Letter to our shareholders

Dear shareholders,

Our society is confronted with many disruptions and the challenges they bring with them – today more than ever, it seems. And of course businesses also feel these undercurrents of change in all their diversity and complexity. But at the same time we are convinced that if a company identifies these trends early and interprets them correctly, it can shape its own future and so achieve sustainable success.

Assume social responsibility

As part of the housing industry, Deutsche Wohnen is currently the focal point for many challenging trends affecting our society, including climate protection, gentrification, a shortage of housing, rising rents and demographic change. Various conflicting interests arise when action is taken to address these challenges. We assume responsibility for resolving these, as a commercial business which also has the wish and the obligation to strive for economic success. Deutsche Wohnen is willing to accept its social responsibility and to make a positive contribution to society to the extent that it is able to do so.

At the same time we see that the current political debates and the resulting regulation are not solving the problems – they are making them worse. This is particularly apparent in the so-called “rental freeze law” [Gesetz zur Neuregelung gesetzlicher Vorschriften zur Mietenbegrenzung] in Berlin, which was enacted on 30 January 2020 and in our opinion does absolutely nothing to relieve the pressures on the housing market. Moreover, we do not expect this legislation to be upheld, particularly since many legal opinions and commentaries consider it to be unconstitutional.

So what is Deutsche Wohnen itself doing to make a sustainable contribution to solving the problem? In 2019 for example we gave a voluntary commitment, known as “Our Promise to Our Tenants”. On this basis we wholly or partly waived our right to raise rents in a total of around 700 cases last year. This also concerns rent increases for existing contracts, which makes Deutsche Wohnen the only private-sector housing company in Germany that has such a far-reaching hardship policy for the benefit of its tenants!

In addition, we encourage the dialogue with housing policymakers and the general public. Here we can point to the Berlin Dialogue meetings held in October and November 2019 as examples. We put together a panel of politicians, business people and representatives of civil society and discussed the topic of “Fair Housing in Berlin” in four townhall meetings. In December 2019 we published the results of the discussions in a “Pact for Fair Housing”. It contains clear targets for the residential property sector. Proposals for solutions were drawn up and presented to the public at the end of 2019.

This is another clear demonstration that the satisfaction of our customers has top priority for our company – in addition to long-term tenancies. In order to measure this customer satisfaction we carried out another tenant survey in 2019. We are using it to identify the potential for concrete improvements. In the key areas surveyed we are pleased to report that Deutsche Wohnen has improved compared with the last survey in 2017: 78% of tenants surveyed are satisfied or very satisfied with Deutsche Wohnen as a landlord and 87% are satisfied or very satisfied with their apartment. These results are both motivating and encourage us to do more. In future we intend to address the changing needs of our tenants even better by means of annual surveys.

Focus on sustainable business and climate action

One important part of the “Pact for Fair Housing” is the systematic construction of urgently needed housing. This is another area which Deutsche Wohnen is using its financial strength to address actively: in the years ahead we even intend to expand our existing plans for extensive new building activity, in order to alleviate pressure on the residential property markets. But we can only implement these measures in the right operating environment, which is the responsibility of policymakers and public administration.

The conflicting objectives mentioned above are very visible in the area of climate action. One example is housing: on the one hand there is an undisputed need for more accommodation, on the other it has to remain affordable and to satisfy the requirements of national and international climate action commitments. This applies equally to Berlin, where 72% of our portfolio is situated, and to Germany as a whole. We say that affordable housing and climate action should not be played off against one another. Everyone involved has to make a contribution and share the burden of protecting the climate fairly. This is the only way to avoid problems of acceptance.

The two degree target set in the Paris Agreement and a climate-neutral housing sector by 2050 imply massive investment by the residential property industry, and require significant technological advances. Here too, we accept our long-term responsibilities and are actively working on solutions. So as a sponsoring member of the “Stiftung 2° – Deutsche Unternehmer für Klimaschutz”, we support this alliance for limiting global warming. This underlines Deutsche Wohnen’s commitment to a dependable framework for achieving the climate policy objectives.

We also recognised the importance of digitalisation in the property industry at an early stage and intend to make the best possible use of the opportunities it offers; in terms of smart and networked buildings, for example. And here too, it is essentially about a more sustainable business.

Portfolio strategy leverages megatrends and metropolitan areas

Our business model builds on megatrends such as urbanisation and an ageing population. At the same time we have a clear focus on German metropolitan areas, where the chances for further growth are particularly good. This applies both to our residential property portfolio and to the Nursing and Assisted Living business field. We made important progress in both areas in financial year 2019.

Our property portfolio saw another steep valuation increase of EUR 1.4 billion as a result of ongoing price rises. Deutsche Wohnen also concentrates on continuous quality improvements. So in the reporting year we disposed of more than 7,000 residential units that were not an optimal fit for our portfolio. On the other hand, we acquired some 4,700 residential and commercial units, mostly in Core+ markets, for a price of around EUR 1 billion. In addition, we invested about EUR 468 million in our portfolio. These investments aim to deliver further quality improvements as well as greater energy efficiency. Altogether, the activities described ensure that we optimise our portfolio for the long term.

In the Nursing and Assisted Living segment we also focus on cities and regions with positive development forecasts, as well as high-quality properties and a high level of nursing care and assistance. Our targeted expansion in this area meets the growing demand for nursing capacities in Germany. In late 2019 we recalibrated our portfolio here too and signed contracts for 13 nursing properties with some 1,700 beds and assisted living units. Our aim is to expand the nursing segment to 15% of Group EBITDA by means of new building and selected acquisitions. At the end of 2019 it accounted for about 10%.

Successful financial year 2019

The key performance indicators reflect Deutsche Wohnen’s strong performance in 2019: the figure we use, FFO I – funds from operations, without disposals – went up by 11% to EUR 538 million, thanks to acquisitions and operating improvements. EPRA NAV (net asset value) also increased by 11% to some EUR 47 per share. Rental growth came to 3.4% in the reporting year. We therefore achieved our forecasts for the financial year 2019. The same applies to the Loan-to-Value ratio, which indicates the Group’s gearing, and at 35.4% is within our target range of 35% to 40%. Deutsche Wohnen is still rated A- and A3 respectively by the two international rating agencies Standard & Poor’s and Moody’s, both with a negative outlook.

Our shareholders also profit from our continuous dividend policy. After preparation and approval of the 2019 annual financial statements, the Management Board and the Supervisory Board decided to adjust the original dividend proposal and to distribute a dividend of EUR 0.90 per bearer share for the financial year 2019. This corresponds to a reduction from the previously planned payout ratio of 5 percentage points to around 60%. This adjustment is used to finance a EUR 30 million relief fund in order to be able to provide Deutsche Wohnen’s tenants with quick and unbureaucratic financial help in the event of hardship in the context of the current Corona crisis. The Deutsche Wohnen share price suffered from the discussion about the introduction of a statutory rent cap in Berlin in 2019 and other regulatory measures – as the chart shows clearly. As of 31 December 2019 the share price was EUR 36.42 or nearly 7% down on the year. This is a discount of 22.5% on EPRA NAV. In November Deutsche Wohnen started a share buyback programme with a volume of up to EUR 750 million. By the end of 2019 this resulted in the purchase of some 2.6 million shares for around EUR 99.4 million.

Deutsche Wohnen’s success is due in very large part to our employees, who again worked with great dedication and passion for our company in 2019. Our sincere thanks go to them all. We are well aware that we have to remain an attractive long-term employer and to keep working on ourselves permanently. Our regular employee surveys show how we are doing in this regard. 77% of all the employees who took part in our 2019 survey are satisfied with Deutsche Wohnen as an employer, which is a decent result. But alongside the positive aspects, our employees also expressed specific requests for improvements. We are looking at these and developing solutions together.

Keep writing the company’s success story

The fundamentals remain promising for German metropolitan areas, where 92% of our portfolio is situated. We therefore intend to keep pursuing our strategy of focused growth in German conurbations going forward; particularly on the basis of our sustainable investment and disposal strategy, as well as our extensive new building activities.

Against the background of all these factors, we are optimistic about the financial year 2020. Our forecast is for FFO I of approximately EUR 540 million and adjusted EBITDA (excluding Disposals) of approximately EUR 710 million.

Overall we believe Deutsche Wohnen is very well positioned, and look forward to shaping the successful future of our company with you!

Berlin, 25 March 2020

Yours sincerely,

Michael Zahn
Chief Executive Officer

Philip Grosse
Chief Financial Officer

Henrik Thomsen
Chief Development Officer

Lars Urbansky
Chief Operating Officer