At this time, it's my pleasure to hand over to Renee. Please go ahead.
Thank you, Maira, and welcome everybody to our H1 update call. Our speakers today are once again CEO Rolf Buch and CFO Philip Grosse. They will be happy to provide an update on the year so far and then answer your questions. We felt that the Q1 call was very efficient, and we have received a lot of positive feedback from both the sell side and the buy side, saying it should be the benchmark for future calls. That is why today's presentation is again more concise than in the past and much closer to Q1 in terms of focus and structure. Again, we will limit the number of questions for the Q&A to two for analysts. I kindly ask for your support here and for your understanding.
If you have more questions, especially as they relate to modeling, you know where to find me and the team after the call. With that, over to you, Rolf.
Thank you, Renee, and good afternoon also from my side as well, and happy holidays to all of you who are on holidays or on the beach. I would like to start with the highlights on page three of the presentation. In a nutshell, our balance sheet stabilization phase is largely completed, and we are in the process of moving into a more positive environment after more than two quite challenging years. Specifically, it is these four points I want to highlight. First, disposal. Selling assets is still not a walk in the park, but we are seeing continuous progress. Transaction volumes are picking up, and the general interest of buyers is increasing. We remain fully committed to deliver the EUR 3 billion of disposal volumes this year, and so far we have signed around EUR 1.5 billion. So very much on track.
Over previous quarters, we have always been able to sign larger disposals in a way that we were able to disclose them together with our earnings. Also, because of the summer holidays and some of our customers are on vacation, this was not possible for more than one transaction for this H1 earning call. That is why it is quite likely that we will announce further disposals before we report our nine-month earning in early November. Third, valuation. Together with our external appraisers, we did a full portfolio valuation as of end of June, and the result was a 1.4 decline for the first half year. So it's clear continuation of the trend we have been seeing. The value decline got smaller and smaller, which every valuation exercise.
It appears to us that we now have reached the trough, or at least we are very close to it, so that the period of value decline essentially seems to be coming to an end. And if market yields are starting to stabilize, then the rent costs we deliver should have a positive impact on NTA and become a meaningful contributor to total shareholder return again. The simple math remain unchanged. 4% of rental costs should translate roughly into EUR 3 billion of value growth if market yields are stable. Our message has not changed, even if we show it now in the appendix on page 26 of today's presentation. What is equally important, once we are absolutely certain that we have passed the bottom of the cycle, we can stop playing defense, and we can stop prioritizing liquidity over profitability. Our focus then can return to organic growth.
The summer months are usually a bit quieter, and this year it is not different. We have been using this opportunity to work with our top management team to evaluate additional sources of growth other than traditional acquisitions. Our goal is to further mitigate additional drag on EBIT from higher interest costs over the next five years. When we report our nine-month earning in November, we will be sharing with you our adjusted strategy and how we intend to bring this period where we have an increased burden for more expensive refinancing to bridge this period where we have the burden from expensive refinancing. The rent costs. The positive momentum clearly continues. Real market rents are growing faster than they probably ever had, and that safeguards healthy rent costs for us for many, many years to come.
As we will show you on a later slide, the gap between our in-place rent and what tenants are forced to pay in a wider market reality of the Radar scheme has probably never been bigger. Of course, we cannot capture this reversion potential overnight, but it does secure for us an extremely robust and long-term upward trajectory where we will be able to consistently grow rents at around 4% per year. And finally, the guidance for 2024, based on what we have seen and achieved in the first six months, we are confident enough to raise our guidance for rent costs, adjusted EBITDA and EBIT to the upper end of our guidance range. All other elements remain unchanged. Let's go on page four for an update on our disposal brokers. We are now at EUR 1.5 billion.
Since our Q1 reporting in May, we have signed agreements to sell assets of almost EUR 500 million. This includes three larger transactions in the Frankfurt-Main region from our core, MFR, and non-core portfolio for a total of EUR 298 million, plus another EUR 185 million in various smaller transactions and across different sales channels. All disposals were made at least in line with their respective fair values and yields. These yields were, of course, different because there are different assets in different locations, but every one of our transactions confirms our book value. Again, we think it is quite likely that we will announce further disposals before we report our nine-month earnings in early November. This is to Philip.
Thank you, Rolf, and welcome from my side. Let's continue on page 5 for the H1 valuation. The results were very much in line with our expectation, and they confirm our view that this cycle has come, or at least is close to coming to a turning point after which values are no longer expected to fall. The bottom-line result of the H1 valuation is that values were marked down 1.4% across the entire portfolio, and this puts our properties at an average gross yield of 4.2% or EUR 2,217 per sq m.
If we take a step back and look at the overall valuation decline since the peak in June 2022 until what appears to be essentially the trough at the end of H1 2024, then we will see a gross value decline in total of 23%, really unprecedented in the German market, which we managed to mitigate through rent growth and modernization down to a net impact of around 15%. On the next page, we have put together some market voices from a variety of sources. There is no point in reading them all out on this call, but the bottom line is that we are clearly not the only ones who are seeing or expecting that German residential is turning the corner. Of course, this does not happen overnight. It's a process.
It's not an event, but the direction of travel, in my view, is pretty clear, and that puts us in a much better position than we have been over the past two years. Moving on to the next page 7, on earnings and cash flow. As you can see, adjusted EBITDA total is down 2.6% because of the lower profitability in our disposal segments, that is, recurring sales and development to sell. And here, we continue to see the consequences of our strategic decision to prioritize cash generation over profitability. Adjusted net financial result in H1 this year was about EUR 16 million lower, and that was mostly driven by the full-year effect of the 2023 financings. And as a result, you see EBIT down 6.2% on a year-on-year comparison.
If you look at the adjusted EBIT after minorities, the increase in minorities is, of course, related to the two Apollo JVs we entered into last year. And finally, our relatively new number, the operating free cash flow. So basically, our Vonovia FFO, if you will, here, in spite of higher cash out for the dividends to our JV partners, which were paid in Q2, slightly above EUR 100 million, the operating free cash flow is up almost 5%, and that is largely a result of a slightly positive contribution from net working capital. So our development business, essentially, as well as higher contribution from recurring sales. So this metric, in summary, does exactly what it is supposed to do. It tells us and our shareholders how much cash we generate in our operating business and represents a very helpful addition to the earnings view that we have with the adjusted EBIT.
Let's take a closer look at our largest segment, rental, which contributed roughly 94% to total EBITDA as per H1. As you can see, and that is on page eight, rent growth is accelerating as we expected, and you can clearly see this is the contribution from the [Foreign Language] or the comparable local rent. Fluctuation is also a bit higher than in the previous period. I, though, do not think that this is a trend, unfortunately, as this is still very much within the general range we have been seeing for this number for the past quarters. Vacancy remains low, only a function of turnaround time in case of fluctuation. Rental collection rate remains at very, very high levels, close to 100%. Finally, expensed and capitalized maintenance is very much in line with the prior year period. And with that, back to you, Rolf.
Thank you, Philip. Let's go on page of the presentation. To me, this is by far the most relevant and consequential page of the deck. Because of the positive implication from this page are key to understand the enormous long-term rent growth potential in our company. This has also put the initial yield debate in a different context. What you see on this page is a comparison between our in-place rent compared to our realizing rent and, more importantly, the real market realizing rent. We are showing the numbers for the full German portfolio and for Berlin as our largest market and also the most extreme example. You will find the data for all other regional markets in the appendix. We took the market data from VALUE Marktdatenbank, formerly Empirika, which has probably the most detailed and most comprehensive database for the market trends.
In our analysis, we excluded furnished apartments and new constructions. We show a range, which is marked by the median on the lower end and the 80% percentile on the upper end. This upper end is a good proxy for our modernized apartment in modernized buildings. On this basis, the gap between our current in-place rent and the real market rent is between 53% and 96% for Germany. For Berlin, it is even between 94% and 175%. In a free market, that is where our rent level would be. In our rule-based system in Germany, this is where our rent is going to be over time. What this data means is that not that we will be able to realize this reversion potential in the short term. [Foreign Language] and [Foreign Language] make that impossible.
But it does provide a tremendous visibility on the extremely robust and long-term period of growing our rent at around 4% per year, like we guided in our last call. Now, you may wonder, if this is a regulated market, especially in Germany, how can real rent be as high as EUR 15 on average in Germany and EUR 21 in Berlin? The answer is very simple. This is supply-demand imbalance trumping regulation. What you see is the tenants are prepared and willing to pay this rental level simply because there is no alternative in these supply-constrained markets. And a good chunk of landlords act outside the radar screen and are not too religious about rental regulation. And keep in mind, there is no sanction if you ignore the [Foreign Language]. But there is another important message in this data.
Our current initial yield is 4.2% based on the in-place rent and the fair values in our book. There is a lot of debate in the market where the 4.2% is not too low and how it still needs to move out quite a bit. The reality is that the inside yield based on real market trends is already much higher. This explains why buyers are ready to pay our book values. For landlords who are ready to ignore the [Foreign Language], the yield is not 4.2%, but between 6% and 8% on average or even higher in Berlin. And this is back to Philip.
Thanks, Rolf. Before I come back to the guidance, let me update you on the debt KPIs, and that is on page 10. We have, as you can see, a pro forma cash position of EUR 4 billion, and that is consisting of EUR 1.5 billion on the balance sheet, EUR 0.8 billion of undrawn loans, and EUR 1.7 billion from disposals signed, but not yet closed, but the majority closing is expected by or around the end of this year. This is clearly sufficient to cover all our nearer-term maturities. In addition, as you know, as a safety backup, so to speak, we also have the EUR 3 billion RCFCP on top, which is undrawn. So our funding situation remains comfortable, especially when you look at the maturity profile for the next two years.
The relevant debt KPIs are shown on the lower left-hand side, and while they're still elevated, we are convinced that we have them under control. With the values essentially at the trough, the focus on LTV becomes less relevant, in my view. Don't get me wrong, it remains a key debt metric for us, and we remain committed to come back into our target corridor. But contrary to much of the last two years, it clearly does not pose a meaningful risk any longer since the general outlook on values is rather clear at this point. So our focus will therefore more and more shift towards net debt to EBITDA, and especially ICR, which require more attention in a higher interest environment. But don't forget that these are metrics we can influence more actively.
By and large, rental growth is sufficient, actually slightly more than sufficient to compensate the higher interest expenses we will be seeing the next few years. But the good news is that we have other segments that we will use to drive earnings growth, and the environment and conditions are clearly improving here. That is why we are very optimistic to turn the corner on these debt metrics soon as well. And as Rolf said at the beginning, we will provide more details on that with our Q3 earnings call. Before I head back to Rolf, let's quickly move to page 11 to our guidance. There are essentially three adjustments we are making compared to Q1 call, and that is that we are now guiding towards the upper end of the range for organic rent growth, adjusted EBITDA total, and adjusted EBT. All other guidance elements remain unchanged.
As in prior years, you can expect our final guidance when we publish again the nine-month results in early November. With that, back to you, Rolf.
Thank you, Philip. Our key messages for this call are straightforward. One, we are well on track to successfully complete our EUR 3 billion disposal program. We have sold EUR 1.5 billion so far, and the market is moving more and more in our direction. Transaction activity is picking up, investor interest is increasing, and the overall sentiment is improving. Two, values appear to have reached the trough level. Again, we don't have a perfect glass ball to predict that there will be absolutely no value decline in H2, but I am confident that if at all we see a further decline, it will be insignificant in terms of balance sheet stability. A turning point in valuation is, of course, significant. It will allow us to switch gears and stop playing defense.
We will no longer need to focus on generating liquidity through sales, but can instead focus on increasing our profitability and earning profile. We are very much aware that following our balance sheet stabilization phase, our attention must return to organic earning growth, and it will, I promise. That is why we are currently analyzing our potential, including our non-core rental segment, and we are looking forward to update you on your outlook for this part of our business on our nine-month earning call on November 6. Three, the positive rent growth momentum continues. As we tried to show in this presentation, there is an enormous revisionary potential. Sure, because of the regulatory framework in our business, largely ignored by some private landlord, it takes some time for us to realize it.
But all this just means we have a strong visibility on a very robust and long-term upward trajectory for an annual growth rate of 4% per year. With that, back to Renee on the Q&A.
Thank you, Rolf and Philip, and I'm going to give it back to Maira to open up the Q&A for us.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Thomas Neuhold from Kepler Cheuvreux. Please go ahead.
Good afternoon. Thank you very much for the presentation and taking my two questions. The first one is on the additional growth apart from your rental business. I was just wondering, are you talking about the existing ones, like the development business or recurring sales one, or are you also considering new ones? That's the first question. The second question is, I was wondering if you can give us an update on the status on the nursing home disposal.
I think Thomas is both for me. So first, please understand that we are really giving you an update on the 6th of November. You know this is a strategy. We also want to discuss it before with our supervisory board and also to have it aligned. So that's why it would not be appropriate to give you some hints here. But the answer is very clear. We are thinking about existing and also new growth opportunities. I think this I can say without telling you any secret. And the second is the nursing. I think I mentioned in the call that we are normally tending to announce to sign a few days before this date. This time, it was not possible in all transactions. And that's why I announced that you will hear from us probably before the end of the summer, some more transactions.
With this, I would leave it here because otherwise we are going too far.
Okay, absolutely. Thank you.
The next question is from Charles Boissier from UBS. Please go ahead.
Yes, good afternoon. Thank you for taking my questions. So two questions as well. First, you mentioned the EUR 483 million sold were in line with fair values. I just was wondering what has been those portfolio values peak to trough relative to the rest of the portfolio? I think it's 15% for your overall portfolio. Can you tell us also more about the structures, the buyers, and the relevant features of those deals? And sorry, this is still the first question, but on a related basis, you've done EUR 7 billion disposal over 2023 or 2024 guided, but the employee count is actually 2%, and it's continuing to rise in Q2 with the company size being smaller, and you're already quite a large organization with 12,000 people. Where have you been doing those net hires?
Okay, for the first, for the buyer, the spectrum is wide. So the Frankfurt portfolio, which actually consists out of three different buyers, it is, I would say, rich individuals in Germany, which are close to institutional money. And the rest of the portfolio, these are small transactions with a value of three or even bigger. It's a mixture of everything. So we see institutional investment, we see normal private money, so nothing which is really special. So it's a good mixture. What we do not see is listed companies, but this is not a surprise. And the employee question, to be very clear, this is good news because we are hiring in our Craftsman organization. If the employees are going up, actually, this shows that we are able to do more in-house, which has a higher profitability than to do it externally.
That's why looking on employees is probably a misleading if you look at a total because it's mainly in the craftsman organization.
Right, but maybe this tells us something about the nine-month announcement. Second question on page 10 of the financing, Philip mentioned the LTV becomes less relevant, but I guess this is probably the metric that pointed more to room for growth. I hear you also on the ability to influence net debt to EBITDA and ICR, but they still don't seem to allow for significant firepower. How do you reconcile those targets with the end of playing defense point you made? Are these targets going to be reviewed also with the nine months? Thank you.
Yeah, look, for us, what is becoming a key priority going forward is that next to the rental segment, we also grow EBITDA outside the rental business, and that ideally in a less capital-intense manner. And that is going to be the package on stuff you know, but also some stuff you don't know yet. We are talking about in more detail in November, but that is essentially earmarked to grow EBITDA at a larger pace than our interest expenses will grow, and thereby returning to overall profitability. And that obviously helps tremendously the net debt to EBITDA and the ICR, which, as I said, is becoming more of a focus point for us, which then will accordingly travel in the right direction again.
Very clear. Thank you.
The next question is from Veronique Mertens from Van Lanschot Kempen. Please go ahead.
Thank you all for taking my question, and thank you for the presentation. I was wondering, why are you still so committed to finishing the EUR 3 billion disposal target? If you actually are quite confident in also selling the nursing home business before the end of the year, value is troughing and becoming a buyer again, is it per se so necessary to finish the EUR 3 billion disposal target? And secondly, on the value-add segment and also the recurring sales, we've seen an improvement or an acceleration in Q2 on both businesses. Do you expect it to accelerate further in the remaining quarters, or is the Q2 operation something that we should spread out over the year? Thank you.
So for the first question, the disposal target, first of all, we are German, and we are doing what we have promised. So the EUR 3 billion is we have promised it, and that's why we will deliver it. But to be more practical, as I said, I think in the last call, a disposal process takes some time. So I think I spoke about between nine and six months. So literally, what I'm saying is that this disposal is already in negotiation. And part of it, as you understand me right, is in very close to finished negotiation. So to stop this negotiation would be crazy. So that's why in the end, we are actually negotiating to an end all the disposals we have started. And this means we are very clear that the EUR 3 billion will be delivered.
But I don't think it is fair to tell people who have invested in due diligence, who have invested in a lot of money, who are getting financing, not to tell them that we are not selling anymore. This would kill our reputation.
Yeah, and before I answer your second question, let me also add that if you look at the clustering of disposals, EUR 2.4 billion is actually considered non-core, nursing and other non-core stuff, and development in our view in these markets is more recycling of inventory, if you will. So we are equally selling here because there's no need for newly built product to be put on our balance sheet. Now, your second question in terms of profitability, if you look at our existing segments, recurring sales and development business is somewhat depending on the market environment, which is improving, but still not an easy one, as we explained. So while I do expect some pickup also on those segments, the key driver really is in value-add, where we are benefiting from our improved investment program in the Craftsman organization, but also in other service business, including energy and multimedia.
Yes, I do expect a further acceleration in growth in the second half.
Okay, that's very clear. Thank you very much.
The next question is from Valérie Jacob from Bernstein. Please go ahead.
Hello, good afternoon. My question has been mostly answered, but I've got two small follow-up questions. The first one is there is a lot of talk in the press about subsidies, and I was wondering if you could clarify if any of these apply to you in terms of energy, new builds, and if you can benefit from them and if this is significant. My second one is your sort of returning to growth and focusing less on cash now. Does that mean that you're going to change your KPI, your reporting KPI? Thank you.
So the first one, the subsidies, actually, it's no new subsidy in this quarter because also politicians have holiday. It's clear to repeat that we get for the heat pump, it's not a direct subsidy, but we can charge 10% and not 8%. And you know that we get for heat pumps more subsidies, which actually reduce the burden for the tenants. And there's probably also this Wachstumschancengesetz, which we have not talked in detail, which actually means that a private investor who is buying an apartment from us, which is a traditional BUWOG development business, is actually allowed to depreciate 5% of the assets in addition to the normal depreciation. And this means actually he can compensate it again with his personal income tax, which is, of course, a subsidy, not for Vonovia, but for our customers.
That's why we are optimistic that we will also pick up in the development results because this Wachstumschancengesetz opens a new corridor for the developers who are still alive, which we are.
There's no change [Foreign Language] our KPIs. I mean, clearly, as we said, we will focus on growing EBT on a per-share basis, but equally, that requires investments, requires significant investments in a capital-intensive business. For that reason, generating the cash in order to fund the investments or the equity portion is a very relevant topic for us. Balancing that out with the requirement on the investor side to also get some decent return in terms of dividend. The operating free cash flow is a second metric to complement that.
Thank you. Next question is from Jonathan Kownator from Goldman Sachs. Please go ahead.
Good afternoon. Thank you for taking my question. Two questions, if I may. First of all, on operating free cash flow, it's obviously been quite lumpy this quarter. Can you remind us where you expect working capital contribution to be? As you say, obviously, investing in development, we should be expecting a flat contribution from working capital. That would be my first question. And also, can you just confirm on the dividend to minorities whether most of it has now been paid? So first question, please. And second question, can you help us understand the contribution of solar at this stage? Is it still negligible? Is it growing? And is it part of the value-add reporting? Thanks.
Yeah, Jonathan, thanks. I mean, first of all, on cash paid to Apollo, that is confirmed slightly above EUR 100 million as a Q2 event. So that indirectly will positively impact the operating free cash flow in the second half because that payment is done and dusted. On the details of our guidance in terms of operating free cash flow, you have that on page 25. And the biggest unknown, as usual, is the change in net working capital, and that is predominantly driven by balancing out investments in developments by cash we receive from our disposals. Our ambition is, which we have achieved already in H1, to make that at least a zero. If things move better than expected, it might be a slight positive, but that's kind of the intention.
If you make the math with all the guidance items we have given, you will come out at an operating free cash flow comfortably above the EUR 1.4 billion last year. If you do the math, you are more in the region of EUR 1.7 billion.
And your second question about the solar panels, I still remind you that on the 6th of November, we will go more in detail on this as well. To be very clear, we have understood that we have to sync solar panels and heat pumps together. And this gives an opportunity, but of course, the most biggest issue is to find enough electricians. So if anybody in the call knows an electrician in Germany who would like to work with a market leader, you are highly welcome to inform us because this is really something which we have to build up.
Okay, thanks. Just one clarification. You said I think you have EUR 1 billion of the dividend capacity or something like that. I can't remember how you framed that. Is it just a matter of taking that number and dividing it by the number of shares, the dividend capacity? Is that going to give us about the dividends for this year?
Essentially, yes. I mean, you take the EBT guidance, 50% of that, plus the implicit guidance I've just given on the operating free cash flow. And if you look at our formula, that is what it's translating into.
All right. Thank you.
The next question is from Bart Gysens from Morgan Stanley. Please go ahead.
Yeah, hi, good morning. I know that it's difficult for you to answer questions on what you're going to announce in November, but more broadly, you say that you're going to stop playing defense no later than next year and focus on profitability rather than liquidity. What does that actually mean? I mean, it sounds good, but what does it actually mean? Your balance sheet is still quite levered. Kind of should we expect you to be a net investor? Kind of can you talk a bit more broadly on what that means from a capital allocation perspective? And then secondly, I remember, if I remember correctly, at the end of last year, you've taken, or better, Deutsche Wohnen has taken the valuation of some of the non-core assets, the nursing homes, down quite substantially at year-end. I thought something like a 20% write-down.
Have you taken or has Deutsche Wohnen taken further write-downs in some of the non-core assets that you're trying to sell? And therefore, can you break that kind of that 1.4% average down by core and non-core? Thank you.
For the first question, I think you have seen our model in the last years where it was very easy. We bought assets, put it on the balance sheet, and get profit because the interest rate was lower than the initial yield, and then the yield was going up. And this was a nice world where we bought Vonovia. Even going forward and even after the stabilization, we will not come back to this because we are buying assets for, if we continue to do so, buying assets for 4% yield and financing with that 4%, it doesn't work. So it is very clear that the strategy we are working on is to find ways to improve EBITDA and cash flows with activities which are less capital-intensive. This is the consequence of this analysis. And this will happen.
Of course, this activity needs the same stability of cash flow than the rental business. This will happen as well. With this, I think I will end and will remind you that the 6th of November will be an interesting day.
Yeah, and Bart, on your second question in terms of valuation, just directionally, if I look at H1, that also includes a further write-down on the nursing side, which was at around 4%, slightly below 4%, I think 3.6%, 3.7%. And this is a function of a market which is in particular challenged by concerns around the operators in a very fragmented business where you have seen some bankruptcies. And that is, yeah, that is demanding higher yields and is putting more pressure on yields. If I look at our pure residential business, in rough terms, there is no big difference in percentage-wise, the revaluation of core and non-core. It's around the same magnitude. And to be very clear, it is market which is driving the valuation, not the intention we have to keep it on the balance sheet or to dispose it.
Okay, thank you.
The next question is from Manuel Martin from ODDO BHF. Please go ahead.
Thank you, gentlemen. Just one question left from my side on the value-add business. I understand that this will accelerate in the second half of the year, and you are hiring craftsmen. My question would be, where do you get the craftsmen from? Because this seems to become a rare good. And the more you have, the better it might be and could be one of the drivers supporting the growth, if I'm not wrong. Maybe you can give us some color there.
I know we have given you a lot of speculation where we're discovering problems. So we are all predicting now what happens on the 6th of November. But of course, it is clear that we are recruiting electricians even from Morocco. So it's not only German. We are recruiting a lot of electricians from Germany, but of course, from Morocco. So we are getting ways where we actually solve also an issue for Germany because this is not a Vonovia problem. It's probably easier for us than for a lot of others to recruit because we have a good brand name and we have a big company and we have a lot of advantages. So yes, but it's still hard. And you are right. This is a challenge. And I think we get means to find it. To be very clear, why electricians are so important.
We have a shift in technology. We used to heat buildings with gas, and now we have this heat pump. So the people who used to build a gas and were first trained to build a gas boiler are not the same ones who are doing a heat pump. So this is a dramatic change in qualification we need. So you cannot take somebody who was able for a gas boiler to put a heat pump. And this is the same as the solar panel. So this is a challenge, but we will work on it.
Okay, thank you.
The next question is from Andres Toome from Green Street. Please go ahead.
Good afternoon. So first question, I'm just wondering, how do you envisage your leverage profile when you do decide to return back to growth? And I guess where I'm getting at is, what have been the lessons that you've learned from this downturn and then how are you going to implement those on your capital structure going forward?
I mean, first of all, how do I look at it going forward? In terms of LTV, more comfortable given that you think we have reached troubled values and given the rental increases we see really over the long term, this will translate into organic rent growth of roughly EUR 3 billion and also contribute to organic deleveraging on the LTV side. And that to EBITDA, ICR is for me not so much a function of reduction of the debt side, but increasing the EBITDA side where we have a lot of ideas.
What are the key lessons learned? Broadening the system of debt KPIs, not only focusing on a simple LTV metric, but on LTV net debt to EBITDA plus ICR and defining ranges, which basically translate into a triple B plus rating. If we would have done so at the outbreak of the crisis, we would have started with EUR 3-3.5 billion more equity. Not sufficient in hindsight to cover all problems, but I think we would have started the crisis in a far more comforting situation.
Probably to add from my side, I think the big learning looking backward is that if you have seen our transaction and acquisition we have done since 2018, we have, of course, always for the big transaction raised a little equity, but we always used our balance capacity to the maximum. So we levered up with all these transactions. And especially in the Deutsche Wohnen where we started the Deutsche Wohnen with 39 point something and ended up with about 45 by not raising enough equity. I think the learning of this management team is that we should not do and never do this again.
Thank you very much. And then my second question is just relating to provisions that you've taken in, I think, in terms of ancillary expenses, but you also noted that there's actually no changes in terms of tenant payment behavior. So what's behind that?
Basically, that's roughly EUR 20 million of provisioning we could get rid of last year, which was positively impacting the cost base and therefore resulting in comparing H1 with H1 higher operating cost this year. We essentially had a positive net debt last year, which is not sustainable.
Okay, thank you very much.
Next question is from Mritunjay Kumar from Barclays. Please go ahead.
Good afternoon, everyone. My first question is regarding your ICR. I see a big drop from 4-3.6x, and it's getting close to your target range of at least 3.5x. I heard you mentioned growth opportunities where you want to bring more EBITDA, but in terms of your financial cost, is there any plan to reduce them through other instruments like convertible bonds, etc.?
For the time, it's really focusing on the EBITDA side. My expectation is that even in 2024, ICR will already start to recover.
Okay, so no plans of other debt instruments like that?
Currently, no plans.
Got it. My second question is regarding your growth opportunities. As you mentioned, you're looking other than traditional acquisitions. Just to clarify, does this strategy include potentially buying back minority stake from your JV partners and simplify the company structure and a bit of idea on how do you plan to fund those growth opportunities?
No, I think this is too early. We just have tons of joint ventures. So the time period is five years from now. So I think this is too early to speculate. So no, we have to really work hard and find new sources and exploit the existing sources. This is not financial or engineering which we want to do to increase EBITDA. This is by real work and real business.
Got it. Is it fair to say that there may be an element of equity support for those growth plans instead of just debt from previous perspectives?
No, I said the growth has to come from less capital-intensive activities.
Got it. That's helpful. Thank you.
The next question is from Thierry Cherel from Natixis. Please go ahead.
Hi. Thank you for taking my questions. Congratulations for this good result. I'm happy to see that Vonovia is back in the sales. Just two questions. First, on ICR, even if you answered it clearly on the former questions, just wonder how you could be that sure you won't go below EUR 3.5. I'm struggling not to break this level by year-end and next year. So I would like to know if it's you mentioned it's about EBITDA. So is it because there's huge growth other than rental business? And maybe it's related to the question of campaign. And the second question is more about development to sale. I'd like to know if the margin is still very low. And I would like you to just comment if you can on the market reality. You mentioned that it's excluding the newly built apartments. What's the market reality yield, please?
Thank you very much.
On your question on ICR, I mean, the good thing is that in terms of increases in the interest line, we are basically done because most of the r efinancing and the effect is already reflected in the numbers. So it's a bit more than 2x what you've seen in H1, but it's not much more than that. At the same time, what I'm implicitly guiding with that is that we see overproportioned contribution on the EBITDA side in the second half of this year. And this is also a key driver why we are more optimistic on the guidance side and are now guiding towards the upper end. And that will essentially help the ICR. Longer term, you're right. I mean, if I look at the rental business, that 4% top line growth are going to eat up almost the entire EBT growth considering the increase in interest expenses.
But with the ideas we have and the return of a more normal environment, we think also medium to longer term, we are able to mitigate that. Development to sell. Your second question, I mean, if I look at the market for new builds in the locations we are present, we are talking typically about yields, 4%, slightly above 4%. If I look at our business, I mean, volume-wise, we have not done much, but gross margin-wise, it's 15%. If I look at the disposal of newly built products to individual owners, we are even above 20%. So volume-wise, again, it's kind of tough, but we already start to see that profitability is also coming back in the development segment.
I think in your question, there was a second element which you are referring to the slide which I showed you about the rental reversionary potential where we excluded the new build and the refurbished buildings. I don't know the exact figure, but if you include the new build and the refurbished, the picture would look extremely different, even more extreme. The reversionary potential would be much higher, but I think it is a wrong comparison because you should compare apples with apples and not existing buildings with new buildings.
Thank you very much.
Next question is from Neil Green from JP Morgan. Please go ahead.
Hello, good afternoon. Thank you for taking my questions. The first one is just on your marginal cost of your debt, please. We've seen, obviously, your bond yields come in, the 2029, 2030 bonds come in quite notably this year. So I was wondering if you were seeing a similar trend when you discuss financing with banks, please. And secondly, appreciate it's only August 2024, but once you've completed the EUR 3 billion of disposals, might we expect further volume targets on disposal for 2025, or will they be more kind of opportunistic next year, please? Thank you.
So the second question is easy to answer. We will continue to have non-core portfolios, which we have to sell anyway. But this is, of course, then we are selling it to optimize the price and not to deliver liquidity. But non-core doesn't belong to us long term, and that's why it has to be disposed. So we are not stopping disposal at all. We will continue to dispose non-core, and we will do a sorting of the portfolio every year like you are used to it. And therefore, we will always have some non-core.
Marginal cost of debt secured and unsecured slightly below 4% for a 10-year tenor. So slightly moved in our favor.
Thank you.
The next question is from Simon Stippig from Warburg Research. Please go ahead.
Hi, good afternoon. Thank you very much for taking my question. First topic would be in regard to the development sector. We all know in Germany is still in a very deep crisis. Even though the segment is not meaningful contributor to EBITDA, it turned positive quarter-over-quarter. So therefore, you already see early signs of recovery in your business and also broadly in the product development sector in Germany. And then what would that mean for you? And then you mentioned that you have Vonovia's development to sale assets in the amount of EUR 1 billion. Have you already started to sell them, and are there any sales figures? And then what's the remaining investment volume for 2025? The second question would be in regard to the Deutsche Wohnen synergies.
Your last guidance you gave is still relevant, and then what would you expect for this year and also for next year in one rate? Thank you.
To be very clear, the Deutsche Wohnen synergies are done. This is forgotten. Deutsche Wohnen is integrated, and we have delivered it, so nothing will happen in the future. This is a done deal. For the first, for the development, I think we don't see any signs at the moment that the development volume in Germany is picking up. Conversely, it's still going down. So the announcement is not Vonovia, but the announcement of the institution is saying that we will probably see a new construction rate of 170,000 apartments by 2026. So it is still further going down, which will, of course, have an impact on smaller developers because they are actually then out of business. You know that the need in Germany is roughly 500,000. So they need to be changed something. Otherwise, Germany will have a problem. I'm not sure, and it's a big call.
I'm not sure if the government of today is still able to take the right decisions. You know that we have an election next year, and I am looking forward that the next government will take the right decisions because the situation in Germany is not sustainable. And this is another way of saying that good developers will be desperately needed in the long-term future.
The next question is from Paul May from Barclays. Please go ahead.
Hello, guys. Thanks very much for taking my questions. Rolf, just mentioning some of your highlights that you mentioned earlier around the low investment yield is no longer attractive to acquire assets given financing costs. Just wondering if it's not attractive for Vonovia, who are most likely the best operator and best owner of those assets, how does it work for others? And as a result, how can you be still confident over your valuations at those very, very low initial yields if, as you say, it doesn't work as an investment? That would be great. That was my first question, and I'll come on to my next question.
Yeah. Actually, I think Philip will say something to this, but it's probably also for me. And I think I have done this page exactly to show you. And this is what we see in the moment. The people who are buying these assets ignore the [Foreign Language], and there's no sanction on it. So there's no consequence. You can just charge a higher rent, and your yield is double. So it's very simple. So the apartments which we are selling in Frankfurt, for example, the prognosis is they will see another rent in the future.
You can't do that because you're a public entity. Is that kind of the message?
We are respecting the law.
Cool. Thank you very much. Second question, just on that rental reversion. I appreciate the churn of the portfolio is about 8%, and you mentioned obviously all the regulation there, and you're going to stick to the regulation in terms of capturing that. Over how many years would you expect to be able to deliver that level of growth? And is there a risk to the market growth? Because I think some forecasts expect German population to decline quite materially over the coming years and having peaked, I think, this year, possibly into next year. Is there a risk on the demand side from a declining population in Germany, particularly say given the economic situation is not particularly attractive and potentially you might get worse and therefore economic migration may stop again putting an impact on population levels?
Do you see that as a risk, or are you very confident that rental growth will continue upwards? Thank you.
So Paul, actually, I don't know what this analysis is all about. The German population is shrinking, so I don't know this analysis. The German population has to grow for a very simple reason because the demographic change. My generation will go into pension in the next 10 years. The next generation is only one quarter of this. We all will not die after we go in pension, but we will hopefully live for a long period, and the living expectation is even higher than lower. So this means if Germany wants to replace all this workforce, we need immigration. So there is no other choice. And I think this is even understood by everybody in the government except very far right, which have no majority. So there is no other alternative. And that's why all prognosis I know is saying that the German population will increase and not decreasing.
So it was 10 years ago where we probably had a different prognosis, but this is long-term ago. There is no way. Even if the population would not increase, which will not be the case, the demographics will show that the numbers of single-person apartments is increasing. The number of apartments which will be needed, even with a stable population, and the population will not be stable, but even if it would be stable, the number of apartments will go up. I think this is fundamental on German real estate, which is out of question.
I'm sorry, just following up on the number of years to capture the reversion potentially that you highlight on slide 9.
Yeah, look, this is just looking at today's rents and growing that by 4% per annum because this is what we expect longer term, and that puts you to like 15 years across Germany, even longer in Berlin market. So it is long term, but it's very robust and stable and based on rent levels also within the affordability ranges.
Perfect. Thank you very much.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Marc Mozzi from Bank of America. Please go ahead.
Thank you. Very good afternoon, and thank you for taking my questions. The first one is on EPRA metrics. Just wondering if you can give us a clue on what is the LTV under EPRA consideration and calculation at the end of June or pro forma. Number one. Number two, what is the growth in an underlying or in an EPRA EPS at the end of June? And more broadly, I'm just wondering why, as a leader in the European real estate industry, you're not considering providing, not as your own management KPIs, but not providing at every quarter or at least every half year EPRA metrics, which I think should be part of your role as to lead by example for the rest of the industry and help international investors to be in a position to compare Vonovia to other peers.
That's my number one question. And my number two question is around growth. So you're back to growth mode, which makes absolute sense as soon as we reach the trough. And I think one of the areas of easy, light capital-intensive growth area is new developments. And in that case, what sort of changing working capital requirements should we expect for 2025? Because you're moving to something zero this year, probably if you have to grow to something negative again next year. And have you ever thought about the size of that change in working capital requirements for 2025? Thank you.
Yes, Mark, we have. So the second question, yes, we have thought about it. We have an analysis of it. But again, I understand that you're all interested in it, but I think it is proper to discuss it internally first before we go to the market. That's why, please understand that we are not getting into this anymore in detail. And please wait for 9th of November.
Let me just add, it's an add-on business. And what we will always be sensitive around, what we have also mentioned many times, is that we put the right weight on the development business via the overall balance sheet. So we will not, through development, change the entire risk profile of Vonovia business. To your second question on the EPRA metrics, that is with annual results that we publish all the various EPRA metrics. We have never done that on a quarterly basis, and there's no intention to do so.
Okay. Thank you very much.
The next question is from Rob Jones from BNP Paribas. Please go ahead.
Yeah, hi, team. Just a quick follow-up question on the ICR. So obviously, you give net debt to EBITDA and LTV on a pro forma basis, which is really helpful. I just wonder if you've got a figure for ICR also on a pro forma basis. And then linked to that, Philip, you said at the Q1s, the expected ICR to come down slightly from 4 times, maybe 3.8, 3.9, and that was your expectation for FY 2024. I just wondered if you're still happy with that as an FY 2024 expectation or whether we think it could be more realistically lower than that. Thank you.
Yeah, as I said, I expect ICR towards the remainder of the year to slightly increase and recover from current level. So I'm not too concerned around ICR. We are not showing that on a pro forma basis because that is then including too many assumptions also on refinancing on the interest rate side, which is why we have not done so. But I think with all the guidance I've given here on the call, you should have a pretty good grip as to the direction of travel on that metric and those two components.
Okay. Thank you very much. Thank you.
That was the last question. I would now like to hand the conference back over to René for any closing remarks.
Thank you very much. That's it from us for today. We hope to see you and speak with you in the coming days and weeks. And until then, as always, stay safe, happy, and healthy. Good day, everyone.
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