alstria office REIT AG

XETRA:AOX

Earnings Call Transcript 2019-Q3

[Operator]

Dear ladies and gentlemen, welcome to the conference call of alstria office REIT-AG regarding presentation of the Q3 results 2019. At our customer's request, this conference will be recorded. [Operator Instructions]May I now hand you over to Olivier Elamine, CEO, who will lead you through this conference. Please go ahead, sir.

[Olivier Elamine, Chairman of the Management Board & CEO]

Thank you very much, and good morning, everybody from a cloudy Hamburg this morning. My name is Olivier Elamine, I'm the CEO of alstria and I'm here today with Alexander Dexne, which is our CFO; and Ralf Dibbern, which is our Head of IR for the 9-month presentation of the 2019 results of alstria.Without any delay, I want to go into the executive summary. I think it's fair to say that the first 9 months of 2019 has been a very strong business for the company, with our revenue and FFO pretty much in line with our full guidance for the year that we are happy to reconfirm at EUR 190 million of revenue and EUR 112 million FFO.We have been working on refinancing part of our debt with the issuance of a EUR 400 million bond with a tenor of 6 years and a 0.5% coupon. But what I believe that was the most impressive performance year-to-date was on the letting market. We've been blessed with a very strong letting market across the cities in which we're investing, which has led us to record leasing 123,000 square meters of new leases and 83,000 -- 81,000 square meters of extension, which brought down our EPRA vacancy rate to around 7.4%. We still have a pretty full leasing pipeline and I would expect this number for the full year to go even higher.As usual, we are using the opportunity of the publication of our Q3 number to publish our Sustainability Report for the year 2018 and '19, and we've also been doing progress in that field, and I would have the opportunity to come back to that in a minute during the presentation.The portfolio itself has not fundamentally changed over the 9 months. Again, the most notable change is related to the improvement in the overall occupancy following the strong leasing prospect and this is, as you can see, translate in most of the KPIs of the portfolios. It had led to higher valuation in half year, we did not do a revaluation in Q3, but this was a half year revaluation of EUR 2,700 per square meters for our portfolio, obviously, a lower EPRA vacancy rate of 7.4%, down from 9.7% at the end of last year and higher WAULT despite the fact that we're almost a year later at 5.2 years and higher contractual rent at EUR 203 million per year, which is reflect again the leasing that we have been doing.From a transaction perspective, and I would have also the opportunity to come back to that in a minute. We've been keeping on with our approach of selling the periphery and buying into the core so we keep on focusing the portfolio on the 5 cities that we invest in across Germany.Again, the main highlights of this year have been the very, very strong letting market on which we have capitalized with the leasing. We have seen major leases in the Düsseldorf area. We're giving 3 examples on this slide, but we're also seeing leases across the cities in which we are invested, which led to a like-for-like record growth year-to-date of 6.4%, and the additional income coming from the new leases of -- additional contractual rent coming from the new leases is actually overtaking the fact that we've been the net sellers, which would lead to an overall rental growth of 3%, including transaction impact over the first 9 months of the year. There is one point which I wanted to highlight at this stage is, we're talking here about contractual rents so this is basically all the rent that we have signed year-to-date, a number of that income is only going to hit our P&L at the end of 2020 and beginning of 2021. As we are currently undergoing the work in the CapEx and the building to accommodate for the new tenant who's going to be joining us in the course of next year and beginning of the year after. So this is looking not at next year's cash, but it's looking at the value of the contract that we have already signed and are in place within our buildings.So we have signed 123,000 square meter of new leases, which will generate for the company a future income of around EUR 175 million, and we have renewed and extended 81,000 square meter of leases, which will generate around EUR 50 million of future income for the company. What is interesting to note is that, and I think this has been one of the major theme we have communicated to the market over the year is, we are achieving clearly better results with our new leases and with extensions and that's linked to the fact that the new leases usually come with retrofitting of the assets and some kind of investment. You can see that in the number where we are we achieving average rent of EUR 14.51 on the new leases and a WAULT of 7.5 years versus EUR 11.29 on the extended leases and a WAULT of 4.4 years. The average rent across the portfolio has been going up steadily since 2014, around 2.8% per annum moving from EUR 11 to EUR 12.60 across the years. But as you can see, our average is still substantially below what we achieved in the new leases today. So a substantial reversion, which is embedded in the portfolios that we intend to tap on in the near future.Just as an example of comparing that reversion, one of the large leases that we have signed in Düsseldorf this year was the lease with Commerzbank, 15,000 square meter in [ Dischtown ]. [ Dischtown ] is a building we acquired as part of the Dutch office transaction with an in-place rent slightly short of EUR 1 million. We'll have EUR 5.6 million of annual income when Commerzbank will get into the building on the 1st of October 2020. We have substantially reduced the vacancy and the profits have captured around EUR 30 million of additional value. I think this has been really the bread and butter of what we're doing here, buying assets which have been for one reason or another and to manage over time and then being able to reposition them, upgrade them leasing up. And bring them back to a more institutional quality level that would then deliver higher value for the company and its shareholders.We are continuously looking for those kind of opportunities. Obviously, we are focusing on the core market in which we are invested and we are buying -- the center buying the core of the city, which we believe are going to be more resilient in the case of an economic downturn. We've been acquiring since the beginning of the year around EUR 30 million of assets, which, as you can see, offer reversion from in-place rent of EUR 10 to EUR 15.20, which we intend to capture over the years. And we've been in parallel selling in the peripheries, capitalizing on the very strong investment market that we're seeing today in Germany to improve the overall quality of the portfolio, and disposing assets mainly in second relocation or outside of the core city in which we invested. We have sold year-to-date EUR 120 million of assets and generated around EUR 20 million of capital gains compared to the year-end valuation.This is really part of our approach and we're also happy to be able to demonstrate this quarter that despite being a net seller, we're still able to grow the top line by capitalizing on the strong letting markets that we are currently enjoying in the German market.We did -- on the balance sheet side of life, we did refinance part of our debt. So although the net financial debt looked pretty much stable with, I mean, literally no change at EUR 1.2 billion. We did issue a new EUR 400 million bond which 6 year maturity at 0.5 coupons and this EUR 400 million is going to be used to refinance the debt maturing in 2020 and 2021.We are net LTV down at around 29%. This is a level which we are relatively comfortable with and our average debt maturity is 5 years. The metrics which we find interesting to look at is the amount of debt per square meter. We believe it provides a good understanding how the amount of risk you take -- you're taking with your leverage which might be more palatable than LTV itself. We have around EUR 795, EUR 800 of debt per square meter, which is by any means relatively low amount of average debt to have.Our cost of debt has reduced to 1.5%. The issuance of the new bond is going to allow us to save around EUR 5 million of financial expenses every year.And finally, before I open to the Q&A, I wanted to spend some time discussing about sustainability. As you know, we've been the first real estate company in the German market to start reporting on sustainability. This was 10 years ago, and we are happy to use the 10-year anniversary to stop printing our Sustainability Report, which is probably something we should have done a long time ago. So it's only going to be digital, it's available for download on our website. We are currently rated by a number of leading ESG companies along with RobecoSAM, [ MSCI ], CDP, and ISS-oekom. We are, as a party, only participating to ratings which are using publicly available information to produce the rating, that for instance, we're not participating within the [ Greg B ] framework. We have -- in 2013, we have committed to the RE100 initiative, which was an initiative which -- to which 207 companies across the globe, across different sector have committed to procure only renewable electricities and we had committed to reach that target by 2020. We have actually reached 100% procurement of renewable electricities in 2018. We do appreciate that procuring electricity is one thing, but the electricity we use is not necessarily coming from where we procure it. We are working very hard at reducing our total carbon footprint, which remained one of the focus of the company when it comes to sustainability. We have reduced our footprint since 2013 by around 42% compared to the base years and we are clearly continuously working on finding ways to reduce the impact of the company essentially on the carbon and climate change. It is one of the main focus that we have today and as the management, we are committed into achieving that goal and spending a substantial amount of time and energy into understanding the consequence of climate change on our business and also how to improve our performance in that field. And we expect to revert back to you with some ideas in the near future about ways to approach that. I encourage you also to have a look at the management letter in the sustainability report.So that's it on our side for the call. We are, obviously, looking forward to a discussion and our debate.

[Operator]

[Operator Instructions] The first question is from Charles Boissier, UBS.

[Charles Boissier, Director and Property Analyst]

I essentially have 3 questions. The first one so just like-for-like, obviously, very strong and in part driven by vacancy reduction. I just was wondering what are the other drivers by contribution? So I imagine that reviewing spread and indication so on, but just the contributor? Then my second question is on acquisitions. So I think you mentioned that in the past that you were planning to be more of a net disposal then I think what has been the case of 2019. In the context of your LTV being at a record low, also share price fully closing, your NAV is strong so the investment, I guess, market is telling you that perhaps it's becoming more acquisitive. Do you -- does that make you more open-minded about becoming net acquirer? Or generally, you're just sticking to selling the periphery, buying central but not as a net acquirer? And then lastly, I think you mentioned last quarter that you saw no impact from the slower GDP growth on leasing activity and I just was wondering if this is still the same? And a subquestion, I think you mentioned that you don't see vacancy coming down below 7%, you're getting quite close to that lower end of the range. I just was just wondering if that's still the case that you don't see vacancy necessarily going down below 7%, but perhaps it's also just to allow for asset management activity.

[Olivier Elamine, Chairman of the Management Board & CEO]

So well, thank you very much, and good morning for the questions. I think on the split, I'm talking about [ rent ] control here. But if my recollection is correct, we have around EUR 1 million year-to-date of additional income, which is coming from indexation, and the rest is basically coming -- so the remainder is basically the net impact between new leasing and termination, and I think new leasing should be around EUR 13.5 million and a negative net impact is around EUR 2.1 million in terms of how the number would add up. The -- I think the point on the acquisition is, I think, is a valid point and on the fact that we are net sellers, I would like to probably start with a more overall statement. When you run a real estate company, you basically have, I mean, we actually built alstria to basically have 2 different buckets of investment opportunities. One bucket of investment opportunity is, as you mentioned, to go out and buy assets in the market. And that's something we are constantly looking into, looking if the asset that would meet our return expectation also considering where we are trading in relation to NAV and where our LTV is trading but the second bucket of opportunities that we have and we've been actually working very hard over the last 10 year to build that is the investment within our own portfolio. And currently, if you look at the return we can achieve with investment in our own portfolio as it's, I think, demonstrated by the strong leasing record that we have this year, we achieved substantially higher returns on investment we do in our own portfolio versus investments we would do in the market. So if we have a euro to spend, the clear priority for us today is to spend it within the portfolio and this is the reason why we have substantially accelerated and increased our exposure to the refurbishment project and that's something which we believe it's much, much more accretive for the company then going out and competing for an asset out there. So we are currently in this kind of luxury situation where we can still deploy capital in a substantially accretive manner within our own portfolio without the need of going out and competing for other assets. Having said that, if there are opportunity again out there we are, obviously, always looking at them and consider them. You're right that the share price had a very strong performance, as we all know, the market is also moving very, very fast. So whether you're trading at a premium or discount to NAV is, obviously, a question of where you look -- where you put your NAV. We are trading currently at a premium to the NAV that we published in the third quarter, but I would still expect to see some further movement in NAV at year-end looking at the recent transaction that took place in the market, but we are also closely monitoring where we stand in relation to NAV and what it means in terms of cost of capital to look at it whether or not it makes sense to fund acquisition in the market. I think it's fair to say we still see the market as very, very expensive as we speak and our preference is by far to invest within our own portfolio.

[Alexander Dexne, CFO & Member of Management Board]

Another way -- it's Alex. Another way of looking at life here is, I mean, right now, as you rightly say, and we are trading close to the last reported NAV, which kind of values the portfolio at around 4.9% yield. Right now, we really struggle to find investment opportunities at 4.9% -- yielding 4.9% in the direct investment market. And as Olivier said, we're finding much more attractive and thus, higher yielding investment opportunities within the portfolio. I mean should the movement and the signaling be in a way that we can find accretive acquisitions? I mean, this is obviously, a turning point and we would reconsider, but my feeling is, we're really not there yet. And the -- I mean what we're seeing in my interpretation is more that the capital market is catching up with the realities we're seeing in the direct market, but still there seems to be a substantial gap as far as we're seeing the movement in the direct investment market.

[Olivier Elamine, Chairman of the Management Board & CEO]

On your question with respect to leasing, I think, there were 2 questions, one with respect to vacancy rate and the second one with respect to whether or not the GDP has an effect on what's happening in the market. With respect to the vacancy rate, I would expect that we will kind of stay in the region of the 7.4%, which is per se, a very low vacancy as far as we're concerned because it [ reduce ] the opportunity we have and we're trying as much as possible to bring that up slightly by trying to terminate tenant earlier or move them out of the building to be able, again, to capture the reversion within the portfolio as fast as possible. As of today, we have not seen a major impact from the GDP headlines or the economic headlines. Within our leasing pipeline, and as I mentioned before, we still have a pretty full pipeline before -- until year-end, and I would expect the number for our new leases to go even higher than that before year-end. But it's also fair to say that most of the leases we're working on right now are decisions that has been taking 12, 18 months ago where we have a different economic background. So I was saying that at a certain point, I mean, reality bites and the -- if the economic situation in Germany deteriorates, I don't see how and why the letting market will be absolutely immune from that, but again, we [ would ] be getting into that cycle of vacancy rate which is at the lowest it has always been. So we also feel pretty strong in where the company is currently.

[Operator]

The next question is from Andre Remke, Baader Bank.

[Andre Remke, Co]

Basically 2 questions. The first question regarding your bond issuance and the planned refinancing. When will the mentioned interest cost savings of EUR 5 million become effective as the bond is only due in 2021? Are you planning any early refinancing on that? And do you have to pay negative interest cost on your quite decent cash position? That's the first question please.

[Olivier Elamine, Chairman of the Management Board & CEO]

So I mean, in short, we do not intend to refinance the existing bond before they actually mature, which is going to be in -- I think as you can see on the slide, in early 2020 for the Schuldschein and mid-2021 for the bond. And the reason why we don't intend to do that is because actually if you were to refinance a bond right now and repay them right now, your total cost that would have would exceed the amount of interest we need to pay between now and the maturity of the bond. So we're basically saving around EUR 3.5 million by just keeping the cash on the bank account and then paying the bond when they are due. I mean without being too technical, this is linked to the negative interest rate environment whereby the sooner you repay, I mean, you don't discount anymore but you compound, we can take that off-line if you want so [ increase ] your liability. The savings themselves. I mean we're basically applying to the new bond, the same accounting treatment as if we were to repay them right now, which is that basically on the old bond, all the interest accrual on day 1 and that creates and that basically is a one-off cost. The same way that if you were to repay the bond today -- and so we are accounting for the cost of the new bond on day 1 as well.

[Andre Remke, Co]

Okay, okay. So then the second question, what if your lease maturity profile for the next, let's say, 2 to 3 years -- we are aware of the situation with the telecom asset moving up your occupancy, but could you remind me of what are the largest reletting of tasks, let's say, for next year and say, year after, i.e., '21?

[Olivier Elamine, Chairman of the Management Board & CEO]

So I think we -- basically, went through most of the large leases that we have. The biggest vacancy we still have in the portfolio, although, we -- sorry, we decreased that quite dramatically over the last 6 months as you mentioned rightly in Darmstadt, we still have some of our refurbishment project in Wiesbaden and Solmsstraße in Frankfurt, we're working on -- but those should be hopefully leased up pretty rapidly. So we do not have any more any major telecom single digital event as we used to have in the past, which would have a material impact on our cash flow going forward.

[Andre Remke, Co]

And the asset in Stuttgart, the Daimler asset, is it still in the phase of step-by-step renewable -- renewal or reposition the assets?

[Olivier Elamine, Chairman of the Management Board & CEO]

Yes, I mean, absolutely, it's currently fully let. I think there is 1,000 square meter vacancy. So we started to lease up to third-party tenants, but Daimler so far has been extending their leases in most of the cases where they had so we have -- there is no major concern on our side on this asset. And we are actually releasing at around EUR 15 to EUR 16 per square meter, where Daimler is paying EUR 12.50. So we're also very comfortable with Daimler moving out.

[Operator]

The next question is from Kai Klose, Berenberg.

[Kai Malte Klose, Analyst]

I've got 2 quick questions. The first one is on Page 15 of the presentation regarding the admin expenses that was a 10% higher level -- sorry, that was a higher level compared to last year. Maybe could explain was anything special for that? And the second question would be also on the development project, in the past, you sold projects after they were completed, being basically opportunistic. Is it still -- that you still have a opportunistic approach also on the development? Or would you consider, rather preferring keeping them in order to grow the portfolio then whilst before you were opportunistically selling assets after completion?

[Alexander Dexne, CFO & Member of Management Board]

Kai, this is Alex. So with respect to the admin expenses, this is really not a structural increase in G&A expenses, but more a project-driven. I mean there were a couple of things we just do irregularly. There was a Board's efficiency review, which is something we have to do according to German Corporate Governance Kodex every -- actually every year, but we were having externally done every 3 years by an external consultant is basically looking at it, I mean, how the collaboration between supervisory Board -- I mean how the supervisory Board works and how the collaboration between supervisory Board and executive team works. There was also a more complex tax question, which we addressed in a tax ruling that we received from the Hamburg Tax Authorities and these were really like more or less one-off project costs that were incurred there. So it's nothing I would expect to happen like every quarter or every year. So it's really non -- as I said, a nonstructural. And with respect to the development assets, I mean, this is certainly something where we're looking at in each individual case, but it also has a lot to do with redeployment of capital opportunities and if we feel that an asset even after a refurbishment probably constitutes a more attractive value proposition than anything we could find in the direct investment market, we're probably more inclined in the current environment to keep the assets on the balance sheet rather than shrinking the top line by just recycling capital, especially since we feel that the deleveraging, which was a big theme over the last 3 years or so has become less of a topic in the -- where we stand currently.

[Kai Malte Klose, Analyst]

Okay. And just a very quick one. Maybe it is too early but could you indicate how much you're going to spend roughly in 2020 on what other renovation projects? Probably will comment on that with the full year results, but maybe an idea, what's was the amount of CapEx there would be -- might be in the next year compared to this year for development projects?

[Alexander Dexne, CFO & Member of Management Board]

I think, as you rightly said, this is going to be a topic for the full year, but with the leasing we have done and the assets in the development pipeline, there's going to be a substantial increase in the CapEx budget as we go into the year 2020 and 2021. That is, I mean, already today a certainty. And this year, I mean, we were more looking at around spendings of EUR 100 million in the development pipeline, which was already a significant up as compared to prior years. I would expect this number at least to double, if not go beyond that but then more on a 2- to 3-year spending time frame. But it's really with the commitment of the leasing. If you like, I mean, these are, is the flip side or the adjusted complementary effect of the various successful leasing here that we have that we now need to up the quality of the portfolio as it was agreed with the tenants and like deliver a building which is up to what we have discussed with the tenants.

[Kai Malte Klose, Analyst]

Sure that's great. And the very last question, lastly, on the development projects. Would you consider maybe changing the financing mix, meaning asking us -- sweetening the recurrence by putting a bit more leverage on the development projects -- financing on the development projects? Or how would you consider doing the financing?

[Alexander Dexne, CFO & Member of Management Board]

Yes. We're in the middle of that discussion. It's also going to be a bit opportunistic. I mean we're looking at various instruments that we could blend into the equation, but as we said, we would basically like to stay in the current capital structure. So to add that is not like a no-go area, but I mean for the time being, we would like to keep the options open. And Kai, maybe, just to complement because what is also a part of the equation here, this is something we've been, I think, all of us on the phone and around the table here have been discussing is, we have some EUR 150 million worth of assets earmarked for disposals, which still fit in the overall asset allocation strategy that Olivier described usually as buying the centers, selling the periphery. So there are still these noncore assets in Landstraße, in Bremen, which we [indiscernible] the nursing home, which is going to be sold over the next whatever 18, 24 months. So they are going to be an important part of the equation in financing the development pipeline and we just need to see how quickly we progress in with those in order then to determine, I mean, what kind of financing options we need to tap onto to complement the cash inflows we're going to generate from disposals.

[Operator]

The next question is from [indiscernible], Kempen.

[Unknown Analyst]

Couple of questions for me. First of all, to go back to like-for-like rental growth breakdown. So it's pretty clear to us that, obviously, if you do the necessary investments, you can capture very attractive reversion upon reletting. But if we look at the extensions which are about 81,000 square meters this period, are you sort of able to raise rents without CapEx? And if so, how much on average? Or is it just more of a straight extension at sort of the last passing rent? That's the first question.

[Olivier Elamine, Chairman of the Management Board & CEO]

So I think, this is something I hope we've been very, very open for years now is, if you want to increase rent, you need to invest and you get substantially higher returns on the investment that you make on the assets than anything else you can find on market. If you just extend the lease as it is, it's usually one-sided option in the hand of the tenants that he exercised and then the rent continue where it was before, which explains why you have a rent of EUR 11.29 on average on the extension, whereby, you have a rent of EUR 14.50 on average on the new leases.

[Alexander Dexne, CFO & Member of Management Board]

This is actually why we always say vacancy is an opportunity for us, not a threat because most of the tenants, obviously, in a standard commercial German lease, they have the extension options, they can roll over the existing contracts and they do this at the in-place rents and if you have a reversion potential, this is actually what you don't want, but still.

[Unknown Analyst]

Is it possible though, if the leasing market is good to negotiate away the extension option? Or is it just this is the way business is done and you don't want to tap with the longevity of the client?

[Alexander Dexne, CFO & Member of Management Board]

Well, I mean, it's basically a contractual obligation. They exercise their option, their contract rolls over. So there is really nothing to negotiate. I mean if the tenant asks to put in additional TIs at the moment where the lease is rolled over, we clearly have more bargaining power today to push back, but basically as a contractual obligation, it's a single-sided option if the tenant exercises, he has the right to live another 5 years with the existing rental framework.

[Olivier Elamine, Chairman of the Management Board & CEO]

Look, there is always a hope and a wish and the possibility that there is free lunch, but there is a very, very little of them. We did actually kind of almost doubled the rent that we have in one of our property in Berlin, one of the property we acquired in Schinkestrasse. We acquired it, I think, last year and then we renegotiated and new leases with the same tenant without CapEx. In the process we almost doubled the rent but the reason why we doubled the rent is because the tenant was paying an extremely low rent which was from the very, very old day compared where the market rent is today. But -- so what I'm trying to say is, you will always find people and you will always find anecdotal evidence that those things are possible, but the sheer reality is you cannot count on that and basically, our core business model is, we do not count on that, we basically believe there is more value in upgrading buildings, providing something which is up to date from a sustainability perspective, from what the tenant is looking for, and then tenants are prepared to commit for the long term and are prepared to pay higher rent for that.

[Unknown Analyst]

No, that's very clear. That actually leads me to my second question, the recent acquisitions you did were at sort of a lower initial yield in the 3s, but they do have very attractive reversionary yield. So my question is, how is the progress on capturing that reversion? And in sort of what time frame should we expect that to be realized?

[Olivier Elamine, Chairman of the Management Board & CEO]

So the Schinkestrasse example, I think, is a good example where we actually did capture a reversion almost 12 to 18 months after the acquisition of the building. On average, we usually try to capture the reversion within the time frame of 4 to 6 years and the reason why we usually have this kind of time frame is, if the reversion is much shorter, then there is a much more competition for the acquisition of the assets, and if the reversion is much longer than the kind of less appetite for us to go there. So the kind of sweet spot for us is assets, which have 3- to 5-year lease, maybe 6-year lease on the clock and some reversion at that point in time. Those are assets which are not of interest for developers that could -- would not hold them for such a long period of time and the lease that is too short for like a cash flow buyer, which would be looking more at the 8-, 10-, 12-year rather than a 5-year lease.

[Unknown Analyst]

That's very helpful color. And just the last one for me. So if you put it all together and you look at sort of the successes on the refinancing front on the leasing front, year-to-date, perhaps some of the lease expiries that you have in Darmstadt, how should we think of the flight path of FFO and keeping in mind of course, you cannot -- you have not yet provided guidance? But how should we think of the flight path of it over the next 1 to 2 years?

[Olivier Elamine, Chairman of the Management Board & CEO]

I think we can clearly comment on that because I would hope it's pretty clear from what we have discussed today. We're still going to have year-end 2020, which is going to be impacted by the full year vacancies that we're having by Darmstadt, this is going to be partially compensated by the saving we are doing on the financing cost. But from thereon, we're going to have all of the benefit of the leasing that we are doing right now, which is going to kick in, in full year -- almost full year in 2021 going forward, and then you should see kind of a more substantial growth in the FFO itself. So we think 2021 without giving like a proper guidance is probably going to be very similar to 2020 -- sorry, 2020 is going to be pretty similar to 2019, but all the work we're doing right now is going to trigger kind of almost certainly growth in '21 and the years going forward.

[Operator]

There are no further questions. [Operator Instructions] The next question is from Thomas Martin, HSBC.

[Thomas Martin, Analyst]

A few questions left from my side. One question relates to statement you did Mr. Elamine, I think it was a year ago, and you talked about the quality of the office stock in Germany and you mentioned that most of the [ buyable ] assets have to go through a comprehensive investment to really to reposition assets and to capture the full upside. What does it mean for your portfolio given the fact that you will prefer to invest in your existing assets? What's the share if you can quantify that? What's the share of your total portfolio you would [ set ] which needs to go through such a repositioning process really to capture the full upside? That would be...

[Olivier Elamine, Chairman of the Management Board & CEO]

I mean if I had to put the number on the table today, I would say around 85% of the portfolio needs to go through that process. But this is really what I was mentioning before and saying, we've built the portfolio in order to be in that position and that allow us today not to have to compete in the current investment market, and basically, have our own destiny within our hands and being able to invest the EUR 150 million, EUR 200 million that Alex was mentioning, and providing loan cost of around 6.5%, 7% basically within our own portfolio, and I believe that's a real luxury we have and that's an incredible position we're in, which basically allow us to basically grow earnings and grow our revenues by just managing our own portfolio. We have probably another 5, 6, 7 years to go. We could just work on our own portfolio without the need to tap outside of the portfolio itself.

[Alexander Dexne, CFO & Member of Management Board]

Another way of looking at it is, I mean, you have -- you take 5% of your portfolio in refurbishment every year, in development. It takes you 20 years to go through the full portfolio. I mean 20 years in office, and looking at the change of demand for quality that we have seen in the last 3, 4 years that we really have experienced this change to what's really a substantially different quality. I think after 20 years, you can start anew. So I would 100% like stress Olivier's point, that basically, the whole portfolio is our development pipeline because it just matters -- it just depends on what kind of view you take in terms of timing, and right now, look at our portfolio for the next 5, 6, 7 years, we already know we're going to have a full pipeline, and know what we need to do in order to crystallize that reversion value.

[Thomas Martin, Analyst]

Yes, yes. Okay. And then [ obviously ] a technical question regarding asset valuation. How the value looked at your particular repositioned assets, I mean, even if it comes to repositioning successful leasing after that, your rents are still far below prime rents. That's just my view. You fulfill a lot of requirements or criteria for a core or prime asset in top market and then maybe you have a single tenant and long lease, but isn't in few of the value of prime assets then when it comes to evaluation? Is it rather 3%, 3.5% yield? Or is it still 4%, 4.5% like for the secondary assets?

[Olivier Elamine, Chairman of the Management Board & CEO]

If we -- most of our assets are [ regularly ] centrally located, and when we finalize a refurbishment project they are actually prime assets. If you look at what we've done in Momentum in Düsseldorf, if we look at the asset Bieberhaus in front of the train station in Hamburg, I mean, those are basically rented to Tier 1 tenants and are valued as Tier 1 assets. So the value we're going look at them as -- yes, as prime as they are. When we finish our work with an asset, I will clearly expect it to be considered as one of the highest quality assets within its own market. This is the whole purpose of what are we doing here is providing tenants with assets which are up to date and this is the only thing tenants are prepared to pay for. They're not prepared for to pay for like low quality and secondary assets.So I think the value and the yield reflect prime yields, yes. But once the work is done, so not upfront, once the work is done, once you have actually delivered on the CapEx, you have delivered on the leasing, you have de-risked the assets, at that moment in time, you can have [indiscernible]. Before the work is done, you have a lot of development risk involved and then the value is going to reflect the fact that the risk is good. So we don't get in front of the value.

[Thomas Martin, Analyst]

That is where I come from because often investors talking about your asset quality and they're arguing about your -- you don't have prime rents even when you repositioning, and then I argue, well, look, the characteristic is like a prime asset. So why not giving such an asset at yields close to a prime yield, yes. Okay. So that means it is my last question. Just the means on your successful leasings where you have repositioned in CapEx. So the fair assumption that, yes, yield is definitely below 4% and your 4.9% for the total portfolio will further come down and you're expecting another nice uplift by end of this year, right?

[Olivier Elamine, Chairman of the Management Board & CEO]

Yes. We're still in the process of starting the evaluation process. But if I look at what happened in the market, if you look at the recent transaction and some of them being very, very large. And again, I think you don't necessarily want to compare things like-for-like but Commerzbank buying the Generali portfolio at EUR 8,000 per square meter and our portfolio being valued at EUR 2,700 per square meter, I think, [indiscernible] I want to go, absolutely.

[Operator]

We have no further questions. I hand back to you, gentlemen.

[Olivier Elamine, Chairman of the Management Board & CEO]

Well, thank you very much for your interest in the company. We will be on the road shortly. We're looking forward to continue our conversations and we will reconvene here for the full year results in around February next year. Thank you very much for your time and looking forward to seeing you on the road.

[Operator]

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