Report of the Supervisory Board
Ladies and Gentlemen,
We were able to support the Management Board of Vonovia SE through a very positive 2017 fiscal year: The Management Board continued to pursue its long-term strategic approach and exploited the company’s good market position in order to further develop the strategy in the interests of the company and its shareholders. The operating business showed successful ongoing development: The company improved its performance data, forged ahead with the extensive investment program and made good progress with the expansion of its service business. These developments once again allowed Vonovia to achieve very good annual financial performance. As part of the expansion of the opportunistic growth strategy to cover foreign regions, a move which we support, the company entered into a cooperation with Group SNI (CDC habitat), a French company that pursues a similar business approach to Vonovia. This was followed, at the end of the year, by a takeover offer made to the shareholders in the Austrian company BUWOG AG. All in all, we are very satisfied with the development of Vonovia SE in 2017.
It is with great sadness that we continue to mourn the passing, on August 27, of Dr. Wulf H. Bernotat, the long-standing Chairman of the Supervisory Board who remained in office in the 2017 fiscal year as well, and deeply regret the fact that he is no longer able to share in this success. Dr. Wulf H. Bernotat had been at the helm of the Supervisory Board since 2013 and played a particular role in shaping Vonovia’s development. He accompanied and supported the company’s strategic realignment with a combination of true entrepreneurial spirit, vision and experience. It is with a great sense of solidarity that we pay tribute to Dr. Bernotat posthumously for the extraordinary contribution he made to Vonovia’s success.
In the 2017 fiscal year, the Supervisory Board continuously monitored the Management Board’s management activities and provided the Management Board with regular advice concerning the running of the company. We were able at all times to establish that their actions were lawful, expedient and regular. The Management Board fulfilled its information obligations to an appropriate extent at all times, notifying us regularly, promptly and comprehensively, both in writing and verbally, of all circumstances and measures that were relevant to the company. This also included notifying us of any discrepancies between the planning and the actual course of business events.
In both committees and plenary meetings, we always had ample opportunity to critically appraise the reports and proposals submitted by the Management Board and to contribute our own suggestions. We discussed and tested the plausibility of all business occurrences of significance to the company, as communicated to us by the Management Board in written and verbal reports, in detail. Where required by law or the Articles of Association, we granted our consent to individual business transactions.
Cooperation Between the Management Board and the Supervisory Board
Up until August 26, 2017, the Supervisory Board consisted of twelve members, and thereafter of eleven. We were on hand to support the Management Board in the various meetings held and also in its key decisions. We also kept a close eye on the company’s business development outside of meetings. The Management Board regularly informs us about key events and the company’s strategic direction as part of a collaboration based on trust.
In my role as Supervisory Board Chairman, I remained in close contact with the Management Board even between Supervisory Board meetings, regularly exchanging information and ideas. Other senior management and supervisory personnel were promptly notified of any important findings or judgments, and at the latest by the next board meetings.
During the fiscal year, the only conflicts of interest of Management Board or Supervisory Board members, which are to be reported immediately to the Supervisory Board, related to the Supervisory Board’s decision to make a takeover offer to the shareholders of BUWOG AG; Vienna/Austria. A member of the company’s Supervisory Board, who is also a shareholder in BUWOG AG, did not take part in the consultation or decision-making processes that took place on December 1, 15 and 17, 2017. Important transactions involving Supervisory Board members and other related parties within the meaning of IAS 24, including family members and intermediate companies, were reviewed on a regular basis.
Focal Points of Our Work
In line with the duties assigned to the Supervisory Board by law, the Articles of Association and the rules of procedure, we closely scrutinized the Group’s operational, economic and strategic progress last year.
In 2017, our advisory sessions and resolutions focused, in particular, on Vonovia’s strategic and operational further development. This included the expansion of the service offering, the implementation of the investment program, including the investments in new living space, the exploitation of opportunities resulting from digitization, the portfolio strategy, internationalization and opportunities for further portfolio expansion. We also took an in-depth look at the future management structure of the company.
In the 2017 fiscal year, the Supervisory Board met a total of nine times to pass resolutions: five times at meetings (March, May, August, September, December) four times using conference calls (July, October, twice in December) and twice via written circular (January, February). Any members absent from the various meetings had always been excused. Four members were excused from the conference call held on July 10, 2017, one was excused from the meeting on August 1, 2017, one from the meeting on September 7, 2017, two from the conference call on October 9, 2017 and two from the conference calls held on December 15 and December 17, 2017 in each case.
Participation in the nine Supervisory Board meetings averaged 88% in the 2017 fiscal year. No member of the Supervisory Board only took part in half of the meetings or less during their term of office in the fiscal year under review. The same applies to the committees.
In preparation for the meetings, the Management Board submitted timely, comprehensive and valid written reports and resolution proposals to us.
On January 3, 2017, we determined, and passed a resolution via written circular on the maximum number of new shares for the non-cash capital increase in connection with the voluntary public takeover offer that Vonovia SE made to the shareholders of conwert Immobilien Invest SE.
On February 24, 2017, we approved the submission of the “Declaration of Conformity by the Management Board and the Supervisory Board of Vonovia SE to the Recommendations of the German Corporate Governance Code pursuant to Section 161 of the German Stock Corporation Act (AktG).”
On March 6, 2017, the Supervisory Board met to adopt the balance sheet: We approved the company’s annual and consolidated financial statements as of December 31, 2016 and prepared the agenda and the resolution proposals for the Annual General Meeting. This also included the proposal for the first-time optional dividend payment in the form of a stock dividend. Under the “HR-related matters” agenda item, the Supervisory Board discussed, and passed resolutions on, the remuneration and target achievement issues that had been prepared by the Executive and Nomination Committee, as well as the extension of CEO Rolf Buch’s contract until February 28, 2023. The status of the acquisition of conwert Immobilien Invest SE, Vienna/Austria, was also discussed: We discussed the resulting financial synergies in detail, addressed the issues relating to the operational integration of the German properties and passed a resolution on a capital increase for other conwert shares offered during the grace period. We also discussed the company’s operating business performance and approved the neighborhood development project in Berlin-Tegel involving the modernization of 1,100 apartments and the construction of 360 apartments in the period leading up to 2023. Other topics included financial performance, Vonovia’s situation in the capital market environment and corporate governance from an outsider’s perspective.
At the meeting held on May 8, 2017, the Supervisory Board took a detailed look at business developments on the basis of the key operating figures. We addressed a number of topics, including the investment programs, the expansion of the technical service and the expansion of the multimedia and metering services. In order to evaluate the company’s performance, we discussed a comparison of key figures between Vonovia and various peer group companies, paying particular attention to expense, cost and interest rate structures. As far as financial performance is concerned, we discussed the rent ceiling and the link between the investment programs and rental price developments in Vonovia’s portfolio. Another agenda item was the development of the company on the capital market and the feedback from investors and analysts. In connection with the transactions requiring our approval, we approved two capital increases: The first was made in connection with the scrip dividend and the second related to the merger of Gagfah S. A. and Vonovia SE in return for payment of compensation for the Gagfah shares that were canceled in the form of new shares in Vonovia. We also approved the construction of 950 new apartments in Berlin-Siemensstadt. Within the context of HR matters, we also discussed the remuneration paid to the Chairman of the Management Board and succession planning for the Management Board, taking the requirements associated with a diversity concept into account. A final topic for discussion was a media response report showing that Vonovia is now outperforming numerous competitors.
At a conference call held on July 10, 2017, we discussed the extension of Gerald Klinck’s contract as a Management Board member and Vonovia’s future structure regarding its functions/executive divisions, considering the proportion of women.
At the meeting held on August 1, 2017, we evaluated the Audit Committee’s reports for the first quarter of 2017 and the first half of 2017 as well as the strategic audit objectives and the fee paid to the auditor for the 2017 fiscal year. Based on the preparatory work performed within the Executive and Nomination Committee, we discussed the situation relating to Management Board succession and followed Gerald Klinck’s wish not to extend the contract as a member of the Management Board beyond the agreed contract end date. In light of the general diversity requirements, we set targets for the period leading up to December 31, 2021, by which time we aim to have a Supervisory Board that is at least 30% female and a Management Board that is at least 20% female. The meeting also focused on strategy: Within this context, we discussed the opportunities available for reducing the complexity of the company structures, optimizing interest rates and making use of other debt instruments. In terms of operational and strategic matters, we looked, among other things, at the expansion of services (energy distribution, electromobility), the greater use of digital channels for business success and the stepped-up moves to develop the portfolio by focusing on neighborhood development. We also looked at the option of strategic investments and at expanding Vonovia’s strategy to make greater inroads into international markets. Furthermore, we discussed operating and financial performance as well as liability management as a package of measures to refinance bonds that are currently issued.
At the meeting held on September 7, 2017, the Supervisory Board unanimously elected Prof. Dr. Edgar Ernst as Chairman of the Supervisory Board with immediate effect after Dr. Wulf H. Bernotat stepped down his position as Chairman of the Supervisory Board and died a short while later. Prof. Dr. Klaus Rauscher was also unanimously elected Deputy Chairman by the Supervisory Board at this meeting. The Supervisory Board confirmed Prof. Dr. Ernst as Chairman of the Audit Committee and approved the associated deviation with the recommendation set out in the German Corporate Governance Code, which Vonovia had complied with in the past. The Supervisory Board elected Prof. Dr. Edgar Ernst as member of the Finance Committee, also with immediate effect. In addition, the Supervisory Board decided not to fill the vacant twelfth mandate for the time being, but rather to combine this process with the next elections for the Supervisory Board as a whole, which were scheduled for the next Annual General Meeting.
At a conference call held on October 9, 2017, we discussed the draft of a decision paper prepared by the Finance Committee on the regional expansion of the company’s strategy and decided to include internationalization as a new component of Vonovia’s strategy. We also discussed the further development of the Internet-based landlord platform and decided to have an external service provider perform an efficiency review on the Supervisory Board’s work.
The results of the efficiency review were presented and discussed at the meeting held on December 1, 2017. In connection with the 2018 budget planning process, the Supervisory Board discussed the possible termination of the sale of the “Non-Core” properties and the issue of increasing rent by way of modernization and new construction. We also addressed the company’s five-year plan, including the plans to expand the Value-add Business and continue the investment strategy. Given the new strategic option of achieving further growth abroad, too, we discussed the fundamental opportunity to acquire the Austrian listed company BUWOG AG. Other agenda items related to operating business performance, financial performance, systematic neighborhood development and the status/construction process of the new company headquarters.
On December 15, 2017, we used a conference call to discuss the potential acquisition of the Austrian company BUWOG AG in detail, including the strategy, the expected synergies and the risks associated with this sort of transaction. Following a detailed discussion, we gave the Management Board our consent to commence negotiations on the conclusion of a business combination agreement as the basis for a voluntary public takeover offer made to the shareholders and convertible bondholders of BUWOG AG.
On December 17, 2017, we used another conference call to continue our discussion on a potential public takeover offer to be made to the shareholders of BUWOG. In addition to the price range for an offer, we also discussed the financing side of things and the possible expansion of the Management Board and Supervisory Board of Vonovia SE to include BUWOG representatives as part of the “friendly takeover.” We decided to let the Finance Committee make the final decision on the further measures associated with the takeover offer.
Work of the Committees
In order to perform our duties effectively, we formed an Audit Committee, a Finance Committee and an Executive and Nomination Committee. The committees prepare subjects which are to be discussed and/or resolved by the Supervisory Board. In addition, the committees passed further resolutions that we had delegated to them instead of passing them on the Supervisory Board as a whole.
The Audit Committee had five, later on four, members in the reporting year: The Chairman was Prof. Dr. Edgar Ernst. The other members were Dr. Wulf H. Bernotat (until August 26, 2017), Burkhard Drescher, Dr. Florian Funck and Hendrik Jellema. One position has been vacant since August 27, 2017. The Audit Committee met four times in 2017 (March, May, August, November) and made one decision using the written procedure (January).
The Committee used the written procedure on January 3, 2017 to pass a resolution allowing KPMG to perform non-audit services in Austria and Germany at the conwert Immobilien Invest SE Group, Vienna/Austria and its subsidiaries. This authorized KPMG to perform tax consultancy services in particular as part of its support for the ongoing tax audit. This did not restrict the impartiality of the activities associated with the audit of the annual financial statements.
At the meeting held on March 6, 2017, the Committee reviewed the annual and consolidated financial statements as of December 31, 2016, and drew up a proposal for the appropriation of profit. The assessment looked, in particular, at the auditor’s report and the development of goodwill. The Committee developed a proposal for the selection of an auditor for the 2017 fiscal year and for this auditor’s appointment as the auditor responsible for the audit of the condensed consolidated interim financial statements and interim Group management reports. Other topics covered included an internal audit report on the status of the audits and a compliance status report.
At the meeting held on May 23, 2017, the Committee looked at the condensed consolidated interim financial statements for the first quarter of 2017, taking the first-time consolidation of the conwert Group and the portfolio changes into account. It passed a resolution on the extension of the guidelines on non-audit services provided by the auditor to cover conwert SE and Vonovia Finance B. V. In light of the more stringent requirements imposed by the European Securities and Markets Authority, ESMA, the Committee adjusted the definition of non-recurring items (one-offs) from the 2018 fiscal year and, in a wider context, also discussed the presentation of EBITDA after adjustments to reflect acquisitions. The Committee also looked at the report on risk management, the internal audit status, the report on the company’s tax position and the compliance report.
At its meeting held on August 1, 2017, the Committee approved the shortened consolidated interim financial statements as of June 30, 2017, passed a resolution on the commissioning of KPMG AG Wirtschaftsprüfungsgesellschaft to audit the annual and consolidated financial statements as of December 31, 2017 and discussed the possible key audit matters presented in the auditor’s report with the auditor. Other topics included the auditor’s status report on non-audit services, the report on the internal control system (ICS), the compliance status report, the internal audit status report and the commissioning of the Internal Audit department to audit the company’s Sustainability Report for 2016.
At the meeting held on November 7, 2017, the Committee discussed the nine-monthly financial statements, risk management and the status of the assignments passed on to Internal Audit. Within this context, the Committee discussed the commissioning of the Internal Audit department to audit the Sustainability Report for 2017 and defined the audit plan and the auditing budget of the Internal Audit department for 2017 as a whole. Other topics of discussion included the preliminary results of the property valuation, the compliance report and the report on major legal disputes.
In the fiscal year under review, the Finance Committee consisted of five members. The Chairperson was Clara-Christina Streit. The other members were Dr. Wulf H. Bernotat (until August 26, 2017), Dr. Ute Geipel-Faber, Daniel Just and Christian Ulbrich. Prof. Dr. Edgar Ernst joined the Committee on September 7, 2017. The Finance Committee met six times during the reporting year (January, May, August, October, twice in December), with three meetings being held as conference calls (January, October, December). In addition, the Committee concluded two resolutions via written circular (March, June). The Finance Committee had been previously authorized by the Supervisory Board to make all decisions on matters outside the scope of the topics for which it is generally responsible.
At a conference call held on January 16, 2017, the Committee discussed, and passed a resolution on, the issue of bonds worth € 1 billion as part of the EMTN program to refinance a loan from the GAGFAH subportfolio. On March 28, 2017, the Finance Committee passed a resolution, using the written procedure, on a further non-cash capital increase as part of the takeover of conwert for conwert shares that had been offered during the grace period. At a meeting held on May 16, 2017, the Committee discussed, and passed a resolution on, two capital increases in line with the general resolution on the appropriation of profit that had previously been passed by the Annual General Meeting: One resolution paved the way for the general granting of a scrip dividend as opposed to a pure cash dividend, although a resolution still had to be passed on the exact number of new shares. The second resolution related to the merger of Gagfah S. A. with Vonovia SE and set in motion the process for paying a settlement to the Gagfah shareholders in the form of shares in Vonovia based on a set exchange ratio.
On June 12, 2017, the Finance Committee used the written procedure to approve the more detailed resolution passed by the Management Board on the implementation of a non-cash capital increase as part of the dividend option for shareholders in Vonovia SE. At a meeting held on August 1, 2017, the Committee performed a retrospective analysis of the first-time granting of a scrip dividend. The offer acceptance rate corresponded to 50% of the shareholdings, which was considered a success. In addition, the Committee discussed a package of measures, within the context of liability management, to refinance hybrid bonds, taking equity measures into consideration with the aim of reducing borrowing costs. Within this context, the Committee also discussed the opportunities and risks associated with the issue of convertible bonds.
The Supervisory Board had delegated the further development of the acquisition policy principles to the Finance Committee, which was then to prepare corresponding decisions for the Supervisory Board. In line with this assignment, the Committee discussed the development of a decision paper based on which internationalization would be included as a new component of Vonovia’s strategy at a conference call held on October 9, 2017. The first step was to involve entering into a cooperation with the French state-owned real estate company SNI, which has its registered headquarters in Paris and focuses on social housing. The aim of the collaboration was to share experience and knowledge as well as to allow Vonovia to familiarize itself with the French real estate market. At the meeting, the Committee also discussed options for making greater use of the opportunities resulting from digitization for the company, for example the greater use of (shared) distribution platforms and the establishment of internal competencies.
At a meeting held on December 1, 2017, the Committee discussed the Management Board’s analysis of future interest rate developments and what was ultimately their limited impact on the company’s business. It also discussed the potential acquisition of BUWOG AG, Vienna/Austria, as part of a “friendly takeover” in line with Vonovia’s acquisition criteria. On December 18, the Finance Committee discussed, and passed a resolution on, the status and main results of the negotiations on the acquisition of BUWOG AG during a conference call. It approved the conclusion of a business combination agreement with BUWOG AG. Under this agreement, the shareholders of BUWOG were to be made a voluntary public takeover offer corresponding to € 29.05 per share in BUWOG. Within this context, the Committee approved the financing of the cash consideration for the takeover offer using a loan and the issue of bonds as part of the EMTN program.
Executive and Nomination Committee
In the fiscal year under review, the Executive and Nomination Committee consisted of five members. It was chaired by Dr. Wulf H. Bernotat up until August 26, 2017. He was succeeded by Prof. Dr. Edgar Ernst with effect from September 7, 2017. The other members included Hildegard Müller, Clara-Christina Streit, Prof. Dr. Klaus Rauscher and Dr. Ariane Reinhart. The Executive and Nomination Committee held five meetings in 2017 (February, March, August, September, December) and one conference call (November).
At the meeting held on February 17, 2017, the Committee developed resolution proposals for the Supervisory Board on the 2016 short-term incentive plan (target achievement), the contractual Management Board remuneration, target agreements for the 2017 short-term incentive plan, the long-term incentive plan for the Management Board (2017 tranche), the extension of Mr. Buch’s contract by a further five years and the assumption of an advisory board mandate by the Supervisory Board member Hendrik Jellema. At the meeting held on March 6, the Committee approved the assumption of a mandate by the Chairman of the Management Board Rolf Buch as a member of the Board of Directors of D. Carnegie & Co AB (publ), Stockholm/Sweden. At the meeting held on August 1, 2017, the Committee developed a recommendation for a resolution setting the proportion of women for the stipulation period leading up to December 31, 2021. It also discussed the issue of succession planning for Management Board positions in general.
Following the resignation of Dr. Wulf H. Bernotat, the Committee developed recruitment proposals for the positions that had become vacant in the meeting held on September 7, 2017. In a conference call on November 9, 2017, the Committee once again addressed the issue of filling the position of Supervisory Board Chairman, in particular, and discussed the selection process for appointing a Management Board member for the Controlling executive division. At the meeting held on December 1, 2017, the Committee discussed the results of the efficiency review performed on the work of the Supervisory Board, the status of the process involved in selecting the new Chairman of the Supervisory Board, and developed a recommendation for a resolution on the definition of a diversity concept for the Management Board and the Supervisory Board in accordance with the CSR Directive Implementation Act. The Committee also discussed, and passed a resolution on, the next steps to be taken in connection with the selection of a new Chief Controlling Officer.
The Management Board and Supervisory Board of Vonovia SE are committed to the principles of good corporate governance. As a result, the members of the Supervisory Board once again looked at the German Corporate Governance Code in the reporting year. On February 21, 2018, the Management Board and the Supervisory Board issued an updated Declaration of Conformity pursuant to Section 161 of the German Stock Corporation Act (AktG). The Management Board also reports, including on behalf of the Supervisory Board, on corporate governance at Vonovia in the Declaration on Corporate Governance. Both declarations will be permanently published by the company on its website for perusal.
After being appointed at the Annual General Meeting on May 16, 2017, to audit financial statements for the 2017 fiscal year, KPMG AG Wirtschaftsprüfungsgesellschaft, Düsseldorf, has duly audited the annual financial statements and consolidated financial statements of Vonovia SE for the 2017 fiscal year as well as the corresponding management report and the accounting on which they were based and has expressed an unqualified opinion thereon. In accordance with Section 317 (4) of the German Commercial Code (HGB), KPMG also assessed the risk early warning system of Vonovia SE.
The auditor has affirmed its independence to the Chairman of the Audit Committee and duly declared that no circumstances exist that could give grounds for assuming a lack of impartiality on its part. The audit assignment was awarded to KPMG AG Wirtschaftsprüfungsgesellschaft by the Chairman of the Audit Committee in line with the Committee’s resolution and the choice of auditor made by the shareholders at the Annual General Meeting.
The annual financial statements were prepared by the Management Board in accordance with the German commercial law and stock corporation law provisions including the generally accepted accounting practice. The consolidated financial statements were prepared by the Management Board in accordance with the International Financial Reporting Standards (IFRS), as applied in the European Union, as well as the supplementary provisions applicable pursuant to Section 315e (1) HGB.
For the annual financial statements and the consolidated financial statements, Vonovia SE prepared a combined management report based on the requirements set out in Sections 315, 298 (2) HGB.
Every member of the Supervisory Board received copies of the annual financial statements, the consolidated financial statements and the combined management report and the auditor’s report in good time. On the basis of the preliminary examination and assessment by the Audit Committee, about which the Audit Committee Chairman reported to the Supervisory Board, the Supervisory Board has scrutinized in detail the annual financial statements, consolidated financial statements and combined management report of Vonovia SE for the 2017 fiscal year and also considered the Management Board’s proposal for the appropriation of profit. The Supervisory Board has observed its duty to review the Non-financial Declaration to be published for the first time in accordance with the CSR Directive Implementation Act.
At the joint meeting on March 5, 2018 with the Audit Committee and at the subsequent Supervisory Board meeting held on the same day, the auditor reported both on their findings including the strategic audit objectives and key audit matters. The strategic audit objectives and the particularly important audit issues or the key audit matters set out in the auditor’s report had been defined by the auditor, within the context of the latter’s independent mandate, in the second half of 2017 and had already been discussed and agreed upon with the Audit Committee in advance.
In the 2017 fiscal year, the audit focused in particular on the valuation of the German investment properties, the identification and valuation of acquired assets, the debts made in connection with the acquisition of the conwert Group and the assessment of goodwill.
The auditor gave detailed answers to our questions. After an in-depth review of all documentation, we found no grounds for objection. As a result, we concurred with the auditors’ findings. On March 5, 2018, we followed the Audit Committee’s recommendation and approved the annual financial statements and consolidated financial statements of Vonovia SE as well as the combined management report. The annual financial statements are thus duly adopted.
The Supervisory Board considered the Management Board’s proposal for the appropriation of profit. It gave particular consideration to the liquidity of the company/the Group, tax-related aspects, financial and investment planning. Following this audit, the Supervisory Board agrees with the proposal set out by the Management Board to be made to the Annual General Meeting namely the proposal that, from the profit of Vonovia SE for the 2017 fiscal year, a dividend of € 1.32 per share or € 640,333,090.32 in total on the shares of the share capital as of December 31, 2017, be paid to the shareholders and the remaining amount be carried forward to the new account or be used for other dividends on shares carrying dividend rights at the time of the Annual General Meeting that go beyond those as of December 31, 2017.
The dividend is paid either in cash or in the form of shares in the company. The shareholders’ right to opt for a dividend paid out in shares is communicated separately in a timely manner together with other information, particularly on the number and type of shares.
There were no staff changes within the Management Board in the reporting period. On January 17, 2018, we appointed Helene von Roeder to the Management Board to assume the executive division of Gerald Klinck, who, on his own request, will not be extending his contract as Chief Controlling Officer after his departure.
On August 27, 2017, the previous Chairman of the Supervisory Board, Dr. Wulf H. Bernotat, sadly died.
We would like to thank the Management Board, all employees and Vonovia’s employee representatives for what was, once again, excellent performance last year.
Bochum, Germany, March 5, 2018
On behalf of the Supervisory Board
Prof. Dr. Edgar Ernst