Vonovia SE (OTCPK:VNNVF) Q1 2023 Earnings Conference Call May 4, 2023 8:00 AM ET
Company Participants
Rene Hoffmann – Head of Investor Relations
Rolf Buch – Chief Executive Officer
Philip Grosse – Chief Financial Officer
Conference Call Participants
Charles Boissier – UBS
Bart Gysens – Morgan Stanley
Marc Mozzi – Bank of America
Paul May – Barclays
Andres Toome – Green Street
Thomas Rothaeusler – Deutsche Bank
Jochen Schmitt – Metzler
Kai Klose – Berenberg
Rene Hoffmann
Thank you, Andre, and welcome to our Earnings Call for the First Quarter 2023. Your hosts today are once again, CEO, Rolf Buch and CFO, Philip Grosse. I assume that you have already downloaded today’s presentation in case you have not, as always, you find on our website under the latest publication. Rolf and Philip will present the results and also give a general business update. And of course, we’re looking forward to your questions afterwards, though we have no intention to set yet another record for the longest call. But let’s see how it goes.
Over to you, Rolf.
Rolf Buch
Thank you, Rene. So welcome to our Q1 earnings call for ‘23. I want to start with what is probably the most relevant update, at least according to the last road show, and this is disposal. Following the Sudewo joint venture transaction from last week, we announced another larger transaction together with Deutsche Wohnen earlier today.
We are selling five assets with 1,350 apartments to CBRE Investment Management. Three of these assets are from our rental segment and the other two are still under construction which completed — with completion expected in Q2 and Q3 this year. So they are nearly finished. The book value of these assets as of the end of last year, including the estimated cost for the remaining builds of completion is EUR600 million. We have agreed on the total purchase price of EUR560 million. The free cash after tax and all the transaction costs reflects an 89% cash conversion, which is pretty high.
On recurring sales, the Q1 volume was low. As I said in the full-year earnings call six weeks ago, December, January and February were extremely quiet, but we have seen increasing momentum in March. Still, for Q1, the volume was only 282 units privatized. The other side of the coin is that the fair value step-up exceeded our expectation and came out to 56%, but that is partly driven by the country mix with a disproportional share in Austria. In addition, we also disposed 381 non-core units, where the fair value step-up was almost 20%.
While we continue to work towards the best outcome, our priority at this point, as we said before, lies on more cash generation and less on margin optimization. And we are fully committed to the cash target we have set ourselves for this year. Second, our rental performance, while Q1 was not exactly strong in all the other segments, basically, because of an extraordinary strong Q1 last year, the rental business continued to unlike a clockwork.
This is, of course, relevant because the rental segment is by far our largest segment. We saw 3.4% rental growth year-on-year, 2.2% vacancy and 99.9% rent collection. So unchanged from our full-year numbers as the metrics and the underlying market dynamics continue to improve further.
Third, we did a valuation update for our German portfolio in light of the two larger transactions we have signed. The result is a EUR3.4 billion value decline in the German portfolio, so down 4.4% on a like-for-like basis. This puts our total portfolio at 26.9 times in-place rent multiple and the value at EUR2,422 per square meter.
And last but not least, our LTV is at 45.4% and the net debt-to-EBITDA at 16 times, both of course, adjusted for the Sudewo and CBRE transaction. Accounting for the free cash from these deals, we now have all unsecured maturity covered for this year as well as two-thirds already for the next year.
Coming to page five. Sudewo joint venture transaction marks a successful outcome of a process that started more than one year ago. As a reminder, we began to initially float the idea of tapping unlisted equity sources earlier last year. Our objective was and still is to achieve something on the equity side that we had on the debt side for a long time. The ability to choose between two options.
For a long time, unsecured was a better option for us on the debt side. And in the current environment, secured is considerably less expensive. Going forward, we have now found a way to provide choice also on the equity side. So following the initial thoughts around the minority structure, and defining the key goals of such a transaction, we started our work on the feasibility of such a transaction to address the complex activity and the granularity especially for residential assets and their tax and legal considerations. And I tell you, we have learned a lot.
Our work led us to identify two portfolios we felt are suited best for what we intended to do. One portfolio, Sudewo is fully integrated in the German operating platform. So there is somewhat limited control and limited protection rights for the joint venture partner. This is also reflected by the fact that we have preserved the VAT group as a tax-optimized structure. And the other portfolio is Sweden, where we have a separate platform and where our minority partner would generally be able to exercise more influence.
This approach allows us to address quite different investors. Following the identification of these two different portfolios, we then started the market approach in Q3 and continued investor conversations eventually negotiations in Q4 and Q1. We have now agreed on a common equity participation in Sudewo with Apollo on behalf of its affiliated and third-party insurance clients and other long-term investors. And this transaction achieves what we have set out to do.
We raised EUR1 billion of equity at much more favorable terms than what we observed in the listed space. While our equity has been trading at a solid double-digit FFO yield for a while now, we have secured 6.95% to 8.3% pre-agreed IRR that is kept via a call option and which, of course, includes all dividends paid.
Similar, we achieved another key objective, and this is to continue control, operation and consolidation of the underlying assets. And this consolidation is much more than just keeping a minority stake. We even succeeded in maintaining the VAT tax group for Sudewo, so that we can benefit from an optimized tax structure.
In addition, the joint venture transaction is also superior to an asset sale as it does not trigger real estate transfer tax. So taking our time here made all sense of the world. But joint venture should be understood as an alternative act — access to equity, not a disposal. And this is, therefore, not the right way to define normal market prices for our assets. And of course, with the joint venture, we finally gained some valuable knowledge and experience in this transaction. This will serve with us in case of potential future minority transactions.
The point is a market to define the market price is different in the next deal. We have reached an agreement with CBRE Investment Management on the disposal of five assets with 1,350 apartments located in Berlin, Munich and Frankfurt. While three of the projects are part of Vonovia’s rental segment, the other two projects are still under construction, which completed expected in Q2 and Q3 this year, so nearly finished, some paint is missing.
As you can see in the charts on the right-hand side, these assets are not exactly the Vonovia average in terms of value per square meter and rent per square meter. At around EUR6,000 per square meter, the average fair value is much more than twice as high as Vonovia average, and the ramp level of close to EUR20 per square meter compares to a EUR7.50 for Vonovia’s portfolio. Plus for Vonovia, you have about 30% uplift potential based on a track record on our optimized apartment investments.
So this is from the very upper end of our portfolio, and it’s probably fair to say that at this rent level, the future rent cost will be more a point of an affordability question. The book value at the end of last year, including this estimated outstanding builds for completion, it was only for a few months for the not yet finished assets is around EUR600 million. And we have agreed on a total purchase price of EUR560 million. We expect a cash inflow after tax and all transaction costs of EUR535 million representing a cash conversion of close to 90%. So not only is this a sizable transaction on an attractive price.
It is also structured in a way that we can achieve a very high cash conversion, which is, in the end, of course, the main objective from our capital allocation point of view. And it shows that large transaction at less than 4% gross yields are possible in the environment if we structure them right. The fact that we have found such a respected acknowledgeable partner for this deal makes me and the market optimistic that this transaction can be a positive signal of the market as a whole.
If we are Vonovia, and if we would have to choose between these relatively new buildings and the normal portfolio, we would probably have chosen to take the normal portfolio because in the normal portfolio, there is still a significant catch-up potential for rent, and there is a possibility of highly accretive investment opportunities, both thanks to our platform. But of course, if somebody has — is not able to have this platform, this newly constructed buildings are better. So in the end, we have found a win-win situation, which is actually following the best ownership concept.
And with this, I hand over to Philip.
Philip Grosse
Thanks, Rolf, and very warm welcome also from my side. Let’s move to Page 10 on the segment overview. Here, as Rolf said, we had a very good quarter in our rental segment, less so in the other segments. And if you look at rental growth, occupancy and rent collection, keep going strong. The first quarter was not as good as last year for the other parts of our business.
In development, this has to do with the fact that Q1 2022 was out of the ordinary with a very large global exit. So the quarterly comparison is distorted here. And for recurring sales, the truth is that the first two months this year were very quiet. So it’s not surprising that Q1 fell short compared to the prior year as we have been guiding for. At the same time, we have been seeing more interest and signs of life in our expectations for the full-year against that backdrop remain that we can deliver on our guidance.
In our value-add segment, we had to operate with a higher cost base and the reduced investment program was not helpful in delivering a growing level of contribution margin. All this combined with the elevated financing expenses led to a 20% decline in FFO per share to EUR0.58 for Q1 this year.
Moving to the next page. Our largest segment, which is, of course, rental, we saw 2.6% revenue growth, 5.2% EBITDA growth, which was supported by a much lower cost base. So here, you can essentially see that Deutsche Wohnen synergies are coming through, and this is also evident if you look at the EBITDA, our operations margin, as well as cost per unit and the outlook for the entire year.
Moving to page nine on our rental KPIs. Year-on-year, organic rent growth in Q1 was at 3.4%, 1.2% coming from market rent growth here, as we have been guiding for. We do expect an acceleration for the remainder of the year. I also want to point out that this number still mostly excludes the impact from higher inflation as we have explained in our March call. Vacancy rate at 2.2%. So unsurprisingly, this remains on a very low level and is expected to stay on a very low level for quite some time, given supply-demand imbalance.
The chart on rent collection is a great indicator also for affordability. We get quite a bit of pushback from people who fear that rent collection will come under pressure for affordability reasons. These numbers clearly speak a different language. To be clear, they include not just the net cold rent, but also all ancillary costs and energy costs, and the latter has seen adjustments beginning of this year to account for the sharp increase in energy prices.
Moving to page 10 on value-add. Here, Q1 fell short of our expectations. While there is some revenue growth, we had to operate with a higher cost base and the reduced investment program. So clearly, a drag on EBITDA contribution. That having said, if I look at the performance year-to-date that comes not as a surprise to us and it’s fully in line with our budget.
Page 11 on recurring sales. Here, as Rolf said, sales volume was a little less than half of the prior year period, while the fair value step-up was about 10 percentage points higher. Clearly, overall, this first quarter is not representative of what we want to achieve in this segment in the course of the year. But as we are beginning to see this market coming back, we remain optimistic overall. And in achieving our goals for this year, we will be careful to find the right mix between a decent fair value step-up on the one hand, and sufficient volume, enhanced cash generation, which is and remains our priority for this year on the other side. Finally, for this page, I also want to point out that we also sold almost 400 noncore units roughly 20% above fair value.
On Page 12, development continues to be an attractive but more volatile business with gross margins still in double-digit territory. Q-on-Q comparison is not very helpful as last year included a large and very profitable global exit in Austria. As you can see on the lower left-hand side, we have been shifting more projects under construction towards development to sell in line with our communicated revised capital allocation policy.
Moving to page 13 on valuation. Here, we have originally intended to do a full valuation update only with our H1 figures and leave Q1 values unchanged, but an update was required in light of the two recent transactions we did ourselves. The valuation update is on the German portfolio only and is a model update based on available market price data and mindful, obviously, of the agreed sales prices, which we have achieved. It includes updated portfolio and market data, including rental, vacancy operating expenses, portfolio volume and also capitalization rates. It also includes EUR240 million of capitalized investments which we undertook in Q1.
The result of the valuation update is in P&L impact of minus EUR3.6 billion or 4.4% on the German portfolio on this basis and as of March this year, our portfolio was valued at the 3.7% gross yield or almost 27 times rent multiplier, which is the German way, as you know, to look at this equation. This is, of course, based on in-place rents and the multiple would be quite different if you were to base it on market trend, which we are able to achieve.
The German portfolio was valued at almost EUR2,500 per square meter. And just as a reminder, the median purchase price for condos is significantly higher, EUR3,500 in the median purchase price for new construction equally, which is even EUR5,300 across Germany. You can, as guided for, expect a full valuation update that is including Sweden and Austria with our half year numbers.
Very brief on page 14, the valuation had, of course, an impact on our NTA, which came out at EUR53.75 per share and therefore, a 6.5% decline vis-à-vis year-end numbers.
Page 15 on debt structure, standard page, not much change, compared to what we presented six weeks ago. So let me directly move to the next page on the key debt KPIs.
Here on page 16, we show the debt KPIs, as reported for Q1. If we account on a pro forma basis for the two transactions, we now spend at an LTV of 45.4% and the net debt-to-EBITDA of 16 times if you apply the average debt of 15.5 times on a spot basis. So here still some way to go to move back into our comfort zone, in particular, on EBITDA and LTV.
So moving to the next page for free cash flow, 17. You know this page from our full year reporting, and we are keeping the full year view here as the point is to show you the expected cash generation over 12 months. So the update here is that it includes the Sudewo joint venture and the CBRE transactions, and while we have now achieved about 75% of our asset disposals target for this year, we will, of course, continue to chase all disposal channels that you see on the upper right-hand side to reach our 2023 target and possibly more.
Page 18 is an illustration on our refinancing and deleveraging progress. We now have fully covered all our 2023 refinancing needs and also two-thirds of 2024. Assuming the rollover of the bank debt, which continues to be — to see a lot of appetite, we have about EUR0.75 billion of unsecured debt left which we still want to address by further disposals. The EUR1.3 billion of loans signed include, as we have reported, the new loan of EUR600 million from the European Investment Bank and the rollover of EUR550 million from Berlin Hyp. And here, there is also included a new unsecured green loan of EUR150 million which we have agreed with CaixaBank at very competitive terms at around 4%.
Page 19, you will see our updated meaning unchanged guidance. As we have discussed, we see lower predictability than normal with regards to volume and profitability for both development and recurring sales. And that is why you see this reflected in the wider ranges we had already included in the guidance update in March. Our expectations for the operating business are entirely unchanged and to avoid any potential confusion, the Sudewo joint venture and CBRE transactions are very helpful in terms of liquidity, but they have very little to no impact on the 2023 guidance.
And with that, back to you, Rolf.
Rolf Buch
Thank you, Philip. So there are two changes to the Management Board of Vonovia. First, Helene von Roeder, which you probably all very well know will resign from her position on the board at the end of June ‘23 to take a new professional role. The change comes on her own request by mutual agreement and on the best amicable terms.
Helene started her position at Vonovia as CFO in May 2018 and played a vital role in the successful business combination with Deutsche Wohnen. After taking over the responsibility as Chief Transformation Officer at the beginning of ‘22, she successfully led Vonovia’s Value-add operation and laid the foundation for this segment’s long-term growth potential. I really enjoyed working together with Helene, and I know she will be missed. We wish her all the best for the new role.
Second, Vonovia’s Supervisory Board has resolved to appoint Ruth Werhahn to the Management Board as Chief Human Resources Officer as of 1st of October this year. Prior to joining Vonovia, Ruth has been a member of the Management Board and Labor Director at TÜV Rheinland, which operates in more than 50 countries with about 21,000 employees.
Ruth began her career at E.ON in 2001, where she was a Managing Director for E.ON Nordic AB in Malmö, Sweden, between 2008 and 2010; from 2010 to 2013, she was responsible for setting up the new business segment electro mobility; and in 2013, she assumed responsibility for human resources at E.ON Germany. We are looking forward to welcoming her to Vonovia, and we have no doubt the she will be a great addition to our team.
My wrap-up will be brief. With rent accelerating, vacancy on continuous low levels and renting payments being fully collected, our core rental business remains the strong foundation. We enjoy extremely healthy operating fundamentals that are increasingly supported by the two key megatrends, supply imbalance in urban areas and decarbonization of real estate. This is attractive not just for us but obviously also now for other investors.
The two recent transactions demonstrate this and show how disposals that — that disposals are possible even if it’s still in a very challenging transaction environment. We consider this as a positive signal for the market as a whole and are optimistic that more confidence can return to the sector as more and more participants begin to realize that the price correction may be not really as strong as initially feared.
And with this, back to Rene.
A – Rene Hoffmann
Thank you, Rolf and Philip, and I’m going to hand it back to Andre to kindly open the Q&A. I think we have already a few people in the queue, so let’s take them one-by-one, please.
Question-and-Answer Session
Operator
The first question comes from the line of Charles Boissier with UBS. Please go ahead.
Charles Boissier
Hi, thank you very much for taking my questions. Three questions from my side. The first on disposals. You mentioned an attractive price on the disposal to CBRE, but it’s hard with the current disclosure to form our own view. Last quarter, Vonovia has taken, I think, EUR450 million negative revaluation on the Deutsche Wohnen development portfolio to align with Vonovia’s cost method. So can we get you that the projects sold to CBRE had also been depreciated at year-end. And so related to that, to understand the EUR560 million paid, what is basically the fully loaded cost to develop these five projects?
Philip Grosse
Yes, Charles. On your question first, what you have to consider is that by acquiring Deutsche Wohnen, we accounted for the development projects, the respective projects back at the time at fair value as part of the PPA. And against that backdrop, I think it comes at no big surprise that in the changed environment we are facing since then, these projects have been somewhat more at risk because there was essentially hardly any development margin. And as for our real estate business in the rental segment, the investment properties, predominantly the development of Deutsche Wohnen has seen some value decline as it’s clearly the case also for the broader portfolio. So you should clearly not read in my view, too much into that.
On the second point, as Rolf said, these projects are almost completed. There are some outstanding payments still to be made, which are roughly EUR40 million. So you see what we have been accounting for or the spreads vis-a-vis the estimated fair value is a very small one. And there is little volatility on these remaining payments.
Charles Boissier
Okay. So just to confirm, so you’re selling at about 7% discount to how much it costs you to build? Is that a reasonable…
Philip Grosse
That is correct. And I mean, also, what is important, we have been focusing a lot on reducing cash leakage to a minimum because cash is king these days and by a cash leakage only up 11%, I think this is a very, very good outcome. And in the structuring of the deal, we also tried to build in a structure which allows to reduce the tax burden. It’s still a good portion. But with part of the deal being a share deal, it was efficiently structured from a tax perspective. And as a consequence, reduced the cash leakage.
Rolf Buch
But just to add, this is two projects, two of them — five projects, two of them are actually not finished and coming from the development, three of them are coming from the operating business from Vonovia. So…
Charles Boissier
Also, you mentioned the higher end and more limited potential ahead. But can I confirm that those projects that are CPI-linked as is usually the case in Germany for developments?
Rolf Buch
It’s not all CPI-linked. It’s a part CPI-linked. The point is, and I think this I tried to mention, if I have — looking from Vonovia’s perspective on two assets, which have more or less the same yield, I always would choose the one where I have rental uplift potential, which is shown as is 30% that you see in the average and probably in the cities, it will be even better than fully priced rent. This is, I think, the first argument.
And the second argument is our platform, it is for us more attractive if the yields are more or less the same to invest in or keep assets where we can invest on an attractive yield basis because our investment in energy modernization is still significantly higher than our cost of capital. So I think for us, this portfolio is probably less attractive because rent uplift potential is limited and there is no possibility to do accretive investments, while keeping the rest is probably something which makes more sense for us because we can generate value.
And this is exactly the strategy which we explained you last summer that we actually, on our disposals list assets, which are actually perfect in shape, which has nothing to be improved and which are ideal for people who do not have a Vonovia platform, and that’s why want to own this asset without a lot of work. So I think that this is exactly — we are doing here exactly what we announced last summer.
Charles Boissier
Sure. My second question is on a related topic on valuation. So the minus 4% valuation update. You mentioned valuers were mindful of recent deals. But depending on how we look at the concessions made to Apollo in particular, on the rents and the CapEx, we can come to a larger discount than the headline discounts. Of course, you also do have this option and some people are looking at this transaction as a bit of a secured debt deal. So there may be various opinion on this. But are your valuers looking at the headline discount versus the concessions granted?
Philip Grosse
Yes. I mean, from a valuation perspective, the Sunrise or the Apollo transaction, is not really relevant because we essentially, as Rolf explained, sold a minority stake of common equity and not a portfolio. And the cost of equity at which we sold is roughly in between 7% to 8%. So the right way to look at that is to compare that to our capital market implied cost of equity. And here, if you look at our FFO yield, if you look at Bloomberg consensus, we are at around 12%. And that essentially means that we have, on an equity basis, been able to achieve 35% better terms looking at the cost of equity than what our stock market implies.
And that is somewhat interesting, because it’s somewhat also corresponds to the implied discount on our gross asset value the — our current stock market valuation implies. And all of that having said, I think there are a number of reasons why this transaction stand-alone is not really the trigger. The trigger is the CBRE transaction where you have some read across on the broader development of asset values, and that is what we have reflected. So point one, we have obviously included the agreed prices with CBRE in our Q1 results. And second, we have also recognized the REIT across from the CBRE transaction on our broader portfolio and all of that was essentially resulting in that 4.5% value decline for our German portfolio.
Charles Boissier
Okay. So we’re taking CBRE, but not Apollo. Okay. And third and last question from my side. So on leverage, you’re making disposals, but LTV is still going up, obviously, from the negative revaluation. And if values were to come down another, let’s say, 8%, LTV could cross the 50%, which is a threshold for the credit rating agencies. What’s your view on defending the credit rating because you’re several notches above non-investment grade? So is your view that if you were to be downgraded, ultimately, it’s — it wouldn’t impact significantly your access to financing? Or is it the current rating very important for you?
Philip Grosse
I think, Charles, first of all, I have very regular dialogue with the rating agencies. And you can expect that we have also in context of the Apollo transaction had dialogue with the rating agencies. And I have no reason to expect any change in their respective rating. I mean, obviously, you’re right in saying that if we were to see further value decline that this will negatively impact the LTV. And clearly, what we have said, Rolf and myself separately in the call is that we keep pushing on the disposal side.
The target for this year is EUR2 billion. But what we have in the pipeline is more than that. So we will see what the outcome is going to be. For now, the target remains of EUR2 billion for 2023. But if there were to be seen further value declines, we have to do more on the asset disposal side. For now, I think it’s speculation to talk about figures or whatever, 8%, 10% of additional value depreciation. we will see how the transaction market behaves in particular, also with, yes, certain signs of life we start to see.
Charles Boissier
Thank you.
Operator
The next question comes from the line of Bart Gysens with Morgan Stanley. Please go ahead.
Bart Gysens
Yes, hi. Good afternoon. I wanted to touch on your home building activities. You’re selling — the CBRE transaction is partly out of this homebuilding business and you’re willing to sell at a low fare. So this is now a loss-making business. Can you help us understand what the kind of working capital requirements are in fee, this should be a self-funding business, but in practice, it may not be the case in the same environment. Kind of, are we seeing an increase in working capital requirements there? And how does that fit into your financing and liquidity position? Thank you.
Rolf Buch
Yes, Bart, to be very clear, if you understand and you know our development business, the key and the core of our development business is actually a business where we build buildings and sell individual apartments out of it. And this is, of course, a margin-generating business like the disposals of our Value-add business — of our recurring sales business.
And in this specific case, we have sold two blocks and the development to sell out of the Deutsche Wohnen portfolio. So this is not typical for the nature of our development business, which is building blocks and then selling individual apartments and attracting the market of individuals who want to live in the big cities. So I think this is a specialty of the business. And again, we limit the development business to a capital exposure of roughly EUR3 billion. And that’s why we don’t see any major impact from this business.
Bart Gysens
Okay, thank you very much.
Operator
The next question comes from the line of Marc Mozzi with Bank of America. Please go ahead.
Marc Mozzi
Thank you very, good afternoon, everyone, please. I’ll start with a question around your transaction — Sudewo transaction. Can you give us a bit of color of what are the different components of the internal rate return you’re guaranteeing to Apollo in the case you will exercise your call option? I mean, sort of breakdown between initial yield rental growth, capital return, whatever color you can give us to try for us to understand what sort of effective value you’re potentially keeping for you in that transaction?
Rolf Buch
And so this is — so Marc, as you know, the complexity in this deal and the fact that for the VAT group consolidation, the minority shareholder has no protection rights because we have to access — and to execute all the decisions made by the Vonovia Board, and there is no — even not normal minority protection rights. That’s why they have a higher than they normally would get a dividend share but this is actually more or less irrelevant because we have a cap in the IRR on our call option.
There is no other guarantees to Apollo remaining this business, because it’s an equity participation, and that’s why we cannot do different guarantees. So the deal is actually relatively simple. Apollo likes the yield, and we like the lower cost of equity.
Marc Mozzi
But is it fair to understand it very basically that assuming 7% payout ratio on the cash that you give around 5% to 6% net yield to Apollo plus 2%, 3% of rental growth that gives the internal rate return or there is any other capital element or capital return we should assume on top? Or part of that…
Rolf Buch
Capital return is because in the IRR calculation, which we have to pay, if we execute the call options, everything is included what is paid to Apollo. So relatively simple, this is the cost of equity.
Philip Grosse
So basically look at the dividend stream and the residual price you have to pay to exercise the call option has to result in an IRR in the given range. So in other words, if I look at the value of the call option that, given the disproportionate share of the dividend will increase over time as a consequence of that. Because the price you have to pay will be reduced over time.
Marc Mozzi
Okay, okay. Makes sense. On — following up on the question from Bart because it looks like that effectively your house development business or house building activity is now shrinking in terms of sales. And traditionally, you cannot stop building and constructing buildings, waiver the level of sales you’re capable to achieve. So that creates a cash drag, if I understand the business correctly. And — can you give us a color of what sort of risk of cash burn we should potentially expect from that business, which it’s called change in working capital requirement? But let’s put it simply cash burn, because if you’re building things on one side and you’re not selling anything on the other side, net-net, there is a cash burn.
Rolf Buch
Yes, Marc, you are assuming that we cannot stop building, and we just have announced that we are stopping building. So we are not doing new buildings as long as we have not sold the old ones. Very simple.
Philip Grosse
And it’s — and to add, I mean Rolf give — has given a guidance on the capital we have deployed in the development business. And one thing is very clear also when the market shifts again and we have — we start to have better visibility, the development segment has to earn the cash in order to undertake new investments. Now for the given years and for the project developments we have started, historically, you’ve seen the development business delivering gross margins of 25%, even 30%.
I think it’s fair to assume that this will somewhat come under pressure. And you see that in Q1 that we are still comfortably double digit, but not as high as we used to be in terms of margin. And for us, we certainly have to calibrate cash requirements vis-a-vis profitability at some stage. But given that we are talking about very healthy development margins from the start, and as a reminder, difference to Deutsche Wohnen back at the time, Buwog was accounting for the development on an ad cost basis always. There is some buffer to absorb some fluctuation, if you will, on the asset side in terms of values.
Rolf Buch
So Marc — and let me just reconfirm the core of our development business is to build blocks and to sell individual apartments. And there, we are addressing, addressing people which are probably more middle-class people. So this is not to rich because we are not building a lot of penthouses. So this is normal people, which actually want to have a home, which they own for their families. So the block sales, which is also part on the development, but this is only a small part, which is actually coming from the original development to hold products, is a part of the development business. A fundamental part of the development business is to build blocks and to sell individual apartments. And this business is healthy.
Marc Mozzi
Okay. So if I understand you correctly, everything you’re going to sell from here in that business has been completed.
Rolf Buch
Yes, there are some construction ongoing because we have started — we have stopped the new construction actually in the middle of last year. This will be now completed very soon, and we are constantly selling out of this portfolio.
Marc Mozzi
If I understand you correctly from the last call, you still had EUR800 million of cash to spend to complete the ongoing buildings. And this is where I’m struggling to understand, if you’re not selling EUR800 million on the other side, then there is a gap.
Rolf Buch
Yes, it’s getting smaller every month we are talking. Because of the stop of the new construction, every month it is getting less, and we are selling. So the gap will go smaller every month we are talking until we start — until we restart new projects. But of course, there’s a — rule is Daniel has to collect the money first and Rene can restart new projects. But then we are willing to support him to restart new projects.
Marc Mozzi
Sure. That’s clear. I have the third one and that it should be a very easy one. Do you really consider that a cash on the balance sheet on the undrawn corporate, RCFs are liquidity at your disposal that you can effectively use those lines to pay down debt?
Philip Grosse
Yes. I mean we always have a small portion of what we consider trapped cash. I think that’s below EUR100 million currently. So in essence, the answer is yes.
Marc Mozzi
Okay, thank you very much. That’s it from me. Thank you very much.
Operator
The next question comes from the line of Paul May with Barclays. Please go ahead.
Paul May
Hi, everyone. A few questions from me. Just on the first one, I appreciate there’s been a lot of questions around this already on the housebuilding business. Would it be easier to consider probably separating out the cash in sort of gross cash in and gross cash out on a quarterly or half yearly basis, so we can probably analyze where the cash is going and where it’s coming in, that would be something you’d consider? We may avoid some of these questions in the future if you were to do that.
Philip Grosse
I think I will not give an answer in this call. We take it back, discuss it if you want to provide that additional transparency.
Paul May
Okay. Second one is, post the value declines you’ve seen in Q1, what’s the headroom that you have with regard to your LTV covenants in terms of further value declines?
Philip Grosse
We had that at the very back end of the presentation. It’s above 26%. It’s on page 39. So it shoud — by the way, it should give you some comfort that I didn’t have that on top of my head because it really falls.
Paul May
Indeed, it does. Moving forward from here, obviously, disposals, and I appreciate looking about exactly what’s relevant, what’s not relevant for valuation that appears to be the one that was relevant is still coming at a larger discount than your — than you took in the Q1. Should we take that, that there’s further — expects to be further value declines from here? Or do you believe that that’s a slightly different portfolio and therefore, it’s not comparable directly?
Philip Grosse
I think as usual, we’ve just freshly printed our Q1, and we have reflected the market intelligence. Some of that’s triggered by our own activity in the transaction market. So as usual, no guidance on what to expect for the first half. But I mean, stating the obvious valuation is always backward looking for now, in other words, some pressure remains. And it also remains to be seen as to what extent the activity by CBRE, which is a very reputable market participants will impact the transaction activity in Germany. And here, we still have two months to go, and we will see how that is translating into our H1 revaluation.
Paul May
And just on that transaction, the NOI yield or the free cash flow yield from that portfolio, I believe, will be higher than your average. I appreciate you’ve got probably greater growth in your remaining portfolio, but in terms of the major spend, future sort of modernization investment, your free cash flow is going to be greater in the CBRE portfolio? Or am I thinking about that incorrectly?
Rolf Buch
I think this depends very much and that’s why we are so proud that we were able to structure the CBRE deal in a way that it is very cash efficient. That’s why we give you the free cash flow. So this might be, of course, if you have land — long land ownership and you feel — or if the building is longer, the ownership of course, the deferred taxes lying with this might be higher, but this depends on how you structure the deal. And there was in the CBRE deal, as we announced, there’s also a share deal for obvious reasons.
Paul May
Last one on valuation, apologies. The — has there been or what has been the change in the discount rates that used or terminal cap values? Because I don’t think you provide that breakdown in Q1. So I was just wondering what the change has been quarter-on-quarter in those two figures?
Philip Grosse
Yes. I mean, yes, we have not provided that detail. But I mean, stating the obvious, this — these are a couple of basis points because essentially, we applied the transactional evidence by what we have seen based on empirical data, but also own — our own transaction across the entire portfolio. And while there are some regional differences, there are not large regional differences.
Paul May
Okay. Cool. And a final one on the call option with Apollo. Are you — what’s the duration of that? I mean — or is there any duration or is it indefinite in terms of that core option? And how would you look to fund that? Obviously, part of the issue is — the reason you’re disposing is because you’re capital constrained wanting to bring down leverage, obviously, to call the option would require you to have capital inflow. Just wonder what your thought process are on duration of that call option and on the ability to buy it back?
Rolf Buch
So the duration is actually between five and 10 years, and then there’s an extra 15 years, so a long-term way to go. And we — it’s our own choice, if we call. And I think this is for the next 15 years, and we will see where the market is in the next 15 years. But it is our right to call after year five whenever we want.
Philip Grosse
And to be precise, after year ’15, there is a step-up to the 8.3%. The call option has no end date. So it’s permanent equity. And your question is the same as to how we would fund the share buyback essentially, which we undertake in some time in the future.
Paul May
Thanks very much.
Operator
The next question comes from the line of Andres Toome with Green Street. Please go ahead.
Andres Toome
Hi, good afternoon. I had a few questions, I’ll just go one-by-one as usual. Firstly, about just Mietspiegel print. And when do you think — or when is the majority of those kicking into your actual in-place rents? There’s some tick up in the first quarter, but presumably, it’s more back loaded to the year.
Rolf Buch
Yes, there’s actually two effects. So the Mietspiegel are not coming out in one specific months. They’re coming out every month, as coming out of Mietspiegel, then of course, it depends on the size of the portfolio, which is just impacted by this Mietspiegel. And then there is some additional rules in the German rent regulation, which actually does not immediately allow us, in all cases, to imply the new Mietspiegel.
So the kicking in, if you are asking about the impact on EBITDA and FFO, it’s always a little bit of a delay. But we cannot say just three months. So this depends on the buildings. It depends on the size of the Mietspiegel relevant to our portfolio. And — but the second effect on the Mietspiegel, as we have said, is that the discounted cash flow actually is increased, and this is, of course, an immediate effect if the Mietspiegel is approved. And to keep you…
Andres Toome
And that will be in your valuation?
Rolf Buch
Yes. So in the valuation, the impact is immediately at the moment as a new Mietspiegel is in place. In the cash flow, there might be a different delay. So what is actually technically happening, we are sending out — and the new Mietspiegel comes, we are sending out for the tenants, which are existing tenants, we are sending out the new rent builds. But this is couple concern for [Indiscernible], so there is a maximum increase in 15 months.
So if, for example, we have sent out a letter 12 months ago, then we have to wait three months or this is little bit longer. This is one effect. And the next one is we have done modernization. We have to wait longer. In the end, you see the impact that last year, we have seen a 1% rental growth from this effect, and now we are seeing 2% on the whole portfolio. So the speed will double.
Andres Toome
Okay. And then my second question was around politics and just to get an idea if you see anything positive from the new Berlin State Government and the CDU mayor?
Rolf Buch
It’s definitely very positive because the left-party which wanted to nationalize us is now out of the government. So this is, of course, a much more rational government which acknowledge that they cannot handle the challenges in the city without actually you. It’s not without Vonovia, but it’s actually your money. And I think this is good news. So — and on top of it, they have actually changed the nationalization by an objective to buy back portfolios, which is the market-driven approach if you want to own more assets. So I think we are coming now back to a rational housing policy also in the State of Berlin.
Andres Toome
And my last question was just around currency exposure to foreign currency and Swedish krona in particular, which has moved quite a lot in the last year. How do you hedge that exposure both through your P&L and then also on the value side? How much of that is sort of naturally hedged versus financially?
Philip Grosse
We have no currency hedges. We have some natural hedge, if you will, on the financing side as we do have — not all, but the majority of the financing of our Swedish business, the Swedish banks and also some smaller Swedish bonds.
Andres Toome
So the LTV ratio there would be something in line with Vonovia’s average or something higher?
Philip Grosse
I need to come back on that. I don’t have — I mean it’s significantly lower. That’s for sure, if I look at the Swedish financing stand-alone because part of the financing of our Swedish portfolio is done on the group level. But we don’t have — we are not allocating our financing sources to our German Swedish/Austrian business. It’s not how we manage our financing.
Andres Toome
Okay, understood. Thank you very much. That’s it from me.
Operator
The next question comes from the line of Thomas Rothaeusler from Deutsche Bank. Please go ahead.
Thomas Rothaeusler
Hi, good afternoon. A few questions, the first is actually on transaction markets and disposals. I mean you view the CBRE deal as a sign of recovery of investment markets, as I understand. So if this is the case, could you provide any color on the chance to sign for the disposals? And do you see any chance for straight asset deals, let’s say, selling average product, let’s say, at book value or around book value in the current environment? And also, would you be willing to exceed the EUR2 billion disposal target at these pricing levels?
Rolf Buch
So Rothaeusler, we will start very clear to your last question. I think we should deliver the EUR2 billion first, and then we should talk about new targets. As Philip has said, we are aware that having a lower leverage is better. So we definitely — I think even if we’re fixing new targets, we will definitely not stop at the EUR2 billion. But before we’re coming out, now there’s an official target of about more than EUR2 billion, let’s deliver the EUR2 billion first. And then we talk again. But we are willing to deliver above the EUR2 billion target to be very clear, but we do not come out with a new target.
The second is, you know we have a portfolio sorting. We have portfolios which are for sale and others, which are to hold. So the traditional, what you call traditional, I would interpret that this is our assets where we have significant rental uplift potential and where we have significant potential to do energetic modernization. This is, of course, our lower priority to be sold. There’s only one exception where we are ready to sell also this type of assets. This is for municipalities for obvious reasons. So we’re trying to sell according to our portfolio strategy and there’s still enough to sell.
And I think I’ve explained it in detail on the — six weeks ago in the year-end call. So there is a health care, there is a nursing home — there is a nursing home business. There is some commercial assets. There is municipality. So all this is still in place, and we are going on, on this route. And normal traditional assets, we are in general are willing to sell to municipalities.
Thomas Rothaeusler
Okay. The second question is actually on your earnings guidance. I mean you have a rather wide range, as I understand, to consider more volatile recurring sales and development business. Would you say you need a recovery of both segments in order to be safe on the full year guidance?
Philip Grosse
Very — broadly speaking, Thomas, the higher end certainly requires some improvement in our disposal driven contributions to EBITDA and Group FFO. So development to sell and privatization business. The lower end is essentially the case for more or less debt market in Germany on the disposal side.
Thomas Rothaeusler
The last question is actually on rental growth. I mean, you drove more upbeat on market rental growth recently. Have you seen any recent data points confirming the upside? Any color here would be helpful. Any new Mietspiegel examples, maybe?
Rolf Buch
So it’s only six weeks ago that we have been our yet as we have discussed. And in the last 6 weeks, I think there is no meaningful Mietspiegel coming out to be very precise. If — the Berlin Mietspiegel will come out very soon. If this Mietspiegel will not come out until end of May, legally, we are allowed to apply the comparable apartment rule. So this would be, of course, still very much to reflect in how we would react on discussion, but the Mietspiegel has to come out very soon. Otherwise, there is no Mietspiegel in Berlin.
Thomas Rothaeusler
So just a follow-up on that. I mean you would be allowed to apply the comparable apartment rule if the Mietspiegel is not published by the end of the month?
Rolf Buch
Yes.
Thomas Rothaeusler
Okay, thanks.
Operator
The next question comes from the line of Jochen Schmitt with Metzler. Please go ahead.
Jochen Schmitt
Thank you. Good afternoon. I have two questions, please. Firstly, on the Sudewo transaction, you said that the acquiring parties would receive above pro rata dividend rights, would you mind giving any percentage figure here, for example, in terms of Sudewo’s payout ratio, which the minority shareholders are eligible to? That’s my first question.
Philip Grosse
It’s somewhat inverted to the ownership quota of 30%.
Jochen Schmitt
Thank you. Second question on the disposal, which you announced today. Could you be a bit more precise on transaction costs and taxes involved in the sale? Are these brokerage and advisory costs and which type of taxes you referred to? Thank you.
Rolf Buch
I think it’s all different type. The majority of the tax is actually the tax because we are not — the tax balance sheet is not the same like our IFRS balance sheet and there’s a difference in between. So even if we are selling for IFRS book value part of this is taxable, especially if you own land for a longer time.
Jochen Schmitt
Thank you.
Operator
The next question comes from the line of Kai Klose with Berenberg. Please go ahead.
Kai Klose
Yes, good afternoon. I’ve got two quick questions on the results. The first one is on the adjusted EBITDA in the care segment, where we saw quite a strong fall in the profitability and EBITDA decrease. Could you give a bit more color on that? And if the increase in the operating costs compared to Q1 last year — do we expect it will continue for the remaining of the year? And the last question is on the cash tax rate or the applied cash tax rate in the Group FFO calculation. It was higher compared to Q1 last year. Is this a trend? What is the level of Q1, a good proxy for the full-year? Thanks.
Philip Grosse
Yes. On the nursing biz, again, there is some distortion because in Q1 last year, we have seen some compensation as a result of Corona, point one. Point two is that we are struggling in the nursing business to get the respective personnel. And that is a drag on occupancy levels because legally, we are required to have a certain number of employees corresponding to a certain number of elderly people. So occupancy rates have come down by 5 percentage points, approximately from 95% to 90%.
And the last point is that we see some cost inflation that, however, is only a phasing effect because that will be compensated. However, with the time delay by long-term care insurance and that cost increases is because of a higher wages and the higher energy costs predominantly. Those are the three drivers. Sorry, and the second question, Kai?
Kai Klose
Was on the applied tax rate — cash tax rate in the FFO calculation, which was, I think, 100 — from 100 basis points higher, compared to Q1 last year. Is this a number — the number of Q1 is a good proxy for the full-year?
Philip Grosse
Look, I mean this is always very, very much depending in particular, on the disposal business. If I look at the tax rate of our rental business, I think we are at around 6%, measured by our respective revenues. In the disposal business, it really depends on the product we are selling for how long and at what depreciated tax book values that has been accounted for. So this is very, very difficult to give you a firmed up guidance on that.
Kai Klose
Alright. Thanks.
Operator
[Operator Instructions] The next question comes from the line of Neeraj Kumar with Barclays. No, sorry, she withdrew the question. We have now Paul Roche from [Indiscernible]. Please go ahead.
Unidentified Analyst
Just a question on my side. On the Sudewo transaction, is there a debt on the portfolio? And if yes, is the level comparable to Vonovia LTV?
Philip Grosse
It is debt-free, essentially debt-free.
Operator
Ladies and gentlemen, there are no further questions. And I hand back to Rene for closing comments.
Rene Hoffmann
Thank you, Andre, and thanks, everyone, for joining. As always, this obviously was just the start of our engagement after the results. We’ll be on the road quite a bit over the next days and weeks with quite some road show dates and conferences that we will be attending. We hope to see many of you live or at least on screen, and you will find a list of events on page 52 of this presentation and, of course, always online on our website. As always, in case of questions, please do reach out to me or my colleagues. That’s it from us for today. Stay safe, happy and healthy and see you soon. Bye-bye.
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