PATRIZIA SE (PAT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the PATRIZIA H1 2023 Conference Call. [Operator Instructions] I would now like to turn the conference over to Martin Praum. Please go ahead.

Hi, and welcome, everyone, to our analyst and investor call for the first half of the year 2023. This is Martin Praum, Head of Investor Relations and Group Reporting speaking. I'm happy to have our CFO, Christoph Glaser, with us today to present to you an overview of our operating business, the market environment and financials for the first half as well as further details on the adjusted guidance for the fiscal year, followed by the usual Q&A session. During today's call, we will refer to the first half 2023 results presentation, which you can find on our website in the section Shareholders under Most Recent Publications. The presentation includes the first half financial figures and details about the guidance for '23. In case of questions, the IR team is more than happy to take a call as usual. This call will be recorded and will be made available on our website, and we'll also offer a call transcript for further reference. With that, I'd like to hand over to Christoph to start the presentation. Christoph?

Thank you very much, Martin, and thanks to all of you on the line for having us here today. As usually, it's a privilege to be a lot to update you on how the company is doing and the financials in particular. I'm going to start with market environment and current trading. So if you go to Page 4 of the presentation, I would like to give you a brief introduction as to how the market in its totality looks like across Europe in real estate, and there's clearly a significant decline in investment activity visible in the first half of this year. This is reflected in the numbers you can see on the left side of the page, were about EUR 180.8 billion of trading in the same period last year has dropped to less than half of that level in the first half of 2023. So it's an extremely challenging market condition around about now, especially for real estate. There are a lot of pending transactions, and there are a lot of buyers and sellers actively involved in deal-making that are at the record low level in terms of activity right now. Interestingly, infrastructure activity has also moderated itself a little bit. But that said, deal count is a bit lower. But where there are mega trend-based investments, like, for instance, in sectors like telco, energy and so on, the investor interest remains quite strong for those market segments that are supported by megatrends. And performance is holding up well compared to real estate and valuation levels are quite buoyant due to sticky inflation. So on the infrastructure side, there's a little bit less activity, but it's still quite strong where it's supported by megatrends and that's just in line with our strategy. Now of course, the revival of the market activity level depends largely on the question when Central Bank policies and the rate levels will stabilize and the outlook in that respect is improving and then the speed of repricing and asset allocation repositioning of investors, which have multiple features to them. So the current environment is a challenge for the entire industry, so not just PATRIZIA, but being part of it, I will talk next about PATRIZIA and our market activity in the first half of '23. So if you go to Slide 5, you can see that like in the market, there is low activity also on our side. On the left-hand side of the page, you can see a comparison of signed and closed transactions between first half '22 and first half '23, and then broken down into acquisitions and dispositions. It's clear that there's an absence of large transactions, but it's also clear that smaller transactions could still be signed and closed. So investment activities is not 0, but very low. And what is very important to note here, if you look at the mix of acquisition related transactions that were signed and disposition-related ones as well as those that were closed, it is clearly visible that we're a net buyer. We're selling very little at the moment on behalf of our investments, and we're buying some. Now that said, equity raised is also at a very low level compared to the past, but this is not so much of an issue for us as we were still having more than EUR 3 billion of so-called firepower in the form of cash and commitments across all of our vehicles that we have under management. So my key message here to you today is that we're focused in these challenging times on fund management, being close to our investors is super important. They are very sticky. They're very strategic, by and large in the mindset and they're very resilient. We preserve our existing AUM quite successfully. And our expertise and knowledge in asset management is playing a key role in that respect because we've been expert in that part of the business model, and that helps in times like these. Of course, in parallel, we are screening the market, but we are careful and cautious. We are making some moves and we will make more moves, but we're not making moves just because we can. With that, what sort of -- how is the sentiment developing? So looking at Slide 6, does the market start to show some silver linings? Well, look, first of all, despite the current development of the current situation, there are some signs that markets could recover and that market sentiment may end up turning quite quickly. So there's quite a few participants who share the view that asset prices will start to stabilize during the course of the second half, but more in the latter part of it. Now that could then be followed by an activity pick up. And it's most important to say here that, that is probably going to happen then very, very late in the fourth quarter or the beginning of the first quarter of next year. And therefore, the effect of it from a volume of transactions being closed and transaction fees being realized within the fiscal year '24 has significantly dropped. And that, by the way, is one of the reasons for why coming out of the first half and going just into the second half, we decided to adjust our guidance in the month of July, but we'll get back to that later in the presentation. The German housing data supporting a stabilization assumption most recently. And then there's a lot of deleveraging and refinancing challenges that should improve market liquidity as they are being resolved and somewhat declining inflation expectations could act as a potential trigger. Structurally, supported sectors with good net operating income, like industrial, like living sectors, alternatives and inflation-linked assets will probably benefit first. That's maybe another point to be made, but it's I guess I'm saying the obvious here. The key messages I want to leave you with here regarding this question as to whether market sentiment may start to show some silver lining is that there are some first indications for stabilization. They could act as a trigger for recovery. The timing remains still uncertain, but it's going to be later than we previously thought. And with that, I would like to go to Page 8 and talk a little bit about financials in more details. Maybe a brief correction before I do that. I think in one of my recent sentences, I mentioned the year '24 and I meant '23, apologies for that. There is a moderate AUM decline visible in our financial reports, which is basically reflecting a stability of the portfolio. We finished the last fiscal year with EUR 59.1 billion under management, and we are currently sitting at EUR 57.9 billion. That is a relative degree of stability here, especially compared to the market. I think there's a lot of competitors who see different trends in this space. And as you can see, there is still a bit of net organic growth in the mix, valuation effects as expected to the tune of about EUR 1.4 billion and then there is a EUR 0.4 billion of other effects they have, however, nothing to do with M&A. They have to do with cash and structures, which tends to reduce itself a bit, especially towards the end of the first quarter and beginning of the second quarter as there's some payouts occurring. Now all of that said, we're quite pleased with this picture. And the second most important point I'd probably make is that the valuation impact is in line with our expectations. So if you extrapolate that over the full year, and we can talk more about that in the Q&A section, we're seeing 4% to 5% across the fiscal year. And the fact that we have a pretty strong portfolio, which I'm going to talk about in a moment, certainly helps here. And the second thing that helps is the behavior of our investors. Now with that, let's go to Page 9, where I would like to talk a bit more about those 2 points. So from the charts on this page, you can see that we're enjoying a high quality asset base under management and quite a decent degree of diversification. And that is one reason for why the AUM development is characterized by a high degree of flexibility at the moment. There is a broad diversification and high quality. But in addition to that, it's also quite important to look at the strength of our investor base. As I mentioned on earlier calls, our investor base tends to be directionally quite equity rich and quite cash rich, also quite long-term oriented. And in many, many cases, also quite willing and able to sit through cycle disruptions, temporary transaction markets, disruptions, pauses and so on and so forth. And this is something that really does help us at the moment. And that, in combination with the healthy diversification of the AUM base, does result in the relative stability of our book, which then, of course, in turn, helps us with stable recurring income streams, which were even mildly growing compared to the last year, which is the result of what I just said, but also a result of a bit of organic growth and really hardly any redemptions or liquidation activities. On a little side note, perhaps here as a last comment, when you look at the AUM by sector, there's 28% in commercial and/or office to be more precise. And you just need to know that only a portion -- a relatively small portion of that is in D or C locations or subject to significant ESG investments, which is why for us, the well-known market pressure on office assets that is heavily debated is also an issue, but it's a manageable one based on what I just said. So I just wanted to make that point. And again, we can talk more about that later on. With that, let's go to revenue on Page 10. I already briefly alluded to the fact that we're enjoying a moderate growth of recurring fee income, which is to be contributed to the stability of our asset under management, but also the strategy we are driving towards step by step changing the mix of our earnings profile and grounded in key trends or conviction-based investment strategies with large coming old and stable investor supported vehicles. Now you see here that recurring management fees have increased by 3.6% to EUR 120.6 million, a little bit in this, of course, due to M&A, of course, which you recall we executed last year, but we had already Whitehelm in 5 of 6 months of the first half of last year. So that effect is clearly much more subdued now, which is good in a way because it means there's more organic growth. The market environment obviously led to a continuation of the transaction fee income decline. So that's down 64.1% to a very, very low level of EUR 4.1 million year-over-year. We did conduct transactions. And when you look at one more aspect of the picture here, you have to think about the question as to when we do a transaction, which at the moment is mostly acquisitions and not so much dispositions, which is good. Some of them are done within vehicles where we have all inclusive management fees. Some of them are done across vehicles where we can charge a transaction fees, especially in the German environment, traditionally. And the mix there is roughly 50-50, not exactly, but roughly 50-50. Performance fees are down as well, almost 20% to a level of EUR 27.1 million. That decline is more gradually, it's less pronounced, but the recovery will take longer. So more U-shape on the transaction fee side, the decline is more rapid and more pronounced. But technically speaking, in the recovery phase, it should also be fast, rapid and pronounced. So total service fee income as a result of that has decreased 6.1% year-over-year in a very challenging environment and also in a situation where PATRIZIA's business model, which is shifting over time, but still sensitive to this type of market disruption because of the transaction fees and the mix and the performance fees in the mix. There is still a certain degree of stability here as well, similar to the AUM equation. So my key messages for you on the revenue side are transaction performance fees do still contribute somewhat to our revenues, but in a subdued market, much, much less than they used to, and we are eager to see how that changes in the future. There is a strategic focus that remains in place with regards to the increase of recurring management fees and the increase of their share in the mix. That's a material support for our financial performance and stabilizes our performance to an increasing degree. And this is true even in the weakest of all quarters. Now if you look at operating expenses after having discussed revenue, we will start with that on Page 11. Net operating expenses increased by 10% compared to the first half of last year. And that's driven by one very important point and that I would like to make right upfront. You may recall that net operating expenses in the first half of last year, i.e., '22 were positively impacted by the profitable deconsolidation of a project development in Northern Germany called Silver Swan in Hamburg, which we had held temporarily in our balance sheet, and that had a relieving effect of almost EUR 18 million on our net operating expenses last year, which is why logically, without that repeating, there is a net increase visible here, but I'll get more into that on the next pages. Our other operating -- perhaps maybe one more comment. You see this statement that I just made reflected in the 66.3% decline in the category other income, which is the fourth category on the walk on the left side of the page. If we look next to that to other operating expenses, you can see that there, we have managed to compress our spend by close to 10% or 8% to 9% to a level of EUR 38.4 million. And when you look at the cost of purchased services, you can also see that we have compressed that by roughly the same degree to a level of EUR 8.5 million. Our personnel expenses are slightly up, but you have to bear in mind that this is after consolidating Whitehelm for 1 more month in the first half of the year compared to '22. And after the consolidation of ADVANTAGE Investment Partners and also after an inflation-driven salary increase round, which we could not avoid despite the restructurings we did. But I will allude more to that in a moment. What is very important is the key message here that development of net operating expenses is in line-up with our expectations because we knew the degree to which the first half of last year was supported. And what is even more important is that our core cost, i.e., the sum of staff costs and other operating expenses actually flat year-over-year despite the headwinds that I explained before, and that's a topic I would like to talk about on Page 12. So if you look at the next page, I would like to start with the chart on the left-hand side. Last year, in the first half, you saw a reported net operating expense of roughly EUR 114.6 million. And to keep it simple and clear for you, we have removed EUR 9.8 million of a net uplift from that number, i.e., added it back. And this is including, among other things, the EUR 18 million windfall from the Silver Swan deconsolidation, but it also includes negative items like, for instance, reorganization expenses and others for deconsolidation effects of loss-making entities. And if you net that all out, including the biggest ticket being silver spooned you add back EUR 9.8 million, and you get to a normalized core cost level of EUR 124.4 million. The makeup of that in the first half of last year was EUR 82.5 million of [indiscernible] and EUR 42 million of other OpEx. Now you look at how that shapes up in the first half of '23. So in the next column, you can see that we've managed to take out costs in the upper category and staff cost has slightly increased mostly due to inflation and the consolidation of the entities that we have acquired in between. We then add back a couple of items similar to the one I explained before in the first half of '23, but it's a much smaller amount and also a much shorter list of items. And you get to normalized number EUR 126 million. So the key here is to compare the core base in the first half of '22 and in the first half of '23, which is essentially flat or dropping by 0.1%. So we have been holding our cost base flat. And we've done that after having acquired 2 entities and we've done that despite quite heavy inflationary environment. As you know, and if you look at it from another angle, i.e., if you would completely back out Whitehelm related costs from January last year or ADVANTAGE Investment Partners cost from the whole of '20 -- from '23 to make it comparable with '22, you would back out about 4% of cost, and then you have inflation at a level of 5%. So without those effects, we would actually be dropping in the core cost about 10%, 9% to 10%. Now that's really a bit more detail. I hope it's clear, and we can discuss this more in the Q&A section. So the key message is being despite M&A transactions and inflation, we kept cost base at a constant level. We're continuing to be focused on cost control, especially also throughout the second half of '23. And with that, I would like to go to Page 13 to give you the EBITDA composition overview. Perhaps starting with a somewhat self-critical comment along the lines of -- it is in line with our expectations for the first half, but it's clearly not yet reflective of our intrinsic potential that is clear and should be stated. So when you look at the first half of '22 on the left side of the chart, we were generating EUR 54.5 million. And when you then look at the composition of the resulting EUR 28.4 million in the first half of '23, you can see the one and only significant positive message on this chart, which is revolving and recurring income and its growth, followed by the known drop in transaction fees, which is quite pronounced and to lesser degree performance fees. And then, of course, also net sales, revenues and co-investment income reduction, which I alluded to already, where the first half of '22 was simply a very rich period and that's not the case anymore at this stage. Then you subtract net operating expenses to the tune of EUR 126 million and get to the EBITDA level, reported at EUR 28.4 million. So EBITDA is year-over-year down by 48%. It is in line with our expectations and budget, but it's clearly not reflective of our intrinsic potential. The majority of the variance is driven by market environment and transaction activities being absent, and therefore, certain income streams dropping out. And that said, key messages here. We see basically a situation where our existing business model, which is changing itself over time, step by step is still somewhat sensitive to the market environment, which also means in return that when the market comes back, it will work again, and we will grow income profile wise. If the market doesn't come back, we will take a combination of more radical steps on the cost or structural cost side. And we may also in a returning market, make some radical moves with regards to acquisitions of assets opportunistically or portfolios of assets or potentially even other entities. So the market activity rebound would help us grow based on the business model that we have in place. That in combination with opportunistic moves would make us grow even more -- in even more pronounced way. And in a prolonged absence of it, we will just simply take other actions on structural costs. Now with that, let's go to the balance sheet. The balance sheet remains quite strong, and it preserves our ability to make strategic moves. But as I mentioned before, we are not going to make a move because we can. We will only make a move because we can, if we believe in the asset or portfolio or entity that is on the table. You see that we're enjoying a net equity ratio of 71.4%. We're enjoying EUR 305 million of available liquidity. There's been a bit of a cash out linked to co-investments we've made over the course of the first half of '23. And that said, we do quite -- we have started to quite actively deploy some capital, as we mentioned before, with a lot of strategic focus. Just in the second quarter alone, we have made co-investments to the tune of about EUR 40 million, especially in infrastructure products and to a lesser degree, in real estate products. And that said, we also have treasury shares amounting to EUR 72.3 million as additional currency on the sidelines. So my key message here today for you is that we continue to enjoy a strong balance sheet, very, very healthy net equity ratio, plenty of available liquidity. And we've started to make moves, and we'll probably continue to make moves to a higher degree of intensity. Now with that, let's go to guidance and the guidance adjustment that we have communicated in July. We did that after having motored through the first half of '23 and getting -- so that we're starting to get a better picture as to how the second half may look like. And as all of you know, there's -- as a result of that being a change to previous guidance, which is in the right most column and the new guidance is summarized in the second column from the right. There is, actually speaking, only a moderate increase in client activity expected anymore as of today for the second half of '23. We did expect a stronger increase of activity previously. So we do see a time shift of that compared to the past. This does impact our AUM guidance because it's just simply going to be less transactions made and less transaction volume as a result. And because we have an acquisition geared mix, we will see less AUM being added in the second half, especially in the fourth quarter. So that's the driver behind lower organic result of AUM and the change of guidance there. On the management fee side, our guidance has remained unchanged. On the performance fee side, it has remained unchanged. And so it really boils down from a P&L point of view to a change of guidance with regard to transaction fees outlook, which has been significantly adjusted. And it's for the reasons that I mentioned before. And the main driver behind that is the key market activity. It's going to start to come back, but not as significant an effect on the late or especially for the quarter as we previously thought. It will come, but with a time shift. So our key message here is the degree to which the market is subdued. It's going to stay with us a bit longer than I previously expected. In colloquial terms, I'd say there's going to be not much of the season again in the third/fourth quarter this year. where it would normally occur in our sector on the real estate side, especially. The market activity is the main driver behind our guidance adjustments kicking through AUM build up headwind and transaction outlook deterioration -- transaction fee outlook deterioration. So -- but that said, our efforts are focused on protecting our assets under management, recurring fee income to grow that and to take the transaction fees and performance fees we can get and to stay close to our investors and to keep our firepower ready to make deals when the market bounces back. So that's on that front. And if we summarize perhaps by going through the key takeaways, moving to Page 16. So message number one, we are really in a situation where the market is bottoming. It's very challenging. We do expect at some stage an improvement of client investment activity and market activity, but not so much anymore before the end of this year, but rather beyond that. Also, by the way, because the transaction windows, i.e., the length of time that passes as the transaction is being executed are still quite long because of the complexity of it. And therefore, that in combination with the activity also drives delays. There are some silver linings for the transaction market, but we will see when that leads to come back. So that's point one. Point 2, as a result of that, to a large degree, we are facing a temporary significantly compressed EBITDA profile. This is driven by where the market is and what that means for our market activity related income streams predominantly. It is also driven by the fact that the first half of last year enjoyed quite a few positive one-off effects. Revenues are under pressure, and it's obvious. We do closely manage our cost base. And as I mentioned before, when you look at really the core cost, we are flat despite the entities that we acquired and consolidated and despite the inflation that we have to -- that kick through into salary levels to some degree. We will do more if necessary. And for the second half, we are already anyway active in terms of suppressing operating expenses to the degree possible. Now our diversified AUM base is very resilient. And that's the third point. It's a sign of a strong platform, a very well diversified set of assets under management as a result of our financial stability. It's also the result of our -- the nature and the features of our investor base, which is very healthy. And we are ready to play when we see the right deals and the opportunities that we have live, predominantly use products that are in line with megatrends and that means also, of course, on the infrastructure side. So with that, I would like to finish. There is some information in the appendix regarding financial calendar, which we perhaps don't need to go through how we are going to publish our annual report next year on 22nd of March, and there's going to be a general meeting scheduled or is scheduled for the 12th of June. And with that, I thank you for your attention. I appreciate the time you took to listen. And I guess with that, we're going to take it over into the Q&A. Operator?

[Operator Instructions] First question is from the line of Andre Remke with Baader Bank.

A couple of questions from my side, please. First, thank you for the slides on the transparency on your cost development because I think it's the key issue. So -- but if you're saying that EBITDA is not reflecting the intrinsic potential, this brings me clearly to the question what is the level you are thinking about in terms of, let's say, EBITDA or in terms of margin? So what should be the profitability for your business over the cycle? I know it's a more general question, but well, transaction markets are up and down. But I guess you have a more than 1-year planning process. And what should be a preferred mix, so to say, of recurring fees with probably lower margin and more, let's say, deal-related, but higher margin activity? Do you have something in your mind or can share with us?

The first point I'd make is there's still relatively bad visibility with regards to market development as we sort of move through the second half of this year and into '24 and then through '24. Our budgeting for '24 as a process has not yet started. We normally do that over the course of October and November and then lock it in early December. The points I would like to make on the back of that are the following, given how the model works today, our profitability very much depends on the activity level of markets and the activity level of our clients. If that comes back in '24 and leads to, let's say, a more normal '24, then you just need to look at a normal year in our performance history, which gives you an indication where we would bounce, what we could bounce back towards against that statement. Now if there's not going to be a normal market level or a level of normal market activity, our current business model would probably still underperform as compared to its prior levels. In that case, we have the option to remove more structural costs and/or to make maybe a selective larger moves transaction-wise in areas like infrastructure or like a certain real estate sectors that are safer to make. So we could make portfolio transactions or the like to compensate for a not so active market yet. Now if you would quantify what I just said, and then I'm going to stop talking to think about a world where we're going to make an incremental EUR 1 billion of transaction volume and this 100 to 120 basis points of transaction fee income for an acquisition, we would generate EUR 10 million of transaction fees against the backdrop of such a transaction. And these type of transactions are starting to come back into the market already now, but slowly. The second thing I would like -- so you can triangulate on that basis, what could happen on the transaction income side. Second thing I would say is we're targeting a mix of revenue streams where recurring management fees is going to be 75% to 80% of the mix. So it should continue to grow and be an increasingly strong contributor. Now if the market stays subdued, I would see a lower to middle double-digit EBITDA. If growth does materialize, I could see a 3-digit EBITDA possible, again, and this better earnings stream quality. So that's kind of how I would respond to that question.

Okay. So if you're seeing a normal level as in previous years, and we have to go back, let's say, in the period of 2017, 2021 with EBITDA margins of 35%. Is this the order magnitude you're thinking about?

Well, in the midterm, meaning on a 5-year horizon, if you pick that, I clearly see PATRIZIA with a 35% to 40% EBITDA margin profile. But I would see it with a higher component of recurring income and a more stable core cost base with less one-offs, but also less income related one-offs, which is good in a way because it would be more reliable and less sensitive. What we have to be clear about is that there's going to be not a linear path towards that probably because it seems to be true that cycles have gotten lumber, which was great until the spring last year. But consolidation period seems to have also gotten the long term, which used to be about a year maybe. Now we thought it's going to be 1.5 years. It looks like it's going to be a 2-year consolidation period, meaning spring '22 until spring '24, and that's quite interesting, but it does mean that the transitioning to the next up cycle is going to be slower and harder. And therefore, it's not going to be a linear trip. I think it's going to be more of a difficult short to medium term still, '24 is going to be still difficult, I think. But I gave you the quantity, if transactions start to happen and our business model will reignite, it's technical in nature, but let's see. And then we will obviously do what we can on incremental opportunistic deals and incremental cost actions if we have to.

Very helpful. While you mentioned that the outlook for the transaction model will also depend on the asset allocation of investors, among other things. So what makes you confident that the overall market, let's only talk about real estate in this case. From your talks with your clients, why could it not be the case that they are simply saying we build up a sufficient share of real estate over the last, let's say, 10 years, 15 years. And now we're at a level for insurance, with a number in Germany, 13% of total allocation. So it's quite enough. It was to move up from 6% to 13%. We doubled to our exposure to real estate and that it even if prices will come down, we have enough real estate. So could it be fair to assume that only your second part, relatively new, good 50% lower part, a smaller part, infrastructure will remain for the time being from the next, let's say, 5 years or so, the only asset under management driver?

That's a very broad question. Let me say this. So we have infrastructure and real estate in the mix. We do believe in our ability to grow infrastructure because we're focused on the areas where there is demand, where the underpinning megatrends are clearly there. And there is demand for the products we offer. And we have the ability to show skin in the game, so we should be able to grow. There's an inflation hedge component there. And there's upside from active management and links to both infrastructure, but also stepping now into the real estate space, I would say there's a huge -- there's going to be a huge demand for back to brown and brown to green focused investments that will span across infrastructure and real estate and that we are able to meet because of our expertise in asset management and real estate development and our expertise in terms of active asset management and active asset conversion and improvement. To give you a little operational founded on that front, we're actually repositioning our development capabilities and capacity into exactly this space to be able to enable current asset holders who want to grow and improve their assets and their values subsequently to do so. And that is just one aspect of it. Now that all said -- so we see infra, we see also demand in real estate and a lot of it will be in that space that I just mentioned. And then there's the general comment I would make on client behavior that is not the same globally. So even if we end up having less growth opportunities in certain European markets, perhaps, we're going to have opportunities in Asia, like in Japan, just as an example, and we've talked previously about some of the activities we are undertaking there. And we're going to work on that front as well. Now last but not least, from a client point of view, so we believe that the structural demand will be there. It will not be as strong anymore everywhere. But the ESG and brown to green topic will add back some spice to it. We do believe that the returns in the value-add segment are there for sure, big enough to compete against alternatives. We believe that the same is true for core plus and also for quite a portion of our core investments. And please, again, don't forget, the majority of our investor base is equity and cash rich. And our LTV average is very low at 31%. So that said, the impact of the rising rate environment on costs and returns is a lot more moderate than elsewhere, and that helps right now. But I agree with you, there will be different levels of growth depending where you look in terms of sector geography combination. There will be a focus back on asset performance, rental growth, where we actually see some real upside developing, which is nice to see. And then there's many other asset classes that do not have that option. So the real estate asset cost will benefit from a bounce back of rental income. And if then the asset is managed well with in-house asset managers, I think you have a gain.

Excellent. And coming to my last question, a more specific question on your guidance. How do you see the risk not to reach the lower end of your guidance? Because if I'm looking to the first half performance, well, if I would assume roughly the same level for recurring management fees a bit up when transaction fee is still on the low base of the first half. What makes you confident to reach such a high level performance piece in the second half because, if I remember correct, in the first quarter, you already collected all the fees from Dawonia?

So maybe as a brief information in terms of the nature of being background and then a straight answer to your question. As we went into the year with our previous guidance, we had itemized line of sight into management fee income expectations, vehicle-by-vehicle. We had a detailed list of transaction opportunities, and we had a detailed list of performance income udders. And because we were not sure how many of our transactions would actually end up occurring depending on market bounce back timing, we, for one single reason, make the guidance wide EUR 50 million to EUR 90 million because we saw between EUR 15 million and EUR 20 million of transaction fees at risk in the case of the market rebound not happening in time, yes. So now 6 months into the year, this risk seems to materialize, and we've done exactly what we said. We said we may know more as we go through summer as to the second half of the year, and we're just simply removing the transaction income-driven piece from the guidance, and that's what led to the drop of the ceiling from EUR 90 million to EUR 70 million. So we're now sitting on this new guidance of EUR 50 million to EUR 70 million with a midpoint of EUR 60 million. And because all of our assumptions after this correction on the transaction-related assumptions are, in essence, holding, we think that that's a good range to provide. And to answer your question directly, there would have to be an unexpected significant negative one-off that could potentially, I mean, a very significant negative unexpected one-off that could drive us into the direction of the lower end of that guidance, which I don't see at the moment at all. So the guidance -- so look at it as a traditional guidance, EUR 50 million to EUR 70 million, midpoint EUR 60 million.

Next question is from the line of Philipp Kaiser with Warburg Research.

A couple of questions from my side, starting with the management fee. Management fee was up year-on-year, but down quarter-on-quarter. Could you just elaborate a bit on the quarter-to-quarter decline?

Yes, there's a very simple answer on the quarter-over-quarter question you just raised. We do have, in the management fee income line, historically, some service fee income that is related to real estate development services that we provide to some of our investors, they are not being -- there's development done, not on own account, so to speak, but development services being rendered to some of our investors like large institutionals. And because some of those development activities are -- there's not a lot of new development activities as we undoubtedly know. So therefore, there is a negative trend here inside the management fee line. But size-wise, it's relatively mundane. There have been some smaller positive true-ups, I think, in the first quarter from memory, but I wouldn't want to allude on this. I mean I also say a smaller role, but that's a technical item.

Okay. Perfect. And the next question is on Dawonia. So the value is virtually unchanged despite all other residential players had negative valuation effect of more than 5%. So what's the opening on the strong intrinsic value in the combination of quality and moderate or conservative positive revaluation in recent years? What's your view on that?

Look, Dawonia in terms of assets under management is a portfolio with a size more so of EUR 5 billion and a relatively low loan-to-value percentage I think around 29-or-so percent. There is a sizable group of very large and long-term-oriented strategic investors in there. And we are enjoying a very high quality, by and large residential portfolio there. And from memory, we have seen in the first quarter, I think a 1.3% valuation effect and in the second quarter, close to 0, like perhaps 0.3% or 0.4%. So it's a very, very mild negative development there, which I -- if I recollect correctly, already alluded to in one of the prior calls that, that could be a scenario, so either flat or maybe super negative now. The drivers for this -- so the portfolio is very high quality. Secondly, it is a portfolio where rental increases have been quite effectively happened. I remember maybe talking already about this that very early in the year, for instance, we've already managed to advertise and execute a very large portion of the planned rent increases, and we had a very high uptake rate on the tenant side, which was positively surprising. Secondly, the portfolio is operationally managed in a very efficient way and also in quite good shape quality-wise and where we do see low-quality assets or assets that may end up requiring more ESG investments. We occasionally also sell small groups of assets because we do portfolio pruning, and we occasionally also buy, of course. And so there is a very healthy portfolio management in place. You may have seen a couple of smaller transaction happening or being talked about publicly, and they have for all kinds of reasons, but this is a very active for the management, and that maintains the quality of the portfolio. And then, of course, remember that most of these assets are in high-quality locations, where demand is unbroken or even rising like Southwestern Germany in particularly, including low cities like Munich, for instance. Secondly, we have historically, and now I get to a couple of technical points, we have historically -- when an external appraiser comes back with a range to value, we've never picked at the lower end or the upper end. We have always somewhere stayed in the second or third quartile. That said, we have, from a discount cash flow analysis always chosen a long-term average, which means that in an up cycle, we have not taken all the upside we could have taken on those 2 fronts. And in a down cycle, we're also not getting all the downside we could otherwise get. So we're selling with sales through the second half of the last cycle and the current period with a bit of downside in the last chapter and now with a little bit of relative upside compared to other competitors' portfolios. So there will be still valuation pressure in the mix going forward on this asset group, I honestly think it's going to be, if at all, very small. So you'll currently see a few more tiny -- and so the impact of this debate here that we're having on the value of the AUM or the carry that we have earned or the management fees is extremely moderate.

Perfect. Really helpful for the in-depth view on that. The third question, you already touched this multiple times during the presentation, also in the Q&A, but I want to make sure that long is anything out. Regarding the next year, is there any concrete visibility already for next year might be fueled by postponed transaction from this year to the next year? Are there any concrete visibility already? Or it's too early to tell?

I guess you answered your own question this year with your last statement, but I'll be a little bit more elaborate than that. Look, visibility is low at this stage. We have not budgeted yet, full stop. Now that said, bottom line profitability, this is the model, as it stands, is still very much market and plant activity dependent. To improve it the market picks up and then it improves automatically almost. If it doesn't, it's not, and then we will address the cost base again. So if we take the second quarter of '23, which as I said, is kind of like -- feels like a bit of a bottom. If you take the second quarter stand-alone as a basis, I would tend to be cautious about the '24 profitability assumptions that you may end up making. And that's one way to look at it. If you take contrary to that, our first half experience as a basis, then '24 could deliver a modest profitability, so modest to balance, but still clearly below the levels we've seen in the last few years. But -- so that's my third and last comment, if the market activity does come back quickly and decisively in '24, that can also change quickly. And then we would not only bounce back based on the model. We are sitting -- business model we're sitting on, but we would also put more of our cash quicker to action. So I'm seeing sort of those 3 perspectives that you could have on '24. And perhaps given the limited visibility as it still stands, it has a choice between taking 2Q and being cautious or maybe more cautious than you or some of your colleagues may be right now. If you take the first half, then it could be okay. And if the market bounces back, it could be quite nice. So you choose.

Okay. Perfect. And my last question is with regards to your tax rate, relatively high tax in the first half. And I was wondering if you could give us maybe some sort of a guidance range here for the tax for the next year?

Yes. That's a question I actually expected because -- so long story short, that's quite a bit easier to answer. Now for a German company, by the way, it's a little bit more difficult than for an Anglo-Saxon company because there's very often a periodic effects that can have a significant impact depending on the reporting year. But with that little side comment aside, we think that both '23 and '24, you probably should see at the higher end of the 30% to 40% range. So traditionally, you would expect around 30%. Based on what I see right now, it's going to be more at the upper end of a 30% to 40% range, so closer to 40%. And then afterwards, it should at some stage, probably normalize back into the 30s space. But so for '23, '24, I'd probably be more betting on an upper 30s number, something like that.

Next question is from the line of Jochen Schmitt with Bankhaus Metzler.

I have 2 questions on cost, please. Firstly, on your cost base in general, may we assume that PATRIZIA has reached the platform size level where it can target organic asset growth in the medium term while keeping cost increases relatively low apart from inflation? That's my first question.

I would say directionally, I'd subscribe to that. So we should be able to definitely grow or generate organic growth much faster than cost growth to say that costs would stay flat given the inflationary environment, where core inflation is going to be with us for a while. I would not expect that [indiscernible] can stay completely flat -- so on the [indiscernible] side, I would still continue to expect a bit of negative pressure, which is simply for that reason, not headcount driven or otherwise. Now we will compensate some of that, the structural simplification, but there will be some pressures there remaining. Now on all other costs, you can already see that we're keeping that below the level we were at before we acquired Whitehelm and AIP. So we're already having this locked in and reduced actually, and that will hopefully stay stable or even shrink further. This is, by the way, one of our key focus areas for the second half of this year. So all that together sort of a stable cost base or moderately increasing, and that in combination with organic growth this what we should for now. Just maybe as one comment related to that, when you look at our net operating expenses in the first quarter, which were around EUR 58 million, and they're up in the second quarter. If you want to take a conservative view, you take the second quarter level for run rate perspective. I think that's a balanced view would perhaps be right in between the first and the second quarter, and an optimistic view would be the first quarter. So directionally, I would choose between balanced and conservative probably. And maybe last comment better operating leverage in general, will be hopefully quite evident once we have a more normalized market and client activity around us. So the time will tell probably over the -- hopefully, over the course of the first half of '24.

Okay. And then the second question also on cost on Slide 12, just a clarification. I assume that you did not adjust for different levels of the variable compensation and the numbers. Following your financial year '22 reporting, my understanding was that you had relatively high cost for variable compensation in the first and then the second quarter last year, which was partly released in Q4.

Yes, very good and important point. Just to make one thing clear, as a matter of discipline and good governance, if we underperform or performed less than in the past, we obviously will also drop a variable compensation. So that's what happened last year where the amount we paid out on short-term variable compensation, which is the key component here to look at in the short-term context, we actually took a severe or made a severe cut compared to the bonus pool that would be paid out if targets would be achieved. I think we ended up paying out a little bit more than half only, if I'm remembering correctly. Now this year, when you look at the first quarter and the second quarter that we have under the belt, the cost that's been booked or accrued to be precise and then reported includes as an assumption that the bonus pool for '23 will be paid out in full. So 2 points on the back of this, point one, our teams are obviously working as hard as they can to make our targets. And if despite the effort we put up, the market does how continues to not help us or we underperform. There will be a, again, a moderate or severe reduction of variable pay, ultimately, which technically means that some of the cost that's been currently accrued for in 1Q and 2Q that targets a full pool payout will be released at the end of the year and have a positive relieving effect on OpEx. Of course, maybe one more technical comment if you -- as you go through the early parts of the year, your visibility on target achievement is different from when you are in the later parts of the year. And then once we know where we are, we will start to adjust and if need be, there will be a significant cost reduction in that. We keep -- obviously, we need to keep our staff motivated. So it varies, and it's a super important point maybe that is completely nonfinancial in nature that strong leadership and value and performance-based leadership is super important in times like these. And I can tell you one thing is the team here in PATRIZIA is fighting hard under the circumstance.

The next question is from the line of Manuel Martin with ODDO BHF.

Now 2 questions from my side. One follow-up question on the assets. When PATRIZIA is talking to its investors, are you observing a kind of mood that investors are rather shifting towards bonds to the expense of real estate? I mean they could say, look, we buy 2-year treasuries or 10-year treasuries, something like that?

I would generally say there's no material change in their behavior which dovetails with the comments I made earlier during the presentation that it's not only the nature of our AUM base, the quality of it and the diversification, but it's also the nature and quality of our investor base that is probably underpinning that statement that I just made. There are smaller shifts here and there, and everyone is looking at higher inflation, higher rate hedges on the other hand. So we do occasionally see some reallocation motivated redemption thoughts. They are then usually being discussed among the investors, say, in a couple of vehicles and then more often than not, they disappear. And then on very rare occasions, from memory, I only remember one vehicle that we put into a phase during which we will try to raise cash to pay somebody out or otherwise liquidate eventually up to 3 or so you used vehicle. I remember one of those, and it's already quite some time ago. And I remember a lot of -- a handful of small redemption considerations, which we had most of which, I think evaporated. So we have a very small problem in that respect. And I kind of like that, I have to say. Sometimes, maybe one last comment -- sometimes are more interested in equities, but focus, especially on alternatives like the ones we offer because of the cash flow growth options. So there's an aspect of that as well. I think the big answer lies in the fact that we have a lot of institutionals that have very long-term strategies. A big focus on alternatives for the reason I just mentioned, who don't need a lot of leverage or actually don't like a lot of leverage in most cases. And that's probably the main point to be made. And do we have some funds where returns get a bit sort of unpalatable in some core vehicles, yes. Do we, as a result of that, occasionally, discuss cost structures in the vehicles, including some fee structures, yes. Most of the time, things the math works out so far.

Okay. My second question would be on M&A. You mentioned that opportunistic acquisitions could be possible. So this has been always an option for PATRIZIA from my understanding. But maybe could you give us a picture on the current M&A market? What are the attractive targets in the market or are asset managers heard that much that they come in dozens to PATRIZIA asking for be on board? Maybe you can say some words on that.

Look, M&A opportunities will come around the corner or not, let's put it this way. But besides the somewhat casual answer, I would say -- and I think I've said that before. We are actively looking in spaces where we see we could benefit from a consolidating acquisition that gives us additional capabilities, like maybe geographic reach, I'm just making up sort of an example in Asia or in the U.S. or maybe less so in Europe. We would -- if we see an opportunity to give us some instrument-related diversification option like on the real estate side, that we would probably look at that and we have looked at that in the past, many options, but they are difficult to find. And the ones you find are usually boutiquey and small and very national in nature and come with some baggage. And so that's a tricky ground. Then we would maybe differentiate between what type of opportunity comes because as you undoubtedly have noticed, our share price is at the moment, probably at a value to lower value compared to the intrinsic potential of the company. But there's a lot of opportunities always, for instance, in the Americas, which are tend to be high priced, very boutiquey owner managed. And we have to be careful there from a pricing point of view. But if I would find maybe on the infra side, relatively young boutiquey player who could give me some reach and some product diversification on infra side, I'd probably like that or if I would see an institutional like a sub of an institutional as a company, less boutiquey in nature, I probably like that, like somebody does maybe a little bit more like us or a large institution owned subs in Europe, we could probably look at that. So we'll be -- I guess what I'm telling you is we will be disciplined. We'll be focused. It's got a dovetail strategy. We're not going to do it just because we have a lot of cash to do on the balance sheet, and we need to be able to digest it. The good news is our new CEO, who's a very global and very multi-asset class perspective and our new COO, who is also quite experienced in the area of acquisition, dispositions and acquisition, integration management. I think we are now even more capable than in the past to move, if you like it.

We have a follow-up question from Jochen Schmitt with Bankhaus Metzler.

Just one follow-up on variable cost on Slide 12, sorry for that. If you were to achieve the midpoint of your EBITDA target range this year and book variable compensation accordingly at the end of this year. Would the chart on Slide 12 then unveil somewhat higher inflationary pressure on a full year basis compared to the 6 months you shown on this slide? Would that be a fair assumption?

I have to apologize, but I did not fully -- I don't fully understand the question. Could you just maybe rephrase it?

Yes. I mean, the core part of my question is on a full year basis, '23, how good this chart look like? I would assume that inflationary pressure would probably slightly go up, and therefore, my scenario is, say, if you achieve the midpoint of your target range, EBITDA target range, book variable compensation accordingly, how would inflationary pressure on a full year '23 basis evolves on this slide?

Okay. Let me -- 2 answers. I understand now your question. So if I -- the range of EUR 50 million to EUR 70 million, the midpoint that you're referring to would be EUR 60 million. If I come out at that midpoint, I would end up not paying out full planned [indiscernible] because our internal targets are beyond that midpoint. Secondly -- so that will be good news in that scenario. Secondly, the inflationary pressure that we have been facing, we have, in essence, addressed for the time being through the merits and performance related or other factor based base salary increases that we decided on around the end of the second -- sorry, the end of the first quarter and that got traction starting in the second quarter of this year. So if you take -- if you are very conservative and you take the cost of the second quarter stand-alone as a run rate baseline, you would be very conservative. But if you take the sort of the point between the 2 stand-alone quarters, you would probably be -- I'm talking about total costs, you would probably be okay. So I do not expect a lot of additional inflationary pressure in this, actually, not really much at all in the second half. We are also actively managing or suppressing replacement requirements or new hires in the second half of this year that are not critical. Critical for us is defined as required by regulation or governance-related topics or critical could be if it has significant impact on a short-term revenue opportunity or short-term cost out opportunity. In both cases, we would make a critical replacement or a new hire. All other moves in that space are being subject to hold. So that's why I don't -- yes, I think I kind of covered the key aspects. If you have any more detailed questions on this front, you can always follow up with the IR team, of course.

There are no further questions at this time. I would like to hand back to Christoph Glaser for closing comments.

Thank you very much, operator, and thanks also for facilitating this call today. Much appreciate it. Look, thank you, everybody, for dialing in. Thanks also for the questions you've asked, challenging times, challenging questions. We hope we've answered them to your satisfaction. And as I just mentioned already, please do call our IR team if you have follow-up questions. Otherwise, have a good rest of the summer. Hopefully, August will be a good month. And with that, we look forward to talking to you again a quarter from now. So thanks a lot.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Goodbye.