Good afternoon, and welcome to the conference call of Deutsche Wohnen regarding the business combination with Vonovia SE. The conference call is hosted by Mr. Philip Grosse, CFO of Deutsche Wohnen. Presentation of the call is available on Deutsche Wohnen's website in the investor relations section. For 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. I'm now handing you over to Philip Grosse, CFO, to begin today's conference. Please go ahead.
Thank you. Good afternoon, thank you very much for joining on such short notice. Sector 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, 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 EUR 53.03, and that is composed of two elements. One is a EUR 52 payment by Vonovia, and on top, subject to AGM approval, you will also be a shareholder of Deutsche Wohnen entitled to the dividend payment. If you look at the numbers, that is translating into a premium versus the closing price as of Friday last week of roughly 18%.
You look at the VWAP, it's actually even 25%. Against that backdrop, certainly, by these numbers, very much towards the upper end of what has been paid in similar transactions in our sector. I look at our 2021 FFO guidance on a fully diluted basis, this is actually translating into an FFO yield of 2.6%. From a fundamental perspective, the price is translating to a slight premium in comparison to our EPRA net tangible assets.
Against that backdrop, with that offer, we have been able to close the gap that has for now persisted for quite some time, and I have to say, will most likely continue to persist given all the political headwinds we are facing in our industry. In terms of conditions of the offer, there's a 50% acceptance threshold, a standard market material asset change clause based on EPRA Developed Europe index.
The remainder are the typical conditions you will expect and which will be detailed in the offer documents once that has been published. 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 Wohnen shareholders, and we therefore think that it's prudent to recommend the transaction to our shareholders.
That has been a more technical aspect, also being backed by fairness opinions we have received by Deutsche Bank, Goldman Sachs, JP Morgan and UBS. On top of that, I think we have also been able to agree on a fairly extensive business combination agreement with Vonovia, and I think that is helpful for both Deutsche Wohnen, but also looking at the future prospects of the combined entity. Rolf Buch, as you have seen, will continue to lead the management as CEO.
Michael Zahn and myself will join the management board of Vonovia, Michael as Deputy CEO and I as a CFO. As such, Michael will oversee the integration of the two businesses, but also asset management and a number of crucial areas. I will assume the typical role of a CFO function. While Vonovia targets some EUR 105 million of synergies.
We have agreed not to have forced employee redundancies due to operational reasons until the end of 2023. I think looking at the transaction from a perspective of all stakeholders, that's a very important notion. 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 facing, in particular in Berlin market, and that we have made the combined proposal for, or the combined proposals for selling a very sizable housing portfolio.
On top, also made some statements as to how we look at future rent developments. That was actually very well received by politicians in Berlin in the press conference which the mayor of Berlin hosted and in which Rolf Buch and Michael Zahn were 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 for that combination of our two businesses. I think if you look at the entire package, it's very attractive for our shareholders, and there is high certainty in my view, given the structure of the transaction.
We will, with that, certainly create the most significant company in the European context, the biggest 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 with that, we are well prepared to also tackle more effectively actually, the challenges which lie ahead of us, and working together towards reducing our carbon dioxide footprint, jointly dealing with the regulatory challenges, and jointly also creating the necessary supply we need in many of the markets in Germany. Against that backdrop, I do actually look very much forward that we leave the legacy behind us, and as a new team, look forward to tackling the challenges with the colleagues of Vonovia, obviously all subject to this transaction going ahead.
With that, I would already conclude my brief remarks and are very happy to take any questions you may have.
The first question comes from the line of Andreas Thum from Green Street Advisors. Please go ahead.
Hi, good afternoon. I was just wondering what made this deal attractive for the management and the board of Deutsche Wohnen at this particular time. Is it 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 a fairly straightforward decision, because it is a cash deal, which has been fully funded. It's a transaction structure which has, as I said, in my view, no significant execution risks. Essentially by all metrics, when I look at pricing, I consider that 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 from the right basis, so to speak. I actually don't see in the next six, 12 months any meaningful catalyst to share price given all the regulatory headwinds we are facing. Against that backdrop, 80% premium versus spot 25% premium, versus our VWAP.
That offer also translating into essentially a slight premium versus research consensus, our EPRA tangible asset all in all is 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, 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. I have considered the negotiations we had to be very constructive, very open-minded, very goal-oriented.
My way how I look at that is that we will hopefully achieve to really combine the best of two worlds. I think there are excellent teams on both sides. The challenge or the chance is that we have to put together our heads and jointly define what is best for the combined company. I think here we have a lot of good ingredients.
Thanks. 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 I'm not reiterating or I'm not conveying details of negotiations, but be assured that the final price was not the starting price.
Okay. If I think about just the product market kind of appetite for German residential generally, if you were to revalue the portfolio, your EPRA NTA would probably be considerably higher for half year. Where do you think it would have landed from that kind of perspective? Do you think you left some money on the table?
Here I can essentially only repeat what I also said in presenting our Q1 results. We have, as you know, the vast majority of our properties sitting in Berlin markets. We have been faced for a fairly long time with the regulatory uncertainty. I simply don't have sufficient data points as of now as to how pricing in the transaction market is developing post decision of our Federal Constitutional Court, which is why we are also guiding for our Berlin stock for no revaluation with half year numbers. 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 a significant revaluation uplift, and respective evidence in 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 a 1% premium versus Q1. You mentioned that more valuation upgrades are likely. Are you considering to do a revaluation of the portfolio at half year just to make sure that all investors who are undecided can make up their mind? 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 vis-a-vis the last revaluation we did. That is simply not the case for now. My view is, as of now, there would be not any meaningful change in the remaining five weeks from now. The answer is no. Again, on pricing. Essentially, you have, in my judgment, always to look at different valuation metrics. One is a fundamental view on valuation towards which you're hinting. Here, certainly, I do see prospects in future years, and also for 2021. I do personally remain very, very convinced on the attractiveness of Germany for the residential products, but in particular, also metropolitan areas in further asset depreciation.
At the same time, what I simply have to acknowledge is that there is a kind of decoupling from fundamental valuation and stock market valuation. Our sector, unlike previous years, is trading at a discount to net tangible assets. That is true almost for the entire sector, for the entire residential sector. That is probably very much because of the regulatory uncertainty in an election year in Germany, and what it may mean for our ability as an industry to develop rents. Against that backdrop, if I look at implied FFO yields, and I was mentioning 2.6%, that is fairly attractive. If I see how also guidance is translating into stock price performance as it relates to asset depreciation, that there is little correlation these days, it is supporting my view.
In other words, what I see is that the cash flow-oriented valuation seems to be more emphasized in capital markets than a fundamental valuation. That I have to acknowledge also in how I judge on the transaction. 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. My second and final question is on the disposal pipeline, this 20,000 units you very likely will sell to municipal companies in Berlin. Can you provide some details on these portfolios?
We contributed the majority to that, and that is essentially forming part of our so-called non-strategic portfolio. It has been put up for sale anyhow, and it will certainly have to be at market price.
The market price is.
Reference is book value.
The last book value, end of 2020 book value, or will there be a revaluation, or there will be no revaluation of you?
There is no mid-year revaluation, as I said, but I was explicitly referring to market value. Look, we have a responsibility vis-a-vis the owner of our equity. Against that backdrop, there is certainly some room to maneuver, but there's equally no room for huge discounts. That sufficiently answering your question?
Yeah, understood.
Okay.
Thank you.
The next question comes from the line of Thomas Rothaeusler 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 five 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 five years is rather long-term. Maybe some general thoughts on this from your side.
Sure. 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 coming to an end, but not yet at the end of the COVID-19 pandemic. I think also in Q1, I was hopefully sufficiently clear that there is a need to deescalate the situation in the housing market. 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. If you bear in mind that we have guided going forward to an expected like-for-like rental growth of around 3%, you can see by these numbers that regular rent increases are already in our guidance, forming part with less than a percentage point.
Because we have 1.5, 1.7 like-for-like rental growth from relettings. We continue to do our investments, which is adding probably some additional 50 basis points. It is not so much different to what we actually see. I have to say, with a 3% like-for-like rental growth, we can handle that, in my view, as an industry pretty well. It is sufficient to generate nice organic growth. It's sufficient to fund our needed investments. In particular, if you look at our portfolio, which has very high rental upside, it is an embedded growth for the very long term, which is providing a very nice safety cushion to a moderate but long-term stable development.
You referred to the need to deescalate. Does this specifically hold true for Berlin, or is it also for other locations, like let's take Dresden?
It's a particular topic for Berlin, but also for other metropolitan areas. For us, as Deutsche Wohnen, as of now, it is very much Berlin, as you know.
Yeah. Thank you.
Again, this is what in my view is really the big achievement of yesterday's announcement is the combination of joined forces, and the deal we have been able to agree, with some of the very leading voices in the Berlin market. I think this is a very important step to deescalate the situation, because there are very supportive and encouraging notions from various political parties.
That is important, because it will be another, in my view, very important step to change also the reputation we have as a sector. I think for the wrong reasons, but our reputation for whatever reason is not the best one. We have to be more clear in what we do and how we do that, and we need to ensure that we come into a dialogue with stakeholders. That was, in fact, in my view, a very important step.
Yeah. Thank you.
The next question comes from the line of Jaap Kuin from Kempen. Please go ahead.
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 now obviously the 100% cash component makes things digestible or more digestible for your shareholders. What about any alternatives that you could have pursued, like for example, stepping up asset rotation because now you're selling at NAV after that you're clearly able to privatize or do block sales above gross asset valuation. Was there not a potential to extract more value for your shareholders by 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. First of all, we have not decided to sell the company. We have decided to recommend our shareholders to accept the offer, which is a very different notion. Ultimately, the decision is with our shareholders. What is created by the combination of Deutsche Wohnen and Vonovia is a very big real estate company. You know that the offer is being financed, initially, purely, with debt. Vonovia already announced that there's a need for a big refinancing. If I were to put myself in the shoes of investors of Deutsche Wohnen, I would argue I have the opportunity to basically sell at a premium, and have the ability to reinvest in the combined entity, in the context of the liquidity event, which is upcoming.
Yeah. That's a clear statement, and I fully agree with that. It's just that, well, you've time and again shown to be able to sell above book value on a gross basis. Obviously, like you indicate, the capital markets haven't fully appreciated NAV growth. I agree with that. Obviously there's a political consideration, with potentially a short period of time in which you were able to execute a deal. Am I correct in interpreting that the overriding kind of necessity to achieve a deal to deescalate the situation to join forces was overriding the longer-term potential of crystallizing value above appraised values?
It was a mix of things we looked at. First and foremost, pricing needs to be right. I think pricing, as I explained in detail, is attractive. Equally, I'm also focused to work towards a combined company which has the ingredients to be an even better company as each company on its own as it stands today. I think the political deal is an important element to that. I think the sheer size of that company also opens up a lot of opportunities. Here I stop because for now I'm a management board member of Deutsche Wohnen.
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 and how to look at the strategy of the combined entity is something which the management board of the combined entity has to explain and present at the appropriate time.
Clear. Maybe last question, if I may, on the directed equity issue to Vonovia. Could you maybe discuss the moving parts there, the rationale?
We have changes in Germany as it relates to the real estate transfer tax that will come into force as of the 1st of July. It's, in my view, a law which has been very badly structured in that certain provisions may trigger real estate transfer tax payments if there is movement in shares. Against that backdrop, that was, in my judgment, the right approach by Vonovia to structure that topic in that they secure that they have, prior to the 1st of July, 10% of Deutsche Wohnen shares and that this risk of that badly structured law is mitigated. Part of that is going to be that we will issue some of our treasury shares at the agreed offer price of EUR 52 to Vonovia by using our respective authorization for preemptive issues.
For the reminder, there are some other ideas, as I understand, Vonovia has to gain access on these shares if for whatever reason that does not materialize. We will equally agree that we will also issue new shares at the price of EUR 52 to Vonovia in order for them to secure the entire 10%. That's an option, and the trigger for using that option is with Vonovia.
Clear. All right. Thank you very much.
The next question comes from the line of Michiel Pasca from Morgan Stanley. Please go ahead.
Hi, Philip. Thanks for your presentation. Sorry for banging on the undervaluation, there seems to be a bit of a difference of opinion between the Vonovia board on one side and then the Deutsche Wohnen board on the other side. Vonovia, as we heard earlier today during the call, is very happy with the opportunity to buy at book value, I think Rolf said something like excuse me, any direct investor would have done it.
Yet the biggest direct investor in Berlin, Deutsche Wohnen, is happy to sell at these levels. Is there just a difference in opinion about future rental growth in Berlin or is the expected value growth in the first half of the year and the second half of the year, is it all outside of Berlin? According to Vonovia. I don't know if you've discussed that with them.
Look, I think over the past days, we are discussing pricing from different perspectives.
Yeah.
That's the natural situation you're facing when two parties try to find an agreement on how an asset or a company is appropriately priced. I can only comment from a Deutsche Wohnen perspective as to how I look at pricing. I can only repeat myself that there are, for me, various angles as to how I look at pricing. Key consideration is stock price market valuation, how research consensus is looking at that is also a fundamental valuation, but it's also a question as to how I view catalysts in the market to actually capture fundamental valuations.
Right. You think that you have. Sorry.
In the mix of all these, we have come to the conclusion that this is an offer we are essentially forced to present our shareholders.
I know, I appreciate that. 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, in the second half of the year as well. On top of the 6%-8%, or 8%-10%, I think they predicted for the first half.
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. Apparently, other market participants, and to quote Vonovia again, any direct investor does see those value increases. For me, I'm just a bit puzzled with the outlook on values. That's it.
Hopefully you didn't get me wrong. First of all, my notion, obviously, each shareholder has to form his own view as to how he looks at fair valuation. I'm certainly not in disagreement that I have a very positive outlook on fundamental valuation for Berlin market. I was only saying that for now, I don't see the transactional evidence, but I hopefully was also clear in saying that we have seen that transactional evidence in many other markets, 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 notion of value uplift in the second half of 2021 is certainly matching my expectation.
The other question is, and that is for you guys to opine on, how is that translating into stock market valuation? Is stock market currently looking at NAVs? Is it currently looking at yields? Is there a decoupling?
Okay. That's fair enough.
I think with all the regulatory headwinds we have, there is the likelihood that at least in the shorter term, there is a decoupling from NTA or NAVs.
Okay. Fair enough.
In the medium and longer term, hopefully that will disappear at some stage because I think it is, at least for me, not logical that the transaction market is offering different prices to the stock market.
Right. Thanks.
The next question comes from the line of Jonathan Jackson from Patronus. Please go ahead.
Hello. Could I just ask whether there was ever an option for Deutsche Wohnen shareholders to receive consideration in Vonovia shares so that we could share in the upside long term of Vonovia?
That is not the way how Vonovia has structured that. The answer is no. However, as I said, there is the need on the side of Vonovia to refinance the equity, to refinance the bridge with the rights issue. I think in the recycling of the subscription rights, there should be also the opportunity for a reinvestment, but obviously subject to market developments.
Okay. Thank you.
The next question comes from the line of Simon Stippig from Warburg Research. Please go ahead.
Hello, team. Appreciate your time for the call and also taking my questions. My first question would be in regard to, again, revaluation. I just see in your presentation, Q1 2021 presentation that is still showing asking prices at the 21% premium to your book values, Berlin book values. Just hypothetically, what would be your best guess in crystallizing that value actually over years, three years, five years, six years? Just because I believe the share prices in the longer term follow fundamental values. It would be interesting even though you have traded at a discount to maybe literally the last four or five years, smaller or larger. Could you give me your best guess about that?
Look, 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, based on more recent transactions, price points in between EUR 3,000 and EUR 3,500. I think I was clear in my expectation how I think things should develop. 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 bond yields, we are at reversionary yields of around 4.5%.
That is essentially the implied risk premium for the residential real estate sector, which I think has proven to be very robust, and which is, in my judgment, certainly above the risk premium I would typically expect for our sector. That's kind of a very high-level guidance towards what levels the sector could move towards.
Okay. Just maybe a second question in regard to your development pipeline within your subsidiary, QUARTERBACK. You're showing on page 60 of the Q1 2021 presentation, you're showing your total investment costs, and I assume that is including land prices of between 20%-30% a share. Do you actually apply modular construction within QUARTERBACK?
Modular construction is not applied in Quarterback or the projects we develop for our own balance sheet.
Okay, great. That's clear. Then maybe just a last one. I just wonder about de-escalation in regard to regulation and just political risk and also, for example, expropriation initiatives, et cetera. I just wonder that, is it really a de-risking or de-escalation, just considering the September elections and potential coalition where certain parties will have greater influence?
Look, just forget about the expropriation campaign. This is just noise, full stop. Will not happen. Will never happen. You see that by reading through the programs or the manifestos of the various political parties in an election year. There are a number of ideas on the rental market. There's a lot of noise as to 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. 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, and that we find joint solutions which work for all stakeholders. That is less about which political party will emerge or what coalition will emerge. This is a very principal topic. I think as a sector, we are making very important steps in that direction. For me, I have to say, it was a very notable outcome to see the mayor of Berlin, and also the Green Party, by the way, is supporting that approach on the hands we have given to politicians in Berlin as to how the sector can help to solve issues.
To ensure that the concerns tenants have are appropriately addressed. That, in my view, is the key point.
Yeah. Okay. Agreed. 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 that would consider nursing and assisted living core to a future combined entity?
It's a very interesting business for us, it's a business which will be within the responsibility of Michael Zahn if shareholders with a majority are accepting the proposal Vonovia has made. That is hopefully answering your question.
Okay. Okay, thanks.
The next question comes from the line of Tom Carstairs from Commerzbank . Please go ahead.
Hi, Philip. I'm sure you'll appreciate this question on valuation sort of thing. I hear what you're saying on the share price premium argument, concerns about the rent growth. If we're looking at this transaction from the other valuation metrics, your Berlin portfolio is valued at around EUR 2,850 per sq m. Your own presentation points to 15% upside to CBRE's asking prices. I appreciate you haven't committed to revaluation gains on your portfolio, you have stated that you're expecting increases in property valuations. I'm just looking at it from the fair value per sq m perspective and that discount to asking prices in Berlin, and struggling to see the attraction in that respect.
I risk repeating myself. There are two angles, full stop. I don't disagree on the prospect of Berlin market. I don't disagree that I do see or do expect valuation uplifts coming through in the second half of this year. I simply have to recognize that our stock pre-announcement is at €45, and our EPRA NTA is at €52. It's at a significant discount. Stock market is not reflecting that. 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.
Yeah. Appreciate that. Thanks.
We currently have no questions in the queue. As a final reminder, please press star one on your keypad to ask a question. The next question comes from the line of Peter Papadakos from Green Street. Please go ahead.
Sorry, Philip. Yeah, I know it's been a long call. Just two quick questions. Obviously, you've been happy to run Deutsche Wohnen with a little bit more low leverage, a little bit safer capital structure. When you were discussing with Helene von Roeder and the Vonovia crew, what's your thoughts on capital structure for going forward? Are you going to take a similar view to Deutsche Wohnen or is it going to be different? Is it going to be more consistent with Vonovia look back? That's one. The second one, as much as you can answer, you're probably and obviously a Deutsche Wohnen shareholder. Will you be a Vonovia shareholder day one? Will you just build your shareholding in Vonovia by upkeep over the long term? Thanks.
On the first point, I have to defer actually to the colleagues of Vonovia. I have to judge the situation from perspective of Deutsche Wohnen. That may change at some point in time, and then you will hear statements from my end, but not for now. For me, at Deutsche Wohnen, it was important that I have certainty that the cash offer is fully funded, which it is by a fully committed bridge. For me, it was important to have certainty that also change of control situations which may be triggered are adequately addressed which is the case and which is embedded in the bridge which has been put in place. On shares, we have committed as management board of Deutsche Wohnen to tender our shares at the offer price which we will do.
If the offer is successful and part of us will join the management board of Vonovia. I think there's also some share ownership guidelines. I have to see what is presented, what is needed. 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.
Will do. Will put it through. Thanks. Cheers.
Just a final reminder, please press star one on your keypad to ask a question.
It doesn't seem to be the case. Thank you very much for your short availability or your availability on short notice, and thank you very much. Have a great evening.
Thank you for joining today's conference call. The next regular call of Deutsche Wohnen will be the H1 earnings call on the 13th of August 2021. For any questions in the meantime, please feel free to contact the IR team. Have a good day and goodbye.