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Operator: Ladies and gentlemen, welcome to the Vonovia SE Interim Results for the 9 Months 2025 Analyst and Investor Call. I'm [ Moritz ], the Chorus Call operator [Operator Instructions] The conference is being recorded [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Rene. Please go ahead.
Rene Hoffmann: Thank you, [ Moritz ], and welcome, everybody, to our 9 months 2025 earnings call. Speakers today are once again, CEO, Rolf Buch; and CFO, Philip Grosse. They will be happy to lead through today's presentation and then answer your questions. With that, over to you, Rolf.
Rolf Buch: Thank you, Rene, and welcome to everybody also from my side. Today, it's earning call #50, so 5-0 for me, but also for the company. And as you are well aware, it is my last one. I want to take this opportunity to remind everybody of what drives Vonovia and what makes this company different. That is why before Philip dives into the 9 months results, I will share a few slides that are more fundamental and general, but very instrumental for understanding how Vonovia approaches the business. But let me start with a brief summary on Page 3 to get us started. 9 months into the year, we are fully on track towards achieving the upper end of the guidance. Total EBITDA is up 6.4%. EBT is up even slightly higher with 6.8% and post minorities EBITDA, the most important figure for you, as I know, is up like EBITDA by 6.4%. As you will see on the guidance page, our growth momentum carries over into next year and will gain full momentum towards '28. We are well on track for our ambitious EBITDA targets. And most importantly, organic rent growth will increase to around 5% by '28. Personally, I think with higher investments and the strong underlying market rental growth, Vonovia may well see rent growth above 5% by then. The market in which we operate continues to normalize and move in the right direction. Organic value growth is happening, and we will probably see a bit more in H2 than what we have seen in H1. The transaction market remains somewhat below the levels we have seen in the ultra-low interest rate period, but it is back to the normal level that we have seen before that period. On Page 4, let me summarize our fundamental beliefs, what our fundamental beliefs are and why I think Vonovia is different. First, a mantra that I keep repeating because it is so fundamental. Our business is built on and followed certain megatrends that provide stability and safeguard Vonovia's long-term earnings and value growth. Imbalance of supply and demand in urban areas, the focus on CO2 reduction and the positive impact of demographic change on our business will not go away for the next 20 to 30 years. Against this backdrop, there are 3 guiding principles that we believe in. First, it is a low-risk business and a low-margin business because the underlying business is regulated and very low risk, the incremental yields are comparatively low. The consequences for us is that cost leadership is crucial, and we achieved this by building scale and rigorously pursuing standardization and industrialization. Second, -- our business is a B2C business. The long-term nature of rental contracts and the relation with our customers makes us a subscription-based business based on real estate. The consequences for us is that we pursue deep vertical and horizontal integration, maximum control over our value chain through in-sourcing and rolling out ancillary services to increase our share of wallets of our tenants. And third, location and portfolio quality matters. Even though it's a subscription-based business, it is still real estate. And there, location matters. There is not the one initial yield for German resi. Supply/demand imbalance is very different in different locations and housing market in urban areas simply have different fundamentals compared to the countryside. And when you are in the right location, you can unlock additional earnings and value growth through investments in the long run. The consequence for us is that we have worked hard through acquisition and disposal to focus our portfolio in the right locations. And second, we have developed the know-how and the capacity to run a large-scale and industrialized investment program. I mentioned the low risk in the underlying business in the markets in which we operate. The beautiful thing about that is obviously that our operating performance does not produce negative surprises. Rents keep going up, tenants pay their rent in full and vacancy only exists in cases where we do modernization work in the apartment. What may be a surprise to some people, even though it should build into -- it is built in the system and actually should not be a surprise is the acceleration of rent growth. We have spent a lot of time and effort in trying to explain the catch-up effect in rent from higher inflation of the past years. It is becoming more and more evident now. As you see on the guidance page later, we are continuing to move upwards to around 5% organic rent growth and above, which will, of course, have very positive implications for both earnings and value growth. Go to Page 6. One of the consequences of running a B2C end consumer business is the need for scale. The size we have reached is impossible to replicate and clearly gives us an advantage on the cost side that cannot be copied by other players who are smaller and in most cases, are a lot smaller. The chart on the bottom shows for Germany how the increase in the portfolio volume led to an expansion of the margins and the reduction of the cost per unit. What is also noteworthy here is that our customer satisfaction increased sustainable from an index 100 at the IPO to 125 today. The cost per unit number is maybe a bit complex and more difficult to compare. So let me make my point about the scale and efficiency very simple and transparent. Let's have a look on Page 7 for gross yields and adjusted net yields. Gross yields are rental income divided by fair value. Gross yields differ within the peer group, which is, of course, no surprise given the very different portfolio locations and quality. If you then look at the adjusted net yields, so EBITDA operations adjusted for maintenance because maintenance spending is clearly not a sign of efficiency, but capitalization policy, we see that the cost leakage with German resi is very different. Vonovia loses 0.4 percentage points between gross and net. And if you look only at the German portfolio, it is just 0.2% versus almost a full percentage point of the peer group. This is the result of our superior scale and efficiency that we have reached since the IPO when our spread was as high as 1.5 percentage points. Of course, at this time, we had a much smaller portfolio. In a business with low initial yield, this gap is huge. It means that we are uniquely positioned to succeed in low-yielding markets, which, of course, have higher growth potential. And it means that we generate more than EUR 400 million additional EBITDA with our platform and our way to do business, then we would have the average peer group leakage. And it means that we are extremely well positioned for a successful second Vonovia strategy. I have mentioned our platform a couple of times, so let me give you a better understanding of what I mean by that. This is Page 8. We have developed a fully integrated one-stop shop that covers the entire value chain in our business from the acquisition and development of new units to the asset and property management to the value-add and facility management to the disposal expertise. We cover the full range of the asset life cycle. And we do it an operating system that is SAP head to toe, which clearly defined interfaces between operating entities and central support functions and the seamless integration between local and central responsibilities. Today, this platform services most of our own portfolio. Owning and operating European's largest residential asset base, including being one of the largest homebuilders, safeguards unparalleled experience and a unique data pool that forms a strong backbone of the platform. Page 9. We are all aware of our activities to increase non-rental EBITDA. The general effort to do that so is not new. We have been ramping up for nonrental EBITDA since the IPO to as much as 20% of total EBITDA by '21. The sudden change in interest rate environment and our focus on liquidity generation over profitability resulted in lower non-rental EBITDAs for good reasons. Going forward, however, there is absolutely no reason why we should not be able to grow outside the rental segment. Of course, the absolute amounts are bigger than in '21, thanks to the successful integration of Deutsche Wohnen. But the underlying strategy of doing more than just collecting rent has been in Vonovia's DNA since the IPO, and there is no reason why this should not be a key element of Vonovia's strategy going forward because it makes all sense of the world. The objective for '28 to reach a level of non-rental EBITDA that we have achieved before Deutsche Wohnen is really not a stretch. Let's go to Page 10 to talk about more about locations. Again, this seems to be misunderstood by the market sometimes. Germany is not the same all across the country. Fundamentals and yields are very different in different locations. The general distinction I would make is that there are urban markets, which tend to come with lower initial yields and there are rural markets, which tend to come with higher initial yield. In both cases, this is obviously a function of the different long-term growth potential of these markets. The strong convictions about the different quality of local markets within Germany prompted a laser focus to make sure that we are in the right location. The large acquisition to grow our portfolios are well known. But what is sometimes forgotten is that we sold more than 100,000 units in what we consider rural and therefore, weaker market. Between the IPO and today, we cut the number of locations in half, and that led to not just better portfolio quality, but also to higher efficiency. And why it is so important to be in the right locations, let's go to Page 11. Most of you will have seen this analysis in previous earnings calls. The appeal of our business, as we see it, is that the annual rent growth may not always be as high as in other sectors, but it is as robust as it can get and allows us to predict our rental growth for many years to come. The gap between the market reality rent levels and our rent level ensures many years of attractive risk-adjusted rent growth. Of course, this does not apply to all markets, but only to the ones where you have a structural supply and demand imbalance. And that's why vacancy is not a concern for us. Doing modernization and charging a higher rent for a better product is not a concern for us and reletting an apartment in line with the regulation at a higher rent is not a concern for us. Affordability to make it short, is not our problem and not the problem for our tenants. As I said earlier, not only the right location matters when it comes to asset management, investments are key to unlocking further earnings and value growth. As consequences, comprehensive investment programs have been a cornerstone of Vonovia's strategy since the IPO. And the peer group comparison clearly shows that we have invested more. I know that the return of these investments cannot be easily extrapolated from the financial results because there is no immediate link between the investment amount of 1 year and the return in the next year as many of these investments take more than 1 year to be completed. That is why we looked at all investments that we have made and fully completed between 2014 and 2024. The aggregate investment amount was EUR 7.4 billion, and the average operating yield we have achieved was 7.1%. So to us, it makes all the sense in the world to continue with these investments and to increase them to EUR 2 billion per year as planned by '28. They make economic sense, and they also make sense from a sustainability point of view. So it's a win-win situation. We talked about locations. We talked about buying and selling to be in the right markets, and we talked about investments to deliver additional growth. Let me put this into context on Page 13. Because of the dynamic in our local markets and because of the comprehensive investment we have been making, we have been able to deliver best-in-class rental growth. As I said earlier, I'm personally convinced that this gap will widen in the future from superior market rent growth and superior investment driven rent growth. And this rent growth, combined with the investment and the portfolio focus has delivered a higher CAGR for value growth based on the development of fair value per square meter since the IPO. The market focus seems to be very much on earning these days, and that is fine. But let's not forget that you have 2 types of returns, earnings and value. I learned this by you 13 years ago where I joined the industry. This is a good segue into the last page of this chapter before I hand over to Philip. When you invest in Vonovia, you do not buy into an initial yield portfolio. That is why I refuse to accept the argument that we are a bond proxy and that it is all about the spread between bond yields and the net initial yield of our portfolio. Rather one should look at the total shareholder return, so earnings and organic value growth and compare that to other equity investments on a risk-adjusted basis, of course. And while it is entirely up to the investors and the market in general, what they make out of it, I consider 13% total return based on the current share price and an attractive from a risk return point of view, and that is why I look forward to remaining a Vonovia shareholder long beyond my tenure here at Vonovia. And with this, over to Philip.
Philip Grosse: Thank you, Rolf, and welcome also from my side. I will start with Page 16. I think it actually speaks for itself. So no need to go into too much detail here. But let me allow to make one important point. Our Rental segment is still impacted by the smaller portfolio. Year-on-year, we have 9,000 fewer units, and that, of course, weighs on the top line. Nonetheless, nominal growth in our Rental segment alone, so excluding the non-rental EBITDA contributions overcompensated the increase in the net financial result in the first 9 months, and that is exactly the logic we have been talking about and the consequence of our long-term and very balanced maturity profile. Yes, our interest expenses are going up as expected, but rents are going up more. And combined with the non-rental growth, we will continue to be able to deliver attractive risk-adjusted earnings growth. Let's go through the 4 segments one by one and start with the Rental segment on Page 17. Rental revenue, as you can see, was almost up 3%, only held back by losing some of our top line as explained. Maintenance was a touch higher as expected and operating expenses were very much in line with last year. All in all, we basically managed to preserve the top line growth on the EBITDA level for a year-on-year increase of 2.5%. Organic rent growth remained very robust with 4.2% overall and 2.8% from market rent growth. Like in previous quarters, no need to deep dive on occupancy and collection rates as they both remain exceptionally high and are expected to remain at that superior level for the foreseeable future. On value add, that is Page 18. As you can see, the internal revenues grew by more than 15%, and that is largely a result of our increased investment and our higher in-sourcing ratio. The year-on-year comparison is skewed in so far as that the prior year includes EUR 58 million nonrecurring adjusted EBITDA from the coax network lease agreement we have made with Vodafone. Adjusting for this onetime benefit last year, value-add EBITDA were actually up 11% equally as expected. In spite of this onetime effect, we expect the value-add EBITDA for the full year to be considerably higher than last year, and that's mainly driven by higher investments and value creation in our craftsman organization as well as rising contributions from our energy business. So here, we are well on track towards further expanding the EBITDA contribution from our value-add segment as we have been guiding for. Recurring sales on Page 19, we sold 1,553 units to be precise, in the first 9 months, up 2.4% compared to last year, revenue growth of almost 12% and the higher fair value step-up far exceeded the growth in units and resulted in EUR 300 million for the 9 months 2025. And it's the combination of higher revenue and higher gross profit plus stable selling costs that drove the EBITDA contribution to almost EUR 57 million, which is 45% above the prior year. For recurring sales, we remain, again, very much on track towards further expanding EBITDA contribution. Finally, development on Page 20. We have explained in previous calls the development EBITDA was positively impacted by a larger land sale that closed early this year, hence, the extraordinary and not sustainable gross margin. If we adjust for this land sale, however, the gross margin comes down to 19%, which I consider a very normalized developer margin we are targeting that is yes, as we have been expecting for. Either way, our development business is a valuable contributor to the overall EBITDA. And here too, the increasing EBITDA contribution is very much on track. That much about the segments. On EPRA NTA, that is Page 21. The main point for the NTA really is that to a new law that will bring a reduction in corporate income tax, we saw a shift of roughly EUR 2.3 billion from deferred tax liabilities to IFRS equity. So on a net basis, more or less flat, but the composition somewhat changed. Page 22 for the debt KPIs. There isn't much change from one quarter to the other. And the bottom line on the leverage side remains that we consider it well under control. The yardstick for that is mainly with what the rating agencies expect from us to be safe on our BBB+ rating with a stable outlook. As I said last time, different points in the cycle require a stronger focus on some debt KPIs more than on others, and we are at a point where our main attention is on the ICR. There are 2 ways to look at the ICR. The numerator is the same in both cases, adjusted EBITDA total of the last 12 months, but the denominator is different. One definition, and that is the one used in bond covenants uses net cash interest and the denominator. This can be a bit volatile from time to time, depending on the interest payment dates. The bond covenant threshold is 1.8x. So I hope we can all agree that this is somewhat irrelevant from a risk point of view. To allow for a more normalized measurement of ICR, we are using the net financial result that we also use in getting from adjusted EBITDA to adjusted EBT. The ICR threshold we have set to ourselves internally is, as you know, 3.5x. Let me reiterate. Our focus is to make sure our debt KPIs are in line with the BBB+ rating criteria and a stable outlook. This is now essentially an organic development as we expect values and EBITDA to grow and therefore, to further move the debt KPIs in the right territory or even further. On the guidance, this is on Page 23. We have fine-tuned 2025 guidance and moved to the upper end of the range for both rental income and adjusted EBITDA total. As we usually do in the third quarter, we are also giving an initial guidance for the next year. No need to read all individual line items now, but do allow me to zoom in on the organic rent growth. You may recall the concept of the additional irrevocable rent increase claim that we introduced a few quarters back. We are showing it here again to demonstrate that the rent growth is coming. It is actually already there, apartment by apartment. But because of the Kappungsgrenze, it cannot be implemented just yet. Kappungsgrenze, as a reminder, is the cap that allows you not to increase rents by more than 15% for selling tenants over a 3-year time horizon in tight markets. We explained the underlying concept on Page 30 of the presentation in more detail. Let me say this, for 2026, we have a net increase of another 0.4 percentage points to a total of 3% that is already booked onto the underlying apartments, but can only be implemented once the rental cap has lapsed in subsequent years. I can put it differently, if the 0.4 percentage points net buildup would be harvested already next year, 2026 organic rent growth would be around 4.6%. So you can actually see that the acceleration is coming through as promised. Without any rental cap, by the way, 2026 organic rent growth would be north of 7%. We did the math on how much net buildup and net use of this additional irrevocable rent increase claim we will have on our way to 2028. And based on our probably rather conservative assumptions for future rent indices, we will see a net use that will take the actual organic rent growth to around 5%, also supported by higher investments. So what we are moving towards is a step change in rental growth that surpasses historic rent growth numbers, which should not come as a surprise actually because at the end of the day, this is higher inflation finding its way over time into organic rent growth like we have always said. And referring back to the commentary Rolf made, this higher level of rent growth will have a positive impact on both types of shareholder return, and that is earnings growth and value growth. Final comment on the guidance page. Some of you are asking for more clarity on minorities and taxes. EBT minorities are expected to be around 10% of adjusted EBT. And cash taxes, and that obviously includes taxes for our disposal segments are expected to be inside 10% of the adjusted EBITDA total for 2025 and same applies for 2026. The CEO handover process is underway, and Luka will be joining at the end of this month before he will officially assume his new role as CEO starting in January. We will miss Rolf, but we are equally excited about Luka joining and with that commentary, for the last time, Rolf, back to you.
Rolf Buch: And for the last time -- thank you, Philip. Before we go to the Q&A, allow me briefly summarize the relevant point of today's presentation. As we laid out, the way Vonovia approaches the business is different, and it has led to operational outperformance that we expect to continue. This puts the company in an excellent position for the future earnings and value growth. Our market environment and operating business remains rock solid, and we are well on track towards achieving our ambitious targets, both for rental and non-rental growth. We have put the company into a tremendous stable footing, and we have -- and we leave it well positioned for further earnings and value growth. We have built a platform that is second to none and will prove to be the cornerstone in the company's effort to build a second Vonovia. All this will be in great hands with Luka. I wish him and the entire Vonovia team all the best and have no doubt that together, they will write a new and very successful chapter in the history of Vonovia. But more important, I would like to thank you all for your support in the last 12 years. Without the support and the willingness to invest, it would not have been possible to build this Vonovia, this great platform. With this, thank you very much. And back to Rene for the Q&A.
Rene Hoffmann: Thank you, Rolf. Thank you, Philip. I hand it back to [ Moritz ] for the Q&A. And just as a reminder, everybody, let's keep it to 2 questions per person, please. [ Moritz ], can you start the Q&A part?
Operator: [Operator Instructions] And the first question comes from Charles Bossier from UBS.
Charles Boissier: I have 2 questions. The first one is on the change in the organic rent growth guidance for 2028 from 4% plus to now 5%. What exactly has changed, I would say, versus the initial guidance that you had set up, whether in the market or in terms of your ability to capture that rental growth?
Philip Grosse: Charles, answer is very, very simple. We've been telling you before above 4%. I think now we have become more precise. If we look at the underlying data, and we have done a very comprehensive analysis, we can see that historic inflation is coming through over time to the extent allowed by the Kappungsgrenze, the rental caps, and you will see also going forward numbers in between 2.5% to 3%, non-investment driven and the other bit is investment driven. That is currently 1.4%, but with us more or less doubling the investments vis-a-vis what we have seen last year, we will see also an acceleration in rental growth, in the investment-driven bit. And here, as a reminder, cash-on-cash is 6% to 7% with the vast majority ending up in the rental EBITDA and a portion of that ending up because of the value creation of our craftsman organization in the value-add EBITDA.
Charles Boissier: Okay. Very clear. And on the transaction market, you present quite a positive story of normalization and you're also pointing to H2 valuation accelerating versus H1. Still in Q3, it seems rather slow in terms of transaction activity. Of course, there were some small deals here and there, 850 apartments at long transaction. But what are you seeing in the transaction market that makes you confident that it has normalized and you would be able to sell assets at book values?
Rolf Buch: So first of all, even in the bad times where the transaction market was much worse, we sold assets for book value. So it's probably quality of assets, which is relevant. But to be very clear, what you see and what is seen in the public is the big transactions. In reality, there is an underlying transaction market of smaller players. And this I mentioned in my speech is actually back to the level where it has been before the ultra-low investment rate environment. So -- what we see here in the listed sector is just a small part of the big transactions. But the market really is consisting out of a lot of smaller transactions. And there, we see a very stable thing, and we see the demand and we see supply coming to the market. So I can confirm that the market is pretty stable and going in the right direction. And as Philip said, we will expect a higher valuation in H2 than what uplift than we have seen in H1.
Operator: Then the next question comes from Valerie Jacob from Bernstein.
Valerie Jacob Guezi: I've just got a follow-up question, a clarification on the comment that you made that you expect organic growth in asset values to be higher in H2. I think part of it is mechanically driven by you spending more CapEx. So I was wondering, is this comment is also valid if we exclude the CapEx from your asset value growth? That's my first question. I've got a second question.
Philip Grosse: You have that acceleration on both sides on a gross as well as on a net basis. And in H1, you have seen net value growth of 70 basis points, and that number will be exceeded in H2.
Valerie Jacob Guezi: Okay. That's clear. My second question is on your ICR. I mean I'm not sure this is helpful that you're changing a definition again. So I was just wondering, going forward, are you still going to publish the definition on the bond definition? Or are you only going to publish your own definition?
Philip Grosse: Valerie, I think what we just wanted to make clear is that we internally manage our business in a different way and not by bond covenants. That, by the way, is no different if you look at LTV metrics. Because if you look at the covenants that the LTV is not a concept in the bond covenants. But here, you more look at capital -- more broader capital ratios. The flip side, if you will, on the bond definition is, as I said, there's a bit more volatility. It very much depends point in time where you actually pay interest. Over time, if you don't make the quarter-by-quarter comparison, the 2 are very, very similar to each other. So typically, a difference of 10 basis points. And more specifically, we will disclose both.
Operator: And the next question comes from Bart Gysens from Morgan Stanley.
Bart Gysens: My first question is also on the ICR actually. You talk about moving that into better territory. But I just wanted to understand how you can do that for the ICR. I mean the average cost of debt is running at 1.9%. You managed to keep that flat. You have to refi about EUR 4 billion to EUR 5 billion a year medium term. Now even if reported EBITDA grows by 7% per annum as you're guiding, that suggests that actually if you finance at the current marginal cost of debt, interest cover will not improve on the contrary. So how do you look at that? And are you considering more alternative solutions like convertible bonds or preferred equity?
Philip Grosse: No, Bart, to be very precise, where we are moving in the right direction is in terms of LTV and is in terms of net debt to EBITDA. LTV because I have conviction as we have seen this in the running here that the rental increase, net of the investment required to achieve that rental increase will translate itself into value growth. And if I look at net debt to EBITDA, we have, as you know, a number of initiatives which are running very well to, in particular, increase also the nonrental EBITDA and that will move that metric further down. The ICR is really our intention to keep that somewhat stable at current level. And that is going to be the major focus. And here, yes, we probably need some positive backdrop in market in terms of refinancing costs. Our assumption is that this somewhat remains at current level of 4%. And it's also no secret that I think that convertible product as part of the capital structure is a good addition. You should not overplay it. So it should be a moderate portion of your capital structure in terms of liquidity and the underlying stock, plus in terms of the overall debt burden. But with that having said, I think there is capacity for more. And to be crystal clear, convertible is for us, no ambiguity, 100% debt. And the assumption always is that it will never come to the dilution, but that if the convertible is in the money and at maturity is going to be refinanced by a new convertible [indiscernible] was at a higher stock price and that is essentially, if you do the math, reducing contingent dilution. But again, the focus, and that is what is driving the capital structure going forward is going to be the ICR.
Bart Gysens: Great. And then my other question is on recurring sales on Slide 19. So you've sold more or less the same amount of units as a year ago, but at a different price point, right, around 10% higher per unit. Have you started selling a different type or quality or location? Should we read anything into this?
Rolf Buch: No, I think the biggest -- there might be a small different mixture, but I think what you should read is that what we have announced, we have sold also this product in the period where liquidity was for us important actually with less focus on price. As we announced in October or November last year, we said now we will come back to normal. And what you see is that the margin is actually coming back what we have expected. So this, of course, comes together with the recovery of the market. So you see here that the market obviously is ready to pay the well-known premium, which was paid before the crisis for individual apartments versus blocks. So the retail and wholesale margin is back to normal, which is also, I think, an additional answer to the question about what -- why the market is coming back. You can see it in this figure.
Operator: . And the next question comes from Thomas Neuhold from Kepler Cheuvreux.
Thomas Neuhold: My first question would be on the non-rental business. Can you please provide us an update on the new expanded business areas such as stranded assets, occupancy rights and third-party business? Did you manage to strike already some interesting deals there?
Rolf Buch: Yes. I think to what we call managed to green assets, which is a former called undeveloped assets, but I think managed to green is a much better and more precise definition. As you know, we have signed the first deal. We are in a round to -- in the final round and actually exclusive negotiation with others with more potential. It took us a little bit longer to get this started than originally we expected. But now I think we are on the full run. So I don't see anything else. This is the same for the occupancy rights. And actually, to be very clear, we manage all these additional activities in total, the 10 where we see -- we are in line with our expectation. We are in line with the guidance which we have given you to '28. So there is no reason to do any -- to be nervous actually or the opposite. Some of them are getting better and especially for the second Vonovia, as you know, we will not talk about potential deals there. But I can tell you that in the last 2 months, which are remaining for me here, there is still a lot of opportunity where we are in discussions.
Thomas Neuhold: And my second question is for Philip. Can you please give us an indication what impact the lowered corporate tax rate in Germany will have on your cash tax rate going forward once it's going to be implemented?
Philip Grosse: I mean, still some time out. It's starting 2028. So this is now asking for a very long-term guidance. This is, as I said, for now, predominantly impacting deferred tax liabilities, which because of the embedded reduction in corporate tax rate is resulting in that one-off gain of EUR 2.3 billion. In terms of more broader picture, I think let me tell you that much. I mean, by us significantly increasing our investments, our rental and value-add business is not hugely impacted by tax payments because most of the investments we undertake according to German GAAP are actually reducing our taxable income, and that you will see in lower tax rates actually for our rental and value-add business going forward. That, however, is somewhat compensated by higher tax rates because we do more disposal business, and that is for development to sell equally as for our recurring sales business. And yes, here, you may have some small benefits in the long run on the lowering of the tax rate. I think what is, however, even more important, and that is in particular for development to sell in global assets is about structuring and the way how you sell it essentially, which allows you to optimize the tax line.
Operator: The next question comes from Andrew McCreath from Green Street.
Andrew McCreath: I also have 2. Firstly, on development. Looking at your numbers, 3Q doesn't suggest much acceleration in activity. Could you please just provide some color on the dynamics there? Are you seeing any improvement in sales pace? That would be the first question. And the second would be on construction. For the initial projects in Berlin and Dresden, you've guided to an all-in cost of EUR 3,600 per square meter. What sort of yield on costs are you underwriting for these developments?
Philip Grosse: On your first question, Andrew, on the development, as I said, if you look at the profitability, that was really much driven by the sale of a land plot we closed in Q1. And that is essentially also the somewhat overriding story for this year because we have sold essentially all project developments we had in our pipeline in the last 2 years in order to generate cash. And because of the crisis did not start new projects, we first need to have building up a platform on the basis of which we can earn the targeted gross margins of 15% to 20%. You will see a kind of more steady development already next year but only partially because also next year is going to be a mix between first completions and selling of those completions or started projects, which we sell based on POC method. But you will also see the disposal of land plots in the coming year. And I think the kind of ramp-up as we have been budgeting for is really to come through as of 2027 and beyond.
Rolf Buch: And for the new construction, I think this is one topic which is not only important for Vonovia, but for the whole German market. I think with the about turbo and with [indiscernible] the most recent new legislation, it will provide us with the possibility to reduce the construction cost by 30%. So this famous EUR 3,500, all including, which is actually comparable to the lateral letting. And we are targeting a initial yield of roughly 5%. And then, of course, these buildings come with in the first years, no maintenance and an increase of rent, which is often very indexed. So that's why the initial yield is low, but then the yield will go up over time. And that's why it's a good investment. And this is either for us on our own balance sheet or if it's for sale, it's for others who are ready to invest 5% yield.
Philip Grosse: Let me be very clear and add one thing. What you see in the development EBITDA is only development to sell. And development to sell, as I said, we are targeting gross margins of 15% to 20%, and we are essentially targeting IRRs north of 10%. And that is what you will see in that profitability line. So it's not yield on cost driven how we manage that business. It's IRR driven.
Operator: The next question comes from Paul May from Barclays.
Paul May: Just a couple of questions from my side. Thanks for the analysis on the return on investment, I think 7.1% you highlight over multiple years. I think as you know, we calculate close to 5% based on reported numbers. I think you said that's not possible to make that calculation. So thank you for providing that color. Just wondered why is that below the 8% to 10% return on investment that you've previously and multiple times guided to? That is the first question. And the second question, I think you highlighted through the presentation how you're better than other listed peers based on your NOI yields. But I think on our numbers, where a lot of your cost comes is through your admin cost line versus others. And if you look at it more on an EBIT yield or EBIT margin basis, you're either lower or similar to peers, and therefore, you obviously your yield much lower. And also, are you penalizing certain peers by including land in their gross asset value and not including, say, housing profits or housing sale profits in the EBITDA or in the NOI? Just wondering if you're sort of overly penalizing certain peers.
Rolf Buch: No, I think the last one we are not doing. This is all public information, and I think Rene can guide you through. To be very clear, we are operating a little bit different in a different platform. That's why I added the site of the platform that our way to do central and noncentral is a little different. That's why this is the reason for efficiency. So I think the only way how you can really compare it is to do the net yield and the gross yield, and we can guide you through this, but this is based on public information. The other question was about...
Philip Grosse: One was on the yield of the investment program. Paul, we've been, I think, explaining for quite some time that the mix of our various investment programs, and that is the energetic modernization of the building that are the reletting investments when we have tenant churn, that is also our develop to hold business are averaging out with cash-on-cash yields of 6% to 7% and that we, at least historically, are more at the upper end of the range that calculation is demonstrating. What we are benefiting here and that is probably a bit different for Vonovia than for the broader sector is that we are able to compensate for some of the maintenance spend, which, by definition, is a part of broader investments by putting our own craftsman organization into play because here, again, we can earn some extra money. So that yield is actually vast majority ending up in the rental EBITDA, but part also in the value-add EBITDA. And it's only for that very reason that we can achieve these high numbers.
Operator: The next question comes from Thomas Rothaeusler from Deutsche Bank.
Thomas Rothaeusler: Two questions. The first one is on the value-add business. Operating profit was only flat despite the pickup of investments. Actually, we see the same pattern for rental growth, which even came down if you look at modernization-driven rent adjustments. You basically say that investment returns come with a time lag of more than 1 year. Just wondering by when we should see a meaningful -- more meaningful pickup here.
Rolf Buch: I think what you're doing is now you're comparing quarter-by-quarter, right?
Thomas Rothaeusler: Actually, year-on-year, if I look at the investments year-on-year and look at the performance of the value-add business and look at the performance from rental growth out of monetization measures.
Philip Grosse: What is -- if you look, Thomas, at the profitability line of value-add, what is distorting a year-by-year comparison is a very big onetime benefit we have seen last year by the conclusion of a finance lease agreement with Vodafone, and that resulted in an EBITDA, which is not repeating itself this year of more than EUR 50 million. Now if I look at the composition of the various profitability streams, which are adding up to the value add is really very much the craftsman organization where we have seen a very nice turnaround story. Craftsman organization, a, benefiting from higher investment volumes; b, benefiting from higher in-sourcing ratio that, by the way, is also why you see that change in terms of revenues in favor of internal versus external. And what you can equally see is that we are seeing a nice ramp-up in our energy business, and that is thanks to the investments we undertaken photovoltaic. All the other businesses really flattish with the exception of multimedia, where we have year-on-year a decline, I think, of 60%, and that is because of that onetime impact, which is not repeating itself. Is that sufficiently answering your question?
Thomas Rothaeusler: Perfect. On the second point is actually on disposals. I mean you referred to improved investment markets. Should we expect this to allow you to speed up noncore disposals maybe?
Rolf Buch: Yes. I think we are now back on the normal level. So we are doing noncore disposals as it is accretive and attractive for the pricing. So we are not pushing so much for volume, but we are pushing a little bit also related to the price. Yes, but it is becoming easier also for the noncore disposal.
Operator: The next question comes from Marc Mozzi from Bank of America.
Marc Louis Mozzi: My first question is around your number of shares. How should we assume the number of shares you're going to use for the calculation of your dividend and EPS for this year at the end of the year because there are some changes here. And I'm just wondering if you can help us having some clarity on that number. I'm talking about the weighted average, not the total.
Philip Grosse: I think there is no change whatsoever. It's always the same if we look at profitability numbers, we take the weighted average of the past 4 quarters. By way of reference, little change. I mean, what you have seen in terms of increase in share count is, a, the scrip dividend, which has seen a take-up of slightly above 30%; and b, I think in total, 12 million shares as a result of the domination and profit loss transfer agreement with Deutsche Wohnen, so people accepting the exchange offer, but that is really marginal. When we look at balance sheet numbers, and that is EPRA NTA, we look at the year-end number in terms of share count, but also no change. And the dividend is always end of period.
Marc Louis Mozzi: Fair enough. And the other question is around the dividend. And I would like to understand how we should think about the dividend per share for the year because we know that it's 50% of the EBT. So that's roughly EUR 950 million plus surplus liquidity, which I understand is very subjective. I guess you would like to show some dividend growth, what sort of growth on which basis, how are you going to assess your dividend proposal to the shareholder and to the Board?
Philip Grosse: Look, Mark, no change here. I mean, for now, I think our dividend policy is what our dividend policy is. It's 50% of EBT plus liquidity, and that is based on the operating free cash flow. And as usual, we will discuss that at the appropriate time and make a proposal to the shareholder meeting, which I think is in May next year.
Marc Louis Mozzi: Are you comfortable with the current market forecast of your dividend for this year?
Philip Grosse: [indiscernible] what that is actually.
Marc Louis Mozzi: Fair enough. That's exactly what I thought. It's EUR 126 million, EUR 125 million...
Rolf Buch: So we should not come even not indirect to dividend guidance. This is not the time we will come with a dividend proposal and not we, but the new management team will come with a dividend proposal if it's appropriate and this is next year.
Marc Louis Mozzi: Fair enough. I totally understand. Well, Rolf, I would like to congratulate you for running Vonovia for the past 12 years and all the best for what's next for you.
Operator: The next question comes from Simon Stippig from Warburg Research.
Simon Stippig: First one is on Page 7, you showed your gross to net yield translation. And you mentioned that here in Germany, it's only 20 basis points. So in Sweden and Austria, I think you're holding only 11% based on units of your portfolio. So could you explain me the reasoning of why holding on to the portfolios in Austria and Sweden? And second one would be -- in regard to your operating free cash flow, Q3 was the lowest compared to previous quarters. I know it's mainly due to net working capital movements that comes obviously from your development to sell pipeline. But could you explain or indicate what we can expect here for the last quarter? And then also more importantly, what you see here for the next year. And by that, I mean items that are not so well explained, not like the minorities, for example, I think you were very clear in previous conference calls. But maybe the capitalization rate, does it stay the same and also your capital commitment to development to sell? And lastly, I, Rolf, stay in good health and best of luck for the next challenge.
Rolf Buch: Okay. For example, the first time -- the first question I take, I think Austria in this respect is probably less relevant. It's all about Sweden. And you know in Sweden, this is a warm rent, so it includes the energy. So that's why the gap, which is actually energy is counted here as cost to operate. That's why technically it is higher, and that's why we are coming to 0.4% in total. But this -- then you have to compare the Swedish business with other Swedish players, which, of course, we have done, and we could provide you the same, for example, comparison with Heimstaden and we are more efficient with Heimstaden. That's why I mentioned the 0.2% because in the end, this slide is more relevant if you compare it to the German peers, you would compare it more with 0.2% and not the 0.4%, which is in the -- in the notes. But because you cannot directly extract from our reported figures, the 0.4%, you can report from the figures that we -- I think we showed the 0.4%. But the difference between 0.4% and 0.2% is because of the different nature in the Swedish market where everybody has to cover the cost as a part of cost and not of a pass-through item.
Philip Grosse: Then, Simon, on your second question, a bit more specific on the operating free cash flow. I mean, you know that we are not guiding on that. What we have been guiding for is excluding changes in the net working capital, why is it that we have done that? Because there's, by definition, some volatility, in particular, if you look on a quarter-by-quarter comparison because it largely depends on the point in time when we have the cash in, for instance, for bigger global exits in the development to sell business. So please don't get nervous on the quarter-by-quarter comparison, but that's not really the picture to draw. More long term, how I would look at it without guiding, if I were you, is that if you start with the depreciation line, that is impacted by, in particular, our investments in photovoltaic, which I think is around EUR 100 million per annum, depreciation 20 years. And given that we do invest in photovoltaic quite significantly, you will see that line gradually going up, which is positive for the cash flow. I think as in the past, net working capital is very difficult. And as a reminder, there are 2 elements in it. It's development to sell, where my intention is to manage the business in a way that it's at least more or less flattish in terms of the net working capital movements, not on a quarter-by-quarter comparison, but on a rolling 12-month basis. What, however, is also in there is the managed to green business, Rolf was mentioning, and that will require an initial capital buildup. So that kind of portion will be negative and how negative depends on how much we are actually able to acquire. But we will give details on that, and we will also give details on the split of those 2 elements going forward, how it affects the net working capital. And the rest, I think, is straightforward. Capitalized maintenance, I would kind of monitor vis-a-vis inflation because this is what's driving that line item. Dividends and minorities, I think we talked about in length. So you should have all the details, including the additional disclosure we put on our web page. And income taxes, I think the guidance somewhat remains also longer term, and I was making that point previously that I expect that to be slightly inside 10% of total EBITDA.
Simon Stippig: Great. Second question was very clear. Maybe I can ask a follow-up on the first one. Is that possible?
Philip Grosse: Yes.
Simon Stippig: Great. I think it's more profound because you made the case that you want to get to scale and scale brings your cost ratio down. So I just wonder in Austria, you're not building up the portfolio. And then Sweden also, I'm sure things have changed since you acquired BUWOG and also since you expanded into geographies in the North. But is it really that you want to build that up? Or is it more a hold case? Or is it really also the potential that you could sell it and then reallocate the cash towards your own business in Germany or even buying back shares?
Rolf Buch: So first of all, and really Austria and Sweden is actually 2 types of story. First of all, the Austrian platform is partly because of language, because of very similar rental systems is partly integrated into or has a higher overlap between the German platform. So -- and then, of course, Austria is also linked to the development business because in Austria, they are running a development to sell business. So you're building a part, you're taking it on your platform for 10 years and then you are selling it with a high margin. So that's why the Austrian part is probably more linked to the development business than to the rental business. For the Swedish business, actually, the same applies. We have bought -- the only 2 listed companies. So we have consolidated the listed market there. We have superior cost in comparison to the other listed -- other Swedish operators are nonlisted by definition because they're not listed left, but we know this data. So it's the same. It's the same opportunity then in Germany, we have in Sweden for the second Vonovia. So I see actually in both in Germany and in Sweden, the chance for playing this platform and making money out of doing just services based on the better cost structure in comparison to people who own assets and want to get rid of the expensive platform where they operate or buy new assets with a very attractive platform. So I see the possibility in both and also you cannot compare Sweden to Germany. You have to compare Sweden to Swedish and you have to compare Germany to Germany. So that's why I think it's 2 different markets. And in those markets, the presentation we have shown you on Page 7 is applicable also -- is applicable.
Operator: The next question comes from Pierre-Emmanuel Clouard from Jefferies.
Pierre-Emmanuel Clouard: Actually, I have a quick follow-up question on Simon's question about Sweden. Is this something that has been discussed with Board members about potential sale of the Swedish portfolio? Or is it up to the new CEO, especially in light of a rebound of the investment market? Is it an open question? Or is it not a case today and Sweden will be there among Vonovia's portfolio for many, many years.
Rolf Buch: So to be very clear, it was discussed in the period of '22 where we talked about disposal. And this was a question where we ended up with alternative structures, which are more attractive at this time. In the moment, it is not part of the discussion which the Management Board is doing with the Supervisory Board, and it's not a discussion inside the Management Board, but also to be clear. So I personally think -- and I think this is not coming to a surprise for you. I personally think that if you are talking about second Vonovia, it is better if you cover more jurisdictions than less. So I think this is important for the second Vonovia strategy, but I'm also here only 2 months left. So I think the new management team under the lead of Luka has also to think about it. But at the moment, there's no indication that there is a thinking, but I should not predict what happens in the future.
Pierre-Emmanuel Clouard: Okay. That's clear. And my second question is on the value-add business and Vonovia in general. With the expected increase in minimum wage in Germany, is there any impact to expect on the -- on margins on your value-add business segment from 2027?
Rolf Buch: No. Very simple question, no.
Pierre-Emmanuel Clouard: Right. Why that?
Rolf Buch: Because the business where we operate, so the craftsmen are much above the minimum salary anyway because this is a different general agreement with the unions. So there is no impact. And the people in some parts of the gardeners are close to the minimum salary, but these are pass-through items to the tenants.
Operator: The next question comes from Manuel Martin from ODDO BHF.
Manuel Martin: The first question, it's a bit kind of accounting question. We saw the effect of the change in legislation on deferred taxes in the P&L and also in the EPRA NTA calculation. When it comes to the EPRA NTA calculation, the EPRA NTA seems to have nevertheless decreased marginally in 3Q versus H1. Is there a special reason behind that? Or is this also kind of effects in the deferred tax? Maybe you can give us a hint there, please?
Philip Grosse: This is predominantly driven by the liabilities we had to account for, for the guaranteed dividend in the context of the exchange offer we made to Deutsche Wohnen minority shareholders. Roughly EUR 400 million.
Manuel Martin: EUR 400 million. All right. Second question is a bit more broader question on the market. I mean the rental increases in the market and which Vonovia is showing and will show in the future, is this something which is also monitored by government and politicians? And what do you hear from politicians? Might that be an issue in the future?
Rolf Buch: No, I think you have to distinguish between sitting tenants and new letting. So for the sitting tenants, it's very simple. I just showed it in the political debate here in Germany. Our increase in sitting tenant between '22 and '24 was 4.8% for sitting tenants without investment. So just having the apartment with no increase. And the increase in salary was more than 10%. So the affordability is going up and not down. So we have no affordability gap. For the new letting, of course, there is an issue because especially if you refer to the gray market. So the market which is outside the mid-price from the partly illegal, of course, where the situation is extreme, where we really have an affordability issue for gray market rents, EUR 20 for Berlin. This is beyond the affordability of normal people. And that's why you have to distinguish this. I think it's getting more and more understood by the politicians, that this is 2 things. But the gray market, even with the mid-price premise, you cannot stop it. So there is only one solution to work on the imbalance of supply and demand to do more products. That's why we have the [indiscernible] where I think this will help. But as you see me in the press, we also now have to work on the rental regulation because the existing rental regulation with mid-price premise with Kappungsgrenze and with the EUR 2 and EUR 3 will not make it happen that there will be more investment in housing. And this means that the situation of high gray rents will be coming worse and not better. And I am positive that one day the politicians will get it.
Manuel Martin: Okay. I see. And Rolf, all the best for you in your future positions or plans.
Operator: The next question comes from Neil Green from JPMorgan.
Neil Green: Just one, please, and it goes back to kind of one of the earlier comments about marginal debt costs. I think you said around 4% was in the guidance. I think your long-term unsecured bonds are trading within that 4% at the moment. And I think it's fair to say then that the secured debt would also probably be within 4% as well. So I'm just wondering whether that 4% assumption you have is kind of conservative or if there's something that I'm perhaps missing, please?
Philip Grosse: I think we will see later today the actual proof point where our cost of debt are currently because we are in the market with a bigger bond issuance, 7, 11 and 15 years. Look, I mean, if you do a midterm planning, I think it is overly aggressive if you were to assume a decrease in rates. And the 4% I've been mentioning actually in our internal planning, I'm even putting kind of a safety margin on top of it because you never know whether there is a slight shift up or down vis-a-vis spot rates. I feel comfortable with the assumption of kind of a stable financing environment. As I said before, that obviously is very paramount for us on how aggressively we need to manage the ICR. But again, my baseline is that 4%.
Operator: Ladies and gentlemen, this was the last question. I would now like to turn the conference back over to Rene for any closing remarks.
Rene Hoffmann: Thank you, [ Moritz ], and especially thanks, everybody, for dialing in and joining this call. As always, if you have any follow-ups, you know where to find me and also my colleagues, feel free to ask. We're looking forward to connecting with you in the days and weeks ahead. And that concludes today's call. As always, stay safe, happy and healthy. Bye now.
Rolf Buch: Bye-bye.
Operator: Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.