Vonovia: strong rental business in Q2 2023 – Refinancing already covered until well into 2024

• Core rental business grows at around 10% in second quarter of 2023 – Virtually full rental occupancy – High customer satisfaction – Full-year 2023 guidance confirmed.
• Demand for rental flats remains consistently high, with more than 400 newly built units above level of Q2 2022.
• €2.7bn asset value decline in Q2 – trend weakens in a quarterly comparison.
• Cautious signs of market stabilization in certain price segments.
• New portfolio identified for joint venture minority shareholding.
• Rolf Buch: “Planned reduction in funding for heat pumps in apartment buildings puts tenants at a disadvantage compared to homeowners.”

Vonovia SE reports a very good result in the rental business in the second quarter of 2023 and has confirmed its full-year guidance for 2023. The development of key metrics is above the estimates given by analysts. Rolf Buch, CEO of Vonovia SE, comments: “It’s a major achievement that we performed so well in this challenging market environment, and we’re equally positive about the further development of the year.”

The company has continued the consolidation of its leading market position in Germany. This positive development is supported by a high level of customer satisfaction and an ongoing need for residential space in urban regions. In fact, with the vacancy rate unchanged at 2.2%, occupancy is at capacity. Furthermore, despite an environment of high construction costs, Vonovia completed an overall total of more than 400 new flats in the second quarter of 2023.

Refinancing well into 2024 already covered

In July 2023, Vonovia partially repurchased 17 bonds maturing from 2024 onwards with a nominal value of €1.0 billion, at a discount of 11%. It is another important step with a positive impact on leverage in an environment of high interest rates, thereby reducing financing costs. Previously, the company had generated around €560 million for the sale of 1,350 flats in May as well as €1.0 billion for a minority stake in the Südewo portfolio in April.

Vonovia has now identified another portfolio of a similar size that is suitable for a joint venture partner. This form of participation offers benefits to both parties. Vonovia can invest in a capital-efficient manner and continue to realise economies of scale in property management. Investors, in turn, benefit from Vonovia’s digital operating platform and its many years of experience in the housing market.

Overall, for this year the outstanding liabilities are €1.7 billion, and for 2024 the amount is at €2.9 billion. For 2023, these liabilities are already fully covered. For 2024, the liabilities are covered by cash as well as by secured and unsecured loans except for around €100 million.

Philip Grosse, CFO of Vonovia SE, says: “The confidence of the capital market in our business model remains high. The successful financing measures in recent months confirm this again.”

The debt-to-property value ratio (LTV) stands at 46.8% on a pro forma basis (Q1 2023: 46.6%). The target remains unchanged at the lower end of an LTV of 40-45%. The average financing cost is 1.6% and has a duration of 7 years.

Rental business records 10% growth

The segment revenues are in the second quarter of 2023 at €1,495.0 million – a plus of 1.5% compared to the previous year’s figure (Q2 2022: €1,473.0 million). At €681.2 million, EBITDA was also slightly higher than in the same quarter of the previous year (Q2 2022: €677.1 million).

Rental, Vonovia’s core business, developed very positively. The EBITDA in the Rental segment – the largest segment with an EBITDA contribution of around 91% – was €618.5 million (Q2 2022: €560.5 million). The 10.3% increase was mainly due to organic growth from new construction and modernization, the development of the market-related rent as well as synergies from the acquisition of Deutsche Wohnen.

According to current data from real estate portals, demand for rental flats remained high throughout Germany in Q2 2023. Demand for existing flats was 30% higher than at the end of 2019, and demand for new-build rental flats was even 90% higher. According to Rolf Buch, “This clearly shows the impact of the housing shortage and the importance of new construction.”

At the same time, however, overall assets, investments, refurbishments, and sales continued to be affected by high interest rates, energy, and construction costs. As expected, the Value-add, Development and Recurring Sales segments were down compared to the respective prior-year figures.

As part of its spending discipline, Vonovia focused on key investment projects, and so the investment volume fell by 46.0% to €329.4 million (Q2 2022: €609.7 million). The resulting decrease in order volume also had an impact on the Value-add segment. The discussions about the planned switch from gas heating to heat pumps also led to a lower modernization volume.

Rolf Buch, CEO: “We welcome the revision of guidelines for federal funding in efficient buildings (BEG), as it will advance the transformation in heat supply. But in the proposal currently under discussion, tenants are disadvantaged, and the installation of heat pumps is slowed down. Above all, this will create a burden for middle and lower-income groups, which should not be in the spirit of an SPD-led government. As landlords, we pass on the subsidy one-to-one to the tenants, which is why landlords should be treated equally and tenants and homeowners should be subsidized on an equal footing.” There are currently plans to cut subsidies for replacing the heating technology and installing heat pumps in larger apartment buildings. Large housing companies in particular can achieve a lot for decarbonization through pilot projects and subsequent rollout in the portfolio.

In the Development segment, Vonovia completed an overall total of more than 400 flats with an average size of 67 sqm in Germany, Austria and Sweden. This was a 27.0% increase compared with the same quarter last year. The close to 50% decrease in EBITDA in the Development segment was primarily due to increased construction costs.

In the Recurring Sales segment, flat continued to achieve good prices in relation to book value, even though the sales volume was lower than in the previous year’s quarter.

The development of EBITDA also impacts Group FFO. In all, Vonovia’s Group FFO, the key figure for operational profitability, was €502.2 million and therefore at the level of the previous year’s quarter (Q2 2022: €503.5 million). Vonovia reports a per-share Group FFO of €0.62 – a figure that takes account of a higher number of shares resulting from the scrip dividend.

Trend in asset value decline weakens in Q2

The development of property values continued to decline in Q2 2023, although this trend weakened compared to the previous quarter. Vonovia had already carried out an unscheduled revaluation of its portfolio in the first quarter of 2023. After a €3.4 billion decline in Q1, the asset value declined by €2.7 billion in the second quarter. The current market value of the company’s real estate portfolio is around €88.2 billion and thus 3.3% less than in Q1 2023 (€91.2 billion).

Mainly due to the development of real estate values, the EPRA NTA (net tangible assets) stood at €40,460.1 million, which was 5.4% below the €42,779.3 million in March 2023. This figure translates into €49.67 per share, taking into account the higher number of shares resulting from the scrip dividend.

As of the reporting date, the existing rental portfolio was effectively at capacity, with a vacancy rate of 2.2%. The organic rent increase was 3.5% in all. The market-related rent increase based on the development of the rent index was 1.5% in the second quarter of 2023 (Q2 2022: 1.0%). Average effective monthly rent across the entire Group was €7.58 per square metre (Germany: €7.51 per sqm).

Conducting regular customer surveys, Vonovia found that the decisive factors for a high level of customer satisfaction are the floor plan of a flat, the surrounding infrastructure and local transport connections. Further positive aspects of customer satisfaction during the second quarter 2023 were the friendliness of the employees, the conduct of its maintenance staff and the improved readability of its service charge invoices.

Cautious signs of market stabilization in certain price segments

According to a recent analysis by market experts (Value Marktdaten), the listing prices for flats continued to decline in the second quarter of 2023. However, the rate of decline has started to slow down. According to BNP Paribas Real Estate, an interest rate break in fall is likely to occur for the first time and will lead to a noticeably higher market momentum in the residential investment market at the end of the year and, in particular, next year. Interhyp confirms that the market will continue to find a new balance and that mortgage structures are robust.

A current survey by the Munich ifo-Institut shows that economists expect real estate prices worldwide to rise in the coming ten years. Average nominal annual growth of 7.2% is expected for Germany without taking inflation into account.

Pilot project for municipal heat planning launched in Bochum

Regarding sustainability, the housing market is undergoing a transformation. Vonovia remains committed to its goal of achieving climate neutrality by 2045, and its innovative research projects in energy supply are setting new standards in the industry. Conventional heating systems are gradually being replaced by heat pumps, and the energy supply is being converted to green electricity. Alternatively, more neighbourhoods should be connected to district heating. In this way, the company is pursuing its climate roadmap, which aligns with the Paris Agreement on Climate Change and its 1.5° target. Expenditure on modernization amounted to €118.8 million in Q2 2023 (Q2 2022: €213.5 million), and approx. €1.6 million for research and development (Q2 2022: €1.0 million).

Together with Bochum City Council and the public utility Stadtwerke Bochum, Vonovia has signed a letter of intent on the swift implementation of municipal heating plans. For Vonovia, it is crucial where and when it can connect to the district heating grid or to newly constructed local heating grids based on renewable energies. Vonovia will use this information in planning the installation of heat pumps in existing buildings. By 2026 at the latest, every city and municipality with more than 100,000 inhabitants is required to submit a heat plan.

Full-year 2023 guidance confirmed

Vonovia has confirmed its guidance for revenue, EBITDA and Group FFO for the 2023 financial year.

The forecast for segment revenues is between €6.4 and €7.2 billion, and the company is expecting its EBITDA to range between €2.6 and €2.85 billion. Group FFO is likely to range between approx. €1.75 and €1.95 billion. With regard to its Sustainability Performance Index (SPI) – the measure of progress for sustainability – Vonovia is expecting to achieve the targets set for 2023 in terms of CO₂ savings, customer and employee satisfaction and low-barrier (partial) modernization.