ANNUAL REPORT AAREAL BANK GROUP

Transcription

1 ANNUAL REPORT AAREAL BANK GROUP

2

3 KEY GROUP FIGURES 01 Jan - 31 Dec Jan - 31 Dec 2004 Change Consolidated Income Statement mn mn mn Operating profit Group net income after minority interest income Indicators Cost / income ratio (%) Earnings per share ( ) RoE after taxes (%) Dec Dec 2004 Change Change Portfolio Data mn mn mn % Property financing 22,025 23,352-1,327-6 of which international 13,033 12, Property financing under management 24,698 26,608-1,910-7 of which international 13,033 12, Shareholders equity 1,241 1, Total assets 39,186 38, Regulatory Indicators % % Core capital ratio (German Banking Act) Total capital ratio (German Banking Act) Dec Dec 2004 Rating Fitch Ratings, London Long-term BBB+ A- Short-term F2 F2

4 CONTENTS C O N T E N 4 CONTENTS Key Group Figures Contents I Letter to Shareholders Aareal Bank Group Profile Corporate Governance Our employees The Aareal Bank Share Group Management Report Business and Environment Group Results Segment Reporting Financial Situation Report on Material Events after the Reporting Date Outlook Risk Report Contents II Consolidated Financial Statements Consolidated Income Statement Consolidated Balance Sheet Consolidated Statement of Changes in Shareholders Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements (A) Basis of Accounting (B) Notes to the Consolidated Income Statement (C) Notes to the Consolidated Balance Sheet (D) Reporting on Financial Instruments

5 T S 5 (E) Segment Reporting (F) Other Explanatory Notes (G) Executive Bodies of Aareal Bank AG (H) Offices Held by Employees of Aareal Bank AG ( I ) Offices Held by Members of Management Boards of Aareal Bank AG s subsidiaries ( J) List of Shareholdings Auditors Report Report of the Supervisory Board Our Offices Financial Calendar Imprint Aareal Bank Group Locations

6 LETTER TO SHAREHOLDERS LETTER TO

7 SHAREHOLDERS 7 LETTER TO SHAREHOLDERS Dear shareholders, business associates and Aareal Bank staff, For Aareal Bank Group, 2005 was a year characterised by strategic decisions with long-term impact. Harnessing all our strengths, we embarked on our strategic review and realignment (where appropriate) of the Structured Property Financing, Consulting/Services and Property Asset Management divisions. We aim to further enhance our position as a leading international property specialist. Specifically, the realignment of Aareal Bank Group is based on a six-point programme, as described in more detail below. Our activities during the year under review focused on substantially expanding new business in real estate financing, which we increased by 25% to 7.1 billion. An early success for the programme was the optimisation of our business organisation and process structure, with a view to attaining a long-term increase in efficiency for the future. We also conducted an extensive analysis of the loan portfolio. The resulting additional loan loss provisioning impacts significantly on our full-year results. The sale of two nonperforming loan (NPL) portfolios combined with additional individual disposals of an aggregate 1 billion enabled us to substantially reduce our NPL volume to billion. This gives us additional room for manoeuvre in further developing our strategic new business. from left to right: Norbert Kickum, Dr. Wolf Schumacher, Hermann J. Merkens, Christof M. Schörnig, Thomas Ortmanns

8 LETTER TO 8 Following the review of all of the Group s investments, the first important steps were taken. The sale of the shares in Aareal Hypotheken Vermittlungs GmbH and Aareal Hypotheken Management GmbH, plus the closure of Via Capital Ltd. marked the first achievements in reducing the level of complexity within the Group. In November 2005, Aareal Bank AG strengthened its capital base by means of a 10 % capital increase. The capital increase (which was carried out excluding shareholders pre-emptive subscription rights) was fully subscribed to by Aareal Holding Verwaltungsgesellschaft mbh, thus demonstrating its confidence in our business model and strategic realignment. The Aareal Bank share performed well in the 2005 financial year. As at 31 December 2005, the share price had climbed % over year-end 2004, to Our aim is to reinforce our investors confidence in Aareal Bank. We will achieve this by consistently implementing our six-point programme. The international focus and expertise of our staff forms the basis for our continued success in positioning Aareal Bank Group in the markets. Yours sincerely The Management Board Dr. Schumacher Kickum Merkens Ortmanns Schörnig

9 SHAREHOLDERS 9

10 AAREAL BANK GROUP PROFILE AAREAL BANK

11 GROUP PROFILE 11 AAREAL BANK GROUP PROFILE Aareal Bank Group, with its Wiesbaden-based parent Aareal Bank AG, is one of the leading international property specialists. Building on a long-standing track record in international commercial property finance, the Group has established a strong presence in Europe and North America, and is selectively expanding into new regional markets, such as Russia or Asia. Our business model comprises three core business divisions, with Aareal Bank Group s business activities centred on Structured Property Financing, which brings together all of its property lending activities. Aareal Bank and its major subsidiaries and financial investments Structured Property Financing Aareal Hyp AG Wiesbaden Aareal Bank France S. A. Paris Aareal Estate AG Wiesbaden Aareal Financial Services USA Inc., New York Aareal Financial Service spol. s r.o, Prague Aareal Financial Service Polska Sp. z o.o., Warsaw Aareal Financial Services (Singapore) Pte. Ltd., Singapore Aareal Valuation GmbH 1) Wiesbaden This overview is based on information as set out in the list of shareholdings, which is available on the Internet, at 1) Spun off with effect from 01 January ) Aareal Hyp AG will be integrated into Aareal Bank AG, with retrospective effect from 01 January Consulting / Services Aareon AG Mainz Aareal First Financial Solutions AG, Wiesbaden Deutsche Bau- und Grundstücks AG, Berlin Immobilien Scout GmbH Berlin Innovative Banking Solutions AG, Wiesbaden Property Asset Management Aareal Asset Management GmbH, Wiesbaden Aareal Immobilien Kapitalanlagegesellschaft, Wiesbaden Deutsche Structured Finance GmbH, Frankfurt/M. Our strength lies in the broad diversification of our portfolio, by region and by sector. We provide property financing solutions in more than 20 countries. Our customer base includes top international and domestic property investors and developers. Employing local experts is of great importance to us. We also have at our disposal industry specialists for logistics, shopping centre and hotel financing packages. This combination of local market expertise and specific industry know-how enables us to offer the best possible financing concepts, designed to meet the specific requirements of our international clientele, in all of the markets in which we operate. In addition, we pursue a very efficient buyand-manage strategy to administer our loan portfolio in the best possible manner. For this purpose, we combine the targeted acquisition of financing exposures with the transfer of selected credit risks onto the capital market by means of securitisations, true sale placements and syndications, which are conducted by our Credit Treasury unit. We have also started to establish ourselves as a regular issuer of covered bonds 2), having issued our first jumbo Pfandbrief at the end of January Our Consulting/Services division offers a comprehensive range of services for managing residential property portfolios and processing payment flows for the institutional housing sector.

12 AAREAL BANK 12 Property Asset Management, Aareal Bank s third business division, is the specialist segment within Aareal Bank Group which initiates, places and manages property funds (closed-end and open-ended) on behalf of institutional investors. corporate structure provides us with the ability to efficiently adjust to new market conditions, and to consistently take advantage of market opportunities. Our committed, highly qualified, and internationally focused team of employees combined with our flexible, mid-sized STRUCTURED PROPERTY FINANCING Entity / Unit Activities Products and Services Aareal Bank, Real Estate Structured Finance unit Aareal Bank s core business activities Combined teams comprising market and sector experts at 19 locations around the world International Markets Optimum, tailor-made property financings for office, logistics, retail, hotel, and residential properties in selected markets covered: Structured Real Estate Finance Development Finance Construction Loans Client coverage in countries where Aareal Bank does not maintain a local presence Coverage of international investors Expert teams: Hotel Finance Logistics Finance Retail Finance First-class hotels in top locations Logistics properties Shopping centres, retail space Aareal Hyp AG Aareal Estate AG Aareal Valuation GmbH Mortgage bank / covered bond issuer; integration and merger into the parent company, Aareal Bank AG, to take place during the first quarter of 2006, within the framework of the new German Pfandbrief Act (Pfandbriefgesetz) Specialist entity for the marketing of troubled commercial properties in Germany Property surveyors covering all regions within the German property market Lending: commercial properties and housing industry Funding: Jumbo issues, mortgage bonds and publicsector covered securities Marketing of properties Expert valuation of properties Monitoring of construction properties Consulting Research

13 GROUP PROFILE 13 CONSULTING / SERVICES Entity / Unit Activities Products and Services Aareon AG Aareal Bank, Institutional Housing Business Aareal First Financial Solutions AG Deutsche Bau- und Grundstücks AG Immobilien Scout GmbH Innovative Banking Solutions AG Europe s leading consultancy and systems house for the management of residential and commercial property Market leader in payment solutions for property companies Development and implementation of integrated payment solutions for property companies Manager of extensive property and trust assets; providing asset management and other services to municipalities, Federal states and institutional players in the German housing market Germany s leading internet property platform held by Aareal Bank as a financial investment Leading developer of add-ons to the mysap-banking software products from SAP AG held by Aareal Bank as a financial investment Provider of IT services to the property management sector GES Blue Eagle Mareon IT services with a high degree of integration in client s environments Payments Deposit-taking Financing Handling of deposits / managing operating costs BK 01 BK XL Urban development Municipal property Property management Property services Online platform for property offers, including Residential and commercial property Land ibs-alp Automatic Loan Processor ibs-cyt Capital Yield Tax ibs-mbs Mortgage Banking Solution ibs-srt Standard Reporting Tool, etc. PROPERTY ASSET MANAGEMENT Entity / Unit Activities Products and Services Aareal Asset Management GmbH Aareal Immobilien Kapitalanlagegesellschaft GmbH Deutsche Structured Finance GmbH Holding company for asset management activities, providing a broadly-diversified range of investments in open-ended and closed-end property funds to institutional investors Initiator of special property funds under the German Investment Act, investing in international properties which are broadly diversified across different property types; part of Aareal Asset Management GmbH Specialist institution focused on arranging structured finance packages and real property investments in enterprises operating in selected high-growth sectors Closed-end funds including Aareal Europe Fund No. 1 Aareal Italy Fund Aareal EuroLogistics Fund Aareal German Residential Fund Special funds including Aareal Nordic Fund Mutual funds including Aviation / aircraft Renewable energies (wind parks) Special properties (logistics, technology parks, etc.)

14 CORPORATE GOVERNANCE CORPORATE

15 GOVERNANCE 15 CORPORATE GOVERNANCE The effect of the German Corporate Governance Code, introduced in 2002, has been to enhance the transparency of the rules concerning the management and monitoring of German listed companies. Containing recognised standards for good and responsible governance, the purpose of the Code is to strengthen the confidence of domestic and international investors, shareholders, clients, employees, and the public, in the quality of German corporate governance. Given the particular importance of avoiding conflicts of interest from a bank s point of view, Aareal Bank has adopted additional principles that go beyond the recommendations of the German Corporate Governance Code, which are stipulated in Chapter III of the Aareal Bank AG Code. These additional principles comprise the inclusion of senior Group executives, the inclusion of conduct outside the work environment, rules governing business transactions by the Management Board, and further rules on conflicts of interest. Aareal Bank AG has complied with the recommendations of the German Corporate Governance Code (as amended on 02 June 2005), without exceptions, throughout the financial year For the first time, this annual report includes the individual remuneration of the Management and Supervisory Boards for the period under review. The Management Board and Supervisory Board have signed a Declaration of Compliance, pursuant to section 161 of the German Public Limited Companies Act, in December 2005, and published it on the Aareal Bank website. The wording of said Declaration of Compliance is shown, together with the Internet address, after this overview of Aareal Bank AG s corporate governance. Management Board The bank has published personalised details regarding the remuneration of members of the Management Board for 2005 for the first time, in line with the recommendations by the German Corporate Governance Code. In addition to the cash component, a longterm compensation component was added to the remuneration package for the Management Board. This long-term component is paid in the form of virtual shares in Aareal Bank AG, which are granted at defined points in time, at the then prevailing share price. Following a three-year holding period starting with the date on which such virtual shares are vested, disposals are permitted within a further three years after the holding period. Supervisory Board The bank has published personalised details regarding the remuneration of members of the Supervisory Board for 2005 for the first time, in line with the recommendations by the German Corporate Governance Code. All members of the Supervisory Board receive a base remuneration, in a fixed amount. For the Chairman and Deputy Chairman, this base remuneration is increased by a set factor.

16 CORPORATE 16 In addition to said fixed base remuneration, members of the Supervisory Board receive a fixed remuneration for participation in Supervisory Board committees, by virtue of their membership in each committee. Moreover, members of the Supervisory Board receive a variable remuneration component, which is linked to the dividends paid. The list shown here only includes remuneration received in the capacity of being a member of the Supervisory Board. To facilitate comparison amongst the members of the Supervisory Board, the list does not include the salaries paid to the employee representatives. The remuneration of the Supervisory Board is analysed below: Fixed Remuneration for Total remuneration committee work (incl. VAT) 1) from 15 June ) before deduction of 30 % withholding tax for Supervisory Board members (section 50a (1) and 50a (2) of the German Income Tax Act) and 5.5 % solidarity surcharge 3) until 15 June 2005 Hans W. Reich 54,000 49, ,712 Christian Graf von Bassewitz 36,000 21,950 67,222 York-Detlef Bülow 36,000 10,800 54,288 Dr. Richard Brantner 18,000 40,200 67,512 Tamara Birke 18,000 20,880 Manfred Behrens 1) 9,750 11,310 Prof. Dr. Johann Eekhoff 18,000 20,880 Wolfgang Fauter 18,000 7,200 29,232 Erwin Flieger 18,000 10,800 33,408 Lutz Freitag 18,000 20,880 Dr. Friedrich-Adolf Jahn 18,000 20,880 Ralf Kupka 18,000 7,200 29,232 Dr. Peter Lammerskitten 18,000 19,800 43,848 Jacques Lebhar 2) 18,000 12,303 Kurt Pfeiffelmann 18,000 7,200 29,232 Klaus-Peter Sell 18,000 7,200 29,232 Jürgen Strauß 3) 8,250 11,550 22,968 Wolf R. Thiel 18,000 14,900 38,164 Prof. Dr. Dr. h.c. mult. Hans Tietmeyer 18,000 20,880 Rainer Wahl 18,000 7,200 29,232 Dr. Jürgen Westphal 18,000 7,200 29,232 Anja Wölbert 18,000 20,880 Total 450, , ,407

17 GOVERNANCE 17 Declaration of Compliance in accordance with section 161 of the German Stock Corporation Act (AktG) The Management Board and Supervisory Board of Aareal Bank AG declare, in accordance with section 161 of the AktG, that: 1. Aareal Bank AG has complied with the recommendations of the Government Commission German Corporate Governance Code (as amended on 21 May 2003 and, with effect from 02 June 2005, as amended on that date) since the last Declaration of Compliance was issued in December 2004; in each case, except for the recommendations on individualised disclosure of remuneration for members of the Management Board and Supervisory Board. These latter recommendations will be adopted for the first time in the Company s annual report for the financial year Aareal Bank AG will in future comply with the recommendations of the German Corporate Governance Code (as amended on 02 June 2005) without exceptions. Aareal Bank AG adopted its own Corporate Governance Code as early as The bank s Code has been adapted to incorporate amendments to the German Corporate Governance Code; it goes far beyond the recommendation of the Government Commission. For further details on the Corporate Governance Principles of Aareal Bank AG, please refer to our website: Wiesbaden, 01 December 2005 The Management Board Dr. Schumacher Kickum Merkens Ortmanns Schörnig The Supervisory Board Hans W. Reich (Chairman)

18 OUR EMPLOYEES OUR EM

19 PLOYEES 19 OUR EMPLOYEES The implementation of the six-point programme that forms the basis of the realignment of Aareal Bank Group has a significant impact in terms of personnel. At the reporting date, 31 December 2005, the Aareal Bank Group employed a total of 3,160 people, down 66 on the previous year-end figure (31 December 2004: 3,226). Last year we conducted an overhaul of Aareal Bank AG s organisational structure. This will result in a reduction of 253 in staff positions within the parent company by the year We will accomplish the necessary job cuts in a manner as socially responsible as possible. We reduced the first management level considerably, from 51 managers to 27. The objective of this measure was to create an effective and efficient first management level, as well as optimising the overall managerial scope and processes. This was accompanied by assigning more responsibility for operative issues. By raising the level of their individual competencies, managers and staff alike should be able to act in an entrepreneurial and autonomous manner. Strengthening the dedication of our workforce In the financial year under review, a modified version of the bonus system that had previously applied only in certain parts of the bank was extended throughout the entire structure, within the scope of a tran- sitional company agreement. Remuneration for first-level managers continues to comprise a cash component and a share-based component. In parallel, we developed a new, modern assessment system during the period under review, as well as a target agreement system for our non-tariff employees. The purpose of these tools is to strengthen the service and profit orientation of our staff, improve their identification with Aareal Bank, and enhance employee participation in the bank s success. Finally, we successfully negotiated the necessary company agreements with the Works Council during the course of last year. These will be introduced at management level in 2006, and implemented for all employees starting in Training Our training activities focus on promoting and securing new recruits from amongst our own ranks. Once we have the necessary environment in place, support measures for our staff will be expanded further next year and will be a major focus of our human resources activities. We accepted trainees from 13 countries into the Aareal Academy during Twelve trainees were offered employment contracts by the bank, following the successful con-

20 OUR EM 20 clusion of their trainee programmes. The content of trainee programmes was meanwhile realigned to meet future requirements: the objective being, to tailor content to the individual, in order to secure a successful start in property financing following the oneyear educational period. In addition to sponsoring new talent within the bank, we also support general university education in Europe. Last year, we sponsored a junior professorship at the European Business School (ebs). We also set up a partnership with Cambridge University in the UK. As an international property finance house, we are committed to an international business culture. This is also evident in the broad range of home countries that our staff come from. Aareal Bank employed staff from 29 different countries last year. Thanks and appreciation The Management Board would like to take this opportunity to express its sincere thanks to the staff of Aareal Bank Group, who have assisted in the bank s realignment with their high level of commitment and expertise. We would also like to thank the members of the Works Council and the representative committee of executive staff for their active cooperation at all times.

21 PLOYEES 21

22 THE AAREAL BANK SHARE THE AAREAL

23 BANK SHARE 23 THE AAREAL BANK SHARE 2005 was characterised by the strategic realignment of the Aareal Bank Group. The strong performance of the Aareal Bank share price in 2005, and since the beginning of 2006, has clearly demonstrated our investors confidence in Aareal Bank s business model, and its management. We would like to express our thanks to our shareholders for maintaining their trust. Key data on the Aareal Bank share The Aareal Bank share is included in the MDAX index. Moreover, since 01 January 2003, Aareal Bank has been included in Deutsche Börse s Prime Standard segment. Companies included in the Prime Standard are required to meet more demanding transparency criteria, in line with international requirements. Key data Share price ( ) 1) Year-end price High Low Book value per share ( ) Dividend per share ( ) Earnings per share ( ) Market capitalisation ( mn) 2) 1, ISIN DE WKN (German Securities ID) Quote symbols Deutsche Börse Bloomberg ARL ARL GR 1) Xetra closing prices 2) Based on Xetra year-end prices Reuters ARLG.F Issued share capital (number of bearer unit shares) 42,755,159

24 THE AAREAL % % Shareholder structure Aareal Holding Verwaltungsgesellschaft mbh 8.94 % Bayerische Beamten- Lebensversicherung a.g % Schweizerische Lebensversicherungsund Rentenanstalt 6.68 % Versorgungsanstalt des Bundes und der Länder 6.06 % Bankhaus Lampe KG 5.25 % Deutscher Ring Gruppe 2.74 % AGF Holding S.A % Condor Lebensversicherungs-AG Share performance In the period between 30 December 2004 and year-end 2005, the Aareal Bank share price rose by % to Compared with the share price of at the time of listing (16 June 2002), this equates to a % performance at the end of the 2005 financial year (excluding dividends). A shareholder who had invested 10,000 when the share was first listed could have seen his invested capital grow to 18,694, including and reinvesting the dividends. This represents an annualised return of roughly 19 %. Free float Aareal Holding Verwaltungsgesellschaft mbh Shareholder Structure In November 2005, Aareal Bank AG strengthened its capital base by means of a 10 % capital increase, which was fully subscribed to by Aareal Holding Verwaltungsgesellschaft mbh (excluding shareholders pre-emptive subscription rights). During the course of the year under review, the Aareal Bank share price ranged between a low of (17 May 2005) and a high of 32.64, which was reached on 25 November 2005 following the publication of major initial achievements with respect to the realignment of Aareal Bank Group. Overall, the Aareal Bank share outperformed the overall market (as measured by the HDAX 110 index)* by 3.9 % in * The HDAX 110 is one of Deutsche Börse s extended selection indices; it comprises the constituents of the DAX, MDAX, and TecDAX indices. Thus the HDAX is a broader variety of the DAX, covering all sectors and comprising the shares of the largest companies listed in the Prime Standard segment. The shareholders of Aareal Holding acquired 3,886,832 shares, at a price of per share. Aareal Holding now holds a % stake in the 42,755,159 notional no-par value bearer shares ( bearer unit shares ) of Aareal Bank AG; the remaining % are in free float. Following a year-end price of 32.07, the performance momentum carried over into the current financial year, reaching as at 31 January 2006.

25 BANK SHARE Relative performance of the Aareal Bank share price (%) SHARE PRICE SINCE LISTING Aareal Bank Investor Relations and coverage 21 investment banks covered Aareal Bank in their research during 2005; at year-end, eleven banks recommended the share as a buy or outperformer, with a further seven rating it as neutral or hold. Only one bank assessed the share as reduce or sell Assessments by analysts 17 Dec Oct Aug Apr Feb Jun Feb Dec Oct Aug Jun Apr Dec Oct Aug Jun Apr Feb Dec Oct Aug Jun 02 SHARE PRICE PERFORMANCE IN Positive Neutral Negative Dec Jan Apr Mar Feb May Aug Jul Jul Sep Oct Nov Dec 05 Numerous meetings and intensive discussions with investors and analysts during the year have demonstrated that our business model and strategic realignment are transparent and convincing. Aareal Bank share price HDAX 110 Prime Banks Performance Index

26 GROUP MANAGEMENT REPORT GROUP MANAG

27 EMENT REPORT 27 GROUP MANAGEMENT REPORT The objective of our strategic realignment is to further enhance our position as a leading international property specialist. Overall, 2005 was defined by numerous measures designed to achieve this objective, set out in a six-point programme. We have already achieved notable success on all points. Business and environment Aareal Bank focuses its business activities on international financing solutions in its Structured Property Financing division, as well as on Consulting/Services and Property Asset Management. In the following section we will analyse property market developments, and outline the re-orientation of Aareal Bank Group that we embarked upon regardless of these developments. International property markets Based on an ongoing, targeted and careful assessment of certain international property markets, we continued to pursue our internationalisation strategy during 2005, with a view to reducing dependency on individual property cycles through regional and product-specific diversification. The downward trend in the German property market which incorporates sub-markets, in different stages of development has been checked. International investors increasingly sought exposure to the German market in This shows the positive stance of foreign investors vis-à-vis the German property market. In fact, this positive attitude grew stronger in the course of the year, with significant investments predominantly in large residential property portfolios, but also in logistics, retail, and selected office properties. We have achieved a broad level of diversification in new commitments across the various property types, and are now concentrating exclusively on selected addresses in urban areas. The volume of new business remained at the levels seen in Our target figure for new German commitments for the current financial year lies between 800 million and 1 billion. The groundwork carried out in Italy in recent years has paid off. The bank attained a particularly favourable position on the market, which we have succeeded in expanding further. The Italian property market has stabilised at a high level. The ongoing rise in the number of international investors provides for a liquid market, and cities such as Rome, Milan and Naples in particular, continue to attract demand. The economies in the Nordic region remain attractive for property investors as well as for users. The investment markets reached another all-time high last year. In particular, momentum on the Swedish market was greater than expected stimulated by the growth in the Swedish economy.

28 GROUP MANAG 28 Denmark was characterised by high housing market demand in the greater Copenhagen area, resulting in a considerable rise especially in residential property financings. In the course of our ongoing Finnish business, we provided two large-volume residential and retail financings there. We continue to regard the Scandinavian economies as one of our core markets. After Sweden, Denmark and Finland, we expect to be offering financings in Norway as well as in the Baltic States in the future. We also increased new commitments in the UK. Britain continues to be characterised by intense competition, compared with Continental Europe, with strong investments and demand for floor space. In line with standard investment criteria, London is ranked first amongst global office locations. We are forecasting a slightly positive development overall in UK property markets. We increased the volume of new commitments in the US, as planned. Due to the size of the market, we will also continue to adopt a selective approach generating sufficient financing possibilities to allow for a modest and sustainable expansion of our business there. We consider the Northeast and the Southwest to be the most attractive US markets at present. Market development in Canada is positive. We expanded our portfolio, and provided for the first time a large-volume office property financing solution. Intensive competition continues to define the Belgian property market. We believe that retail and logistics properties offer potential for positive development. On the other hand, the office market proves difficult. Accordingly, the volume of new commitments in this market was down once again on the previous year. The property market in France has performed well, especially in the retail sector. Against the background of a stable office market, and despite the fall in rental income in recent years, the Parisian office property market (in particular) remains interesting for investors and users alike. New commitments in France were therefore up on the previous year s level. Business development on the Spanish property market has been similar to France. Robust development in the retail sector, as well as a stable office market, is reflected in the increase in our new commitments. Due to our cautious assessment of the Dutch market, and the competitive pressure that exists there, the volume of new commitments was down on the previous year. Nonetheless, the recovery in the Netherlands that was evident in 2005 should impact positively on the property market there.

29 EMENT REPORT 29 Development of the international property financing portfolio volume by region ( mn) mn 3,000 2,000 1, United Kingdom Italy Sweden USA / Canada France Netherlands Denmark Belgium/ Luxembourg Other* Central Eastern European Countries Spain / Portugal * Finland, Mexico, Austria, Switzerland, Turkey and Asian countries Once again, our investments in the Central and Eastern European (CEE) property markets exceeded the levels of the same period of the previous year. We have an active local presence in the Czech Republic and in Poland. We also finance properties in Slovakia, and since 2005 in Russia (exclusively in the greater Moscow area). Investors, especially from Austria, Germany and Ireland, were active in these markets during We plan to gradually increase our exposure to the Moscow and St. Petersburg markets during 2006, with selected new business designed exclusively for international investors. The Swiss property market is characterised by a high level of stability, whereby the competition for property financing has increased significantly. Due to our unchanged ambitious target returns, we therefore redu-

30 GROUP MANAG 30 ced the volume of commitments there in 2005, compared with the previous year. We consider Turkey an attractive market: we have been active there since 1999, and opened a representative office in Istanbul last year. International property investors consider Turkey to be a very promising investment location. Demand for property investments and financing has increased immensely and, in our opinion, will have a particularly positive effect on investment activity in the years ahead. The focus is on the cities of Istanbul, Ankara, Antalya and Izmir. Our expertise in hotel and shopping centre properties underlines the excellent position we command in this growth market. We conducted our first hotel financing project in Mexico, where we supported the investment activities of a long-standing customer in this country. Our Singapore office, which we established in 2004, is operating a successful advisory service for hotel investors in the Asia-Pacific region. We expanded our advisory activities according to plan. As a consequence of our market entry in property financing, for which we have been preparing since 2004, we participated in a hotel financing project, and have given an initial confirmation for a financing in the People s Republic of China. With target aggregate new commitments for the current financial year across all commercial property finance markets at up to 7 billion, we are looking for balanced, high-quality growth. Realignment programme for Aareal Bank (six-point programme) The strategic realignment that we embarked upon in April 2005, and which is reflected in a six-point programme, was significant for the course of business last year. 1. New business growth and strengthening regional diversification We increased new business during the 2005 financial year by 25%, to 7.1 billion, clearly exceeding the previous year s levels. We acquired our new business in more than 20 countries across three continents. The opening of a representative office in Turkey emphasises our strategy of further diversifying our international activities. We also underwrote initial financings in the People s Republic of China, and in Mexico during the period under review. On 14 November 2005, we appointed Norbert Kickum as a new member of the Management Board; he has assumed responsibility for all of Aareal Bank s decentralised and central market units in the property financing business.

31 EMENT REPORT Reducing the non-performing loan portfolio (NPL) We carried out a comprehensive audit of our loan portfolios during the 2005 financial year. This operation yielded additional write-downs on claims and provisioning requirements totalling 273 million, which has impacted significantly on the results in the financial statements presented. On this basis, we expect risk costs to return to normal as of the current financial year. The sale of two non-performing loan (NPL) portfolios combined with additional individual disposals enabled us to substantially reduce our NPL inventory during the year under review, by an aggregate 1 billion, to billion. 3. Leveraging our mid-sized corporate structure During 2005, we started to review all of Aareal Bank s investments with regard to the bank s core business activities, with the purpose of reducing the complexity of the Aareal Bank Group and thus to leverage our mid-sized corporate structure. We have already implemented important milestones in reducing Aareal Bank Group investments. By disposing of our Aareal Hypotheken Vermittlungs GmbH and Aareal Hypotheken-Management GmbH subsidiaries at the end of 2005 and the beginning of 2006 respectively, we have parted with our services for private customers in our Con- sulting /Services division. We suspended the operations of the Via Capital Ltd. property investment banking subsidiary during the period under review. Additionally, we are in the process of combining all of our asset management activities. We embarked on a realignment process in the housing sector in the second half of 2005, with the purpose of coordinating the individual units Aareon AG, Aareal First Financial Solutions AG and the bank s institutional housing sector business - more closely, and strengthening the bank s market position at the same time. We have requested the granting of a licence for Aareal Bank AG to issue Pfandbriefe following the introduction of the new German Pfandbrief Act on 19 July It will be granted, provided the mortgage bank subsidiary Aareal Hyp AG is reintegrated within the parent company. We will achieve this during the first half of 2006, with the integration to take retrospective effect from 01 January This measure will considerably expand the scope of Aareal Bank AG s funding mix. We want to establish our presence on the market as a regular issuer of jumbo mortgage bonds. Our medium-term objective is to increase the share of mortgage bonds relative to Aareal Bank Group s entire volume of property financing from currently 10 % up to between 40 % and 60 %.

32 GROUP MANAG Upgrading the organisational structure Aareal Bank s entire organisational structure has been realigned. In an initial step, a first management level with stronger operational responsibilities was established, with effect from 01 July This level will now comprise only 27 managers, as opposed to 51 previously. Staff numbers at the parent company are set to be reduced by a total of 253 to 1,249 by the end of At the same time, we will combine our German locations for structured property financing, offering the services in future from our offices in Wiesbaden, Munich, Berlin and Hamburg. Additionally, a considerable reduction in interfaces, and investment in the IT infrastructure, will lay the groundwork for more efficient procedures. A fifth new Management Board portfolio headed by Thomas Ortmanns, who was appointed as a new member of the Management Board as at 01 September 2005 will assume responsibility for the further optimisation of workflows and the bank s organisational structure. 5. Emphasising a modern corporate culture To ensure that we exploit market opportunities swiftly and flexibly, we want to support our staff in making decisions within the scope of decentralised, entrepreneurial structures, and to enable them to assume a more active role in decision-making processes. We are devoting special attention to the international trainee programme at the Aareal Academy, as well as providing a broadly diversified training concept that is designed to support all Aareal Bank employees. 6. Transparency in managing our business We are undertaking a series of measures with a view to reinforcing the trust of investors and staff, also aiming at a more professional management of our public profile. This is emphasised by the appointment of a new Group Press Officer, and the strengthening of capital market-oriented communication through a dedicated Investor Relations unit. For the first time, the financial statements will include the individual remuneration of the Management and Supervisory Boards for the period under review. This measure, along with the resolution by the Supervisory Board to reduce its membership from 21 to 12 members, emphasises amongst other things the commitment of the corporate executive bodies to the principles of good corporate governance.

33 EMENT REPORT 33 Group results The strategic realignment of the bank and specific market developments are both reflected in the results for the 2005 financial year. This applies particularly to the review of our loan portfolios. Conducted as part of the realignment process, this had an impact on Group results for 2005: a net loss after taxes and minority interest of 55 million, after 129 million in Net interest income of 419 million fell short of the previous year s level of 441 million. This was due to lower risk-weighted assets, as a result of the accelerated reduction of exposures which are no longer in line with our strategy. Net commission income was up 7.6 % on the previous year, from 157 million to 169 million. This increase was largely due to higher income in the Consulting /Services division, which however implied higher administrative expenses. Ineffective portions of hedges, which we had recognised in net trading income in the past, are now reported in a separate item on the income statement. The net result from hedging relationships amounted to 2 million (2004: -9 million). Net trading income of -25 million (2004: -18 million) was attributable mainly to expenses for credit derivatives used for synthetic securitisation and to the measurement of standalone derivatives. Results from non-trading assets grew from 30 million to 46 million, largely attributable to the realisation of securities from the available-for-sale portfolio. The net result from investments accounted for at equity ( -10 million; 2004: -16 million) comprises the measurement and results of minority interests held. The -8 million result from investment property (2004: -15 million) contains property measurement effects, in an amount of -16 million. Administrative expenses rose by 10.7 %, from 363 million to 402 million. In addition to higher staff costs and ongoing realignment expenditure (with a focus on IT), consultancy costs related to NPL transactions contributed to this increase. Within the Consulting / Services division, this item also comprises higher restructuring costs. Furthermore, to ensure comprehensive transparency of our business activities in the financial statements presented, we consolidated a number of entities for the first time. This resulted in an increase in administrative expenses by approx. 6 million, with higher income recognised in net other operating income/expenses. Net other operating income and expenses include -34 million in property measure-

34 GROUP MANAG 34 ment, in addition to approx. 6 million in income from first-time consolidation (as discussed above), and income upon the disposal of a property amounting to approx. 8 million. The item also comprises restructuring charges incurred within the scope of the realignment. Net other operating income and expenses amounted to -6 million (2004: 15 million). Profit before taxes thus amounted to -88 million (2004: -195 million). Taking into account a net tax refund claim of 52 million (comprising 25 million in current taxes and a net deferred tax assets of 77 million), the Group net loss excluding minority interest amounted to 55 million. Segment Reporting Structured Property Financing Our Structured Property Financing division comprises all of Aareal Bank s property finance activities: structured commercial property finance, portfolio financing and advisory services. Segment result Reflecting the extensive realignment process, and particularly the audit of the bank s loan portfolios, the division s result after taxes amounted to -32 million, after -109 million in Net interest income was down slightly, by 4.0 %, from 400 million to 384 million. This was due to lower risk-weighted assets, as a result of the accelerated reduction of exposures which are no longer in line with our strategy. Net commission income of 22 million almost matched the previous year s figure of 24 million. Administrative expenses rose by 10.3 %, from 184 million to 203 million. In addition to higher staff costs and the impact of first-time consolidation (as discussed above), ongoing realignment expenditure (with a focus on IT), and consultancy costs related to NPL transactions contributed to this increase. Profit before taxes thus amounted to -78 million (2004: -193 million). Business development We consistently pursued our internationalisation strategy throughout the 2005 financial year. Having established a new representative office in Turkey, we now have a presence in 13 other European countries outside of Germany, as well as in the US and Asia, and provide property financing solutions in more than 20 countries.

35 EMENT REPORT 35 We operated a targeted buy-and-manage strategy, which further optimised the regional diversification of our portfolio in the year under review. For our German business, this meant the sale of two portfolios of nonperforming loans (NPL), which had the effect of enhancing our portfolio structure and freeing up capital for profitable new business. we have achieved in focusing on our core business. The broad diversification, by country and types of property, is very much in line with Aareal Bank s business model. Analysing new business generated by region, we were most successful in Italy ( 1.7 billion), followed by Scandinavia ( 1.1 billion), Germany ( 1.0 billion), and USA /Canada and France (each approx. 800 million). * Mexico, Poland, Russia, Czech Republic, Slovakia, Turkey and Asian countries New committments New commitments during the year under review totalled 7.1 billion, up 25.4 % on the previous year. International new business rose by 31.4 %, to 6.1 billion, whilst new business in Germany diminished slightly, by 2.1%, to 1.0 billion. The marked increase in new business demonstrates the success Consulting / Services The Consulting / Services division comprises advisory and other services for the institutional property industry, as well as other services. Up to the end of 2005, the division also comprised services for the retail business. Segment result Switzerland / Austria (3 %) Spain / Portugal (4 %) Benelux (4 %) United Kingdom (8 %) New commitments by country (%) 01 Jan - 31 Dec 2005 Other * (6 %) Italy (24 %) Scandinavia (15 %) The result after taxes in this segment deteriorated in 2005, from -2 million in 2004 to -5 million. Net commission, the segment s most important source of income, increased by 5.4 % to 177 million. Administrative expenses rose by 14 million to 186 million. This item was influenced in particular by restructuring costs. Business development France (11 %) USA / Canada (11 %) Germany (14 %) The objective within the realignment programme is to reduce the complexity of the Aareal Bank Group. In line with this objective, we started to restructure the Consulting / Services division in the year under review,

36 GROUP MANAG 36 selling subsidiaries in order to focus on our core business objectives. We sold Aareal Hypotheken Vermittlungs GmbH, the outsourcing service provider for the distribution of retail property loans, to PlanetHome AG (a wholly-owned subsidiary of HVB Group) during the fourth quarter of With effect from 20 January 2006, we also disposed of our entire investment in the loan servicing subsidiary, Aareal Hypotheken-Management GmbH, to VR Kreditwerk Hamburg Schwäbisch Hall AG. With these two sales, we have parted with our services for private customers in our Consulting / Services division. Services to the institutional housing sector We aim to further enhance our range of products and services to the institutional housing sector, through a closer coordination of all units involved. In addition to Aareal Bank s Institutional Housing unit, at a Group level this business comprises the subsidiaries Aareon AG, Europe s leading international consultancy and IT systems house for the property sector, and Aareal First Financial Solutions AG. Aareal First Financial Solutions AG develops and maintains the account management software which Aareal Bank leverages to boost its business with the housing industry. The software is distributed by the bank s Institutional Housing unit, as a market leader for payments solutions to property com- panies. Integrated into customers IT environment to a significant degree, the product range goes beyond payments, to cover deposit-taking as well as handling rental deposits and managing operating costs. A comprehensive efficiency-enhancement process was initiated in 2005, to more closely coordinate these three units, and thus to secure market leadership. A dedicated Management Committee was established to oversee the harmonisation of policies regarding products and target clients, to ascertain a uniform market presence, and to boost the efficiency of this business segment. We envisage initial results during the current financial year. Aareon AG offers a range of products and services that cover all administrative aspects of residential and commercial property in particular the development, maintenance and distribution of software for managing rental portfolios and commercial properties. Aareon AG is a leading European consultancy and IT systems house. Its software solutions are employed by around 2,000 clients (comprising almost 50,000 users) to manage some eight million residential and commercial properties throughout Europe. The residential property module (Release 2.0) of Aareon s Blue Eagle software was completed and rolled out on schedule, at the beginning of Incorporating the legacy property management applications (GES, Wohndata, Dagomix) within an SAP