alstria S.à r.l. (AOX) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of alstria office REIT-AG regarding the 9 months results 2021. [Operator Instructions] I may now hand you over to Olivier Elamine, who will start today's conference. Please go ahead.

Thank you very much. Welcome, everybody, to cloudy and rainy Hamburg this morning for our third quarter results, and we're also very excited to publish our sustainability report this morning. And I'm here today with Alexander Dexne, which is alstria's CFO; and Julius and Ralf, which you know very well from the IR team. Without any delay, just running into briefly over the disclaimer and duty to update any forward-looking statements. And of course, I guess, the news this morning of the investment agreement that we have signed with Brookfield is clearly something that is going to be discussed more in the Q&A. So I just wanted to briefly give you an overview about what we have agreed and discussed with Brookfield. So Brookfield is preparing a voluntary tender offer for all the share capital of the company at a price of EUR 19.50 per share. that represents a premium of 6.8% on the last reported, which we're reporting today. EPRA NTA and 17.3% compared to the closing price yesterday. We have been in contact with Brookfield for a number of years, and we've been knowing them relatively well, and we share a certain number of views on how the office market is developing and in which direction it's developing. We intend subject to the review of the final document to be supportive of the offer, which is aiming at gathering 50% plus 1 shares of the company. And we do expect the offer to close in the first quarter 2022. I think from our perspective, I think it's fair to say that the office market is going through a major transformation as we speak. And this is both driven, and I think accelerated by what happened on the COVID and the new work from home policies that company adopting here and there. This has started probably before COVID. And you know our view that the market in Germany and the office sector need to upgrade and we need to move the buildings from where they are today into the 21st century. This is something we've been doing as a company for quite a while. You also have everything which is related to ESG and decarbonization. We're going to speak about that in more detail in a minute. But this increase into the transformation need of the market we believe, is going to provide substantial volatility in the market. And we see, as a company, a lot of value and being able to anchor ourselves to a large shareholder like Brookfield, who will be able -- with whom we basically share the similar view about the challenge of opportunity that are taking place in the market right now. So I think the result of that is we will need to do more, and we are actually doing a lot, but we need to do more on the asset, accelerate a bit capital rotation. We would be looking at keeping more cash at the company level and therefore, reducing the dividend going forward if the offer succeeds. So those are, I think, elements, which I think we have taken into consideration into -- looking into all of that. The attractiveness, I think, from Brookfield to the company, is essentially also linked to the quality of the platform, and I really would like here to insist on that. The work -- I mean, the only reason why we're able to go through that transformation is because we have been building over the years, a functioning platform, which is able to take those old assets, work them out through the newer concept through the ESG requirements. And that's really something which I feel is one of the valuable assets that we have and which is attractive Brookfield. And in that respect, they have agreed and to basically help us to keep and improve and attract more talent to the company. And from a governance perspective, the plan so far is that going to be no change at our level. So Alex and myself and then there will be a proportionate representation of Brookfield [ Supervisory ] Board, depending on the final outcome of the offer. I'm sure there is a lot of question about that, and I'm sure I have not addressed them all in the 2-minute introduction. But I'm just going to use the fact that you all want to wait till the end to ask this question to walk you through our ESG report because I still believe it's an important topic that we should be addressing, and then we can go through the Q&A. We have been like every year in November, we publish our sustainability report. This year is a bit particular because we happened to be during the week of the COP 26.So we are kind of in tune with the overall global news. We have been reducing our GHG emission. And as you can see from the slide, our kind of carbon footprint and energy footprint on the building is substantially lower than what we have into -- when you compare it to German or European offices. And our current portfolio, if you look at the CRM tool, which is basically seeing where we stand today compared to the target in 2030 and 2050. It is already for all practical purposes, very much compatible with the 2030. The way we achieve that is not necessarily by being hyper energy-efficient on the assets themselves, but it's mainly because our building, our kind of low-tech buildings, and therefore, they tend to use less energy. And obviously, once we refurbish them, we improved dramatically the performance that you have on that screen, which help us to become kind of very rapidly compatible with the 2050 and 2040 targets. The thing which I think is important to highlight here, not only from an ESG perspective, but there is currently a discussion about how much CapEx do you need to do to meet your ESG targets. I mean from our perspective, the CapEx that you need to put in, you need to put in any way. So the sense of direction is clear. We know where the market need to go. And we knew that for the last 10, 15 years. So it's not like we've discovered yesterday that we need to invest in the building in order to meet those targets. And this is really -- has been our bread and butter for the last 10 years or so. So there is no fundamental change in the amount we need to invest in the building compared to what we were planning before. We did know what was necessary and what was required. And now, we're just going out with those plans, which basically allow us to improve the overall performance of the assets. We really see ourselves and the purpose of the company as helping into that transition and doing that in a way that is both sustainable financially and sustainable economically. One of the points, I think, in our narrative, which is very, very strong and thankfully, is being very much picked up more and more in the market is the importance of retrofitting existing building versus building new assets. And this is really, I think, 1 of our main contribution, if I may, to the real estate sector. In a sense that we believe that the efforts need to be focusing on retrofitting existing buildings, which is both financially viable and ESG compatible. What you see on the slide, if you happen to just be coming into your new office building, what you see on the slide on the left side of the slide is basically showing how many years you would need to use green energy or how many years you would need to recycle to basically compensate for the amount of carbon that you have been emitted just to allow you to get into that building in the first day because that's the amount that has been emitted to build the building itself. So if you look at that slide, it should be self-evident that getting a new building is not as efficient as you might think. And it's actually probably 1 of the worst thing you can do if you're looking at it from an ESG perspective. And you should be focusing your attention on if you're a tenant renting into a renovated building and avoiding new building as much as you can. And that's something which, as a company, we strongly believe in the stranded assets are not the old buildings. There are the buildings that need to be built in the future. We have been also -- and this is really 1 of the new topic and focus, I think, from an ESG perspective, which is biodiversity. I mean I've been quoted in press saying that alstria has been doing a bit of greenwashing here and there recently, and this is probably 1 of the place where you could argue that. We are 1 of the largest manager in Europe of Green Roof. We have the equivalent of 12 football fields of green roof that we are managing and a couple of pictures to illustrate that on the slide. I think we also need to be clear that the reason why we have those green roof is because they are in most of the things which we operate mandatory at the time of the construction. And also, they don't necessarily increase biodiversity, but this mitigate the negative impact that the building have. We have been also investing into timber and forest. We've done our first acquisition. And here again, although we are highlighting that into the ESG report, the view that we're taking is that timber looking at decarbonization path that the real estate industry is going to take is going to become a critical element of our business going forward. And -- this is by definition a resource, which is limited in terms of supply, where the demand is going to grow exponentially as we move into the carbonized economy, and we try and the intention here is to secure our supply, secure the supply of the company going forward. So we've made that first acquisition to better understand how that market function, better understand how you underwrite the forest. But this is -- it's not driven by -- I mean, we're not looking here at offsetting our carbon emission. We're really looking at securing the future needs of the company. And the forest we acquire right now basically represent around 2% of our annual needs in terms of timber. So if we want to secure that further, we will need to continue investing in that field. That's it for the sustainability report. I will clearly encourage you to take a look at it. I'd like to thank all the people at alstria who has been putting the information together -- There is a lot more into the report that we just discussed today, and I always hope you will find it as entertaining to read as we find it interested to put together. And so I'm looking forward to your feedback on that, although I assume it's not going to be on that call. Moving to the quarterly results presentation per se. The revenue of the company has been going up 3.4%, our FFO is up around 4.8%, and the FFO per share is also up approximately of the same amount. We are reviewing the guidance, and I'll come back to that at the end of the presentation to basically give you a bit more overview about the nature of the guidance review and where it's coming from. The leasing market itself has been improving gradually over the last few months, which is reflected a bit in our guidance increase. But we still expect them to recover at a more global scale, assuming nothing bad happened from the health situation in early 2022. There is still a lot of backlog of leases that have not been signed over the last 18 months that need to go through the market. But there is clearly a positive dynamic around the letting market right now. Our EPRA NTA is at EUR 18.26, which is up 2% year-on-year, and our net LTV is up as well, which is basically reflecting the acquisition that we have been doing over the quarter at around 30%. If we have a brief look at the portfolio. I think here, again, I think the main thing I would like to highlight, which is similar to what we have highlighted in the first -- in the second quarter is the fact that you don't have any more a placeholder called others. So we have kind of finalize cleaning up of the portfolio when it comes to the acquisition of Deutsche Office that we've done in 2015. And now we would be moving into a higher kind of asset rotation in order to fund for our development pipeline, development pipeline that we have. So the portfolio from a geographical perspective is very much focused on the 5 regions where we want to be. Munich is still not on that map, and it's still a market that we are considering. But so far, we have not find the right and appropriate entry point into that market. Looking very briefly at the letting result. So we signed 26,800 square meters of new leases, a number of extension. As you know, tenant has a tendency when they have the choice today to extend and stay where they are rather than move out. It's an easier choice given the COVID and the question mark around how much space do people need that represents around EUR 24 million of future income for the new leases and 21 for the lease extension. And our average rent per square meter is up to EUR 13.24. Looking now, again, briefly at the balance sheet. I'm not going to expand too much on that, but investment property is up 3.2%, essentially reflecting the acquisitions that we have made as well as the CapEx investment and the portfolio, the change in equity is essentially related to the dividend payment and basically the net impact between the dividend payment and the retained earnings that happened since the beginning of the year. And the net financial debt is up here again, reflecting essentially the acquisition that we have been making converting cash into assets, increase the net LTV at the company level. And looking at the profit and loss, I'm also not going to spend too much time on this because we have been looking into that and discussing it briefly on the introduction slide. But our revenue for operation is up, which is triggering the increase into guidance, which -- on which I want to spend a bit more time to give you a bit more granularity about where this is coming from and what implication it have for future years, FFO although I'm not intending to provide a guidance for next year. The revenue guidance is basically driven by the transaction that we have been doing, but also by lease up, we were anticipating even a lower turnover in leases that what we have finally achieved. And on the FFO guidance, 1 of the main adjustment point relate to the fact that number of the measures that we're expecting to do in terms of maintenance in the assets were not done in 2021. Either because of COVID or because of the supply chain constraints, but our intention is not to build up a maintenance backlog. So what we have not done this year, we will be doing next year. And therefore, we should have kind of a higher real estate operating expense next year compared to the running average. Whereby this year, we're having lower real estate operating expense compared to the running average, and that's basically an effect, which is just going to kind of correct itself year-over-year. Clear intention is not to let maintenance backlog building up within the portfolio. In summary, when we look at the -- as the market on the leasing side, we do see that the letting market is improving. The momentum is improving. Our leasing pipeline is getting stronger as we go through the year. We still believe there is a substantial backlog that has been built over corona that we need to go through. And we expect increasing letting demand starting over '22, that would help to absorb the backlog. One of the reasons why we believe that's going to be the case is, we're currently in a phase where a lot of corporations are having discussions between management, unions, labor, and the labor to basically agree on the setup for their future offices, and that's a bit all over the place as we speak. And we think that the last few years of 2021 are going to be used to go through that dialogue, which is an important 1 before company are in a position to actually make an educated decision about their office location. The investment market remains supportive essentially for the same reason that they were supportive over the last 6 years, which is the low interest rate environment. And there's clearly an increase ESG-relevant. You would notice that I said here for the investment market, which is looking much more into that following the taxonomy being put out there. The letting market itself, there is some kind of relevance, but clearly to a much lesser extent, than it is for the investment market, at least in the market in which we operate. So that's it on my side, I'm sure there's a lot of questions about our ESG report, so I would like to open the floor to the Q&A.

[Operator Instructions] The first question is from Ben Richford of Soc Gen.

So just clearly, what you can give us on the Brookfield offer. How do you assess the value of that 7% premium to NTA? Do you, in your own estimations see that NTA growing, and therefore, are you sort of selling the company toward NTA about a year or 2. So a little bit more about how you think about value? Secondly, what do Brookfield bring to you? Obviously, they're a global leader in the office business. What will you do differently with them on board -- So just start with those 2 questions and give a chance for others to ask around the Brookfield transaction?

So we -- I mean, on your first question, I mean, the -- we are in the process of running the valuation process for year-end, which is not something we have done yet. So we don't know where the NTA is going to land at year-end. But there is, from our perspective, some revaluation gain to be expected between now and then. We still believe that the Brookfield offer is going to be at a premium compared to where it's going to land. But again, this is a process which is ongoing, and we're not going to have the end result of that before the -- basically end of January -- beginning of January basically where the value is going to sign up on the values. I think well, the -- first of all, if you look at the Brookfield offer, it represents a substantial premium to where the share price is trading, and even more substantial premium to where your target price is at auction. So I think that's clearly reflecting that there is a gap today between the private market and the public market and the offer of Brookfield is clearly valuing the company at the private market level rather than the public market level, which we think is interesting for the shareholder to look at. And this is something clearly we've took into consideration when we decided to recommend the offer. From a company perspective, what I've mentioned before is the -- we are -- the market is going to go into a place where there are going to be much more earning volatility than you would expect and probably where the public market is comfortable with. And that's linked to the transformation we've been discussing here. And having a shareholder like Brookfield within the company, which basically have a deep understanding of those dynamics and which one we can have a deep dialogue and Brookfield has been a shareholder of the company basically forever. So I think we have the time over our years of interaction to basically check and confirm that we share views. They do provide this kind of stability that we think is going to be extremely helpful going forward. Typically, Brookfield is not necessarily interesting in receiving like high dividend every year. And therefore, as a company is going to be able to retain more of its earnings to reinvest into if we have opportunities, obviously, to do that to invest into the portfolio and then accelerate the pace at which we are investing. So we do see a lot of value. And then on top of that, as you rightly said, when you're in the office world, being able to rely on a partner like Brookfield sounds like an attractive value proposition. Because they have within the network. I mean we were all looking at different kind of technology. We're looking at different elements. And so being able to access Brookfield network both from a real estate perspective and from a financial perspective, is something that we feel could be valuable to the company.

I mean -- Do you think if you sold the properties today, you'd get a similar outcome? Or do you sort of do you believe the NTA is a fair reflection of what you would achieve for a piecemeal disposal?

Well, I mean, first of all, and I think that's a major difference between what I'm suggesting here and what Brookfield is suggested. Brookfield is not suggesting to liquidate the company. So you're suggesting here is to liquidate the company. And that's a completely different value proposition, right? So Brookfield is not doing that. And so there are people working for the company, and I would not support anything which get anywhere close to liquidating the company at this stage. But then we do sign off on accounts, which basically reflects the NTA of the company. And so yes, we do believe that the underlying value of the properties is what is reflected in our books.

The next question is from Sander Bunck of Barclays.

A couple of questions as well related to the Brookfield side. Just a couple of technical ones really. Do -- obviously, I presume that Brookfield will look to reduce the real estate transfer taxes that potentially could be required. Does it mean that they expect to remain under the 19%, and that alstria will remain a listed entity or will alstria be taken private at all? And the second 1 would be on the REIT status. Do they expect that they can retain the REIT status? Or will the REIT status be lost as a result of that? And just the third one, which is just more a bit of a curiosity question, like when did the conversation start? Because I believe the last one initial kind of press release came out, I think you mentioned that the conversations haven't started yet. They basically started conversations right at the time? Or was it after shares kind of had a very strong run up. They started today somewhat underperformed after that. And basically then the dialogue was initiated just out of curiosity.

So I think your first 2 questions are closely related, right? So whether or not to remain listed or -- and whether or not you remain a REIT and the transfer tax are, to a certain extent related because I mean they -- I mean, because they're all related to the free float and the condition to become a REIT. I mean Brookfield is making enough of 100% of the shares of the company. So I'm assuming that would be comfortable in only 100% of the share of the company. As you know, they have already disclosed that they own a certain percentage of the company. And they do expect that have non-tendering agreement with a number of shareholders to limit the transfer tax that's clearly the case. I don't believe that the Brookfield, I mean, the conversation we have is not depending on whether or not we could delist or we should delist the company. It is 1 option, but it's not necessarily the option. So that's something which will obviously depend on how much -- what the overall result is at the end of the day. But the strategy, I think, that we have discussed with them would work out the way, and there is no like need to do that. On the REIT, I mean, from our perspective, the REIT is essentially a tax status, which is currently rapidly helpful to the company. But there's also different ways where you can structure around that. And there's -- I mean the REIT is rather the exception rather than the norm in Germany. So there are hundreds of companies who operate outside of REIT status and are operating pretty efficiently from that perspective. So here, again, I think the -- whether or not you are a REIT in 3 years from now or 4 years from now is really going to be a question of what's the best things to -- and the best structure at that moment in time. I mean Brookfield has been a shareholder of alstria basically almost since the IPO. So we've been having conversation with them all the time. But the same way we've been having conversation with other shareholders. And obviously, during those conversations, we not only speak about what alstria is all about, but also about our view of the market, how we think things developing. And then over times, we have kind of the view that we tend to share the perception of a certain number of elements. The actual conversation about the offer itself, I mean, we haven't slept much over the last weeks or so. And this is really where the things have accelerated. But I mean since I'm running this company, like every year, I had conversation with somebody who was discussing with us, whether or not they would consider making an offer on the company and that's Brookfield and others. But the real conversation that really started relatively recently. And so -- and after what you mentioned before, so after they disclose, like way after they disclose the -- their position in the company back in August, where we had a conversation which were like more informal rather than as really concrete.

Yes, understood. Understood. Okay. Just very quickly, kind of related to the first one. I think it was mentioned that they're not looking to implement a domination agreement. Has the regulator been consulted on that? Do they believe it's not required? Or is there a chance that the regulators will basically say, "Look, you have to implement a domination agreement as part of this deal?

Look, there is no synergies here to be realized for a domination agreement. I think the business plan is really the business plan of alstria. And so unless you want to realize synergies, there is really no need for a domination agreement. So the chances that the regulator. I mean there is really no reason for regulator to interfere. We're not into a merger, which have happened into other situations where you would argue you can't put the synergies in place if you don't have the domination agreement. So I think from that perspective, it's pretty transparent. There is literally no need for domination agreement here.

The next question is from Thomas Rothaeusler of Deutsche Bank.

Maybe some questions beyond the offer. Firstly, on leasing markets and the outlook. I mean, you expect the backlog could start to be released at the beginning of next year. Maybe you can elaborate a bit on your assumption. What does you make so confident on this?

Well, for once we're confident and aggressive on our assumption on leasing, I would have hope a bit more support on this one. But in essence, look, you can delay a decision when you're a company for a couple of months, a couple of years, but at 1 stage, not making a decision is making a decision. So company need to decide what they want to do with their real estate. And what is holding back at least in our conversation with the tenant. What is holding back today is really the uncertainty and the fact that this dialogue between the labor force and the management have not completely take place, and it's not completely clear. What does it mean to work from home? Is it an obligation? Is it not an obligation. Is it going to be 2 days or 3 days a week? Are we going to do debt sharing or aren't we going to do debt sharing? How we want to organize the office? Do we want to fundamentally change it or are you going to change it briefly. So this conversation, which is a fundamental conversation, which is company by company because every company is going to have a different answer to the same question. It's taking place as we speak. And what we see in the leasing conversation that we have is that those conversations are getting to an end right now. And so we expect that this is really the case across the board and most of the German corporation are as people go back to the office. What has been holding back as those conversation is the fact that companies are knock back into the office because it's very hard to discuss how your office is going to look like in the future, if you're not in the office yet, and you're doing that from home. So as company go back, those conversations start. And as those conversations start, people are going to be more comfortable about what they need and how much they need, therefore, when they need it. And so we believe that all the decisions that were not made over the last 18 months are going to be made in early 2022, which is going to come as an increase amount of demand. I mean, early like in the course of 2022, but starting early '22, which is going to be an increase in demand compared to what you would usually have in a normal year. It's -- I think we -- where we should not be overly excited is just a backlog to run through once you run through that backlog, you're going to go back to normal. But that's clearly be a backlog we would need to run through here as a market as a whole. And our intention as a company is to try to take advantage of that as much as we can.

Maybe another question on your CapEx program. And what would you say is the consequence of increasing construction costs? I mean do you adjust your CapEx program on this? And what's the impact on returns? And maybe just this change of allocation between acquisitions and renovations?

So I mean construction cost is increasing. Inflation is pretty high right now in Germany, not only in construction cost, but everywhere. And it does I mean obviously, at the end of the day, if you can't compensate an increase in construction costs with an increase in rent, then it does here to return. Having said that, if you look at the impact of an overall construction cost increase, on the overall performance of the transaction, you're talking about kind of 10 to 15 basis points up or down on an IR perspective compared to what we usually underwrite because obviously, our underwriting assumes that there is going to be some kind of construction cost increase between the moment where we acquire the property and the moment where we will do the construction itself. But then if inflation is stronger than what we have expected and construction costs are substantially higher than what we have expected. There is no black magic here, either you can adjust that through a higher rent. And if there is inflation usually rent tend to go up in line with construction costs or if you cannot, as this was the case over the last few months where construction cost was substantially higher than inflation, then your return are downgrading a bit.

What has helped, obviously, over the last -- look, even decades because the increase in construction cost has not -- is not a new phenomenon. What has helped, obviously, is the compression of exit yields or the increase of exit multipliers, which has, in the past, at least way outweighs the -- any construction cost increases that we had to experience. And even if you look at this year, because the product we're producing is usually brand new, fully let. And this is realizing and basically translating into like top exit yields in the market. And therefore, I mean, with the additional yield compression we've seen even in 2021. I think, yes, basically inflation has been of a lesser concern to us because the markets have been so strong and so supportive. And this has really also I mean, not led us to focus too much on the threat of inflation.

And then, Thomas, to your last question, is that changing our allocation between acquisition and CapEx, the answer is clearly not because we still believe that the opportunity is really to upgrade buildings, and as Alex says, turn them into where they are today to brand new building, which we are in support, higher valuation multiple.

And this is where the scarcity of product is. I mean this is really where -- if you look at the investment market, this is really where the scarcity of product is to have like quasi brand-new building, which fulfills all the sustainability ESG requirements, which offers like high-quality office space. And this is why -- I mean -- and in the context of the M&A, rationale, we're discussing -- I mean, it's probably rather the idea to accelerate that, than to think about capital allocation otherwise.

The next question is from Veronique Maton of [indiscernible]

A few more questions from my side on the offer. First, going back to the REIT status, could you give an indication or an estimate on the retroactive tax impact if you would lose the sales? And then secondly, maybe the tax impact for shareholders that would tender. Am I correct to say that they should face around 30% of capital gains tax on the delta between their acquisition price and exit price. And then maybe lastly, are you aware of any irrevocable -- that Brookfield's received any irrevocable undertaking from other major shareholders?

On the last question, I think you should address the question to Brookfield, because we're not aware of -- I mean, I don't know, in essence. So it's moderate to go fit. On the first question, I'm not sure I understand the question, but I'm still going to try to answer. In essence, if you lose the REIT status, there is no tax to be paid. You -- I mean because you just go back to the normal tax world. So then if we sell a building, we would need to pay capital gain tax, assuming there is capital gain to be paid. But the fact that you exit the regime per se doesn't trigger necessarily any payment at the company level. And at the shareholder level, I mean, this is the first time I hear about it. So I'm not sure why this would impact the shareholders. So I wouldn't -- I don't know where this information comes from. Maybe it's something I'm not aware of, but I've never heard that before.

No the last 1 isn't exactly concerning the losing of the REIT status, but currently, if a shareholder would tender because of the REIT status, they would have to -- they are facing capital gains tax if they tender, right?

Well, I don't know. I really I have no idea where that information come from. I mean, basically, every shareholder face taxes depending on like his entry price and his exit price, depending on his tax position, but I don't see why being a REIT would have any influence on that. And I'm -- I mean, I don't know the answer to that question, Veronique, but as far as I know, I mean, if I speak about my position. I mean I wouldn't see any of what you're mentioning, the 30% coming out more than the -- I mean, I wouldn't need to pay any taxes beyond what I need to pay as income tax in essence. But maybe you know better.

The next question is from Thomas Neuhold of Kepler Cheuvreux.

I have 2 follow-up questions on the REIT status and the tax implications. If you read the REIT law it says in accordance with Paragraph 11 of the German REIT law that no investors must own more than 10% directly or indirectly to have a REIT status. So is it fair to assume that most likely the REIT status will be lost if the -- is successful. And it also says that if the REIT status is lost that the company must compensate all investors only less than 3%. And I was wondering how this potential compensation is calculated and what the value of this compensation could be?

So on your first question, we had in the past multiple times, shareholder with more than 10%. That's not a real problem. It's very easy to structure around that because what you need to have is multiple vehicle owning less than 10%. So when the company IPO-ed, it have a private vacancy fund, which has a 50% -- more than 50% stake in the company. And later on, when we merged with Deutsche Office, we had Oaktree fund, which has more than 30% of the company itself. And then at a later stage, we have GIC, which has a 20% stake in the company, and there was never a problem under the REIT law. So I think -- I mean so the idea that nobody can own more than 10% of a REIT and kind of challenge the REIT status, I don't think is rooted in fact. The second point is the paragraph that you're mentioning, I think we need to be very specific about that, is only triggered in the case where the loss of the REIT regime comes out of a shareholder breaching those 10% rules. And clearly -- I think no -- and it's actually here and the law as a deterrent to basically prevent for anybody to do that because you would be hurting your own stake in the company, if you were to do that. So I think to like going through this calculation of the damages that would be due to the minority shareholder is, to a certain extent, I mean, super flows because nobody intend to breach that rule in the first place. So what I'm trying to say, it's a very theoretical compensation, which is very unlikely to happen in real life.

The next question is from Monika Leykam of Immobilien Zeitung.

I got 1 specific question and 1 more general. The specific 1 concerns the new risk return profile that you intend to achieve together with Brookfield. How does -- will that affect your cost of capital and your leverage, your leverage now is very conservative. How much will it grow? And what will be the advantages of a higher leverage? That's the specific one. And then you mentioned that there will be a high return volatility in commercial real estate in the next years due to the ESG transformation. And this doesn't match very well with an income producing a dividend company, dividend-paying company. But if that is true, wouldn't that affect the whole of real estate as an income-producing asset class because real estate is very much appreciated because of its stable cash flow returns, the whole institutional market, front market is going in that direction. So if this was true with the income volatility, this would also concern other parts of the real estate industry? Or did I get that wrong? These are the 2 questions.

So to your first question, I think you're right, alstria's leverage today, we believe, is completely appropriate for a company which has 100% free float, because we're trying really to provide low income volatility in essence and shield the volatility. The more you increase leverage, the higher volatility is on the equity. If you go now into -- you look at how other company operates in a more private setting, they tend to have a higher leverage that's what you would find in the public market. And clearly, 1 of the benefits into having a shareholder -- like an anchor shareholder like Brookfield would allow to move away from where we're comfortable as a company with 100% free float and get closer to where you would be if you were 100% kind of private. So there will be an increase in leverage. I'm pretty certain about that, that would take place after the offer, which will again would be then we would look at -- I think that's clearly the case, and that's going to increase the risk return profile you were speaking about. On your point about the market as a whole, I would not necessarily disagree with you. I think this is not an alstria specific conversation. This is a broader conversation. And you can actually see that if you read most of the analyst report or the question they ask, it's all about how much CapEx you need to spend on the build, are those CapEx is going to be yielding yes or no. And obviously, in order to do CapEx, you need to get the building empty, which is basically tend to reduce your revenues while you're doing the work. So if you assume that you have a portfolio where 100% of the assets need to be retrofitted over time then -- and you want to do more of that, it means that you need to have more assets vacant, more assets which are not income producing. And until the market has gone through that transformation, you are going to see volatility in return on the market as a whole, much more than we had in the past. So I would agree with your statement. I don't think this is very much specific to us. What we are saying is we are aiming to adapt and adjust to that reality.

Could you give me an idea about the leverage you are intending to achieve? Will that be around 60%? Or will it get up to 80%?

Well, I think this is something we would need to go into more detail at this stage. We don't have real clarity. We're an investment grade company where we are. But we would probably look at something more closer to the 50% level. But then we also would need to look at what impact would that have on the overall rating, et cetera. So it's a conversation we need to have with a number of stakeholders before we make that call, but it's clearly going to be higher than where we are today. And it's not going to be 80%. So.

The next question is from Jonathan Kownator of Goldman Sachs.

At the risk of repeating perhaps some of the questions. But just to go back to the tax status. Just could you confirm, so I think I heard you said that they would probably be some agreement of nontendering so that there wouldn't be a threshold of 90% breached. Are you expecting that there would be some real estate transfer tax payable in relation to the offer and under which condition. So that's the first question. And then to skip to the next topic of sustainability because there haven't been any questions on that. Just on your assessment for forest, you said it's 2% of your requirement going forward. But how do you calculate your requirements, i.e., how much do you expect would to become effectively key material in your requirements going forward?

So your first question is, I mean, I don't expect that they're going to be with the transfer tax triggered by the transaction. But I'm clearly not going to like give you a reps and warranty on that, but at least my expectation that they wouldn't. And that's -- so that's not something I would be so concerned about.

Even in the case of the delisting, if there was ever a delisting?

Yes. But look, there are other precedent in Germany where company are taking older companies over without triggering transfer tax and even in case of delisting, yes.

Yes. And the new law introduced in July has no change to that?

Well, the new law introduced in July, as we all know, have introduced also ways to kind of limit the -- or annihilate the transfer tax, depending on whether or not you have an existing shareholder, which was there before the -- before the 1st of July, who basically hold the shares and play the role of the kind of blocker in the structure.

But there can be several shareholders doesn't have to be one -- 10%, right?

It could be any -- I mean, yes, it could be several if you want to make sure that it doesn't happen, which I think it's in everybody's best interest and you better know who they are. And that's really where -- so I would not expect that you're going to have transfer tax triggered for Brookfield. On your second point, we do expect that wood are going to be a substantial part of construction going forward. I mean it's clearly not the only solution because if this is the only thing we rely on, we are in deep trouble. But in our specific business where we barely do new construction. What we do from time to time is we add the floor on top of the building, et cetera. And those construction, we tend to do in wood, it's basically more economic because it's lighter in terms of weight. So it requires less structural implication on the building itself, which is underneath. And the technology has evolved dramatically over the last few years, which basically allow that be an extremely viable path to those -- to the structure. That's also true for -- it's also true, for instance, for all the windows, and we have -- you don't want to know, but we have tons of windows in our buildings, which we're replacing all the plastics with wood. So as part of the decarbonization process, wood is one of the key resources. And so the way we estimate our needs is basically looking at the pace at which we are using with today in our refurbishment assuming that's going to go on increasing. And then make an estimate of how much timber that represents, which lead us to the estimate that we have provided earlier.

Then you see talk about rooftop extensions and things like that something dear to my heart, but those are usually done not in hardwood necessarily, but in CLT or similar material. Is that something that you've taken into consideration? I mean I assume are you going to become a CLT producer or transform that? How do you expect to not to play...

We don't necessarily -- so that's exactly what we're using. It's CLT and or equivalent material. But we don't expect to necessarily become a producer. The view here is the -- I mean the amount of wood that is produced every year is limited by supply constraint, right? This is I hope is pretty straightforward. And especially in Germany, where the overall forest management and how much timber you could harvest is basically fixed, because Germany intend to use forest as a carbon thing as a whole. And therefore, the amount you can take out is fixed. So you are going to have more and more people looking at decarbonizing the portfolio, the demand of wood is going to go up, the price of wood on the market and as such, [ TLT ], et cetera, is going to go up. We're not necessarily saying that we're going to be chopping the trees and the forest that we own and then using them to put in our buildings and, therefore, have the full value chain incorporate within the company. But basically, the value you're basically hedging your exposure to a certain extent, right? The value of your wood and the timber and the forest increase and then whatever you sell in the market increase as well. And so you're basically locking on 1 material, which we believe is going to be a fundamental competitive advantage going forward. If our construction costs can be lower than average because we are able to hedge that specific cost naturally, then we will have a competitive advantage in the market. And this is exactly what we're trying to assess here and potentially getting to.

And how big are you planning to become in this market?

Sorry?

How big are you planning to become if you're only right now covering 2% of needs, it's not much.

Yes. But I think it gives you -- the reason why we provide those 2 numbers is give you an idea about how much we would need to become 100% of our needs.

The next question is from Kai Klose of Berenberg.

I've got 3 questions, if I may. The first 1 is regarding the dividends or potential for the dividend, I think it was mentioned in the press release that the dividend could be lower, the payout ratio could be lower. And any numbers already in mind, which you could share? Second question is on Page 4 of the presentation regarding the GHG emissions in 2020 compared to '19. Could you already -- do you have an idea of what could be the reduction of which we are targeting for 2021? And then the last question is on the lettings in on Page 10 of the presentation, where we had a lease extensions of just 3.7 years.

Kai. Operator, are we still on the line.

Yes. Yes, you are. I think it's a line of Kai. He hang up now. I think he will come later. So we can take -- the next 1 is from Manuel Martin of ODDO BHF.

I have 2 questions. One is on the REIT status. Would it be a scenario which makes sense to give up the REIT status of alstria in view of being able to reduce the dividend maybe notably to finance CapEx plan? That would be the first question?

So I think, Manuel, the -- The REIT status have never been a driver in our dividend policy. So the obligation that we have under the REIT is to pay out 90% of the German GAAP net income. And to calculate the German GAAP net income, you need to account for the depreciation of the assets. So it's -- the German GAAP net income is somewhere around EUR 10 million to EUR 20 million every year. So we pay substantially more than what is required by the REIT status. So it has never been really a driver for the dividend policy of the company. And as such, if we were to consider reducing that to basically reinvest more or keep more cash to invest in accretive -- investment in the company, I mean the REIT status is almost irrelevant in that conversation to a certain extent. Does that make sense, what I'm saying?

Well, I will go through that. Yes.

So if you look at the obligation under the REIT law is the obligation is to distribute 90% of your German GAAP profit. And the German GAAP is not IFRS. It has depreciation of the assets on top of your cost and also looking at it only at the AG level, it's not consolidated. So basically, if you look at how we were paying dividend every year, we're basically recreating profit out of reserves to be able to pay substantially more than what is required by the REIT law.

Okay. So you don't have to give up the REIT status to ramp up.

Yes.

Okay. Okay. The second question would be on your CapEx plans. I mean you -- if I understand correctly, the FFO guidance was also raised because you couldn't spend all the CapEx you wanted to spend this year. Is there a number you could share with us how much CapEx have you to postpone to next year, which will influence the FFO, of course, next year?

Yes. I think it's -- I think it's in the presentation. I'm looking at. The amount of CapEx we -- which is impacting our risk operating expense. So it's not really CapEx, right? It's maintenance expense. So it's -- and we had the number in the presentation on the slide. Sorry -- but the order of magnitude is around EUR 3.5 million. So that's what I would expect would increase the real state operating expense next year.

Yes, that's the right number.

Yes. So I was just another topic, yes. So look, basically, I don't have the presentation in front of me right now. But basically, we're increasing the guidance to EUR 150 million. I would say this EUR 150 million is overstating the going rate and the recurring income potential of the company by EUR 3 million. So you're basically all equal growing rates would be more under 12-ish. And -- And this EUR 3 million that we have enclosed in record saving this year is going to be in excess and extraordinary burden on next year. So without guiding to next year, if you take the growing rate of EUR 112 million and put them into next year, next year is probably all others equal, than more 109. So this is what we're saying. Our growing rate is 112. This year, we have EUR 3 million higher because of projects we didn't realize, i.e. EUR 115 million. Next year, we're going to be EUR 3 million lower, all others equal, again because these EUR 3 million from this year is going to happen next year.

Kai Klose is back in the line.

I had 2 questions. The first 1 was on Page 10 of the presentation. On the lease extensions of 3.7 years, could you indicate what was the award of the expiring leases to get a feeling how tenants currently look in the terms of lease lengths? And the second question would be on Page 4 of the presentation regarding the reduction in emissions. Could you already indicate what kind of emission reductions we can broadly expect for 2021?

So on your first question on the -- why is the world of the extension lower than it used to be. I think that's really a reflection of what we've discussed in the past, which is the tenant, which is currently in the building and have like the option to terminate because they don't really know what to do next, their best option is to stay where they are and then they're going to extend with a shorter terms that they would initially. So you had a couple of tenants, which we agreed an extension for 12 or 18 months, just to give them more time to figure out exactly what they want to do. And that basically is reflected into the lower wealth extension you're referring to. With respect to -- I hope that answers the question. With respect to the ESG, I think -- and this is something where I'd like to be a bit transparent about is the vast majority of ESG reduction that takes place the -- GHG reductions that takes our portfolio is not necessarily driven by things we do, but it's driven by the combination of the economy as a whole. And so in essence, there is no way we're going to reach any of the 2050 targets if the grid does not decarbonize. And if the district heating system is not decarbonizing. So I can't really give you a target of where we're going to be next year because I don't really know and that's really the biggest proportion of the capitalization is coming from district heating and electric grid decarbonization. So what we do is we basically electrify more and more of our buildings, and we connect them more and more to the district heating. But if they don't decarbonize, we're just doing that in vain. So it's very important for us that those things happen. And you can't really look at 1 company in isolation of what's happening around it. It's -- we can't get there on our own. We need the whole economy to get there. And that's really the question mark. If you look at the pace at which things have been decarbonizing, the grid is not decarbonizing that fast. The district heating we're hoping is going to be doing better going forward.

If there are no further questions, I hand back to the speakers.

Okay. Well, thank you very much for being here today. We appreciate your time. I'm sure we will have a number of follow-up questions. We are obviously available to answer them either Ralf, Julius or Alex and me. Please do not hesitate to reach out. Otherwise, we wish you a nice end of the day and looking forward to speaking to you next time. Thank you very much. Have a nice day.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.