Vonovia SE (VONOY) CEO Rolf Buch on Q4 2019 Results - Earnings Call Transcript

Vonovia SE (OTCPK:VONOY) Q4 2019 Earnings Conference Call March 5, 2020 8:00 AM ET

Company Participants

Rene Hoffmann - Head of Investor Relations

Rolf Buch - Chief Executive Officer

Helene von Roeder - Chief Financial Officer

Conference Call Participants

Jonathan Kownator - Goldman Sachs

Charles Boissier - UBS

Kai Klose - Berenberg

Thomas Neuhold - Kepler Cheuvreux

Veronique Meertens - ABN AMRO

Operator

Dear, ladies and gentlemen, welcome to the Annual Results 2019 Analyst and Investor Call of Vonovia SE. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

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

Rene Hoffmann

Thank you, Aurelia, and welcome everybody to our earnings call for the full year 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 Publications.

Rolf and Helene will lead through this results presentation on the basis of the agenda on page two and we'll then, of course, be happy to take your questions.

So without further delay, let's get things started. And for that, I'm handing you over to Rolf.

Rolf Buch

Thank you, Rene, and also from my side a warm welcome. Before we get into the normal specific of the full year 2019, allow me to paint out a broader picture on page three and four of the presentation. Today we are presenting the seventh full year results since our IPO and as in the very prior years, basically all relevant KPIs improved on a year-on-year once again.

And while we are benefiting from a positive environment in terms of low interest rates, we are convinced that the business model we have built will be also successful in different environments. At the heart of this fact is that, we have built our business model on the basis of megatrends, namely urbanization with the supply/demand imbalance, energy efficiency and the need for CO2 reductions and demographic change with an aging population.

All three are no short-term sentiments, but structural long-term trends that present an opportunity and a challenge at the same time. We are convinced that looking on these megatrends and working to be part of the solution to these challenges, they will bring -- be our future success. Whatever we do, always, has more than one dimension and only if we continue to succeed in creating benefits for all stakeholders, we will be able to enjoy long-term success.

Page four looks new, but actually it isn't really new. It is the story you are very familiar with presented in a fresh way and somewhat from different end and view. You will find all elements of the well-known 4+2 Strategy chart on this page as well.

But what has not been sufficiently included on our 4+2 charts is the bigger picture. We've been talking a lot about these megatrends that present challenges, but also provide structural tailwind for our business. As I said, how we deal with these megatrends will be very important for our future success.

And you also know from us that we take our social responsibility very serious. As we have been demonstrating time and again, we are fully aware that our product is not a commodity, but a fundamental need and close to our customers' hearts. And the relevance of a robust corporate governance structure is more important than ever, if you can see if you look on our peers in this sector.

None of this is new for us, but the first time we have tried to put it all in one page to show how we look on our business in a much bigger picture view. Of course, we are in to provide an adequate return to our shareholders, informed on earnings and value growth. And I think it is fair to say that we have been quite successful in doing so in the last years.

But if that were our only focus, we would fall short in the long run. Almost everything that we do has some or one or several ESG elements and we are in the process of sustainably improving our disclosure on this subject, because I'm convinced that we are doing already much more, but we have not been successful yet in marketing this transparency.

And with that, I would like to switch to the traditional full year results presentation for 2019. None of them should come to you as a surprise. Our business remains largely predictable and unsurprisingly for us, we once again delivered what we have promised.

Let me start with the highlights on page five before Helene will take you through the specifics. EBITDA for all four segments improved and total EBITDA was up by 13.2%. Group FFO was up by 7.7% based on the new group FFO metric, which equals 3.2% per share.

If you compare it to our old FFO1 metrics earnings were actually up by 9% per share. Our adjusted NAV per share was €51.93 which was almost 16% higher than at the end of 2018. Adjusted for acquisitions and sales, we saw an 11.8% like-for-like overall value increase in 2019.

We will be promising a dividend -- or we were proposing a dividend per share of €1.57 to the Annual General Meeting in May. In line with previous years, we expect to offer a scrip dividend so long as our share trade around or above adjusted NAV. Our LTV on the end of 2019 was 43.1% and very much in the middle of our comfort zone. Net debt-to-EBITDA multiples of 11.5, is in line with what we reported in the November figures.

And with this, I hand over to Helene.

Helene von Roeder

So, thank you very much, Rolf, and a kind hello from my side too. So in the course of 2019, we managed to grow across all four segments. This is partly due to a slightly larger portfolio, but also because of the continuous improvements we have been making to our business. To be sure Hembla is included in these numbers for two months.

The average number of residential units in 2019 was 3% higher than in 2018. On that basis, we grew the adjusted EBITDA total by 13.2%; and the group FFO which is a basis for our dividend by 7.7%. Group FFO per share was up 3.2%. As Rolf said, the 2018 comparables here are based on the group FFO metric even though we manage the business in 2018 on an FFO 1 basis. If we adjust for this, the FFO per share was up 9% in 2019.

Just as a reminder, we adjust all IFRS 16 effects in line -- in the line item consolidation. So our FFO does not exclude -- include the positive impact of IFRS 16. I do understand other companies in this space do not make this adjustment, so this is probably something you want to look out for when you do peer comparisons. You also see that while recurring sales and especially development made 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 on to page 7. Looking at the individual segments and starting with the Rental segment. Rental income is up almost 9.5% on the basis of a larger portfolio and organic rental growth. The increase in maintenance expenses is partly volume-driven. The increase in operating expenses is partly the result of including Victoria Park for now 12 months in 2019 versus 6 months only in 2018. And as I explained on previous earnings calls, the Swedish rents include ancillary expenses, so the revenue is in Rental income and the cost is in operating expenses and this distorts the year-over-year comparison a bit. We obviously also have included 2 months of Hembla, which is sort of exacerbating this effect.

Page 8 shows the main operating KPIs for the Rental segment. Organic rent growth was 3.9% year-on-year. On the upper left-hand side, we are showing the main drivers that are holding back an even higher Rental growth. Individually, none of the impact we show here make a meaningful dent, but collectively they're weighing on overall rent growth and leads to an environment where it will be challenging to get to much above 4%. The vacancy rate of 2.6% is mostly the result of our investment activities. And then finally, maintenance expenses per square meter were broadly on the same level as in the prior year period and capitalized maintenance was €1 more than in 2018.

You actually made tired of me saying it, but given the different reporting with the peer group, I feel it's extremely important to point out. Let's please keep maintenance which protects future EBITDAs whether it is capitalized or not separate from the investments that actually drives the growth of future EBITDAs.

Over to you Rolf.

Rolf Buch

Thank you, Helene. Let's move on our fair value -- value-add segment on page 9. The EBITDA from the segment was up by 21%, which was largely a result of our organic growth in this business. We simply rolled out what works to a larger part of the portfolio, but we also continue to do and to develop new ideas. We are targeting an average annual EBITDA growth of around €20 million in this segment so obviously in 2019 we were a little bit better than the average target.

Page 10 shows the result of the Recurring Sales segment. We sold 2,607 individual apartments for a cost proceed of €365.1 million. The average sales price increased by 11% year-on-year. The fair value step-up was 41.3% on average and quite a bit higher than last year in spite of a higher basis. 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 €91.9 million to the adjusted EBITDA.

Because this segment Recurring Sales obviously one unit can be sold only once by us. But we have more than 28,000 units left in this autumn. So at our current pace which we don't intend to change, we easily have 10 more years to go. As a side note, outside the recurring sales segment, we sold almost 2,200 non-core units in 2019 with a fair value step-up of close to 16%. To me, this is also a good indicator for an unbroken strong demand.

Non-core is no longer a meaningful number in the overall context. At the end of 2019, we had 4,200 apartments left in our non-core bucket. This is less than 1% of our total. We will continue to sell what is left in non-core, but this will not move the needle going forward. Helene please.

Helene von Roeder

And finally, our Development segment on page 11. The 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-sales and development to-hold for our own portfolio. The bottom line adjusted EBITDA was €84.5 million in 2019. Obviously, this part of our business is less linear than the Rental business, so one quarter can be a bit different from another one. But generally speaking, 2019 should be a much better proxy than 2018 for what to expect going forward.

Page 12 has more color on our new construction activities. We completed 1,301 apartments to-hold for our own portfolio and 791 apartments to-sell. In our construction to-hold, we now have identified potential for about 40,000 apartments based on the opportunities in our portfolio today. So we have been able to identify more medium and long-term opportunities since we last reported. For 2020, we expect to deliver up to 1500 this year.

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 actually work financially. So often you have one-third development at some form of subsidized rents, one-third at market rents, and one-third for sale and the for-sale volume basically carries the land cost. The pipeline for to-sell is approximately 7,000 apartments.

In terms of overall capacity, we were successful in acquiring a residential development in the Rhine Main metropolitan region. We signed an agreement earlier this week to buy 100% of the shares in a company called Bien-Ries that focuses on developing for apartments for smaller and medium incomes in the Greater Frankfurt area. While the deal is still relatively small with a pipeline of 2,500 apartments, it does allow us to beef up our activities in this attractive region and acquire their excellent know-how and network.

Buwog has been focusing on Berlin, Hamburg and Leipzig so the Frankfurt area will be a very nice addition. In case you're wondering this will be financed through cash flow on a corporate level and will not move the needle so actually nothing to write home about.

Page 13 shows the valuation results. We saw an 11.8% like-for-like value growth in 2019, which broke down into 3.1% from performance, 2.2% from investments and 6.5% from yield compression. All-in, our portfolio is valued at €1,865 per square meter including the land. This still leaves a wide gap to new construction costs, which are closer to around €3,000 plus land. So while we have seen healthy valuation gains in recent years, we do not view the current level as a stretch.

To give you some color of what we're seeing in the market, market observations in preparation for the work of our H1 2020 valuation suggest an unbroken momentum and there appear to be no signs of the substantial slowdown of continued value growth. You know us, we do not guide to specific numbers for estimated yield compressions. And in early March it's way too soon. But it seems fair to say that in absolute terms H1 2020 will probably not be a disappointing compared to H1 2019.

And with that back to Rolf.

Rolf Buch

Thank you. On page 14, we have put a little bit more color to the valuation gain. We took the valuation on a more granular level by breaking it down across regional markets in Germany and also Sweden and Austria. While the valuation costs differ a little bit between different regions, we're very happy with the performance of all our markets. This is even more visible on the next slide because keep in mind looking on the yearly evaluation sometimes lead to disappointing elements in one year, but to very positive elements in others year.

So on page 15, we did exercised an average annual value cost from the performance and yield compression, as well as from our investment for each of our 15 regional markets for the period 2017 to 2019 so several years. This is in the right-hand side of the chart. So the average of our strategic market was 40% with a range between 30% and 40% -- 50% across the different markets. So in contrast to that you have the noncore location, which show only a 6% during that period. So obviously our selection was high. Combined with an analysis of the German Federal Office for Construction and Urban Development, which has been looking at the growing and shrinking regions in Germany, which you see on the left part of the slide, we feel very much confirmed in our portfolio's management strategy. 99% of our portfolio is located in these growing regions.

Helene von Roeder

So with that to slide 16, the adjusted NAV. The adjusted NAV increased by 21.1% in absolute terms and 15.7% on a per share basis in 2019. As most of you will be aware, EPRA has revised their best practice recommendations and introduced new KPIs. There will be an EPRA net disposal value and EPRA net tangible asset value and an EPRA net reinstatement value. We are in the process of calculating our numbers on that basis and expect to disclose the new metrics in the context of our H1 2020 results for the first time. The net tangible asset value is probably the one that is closest -- that is the closest successor to the EPRA NAV and our adjusted NAV. So when it comes to looking at a proxy for our bricks-and-mortar portfolio this will probably be the one.

Something entirely new will be the EPRA reinstatement value. The idea here is to highlight the value of the assets on a long-term basis as well as attach the value to intangible assets. We expect this value to be a much better proxy for the overall business of Vonovia and hence our share price, because we have been arguing for a while now not only that a granular operating business like ours is more than just bricks and mortar but also that the actual cash flows are substantially higher than what is included in the portfolio valuation.

To page 17 and the LTV. Our LTV at the end of 2019 was 43.1% or 30 basis points higher than at the end of 2018 and well within our target corridor. I'm, of course, aware that different market participants have different LTV comfort zones. We continue to argue that even after yield compression, we have seen the in-place value of our portfolio remains conservative. If you not only look at transaction prices, but also 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 yields. So we continue to feel very comfortable at that level, especially if we include the roundabout eight-year duration of our debt and the fact that 96% are fixed or hedged.

Many of you also look at debt-to-EBITDA in addition to LTV. 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 11.5 times which to us is a sensible level, if you look at the stability of the cash flows.

And finally, I said it in our last earnings call, and I'll say it again today, the Hembla acquisition is fully financed. We used the capital increase in May last year for the equity portion and we raised €1.5 billion of debt in the fourth. So there's no further need to raise equity for Hembla.

Page 18, a bit more color on the capital structure and debt instruments. The interest cover ratio is now 4.9 times and thus very healthy above the minimum levels required in some of our debt instruments. Almost, all our debt is fixed by hedge 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 on our earnings or dividend capacity.

I want to point out that the average cost of debt per year and 2019 has come down to 1.5%. And even more importantly, we now have a second rating. Europe's leading rating agency Scope gave us an A- at the end of the year.

You may have noticed that, the weighted average maturity went from 8.4 years at the end of September to now 7.9 years. The reason is the inclusion of Hembla. We are currently looking at Hembla's financing structure, which is a little bit shorter than the Vonovia one and are analyzing potential opportunities to refinance some of the secured loans on a group level. To give you some color on the incremental financing costs our current coupon for eight-year unsecured bonds would be roughly around 50 basis points.

Back to Rolf.

Rolf Buch

And with this, I continue to give an update on Sweden on page 19. I would like to start to repeat our main goal. We want to show that Vonovia's business model for a scalable operating platform and efficiencies can be replicated in a similar market and that over time the KPIs in Sweden will develop comparable to what we have done in Germany. This is the main point. And we are well underway. We own now more than 90% of Hembla, we have delisted the Hembla shares and initiated a squeeze-out proceeding. None of what is left to be done is a serious sever. We just have to execute all these technicalities. But given that we have done this several times before, you can be sure that we will deliver this just as we have delivered in the past.

2020 will then be mainly about harmonizing the systems, we used in Sweden and building a common platform to serve as a basis for further goals. All this is well on track and we do not see any meaningful obstacles. The business is performing well and we see all our expectations met and in some cases even exceeded.

And finally, before we come to the guidance, a word on the Berlin on page 20. We have spent so much time on this in our last two earnings calls and all of the individual meetings that I would like to be short this time. The Berlin rent specific regulation became law on February 23, as announced. And in line with our earlier anticipation both on the state level as well and the federal level, we will expect a fast-track court ruling, which of course the [Foreign Language] from the Deutsche Bundestag will be the most important, which will bring actually the court ruling directly in front of the [Foreign Language] in council. We will take law – it will take law makers a few weeks to actually file the suit with the court, but we are optimistic that this will happen very soon.

Speaking of processes, we have implemented a process to make sure that each and every one of our tenant in Berlin received a requested letter from us informing him or her about the rental level under the new legislation. As we have said before, we think that the rent freeze is a wrong instrument that we will make – which will make a very real problem actually worse. But we will – we still stick completely to the rules.

I am happy to reiterate, what I have said before. We continue to believe that the spillover risk into other jurisdictions is extremely low. We consider this to remain a Berlin-specific situation, which will not be copied by other states and turned out to be at least largely unconstitutional.

Helene von Roeder

So with that, the guidance. On page 21, you can see the guidance for next year this year, which is unchanged from our November 2019 presentation except for the rent growth line item. We now know that, the rent reduction at Berlin down to 120% of the rent ceiling obergrenze will have to be implemented by landlords and not only at the request of tenants as suggested in the prefinal draft bill. The time to do this is nine months after the implementation of the law.

So, we're looking at November and hence before the end of this year. As we have said before, this is a one-off effect of approximately 50 basis points which would take what is otherwise approximately 4% guidance down to approximately 3.5% including this impact. The rest is as I said unchanged from what we showed you last November.

Rolf Buch

Before we get to the Q&A, let me quickly summarize the main points on page 22. But allow me to do a side step -- and will allow me to do a side step on very -- on one very specific topic of this day.

We have all seen the speed of which the coronavirus has been spreading and the consequences we are all reaching. And while we believe it is important not to overreact or even panic in this situation, it is equally important to act carefully and responsibly.

As an employer of more than 10,000 people we have -- we take the potential scare very serious. We are in contact with the authorities to be sure we react appropriate if there is a need.

We have taken the necessary precautions to make sure that our employees are as safe as they can be. We have not seen any infections among our workforce and we are doing everything we can to make sure that this stays that way.

From the business point of view, I would like to say the obvious. We are not impacted by the coronavirus. We -- there are no meaningful supply chains that can be disrupted. There is no production facility that could be closed down and cause a revenue problem. And most important, there is no risk that demand for our product is going down.

It is no surprise when markets undergo a correction that individual stocks will find it's almost impossible to escape. But if you stop and think about the actual impact of the coronavirus on our business, you will quickly see that there isn't really an impact -- each of our four segments continue to perform strongly and we are confident not only with regards of 2020 guidance, but also on the longer term.

As I said in the beginning, the megatrends that drive our business are a challenge and an opportunity at the same time. We are fully committed to be part of the solution and we are optimistic that this will enable us to continue our positive development.

We are increasingly seeing the benefit of our geographic and business diversification that has also enabled us to mitigate much of the political and regulatory influence. And finally, we are convinced that our efforts in stakeholder reconciliation and ESG are crucial for our long-term success.

And with this I'll let you to ask your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And the first question is from Jonathan Kownator of Goldman Sachs. Your line is now open, please go ahead.

Jonathan Kownator

Good afternoon. Thanks for the presentation. I have four questions if I may please. The first one which is quite a broad question actually is given the political debate nationally around the rent freeze can you please help us understand how this debate has moved on over the last three months? And if there are wider discussions about what would be actually the correct solution to improve the housing market? So, that's the first question.

And as a corollary to that I'd be very interested to understand how you're looking at your development strategy at this stage. I mean obviously you argue that this is part of the solution. But it seems you've substantially increased your pipeline, you've bought a developer. So, can you please help us understand your ambitions there and how you can perhaps accelerate if that's what you want to do this strategy?

Rolf Buch

Can we -- sorry can we question-by-question? Because otherwise I will forget the first question, I will not return.

Jonathan Kownator

Okay. All right. So, these are there.

Rolf Buch

One question and then you will start the next one. So, I think the political debate have not massively changed. So, I think now we are in a period where the law is active in Berlin. So, everybody is now waiting for the constitutional part. This might take 18 to 24 months. So, I don't expect any meaningful and an additional as I said as a lender in Germany to follow. In Berlin I think the government gets aware that they started a mess which will most probably will end up in a bigger mess. But this is now too late.

So, I think we have to see now what will happen. So, there is no massive political debate anymore about this topic because this is law and it's done and that is what we will see. Still to repeat the left party in Berlin still wants to do the nationalization, so this comes up again. But this is only the left party. The social democrat party and the green party explicitly say that they are against the nationalization. So, did the Mayor which whom I talked on Friday.

So, for the development we believe and this has also an ESG element. By the way to do development beyond EBITDA and it's very attractive business. Strategically the Development business for us is also the possibility to show that we are constructing new apartments and solving some problems. So, we earn money with this. We are getting -- we are getting support from the government. And this is all very important for our ESG strategy.

By developing the apartments to-hold, we are not massively from one year to the other changes the portfolio because just of the size of business which we are building. But slightly we are generating additional EBITDA. But the development to-hold cannot replace bigger portfolio acquisitions in our strategy.

Jonathan Kownator

Okay. Sure. And so, you said that you had previously your sort of target of 2,000 units perhaps per annum. But now you have a land bank, which is around 40,000 units. So 20 years of that should you keep your target. Do you have a plan to potentially increase that target of 2,000 a year? And if so how that would work?

Rolf Buch

So definitely, and again this is not too much driven by the FFO but this is more driven by the pressure we get. So yes, we would like to increase the speed of building new apartments. We still have to overcome the normal hurdles which are construction permissions and construction capacity. That's why we are in the moment with the 2000. But of course, our ambition is to do more in the future. But this is not completely in our hands. It is more in the hands of the construction permission departments of the municipalities.

Jonathan Kownator

And then that was perhaps also the aim of my first question is, are you seeing the political debate evolving towards what could actually be the solution if the freeze is not the solution. And does that make the political class a bit more aware of those planning constraints and that it did should actually solve?

Rolf Buch

I think the political class is well aware about the constraints. The constraints are mainly on the municipality level and the debate about the rental regulation is more a German or lender-wide debate. So the municipality has no right to do any regulation on rent.

So, yes, actually everything you said, everything is understood. Unfortunately, and allow me to remark like in some other cases, Germany in the moment is not able to take the necessary decisions.

Jonathan Kownator

Fair enough. Perhaps the two additional questions then, in services so you said, obviously you've beaten your targets of €20 million per increase. And obviously you're continuing to grow, you're continuing to adopt new services, you've rolled out a new app. Should there be a new target that we should think about in the exceptional year?

Rolf Buch

No I – no I think the €20 million and I think we had made a little bit more this year. It might be also even in a year where we probably do a little bit more initial investments and it can be a little bit lower. So €20 million is a good target.

Jonathan Kownator

All right. Fair enough. And sorry last question. Can you comment perhaps a bit on valuations in Berlin? Obviously, your values were up to 11%. But if you can provide a bit of color on the environment that would be helpful. Thank you.

Helene von Roeder

So what we've seen in Berlin is that the valuations were flattish after the announcement of the rental cap. We have seen that valuations in the outer level of Berlin, which is not Berlin City is going up and now really reaching Berlin levels. I think what I find really interesting is that the valuation for individual flats in Berlin is rising strongly showing that already you can see people being pushed out of the rental market into needing to buy properties.

Jonathan Kownator

Thank you very much.

Operator

And the next question is from Charles Boissier UBS. Your line is now open. Please go ahead.

Charles Boissier

Yes. Hi, good afternoon. Thank you for taking my questions. I have three questions. The first one is just on the guidance where you mentioned 3.5% to 4%. So at nine months you were pointing to 4% without the impact of the rent reduction back to the ceiling. And then you were pointing to 50 basis points so that would bring to 3.5%. Now because the law is that – that the law would have to automatically decrease or notify the turnout of possible potential for decrease of rent, why is the guidance 3.5% to 4% as opposed to 3.5%? Do you have additional elements? Or is it just that you're making assessment of the potential and you're still assessing how much the rent would then be decreased back to the 120%? Yes, okay.

Helene von Roeder

Okay. So I'll take this one first. So let me just walk us through because I saw there's some confusions in the questions. So everything being equal, we would expect rent growth of around 4%. That is actually totally unchanged from our previous reporting. However, given we have the Berlin-specific rent freeze, which was adopted in February 23, we now know that this one-off one-time reduction of rents will come in November. And that as you correctly point out 50 basis points.

Now, it's not certain that the new law will be in place in November this year because as Rolf already pointed out, we have a number of legislative initiatives that could maybe lead to the law being turned over before this November day.

So as a result like not too sure whether it's those 3.5% or 4% because we just sort of depend on how this is now panning out. But important for 2021 and beyond, we wouldn't obviously not have this one-off effect and would be back to our expected 4% growth rate.

Charles Boissier

Okay. That's clear. So the spread of the 50 basis point adjustment is the potential success of the parties applying for the [Foreign Language] challenge in court?

Helene von Roeder

Yes, that's exactly how it is.

Rolf Buch

So – but still keep in mind what I have said that we think the probability we're also clear about probabilities that the [Foreign Language] will be ruled out until November is very low. So that's why we are playing as open as we can. We are saying results without Berlin effect it is 4%. With the Berlin effect it becomes 3.5%.

Charles Boissier

Okay, yes, sure.

Rolf Buch

So it's very easy you should be making those parameters. And that's why it is very obvious. It didn't – the market. There's no change. There's also – because I have seen some comments they’re saying now that we have decreased the rental guidance, this is not the case. This is a onetime effect which was one-time included. And Berlin law is not included it just depends on the legislation.

Charles Boissier

Sure, very clear. And then you mentioned acquiring a small developer and you said nothing to write about it, can we just ask what pricing are you paying for it? So I'm just thinking in terms of EBITDA, multiple or price per square meter or however you look at it?

Rolf Buch

So we -- you know we are doing these kind of acquisitions on an IRR criteria, but I have to tell you openly that the amount we paid was below the approvement level on our Supervisory Board. So this was not a big deal. That's why Helene said, it's not necessary to write home about.

In this case, it means home means our Supervisory Board. So we are -- really this is a small deal, but we have agreed not to disclose the price but this has nothing massively worth noting.

Charles Boissier

Okay. So – okay sorry.

Rolf Buch

Additional 2000 apartments and that we have access to the Frankfurt region because the Frankfurt region is also a very hot region where I think there's a lot of demand and where you can have a very nice development business. So this is more than that.

Charles Boissier

Okay. Thank you. And then just would you anticipate -- obviously the developer market in Germany is extremely fragmented. Do you anticipate to potentially maybe not consolidate because that would be a strong word here, but acquire more and play that market a little bit longer?

Rolf Buch

No. What is also clear we are -- and this was also the case in these markets, we are not paying more than the value of the development project. So we are not paying a strategic premium for developer to be very clear.

And with this policy you cannot consolidate the development market today because every developer expect a premium except -- was a situation where somebody was owed wants to give the business in good hands. So, we probably better get the business because we have good hands and not because we paid a full price. So to be very clear in this case we would anticipate especially if we open a new region. But we are not on the way to consolidate the development market.

Charles Boissier

Okay, very clear. And then you also mentioned the Swedish and German residential regulation right reputation obviously regulation. We know very well about rates probably less of an issue. Just on the reputation point you often emphasized in the past the customer satisfaction index.

And then in your annual report, it's down for a second consecutive year by a larger extent. I think in annual report you mentioned you will investigate the exact reason for the decline.

But just wondering if you would potentially soften the rent increases or do any measure to work on that customer satisfaction metric? Or do you anticipate that there is no particular financial impact to be fully back to its higher historical level? And I think also that index is part of your long-term comp plan just wanted to check that point.

Rolf Buch

So that's why it hurts. That's why it hurts. No of course, we have -- and -- but this we have not disclosed the annual report. Of course we have a much deeper analysis. And you can see and this is not a surprise that there is a direct relationship between reporting in the press about the residential market.

So it's not necessarily about Vonovia, but even for example about Deutsche Wohnen LEG and there's a direct relationship between this reporting comparative reporting and the CSI. You can follow the line. So we are impacted by the CSI not only by the satisfaction of our tenants with our caretakers and with our services, but also the overall impact on Germans looking on the industry.

So yes, that this is the main factor which we can distinguish. So that's why, I think this is a clear understanding. I think it is right. But it hurts because we think that it is also our task to make sure that the industry and not only Vonovia, but the Vonovia and the industry is well-respected in Germany. And that's why, it's good that it hurts and we have to improve it.

But it -- we cannot solve it by increase of rent because if you look on the figures actually Vonovia is not driving the rent in Germany. So we have a very modest renting policy so the origin is not the rent level.

Charles Boissier

Okay. Thank you.

Operator

And the next question is from Kai Klose, Berenberg. Your line is now open. Please go ahead.

Kai Klose

Yes, hello good afternoon. I've got three questions. The first one, I saw on the press release that the modernization volume was about 4% of the portfolio after 5% in the last year. Could you indicate what would be the rough volume here for 2020? Second question would be looking into the NAV of €1865 per square meter. Do you have an idea what was the change in the...

Rolf Buch

Sorry can we do question after question because -- I think yes you are right. We are coming down from 5% to 4% which is still massively above the market because the market has 1%. So -- but of course this is a consequence of the regulation, the new regulation in 2018. So, the cap of €2 and €3 which is of course has an impact on our modernization. So, in 2020, we will have an issue because modernization in Berlin will not happen due to the legislation. That's why we will have a little bit less potential for modernization. But we still stick to this target. Our target on the long-term is above 3% modernization rate. So, it will be in the corridor of between 3% and 4% also in the next period.

Kai Klose

Great. Thank you. Second question would be on the NAV on page 13. We had €1,865 per square meter. Could you indicate, if you have the numbers, how much the value -- the land value has picked up just as in year-end? And what's the composition between properties and land value and land value changes?

Helene von Roeder

So unfortunately, no, we can't split out these numbers, but I think it's rough to say, it's roughly one-third, two-thirds land versus properties.

Kai Klose

Okay. And then the last question on the debt expiry settle. Could you indicate, how you intend to extend the upcoming -- the upcoming debt? Will it mainly be on an unsecured business or a mix of asset-based and mortgage-based and unsecured?

Helene von Roeder

I think you should know us by now is like we keep things very tactical and try to optimize for cheapness of funding. So, don't know yet. It'll be cheap, I can promise you that.

Kai Klose

Thank you.

Operator

And the next question is from Thomas Neuhold, Kepler Cheuvreux. Your line is now open. Please go ahead.

Thomas Neuhold

Yes, good afternoon. Thank you for taking my questions. I have a couple of follow-up questions. I would like to start with the Development business. The increase from 31,000 to 40,000 units in the pipeline, which portion is driven by acquisitions Hembla in recent which is done organically? And where did you add the new potential apartments from a regional perspective?

Rolf Buch

I don't know. So, actually Hembla of course has nothing because, we will need probably a few years before we start in Sweden, a real development business. And then this was after the closing, so that's why of course it's not included. It was acquisition. We are constantly buying land at the moment. I think every month, we are taking a decision to buy a piece of land for the development, so this is a normal increase of the pipeline which was I think announced with the acquisition of Buwog, so we are just doing what we have announced.

Thomas Neuhold

Okay. And from a regional perspective, are there any focus regions? Or is it across...

Rolf Buch

It's very simple. We are doing the four country -- for the four cities which is Hamburg, Berlin, Leipzig, Vienna and since yesterday Frankfurt.

Thomas Neuhold

Okay understood. And can you give us an indication where construction costs are for the development to-hold portfolio versus the development to-sell which is I think at €4,500 per square meter? And then what kind of roughly average rent level you're achieving with the new constructed apartment?

Rolf Buch

So I think you quoted the right figure. So to-sell is €4,500. To rent is of course lower because with €4500 you cannot catch up what we have in rent return, which has also to do something with the land because you have an allocation of land. Actually the land cost more than to-sell apartment. So -- but this is a normal -- you deliver your normal year, but it's very difficult to say no. This is the average rent because it's the first by project.

Thomas Neuhold

Understood. Okay. And the last question is on the Value-add Business. You mentioned you're confident to increase EBITDA contribution by roughly €20 million annually. We have to withstand in terms of ramp-up of existing and new services and for how many years you think you can add this €20 million additional EBITDA on the...

Rolf Buch

So I would not say for the next 100 years to be very clear. Not for the next 100 years I think for the foreseeable future. I think in the moment in this field, we are working very much on the energy field because the energy is our key to succeed to get our buildings CO2-neutral by 2050. Because if we continue to do the modernization, we will reduce the CO2 footprint until 2050 by 60% to 90%. So -- but there's still remaining 10 -- a little bit more than 10% of CO2 remaining open.

So therefore we have to develop new solutions. And that's why we are working on capacity close to Bochum to actually test different technologies, which in all cases combine electricity production and heating. You know heating is today a part of our business. Electricity production is normally not. To fulfill it we have to become the electricity provider for our tenants. And that's why we are investing a lot. But of course this is a challenge because we have to find solutions.

But if we find the solutions this is a big chance because then we are not talking only a part of the money tenants are spending for housing but we are also talking about the part that the tenants are spending for electricity, and if you're seeing a little bit longer also for petrol stations.

So this has an enormous potential for our business. Of course, in the moment, as always we do it step-by-step. So we have more in the research and development phase there. But that's why I'm very convinced that you will see us growing very long in this Value-add segment. But again, don't take the €20 million year-by-year. We have seen a year where it's a little bit more. It can also be in the next years where we have a year, which is a little bit less. The €20 million is a nice guidance.

Thomas Neuhold

Okay. Thank you.

Operator

[Operator Instructions] And the next question is from Veronique Meertens ABN AMRO. Your line is now open. Please go ahead.

Veronique Meertens

Hello. Thank you for taking my questions. Two questions from my side. First of all, also on the construction. Just to catching up the target of completion is without the developer is just small right?

Helene von Roeder

Yes. That's the case. It's just such breaking news that it's not included in our new guidance.

Veronique Meertens

Okay. Can you already give us an indication how much the target would be increased?

Helene von Roeder

So in total there are 2,500 apartments. Exactly how it breaks down over the years I don't know, but just expect it to be roughly linear.

Veronique Meertens

Okay. Perfect. Because I noticed that the target has decreased significantly since in the last six months. Is that purely due to the permits? Or is it also just scarcity of craftsmen of construction? Or what's caused that?

Rolf Buch

Yes in general it's the permits are an issue like before and the availability of construction capacity in all fields is an issue as well. So, but also looking on quarters by achieving the targets is also particularly because construction is a longer period business.

Veronique Meertens

Okay. Thank you. And then last question is on the revaluations. Correct me if I'm wrong, but the on the normally at the half year figures you revalued two-thirds of the portfolio and then the full year it's the complete portfolio. So in the last years, we've always seen that revaluations that the full year figures were higher than the half year. But I noticed that this year they were lower. Is there a specific Berlin-driven or?

Rolf Buch

But this is clear. Helene said it, it's Berlin-only effect because we see no valuation uplift in Berlin. And Berlin is a significant source of -- was a significant source of value uplift.

Helene von Roeder

Actually if you exclude Berlin from the valuation, you have exactly the same levels than you had last year.

Veronique Meertens

Okay. But because you mentioned that in the next half year you do expect some easing absolute level. Do you expect the Berlin revaluations to increase a bit then again or?

Helene von Roeder

No. We do -- so again, a, we said like we're pretty optimistic about the next half year. We didn't say anything like we expect the same level. So a that. And Berlin as long as the rent ceiling is in place, we expect it to be roughly flat. It's pretty unlikely that you will see a massive uplift. But let's see what happens, uncharted territory.

Veronique Meertens

Okay. Thank you very much.

Operator

There are currently no further questions. So I hand back to the speakers for closing remarks.

Rene Hoffmann

Thanks everyone for joining. As a reminder, our Q1 2020 results will come out on May 5. Until then we'll be engaging quite a bit. Our financial calendar on page 30 of today's presentation shows our planned activities and the most up-to-date version of it is always on our IR website.

With regards to the roadshow meetings tomorrow and next week, we've taken the decision to turn them into a virtual roadshow. We do not want to be overly cautious, but conversations we've had with the sell-side and the buy side over the last few days suggest that this was simply the prudent thing to do at this point in order to avoid any potential problem plain and simple. So for all the meetings, we've scheduled we're looking forward to connecting with you by video or audio conference call.

As always, feel free to reach out to me or the team with any questions or comments you may have and we're looking forward to staying in touch. That's it from us today. Have a good day. Bye-bye.

Rolf Buch

Thank you very much.

Operator

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