Deutsche Wohnen SE

XETRA:DWNI

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Earnings Call of Deutsche Wohnen SE regarding the publication of the Q1 results as of 31st of March 2018 hosted by Mr. Philip Grosse, CFO; and Mr. Lars Wittan, CIO. The presentation of the call is available on Deutsche Wohnen's website in the Investor Relations section. [Operator Instructions] I am now handing you over to Philip Grosse to begin today's conference. Please go ahead.

[Philip Grosse, CFO & Member of the Management Board]

Thank you very much, very warm welcome also from my side. And yes, let's start with the Q1 earnings call that, in my view, contains little surprises, so we will make it brief and crisp. I will quickly run through the presentation, and thereafter, Lars Wittan and myself will answer any questions you may have. So starting on Page 4 on our portfolio. Here, given the tightness of the supply side, we continue to see our reletting rents to grow at a much higher pace than our in-place rents. So in a year-on-year comparison, our reletting rents actually have grown almost twice as fast as our regulated in-place rents. And as a consequence of that, the rent potential has widened further to 31% across the entire portfolio; in Berlin, to even 37%. And that, as you know, is for us really the key metric to exploit this rent potential through: a, index adjustments; and b, investments as this will add to our NAV growth for the coming years. What you can also see on Page 4 is that, based on our reletting rents, we have actually seen some yield expansion versus our year-end valuation, and that certainly gives us comfort for the next revaluation of our portfolio with our half year numbers, as in our view, a gross yield of greater 5% based on market rent levels, looks conservative in today's market environment. Moving to Page 5. On a like-for-like basis, we have increased rents by 4.4%; in Berlin, even by 5.1%. That 4.4% of the last 12 months includes, as you know, the full impact of the Berlin Mietspiegel, the index, which has been published in summer last year. This impact on rent per square meter will vanish, to some extent, until December 2018, which is also why we stick to our guidance of 3% like-for-like rental growth for the year 2018. And here, please keep in mind that the 3% is based on comparing the expected in-place rent as of 31st of December 2018 with the corresponding in-place rent as of 31st of December 2017. So it's not a cash flow-driven figure and does not include any potential movements in vacancy. From a cash flow perspective, as mentioned before, we expect 4% to 5% like-for-like rent increase in 2018, leading to some EUR 30 million to EUR 35 million higher cash rents in our P&L. Our vacancy rate, in line with expectation, slightly increased to 1.9%. That, however, as usual, is also CapEx driven and that applies to 50 basis points of net vacancy rate.Our investments, as you can see on Page 6, have increased on a year-on-year comparison by 27%. Our full year guidance here remains unchanged, with the expected total investments of up to EUR 45 per square meter. They're of the usual EUR 9 to EUR 10 per square meter as maintenance charged directly through the P&L. The remaining investments will actually add to the rental and capital growth and will be capitalized in our balance sheet. Moving to Page 7, our letting business. The rental income have increased year-on-year by almost 7% to EUR 193 million. The NOI margin came out at 79%, more or less flat on a year-on-year comparison, in particular if adjusted for maintenance expenses, but up around 3 percentage points versus year-end 2017. So also here, we are on a very good track. In our privatization business that is on Page 8, we continue to see an acceleration of prices, which is very much supported by the significant widening of the reversionary potential. The reversionary potential, as mentioned before, is one of the key metric the transaction market these days is focusing on in under-supplied markets as Berlin. But consequently, since 2014, we have seen we are more than a doubling in privatization prices from slightly below EUR 1,200 per square meter to more than EUR 2,400 per square meter. Gross margin's about 40%. However, as you can also see on Page 8, we have only privatized a fairly small number of apartments. And that slowdown in privatization pace is very much driven by our strong belief that we will see transaction prices to grow further, and that mainly supported by market rent levels, still on an upward trend, in particular in Berlin. Coming to Page 9 at our Nursing and Assisted Living business. This segment, as you know, remains one of our key focus area to grow also through M&A. Given our pipeline, we continue to be confident to deliver some progress over the course of this year and to grow this business segment towards 15% of group EBITDAR. Net expansion consequently will also add to our FFO I growth for the coming years. If you look at the profitability of our operating business, we have seen an expected approximately EUR 1 million decline in EBITDAR. Reason for that are predominantly higher personnel expenses, in particular, as we had to make use of more costly temporary staff to cover the shortage on our personnel side. Here, we actually simply have been suffering a lot from the influenza season in Germany. But in addition, we also had one-off expenses for the late opening of a new build facility in Krampnitz that was delayed by a couple of months, but staff was already hired earlier for the initially scheduled opening date. As outlook, these impacts, in our view, should mainly recover throughout the year, which is why we continue to expect this business segment to deliver towards EUR 50 million of EBITDAR, so very much in line with our budget. Moving to Page 10 on EBITDAR -- group EBITDAR. Here, our adjusted EBITDAR, excluding disposal business, came out at EUR 157 million, so up 7% on a year-on-year comparison. The EUR 1.4 million of one-offs are related to some project. Cost items here, predominantly investments in our IT platform, but also to comply with the new data protection laws, which will be introduced in Germany end of this month. Our margin, excluding disposals, was more or less stable at above 80%.Moving to Page 11. FFO I came out at EUR 123 million for the first quarter, so up 9% on absolute terms, 6% on a per-share basis. So we are very much on track to deliver our FFO I guidance of EUR 470 million. In the base case scenario, that is without further M&A or major disposals. On a per-share basis, the increase in FFO I on a fully diluted basis was even plus 13% as a result of the successful refinancing of the -- in the money convertible bonds in the last year. Looking at the margin, here we are focusing on the pretax margin that has increased to almost 69%, so up 2 percentage points on a year-on-year comparison. And that is because of our operating performance, but yet again, on lower financing expenses. Last but not least, Page 12 on EPRA NAV, more or less stable at EUR 36.05 on a per-share basis, and the slight increase versus year-end -- well given our earnings contribution to equity. Here, as mentioned at the beginning of the call, we will do a revaluation of our portfolio with our H1 numbers, so that obviously will be the key catalyst to capital growth. But at this stage, as usual, we refrain from giving any further guidance on the expected revaluation amount. With that, I conclude the presentation, and Lars and myself are available for any questions you may have.

[Operator]

[Operator Instructions] The first question comes from the line of Valerie Guezi from Exane.

[Valerie Guezi-Jacob]

I've got a couple of questions. The first one is on your ratio in the nursing homes business. You said you expect the ratio to recover, and I was wondering if you could be a bit more specific. Do you think you're going to go back to your 25%, 26% margin? Or do you think that the additional wage costs mean that this ratio could be a bit lower for the next 12 months or even longer? That's my first question. And my second question is about M&A's opportunities. I was wondering if you could give us a bit more color. Are you looking at acquisition in the nursing homes segment or in resi or in both? If you could be a bit more specific about the current opportunity that are available.

[Lars Wittan]

This is Lars. I will start with your second question, the acquisition opportunities. I think the situation in the market is more or less unchanged to all other cohorts. That means in the resi segment, we see more or less nothing, more really little deals multifamily houses with 5 to 10 or 20 apartments to a house. Price development is also unchanged, and that means we see in Core+ markets a multiplier on in-place rent between 30 to 35, up to 40. But combined with the rent potential what we have, we came out on a market rent multiplier between 20 to 25. So from a price per square meter, we see the prices in the Core+ market between EUR 2,500 to EUR 3,000 per square meter. And in core regions, we see also increasing prices but on a -- as a -- well, on a different level. And in the housing business, it's a little bit different. Here, we see a little bit more acquisition opportunities, small deals but also midsized deals. And we think we have here a good pipeline, which we can perhaps also conclude some deals at this year. But as always, we cannot really comment any actual opportunities. But in principle, a similar situation. And that means prices for properties are increasing. We see a spread between resi and housing, which is clear and due to the different risk profile, but we see also, as I said, an increase in prices. That is in principle to the acquisition opportunities.

[Philip Grosse, CFO & Member of the Management Board]

Let me cover your first question on nursing. Here, we are, in terms of profitability, actually EUR 500,000 behind budget. That implicitly points towards an EBITDAR margin of 24%. And that's actually the margin we also expect for the year as most of the effects are of a temporary nature. I mentioned we have seen in Nursing and Assisted Living some wage inflation. We had to use temporary employees to cover shortfalls. And that kind of wage inflation usually gets covered by adjustments of the reimbursement amounts when negotiated with the long-term care insurance providers, and that is currently on its way. Second, that facility I mentioned in Krampnitz had its opening in this month, so we are behind schedule. But that, some cost so to speak, will not occur going forward. And these costs actually were responsible for 50% of the shortfall versus our budget.

[Operator]

The next question comes from the line of Thomas Neuhold from Kepler Cheuvreux.

[Thomas Neuhold, Head of Research of Austria]

I have 2 questions. The first one is on Slide 18. You mentioned that there is an increasing housing shortage in the Berlin market. Can you share with us your views, what do you think could be the political response to this increasing shortage? And also, what you think should be the response to this shortage? And the second question is on your guidance on Page 14. You mentioned that you plan a 65% payout ratio and to keep your LTV in the target range of 35 to 40. You now mentioned that the prices continue to go up, and it's increasingly difficult to find attractive value targets. If you do not succeed to make enough acquisitions this year to keep the LTV in your target range, would you consider to increase your payout ratio, or even consider a share buyback if you don't find enough acquisition opportunities?

[Lars Wittan]

To your houses shortage, I think the situation is unchanged also to the year-end call. We see a huge migration into the big cities in Germany. We have not really -- the new construction activity we need. Last week, I think there was a new statistic for the city of Berlin, for instance, where a new construction activity is decreasing. And so the pressure will be higher and higher on the residential market, that means on tenants, on the landlords and also on the politicians. And what the politicians discuss is: the left side, I think more regulation -- rent regulation on the [ labor rates ]; and right side, [ dealers ] cutting more and more how they can stimulate the new construction activities. And we think about subsidized and so on or also for improvements in the energy savings, et cetera, to reduce new construction costs. But at the end, it is a big challenge I think for the entire market because you need land plots in the big cities. Land plots are also expenses. Here, we have also a speculation. You need capacities for the new construction [ firms ]. And you have not really enough capacity in the market, that is also a driver for prices. And that is, in principle, the situation. And what we see in Berlin, for instance, as our main market, here we have more or less a left-wing party or a government and they are asking for more regulation. But at the end, it is not the solution, as you know. You know all the arguments and what we need is new construction activity. What we need is a more efficient use of the existing land, that means not only to build a house with 3 floors, and we need perhaps 8 or 10 floors and, et cetera. And that is what we need, and we need a better investment climate between the politicians and the companies, and that could help but not in the short term because, as you know, to get the approval from the authorities to build something needs time, and therefore, it is more or less a time frame of 2, 3, 4 years. Yes, that's the situation. For us as a landlord, from an economic point of view, it's good because the shortage is there. That means rents will increase. Prices will -- increases. But from the entire environment, we need here better solutions.

[Philip Grosse, CFO & Member of the Management Board]

On your second question, on dividend policy, there are currently no plans to change our payout ratio of 65% FFO I. Here, we have the principal policy in terms of how we look at our capital structure to overcapitalize in the upswing of a cycle. So if we are right about our view that we will see further appreciation on the asset side, mathematically, our LTV should come down further. That's point one. Point two, as Lars mentioned, while M&A environment has been -- while it become more challenging, there are opportunities. And at least part of our balance sheet headroom, we're confident to deploy in M&A, and here, as mentioned, in particular, for M&A in Nursing and Assisted Living. And my third point, I mean, as an outlook going forward, we look at dividend very much from a free cash flow perspective. Currently, the situation is such that those dividend, we are more or less in a situation to cover almost all investment needs through remaining available cash based on our capital structure or by leaving the capital structure as is. Once we take the decision to accelerate privatization business, this, I think, is the key turning point. Maybe also have to revisit our dividend policy, make that more cash flow-driven because privatization business usually comes at a cash conversion rate, greater [ 90% ], and that's kind of supporting a change in dividend policy.

[Operator]

The next question comes from the line of Kai Klose from Berenberg.

[Kai Malte Klose, Analyst]

I just have 2 quick questions. The first one is on Page 7 of the presentation. The income from rents increased by 7%, whilst the income from utility costs were up by 10% and the expenses by 12%, plus on a sense, the income and expenses relating to utility charters is it -- has it a seasonal effect of what anything special included in the first quarter that we had a bit of a different change compared to the increase in -- change in rents? And the second question is on Page 6 of the presentation. You mentioned the rent reviewed on cost on the reletting activities. Is it a level which we could expect also for the full year? And if you split that by regions, could you indicate in which regions it is -- slightly below or even slightly higher?

[Lars Wittan]

The yield on costs of roughly 12%, you can expect for the full year. I would say in principle, is the yield more or less similar also between the different regions point. So on to your first question, utility income and expenses, I wouldn't say there is a special effect under the normal course of the utility expenses and income. And we disclose on the right side in the table the net impact, and that is what we have in our eyes to manage the utility expenses.

[Philip Grosse, CFO & Member of the Management Board]

I'd like to add on that point, part of that increase you have seen on the year-on-year comparison, and that refers to the nonrecoverable expenses but also the rental loss is very much CapEx-driven, yes? Because here, we see a pickup, given that we on purpose built up vacancy for our CapEx stock and that increases the cost items, which we can't recover from our tenants.

[Kai Malte Klose, Analyst]

I see. And -- may -- can I ask a last question, in your press release, you mentioned that you're going to start a number of new constructions, including Berlin and Leipzig and also the Eisenbahn. Could you just indicate how much of investments in your [ M&A ] spend you expect to invest for these new construction activities for this year and potentially over -- for next year, if possible?

[Philip Grosse, CFO & Member of the Management Board]

This year, we, if I recall correctly, plan to start new construction for approximately 300 units. That's towards the second half, so don't expect too high cash expenses this year. This really will kick in as of 2019, 2020. And here, expect slippages to.. check that number. And for the years to come, expect EUR 150 million to EUR 200 million of investments.

[Kai Malte Klose, Analyst]

And which is not part of the -- which would come on top of the annual modernization and maintenance program which you have? [Audio gap]

[Philip Grosse, CFO & Member of the Management Board]

Operator, are there any additional questions?

[Operator]

The next question comes from the line of Manuel Martin from ODDO.

[Manuel Martin, Analyst]

Two questions, please. Question one is relating to your nursing business. I saw that you split up the revenues from -- for nursing into rental and lease income and income from nursing. I'm particularly interested in income from nursing. Could you detail that a bit more for me because rental and lease, it's clear for me, just the other income stream.

[Philip Grosse, CFO & Member of the Management Board]

It's very detailed. The vast majority really is from a -- from nursing part of that, which is included in the income, however also relates to day care and some outpatient care services. But these 2 items are probably around 5% of total revenues. So a vast -- vast majority of that is really as you would expect from nursing. Is that answering your question?

[Manuel Martin, Analyst]

More or less, but maybe we can go into that in a bilateral discussion as it is a really detailed question, I must admit. The second question on your FFO I guidance. After having such a good start in Q1, I know that there will be some costs at the year-end, as usual. But how do you see the likelihood that you might revise your FFO I guidance within this year?

[Philip Grosse, CFO & Member of the Management Board]

As mentioned, at this stage, no update on guidance, so we are confident on the EUR 470 million. But as of today, we have not sufficient visibility on changing that guidance at this point in time.

[Operator]

We currently have no further questions in the queue. [Operator Instructions] Okay, there are no further questions, so I would like to thank everybody for joining today's conference call. The next earnings call of Deutsche Wohnen will be on the 14th of August 2018. For any questions in the meantime, please feel free to contact the Investor Relations team. Have a good day and bye-bye. You may now replace your handsets.