Dear ladies and gentlemen, welcome to the analyst and investor call of Vonovia SE regarding the 3 months 2019. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Rene, who will lead you through this conference.
Please go ahead, sir.
Thank you, Judith, and welcome everybody to our earnings call for the Q1 2019. Your hosts today are CEO, Rolf Buch and CFO, Helena von Roeder. I assume you have all had a chance to download the presentation. Just to be sure, the earnings call presentation for today is available on our IR website in the section Latest Applications. The management will lead through this results presentation on the basis of the agenda on Page 2 and will then, of course, be happy to take your questions.
So without further delay,
let's kick it off, and
I'm handing you over to Lars.
Thank you, Rene. And also from my side, a happy welcome, and thank you very much for participating in this call. Let me start with the highlights of the Q1 2019. Performance, you know that this is the Q1 in which we manage the company based on our 4 segments: dental, value add, recurring sales and development. And I am happy to say that in all four segments, we are well on track, and this is actually a good start in the year 2019.
Later, Helene and myself, we will guide you by segment, but this will come later. NAV and valuation. Actually, as you know, with except Sweden, we don't have a revaluation in the Q1. So that's why NAV cost is mainly coming from the investment, and it's nothing special. We highlight that the next portfolio valuation will be in Q2 2019, and our current indications suggest a stronger valuation uplift than what we have seen in the last half year in 2018.
So this means actually that at the moment, we don't see any change in trend of valuation. In some cities, actually, the opposite, valuations going up stronger than last year. Capital structure, nothing special to mention here. I think Helene will go through this later. Guidance, we want to give you guidance update.
We are increasing our guidance for adjusted EBITDA total and group FFO. EBITDA guidance is up by €50,000,000 This is basically driven by 2 factors. 1, it is performance growth and the other is a result of change in IFRS accounting policy. I'm sure that you are much more familiar with the new IFRS 16, and I'm happy to have Helene live close to me because I'm not ready to answer all detailed questions about 16. For our numbers, it means an additional EBITDA contribution of an estimated €30,000,000 due to the effect of IFRS 16 for the year 2019.
Since the underlying activity does not change, we adjust for this effect in the FFO and do not include any positive IFRS 16 contribution in our book FFO as this is the basis for our dividend guidance. I understand that some of our peers do it differently. So I want to you to look out for this when you compare FFOs. I think also as a member of EPRA, the acting president, this is also, I think, a topic which we should discuss in EPRA because we have to make sure that the definition even FFO is not an EPRA KPI should be similar. And I think this will be a topic for the future.
€25,000,000 of the increase in coop FFO comes from normal performance growth, and we will show you how this will develop in the future. Based on these very positive results and our visibility down the road, we feel we are well positioned to continue our upward trend, and we are very confident in our ability to deliver sustainable growth 2019 and beyond. And with this, I hand over to Helene.
So good afternoon. Page 4 is the central page because it shows how much the individual segments contribute to adjusted group EBITDA and how we get to group FFO as a basis for dividend distribution. You can see that we have shown growth across all segments, which is, of course, partly driven by the inclusion of BUWOG and Victoria Park, which were not included in our Q1 last year. You also see that while recurring sales and development make a considerable contribution to overall EBITDA and will continue to do so, the operating business with rental and value add clearly remains the largest part of our business. Almost 30% more EBITDA in Q1.
This year, of course, means that cash taxes are higher. And since we financed BUWOG mostly with debt, the interest expenses have gone up year on year as well. Bottom line, group FFO, so the basis for our dividend, is 20% higher in absolute numbers in Q1 and 13.5% on a per share basis. Let's have a closer look at the rental segment on Page 5. Rental income is up 20% on the basis of a larger portfolio and rental growth.
Maintenance expenses increased by broadly the same magnitude. On a per square meter basis, as you will see on a later page, maintenance expenses did not change. The increase in operating expenses needs a bit more explanation. In Sweden, rents are reported on a gross basis, so net cold rent plus ancillary costs in all one number. The concept of a net cold rent does not really exist there.
For Victoria Park, this means that around about €9 per square meter are the all in rent, of which €6 to €6.50 are net cold rent and the remaining €2.50 to €3 ancillary cost. It's impossible to break this down to the last €0.02 but that is broadly it. In Sweden, these ancillary costs are included in the rental income and because they are basically a pass through item also in our operating expenses. Rough math shows that it's about €10,000,000 for the Q1. The impact of these €10,000,000 in the rental income line is not material, but it is so in operating expenses, and it distorts the comparison.
I'll get back to this on the next page and show that the actual operating expenses in terms of efficiency have continued to improve. Also improved is our EBITDA operations margin, which is 78.4% for Germany and at 76% overall now. Slide 6 proves what I've just said regarding the operating expenses and efficiency of our business. You know the structure of this slide very well by now, I guess. These numbers are Vonovia Germany, so excluding Sweden and excluding Austria, but including the German portfolio we acquired from BUWOG.
The average portfolio size was 4.1% larger compared to Q1 last year, and we managed to grow the rental income by 8 0.3% or $34,400,000 because of rental growth and better portfolio quality. At the same time, operating expenses only grew by $1,000,000 which shows that we have managed to integrate BUHOG's German portfolio at very little additional cost. If we then include the growth in value add, we get to an EBITDA operations growth of 12.6% on the basis of a portfolio that only grew by 4.1%. Now to manage your expectations, we might be showing the slides for the last time. While we like how we demonstrated our efficiency improvements, we run operations not just in Germany but in Sweden and Austria as well.
And we want to show you how SameSite is improving not only in Germany but across the entire operating business. Page 7 shows the main operating KPIs for organic rent growth was 4.0% year on year and in line with our expectations. As you will see on the guidance page later, we remain optimistic about our full year guidance and the rental growth of around 4.4%. The vacancy rate is basically unchanged and remains low at 2.9%. This number, as I'm showing you know, is mostly the result of our investment activities.
And then finally, maintenance per square meter is on the same level as in the prior year period. Allow me to repeat at this point. Both the maintenance expense and the capitalized maintenance are money that we spend for the repair and maintenance work to protect our EBITDA. And given the longevity of our properties, we believe it is wiser to on the side of caution and better spend a touch more than not enough. But neither expense maintenance nor capitalized maintenance result in any rent growth.
The only difference between them is how they're treated in the accounting. Maintenance expense goes through P and L and is a direct cost. And capitalized maintenance is capitalized on the balance sheet. But please do not confuse capitalized maintenance with our investment program. The investment program leads to rent growth and has a year.
I do know it's sometimes difficult to keep the 2 apart because most of our peers report capitalized maintenance and modernization investment as one number, but they're really 2 very different things and should be kept separate. Now Page 8 is our investment program. We are well on track here with the majority of the investments completed or kicked off. As a reminder, the investment program includes our development to hold, upgrade buildings and optimize apartment investments, but it does not include development to sell investments. Our neighborhood development projects, which usually include all three types of investments, are allocated across these three categories.
We continue to guide the total volume between €1,300,000,000 and €1,600,000,000 for this year and currently see us at about the middle of this range by year end. But there's still more than half of the year to go, so we want to keep the flexibility and the range for the time being. While yields and IRRs differ between the three elements, we continue to expect a 9% to 10% average IRR across all investments, in line with previous years. So there will always be cases and reasons for shifting capital from one investment bucket to another. But at the end of the day, we remain confident in our ability to invest the €1,300,000,000 to €1,600,000,000 at an average IRR of 9% to 10%.
And with that, over to Rob.
Thank you, Helene. So I'm talking about a new portfolio because historically, I always have done it. It's still part of the rental segment. And Page 9 and 10 are also 2 pages, which are you are very familiar. Normally, we found that we put them in the annex, but I think Remy thought that this is a good idea to put them in the main.
So that's why on Page 9, you see our portfolio cluster. You are very familiar with this. It shows that 60% of our portfolio is earmarked to investments, actually more than that because many units undergo investment twice, once for upgrade building and once for optimized apartment. Since we cannot double count them, however, each unit is, of course, only included once in the pie chart. What is important, though, is that we have plenty of opportunities at least for the next 10 years.
Another takeaway from this page is that we sold 7.30 noncore units in Q1, which a fair value step up of almost 16%, which is a dynamic of the German house as the price market is still unbroken and it remains very strong. Don't be afraid. I will not go into details on Page 10 of the regional cluster. There's a lot of data that's why it used to be in the Annex. But I would like to spend some time in telling you that there is probably an interesting relation which you should regard, which is the relation between rental level and in place multiples on one hand and the purchasing power on the other hand.
This also gives you an indication why we, at the moment, in Berlin, have so many political pressure because, obviously, brand is growing faster than the purchasing power. What is also very interesting is the revision of the potential. We have been reletting apartments during the last 12 months at 36% higher than the previous rent. Of course, this is largely the result of our optimized apartment investment strategy. Without this investment, we are bound to the 10% rental cap, of course.
And we do expect the German rental respect to German rental regulation. And finally, the rent growth of what is left is in the noncore portfolio was 0.6%. It's now a very small number of apartments, but I think also this same cost shows why it is non core. Let me turn to Page 11. This is the one page where we describe the Value add segment.
Actually, also new boring business, very predictable. We have seen a significant increase in EBITDA in comparison to last quarter. Keep in mind that this is mainly still Vonovia. Only a very small amount comes from the addition of BUWOG. As you know, we are targeting around €20,000,000 growth in 2019.
And if you look on these figures, we are well on track to achieve it, and we are very relaxed about this. The next page is about the recurring sales segment. Page 12 shows the result of this. We sold 809 individual apartments for cost proceeds of €109,000,000 The average sales price increased by 19% in comparison to last year. The fair market value step up was 37.2% on average, almost 10 percentage points higher than last year.
This is partly driven by recurring sales in Austria, where fair value step ups are considerably higher than in Germany. All in all, recurring sales contributed €26,300,000 of adjusted EBITDA, more than double the volume of last year. Also, this shows you that we still have an unbroken trend in value uplift. Coming to the Development segment on Page 13. This segment includes all new construction of apartments by way of building, entirely new buildings.
We distinguish between development to sell and development to hold for our own portfolio. The bottom line EBIT adjusted EBITDA was €10,400,000 in Q1, which is probably a bit lower than the run rate you can expect for the rest of the year. This is also something to do with that this finished construction normally is not so strong in January too much. So you will see more finished building in the summer. Page 14 gives you more color on the new construction activities.
In the new construction to hold, we have around 20,000 29,000 apartments in overall long term pipeline. So don't think that this will be built very soon based on opportunities in our portfolio today. And we want to deliver between 1,500 and 2,000 this year. All of these units are built for our own portfolio, and we capture the spread between construction costs and the initial valuation in our EBITDA development. The development to Cellpath is a useful addition to the 2 hold developments.
On the one hand, it generates attractive margins, but what is maybe even more important is that you often need the higher margins from the to sell projects to cost finance the lower margins to whole development in order to make an entire development project work. So we have only onethree of development as a form of subsidized rent, onethree is for normal market trends and onethree is for sale. And the for sale segment basically carries the cost of the land. This is the way how the big cities today allow you to do construction permissions. They ask you actively to do onethree of subsidized, onethree of normal rent and onethree to sell.
So Vonovia is, in the moment, the only company in the market who is able to use all three models for itself. Others are either for us to sell the for sale segment or more often with developers not to operate themselves but to sell it in a block, which, of course, can generate significant discounts. So the pipeline for the development to sell is around 6,700 units. And with this, I hand over with a lot of fun to Helene to discuss the IFRS 16.
So this is what you've all been waiting for. Wrapping up the segment reporting, let me say a few things about IFRS 16, which came into effect on the 1st Jan 2019. IFRS 16 governs the accounting, valuation and reporting of lease business, and it basically has the idea of making companies that buy and that lease more comparable. For Vonage as a lessee, this means that leasing expenses are capitalized on the balance sheet, representing an asset which in turn leads to right of use on the liability side. In the profit and loss statement, lease expenses are no longer reported.
Instead, the P and L only shows the interest expense and any depreciation of fair value adjustments. So like others, we've applied IFRS 16 in Q1 2019 for the first time, and we are reporting an impact of $7,500,000 positive in our P and L for the 1st 3 months. For the full year 2019, we expect the IFRS 16 impact to be approximately €30,000,000 Prior year numbers remain unadjusted. Now after lots of discussion, the way we implement this new regulation is that the impacts are, of course, included in the IFRS accounts and also in our adjusted EBITDA total. But because IFRS 16 does not have any impact on the liquidity or cash situation, we're excluding any IFRS 16 contribution from group FFO and LTV.
We do understand that some of our peers do not adjust for this in their FFO, so you want to bear this in mind when you compare FFOs, which form the basis for dividend payout between companies. Slide 16, net asset value. The adjusted NAVs increased by 1.5% in the 1st quarter, but our next portfolio variation will be at the end of Q2 and in line with last year will cover approximately twothree of our portfolio via the 26 largest cities in Germany plus Vienna and a full portfolio valuation in Sweden. Based on our current estimates, we expect the H1 value uplift, excluding investments, to be stronger than H1 2018. Now with respect to goodwill, I had already indicated that in the full year call in March where we reported goodwill impairment of around $700,000,000 that to the extent yield compression continues, we will likely see more impairments in 2019 going forward.
To Page 17. Our LTV as of March 31 was 42.4%, so 40 basis points down from Q4 2018 and right in the middle of our target corridor. As I've said in the past and experienced on roadshows, different parking participants have different LTV comfort zones. We continue to argue that even after years' compression, we have seen the in place value of our portfolio remain conservative if you not only look at transaction prices but especially replacement values. And we really do not see a scenario in which these values would come under material pressure.
So at this point, we believe our target ratio of 40% to 45% still gives investors enough of a security buffer while at the same time not putting an undue burden on our equity yields. Many of you also look at debt to EBITDA in addition to LTV, so do we. When you take our total EBITDA of the last 12 months and put it in relation to the average net debt over the same period, we are at 11.4x, which to us is a relative sensible level if you look at the stability of the cash flows. The cash number for Q1 2019 is quite high, but please bear in mind that this is at the end of Q1, so before the repayment of the EUR 700,000,000 debt hybrid, which we have done so in the meantime. Page 18 gives you more color on the capital structure and debt instruments.
Interest cover ratio is 4.7x and that's very healthy about the minimum levels required in some of our debt instruments. Almost all debt is fixed or hedged, so any interest rate increase would affect our numbers only slowly as no more than 12 percent of the total debt becomes due in any given year because of our smooth maturity profile. And thanks to the robust top line growth, there's plenty of interest rate increases we can absorb before we feel the pain of our earnings and dividend capacity. We're happy with the maturity profile and overall financing mix. As always, we potentially look at all available sources of capital to finance our business and try to choose the most attractive type of capital at any given time.
And finally, Page 19 for the 2019 guidance. We are increasing the guidance for adjusted EBITDA total by €50,000,000 As I indicated before, this is about €30,000,000 from IFRS 16 and €20,000,000 from performance growth. We are increasing the guidance for group FFO by €25,000,000 So group FFO per share is now guided €0.05 higher between €2.25 and €2.35 And by definition, the implied dividends guidance at approximately 70% of group FFO is also higher now. Now to avoid confusion, we are our group FFO, but our understanding is that not everybody of the peer group follows this approach. So you want to be careful when you compare FFOs between companies.
And with that, Toerl.
Thank you, Helene. So for the management probably one last slide for the management board changes. Claus Freiberg, as you probably have seen yesterday, has stepped down or has decided to step down from Vonovia's Management Board effective from the end of the Annual General Meeting. You know he served for Deutsche Ennington in the beginning and later for Vonovia in total nearly close to 10 years. It was a very intensive and very positive cooperation between me and him.
And so that's why I'm very sad that he's leaving. But I have to accept and I have to honor the effect that he is arguing, saying I have worked now for 10 years in this industry. I have changed a lot, and I think it's time for me to do a little bit less. So he will stay in contact with Renault where he will be also used or we can use him to, in some specific cases, as a consultant. So I am very happy that he was ready to work for so long time for this company.
I think the very good news is that we have the next generation Amphitco. And the very special effect is that this is the first time, I think, in Deutsche Ennig and Bonovia's history that we were able to develop a board member out of our own people. So I think this is a very good sign. So we are able to have got enough calibers also in the 2nd line, which can be able to sit in the board. So I'm 5446, so significantly younger.
He has worked for the company actually the whole year nearly the whole year since 2002. And he is a specialist. He was well prepared as actually is a general manager of the whole operating and the development. So I think this was a preparation for the long term. And I'm very happy to see Arnd on the board and to work together with him for your information.
As you know, we have now 4 Board Executive Board members. It's myself and Helena. It's Arnd Fittgauer as Chief Rental Officer and Daniel Rieder, Eagle S' Chief Development Officer. And this is we hand over to Renee, right?
Right. And I'm happy to open the Q and A. A.
The next question is from Thomas Neuhard, Kepler Cheuvreux. Your line is now open.
Good afternoon. Thank you very much for taking my questions. Actually, I have 4. Firstly, on the organic rent growth, the 1.2% the market rate for like for like rent increase is rather on the lower end of the storage range. I wonder if this was mainly driven by the first time consolidation of BUWOG and its Austrian portfolio where rent increases are lower?
Or have there been also other drivers in place which were dragging down on the like for like market driven rent growth in Q1?
I think it's only a quarter. So this is why we think you should not overestimate it. There's probably a few elements coming into this. One you mentioned is probably the BUWOG. But overall, don't overestimate.
We stick with our loan also guidance for 2019. So probably this is a little bit early. In general, as you know, we are probably also pushing rent not as hard as we were pushing before because of the overall political debate. This might have also a little bit impact.
Okay. Thank you. My next question is on Sweden. I was wondering if you can give us an update on key trends in the rental and investment market in Sweden. And what potential do you see for acquisitions like we saw in the Q1 in Sweden during 2019?
So first of all, I think the situation in Sweden is completely different than what we have in Germany in the moment. In Sweden, you know there is a government, a new government and actually tenant associations are ready this year to accept higher rental costs than the years before. So we will see probably in Sweden positive surprise from rental costs during the year 2019. The imbalance between supply and demand, of course, is completely unchanged. So that's why the fundamentals in Sweden are, in the moment, very surprisingly positive.
Unfortunately, we don't have such a big portfolio in Sweden. That's why it doesn't drive totally the Vonovia figures. You have seen us buying portfolios in the end of the last year. And we are able, if the price is right and we fit to our acquisition criteria, that we will continue to buy in Sweden because we feel that we are the only natural consolidator in Sweden. But we are not in a hurry, as you know.
So that's why we have to take care about prices and about opportunities.
Yes. Thanks. My next question is on rent regulation in Germany. The planned change of the niche big observation period from 4 to 6 years has not been implemented yet. Why do you think this is the case?
And do you have any realistic time frame for the implementation of this change?
No, not really. It is in the moment not a real topic in the debate. So actually, I have not heard anything about politicians talking about this. I think we have the debate in Berlin, which is probably overlaying everything else. And then I think we have to wait now for the election in Europe.
And then I think there is also a possibility that we have changes in government in Germany. So I think this is not on the topic at the moment. And it is too small to be passed from my point of view. It's too small to be passed as an individual law. It has to be a part of the other law.
And we don't see in the moment anything that is coming up soon.
Okay. My last question then is on the recent press article which stated that the court ruling in Bavaria was that Von Ove has to pay back a portion of ancillary expenses charged to a tenant as there seemed to be a lack of article also claimed that there might even be some kind of gas actual lawsuits coming, which could be initiated by the tenants organizations in Bavaria. What is your view on this?
Yes. I think you are referring to this court in Munich, which actually forced us to pay back around €300 for external expenses, so not a really big amount. Actually, they did the court did not rule out that we cannot do value ad service and also did not rule out that we do on-site inspections as nonrecoverable expenses. So in contrary, actually, it confirms the way how we do it and it confirms how the way we prove it to the tenants in general. But the court requested a level of transparency on the internal cost structure calculation, what we are not prepared to show because also any independent third party provider would ask not to disclose this internal cost calculation.
For example, one thing is that the court asked us to disclose the individual salary of any house caretaker, which I think from data protection And our legal department is very confident that we will And our legal department is very confident that we will win this court case. I think a bigger risk is not there, at least according to our lines.
Okay. Thank you very much.
The next question is from Sander Bank, Barclays. Your line is now open.
Hi, afternoon guys. Two questions for me please. First one is on the FFO guidance. Can you just give a bit more detail on what has led you to upgrade the guidance, I. E, which segment is performing better than initially estimated?
And how and why is that?
I think ultimately, as we said in the beginning of the call, we see all segments performing extremely well. And please don't be too disappointed if we don't want to point to a particular segment, which is leading this improvement. It is actually really truly across the board of all 4.
Okay. So it is not because the sales I mean, the sales performance this quarter was particularly good. That is not that was pretty much in line or slightly better than expectations, but that's not the sole driver of it.
No. I mean, it's really across all four businesses where we see significant improvements, which sort of leads us to increase our guidance.
Okay. Cool. And the second flag rental growth as well. Again, a slight slowdown at the moment, and the full year guidance was left unchanged at 4.4%. Can you just give a bit more detail on how you're looking to bridge this gap over the remainder of the year?
Are you for example, will new construction make a more material impact this year? Or how are you thinking about the composition of that 4.4%?
No, I think, again, it is early. It's the first quarter. And we have told you there is nothing fundamental. Of course, a little bit more will come from more construction. Finished buildings are not coming in January, March because there's weather.
So there's a lot of elements which actually can explain that we are a little bit lower. We stick with our guidance, and I am very positive that we will reach the guidance. So there is no doubt at all.
Okay. Okay. It is mainly because obviously To be
honest, in the moment, in the political debate in Germany, I'm actually happy that it is a little bit lower because it's easier to sell.
No, I do get that. But ideally, and I guess this is also in their interest, for example, you could make up the bridge for additional new construction, that would be a win win for everyone, I guess. So for example, do you expect a more material acceleration, for example, in that segment that could potentially bridge, leave the other numbers pretty low, I. E, which makes everyone happy, but then also the new construction, if you could accelerate that, which would also be pretty good for everyone. And that's mainly because last year, obviously, you had some it was difficult to get to your run rate numbers to ramp up, mainly because it took time to get into permits.
So how is there a possibility that this year is going to be more material from that angle?
I think the fact that it is difficult to get construction permissions is not changing at all. Please don't expect that this will change short term. So we are still fighting with the same problems. Yes, I think we are sticking to this up to 2,900 units or 3,000 units maximum in this year. We're optimistic that we will deliver it.
But please, we don't we think that all other factors also will deliver growth as we have announced it. So we are not dependent on the new construction.
All right. Excellent stuff. Thanks very much, guys.
Next question is from Christopher Fremantle, Morgan Stanley. Your line is now open.
Hello, good afternoon. You have given some helpful color on the trajectory of your valuation. Can I just ask if you have received any color that you are willing to share at least on the trajectory for Berlin and how that might compare to the group guidance you have given? I appreciate you may not want to give that, but any color that you can give on Berlin versus rest would be helpful, please. And secondly
Can I do this answer because it was anesthesia and then you asked your second question? No, I think it is too early. We are in the middle of the process. It's not finished. I can just tell you that probably the phenomenon that you have seen some bigger or big cities are contributing significantly to the value is also due this year or this half year.
So I think we have good development everywhere. But in our big locations, you see a high strong value uplift.
Okay. That's helpful. And then Spindley, we're expecting an announcement on the Leach Spiegel quite imminently. Can you give any color like for like rental growth guidance?
You are probably referring to the Mittsbergel in Berlin, no? Because we have a lot of Mittsbergel, but
there is a Mittsbergel in Berlin coming out. To be
very clear, in Berlin coming out. To be very clear, I think in our guidance, we have a very low expectation anyway for this Mitschbiger. So we will not be surprised. In the political existing political situation which we have in Berlin, I would be very surprised if the mix will comes out very high. This would be suicide definitely suicide for the left wing government there.
So they will do everything to keep it down.
That's helpful. Thank you.
The next question is from Jaap Korn, ING. Your line is now open.
Hi, good afternoon. A couple of questions also on my side, I think 3, maybe hopefully not more. The first one is on trying to still get to a FFO one type of calculation. So Q3 2018, you gave guidance for EBITDA on sales and development of between €130,000,000 to €160,000,000 And I was wondering if that is still a valid statement or whether that has also changed with the update today. Yes, I'll wait for the
Look, I think we discussed it before. I'm actually absolutely incapable of splitting our taxes and interest rates. So and this is why we stopped giving FFO one guidance. So whatever you want to calculate, I'm fine. But we will stick with group FFO because, as we discussed, is any attempt to divide interest rates and especially taxes according to the 4 business lines will be purely arbitrary.
And if I did such division, we would be discussing without ends on whether that division was correct. So we stick to group FFO because we think it's the right number. And then I believe everybody should try and come up with a smarter way of splitting up taxes and interest rates.
Okay. But just basically disregarding FFO I then, would you say your expectations at the end of last year with regards to EBITDA on sales and development is still correct?
I'm not sure I get the question.
So we actually, what we have said is that in all segments, we are doing a little bit better than we thought.
Okay. That's clear. Okay. And then on Page 6 of the presentation
Actually, because this was the second time the question was asked. I think you keep in mind that we were, in the last year, giving you a guidance on a completely new format with 4 segments. But in this case, we probably are a little bit more prudent in giving you guidance is normal. And this is still we still have some prudence today in the guidance because we have to also we have to learn better how the segments are working.
Okay. That's very helpful. Thank you. Maybe then moving to Page 6 of the presentation. I was just wondering the adjusted EBITDA operations for the German operations shown there at 350, dollars is that actually including the IFRS 16 impact of $7,500,000 or is that excluding that impact?
No, that's not including because it's an IFRS number. We would be then including the IFRS 16 effect to follow the accounting philosophy.
Okay. Thank you very much. And then my last question will be on your valuation guidance. You suggested that there's also a likely impairment of goodwill associated with the devaluation uplift. Obviously, that's very hard to predict for us.
Do you have any sensitivity to offer in terms of whether that goodwill impairment is proportional to valuation uplifts like last year or higher or lower? Is there any way you can help us try to understand the likely size of the goodwill impact?
To tell you the truth, I'm a little bit relaxed about this. Why? Because we also have always have the adjusted NAV. And if I look at the Capital Markets, that's what the Capital Markets seems to be looking at. So the EPRA NAV, including the goodwill, seems to be a number, but the capital market doesn't seem to be looking at that.
So I'm not sure I can give you sort of guidance because the model is very, very sensitive. But again, in as we expect valuation uplifts, we will also expect an impact on goodwill. Ultimately, what it means in my mind is that when my predecessor and Rolf bought portfolios, they actually sort of like did the right thing and the value catch up is now sort of like proving the colleagues right.
Okay. Thank you very much.
The next question is from Aaron Geiss, Citi. Your line is now open.
Great. Hi, there. Just a couple of quick questions, please. Just firstly around the political environment in Berlin, potential for nationalization, etcetera. Can you just talk a bit about what your view is on that and potential impacts to your more Han German portfolio?
And then just related to that, is the political climate, can you just give an update on what you're sort of hearing in that sort of inner circle, if you like? And is the discussion changing from, say, increased regulation to other new solutions? Or is it still heading down that kind of same track of more regulation and that sort of thing?
So I think what you have to understand, so nobody is afraid, at least not on the professional side, that nationalization of the portfolios will in reality happen because it does not solve the issue. It is very expensive. The state of Berlin cannot afford it. So I think there is no real risk in the end that portfolios will be taken away. The problem in this debate is more that it shows that the political climate in Berlin, which is special anyway in Germany because you have a big part of former East German functioners still.
So people who worked, actually served the East German state, they are still living in Berlin, for example, in the Karl Marxhalle. And on the other hand, in West Berlin, we had people actually which were used to live from subsidies, rather, because West Berlin was actually completely subsidized for decades in Germany. So there is a very special climate. And what is probably more interesting is that the debate in Berlin about the housing and the nationalization actually is opening. A lot of other debates, which is, of course, going in more regulation.
It's going in more restrictions in the rental business. And most recently led actually to a nationalization rebate of BMW. So they are a little bit crazy in Berlin, and we have to live with this effect. Of course, this does not ease the business. So this debate will not help to do less regulation.
But in reality, I think in the government in Germany, we also don't think that there is massive more regulation. So it's a lot of noise. The disadvantage is that at the moment, management teams in the companies have to spend much more time to answer questions according to this noise. And so this is actually something I'm spending much more time at the moment on the political area than before.
Okay. And
just the second question related to that. If your property valuations, as you mentioned in this possibly stronger in H1 this year than last year, And if the valuations continue on the same annual trajectory as the last few years, the values are going to have house prices will roughly double within a sort of 7 ish year kind of period. How do you think about the business with a 10 year view? If the valuation of the NEVs kind of peaked at that point, do you have to think about potentially shareholder returns, the total return coming from other areas, development, more increased privatizations, etcetera? Obviously, the EPS and SFO will take longer to capture than possibly what will be priced into house prices in the short term.
But longer term, if that trajectory happens, how do you think about the business?
No, I think to be very clear, we are there's good reasons why we are not giving you a guidance on value uplift because I think this is it's not our job. It's a job of the valuers. So we are not giving you guidance for the full year. We have just said it's because we have now more clarity that the half year will be higher than last year. And of course, if everything is not changing, there's also fine hypothesis that the trend and what I'm saying is the trend is not broken.
So there is, of course, as long as the trend is not broken and we don't see that the trend is broken, there will be positive development in the future, which is, for me, not at all a surprise. We have all these political debates because of the simple effect that in the big cities, we have not enough housing. So if you have not enough housing, prices for housing is going up. So this is something which does not which should not shock us, which is actually the normal reaction on the market of shortage of a product. And since we are not solving the imbalance between supply and demand, we will see price increases.
This is it. So it's very simple. Okay. Thank you. Because of salaries, at the moment, salaries in Germany is also significantly increasing.
I don't think that we have a significant impact in purchasing power. So I think a big part of our tenants also can afford higher rents.
Perfect. Thank you.
The next question is from Jonathan Knoetjer, Goldman Sachs. Your line is now open.
Good afternoon. A couple of questions for me. The first one on cost inflation, perhaps if you can update us on that point, if you're seeing still seeing the same level of inflation that you were seeing last year more or less? And also perhaps to come back and look at the debate from a broader angle perhaps on the regulation, are you seeing any more response from either the locals or probably more likely the national government on any sort of measures debated that could actually stimulate development. We see that obviously you're still talking about how difficult it is to get permits at the local level.
But are there some voices to try to help on that debate and think about any program perhaps to help development? Thank you.
So coming back to your last question, of course, at the moment, if you follow the German politicians, they have an issue. They don't want to have nationalization because the majority is against nationalization. So they are talking about putting more money in the system. So higher subsidies, helping for more construction, more spending for social housing, which I think we will we are ready to take this money, so we are not against it. The volume is not solving the issue because the issue is not money.
We can today in the regime and not in Westphalia, we are able build social housing with a completely normal return. So fully social housing with the subsidy program in Northern Westphalia, there's no problem. It's the same as in Zacks and so in Dresden. We are building there social housing, and it's a good model. This delivers the same returns as a normal private normal rental business.
So a lot of people are talking now to put more money in, but the problem is not the money. Problem is land and construction commissions.
But if you look at land, I mean, obviously, you do have quite a bit of land, and some of the cities like Berlin or others are not necessarily super highly densely built, let's put it this way. So is it really the permitting issue? And do you see local or national authorities trying to put more resources to that?
No, I think it's even to be a little bit more going more down. And you're right, Berlin is not condensed. Actually, no German city is condensed. So if you are coming from New York or London, you are thinking this is a midsized city, which is in reality this. So it's not condense the condensation potential in Berlin but in all other big cities there.
Actually, the point is we are always talking about construction permissions. In the end, the point is that politicians are not strong enough explaining to people that we need construction. Not in my background, I think you know this phenomenon all over the world. And every time you're doing construction, there is some people who are against this construction. And the moment in Germany, politicians are obviously not strong enough to work and to explain to people that this is necessary in the interest of the whole city.
I don't know if you see the sentiment in other parts of the world. In Germany, at the moment, it's a very big phenomenon. And that's why to solve this issue, politician has to become stronger. They have to be more leaders. They have really to lead also discussion.
And they need to explain to the people that no construction is not an option in a city where people are moving in.
And is there perhaps a more federal answer to that as well? I mean, obviously, you need to streamline processes and perhaps also people need to be involved to some extent less in the decision making process to the extent that they can appeal to it. Is it something that is happening at all or not really at this stage?
No, I think what happened was in around 2 1000 and a little bit later in the consequence where Germany thought that we are finished, we actually gave the whole power for construction processes, for local regulations, for all these to the lender. So the central government actually has no power. Even the Bauer Otten, which actually discussed how we have to build, is actually decentralized today. So the federal Minister of Construction is in the same time the Minister of Interior Affairs actually don't have too much decision power left. It's all local.
And I don't see in the moment a willingness in Germany to change it to give more power to the federal government. So it's a backlog situation.
And from this what you're seeing, I mean, obviously, you're saying people don't want more construction in their backyard. Is that a national level national sort of phenomenon? Or do you see some lenders that are more open perhaps since Moses?
Actually, it's again, the construction permission is not given by lender but then by the municipality, which is a third level. So the framework legislation is done by lender, and then definitely construction permission is doing in the municipality. And I would say in all big cities, you see the same framework, not in my backyard.
All right.
But of course, cities are reacting different. In Berlin, they are actually asking for nationalization. In Munich, they are just walking together with their politicians, drinking a lot of beer, telling them that they don't want to have the construction permission. So actually, the cities are a little bit different. But in the end, the phenomenon is the same.
People don't want to have changes.
Okay. Understood. Perhaps one last question, if I may, on your services business. Can you give us an update on that? I mean, are you seeing are you trying to develop additional services?
Are you still seeing I mean, obviously, you've talked about the $20,000,000 increase of that business. You have anything new to say or new services that you're developing?
No. I think at the moment on the new services, as you see, we are very good on track. So I think you mentioned you noticed probably that I'm very optimistic there in the guidance to deliver the €20,000,000 more. In the moment, we are working hard on the energy piece because this is the next big thing. But of course, in this business, which is a very long term business
And you mentioned insurance as well?
No. I'm talking about energy. Energy is actually the piece of business there. Of course, there's a massive potential there, but this will not change from 1 quarter to the next.
All right. Okay. Thank you.
I take this business as a very stable growing business for years after years. We make it boring, so we are not taking this. That's why it becomes very boring, but it's a very, very stable business.
Thank you very much.
The next question is from Kai Klose of Berenberg Bank. Your line is now open.
Yes, hello, good afternoon. I've got 2 quick questions. The first one is on Page 18 regarding the debt expiry profile. Could you just share your thoughts what you aim for the upcoming debt expiries in particular regarding lengthening the debt maturity and or changing the exposure to unsecured and secured funding? And the second question would be on Page 27 regarding your recent, let's say, acquisition opportunities we're looking to.
Could you indicate of these 3,000 units where you are currently in the due diligence process, if this could also if this also includes a higher portion of development land or if you're interested to buy more land rather than existing properties in order to beef up your development pipeline? Thank you.
Can I do the second question first and then I hand over to Elena because the apartment is a little more complex? It is very clear on the acquisition, there is no land. This is just apartments. There is no land reported.
All right.
The next question is from Robert
Gordon. No, no, no.
We have one more question
from Kai. No, no, no. We have one more question from Kai. No, no, no. We have one more question
from Kai. No, no, no. So Kai, what we're doing is that we're really opportunistic about this. And you may have seen that the spreads have come in significantly. So at this point in time, even in the long maturities, eurobonds do look quite attractive.
But again, I'm keeping it open. I can do secured and I can do euro bonds, and I will just sort of like decide if and when time comes due to refinance the bond. Clearly, as you know, given with the Deutsche Wounden disposal and now the repayment of the hybrid, I don't have a lot of refinancing to go for the remainder of the year.
Okay. Thanks so much indeed.
The next question is then from Robert Wertheimer, Kempen. Your line is now open.
Good afternoon. This is Robert Kempen. Perhaps, I mean, with a number of higher level questions. First of all, where are we on France? You have been studying the market now for 1.5 years.
And what are currently so far your findings after also taking your first stake in a French company? How can we expect the Vinovia to take place in the French market? Is it going to happen in the next 3 to 5 years? Any views?
So first of all, I think we are positively surprised, and it unfortunately is not shown in the figures because it's too small, With the development of our 4,000 10% of the 4,000 units, they will definitely be better than we expected. But this, of course, you will not see unfortunately in our figure because it's too small. We are learning. We are still having very interesting and teaching debates with the French government. There's always coming opportunities.
But again, I think you mentioned in your question correctly, it's 3 to 5 years. I think I would be very positive that Bonnove is bigger in 3 and the 5 years from now in France. I'm not sure if it's 5 years or 3 years, and I'm not sure how much is much bigger. I think this is a long term project. And nothing has changed in a way that we say we would revise completely what we have said on the last quarter.
Okay. But the protest of the yellow vest is not helpful for the liberalization of the market. On the other hand, also there, they are putting now more money in the system. New construction is not working really. So this is all indicators that the system is long term not sustainable.
Okay.
But the fact that you mentioned It's not
too fast because then it will change and then this gives offers opportunities. And it's not chopper.
Okay. But the fact that you mentioned better than expected on the only 400 units that you have indirectly means that this is a market that you are going to grow in?
No, I cannot tell you because we are not continuing to buying 400 units. So this was just the way that we actually are positively surprised. We learned that you can manage it. So this is what the message is. So there's no bad surprises.
Everything is doing well. It doesn't make sense for us to own 4000, 8000 units just to be in France. This was actually, as you know, this was research and development. So research and development is performing well. The opportunity will come if the market is changing because we are talking here about housing for the mass of the people, housing in the high end caliber in Ile de France in center of Paris is a completely different market, and this is definitely not a market for us.
Okay. Clear. With the current knowledge that you have, how should we expect, let's say, your medium term capital being allocated between, let's say, Germany and Sweden? Where do you expect to see the most growth for you?
In relatively figures, because of the small base, I would say Sweden probably in the moment is will grow faster in percentage wise of portfolio, but I think this is a no brainer. This depends on a lot of things. It depends on the development of prices in Germany. It depends on the willingness of owners and Sine to sell. So we are there completely opportunistic.
And because this is in the end, the question is where we want to acquire more. And this is we should be completely opportunistic because otherwise, we are putting pressure on us, which we don't need and which is not helpful for the shareholders. You know my story. So of course, Sweden is because we are still so small. If you buy a portfolio in Sweden of 1,000 units, you are growing the company by 5% or 6%.
So that's why I think it's obviously that Sweden will go a little bit faster percentage wise.
Yes, of course. And have you already identified the number of portfolios you're interested in?
We are actually the same like in Germany. We are waiting for opportunities.
Okay. And I'm And it's all about KPIs.
You can calculate a lot of portfolios. It's very easy. It's just expensive. And we are not buying. If it's fine, we are buying.
Okay. But we are not in
a hurry. So we are not we have never promised to be in Sweden with 30,000 units next year. So we are not under pressure.
Okay. And perhaps a tricky one. You mentioned yourself that prices are going up quite rapidly in the urban areas, including Berlin. Now with the recent unrest in Berlin, this has led to quite a derating of certain stocks. Would this if this were to continue, is this for you a good opportunity to step in again?
I think there's 2 others. Politically, it would be probably suicide because I would be the most hated man in Germany. Imagine that they want to nationalize and somebody else will make an offer. So I think this is probably something which is not possible. But again, I think we have learned in 2015 very clear that a transaction like this only works if 2 CEOs agree that this is a good transaction.
I don't see any change in attitudes here. So we have taken our learnings. So that's why I think nothing have changed. Nothing is new there. You know probably one day, 10 or 15 years or so, some of our successors will reopen the discussion.
Excellent. Many thanks.
The next question is from Manuel Martin, ODDO BHF. Your line is now open.
Thank you. A question regarding the tenants in your portfolio. If you have a look at your tenants, what do you think could be right now more or less the share of rent, which they have to pay versus disposable income? And has that increased? And where could be the level in the future?
Of course, I think that might be different in the different countries, I admit.
Actually, I cannot answer you completely because we don't know the detailed income of the tenants. So technically, we are not allowed to. But In general, let me look just for 1 data. So you can talk about actually the country as a whole. So I don't know the exact salary of my tenants.
And actually, I don't want to note from month to month because this is just an issue, which I think we as a non state company should not know every detail of our tenants. I know Sweden has a completely different view on this, but transparency in Germany is not as high. What you see in general is that this rent as a disposable income of Germany in general in the country is more or less it's actually a little bit decreasing, which is clear because rent is normally growing lower than inflation rate. So this means that disposable income, which is more or less coming with inflation rate, is actually growing faster than the rent, which is, of course, this is the average. There is a portion of people where this is not the case.
Okay. Thank you.
But for example, to give you, in Germany, we have an average of this is our country of below 24% disposable income, while for example, in France, you have 26% or in the UK, you have 27. So renting an apartment in Germany is still relatively cheap if you compare it to other countries. It is getting more expensive in the big cities in comparison to 10 years ago. Okay.
Yes, sir. Thank you.
Just one reminder, if you look on our average trend, which is €6.50, if you compare and this is mainly we are today now mainly focused in big cities. So if you look on this and you compare it to other markets, you know by yourself that this is still very cheap in Germany.
I see.
It's per square meter for the Americans in the call, €6, it's per square meter and not per square feet.
As there are no further questions, I would like to hand back to Rene for some closing words.
Thank you, Judith, and thanks everyone for joining. Now I received various emails during this call of people complaining about the sound quality. So to the extent you were affected, apologies. We'll look into that and hopefully have better sound quality next time around. Apologies for that.
In terms of timing and what's ahead of us, as a reminder, the H1 2019 results will come out on August 2. Until then, we'll be on the road quite a bit. We also have our Capital Markets Day on June 5 in Frankfurt with the dinner to kick it off on June 4. And certainly, we hope to speak with you on one occasion or the other before then. As always, please do reach out to me or the team with any questions and comments you have.
And with that, that's it from us for today. Have a great day, everyone.
Thank you very much.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.