Vonovia Se Unsp/Adr

Thank you, Andre, and welcome to our earnings call for the first quarter 2023. Your hosts today are once again CEO Rolf Buch and CFO Philipp Grosse. I assume that you have already downloaded today's presentation. In case you have not, as always, you'll find it on our website under latest publications. Rolf and Philipp will present the results and also give a general business update. And of course, we're looking forward to your questions afterwards, though we have no intention to set yet another record for the longest call. But let's see how it goes. Over to you, Roy.

Thank you, René. So, welcome to our Q1 Earnings Call for 2023. I want to start with what is probably the most relevant update, at least according to the last Roadshow, and this is Disposal. Following the GDW joint venture transaction from last week, we announced another larger transaction together with Deutsche Buhnen earlier today. We are selling five assets with 1,350 apartments to CBRE Investment Management. Three of these assets are from our rental segment, and the other two are still under construction with completion expected in Q2 and Q3 this year, so they are nearly finished. The book value of these assets as of the end of last year, including the estimated cost for the remaining builds of completion, is $600 million. we have agreed on a total purchase price of 560 million. So free cash after tax and all the transaction costs reflect an 89% cash conversion, which is pretty high. On recurring sales, the Q1 volume was low. As I said in the full year earning call six weeks ago, December, January, and February were extremely quiet. but we have seen increasing momentum in March. Still, for Q1, the volume was only 282 units privatized. The other side of the coin is that the fair value step-up exceeded our expectation and came out to 56%, but that is partly driven by the country mids with a disproportional share in Austria. In addition, we also disposed 381 non-core units where the fair value step-up was almost 20%. While we continue to work towards the best outcome, our priority at this point, as we said before, lies on more cash generation and less on margin optimization. And we are fully committed to the cash target we have set ourselves for this year. Second, our rental performance While Q1 was not exactly strong on all the other segments, basically because of an extraordinary strong Q1 last year, the rental business continued to run like a clockwork. This is, of course, relevant because the rental segment is by far our largest segment. We saw 3.4% rental growth year-on-year, 2.2% vacancy, and 99.9% rent collections. So unchanged from our full year numbers as the metrics and the underlying market dynamic continue to improve further. Third, we did evaluation update for our German portfolio in light of the two larger transactions we have signed. The result is a 3.4 billion value decline in the German portfolio, so down 4.4% on a like-for-like basis. This puts our total portfolio at a 26.9-time in-place rent multiple and the value at 2,422 euros per square meter. And last but not least, our LTV is at 45.4% and the net debt to EBITDA at 16 times. Both, of course, adjusted for the SUDEBU and CBIE transactions. Accounting for the free cash from these deals, we now have all unsecured maturity covered for this year as well as two-thirds already for the next year. Coming to page five. The Zudevo joint venture transaction marks a successful outcome of a process that started more than one year ago. As a reminder, we began to initially float the idea of tapping unlisted equity sources earlier last year. Our objective was and still is to achieve something on the equity side that we had on the debt side for a long time, the ability to choose between two options. For a long time, unsecured was the better option for us on the debt side. And in the current environment, secured is considerably less expensive. Going forward, we have now found a way to provide choice also on the equity side. So following the initial thoughts around the minority structure and defining the key goals of such a transaction, we started our work on the feasibility of such a transaction to address the complexity and the granularity especially for residential assets and their tax and legal considerations. And I tell you, we have learned a lot. Our work led us to identify two portfolios we felt are suited best for what we intended to do. One portfolio, SUDEVO, is fully integrated in the German operating platform. So there is somewhat limited control and limited protection rights for the joint venture partner. This is also reflected by the fact that we have preserved the VAT group as a tax-optimized structure. And the other portfolio is Sweden, where we have a separate platform and where a minority partner would generally be able to exercise more influence. This approach allows us to address quite different investors. Following the identification of these two different portfolios, We then started the market approach in Q3 and continued investors' conversations, eventually negotiations in Q4 and Q1. We have now agreed on a common equity participation in Südebro with Apollo on behalf of its affiliated and third-party insurance clients and other long-term investors. And this transaction achieves what we have set out to do. We raised one billion of equity at much more favorable terms than what we observed in the listed space. While our equity has been trading at a solid double-digit FFO yield for a while now, we have secured a 6.95 to 8.3 pre-agreed IRR that is capped via a call option and which, of course, includes all dividends paid. Similar, we achieved another key objective, and this is to continue control operation and consolidation of the underlying assets. And this consolidation is much more than just keeping a minority stake. We even succeeded in maintaining the VAT tax group for Südebro so that we can benefit from an optimized tax structure. In addition, the joint venture transaction is also superior to an asset sale as it does not trigger real estate transfer tax. So taking our time here made all sense of the world. But joint venture should be understood as an alternative access to equity, not a disposal. And this is therefore not the right way to define a normal market prices for our assets. And of course, with the joint venture, we finally gained some valuable knowledge and experience in this transaction This will serve with us in case of potential future minority transactions. The point to define the market price is different in the next deal. We have reached an agreement with CBIE Investment Management on the disposal of five assets with 1,350 apartments located in Berlin, Munich, and Frankfurt. While three of the projects are part of Vonovia's rental segment, The other two projects are still under construction, with completed expected in Q2 and Q3 this year, so nearly finished. Some paint is missing. As you can see in the charts on the right-hand side, these assets are not exactly the Bonovia average in terms of value per square meter and rent per square meter. At around €6,000 per square meter, the average fair value is much more than twice as high as the Vonovia average. And the rent level of close to €20 per square meter compares to €7.50 for Vonovia's portfolio. Plus, for Vonovia, you have about 30% up-to-date potential based on a track record on our optimized apartment investments. So this is from the very upper end of our portfolio, and it is probably fair to say that at this rent level, the future rent costs will be more a point of affordability question. The book value at the end of last year, including this estimated outstanding bills for completion, this is only for a few months, for the not yet finished assets is around 600 million. And we have agreed on a total purchase price of 560 million. we expect a cash inflow after tax and all transactions costs of 535 million, representing a cash conversion of close to 90%. So not only is this a sizable transaction on an attractive price, it is also structured in a way that we can achieve a very high cash conversion, which is in the end, of course, the main objective from our capital allocation point of view. And it shows that large transactions at less than 4% cross-yield are possible in the environment if we structure them right. The fact that we have found such a respected, acknowledgeable partner for this deal makes me and the market optimistic that this transaction can be a positive signal of the market as a whole. If we are Vonovia, and if we would have to choose between these relatively new buildings and the normal portfolio, we would probably have chosen to take the normal portfolio because in the normal portfolio, there is still a significant catch-up potential for rent and there is a possibility of highly accretive investment opportunities, both thanks to our platform. Of course, if somebody is not able to have this platform, these newly constructed buildings are better. So in the end, we have found a win-win situation, which is actually following the best ownership concept. And with this, I hand over to Philipp.

Thanks, Rolf, and very warm welcome also from my side. Let's move to page 10 on the segment overview. Here, as Rolf said, we had a very good quarter in our rental segment, less so in the other segments. And if you look at rental, growth, occupancy and rent collection keep going strong. The first quarter was not as good as last year for the other parts of our business. In development, this has to do with the fact that Q1 2022 was out of the ordinary with a very large global exit. So the quarterly comparison is distorted here. And for recurring sales, the truth is that the first two months this year were very quiet. So it's not surprising that Q1 fell short compared to the prior year as we have been guiding for. At the same time, we have been seeing more interest in signs of life in our expectations for the full year against that backdrop remain that we can deliver on our guidance. In our value-add segment, we had to operate with a higher cost base. and the reduced investment program was not helpful in delivering a growing level of contribution margin. All this combined with the elevated financing expenses led to a 20 percent decline in FFO per share to 58 cents for Q1 this year. Moving to the next page, our largest segment, which is, of course, rental, we saw 2.6 percent revenue growth 5.2% EBITDA growth, which was supported by a much lower cost base. So here you can essentially see that Deutsche Wohnen synergies are coming through. And this is also evident if you look at the EBITDA operations margin, as well as cost per unit in the outlook for the entire year. Moving to page nine on our rental KPIs, year on year organic rent growth in Q1 was at 3.4%, 1.2% coming from market rent growth. Here, as we have been guiding for, we do expect an acceleration for the remainder of the year. I also want to point out that this number still mostly excludes the impact from higher inflation, as we have explained in our March call. Vacancy rate at 2.2%. So unsurprisingly, this remains on a very low level and is expected to stay on a very low level for quite some time, given supply-demand imbalance. The chart on rent collection is a great indicator also for affordability. You get quite a bit of pushback from people who fear that rent collection will come under pressure for affordability reasons. These numbers clearly speak a different language. To be clear, they include not just the net cold rent, but also all ancillary cost and energy cost. And the letter has seen adjustments beginning of this year to account for the sharp increase in energy prices. Moving to page 10 on value add. Here, Q1 fell short of our expectations. While there is some revenue growth, we had to operate with a higher cost base and the reduced investment program. So, clearly, a drag on EBITDA contribution. That having said, if I look at the performance year-to-date, that comes not as a surprise to us and is fully in line with our budget. Page 11 on recurring sales. Here, as Rolf said, sales volume was a little less than half of the prior year period, while the fair value step-up was about 10 percentage points higher. Clearly, overall, this first quarter is not representative of what we want to achieve in this segment in the course of the year. But as we are beginning to see this market coming back, we remain optimistic overall. And as achieving our goals for this year, we will be careful to find the right mix between a decent fair value step up on the one hand and sufficient volume and hence cash generation, which is and remains our priority for this year on the other side. Finally, for this page, I also want to point out that we also sold almost 400 non-core units, roughly 20% above fair value. On page 12, development continues to be an attractive but more volatile business with gross margins still in double-digit territory. Q&Q comparison is not very helpful, as last year included a large and very profitable global exit in Austria. As you can see on the lower left-hand side, we have been shifting more projects under construction towards development to sell in line with our communicated revised capital allocation policy. Moving to page 13 on valuation, here we have originally intended to do a full valuation update only with our H1 figures, and least Q1 values unchanged, but an update was required in light of the two recent transactions we did ourselves. The valuation update is on the German portfolio only and is a model update based on available market price data and mindful, obviously, of the agreed sales prices, which we have achieved. It includes updated portfolio and market data, including rent rule, vacancy operating expenses portfolio volume and also capitalization rates. It also includes 240 million euros of capitalized investments which we undertook in Q1. The result of the valuation update is a P&L impact of minus 3.6 billion or 4.4% on the German portfolio on this basis and as of March this year our portfolio was valued at the 3.7 gross yield or almost 27 times rent multiplier, which is the German way, as you know, to look at this equation. This is, of course, based on in-place rents, and the multiple would be quite different if you were to base it on market trend, which we are able to achieve. The German portfolio is valued at almost 2,500 euros per square meter, And just as a reminder, the median purchase price for condos is significantly higher, 3,500 euros, and the median purchase price for new construction equally, which is even 5,300 euros across Germany. You can, as guided for, expect a full valuation update that is including Sweden and Austria with our half-year numbers. Very brief on page 14, the valuation head of course, an impact on our NTA, which came out at 53 euros and 75 cents per share, and therefore a 6.5% decline vis-a-vis year-end numbers. Page 15 on debt structure, standard page, not much change compared to what we presented six weeks ago. So let me directly move to the next page on the key debt KPIs. Here on page 16, we show the debt KPIs as reported per Q1. If the account on the pro forma basis for the two transactions, we now stand at an LTV of 45.4% and the net debt to ABDR of 16 times if you apply the average debt of 15.5 times on a spot basis. So here, still some way to go to move back into our comfort zone. in particular on EpiDR and LTD. So moving to the next page for free cash flow 17, you know this page from our full year reporting and we are keeping the full year view here as the point is to show you the expected cash generation over 12 months. So the update here is that it includes the Zootivo joint venture and the CBRE transactions. And while we have now achieved about 75% of our asset disposals target for this year, we will of course continue to chase all disposal channels that you see on the upper right-hand side to reach our 2023 target and possibly more. Page 18 is an illustration on our refinancing and deleveraging progress. We now have fully covered all our 2023 refinancing needs and also two thirds of 2024. Assuming the rollover of the bank debt, which continues to be or to see a lot of appetite, we have about three quarters of a billion of unsecured debt left, which we still want to address by further disposals. The 1.3 billion of loans signed include, as we have reported, the new loan of €600 million from the European Investment Bank and the rollover of €550 million from Berlin HIP. And here, there is also included a new unsecured green loan of €150 million, which we have agreed with Caixa Bank at very competitive terms at around 4%. Page 19, you will see our updated, meaning unchanged guidance. As we have discussed, we see lower predictability than normal with regards to volume and profitability for both development and recurring sales, and that is why you see this reflected in the wider ranges we had already included in the guidance update in March. Our expectations for the operating business are entirely unchanged, and to avoid any potential confusion, The ZuDevo joint venture and CBRE transactions are very helpful in terms of liquidity, but they have very little to no impact on the 2023 guidance. And with that, back to you, Rolf.