Vonovia SE (VNA) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the Interim Results H1 2021 Analyst and Investor Call of Vonovia SE. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Rene, who will lead you through this conference. Please go ahead.

Thank you, Kai, and welcome to our H1 2021 earnings call. Your hosts today are once again, CEO, Rolf Buch; and CFO, Helene von Roeder. We're in different locations today, so bear with us in case we have a slight delay here and there. I assume you've all had a chance to download the presentation. In case you have not, please go to our website, where you'll find it under latest publication. Rolf and Helene will lead you through the first part of the slide deck through Pages 4 through 20. And of course, we'll be happy to answer any questions afterwards. So let me now hand you over to Rolf.

Thank you, Rene. So also a warm welcome from my side. I hope nobody will be surprised that we have continued our good start into 2021. Our operating business and market fundamentals are fully intact, and we are following our path in managing the residential megatrends with a view toward sustainability and adequate shareholder reconciliation. COVID-19 is still a reality which affects us in our day-to-day operational business. But by now, I think it is well understood why there is hardly any impact on our financials. Our top line -- total segment revenue was up by 10%. Adjusted EBITDA grew by 8.4% and FFO by 13.1% or 6.6% on a per share basis. We have seen a high positive valuation momentum in H2 with the valuation growth of EUR 4.2 billion, which is well within the indicated range we had given you before. As of June 30, our EPRA NTA was EUR 68.44 per share, and our EPRA NRV was EUR 82.45 per share. The LTV at the end of H1 was 42%. If we look at the perpetual hybrid as debt, and the net debt-to-EBITDA multiple was 12.3. You probably also our last issuance in June, which were 5 bonds with a total volume of EUR 4 billion, an average tenor of 9.5 years and an average coupon of only 6.875% (sic) [ 0.6875% ]. And finally, before I hand over to Helene we'll move on to our guidance. The strong performance across all segments leads to an increase in our guidance for 2021. The guidance range of adjusted EBITDA total increases by EUR 80 million to EUR 2.055 billion to EUR 2.105 billion and the range of our FFO rise by EUR 50 million. Improved CO2 savings continued positive development in our customer satisfaction increase and increased gender diversity has been the main drivers for the SPI, which we are now guiding to 104% of the relevant KPI. Our good performance on sustainability was also recognized against Sustainalytics where we managed to improve from 7.7 to now 6.7, which means we are ranked #18 out of the global universe of more than 13,000 companies of all industries. And with this, I hand over to Helene.

From my side. On Page 5, we saw earnings growth across all segments with a minor exception of development. where the project nature of this business means it is, by definition, a bit less linear than the other 3 segments. Nonetheless, we do see ourselves fully on track to deliver performance growth not just in the overall top line, but also for all 4 segment EBITDA also hence, including development. With the exception of minor changes at the margins we had a stable portfolio of around 415,000 apartments, so similar to last year. On that basis, rental EBITDA was up 5.4%. Supported by strong year-on-year growth in value-add and recurring sales, we delivered an overall EBITDA growth of 8.4%. Accounting for lower interest expenses and higher taxes, the FFO growth was 13.1% or up 6.6% on a per share basis. The interest expenses were, of course, lower from our refinancings. At the same time, current income taxes were higher largely as the result of increased disposals. So with that, on to Page 6. For a change, this is a pretty clean half year to half year comparison, and we also do not have distortions from the season effect with warm rents more in 1 period than the other, like we did all throughout last year. On that basis, our similar portfolio volume delivered 3.3% rental revenue growth and 5.4% EBITDA growth. Maintenance expenses were slightly higher than last year and operating expenses continue trending down because of operational improvements, but also because of fewer COVID-related precautionary measures compared to last year. While the adjusted EBITDA operations margin of 80.4% is probably a bit elevated, the trajectory of increasing that margin even on a stable portfolio is clearly intact. On Page 7, we show the main operating KPIs for the Rental segment. Organic rent growth was 3.4% year-on-year, of which 0.9% came from the market, 2% from modernization and 0.5% from new construction. Our vacancy rate was 2.7%, so very much in line with our expectations. Clearly, it is mostly impacted by modernization work, not by demand. The list of people interested in an apartment is getting actually longer, not shorter. Maintenance expenses were a bit higher than last year as we continue to err on the side of caution and keep our assets in very good condition. And finally, our rent receivables in Germany were at an all-time low at the end of the reporting period. We had seen a temporary increase during the corona pandemic, but this has been overcompensated by now, and we are actually below pre-COVID levels. So back to Rolf.

So let's go on Page 8 on the value-add segment. It's not a lot of to report there. We have continued our good start here as well. Both external and internal revenue is up compared to previous year and help to achieve a 17% EBITDA increase. As expected we are getting better step-by-step keeping rolling out what works and try to come up with new ideas. On the next page, Page 9, we are talking about our recurring sales. We have completed the sale of 1,865 apartments in our recurring sales segment in the first half. This is relative high volume can be explained by 2 effects. First of all, a bit of spillover from the strong demand already in Q4 last year that had got pushed into 2021 and some small -- some harder-to-sell units, which we managed to sell as a block. In spite of the elevated volumes and in spite of the block sale, average fair value step up were almost fully in line and well above of our initial target of approximately 30%. So this gives you later a very good sense also which Helene will talk about the valuation. And this is -- back to you, Helene.

So let's look at the Development segment on Page 10. This segment includes all new constructions of apartments by way of entirely new buildings, but it does exclude additions of floors on existing buildings. In H1 2021, you see how this segment is actually a bit less linear overall compared to the other segments, especially rental and value add. Development to sell was quite a bit higher than last year. Development to hold was lower. And combined with more normalized operating expenses, the overall EBITDA does fall short of H1 2020. This level of volatility can probably be expected. But if I do look at the remainder of the year, where we also expect the sale of a larger project in H2, I am very optimistic that we will deliver more EBITDA in the Development segment than last year. If we go to Page 11, then we can see that including the floor additions, we completed 841 apartments over which -- overall of which 389 were to hold and 452 to sell. Again, this business is not exactly linear, and we continue to aim to complete around 1,500 apartments to hold and another approximately 800 apartments to sell. For the overall pipeline, we are looking at a long-term potential of 38,000 apartments for our own portfolio and another 9,000 that we will be selling to third parties. Page 12 does show the H1 valuation result. As in prior years, we took a pragmatic approach to the H1 valuation and did not value the entire portfolio, but only about 3 quarter. This includes the 30 largest and most dynamic cities in Germany, plus Vienna, plus Sweden. The rest of the portfolio was not revalued and only adjusted for EUR 109 million capitalized investments. On this basis, values are up by a total of EUR 4.2 billion. In the table on the bottom right of this page, we show the like-for-like valuation result of the revalued portfolio with 9.2% for H1 2021. And on the right-hand side, the comparable for H1 last year, where we had a 5.6%. So clearly, a stronger dynamic compared to last year. The new valuation puts the overall portfolio at 25.6x in-place rent multiple and EUR 2,215 fair value per square meter. So Page 13 shows a bit more detail across our 15 regional markets in Germany, plus Sweden and Austria. As I said, we did a valuation of our 30 largest and most dynamic cities in Germany, but not for the rest. How much of the regional market was revalued is indicated by the pie charts. So for some regional markets like Dresden, Berlin, Kiel Bremen or the Southern Ruhr area, almost the entire asset base was revalued. For others, such as Stuttgart or the North Ruhr area, only a small part was revalued. The table gives you the breakdown of the total value uplift between performance and yield compression on the one hand and investment on the other. The map on the right-hand side shows the total value growth, including investments. So one word of the valuation in Berlin on Page 14. As you can see in the chart, Deutsche Wohnen's fair value in Berlin was somewhat lagging compared to Vonovia's value as of June last year. With the H2 valuation, Deutsche Wohnen then saw a large uplift of 10% that resulted in a fair value level that Vonovia reaches only now on the basis of this H1 2021 valuation. This suggests that there is little room for Deutsche Wohnen for a material valuation uplift at the half year mark, which we understand is the very reason why Deutsche Wohnen plans not to do a half year valuation this half year. So let's go to Page 15 for our investment program. We are very much on track for our guidance between EUR 1.3 billion and EUR 1.6 billion for 2021, and most important, continue on that level that is sufficient in light of our CO2 reduction goals. By now, almost all of the work to be completed this year has at least been kicked off. So we have a pretty good visibility in spite of some weather and COVID-related delays that we had seen at the beginning of the year. So let's move on to Page 16 for the NTA and the NRV. The strong valuation uplift in H1 helped increase the EPRA NTA to EUR 68.44 per share or 9.1% compared to year-end. The EPRA NRV rose to EUR 82.45 per share. Please note that for the NRV, we are using the same value for the intangibles that we have showed for Q4 2020 as this is only updated once a year. As a reminder, the NTI does include deferred taxes and purchases costs for our whole portfolio, but not for our sales portfolio. The ratio hold sales for NTA purposes is 88% to 12%. We know that some of you adjust our NTA for purchases costs, and if you were to do that, that leads to an EPRA NTA of EUR 62.09 per share. On Page 17, we have the LTV and the net debt-to-EBITDA multiple. Based on our standard definition, the LTV was 40.5% at the end of H1 2021. However, in light of the call date for the perpetual hybrid at the end of this year, it makes probably sense to look at the LTV, including the hybrid, and that is 42% because we are now in a position to repay it with straight debt. Either way, the LTV is well within our target range, which continues to be between 40% and 45%. The main changes are the increased liabilities from our June bond issuance and the revaluation effect plus obviously the Deutsche Wohnen stake at the fair value. The net debt-to-EBITDA multiple was 12.3x, so hence similar to year-end 2020. There have been some discussions in the past. So let me reiterate our definition of the net debt-to-EBITDA multiple. In order to mitigate distortions by comparing an accumulated number like EBITDA with a spot number like net debt, we are using the average net debt of the preceding 5 quarters in relation to the EBITDA of the last 12 months. Please do note that our EBITDA number is reduced by the IFRS 16 effect and does not include any positive impact from our noncore sales. So Page 18 has all the relevant financial KPIs. You have heard me say on many occasions before that I do think that LTV alone is not a very meaningful indicator for the resilience of the company's balance sheet. And very surprisingly, I still haven't changed my mind. I'd like to look at it at least together with the fixed or hedged debt ratio and the maturity profile. And we clearly continue to be in very good shape here. You have all seen it, I'm sure, but in the context of interest rate discussions or concerns, it is still interesting to note our bond issuance in June. We issued 5 bonds with maturities between 3.25 and 20 years with an average maturity of 9.5 years, and the average coupon was 0.6875%. To be honest, if I look at these terms, I am not really worried as it looks like refinancing will remain an opportunity. On Page 19, we show the guidance for the current year. We see a strong performance across all segments, which leads to an increase of our guidance for several KPIs. Compared to our previous guidance, we have increased the range of the adjusted EBITDA total by EUR 18 million. The guidance range of the group FFO has also been adjusted upwards by EUR 50 million. So why is that? In our recurring sales segment, we see an increased sales volume of approximately 2,800 units and high price levels with an expected fair value step-up above the 35%. In the Development segment, we expect the sale of a larger project in H2. However, higher sales volumes come with higher tax payments, and together with some consolidation effects, this is why we increased the adjusted EBITDA total, cannot be fully passed on to the group's FFO. We also expect a strong development of our Sustainability Performance Index, the SPI, mainly driven by CO2 reduction, the customer satisfaction index and gender diversity. And with that, back to Rolf.

And for me, it's just one slide left, which is a summary of today's call. So one, the first is a high resilience on our operating performance continues. The market fundamental and long-term outlook remains favorable. This makes our stock perfect for investors, who like the boring nature of our business and the predictability of our business. I know that the Deutsche Wohnen transaction has taken up a lot of airtime over the last weeks. However, you can clearly see in our numbers that it has not impacted our performance. Two, we remain confident that we continue to deliver earnings and value growth for this year and beyond. And three, ESG focus and stakeholder reconciliation are more crucial these days than ever. As we have said before, most of our actions have more than just an economic dimension. So expect us to continue and try to strike the right balance going forward. To us, that is not a conflict. We have built a business that can deliver the kind of returns that you expect from us and still make sure that we do not -- that we do it in a way that treats other stakeholders fairly as well. In the end, finding relevant solution to ESG challenges will be revolving in multiple ways, financially for our future and also beyond. And with this, thank you very much, and back to Rene.

Thanks, Rolf. And I'm going to give it right back to Kai for the Q&A, please.

[Operator Instructions] And the first question received is from Marc Mozzi of Bank of America.

I have 3 questions on my side. The number one is, did you book any acquisition of Deutsche Wohnen shares in your balance sheet at the 31st -- at the 30th of June? Shall I go one by one, or you would like me to ask 3 questions?

Yes, one by one is better. Helene, can you do it?

Yes, of course. You can see it in the financial assets on our accounts.

Can you give us an absolute number? Is it EUR 1 billion, EUR 2 billion? Just trying to figure out how big it was at June just to understand how the leverage has moved accordingly?

If you give me a few minutes, I'll deliver that question quickly. I need to find it. All that I know it's got to EUR 3.3 billion.

EUR 3.3 billion, okay. So that's your entire 18% that you disclosed at the time of the first quarter, if I am looking correctly?

Yes.

My second question is about your full year, FFO full year guidance. Does it include the benefit of refinancing of your current perpetual bond or hybrid average bonds?

Yes. That is included in the FFO guidance. So we are assuming that we're replacing that with senior debt. And obviously, you've seen the spread level. So the factor, as we repay the hybrid, we will have a lower interest rate. But what you need to keep in mind is that it's actually only for like 2 to 3 months. So the effect is de minimis.