M&A Announcement

May 25, 2021

Good afternoon, and welcome to Conference Call of Deutsche Wohnen regarding the business combination with Panovia SE. The conference call is hosted by Mr. Philip Gross, CFO of Deutsche Wohnen. Presentation of the call is available on Deutsche Wohnen's website in the Investor Relations section. The duration of the call. You will be on listen only. However, at the end of the call, you will have the opportunity to ask questions. The operator. Call. I'm now handing you over to Philip Gross, CFO, to begin today's conference. Please go ahead. Thank you. Good afternoon, and thank you very much for joining on such short notice. Dexter keeps busy, keeps all of us busy. I want to take the opportunity to very briefly run you through the key terms of the transaction that has been announced yesterday evening, as you have probably seen. The and the corresponding business combination we entered into with our colleagues from Vonovia. If you look at the terms of the proposed transactions, our shareholders will essentially receive a cash consideration of €53.03 and that is composed of 2 elements. The €52 payment by Vonovia and on top subject to the AGM approval, you will also be a shareholder of Deutsche Wohnen entitled to the dividend payment. The And if you look at the numbers that is translating into the premium the closing price as of Friday last week of roughly 18%. The If you look at the VWAP, it's actually even 25%. And against that backdrop, Certainly, by these numbers, very much towards the upper end of what has been paid the in similar transactions in our sector. If I look at our 2021 FFO guidance. On a fully diluted basis, this the This is actually translating into an FFO yield of 2.6%. And from a fundamental perspective, the price is translating to a slight premium in comparison to our AirPra net tangible asset. The So against that backdrop, with that offer, we have been able to close the gap the continue to persist given all the political headwinds we are facing in our industry. The In terms of conditions of the offer, there's a 50% acceptance threshold, the Standard Markets Material FX Change Clause based on EPRA Developed Europe Index. The reminder are kind of the typical conditions you will expect and which will the Looking at the offer As a management board and also backed by our supervisory board, we believe that the terms of the proposed transaction are very compelling for Deutsche Bohn shareholders. And we therefore think that it's prudent to recommend the transaction to our shareholders. There has been more technical aspect, also being backed by fairness opinions On top of that, I think we have also been able to agree on a fairly the extensive business combination agreement with Vonovia. And I think that is helpful for both Deutsche Wohnen, the But also looking at the future prospects of the combined entity. Rolf Buch, as you have seen, the continue to lead the management as CEO, Michael Zahn, and myself will join the management board of Innovia, Michael as the Deputy CEO and I as the CFO. The And as such, Michael will oversee the integration of the 2 businesses, But also asset management and the number of crucial areas, I will assume the typical role the CFO function. The While Vonovia targets some €105,000,000 of synergies, we have agreed the Not to have forced employee redundancies due to operational reasons until the end of 2023. The I think looking at the transaction from a perspective of all stakeholders, that's a very, very important notion. The You might have also seen that we together made a very comprehensive proposal to the state of Berlin to alleviate rent escalations and the situation we are the in particular in Berlin market and that we have made the combined proposal for the combined proposal for selling a very sizable housing portfolio. On Top also made some statements as to how we look at future rent developments. The That was actually very well received by politicians in Berlin in the press conference, the Which the mayor of Berlin hosted and in which Rolf Buch and Michael Sahn the We're also present. That was very well noted, and I think it was a tremendous important step to actually deescalate the situation and to also secure political support the best combination of our 2 businesses. Again, I think if you look at the entire package, it's very attractive for our shareholders, the And there is high yield certainty in my view given the structure of the transaction. We will that certainly create the most significant company in the European context, the biggest the residential real estate developer in Germany, which is addressing one of the key topics we are facing in many metropolitan areas here and also an owner and operator of a sizable Nursing and Assisted Living Business. I think that, that we are well prepared to also tackle more effectively actually the challenges which lie ahead of us and the Yes, working together towards reducing our carbon dioxide footprint, jointly dealing with the regulatory challenges and jointly also creating the necessary supply the we need in many of the markets in Germany. So against that backdrop, I do actually look very much forward the that we leave the legacy behind us. And as a new team, look forward to tackling the challenges the colleagues of Innovia, obviously all subject to this transaction going ahead. The With that, I would already conclude my brief remarks and are very happy to take any questions you may have. To the question and answer session. The first question comes from the line of Andreas Thum from Green Street Advisors. Please go ahead. The Hi, good afternoon. I was just wondering what made this deal attractive for the management and the Board of Deutsche Bank at this particular time? This is more related to the political pressures that you're seeing in Berlin or what prompted it at this stage? By all fairness, I think in essence, it was for us the Fairly straightforward decision, because it is a cash deal, which has been fully funded. The It's a transaction structure which has, as I said, in my view, no significant execution risks. And essentially by all metrics, when I look at pricing, I consider that the very attractive for our shareholders. We have seen a fairly significant recovery in our share price following the decision of the Supreme Court. So we started the right basis, so to speak. I actually don't see In the next 6 to 12 months, any meaningful catalyst to share price given all the regulatory the headwinds we are facing. And against that backdrop, 18% premium versus spot, 25% premium versus our BVOP and that offer also translating into essentially the Slide premium versus research consensus and our EPRA net tangible asset, all in all is the In my judgment, but that is also mirrored by my colleagues in the Management Board and also by the Supervisory Board, attractive in terms of financials. Now that is at first What we have to judge our decision on from a shareholder perspective. Equally and I hope I made that clear, I think There are, however, also tremendous opportunities for us as a combined management team to effectively tackle the challenges of our industry. I know we have a legacy and This time around, it is certainly a very different approach, which has been taken. The I have considered the negotiations we had to be very constructive, very open minded, the My way how I look at that is that we will hopefully achieve to really combine the best of 2 worlds. I think there are excellent teams on both sides. The And the challenge or the chance is that we have to put together our heads and jointly define what is best for the combined company. And I think here we have a lot of good ingredients. The Thanks. And just coming back to the pricing, could you give a sense of what was the pricing range of negotiations For this deal as you were going through that process. Look, I think the I'm not reiterating or I'm not conveying details of negotiations by but be ensured the final price was not the starting price. The Okay. And if I think about the just the private market kind of appetite for German residential generally, If you were to revalue the portfolio, your F grantee would probably be considerably higher the Where do you think it would have landed from that kind of perspective? And do you think you'll have some money on the table? I mean, yes, I can essentially only repeat what I also said the presentation. In presenting our Q1 results, we have, the As you know, the vast majority of our properties sitting in Berlin market, we have been faced the for a fairly long time with the regulatory uncertainty. And I simply don't have sufficient data points as of now the as to how pricing in the transaction market is developing post decision of our Supreme Court, Which is why we are also guiding for our burden stock for no revaluation with half year numbers. The All of that having said fundamentally and also acknowledging what is happening In other markets in Germany outside Berlin, I would be extremely surprised if we do not see the significant revaluation uplift and respective evidence the transaction market in the months to come. Thank you. That's all. The next question comes from the line of Thomas Neuhold from Kepler Cheuvreux. Please go ahead. Good afternoon. Thank you for my questions. I also would like to come back on the fairness of the offer. It's The 1% premium versus Q1. And you mentioned that more valuation are priced likely. The Are you considering to do a revaluation of the portfolio at half year just to make sure that all investors are undecided can make up their mind? Because I think the extended offer period will most likely end after the release of your Q2 result. Thomas, again, I can do a revaluation of our portfolio if I have data points which have changed the vis a vis the last revaluation we did. And that is simply not the case for now. So my view is, the As of now, there would be not any meaningful change in the remaining the So the answer is no. But again on pricing, the I mean, essentially, you have, in my judgment, always to look at the different valuation metrics and one is a fundamental view on valuation towards which you are hinting. The And here, certainly, I do see prospects in future years the and also for 2021. And I mean, I do personally remain very, very convinced the on the attractiveness of Germany for the residential products, but in particular also metropolitan areas and further the Investor Relations. But at the same time, what I simply have to acknowledge is that there is the kind of decoupling from fundamental valuation and stock market valuation. And our sector, Unlike previous years, it's trading at a discount to net tangible assets, and that is true Almost for the entire sector, for the entire residential sector. And that is probably very much because of the regulatory uncertainty in an election year in Germany and what it may mean And against that backdrop, if I look at the implied FFO yields, and I was mentioning 2.6%. That was fairly attractive. The And if I see how also guidance is translating into stock price performance as it relates Asset appreciation that there is little correlation these days, it is supporting my view. So in other words, what I see is that the cash flow oriented valuation Seems to be more emphasis in Capital Markets than a fundamental valuation and that I have to acknowledge also in how I judge the transaction. But obviously, ultimately, it's each and every shareholder Who has to decide once the official offer is out to what extent he considers that attractive or not. I can only mirror the view we have at the Management Board with the backing of our Supervisory Board. Understood. And my second and final question is on the disposal pipeline, these 20,000 units, you're very likely to sell to Super Companies in Berlin. Can you provide some details on these portfolios? The Yes, I mean, the contrary is that the majority to that, and that is essentially forming part of So it has been put up for sale anyhow. The And market price is the last The parenthesis book value. The last book value. So end of 2020 book value or will there be a revaluation or there will be no revaluation, Javier? There is no midyear revaluation, as I said, the But I was explicitly referring to market value. I mean, look, we have a responsibility the owner of our equity. And against that backdrop, there is certainly the some room to maneuver, but there's equally no room for huge discounts. The the next question comes from the line of Thomas Rothausler from Jefferies. Please go ahead. Hi, good evening. One question on rental growth actually. You limit rent growth voluntarily to 1% or I think CPI also for the next 5 years for the Berlin portfolio, Which is actually well below recent dynamics. I understand short term limitation on provisional rent table and COVID as drivers for that, but 5 years rather long term. Maybe some general thoughts on this from your side. Sure. The I mean, first of all, just for the sake of clarity, in 2021, we will essentially not implement any regular rent increases, given that we are still the Yes. Coming to an end, but not yet are at the end of the COVID-nineteen pandemic. But I think also in Q1, I was hopefully sufficiently clear that the There is a need to deescalate the situation the in the housing market. And against that backdrop, we have to somewhat balance out social responsibility versus yield requirements And also the need for some rental growth we obviously have to fund our business and necessary investments. The But if you bear in mind that we have guided going forward to an expected the like for like rental growth of around 3%. You can see by these numbers that the regular rent increases are already in our guidance, forming part with less than a percentage point, the Because we have 1.5, 1.7 like for like rental growth from reletting, we continue to do our investments, Which is adding probably some additional 50 points 50 basis points. So it is not so much different to what we actually see. And I have to say with a 3% the like for like rental growth. We can handle that in my view as an industry pretty well. The It is sufficient to generate nice organic growth. It's sufficient to fund our needed investments. The And in particular, if you look at our portfolio, which has very high rental upside, it the is an embedded growth for the very long term, which is providing a very nice safety cushion to the moderate but long term stable development. The I mean, you referred to the need to deescalate. Does this specifically outdo for Berlin? Or Is it also for other locations like, let's take Dresden? The It's a particular topic for Berlin, but also for other metropolitan areas. But for us, as Deutsche Wohnen, as of now, it is very, very much burden, as you know. The But again, I mean this is what in my view the It's really the big achievement of yesterday's announcement is the combination of joint forces and the deal we have been able to agree some of the very leading voices in the Berlin market. And I think this is the very, very important step to deescalate the situation because they are very supportive and encouraging notions from various political parties. The And that is important, because it will be another, in my view, very important step to change also the reputation we have as a sector, and I think for the wrong reasons. The But our reputation for whatever reason is not the best one. And we have to be more clear the in what we do and how we do that. And we need to ensure that we the The next question comes from the line of Jaap Cohen from Kempen. Please go ahead. The Hi, good afternoon. Thanks for taking my question. I think Just looking at the alternatives that you have, I guess you decided to sell the company for a cash deal, which obviously the 100% cash component makes the digestible or more digestible for your shareholders. But what about Any alternatives that you could have pursued like, for example, stepping up asset rotation because now you're selling ADNAF that you're clearly able to privatize or do block sales above gross asset valuation. So, the to block sales above gross asset valuation. So was there not a potential to extract more value for your shareholders by the either partly liquidating the company yourself over either short or midterm or even longer term. Hopefully, liquidating the company is not really an option you think we should consider. The Look, I mean, first of all, we have not decided to sell the company. We have decided to the to recommend our shareholders to accept the offer, which is a very different notion. The Ultimately, the decision is with our shareholders. And the What is created by the combination of Deutsche Wownen and Vonovia is a very big real estate company. The You know that the offer is being financed initially the Board of Directors. And Bonovia already announced the There's a need for a big refinancing. So if I were to put myself in the shoes of the investors of Deutsche Wohnen, I would argue I have the opportunity to basically sell at a premium the and have the ability to reinvest in the combined entity the liquidity event, which is upcoming. Yes. The That's a clear statement and I fully agree with that. It's just that where we've time and again shown to be able to sell above book value the On a gross basis, so that makes and obviously, like you indicate, the capital markets haven't fully appreciated the NAV growth. I agree with that, but that could also have to be and obviously, there's a political consideration the With potentially a short period of time in which you were able to execute a deal, so Am I correct in interpreting that the overriding kind of necessity to achieve a deal to The situation to join forces was overriding the longer term potential of crystallizing value above appraised values. Yes, for us it was a mix of things we looked at. I mean, first of all, the 1st and foremost, pricing needs to be right. And I think pricing, as I explained in detail, is attractive. But equally, I'm also focused to work towards a combined company, which has the ingredients to be the each company on its own as it stands today. The And I think the political deal is an important element to that. And I think the sheer size of that company the Also opens up a lot of opportunities. But here I stopped because for now the management board member of Deutsche Wohnen. So for now, I am opining on the offer which has been presented to us and the rest and how that will develop at some later stage in how to look at the strategy of the combined entity This is something which the management board of the combined entity has to explain and present the the Could you maybe discuss the moving parts there, the rationale? Yes, we have changes in Germany as it relates to the real estate transfer tax That will come into force as of the 1st July. And it's, the In my view, the law which has been very badly structured in that Certain provisions may trigger real estate transfer the tax payments if there is movement the And against that backdrop that was in my judgment the right approach the by VANOVIA to structure that topic and that they secure That they have prior to the 1st July, 10% of Deutsche Bohnen shares. And with that, the This risk of that badly structured law is mitigated. And part of that is going to be that we will issue Some of our treasury shares at the agreed offer price of €52 to VANOVIA by using our respective authorization for preemptive issuance. The And for the reminder, there are some other ideas as I understand, Vonovia has to the to gain excess on these shares if for whatever reason that does not materialize. We We'll equally agree that we will also issue new shares the at the price of €52 to Bonovia in order for them to secure the entire 10%. That's an option and the trigger for using that option is with Vonovia. The Clear. All right. Thank you very much. Your next question comes from the line of Mikhail Topazka from Morgan Stanley. Please go ahead. Yes. Hi, Philip. Thanks for your presentation. Sorry for banging on the valuation, but there seems to be a bit of a difference of opinion between the Vanovia Board on one side and the Deutsche Waughn Board on the other side. Vanovia, as we heard earlier today during the call, He's very happy with the opportunity to buy at book value. And I think Rolf said something like, excuse me, the Any direct investor would have done it. Yet the biggest direct investor in Berlin, Barcelona, is happy to sell at these levels. So is there just a difference in opinion about future rental growth in Berlin? Or the what is it? The is the expected value growth in the first half of the year the second half of the year, is it all outside of Berlin according to Vanovia? I don't know if you discussed that with them. Okay. I mean, I think over the past days, we are discussing pricing from different perspectives. And that's the natural situation you're facing when 2 parties try to find an agreement on how the I can only comment From a Deutsche and Onen perspective as to how I look at pricing, and I can only repeat myself that there are for me various angles as to how I look at pricing. And key consideration is stock price market valuation, how research consensus is looking at that It's also a fundamental valuation, but it's also a question as to how or how I view catalysts in the market to actually capture the fundamental valuations. Right. And you think as you said In the midst of all these, We have come to the conclusion that this is an offer. We are essentially forced to present our shareholders. The Yes. No, and I appreciate that, and I understand that. It's just that there seems to be Such a vast array of difference of opinions here and also for your new employer. That's going to be interesting how to look at it because, again, Vonovia apparently already sees further value appreciation, sorry, the second half of the year as well on top of the 6% to 8% or 8% sorry, 8% to 10%, I think, the predictive for the first half. And I yes, for me, it's very difficult to square these two opinions because basically you're operating in the same market. You on the one hand said there's no transactional evidence to support further value growth in the first half of the year. But apparently, other market participants, the And to quote Vanovia again, any direct investor does see those value increases. So for me, I'm just a bit the with the outlook on values. That's it. No, but hopefully you didn't get me wrong. The I mean, first of all, my notion, obviously, each shareholder has to form its own view as to how He looks at a fair valuation. And I'm certainly not the in this agreement that I have a very positive outlook on fundamental valuation for Berlin Markets. I was only saying that for now, I don't see the transactional evidence. But I hopefully was also clearly in saying that we have seen that transactional evidence in many other markets, the Not in Berlin, not in Berlin because of the regulatory uncertainty, which we had for long. Now that has gone away, it is in fact my clear expectation that we will see some catching up, some recovery. The So the notion of value uplift in the second half of twenty twenty one is certainly matching my expectation. But the other question is, and that is for you guys to opine on, how is that translating into stock market valuation? And is stock market currently looking at NAVs? Is it currently looking at yields? Is there a decoupling? The Okay. That's fair enough. I think before the regulatory headwinds we have, There is the likelihood that at least in the shorter term, there is decoupling from NTAs the Okay. In the medium or longer term, hopefully that will disappear at some stage, the Because I think it is, at least for me, not logical that the transaction market is offering different prices to the stock market. The Your next question comes from the line of Jonathan Jackson from Petronas. The Hello. Can I just ask whether there was ever an option for Deutsche Vonnen shareholders to the to receive consideration in Vonovia shares so that the upside so that we could share in the upside long term of Vonovia? That is not the way how Bonovia has structured that. So the answer is no. However, as I said, There is the need on the side of Innovia to refinance the equity to refinance the bridge with the rights issue. And I think in the recycling of the subscription rights, there should be also the opportunity the for a reinvestment, but obviously subject to market developments. The The next question comes from the line of Simon Stipping from Warburg Research. Please go ahead. Hello, team. I appreciate your time for the call and also taking my questions. The first question would be in regard to, again, revaluation. I just see then in your presentation, Q1, 'twenty one presentation that the It's still showing asking prices at 21% premium to your book value, spell and book value. Just hypothetically, what would be your best guess in crystallizing that value actually over years? 3 years, 5 years, 6 Just because I believe the share prices in the longer term follow fundamental values. So it would be interesting, even though you have traded at a Welcome to NAB literally the last 4 or 5 years, smaller or larger. But could you give me your best This is really a bit crystal ball looking. I mean for Berlin stock, which is making up the majority of our holdings, we see in the institutionalized market the Based on more recent transactions, price points in between €3,000,000 €3,500 I think I was clear in my expectation how I think the If I look at it from a different perspective, which is simply looking at market rent levels, which we currently don't have, but which we should achieve in the longer run. And compare that to current bundt years, we are at reversionary years of, yes, Around 4.5%. And that is the Essentially, the implied risk premium for the residential real estate sector, which I think has been the Yes, has proven to be very robust, and which is, in my judgment, certainly above the risk premium I would typically expect for our sector. And that's kind of a very high level guidance towards what levels the sector could move towards. Okay. And Just maybe a second question in regard to your development pipeline within your subsidiary quarterback. The Is it you're showing on Page 60 of the Q1 'twenty one presentation, you're showing your total investment cost. And I assume that is including land prices of between 20% to 30% a share. The Do you actually apply modular construction within Waterbeck? The modular construction is not applied in quarterback or the projects We developed for our own balance sheet. Okay, great. That's clear. And then maybe just last one. I Just wondering about de escalation in regards to regulation and just political risk and also, the For example, expropriation initiatives, etcetera. But I just wondered at, is it really a the Derisking or de escalation, just considering the September elections and potential coalition where the Look, I mean, Just forget about the expropriation campaign. This is just noise, full stop. Will not happen, will never happen. I think and you see that by reading through the programs of or the manifestos of the various political parties in an election year. The There are a number of ideas on the rental market. There's a lot of noise as what needs to happen and what not. I think ultimately, you have to acknowledge that What you promise is not ultimately what you achieve. It's building up the position to negotiate a coalition agreement in whatever form that will emerge post election in September, the And it has to be translated ultimately in politics, which work. What I think though is important that we are not any longer Tackling this situation as this is the position of politicians, this is the position of tenants. This is the position of landlords, but that we come together, that we speak the And that we find joint solutions which work for all stakeholders. The And that is less about which political party will emerge or what coalition will emerge. This is a very principal topic. The And I think as a sector, we are making very important steps in that direction. The And for me, I have to say it was a very notable outcome to see the Mayor of Berlin the And also the Green Party, by the way, is supporting that approach On the hand, we have given to politicians in Berlin as to how the sector Can help to solve issues and to ensure that the The concerns tenants have are appropriately addressed. And that, in my view, is the key point. The Yes, okay. Agreed. And just maybe one last one. In regard to your Nursing and Assisted Living segment. Were there any or was there any discussion within your negotiations the That would consider Nursing and Assisted Living core to a the future client entity. It's a very interesting business for us and It's a business which will be within the responsibility the if shareholders with the majority are accepting the proposal Vonovia has made. The next question comes from the line of Tom Carstairs from Commerzbank. Please go ahead. Yes. Hi, Philip. I'm sure you'll appreciate this call on valuation question on valuation side of things. The I hear what you're saying on the share price premium argument, concerns about the rent growth. But if we're looking at the transaction from the other valuation metrics. Your Berlin portfolio is valued at around 2,850 euros per square meter. Your own presentation points to 15% upside to CBRE's asking prices. I appreciate you haven't committed to revaluation gains on your portfolio, but you have stated that you're expecting increases in property valuations. So I'm just looking at it from the fair value per square meter perspective and that discount to asking prices in Berlin I risk repeating myself. It's there are 2 angles, full stop, yes. The I mean, I don't disagree on the prospects of Berlin market. I don't disagree that I do see or do expect valuation uplift coming through in the second half of this year. But I simply have to recognize that our the stock preannouncement is at €40, €45 the And our AirPra NTA is at €52, it's at a significant discount. So stock market is not Reflecting that and for that very reason, I think I cannot withhold that opportunity to our shareholders And that is why we are presenting that opportunity to shareholders to form a decision on. The We currently have no questions in the queue. The next question comes from the line of Peter Papadakis from Green Street. Please go ahead. Sorry, Philip. I know it's been a long call. Just two quick questions. Obviously, You've been happy to run Deutsche Bohnen with a little bit more low leverage, a little bit safer capital structure. When you were discussing with Helene and then the Novia Crude, what's your thoughts on capital structure for Going forward, are you going to take a similar view to Deutsche Wainen or is it going to be different? Is it going to be more consistent with whenever look back? That's one. And then the second one, as much as you can answer, you're probably and obviously a Deutsche Bank shareholder. Will you be a Benoit shareholder day 1. Or will you just build your shareholding in Benoit the I mean, on the first point, presentation from the perspective of Deutsche Vonnen that may change at some point in time, the And then you will hear statements from my end, but not for now. The And for me, as Deutsche Wohnen, it was important that I have the certainty that the cash offer is fully funded, which it is by a fully committed bridge. The And for me, it was important to have certainty that also change of control situations which may be triggered, our adequity addressed, which is the case And which is embedded in the bridge, which has been put in place. And on shares, I mean, we have committed the As management of Deutsche Bockens to tender our shares at the offer price, which we will do. The If the offer is successful and part of us will join the management board the I think there's also some share ownership guidelines. So the I have to see what is presented, what is needed. But typically, and that's only a personal notion, I like If I have personally also some skin in the game for the business, I'm responsible. We would totally agree. Thanks, Stefan. Cheers. Dan, doesn't seem to be the case. Thank you very much for For your short availability or your availability on short notice. And thank you very much. Have a great evening. The conference call. The next regular call of Deutsche Wohnen will be the H1 Earnings call on 13th August 2021. For any questions in the meantime, please feel free to contact the IR team. Have a good day and goodbye. You may now replace your handsets.