Economic Development of Vonovia SE

(Reporting on the basis of the German Commercial Code [HGB])

Fundamental Information

Vonovia SE has been entered in the commercial register of Bochum Local Court under HRB 16879 since 2017. Vonovia SE was established as Deutsche Annington Immobilien GmbH on June 17, 1998, with its registered headquarters in Frankfurt am Main, to serve as an acquisition vehicle for the purchase of residential properties by financial investors. Following further successful acquisitions over the course of time, it now forms the Vonovia Group together with its subsidiaries and is one of the leading German, Austrian and Swedish residential real estate management companies. Following the successful integration of the BUWOG Group, Vonovia also ranks among the leading real estate developers in Germany and is the market leader in Austria.

Vonovia SE performs the function of the management holding company within the Vonovia Group. In this role, it is responsible for determining and pursuing the overall strategy and for implementing this strategy by setting the company’s goals. It performs property management, project development, financing, service and coordination tasks for the Group. Furthermore, it is responsible for the management, control and monitoring system as well as risk management. To carry out these management functions, Vonovia SE also maintains service companies to which it has outsourced selected functions, allowing it to realize corresponding harmonization and standardization effects, as well as economies of scale.

The description of the company’s net assets, financial position and results of operations is based largely on the reporting of the Vonovia Group. The net assets, financial position and results of operations of Vonovia SE as the management holding company are ultimately determined by the assets of the Group companies and their ability to make sustainable positive contributions to earnings and generate positive cash flows. The company’s risk profile is therefore largely the same as the Group’s.

The preceding reporting for the Group of Vonovia SE therefore also expresses the company’s position.

The Vonovia SE annual financial statements have been prepared in accordance with the provisions of the German Commercial Code (HGB) taking into account the supplementary regulations of the German Stock Corporation Act (AktG). As a listed company, Vonovia SE is classed as a large corporation.

The annual and consolidated financial statements as well as the combined management report are published in the Federal Gazette (Bundesanzeiger).

Development of Business in 2021

Vonovia SE’s 2021 fiscal year was also dominated by the coronavirus pandemic. The top priority for Vonovia SE, as the Group parent company, was to implement the coronavirus protection measures for the employees and customers of the Vonovia Group and to maintain its business operations.

The 2021 fiscal year was also dominated by the public takeover offer made to the shareholders of Deutsche Wohnen SE to acquire the majority of its shares as well as related equity and debt capital measures. As a result of the takeover procedure, as well as purchases on the stock market and based on bilateral agreements, Vonovia SE holds 87.6% of the shares in Deutsche Wohnen SE as of December 31, 2021. This means that Vonovia holds a majority stake in, and is the controlling entity of, Deutsche Wohnen SE in accordance with the German Stock Corporation Act (AktG); Deutsche Wohnen SE is a majority-owned dependent company of Vonovia SE.

Vonovia SE increased its total equity by means of a capital increase with subscription rights in the amount of € 8,080.5 million upon entry in the commercial register on December 2, 2021. Vonovia SE also increased its total equity by € 470.3 million by means of a scrip dividend.

In 2021, Vonovia issued bonds in the amount of € 9 billion to finance the public takeover offer.

Vonovia has a BBB+ rating awarded by the rating agency Standard & Poor’s, an A3 rating awarded by Moody’s and an A- rating awarded by the European rating agency Scope.

Vonovia held its Annual General Meeting as a virtual event on April 16, 2021 due to the pandemic. A virtual Annual General Meeting is once again planned for 2022.

Results of Operations of Vonovia SE

The company regularly generates income from the charging of the services it provides, from income from investments in the form of dividend distributions from Group companies and income from the transfer of profits. Profit-and-loss transfer agreements exist with, among other entities, the service companies, which themselves generate income by charging the real estate companies for the services they have provided.

The income from investments collected is based on the net profit of the subsidiaries that is eligible for distribution, which is, in turn, calculated based on the accounting standards set out in the German Commercial Code. The main difference between these standards and the IFRS accounting principles lies in the fact that, under IFRS accounting, the fair value principle has more of an impact than the cost principle does under HGB accounting.

In the consolidated financial statements under IFRS, the properties are remeasured at periodic intervals. Under HGB, the fixed assets are stated at amortized cost, taking depreciation into account. The capitalization regulations in particular also vary.

Expenses relate largely to personnel and administrative expenses associated with the management holding function, as well as to losses to be compensated for in connection with profit-and-loss transfer agreements.

The financial result is governed by the Group financing and was dominated in 2021 by the financing of the takeover offer to acquire the majority of the shares in Deutsche Wohnen SE.

Business development in 2021 and, consequently, the result for the year are influenced to a significant degree by special effects relating to the public takeover offer to acquire a majority stake in Deutsche Wohnen SE. These include, in particular, consultancy costs and fees in connection with the financing measures as well as the equity increase. By contrast, the previous year of 2020 saw virtually no significant non-recurring items with regard to operating expenses.

Revenue and other operating income fell by € 26.9 million in total. Revenues was down by € 15.2 million, mainly due to lower income from handling business for other companies, and other operating income also fell, primarily due to lower repayment waivers.

Purchased services, as a key component of the cost of materials, fell by € 7.0 million due to lower externally purchased services.

Personnel expenses came to € 31.3 million in 2021 as against € 38.4 million in 2020 due to lower allocations to the long-term incentive program.

The other administrative expenses recognized in other operating expenses come to around € 120 million in the 2021 fiscal year after adjustments to reflect the main special effects relating to the acquisition of the majority stake in Deutsche Wohnen SE, down slightly by around € 2.6 million in a year-on-year comparison.

The special effects in other operating expenses amount to around € 303 million. They mainly relate to expenses in connection with the financing measures as well as the capital increase.

Net financial expenses rose by € 51.2 million in total. Interest expenses of € 46.1 million due to the increase in debt financing made a considerable contribution to this trend. Net interest expenses vis-à-vis affiliated companies increased by € 5.0 million in total. This means that the increase in net financial expenses is due to volume-related and structural factors.

At € 172.9 million, income from investments in the 2021 fiscal year is € 48.6 million lower than in the 2020 fiscal year, when it came to € 221.4 million. Income from investments include € 9.9 million in Deutsche Wohnen SE dividends.

All in all, the net contribution to earnings made by profit and loss transfers fell by € 60.1 million. While the losses assumed fell considerably, by € 43.3 million to € 5.3 million, profit transfers also fell, by € 103.5 million. The prior-year figures were influenced by internal company law measures and special effects.

Tax expense in 2021 amounts to € 61.8 million as against € 12.5 million in the previous year, with € 4.6 million of the taxes reported for the fiscal year relating to previous years and € 57.27 million relating to deferred taxes. As the controlling company in a VAT group, Vonovia SE owes the corresponding income taxes.

Vonovia SE closed the 2021 fiscal year with a net loss of € 544,825,598.94 (2020: € 53,522,768.55).

After offsetting this loss for the year against the profit carried forward from the previous year of € 43,650,464.69, the Management Board withdrew a further € 1,826,175,134.25 from capital reserves, resulting in a net profit for the 2021 fiscal year of € 1,325,000,000.00.

The Management Board and the Supervisory Board propose to the Annual General Meeting that, of the profit of Vonovia SE as of December 31, 2021 of € 1,325,000,000.00, an amount of € 1,289,151,665.74 on the 776,597,389 shares of the share capital as of December 31, 2021 (corresponding to € 1.66 per share) be paid as a dividend to the shareholders, and that the remaining amount of € 35,848,334.26 be carried forward to the new account or be used for other dividends on shares carrying dividend rights at the time of the Annual General Meeting and which go beyond those as of December 31, 2021.

As in the 2018, 2019 and 2020 fiscal years, the dividend for the 2021 fiscal year, payable after the Annual General Meeting in April 2022, will again include the option of a non-cash dividend in shares, to the extent that the Management Board and the Supervisory Board consider this to be in the interests of the company and its shareholders.”

Income Statement

Vonovia SE – Income Statement

in € million	2020	2021

Revenues	181.3	166.2
Other operating income	51.6	39.8
Cost of purchased services	-80.2	-73.2
Personnel expenses	-38.4	-31.3
Other administrative expenses	-169.7	-497.7
Loss (profit) before financial result and tax	-55.4	-396.2
Income from profit transfer	256.5	153.1
Income from investments	13.5	25.1
Income from other non-current securities and non-current loans	–	18.9
Interest and similar income	22.1	16.1
Expense from the assumption of losses	-48.6	-5.3
Interest and similar expense	-229.1	-294.7
Financial result	14.4	-86.8
Tax	-12.5	-61.8
Net loss	-53.5	-544.8

Net Assets and Financial Position of Vonovia SE

The company’s asset position is characterized by the acquisition of a majority stake in Deutsche Wohnen SE, on the one hand due to the increase in shares in affiliated companies and on the other due to the increase in equity and debt capital.

The company’s non-current assets in the amount of € 39,965.4 million (previous year: € 20,626.5 million) are largely characterized by non-current financial assets in the amount of € 39,936.8 million (previous year: € 20,596.1 million). The increase in non-current financial assets in the 2021 fiscal year is due primarily to the increase in shares in affiliated companies of € 18,339.8 million due to the acquisition of shares in Deutsche Wohnen SE and the reclassification of Group financing in the amount of € 989.4 million, particularly in the real estate development segment, due to the long-term provision of financial resources.

The company’s intangible assets and tangible fixed assets fell overall due to depreciation and amortization in the normal course of business.

Net current assets (current assets less liabilities, prepaid expenses and deferred income) including cash and cash equivalents are governed by the Group financing structure, in which Vonovia SE assumes the function of the cash pool leader. Net current assets improved by € 1,177.1 million in favor of Vonovia SE in the 2021 fiscal year, with € 799.2 million of this improvement resulting from short-term investments of excess liquidity relating to the financing measures connected to the takeover offer.

The Group’s net lending/borrowing position, which comprises receivables from and liabilities to affiliated companies as well as company loans resulting from the Group financing activity, developed by a total of € 1,498.5 million in Vonovia SE’s favor in 2021.

The issue of bonds in the amount of € 9,600.0 million and the funds borrowed from banks increased Vonovia SE’s debt financing to € 14,641.1 million as of December 31, 2021 (previous year: € 1,257.7 million).

Provisions came to € 193.3 million at the end of the year (previous year: € 167.4 million), with € 84.8 million attributable to provisions for pensions (previous year: € 74.2 million) and € 35.5 million attributable to provisions for income taxes (previous year: € 32.9 million). Other provisions rose by a total of € 12.6 million as against December 31, 2020. The increase is due, on the one hand, to the allocation of a risk provision in connection with the recoverability guarantees vis-à-vis Vonovia Finance B.V., while on the other, the provision for the long-term incentive program was reduced.

Total equity increased again in the 2021 fiscal year to € 17,775.2 million due to the offer of the scrip dividend and the capital increase with subscription rights totaling € 8.1 billion. The cash dividend distribution in 2021 and the net loss for the year had the opposite effect of reducing total equity.

Assets

Vonovia SE Assets

in € million	Dec. 31, 2020	Dec. 31, 2021	in € million	Dec. 31, 2020	Dec. 31, 2021

Assets			Equity and liabilities
Financial assets	20,596.1	39,936.8	Equity	10,725.6	17,775.2
Other assets	30.4	28.6	Provisions	167.4	193.3
Receivables from affiliated companies	4,934.2	4,469.6	Loans	–	9,600.0
Other receivables and assets	26.2	67.1	Liabilities to banks	1,257.7	5,041.1
Securities	–	549.2	Liabilities to affiliated companies	13,616.2	12,642.4
Cash and cash equivalents	190.8	356.6	Other liabilities	10.8	155.9
Total assets	25,777.7	45,407.9	Total equity and liabilities	25,777.7	45,407.9

Cash flow from operating activities is characterized by the income and expenses relating to the performance of the management holding functions. Vonovia SE only has appreciable cash flows from investing activities when acquisitions are made. Cash flows from financing activities regularly result from changes in Group financing and from the borrowing/repayment of debt financing following the assumption of the primary Group financing function from Vonovia Finance B.V.

Employees of Vonovia SE

At the end of the 2021 fiscal year, an average of 160 people were employed at the company (2020: 161), 126 of whom were full-time employees and 34 of whom were part-time.

Opportunities and Risks for Vonovia SE

The likely development of Vonovia SE in the 2022 fiscal year depends to a considerable extent on the development of the Group as a whole and its opportunity and risk situation. This situation is set out in the Group’s opportunity and risk report, meaning that the statements set out there in regard to the opportunity and risk situation of the Group also apply to the annual financial statements of Vonovia SE prepared in accordance with German commercial law, where the risks can have an impact on the valuation of long-term financial assets and on the amount of the results of subsidiaries collected/compensated for.

Forecast for Vonovia SE

Since the company’s net assets, financial position and results of operations are determined solely by the ability of the Group companies to make positive earnings contributions and generate positive cash flows in the long term, we refer at this point to the Forecast Report for the Group. The most important financial performance indicator for the annual financial statements of Vonovia SE is the annual result.

The company’s result for 2021 is characterized primarily by the special effects from the acquisition and its financing, which played much less of a role in 2020. Without taking these special effects into account, the net loss for 2021 runs into the mid-double-digit millions, on par with the level seen in previous years, in line with the forecast.

The results for the 2022 fiscal year will in turn be characterized by the results of subsidiaries collected/compensated for on the basis of income from investments and profit-and-loss transfer agreements, income from services, personnel and administrative expenses and the financial result.

All in all, we expect the company’s result for the 2022 fiscal year to again be on a par with the figure seen in the previous years without special effects.

Vonovia plans to distribute a dividend of € 1.66 per share to the shareholders for the 2021 fiscal year. In principle, this is consistently aligned with the company’s established policy of distributing around 70% of its Group FFO, albeit taking into account the contribution made by the Deutsche Wohnen Group for the 2021 fiscal year.

Statement of the Management Board on the Economic Situation

The net assets, financial position and results of operations of the company are extremely positive, particularly given the solid financing, the resulting balanced maturity profile and the financing flexibility gained through the rating-backed bond financing with a view to both organic and external growth. The ongoing improvements to the property management processes, the expansion of the Value-add segment, Recurring Sales and a successful development business promote ongoing improvement in profitability. Developments in Germany are complemented by equally positive developments in Sweden and Austria.

Adjusted EBITDA Development

The Adjusted EBITDA Development includes the gross profit from the development activities of “to sell” projects (income from sold development projects less production costs) and the gross profit from the development activities of “to hold” projects (fair value of the units developed for the company’s own portfolio less incurred production costs) less the operating expenses from the Development segment.

Adjusted EBITDA Deutsche Wohnen

The Adjusted EBITDA Deutsche Wohnen is calculated by deducting the operating expenses of the Deutsche Wohnen segment and the carrying amount of properties sold from the segment revenue of the Deutsche Wohnen Group.

Adjusted EBITDA Recurring Sales

The Adjusted EBITDA Recurring Sales compares the proceeds generated from the privatization business with the fair values of assets sold and also deducts the related costs of sale. In order to disclose profit and revenue in the period in which they are incurred and to report a sales margin, the fair value of properties sold, valued in accordance with IFRS 5, has to be adjusted to reflect realized/unrealized changes in value.

Adjusted EBITDA Rental

The Adjusted EBITDA Rental is calculated by deducting the operating expenses of the Rental segment and the expenses for maintenance in the Rental segment from the Group’s rental income.

Adjusted EBITDA Total

Adjusted EBITDA Total is the result before interest, taxes, depreciation and amortization (including income from other operational investments and intragroup profits) adjusted for effects that do not relate to the period, recur irregularly and that are atypical for business operation, and for net income from fair value adjustments to investment properties. These non-recurring items include the development of new fields of business and business processes, acquisition projects, expenses for refinancing and equity increases (where not treated as capital procurement costs), IPO preparation costs and expenses for pre-retirement part-time work arrangements and severance payments. The Adjusted EBITDA Total is derived from the sum of the Adjusted EBITDA Rental, Adjusted EBITDA Value-add, Adjusted EBITDA Recurring Sales, Adjusted EBITDA Development and Adjusted EBITDA Deutsche Wohnen.

Adjusted EBITDA Value-add

The Adjusted EBITDA Value-add is calculated by deducting operating expenses from the segment’s income.

COSO

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a private-sector U.S. organization. It was founded in 1985. In 1992, COSO published the COSO model, an SEC-recognized standard for internal controls. This provided a basis for the documentation, analysis and design of internal control systems. In 2004, the model was further developed and the COSO Enterprise Risk Management (ERM) Framework was published. Since then, it has been used to structure and develop risk management systems.

Covenants

Requirements specified in loan agreements or bond conditions containing future obligations of the borrower or the bond obligor to meet specific requirements or to refrain from undertaking certain activities.

EPRA Key Figures

For information on the EPRA key figures, we refer to the chapter on segment reporting according to EPRA.

EPRA NTA

The presentation of the NTA based on the EPRA definition aims to show the net asset value in a long-term business model. NTA stands for Net Tangible Assets. The equity attributable to Vonovia’s shareholders is adjusted by deferred taxes, real estate transfer tax and other purchasers’ costs in relation to the existing portfolio and the fair value of derivative financial instruments after taking deferred taxes into account. Stated goodwill and other intangible assets are also deducted.

European Public Real Estate Association (EPRA)

The European Public Real Estate Association (EPRA) is a non-profit organization that has its registered headquarters in Brussels and represents the interests of listed European real estate companies. Its mission is to raise awareness of European listed real estate companies as a potential investment destination that offers an alternative to conventional investments. EPRA is a registered trademark of the European Public Real Estate Association.

European Public Real Estate Association (EPRA)

Fair Value

Fair value is particularly relevant with regard to valuation in accordance with IAS 40 in conjunction with IFRS 13. The fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

Fair Value

GAV

The Gross Asset Value (GAV) of the recognized real estate investments. This consists of the owner-occupied properties, the investment properties including development to hold, the assets held for sale and the development to sell area. In the latter, both residential properties for which a purchase contract has been signed and those with the intention to sell – i.e., a purchase contract has not yet been signed – are included.

GAV

Group FFO

Group FFO reflects the recurring earnings from the operating business. In addition to the adjusted EBITDA for the Rental, Value-add, Recurring Sales and Development segments, Group FFO allows for recurring current net interest expenses from non-derivative financial instruments as well as current income taxes. This key figure is not determined on the basis of any specific international reporting standard but is to be regarded as a supplement to other performance indicators determined in accordance with IFRS.

Maintenance

Maintenance covers the measures that are necessary to ensure that the property can continue to be used as intended over its useful life and that eliminate structural and other defects caused by wear and tear, age and weathering effects.

Maintenance

Vacancy Rate

The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.

Vacancy Rate

The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.

Vacancy Rate

The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.

Vacancy Rate

The vacancy rate is the number of empty units as a percentage of the total units owned by the company. The vacant units are counted at the end of each month.

LTV Ratio (Loan-to-Value Ratio)

The LTV ratio shows the extent to which financial liabilities are covered. It shows the ratio of non-derivative financial liabilities pursuant to IFRS, less foreign exchange rate effects, cash and cash equivalents less advance payments received by Development (period-related), receivables from disposals, plus purchase prices for outstanding acquisitions to the total fair values of the real estate portfolio, fair values of the projects/land currently under construction as well as receivables from the sale of real estate inventories (period-related) plus the fair values of outstanding acquisitions and investments in other real estate companies.

Rental Income

Rental income refers to the current gross income for rented units as agreed in the corresponding lease agreements before the deduction of non-transferable ancillary costs. The rental income from the Austrian property portfolio additionally includes maintenance and improvement contributions (EVB). The rental income from the portfolio in Sweden reflects inclusive rents, meaning that the amounts contain operating and heating costs.

Rental Income

Modernization Measures

Modernization measures are long-term and sustainable value-enhancing investments in housing and building stocks. Energy-efficient refurbishments generally involve improvements to the building shell and communal areas as well as the heat and electricity supply systems. Typical examples are the installation of heating systems, the renovation of balconies and the retrofitting of prefabricated balconies as well as the implementation of energy-saving projects, such as the installation of double-glazed windows and heat insulation, e.g., facade insulation, insulation of the top story ceilings and basement ceilings. In addition to modernization of the apartment electrics, the refurbishment work upgrades the apartments, typically through the installation of modern and/or accessible bathrooms, the installation of new doors and the laying of high-quality and non-slip flooring. Where required, the floor plans are altered to meet changed housing needs.

Modernization Measures

Monthly In-place Rent

The monthly in-place rent is measured in euros per square meter and is the current gross rental income per month for rented units as agreed in the corresponding rent agreements at the end of the relevant month before deduction of non-transferable ancillary costs divided by the living area of the rented units. The rental income from the Austrian property portfolio additionally includes maintenance and improvement contributions (EVB). The rental income from the portfolio in Sweden reflects inclusive rents, meaning that the amounts contain operating and heating costs.

The in-place rent is often referred to as the “Nettokaltmiete” (net rent excl. ancillary costs such as heating, etc.). The monthly in-place rent (in € per square meter) on a like-forlike basis refers to the monthly in-place rent for the residential portfolio that was already held by Vonovia 12 months previously, i.e., portfolio changes during this period are not included in the calculation of the in-place rent on a like-forlike basis. If we also include the increase in rent due to new construction measures and measures to add extra stories, then we arrive at the organic increase in rent.

Monthly In-place Rent

Sustainability Performance Index (SPI)

Index to measure non-financial performance. Vonovia’s sustainable activities are geared towards the top sustainability topics that we have identified, which are bundled in the Sustainability Performance Index. The Customer Satisfaction Index (CSI) is included in the calculation of the Sustainability Performance Index. The CSI is determined at regular intervals in systematic customer surveys conducted by an external service provider and shows the effectiveness and sustainability of our services for the customer. Other indicators used in the Sustainability Performance Index are the carbon savings achieved annually in housing stock, the energy efficiency of new buildings, the share of accessible (partial) modernization measures in relation to newly let apartments, the increase in employee satisfaction and diversity in the company’s top management team.

Sustainability Performance Index (SPI)

Non-core Disposals

We also report on the Other segment, which is not relevant from a corporate management perspective, in our segment reporting. This includes the sale, only as and when the right opportunities present themselves, of entire buildings or land (Non-core Disposals) that are likely to have below-average development potential in terms of rent growth in the medium term and are located in areas that can be described as peripheral compared with Vonovia’s overall portfolio and in view of future acquisitions.

Rating

Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.

Rating

Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.

Rating

Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.

Rating

Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.

Recurring Sales

The Recurring Sales segment includes the regular and sustainable disposals of individual condominiums from our portfolio. It does not include the sale of entire buildings or land (Non-core Disposals). These properties are only sold as and when the right opportunities present themselves, meaning that the sales do not form part of our operating business within the narrower sense of the term. Therefore, these sales will be reported under “Other” in our segment reporting.

Fair Value Step-up

Fair value step-up is the difference between the income from selling a unit and its current fair value in relation to its fair value. It shows the percentage increase in value for the company on the sale of a unit before further costs of sale.

Fair Value Step-up

Cash-generating Unit (CGU)

The cash-generating unit refers, in connection with the impairment testing of goodwill, to the smallest group of assets that generates cash inflows and outflows independently of the use of other assets or other cash-generating units (CGUs).

Cash-generating Unit (CGU)