Vonovia SE (VNA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the Vonovia SE Full Year Results 2022 Analyst and Investor Call. [Operator Instructions] And I would now like to turn the conference over to Rene. Rene, please go ahead.

Thank you, Francie, and welcome to this earnings call. Your hosts today are once again, CEO, Rolf Buch; and CFO, Philip Grosse. I assume you have all had a chance to download today's presentation, and I guess we gave you a bit more time this time around. You will understand why that was the case. But we do apologize for the inconvenience that this surprise timing may have caused. Rolf and Philip will now present the results and give you also a general business update. And of course, as you know, there's going to be an extensive Q&A afterwards. With that, over to you, Rolf.

Thank you, Rene. Welcome for our full year earnings call for 2022. I would like to have a bit of a different start today by giving you more context on how we see things and why we have made the decision we have made. So let's start with Pacht. There is, of course, no doubt that the environment we find ourselves in is very different from 12 or 18 months ago. Looking at the near term, we are faced with macro-driven challenges, mainly because the drawback of our stable and robust business model is that it does not react as quickly as most other business. That is the flip side of sustainability, which we all like. The unprecedented speed at which interest rate has gone up as Central Bank reacted to the consequences of the Russian war in Ukraine based on some of our key metrics on now. It is, therefore, important that we take a very thorough look at the consequences for our business and analyze the impact of this environment very carefully. That is exactly what we have done. We contracted a comprehensive stress test when we use much more better assumptions than one can realistically expect. This was to make sure we have sufficient headroom, and we will not get into a situation where we have to raise emergency equity or do fire sales. That is what we need to avoid by all means and should be able to avoid even such a highly bearish scenario. Philip will share the results with you on Page 9. However, what is equally important is that we also understand the medium and long-term consequences of this new environment. And it is crystal clear to us that 2 of the relevant megatrends, which are important for our strategy in our business are becoming more dominant, providing an even more favorable operating environment for us. We do not foresee any scenario under which the German government will simply not care about the growing supply and demand imbalance or the fact that the real estate sector keeps falling short of the climate targets, risking Germany's 2030 and 2045 goals on CO2 reduction. We all remember what happens to former U.K. Minister list trust when she tried to ignore market forces. Whatever the answer of this crisis are going to be we are convinced they will provide further table for us. We own a product that is desperately needed by an increasing number of people and what is priced way below market values, and we have capabilities, which are more needed than ever to be a part of the solution. Turning to Page 5. The 4+2 strategy is still valid, and we do not see a need to make a radical strategic change. But of course, the focus has shifted acquisitions are off the table for now, and European expansion is on hold. The disposal of our 10% stake in France for almost EUR 100 million and above what we have paid is clear evidence for this. But the 4 pillars are relevant as they have ever been. On property management, I think our KPIs speak for themselves. And while I understand how some people are still cautious on rent growth acceleration I think the evidence we have seen so far is pretty clear. The financing strategy brings visit considerable challenges in this environment, but that does not put the strategy itself into questions. Diverse funding sources and the long-term maturity profile are keys in this environment as well. Portfolio management is about investment and disposals. Investment in our portfolio will continue, of course, and our commitment to the climate path is as strong as it ever have been. On disposals, the focus of the past sales has been mostly on cleaning up the portfolio with processes and which this process is basically completed. Just look at where we have exposure today and consider what we have sold more -- that we have sold more than 100,000 apartments since the IPO. Now the motivation behind the disposals, we are now trying to do it, of course, of a different one. We want to free up capital and use the proceeds to delever and bring our debt KPIs comfortable within our target range to safeguard our current rating. And value add is about generating additional revenues and EBIT from our customers and assets as well as for monetizing our platform value by existing -- extending our services business to third parties. Let's come to Page 6. Capital discipline is key in the moment, and I don't think anyone will disagree with this statement. If you look at the steps we have taken between Q1 and Q3 of last year, it is obviously that we have put a lot of measures in place to make sure that we exercise this discipline. But when it comes to dividend, the case is not black and white. In addressing the consequences of the Russian war on Ukraine, Central Bank around the world has been increasing interest rates as an unprecedented speed. The drawback of Vonovia's stable business model in a regulated market is that it reacts only slowly to the new environment and the initial impact on our KPIs is negative. However, the new environment also escalates the relevant megatrends around which we have built our business, especially the supply-demand imbalance in the big cities and the need for climate change. This will lead to an even stronger fundamentals in the medium and long term. As dividend continuity is a key priority for Vonovia, offering adequate dividend remains an important objective in light of a significant part of our shareholders base who counts a dividend as a form of shareholder return. However, the current environment, capital discipline is also critical. It is therefore prudent to adjust the payout ratio for the full year '22 dividend and strike an appropriate balance between capital discipline and return to shareholders. In the German legislation in Germany, it is for the annual meeting and for our shareholders. So for you, to decide, but we believe our proposal of EUR 0.85 per share strikes such an appropriate balance. And from a cash point of view, we estimate the expected cash out to be around EUR 350 million given the scope component. No matter how cautious you are about the strength of our balance sheet. This amount cannot be a make or break difference. Our decision underlines our responsiveness to what shareholders what you expect from us regardless of our firm conviction with respect of the medium and long-term robustness of the business model. So by proposing a cut of the '22 dividend and maintaining the scope component, we show that we take capital discipline sees in this regard as well, but not paying any dividend for the last year is simply too extreme. It would be unnecessary and sense a wrong message about the stability of our business and may further increase the cost of equity. And to be very clear, both management and Supervisory Board considers the '22 dividend cuts to be an exception and remain fully convinced of Vonovia's stability. Both [ spots ] explicitly confirm the general and unchanged dividend policy of paying out around 70% of group FFO after minority. This politic makes sure that the retained earnings plus the proceeds from recurring sales provide sufficient funds to sustain the investment for our climate path without jeopardizing the robustness of our capital structure. And with is, I hand over to Philip.

Thanks, Rolf. Also a very warm welcome from my side. And let's move to Page 7, where we want to give you it update on our free cash expectations for 2023. As you can see, the starting basis for 2023 is clear with EUR 1.3 billion cash on hand. We then have the FFO, and I will get to the guidance a bit later. But the midpoint is EUR 1.85 billion. We have netted a capitalized maintenance with the additional cash from recurring sales that is not included in the group FFO. And as I'm sure you are aware, the FFO only includes recurring sales EBITDA minus cash taxes for these sales. The portfolio investments are unchanged with EUR 850 million as previously guided. We expect this to take us to around EUR 2 billion. So clearly, cash flow positive. The next blocks are based on our disposals for which we guide the free cash flow generation in excess of EUR 2 billion. And while it is true that the market is still difficult, the negotiations and feedback make us confident that this continues to be a realistic target for the remaining of 2023. There can be no doubt that the transaction market is challenging at this point. But clearly, we equally do not see a complete shutdown based on the negotiations we are having. And looking at the different buckets with a diverse product range for different types of buyers, we have multiple sources that make us very confident. And with that, back to Rolf.

So on the joint venture structures, we have very good negotiations, but the recent primary acquisition against former employees are not helpful. We do remain optimistic that such a transaction can be done and we will take the amount of time what it takes. Municipalities are a different potential by our group, and we are getting serious indications of interest from various municipalities. Right now, we are talking to 7 different ones in 6 federals states. General speaker, social demographic cities with tight housing markets tend to be the one where the interest lies. Here, two, good negotiation about mining from volumes underway. But of course, municipalities are experienced to buy single buildings, so to buy a portfolio for them, it takes more time. We do reconfirm our support for disposals of Deutsche Wohnen's Healthcare business, but of course, it would have to be for the right price. I'm sure you all saw the [indiscernible] So I guess this shows where these kind of transactions are possible. Multifamily houses are also promising sales channels, and we have sold 35 apartments at a 7% premium and a net initial yield below 2.5%, but the market is slow and transaction need do -- and transaction do need time here, too. And our sales channel includes our commercial assets. This is a granular portfolio with an aggregated asset value of just under EUR 1 billion, of which we are currently marketing a meaningful part. And finally, there is a newer buildings apartment, which work well for owner occupiers, and we are also preparing projects for a global exit. It is probably fair to say that our price flexibility is higher in the case of global access for new buildings as we would prioritize cash generation over price optimization. The bottom line in all of this is we are in the market with sizable volumes, and we are in good conversation and negotiations. Our experience every day is that the market is not that, but it remains difficult for now. And that is why we are taking more time to strike the right balance between pricing and capital redeployment. And back to Philip.

Here, we show an update from last quarter on the upcoming quarterly maturities for 2023 and 2024, including a breakdown between unsecured and secured financing and by comparing the numbers you can see that we have made some good progress. As a general strategy for this year, we look to roll over secured financing and to buy back or repay unsecured bonds with excess cash to delever and meet our internal debt KPI targets. In terms of hedging, we have a EUR 1 billion zero-cost swaption collar in place to address part of the 2023 refinancing needs. We have also very recently agreed on the EUR 550 million secured loan for 10 years. The coupon is almost a 4 percentage point more competitive than comparable unsecured bond financing. And further negotiations on rolling over secured debt are progressing well, and we have on top the EUR 600 million loan from the European Investment Bank that is not yet drawn. On the bond side, we want to repay or at least as much as possible of the upcoming maturities, especially in 2023 with the liquidity that we generate from selling assets. The magnitude, of course, depends a bit on how much cash we can reallocate at the end of the day. Moving to Page 9, that is new and important. I will spend some time on this one here. It is really key to understand the context in which we take our decisions. It's no secret that we are more optimistic about our position and outlook by many of you. And as you should expect from us that EU is based on a very sober analysis. We usually provide guidance for 1 year, but our internal assessment is detailed or based on detailed multiyear business plan that we keep very much up to date. We took this plan, flexed the assumptions and used really bearish input parameters. The result is not a realistic scenario but a highly adverse one, in which we still have sufficient headroom. Take our interest rate input parameter, for example, we are using 6% per year for this exercise, which is around 50% above our current refinancing rate in the banking market. I acknowledge that expectation for the development of our values differ quite a bit. But it appears that it is somewhat consensus that forms around minus 10%. We have Page 46 in the appendix to provide a bit more color on what we mean. For this stress test, however, we have assumed 10% value decline this year, another 10% in 2024, and that obviously on top of the 4% value decline we have seen since H2 -- since H1 2022. On disposals, we pretend for the stress test analysis that we will sell nothing in terms of joint ventures, in terms of municipalities Deutsche Wohnen Healthcare business, noncore multifamily homes or commercial assets, nothing. But this year, not next year and not in 2025. Again, to be very clear, this is not our expectation that is, of course, the point of the entire exercise. Finally, for rent growth, we have not assumed any acceleration which is definitely, again, not our expectation, and more importantly, also not what we currently see in the market. So to be clear, none of the assumptions reflect our view, but the purpose of a stress test is to prepare for a scenario that is a lot more negative than our base case assumption. And to cut a long story short, all our 4 bunkers have plenty of headroom even in this scenario. But obviously, bond covenants are one thing, but the rating is important as well. And while the bond covenants are binary, the ratings are much less black and white. Vonovia, as you know, is rated BBB+ by S&P and Baa1 by Moody's, each with a stable outlook based on the company's relevant debt KPIs and committed financial policy. And while the rating deal is anchored around the debt KPIs, the assigned rating is considered over a longer period of time, usually 12 to 18 months. And in context with other factors, such as scale, business profile, liquidity and access to capital. So the rating agencies consider that KPI over a period of time assessing how a metric evolves over an extended period or to what extent it remains sustainably or stabilizes materially in relation to the target levels. As a consequences, there are no hard or automatic trigger levels for a rating change. In any case, and that is important. For 2023, we consider our current rating safe in this stress test scenario. With the measures we are taking, we aim to secure this rating beyond 2023, and this is the focus of our actions. But if we were to assume that we are not successful with these measures. Our stress test analysis shows that the maximum risk is a one-notch downgrade and that would still be a good investment-grade rating. And again, make no mistake, this is under the assumption that we see a period that is much more adverse and much longer than we realistically expect and it assumes that we fail with all mitigants such as disposals or higher rent growth. Our clear target is and remains to protect our current rating. To sum this all up, the main point is that we do not foresee any need to raise emergency equity or to have to engage in uneconomical fire sales, both from a liquidity and leverage perspective in order to remain within very healthy investment-grade thresholds. Moving to Page 10, which shows the segment overview. Here, following the very successful integration of Deutsche Wohnen, we are now able to show you the Deutsche Wohnen contribution within the different Vonovia segments and of course, the biggest impact was in the rental segment. We have also restated the 2021 numbers to reflect the Deutsche Wohnen contribution across the segments, but last year, it was only for Q4, of course. The group FFO of EUR 2.36 billion was 20% higher than last year and almost at the midpoint of our guidance. On a per share basis, group FFO increased by 17% to EUR 2.56. We were not able to fully pass on the EBITDA growth as some of that was absorbed by higher interest expenses because of a larger debt volume and somewhat higher current income taxes. Moving to Page 11. As you can see, rental revenue was up 23%, which was, of course, largely the volume effect. On the cost side, the increase was smaller for both maintenance and operating expenses, even though we have only realized about EUR 20 million of synergies from Deutsche Wohnen and transactions so far and in line with our expectations. On that basis, the rental EBITDA growth exceeded the top line growth and was more than 25% up. Synergy realization will be much higher this year compared to last year, and it will be a meaningful boost to both the EBITDA operations margin and our cost per unit. Moving to Page 12. Here, organic rent growth in 2022 ended up at 3.3%. Here, 1% is coming from market rent growth, the reminder investment driven. Of course, that number for now excludes the impact from higher inflation. We will show you on the next 2 slides how that is now changing. Our vacancy rate is 2%, which is actually the lowest level we have ever had since the IPO, and I don't think it was lower than that even any time before the IPO. The next chart is new. And we included this chart because we get quite a bit of pushback from you guys who fear that rent collection will come under pressure given what we see in terms of price development. I think the numbers speak for themselves. Rent collection rate, which has always been high to begin with, is at its highest level, we are only seeing a default of some 20 basis points of gross rents. And finally, maintenance, we are more or less on the same level as last year on similar volumes. So again, this, I think, is a good proof that we were able to compensate inflationary pressure. And with that, back to Rolf.

Thank you, Philip. For my part of the presentation, Page 13 and 14 are probably one of the more important. We think this is a changing environment. It needs to have a little bit better and deeper training of what is the mix bag all about. So let's take a closer look at market rent growth and Mietspiegel. On the left-hand side of the slide, we have a reminder on the Mietspiegel basics. And while there's a 1,000 details, one could discuss about the Mietspiegel system. There is one basic fact that is important to understand for all of us. The Mietspiegel is a market-based instrument. It is not the result of the political -- this is specifically the case if we talk about the detailed so-called qualified Mietspiegel, which will be mandatory for large cities starting '24. We probably all have ignored the small changes in the German legislation. That means that we will have to be a true and fair reflection of local rental levels and based on a scientifically recognized metrology. That is why in '22, we have begun to see an acceleration, and this is driven by supply/demand imbalance and not by inflation yet. Going to Page 4. Maybe even more interesting is a look ahead. We have listed the large cities in our portfolio and the timing of when we expect a Mietspiegel update plus what kind of update. The first large city is this year was Munich, which came out with a new Mietspiegel that was 21% higher than the one, 2 years ago. And this Mietspiegel is based on a full bottom-up calculation of market evidence after Munich has rolled over the Mietspiegel 2 years ago when inflation was still very low. We should not expect all other Mietspiegel to come out at 20% plus. But clearly, this is a proof that the Mietspiegel is based on the market and not on the political will. For your information, you need is managed by a social democrat mail. In general, we see 2 scenarios for most cities. Cities that did an indexation last time when inflation was still very low, and that has to do a full bottom-up calculation this time like Munich, where the increased supply/demand imbalance will be the main driver. And cities that did a full bottom-up analysis last time and now we'll do a rollover based on the much higher CPI, which we see now. Either way, the actual market dynamic will translate into higher Mietspiegel growth and then, then have seen in the past recent years. You all have forgot what happens to Mietspiegels this inflation. This higher end growth is relevant in 2 aspects. First, it gets reflected in the cash flow projections and all else equal, leads to a stabilized valuation with positive impact on LTV. So this is yield expansion driven by a higher numerator, not a smaller denominator. Of course, the final valuation will also be dependent on market evidence, but the higher cash flow projections from accelerating rents will impact valuation directly and that will be positive for the values. And second, it increased the top line and supports the FFO. Not everything will come immediately because some of our apartments are already priced north of the Mietspiegel because they were relet or modernized recently. And because of the maximum annual rent increase kept so-called Kappungsgrenze, might not allow for the full impact to be reflected at once. But this is only a timing issue. And one final word on Berlin. Berlin used the option rollover based on CPI in '21. So They would need to do a bottom-up calculation based on market evidence to main their status as a detailed Mietspiegel. You know if you don't have a detailed qualified Mietspiegel, land laws has the right to use the comparable apartment methods to fix event. However, there is not enough time left now to prepare that and that is why we expect meat burning to implement a simple mice figure in '23 to bridge the gap before they do a full bottom-up calculation in '24. Let's see what the growth rate in '23 will be, but I think it is fair to say that it will not be around 1% like '21. If you ask me, my estimate is around 6% for '23 and then a full bottom-up analysis for '24, which has to lead to a very attractive rate as well. Let's go to Page 15. The EBITDA from value add short of our expectation. And while we did see growth internally and externally, we were not able to pass it down to the EBITDA level because of higher cost base. The negative impact were mainly the reduced investment volume technology change and planned heating systems, inflationary pressure as well as COVID-19 safety measures and increased absence ratio due to sickness and quarantine, which forced us to rely on more expensive subcontractors. Page 16, recurring sales. Both volumes and fair value step-up were higher than in '21, but the number of sold units fell a bit short of our guidance because of the more challenging environment condition, especially in December. The appetite for this product is still there, but more for vacant units, and we do not have too many of those. While Q4 was the strongest quarter last year in terms of volume in spite of the challenges, Q1 this year has been comparably light so far. As you saw on the cash flow side, the liquidity from recurring sales is substantial and far higher than the EBITDA contribution minus taxes that is included in the group. For '22, it was almost EUR 500 million of cash, of which only a small part is included in the FFO. And with this, over to Philip.

Yes. Moving to Page 17 on our development segment. As you can see, that continues to be a very attractive business, very healthy gross margins in a somewhat supply constrained market. We completed in excess of 3,700 units in the last year, of which roughly 1,700 units were to sell and 2,100 units were to hold. And as you can see on the lower left-hand side, we have been shifting, as we have discussed previously, more projects to both development to sell and in line with our revised capital allocation policy. Most new constructions are being sold to owner occupiers and sometimes the retail investors but projects are also more and more made ready for global exits. Moving to Page 18. On valuation, that will probably not come as a surprise by now. Looking at full year values did not move that much as the growth we have seen in H1 was basically reversed in H2 where we saw almost a 4% value decline. For the full year of 2022, the P&L impact on valuation was minus EUR 1.3 billion and resulted with almost EUR 700 million from the standing portfolio, EUR 450 million from development projects, predominantly in Deutsche Wohnen which we now carry at cost and not as before at the estimated disposal price, meaning fair value. And last EUR 130 million in our Nursing segment. So our spending portfolio was down 0.5%, excluding investments and up 0.5%, including investments. As of December 2022, our portfolio was valued at 3.6% gross yield or a 28.1% rent multiplier which, as you know, is the German way to look at this equation. This, of course, is based on in-place rents and the multiple would be quite a bit lower on the market rent basis where we do see a lot of dynamic, as Rolf alluded to. The German portfolio was valued at EUR 2,590 per square meter, which compares to a medium purchase price for condos of EUR 3,600 and the medium purchase price for new construction of EUR 5,300. And if you look at Berlin or fair values, was slightly above EUR 3,100 and that compares to an average condo price of EUR 5,500 and new build of even EUR 8,500. So if you look at the delta that is really more than 40% and 60%, respectively. Speaking of valuation, the higher interest rate environment also resulted in a technical impairment loss under German GAAP no consequences for the consolidated accounts, but for the statutory accounts of our holding Vonovia SE. Moving to Page 19. On EPRA NTA that was at the end of last year at EUR 57.48, so down roughly 8%. This change was driven by deferred tax adjustments in the context of our new portfolio clustering, asset revaluation and depreciation and obviously, the 2021 dividend. Moving to Page 20. We already covered the 2023 and 2024 maturities on one of the previous pages. What is important on this page is that you see the impact of our overall smooth maturity profile. The average cost of debt has gone up from 1.1% to 1.5%. Of course, this is nothing. This is not nothing, but it does show you what we have pointing out all along, the higher rates eat into the overall cost of debt only slowly. And Rolf already spoke about the accelerated top line growth. So this is exactly the interplay we expect to play out in a higher interest rate environment. The other number I want to draw your attention to is the fair value of our debt, which was 83% of the nominal value at the end of 2022 compared to 96% at the end of 2021, and this opens up opportunities for liability management to the extent we can deploy excess cash. On the next page, we show our 3 main debt KPIs. Net debt-to-EBITDA was 15.8x, so very much in line with what we had expected and guided for. Our target 14 to 15x and the measures we have put in place will enable us to get there. ICR stood at 5.5x, so down 0.3x but still very comfortably above what rating agencies expect for our current rating and certainly way above the potent covenants. LTV was just outside of our target range at 45.1%. And here too, I do expect the measures we have initiated to move the number back into the range as we are working to get towards the lower end of our 40% to 45% range in the medium term. In terms of LTV sensitivity, our dividend proposal provides a full percentage point advantage over a full all cash dividend, assuming a scrip take up similar to previous years. Moving to the next page on investments. The 2022 investment amount was a bit more than EUR 1.4 billion and in line with the prior year, even though the portfolio was, as you know, due to the acquisition of Deutsche Wohnen substantially bigger. This is, of course, the result of us stepping very hard on the break and the 2023 guidance takes this even a step further. The reduced investment program is the consequence of us increasing the return hurdles for our investments and the funds we are investing are generating returns above our increased weighted average cost of capital. The most attractive form from a net initial yield point of view remains apartment modernization -- sorry, apartment optimization with a yield on cost of more than 10%. On the right-hand side of this page, we provide some additional color on development to sell. We sometimes hear concerns from investors that this is a kind of black hole that brings with it unpredictable liquidity needs. I think the truth is quite different. We have committed about EUR 3.5 billion of capital to our development business, this is less than 4% of our balance sheet. And to be also very clear, we are not providing more funding. So development to sell is a self-financing entity, which means that new projects must be financed through the disposal of finished projects. So we are very much looking towards the recycling of our inventory. In light of the growing supply-demand imbalance, this part of our business, however, remains very attractive, but the scope in the overall context of Vonovia as small and will remain small in this environment. And with that, back to you Rolf.

So on Page 23, I would like to talk about energy efficiency. Coming back to our investment program, Page 22, showed how our investment volumes has come down. This raises the question, to what extent our climate path is impacted? If you look at Page 39, you see that we are actually ahead of the curve. And on Page 23, we show the energy efficiency classes for our German multifamily home market versus our portfolio. And that shows how we are in a more favorable position because of early start versus the market and our high level of investments over the year. We have just 5% in G and H combined which are the 2 energy classes that Germany and the European unions are targeting to clean up first until 2030. So we can afford to slow down for the time without jeopardizing our climate targets. In broad terms, asset with an energy efficiency class of C or better can be made climate neutral by installing heat pumps, where assets with D or below will also need a comprehensive modernization of the building envelope. And of course, what we are doing, we will do also concentrate in energy heat pump installation in the next years. And let's not forget, good energy performance is not only important with a view towards the climate. We also expect to see a value dispersion between more and less energy efficient assets. On Page 28 (sic) [ page 24 ], we provide details around our SPI, which is the leading nonfinancial KPI for Vonovia. The 103% target achievement for '22 was driven by good performance on CO2 reduction, lower primary energy need for new construction, a higher ratio of senior-friendly apartments conversion and yet another increase in customer satisfaction. We fell short on the two criteria, employee satisfaction and gender diversity. And now Philip will give you an overview of the investigation.

Yes. Moving to Page 25. So what are the allegations? Last week Tuesday, as you know, authorities, such 2 of our offices in connection with allegations against meanwhile, former employees and also external parties accused of fraud, embezzlement, collusive tendering and commercial bribery related to the awarding of contracts to subcontractors and to the detriment of Vonovia. No allegations are made against Vonovia. What is the impact of that? Based on the information currently available to us, the maximum order volume with third-party companies potentially affected by the investigations for 2022 is less than a percentage point of the maintenance and investment volume and at similar low levels in prior years. And the actual impact of fraudulent action is expected to be only a fraction of that. We and our auditors therefore agree that the allegations do not have any material impact on the company's net asset financial position and results of operations. But what is our reaction? We have set up an internal task force that is going to be headed by the General Counsel, and it's going to be sponsored by myself to investigate any potential involvement of individual within Vonovia, including its decision-making bodies, any breach of duties by representatives of Vonovia, any impact on Vonovia's customers, but also obviously, claims by Vonovia against third parties. And in this context, as you all have probably read, we have mandated Deloitte and Hengeler Mueller to product a very comprehensive internal investigation, and that, to be very clear, will also include a comprehensive review of our internal control system. And what can you expect a very comprehensive and diligent internal investigation, and we will make the results available once they are available, but that will take a couple of months. What you can expect also is full cooperation with authorities and improvement of processes if warranted based on the results of the investigation, and we will update you when material new information will become available. Let me now move to the next page on guidance, where we have presented our updated guidance. The majority of our KPIs are stable, but we have adjusted 3 line items: revenue, total EBITDA and Group FFO and that is really to reflect the higher uncertainty around volumes and profitability in our sales channels. So you will see that we have decreased the lower end the ranges for a and also made a small haircut of the EBITDA of the top end of the EBITDA range. Our expectation for the operating business are entirely unchanged. So this is a bit technical to ensure that no one is overly optimistic around the 2 sales channels that go into the group FFO, which is recurring sales in our development business. And to avoid misunderstandings, all other disposals we pursue the joint ventures the potential disposal of Deutsche Wohnen Healthcare business, noncore multifamily homes and/or commercial assets, they all have no direct impact on our guidance.

So with me -- now it's with me to wrap up the call. As you have seen, the operating business is stable and produces increasing cash flow. The market fundamentals in terms of operation could hardly be better. The mega trends around which we have built our business are becoming even more relevant and dominant. The discussion around the direction of our fair value is important for the balance sheet stability, and we have shown you in the stress test scenario that we consider our balance sheet waterproof even under very adverse assumptions. For our equity valuation, the fair value seems to be much less relevant because the market is already made up its mind. The average historic spread between our FFO yield and the bond yield was around 440 basis points between 2013 and 2021. I and it has widened to around 720 basis points on average since the beginning of '22. This is a shift of almost 300 basis points. unless you believe you need a massive equity raise, and I hope we were clear on how we think about that. This leaves quite a buffer for anyone's negative expectation. And this is the finish a presentation.

And open the Q&A. So Francie, back to you, if you can get us started on the Q&A, please.

[Operator Instructions] We have the first question from Charles Boissier from UBS.

So 3 questions from my side. The first one on...

Charles -- sorry, can we take them one by one if you don't mind?

Of course. So first question on disposals. Rolf mentioned on JV structures, there are ongoing negotiations, but the current investigation is not helpful. So I just wanted to understand, should we deduce that because the platform was a bit of a selling point, potential buyers are now waiting for clearance on the investigation before the JV sales can happen.

To be clear, there is a part of the world where this library and all these is very sensitive in going into partnerships. And that's why I think some of our potential partners has to go to compliance clearance. And that's why it is probably taking longer than we expected.

Second question on Slide 9. Just to play a bit devil's advocate. You mentioned this is a stress test analysis, is it what you're discussing as a stress test with your Board and the rating agencies because some of the assumptions like the 10% value loss in 2023 what confidence do you have? This is actually a stress test scenario. It seems that right now, there are not so many disposals, so we don't have as much visibility on the clearing price.

Yes. I mean, this is essentially what is the stress scenario about because what we essentially did is to max out a couple of assumptions and to see what would actually need to happen before we were to consider any more drastic measures in terms of disposals at prices below our book values and/or any kind of capital raise. And I think -- and I'm kind of repeating what we have said in the presentation, if you were to consider an uplift in interest expenses by another 50% compared to where we are today. And over the next years to consider in addition to what we have already seen, another value decline of in aggregate, 20% and our top all mitigating factors not bearing fruit in terms of asset disposals. So the radio silence, if you will, disposal market. I think this is a very drastic description of a potential adverse scenario, but which equally provided us with a certain degree of comfort that we do have, in fact, a very stable and resilient business because on rents, which account for the vast majority of our EBITDA and FFO contribution, there is no there is no downside risk. And that also provides us with comfort that we don't need to hurry into any kind of premature decisions on the disposal side.

Right. So these are the levels of assumption at which you would move into more aggressive capital preservation if we were to reach those scenarios.

If it's getting worse than that, we would need to consider more drastic measures, yes.

Also to make clear, one thing is clear. This is not a onetime exercise. We have taken the decision a long time ago not to give you a long-term guidance. That's why this is the first time we have changed a little bit from this policy because in the end, we are talking here about the year's performance. Of course, internally, we are managing the company with a much longer and more plan. So of course, we have this on the radar. So if we see any changes, this plan is adopted on a regular basis. So we just wanted to give you comfort that we are not sitting here being just optimistic. So optimism we have in our business is based on a very fundamental on data-driven analysis -- of the near-term future. This is actually the chart or the reason for this chart.

Last question from my side on the guidance. So you're very positive on organic growth. You mentioned, especially in Berlin, you're mentioning 6% revision this year and a very attractive level also in 2024. So that sounds really supportive. So my question is, given those assumptions, what has changed in terms of the group FFO guidance for 2023 to be minus 9% at the midpoint versus slightly below 2022 before. This guidance seems more negative. So is it due to the refinancing assumption. But presumably, you were expecting a bit more disposal at the start of the year?

Look, as you can see, we have left untouched our guidance on our operating business, the rental business. So we have not baked in any evidence we see year-to-date on rent developments like the one Rolf mentioned in Munich. So I think realistically, on the rental side, there might be positive surprises. But what we equally need to recognize is that the transaction market remains challenging. And part of the EBITDA and part of the group FFO is driven by how successful we are in the recurring sales business, but also in our development business. And in particular, with respect to the latter, we do see that multipliers are coming down. We equally see that we are able to achieve better rents. But our expectation is that there remains an elevated risk that the increase in rents is not sufficient to compensate for the compression on multipliers. In that kind of margin squeeze this is reflected by somewhat adjusting the top end of the range we have given previously and also made us to extend the range of FFO and EBITDA in order to acknowledge that portion of our earnings, which are more driven by the performance of our disposal business.

The next question comes from Bart Gysens from Morgan Stanley.

I also have 2 questions. I'll take them one by one, as Rene asked. Look, I want to come back to capital values. CBRE said recently that is guiding to a 4% to 6% decline for German residential portfolios for the first quarter of '23 alone. And CBRE seems to be pretty accurate most of the time. But that means that your LTV has gone up another 2 points to 47% all else equal. And that guidance came before the recent shock to the banking system. If 10% is a stress test number for '23, are you basically assuming that pressure on appraisals is moderating despite the shock to the banking system? And are you basing that on conversations you're having with potential buyers?

Let me do the start, but I mean first, on capital values. I think what we need to recognize is that we also have a compensating effect by how the rental side of the equation behaves, and Rolf was alluding to that. What we continue to see is very thin transactional volume. So for us, we will do essentially a full-fledged revaluation of our residential portfolio with half year numbers. But to make any additional commentary around that, I think, is premature given that we simply don't see a lot of transactional evidence. All of that having said, I mean if you look at data, I mean, very recently for condominiums data has come out, which points to a somewhat stabilizing of the developments. So there are -- they remain kind of conflicting messages, how you interpret the different numbers. . I think in this business, we simply see -- or we simply need to see somewhat transactional evidence because either way, I'm not willing to base any assumption view on this kind of thin volumes we currently see in the market.

And Bart, probably one addition to this. I think the time is over where we discussed about average value development in Germany as I have shown you in the energy quality of the buildings. I think with all the debates which we see in the moment in the European level and in the German level of about energy classes and buildings people start to realize that a modernized building is getting an issue. And this, of course, has an impact on the value of this building. So what we will see, and this is also the prognosis that a better portfolio, especially with less of these buildings, such as to disappear until 2030 is probably value different in the portfolio, which has a German average or even below. So I think if you're talking to CBRE and to the data, they are talking about an average Germany and this is probably an effect which you have to take into consideration as well.

Okay. And then my other question is about the scrip dividend. I mean last year, the question has been asked multiple times. What would you consider to do to delever? Would you consider raising equity? And the answer was often quite consistently now raising equity below NAV doesn't make sense. Now you're effectively offering a couple of hundred million euros, not a huge amount, but still a couple of hundred million euros at EUR 18 or EUR 19 a share, 70% discount to NAV, creating what, 2.5% dilution while you have full flexibility on the payout, right? You don't -- you're not a REIT, you don't have to pay out anything. Can you talk to the rationale why do you scrip dividend?

Yes, Bart, let me take that one. I mean, as we have pointed out to preserve liquidity that was one of our key priorities. And obviously, the scrip dividend is working in that direction. Second comment, if you're offering a scrip dividend, it is non-dilutive if you opt for the scrip dividend. So if there is a dilution effect, it's only for those shareholders who opt for the cash component. And here, given that we are issuing shares at market the dilutionary effect is marginal. And kind of as a side note, if you are referring to the huge, huge discount at which our stock is trading vis-a-vis EPRA NTA. That is certainly true, but it also tells me that capital markets apparently don't put too much value to our EPRA NTA sale.

Okay. I'm not sure...

But let me also add one more commentary. I mean, not paying a dividend is basically not striking the right balance between very different objectives we have seen in our shareholder base. And I'm also very sensitive towards those shareholders who count on the dividend, and I'm very sensitive that I don't want to lose shareholders and thereby implicitly increasing our cost of equity and not paying a dividend at all. And that was also one very important consideration we have had in the discussion in the management board and also in our discussions with our Supervisory Board. .

But probably...

It could also be -- sorry, go ahead.

Probably let me also add one point. In the German context, it is not the management board and not the Supervisory Board who decides on the dividend. We are just doing a proposal. And we have to hear to all our shareholders because you don't want to have a management board decision in the shareholders' meeting that they do not accept your proposal. So it is not finally our decision. It is, and I think it's completely right, it's a decision of the owners of the company to decide how much money and in which form they take it out of the company. And we are doing a proposal.

I understand that, Rolf, that's very clear, but the problem is a lot of investors, you can also entice certain investors back to become a shareholder again, right? And perhaps some investors have [indiscernible] English vote with their feet and have sold the shares and maybe by not paying a dividend, you can entice some of those investors back. But look, I appreciate I shouldn't talk too long on this call.

The next question comes from Jonathan Kownator from Goldman Sachs.

I will go one by one. The first one, coming back to your organic growth, right? You had 1% in 2022 coming from the Mietspiegel. Clearly, you're telling us that the new Mietspiegels are coming for some at much higher levels. I think it's still difficult for investors to picture how much your organic growth can reach only through Mietspiegel. So can you help us underpin if you achieve the numbers that you're talking about, what is the path through to your organic growth? What key did be in TRA?

I think it is not about series. That's why we have not changed our financial guidance actually in the new guidance. There is probably an uplift potential. But as I've explained to you, first of all, it is clear that the mice will come up higher. We don't know exactly what will happen in every inner city. So you cannot calculate is. And second, what I've explained to you in the FFO immediately, not everything will come through because we have related apartments. So we are above the metier today, we can relet by 10% above. So Mietspiegel, we have done modernization. So this is a lot of variables, which we cannot calculate in detail before we don't know the output of the Mietspiegel. So the 2 slides in this presentation deck is just to remind all of us that it is probably helpful to do a little bit more work in getting educated in detail on the Mietspiegel system because what we are, I think, having not in the past is that with the qualified Mietspiegel, the municipality -- it's very expensive to make the qualified Mietspiegel because you have to pay external advisers to do it. So that's why municipality, normally do a qualified new Mietspiegel every 4 years. And the 2 years in between, it is by the German law alternative, not to do a full one, but to apply the CPI the CPI was relatively low. That's why nobody actually all everybody ignores the fact that in reality, the way how the Mietspiegel are done, in fact, the Mietspiegel is linked to the CPI, especially for the municipalities, which are not doing a Mietspiegel every second year. And if they are doing a new Mietspiegel every second year, the reality will be shown like in Munich. So I just wanted to make sure that we all together go a little more deeper in the Mietspiegel system because I think we were too lazy also including ourselves to go too deep in the way housing municipality and the legal framework to be done. But I cannot and I will not give you a new guidance for the rental growth. Let's wait and see. We just wanted to make sure that it is better understood because it has 2 components. One is and this is FFO, and this is probably happening later. The other one is the values. And there, the Mietspiegel increase, it goes immediately into the discount cash flow, which is actually a part of the valuation, of course, dependent on market evidence.

Okay. On the studio, I mean any guidance you'll be able to give, I think, going forward will be helpful to investors if I may. So the second question on the funding, obviously, given the current environment, some investors are concerned around the ability for you to access financing altogether. So can you please help us give us a bit more color on who are the type of financial institutions that you're getting secured debt from, how are they feeling in the current environment? Is the still open? Or can it close? In effect, what would it take for you to not have access to any liquidity whatsoever at this stage?

Jonathan, by all fairness, it's only a very theoretical question. I mean the unsecured market, whenever we tap the unsecured market, we get far more demand than what we offer and also in the secured banking market, I actually did recently a banking roadshow. So I've seen all our bigger lenders and they were all very eager with us to make additional business. And I mean, I was alluding to the fact that we have just actually yesterday signed the agreement for EUR 550 million, 10-year secured financing with a very competitive spread, and we have a number of ongoing discussions with the aim to secure additional secured financing as and when we need it. So appetite is there in terms of universe. We are talking to a group of roughly 15 banks. Those are banks who are on their side, able to refinance themselves to the so-called brief market that allows them, in turn, to offer us very competitive terms, and there is sufficient headroom and sufficient appetite. So for me, to be very clear on this point, it's not an issue of accessing liquidity the issue we are facing is that financing become -- has become far more expensive. And that is the reason why we intend to delever also with a view to manage our interest expenses.

Just for the sake of clarity, can you just remind us how big is the foundry market and as it ever closed before?

It has never closed. At least, I'm not aware that it has ever closed. I think the limitations are more in context to be read that we have an unencumbered asset ratio and that kind of defines the headroom. If I recall correctly, the additional headroom we have comfortably is roughly EUR 7 billion. We would probably not stretch that to the limit. But by that, you can see that there is a lot of additional funding available in the secured banking market. But again, as a reminder, this is not about additional funding what we are currently doing. It's about extending existing financing to the secured banking market, and our aim is to replace to redeem the unsecured bit.

Okay. Very clear. Apologies one last question. Rolf is going to like this one because I get it all the time. How are we progressing with government programs around housing, how they're thinking about the market? And are the new discussions around the European IRA program, something that impacts you directly.

No, fortunately, we were very aware about the European program probably at the same time as the German government or even before. So the European program is actually why I'm talking about the mega trend because it will generate a lot of stress assets in Germany, but not ours. That's why we have some slide in it because the remaining 5% is easy for us to get rid of until 2030 by modernizing. So -- but of course, in Germany, in the moment, if you read the German newspaper, it's a high emotional debate because now the first landlords figure out that they will have a problem and probably the time for -- until 2030 is late. But the German government, and especially the economic minister of Germany, which is also responsible for environment protection. Mr. [indiscernible], so I don't think that a lot of movement will happen there because if Germany is not fulfilling its target, it will pay -- has to pay billions of money to the European Commission. And this is all set in stone. So you cannot change it anymore. So I think, yes, we will have a lot of debates which will lead to the demand of more subsidies, doing something against helping landlords, all this, we will see. But in the end, my assumption is that, of course, probably some changes more or less the European legislation and the -- especially the German legislation, which is a bit weaker, will not get weaker, but even more stronger. So this will be a problem. And this is for us a chance, we have prepared a few years for this chance and probably will not realize not in '23, but probably somewhere in '26, '27, '28.

The next question comes from Thomas Neuhold from Kepler.

My first question would be on your disposal plans. Can you give us an indication what the total amount of assets you currently have in the market for sales? And in addition, I remember in the past to refrain from providing concrete disposal targets for a specific you're stating that this is not beneficial for your negotiating positions. So I was just wondering how you have this EUR 2 billion target out for this year. Does this mean that you are already well advanced with potential discussions about disposals what does this maybe reflect the increased focus on deleveraging? Or maybe you can also comment a little bit on the price entities currently?

So to be clear, I think in our presentation, you see the volume, which is out for disposal because this is the sorting, which we provide. This, of course, we don't want to sell. And I think this was a business understanding in this year all, but this is the volume. What we see is for disposal, the noncore and low-yielding and it's a condos. So -- and with this, we are in the market. I have to add, in the case of the municipalities, there are also some demand for assets coming from the municipalities, which are not sorted in these buckets, but which are in our more core assets. So -- which we are in the market is bigger than this. I don't want to give you a detailed number, but it is exceeding significantly the EUR 2 billion, what we are in the market. And yes, and I think this is the answer I would like to provide you. And again, thank you for reminding me, and that's why it was also important to show to the outside the stress test because everybody has to understand that Vonovia cannot be blackmailed. We are not in a position that we have to transact, and this is an important message to the market.

Yes, understood. And the second question is a follow-up...

The municipalities, especially the Social Democrats, they for them, the price is not the main driver. It's a specific asset they want to have for very different reasons because it fits well to the social agenda or to the political agenda. This is what we have seen, by the way, in the disposal in connection with the Deutsche Wohnen deal. This was 19,000 apartments, which were partly coming from us, but partly were selected by the Mayer because he wanted to own them. And you can -- you probably also to give you some more favor because it is public. The interest and you know we are a very big landlords there. . There is a decision taken in the parliament of the social democratic party saying they want to force the Mayer to buy not only the 3,000 offered apartments that we are offering to Tristan, to 5,000. So there is already decisions made in parliament in the specific case in public, where there is a decision to buy. So here, we have a partner which wants to buy. It's probably from the economical point of view, not the most we say, economical decision to go to somebody and say, "I want to buy without surprise, but this is how politic is working.

The next question is...

Are very clear to not give you an understanding. The problem is that the municipality companies, and we are experiencing now, they are normally buying one building and assuming the process and using the process to buy one building on a portfolio takes a lot of time.

Okay. The next question is on the funding situation. Can you provide us an update if the spread to need to pay for secured financing for 5 to 10 years to release now?

On average, 120 basis points.

And my last question is on the CapEx outlook.

For 10 years, right?

5 to 10 years, yes.

Yes. So secured financing is always for 10 years. That's most economically. And here, it's 120 basis points.

And the last question is on the CapEx outlook. If the going remains tough and you are not a successful disposals as expected, how much you think you could further cut your CapEx without jeopardizing your operational performance?

Actually, to be clear, we have different CapEx is modern CapEx maintenance. We are not talking about, but if you are looking on the EUR 850 million, this theoretically can go down close to 0. But this is why we are doing actually the disposals because we think we want to come back to a phase where we can invest and do value-accretive investments, right.

Thomas, to remind you, if I look at optimized apartments, the yield on cost is in excess of 10%. If I look at our upgrade building, we are comfortably also earning our increased cost of capital for a very, very good portion of our investments. So it is accretive to us even in the changed environment to be to continue to invest. So for us, it's really this year discipline to get the leverage where we want to have it, to be very robust in our capital structure. But then to continue to, as you would say, generate and continue to generate alpha.

The next question comes from Rob Jones from BNP.

I've got 4 questions. The first one, which I'll do them separately. Recurring sales, you said that Q1 '23 has been slow or quiet so far. You haven't cut your recurring sales guidance. And I wanted to know what gives you the confidence that your remaining 3/4 of this current financial year are going to be sufficiently high enough to achieve your guidance.

So first, in Austria, the business is very stable and with very high margins. So that's why we are not concerned. In Germany, to be very precise, the first quarter, mainly January and February, especially January was very weak, like December. We are seeing, at the moment, the number of reservations and rates are going up. which is in line with what Philip has said that the values are seems to be stabilized.

Okay. Great. And next one is on the...

To be very -- one addition is, at the moment, as I said before, there is a difference between in apartments, if vacant or not vacant because it's 2 different target groups. The once are not vacant, are actually institutional small investors. And there the market is different for every vacant apartment seeing the housing crisis in the big cities. It is relatively easy because it's the cheapest way to live in a big city in the moment to buy an apartment from us. So that's why it is also a function of how much vacancy we can generate in this portfolio.

Very clear. Secondly, on the bribery allocations. So we had LEG saying that they had an increase in cost of funding around that date when they were looking at doing some private placement, have you seen any higher cost of financing that could potentially be linked to that? And secondly, on that topic, can you disclose the number of former employees involved. In my head, I'd like to see a scenario where it was the number of employees I'd be able to count on one hand, and they were known to each other, and therefore, cases at this stage from your initial understanding could be potentially relatively isolated.

Look, I mean, I think we've been clear in that we do a very comprehensive investigation. And based on the results, we disclose details. But at some color. I mean, in terms of financing, given it was last Tuesday, there was not that much of financing we did. Meanwhile, except for the EUR 550 million secured loan and that had no impact whatsoever. I gave a call to the CEOs of both in both banks and they have been fairly relaxed. And let me some -- let me add some additional -- somewhat technical note on that. For this year, for the first time, we had to report under the EU taxonomy rules -- and here, we had to disclose also our OpEx, CapEx revenues, which are considered green and which at the same time are in line within do no significant harm qualifier. And you can expect our auditors to have a very, very close look given that they had to issue a review opinion that this is by no means material in order for them to issue the opinion. And as you can see in our audited and that is including the nonfinancial declaration, we have received not only the audit, but also the review opinion for the EU taxonomy disclosure.

Okay. The third question was on development. I see in one of the slides you're now holding them at cost rather than fair value. I'm not the master of IFRS 13, unfortunately anymore. But can you just remind me as to why from an accounting perspective, if that's the case? And if values fell again, does that mean that, that component of your portfolio wouldn't see a reduction in value because it's just still held a historic cost?

It's somewhat different. Historically, Vonovia was always accounting for developments at cost. What was somewhat different is that in context of the purchase price allocation, we did when acquiring Deutsche Wohnen we had to assign to the Deutsche Wohnen developments, the respective fair values, which are different from the cost method. And that obviously makes that portion of the portfolio far more vulnerable against changes in the market environment, which is why if I look at the valuation result, the EUR 450 million depreciation we have seen refers predominantly to the Deutsche Wohnen portfolio. For the old Vonovia portfolio, if you will, it's if at all, eating into the margin, but not into the valuation at cost.

Okay. Understood. And other one, Philip, was I remember -- and maybe now I'm thinking this may have been a dream, but I remember someone telling me that the nursing homes portfolio was a high likelihood to get sold in H1 '23 or even Q1 '23, and it feels like it's gotten a little bit quieter on that. So is that because potential suiters have walked away? Or is it just because you weren't happy with pricing? Or maybe the answer is you can't comment at this stage. .

So I think it is very clear. It is a decision of [indiscernible] to be formally right. I think we have made in our speech, very clear that we support still the Deutsche Wohnen by selling this asset. But we think it should be for the right price. And we have seen a big transaction in France, which gives you a feeling of the price level. you can achieve for this type of assets.

Next question comes from Paul May from Barclays. .

I've got probably 3 questions, I think. First one, can you explain or talk me through how your discount rates are unchanged year-on-year in your valuation parameters, just given everything that's happened with the cost of capital, it seems a bit illogical. But I just wonder what your theories are on that.

Yes, Paul, I agree, but that is because this time, for the first time, we are looking at the combination of the valuation we did not only for the Vonovia portfolio, but also for the Deutsche Wohnen portfolio. And the respective outcome was very similar for both portfolio portions, if you will. But the underlying assumptions were different at how Deutsche Wohnen and now in the combined approach, Vonovia has valued the Deutsche Wohnen. And that's why a long way in saying that the comparison 2021 to 2022 is not a good comparison. It's distorted by the integration.

Okay. Just to check on that. I think you gave the combination in the annual report this year around. So you combined Deutsche Wohnen and Vonovia. Are you saying that the combination in the 2021 numbers is wrong or is not looked at in the same way as 2022, just to be clear.

No, 2021 is essentially the parameters for Vonovia portfolio. 2022 are the parameters for the combined Deutsche Wohnen and Vonovia portfolio. And that's why the numbers, if you compare with be somewhat distorted.

You have more Berlin in it, a higher portion of Berlin than the Vonovia portfolio.

I appreciate just as I say in this percent of results you've got the combined in both we can do that one offline. That's why we can go through that. Just wanted to check, the average sales price of privatizations in Q4, I'm calculating at around EUR 165,000 versus EUR 221,000 average price for the first 9 months. Is there anything we should read into that as sales prices either come down materially? Or is it just your selling different types of units? Is there just more demand for lower value units? Just wonder what the changes were there versus the Q4 versus the 9 months?

So I think the last is right. This is a mixture of apartments what we are selling. And sometimes, you are doing some packages, which is more obviously used more for the less quality.

And then the last one, which is sort of combined, I think. You mentioned earlier on a question around the scrip dividend saying that it wasn't dilutive. I think in Q3, you specifically said it would be dilutive, and that's why you wouldn't do it just looking at the transcript. So I just wondering what the thinking has changed there? And if it's now considered to be not dilutive a rights issue is, by its very nature, not dilute it either. So I just wonder what the theory is behind why you're not writing off a rights issue, but happy to do a scrip if either one is not diluted in your thinking.

Yes. Look, Paul, I'm kind of repeating myself, it's striking the balance between offering a dividend in order to also safeguard our cost of equity. At the same time, has capital discipline and preserve as much cash within the company as possible. And for us, from what we heard from our shareholders that was the best compromised strike, which we are offering our shareholders for approval in our upcoming AGM. Not much more color I can give around it.

Okay. And just bringing all that together, obviously, market reaction today, and you can pay, whether it's the market or whether it's the reaction to your decision clearly telling you something different from what you're saying with regard to the market reaction. I think Rolf in your opening comments, you mentioned it's dangerous to sort of not look at market forces and to go market forces I just wondered at what point does it change and you think actually maybe the market is right and maybe a different strategy is needed? I just wanted to do any thoughts on that.

So I think it's our -- we still -- and I think we are also supported by a lot of shareholders saying management team has to provide the business, have to provide. And I think it is clearly said also if you look on our different companies, that there is this is probably more macro than the specific effect on. So I think our major task is to make sure that all stakeholders are actually considered in our strategy and are doing and that we deliver the I cannot fight against macro trends.

The next question comes from Andres Toome from Green Street.

I'll go one by one as well. First one is on disposals. You have more than $2 billion in the bridge there for this year I'm just wondering how much of that you have already signed? And what sort of pricing levels are you seeing for that?

So we are clear. We don't need fire sales. So that's why it must be around somewhere around fair value, of course, dependent on the different sales channels. and I cannot repeat more. I cannot do more than repeat. We are in good negotiations for a significant part. And we do not disclose any LOIs on what we are doing, and that's why you will hear if we unenclosed.

Okay. So right now, it's 0, but you are close to signing potentially on many deals. Is that the right way to read it?

We have the middle of March until the end of the year, it's a long period, right? We are saying they're doing the EUR 2 billion at the end of the year, not in the first quarter.

Got it. Got it. Understood. And then you've been on the market with several larger portfolios as well over the last sort of 6 to 9 months. Obviously, you haven't stalled a big portfolio. So I'm just wondering where have the bids come in? And where would be the sort of the line for you to pull the trigger? Would that be the December '22 reported values?

Look Toome, I mean, if you are in ongoing M&A discussions, I think the worst you can do is to guide the outside world as to how negotiations and in particular, how pricing discussions are going on. I think it's in your utmost interest that we don't disclose these kind of details to secure a good outcome. So please take our commitment that we do have the number of initiatives, negotiations going on and that based on the discussions we are having that there's a high degree of confidence that we will achieve the EUR 2 billion, by the way, 2% of our balance sheet, and that is what we are targeting for this year. But it's getting nowhere because we cannot provide and will not provide for technical reasons, any additional details at this stage.

Understood. And then my last question was just around Page 9 of your presentation, where you do those stress tests, so the unencumbered asset ratio, what exactly are you assuming there? Because you're saying 20% decline in values by end of 2024, that by itself would knock down that ratio probably around 125%. So what are the offsetting effects that are bringing it back to sort of same level where you are today?

Yes. You're comparing -- it's a relative measurement. So if you have a significant value decline, the encumbered and the unencumbered portion should go down by the same magnitude. So by definition, a value decline is not impacting that ratio. What is impacting that ratio if you change the mix between secured and unsecured.

Sorry. But your numerator is the asset side, but the denominator is the debt side, which presumably doesn't move by that very reason of asset wages going down.

Unencumbered assets and nominate as not the debt side.

It's the ratio.

It's a ratio.

You can take that offline.

We can take it offline, but you have a net in the back of your presentation where you show that on unencumbered assets divided by unsecured debt. But we can take it off-line. .

The next question comes from Jaap Kuin from Kampen.

Yes, I was hoping to get a bit more details about the guidance. So I think you've sufficiently indicated that the downside to the earlier statements is caused by more cautious stance towards development to sell profits and recurring sales profits. If I look in the numbers for 2022, the total amount included in FFO is around EUR 225 million, which almost coincides with the lower amounts at the low end of the guidance. So would you be able to confirm and break into steps exactly how you see the low end of the guidance? For example, does this mean you assume absolutely 0 contribution from these 2 segments in FFO?

It doesn't mean -- I mean, let me start that way. It's not that we are assuming 0 contribution from recurring sales and/or our development to sell business. But if I were to guide for a number by which group FFO were to be impacted if, in fact, we are selling it's not far away from that number of EUR 200 million.

Okay. So -- because to my understanding, there must be -- maybe please tell me if I'm wrong, that must be 80% to 90% of that number of these because you highlighted that basically the downside to FFO was not caused by anything else.

But it's very clear just to do the recurring sales. At the moment, we are doing a margin of 25%. If we decide not to do margins and the average is gone, right? And this has an impact on FFO. We are still selling for book value but without the margins, that's why the EBIT is gone and this has an impact on the guidance.

Yes, of course. My point being that if the delta versus this year could be EUR 250 million, that's the full amount of the contribution of this year. Hence, there's no room for anything else.

But this means actually, if you're doing this calculation, it's too rough, but in principle, if you are doing it, the sales that we're all selling everything for book value.

Yes, correct. All right. And then my second question is you're cutting on modernization CapEx. So if you think about kind of lead times in modernization projects being 2 to 3 years. Could you maybe confirm that and explain how you see that working through in like-for-like growth going forward. Is that correct to expect that actually the cutting in CapEx last year and this year has almost no impact on like-for-like.

No, no. So we are doing more or less. So the CapEx is, of course, modernization is actually 2 things, which is to optimize apartment. And there you're doing the CapEx at the moment the apartment is empty. And 2 months later, you get the increased rent because you're relating the apartment. So this is very short term for the modernization for the energetic modernization, you know we are doing a plan over summer. So in the Q3, we are normally giving you an indication for the next program. And then we start to do the modernization in the next program. Of course, there is a small overlap to them. For example, we start a new hire program in for '24. There will be a small overlap into '25. So -- but this is not meaningful, and this also depends on the combination of how much energetic modernization optimizer partner we are doing. And to be very clear, with an above 10% yield in optimized apartments. This is a very attractive investment. And as soon as we have finished our capital discipline period saying that we are now focusing this year on delevering. I think I'm assuming that we achieved the EUR 2 billion of disposal this year. I think you will see a normal investment program coming back in '24 without giving you any guidance here, but this is at least if you follow our strategy. And what we have said is obviously what you can read in this.

We have the next question from Marios Pastou from Societe Generale.

Two questions from my side. Firstly, just back on guidance. Can you just walk us through the point you made on posit side of, say, the recurring sales business don't impact guidance. So the timing of disposals and the timing of debt refinancing, do you have an impact? If you could just maybe take us through some of the parameters there included, that would be very handy.

Sorry, I was -- could you repeat the question? It was very hard. You were somewhat breaking out. I didn't quite get your question.

Apologies, I'll try again. I'll speak a bit later. But in terms of your guidance, I know you mentioned the other disposals outside of your recurring sales and your development business don't impact on guidance that I just wanted to check surely the timing of disposals is pretty crucial on the confirmation of your guidance. So any parameters around that would be very useful for a bit more understanding.

Yes. I mean it has no direct impact on EBITDA and Group FFO. It has some indirect impact in that we will obviously use the proceeds of our disposals outside recurring sales and development to sell to delever the balance sheet, and that allows us to save interest expenses. It's not the most meaningful number given that what we redeem is that, which is currently bearing interest of 1, 1.5 percentage points. And if you do the math, it's not moving the needle too much.

And to be clear, on the other side, if you are selling buildings now, you are losing the revenues and the EBITDA of these buildings immediately. If you would in other extreme sell everything in December, you would have, of course, a positive impact on your top line because you still have the whole EBITDA and FFO contribution of these buildings. We are not doing it. This is not striking our strategy for sales, but it's just to explain you the mechanic.

Okay. Very helpful. So in essence, we should assume disposal later in the year under that rhetorical.

No, no. We are not saying this. We are saying we are doing the disposals when it's finished and negotiated. I just wanted to explain you the mechanic. So if we are doing a lot of this -- if we would do a lot of disposals now in March, we would have a lot of cash surplus cash which is in lying on the bank account before we have to repay the debt, which is probably maturing in December. So then we would have a negative impact because we are losing the rental contribution, and we have no contribution from debt reduction. So -- but this is just to explain you the technique. This is not driving the business. The business is driven by doing sales. If the prices rise, we are signing and closing as soon as possible. And on the other hand, we have to repay the debt when they are due.

Very useful. And then just secondly, on your value-add segment on Slide 15. How have you seen the environment as you've come into the start of this year? Should we expect a bit more stability on the margin side of things or be it offset with your reduced investment volumes? How should we see 2023 going forward?

No, I think what is clear is, at the moment, with the less investment, our insourcing ratio goes up, which is normally positive. We also see that COVID is now impacting less. So we have a high -- much lower illness rate at the moment than we used to have in the last year, with this is just a coat effect. So I think we will see a stabilization in the value-add segment.

Next question comes from Marc Mozzi from Bank of America.

I just wanted to be back on your Slide 7. Just to start with, I'm right to read that if we were to remove, as everyone has been mentioning, all the contribution from asset prioritization and development to sell. Actually, your operating free cash flow for of EUR 2 billion in that slide should be equal to 0, if I'm correct? Or is there another way to look at it because I'm missing something here?

Sorry, I mean if you're referring to recurring sales, net debt versus...

Yes, you start from your EUR 1.85 billion FFO contribution this year. And if you remove all the contribution of 2022 from asset sales, privitization and development to sell, then you end up with a free cash flow at 0 before dividend obviously. So what I mean here is everyone has been focusing on those 2 items from the beginning of this call, just because it looks like that everything we're discussing here about delivering, covering the dividend is all about disposals over privatization development or noncore. And then on top of the $2 billion you indicate at the tip.

Yes. Yes. But Marc, look, I mean, a, I think it's highly unlikely that we're not doing recurring sales business because it has a slow start, but it's actually happening. Second, you are deducting the entire and portfolio investments. Those are those ones, just as a reminder, who are yielding additional rental income. So by making that statement, you imply that these investments deserve 100% equity financing, which I think is not the reality. So if you assume and apply kind of our capital structure on the portfolio investments of, let's say, 40% debt and 60% equity to be on the very conservative side. the math still works, right?

Yes, maybe I'm not sure. I need you on the leverage here. I was just trying to find out the amount of cash you're capable to generate and my conclusion is it's entirely relying on this pro whatever the type of this to develop. Maybe we can discuss that offline. I'm surely missing something here.

Not again. I mean if you are doing an investment which is yielding additional rental income. I think it's simply not right to assume that this needs to be 100% equity backed. This is outside reality. And if I look at the profile and let's just return to kind of a normalized environment, if I look at the FFO post dividend, the group FFO post dividend. What is remaining in terms of what we can invest is allowing us to significantly step up the investment volume. So far in excess of the EUR 850 million we are stating here if you assume a typical financing of these investments in line with our capital structure, as I think this is the right way to look at it.

Okay. Okay. Got it. Second question is around what is currently the ongoing outstanding volume of construction currently on site in your terms? And what is the remaining amount of money for your development to sell. I mean we are specifically the amount of money you need to spend just to complete the buildings which are on site?

I mean what we have currently deployed in terms of capital is roughly EUR 3.5 billion for this year in order to complete roughly 3,000 units. An additional EUR 350 million is required. This is what we have earmarked for the running year in order to complete I think we have not given any guidance as to what our additional investment volume we currently envisage for 2024. But given that...

It will be very -- not meaningful anymore because we have decided, and I think back in 2022, not to start any new construction. So this is just the volume, which is now going down. and it is clear commitment that the capital exposure of the development business is not increasing. So for the development business, very simple. They sell buildings and then they can use the money to start new construction or they do not start new construction.

Okay. So if I'm reading you correctly here, you have EUR 3.5 billion, which is committed, you only need EUR 350 million, so less than 10% just to complete the EUR 3.5 billion at the way I should read it? Or are you reselling everything 100% upfront. So you get 100% of the cash upfront and then you go for the construction.

You are saying we are not starting new construction at the moment. This is what is happening. But since a longer time now. So there is a remaining pet, which just Philip has said, in the EUR 850 million, there is EUR 350 million of standing of buildings in '23 to finish. And there is a much smaller portion because it's logic, it's getting less and less for construction in '24. And then before we start new construction the development business, Daniel has to sell other billings to get cash in right? So this is not consuming cash anymore. But of course, to give you options, there is thousands of options we own land. We own everything. So I'm sure that Daniel will sell something that he can continue to build because we would like to build. But from our perspective, is very clear, there will be no more exposure than what we have committed here.

Yes. I'm just trying to understand what I understand from the housebuilding business and that's been a recurring traction from our side. there is this disconnection between on one side, the cost of use construction. You have started a building whatever the level of sales you need to -- you will complete it. So you will not wait for people to pay you before you finish the drilling and you complete the building. So there is somehow somewhere a cash drag from new construction which I'm not sure I'm unable to capture here, but we can also potentially discuss that offline.

It's very simple to be made very clear, there is no more money coming from Vonovia to the development business. It's very simple. Except the EUR 350 million, which we are spending. And that's why he cannot order any more construction. But he will sell because we have a lot of assets that she can sell. So then he will generate its own cash and that's it. But we can go in more detail, but it's very simple for the rental business and for the whole business, it's not meaningful. I understand if you're a stand-alone developers and actually your business, if you don't sell the business is that.

Okay. That's just what I wanted to make clear.

The next question comes from Thomas Rothaeusler from Deutsche Bank.

I have got a few questions. The first one is on leverage. You are currently at 45% LTV, but your target to get closer to 40%. Can you describe the major steps to get there and especially the time frame and specifically on the back of headwinds from lower property values. I mean if we assume the 10% value cut you referred to, I mean, you would need basically billions of disposal proceeds just to keep the LTV stable.

Thomas, just one remark. If you now assume that the 10% is our assumption for the value cut. I think you have to please keep in mind that we have said this is a stress test is a scenario is not what we're assuming, just to make clear that this very self everybody here, this is not an assumption. This is not a guidance. This is just the basic impact of our staff test. And with this, I hand over to Philip to answer the question. But just to make sure that we are not assuming a 10% plus 10% value downturn.

Thomas, I mean it's fairly simply math. If we delever by EUR 2 billion, that obviously has a positive impact on if we were to assume that we have additional value decline, which is not being compensated by growth in rents, we see that impact will be will be reduced or will go away. So ultimately, it's all about assumptions you have on capital values. And we're kind of going in circles now. All we can say and what we reiterate is that we take capital discipline series, that is why we have initiated a number of processes in order to free up capital in order to reduce leverage, and that is providing a buffer also in terms of our debt KPIs if there should be additional pressure on valuations. Again, I mean, we see conflicting, if you will developments. We have the supply-demand imbalance. We have repeatedly mentioned, we see pressure on rents, and we will have to see how that will calibrate in the market once we see more liquidity and more investors positioning in this market, which is currently only a very limited investor universe the case.

Okay. One question on refinancing. As I understand, you plan to refinance the EUR 2 billion unsecured debt maturities for this year, mainly through disposal proceeds. What are your alternative options if disposals shouldn't materialize? And what is the cost for that? And I assume this would require an adjustment of the guidance tens, right?

If we were not able to secure the EUR 2 billion of disposals. We probably have to some extent, tap the capital markets, but only to some extent, given that we have EUR 1.3 billion cash on hand already. We have secured a EUR 600 million loan from the European Investment Bank at very competitive terms, which we can draw any time on top of the EUR 500 million in the secured banking market. So even in that scenario, it is somewhat limited in terms of actual refinancing need for the running year. We are almost done. But almost, I mean, the delta is roughly EUR 800 million, what we essentially need in disposal proceeds to be done for the running year.

EUR 800 million. The last one is...

And to the extent it impacts our guidance is very much a function as to when we are doing the refinancing. And I mean, given that the bigger maturity is then in December, that's probably very back ended. So I don't see this to be a key driver to our guidance for the running year.

Okay. Got it. The last question is actually on CapEx and CapEx returns. I mean, if I look at rental growth for modernization was only stable at 1.6%. And despite much higher CapEx over recent years. Actually, which might indicate to declining return on CapEx. I mean, is this the right way to look at it? Or do I miss something? And what is -- what is the current level of yield on cost and I mean on average? And how did it evolve over recent years? I mean -- is there any chance to get more transparency on this, maybe on a regular basis would be very helpful?

It's very simple. I think we haven't changed. And I think we have shown you on this slide what we have done actions. We had a period before February '22 in the period after February '22. And before February [ '22 ], the costs were actually for cost for capital were going down. So it was a period where we spent actually investment where we did investment programs, which were above the cost of capital at this time, and that's why we did it. So now after we stopped actually all the investments, and we are recalibrating now the investment based on the new normal. And I think Philip has given you an indication that the part of the investment we are doing at the moment on a much lower scale is initial yielding above 10%. So I think there is a period of investment, which has decided before February and these investments are decided after February. And the yield of these 2 groups are very different.

You referred to the 10% for the apartment to invest. And what's the other -- the rest or...

Yes, but the rest is more or less stopped. That's why we are going down to EUR 500 million. So that's why this is the interesting part is probably in Q3 this year, where we will deliver our new investment program with new yields and new volumes. But therefore, we are working now on it. What is clear is that the old yield doesn't work in the new environment anymore.

The next question comes from Kai Klose from Berenberg.

Two quick questions from my side. The first one is in the group FFO calculation. We had an increase in the cash tax rate from 3.5% to 6.4%. Could you give more indication as more color on that? And what we can expect for '23?

Yes. On cash taxes, this is predominantly because we have reduced our investment volume, and this results in less tax deductible expenses, and this is why tax rate has gone up. That is one portion. The other portion is because we have increased development to sell in terms of profit contribution.

And the second question, we had around EUR 128 million of nonrecurring items in '22, which I think was primarily due to the integration of Deutsche Wohnen. This is possibly probably finished. Could you give a number for the cation for '23? Or are you -- and/or are you planning additional or new cost savings element in the context of, let's say, reduced spending strategy?

The EUR 128 million is predominantly Deutsche Wohnen to a very, very large extent, and I don't have the number on top of my head, but I think that to be a very reasonable number for this for the running year. And for '23 are very reasonable number. Let's follow up on that. I don't have it on top of my mind, which is an indication, it's not meaningful.

The next question comes from Simon Stippig from Warburg Research.

On with the call. First one would be in regard to valuation. So you had the development project revaluation to an ad cost valuation within the Deutsche Bond portfolio. So could you please indicate what's the gross yield of the Deutsche Wohnen development portfolio at cost when finalizing the projects? And is that roughly in line with [indiscernible].

We need to come back on that. I don't have that on top of my head.

Okay, sure. And maybe one more in regard to valuation. The nursing portfolio, could you indicate the gross yield on the portfolio currently?

Actually not is disclosing it. It has to be done by side.

But I can tell you, if you look at return on capital employed, so you simply take the fair value, the depreciated fair value of the nursing business and you look at the EBITDA contribution from the assets plus the operations, it's translating into a yield of 7.5%.

Okay. Great. That's very interesting. And just out of -- if -- I mean, you have to ask Buchum management for that and potentially not for that, but in general, but if your best guess, can you see something similar with residential portfolios where you see, okay, this is energetic efficient and sells better into a higher price compared to what you see in the nursing home area where there is the new flag reform? And do you see any pricing impact?

No, I think to be very clear, and this is -- again, it's Deutsche Wohnen, but we believe, and I think the new management of Deutsche Wohnen also believe the nursing home doesn't fit to the strategy of a housing company. And this is said, it's not about yields. It's said about strategy. And I personally convinced -- I also have our convinced that nursing is a different business. And that's why from my point of view, also for the Deutsche Wohnen, which is dominantly a housing company, it doesn't make sense to own nursing.

Sure. And that's totally understood. I just wonder how easily you can sell this portfolio, how easily Deutsche Wohnen can sell this portfolio? And given the...

Yes. And I give you just an indication in France, a much bigger portfolio was actually sold for a reasonable price -- performed there, of course, you have an operator and OpEx and OpEx property business, so the owner of the assets and then an operator the problem of the nursing reform is more on the operator side, not on the asset side, if I understand correctly, is business, but I'm far away from this.

Yes, that's right. I just wonder if there is a translationary effect on the prices and yields of the portfolio or general on the nursing home portfolio. But my second question will also be again, on valuation and on your core portfolio. So you indicated a gross yield of 3.6%. What would be the gross yield if I apply the market rent currently?

We will come back with this question, give us a second. So -- but I think there is an indication probably it's easier to be done. We are normally calculating in multipliers. So if you take the market then the multiplier is going 3.5 points down.

Okay. And then just one more question in regard in a reflection to November and what you indicated in November. So if I look into the guidance you gave for 2023 and then looking into financing costs that has not worsened given you looking into your unsecured bonds and where the year to maturity is -- then also there was this newspaper interview where you were -- given the supply/demand imbalances, it is more expected to have a stagnating development of values within the residential market. And now the guidance is what Charles indicated before, it's 9%, the midpoint below. So what I just tried to understand is what has changed since then? Is it predominantly the function out of the transaction market? Or is there something else that has changed that brings you to adjust the guidance downward on an FFO basis.

Yes. We are kind of starting repeating ourselves. On FFO, we said before, slightly below prior year. If you look at the top end range, at the top end of the range, this is the case and skewing that towards the downside. This is a reflection of the high uncertainty we have with respect to those elements, which are sales driven and are contributing towards the group FFO, namely development to sell and recurring sales.

Okay. Great. And the bigger level would probably be the margins on your recurring sales business.

Yes. Yes, it's always -- I mean, it's always a question on how you play pricing versus liquidity in both businesses.

Sure. And that's maybe one follow-up question to recurring sales. If I look into Q4 and your Q4 margins, then they came down within the recurring sales business. Is that then also because you're not selling only to retail investors, but also maybe a couple of more units to institutional investors, and therefore, you have to decrease your margin, what we have also seen before in previous quarters? Or is there anything assets that you, for example, had to discount your prices in that regard in Q4.

In Q4, we put more emphasis on liquidity versus pricing because we have done a tremendous job in the first 9 months. So against that backdrop, all of that averaging out at a gross margin of almost 40%. And against that backdrop, in fact, in Q4, we do quite a lot and also compromised a bit on pricing. If you look at the average gross margins, we were able to gather in the first 3 quarters. So again, it's kind of balancing that out. I think 38% is quite a good result. If you look at what has happened, so don't read too much into that.

That was our last question for today, and I hand back to Rene for closing comments.

Thank you, Francie. I guess we set a new record. I'll have to go to the file, but that may have been the longest call we've had. Thanks for joining, everyone. It was up only the start of our engagement after the results, and we will be on the road quite a bit over the coming days, both in person and virtually, and we hope to see many of you live or at least on screen. You will find a list of events on Page 58 of the presentation and of course, always online. As always, is any questions, do let us know. That's it for today. As always, safe happy and healthy, and have a great day and weekend, actually, everyone. Bye-bye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you very much for joining, and have a great weekend. Goodbye.