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Deutsche Wohnen SE
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Good morning, ladies and gentlemen, and a very warm welcome to our Q1 earnings call. You may have seen, we had once again a very strong start into 2019, to which basically all our business segments contributed. I will quickly run through the presentation and highlight the key takeaways and thereafter, as usual, Lars and I will be available to answer any questions you may have.So let's start on Page 4 on the portfolio. The market is unchanged, and the pressure on rents and prices driven by the undersupply continues. There is still, as you can see on the slide deck, a significant spread of around 8x between in-place and reletting rents in Berlin. And that is even 10x spreads versus market rents, which are unaffected from regulation.The current reversionary potential we observe is around 31% across the entire portfolio and 33% in Berlin. So that came slightly down compared to our year-end numbers 2018. The reason for that is the reduction in the modernization charge from 11% to 8%, which was, as you know, implemented at the beginning of this year.That had an expected slight negative impact on our reletting rents. For the entire year 2019, I do expect this to lower our like-for-like rental growth coming from relettings by approximately 10 basis points versus what we've seen in 2018. That's obviously all other things being equal.Based on our reletting rents, we have seen some technical yield expansion versus our year-end valuation. The next valuation update, as usual, will come with our half-year numbers. And unlike our peers, we are giving no specific guidance on NAV uplift at this stage. But having set rental growth and further evidence in the transaction market make us once again very confident that also in 2019 the bulk of shareholder return our business model is able to generate will be delivered through uplift in our EPRA NAV on a per share basis.So moving to Page 5, you can see that rents have increased on the like-for-like basis by 3.4%. In Berlin, that was even 3.7%. Roughly 60% of that comes from relettings, the remainder from existing contracts. Tenant churn as well as vacancy level is stable to what we have seen previously. Please note also that we have already excluded the disposal stock from our letting portfolio that are roughly 9,000 units, which however had no impact on the result. I will come to that a bit later.As you may have seen, the Berlin rent index has been published yesterday with an average increase of 5.2% to EUR 6.72 per square meter. This clearly does not reflect real market developments, which I would have been expecting to be more in the region of 10% based on the methodology of the rent index calculation. However, in the current political environment, we expected a somewhat moderate rent index result and therefore considered that also in our annual guidance in that we have assumed a lower rent index contribution.As always, we need some time to check and implement the Berlin rent index. So it's clearly too early in time to give you more color on the impact on our rental growth guidance. But having said, I consider our like-for-like guidance for the entire portfolio of around 3% to be on the fairly conservative side.So moving to Page 7, our letting business. Our rental income has increased year-on-year by around 6%, EUR 205 million, based on a somewhat stable portfolio size. Our NOI margin came out at roughly 84%, also driven by lower maintenance and around EUR 5 million accounting effect from treatment of leases. Adjusted for these items, our NOI margin expanded by a still healthy 80 basis points.Relatively low maintenance spending will increase throughout the year. And I expect maintenance expenses to reach prior year's level of around EUR 10 per square meter or EUR 100 million in absolute numbers. Total CapEx investments are also on track and expected to reach the level of 2018 with around EUR 30 per square meter or EUR 300 million in absolute terms. Our reletting investments are accounting for around 1/3 of our CapEx budget and are delivering a very attractive yield on cost of around 10% on an unlevered basis.Moving to Page 8, on our disposal business. You can see that in our privatization business, so the single-unit sale, we continued to see price increases driven by the high demand and the continued supply shortage in metropolitan areas. Gross margin of 92%, average price per square meter above EUR 4,000 in Q1 was strongly driven by the disposal of a mixed use commercial residential building in a very central location in Berlin. Here for 19 units, we have been able to achieve a purchase price of EUR 33 million or more than EUR 7,100 per square meter. This is around 48x the current rent and is translating into a gross margin of almost 130%.At normalized levels that is adjusted for this exceptional disposal, we achieved around EUR 2,800 per square meter in the privatization market for below average quality units in Berlin. And that is a gross margin of around 40%. So similar to what we've seen in previous years. In the institutional sales cluster, we want to make use of the strong demand and dispose selected units. Here we are talking about locations, B locations such as Kiel and Lubeck, to monetize on the attractive environment we see in the transaction market.As mentioned before, we have re-clustered around 9,000 units, lower quality units for disposal. And against that backdrop, I do expect a fairly significant contribution to this year's EBITDAR from this segment. And that obviously will also contribute towards this year's NAV uplift. Proceeds of that will be used to refinance our recently announced acquisitions in Core+ areas of Koln, Dusseldorf and Frankfurt, so essentially a recycling of cash towards further quality improvements.Let's move to our Nursing business on Page 9. As a result of our M&A activities last year, total EBITDA contribution almost doubled to EUR 21 million in the first quarter. Since the beginning of this year, we also consolidate the operational platform for the Hamburg assets, which we acquired last year. As a result, we see some pressure on EBITDAR prior to lease revenues with a margin of around 20% for KATHARINENHOF on a standalone basis. So our assets or our operational platform we managed for quite some time is at 24%.That's the good news. We have been able to improve the KATHARINENHOF margin, which was suffering last year from the late opening of a new facility and some increased personnel expenses. Overall, we expect the nursing business to contribute around EUR 80 million in total to our EBITDAR this year. That's approximately a return on capital employed of 6% based on the underlying asset value.Further, also in Nursing and Assisted Living, we will streamline our portfolio and focus the portfolio in metropolitan areas, predominantly on Hamburg, Frankfurt and Berlin area. And against that backdrop, we are currently considering to put some of our facilities for sale which we have acquired as part of a larger portfolio transactions in past years.Moving to Page 10, our adjusted group EBITDA excluding disposals came out at around EUR 185 million, so an increase of 17% year-on-year. Strong contributions from letting and Nursing business led to significant improved margin of 83%. And even without accounting effects and with normalized maintenance, the margin improved year-on-year by around 170 basis points.Our FFO on Page 11 came out at EUR 144 million for the first quarter, so up around 16% on absolute measures and around 14% increase on a per share basis. So here we are very well on track to reach our FFO guidance of EUR 535 million for the full year and the first quarter to that respect already contributed around 27% towards our guidance.EPRA NAV on Page 12 came out at EUR 42.54 on a per share basis, slight increase versus year-end given our earnings contribution to equity. Given that the moderate goodwill in our balance sheet of around EUR 150 million is related to the acquisition of service and operating platforms and as such not part of the NAV, there is no adjustment necessary.On Page 13, our capital structure. You can see that we have maintained our average interest rate of around 1.3%, average maturity around 8 years. So our capital structure remains very conservative. LTV 36.6% and even pro forma for the recently signed acquisitions only around 38%, so well within our LTV target range of 35% to 40%.In the first quarter of this year, we have also successfully refinanced almost half of our EUR 500 million corporate bond through a public tender offer and hedged the vast majority of the remaining balance. Consequently, the upcoming maturities in 2020 are more or less addressed. Overall, on the financing market, the environment remains very attractive. Year-to-date we have been able to refinance more than EUR 0.5 billion and that's with an average tenure of 11 years and average interest cost of less than 1.5%.So overall our business continues to perform very well. As we are only at the beginning of the year, we stick to our guidance with an FFO I for 2019 of EUR 535 million and the like-for-like rental growth of around 3%.With that, I conclude the presentation and open the floor for Q&A.
Our first question comes from the line of Jaap Kuin from ING.
I think my first question is on the Berlin political situation. Obviously in your e-mail statement, there's a bit of commentary. Could you maybe describe how in the more medium to longer term you think any of this, what has happened in the last couple of months, affects your strategic planning and whether you want to be more active on the development side, for example? And then secondly, if you could make a comment on the nursing home business on your strategic views there, any incremental news you can give on the future and medium term as well? That would be very much appreciated.
Yes, I mean, on the political side, as you know, there is a lot of noise which is the result of the tremendous pressure we continue to see on rents and prices. Politicians, in particular in Berlin, are doing their utmost to soften the impact. I think the rent index outcome we have seen yesterday is a clear sign of that. As I mentioned in the presentation, looking at tenants shown, looking at refurbishment ratios and the developments in the market, I would've clearly expected based on true developments, an outcome of around 10%. So you can see that politicians do actively or have actively influenced the outcome of the rent index.Is all that political noise impacting our longer-term strategy? Clear answer is no. We continue to be very focused on metropolitan areas. I also don't see that the talk around regulation is negatively impacting the transaction market here. As I mentioned, we do see prices to increase further which is evidenced in our privatization business, but also in our institutional block sale business. So against that backdrop, I think our longer-term strategy to focus on metropolitan areas and in the upswing of the cycle to invest money to improve quality and to use this very favorable market for more opportunistic sales of B location is the right approach.On your second notion, developments, yes, we will be more active on that front. We have in preparation around 2,500 units which we aim to complete by the end of 2022. You will also see spendings this year for new developments to slightly increase. That having said, new builds requires a lot of preparation. In some instances we are also required to get respective approvals by authorities. This still takes very, very long in particular in Berlin market. So the vast majority of that is really going to happen in the years to come.On Nursing and Assisted Living, yes, I mean, I think not much more to say than as part of the presentation. I mean, similar to our residential business, we have a clear focus on metropolitan areas. Against that backdrop, do expect some disposals. Second, we have also defined a very clear investment strategy for our assets, which we intend to hold for the longer term here. Our approach is that we want to improve quality by improving quality to basically maximize the number of self-payers and that exposes you to less regulatory risk.But all-in-all, in our view in Nursing and Assisted Living, we are at the very early stage of also a huge supply-demand imbalance. Demographics are very clear, allows you to predict future demand. New supply activity is very moderate and against that backdrop we consider that to be a very attractive niche market in the longer or in the medium to longer term.
Our next question comes from the line of Sander Bunck from Barclays.
Two questions from my side. The first question is on Page 4 and the impact the new regulation has on reletting and market rents. Can you explain to me how that works because I was always under the impression that if a tenant left and you were due to modernize it that you could effectively relet the unit at market rent. So how is it possible that this market rent is being affected by the regulation because I thought it was always outside that proposal?
We have in rented cap, 2 extensions from the investment side. The one is, if you make very complex investment in the apartment, let me say for instance more than EUR 800, EUR 1,000 per square meter or something, then you are free to adjust the rent on a market level. If you make more smaller investments in the apartment, then you are -- then you have to consider the modernization caps of EUR 2 or EUR 3 per square meter. And that is something which is new because the caps are, I believe, from the beginning of this year and therefore we see some impacts.
But again, how does that -- and for the reletting rent, I can see that argument. But for market rents, how does that negatively impact market rents?
Okay. That's right. We don't see a negative impact on the market rent level. But I think we show in the table our new letting rents and not the rear market rent, I would say. And therefore you see the impact in our table.
Okay. So just for my understanding, so you have in-place rents, that's what you currently have. The reletting rent is what you're doing at 21.7x and the new market rents, what is that exactly? I thought it was just the rent from CBRE?
That's correct. That's the rent by CBRE. But what we basically do in calculating that multiplier is that we put in context the CBRE market rent versus our fair value on a per square meter basis. And that is resulting in the respective multipliers.
Okay. But just to make sure, there is actually no impact on market rents?
Market rents in the first quarter slightly increased once again. I think we have that number in the appendix, by around 3%.
Okay. So the 18.9x is not a real reflection of what's going on in the market?
Correct.
Okay. Fine. Then another question which is on the IFRS 16 and the impact of that, I take it that you include the positive impact of that in your FFO methodology. And then secondly, a follow-up on that. Was that IFRS impact, was it already accounted for when you updated your guidance at FY -- with the full year results of '18 or is that something that actually comes on top of that?
No, that was already included in our guidance. And in that context, we explicitly stated that based on the increase in FFO I, approximately EUR 20 million is driven by accounting effects here, vast majority by IFRS 16 effect.
Okay. So ex the impact, your FFO guidance would have been, say, EUR 20 million lower?
Right.
[Operator Instructions] Our next question comes from the line of Kai Klose from Berenberg.
I've got a quick question on Page 5 of the presentation where you mentioned that 9,000 units are earmarked for disposals, including Lubeck. I think Lubeck -- Kiel and Lubeck, this amounts to about 5,000 units. Just wanted to ask where the remaining 4,000 units are coming from?And the next question would be on the, again on Lubeck. Are you intending to sell the entire -- staying out of the entire region? And the last question would be on the nursing activities, healthcare activities. Remember, with the full-year results, you mentioned that you may also look into acting as a kind of operator doing this. In this regard, can you maybe give us an update on what your thoughts are on this regard?
Yes, on the 9,000 units earmarked for disposal, that are predominantly locations in these cities. So Kiel, Lubeck, but we are also considering Anfahrt, [indiscernible], Magdeburg for potential disposals. Part of that is also certain portion of our stock in Berlin market. Here we are talking about units predominantly rent restricted, these rent restriction actually, yes, being there for the very long term, often 20 years and more.So all-in-all, below average quality compared to our overall portfolio. At this stage, I probably can't get more explicit as the preparation and sales process is in the doing. But assume that we have structured that in a way that we offer attractive portfolio transactions for disposals. Looking at the market in that respect, I do see a lot of appetite. So that's what I mentioned in the presentation is what we intend to monetize on in terms of price expectation.On Nursing and Assisted Living, based on our operating business, around 40% of the stock we own in Nursing and Assisted Living are also operated by subsidiaries of Deutsche Wohnen. Here the key task for the current year is really the integration of the newly acquired operating platform of our Hamburg facilities. Longer term, no updates at this stage how we will go about the operating business on a longer-term basis.
Okay. And just maybe a quick follow-up, coming back on the disposals. If I compare Page 5 of the presentation with Page 17, without going to details, but I just want to say that from these 9,000 units in [indiscernible] for sale, it is coming entirely of the Core+ of the portfolio that's shown on Page 17?
Most of that is coming from the Core+ but as I mentioned we have also earmarked some of our Berlin stock for disposal. So a third, approximately a third is coming from Core+.
The next question comes from the line of Robert Woerdeman, from Kempen.
This is Robert, Kempen. Question on your guidance. With the full-year results, you didn't give out a very challenging target and it did not include the 2,800 residential units. And now in the next quarter, I reckon that those are included and thus one would have expected a further increase in FFO. What is the reasoning, what are we missing in, let's say, don't expecting a higher FFO for 2019? Is that due to the fact that you're stepping up the disposal pace? Can you give any clarity on that?
Let me put it that way. I feel very comfortable that we achieved our FFO I guidance. What you have to consider, the acquisitions we undertake are on in-place rent multipliers at around 30x. They are to 100% debt financed and there's no intention on our side apart from the scrip dividend, raise equity. And on that basis, the FFO I contribution based on a normalized NOI margin is somewhat moderate at least initially.Second, the big acquisition we have done around 3,000 units has not yet closed. That's a staggered process which will probably take until the third quarter of this year for this transaction to fully close. So again, remaining impact is only for the portion of the year. But again, I think we are comfortable. You certainly have to assume for the remainder of the year that you will see some pickup in our maintenance spending towards the targeted EUR 100 million. In addition, you will also see some pickup of our corporate expenses. We still have some hirings outstanding which will proportionately increase that cost base.So against all of that -- and you rightly pointed out that we are also disposing some assets, so we are losing some FFO based on the point in time to which we essentially conclude the disposal. And based on all of that, we think it's still a bit too early in time to revise our guidance.
Okay. That's clear. And I think the 9,000 units now earmarked for sale, that is a slightly higher number than previously guided. Should we read anything into that as in are we now approaching the peak of the valuation for the B cities or what is the line of thinking here?
I mean, first of all, I think it's more or less exactly in line of what we have guided. We said as part of the year-end presentation that net of acquisition, we are likely to see our portfolio, our overall portfolio shrinking by around 5,000 units. So considering that we have acquired around 3,500 units year to date, that disposal number should not come as a big surprise. And I think our view in fact on B locations is that we do see more risk to the downside than chances to the upside in these markets. The macro backing of the valuation is less compelling compared to metropolitan areas, which is why based on price levels we observe in B locations and based on the fairly significant yield compression we have observed predominantly in B locations the timing is right to de-risk our portfolio structure and engage in these kinds of opportunistic disposals.As it relates to our targeted disposal stock in Core+ areas, this is more a topic that as I mentioned, we are talking about subsidized rent restricted units. It's very hard for these portfolios to invest money given rent restrictions. So it's in essence not the kind of quality we want to be associated with, which is the reason why we also think timing is right to test the market for opportunistic disposals also in selected, very selected Core+ areas.
Okay. That's clear. And one point to focus on. You mentioned more risk to the downside. When did you -- it's difficult to pinpoint exactly, but when was that turning point? Is that something that you basically have seen or is that your assessment over the last 6 months or is this turning point kicked in earlier?
I think it's a fair assessment that based on developments we've seen in the last 6 months, that is a price development which triggered our decision to engage in selected disposals of the locations.
Our next question comes from the line of Bart Gysens from Morgan Stanley.
I had a question on capital structure and use of capital. At what point would you consider buying back your own shares if you are selling assets? Well, your LTV is pretty low. I appreciate from a net debt to EBITDA perspective you're perhaps at the higher end of the sector and of yourself in both levels. But you could start making a case to start buying your own portfolio. How do you see that?
I mean, I see a share buyback to be more or less equivalent to a dividend. Currently, there's no intention for a share buyback or to increase dividend. The reason is from a capital structure perspective, I am very focused on coverage ratio and that I want to have a sound relationship between the EBITDA our assets are generating and the total debt burden on the respective asset base here pro forma for the acquisitions. We are slightly above 14x. That's in my view. That kind of on the aggressive side, obviously with the huge rent potential we're sitting in our portfolio that coverage ratio as we're able to capture some of the reversion will come down over time. But for the time being, it's on the aggressive end.Second, from a liquidity perspective, what we distribute as a dividend to shareholders is basically the free cash flow we do not require for our investments. If I look at our guidance, EUR 535 million, 65% of that as a dividend, what is remaining, assuming that we finance investments in the same way we finance our group, meaning 60% equity, 40% debt, we have basically sufficient cash available to fully cover the investments we have earmarked for our existing stock.
The next question comes from the line of Manuel Martin from ODDO BHF.
Gentlemen, 2 questions for me. Question one, regarding the FFO coming back to the IFRS 16 topic, would you be so kind to give me an indication on how your FFO I would have been in the first quarter, disregarding the IFRS 16 topics, so in the good old way. That would be question #1.Question #2 would be, maybe you could give us your opinion on the plans of the Minister Barley that she plans to make landlords pay back too high rents retrospectively in the future. Maybe you can give us your opinion on that.
On your first question, the FFO I as you said, in the good old way, would have been EUR 4.8 million lower.Yes, we got to your second question. It is the voice here in Germany that rental cap is not strong enough, et cetera, and that is in sanction as landlords were not considered in the tenant, the rental cap, but for us at Deutsche Wohnen, it's not really a topic because we are fully in line with the legal framework and therefore it is for us not really a topic.
[Operator Instructions]. Our next question comes from Bernd Janssen from VictoriaPartners.
One, I could probably call it follow-up question on capital recycling. Could you give us an idea of the regional focus? To what extent was the acquisition of the portfolio you bought, the EUR 685 million in Dusseldorf, Koln and Rhineland area and so on? Was that a signal that you are preferring potentially other places than Berlin given the political situation and also the outcome of the rent table or was it just an opportunity and you will continue to see Berlin as an equal growth area compared to other metropolitan areas in Germany?
Well, I think our capital recycling or capital strategy, as Philip said, has not really changed. We are focusing on metropolitan areas. At the end, I think it's more a question of on capacities on offers which we have in the market. And this situation is completely unchanged. That means we don't see a really big transaction or a smaller end transactions in the market in the metropolitan areas. We try and we have bought also in the past in these areas Frankfurt or Dusseldorf or something else. But as I said, the capacity are not there.For the B cities, as sort of mentioned, it's more a question of risk, but is also a little bit driven by operational challenges. If we're talking about for instance about Chemnitz or part of Magdeburg or something else, we are -- we have here only a small footprint of 500, 600 units. That is more expensive to manage than stock like in Berlin with more than 100,000 units. That is also drive our employee decision.For Berlin, yes, we have the political challenge, we have the pressure. But at the end, also here the situation is unchanged. We have a strong urbanization trend. The people comes in the city, they need apartments. We have no offer on the new construction site or not enough offer. And therefore, we will see rent increases, we will see price increases, and all what the politicians have to do -- what they do, sorry, is to try to regulate the market about the rent levels. But what we need is more new construction.
So, I guess, I've got your message. But in summary, despite what I would see as a more intense political pressure, overall regulatory trends in Berlin have not changed your preference of Berlin versus other attractive metropolitan areas in Germany.
No, I don't see this because we have also -- let me say, any other big cities or in the other 7 big cities in Germany like Hamburg, Frankfurt, Dusseldorf, Munich, Stuttgart, et cetera, we have more or less the same political situation and we have also in these cities a lot of pressure.
[Operator Instructions]. We have no further questions coming through. So I'd like to thank everybody for joining today's conference call. The next earnings call of Deutsche Wohnen will be on the 13th of August 2019. If any questions in the meantime, please feel free to contact the IR team. Have a good day and bye-bye.