Aareal Bank AG

XETRA:ARL

Earnings Call Transcript 2020-Q2

[Operator]

[Audio Gap]

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. Thank you. Good morning, everybody. Marc and myself, we will guide you through our presentation. He is with me today. Sorry for the short delay. We had some technical problems with our audio conference system, but as we've learned during the COVID crisis, you should have a backup, and now we are on the remote backup with respect to audio conference. So sorry for the delay, but we could, right, go into our presentation, which starts with Page 4. A little bit of summary, what has changed in our view between May 2020, our Q1 call and August 2020, today's call. Clearly, what we see and what everybody is, following a more gradual recovery. So we've, compared to May, clearly experienced economic-wise, a more pronounced dip than originally expected. So starting point for the recovery is lower as we've thought it might be in May. How we manage through the crisis, clearly, from a client perspective, we are presenting ourselves and are the reliable partner for all the needs a client may have. We've started in May Q1 business model based risk provisioning and value adjustments. And Marc will go into details on that one. But on the other hand, we've been very strong in Q2 with our strategic initiatives. You have noticed that we've derisked our Italian NPL portfolio successfully, completion in June -- in July, but we clearly thought that we should recognize that in our Q2 figures. And our Aareon minority process is still successfully running. So 2 important strategic initiatives which we catch up in Q2. What we expect, again, here, still gradual recovery will continue. Smooth scenario still in place. Although as already mentioned, a more pronounced dip, which clearly, at the very end, means that the economic recovery for 2020 is to be expected, a little bit lower compared to May. On Page 4, overview about Q2 figures. The EUR 2 million operating profit. Clearly, the -- here, we have to be in mind, that we've been successful on the derisking, which has reflected in a EUR 10 million, some EUR 10 million loan loss provision. Nevertheless, I think a quite good result in that quarter. During the press call, I said the Q2 2020, I think that will be a quarter, if you all will remember a long while. And in that environment, quite strong results. Strong capital funding and liquidity position, which is clearly very good in that environment for various reasons. So we are able to pick up opportunities and weather the crisis at the same time. And Marc will guide you through those figures in detail in a second. From the segment performance, clearly very good on SPF. As mentioned, Italian NPLs significantly reduced. We've done model based risk provisioning. And low LTVs, clearly a good start point into that environment. Consulting/Services Bank, housing industry and deposit funding has been proven again as very stable and a relatively cheap funding source. Commission income has increased in Q2, and we've been able to do a small -- to run a small strategic initiative here in this segment as well. You may have noticed that we've teamed up with -- in a start-up called objego. Aareon remaining on track. A small, COVID-19 impact. As we've outlined in Q1 call, we do expect some EUR 10 million net effect, which is now reflected in the Q2 figures, partially. Strong sales of digital products and high demand on consulting services on a digital basis. That is another thing which I'd like to mention here for the Aareon business. And clearly, the minority sale process is still running. So all in all, from today's point of view, we remain confident that at the very end, meaning for 2020 -- not at the very end, but for 2020, we do expect a substantially positive consolidated operating profit. More details on that from Marc. Asset quality, Page 7. Clearly, here is some overview. You may have digested into that already. Clearly, uncertainties will continue. There's no day where we do not receive a different messaging about COVID virus outbreaks, lockdowns, releases and so on. So that has to be expected to be continued, so to speak. But on the other hand, my impression that is clearly reflected in the economic figures as well, we all, and everybody is getting more and more used, so to speak, to live with that overall environment. Nevertheless, we as Aareal Group do have comfortable headroom due to our conservative risk parameters once we started into the crisis and clearly do have a very solid capital position. More details on everything which is laid out here from Marc, if we are running through the detailed pages. Page 8 and 9, snapshot on the hotel portfolio and what we see and what we expect. So clearly, EUR 8.7 billion portfolio, no major changes here. What we do expect, which is supported from market research, how the recovery will go through that -- or the various segments of the hotel world. Clearly, leisure segment, that's our expectation, and that's what we see already in our hotel portfolio. Leisure segment will recover first; corporate segment, clearly depending on lockdown measurements will follow thereafter. And MICE segment which is conventions and all that type of sales and all that type of stuff, that will take the longest to recover, clearly, for obvious reason. And only 10% of the entire hotel portfolio is expected to be in a prolonged recovery from our and from clients' perspective. That means airport hotels, convention hotels and the high-end luxury end of hotels, which is clearly affected by the low travel density throughout the world. The yield on that is down from 9.6% to 4.5%, 4.5% is clearly including somewhat forward-looking element. Over 90% of our portfolio is with management contracts. And I explained that during the Q1 call. That is a good one because we do have access to liquidity reserves of the hotels. It's different, if one would have a hotel portfolio with lease contracts. And over 90% of our portfolio is managed by large international brands. And -- but I think that something one have to bear in mind as well and here, it's clearly stated. We do have, in the 10 last years, a consecutive year per year RevPAR increase. And that is a major driver for the fact that our clients, but the hotel operations at the ground do have sufficient liquidity reserve. So we do have investment finance only, meaning no development in that area. As already mentioned, a quite good entry LTV and just EUR 37 million with an LTV above 70%. With Marc, to the LTV, as outlined, clearly, even the appraisers do have difficulties during lockdown to do their work. So -- but we will start and have already started with that to have a quite fair and good picture throughout the next 6 months with respect to our overall portfolio. NPL. We do have EUR 152 million on NPL, which translates into 1.8% NPL ratio. On Page 9, a little bit more detail again for the hotel portfolio. LTVs, I talked about yield on debt average, 4.5%. I talked about -- and maybe interesting one is the hotel portfolio by demand sources. That's the average of the hotel portfolio. It's not that -- it's not a breakdown of that we do have 45% of our portfolio would adjust create revenues out of the corporate transition. It's simply average of our entire hotel portfolio. So MICE is relatively across the portfolio, underrepresented whereas clearly, there are some hotels which are heavily depending on that one. That translates into the 10%, which I mentioned a page earlier. So that's the overall income source stream or feeder business, how you would say it in hotel language, on average of our portfolio, which might be an interesting figure. By the way, Maldives, it's quite a good example. They had a shutdown until end of July, I think, and the bookings there went up fairly good. And we do expect somewhat of, if I may so, more or less a normal high season on the Maldives, just to give you an example, how quick things could change in that picture. On Page 10, retail portfolio, EUR 5.9 billion; 80% of that is located in Europe. Largest portfolio shares in the second bullet. Some remarks on that. I think most of the assets, somewhat slightly above 90% are now reopened. The footfall, clearly, across the portfolio is still below pre-crisis levels. What increased is the per customer spend. So meaning everybody who is now walking into a mall or shopping center is clearly a buyer, if I may, so somebody who really wants to spend money. So that ratio increased and what is interesting as well, maybe that -- which is not on the page here, that the average turnover increased very well, whereas the collection ratio is still on a somewhat lower level. That clearly has to do with lease contracts, which may be suspended for a while or may be under review. So all in all, I would say, we do see a recovery in our shopping center portfolio. The yield on debt, that's the next bullet, dropped from 9.6% to 8.6% in Q2 2020, which is reflecting the actual -- these contracts clearly could go in the one or the other direction in the next couple of months or years. Overall market research clearly, is hinting into malls as asset cars, which may continue to be under pressure or maybe even under accelerated pressure. Retail parks are less impacted and some of our portfolio is clearly retail parks, especially in the U.K.. And prime and luxury high street clearly lifts somewhat from travel. On the other hand, if you look into China, I would say, it's back to pre-crisis level in that area, which clearly indicates if and when travel comes back, then I would expect that especially this and from the retail area will profit from that the most. Overall, I think not that much to add to that page. And you have the numbers, I think, from Q1 and in this presentation. Anyhow, retail portfolio by category, as mentioned, we do have 6% here on Page 11. We do have 6% high street; 15% retail parks; most of that in U.K. and malls, 72%. And the other information on that slide is how the yield and that's developed so far. Average, as already mentioned, down from 9.6 to 10 -- 9.6% to 8.6%.The Page 12, the usual portfolio breakdown, not that much to add on that here. Page 13 and 14, again, a breakdown of the portfolio from different perspectives. The one is by country, and you clearly see the countries where we do have a fairly large hotel exposure somewhat has the most deviation or the highest division from pre-crisis levels. And on Page 14, the same from a different angle by property types, which I already mentioned, especially for hotel and retail once we've gone through those slides. So far, in my view, as a summary, nothing unexpected, so to speak. Clearly, if hotels have to close, then they simply cannot produce any yield on that. But we clearly see here in the -- given that forecast that we are now moving again in the right direction, clearly, the overall development is somewhat depending on travel and travel restrictions, all that type of stuff you are well aware of. On Page 15, as mentioned in my intro, we've been able to do significantly decreased action in July, but we recognize that loan loss provision wise in Q2. So we are now down as of July, to EUR 461 million in Italy, which is, I think, remarkably success in that environment and down to 3.7%. And if we look into the years, I think we have to go beyond 2016 to find a number like this in our NPL charge, which is a good one, especially in this environment. On Page in 17, some remarks to the new business. Yes, we do have a COVID implication on new business as well. So April and May, very silent month in that respect. A lot to do with the portfolio. We've been not on holiday, but a lot to do with respect to portfolio, but not that much on new business. And practical example, if you have to go to a notary and the office is closed, then you can't do the business if you want to have a mortgage in place and that might be and should be preconditioned for a drawdown. So we do have here a little bit of COVID effect. And most of the new business has been done in -- sorry, June, more or less, all of it has been done in June. The margins are very good, 235 basis points, clearly offsetting somewhat the higher refi costs and on senior unsecured. And Marc will report on our success on that end when he's going through the detailed figures. Last but not least, portfolio size. Clearly, that is driven by that effect I already mentioned with EUR 26.3 billion clearly, again, on the lower end of our guidance, but we expect that portfolio to go up to 27 -- even a little bit above EUR 27 billion towards year-end. The new business we've written was very good one from margin-wise, but from ATV perspective as well. Asset classes, and we have done a hotel deal, by the way, 7 hotels, 42% LTV and the 2-year cash reserves, so that our -- you could especially do during crisis times. New business at -- or area of new business that we are looking into, maybe that we had some on our logistic portfolio. Consulting/Services Bank, that's Page 18. We've been able to increase our deposit volume up to EUR 10.9 billion. Big success with the sticky rental guarantee part of the deposits. We are now by up to EUR 2 billion. And if I may lead your attention to the very bottom figure on the operating profit. I think it took a while to show a 0 number here, but now we are there. Unfortunately, it was somewhat a one-off or maybe it was supported by the Euribor development we've seen throughout the quarter, but indicating we are moving in the right direction. Especially if you go into the net commission income line, here, you see a EUR 7 million, which is clearly underpinning that our direction in that line is moving in the right one.So we are here well in our CAGR forecast with 13%, if I have that correctly in my head, 13% CAGR, which we are expecting here. So all in all, this segment is moving in the right direction. And as already mentioned, even here, we've been ever in Q2 to do a joint venture with. It's a large metering service across Europe with a joint venture, which is called objego. And I guess and that -- I will report on that one on a regular basis. I think we are here invested in a very interesting case. On Aareon, just to go back to 2016, you may remember, we started here with the 2 digitization of the Aareon business based on a European footprint. We started the sales process in May, which is already announced. And it's good underway, and you will hear from us on that one in due course shortly. And I would say that would be -- it's too early to say something, but would be the next and important step for the Aareon on their road map. Overall, segment reporting wise, that's on Page 20. Clearly, we announced and indicated that we do expect some EUR 10 million one-off effect from COVID, which I would say is the one -- one should really expect. So nothing more we see on the horizon. All the other line items are going in the right direction. And as mentioned, process is running. And now I have the pleasure to hand over to Marc, which we'll guide you through the detailed figures.

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes. Thank you, Hermann, and very good morning also from -- from my side, I hope you can hear me well. As said, we are on the back up. I'll move a little bit closer to the mic. And I -- keep your distance. You move away. Thank you. So as said, I would like to present to you the financials now in more detail, starting on Page 22. And as already mentioned, we posted an operating profit of EUR 2 million, after preempting some COVID-19 related value adjustments of EUR 57 million. Most of them model-based, as said, and also digested the EUR 9 million burden of the successful derisking transaction that we closed in July. In the tax position here, we activated some so far unused tax loss carryforwards, so that the profit after tax was at EUR 9 million in the second quarter. However, and just as a guidance for you, we expect the tax ratio to be at around 50%, so 5-0 percent this year. As the share of the nontax deductible items like the banking levy will increase relatively in 2020 due to the lower expected profit level. Our normalized tax level remains, however, unchanged at around 34%, of course. Moving to net interest income on Page 23 and to the details here. You can see that it remained on the low level of Q1 as we expected and said in Q1 -- in the Q1 call. That is due to the loan volume, which is at the lower end of the range, even more than that the new business only recovered in June after the lockdown. So really, if you look at -- or if you could look at average volumes, Q2 would be lower than the EUR 26.3 billion just at the 30th of June. On top, we have seen a lower contribution from the unwinding in the second quarter '20 than in the respective quarter in 2019 due to the derisking that we have done meanwhile. However, and Hermann has just mentioned that, we have already identified some attractive new business opportunities now in the crisis. So we are confident to increase the portfolio to the upper half of our target range by year-end in Q3. That might be still somehow diluted by the headwind of the weak dollar, so maybe in Q3, we are not yet in the upper range, but that's our clear target for the end of the year. And that, of course, then should support NII growth. On top, we have participated in the ECB's TLTRO program. If we are successful in increasing the qualifying part of our loan book, we can benefit from the 50 basis point bonus on the refinancing costs. So on the EUR 4 billion where we participate, that would be around EUR 20 million over 12 months. And that, of course, would need to be partially shared with the customer, but nevertheless, would support NII as we expect. Regarding risk provision on Page 24, here on the left side of the chart, you see the classic risk provision, so to say, so the LLP line. In the right part of the chart, you can see the value adjustments that we have done, which affect the LLP line, the fair value P&L line and also the other income line. So starting maybe with the left part of the graph. Here, we booked, as you can see, in total, EUR 48 million in the second quarter, there of EUR 31 million corona-related on the basis of management overlays purely. The EUR 17 million blue, let's say, normal loan loss provisions include the EUR 9 million from the accelerated derisking. And we didn't have to consider any LLPs for any new defaults in Q2, which I think is a very good sign, so unlike in the first quarter where the LLP was diluted by one new NPL case. All in all, we digested and now moving to the right part of the graph, EUR 57 million corona-related value adjustments in the 3 lines, LLP, fair value P&L and other income, as I just mentioned, that is EUR 107 million in the first half. That included EUR 33 million of management overlays in the second quarter or EUR 50 million in the first half, as you can see here. And as said, we have tried to preempt the expected corona-related impacts on our portfolio. How have we done that for stage 1 and stage 2 classified loans? We have modeled the expected cash flows on the basis of our updated smooth scenario and simulated the effect on PDs and entities for stage -- and of course, then via the expected loss had to increase reserves for stage 1 and stage 2. We also have a footnote here, left, down, you can see we have increased that by 64%, the stock of risk provisions for stage 1 and 2 versus year-end last year. For stage 3 and fair value P&L classified loans, where due to the lockdown, we were hardly able to get any market values by external appraisals we calculated the values as well on the basis of the expected cash flows under different scenarios and booked the value difference then for real estate on our own books. And this is then represented in the other expenses line, we used a similar approach that led to a value adjustment of EUR 13 million, 13, 1-3, in Q2 that is part of the EUR 24 million in the lighter gray shade here in the pie chart. So fee income, net commission income, Page 25, a little bit less complex than the LLP line. Here, we were able to keep the level of the first half of last year. Even to increase it slightly, it was at EUR 110 million despite of COVID-19. Certainly, and as expected, Q2 was slightly diluted by less consultancy income from Aareon due to the lockdown, Hermann just explained that. Nevertheless, on the other hand, the digital revenues continue to grow at high rates, at 27% to be precise. And in Consulting/Services Banks, in the new segment, we continue to increase our fees successfully in line with our own target of a 13% CAGR. Costs. Here, we did our best to somehow compensate for some COVID-19-related burdens. So -- versus Q1, you can see a drop of EUR 20 million. Of course, most of that is technically explained as we booked EUR 18 million of banking levy and deposit protection scheme for the full year in Q1. You are well aware of that. Nevertheless, with EUR 109 million, we are well below Q2 last year. Despite of the fact that, of course, Aareon is growing according to its strategy. So here, we had EUR 3 million more costs, somehow reflecting also the strategic investments, which we explained to you last year in our May investor seminar on Aareon. That means that the bank had cost savings of EUR 6 million versus last year. Here, again, EUR 2 million technically as we still had EUR 2 million of integration costs for DHB last year in the second quarter then EUR 4 million we underspent. I would now like to move to capital on Page 28, the capital ratios remain stable on very solid levels, as you can see here. Under Basel III, we saw some limited first effects in the RWAs from COVID-19. Here, we rerated the largest part of those loans where we granted amortization holidays and/or liquidity lines, which led to higher PDs and thus, to approximately EUR 200 million higher or 3 RWAs in the second quarter. In Basel IV, RWAs were hardly affected. They are more affected by the LTVs. And here, regarding those LTVs, we were not able to consider management overlays calculating the RWAs on that basis because that would have triggered a model change. As a consequence, of course, we expect some further RWA inflation for Basel III, especially, when we receive the new appraisal values, but they should not exceed a 10% increase of course, ceteris paribus, that means on that volume level. So if we grow the volume, as we just indicated, then, of course, this would naturally lead to additional higher RWAs. The inflation that we expect from COVID-19, however, will be partially mitigated. And here, we have to correct somehow the third bullet point because here, it only says it's expected mitigated. I think there are some words missing. So it should be partially mitigated by the SME factor of the CRR quick-fix that we will consider in the third quarter, I think, as most other banks do, too. The total capital ratio, to mention that as well, remained at around 30%. This is why we are continuously reviewing the composition, including, of course, the AT1 and the Tier 2 instruments, which are part of it for future optimization potential. On the next slide, just as a reminder, you can easily see that we have significant buffers to our minimum ratios, both in CET1 and in the total capital ratio, so more than 2x, close to 2.5x above the minimum requirement. Balance sheet. On Page 30, the structure is basically unchanged. However, you can see a temporary increase of the TLTRO where we participated with just above EUR 4 billion for the first time, by the way. So that was a -- just opportunistic decision given the very good refinancing costs that could be realized, including the bonus, of course, participating in the TLTRO. So as said, that should be a temporary increase. Of course, that is diluting also our leverage ratio, you can see that on Page 28 to 5.8%. So still at a very good level, but of course, down from the, I think, 6.6%, it was before in Q1. Funding on Page 31. We, of course, can show an unchanged stable refinancing mix, as expected. The housing industry deposits proved to be a stable source of funding at the top of the crisis without any volatility in spreads as we have seen in the market for all other funding instruments. On top, as we are a stable and high-quality issuer, we experienced a strong demand for our unsecured issuances. And here, we were able to place EUR 500 million compared to EUR 140 million last year in this month of the crisis. So as said, good demand, and therefore, we are also very well advanced with our funding plan for the full year. The liquidity ratios, of course, remained significantly above their thresholds. As already mentioned, we participated in the TLTRO due to the favorable conditions here. With regards to the asset side, the treasury portfolio on Page 32. Here, we continued the improvement of our rating structure, so the quality of the book. You remember, last year, we very much focused on the reduction of the BBB-related assets coming from 20%, continued that somehow. So we are now at 13%. At the same time, we also increased now our AAA assets to 41%. So that already leads me to the outlook on Page 34. As said in Q1 already, naturally giving an outlook in these volatile times is subject to a high level of uncertainty. So our outlook is still based on our swoosh scenario that has been updated since Q1 regarding the more pronounced dip than originally expected and thus a slightly slower recovery. Nevertheless, we remain confident that we can achieve a substantially positive operating profit in the mid to upper double-digit million euro range this year. And as just said, the prerequisite is that our base scenario materializes, which means, in particular, that we see no setbacks in the recovery and that the negative effects, for example, the payment disruptions remain temporary. Hermann, back to you. I'll move away. You can move closer again.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. Thank you very much. And as we've seen, we are able, even in that environment, to present strong figures. More important, we've been able to underpin that we are acting along with our strategy we presented in January, minority sales process started, derisking is on the way, although the environment is challenging. But in challenging environments, as always, there are a lot of opportunities around which we will grab up from the financing and -- but maybe with other opportunities as well. And that's from our end, and we are happy to take your questions.

[Operator]

[Operator Instructions] The first question is from Benjamin Goy with Deutsche Bank.

[Benjamin Goy, Research Analyst]

And 3 questions from my side, please. First, you mentioned, in due course, you want to update us on Aareon. I was just wondering whether you've talked to regulators about capital return. Obviously, this is not a 2020 story, but would you expect after potential gains on stake sale on Aareon that you can fully distribute those gains? And the second question is on Aareon and the fees. I think it was down 5% year-on-year in the second quarter. Do you think that was a low point? And do you already see some return of activity, larger projects? And the last one is thank you for the details on the various portfolios, in particular, on the hotel portfolio. Just want to double check on the 4.5% yield on debt at the hotel portfolio level. I think you mentioned this is somewhat forward-looking. Maybe you can explain a bit, is the 4.5% -- is that H1 or Q2 level? And yes, how this is performing going into July?

[Hermann Josef Merkens, Chairman of the Management Board]

Yes, the actual portfolio performing of the hotel portfolio is clearly depending on whether the hotels are allowed to open. So my example was a little bit, the Maldives, because it's -- that's easy, so to speak, to pick up. They've been allowed to open. I think it was 28th of July booking is going quite good. And as already mentioned, as they are more a leisure destination. We do expect that they will have, for the rest of the year, more or less close to normal season. Clearly, it's subject to no major lockdowns or travel restriction on countries which may not allow to travel anyhow. So that's maybe the best example. Other example, London Hotels. So if London hotels are still closed. Clearly, there's no yield on that to be reported, but the expectation, as mentioned, is once the hotels are opened, there will be business back. Again here, starting with leisure and other assets -- other -- sorry, feeder business. So it's a fairly mixed, if I may, so picture. Other example, we do have relatively good located, but large hotel in Vancouver. Once Chinese people are again allowed to travel to Vancouver, I think this would probably be just flooded from interest because usually, you see a clear strong relationship between China and Mainland and Vancouver. As long as travel restrictions are around, clearly, the yield on that is somewhat affected. So -- but the most important message here is, all that has been foreseen by our clients as well. So they are spending liquidity out of their pockets or out of the reserves to the -- to a very large extent. Clearly, we are supporting business with some liquidity lines. So that was a little bit what I tried to say so far, everything is moving like we expected. This is clearly deeper than originally thought in May. But so far, especially on the hotel and the development restart of businesses, leisure followed by the other events, corporate and MICE. That is still the picture we are in. You had another question with respect to the capital gain. So first of all, the deal has to happen. So I'm not the one -- we should not start. That's what I'm telling all the deal teams in every second. But if we are able to do that, I think especially in those times, we do have a lot of opportunities to look into: a, the IM business is a promising one, could be supported; b, on the lending and as I explained, we see a lot of opportunities. And maybe that there is one or other upcoming opportunity on the bank end as well. And I clearly remember, so to speak, a little bit back, not that far, but in November, December, everybody thought these famous deals which we've done with Korea, with DHB, the better deals for banks are now over, I would say. You will see maybe that even on that front, there might be an opportunity. So -- but we will report on the potential opportunities and directions and on what you should really see if the deal happens. As indicated, the process is well underway.

[Operator]

The next question is from Johannes Thormann with HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes Thormann, also 3 questions, please. First of all, on your hotel new business, could you elaborate a bit more on the margins in this deal, how much they've been above your average margin? And then what kind of volume do we talk about? Secondly, sorry to come back on Aareon's sale. But can you confirm the price ranges mentioned in the market of up to EUR 1 billion you're talking about? And also, what kind of stake are you willing to sell? And then provide some more clarity on this as we talk about 25% or 49%, for example. And then last but not least, a bit odd, the other income, you showed the adjustment of owned assets, if you could shed also some light on what kind of owned assets you have there.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes, Johannes. Thank you for your questions. If I may start with the first one, is what the 42% LTV deal, 7 hotels, I think, what was the loan size, Marc? Some...

[Marc Oliver Hess, CFO & Member of the Management Board]

Just below EUR 400 million.

[Hermann Josef Merkens, Chairman of the Management Board]

The EUR 300 million ex euros, a 2-year cash reserve plus additional cash for the next 6 years in the Holdco structure. For that very secured deal, we are talking about close to 200 basis point margins. The level here, we do have fairly good, well-known sponsors, in addition to that, I would say. So which -- that may explain the margin. With respect to the deal, forgive me that I cannot share details or market rumors or could comment on that. But with respect to size, we are clearly looking for a minority deal which may indicate that if you do something, one should -- do expect something in that area and not close to, I would say, half and half or joint venture type of deal. Although we clearly intend from practical purposes, more in day-to-day business joint venture type of thing, but not from the shareholding. Hopefully, that explains a little bit the size with respect to prices. I think we will report on that if we are through.

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes. Johannes, I'd like to take your question regarding the real estate on our own book and the respective burden that we have taken in the other expenses line that was in total EUR 17 million, and as you can see on Page 24, EUR 13 million were due to scenario-based valuations. What do we have here? Here, we do have some assets that we took on our own book to develop them and then to sell them off as we believe this is the better way to crystallize value. In particular, we are talking here about 2 assets. One is in hotel, and the other one is a retail mall park in the U.S. With regards to the hotel, we didn't have to book any value adjustments in particular here, as we won a court trial, which leads to less tax expenses going forward. So here, the value has been stable for the mall, as we have done that for the other assets, respectively, especially the NPLs and fair value P&L assets, as I just said. We have also taken similar calculations to calculate the value, and that led then to a write-down of EUR 13 million.

[Operator]

The next question is from Tobias Lukesch with Kepler Cheuvreux.

[Tobias Lukesch, Equity Research Analyst]

First, a question on the asset quality and your stage 2 exposure with regards to commercial estate on balance sheet. I was just wondering, you only have around 3% of your current exposure in that stage 2 category. If I read your Slide 57 correctly, where you have this kind of -- well, very helpful theoretical case of a complete shift of stages from 1 to 2, do I read that correctly that this would create another EUR 100 million base on Q1? And therefore, that kind of migration is a percentage point more or less EUR 1 million? Is that a fair assumption that one can have on that type? And secondly, with regards then to your valuation approach, could you help me again what the macro considerations are in your current risk provisioning, i.e. have you based it on a ECB base case, the adverse scenario? Just a bit more light shed on this.

[Marc Oliver Hess, CFO & Member of the Management Board]

Tobias, I'll try to answer your question. First of all, as a clarification, I just said there are especially 2 exposures on our own books. You said we have 2 exposures. No, we have more, but these 2 are the ballpark volume-wise, and we only had to do an adjustment on one of these larger exposures. With regards to Page 57, you're right. Here, we calculated as a basis of Q1, what would happen if the total portfolio -- and I think this is important to mention, would shift from stage 1 into stage 2. This is not what we expect, of course, or what can be expected. And this would lead to an additional EUR 100 million risk provision moving from 1 year expected loss to lifetime expected loss for the total portfolio. I think the question that would come immediately now is where are we in Q2. Here, I would answer at about the same level. Why? Of course, in the management overlay, we have taken, as I just explained, some stage 1 and some stage 2 risk provisions. But secondly, as we also just said, even in our base scenario and our swoosh scenario, we have experienced that the dip was more pronounced than originally expected by the economists in Q1 and therefore, of course, the recovery will also be slightly taking more time. With regards to our own book, you said we have only a limited amount in stage 2. That is correct. Of course, here, we are following the interpretation of IFRS 9 that has been presented by several bodies like the ESMA, the IASB itself and the IDB, saying as long as these payment disruptions are temporary, there is no need for a shift. Regarding the macro scenarios, yes, we are quite close to what the ECB expects. Remember, please, the ECB only made expectations or published expectations for the Eurozone. So what is our key assumption here? We expect that the U.S. should contract by around 6% this year in GDP; Eurozone, about 8%; and the U.K., close to 11%.

[Hermann Josef Merkens, Chairman of the Management Board]

Full year.

[Marc Oliver Hess, CFO & Member of the Management Board]

Full year. Maybe also to mention, one should not forgive -- one should not forget that, especially in the U.K. and even -- or even more in the U.S., we will also see much lower interest rates than they were expected before the crisis. We all know that interest rates also are an important element in asset valuation. And here, we also believe, especially in the U.S., and I think we can see that at the stock markets already, that this lower discount factor is supportive for the value of assets.

[Tobias Lukesch, Equity Research Analyst]

So does that mean that for H2, you would expect that you do not have to adjust your macro data downwards? Is that your current assumption? Or do you see more pressure on that side as well?

[Marc Oliver Hess, CFO & Member of the Management Board]

No, we have reflected the current macro outlook, as I have just said. And then this is why we always stress that with regards to the outlook, of course, it is important if this outlook materializes. So this is baked in. If we see further disruptions now with regard to the improvement path that we are expecting, then, of course, this would have to be reflected. But we have reflected the current outlook. As said, same is true for the stage 3 assets. Here, we have calculated the values according to the cash flow projections that we have. Now we are demanding external appraisals, and we will then consider these appraisal values, which hopefully meet our own expectations, our own calculations and figure them in.

[Operator]

The next question is from Philipp Häßler with Pareto.

[Philipp Häßler, Analyst]

Yes. 2 questions from my side. Philipp Häßler from Pareto. Firstly, you said that you expect new business to increase in the second half. Maybe you could shed some light on your margin expectation for the second half or Q3? And then a more general question, there's currently a lot of talk about the office segment, that vacancies could ride -- values could come under pressure due to growing popularity of home office. Some large companies have already said that they moved a large proportion of their employees into home office. I would be interested in your view on this. How do you see this segment to develop, in particular, prices and vacancy rates?

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. If I may start with the last question. Clearly, at that point in time, the move of the companies is, in my view, clearly following somewhat that otherwise, they would lose a larger part of the employees because if schools and kindergartens are closed and you do have double income families, which is even in our small real-world, fairly often to see in pattern, then you would clearly have the problem as a family to accommodate with the environment. So in that respect, I would say that it is clear to do as long as there's a lot of uncertainty, especially on that end around. And my basic expectation is that will continue to a certain extent for a while. Second remark, clearly, if the processes of a company are designed and organized that would allow to have a large part of the employees for a long while, and we are not -- here, we are talking not about 1 or 2 or 3 months for a long while. In home office that may clearly be a trend. Although I think that what is counterbalancing effect, if one would have to design the offices, which remain to a certain extent, like you have to keep all those distance rules, et cetera in place, then the overall entity per employee will increase. So there will be an effect, but I think it's -- for me, it's simply too early really to look into how large that will be over a longer time. Fourth remark, clearly, in all of those environments, properties, which are relatively new and refurbished with profit against those which are somewhat dated, that has been in every scenario, the case even in the past. And fifth remark, to a certain extent, yes. I think, life and office use will change after or throughout this crisis. What effect really will remain? Again, it's too early for me to say this. And it's clearly depending on a company setup, ability to do the work from home, I guess. At Aareal AG, clearly, we're looking into that as well. So far, we are still on a 30% leverage here. So meaning 70% of our employees are at home office. That is mostly driven by the explained double income-type of thing. And just to remind you, you -- we all have experienced that. It's very, so to speak, from a management type of thing -- from a family management type of thing, it's not that easy, if you do not have a support through schools or kindergartens, even if you are at home office. So I would not underestimate -- to be honest, I would not underestimate those effects in combination. Clearly, from a pure building stand -- point of view, we could ramp up to 70% easily. And clearly, there are 30% left, which we will look into how to -- or are looking into. It's not just that we will start, are looking into how to deal with that. I think that is something every company is somewhat doing. What are the, if I may so, takeaways from that? So the -- I think you mentioned 20% to 40% level. In our case, it's some 30%. So that is in the middle, and every company is doing that right now. The long-lasting effect, that is something I would feel, it's a little bit too early to judge on that.

[Marc Oliver Hess, CFO & Member of the Management Board]

Okay. So I would try to answer your questions on the margin. I believe that with the 235 basis points that we generated in the second quarter, we have somehow reached the top. There are 2 reasons. One is that in the broader market, the refinancing spreads have also contracted from the heights that we have seen in March and April. So the pressure for other competitors is also moving out slightly to generate those high margins. And secondly, especially in the Eurozone, as I just mentioned, we have seen the TLTRO with quite favorable refinancing conditions, which I think will also have some effects on margin in the Eurozone. So that is a more macro effect. Regarding to Aareal's new business, as expected, we are now somehow focusing on logistics. We expect that we have some good deals in the pipeline there. Typically, the margins for logistics and especially in the crisis, as they are less affected by these developments, are a little bit lower than for other asset classes. And therefore, we are, of course, confident that for the full year, we will be above the original margin guidance of 180 to 190. But as I just said, the 235 is probably the top.

[Operator]

There are no further questions at this time. I hand back to Mr. Hermann Merkens for closing comments.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. Thank you very much for your interest and your questions, as always. And as I said during the start in this call, I think the Q2 2020, that will be a quarter we will all remember very well. I think the world has, to a certain extent, changed through the COVID. On the other hand, as a group and Aareal Bank, I think we are well prepared to -- on the other hand -- on the one hand, to weather the crisis, on the other hand, to take the opportunities. As we laid out and demonstrated, we are able to do and follow our strategic road map we outlined in January 2020. So we are following the past and on the other hand, weathering the crisis. And as always, in those times, there are a lot of opportunities around which we are clearly able, thanks to our strengths to grab on, if they occur. Thank you very much for your attention, and have a good day.

[Operator]

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