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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining the Aareal Bank update conference call. [Operator Instructions]And I would now like to turn the conference over to Jürgen Junginger, Managing Director and Head of IR. Please go ahead.
Good morning, ladies and gentlemen. Welcome to our analyst call. This is the first time for so many years that I do not hand over this now to Hermann. We wish him all the best. And I want to thank you for your wishes for him.With us is our CFO, Marc Hess; and our Chief Marketing Officer, Christof Winkelmann. After presentation, we will be delighted to take your questions.And now please, Marc, the stage is yours.
Yes. Thank you, Jürgen. Good morning, and welcome also from my side to our analyst call. As you're all aware, and Jürgen just mentioned that, our CEO, Hermann Merkens, will not be able to perform on his duties for health reasons for an expected period of 3 to 4 months. So we do, of course, wish him a swift recovery and are confident that he will fully recover.In the meantime, my fellow Board members and I have taken over his responsibilities. And one of the consequences you will directly experience today is that our CMO, Christof Winkelmann, is here with me on this call. But this is not the only reason why he has joined in. He is really the one who knows our portfolio best and will give you some further insights today.But let me start first with a brief overview of the latest developments on Page 4. As you all know, we started into the crisis in a very robust and resilient matter with a conservative risk profile, a strong capital base, a strong liquidity position, and this all still holds true, and we stay on course. We are a reliable partner for our customers. We are in close contact with them, and we are there to find solutions where necessary to go to this crisis -- through this crisis successfully together. We have also established a precautionary model-based risk provisioning and value adjustments, always based on the latest estimates, and we pursue our strategic initiatives consistently and have reached major milestones throughout the year and especially here in Q3.What is the current base assumption regarding the further evolvement of the crisis? You can see that here, on the right down part of this chart, we stick to our updated swoosh scenario. However, due to the lockdown and the overall deteriorated market forecast, and we explained to you already that we always take external forecasts here from very reputational consultants, we expect a more pronounced decline of the economic activity and a 6 months' delayed recovery as a consequence.These updated expectations -- and I'm now turning to Page 5 -- has been incorporated into our market value assumptions via the management overlays. That means we have adjusted our risk provisions in Q3 to that level. And in total, we have, however, been able to achieve an operating profit of EUR 11 million in the third quarter. We have also locked in the capital gain for the Aareon sale of EUR 180 million, the minority sale, but I'll come to that in a second.The operating business, and we can see that -- say that here proudly is performing well. We have good new business with low LTEs (sic) [ LTVs ], with significantly above planned margins, and we are even confident that we will go to the upper end of our guided range of EUR 26 million to EUR 28 million -- EUR 26 billion to EUR 28 billion, sorry, by the end of the year. And that should, of course, support the net interest income who has showed a turnaround in Q3 and should thereby further increase going forward.Consulting/Servicing Bank, very stable, especially the deposits, their main funding source for us. The commission income is increasing steadily. And we have again increased our profit target for this year but also more details later on. And Aareon, as I just mentioned, the sale of the minority stake has now successfully been closed at the end of October. And here, we can also say that the growth in revenues, especially in the digital solutions, is continuing with a growth rate of 25%. And the impact of the crisis on the adjusted EBITDA stay limited as confirmed.On top, this quarter, we have started a 360-degree review of our strategic program, Aareal Next Level, that was several weeks ago, to adjust and create sustainable shareholder value even in a new normal after COVID-19. I will go into the details later on.And regarding the outlook, as already mentioned, due to the muted market forecast, we now expect a substantial positive operating profit in the mid-double-digit euro million range. Before, we said mid to higher. But here, as just said, due to the overlays, we adjusted, especially our risk provisions.To the highlights on the next slide that we performed in Q3 and throughout the year. One major one was certainly the sale of the minority stake in Aareon to Advent. That was closed in October, as I just mentioned. The financials are confirmed, unchanged and now locked in. The equity value is EUR 860 million, and we have received net cash proceeds of EUR 260 million already. And the capital gain of EUR 180 million will be accounted in our activity directly in Q4 this year.So Advent is now onboard since a couple of days, and we have immediately started to develop the joint value-creation plan. As you know, this has 2 ambitions at least, to ever -- to even exceed the old plan that we explained to you in May 2019. That was always already ambitious. We want, as you know, to double the EBIT midterm, so this should even be improved by this value-creation plan. And we want to develop Aareon into a Rule of 40 company to even increase its valuation. You know that this Rule of 40 means that margin plus growth should exceed 40%, and that is typically a very good basis for a strong valuation.So as said, we want to develop that together with Advent, and we want to present these new goals in our annual press conference mid-February to you. In the meantime, a representative of Advent, that is Jeff Paduch, he's a managing partner of Advent International, will join the Supervisory Board. We are very happy that he is joining us. And if he's listening, a warm welcome from our side. And we will also establish on top an Advisory Board here also with the presence of Advent.So, so far as the intro, I'm now happy to hand over to Christof for him to share his insights on our loan portfolio with you.
Thank you, Marc, and good morning to everybody on the phone today. My name is Christof Winkelmann, and I'm responsible for our real estate structured finance business on the Board. And I'm actually quite delighted to be able to shed some more light on what we do in our RSF business during these turbulent times but also with a view of what we are going to do in the future.On Page 8, we started into this crisis with a very low LTV in our portfolio, which was at 57%. We managed within the first 3 weeks as of the inception of the crisis and restrictions thereto to contact over 90% of our clients directly, maybe not in person just because of restrictions but at least via phone or MS Teams and other wonderful means that have evolved out of this crisis and that, again, all of -- in all of our parts of our 3 continents.What we can see across the board is that clients are very willing to make significant contributions during the crisis out of equity, not only those who have guaranteed but also those do not have any legal obligations to do so other than what the contract says. That was supported, in many cases, by different state programs, to name a few: in the U.S. and the U.K., furlough programs; or in Germany, the so-called Kurzarbeit. All in all, year-to-date, September 30, we have supported our clients with EUR 80 million of amortization deferrals and EUR 107 million of liquidity both aimed at interest and operating costs in these assets. I'll remind you this represents less than 1% of our book.As I said, in most cases, when we look at how we are planning the next 6 to 12 months forward, we work together with our clients in looking at business plans and making a joint business plan. That means both sides have to contribute to this plan, not just calling the bank saying please give me liquidity. As per 30th of September and due to the fact that, indeed, there were lockdowns and visiting properties was quite difficult even for valuers locally, we only have a limited number of updated external valuations by the end of September. There's a lot more already coming in, and we expect the majority to be done by the end of this year. However, the LTV increase will remain in our assumptions below 70% LTV. And again, this is below the point that we had in our book at the start of the last crisis in 2008, the World Financial Crisis.If I may take your attention to Page #9. As you can see, we have a highly diversified EUR 26.1 billion commercial real estate book. Both in terms of geographic location and property type, the portfolio has remained in or about the same composition whereby North America contributed roughly 1/3 of the volume, the remaining 2/3 in Europe and less than 5% in our Asia Pacific regions. Furthermore, also on the bottom right, you will see that -- I'm sorry, that the overall LTV of the portfolio that is below 60% by volume represents 96%. On the left bottom side, you see a new graph whereby the current LTV shows at 57%. With the valuations that we have gotten so far and speaking to market participants and with our own experts, we are projecting the overall book by year-end to be, LTV-wise, in the range of 63% to 65%, again, a good buffer to the initiation of the values at the last crisis.On Page #10. As mentioned, also by country, the portfolio has remained relatively stable. And LTVs within those countries, as you can see, quite transparent, are in a close range, around the median of 57%, i.e., the lowest point would be 44% LTV for the country portfolio and 69% for the highest. Both of those, as you can see, remain -- represent relatively small volumes of the overall portfolio. The average yield on debt across the portfolio sits at a very comparable 6.7%. This is lower than the yield on debt of 8.9% per year-end. And I wanted to take the opportunity to further elaborate on where this comes from and maybe give you a couple of surprising points to that.On Page 11. As I said, the overall LTV stayed within the range of those prior to COVID, but even that has changed. Contrary to the general assumptions that are -- that the retail segment has suffered or will suffer a lot during this crisis, in our book, that is not the case. We started -- we finished the year 2019 at an average yield on debt of 9.6% and per end of September have a yield on debt of 8.4%. It indicates a much more robust portfolio and performance than maybe expected by many participants. It's a bit joking, but it is not that somebody decides not to buy TV, people have pushed off buying TVs. That's somewhat of an effect of event spending. But even counting that aside, the overall sales for retailers, stationary and online, has increased year-to-date over last year.As expected, logistics and residential properties remain quite stable with office properties even increasing in average yield on debt over the term since end of 2019. When we look at hotels, it is quite simple. If a hotel is closed one day, it doesn't generate revenues, but the first day, it will still generate a lot of cost. That is simply due to the fact that hotels are little companies. They have 100, 200, 300 plus/minus employees that don't just vanish just because you locked the door. So it takes them longer to decrease their cost base. But by the way, as last crises have shown, not only do you -- are you able to reorganize your staffing, you're also able to decrease costs in the long run, which usually means that there is a quick ramp-up should top line revenues come back in because you simply have a better cost structure.So how do we approach the hotel sector, both in terms of the existing book and as well as in terms of going forward? And that's why on Page 12, I wanted to give you a bit of a background. Hotels had, long time, been part of our strategy, to be exact, a dedicated strategy since the year 2000. The team members of our hotel team all stemmed from the industry. That doesn't mean that we necessarily hire the front desk clerk, and not to say that we wouldn't, but we haven't so far. But absolutely true is that our people and employees in that team stemmed from the industry, from management companies, from owners of hotels, from operator of hotels or developer of hotels and even valuers. So all of that, we have gotten in-house. We are able to discuss P&Ls with our clients the same way that they do with their colleagues.As I said, we started out 20 years ago that led up to the financial crisis having a book of EUR 3.7 billion across the globe worth of hotel financing with an LTV of 68%. Coming into this crisis, taking 2019 December as the benchmark of that, we had a book of EUR 8.6 billion with an LTV decreased significantly to an average of 56%. We have made a very clear decision to invest into this industry throughout the cycles, not just when it seems fashionable. We, by the way, have steered both portfolios after the events of September 11 and the World Financial Crisis without any large harm. On the contrary, it's fared very well and, comparatively speaking, even along or better than of the other asset classes.On Page #13, we are showing you details that we have not shown this way before, but I thought that this was something that might be of interest to you to further show insight and shed insight into our portfolio. The portfolio, as I said, is at EUR 8.6 billion. 45% of those are portfolio deals, i.e., legally cross-collateralized, to the legal extent possible, portfolios that look at good granularity. We invested in 19 countries with those hotels, in total, 236 of the same with an average exposure per asset of EUR 36 million. So all in all, a simply very granular, well-diversified property portfolio.On Page #14. As I said, well diversified. It is also well balanced in terms of brands and hotel categories. Location within those countries are the major CBDs. That means London, Paris, Amsterdam and, yes, New York and other major metropolitan areas. If we deviate from that, that is, in connection with portfolios whereby you get risk reduction very granularly in those portfolios, again, that is only an addition to portfolios, not a focus.Of the top 15 loans that we have on the books that are all above EUR 150 million, 12 are portfolio financings, so no single-asset financing. Only 6 of those were provided with additional liquidity since March. That means, the other way around, the others supported their assets out of their own means via equity injections reserves built up over the past 10 years of success in this industry. Hoteliers are used to seasonality and therefore usually do keep some of the cash within those companies and on their bank accounts. Overall, merely 35% of the total hotel portfolio has received liquidity support from our side, representing less than 1.4% of the overall hotel portfolio.Taking your attention to Page #15. This is the similar display of what I've shown you before, this time just for hotels. The hotel book has about 80 -- sorry, 58% of its volume located in Europe, 38% in North America and less than 5% in Asia Pacific. And as you can see, it is also, as I mentioned, well diversified over the different segments and categories, however, with a tendency to the higher-weighted assets. LTV at the end of September stands at a very low 56%. And as I mentioned already, due to the lockdown, we have a limited number of valuations and are working on getting most of them done by the end of the year. Therefore, we have assumed, with the current received valuations, with our market insights, speaking to valuers and clients, we are assuming that the LTV per year-end of the portfolio will be within a range of 65% to 69%, as you can see on the bottom left graph. Again, this compares well to the onset level at the financial crisis end of 2008 of 68%.On Page #16. As I have mentioned before, if the hotel is closed for one day, it doesn't generate income, and it has a larger running cost base. However, it can be reduced significantly, but it takes time. And as I mentioned, yield on debt, therefore, has decreased the most in this asset class, namely from 9.6% to 3.6%. As I've also mentioned, in conjunction with this, is that 10 years of booming industry has allowed for substantial reserves. Debt costs, at the same time, compared to 2008 where the Euribor was at an average of about 4.5%, it currently is at negative 40 basis points, making any and all liquidity support very affordable or, put like this, very cheap compared to the last time around. That is probably also one of the reasons why we do not see any markable increase in NPL transaction, distress transactions, for sales neither in the hotel asset class -- by the way, neither do we see it in other asset classes.The one thing that has happened over the past month is large -- very large amounts of liquidity has been injected into the worldwide system across the globe, creating even more liquidity and pressure to invest. With interest rates not going up for the foreseeable future and as the ECB has mentioned that they would consider, if needed, to go even lower, and you look at the U.S., they have gone lower to where they said they would not go, this has a significant impact on capital values, bridging cash flow declines via compression -- further compression for lack of investment alternatives in hotel assets.If you turn to Page #17. What happens with the hotels going forward? Well, I believe, we believe, and we see it, there is a significant catch-up demand that will come. Mind you, looking at the summer, just coming out of a complete lockdown, and whilst maybe there were restrictions as to which countries you could travel to, the hotels within the countries were absolutely filled. I think the [ Aareon Resort ], for those of you that are familiar with it, had 100% occupancy during summer.What does it indicate? I believe that -- and I can say that I'm German -- the Germans will not travel to either Majorca or Antalya in the summer with their families for vacation nor will they not take a trip to the Swiss, French or Austrian Alps or stay in Germany, going out to countries or visit the coast line in the Netherlands. I think we will learn to live with COVID and travel with COVID, not against it. Absolutely, point taken, the final resolution will come with an accepted treatment and/or a vaccine. This, we currently do not factor into our assumptions. Also, Resort Hotels have fared better as they are perceived to be mostly at the sea or in the middle of nowhere whereby you have less contact with other people, and you can drive to them.With our profound know-how and established networks, as I've written here, I think we are able to do the 2 things. In the morning, I feel like our team here in the bank, together with our clients, are working on our existing book. We take care of our existing book. We are in exchange with each and every one of our clients, made possible by our offices in the locations. And again, we are active in up to 30 countries. And as we have said, at the same time, in the afternoon, we change hats and look at opportunities because there's one thing. Hotels, during a downturn, are the first one to decline in performance. This has been true for about every crisis there was. It doesn't matter what kind of crisis it was. But they're the first ones to come out of the crisis because hotels do need to do business.I believe -- when I'm being asked as to will you travel for business, will we travel, my guys and -- my teams ask me, "Will we be able to travel?" "Should we be traveling in the future for business?" And I'm going, "Well, let me put it a different way. I'll put a question to you. If you don't travel for business to visit your clients, I'm pretty sure that somebody else will do that for you." Picture is always nice. I think you can look at those, give you an idea of what we usually do, what kind of hotels we like.If you now look at the performance for the third quarter on Slide #19. We were able to generate excellent new business at very low LTV of 57%. Mind you, this is post-COVID valuation, not pre-COVID valuation. With 220 basis points of average spread, we are far above plan and below plan on the LTV planning. Now you ask me, "Well, what kind of business did you do this quarter within all the turmoil? And how can you decide that?" Well, first of all, whilst it is, I think, the asset class on bulk during the crisis, logistics. Logistics, everybody understands logistics because if you are locked up at home or have to stay home or can't travel or spend more time at home, you need to have somebody bring things to you. Stores are closed, you need to bring things to you. What do you need? Logistics. Logistics was undersupplied before the crisis and is even more undersupplied during the crisis.This also usually has the effect that as everybody focuses on this asset class, it becomes very competitive, both on the purchase as well on the finance. We are concentrating on our USPs. With our USPs, we can do difficult structures. We can do cross-border portfolios. We can do large loans. We have an excellent syndication partner portfolio. So what do we do? We can underwrite, in a short time frame, complicated structures, giving surety to our clients that they are indeed able to deliver on the day when they have to put deposits down and/or hand over the keys or buy the keys.We have tripled the volume logistics financing in the third quarter. And I can already give you a hint that this is continuing in the fourth quarter. We are and/or have or currently in the midst of underwriting and/or have already closed 3 transactions that are somewhat in the range, and don't quote me on the exact number, between EUR 300 million to EUR 500 million; diversified portfolios in countries, across countries, cross-collateralized, which, by the way, to a large extent, we have already placed with our partners, that benefit of our expertise that they do not possess in-house and we do.Also, you're going to ask me why and how many hotels did you finance? Unfortunately, I have to say, in the third quarter, none. This is not planned. It's the other way around. If -- we would love to finance more hotels because we think that, in the crisis, you finance when it's at the lowest point and not when it's at the highest point. And the other thing is we look through the cycles. We have done so over the past cycles very successfully. And we'll copy and try to copy what we've done in the years following the financial crisis, make use of a limited amount of available resources for something that is very sought-after, and one of them is hotel financing. Maybe that's contrary to some market participants' perception. They're better for us because it gives more choice and better risk profile to our book.Two more things to hotels, and then I will hand back over to my colleague, Marc. We started -- we ended the first quarter of 2020 with an NPL portfolio in the hotel space of EUR 178 million. The same number was on our books at the end of the second quarter. And at the end of the third quarter, the number is EUR 153 million. Two things, it didn't increase. And the second thing, it decreased. I think to show that we can decrease NPL portfolios in a crisis shows to the strength of our portfolio.And last but not least, for those of you that are interested in the capital markets and how they react to potential easing of a COVID crisis, if you look at the share price of the 6 or 10 major U.S. hotel REITs that invest exclusively into hotel and hospitality assets, and you see -- take a look at their share price, what happened on the day that a small company and mindset that they might have a vaccine that gives a 90% immunization against the virus, their share prices, I believe, jumped, and don't quote me on the individual numbers, between 50% to 300-plus percent. All I'm saying is that people do not believe that there is no value in hospitality. But in crisis times, it is much safer as a perception to invest in offices, and we believe that this is a good opportunity to be countercyclical.So with that word -- those words, I'd like to hand back over to my colleague, Marc.
Yes. Thank you, Christof, for the insights.Let me now continue with the latest developments in our other segments, namely Consulting/Services Bank on Page 20. All in all, we can say we have a good performance here this year. Deposits are stable. You know that is important for us. They are a main funding source. We always expected them to, say, react safely in a crisis, and this is exactly what they do. You can also see that we increased NII significantly versus last year where, due to the adjusted modeling and the transfer pricing, we had a pickup. And this is not only internal allocation, that's also external increased NII value that we have here by replacing longer-term funding, as you know. So overall, we can say with the slightly higher short-term interest rates at the short end, we are even more confident regarding the overall performance this year. The original guidance, as you know, was minus EUR 20 million. We already increased that to minus EUR 10 million in the Q2 call, and we would now be at around minus EUR 5 million to minus EUR 10 million, which is our current expectation for the end of the year.So you can see that smaller shifts in the interest rates are already having effects here. And well, I well remember, I wasn't here at that time, but people tell me when this segment yielded substantially positive profits in a higher environment. It's not that I'm promising that we are going to be there soon because I don't think that interest rates will increase substantially over the next couple of quarters and years, but it's certainly an option value that we have. In the meantime, we want to unlock our business opportunities, especially when it comes to the capital-light, so fee-based business. Another milestone here was that we formed a joint venture with ista. We took 40% here, which is a very promising business model. So we are happy that we have concluded that.When it comes to Aareon, on the next slide, I just talked about stability here. Again, I would say it's a resilient performance under COVID-19. The EBITDA is at -- the adjusted EBITDA is at EUR 41 million versus EUR 42 million last year. Same is true for the margin, it was 22% versus 23%. So of course, COVID diluted our ambitions this year. We explained that to you already. Our EBITDA ambition for this year would be -- would have been EUR 10 million higher, but we can confirm that it will stay in this range. I'm, personally, even a little bit more positive on the performance in Q4 but certainly too early to talk about it. Nevertheless, what we can certainly say is that this is a single event. It was very much driven by COVID-19. It is, especially, our consulting business which is affected here. And midterm, we firmly believe that COVID-19 will be a catalyst for our digital solutions, will even drive the demand for our clients. And this should be reflected then in the value creation plan that we are now developing together with Advent.Regarding the revenues, you can see that on the next slide. Overall revenues increased by 4%, still very much driven -- and that's the good message -- by the digital revenues that grew by 25%. The ERP revenues decreased. This is not the ERP software business itself. It's the consulting business, which is part of that product line. So as I just said, due to the lockdowns, some of our clients shifted their projects forward. They didn't start them. So the consulting utilization rate, you can see that it was at 60% as a comparison of 70% in the year before. Another positive aspect is that the recurring revenue share increased to 66% from 64%. It's also a very important element of our value creation plan. And here, the trend towards SaaS-based ERP is ongoing and also the demand for outsourcing services of Aareon is also ongoing so, as said, a very positive and then very stabilizing development going forward.So let's have a closer look into the results on Page 24. The operating profit was at EUR 11 million, as I have already stated. We have seen the turnaround in NII. Of course, Q3, as I mentioned, was diluted by higher loan loss provisions, mainly resulting from overlays, and the admin expenses are under control. So please let me remind you, if we look below the operating profit, that we expect an above-average tax rate this year. That has a simple reason. The fact is that the share of the nontax-deductible items, like the banking levy, I think, is the most prominent example, is increasing. And that, unfortunately, is driving the tax rate up. This is what we had to consider here. And nevertheless, also to be reassured, we confirm, of course, our normalized tax rate of 34% in a normalized environment.So going ahead, NII, as I just said, we had a turnaround here. This is very much related to the portfolio development. You know that the portfolio decreased to the lower end of our range of EUR 26 billion to EUR 28 billion due to 2 facts: one was the derisking, especially in Q4 last year, also somehow, of course, now in Q3; but also due to the muted new business in the first half. This has turned around. Christof just said how confident he is that we can even go to the upper range -- to the upper end of the guided range, so towards EUR 28 billion. That has a nice side effect so that we can be very confident to collect the TLTRO bonus. And we have already taken here EUR 4 million in Q3 already.Regarding risk provisions, you can see that on the next slides. Over the last 9 months, we have digested in the risk provisioning line EUR 111 million COVID-19 effects there of EUR 30 million in Q3, over 9 months, EUR 57 million came from those management overlays, EUR 20 million in Q3. That is mainly accounted in Stage 2. Some Stage 3 overlays will also build, especially for our U.K. portfolio, where we had a stronger deterioration of the macro forecast. So we took a special overlay here of -- I think it was EUR 9 million for the U.K. portfolio remaining, as I said, mainly in Stage 2.So the total COVID-19-related burden from the valuations across the 3 lines who are affected from valuation increased to EUR 138 million. Please be reminded that these effects show up in LLP than in fair value P&L line for those loans that were classified as fair value P&L when IFRS 9 was implemented and also for the other expenses or any other expenses for those real estate held on our own book. In Q3, the COVID effect mainly focused on the risk provisioning line, EUR 30 million, as I just mentioned, EUR 32 million in total, so some EUR 2 million in fair value P&L. Also, one thing I forgot to mention regarding back to LLP was that the underlying loan loss provisions of EUR 31 million were absolutely in line with the expectation and the previous year.The positive message, however, and this can be seen on 27, and I think it's a little contradictory, nevertheless, it's a fact. Our NPLs didn't increase in the crisis. They continued to decrease. So I think this has really taken -- to be taken into account. As you can see it here, from the top in Q2 2019, or from 2016 levels, we are basically down by 50%. We have now a defaulted exposure ratio of 3.9%. They still decreased in Q3. That was mainly driven by Italy. You can see it here, down from 640 to 500 this year. So we continued derisking, as you know, and we cut NPLs in Italy by 50% over the last 12 months. So I think quite a successful workout. We only had 2 new NPLs in Q3 overall, and that was one, corona-related one; and one, let's say, normal new NPL. So overall, an NPL reduction of EUR 80 million was achieved in Q3.Fee income, on the next slide, not much to tell you about it. Driven by Aareon, we have just discussed that, increased from EUR 54 million to EUR 57 million, so it's performing well. Admin expenses, as I also said, under control. So we are flat compared to Q3 last year. Please be reminded that, of course, the growth with Aareon with a cost/income ratio of around 80% always goes along with the cost increase for new consultants, for new staff, whatsoever. So growing Aareon also means growing costs in -- on the group level. That means, when we are talking about flat cost, the costs in the bank have decreased by EUR 3 million, whilst they have increased according to the strategy in Aareon by EUR 3 million.So let's turn to capital, Page 31. Basel III, the ratio increased to 20.4%. RWAs decreased despite of the volume increase. The main factor is the CRR2 Quick-Fix, the implementation of the ESME (sic) [ ESMA ] factor in Q3. So overall, we had an increase -- sorry, a decrease of the RWAs and an increase of the ratio already having some COVID-19-related effect already in the RWAs in Q3. In Basel IV, this ESMA factor benefit is not showing up because it's just not affecting Basel IV. So therefore, due to the volume increase, the ratio decreased slightly to 13.9%, but still at very comfortable levels there.So as I just mentioned briefly, be reminded that those overlays, that means those value -- the forward-looking value adjustments that we take in the risk provisions cannot fully be taken in our RWAs. This is due to the ECB-approved model, which doesn't allow for those elements. So we have to wait until all our external appraisals are coming in and then have to take them into account, meaning that RWAs should increase in Q4 when those external appraisals are available. However, it should be significantly below 10% under Basel III and even below 5% under Basel IV. That is our current expectation. Other drivers in Q4 will, of course, be the volume growth on the one side but also the positive contribution from the Aareon gain on sales on the other side.Balance sheet structure hardly changed here. Again, we increased the balance sheet due to the participation in the TLTRO by EUR 4.3 billion in Q2. Here, we don't -- we will not have a funding issue going forward. I think that is somehow a concern in the market that when this runs out and many banks have to tap the market to refinance, that there could be some constraints. This will not be a problem we have to face. Why is that so? Because EUR 4.3 billion of the -- EUR 3 billion of the EUR 4.3 billion are directly on the ECB deposit at this time, so they can be paid back without any consequences directly, and the remaining part is fund [ briefer ], EUR 1.3 billion on our own books, which I think can be placed easily at the market.And this is witnessed on Page 33. What we can say regarding funding is that our funding plan for this year is completed, even in the light of the growing portfolio that Christof just promised. So we are fully funded also to cover that. We were really successful here with the private placements we do when it comes to unsecured, happily, private placements because they give us a clear cost advantage. We have placed a EUR 500 million senior preferred benchmark in September at good rates, and we have recently placed a EUR 500 million fund we've benchmarked. Both of those transactions were significantly oversubscribed.Treasury portfolio. Here, no real new developments in Q3. Maybe you will see something in Q4. What we are looking here is, especially with regards to ICAAP, to identify optimization potential. And this is why you can see that the lower-rated assets classes are decreasing.So let's come to the outlook. Let me, of course, remind you, as always, and this hasn't changed, that we have an obvious disclaimer. The outlook in these days is certainly difficult and volatile, subject to the increased uncertainties. However, we have also heard, Christof just alluded on that, that there can also be positive news on COVID regarding the vaccine. This is not yet figured in our outlook so far. So what we expect, I mentioned that at the beginning, is that market forecast, they have deteriorated, and therefore, we expect a more pronounced decline and a slower recovery delayed by roughly 6 months. So we have directly put that in our models and, therefore, increased the overlays. We continue to anticipate a market recovery in '21 and '22, of course. And against that background, the bank expects a significant positive operating profit in the mid-double-digit euro million range for this year.But the crisis is one, but not the only one or the only thing, that kept us busy this year. The other important one is, of course, working along the strategic program, where we have reached major milestones. And I want to remind you of them. On Page 38, of course, most prominent one, the minority sale in Aareon and partnering with Advent before, to make this possible, the unbundling where we have reached great steps forward, and we'll continue that. Then also regarding C/S, I just mentioned that we want to grow our capital-light business. We have established here the joint venture with ista, for example. So that is one element to support these strategic goals. We have continued, even in this difficult environment, our accelerated derisking. And as Christof pointed out, we have taken the opportunities in the new business in commercial real estate financing.So you can see we have a sound financial and strategic basis, but we have to ask ourselves how we can be even more successful in a new normal after COVID-19. This is why we have initiated a 360-degree review of our Aareal Next Level program with the support of McKinsey at this time to adjust and improve our strategy wherever necessary.What are we looking at? This can be seen on the next page in this context. We will analyze how to allocate capital in the most efficient way against all current and future normative and economic frameworks, so Basel III, Basel IV, economic ICAAP. They are somehow contradicting, so it's really a difficult task to find the right balance. But here, we are very confident that we will develop very good concepts and improve our steering here. We will analyze the possibilities to optimize our capital structure and the level as well. Of course, this is always subject to the necessary approval of the ECB.We want to continue to invest in capital-light business organically and by M&A. I think the most prominent part here is the value creation plan of Aareon and achieving the Rule of 40. But as well and already mentioned, we are looking at opportunities in C/S Bank also for those capital-light business, like this ista joint venture that I mentioned. Where possible -- and this is, of course, always opportunity-driven, we will continue our track for badwill deals, M&A deals, like you have seen in the past, so WestImmo, Coreal, DHB. But of course, this is very difficult to plan. And we will also look at our corporate setup. That means we want to figure out what the new way of working means for us, for our premises, for example, for our IT, is it ready for the next wave of digitization, other things, how can we manage our pension in the lower for longer scenario and so on and so on.So last, but not least, of course, we also want to strengthen our ESG footprint to become even more attractive for our clients but also for our debt and for equity investors. And the ambition is clear, you can read it here. We want to create a sustainable shareholder value in this new normal of COVID-19 with the aim of reaching our cost of equity midterm, and we want to resume our track record as a reliable dividend payer.So let me summarize. Aareal, as I think you have been able to see, has proven its resilience even in those difficult times. We have a positive operating profit despite of the significant COVID-19-related burdens. Risks are under control. We have a strong financial position both in capital and on the funding side. We have specified the outlook, confident to reach a positive operating profit this year. And we have achieved major strategic milestones, have started the review of our strategy to be ready for the future.So thanks for listening at this point, and we are now, of course, happy to take your questions. Thank you.
[Operator Instructions] And the first question comes from the line of Johannes Thormann of HSBC.
Johannes from HSBC. First of all, the new business volumes -- probably this is one for Christof -- were weaker but at better margins, the Q4 outlook as well as the midterm outlook, and what does this mean also for your new business volumes, in general? Do we have, at one point in time, the ability to see back volumes of EUR 7 billion to EUR 8 billion new business? Or do you think you're structurally now shooting for lower levels, at EUR 6 billion or so? And also the margins, what do we have to expect in the quarter and in the midterm?Secondly, just to get a better feeling for your property types, could you rank the 5 property types by risk and probably also by reward in terms of margins so we get feeling what is the most problematic and what is the least risky business? And last, but not least, on your net interest income, the net interest income, if I remember correctly, you guided for EUR 130 million average in H2 plus TLTRO benefit. And then now we have EUR 128 million, including TLTRO benefits, in Q3. Do we -- can we still expect a strong uplift to reach that guidance in Q4? And then how is the better volumes or the higher lending volumes impacting this?
Yes, Johannes. Thank you for your questions. Let me take them, hopefully, somewhat in the order that you have asked them. When we look at new business, it is a function of -- I always imagine, taking a glass of -- we determine that the rim of the glass is 100% or our goal target where we want to be, then we can only fill water in that glass when some has evaporated, has been drunken or has spilled. So the function of new business is really the addition and subtraction of the current portfolio, our goal and the difference in between. So as you might have heard in the market, there's a lot less transaction volume because the actual incentive of refinancing at this time is probably not as large than it used to be just because refinancing is probably more expensive than it used to be in 2019, which also is displayed by our higher margin.So I would say, rather than looking at the pure new volume of new business, we're looking at the aim of our year-end portfolio volume. And as Marc has said and as I have stated, we are very confident that we will be heading to the overall volume of and around EUR 28 billion, give or take. Again, when you look at margins, we have shown you quarter 3, I can say that quarter 4 looks quite good, to that extent, not giving any details and numbers, but let's assume they don't deviate that much from the levels you have seen so far.When it comes to rank and property types, it's always a good question. Many people say it's personal. When you talk about hotels, everybody's got something to say. When you talk about logistic asset, people are much more numbers-driven, and there's much less emotion in logistic assets. I think all these assets you need to assess individually. And that's why, as you can see, the hotel portfolio has a lower LTV than probably an office portfolio has just because, in hotel portfolios, you do expect a fluctuation in cash flows. You might have a bad season. You might have a year of less convention. I can tell you that Düsseldorf, as a city in Europe, every 4 years, has the highest RevPAR increase of about 35%, purely because there are 2 large conferences that come in the same year.And at the end of the day, it's also a function of supply and demand. So can you finance residential? Yes, absolutely, you can. But there are a lot of people doing that, and the margin and profits are extremely thin. When it comes to hotels, you use the cycles and you use supply-and-demand figures, again, with different KPIs. So I would do the same-day hotels in a lower LTV with higher margins than I would do office with maybe a bit lower margins and high LTV. But on a risk modeling, they can come quite close to each other. Now point taken that hotels are probably a bit outside the range just because you have to truly invest into expertise within your companies, which we have, as I stated over the past 20 years. So I would approach it rather than that. What do I like personally best? Absolutely, my personal favorite is hotels just because I think it's the most interesting, but other people might say that they really like logistics because they are much more prominent looking how traffic flow and infrastructure works. So I think that would be my answer to that.
Yes, Johannes, your question regarding NII, it's right, we had a little setback by the weakening dollar during Q3. Without dollar weakening, we would have been above EUR 27 billion portfolio already, and that should have also supported NII further. Nevertheless, looking at Q4, I'm still confident that, on the average, we will have a EUR 130 million average plus NII for the second half of this year. So you can also see that we are able to react quickly and to balance that weaker dollar. And this is why we are confident that we can go up to the upper range and please be reminded that even an increase of our target because, in Q2, we said to the upper half of our range, so basically pointing at EUR 27.5 billion. So despite of the weak dollar, we can quickly balance it, and we are even more confident now to go even above that. So that's the development regarding NII and portfolio.
Next question is from Mengxian Sun of Deutsche Bank.
So 2 questions from my side: one on risk provision outlook for 2021 and the portfolio outlook and the second one on the possibility of disposal of assets. So the first question is, is it possible if you can provide us some guidance on loan loss provision for 2021, considering if an efficient vaccine is available on the market and whether -- and how will that change the outlook in your REF (sic) [ RSF ] portfolio, especially in hotel retail office book. Appreciate it if you can share some thoughts on that. And the second question is, given the current or upcoming repricing in the asset market, do you see the possibility of disposal of assets both regarding to further derisking opportunities and also healthy assets on the secondary market?
Yes. Thank you for your question. Obviously, the first one is a quite difficult one because we have just started our planning session and are in the midst of the strategic review, as I just mentioned. So please let me express somehow an outlook, which is not based now on a concrete plan. But if the development is normalizing and recovering as we have just seen, then we would certainly not need further risk provision to the same extent in a forward-looking manner. That means I'm confident today that risk provisioning next year should be below what we have seen this year. But please let me be more precise then in our annual press conference when I have the figure available.Regarding disposal of assets, as you have seen, we have continued our derisking initiative successfully in Q3. And this is always driven by opportunities. We made clear from the very beginning we don't want to sell greater portfolios because the discount at that level is what we wouldn't accept. That this would not represent the values and, let's say, the unlocking potential of equity, whatever, which is on the positive side when you do such a deal. So we will do that very individually. You have seen the discounts we had to take were minimal. And as I said, we're more than justified by the relief in equity or RWAs that we have seen so far. So this is one thing.But when we are talking about disposal of assets, please be reminded, I mentioned that several times, we are not only looking at our loan book. We are also optimizing our treasury book. And I have hinted to that. We are especially looking at those kinds of assets that show high consumption mainly of ICAAP. Typically, those don't have high RWA ratings, but due to volatility, they have high ICAAP consumption. And this is what we're also looking at, and this is what we will continue certainly.
Maybe one addition to your question, from my side, when it comes to possible syndication of loans as also a part of, as you mentioned, disposal of assets, we have not stopped syndication throughout this year. On the contrary, I think we had to slow it down towards year-end. Why? In these markets, transaction volume, as I've mentioned, both on the distress side, but much more so also on the regular side, on the performing asset side, has slowed significantly across the globe. That means banks and owners are holding on longer to their assets; means that if you are trying to build up a larger volume, maybe your asset size on the equity or on the debt side, it is against a trend that simply yields less product.So we -- as I mentioned beforehand, are using our USP, so being maybe very focused on certain things and others are being quick, reliable, we can do difficult transactions structurally seen and have a standing in the industry of being an effective asset lender, should you, though, have a short time frame, which is often the case during these times to actually do a transaction. So the answer is we had to slow down on syndication. On -- the one other transaction that I had mentioned, especially when it comes to the larger logistic transactions, we were completely oversubscribed. We could have sold 150% of those loans, which, of course, we haven't because we after also need some net interest income. But let me tell you that we have sold large portions of these loans. And of course, in order to pay the work that we had to do to get there, we will usually keep a portion of the running and onetime profits in -- as we've explained on other occasions beforehand. So yes, syndication is absolutely an option currently and going forward.
[Operator Instructions] And the next question comes from the line of Christoph Blieffert of CommerzBank.
Two questions from my side, please, the first on your NPL portfolio and then secondly on your hotel exposure. On your NPL portfolio, it would be helpful if you could disclose the amount of risk-weighted assets, which are allocated to your NPL portfolio. And if you could disclose the share of retail loans in your NPL portfolio, this would be helpful as well. And then on hotels, here, it would be interesting to know which percentage of your hotel portfolio is able to generate a positive operating cash flow in the current environment.
Yes. Mr. Blieffert, thank you very much for your questions. I just have to look it up. The RWAs on the NPL portfolio in Basel III is around EUR 700 million and on the Basel IV, fully phased, around EUR 600 million. So that's the RWAs. Regarding retail loans, how many NPLs, I don't have the figure here, but it's minimal. I think Jürgen will provide you...
Retail.
Retail. I thought the WestImmo and -- okay. So I don't have the split here. So this can be provided by the IR team.
Yes. When it comes to hotel exposure and which ones have a negative cash flow, as I explained beforehand, hotels are much more -- when they open, they usually have a cash flow, maybe not the first day after reopening, but the second day or third day, for sure, because you can plan. Likewise, when hotel is closed, the cash flow is negative. So I would rather go via gut feeling of -- not by gut feeling but by the numbers of how many hotels are currently closed and how many are open. So the majority of our hotels have opened back up. And even in Europe, I think, for the most part, at least for business travel, they did stay open.Cash flow for hotels, as you know, is projected and looking backwards at the same time because, again, you have no fixed leases that run for 10 years, you have daily leases. So the convention is on that factor, as we have explained here, which is still at a 3.4%. And just to also take a bit of a scare out of closed hotels have negative cash flow, the good thing about hotels is within the structure, they already, by description, have large cash deposits, which are used usually for maintenance when hotels are used. There are [ SS&E ] reserves being built up there, there are trading accounts. So even if no equity would be injected in addition to what is there, they can survive for quite a period of time. And again, we have seen by the vast majority of our borrowers, they are bringing equity to the table. So as I said, hotels is difficult. When they close, they're negative. When they open, they usually tend to be positive.And then the next question that's also often asked, at what percentage of occupancy do you think the hotel is profitable. That ranges across countries, price levels and locations of those hotels. I think in Germany, from what I have heard and know, a good thumb -- rule of thumb time will probably be about 25% occupancy. That's when most of German hotels will probably break even. Below that, it will be a negative cash flow. And above that, it will be a positive cash flow. That maybe helps to answer that question.
The next question is from Tobias Lukesch from Kepler Cheuvreux.
Yes. Two questions from my side. First, on capital and the second one on dividends. On the capital, I was wondering since you now officially closed the deal, the Aareon sale, the partial sale, the EUR 180 million in capital gain with the Q2 call -- or at the Q2 call, right, at the Aareon acquisition call, basically, you mentioned that this EUR 180 million would be reinvested. My understanding was mainly in Aareon but partly, potentially, in the bank business as well. Could you please again elaborate a bit how you think you will apply this capital gain and consider the possibility of distributing some of this to shareholders? And in this connection, the second question on dividends, could you please provide an update like how do you see distributions to shareholders currently? What should people think of the 2019 dividend? Is that gone? Or is there still a chance of seeing the payments in '21 at least -- essentially even the special dividends potentially subject to regulatory approval?
Yes. Thank you for your question. First of all, you quoted us correctly. The Aareon gain should be used for growth. Especially in Aareon, we have several levers here for M&A-driven growth that should also be planned of our goal to become a Rule of 40 company. First of all, of course, it's the cash flow of Aareon that can be used. Here, we are talking about EUR 20 million to EUR 30 million every year. Secondly, it's leverage on Aareon side. Be reminded, Aareon has hardly any debt, yes, so they can also fund some of potential M&A growth out of debt they could take up on their side. And last, but not least, we are also able and willing if there is a good target to inject equity. Here, we said, together with Advent, that we are committed, and we are also committed to inject equity according to our current stakes. So would be 70% us and 30% Advent.Regarding dividends, let me say it very clearly, we want to pay a dividend in 2021. Nevertheless, and I think you're also aware of that, this is subject to ECB approval. And at least what I heard is that the Supervisory Board of ECB wanted to decide on a potentially new policy in November. They have shifted that decision now to December, and we have to wait and to see what is possible then. So it's quite difficult, of course, to anticipate that at this point in time. But what we have also said is we would also like to look at the total capital that we have. So it's not only CET1, as you know, and hopefully, get a good package here to the benefit of our shareholder.
Yes. If I may follow up here, so I understand that you're not committing to 2019 dividend basically to be paid in '21, which is, I think, fair. But looking at the capital base and factoring in back at the envelope, basically, the RWA increase on the market revaluations on the growth of the portfolio and also adding the EUR 180 million in total to your capital, basically, I would end up with a -- still with a 13.9% core equity 1 ratio basically. And so I'm just wondering, like, if I take that out, the EUR 180 million, I have 12.9, which has quite thinned actually the gap to the special 12.5, which I think you still have as a management target. So I was just wondering, like, does this leaves you with EUR 65 million, so more or less EUR 1 per share in excess capital with that earmarked EUR 180 million capital gain. So yes, I mean, what is the message on the payout going forward? So is that firm? Or are you really more transitioning into that kind of growth, investing especially at Aareon?
Well, look, first, I have just to reiterate what I said. The EUR 180 million, to a large extent, is a buffer for potential growth in Aareon. So we have to consider that. We will certainly know more once we have revised the strategy and done the value-creation plan. With regards to ECB, it's all speculation. But obviously, what I hear, there is still quite a contradictory, so to say, messaging that we hear out of the Supervisory Board. What I wouldn't expect is that we move from a situation where nothing is possible, moratorium, to everything is possible after 1st of January. I don't think this is realistic. And this is why I'm saying, I think it is best, to the best benefit here for our shareholders, that we are looking at our total capital structure. But this, again, is all subject to approval by ECB. So we will have that on our agenda. We will have those discussions. And we just have to wait and see what the position of the ECB will be going forward.
The next question is from Philipp Häßler of Pareto.
Yes, Philipp Häßler from Pareto. Two quick questions, please. Firstly, on the hotel portfolio, perhaps you could shed some more light on this. Could you give us the proportion of the hotels, which you consider as business hotels versus tourists hotels? And secondly, on the North America portfolio, which declined quarter-on-quarter, just to make sure this is probably due to the weaker U.S. dollar you are mentioning.
Yes. I'll take your first question. This is -- the second question, sorry. You're right, that is mainly due to the weakening U.S. dollar. And Christof is just looking for some figures.
I'm sorry. The microphone, of course, was off. I'm sorry. Just to be correctly answering to you, you said what's the percentage of leisure hotels versus business hotels. Is that correct?
That's correct.
Okay. It is difficult -- well, on the -- if you take resort as a leisure per se, then that would probably below 10% overall as a hotel type, as a destination property, and 90% would be more business-oriented or a mix. If you look at probably the average segmental mix that we have within those, we have about 40% leisure, about 45% corporate transient and MICE business on meeting, planning and incentive would probably be somewhere around the 15%. So tenancy is about 50% split between business, leisure portion in those hotels, again, differentiating not to say that we have 40% of leisure hotels, yes. So true resorts or lease reservations, probably less than 10%.
The next question is from [ Kyle Mack ] of Petros Advisors.
I wanted to ask with regard to cost, which was stable in Q3 compared to last year. And I want to particularly understand what accruals have been made for compensation in this regard. So is there any form of bonification that is in these plans? And if so, what amount? Secondly, I would expect that you have a substantial saving from a complete hold-to-travel activity? And I'd like to understand what amount you're currently saving by being forced to doing everything via teleconferences since you're not being able to travel. So to what extent there is a substantial cost increase that is hiding behind the fact that costs are only stable.And then I want to understand the third thing. There is obviously a regulatory ruling on clawback. So I would expect that, given the exorbitant levels of compensation in the bank, historically, that we're going to see a substantial amount of clawback now that we're seeing a bank that still has quite an elevated level of NPLs compared to any other bank we look at in Europe and is, again, building nonperformers in the portfolio. I'd like to understand how that clawback works and who will be affected by it.
Yes. Thank you, Mr. [ Mack ] for the question. Regarding bonification, we usually take 100% as an assumption throughout the year and only adjust that in Q4 when the total results are available. So that would be an adjustment then booked in Q4. When it comes to travel, the underspend is around EUR 1 million to EUR 1.5 million, if I recall it correctly. But please also take into account, we also have increased costs, on the other hand, regarding management and staff town halls, et cetera, which are, of course, then for the first time to be held via videoconferencing. This is, of course, not to the same extent, but it's also 3-digit-thousand euro figures.And regarding the clawbacks, yes, certainly, there are certain clawback clauses. They are disclosed, to my knowledge, in the annual report to some extent. You said that NPLs are rising. I have just outlined that we have even decreased NPLs so by nearly 50% since last year. So also here, we have, of course, at the end of the year, a revision in the Supervisory Board. And yes, I can just point to after the closing of the year and to the duties of the Supervisory Board here.
And what is the level -- you said you're accruing at 100% for bonification? What is the level in euros that has been put into the Q3?
How many million euros have been accrued?
I have to come back with that. Sorry, I don't have that available. As said, it's stable to the earlier quarters.
Okay. We can have that number updated.
Yes. Any further questions from your side?
No.
So may I ask the operator, are there any further questions?
There are no more questions at this time.
Okay. So thank you very much for joining in. We are now to conclude the call. We are, of course, happy to answer any further questions if they come up. The IR team is ready. And please don't hesitate to contact us. And looking forward talking to you next time. Bye-bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.