Letter to shareholders
How, in this day and age, can a publicly listed company add value for all its stakeholders? When does society consider that it is a force for good? The demands made of Deutsche Wohnen – as one of Germany’s leading residential property companies – are as varied as they are numerous. Challenges particularly include climate protection, demographic change, urbanisation and digitalisation. We are working on all these topics and last year again reached some important milestones.
Answers to the requirements of tomorrow
Like many other areas of life, housing will be very different in the future. Today’s consumers are more demanding than ever and want to know exactly what a product contains, where it comes from and how it affects health, the environment and society. We are convinced that this trend will also impact housing: in future people will look even more closely at the materials their home is built of and whether its surroundings are agreeable to live in.
Deutsche Wohnen already takes these aspects into account in its work, whether this involves the refurbishment of existing properties or new building. When we maintain and invest in our residential units we give top priority to quality and sustainable solutions. Because we know that we have to take the right decisions today for the generations that will come after us. One current example is the new building work that was completed in the reporting year in Elstal, near Berlin. All the load-bearing walls and ceilings in these four apartment blocks are made of solid timber elements. We were awarded with the DGNB platinum certificate for this sustainable construction.
In addition to quality, we pay particular attention to the location of the new residential units that we build, planning them where they are needed most urgently: in conurbations with tight housing markets. We are convinced that only new building can relieve the pressure on these residential property markets. Our objective is to develop properties that meet the needs of their residents and are fit for the future. However, the possibilities of private-sector companies like Deutsche Wohnen are limited when the necessary framework is inadequate. Policymakers and public administrators are not creating the necessary conditions for the new construction that is needed. There is a lack of energy and the will to take the necessary decisions. We are ready to play our part.
We do so when it comes to climate protection too, because the property industry can and has to play a central role in achieving the climate goals. Carbon emissions can be cut significantly by means of careful portfolio refurbishment. In terms of energy supplies we rely on more efficient heating systems and convert existing systems to use more environmentally friendly fuels. Our G+D joint venture puts in a very strong position, and we now supply around 76% of the centrally supplied Deutsche Wohnen portfolio with energy.
In all its refurbishment work, Deutsche Wohnen gives high priority to ensuring that its activities are socially aware. We therefore apply our hardship clause if overall rent reaches 30% of household net income, to ensure that incomings and outgoings remain in balance. Furthermore, we have signed various agreements with the boroughs of Berlin that comprise wide ranging concepts for carrying out maintenance and refurbishment work responsibly.
Demographic developments also represent a major challenge for property markets: demand for places in nursing homes will continue to increase in future. We are focussing on addressing this by expanding our capacities in the Nursing and Assisted Living segment. In 2018 this also entailed the start of operations at a new facility with almost 90 beds operated by the KATHARINENHOF Group. In addition to the 37 homes operated by our investee companies KATHARINENHOF and PFLEGEN & WOHNEN HAMBURG, Deutsche Wohnen owns a further 52 facilities. We significantly expanded our capacities in this growing sector with the acquisition of 37 facilities. Deutsche Wohnen was thus able to consolidate its position as one of the biggest owners of nursing properties in Germany and now offers a total of 12,200 beds.
Digitalisation is also playing an ever greater role in the real estate industry. Deutsche Wohnen intends to seize the opportunities this offers and acquired the GETEC media Group in October 2018 to this end. The company specialises in cutting-edge telecommunication services and also designs product and solutions for smart building networks. It gives us the opportunity to play a central role in shaping the transformation of infrastructure and technologies. In addition, we are investing specifically in digital innovation whenever it adds value for our customers. Ultimately this also enables a more sustainable business.
Successful financial year 2018
The performance figures for last year demonstrate that our efforts are paying off: Deutsche Wohnen again had a very successful financial year and improved all its key performance indicators. Group profit rose year on year by nearly 6% to EUR 1.9 billion. The valuation uplift in our property portfolio contributed significantly: the key performance indicator for us, FFO I – Funds from Operations excluding Disposals – went up by 11% to EUR 479.4 million, thanks to acquisitions and operating improvements. EPRA NAV (Net AssetValue) also increased by 18% to EUR 42.26 per share. Rental growth came to 3.4% in the reporting year. In-place rents went up moderately by 1.4%. As of year-end 2018 average in-place was EUR 6.62 per sqm, and EUR 6.71 per sqm in Berlin.
Our financing continues to be very solid. The Loan-to-Value ratio, which measures the Group’s leverage, was 36%, which 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 stable outlook.
Our success also brings tangible rewards on the stock market for our shareholders: the price of the Deutsche Wohnen share went up yet again in 2018, although all the main indices declined. In a generally weak market, the share price rose by 12% to EUR 40.00. In addition, our shareholders could choose between a cash and a script dividend for the first time last year. In total, for around 31% of all shares entitled to dividends, a script dividend was issued.. At the Annual General Meeting the Management Board and Supervisory Board will propose to distribute a dividend of EUR 0.87 per share for the financial year 2018.
Employees and portfolio are the major pillars of success
All the successes mentioned above are only achievable with highly qualified staff, who all work together for the good of the company. We would therefore like to express our sincere thanks to our employees, who serve our company every day with extraordinary motivation and great dedication. To ensure we remain an attractive employer, we intend to take the findings of the staff survey carried out in 2018 into account for our future activities.
Another success factor is our portfolio, which we have developed over many years and in which we continue to invest heavily. At an early stage we focussed on fast-growing metropolitan areas and conurbations in Germany, where the bulk of our portfolio is situated today. Berlin accounts for about 70% of the portfolio and 77% of total fair value with some 115,600 residential units and 1,900 commercial units.
In total we now manage around 167,000 residential and commercial units, with an annualised rental income of EUR 815 million, making us one of Germany’s largest property management companies. Our market capitalisation rose by 10% to EUR 14.3 billion on the back of the positive share performance in 2018, and we are now the third largest listed property company in Europe.
Focus on customer satisfaction
Our vision is of sustainable properties that meet the demands of future generations too. We therefore respect the sustainability and quality of our neighbourhoods, act dependably and in line with the interests of our customers. In future we will focus on managing our residential and commercial properties and nursing facilities with the appropriate, customer-centric services.
We will continue to invest widely in our properties, in order to maintain and keep improving the quality and future viability of our portfolio. Furthermore, we are planning an extensive programme of new building work in the years ahead, in order to relieve pressure on tight housing markets. We also intend to expand our property-related services to meet our customers’ demand for up-to-date housing standards and all-round service. By means of strategic equity investments we are opening up additional property-related business units, like Kiwi, our digital key system, or VRnow for the digitalisation of floor plans.
The outlook for the German residential property market remains bright, particularly in metropolitan areas, and we therefore expect the value of our property portfolio to increase further. For 2019 we are forecasting FFO I of approximately EUR 535 million and adjusted EBITDA (excluding Disposals) of approximately EUR 685 million.
Overall, Deutsche Wohnen is therefore very well positioned to continue its successful growth and to carry on a sustainable business in the spirit of future generations. We would be pleased if you would continue to show us your trust and to support our company.
Berlin, March 2019