Deutsche Wohnen SE

XETRA:DWNI

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, and welcome to the earnings call of Deutsche Wohnen SE regarding the publication of the 9M results of 2019 hosted by Mr. Michael Zahn, CEO; and Mr. Philip Grosse, CFO. The presentation of this call is available on Deutsche Wohnen's website in the Investor Relations section. [Operator Instructions]I'm now handing you over to your host, Michael Zahn, CEO, to begin today's conference. Please go ahead.

[Michael Zahn, Chairman of the Management Board & CEO]

Thank you. Good morning, everybody, and welcome to the publication of our 9 months results. We can once again present you with a strong operating results. Before Philip will give you a detailed insight, I would like to say a few introductory words. To begin with, I would like to point out some of the highlights, which you can also find on Page 3 of the presentation. First of all, key corporate figures continued to develop positively. Over the entire portfolio, rents rose by 3.4% over the last 12 months. The rental growth in the portfolio was moderate at 1.5%. The adjusted EBITDA margin significantly improved to 87% (sic) [ 80.5% ]. Furthermore, the FFO I per share rose by 12% year-on-year. So we can, therefore, confirm our 2019 FFO I guidance of EUR 535 million, I think, expected and not a big topic today. The tight situation on the housing markets and the associated social debate were also crucial in the first 9 months of the year. We assume that the shortage of housing and the result in rent increases can only be changed by long-term favorable framework conditions for new construction and densification. We will continue to trust in partnerships and cooperation with all those involved. That is why we have created a platform for public dialogue. So far, we have organized 3 dialogue forums in which representatives from politics, science, business and society discuss how we can shape the Berlin housing market fairly together. The fourth and final dialogue forum will take place tomorrow. So far, Deutsche Wohnen is thus making a further active contribution to improving the situation on the Berlin housing market by developing ideas how to overcome its shortfall. Every 2 years, we conduct tenant surveys and give our customers the opportunity to provide feedback on their living situation and satisfaction with our service. A review of the first preliminary results showed that we have improved in all the dimensions surveyed. First of all, it is positive to note that the response rate of around 30% is already well above the level of the last survey. Once again, over 70% of our tenants are satisfied or very satisfied with us as the landlord. More than 80% stated that they were satisfied or very satisfied with the apartment, including its pricing. Overall, the work of Deutsche Wohnen continues to be rated as very positive by its tenants despite the social debate. Against this background, I see our current strategy confirmed. The efforts of the Senate in Berlin to legally cap rents have become increasingly concrete in the first 9 months. The bill is expected to be passed in the first quarter of 2020. Before Philip will give you a detailed explanation of the rental cap, in particular, the economic consequences, I would like to say a few general words on this topic. Almost 30 years after the fall of the Berlin Wall, there seem to be some people that want the former conditions back, but I'm sure that this is not in the interest of the vast majority in Berlin. Should the regulation actually come into force, I warn that the housing shortage will continue to worsen. It is always suggested that according to the rental cap, apartments in Berlin are allowed to cost a maximum of EUR 9.80 cold per square meter when we let in the future. However, this misses out the fact that this only applies to apartments built between 2003 and 2013, and therefore, only a small single-digit percentage of apartments in Berlin. If you look at the big picture, you will realize that if the rental cap comes into force, you have to pay an average of only EUR 372 for a 60-square-meter apartment in Berlin. This is simply a subsidization of high income households and the economic consequences are affecting everyone. First, a rental cut will not overcome the supply shortage. Tenants with existing leases might benefit from capped rent increases. People moving to Berlin are faced with less supply and fewer opportunities [ available. ] Secondly, a rental cap will negatively influence new construction. The mere fact that for the first time, new construction until 2014 will be affected by the regulation will have a significant negative impact on investors. As a result, politics is losing once again credibility. In the first 9 months, we invested around EUR 300 million in maintenance and value-enhancing refurbishment. This has enabled us to increase the energy efficiency of our buildings and protect the climate. Energetic refurbishment to this extent will no longer be economically possible if the modernization allocation is limited to EUR 1. There's virtually no financial incentive for owners to modernize if they are not allowed to pass the improvement on at least in part to tenants. A repeated reallocation of modernization costs to the expense of the owner will cause Berlin not to achieve its climate targets. It is to be expected that the conformity of the draft will -- with the constitution will be legally examined. Until a decision by the court, there will be great uncertainties among tenants and landlords, which is [ poisonous ] for investments. However, much more important than the operational impact is the fact that the rental cap sends a strategically wrong message about Berlin. According to a recently published analysis, Berlin has the best location conditions in the whole of Germany and, therefore, the prerequisites for a golden future. Berlin's [ court ] with [ the highest ] percentage increase in population, the highest growth in employment of all 30 cities surveyed, a significant improvement in productivity, a strong international orientation and positive demographic focus. Let's not destroy bright outlook by opportunistic regulation like the rental cap, but work together on a colorful, vibrant, open Berlin that remains attractive to everyone. Instead of introducing more regulation that do not have the desired effect, it would be much more important to improve the already existing rules, and finally, having them to succeed in order to protect those who can no longer afford their apartments. This is exactly the approach that we at Deutsche Wohnen have been following since the publication of our promise to our tenants. Since the entry of our promise, we have allocated more than 1,200 apartments to tenants who are, based on their income situation, entitled for social housing. This corresponds to 37% of the apartments newly let during this period. In this way, we support [ briefly ] those who find it difficult to find an apartment in this tense tenant market. In addition, we have agreed to hardship provisions with nearly 500 tenants and voluntarily waive rent increases following modernization or the implementation of the rent index. A small number of those who make use of our tenant promise shows above all one thing: our apartments are affordable for large segments of the population. A look back at the past shows that some management decisions for which we lacked support at the time would have been very good in retrospect and especially under the current circumstances. Against this background, I would like to point out once again that despite the current politically very challenging situation, we should not act in an action-oriented manner, but with a long-term perspective on the positive development of the company. And with that, I hand you over to Philip.

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

Thank you very much, Michael, and a very warm welcome from my side. Before I move to the details of the proposed Berlin rental freeze, I want to briefly comment on our EUR 750 million share buyback, which we have announced yesterday post-market close. As you know, our shares trade at a significant discount to our net asset value. And our stock price valuation by no means reflect the attractive fundamentals of our business and the underlying quality of our Berlin portfolio. Recent disposals, which we have undertaken at very attractive prices significantly above our IFRS book values are, in my view, a very good proof point of the continued liquidity and attractiveness of the transaction market in Berlin. Against that backdrop, we have taken the decision, and that's with the full support of our Supervisory Board, to initiate a 12-month share buyback program via the stock exchange. In the current set of parameters, we consider the investment into own shares is a compelling use of our free liquidity from a capital allocation perspective. In other words, we sell and will continue to sell assets at a premium to NAV and will reinvest the proceeds at a discount to NAV to create value for our shareholders. At the same time, and to be very clear on that point, we will preserve our conservative capital structure philosophy and target an LTV, including share repurchases, of below 40%. So moving to Page 4. The draft bill on the Berlin rental cap has been approved by the Senate and is scheduled to be implemented in Q1 2020, as you know. I will not go through every detail of the proposed law, but the executive summary is fairly simple. First, there will be basically no further increases in rents. The provision for small rent increases for defined energetic modernizations due in broader terms do not work from an economic perspective. Second, running leases can be reduced to 100% -- sorry, 120% of the applicable rent cap level. The provision comes into force in Q4 2020 and requires the tenant to apply for a rent reduction with the administration in Berlin. Third, relettings shall be further reduced to the level of the applicable rental cap or remain at the previous rent level, whatever is lower. And fourth, the rental cap shall be enforced for 5 years applies to all nonsubsidized apartments and will be retroactively applied as of June 2019.On Page 5, we have applied the proposed rental caps to our underlying Berlin portfolio. Based on the clustering of Deutsche Wohnen's Berlin portfolio by year of construction, the rental ceilings following the draft bill would amount of a weighted average rental cap of EUR 6.20 per square meter a month, and this is around 9% below the current weighted average in-place rent of our portfolio. Interestingly, as a side note, even the rent restricted Deutsche Wohnen apartments, which are subject to former subsidy programs, [ have ] higher rents than the rental cap suggested by the Senate of Berlin.Economically, as Michael mentioned, the rental ceilings translate into an average monthly net cold rent, so excluding ancillary costs of around EUR 370 for a typical 2-person household regardless if you're in the city center or in the outskirts and regardless if your apartment has been recently refurbished or not. This EUR 370 average rent is around 11% of the average net disposable household income in Berlin. And by this, you can easily see that the draft bill may help some tenants in the short term who are struggling with the developments in the Berlin rental market. However, as the individual income situation is not considered in the draft law, the higher income households would benefit the most. So what does all of that mean to us and how does it affect our business model, moving to Page 6. First, on the legal side, we remain convinced that the proposed regulation is not in line with our constitution, the view that is shared by almost all legal experts in the market. The timely legal assessment is paramount. The negative consequences of that regulatory experiment are already becoming increasingly visible. If you look at approval rates for new construction in Berlin, for instance, they have decreased by 10% in the first 9 months of 2019, whereas respective approval rates in the federal state of Brandenburg has increased by 20% on a year-on-year basis. In other words, the situation for tenants gets even worse. Second, how are our rents and cash flows impacted over the next years? In an absolute worst-case scenario, we have calculated an accumulated cash flow risk of EUR 330 million for the next 5 years, and that, to be very clear, includes both unrealized rental growth as well as rent reductions based on the defined rental ceilings. The unrealized rent account for approximately 60% of the EUR 330 million cash flow risk, and this assumes 3% annual like-for-like rental growth based on the current rental income of around EUR 500 million of the relevant Berlin portfolio. So in annual terms, EUR 50 million, which is adding up in year 5 to an accumulated EUR 190 million unrealized rental income. Possible rent reductions account for approximately 40% of the EUR 330 million cash flow risk, and there are 2 drivers to that. The first driver are rent reductions of running leases, 120% of the applicable rent cap level. If we very conservatively assume that 100% of our tenants would make use of the right to reduce rents as of Q4 next year, you will see rent reductions of around EUR 25 million per annum as of 2021, which is adding up, again, on an accumulated basis, to EUR 100 million by 2024. The second driver are rent reductions resulting from relettings to 100% of the applicable rent cap level. If we again conservatively assume that the fluctuation rate remained stable at around 7%, which we currently observe in Berlin market, the accumulated total reduction in rent amounts to approximately EUR 40 million by 2024. Both drivers would result in a possible rent reduction of initially EUR 30 million in 2021, increasing to around EUR 40 million in 2024, or in other words, around 6% to 7% of our current FFO I guidance. For 2020, I do not see any notable impact. However, to be very clear, this is a worst-case scenario, it is, in my view, a somewhat manageable scenario and assumes that we will have 5 years of the proposed rental law in Berlin, which is not, by the way, our expectation. Further, we have not factored in any mitigating effects, such as inflation adjustments, additional refurbishment allowances or counter effect from cost savings at NOI level. So what does that mean for our rental policy? As I initially pointed out, we clearly think the Berlin law is not in line with our constitution, and as such, will not survive the constitutional review. And against that backdrop, we will reflect legal uncertainty in all our rental contracts with tenants. Depending on the outcome of the constitutional review, the tenant has either the liability or the claim vis-à-vis Deutsche Wohnen, and that applies to both current leases as well as new leases concluded as part of our relettings. Third, how does it affect our investment strategy? Regional allocation of our CapEx budget will be impacted by the rental cap. We will complete all refurbishment projects in Berlin that have already been announced and started. Almost all of our refurbishment projects have been agreed in writing with the local districts as it relates to scope and timing of the measures as well as the financial implications for our tenants. Part of that agreement are also financial hardship clauses in line with our promise to tenants to protect those who need protection. New refurbishment projects, however, will focus on settlements outside Berlin. Further, we have put all our new construction activity in Berlin on hold. In terms of new construction, against that backdrop, we will focus on our projects outside Berlin markets, so predominantly on our developments in Potsdam, Dresden and Leipzig, all in all, around 2,000 units. So that much on the implication on the rental cap, then let's move to Page 7 on our letting portfolio. Rents in our portfolio increased by 3.4% on a like-for-like basis; in Berlin, 3.6%. Roughly 60% of -- from reletting, 40% from existing contracts. Vacancy, as you can see on the slide, unchanged, low at 1.7%, and the letting portfolio, even 1.1% if you strip out the CapEx-related vacancy. Page 8, for the valuation of our portfolio. We have conducted no revaluation of our portfolio as of September 2019. So the valuation you can see is broadly unchanged versus H1 with a 3.6% gross yield and a 4.7% reversionary yield based on our reletting rents. The value per square meter is at roughly EUR 2,500, which corresponds to around 55% of replacement cost. As usual, next revaluation of our portfolio will take place with our year-end numbers, and it will result in another uplift of our portfolio-based values, including those in Berlin. Again, as usual, I will not specify the amount of the envisaged value-add uplift in any more detail at this stage. That having said, the recent disposal of a portfolio consisting of 5,800 units in Berlin by one of our peers at a 20% gross margin versus book value, according to our calculations, clearly a valuable data point, and I expect more to follow in the course of this year. And yesterday's news that carmaker Tesla will invest in its first European factory and the development center in Greater Berlin area creating up to 10,000 jobs. It's, in my view, another proof point of the fundamental attractiveness of Berlin market. So moving to Page 9, our letting business. Our rental income increased year-on-year by around 6% to EUR 622 million. That was driven by operational performance as well as M&A. NOI margin came out at 82%, also driven by EUR 14 million accounting effect from the changed treatment of leases. Adjusted for these items, we have been able to keep our NOI margins stable at a high level of almost 80%. Maintenance and refurbishment spending are expected to come out at previous year's level.Moving to Page 10, our disposal business. As you can see, privatizations continue to perform well. In the first 9 months, average gross margin for privatization was 66% or around 40% adjusted for the exceptional disposal of a mixed-use central building in Berlin.With respect to our institutional sales, you will have seen that we have successfully sold 6,400 units, predominantly in the northern part of Germany for the total price of EUR 650 million. We have been able to realize a gross margin of EUR 155 million or 34% above our book value and even almost 60% versus the former acquisition price. All relevant transaction details are summarized on the following page. Closing for this deal is scheduled for the 31st of December this year. So it's not yet in the 9-month figures. The disposal will, however, increase EBITDA contribution from this segment towards EUR 200 million by year-end. At the same time, we will lose around EUR 20 million of FFO I as of next year.Disposals form part of our strategy in that we want to actively use the liquidity in the transaction market to dispose of below average quality, and that is from a regional and/or product perspective and, obviously, in a value-accretive manner for shareholders. In this context, we have also earmarked up to 5,000 units in Berlin for disposal.Let's move to our nursing business, Page 13. Predominantly M&A driven, total EBITDA contribution from that segment increased to EUR 65 million in the first 9 months. EBITDAR margin prior to lease revenues remained stable at around 20% compared to the first half of 2019. This is including the as of this year fully consolidated operational platform in Hamburg. We continue to expect the nursing business to contribute EUR 80 million in total to our EBITDA this year, which is a return on capital employed of around 6% based on the underlying asset value. Like our strategy in residential, we have also earmarked around 15% of our nursing portfolio for disposal in 2020. The respective sales process is already up and running.Our adjusted EBITDA, excluding disposals, came out at EUR 545 million, up 14% year-on-year, as you can see on Page 14. Strong contributions from all of our 3 business segments led to the improved margin of above 80%. This represents an increase of 3.4 percentage points on a year-on-year basis. Excluding the impact of the accounting effects, the margin increased by a healthy 1.3 percentage points.Page 15, FFO came out at EUR 416 million, so up 13% on a total basis, 12% on a per share basis. Main drivers were the improved operational performance of the residential business and the significantly increased contribution from our nursing business following last year acquisitions. So as Michael mentioned, full year guidance not at risk.EPRA NAV increased by 3% to roughly EUR 43.50, mainly driven by the moderate asset revaluations in H1. As mentioned earlier, I do expect, amongst others, by the year-end a revaluation of our portfolio.Moving to Page 18, financing. Average interest rate, 1.3%. Average maturity almost 8 years. So our capital structure remains conservative. Our LTV is currently at 38%, so within our target range of 35% to 40%. And with the revaluation of our portfolio as well as the announced disposals, both of that will give us enough headroom to keep LTV in the target range, even pro forma for the full impact of our announced EUR 750 million share buyback program.So a bit lengthy presentation this time. But with that, I conclude the presentation and open the floor for Q&A.

[Operator]

[Operator Instructions] So the first question comes from the line of Charles Boissier from UBS.

[Charles Boissier, Director and Property Analyst]

Thanks for providing more color on the impact from the rent freeze. You mentioned your calculations are absolute worst-case scenario. So I just wanted to check 2 assumptions. The first one is on the rent. So specifically on the rent reduction bucket, I think you mentioned no notable impact for 2020. I think it's because you don't assume any rent reduction from current leases. And I'm just wondering, in other word, as you previously stated that you took the view that the Mietspiegel could be passed until it became a draft law, which is, I think, a different quotation from your peers. I just was wondering what would be the impact actually in 2020 if tenant challenges the passing of the Mietspiegel -- perhaps you've already integrate that? And then secondly, for new leases, I think you mentioned that the 7% churn rate is a conservative assumption. And I just was wondering what would be the impact if the churn rate went back up to its historical level because I think it went down quite a bit in recent years from 10%, 11% to 7% because rents were always increasing. But I'm wondering if 7% is a conservative assumption because now a low churn rate is what you want if the tenants can negotiate the new rents lower. And then finally, so it's a quite practical question, but you mentioned [ effecting ] this uncertainty into your leases. How do you come back to the tenants when they move out, say, they move to a different city or country and if the rent freeze has not been ruled yet? Or do you go back to the tenant -- or is that possible?

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

Yes, Charles, on your questions. Yes, the Berlin law shall be retroactively applied, which we think is clearly not covered by our constitution, which is why we have taken also in the interest of shareholders the decision to do business as usual for the time being and for as long the new law has not been put into effect.What is at risk? If I look at rental increases in Berlin, we have [ effective ] following June 2019 deadline, the rent reduction risk for 2019 is roughly EUR 2 million, EUR 2.5 million annualized. We are talking about approximately EUR 9 million. So that would be the effect for 2020.Your second question on tenant churn, [ Mike? ]The expectation is that if that law were to be implemented. The churn -- tenant churn will actually come down further. There will be no incentive whatsoever to give up on highly subsidized housing, which is implied by this law. But to put that into perspective, on an annualized level, based on the 7% churn assumption, we are talking about approximately an impact of EUR 3 million. So you can play around with the figures a bit but at 5 or what you are suggesting 9% or 10%, but that is not materially impacting the numbers.On your last question. As we said, we will consider the uncertainty in our legal contracts, in the tenant contracts in that tenants either have a claim or liability vis-à-vis Deutsche Wohnen. And that's all I can disclose in terms of details on that subject matter in a public call.

[Operator]

The next question comes from the line of Sander Bunck from Barclays.

[Sander Bunck, Vice President of Real Estate Equity Research]

A couple of questions from me. So first, a couple on the buyback, actually. The first one on that is, is the total amount of the buyback, is that a target for this year? Or is this amount -- does the amount that you eventually will buy back this year, will it depend on liquidity, et cetera, and other factors? Or is it fully committed that this full amount will be bought back? Then to that, is this buyback or the thinking about your buyback, is this a structural shift in your strategy for as long as rent freeze is in place, i.e., is it likely that you will continue to commit to buybacks for as long as the rent freeze stays in place? And then lastly on that, why have you chosen for a buyback as opposed to a special dividend? And I have another question, but I'll do that later on.

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

Okay. So on the -- on the buyback target, we will undertake an open market repurchase. And to be in line with the safe harbor rules on market abuse, we have to limit ourselves in the buyback on liquidity in sector trading of our stock. Against that backdrop in order to buy back EUR 700 million of volume and considering the liquidity of our stock and further considering that you cannot buy back more than around 20% of daily liquidity, we are talking at least about 6 months time period required for the buyback. Is it fully committed, your second question? For the time being, yes. We have, however, the flexibility to stop the buyback at every point in time, also depending, amongst others, on how our stock price should develop over the next months. Is it a structural shift? Look, we are currently confronted with the situation that in line with our strategy, which we have communicated end of last year, beginning of this year that we want to use the attractiveness of the transaction market to opportunistically sell above average product in the current market environment. That is a strategy, which will also be applied in the following year. As we mentioned, we have also earmarked up to 5,000 units for disposal in Berlin markets. And with that, we have a lot of excess liquidity, and we currently do not see a tremendous opportunity to buy portfolios in the M&A market of residential product. And instead of delevering and returning debt, which currently has average interest rate of 1.3%, we think the best way and the best way to also create value for shareholders is to accretively use the disposals we have done at a premium to NAV and reinvest the proceeds, as I mentioned, in our stock price, thereby implicitly buying the Berlin portfolio at a discount to NAV. Hopefully, that is sufficiently answering your question on these topics, Sander?

[Sander Bunck, Vice President of Real Estate Equity Research]

Yes, yes. Pretty much. And just to be crystal clear, on the EUR 750 million, you're quite confident based on your assumptions that you fully buy back -- use that whole amount of EUR 750 million this year based on the current criteria you're seeing, that should not be a problem?

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

Not this year because this year are only 1.5 months left. This will also be executed next year. So all in all, as I said, a minimum of 6 months. And then I also need to answer your last question why share buyback and not a special dividend. Special dividend requires AGM approval. A special dividend, in my view, is not the right instrument at the current time. Our dividend policy is very much focused on available operational funds we are able to earn with our operational business. If you look at our dividend policy, as you know, we pay as a dividend, 65% of FFO I. The remaining number of FFO I basically covers the investment needs in our existing portfolio which are being capitalized based on the current investment volume of approximately EUR 300 million.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. Great. And one very last one. Aside from the buyback, one question on kind of Q3 and what you've done in terms of rents. Am I correct to understand that you kept on increasing rents into Q3, or am I wrong there?

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

Say it again. I don't understand your question.

[Sander Bunck, Vice President of Real Estate Equity Research]

Did Deutsche Wohnen continue to increase rents in Q3 of 2019, i.e. based on relapsing and modernization? Or was that already fully stopped in the last 3 months?

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

No. We do business as usual.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. So rents were increased in Q3, and that may need to be reversed? Is that the right way to -- looking at it? Or...

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

That is correct. And as I mentioned before, based on rental increases we have undertaken year-to-date, the effect is slightly above EUR 2 million.

[Sander Bunck, Vice President of Real Estate Equity Research]

Okay. Is there a risk? Because I think part of it, the legislation says that if you were to still increase rents that there is a fine attached to that. Is there a risk that you inherit fines because of that? Or you don't see that as a risk?

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

We don't see that as a risk because the fine can only be imposed on an existing law. Currently, we don't have a law.

[Sander Bunck, Vice President of Real Estate Equity Research]

Sure. But it does get retrospectively implemented by the end of June, right? So...

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

If this law should survive the constitutional review.

[Operator]

The next question comes from the line of Marc Mozzi from Bank of America.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

Once again, on my side, well done for your clarification on the rent freeze in Berlin. A simple practical question to start with. We agree that you're going to cancel all the shares you're going to buy back?

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

In principle, yes.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

Why in principle? This is just an option or this is something you're effectively dedicated to do?

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

No. The shares we are buying back will not be deleted. So in principle, there is the possibility to reissue those shares. In case we have a respective Board decision and the approval of our Supervisory Board. For me, for the time being, it's kind of a theoretical question because I don't see a situation where we actually do need equity and are required or forced to issue new shares at a significant discount to NAV.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

So you -- so what you're telling me practically, you're going to impact your number of the shares, net asset value, EPS, removing the shares which you've bought -- you bought back but still having those shares in your balance sheet and potentially coming back on the market for whatever reason, M&A or so on?

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

It's basically the same bucket as our authorized capital to issue new shares via capital increase. The process is identical. But yes, for calculation of our per share figures, the bought back shares will be not considered.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

Yes. Okay. I find it a little bit weird but I understand the principles behind it. On the 5,000 units you're targeting to dispose in Berlin, should we expect the same premium that we've seen for ADO recently, the same premium that you've been able to achieve outside of Berlin, 8%, if I'm correct, for the 9 first months? Or is it something substantially higher or lower than that?

[Michael Zahn, Chairman of the Management Board & CEO]

Michael here. We are, as you know, in an ongoing process in an advanced process, and we will deliver details after signing and not before, yes? So that is the situation we are in, and that's the question we can answer.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

Okay. And can we have an idea of what are the type of investor you're talking to? Are they...

[Michael Zahn, Chairman of the Management Board & CEO]

Generally speaking, there is no need. There is simply no need. And we have our NAV. We have expectation. We think that is unchanged, a good momentum in the market. It's a sizable portfolio. And therefore, we are optimistic that we can sign this deal. And after signing, as I said, we will deliver the market with more details.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

Okay. Just to try to understand the calculation of the EUR 8 million of potential rent or cash flow decline due to the reletting. If I do EUR 8 million out of EUR 500 million of rents, that's 1.6%. Is that a fair number we should look at? Because from my understanding, 7% of churn rate time 9% of overvaluation doesn't equal to 1.6%. But maybe I'm missing something somewhere here, if you can help.

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

The calculation is simply that we have, as I mentioned, an initial rent reduction risk of EUR 25 million in total is 100% of our tenant supply for the rent reduction. The remaining risk of approximately EUR 38 million is the total risk, which is subject to fluctuation. The 7% of EUR 38 million, the remaining risk is the effect of the EUR 3 million around I mentioned before, which is driven by fluctuation.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

Okay. And the last one, I'm correct to read into your numbers that you have massively accelerating your investment or modernization program in Q3. So you spent roughly EUR 100 million just in the quarter, or I'm misreading things here?

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

Yes, numbers increased, but it's very much in line with the guidance we have given that in total, we want to spend for the entire year of 2019 EUR 400 million. EUR 100 million is maintenance, EUR 300 million capitalized, and we are on track to achieve that target.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

And sorry, last one on Sander question about the potential fine. How many units did you -- on which you did apply this increase of the Mietspiegel 2019 in Berlin?

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

It is twofold. We are doing relettings. And here, we have an unchanged tenant churn of 7%. So that's number one. And number two is that we have implemented the rent index that has been published in June this year. And again, the cumulative effect of all rental increases are for 2019, slightly above EUR 2 million. So we shouldn't get too excited about it.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

Yes. I'm not -- that's not an issue for me. And I'm exactly in line with Sander on that. But how many units did you apply to indexation in Berlin in 2019 so far? Because the fine is up to 500K per unit. And if it's a significant amount, we're talking about billions of potential fine. I agree, it's going to be nonconstitutional. But if that numbers get out from the city of Berlin because it seems like you are the main target of the city of Berlin, I don't think it's going to be a great news, even if it's unconstitutional, and you're going to have to fight against the -- this potential fine. So can we have the number -- how many units...

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

To be very clear, a fine cannot be applied for rent increases which have taken effect at a time a law even didn't exist.

[Marc Louis Baptiste Mozzi, MD & Head of the EMEA Real Estate team]

Yes, but there is this retroactive effect.

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

Again, there is no law as of now. And against that backdrop, a fine cannot be imposed on these rental increases. What may be at risk is if the constitutional court should conclude that the Berlin rental cap is in line with the constitution, the view, as I mentioned many times, I clearly do not share and most legal experts do not share. And if that court should further conclude that you can retroactively apply that law to the rent levels as of June 2018, what is at risk and what is only at risk is for 2019, slightly above EUR 2 million, full stop.

[Operator]

The next question comes from the line of Veronique Meertens from ABN AMRO.

[Veronique Meertens, Analyst]

Also some questions from my side. Something has been unclear for me. When will you stop increasing rents? Because the constitution review takes about 2 years. Will you keep operations those entire 2 years? Or what's the strategy there?

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

As I said, we will continue to do business as usual for the time being. Once that law has been implemented, we will reflect the legal uncertainty in our contracts. And that's all for the time being I can tell in a public call.

[Veronique Meertens, Analyst]

Okay. And by implementation, you mean this -- the first quarter of 2020?

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

By reflecting, I mean that we will reflect the uncertainty by either having a claim or a liability vis-à-vis our customers.

[Veronique Meertens, Analyst]

Okay. And then on the slides, you mentioned that there will be a loss of 3% in like-for-like rental growth. Does that mean that the like-for-like rental growth will go down to 0.4% from the next years?

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

On like-for-like rental growth, we do not expect any impact for this year. So here, we confirm our guidance of 3% for the entire portfolio for 2020 at this stage. We will give no guidance that will come with our fiscal year 2019 publication in March next year. But on like-for-like, bear in mind that our like-for-like is not cash flow-driven, but it's comparing the respective in-place rents as of the respective accounting dates. From a cash flow perspective, I think we have given you sufficient guidance on what the impact for our Berlin portfolio is going to be based on the proposed rental cap law in Berlin.

[Veronique Meertens, Analyst]

Okay. And on the refurbishments, this year, you had 30 on refurbishment and 10 on maintenance. Can we expect this number to go down? You mentioned that you want to seek it elsewhere outside of Berlin. Are there enough opportunities outside of Berlin for new construction development, but also for the refurbishment?

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

We will continue those projects, which we have announced and started and which are subject to agreements with the respective district in Berlin. That is, there are quite a number of projects affected in Berlin. So all in all, I do expect that our investments will not be materially impacted in 2020 versus the level of investments we have seen this year.

[Veronique Meertens, Analyst]

Okay. But that's not completely clear to me. So these refurbishments will be finished in 2020 but then afterwards, you're not allowed to increase rents, right? Because if you do, you do have a chance on a fine -- for a fine.

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

For '21, no guidance at this stage. We will review our investment program, and we will monitor how the constitutional review evolves once that law has been implemented. For the time being, I can give you guidance for 2020, which I did. For 2021, we have to review. But yes, as you know, we have 30% of our holdings outside Berlin, and there are also refurbishment projects, which we are preparing for, but I won't quantify in any more detail at this stage.

[Veronique Meertens, Analyst]

No, I understand. But I mean the refurbishments that are now already well signed and planned for 2020, you cannot increase rents afterwards, right? Or am I missing something here?

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

You should bear in mind that these refurbishments have been announced and agreed with the districts at a time at which the rental freeze has not been put into force.

[Veronique Meertens, Analyst]

Exactly. So you won't get a fine.

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

Our legal assessment against that backdrop is very clear that we can ultimately, following a constitutional review, implement these rental increases, which is why we are reflecting those in the structuring of our contracts with tenants.

[Veronique Meertens, Analyst]

Okay. Clear. Last question on the nursing business. Are we getting a more clear update on the strategy in this business? You say you're going to dispose a part of it. At some point, you mentioned that you want to cluster it more in the bigger regions. Are we getting -- are we -- can we expect a more clearer update on this in the near future?

[Michael Zahn, Chairman of the Management Board & CEO]

So there is simply to say, first, as Philip mentioned, we like to streamline our portfolio. We see very favorable environment in the M&A market. So we are quite optimistic that we can sell down. On the country side, on the other side, we will focus, like in the resi business, our activities to cities like Hamburg, Berlin and Frankfurt. With this, we have a sizable position, yes? With this, we have a strong strategy. And in the outlook, M&A activities are more and more focused in new construction. That means we are, yes, thinking -- it makes a lot of sense to invest money like in Berlin or Hamburg. And that means no bigger M&A, no portfolio transaction. And it is what it is. It's, at the end, a niche strategy, and we always said we will have not a big impact of this business. So it means, once again, we sell a part. We hold the biggest part. We will refocus this business to cities where we have strong fundamental outlook, and we will grow the business by new construction in these focus areas.

[Operator]

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

[Thomas Neuhold, Head of Research of Austria]

I have 3, and I think it's the best goes through them one by one. Firstly, on Slide 6, this EUR 330 million of potential negative cash flow impact, you mentioned that is the worst case, not taking into consideration any offsetting measures. Can you elaborate a little bit maybe on what the potential offsetting measures you might consider to implement? I could imagine that especially maintenance, which is running at around EUR 10 at -- in the current year, could be an area where you might be able to save some costs given the increasing supply shortage and no problems in reletting apartments anyway? Is this something you will consider or not? Do you see any other options to protect your cash flow by other measures?

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

On your point of maintenance, we have not the intention to reduce the amount of maintenance given that maintenance is required to protect the value of our properties. And if you delay required maintenance work, you are risking that it costs you more in the outer years. However, what I do expect on maintenance is that given that many investors are reducing their investments in Berlin markets that we have deflationary price pressure in the [ craftsman ] organizations. But that remains to be seen and will be evaluated, but I don't expect any further inflation, but deflation. The key driver actually is going to be that if our ability to undertake investments is limited, there is obviously also no need to build up CapEx-related vacancy. I mentioned that CapEx-related vacancy across the entire portfolio is approximately 60 basis points. In Berlin market, it's even higher. And if I take a percentage point or so on the Berlin rents, that is quite a significant impact.

[Michael Zahn, Chairman of the Management Board & CEO]

I would say we have today losses of around EUR 30 million driven by vacancy, driven by CapEx measurements, driven by losses. There is no need with this rent cap to manage this in the way we did over years. There is clearly a potential to reduce furthermore on the -- our vacancy. On the other side, I think this is the big question for the next 2 years, we believe, on the one hand side, in the Berlin market. On the other side, we want to differentiate Deutsche Wohnen more and more in a way we want to establish a quality, yes, landlord, which offers quality. And therefore, like in former years, that is nothing new. We will further on streamline our portfolio, streamline a way that we sell down under average quality also in Berlin and other cities. On the other side, if there is a big -- and I believe we have a big stock, which offers long-term, a quite nice story in NAV growth and rent growth, yes, it makes simply sense to stabilize investments in such buildings, in such products, in such cities. And therefore, I would say if the rent cap is on the table, and we had to work with this next year, we will clearly present a clear portfolio strategy which will give you a little bit more color on investments, of sales, yes, and let me say, at the end, core regions.

[Thomas Neuhold, Head of Research of Austria]

Okay. The next question is on this potential back gains against tenants where you would like to try realize the rental growth, which would happen since the implementation of the rent law. I was wondering, will that affect only rental contracts which are signed after the implementation of the rental freeze? Or you will also try to implement that on the existing tenant space? And secondly, I'm wondering, will there be a lot of unrealized rent growth after this law comes into existence because if the 2019 tenant is stable, then we get the rental freeze law. As you mentioned, in the reletting process, most likely we'll get lower rents. The other rents will be freezed. So there should not be any rental growth or until we get the final court ruling of the constitutional court? Am I mistaken here?

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

I think how we structure our rental agreements, all has been said. We can't provide further details. And at this stage, how a worst-case scenario might look like, I think we've been fairly explicit on that. But you should equally assume that if constitutional review of the law results in the expected outcome that the structuring of the contracts provides upside to us.

[Thomas Neuhold, Head of Research of Austria]

Okay. My last question is on your views on the impact on the transaction market in terms of volumes and then prices. What do you think could happen next year once the law is effective?

[Michael Zahn, Chairman of the Management Board & CEO]

What we see today is that, clearly, we see no bigger portfolios in the market, yes. Clear. On the other side, from pricing, we are very -- in a situation that the price in Berlin are very stabilized up to multiples, 30, 35. I think we have simply a lot of noise today in the market. So sellers are thinking about if it's the right time to sell or not, is it the right time to buy or not. And therefore, I'm quite optimistic that within the next 6 months, we will have more clarity in the market, and I believe multiples will not come down. And therefore, I'm quite optimistic that based on our current valuation, there is also in the future upside.

[Operator]

We currently have no further questions in the queue. [Operator Instructions] We've had one question come through from the line of Robert Woerdeman from Kempen.

[Robert Woerdeman, Research Analyst]

This is Robert. Let me end on a positive note and basically ask the opposite of Sander and Marc. You highlighted the potential loss of EUR 300 million over 5 years. Now if the law is a verdict that's unconstitutional in, let's say, 4.5 years, can you claim this loss of EUR 330 million with the state of Berlin or elsewhere?

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

Elsewhere?

[Robert Woerdeman, Research Analyst]

And elsewhere would be tenants or...

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

As I said, we will structure the rental agreements in a way that we will reflect the legal uncertainty. Full stop.

[Operator]

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 25th of March 2020. For any questions in the meantime, please feel free to contact the IR team. Have a good day, and goodbye.