29 Financial Assets

Financial Assets

	Dec. 31, 2020		Dec. 31, 2021
in € million	non-current	current	non-current	current

Non-consolidated subsidiaries	1.5	–	2.4	–
Other investments	309.7	–	374.6	–
Loans to other investments	33.3	–	33.2	–
Securities	4.9	–	5.2	–
Other non-current loans	11.3	–	511.8	563.1
Receivables from finance leases	–	–	23.7	–
Other current financial receivables from financial transactions	–	–	–	499.6
Derivatives	22.4	0.4	65.8	0.6
	383.1	0.4	1,016.7	1,063.3

Accounting Policies

Financial assets are recognized in the balance sheet when Vonovia becomes a contracting party of the financial instrument. A financial asset is derecognized when the contractual rights to the cash flows from a financial asset expire, or the financial asset is transferred and Vonovia neither retains control nor retains material risks and rewards associated with ownership of the financial asset.

In accordance with IFRS 9, the classification of financial assets takes into account both the business model in which financial assets are held and the characteristics of the cash flows of the assets in question. These criteria determine whether the assets are measured at amortized cost using the effective interest method or at fair value.

With regard to the business model criterion, all financial investments at Vonovia are to be assigned to the “hold to collect” model pursuant to IFRS 9.4.1.2(a). Whenever financial investments are categorized as equity instruments, Vonovia has exercised the irrevocable option to state future changes to the fair value in other comprehensive income in equity. Gains and losses recognized in other comprehensive income are never reclassified from total equity to the income statement on their disposal.

The carrying amount of financial assets corresponds to maximum risk of loss as of the reporting date.

Other investments comprise the Vesteda Residential Fund FGR, Amsterdam, in the amount of € 193.5 million (Dec. 31, 2020: € 160.2 million) and OPPCI JUNO, Paris, in the amount of € 109.7 million (Dec. 31, 2020: € 110.7 million).

The loans to other investments not yet due relate to a loan to the property fund DB Immobilienfonds 11 Spree-Schlange von Quistorp KG.

The increase in other non-current loans is connected, on the one hand, with the takeover of a Lombard loan in the amount of some € 250 million, which was issued to Aggregate Holdings S.A. by a banking consortium in the period until October 7, 2021 and that is secured by means of 26.6% of shares in the Adler Group.

Vonovia also concluded a call option for 13.3% of the shares in Adler-Group S.A. with a term of eighteen months with Aggregate Holding.

As the two transactions are linked economically and depend on each other, they are considered as a linked transaction in accordance with IFRS.

There was a positive fair value of € 20.2 million for the call option at the time of addition. The fair value of the Lombard loan granted therefore came to € 229.8 million.

In line with the IFRS 9 classification model, subsequent measurement was at fair value through profit and loss for the call option and at amortized cost for the Lombard loan. The conditions required under IFRS 9 for measuring the loan at amortized cost were sufficiently checked and fulfilled by means of the “Business Model Test” and the “SPPI test.”

As of December 31, 2021 the subsequent measurement of the call option results in positive net interest from the valuation of € 6.1 million. The positive fair value of this option is recognized under derivatives in the amount of € 26.3 million.

Amortization within net interest of € +3.3 million was applied to the Lombard loan based on the amortized cost approach using the effective interest method. In addition, and in line with IFRS 9.5.5, as of the reporting date the lifetime expected credit losses (ECL) of € 15.9 million were recognized affecting net income within impairment losses on financial assets. The expected credit losses were calculated in accordance with the IFRS 9 general approach. As there was no significant increase in credit risk as of the reporting date, the calculations were performed on the basis of a twelve-month probability of default in line with IFRS 7.35M. Subsequently, the criterion of a significant increase in credit risk pursuant to IFRS 9.5.5.7. will be reviewed on every reporting date. As of the reporting date, the Lombard loan was therefore recognized in the amount of € 217.2 million.

On the other hand the non-current loans include loan receivables from the QUARTERBACK Immobilien Group based on standard market conditions in the amount of € 261.8 million.

The majority of other non-current loans are held with the QUARTERBACK Immobilien Group as the counterparty.

The expected credit losses for the loans granted to the QUARTERBACK Immobilien Group totaling € 806.5 million were calculated based on the general approach under IFRS 9. These credit losses were not recognized in the balance sheet as they are not considered to be material.

The loans generally include a risk concentration. As there was no significant increase in credit risk as of the reporting date, the calculations were performed on the basis of a twelve-month probability of default in accordance with IFRS 7.35M. As a result, these loans are recognized at their face value as of the reporting date.

The receivables from finance leases were added to the Group as part of the acquisition of Deutsche Wohnen. Receivables from the letting of certain broadband cable networks totaled € 23.7 million as of the reporting date, with interest income of € 0.3 million. The debt maturity profile of the receivables is as follows:

Debt maturity profile of receivables from finanace leases

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

Nominal value of outstanding lease payments	–	28.2
thereof due within one year	–	–
thereof due between one and two years	–	3.5
thereof due between two and three years	–	3.6
thereof due between three and four years	–	3.0
thereof due between four and five years	–	3.0
thereof due after more than five years	–	15.1
plus unguaranteed residual values	–	0.2
less unrealized financial income	–	-4.7
Present value of outstanding lease payments	–	23.7

Other non-current financial receivables from financial transactions include time deposits and short-term financial investments in highly liquid money market funds that have an original term of more than three months.

In addition to the call option, non-current derivatives include positive market values from cross currency swaps in the amount of € 35.2 million (Dec. 31, 2020: € 18.4 million), together with positive market values in the amount of € 4.3 million (Dec. 31, 2020: € 4.0 million) from other interest rate derivatives. Due to the high prepayment fees, embedded derivatives from loan termination rights were no longer recognized as of the reporting date. The positive fair value of the previous year in the amount of € 3.6 million was derecognized accordingly in profit or loss.

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)