Good morning, everyone, and welcome to this investor call. My name is Andrew Wallis, the Deputy CEO of Aroundtown, and I will be leading you through this call. I am joined by Mr. Shmuel Mayo, the CEO of Aroundtown. Mr. Eyal Ben David, the CFO of Aroundtown. Mr. Barak Bar-Hen, the CEO of TLG. Mr. Gerald Klinck, the CFO of TLG. Dr. Gerhard Cromme, the Chairman of the Aroundtown Advisory Board, and by Mr. Yakir Gabay, the Vice Chairman of the Aroundtown Advisory Board. On Monday, the 18th of November, 2019, i.e., yesterday, the Board of Directors of Aroundtown and the Management Board of TLG have agreed and signed the terms contained within the business combination agreement or the BCA, and a Section 10 announcement has been published. The presentation released this morning is a summary of the key items of that BCA.
The management teams of both Aroundtown and TLG will now take you through the main points of this presentation. We have received a number of questions since the announcement from yesterday, and we will answer these questions after this short presentation. Please go to slide two. The key terms of the all share offer are shown on this slide. Each TLG share will receive 3.6 Aroundtown shares. This has been determined on the basis of the reported EPRA NAVs for the 30th of June, 2019. This offer has no minimum acceptance threshold and has the secured support ahead of this launch of the major shareholder with approximately 28%. Aroundtown can issue the necessary amount of new shares from its existing authorized capital.
As already stated in the merger update from the end of October, an updated governance structure will also be introduced at an acceptance rate of over 50%. The compositions of the Board of Directors, management body, and advisory board have been agreed. The operational headquarters of the new merged company will remain in Berlin, and the new company name will be announced in due course. Please go to slide three. The merger of Aroundtown and TLG will create the European market leader in commercial real estate and be amongst the top 3 publicly listed real estate players in Europe as a whole. We see clear synergies in operational, financial, and development activities that will drive further accretive FFO and NAV growth. In addition, we see an even stronger combined business profile that will accelerate us to the targeted A-minus rating.
Future DAX inclusion is also becomes possible in the medium term through our combined market value, free float , and liquidity. Please go to slide four. The merger of Aroundtown and TLG will create the clear leader in the European office and hotel sectors with over EUR 28 billion in total assets. Overall, only Unibail in retail and Vonovia in residential would be larger. Slide five highlights how the combined company's overall strong diversification is even further strengthened across the top tier cities and sectors. Berlin, Frankfurt, Hamburg, Munich, Amsterdam, and London dominate with over half of the combined portfolio. The office, hotel, and residential sectors make up 80% of the combined portfolio, further deepening our diversification into those strongest sectors. A continuation of this information is shown on slide six, which highlights the office and hotel sectors in more detail.
In both sectors, the combined group is well-diversified across all the major German and Dutch tier 1 locations, as well as other tier 1 European cities. I'll now hand you over to Barak for the next part of this presentation.
Thanks, Andy. The combined higher concentration and stronger local presence is also shown on slide seven, driving like-for-like rental growth and operational synergies. The current combined pipeline of acquisition opportunities will only further strengthen our position in these top tier locations. On the following slide, eight, nine, and ten, we have updated the original Aroundtown slides that can be found on their website and from previous presentation with our TLG assets in same areas. We think this clearly shows how strong the combined Berlin assets are in terms of their locations with dozens of assets in very best Berlin neighborhoods. Slide eight showing the area around the Berlin Gendarmenmarkt. Slide nine, the Alexanderplatz. And slide ten in the area around the Kurfürstendamm. Please go to slide 11.
The merger further enhances the already large hotel portfolio with the combined group having over 160 hotels valued at almost EUR 5 billion. TLG brings seven hotels into the transaction. These will benefit hugely from Aroundtown's strong market presence, negotiation power, and economies of scale. Our TLG portfolio includes Marriott, Louvre Hotels Group, and Steigenberger, which are all brands that already enjoy a very strong relationship with Aroundtown. Slide 12 also looks at the combined tenancy profile. The merger will further improve the overall tenant diversification and more significantly for us at TLG. Significantly reduce our dependency on top 10 tenants from over 30% to less than 20%, as well increase our weighted average lease from term from 5.8 years to seven and a half years. Slide 13 shows the potential revisionary upside of both portfolios.
The management have a strong track record in identifying and extracting value from their respective assets. We believe that by combining both companies' expertise, more value will ultimately be unlocked from the TLG portfolio and over a faster time frame. Shmuel will take you through the next couples of slides.
Thank you, Barak. This is very much the case when looking at the combined group's development opportunities, as shown on slide 14. Both companies' current development pipelines are focused on the top tier cities, with 63% in Berlin alone. There also exists a strong geographical overlap. The combined group will already have a very experienced, 30-strong development team in place, and together with the larger yielding asset base and a much stronger balance sheet, will allow us to accelerate the TLG development pipeline. In addition, stronger joint operational letting capabilities will enable an accelerated development without the risk of speculative construction. Slide 15 summarizes the three main areas of synergy potential of the combined company. Operational synergies through utilization of our scale or systems and low-cost structure. Cost reduction through centralization and with lower corporate fees, as well as IT synergies across the group.
Financial synergies through a stronger financial and business profile. We believe that we will have taken a significant step closer to obtaining our long-term objective of an A-minus rating. Through this merger, we update this long-term objective from A-minus to A. This will not only significantly reduce our future funding costs but will expose us to a much wider international investor base. As previously highlighted, there exists significant development synergies, especially on the TLG development asset. The combined group will be able to reduce the time required to realize these opportunities, though bringing forward the cash flow potential, resulting in further additional accretive FFO and NAV growth. Combining all of these synergies areas will bring significant growth to cash flow and upside in value creation. I will now hand you over to Gerald.
Shmuel, thank you very much. Good morning, everybody. On the next pages, we come to synergy impact and also what is an impact on FFO. On page 16, you see, let's say, the outcome in terms of FFO impact. We divided that mainly in two segments. One of that is the operational synergies. I come to that later. The financial synergies of those companies. Together, we think that we have an impact in terms of acceleration of savings and synergies of around EUR 110 million to up to almost EUR 140 million. If you deduct the tax, which we put in here was a 16% tax rate, from our point of view, I think a conservative one, we end up with an FFO impact of EUR 22 million up to EUR 170 million. This is what we can measure and what we can estimate and what we can calculate.
We have further improvements coming from incremental financing for future growth and also our development pipeline, which accelerate our FFO and growth profile in the future. This is not included in these numbers. Moving on to page 17, give a little bit of an overview of the operational impact here. It's not more or less a cost-cutting program which we have. We are really focusing on increasing operational profitability. We split that into four, let's say, categories or issues that we have to look at in the combined entity for the merger, and these are more or less what you also can expect from other mergers as well. This is one thing, is the operational improvements on the property level. We have a big overlap in terms of locations.
We see efficiency gains for us in asset management and property management, scaling effects, and that will really have a major impact here on these numbers. Secondly, we see that we come together with a better purchasing power in terms of maintenance, procurement savings, and so on. The third part is something where we are focusing on the overhead, which is, let's say, really the corporate level expenses, and very most important stuff is also the IT synergies. Overall, we think we can increase our margin by 2.5%-3.5% over time. We think we can achieve that over the next 3-4 years. On the next page, this is page 18. Through increased size, a larger footprint, greater diversification, lower vacancy, and increased profitability, we see a very strong case that the combined company will move into the A debt rating category.
This will significantly improve our overall access to global capital, especially as a combined company, will not only be the largest office and hotel real estate company in Europe, but the only one offering a very strong diversification across the top-tier cities. Page 19, and also on 20, there we have to split how we are focusing here on our savings in terms of cost savings on the financing side. As we all know, real estate business is very debt-intensive business, so cost for debt is very important for us and here is the main driver in the rationale which we can measure for the combined entity.
What we see is here, if we compare A-minus companies, they trade with a significant lower cost of debt of 0.5% compared to the combined entity or also to the cost of debt of Aroundtown, which reflects not the perpetuals and here really looking on the bonds, on a 1.7%. We think that we can really decrease the cost of debt, and we assume here 0.6%-0.7% in terms of cost. Over the next five years, we want to achieve that. 75% of the overall debt will mature in that timeframe, and also a little bit to prepay some of the bonds of Aroundtown in year six and seven. There you have a sensitivity on the right-hand side, which gives you, let's say, a flavor what we can achieve depending on refinancing volume and also what we can achieve in terms of cost reduction.
Secondly, we have also the perpetuals, and there we also see a slightly higher decrease of costs. This is also reflected in the lower part of the slide. Overall together, we think we can achieve over the next five years, EUR 64 million-EUR 80 million in terms of FFO cost savings from the Aroundtown side. On page 20, there you can see how it looks into the TLG segment. I think it's the same methodology which we are focusing here. Maybe one distinction here is that our portfolio is a little bit, on the debt portfolio, is a little bit shorter refinanced. Therefore, we think we can do a little bit more in the next five years, so assume it's 90%. You see, we end up with EUR 15 million-EUR 17 million of savings, if you take the same cost saving into account for our bond.
Our perpetual is trading a little bit higher with a higher coupon. We assume here the same average coupon for the combined entity, and the savings are therefore a little bit higher than on the Aroundtown side. Overall, we see on the TLG side, EUR 22 million-EUR 25 million of savings from the TLG side. Moving on to page 21. This is showing here our debt maturity profile. You see that the main parts of it are kicking in in the next five years. What I just told you for year 2026 and 2027, we can repay that, and this is the assumption, a little bit ahead of maturity. Page 22 gives you a feeling what is accelerating, let's say, FFO improvement here.
We think that the growth of Aroundtown and also the duty to refinance our developments in future times gives us additional debt in the future, which comes on top. If you also make here, let's say, a synergy out of a better refinancing, we can also add EUR 23 million-EUR 45 million, depending on what we really will achieve in future time. Page 23 gives you an overview, how do we see the financial policy in future? I think we stick to the same as we did before on those companies. LTV will remain below 45%. We think diversified long debt maturities is also what we are focusing on, high unencumbered rate. For the dividend policy, we have here two different payout ratios, but we are very tight together, 65%-70%. That will be the range in the future times as well.
We really strive for A rating in future times. Page 24 is our development pipeline from the TLG. I think the combined entity can really have here also acceleration of FFO impact in future time. We as a TLG, we are a little bit blocked in terms of capacity in that, so we can unlock other projects which are not in the 10-year plan. This is one thing. Secondly, as I mentioned before, we can refinance these developments better than before. With a combined team of Aroundtown and us, we also think that we can shorten a little bit the timeframe. With that, I hand over to Eyal.
Thanks, Gerald. On slide 25, we highlight the main points why we feel this merger brings a lot of value to both sides. We have a larger scale across similar locations and asset types. We're bringing management ability to accelerate rental growth. We will have a stronger combined position when negotiation with tenants. We have the healthy development portfolio, a stronger and more profitable operational platform, better IT landscape, stronger ESG, a more diverse shareholder structure, a better platform to accelerate non-core asset sales, and a higher rating leading to lower cost of debt and perpetual notes. Additionally, the combined company will be positioned as a market leader in the European real estate, where we believe we will result ultimately in a lower cost of capital.
We also see the combined company knocking on the DAX door, opening even more the global investor base and bringing with it increased visibility and liquidity. These medium to long-term synergies are not currently factored into our numbers. Slide 26 reiterates the makeup of the post-transaction board of directors and the management body. The board of directors will have a Chairman nominated by TLG if the acceptance rate is over 40%. The board as a whole will consist of 7 to 8 members, out of which 3 to 4 will be independent. Aroundtown will nominate the CEO. Should the acceptance rate be over 50%, TLG will nominate the CFO. There will be three further management body positions including Chief Investment Officer, Chief Operating Officer, and Chief Development Officer, one of which will be nominated by TLG should the acceptance rate be over 66%.
The advisory board will stay intact under its current leadership of Dr. Cromme and Mr. Gabay. I give you back now to Andy.
Thanks, Eyal. Slide 27 summarizes how this transaction is accretive for both shareholder groups. These figures do not include the long-term synergy benefits from the development pipeline, further value add upside, as well as those benefits associated with the potential tax inclusion. Also, the regular growth from like-for-like rental increases, accretive acquisitions are not included here. Assuming the current dividend policy, this transaction will also be accretive on the dividend per share. Finally, on Slide 28, it shows the current timeline and next steps. The business combination agreement and the publication of the decision to make an offer through the Section 10 announcements were completed yesterday, the 18th of November 2019. It is expected that the tender offer period will be launched before year-end. This will be followed by an initial 4-week offer period, followed by an additional 2-week period thereafter, where TLG shareholders may formally accept the offer.
We expect to then have completed and closed the deal by the end of Q1 2020. I'll now hand you over to Dr. Gerhard Cromme, who would like to say a few words.
Thank you very much, Andy. As I have already stated, and I don't mind saying it again, the strategic, the operational, and the financial merits of merging these two companies are crystal clear to all of us. We are creating not only one of the largest real estate companies in Europe, but doing so with a tremendous amount of synergy potential, which I'm convinced the management will realize going forward. I would like to say a very special thank you, because I've been very often in a similar situation, to all of those involved in getting us to this point today. You all have done an amazing job. Back to you, Andy.
Thank you very much. That concludes our presentation. We have received a number of questions since the announcement, we will answer them all now.
Andy. Gerald, I will take the first one. I will read the question. Hopefully I can give you a good answer to that. Why do you think the transaction is attractive for TLG shareholders? I also want to add something from me. I think it's not only for TLG, I think for the Aroundtown shareholder, I think it is as well. I think there are a couple of reasons why this is a good merger. First of all, it's the size. TLG will join forces with Aroundtown and become shareholders in the largest pan-European listed real estate company, focused office, hotel, and residential. I think we are not able to achieve that on a standalone basis from the TLG point of view.
Second, as I mentioned before, the real estate business is a very debt-intensive business, our cost of debt is one of the main driver to be efficient on FFO. In terms of rating, we are at the moment with a triple B, with a positive outlook, the way to A minus or to a single A from a TLG point of view is so far away for us, that we really jump here from a triple B to a potential A minus company in a very short timeframe, which gives us good opportunities to participate in better funding costs. Synergies, as I mentioned before, the financials, I stated that. Also, the synergies on the operational level on the combined entity, we are too small to have these scaling effects and impact for our business.
The synergies on the operation level, more or less, we are not able to achieve on a standalone basis. I think that's for both companies. We can here with the joint forces, we can really participate on these efficiency gains. In terms of the exchange ratio, share to share offer at NAV is favorable for all parties and aligns Aroundtown shareholders with TLG shareholders as proportionally equal. There's not a premium, not for one or the other of us. It's really we participating in terms of synergies on a proportional basis, which I think is totally fair. The transaction will be accretive on FFO and dividend per share. Value accretive, improved joint portfolio quality and diversification to all shareholders. From day one on, we are accretive for both parties. Trading volume and free float.
The trading volume of the merged company will be significantly higher than TLG's current trading, which is especially beneficial to TLG shareholders who have now relatively illiquid stock. Post-merger, the free float will be around 80%, which will enhance the trading volume and will be DAX inclusive supportive. TLG's management will contribute to a strengthening of the renewed governance structure, according to which Aroundtown commits to TLG appointing two management board members out of five, subject to Aroundtown shareholding in TLG. TLG will also nominate the chairman of the board of directors of the combined company, subject to Aroundtown holding of more than 40% in TLG. I think the governance here is really improved for both companies, which is good, and we as a TLG has really a vote in that. That feels good, and that feels like a merger and not like a takeover scenario.
External growth from our point of view, I'm staying with the company now since one year. It is very hard for us to be very successful in acquisitions in the market. When we look to Aroundtown and the growth path of Aroundtown over the couple of last years now, that's very good and very successful, and I think that is something where we really participate on. With that, I hand over to the next question.
Thank you. Next question. The exchange ratio of NAV to NAV, take into account the current trading level of Aroundtown and TLG reflects a premium of over 3% to TLG shareholders. Why did you agree to it? For the time of the merger talks when they were announced, both companies were trading at similar discounts to the EPRA NAV of around 9%, which we consider the undisturbed reference point. Our appraisals follow similar strict standards. We have similar valuation yields on our comparable investment properties, and an exchange based on the respective EPRA NAVs is fair for both sides. If and when shares are moving in the short term should not change our management assessment of the fair proportional values in the long term. The next question. How have you determined a new dividend policy of the combined group?
Aroundtown's existing dividend policy is 65% of the FFO one per share, including hybrid bond interest, and is more or less in line with TLG's payout ratio of 70%. Hence, the similar payout ratio will be extended. The newly created shares will be eligible for the 2019 dividend, payable in 2020, and the transaction will be dividend per share accretive to Aroundtown and TLG shareholders. In short, both companies will maintain their respective dividend policies for the time being.
Next question. What are the material changes of the agreed BCA versus the non-binding terms you had communicated earlier? There was no material change of terms from the non-binding agreement. The BCA is just more detailed.
Next question. What happens if the acceptance ratio of TLG is below 50%? Our offer is not expected to be subject to a minimum acceptance threshold, and therefore, Aroundtown will acquire all the shares that will be tendered. If the resulting ownership is below 50%, which we do not expect given the strong support from both sides, an irrevocable agreement with the biggest TLG shareholder, and significant synergy potential, we will discuss Aroundtown's representation influence in line with market standards. In any case, we estimate that Aroundtown will continue to seek ways to utilize the potential synergies of the two businesses together with the management of TLG, which will be achievable already through arm's length commercial agreements. Next question. Any idea what the new name of the company will be? We've not made a decision yet on that.
The combined company will operate under a new brand name post-completion, and that will be announced in due course.
Next question. When will the takeover offer be launched? The takeover offer will be launched after the approval of the offer document by BaFin. We expect this to take place in the next weeks, still in 2019. Next question in the same subject. What is the expected timeline? We have signed a BCA yesterday, November 18th. The expected launch, as mentioned, of the takeover offer will commence in December before year end. We envisage a 4-week offer period plus additional 2 weeks in line with market standards and regulations. The transaction is then expected to close in Q1 2020.
Next question. When is the antitrust clearance by the German Federal Cartel Office expected to be received? Can you please clarify which antitrust jurisdictions you will notify about the deal? In terms of which jurisdictions, it will be the German jurisdiction. We will get in touch with the Cartel Office once it is legally allowed. However, as TLG got a green light for its 50% stake in Aroundtown, and due to the fact that the filing is the same in the case of Aroundtown offering for the majority stake in TLG, we strongly believe to receive the cartel approval in due course.
Will you implement a domination agreement? This is not decided at this stage. We are envisaging a friendly transaction and all identified synergies can be extracted without domination agreement. What is the leverage after the merger? We will remain below our internal policy of 45% LTV, as the takeover will be through an all-share exchange. Leverage levels will of course depend on final acceptance of the offer. Upon completion of the merger, we will be able to accelerate our path to an A-minus rating profile in the stage 1 and to A rating in the long term. What are the chances to reach the A-minus rating post-merger? Did you receive any indication from the rating agencies? We believe the chances are good. The rating agencies published their opinion on the merger with a positive implication.
The merger will accelerate a potential upgrade to A- as the combined company will have a larger size and footprint, stronger diversification in the stronger asset classes, and stronger locations, lower vacancy, and higher profitability.
Next question. What is your expected timeline for getting upgraded to A-? What are the key risks not to reach an upgrade? The merger ticks all the boxes for a rating upgrade, which shall be driven by a stronger and larger portfolio with a lower vacancy, which is important for the rating agencies. We cannot assess the timing as this is dependent on the rating agencies, but the merger could accelerate this process and will also support for a long-term development to A, as it has many rating supportive aspects. We do not see a hurdle preventing the rating increase as long as we maintain our conservative financial policy. The timeline is still open. Next question. What is the combined company's plan referring to the investment in Grand City Properties?
The stake in Grand City Properties is a strategic investment for Aroundtown and supports its business through diversification into one of the strongest asset classes in Germany, and participating in a company which is specialized in residential real estate and knows how to create value and strong cash flows. The potential merger does not change this strategy.
You described the combination of creating the leading European office and hotel company. Does this mean that you intend to expand into new European geographies going forward? Does this mean you intend to sell retail? Aroundtown has its focus on Germany and the Netherlands with presence in strong European metropolitans. The combined company will keep the focus on Germany and the Netherlands and will continue to search opportunistically for strong additions within European top metropolitans. Among all real estate companies in Europe, the combined company will be the top three and the largest in the diversified segment office, hotel, residential. We intend to sell retail. The combined exposure is less than 10%, while there should always be around 5% portion due to retail shops and services as part of our office buildings, hotels and residential.
TLG has decided to reduce their retail portfolio in the near future as part of their non-core strategy cluster, which from Aroundtown perspective, is a sound strategy. Aroundtown has strong sales team and sold EUR 2 billion of assets in recent years in dozens of sales processes. This team will support to accelerate the retail asset sales.
Next question. What are your plans for TLG's development portfolio, including Alexanderplatz? Well, this is one of the main reason we at TLG thinks the combination with Aroundtown is great for further accelerated growth. We see significant value and further substantial value creations in our TLG development portfolio. Aroundtown and TLG are committed to accelerating further development projects and basically utilize the internal growth engine. Both companies development activities are complementary and enhance the combined equity story.
Next question. Regarding potential acquisitions, what could one expect in terms of future acquisitions for both companies short term, i.e., during the merger process as well as on the medium term? Will the focus shift more towards organic growth rather than further external growth? As we see a significant pipeline and strong opportunities still continuing in the market, we will continue to grow externally on an opportunistic basis as long as we find accretive acquisitions. We will continue as business as usual, both on operations and on acquisitions. That concludes the Q&A from this presentation, and that concludes our presentation as a whole. On behalf of the management teams of Aroundtown and TLG and the advisory board members present from Aroundtown here today, I'd like to thank you for listening, and we look forward to meeting you all in, hopefully, in the near future. Thank you and goodbye.