Letter from the Management Board

Dear Shareholders, Ladies and Gentlemen,

Almost five years have now passed since we went public with what was then our new business model. Our objective was an ambitious one: We aimed to achieve nothing less than to use our strategy to reconcile what had, until then, been considered opposing interests of our target groups in a manner that would allow all of them to benefit: our investors, our tenants and employees, as well as society at large.

Today, we know that our idea was the right approach. Quarter after quarter, we continue to show that customer orientation is not just one of many factors, but rather plays the decisive role in our ability to manage residential properties successfully in the long term. The only prerequisite: We have to pursue an entrepreneurial approach – utilize efficiency potential, be creative and exhaust the commercial opportunities that arise.

Our 4+1 strategy, which essentially relies on a scalable business model, financing, portfolio management and property-related services as well as on making acquisitions as and when opportunities present themselves, has guided us along this path in recent years. The application of this strategy has not only changed the quality of our portfolio and the way in which we manage our properties, but has also resulted in us offering a much wider range of services: Today, we are more than just a property manager. We are a service provider that understands its customers increasingly better and is able to offer them growing support with innovative products and services. We also have our solid financial position to thank for our ability to achieve this – we have all of the possible options open to us in terms of our further development.

Let’s take a look at developments over the last fiscal year: In 2017, we picked up exactly where we had left off in the previous year in terms of continuing with our strong operating performance. In the Rental segment, we implemented our modernization and new construction measures as planned. Our innovative new building solutions using a standardized series construction system allowed us to underpin the role in which we see ourselves, namely as a company that provides impetus for the industry as a whole. In the Value-add Business segment, we successfully expanded the services provided by the craftsmen’s organization and our residential environment organization. At the same time, we also witnessed growth in our condominium administration, the supply of cable TV to tenants, and metering and insurance services. In the Sales segment, we continued to pursue our strategy of selective sales, reducing our portfolio significantly in regions that are not strategically relevant to us. We sold a total of just under 12,000 apartments in 2017 and acquired almost 25,000.

We were able to either reach or outstrip our quantitative targets: Including the conwert portfolio for the first time, the adjusted NAV per share rose by around 25% year-on-year to € 38.49 thanks to the very positive development of our property values. Increased efficiency, positive financing effects and growth in our Value-add Business segment, which comprises property-related services, pushed the up by 21% to € 920.8 million. This meant that it was once again up slightly on the most recent forecast. We had aimed to achieve a stabilization in our customer satisfaction indicator, the . In actual fact, however, it climbed by 1.6%.

In addition to these operational achievements, we were also successful in other areas: We completed the integration of the conwert Group comprising 208 companies and also achieved a legal merger of Gagfah S. A. with our company. Over the last fiscal year, we borrowed funds of around € 2.9 billion from a variety of sources and repaid loans worth more than 3.2 billion. Our financing remains stable, meaning that we can cover our liquidity needs on the capital market at all times. The key indicator in this regard, the loan-to-value ratio, came to 39.8% as of December 31, 2017.

Our share price showed exceptionally good performance last year, climbing by almost 34% and clearly outperforming the DAX (+12.5%). We see this as confirmation that, thanks to its stable business model, Vonovia is seen as a reliable player by stock market investors.

In 2018, we want to successfully continue on the path we have forged and further strengthen our leading position on the residential real estate market. In order to achieve this, we will be working on making further improvements to our customer services and expanding our service business. Energy services and energy distribution are a new service area that we believe holds the promise of good development.

We will be stepping up our investment program in 2018: All in all, the aim is to achieve a and modernization volume of € 1.4 billion. This includes the construction of new apartments, the addition of stories to existing properties and modernization in response to tenant requests. Capitalized maintenance will increase to a volume of more than € 360 million. In the current fiscal year, we will continue to dispose of properties that do not fit with our real estate portfolio in the long term, after which this process will be close to completion.

This means that our figures will continue to improve overall: Despite the sales, we expect our to remain stable, meaning that, together with improvements in other operating earnings items, we will be able to increase our FFO 1 further, bringing it to a value of between € 960 million and € 980 million, a figure that does not include acquisitions.

As far as our dividend is concerned, we will be proposing the distribution of € 1.32 per share to the Annual General Meeting on May 9, 2018. This would see the dividend increase by 18% year-on-year. When given the choice of either a cash dividend or a stock dividend last year, half of our shareholders opted for a stock dividend. We believe that this relatively high value is a clear sign of confidence.

What does the future hold for us strategically? The positive developments seen in recent years have boosted the confidence in our business model. Our numerous talks with market participants have shown that the opportunities and challenges facing many European metropolitan areas are similar to those in Germany. This is why, after performing an in-depth analysis, we have decided to add a European component to our strategy, which was previously focused on Germany, i. e. to turn our 4+1 strategy into a 4+2 strategy. This decision gives us the option not only of purchasing portfolios where opportunities present themselves in Germany, but also of pursuing activities in other European countries.

We took the first step in this direction in October, when we concluded a partnership agreement with the French Groupe SNI, which is now operating under its new name CDC habitat. CDC habitat is France’s biggest landlord with around 348,000 apartments. We want to use our collaboration to evaluate common growth and investment opportunities.

In addition, we made a purchase offer to the shareholders in the Austrian company BUWOG AG for their shares at the beginning of February of this year, after having published a corresponding announcement in December 2017. The acquisition of the conwert portfolio means that we have already been managing a small portfolio in Austria since last year. The acceptance of the offer would see the Austrian portfolio grow to around 24,000 apartments in the future.

BUWOG’s portfolio includes a total of around 49,000 apartments, 55% of which are located in Germany, in cities including Berlin and Hamburg. In Austria, BUWOG’s portfolio is spread over Vienna in particular and the regional centers of Graz, Klagenfurt, Salzburg and Villach. The successful integration of the portfolio would allow us to achieve cost advantages of € 30 million a year.

In order to exploit these cost advantages, realize integration projects like these and – in general – to be able to efficiently manage such an extensive portfolio, we need employees who are committed to common goals. My colleagues on the Management Board and I would like to thank the now almost 8,500 Vonovia employees for their considerable commitment.

We were deeply saddened to learn of the passing of Dr. Wulf H. Bernotat last year. He had been Chairman of Vonovia’s Supervisory Board since June 2013 and supported our company’s ascent from the IPO to the MDAX and then into the DAX 30. As a Chairman, whose thoughts and actions were always guided by a sense of entrepreneurial spirit, he made a particular contribution to supporting our strategic realignment, playing a decisive role in shaping our company’s development.

We would like to thank you, our shareholders, for the trust you have placed in us with your investment in our company. We are confident that we will be able to continue successfully on our positive trajectory with our extended strategy – ensuring both your satisfaction and the satisfaction of the people who form the basis for our joint success: our tenants and our customers.

Bochum, Germany, March 2018


Rolf Buch
Chairman of the Management Board

Rolf Buch (CEO) (signature)

Rolf Buch (CEO)

The profit or loss for the period to reflect the adjusted profit or loss from sales; period adjustments from assets held for sale; specific effects that do not relate to the period, are non-recurring or do not relate to the objective of the company; the net income from fair value adjustments of investment properties; depreciation and amortization; deferred and prior-year current taxes (tax expenses/income); transaction costs; prepayment penalties and commitment interest; valuation effects on financial instruments; the unwinding of discounting for provisions, particularly provisions for pensions, and other prior-year interest expenses and income that are not of a long-term nature.
CSI (Customer Satisfaction Index)
The CSI is determined at regular intervals by means of systematic customer surveys and reflects how our services are perceived and accepted by our customers. The CSI is determined on the basis of points given by the customers for our properties and their neighborhood, customer service and commercial and technical support as well as maintenance and modernization management.
Maintenance covers the measures that are necessary to ensure that the property can continue to be used as intended over its useful life and that eliminate structural and other defects caused by wear and tear, age and weathering effects.
Rental Income
Rental income refers to the current gross income for rented units as agreed in the corresponding rent agreements before the deduction of non-transferable ancillary costs.