Report of the Supervisory Board

2019 was a commercially successful fiscal year for Vonovia. The year under review was, however, once again characterized by particular sociopolitical challenges. The political debate on the issue of housing is now at the heart of society, which resulted in people adopting polarized, and in some cases extreme, social opinions.

A great deal of sensitivity was required from the Management Board and the Supervisory Board in this situation. Their decisions had to strike a balance between ensuring the positive commercial development of the company while at the same time paying special attention to social demands. The significance of the issue of housing in the minds of the general public was underlined by the actions taken by policymakers: In Germany’s major metropolitan areas, the increasing shortage of affordable housing resulted in measures designed to regulate the market – for example, in the form of the rent freeze in Berlin.

The Supervisory Board supported the Management Board in its approach of seeing Vonovia as part of the solution to the housing problems. The Management Board was increasingly successful in establishing Vonovia as an accepted partner in the housing policy landscape and creating a positive link between the company on the one hand and the pressing social issues on the other.

In the 2019 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.

In both our committees and at our 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

In the last fiscal year, our Supervisory Board consisted of twelve members. 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 informed us about key events and the company’s strategic direction as part of a collaboration based on trust.

As Supervisory Board Chairman, I remained in close contact with the Management Board, and in particular with the Chairman of the Management Board, even between Supervisory Board meetings, regularly exchanging information and ideas. The employee representative bodies were involved in communications on key company matters via the Management Board. The Chairman of the Management Board informed me on company-related topics emerging from the Management Board’s discussions with representatives of the Group works council, going into an appropriate level of detail. Other members of the Supervisory Board were notified of any important findings promptly, or at the latest by the next board meeting. In the fiscal year, there were no conflicts of interest of Management Board or Supervisory Board members, which are to be reported immediately to the Supervisory Board.

Main Remit

In line with the duties assigned to the Supervisory Board by law, the Articles of Association and the rules of procedure, we once again closely scrutinized the Group’s operational, economic and strategic progress in the last fiscal year. The key focal points were the diversion of investments due to the modified statutory regulations affecting the modernization of our residential real estate, neighborhood development and the undertaking of investments in new homes, the exploitation of opportunities resulting from digitalization, the portfolio strategy, internationalization and the evaluation and provision of support with regard to opportunities for further portfolio expansion. We also took an in-depth look at the future management structure and the succession plan for the Management Board of the company.

Meetings

In the 2019 fiscal year, the Supervisory Board met a total of eight times to consult and pass resolutions: four times at meetings (March, May, September, December) and four times via conference call (January, March, April, September). The Supervisory Board made decisions by written circular in one case (July). Any individual members absent from the eight meetings had always been excused.

Participation in the eight Supervisory Board meetings averaged around 91% in the 2019 fiscal year. No member of the Supervisory Board took part in less than half of the meetings during their term of office. 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.

Information on the individual meetings and their content is provided below:

On January 31, 2019, the Supervisory Board held a conference call to discuss and pass a resolution on the sale of a package of 16,821,000 shares in Deutsche Wohnen SE. Furthermore, the Supervisory Board 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, 2019, the Supervisory Board met to adopt the balance sheet: the Committee approved the company’s annual and consolidated financial statements as of December 31, 2018, and prepared the agenda and the resolution proposals for the Annual General Meeting. This also included the proposal for the appropriation of profit. Regarding the manner in which the dividend would be granted, the Supervisory Board decided to once again propose to the Annual General Meeting that the dividend be paid either in cash or in the form of shares. Furthermore, the Supervisory Board approved the Non-financial Declaration. A supplement to the rules of procedure for the Management Board and Supervisory Board, adopted by the latter, sets out provisions governing the information obligations that apply to development investments. Under the “HR-related matters” agenda item, the Supervisory Board discussed remuneration issues (including target agreements, short-term and long-term incentive plans) and passed corresponding resolutions. The Supervisory Board discussed the succession plan for the Management Board after Management Board member Klaus Freiberg left the Management Board at his own request in the 2019 fiscal year. Within this context, the Supervisory Board held in-depth discussions on the distribution of duties within the Management Board and possible candidates for the position on the Board that had become vacant. The members of the Supervisory Board advocated a distribution of duties among the four segments Rental, Development, Recurring Sales and Value-add, and instructed the Executive and Nomination Committee to prepare for the Management Board position to be filled on this basis. The Chairman of the Supervisory Board was tasked with the arrangement of the cancellation of Klaus Freiberg’s Management Board contract. As far as operational issues are concerned, the Supervisory Board looked at issues including the report submitted on the status of ancillary expense bills and the media response to this report. The innovative solutions proposed by the Management Board to reduce the number of outages affecting technical facilities (for example, heating systems and elevators) were discussed, as were measures to improve customer satisfaction.

On March 11, 2019, the Supervisory Board held a conference call to discuss the use of accelerated bookbuilding and approved the implementation of this measure taking the corresponding requirements into account.

During a conference call held on April 11, 2019, the Supervisory Board passed a resolution appointing Arnd Fittkau as a Management Board member with effect from the end of the Annual General Meeting. Given the organizational and divisional changes already confirmed by the Supervisory Board, it also approved the resignation of Management Board member Klaus Freiberg with effect from the end of the Annual General Meeting and the cancellation of his contract as of the end of 2019. The Chairman of the Supervisory Board was entrusted with the implementation of the measures required in this regard.

On May 15, 2019, the Supervisory Board approved the Management Board’s fundamental resolution on the partial use of the 2018 authorized capital in connection with the 2019 scrip dividend. The Supervisory Board also discussed the structuring measures in the context of the integration of BUWOG. Further topics included the financial and operational performance in the Rental and the Development segments. In light of the expropriation debate that had arisen in Berlin in particular, our Supervisory Board discussed the situation in the media in detail with the Management Board. The Supervisory Board also looked at the performance of Vonovia’s shares and feedback from investors and analysts, as well as the recommendations made by the voting right consultants on the items on the agenda for the Annual General Meeting.

On July 25, 2019, the Supervisory Board passed a resolution via written circular on the targets for Management Board member Arnd Fittkau for the 2019 short-term incentive plan.

At the meeting held on September 5, 2019, we discussed the reports on the decisions made by the Finance Committee and the Executive and Nomination Committee, the results of the Audit Committee on the financial statements for the first half of 2019, the focal points of the audit and fee for the auditor of the annual financial statements for the 2019 fiscal year. In addition to the reports on operating business development in the individual segments, the issue of the company’s strategy was also covered. Current megatrends and the issue of sustainability, as well as the company’s reputation and social acceptance, are creating challenges for Vonovia’s current business model that the Management Board is rising to by implementing innovative concepts and adopting a clearly customer-centric approach. Both the Value-add Business and the Development segment are significant additions to the value chain and offer further opportunities for development involving new technologies. Under the “HR-related matters” agenda item, the Supervisory Board looked at the remuneration paid to the Management Board, taking market evaluations and comparative data into account. It also discussed, and passed resolutions on, further contractual matters involving Management Board members.

On September 20, 2019, we used a Supervisory Board conference call to delegate the decision on the approval of the conclusion of a purchase and transfer agreement for the acquisition of Blackstone’s stake in the Swedish residential real estate company Hembla AB in the amount of 69.30% of the voting rights and 61.19% of the share capital to the Finance Committee. If implemented, this would trigger a mandatory offer for all outstanding shares in Hembla AB. The decision also relates to the instruction issued to Vonovia Finance B.V. to conclude and execute a bridge facility agreement and issue bonds under the EMTN program used by the company.

On November 8, 2019, we approved using a written circular 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).”

At the meeting held on December 5, 2019, we discussed HR-related topics within the Supervisory Board and passed resolutions, among other things, on adjustments to Management Board remuneration effective January 1, 2020. We discussed and adopted the budget for 2020 submitted by the Management Board and discussed the medium-term planning for the next five years. Other topics included the reports on operating business performance in the Rental Germany and Rental Austria segments, developments within the Development segment and in the Rental Sweden segment, financial performance and capital market performance, as well as the report on the Value-add segment. The Supervisory Board used a structured process, involving an independent moderator, to subject itself to a review of the efficiency of its activities in the fourth quarter of 2019, discussing the results on the evaluation process in depth. The efficiency of the Supervisory Board’s work was confirmed. The Supervisory Board was open to, and implemented, recommendations for action on individual aspects of its work. The efficiency review is performed on a regular basis as part of the Supervisory Board’s work.

Duties of the Committees

The Supervisory Board made use of the existing committees (Audit Committee, Finance Committee and Executive and Nomination Committee) to effectively perform its work. 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.

In addition to regular dialogue between the Audit Committee and the auditors at the quarterly meeting, there is also regular communication between the Chairman of the Audit Committee and the auditors, particularly before the quarterly meetings of the Audit Committee.

Audit Committee

The Audit Committee had four members in the reporting year. The Chairman was Prof. Dr. Edgar Ernst. The other members were Burkhard Ulrich Drescher, Vitus Eckart and Dr. Florian Funck. In 2019, the Audit Committee met four times (March, May, August, November).

At the meeting held on March 6, 2019, the Committee reviewed the annual and consolidated financial statements as of December 31, 2018, as well as the combined management report for the 2018 fiscal year. Its review took account of both the company’s reports and the reports prepared by the auditor. The auditor considered the main points of the audit of the consolidated financial statements to be the valuation of investment properties, the value of the goodwill as well as the identification and measurement of assets and liabilities acquired as part of the acquisition of BUWOG. The Committee drew up a proposal for the appropriation of profit and developed a recommendation for a resolution to be submitted to the Supervisory Board regarding the adoption of the annual financial statements. The Committee developed a proposal for the selection of an auditor for the 2019 fiscal year and for this auditor’s appointment as the auditor responsible for the audit of the condensed consolidated interim financial statements, interim Group management reports and quarterly reports. Further topics included the company’s CSR reporting and the outcome of the audit of the Non-financial Declaration conducted by Internal Audit. The Committee recommended that the Supervisory Board approve the Non-financial Declaration. The discussions also covered the Internal Audit status report and the compliance report.

At its meeting held on May 6, 2019, the Committee looked at the condensed consolidated interim financial statements as of March 31, 2019. It discussed the auditor’s report and the report on the auditor’s evaluation of the effectiveness of the tax compliance management system. The Committee also took an in-depth look at the risk management and compliance reports, as well as the Internal Audit status report. The Committee was also informed of the status of lease accounting in accordance with IFRS 16. In addition, the committee members looked at the report on the company’s tax situation and, within this context, the status of the ongoing company tax audits.

At its meeting held on August 1, 2019, the Committee approved the consolidated interim financial statements as of June 30, 2019, and passed a resolution on the commissioning of KPMG AG Wirtschaftsprüfungsgesellschaft to audit the annual and consolidated financial statements as of December 31, 2019, based on the vote at the Annual General Meeting. It discussed the company’s report and, within this context, addressed issues including the impact of the changes in the organizational structure of the property management business on the measurement of goodwill. Other topics included the Internal Audit and compliance management status reports.

At the meeting held on November 4, 2019, the Committee discussed the condensed consolidated interim financial statements as of September 30, 2019, along with the corresponding reports prepared by the company and the auditor. It looked at the preliminary result indications of the property valuation, risk management, the compliance report and ongoing major legal disputes. It also discussed the report prepared by the Internal Audit department on the status of its audits and set the audit plan and audit budget for the Internal Audit department for the 2020 fiscal year.

Finance Committee

In 2019, the Finance Committee consisted of five members. The Chairperson was Clara-Christina Streit. The other members were Jürgen Fitschen, Dr. Ute Geipel-Faber, Daniel Just and Christian Ulbrich. The Finance Committee met six times in the reporting year, once at a face-to-face meeting (March) and five times using conference calls (twice in May, once in August, and twice in September). The Committee made decisions using a written circular in one case (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 meeting held on March 6, 2019, the Finance Committee approved an investment proposal submitted by the Management Board regarding a new construction project involving around 980 apartments in Berlin-Siemensstadt.

On May 13, 2019, the Committee held a conference call to approve the passing of a resolution by the Management Board on a cash capital increase, excluding subscription rights, using accelerated bookbuilding. In a second conference call held on May 13, 2019, the Finance Committee discussed the modified resolution submitted by the Management Board and approved the increase in the company’s share capital, using the authorized capital, by € 16.5 million in return for cash contributions by issuing the same number of no-par-value shares, and their placement using an accelerated bookbuilding procedure at a placement price of € 45.10 per share. The proceeds from the issue were to be used to refinance the acquisition of a Swedish real estate portfolio by Victoria Park AB at Group level, and for further growth.

On June 7, 2019, the Finance Committee used a written circular to approve the more detailed resolution passed by the Management Board on the implementation of a non-cash capital increase as part of the scrip dividend 2019.

In a conference call held on August 29, 2019, the Committee approved the implementation of a public buyback offer for outstanding bonds and the issue of two new bonds under the existing EMTN program.

On September 17, 2019, the Finance Committee used a conference call to discuss the conclusion of a purchase and transfer agreement regarding the acquisition of Blackstone’s stake in the Swedish residential real estate company Hembla AB in the amount of 69.30% of the voting rights and 61.19% of the share capital, and of a real estate portfolio comprising around 21,500 apartments in Sweden.

During a conference call held on September 23, 2019, the Finance Committee approved the Management Board’s decision on the conclusion of a purchase and transfer agreement regarding the acquisition of Blackstone’s stake in Hembla AB in the amount of 69.30% of the voting rights and 61.19% of the share capital. This also includes all of the necessary and expedient preparatory measures for the financing of this acquisition, both regarding the short-term bridge facility as part of the syndicated financing arrangement and regarding the issue of bonds under the EMTN program in the long term.

Executive and Nomination Committee

In the fiscal year under review, the Executive and Nomination Committee consisted of five members. The Committee was headed up by Jürgen Fitschen as Chairman of the Supervisory Board. The other members were Hildegard Müller, Prof. Dr. Klaus Rauscher, Dr. Ariane Reinhart and Clara-Christina Streit. The Executive and Nomination Committee met six times in 2019, twice at meetings (February, September) and four times using conference calls (January, April, July, November). The Committee made one decision by written circular.

In a conference call held on January 22, 2019, the Committee discussed and approved the structure of the long-term incentive plan, tranche 2019–2022, for the 2019 performance period and the corporate objectives for the 2019 short-term incentive plan as a recommendation to be made to the Supervisory Board.

At the meeting held on February 22, 2019, the Committee developed resolution proposals for the Supervisory Board on the 2018 short-term incentive plan (target achievement), the 2019 short-term incentive plan (target agreements) and the long-term incentive plan for the Management Board (2019 tranche), as well as the payout of the long-term incentive plan tranches from 2015 and 2016. The Committee reviewed the appropriateness of the remuneration paid to the Management Board and recommended that a further discussion be held given the upcoming regulatory and statutory changes. The Committee also discussed the succession plan for the Management Board.

On April 10, 2019, the Committee discussed the succession plan for the Management Board and prepared the resolution proposals for the Supervisory Board regarding the cancellation of the Management Board contract with Klaus Freiberg and Arnd Fittkau’s appointment as Management Board member, as well as the conclusion of a corresponding Management Board contract.

At a conference call held on July 17, 2019, the committee members discussed and passed a resolution on a recommendation regarding the target agreement for the 2019 short-term incentive plan for the Management Board member Arnd Fittkau.

On September 5, the Committee discussed the appropriateness of the Management Board remuneration and developed recommendations for the discussions to be held within the Supervisory Board.

The Committee held a conference call on November 20, 2019, to take an in-depth look at the Management Board remuneration, including market data submitted by an independent remuneration consultant based on the Supervisory Board’s requirements, and made recommendations regarding the discussions to be held, and resolutions to be passed, by the Supervisory Board. The committee members used a written circular to confirm the amended recommendations to be discussed at the Supervisory Board meeting on November 28, 2019.

Corporate Governance

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 January 31, 2019, and November 8, 2019, 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.

Audit

After being appointed at the Annual General Meeting on May 16, 2019, to audit financial statements for the 2019 fiscal year, KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, has duly audited the annual financial statements and consolidated financial statements of Vonovia SE as of December 31, 2019, and the combined management report for the 2019 fiscal year and has expressed an unqualified opinion thereon. In accordance with German legal regulations, the content of the Non-financial Declaration, which is included in a separate section of the combined management report, was not reviewed by the auditor. 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 2019 fiscal year and also considered the Management Board’s proposal for the appropriation of profit. With regard to the Non-financial Declaration to be published pursuant to the CSR Directive Implementation Act, the Supervisory Board complied with its review obligation.

At the joint meeting on March 4, 2020, with the Audit Committee, and at the subsequent Supervisory Board meeting held on the same day, the auditors reported both on their findings including the strategic audit objectives and key audit matters. The strategic audit objectives and the key audit matters set out in the auditor’s report had been defined by the auditor in the second half of 2019, and had already been discussed and agreed upon with the Audit Committee in advance.

In the 2019 fiscal year, with regard to the consolidated financial statements, particularly key audit matters included the value of goodwill, the valuation of investment properties and the identification and valuation of the acquired assets and liabilities as part of the acquisition of Hembla. With regard to the annual financial statements of Vonovia SE, special importance was given to the value of the shares in affiliated companies as well as the recognition of income through the disclosure of hidden reserves as part of the intragroup restructuring of the BUWOG Group.

The auditors 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 4, 2020, 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.

Dividend

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 its 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 for the 2019 fiscal year, a dividend of € 1.57 per share or € 851,369,569.27 in total on the shares of the share capital as of December 31, 2019, 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, 2019.

The dividend will be 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.

Personnel

The following staff-related changes were made within the company’s management team during the reporting period: On April 11, 2019, the Supervisory Board appointed Arnd Fittkau to the Management Board to assume the position of Chief Rental Officer. He took up his office following the end of the Annual General Meeting on May 16, 2019.

COO Klaus Freiberg, who had held the position of CFO up until then, left the Management Board at his own request at the end of the Annual General Meeting. The Management Board employment contract ended with effect from December 31, 2019. Klaus Freiberg has played a key role in Vonovia’s success story. The Supervisory Board would like to thank him for his exceptional performance and valuable contribution to the company’s excellent performance in recent years.

Concluding Remarks

We would like to thank the Management Board for successfully managing the company over the last year and would also like to thank our employees for what was, once again, excellent performance. We would like to thank the employee representative bodies for another year of constructive collaboration.

Bochum, Germany, March 4, 2020

On behalf of the Supervisory Board

Jürgen Fitschen