Economic prospects in harmony with social responsibility. ANNUAL REPORT

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1 Economic prospects in harmony with social responsibility. ANNUAL REPORT

2 2 3 KWG at a glance facts & figures 31 Dec Dec Change in % Units 5,419 4, % Total lettable space in sqm 311, , % Revenue in EUR million % Net basic rent in EUR million % EBITDA in EUR million % EBIT in EUR million % Operating result in EUR million % Consolidated net profit in EUR million % Total assets in EUR million % Gross financial liabilities in EUR million % Cash in EUR million % Property assets in EUR million % Reported equity in EUR million % Equity ratio in % % NAV per share in EUR % NNNAV per share in EUR % Property assets in EUR/sqm % Loan-to-value in % % KWG'S share 31. DEC German securities identification number ISIN DE Stock exchange symbol BIW Stock exchange Frankfurt, Berlin, Hamburg, Hannover, Munich, Stuttgart, Düsseldorf, XETRA Share capital EUR 10,804,729 Number of shares 10,804,729 Mathematical par value EUR 1,00 Share price performance (January 2011 to March 2012) Corporate bodies of KWG Supervisory Board 140 % 130 % 120 % Prof. Dr. Peer Witten Franz-Josef Gesinn Thies-Martin Brandt (Chairman of the Supervisory Board) (Deputy Chairman of the Supervisory Board) 110 % 100 % Björn Engholm Hans-Michael Porwoll Patrik Zeigherman 90 % 80 % Management Board Stavros Efremidis (Chairman of the Management Board) 70 % 60 % Jan. Feb. March Apr. May June July Aug. Sep. Oct. Nov. Dec. Jan. Feb. March Torsten P. Hoffmann DIMAX* KWGs Share * German property share index, Bankhaus Ellwanger & Geiger KG kwg at a glance kwg at a glance

3 4 5 HIGHLIGHTS table of contents April 2012: Successful capital increase from authorised capital December 2011: Vacancy rate reduced to less than 3 % To our shareholders Page 06 Letter from the Management Board Report of the Supervisory Board Interview with the Management Board KWG s vision KWG s share March 2012: Investment in Barmer Wohnungsbau AG with 1,394 units August 2011: Announcement of record results for the first six months of 2011 Management Report Page 26 Development of business and economic environment Financial position, cash flows and financial performance Events after the reporting period Report on risks and opportunities Anticipated developments April 2011: Earnings per share doubled year on year Page 38 Consolidated statement of financial position Consolidated statement of comprehensive income Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the consolidated financial statements Auditors report Financial calendar / Publishing information Page 82 THEMA / ABSCHNITT / BLINDTEXT

4 7 DEVEloping value for mutual benefit Letter from the Management Board Dear Shareholders, Ladies and Gentlemen, This past financial year was the most successful in the history of KWG. We achieved not just key successes in both operating and strategic terms, we also beat our forecast. Acquiring equity interests in Barmer Wohnungsbau AG has both strengthened our portfolio and further improved KWG s growth prospects. We will build on these successes and thus continue expanding from a stronger position. Let us turn our attention to the performance of KWG during the reporting period: We boosted revenue which corresponds to gross rent to roughly EUR 21.7 million in the 2011 financial year, setting a new record. The revenue from net basic rent rose substantially to EUR 14.8 million from the previous year, developing exponentially in the course of the year. Net rental income in the fourth quarter alone was EUR 4.0 million. Some EUR 16 million in annual net basic rent thus can be extrapolated solely from our performance in the fourth quarter. The profitability of the KWG Group also kept rising. At EUR 11.9 million, earnings before taxes (EBT) were higher than ever before. And net profits of roughly EUR 9.8 million substantially surpassed the previous year s record of EUR 8.6 million. These positive developments show that we are on the right path by optimizing our portfolio and pursuing profitable growth. We lowered the vacancy rate in our core portfolio to 2.7 % as at 31 December 2011, in effect cutting the previous year s figure of 6.4 % by more than one half. We now are in possession of an excellent property portfolio in select micro locations thanks to consistent investments in existing properties. The fact that we invested just under EUR 12.0 million to enhance the value of our portfolio shows that we have made every effort to optimise our properties. That these activities pay off is reflected not just in the consistent reduction of the vacancy rate but also in the substantial increase in income from basic net rent to EUR 14.8 million. At the same time, we have boosted the value of our properties by a total of EUR 20.8 million year on year thanks to modernisation and renovation work. This underscores our motto that we are in the business of developing property values, not managing tangible assets. But we will not rest on our laurels. For one, we plan to further improve our profitability in 2012 and continue optimizing our property portfolio. For another, we plan to continue expanding and thus become one of Germany s premier listed property companies. We have laid the foundation for that by acquiring an equity interest in Barmer Wohnungsbau AG, successfully increasing our capital in the spring of 2012 and optimizing our portfolio. It is the untiring and dedicated work of our staff, to whom we extend our heartfelt thanks, that makes all of this possible in the first place. But our thanks are also due to our business partners and shareholders, whose trust we will strive to earn in the future as well. We will continue to create value and pursue profitable growth in 2011 with your support. Sincerely, Stavros Efremidis Chairman of the Management Board Torsten P. Hoffmann Chief Financial Officer Letter from the Management Board

5 8 9 Report of the Supervisory Board The Supervisory Board s report on its activities in the 2011 financial year follows below. Advising and monitoring the Management Board in a spirit of trusting cooperation The Company s Supervisory Board carried out its duties during the 2011 financial year as required by law and the Company s Articles of Association, and participated in all key decisions in an advisory capacity. It regularly advised the Management Board on its management of the Company and monitored all related management activities. The Supervisory Board was involved, directly and at an early stage, in all decisions material to both the Company and the Group. At four regular meetings (on 23 February, 15 April, 27 June and 25 October), as well as two extraordinary meetings (on 16 May and 30 November), the Supervisory Board discussed the Company s business policies with the Management Board and had the latter brief it on the performance of KWG AG. In that connection, it focused on the Company s financial performance, financial position and cash flows; its ongoing liquidity planning; the implementation of the renovation work at specific locations; and the Company s expansion. Extensive and open exchanges characterise the Supervisory Board s collaboration with the Management Board. The Supervisory Board made all decisions required by law and the Company s Articles of Association. Transactions requiring the Supervisory Board s approval were duly submitted to it by the Management Board and discussed in detail by the former before any resolutions were passed. All members of the Supervisory Board were present at all of its regular meetings. Two members each attended one of the extraordinary meetings, and one member was unable to attend either one of the extraordinary meetings. This means that all members of the Supervisory Board attended more than one half of all Supervisory Board meetings in The Management Board also informed the Supervisory Board in between meetings of specific transactions material to assessments of the Company s position and performance as well as to its management. In addition, the Chairman of the Supervisory Board was in regular contact with the Management Board outside of the meetings and kept abreast of current developments within both the Company and the Group. The Management Board reported regularly to the Supervisory Board on the Company s business, cash flows, financial performance and financial position, as well as on all related risks and risk management. A capital increase from authorised capital entailing the issuance of a total of 3,576,505 new shares at a subscription price of EUR 5.25 per share was carried out in early April The drawdown from authorised capital had been approved by the Supervisory Board. Among other things, its deliberations in that connection focused on the amount of the drawdown and the subscription price. The capital increase generated total gross issue proceeds of EUR 18,776,651. The share capital of KWG AG thus was raised from EUR 10,804,729 by EUR 3,576,505 to EUR 14,381,234. The capital increase was recorded in the Commercial Register on 11 April Supervisory Board committees In order to perform its duties efficiently, the Supervisory Board maintains a Personnel Committee that deals primarily with matters concerning the Management Board. The Supervisory Board Chairman and Deputy Chairman constitute this Committee, which only has an advisory function. As there were no personnel changes on the Management Board in 2011, the Committee dealt with the Management Board members variable compensation for Audit of the financial statements and consolidated financial statements FIDES Treuhandgesellschaft Unterweser, a branch office of FIDES Treuhandgesellschaft KG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Bremerhaven the entity appointed as the Company s auditors by the Annual General Meeting audited the Company s annual financial statements for the 2011 financial year, as well as its consolidated financial statements pursuant to the International Financial Reporting Standards (IFRS) and the Group management report for the 2011 financial year, all of which were submitted by the Management Board along with the accounting. The annual financial statements for the 2011 financial year, the IFRS consolidated financial statements, the Group management report for the 2011 financial year as well as the auditors audit reports were available to all members of the Supervisory Board. The auditors explained the audit results to the Supervisory Board at its meeting on 16 April 2012 that was convened to adopt the financial statements. In particular, the auditors reported to the Supervisory Board on the Company s internal control and risk management system. The auditors also informed the Supervisory Board that there were no grounds for any bias on their part. The Supervisory Board did not have any objections to the audit reports and thus duly noted the relevant findings. It subjected the annual financial statements for the 2011 financial year, as well as the IFRS consolidated financial statements and the Group management report, to an exhaustive review. Based on the conclusive findings of its review, the Supervisory Board approved the Company s annual financial statements for the 2011 financial year, thus adopting them in accordance with Section 172 German Stock Corporation Act (Aktiengesetz AktG). It also approved the IFRS consolidated financial statements and the Group management report for the 2011 financial year. The Supervisory Board would like to thank the Management Board and the staff of KWG for their work in the financial year just ended. Hamburg, April 2012 The Supervisory Board Prof. Dr. Peer Witten Chairman of the Supervisory Board Report of the Supervisory Board Report of the Supervisory Board

6 Interview with the Management Board We are on the right track. What s past, what s next? Last year was the most successful in KWG s history, and the Company recently reported its largest single transaction ever. All signs point to growth. In this interview, the two members of the Management Board, Stavros Efremidis and Torsten Hoffmann, report on the units the Company has purchased in Wuppertal, as well as on its successful operating performance in 2011 and its plans for growth. Last year s performance continues the previous year s success; most recently, you announced that you acquired a stake in Barmer Wohnungsbau AG (BWAG), which has 1,394 rental units. What is your take on KWG s growth strategy? Stavros Efremidis: Growth is not about quantity, it s about quality. Optimizing our portfolio has put in place the prerequisites for boosting the dynamic of our growth through acquisitions. The acquisition of BWAG s property portfolio plays an important role in this process. We want to continue on this course in the current year and keep growing by acquiring profitable portfolios. In the final analysis, however, successful long-term growth requires a stable and functioning business model. Our performance this past year shows that we are properly positioned in this respect. Torsten Hoffmann: In 2011, we surpassed the previous year s performance and substantially boosted rental income. This success is based not least on a significant reduction in our vacancy rate, rising prices per square metre for new rentals and consistent investments in boosting the value of our portfolio. We cut the vacancy rate in our core portfolio to roughly 2.7 % as at 31 December 2011, and thus by more than one half. This creates optimal conditions, which we must now exploit. Your outlook for the new financial year seems optimistic. Where do you want KWG to be by year s end? What are your goals? Stavros Efremidis: We can t rest on our laurels. Instead, we must exploit these optimal conditions for continuing to expand our portfolio of residential units in accordance with our strategy. In that connection, we must make sure that our equity is used in ways that avoid diluting the net asset value (NAV) to the greatest extent as possible. The maxim is clear: Both shareholders and tenants must benefit from our growth. Only then can we be truly successful in the long term. Torsten Hoffmann: Annual net basic rent of EUR 16 million can be extrapolated solely from our performance in the fourth quarter of 2011 based on the current portfolio. We plan to surpass this level in the 2012 financial year by further optimizing our portfolio. We also expect consolidated profit to continue improving. This also applies to the net asset value. And we plan to substantially boost all specified key performance indicators through lucrative acquisitions. Acquiring an equity interest in Barmer Wohnungsbau AG seems to be an important component of your strategy. How do you assess the company s property portfolio, and how does it fit into your investment strategy? Stavros Efremidis: Acquiring an equity interest in BWAG has enabled us to secure access to a highly attractive portfolio. BWAG owns more than 1,394 rental units with total usable space of approximately 90,600 square metres within the city of Wuppertal. All of these residential units were thoroughly renovated in the past few years and are in good condition. At currently EUR 4.8 million, however, the annual net basic rent is about 20 % below market rates. This means that the transaction not only expands our portfolio of residential units to 6,800 units, it also enhances it. It has enabled us, for example, to cut the vacancy rate in our core portfolio to 2.3 % as at 31 December Torsten Hoffmann: In addition, the transaction will boost consolidated profit in cash terms, and BWAG s dividend payment for the 2011 financial year will also strengthen our liquidity. The funding structure of BWAG also offers considerable growth potential for continuing to expand our portfolio based on a conservative loan-to-value ratio. As a result, the acquisition of BWAG thus exemplifies precisely that which makes KWG excel consistently taking advantage of opportunities as they arise. Interview with the Management Board Interview with the Management Board

7 How does KWG s positioning as an entity that looks to develop properties value fit into this picture? Is the acquisition of BWAG s fully renovated portfolio going to change this approach? Stavros Efremidis: No, KWG will remain faithful to its business philosophy. We search for and identify property portfolios that offer depth, the true value of which only emerges at second glance. Whether we renovate such properties in terms of energy efficiency, align property management with regional requirements or bank on the potential of harnessing the local rental market we always apply individualised approaches that are tailored to the given situation. In our view, managing and renting the BWAG properties offers real leverage for growth. The acquisition of BWAG thus fits perfectly into KWG s strategic concept. Torsten Hoffmann: We are also aiming to boost the share of our core portfolio in the overall portfolio on a continuous basis. Our current core portfolio will rise to about 5,400 residential units once the acquisition has been completed. That corresponds to just under 80 of our portfolio on the whole. At the end of last year, the core portfolio still accounted for only 63 % of the overall portfolio. We added properties in Braunschweig, Salzgitter, Königslutter, Dortmund and Mülheim that were part of the investment portfolio to the core portfolio after carrying out extensive modernisation work in the financial year just ended. We plan to continue pursuing this strategy in the current financial year through intragroup construction and asset management. The window for acquisitions in the property sector seems to be wide open for now. Should we expect you to announce more acquisitions in the near term? Stavros Efremidis: A lot of property portfolios are on the market right now, and some of them also match KWG s investment criteria. Both the authorised capital and the organisational structure of KWG enable us to exploit opportunities quickly and efficiently as they arise. To date, however, the bid and ask prices are still too far apart. But we do plan to continue expanding KWG s portfolio in the current financial year through acquisitions of valuable portfolios in attractive micro locations. At a price of EUR 5.25 per share, KWG s share still seems to be valued at the lower end. What s your take on this development, and what would be a fair share price in your view? Stavros Efremidis: For the most part, our share performed well during the financial crisis, bucking the industry s trend. But it has not yet reached its full potential. If you look at what we accomplished last year and at our prospects for the future, I would say that a substantially higher price should be possible. Indeed, the discount of the triple net asset value (NNNAV) relative to the share price is about 35 %. Our analysts, who are estimating a target price of between EUR 7.00 and EUR 7.50 per share concur with this assessment. In fact, the share price target for KWG s share was even raised to EUR 8.00 per share after we announced in March 2012 that we had taken over the equity interests in BWAG. The successful placement of the capital increase shows, moreover, that even investors assume that we will continue our profitable growth course. The outlook thus is very good indeed. We look forward to pursuing this exciting journey together with our shareholders. Interview with the Management Board Interview with the Management Board

8 14 15 Our principle: identify and enhance true value. We do not focus on surface appearances and superficial attractiveness when buying property. We search for and identify property with substance, the true value of which others overlook. Whether we renovate a property in terms of energy efficiency, align its property management with regional requirements or bank on the potential of harnessing the local rental market we always apply innovative and individualised approaches to the development of properties value. While it may seem accurate at first glance to define our properties as secondary and tertiary locations, this does not reflect a long-term economic perspective. This is because the value of our properties should always be defined and described as Prime. Our property in Wolfsburg is an excellent case in point because we managed to increase its value by more than 40 % through extensive renovation work. Hochring residential complex, Wolfsburg THEMA / ABSCHNITT / BLINDTEXT THEMA / ABSCHNITT / BLINDTEXT

9 our aim: link corporate and social responsibility. Veilchengrund residential complex, Celle In the 2011 reporting year, we invested a total of EUR 12.0 million in our property portfolio. That is a substantial investment in terms of time and money, for landlord and tenants alike. But it is an expenditure that pays in the long term for both sides. We achieve savings of between 40 % and 75 % in energy consumption by renovating buildings based on our energy concepts. This allows us to substantially lower ancillary costs and boost the profitability of the given property. The bottom line is that it is a win-win scenario for all. For tenants by improving their quality of life and protecting them from exploding energy costs. For investors by adding value in the long term and boosting profitability. For the environment by lowering energy consumption and enabling considerable CO 2 savings. This claim is also reflected in our project in Celle, where we reduced the consumption of primary energy by more than 75 % through renovation.

10 Hermann-von-Vechelde-Strasse Residential complex, Braunschweig The lack of good-quality residential space is a problem that is no longer confined to metropolitan regions alone. Rather, it is increasingly becoming an economic and social challenge in small and medium German towns too. New construction rarely meets the need because new rental units in the lower and mid price segment frequently are uneconomical. But why build if we can redevelop existing buildings at a much lower cost? This is why we bank on modernizing existing residential spaces and renovating them in terms of energy efficiency. Hermann-von-Vechelde-Strasse in Braunschweig is an excellent example of this. Our residential building was extensively renovated in terms of energy efficiency last year, which is advantageous for tenants, investors and the environment. Considered from this vantage point, we create not only a balance between affordable rents and reasonable returns but we also solve current social problems through our daily work. Our approach: use the old to develop the new.

11 OUR DRIVE: achieve our goal with experience and passion. Last year was the most successful in our history: we expanded our portfolio and more than halved our vacancy rate but we will not rest on our laurels. We want to continue expanding, in healthy and dynamic ways, and turn KWG into one of Germany s leading property companies. We work hard to achieve this goal and believe that we have made real progress. At least the figures speak for themselves, and they show that our commitment is worth the effort and brings us a step closer to our goal every day. At the same time, projects such as the Veilchengrund in Celle or the Vittinghoff-Siedlung in Gelsenkirchen prove that KWG achieves much more than mere financial success. We create sustainable value for society and the environment. Vittinghoff residential complex, Gelsenkirchen

12 Liebenwalder Strasse, Berlin Those who plan for the long term and make clever investments aim to bring about the satisfaction of all parties. As a company that manages German residential properties based on a long-term strategy, we do everything in our power to offer tenants and investors alike a sustainable and long-term perspective. Only satisfied tenants are good tenants and good tenants ensure attractive returns in the long term. For instance, net basic rent rose to more than EUR 14 million in This was possible because KWG covers the entire value chain from acquisition through construction management to internal property management. The interaction of our operating units enables us to lower our vacancy rates to lasting effect and boost rental income on a continuous basis. Our property in Liebenwalder Strasse is testament to this success. Whereas the vacancy rate was more than 10 % when we took over the property, all of the residential units now have tenants. OUR FUTURE: healthy growth in a spirit of partnership.

13 24 25 KWG s share Market environment The stock markets were bearish in While the natural and nuclear disaster in Japan caused a noticeable slide in share prices in the spring, the markets quickly rebounded. In the year s second half, however, concerns fuelled by sovereign debt and the direction of the economy put a lot of pressure on share prices. There was a dramatic downturn in August. On the whole, the DAX (Germany s leading stock index) shed 14.7 % during the year, and the SDAX (a small cap index) lost 14.5 %. Property shares fared a bit better but were also unable to avoid losses. The DIMAX, an index of German property companies published by Ellwanger & Geiger Privatbankiers, was down by 11.9 % in KWG s share KWG s share lost a total of 5.0 % in 2011 on the whole but outperformed the benchmark indices. It made substantial gains in the first few weeks of 2012, more than making up for lost ground within a few weeks. After closing 2010 at EUR 5.50 per share, KWG s share closed 2011 at EUR 4.89 per share. It reached its low for the year of EUR 4.50 in Xetra trading on 12 January 2011 and its high for the year of EUR 6.20 on 16 February An average of 8,804 KWG shares changed hands per day on all German stock exchanges in 2011, with Xetra trading accounting for 70 % of the aggregate volume. The daily number of shares traded on Xetra in 2011 surpassed the previous year s level by almost 80 %, reflecting the increasing liquidity of KWG s share. Silvia Quandt & Cie. AG served as the designated sponsor. 120 % 110 % Capital measures KWG AG announced on 6 March 2012 that it had acquired 77.3 % of the equity interests in Barmer Wohnungsbau AG. A portion of the purchase price will be paid in KWG AG shares. A total of 1.5 million new shares have been issued from authorised capital to this end. The Management Board of KWG AG resolved with the approval of the Supervisory Board dated 13 March 2012 to increase the Company s share capital by up to EUR 14,381, by issuing up to 3,576,505 no par value shares from authorised capital. The capital increase was very successful and all shares were placed. The proceeds of EUR 18.8 million from the issue shall be invested in the acquisition of attractive portfolios. Coverage The share of KWG AG is monitored on a regular basis by analysts who then publish research reports. For 2011, this refers particularly to Close Brothers Seydler Bank AG and SRC-Research GmbH. They recommended buy in 2011, with share price targets between EUR 7.00 and EUR 7.50 per share. Following the announcement that KWG had acquired 77.3 % of Barmer Wohnungsbau AG in March 2012, SRC Research raised the target for KWG s stock to EUR 8.00 per share. Investor relations KWG maintains transparent and regular communications with both the capital market and the media. The Company carried out numerous road shows in 2011 as well to introduce itself to investors and financial journalists. KWG also attended various capital market conferences, both nationally and internationally. KWG s shares are listed in the Entry Standard of the Frankfurt/Main Stock Exchange. Going beyond the guidelines applicable to the Entry Standard, the Company also publishes regular reports on its quarterly performance, for instance, and communicates with its shareholders in English. 100 % Key figures on KWG s share (As AT 31 DEC. 2011) 90 % 80 % 70 % Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec No. of shares 10,804,729 Share capital EUR 10,804,729 Free float 35 % Stock exchange segment Entry Standard Designated sponsor Silvia Quandt & Cie. AG Research SRC-Research GmbH, Close Brothers Seydler Bank AG DIMAX* KWG Kommunale Wohnen AG * German property share index, Bankhaus Ellwanger & Geiger KG KWG s share KWG s share

14 26 27 Management report Development of business and economic environment Macroeconomic conditions The global economy developed well in the 2011 financial year and continued to recover from the consequences of the financial crisis. The previous year s growth momentum continued worldwide, particularly in the first six months of 2011, but it weakened considerably in some regions during the year s second half. This development was due to uncertainties in the financial markets stemming from the intensification of the sovereign debt crisis in both the euro zone and the United States. According to the International Monetary Fund (IMF), at 3.8 % the expansion of the global gross domestic product (GDP) was weaker than in 2010 (5.2 %) for this reason. The European economy followed this trend. While GDP in the European Union expanded at a robust pace in the first half of 2011, its growth weakened in the year s second half. Above all, this was due to uncertainties regarding the development of the sovereign debt crisis and increasingly restrictive fiscal policies. The momentum of investments in the euro zone has been lost, given the darkening of the economic horizon. This has been accompanied by a marked decline in private consumption. Growth rates within the euro zone differed widely owing to some European countries large sovereign debt. While the German Federal Statistical Office reported that in 2011 German GDP rose by 3.0 % (previous year: 3.7 %), merely marginal economic growth is expected for Southern Europe. GDP is even expected to decline in Greece and Portugal. The German export industry, in particular, benefited from good foreign demand for capital goods, developing into a growth driver for the European Union on the whole. In turn, this stimulated domestic demand in Germany, which also had a positive effect on the property sector. Conditions in the property sector The German property market continues to follow a growth course, and it did very well in all its segments during the reporting period. Germany thus has clearly distinguished itself from other countries, some of which are still suffering from the fallout of the financial market crisis. Both the decline in the unemployment rate and the increase in the German population s purchasing power have been key growth drivers in this respect. The transaction volume for both commercial and private property in Germany continued to climb relative to 2011 thanks to the positive economic climate. According to the German Property Association (Immobilienverband Deutschland IVD), it climbed by about 13 % to EUR billion year on year. The transaction volume in the year s second half slightly surpassed that of the first half, thus underscoring the German property sector s positive trend. Retail property Retail property in prime locations developed particularly well, as in previous years. Analysts of Deutsche Genossenschafts Hypothekenbank ( DG HYP ) expect retail sales to have risen by about 2 % in 2011, also as in previous years. Shopping centres in downtown areas, in particular, have benefited from the favourable economic climate. In regional terms, however, retail sales developed at very different rates throughout Germany. The decline in retail property in fair locations continued in 2011, as the development of both retail space and retail sales shows all too well. Office property The office market also performed well during the reporting period. The expanding German economy turned out to be the key driver of growth in this respect, stimulating the property market particularly in prime locations. Germany s five largest office markets Berlin, Düsseldorf, Frankfurt, Hamburg and Munich closed 2011 on a three-year high in terms of take-up. It was approximately 2.85 million square metres, thus rising by about 7 % year on year according to Savills Research. The experts of DG HYP expect secondary locations to profit from the upswing as well because supplies will increase but marginally and prices are rising at a rapid clip. High vacancy rates in some locations are preventing sustained development. According to analysts observations, in the past few years the amount of space has grown at a much higher rate than the number of office employees. This is what has caused the vacancy rate to rise overall. Residential property For the past five years or so, rents for residential units in Germany have been rising at an annual rate of about 2 %. This trend continued apace in According to the IVD, rents for older construction (built until 1948) have climbed by 2.9 %, whereas rent for residential units constructed after 1949 have risen by 2.1 %. The increases have been even more substantial in major cities where, the IVD reports, rents have climbed 5.8 % (units built until 1948) and 3.8 % (units built after 1949). The positive development in rents has gone hand in hand with strong growth in new residential construction. According to the Federal Statistical Office, permits for new construction and renovation of 228,400 apartments were approved in the reporting period. This corresponds to an increase of 21.7 % year on year the strongest since But experts believe that the dynamic will continue nonetheless because not even these numbers are sufficient to cover the need for residential space. The positive outlook is confirmed not least by the developments in the transaction market which, according to analysts, have continued apace in the calendar year just ended. Deutsche Genossenschafts Hypothekenbank reports that 213 residential property portfolios containing a total of some 82,600 units were sold in This corresponds to a year-on-year increase of about 50 %. Compared to 2010, the transaction volume increased by 47 % to roughly EUR 4.8 billion. According to the experts, this upturn occurred, for one, because Germany is being perceived as safe for investments in a tight market overall and, for another, because the stability in the performance of residential property satisfies investors increasing need for safety. Management report Management report

15 28 29 Management report KWG s business model KWG Kommunale Wohnen AG ( KWG AG ) a company that manages property portfolios based on a long-term strategy benefits from the positive development of the German property market. KWG AG is specialised in the acquisition of properties with above-average upside potential that have not been optimally developed to date. This asset class offers stable returns, high cash flows as well as robust and inflation-proof marketability. We exploit the potential of our property portfolio through an integrated business model that combines three operating divisions: Acquisition, Construction Management and Asset Management. Asset Management Based in Hamburg, Asset Management plans, manages and monitors all operating processes related to residential property in our portfolio with the aim of optimizing their value and their yield over the short and the long term. KWG Wohnwert GmbH offers Asset Management a decentralised, streamlined and modern administrative structure. The company has a head office in Glauchau and regional offices in all key locations where KWG AG owns properties. Overview of the Company s development At the end of 2011, KWG held a total of 5,419 residential units, 1,210 garages and parking spaces, as well as roughly 74,000 square metres of undeveloped property. Acquisition Construction Management Asset Management The success of KWG s integrated business model is mirrored in the Company s successful operating performance. Selective acquisition of property with upside potential Focus on the German propery market Rehabilitation and renovation of the investment portfolio Transfer of properties from investment portfolio to core portfolio Active and sustainable asset management of KWG s portfolio Reduction of vacancy rates and optimisation of rental income Acquisition KWG AG acquires mostly portfolios whose sellers have held them for longer periods of time such that meaningful portfolio data are available. Hamburg-based Acquisition analyses properties based on both qualitative and quantitative criteria using a complex appraisal system. In particular, KWG AG acquires properties in so-called secondary and tertiary locations of large metropolitan areas because they offer higher returns, given their upside potential and attractive purchase prices. Construction Management Construction Management is responsible for all renovation and rehabilitation work on KWG properties. Integrating construction management activities into the Group enables us to carry out construction and ongoing maintenance work much more cost-efficiently than would be the case if both planning and construction management were outsourced. For the most part, the properties have been renovated and rented at solid levels. In these properties, Construction Management only effects structural adjustments of individual rental units. KWG AG reports them as part of its core portfolio. Construction Management carries out comprehensive renovation work in properties that are allocated to the investment portfolio; they are transferred to the core portfolio once the work has been completed. Consolidated sales pursuant to the International Financial Reporting Standards (IFRSs) were EUR 21.7 million (previous year: EUR 19.8 million). Net basic rent rose to a total of EUR 14.8 million in the 2011 financial year, up from EUR 13.3 million the previous year. The year-on-year increase in earnings before taxes (EBT) continues, with EUR 11.3 million in the 2011 financial year, compared to EUR 10.2 million the previous year. Consolidated net profit climbed from EUR 8.6 million the previous year by EUR 1.2 million to EUR 9.8 million in At EUR 8.8 million (previous year: EUR 9.6 million), the fair value measurement of the investment property, along with a total of EUR 1.5 million in income from differences arising on the acquisition accounting for three entities (KWG Grundbesitz CV GmbH & Co. KG, Hamburg; HvD I Grundbesitzgesellschaft mbh, Norderfriedrichskoog; and Viva I Immobilien u. Verwaltungs GmbH, Norderfriedrichskoog), which was recognised in profit or loss, had a major impact on earnings. The operating result of KWG AG (earnings before income taxes as well as measurement and consolidation effects) was EUR 1.0 million (previous year: EUR 0.5 million). In the 2011 financial year, KWG AG took out an additional EUR 16.5 million in borrowings to expand its portfolio and invest in its existing property portfolio. The average interest rate for the Company s overall portfolio was 4.9 % and thus at the previous year s level. Financial liabilities of KWG AG were extinguished at a rate of 1.5 % per annum. The average remaining fixed-interest period of KWG AG s liabilities was about 4.3 years. At this time, negotiations to refinance the loan volume of about EUR 25 million that will mature in 2012 are currently taking place. By now, KWG AG has already received indicative offers from four banks. The Management Board of KWG AG is highly satisfied with the Company s performance in 2011 and maintains its optimistic outlook for The transactional environment has recovered, and there should be more opportunities for expanding the Company s property portfolio. On the whole, 2012 is also expected to bring rising sales and the continued improvement of a number of key performance indicators (KPI). Management report Management report

16 30 31 Management report Company structure KWG Kommunale Wohnen AG is a stock corporation under German law and acts as the parent of the KWG Group. Its individual portfolios are allocated to project companies that are included in the consolidated financial statements. As at 31 December 2011, the Group had a total of 30 subsidiaries (previous year: 16). The individual investees are enumerated in the notes to these consolidated financial statements. The Company is domiciled in Hamburg. Staff of the KWG Group have also been active in the following locations: Bad Langensalza, Berlin, Bremen, Celle, Erfurt, Gelsenkirchen, Glauchau, Hagen and Hainichen. Financial structure KWG AG had share capital of EUR 10,804, as at 31 December 2011, divided into 10,804, no par value bearer shares with a pro rata interest in the share capital of EUR 1.00 per share. An additional 325,859 shares shall be issued from authorised capital to pay for the acquisitions carried out in These additional shares have not yet been recorded in the Commercial Register to legal effect. Employees As at 31 December 2011, the KWG Group had a total of 46 employees (previous year: 38 employees) and two Management Board members. Financial position, cash flows and financial performance Financial position The equity ratio of KWG AG pursuant to IFRS in the 2011 financial year fell from 38.1 % the previous year to 36.8 % as at 31 December 2011 despite the substantial increase in total assets; however, this amount does not take into account the contributions and premiums paid in connection with the previously adopted capital increase. This means that KWG AG possesses a level of equity capital resources that is very comfortable for a property company and enables it to acquire additional portfolios. Total assets rose substantially in the reporting year, from EUR million the previous year to EUR million at the close of At EUR million (previous year: EUR million), non-current assets account for most of the assets, as before. Investment property totalling EUR million accounts for the bulk of these assets yet again, up from EUR a year earlier. Consolidated equity pursuant to IFRS rose substantially to EUR 87.8 million, up from EUR 78.1 million the previous year, not taking into account the contributions and premiums related to the pending capital increase. The increase in equity capital stems largely from the consolidated net profit of EUR 9.8 million. Non-current borrowings fell from EUR million the previous year to EUR million as at the close of In particular, this concerns the decline in non-current financial liabilities, which were EUR million as of the reporting date (previous year: EUR million). Current borrowings rose substantially from EUR 8.6 million the previous year to EUR 36.0 million. This rise stems from the increase in current financial liabilities from EUR 5.0 million the previous year to EUR 31.0 million at the close of the reporting year. Given extremely low interest rates, restructuring the funding that is set to mature in 2012 offers KWG AG the opportunity to generate additional savings with respect to interest expense and further optimise its funding structure in targeted ways. Cash flows The Company s liquidity was assured at all times, both during the 2011 financial year and as at the reporting date. The cash of KWG AG as at 31 December 2011 amounted to EUR 3.6 million. KWG AG successfully expanded its property portfolio in the 2011 reporting year. Acquisitions of properties in Berlin, Celle and Delmenhorst were among the transactions that caused cash outflows. One developed property in Munich was sold during the reporting year, generating a positive cash flow of EUR 1.1 million. A total of EUR 21.6 million was used in 2011 for investing activities and apartment sales, up from EUR 5.8 million the previous year, largely due to the aforementioned sale and acquisitions as well as the comprehensive renovation of properties in the Company s existing portfolio. Loans were taken out to finance both the acquisition of property and the renovation work. Payments on all existing financial loans were made in timely fashion during the 2011 reporting year. The cash flow from financing activities thus was EUR 16.5 million. The cash flow from operating activities as at the close of the reporting year was EUR 0.03 million. Cash proceeds of EUR 1.1 million from a project that was successfully completed in 2011 were allocated to investing activities. KWG AG s consolidated profit of EUR 11.3 million before income taxes stem mainly from the non-cash appreciation of the property holdings in its portfolio. This is contrasted by expenses for renovating units acquired. The Management Board expects to be able to generate substantial cash flows from operating activities upon completion of the major renovation work on the projects. Current assets fell from EUR 12.1 million the previous year to EUR 8.1 million as at the 2011 reporting date. Consolidated cash was EUR 3.6 million due to long-term investments in the Company s own property portfolio and targeted acquisitions, down from EUR 8.7 million the previous year. Management report Management report

17 32 33 Management report Financial performance Net revenue rose substantially from EUR 13.3 million the previous year to EUR 14.8 million in the 2011 financial year. This amount contains solely the rental income from investment property. Measured at fair value, the investment property was worth EUR 8.8 million in the reporting year, down from EUR 9.6 million the previous year. This means that rental income continued to account for the lion s share of revenue in the 2011 financial year underscoring KWG AG s highly sustainable income base. The cost of materials, which mainly reflects allocable operating costs, rose from EUR 6.2 million the previous year to EUR 7.0 million in the reporting year thanks to the increase in revenue from the rising transaction volume. At EUR 2.3 million, staff costs were up from EUR 1.8 million the previous year. Among other things, this increase stems from the continued expansion of our own successful property management company, KWG Wohnwert GmbH, which is domiciled in Glauchau. Expenses related to investment property rose slightly from EUR 3.0 million the previous year to EUR 3.4 million. This amount reflects such costs as maintenance expenses, rental commission and own administrative costs that are directly attributable to the properties but cannot be allocated to third parties. Other operating expenses rose from EUR 1.9 million in 2010 to EUR 2.8 million in the reporting year. Interest expense rose from EUR 5.9 million the previous year to EUR 6.4 million in the reporting period due to transactions related to our portfolios in Berlin, Celle and Delmenhorst, as well as loans from KfW for financing a portion of the renovation work. On the whole, consolidated earnings from ordinary activities pursuant to IFRS rose from EUR 10.7 million the previous year to EUR 11.9 million in the 2011 financial year. After deducting other taxes and corporate income taxes (almost entirely in the form of deferred taxes), consolidated net profit climbed from EUR 8.6 million the previous year to a total of EUR 9.8 million in the 2011 financial year. Events after the reporting period KWG AG announced on 6 March 2012 that it had acquired 77.3 % of the equity interests in Barmer Wohnungsbau AG. A portion of the purchase price will be paid in KWG AG shares. A total of 1.5 million new shares shall be issued from authorised capital to this end. The Management Board of KWG AG resolved on 12 March 2012, with the approval of the Supervisory Board dated 13 March 2012, to increase the Company s share capital up to EUR 14,381,234.00, divided into the equivalent number of no par value shares, by issuing 3,576, no par value shares from authorised capital. The subscription period runs from 16 March 2012 to 30 March 2012 (6:00 p.m.). The subscription price was fixed at EUR 5.25 per share based on a book-building procedure. Report on risks and opportunities Risk management and internal control system KWG AG continually reviews all opportunities for expanding and growing the Group as they arise. The Company must assume risks as necessary to ensure that it achieves its aims. A balanced risk and opportunity profile is essential in that regard, as is the ability to know, gauge and control all material aspects. Hence the risk policies of KWG AG aim to identify risks as early as possible in order to be able to initiate counteracting steps in due time. Remaining risks are gauged in the lead-up to any activity in order to reduce them. Risk report The Company s risk philosophy has been aligned such that both its risk management (RM) and its internal control system (ICS) serve to identify, record, analyse, assess and communicate all relevant risks in appropriate fashion to the given decision maker. Regular reviews of the risk management process by the Management Board ensure that it is efficient and refined on an ongoing basis. KWG AG introduced a software-based risk management system groupwide for this purpose. Compared to the Company s previous risk management system, this software has been expanded by a process analysis that lends transparency to the Company s internal complexity. KWG AG uses its risk management system to systematically identify, evaluate, control and document risks. It is integral to all operating units and the basis for all action in the Group. The Management Board of KWG AG formulates the Company s risk policies and continuously defines all potential risks related to both the planning and the implementation of business strategies. Comprehensive information that is furnished to the Management Board by each individual operating unit at regular meetings related to controlling, projects and business units serve as the basis for identifying and managing risks. The following individual risks, in particular, are closely monitored as part of the risk management process. Macroeconomic risks, industry-specific risks and operating risks While the Group is engaged solely in the German property market, the market environment is affected by international economic data. Experts believe that the economy s positive development will continue apace. The analysts of the KfW Banking Group are projecting growth of 1.2 % for all of But weaker performance is possible, of course, despite the positive outlook. It cannot be ruled out that an economic downturn might have a negative effect on both achievable rental income and interest levels. In addition, rising competition from new national or international buyers might trigger further changes in the current conditions governing the acquisition of residential portfolios. Management report Management report

18 34 35 Management report Falling property prices While KWG AG subjects residential properties on offer to intensive reviews and performs a due diligence before acquiring them, the fair values of properties in our portfolio may decline nonetheless due to outside influences. KWG AG counteracts this risk through proactive asset management and targeted investments in its portfolio. But the Group cannot fully escape global declines in property values that arise from inherent factors. Liquidity risks To pursue its growth strategy, KWG AG requires substantial additional outside capital besides its equity for both investing in its existing properties and acquiring additional portfolios of residential properties. These activities entail the risk that banks may not be able or willing to renew maturing loans. There is also the possibility that refinancing arrangements will entail non-recurring financing costs. Interest rate risks / currency risks KWG AG is exposed to interest rate fluctuations, especially in connection with its funding. This directly affects the Group s net interest income. In particular, interest rate risks also make themselves felt in connection with the extension of existing loans. We counteract these risks through proactive loan management by performing regular assessments of interest rate trends. At this time, there are no foreign currency cash flows at KWG AG. The Group thus is not exposed to currency risks. IT risks There are IT risks because the majority of KWG AG s business processes are based on information technology. This also includes all required data privacy and protection measures. KWG AG protects its IT system from unauthorised access and loss of data by means of comprehensive technical precautions. In addition, the IT system is continuously reviewed and adapted to the latest technical standards. Legal risks Legal risks may arise from the diverse range of statutory requirements that affect the companies of the KWG Group and, in certain circumstances, might trigger financial losses. A review of the Company s risk exposure as at the 31 December 2011 reporting date showed that there are no risks that could pose a going-concern risk to the Company and the Group or materially undermine their performance. We have not presently identified any risks of this nature for the future. Opportunities report KWG sees opportunities particularly in the acquisition of property where payments on the related loans are in arrears (non-performing loans). In particular, this concerns highly leveraged properties that were bought in the past five years. In the future, creditors are likely to seek out solvent buyers for their properties with non-performing loans. KWG AG perceives itself as a potential partner for such creditors. Thanks to good contacts with potential sellers, KWG is one of the first companies to be contacted when property portfolios are sold. KWG s experts can rapidly identify promising investments based on their expertise. Selective modernisation work on individual properties enables us to enhance tenant satisfaction and, at the same time, lower the vacancy rate in the properties concerned. Management report Management report

19 36 Management report Anticipated developments KWG AG looks to 2012 and the years beyond with optimism. The Management Board expects the parameters for the residential property market in Germany to remain positive and thus to offer KWG AG further market opportunities in the current financial year. KWG AG wants to use this opportunity to continue expanding its own residential portfolio in accordance with its strategy. To the extent possible, equity shall be employed for acquisitions in ways designed to prevent dilutions of the net asset value (NAV). KWG AG thus expects dynamic growth to continue in the current financial year. Annual net basic rent of EUR 16 million may be extrapolated solely from earnings in the fourth quarter of 2011 based on the portfolio as at 31 December The Management Board plans to surpass this value by continuing to optimise the Company s portfolio in the 2012 financial year. It also expects consolidated profit to continue improving, based just on the portfolio of residential properties as at 31 December This also applies to the net asset value. And we plan to substantially boost all specified key performance indicators through lucrative acquisitions. Hamburg, 29 March 2012 KWG Kommunale Wohnen AG Stavros Efremidis Torsten Hoffmann By acquiring a stake in BWAG, we are actively pursuing our growth strategy as a portfolio developer and are leveraging economies of scale. Stavros Efremidis Management report

20 38 39 Consolidated statement of financial position pursuant to Int. Financial Reporting Standards (IFRS) as at 31 December 2011 Consolidated statement of comprehensive income pursuant to Int. Financial Reporting Standards (IFRS) from 1 January to 31 December 2011 ASSETS in eur notes 31 Dec Dec Non-current assets Intangible assets 5.1, 7.1, , , Property, plant and equipment 5.2, 7.2, , , Investment property 5.3, 7.3, ,388, ,635, Deferred tax assets 5.4, 7.4 3,915, ,984, Total non-current assets 230,753, ,170, Current assets Inventories 5.5, , , Trade receivables 5.6, 7.6 1,245, , Tax assets 5.6, , , Other receivables and assets 5.6, 7.6 3,127, ,437, Cash 5.7, 14 3,583, ,736, Total current assets 8,075, ,064, Total assets 238,828, ,235, in eur notes Revenue ,658, ,764, Income from the fair value measurement of investment property 6.2 8,753, ,602, Other operating income 6.3 3,606, , Cost of materials 6.4 7,013, ,235, Staff costs a) Wages and salaries 6.5 2,045, ,546, b) Social security and retirement benefit costs , , Depreciation and amortisation , , Expenses related to investment property 6.7 3,350, ,999, Other operating expenses 6.8 2,754, ,865, Income from investment securities 8, Other interest and similar income , , Interest and similar expenses ,444, ,861, Profit attributable to non-controlling interests , , Result from ordinary activities 11,940, ,741, Income taxes ,494, ,615, Other taxes , , Consolidated net profit for the period 9,826, ,583, EQUITY AND LIABILITIES in eur Equity Issued capital ,804, ,804, Capital reserves ,887, ,892, Retained earnings 7.8 1, , Market valuation reserve , , Consolidated net retained profits ,688, ,863, Equity before non-controlling interests 87,768, ,098, Equity attributable to non-controlling interests 3, , Total equity 87,772, ,101, Special items Changes in the fair value of hedging instruments , , Income taxes on expenses recognised directly in equity , , Total income and expense recognised directly in equity 149, , Total comprehensive income 9,677, ,531, Consolidated net profit for the period attributable to: Non-controlling interests , Investors in the parent 9,819, ,582, Total comprehensive income attributable to: Non-controlling interests , Investors in the parent 9,670, ,530, Earnings per share (basic and diluted) Contributions related to the implementation of the capital increase , Share premium related to the implementation of the capital increase 7.9 1,955, Special items, total 2,281, Non-current borrowings Non-current financial liabilities 5.8, ,732, ,171, Non-current trade payables 5.8, ,009, Deferred tax liabilities 5.8, ,021, ,332, Non-current borrowings (third-party interest in commercial partnerships) 5.8, , , Non-current liabilities, total 112,822, ,556, Current borrowings Current financial liabilities 5.8, ,985, ,975, Current trade payables 5.8, ,070, , Current tax liabilities 5.8, , , Other current liabilities 5.8, 5.10, ,799, ,596, Current borrowings, total 35,952, ,576, Total equity and liabilities 238,828, ,235,018.64

21 40 Consolidated statement of cash flows pursuant to Int. Financial Reporting Standards (IFRS) from 1 January to 31 December 2011 in Teur notes 7.7, 14 1 Jan Dec Jan Dec Consolidated profit (including non-controlling interests) before income taxes 11,321 10, Depreciation and amortisation Other non-cash income 1, Gain ( ) / loss (+) from the disposal of property, plant and equipment Gain ( ) from the disposal of property held for short-term sale 1, Interest and similar income Interest expense 6,445 5, Loss (+) / gain ( ) from the fair value measurement of investment property 8,753 9, Increase ( ) / decrease (+) in inventories, trade receivables and other assets not attributable to investing or financing activities Increase (+) / decrease ( ) in trade payables and other liabilities not attributable to investing or financing activities Interest received Interest paid 6,380 5, Cash flow from operating activities Payments for the acquisition of shares in the subsidiary KWG Grundbesitz I GmbH & Co. KG Payments for the acquisition of the subsidiaries HvD I and Viva I 10, Payments for the acquisition of shares in the subsidiary KWG Grundbesitz CV GmbH & Co. KG 3, Payments for investments in property held for short-term sale ( ) 5, Proceeds from the sale of property held for short-term sale (+) 6, Payments for investments in intangible assets Proceeds from the sale of property, plant and equipment including investment property Payments for investments in investment property 8,716 5, Payments for investments in other property, plant and equipment Cash flows from investing activities 21,645 5, Income from the issue of share capital Proceeds from issuing long-term loans 23,433 4, Cash payments for the redemption of loans 6,913 2, Proceeds from capital increases less payments for costs directly attributable to the capital increase 0 3, Cash flow from financing activities 16,520 7, Net change in cash funds 5,153 1, Cash funds at beginning of period 8,736 7, Cash funds at end of period 3,583 8,736 Note: Income taxes received The successful execution of our capital increase shows that investors also believe in our ability to continue on our profitable course of growth. Stavros Efremidis