PATRIZIA SE (PAT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Patrizia's 9-month 2023 Conference Call. [Operator Instructions] I would now like to turn the conference over to Martin Praum. Please go ahead.

Welcome everyone to our analyst and investor call for the first 9 months of '23. This is Martin Praum, Head of Investor Relations and Group Reporting. I'm happy to have our CEO, Asoka Woehrmann; and our CFO, Christoph Glaser, with me in the room today to present you an overview of the operating business, the market environment and the financials for the first 9 months of the year '23, as well as further details on the guidance for the fiscal year, followed by the new year Q&A session. During today's call, we will refer to the first 9 months results presentation, which you can find on our website in the IR section on the most recent publication. The presentation includes the first 9 months figures and details about our guidance for the full year. In case of questions, we are more than happy to take a call. And as usual, this call will be recorded and will be made available on our website and will also offer a call transcript for further reference. With that, I'd like to hand over to Asoka to start the presentation and give an overview of the impression of the first 6 months and offers with Patrizia.

Thank you, Martin. Dear ladies and gentlemen, a warm welcome [ from me too ]. I'm delighted to share my impression of the first 6 months of Patrizia, my view on the latest developments and some [indiscernible] reports about the future strategic direction we need to [ kick ]. Our conversation with most employees and many clients, I have found important strengths on which to build the future development of the company. A strong foundation based on the deep rooted German heritage mixed with an international collective [ well ] of expertise and skills. An international platform spanning across many key markets in Europe and Asia Pacific position [indiscernible] as a global player. A remarkably broad product offering across regions and asset classes in real estate and infrastructure, providing comprehensive solutions for our clients to achieve their individual portfolio activities. Patrizia's strong culture as an independent investment manager within a strong entrepreneurial mindset. This is a very solid base to become a truly integrated global real assets player in the future. Looking at these strengths, together with our very solid financial profile I'm convinced that Patrizia will become a strong global investment manager in the future. Let's turn to the Page 5. Nevertheless, in the many conversations with our clients and partners, I see much more clearly today that our markets are not just in a cyclical downturn but fundamentally changing. This concerns primarily real estate, which is a big part of our business. After 15-year long [ growth ] market, the current real estate cycle is different to previous cycles and we expect a sharpier and longer recovery with no improvement before second half of 2024, perhaps even later. These markets are challenged by a combination of continued uncertainty driven by a rising geopolitical risk as well as high interest rates and inflation, both expected to stay higher for longer. At the same time, we see a strong need for investment in ESG and decarbonization a fundamental change in asset usage and valuation and altering investor preferences regarding the portfolio diversification. These challenging markets leads to continued [ pressure on ] revenues, especially transaction and performance teams but also valuations and management fees. But let's face it, changing markets have always been part of our reality and life. What is important, we need to adapt to this new market environment to protect our profitability and successfully managing with the current economic cycle with the clear goal to emerge even stronger. Let's turn to Page 6. Management is taking action. Firstly, to safeguard profitability levels in 2024, but more importantly, to structurally improve our profitability in a sustainable way and to strengthen Patrizia's resilience against future market fluctuations in the business cycle. We will undertake a number of strategic initiatives to improve our balance chain, drive synergies between real estate and infrastructure to better meet future client needs and strengthen the long-term success of Patrizia. These core initiatives are based on a comprehensive review of our platform structure and offering as well as [ total ] analysis of our cost basis. Our clear goal is to enhance the relationship between recurring income and recurring costs. Furthermore, management is actively working on rightsizing of our platform while maintaining a healthy debt in our value chain while pursuing our client service center and ability to act on markets recovery. The comprehensive review may lead to reorganization expenses between EUR 10 million and EUR 20 million in quarter [ 2023 ]. So what does this effectively mean? On the one hand, management aims to bring our cost base down to around financial year 2021 levels. This target is to ensure 2024 profitability, considering the pre-inflation and preconsolidation conditions following 2 M&A transactions of Whitehelm Capital and ADVANTAGE Partners. Furthermore, bringing costs down statically to financial year 2021 levels in a strategic move to safeguard profitability in anticipation of a potentially weaker revenue environment in the coming years. On the other hand, these effects are expected to yield significantly increased operating leverage in terms of platform efficiency, a better quality of earnings and once market activity recovers, position the company and U.S. shareholders for higher earnings upside. The combination of cost reduction and increased operating efficiency will put us in a sustained stronger competitive position against [ struggling ] market peers in the future. What do we need to go beyond the cyclical investment reorganization rebalance for growth from last year? Real balance for growth was executed with the [ assumption ] that market activity would pick up again in the second half of 2023. Looking at our cost position, which is flat [indiscernible] cost in an environment of inflation, the measures taken were successful but not sufficient. Under our revised assumption of a longer and slower market recovery, we have [indiscernible] Patrizia to stay profitable during this cycle and to be ready to generate additional profitability then market activity picks up again. These strategic targets will also be reflected in our new dividend policy. Let's turn to Page 7. Our current dividend policy relies on growth of assets under management and management fees. This was with a reflection of the past international development of the company and the long industry growth cycle, consequently focusing on growth as the main KPIs for our diligent outcome, reflecting the fundamental change of the market and the review of our cost base and increased focus on profitability and earnings quality, management will review the current dividend policy and based to future dividend payments on the profitability KPI. Be rest assured that we remain fully committed that our shareholders will benefit directly from our new profitability targets and strong operational performance. As these targets are achieved and our operational performance improves, shareholders can expect to benefit from the results. An update on the dividend policy as well as the dividend proposal for full year 2023 will be given in February 2024 together with the publishing of the preliminary results of fiscal year 2022. I'll hand over to Martin and to Christoph.

Thank you very much, Asoka, for sharing your views on the market and the company. It's great to have you with us today. And with that, I would like to dive into our financials and guidance. As always, we will give folks on the call a chance towards the end to get to the Q&A to have a good dialogue about everything that we're going to talk about. With that, I would like to pick up on something that Asoka was alluding to, which is choppy waters or market [indiscernible] still subdued. The good news is if you look at Page 9 of our presentation that even under those market circumstances, we signed that transactions worth around about EUR 1.6 billion. We've been a net buyer in the market. And although that level of transactions is only roughly about 1/3 of the level we were at in 2022, the good news is that a lot of it has been happening in the infrastructure space, which is a result of our traction that we're getting as regards to leverage to finding the business model. And on this page, I just want to show you a couple of examples of what we have done very recently in the area of electric vehicle charging or embedded network platforms for solar power generation and storage facilities, but also somewhat more traditional real estate, industrial or logistics platforms in the Nordics, as you can see from the page. The bottom line is that we have rather successfully diversified from the capability point of view and our recent acquisitions start to demonstrate traction in that respect. It's still a very low absolute level of transaction performance but as I said, we are transacting and we are in a supplier. With that, I would like to take you to Page 10 of the presentation and talk a little bit about assets under management, which have been quite resilient despite valuation pressure. Again, to some degree, thanks to the fact that we have maintained the posture as a net buyer and the effect of that, you can see on the left side, where it's been around about EUR 1.3 million of net organic growth. Unfortunately, not quite enough to offset some of the valuation pressures to the tune of EUR 1.8 billion and some cash outflow out of structures, all of which led to a moderate decline of AUMs by 1.7% and which is obviously something we don't really appreciate, but under the circumstances and relative to competition, I think we're holding up quite well. And the defense work done by the team on the system based with assets under management is quite effective, and we're committed to keep it that way. I think the really important to take away here is that on the backup of our clients' trust, their equity positions, their cash positions and their long-term posture in combination with our operational excellence around the asset, asset management, operations, fund management and our proximity to both the customer and the asset we're faring rather well on that front. So with that, maybe a couple of words -- a couple of words about the composition of our assets under management on Page 11. Most of you are familiar with that slide. I'm not going to really talk much about the geographic split today, I would rather focus on the middle of the page where you see that our share of infrastructure investment is growing. We're right now at around 16% and we intend to continue to grow the share of infrastructure and the mix but we will keep you posted in that respect. And so again, product diversification has started to gain momentum and we really look forward to that accelerating once the market activity will hopefully bounce back in 2024. So that's really a space to watch. On the next slide, Page 12. I will spend a little bit more time because it's all about the size and dynamics of our income streams. And the main message here being that the size and the dynamic of the recurring income stream somewhat [ pushes ] the market development or market dependence revenue drop. So on the left side, management fees growing by around about 2% to almost EUR 188 million and certainly a good story. Nowadays also includes occasional effect structuring-related management fees. And that, to some degree, offset the drop in transaction fee income and the performance fee income. It's obvious that the market and also products which are more all in the products contributed to the drop of transaction fee income. The good news inside the bad news is that out of the transaction fees, we're earning maturity goes to acquisition-related transaction fees at a ratio of roughly 72 or 4 to 1. And that's good because we get [indiscernible] of us being a net buyer and we continue to maintain that posture. Performance fees are dropping as well compared to last year. That trend will probably somewhat continue into 2024. With regard to transaction fees, we obviously expect that there will be a bounce back of the circa size in 2024 on the other hand. So we will keep you posted in that respect. And the main message is that recurring income streams are strong. They are not entirely offsetting for the drop in market depending -- dependent revenue streams but the direction is right, the direction in terms of change of quarter earnings was right, and therefore, the mix of income is somewhat healthier compared to the past. Of course, 80% recurring revenue contribution to total service fee income is a great number, but let's be modest and self-critical here at least that a large part of it is driven by the relatively low level of the transaction fee income -- performance fee accounts. But nonetheless, we feel good about the overall direction here as we transform the business. So with that, going to Page 13, I would like to spend a little bit more time on net operating expenses, and we're going to elaborate a bit more on what we're going to do in that respect going forward afterwards as well. So in a nutshell, the net operating expense-related picture year-to-date is a somewhat mixed picture because we've done a great shot on general and administrative expenses. But there is a bit of a moderate increase in the personal expense base and overall, the core cost is a bit too severe to our pace. So when you look at the picture on the left side, we have, as we did last time [indiscernible] from EUR 177.4 million of net operating expenses. Backing out of adding back in for '22 at the [ Delta ] to be -- to the core cost base to the tune of EUR 184.8 million, which is comprised of EUR 60 million of G&A, [ year to-date '22 and EUR 125 million ] roughly of personnel expense. Compare that to this year, 9 months to date, you can see the pretty good story on the G&A side and the somewhat lukewarm story on the personal expense side. And then we walk it back to you adding other cost measures to get to the EUR 182.5 million of reported net operating expenses for 9 months '23. The details for all of this, you find in the release documents that we've shared on time. So I'm going to spare you with the details of 107.4% and 2.6%. The main message here is that overall core cost will be market circumstances and the pressure we are facing on the market-dependent revenue is a bit too sticky. And therefore, cost containment is and will even more so we talk about management agenda and going forward and [indiscernible] will look to that in a moment after have I covered the work on the balance sheet. So with that, I would like you to take you to Page 14. So here again, an overview that familiarizes you with the composition of our EBITDA year-to-date. Management fee income big story of 187.7 million. Obviously, that transaction fee income at [indiscernible], on the current low level of 8.8%, complemented by performance fee income of almost EUR 32 million. And that, together with a relatively lower net sales revenue for investment income gets you to the complete revenue stream, which offer detecting net operating expenses that due to the year-to-date EBITDA of 50.2%, which in itself is a pretty decent number getting us into the lower end of the guidance range for the full fiscal year already. However, of course, compared to last year, we're operating at roughly 2/3 of the EBITDA level year-to-date. So that's really it in a nutshell, and we can discuss this further in the Q&A. Balance sheet-wise, on Page 15. A couple of things have certainly not changed. It remains quite strong and gives us the necessary flexibility in the current environment to make moves, and we're going to talk about that as well. Total assets stand at EUR 2 billion and equity is EUR 1.2 billion, giving us an equity ratio of 60.5% pretty rich as historically always been the case. [ Lot of ] cash and cash equivalents and term deposits on the balance sheet with a corporate loan back against the EUR 158 million, leaving us with a net cash position, excluding warehouse assets of EUR 187 million roughly. Net cash would be reported at EUR 38 million. Please bear in mind some of the assets we are warehousing come with the consolidation of debt positions, which is shown here quite clearly. Net equity ratio at 71.3%, again, historically very strong stays that way. There is significant liquidity available because you can see that cash and cash equivalents together with term deposits created cash balance of EUR 345 million. That minus the regulatory reserve requirements we have in a couple of operational liquidity cushions we have in place provides us with available liquidity to the tune of EUR 282 million, and that does not include roughly EUR 50 million of treasury shares that Patrizia owes itself. If you would add that to the next [indiscernible], you would be at roughly EUR 372 million versus the EUR 282 million. So we continue to enjoy a strong balance sheet, there's a strong net equity ratio and depending on how you look at it EUR 282 million or EUR 332 million of our liquidity. Now I was briefly already pointing out that it's good to have a strong balance sheet and the financial strategy be flexible in the current environment. And some of what we do in terms of the active use of the group's balance sheet, we have summarized for you on Page 16. So we're actively using the balance sheet to trigger and facilitate AUM growth through the cycle. And I think we are one of a few players in the market, we have the strength and the stamina to do that. I would generally group these activities into seeding of funds, warehousing of assets that we like and co-investing together with partners where we have a partnership base growth for instance, in Asia Pacific there is Mitsui or other partners. And so here, you can see a couple of the bigger activities we have undertaken on the seeding side, in infrastructure, that fund or in the Trans European property funds in the real estate space. You can also see a couple of warehousing activities, both of them having occurred in Germany in the real estate space, one of them more value-add office space that we kind of like and that we're good at. One of them more of the residential play in high-quality [indiscernible] type space. And we believe that we have the expertise in-house on asset management, fund management and certainly in the future transaction management to get the most out of these assets. Some of them, we may end up holding for a couple of years or 3 years or longer because we like them and we know the cycle and the amount of time it takes to extract value. On average, though, I would say these co-investment receiving actives probably have a lifetime of -- let's say, if you make the [indiscernible] order between 6 and 24 months, if you make it a bit more narrow maybe between 12 and 18 months. So just to give you a direction about the time line, maybe we'll obviously make sure that there's going to be a rolling balance and that we won't end up just adding to the pile and not subtracting from the 5 needless to say. Some of these activities obviously trigger a couple of new line items or different beside line items on the balance sheet. So for extent with regards to noncurrent borrowings, all with regards to inventories in the current asset base or with regards to security positions in the current asset space. So we just thought it quite prudent to give you a bit of labor perspective here where that comes from and while we're doing it and how that fits our capital allocation and strategy and balance sheet utilization. Obviously, then on the right side of the balance sheet, we now see a couple of short-term bank loan positions related to some of those real estate a place that we have outlined on the left side to the tune of EUR 149 million. And so we intend to further seed in that, in particular, in European infrastructure. You may like to hear that we are actually -- as we seed right now are actively deploying a bit more capital in the infrastructure space with European focus. There's a decent pipeline doing a good job of bringing the transactions home. The demand is there and the return outlook is pretty decent as well. So it's a good way to bridge the consolidated period between the cycles. Now with that, I would like to spend a bit more time on cost management, as I was promising before. So if you go to Page 17, I will summarize for you some of the cost measures we have been announcing as recently as yesterday and the impact they're going to have on this fiscal year, in particular, the fourth quarter that's currently underway, but also fiscal year '24 and beyond. At the end of the day, in a nutshell, '23 is turning out to be a decent year under the circumstances. Again, as I mentioned, we're in the annual guidance range now already heading close to the third quarter. We do feel the need to tackle our core cost base near decisively, both on the personal expense and the general expense side. And we can afford a more significant reorganization, so to speak, to be executed inside the fourth quarter now. And having said that -- having made that point that we can afford to take action to make the income core company better. It's important to note that '23 also it does include quite a bit of other income, some of which we really like, an example being debt structuring related management fee income, et cetera. But it's not going to be potentially as much of that in 2024. And then the other thing that's going to happen in '24 is not going to be as much as the performance fee income probably that we're seeing right now still. And it will take some time for that income stream to come back. So that's kind of the second and the third point that's important to make because the outcome of the activity needs to be that the EBITDA or the measures that we take right now benefit in particular '24 because excluding the benefits of the restructuring effort that we execute now, the '24 outlook wouldn't be as quay. And you can see in the shaded orange part of the chart. But inclusive of the impact of the measures we are taking right now, we believe that we can hold it at quite solid levels also inside '24, where we're going to face subdued performance fee income and also potentially not as rate pipeline and other income streams as we're doing right now. So long story short, '23 is a decent year to take action, we can afford it while still staying in the guidance. '24 will benefit from this, and probably most importantly it's going to get '24 a better earnings quality profile on top of the dynamics that we have already alluded to earlier in the sense of recurring income contributing to going. But that, in combination with the recurrent cost base being covered -- more than covered by recurring income and market-driven income streams, bringing us be on top of that, and I think that's kind of where we want to end up. So there's a package of measures we have prepared and we [indiscernible] storage to implement to safeguard EBITDA and to increase the current profitability in '23. And we can certainly dialogue more on that in the Q&A. Last but not least, on Page 18, our guidance range support for fiscal year '23 are being confirmed with regard to AUM between 57% and 62% with regards to EBITDA between 50% and 70%. As I mentioned before, the restructuring measures we've taken are going to move us from a very healthy place inside that range towards the lower end of that range, but it's an investment that carries strategic value, I may say so. And the margin between EUR 6721.2 million. In very simple words, we're taking action to whether-proof the platform and to navigate through the next phase of the cycle. So with that, I guess, more can -- we can conclude on the presentation. So again, I say thank you very much for interior [indiscernible] coming on to market and the company. I think we have covered all the financial aspects, including the -- some of the balance sheet dynamics and the cost containment related actions we are undertaking. And with that, I guess we can move into the Q&A.

Couple with [indiscernible], we're happy to start the Q&A.

[Operator Instructions] The first question comes from the line of Remke, Andre with Baader.

A couple of questions from my side, please. Starting with your cost measures. How long is the amortization rate of the EUR 10 million to EUR 15 million or EUR 10 million to EUR 20 million? And what are the full annual effect and when it is expected to be achieved in full?

Thanks for the question. The 2020 of restructuring cost flow in 4Q '23 should directionally yield us a benefit on an annualized basis between 1.3 and 1.6x, I would say directionally. Secondly, obviously, a question of timing of realizational of payback, I would say that both from the P&L and cash payback point of view, I'd probably say 3 quarters direction. So that feels right. And that's how we're going to see a big part of the benefit already in '24. Some of the small timing delays in the early stage of '24 will then come and get added in early '25.

So it's on Page 17, we show the rate at EUR 10 million to EUR 20 million reorganization expenses and the cost savings on the right-hand side, it seems to be much larger. So this is the 1.3 to 1.6?

That's what with regard to when I was talking about 1.3 to 1.6x. So we directionally multiply the box on the left side, the gray on listed number to get to the cost savings impact in fiscal year '24. And again, this should enable us to depend somewhat reasonable EBITDA level of the measures compared to '23. [indiscernible]

Okay. Okay. Perfect. And you mentioned the ratio between recurring costs and fees. Do you have a special target ratio for the upcoming years because probably it's not all what you are intending to introduce today or over the coming weeks, so you have something in your mind you could share with us?

Yes. Certainly, we do. There's been quite a lot of discussion among top management on that front because historically, probably fair to be critical of the company for not having secured recurrent income coverage of the current costs. Which means that historically and so now or very recently, we have been running that equation and a ratio most of 100%, which is something that is not acceptable. And it has the potential of hurting us badly in a [indiscernible] consolidation phase, which we expect to be the last 2.5 years or so between '22, '24. And on that fact, we want to get it now when it's actually most painful to do so. We want to get it in 24 below 100%, so somewhere between probably 95% and 100%, I would say. And then medium term we're shooting more for something between -- around 85%, let's say, and long term, to get [indiscernible] around like 70%. I think when we're going to be at that level, which needs to be a function of both cost containment and markets we found, I think we will feel a lot better. And that's kind of something Asoka, myself and then the rest of the leadership team have really set our sights and it's not up for [indiscernible] anymore. So I mean maybe one more comment in that respect, we're not saying that market activity induced fee income is bad and [indiscernible] transactional performance income. In fact, we believe that transaction fee income is more part of recurring in a way, but you can argue that performance is maybe geared a bit differently because -- and they do show -- or they are reflective of the value we generate for our clients, which is [indiscernible] pay those fees. So we're not trying to get into the mood of saying we only want to be in the game of [indiscernible] management fees. We do have our eyes also set on a rebound of transaction fees in '24 compared to '23. Whereas opposite to that performance fees will evolve to a bit longer, as I mentioned before. And then we will hopefully have the full package you can later out in '26 or so.

Okay. Very helpful. Then another question is on your dividend. You mentioned that you will be based on a profitability KPI. As far as I know, you only have one KPI, the EBITDA. So will this mean the growth rate of the EBITDA or a certain ratio of the EBITDA as a new reference? Or do you think about introducing another KPI? And or let's finish the question then? Or is it just the case that you will not become more precise today due to the potential layoff of staff and announcing a dividend?

Look, we're -- let me give you -- let me put the topic a little bit in a perspective here for a second. There's a lot of things we're looking at right now in terms of playing defense and offense and short-term and medium-term measures. We have started discussion internally among management and also with the Board of Directors about dividend policy that in the future would be more linked to profitability type of KPI versus a set of growth KPIs as it is right now because we have historically talked a lot about growth and management fee growth. Now that said, a couple of maybe 4 or 5 fundamental statements at this point in time from my side. We do -- we are a dividend payer, and we plan to stay a dividend payer. I think that in itself doesn't change, and we intend to differentiate ourselves along this plan. Secondly, we believe that long term, i.e., in the future, we would benefit from tying the dividend payment more to profitability than historically and less to only growth. Now it's needless to say that although that's where we want to go '22 and '23 and potentially spill off to '24 or somewhat especially years [indiscernible] make up that transition period between cycles. And so we will make -- really adjust and call on those periods, together with the board and end up with a proposal, which I guess is in a place that beginning next year. That will little bit profitability, if we look at cash flow, which tends to be in quite recent shape. If we look at the balance sheet strength and also what the market is doing or more competition to it. So we'll cross that bridge once we're close the year and have a dialogue at the beginning of next year and then come back to you. And that will be the right time for this. And we just wanted to give you the indication that we're going to move that way because we believe it's fundamental [indiscernible] unless it's achieved one more change that we will embrace. And that's really it for the time being.

Okay. Understood. And then another question on the service fee and for development and debt structuring you earned in the third quarter. What is the amount here and concerning debt advisory, so to say, is this not the usual service as an asset manager for an investment? And if not, could it become an additional revenue stream going forward?

Yes, there's that question, I can answer in a very straightforward way. As you know, we're doing a real estate development to largely as a service for investors at a much smaller degree on own accounts historically. Secondly, that yields on a fairly frequent basis, real estate development-related management fees. I think year-to-date, we're talking around about 10 million or so, of which about 5 million in the third quarter alone. So that one, I would up some under the notion of recurring and normal course business, although '23, '24 is probably going to be again low type of environment for these types of management fees. There will be some more in the fourth quarter that we count on a similar direction. The debt structuring service is also something we do quite a lot of traditionally, as you may recall that we have average I guess, about 31-32% or so across the whole portfolio of our vehicles. And we're managing EUR 670 billion of debt with an in-house team, a lot a degree of expertise. And so we're doing this kind of structuring work for our clients quite frequently actually on a day-to-today but I think this year, we're prolonging around about EUR 2 billion. And some of that work is being rewarded increasingly because of the complexity that's increasing because of the market situation that makes it simply more complicated to pull off. The good news is that with 150 partner banks and the long history of reliable debt structuring, we are in quite position -- quite good positioned to do this product line even today. Some of you may have heard [indiscernible], the Commerce Bank Tower refinancing that we did earlier this year. And there are other deals given that space like on our [indiscernible] business or on large real estate portfolios in the state of [indiscernible]. And some of those are just -- has the potential to be more rewarding from a management fee income point of view. And so we see opportunity there. There will be more of this going forward. You'll see how that unfolds in '24. But in this year, we had a couple of deals that are worthwhile to mention. So I would say that around about EUR 4 million or so probably in that pocket in the third quarter. That's not worthy to point out because [indiscernible] EBITDA '22 or so in the second and the third quarter. So that's the one I would point out, it's not going to be that much in 4Q and where Q2 next year, but there will be some of that work with in general.

Okay. Okay. then your indication of a lower performance fee in the next year. So it's that obvious because it's probably related to disposals. Is there a special reason for further decline on additional special reason, a big [indiscernible] of the question is the question on the [indiscernible] performance. Is this still included and do we expect that to be earned next year? Or is this the Delta?

No, I'll address those questions in the exactly the same sequence. So performance fees, we usually are recognized when we dispose assets and performance on the investment in the above [ certain threshold ], the upside beyond which we see them sharing with investors. And there will be just structurally speaking, less disposal. Well, there are already less disposed right now, there will be less next year. Because of that, we are going to be a net buyer and that would just be less clients selling because most of the assets we're managing are of decent quality. And most of our clients are -- a vast majority of our clients have no pressure to sell, and it will not be [ the kind of ] people who sell under force or pressure, but they will rather demonstrate their ability to sit through the transition period. And just because of that, there will be less disposals and less performance [ being recognized ]. So there will still be some -- the good news is that I don't foresee any change in that respect for our fiscal year '24 vis a vis [indiscernible]. We do expect to more decent performance fee income vis-a-vis [ Dawonia ] in Spring '24 as we did this year, a bit less probably but actually still quite significant. And then there will be some other positions on top of that because across our portfolio, we are sitting on a well-known -- on a decent number of embedded performance and it's just a question of time when we recognize them, but we are pretty cautious in that respect, and we think overall performance income will be lower next year compared to this. But also the transaction fee income should be higher and to be hopefully we'll see a continuous moderate growth of management fee income. All of this, by the way, excluding any assumption on M&A or quartile M&A or portfolio deals that is excluded from commentary because we traditionally don't plan for that and we don't communicate our [indiscernible].

Well, I intended to stop my questions here, but you mentioned the M&A thing. You also mentioned that the M&A drove the cost higher over the last 2 years for good investments by the way. But in the current market environment, in [indiscernible] offers to lower your costs. Is it fair to assume that you will be a bit more prudent with regard to your M&A activity on the group level, at least for the time being?

I don't like the idea of confirming the [indiscernible] improvement, but [ put that aside ], as I mentioned before, we did quite a few infrastructure transactions right now in the [IP business we purchased in -- recently also growing quite niche], but put that aside for a second, we will always include it when it comes to M&A. And as I mentioned on many calls before, we're not going to just buy an [ end ]. We will only make a deal if we see strategic value in it, either geodata diversification-wise maybe concluding acquisition acceleration growth, whatever. But the [indiscernible] a strategic twist. Secondly, we've got the balance sheet to do one. If it makes sense, but we're not under pressure. The -- I would longer focus the mindset on capital allocation that is linked to the 3 topics I was mentioned before, these investments were housing and coal investment. I think that will be more team investing and more co-investments, warehousing is more tactical, either when we see it and we like it. On top of that, I see us more looking at portfolio deals, small, medium, large size. We're looking at other market participants to ship portfolios to us. So kind of quartile organic growth, if I may say so, there will be some of that. And that could be quite exciting in '24, but you'll see, I think M&A, as an idea, is further away from that in terms of [indiscernible] -- but we're looking. So I wouldn't exclude that [indiscernible] that so far may have -- be on this, but I guess, summarize our collective perspective.

The next question is from Philipp Kaiser with Warburg Research.

You mentioned kind of EUR 4 million are linked to project development, service fee and restructuring fees in the third quarter. Am I right?

Briefly. I was talking about development-related management fee income. Year-to-date, about EUR 10 million of which half is in the third quarter, the other half in the first half of the year, and there will be some in the fourth Q as well. The other topic we talked about was, let's call it, positively choppy debt structuring in common main income in the third quarter because we had about close to 4 million of that in the first quarter, which was a bit more than we normally see. So that made the third quarter a good quarter also. The rent income is clearly more in the category of recurring. The debt structuring fee income is, let's say, a bit less recurring and comes in a bit more bulky chance once in a while. And so it's up to you to choose what you want to see in this quarter or not, being precedential goes quite strong in the third quarter, which is nice under the circumstance [ either way ].

Okay. certification. And then with regards to the development service fees, how long can you kind of benefit from your pipeline to generate this fee, I would assume it's kind of a legacy business in the current market environment isn't it? Or...

We have a pack of developments that are currently being executed. We've just actually -- we're actually finishing a bigger one in the fourth quarter/first quarter next year. So there will be a bit of income related to that in the course of -- in the first quarter of next year. So that stack of active real estate development project that we do pursue as a service, for key strategic clients. It's getting a bit smaller at the moment. So the activity level is reducing. It's just not surprising on the current market circumstances. -- meaning we don't really have our own balance sheet at risk here. And the second big news is that [indiscernible] we're working on this as a team. They are a very good team, and we have a phenomenal opportunity to reposition some of their capacity away from a shrinking sort of traditional development set of activities towards [ brown to green and black to green ] ESG asset management or ESG-focused asset management activities. So think that some of our development experts to become fast value as [ brown to green ] asset management strategy, owners and service providers for clients who have to address ESG CapEx needs to [ interquarter ] at the period. So that's how we look at this, which is a nice flexibility to matter.

So in terms of the amount will be a bit smaller next year, but if the market picked up then the [indiscernible] does not dry out...

No. The pipeline -- the projects that we still have that we are working on the last '24 and '25, I would have to check because I don't know from the top of my head, what's the longest [ tail you ] but it's definitely beyond that solution. It may come back and get -- and see some [ add on to ]

Okay. Yes, clear. And the last one is on the amortization of fund management contracts. Could you give us kind of the guidance for the last quarter? Can you just take the last quarter as a run rate or anything special crops up by the end of the year?

Yes. I'll refer that question to Martin, who will [indiscernible].

Yes. Sure. Philipp, so for the fourth quarter, if you look at amortization, typically, we sell about a one rate of say around EUR 180 million per annum, which you can invest in 2 quarters. If you look at other items and depreciation and amortization, you might see or at least we budget a little higher number in the fourth quarter, just to prepare for potential valuation effects of the temporarily held assets. So just a EUR 85 billion plus for your model.

The next question comes from the line of Lars Vom-Cleff with Deutsche Bank.

You mentioned in your presentation that assets under management were hit by a negative 3% valuation impact so far this year. And if I remember correctly, you said you're assuming or you're guesstimating 4% to 5% for the full year. That is still your latest estimate or would you change that at this point in time?

I would let that sit there that's somewhere between 4% and 5%.

Okay. Perfect. And are you seeing different trends when looking at the various real estate sectors or are all sectors hit by more or less the same amount of [indiscernible]?

It varies quite widely, not wildly, but widely directionally from an asset class sub-class point of view in price is in very good positive shape in general residential, if it's in the right places is either stable or lower single digits. Logistics is in decent shape. Office -- mixed-use and office are under quite some pressure there you can easily see, in some cases, double-digit, 10%, 15%, 20%, I would say. You're not in a good spot if you have office with ESG investment pressure in the locations that summarize it that way. As [indiscernible] we have very few of those but Office is the one that keeps everybody awake at night, maybe as a little bit lesser than competition. It's a location question. Our mixed use is called a topic. High-speed retail has seen a negative [indiscernible] it kind of digested, I would say, at this stage, at least on our own side. Geography-wise we have seen quite a bit of deterioration in Benelux, Southwestern Europe and partly also UK, Ireland. Less so in this Germanic region or part of the Nordics. It's fair to say, though, that as I mentioned before, we're still going to see some lower single-digit valuation downside probably also in '24, makes that 3% or so, I don't know, but somewhere [indiscernible]. Probably there's going to be a tail end in some of the [indiscernible] on average.

Okay. Perfect. You also mentioned you would assume transaction fees to bounce back at some point in time next year. At this stage, I guess that's rather a guesstimate or are you already seeing something in your pipeline that would back this statement?

We're starting to see transactions. In fact, I was just [indiscernible] about on being closer EUR 40 million or so EUR 45 million. We see what I call early days of the new pipeline [indiscernible] let's say, the very early days. Then there are transactions that -- so in a way it's funny, it there's not funny, but professionally speaking, there is a tail of an old transaction pipeline that's still in place, and that's been diligently executed by some of our investors and us. Then there is not really much new stuff coming out of late '22 or '23, because it's kind of quiet orders. And then there is some sort of the beginnings of the new silver lining, and that can be -- that can be coming from financial actions at 30 days. So it would be not be appropriate to say that we have a full [indiscernible] transaction fee pipeline for Q4, but going to be more than this year, unless than [indiscernible] that we want.

That at least sounds promising. Which brings me to my last question, if I may. I mean, playing around with the numbers. Would you regard your assumptions and your Slide 17, more or less showing an EBITDA on this year's level as realistic or as conservative? I mean comparing it to 2021, the year you take for the comparison or to compare your cost base, to the cost base would come down by, I don't know, EUR 25 million, EUR 30 million. Management fees are, let's say, EUR 40 million higher given the acquisitions you made than they were in 2021. Transaction fees bouncing back, at least not nose diving further. Admittedly, yes, other operating income, performance fees coming down. It's pretty hard for me to come up with an EBITDA, which is not markedly higher than this year's.

I'm not -- that's not what we're saying on Page 17. I guess you can [ delay ] on circa Page 17 that we're saying we gave the guidance between 50% to 70% for this year, we're feeling pretty good about our position inside that guidance before taking a restructuring action. After having taken those, we will end up somewhere around the lower end of that guidance and the effect of preloading that will then benefit next year and to take [indiscernible] little bit of litigation in this chart, you can estimate it at least as in '24. So it's going to be a decent EBITDA level. It's directionally conservative on performance fee income. It's mildly bullish on transaction fee income. It assumes a moderate growth in management fee income, and that will be subject to the valuation of [ a store ]. And the cost will come out just the multiples I explained and the range for that is on the page. So if you [indiscernible] you get a good feel for what we're thinking.

There are no further questions at this time. I now hand the conference back to Christoph Glaser for closing comments.

Thank you very much, operator. As usual, we really enjoyed hosting everybody today. I'm super excited about [indiscernible] this time, it's going to stay like this come forward, is great as well. We're very happy to see you on the road over the course of the next couple of weeks. We're going to actually fly out to London tonight and then [ give money ] tomorrow after and then there will be more actually on the road after that. And we are virtually fully booked by the way, as we go to the Investor Conference end of November which is amazing to see and the next is quite excited to the interest in the stock. So thank you for that. And we'll keep in touch, and we'll speak soon. Thank you.

Thank you. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.