Morning Note: Market News and Updates from Vonovia and Marriott.

Market News

US equities fell last night – S&P 500 (-0.8%); Nasdaq (-0.9%) – although the futures rose as plans for trade negotiations between China and the US spurred optimism tensions between the world’s two largest economies will ease. That said, President Trump downplayed trade negotiations saying he would prescribe tariff levels and trade concessions for partners looking to avoid higher duties, appearing to move away from the idea he would engage in back and forth negotiations.

In Asia this morning, markets were generally higher: Nikkei 225 (-0.1%); Hang Seng (+0.4%); Shanghai Composite (+0.8%). China reduced its policy rate to boost the economy.

The FTSE 100 is currently 0.3% lower at 8,584, while Sterling trades at $1.3350 and €1.1750. Healthcare stocks are weak – AstraZeneca (-2.5%) and GSK (-4.5%) – as the US FDA names Vinay Prasad, a hematologist oncologist and critic of the Covid-19 vaccine for children, as the next director of the Center for Biologics and Research.

The FT reports the UK is set to sign trade deal this week with the US that would include lower tariff quotas for steel and car exports.

Ahead of the Federal Reserve meeting, the 10-year Treasury yield ticked up to 4.32%. Rates are expected to remain unchanged. The $42bn auction drew strong demand with bid to cover ratio of 2.604, above the six-auction average of 2.59. Gold enjoyed another strong session yesterday, although it has drifted back below $3,400 an ounce on hopes for a trade negotiation. Brent Crude rose to $63 a barrel.

Source: Bloomberg

Property News

Vonovia has today released its Q1 2025 results, highlighting a positive start to the year in terms of market transactions, rental growth, and cash flow. Guidance and targets for this year and for 2028 have been reiterated. The company has also announced a succession plan involving the appointment of a new CEO. The shares have been volatile this year, tracking the movement in bund yields, which have been impacted by the new German government’s economic stimulus programme which will lead to a debt overhaul and a significant increase in state spending. Ahead of this afternoon’s analysts’ call, the shares are little changed in early trading, leaving them on a 35% discount to NAV which rose by 2.3% in the quarter.

Vonovia is Europe’s largest residential real estate company with a market cap of around €25bn. The group owns around 535k units worth around €82bn across Germany (c. 84%), Sweden, and Austria. The group also manages a further 73k units owned by others. Despite its size, in Germany Vonovia still only owns 2% of a highly fragmented market. The focus is on multi-family housing for low- and medium- income tenants in metropolitan areas. The aim is to benefit from residential megatrends such as urbanisation, energy efficiency, and demographic change.

Following a number of acquisitions, Vonovia now enjoy the benefits of increased scale – over the last 10 years, its adjusted EBITDA margin has risen by 20 percentage points to 80% and its cost per unit has fallen by two thirds.

Last night, the company announced the appointment of Luka Mucic as the new CEO. After more than 12 years at the helm of Vonovia, Rolf Buch will hand over the leadership of the company at the end of the year. Mucic is currently the CFO of Vodafone and was previously the CFO and COO of SAP – with long-term experience in the technology and telecommunications industry, on the face of it the appointment appears a strange one.

In the first three months of 2025, all economic indicators developed positively. Adjusted earnings before tax (EBT) – the group’s preferred profit metric – rose by 14.9% to €478.7m. Operating free cash flow (OFCF) – the key figure for internal financing and thus liquidity management – rose by 43.3% to €718m, although guidance for 2025 to be moderately below last year has been reiterated.

The most recent market data for the German residential sector confirms a stabilisation of price indices, albeit recent political events create some uncertainty. The transaction market has got off to a good start to 2025 with no impact from temporary bund yield hike.

The core rental segment grew revenue by 2.0% to €840m, despite having 9,000 fewer homes. The vacancy rate remains very low (2.1%) and highlights the ongoing mismatch between supply and demand. The trend towards higher rents continued, while the collection rate was over 99%. This includes all ancillary and energy costs, which management see as a strong sign of affordability.

The organic increase in rent was 4.3%, with new construction accounting for 0.4%. Like-for-like rental growth of 3.9% was driven by market-related factors (+2.9%) and investment in existing buildings (+1.0%). The monthly rent per square metre increased by 4.8% to €8.15. Going forward, under the regulatory system, rent growth is expected to follow inflation higher over time albeit with a lag. For 2025, rental growth of ‘around 4%’ is still expected. Further out, the target is ‘greater than 5%’ driven by an additional EUR1bn investment in modernisation (see below).

That said, there is some political uncertainty following the recent government coalition agreement under which the rent control law that limits how much rent landlords can charge (Mietpreisbremse) has been extended for four years. This is longer than initially planned, albeit Vonovia’s short and medium-term targets were all based on the rules remaining in place.

Revenue from other business streams came from development (-17.6%), recurring sales (+63.5%), and value-add (+19.1%). Overall, the company is seeing the first signs of increased traction in these segments and sees multiple organic growth initiatives to develop non-rental activities. In 2028, the group estimates a contribution of €0.5bn-€0.7bn, equalling 20%-25% of adjusted EBITDA, versus less than 10% today.

Vonovia continued to sell properties of inferior quality or in non-core regions. The volume of recurring sales was 63.5% higher in the quarter (at 689), with the fair value step-up, at 25%, slightly above last year (22.4%). Outside of the recurring sales segment, 5,731 non-core units were sold.

Disposals so far in 2025 include the sale of 13 nursing homes to the city of Hamburg for €380m. This is the group’s last nursing platform and completes the disposal of the remaining discontinued operations. The company reiterated that, going forward, disposal pricing decisions will no longer be driven by leverage considerations but profitability.

Capital is being partly re-allocated toward the construction of new properties and the improvement of the existing portfolio to comply with environmental demands which can drive higher rents. In Q1, the group spent €409.6 (+29.4%), with spend on maintenance up +8.8%, modernisation up 68.6%, and new construction spend up 10.5%. Vonovia completed only 86 new apartments (down 90%), 44% to hold to rent and 56% for sale. In 2025, Vonovia still intends to significantly increase investments in modernisation and new construction for its own portfolio to approximately €1.2bn, with construction of around 3,000 new units scheduled to begin. Encouragingly, following the recent government coalition agreement, subsidies for modernisation of building and heating systems will continue and initiatives to reduce construction costs are being put in place.

The group’s loan-to-value (LTV) declined slightly during the quarter to 46.7%, still above the 40%-45% target range. Including potential proceeds from announced transactions, the pro-forma LTV is 45.0%, at the top end of the target corridor. However, the group’s long-term and well-balanced debt maturity profile provides a hedge against increasing financing costs: weighted average maturity (6.1 years); average cost of debt (1.9% vs. 1.9% at the end of 2024); fixed/hedged (98%); and no more than 12% of debt maturing annually. Overall, the group has said that marginal debt costs have come in lower than feared and that pro-active balance sheet stabilisation is no longer required. The volume-weighted average interest cost, after hedging, of new bonds was 4.29% in 2024.

The strategy is to roll over secured debt and repay unsecured bonds with disposal proceeds. Vonovia has said its pro-forma cash position of €4.0bn covers all near-term maturities.

In 2024, the group changed its dividend policy – it will now pay out 50% of earnings plus surplus liquidity from operating free cash flow. As a result, the 2024 payout was raised by 36% to €1.22 per share (c. €1bn), equal to a yield of 4% at the current share price, and due to be paid in June.

The market value of the portfolio rose by 0.4% to €82.3bn in the quarter and company believes the market has now bottomed out. The net asset value (known as EPRA NTA) has risen by 2.3% since the start of the year from €45.23 to €46.27.

Guidance for 2025 has been reiterated: EBT of €1.75bn-€1.85bn and adjusted EBITDA €2.70bn-€2.80bn. The company has a target for EBITDA in 2028 of €3.2bn-€3.5bn, although there is still no guidance on interest payments or EBT.

Greater visibility over the outlook for interest rates (and the marginal cost of new debt) and property market valuations will be required for the shares to move substantially higher. Clearly, plans by the new government to ease its fiscal rules are unhelpful, with bund yields rising in anticipation of an increase in government debt. Not only does this increase the group’s borrowing costs (and free cash flow) but is also has a negative impact on property values and makes bond proxies such as real estate relatively less attractive. In the meantime, however, we are comforted by the outlook for rental growth, improved transaction market, and the ongoing substantial mismatch between Vonovia’s equity value, the valuation in the direct real estate market, and the cost of newly constructed properties.

Source: Bloomberg

Company News

Yesterday afternoon, Marriott International released mixed Q1 results. Revenue was slightly slower than expected, due to increased consumer uncertainty and caution in travel spending, although earnings were better than forecast. The group trimmed its full-year revenue guidance buy maintained it expectation for EPS. The sector has been weak this year, but this report was better than some had feared, and in response the shares were marked up by 2%. Industry peer IHG reports its results tomorrow.

Marriott is the world’s largest hotel company, with 9,463 properties in 142 countries and territories. The company is a fee-driven, asset-light operator with a focus on franchising and management contracts. The group’s 30 leading brands are skewed toward the mid-scale to luxury end of the market, and include: Ritz-Carlton, Marriott, St Regis, Le Meridien, Sheraton, MGM Collection, and City Express. At the end of March 2025, the company had more than 1.7m rooms, around a 7% global market share. The group’s travel and loyalty programme, Marriott Bonvoy, now boasts more than 236m global members.

In the three months to 31 March 2025, global revenue per available room (RevPAR) – the key measure of industry performance – grew by 2.7% in constant currency, just below the group’s 3%-4% guidance range. Occupancy grew by 0.7 percentage points to 65.7% and average daily rate (ADR) was up 2.9% to $181.73.

In the US & Canada, RevPAR grew by 3.3%, although the company did see slower growth in March. International markets RevPAR rose by 5.9%, led by double-digit gains in Asia Pacific ex China. Greater China fell by 1.6%.

The group continued to expand its estate, adding around 12,200 rooms in the quarter, +4.6% year-on-year. The company enjoyed record first quarter signings of over 34,000 rooms, of which two-thirds were in international markets. Conversions remained a key driver of growth, representing around a third of room signings and openings. The pipeline was 587,000 rooms, including roughly 27,000 pipeline rooms approved, but not yet subject to signed contracts. Over half of rooms in the quarter-end pipeline were in international markets. Around 42% of the pipeline was under construction at the end of the quarter.

Last week, the company announced an agreement to acquire the citizenM brand, an innovative lifestyle lodging offering in the select-service segment.

Q1 gross fee revenue rose by 5% to $1,275m, while the adjusted operating income margin ticked up to 63%. The decline in costs was driven an enterprise-wide initiative to enhance effectiveness and efficiency which is expected to yield $80m to $90m of annual cost reductions beginning in 2025. Adjusted EPS grew by 9% to $2.32, above the company’s guidance range of $2.20 to $2.26 and the market expectation of $2.25.

During the quarter, net debt rose from $14.0bn to $14.6bn and the group continued to buy back its shares, with $0.8bn repurchased in the quarter. Including dividends, the group returned $1.2bn to shareholders in the year to the end of April.

In light of the current uncertainty, the company has trimmed its guidance for full-year worldwide RevPAR growth to 1.5%-3.5%, versus 2%-4% previously. The updated outlook generally assumes the continuation of current booking trends. Compared to prior expectations, it incorporates somewhat softer expectations in the US & Canada region. However, guidance for EPS has been maintained at $9.82 to $10.19. In the current quarter, RevPAR is expected to grow by 1.5%-2.5%, with EPS of $2.57-$2.62.

Net room growth is now expected to grow by ‘approaching 5%’ in 2025, assuming the purchase of the citizenM brand closes before year end. This compares to 4%-5% previously. The group is still committed to return $4.0bn to shareholders.

In the medium to long term, we believe the industry has attractive long-term growth potential, and with its scale and strong brands, Marriott should benefit from ‘survival of the fittest’ bias as many smaller competitors continue to exit the market.

Source: Bloomberg