Annual Report 2019

Letter from the Management Board

Dear Shareholders, Dear Readers,

 800 billion. The Association of German Housing and Real Estate Companies (GdW Bundesverband deutscher Wohnungs- und Immobilienunternehmen e. V.) has calculated that this is how much German society will need to invest over the next ten years if it wants to meet all of its objectives for the housing market. The main objectives are energy-efficiency refurbishment and new construction, senior-friendly housing, and integration. 

This amount corresponds to 2.2 times the German federal budget for 2020, meaning that the investments cannot be made by the state alone. It will need partners like us, Vonovia. We are aware of our social responsibility. For us, commercial success and social responsibility are two concepts that go hand in hand.

After all, there is no doubt that we can only help to master the challenges facing society because we are a company with solid financial resources. We generated rental income of € 1.8 billion in Germany last year, and we invested more than € 2.2 billion in apartments. Spending this money also allowed us to increase the appeal of our existing apartments and build new ones in keeping with the social objectives referred to earlier.

And we can nevertheless pay you, our shareholders, an attractive dividend again this year. This is something we can manage to do because our business model is built on a broad-based, solid foundation, and because it is successful as a whole.

In general, we believe that the government is right to intervene in the residential property market by setting a framework for rental development. A home is a basic human need. And having an affordable home is a prerequisite for allowing each and every individual to participate in social interaction.

But what exactly is the right framework? It is not the rent freeze currently being applied in Berlin. This is evident from examples such as London or New York, where even high-earners can no longer afford a home. A good framework preserves – and opens up – the opportunity for companies to make a meaningful contribution to long-term urban development. After all, the main thing that we need in our cities at the moment is more apartments and market players that can build them cost-effectively. The rent freeze will hinder the construction of affordable apartments in Berlin. What is more, the urgently required investments in energy-efficient modernization and senior-friendly apartment conversion are also less likely to be made here in the future.

Nevertheless, we are playing our part in the approach taken by policymakers in Berlin. Last year, for example, we made the decision of our own accord not to increase rents, opting to do without rental income we could otherwise have generated. In relation to our total income, this amount might not be significant, but it sends out a signal: We are living up to our social responsibility – trusting that you, our shareholders, will also support us in our strategy aimed at long-term social sustainability.

In 2019, we used a business philosophy to set out how we see our role within society and what sort of contribution we want to, and indeed are able to, make. We are making a voluntary commitment with this code. Our aim is to ensure that our activities enjoy social acceptance. We want to show that we are responsive to people’s current concerns. One example is climate protection. If some of our customers are not prepared to bear the additional costs associated with sensible modernization work at the moment, then we have to find other ways of reducing CO2. Examples include supporting e-mobility or offering electricity from renewable energy sources. And if our older customers are worried about no longer being able to pay their rent, then we find solutions, such as the regulation for over-70s, which allows us to assure our customers aged 70 or over that they will be able to stay in their homes.

Arnd Fittkau, Rolf Buch, Helene von Roeder and Daniel Riedl (photo)
From left to right: Arnd Fittkau — Member of the Management Board (CRO) — Rolf Buch — Chairman of the Management Board (CEO) — Helene von Roeder — Member of the Management Board (CFO) — Daniel Riedl — Member of the Management Board (CDO)

In operational terms, we remain on the right track: Our portfolio is now well balanced in geographical terms and is able to compensate for individual regional fluctuations.

Our investments in modernization rose by 10% in 2019, with our maintenance investments rising by 12%. At the same time, our renovation rate fell from 5% to 4%. This is due to our voluntary commitment not to carry out any modernizations that would lead to a rent increase of more than € 2 per square meter. We also postponed our projects in Berlin. We are sticking to the target we set back in 2017: We will be carrying out energy-efficiency modernizations on at least 3% of our building stock in Germany each year in the interests of maintaining our portfolio, ensuring cost-effectiveness and protecting our climate.

As far as new construction is concerned, we completed a total of 2,100 residential units, 1,200 of them in Germany. We will be increasing our construction activity considerably over the next few years, building up to 12,000 new apartments in the foreseeable future. The question as to how quickly we can make progress depends first and foremost on the official processes. We are prepared and have the potential to build additional apartments on our properties, provided we are granted the required building permits.

Now that we have achieved a good level of diversification within our portfolio in Germany, we will be gradually stepping up our activities in other European countries. The pace of this development will depend on the opportunities that present themselves. We added 21,400 new apartments to our portfolio last year when we acquired the portfolio of the Swedish company Hembla. This has expanded our portfolio in Sweden to 38,000 units. Combined with the 22,500 units in Austria, 14.5% of our apartments are now located outside of Germany.

The financial data continued to show positive development. Our operating earnings, Group FFO, rose by 7.7% to € 1.22 billion, slightly ahead of our forecast. The acquisitions of BUWOG and Victoria Park, whose results were included in full for the first time, were the main factors making a positive contribution to this trend. The vacancy rate remained very low at 2.6%.

The fair value of the portfolio increased considerably year-over-year, rising to € 53.3 billion. The adjusted net asset value climbed by 21.1% to € 28.2 billion. Expressed per share, it increased by 15.7% to € 51.93. This positive development was due to the high demand for housing, as well as to the acquisitions and investments in modernization and new construction. The increase in value of our properties came to € 5.3 billion. This shows that we were successful with our portfolio optimization strategy and that our apartments are in the right locations.

Bolstered by the increase in value, our balance sheet structure also improved further. This resulted in us receiving a very good “A-” rating from the rating agency Scope for the first time. Our debt level is now at 43.1%, within our target corridor. Our debt maturity profile remains balanced with long maturities. We were able to raise equity of € 1 billion without any problems. We also expanded our broad range of financing instruments to include an additional option by placing a promissory note loan via an online platform. We still enjoy unrestricted access to the capital market, something that is very helpful given our average issue volume of € 3 billion a year.

Dear Shareholders,

After what was once again a successful fiscal year, my colleagues on the Management Board and I, together with the Supervisory Board, are delighted to be able to propose a dividend of € 1.57 per share to you at the Annual General Meeting on May 13. As far as the overall conditions allow, we also once again want to give you the option of choosing a scrip dividend at the same time.

Looking at the current year, we are confident that we will be able to continue successfully on the path we have carved out. We will be making substantial investments again in an amount of between € 1.3 billion and € 1.6 billion. We expect to increase the Group FFO by 7% on the basis of our expanded portfolio. What is more, we will also continue to address the issues that are of concern to society at large: climate protection, social integration and new and suitable homes. It is important for us that our customers in Germany, Austria and Sweden know that we are on hand to assist them as a reliable partner that pursues a responsible approach with a view to the long term.

My colleagues on the Management Board and I would like to thank you, our shareholders, our partners and our employees, for the trust you have placed in us over the past year. We are delighted that you will be accompanying us on our journey in the future, too.

Bochum, March 2020

Yours faithfully,

Rolf Buch
Chairman of the Management Board

Rolf Buch (CEO) (Signature)

Rolf Buch (CEO)

Fair Value
Fair value is particularly relevant with regard to valuation in accordance with IAS 40 in conjunction with IFRS 13. The fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
Group FFO
Group FFO reflects the recurring earnings from the operating business. In addition to the adjusted EBITDA for the Rental, Value-add, Recurring Sales and Development segments, Group FFO allows for recurring current net interest expenses from non-derivative financial instruments as well as current income taxes. This key figure is not determined on the basis of any specific international reporting standard but is to be regarded as a supplement to other performance indicators determined in accordance with IFRS.
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.
Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.
Rental Income
Rental income refers to the current gross income for rented units as agreed in the corresponding lease agreements before the deduction of non-transferable ancillary costs. The rental income from the Austrian property portfolio additionally includes maintenance and improvement contributions (EVB). The rental income from the portfolio in Sweden reflects inclusive rents, meaning that the amounts contain operating and heating costs.
Vacancy Rate
The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.