48 Segment Reporting

Vonovia is an integrated residential real estate company with operations across Europe. The company’s strategy is focused on sustainably increasing the value of the company. This is achieved by managing the company’s own portfolio with a view to enhancing its value, investing in existing properties in order to create value, building new residential buildings and selling individual apartments, as well as by engaging in active portfolio management and offering property-related services. For the purposes of managing the company, we make a distinction between four segments: Rental, Value-add, Recurring Sales and Development. We also report the Other segment, which is not relevant from a corporate management perspective, in our segment reporting. This includes the disposal, only as and when the right opportunities present themselves, of entire buildings or land (Non-Core Disposals) that are likely to have below-average development potential in terms of rent growth in the medium term and are located in areas that can be described as peripheral compared with Vonovia’s overall portfolio and in view of future acquisitions.

The Rental segment combines all of the business activities that are aimed at the value-enhancing management of our own residential real estate. It includes our property management activities in Germany, Austria and Sweden. The consolidation of our property management activities in Germany, Austria and Sweden to form one single reporting segment is based on the similarities that we see in the property management business in these three countries. This applies both to the way in which services are provided and the individual service processes that form part of the property management business, as well as to the customers in the residential rental market and the type of customer acquisition used. Overall, the residential rental market in all three countries is characterized by a shortage of housing and is regulated by statutory requirements, resulting in return expectations that are similar in the long term.

The Value-add segment (formerly known as “Value-add Business”) bundles all of the housing-related services that we have expanded our core rental business to include. These services include both the maintenance and modernization work on our properties and services that are closely related to the rental business. We allocate the activities relating to the craftsmen’s and residential environment organization, the condominium administration business, the cable TV business, metering services, energy supplies and our insurance services to the Value-add segment. Energy supply is a new service that we have been offering our tenants since 2018.

The Recurring Sales segment (formerly part of the “Sales” segment) includes the regular and sustainable disposals of individual condominiums and single-family houses from our portfolio. It does not include the sale of entire buildings or land (Non-Core Disposals). These properties are only sold as and when the right opportunities present themselves, meaning that the sales do not form part of the Recurring Sales segment. We report these opportunistic sales in the Other column of the segment report. In the previous reporting period, Recurring Sales and Non-Core Disposals were shown combined in the Sales segment. As a result, the prior-year figures have been adjusted accordingly for the current reporting period.

The Development segment encompasses the project development of new residential buildings. This covers the value chain starting with the purchase of land without any development plan/dedicated purpose and ending with the completion of new buildings and new construction measures on our own properties. These properties are either incorporated into our own portfolio or sold to third parties. The Development segment deals with projects in selected attractive locations. Project development work is currently focusing on Berlin, Hamburg and Vienna. The Adjusted EBITDA of the Development segment includes the fair value step-up for properties that were completed in the reporting period and have been added to our own portfolio. As far as the prior-year reporting period is concerned, a fair value step-up is shown for those new buildings that fell within the sphere of responsibility of the Value-add segment in organizational terms. The segment reporting for 2017 does not yet show any fair value step-ups for new buildings in the Adjusted EBITDA.

A Group-wide planning and controlling system ensures that resources are efficiently allocated and their successful use is monitored on a regular basis. Reporting to the chief decision-makers and thus the assessment of business performance as well as the allocation of resources are performed on the basis of this segmentation. Asset and liability items are not reported separately by segment. Internal reporting is based on the IFRS reporting standards in general.

The Management Board as chief decision-makers of Vonovia monitor the contribution made by the segments to the company’s performance on the basis of the segment revenue as well as the Adjusted EBITDA. The Adjusted EBITDA Total represents the Group’s adjusted earnings before interest, taxes, depreciation and amortization adjusted for items that are not related to the period, recur irregularly or that are atypical for business operation and excluding effects from adjustments in value of investment properties.

The following table shows the segment information for the reporting period:

To show the development of operating performance and to ensure comparability with previous periods, we calculate Adjusted EBITDA for each of our segments: Rental, Value-add, Recurring Sales and Development. The total of these key figures produces the Group’s Adjusted EBITDA Total. The adjustments made include items that are not related to the period, items that recur irregularly and items that are atypical for business operation. The non-recurring items include the expenses for pre-retirement part-time work arrangements and severance payments, the development of new fields of business and business processes, acquisition projects including integration costs and expenses for refinancing and equity increases (where not treated as capital procurement costs).

The following table gives a detailed list of the non-recurring items for the reporting period:

In the 2018 fiscal year, the non-recurring items eliminated in the Adjusted EBITDA as a whole came to € 106.6 million, up 22.7% on the prior-year value of € 86.9 million. The acquisition costs including integration costs for 2018 include € 20.0 million for acquisitions in earlier years, which are offset against tax income in the same amount, meaning that they do not affect the profit for the period. Taking this into account, the non-recurring items in the fiscal year came to € 86.6 million, on a par with the prior-year value of € 86.9 million.

The breakdown of non-Group revenue from contracts with customers (pursuant to IFRS 15.114f) and its allocation to the segments referred to above is as follows:

External income and non-current assets, excluding financial instruments, deferred taxes, post-employment benefits and rights under insurance contracts, are distributed among Vonovia’s country of origin and other countries as follows. The revenue is allocated based on the registered office of the unit providing the service.