U.S. Markets open in 3 mins

Edited Transcript of VNAn.DE earnings conference call or presentation 5-Nov-19 1:00pm GMT

Q3 2019 Vonovia SE Earnings Call

Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Vonovia SE earnings conference call or presentation Tuesday, November 5, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Helene von Roeder

Vonovia SE - CFO & Member of Management Board

* Rene Hoffmann

Vonovia SE - Head of IR

* Rolf Eberhard Buch

Vonovia SE - Chairman of the Management Board & CEO

================================================================================

Conference Call Participants

================================================================================

* Charles Boissier

UBS Investment Bank, Research Division - Director and Property Analyst

* Christopher Richard Fremantle

Morgan Stanley, Research Division - Executive Director

* Georg Kanders

Bankhaus Lampe KG, Research Division - Investment Analyst

* Kai Malte Klose

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

* Marios Pastou

Crédit Suisse AG, Research Division - Research Analyst

* Sander Bunck

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

* Thomas Carstairs

Commerzbank AG, Research Division - Senior Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Dear ladies and gentlemen, welcome to the 9 Months 2019 Results Analyst and Investor Call of Vonovia SE. At our customers' request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Rene, who will lead you through this conference. Please go ahead, sir.

--------------------------------------------------------------------------------

Rene Hoffmann, Vonovia SE - Head of IR [2]

--------------------------------------------------------------------------------

Thank you, Judith, and welcome everybody to our earnings call for the first 9 months of 2019. Your hosts today are once again, CEO, Rolf Buch; and CFO, Helene von Roeder. I assume you've all had a chance to download the presentation. Just to be sure, the earnings call presentation for today is available on our IR website in the section Latest Publication. Rolf and Helene will lead through this results presentation on the basis of the agenda on Page 2, and we'll then, of course, be happy to take your questions. So without further delay, let's get it started.

And for that, I'm handing you over to Rolf.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [3]

--------------------------------------------------------------------------------

Thank you, Rene. And also a warm welcome from my side. I have always the pleasure to start with the highlights of the first 9 months. In this case, total EBITDA is up almost 17%; Group FFO, almost 11% or 5.5% per share.

After 9 months into the year, the adjusted NAV has grown by 9% and we estimate a second fair value growth at the end of the year between EUR 2.1 billion and EUR 2.8 billion for the second half, which would bring adjusted NAV at the end of the year of something between EUR 51.50 and EUR 53 per share.

At the end of Q3, our LTV was at 40.3%. And if we include everything we know today, including Hembla, the full financing of Hembla, which is already completed, plus the H2 valuation estimate, we expect the LTV to still be very comfortable in the target range at the end of the year.

There's 2 months to go, only we are giving you as always our final guidance for this year, with total EBITDA and Group FFO at the very top end of the [previously] given range. And we were confident enough to reach all these figures that we are already -- to fix -- we are already ready to fix the dividend at EUR 1.57, which we will propose to the AGM, so this is a 9% year-on-year growth.

As always, we also give you the first guidance for the year 2020. As we are looking back on a very successful year 2019, we estimate that the FFO -- Group FFO will grow by 7% in the midpoint and 9% at our top end of the guidance range. Then we also will talk this time about regulation and political debate. As you know, the draft bill of Berlin-specific rent freeze regulation will cost us around EUR 6 million of Group FFO next year. So you can see that what we have said always, while the law will not solve the problem, but only make things worse, we will not be materially impacted by that one way or the other.

In terms of spillover, we remain very confident that this is a Berlin-specific topic, and we estimate the risk of similar legislation outside of Berlin to be extremely low. What we do see is that stakeholder debate is becoming increasingly important. And here, we, as Vonovia, we are determined and we were determined to continue to lead by example.

And with this highlights, I hand over to Helene.

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [4]

--------------------------------------------------------------------------------

Thank you very much, Rolf, and good afternoon. So on to Page 4. You see that we show growth across all segments. This is, of course, partly driven by the full inclusion of Buwog and Victoria Park, which only had a smaller impact in the first 9 months of 2018. The average number of residential units in 9 months 2019 was 2.4% higher than in the prior year period. On that basis, we grew the adjusted EBITDA total by 16.7% and the Group FFO, which is the basis for our dividend, by 10.7%. Group FFO per share was up 5.5%. You also see that while recurring sales and development make a considerable contribution to overall EBITDA and will continue to do so, the operating business with rental and Value-add clearly remains the largest part of our business.

So let's have a closer look at the individual segments, starting with the Rental segment on Page 5. Rental income is up almost 10% on the basis of a larger portfolio and organic rental growth. The 5% increase in maintenance expenses is volume-driven. On a per square meter basis, maintenance is basically flat year-on-year. The increased operating expenses needs a bit more explanation. In Sweden, rental reported on a gross basis, so net code rent plus ancillary costs all in 1 number. The concept of a net code rent does not really exist.

For Victoria Park, this means that around about EUR 9 rent per square meter are the all-in rent. About EUR 6 to EUR 6.50 of that amount are net code rent, if you apply our logic and the remaining EUR 2.50 to EUR 3 ancillary costs. You cannot break it down to the last few cents, but that is broadly it. These ancillary costs paid implicitly by the tenant are included in the rental income, and because they are basically a pass-through item, also in our operating expenses.

Rough math shows that it is about EUR 30 million for the first 9 months based on the 1.1 million square meter of Victoria Park at an assumed EUR 3 per square meter. The impact of EUR 30 million in the rental income line is not all that material, but in operating expenses, it is quite significant and distorts the comparison.

Page 6 shows the main operating KPIs for the Rental segment. Organic rent growth was 4% year-on-year. The vacancy rate of 2.9% is mostly the result of our investment activities. And then finally, maintenance per square meter is broadly on the same level as in the prior year period. Just as a reminder, let's please keep maintenance, which protect future EBITDA, whether it's capitalized or not, separate from the investments that drives the growth of future EBITDA.

And with that, back to Rolf.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [5]

--------------------------------------------------------------------------------

So let's move towards the Value-add page on Page 7. The EBITDA from this segment is up by 21%, which is largely the result of our organic growth in this business. Only a very, very small amount comes from the adding of Buwog and Victoria Park. As you know, we are targeting around EUR 20 million EBITDA growth per year in this segment.

Given where we are at this time, at this moment, it is probably to say -- safe to say that we will likely overachieve this growth rate in 2019. Page 8 shows the result of our recurring sales segment. We sold roughly 1,900 individual apartments for gross proceeds of roughly EUR 270 million.

The average sales price increased by 10% year-on-year. The fair value step-up was 41.4% on average and quite a bit higher than last year in spite of the higher basis because we have the higher revaluation last year. This is partly driven by recurring sales in Austria, where fair value step-ups are considerably higher than in Germany.

All in all, recurring sales contributed close to EUR 70 million of adjusted EBITDA. As a small note -- side note, outside the recurring sales segment, we sold almost 1,700 noncore units, which are not reported in this segment in the first 9 months as a fair market value step-up of more than [15%]. This gives also a flavor where our valuation is in comparison to the market.

And with this, back to Helene.

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [6]

--------------------------------------------------------------------------------

So finally, our Development segment on Page 9. This segment includes all new constructions of apartments by way of entirely new buildings, so excluding additions of 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 62 million in the 9 months result for 2019. To state the obvious, [despite of our] business is less linear than the Rental business, the 1 quarter can be quite a bit different from another one.

So Page 10 has more color on our new construction activities. We completed 967 apartments to hold for our own portfolio and 515 apartments to sell. In development to hold, we have about 31,000 apartments in the overall pipeline based on the opportunities in our portfolio today. And we want to deliver up to 1,400 apartments to hold this year.

This is a bit below our earlier expectations where we had hoped to be able to complete between 1,500 and 2,000 apartments. But we are continuing to experience difficulties and delays in construction permits. You may have seen that recently, the Federal Statistics Office reported that on a national level, the number of building permits as per August have declined by 2.5% year-on-year.

For multi-family homes, the decline was even steeper at 3.5%. The whole task of building new apartments is made more difficult by the fact that the shortage of construction labor is not getting any better. The development to sell [part] is a useful addition to the to-hold developments. On the one hand, it generates attractive margins, but what is maybe even more important is that you often need the higher margin from the to-sell project to cross-finance the lower margin to hold development in order to make an entire development project work.

So often, you have 1/3 development at some form of subsidized rent, 1/3 at market rent and 1/3 for sale and the for sale volume basically carries the land cost. The pipeline for to-sell apartments is approximately [7,400] apartments.

So Page 11 shows the estimates for the H2 valuation. For H2 2019, we estimate an overall value growth between EUR 2.1 billion and EUR 2.8 billion, which would take the full year 2019 value growth to between EUR 4.7 billion and EUR 5.4 billion or 10.5% to 12.1%.

In terms of market evidence, we have been seeing offer prices in 2019 continuing to rise across all of our markets. The one exception is Berlin, where in H2, we have seen flat offer prices and volumes alongside and not a declining number of transactions. When we look at value growth from yield compression, and this is the lower left-hand chart, we see that number losing steam since the 2016 peak. That clearly shouldn't come as a surprise because yield compression is not a concept for eternity. But what is interesting is that the slowdown is happening at a slower pace. With the exception of Berlin, we are seeing value growth from yield compression, almost on the same level as last year.

So while Berlin appears to be lagging at this point, we are seeing other locations basically growing in value at similar speed as last year. Given the absolute growth in value, which is looking to be higher than in 2018, it is fair to say that we have managed to compensate for the lack of growth in Berlin. The H2 valuation is expected to put the portfolio at an all in-place rent multiple between 23 and 24, and the fair value per square meter between EUR 1,800 and EUR 1,900.

So a bit more color on the valuation of our portfolio in Berlin versus the rest of Germany on Page 12. Offer prices in all our regional markets except for Berlin has been continuing to grow in H2, but we have seen little movement in Berlin. There, the offer prices have largely been flat and so have the number of offers. At the same time, the number of transactions is down.

To what extent values will change in the context of the planned rent freeze legislation in Berlin, if at all, will probably not be seen before H1 2020. So with that, to Slide 13, on the net asset value. The adjusted NAV increased by 14% in absolute terms and 9% on a per share basis for the first 9 months of 2019. This is largely the result of the equity raise in May, the script dividend after the AGM and the portfolio valuation.

So Page 14 shows the LTV. Our LTV as of September 30 was 40.3%, so 250 basis points down from the end of 2018 and at the low end of the target corridor. As I have said in the past, different market participants have different LTV comfort zones. We continue to argue that even after yield compression, we have seen the in-place values of our portfolio remains relatively conservative, if you not only look at transaction prices but especially replacement value. And we really do not see a scenario in which these values would come under material pressure.

So at this point, we believe our target range of 40% to 45% still gives investors enough of a security buffer while at the same time not putting an undue burden on our equity yield. As quite a few things have happened since September 30, I would like to give you an estimate of our year-end LTV accounting for what we currently know. So mainly the Hembla acquisition, the financing of it and the estimated H2 portfolio valuation.

Accounting for all this, the year-end pro forma LTV estimate is still well within our range. And I'm happy to say that we feel very comfortable at that level. To be clear, Hembla is fully financed. We used the capital increase in May this year for the equity portion, and we raised EUR 1.5 billion of debt a few weeks ago. So there's no further need to raise any additional equity for Hembla.

Many of you also look at debt-to-EBITDA in addition to LTV, and so do we. When you take our total EBITDA over the last 12 months and put it in relation to the average net debt over the same period, we are at 11.1x, which to us is a sensible level if you look at the stability of cash flows.

Page 15, a bit more color on the capital structure and debt instruments. Interest cover ratio is now at 4.9x, and thus very healthy, above the minimum levels required in some of our debt instruments. Almost all debt is fixed or hedged, so any interest rate increase would affect our numbers only slowly as no more than 12% of the total debt becomes due in any given year because of the smooth maturity profile.

And thanks to the robust top line growth, there's plenty of interest rate increases we can absorb before we feel any pain in our earnings or dividend capacity. I want to point out that the average cost of debt as per September 30 has come down to 1.6%. Accounting for the refinancings we have made since, the overall average now is at 1.5%.

To give you some color on incremental financing terms. We issued 3 EUR 500 million bonds a few weeks ago, and the coupons were: 0.125% for the 3.5 years; 0.625% for the 8-year; and 1.625% for the 20-year maturity. So even a 20-year maturity is at the level of our overall average interest rate, the blended coupon across the EUR 1.5 billion is 0.8% for a duration of 10.5 years.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [7]

--------------------------------------------------------------------------------

So let me give you an update on where we stand on Hembla. This is Page 16. In September, we announced that we have agreed to buy 69% of the voting rights and 61% of the shares in Hembla from Blackstone, subject to merger clearance. We just got a few hours ago or 2 hours ago, the merger clearance in Sweden through the system. If we add to the Blackstone stake, the shares we have been buying since September, our total stake will be close to 72% of the voting rights and about 64% of the shares.

Once the mandatory offer has been triggered, which will happen very soon by the closing of the Blackstone transaction, the offer will be announced and the offer period of 4 weeks is expected to run in November and December 2019. Minority shareholders will be able to tender their shares for SEK 215 per share. In terms of strategy, we are building on the know-how and the experience from our German operations, and we intend to continue to consolidate the Swedish market and build an efficient and scalable operating platform.

Vonovia is a long-term investor and holder of property. We said in the announcement that we will stay in Sweden forever. It is not part of our strategy to realize value through the future sale of our buildings for our own benefit or for that of the minority shareholders. Instead, we will focus on expansion and further investment in Hembla's properties. Hembla's current dividend policy is not to distribute dividend to shareholders but to invest earning into the properties. We agree with this strategy completely and currently have no intention to amend Hembla's dividend policy.

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [8]

--------------------------------------------------------------------------------

So Page 17 is a bit technical, but still quite important. You've heard us say countless times that there are very few ways to really hurt our business. Overpaying on an acquisition is one way. That is why acquisition criteria are important. A management team with an acquisition target, however, is dangerous for shareholders.

We now need to make 2 technical changes to our criteria to make sure we can remain disciplined. The first 2 criterion remain the same. The acquisition portfolio must make sense from a strategic point of view, and it must be at least rating-neutral, assuming a 50/50 equity and debt financing. Criteria 3 and 4 will be amended. Since we discontinued the FFO 1 and replaced it with Group FFO, we need to find a new metric to measure earnings accretion. Group FFO is not the best metric because there's basically no portfolio company out there that operates across the 4 segments as we do. So accretion to Group FFO is tricky because you compare apples and pears.

As most portfolios are mostly or are entirely rental, we will be looking at EBITDA rental yield, and that yield must be better within the acquisition than without. And finally, EPRA is looking to retire the net asset value and replace it with another metric. That will not be radically different and is, in fact, quite similar to NAV, but we'll be using that metric, and future acquisitions will have to be at least neutral on a per share basis to that metric.

I'd like to think of this criterion as a currency check to see how much we can afford to pay in respect to our own brick-and-mortar value. So on to the final guidance for 2019 on Page 18. This is excluding Hembla, except for the adjusted NAV per share. Starting with organic rent growth. As I said on the Q2 earnings call, the guidance we gave then dependent on timely completion of the investment projects and receipt of the required construction permits. We have, unfortunately, seen that many of these permits are taking longer than we would like, and that is why we will not be able to reach our targeted volume for 2019. I also indicated last time that if we were to decide not to implement the 2019 Berlin Mietspiegel, it would cost us about 10 basis points.

We did make the decision not to send out this rent growth letters in Berlin. And looking at the planned legislation, we are actually very, very happy we didn't. Add these 2 reasons together and you get to a revised organic rent growth guidance of approximately 4% for this year. However, as we have put the basis on a broader footing, we still think we will come out at the upper end of our range for both EBITDA and Group FFO. That is why we intend to propose a dividend of EUR 1.57 per share to the AGM in May. And finally, since we're late in the year, we feel comfortable to give you some guidance on the adjusted NAV per share for the year-end. We estimate it to be between EUR 51.50 and EUR 53.

So on Page 9, you see our initial guidance for 2020. So starting with organic rent growth again we estimate this to be around 4% in 2020 as well. There are quite a few analysis in the appendix under Pages 35 to 38. In a nutshell, they are the following factors why we estimate around 4%.

The Berlin rent freeze is estimated to cost us 30 to 40 basis points. Continuously declining fluctuation is responsible for around 20 to 30 basis points. And as indicated before, lagging building permits, labor shortage and more comprehensive investment projects, especially in neighborhood development and new constructions result in a more extended period for realizing the full rent growth from the investments.

At this point, today, we are looking at a pipeline of EUR 63 million incremental rent growth from investments that have been started, but are not yet fully completed. Based on our track record of delivering the returns on investment, I can tell you that this incremental rent will be coming, but it will take a bit longer than in previous years.

The chart on Page 37 shows this effect nicely, I think. And finally, we are seeing a slight decline in growth potential from Mietspiegel upgrade because of the political influence in Mietspiegel and the impact of the 10% rental cap, the Mietpreisbremse, for those of you who like German, on Mietspiegel.

So one more word on the 2020 rent growth estimate and another potential impact of Berlin legislation. It does not include the one-off rent reductions called for if the in-place rent is more than 120% above the rent ceiling, the Mietenobergrenze. First, this is expected to be enforced only 9 months after the rent freeze becomes law, so towards the end of 2020, probably. Second, tenants will have to file a rent reduction request with the authorities who will need to review it and then order us to lower the rent. And third, this rent reduction element is considered to be the most unconstitutional element of the draft.

So on balance, we have decided not to account for it at this point in our 2020 organic rent growth guidance. Bottom line 2020 guidance is EBITDA up 8.6% at midpoint and 10% at the upper end. Group FFO, plus 7% at midpoint and 9% at the upper end of the guidance range. And back to Rolf.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [9]

--------------------------------------------------------------------------------

So thank you, Helene, for the good guidance. Probably because I mentioned that there were also a lot of questions about Berlin in the Q&A session. I would like to give you a little bit some more color on the planned Berlin-specific rent freeze and rent reduction on Page 20.

As most of you are aware, the draft bill was approved by the Senate, and is expected to be enacted in Q1 next year. So legislation time line was January 11, but it might come in a little bit later. What I think has not fully understood by many is the element of rent reduction in this regulation. It is called a rent-free law -- rent freeze law. But in reality, it includes rent reduction elements, and to reduce rent is actually the declared objective of the Berlin government. So they are looking to fix a price irrespective of all circumstances that usually play a role in price setting.

Location is largely ignored, increasing costs are totally ignored. This is very unique, and in our view, unconstitutional. This is an unconstitutional approach to regulation and a clear back-break with any form of [our form] of social market economy.

And the main problem is that it does not solve any issue. The regulation will lead to a decline in investment, both in the existing stock and in new housing. But make no mistakes, even through -- so we very much disagree with the legislation, we will play by the rules for as long as they are in place. For 2020, this means we expect a EUR 6 million loss of FFO because of it.

To be clear, this is a cash flow number and low because we only need to hold back a smaller number of increase made after June 18. Technically, Berlin portfolios might show negative rent costs under the planned legislation for the year 2020 and what you have heard from Helene in '21. So 2 years of negative rentals.

To repeat what we have been saying for a while now. We see the spillover risk as extremely low. I know that the Mayor in Frankfurt, for example, has said that he likes the idea. But make no mistakes, rental regulation is, in Germany, [credible] . It is already highly questionable whether a state can pass a law -- his own law on regulation.

For a city, this is basically out of question. And Frankfurt, for example, on Munich, a very conservative federal state, where the government has been very clear in saying that the rent freeze is not a good idea. So yes, individual and small groups here and there outside of Berlin are in favor. But we clearly do not see any broad-based support for this outside of Berlin. And I know that some of you think that this is very popular with voters, and politicians will have to do it. But I think we should not underestimate a large majority of Germans who do not want to give up on the idea of social market economy, which has worked rather well in Germany for the last 70 years.

Germans also have tried the alternative, and it has clearly failed.

So our next page, on 21. Before I wrap up of today's presentation, allow me to say words of political and public debate. You have heard me say many times that I believe residential rents need to be somehow regulated. Obviously, Berlin is taking it way too far in the wrong way in the wrong direction. But I do believe that because housing is such a sensitive and important product, you cannot leave it to the free market forces. This is also the consensus in Germany and actually works reasonably well to the [Mietpreisbremse] system of Mietspiegel. Yes, there is quite a bit of political influence in developing new Mietspiegel, but by and large, the German system, which in essence, is quite close to the system in Sweden works well in that sitting tenants need not to fear excessive rent increase and landlord can build a business around a largely stable top line. So we support the concept of Mietspiegel and even Mietpreisbremse.

But precisely, because we operate in this business that is more important than most anything else in our tenant's life, we will have a very special responsibility to strike for the right stakeholder balance. And we take this responsibility very serious. We developed a business and philosophy that guides our action and goes beyond what is legally required in Germany.

We have limited ourselves to a rent cost of not more than EUR 2 per square meter, following a modernization, even through, in many cases, the law would allow us EUR 3. We have made a promise to our tenants who are 70 years and older, that they will not be forced to move out because of rising rent. And we made the deliberate decision not to implement the 2019 Mietspiegel in Berlin because we felt that it would add only fuel to the fire and add [more insecurity] to our tenants.

I think that all this decision was very positive noted in the German press and by the politicians of Germany. Of course, we are a commercial enterprise, and we work hard to generate a decent risk-adjusted return for our shareholders. But we also believe that this is in the long run, we cannot and do not want to ignore the interest of all our stakeholders.

Moving to Page 22. Clearly, this is an effort that never ends, and we will all have -- always have cases where we do can better. But there is no doubt that we have come a long way. By now, we are among the top 10 homebuilders in Germany, so we are making a real contribution to [factor] the housing shortage. So to build new houses in Germany and new apartments in Germany is not only economically interesting, but it is also contributing to society, which is highly appreciated.

Our efforts are increasingly recognized and interestingly, we are seeing that more and more often, politicians are starting to distinguish between different players. You can see probably the different quotes. My most favorite quote is actually on the upper right, which is a quote from the Minister -- from the left-wing Minister of Housing in Berlin. So this is a lady who has invented Mietenstopp and Mietendeckel. But also here, you can see that she is able and loves the support, which we are giving to Berlin. Well, take ancillary expenses, for example. Because of our efficiency, we are 9% below the German average. This is a direct and tangible value for our tenants.

We clearly see ourselves as a part of the solution, and we're very mindful of the fact that in our regulated business, you cannot be successful in the long term if you work against your tenants or the regulator or other stakeholders. We will continue to be vocal about the real problems, and we will continue to actively work for solutions. We owe it to our tenants and we owe it to the long-term interest of our shareholders.

And this is a mark, only finally allow me before we go to the Q&A, to wrap up our presentation. As you have seen, based on our Q 9 2019's performance, we are on track to deliver EBITDA and Group FFO on the very upper end of our guidance. Our valuation estimates for the H2 adjusted value uplift and adjusted NAV share between EUR 51.50 and EUR 53 at the end of the year.

Our expectation for the year-end 2019 pro forma LTV is well in our target range. The initial guidance for 2020 shows an estimated Group FFO growth of 7% at the midpoint and 9% on the top on the range. We expect to continue to deliver best-in-class rental growth, the diversification of our business in terms of geographic and breadth of activity is paying off. The Berlin-specific rental regulation, will only have a minor impact on Group FFO with EUR 6 million. But we will see, for Berlin only, in the portfolio and negative rent costs in 2020 and 2021. And we continue to see no spillover risk into other areas outside Berlin. We consider them as extremely low. And finally, Vonovia leads by example with regard of the higher relevant stakeholder debate.

And with this, I will go into questions. Thank you very much.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from Charles Boissier, UBS.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I have a few questions. So the first one on the revaluation for second half. You mentioned a fair value of EUR 2.1 billion to EUR 2.8 billion, so 4.4% to 5.9%. That's quite actually unusually wide range, it's 2x wider than last year. I was just wondering, given where we were in November, and you may have received some clear enough indication from CBRE to provide you guidance, what is driving the wider range? Is it just Berlin uncertainty on revaluation? Or is there anything else?

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [3]

--------------------------------------------------------------------------------

Actually, I think that's more -- actually, to say the truth, there's nothing behind it. We have a larger portfolio. And as a result, we sort of like decided to increase the range a little bit. We haven't seen any sort of major noise on this. At the moment, we're working through the numbers. So nothing to read into this at all.

--------------------------------------------------------------------------------

Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [4]

--------------------------------------------------------------------------------

Okay. And then on Hembla, just looking at the recent quarterly presentations, so they speak about like-for-like of 1.7% in the third quarter, that was actually 3.8% in the first half. So I just was wondering what's your take on the performance. And what -- like-for-like do you expect from this business going forward? Because it just seems like it has slowed a little bit in the third quarter.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [5]

--------------------------------------------------------------------------------

To be very open, we have no -- of course, we got the merger control today. So we were not allowed to discuss with them at any detail in the business. So actually, I only know what you have seen also in the figures. What we know from our business in Victoria Park is that the business is completely intact. So we are showing a significant rental growth in Sweden. If there's any one-off effects or [any offers of] modernization in Hembla, I don't know. But we don't see any changing trend in Sweden. Opposite, we see a very positive development in fee, and also there's a normal quite better rent because the government in Sweden and that's why the tenant associations are pretty nice with the tenant and landlord at the moment.

--------------------------------------------------------------------------------

Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [6]

--------------------------------------------------------------------------------

Okay. Then I'm just having some question on Page 35, which is actually an appendix. So just taking them one by one. So on Point A, you mentioned Berlin impact, 30 to 40 basis points. Is that essentially the rent freeze? And then the rent reduction, which would come 9 months later, would be more of a 2021 impact? And that would be an additional 60 basis points to get to the 1% you were guiding late August? Or is there something else to think about on the Berlin impact? Just then in terms of the total impact, when you consider both 2020 and '21. Still keeping in mind that you mentioned that the rent reduction is more discussable or debatable part of the merger.

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [7]

--------------------------------------------------------------------------------

So as you rightly just said, this is about the first step of the Berlin legislation. This is the 30 to 40 basis points. And you may note that the reason why this is quite low is because we have not enacted last -- this year's Mietspiegel. So we don't need to go up and then down, like other players may or may not have to do. What we haven't included in this is, I think, big footnote, is this whole thing about the 120% cap. Why? Because it's only coming into place in 9 months' time because tenants need to ask for the cap to be enacted. And thirdly, because we consider that as a really, really, really unconstitutional element of the rent regulation.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [8]

--------------------------------------------------------------------------------

But to be very clear, the rent regulations. This rent will come -- regulation would come in place. If you are talking to the lawyers in the -- members of parliament in the Bundestag, they are telling us that, at least, it will take 2 years before the government will come to -- [a visit] before the court will come to a final conclusion. So we have to be realistic. This law will be in place in 2020. And for us, it will have only a small impact because Helene would explain. And for 2021, there will be a bigger impact. We just don't think that the impact will happen in the end of 2020 because the bureaucracy of Berlin, also to be very clear, has to handle, not all [players the] same way. So there might be some priorities for Bürokratie to decide that rent reduction should become easier in some other parts of the game.

So that I think here, is where Vonovia we will see the impact probably -- most probably in 2021. But as I said before, we will see negative rent costs, significant negative rent costs for our portfolio in Berlin in 2020 and especially in 2021. And then hope then in '22 or '23, we will see rent uplift if the constitutional court is declaring the law unconstitutional.

--------------------------------------------------------------------------------

Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [9]

--------------------------------------------------------------------------------

So would you say that this measure as it stands has a bigger impact than what you were looking at from [Mietspiegel] back end of August, when you were talking about the total impact of 1%?

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [10]

--------------------------------------------------------------------------------

No. I think it's different phases. What is definitely clear is we have seen 3 announcements. The first was, I think, the 18th of June. Then we saw an intermediate announcement, which looks like a little bit looser and not as strong as the 18th of June. This was a cap of the rent was only for people who have to spend more than 30% of their income for rent. And then we saw the final draft, which is -- worse and more strict than the one because there the rent reduction is [gone] for all apartments, independent if the tenant is spending more than 30% of his income or not.

To be very precise, there are apartments, which is probably not in our portfolio, but they are very well-renovated apartments built in the '50s, which probably has a rent today of EUR 20 per square meter, and they will reduce to EUR 9 per square meter. So this is completely new, and this is actually stronger than the in-between proposal we have seen pricing in August.

--------------------------------------------------------------------------------

Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [11]

--------------------------------------------------------------------------------

Okay. And then on Point C, you mentioned Mietspiegel and investments and you mentioned the political influence on Mietspiegel values. What about the recent coalition agreement on housing with regards to the rent table? I know it's still in discussion between the Federal Minister of Justice and Housing, but do you see that potentially having an impact in 2020? Or you think '21? Or you think that would not have any impact, those currently on discussions?

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [12]

--------------------------------------------------------------------------------

No. I think this discussion will happen, and that's why this is a part of this discussion. So what we are saying is actually what we're seeing in the last years. We see more pressure on the Mietspiegel. But first of all, more political pressure. So look, on the 2019 Mietspiegel, even in Berlin, they managed to bring it down to 5%, which is probably a little bit away from the market before the legislation. But you see also the mid-price premise, which has an impact because the mid-price branches, reduces the new rent, which will go to the rent table 2 years after, and then you see the element of 4% to 6%. So what we see in Rental is because of the significant rent increase we have seen, politicians are pushing harder to reduce the Mietspiegel system. And that's why I think in what we have previously said, a rental growth of 5% that we probably see a rough estimate, which is 20 to 30 basis points coming from just lower Mietspiegel.

--------------------------------------------------------------------------------

Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [13]

--------------------------------------------------------------------------------

I don't aim to push back. But I thought the whole discussion on that new Mietspiegel revision was also to make it more scientific and less...

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [14]

--------------------------------------------------------------------------------

This is not included in our figure because we have not seen any legal document for this. So I think the only thing what they will decide on -- and I think they are already in the process, is to extend from 4 to 6 years. So to get it more artificially better, this, of course, would help us, and it would not be a negative impact. There's a positive impact, but we have not included it into our -- in our figures at the moment.

--------------------------------------------------------------------------------

Charles Boissier, UBS Investment Bank, Research Division - Director and Property Analyst [15]

--------------------------------------------------------------------------------

Okay. And apologies, the last question on the technical update of acquisition criteria. You mentioned earnings acquisition will be measured relative to comparable portfolios within Vonovia. So I just wanted to know -- so for example, if you make an acquisition, say, in the Netherlands or France, are you talking here when you're talking about comparable portfolios is that just a rental portfolio? Or is that portfolios you would select that you consider to be the right benchmark?

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [16]

--------------------------------------------------------------------------------

No. No, it's the Rental portfolio. So don't worry.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [17]

--------------------------------------------------------------------------------

And to be open, in France, we would not have a comparable portfolio yet. And we don't consider our 400 apartment as a portfolio, which should be comparable for the future acquisitions. So this is mainly for Germany and Sweden.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

The next question is from Christopher Fremantle, Morgan Stanley.

--------------------------------------------------------------------------------

Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [19]

--------------------------------------------------------------------------------

I just wanted to follow-up on the acquisition criteria that you have represented. How does the fact that your shares have started to trade at a discount to your NAV affect your strategy to continue this bolt-on acquisitions, and in particular, whether you would fund those via new equity issuance? Clearly, that has been the trend over the last few years and interested in how you think about that, please.

And then on the same subject, when you talk about being accretive on EBITDA rental yield, do you mean on a same year basis? Or do you -- are you talking about a year 1 or year 2? Because clearly, you -- there can be different outcomes based on how you -- how far forward you'd look on that basis. So if you can just be a bit more specific about that, that would be helpful, please.

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [20]

--------------------------------------------------------------------------------

Chris, so on the NAV criteria, nothing has changed. So we continue as we did before, only that, obviously, the NAV calculation on EPRA have been announced, I think, yesterday at 5:00 or something like that, for those interested. I saw [Buwog] issuing a research on this already. So no change there whatsoever.

And then your second question was around -- sorry, someone help me.

--------------------------------------------------------------------------------

Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [21]

--------------------------------------------------------------------------------

The EBITDA rental yield. Are you talking about the same -- does it have to be accretive on this -- in the same year? Or are you talking -- or is it accretive on a forward-look basis?

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [22]

--------------------------------------------------------------------------------

So it is after synergies. So again, nothing changed on that metric.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [23]

--------------------------------------------------------------------------------

We normally say that this is the first year of full consolidation.

--------------------------------------------------------------------------------

Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [24]

--------------------------------------------------------------------------------

Okay. And -- all right.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [25]

--------------------------------------------------------------------------------

It will only make sense -- So for half year, it's very artisanal. So I think the first year of consolidation is the first year where we really can verify it.

--------------------------------------------------------------------------------

Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [26]

--------------------------------------------------------------------------------

All right. Okay. Can you -- my second question, just -- you talked about yield compression outside Berlin, and you suggested that the pace of revaluations and capital growth was at a fairly constant pace. Do you see you see that continuing into 2020, given what has happened to the cost of debt? Or are we in the sort of the end game of yield compression as far as you can see? I appreciate you don't want to give too much specific guidance, but should people be expecting yields to continue falling after your full year '19?

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [27]

--------------------------------------------------------------------------------

So Chris, same answer as every call. We do not give any guidance on yield compression. So unfortunately, we don't know. We can't help you. There's nothing we influence. What we do in France is clearly value accretion as a result of the investment programs. And that we do guide. Yield compression, we do not have an opinion on. At least not a public one.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

The next question is from Kai Klose, Berenberg.

--------------------------------------------------------------------------------

Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [29]

--------------------------------------------------------------------------------

Yes. I've got a quick question on Page 31 of the presentation, where you show the splits of investments. Just being curious for 2020 as you haven't shown the splits between upgrade and optimize. Just interested if you want to keep it a bit more open, or a bit more flexible? Or do we -- or if you might expect a bit of a stronger shift in terms of investment into the portfolio?

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [30]

--------------------------------------------------------------------------------

Kai, so yes, we continue to keep it flexible. Also this year, we have seen that we do need to shift between investment programs. Really, this year, a function of when we get building permit. That was the key driver. So indeed, we do just want to keep it flexible. And just to preempt one of the question that always comes, we don't detail the exact amount of how much we invest in one into the other program.

--------------------------------------------------------------------------------

Kai Malte Klose, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [31]

--------------------------------------------------------------------------------

And the last question would be on Page 10 regarding the pipeline. The -- compared to the second quarter, the pipeline is now at 31,000 units before it was a bit lower, I think, about 29,000 so and so, by the end of June. This comes from where? Did you -- from securing more [bidding wider possibility] for -- from Sweden? Just interested where we have seen where this larger, longer pattern is coming from?

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [32]

--------------------------------------------------------------------------------

Yes. No, actually, we bought some land, both in Austria and in Germany. So that's basically land, which we are now developing to basically add to the pipeline.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

The next question is from Sander Bunck, Barclays.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [34]

--------------------------------------------------------------------------------

A couple of questions for me as well, please. Just going back to Page 35, just to make sure this is absolutely crystal clear. So if I look at portion A, where there's a 30, 40 basis points impact from the reversal, am I right to understand that this is a one-off effect, which kind of ceases at the end of 2020 and that will then effectively will be replaced by 50 basis points impact in the year thereafter. So net-net, in 2020, the -- there is a -- the 30, 40 basis points rolls off that's -- as a result, has a slight positive impact but then the 50 basis points has a negative impact, so net-net, you're between 10 and 20 basis points lower compared to the 5%? Is that the right way to look at it? Or?

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [35]

--------------------------------------------------------------------------------

So actually, to be very clear, we are not speculating in the moment. I said that in 2 years, this the earliest moment where the constitutional court can decide or not decide about constitutional of the rent freeze and the Mietendeckel. Our assumption is, in the moment, that the law is in place, and we have no assumption when the law will get out of place. So to be very clear, it's not that we are building models onto our long-term plan. We are modeling that this rent law will stay there for 5 years. And to be also very clear, nobody has a clue what would happen after 5 years because it is technically impossible to just stop the law because this would come to an exclusion of rents. So nobody has a clue at the moment in Germany what will happen about the 5%.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [36]

--------------------------------------------------------------------------------

I understand, but it's more -- the 30 to 40 basis points impact, is that a one-off impact...

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [37]

--------------------------------------------------------------------------------

No. But it's every year...

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [38]

--------------------------------------------------------------------------------

For 2019? And then it rolls off or not?

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [39]

--------------------------------------------------------------------------------

(inaudible) The [problem] is normally, in Berlin, you would realize a rental growth every year and this has stopped, right? So this is not coming.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [40]

--------------------------------------------------------------------------------

No. I understand. But so -- but there's effectively 2 impacts here -- you're calling here. You have a big footnote, about 50 basis points. And you have another in point A...

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [41]

--------------------------------------------------------------------------------

(inaudible) The 50 basis point is a onetime effect, where you bring everything back to the Mietendeckel.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [42]

--------------------------------------------------------------------------------

Yes. Okay. So there's a 30, 40 basis point impact for next year. Then that effect goes away. And then there's another 50 basis point impact...

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [43]

--------------------------------------------------------------------------------

No. No, no, no. The 30 to 40 will continue to look -- because the 5% was actually what we used to have on the rental cost portfolio before. Now we have Berlin, and we are losing 30 to 40 basis points in Berlin every year because we are not showing rental cost in Berlin, I mean, yet, which we would have before the legislation. Again, the 50 percentage basis point, which is actually really going down one-off because it just brings [a large number].

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [44]

--------------------------------------------------------------------------------

Okay. So the 30 to 40 basis is permanent and the 50 basis is a one-off. Not the other way around. Okay. Okay. Perfect.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [45]

--------------------------------------------------------------------------------

But then you have a small -- to be very clear, you have -- actually, to be very clear, but I think this still important because a lot of people have not understood it. You have actually 2 elements of rent reduction in recording to the law, as Helene has explained. The first is coming in January, where you have to rewind all rent, which we have increased since 18 of June 2019. Keep in mind, there is a new Mietspiegel. So a lot -- some players have increased their rent according to the Mietspiegel because they have the right. Now they have to reduce it. This is the first element of rent reduction.

We are not so much impacted because we have decided not to increase the rent. So that's why, of course, we will not have to reduce it. But to be also very clear, there is newly renovated apartments, which we have rented out since June 2018, and this apartment will be reduced by the rent in January 2020. That is all. So I want to make it very clear. There is a tenant who has signed an apartment for EUR 11 per square meter in August, and he will go back, for example, depending on the age of the building, to EUR 8 or EUR 9 in January. This is why we are saying this is a good signal for being unconstitutional because a lot of rights in Germany are violated here. But this is another debate. So this is the first wave.

And then the second wave, which is a much bigger one, is coming in September or later, dependent on the approval process in the administration, where actually, people can ask to have the rent reduced to amount, which is 100% of the rental cap. And they call it wuchermieten. But this is not a wuchermieten. They call EUR 8 a [wuchermieter] , to be very precise. So -- or even EUR 7. So this is -- but this is a reduction, and this will hit all of us. We don't know exactly in which time frame, but will hit all of us probably in 2021.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [46]

--------------------------------------------------------------------------------

Okay. And if you -- you spoke earlier about very negative like-for-like rental growth in Berlin. Can you kind of quantify what kind of number you're looking at?

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [47]

--------------------------------------------------------------------------------

We are not quantifying it, and it's also difficult to be very clear because we don't want to give guidance for other companies. So also, you have to be very careful that normally -- that you just put our volume and multiply it or divide it by the other volumes. This is probably not helpful because it depends very much on your location. It depends on your rent. Actually, you can say one thing is better. Your quality in Berlin is -- it's as better you get a bigger problem.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [48]

--------------------------------------------------------------------------------

No. No, but I understand. But just broad magnitude, are we talking minus 10%? Or are we talking minus 2%?

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [49]

--------------------------------------------------------------------------------

We have not given you and I actually -- I have not calculated from the Berlin specifics or this would be guessing now. We will probably include it in the next presentations.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [50]

--------------------------------------------------------------------------------

Okay. That's fair. And just on that, like, how are you looking at Berlin in terms of CapEx? Are you basically putting CapEx -- are you -- keep on investing the maintenance but reducing your CapEx program? Or you're looking to shift that around? Or how are you thinking about that?

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [51]

--------------------------------------------------------------------------------

So it's clear. CapEx is not allowed anymore, at least if you don't want to -- only -- it's only allowed if you are...

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [52]

--------------------------------------------------------------------------------

[A few of it] is allowed.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [53]

--------------------------------------------------------------------------------

So -- but it's technically not allowed anymore to make investments there. So we will lose -- you reduce CapEx, especially in modernization to a minimum. And we will shift this to other places. As you see in our guidance, we are guiding more or less the same volume than what we have done in 2019. And the new construction, of course, we will finish the buildings, which are under construction, because they are not directly impacted by the law. And we will look very carefully on new construction in Berlin because what is not in the law today might be in the law tomorrow. So that's why we have to be very careful in Berlin what we are doing.

--------------------------------------------------------------------------------

Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [54]

--------------------------------------------------------------------------------

Sure. Okay. And the very last one. It's -- how do you -- are you currently looking at potentially doing acquisitions in Berlin, even if those acquisitions fall outside of your acquisition criteria but you're taking a slightly longer-term view? And especially, I think, there were some headlines this morning where you were quoted saying that the financing environment has become a bit more difficult and a bit more tricky. How are you looking at that? How are you looking at the moment at valuations in Berlin should...

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [55]

--------------------------------------------------------------------------------

To be very clear, Helene is knocking on me because she's just claiming what I have said in this morning. But I cannot remember that I have said that financing conditions are getting more difficult. I think it's more the opposite, but anyhow. And no, we are not -- to be very clear. In Berlin, if somebody -- and I said it more in the example that a small butcher owns the apartment. If his rent was reduced by half, he is probably forced to do a forced sale because he just gets the half of the rent. This means actually that probably his interest in his personal case because he has levered it, probably it was 80%, 90%, is higher than the rent he is collecting. And in this moment, he is probably pushed by the banks to sell. So these cases will happen. And of course, in these cases, you might have a chance to buy for a very good price. This was the explanation. This was more to be very clear, it was not for the capital market. It was explained to German press what will happen to the butchers in Berlin because this has a massive impact on people. So don't underestimate because this has a massive impact on the population because a variety of Germans are using apartments, which they rent out for their pensions. And this is now -- this pension money is now getting to become 0. So this has an impact, but this is more for the political debate for us. Of course, if somebody would offer us a very good portfolio in Berlin for a very low price, so much lower than what we see today, we would not ignore to look on it as we look on all portfolios. But I think there is enough uncertainty in the moment in Berlin that you have to be very, very careful.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Rene Hoffmann, Vonovia SE - Head of IR [57]

--------------------------------------------------------------------------------

Operator, do we have anybody else in the queue at this point?

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

Yes. We have -- the next question is from Tom Carstairs, Commerzbank.

--------------------------------------------------------------------------------

Thomas Carstairs, Commerzbank AG, Research Division - Senior Equity Analyst [59]

--------------------------------------------------------------------------------

Yes. Two questions, please. First one regarding Rolf's comments on the court decision not before 2 years. Because I understood that the FDP is planning to do -- challenge this in Parliament, and that would -- potentially that could be fast-tracked to the constitutional court. So does that exclude that FDP potential?

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [60]

--------------------------------------------------------------------------------

No. This is the only way how we can come to 2 years. If this is not happening, the time will be much longer. And -- but what everybody is telling us -- so I'm an engineer. I'm not a lawyer. But everybody, what the lawyers are telling me, if you are applying in front of the constitutional court in Germany, it will take a while before the constitutional court will decide the first meeting. And they have to collect material and all these things. So this process, according to our lawyers, is normally taking 2 years. But the constitutional court is very free in how fast they want to react. But as I understood from some members of parliament, they are actually saying 2 years is fast.

--------------------------------------------------------------------------------

Thomas Carstairs, Commerzbank AG, Research Division - Senior Equity Analyst [61]

--------------------------------------------------------------------------------

Okay. Cool. Second question...

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [62]

--------------------------------------------------------------------------------

It's not cool. It's not cool. It's a disaster.

--------------------------------------------------------------------------------

Thomas Carstairs, Commerzbank AG, Research Division - Senior Equity Analyst [63]

--------------------------------------------------------------------------------

It's not cool. Sorry, misuse of the word. The second question relates to Hembla, and I was wondering whether you could give any indication of your estimate of Hembla's 2018 earnings based on your group FFO earnings approach.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [64]

--------------------------------------------------------------------------------

So again, I said we had no possibility, except public available information. So I think we should not say anything about Hembla at this moment of time. And again, to be very clear, our assumption is that we will run the Hembla portfolio like the Victoria Park portfolio. So we don't care too much about what is the historic figures of Hembla.

--------------------------------------------------------------------------------

Thomas Carstairs, Commerzbank AG, Research Division - Senior Equity Analyst [65]

--------------------------------------------------------------------------------

It was more for me.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [66]

--------------------------------------------------------------------------------

I'm sorry. I'm sorry. It's just -- I'm not educated in Hembla enough to answer questions about 2018 and '19.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

The next question is from Marios Pastou, Credit Suisse.

--------------------------------------------------------------------------------

Marios Pastou, Crédit Suisse AG, Research Division - Research Analyst [68]

--------------------------------------------------------------------------------

Look, I just want to go back over Page 35, just very, very quickly, just to make absolutely certain in terms of future growth. Because on Page 20, you're mentioning that your estimated impact on Group FFO in 2020 will be EUR 6 million, which is the unrealized rent growth because of the freeze and then also the rent reversals. So on Page 35, is part of that 30 to 40 basis points a mixture of the 2? So the 30 to 40 won't be every year because some of that is the day 1 rent reversals and the rest of it is the unrealized rent growth. Is that correct?

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [69]

--------------------------------------------------------------------------------

Keep in mind that our rent reversal is very little because we have not used the rent Mietspiegel 2019 to increase guidance. So we don't have to reverse.

--------------------------------------------------------------------------------

Marios Pastou, Crédit Suisse AG, Research Division - Research Analyst [70]

--------------------------------------------------------------------------------

Okay. So a very, very small portion of that 30 to 40 basis points is basically...

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [71]

--------------------------------------------------------------------------------

I explained the system because I think a lot of people have not understood that there's 2 elements of rent reversal in the system. In our case, we have decided not to increase the rent, and I think this was a good decision because it is a confusion to send out to tenants in October a rent increase letter and in December, a rent decrease letter. So probably the cost related to this is higher than the difference in rent. So that's why for us, the first rental reduction will be not material. And then the second one, will be material.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

The next question is from Georg Kanders, Bankhaus Lampe.

--------------------------------------------------------------------------------

Georg Kanders, Bankhaus Lampe KG, Research Division - Investment Analyst [73]

--------------------------------------------------------------------------------

I have a question regarding the outlook for the current year. You had now quite a high contribution from the development department and on recurring sales. Do you expect for Q4 there are significant reduction from the contribution? And then I have a special question regarding the Development segment. When I look at the quarterly development, there are very low operational expenses booked in Q3. Is there a special reason for this?

--------------------------------------------------------------------------------

Helene von Roeder, Vonovia SE - CFO & Member of Management Board [74]

--------------------------------------------------------------------------------

So I think we need to follow-up on that one, because that goes deeply into sort of like the development accounting. As you know, for the development to sell, we have PoC accounting. That can always have an effect. Then we have the development to hold where buildings come in online, all at once. So we ideally would like to come back to you with details and granularity on these questions.

--------------------------------------------------------------------------------

Georg Kanders, Bankhaus Lampe KG, Research Division - Investment Analyst [75]

--------------------------------------------------------------------------------

It's just that it was more or less a normal development for the first quarters and then just -- you were below EUR 2 million operating expenses, and I would expect, normally, there's a certain level in operating expenses from the revenue side.

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [76]

--------------------------------------------------------------------------------

We will come back to you with this because this is a very difficult. Before we are giving wrong answers, we will not take it.

--------------------------------------------------------------------------------

Georg Kanders, Bankhaus Lampe KG, Research Division - Investment Analyst [77]

--------------------------------------------------------------------------------

But what I want to -- is my impression correct that there will be more or less a decline in Q4, especially from these 2 items? Or is this -- because...

--------------------------------------------------------------------------------

Rolf Eberhard Buch, Vonovia SE - Chairman of the Management Board & CEO [78]

--------------------------------------------------------------------------------

I think to be very clear, this -- to look on the development business on a quarter-by-quarter view is probably a little bit difficult because the -- especially the development to hold, realizing it’s offered at the moment, if the buildings are finished. And if you have, for example, because of that [vassar] finishing in January, then you don't realize the profit. So I think to look on the development business on a quarter-by-quarter business is a little bit tricky. And we will have this always. So -- but you cannot read anything out of it.

--------------------------------------------------------------------------------

Operator [79]

--------------------------------------------------------------------------------

As there are no further questions, I would like to hand back to Rene.

--------------------------------------------------------------------------------

Rene Hoffmann, Vonovia SE - Head of IR [80]

--------------------------------------------------------------------------------

Thank you, Judith, and thanks, everybody else for joining. As a reminder, our full year earnings results 2019 will come out on March 5, which is obviously quite a wait away. So until then, we'll be on the road quite a bit, and we hope we'll be speaking during the road show or at a conference. Our financial calendar is on Page 55 of today's presentation, and the most up-to-date version is always on our website. As always, feel free to reach out to me or the team with any questions or comments you may have. That's it from us for today. Have a great day, everyone.

--------------------------------------------------------------------------------

Operator [81]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.