DIC Asset AG (OTCPK:DDCCF) Q3 2022 Earnings Conference Call November 9, 2022 4:00 AM ET
Company Participants
Sonja Wärntges – Chief Executive Officer
Peer Schlinkmann – Head of Investor Relations
Conference Call Participants
Andre Remke – Baader Bank
Philipp Kaiser – Warburg Research
Stefan Scharff – SRC Research
Manuel Martin – ODDO BHF
Jochen Schmitt – Metzler
Thomas Martin – HSBC
Sonja Wärntges
Good morning, ladies and gentlemen. A very warm welcome to DIC’s 2022 Nine Months Results Conference Call. Today, I’m joined by my colleague, Patrick Weiden, CCMO of DIC Asset and my colleagues from Accounting and Investor Relations. As usual, we will give a short presentation of the highlights of our nine months results 2022 followed by a Q&A session.
Ladies and gentlemen, as you all know, we are currently experiencing major changes these days. The major uncertainty is particularly with regards to energy supplies and prices, the stability of supply chains and the development of inflation are leading to a clouding of the economy in Germany. At the same time, a recession is expected in 2023. And also the real estate industry is not unaffected by the challenges of the political situation.
The real estate investment market has been significantly slowed down these days. Among investors, there is little intention to sell in these times and rising interest rates are curbing investors’ appetite to buy. But the returns of our owned and well-managed portfolios are strengthened, thanks to CPI-linked rental contracts and the robust letting markets. This is where our robust business model proves its worth and the mix of our portfolio creates stability.
In addition, our decision to significantly strengthen the logistics asset class by the maturity takeover of VIB at the beginning of the year have given us even greater resilience. Therefore, we are firmly convinced that we are in the best possible position for the future, namely by the right strategy, which means our growing platform of €14.5 billion is generating a higher share of recurring and predictable income, thanks to the strong growth of the commercial portfolio.
Our investment focus on the attractive asset classes, logistics and office, along with a high portfolio diversification. And the future positioning of VIB as a logistic expert within the DIC Group. And second, our underpinned by a clear 360-degree management approach, which means we are continuing to achieve strong letting results in the market along with higher rents from indexations.
A product pipeline for the institutional business with shifted focus from core/core-plus to logistics, value add and managed to ESG. And a clear defined ESG strategy and a road map for the DIC Group and finally backed by a solid financial and balance sheet structure, which is driven by a stable property valuation expected at year-end 2022, an increasing share of green financial instruments to around 40% to 50% by 2027, a consistent and reliable dividend policy, while we keep our focus on the goal of deleveraging and reducing our LTV to below 50%.
Ladies and gentlemen, let me now summarize the operational and financial performance of the first nine months 2022. So far, we have notarized €368 million of transactions across all business segments. On top of that, we added €2.3 billion of assets to our commercial portfolio through the acquisition of VIB in April 2022. This made us a leading platform for commercial real estate with special focus on logistics and office in the German market. Year-on-year, our real estate platform grew by 27% to assets under management of €14.5 billion. The institutional business segment now reached almost the level of €10 billion.
Despite a challenging investment market and signs of a recession, the letting markets are performing well with high take-up volumes noted by the progress. According to the progress, two key factors are driving the office market performance. First of all, the labor market, which means robust and second, the corporate balance sheet, which are predominantly positive and indicate that many companies are relatively healthy while going into a possible recession. In the context of this general uncertainty and the robust fundamentals in the letting market, the office space take up in the big seven cities over the nine months – over the first nine months of 2022 reached nearly 2.8 million square meters, an increase of 29% compared to the same period last year.
For logistics basis, the progress CBRE just announced that vacancy rates across Europe reached 2.3%. That means 50 basis points lower compared to the previous period. And due to the lower availability of space, many tenant inquiries cannot be satisfied at present. The imbalance between supply and demand continues to put positive pressure on rents. Several logistic hotspots recorded a renewed increase in prime rents in the third quarter. This positive letting market development is also reflected by our letting results. We achieved a high letting performance of 296,300 square meters and generated a total rental growth of 4.2% on the platform.
The successful leases represent a total of €37.5 million of annualized rents. Both rents on a per square meter basis for office and logistics increased year-on-year. The platform’s 2022 lease expiry volume fell to just 1% as a result of the strong letting activities and around 73% of lease expire in 2026 or later.
Now looking at the profit and loss statement of the first nine months of 2022, we want to highlight the following: the development of both of our main income streams is nearly similar to the last quarter. The rental income has seen a massive increase since the consolidation of VIB for the first time in the second quarter, which has continued in the third quarter.
On the other side, the real estate management fees saw a sharp decrease as a direct result of the lower transaction activities since the second quarter. Compared to the first nine months of the last year, the net rental income grew to €108.8 million, a plus of 67%, driven by the VIB consolidation and strong like-for-like growth. Together with the recurring fee income of €26.9 million from the institutional segment, the share of recurring income from our two business segments increased to more than 80% compared to last year.
With €76.1 million, the FFO in the nine month result was a bit below previous year FFO, which was mainly the outcome of the lower fee income from transaction. In more detail, the net changes contributed to the development of the FFO year-on-year stem from the decrease of management fees, higher OpEx and an increased net interest result. These increases were almost fully compensated by additional net rental income and profit from associates from the takeover of VIB.
By the end of September 2022, the NAV and adjusted NAV were almost unchanged compared to half year’s results. NAV per share stood at €18.54 and the adjusted NAV per share reached €24.99. As usual, I would like to give you a quick update on our current financial structure. Our main priority is the refinancing of the bridge loan maturing in 2024. Already roughly €100 million were paid back in the third quarter. We plan to refinance the bridge loan via free cash flow from disposals and using the available capacity of secured debt within the DIC Group. We are managing our maturity profile for cited using our existing cash and cash generated from our business activities to meet our debt services.
We see the Green Bond 2026 currently trading at a very high discount to par, which, in our view, is not showing the true value and is probably not reflecting the robustness of our business model. Looking at the covenants of the green bond, we can assure that we have sufficient headroom, especially the covenant ICR shows our ability to meet our interest payments. And we do not see a risk from lower valuation of our portfolio with regards to our LTV figures.
Let me conclude my presentation with our revised guidance for 2022. We confirm the latest updated guidance, including VIB effects on the main income streams. On the transaction side, we have updated our figures, taking into account the low activity in the current market environment. On the acquisition side, we have reached our goal for the commercial portfolio after the takeover of VIB. For the institutional business, we have adjusted our acquisition target to the range of €650 million to €700 million.
For the disposals, we have kept our target of planned disposals for the commercial portfolio, while we were cutting our plans for disposals for the institutional business down to zero. All in all, the funds from operation is now targeted at a range of €114 million to €117 million, which is still an expected growth of 7% to 10% compared to the generated FFO in 2021.
Ladies and gentlemen, thank you for listening to our presentation today, and we are now ready to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question comes from Andre Remke. Please go ahead.
Andre Remke
Yes. Good morning, Sonja. Thanks for the presentation. A couple of questions from my side. First, starting with your comment on property valuation towards year-end that this should be stable. Well, we see already some reactions in the market due to higher interest rates, let’s say, moving up 30, 40 bps higher in yields. What makes you confident that this will not affect your own portfolio with this overcompensated in total by rising CPI-linked rent? This is the first question, please.
Sonja Wärntges
Yes. Good morning, Andre, thank you for the question. As you know, we have our evaluators in place, and they are working on the evaluation. So we are in discussion with them, and we have got the first results there. So we are very confident that they – that the results stay as nearly as the same range as the year before, a little bit higher maybe. So this is very stable. And what makes me confident is that we are in a discussion with the evaluators. And as you know, we need a valuation, not for a fair value accounting. So only for our NAV. And so therefore, we have started the evaluation, and we are nearly close to the end, so to say.
And what makes it happen is that we increased the rents, as you said, via indexations that we have, in total, more than 4% like-for-like growth. And this overcompensates the interest. And on the other hand, we have a very granular and not a very high price portfolio. So we don’t have factors over 30 or something like this in our portfolio. So it’s very stable granular and we see the renewals also with some rent increase, not only coming from indexation and the high amount of renewals, you can see that our tenants stay in the office, in the spaces also the indexation was done. So it’s very healthy on the site and also the evaluators say this and see this in the portfolio.
Andre Remke
Yes, excellent. Thank you for this update. Second question relates on the valuation of the institutional business. So this isn’t included in the adjusted NAV and also for the adjusted LTV is important. So what is your expectation here? Because at least here, you probably see a negative effect from a higher discount rate or I’m completely wrong on that side?
Sonja Wärntges
No, you are not completely wrong. So the valuation for the institutional business is on the [indiscernible]. Yes, and so we are finalizing also this at the moment. But for this, we need the plans for the next years. So this is part of the evaluation there. And we have not finalized them. So this evaluation is not ready yet. But at the end of the day, you are right, it compares to the interest rate and then compares to the don’t know in English [indiscernible]. The [REWE Group] is, we have foreseen from [indiscernible]. So they discuss what’s the right thing will be among themselves, among the IDW at the moment. But at the end of the day, we also think that there will be a loss in the valuation. But we can today, not say how the number will look like there.
Andre Remke
And this is one part of the valuation of the institutional business, what relates also to the insti business is the goodwill? Do you see here what is the status with the discussions on with the phases on this topic. So do you see a confirmation of this goodwill? Or do you see any kind of risk here?
Sonja Wärntges
No. From one hand, we don’t expect that there is no value in the institutional business. So we don’t know the exact number, I cannot say on a serious basis, how it looks like, but we do not expect a number that brings us to a headroom of zero to have the goodwill – to decrease the goodwill. So there is so much headroom here that we don’t see a chance that a goodwill will be payout.
Andre Remke
Okay. Excellent. Then on your path to lower the LTV, how confident are you that you bring this down already, at least on a pro forma basis until year-end via any kind of disposal. Is there a remaining risk? Or you think, well, it’s more or less done?
Sonja Wärntges
No, we have a lot to do until the end of the year. So as we had in the past in the last three years, we always have done most of the business in the last quarter. And so we have also to do a lot in the next 10 weeks. But to say it clearly, we are working on transactions, and we are confident that we do some of them.
But at the end of the day, we can sign them until the end of the year, but we will not have the closing until the end of the year. So what we can say at the end of the year, we have signed and this means on a pro forma basis for the LTV 6%. But at the end of the day, this will happen, and you’ll see it in our reports I think, at the end of Q1 of the next year. And so we expect for end of the year, nearly the same range as we have now at the end of Q3, but the effects we will hopefully get done until the end of the year, which you will see in the beginning of next year will be around about three percentage points, sorry, the right technology.
Andre Remke
Three percentage point lower LTV from the disposals. Did I get it right?
Sonja Wärntges
Yes.
Andre Remke
Perfect. Then there was a further way to go to lower the bridge financing of €400 million. So you highlighted, let’s say, what – how you quoted it consistent and reliable dividend policy. What is your dividend policy here from year-to-year increasing? And also for this year, the FFO will increase, but on the other hand, you have to pay down the bridge. Would it be also in the cards to lower four years the dividend payout to pay down the highly more and more expensive bridge financing?
Sonja Wärntges
So on the one hand, I told my colleagues last week. I think we have a market phase where you have to work much more than in other market phases to get your things done and to reach the goals we have set up here. So this is what we are doing here. And at the end of the day, what we do is we create a lot of options to reach our goals. And therefore, I’m confident that we do the right things and that we can pay the bridge as soon as possible payback from different income streams as I have said, yes.
I cannot say we have finalized this today, but I’m very confident that we will have finalized this until the end of the year. So then I can say more how we will pay back this and in what form and the exact date. But at the end of the day, we will pay back it, and we will do via different transactions, so to say.
On the other hand, I’ve forgotten your second part of the question, sorry. Dividend policy. Yes. As always said, the dividend – we are a dividend-paying company. We see ourselves and our payoff ratios were in the past around about 50% of the FFO, and this is what we also expect for the future. So the dividend comes from – not from the concern outflows, but from the financial outflows. So therefore, we are also very confident that when we as the company ask our annual meeting that they will say until – yes, we’ll follow our suggestion that we also stay with this dividend policy in the future.
Andre Remke
Okay. Excellent. That’s from my side. Thank you very much, Sonja.
Sonja Wärntges
Thank you.
Operator
And the next question comes from Philipp Kaiser. Please go ahead.
Philipp Kaiser
Yes, hello everyone and thank you for taking my question. Just actually three questions left. So first regarding the like-for-like rental growth. Could you just indicate how much of this increase came from indexation of rents?
Sonja Wärntges
Yes. Good morning. So yes, we can indicate it’s nearly 90%.
Philipp Kaiser
Okay. Perfect. Thanks. And then switching to the institutional business and the real estate management fees despite lowing your guidance on that, there are still huge amount of fees to be generated within the last quarter of the year. Is that linked to the one fund you’re not postponed towards the next year and how is the visibility on fee income on that?
Sonja Wärntges
Yes, definitely. So as you said, we have postponed two of the funds, and we are still in process for establishing one fund. And we have come – yes, to a certain point that we can say we – it’s probably makeable until the end of the year. And so therefore, we expect the fees coming from that fund until the end of the year. And therefore, we have the guidance given for our management fees, and we are today very sure that we can reach with it.
Philipp Kaiser
Okay. Thanks. And the last question for my side is with regards to the two assets where Galeria is still a [indiscernible]. I think yesterday, it was in the newspaper that [indiscernible] pointed eyes on 47 Galeria Kaufhof assets and also like the assets in Chemnitz and Leverkusen, are you aware of that? And is that a possible option for those two assets? Or you are kind of favor to do the – after you – by yourselves as you did in the other assets earlier with Galeria?
Sonja Wärntges
To say, clearly, it’s very interesting for me to read a newspaper because I see it then in the newspaper, it was a little bit sarcastic. So to say, clear, we have no discussions with [indiscernible] we don’t know them. It’s very interesting to read it. But at the end of the day, as you know, we had the discussions with Galeria Kaufhof two years ago. They had left Bremen, the Kaufhof in Bremen and until they had left we had a new tenant there. We have now established a tenant.
So also knowing that we have worked with Galeria to renew the contracts two years ago and to establish the cities of Leverkusen, the inner cities of Leverkusen and Chemnitz and to save the work for the people who are working for Galeria, we have made some decisions. But at the end of the day, we cannot do this every two years. So we have worked on other possibilities for these two assets, and we are in discussions with community and with town government and so on. So we have plans there beside Galeria Kaufhof and we will now speak to [indiscernible] if they are really interested.
But on the other hand, there are other tenants who are interested in such things or maybe a totally other usage for the assets. So we are in the planning phase here, but what we have worked in the last two years on that. So we are also confident we are a specialist for commercial real estate that we can do something else with the assets and bring them to – yes, to a new highlight, so to say.
Philipp Kaiser
Okay. Perfect. Thanks a lot. Very helpful. That’s all from my side.
Sonja Wärntges
Thank you.
Operator
And the next question comes from Stefan Scharff. Please go ahead.
Stefan Scharff
Yes. Good morning, Sonja. Good morning, gentlemen. Most questions are gone, but I would like to ask perhaps something has changed with the structure of investors as Asian investors might accept lower yields than investors from Europe or from U.S. Perhaps you can tell a little bit more what you think about the yield development in general and what this could mean for the structure of investors investing in your funds? And the second question is about the logistic funds and the plans here for next year or for the next one or two years as some of the [indiscernible] properties might fit to new logistic funds? Thank you.
Sonja Wärntges
Good morning, Stefan, yes, thank you for your questions. These are the interesting ones although. So as said, logistics is the most interested asset class for investors at the moment. So we also – we have, as you know, established international sales force, so to say, in our institutional business 1.5 years ago because we have around about 180 investors in place here, but most of them are German ones. So this an interesting market for us. We have done a lot there and also a lot of discussions with them, and you’re totally right. At the end of the day, they want to invest in Germany, and they also see Germany as an interested market especially for logistics and light industrial but also for office.
And office, as you can imagine, offices, which are green buildings, but also offices, which we call value-add managed to ESG managed to green name it. So offices with potential where we, as commercial real estate specialists can do something, I call it that way, managed ESG or found new tenants or whatever or in or at first managed ESG and then found new tenants.
And we don’t see a shift in the institutional investor basis, so we have commitments in place and the positive effect of what you have seen that we have no sales in institutional business is that they all want to stay with their assets managed by DIC and are very lucky with them. So at the end of the day, the existing investors want to stay and want to exist, but not until the end of this year. What we heard and also Asian investors are interested we cannot say anything about the U.S. because we have not talked to U.S. investors for the institutional business at the moment.
Stefan Scharff
Okay. And the logistic funds in general and the schedule here?
Sonja Wärntges
Yes. As I said, the two funds are what we want to establish next year is logistic and value add. We have want to do this until the end of the year, but we see no possibility to close it until the end of the year, so we will do it next year, and this is logistic and value-add managed to ESG manage to green.
Stefan Scharff
Okay. Thank you very much.
Sonja Wärntges
Thank you.
Operator
And the next question comes from [indiscernible]. Please go ahead.
Unidentified Analyst
Hi. Good morning and thank you for the transparency and the interesting thoughts. I have a few clarifying questions. Starting with the LTV calculation, just to make sure you fully consolidate both on the value side and the debt side, VIB there?
Sonja Wärntges
Good morning. Yes, you’re right. We are fully consolidated.
Unidentified Analyst
And then if we back out the implied asset values from the adjusted LTV. That implies about €485 million for your institutional business, which on an annual basis, generates about €30 million, €35 million of EBITDA. So that’s a range of 15x to 16x right now on a multiple basis. And I know I’m just giving back off hand, quick calculations here. I’m just trying to understand is that correct? Or if I’m thinking about it completely wrong?
Sonja Wärntges
Yes. That’s actually a multiple of 15x to 16x.
Unidentified Analyst
And [indiscernible] here, for example, which is a larger trades at 7.5 right now. So maybe you could shed some light why your valuation of this institutional business would be double?
Peer Schlinkmann
This is Peer speaking. Maybe I can add some thoughts on this. As Sonja already mentioned, I mean, we are currently in the process of revaluation of the institutional business segment and yes, we see some reduction, as Sonja mentioned, and we’re currently in the process. But nevertheless, we still believe in the transaction market that it will pick up again next year, and we have a clear plan on this.
What we see, what we have in our pipeline, what we can do as transactions next year. So we strongly believe that we are here in a situation that the valuation is on that level, fair from our perspective. But yes, if you take the numbers today and see it in the Q3 results, it’s definitely a different picture, but it’s not a long-term view we have here now, and this is what we are discussing at least on a serial plan here.
Unidentified Analyst
Understood. And of course, we all know that valuations across the real estate space are depressed right now. So I just wanted to understand whether you take a forward look and how the valuation is done basically. Then out of the large portion of debt you repaid between Q2 and Q3 was most of it or all of it at DIC level because there is still some debt at VIB, right, which I’m assuming is also fully consolidated in your balance sheet?
Sonja Wärntges
Yes, around about €700 million is coming from VIB.
Unidentified Analyst
And that’s stable quarter-over-quarter, probably right? So the €200-odd million that was repaid was at DIC level.
Sonja Wärntges
Yes, definitely.
Unidentified Analyst
Great. Look, I will jump back on the queue. If I may ask one last question, and you’ve probably disclosed this in your full year or you will disclose it, you hold an asset on your balance sheet other 100 million loans to related parties. Could you shed a little bit more light on that, please?
Peer Schlinkmann
Yes, we can do. These are related to projects we have financed in the past. And for that, we have given a shareholder loan to related parties. And we expect this to be repaid within the short to mid-term period when these projects are finalized.
Unidentified Analyst
Understood. Last observation would be – it would be very useful, I think, for us to see on your debt maturities, how much of that is VIB versus DIC to better understand the upcoming maturities. Thank you very much for your transparency today, and I’ll jump back on the queue.
Sonja Wärntges
Thank you.
Peer Schlinkmann
Thank you.
Operator
Okay. So at the moment, there seems to be no further questions. [Operator Instructions] And we have another question. It comes from Manuel Martin. Please go ahead.
Manuel Martin
Yes. Thank you. I have two questions from my side, please. First question is on your administrative expenses. I’ve seen that they declined in the third quarter to something like €6.7 million. Could you elaborate a bit on that because that’s quite a shift from €10 million or €12 million in the quarter one and quarter two? And what could we assume as a run rate for the admin expenses?
Sonja Wärntges
Good morning, Manuel, yes. Yes, as written down. So we had the onetime effect in the past. So we don’t have it now. So the run rate is the Q3 number, around about €17 million, €17.5 million, and the onetime hit was around about €10 million.
Manuel Martin
Okay. So run rate is €17 million in nine months. That means that’s something like €5 million to €6 million, €5 million to €7 million, something like that probably per quarter.
Sonja Wärntges
Per quarter?
Manuel Martin
Yes.
Sonja Wärntges
17.5% per quarter.
Manuel Martin
17.5% per quarter on admin expenses that would be higher than…
Sonja Wärntges
The OpEx. We talk about the OpEx in total. So personnel and administrative expenses.
Manuel Martin
Okay. Okay. I see. Understood. Second question, maybe a bit tricky, but on 2023, the next year, do you have any feeling how your markets could evolve there? I know it might be a bit too early in these times, but you have already given an indication that you’re relatively positive on your institutional business. All in all, could you share with us a bit your thoughts on 2023, if it’s not too early?
Sonja Wärntges
Yes, definitely. So we are thinking about the next 1 to 1.5 years on a day-to-day basis, and there are a lot of uncertainties, that’s for sure. But at the end of the day, we have to have our plans and make them. And what we see on the interest side is that we think that the ECB will increase the rate for 2x to 3x, but I don’t think in a way they have done the last two times, so maybe a little bit lower. And I think following the decisions of the Fed, so they will stop and lower them in the first quarter, second quarter next year so that we think that we will have stabilized the interest rate end of Q1, Q2 next year.
And I think if we have stabilized the interest rates and have better picture how the decisions will be done from the Fed and the ECB in the next month. Also, the transaction market on the investment market will come back. So if you have a clear picture how the calculations can be done, you can decide better even if you are an institutional investor and have to decide whether you want to do real estate investments or not?
And then we think that the market will be – investment markets will be back end of Q2, beginning of Q3. I think on a little bit lower level than we have seen in the past for sure, but the indexation and the rental market at the moment is in a good shape. And with the unemployment rates not increasing that much. We don’t see big a decrease for office needs and logistic needs for especially not at all.
And so at the end of the day, we see the markets coming back in the second half next year on a stable basis, I think. And then we think 2024, the interest rates will be stable, maybe decrease a little bit. So a good sign for real estate investment market, especially for commercial real estate. And the logistics markets are there. So we have – I especially have talked a lot with tenants on the logistics side, and they all need space. They don’t have space. And they told me, if you have something, even if it’s 100-kilometer, in the surrounding of 100 kilometer, please let us know. Can we do something? Can you do something for us? So there’s a real need for space and this drives the rents and reduces the yield and also the accepted yields from institutional investors. So therefore, yes, following the inflation, the results in prices, and so we will see in the upcoming months, but I think it will be stabilized mid of next year.
Manuel Martin
Okay. Very helpful. Thank you very much.
Sonja Wärntges
Thank you.
Operator
And the next question comes from Jochen Schmitt. Please go ahead.
Jochen Schmitt
Thank you. Good morning. Sorry, I missed part of the call. I apologize in case you have already addressed my question. It is on rent increases due to indexation. Could you comment on how much of the rent indexation you can realize? Or do you have often discussions with clients about possibly waiving part of the rent indexation, which are theoretically eligible to? That’s my question.
Sonja Wärntges
Good morning, Jochen, no, that question was not there until now. So the question was how much of the rent increases indexation, I answered that with nearly 90%. And your question, so we don’t have discussions, I knew from. So there may be smaller tenant like a cosmetic studio or something like this. But at the end of the day, some of our tenants have even got the second indexation this year, but there are no discussions at the moment. They all pay it. So we realize the indexation we have in the rental income number in the profit and loss.
Jochen Schmitt
Thank you.
Sonja Wärntges
Thank you.
Operator
And the last question comes from Thomas Martin. Please go ahead.
Thomas Martin
Yes. Good morning. Just two quick questions for me left. Also on indexation. Could you remind us the percentage of index leases you have across your portfolio and maybe you can split it between office and logistics that would my first one? And the second question refers to the third party business, the institutional business. I mean we all know that investment market slowed significantly and that no one knows really what’s going on next year or in coming quarters, how the demand will develop. But what would be in worst case, your – based on your current €10 billion asset under management, your recurring FFO assuming no transactions, so no acquisitions, no disposals, just retail recurring number. That would be interesting to you? Thank you.
Sonja Wärntges
Yes. Good morning, Thomas. So to your last question, we have recurring fees from the institutional business of around about €37 million this year. So this is what is there. And as I said before, we have no indication that any of our institutional investors will get away from their commitments or something like this. As you see, nobody will sell anything this year. So this is the run rate also for next year, a little bit higher than. On the other side, I have said that 80% of our income is recurring. So I think you can calculate how much this means in the worst case for this year and transferred into next year, we do not give guidance for something like this, but you can calculate it on these numbers. I’ve forgotten the first question I have to ask. How many contracts are – have indexation? It’s over 90%, I think 92% of our contracts have an indexation clause.
Thomas Martin
Okay. Maybe a follow-up on that. So overall, you would expect that you see an acceleration of that effect rent growth coming from indexation? Yes.
Sonja Wärntges
Yes. I think that the inflation rate will decrease next year because I think we have seen the effects from energy in this year, and we – I don’t have a crystal ball, but I don’t think that we see next year inflation rates of 10% or more than 10%. So they will go down. So also the indexation from the rents will go down.
At the end of the day, this has to air, but our tenants pay the indexation at the moment, and we don’t have indicated that they will not pay and we don’t have indicated that our big tenants or the really interesting tenant for us have an insolvency besides Kaufhof, Galeria Kaufhof, but we don’t have it from the industry or from our office tenants at the moment.
Thomas Martin
Okay. Thank you.
Sonja Wärntges
Thank you.
Operator
Okay. As this was the last question, let me hand back over to Sonja Wärntges for some closing remarks.
Sonja Wärntges
Yes. Thank you very much for being part of our presentation today. And if you have any questions, please contact Max Breuer or Peer Schlinkmann or myself, we are ready for answering the questions. Thank you. Bye.
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