Today I would like to give you my impressions of the conference call to present Vonovia's ($VNA (-2,32 %)) annual results for 2024.
Rolf Buch, CEO, began by emphasizing that the current situation is characterized by uncertainty, particularly due to the German government's announcement of massive investments in the military and infrastructure. He outlined Vonovia's development in three phases: a growth phase after the IPO, supported by low interest rates, followed by a defensive phase after the war in Ukraine and the rise in interest rates, in which the rating and balance sheet were protected. The company is now at the beginning of a third phase, a less capital-intensive return to growth, particularly in the high-margin non-rental business.
On a positive note, Buch emphasized that the planned investment programme also offers opportunities for modernization and new construction in the areas of climate protection, energy and housing. The aim is to react prudently, learn from the experience of recent crises and maintain the strategic priorities of rating protection, debt management and long-term growth. There may be delays in individual growth projects, which are more capital-intensive, but the company is prepared to act decisively if necessary. Overall, however, the business model is robust, the market fundamentals are strong and the operating business is more solid than ever. It is encouraging that the data on property valuations shows stabilization and even slight price growth for condominiums.
Transaction volumes also picked up in the fourth quarter and a survey by Ernst & Young shows that investors continue to focus on residential real estate. Despite rent regulation, demand for residential space is enormous, which ensures solid rental growth in the long term. With the current investments of around one billion euros, rental growth is expected to be around 4%, which could even rise to 6-7% by 2028 if increased to two billion euros. The rental business will remain the core business, accounting for over 90% of EBITDA in 2024. The non-rental business is expected to grow significantly by 30% by 2028, while overall EBITDA growth of around 8% and EBT growth in the mid-single-digit range are targeted.
Philip Grosse then presented the details of the 2024 annual results. Organic rental growth of 4.1% and EBT at the upper end of the forecast were achieved for 2024. Operating free cash flow had increased significantly as cash generation was a priority. The dividend is set to increase by 36% to EUR 1.22 per share. After disposals of almost 8 billion euros in the last two years, the focus is now on the sale of the remaining non-core business of 1.6 billion euros. The Value-Add segment has increased significantly, but includes a one-off effect. The increased financing costs had a negative impact on the financial result. The value of the portfolio is 23.2 times the net cold rent or a gross yield of 4.3%, which appears reasonable compared to new-build prices for owner-occupied apartments.
The forecasts for 2025 and the medium-term targets up to 2028 were confirmed, with the expected rental growth of over 4% reflecting the planned increase in investment.
In the subsequent Q&A, the analysts asked various questions.
Valerie Jacob from Bernstein asked about the lower dividend compared to the previous formula and how the dividend policy should be assessed in the future. Philip Grosse explained that the prioritization of cash generation in recent years and the increasing investments had limited a higher payout, but that shareholders would benefit from the profitable investments in the long term. Rolf Buch added that the development of interest rates, the specific structure of government programs (in particular the funds for the environment and housing) and the development of real estate values were being closely monitored and that investment decisions would be adapted to the changed framework conditions.
Charles Boissier from UBS asked about the flexibility of the strategic plan in the face of rising capital costs and under what circumstances there would be a renewed focus on cash preservation. Rolf Buch replied that less capital-intensive growth initiatives could be prioritized and capital-intensive projects such as new construction could be scaled back if interest rates rise. With regard to the expected deterioration in the interest coverage ratio (ICR), Philip Grosse stated that there was no pressure in the short to medium term due to the staggered debt maturities and the current margin to the internal target value of 3.5x.
Jonathan Kownator from Goldman Sachs addressed the uncertainties regarding government investments and their potential impact on Vonovia as well as the discrepancy between the potential for rental growth through investments and the communicated forecast. Rolf Buch explained that initial information on subsidies for residential construction was available, but that the exact structure was still unclear. The rental growth forecast may be conservative, as investments are being made gradually and the full potential will only become apparent in the future.
Thomas Neuhold from Kepler Cheuvreux asked about the increased taxes and the long-term tax rate as well as the plans and measures to reduce construction costs in the sales business. Philip Grosse explained that the taxes reported in the operating cash flow related to the core business and that the increase was due to higher sales volumes. In the long term, a tax rate of less than 10% of EBITDA is expected. With regard to the reduction in construction costs, it is still too early to make concrete statements, but various initiatives are being worked on and political support is hoped for.
Veronique Meertens from Van Lanschot Kempen enquired about the current status of the discussions surrounding the rent freeze and about concrete steps to expand new business areas. Rolf Buch was optimistic that the rent freeze in its current form would be reconsidered and adapted. In terms of new business areas, he sees great potential in working with long-term investors, particularly in the infrastructure sector, as their investment horizon and Vonovia's cash flow profile are a good match.
Manuel Martin from ODDO BHF wanted to assess the regional strategy in the three countries (Germany, Sweden, Austria) and the portfolio's sensitivity to migration. Rolf Buch highlighted the relative strength of Sweden, but emphasized the similar stability and excess demand in all three markets. With regard to migration, he does not expect any negative effects on demand, as illegal immigrants are initially housed in camps and legal immigration is more likely to increase due to labor shortages.
Conclusion:
The Vonovia analysts' conference conveyed a picture of a company that is well positioned despite a challenging economic and political environment. The stabilization of real estate values and the confirmed growth targets give confidence. The uncertainties caused by the government's investment plans are taken seriously, but are also seen as an opportunity. The management emphasized the flexibility to react to changing conditions and to consistently pursue the strategic priorities. The significant dividend increase is a positive signal for shareholders, even if the retained liquidity is to be used for future growth and stability. Overall, Vonovia appears to be well equipped to master the current challenges and grow in the long term.
