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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Dear ladies and gentlemen, welcome to the Analyst and Investor Call of Vonovia SE Regarding the 3 Months 2019. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Rene, who will lead you through his conference. Please go ahead, sir.
Thank you, Judith, and welcome, everybody, to our earnings call for the first quarter 2019. Your host today, our CEO, Rolf Buch; and CFO, Helene von Roeder. I assume you have all had a chance to download the presentation. Just to be sure, the earnings call presentation for today is available on our IR website in the section Latest Publications. The management will lead through this results presentation on the basis of the agenda on Page 2 and will then, of course, be happy to take your questions. So without further delay, let's kick it off, and I'm handing you over to Rolf.
Thank you, Rene, and also, from my side, happy welcome, and thank you very much for participating in this call. Let me start with the highlights of the Q1 2019. Performance, you know that this is the first quarter in which we managed the company based on our 4 segments: Rental, Value-add, Recurring Sales and Development. I'm happy to say that in all 4 segments, we are well on track, and this is actually a good start in the year 2019. Later, Helene and myself, will guide you by segment, but this will come later. NAV and valuation, actually, as you know, except Sweden, we don't have valuation in the Q1. So that's why NAV cost is mainly coming from the investment and is nothing special. We highlight that the next portfolio valuation will be in Q2 2019, and our current indications suggest a strong valuation uplift than what we have seen in the last half year in 2018. So this means actually that in the moment, we don't see any change in trend of valuation. In some cities, actually is opposite, valuation is going up stronger than last year. Capital structure, nothing special to mention here. I think Helene will go through this later. Guidance, we want to give guidance update. We are increasing our guidance for adjusted EBITDA total and Group FFO. EBITDA guidance is up by EUR 50 million. This is basically driven by 2 factors: one, it is performance cost; and the other is a result of change in IFRS accounting policy. I'm sure that you're much more familiar with the new IFRS 16, and I'm happy to have Helene close to me because I'm not ready to answer all detailed questions about IFRS 16. For our numbers, it means an additional EBITDA contribution of an estimated EUR 30 million due to the effect of IFRS 16 for the year 2019. Since the underlying activity does not change, we adjust for this effect in the FFO, but do not include any positive IFRS 16 contribution in our Group FFO as this is the basis for our dividend guidance. I understand that some of our peers do it differently. So I want to -- you to look out for this when you compare FFOs. I think also as a member of EPRA and [ as its acting president ]is also, I think, a topic that we should discuss in EPRA because we have to make sure that the definition, even FFO, is not an EPRA KPI should be similar, and I think this will be a topic for the future. EUR 25 million of the increase in Group FFO comes from normal performance cost, and we will show you how this will develop in the future. Based on this very positive result and our visibility down the road, we feel we are well-positioned to continue our upward trend, and we are very confident in our ability to deliver sustainable cost 2019 and beyond. With this, I hand over to Helene.
Good afternoon. Page 4 is a central page because it shows how much the individual segments contribute to adjusted group EBITDA and how we get to Group FFO as a basis of dividend distribution. You can see that we have shown growth across all segments, which is, of course, partly driven by the inclusion of BUWOG and Victoria Park, which were not included in our Q1 last year. You also see that while Recurring Sales and Development make a considerable contribution to overall EBITDA, and will continue to do so, the operating business with Rental and Value-add clearly remains the largest part of our business. Almost 30% more EBITDA in Q1, this year, of course, means that cash taxes are higher and since the finance will work mostly with debt, the interest expenses have gone up year-on-year as well. Bottom line, Group FFO through the basis for dividend is 20% higher in absolute numbers in Q1 and 13.5% on a per share basis. Let's have a closer look at the Rental segment on Page 5. Rental income is up 20% on the basis of a larger portfolio and rental growth. Maintenance expenses increased by broadly the same magnitude. On a per square meter basis, as you'll see on a later page, maintenance expenses did not change. The increase in operating expenses needs a bit more explanation. In Sweden, rents are reported on a growth basis. So net cold rent plus auxiliary costs in all one numbers. The concept of the net cold rent does not really exist there. For Victoria Park, this means that roundabout EUR 9 rent per square meter are the all-in rent, of which EUR 6 to EUR 6.50 are net cold rent and the remaining EUR 2.50 to EUR 3 auxiliary cost. It's impossible to break this down to the last few cents, but that is broadly it.In Sweden, these auxiliary costs are included in the rental income and because they're basically a pass-through item also in our operating expenses. Rough mark shows that it's about EUR 10 million for the first quarter. The impact of these EUR 10 million in rental income line is not material, but it is so in operating expenses, and it distorts the comparison. I will get back to this on the next page and show that the actual operating expenses in terms of efficiency have continued to improve. Also improved is our EBITDA operations margin, which is 78.4% for Germany and at 76% overall now. Slide 6 proves what I've just said regarding the operating expenses and efficiency of our business. You will know the structure of the slide very well by now, I guess. These numbers are Vonovia Germany, so excluding Sweden and excluding Austria, but including the German portfolio we acquired from BUWOG. The average portfolio size was 4.1% larger compared to Q1 last year, and we managed to grow the rental income by 8.3% or EUR 34.4 million because of rental growth and better portfolio quality. At the same time, operating expenses only grew by EUR 1 million, which shows that we have managed to integrate BUWOG's German portfolio at very little additional cost. If we then include the growth in Value-add, we get to an EBITDA operations growth of 12.6% on the basis of a portfolio that only grew by 4.1%. Now to manage the expectations, we might be showing the slide for the last time. While we like how we demonstrated our efficiency improvement, we run operations not just in Germany, but in Sweden and Austria as well, and we want to show you how things are improving not only in Germany, but across the entire operating business. Page 7 shows the main operating KPIs for the Rental segment. Organic rent growth was 4.0% year-on-year and in line with our expectations. As you'll see on the guidance page later, we remain optimistic about our full year guidance and rental growth of around 4.4%. The vacancy rate is basically unchanged. It remains low at 2.9%. This number, as I'm sure you now, is mostly the result of our investment activities. And then finally, maintenance per square meter is on the same level as in the prior year period. Allow me to repeat at this point, both the maintenance expense and the capitalized maintenance are money that we spent for the repair and maintenance work to protect our EBITDA. And given the longevity of our properties, we believe it is wiser to err on the side of caution and better spend a touch more than not enough. But neither expense maintenance, nor capitalized maintenance result in any rent growth. The only difference between them is how they're treated in the accounting. Maintenance expense goes through P&L and it's a direct cost, and capitalized maintenance is capitalized on the balance sheet. But please do not confuse capitalized maintenance with our investment program. The investment program leads to rent growth and has a yield. I do know it's sometimes difficult to keep the 2 apart because most of our peers report capitalized maintenance and modernization investment as one number, but they're really 2 very different things and should be kept separate. Now Page 8 is our investment program. We are well on track here with the majority of the investment completed or kicked off. As a reminder, the investment program includes our developmental hold, upgrade buildings and optimize apartment investments, but it does not include development to sell investment. Our enabled development projects, which usually includes all 3 types of investments, are allocated across these 3 categories. We continue to guide a total volume between EUR 1.3 billion and EUR 1.6 billion for this year, and currently see us at about the middle of this range by year-end. But there's still more than half of the year to go, so we want to keep the flexibility and the range for the time being. While yields and IRRs differ between the 3 elements, we continue to expect the 9% to 10% average IRR across all investments, in line with previous years. So there will always be cases and reasons for shifting capital from one investment bucket to another. But at the end of the day, we remain confident in our ability to invest EUR 1.3 million to EUR 1.6 billion at an average IRR of 9% to 10%. And with that, over to Rolf.
Thank you, Helene. So I'm talking about portfolio because historically I always have done it. It's still part of the Rental segment. Page 9 and 10 are also 2 pages, which you are very familiar normally. We put them in the annex, but I think Rene saw this as a good idea to put them in the main. So that's why on Page 9, you'll see our portfolio cluster. You are familiar with this. It shows that 60% of our portfolio is earmarked for investments. Actually more than that because many units undergo investment twice, once for upgrade building and once for optimize apartment. Since we cannot double count them, however, each unit is of course only included once in the pie chart. What is important so is that we have plenty of opportunities, at least for the next 10 years. Another takeaway from this page is that we sold 730 noncore units in Q1 with a fair value step-up of almost 16%, which is a good indicator, but I have indicated in the beginning that the dynamic of the German house price market is still [ unspoken ] and has remained very strong. Don't be afraid, I will not go into details on Page 10 of the regional cluster. There's a lot of data that's why we used to build the annex. But I would like to spend some time in telling you that there is probably an interesting relation that you should regard that is the relation with rental level and in-place multiples on one hand and the purchasing power on the other hand. This also gives you an indication why we at the moment in Berlin have so many political pressures because obviously, land is covering faster than the purchasing power. What is also very interesting is the revision of the potential. We have been reletting apartments during the last 12 months at 36% higher than the previous rent. Of course, this is largely as a result of our optimized apartment investment strategy. Without this investment, we are bound to the 10% rental cap, of course, and we do expect the German rental -- respect the German rental regulation. And finally, the rent cost of what is left in the noncore portfolio was 0.6%. It's now very small number of apartments, but I think also this rent cost shows why it is noncore. Let me turn to Page 11, this is the one page where we describe the Value-add segment. Actually, also new boring business, very predictable. We have seen a significant increase in EBITDA in comparable to last quarter. Keep in mind that this is mainly still Vonovia, only a very small amount comes from the addition of BUWOG. As you know, we are targeting around EUR 20 million calls in 2019, and we will look on those figures. We are well on track to achieve it and we are very relaxed about it. The next page is about the Recurring Sales segment. Page 12 shows the result of this. We sold 809 individual apartments for gross proceeds of EUR 109 million. The average sales price increased by 19% in comparison to last year. The fair market value step-up was 37.2% on average, almost 10 percentage points higher than last year. This is partly driven by recurring sales in Austria, where fair-value step-ups are considerably higher than in Germany. All-in all, recurring sales contributed EUR 26.3 million of adjusted EBITDA, more than double the volume of last year. Also this shows you that we still have an [ unspoken ] trend in value uplift. Coming to the Development segment on Page 13. This segment includes all new construction of apartments by way of building, entirely new buildings. We distinguish between development to sell and development to hold for our own portfolio. The bottom line EBIT, adjusted EBITDA was EUR 10.4 million in Q1, which is probably a bit lower than the run rate you can expect for the rest of the year. This is also something to do with that -- finished construction normally is not so strong in [ January ] too much. So we will see more finished building in the summer. Page 14 gives you more color on the new construction activities. In the new construction to hold, we have around 20,000 -- 29,000 apartments in overall long-term pipeline, so don't think that this will be built very soon. Based on opportunities in our portfolio today and we want to deliver between 1,500 and 2,000 this year. All of these units are built for own portfolio and we captured the stat between construction costs and the initial valuation in our EBITDA development. The development-to-sell part is a useful addition to the to-hold developments. On the one hand, it generates attractive margins, but what is maybe even more important is that you often need as a higher margins from the to-sell projects to cost finance lower margins to-hold development in order to make an entire development project work. So often we have only 1/3 of development as a form of subsidized rent, 1/3 is for normal market trends and 1/3 is for sale. And the for sale segment basically carries the cost of the rent. This is the way how the big cities today allow you to do construction permissions. They ask you actively to do 1/3 of subsidized, 1/3 of normal rent and 1/3 to sell. So one moment -- in the moment, the only company in the market who is able to use all 3 models for itself, others are either forced to sell the for-sale segment or more often these developers not to operate themself, but to sell it in a block, which of course, can generate significant discounts. So the pipeline for the development to sell is around 6,700 units. And with this, I hand over with a lot of fun to Helene to discuss the IFRS 16.
Now this is what you've all been waiting for, wrapping up the segment reporting, let me say a few things about IFRS 16, which came into effect on the 1st of Jan, 2019. IFRS 16 covers the accounting valuation of reporting of lease business. And it basically has the idea of making companies that buy and that lease more comparable. For Vonovia as a lessee, this means that leasing expenses are capitalized on the balance sheet, representing an asset, which in turn leads to right of use on the liability side. In the profit and loss statement, lease expenses are no longer reported. Instead, the P&L only shows the interest expense and any depreciation of fair value adjustments. So like others, we've applied IFRS 16 in Q1 2019 for the first time, and we're reporting an impact of EUR 7.5 million positive in our P&L for the first 3 months. For the full year 2019, we expect the IFRS 16 impact to be approximately EUR 30 million. Prior year numbers remain unadjusted. Now after lots of discussion, the way we implement this new regulation is that the impacts are, of course, included in the IFRS account and also in our adjusted EBITDA total. But because IFRS 16 does not have any impact on the liquidity or cash situation, we're excluding any IFRS 16 contribution from Group FFO and LTV. We do understand that some of our peers do not adjust for this in their FFO. You want to bear this in mind when you compare FFOs, which form the basis for dividend payouts between companies. Slide 16, net asset value. The adjusted NAV increased by 1.5% in the first quarter, but our next portfolio valuation will be at the end of Q2, and in line with last year, we'll cover approximately 2/3 of our portfolio via the 26 largest cities in Germany plus Vienna and a full portfolio valuation in Sweden. Based on our current estimates, we expect the H1 value uplift, excluding investments, to be stronger than H1 2018. Now with respect to goodwill, I had already indicated that in the full year call in March, where we reported goodwill impairment of around EUR 700 million, but to the extent yield compression continues, we will likely see more impairments in 2019 going forward. To Page 17, our LTV as of March 31 was 42.4%, so 40 basis points down from Q4 2018 and right in the middle of our target corridor. As I've said in the past, as experienced on roadshows, different market participants have different LTV comfort zones. We continue to argue that even after used compression, we have seen the in-place value of our portfolio remain conservative. If you not only look at transaction prices, but especially replacement value and we really do not see a scenario, which sees values would come under material pressure. So at this point, we believe our target ratio of 40% to 45% still gives investors enough of a security buffer, while at the same time, not putting an undue burden on our equity yields. Many of you also look at debt-to-EBITDA in addition to LTV, so we do -- so do we. When you take our total EBITDA of the last 12 months and put it in relation to the average net debt over the same period, we are at 11.4x, which to us is a sensible level if you look at the stability of the cash flows. The cash number for Q1 2019 is quite high. But please bear in mind that this is at the end of Q1, so before the repayment of the EUR 700 million debt hybrid, which we have done so in the meantime. Page 18 gives you more color on the capital structure and debt instruments. Interest cover ratio is 4.7x and thus, very healthy above the minimum levels required in some of our debt instruments. Almost all debt is fixed or hedged, so any interest rate increase would affect our numbers only slowly, as no more than 12% of the total debt becomes due in any given year because of our smooth maturity program. And thanks to the robust top line growth, there's plenty of interest rate increases we can absorb before we feel the pain of our earnings and dividend capacity. We're happy with the maturity profile and overall financing mix. As always, we potentially look at all available sources of capital to finance our business and for us to choose the most attractive type of capital at any given time. And finally, Page 19, for the 2019 guidance. We are increasing the guidance for adjusted EBITDA total by EUR 50 million. As I indicated before, this is about EUR 30 million from IFRS 16 and EUR 20 million from performance growth. We are increasing the guidance for Group FFO by EUR 25 million. So group FFO per share is now guided EUR 0.05 higher between EUR 2.25 and EUR 2.35. And by definition, the implied dividend guidance at approximately 70% of Group FFO is also higher now. Now to avoid confusion, we are excluding the positive impact from IFRS 16 in our Group FFO, but our understanding is that not everybody of the peer group follows this approach. So you want to be careful when you compare FFOs between companies. And with that, to Rolf.
Thank you, Helene. So for the management -- only one last slide for the management board changes. Klaus Freiberg, as you've already seen yesterday, has stepped down -- or has decided to step down from Vonovia's management board effective from the end of the Annual General Meeting. You know he served for Deutsche Annington in the beginning and later for Vonovia in total, nearly close to 10 years. It was a very intensive and very positive cooperation between me and him, and so that's very sad that he's leaving. But I have to accept and have to honor the effect that he is arguing, saying I have worked now for 10 years in this industry, I have changed a lot and I think it's time for me to do a little bit less. So he will stay in contact with Vonovia. He will be also used -- or we can use him to -- in some specific cases as a consultant. So I'm very happy that he was ready to work for so long time for this company. I think a very good news is that we have the next generation, Arnd Fittkau, and a very special effect this is the first time, I think, in Deutsche Annington and Vonovia's history that we were able to develop a board member out of our own people. So I think this is a very good sign. So we are able to have -- get enough caliber can be also on the second line, which can be able to sit in the Board. So Arnd Fittkau, 46, so significantly younger. He has worked for the company actually the whole -- nearly his whole career since 2002. He is a specialist. He was well prepared as -- actually he's a General Manager of the whole operations and development. So I think this was preparation for the long term, and I'm very happy to see Arnd on the Board and to work together with him. For your information, as you know we have now 4 Board -- Executive Board members, it is myself and Helene, it's Arnd Fittkau as Chief Rental Officer and Daniel Riedl as Chief Development Officer. And with this, we hand over to Rene?
Right. And I'm happy to open the Q&A.
[Operator Instructions] The next question is from -- the first question is from Thomas Neuhold, Kepler Cheuvreux.
Firstly, you on the organic rent growth, the 1.2% market rate for like-for-like rent increase is rather on the lower end of the historic range. I wonder if this was maybe driven by the first time consolidation of BUWOG and the Austrian portfolio or rent increases are lower. Or have to be all the other drivers in place, which are dragging down on the like-for-like market rate for rent growth in Q1?
I think it's only a quarter, so this is why we think you should not overestimate it. There's probably a few elements coming into this one. You mentioned is -- probably is BUWOG, but overall, don't overestimate -- we stick with our guidance for 2019. So probably this is a little bit early. In general as you know, we are probably also pushing rent not as hard as we were pushing before because of the overall political debate. This might have also a little bit impact.
Next question is on Sweden. I was wondering if you can give us an update on key trends in the rent lending resident market in Sweden. And what potential do you see for acquisitions like we saw in the first quarter in Sweden during 2019?
So first of all, I think, the situation in Sweden is completely different than what we have in Germany in the moment. In Sweden, you know there is a government, a new government and actually tenant associations are ready this year to accept higher rental costs than the years before. So we will see probably in Sweden positive surprise from rental costs during the year 2019. The imbalance between supply and demand, of course, was completely unchanged. So that's why the fundamentals in Sweden are, in the moment, very surprisingly positive. Unfortunately, we don't have such a big portfolio in Sweden. That's why it doesn't drive totally as the Vonovia figures. You have seen us buying portfolios in the end of the last year. And we are able, if the price is right and we fit to our acquisition criteria as we will continue to buy in Sweden because we feel that we are the only natural consolidator in Sweden. But we are not in a hurry, as you know, so that's why we have to take care about prices and about opportunities.
My next question is on rent regulation in Germany. The planned change of the Mietspiegel separation period from 4 to 6 years has not been implemented yet. Why do you think this is the case? And do you have any realistic time frame for the implementation of this change?
No, not really. It is in the moment, not a real topic in the debate. Actually, I have not heard anything about politicians talking about this. I think you know we have to debate in Berlin, which is probably overlaying everything else. And then I think we have to wait now for the election in Europe. And then I think there is also the possibility that we have changes in government in Germany. So I think this is not on the topic at the moment. And it is too small to be passed from my point of view. It's too small to be passed as an individual law. It has to be a part as a law, and we don't see in the moment any change for this coming up soon.
Okay. My last question then is on the recent press article, which stated that the court ruling in Bavaria was that Vonovia has to pay back a portion of ancillary expenses charged to the tenant. As it seemed to be a lack of transparency regarding the calculation of the services rendered. The article was a claim, but there might be some kind of class-action lawsuits coming, which could be initiated by the tenants organization in Bavaria. What is your view on this?
Yes, I think you are referring to this court in Munich, which actually forced us to pay back around EUR 300 for ancillary expenses, so not a really big amount. Actually, they did -- the court did not rule out that we cannot do value-add service and they also did not rule out that we do on-site inspections as nonrecoverable expenses. So in contrary, actually it confirms today how we do it and it confirmed how today we over-expose the tenants in general. But the court requested a level of transparency on the internal construction calculation what we are not prepared to show because also any independent third-party provider would ask not to disclose this internal cost calculation. For example, one thing is can the court asked us to disclose the individual salary of any in-house caretaker, which I think from data protection law, we are not -- we should not disclose it. So that's why we will go in front of the next higher-ranking court. And our legal department is very confident that we will win this court case. I think a bigger risk is not there, at least according to our lawyers.
The next question is from Sander Bunck, Barclays.
Two questions for me, please. First one is on the FFO guidance. Can you just give a bit more detail on what has led you to upgrade the guidance, i.e., which segment is performing better than initially estimated? And why is that?
I think ultimately as we said in the beginning of the call, we see all segments performing extremely well. And please don't be too disappointed if we don't want to point to a particular segment, which is leading this improvement. It is actually really truly across the board of all four.
Okay. So it is not because the sales -- I mean the sales performance this quarter was particularly good. That is not -- that was pretty much in line or slightly better than expectations, but that's not the sole driver of it?
No. I mean it's really across all 4 businesses that we see significant improvements, which sort of leads us to increase our guidance.
Okay. Cool. And second one I had was on the like-for-like rental growth as well. Again, the slight slowdown at the moment and the full year guidance was left unchanged at 4.4%, can you give a bit more detail on how you're looking to bridge this gap over the remainder of the year, i.e., for example, will new construction make a more material impact this year? Or how you're thinking about the composition of that 4.4%?
No. I think -- again, it is early. It's the first quarter. As we have told you, there is nothing fundamental, of course, a little bit more will come from more construction. And our finished buildings are not coming in January-March because there is weather. So there's a lot of elements, which actually can explain that we are a little bit lower. We stick with our guidance, and I'm very positive that we will reach the guidance. So there's no doubt at all.
Okay. Okay. It is mainly because, obviously...
To be honest, in the moment, in the political debate in Germany, I'm actually happy that it is a little bit lower because it is easier to sell.
No, I do get that. But ideally and I guess this is also in their interest if for example you could make up the bridge for additional new construction that would be a win-win for everyone, I guess. So for example, do you accept -- do expect a more material acceleration, for example, in that segment, that could potentially bridge -- leave the other numbers pretty low, i.e., which makes everyone happy, but then also the new construction, if you could accelerate that, which would also be pretty good for everyone? And it's mainly because, last year, obviously, you had some -- it was difficult to get your run rate numbers to ramp up, mainly because it took time to get in the permits. So how -- is there a possibility that this year is going to be more material from that angle?
I think the fact that it is difficult to get construction permissions is not changing at all. Please don't expect that those would change short term. So we are still fighting with the same problems. Yes, we were -- I think we are sticking to this up to 2,900 units or 3,000 units maximum in this year. We're optimistic that we will deliver it. But please, we don't -- we think that all other factors also will deliver cost as we have announced, so we are not dependent on the new construction.
The next question is from Christopher Fremantle, Morgan Stanley.
You have given some helpful color on the trajectory of your valuation. Can I just ask if you have received any color that you are willing to share, at least, on the trajectory for Berlin? And how that might compare to the group guidance you have given? I appreciate you may not want to give that, but any color that you can give on Berlin versus rest would be helpful, please? And secondly...
Can I do this answer because by then it is easier, and then you ask your second question?
Sure.
I think it is too early. We are in the middle of the process. It's not finished. I can just tell you that probably the phenomenon that you have seen some bigger -- our big cities are contributing significantly to the value is also to this year, or this half-year. So I think we have good development everywhere, but in our big locations, you will see high, strong value uplift.
Okay. That's helpful. And then secondly, we're expecting an announcement on the Mietspiegel quite imminently. Can you give any color on what your expectations are for that? And how that might impact your like-for-like rental growth guidance?
You are probably referring to the Mietspiegel in Berlin, no, because we have -- Mietspiegel but there is a Mietspiegel in Berlin coming out. To be very clear, I think in our guidance, we have a very low expectation anyway for this Mietspiegel. So we will not be surprised. In the political -- existing political situation, which we have in Berlin, I would be very surprised if the Mietspiegel comes out very high. This would be suicide -- definitely suicide for the left wing government there, so they will do everything to keep it down.
The next question is from Jaap Kuin, ING.
Couple of questions from my side, I think 3, maybe hopefully not more. The first one is on trying to still get to a FFO 1 type of calculation, so Q3 '18, you gave guidance for EBITDA on sales and development of between EUR 130 million to EUR 160 million. And I was wondering if that is still a valid statement? Or whether that has also changed with the update today? Yes, I'll wait for the...
Look, I think we discussed it before. I'm actually absolutely incapable of splitting out taxes and interest rates. So -- and this is why we stopped giving FFO 1 guidance. So whatever you want to calculate, I'm fine. But we will stick with Group FFO because, as we discussed, any attempt to divide interest rates, and especially taxes according to the 4 business line will be purely arbitrary. And if I did such division, we would be discussing without ends on whether that division was correct. So we stick to Group FFO because we think it's the right number. And then I believe everybody to try and come up with a smarter way of splitting up taxes and interest rates.
Okay. But basically disregarding FFO 1 then, would you say your expectations at the end of last year with regards to EBITDA on sales and development is still correct?
I'm not sure I get the question?
So we -- actually what we have said is that in all segments we are doing a little bit better than we thought.
Okay. That's clear. Okay. And then on the Page 6 of the presentation...
And to be -- actually because this was the second time the question was asked. I think you keep in mind that we were, in the last year, giving you a guidance on a completely new format. It's 3-4 segments. That in this case, we probably are a little bit more prudent in giving you guidance is normal. And this is still -- we still have some prudence today in the guidance because we have to also -- we have to learn better how the segments are working.
Okay. That's really helpful. Maybe now moving to Page 6 of the presentation. I was just wondering, the adjusted EBITDA operations for the German operations shown there, the EUR 350 million, is that actually including the IFRS 16 impact of EUR 7.5 million? Or is that excluding that impact?
Now that's not including because it's an IFRS number. We would be then including the IFRS 16 effect to follow the accounting philosophy.
Okay. And then my last question will be on your valuation guidance. You suggested that there is also a likely impairment of goodwill associated with the valuation uplift. Obviously, that's very hard to predict for us. Do you have any sensitivity to offer in terms of whether that goodwill impairment is proportional to valuation uplifts like last year or higher or lower? Is there any way you can help us try to understand the likely size of the goodwill impairment?
To tell you the truth, I'm a little bit relaxed about this. Why? Because we also have -- we always have the adjusted NAV and if I look at the capital market, that's what the capital market seems to be looking at. So the upper NAV, including the goodwill seems to be a number, but the capital market doesn't seem to be looking at that. So I'm not sure I can give you sort of a guidance because the model is very, very sensitive. But again, as we expect valuation uplift, we will also expect an impact on goodwill. Ultimately, what it means in my mind is that when my predecessor and Rolf bought portfolios, they actually sort of like did the right thing and the value catchup is now sort of like proving the colleague's right.
The next question is from Aaron Guy, Citi.
Just a couple of quick questions, please. Just firstly around the political environment in Berlin, potential for nationalization, et cetera. Can you just talk a bit about what your view is on that? And potential impact to your more German portfolio? And then just related to that, is the political climate, can you just give an update on what you're sort of hearing in that sort of inner circle if you like? And is the discussion changing from, say, increased regulation to other new solutions? Or is it still heading down that kind of same track of more regulation and that sort of thing?
If I see what you are [ referring to], nobody is afraid, at least not on the professional side that nationalization of the portfolio, [ when reality happens ] because this does not solve the issue. It is very expensive, the State of Berlin cannot afford it. So I think there is no real risk in the end that the portfolios will be taken away. The point in this debate is more that it shows that the political climate in Berlin, which is special anyway in Germany, because we have a big part of former East German [ functionaries ], those are people who worked and served the East German state. They are still living in Berlin, for example, in the Karl-Marx-Allee.And on the other hand, in West Berlin, where people actually, which are used to live from subsidies forever because West Berlin was actually completely subsidized for decades in Germany. So there is a very special climate. And what is only more interesting is that the debate in Berlin about the housing and the nationalization actually is opening a lot of other debates, which is, of course, going in more regulation. It's going in more restrictions in the rental business. And most recently lead actually to a nationalization debate of BMW. So they are a little bit crazy in Berlin, and we have to live with this effect. Of course, it does not ease the business. So this debate will not help to do less regulation. But in reality, I think, the current government in Germany will also don't think that there is massive more regulation. So it is a lot of noise. The disadvantage, as I said, at the moment, management teams in the companies have to spend much more time to answer questions according to this noise. And so this is actually something I'm spending much more time in the moment on the political awareness than before.
Okay. And just the second question related to that, if your property valuations, as you mentioned in this possibly stronger in H1 this year than last year. If the valuations continue on the same annual trajectory as the last few years, the values are going to -- house prices will roughly double within a sort of 7-ish year kind of period. How do you think about the business with a 10-year view? If the valuation of the NAV is kind of peak at that point, do you have to think about potentially shareholder returns, the total return coming from other areas, development, more increased privatizations, et cetera? Obviously, the EPS and FFO will take long to capture than possibly what will be priced into the house prices in the short term, but longer term, if that trajectory happens, how do you think about the business?
No. I think -- to be very clear, we have -- there is good reasons why we are not giving you a guidance on value uplifts because I think this is not our job. It's the job of surveyors. So we're not giving you guidance for the full year. What just said is because we have now more clarity, because the half year will be higher than last year. And of course if everything is not changing, there's also fine [ reporting], it's a trend and what I'm saying is the trend is not broken. So there's of course as long as the trend is not broken and we don't see the trend is broken, there will be positive developments in the future, which is for me not at all a surprise. We have all this political debate because of the simple effect that in the big cities we have not enough housing. So if we have not enough housing, prices for housing is going up. So this is something, which does not -- which should not shock us, which is actually normal reaction on the market of shortage of a product. And since we are not solving the imbalance of supply and demand, we will see price increases. It's very simple. And because of salaries, at the moment salaries in Germany is also significantly increasing. I don't think that we have significant impact in purchasing power. So I think a big part of our tenants also can afford higher rents.
The next question is from Jonathan Kownator, Goldman Sachs.
A couple of questions for me. And the first one on compensation, perhaps if you can update us on the point, if you're seeing -- still seeing the same level of inflation that you were seeing last year, more or less? And also perhaps to come back and look at the debate from a broader angle, perhaps on the regulation. Are you seeing any more response from either the local law or probably more likely the national government on any sort of measures debate that could actually stimulate development? We see that obviously you're still talking about how difficult it is to get permits at the local level. But are there some voices to try to help them that debate and think about any program, perhaps, to help development?
So coming back to your last question, of course, at the moment, if you follow the German politicians, they have an issue, they don't want to have nationalization because the majority is against nationalization. So they are talking about putting more money in the system, so higher subsidies, helping for more construction, more spending for social housing, which I think we are ready to take this money, so we are not against it. As volumes will not solve the issue, because the issue is not money. We can, today, in the regime and not on this failure, we are able to build social housing with a completely normal return. So fully social housing with a subsidy program and normally is failure. There is no [ profit ]. The same is in Jackson. So interesting. They are building their social housing. It is a good model. This is about the same returns as a normal private -- normal rental business. So -- but a lot of people are talking now to put more money in it. But the problem is not the money, the problem is land and construction permissions.
But if you look at land and obviously you do have a quite a bit of land in some of the cities like Berlin or -- although they are not necessarily super highly densely built, let's put it this way. So is it really the permitting issue? And do you see local or national authorities trying to put more resource to that?
I think it seemed to be a limit bit more -- going more down. And you are right, Berlin is not condensed. Actually no German city is condensed. So if you're coming from New York or London, you are thinking this is a midsized city, which is in reality it is. So it's not condensed. So contrary to the condensation potential in Berlin, but in all other big cities is there. Actually, the point is, we are always talking about construction permissions. In the end, the point is that politicians are not strong enough explaining to people that we need construction. Not in my backlog. I think you know this phenomenon all over the world and every time you're doing construction, there are some people who are against this construction. In the moment in Germany, politicians are obviously not strong enough to work and to explain to people that this is necessary in the interest of the whole city. I don't know if you see this phenomenon in other parts of the world. In Germany, in the moment, it's a very big phenomenon and that's why, to solve this issue, politicians have to become stronger, they have to be more leaders, they have really to lead also the discussion and they need to explain to the people that no construction is not an option in a city where people are moving in.
And is there perhaps a more federal answer to that as well? I mean, obviously, you need to streamline processes and perhaps also the people need to be involved from a stand less in the decision-making process to the extent that they can appeal to it. Is this something that is happening at all or not ready at this stage?
No. I've seen what -- what happened was in -- around 2011, a little bit later and as a consequence, Germany saw that are finished, we actually gave the whole power for construction processes for local regulations, for all these to the lender. So the central government actually has no power. Even the BUWOG, which actually describes how we have to build is actually decentralized today. So the Federal Minister of Construction is at the same time the Minister of Interior Affairs. Actually don't have too much decision power left. It's all local, and I don't see in the moment, a willingness in Germany to change, to give more power to the federal government. So it's a deadlock situation.
Yes. And from this -- what you're seeing, I mean obviously, you think people don't want more construction in their backyard. Is that a national level -- a national phenomenon? Or do you see some lenders that are more open perhaps than others?
Actually, it's good again. The construction permission is not given by Berlin, but then by the municipality, which is the sub level. So the framework legislation is standby lender and then definitely construction permission is doing in the municipality. And I would say in all big cities in sales see the same framework, not in my backyard. But of course, cities are reacting different. In Berlin, they are actually asking for nationalization. In Munich, they are just walking together with their politicians, drinking a lot of beer, telling them that they don't want to have the construction permission. So actually the cities are a little bit different, but in the end, the phenomenon is the same people, don't want to have changes.
Okay, understood. Perhaps one last question if I may on your services business. Or you -- can you give us an update on that? I mean are you seeing they're trying to develop additional services? Are you still seeing -- I mean obviously you just talked about the timing of increase of that business? Do you have anything new to say or new news that you are developing?
No. I think at the moment no new services. As you see, we are very good on track. So I think you mentioned -- you noticed probably that I'm very optimistic on the guidance to deliver the EUR 20 million more. In the moment, we are working hard on the energy piece because this is the next big thing. But of course, in this business, which is a very long-term business.
And you mentioned insurance as well?
No. I'm talking about energy. Energy is actually the piece of business there. Of course, there's massive potential there, but this will not change from 1 quarter to the next. Take this business as a very stable growing business for years after years. We make it boring. So we are not taking us -- that's why it becomes very boring, but it's a very, very stable business.
The next question is from Kai Klose of Berenberg Bank.
I have 2 questions. The first one is on Page 18 regarding the debt expiry profile. Could you just share your thoughts what you aim for the upcoming debt expiries regarding lengthening the debt maturity and/or changing the exposure to unsecured and secured funding? And second question would be on Page 27 regarding your recent acquisitions. Let's say acquisition opportunities you're looking into. Could you indicate of these [ 3000 ] units where you are currently in the due diligence process if this could also -- if this also includes a higher portion of development land? Or if you're interested to buy more land rather than exiting properties in order to beef up your development pipeline?
Can I do the second question first? And then I hand over to Helene because it is a little more complex. It is very clear on the acquisition, there is no land. This is just apartment. They're is no land reported.
We have one more question to answer for Kai. So Kai, what we're doing is like we're really opportunistic about this and you may have seen that the spreads have come in significantly. So at this point in time, even the long maturities, Eurobonds do look quite attractive, but again I'm keeping it open. I can do secured and I can do Eurobonds. And I will just sort of like decide if and when times comes due to refinance the bond. Clearly, as you know, given with the Deutsche Wohnen, disposed land, now the repayment of the hybrid, I don't have a lot of refinancing to go for the remainder of the year.
The next question is then from Robert Woerdeman, Kempen.
This is Robert from Kempen. Perhaps only with a number of higher-level questions. So first of all, where are we on France? You have been studying the market now for 1.5 years and what are currently, so far, your findings after also taking your first take in a French company? How can we expect Vonovia to take place in the French market? Is it going to happen in the 3 to 5 years? Any views.
So first of all, I think we are positively surprised, but unfortunately is not shown in the figures because it is too small, the development of our 4,000 -- 10% of the 4,000 units. They will definitely be better than we expected. But there's, of course, you will not see unfortunately in our figures because it's too small. We are learning. We're still having very interesting and teaching debates with the French government. There's always coming opportunities, but again, I think you mentioned in your question correctly, it's 3 to 5 years. I think I would be very positive that Vonovia is bigger in 3 and 5 years from now in France. I'm not sure if it's 5 years or 3 years, and I'm not sure how much is much bigger. I think this is a long-term project and nothing has changed in the way that we say we would revise completely what we have said on the last quarter. But the protest of the yellow vest is not helpful for the liberalization of the market. On the other hand, also there, they are putting no more money in the system, new construction is not working really. So this is all indicators that the system is long term not sustainable.
Okay. But the fact that you mentioned...
[indiscernible] fast because then it will change and then this gives us opportunities. It's not short term.
Okay. But the fact that you mentioned better-than-expected on the only 400 units that you have indirectly means that this is a marker that you're going to grow in?
No, I cannot tell you because we are not continuing to buy 400 units. So this was just today that we actually are positively surprised to be learned that you can't manage it. So this is what the message is. So there is no bad surprises, everything is going well. It doesn't make sense for us to own 4,000, 8,000 units just to be in France. This was actually, as you know, this was research and development. So research and development is performing well. The opportunity will come if the market is changing because you know we are talking here about housing for the mass of the people, housing in the high-end caliber. It is, of course, in Central Paris, is a completely different market. And this is definitely not a market for us.
Okay. Clear. With the current knowledge that you have, how should we expect, let's say, your medium-term capital being allocated between, let's say, Germany and Sweden? Where do you expect to see the most growth for you?
In relatively figures, because of the small base, I would say Sweden probably in the moment is little faster in percentage-wise of portfolio, but I think this is a no-brainer. Is this dependent on a lot of things? It depends on the development of the prices in Germany, it depends on the willingness of owners in Sweden to sell. So we are there completely opportunistic. And because this is, to answer the question, is where we want to acquire more and this is -- we should be completely opportunistic because otherwise we are putting pressure on us, which we don't need and which is not helpful for the shareholders. You know my story. So cause -- Sweden is because we still are so small. If you buy a portfolio in Sweden of 1,000 units, you're growing the company by 5% or 6%. So that's why I think it's obviously that Sweden will grow a little bit faster percentage-wise.
Yes, of course. And have you already identified a number of portfolios you're interested in?
No, we -- actually, it's the same like in Germany. We are waiting for opportunities. What about KPIs, you can calculate a lot of portfolios, very easy. It's just expensive. And we are not buying. If it's fine, we are buying. But we are not in a hurry. So we are not -- we have never promised to be in Sweden with 30,000 units next year. So we are not under pressure.
Okay. And perhaps a tricky one. You mentioned yourself that prices are going up quite rapidly in the urban areas including Berlin. With the recent unrest in Berlin, and this has led to quite a de-rating of certain stocks. Would this -- if this were to continue, is this for you a good opportunity to step in again?
I think there are 2 others. Politically, it would be probably suicide because I would be the most hated man in Germany. Imagine that they want to nationalize and somebody else will make an offer. So I think this is probably something which is not possible. Again, I think we have learned in 2015 very clear that the transaction like this only works if 2 CEOs agree that this is a good transaction. I don't see any change in attitudes here. So we have taken our learnings. So that's why I think nothing has changed. Nothing is new there. Probably, one day, 10 or 15 years around, some of our successors will be open to discussion.
The next question is from Manuel Martin, ODDO BHF.
Question regarding the tenants in your portfolio. If you have to look at your tenants, what do you think could be, right now, more or less, the share of rent, which they have to pay versus disposable income? And has that increased? And where it could be the level in the future? Of course, I think, that might be different in the different countryside.
Actually, I cannot answer you completely because we don't know the detailed income of the tenants. So technically, we are not allowed to talk. In general, let me just look for one data, so you can talk about actually the country as whole. So I don't know the exact salary of my tenants and actually, I don't want to know it, 4 months, 2 months, because this is just an issue, which I think me as a non-state company should not know every detail of our tenants. I know Sweden has a completely different view on this, but transparency in Germany is not this high. What you see in general is that this rent is a disposable income of Germany. In general, in the country is more or less -- is actually a little bit decreasing, which is clear because rent is normally going lower than inflation rates. So this means that disposable income, which is more or less coming with inflation rate, is actually growing faster than the rent, which is, of course, business average. So it's a portion of people where this is not the case. But for example, to give you, we in Germany, we have an average of -- this is the whole country of below 24% disposable income while, for example, in France, you have 26%, or in the U.K., you have 27%. So renting an apartment in Germany is still relatively cheap if you compare it to other countries. It is getting more expensive in the big cities in comparison to 10 years ago. And even -- just one little reminder, if you look at our average rent, it's EUR 6.50. If you compare -- and this is mainly we are today, now mainly focused in big cities. So if you look on this and you compare to other markets, you know by yourself that this is still very cheap in Germany. It's per square meter. Because the Americans if they call EUR 6, it's per square meter not per square feet.
If there are no further questions, I would like to hand back to Rene for some closing words.
Thank you, Judith, and thanks everyone for joining. Now I received various e-mails during this call, people complaining about the sound quality so to the extent you are affected, apologies. We'll look into that then to hopefully has better sound quality next time around. Apologies for that. In terms of timing and what's ahead of us, as a reminder, the H1 2019 results will come out on August 2. Until then, we'll be on the road quite a bit. We also have our Capital Markets Day on June 5 in Frankfurt with a dinner to tick it off on June 4. And certainly, we hope to speak with you on one occasion or the other before then. As always, please do reach out to me or the team with any questions and comments you have. And with that, that's it from us for today. Have a great day, everyone.
Thank you very much.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.