Operator: Ladies and gentlemen, welcome to the Vonovia H1 2024 Results Analyst and Investor Call. I am Mayra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time it's my pleasure to hand over to Rene. Please go ahead.

Rene Hoffmann : Thank you Mayra, and welcome everybody to our H1 update call. Our speakers today are once again CEO, Rolf Buch and CFO, Philip Grosse. They will be happy to provide an update on the year so far and then answer your questions. We felt that the Q1 call was very efficient and we have received a lot of positive feedback from both the sell side and the buy side saying it should be the benchmark for future calls. That is why today's presentation is again more concise than in the past and much closer to Q1 in terms of focus and structure. And again, we will limit the number of questions for the Q&A to two per analyst. I kindly ask for your support here and for your understanding. If you have more questions, especially as they relate to modeling, you know where to find me and the team after the call. With that, over to you, Rolf.

Rolf Buch : Thank you, René, and good afternoon also from my side as well, and happy holidays to all of you who are on holiday or on the beach. I would like to start with the highlights on page 3 of the presentation. In a nutshell, our balance sheet stabilization phase is largely completed, and we are in the process of moving into a more positive environment after more than two quite challenging years. Especially, it is these four points I want to highlight. First, disposal. Selling assets is still not a walk in the park, but we are seeing continuous progress. Transaction volumes are picking up, and the general interest of buyers is increasing. We remain fully committed to deliver the $3 billion of disposal volumes this year, and so far we have signed around $1.5 billion, so very much on track. Over previous quarters, we have always been able to sign larger disposals in a way that we were able to disclose them together with our earnings. Also, because of the summer holidays and some of our customers are on vacation, this was not possible for more than one transaction for this H1 earning call. That is why it is quite likely that we will announce further disposals before we report our nine-month earning in early November. Third, valuation. Together with our external appraisers, we did a full portfolio valuation as of end of June, and the result was a 1.4 decline for the first half year. So it's clear continuation of the trend we have been seeing. The value decline got smaller-and-smaller with every valuation exercise. It appears to us that we now have reached the trough, or at least we are very close to it, so that the period of value decline essentially seems to be coming to an end. And if market yields are starting to stabilize, then the rent growth we deliver should have a positive impact on NTA and become a meaningful contributor to total shareholder return again. The simple math remains unchanged. 4% of rental growth should translate roughly into $3 billion of value growth if market yields are stable. Our message has not changed, even if we show it now in the appendix on page 26 of today's presentation. What is equally important, once we are absolutely certain that we have passed the bottom of the cycle, we can stop playing defense and we can stop prioritizing liquidity over profitability. Our focus then can return to organic growth. The summer months are usually a bit quieter, and this year it is not different. We have been using this opportunity to work with our top management team to evaluate additional sources of growth other than traditional acquisitions. Our goal is to further mitigate additional drag on EBT from higher interest costs over the next five years. When we report our nine-month earning in November, we will be sharing with you our adjusted strategy and how we intend to bridge this period where we have increase burden from expensive refinancing -- to bridge this period where we have the burden from expensive refinancing. The rent growth. The positive momentum clearly continues. Real market rents are growing faster than they probably ever had, and that safeguards healthy rent growth for us for many, many years to come. As we will show you on a later slide, the gap between our in-place rent and what tenants are forced to pay in a wider market reality of the RADA [ph] scheme has probably never been bigger. Of course, we cannot capture this reversion potential overnight, but it does secure for us an extremely robust and long-term upward trajectory, where we will be able to consistently grow rents at around 4% per year. And finally, the guidance for '24. Based on what we have seen and achieved in the first six months, we are confident enough to raise our guidance for rent growth, adjusted EBITDA, and EBT to the upper end of our guidance range. All other elements remain unchanged. Let's go on page 4 for an update on our disposal brokers. We are now at EUR1.5 billion. Since our Q1 reporting in May, we have signed agreements to sell assets of almost EUR500 million. This includes three larger transactions in the Frankfurt mine region from our core MFH and non-core portfolio for a total of EUR298 million plus another EUR185 million in various smaller transactions and across different sales channels. All disposals were made at least in line with their respective fair values and yields. These yields were, of course, different because there's different assets in different locations, but every one of our transactions confirms our book value. Again, we think it is quite likely that we will announce further disposals before we report our nine-month earning in early November. And this is to Philip.

Philip Grosse : Thank you, Rolf, and welcome from my side. Let's continue on page 5 for the H1 valuation. The results were very much in line with our expectation, and they confirm our view that this cycle has come, or at least is close to coming, to a turning point after which values are no longer expected to fall. The bottom line result of the H1 valuation is that values were marked down 1.4% across the entire portfolio, and this puts our properties at an average gross yield of 4.2%, or EUR2,217 per square meter. If you take a step back and look at the overall valuation decline since the peak in June 2022, until what appears to be essentially the trough at the end of H1 2024, then we will see a gross value decline in total of 23%, really unprecedented in the German market, which we managed to mitigate through rent growth and modernization down to a net impact of around 15%. On the next page, we have put together some market voices from a variety of sources. There is no point in reading them all out on this call, but the bottom line is that we are clearly not the only ones who are seeing or expecting that German residential is turning the corner. Of course, this does not happen overnight. It's a process. It's not an event, but the direction of travel, in my view, is pretty clear, and that puts us in a much better position than we have been over the past two years. Moving on to the next page 7, on earnings and cash flow. As you can see, adjusted EBITDA total is down 2.6% because of the lower profitability in our disposal segments that is recurring sales and development to sell, and here we continue to see the consequences of our strategic decision to prioritize cash generation over profitability. Adjusted net financial result in H1 this year was about EUR16 million lower, and that was mostly driven by the full-year effect of the 2023 financing, and as a result, you see EBT down 6.2% on a year-on-year comparison. If you look at the adjusted EBT after minorities, the increase in minorities is, of course, related to the two Apollo JVs we entered into last year. Finally, our relatively new number, the operating free cash flow, so basically our Vonovia FFO, if you will, here in spite of higher cash out for the dividends to our JV partners, which were paid in Q2, slightly above EUR100 million, the operating free cash flow is up almost 5%, and that is largely a result of slightly positive contribution from networking capital for our development business, essentially, as well as higher contribution from recurring sales. So, this metric, in summary, does exactly what it is supposed to do. It tells us and our shareholders how much cash we generate in our operating business and represents a very helpful addition to the earnings view that we have with the adjusted EBT. Let's take a closer look on our largest segment, rental, which contributed roughly 94% to total EBDR as per H1. As you can see, and that is on page 8, rent growth is accelerating as we expected. And you can clearly see this is the contribution from the Mietspiegel or the comparable local rent. Fluctuation is also a bit higher than in the previous period. I do not think that this is a trend, unfortunately, as this is still very much within the general range we have been seeing for this number for the past quarters. Vacancy remains low, only a function of turnaround time. In case of fluctuation, similar collection rate remains at very, very high levels, close to 100%. And finally, expense and capitalized maintenance is very much in line with the prior year period. And with that, back to you, Rolf.

Rolf Buch : Thank you, Philip. Let's go on page 9 of the presentation. To me, this is by far the most relevant and consequential page of the deck. Because of the positive implication from this page are key to understand the enormous long-term rent growth potential in our company. This is also put the initial yield debate in a different context. What you see on this page is a comparison between our in-place rent compared to our reletting rent, and more importantly, the real market reletting rent. We are showing the numbers for the full German portfolio and for Berlin as our largest market, and also the most extreme example. You could, we will tell the data for all other regional markets in the appendix. We took the market data from Value Market Datenbank, formerly Empirica, which has probably the most detailed and most comprehensive database for the market trends. In our analysis, we excluded furnished apartments and new constructions. And we show a range, which is marked by the median on the lower end and the 80% percentile on the upper end. This upper end is a good proxy for modernized apartment and modernized buildings. On this basis, the gap between our current in-place rent and the real market rent is between 53% and 96% for Germany. For Berlin, it is even between 94% and 175%. In a free market, that is where our rent level would be. In our rule-based system in Germany, this is where our rent is going to be over time. So what this data means is that not that we will be able to realize this reversional potential in the short term. Mietpreisbremse and Kappungsgrenze make that impossible. But it does provide a tremendous visibility on the extremely robust and long-term period of growing our rent at around 4% per year, like we guided in our last call. Now, you may wonder, if it is as a regulated market, especially in Germany, how can we letting rent be as high as EUR15 on average in Germany and EUR21 in Berlin? The answer is very simple. This is supply-demand imbalance trumping regulation. What you see is the tenants are prepared and willing to pay this rental level simply because there is no alternative in these supply-constrained markets. And a good chunk of landlords act outside the RADA screen and are not too religious about rental regulation. And keep in mind, there is no sanction if you ignore the Mietpreisbremse. But there is another important message in this data. Our current initial yield is 4.2% based on the in-place rent and the fair values in our book. There is a lot of debate in the market where the 4.2 is not too low and how it still needs to move out quite a bit. The reality is that the implied yield based on real market trends is already much higher. This explains why buyers are ready to pay our book values. For landlords who are ready to ignore the Mietpreisbremse, the yield is not 4.2, but between 6% and 8% on average or even higher in Berlin. And this is back to Philip.

Philip Grosse : Thanks, Rolf. Before I come back to the guidance, let me update you on the Z KPIs, and that is on page 10. We have, as you can see, the performer cash position of EUR4 billion, and that is consisting of EUR1.5 billion on the balance sheet, EUR0.8 billion of undrawn loans, and EUR1.7 billion from disposal signed, but not yet closed for the majority. Closing is expected by or around the end of this year. This is clearly sufficient to cover all our nearer term maturities. In addition, as you know, as a safety backup, so to speak, we also have the EUR3 billion RCF/CP on top, which is undrawn. So our funding situation remains comfortable, especially when you look at the maturity profile for the next two years. The relevant debt KPIs are shown on the lower left-hand side, and while they're still elevated, we are convinced that we have them under control. With the values essentially at the trough, the focus on LTV becomes less relevant in my view. Don't get me wrong. It remains a key debt metric for us, and we remain too committed to come back into our target corridor, but contrary to much of the last two years, it clearly does not pose a meaningful risk any longer since the general outlook on values is rather clear at this point. So our focus will therefore more-and-more shift towards net debt to EBITDAR and especially ICR, which require more attention in a higher interest environment. But don't forget that these are metrics we can influence more actively, and by and large, rental growth is sufficient, actually slightly more than sufficient to compensate the higher interest expenses we will be seeing the next few years, but the good news is that we have other segments that we will use to drive earnings growth, and the environment and conditions are clearly improving here. That is why we are very optimistic to turn the corner on these debt metrics soon as well, and as Rolf said at the beginning, we will provide more details on that with our Q3 earnings call. Before I head back to Rolf, let's quickly move to page 11 to our guidance. There are essentially three adjustments we are making compared to Q1 call, and that is that we are now guiding towards the upper end of the range for organic rent growth, adjusted EBITDA total, and adjusted EBT. All other guidance elements remain unchanged, and as in prior years, you can expect our final guidance when we publish again the nine-month results in early November. And with that, back to you, Rolf.

Rolf Buch : Thank you, Philip. Our key messages for this call are straightforward. One, we are well on track to successfully complete our EUR3 billion disposal program. We have sold EUR1.5 billion so far, and the market is moving more-and-more in our direction. Transaction activity is picking up, investor interest is increasing, and the overall sentiment is improving. Two, values appear to have reached the trough level. Again, we don't have a perfect glass ball to predict that there will be absolutely no value decline in H2, but I am confident that if at all we see a further decline, it will be insignificant in terms of balance sheet stability. A turning point in valuation is, of course, significant. It will allow us to switch gears and stop playing defense. We will no longer need to focus on generating liquidity through sales, but can instead focus on increasing our profitability and earning profile. We are very much aware that following our balance sheet stabilization phase, our attention must return to organic earning growth, and it will, I promise. That is why we are currently analyzing our potential, including our non-core rental segment, and we are looking forward to update you on your outlook for this part of our business on our nine-month earning call on November 6th. The positive rent growth momentum continues. As we tried to show in this presentation, there is an enormous revisionary potential. Sure, because of the regulatory framework in our business, largely ignored by some private landlords, it takes some time for us to realize it. But all this just means we have a strong visibility on a very robust and long-term upward trajectory for an annual growth rate of 4% per year. With that, back to Rene on the Q&A.

Rene Hoffmann : Thank you, Rolf and Philip, and I'm going to give it back to Mayra to open up the Q&A for us.

Operator: We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Thomas Neuhold from Kepler Cheuvreux. Please go ahead.

Thomas Neuhold: Good afternoon, thank you very much for the presentation and taking my two questions. The first one is on the additional growth apart from your rental business. I was just wondering, are you talking about the existing ones like the development business or recurring sales one? Are you also considering new ones? That's the first question. And the second question is, I was wondering if you can give us an update on the status on the nursing home disposal.

Rolf Buch : I think, Thomas, it's both for me. So first, please understand that we are really giving you an update on the 6th of November. You know, this is a strategy. We also want to discuss it before with our supervisory board and also to have it aligned. So that's why it would not be appropriate to give you now some hints here. But the answer is very clear. We are thinking about existing and also new growth opportunities. I think this I can say without telling you any secrets. And the second is the nursing. I think I mentioned in the call that we are normally tending to announce, to sign a few days before this date. This time it was not possible in all transactions. And that's why I announced that you will hear from us probably before end of the summer. Some more transaction and visits, I would leave it here because otherwise we are going too long.

Thomas Neuhold: Okay. Understood. Thank you.

Operator: The next question is from Charles Veasey from UBS. Please go ahead.

Charles Veasey : Yes. Good afternoon. Thank you for taking my questions. So two questions as well. First, you mentioned the EUR483 million sold were in line with fair values. I just was wondering what has been those portfolio values relative to the rest of the portfolio. I think it's 15% for your overall portfolio. Can you tell us also more about the structure, the buyers and the relevant features of those deals? And sorry, this is still the first question, but on a related basis, you've done EUR7 billion disposal over 2023 or 2024 guided. But the employee count is actually 2%. And it's continuing to rise in Q2 with the company size being smaller. And you're already quite a large organization with 12,000 people. Where have you been doing those net hires?

Rolf Buch : Okay. First, for the buyer, the spectrum is wide. So the Frankfurt portfolio, which actually consists out of three different buyers, it is, I would say, rich individuals in Germany, which are close to institutional money. And the rest of the portfolio, these are small transactions with a value of three or even bigger. It's a mixture of everything. So we see institutional investment, we see normal private money. So nothing which is really special. So it's a good mixture. What we do not see is listed companies, but this is not a surprise. And the employee question, to be very clear, this is good news, because we are hiring in our Kraftsmann organization. If the employees are going up, actually, this shows that we are able to do a more in-house, which has a higher profitability than to do it externally. So that's why looking on employees is probably a misguided leading if you look at a total, because it may be in the Kraftsmann organization.

Charles Veasey : Right. But maybe this tells us something about the nine-month announcement. Second question, on page 10 of the financing, Philippe mentioned the LTV becomes less relevant. But I guess this is probably the metric that pointed more to room for growth. And I hear you also on the ability to influence net debt to EBITDA and ICR, but they still don't seem to allow for significant firepower. So how do you reconcile those targets with the end of playing defense point you made, and are these targets going to be reviewed also with the nine months? Thank you.

Philip Grosse : Yeah, look, for us, what is becoming a key priority going forward is that next to the rental segment, we also grow EBITDAR outside the rental business, and that ideally in a less capital-intense manner. And that is going to be the package on stuff you know, but also some stuff you don't know yet, we're talking about in more detail in November. But that is essentially earmarked to grow EBITDAR at a larger pace than our interest expenses will grow, and thereby returning to overall profitability. And that obviously helps tremendously the net debt to EBITDAR and the ICR, which as I said, is becoming more of a focus point for us, which then will accordingly travel in the right direction again.

Charles Veasey : Very clear. Thank you.

Operator: The next question is from Veronique Meertens from Van Lanschot Kempen. Please go ahead.

Veronique Meertens : Thank you all for taking my question, and thank you for the presentation. I was wondering why are you still so committed to finishing the EUR3 billion disposal target. If you actually are quite confident in also selling the nursing home business before the end of the year, value stropping and becoming a buyer again, is it per se so necessary to finish the EUR3 billion disposal target? And secondly, on the value-add segment and also the recurring sales, we've seen an improvement or an acceleration in Q2 on both businesses. Do you expect it to accelerate further in the remaining quarters, or is the Q2 operation something that we should spread out over the year? Thank you.

Rolf Buch : So for the first question, the disposal target, first of all, we are German and we are doing what we have promised. So the EUR3 billion is, we have promised it and that's why we will deliver it. But to be more practical, as I said, I think in the last call, a disposal process takes some time. So I think I spoke about between nine months and six months. So literally, what I'm saying is that this disposal is already in negotiation. And part of it, as you understand me right, is in very close to finish negotiation. So to stop this negotiation would be crazy. So that's why in the end, we are actually negotiating to an end all the disposals we have started. And this means we are very clear that this will be delivered. But I don't think it is fair to tell people who have invested in due diligence, who have invested in a lot of money, who are getting financing now to tell them that we are not selling anymore. This would kill our reputation.

Philip Grosse : Yeah. And before I answer your second question, let me also add that if you look at the clustering of disposals, EUR2.4 billion is actually considered non-core. Nursing and other non-core stuff and development in our view in these markets is more recycling of inventory, if you will. So we are equally selling here because there's no need for a newly built product to be put on our balance sheet. Now, your second question in terms of profitability, if you look at our existing segment, recurring sales and development business is somewhat depending on the market environment, which is improving, but still not an easy one as we explained. So while I do expect some pickup also on those segments, the key driver really is in value-add, where we are benefiting from our improved investment program in the Kraftsmann organization, but also in other service business, including energy and multimedia. And yes, I do expect a further acceleration and growth in the second half.

Veronique Meertens : Okay. That's very clear. Thank you very much.

Operator: The next question is from Valerie Jacob from Bernstein. Please go ahead.

Valerie Jacob : Hello. Good afternoon. My question has been mostly answered, but I've got two small follow-up questions. The first one is there is a lot of talk in the press about subsidies. And I was wondering if you could clarify if any of these apply to you in terms of energy, new builds, and if you can benefit from them and if this is significant. And my second one is you're sort of returning to growth and focusing less on cash now. Does that mean that you're going to change your KPI, your plotting KPI? Thank you.

Rolf Buch : So, the first one, the subsidy is actually, it's now new subsidy in this quarter because all the politicians have holiday. It's clear to repeat that we get for the heat pump. It's not a direct subsidy, but we can charge 10% and not 8%. And you know that we get for heat pumps more subsidies, which actually reduce the burden for the tenants. And there's probably also this that we have not talked in detail, which actually means that a private investor who is buying an apartment from us, which is a traditional BUWOG development business, is actually allowed to depreciate 5% of the assets in addition to the normal depreciation. And this means actually he can compensate it again with his personal income tax, which is of course a subsidy, not for Vonovia, but for our customers. And that's why we are optimistic that we will also pick up in the development results, because this is a function that opens a new corridor for the developers who are still alive, which we are.

Philip Grosse : And there's no change envisaged on our KPIs. I mean, clearly, as we said, we will focus on growing EBT on a per share basis. But equally, that requires investments, requires significant investments in a capital intense business. And for that reason, generating the cash in order to fund the investment or the equity portion is a relevant, very relevant topic for us. And balancing that out with the requirement on the investor side to also get some decent return in terms of dividend. So the operating free cash flow is a second metric to complement that.

Valerie Jacob : Thank you.

Operator: Next question is from Jonathan Kownator from Goldman Sachs. Please, go ahead.

Jonathan Kownator : Good afternoon. Thank you for taking my question. Two questions, if I may. First of all, on operating free cash flow, it's obviously been quite lengthy this quarter. Can you remind us where you expect working capital contribution to be? As you say, obviously, investing in development, obviously expecting a flat contribution from working capital. That would be my first question. And also, can you just confirm on the dividend to minorities where the most of it has now been paid? So first question, please. And second question, can you help us understand the contribution of solar at this stage? Does it feel negligible? Is it growing? And is it part of the value added portfolio?

Philip Grosse : Yeah, Jonathan, thanks. I mean, first of all, on cash paid to Apollo, that is confirmed slightly above EUR100 million. It's a Q3 event. So that indirectly does positive impact the operating free cash flow in the second half, because that payment is done and dusted. On the details of our guidance, in terms of operating free cash flow, you have that on page 25. And the biggest unknown, as usual, is the change in net working capital. And that is predominantly driven by balancing out investments in development by cash we receive from our disposers. Our ambition is, which we have achieved already in H1, to make that at least a zero. If things move better than expected, might be a slight positive. But that's kind of the intention. And if you make the math with all the guidance items we have given, you will come out as an operating free cash flow comfortably above the EUR1.4 billion last year. If you do the math, you're more in the region of EUR1.7 billion.

Rolf Buch : And your second question about the solar panels, and I still remind you that on the 6th of November, we will go more in detail on this as well. To be very clear, we have understood that we have to think solar panels and heat pumps together. And this gives an opportunity. But of course, the most biggest issue is to find enough electricians. So if anybody in the call knows an electrician in Germany, who would like to work as a market leader, you are highly welcome to inform us. Because this is really something that we have to build up.

Jonathan Kownator : Okay, thanks. Just one clarification. You said I think you have a EUR1 billion of dividend capacity or something. I can't remember how you claim that. Is it just a matter of taking that number and divide it by the number of shares in the dividend capacity? Is that going to give us about the dividends of this year?

Philip Grosse : Essentially, yes. I mean, you take the EBT guidance, 50% of that, plus the implicit guidance I've just given on the operating free cash flow. And if you look at our formula, that is what it's translating into, precisely.

Jonathan Kownator : All right. All right. Thank you.

Operator: The next question is from Bart Gysens from Morgan Stanley. Please go ahead.

Bart Gysens : Yeah. Hi, good morning. I know that it's difficult for you to answer questions on what you're going to announce in November. But more broadly, you say that you're going to stop playing defense no later than next year, and focus on profitability rather than liquidity. What does that actually mean? I mean, it sounds good. But what does it actually mean? Your balance sheet is still quite levered. Should we expect you to be a net investor? Can you talk a bit more broadly on what that means from a capital allocation perspective? And then secondly, I remember, if I remember correctly, at the end of last year, you've taken or better Deutsche Wohnen has taken the valuation of some of the non-core assets, the nursing homes, down quite substantially at year end, I thought something like a 20% write down. Have you taken or have Deutsche Wohnen taken further write downs in some of the non-core assets that you're trying to sell? And therefore, can you break that kind of that 1.4% average down by core and non-core? Thank you.

Rolf Buch : For the first question, I think you have seen our model in the last year. So it was very easy. We bought assets, put it on the balance sheet, and get profit because the interest rate were lower than the initial yield and then the yield were going up. And this was a nice world where we bought Vonovia. Even going forward, and even after the stabilization, we will not come back to this because we are buying assets for, if we continue to do so, buying assets for 4% yield and financing is with that 4%, it doesn't work. So it is very clear that the strategy we are working on is to find ways to improve EBIT -- EBITDA and cash flows with assets, with activities which are less capital intensive. This is the consequence of this analysis. And this will happen. And, of course, this activity needs the same stability of cash flow than the rental business. And this will happen as well. And with this, I think I will end and remind you that the 6th of November will be an interesting day.

Philip Grosse : And Bart, on your second question in terms of valuation, just directionally, if I look at H1, that also includes a further write down on the nursing side, which was at around 4%, slightly below 4%, I think 3.6%, 3.7%. And this is a function of a market which is in particular challenged by concerns around the operators in a very fragmented business where you have seen some bankruptcies, and that is demanding higher yields and putting more pressure on yields. If I look at our pure residential business, in rough terms, there is no big difference in percentage wise, the revaluation of core, non-core. It's around the same magnitude. And to be very clear, it is market which is driving the valuation, not the intention we have to keep it on the balance sheet or to dispose it.

Bart Gysens : Okay, thank you.

Operator: The next question is from Manuel Martin from ODDO BHF. Please go ahead.

Manuel Martin : Thank you, gentlemen. Just one question left from my side on the value-add business. I understand that this will accelerate in the second half of the year, and you are hiring craftsmen. My question would be, where do you get the craftsmen from? Because this seems to become a rare good, and the more you have, the better it might be and could be one of the drivers supporting the growth, if I'm not wrong. Maybe you can give us some color there.

Rolf Buch : I know we have given you a lot of speculation, so we are all predicting what happens on the 6th of November. But of course, it is clear that we are recruiting electricians even from Morocco, so it's not only German. We are recruiting a lot of electricians from Germany, but of course, from Morocco. So, we are getting ways where we actually solve also an issue for Germany, because this is not only a problem. It's probably easier for us and for a lot of others to recruit, because we have a good brand name, and we have a big company, and we have a lot of advantages. So, yes, but it's still hard, and you are right. This is a challenge, and I think we get means to find it. To be very clear, why electricians are so important, you know, we have a shift in technology. We used to heat buildings with gas, and now we have this heat pump. So, the people who are used to building gas, and they were trained to build a gas boiler, are not the same ones who are doing a heat pump. So, this is a dramatic change in qualification we need. So, you cannot take somebody who was able for a gas boiler to put a heat pump, and this is the same as a solar panel. So, this is a challenge, but we will work on it.

Manuel Martin : Okay. Thank you.

Operator: The next question is from Andres Toome from Green Street. Please go ahead.

Andres Toome : Good afternoon. So, first question, I'm just wondering, how do you envisage your leverage profile when you do decide to return back to growth? And I guess where I'm getting at is, you know, what have been the lessons that you've learned from this downturn, and then how are you going to implement those on your capital structure going forward?

Philip Grosse : I mean, first of all, how do I look at it going forward? In terms of LTV, more comfortable, given that you think we have reached traffic values, and given the rental increases we see really over the long term, this will translate into organic rent growth of roughly EUR3 billion, and also contribute to organic deleveraging on the LTV side. And that led to EBITDA, ICR is for me not so much a function of reduction of the debt side, but increasing the EBITDA side where we have a lot of ideas. What are the key lessons learned? First, broadening the system of debt KPIs, not only focusing on the simple LTV metric, but on LTV, net debt to EBITDA plus ICR, and defining ranges, which basically translate into a triple B plus rating. If we would have done so at the outbreak of the crisis, we would have started with 3 billion, 3.5 billion more equity. Not sufficient in hindsight, to cover all problems, but I think we would have started the crisis in a far more comforting situation.

Rolf Buch : And probably to add from my side, I think the big learning looking backward is that, you know, if you have seen our transaction and acquisition we have done since 2018, we have, of course, always for the big transaction raised a little equity, but we always used our balance capacity to the maximum. So we leveled up with all these transactions. And especially in the Deutsche Wohnen, where we started the Deutsche Wohnen with 39 point something and ended up with about 45 by not raising enough equity. I think the learning of this management team is that we should not do and never do this again.

Andres Toome : Thank you very much. And then my second question is just relating to provisions that you've taken in, I think, in terms of ancillary expenses. But you also noted that there's actually no changes in terms of tenant payment behavior. So what's behind that?

Philip Grosse : Basically, that's roughly EUR20 million, EUR20 million euros of provisioning we could get rid of last year, and which was positively impacting the cost base, and therefore resulting in comparing H1 with H1 higher operating costs this year. We essentially had a positive net debt last year, which is not sustainable.

Andres Toome : Okay. Thank you very much.

Operator: Next question is from Mayur Kumar from Barclays. Please go ahead.

Mayur Kumar : Good afternoon, everyone. So my first question is regarding your ICR. I see a big drop from 4 times to 3.6 times. And it's getting close to your target range of at least 3.5 times. I heard you mentioned growth opportunities, you want to bring more EBITDA. But in terms of a financial cost, is there any plan to reduce them through other instruments like convertible bonds, etc.?

Philip Grosse : For the time, it's really focusing on the EBITDA side. And my expectation is that even in 2024, ICR will already start to recover.

Mayur Kumar : Okay, so no plans of other debt instruments like that?

Philip Grosse : Currently, no plans.

Mayur Kumar : Got it. And my second question is regarding your growth opportunities. As you mentioned, you're looking other than traditional acquisitions. Just to clarify, does this strategies include potentially buying back minority stake from your JV partners and simplify the company structure and a bit of idea on how to plan to fund those growth opportunities?

Rolf Buch : No, I think this is too early. You know, we just had done the joint venture. So the time period is five years from now. So I think this is too early to speculate. So no, we have to really work hard and find new sources and exploit the existing sources. This is not financial or engineering, which we want to do to increase EBITDA. This is by real work and real business.

Mayur Kumar : Got it. And is it fair to say that there may be an element of equity support for those growth plans, instead of just debt from previous perspectives?

Rolf Buch : No, I said is the growth has to come from less capital intensive activities.

Mayur Kumar : Got it. That's helpful. Thank you.

Operator: The next question is from Thierry Cherel from Natixis. Please go ahead.

Thierry Cherel : Hi, thank you for taking my question. And congratulations for this good result. I'm happy to see that Winnie is back in the field. Just a question, two questions. First on ICR, even if you answered it clearly on the former question, just wonder how you could be that sure you won't go below 3.5. I'm struggling not to break this level by year end and next year. So I would like to know if it's, you mentioned it's about EBITDA. So is it because there's huge growth on other than rental business? And maybe it's related to the question of campaign. And the second question is more about development to sell. Like to know if the margin is still very low. And I would like you to just comment if you can on the reality, market reality. You mentioned that it's excluding the newly built apartment. What's the market reality yield? Thank you very much.

Philip Grosse : On your question on ICR, I mean, the good thing is that in terms of increases in the interest lines, we are basically done because most of the refinancing and the effect is already reflected in the numbers. So it's a bit more than 2 times what you've seen in H1, but it's not much more than that. At the same time, what I'm implicitly guiding with that is that we see over proportion contribution on the EBITDA side in the second half of this year. And this is also a key driver why we are more optimistic on the guidance side and are now guiding towards the upper end. And that will essentially help the ICR. Longer term, you're right. I mean, if I look at the rental business, that 4% top line growth are going to eat up almost the entire EBT growth considering the increase in interest expenses. But with the ideas we have and the return of a more normal environment, we think also medium to longer term, we are able to mitigate that. Development to sell, your second question, I mean, if I look at the market for new builds in the locations we are present, we are talking typically about yields, 4%, slightly above 4%. If I look at our business, I mean, volume-wise, we have not done much, but gross margin-wise, it's 15%. If I look at the disposal of newly built products to individual owners, they are even above 20%. So volume-wise, again, it's kind of tough, but we already start to see that profitability is also coming back in the development segment.

Rolf Buch : I think in your question, there was a second element which you are referring to the slide I showed you about the rental of a version of potential where we excluded the new build and the refurbished buildings. I don't know the exact figure, but if you include the new build and the refurbished business, the picture would look extremely different. Even more extreme version of the potential would be much higher, but I think it is a wrong comparison because you should compare apples-with-apples and not existing buildings with new buildings.

Thierry Cherel : Thank you very much.

Operator: Next question is from Neil Green from JPMorgan. Please go ahead.

Neil Green : Hello. Good afternoon. Thank you for taking my questions. The first one is just on your marginal cost of Euro debt, please. We've seen, obviously, your bond yields come in, the 2029-2030 bonds coming quite notably this year. So I was wondering if you were seeing a similar trend when you discuss financing with banks, please. And secondly, appreciate it's only August 2024, but once you've completed the EUR3 billion of disposals, might we expect further volume targets on disposal for 2025 or will they be more kind of opportunistic next year, please? Thank you.

Rolf Buch : So the second question is easy to answer. We will continue to have non-core portfolios, which we have to sell anyway. But this is of course, then we are selling it to optimize the price and not to deliver liquidity. But non-core doesn't belong to us long-term. That's why it has to be disposed. So we are not stopping disposal at all. We will continue to dispose non-core and we will do a sorting of the portfolio every year like you are used to it. And therefore, we will always have some non-core.

Philip Grosse : Marginal cost of debt secured as unsecured slightly below 4% for a 10-year tenor. So slightly moved in our favor.

Neil Green : Thank you.

Operator: The next question is from Simon Stippig from Warburg Research. Please go ahead.

Simon Stippig : Hi, good afternoon. Thank you very much for taking my question. First topic would be in regard to the development sector. We all know in Germany is still in a very deep crisis. Even though the segment is not meaningful contributor to EBITDA, it turned positive quarter over quarter. So therefore, you already see early signs of recovery in your business and also broadly in the product development sector in Germany. And then what would that mean for you? And then you mentioned that you have one of the development to sale assets in the amount of EUR1 billion. Have you already started to sell them and are there any sales figures? And then what's the remaining investment volume for 2025? The second question would be in regard to the Deutsche Wohnen synergies. Is your last guidance you gave still relevant? And then what would you expect for this year and also for next year in one rate? Thank you.

Rolf Buch : To be very clear, the Deutsche Wohnen synergies are done. This is forgotten. Deutsche Wohnen is integrated and we have delivered it. So nothing will happen in the future. This is a done deal. For the first for the development, I think we don't see any signs at the moment that the development volume in Germany is picking up. Controversially, it's still going down. So announcement is not going away, but the announcement of the institution is saying that we will probably see a new construction rate of 170,000 apartments in by '26. So it is still further going down, which will, of course, have an impact on smaller developers because they are actually then out of business. You know that the need in Germany is roughly 500,000. So there needs to be changed something. Otherwise, Germany will have a problem. And I'm not sure. And it's a big call. I'm not sure if the government of today is still able to take the right decisions. You know that we have an election next year and I am looking forward that the next government will take the right decisions because the situation in Germany is not sustainable. And this is another way of saying that good developers will be desperately needed in the long term future.

Operator: The next question is from Paul May from Barclays. Please go ahead.

Paul May : Thanks very much for taking my questions. Rolf, just mentioning something you mentioned earlier around the low investment yield is no longer attractive to acquire assets, given financing costs. I'm just wondering if it's not attractive for Vonovia, who are most likely the best operator and best owner of those assets. How does it work for others? And as a result, how can you be still confident over your valuations at those very, very low initial yields if, as you say, it doesn't work as an investment? That would be great. That was my first question and I'll come to…

Rolf Buch : Actually, I think Philip will say something to this, but it's probably also for me and I think I have done this page exactly to show you. And this is what we see in the moment. The people who are buying those assets, ignoring the mid-price fund and there's no sanction on it. So there's no consequence. You can just charge a higher rent and your yield is double. So it's very simple. So the apartments which we are selling in Frankfurt, for example, the prognosis is they will see another rent in the future.

Paul May : And you can't do that because you're a public entity. Is that kind of a message?

Rolf Buch : We are expecting them all.

Paul May : Thank you very much. Second question, just on that rental, the reversion, I appreciate the churn of the portfolio is about 8% and you mentioned obviously all the regulation there and you're going to stick to the regulation in terms of capturing that. Over how many years would you expect to be able to deliver that level of growth? And is there a risk to the market growth? Because I think some forecasts expect German population to decline quite materially over the coming years and having peaked, I think this year, possibly into next year. Is there a risk on the demand side from a declining population in Germany, particularly you say given the economic situation is not particularly attractive and potentially you might get worse and therefore economic migration may stop again, putting an impact on population levels. Do you see that as a risk or are you very confident that rental growth will continue upwards? Thank you.

Rolf Buch : So Paul, actually, I don't know what this analysis is all about the German population is shrinking. So I don't know this analysis. The German population has to go for a very simple reason because the demographic change, my generation will be going to pension in the next 10 years. The next generation is only one quarter of this. We all will not die after we go in pension, but we will hopefully live for a long, long period and living expectations even higher than lower. So this means if Germany wants to replace all this workforce, we have, we need immigration. So there is no other choice. And I think this is even understood by everybody in the government, except very far right, which have no majority. So, so there is no other alternative. And that's why all prognosis I know is saying that the German population will increase and not decreasing. So it was 10 years ago where we probably had a different prognosis, but this is long term ago. So there is no way. And even as the population is, is would not increase, which will not be the case, the demographic will show that the numbers of single apartments, single person apartments is increasing. So the number of apartments, which will be needed, even if there's a stable population and the population will not be stable, but even if it would be stable, the number of apartments will go up. So I think this is a fundamental on German, which is out of question.

Paul May : Sorry, just following-up on the number of years to capture the reversion potentially that you highlight on slide nine.

Philip Grosse : Yeah, look, this is, this is just looking at today's rent and growing that by 4% per annum, because this is what we expect longer term. And that puts you to like 15 years across Germany, even longer in Berlin market. So it is long term, but it's very robust and stable. And based on rent levels, also within the affordability ranges.

Paul May : Thank you very much.

Operator: [Operator Instructions]. The next question is from Marc Mozzi from Bank of America. Please go ahead.

Marc Mozzi : Thank you very good afternoon, and thank you for taking my questions. I have two. The first one is on EPRA metrics. Just wondering if you can give us a clue on what would have been the, what is the LTV under EPRA consideration and calculation at end of June or pro forma, number one. And number two, what is the growth in underlying or EPRA EPS at the end of at the end of June? And more broadly, I'm just wondering why as a leader in the European real estate industry, you're not considering providing not as your own management KPIs are not providing at every quarter is or at least every half year EPRA metrics, which I think should be part of your role as to lead, by example, for the rest of the industry and help international investors to be in a position to compare to other peers. That's my number one question. And my number two question is around growth. So you're back to growth mode, which makes absolutely sense as soon as we reach the trough. And I think one of the areas easy, like capital intensive growth area is new developments. And in that case, what sort of changing working capital requirements should we expect for 2025? Because you're moving to something zero this year, probably if you have to grow to something negative again next year. And have you ever thought about the size of that change in working capital requirements for 2025? Thank you.

Rolf Buch : Yes, Marc, we have. So the second question, yes, we have thought about it, we have analyzed it. But again, I understand that you're all interested in it. But I think it is proper to discuss it internally first before we go to the market. But please understand that we are not getting into any more detail. And please wait for another month.

Philip Grosse : Let me just add, it's an add-on business. And what we were always sensitive around, what we have also mentioned many, many times is that we put the right weight on the development business. These are the overall balance sheets. So we will not, through development, change the risk profile of the Vonovia business. The second question on the EPRA metrics that is with annual results that we publish all the various EPRA metrics. We have never done that on a quarterly basis, and there's no intention to do so.

Marc Mozzi : Okay. Thank you very much.

Operator: The next question is from Rob Jones from BNP Paribas. Please go ahead.

Rob Jones : Yeah, hi, team. Just a quick follow-up question on the ICR. So obviously, you give net debt to EBITDA and LTV on a pro forma basis, which is really helpful. I just wondered if you got a figure for ICR also on a pro forma basis. And then linked to that, Philip, you said the Q1s, you expect the ICR to come down slightly from 4 times, maybe 3.8 times, 3.9 times. And that was your expectation for FY '24. I just wondered if you're still happy with that as an FY '24 expectation, or whether we think it could be more realistically lower than that. Thank you.

Philip Grosse : Yeah, as I said, I expect ICR towards the remainder of the year to slightly increase and recover from current level. So I'm not too concerned around ICR. We're not showing that on a pro forma basis, because that is then including too many assumptions also on refinancing on the interest rate side, which is why we have not done so. But I think with all the guidance I've given here on the call, you should have a pretty good grip as to the direction of travel on that metric and those two components.

Rob Jones : Okay. Thank you very much. Thank you.

Operator: That was the last question. I would now like to hand the conference back over to Rene for any closing remarks.

Rene Hoffmann : Thank you very much. That's it from us for today. We hope to see you and speak with you in the coming days and weeks. And until then, as always, stay safe, happy and healthy. Good day, everyone.

Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

Earnings Transcript for VNA.DE - Q2 Fiscal Year 2024

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