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Edited Transcript of DWNG.DE earnings conference call or presentation 13-Aug-19 9:00am GMT

Q2 2019 Deutsche Wohnen SE Earnings Call

Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Deutsche Wohnen SE earnings conference call or presentation Tuesday, August 13, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Zahn

Deutsche Wohnen SE - Chairman of the Management Board & CEO

* Philip Grosse

Deutsche Wohnen SE - CFO & Member of the Management Board

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Conference Call Participants

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* Andres Toome

Green Street Advisors, LLC, Research Division - Research Associate

* Charles Boissier

UBS Investment Bank, Research Division - Director and Property Analyst

* Kai Malte Klose

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Manuel Martin

ODDO BHF Corporate & Markets, Research Division - Analyst

* Marc Louis Baptiste Mozzi

BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team

* Robert Woerdeman

Kempen & Co. N.V., Research Division - Research Analyst

* Sander Bunck

Barclays Bank PLC, Research Division - VP of Real Estate Equity Research

* Thomas Martin

HSBC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the earnings call of Deutsche Wohnen SE regarding the publication of the first half results of 2019, hosted by Dr. Michael Zahn, CEO; and Mr. Philip Grosse, CFO.

The presentation of the call is available on Deutsche Wohnen's website in the Investor Relations section. (Operator Instructions)

I am now handing you over to Michael Zahn, CEO, to begin today's conference. Please go ahead.

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [2]

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Good morning, and welcome to the publication of our half year results 2019. First of all, we had a very successful start to the year. Before Philip will give you a detailed insight into our half year results, I would like to say a few introductory words.

Half year result, to begin with, I would like to point out some of the highlights which you can also find on Page 3 of the presentation. FFO I, the development of earnings year-to-date has been in line with our assumptions. So we can confirm our earnings forecast for FFO I of around EUR 535 million per year at this point in time. FFO II. The FFO II is well above plan at the present time, and we expect a significantly higher result on an annual basis due to the wide range of sales activities that we have started in the market.

Valuation result. The half year valuation result is not based on a comprehensive valuation of the portfolio, but on minor adjustments to our model. We have decided also from a cost perspective, not to carry out a half year valuation. What we can already say today is that the price trend in our major acquisition markets remains challenging. In Berlin, we are currently seeing gross yields of 2.5%. Even the discussions about the rent fees have had no influence on price expectations in Berlin so far.

In general, I am convinced that our sector will continue to benefit from the monetary policy perspective within the Euro area. On the one hand, we feel confirmed in our appraisal of the interest rate policy, the repeated discussions on possible interest rate risk that have taken place in recent years were round founded. I believe that we have been moving towards a scenario of low interest rates that will persist for the long term and positively support the pricing of real estate products. [10-year] swap is currently at minus 10 basis points.

Real estate stocks, such as Deutsche Wohnen, with the current market valuation of around 4.5% FFO yield are currently very attractively priced. And this sector is also becoming more and more interesting for small investors, as the price difference to a direct investment is enormous and the dividend yield of around 3% seems very attractive.

Outlook. As in previous years, we will specify our annual guidance in the third quarter.

Regulatory challenges. Intervention failed to have the desired effect. If you turn to Page 4 of the presentation, you can see that the float of regulatory interventions in the housing market is not abating, even so the success of the rental policy to date is doubtful. The measures do not help those who are dependent on help. The rental cap is working. I have to contradict quite clearly statements to the contrary, however, it misses the target. First and foremost, households with higher incomes will benefit from a subsidy. By contrast, low-income households fall by the rate side. New construction and climate objectives are not achieved, the uncertainty on the market caused by constant discussions on the reduction of rents is now also negatively affecting new construction activities. The investment climate has worsened, declined, particularly as a result of the discussions about the Berlin rent freeze. I do not see that we are using these discussions to produce the housing that we urgently need, nor to achieve the climate targets for the sector that have been announced on a large-scale in social policy terms.

Already today, energy investments in the overall market are well below the required ratio of 1.5%. Consequently, we will not be able to master the challenges on the housing market with the policy we have pursued so far. Instead, existing problems will worsen and those who really need support will fall by the wayside. And this is exactly where our declaration, our promise to our tenants comes in. We demand a more differentiated rent policy and the departure from the current undifferentiated policy. We are, therefore, in favor for (inaudible) in order to provide housing for those people who are not in a position to pay market prices. Our proposal is that 25% of the new apartments to be rented should be assigned to these tenants. The principle of efficiency must, once again, be embedded more firmly in rent policy. In other words, we must orientate the rent policy by the disposable household income. We also need a more honest debate on the question of what climate protection costs and who should pay for it. One-sided accusations and discrimination against the industry, especially the private sector, are harmful in long term. The widely expressed belief that the state alone can meet the sociopolitical and economic challenges is unrealistic. I hope that politics and the housing industry will approach each other and develop a joint master plan for more new construction, energy-efficient refurbishments and fairness. Our declaration, our promise to our tenants promotes this fundamentally constructive solution-oriented attitude. On this basis, we have not yet made any rent adjustments from the rent index 2019. Since politics in Berlin is still in the process of formulating a possible law with regard to the rent freeze, we will not answer or comment on questions about the rent freeze or other considerations. We do not want to speculate but to constructively fertilize the further political process with our knowledge and experience. If our efforts for a better rent and a new building policy should remain unsuccessful, you can be assured that we will react fast and comprehensively to possible interferences. In other words, we did our homework.

Coming to M&A. We have, so far, notarized purchase contracts for approximately 3,600 residential and commercial units with a value of around EUR 840 million, exclusively in our core markets. As already mentioned, the purchase price expectations on the seller side remain very ambitious and the competitive environment very sporty. Nevertheless, we continue to succeed in acquiring above average products at reliable prices.

Sales activities. We have made considerable progress in implementing our sales plan. And from today's perspective, we will be able to fully achieve our targets here as well. These sales will further improve the efficiency and growth prospects of our residential portfolio.

And with that, I hand you over to Philip.

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [3]

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Thank you very much, Michael, and also a very warm welcome from my side. Let's move to Page 5 on our letting portfolio. As you can see here, our rents of our portfolio increased by 3.3% on a like-for-like basis in Berlin by 3.6%. Of that, roughly, 60% stems from relettings and 40% comes from our existing contracts.

Tenant churn, somewhat stable to levels we have observed previously, meaning 7% in Berlin and 8% across the entire portfolio. Also vacancy unchanged low at around 1.5%, if you exclude CapEx related vacancy. And here, just a gentle reminder, as mentioned also in Q1, we have excluded around 9,000 units in the chart, which have been earmarked for disposals, that, however, had no impact on the result.

Moving to Page 6 on the valuation of our portfolio. As highlighted by Michael, we have simply undertaken the model update with our H1 results to adjust general model assumption where necessary. In contrast to our year-end valuation where we provide a fully fledged detailed portfolio valuation, this is more a desktop-like analysis, is validated by our external appraiser, Jones Lang LaSalle. That model update results in an upward valuation of roughly EUR 450 million and corresponds to a like-for-like growth in fair values of around 3%. Economically, that valuation uplift predominantly reflects the higher rents we have been able to capture year-to-date.

Overall, our residential portfolio is valued at around EUR 23 billion or a fair value per square meter of EUR 2,222. In Berlin, on a per square meter basis, our stock is valued just shy of EUR 2,500 on a per square meter basis and that corresponds to a discount to replacement cost of around 55% and the discount to price levels we observe in the institutional transaction market for multifamily homes of around 20%. Obviously, the discounts to the prices for condominiums, even more pronounced.

Valuation. And that is important in my view, if also supported from an affordability perspective, for both rents and prices for condominiums. Based on an average monthly household income, our product corresponds to a housing cost ratio of 25% at market rent levels even below 20% based on our current inflate rents. And for home ownership, considering an average price for condominiums of EUR 4,500 per square meter, which we observe in the market and further assuming monthly payments of around EUR 900 for interest, amortization and ancillary cost, the monthly financial burden seems to be manageable with less than 30% spent on housing for people with an average income situation. And here, very clearly, I don't want to put in question that rising rents and prices are a problem for part of the population in Berlin. In this context, it is, in my view, paramount to find solutions for people affected by the price developments in the market. And this is why we have introduced our promise to our tenants with respect of hardship clauses to protect those people who actually need protection. But then having said, price developments appear very reasonable from an affordability perspective, if measured by the broader market. And that is key for the sustainable development of our capital values.

Moving to Page 7, our letting business. Our rental income increased year-on-year by around 6%, EUR 660 million. That was driven by operational performance as well as M&A. NOI margin came out slightly above 82%, also driven by lower maintenance and around EUR 9.5 million accounting effect from the change treatment of leases, which is required according to IFRS as of this year. Adjusted for these items, we have still achieved a very attractive NOI margin of almost 80%.

Maintenance and refurbishment spending are expected to increase throughout the year towards previous year's levels of around EUR 40 per square meter or EUR 400 million in absolute terms.

For the time being, we have not adjusted our CapEx budget considering the regulatory headwinds. That having said, and as Michael mentioned, we are able to react quickly if necessary.

On our disposal business, privatization business continues to perform very well, driven by high demand and a continue to supply -- the continued supply shortage in metropolitan areas, prices continue to increase. In the first half, our average price per square meter was at EUR 3,600, with a gross margin of 80%. These numbers, as already mentioned in Q1, were strongly driven by the disposal of a mixed-use commercial residential building in a very central location in Berlin. As already mentioned, here we have achieved the purchase price of EUR 33 million, more than EUR 7,000 per square meter at a gross margin of 130%. So excluding these exceptional disposal and only looking at privatizations in Berlin, we achieved levels of around EUR 3,000 per square meter for a below-average product with a gross margin of almost 40%.

Institutional sales consisted predominantly of portfolio cleanups in the remainder of the year, as Michael mentioned at the beginning. I do expect a very significant contribution to EBITDA from the disposal of a larger portfolio with units predominantly in the northern part of Germany. Here, our disposal process is very well on track.

So moving to our Nursing business on Page 9. Here, our M&A activities, last year, have resulted in this segment contributing almost EUR 44 million to our group EBITDA. This is twice as much as we have observed in the first half of 2018. Looking at the operational EBITDA margin prior to lease revenues, that remained stable at around 20% versus Q1 and that is including the -- as of this year, fully consolidated operational platform in Hamburg.

Looking stand-alone on our long-standing KATHARINENHOF business, our EBITDA margin prior to lease revenues actually recovered to 25%. So we have fully made up for the slight decrease we have observed in the last year and achieved a very attractive margin yet again. In Nursing, we continue to expect this segment on an annual basis to contribute around EUR 80 million in EBITDA to the group profitability, that is around 6% return on capital employed based on the underlying asset value of around EUR 1.3 billion.

On EBITDA, excluding disposals, that came out at EUR 367 million, so an increase year-on-year of around 15%. Strong contribution from our letting and nursing business led to the significant improved margin of 82%. And even without accounting effect, the margin improved by 2 percentage points year-on-year, which, in my view, is a testimonial to the efficiency of our platform.

Coming to FFO I. That came out at EUR 283 million for the first half. So up 13.5% on a total basis and 13% on a per share basis. Main drivers were the improved operational performance of the residential business and a significantly increased contribution from our nursing business following last year's acquisitions. And with that, we have already earned 53% of our annual FFO guidance. So very well on track to achieve our targets.

EPRA NAV increased by 3% to EUR 43.43 on a per share basis, mainly driven by the asset revaluations. But please also note in this context that EUR 310 million dividend, which was paid out in July, is already included in the equity. So effectively, we delivered year-to-date, a total shareholder return of around 5%.

Moving to Page 13. Last but not least, on our capital structure. Here, everything looks very promising and we have seen yields in the financing market going down again. Average interest rate remains at 1.3%, average maturity around 8 years. So all in all, a very conservative capital structure. And we, obviously, make very actively use of the favorable financing environment and refinanced some EUR 1.4 billion of debt year-to-date on a long-term basis to keep the average cost of debt at low level for longer. LTV at 37%, so right in the middle of our target range of 35% to 40%.

With that, I conclude the presentation and open the floor for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Charles Boissier from UBS.

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Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [2]

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I have three questions. The first one is, you mentioned your promise to your tenants that you announced on 1st of July. Just I was wondering what impact has it had on the political debate, if any? And then second question. When we look at actual revaluation in Berlin, it seems like when we go into the report, looking at the assumptions you changed the vacancy rate, long-term assumption from 2.1% to 2.9%, and then discount rate increasing. At the time when deals basically took 6.5% to 8.5% revaluation. So just was wondering how much of these adjustments are your initial estimate of 5-year rent freeze's possible impact? And then perhaps fueling the way for positive revaluation at year-end, given what you said on low interest rate pumping the impact from migration? And then finally, on privatization. We're starting to hear that privatizations are also starting to come under some political scrutiny. I just was wondering what are your discussions with local politicians on privatization?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [3]

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Yes. Thanks, Charles. Let me start with your question on valuation. Basically, in our DCF, we have assumed 1.9% rental increases in the model. That having said, the valuation, as you know, is based on transactional evidence. So it is clearly depending on price levels we observe in transactions in the real estate market. And any reduction of the rent increase assumption in the DCF do not automatically lead to valuation -- to lower valuation. So in other words, the assumption of lower rental growth might be compensated by tighter capitalization rates.

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [4]

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Okay. Coming to privatization, I would say, first, our sales activities currently are not dominated by single privatization. So what we see in the market is a lot of cheap money and strong demand. And the result is simply that we have an increase in average prices of 20%, so coming up to EUR 3,000. The idea of sales business is something we have to approach over the next month, but it is totally clear that it makes more and more sense to take the part as a seller. Our promise to our tenants, I would say, the idea is, first as the biggest landlord here in Berlin, we have to show social responsibility. And second, and that's very important for us, we want to contribute to a more rational debate, yes. So that's it.

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Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [5]

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Okay. Finally, may I ask, you mentioned 3% like-for-like, I guess, that's dependent on passing the mid figure of 5.2%, which was provisioned in May. What would it be if you decide that you have to observe the 5-year rent freeze and what would it be next year, if that was the case as well?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [6]

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Yes, Charles. We confirm -- best confirmed our like-for-like guidance of 3% for the year 2019. And I mean, obviously, as a company, are required to pursue our business based on the actual regulatory regime. So basically, our like-for-like rental guidance also assumes a moderate increase of our -- of the rents of our existing tenant base. As it comes to next year, at this point in time, there's no reliable forecast possible if the draft law has not been issued so far.

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Operator [7]

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The next question comes from the line of Andres Toome from Green Street Advisors.

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [8]

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Just one question. Are you considering any sizable disposals in Berlin given that you trade at a significant discount to your NAV currently? And kind of a second part to that question, you mentioned that the pricing and the interest remains strong in the transaction market, but are there buyers at current pricing in Berlin for a sizable portfolio either from the private sector or from a state housing company?

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [9]

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Let me answer. I would say, there's no reason to stop potential disposals also in Berlin. What we see is a strong demand. What we see is that prices are not affected by the current discussions on the political side. And our strategy is, clearly, if we achieve price levels like we see today in the M&A market, it makes a lot of sense to streamline all for the portfolio in Berlin. And we see, especially from institutional players also the power to manage sizable portfolios.

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [10]

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Okay. And just a follow-up on that. Have you seen transaction comparables in Berlin after the proposal from the Berlin senate that would suggest the 2.5% gross yield that you mentioned or somewhere in that ballpark?

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [11]

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This figure is simply based on the transactions we have seen in the market or transactions which are on the desk, yes.

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Operator [12]

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The next question comes from the line of Sander Bunck from Barclays.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [13]

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Just one question for me, please. Give -- mainly looking at new initiative of affordability for tenants. Can you just highlight or give some insight on how your affordability currently is for the portfolio in terms of gross rent as a percentage of net household income? I think you're targeting now a maximum of 30%. Are you already pretty much there? Are you still materially below that? Or are you, in some cases, above that number?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [14]

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On that point, for data protection reasons, we don't have insights into the income situation of our standing tenant base. So we can only refer to the comments we made earlier that based on the average income situation, an average household would spend approximately 18% of its net disposable income towards housing. Obviously, that is an average figure. So it may not apply for part of our tenant base with lower income, which is why we have introduced the promise to our tenants in order to address these hardship situations.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [15]

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Okay. But does that mean that, going forward, you will be given that data -- those data protection rules? How are you going to verify that a maximum level is applied? And how are you not sure that sometime -- that a tenant comes to you, and basically, says something about the income that is not entirely correct or in line with what it really is. So basically, how are you going verify that -- how are you going to verify that promise?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [16]

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Sure. That is a case-by-case analysis. So people applying for that hardship have to prove to us that they're eligible for the hardship clause. And to that respect, we have based already some experience, given that we have introduced that hardship clause as part of our modernization efforts, bigger refurbishments already for quite sometime.

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Operator [17]

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The next question comes from the line of Kai Klose from Berenberg.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

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I've got three questions on the financials. The first one is on Page 11 of the presentation. First question on the tax rate. If I look into the income taxes and adjust the -- reported adjusted EBITDA by the interest expenses and the tax rate is a bit lower. Was there any special reason for that? Or is it also to be expected at these lower levels compared to the last year for the full year? The second question would -- on Page 14 of the report. The G&A expenses went up quite strongly compared to last year [in May it was] indicated this was kind of a special reason? And the last question would be on the balance sheet. The employee benefits went up. They only went up in the first quarter, but went up also in the second quarter (inaudible) what were the reasons behind?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [19]

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Yes. On your tax question, you have to acknowledge that part of the tax is also driven by disposals. So we are not separating that here, we are basically in line with our expectation according to our budget of full year taxes of around EUR 40 million. On G&A, the increases we have seen are very much in line with our budget. We are, basically, undertaking investments in our operational platform that is predominantly IT driven, but we also -- it's some higher expenses for communication and marketing efforts in context of HR. So those are the key drivers. But once again, very, very much in line with our assumptions we have taken as part of our budgeting process.

On the balance sheet, the increase you have seen in pension liabilities, the reason for that is twofold. One is that, as of this year, we have fully consolidated PFLEGEN & WOHNEN Hamburg, that is the operational platform for our nursing business in Hamburg and had to assume the respective pension liabilities. Second, based on the interest environment, we have also adjusted for the capitalization sector and valuing pension liabilities.

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Operator [20]

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The next question comes from the line of Robert Woerdeman from Kempen.

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Robert Woerdeman, Kempen & Co. N.V., Research Division - Research Analyst [21]

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This is Robert, Kempen. Are there any strategic changes to be expected if the Mietendeckel [is in effect]? And then would you consider increasing the exposure to health care/nursing homes? Would you have a different capital structure? Are you going to be more actively looking into other regions? Is there anything you can share on this?

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [22]

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So first, we believe in the fundamentals of (technical difficulty) there are no activities to change fundamentally our strategy and this means also in the balance sheet. On the other side, as I said, in former times, we are in, yes, deeper discussions on the healthcare business. And there we want growth, and that means we have to restructure a little bit the portfolio and will come out with our idea of this business in Q3. What I see is, and this is not driven by discussions on the rate cap, this is more driven by the situation that we have simply a scarcity in product. We -- I would expect that Deutsche Wohnen is more and more a net seller of how things like this year. And the goal for this year, as I said at the beginning of this year, is roughly 10,000 units, which we want sold in western parts but also in Berlin. On the other side, we have acquired roughly 4,000. This is something you should expect also in future, in the next years.

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Robert Woerdeman, Kempen & Co. N.V., Research Division - Research Analyst [23]

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Okay. Perhaps and in line of your answer here, could we also expect you to sell more assets, let's say, at or above book value and then starting a meaningful share buyback if the shares continue to trade at such a significant discount to NAV? And if not, why not?

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [24]

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For the time being, if I look at liquidity, and if I look at investments, there's no change in strategy. And what we are investing is earned through predominantly our operational performance in FFO I. Second, we still find, as you can see, reasonable investment opportunities in the M&A market, where we redirect the money, the liquidity we have freed up as part of disposals. So for the time being, with no excess liquidity. No -- not the right timing to speculate around or about different approach to distributions to shareholders via dividend or share buyback.

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Robert Woerdeman, Kempen & Co. N.V., Research Division - Research Analyst [25]

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Okay. But if you were to have the liquidity, let's say, if you would step up the disposal base, is this something that you would or could put on the agenda? Do you see this as a way to basically try and create shareholder value via another way rather than on the asset side?

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [26]

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Yes. I would argue shareholder distribution are a function of excess liquidity.

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Operator [27]

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The next question comes from the line of Marc Mozzi from Bank of America Merrill Lynch.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [28]

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Two simple questions for me. The first one is, what we've been reading in the current paperwork of the [low] is actually going to set up an upper rent limit. Do you envisage that will lead to market rental value decline? The second one, if you would like to now. If you're planning to invest more in nursing to dispose assets and then to reinvest in M&A, should we assume that the proportion of Berlin assets will be reduced in your portfolio in the end? And if so, do you have any target to provide us?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [29]

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On the rent limit, we will not speculate in this call on the potential outcome on the rental freeze. But let me say that much, if you look at our rents, the vast majority is at a rent per square meter below EUR 7. The vast majority of our product is very much affordable for our tenant base. And against that backdrop, once again, we have introduced the promise to our tenants. How that affects the transaction market for the time being? As we have alluded to, we do not see any impact on prices. Actually, to the contrary, we see yields further compressing and it's not a mechanical exercise that the assumption of lower rental growth necessarily need to result in adjustment of values. For the time being, we have seen the situation that yields have compressed. And if I look fundamentally at the market, from an affordability perspective, as we have discussed, and second, to also average prices for new builds, average prices for multifamily homes, average prices for condominiums, we remain very optimistic on the capital value outlook.

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [30]

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So one comment from me. Rental Freeze will further decrease the speed of new construction, first, yes. Second, if we believe in the fundamentals and if we see the environment driven by the monetary policy, there's enough cheap money in the market, enough demand. And therefore, I think there are really, really good reasons to believe in a further increase for demand and prices. And I am personally a big believer that we will not see a decline in prices, we will see an increase, yes, that's my figure. That's my view.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [31]

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Okay. I think we read on the press -- on the German press, that the Berlin senate is envisaging to set up this rent freeze at Mietspiegel in 2011, i.e. prior the massive price increase, which is basically 25% below current market level. Don't you think that should have any impact on rental values, and therefore, yield can compress probably below 2%, but at least prices will stop growing?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [32]

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By all fairness, I think, at this stage, that is speculation. And we reminded that whatever is being put forward as a draft bill also needs to be measured by the boundaries of our constitution.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [33]

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Okay. And on the proportion of the Berlin assets in your portfolio after the 10,000 units you're planning to sell, M&A activity in nursing, I mean, in the residential business. Where do you see that proportion to be?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [34]

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Marc, the key message is that there's no shift in strategy. We are and remain very big believers of Berlin market. And the disposals, Michael mentioned, of around 9,000, 10,000 units, is predominantly for products in the northern part of Germany that are around 6,500 units. And we have also earmarked approximately 3,000 units of Berlin stock for disposal, that is stock, yes, somewhat lower quality subject to former subsidy programs, and it's not the product we want to have for the longer term. In other words, this is an improvement of product quality regional-wise and product-wise to be envisaged with the selected disposals we are undertaking, but it's not changed. No change in strategy. We will remain very much focused on Berlin market and other metropolitan areas.

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Operator [35]

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The next question comes from the line of Thomas Martin from HSBC.

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Thomas Martin, HSBC, Research Division - Analyst [36]

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Just two questions from my side left. One question, again, on the rent freeze proposal. I know it's very difficult for you to share your view on that and so you're speculating, I know. Nevertheless, if I'm right, the only way to get clarity if this is constitution or not, this law is that we have a decision from the Federal Constitutional Court. And here my question, how do you see the likelihood that the Liberal party in Berlin, together with the Christ democrats will bring that to the court [via] in Germany, so-called obstruct a (inaudible). That would be my first question. Do you have a view on that? That would be very helpful.

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [37]

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Look, it's a public call, so I'm only citing what is publicly available. And here, the liberals have already said very loud and clear that they will initiate and try to gather the required quorum of 25% of Berlin Parliament to initiate the so-called special proceedings, direct potential rental freeze directly through the Constitutional Court of Berlin?

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Thomas Martin, HSBC, Research Division - Analyst [38]

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But do you see a chance that they will do that when the final draft will be published end of August?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [39]

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I see a chance because -- I mean, as we discussed previously, such rental freeze is outside the competencies of government of Berlin. It's governed in the Civil court. Second is very broad, undifferentiated at least based on the graph which has been suggested. And as such, not covered by the boundaries of our constitution, which protects the property. So against that backdrop, I have the expectation that there will be legal challenges from various participants in the market for such drafts or for such law if implemented. And that also includes or may include political representatives.

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Thomas Martin, HSBC, Research Division - Analyst [40]

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Okay. Another one, maybe a follow-up on regulatory changes. On federal level, if I'm right, I think the Ministry of Justice, the new one, Miss Lambrecht is also working on a reform of the Mietspiegel and a couple of other things. Would be helpful to have your view on that as well? Because I mean, this relates also to other regions you have in your portfolio.

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [41]

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Let me comment. Housing and especially affordable housing will continue to be an integral part of the political debate. And therefore, I think the issue of French regulation remains a current topic in the federal, but also in cities and all.

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Thomas Martin, HSBC, Research Division - Analyst [42]

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Okay. And then my last point, once again, on the disposal side. Just technically or from a legal perspective, what is the concrete privatization potential of your existing portfolio in Berlin? And do you plan to separate further multifamily houses/buildings into condominiums going forward? So what's the absolute potential actually, independent from your strategy for long term just kind of potentially would be helpful to know that.

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [43]

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It's a very theoretical question because there is no change in strategy. We're big believers in Berlin market. Against that backdrop, we will not accelerate our privatization efforts, including our privatization efforts in Berlin markets. But all in all, looking at the product, micro location, approximately 70% in principle would be eligible or beautiful product for privatization. But once again, no decision, what so ever in that respect, I consider that very unlikely.

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Operator [44]

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There are currently no further questions in the queue. (Operator Instructions) And the next question comes from the line of Manuel Martin from ODDO BHF.

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Manuel Martin, ODDO BHF Corporate & Markets, Research Division - Analyst [45]

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Three questions left, if I may. My first question is a follow-up on your promise to tenants published on 1st July. Is there any feedback on your promise for tenants from public politicians or the people which you might share with us? The second question is a rather housekeeping question. I suppose that you made a valuation of 100% of your portfolio in the second quarter like last year, maybe you can confirm that? And last question has to do with milestones, and when do you expect the parliament in Berlin to decide about the rent freeze topic?

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Philip Grosse, Deutsche Wohnen SE - CFO & Member of the Management Board [46]

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On your question on valuation. As I said, it was basically a model update. Economically, we have reflected in the revised valuation the rental increases we have seen year-to-date, not a full-fledged revaluation of our portfolio, which will only happen with year-end numbers and going to be appraised by Jones Lang LaSalle and also validated by our accountants. On timing, what we can only cite in terms of timing for the rental freeze is the intention that has been brought forward by the coalition in Berlin. That if by the end of August, a draft bill shall be made available for discussions with the experts until mid of September. A resolution is scheduled for mid of October with the aim to have the new law implemented as of the beginning of next year. Your third question. Yes, we have received various positive reactions from politicians, other institutions, also from the German Tenant Association. So I think it was a good move for us.

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Operator [47]

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The next question comes from the line of Kai Klose from Berenberg.

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Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [48]

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Yes. I forgot to ask one last question. In your [year 2] report, you gave quite a good update on your current development or future development projects. Could you maybe give an update, how many units potentially could be completed in 2020 or 2021? And what could be the amount of CapEx to be spent? That's just a rough number in this and the next year.

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Michael Zahn, Deutsche Wohnen SE - Chairman of the Management Board & CEO [49]

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Question -- is very simple answer. We will start next year with approximately 2,000 units, yes, in Dresden and in Berlin. And this means the investments in this area will increase, I think, roughly up to EUR 150 million to EUR 200 million yearly, beginning point 2020.

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Operator [50]

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There are currently no further questions in the queue. (Operator Instructions) Okay, there are no further questions. So I would like to thank everybody for joining today's conference call. The next earnings call of Deutsche Wohnen will be on the 13th of November 2019. For any questions in the meantime, please feel free to contact the IR team. Have a good day, and goodbye. You may now replace your handsets.