Dear ladies and gentlemen, welcome to the H1 2020 Results Analyst and Investor Call of Vonovia SE. At our customers' 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. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Rene, who will lead you through this conference. Please go ahead, sir.
Thank you, Alexandra, and welcome to our earnings call for the first half of 2020. Your hosts today are once again CEO Rolf Buch and CFO Helene von Roeder. We're in different locations today, so bear with us in case we have slight delays, especially in the Q&A. I assume you have all had a chance to download the H1 presentation. In case you have not, please go to our website and you'll find it under latest publications. Rolf and Helene will lead you through this results presentation on the basis of the agenda on page three, and of course, we'll be happy to answer your questions afterwards. Let's get right to it, and let me hand you over to Rolf.
Thank you, Rene. Also from my side, a warm welcome in the summer holidays, probably for some of you. I have already finished summer holidays and I'm in Bochum now. I think you have seen in the H1 presentations that we have shown a robust performance and actually we have seen no meaningful impact from COVID-19. We have not explicitly disclosed it, but our rent collection is in the normal corridor of above 99%. It's a B2C business. This is risk to many. This is specialty that the customers are backed by a strong Social Security network. That's why it's not a surprise that rent collection is in the normal corridor. Overall, the business is boring and we are even now more relaxed than after the Q1 because all processes in our company are adapted to COVID-19.
Performance was more or less comparable to last year, 3.9% organic rental growth. EBITDA was up by 8%. Group FFO was up by 11%, so good results. Adjusted NAV is up by 5.4% in comparison to year-end 2019. The main reason is EUR 2.2 billion of value growth. But please keep in mind that we only have valued two-third of our portfolio, and we see constant value growth across all regions except Berlin, which of course is obvious because of the rental regulation there. There we only have seen a 0.9% growth from value growth. EPRA, we have disclosed the first time the new EPRA metrics, especially the EPRA NTA, which reflects more or less the value of the brick and mortar, which is EUR 58.14 per share, and then the EPRA NRV, which reflects more or less the value of the company, which is around EUR 72. Capital structure, very solid.
LTV is back in the middle of our comfort zone at 42.7%. Net debt to EBITDA multiple is 12. We fully can confirm our guidance 2020, which in EBITDA of roughly, let's say, EUR 1.9 billion, in the corridor, which you see on the slide. We also confirm the corridor for FFO, on the upper end of the corridor of EUR 2.75 to EUR 3.25. This is relatively good news in this period, probably not all companies are able to confirm the upper end of their original guidance before COVID-19. With this, I hand over to Helene.
Hi, thank you very much. We had a slightly larger average portfolio base in H1, and together with performance improvements, this resulted in an 8% growth for EBITDA total and 11% growth for Group FFO. As per the end of June, the FFO per share is still based on 542.3 million shares. Just as a reminder, as the end of July, that number went up by 6.6 million shares as a result of the scrip dividend, which was chosen by 41% of our shareholders. That is an increase of 1.2% in the number of outstanding shares. If you look at year-end per share estimate, you want to be sure to account for this. Let's talk about the individual segments and start with the rental segment on page six.
Rental income increased by 11.6% and EUR 118 million in total, of which EUR 89 million came from Hembla and the remainder from organic growth by way of rent increase and vacancy loss reduction. Maintenance expenses were EUR 154.7 million, slightly up in line with the increased portfolio volume. Similar to Q1 2020, operating expenses were impacted primarily by two things. The first thing is obviously Hembla. As you know, we are in the process of putting the operations of Victoria Park and Hembla together. At this point, the operating synergies are still to be realized. The second reason is the auxiliary expenses included in the rental income and in the operating cost because of the concept of warm rents in Sweden. Rough math suggests it's about EUR 50 million for H1 2020 and about EUR 20 million for H1 last year. On to the next page, seven.
It shows the main operating KPIs for the rental segment. Organic rent growth was 3.9% year-on-year, of which 1% came from the market, 2.3% from modernization, and 0.6% from new construction. Vacancy remains very uneventful at a low 2.8%. We're actually seeing in the wake of the COVID-19 crisis that vacancy loss is coming down as fewer people move out, but interest in our flat from potential tenants remains very high. Maintenance expenses per square meter were exactly in line with last year, and capitalized maintenance was higher than last year, as expected, because we have planned for a number of targeted larger scale measures this year. With that, back to Rolf.
Let's move on page eight of the value add segment. The adjusted EBITDA came out at roughly EUR 67 million and was roughly 10% lower than last year. There are basically two reasons for this. First, the share of the work carried out by our own craftsmen was lower than last year and was compensated by higher volumes of order handling. Actually it is clear in the COVID-19 crisis, we decided not to tear down facades on the building and roofs, which this is work which we are normally doing with internal resources. Of course, we continued the new construction. That's why the mix effect is a little bit slightly changed, and that's why we lost a little bit volume for our craftsmen organization. This comes out as a little less contribution.
We are very optimistic that this will be kept, caught up during the year, so we are not worried at all. Here you will see really a small COVID-19 impact. Second, as we have said in the first quarter, was the extreme wild winter with actually absence of snow. That's why we had no external turnover from snow removal and de-icing of sidewalks, which explains the smaller external income. Overall, value add business is a long-term business, and we will see long-term growth. Why probably some quarter, especially this quarter, was negatively impacted mainly due to COVID-19, we see good progress in all other sectors. We provide multimedia service to 10% more customers than one year ago. We provide 85% of the residential environment service with our own people. This is up 15% year on year.
With the smart metering, we are covering 270,000 customers, 10% year-on-year. We are supplying energy to 68 delivery points in our portfolio, which is a relatively new business for us, which is 27% more than a year ago. Because I expect that we will catch up, especially with the modernization in the end of the year, I am very optimistic that the EBITDA of value add will be higher than 2019. Let's move on page nine, which shows the results on the recurring sales segment. We sold roughly 1,300 individual apartments for a gross proceed of EUR 195 million. The fair value step-up was surprisingly high with 38.8%. This is significant above the guidance of 30%. We are well underway and actually see the potential to finish the year with a fair value step-up that might be a little bit above the 30% threshold.
In terms of market sentiment, the demand for condo units is unbroken, and we do not even see any COVID-19 effect. The overall underlying market fundamentals are healthy, and I think this also gives a strong support for the valuation results, which Helene will show you a few slides later. With this, back to you, Helene.
Finally, our development segment on page 10. This segment includes all new constructions of apartments by way of entirely new buildings, excluding additions to floors on existing buildings. We distinguish between development to sell and development to hold for our own portfolio. The bottom line adjusted EBITDA was EUR 45.1 million in H1 2020, driven by a higher gross profit and lower costs, which were partly due to the reversal of provisions that are no longer required. Page 11 has more color on our new construction pipeline. We completed 534 apartments to hold for our own portfolio in the first half and 83 apartments to sell. In our construction to hold, we now have identified potential for around 41,000 apartments based on the short, medium, and long-term opportunities across our portfolio today. For 2020, we expect to deliver around 1,300 apartments.
The development to sell part is a useful addition to the to hold development. As I have explained before, we often rely on the higher margins from the to sell projects to cross-finance the land cost and make the to hold of these developments more economically feasible. The pipeline to sell is approximately 9,000 apartments. Our target for this year is to complete more than 300 apartments to sell. Page 12 shows the H1 valuation results. As in prior years, we took a pragmatic approach to the H1 valuation and did not value the entire portfolio, but only about two-thirds. This includes the 26 largest cities in Germany, plus Vienna, plus Sweden. The rest of the portfolio is not revalued and only adjusted for the capitalization of our investments. On this basis, values are up by a total of EUR 2.3 billion.
Of that amount, EUR 1.8 billion came from performance and yield compression, and around EUR 0.5 billion from investment in both the revalued part of the portfolio and on the rest. In the table on the bottom right of this page, we're showing the actual valuation result with 5.6% for H1 2020, and on the right-hand side, the comparable for H1 last year, where we had 7.9%. The shaded columns in the middle are a back-of-an-envelope scenario what the valuation would have been for H1 this year if Berlin had performed similar to last year. As you can see, the absolute value growth would have been a bit higher and the relative growth at 7.2% a bit lower due to the larger portfolio base. The new valuation puts the overall portfolio at a 23.4x in-place rent multiple and EUR 1,954 fair value per square meter.
Page 13 shows a bit more detail across our 15 regional markets in Germany. As I said, we did a valuation of our 25 largest cities in Germany, but not for the rest. For some regional markets like Dresden, Berlin, or Kiel, almost the entire asset base is revalued. For others, such as the Rhein-Main area or Stuttgart regional market, only a part is revalued. This is particularly relevant for the northern Ruhr area, where we only included Duisburg, much of which is probably the extended northern part of Düsseldorf. The table gives you the breakdown of the total value uplift between performance and yield compression on one hand, and investments on the other. The map on the right-hand side shows the total value growth. Let's move on to page 14 for the NAV.
Supported by the H1 valuation, the adjusted NAV was up 5.4% to now EUR 54.72 per share. As most of you will be aware, EPRA published new best practice recommendations, including three new NAV definitions. While the new metrics are mandatory starting with the reporting of the full year 2020 results, we have decided to already publish two of them with the half year results. In light of the H1 valuation, we think that makes sense. Let's go to page 15. Page 15 shows the reconciliation between equity, including deferred taxes, and the new metrics Net Tangible Assets, NTA, and Net Reinstatement Value, NRV. We consider the NTA on the left-hand side to be broadly similar to the current adjusted NAV that we report, as it's a proxy for the portfolio value.
The main differences are that for the NTA only looks at the long-term holding portfolio and ignores the disposal portfolio. In this context and logic, the second difference to the adjusted NAV is that purchases costs, such as real estate transfer tax, are no longer subtracted from the value, which makes sense if you're looking at a holding portfolio on a going concern basis. The other metric, the NRV on the right-hand side, goes a step further and for the first time also accounts for value that lies outside of the portfolio to determine a proxy for the value of the entire company. We have been arguing for a long time that Vonovia is more than a collection of stones. The NRV takes this into account and includes the value for intangibles. In our case, that is the value add and the development segments.
The fair value of the intangibles is the result of an external independent valuation, which uses our internal five-year business plan to calculate an enterprise value via DCF. Similar to the NTA, the NRV also includes purchases cost, in this case for the full portfolio, because the underlying assumption here too is a going concern basis. To page 16 and the LTV. Our LTV at the end of H1 was 41.8%, but the more relevant number is probably the LTV including the dividend and scrip ratio, and that number is 42.7%, so well within our target corridor. We do continue to believe that a range between 40%-45% is the right level for us, especially if we include the roundabout eight-year duration of our debt and the fact that 96% of our debt are fixed or hedged. The net debt to EBITDA multiple was 12 x.
While this is a little bit elevated from the end of last year, we think it's still at a reasonable level, especially if you consider that this number already includes the full debt, but not the full EBITDA potential, which is normal in a growing business. We're not concerned. Page 17. A bit more color on the capital structure and debt instruments. We received an upgrade of our business risk profile from S&P from strong to now excellent, which is the highest possible category. From what we understand, only a few real estate companies worldwide are in this category. We view this as an evidence for a successful strategy to keep the risk profile low by broadening the business in terms of strategy and geography. On balance and in combination with our financial risk rating, S&P has, however, left the company rating at a BBB+.
You can imagine that we have ample headroom. We've added the bond covenant to the upper right-hand side of the page, and it is no surprise that there's plenty of headroom for all of them. Almost all debt is fixed or hedged , so any interest rate increase would affect our numbers only slowly, as no more than 12% of the total debt becomes due in any given year because of the smoother maturity profile. You all saw the two bonds we issued a few weeks ago. After paying an elevated coupon for these bonds that we issued at the peak of the COVID crisis in April, the recent bonds were issued in a much calmer environment, and you see this reflected in the new coupon levels. By issuing these bonds, we were able to lock in the financial synergies for Sweden.
On page 18, you see our guidance for 2020, which is entirely unchanged from Q1. We still expect rental income of approximately EUR 2.3 billion and we're fully on track. Organic rent growth guidance remains at approximately 3.3% to approximately 3.8%, and the main determining factor is the one-off rent reduction expected for November in Berlin. Apart from that fluctuation, which we have seen coming down because of COVID-19, has an impact on this number, and if turnover remains low, this guidance could become a bit of a stretch. For recurring sales, we're well underway in terms of volume and fair value surplus, and actually it looks like we might come out a bit above the 30% that we usually expect, as demand continues to be very, very strong.
Overall, in terms of Adjusted EBITDA total, we're very happy with the range and see no reason why we should not reach it. Finally, the Group FFO, we're also confident and even see a reasonable chance to end the year towards the upper end of the guidance range. This, of course, is relevant for the dividend as we once again intend to pay out 70% of the Group FFO. With that, back to Rolf.
Yes. You see the results and the guidance is pretty straightforward, let me briefly summarize. Our business continues to perform very stable and is fully in line with the expectation we have set before COVID-19. We have proven the robustness of our business model and are only marginally impacted by COVID-19. I think this is what we have said over the last years. It's a stable B2C business backed by a social security network in all three countries, Germany, Sweden and Austria. This I think is now proven in difficult times. The underlying market fundamentals are completely intact and the environment in which we operate remains very favorable. We remain very confident our ability to deliver growth as guided in our 2020 guidance and beyond.
Last, Vonovia is more than brick and mortar, and I think the new EPRA metrics are a good proxy to show the value of the portfolio, so the brick and mortar and the full value of the company. With this, thank you for your attention and back to Rene.
Thank you very much, Rolf and Helene. I will pass it directly to Alexandra for the Q&A, please.
Now we begin the question and answer session. If you have a question for our speakers, please dial zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask the question. If you find your question is answered before it is your turn to speak, you can dial zero and two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question is from Thomas Neuhold of Kepler Cheuvreux. Your line is now open.
Good afternoon. Thank you very much for your presentation and taking my questions. I would like to start with a couple of questions on the slide, page 15, the calculation of the NAV. Can you please provide more details on the composition of the EUR 3.9 billion in fair value of intangibles? Which portion is due to the value add segment and which portion to the development business? Can you maybe also elaborate on key valuation assumptions there? I have more questions.
Helene, you will do it. This is your slide.
Hi. As you can imagine, this is all very new. At this point in time I'm not sure we will going forward disclose the differential between the two things. I would like to come back to you on that one. What we have done is we used our five-year business plan as audited and decided by the supervisory board. We gave it to a financial accountant, which we asked to do the valuation. He's using the valuation, using the WACC that we actually publish in our financial report in order to come up with a DCF method. In a way what we've tried to do with the new NAVs is to make sure that everything can be tied back to the audited financial report.
At some point, I'm pretty sure you're going to grill Rene on that and he's really looking forward to it. He will be able to point to every single number which is used to calculate. The one problem I'm having is the fact that we don't disclose our five-year business plans. To be honest, we're in discussion with both the EPRA and internally to sort of find a way to get that solution because that indeed is something I'm sure you will want to follow. Yeah.
Exactly. Yeah. Okay. Understood. Okay. Then I have two more really general, more or less philosophical questions, maybe for Mr. Buch. Firstly, I was wondering, what is your view on the work from home trend and what implications, chances, and risk could this trend have for Vonovia and its strategy?
I think what we have experienced here was a crash course in digitalization. I was surprised because my original was call centers, my original business, how fast we were able to transfer the full business in the call center, which actually took us one day because we have a very good technical backbone. We learned here all that it is obviously possible to work from home and to manage the company. It was even challenging times to manage the company because we have changed processes, and we all did it literally from home. I don't think that we will come back to a situation where everybody has to do five days a week in the office.
What I also have experienced here in our company, in talking to other CEOs who have seen the same experiences, you need the people from time to time to meet in person because you get some effects which you probably don't get on the digital format. I think we will come to a solution where we have a mixture of home office and in presence, and that's why we will need our headquarter building. Probably, we have more room for expansion in this building before we need to expand the building. The usage of office space, from my point of view, will be reduced in the future.
In terms of impact on your operations, do you see any risks or chances there that maybe tenants demand bigger apartments because they need an office room, so to speak? Or do you see that there's a risk that the urbanization trend might stop and people use the opportunity to move out of the bigger cities because it's cheaper there if they have to commute only two or three days per week?
I think, one of the big driver to choose a location is actually the school system for everybody who has children. This is literally better in the cities. If we are talking about the cities in our regions, we are not only talking about the city center. If you know the German cities, actually, the single-family houses, it's still part of the city. We are not talking about countryside. Nobody will move to Mecklenburg-Vorpommern because he has to work in Berlin and then is commuting two hours. He's probably moving to Brandenburg, very close to Berlin, to move in Berlin. This is, for us, the same business. Actually, we are literally not in the city center, but a little bit on the outside where the people will move to.
We don't think that actually there will be a demand for bigger apartments. In general, I think the people have managed to do it. I think the biggest problem was the children were at home at the same time. The moment, as long as the children and childcare will go on with kindergarten, with schooling, I think the people are able to work from their home even with the existing apartment. We don't think that there will be a massive change, and I also don't think that people will have the affordability to rent an 80 sq m apartment instead of a 60 sq m apartment. I think this will have no major impact.
Okay.
Of course, what is important, and I am so happy that we have done since 2013, modernization, always with balconies. I think it now makes a big difference to have an apartment without balcony or with balcony, and I personally think that to rent out apartments without a balcony will be more difficult in the future.
Okay, thanks. Last question I have is, if you could also maybe share your view on how investment demand for residential assets and residential prices could develop in light of high macroeconomic uncertainties, high unemployment rates on the one hand, but on the other hand, clearly negative interest rates most likely will persist for much longer?
We had, actually, in our last board meeting, we had a long debate because we always looked, of course, on the long-term history of our valuation. Now you have to help me with the word linear. What is the English word for linear?
Like a ruler. A straight line.
Like a ruler. It's like a ruler. There is no trend broken. If you look on the valuation, especially of individual apartments, it's like a ruler. It has no change in trend. It's very astonishing. Of course, for the block sales, you see sometimes a little bit more volatility, but this is because there's less transactions. This is a very, very stable trend, and there's no reason why anything should change there. This is probably partly driven by interest rate, but I think more important, it is driven by demand and supply. You know my famous example of my 21-year-old daughter. Actually, if she wants to move to Munich and she calls me saying, "I need an apartment, and I don't find a rental apartment," I will buy an apartment for her and rent it out to her independent on interest rates.
It's a supply/demand issue, and supply and demand issue is not changing due to COVID-19. It's not changing due to economic cycles. It's just people have to live in the cities, and there's no alternative to the normal product. That's why it's a very long-term trend. The long-term trend will only be broken at the moment if Germany would be able to deliver much more construction volumes. If vacancy goes up, then I think we will see a change in rent. As long as vacancy is low and as long as we have so much construction permission issues, I don't see any change in rent.
Okay. Thanks a lot.
The next question is from Sander Bunck of Barclays. Your line is now open.
Hi. Good afternoon, team. Thanks very much for that. I have a couple of questions. I'd first like to go to page 15, which I guess indeed is going to be the most favorite slide for you in the next couple of weeks and months. Rather than focusing on intangibles, I'm actually a bit more interested in the impacts of the real estate transfer taxes. Can you just confirm that indeed the full EUR 3.5 billion that you're effectively adding back, that is solely due to the add back of real estate transfer taxes? Is that correct?
Helene?
Let's talk a little bit about the transfer taxes, or taxes in general. What we've done is we sort of bucketed our portfolio. One, according to a portfolio which we know we will hold forever, and a portfolio out of which we could potentially be selling apartments. For example, that means that our entire Austrian portfolio, where you know the business model is slightly different than in Germany, is classified as a potential to sell a portfolio. The portfolio where we have singled out into individual flats, where we've created individual land registers out of which we do the recurring sales, is classified as a to sell portfolio. For those portfolios, we deducted the entire deferred tax, and we also didn't make an adjustment for the real estate transfer tax.
We were very clean around looking at portfolios where there might be, at any point in time, and this is only in 50 years, the intention to sell the flat. There is a portfolio like Sweden and our normal to hold portfolio, where there's absolutely no intention to sell the flat. We are looking at the valuation as a going concern basis. There we feel that, A, we keep the deferred tax and the real estate transfer tax is simply not relevant because those are the portfolios we're simply running at least that's the planned business model, eternity.
Okay. That is clear. The net impact is still + EUR 3.5 billion. I understand the rationale, but more in terms of how appropriate do you think this is to do, given that there's a lot of debate at the moment about real estate transfer tax in general? I also have always believed that effectively, if you were to sell down your portfolio, and I understand you don't want to do that, but you always need to keep the 5% in order to keep the REIT in place. Particularly because of the first point, how appropriate is it to make that adjustment now, given that there's a lot of political discussion around that?
I think probably I can answer this in my still existing role of EPRA chairman. We had this debate for a long time because this is not really a Vonovia issue. I think the old system said actually there is a value of the building, and if you are selling it, the buyer has to pay real estate transfer tax, and he will deduct the real estate transfer tax from the buying price. That's why it's reduced in the valuation. In reality, if we sell buildings in blocks, we often do share deals. There's actually no real estate transfer tax. You can argue actually real estate transfer tax doesn't happen. What you have seen in our past history is that the buyer was never able to deduct real estate transfer tax, but he had actually, in reality, pay a premium on the valuation.
I think this is really doubtful if it was a right concept for the valuation to deduct real estate transfer tax. I think that's why now it's more fair, and especially these buildings we are not selling, so that's why real estate transfer tax will never happen. That's why it doesn't make sense to deduct it, and that's why it is added back because the valuer has deducted it.
Sure. If the real estate transfer tax was to be abolished, that rule in Germany, you would effectively lose that benefit. Is that correct?
No, the valuer will not deduct it, and then we cannot add it back.
Sure. In that case, your NTA goes down, right, if you can't add it back?
No, because the value will go up because there's nothing deducted, and then there will nothing be added on. The NTA will be the same.
Okay.
If you want to think about it the other-
In our EUR 29.6 billion, actually in the valuation, there was a deduction made of real estate transfer tax. It is just add back. If there is no real estate transfer tax, the valuer does not have to deduct the real estate transfer tax.
I mean, not necessarily that the real estate transfer taxes get deducted. What I mean is that at the moment, you can do share deals and you can do asset deals. Your portfolio is valued on an asset deal basis, which means that the real estate transfer taxes get deducted. There is a discussion now where the share deals get abolished, and basically, you always have to pay transfer taxes on it. In that case, your starting point remains the same, but isn't it true that you cannot add back the remaining EUR 3.5 billion?
In the end, the main argument is what Helene said, is we are not selling it. That's why no real estate transfer tax will happen.
Okay. Just for my understanding, that I understand the bridge correctly. Basically the impact is EUR three and a half billion, which is approximately EUR 6.5 On a per share basis. I'm trying to get the bridge between the adjusted NAV of EUR 54.7 and translate that to EUR 58.1, which is effectively EUR 3.5. But the added benefit of the add back is circa EUR 7. What is the delta between the EUR 3.5 and EUR 6.5?
Can we do this later with Rene, because this is number crunching? Is this fine for you?
Yeah. Okay, that's fine. I think it's important number crunching.
Yes
okay. Yeah, we can do it later. The other question I had is on the EBITDA from services business. I understood that there was some impact from COVID. I understand there was some impact from snow removal. If I just look at the numbers, then the contribution was lower in Q2 than it was in Q1. I assume usually in May and June, we don't have that much snow. I'm just trying to understand, because you've been quite bullish on it in the past, and it's a small number, but just trying to get a feeling for what the impact effectively was in Q2.
The Q2 is a COVID effect. We don't have a COVID effect in Q1. This is amazing. Snow removal is a small part. The big part is the COVID-19 effect, which actually where we decided to stop work, which we are doing with internal resources. We normally would have dispensed more, which you can also see that we are lacking a little bit behind in modernization in the moment, which was by intention because we are not removing walls and not removing roofs during the lockdown. That's why our people has a little bit less to do. Overall revenue of the value add business is the same because we have more external work. For example, we have not stopped at construction places for new buildings because there is no tenant in it, so that's why there was no reason to stop it.
That's why actually the mixture between internal, so what we are providing ourselves and external work was changed. Even if we have the same revenue, we have less internal revenue in the craftsmen organization, and that's why we have lost a little bit of contribution, which is the effect actually of our own decision. We decided this on our own. We would have been legally possible to continue the modernization, but we saw it for the reputation and in the interest of our tenants that we had to stop it, and that's why you see the impact. This, of course, you see only in Q2 because in Q1 there was no COVID-19.
Okay. Sorry. Then very last one is on your rating. Basically S&P has nudged it up another one to kind of an excellent rating. What is it that they're expecting from you before you get to an A rating? What is the requirement to become A-rated?
Yeah. I think ultimately they want us to have a hard commitment on our financial policy. To be perfectly honest, we don't feel that it's the right thing to do to sort of lock ourselves in the respect that they are asking for us. It's an ongoing debate. Let's see. As you all know, I get a bit emotional about it, especially the way we go around the crisis. I think constantly showing resilience and strength compared also to other companies with a higher rating. Yeah, let's say it's an ongoing friendly discussion between the two of us.
Fine. Okay. Just curious, what kind of hard financial target is it that they're looking for? Is it the net debt to EBITDA or is it an LTV or what is it exactly that they're currently not quite happy with?
Well, it's not really that they're not quite happy with the current situation. It's just sort of like they want to have a firmer commitment from us. As you know, they look at debt to equity ratios. No, debt to debt plus equity ratios. That's how they calculate it. Again, it's not yet another number which they are calculating, which is again, slightly different from what we show in these presentations.
Okay, fine.
Again, I think this debate is all about, we always are prepared also to do acquisitions and sometimes we are doing acquisitions without raising equity, even if it's smaller acquisitions. That's why I think we need a little bit of headroom. That's why we stick still with the corridor of, in LTV term, from 40 to 45. This is pretty comfortable corridor. It's a few billions . I think this is good in our business model and we are not ready to tighten our jacket. That's why we stick with this because we think you can run this company even with a 45% LTV easily. We have seen it, and I think there's a lot of arguments. That's why I don't see any need to tighten our tack.
In addition to it, A-minus and BBB+ I have learned it's not a big difference.
Okay. That's great. That's appreciated. Thanks very much.
The next question is from Andres Toome of Green Street Advisors. Your line is now open.
Good afternoon. First question, regarding the develop to sell business, how do you expect profitability to evolve there, if the economic recession will be sustained?
I think, also development to sell business, if you are going on the very high-end apartments, which is not meaningful for us, but there you might see a slower turnover. We are just building a skyscraper in Vienna, and on the top three floors, there is very expensive apartments, beautiful view, perfectly, which has their price. This probably might take a little bit longer if a recession will actually start. Today we don't see any impact, but if it comes. This is probably a few apartments, probably a handful of apartments, which will take a little bit longer. You will not see this in our business. This will be the third decimal after the. You will not see it. There might be an impact.
For the normal Prime and Better apartment, where people need to live in the cities, and they need desperate an apartment because they have no alternative, there will be no impact on the price.
Fair enough. The second point, in your press release, you've put a lot of focus on senior friendly modernization in the communication. Just wondering, does that in any way allude to potentially Vonovia pivoting into senior housing segment, in the future? Is that something you've been thinking about?
I think this is something which is specifically in Germany. This is more for my responsibility role as a CEO of a German resi company. It's also business, but it's also more for society. In Germany, we have an issue. Demographic is given. We cannot change it. In 10 years from now, we need 3 million apartments. Today, we have 700,000 apartments in Germany which are suitable for older people. The main reason is that today, apartments have bathtubs in the bathroom. For older people, you need showers and you have a little bit wider doors that they can go with a, how do you call it?
Walker.
With a walker. That is why some changes have to be made in the apartment. If we are not doing this as a society, we will send people earlier to nursing homes than they need to. I have not met any person here in Germany who prefers to live in the nursing home. It is more expensive for society to have people in nursing homes than if they are still independent in the apartments. It is less quality for the people.
We do not have enough nursing homes as well. This is actually something which goes beyond EBITDA and FFO. If we do not manage this as an industry, in 10 years from now, we will have voters who will be very dissatisfied because they have to be forced to go into a nursing home. This does not mean that we are investing into nursing homes for a very simple reason.
Nursing homes is a different nature. It's a B2B business because your customer is not the old person, but it's somebody who's operating the nursing home. That's why it's a completely different risk profile as long as you send it out to operators. If you are going into the business of operation, you have an issue because people are going into your houses to die there. This is the business which has a reputational risk. Also, you can see in the COVID-19 crisis that we had some issues, especially in Sweden, for example. Not Vonovia, but in general. The high death rate came from nursing homes. It's a totally different business, and we have no experience in it. That's why I don't think that we should be in this business.
That's very clear. Thank you very much.
The next question is from Marc Mozzi of Bank of America. Your line is now open.
Good afternoon, everyone. Thanks for taking my questions. I have three questions. I'm sorry, I have to as well to look at your page 15 once again. Can I just understand what is the difference between the starting point between the NTA and the NRV? One start at EUR 29.6 billion and the other one at EUR 31.1 billion. It seems it has exactly the same definition. I'd like to understand this. Can we have the EUR 58.14 comparable for December 2019, just to see how much growth you've been capable to generate here. Definitely, as Sander asked, if we can have a breakdown of how your EUR 3.5 billion works between transfer tax and the rest would be much appreciated because I have to admit, I'm completely lost here with your bridge. That's my first question.
Helene, I think the first two questions are in the presentation, but can you go a little bit more in detail there?
Starting simply, what is the difference between the EUR 29.6 billion and the EUR 31.1 billion as IFRS shareholder equity plus deferred tax on investment properties and one on holding properties? I'm not sure exactly to understand the difference.
Yeah. Let me maybe Sorry.
Helene,
Yes.
Can I quickly start this one by saying that one is the holding portfolio only, i.e., it includes the deferred taxes of the holding portfolio only and not of the selling portfolio to the point that you made. The other is the entire portfolio. The difference lies in the amount of deferred taxes added back. The second question, Marc, is on page, sorry, 48, where you have the development of the NTA and the NRV from December 31 to June 30.
Okay, great. Thank you. Next question.
The third question, Marc. Sorry, go ahead.
No, sorry, please. The breakdown of the 3.5-
You asked of the breakdown of the EUR 3.5. That again, so you're referring to the real estate transfer tax, the green thing on page 14?
Yeah, exactly.
Is that what you're looking at?
Yeah, exactly.
Exactly, yeah.
Yeah.
As I said, the way you need to think about it is like when CBRE values our buildings, they will say it's worth EUR 100. Yeah. All in. What they do is they deduct the real estate transfer tax from the value of that building, which dependent on the federal country you're in Germany, is somewhere between 2.5% and 6.5%, I think. Ultimately, in our balance sheet, the value of the building, let's say it would be 5%, just to pick a number, will show up as EUR 95. That is what the CBRE valuation of our buildings is in our balance sheet. For the holding portfolio, what we have done is we've added back those EUR 5 because we are never intending to sell it. These buildings to us are worth EUR 100.
For those portfolios where we have individual land registers and which are classified as to sell for our recurring sales portfolio and for the Austrian portfolio, we have not added back those EUR 5 because we felt we couldn't make the claim of us never touching these portfolios. Yeah? Does that make sense?
Yeah, it makes sense.
Okay, cool.
EUR 3.4 billion, it's entirely linked to transfer tax. Nothing to do with deferred tax.
No, the deferred tax is not in there.
Okay. I do start to understand now. Okay. Leave it. I'm sure we're going to have this conversation again outside of this call. My other question would be, can we have an update on the Berlin rent freeze? Where are we now according to your information in terms of future ruling from the Constitutional Court? Should we still expect something to come out before the end of this year? Maybe more importantly, how do you think that the departure of Mrs. Lompscher may influence the viability of the Berlin rent freeze?
I think Constitutional Court, nothing has changed. I think they have now sent out 10 requests. Actually, to be very clear, there are two courts now in the Constitutional Court which are taking care about the same subject. One, which is the first chamber, actually has sent out a questionnaire to 10 organizations, including ZIA, where I am vice president. We have answered the questions. They have got the answers back. You never know, but I think everybody is still saying in the late summer next year, we can expect a ruling. It is out of my range. I am not a lawyer. I am not a part. Nobody knows it. The question is which chamber will rule first, and then the second chamber can overrule the first one. It is a very complex process. Nothing has changed in the while.
This is now the process working, and we as Vonovia, we expect to have to reduce our rents in the end of November, because we don't think that we have a ruling before November. Definitely not a firm final ruling before November. Mrs. Lompscher, I think it was possible to talk to Mrs. Lompscher, so this was nothing. You can talk to her. She was hearing, she was acting, so we were able to cooperate with her. I think we will have the same with the successor. The problem was and is not Mrs. Lompscher. It's the Left Party in Berlin, and it's a fundamental of a big part of the Berlin population, which thinks that private companies should be abolished. To be very clear. This is probably, I don't know what's the percentage, but this is a significant percentage of Berliners believing that we should not exist.
The outcome is a strong vote for the Left Party, and Mrs. Lompscher is just speaking for this group. It doesn't change if you only change the spokesperson.
Okay. Makes sense. The final one would be on your admin cost for your rental business. We still have to see the synergies of the acquisition of Hembla. When do you think that should occur? What sort of amount should we think about?
I think I cannot give you an amount because we are not disclosing it more than what we have disclosed at the acquisition of Hembla. This was around EUR 30 million synergies for the operation and financial synergy. As this will come in Hembla, to be very precise, we actually plan to merge the systems in late autumn this year. We now have decided due to COVID-19 to merge it in the beginning of January. This means that we will do the closing in the old Hembla system. This is literally a delay of three months. Nothing which is actually meaningful. The reason for this is you are not merging a system closely before the closure, because then if you see that you have issues, you have no time to react, and then you cannot close your book.
That's why it's a security decision, because we don't want to do the merge of the two systems too late in the year.
Brilliant. Thank you very much.
Nothing, actually, this is nothing to worry about. It will be delivered. It is up and running. No issues with this.
The next question is from Véronique Meertens of ABN AMRO. Your line is now open.
Thank you. Good afternoon, all. Thank you for the presentation. Just one last question from my side, actually. You mentioned that around 1% of your tenants have taken you up on the offer to find a solution for the financial difficulties due to COVID-19. First of all, is this still mainly commercial tenants, or is the residential tenants also picking up? How will this work in the future with the macroeconomic uncertainty? I think first wave of layoffs has started. What's your view towards the future on that?
The 1% is actually the people or tenants which contacted us. This is not necessarily people which cannot pay their rent. They were afraid, a lot of them, we could help them to find their way through the Social Security, that's why they can pay their rent. This is, again, what I said in the beginning of the presentation. It's not only a B2C business, the 2C part is backed by Social Security Network. If you are getting unemployed in Germany, actually, you don't have any issue with your rent because the rent is paid by the state. I think the vast majority of our buildings are suitable for social welfare. That's why this is not an impact. Unemployment rate and rent collection has no correlation.
It's good that it has no correlation, because otherwise we would have in Germany social problems. At the moment, we are relatively proud as Germans that we can manage the crisis without any social impact for the people.
Okay. That's good to hear. Thank you.
The next question is from Chris Fremantle of Morgan Stanley. Your line is now open.
Hi. Good afternoon. Just two quick housekeeping questions, please. You talk about the one-off reduction in rents in Berlin that's possible in November and the impact on the 2020 FFO. Can you just clarify what that figure is on an annualized basis, please, so that we can calculate how that might or might not impact the 2021 FFO as well, please?
As disclosed, it's roughly EUR 10 million.
EUR 10 million on an annualized basis. Okay.
Yes.
Thank you. Secondly, you've been very clear about your acquisition criteria. Just on the new NAV reporting, how will that new NAV reporting alter your acquisition criteria, especially around the NAV accretion? Should we assume dilution of the EPRA NTA is the new benchmark for acquisitions going forward?
We have not taken a clear decision because this is the first time that we as a service report the new EPRA metric. You will have the formal EPRA metrics as EPRA decided in the end of the year. I, as a chairman of EPRA, should stick to the rules of EPRA. That's why we are sticking exactly to the rules. If you want to know my personal opinion, I think the NTA is probably the best. If you are buying brick and mortar, then the NTA accretion is probably the best criteria. We will take this decision later, and we will discuss it with our supervisory board before we will disclose it.
Okay. Thank you.
Of course, the sense of this acquisition criteria is to make sure that the management board is not pushing too hard for acquisitions. To protect actually shareholders from too expensive acquisitions, and that's why we will use it accordingly to fit to this purpose.
The next question is from Crispin Royle-Davies of Nuveen. Your line is now open.
Good afternoon. I've just a quick question on the external value add business. You've set out very clearly where you've seen growth in multimedia, smart metering, energy supply. How is the external revenue in the value add segment down year-on-year, even slightly, if all the KPIs of delivery are up meaningfully?
No, the external was actually the snow removal. This was the explanation for this actually was in the first quarter, which is I think an effect which is not meaningful for the long term. It's a relatively high rentability business, the snow removal, because you actually take the risk if there's snow falling or not. That's why of course, in a year where there's no snow, you have no revenue and you still have some costs related. This is how it is rewarded, and that's when the other years it will be better. The external revenue will grow, of course, significant because we will grow in the energy providing.
We have to grow in the energy providing anyway because we have to manage our CO2 emission targets. It's actually the only solution to get a CO2 neutral housing stock, if that we also provide energy and electricity mainly to the tenants. That's why this will be an external revenue and this will grow in the next years. I have to admit that we have to work on the lobbying because some of these, which is good for environment, which is good for the CO2 emission footprint of Germany, is still in the regulatory environment in Germany, not allowed. There is some processes being done. I think we will only expect actually some more legislation, where we allowed to sell directly electricity to the tenants before the end of the government. This is ongoing.
We think we have to do it because otherwise you will not get CO2 emission neutral buildings. This is linked and probably you have seen our example, what we are doing in Bochum, Weitmar, where we are doing research, where we actually are learning how we can produce from solar panels, heating and electricity, and store it, and then sell it to the tenants. This is a widely respected and a lot of politicians are traveling at the moment to Bochum, Weitmar to look what we are doing. We will have a conference in the beginning of October with very prestigious people. I think we will use this as a showcase to show what has to be changed to protect our environment. This is a huge potential.
Economically, of course, if we are able to sell to our tenants electricity, this is a very big basket of additional revenue and additional EBITDA. This, of course, again, as you know, we are prudent, we are slow. We are doing step by step. This will not come immediately, but step by step.
Thank you. Can you just confirm that then the residential environment bucket of the value-add EBITDA, how much of that comes from snow removal in a typical year?
We are not disclosing the detailed figures. Actually, it's not meaningful. It came to zero this year.
Yeah. Okay. That's understood. Thank you.
As there are no further questions, I hand back to the speakers.
Thank you, Alexandra. Thanks everyone for dialing in. That concludes today's call. As a reminder, our nine months 2020 results will come out on November 4th. We'll be engaging with you guys quite a bit until then. Obviously, as always, me and the colleagues are readily available. If you have questions, please do reach out, let us know. Until we speak again, and one day hopefully see each other again, so long, have a good day, and thanks for joining.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.