Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining PATRIZIA's first quarter 2022 interim statement with investors and analysts conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Martin Praum. Please go ahead.
Thank you, Nairobi. Welcome everyone to our first quarter 2022 analyst and investor call. This is Martin Praum, Head of Investor Relations and Group Reporting, speaking. I'm happy to have our CEO, Christoph Glaser, with us today to present to you an update on our operating business, the market environment, and our financials. During today's call, we will refer to the first quarter 2022 results presentation, which you can find on our website in the section shareholder and then under most recent publications. The presentation includes the first quarter 2022 figures and the adjusted guidance for 2022, which we released yesterday. In case of questions, the IR team, as always, is more than happy to help you. As usual, this call will be recorded and will be made available on our website. In addition, we'll also offer a call transcript for further reference.
With that, I'd like to hand over to Christoph to start the presentation. Christoph, the floor is yours.
Thank you very much, Martin. Good morning everybody, and welcome to our call. I do appreciate your interest, and I also do look forward to meeting some of you in the near future. Today, we will talk about our strategic progress. We'll talk about our financial results in the first quarter and also provide you with an update regarding our outlook for the year. As far as I understand, that will be followed by a Q&A session at the end. Now first, before we get into this agenda, let me introduce myself since I've just been for about six weeks in the company. I came to PATRIZIA on the first of April after five years at PPF Group, where I was the CFO of Home Credit, a global retail banking and consumer finance specialist spanning nine mature and emerging markets.
The other 20 years of my 25 years of professional work, I spent at GE in financial services, in the energy sector, but also in corporate roles. Now, academically speaking, I have a background in economics and in Chinese studies. What's probably more important for you to know is that my experience from a typology point of view spans across financial services and energy or infrastructure across banking and renewable energy in particular. It spans across Europe, Asia, and the U.S. It includes stints in finance and also in sales. Now, I think that dovetails nicely with PATRIZIA's effort to become a real asset investment management company with more infrastructure assets in the mix. It dovetails nicely with our drive towards renewable energy vehicles focused on decarbonization trends.
It dovetails also with our geographic expansion goals vis-à-vis Asia Pacific and potentially in the midterm future, also the US. Of course, we also wanna diversify our distribution footprint. There, I think my sales experience will also be beneficial. Long story short, in the context of PATRIZIA becoming a global real asset investment manager of maybe 2x the size of what it's today in the midterm future and spanning maybe two or three continents versus just one, and really focusing as a multi-asset class provider across both equity and debt and multiple channels. I think that all fits together. With that said, I would like to transition into the first chapter of the agenda, which will also run an update on strategic progress and operational activities.
Now, maybe one thing first, Martin, if you feel to chime in, please do so because I'm still relatively new to the company. If you go to slide five, let me talk about the topic I just mentioned. At the end of the day, the first point I would like to make is the following. In the first quarter of the year, we have performed in a challenging environment. We have signed more than EUR 1 billion of transactions. We have raised about EUR 200 million of fresh equity, and we're now standing at a level of EUR 55 billion of assets under management. We have a very good pipeline of transactions in place. Although of course, and we will talk about that later, a certain uncertainty exists around the timing of that being harvested. We will get back to that a little bit later.
That said, though, we have a structural demand for investment in real estate, which remains unchanged. There's certain underlying stabilizing trends around, demographics, sustainability, decarbonization, urbanization in particular, which play really in our favor. Of course, that against disruptive trends around inflation and de-globalization and so on, will have to be seen how that plays out. We strongly believe that the stabilizing trends are still going to prevail, and therefore a demand for real assets and especially real assets with stable cash flows and decent deals, will prevail in terms of demand. On that basis, we have no reason to believe that our performance will remain good under challenging circumstances being reflective of a resilient business model and a strong platform.
Now, that said, one thing that is really important to note as we speak about the first quarter is that we created an infrastructure pillar of material size. We've closed the Whitehelm acquisition, or to be more precise, the Whitehelm Capital acquisition. I feel really great about that because that's the right thing to do, again, on the path of the strategic evolution of PATRIZIA that I just alluded to. You know, if I use a simple term, I think that in an inflationary environment, an infrastructure-focused drive could well beat real estate from a, you know, return point of view under those circumstances. Good timing, right thing to do, and good performance. Whitehelm Capital has already four to six infrastructure funds in place, which we will very quickly scale, and we may put further NPIs on top of that.
One thing we'll consider quite strongly is to drive our capital allocation behavior towards the support of an accelerated scaling and further build-out of that infrastructure pillar. Now, that said, growth by new markets and products is something we're also progressing on. We have expanded client coverage and product offering. We have made big strides with our flagship funds like Living Cities, made a EUR 600 million investment in Barcelona, and we have opened or we're in the process of opening offices in Singapore and Australia. Geographic expansion is also progressing in a productive and proper way without spending too much. Now, last but not least, a fourth topic to highlight is our progress on ESG. Focus on governance, impact investing, diversity, and reporting. Maybe most importantly are three things to mention. Sustainability report has been published.
Our first impact investing fund launched in February, so just within the first quarter. Our annual general meeting, which is scheduled for the first of June, and will also culminate in the conversion of the company to an SE, is also well on track. That will further fuel the internationalization of the company. Our new supervisory board is very strong, very supportive of the company and very well-positioned to support us in that effort. That said, let's talk briefly a little bit about kind of what I call heroes and stories, because it's always important to take the discussion maybe from the corporate through the fund and level or the product level to the actual asset or underlying asset level.
When you look at what we do there, and you look at the investment we've made in the first quarter into high-quality residential assets, so Living Cities on the left side, like in Barcelona, which is European-focused, residential, and institutional nature. We also continue to do Germany-focused asset investments. We do office-focused ones and more geared towards private investors. What I'm trying to say here is that, you know, we are focusing on core and core plus. There's also a little bit of value add in the mix, but we're stable. We grow, and we have a good risk performance profile. We believe that under the circumstances as they emerge, there will be a flight to quality. The two assets I'm showcasing here are reflective of high-quality assets.
Our capability to generate those based on global research and local expertise on the ground in these markets, i.e., asset expertise at its best, that will matter more and will probably be even more appreciated in the near and midterm future than it is being appreciated today. With that, let's briefly talk about the product offer. At the end of the day, our product offer, and you can see that on slide seven of the deck, is theme-based and solutions-based. It is research-backed. It is multi-geography, multi-asset, multi-channel, and multi-risk return profile focused. We are not a monoliner. I would like to particularly highlight on the right-hand side the themes around living and infrastructure. Again, stabilizing trends which will remain in place around urbanization, around demographics, around digitization, and around sustainability and decarbonization.
Flagship vehicles like Living Cities or Smart Cities, like on the Whitehelm Capital side, can very nicely combine our today's focus on urbanization from a real estate and residential point of view or office point of view, but it can also now add the infrastructure component of it. That combination gives us a lot of possibilities to adapt and flexibly move forward. That tallies with our strategic journey, which I've outlined before. With that, let's go a little bit more into the topic of financials and outlook update. I've turned to slide 9. On slide 9, you see a summary of the highlights that I would like to bring to your attention. We feel very good about our growth in assets under management, almost 14% year-over-year.
I feel really good about our revenue performance when it comes to management fee growth at 7.4%, which is particularly important because of its recurring nature. Our EBITDA has dropped from a year-over-year comparison, and part of the answer for that lies in a lower than prior year transaction fee revenue, and I will get to that in a moment. It also lies in a temporary increase of cost which I will also allude to in a moment. It lands at a point where we see some pressure on one component of the revenue line and some pressure, but mostly temporary in nature on the cost line, and that takes us where we are. Now that said, the balance sheet is very strong with a net equity ratio of 71.5% and influx of liquidity, roughly EUR 500 million.
That gives us a lot of strategic flexibility going forward, even if the current uncertainties remain, or even if certain trends develop in an unfavorable fashion. It will give us the opportunity to capitalize on opportunities that may come along the way. Our strengths, I think, will pay off nicely in the near and midterm future. Now we've adjusted our full year guidance for 2022, fundamentally because of two reasons. The environment is very volatile right now. There's a lot of risk in macroeconomic trends emerging, and we believe that we need to review our transaction outlook and our transaction fee income outlook and to take a slightly more conservative stance in that respect.
Secondly, because we are reviewing our technology investments on a recurring basis, and we look at where they are with regard to their stage of evolution, and we look at their payback profile. When you are in uncertain environments, you should take a more conservative stance on those. Therefore, we parse them into what we wanna continue or discontinue. On the back of that, we've decided to discontinue some of them. These two topics leads to a situation where guidance remains unchanged on AUM and management fees, but it leads to a change of EBITDA guidance and also a change of guidance related to the respective margin, and also below the EBITDA line to an adjustment of the EBT guidance, based on what I said before. All of that said, let's spend a little bit of time on the EBITDA composition on slide ten.
Let's first focus on revenue. I've already mentioned that we feel good about the management fee increase by 7.4%. As I also already mentioned, the revenue line, there's a significant decline in the transaction fee income year-over-year. One thing I would like you to bear in mind though, is that some of that is the result of a wanted change of fee mix in certain transactions, i.e., less upfront transaction fees, but rather higher management fees. So a recognition of income over time rather than upfront. So that is an effect of a wanted shift in strategy. However, we also have a certain expectation on what transaction fees should still come in, regardless of this deliberate shift, and that is not yet trending where it needs to trend, and that leads to the cautionary position we have taken.
Performance fees have actually outperformed so far. We've seen increase also on a year-over-year basis, so we feel good about that and it'll stick. Now net sales and revenues and co-investments are also quite strong on a year-over-year basis, and we feel very good about that. Now let's talk again a little bit more about net operating expenses and their growth. What I'd like you to know is that first of all, there are certain extraordinary expenses related to the acquisition of Whitehelm and the closing of that deal, which are part and parcel of that increase of cost on a year-over-year basis because some of them fall in the first quarter of 2022. Secondly, there's a natural increase in cost because the business is growing, which is actually relatively moderate.
Thirdly, there are certain temporary cost increases which we incur for two reasons. We hire more people to reposition our operational set up to enable a stable cost base in the medium and long term while the business continues to grow. Secondly, we have to engage into certain restructuring efforts, which partly are also linked to the discontinuation of certain investments, and that will also add temporary costs. Once again in summary, Whitehelm Capital acquisition related, one-time cost. Secondly, business as usual, growth related cost increment, which is rather moderate. Certainly, two components of temporary extra cost to reposition the business with a better cost base outlook for the mid and long term, especially as we are continuing to sail through uncertain environments.
With that said, I would like to turn to a bit more detail on the management fees or the revenue lines in general. Starting on page 11, the management fee story is quite decent under the circumstances. We also confirm our guidance in that respect. One thing to mention here upfront that could be of interest for the audience is the fact that we had quite a lot of deals signed in 2021. We're sitting on a very strong pipeline of signed deals. We expect to get some tailwind from that for closings in 2022.
Therefore, we believe that even if there would be an early stage, moderate negative impact on management fee outlook stemming from partially delayed transactions within the reporting period, we would still expect that to be offset by the fact that we have a much, much better pipeline of signed deals in place, than we historically had. Then on top of that, the built-in mix shift away from transaction fees and towards richer management fees should also support us and neutralize or more than offset, certain negative trends. That's the story on management fees. If we talk again briefly about transaction fees on slide 12. You know, we've signed EUR 1.1 billion of transactions in the first few months of the year. I mean, that's pretty good. It's outperformance against the market, so we feel good about that.
I already alluded to the fact that our transaction fees in the first quarter are about two-thirds lower than in the prior year. I would have liked to see that more at the level of 50% lower than last year. I see a little bit of an early stage trend evolving, and that is really also at the heart of our revision of guidance, yeah. Our acquisition fees are a bit lower and, otherwise there is a well-filled transaction pipeline which will unfold. The question is really what the market uncertainty will do vis-à-vis the length of negotiation period, the time that has to pass between signing and closing.
As assumptions shift, these time windows may extend, and we may see a bit of slippage within the year, and we may see some slippage as we leave the year, in late 2022. That's a trend we are watching extremely carefully. Because we see some early signs of a negative diversion here, we kind of take a conservative stance and address that. I think that's really it on the transaction fee side. If you go to performance fees, they are at a fairly high level of EUR 25.9 million. Successful realization of investment strategies. Again, the hallmark of our track record.
The performance fee claim on Davonia which sits at EUR 414 million is quite solid and we expect that to remain in place at that level. At the end of the day, the Davonia portfolio is one of the best, if not the best, residential portfolio in Germany. The demand for these type of assets continues to be high. Global supply chain and development sort of related challenges are suppressing supply. We believe there is a sort of a positive tailwind coming from that direction. That's really the key message on that item.
If you go to slide 14, I would like to highlight that the balance sheet does not only remain strong, but it's stronger than ever, which gives us a lot of financial flexibility to invest in in organic growth, the platform and technology. I will get back to that in a moment, but let me first explain what we have in place as of the end of March. We have an equity ratio of 59.5%. There's about EUR 366 of cash and another EUR 170 of deposit securities. If you net that all out against bank loans and bonds, we're sitting on a net cash balance of EUR 150. That is after having temporarily invested in certain warehousing facilities.
This number is actually more around EUR 200 million. If you take that, and then you take what we have on the balance sheet vis-à-vis Davonia as an expected value, you get into quite strong territory. Our net equity ratio today stands already at 71.5%. Available liquidity at almost EUR half a billion, which takes me back to my earlier point that we have a lot of flexibility to invest. As we go through 2022 and as the market remains very interesting, we will have additional opportunities with regard to M&A. You know, whether that will center around product suite enhancements or maybe rounding out our distribution capabilities is something to be seen. We're working actively on both.
Secondly, it gives us an opportunity to do more co-investments, especially when it comes to the scaling of strategically important, either real estate or, more importantly, infrastructure flagship funds. That is something that carries a lot of importance for us. There's of course also the opportunity to allocate more into organic growth, which we are also doing. I talked already a little bit about some of the things we're doing to reposition the operational model, but also to focus more and clean out certain things that create otherwise too much of a drag, in the medium term. That's it on the balance sheet. If we then transition on page 15 to the guidance, which we very recently adjusted. I already briefly alluded to the fact that there's basically two themes that caused us to make a move.
One is the evolving situation in the markets. I mean, all of you know potentially more than I do about that, but it's very real. We see early signs of some diverging trends on the transaction side. We believe we can manage those, but we also believe that we need to take a more cautious stand knowing what we know today in the middle of May. The second theme revolves really around the fact that we are going to continue living uncertain times, and that in combination with a regular review of some of our investments that we've done to propel the company forward leads to two very simple questions. Are those investments where they should be from a valuation point of view between startup, early growth and maturing?
Secondly, are they expected to pay back in the short, medium, or long term or in maybe one or two cases, not at all? As we go through that assessment, also with the support of a very investment and technology-savvy supervisory board, we have come to the conclusion that we need to tighten our belt in that space and to take some actions on a couple of investments, which leads to some exits, either through liquidation or sales. That's really the two trends that are sort of driving our perspective on guidance update. As a result, we have upheld our guidance on AUM growth. We have upheld our guidance on management fees.
I already alluded to the fact that there could be a little bit of a spillover from a transaction timing challenge, but we believe that that will be offset or more than offset by the fee mix changes that we have proactively created, and secondly, by the richness of this pipeline of signed deals. On the performance fee side, we have slightly increased our guidance for two reasons. One, we have performed better year to date than expected. Secondly, we have a track record in that space, so we believe that there's no reason to not either hold or slightly up guidance. Same applies to net sales revenue and co-investment income.
Now back to what I said before, we have also felt a need to update our guidance on the cost outlook. I already explained that although the business growth or business as usual related cost increase, which comes with a positive operating leverage compared to revenue growth. Let's say management fee growth of about 7% or 8% and let's say underlying BAU cost growth of 3% or 4%, let's say, there's an additional cost growth component which is driven by us spending money to reposition the operational core, which is about another third of the overall cost increase.
Then there's another third of the overall cost increase, which, not probably, which is driven by the activity to undertake to restructure the business and to accommodate or to accompany the exit from certain direct investments. In a nutshell, when it comes to the increase of guidance with regards to cost growth, sort of take a framework of one-third, one-third, one-third, and think about one-third of that increase maybe being sticky and two-thirds coming out again because it's temporary in nature. Whether it's gonna be exactly like this, I cannot yet tell you, but this is directionally what I have in mind, in my head, being just five or six weeks in the company. That's really it on the adjustment of the guidance.
Once again, we feel good about AUM. We feel good about recurring revenues. I've talked about the topics revolving around transaction fees and cost guidance and also of course below the EBITDA line around liquidation of investments. Now, maybe a general comment before we leave that page. To change guidance towards for EBITDA to EUR 100 million-EUR 120 million after the previous guidance or the historical guidance, on the one hand makes me not feel great, but I'm thinking about making EUR 100 million of EBITDA in the current environment. I think that's true pretty strongly.
Secondly, knowing that it's EUR 100 million and maybe not EUR 110 million or EUR 115 million because of the temporary cost load, I think it returning to a level of maybe or it being on a pro forma basis, maybe it's more of a level of EUR 110 million, excluding these two topics I just mentioned, makes me feel quite good. As we are gonna sail through 2022 and the environment stays where it is in terms of uncertainty or even deteriorates further, I think this is a good base to have. With that, I would like to hand over back to the operator because as far as I understand, it's now gonna be time for questions, and I am more than happy to take those questions. Operator, it's over to you.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. Anyone who wish to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Andre Remke from Baader Bank. Please go ahead.
Good afternoon. Firstly, Mr. Glaser, congrats to your new role. Starting with a couple of question, I prefer to do it one by one. The first question refers to the AUM. Based on my calculation, Whitehelm contributed roughly EUR 5 billion to the infrastructure part. With acquisitions and disposals roughly netting out, this will result in value uplift of EUR 1.5 billion. 3% value uplift. Is this correct? If so, are there any larger contribution from any specific investments, as a value of the Davonia seems to be rather stable. I'm a bit surprised by such a value uplift. This is the first question, please.
Well, thank you. Thank you very much, Andre, for the question, and nice to meet you. Look, our assets under management growth is driven essentially by three components. One is the addition of Whitehelm Capital AUM, number one. Number two, organic growth. Number three, an uplift in valuations. The uplift in valuations is quite distributed in nature, so there is no specific, outlier there, either positive or negative, to my best knowledge. Secondly, as some of you may know, we take a relatively conservative stance when it comes to valuations, and we have done that historically all the time, as far as I know, and we have no intention to change that. That of course gives us a bit of additional comfort, maybe compared to other market participants, but I can't judge that.
That's why it is not surprising that on an ongoing basis, there is a decent amount of valuation uplift coming in. I don't really see any unusual trend here. I mean, if you ask. You know, of course, the organic growth component could have been a bit bigger, fair enough. I already alluded to the fact that the pipeline is strong, and we will see some of that picking up more strongly as we go through the year. I think the organic component will probably pick up in terms of size of increments that will be added quarter by quarter. Whitehelm will now execute its business plan.
If we turbocharge some of their flagship vehicles, we may be able to accelerate that as well. I think the valuation uplift will continue to be there at a reasonable level. I have no other comment on that at the moment. I guess we can go to your second question.
Yeah, sure. It's also on assets under management. So in general, the question partly may be answered, but if I get it correctly, probably we'll invest more into funds of Whitehelm or together with them. Otherwise, I would not really see that, given the transaction environment at the moment and the lower guidance on the market or more, your more cautious views on the market, will not raise a question on your asset under management target. From today's point of view, another EUR 2 billion in growth. On the other hand, you are saying, clients are hesitating to close the deals at the moment.
Yeah, yeah. You're hitting on a big topic, which is also, of course, top of mind for us. You know, so maybe one comment first to make you aware of the situation that will help us or continue to help us. We had quite a bit of spillover from last year, signed, but not yet closed. So that creates tailwinds as we go through 2022. If I put that aside for a second, I mentioned the transaction pipeline is good. I'm quite comfortable that the transaction pipeline will materialize.
What I've also said is that there could be an extension with regards to the timeline or time that will expire between signing and closing for transactions that are gonna happen within 2022. With that, of course, comes a certain risk that certain transactions that are slated for, say, third or early fourth quarter may, just because closing will not be accomplished towards the end of the year, slip into 2023. That's the only thing that worries me a little bit. The good news is that if that happens later in the year, the impact on management fees will be immaterial. Yeah. Now, that said, the outlook vis-à-vis acquisitions and AUM or additions of incremental AUM will differ between real estate and infrastructure. I have no illusion about it.
I see more concerns or more pressure on the real estate side, and I see probably less pressure on the infra side. Because return profile is better, there is gonna be maybe a stronger mix of equity and debt, compared to real estate. Against the inflation trends simply because it's a different risk return and yield business. Now this Whitehelm having closed, I would say just in time, I feel a lot better than if that would not have happened. We have the team in place.
We have a business plan that is very rich with that, and we have plenty of capital in PATRIZIA to scale their flagship vehicles in the global infra vehicles or in the decarbonization vehicles and so on, much faster than they could have done on their own. We were actually discussing exactly that topic yesterday at the strategy session of the whole team, and there's a huge opportunity to more smartly deploy capital to accelerate Whitehelm's business plan and to make it bigger. Some of that I think can easily happen already in 2022, and we've already taken first steps for that to unfold. Which takes me back to the real estate side, where I think the game is slightly different. Yes, there's pressure, but we have a good pipeline.
Secondly, the trends that we are revolving around with our investment strategy around urbanization, decarbonization, sustainability, or Living Cities, one example for flagship vehicle. I think they will continue to attract investments, and I think they will continue to grow. So I don't see any reason to dial back guidance on that front, to be honest, of course, short of any, you know, more severe market disturbance. We are quite, you know, long story short, as a result of having real estate and infra now, as a result of having favorable stabilizing trends on the real estate side, and really the opportunity to accelerate on the infra side, all that together against the market caution that you were alluding to, I think we are still feeling okay.
Okay. Fine. Follow up on the Whitehelm structure, could you remind me of the fee structure here? Does it mean, from such investments, we will not see transactions, but rather than higher management fees? Is this correct way of thinking?
Yeah. Whitehelm is quite dominated by fairly rich management fees and hardly any, well, I don't know if hardly any is the wrong word, very low transaction fees and also very low performance fees. When I look at the historical numbers, which I actually did this morning, and also the budget, I think it will stay that way, which is good. Whitehelm is rich in recurring revenue, and there is no reliance on upfront transaction fees and high performance fees.
Scaling AUM on the Whitehelm side, thus scaling a very rich management fee, again, it's back to my earlier point, can catch two birds with one stone size and stability of revenue streams and also, rich revenue streams. That's again, why we feel really good about AUM outlook, in particular following the Whitehelm deal closing.
Okay. Got it. Thank you. The next question is on the EBITDA margin. It's guided now for 32% this year. Well, as you mentioned some extraordinary costs here. From your new CFO perspective, would you regard as a possible, let's say, mid or maybe also over the cycle margin to reach in this business? Because you have a lot of experience in other businesses and other corporate structures. What would you say could be a reasonable EBITDA margin to reach?
That, you know, to answer that question, it's been six weeks and just a bit sporty. Look, in principle, I would say that's a relatively low base we're dialing in here as a result of what I alluded to before on the different components of the EBITDA story here. I expect it to go back up. Yeah. You know, if you ask me where to, you know, I probably see definitely something north of 35% towards 40% or so, directionally, maybe 40-ish%. I see that as I said because I see strengths with regard to recurring revenues. I see stability with regard to performance fees and other income streams.
I see some risk on transaction. I see a cost base that is at the moment higher than I would like it to be, but I explained that, and that will come down. Let's say two-thirds of that will disappear over time. As a result, margin will have to bounce back. Don't nail me on the exact level, but I would mentally, directionally be somewhere at the 40% level, probably. Which again, under the circumstances would not be bad. Yeah.
Yeah. Okay. Perfect. The very last question, coming to your CFO role. Well, you know, for years, PATRIZIA has plenty of available liquidity, EUR 500 million plus treasury shares plus the Davonia, et cetera. So fair enough to say that this gives you high liquidity or high flexibility for any kind of opportunities. But from your CFO perspective, is this really the right capital structure, apart from today? Yes. Simply saying this flexibility also limits the margins and the return on equity. What are your thoughts on that view?
Yeah. Look, I have no illusion about the fact that we're sitting on a lot of cash already. We're gonna potentially sit on even more cash in the medium-term future. The question is, what do you wanna do? Again, I would say that there are 1, 2, 3, 4. Maybe 4 or 4.5 tracks here. Track number 1. Additional incremental M&A activities, which as I said, will either center around product suite expansion, like the Whitehelm Capital example or distribution channel diversification. If you ask me where I put my money there, I would put it maybe rather on the second than the first, because with the Whitehelm acquisition, we've already made a huge stride, and we will see.
Secondly, co-investments in a smart way to accelerate the scaling of existing real estate flagship vehicles or more importantly, infrastructure flagship vehicles, with the objective of making them bigger, faster, and that dovetails super well with the market. Thirdly, investment into organic growth, but that we have to do carefully, and to not overshoot. Of course, number four, there is a growth in dividends, which I could imagine to play a bigger role than in the past. Of course, there's the topic of buybacks, which is when I say four and a half, that's kind of the half at the end, because that's obviously also something we need to judge carefully. You know what our plans are in that respect. We have been executing exactly against those plans in the past.
That's obviously gonna be a topic or continue to be a topic. The key sort of point I would make at the end is that I think we are sitting on a lot of cash, which will further improve at a time when opportunities start to unfold. If you want me or my sort of new-to-the-job CFO view, I would say let's wait and see for the next couple of weeks, months, quarters, because there will be opportunities coming along that will either be strategically good fits, and we will just execute them swiftly, or they will be distressed, strategically good fits, which we will try to execute even faster. That's on the M&A side. On the co-investment side, it's under our own control, what we wanna do to accelerate or turbocharge certain flagship infrastructure vehicles.
That process has already started. We are already making a move with regard to capital allocation into that direction, which I think will pay back nicely, as infra will rise to a different level. That's where my head is on that question. That was now four questions and four answers, no? If I counted correctly. Yes, that's enough. That's doubling up within a single call. No big deal. Thank you for sharing your questions with us.
Thank you.
The next question is from the line of John Munge from Highclere Investors. Please go ahead.
Hello. Hi, and thanks for taking my call. I'd like to get some more information on the, technology investments, the ones which you're writing down and discontinuing. Can you please provide us with some more information as to what exactly these are? How did they come about, and what exactly you're discontinuing?
Hey, John, if I'm not mistaken, we met already on a video call at some stage, once at least.
Yeah. Yeah, we did.
Glad to have you back here. Look, let me first take one step back before I answer your question so that you understand the context of it, which is super important for me, because I wanna look at this topic in the context of our approach towards the technological enhancement at PATRIZIA, okay? There's five things we do at PATRIZIA to become a technologically even more leading company. Number one, we do trend scouting in the market, and we have a team for that, and we feed that into our core business to make them better, like smart building management, for instance. Secondly, we make direct investments with the objective to invest into technology companies, of course, for a return, but also for a strategic fit.
Thirdly, we do indirect investments into or real asset-related venture funds. Let's put it this way, and there are three of them, if I'm not mistaken. Number four, we do ourselves set up something called a sustainable venture fund, like any other fund we set up, but with the objective of investing into real asset-related sustainable ventures. We have very specific activities in place which revolve, for instance, around the topic of smart building management, which is in essence geared towards making our asset management core business unit smarter and to provide also smart solutions to our investors. Those are five pillars that are essential to us embracing technology at PATRIZIA. Now, with regard to the direct investments, we're only touching one of these pillars, point number one.
Point number two, we have around about 6 or 7 of them, and the investment in those is still relatively young in nature when you think about it big picture. It just started, I guess, a couple of years ago, year and a half ago, a year ago, half year ago, and so on. This is a relatively young activity that PATRIZIA has started to execute in the not so far away past. We are now at a point where we are regularly reviewing how these investments are doing. Frankly speaking, I would say two of them are well ahead of where we would expect them to be regarding their evolution as a venture.
Second, two of them are probably kind of where they should be, and we feel okay about them. Then there's 2-3, which we feel are behind their expected evolution curve, performing below expectations and are subject to a decent or not so good or really bleak payback outlook. That said, one of them for sure will have to be liquidated, one of them may have to be liquidated, and one of them I feel pretty okay about. I'm not gonna go give you specific names here because we're not in the business of doing that. We have earmarked EUR 12 million below the EBITDA line for taking those hits. We believe that these hits are the right thing to do right now for two reasons. One, because we see what we see.
If I see no payback or very far away payback, let's pull the plug and stop the bleeding. Especially in a situation where we are in uncertain environment, I think it's not a time to stick to questionable non-core activities. I mean, questionable in the sense of their performance outlook. Yeah, they were probably the right thing to do a year or a year and a half ago, but today they don't look. They're not in line with expectations. I wanna stop the bleeding and reduce the midterm running cost base from. Basically, I'm already starting to reduce it.
I'm gonna have it already starting to come down in the second half of 2022, and then of course be solid and locked in as a reduction in 2023. That is what I care about, like. That costs me a little bit of money right now because to liquidate one or two of those comes with a bit of restructuring costs also above the EBITDA line. It comes with some costs related to liquidation itself. You have to reposition certain underlying activity. There is a write-off with regard to technology assets or and/or goodwill, and then there is, of course, a bit of an OpEx temporary hit above the EBITDA line.
I'm not, you know, going into an uncertain environment which could even become more uncertain, not focusing on the core and turbocharging the core is not the right thing to do. We need to, you know, fasten our seatbelt, decide quickly what we wanna go with and what we wanna jettison overboard, and then we move. Yeah. It's a natural process, and you just see it for the first time because PATRIZIA has not been in this activity for very long. Yeah. This is also a bit of a learning curve for the company, I think. That's it. Sorry for the slightly long, winding answer, but I just wanted to give you the full picture again. Yeah.
Are these investments fully consolidated, or is it that you hold a certain proportion of these companies?
We have multiple levels of intensity here. We have some that we own only a small stake in, as small as 5 or 10%, and we have also investments that we own 100%.
Just, for my own understanding, when I look at your annual reports, where would I find these investments? Would they be on the associate line or do they occur somewhere else?
I'm not sure I understood this question completely. Wait. Sorry. Could you repeat the question? I didn't completely-
In terms of the value that you're knocking down on your balance sheet, where would I find these investments?
I guess it would be in participations. I would have to check what the exact name of the line is. It's in participations and probably also partially in goodwill, logically.
Understood. Finally from my end is around the point that you're making around capital allocation. Am I correct in understanding that you might be considering a possible transaction in the coming months or so?
Look, we always look at opportunities. That doesn't change. There's a handful of them at any point in time. We have a pipeline, including possible transactions that could materialize in the near-term future. As I told you, they will either revolve around further product suite enhancements or possibly also distribution diversification. I have personally been involved in looking at one or two of those, but I'm not gonna tell you which one we are likely to or consider to be able to bring over the finish line in the near term. That would not be appropriate, I think.
Understood. Thank you.
The next question comes from the line of Manuel Martin from Oddo BHF. Go ahead.
Hello, gentlemen. Thank you for taking my questions. Christoph, I have three questions. Maybe we can go one by one through them. First question is a follow-up question. It's just to make sure that I got the point on the AUM growth between the fourth quarter 2021 and the first quarter 2022. The increase from EUR 48.6 billion to EUR 55.3 billion when I try to make a bridge in EUR on my white paper here. That means EUR 1.1 billion came from signing transactions and part of some of that came from Whitehelm. Maybe you can give us a bridge in EUR of the three components, including the value increase.
My apologies. I forgot to hit the unmute button. I will repeat the wise words you didn't hear. About 75% is Whitehelm, around about EUR 5 billion. You have about 10%-15% in organic valuation uplift, and you therefore have between around 10%, I guess, in organic, I guess, from memory, but I would have to look at the numbers. Certain valuation, which is reflective of EUR 1 billion, correct? 2% organic and 80% Whitehelm, and the remaining 5% margin? Okay. Subject to clarification.
Okay. Okay.
It's heavily.
Sorry. That's other foreign exchange, et cetera.
Yes.
One. Oh, okay.
The main message is that Whitehelm is leading, followed by valuation uplift and followed by organic. Organic is also, as I mentioned already, there's a bit of a delay factor here building up, and I think we'll see it catch up very shortly.
All right. That leads me to my second question. It's to have a deeper understanding on the AUM growth and transaction fees. PATRIZIA, you kept the AUM growth guidance unchanged while you decreased the transaction fee guidance. I understand that part of the reduction of the transaction fee guidance is due to the shift in the fee structure, more management fees, less transaction fees. However, the lowering of the guidance is significant. How can we reconcile keeping an AUM growth target unchanged and the transaction guidance lowered at this magnitude? Does it have something to do with signing and closing or how can I understand that?
Now, look, First of all, with regard to management fees, there is a positive spillover effect from last year, yeah, number one. Number two, they're gonna benefit from the change in the fee mix, so to speak. Number three, there is an ability to accelerate the growth of certain flagship vehicles. All of that together, I think, will outweigh the headwinds we may face if transactions are delayed with an impact on management fee earnings starting later than planned in the year. That's why we feel good about the management fee guidance. You know, there's about EUR 1 billion of signed deals which have not yet closed. There's a rich sort of cushion that we sit on.
Now, on the transaction fees, if I take a slightly more operational perspective here, let me say the following. You're alluding to the guidance drop being fairly significant, but I'm looking at it at three or four levels, yeah? I'm coming out of 2021 and I'm going into 2022, and I'm saying, you know, my transaction volume will grow quite significantly and my transaction fees will grow much more moderately, because I have this mix shift built in. That's the starting point. I'm saying, okay, so we make a growth assumption on both volume and fees and factor in the mix shift.
We do it in an environment that was not yet as volatile from an expectation formulation point of view in late 2021, and now it's a lot more volatile, yeah? The growth assumption, no matter whether the volume-related growth assumption is more pronounced than the transaction fee growth assumption because the mix shift is being addressed, it is still two growth assumptions, which are under the current circumstances, must be subject to review. Secondly, I look at it operationally, and I look at the hit rate of the teams, yeah? Which is pretty good. I mean, we have hit rates, i.e., do versus say ratio, which is probably somewhere between 90% and 100%, and in some areas north of 100% historically.
That hit rate or that do versus say ratio in the transaction teams is already pretty strong. Although it could occasionally be even better, I think it is more likely that it will suffer from the circumstances as they evolve. Let's factor that in, that the hit rate will be, let's say, subject to challenge to be upheld. When I do that, and then I look into the market either staying with us on transactions or moving away from transactions, I run a couple of scenarios and multiply sort of my growth expectations over my hit rate or an adjusted hit rate, and I multiply that over a change in client behavior.
I'm getting to a transaction fee corridor that is what the new guidance is. Now, I think at the moment I would feel that we'll probably be more in the upper end of that guidance. But I also only see four months of trends or subtle trends, divergence. I'm sitting here in early May, and I expect a transaction fee profile of about 50% of prior year, which would be about EUR 3.5 million. I'm seeing EUR 2.2 million, EUR 2.3 million, and I see a slight divergence. Is that gonna stick or bounce back? Is it going to continue on a prorated basis or further deteriorate? There needs to be a corridor around that, and that's what we've built.
It revolves around the underlying growth expectations, which have to be revised I think. The hit rate expectations, which I think I mean, we are good, but the teams they're not God. Then certainly, the customer behavior, which is probably creating the most sensitivity. The corridor is what we've said now. I feel more being in the upper half or sort of fourth quartile of it right now, but I may drop towards the middle of it. I may stay where I am. I don't know yet. TBD, just stay with us as. I'm gonna take a slightly conservatively biased stance here. I'm not gonna I don't wanna be in the business of downward revising this going through the year. I just.
For that, I think, you know, these three sort of layers of perspective are, they're just there, but let's see.
That leads me to my third question, the topic client behavior. Can you maybe give us some color on the current client behavior? I mean, are buyers shying away to spend money right now sitting on cash, and they don't know what to do because of Ukraine war or sellers not willing to sell or prices under pressure and sellers don't want to go down with the selling price? Maybe you can tell us a bit on that. Is that possible?
Yeah. Look, I mean, our investors' portfolio is very high quality. It's largely institutional, resting on long-term relationships that I think differentiates from some other players in the market. Secondly, we play predominantly core and core plus and some value add on the real estate side, and there will be a flight to quality, whether it comes at the price of having to accept smaller returns. Yes, I think some people will just keep chasing returns, but some will just fly towards quality and safety, and that's us. The second avenue is infra which will continue to stand tall.
All of that said, to answer your question, we don't see at the moment much of what you were asking about in terms of people or investors walking away, other than the occasional client changing his risk strategy or whatever. I think part of that is because we are who we are, and we have that investor base. Could that change as the environment emerges? Maybe. We keep watching, we keep researching, and we keep pulsing our client base. I don't see any substantial negative pattern there yet, yeah. On the investment side, I mean, the acquisition side, so far so good. You know, we have...
We acquire either built properties or infra assets or some of those which are fairly late stage. We have even our own development business largely late stage and negotiated through projects. So again, compared to some other market participants, we're probably less prone to or less exposed to the risk of development falling apart. Of course, we are cognizant of the fact that we do have an increasing risk towards developers in general, but there's no substantial pattern unfolding here that makes us uncomfortable. Again, like under the current circumstances, I'm not gonna put my hand down for that staying that way. So far so good, knock on wood.
Okay. Thank you, and good start despite this tricky environment.
Yeah. It makes the role more interesting. Very good. Nice to meet you, Manuel.
Thank you.
Do we have any other questions?
No. No. I'm fine so far. Thanks.
The next question is from the line of Miro Tušak from GMS. Please go ahead.
Yes. Hello. Gentlemen, can you hear me?
Yes, we can. Loud and clear.
Excellent. Thank you. The first one is just a clarification question. You, in your guidance, you guide for EUR 235 million-EUR 260 million for the net operating expenses. Now, there was a slight change in the way how you reported this line in Q1 versus the previous quarters in the sense that you included also the depreciation, amortization, financial result, and other in the EUR 61.4 million that you reported. Is this guidance the EUR 235 million-EUR 250 million, including depreciation, financial result, and other, or is it excluding?
It's excluding. With the first item you're above the EBITA line, with the other one you are below the EBITA line.
Okay.
Which is why the two main pillars of guidance change. Transaction fees obviously hit above the EBITA line, and the write-downs we expect to make are hitting below the EBITA line. That's also where the financial results are and some other small items.
Okay, thank you. The second question, if I do the math, take the midpoint of your management fees and deduct the Q1 management fees, I get to EUR 197 million that you still want to achieve in management fees this year. Now, this breaks down to roughly EUR 65 million, EUR 66 million per quarter, which is EUR 10 million higher compared to the run-rate you had in Q1. Please tell us how will these EUR 197 million be split over the upcoming three quarters? We will see still a relatively low Q2 and then a back-end loaded massive increase, or will it be evenly split at around roughly EUR 64 million, EUR 65 million, and EUR 67 million?
Yeah, thanks for the question. I'm acutely aware of the fact that from an outside perspective, we seem to be run rate wide behind. Don't forget that there is the spillover effect I was alluding to. Management fees will pick up in terms of traction. It is mathematically built in because of the timing of the signing and the closing. Secondly, I expect the mix shift between or the fee component shift from transaction fees away towards management fees will also get only traction over the course of the year. Certainly that this is under our control, as we accelerate some of the scaling of the flagship vehicle, there will also be more, let's say, faster increments.
Because of that, we believe that the guidance, although 1Q run rate technically speaking is below, is holding.
It's back-end loaded, clearly. We will see the majority of these EUR 197 million clearly in late Q3 and Q4, and not yet in Q2.
Yeah. I would say directionally it's loaded more into, or it's loaded more into the second half of the year, that's for sure. I would not use the same terminology here as being back-end loaded as much as a transaction-heavy third or fourth quarter, you know, towards October. No, I think it's a more gradually shaped, stronger loadings as we go through the year.
Okay.
I'll give you a practical example. Take a fund, a flagship fund like Living Cities, which I just talked about. That one is a fund that will only lose. Well, they'll have a richer management fee profile, but the inception of these management fee stream is happening later than previously thought. It is coming. That means there, as I said, there's a built-in expectation, which is just a matter of time, literally. Yes, it does mean that the profile has tilted a bit on a quarter-by-quarter basis.
Okay. The other questions are probably a bit more, let's say, esoteric. The first one is typically in the valuations of the real estate object, there is a kind of cushion with regards to the discount rate. If interest rates go up, the valuations are not immediately affected, but they have to go up a certain amount until this is the case. Can you comment on that? In your portfolio, what is the cushion, and the other way to ask the other way around, by how much do interest rates have to go up in Europe, in the Euro area until you will see an impact or a significant impact in the portfolios you are managing?
Okay. Thank you for the question. Look, factually speaking, our external appraisers always use long-term average discount rates, yeah. We're not discounting at what I would call a relatively low recent or current or short-term average rates, but we're discounting based on long-term average rate. That provides us with a cushion. Secondly, I guess that comes with a built-in hedge, so to speak, which we don't foresee to be eaten up any time soon. Do you expect me to see the valuation gains to maybe become smaller, relatively speaking? Yes. That's kind of obvious.
This is not a short or maximum, a medium or long-term horizon until we get to that sweet spot you were asking about when it will start to flip. Just to give you another benchmark, our value compared again to other market participants, which I think is relevant. When you look at other market participants, their valuation upticks are somewhere between, I think from memory, 4% and 8% or so, whereas ours is 2% per annum. We're tracking at half to a quarter of what other market participants have been doing, and that gives me a lot of comfort. Again, like, we are not like.
We are just philosophically a company that is built around long-term relationship track records and a bit conservative, is my guess. We don't intend to change that. That is exactly what enables us to sail through cycles. That is very fair. That's actually one thing I like about PATRIZIA. You know, you can debate whether I like certain things about certain operational activities or so that might be an area where we're addressing those right now. On that front, I think, which is very important, the company has traditionally taken a very conservative stance.
Okay. Another question. You mentioned that there will be temporary extra cost in order to reduce costs. Can you give an example what you mean?
I will repeat what I said, and then I'll give you an example. We are already, as we are in the first or second quarter of this year, incurring extra cost, or even more the second quarter than the first because it started. We are incurring extra costs to what we call reposition the core of our operational setup. We are incurring extra costs because we have to liquidate certain activities which I alluded to. These are by nature temporary costs. The first one, you can look at as, let's say, an incremental headcount increase, which is being spent on people and other expenses related to them, which is spent to re-engineer a process, a system, an operational activity.
If you do that across our large fund service space and also to a lesser degree in some of our core business units, and you're talking about 20 or 30 or 40 people or so, this is not a small number for a certain period of time. That cost will come out, and it will hopefully lead to a situation where certain processes, systemic setups, automated data flows and so on, will be able to handle increased scale without the addition of additional headcount. That's the objective. We sometimes refer to this as turning the company in operationally into a shop where the size of PATRIZIA can grow, but the size of the operational core doesn't have to grow anymore.
It's in essence a process reengineering, digitization, and related project management effort, which is temporary in nature, but it should come out at some stage. Of course, if I liquidate an investment activity, there is cost associated with that, besides the write-offs that we have to handle. There's certain restructuring activities that we have to handle, which I don't wanna allude to, which cause one-time costs. That's really it. We will look at the end of the day down to how does revenue grow? You know, question one. How does cost grow? At the moment, I have, you know, 14% or 15% cost growth year-over-year, and in the recurring revenue, I have 7% or 8% growth.
I have what I call a negative operating leverage. If I look only at the BAU cost increase, which is about a third of the total cost increase, so let's say 4% or so, yeah, 4.5, I am at half of my revenue in the recurring revenue growth. Yeah. I have a 2x positive operating leverage. The key will be to get back to that. Yeah. That's what I'm gonna have a laser sharp focus on as we go through 2022. Yeah. If there's upside on revenue growth, especially recurring revenue growth, we can maybe take a little bit more time to go back to normal cost growth levels. Otherwise, we'll have to do it faster. Yeah.
That's something we will deal with, as the environmental situation unfolds.
Okay.
Okay.
Last question. Sorry. Davonia, you mentioned EUR 400 million in the call explicitly. Any update there with regards to the negotiations you are having with the other investors in this vehicle?
When we look at Davonia, it's obviously, as I mentioned before, I mean, it's a tremendously high quality and highly valued portfolio. Secondly, you know, we don't know yet how the investors from a point of view of forming a sort of a maturity or a view on the topic will wanna proceed as we get into early next year. I fundamentally or conceptually see three scenarios. One is that it will be turned into an evergreen structure because it is a very rare set of assets. It is a very valuable asset.
It has, I think, very limited or no valuation risk embedded or maybe even upside, yeah, because of its quality. That's option one. I think option two would be to think about liquidating it, and then the question is whether you wanna do this in a price optimization fashion, taking your time and do it properly, right? Because it's not a small asset. Or whether you wanna do it maybe more decisively. You know, with that will come three scenarios to us.
I think no matter which one, it will either keep us in a kind of balance sheet or AUM, from an AUM point of view, where we are with maybe a moderately diluted recurring revenue stream, but a substantial one-time gain in terms of performance fees. That will come anyway in any of these scenarios. Or it will give us a lot of extra cash upfront and no more recurring revenue stream. Then we have just a substantially high degree of flexibility what to do. With that amount of money, we can do a lot. We're staying close to our investors.
We will see to which direction they will tilt. We are prepared for each and every one of these scenarios. That's kind of where my head is on this, but I'm still again, fairly new to the company, so just bear with me as I'm forming a better perspective. That's it from my side. I think we don't have. Oh, sorry. Miro, any follow-up question?
No, that's all. Thanks a lot. Thank you.
Okay. Sorry, I was jumping the gun there a little bit. Look,
Operator, any other question?
No, there are no further questions at this time.
Okay, good. Martin, thanks for organizing this call here. Everybody on the call, thank you very much for attending. You know, Martin's looking at me and telling me that the share price is starting to recover already, which is great news. It looks like you found our answers helpful and useful. I do appreciate your questions, and I hope I answered them all. I really look forward to upcoming future calls, but also to maybe some meetings in person. Thanks again, and please reach out to our IR team if you have additional questions or if there was maybe on one or two points insufficient precision or clarity. Feel free to do that.
It's been a great thing for me to join this first call. I really think that PATRIZIA is on a good track to become what we want it to become, which is a global real asset investment manager who is gonna continue to grow and be resilient. That's kind of what's top of my mind, and that's what I'm gonna keep working on once I get off this call. Thank you very much.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.