Letter from the Management Board
Together with my colleagues on the Management Board and our 7,437 employees, I can once again look back on a very successful year. Our strategy of focusing on our customers and their needs is being put into practice at all levels of the company and is paying off. Customer satisfaction levels are high and the key operating figures show very positive values for the 2016 fiscal year.
Our portfolio decisions, primarily the acquisitions of GAGFAH and SÜDEWO, have proved to be the right move. In the first few days of the new fiscal year, we were also able to acquire another portfolio that is a very good strategic fit for us: The acquisition of conwert Immobilien Invest SE will see our portfolio grow in attractive locations such as Berlin, Potsdam, Leipzig and Dresden.
I am delighted that our offer has enjoyed full support on conwert’s side as well: Following in the footsteps of the company’s Administrative Board, a large majority of conwert’s shareholders also accepted our offer. This means that the customers living in the approximately 25,000 apartments that have been acquired will soon be able to benefit from our highly efficient property management platform and have access to our innovative services.
As with our previous acquisitions, we are confident that we will be able to complete the integration process quickly and exploit the synergy potential very soon.
Our housing stock has become more valuable: On the reporting date, the EPRA NAV came to € 36.58 per share. This equates to a year-on-year increase of 22% based on a portfolio that features around 24,000 fewer units than it did in 2015. This increase in value is no coincidence, but the result of constant work in three areas of activity:
First, value-enhancing investments in our existing properties are starting to pay off: Since our IPO, we have invested more than one billion euros in our apartments, buildings and the residential environment, significantly boosting the quality of our portfolio. We will once again be stepping up these efforts considerably this year with an investment program worth one billion euros.
Second, our active portfolio management strategy is bearing fruit: Targeted acquisitions in fast-growing regions such as Baden-Württemberg and Bavaria now give us a greater presence in attractive locations than we had only a few years back. At the same time, we disposed of properties in other regions that we expected to show below-average development in the medium and long term. A recently published study conducted by the German Association of German Housing and Real Estate Companies in collaboration with empirica on high-influx cities (“Schwarmstädte”) also confirms that we have apartments in those areas of Germany that are in high demand. The study predicts positive demographic development in the long run for the vast majority of our portfolio locations.
Third, we made further improvements to our operating performance. Our property management platform allows us to manage our portfolio in an efficient, service-oriented manner. As a result, we were once again able to improve our operating performance data in 2016. The vacancy rate dropped by another 30 basis points to a very low 2.4%. This vacancy rate is largely the result of fluctuation and apartments that are vacant due to investments, meaning that Vonovia has virtually full occupancy. The monthly in-place rent rose to € 6.01 per square meter between 2015 and 2016, with 1.5% of this increase attributable to higher market rents. We achieved the remaining 1.8% as a result of property improvements. The FFO 1 per share increased by 25% to € 1.63.
The good overall operating performance is also reflected in all three of our defined business areas: In the Rental segment, adjusted EBITDA climbed by 13.2%. In the Sales segment, our sales strategy once again proved to be very successful: We sold a total of 26,631 apartments, 2,701 of which were privatized individually. The proceeds from the sale of properties in the “Privatize” subportfolio were 36.2% higher than the carrying amounts on average.
In the Extension segment, we successfully expanded our range of housing-related services and products, allowing us to achieve a clear increase in our adjusted EBITDA Extension of 51.6%. This increased the contribution that this business area made to the adjusted EBITDA Operations to 4.8%. We believe that there is still a long way to go until all of the potential in this area has been exploited. With the help of our own craftsmen’s organization, we will continue to pursue a creative approach to expanding areas such as digital services, energy supplies, senior-friendly living and improving basic apartment features in the course of the year.
Our financing situation is stable – and remained stable throughout 2016. The capital market was characterized by very low interest rates in 2016. Not least thanks to our solid rating, we are able to cover our liquidity needs on the capital market at all times. This is also owed to our LTV of 41.6% as of December 31, 2016 (before the takeover of conwert). This fundamentally stable financing situation will not change even if interest rates rise. In order to ensure this, we take a forward-looking approach to capital procurement and are extremely flexible. With an average maturity of around seven years and current financing costs of 2.1%, our financing stands on a solid long-term footing.
Our shares fared relatively well in a political and economic environment that was marred by turbulence across the globe. Over the course of the year, our share price rose by 8.2%, outperforming the DAX by 1.3 percentage points. This shows that our company, with its stable business model, is seen as a reliable player by stock market investors, even if cyclical stocks have been experiencing a revival in demand on the stock markets in recent months.
The housing policy environment is still being defined by the debate on how to resolve the shortage of housing. As a result, we continued to work intensively on densification and new construction measures last year, launching ambitious projects to create new, and most importantly affordable, apartments. We have already completed the first lot of new buildings and measures to add extra stories to existing buildings using modular construction methods. In the Hofstede district of Bochum, for example, we completed the first series-built residential unit with a modular construction. Fourteen new turnkey apartments were completed in the space of only three months with construction costs of around 1,800 euros per square meter. The term ‘modular’ means that the three-story building was erected at the construction site using standardized elements that were transported to the site in a lowboy trailer to be assembled there.
Last October, we published our very first Sustainability Report to reflect our conscious awareness of the special social role we play. The first progress report is set to be published as early as this summer. Our new headquarters will also be sustainable, as they meet state-of-the-art energy standards and are to receive a Gold standard certificate awarded by the German Sustainable Building Council (DGNB Gold). We will be moving into the six-story building for 1,000 employees, which is located right next to our current administrative building, in as early as 2018.
So what does 2017 have in store for Vonovia? My colleagues and I expect the year to be free of any surprises in a positive sense, which is what you, our shareholders, are accustomed to. We had already announced our main objectives for the year early on: We will be investing a record amount of up to one billion euros in our portfolio. These measures will focus on new construction, moves to add extra stories to existing buildings and improvements to existing building stock. As far as the EPRA NAV per share is concerned, we expect to see a value of between € 37 and € 38. This does not yet include possible increases in value due to further dynamic developments in our locations or the effects of the conwert takeover.
As a result of sales, mainly to implement our portfolio strategy, our portfolio was more than 24,000 units smaller on December 31, 2016 than it had been a year previously. We nevertheless expect rental income to remain stable at a level of around € 1.5 billion this year, despite the planned sales. We predict that FFO 1 will increase to between € 830 million and € 850 million in 2017. The amount that will be generated by the conwert porfolio is not yet included in this amount. Our outlook underscores the very reliable positive trend in our operating development, which is designed to be sustainable and to focus on the long term.
We want to allow you to share in our success. At our Annual General Meeting on May 16, 2017 we will be proposing a dividend distribution of € 1.12 per share. This is consistent with our policy of distributing around 70% of FFO 1 to you.
We would like to thank you, our shareholders, for the trust you have placed in us with your investment in our shares. We want to continue to systematically pursue our strategy this year, too, in order to boost customer satisfaction further and build on the company’s success.
Bochum, Germany, March 2017
Chairman of the Management Board
Rolf Buch (CEO)