDA in 2024. and that will continue to be in the main sources of earning contribution going forward. In addition to that, we are preparing our non-rental business, and we presented the concept to you last November. As a reminder, we are talking about three categories, return to performance, accelerated tax-reported investment, and new business areas. Our ambition until 28 is to close the rental EBITDA by 4%, and the non-rental EBITDA by 30% for a combined total EBITDA growth of around 8%. In terms of EBT, we aim to grow in the middle single digit range. And with this, I hand over to Philip.

Thanks, Rolf, and also a warm welcome from my side. So let's move to the second chapter, starting page nine. Here, the big picture again, we have been seeing that value decline has stopped and prices have stabilized in the last quarter of last year. In addition, transaction volumes are increasing and there is certainly growing market optimism. For Vonovia, we have successfully completed our disposal program for cash generation purposes and seem to have seen the end of the negative price correction for now. As a consequence, leverage is under control and ratings remain in a good investment grade territory. Our organic growth trajectory until 2028 remains unchanged. Here, as Rolf said, we aim to deliver about 4% CAGR for adjusted WDR rental, which is based on a billion investments. And here again, you know that we intend to ramp that up with an operating yield of 6% to 7%, and that is positively impacting the rental as well as the value at EBITDA-R. And against that backdrop, we also expect the growth in our non-rental EBITDA-R to be much more dynamic, more in the magnitude of a 30% CAGR until 2028, and all of that will translate into adjusted EBT CAGR in the mid-single digit. For highlights, 2024, 4.1 organic rent growth for upper end of guidance, Adjusted EBT, a bit softer, but again, top end of our guided range. Operating free cash flow much higher in 2024 as a result of our preference for cash generation over profitability. LTV came down fairly significantly, 150 basis points, and it's now on a performer basis at 45.8%. So almost where we want to be in terms of our target range, 40 to 45%. APRA NTA was down 3.4% year-on-year, now at 45 euros, 23 cents per share. And finally, on the dividend as guided, we intend to propose a euro and 22 cents in the upcoming AGM in May. This is an increase of 36% compared to last year. Let me update you on the disposer side following more than 4 billion euros in 2023. We delivered another 3.8 billion in 2024 for a combined transaction volume of almost 8 billion euros over the last two years. Most recently, you may have seen we sold our nursing business in Hamburg for 380 million euros, significantly above book value, by the way, and that more or less complete our disposal program that we have initiated for cash generation that having said what we are now going to focus on is selling the remaining non-core business of 1.6 billion euros which is still on on our balance sheet we have made our disposals at or above book value at the time at the time and we were proven right i think when we said we would not rush into it I still recall quite a few market participants urging us at the beginning of the crisis to sell at all costs. It's good that we have taken a far more balanced approach because otherwise I think the consequences would have been to the detriment of all shareholders. Moving to page 11, we have the familiar overview of EBITDA, EBT, and operating free cash flow. A couple of comments to put this into context. Yeah, underlying operations and Rolf was alluding to it remain extremely favorable. Rents are growing. There is basically no vacancy, and we are collecting the full rent. On the other hand, we are seeing the drag from disposals on adjusted EBITDA rental that was slightly down because of a smaller portfolio and also more normalized cost levels for last year compared to 2023. Value-add segment is up fairly significantly year on year. That includes roughly 60 million euros from a leasing agreement on our COEX network, something that unfortunately will not repeat itself in 2025. Recurring sales volumes, development to sell both saw higher volumes, but also lower margins that as a result of our focus on cash generation and the increase in adjusted EBT attributable to minorities is due to the annualized impact from the two Apollo joint ventures we entered into end of mid end of 2023. The increase in our adjusted net financial result is related to the higher refinancing cost and also here the full year effect of 2023 financings. Text line item, the increase is the result of increased disposal activities. And finally, the higher minorities in the operating free cash flow, again from the two Apollo JVs, the higher cash dividends. Moving to page 12. Here, we thought it might be helpful to put together all the different buckets that we include these days in our investment programs. So, you see that on the right-hand side of the page. We have the traditional categories you're all familiar with, optimized apartments, upgrade building, and development to hold or space creation. With the non-rental EBITDA growth initiatives, we are adding three additional categories, which are serial modernization, energy cube, and heat pump, as well as photovoltaic. These three are more industrialized, more tech supported, and will allow us to ramp up our investment program from currently less than a billion euros to the targeted 2 billion euros by 2028. The target funding, to be very clear, for the investment program is 60% equity, and we will make sure that this is leveraged neutral, our good performance on the operating free cash flow certainly helps. And as a reminder, I made that point before, all of these initiatives have a yield on cost of around 6% to 7%, so it's highly profitable business class. Page 13, I think I've said it before, highly robust, like a clockwork, no surprises here. Let's go for the next page for the valuation update. Just some additional remarks on valuation. Full year value decline minus 0.9% breaks down into 1.4 in H1 and plus 50 basis points in H2. Our portfolio is now valued at 23.2 times net cold rent or a gross yield of 4.3%. This by reference represents per square meter value of just under 2,300 euros, including the land. And if you compare prices for condos, which are more in the direction of 3,400 euros on new construction, even 5,500 euros, you see the big discrepancy, which in my view is supporting our valuation approach. Moving to page 15 on the financial KPIs. Proforma cash position is currently 3.8 billion euros, 1.8 cash on hand, 2 billion euros still to come based on signed disposals, and by the way, excluding the red blocker in the context of the domination agreement. So if I move to our Proforma LTV, 45.8%, so only slightly above our target range, And here, assuming stable yields, LTV will decline organically as rent growth drives value growth, so the direction of travel should be positive once market is finding its long-term equilibrium. Net debt to EBITDA is 14.5 times, so basically in the middle of our target range, that again, on a pro forma basis. And here, in light of our ABDR growth initiatives, we should equally see that metric declining over time as well. ICR, 3.8 times above our internal threshold. And while this KPI is the most challenging of all the three, I'm still confident that we will be able to maintain it above our internal target threshold as well. Rating agencies, as you know, have maintained their rating and outlook on Vonovia Moody's and Fitch just very recently in mid-February. Page 16 is on the dividends. As I said, we will propose €1.22 to the upcoming AGM. This is a 36% increase and marginally above consensus, but very much in line with the guidance we gave when we said we expect a dividend capacity of around €1 billion for 2024. If you look at the dividend policy, there's an extra €200 million of surplus liquidity, which we have, however, decided to retain and deploy towards the significantly increased investment program for 2025. So, I think this is a sensitive decision. With regards to a potential script option this year, we will be making that decision as usual. at the time of convening the AGM, which we expect to be in mid-April. Scrip option, just as a reminder, remains a year-by-year decision, and that is primarily based on share price level versus our net tangible asset value, but also on the other side, leverage and cash flow considerations. And on a more general note, based on our dividend policy, we aim to pursue the progressive dividend policy with long-term dividend growth over time. Page 17 on guidance, we confirm both 2025 guidance and the 2028 medium-term objectives. There's one line item that I would like to clarify, as there was some confusion last time. The objective 2028 now shows that rent growth of more than more than 4 percent, and this reflects our plans to ramp up our investment program from currently just under a billion euros to 2 billion euros by 2028. And these higher investments, of course, lead to a higher rent growth as a result of adding 8 percent of the investment amount minus maintenance cost to the rent, and that, against that backdrop, should gradually see a move towards 4.5 percent on our way to 2028. And with that, back to you, Rolf, for wrapping it up.

So thank you, Philipp. Before we go into the Q&A, let's summarize. Following the inflation-driven interest rate hike in the wake of the war in Ukraine, our residential market has shown clear signals of stabilization and normalization with the values bottoming out and optimism returning to the sector. Renovia's operating business remains rock solid and we are confident in our ability to deliver on the 25 guidance as well as the 28 adjusted EBITDA growth objectives. However, no uncertainty has emerged from the planned investment in military and infrastructure spending by the German government elect. The amplification, both positive and negative, are still unclear at this point, and we carefully monitor the evolving situation. The last three years have confirmed that we are well advised to refrain from unique jerk reactions, but to continue to manage the business with a steady hand. Contrary of the three years ago, we are much better prepared today and can draw from the lessons we learned over the last three years. The key priorities are clear, protect our rating, manage our debt KPIs, maintain overall capital discipline, but in the same time, And it's the same importance safeguards the long-term success and the long-term stable growth of our business. And this is back to Rene.

Thank you, Rolf and Philipp. And I hand it to our operator, Moritz, to open up the Q&A. Just one reminder to everybody, just like in previous calls, We are going to limit the amount of questions to two per person. And I kindly ask you that you honor this request. So with that, Moritz, let's do the Q&A.

Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchdown telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. And the first question today comes from Valerie Jacob from Bernstein. Please go ahead.

Hi, good morning. Thank you for taking my question. So I've got two questions. The first one is on the dividend. I think last year you came and you gave us a formula on how to think about the dividend and this is the first year after this formula and you've decided to pay a dividend which is lower than the results of the formula. So I was just wondering how shall we think about that and is your objective, you know, purely to grow the dividend and shall we forget about this formula or how do you think about that? That's my first question and my second question is, so you mentioned that despite all the uncertainties, you know you think that there is no need for immediate reaction, sorry, and that you're monitoring what's happening. And my question is, you know, can you be more specific in terms of what you are monitoring and you know, is it the response for the credit agency? Is it you know the sentiment from market participants on prices. If you could be a bit more specific, that would be helpful. Thank you.

Thanks, Valerie. On your first question on the dividend, we have a dividend policy in place, which is 50% of EBT and surplus liquidity. But at the same time, I think we are still in a more Rough environment, if you, if you will, if I, if I look at the performance of operating free cash flow in the last 3 years, this obviously was highly impacted also by us polarizing. Cash over profitability in order to deliver the balance sheet. So the basis for operating free cash flow, in my view is not quite a sustainable 1 and 2nd, as we ramp up our, our investments going forward. I think it's prudent. uh that uh yeah so to speak shareholders have to live with only a 30 plus increase in the dividend actually valerie what we have to manage it's a lot of things we have to monitor of course of course we are monitoring very class for the development of the interest rates hours and the months

We also have to monitor, I think this is the most important task now, the outcome of the coalition agreements which are taking place in the moment, which means we have to understand how much money we get off the 100 billion which is reserved for the environmental, which I think we will get a big part of it. So this, of course, will drive our ability to finance even with higher interest rate. And then we have to pursue also to get a better understanding how the outflow of these 500 billion will happen, because this is streets and bridges and all these, and we have an approval process. So if today's approval process will apply, which is the same as housing, this will take a very long time. So there might be, and I think the government will be forced to revise the whole approval processes, to speed it up because otherwise the money will be spent somewhere in year 10 and 11. So that's why I think this is to be monitored. Of course, we also have to look on the value development. Our assumption is still that increasing rents will be with stable yields lead to a higher value growth. This might be different depending on the cost of capital. So to make it short, We have to understand what the evaluation of cost of capital is not only on debt on the equity side. We have to monitor our returns on the different investments, which we have to do. And if we find out that some investments are probably not as attractive with higher cost of capital and probably not significant higher returns, then we will refrain from them. And to be very clear, the most prominent, which is very easy to stop, or to do slower is what we call undeveloped assets or potential stranded assets, maybe just buy a little bit later. Or in the development field, especially developmental, we can start construction places a little bit later. So I think this is the kind of prudence which we now will put to place. But the cost of capital is the most important, which we have to monitor.

Thank you. So, Philippe, just maybe on the dividend, because I don't think I really understood the answer. I understand you want to be prudent, but how shall we think about next year? Shall we just think that the objective is to be prudent and grow the dividend? Because I know that networking capital is highly volatile, but you chose to include it in the formula, so that's what I don't understand.

Yeah, Valérie, again, I think 2024 was very much characterized still by by stabilizing our balance sheet. I think it's fair to assume when we ramp up our investment that the additional free liquidity, which adds up to the 50 percent of EBT, is somewhat pressurized in a positive sense, because if we do more investments coming back to Rolf's point, that means we are earning more than our cost of capital and that by nature is then to the advantage of shareholders. And that is what we have baked in in the decision not to pay on top the full surplus liquidity, but only a portion of that, but still translating into a 36% increase year on year in terms of dividend per share.

Thank you.

And the next question comes from Charles Boissier from UBS. Please go ahead.

Thank you for taking my question. I think a related question, but just to understand your flexibility of adjusting the new strategic plan around the cost of capital. Under what circumstances do you move back more radically to cash preservation in terms of investments, dividends, and disposals? Meaning, you know, going back to phase three, from phase three to phase two, if I refer to your slide three.

So to be very clear, there is in the growth initiatives, there is initiatives which really do not need any investment, so very acid light. And of course, this is not impacted by the changing cost of capital, and we will continue to do so and even probably prioritize this. Then there are some activities like, for example, the heat pump or the serial modernization, which is relatively acid light, so have a relatively high return. and will be significant above our cost of capital, even if the cost of capital is going higher. And this, of course, we will continue as well, because this is a creative power share with us. There are sectors like, as I said, the development to hold and the potential stranded assets. especially in the case of development to hold the yield gap between the cost of capital and our internal on our returns is not very high. So this will be probably the first which will be, which will stop. And for the potential undeveloped assets, it is actually easy. You can do it just a half year later and that's why to be a little bit more prudent. And so if you have more clarity. But the general rule is if we see our cost of capital rising, we will do less investments. And this is a cost taken, and as you know, investments are discrete decisions, investment by case. So this is building by building, modernization by modernization, and this is actually very, can be very granular.

Okay, clear. And my second question is on the feature recent reports, they expect EBITDA to net interest coverage to tighten from the current level. So basically deteriorate. I think you guide for ICR to be roughly stable. So, you know, could you give us a little bit of like a direction for the ICR as to when exactly to stabilize? Thank you.

Yeah, on the ICR side, stating the obvious, our average interest costs are now roughly 2%. And if I look at the marginal cost of debt now with the slightly changed parameters, it's up 30, 40 basis points. So we are currently at 4.3% roughly for a 10-year tenor. So by that, you can see that it will take some time for our interest line to grow into the new financing environment. But given our staggered maturity profile, that only comes step by step. Now for this year, I expect kind of a flattish, small pressure on ICR, but we will maintain that. Above our internal threshold of three and a half times which by the way is at a big safety buffer either be What the rating agencies are expecting just recently? Moody's has has lowered their threshold on the on ICR so there is quite a big discrepancy between our internal target and and and what is rating expecting from us for for the current rating and And then the years to follow obviously depends on the development of the interest rate side. So here I think we should somewhat monitor the markets. But short to medium term, I have no pressure on that side.

Okay, thank you. And the next question comes from Jonathan Conator from Goldman Sachs. Please go ahead.

Good afternoon. A couple of questions on my end. The first one, please, so both kind of focus on growth, but you said, I mean, obviously, there's an uncertain environment regarding also government measures, but it would be really good to understand your current reading of things and how you've talked about the volume of investment, but also the understanding of how that $100 billion could get spent and whether you get any other benefits from the infrastructure fund in general, where you see any impact in terms of subsidies, rental, business and development. The second question is around growth and organic growth, essentially, including investments. If I look at slide 12 and 13, You've got a starting base of Meech Beagle this year of 2.8%. You can presumably think that that's going to stay stable or perhaps grow given the inflation over the last few years. If you want to add as much as potentially $2 billion of investments, say, not even that, that if you do $2 billion at 6% or 6.5%, that's another 4% of rental growth versus the 2.8%. Obviously, I'm sure there's a bit of maintenance here, but the 4% to 4.5% that you're highlighting seems... a bit, you know, underwhelming, there's that potential. So just wanted to understand if your assumption is very conservative or if there's a number of costs that you're not highlighting in there. Thank you.

No, I think for your second question, to be very clear, it might be conservative. Keep in mind that it has to be ramped up so that 2 billion, which we're doing in one year, not necessarily shows up in rental costs in the year because, you know, there's delay because we're investing. So what is important is that you can do your math yourself. it's six to seven or even eight percent of yield on every euro which is invested in which as and mainly in the end so so so this is a mess so you can do one billion more and if you are in a fully steady state then you can calculate the rental growth um from the rent table itself yes you are right there is a trend upwards but as you know the complex rental regulation in germany the 4% with 1 billion is probably more or less a safe side to calculate with. And of course, if it's 2 billion, then it's more. But this is mathematic. For the second thing, what we know for sure already is that 35 billion of this package will be for housing, subsidies for housing. So of course, if we are building housing and we have one of the remaining house builders left in Germany, we will get out of this an amount of money. How it will be structured, is it a percentage per square meter, is it an absolute amount per square meter, is it a subsidy for land, is it a subsidy for we don't know, it's not written, so it's not drafted. So in the moment they are sitting together, forming this coalition negotiations, and I think also it will be not the case that in the end of April we know exactly, we know them some guidelines. Give you another example, our heat pump, which I think you have seen in the capital markets day, which is actually the structured heat pump. You know, there was a subsidy which was given by the old government of 10% for this type of heat pump. And it was then a privileged situation because they had not enough budget that owners of buildings got 70% of subsidies. and we as a landlord only get 30%. So the original plan was that everybody can get up to 70%. So I assume now that there's more money there. So this might be an option, and at least we will lobby for it, that everybody is treated equal, which I think is also an important factor. And this means that the peat pumps will be subsidized not by 30%, but by 70%. So this is So these are examples. So Jonathan, I'm really sorry. I cannot give you an exact, but I just want to give you as much clarity as we have and how we think on it. Of course, if there is more subsidies in heat pumps and if we can get a higher return on heat pumps, we will do more heat pumps. So this is obvious. And if there is no subsidies for new construction and the cost of capital are going up, then we are doing less new construction. as simple as it is. It's individual decisions, so we can really optimize the decisions there. And of course, we will speed up all the investment, all the growth programs, which have no or very little investment. For example, property and asset management services, which actually comes with no investment. We want to speed up there. So that's why I don't see a big change in the growth profile. That's why we stick to the 28 guidance. There might be a shift from more capital-intensive to less capital-intensive dependent on our cost of capital.

Very clear. Thank you.

But to let me just add one thing. If we would not have invented the new growth strategy in Q3 last year, we should have invented it now, because this gives us the possibility to have a good mixture between more capital-intensive and less capital-intensive growth initiatives which we can drive forward. So we have actually 10 parts of driving cross-forward and not only one.

OK, very clear. Thank you.

And the next question comes from Thomas Neuhold from Kepler Schiffl. Please go ahead.

Thank you very much for the presentation and taking my questions. I have one for Philip and one for Wolf. The first one is on cash taxes, which went up quite substantially last year. I was wondering if you can split the cash taxes of $235 million related to disposals and which related to the recurring business and what do you think is your realistic long-term cash tax rate for your recurring business? And the second question is on the development to sale business, page 27 of the presentation. As of when do you plan to reach this one billion investment volume and the targeted 30% reduction average construction costs? And can you elaborate what measures you want to implement in order to bring down construction costs by 30%? Thank you.

Yes, on your first point on Cash taxes, if you look at our operating free cash flow, the cash taxes we show there are basically the cash taxes related to our core business. So it does not include any non-core disposals. So this is only, if you will, on rental value at development to sell and recurring sales. So why has this number gone up? because we sold more than we did previously and that is true for our development business but that is also true for our recurring sales business you see that if you if you look at the respective volumes in in both categories on the profitability side as I as I was alluding to there was kind of a drag because we prioritize cash vis-a-vis profitability so we have been accepting quite low gross gross margins how to look at that that going going going forward i mean we certainly want to increase our privatization pace so that will go hand in hand also with higher tax payments on the development side and that is slightly biting into your second question I think the situation is that we have essentially sold everything which is under construction in order to generate liquidity. So it will now require some pre-investments before we can actually generate additional EBITDA, which is why this year is less in the development space about selling project developments. It's more about selling defined land plots in order to generate some profitability and reduce our exposure somewhat in terms of land plots we have on the balance sheet. When is it when we move to the billion euros? I think in terms of investment, quite soon. I mean, we have given the kickstart for 3,000 new developments this year. Um, I think it's, um, it's good timing, uh, with all capital discipline, we have to apply by the good timing because, uh, very few other developers are currently developing. So, our product will meet the market, but which will see, by definition, very little, uh, competing supply. Um, and, uh, and that is positive. So, quickly are to actually adjust, uh, and, uh, and move towards a 30% reduction in construction cost. Uh, I think. A bit premature to give guidance on that point. Now, we are working very hard on various initiatives and hopefully, um, also reiterating what, uh, what role set, uh, there will be some political support on that end. Uh, there is an initiative called the boy, the 2B, uh, which, uh, is basically the political answer to, uh, to also give some ingredients in order to reduce construction costs. And that would be helpful and accelerate that process to move to our target. Thank you.

And the next question comes from Bart Geissens from Morgan Stanley. Please go ahead.

Yeah, hi, good afternoon. Two questions for me, please. You state very clearly as priority number one that you want to protect the rating. Can I ask where are you the most concerned regarding your rating? Looks like your ICR is very much under control given you've turned out the debt so much. And given that, you know, the other metric that really mattered for the rating agencies is LTV, So are you effectively saying you cannot exclude that valuations go down, say, 5% taking the LTV and therefore that would put pressure on the rating? Any color you could provide on that would be great. Secondly, you have decided to increase the dividend massively, right? 36%, not surprised you guided to that. And even if you haven't paid out everything you could have paid out, that's still a massive uplift. um in these should we assume that if the uncertainty persists at the time you convene the agm that you will try to obtain a significant script take up even if the stock continues to trade at a wide nav discount thank you on uh but on your on your first question i mean you're completely right uh i i made that point many many times uh preserving the rating is really paramount for us

If I look at the different stats, we have fairly comfortable headroom in terms of net debt to APDR. Under the rating metrics, we have very comfortable headroom. Also, in terms of ICR, where it is a bit light, if you will, a bit pressured, is still on capital values. So, yes, the risk, if you will, is that the increase we have seen in our financing terms. I was mentioning 30 to 40 basis points, which, by the way, is not a topic at all. It pretty much matches what we have assumed in our planning and medium-term planning. But if there are potentially any spillover effects on capital values, and here I think it's still too early to judge on if and if yes, to what extent, there is a potential impact on the transaction market, but that is something we will observe. And if, I think we made that point, we are not necessarily expecting that, but if that were to materialize, I think we have learned how we have to react to that in order to protect our balance sheet. And that is and will remain very much the priority. Now, on your second question on a potential script, we always decide that than convening the AGM. But if all things remain as they are today, I think you can assume that the likelihood of us opting for the script option is very, very high. And therefore, also providing a constituent to strengthen our balance sheet. Great. Thank you very much.

And the next question comes from Veronique Mertens from One Launch Hot Camper. Please go ahead.

Thank you. Two questions for me as well. So, first, maybe on the political discussions, I appreciate, obviously, a lot went around the budget, but is there any update on the meat price bremsen, both in Berlin and on a federal level? Is it a topic that is still being discussed? And are there any updates on that? And secondly, One of the pillars is also the expansion business areas. Also here, is there anything concrete? How serious are these options? As you also mentioned that you might want to speed that part up. Thank you.

So the first, thank you very much for the two words question. I think the meat press funds, the pre-agreement is um that they will extend it for two years the reading of not only us but also the tenant association is that actually they ready to accept that the mid-press firms in its way doesn't work doesn't fulfill what the politicians want um so that's why i think this i consider this as a success you know that to to just stop the mid-press runs was would be probably very brutal so that's why i think they give them now themselves a short period to redefine the Mietpreisbremse to adapt it better to the needs. So I think this is positive. Of course, this was a pre-agreement. We have to wait for the coalition agreement, which might change. But I think this reading, I'm pretty optimistic that Mietpreisbremse, Kappungsgrenze and also the gap of two or three euros will be shortly redefined in the new government. So this is something which I consider positive. The second is for the second Vonovia, this is what I mentioned. There is obviously, to be clear, I have now the chance to talk to some during my roadshows, which I normally do to visit you. I'm always mixing some meetings in there with people who are investing in long-terms or not in shares, but in direct investment also sometimes coming from the infrastructure side because people from the infrastructure side consider our cash flow profile is very similar to what they know from infrastructure. And if you talk to these people, they have a different horizon. So they are talking about five, 10 years. So this is for them relatively normal to talk about. And then of course, they have a different view on our business. So I think there is a huge potential where we can use our platform, our abilities to help also these people to get invested into German Resi, because from the discussions you have with them, they all know that it's not easy just to go to Germany to buy a few housing and being invested in German Resi. So I think this is a big chance, which by the way, just to be complete, is not completely covered in our business plan, as we always told you, because it's a business to business decision. And that's why it's very difficult to predict the cash flows because it depends when you sign a contract. But this is an upside. And as I mentioned before, we are doing more for less capital intensive. I think our priority at the moment is this because this requires no capital.

Okay. Thank you very much.

Or very little capital.

And the next question comes from Mark Motze from Bank of America. Please go ahead.

Thank you very much. Very good afternoon. First question from my side is trying to understand what is the bridge between your two euro per share of EBT after minorities and your 1.5 euro per share of your EPR, EPS. That's roughly 400 million euros, a gap between the two. I know we're missing the taxes here. I know we don't have the depreciation, but it sounds a bit high for those two numbers, so how should we think about this gap of 50 cents or 400 million?

Look, Marc, I think this is not for the call to talk about a bridge to a metric which does not form part of our key performance measures. Why does it not form part of our key performance measure? Because APRA earnings are not a good reflection of our business model. It does not include development business. It does not include privatization business, and it's therefore not adequately mirroring our business. But that having said, if you are interested to better understand the deviation on top of what I've just said, let's take that offline. I think it's too technical for this call.

Thank you. On your Dr. Ronan offer, share offer for the rights blocker, is Apollo to benefit also from the fixed compensation scheme you're planning to give to investors which are not providing their share or not?

If you're dominating a company, according to the German corporate law, you have to give shareholders two alternatives. That is either to exit Deutsche Wohnen, become a shareholder of Novia, and if they intent to maintain the shareholder in Deutsche Wohnen, which, by the way, long-term at least, once the appraisal proceedings have finished, typically is not the preferred choice of people. But then it's simply a dividend. So, in other words, shareholders have to decide, do they want to receive as a Vonovia shareholder the Vonovia dividends, And if they decide to maintain the shareholdership in Deutsche Wohnen, they will get an equivalent dividend on the Deutsche Wohnen side, which is being determined on the basis of the valuation approach, the valuation opinion that has been discussed in the EGM earlier this year.

Brilliant. Thank you very much.

and the next question comes from paul may from barclays please go ahead hi guys thanks for taking my question i'm just focusing on the cash taxes again apologies for that but um i find it interesting that you moved to a kpi that was free tax just at the point your cash tax is materially increased i'm sure it's coincidental but just looking at your ffo It's not the key metric you consider, but that's down about 15-ish, maybe 20% year-on-year, and likely given higher financing costs, minorities' costs, higher taxes and disposals, it might be down again in 2025. So I just wondered, when do you expect that measure to start to increase? Because it's a measure that a lot of investors and analysts still look at, so it'd be great to get some follow on that. Also linked to that, I think two of the key drivers of your adjusted EBITDA growth are you repairing sales and development to sell both of those businesses if I'm correct incur cash taxes but if you could just confirm that would be great so again is that something that you'd consider including in your KPIs given describing your your EBITDA um an apologies last one it's just a technical one I guess um Can you provide some color on the additional 90 million of non-recurring expenses year-on-year? I think they went to about 240 million year-on-year. Just wondered if you could provide some additional color on that. That would be great.

Thank you. Yeah, Paul, on the cash taxes, I mean, first I can confirm that this number is highly dependent on our success in development business, but even more in the privatization business. In the privatization business, we are often privatizing condominiums, which we are holding onto for long. So they have been depreciated from a tax perspective. And if you look at our deferred tax liabilities in relation to gross asset value, you get a good estimate on how much that is. So that is very much impacting that. That having said, I mean, I think we provide that transparency, not in terms of our guidance, but in terms of our reporting, and that you explicitly see the cash taxes which are assigned to our business, our core business, our four segments. So, you will, you will see the development, uh, for the running here. Uh, don't don't expect the big surprises. Uh, cash taxes based on our planning will be inside 10% of, uh, of. So, uh, no, no really massive change, um, in terms of what we've seen 23 to, uh, towards, uh, towards 24. uh on the on the on the one-off side um here we we have seen we have seen various various impacts i mean they had a lot of transaction business structuring uh the real estate transfer broker in terms of the apollo jvs and other other transactional business and that was that was accounting for for the one-off My clear expectation is that we will hopefully not see the repetition of that high one-offs in the running here. So with our disposal program hopefully completed.

Sorry, just to come back, apologies, appreciate that you should take follow-ups. Just on the taxes, I appreciate it's dependent on the success in the development style and the privatization business. So that is a key part of your growth, moving forward in your growth strategy to be successful in that part of the business. So it certainly seems counterintuitive or at odds with shareholders that you get rewarded for the success of that business, but they don't reap the full reward because they also incur the cash taxes. So I just wondered, is that still an appropriate metric to look at before taxes, or should it be appropriate now that you look post-taxes for shareholders for your KPIs as well, or is that not something that's considered in terms of changing that?

I think we have chosen EBT for a reason, and there's no intention to change KPIs. But again, Paul, to be very clear, I mean, that transparency you are rightfully asking for is transparency we are giving. I think far more important than looking at accounting taxes, which also include deferred taxes, non-cash taxes to a large amount that really do focus on cash taxes. And that is what we do on our operating free cash flow. But given the fact that cash taxes are highly dependent on our disposal success here, as I said, predominantly in our privatization business, And that again here, that also somewhat depends on which entity is that you are essentially privatizing condominiums from whether there are some, some, some tech assets you, you can, you can use is. Is a number of there are a number of complications, which make that difficult to guide. Now, I think I've, I've given you some good indication what to expect for for this year. As I said, it's inside 10% of of total. That obviously is accounting for our best guess on successful execution of our disposal program, which is tripped predominantly related 2023. to land plots in the development business and to condominiums later with a good increase. But I think this is as much transparency I can give as of now.

Perfect. Thank you very much.

And the next question comes from Manuel Martin from OdoBHF. Please go ahead.

Thank you for taking my questions. Two questions. The first question is, given the many things that are going on in Europe and in the world, And in view that you're operating in three countries in Europe, it's Germany, Sweden and Austria. Currently, where would you feel more comfortable in your investments and divestments decisions or where would you like to be active? Maybe you can give us some color on your regional strategy. First question. Second question is on the migration factor. We don't know what to expect from policy in terms of migration, whether a lot of migrants will leave Germany or not, or whether more migrants will come. But could you describe a bit the sensitivity of your portfolio on when it comes to the effect of migration, if that's possible, of course?

So I'll start with the migration fact. If you look on Germany and if you look where the immigrants, which you know we have illegal immigrants and legal immigrants. I think the agreement is clear that we need more legal immigrants. So I'll refer to the illegal immigrants first. The illegal immigrants at the moment are not in the housing sector. They are living in camps, for example, in the big two airports. In Berlin, they are full of camps which are temporary housing where these immigrants live. And if they are approved to stay in Germany, then they can ask for housing allowance and then they show up in our portfolios. So I think the new government will be more rigid against these immigrants. This will have no impact on our housing because just the camps will be smaller, hopefully. If it comes to the legal immigrants, which we also pardon because we are recruiting electricians from Colombia, which we say is legal immigrants, this has to be ramped up massively. because otherwise it is no chance that we will deliver the 500 billion spending, because somebody has to produce the weapons, somebody has to produce the streets and the bridges and all these. So there will be a massive need of workers in this country, otherwise the program will fail. And I think everybody is aware of, and that's why we will see a legal framework for immigration here into Germany It just is, of course, a prognosis. I'm not a politician who is negotiating at the moment, but I think this is highly shared. So if this program will happen and if we get the approval process in time, if we don't solve the labor force, we will have an issue. And I can tell you from another job where I'm in the supervisory board, where this is not highly paid labor, they are desperately looking for it. And if they cannot provide housing, they will not provide employment. So the immigrants which will come now with this program, this is one element which we cannot judge, but it will put much pressure on this imbalance of supply and demand, because what we see is the immigrants will go to the big cities as well, the illegal immigrants. And the first question I forgot now. So what we see is actually to be very clear, we see in the moment that Sweden is in all KPIs a little bit better than the rest of the pack. So that's why we are happy to have Sweden. From the stability of the cash flows, all the three countries are very similar. 100% stable, 100% solid, because they are all regulated markets, and they have all massive imbalance of supply and demand. So the problem of this imbalance of supply and demand is actually the same in all big European cities, and we are only in all these countries in the big cities.

Okay, thank you. Ladies and gentlemen, this was the last question for today. I would now like to turn the conference back over to René for any closing remarks.

Thank you, Moritz. And thanks, everybody, for dialing in and participating in this earnings call. Also, thank you for honoring our two question requests, at least for the most part. We will be on the road quite a bit, so hopefully we will have a chance to connect in the days and weeks to come. That concludes today's call. As always, stay safe, happy, and healthy, and speak soon. Bye-bye.

Ladies and gentlemen, the conference is now concluded and you may disconnect. Thank you for joining and have a pleasant day. Goodbye.