Vonovia SE (VNNVF) CEO Rolf Buch on Q4 2020 Results - Earnings Call Transcript

Vonovia SE (OTCPK:VNNVF) Q4 2020 Earnings Conference Call March 4, 2021 8:00 AM ET

Company Participants

Rene Hoffmann - Head, Investor Relations

Rolf Buch - Chief Executive Officer

Helene von Roeder - Chief Financial Officer

Conference Call Participants

Marc Mozzi - Bank of America

Kai Klose - Berenberg

Christopher Fremantle - Morgan Stanley

Andres Toome - Green Street Advisors

Manuel Martin - Oddo BHF

Rob Jones - Exane

Operator

Dear ladies and gentlemen, welcome to the Full Year Results 2020 Analyst and Investor Conference Call of Vonovia SE. At our customer's request, the 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 for his conference? Please go ahead.

Rene Hoffmann

Thank you, Alexandra and welcome to our 2020 earnings call. In line with tradition, your hosts today are once again CEO, Rolf Buch; and CFO, Helene von Roeder.

I assume you have all had a chance to download the presentation. In case you have not, please go to our website and you'll find it under Latest Publications. It has become a pretty thick deck. But that is because it is really two parts. The first is the earnings call presentation which we will be going through today. So pages 2 through 28. And the second is the more general investor presentation plus the appendix; we have combined the two documents into one to use the same sets for different events and situations over the next week. So Rolf and Helene will now lead you through this first part. And of course, we'll be happy to take questions afterwards.

And with that over to Rolf.

Rolf Buch

Thank you very much, Renee, and welcome also from my side. Yes, we are doing every year a full year set of reporting numbers. And I think this is a good opportunity not to just look on the detail of supply a year but also to take a step back to a broader view. We are reporting today annual results for the eighth time since our IPO in 2013. And I would like to briefly take the opportunity to give you an overview of the main difference between then and now.

Our business scope is much broader, or geographic scope is much wider. But also in the same time more focused on urban coast areas. Verticals integration is working. And we have built a successful in sourcing model as part of our operating platform. We have acquired more than 300,000 apartments and it is our competitive cost of capital, our best-in-class operating cost. And now is our strategy for CO2 reduction. We expect to see additional opportunities in the future.

We have proven scalability for Germany, and we are now looking to replicate the business model in similar markets outside of Germany. Sustainability has been now firmly anchored in our business. In terms of reputation, we still have some way to go. As it will be no doubt to be seen this year because of the federal election campaigns. But we have made a lot of good progress. We are an accepted and appreciated partner for many of all levels of the government.

In summary, where we have been very true to our strategy is that we communicated and promised to you during the IPO. I think we ever managed not only close the company, but also to put it on a more solid and order basis for sustainable long-term costs.

On the next page, I like this page, by the way, our KPI and the development since the IPO. Every time we report a new set of numbers, we have a better than the year before. And I'm as confident as ever said we will continue to deliver earnings and value calls into future as well. So now, let's go on the highlights on Page 6. Clearly, last year was an exceptional year in many ways. The world had to deal and still deals with a global pandemic that has proven to be disruptive in so many ways. But even in this environment, as you have already seen our interim results, our business was barely impacted. And we saw the same robustness and stability as we have seen in previous years. And in all situations which are highly challenging.

So I think we are able to prove this year as our season [ph] of a very robust business as always, the case. The pandemic also has reminded us how serious we need to take our responsibility of providing a place that 1 million people call their home. I have said this in many times before. We will only be successful in our business if we strike the right balance between our different stakeholders. Because our business is so stable and we have been able to look after our tenants to demonstrate the advantages of living with a large professional organization. And to clearly show once again that we have solutions about our stakeholder approach. And finally, we made a lot of progress on sustainability in 2020.

We improved our scores and the different rankings as committed to a path of climate and we committed a path to climate neutrality by 2050. And we implemented a measuring system to track our success in this respect. On the financial side, it was the same old story as before; we achieved or over achieved the targets that we have set ourselves. Total segment revenue was up by more than 6%, adjusted EBITDA grew by 8.5% and group FFO by more than 10% or 6% per share. Organic rent growth was 3.1% percent, of cost impacted by the Berlin rent freeze as announced. This costs us 50 bips because of seven time reduction in November. Valuation on also came in as expected with a 9.4 total value costs for 2020, resulting in an overall 14% calls on adjusted NAV, and also on the new NPA. Our capital structure remains conservative with an LTV including albeit [ph] of 41.1% on the lower end of the range.

And finally, before I hand over to Helene for more details about on sustainability, I will explain the SPI a little bit later in the presentation. And I only want to say two points now. First, it aligns our interests even better with the interests of our shareholders, and our stakeholders. And second, make sure that our performance on sustainability as relevant as our financial performance.

And with this, I hand over to Elena.

Helene von Roeder

So thank you very much Rolf and good afternoon from my side also. As always, I will start with the overview of the segment EBITDA and how that translates to group FFO. On average, our total number of units grew by 3.9% in 2020. And on that basis, our top line with the total segment revenue grew by 6.3%. Our EBITDA increased by 8.5%, and our FFO was up 10.6% in absolute terms.

On a per share basis, that is a 6% increase for end of period share, and 7.1% for average share. Year-on-year, the number of shares increased by 4.4% because of the script evident in July, and also the equity raise in September. So let's take a closer look at the different segments and start with the rental segment on Page 8.

Rental revenue increased by 10.2% or €211 million. The larger part clearly came from humbler and the remainder from organic rental growth. Maintenance expenses grew by 3.9%, which is in line with the overall portfolio growth. And for the operating expenses, you're probably now familiar with the so-called Sweden effect. The increase you see here is mostly driven by this. Because Sweden does not distinguish between the net code [ph] rent and auxiliary expenses both the rental revenue and the corresponding operating expenses include auxiliary costs. Rough math suggests it's about €100 million for 2020 and about €50 million for 2019. So adjusting for this on a pro forma basis, we saw rental revenue increased by 8% and operating expenses by 11%. But please bear in mind that this is still on the basis of running two operating platforms in Sweden with no operational synergies. This will obviously be different in 2021 because we completed the integration at the end of last year.

Final comments on this page, our EBITDA operations margin in Germany increased slightly to 76.7%. But the costs per unit were also up of it. I do not see a trend here though; the slight increase is mostly driven by some COVID related expenses, but nothing to write home about. The general direction of this numbers remains first bound [ph]. But of course, on a more or less stable portfolio, the momentum will be slower.

On page 9, we have the main operating KPIs for the rental segment. Organic rent growth was 3.1% year-on-year, of which 0.6% came from the market, 1.9% from modernization and 0.6% from new construction. Obviously, we're missing 50 basis points from the reduction of the rents on one third of our Berlin portfolio due to the rent free. Vacancy is down another 20 basis points and this is both the result of the unbroken demand for a product, but also, because our team performed extremely strongly in spite of COVID-19 restriction. So for example, mass viewings were not possible during lockdown.

Again, maintenance expenses were in line with last year, and on a per square meter basis and capitalized maintenance was higher than last year, as we think carrying out some larger maintenance work that accounting wise does not go through P&L.

And with that back to Rolf.

Rolf Buch

Thank you, Helene. So let's go on Page 10 and talk about the value-add segment. You may remember that we were below the prior year numbers for the first six and for the first nine months of this year. And I'm happy to report that we ended the year 4.1% better than last year. What held back and even better performance was that we have discussed on previous calls; so temporary delay in our investment program and the lack of earning contribution in the residential environment on back on the cold winter or the mild winter temperature last winter. Other than that, we continue to move along with the different value add initiatives. So I expect our value-add EBITDA to call again in 2021 as well.

On Page 11 you have the result of the recurring sales segment; we close the year with 2442 individual apartment's sales for cost proceeds of €382 million. So fast value step above was again 39.6 on average. And so again well above our guidance of 30%. So there's a slightly lower volume but higher proceeds and the fair values. This is similar margins. So to us that there's an evidence of unchanged positive market sentiment. The demand for condo units remains very strong. And that is testimony for the positive overall underlying market fundamentals. You will also see this trend when Helene shows us a valuation result in a few minutes.

Helene von Roeder

So with that the last segment development on Page 12. This segment includes all new constructions of apartments by way of entirely new buildings, but excludes additions of floors on existing buildings. Both the revenue from to sell developments as well as to hold volume were up by double digit percentage numbers. Combined this led to more than 30% growth in EBITDA for this segment. Overall, the development, EBITDA represents less than 6% of our total EBITDA, so from a risk point of view negligible. We consider the development to hold to be even less of a risk because we know the market very well and letting the newly completed unit is usually not exactly a major challenge.

If we go to Page 13, then we can see that including the floor additions we completed 1442 units to hold and another 646 to sell for a total of more than 2000 apartments. And as we have said before, this is important for two reasons. For one, it makes economic sense but it also helps us to be part of the solution to mitigate the housing shortage. The current pipeline stands at about 38,000 apartments to hold plus approximately 9000 apartments to sell. For this year, we're looking to complete 1500 units for our own portfolio and another 1000 to sell for other parties.

So let's look at Page 14 for investment program. 2020 was the second year in which we have achieved our target range volume, after a few years of ramping it up through the current size. At €1344 billion, it was below last year. But that was basically Corona related. For 2021, we clearly target a similar volume again. You know, we never give you the exact breakdown into the three investment categories, and actually only shade the three blocks to give you a rough idea. Now, we're taking secrecy one step further for now, and leave out the shading as though, actually not because we enjoy giving you a hard time. But we are in the process of analyzing what the new federal funding regulations for energy efficient buildings, BEG means for us in terms of hard numbers, and Rolf will explain to you, that is clearly a positive, we just don't know yet how positive and need a bit more time before we can come back to you.

So Page 15 shows the 2020 valuation results. The overall value growth was €4.9 billion or 9.4% on a like for like basis. 7.5% of that came from performance and use compression and the remaining 1.9% from our investments. This is a bit below the 11.9% of last year but if you exclude Berlin from the equation for obvious reasons, you get a very similar results, both in 2019 and 2020. The new valuation puts the overall portfolio at 24.2 times in place rent multiple or a 4.1% growth yield and €2063 fair values per square meter.

So on Page 16, we're looking at the mother of all real estate questions, what will the future bring in terms of yield compression. Our general position has not changed, since we do not have direct influence on yield compression, we cannot speak to the quantum of further used compression yet to come. Having said that, there are a couple of points I'd like to make to show that there's a strong indication that even after substantial yield compression in the past, there's probably more yield compression yet to come.

First, our market observations and our preparation work for the H1 variations point to material yield compression also in H1. Second, if you look at our German portfolio, excluding Berlin, you see that the momentum on yield compression increased after decreasing for three consecutive years before. And third, transaction prices both for portfolio deals and condo sales and our market suggest a further tightening of yields. Fourth, in light of the enormous volume of sovereign bonds with positive years issued by countries that have now a negative use, it is probably reasonable to assume that some of this money will end up in residential real estate and continue to drive up prices.

So with that, let's move on to Page 17 for the NAV. On the back of the portfolio valuation the adjusted NAV grew by 19.3% in absolute terms, and 14.4% on a per share basis. The impairment trust resulted in no need for an impairment in 2020. However, if we look on the one hand at the headroom in this two remaining operating regions, in which we still have a bit of goodwill left, it's about 150 million, and on the growing fair values on the other, I cannot rule out an impairment at least in part in the course of this year. The goodwill outside the rental segment, so in value add and development looks to have plenty of headroom at this point.

On Slide 18 will become a bit technical. We had already given you a preview of our MTA and NRV with the half year numbers. And now is the first time that we're reporting the new ACRA [ph] NAVs as part of our regular reporting. We noticed after our HI reporting that there seem to be a bit of confusion as to what should go into these numbers. And at the risk of being a bit theoretical or maybe even though at this point, I would like to remind you on how we apply the ACRA [ph] business practices. ACRA [ph] specifically cause for the separation of the portfolio into a whole portfolio, where the intention is not to sell the portfolio in the long run, and be the rest, which is an essentially sales portfolio.

On that basis, deferred taxes are excluded from the whole portfolio by adding them back to the equity because if the intention is not to sell the portfolio, then clearly the deferred taxes will not materialize. That makes perfect sense. The very same logic should be applied to the item of purchases costs, including real estate transfer tax as well we think. The portfolio valuation is a DCF calculation of the rental cash flows from the gross value that results from the valuation, a certain amount is then deducted for purchases costs, and the net amount is included in the IFRS account.

In the case of the whole portfolio however, by definition, assets will not be sold. So this cost item that reduces the rental cash flow value should be added back, just like its added back for the deferred taxes. This is clearly in line with ACRA's recommendation. So in our case, we're talking about 88% of the portfolio, the remaining 12% of the self-portfolios and this is the non-core portfolio, the portfolio out of which we sell the condominium and to be conservative of Austria.

On Page 19, we translate this into numbers. Keeping with the NTA on the left-hand side, we're starting with the IFRS equity to which we add back, the deferred taxes for the whole portfolio. In addition to the adjustments for fair value of financial instruments, goodwill, and IFRS intangibles, we also add back the purchases cost to the extent they relate to the whole portfolio to get to the NTA. As of the end of 2020, this was €62.71 per share up 14.3% year-on-year. We have the full set of 2019 and 2020, old and new NAV numbers on Page 69 in the appendix.

Now moving to the right side of the page, we show an NRV of €77.18 per share. But NAV, there's no distinction between the hold and the sales portfolio and in addition to the deferred taxes, and the purchases cost, the fair value of intangibles that are not included in the balance sheet are also added. The fair value of intangibles is calculated by a third-party independent appraiser on the basis of a five-year plan for both the value add and the development segments.

So on Page 20, we have the LTV, our standard definition resulted in an LTV of 39.4% at the end of 2020. Now in light of the call date for the perpetual hybrid at the end of this year, however, it makes probably sense to start looking at the LTV including replacing the hybrid with the senior debt instrument because we are now in a position to have repaid. Either way, the LTV is at or even slightly below our target rate, which continues to be between 40% and 45%. The net debt to EBITDA multiple was 12.3 times up 80 basis points from the end of 2019. This is still a level that doesn't make us nervous. Let us not forget, this number already includes the full depth, but not the full EBITDA potential, which is normal in a growing business.

And Page 21 has all the relevant financial KPIs. I like to remind people that LTV alone is not a meaningful indicator for the resilience of a company's balance sheet. I like to look at it together with the fixed or hedged debt ratio, and the maturity profile. And I continue to believe that we're in very good shape here. You may have seen our last bond issuance for €500 million with a 20-year maturity, and a 1% coupon. There's quite some talk about steepening yield curves and the fear of rising interest rates but if I look at these terms, and not particularly worried, as it looks like refinancing will remain rather an opportunity.

And with that back to Rolf.

Rolf Buch

Thank you, Helene. And now it will become tough [ph], page 22 to 24 is really dense. The good news is that you will not see additional new topics coming up to this page during the year '21. Because we probably have a few weeks left for the legislation body to invent new legislation. So because then we are coming in the campaign mode. So this will be a relatively relaxed topic despite of course effects, which we have on [indiscernible].

Let me start on page 22 visible inventories. We have been very clear in all of our conversations in the past, that if f you believe the court decision in Q2 will simply bring back the situation which we had before the rent freeze, then you might want to think again. This election in Berlin and the possibility of the nationalization referendum on the same day in September, we believe that we will continue to see a pretty difficult period for Berlin for some time to come. It will be a hot summer. And we do not think that there can be business as usual one that once the court has spoken. The next topic, by now you will be familiar with a CO2 tax that was implemented in the beginning of the year. As a reminder, this is fully recoverable from tenants and there is no doubt about this, based on the current legislation. What we are seeing is a discussion on how this might change in the future. So this will be definitely a topic for the election campaigns.

Vonovia proposal is clear; in order to set the right incentives, we think that an allocation of the CO2 tax between tenants and landlords need to be made alongside energy efficiency classes on the buildings. What is more important is that CO2 emissions must be reduced, regardless who pays the tax on it. But to be also very clear, if we do not find a solution for the distribution of CO2 tax in the next three weeks, the CO2 tax of the year '22 will also be paid by the tenants.

Our efforts to reduce CO2 received some tailwinds recently which is Renewable Energy Act in Germany. While there is small policy work to be done this is good progress, because this provides us better incentives for landlords, to tenant electricity models. Improve conditions for energy side generation and the implementation of the neighborhood concept. This is helpful, because we see the future of energy supply to be local with neighborhoods. It is here that we want to generate store and supply energy to our terms. This all modesty, I think we have been pretty successful in lobbying process.

At the next page, Page 23 includes a bit of color on the last two pieces of legislation that are being worked on plus or minus '21 is an important as I said before election year in Germany. So first law is a much bigger form, one element is slightly negative, the extension from two to three years is negative. The other is a potential positive and that is a plan to make this image bigger, more reliable, and more accurate reflection of what happens in the market. This would reduce the room for political interference and would probably be helpful for all of us.

The other planned [ph] law is a modernization of land for construction. This has two parts. The first one is looking to improve the focus to designate land as development land, but also gives local authorities a preemptive purchasing light, which is good. So order is a provision that would require owners to obtain prior approval from the local authorities before a multifamily home can be converted into condos for sale. This can be seen as a direct response to landlords trying to escape legislation by selling the units individually which you can see in the moment in Berlin. This is legislation that would become substantially more difficult. To be clear, this will only apply for future condos, not to condos that already exist, so our 26,000 condos would not be affected.

The summary of all this legislation is that we do not see anything that we find too boring. Regulation at the right level is helpful for our business. 70% of all rental apartments in Germany are owned by retail. That is why legislation always needs to work for the average owner. For us, the opportunity lies in operating with a legal framework and driving all performance and value generation by just being better than the average owner, small scale and efficiency. And finally, on this page, please keep in mind that '21 as I said is an election year. COVID-19 is fading out in one way or the other. The social impact discussion will be a very big topic in the future months, which will come. So be prepared for some quiet noise, but remain confident that at the end of the day, our business will not be impacted materially.

And now the last page on regulation is Page 24. Now it comes clearly positive element at the end of 2020. Germany approves a federal funding regulation for energy efficiency buildings. Helene already mentioned it. So objective is to provide one comprehensive subsidy regime to set the right incentives for owner to step up to energy efficiency investments, and renewable energy investments. Unlike before, you can now also choose to take the subsidy as a cash investment instead of a subsidized loan. Depending on how much energy you save, and how you deal with the aspect of renewable energy, you can get sustainable subsidies on much as 45% of the investment amount, up to investment of €120,000 per apartment. This is quite meaningful.

As you should expect from us, we are in the progress of looking at this subsidy regime to figure out precisely what does this mean for us in terms of hard numbers. At this point, as Helene mentioned, I cannot estimate the quantitative impact yet. For what we need to go through our portfolio on a granular level because every situation is different and we want to make sure that we get the best possible outcome by combining the right subsidy elements in each case. But this is a process of an optimization, so really on home turf [ph].

What I can say today is the positive impact will include more investment in energy efficiency modernization, and therefore faster CO2 reductions and definitely more NAV cost. Rental cost and investment yields will probably not change much because of subsidy amount will of course not be able to be passed on the modernization loans to the tenants because this would probably generate two returns. But however, as much as the work to be done by our own people, we will see a significant EBITDA contribution on our value-added business based on the increased investment volume. And not to forget, this legislation can improve the social acceptance of energy efficient modernization because of reduced modernization loans and increased savings in the [indiscernible].

So this was the regulatory framework. So now let's go to sustainability update. I would like to give you this update on Page 25. As I mentioned before, the new sustainability performance index, we are implementing a measurable KPI that we consider as relevant as FFO or MTA. I explained the index on the next page. But before we go there, let me mention two things. First, we have been getting ready to use and to issue a clean bond, the necessary framework has been established and can be found in our IR website, subject to market conditions we are now basically ready to go and look for an adequate window.

Second, we have made sure that the ESG related risks are comprehensively included in our risk management system. The good news is that there is no material ESG related risk, the most relevant is a CO2 tax. And the risk is that at least a part of it has to be paid by the landlord's at one point, but most probably not before '23. But even this most material is clearly manageable in the overall context and so our CO2 reduction strategy, we are actively mitigating to discuss.

So finally, let's have a closer look on the SPI on Page 26. The SPI includes as laid out here on the slide. For each one we have a specific target and if we achieve 100% of all six individual targets of SPI, we will [indiscernible] total 100% number and of course higher or lower depending on how we do in this six individual criteria. You may have noticed that it says sustainable increase. This is because of the pool of new buildings and construction work started a while ago, and then the focus on primary energy need was not as strict as today. Still, we felt it was important to include it already now, to make sure that the SPI follows the same structure from the very start. Of course, new projects that we will approve will lead to reduction of the primary energy needs and you will see this reflected in our future targets and figures.

As I said before, this index represents our commitment to energy and to guide and support on our SPI numbers like we do for FFO and NAV. For the senior staff below the management board observes the SPI is already an important KPI on their LTV, and if the AGM reports and new management remuneration scheme on April 16, the SPI will also play an important role on the LTV of my collect and myself to make sure that we are aligned with the interests not only of our shareholders, but all other stakeholders as well.

And with this back to Helene.

Helene von Roeder

So on Page 27, we have the guidance for 2021. We probably do not need to talk too much about it today, because this is what he guided initially when we reported our nine-month numbers last November. And we decided to keep the guidance for now, because nothing we have seen so far this year would suggest otherwise.

Rolf Buch

So my summary call is as follows. First 2020 saw owning and value close across the board, just like any other year before we reported since IPO. Second, the underlying market fundamentals are intact as environment in which we operate remains favorable. And third, we remain comfortable that we can build on our track record and continue to deliver earnings and value growth this year and beyond.

Back to you, Rene.

Rene Hoffmann

Thank you, Helene. Thank you. Rolf, and back to Alexandra actually at the operator's side for the Q&A please.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Thomas [ph]. Your line is now open.

Unidentified Analyst

Good afternoon. Thank you very much for the presentation and taking my questions. I actually only have two. The first is on the topic of capital allocation, acquisitions, potential share buybacks. Your LTV is now slightly below at the lower end of your target range. You said you expect further revelation gains this year and you emphasized in your presentation that you have more appetite for acquisitions. So I was wondering if you can provide us an update on your acquisition by and if there's any currently and if there are no attractive acquisition opportunities would you consider share buyback, especially given the fact that your stock is trading well below the ACRA NTA [ph] and also NRV? That's the first one.

Rene Hoffmann

So probably I start and then about capital structure, Helene can step in. I think the question we get very often as the answer is always the same. Yes, we have a pre-acquisition strategy, which was completely opportunistic. It is there's always an acquisition pipeline. So we are never running out of steam. Sometimes it works. Sometimes it's too expensive. And that's why you see us opportunistically acquiring, but I see no change in demand. And there will be also in the short-term future bigger portfolios coming to the market, because people will realize that the CO2 emission issue will be an issue. And the company like us was able to manage this will even have better opportunities. And probably Helene you can add a little bit to the LTV argument.

Helene von Roeder

And I mean, as you see in the slide, we are right now at a pro forma basis 41.5%, which is still well within our range. And trust me, there's more than enough demand for organic growth in terms of like additional investments and as Rob said, like the strategy remains to be around acquisition. So at this point in time, I'm not worried that I don't find a good home for the money.

Unidentified Analyst

Okay, and just theoretically, share buybacks topic for you, and under which conditions you would consider the share buyback?

Helene von Roeder

Look, I mean, you know, as we act very opportunistically and tactically, and if it makes sense for the company, the stakeholders and the shareholders, we would also look at such a thing, but that's not pretty hypothetical question at this point in time.

Unidentified Analyst

Okay. Understood. And my second question is on this new federal funding regulation, it looks to be quite positive for your business, you kept your investment targets unchanged for this year. I was just wondering, once you've done your analysis, and then you find out actually, a lot of things could be done. Is it possible that you might increase investment growth in the medium term?

Rene Hoffmann

So first of all, you're completely right, we have to work. So is this actually the new regime is up in the first of July. So we still have a little bit time. But I will probably say is that we can shift also from one investment program to the other. And because of €1.3 billion to €1.6 billion is actually a stable number, which also is backed because we don't need equity to investors. So to massively increase it, this is actually the other side of your question. So then we should be would have to be forced to issue equity and our policy is actually not to issue equity for just running the business. So that's why the €1.6 billion is probably not a strict limit, but we cannot go as much as we want, because then we would probably need to issue equity on ongoing basis, which is not a strategy. But here again, you see that we have a lot of opportunities to invest before we buy back shares.

Unidentified Analyst

Okay, thanks.

Operator

The next question is from Marc Mozzi of Bank of America. Your line is now open.

Marc Mozzi

Yes, thank you. Very Good afternoon, everyone. Thank you for taking my questions. I have two questions essentially. The first one is on regulation. And it's in two parts. The first one is about the rent freeze in Berlin, where do you see the potential nuisances coming from the ruling of the Federal Constitutional Court? What could be the unexpected at this stage from your point of view? And then, the next one regulation is about the low for the rich people [ph], how do you see the extended period of data which people - which in fact is impacting your rental growth? And why so?

Rolf Buch

The second is relatively easy. It's only a slight impact. Actually I cannot give you the exact figure, but it is not really meaningful for the two to three years. Because it depends if you are in a city where you have seen strong rental costs and in the last two years, or more stable rental homes in the year, so this is probably not a massive impact in our - and will not change our guidance. For the Berlin Mitch be [ph] for the Berlin legislation as a Constitutional Court, theoretically, it can be everything between - everything is constitutional to everything's unconstitutional. Both extreme points are probably most less probable. And you will see something in between.

And you might see also that the court gives a hint to the city of Berlin saying, this element is unconstitutional, but if you change it this way, you can make it constitutional. I'm not a lawyer, so I don't know and nobody knows the outcome to be very clear. And there's also no possibility to get access to the Constitutional Court. So it's not like this in the parliament, where you probably get a proposal two weeks before it is read in the parliament, in a closed shop. What we know is that there's two parts of the court ruling on two different questions. And there might be even a scenario that one part of the court is saying it's constitutional, the other part is saying it's non constitutional. And then, we have a big mess, because then they have to meet together and find a common understanding, and this I learned, can take years.

Marc Mozzi

Okay. And the second one is, it's about your ESG, or sustainability targets, in your objectives to reduce your CO2 emission, are you looking at scope free, or does it include Scope free, i.e. new construction into your targets, or something you put on the side for the time being, and you will see later?

Rolf Buch

So we have two targets, one is CO2 emission of our existing buildings. And there's actually the Scope free for the energy is included, because this is a primary energy which leads to CO2. And for the new construction, actually, the material we are using is, of course, in --- no, it's not included, there is just a CO2 emission of this building if it is constructed. And we will continue to work on the second topic to actually look on the supply chain of the building this year, next year, and this will be definitely a topic with which we are coming back to you. The biggest and the hottest debate is in this topic that we probably on the long run have to change the building material. I think the construction in solid [indiscernible] find ways to get their production CO2 neutral, which will be difficult, or we will produce more visible. And there is an ongoing debate in Germany, which we are taking part, where we are actually arguing, saying, if we use wood for construction, we extract CO2 for the next 100 years, and that's why we should get actually a negative tax.

So positive payment to do so, which then can compensate the difference of wood construction and compare them to solid, because wood construction today is in general a little bit more expensive than solid. This is a working topic for us in the year 2021 and 2022. But also to add, of course, we started with the CO2 emission on the CO2 footprint of the existing buildings, because this is by dimensions bigger than what we are generating in the supply chain - what is generated in supply chain. So we're starting with the big pieces, and then they are going and drilling down to smaller pieces.

Operator

The next question is from Kai Klose, Berenberg. Your line is now open.

Kai Klose

Yes, hello. Good afternoon. I've got two quick questions if I may. The first one is regarding Page 14, could you indicate how much you spent in the last year for the purchase of land to be used for the construction of develop-to-hold and develop-to-sell units? And secondly, on Page 13, could you indicate of the about 38,000 units develop-to-hold, how much you intend to build on land you already own, including floor additions and on land you have bought with the or added to them as the process to develop on?

Helene von Roeder

Yes, hi, thank you very much for the question. So we spent approximately €100 million for land service in Germany and in Austria. And then, roughly, it's about 50-50, 50% of our land pipeline is a pipeline on existing land, so land between our individual already existing housing blocks, and 50% is land which we purchased - purposefully purchased in order to construct new houses.

Kai Klose

A quick follow up on the second answer. Do you see any huge differences in the construction cost, development costs, depending on if you develop on land, or on land you have recently purchased for the construction of new properties?

Rolf Buch

In general, not, I think what you can say, in general, if you have a big piece of land, the construction cost normally will be lower. If you're building a one building only, the construction cost per square meter is a little bit higher. This is a very general statement, of course, construction costs depend on the type of building you're building, depends on how much social housing you are building, depends on the region, construction costs in Munich is higher than in Berlin. So there's a lot of different arguments, which actually makes every project a little bit different.

Operator

Christopher Fremantle of Morgan Stanley, your line is now open.

Christopher Fremantle

Hi, good afternoon. I just had one question, which is just to ask you to talk in a little bit more detail about the profitability of your CapEx envelope to €1.3 to €1.6 billion, but specifically, the modernization part of that CapEx. I appreciate there's a huge amount of detail and work that goes into that activity. But what I'm trying to drive at is, should we assume that the two percentage point contribution to rent growth from modernization is sustainable? Clearly, the size of your overall rent is a bit of a headwind to that. And I think as you highlighted, some of the environmental legislation may be a tailwind to that profitability, but how should we think about that two percentage point contribution? Or if you can talk about the profitability on your modernization CapEx in a different way, that would be helpful just to understand the sustainability of that modernization profitability, please.

Rolf Buch

I think in general, our target is to manage that we are delivering stability, the €1.3 million to €1.6 million actually is not only modernization, includes also new construction. And I think there is a bigger difference, as the modernization 8% - is more or less 8% on top of the regulated yield, is more or less given as a fact of the legislation. So there is no change in this legislation for CBL [ph], especially not in 2021. And so, I think there is no big change. So the higher subsidy regime will actually lead probably to the effect that we have the same amount of which we can pass on to other tenants with this 8% rule. But on top of it, we will have additional investment for further modernization, which will actually increase NAV, but of course will not increase [indiscernible]. So this is a mechanic of the new system. So to be very clear, if we are lucky, and we get a 40% subsidy on an apartment with 120, but it's very difficult to spend on the 20, but just as a as a mathematic if, let's say 100,000 is spent on the 1000 and we get 40% subsidies, actually the 60,000 we pass on to the tenant in forms of land and the other 40,000 we get in our balance sheet without paying for it.

Christopher Fremantle

So yes, just to be clear, you're not saying we're going to increase the overall amount of CapEx that you spend even, though you might increase the amount of total CapEx, some of which is subsidized by…

Rolf Buch

We will slowly invest, but this is actually the detailed work. But on the long run we will invest 1.6 plus subsidies we get. So this might be more, so it is clear. We will put more and we have to put more because also our CO2 reduction pass, we have to do a little bit more modernisations that we have done in the past. So we need to do spend a little bit more in modernisation which will be covered by the subsidy.

Christopher Fremantle

And do you think that will alter the fundamental contribution to organic rental growth, which has been around two percentage points per annum, or when you boil - I appreciate all of your work is not complete there - material difference to that two percentage points?

Rolf Buch

No, I think we will add on top actually, I think this more or less stays the same, of course, so under the reserves that we still have to do the details, but logically, this will stay the same. But on top of it, we will have some more investment which will not lead to undergrowth but only lead to NAV growth, which will improve the substance of the building further. And, to remind you, actually, I think with our climate conference in October, we have led the way for this legislation. Because we have said, to reduce buildings, you need to do this, you have to revise the subsidy regime. And the second is, you have to make possible that you can produce energy on top of our books, and both happened. So we are happy and now we have to figure out how we have to do it in the details.

Operator

The next question is from Andres Toome of Green Street Advisors. Your line is now open.

Andres Toome

Hi, good afternoon. I was just wondering if you can maybe express some of your views on the latest government plans to increase with rental constructions. So do you think these proposals to mobilize building land have truly substance and will lead to more construction activity?

Rolf Buch

If you are referring to the meeting of the German government probably one and a half week ago, this was a meeting where they celebrated the successes of the past. And this is, of course, pre-election campaign. And so actually, this was - how would they have shown, they had a target of 1.5 million constructions. And they are now showing that in the last four years they have fulfilled it, if they include all the construction permissions they have given in a period. So the opposition, of course, as I am saying, this is not exactly what we have promised but this isn't our pre-election debate. But there was no more actions taken, because it's now end of action. So the government is not passing new legislation. This was more presenting what they have done in the last two and a half years. And it is evident that that we have not enough apartments in the big cities. And it is evident that it is not easy to replace it. Probably in this context, it is important for you to know, and we have just had a publication but only in German language, that all prognosis of households in Germany are actually based on the fact that we have no [indiscernible] to Germany.

But we have an aging population; so if you want to keep the production capacity of Germany stable, you need to get more than 3 million families into Germany in the next 10 or 15 years. This prognosis is not included in any housing forecast. And 3 million more apartments in 10 years, this would mean that we have to double our construction capacity, which is very good news for Donnie Liddell [ph] and our development business, but it's very bad news for the hope of people that imbalance between supply and demand in Germany will be covered. What is behind there is actually if somebody gets retired, he's still occupying an apartment, but he's not working anymore.

Andres Toome

Yes, fair enough. But also coming back to that mobilization of land for construction, in your presentation, you also show that there is a draft law that's in the works right now. Do you think that will be meaningful in adding supply?

Rolf Buch

Unfortunately, I don't think so. It will probably help a little, but not in the magnitude we need.

Andres Toome

And then, my second question is, maybe you can speak to the lightly [ph] growth that you derive from Sweden, I think there have been several transactions recently quite sizable. So to that end, is there more juice in the tank, so to speak, in Sweden versus Germany, if I look forward to 1H21, in your reported evaluations?

Rolf Buch

We are not giving guidance for valuation, especially also not valuation forward looking for 2021. What you have correctly figured out is that, especially in Sweden, because Sweden is a small market, there is people on the markets which are willing to accept yields, which were unbelievable for us to be accepted. And this was the latest transaction, we were really surprised. We were participating in all these, and we were not able, or we were not ready, actually, to accept this very low yields. So understanding the logic of valuation, this might have an impact on values in the future. I'm giving you not giving you a guidance. And I think what we have seen in Sweden is a small market. And that's why we will probably see it first there. And we might see the same pediments in Germany, and in Austria.

So the underlying fact is that people are understanding what I think we have told you, this operating residential apartments in a regulated environment with a good social security network is a pretty stable business. And you also see now companies, like insurance companies, are thinking about going back into this business. But for them, of course, it's difficult because they don't have a platform.

Operator

[Operator Instructions] The next question is from Manuel Martin of Oddo BHF. Your line is now open.

Manuel Martin

Thank you very much. Two questions from my side, maybe one on one, one after the other, if I may. The first question is the follow up question on your construction, activity and modernization activity. Maybe you can elaborate a bit on potential bottlenecks or headwinds that you're experiencing, because I could imagine that you would like to construct a bit more than just around 2000 units per year.

Rolf Buch

I think in the construction, one bottleneck is definitely the availability of construction permissions, which is indirectly actually saying land with construction permits, the process is very long and difficult and this has not changed really. And what we will see in the future is that Germany has actually underestimated and was under-invested in infrastructure in general. And this COVID-19, what I think people now in the moment, we are spending money to cover the results of COVID-19. But on the longer arm, I think we have to reinvest in our - we have to spend money to get the economy going up again. And this means that the German state will most probably invest more in infrastructure, which will not make it easy for us to get construction capacity. So, if I would have a son which was able to do a little bit practical work, I would advise him to become a construction worker because this will be guarantee for full employment of the next 30 years.

So yes, we have challenges there, in the modernization is a little bit easier for us because we have our own workforce. So we are not 100% dependent on sub-parties, but also there it is not easy to recruit people and it's not easy to find contractors.

Manuel Martin

I see, okay. Second question is pointing more towards your foreign country target market. Do you see any relevant trends there which might be new, or directions which might be worth to share with us, or legislations or possibilities, something like that?

Rolf Buch

No, I think if you refer to Austria and Sweden it's very stable. In Sweden, I think it was not very in detail in the presentation, we have fulfilled our partners [ph] and company is now integrated, as I think we have said in the in the Q4 reporting. It's finished, we are now working on one platform, actually. So we are probably there on the birth date where we announced that Deutsche Annington and Gagfah is merged. And we are now in Sweden, and that's why I think we have positive momentum there. And nothing meaningful has changed in another land and influence. This is definitely - to be very clear, this is definitely a negative impact of COVID, because traveling to France or to the Netherlands at the moment is very difficult.

Operator

The next question is from Rob Jones from Exane. Your line is now open.

Rob Jones

Great, thanks. I'm looking at Page 22 of the presentation and thinking about CO2 taxes. Obviously, at the moment, the cost of the CO2 taxes is borne by the tenant, that obviously could change potentially over time. But if we just roll forward to 2025 for a moment and imagine simplistically that no expenditure is made on the portfolio, and therefore CO2 emissions don't decrease, appreciate that's not the reality but just to keep it simple, at that point, we could say a tenant paying 55 years a ton for their emissions. In relation to that, number one, do you know or have a view on the quantum of emissions that a tenant typically would incur? Are we talking seven tonnes per capita, for example? And if so, in relation to that, does that then have an influence on the tenants' ability to effectively use its discretionary income to pay rent rather than CO2 tax? Is there a rental impact because of the fact that the tenant is spending more money on CO2 taxation?

And then secondly, in relation to that, do we get to a position where a tenant, when they're selecting an apartment, starts to look at its energy efficiency in greater detail and that becomes a key component as to where someone lives, obviously, alongside location, costs, etc?

Rolf Buch

So first of all, your first question is assumptions that we are not improving our CO2 so we would stop modernization immediately. In five years from now, we will still be at 1 million tons CO2 multiplied by €55 per tonne. So the whole bill for all our apartments in Germany is then 55 million, and then you can divide it by the apartments and you will get the average impact. Of course, keep in mind that when building in a category H, so very poor energy modernization, it will be significantly higher than the average, while an A and B building will be significantly lower than the average. So that's why it's difficult to say but it can be - rough estimates show that the CO2 tax can be verse one month's rent, which means it's a significant amount of money. And, but keep also in mind, that tenant today he has to cover the CO2 tax because we can pass it on, but in the same time as the CO2 tax was decided, there was a compensation mechanism for the tenants to be rewarded for this. So, for the social tenants who receive payments from the state actually this payment was increased and the tax on electricity was reduced. So for an average household, it is more or less neutral.

For a household which is living in an H building, so very poor building, it is not neutral. And so is it push, actually everything in the direction that you have to get rid of your H burnings, which was intentional, and you can get rid of H buildings by two ways; either you modernize, this is our way or you sell it to somebody. And that's why I'm talking about a competitive advantage. We have built up now the knowledge and the capacity to modernize buildings. And we are not talking not about the year 2021, but on the long term, we will see a lot of landlords which don't have this ability. And then, these landlords will have an issue, which is intended by the European Commission.

Rob Jones

And in relation to a second point around talent apartment selection and being influenced by its energy efficiency, do you think there's scope for that to become a factor for a tenant perspective?

Rolf Buch

Yes, I think it's already today, in Germany you're not allowed to rent out apartments without showing which type of efficiency it is. I think the energy will be an important factor because this is an auxiliary cost today, which will pass on and, of course, the tenant is more looking on the overall bill and not only on the net rent. I think you will be pointing out as your question is a very important point, this will change the market and this is a next driver for consolidation because the small ones will not be able to manage this issue.

Rob Jones

And therefore, do you think there is acquisition opportunities, if we start to see an asset price divergence between at one extreme, an H and H rated asset versus an A, B, or even C-rated asset and therefore, opportunity for landlords like yourself to be acquires of these assets from other individuals or companies who don't have the modernization expertise that you do? And then obviously, you can add value through the improvement and modernization of those assets…

Rolf Buch

This is exactly what I - actually exactly what I wanted to express, but of course, keep in mind, this is a longer process, because today's CO2 emission tax is only €25, and in the year 2025, it will be €55. And more important, in the year 26, it will be a CO2 emission rate system. And then politicians can decide how high CO2 tax will be because they just have to take a CO2 emission certificate out of the market. So in the past, sustainability was a nice to have, it I think in the most recent years, it was considered as a must-have. For us, sustainability is a competitive advantage.

Operator

As there are no further questions, I hand back to the speakers.

Rene Hoffmann

Okay, thanks everyone for joining today. As a reminder, the Q1 2021 results will come out on May 4, and until then we'll be engaging quite a bit, obviously still virtually for the time being. Our financial calendar is on Page 81 of today's presentation, and it shows our planned activities for the coming weeks and the most up-to-date version of it can always be found online on our IR website. While we're talking about dates, please kindly note that we have moved our capital markets' date from the end of June to September 29, to be exact. We hope that by pushing it down the road another three months, we will be able to do what our capital markets today is largely about. And that is not just to give you an insight into certain parts of the business, but also allow for a personal exchange, over dinner, over coffee, and happily over beer, as well. We will send out a new save-the-day demo tomorrow for September 29.

So much for today, as always let me or the team know any questions you may have. And we're looking forward to staying in touch. Thanks for today. That's it from us, stay happy and healthy and a great day, everyone.

Operator

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