alstria office REIT
Annual Report 2018

Plain-text annual report

ANNUAL REPORT IFRS financial statements KEY FIGURES FIVE-YEAR OVERVIEW EUR k Revenues and earnings Revenues Net rental income Consolidated profit for the period FFO1) Earnings per share (EUR)1) FFO per share (EUR)1) 1) Excluding minorities. EUR k Balance sheet Investment property Total assets Equity Liabilities Five-year overview 2018 2017 2016 2015 2014 193,193 169,068 527,414 114,730 3.02 0.65 193,680 172,911 296,987 113,834 1.94 0.74 202,663 179,014 115,337 102,140 176,872 −110,970 116,410 59,397 1.16 0.76 −1.15 0.61 101,782 90,020 36,953 47,626 0.47 0.60 Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 3,938,864 3,331,858 2,999,099 3,260,467 1,645,840 4,181,252 3,584,069 3,382,633 3,850,580 1,769,304 2,684,087 1,954,660 1,728,438 1,619,377 1,497,165 1,629,409 1,654,195 2,192,916 846,593 922,711 10.71 50.4 Net asset value (NAV) per share (EUR) Net loan-to-value (Net LTV, %) 15.13 30.4 12.70 40.0 11.28 40.9 10.64 49.3 G-REIT figures G-REIT equity ratio (%) Revenues including other income from investment properties (%) EPRA figures1) EPRA earnings per share (EUR) EPRA cost ratio A (%)2) EPRA cost ratio B (%)3) EPRA NAV per share (EUR) EPRA NNNAV per share (EUR) EPRA net initial yield (%) EPRA ‘topped-up’ net initial yield (%) EPRA vacancy rate (%) Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 67.2 100 2018 0.62 23.0 19.0 57.1 100 2017 0.68 19.6 16.4 56.7 100 2016 0.57 20.6 16.6 49.4 100 2015 0.42 26.1 22.1 50.2 100 2014 0.59 22.9 19.8 Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 15.14 14.96 4.0 4.4 9.7 12.71 12.45 4.6 5.0 9.4 11.31 10.81 5.0 5.4 9.2 10.91 10.66 5.0 5.3 11.2 11.22 10.58 4.8 5.0 11.0 1) For further information, please refer to EPRA Best Practices Recommendations, www.epra.com. 2) Including vacancy costs. 3) Excluding vacancy costs. alstria Annual Report 2018 CONTENT DETAIL INDEX GROUP MANAGEMENT REPORT .................................................... 2 GROUP MANAGEMENT REPORT ...................................................................... 3 ECONOMICS AND STRATEGY ....................................................................................... 3 FINANCIAL ANALYSIS ............................................................................................. 12 RISK AND OPPORTUNITY REPORT .............................................................................. 24 SUSTAINABILITY REPORT ........................................................................................ 41 DISCLOSURES REQUIRED BY TAKEOVER LAW ................................................................. 42 ADDITIONAL GROUP DISCLOSURE .............................................................................. 45 EXPECTED DEVELOPMENTS ...................................................................................... 46 DETAIL INDEX CONSOLIDATED FINANCIAL STATEMENTS ....................................... 49 CONSOLIDATED FINANCIAL STATEMENTS ......................................................... 50 CONSOLIDATED INCOME STATEMENT .......................................................................... 50 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ................................................ 51 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...................................................... 52 CONSOLIDATED STATEMENT OF CASH FLOWS ................................................................ 54 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ...................................................... 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS .................................................. 58 RESPONSIBILITY STATEMENT ...................................................................... 132 INDEPENDENT AUDITOR‘S REPORT............................................................... 133 CORPORATE GOVERNANCE ........................................................................ 140 REPORT OF THE SUPERVISORY BOARD ....................................................................... 140 CORPORATE GOVERNANCE STATEMENT ...................................................................... 146 REMUNERATION REPORT ....................................................................................... 157 REIT DISCLOSURES .................................................................................. 165 REIT DECLARATION .............................................................................................. 165 REIT MEMORANDUM ............................................................................................. 167 FINANCIAL CALENDAR/IMPRINT ................................................................... 169 FINANCIAL CALENDAR ........................................................................................... 169 CONTACT/IMPRINT .............................................................................................. 169 alstria Annual Report 2018 Group Management Report DETAIL INDEX GROUP MANAGEMENT REPORT ECONOMICS AND STRATEGY ....................................................................................... 3 ECONOMIC CONDITIONS ......................................................................................... 3 STRATEGY AND STRUCTURE .................................................................................... 5 PORTFOLIO OVERVIEW........................................................................................... 6 FINANCIAL ANALYSIS ............................................................................................. 12 EARNINGS POSITION ............................................................................................ 12 FINANCIAL AND ASSET POSITION ............................................................................. 17 CORPORATE MANAGEMENT ................................................................................... 23 RISK AND OPPORTUNITY REPORT .............................................................................. 24 RISK REPORT .................................................................................................... 24 REPORT ON OPPORTUNITIES .................................................................................. 39 SUSTAINABILITY REPORT ........................................................................................ 41 DISCLOSURES REQUIRED BY TAKEOVER LAW ................................................................. 42 ADDITIONAL GROUP DISCLOSURE .............................................................................. 45 EMPLOYEES ...................................................................................................... 45 REMUNERATION REPORT ...................................................................................... 45 CORPORATE GOVERNANCE GROUP DECLARATION PURSUANT TO SECTION 315D HGB (“HANDELS-GESETZBUCH”: GERMAN COMMERCIAL CODE) .............................................. 45 DIVIDEND ......................................................................................................... 45 EXPECTED DEVELOPMENTS ...................................................................................... 46 2 alstria Annual Report 2018 Group Management Report GROUP MANAGEMENT REPORT ECONOMICS AND STRATEGY ECONOMIC CONDITIONS Framework The German economy again proved to be solid in 2018. Germany’s GDP increased by 1.5 %, after 2.2 % in previous years. The growth has lost some of its momentum. However, a longer-term consideration shows that the average of the last ten years (+1.2 %) was exceeded. This good development was also reflected in the German labor market, as the unemployment rate decreased by 0.5 percentage points to 5.2 %. The employment level reached an all-time peak of 44.8 million employees, which is 1.3 % more than last year.* The total volume of the German investment market for commercial real estate increased by 6.0 % to EUR 60.1 billion compared to the previous year of EUR 57.4 billion. It can be concluded that Germany still offers great investment opportunities due to its strong key economic and real estate figures.** Overview of the German office-property market Development of office rents In 2018, according to the largest commercial real estate agencies, the average rents for office space in seven important commercial real estate markets — Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich, and Stuttgart — known as the Big 7 — exceeded the previous year’s levels. Berlin reached the highest average rent for office space at EUR 21.48/m², followed by Frankfurt at EUR 20.52/m², Munich at EUR 18.86/m², Hamburg at EUR 15.92/m², Düsseldorf at EUR 15.67/m², Stuttgart at EUR 14.00/m², and Cologne at EUR 13.80/m². Take-up in major German cities The vacancy rate of office properties in German cities decreased from 4.8 % in 2017 to 4.0 % in 2018, which represents a total vacancy of 3.4 million m² (a decrease of 0.9 million m²). Among the Big 7, the highest vacancy rate was recorded in Düsseldorf at 7.4 %, followed by those in Frankfurt at 7.1 %, Hamburg at 4.0 %, Cologne at 3.0 %, Munich at 2.5 %, Stuttgart at 2.3 %, and Berlin at 1.9 %. * Annual Economic Report 2019 from the Federal Ministry of Economics and Energy. ** Sources of real estate market data in this chapter are Jones Lang LaSalle, Colliers International Deutschland GmbH, BNP Paribas Real Estate, and CBRE GmbH. alstria Annual Report 2018 3 Group Management Report New lease-ups In 2018 new lease contracts were signed for more than 3.9 million m² of office space in the Big 7 German cities. This reflects a decrease of 0.3 million m², or 6.9 %, compared to the previous year. Nevertheless, the revenues achieved in most of the cities are under the top 2 or top 3 results of all times. The highest positive take-ups of office space were registered in Munich at 978,325 m² (−1.1 %), along with 826,025 m² (−11.2 %) in Berlin, 637,375 m² (−10.3 %) in Frankfurt and 568,000 m² (−9.7 %) in Hamburg. In defiance of the national trend, Düsseldorf at 382,875 m² (+3.5 %) showed an increase compared to the previous year. Cologne at 300,400 m² (−2.6 %), and Stuttgart at 215,700 m² (−17.5 %) showed a decline in office space sales. In particular, these declines were attributed to the declining supply of space. New office supply According to the largest commercial real estate agencies, approx. 985,000 m² of new office space was built in 2018. Compared to last year, this was an increase of around 7.9 %. Cologne (+30.7 %), Berlin (+29.7 %), Munich (+26.2 %) and Frankfurt (+0.8 %) were the only cities of the Big 7 that gener- ated an increase in new office spaces compared to the previous year. The amount of new office builds declined in the other Big 7 markets, including Stuttgart (−27.3 %) Düsseldorf (−17.0 %) and Hamburg (−1.6 %). For 2019, the completion volume is forecasted to increase (approx. 1,680,000 m²). Investment markets The positive trend in the investment markets continued in financial year 2018. Total investment volume (around EUR 60.1 billion for commercial assets) was around 6.0 % higher than the previous year’s result. The Big 7 cities recorded a transaction volume of around EUR 32.4 billion. Through the increase in Frankfurt’s market volume, Frankfurt (EUR 9.2 billion; +31.1 %) replaced Berlin (EUR 6.0 billion; −20.9 %) at the top. Munich’s market had the third-highest transaction volume of the Big 7 at EUR 5.6 billion (−1.9 %), followed by Hamburg at EUR 4.9 billion (+32.3 %), Düsseldorf at EUR 3.3 billion (+9.2 %), Stuttgart at EUR 1.9 billion (+43.9 %), and Cologne at EUR 1.5 billion (−28.0 %). With regard to the deal structure, around 62 % of the commercial investment turnover in the 2018 financial year was related to single-asset deals, while the share of portfolio transactions amounted to 38 %; these values are in accordance with those from the previous year. There were no apparent fundamental changes in investment strategies due to the price increases of real estate, although there were indications of a slightly higher risk tolerance. Nevertheless, investors are more interested in value-add assets. Followed by core assets — which are characterized by their good condition, good location, and long-term, attractive letting status — and core-plus, and opportunistic assets. 4 alstria Annual Report 2018 Group Management Report STRATEGY AND STRUCTURE alstria office REIT-AG (hereafter referred to as ‘the Company’) is a real estate company listed on the Frankfurt Stock Exchange. As of December 31, 2018, the alstria Group consisted of the corporate parent, alstria office REIT-AG, and 50 direct and indirect subsidiaries (together hereafter referred to as ‘alstria’ or ‘the Group’). Operational decisions are made at the parent-company level. While alstria office REIT-AG directly held more than 50 % of the Company’s real estate assets (69 properties with an overall market value of EUR 2.0 billion), the remaining real estate assets were held by 34 subsidi- aries as of December 31, 2018. alstria pursues a long-term investment strategy for its portfolio, which is essentially based on the following assumptions:  Considering the high market prices on the German office investment market, alstria follows a more selective investment strategy, thereby using the current market situation for the sale of non-strategic assets.  Opportunities in the German office market can be found in the modernization of rental space, which owing to its age, no longer meets today’s requirements.  By modernizing of office space, a higher rental income can be achieved, as well as an increase in real estate value. alstria faces these challenges with a long-term strategy that is characterized by high price discipline in terms of its acquisitions and by active asset and property management. Key aspects of this management approach are as follows:  The focus is on the tenant. Only those who know the needs of their tenants will have successful letting activities in the long run.  Continuous investments secure the quality of the assets. Increased value can only be realized through constant modernization measures and reduced vacancy.  The potential of value enhancements is realized through comprehensive repositioning and asset development.  Providing the best value for the money secures the lettability of the assets. Many tenants are price sensitive, and only lessors who offer better value for money than the competition will be successful. The aim of this strategy is the steady development of revenues and funds from operations (FFO). Due to its active asset management approach and its high level of discipline regarding prices, alstria believes it has been able to achieve above-average returns in past years. The precondition that this will remain true for the future is supported by the following facts:  alstria’s portfolio has a weighted average of unexpired lease terms — WAULT — of around 4.8 years. Approx. 60 % of its rental income is derived from a limited number of high-quality tenants. alstria Annual Report 2018 5 Group Management Report  alstria pursues a nontrading strategy and focuses on long-term value creation by conducting work on and within each building (i. e., asset and property management). At alstria, these activities are handled internally, which differentiates the Company from its main public and private competitors.  A key element of alstria’s strategy is supporting tenants in optimizing their real estate operating costs. From the tenants’ point of view, real estate operating expenses are crucial in the decision-making process for rental agreements. alstria believes that optimizing costs using active asset and property management will offer new potential for successful letting activities. PORTFOLIO OVERVIEW Key metrics of the portfolio Key metrics Number of properties Market value (EUR bn)1) Annual contractual rent (EUR m) Valuation yield (%, annual contractual rent / market value) Lettable area (m²) EPRA vacancy rate (%) WAULT (years) Average value per m² (EUR) Average rent/m² (EUR / month) 1) Including fair value of owner-occupied properties. Real Estate Operations Letting metrics (m²) New leases Renewals of leases Total Dec. 31, 2018 Dec. 31, 2017 118 4.0 197.0 4.9 116 3.4 202.0 5.9 1,577,000 1,570,100 9.7 4.8 2,525 12.25 9.4 4.7 2,171 12.06 2018 110,800 92,500 203,300 2017 98,300 147,100 245,400 Change 12,500 −54,600 −42,100 In the 2018 financial year letting activities amounted to approximately 203,300 m² (as measured by new leases and lease extensions). 6 alstria Annual Report 2018 Group Management Report The signings of the following lease contracts had a substantial impact on the positive development of the new leases: Asset City T-Online-Allee 1 Darmstadt Epplestrasse 225 Stuttgart Elisabethstrasse 5−11 Düsseldorf Epplestrasse 225 Stuttgart Am Wehrhahn 33 Am Wehrhahn 33 Nagelsweg 4 Düsseldorf Düsseldorf Hamburg Georg-Glock-Strasse 18 Düsseldorf Süderstrasse 24 Hamburg Am Wehrhahn 33 Düsseldorf Heidenkampsweg 99−101 Hamburg Gasstrasse 18 Hamburg Breitwiesenstrasse 5−7 Heidenkampsweg 99−101 Hamburg Stuttgart Am Wehrhahn 33 Düsseldorf 1) In % of lease length. Lettable area (m²) 29,100 5,400 4,4002) 3,800 2,700 2,400 2,100 2,000 1,900 1,900 1,800 1,800 1,700 1,600 1,500 Net rent/m² (EUR) 12.00 15.69 20.23 12.06 17.28 16.98 12.86 18.67 11.62 17.02 12.04 16.34 12.11 12.86 16.17 Net rent p.a. (EUR k) 4,200 1,017 1,068 550 560 489 324 448 265 388 260 353 247 247 291 Lease length (years) 7.5 6.0 10.6 10.0 10.0 7.0 10.0 7.0 3.0 10.0 5.0 10.0 5.0 10.0 10.0 Rent free (%)1) 0.0 0.0 1.6 0.2 8.3 10.7 0.0 4.8 8.3 7.5 0.0 3.3 0.0 1.6 8.3 2) A 2,500 m² extension of an existing lease and a 1,900 m² new lease. For the 2019 financial year, reducing vacancy remains the operational focus. Portfolio Valuation and Regions As of December 31, 2018, external appraisers (Colliers International Valuation UK LLP and Savills Advisory Services Germany GmbH & Co. KG) valued alstria’s portfolio in line with International Financial Reporting Standards (IFRS) 13 requirements at market value. The valuation resulted in a total market value for the investment properties of EUR 3,985 million.* Of this total market value, approx. EUR 3,878 million, or 97 %, was located in core markets of the Company. The regional split is shown in the table below: Total portfolio by region (% of market value) Hamburg Rhine-Ruhr Rhine-Main Stuttgart Berlin Others * Inclusive assets held for sale. Dec. 31, 2018 Dec. 31, 2017 Change (pp) 31 29 19 12 6 3 29 29 21 12 5 4 2 0 −2 0 1 −1 alstria Annual Report 2018 7 Group Management Report Tenants The table below shows the ten largest tenants of alstria as of December 31, 2018: alstria’s main tenants (% of annual rent) Daimler AG City of Hamburg GMG Generalmietgesellschaft HOCHTIEF Aktiengesellschaft Residenz am Dom gem. Betriebsgesellschaft mbH Hamburger Hochbahn AG1) ATOS Origin City of Berlin State of Baden-Württemberg Württembergische Lebensversicherung AG Bilfinger SE Others 1) Shown under the tenant ‘City of Hamburg’ as of December 31, 2017. Dec. 31, 2018 Dec. 31, 2017 Change (pp) 12 12 8 5 2 2 2 1 1 1 0 12 12 10 4 2 0 1 1 1 1 3 54 53 0 0 −2 1 0 2 1 0 0 0 −3 1 Furthermore, the focus is clearly on one asset class: approximately 90 % of the lettable area is office space.* The table below summarises the current lease expiry profile of the portfolio for the next three years: Lease expiry profile (% of annual rent) 2019 2020 2021 Transactions Dec. 31, 2018 Dec. 31, 2017 Change (pp) 14.6 17.6 13.2 18.8 14.0 10.0 −4.2 3.6 3.2 alstria’s investment decisions are based on both analyses of local markets and individual inspections of each asset. The latter focus on the attributes of location, size and quality (relative to those of direct competitors’ assets) as well as the long-term potential for value growth. alstria’s strategy is aimed at both increasing its portfolio to a critical size at every location and retracting from the markets that do not adhere to alstria’s core investment focus. alstria performed the following trans- actions in the 2018 financial year: * Office and storage. 8 alstria Annual Report 2018 Group Management Report Disposals Asset City Frankfurter Straße 71−75 Eschborn Eschersheimer Landstraße 55 Frankfurt am Main Lötzener Straße 3 Harburger Ring 17 Washingtonstraße 16 Gathe 78 Bremen Hamburg Dresden Wuppertal Jagenbergstraße 1 Neuss Brödermannsweg 5−92) Hamburg Disposal price (EUR k) 16,200 44,000 3,600 10,000 28,080 9,120 23,400 4,300 Gain to book value (EUR k)1) 500 Signing SPA Transfer of benefits and burdens Oct. 9, 2017 Jan. 31, 2019 16,600 Dec. 21, 2017 Mar. 31, 2018 0 750 Jan. 26, 2018 June 30, 2018 Feb. 20, 2018 Aug. 31, 2018 11,080 Oct. 5, 2018 Dec. 31, 2018 120 Oct. 10, 2018 Jan. 1, 2019 4,400 Oct. 29, 2018 Dec. 31, 2018 1,8003) Nov. 29,2018 Feb. 28, 20194) Gesamte Verkäufe 138,700 35,250 1) Different from the position “Net result from the disposal of investment property” in the income statement. This position only contains contracts, which were signed in 2018 financial year and their transaction costs. 2) Partial sale of the residential building. 3) Disposal price less OMV of the residential building (percentage share of residential rents). 4) Expected. Acquisitions Asset Eichwiesenring 1 Sonninstrasse 26−28 Taunusstrasse 45−47 City Stuttgart Hamburg Frankfurt Gustav-Nachtigal-Strasse 5 Wiesbaden Berlin Berlin Berlin Stuttgart Schinkestrasse 20 Lehrter Strasse 17 Uhlandstrasse 85 / Pfalzburger Strasse 41−42 Handwerkstrasse 4 / Breitwiesenstrasse 27 Total acquisitions 1) Excluding transaction costs. 2) Expected. Acquisition price (EUR k)1) 28,000 54,584 25,100 7,675 9,400 8,470 42,400 7,350 182,979 Signing SPA Transfer of benefits and burdens Dec. 20, 2017 Apr. 1, 2018 Dec. 21, 2017 Feb. 1, 2018 June 7, 2018 Aug. 1, 2018 July 27, 2018 Sept. 1, 2018 Aug. 27, 2018 Nov. 1, 2018 Dec. 12, 2018 Feb. 1, 2019 Dec. 18, 2018 Dec. 31, 2018 Dec. 18, 2018 Mar. 1, 20192) alstria Annual Report 2018 9 Group Management Report Refurbishment projects alstria has achieved progress with respect to the following development projects:  Besenbinderhof 41, Hamburg The listed office building from 1927 was built for the Public Health Department and acquired by alstria in 2006 as part of the Primo-portfolio. The property is located close to the central station in Hamburg and is characterized by its clinker front, with narrow clinker pillars. In the front part, the building has a basement and five floors. The building was built in typical 1920s style. As the offices do not meet today’s requirements in terms of space flexibility or the building’s technical equipment, alstria decided to fundamentally revitalize the building. This current planning includes the core removal of the office space, except for the shell of the building. Over the course of this refurbishment, the original outer appearance is to be rebuilt by adding one and a half floors to the main building, which is still subject to the approval of the authorities. The main entrance doors and staircase houses will keep their 1920s charm. Beside the main entrance, two new entrances will be created that resemble the main entrance in terms of style and materials. The construction work is expected to be completed by mid-2020, and began in January 2019.  Amsinckstrasse 28 and 34, Hamburg The buildings Amsinckstrasse 28 and 34 are located in the center of Hamburg between the Kon- torhausviertel, HafenCity, and the City Süd. The properties were built in 1991 and 1993 for official use by the City of Hamburg. Amsinckstrasse 28 has around 8,500 m² of total rental space and an underground carpark with 70 parking spaces. In contrast, Amsinckstrasse 34 has around 6,600 m² of total rental space as well as an underground carpark with 64 parking spaces. Since the public authorities moved out at the end of October 2017, the buildings have been undergoing extensive refurbishment. The aim is to convert the buildings from single-tenant to multi-tenant utili- zation with totally new office areas that meet today’s standards. The technical equipment is also being entirely renewed. The layout of the rental areas provides high flexibility for small and large rental areas. The office areas will be highly flexible and modern to cater for high demands concerning the design standards. The refurbishment is expected to be finished by end-2019. Even before completion, the first rental success in house number 34 with more than approximately 1,100 m² has already been achieved.  Gustav-Nachtigal-Strasse 3, 4, 5, Wiesbaden The office skyscraper at Gustav-Nachtigal-Strasse 3, was built in 1984 and contains approximately 18,455 m² of total rental space as well as an underground carpark with around 160 parking spaces and 65 outside parking spaces. The property is located about five minutes east of Wiesbaden Main Station. It consists of eight upper and two basement floors. On the 8th floor there is a roof terrace with a view over Wiesbaden. The ground floor has a spacious foyer, a general conference area, offices and a large canteen. 10 alstria Annual Report 2018 Group Management Report After more than 30 years of single-tenant utilization, neither the appearance nor the office work- stations meet today’s requirements. The entrance as well as all usable areas and offices are being redesigned. The new rental units are being developed floor by floor via the central core with eleva- tors, three staircases, and newly arranged access doors, to enable flexible utilization. Due to negotiations with various tenants with substantial space requirements alstria decided to in- clude two of the adjacent buildings at Gustav-Nachtigal-Strasse 4 and 5 in a campus concept and develop them simultaneously. Number 5 contains approximately 7,610 m² of total rental space and consists of ten floors. Number 4 with 768 m² of total rental space and two floors is smaller. The revitalization of the buildings combined with the design of a campus is currently in the planning phase.  Carl-Reiß-Platz 1−5, Mannheim The three linked buildings, which consists of one office skyscraper and two single office buildings, are located in the office and residential area Schwetzingerstadt in Mannheim. They were built in 1959 − 1979 and contain approximately 17,500 m² of total rental space. The skyscraper consists of 14 upper and two basement floors, while the area of the other two buildings distributes to three upper and two basement floors or rather eight upper and two basement floors, respectively. Apart from the 78 parking spaces on the plot, there are 266 additional parking lots in a separate underground carpark below the Carl-Reiß-Platz. The tenants have moved out and as the office spaces no longer meet current requirements regarding building services and flexibility, alstria has decided to fundamentally revitalize the building. The revitalization of the building is currently in the planning phase. Start of construction is expected in the second quarter of 2019. In 2018, alstria invested around EUR 86 million in ongoing refurbishment projects. Around EUR 36 million of this amount was for the main development projects, and the remainder of EUR 50 million was invested in value-increasing tenant-improvement measures. The main part of the 2018 capital expenditure investment was linked to the assets Momentum and Am Seestern in Düsseldorf, and the assets Bieberhaus, Gasstrasse 18, Heidenkampsweg 99−101 and Steinstrasse 5−7 in Hamburg. Within the next three years, alstria is planning to invest around EUR 200 million into its portfolio through refurbishment measures. This investment plan is part of alstria’s ongoing asset-value-enhancement program. The volume of these investments, however, also depends on ongoing lease negotiations with existing and potential tenants. alstria Annual Report 2018 11 Group Management Report FINANCIAL ANALYSIS The 2018 financial year developed as expected for alstria. alstria’s original revenue* and FFO forecasts for 2018 increased as of June 30, 2018, for the most part, due to the deviation of expected transfers of benefits and burdens of the purchased and sold assets as well as the indexation of substantial lease contracts. As a result, the revenue forecast increased by EUR 3 million, from EUR 187 million to EUR 190 million, for the 2018 financial year. As a consequence, the FFO forecast increased by EUR 3 million from EUR 110 million to EUR 113 million. Due to the Company’s good letting perfor- mance, its 2018 revenues of around EUR 193 million were slightly higher than the adjusted forecast of EUR 190 million. The FFO (after minorities) amounted to EUR 115 million in the reporting period, which is also in line with the forecasted level of EUR 113 million for the alstria Group. EARNINGS POSITION Funds from operations (FFO) In 2018, FFO amounted to EUR 118,027 k before minorities or EUR 114,730 k after minorities, com- pared to EUR 117,550 k before minorities or EUR 113,834 k after minorities in 2017. The FFO margin increased to 61.1 % (i. e., by 0.4 percentage points; before minorities). As a result, FFO per share was EUR 0.67 before minorities or EUR 0.65 after minorities in the 2018 financial year (compared to EUR 0.76 before minorities or EUR 0.74 after minorities in 2017).** The slight increase of the overall FFO mainly resulted from a better net financial result, a better share of the result of the joint venture as well as a decrease in other operating expenses compared to 2017. Small opposite effects were the lower net rental income and other operating income as well as slightly higher personnel expenses compared to the previous year. * This involves in this passage revenues without revenues from service charge income. ** This is calculated using the number of shares as of December 31, 2018, which was 177,416,497 (December 31, 2017: 153,961,654). 12 alstria Annual Report 2018 Group Management Report EUR k IFRS P&L Adjustments Revenues Revenues from service charge in- come Real estate operating expenses Net rental income Administrative expenses Personnel expenses Other operating income Other operating expenses Net gain/loss from fair value adjustments on investment property Gain/loss on disposal of investment properties Net operating result Net financial result Share of the result of joint venture Net result from fair value adjust- ments on financial derivatives Pre-tax income / FFO (before minorities)1) Income tax expenses Consolidated profit Minority interest Consolidated profit / FFO (after minorities) Maintenance and reletting Adjusted funds from operations (AFFO)2) Number of shares outstanding (k) FFO per share (EUR) AFFO per share (EUR) 193,193 39,160 −63,285 169,068 −8,834 −15,910 10,656 −13,746 398,954 14,887 555,075 −29,497 −70 - - - - 794 1,304 −9,728 12,752 −398,954 −14,887 −408,719 1,238 - FFO 2018 FFO 2017 193,193 193,680 39,160 −63,285 169,068 −8,040 −14,606 928 −994 - - 146,356 −28,259 −70 37,387 −58,156 172,911 −7,543 −12,544 3,319 −3,703 - - 152,440 −32,887 −2,003 2,452 −2,452 - - 527,960 −546 527,414 - −409,933 546 −409,387 −3,297 118,027 - 118,027 −3,297 117,550 - 117,550 −3,716 527,414 −412,684 114,730 113,834 −50,100 64,630 177,416 0.65 0.36 −40,700 73,134 153,962 0.74 0.48 1) (A)FFO is not a measure of operating performance or liquidity under generally accepted accounting principles, in particular IFRS, and it should not be considered an alternative to the Company’s income or cash flow measures as determined in accordance with IFRS. Furthermore, there is no standard definition for (A)FFO. Thus, alstria’s (A)FFO values and the measures with similar names presented by other companies may not be comparable. 2) AFFO is equal to FFO after adjustments are made for capital expenditures used to maintain the quality of the underlying investment portfolio and expenses for lease-ups. alstria Annual Report 2018 13 Group Management Report Net operating result alstria closed the 2018 financial year with a net operating result (before financing costs and taxes) of EUR 555,075 k, compared to EUR 348,008 k for the previous year. As compared to the previous year, alstria had a slightly higher other operating result, and a higher result from fair value adjustments to investment property. The following table shows the main figures of the income statements for the 2018 and 2017 financial years: EUR k Revenues Net rental income Administrative and personnel expenses Other operating result Operating income Net gain/loss from fair value adjustments to investment property Gain/loss from disposals of investment properties Net operating result 2018 193,193 169,068 −24,744 −3,090 2017 193,680 172,911 −21,856 −4,232 141,234 146,823 398,954 14,887 181,492 19,693 555,075 348,008 Revenues In the reporting period, revenues totaled EUR 193,193 k (compared to EUR 193,680 k in 2017). Real estate operating expenses Real estate operating expenses consist of recoverable and non-recoverable operating costs and amounted to EUR 63,285 k (compared to EUR 58,156 k in 2017). The expense ratio of non-recoverable operating costs increased slightly from 11.2 % in 2017 to 12.5 % in 2018. Thus, the Group’s net rental income decreased by EUR 3,843 k to EUR 169,068 k (compared to EUR 172,911 k in 2017). Administrative and personnel expenses Administrative expenses increased by EUR 801 k to EUR 8,834 k (compared to EUR 8,033 k in 2017), which was due to higher depreciation in owner-occupied properties and IT infrastructure spending. Personnel expenses were EUR 15,910 k for the reporting period (compared to EUR 13,823 k in 2017). The 2018 increase was mostly a result of an increase in salaries by EUR 1,308 k to EUR 7,937 k, due to an increased number of employees (from 121 employees as of December 31, 2017 to 149 employees as of December 31, 2018). Moreover, the bonuses increased by EUR 353 k to EUR 2,338 k (compared to EUR 1,986 k in 2017). Total administrative and personnel expenditures were around 12.8 % of total revenues and 0.6 % of the value of the market value of the portfolio (compared to 11.3 % and 0.6 % in 2017, respectively). 14 alstria Annual Report 2018 Group Management Report Other operating result alstria’s other operating result amounted to EUR −3,090 k during the reporting period (compared to EUR −4,232 k in 2017). A EUR 517 k increase in income mainly resulted from EUR 1,765 k higher income from the reversal of accrued liabilities. A EUR 625 k decrease in expenses mainly re- sulted from EUR 1,160 k less property disposal costs during the reporting period. Net result from fair value adjustments on investment property In the 2018 financial year, the net result from fair value adjustments on investment property was EUR 398,954 k (compared to EUR 181,492 k in 2017). The growth was mainly linked to the success of the asset management in the reporting year and the increase in value due to refurbishments of the assets as well as the higher demand for real estate. Net result on disposals of investment property In 2018, alstria was able to achieve a positive result of EUR 14,887 k from the disposal of investment properties. The realized disposal gains mainly resulted from the sale of the Washingtonstraße asset in Dresden. Net financial result EUR k Interest expenses, corporate bonds Interest expenses, convertible bond Interest expenses, other loans Interest result Schuldschein Other interest expenses Financial expenses Financial income/interest income Other financial expenses Net financial result 2018 −21,138 −1,783 −3,433 −3,186 −282 −29,822 745 −420 −29,497 2017 −23,314 −5,357 −3,585 −3,248 −480 −35,984 816 −32,540 −67,708 The financial expenses decreased by EUR 6,162 k to EUR 29,822 k due to both the lower quantum of debt in the 2018 financial year and a lower average interest rate. The net financial result for the year decreased by EUR 38,211 k to EUR 29,497 k compared to the prior-year period. This development is the result of existing bonds in the 2017 financial year being repurchased with a nominal value of EUR 348,200 k and a new bond with a longer maturity and a nominal value of EUR 350,000 k being placed on the market. The premium for the repurchase of the bonds in the amount of EUR 29,172 k was included in the other financial expenses in the previous year. Furthermore, in 2017 financial year the other financial result was burdened by the reversal of the accrued incidental costs of the bond, which were repurchased in the amount of EUR 2,809 k in the previous year. For details on the new loans, also refer to the ‘Financial management’ section starting on page 18. alstria Annual Report 2018 15 Group Management Report Share of the result of joint venture companies In 2018, alstria’s share of the result of joint venture was EUR −70 k (compared to EUR 28,118 k in 2017). The share of the result in the previous year was mainly attributable to the sale of the Kaiserga- lerie asset in Hamburg. Net result from fair value adjustments on financial derivatives To minimize the impact of interest-rate volatility on profits and losses, alstria uses financial derivatives to hedge on floating interest rate loans. Due to the termination of an interest rate cap in the 2018 financial year, the nominal amount of the interest-hedging instruments decreased from EUR 152,630 k to EUR 95,892 k. The net result from fair value adjustments on these financial derivatives amounted to EUR 2,452 k in 2018 (compared to EUR −9,334 k in 2017). While no appreciable valuation result arose in the 2018 financial year from the interest rate derivatives financial instruments (EUR −14 k), the valuation of the embedded derivative linked to the convertible bond resulted in a gain of EUR 2,466 k. The fair value of the embedded derivative was largely determined by the performance of the share price of alstria, as it affected the market value of the potential repayment obligation in the event of conversion of the convertible bond. With the end of its term on June 14, 2018 all units of the convertible bond have been converted into equity instruments of the Company. Since the conversion, the embedded derivative no longer exists. Further details and a tabular reconciliation can be found in section 6.5 of the consolidated financial statements. Consolidated net result The consolidated net result amounted to EUR 527,414 k (compared to EUR 296,987 k in 2017) in the reporting period; hence, it increased by EUR 230,427 k. Overall, lower net rental income and decreased share of earnings from joint venture companies were overcompensated by an increase in net result from fair value adjustments of investment properties, a positive net result from fair value adjustments on financial derivatives as well as an increase in net financial result. Undiluted earnings per share amounted to EUR 3.02 for the reporting period (compared to EUR 1.94 in 2017). REIT-AGs are fully exempt from the German corporate income tax and trade tax. However, tax obligations can arise to a minor extent for REIT subsidiaries. 16 alstria Annual Report 2018 Group Management Report FINANCIAL AND ASSET POSITION Investment properties The total value of investment properties as of December 31, 2018 was EUR 3,938,864 k, compared to EUR 3,331,858 k at the beginning of 2018. This increase in investment property value was mainly due to the increase in value of the investment portfolio following the revaluation (EUR 398,954 k) as well as the result of the acquisition of six assets. This increase was slightly levelled out by the sale of six assets. Two of the assets are reported under assets held for sale in the balance sheet as of December 31, 2018. EUR k Investment property as of December 31, 2017 Investments Acquisitions Acquisition costs Disposals Transfers to assets held for sale Transfers to property, plant and equipment (owner-occupied properties) Transfers out of property, plant and equipment (owner-occupied properties) Net loss/gain from fair value adjustments on investment property Investment portfolio as of December 31, 2018 Advance payments Investment property as of December 31, 2018 Carrying amount of owner-occupied properties Fair value of assets held for sale Interests in joint ventures Carrying amount of immovable assets Cash position 3,331,858 86,420 161,659 10,716 −48,850 −11,408 −307 7,878 398,954 3,936,920 1,944 3,938,864 17,585 29,620 8,589 3,994,658 Cash and cash equivalents increased by EUR 30,821 k from EUR 102,078 k to EUR 132,899 k in the reporting period. A positive cash flow of EUR 119,014 k was generated from operating activities. Financing activities have shown net cash inflows of EUR 48,010 k. The increase was mainly driven by a capital increase in January 2018, resulting in a cash inflow of EUR 190,461 k. On the other hand, the net cash used in financing activities was affected by the dividend payment of EUR 92,170 k and the cash flows from issuing and repayment of loans, resulting in net cash outflows of EUR 48,088 k. Investing activities amounted in cash outflows of EUR 136,203 k. alstria Annual Report 2018 17 Group Management Report Equity metrics Equity (EUR k) NAV per share (EUR) Equity ratio (%) G-REIT equity ratio (%)1) Dec. 31, 2018 Dec. 31, 2017 2,684,087 1,954,660 15.13 64.2 67.2 12.70 54.5 57.1 Change 37.3 % 19.1 % 9.7 pp 10.1 pp 1) This is defined as total equity divided by the carrying amount for immovable assets. The minimum requirement according to G-REIT regulations is 45 %. Compared to December 31, 2017, equity increased by EUR 729,427 k as of December 31, 2018. Of this increase, EUR 190,461 k was contributed to the capital increase, which took place in January 2018, and EUR 98,562 k was contributed to the conversions of the convertible bond taking place within the first half of 2018. The period’s profit contributed to a higher equity of EUR 527,414 k. On the other hand, dividend payments in May decreased the equity by EUR 92,170 k.* Liabilities minority interests Liabilities due to minority interests represent the limited-partner capital of noncontrolling sharehold- ers in alstria office Prime. In line with IFRS requirements, the share capital owned by minority share- holder in German partnerships is treated as a liability on the Company’s balance sheet. Financial management alstria’s financial management is carried out at the corporate level. Individual loans and corporate bonds are taken out at both the property and the portfolio levels. alstria’s main financial goal is to establish a sustainable long-term financial structure. Therefore, alstria diversifies its financing sources and strives for a balanced maturity profile to enable coordinated and constant refinancing. All shares of the convertible bond as of the prior year’s balance sheet date, with a notional amount of EUR 73,500 k, were converted on June 14, 2018. The conversion resulted in the issue of 7,987,972 new shares by making use of the conditionally increased capital provided for such purposes (Condi- tional Capital 2013). On September 28, 2018, alstria drew down on a new loan with a nominal amount of EUR 60,000 k and used the proceeds to simultaneously repay a loan, which had amounted to a notional amount of EUR 57,975 k as of December 31, 2017. On November 6, 2018, the floating-rate loan shares of the Schuldschein were repaid with a notional amount of EUR 35,000 k before the end of the term, so that the Schuldschein has a notional amount of EUR 115,000 k at the end of the reporting period (December 31, 2017: EUR 150,000 k). Furthermore, on December 28, 2018, alstria repaid a loan, which had amounted to a notional amount of EUR 15,113 k as of December 31, 2017. * See also the consolidated statement of changes in equity on page 56. 18 alstria Annual Report 2018 Group Management Report The loan facilities in place as of December 31, 2018, are as follows: Liabilities Loan #1 Loan #21) Loan #3 Loan #4 Loan #52) Loan #6 Total secured loans Bond #1 Bond #2 Bond #3 Convertible bond Maturity June 28, 2024 Apr. 30, 2021 Mar. 28, 2024 June 30, 2026 July 31, 2021 Sept. 29, 2028 Mar. 24, 2021 Apr. 12, 2023 Nov. 15, 2027 June 14, 2018 Schuldschein 10y/fixed May 6, 2026 Schuldschein 7y/fixed May 8, 2023 Schuldschein 4y/fixed May 6, 2020 Schuldschein 7y/variable3) May 8, 2023 Schuldschein 4y/variable4) May 6, 2020 Revolving credit line June 15, 2020 Total unsecured loans Total Net LTV Principal amount drawn as of December 31, 2018 (EUR k) LTV as of December 31, 2018 (%) Principal amount drawn as of December 31, 2017 (EUR k) LTV covenant (%) 67,000 - 45,900 56,000 - 60,000 228,900 326,800 325,000 350,000 - 40,000 37,000 38,000 - - - 1,116,800 1,345,700 37.0 - 38.1 37.4 - 50.0 34.8 - - - - - - - - - - - 33.8 30.4 65.0 - 75.0 65.0 - - – - - - - - - - - - - - - 67,000 57,975 45,900 56,000 15,113 - 241,988 326,800 325,000 350,000 73,500 40,000 37,000 38,000 17,500 17,500 - 1,225,300 1,467,288 1) Loan agreement terminated, refinancing (Loan #6) occurred on September 28, 2018. 2) Loan agreement terminated, refinancing occurred on December 28, 2018. 3) Loan agreement terminated, refinancing occurred on November 6, 2018. 4) Loan agreement terminated, refinancing occurred on November 6, 2018. Cash cost of debt Dec. 31, 2018 Dec. 31, 2017 Bank debt Bonds Schuldschein Convertible bond Total Nominal amount (EUR k) 228,900 1,001,800 115,000 - 1,345,700 Ø cost of debt (%) Ø maturity (years) 1.1 1.9 2.2 - 1.8 7.1 5.3 4.5 - 5.5 Nominal amount (EUR k) 241,988 1,001,800 150,000 73,500 1,467,288 Ø cost of debt (%) Ø maturity (years) 1.3 1.9 2.0 2.8 1.9 6.0 6.3 5.1 0.5 5.8 alstria Annual Report 2018 19 Group Management Report Maturity profile of financial debt as of December 31, 20181) in EUR million 362.0 326.8 350.0 112.9 96.0 60.0 38.0 0.0 0.0 0.0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 1) Excluding regular amortization. Compliance with and calculation of the Covenants, referring to §11 of the Terms and Conditions* In case of the incurrence of new Financial Indebtedness for purposes other than the refinancing of existing liabilities, alstria needs to comply with the following covenants:  The ratio of Consolidated Net Financial Indebtedness to Total Assets will not exceed 60 %  The ratio of Secured Consolidated Net Financial Indebtedness to Total Assets will not exceed 45 %  The ratio of Unencumbered Assets to Unsecured Consolidated Net Financial Indebtedness will be more than 150 % In the third quarter of 2018, alstria incurred further Financial Indebtedness in the amount of EUR 60,000 k primarily to refinance existing Secured Financial Indebtedness (for further information, please refer to the loan overview on page 19). The compliance with the covenant was reported in the consolidated interim statement as of September 30, 2018. * The following section refers to the Terms and Conditions of the Fixed Rate Notes, issued on November 24, 2015, April 12, 2016, and on November 15, 2017 as well as to the Terms and Conditions of the Schuldschein issued on May 6, 2016 (for further information, please refer to www.alstria.com). Capitalised terms have the meanings defined in the Terms and Conditions. 20 alstria Annual Report 2018 Group Management Report Furthermore, alstria needs to maintain a ratio of the Consolidated Adjusted EBITDA over Net Cash Interest of no less than 1.80 to 1.00. The calculation and publication of the ratio should be done at every reporting date following the issuance of the bond or the Schuldschein, respectively, starting after the fifth reporting date. The publication first took place in the annual report 2016. EUR k Cumulative 2018 Earnings Before Interest and Taxes (EBIT) Net profit/loss from fair value adjustments to investment property Net profit/loss from fair value adjustments to financial de- rivatives Profit/loss from the disposal of investment property Other adjustments1) Fair value and other adjustments in joint venture Consolidated Adjusted EBITDA Cash interest and other financing charges One-off financing charges Net Cash Interest Consolidated Coverage Ratio (min. 1.80 to 1.00) 1) Depreciation and amortization and nonrecurring or exceptional items. 557,458 −398,954 −2,452 −14,887 6,323 - 147,488 −25,914 - −25,914 5.7 As of December 31, 2018, no covenants under the loan agreements and/or the terms and conditions of the bonds and Schuldschein have been breached. Long-term loans Long-term loans decreased by 3.3 %, from EUR 1,381,965 k as of December 31, 2017, to EUR 1,336,090 k as of December 31, 2018. The decrease resulted essentially from the repayment of the floating rate Schuldschein in the amount of EUR 35,000 k in November 2018. Moreover, in the fourth quarter of the 2018 financial year, alstria completely repaid a loan, which had amounted to EUR 15,113 k as of December 31, 2017. This was contrasted by the closing of a new loan in the amount of EUR 60,000 k in the third quarter of 2018 and the using of the proceeds to simultaneously repay a loan, which had amounted to a notional amount of EUR 57,975 k as of December 31, 2017. Short-term loans Short-term loan obligations amounted to EUR 14,171 k as of the reporting date (prior year: EUR 86,450 k) and hence were EUR 72,279 k lower than as of the previous reporting date. The decrease resulted essentially from the conversion of the convertible bond in the second quarter of the 2018 fi- nancial year, which had amounted to EUR 73,500 k as of December 31, 2017. Furthermore, short-term loans were mainly influenced by accrued interest for the bonds (December 31, 2018: EUR 11,344 k; December 31, 2017: EUR 11,344 k) and the Schuldschein (December 31, 2018: EUR 1,654 k; December 31, 2017: EUR 1,752 k), as of December 31, 2018. alstria Annual Report 2018 21 Group Management Report Current liabilities Current liabilities amounted to EUR 90,777 k (December 31, 2017: EUR 187,703 k) and mainly consisted of short-term loan obligations of EUR 14,171 k (December 31, 2017: EUR 86,450 k) and of the current liabilities to noncontrolling shareholders of EUR 47 k (December 31, 2017: EUR 47 k). Another EUR 5,945 k of this total was attributable to income tax obligations (December 31, 2017: EUR 13,675 k) that arose at the level of the consolidated alstria office Prime companies. Moreover, current liabilities include trade payables (December 31, 2018: EUR 4,400 k; December 31, 2017: EUR 7,268 k) and other current liabilities (December 31, 2018: EUR 60,207 k; December 31, 2017: EUR 49,204 k). The other current liabilities include liabilities from the real estate transfer tax (December 31, 2018: EUR 13,902 k; December 31, 2017: EUR 11,869 k), which were incurred at the alstria office Prime level, provisions for outstanding invoices (December 31, 2018: EUR 16,595 k; December 31, 2017: EUR 18,116 k), prepayment of rents (December 31, 2018: EUR 2,564 k; December 31, 2017: EUR 3,313 k), and tenants deposits (December 31, 2018: EUR 6,353 k; December 31, 2017: EUR 5,414 k). 22 alstria Annual Report 2018 Group Management Report CORPORATE MANAGEMENT alstria proactively focuses on the following key financial performance indicators: revenues* and FFO. Revenues mainly comprise rental income derived from the Company’s leasing activities. FFO is the funds from operations and is derived from real estate management. It excludes valuation effects and other adjustments, such as non-cash expenses/income and non-recurring effects.** alstria’s original revenue and FFO forecasts for 2018 increased in the most part due to the deviation of expected transfers of benefits and burdens of the purchased and sold assets as well as the indexa- tion of substantial lease contracts. As a result, the revenue forecast increased by EUR 3 million from EUR 187 million to EUR 190 million for the 2018 financial year. As a consequence, the FFO forecast increased by EUR 3 million from EUR 110 million to EUR 113 million. Due to the Company’s good let- ting performance in the 2018 financial year, its revenues were approx. EUR 193 million and therefore slightly higher than the adjusted forecast of EUR 190 million. In the 2018 financial year, FFO totaled EUR 115 million, which is in line with the adjusted forecast of EUR 113 million. The Company also monitors the progress of its Net LTV, its G-REIT equity ratio, net-debt / EBITDA, and its liquidity, whereby these are not classified as for the internal control of the Company most relevant performance indicators. alstria’s Net LTV was 30.4 % as of December 31, 2018, compared to 40.0 % at the end of the 2017 financial year. The G-REIT equity ratio was 67.2 %, compared to 57.1 % in the previous year and the minimum statutory rate of 45 %. The net-debt / EBITDA was 8,3 as of December 31, 2018, compared to 9,1 as of December 31, 2017. * This involves in this passage revenues without revenues from service charge income. ** For further details, please refer to page 13. alstria Annual Report 2018 23 Group Management Report RISK AND OPPORTUNITY REPORT RISK REPORT Risk management alstria has implemented a Group-wide system for structured risk management and early warning in accordance with Section 91 para. 2 of the German Stock Corporation Act (AktG). All risks are recorded, evaluated, and monitored on at least a quarterly basis. The aim of alstria’s risk management strategy is to minimize or, where possible, completely avoid — the risks associated with entrepreneurial activity in order to safeguard the Company against losses and against risks to the Company’s going concerns. The Company’s risk identification allows for the early identification of potential new risks on an ongoing basis. Risk mitigation measures are defined so that alstria can undertake the necessary steps to circumvent any identified risks (i. e., to insure, diversify, manage, or avoid those risks). For alstria, risk management involves the targeted securing of existing and future potential for success and improvements in the quality of the Company’s planning processes. alstria’s risk-management system is an integral part of its management and control system. The risk-management system is integrated into its regular reporting to the Management Board and Supervisory Board, which ensures that risks are dealt with proactively and efficiently. The risk-management system thereby focuses on full coverage of the risks. The identification and assessment of opportunities is not part of alstria’s risk-management system. Structure of the risk-management system Risk management is coordinated independently from individual business divisions. The risk manager prepares a risk report on a quarterly basis and provides it to the Management Board. This report is based on the reports from the risk owners — those who are responsible for particular areas of risk. alstria faces various areas of risk within the context of its business activities; these are divided into the following four risk categories: > Strategic risks > Operational risks > Compliance risks > Financial risks 24 alstria Annual Report 2018 Group Management Report Each risk category is assigned to a so-called risk owner. Inherent to the risk owner’s position in the Company is that he or she represents the area in which the identified risks could materialize; the risk owner is also responsible for the assigned risk category: alstria’s areas of risk and risk categories Risk category Strategic risks Operational risks Compliance risks Financial risks Risk owner Finance & Controlling Real Estate Operations Legal Finance & Controlling The risk report presents the findings that are observed during risk identification, assessment, evaluation and monitoring. At the same time, the comprehensive documentation of this report ensures an orderly assessment, which the responsible departments and the Supervisory Board conduct. In addition, the divisions report their respective risks and opportunities to the Management Board in weekly meetings. Risk valuation Risks are assessed according to their likelihood of occurrence and their magnitude of impact. Accordingly, they are categorized as ‘high’ ‘medium’ or ‘low’. The potential damage includes any potential negative deviation from alstria’s forecasts and objectives with regard to its total compre- hensive income. Classification according to likelihood Probability/likelihood of occurrence 1 to 15 % 16 to 35 % 36 to 55 % 56 to 75 % 76 to 99 % Description very unlikely unlikely possible likely highly likely According to this framework, a very unlikely risk is defined as one that will occur only in exceptional circumstances, and a highly likely risk as one that can be expected to occur within a specified period of time. alstria Annual Report 2018 25 Group Management Report Classification according to degree of impact Expected impact in EUR m Between 0.0 and 0.6 Between 0.6 and 1.5 Between 1.5 and 6.0 Between 6.0 and 15.0 Greater than 15.0 Degree of impact minor low moderate high critical Based on the likelihood that a specific risk event will occur and the impact it would have on alstria’s business, financial position, profit, and cash flow, each risk is classified as ‘high’, ‘medium’ or ‘low’ according to the following matrix. Risk classification Probability highly likely likely possible unlikely very unlikely L L L L L M M L L L H M M L L H H M M L H H H M M Degree of impact minor low moderate high critical L = low risk. M = medium risk. H = high risk. In 2018, the Company’s risk-management system was not exposed to any significant changes from the previous year. Key characteristics of the accounting-related internal control and risk-management system Regarding the reporting process, the objective of the control and risk-management system is to make sure that reporting is consistent and in line with legal requirements, generally accepted accounting principles, the International Financial Reporting Standards (IFRS), and internal guidelines. Only then can it provide true and reliable information to the recipients of the annual financial statements. To this end, alstria has implemented an internal control and risk-management system that combines all relevant principles, processes, and measures. The internal control system consists of two areas: control and monitoring. In organizational terms, the divisions’ treasury, controlling, and accounting divisions are responsible for control. The monitoring measures consist of elements that are incorporated in the process as well as independent external elements. The integrated measures include process-related, system-based technical controls such as the ‘dual control principle’ (which is applied universally) and software- based checking mechanisms. In addition, qualified employees with the appropriate expertise and specialized departments such as controlling, legal, and treasury perform monitoring and control functions as part of the various processes. 26 alstria Annual Report 2018 Group Management Report The Management Board and the Supervisory Board (in particular, the Audit Committee) are involved in the monitoring system. These groups perform various checks that are independent of the Company’s processes. The internal audit function is transferred to an external auditing firm. Accounting acts as the central interlocutor for special technical questions and complex reporting issues. If required, external experts (auditors, qualified accounting specialists, etc.) are consulted. In addition, monitoring related to accounting is executed by the Company’s controlling department. All items and main accounts for the consolidated companies’ income statements and balance sheets, as well as the consolidated income statements and the consolidated statement of financial position, are reviewed regularly for accuracy and plausibility. This is conducted both for the consolidated fi- nancial statements and for alstria’s individual financial statement. Accounting-related data are mon- itored monthly or quarterly, depending on the frequency of their preparation. The accounting-related risk-management system forms part of the alstria Group’s risk-management system. The risk owner responsible for the finance area monitors the risks that are relevant to the accuracy of accounting-related data. Risks are identified on a quarterly basis and are assessed and documented by the risk-management committee. Appropriate action is taken to monitor and optimize accounting-related risks throughout the Group. Description and assessment of risks In accordance with alstria’s risk-management system, all material risks inherent to the future devel- opment of the Group’s position and performance are described in this chapter. The individual risks that are described relate to the planning period from 2019 to 2021. alstria Annual Report 2018 27 Group Management Report Corporate risks Strategic risks Likelihood Risk impact Risk level Change since prior year Market environment risks unlikely moderate Risks in relation to changes to the legal environment Risks due to inefficient organizational structures Operational risks Maintenance risks Refurbishment projects risks Vacancy risk Risks relating to property transactions HR risks IT risks Shortfalls of rental payment risks Environmental risks Compliance risks Risks resulting from not complying with G-REIT legislation Risks arising from fraud or non-compliance Litigation risks Financial risks Valuation risks Breaches of covenants Tax risks Interest rate risks Liquidity risks unlikely moderate unlikely moderate possible possible unlikely unlikely possible possible very unlikely unlikely high high high moderate low low high low unlikely moderate unlikely unlikely unlikely unlikely unlikely unlikely unlikely moderate moderate high high high high moderate Refinancing on unfavorable terms Counterparty risks very unlikely very unlikely high high L L L M M M L L L L L L L L M M M M L L L unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged 28 alstria Annual Report 2018 Group Management Report Strategic risks Strategic risk management addresses the factors that influence the Company’s market environment, regulatory environment, and strategic corporate organization. Market environment risks For the Group, market environment risks are derived from macroeconomic developments and their impact on respective real estate markets. An economic downturn in the German market could result in a decreasing number of employees and in lower demand for rental areas in office properties. For alstria, this would lead to a higher risk of vacant space or to lower rental income. Developments that could have a negative impact on the export-sensitive German domestic market, at least indirectly through the reduction in foreign demand, are slowing growth in developing and emerging countries, the increasing political instability of certain countries in crisis, the continuing low interest rates of the European Central Bank, and the discussion about certain states’ high debt. While the developments described are currently no longer in the focus of public debate, the imminent exit of Great Britain from the EU, the trade policy of the US government and the interest rate policy of the US Federal Reserve have been added as uncertainties. Nonetheless, the German market is in a phase of sustained growth, which resulted in a strong economic upswing for the reporting period.* The first signs of a gradual end to this positive trend emerge from the developments mentioned are also seen by some of the market observers and analysts.** With most market research institutes predicting further, albeit weaker, growth, market environment risks remain at a low (L) risk level. Risks in relation to changes in the legal environment Risks related to the Company’s legal environment result from changes to regulations and laws. These may, in turn, have an impact on key regulatory requirements and on the corporate constitution of the alstria companies. These include alstria’s classification as a REIT and other regulations concerning publicly listed companies. New laws and regulations may result in new regulatory requirements and thus in higher expenses. Overall, risks regarding the legal environment are, like in the previous year, classified as low (L). Risk caused by inefficient organizational structures Within the scope of the business organization’s strategic direction, there are further risks caused by inefficient organizational structures and the Company’s dependence on IT systems and structures. Both the organizational structure and the IT infrastructure support strategic and operational objec- tives. The risk of strategic corporate organization therefore remains low (L). * Deutsche Bundesbank, Monthly Report – June 2018, Vol. 70, No 6, page 13, Frankfurt. ** Deutsche Bundesbank, Monthly Report – Monthly Report – January 2019, Vol. 70, No 1, page 5, Frankfurt; ifo Institut, press release December 13, 2018 ‘ifo Institute Expects Cooldown in German Economy, But No Recession’. alstria Annual Report 2018 29 Group Management Report Operational risks alstria’s operational risk management deals with property-specific risks and with general business risks. This includes vacancy risk, tenants’ creditworthiness, and the risk of falling market rents. Personnel-related risks, such as loss of know-how and competencies due to staff fluctuations, are also monitored in this risk area. alstria applies various early-warning indicators to monitor these risks. Ongoing insurance checks, such as rent projections, vacancy analyses, and the control of lease terms and termination clauses, are designed to help identify potential dangers and risks. Maintenance risks To plan for the requirements of maintenance measures, the Company makes assumptions about a property’s condition and the intended standard. Undetected defects, repair requirements resulting from external damage, new legal requirements regarding the condition of the building, and an incorrect assessment of the maintenance requirements could all result in higher-than-planned maintenance costs. Due to alstria’s still-high maintenance budgets, the maintenance risk is categorized as medium (M), as it was in the previous year. Refurbishment project risks alstria realizes a significant number of refurbishment projects. All risks related to these projects are managed through extensive project control and through a related budget-management process. Potential risks include those of delayed completion, budget overrun, and deficiencies in construction. The strong economy, especially in the construction industry, led to increasing demands on the procurement and execution of contracts. The risk resulting from refurbishment projects is still categorized as moderate (M). Vacancy risk In the case of lease terminations, leases that are not extended and existing vacancies, there is a risk that the rental area will not be re-let as planned, resulting in lower-than-anticipated revenues. alstria’s budgeting is based on the assumption that rental areas can be re-let within a defined period following the end of a lease. During the reporting period, leases for some large rental areas expired. However, the re-letting activities for these areas achieved a highly positive response. As in the pre- vious year, the overall vacancy risk was medium (M). Risks relating to property transactions alstria is exposed to risks related to the acquisition and disposal of real estate properties. Related risks include the partial or complete failure to detect the risks and liabilities associated with properties during the due diligence process. In case of the disposal of real estate assets, alstria usually gives certain warranties to the potential purchaser regarding factual and legal matters for the property in question. The possibility that alstria’s management is not aware of risks that are covered by certain elements and warranties given in a sales agreement cannot be fully ruled out. As a result, there is generally a risk that a prospective purchaser may charge alstria (as the seller) with breach of 30 alstria Annual Report 2018 Group Management Report warranty. From a purchasing perspective, alstria is exposed to the risks that hidden deficiencies on land and/or property are not observed or that unfavorable contractual agreements are transferred to the Company, resulting in additional future costs. In both acquisition and selling proceedings, alstria responds to these risks with thorough technical, legal, and tax analyses of all relevant property and contractual issues. It does so by employing internal and external lawyers, tax advisors, architects, construction engineers, and other required experts. As before, risks relating to transactions of properties are assessed to be of a low (L) to medium (M) level. HR risks The skills and motivations of alstria’s employees are decisive factors in the Company’s success. The risk of losing knowledge results from the fluctuation of staff and from the inability to recruit sufficiently qualified experts to fill vacancies in good time. Both cases could result in a shortfall of suitable experts and key personnel, which could endanger alstria’s competitive advantages in its markets as well as its further growth opportunities. alstria mitigates these risks through the following measures: selective, needs-oriented skill development for existing staff members; strengthening of its image as an attractive employer; university marketing; promotion of employee motivation through strong leadership and corporate culture; and profit-oriented variable remuneration schemes. Overall, alstria estimates the described risks to be at a low level (L), which corresponds to the situation at the end of the previous year. IT risks The majority of alstria’s business processes are supported by efficient IT systems. Any fault affecting the reliability or security of the IT system could lead to delays or interruptions in operating activities. alstria protects itself against IT risks through constant examination and enhancement of the information technology that it deploys. In addition, it has installed modern hardware and software solutions and safeguards against attacks. In view of the accumulation of attempted hacker attacks, measures to combat such cyberattacks have intensified. Structural security measures are in place to protect the computer center. All data are backed up daily in an internal data depository and once per week in a separate data depository. Workstations have access restrictions so that employees are only able to access the systems that they need for their work. Therefore, overall IT risks are assessed to be unlikely to materialize; as in the prior year, their possible consequences are considered to be low (L). Shortfall of rental payment risks An operational risk is a potential shortfall of rental payments from one or more major tenants; it could be realized as a result of an economic downturn or a particular case. Because many of alstria’s main tenants are public or highly rated institutions, the risk of a shortfall in payments is currently, as in the previous year, low (L). alstria Annual Report 2018 31 Group Management Report Environmental risks Considering the long-term nature of the real estate business and the immovable nature of the assets, it is of key importance to take into account the effect of climate change on the prospects. The specific risks related to climate change that the Company faces are the following: Physical risks – acute: Part of our portfolio is subject to extreme weather events that may weaken building structures and threaten tenants’ safety. Such phenomena will intensify in the coming years. alstria’s control process includes:  Use of risk assessments from insurance companies to determine which buildings need to be upgraded.  Insurances covering the portfolio from the loss of rent due to fire, storm, hail or any act of God with a total insured value at least as high as our assets’ balance sheet value. Transition risks – regulatory: After the Paris Agreement, new regulations, notably regarding energy efficiency restrictions, will be anticipated. This might impose more stringent obligations on the build- ing sector resulting in the need for more renovations per year. alstria’s control process includes:  Ongoing environmental monitoring and compliance with applicable laws and standards.  Participation in industry bodies to monitor early on emerging legislation. Transition risks – market: Climate change has shaped tenants’ behavior in requiring flexible office space often associated with energy-efficient solutions. Failing to respond to the growing demand for sustainability services can result in a lack of attractiveness of the assets, implying a subsequent de- crease in their rental potential. The prevention measures alstria takes are:  Offering additional services to help tenants run their offices efficiently.  Recognizing early the financial requirements to upgrade and modernize a building. Similar to the previous year, environmental risks are at a low (L) level. Compliance risks Risks resulting from not complying with G-REIT legislation alstria is registered in the commercial register as a German REIT-AG (G-REIT). The German REIT segment allows alstria to offer an attractive profile to investors and to distinguish itself in the capital markets as a REIT. The REIT shares are traded on the Frankfurt Stock Exchange. The G-REIT status does not have any influence on the admission to the regulated market (Prime Standard). Certain requirements have to be met by the Company in order to qualify for and retain its designation as a G-REIT. Following are the most significant requirements: The G-REIT must be a stock corporation listed on an organized market and its registered office and management must be in Germany. Its registered share capital must amount to at least EUR 15 million. All shares must be voting shares of the same class. Free float must be at least 15 %, and no investor may directly hold 10 % or more of the shares or shares that represent 10 % or more of the voting rights. Furthermore, at least 75 % of assets 32 alstria Annual Report 2018 Group Management Report must consist of real estate and at least 75 % of gross income must be generated from real estate. At least 90 % of annual profits as resulting under German GAAP-accounting must be distributed to shareholders, and the G-REIT’s equity may not fall below 45 % of the fair value of its real estate assets as recorded under IFRS. Due to consistent monitoring of compliance with all described REIT criteria, the risk of non-compli- ance is considered to be low (L), as in the previous year. REIT corporations are exempt from German corporate income tax (KSt) and German trade tax (GewSt). This tax exemption has been applied to the Company with retrospective effect starting on January 1, 2007. Capital and investment management activities maintain the Company’s G-REIT status in order to support its business activities. According to Section 15 of the REIT Act, alstria’s equity (as reported in its consolidated financial statements) must not fall short of 45 % of its immovable assets. If the minimum equity ratio is, how- ever, not satisfied for three consecutive financial years, the exemption from corporate income tax (KSt) and trade tax (GewSt) ceases at the end of the third financial year. The G-REIT equity ratio is 67.2 % as of the balance sheet date. Accordingly, alstria complies with the minimum G-REIT equity ratio requirement according to Section 15 of the G-REIT-Act (REITG). alstria cannot lose its G-REIT status as a result of failing to meet the 45 % threshold within the three-year forecast period through December 31, 2021. Risks resulting from fraud or non-compliance alstria depends on all employees and management respecting the compliance standards in place. alstria’s business expects employees and the members of management to comply with laws, policies, and procedures as prescribed by the documented policies, procedures, and laws. If alstria’s senior management fails to document and reinforce the Company’s policies and procedures or employees commit criminal, unlawful, or unethical acts (including corruption), this could have an adverse material effect on alstria’s business, financial condition, and results of operations. It would also harm alstria’s reputation in the real estate market, thereby negatively affecting future business opportunities. The General Data Protection Regulation (Datenschutzgrundverordnung), which came into force in the past financial year, provides significantly higher fines in the event of infringements. The data protection measures already in place at alstria, as well as newly introduced guidelines and processes, are in line with the requirements of the General Data Protection Regulation. alstria has implemented a compliance organization, which deals with adequate and documented compliance rules and regulations and provides training to all employees concerning compliance-related topics. The materialization of compliance risks is assessed to be low (L), which is unchanged from the previous year. alstria Annual Report 2018 33 Group Management Report Litigation risks alstria office REIT-AG or any of its subsidiaries could be involved in pending or foreseeable court or arbitration proceedings that might have a significant impact on the Group’s business position at any time. Other risks might arise from legal actions taken to address warranty claims, repayment claims, or any other claims brought forward in connection with divested properties or implemented development projects over the last few years. Risks associated with the change of legal form of DO Deutsche Office AG into the limited part- nership alstria office Prime Portfolio GmbH & Co. KG in 2016 Some shareholders of former DO Deutsche Office AG have taken the view that the amount of cash compensation that was offered to those former DO Deutsche Office AG shareholders who declared an objection during the general meeting of DO Deutsche Office AG on July 12, 2016, and declared to exit the limited partnership alstria office Prime Portfolio GmbH & Co. KG, was set too low. For this reason, these shareholders used the opportunity to have the fairness of the cash compensation reviewed in a judicial arbitration proceeding and filed the necessary application for the initiation of such a pro- ceeding. In the event that the court rules in a final decision that the cash compensation has to be improved by the Company, such a decision will, in accordance with Section 13 of the German Arbi- tration Proceedings Act, be effective for and against all the shareholders of former DO Deutsche Office AG who are entitled to cash compensation, e. g., all shareholders who declared an objection during the Annual General Meeting of DO Deutsche Office AG on July 12, 2016. This means that the additional cash compensation fixed by the court will also be paid to shareholders who have not filed an application in the arbitration proceeding and/or have already declared their exit from the limited partnership. As of the date of the transformation notice published with the commercial register of the local court in Hamburg, the additional cash compensation will have to be made with an annual interest of five percentage points above the base lending rate effective at that time. This right to an additional cash compensation of an unlimited amount with interest might result in a financial burden and hence have an adverse impact on the net assets, financial position, and results from operations of the Group. Prior to the transformation, the Company obtained an expert opinion with the aim of establishing the enterprise value and adequate cash compensation. Subsequently, the adequate cash compensation was subject to a mandatory audit by an independent expert, as prescribed by law. In addition to measures implemented before the litigation to reduce the risk of an additional cash com- pensation, the Company receives legal support from external advisors in the current proceeding. The effects of the described lawsuit on the risk of litigation as well as the general risk situation are considered low due to the expected low likelihood of occurrence. Provisions were not made. Apart from these lawsuits, neither alstria office REIT-AG nor any of its subsidiaries are involved in pending or foreseeable court or arbitration proceedings that might have a significant impact on the Group’s business position. This also applies to legal actions addressing warranty claims, repayment claims or any other remuneration brought forward in connection with divested properties or implemented development projects over the last few years. The respective Group companies have 34 alstria Annual Report 2018 Group Management Report accounted for appropriate provisions to cover any potential financial charges from court or arbitration proceedings. Since none of the Group’s companies are currently exposed to any further civil rights proceedings or other kind of legal dispute, nor is this expected to occur, the risk of legal disputes is classified as low (L), as it was in the previous year. Financial risks Due to alstria’s refinancing strategy, its financial risk situation remained stable compared to the previous year’s reporting period. Valuation risks The fair value of the real estate properties owned by the Company reflects the market value as determined by independent appraisers. It can be subject to change in the future. Generally, the market value of real estate properties depends on a variety of factors, some of which are exogenous and may not be under alstria’s control. These factors include declining rent levels, decreasing demand, and increasing vacancy rates. Many qualitative factors are also decisive in the valuation of a property, including a property’s expected market rents, its condition, and its location. The final assessment of the mandated appraiser is, to a certain extent, discretionary and may differ from the opinion of another appraiser. Should the factors considered or assumptions made in valuing a property change in order to reflect new developments, or for other reasons, subsequent valuations of the respective property may result in a decrease in the market value ascribed to such a property. If such valuations reveal significant decreases in market value compared to prior valuations, the Company can incur significant revaluation losses with respect to such properties. Factors such as economic changes, interest rate fluctuations, and inflation may adversely affect the value of the properties. To minimize these risks, regional diversification of investment portfolios, consistent focus on the individual needs of tenants, and detailed market research and analysis (broker reports) are applied. In addition, the market value of all of alstria’s assets is determined annually at year-end by independent, internationally recognized experts. In summary, the risk of unexpected devaluations is, as in the previous year, classified as medium (M). Breaches of Covenants In the process of taking out loans and the issuance of a Schuldschein, alstria agrees to comply with certain covenants, such as not to exceed a certain level of debt (LTV) or to achieve a minimum income (debt service coverage ratios) from mortgaged properties. In the event of a breach of these covenants, consequences would arise, such as increased credit margins or, in the worst case, an extraordinary termination of a loan by the lender. The Group’s current LTV ratios as described above, give signifi- cant leeway to the permitted leverage ratios. Hence, the risk of a breach of covenants is at present classified as medium (M), as it was in the previous year. alstria Annual Report 2018 35 Group Management Report Tax risks REITs are completely exempt from corporate income tax and trade tax. As a result, tax risks can only arise in the case of loss of REIT status or at a subsidiary level. Additionally the Group as a whole faces risks from value-added tax, real transfer tax and property tax. Furthermore, it is possible that changes in tax laws or their interpretations can result in a higher tax liability for prior tax periods that have not yet been finally approved. As consequence of the takeover of the alstria office Prime Group, companies are included in the consolidated financial statements that are not subject to the regulations of the REIT legislation. The restructuring, which was implemented during the 2016 financial year, and in particular the conversion of the legal form of these companies into limited partnerships, resulted in the taxation of hidden reserves and hidden liabilities existing within the acquired companies. Subsequently, the companies are tax transparent. Due to the income tax exemption as a REIT and consistent monitoring of tax relevant issues by internal and external tax experts, the probability of a tax loss is considered to be limited. Since certain tax- related issues, such as real estate transactions or valuations of assets and liabilities as well as a re- entry into a tax liability status could result in high tax obligations over the three-year risk period, the risk impact is considered to be significant. As a result of the Federal Constitutional Court judgment, the German Federal Government is required to present a new regulation on land tax by the end of 2019. Different concepts are being discussed by the coalition parties. a new concept should, on average, stay at the same level of tax expenses. Nevertheless, a potential increase in land tax caused by a new regulation cannot be closed out for alstria’s properties. Basically, changes in property tax affect tenants by way of higher service charge costs. There was a proposal to prohibit the passing on of costs to the tenant. If this proposal really should be realized, it can be assumed that commercial leases based on private-sector autonomy will not be affected. However, the Federal Constitutional Court will allow the application of the current land tax rates until the end of the year 2024. Therefore, higher land tax rates are not expected for the next three years. This results in an overall tax risk level that is moderate (M), which is unchanged from the previous year’s average tax risk. Interest rate risks Interest rate risks result from fluctuations in market interest rates. These affect the amount of interest expenses in the financial year and the market value of derivative financial instruments used by the Company. alstria’s hedging policy allows the use of a combination of plain vanilla caps and swaps if applicable in order to limit the Company’s exposure to interest rate fluctuations. It still provides enough flexibility to allow for the disposal of real estate assets, avoiding any costs associated with an over- hedged situation. The interest base for the financial liability (loan) is the three-month EURIBOR, which is adjusted every three months. The maturity of the derivative financial instruments is linked to the 36 alstria Annual Report 2018 Group Management Report term of maturity of the loans. Derivative financial instruments relate to interest caps in order to cap the interest at a set maximum. As of the balance sheet date, the main part of funding consists of long-term fixed-interest loans and bonds and is therefore not subject to interest rate risk up to its maturity. The floating interest rate loans are mainly hedged by interest rate caps. For the possible use of a variable-rate credit line of up to EUR 100,000 k, which is not fully hedged by derivative financial instruments, and the requirement to refinance a bond in 2021, i. e. within the risk observation period, the interest rate risk remains unchanged at the balance sheet date as a medium risk (M). Liquidity risk One of alstria’s core processes is cash management. The Company manages its future cash position and monitors its progress on a daily basis. A cash forecasting tool is used to prevent liquidity risks. As a basis for analysis, this liquidity planning tool makes use of the expected cash flows from business activities and the maturity of the financial investments. Due to the refinancing implemented in recent years, including the placement of a convertible bond and three corporate bonds with diversified maturity profiles, the substantial liquidity risk arising from the repayment of all or most of alstria's credit commitments has been successfully managed. Since the main part of the loans and bonds will not be due until the year 2021, the liquidity risk resulting from repayment obligations is currently, as in the previous year, low (L). Refinancing risks The main financial instruments used by the Group are fixed-interest bonds. In addition, there are mortgage-backed bank loans and derivative financial instruments. The main purpose of the bonds and the bank loans is to finance alstria’s business activities. Derivative financial instruments include interest caps. The purpose of these derivative financial instruments is to hedge against interest risks arising from the Company’s business activities and its sources of finance. The main risks arising from the Group’s financial instruments are cash flow risks, interest rate risks, and liquidity risks. alstria Group’s current Net LTV is 30.4 %. This is a reasonable ratio compared to the average leverage of German real estate companies. The Group’s bank loan LTVs on the balance sheet date are well below the LTVs permitted under the respective loan agreements (see an overview of loan facilities on page 19). The risk of a covenant breach was thus encountered effectively. The creditworthiness of alstria was classified by the rating agency Standard & Poor’s as unchanged at BBB (‘Investment Grade’) at the end of the reporting period. The refinancing of the majority of alstria’s bonds and bank loans is not required before the 2021 financial year, when one out of three bonds matures. The two other bonds mature by the 2023 and 2027 financial year, respectively, so that a diversified maturity profile exists and the refinancing of the entire loans in one amount can be avoided (see the maturity profile of the loans on page 20). As a result, the risk of refinancing on unfavorable terms was classified as low (L). alstria Annual Report 2018 37 Group Management Report Counterparty risks alstria hedges a portion of its risk by applying third-party instruments (interest rate derivatives, property insurance, and others). alstria’s counterparties in these contracts are internationally recognized institutions that are rated by the leading rating agencies. alstria reviews the ratings of its counterparties on a regular basis in order to mitigate any risk of default. The financial crisis of 2007 has raised doubts regarding the reliability of rating agencies’ assessments. In response to this concern, alstria makes use of other sources of information to verify the rating agencies’ assessments. alstria is otherwise not exposed to any significant credit risks. Hence same as last year, they can be classified as low (L). Overall risk assessment by the Management Board alstria office REIT-AG consolidates and aggregates all risks reported by the different business units and functions adhering to its risk management policy. Compared to the previous year, the overall risk situation of alstria remained stable. In the 2018 financial year, only minor or immaterial changes were noted in alstria’s risk level matrix for risks categorized as high (H) or medium (M). At the end of the year, risks categorized as high accounted for 1.0 % (December 31, 2017: 1.0 %) of all identified risks while risks categorized as medium accounted for 41.2 % (December 31, 2017: 39.6 %) of all identified risks. On the one hand, this is due to the economic environment in alstria’s investment market, which still proves to be economically strong. On the other hand, the Company’s stable funding position, conservative level of debt, and solid REIT equity ratio support this assessment. The long-term refinancing position mitigates the risk of higher borrowing costs in the event of rising interest rates, the low LTV reduces the risk that could arise if the property valuations should come under pressure, e. g. as a result of interest rate hikes. Sufficient precautionary measures have been undertaken to counteract identifiable risks. In addition to assessing the potential impact of the realization of risks on the value of the Group’s net assets, the potential liquidity requirements for selected key risks are identified to cover a period of three years. The assessed amount of liquidity amounted to EUR 27.4 million as of the balance sheet date. In our view, the risks described in our aggregated risk report do not threaten our ability to continue as a going concern either individually or cumulatively, given their likelihood of occurrence and po- tential level of impact. 38 alstria Annual Report 2018 Group Management Report REPORT ON OPPORTUNITIES Management of opportunities alstria’s opportunities management aims to identify and assess opportunities as early as possible and to initiate appropriate measures in order to take advantage of those opportunities and transform them into business success. Growth and earnings opportunities result both from alstria’s existing real estate portfolio and from its acquisition of properties. Depending on the property’s position in the life cycle, opportunities may be found in repositioning and development, in strengthening tenant relationships, or in selling the property. The Company’s financing activities safeguard the necessary funding to implement these activities. Here, opportunities are based on ensuring sustainable financing, including equity funding, on favorable terms. The evaluation of opportunities is carried out in the context of annual budget planning and on an ongoing, occasional basis during the year. The process starts with a careful analysis of the market environment and of the market opportunities related to the properties held in the portfolio. These include the assessment of criteria such as tenant needs, property categories, and regulatory changes. Regular reporting addressing the Management supports the monitoring of growth initiatives within the budget and planning-approval processes. The alstria Management Board is regularly updated on the status and progress of the initiatives being implemented. In addition, the real estate operations department receives monthly reports in which the planned costs and revenues are compared to the actual budget consumption and revenues. In addition, financial and liquidity planning and forecasts are updated, and changes to the project scope are clarified. Opportunities related to real estate acquisitions The location of a property is essential for its attractiveness. Opportunities arise when a regional market is characterized by favorable demographics and real estate dynamics. Together with optimal property management, this results in opportunities for long-term capital appreciation. alstria’s ac- quisition strategy is aimed at identifying properties with the described opportunity structure. Its in- vestment strategy therefore focuses on acquiring properties and portfolios with higher vacancy rates that are thus open to additional growth opportunities through the stabilization of these properties’ leases. Acquisitions will only be performed if the investment volume offers the prospect of achieving a sustainable increase in value. In particular, the low LTV debt ratio offers opportunities in the form of greater flexibility for acquiring real estate. alstria Annual Report 2018 39 Group Management Report Opportunities related to tenant relationships Structured and active property and asset management both ensures the quality of our leasing service and is the basis for sustainable tenant relationships. Opportunities arise through a flexible response to existing or potential tenants’ needs. The Company has the knowledge and resources to provide solutions and to implement tenants’ requirements. This gives rise to opportunities to generate sustainable, long-term leases. Opportunities arising from real estate development As a long-term-oriented owner of real estate, alstria’s property portfolio also entails aging buildings that require refurbishment or repositioning. The modernization of a property opens up the oppor- tunity for value creation by reshaping the asset for the next 20 to 30 years and strengthening its future attractiveness in the market and for tenants. Opportunities arising from financing alstria’s financing strategy is focused on the optimal provision of funds to invest in new properties and development projects. Opportunities arise from the optimization of these financing terms. This requires implementing long-term and flexible funding at favorable conditions and safeguarding financial covenants at all times. A significant opportunity also arises out of a low debt ratio (the Net LTV of bank loans is currently 30.4 %; see the overview of loan facilities on page 19), representing a comfortable base for future funding and growth. Funding options include mortgage loans, corporate bonds, and equity funding. Opportunities arise from the diversification of funding sources and with regard to the rating obtained. Overall summary of the Opportunities Report alstria’s current financial situation involves a stable financial position at favorable interest rates until 2021. The rating allows for greater flexibility in terms of new funding sources. Concerning revenues, alstria benefits from long-term rental agreements with an average lease length of approximately 4.8 years and potential increases in rents due to decreasing vacancy rates. In addition, the Company possesses a range of properties that offer attractive and value-adding refurbishment opportunities. alstria’s portfolio is well-balanced and contains many first-class anchor buildings with high-quality tenants. The low LTV debt ratio offers the chance of greater flexibility for acquiring real estate in the event that spontaneous opportunities arise. Therefore, alstria is well-positioned to continue its buy-and-manage strategy and to successfully identify and implement relevant future market opportunities. alstria’s core competence is asset management. The asset repositioning and refurbishment that alstria is continuously undertaking will strengthen the basis for increased organic value across the portfolio. 40 alstria Annual Report 2018 Group Management Report SUSTAINABILITY REPORT In November 2018, alstria published its ninth sustainability report. The report is based on the GRI Standards and has received third-party assurance for all disclosed environmental and social indicators. It provides information about alstria’s next steps toward a carbon-neutral economy. The concept of sustainability goes beyond the reporting exercise itself. Its sustainability approach is embedded in every decision across all levels of the organization. To alstria, pursuing a path of con- tinuous improvement and innovation is what sustainability is all about. 2017 has been a successful year for alstria, as the Company managed to emit nearly 20 times less carbon emissions compared to 2013, and 13 % less than the previous year. Furthermore, alstria man- aged to procure 98 % renewable energy for the electricity that it controls across the portfolio, being close to meeting its RE100 target. Its comprehensive low-carbon portfolio strategy has received a prize in 2018 from the German Property Federation (ZIA) and has been further recognized as a sector leader by Carbon Disclosure Project (CDP). alstria Annual Report 2018 41 Group Management Report DISCLOSURES REQUIRED BY TAKEOVER LAW Disclosures and the explanatory report pursuant to Section 315a para. 1 of the German Commercial Code (Handelsgesetzbuch, HGB) Composition of subscribed capital On the balance sheet date as of December 31, 2018, the share capital of alstria amounted to EUR 177,416,497.00, divided into 177,416,497 no-par value bearer shares. All shares are fully paid in and have equal rights and obligations. Each share entitles the bearer to one vote at the Annual General Meeting and is decisive for the shareholder’s share in the profits of the Company. The individual rights and duties of the shareholders result from the provisions of the German Stock Corporation Act (Ak- tiengesetz, AktG), in particular Sections 12, 53a et seq., 118 et seq. and 186. Restrictions on voting rights or the transfer of shares The exercise of voting rights and the transfer of shares are based on the statutory requirements and alstria’s Articles of Association; the latter do not restrict either of these activities. According to Sections 71b and 136 AktG, for example, the voting rights of the affected shares are excluded by law. Other restrictions as to voting rights or the transfer of shares do not exist, or, as far as they arise from agreements between shareholders, are not known to the Management Board. Shareholdings exceeding 10% of the voting rights On the balance sheet date as of December 31, 2018, alstria was not aware of any shareholders directly holding more than 10 % of the voting rights. The Government of Singapore notified us in April 2016 that via controlled undertakings, it held approximately 12.6 % of alstria’s shares. In addition, please refer to the disclosures in the Notes under no. 17.3 Voting Right Notifications. Shares with special rights There are no shares with special rights of control. System of Control for any Employee Share Scheme in which employees do not directly exercise the Control Rights The employees who hold alstria shares exercise their rights of control as any other shareholders do, in accordance with the applicable law and the Articles of Association. Appointment and dismissal of Management Board and amendments to the articles of association alstria’s Management Board consists of one or more members who may be appointed or dismissed in accordance with Sections 84 and 85 AktG. The Articles of Association do not contain any special provisions in this respect. Pursuant to Section 84 AktG, members of the Management Board are appointed by the Supervisory Board for a maximum term of five years. Reappointment or extension of the term of office is permitted, for a maximum of five years in each case. Amendments to the Articles of Association are made pursuant to Sections 179 and 133 AktG. Pursuant to Section 12 para. 2 of the Articles of Association, the Supervisory Board is furthermore authorized 42 alstria Annual Report 2018 Group Management Report to make changes and amendments to the Articles of Association that merely affect the wording without passing a shareholder resolution in the General Meeting. In addition, the Supervisory Board has, by resolution of the Annual General Meetings on May 16, 2017 and April 26, 2018, been authorized to adapt the wording of the Articles of Association to the utilization of the Conditional Capital III 2017 and the Authorized Capital 2018 and after expiration of the applicable authorization periods. Pursuant to Section 15 para. 5 of the Articles of Association in conjunction with Sections 179 para. 2 and 133 of the AktG, shareholders may make resolutions regarding such amendments at a general meeting with a simple majority of the votes cast and a simple majority of the share capital represented. Insofar as a larger majority is prescribed by law, such majority shall be decisive. The Articles of Association were last amended in the reporting year by a resolution passed by the Supervisory Board on June 8, 2018: Section 5 para. 1, 2 and 6 of the Articles of Association were formally adapted to capital increases executed from the Company’s Conditional Capital 2013 and Conditional Capital III 2015. Section 5 para. 5 of the Articles of Association has been deleted as the Conditional Capital 2013 became obsolete. Authority of Management Board regarding the issue and buyback of shares 1. Authorized Capital The Articles of Association authorize the Management Board, with the approval of the Supervisory Board, to increase the share capital on or before April 25, 2023, by issuing new no-par value bearer shares against contributions in cash and/or in kind once or repeatedly up to a total amount of EUR 33,950,413.00. Further details are governed by Section 5 para. 3, 4 and 4a of the Articles of Association. 2. Conditional Capital alstria holds two conditional capitals (pursuant to Sections 192 et seq. of the AktG), which are regulated in Sections 5 para. 6 and 7 of the Company’s Articles of Association. a) Conditional capital III 2015 The share capital is conditionally increased by an amount of up to EUR 356,250.00 by issuing up to 356,250 no-par value bearer shares. The conditional capital increase shall be used exclusively to grant shares to the holders of convertible profit participation certificates issued by the Company through May 5, 2020, in accordance with the authorization of the General Meeting held on May 6, 2015. The conditional capital increase is only carried out to the extent that issued convertible profit participation certificates are converted into shares of the Company and no treasury shares are used to satisfy the certificates. The new shares shall participate in the Company’s profits from the beginning of the financial year in which they come into existence as a result of the conversion of certificates. alstria Annual Report 2018 43 Group Management Report b) Conditional capital III 2017 Furthermore, the share capital is conditionally increased by an amount of up to EUR 1,000,000.00 by issuing up to 1,000,000 no-par-value bearer shares. The conditional capital increase shall be used exclusively to grant shares to the holders of convertible profit participation certificates issued by the Company through May 15, 2022, in accordance with the authorization of the General Meeting held on May 16, 2017. The conditional capital increase is only carried out to the extent that issued convertible profit participation certificates are converted into shares of the Company and no treasury shares are used to satisfy the certificates. The new shares shall participate in the Company’s profits from the beginning of the financial year in which they come into existence as a result of the conversion of certificates. 3. Purchase of treasury shares In the General Meeting held on May 16, 2017, the shareholders authorized the Management Board to acquire shares of up to a total of 10 % of the Company’s share capital in place at the time of the authorization’s issuance until May 15, 2022. The acquired shares and other treasury shares in the possession of, or to be attributed to, alstria (pursuant to Sections 71a et seq. of the AktG) may at no point in time amount to more than 10 % of the share capital. Shares may be purchased through a stock exchange, by means of a public offer to all shareholders, or by making use of financial derivatives (put or call options, or a combination of both). Significant agreements of alstria office REIT-AG that take effect upon a change of control following a takeover bid Some of alstria office REIT-AG’s financing agreements contain the clauses common to such contracts regarding a change of control. In particular, the agreements entitle the lenders to request repayment of the loans or an obligation by alstria to repay the loans in the event that any person, company, or a group of persons should acquire, directly or indirectly, 50 % of the voting rights or a controlling influence in alstria. However, for some financing agreements, the repayment obligation is subject to a downgrade of the Company’s rating, occurring within 120 days of the change of control. The terms and conditions of the fixed-interest bonds issued by the Company in the 2015, 2016 and 2017 financial year entitle each bond holder to request the Company to redeem or purchase its bond for 101 % of the principal amount of such bond plus unpaid interest accrued, if any person, company, or group of persons should acquire (directly or indirectly) more than 50 % of the voting rights in alstria and within 120 days after such change of control the rating for the Company or the bond is down- graded. The total volume of obligations under those agreements with corresponding change of control clauses amounted to approximately EUR 1,177 million on the balance sheet date. 44 alstria Annual Report 2018 Group Management Report Compensation agreements with Management Board members and employees in case of a takeover bid No compensation agreements with Management Board members or employees are in place that will take effect in case of a takeover bid. These provisions comply with statutory requirements or are reasonable and common practice at comparable, publicly listed companies. They are not intended to hinder potential takeover bids. ADDITIONAL GROUP DISCLOSURE EMPLOYEES As of December 31, 2018, alstria had 149 employees (compared to 121 on December 31, 2017). The annual average number of employees was 139 (compared to 118 in the previous year). These figures exclude Management Board members. REMUNERATION REPORT Management Board members’ compensation comprises a fixed and a variable component that are linked to the Company’s operating performance. In addition to the bonus, members of the Management Board receive share-based remuneration as a long-term incentive. Members of the Supervisory Board receive fixed remuneration. The remuneration report (see pages 157 to 164), which contains details of the principles for the remuneration of the Management Board and Supervisory Board, forms an integral part of the audited Group management report. CORPORATE GOVERNANCE GROUP DECLARATION PURSUANT TO SECTION 315D HGB (“HANDELS-GESETZBUCH”: GERMAN COMMERCIAL CODE) The complete corporate governance declaration is published on alstria office REIT-AG’s website (www.alstria.com). Thus, it is made permanently accessible to the public. DIVIDEND At the Annual General Meeting, the Managing Board intends, in agreement with the Supervisory Board, to submit the following proposal to allocate the unappropriated net income of alstria office REIT-AG for the 2018 financial year: To distribute a dividend of EUR 0.52 for each share of no par value entitled to the dividend for the 2018 financial year and that exist at the date of the Annual Shareholders’ Meeting, with the remaining amount to be carried forward. Payment of the proposed dividend is contingent upon approval by alstria shareholders at the Annual General Meeting on May 22, 2019. The proposed dividend of EUR 0.52 per share for the 2018 financial year represents a total payment of EUR 92.3 million based on the number of shares entitled to the dividend at the balance sheet date. alstria Annual Report 2018 45 Group Management Report EXPECTED DEVELOPMENTS The report on expected developments contains statements related to anticipated future developments. The Company’s development depends on various factors, some of which are beyond alstria’s control. Statements about expected developments are based on current assessments and are hence, by their very nature, exposed to risks and uncertainty. The actual development of the alstria Group may differ positively or negatively from the predicted development presented in the statements of this report. EXPECTED ECONOMIC DEVELOPMENT The German economy remains on a growth path. GDP growth was at 1.5 % in 2018 compared to the previous year. The employment rate also increased by 1.3 % to 44.8 million. Economic growth will also continue in 2019, albeit at a low level. The German government expects a GDP growth of 1.0 % compared to the previous year and a positive development in the German labor market of approximately 45.2 million for 2019. German economic associations also estimate a positive economic development for 2019, as well as a rise in investments in public construction of 3.0 %. The construction industry remains the growth driver.* DEVELOPMENT OF THE REAL ESTATE MARKET: OUTLOOK FOR 2018 In connection with low interest rates and a lack of investment alternatives, the importance of real estate as an investment class will still be high. Demand for real estate in core areas is estimated to remain high in 2019. Due to the limited investment offerings, the tendency to invest in value-added assets will continue. OUTLOOK FOR THE ALSTRIA GROUP Based on the expected stability of the German economy and of the real estate market, the Company does not expect significant changes in alstria’s direct environment. However, unexpected changes in terms of interest rates, further property acquisitions, property disposals, or other changes in the assumptions for the 2019 financial year could have an impact on the projections. Mainly due to the transfer of benefit and burden of the assets sold in 2018, alstria expects revenues to decrease in 2019 by approximately EUR 3 million to EUR 190 million, compared to revenues in 2018. For the 2019 financial year, the Company expects FFO of around EUR 112 million. The year-on-year decrease in FFO compared to the 2018 achieved FFO of EUR 115 million is mainly due to lower revenues. * Please refer to Annual Economic Report 2018 from the Federal Ministry of Economics and Energy as well as ifo, IfW, IMK, RWI und IWH. 46 alstria Annual Report 2018 Group Management Report Since the Company pays out a significant part of its funds from operations as dividends, future external growth largely depends on the Company’s ability to raise additional equity. Consequently, further portfolio growth is highly dependent on the development of the global equity markets and is therefore difficult to predict over a longer period of time. Hamburg, February 21, 2019 alstria Annual Report 2018 47 Group Management Report 48 alstria Annual Report 2018 Consolidated Financial Statements DETAIL INDEX CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS ......................................................... 50 CONSOLIDATED INCOME STATEMENT .......................................................................... 50 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ................................................ 51 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...................................................... 52 CONSOLIDATED STATEMENT OF CASH FLOWS ................................................................ 54 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ...................................................... 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS .................................................. 58 1. BASIS OF PRESENTATION .................................................................................. 58 2. BASIS OF PREPARATION ................................................................................... 58 3. SEASONAL OR ECONOMIC EFFECTS ON BUSINESS ..................................................... 86 4. SEGMENT REPORTING ..................................................................................... 86 5. NOTES TO THE CONSOLIDATED INCOME STATEMENT ................................................ 86 6. NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION – ASSETS ................. 91 7. NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION – EQUITY AND LIABILITIES ................................................................................................. 101 8. OTHER NOTES .............................................................................................. 109 9. RELATED PARTY RELATIONSHIPS ....................................................................... 110 10. EARNINGS PER SHARE .................................................................................... 111 11. DIVIDENDS PAID AND DIVIDENDS PROPOSED .......................................................... 111 12. EMPLOYEES ................................................................................................. 112 13. SHARE-BASED REMUNERATION .......................................................................... 113 14. FINANCIAL RISK MANAGEMENT .......................................................................... 118 15. SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD .............................. 127 16. UTILISATION OF EXEMPTING PROVISIONS ............................................................. 127 17. DISCLOSURES PURSUANT TO THE WERTPAPIERHANDELSGESETZ [GERMAN SECURITIES TRADING ACT] AND EUROPEAN MARKET ABUSE REGULATION [MAR] ............................. 127 18. DECLARATION OF COMPLIANCE PURSUANT TO AKTG SECTION 161 ............................... 129 19. AUDITORS’ FEES ........................................................................................... 130 20. MANAGEMENT BOARD..................................................................................... 130 21. SUPERVISORY BOARD ..................................................................................... 130 alstria Annual Report 2018 49 Consolidated Financial Statements CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT For the period from January 1 to December 31, 2018 EUR k Revenues Revenues from service charge income Real estate operating expenses Net rental income Administrative expenses Personnel expenses Other operating income Other operating expenses Net result from fair value adjustments to investment property Net result from the disposal of investment property Net operating result Net financial result Share of the result of companies accounted for at equity Net loss from fair value adjustments to financial derivatives Pretax result Income tax expenses Consolidated profit Attributable to: Notes 5.1 5.1 5.2 5.3 5.4 5.5 5.6 6.1 5.7 5.8 2.2.3 5.8; 6.5 5.9 2018 193,193 39,160 -63,285 2017 193,680 37,387 -58,156 169,068 172,911 -8,834 -15,910 10,656 -13,746 398,954 14,887 555,075 -8,033 -13,823 10,139 -14,371 181,492 19,693 348,008 -29,497 -67,708 -70 28,118 2,452 -9,334 527,960 299,084 -546 527,414 -2,097 296,987 Shareholders of alstria office REIT-AG 527,414 296,987 Earnings per share in EUR Basic earnings per share Diluted earnings per share 10 10 3.02 3.00 1.94 1.85 50 alstria Annual Report 2018 Consolidated Financial Statements CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the period from January 1 to December 31, 2018 EUR k Notes 2018 2017 Consolidated profit for the period 527,414 296,987 Items that will not be classified to the income statement in a future period: Additions in the revaluation surplus according to IFRS 16 6.3;7.1 Other comprehensive income for the period 3,485 3,485 0 0 Total comprehensive income for the period 530,899 296,987 Total comprehensive income attributable to Shareholders of alstria office REIT-AG 530,899 296,987 alstria Annual Report 2018 51 Consolidated Financial Statements CONSOLIDATED STATEMENT OF FINANCIAL POSITION As of December 31, 2018 ASSETS EUR k Noncurrent assets Investment property Equity-accounted investments Property, plant and equipment Intangible assets Financial assets Derivatives Total noncurrent assets Current assets Trade receivables Income tax receivables Other receivables Cash and cash equivalents thereof restricted Assets held for sale Total current assets Notes Dec. 31, 2018 Dec. 31, 2017 6.1 6.2 6.3 6.3 6.4 6.5 6.6 6.6 6.7 6.8 3,938,864 3,331,858 8,589 18,972 349 36,737 0 8,659 22,442 313 36,567 14 4,003,511 3,399,853 6,865 43 8,314 132,899 0 7,153 25 14,760 102,078 0 29,620 60,200 177,741 184,216 Total assets 4,181,252 3,584,069 52 alstria Annual Report 2018 Consolidated Financial Statements EQUITY AND LIABILITIES Notes Dec. 31, 2018 Dec. 31, 2017 EUR k Equity Share capital Capital surplus Retained earnings Revaluation surplus Total equity Noncurrent liabilities Limited partnership capital noncontrolling interests Long-term loans and bonds, net of current portion Other provisions Other liabilities Total noncurrent liabilities Current liabilities Limited partnership capital noncontrolling interests Short-term loans Trade payables 7.1 7.2 7.3 7.4 7.5 7.2 7.3 7.5 Profit participation rights 5.4; 13.2 Derivatives Income tax liabilities Other provisions Other current liabilities Total current liabilities Total liabilities 6.5 7.6 7.4 7.5 177,416 153,962 1,538,632 1,363,316 964,554 437,382 3,485 0 2,684,087 1,954,660 64,013 53,834 1,336,090 1,381,965 1,275 5,010 1,499 4,408 1,406,388 1,441,706 47 14,171 4,400 530 0 5,945 5,477 60,207 47 86,450 7,268 538 27,529 13,675 2,992 49,204 90,777 187,703 1,497,165 1,629,409 Total equity and liabilities 4,181,252 3,584,069 alstria Annual Report 2018 53 Consolidated Financial Statements CONSOLIDATED STATEMENT OF CASH FLOWS For the year ending December 31, 2018 EUR k Notes 2018 2017 1. Cash flows from operating activities Consolidated profit or loss for the period 527,414 296,987 Interest income Interest expense Other financial expenses Result from income taxes Unrealized valuation movements Other noncash income (–)/expenses (+) Gain (–)/loss (+) on disposal of investment properties Depreciation and impairment of fixed assets (+) Increase (–)/decrease (+) in trade receivables and other assets not attributed to investing or financing activities Increase (+)/decrease (–) in trade payables and other liabilities not attributed to investing or financing activities Cash generated from operations 5.8 5.8 5.8 5.9 8.3 5.7 6.3 Interest received Interest paid Income taxes paid −745 29,821 420 546 −816 35,984 32,540 2,097 −389,465 −190,962 5,616 −14,887 794 −1,055 5,174 −19,693 490 −765 −369 5,240 158,090 166,276 745 −26,658 −13,163 817 −36,299 -8,526 Net cash generated from operating activities 119,014 122,268 2. Cash flows from investing activities Acquisition of investment properties Proceeds from the sale of investment properties Payment of transaction cost in relation to the sale of investment properties Acquisition of other property, plant and equipment Proceeds from the equity release of interests in joint ventures Payments for investment in financial assets −253,119 −251,505 119,200 87,975 −139 −2,145 0 0 −1,160 −627 49,850 −1,764 Net cash used in investing activities −136,203 −117,231 54 alstria Annual Report 2018 Consolidated Financial Statements EUR k Notes 2018 2017 3. Cash flows from financing activities Cash received from cash equity contributions Payment of transaction costs of issue of shares Payments for the acquisition of minority interests Distributions on limited partnerships of minority shareholders Proceeds from borrowing Proceeds from the issuing of corporate bonds Payments of transaction costs for taking out loans Payments of dividends 7.1 7.1 7.3 7.3 11 Payments due to the redemption of bonds and borrowings Payment of loan premium for redemption of corporate bonds 5.8 Payments for the termination/change of financial derivatives 193,072 −2,611 −101 −1,941 60,000 0 −151 −92,170 −108,088 0 0 0 0 −26,919 0 30,000 350,000 −4,861 −79,680 −389,876 −29,172 60 Net cash generated from/ used in financing activities 48,010 −150,448 4. Cash and cash equivalents at the end of the period Change in cash and cash equivalents (subtotal of 1 to 3) Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period thereof restricted: EUR 0 k; previous year: EUR 0 k 30,821 102,078 −145,411 247,489 6.7 132,899 102,078 alstria Annual Report 2018 55 Consolidated Financial Statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the period from January 1 to December 31, 2018 EUR k Notes Share capital Capital surplus Retained earnings Revaluation surplus As of Dec. 31, 2017 153,962 1,363,316 437,382 First-time adoption from IFRS 9 2.1 0 0 -242 As of Jan. 1, 2018 153,962 1,363,316 437,140 Changes in the financial year 2018 Consolidated profit Other comprehensive in- come Total comprehensive in- come Payments of dividends 11 Proceeds from shares is- sued against contribution in cash Share-based remuneration Conversion of convertible participation rights Conversion of convertible bond As of Dec. 31, 2018 7.1 5.4; 13.2 13.2 7.2 7.1 0 0 0 0 0 0 0 -92,170 15,323 175,138 0 1,629 144 144 7,987 90,575 527,414 0 3,485 3,485 527,414 3,485 530,899 0 0 0 0 0 0 0 0 0 0 -92,170 190,461 1,629 288 98,562 177,416 1,538,632 964,554 3,485 2,684,087 Total equity 1,954,660 -242 1,954,418 527,414 0 0 0 0 56 alstria Annual Report 2018 Consolidated Financial Statements For the period from January 1 to December 31, 2017 EUR k As of Jan. 1, 2017 Changes in the financial year 2017 Consolidated profit Total comprehensive income Payments of dividends Share-based remuneration Conversion of convertible participa- tion rights Conversion of convertible bond As of Dec. 31, 2017 11 5.4; 13.2 13.2 7.2 7.1 Notes Share capital Capital surplus Retained earnings Total equity 153,231 1,434,812 140,395 1,728,438 0 0 0 0 111 620 0 0 -79,680 1,129 111 6,944 296,987 296,987 0 0 0 0 296,987 296,987 -79,680 1,129 222 7,564 153,962 1,363,316 437,382 1,954,660 alstria Annual Report 2018 57 Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION alstria office REIT-AG (the Company) is a listed real estate property corporation under the scope of the G-REIT Act. The main objectives of the Company and its subsidiaries (the Group or alstria)are the acquisition, management, operation, and sale of owned real estate property and the holding of par- ticipations in enterprises that acquire, manage, operate, and sell owned property. alstria prepared its consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union and with the additional requirements set forth in Section 315e para. 1 of the German Commercial Code (HGB). The consolidated financial state- ments were authorized for issue by the Management Board on February 21, 2019. alstria office REIT-AG’s registered office and address is Steinstrasse 7, 20095 Hamburg, Germany. The Company is entered in the commercial register at the local court of Hamburg under HRB No. 99204. alstria prepares and reports its consolidated financial statements in Euro (EUR). Due to rounding, the numbers presented may not add up precisely to the totals provided. The financial year ends on December 31 of each calendar year. The consolidated financial statements presented in this report were prepared for the period from January 1 to December 31, 2018. 2. BASIS OF PREPARATION Apart from investment property (land and buildings) and certain financial instruments that are meas- ured at fair values at the end of each reporting period and as explained in the accounting policies below, the consolidated financial statements have been prepared based on historical cost. The preparation of financial statements in conformity with the IFRSs requires the use of certain crit- ical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. Areas involving a higher degree of judgement or complexity or items wherein assumptions and estimates have a significant impact on the consolidated financial statements are disclosed in Note 2.3. Single items are summarized in the consolidated statement of financial position and the income state- ment. They are commented on in the Notes to the financial statements. Assets and liabilities are classified as noncurrent and current, respectively. Current items are defined as items that are due in less than one year and vice versa. 58 alstria Annual Report 2018 Consolidated Financial Statements 2.1 Changes in accounting policies and mandatory disclosures Effects resulting from new and amended IFRSs The Company adopted the following new standards and amendments to standards for the first time for the financial year beginning January 1, 2018: EU Endorsement Standard/ interpretation Nov. 22, 2016 IFRS 9 Sept. 22, 2016 Feb. 26, 2018 Nov. 3, 2017 Mar. 14, 2018 Feb. 7, 2018 IFRS 15 Amendments to IFRS 2 Amendments to IFRS 4 Amendments to IAS 40 Annual Improve- ments to IFRSs Mar. 28, 2018 IFRIC 22 Oct. 31, 2017 IFRS 15 Content New standard ‘Financial instruments: clas- sification and measurement’ New standard ‘Revenue from contracts with customers’ Classification and measurement of share- based payment transactions Applying IFRS 9 financial instruments with IFRS 4 insurance contracts Transfers of investment property Improvements to IFRSs 2014−2016 Foreign currency transactions and advance consideration Clarifications issued for IFRS 15, ‘Revenue from Contracts with Customers’ Applicable for FY beginning on/after Jan. 1, 2018 Effects No material effects Jan. 1, 2018 Presentation Jan. 1, 2018 None Jan. 1, 2018 Jan. 1, 2018 Jan. 1, 2017/ Jan. 1, 2018 None Currently None None Jan. 1, 2018 None Jan. 1, 2018 None IFRS 9 Financial instruments The new standard IFRS 9 ‘Financial Instruments’ contains rules for recognition, measurement, derec- ognition, and hedge accounting. The Standard replaces the accounting for financial instruments pre- viously carried out under IAS 39 ‘Financial Instruments.’ The central requirements of the final IFRS 9 can be summarized as follows:  Compared with the previous standard, IAS 39 ‘Financial Instruments: Recognition and Meas- urement,’ the requirements of IFRS 9 with regard to the application and the entry and derec- ognition are largely unchanged.  However, the regulations of IFRS 9 provide for a new classification model for financial assets compared to IAS 39.  The subsequent measurement of financial assets will in the future be based on three catego- ries with different valuation standards and a different recognition of changes in value. The categorization results in both dependence on the contractual cash flows of the instrument and the business model in which the instrument is held. Depending on the nature of these conditions, they are measured at amortized cost using the effective interest method (AC cat- egory), at fair value, with changes recognized in other comprehensive income (FVTOCI cate- gory), or at fair value, where changes are recognized through profit or loss (FVTPL category). Basically, these are mandatory categories. In addition, however, individual options are avail- able to companies.  For financial liabilities, however, the existing rules were largely adopted in IFRS 9. The only alstria Annual Report 2018 59 Consolidated Financial Statements major change concerns financial liabilities in the fair value option. For them, fair value fluc- tuations due to changes in their own credit risk are to be recognized in other comprehensive income.  The new impairment model in IFRS 9 provides for three levels that will determine the amount of losses to be recognized and interest received in the future. Thereafter, expected losses in the amount of the present value of an expected 12-month loss are recognized on acquisition (Level 1). If there is a significant increase in the risk of default, the risk provision must be increased up to the amount of the expected losses of the entire residual maturity (Level 2). If there is an objective indication of impairment, the interest must be collected on the basis of the net book value (book value less risk provisions) (level 3). alstria applies the simplified approach for the valuation of trade receivables in accordance with IFRS 9.5.5.15.  The revised hedge accounting rules continue to include the three types of hedge accounting that are also available in IAS 39. However, the requirements of IFRS 9 provide more opportu- nities for the application of hedge accounting and allow the reporting entity to better reflect its risk management activities in the financial statements. The main changes concern the extended scope of underlying transactions and hedges as well as new rules on the effective- ness of hedging relationships, particularly the elimination of the previous 80-125 % corridor.  In addition to extensive transitional provisions, IFRS 9 is also associated with extensive dis- closure requirements for both transition and ongoing application. Changes compared to IFRS 7 ‘Financial Instruments: Notes’ mainly result from the provisions on impairment. The first-time application of IFRS 9 has the following effects on the consolidated financial statements: Classification and valuation Except for the changes resulting from the application of the new impairment model in IFRS 9, alstria’s current financial assets and liabilities continue to be accounted for, as it was the case under IAS 39. The following table explains the original measurement categories under IAS 39 and the new measure- ment categories under IFRS 9 for each class of the Group’s financial assets and financial liabilities as at 1 January 2018. The effect of adopting IFRS 9 on the carrying amounts of financial assets at January 1, 2018 relates solely to the new impairment requirements. 60 alstria Annual Report 2018 Consolidated Financial Statements Original classifica- tion under IAS 39 New classification under IFRS 9 Original carry- ing amount un- der IAS 39 New carrying amount under IFRS 9 EUR k Financial assets Bank deposits Interest rate derivatives Trade and other receivables Cash and cash equivalents Total financial assets Financial liabilities Loans and receiva- bles Fair value – hedging instrument Loans and receiva- bles Loans and receiva- bles Amortized cost Fair value – hedging instrument Amortized cost Amortized cost Trade payables Bonds and loans Ltd. equity of noncontrolling interests Other financial liabil- ities Other financial liabil- ities Other financial liabil- ities Fair value – hedging instrument Other financial liabil- ities Embedded derivative Other liabilities Other financial liabili- ties Other financial liabili- ties Other financial liabili- ties Fair value – hedging instrument Other financial liabili- ties Total financial liabilities Impairment 36,567 36,494 14 14 11,635 11,466 102,078 150,294 102,078 150,052 53,881 53,881 1,468,415 1,468,415 7,268 7,268 27,529 50,299 27,529 50,299 1,607,392 1,607,392 With trade receivables and noncurrent financial assets, the Group only has assets that continue to be measured at amortized cost. The first-time inclusion of expected losses instead of losses incurred resulted in an additional write-down of trade receivables in the amount of EUR 169 k. The fair value adjustment was taken into account as a first-time effect from IFRS 9 in retained earnings not affecting the income statement. The same applied to the adjustment in the amount of EUR 73 k to be made to Bank deposits. Hedge accounting As the new hedge accounting rules better reflect the Group’s risk management and as the range of possible hedged items and hedges has widened, the existing hedges continue to be recognized as a hedge under IFRS 9. Transition method In accordance with the transition guidelines provided by IFRS 9, the adjustment of prior-year figures was waived. For an explanation of the classification and measurement of financial instruments and the presenta- tion of profits and losses in accordance with IFRS 9, please refer to Notes 2.4. IFRS 15 Revenue from contracts with customer In May 2014, the International Accounting Standards Board (IASB) published IFRS 15 ‘Revenue from Contracts with Customers.’ IFRS 15 replaces the previous IFRS regulations on revenue recognition: alstria Annual Report 2018 61 Consolidated Financial Statements e. g. IAS 18 and IAS 11. The goal of the new standard on revenue recognition is to present the multi- tude of regulations previously contained in various standards and interpretations in a uniform revenue recognition model. The standard provides a five-step model to determine the amount of revenue and the time of realization. According to this five-step model, the contract with the customer must first be determined (step 1). In step 2, the independent performance obligations are to be identified in the contract. Subsequently (step 3), the transaction price is to be determined, with explicit provisions for the treatment of variable consideration, financing components, payments to the customer, and barter transactions. After determining the transaction price, in step 4 the distribution of the transaction price to the individual performance obligations has to be carried out. This is based on the individual selling prices of the individual performance obligations. Finally (step 5), the proceeds can be recognized if the performance obligation has been met by the Company. The prerequisite for this is the transfer of power of the disposal of goods or services to the customer. When concluding a contract, it is to be determined under IFRS 15 whether the revenues resulting from the contract are to be recognized at a specific time or over a period of time. It is first necessary to clarify on the basis of certain criteria whether the power of disposal over the performance obligation is transferred over a period of time. If this is not the case, the proceeds must be recognized at the time at which the power of disposal is transferred to the customer. Finally, the standard contains new, more extensive rules on disclosures about the proceeds of an IFRS preparer’s financial statements. In particular, qualitative and quantitative information should be pro- vided on each of the following topics:  its contracts with customers;  significant discretionary decisions and their changes made in applying the revenue provisions to these contracts; and  any assets resulting from capitalized costs for obtaining and fulfilling a contract with a customer. In April 2016, the IASB published clarifications on IFRS 15 covering the following topics:  identification of performance obligations (regarding autonomous identifiability in the context of the contract);  principal–agent relationships (regarding assessment of the control of goods or services prior to transmission to the customer);  licenses (regarding determination of the type of license granted as well as license and usage-based license fees); and  transitional provisions (regarding practical facilitation of the first-time application of the standard). The Group mainly generates revenues from the long-term leasing of real estate space. The accounting of these revenues is based on IAS 17 or, in the future, on IFRS 16 and is not subject to the requirements 62 alstria Annual Report 2018 Consolidated Financial Statements of IFRS 15. In addition, revenues are generated from the Group’s own provision of real estate man- agement services, which, however, are of subordinate importance in relation to the Group’s total revenues. Proceeds from the sale of real estate assets are not reported under sales but in a separate line item, ‘Net result from the disposal of investment property’ and are also subject to the regulations of IFRS 15. As part of the conclusion—also taking emerging industry best practices into consideration—it emerged that alstria assumes a principal position with regard to the service charge costs of letting and that these ancillary costs charged to the tenants are to be presented as revenues. The costs incurred relating to the provision of services in this context are presented as real estate operating expenses. This does not result in a change in net rental income. The following table shows how revenues and the corresponding expenses from property management increased in the 2017 and 2018 financial years compared to the balance sheet to be applied up to December 31, 2017. EUR k Revenue in accordance with IAS 18 Revenue in accordance with IFRS 15 Increase in revenue as result of application of IFRS 15 Expenses from property operating expenses due to presentation in accordance with IAS 18 Expenses from property operating expenses due to presentation in accordance with IFRS 15 Increase in operating expenses due to presentation in accordance with IFRS 15 2018 193,193 232,353 39,160 -24,125 -63,285 -39,160 2017 193,680 231,067 37,387 -20,769 -58,156 -37,387 Since alstria applies the retrospective approach with regard to the first-time application of IFRS 15, the comparative information in the consolidated financial statements 2018 has been adjusted for the corresponding periods of the 2017 financial year. Expenses and income from service charges in accordance with IFRS 15 are now presented gross, but their amount does not change. Therefore, the first-time application of IFRS 15 has no impact on the earnings position of the Group. alstria Annual Report 2018 63 Consolidated Financial Statements New and amended IFRSs and interpretations to existing standards that are not yet effective and that the Group has not adopted early EU Endorsement Standard/ interpretation Content Applicable for FY beginning on/after Effects No material effects Oct. 31, 2017 Not yet endorsed Not yet endorsed Mar. 22,2018 Not yet endorsed Not yet endorsed Not yet endorsed Not yet endorsed IFRS 16 New standard ‘Leases’ Jan. 1, 2019 IFRS 17 Amendments to IFRS 3 Amendments to IFRS 9 Amendments to IAS 1 and IAS 8 Amendments to IAS 19 Amendments to IAS 28 Annual Improve- ments to IFRSs New standard ‘Insurance contracts’ Business combinations: Definition of a busi- ness Prepayment features with negative com- pensation Jan. 1, 2021 None Jan. 1, 2020 None Jan. 1, 2019 None Definition of ‘material’ Plan amendment, curtailment or settle- ment Long-term interests in associates and joint ventures Jan. 1, 2020 None Jan. 1, 2019 None Jan. 1, 2019 None Improvements to IFRSs 2015−2017 Jan. 1, 2019 Oct. 23, 2018 IFRIC 23 Uncertainty over income tax treatments Jan. 1, 2019 None Currently None IFRS 16 Leases IFRS 16 provides a comprehensive model for the identification of lease arrangements and their treat- ment in the financial statements of both lessors and lessees. IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Oper- ating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 is generally applicable to all leases. A lease according to the standard exists when the lessor has contractually granted the lessee the right to control an identified asset for a specified period and, in return, the lessor receives consideration from the lessee. For lessees, the previous distinction between operating leasing and finance leasing is not made. In- stead, the lessee has to account for the right of use of a leased asset (so-called ‘right-of-use asset’ or RoU asset) and a corresponding lease liability for the leasing payment obligations. Exceptions to this are made only for short-term leases and leases for low-value assets. The amount of the RoU asset at the time of acquisition is equal to the amount of the lease liability plus any initial direct costs of the lessee. In subsequent periods, the RoU asset is valued at amortized cost (with two exceptions). The lease liability is the present value of the lease payments that are paid during the term of the lease. Subsequently, the book value of the lease liability is compounded using the interest rate used for discounting and reduced by the lease payments made. Changes in the lease payments lead to a revaluation of the lease liability. For lessors, on the other hand, the accounting principles known from IAS 17 ‘Leases,’ with a distinc- tion between finance leases and operating leases, remain the same. 64 alstria Annual Report 2018 Consolidated Financial Statements The list of criteria for the assessment of a finance lease was adopted unchanged from IAS 17. In addition, the disclosure requirements for lessees and lessors in IFRS 16 have increased considerably in comparison with IAS 17. The objective of the disclosure requirements is to provide information to users of the financial statements so they can gain a better understanding of the effects of leases on the net assets, financial position, and results of operations. Furthermore, according to IFRS 16, some payment entitlements from lease agreements represent cost allocations that do not provide additional benefits for the customer. These include property tax, building insurance and allowances for asset management services. With the application of IFRS 16, the service charges to be paid by the lessee will be divided between all leasing and non-leasing com- ponents identified in the contract. This will result in extended disclosure requirements in the Notes to the consolidated financial statements. The first-time application of IFRS 16 is not expected to have a material impact on the consolidated financial statements of the Company, as the Group has mainly concluded lease agreements for the commercial leasing of its investment properties, thereby acting as the lessor. The scope of the trans- actions agreed by the Company as lessee, however, is of minor importance. The Group will recognize new assets and liabilities for its operating leases of car parking spaces, company cars and photocopiers (see Note 8.2). The nature of expenses related to those leases will now change because the Group will recognize a depreciation charge for right-of-use assets and inter- est expense on lease liabilities. Previously, the Group recognized operating lease expense on a straight-line basis over the term of the lease, and recognized assets and liabilities only to the extent that there was a time difference between actual lease payments and the expense recognized. Based on the information currently available, the Group estimates that it will recognize additional lease liabilities of EUR 4,307 k as at 1 January 2019. At the same amount, the recognition of a "right- of-use” asset is expected. The Group plans to apply IFRS 16 for the first time on 1 January 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognized as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information. The Group plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4. No significant impact on financial reporting is expected from the other new standards and amend- ments to the existing standards listed above. The Group did not adopt any new or amended standards or interpretations early in the 2018 financial year. alstria Annual Report 2018 65 Consolidated Financial Statements 2.2 Basis of consolidation 2.2.1 Subsidiaries The consolidated financial statements incorporate the financial statements of alstria office REIT-AG and entities controlled by the Company and its subsidiaries. Control is achieved when the Company:  exercises authority over the investee;  is exposed or has rights to variable returns from its involvement with the investee; and  has the ability to use its authority to affect the amount of its returns. The Company reassesses whether it controls an investee if facts and circumstances indicate changes to one or more of the three elements of control listed above. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, the income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of the other comprehensive income are attributed to the Company’s owners and noncontrolling interests. The total comprehensive income of the subsidiaries is attributed to the Company’s owners and noncontrolling interests, even if this results in the noncontrolling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to align their accounting policies with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses, and cash flows relating to transactions between members of the Group are eliminated in full upon consolidation. a) Changes in the Group’s ownership interests in existing subsidiaries Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and noncontrolling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the noncontrolling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to the owners of the Company. When the Group loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill) and liabilities of the subsidiary and any noncontrolling interests. 66 alstria Annual Report 2018 Consolidated Financial Statements All amounts previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i. e. reclassified to profit or loss or transferred to another category of equity, as specified/permitted by applicable IFRSs). b) Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree, and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognized in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any noncontrolling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. After reassessment, if the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any noncontrolling interests in the acquiree and fair value of the acquirer’s previously held interest in the acquiree fit and the excess is recognized immediately in profit or loss as a bargain purchase gain. Noncontrolling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the noncontrolling interests’ proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement is made on a transaction-by- transaction basis. Other types of noncontrolling interests are measured at fair value or, when applicable, on the basis specified in another IFRSs. When a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured to its acquisition-date fair value, and the resulting gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive incomes are reclassified as profit or loss, where such treatment would be appropriate if that interest were disposed of. Significant companies wherein alstria office REIT-AG is directly or indirectly able to significantly influence financial and operating decisions (associates), or directly or indirectly share control (joint ventures), are accounted for using the equity method. alstria Annual Report 2018 67 Consolidated Financial Statements 2.2.2 Fully consolidated subsidiaries The Group of consolidated companies, including alstria office REIT-AG, comprised 56 companies in the financial year (2017: 63). As of the balance sheet date, 51 companies (prior-year balance sheet date: 55 companies) existed. In addition, two joint ventures and one noncontrolling interest have been accounted for using the equity method. In the consolidated financial statements of alstria office REIT-AG, the following companies are in- cluded: No. Company 1 alstria office REIT-AG 2 alstria Bamlerstraße GP GmbH 3 alstria Gänsemarkt Drehbahn GP GmbH 4 alstria Englische Planke GP GmbH 5 alstria Halberstädter Straße GP GmbH 6 alstria Portfolio 3 GP GmbH (vormals alstria Hamburger Straße 43 GP GmbH) 7 alstria Ludwig-Erhard-Straße GP GmbH 8 alstria Mannheim/Wiesbaden GP GmbH 9 alstria Portfolio 1 GP GmbH 10 alstria Steinstraße 5 GP GmbH 11 alstria solutions GmbH 12 alstria office Bamlerstraße GmbH & Co. KG 13 alstria office Gänsemarkt Drehbahn GmbH & Co. KG 14 alstria office Englische Planke GmbH & Co. KG 1) 1) 1) Headquar- ters Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg 15 alstria office Halberstädter Straße GmbH & Co. KG 1),2) Hamburg 16 alstria office Hamburger Straße 43 GmbH & Co. KG 1),2) Hamburg 17 alstria office Insterburger Straße GmbH & Co. KG 18 alstria office Mannheim/Wiesbaden GmbH & Co. KG 19 alstria Prime Portfolio GP GmbH 20 alstria Prime Portfolio 2 GP GmbH 21 alstria office Steinstraße 5 GmbH & Co. KG 22 beehive GmbH & Co. KG 23 alstria office Prime Portfolio GmbH & Co. KG 24 alstria office PP Holding I GmbH & Co. KG 25 alstria office Kampstraße GmbH & Co. KG 26 alstria office Berliner Straße GmbH & Co. KG 27 alstria office Hanns-Klemm-Straße GmbH & Co. KG 28 alstria office Maarweg GmbH & Co. KG 29 alstria office Heerdter Lohweg GmbH & Co. KG 30 alstria office Solmsstraße GmbH & Co. KG 31 alstria office PP Holding II GmbH & Co. KG 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) 1) Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg 32 alstria office Vichystraße GmbH & Co. KG 1),2) Hamburg 33 alstria office Wilhelminenstraße GmbH & Co. KG 34 alstria office Hauptstraße GmbH & Co. KG 35 alstria office Frankfurter Straße GmbH & Co. KG 36 alstria office Mergenthaler Allee GmbH & Co. KG 37 alstria office Am Hauptbahnhof GmbH & Co. KG 38 alstria office Berner Straße GmbH & Co. KG 1) 1) 1) 1) 1) 1) Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg 39 alstria office Eschersheimer Landstraße GmbH & Co. KG 1),2) Hamburg 40 alstria office Kastor GmbH & Co. KG 41 alstria office Heidenkampsweg GmbH & Co. KG 42 alstria office Stiftsplatz GmbH & Co. KG 43 alstria office An den Dominikanern GmbH & Co. KG 1) 1) 1) 1) Hamburg Hamburg Hamburg Hamburg 44 alstria office Carl-Benz-Straße GmbH & Co. KG 1),2) Hamburg Equity interest (%) Parent company Held by no. Business activity Asset management; holding 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 1 General Partner 1 General Partner 1 General Partner 1 General Partner 1 General Partner 1 General Partner 1 General Partner 1 General Partner 1 General Partner 1 Service company 1 Own property 1 Own property 1 Own property 1 No activity 1 No activity 1 Own property 1 Own property 1 General Partner 1 General Partner 1 Own property 1 Service company 1 Intermediate holding 23 Intermediate holding 24 Own property 24 Own property 24 Own property 24 Own property 24 Own property 24 Own property 23 Intermediate holding 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 68 alstria Annual Report 2018 Consolidated Financial Statements No. Company 45 alstria office Carl-Schurz-Straße GmbH & Co. KG 46 alstria office Pempelfurtstraße GmbH & Co. KG 47 alstria office Josef-Wulff-Straße GmbH & Co. KG 48 alstria office Ingersheimer Straße GmbH & Co. KG 49 alstria office Frauenstraße GmbH & Co. KG 50 alstria office Olof-Palme-Straße GmbH & Co. KG 51 alstria office Region Nord GmbH & Co. KG 52 alstria office Region Süd GmbH & Co. KG 53 alstria office Region Mitte GmbH & Co. KG 54 Balgebrückstrasse GmbH & Co. KG 55 alstria office PP Holding III GmbH & Co. KG 56 alstria office Vaihinger Straße GmbH & Co. KG Headquar- ters Equity interest (%) Held by no. Business activity 1) 1) 1) 1) 1) 1) 1) 1) 1) Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg Hamburg 1),3) Hamburg 1) 1) Hamburg Hamburg 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 94.0 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 31 Own property 23 Intermediate holding 55 Own property 1) The Company has made use of the exemption from the obligation to prepare annual financial statements in accordance with the provisions applicable to corporations in accordance with Section 264b HGB. 2) Terminated as a result of a step-up merger in 2018. 3) Founded with partnership agreement dated September 18, 2018. Alongside alstria office REIT-AG, the consolidation comprised companies in which the Company directly or indirectly held the majority of voting rights. The consolidated group at the balance sheet date consisted of the Company, 20 domestic subsidiaries, and 30 domestic second-tier subsidiaries. Five subsidiaries were terminated as a result of a step-up merger. The reporting date for the consolidated financial statements is the same as the reporting date for the Company and consolidated subsidiaries. There were no further changes to the consolidated Group in the 2018 financial year in comparison to the consolidated financial statements as of December 31, 2017. All Group companies are property management, holding, or general partner companies. 2.2.3 Interests in joint ventures and noncontrolling interests The Group holds interests in two joint ventures that had a carrying amount of EUR 7,650 k at the end of the reporting period. Details of the Group’s joint ventures at the end of the reporting period are as follows: Name of joint venture Alstria IV. Hamburgische Grundbesitz GmbH & Co. KG Principal activity Hold and manage real estate Place of incorporation and business Hamburg, Germany Alte Post General Partner GmbH i.L. n/a Oststeinbek, Germany Proportion of ownership, interest, and voting rights held by the Group Dec. 31, 2017 (%) Dec. 31, 2018 (%) 49.0 49.0 49.0 49.0 In these consolidated financial statements, the abovementioned joint ventures were accounted for using the equity method. alstria Annual Report 2018 69 Consolidated Financial Statements The following table provides the aggregated information for joint ventures whose individual carrying amounts are not material: EUR k The Group’s share of profit (loss) from continuing operations The Group’s share of total comprehensive income 2018 -82 -82 2017 28,064 28,064 EUR k Dec. 31, 2018 Dec. 31, 2017 Aggregate carrying amount of the Group’s interests in these joint ventures 7,650 7,733 There were no unrecognized shares of losses of a joint venture or any significant restrictions as to the ability of joint ventures to transfer cash funds to the Group. Furthermore, alstria holds a noncontrolling interest in an affiliate in the amount of EUR 939 k. The Company was acquired in the 2017 financial year and is considered immaterial. Its business is the investment in innovative real estate technology concepts. The Company recorded a gain of EUR 12 k in the reporting period. 2.3 Key judgments and estimates To a certain degree, estimates, assessments, and assumptions must be made in the course of preparing the Group’s consolidated financial statements. These can affect the reported amounts and recognition of assets and liabilities, contingent assets and liabilities on the balance sheet date, and the amounts of income and expenses reported for the period overall. The major items that such estimates, assessments, and assumptions affect are described hereafter. Actual amounts may differ from the estimates. Changes in the estimates, assessments, and assumptions can have a material impact on the consolidated financial statements. 2.3.1 Judgements Management has made the following discretionary decision in line with the Group’s accounting policies. Apart from decisions involving estimations, it has the most significant effect on the amounts recognized in the financial statements: Operating lease commitments—Group as lessor The Group has entered into commercial property leases in its investment-property portfolio. Based on an evaluation of the terms and conditions of the arrangements, the Group has determined that all significant risks and rewards of ownership of these properties remain with the Group. As a result, the contracts are treated and accounted for as operating leases. Equity settled share-based payment transactions As part of his remuneration, the Management Board was granted virtual shares in the form of share- based payments (see Notes 13.1). While the virtual shares issued in previous years were cash-settled share-based payments, in the 2018 financial year, share-based payments were for the first time equity settled. 70 alstria Annual Report 2018 Consolidated Financial Statements All conditions of the share-based payment conditions were agreed in advance by the parties involved. The predominant value-determining parameters are objectively observable market parameters, such as the share price performance of the alstria share or the performance of a benchmark index. At the end of the term, the number of equity instruments to be granted can be adjusted by the Supervisory Board of the company in a narrow band (so-called discretionary factor). This leads to the question of whether the grant date is in the current financial year or only at the time when the Supervisory Board determines the discretionary factor. In the first case, the virtual shares are measured at fair value at their issue. The amount of the valuation is to be recognized pro rata in equity over the term until conversion. If the grant date falls to the end of the term, the value of the virtual shares must be revalued at each reporting date and recognized as a liability. The terms of the agreement on which the equity instruments were granted were already fixed when the virtual shares were issued during the reporting period. The main value drivers are observable market parameters. Therefore, the date of issue of the virtual shares is considered to be the date of granting the share-based payment with the result that the virtual shares were valued at the date of issue and recognized pro rata as personnel expenses and in the equity of the Group. The option of the Supervisory Board to exercise a discretionary factor does not exclude this judgement, since it is not a change in the terms of the contract. Furthermore, based on previous practice, a reduction in the number of equity instruments cannot be assumed. 2.3.2 Estimates and assumptions Significant key sources of estimation uncertainty and key assumptions concerning the future as of the balance sheet date relate to the following balance sheet items. They present a significant risk, possibly resulting in necessary material adjustments to the carrying amounts of assets and liabilities within the next financial year. Applying estimates is particularly necessary to  determine the fair value of investment property (see Notes 6.1);  determine the fair value of derivative financial instruments, including the embedded derivative (see Notes 6.5);  determine the fair value of virtual shares granted to management (see Notes 13.1);  determine the fair value of limited partnership capital of noncontrolling interests (see Notes 7.2);  determine the fair value of other provisions (see Notes 7.4); and  determine the best estimate of convertible profit participation certificates (see Notes 13.2). At the end of the reporting period, the above-stated assets, liabilities, and equity instruments, which are particularly exposed to estimation uncertainties, had the following impact on the consolidated statement of financial position: alstria Annual Report 2018 71 Consolidated Financial Statements EUR k Dec. 31, 2018 Dec. 31, 2017 Investment property and properties held for sale, without prepayments made 3,966,540 3,386,558 Positive fair values of derivatives Negative fair values of derivatives Limited partnership capital of noncontrolling interests Other provisions Valuation of convertible profit participation rights and virtual shares 0 0 64,060 6,752 -2,925 14 27,529 53,881 4,491 -2,773 2.4 Summary of significant accounting policies The following accounting and valuation methods have been used to prepare the consolidated financial statements of alstria office REIT-AG. 2.4.1 Fair value measurement The Group measures financial instruments, such as derivatives, and non-financial assets, such as in- vestment property, at their fair value at each reporting date. The fair value of an asset or liability is determined based on the assumptions that market participants would use in pricing the asset or liability, regardless of whether that price is directly observable or estimated by applying another valuation technique. In estimating fair value, it is assumed that the transaction during which the disposal of the asset or the transfer of the liability occurs takes place either   in the principal market for the asset or liability or in the most advantageous market for the asset or the liability if no principal market exists. The Group must have access to the principal market or the most advantageous market. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis. Hereby excluded are the following:   share-based payment transactions that are within the scope of IFRS 2 ‘Share-based payments,’ leasing transactions that are within the scope of IAS 17 ‘Leases,’ and  measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 ‘Inventories’ or value in IAS 36 ‘Impairment of assets.’ Market prices are not always available to determine the fair value. It must often be determined based on various valuation parameters. In addition, for financial-reporting purposes, fair value measurements are categorized as Level 1, 2, or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:   72 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. alstria Annual Report 2018 Consolidated Financial Statements  Level 3 inputs are unobservable inputs for the asset or liability. Level 3 inputs require more extensive disclosures. 2.4.2 Investment property Investment properties are properties held to earn rental income and/or for capital appreciation (including property under construction for such purposes). They are not used in production or for administrative purposes. This includes properties that are in production and are intended to serve the aforementioned purposes. Investment properties are measured initially at cost at the time of purchase or construction, including transaction costs. In accordance with IAS 40.17, costs incurred subsequently for dismantling, replacement of parts, or maintenance of property are also included. Costs of debt, which can be directly allocated to the acquisition or production of investment property, are capitalized in the year in which they arise. For subsequent measurement, the Company uses the fair value model according to IFRS 13.61 et seq., which reflects an income-capitalization approach combined with market conditions at the end of the reporting period. In the context of the fair value hierarchy described above, only inputs of Levels 2 and 3 are applicable for property. The majority is categorized as Level 3. Inputs used in the valuation approach the Group has adopted for all of its properties include rental revenues, adjusted yield figures (e. g. property- based capitalization rates), and vacancy periods. These inputs are not observable in markets and considered significant. Therefore, the fair value measurement used by the Group for valuation of all investment properties is generally categorized as Level 3. Information about the significant unobserv- able inputs used and their sensitivities on the fair values of the Group’s investment property is pre- sented in Note 6.1. Gains and losses arising from changes in the fair value of investment properties are included in profit or loss in the period in which they arise. An investment property derecognized upon disposal or when the investment property is permanently withdrawn from use and future economic benefits are expected from the disposal. Any gain or loss arising upon derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognized. Investment properties are transferred to property, plant and equipment when there is a change in use evidenced by the commencement of owner occupation. The properties’ deemed cost for subsequent accounting corresponds to the fair value at the date of reclassification. alstria Annual Report 2018 73 Consolidated Financial Statements 2.4.3 Valuation process for investment properties The fair value hierarchy gives no information about the applied valuation techniques. The basis for deriving fair value as defined by IFRS 13.61 should, if possible, be based on valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, thereby maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. The analysis above showed that there was no sufficient number of official comparable transactions to derive any market values. Therefore, fair value was determined based on an income approach in accordance with IFRS 13.61. In estimating the fair value of the properties, the highest and best use of the properties is their current use. No fundamental change to the valuation method has occurred during the year. As in the prior year, external real estate experts conducted the valuation of investment property at fair value on December 31, 2018 according to internationally accepted valuation methods in accord- ance with IFRS using the ‘hardcore-and-top-slice’ method. The fair value measurement was performed by accredited, external, and independent experts (Savills Advisory Services Germany GmbH & Co. KG, Frankfurt am Main, Germany, and Colliers International UK LLP, London). Description of the hardcore-and-top-slice method According to the hardcore-and-top-slice method, rental income is horizontally segmented. The hardcore portion represents the prevailing contractual rent. The top slice represents the difference between market and contractual rent. This method fulfills the requirements of the Red Book, a set of international valuation standards, set forth by the Royal Institution of Chartered Surveyors. In addition, the method used by the independent experts is also appropriate and suitable for determining market values in accordance with the provisions of the International Valuation Standards (IVS, or the White Book). To derive the fair value, the properties, which the independent experts evaluated, were divided into two groups and valued accordingly. Group 1 contained properties with anchor lease terms of five years or less, and Group 2 held properties with anchor lease terms of more than five years. Group 1 is for properties with leases set to expire in five years or less: hardcore-and-top-slice method, taking into account  the contractual rent for the remaining term of the lease;  a vacancy period of between 0 and 24 months following the expiry of the lease;  the necessary maintenance costs to re-let the properties at a comparable rent level;   re-lets at market rents (accounting for the difference between market and contractual rent); capitalization rates reflecting the individual risk of the property and market activity (compa- rable transactions);  management costs between 1 and 3 % of the market rent; 74 alstria Annual Report 2018 Consolidated Financial Statements  non-allocable costs of ongoing maintenance between EUR 5.00/m² and EUR 11.00/m² de- pending on the property standard; and  the net selling price as comparable. Group 2 is for properties with anchor leases that are let to tenants with strong credit ratings on a long-term basis (i. e., hardcore-and-top-slice method), taking into account    the contractual rent for the remaining term of the lease (in the case of open-ended leases, a residual term of one year to half of the previous rental period is assumed); re-lets at market rents (accounting for the difference between market and contractual rent); capitalization rates reflecting the individual risk of the property and market activity (compa- rable transactions);  management costs between 1 and 3 % of the market rent;  non-allocable costs of ongoing maintenance between EUR 5.00/m² and EUR 11.00/m² de- pending on the property standard; and  the net selling price as comparable. If the future development of these properties differs from the estimate, large-scale losses resulting from the change in the fair value may be incurred. This can have a negative impact on future earnings. The effects of the most significant input parameters on the valuation of the Group’s investment prop- erties are shown in Note 6.1. The valuation method described also applies to investment properties in which development projects are realized. Gains or losses arising from changes in the fair values of investment properties are disclosed in the income statement under the item ‘Net gain/loss from fair value adjustments on investment property’ in the year in which they arise. Investment properties are derecognized when they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the income statement in the year of retirement or disposal. 2.4.4 Assets held for sale Noncurrent assets intended for disposal under an asset deal are reported separately as being held for sale in the consolidated financial statements if the formally required resolution of the Board — and, when above a certain level of transaction volume, the Supervisory Board — for the sale of a property is met until the end of the reporting period. If the disposal is to take the form of a share deal, noncurrent assets and other assets and liabilities held for sale are reported separately on the consolidated balance sheet. Assets held for sale are measured at fair value on the date of reclassification and each subsequent reporting date. Gains or losses from measuring individual assets held for sale and disposal groups are alstria Annual Report 2018 75 Consolidated Financial Statements reported under gain or loss on the disposal of investment property until they have been sold. 2.4.5 Leases In accordance with IAS 17, the lessee is considered to be the beneficial owner of leased assets if the lessee bears all risks and rewards incidental to the assets (finance lease). If the lessee is deemed to be the beneficial owner, the leased asset is recognized at fair value or at the lower present value of the minimum lease payments at the inception date of the lease. The corresponding leasing liability is recorded as a lease commitment under other noncurrent liabilities. The resulting lease payments are divided into an interest portion and a redemption portion. Operating leases Lease agreements that alstria has entered into with commercial tenants are classified as operating leases under IFRS. Accordingly, alstria acts as a lessor in many different types of operating lease agreements for investment properties. All of the Group’s leases are classified as operating leases, as all significant risks and rewards of the Group’s real estate remain with alstria. These leases generate the majority of proceeds and income for alstria. Furthermore, to a limited extent, alstria is the lessee within the scope of operating lease agreements. 2.4.6 Revenue and expense recognition The Group has initially applied IFRS 15 from 1 January 2018. The effect of the first-time adoption of IFRS 15 is described in Note 2.1. Revenues and other operating expenses are generally only recognized when the entity satisfies a performance obligation by transferring a promised good or service to a customer. An asset is trans- ferred when the customer obtains control of the asset. This is usually the case when services are rendered or goods or products have been delivered and the risk has thus been transferred. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and other sales taxes or duties. Revenues are recorded, excluding VAT. In addition, the following specific recognition criteria must be met before revenues are recognized. Rental income from operating leases on investment properties is recognized on a straight-line basis over the terms of the relevant lease, regardless of the payment date. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset. Operating expenses are recognized at the time of the service or when they are incurred. Interest expenses and interest income are recognized using the effective interest method. 76 alstria Annual Report 2018 Consolidated Financial Statements 2.4.7 Income taxes Income tax expenses is recognized in profit or loss, except when it relates to items recognized in other comprehensive income or directly in equity, in which case, current taxes are also recognized in other comprehensive income or directly in equity, respectively. As a REIT-AG, the parent company, alstria office REIT-AG, is exempt from corporation and trade taxes. Current tax assets and liabilities for the current and prior periods are shown as the amount expected to be recovered from or paid to the tax authorities. In order to take effect, the determination of the amount is based on the tax rates and tax laws applicable on the reporting date or soon after. 2.4.8 Earnings per share Basic earnings per share are calculated by dividing the profit attributable to the shareholders of the parent company by the weighted-average number of shares outstanding during the financial year. Diluted earnings per share are calculated based on the assumption that all potentially dilutive securities and share-based payments are converted or exercised. 2.4.9 Impairments of assets according to IFRS 36 Assets are tested for impairment when triggering events or changes in circumstances indicate that the carrying amount may no longer be recoverable. An impairment loss is recorded at an amount equivalent to the excess of the carrying amount over the recoverable amount. If the reasons for an impairment loss cease to apply, the impairment loss is reversed as appropriate but not above the maximum value that would have resulted if normal amortization had been charged. 2.4.10 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. They include owner-occupied real estate as well as operating and office equipment. Such costs include the cost of replacing part of the property, plant and equipment at the time the cost is incurred, if the recognition criteria are met. All other repair and maintenance costs are recognized in profit or loss as incurred. The depreciation of operating and office equipment is calculated on a straight-line basis over the estimated useful life of the asset (three to 15 years). The useful life of owner-occupied property is estimated at 33 to 50 years. While the building is depreciated on a scheduled basis, the land is not subject to depreciation. 2.4.11 Intangible assets The Group amortizes intangible assets with finite useful lives on a straight-line basis over their respective estimated useful lives. Estimated useful lives for patents, licenses, and other similar rights generally range from three to ten years. Currently, the Company does not have intangible assets with indefinite useful lives. alstria Annual Report 2018 77 Consolidated Financial Statements 2.4.12 Financial instruments Recognition and initial measurement Trade receivables and debt securities issued are initially recognized when they are originated. All other financial assets and financial liabilities are initially recognized when the Group becomes a party to the contractual provisions of the instrument. A financial asset (unless it is a trade receivable without a significant financing component) or financial liability is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. A trade receivable without a significant financing component is initially measured at the transaction price. Classification and subsequent measurement Financial assets – Policy applicable from January 1, 2018 On initial recognition, a financial asset is classified as measured at:    amortized cost; FVOCI – debt investment; FVOCI – equity investment;  or FVTPL. Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets, in which case all affected financial assets are reclas- sified on the first day of the first reporting period following the change in the business model. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL:   it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt investment is measured at FVOCI if it meets both of the following conditions and is not desig- nated as at FVTPL:   it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the investment’s fair value in OCI. This election is made on an investment-by-investment basis. 78 alstria Annual Report 2018 Consolidated Financial Statements All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets (see Note 6.5). On initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Financial assets – Business model assessment: Policy applicable from January 1, 2018 With respect to financial assets, the Group pursues a business model whose objective is to hold assets in order to collect the contractual cash flows. Financial assets – Assessment whether contractual cash flows are solely payments of principal and interest: Policy applicable from January 1, 2018 In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. A prepayment feature is consistent with the exclusive payments of principal and interest criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable additional compensation for early ter- mination of the contract. Financial assets – Subsequent measurement and gains and losses: Policy applicable from January 1, 2018 Financial assets at These assets are subsequently measured at fair value. Net gains and losses, including any interest or FVTPL dividend income, are recognized in profit or loss. Financial assets at These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss. Financial assets – Policy applicable before January 1, 2018 The Group classified its financial assets in one of the following categories:  loans and receivables;  held to maturity;  at FVTPL, and within this category as: -derivative hedging instruments; or alstria Annual Report 2018 79 Consolidated Financial Statements Financial assets – Subsequent measurement and gains and losses: Policy applicable before January 1, 2018 Financial assets at Measured at fair value and changes therein, including any interest or dividend income, were recog- FVTPL nized in profit or loss. Held-to-maturity Measured at amortized cost using the effective interest method. financial assets Loans and receivables Measured at amortized cost using the effective interest method. Financial liabilities – Classification, subsequent measurement and gains and losses Financial liabilities are classified as measured at amortized cost or FVTPL. A financial liability is clas- sified as at FVTPL if it is classified as held-for-trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value, and net gains and losses, including any in- terest expense, are recognized in profit or loss. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognized in profit or loss. Any gain or loss on derecognition is also recognized in profit or loss. Derecognition Financial assets The Group derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which all significant risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains all significant risks and rewards of ownership and it does not retain control of the financial asset. Financial liabilities The Group derecognizes a financial liability when its contractual obligations are discharged or can- celled or expire. The Group also derecognizes a financial liability when its terms are modified signif- icantly and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognized at fair value. On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recog- nized in profit or loss. 80 alstria Annual Report 2018 Consolidated Financial Statements Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously. Derivative financial instruments and hedge accounting Derivative financial instruments and hedge accounting – Policy applicable from January 1, 2018 Derivative financial instruments, such as interest rate swap contracts, are measured at fair value and classified as being held for trading unless they are designated as hedging instruments, for which hedge accounting is applied. For the derivative financial instruments, fair value measurements were carried out by independent external experts, with the market data evaluated by these experts being included in the usual valu- ation models. There could be estimation uncertainties regarding the possible deviation from market data used. We consider the models used to be adequate. In our opinion, they are not subject to any uncertainty as to their applicability. At inception of designated hedging relationships, the Group documents the risk management objec- tive and strategy for undertaking the hedge. The Group also documents the economic relationship between the hedged item and the hedging instrument, including whether the changes in cash flows of the hedged item and hedging instrument are expected to offset each other. Cash flow hedges The effective portion of changes in the fair value of derivative instruments designated as cash flow hedges is recognized in line item other comprehensive income, and any ineffective portion is recognized immediately in net income. Amounts accumulated in equity are reclassified to net income during the same periods in which the hedged item affects net income. If the hedge no longer meets the criteria for hedge accounting or the hedging instrument is sold, expires, is terminated or is exercised, then hedge accounting is discontinued prospectively. When hedge accounting for cash flow hedges is discontinued, the amount that has been accumulated in the hedging reserve remains in equity until, for a hedge of a transaction resulting in the recognition of a non-financial item, it is included in the non-financial item’s cost on its initial recognition or, for other cash flow hedges, it is reclassified to profit or loss in the same period or periods as the hedged expected future cash flows affect profit or loss. If the hedged future cash flows are no longer expected to occur, the amounts that have been accumulated in the hedging reserve and the cost of hedging reserve are immediately reclassified to profit or loss. alstria Annual Report 2018 81 Consolidated Financial Statements Other hedges—policy applicable before and from January 1, 2018 The Group neither uses any financial derivatives that qualify for the hedging of the fair value of recognized assets or liabilities or a firm commitment (fair value hedges) nor such financial derivatives that qualify for the hedging of a net investment in a foreign operation (net-investment hedge). Derivative financial instruments and hedge accounting – policy applicable before January 1, 2018 The policy applied in the comparative information presented for 2017 is similar to that applied for 2018. However, for all cash flow hedges, including hedges of transactions resulting in the recognition of non-financial items, the amounts accumulated in the cash flow hedge reserve were reclassified to profit or loss in the same period or periods during which the hedged expected future cash flows affected profit or loss. Cash and cash equivalents - policy applicable before and from January 1, 2018 The Company considers all highly liquid investments with less than three months’ maturity from the date of acquisition to be cash equivalents. For the purposes of the consolidated cash flow statement, cash and cash equivalents include the cash and cash equivalents defined above, other short-term, highly liquid investments with original matur- ities of three months or less, and bank overdrafts. 2.4.13 Impairment Non-derivative financial assets Policy applicable from January 1, 2018 Financial instruments and contract assets The Group recognizes loss allowances for ECLs on financial assets measured at amortized cost. The Group measures loss allowances at an amount equal to lifetime ECLs, except for the following, which are measured at 12-month ECLs:  bank balances for which credit risk (i. e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition. Loss allowances for trade receivables are always measured at an amount equal to lifetime ECLs. Value adjustments on trade receivables are always based at the amount of the expected credit loss over the term. The Group applies the simplified approach in accordance with IFRS 9.5.5.15. When determining whether the credit risk of a financial asset has increased significantly since initial recog- nition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and informed credit assessment and including forward-looking information. 82 alstria Annual Report 2018 Consolidated Financial Statements The Group assumes that the credit risk of a financial asset other than trade receivables has increased significantly if it is more than 30 days past due. For trade receivables the amount of days past due could be significantly higher due to the fact that service charge invoices are regularly under investi- gation on the tenants’ side causing delay accepted by alstria until consent has been met. The same applies for rental receivables not paid by the tenants in case of other disputes relating to the tenancy. The Group considers a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realizing security (if any is held). This usually does not apply to rental receivables where the usual security deposit of two months net rents is included in the assessment of whether a rental claim is deemed canceled. The Group considers a financial asset to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment grade.’ The Group considers this to be Baa3 or higher per Moody’s Corporation, New York, USA or BBB- or higher per Standard & Poor’s Corporation, New York, USA. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument. 12-month ECLs for financial assets are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date (or a shorter period if the expected life of the instrument is less than 12 months). The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk. Measurement of ECLs ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i. e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). Credit-impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortized cost and debt securities at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable data:  significant financial problems of the borrower or issuer;  a breach of contract such as a default;  it is probable that the borrower will enter bankruptcy or other financial restructuring; or alstria Annual Report 2018 83 Consolidated Financial Statements Presentation of allowance for ECL in the statement of financial position Loss allowances for financial assets measured at amortized cost are deducted from the gross carrying amount of the assets. Write-off The gross carrying amount of a financial asset is written off when the Group has no reasonable ex- pectations of recovering a financial asset in whole or in part. For tenants, the Group individually makes an assessment with respect to the timing and amount of write-off based on whether there is a reasonable expectation of recovery. The Group expects no significant recovery from the amount writ- ten off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Group’s procedures for recovery of amounts due. Non-derivative financial assets Policy applicable before January 1, 2018 Financial assets not classified as at FVTPL were assessed at each reporting date to determine whether there was objective evidence of impairment. Objective evidence that financial assets were impaired included:  default or delinquency by a debtor;  restructuring of an amount due to the Group on terms that the Group would not consider oth- erwise;  indication that a debtor or issuer would enter bankruptcy; observable data indicating that there was a measurable decrease in the expected cash flows from a group of financial assets. Financial assets measured at amortized cost Losses are recognized in profit or loss and posted to an allowance account. If the Group did not see any realistic prospects for the recoverability of the asset, the relevant amounts were written off. If an event occurred after the impairment was recognized and the amount of the allowance decreased, the decrease in the allowance was recognized in profit or loss. 84 alstria Annual Report 2018 Consolidated Financial Statements 2.4.14 Provisions Provisions are recognized when a present obligation to third parties exists as a result of a past event, a future outflow of resources is probable, and a reliable estimate of that outflow can be made. Provisions are measured, taking all risks into account at the best estimate of future cash outflows required to meet the obligation. If they are not current, they are discounted. Provisions are not offset with reimbursements. A debt resulting from the termination of employment (severance) is recognized when the Group may not withdraw the offer of such services or, if earlier, the Group has recorded costs related to restructuring. 2.4.15 Share-based payments Share-based payments comprise cash-settled liability awards and equity-settled equity awards. The fair value of equity awards is generally determined using a modified Black-Scholes option-pricing model at the grant date. It measures the total personnel expense, which is to be recognized in profit or loss for the service period and which, in turn, increases equity (paid-in capital) by the same amount. Equity-settled awards are granted to the Group’s employees in the form of convertible profit participation certificates, the fair value of which was estimated at the respective grant dates by applying a binary barrier-option model based on the Black-Scholes model; assumptions included an automatic conversion once the barrier was reached. The model took the terms and conditions upon which the instruments were granted into account. This valuation required the Company to make es- timates concerning these parameters, which are therefore subject to uncertainty. Furthermore, share-based compensation plans with compensation through equity instruments were issued to the Company's Management Board for the first time in the 2018 financial year. The fair value of these stock awards at the grant date was calculated using a 100,000-path Monte Carlo simulation based on the terms of the LTIP 2018. Until settlement liability awards are measured at fair value on each balance sheet date, they are classified as provisions. The expense of the period comprises the addition to and reversal of the provision between two reporting dates and the dividend equivalent paid during the period. Cash-settled liability awards relate to virtual shares granted to the Management Board until the 2017 financial year. The virtual shares are measured at each balance sheet date and are accounted for as provisions. The proportional expense incurred in the period comprises the addition to and reversal of the provision between two reporting dates and the dividend paid during the respective period. This valuation requires the Company to make estimates about certain parameters, and, hence, they are subject to uncertainty. The fair value of the virtual shares granted is allocated to the vesting period subject to the terms of the underlying share-based incentive plan. The resulting personnel expenses incurred an addition to provisions of EUR 1,232 k (December 31, 2017: EUR 1,488 k) and a provision of EUR 2,563 k, as reported in the consolidated financial statements as of December 31, 2018 (December 31, 2017: EUR 2,887 k). alstria Annual Report 2018 85 Consolidated Financial Statements Further details on the share-based payment schemes are given in Note 13 and the remuneration report, respectively. 3. SEASONAL OR ECONOMIC EFFECTS ON BUSINESS The business activities of alstria office REIT-AG (primarily the generation of revenues from investment properties) are not generally affected by seasonality. However, the sale of one or more large proper- ties can have a significant impact on revenues and operating expenses. Experience shows that the real estate market tends to fluctuate as a result of factors such as changes in consumers’ net income, GDP, interest rates, consumer confidence, demographic factors, and other factors inherent to the market. Changes in interest rates might lead to a modified valuation of the investment property and derivatives. 4. SEGMENT REPORTING IFRS 8 requires a ‘management approach,’ under which information on segments is presented to the Management Board on the same basis used for internal-reporting purposes. The services offered by alstria office REIT-AG exclusively focus on letting activities to commercial- property tenants in Germany. In accordance with IFRS 8, a single reporting segment is identified that comprises all of the Group’s operations. The manner of reporting for this segment is consistent with the internal reporting provided to the chief operating decision maker, who is responsible for allocating resources to the operating segments of an entity and assessing their performance. The Group’s chief operating decision maker is the Management Board. A larger number of tenants generate revenues. Total revenues amount to EUR 232.353 k (2017: EUR 231,067 k), of which EUR 30,864 k (2017: EUR 27,446 k) and EUR 28,438 k (2017: EUR 26,509 k) relate to leases to the Group’s two largest customers. No other single customer has contributed either 10 % or more to the consolidated revenues in the 2017 or 2018 financial year. 5. NOTES TO THE CONSOLIDATED INCOME STATEMENT 5.1 Revenues EUR k Revenues from investment properties Revenues from service charge income Revenues 2018 193,193 39,160 232,353 2017 193,680 37,387 231,067 Revenues from investment properties mainly comprised rental income from investment properties. The rental income includes effects totaling EUR 2,696 k (2017: EUR 1,984 k), which are attributable to rent-free periods. In addition, revenues include income from asset management services in relation to the leased real estate properties in the amount of EUR 2,580 k (2017: EUR 2,429 k). 86 alstria Annual Report 2018 Consolidated Financial Statements Rental income from property leases contains variable rental income amounting to EUR 7,908 k (2017: EUR 8,275 k). These are rental agreements in which the rental payments are linked to the operating results of the tenants. 5.2 Real estate operating expenses EUR k Operating costs that can be charged on to tenants Maintenance and refurbishment Vacancy costs Ongoing repairs Legal and advisory fees Rent expenses Electricity costs Insurance expenses Property management Other expenses Total 5.3 Administrative expenses EUR k Legal and consulting fees Depreciation Communication and marketing Travel expenses Supervisory Board compensation Audit fee (audit and audit-related services) Recruitment Leasing costs IT maintenance Office equipment Insurances Office area costs Training & workshops Contributions Other Total 2018 39,132 8,532 7,482 4,802 488 362 161 159 155 2,012 63,285 2018 2,345 794 703 604 525 484 413 402 386 362 344 272 186 160 854 2017 36,519 9,086 6,201 4,275 246 114 150 373 164 1,028 58,156 2017 2,642 490 670 507 353 757 309 436 205 299 213 205 151 191 605 8,834 8,033 alstria Annual Report 2018 87 Consolidated Financial Statements 5.4 Personnel expenses EUR k Salaries and wages Social insurance contribution Bonuses Expenses for share-based compensation thereof relating to virtual shares thereof relating to the convertible profit participation certificates Amounts for retirement provisions and disability Management Board Other Total 2018 8,588 1,458 2,338 2,925 1,343 1,582 144 457 15,910 2017 7,338 1,225 1,986 2,773 142 359 13,823 1,488 1,285 The increase in personnel expenses is based on a higher number of average employees and higher share-based payments. Convertible profit participation rights granted to employees not only grant the right to a conversion when the conditions apply but also to an annual payment equivalent to the dividend amount paid out per share. Therefore, expenses for share-based compensation resulting from the convertible profit participation rights must be accounted for in equity (for the conversion right) and in liabilities (for the dividend entitlement). Of the total expenses related to the profit participation rights amounting to EUR 1,582 k, EUR 1,518 k were recognized in equity (2017: EUR 1.129 k), while EUR 64 k were recorded as an item in liabilities (2017: EUR 156 k). The employer’s contribution to statutory pension insurance, included in wages and salaries, amounts to EUR 702 k for the 2018 financial year. On average, the Group employed 139 employees in 2018 (2017: 118). 5.5 Other operating income EUR k Compensation payments and other recharges Income from the reversal of accrued liabilities 2018 6,559 2,771 of which due to the termination of litigation 101 0 Payments on provisions on doubtful debts Property management services Compensation for damages Other Total 231 43 38 1,014 10,656 2017 7,406 1,006 296 335 379 717 10,139 Compensation payments and other charges result from early termination of leases and refurbishment activities conducted by alstria. The latter refers to refurbishments the tenants had originally committed themselves to carry out upon conclusion of the leasing contracts. 88 alstria Annual Report 2018 Consolidated Financial Statements In the previous year’s period the results from annual operational cost statements for prior years in the amount of EUR 632 k had been disclosed under other operating income. The item relates to pre- payments received in previous financial years, which were definitively collected after the final service charge calculation had been prepared by the Company. Since these are sales revenues in accordance with IFRS 15, they were reclassified in the current year to Revenues from service charge income. 5.6 Other operating expenses EUR k Revaluation of the limited partnership capital noncontrolling interests Settlement agreements Impairment on trade receivables Transaction and restructuring costs following the alstria office Prime takeover Property disposal costs Remaining other operating expenses Total 2018 12,261 444 247 27 0 767 2017 9,210 676 698 1,971 1,160 656 13,746 14,371 Other operating expenses are at the previous year’s level. Although the consequential costs resulting from the integration of the Prime Portfolio declined significantly, there was a considerable amount of additional costs resulting from the revaluation of the limited partnership noncontrolling interests. Impairment on trade receivables mainly relates to tenants subject to insolvency or eviction proceedings. The item also includes valuation allowances related to disputed invoicing of ancillary costs. In the year under review, property disposal costs are recognized, unlike in the previous year, in the net result on the disposal of investment property. 5.7 Net result on the disposal of investment property EUR k Proceeds from the disposal of investment property Carrying amount of investment property disposed Total 2018 109.080 −94.193 14,887 2017 119,200 -99,507 19,6931) 1) Due to the presentation of the real estate sale costs in the previous year as other operating expenses (see Note 5.6), the net result from the disposal of investment property of the previous year contains no real estate sales costs. The total loss from the disposal of objects and portfolios sold below their carrying value amounted to EUR 336 k in 2018 and EUR 194 k in 2017. alstria Annual Report 2018 89 Consolidated Financial Statements 5.8 Financial and valuation result The financial result breaks down as follows: EUR k Income from financial instruments Interest expenses, corporate bonds Interest expenses, convertible bond Interest expenses, other loans Interest result ‘Schuldschein’ Other interest expenses Financial expenses Commitment fees Agency fees Fees, loan premium and effective interest costs in relation to the repayment of loans and corporate bonds before maturity Other Other financial expenses Net financial result 2018 745 -21,138 -1,783 -3,433 -3,186 -282 -29,822 -385 -13 0 -22 -420 -29,497 2017 816 -23,314 -5,357 -3,585 -3,248 -480 -35,984 -152 -38 -31,981 -369 -32,540 -67,708 The total interest income and expenses for financial assets and liabilities other than financial deriv- atives amounted to an interest income of EUR 745 k (2017: EUR 816 k) and EUR 29,822 k of interest expenses (2017: EUR 35,984 k), respectively. The total interest expenses calculated by applying the effective interest method for financial liabili- ties (i. e., not recognized at fair value through profit or loss) amounted to EUR 2,286 k (interest ex- penses, 2017: EUR 2,122 k). The prior-year’s premium and the effective interest expense due to the repayment of loans or corpo- rate bonds in the amount of EUR 31,981 k relate to the proportionate repurchase of two corporate bonds prior to their regular maturity (see also the explanations of corporate bonds in Notes 7.3 Loans and bonds). As part of a tender offer for repurchase, bonds with a nominal value of EUR 348,200 k were bought back in the market. The premium to be paid on the basis of the bond prices at the time of the repurchase amounted to EUR 29,172 k. The reversal of the allocated accrued original ancillary costs of the bond placement at the time of the repurchase amounted to EUR 2,809 k. In neither of the two former financial years did the Group hold any financial assets available for sale. Therefore, the net result from the disposal of financial assets available for sale amounted, as in the previous year, to EUR 0. 90 alstria Annual Report 2018 Consolidated Financial Statements Fair value adjustments on financial derivatives resulted in a net loss: EUR k Ineffective change of the fair value of cash flow hedges Change in fair value of financial derivatives not qualifying as a cash flow hedge Net loss from fair value adjustments on financial derivatives 2018 -14 2,466 2,452 2017 -25 -9,309 -9,334 Further details and explanations on derivatives are presented in Note 6.5. 5.9 Income tax expenses On January 1, 2007, alstria office REIT-AG obtained G-REIT status. At this time, it was subject to final taxation and has been tax exempt with regard to corporate tax and trade tax effectively since then. With the acquisition of the alstria office Prime, however, companies were included in the consolidated financial circle that are not subject to the REIT exemption. This resulted in expenses for income taxation at the level of the alstria office Prime subgroup. Income tax expense comprises only current tax expenses, as a deferred tax result is no longer ex- pected due to the de facto tax exemption of the Group. 6. NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION – ASSETS 6.1 Investment property This item, comprising investment properties held by the Company, breaks down as follows: Fair values in EUR k As of January 1 Property acquisition Capital expenditure Disposals Transfers to held for sale Transfers to property, plant & equipment (own used property) Transfers from property, plant & equipment (own used property) Net result from the adjustment of the fair value of investment property Subtotal Prepayments made As of December 31 2018 2017 3,331,858 2,999,099 172,375 86,420 -48,850 -11,408 -307 7,878 398,954 3,936,920 1,944 3,938,864 187,723 58,780 -42,800 -43,100 -14,836 0 181,492 3,326,358 5,500 3,331,858 In the 2018 financial year, six properties were sold or reclassified as assets held for sale. Two of the properties are still included in the items held for sale at the end of the financial year. Together with an object held for sale on the previous year’s balance sheet date, three properties with a transaction volume of EUR 29,620 k are reported as held for sale as of the reporting date. alstria Annual Report 2018 91 Consolidated Financial Statements Property transaction Contract signed in 2017, transferred in 2018 Contract signed and transferred in 2018 Contract signed in 2018, transferred 2019 Total Acquisition Disposal Number of properties Transaction amount in EUR k Number of properties Transaction amount in EUR k 2 4 2 8 82,584 84,575 15,820 182,979 1 4 2 7 44,000 65,080 29,620 138,700 Capital expenditure (EUR 86,420 k) comprises subsequent acquisition and production costs relating to property acquisitions and refurbishment projects. For more information on changes to the immovable property, please refer to the ‘Transactions’ section in the Group management report for the 2018 financial year (see page 8 f). Borrowing costs that would have had to be capitalized as construction costs were not incurred during the reporting period (2017: EUR 0). The alstria office REIT-AG applied the fair value model pursuant to IAS 40.33 et seq. for subsequent measurement of investment property. External appraisals were obtained for measurement. For a detailed description of the valuation of assets, please see Note 2.4. The item on the income statement ‘net result from fair value adjustments on investment property’ of the amount of EUR 22,040 k is attributable to a change in unrealized losses. As in the previous year, all real estate held as investment property measured at fair value is classified as level 3 in the fair value hierarchy. The Group has considered the nature, characteristics, and risks of its properties, as well as the level of the fair value hierarchy within which the fair value measurements are categorized, in determining the appropriate classes of investment property. The following factors help determine the appropriate classes. a) The real estate segment: Within all investment portfolios, the majority of the lettable area is dedicated to offices. Therefore, all investment properties belong to one asset class: offices. b) The geographical location of all properties is Germany. c) The level of fair value hierarchy for all investment properties is level 3. d) There are large differences between the contractual lease terms. This also affects the weighted average unexpired lease term (WAULT) for each investment property. A distinction is made between objects with a short, medium, and long WAULT. As a result, three appropriate classes of investment properties have emerged:  Germany – Office – Level 3 – short WAULT (0–5 years);  Germany – Office – Level 3 – medium WAULT (> 5–10 years); and  Germany – Office – Level 3 – long WAULT (> 10 years). 92 alstria Annual Report 2018 Consolidated Financial Statements Quantitative information about fair value measurements using unobservable inputs (alstria port- folio) (level 3) EUR k, unless stated otherwise Portfolio Fair Value on Dec. 31, 2018 German offices 3,936,9201) Number of properties: Valuation technique hardcore and top slice Unobservable inputs Estimated rental value (EUR/m²/mo.) Adjusted yield Void period of office leases expiring within the next 5 years [months] 115 0 ≤ WAULT ≤ 5 Years German offices Number of properties: 78 5 < WAULT ≤ 10 Years German offices Number of properties: 31 WAULT > 10 Years German offices Number of properties: 6 2,420,908 hardcore and top slice Estimated rental value (EUR/m²/mo.) Adjusted yield Void period of office leases expiring within the next 5 years [months] 1,243,607 hardcore and top slice Estimated rental value (EUR/m²/mo.) Adjusted yield Void period of office leases expiring within the next 5 years [months] 272,405 hardcore and top slice Estimated rental value (EUR/m²/mo.) Adjusted yield Void period of office leases expiring within the next 5 years [months] Range Min. Max. Weighted average 7.1 21.9 3.0 % 8.7 % 12.7 5.0 % 0.0 24.0 11.0 7.1 22.8 3.4 % 8.7 % 12.8 5.3 % 0.0 24.0 10.8 7.9 17.9 3.2 % 6.0 % 12.7 4.5 % 0.0 24.0 12.3 10.0 18.1 3.0 % 4.6 % 11.7 3.4 % 0.0 12.0 11.9 1) Fair value of investment property without prepayments of EUR 1,944 k. Sensitivity of measurement to variance of significant unobservable input A decrease in the estimated rental income decreases the fair value. An increase in the vacancy period decreases the fair value. An increase in the adjusted yield decreases the fair value. A decrease in the estimated rental income leads to an increase in the adjusted yield; an increase in the estimated rental income leads to a decrease in the adjusted yield. A decrease in the vacancy period leads to an increase in the adjusted yield; an increase in the vacancy period leads to a decrease in the adjusted yield. The external assessors have carried out sensitivity analyses on their fair value assessments, which show the effect of changes in capitalization rates (adjusted yield) on fair market values. alstria Annual Report 2018 93 Consolidated Financial Statements Fair value of investment properties (EUR m) Capitalization rates Dec. 31, 2018 Dec. 31, 2017 –0.25 % 0.00 % 0.25 % 4,190 3,937 3,700 3,523 3,332 3,162 Operating lease commitments – Group as lessor The Group has entered into commercial property leases on its investment property portfolio, which consists of the Group’s offices and commercial real estate. These noncancelable leases have remaining maturity of between one and 18 years. Most leases include an indexation clause allowing rental charges to be raised annually according to prevailing market conditions. Future minimum rental charges receivable as agreed on in noncancelable operating leases are as follows: EUR k Within 1 year After 1 year but not longer than 5 years Longer than 5 years Total Dec. 31, 2018 Dec. 31, 2017 187,337 452,179 309,062 948,578 182,475 454,425 315,742 952,642 Disclosures concerning expenses/income as recorded in the income statement pursuant to IAS 40.75 (f) include:  EUR 232,353 k (2017: EUR 231,067 k) rental income from investment properties;  EUR 55,804 k (2017: EUR 51,956 k) operating expenses (including repairs and maintenance) directly allocable to investment properties from which rental income was generated during the period under review; and  EUR 7,482 k (2017: EUR 6.201 k) operating expenses (including repairs and maintenance) aris- ing from investment properties that did not generate rental income during the period under review. Investment properties, held-for-sale properties, and own used properties amounting to EUR 658,065 k (December 31, 2017: EUR 618,329 k) served as collateral for bank loans. 6.2 Equity-accounted investment At the end of the reporting period, two companies in which alstria office REIT-AG holds a share of 49.0 % were treated as joint ventures and accounted for using the equity method. The carrying amount of the joint ventures at the end of the reporting period was EUR 7,650 k (December 31, 2017: EUR 7,733 k). In addition, alstria holds interests in an entity with a carrying amount of EUR 939 k. For further information, please refer to Note 2.2.3. 94 alstria Annual Report 2018 Consolidated Financial Statements 6.3 Intangible assets and property, plant, and equipment The intangible assets consist of software licenses and licenses to other rights with carrying amounts of EUR 226 k and EUR 123 k, respectively. The useful life of the intangible assets is estimated to be between three and five years. The alstria office REIT-AG occupies areas for its own use in four of its office buildings in Hamburg, Berlin, Düsseldorf, and Frankfurt. Therefore, the owner-occupied areas of the properties are categorized as ‘property, plant and equipment,’ according to IAS 16 and amortized according to plan. In the 2018 financial year, the owner-occupied use ended for office space with a market value of EUR 7,878 k. As a result, the office space was transferred from property, plant and equipment to investment property. The carrying amount of these areas amounted to EUR 4,393 k at the time of the transfer. The increase in value of EUR 3,485 k was recognized in other comprehensive income and allocated to the revaluation surplus. The carrying amount of all own used areas equals EUR 17,585 k as of the balance sheet date, compared to EUR 21,049 k on the previous year’s reporting date. The decline resulted from the move from the offices of the former headquarters of the company in Hamburg at the beginning of 2018. The following table shows the development of property, plant and equipment. EUR k Acquisition and production cost Plant Furniture and fixtures Owner-occupied property Total 2018 As of January 1, 2018 1,266 2,915 Transfer from investment property Transfer to investment property Additions Disposals 0 0 0 0 0 0 240 0 21,844 307 -5,093 919 0 26,025 307 -5,093 1,159 0 As of December 31, 2018 1,266 3,155 17,977 22,398 Accumulated amortization, deprecia- tion, and write-downs As of January 1, 2018 Additions Transfer to investment property Disposals As of December 31, 2018 Net book values as of December 31, 2018 1,190 12 0 0 1,202 64 1,597 235 0 0 1,832 1,323 795 298 -701 0 392 3,582 545 -701 0 3,426 17,585 18,972 alstria Annual Report 2018 95 Consolidated Financial Statements EUR k Acquisition and production cost Plant Furniture and fix- tures Owner-occupied property Total 2017 As of January 1, 2017 1,296 2,151 Transfer from investment property Additions Disposals 0 -30 0 0 763 0 6,657 14,836 351 0 10,104 14,836 1,084 0 As of December 31, 2017 1,266 2,914 21,844 26,024 Accumulated amortization, deprecia- tion, and write-downs As of January 1, 2017 Additions Disposals As of December 31, 2017 Net book values as of December 31, 2017 1,184 12 -6 1,190 75 1,416 181 0 1,597 1,317 690 105 0 795 3,290 298 -6 3,582 21,049 22,442 As in the previous year, two of these properties were pledged with a mortgage in order to secure loans from the Group. Additionally, operating and office equipment in the amount of EUR 1,387 k is shown under property, plant and equipment, compared to EUR 1,393 k as of the previous year’s balance sheet date. 6.4 Financial Assets The financial assets of EUR 36,737 k (December 31, 2017: EUR 36,567 k) relate to long-term bank de- posits in the amount of EUR 36,494 k and a term up to the 2021 financial year. A further EUR 243 k is attributable to a below 3 %-share in a stock corporation to which alstria cannot exert any significant influence. 96 alstria Annual Report 2018 Consolidated Financial Statements 6.5 Derivative financial instruments The following derivative financial instruments were in place at the end of the reporting period: Product Strike p.a. Maturity date Notional Fair value Notional Fair value Dec. 31, 2018 Dec. 31, 2017 (%) 3.0000 Sept. 30, 2019 3.0000 3.0000 Apr. 30, 2021 Dec. 17, 2018 Cap Financial derivatives – held for trading Cap Cap Financial derivatives – cash flow hedges Total interest rate derivatives Embedded derivative n/a June 14, 2018 Total 1) Underlying number of shares subject to conversion in thousands. (EUR k) 50,250 50,250 45,642 0 45,642 95,892 0 (EUR k) 0 0 0 0 0 0 0 0 (EUR k) 50,250 50,250 46,380 56,000 102,380 152,630 7,9871) (EUR k) 0 0 14 0 14 14 -27,529 -27,515 The notional amount of the financial derivatives effective at the end of the reporting period is EUR 95,892 k (December 31, 2017: EUR 152,630 k). This includes cash flow hedges and derivatives not qualifying for cash flow hedging. Derivatives of a notional amount of EUR 50,250 k (December 31, 2017: EUR 50,250 k) are not designated as a cash flow hedge. On June 7, 2013, alstria issued a convertible bond for a total amount of EUR 79,400 k. With the end of its term on June 14, 2018 all 794 units had been converted into equity instruments of the Company. Due to the terms and conditions of the convertible bond, the conversion right had to be separately accounted for as an embedded derivative. The value changes of the derivatives are reflected in various items in the balance sheet. The following table shows the change in financial derivatives since December 31, 2017: EUR k Hedging instruments as of January 1, 2018 Ineffective change in fair value cash flow hedges Net result from fair value changes in financial derivatives not qualifying for cash flow hedging Termination Hedging instruments as of December 31, 2018 Financial assets Financial liabilities Noncurrent Current Noncurrent Current Total 14 -14 0 0 0 0 0 0 0 0 0 0 0 0 0 -27,529 -27,516 0 -14 2,466 2,466 25,063 25,063 0 0 The ineffective portion that arises from cash flow hedges amounted to a fair value loss of EUR 14 k (2017: loss of EUR 25 k) and is recognized in profit or loss. alstria Annual Report 2018 97 Consolidated Financial Statements Gains totaling EUR 2,466 k (2017: loss of EUR 9,309 k), which were due to the market value of the derivatives not included in hedge accounting, were recognized in profit or loss in the 2018 income statement. Overall, this results in a total gain of EUR 2,452 k (2017: loss of EUR 9,334 k), which is presented as the ‘net result from fair value adjustments on financial derivatives.’ 6.6 Receivables and other assets Due to the specific nature of the business, the Group considers receivables with a remaining term of up to one year to be current. The following table presents an overview of the receivables of the Group: EUR k Trade receivables Rent receivables Other receivables Deductible capital gains taxes VAT receivables Prepayments made Creditors with debit balance Security deposits and other deposits granted Accrued receivables for ‘rent-free periods’ Receivables and other assets Other receivables Dec. 31, 2018 Dec. 31, 2017 6,865 4,578 2,176 426 315 204 0 615 8,314 7,153 0 2,093 684 474 359 10,303 847 14,760 A total of EUR 10,303 k of other receivables consists of deferred amounts resulting from the recognition of total rental revenues on a straight-line basis over the entire term of the lease agreements (rental smoothing). In the reporting period, accrued receivables for ‘rent-free periods’ were reclassified to investment property. The reason for this change in presentation is that the deferred rental receivables can be considered part of the fair value of the investment properties, and the reclassification increases the consistency of the presentation. The deductible capital gains taxes relate to the taxation on hidden reserves in the course of the change of legal form in subsidiaries in the 2016 financial year. Affected are companies of the Prime Portfolio subgroup which, following the takeover of the former DO Deutsche Office Group, have changed the legal form of a limited liability company into the legal form of a limited partnership. All receivables are due within one year from the balance sheet date. The fair value of all receivables is equal to their carrying amount. Trade receivables were written down by EUR 247 k (December 31, 2017: EUR 698 k) due to rent payments in arrears. Apart from trade receivables, no other receivables were impaired. The consideration of expected credit losses on trade receivables, which had to be carried out for the first time in the financial year, resulted in a risk provision of EUR 134 k as of the reporting date. The first- time application effect as of January 1, 2018 amounted to EUR 169 k. 98 alstria Annual Report 2018 Consolidated Financial Statements The expected credit losses are calculated based on the simplified impairment model at two levels. For alstria’s key tenants, default probabilities observed on the market made available by Bisnode Deutschland GmbH, Darmstadt, Germany, are used. For its receivables from the remaining (non-key) tenants, alstria uses an impairment matrix. The receivables of these other tenants are valued based on historical probabilities of default. Future developments or macroeconomic indicators are moni- tored, and adjustments are made if necessary. On this basis, alstria estimates the following default rates. EUR k Default rate 0-30 days overdue 31-90 days over- due 91-180 days over- due More than 180 days overdue 0.33 % 3.82 % 2.77 % 5.75 % Trade receivables from tenants of alstria are valued as follows. EUR k 0-30 days overdue 31-90 days overdue 91-180 days over- due More than 180 days overdue Total other tenants Key tenants Total Gross amount Provision made for default of receivables over the entire term 1,164 264 438 1,212 3,078 3,922 7,000 -4 -10 -12 -70 -96 -39 -134 Net amount 1,160 254 426 1,142 2,982 3,883 6,865 Apart from trade receivables, other receivables or other assets were not impaired. As of December 31, 2018, trade receivables in the amount of EUR 5,605 k (December 31, 2017: EUR 6,955 k) were past due but not yet impaired. These relate to a number of independent tenants for whom there is no recent history of default. The aging analysis of these trade receivables is as follows: EUR k Trade receivables Up to 3 months From 3 to 6 months More than 6 months Total Dec. 31, 2018 Dec. 31, 2017 4,190 509 906 5,605 4,435 1,056 1,464 6,955 Receivables from rental agreements and property disposals, as well as insurance receivables and derivative financial instruments, have been assigned to the lenders (Note 7.3) to secure the Group’s mortgage-backed loans. alstria Annual Report 2018 99 Consolidated Financial Statements 6.7 Cash and cash equivalents EUR k Bank balances Dec. 31, 2018 Dec. 31, 2017 132,899 102,078 Current accounts held with banks attract variable interest rates for on-call balances. As of the re- porting date, no cash amounts were subject to restrictions. Due to the very low credit default prob- abilities of the banks for the daily available bank balances, an impairment of cash and cash equiva- lents was not made. The credit rating was based on observable market parameters. As of the balance sheet date, EUR 13,171 k have been accrued for interest payment liabilities, which will be payable in the course of the next twelve months (December 31, 2017: EUR 13,278 k). In addition, cash and cash equivalents include EUR 6,353 k in rent deposits received from tenants and held in trust by the Group (December 31, 2017: EUR 5,414 k). These tenant deposits, recognized under cash and cash equivalents, are offset by an item included under Other Liabilities. 6.8 Assets held for sale The assets held for sale comprise three properties. All three properties were already transferred to the buyer in the first quarter after the reporting period. The sale of properties resulted in disposal revenues of EUR 29,620 k. As of the previous year's reporting date, two properties were held for sale. While one of the two properties continued to be accounted for as held for sale as of December 31, 2018, the other building was transferred to the buyer in 2018 as planned. The property held for sale as at 31 December 2017 was transferred to the buyer on January 31, 2019 after all agreed conditions had been met by the contracting parties. EUR 4,420 k out of the income statement item ‘gain on disposal of investment property’ relates to the assets held for sale shown on the balance sheet date. The valuation of assets held for sale is based on the contract prices and, therefore, included within level 1 of the fair value hierarchy. 100 alstria Annual Report 2018 Consolidated Financial Statements 7. NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION – EQUITY AND LIABILITIES 7.1 Equity For detailed information on equity, please refer to the consolidated statement of changes in consol- idated equity. Share capital Thousand Ordinary shares of EUR 1 each Dec. 31, 2018 Dec. 31, 2017 177,416 153,962 A total of 15,323,121 new shares were issued against cash consideration; this increased alstria office REIT-AG’s share capital by EUR 15,323,121. The capital increase was registered in the commercial register on January 31, 2018. The conversion of profit participation rights (Note 13.2) in the second quarter of 2018 resulted in the issuance of 143,750 new shares by making use of the conditionally increased capital provided for such purposes. The share capital increased by EUR 143,750.00. All remaining 735 shares of the convertible bond as of the prior year’s balance sheet date, with a notional amount of EUR 73,500 k, were converted in the course of the first half year. The conversion resulted in an issuance of 7,987,972 new shares by making use of the conditionally increased capital provided for such purposes (conditional capital 2013). In total, due to the capital measures stated above, alstria office REIT-AG’s share capital increased to EUR 177,416,497 (EUR 23,454,843 higher than on December 31, 2017). As of December 31, 2018, it is represented by 177,416,497 no-par value bearer shares. The following table shows the reconciliation of the number of shares outstanding: Number of shares Shares outstanding on Jan. 1 Issue of new shares against capital contribution in cash Conversion of convertible bond Conversion of convertible participation rights 2018 153,961,654 15,323,121 7,987,972 143,750 2017 153,231,217 0 619,437 111,000 As of Dec. 31 177,416,497 153,961,654 The majority of the Company’s shares are in free float. alstria Annual Report 2018 101 Consolidated Financial Statements Capital reserve The capital reserve changed as follows during the financial year: EUR k As of Jan. 1 Payment of dividends Issue of new shares against capital contribution in cash Cost of issue of new share Conversion of convertible bond Share-based remuneration Conversion of convertible participation rights 2018 1,363,316 -92,170 177,749 -2,611 90,575 1,629 144 2017 1,434,812 -79,680 0 0 6,944 1,129 111 As of Dec. 31 1,538,632 1,363,316 The new shares generated from the capital increase were placed on the capital markets and sold at a price of EUR 12.60 per share. The issue proceeds exceeded the nominal share capital by EUR 177,749 k and were recognized in capital reserves. After having deducted placement costs of EUR 2,611 k caused by the share placements, the increase of the capital reserve amounted to a net EUR 175,138 k. The share premium resulting from the conversion of the convertible bond amounted to EUR 90,575 k. It was recognized in the capital reserve. The share premium resulting from the conversion of 143,750 profit-participation rights resulted in an increase in capital reserves of EUR 144 k. Revaluation surplus Following the relocation of the headquarters within Hamburg in the first quarter of the financial year, the office space that had previously been used as owner-occupied property again became investment property and was remeasured at fair value. The fair value revaluation resulted in an increase in the carrying amount of the property in the amount of EUR 3,485 k. The increase in value was recognized in other comprehensive income and allocated to the revaluation surplus. Treasury shares As of December 31, 2018, the Company held no treasury shares. By resolution of the Annual General Meeting held on May 16, 2017, the Company’s authorization to acquire treasury shares was renewed. The resolution authorized alstria office REIT-AG to acquire up to 10 % of the capital stock until May 15, 2022. There is no intention to make use of this authorization at present. Retained earnings Retained earnings as of December 31, 2018, totaled EUR 964,554 k (December 31, 2017: profit carried forward of EUR 437,382 k). At the dividend’s due date, alstria office REIT-AG’s standalone positive 102 alstria Annual Report 2018 Consolidated Financial Statements retained earnings were not high enough for the payment of the dividend according to German GAAP [HGB]. Therefore, the amount of the dividend payouts was released from the available capital reserve in 2018. Furthermore, the first-time adoption of IFRS 9 resulted in valuation effects amounting to EUR 242 k, which were recognized directly in retained earnings. Authorized capital The authorized capital 2017 of the Company in the amount of EUR 30,646 k was limited until May 15, 2018 and was replaced by the authorized capital 2018 by resolution of the Annual General Meeting on May 26, 2018. The authorized capital 2018 allows the Management Board, with the approval of the Supervisory Board, to increase the share capital of the Company by May 25, 2023 by up to a total of EUR 33,950 k. Conditional capital The Company’s share capital has been conditionally increased in order to grant convertible profit participation rights to the employees of the Company and its subsidiaries. As of December 31, 2018, the conditional capital amounted to EUR 1,356 k. This was divided into conditional capital III 2015 (EUR 356 k) and conditional capital III 2017 (EUR 1,000 k). In the year under review, conditional capital III 2015 was used in the amount of EUR 144 k. Conditional capital 2013 was used in the amount of EUR 7,679 k and has otherwise become obsolete. 7.2 Noncontrolling interests of limited partners In addition to alstria office REIT-AG, other limited partners are minority shareholders in the subsidiary alstria office Prime, which is included in the consolidated financial statements. From the Group’s point of view, the equity of these limited partners is to be reported as debt capital in accordance with IFRS. They are shown in the consolidated balance sheet under the item ‘limited partnerships of noncontrolling interests’. In the 2017 financial year, alstria office REIT-AG acquired 2,128,048 limited partner shares. A further 3,593,463 limited partner shares were redeemed against cash compensation by alstria office Prime. In the 2018 financial year, a further 30,287 limited partner shares were acquired. By the end of the reporting period, the acquisition and redemption of limited partnership shares as well as the change in value of the existing limited partnership shares of noncontrolling interests re- sulted in expenses of EUR 12,261 k (2017: EUR 9,317 k). The fair value of the limited partnerships of noncontrolling interests reported as of the balance sheet date amounted to EUR 64,060 k, whereby EUR 64,013 k are to be classified as long-term and EUR 47 k as short-term. alstria Annual Report 2018 103 Consolidated Financial Statements 7.3 Financial liabilities EUR k Loans Corporate bonds Mortgage loans Schuldschein Total EUR k Loans Corporate bonds Mortgage loans Schuldschein Convertible bond Total Noncurrent Current Total Loan Accrued interest Total current Dec. 31, 2018 993,843 228,477 113,770 1,336,090 0 0 1,000 1,000 11,344 173 1,654 13,171 11,344 1,005,187 173 2,654 228,650 116,424 14,171 1,350,261 Noncurrent Current Total Loan Accrued interest Total current Dec. 31, 2017 992,215 240,179 149,571 0 1,381,965 0 1,076 0 72,096 73,172 11,343 11,343 1,003,558 86 1,752 97 13,278 1,162 1,752 72,193 86,450 241,341 151,323 72,193 1,468,415 The table presents the long-term loans and the net of the current portion as stated under noncurrent liabilities. Furthermore, it shows the current amount due within one year, recorded as an item in short-term loans in current liabilities. As of December 31, 2018, the total repayable amount of the corporate bonds, the bank loans, the Schuldscheindarlehen, and the convertible bond drawn by alstria (as of the prior year’s balance sheet date) was EUR 1,345,700 k (December 31, 2017: EUR 1,467,287 k). The carrying amount of EUR 1,350,261 k (EUR 1,336,090 k, noncurrent, and EUR 14,171 k, current) takes interest liabilities and accrued transaction costs into account. Financial liabilities with a maturity of up to one year are recognized as current loans. The following table shows the changes in financial liabilities: EUR k Long-term loans and bonds, net of current portion Short-term loans Total December 31, 2017 Payments of the pe- riod Reclassification non-current/ current Changes in fair value 1,381,965 -11,434 86,450 -110,153 1,468,415 -121,587 -36,577 36,577 0 2,1361) 1,2972) 3,433 December 31, 2018 1,336,090 14,171 1,350,261 1) Changes in deferred loan costs (effective interest). 2) Changes in the accrued interest. The cash changes in borrowings shown in the column ‘Payments of the period’ include, in addition to the cash inflows and outflows from loans and corporate bonds, the payments of transaction costs for taking out loans. 104 alstria Annual Report 2018 Consolidated Financial Statements Corporate bond I In the fourth quarter of the 2015 financial year, a bond loan in the total amount of EUR 500,000 k with a maturity until March 24, 2021, and a coupon of 2.25 % p.a. was issued. As result of the invitation to tender for the existing corporate bond, on November 16, 2017, alstria office REIT-AG repurchased shares with a notional amount of EUR 173,200 k. Following settlement of the invitation and cancellation of the relevant bond notes, the outstanding notional value of the bond still amounts to EUR 326,800 k. The bond was recognized with its carrying amount of EUR 325,354 k; additionally, interest liabilities in the amount of EUR 5,701 k were recognized as of the balance sheet date. The fair value (hierarchy level 1) amounted to EUR 336,310 k as of the balance sheet date. Corporate bond II In the second quarter of the previous year’s reporting period, a second bond loan in the total amount of EUR 500,000 k with a maturity until April 12, 2023, and a coupon of 2.125 % p.a. was issued. As result of the invitation to tender for the existing corporate bond, on November 16, 2017, alstria office REIT-AG repurchased shares with a notional amount of EUR 175,000 k. Following settlement of the invitation and cancellation of the relevant bond notes, the outstanding notional value of the bond still amounts to EUR 325,000 k. The bond was recognized with its carrying amount of EUR 322,458 k; additionally, interest liabilities in the amount of EUR 4,995 k were recognized per the balance sheet date. The fair value (hierarchy level 1) amounted to EUR 334,750 k as of the balance sheet date. Corporate bond III In the fourth quarter of 2017, alstria office REIT-AG issued a corporate bond with a maturity until November 2027, a total nominal value of EUR 350,000 k, and a coupon of 1.5 % p.a. After deducting the deferred loan ancillary costs, the bond was recognized at the end of the year with a carrying amount of EUR 346,032 k. Interest liabilities amounting to EUR 647 k were accrued as of the balance sheet date. The fair value (hierarchy level 1) amounted to EUR 315,350 k as of the balance sheet date. Mortgage loans These are property-related bank loans, most of them with variable interest rates. The loans are secured by mortgages and other collateral customary for bank loans. Schuldschein As of May 6, 2016, alstria issued a Schuldschein [debenture bond] with a nominal value of EUR 150,000 k. The Schuldschein has an average coupon of 2.07 % p.a. payable according to end-of- year convention and a staggered term of between four and ten years (see table on page 120). With effect from November 6, 2018, the floating-rate loan shares in the amount of EUR 35,000 k were repaid before the end of their term, so that the Schuldschein has a notional value of EUR 115,000 k at the end of the reporting period. The fair value (hierarchy level 2) amounted to EUR 127,303 k as of the balance sheet date. alstria Annual Report 2018 105 Consolidated Financial Statements Convertible bond In the second quarter of the 2013 financial year, alstria office REIT-AG issued a convertible bond, generating proceeds of EUR 79,400 k. The convertible bond has a maturity term of five years. It will be redeemed at 100 % of its principal amount. It has a coupon of 2.75 % p.a., payable in quarterly installments in arrears, and an initial conversion price of EUR 10.0710. In line with the terms and conditions of the convertible bond, the conversion price was most recently adjusted to EUR 8.9948. More information on the terms and conditions of the syndicated loan and the other loans can be found in the table on page 120 in Notes 14.1 of the Notes. Further details regarding the loan liabilities The current portion of the loans refers to scheduled repayments and accrued interest on the loans. The variable interest of the loans is payable on a quarterly basis, whereby the standard margin and borrowing costs for the market are added to the respective EURIBOR rate. Due to the variable interest rate of the main part of the mortgage loans, there are no significant differences between the carrying amounts and the fair value of these loans, with the exception of transaction costs. A total of EUR 37,100 k (December 31, 2017: EUR 37,100 k) in financial liabilities from mortgage loans relates to a fixed interest rate loan. At the end of the reporting period, the loan had a fair value of EUR 42,175 k (December 31, 2017: EUR 42,499 k). The fair value estimation is based on the discounted cash flows using quoted prices for loans with equivalent risk and maturity as a discount rate (level 2 in fair value hierarchy). As of December 31, 2018, the loans and the convertible bond were reduced by accrued transaction costs of EUR 8.610 k (December 31, 2017: EUR 12,150 k). The average debt maturity decreased from 5.8 years as of December 31, 2017, to 5.5 years as of December 31, 2018. The Group’s average interest rate decreased from 1.9 % to 1.8 % from balance sheet date to balance sheet date. The carrying amounts of the loans are all reported in Euro. With the exception of the fixed rate loan, the corporate bonds, the Schuldschein, and the convertible bond described above, the fair values of the Group’s financial liabilities approximate their carrying values at the end of the reporting period. This does not apply to their accrued transaction costs. As of December 31, 2018, a loan facility of EUR 100.000 k was in place. The liabilities exposed to an interest rate risk are due as follows: EUR k Up to 1 year More than 1 year Total 106 Dec. 31, 2018 Dec. 31, 2017 0 191,800 191,800 1,076 238,811 239,887 alstria Annual Report 2018 Consolidated Financial Statements The following loans are secured by land charges: EUR k Financial liabilities secured by land charges thereof on investment property thereof on own used property 7.4 Other Provisions Dec. 31, 2018 Dec. 31, 2017 229,400 223,476 5,924 246,330 241,027 5,303 EUR k Other provisions Provision virtual share liabilities Other Total Due Due up to 1 year in more than 1 year Total Dec. 31, 2018 up to 1 year in more than 1 year Total Dec. 31, 2017 1,288 4,189 5,477 1,275 0 1,275 2,563 4,189 6,752 1,388 1,604 2,992 1,499 0 1,499 2,887 1,604 4,491 The development of other provisions is shown in the following overview: EUR k Development of other provisions Provision virtual share liabilities Other Total Dec. 31, 2017 Consumption Resolution Additions Dec. 31, 2018 2,887 1,604 4,491 -1,556 -65 -1,621 0 -1,035 -1,035 1,232 3,685 4,917 2,563 4,189 6,752 As of the balance sheet date, EUR 2,563 k (December 31, 2017: EUR 2,887 k) was recognized as a provision for awarding the Long- and Short-Term Incentive Plan (Note 13.1). Other provisions include EUR 3,125 k of expenses that could result from claims for compensation by third parties. These are mainly claims for alleged refunds, which are considered by alstria to be unjustified. In addition, provisions were made for costs in connection with further litigation concerning smaller amounts. alstria Annual Report 2018 107 Consolidated Financial Statements 7.5 Trade payables and other liabilities Due Due up to 1 year in more than 1 year Total Dec. 31,2018 up to 1 year in more than 1 year Total Dec. 31, 2017 EUR k Trade payables Other current liabilities Accruals for outstanding invoices Real estate transfer tax 4,400 16,595 13,902 0 0 0 4,400 7,268 16,595 18,116 13,902 11,869 0 0 0 Rent and security deposits received 6,353 5,010 11,363 5,414 4,408 Other advance payments received 10,120 Customers with credit balances Advance rent payments received Salary obligations Value-added tax liabilities Supervisory Board compensation Auditing costs Vacation provisions Miscellaneous liabilities Total 3,997 2,564 2,238 2,095 525 332 322 1,164 60,207 0 0 0 0 0 0 0 0 0 10,120 500 3,997 2,167 2,564 3,313 2,238 2,039 2,095 3,213 525 332 322 353 527 288 1,164 1,405 0 0 0 0 0 0 0 0 0 5,010 65,217 49,204 4,408 7,268 18,116 11,869 9,822 500 2,167 3,313 2,039 3,213 353 527 288 1,405 53,612 The disclosed carrying amounts approximate their fair values. Real estate transfer tax in the amount of EUR 10,483 k resulted from the merger between Deutsche Office and the Prime Office REIT-AG in the year 2013. For two properties transferred within the merger, the real estate transfer tax obligation is still due. A further EUR 3,420 k of the real estate transfer tax relates to the acquisition of real estate in December of the financial year. Other advance payments in the amount of EUR 10,120 k were received for the sale of two properties, which were transferred to the buyer in 2019. 7.6 Income tax liabilities The recognition of income tax liabilities as of December 31, 2018, is described in Note 5.9 regarding income tax expenses. Obligations from income taxes arise almost exclusively at the level of the alstria office Prime companies acquired through the business combination on October 27, 2015. The tax liabilities mainly resulted from taxes arising out of the realization of hidden reserves as a result of the inclusion of the companies in the tax-exempt REIT structure. As a result, no further deferred tax liabilities had to be formed since the 2016 financial year. 7.7 Trust assets and liabilities At the end of the reporting period, alstria office REIT-AG held no trust assets. Trust liabilities existed worth EUR 6,353 k from rent deposits and worth EUR 5,010 k from security deposits. As of December 31, 2017, EUR 5,414 k rent deposits and EUR 4,408 k security deposits existed. 108 alstria Annual Report 2018 Consolidated Financial Statements 8. OTHER NOTES 8.1 Compensation of the Management Board and Supervisory Board Management Board The following total remuneration was granted to the members of the Manage- ment Board, according to IAS 24.17: EUR k Short-term benefits Share-based remuneration Postemployment benefits Total 2018 1,277 800 160 2,237 2017 1,161 905 125 2,191 On the reporting date, liabilities for the compensation of the Management Board members amounted to EUR 433 k (2017: EUR 339 k). As of December 31, 2018, 291,392 virtual shares (December 31, 2017: 315,600 virtual shares) were issued to members of the Management Board from the cash-settled share-based management remuneration plan implemented in 2010 and the equity-settled management remuneration plan in place since 2018 (see Notes 13.1 ). Supervisory Board Pursuant to the Articles of Association, Supervisory Board members’ fixed annual payments amounted to EUR 525 k (2017: EUR 353 k). Further information on disclosures from HGB Section 314, para. 1, no. 6a (German Commercial Code) and IAS 24.17 is provided in the remuneration report, which is an integral part of these Notes. 8.2 Other financial commitments and contingencies Other financial obligations from refurbishment projects and ongoing maintenance amounted to EUR 30,324 k (2017: EUR 24,317 k). As of December 31, 2018, rental agreements for the car parking spaces and administrative premises were subject to a minimum lease term. Future financial obligations of EUR 5,453 k arose from other leasing agreements. Of these, obligations totaling EUR 390 k have a residual maturity of up to one year; obligations in the amount of EUR 1,113 k have a remaining maturity of one to five years, the remaining EUR 3,950 k of more than five years. 8.3 Consolidated cash flow statement The cash flow statement shows how the Group’s cash and cash equivalents have changed over the course of the financial year as a result of cash received and paid. In accordance with IAS 7, a distinc- tion is made between cash flows from operating activities and cash flows from investing and financing activities. Cash flows from investing and financing activities are calculated based on payments, whereas cash flows from operating activities are derived indirectly based on the consolidated profit for the year. alstria Annual Report 2018 109 Consolidated Financial Statements The net cash generated from operating activities for the 2018 financial year amounted to EUR 119,014 k and was slightly below the level of previous year’s operating cash flow (EUR 122,268 k). The net cash generated from operating activities includes other non-cash income and expenses in the amount of EUR 5,616 k. These essentially relate to allocation to provisions and other liabilities. The cash flow from investing activities is affected by the inflow of cash and cash equivalents from property disposals in the amount of EUR 119,200 k, while investments in the investment property portfolio resulted in cash outflows of EUR 253,119 k. The cash flows from financing activities mainly reflect cash inflows from the capital increase in the amount of EUR 190,460 k and from borrowings of EUR 60,000 k. Cash outflows resulted from the repayment of loans in the amount of EUR 108,088 k and the dividend distribution in the amount of EUR 92,170 k. Cash and cash equivalents reported in the cash flow statement relate to all liquidity items disclosed on the balance sheet (e. g. cash in hand and bank balances). 9. RELATED PARTY RELATIONSHIPS 9.1 Preliminary remarks Related parties are the Management Board, the members of the Supervisory Board, the managing directors of subsidiaries and second-tier subsidiaries, and their close relatives. Related parties also include entities with a controlling influence over the Group and entities with joint control or significant influence over alstria office REIT-AG. The majority of alstria office REIT-AG’s shares are free-floating shares. No person or entity has a controlling influence over the Company. alstria office REIT-AG is the ultimate parent company of the Group. Joint ventures over which alstria office REIT-AG has joint control are also considered related parties. In the view of alstria office REIT-AG’s management, all transactions with related parties entered into in the 2018 financial year were undertaken in terms of arm’s-length transactions or under conditions in alstria office REIT-AG’s favor. 9.2 Remuneration of key management personnel For a detailed description of the remuneration of key management personnel, please refer to Note 8.1 and the remuneration report on page 157 to 164. 9.3 Related party transactions At the end of the reporting period, the Group recorded no receivables from or liabilities to joint ventures. Furthermore, alstria office REIT-AG reimbursed EUR 23 k to joint ventures. In the previous year, alstria received EUR 10 k from the joint ventures as compensation for services connected to real estate. No further transactions with related parties were carried out during the reporting period. 110 alstria Annual Report 2018 Consolidated Financial Statements 10. EARNINGS PER SHARE Basic earnings per share are calculated as the quotient of the profit attributable to the shareholders and the weighted average number of shares outstanding during the financial year—except for the average number of treasury shares held by the Company itself. Diluted earnings per share are calculated by dividing the profit attributable to ordinary owners of the parent company by the weighted average number of ordinary shares outstanding during the year— except for the treasury shares held by the Company itself—plus the weighted average of shares that would be issued as a result of the dilutive potential ordinary shares’ conversion. The following table reflects the income and share data used in the earnings per share computations: Earnings per share Profit attributable to the shareholders (EUR k) Average number of shares outstanding (thousands) Basic earnings per share (EUR) 2018 527,414 174,387 3.02 2017 296,987 153,402 1.94 The possibility of converting shares in connection with the convertible bond actually converted in the financial year resulted in the following diluted earnings per share. Diluted earnings per share Diluted profit attributable to the shareholders (EUR k) Average diluted number of shares (thousands) Diluted earnings per share (EUR) 2018 527,665 176,061 3.00 2017 299,153 161,390 1.85 There were no dilution effects resulting from the granted stock options or the convertible profit participation rights during the period under review, as the related vesting conditions had not been satisfied as of the end of the reporting period. alstria office REIT-AG is authorized to issue up to EUR 1,356 k in shares as conditional capital. These contingently issuable shares could dilute basic earnings per share in the future, but they were not included in the calculation of diluted earnings per share because they are non-dilutive for the period presented. 11. DIVIDENDS PAID AND DIVIDENDS PROPOSED EUR k Dividends on ordinary shares1) not recognized as a liability as of Dec. 31 Dividend per share 1) Refers to all shares except treasury shares on the dividend payment date 2018 92,170 0.52 2017 79,680 0.52 At the Annual General Meeting held on April 26, 2018, alstria office REIT-AG resolved to distribute dividends totaling EUR 92,170 k (EUR 0.52 per outstanding share). The dividends were distributed on May 2, 2018. By comparison, the dividends paid out in 2017 totaled EUR 79,680 k (EUR 0.52 per outstanding share). alstria Annual Report 2018 111 Consolidated Financial Statements At the Annual General Meeting, the Management Board intends, in agreement with the Supervisory Board, to submit the following proposal to allocate the unappropriated net income of alstria office REIT-AG for the 2018 financial year: Distribution of a dividend of EUR 0.52 for each share of no par value entitled to the dividend for the 2018 financial year as of the date of the Annual General Meeting. Payment of the proposed dividend is contingent upon approval by alstria shareholders at the Annual General Meeting on Mai 22, 2019. The proposed dividend of EUR 0.52 per share for the 2018 financial year represents a total payment of around EUR 92.3 million based on the number of shares entitled to dividend at the balance sheet date. 12. EMPLOYEES During the period from January 1 to December 31, 2018, the Company had an average of 139 employees (January 1 to December 31, 2017: 118 employees on average). The average was calculated based on the total number of employees at the end of each quarter. On December 31, 2018, 149 people were employed at alstria, excluding the Management Board members (December 31, 2017: 121 employees). Real estate management and development Finance and legal Other occupations Total Average 2018 December 31, 2018 Employees 76 38 24 139 83 39 27 149 112 alstria Annual Report 2018 Consolidated Financial Statements 13. SHARE-BASED REMUNERATION 13.1 Share-based remuneration (virtual shares and stock awards) for Management Board members The virtual shares issued to the Management Board relate to share-based remuneration. In January 2017, the Supervisory Board of the Company adopted an amendment to the remuneration system for members of the Board of Management, which has remained unchanged since 2010 and which came into effect on January 1, 2018. As the term of the granted virtual shares is four years, virtual shares will be issued under the compensation system valid from 2010 and those issued under the criteria of the new compensation system effective January 1, 2018. The latter are referred to as Stock Awards. In the following, therefore, the cornerstones of the virtual shares under the Remuneration System 2010 and the Stock Awards under the new Remuneration System 2018 are explained. 13.1.1 Virtual share based remuneration 2010 to 2017 On March 2, 2010, the Company’s Supervisory Board established a new share-based remuneration system as a means of providing success-based remuneration for members of the Management Board. The share-based remuneration is made up of a long-term component, the Long-Term Incentive Plan 2010 (LTIP 2010), and a short-term component, the Short-Term Incentive Plan 2010 (STIP 2010). These plans offer cash-settled and share-based payment transactions, respectively. Under the LTIP 2010, alstria office REIT-AG grants virtual shares, which entitle the recipient to a conversion into cash payments after four years. The amount of the conversion payment is based on the number of virtual shares multiplied by the average stock market price of alstria’s shares on the Frankfurt Stock Exchange during the 60 trading days prior to the relevant maturity date. An amount equal to the sum of the dividend per share the Company paid to its shareholders between the grant date and the maturity date is added as well; in no event can the payment be higher than 250 % of the average stock market price of alstria’s shares on the Frankfurt Stock Exchange in the 60 trading days prior to the relevant grant date multiplied by a specified discretionary factor. The discretionary factor is a multiplier that can vary between 0.8 and 1.2; it is subject to each participant’s individual performance during the holding period. The assessment of the target achievement depends equally on the absolute return of the alstria share price (absolute total shareholder return) and on the relative performance of alstria’s share in relation to the EPRA/NA-REIT Index Europe Ex UK (relative total shareholder return). Since the payment per vested virtual share depends on the average quoted price of alstria’s shares for 60 trading days, the quoted average prior to the end of the reporting period essentially represents the fair value of each virtual share. The virtual shares resulting from the STI 2010 remuneration are subject to a minimum vesting period of two years. Virtual STI 2010 shares are converted into a cash amount after the expiration of the alstria Annual Report 2018 113 Consolidated Financial Statements vesting period. This cash amount is calculated based on the number of virtual shares multiplied by the share price of one alstria share at that time, which is in turn calculated based on a reference period. 13.1.2 Stock award bases remuneration starting 2018 Unlike the STIP 2010, no virtual shares or stock awards will be issued under the STIP 2018. The structure of the long-term share-based compensation system was retained in principle. The key difference is that LTIP 2010 was a cash-settled share-based remuneration, while the LTIP 2018 pro- vides equity-settled share-based compensation. Apart from that, only simplifications and adjustments were made. As part of the LTIP 2018, the alstria office REIT-AG grants stock awards, which entitle the holder after four years to receive shares in the Company instead of a cash payment as in the LTIP 2010. The number of the shares to be issued to a member of the Management Board at the end of the term is calculated as the number of stock awards achieved, multiplied by the average price of the alstria shares on the Frankfurt Stock Exchange during the last 60 trading days prior to the respective conver- sion date, plus an amount equal to the total dividend paid by the Company to its shareholders per alstria share during the respective term of a stock award. But in no case more than 250 % of the average price of alstria shares on the Frankfurt Stock Exchange during the last 60 days before the grant date. The number of the shares to be issued to a member of the Management Board is multiplied by a specified discretionary factor. The discretionary factor is a multiplier that can vary between 0.7 and 1.3, taking into account the individual performance component of each participant during the waiting period. The basis for determining the performance targets, as in the LTIP 2010, is the absolute and the rela- tive total shareholder return. However, the relative total shareholder return will be weighted more heavily at 75 % (previously: 50 %). The comparative index for the relative total shareholder return is the FTSE EPRA/NAREIT Developed Europe Index (previously: EPRA/NAREIT Europe Ex-UK Index) for aligning with the standards of the real estate industry. The fair value of the stock awards at the grant date was estimated using a 100,000-path Monte Carlo simulation based on the terms of the LTIP 2018. 114 alstria Annual Report 2018 Consolidated Financial Statements The following table lists the model specifications used to determine the fair value: Grant date Expected term of the option (in years) Risk-free interest rate (%) Volatility of the share (%) Volatility of FTSE EPRA/NAREIT Developed Europe Index (%) Correlation between share and benchmark index (%) Expected dividend yield of the share (%) Share price on grant (in EUR) Value of the index when granted Reference Share Price Reference price of the FTSE EPRA/NAREIT Developed Europe Index March 3, 2018 4.00 0.11 18.77 16.46 65.19 4.03 12.06 2,085.51 12.69 2,176.16 Comparison of the key terms of the variable remuneration system 2010 and 2018 STI (Short-Term Incentive) LTI (Long-Term Incentive) Until 2017 FFO as target value Threshold for the performance target: 50 % Discretionary factor to reflect individual performance: 0.8−1.2 75 % cash payout / 25 % payout in virtual shares Virtual shares with term of 4 years, then payout in cash Performance subject to absolute TSR (50 %) and relative TSR (EPRA/NAREIT Europe Ex-UK Index) (50 %) Discretionary factor to reflect        From 2018 FFO per share as target value Threshold for the performance target: 70 % Discretionary factor to reflect individual performance: 0.7−1.3 100 % cash payout Stock awards with term of min. 4 years, payout in Company shares Performance subject to absolute TSR (25 %) and relative TSR (FTSE EPRA/ NAREIT Developed Europe Index) (75 %) Discretionary factor to reflect        individual performance: 0.8−1.2 individual performance: 0.7−1.3 alstria Annual Report 2018 115 Consolidated Financial Statements The table below summarizes the number of virtual shares and (from 2018 onwards) stock awards granted under the existing STIP and LTIP that remained outstanding as of December 31, 2018. Start of deferral period Reference share price in EUR End of deferral period Olivier Elamine Number of virtual shares Alexander Dexne Number of virtual shares STI 2016 STI 2017 LTI 2015 LTI 2016 LTI 2017 LTI 2018 2017 2018 2015 2016 2017 2018 11.68 12.24 10.97 11.71 11.52 12.69 2019 2020 2019 2020 2021 2022 5,142 4,572 40,109 37,575 38,194 34,673 4,207 3,741 32,817 30,743 31,250 28,361 The development of the virtual shares through December 31, 2018 is shown in the following table: Number of virtual shares and stock awards January 1 Stock Awards (2017: virtual shares) granted in the reporting period LTI 295,434 63,042 Converted into cash in the reporting period -84,746 December 31 273,730 2018 2017 STI 20,166 8,313 -10,817 17,662 LTI 312,104 69,444 -86,114 295,434 STI 20,580 9,349 -9,763 20,166 The 10,817 virtual shares converted into cash under the STIP 2010 resulted in payments to the Man- agement Board in the amount of EUR 152 k within the 2018 financial year. The conversion amount was the weighted average price of the first 20 trading days in the 2018 calendar year plus the dividend paid during the vesting period. It amounted to EUR 14.03, of which EUR 13.01 related to the share price and EUR 1.00 related to the dividend paid. Under the LTIP 2010, 84,746 virtual shares were converted, resulting in a payout of EUR 1,403 k. In 2018, the LTIP and the STIP generated remuneration expenses amounted to EUR 1,343 k (2017: EUR 1,488 k) and provisions amounting to EUR 2,563 k (2017: EUR 2,887 k). The Group recognizes the liabilities arising from the vested virtual shares under other provisions. 13.2 Convertible profit participation rights program On September 5, 2007, the Supervisory Board of the Company resolved the issuance of convertible profit participation certificates (‘certificates’) to employees of the Company and of companies in which alstria office REIT-AG directly or indirectly holds a majority interest. Members of alstria office REIT-AG’s Management Board are not considered employees of the Company in terms of this convertible profit participation rights program. The Supervisory Board passed a resolution to specify the details of the convertible profit participation rights program in accordance with an authorization granted by the General Meeting of shareholders on March 15, 2007. The convertible profit participation rights program was renewed by the Supervisory Board with minor modifications in 2012 116 alstria Annual Report 2018 Consolidated Financial Statements in accordance with an authorization granted by the General Meeting of shareholders on April 24, 2012. The main terms of the program can be summarized as follow: The nominal amount of each certificate is EUR 1.00, which is payable upon issuance. Under the program, a maximum of 500,000 certificates may be granted, using the conditional capital III 2015 created by the Annual General Meeting in 2015. By the end of the reporting period, certificates were granted corresponding to EUR 323,425 of conditional capital III 2015. In 2017, the Annual General Meeting approved the implementation of additional conditional capital III 2017 with an aggregate nominal value of up to EUR 1,000,000 for the conversion of 1,000,000 certificates. At the end of the reporting period, certificates in relation to this conditional capital III 2017 had been granted for 506,575 certificates. The certificates are issued as non-transferable rights and are not sellable, pledgeable, or otherwise chargeable. The maximum term of each certificate is five years. During its term, each certificate entitles the holder to a disbursement corresponding to the amount of the dividend per share that the Company paid for a full financial year. For certificates held by a beneficiary for less than a full financial year, the profit share is reduced pro rata temporis. Each certificate shall be converted into one non-par-value bearer share in the Company on the second, third, fourth, or fifth anniversary of the issue date if the Company’s then-current stock exchange share price has exceeded the price on the issue date by 5 % or more on at least seven non-subsequent trading days (market condition). For the 177,675 certificates issued on May 19, 2017, and the 206,075 certificates issued on April 27, 2018, this market condition was fulfilled until the end of the 2018 financial year. Upon conversion of a certificate, the beneficiary shall pay an additional conversion price to the Company for each certificate to be converted. The conversion price shall be the aggregate proportionate amount of the Company’s share capital to which the certificate entitles the holder; this amount shall be payable in addition to the offer price. The fair values of the inherent options for conversion were estimated on the respective grant dates using a binary barrier option model based on the Black-Scholes model, and the conversion will be affected automatically once the barrier has been reached. The model takes into account the terms and conditions upon which the instruments were granted. alstria Annual Report 2018 117 Consolidated Financial Statements The following share-based payment agreements under the employee profit participation program ex- isted during the year: Number of certificates Grant date of tranche January 1, 2018 Expired due to termination of employment Converted Granted December 31, 2018 May 18, 2016 May 19, 2017 April 27, 2018 143,750 0 -143,750 0 0 179,675 -2,000 0 0 177,675 0 -500 0 206,575 206,075 Total 323,425 -2,500 -143,750 206,575 383,750 The relevant amount for the conversion of 143,750 of the 2016 convertible profit participation rights certificates was the relevant XETRA share price on the conversion date: EUR 12.50 per share. Total expenses relating to convertible profit participation rights amounted to EUR 1,582 k in 2018 (see Note 5.4). The following table lists the inputs used to determine the fair value of the options for conversion: Grant date of tranche Dividend yield (%) Risk-free interest rate (%) Expected volatility (%) Expected life of option (years) Exercise share price (EUR) Labor turnover rate (%) Stock price as of valuation date (EUR) Estimated fair value of one option for conversion on the grant date May 18, 2016 May 19, 2017 April 27, 2018 4.28 -0.54 21.20 2.00 2.00 8.10 11.67 8.57 4.45 -0.69 18.37 2.00 2.00 8.00 11.62 8.02 4,20 -0,56 16,22 2,00 2,00 7,20 12,39 8,52 Expected volatility was based on an average of the historical volatility of alstria and the comparable listed companies for the certificates granted until 2017. From the 2018 financial year, the implied volatility of the alstria share was used. 14. FINANCIAL RISK MANAGEMENT 14.1 Managing financial risk factors The Group’s activities expose it to a variety of financial risks related to interest rates, credit, and liquidity. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. For this purpose, sources of funding are diversified and a balanced maturity profile is planned, enabling a coordinated and continuous refinancing process. The financial instruments chiefly used by the Group are corporate bonds, bank loans, a Schuldschein and derivative financial instruments. The main purpose of the debt funding is to finance alstria’s business activities. In addition, the Group also owns various financial assets, such as cash and short-term deposits, which arise directly from business activities. 118 alstria Annual Report 2018 Consolidated Financial Statements The Group uses derivative financial instruments to hedge floating rate loans. The treasury function (group treasury) within the finance and controlling department carries out the management of financial risks. The group treasury identifies, evaluates, and hedges financial risks in close cooperation with the CFO. The Management Board provides written principles for overall risk management and policies that cover specific areas, such as interest rate risk and credit risk, making use of derivative and non-derivative financial instruments as well as excess liquidity investment. Derivative financial instruments comprise interest caps. The purpose of these derivative financial instruments is to hedge against the interest risks that arise from the Group’s business activities and funding. The main risks arising from the Group’s financial instruments relate to cash flow, interest rates, and liquidity. The Group is exposed to credit risks mainly due to derivative financial instruments being held as assets and due to its bank balances. The amount that best presents the maximum credit risk is the carrying amount of the financial assets. The Management Board decides on strategies and processes for managing specific risk types; these are defined in the following paragraphs. Risks that could arise as a result of an economic slowdown are seen mainly in the potential default of payment by a major tenant. Due to the fact that all of the Company’s main tenants are public institutions or are highly rated, the risk of such defaults is currently limited. The loan agreements of alstria Group allow for loan-to-value (LTV) ratios as outlined by the following table. As represented in the overview, the Group managed to keep its LTV below the LTV of the loan at the relevant date—in some cases significantly. The risk of a breach of covenant is effectively countered. alstria Annual Report 2018 119 Consolidated Financial Statements The following table presents the single-LTV ratios and covenants for the Group’s loans as of the end of the reporting period: Existing loan agreements as of December 31, 2018 Liabilities Loan #1 Loan #21) Loan #3 Loan #4 Loan #52) Loan #6 Total secured loans Bond #1 Bond #2 Bond #3 Convertible bond Schuldschein 10y/fixed Schuldschein 7y/fixed Schuldschein 4y/fixed Maturity June 28, 2024 Apr. 30, 2021 Mar. 28, 2024 June 30, 2026 July 31, 2021 Sept. 29, 2028 Mar. 24, 2021 Apr. 12, 2023 Nov. 15, 2027 June 14, 2018 May 6, 2026 May 8, 2023 May 6, 2020 Schuldschein 7y/variable3) May 8, 2023 Schuldschein 4y/variable4) May 6, 2020 Revolving credit line June 15, 2020 Total unsecured loans Total Net LTV Principal amount drawn as of December 31, 2018 (EUR k) LTV as of December 31, 2018 (%) Principal amount drawn as of December 31, 2017 (EUR k) LTV covenant (%) 67,000 - 45,900 56,000 - 60,000 228,900 326,800 325,000 350,000 - 40,000 37,000 38,000 - - - 1,116,800 1,345,700 37.0 - 38.1 37.4 - 50.0 34.8 - - - - - - - - - - - 33.8 30.4 65.0 - 75.0 65.0 - - – - - - - - - - - - - - - 67,000 57,975 45,900 56,000 15,113 - 241,988 326,800 325,000 350,000 73,500 40,000 37,000 38,000 17,500 17,500 - 1,225,300 1,467,288 1) Loan agreement terminated, refinancing (Loan #6) occurred on September 28, 2018. 2) Loan agreement terminated, refinancing occurred on December 28, 2018. 3) Loan agreement terminated, refinancing occurred on November 6, 2018. 4) Loan agreement terminated, refinancing occurred on November 6, 2018. Apart from the risks mentioned above, the Group is not exposed to any commodity or currency risks. a) Interest rate risk The following tables display the carrying amount of the Group’s financial instruments that are exposed to interest rate risk by maturity: EUR k Financial year ending Dec. 31, 2018 Variable interest Mortgage bank loans Total < 1 year 1–2 years 2–3 years 3–4 years > 4 years Total 0 0 0 0 0 0 0 0 191,800 191,800 191,800 191,800 120 alstria Annual Report 2018 Consolidated Financial Statements < 1 year 1–2 years 2–3 years 3–4 years > 4 years Total 1,076 0 1,076 1,076 0 1,076 17,500 69,858 131,800 204,886 0 17,500 35,000 1,076 18,576 69,858 149,300 239,886 EUR k Financial year ending Dec. 31, 2017 Variable interest Mortgage bank loans Schuldschein Total With its noncurrent financial liabilities with variable interest rates, alstria is exposed to risks from fluctuations in market interest rates. The interest base for the financial liability (loan) is the three- month EURIBOR rate, which is adjusted every three months. A number of derivative financial instruments were acquired to secure the interest expense. The derivatives’ terms to maturity generally correspond to those of the loans. The derivative financial instruments relate to interest caps; that is, the interest is capped at a predetermined maximum. If the maximum interest rate is exceeded, the difference between the actual interest rate and the cap rate is paid out. The derivative financial instruments of alstria office REIT-AG as of December 31, 2018 are presented on page 97. These interest rate caps are also used to hedge the obligation underlying the loans. The following table shows the sensitivity of the Company’s loans to consolidated profit or loss and equity due to a reasonably possible change in interest rates (due to the effect on the floating-interest loans). All variables remain constant; the effects from the derivative financial instruments were not factored into this calculation. Interest expenses per annum EUR k + 100 bps – 50 bps 2018 1,918 -825 2017 2,399 -700 The fair market value of derivative financial instruments is also subject to interest rate risks. A change in the interest rate would give rise to the following changes in respective fair market values: aa) Impact on equity Financial derivatives qualifying for cash flow hedge accounting EUR k + 100 bps – 50 bps 2018 9,696 -287 2017 80 -10 alstria Annual Report 2018 121 Consolidated Financial Statements ab) Impact on income statements and on equity Financial derivatives not qualifying for cash flow hedge accounting Impact from 3-month EURIBOR interest rate changes: EUR k + 100 bps – 50 bps 2018 178 0 2017 9 0 Impact from changes in alstria office REIT-AG’s share price (only relating to the embedded derivative): EUR k Share price compared to the 2018 year-end price (EUR 12.90) + 10 percent  –  10 percent b) Credit risk 2018 n/a n/a 2017 -9,738 10,377 Except for those relating to accounts receivable balances, credit risks are managed at the group level. The department responsible for managing the operating business property oversees and analyzes credit risks in relation to each reletting activity before the standard payment and lease terms and conditions are offered. Credit risk arises from cash and cash equivalents, derivative financial instruments, deposits with banks and financial institutions, and credit exposures to customers (including outstanding receivables and other compensatory commitments). Only banks and financial institutions are accepted as counterparties—and only if they are independently rated parties with a minimum rating of ‘investment grade.’ If tenants are independently rated, these ratings are applied. If there is no independent rating, the tenant’s credit quality is assessed, taking into account their financial position, past experience, and other factors. Credit limits are generally not provided to tenants. Lease receivables from tenants are settled in bank transfers, which are usually due at the beginning of each payment term. Tenants must pay a deposit or provide other warranties prior to the start of a lease term. c) Liquidity risk The Company continually monitors the Group-wide risk of potential liquidity bottlenecks through the use of a liquidity planning tool. The tool uses the expected cash flows from business activities and the maturity of the financial liabilities as a basis for analysis. The Group’s long-term refinancing strategy ensures that these medium- and long-term liquidity requirements are met. Such forecasting considers the Group’s debt-financing plans, covenant compliance, compliance with internal balance sheet targets, and, if applicable, external regulatory or legal requirements (e. g. G-REIT equity ratio). At the end of the reporting period, the nominal financial liabilities had the following maturities in line with their contractual maturity (based on the three-month EURIBOR) as of December 31, 2018. 122 alstria Annual Report 2018 Consolidated Financial Statements The following chart shows the related future undiscounted cash flows of financial liabilities: EUR k < 1 year 1–2 years 2–3 years 3–4 years 4–5 years >5 years Total Financial year ending Dec. 31, 2018 Corporate bond Loans Interest Schuldschein Trade payables Other liabilities 0 0 0 0 326,800 0 0 0 325,000 350,000 1,001,800 0 228,900 228,900 24,521 24,817 24,720 18,020 18,573 32,633 143,284 0 38,000 4,400 0 0 0 0 0 37,000 40,000 115,000 0 0 4,400 53,467 1,003 1,002 1,002 1,002 1,002 58,478 82,388 63,820 352,522 19,022 381,575 652,535 1,551,862 EUR k < 1 year 1–2 years 2–3 years 3–4 years 4–5 years >5 years Total Financial year ending Dec. 31, 2017 Corporate bond Loans Interest Schuldschein Convertible bond Trade payables Other liabilities 0 0 0 0 326,800 675,000 1,001,800 1,076 1,076 1,076 69,860 0 168,900 241,988 19,855 19,160 19,651 18,759 11,328 37,984 126,737 0 73,500 7,268 62,879 0 0 0 55,500 0 0 0 0 0 0 0 0 94,500 150,000 0 0 73,500 7,268 882 882 882 882 882 67,289 164,578 21,118 77,109 89,501 339,010 977,266 1,668,582 Details on the loans, borrowings, and bonds can be found in Note 7.3. The maturity profile of the loans is shown on page 20 in the Group management report. To secure the bank loans, receivables from rental and property purchase agreements and from insurance and derivative financial instruments were assigned to the lenders; liens were granted on bank accounts, and charges were registered on the land. Obligations arising from floating-interest bank loans were fully secured. Land charges for real estate properties with a carrying amount of EUR 661,393 k (December 31, 2017: EUR 618,329 k) were provided as collateral. 14.2 Capital management Capital management activities are aimed at maintaining the Company’s classification as a REIT in order to support its business activities and maximize shareholder value. The Group actively manages its capital structure and makes adjustments in response to changes in economic conditions. To maintain or adjust the capital structure, the Group can make a capital re- payment to its shareholders or issue new shares. No changes were made to the aims, guidelines, and processes as of both December 31, 2018 and December 31, 2017. The Company monitors its capital structure by using the LTV indicator as well as the performance indicators relevant for its classification as a REIT. The REIT equity ratio, which is the ratio of equity to immovable assets, is the most important of these indicators. According to the Group’s strategy, the REIT equity ratio is aimed at to be well above the REIT equity ratio of 45 %, within the relevant alstria Annual Report 2018 123 Consolidated Financial Statements term provided by REIT law. G-REIT status is unaffected as long as the G-REIT ratio is not below 45 % at the end of the financial year for three consecutive financial years. The following ratios are also used to manage capital: Ratios according to G-REIT law % Equity ratio according to G-REIT law Immovable assets Revenues gained from immovable assets Income gained from disposal of immovable assets 1) Within five years, based on the average property value during this period. 2018 67.19 95.54 100.00 28.04 2017 57.12 95.47 100.00 32.58 G-REIT covenant > 45 > 75 > 75 < 501) The following table shows the carrying amount and fair value of all financial instruments disclosed in the consolidated financial statements: Carrying amount Nonfinan- cial assets Assets as per balance sheet (EUR k) as of Dec. 31, 2018 Financial assets Derivatives 36,737 0 Total long-term 36,737 Trade receivables Tax receivables Receivables and other assets Cash and cash equivalents Total short-term Total 6,865 43 8,314 132,899 148,121 184,858 At amor- tized costs 36,493 0 36,493 6,865 43 7,888 132,899 147,695 184,188 0 0 0 0 426 0 426 426 Financial assets Fair value through p/l) Fair value – other income 244 0 244 0 0 0 0 0 244 0 0 0 0 0 0 0 0 0 Total Fair value 36,737 36,737 0 0 36,737 36,737 6,865 43 6,865 43 7,888 7,888 132,899 132,899 147,695 147,695 184,432 184,432 124 alstria Annual Report 2018 Consolidated Financial Statements Carrying amount Nonfinancial liabilities Financial liabilities Liabilities as per balance sheet (EUR k) as of Dec. 31, 2018 Ltd. equity of non- controlling interests 64,013 Long-term loans 1,336,090 Other liabilities 5,010 Total long-term Ltd. equity of non- controlling interests Short-term loans Trade payables Derivatives Tax liabilities Other liabilities Total short-term 1,405,113 47 14,171 4,400 0 5,945 60,207 84,770 Total 1,489,883 Fair value through p/l At amortized costs Total Fair value 0 0 0 0 0 0 0 0 5,945 12,684 18,629 18,629 0 0 0 0 0 0 0 0 0 0 0 0 64,013 64,013 64,013 1,336,090 1,336,090 1,338,077 5,010 5,010 5,010 1,405,113 1,405,113 1,407,100 47 14,171 4,400 0 0 47,523 66,141 47 14,171 4,400 0 0 47,523 66,141 47 14,171 4,400 0 0 47,523 66,141 1,471,254 1,471,254 1,473,241 Carrying amount Nonfinancial assets Financial assets At amor- tized costs Fair value through p/l) Fair value – other income Assets as per balance sheet (EUR k) as of Dec. 31, 2017 Financial assets Derivatives Total long-term Trade receivables Tax receivables Receivables and other assets Cash and cash equivalents Total short-term Total 36,567 14 36,581 7,153 25 0 0 0 0 36,567 0 36,567 7,153 25 14,760 10,987 3,772 102,078 124,016 160,597 0 102,078 10,987 113,029 10,987 149,595 14 0 14 14 0 0 0 0 0 Total 36,567 14 Fair value 36,567 14 36,581 36,581 7,153 25 7,153 25 3,772 3,772 102,078 102,078 113,028 113,028 149,609 149,609 0 0 0 0 0 0 0 0 0 alstria Annual Report 2018 125 Consolidated Financial Statements Carrying amount Nonfinancial liabilities Financial liabilities Liabilities as per balance sheet (EUR k) as of Dec. 31, 2017 Ltd. equity of noncontrolling interests 53,834 Long-term loans 1,381,965 Other liabilities 4,408 Total long-term Ltd. equity of noncontrolling interests Short-term loans Trade payables Derivatives Tax liabilities Other liabilities 1,440,207 47 86,450 7,268 27,529 13,675 49,204 Total short-term 184,173 Total 1,624,380 Fair value through p/l At amortized costs Total Fair value 0 0 0 0 0 0 0 0 13,675 3,813 17,488 17,488 0 0 0 0 0 0 0 27,529 0 0 27,529 27,529 53,834 53,834 53,834 1,381,965 1,381,965 1,442,660 4,408 4,408 4,408 1,440,207 1.440,207 1,500,902 47 86,450 7,268 0 0 47 86,450 7,268 27,529 0 47 86,450 7,268 27,529 0 45,391 45,391 45,391 139,156 166,685 166,685 1,579,363 1,606,892 1,667,587 Independent experts determined the fair value of the derivative financial instruments by discounting the expected future cash flows at prevailing market interest rates. The net gains and losses from these financial instruments are as follows: EUR k Fair value - hedging instruments Fair value - financial liabilities At amortized costs Total 2018 -14 2,466 -12,508 -10,056 2016 -41 -14,635 -10,015 -24,691 The net losses during the reporting period resulted from valuation losses and, in the case of loans and receivables, from write-downs of trade receivables. 14.3 Determination of fair value The fair value of financial instruments that are not traded in an active market (i. e. over-the-counter derivatives) is determined using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely on entity-specific estimates as little as pos- sible. If all significant inputs required to ascertain the fair value of an instrument are observable, the instrument is included in level 2. An independent expert determined the fair value of the derivative financial instruments by discount- ing the expected future cash flows at prevailing market interest rates. Future cash flows were esti- mated at the end of the reporting period based on forward interest rates from observable yield curves 126 alstria Annual Report 2018 Consolidated Financial Statements and on contractually agreed interest rates. These rates are discounted to reflect the credit risk of the various counterparties. All of the Group’s financial instruments, which are measured at fair value in the balance sheet, are valued by applying the level 2 valuation measurement approach. This only applies to the Group’s financial derivatives, as no other financial instruments are measured in the balance sheet at fair value. 15. SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD Transfer of benefits and burdens In January 2019, the transfer of benefits and burdens of all three properties held for sale as of the balance sheet date took place. In addition, a property for which the notarial purchase agreement had already been signed in the 2018 financial year was transferred to alstria office REIT-AG. On January 16, 2019, the notarization of the sale of another property at a transaction price of EUR 40,000 k took place. The transfer of the property to the buyer took place at the beginning of February 2019. On February 18, 2019, the notarial purchase agreement for the sale of a property in Stuttgart was signed at a transaction price of EUR 41,491 k. 16. UTILISATION OF EXEMPTING PROVISIONS The following German subsidiaries included in the consolidated financial statements of alstria office REIT-AG have made use of the exemption granted in Section 264b HGB: Certain subsidiaries that have been included in the consolidated financial statements of alstria office REIT-AG have claimed exemption from the obligation to prepare annual financial statements in ac- cordance with the provisions applicable to corporations in accordance with Section 264b HGB. An overview of the companies that made use of the exemption can be found in the table on pages 68 to 69 in Notes 2.2.2. 17. DISCLOSURES PURSUANT TO THE WERTPAPIERHANDELSGESETZ [GERMAN SECURITIES TRAD- ING ACT] AND EUROPEAN MARKET ABUSE REGULATION [MAR] 17.1 Ad hoc announcements The following table summarizes the announcements pursuant to Art. 17 MAR as published by the Company during the reporting period: Date Topic Jan 29, 2018 Capital increase of up to 15,323,121 new shares to finance further growth Jan 29, 2018 alstria successfully executed capital increase Jan 14, 2019 Portfolio valuation will lead to a positive P&L impact of approx. EUR 400 million in 2018 alstria Annual Report 2018 127 Consolidated Financial Statements 17.2 Directors’ dealings The following transactions regarding the shares of the Company (ISIN DE000A0LD2U1) have been re- ported to the Company pursuant to Art. 19 MAR during the reporting period: Name of person subject to the disclosure re- quirement Olivier Elamine Olivier Elamine Aggregated information for the transactions by Mr. Elamine on March 06, 2018: Average weighted share price: EUR 12.2000; aggregated volume: EUR 61,000.0000 Place Outside a trading venue Outside a trading venue Transaction Buy Function CEO Buy CEO Transaction date Mar 06, 2018; UTC + 1 Mar 06, 2018; UTC + 1 Price per share in EUR 12.20 Volume in EUR 7,503.00 12.20 53,497.00 Name of person subject to the disclosure re- quirement Marianne Voigt Function Member of the Supervisory Board Transaction Buy Place XETRA Transaction date Mar 21, 2018; UTC + 1 Price per share in EUR 12.37 Volume in EUR 30,925.00 Aggregated information for the transaction by Ms. Voigt on March 21, 2018: Average weighted share price: EUR 12.37; aggregated volume: EUR 30,925.00 Marianne Voigt Marianne Voigt Member of the Supervisory Board Member of the Supervisory Board Buy Buy XETRA XETRA May 07, 2018; UTC + 2 May 07, 2018; UTC + 2 12.51 736.11 12.52 38,048.28 Aggregated information for the transactions by Ms. Voigt on May 07, 2018: Average weighted share price: EUR 12.5198; aggregated volume: EUR 38,811.3900 Name of person subject to the disclosure re- quirement Stefanie Frensch Member of the Function Supervisory Board Transaction Buy Place XETRA Transaction date May 25, 2018; UTC + 2 Price per share in EUR 12.62 Volume in EUR 29,909.40 Aggregated information for the transaction by Ms. Frensch on May 25, 2018: Average weighted share price: EUR 12.6200; aggregated volume: EUR 29,909.4000 Name of person subject to the disclosure re- quirement Alexander Dexne Alexander Dexne Aggregated information for the transactions by Mr. Dexne on August 22, 2018: Average weighted share price: EUR 13.1535; aggregated volume: EUR 52,613.81 Transaction Buy Function CFO Place XETRA XETRA CFO Buy Transaction date Aug 22, 2018; UTC + 2 Aug 22, 2018; UTC + 2 Price per share in EUR 13.16 Volume in EUR 18,173.96 13.15 34,439.85 Name of person subject to the disclosure re- quirement Dr. Bernhard Düttmann Function Member of the Supervisory Board Transaction Buy Place XETRA Transaction date Sep 20, 2018; UTC + 2 Price per share in EUR 12.85 Volume in EUR 12,850.00 Aggregated information for the transaction by Dr. Düttmann on Sept. 20, 2018: Average weighted share price: EUR 12.85; aggregated volume: EUR 12,850.00 128 alstria Annual Report 2018 Consolidated Financial Statements 17.3 Voting right notifications Information according to Section 160 para. 1 No. 8 German Stock Corporation Act (AktG): The follow- ing table shows shareholdings in the Company that were in place on the balance sheet date of 2017, were communicated to us pursuant to Section 33 para. 1 WpHG (Section 21 para. 1 WpHG old version), and have been published pursuant to Section 40 para. 1 WpHG (Section 26 para. 1 WpHG old version). Moreover, shareholdings were considered that were in place until the date of the preparation of the financial statements, were communicated to us pursuant to Section 33 para. 1 WpHG (Section 21 para. 1 WpHG old version), and have been published pursuant to Section 40 para. 1 WpHG (Section 26 para. 1 WpHG old version). The Company did not receive any notifications pursuant to Section 20 para. 1 and 4 AktG or pursuant to Section 33 para. 2 WpHG (Section 21 para. 1a WpHG old version) during the reporting period. Voting rights (new) (%) 3.0265 Date of change Apr 5, 2016 Attribution of voting rights No Contains 3 % or more of voting rights from - No. Shareholders, registered office 1 Prédica, Paris, France 2 SAS Rue la Boétie, Paris, France 3 Government of Singapore, acting by and through the Ministry of Finance, Singa- pore 4 GIC Private Limited, Singapore 5 GIC (Realty) Private Limited, Singapore 6 Europe Realty Holdings Pte Ltd, Singa- pore 7 Euro Periwinkle Private Limited, Singa- pore 8 BlackRock, Inc., Wilmington, DE, USA 9 BNP PARIBAS ASSET MANAGEMENT Hold- ing S.A., Paris, France 10 Kairos International SICAV, Luxembourg 11 Julius Baer Group Ltd., Zurich, Switzer- 12 land Brookfield Asset Management Inc., To- ronto, Canada 5.7691 Apr 12, 2016 Yes 12.61 12.61 7.90 7.90 7.90 3.591 2.99 2.97 2.99 Apr 22, 2016 Apr 22, 2016 Apr 22, 2016 Apr 22, 2016 Apr 22, 2016 Sep 21, 2018 Nov 06, 2018 Nov 21, 2018 Nov 27, 2018 Yes Yes Yes Yes No Yes Yes No Yes Prédica GIC Private Limited (4.71 %) Euro Periwinkle Pri- vate Limited (7.90 %) Euro Periwinkle Pri- vate Limited Euro Periwinkle Pri- vate Limited Euro Periwinkle Pri- vate Limited - - n/a - - Public Brookfield Group Securities (formerly: LLC Brookfield Invest- ment Management Inc.) 1) Contains 0.17 % financial instruments pursuant to Sec. 38 para. 1 No. 1 and No. 2 WpHG 3.01 Dec. 18, 2018 Yes 18. DECLARATION OF COMPLIANCE PURSUANT TO AKTG SECTION 161 The Management Board and the Supervisory Board have submitted the declaration of compliance that is required by AktG Section 161 with respect to the recommendations of the German Corporate Gov- ernance Code as developed by a government commission. It is permanently available to the public on alstria office REIT-AG’s website (www.alstria.com) and is included in the Group’s declaration of cor- porate management according to HGB Section 315d. alstria Annual Report 2018 129 Consolidated Financial Statements 19. AUDITORS’ FEES On May 16, 2017, the General Meeting elected Deloitte GmbH Wirtschaftsprüfungsgesellschaft (Dammtorstrasse 12, Hamburg) as auditors of the separate and consolidated financial statements for the 2018 financial year. The fees totaled EUR 497 k in 2018. Of this, EUR 429 k was attributable to audit services, and EUR 68 k was attributable to non-audit services. 20. MANAGEMENT BOARD During the financial year, the Company’s members of the Management Board were: Olivier Elamine since June 20, 2018 Hamburg, Germany COIMA RES S.p.A. SIIQ Urban Campus Group SAS CEO of the Company Non-Executive Director Member of the Advisory Board Alexander Dexne until July 2, 2018 Hamburg, Germany Brack Capital Properties N.V. CFO of the Company Chairman of the Board The attached remuneration report contains the details of the principles used to define the Manage- ment Board’s and Supervisory Board’s remuneration. 21. SUPERVISORY BOARD Pursuant to the Company’s Articles of Association (Section 9), the Supervisory Board consists of six members who are elected at the General Meeting of the shareholders. During the 2017 financial year, the members of the Supervisory Board and their membership in super- visory boards of German companies or comparable German or foreign controlling committees of com- mercial enterprises were as follows: Dr. Johannes Conradi Chairman Hamburg, Germany Richard Mully Vice-Chairman until March 21, 2018 Elbphilharmonie und Laeiszhalle Betriebsgesellschaft mbH Hamburg Musik gGmbH Cobham (Surrey), United Kingdom Airlington Business Parks LLC Great Portland Estates plc Standard Life Aberdeen PLC St Modwen Properties PLC TPG Europe LLC Lawyer and Partner, Freshfields Bruckhaus Deringer LLP Member of the Advisory Board Member of the Supervisory Board Director, Starr Street Limited Director Non-Executive Director Director Director Senior Advisor 130 alstria Annual Report 2018 Consolidated Financial Statements Dr. Bernhard Düttmann Meerbusch, Germany Executive consultant since May 9, 2018 CECONOMY AG Vossloh AG Member of the Supervisory Board Member of the Supervisory Board Stefanie Frensch Berlin, Germany until November 21, 2018 BBU Verband Berlin-Brandenburgi- scher Wohnungsunternehmen e.V. Managing Director, HOWOGE Wohnungsbaugesellschaft mbH Chairman of the audit committee Benoît Hérault Uzès, France from March 2, 2018 un- til October 29, 2018 Marie Birzard Wine & Spirits SA Marie Birzard Wine & Spirits SA Managing Director, Chambres de l’Artémise S.à r.l Chairman of the Board CEO Westbrock Partners Senior Advisor for France Marianne Voigt Berlin, Germany since October 1, 2018 BDO AG Wirtschaftsprüfungsgesell- schaft DISQ Deutsches Institut für Service- Qualität GmbH & Co. KG Managing Director, bettermarks GmbH Member of the Supervisory Board Member of the Advisory Board Hamburg, February 21, 2019 alstria office REIT-AG The Management Board Olivier Elamine CEO Alexander Dexne CFO alstria Annual Report 2018 131 Responsibility Statement RESPONSIBILITY STATEMENT To the best of our knowledge we confirm that, in accordance with the applicable reporting principles, the consolidated financial statements 2018 give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the Group management report 2018 includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group. Hamburg, February 21, 2019 alstria office REIT-AG The Management Board Olivier Elamine CEO Alexander Dexne CFO 132 alstria Annual Report 2018 Independent Auditor‘s Report INDEPENDENT AUDITOR‘S REPORT To alstria office REIT-AG, Hamburg REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS AND OF THE GROUP MANAGEMENT REPORT Opinions We have audited the consolidated financial statements of alstria office REIT-AG, Hamburg and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 31 De- cember 2018, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the financial year from January 1, 2018 to December 31, 2018, and notes to the consolidated financial statements, including a summary of significant accounting policies. In addition, we have audited the group management report of alstria office REIT-AG for the financial year from January 1, 2018 to December 31, 2018. In our opinion, on the basis of the knowledge obtained in the audit,   the accompanying consolidated financial statements comply, in all material respects, with the IFRSs as adopted by the EU, and the additional requirements of German commercial law pursuant to Section 315e (1) HGB [Handelsgesetzbuch: German Commercial Code] and, in compliance with these requirements, give a true and fair view of the assets, liabilities, and financial position of the Group as at 31 December 2018, and of its financial performance for the financial year from January 1, 2018 to December 31, 2018, and the accompanying group management report as a whole provides an appropriate view of the Group’s position. In all material respects, this group management report is consistent with the consolidated financial statements, complies with German legal requirements and appro- priately presents the opportunities and risks of future development. Our opinion on the group management report does not cover the content of the corporate governance statement men- tioned above. Pursuant to Section 322 (3) Sentence 1 German Commercial Code (HGB), we declare that our audit has not led to any reservations relating to the legal compliance of the consolidated financial state- ments and the group management report. Basis for the Opinions We conducted our audit of the consolidated financial statements and of the group management report in accordance with Section 317 HGB and the EU Audit Regulation No 537/2014 (referred to subse- quently as “EU Audit Regulation”) and in compliance with German Generally Accepted Standards for alstria Annual Report 2018 133 Independent Auditor‘s Report Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Au- ditors in Germany] (IDW). Our responsibilities under those requirements and principles are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report” section of our auditor’s report. We are independent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these requirements. In addition, in accordance with Article 10 (2)(f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinions on the consolidated financial statements and on the group management re- port. Key Audit Matters in the Audit of the Consolidated Financial Statements Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements for the financial year from January 1, 2018 to December 31, 2018. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, we do not provide a separate opinion on these matters. Valuation of Investment Property For information on the valuation of Investment Property, please see the comments in the notes to the consolidated financial statements (‘accounting policies’ section) and the group management report. THE FINANCIAL STATEMENT RISK In the consolidated statement of financial position of alstria office REIT-AG as of December 31, 2018, the total value of investment properties amounted to EUR 3.9 bn. The investment property is meas- ured at fair value. For 2018, a net gain of EUR 0.4 bn resulting from the fair value adjustment was recognised in the consolidated income statement. The measurement of investment property at market value is carried out by independent valuation appraisers using a capitalised earnings valuation model ("hardcore and top slice"). The valuation date was December 31, 2018. The fair values were determined by two accredited, external and independent valuation appraisers (Colliers International UK LLP, London, and Savills Advisory Services GmbH & Co. KG, Frankfurt am Main). Besides information on the investment property, numerous assumptions are included in the measure- ment, which are subject to considerable estimation uncertainties and judgments. Even minor changes in the assumptions relevant to measurement may have a material effect on the resulting fair value. The key valuation assumptions used to measure the investment property as of the measurement date are market rents, vacancy periods and the capitalization rates. 134 alstria Annual Report 2018 Independent Auditor‘s Report There is a risk for the financial statements that, due to inaccurate or incomplete data provided by alstria office, the measurement of the investment property by the external experts is not appropriate. Estimation uncertainties and the incorrect exercise of judgment in relation to the relevant measure- ment parameters can also lead to inaccurate measurement results. In addition, there is the risk for the financial statements that the disclosures on property held for investment required in the notes pursuant to IAS 40 and IFRS 13 are incomplete and inadequate. OUR AUDIT APPROACH Our audit procedures particularly include assessing the appropriateness of the assumptions and results of the external valuation appraisers as well as the accuracy and completeness of the data used con- cerning the real estate portfolios. We included our KPMG valuation specialists in the audit. We assessed the internal control system used to assess the fair values determined by the external appraisers and tested the implemented controls. We verified the qualifications and objectivity of the external appraisers commissioned by alstria office REIT-AG to assess the investment property and evaluated the valuation logic applied in their expert appraisals in terms of compliance with IAS 40 in conjunction with IFRS 13. We assessed the appropriateness of the selected assumptions for measurement using a risk-based selection of real estate. In particular, we assessed the assumptions made to determine the real es- tate-specific market rents, vacancy periods and capitalization rates and reviewed these assumptions for appropriateness, taking into account the type and location of the real estate. Furthermore, in isolated cases, we carried out some on-site inspections to verify the respective property's condition. We previously verified the appropriateness and functionality of the controls implemented in relation to the master data relevant to measurement. Furthermore, as part of our substantive audit procedures, we assessed whether the data provided to the external experts was complete and correct and, thus, if it allowed the experts an appropriate basis for making an assessment. We also assessed the completeness and adequacy of disclosures on investment property required in the notes to the consolidated financial statements pursuant to IAS 40 and IFRS 13. OUR OBSERVATIONS The data used to assess the investment real estate is appropriate. We have no reservations, neither with the qualifications and objectivity of the external experts commissioned by alstria office to assess the investment property, nor with the result of these experts. The disclosures on investment property in the notes to the consolidated financial statements pursuant to IAS 40 and IFRS 13 are complete and appropriate. alstria Annual Report 2018 135 Independent Auditor‘s Report Other Information Management is responsible for the other information. The other information comprises all remaining parts of the Annual Report, with the exception of the audited consolidated financial statements and group management report, as well as the declaration of the executive directors for the compliance with the requirements of Section 11 to 15 REIT Act (REIT-Gesetz) and the composition of the proceeds concerning the pre-taxation of proceeds according to Section 19 (3) and Section 19a REIT Act and our auditor’s report. Our opinions on the consolidated financial statements and on the group management report do not cover the other information, and consequently we do not express an opinion or any other form of assurance conclusion thereon. In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information  is materially inconsistent with the consolidated financial statements, with the group manage- ment report or our knowledge obtained in the audit, or  otherwise appears to be materially misstated. Responsibilities of Management and the Supervisory Board for the Consolidated Financial State- ments and the Group Management Report Management is responsible for the preparation of the consolidated financial statements that comply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e (1) HGB and that the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of the Group. In addition, management is responsible for such internal control as they have determined necessary to enable the preparation of consolidated finan- cial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so. Furthermore, management is responsible for the preparation of the group management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, management is responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a group management report that is in accordance with the applicable Ger- man legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the group management report. 136 alstria Annual Report 2018 Independent Auditor‘s Report The supervisory board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements and of the group management report. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report Our objectives are to obtain reasonable assurance about whether the consolidated financial state- ments as a whole are free from material misstatement, whether due to fraud or error, and whether the group management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our opinions on the consolidated financial statements and on the group management report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Section 317 HGB and the EU Audit Regulation and in compliance with German Gen- erally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and this group management report. We exercise professional judgement and maintain professional scepticism throughout the audit. We also:  identify and assess the risks of material misstatement of the consolidated financial statements and of the group management report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appro- priate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.  obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrangements and measures (systems) relevant to the audit of the group management report in order to design audit procedures that are appropriate in the circum- stances, but not for the purpose of expressing an opinion on the effectiveness of these sys- tems.  evaluate the appropriateness of accounting policies used by management and the reasona- bleness of estimates made by management and related disclosures.  conclude on the appropriateness of management’s use of the going concern basis of account- ing and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw alstria Annual Report 2018 137 Independent Auditor‘s Report attention in the auditor’s report to the related disclosures in the consolidated financial state- ments and in the group management report or, if such disclosures are inadequate, to modify our respective opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to be able to continue as a going concern.  evaluate the overall presentation, structure and content of the consolidated financial state- ments, including the disclosures, and whether the consolidated financial statements present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e (1) HGB.  obtain sufficient appropriate audit evidence regarding the financial information of the enti- ties or business activities within the Group to express opinions on the consolidated financial statements and on the group management report. We are responsible for the direction, su- pervision and performance of the group audit. We remain solely responsible for our opinions.  evaluate the consistency of the group management report with the consolidated financial statements, its conformity with [German] law, and the view of the Group’s position it pro- vides.  perform audit procedures on the prospective information presented by management in the group management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by management as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter. 138 alstria Annual Report 2018 Independent Auditor‘s Report OTHER LEGAL AND REGULATORY REQUIREMENTS Further Information pursuant to Article 10 of the EU Audit Regulation We were elected as group auditor at the annual general meeting on April 26, 2018. We were engaged by the supervisory board on April 26, 2018. We have been the group auditor of alstria office REIT-AG for the first time in financial year 2018. We declare that the opinions expressed in this auditor’s report are consistent with the additional report to the audit committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report). GERMAN PUBLIC AUDITOR RESPONSIBLE FOR THE ENGAGEMENT The German Public Auditor responsible for the engagement is René Drotleff. Berlin, February 21, 2019 KPMG AG Wirtschaftsprüfungsgesellschaft [Original German version signed by:] Schmidt Wirtschaftsprüfer [German Public Auditor] Drotleff Wirtschaftsprüfer [German Public Auditor] alstria Annual Report 2018 139 Corporate Governance CORPORATE GOVERNANCE REPORT OF THE SUPERVISORY BOARD Dear shareholders, In this report, we present an overview of the supervision and advising activities of the Supervisory Board to monitor the Company’s management. Furthermore, we present the main topics discussed by the plenary Supervisory Board and its committees, in addition to the audit of the annual and consolidated financial statements as well as the Company’s corporate governance during the reporting period. MAIN POINTS OF DISCUSSION The main points of discussion for the Supervisory Board and its committees during the 2018 financial year were the financial and profit situation, the capital increase of 10% by way of an accelerated book building procedure from authorized capital against contribution in cash as well as bigger asset transactions. We have also intensively examined the strategic position and direction of the Company with the support of external advisers. Based on the Management Board’s reports, we have discussed in detail the Company’s performance as well as decisions and operations, which have been important to the Company. SUPERVISION AND ADVISING OF THE COMPANY’S MANAGEMENT BOARD During the 2018 reporting period, we performed the duties required by the statutory provisions and the Company’s Articles of Association. We advised and supervised the Company’s Management Board and its conduct of business. Moreover, we were intensively involved in decisions of material importance to the Company. During the meetings of the Supervisory Board and its committees, the Management Board provided us with regular, prompt and detailed reports on the development of the business and the financial situation of the Company. Furthermore, we were informed about issues concerning the Company’s planning, important business events and current risks, risk management and the Company’s compliance. The Management and Supervisory Boards cooperated to determine the strategic direction of the Company. Between meetings, the Management Board further informed the Supervisory Board of important events by oral and written reports. The Chairman of the Supervisory Board met regularly with the Management Board to exchange information and deliberate on matters concerning the Company’s business strategy, planning, business development, current risks, risk management and compliance. Management Board and Supervisory Board have discussed in detail transactions requiring approval. After careful examination and consultation, the Supervisory Board voted on all matters brought to its attention as required by law, the Articles of Association or rules of procedure. This also included the Company’s budget planning. 140 alstria Annual Report 2018 Corporate Governance MEETINGS OF THE SUPERVISORY BOARD In the 2018 financial year, the Supervisory Board held four ordinary and three extraordinary meetings. The presence of the members in the meetings of the Supervisory Board averaged 98%. Thus, all members of the Supervisory Board attended a minimum of at least half of the meetings. Additionally, we passed written resolutions on five issues based on detailed documents. In 2019, the Supervisory Board met for two additional meetings and passed one written resolution prior to the finalization of this report. In the ordinary meetings, the Supervisory Board and the Management Board discussed the situation and development of the Company as well as its business performance, market situation and financial results (quarterly interim statements and half-year financial reports, financial statements and consolidated financial statements). The chairmen of the committees reported on the activities of the committees. In an extraordinary meeting in January 2018, the Supervisory Board discussed the general strategic direction and Corporate Governance of the Company with the Management Board and external advisors. The Supervisory Board passed a resolution on the formation of a special committee on the capital increase and authorized it to grant all necessary approvals and make all other declarations in connection with the launch of a capital increase against contribution in cash in the amount of 10% of the share capital by use of the Authorized Capital 2017 (Sec. 5 para. 3, para. 4 and para. 4a of the Articles of Association). In February and March 2018, the Supervisory Board decided on the Corporate Governance Statement jointly made with the Management Board and on the annual compliance statement regarding the recommendations by the German Corporate Governance Code, both by way of a written circular resolution. During its financial meeting in March 2018, the Supervisory Board addressed the consolidated financial statements, the financial statements as of December 31, 2017 and the management reports, and then discussed these with the auditors. The Supervisory Board approved the financial statements of alstria office REIT-AG and the consolidated financial statements as of December 31, 2017 and confirmed the Management Board’s proposal regarding the appropriation of profits for the 2017 financial year. The Supervisory Board also passed a resolution on its report to the Annual General Meeting for the 2017 financial year, discussed the agenda and proposals for resolution for the Annual General Meeting of the Company for the 2017 financial year with the Management Board, and resolved on the variable management board remuneration. Based on a vertical remuneration comparison and the recommendations of the nomination and remuneration committee, the Supervisory Board also discussed and decided on the amount of the long-term variable remuneration for the members of the Management Board for the 2014 financial year and on the short-term variable remuneration for the 2017 financial year . It thereby considered the board members’ individual performances and also discussed the long-term parameters of the variable remuneration for the members of the Management Board for the 2018 financial year. In April 2018, the Supervisory Board decided by way of written alstria Annual Report 2018 141 Corporate Governance circular resolution on the recommendations for resolution to the Annual General Meeting of the Company. In its ordinary meeting in April 2018, the Supervisory Board deliberated with the Management Board on real estate disposals and acquisitions and leases. In two extraordinary meetings in April and June 2018, the Supervisory Board discussed the strategic position and direction of the Company with the Management Board and external advisors. The Chairman reported on a road show, where he and the Vice-Chairman of the Supervisory Board had met investors of the Company. In June 2018, the Supervisory Board resolved on the editorial amendments to the Company’s Articles of Association relating to the capital increases from conditional capital by way of written circular resolution. In connection with the conversion of convertible bonds issued by the Company, a total of 7,987,972 new shares were issued to investors, and in connection with the Company’s employee participation program, a total of 143,750 new shares were issued to employees of the Company. In the ordinary meeting in September 2018, the Management and Supervisory Boards deliberated on real estate acquisitions and disposals as well as on leasing projects. The Management Board reported on ongoing refinancing activities and the Supervisory Board discussed corporate governance issues as well as the positive results from the review of the composition and efficiency of the Supervisory Board’s work, which the Supervisory Board members had performed by means of questionnaires in summer 2018. In its ordinary meeting in December 2018, the Supervisory and Management Boards discussed the Company and budget planning for the 2019 financial year and approved these. The Supervisory Board advised the Management Board on executed and planned real estate acquisitions and disposals as well as on development projects planned for 2019. The Supervisory Board deliberated on personnel matters regarding the Management Board and Supervisory Board and, based on the recommendation of its nomination and remuneration committee, resolved on proposing to the Annual General Meeting Mr. Richard Mully and Mr. Benoît Hérault for another office term as members of the Supervisory Board. In a meeting in January 2019, the Supervisory and Management Boards discussed the market outlook with an external advisor. The Management Board and Supervisory Board discussed the strategy for the Company as well as bigger leasing projects, and the Supervisory Board resolved on leases that require approval as well as on a small amendment to the rules of procedure. In February 2019, the Supervisory Board resolved by way of written circular resolution on the Corporate Governance Statement and the annual compliance statement regarding the recommendations of the German Corporate Governance Code. In its financials meeting in February 2019, the Supervisory Board discussed the consolidated financial statements and financial statements for the year ending on December 31, 2018. It further reviewed the Management Board’s recommendation for profit appropriation. The Supervisory Board passed a resolution on its report for the Annual General Meeting for the 2018 financial year. Management Board and Supervisory Board discussed the agenda and proposals for resolution to the annual General Meeting of the Company for the 2018 financial year. The Supervisory Board also discussed the variable remuneration for the members of the Management Board. 142 alstria Annual Report 2018 Corporate Governance COMMITTEES OF THE SUPERVISORY BOARD According to the Company’s Articles of Association, the Supervisory Board has six members. It has formed four permanent committees to support it in its work, each of which are composed of at least three members. The composition of all committees is described in the Company’s Corporate Govern- ance Statement on pages 146 to 156 of the annual report. In some cases, the committees prepare the resolutions that the Supervisory Board will pass by making proposals. In some cases, the committees have been given decision-making powers, to the extent permitted by law. During the ordinary Supervisory Board’s meetings, the committee’s chairmen report on their committees’ work. In the 2018 financial year, the Supervisory Board’s committees were mainly concerned with the topics detailed below. The audit committee held five meetings in the 2018 financial year. All of them were attended by the Chief Financial Officer. In the course of auditing the accounts of the Company in March 2018, the audit committee reviewed the consolidated financial statements and financial statements as of December 31, 2017 as well as the management reports. It discussed the documents with the independent auditors and carried out a preliminary examination of the annual and consolidated financial statements and the Management Board’s recommendation for the appropriation of profit. As a result, the committee submitted corresponding proposals for resolution to the Supervisory Board. Moreover, the audit committee approved non-audit services of the auditors and resolved in this matter by written circular resolution. The audit committee dealt with the half-year financial report as of June 30, 2018 and discussed it with the auditors and the Management Board prior to its publication. The Company’s risk situation was addressed regularly. Further topics included a recommendation to the Supervisory Board regarding the proposed resolution of the Supervisory Board for the choice of the auditors for the 2018 financial year Annual General Meeting, the auditors’ independence and any additional services to be performed by them. KPMG AG Wirtschaftsprüfungsgesellschaft, Hamburg, was appointed as auditor. The audit committee decided on the engagement agreement and dealt with the Company’s accounting, accounting process, risk management system and key risks. Moreover, the effectiveness of the Company’s internal controlling, audit and compliance systems were discussed. Furthermore, the audit committee discussed the costs of development projects as well as the results of the Company’s internal audit for the 2018 financial year, and the audit schedule for the internal audit for the coming years. The nomination and remuneration committee met three times during the 2018 financial year. The committee discussed the amount of variable remuneration for the members of the Management Board. In light of this discussion, each Management Board member’s individual performance was discussed, providing the Supervisory Board with corresponding resolution proposals. Moreover, the nomination and remuneration committee dealt with the status of implementation of the share ownership guidelines for the members of the Management Board and the self-commitment of the members of the Supervisory Board on acquiring shares of the Company, and the committee gave its approval for ancillary advisory activities of one member of the Management Board. The nomination alstria Annual Report 2018 143 Corporate Governance and remuneration committee discussed the composition of the Management Board, which has been the same for years. As the office terms of two Supervisory Board members will expire in the 2019 financial year, the committee also discussed the succession planning for the Supervisory Board and submitted a proposal to the Supervisory Board for a resolution to the Annual General Meeting with regard to the re-election of both members of the Supervisory Board. In the 2018 financial year, the finance and investment committee deliberated with the Management Board on the financing strategy of alstria office REIT-AG and real estate transactions in three meetings. The committee approved acquisition and disposals of a real estate portfolio executed in the 2018 financial year as well as leases. Finally, by way of written circular resolution, the finance and investment committee agreed on the refinancing of a bank loan, which took place as part of executing the financing strategy. In the 2018 financial year, the corporate social responsibility committee convened in two meetings and discussed questions of Corporate Social Responsibility in the real estate sector with the Management Board and external advisors. The committee discussed the activities of the Company in the field of sustainability with the Management Board, reviewing both their impact on the Company’s business activities as well as the corresponding perception of other market participants and rating agencies. Moreover, the committee and the Management Board examined possible future fields of activity for the Company in the area corporate social responsibility. The special committee dealing with the capital increase, established in January 2018, held two meet- ings in January 2018. Pursuant to its authorization, it approved the increase of the Company’s share capital by up to 10% of the share capital against cash contributions by utilizing the Company’s Au- thorized Capital 2017 and excluding shareholders’ subscription rights. AUDIT OF THE ANNUAL FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENTS KPMG AG Wirtschaftsprüfungsgesellschaft, Hamburg, audited the financial statements and management report of alstria office REIT-AG and its consolidated financial statements, including the management report of the Group for the financial year from January 1 to December 31, 2018. All reports were prepared by the Management Board and each issued with unqualified audit statements. Immediately after their preparation, the members of the Supervisory Board were presented with the financial statements and management report of alstria office REIT-AG. Likewise, the consolidated financial statements, including the management report of the Group, the auditors’ report and the Management Board’s recommendation for the appropriation of the annual net profit, were presented. The Supervisory Board examined the documents provided by the Management Board in detail in both its audit committee and at a plenary meeting. In the meeting of the audit committee, the auditors presented the essential results of their audit (including the audit of the internal control and risk- management system) and were available to answer questions. The audit committee prepared the Supervisory Board’s audit and focused particularly on the key audit matters described in the auditors’ opinion, including the audit procedures implemented. The audit committee reported to the plenary 144 alstria Annual Report 2018 Corporate Governance Supervisory Board in the presence of the auditors of the financial statements of alstria office REIT- AG and its consolidated financial statements. The auditors reported on the scope, focal points and main findings of their audit, addressing, in particular, key audit matters and the audit procedures implemented. The plenary meeting examined and discussed the annual financial statements of the Company and the consolidated financial statements as prepared by the Management Board, as well as the auditors’ results. After the review conducted by the Supervisory Board, there were no objections to be raised. The Supervisory Board approved the financial statements of alstria office REIT-AG and its consolidated financial statements. The annual financial statements are thus endorsed. The Supervisory Board also shared the Management Board’s recommendation for the appropriation of the profit as well as the adjustment of the proposal due to a changed number of shares. CORPORATE GOVERNANCE In the reporting period, the Supervisory Board also discussed alstria office REIT-AG’s compliance with the recommendations of the German Corporate Governance Code. The Management Board and the Supervisory Board last issued the annual declaration of compliance with the German Corporate Governance Code in accordance with Section 161 AktG in February 2019; the declaration was subsequently made permanently available to shareholders on the Company’s website. In their declaration, the Management and Supervisory Boards explained that most of the recommendations of the German Corporate Governance Code have been, or will be, adopted. Furthermore, information on the recommendations that have not been, or will not be, followed, is presented together with the reasons for making these decisions. The Supervisory Board reviewed its own composition and the status of implementation of the profile of skills and expertise with specific objectives for its composition and the diversity concept, which is published in the Company’s Corporate Governance Report on pages 146 to 156 of the annual report. The composition of the Supervisory Board as of December 31, 2018 meets these objectives and the profile of skills and expertise is fulfilled. There were no personnel changes in the Supervisory Board in 2018. No conflicts of interest concerning members of the Supervisory Board or Management Board arose during the 2018 financial year. The Supervisory Board would like to thank the Management Board and all employees for their high level of commitment and their successful work in the 2018 financial year. Hamburg, February 2019 For the Supervisory Board Dr. Johannes Conradi Chairman of the Supervisory Board alstria Annual Report 2018 145 Corporate Governance CORPORATE GOVERNANCE STATEMENT In this declaration, the Management Board and the Supervisory Board report on the corporate governance of alstria office REIT-AG (‘alstria’) and the Group pursuant to Section 289f and 315d of the German Commercial Code (‘HGB’) as well as Section 3.10 of the German Corporate Governance Code (‘Code’). DECLARATION OF MANAGEMENT BOARD AND SUPERVISORY BOARD PURSUANT TO SECTION 161 GERMAN STOCK CORPORATION ACT ON THE GERMAN CORPORATE GOVERNANCE CODE The suggestions and recommendations of the Government Commission, as appointed by the German Federal Ministry of Justice, contain internationally and nationally recognized standards for effective and responsible corporate management. The Company’s declaration of compliance with the recommendations of the German Corporate Governance Code is published on the Company’s website (www.alstria.com). After careful consideration, alstria has chosen not to comply with some of the Code’s recommendations. These items and the reasons for the Company’s nonconformity are set out in the declaration of compliance as issued by the Management Board and the Supervisory Board on February 12, 2019: Declaration of compliance, dated February 12, 2019 “Since the prior declaration of compliance, dated February 13, 2018, the Company has — apart from the exceptions stated below — complied with the recommendations of the ‘Government Commission German Corporate Governance Code’ in the version as amended on February 7, 2017. The Company intends to continue to comply with the recommendations of the Code as amended on February 7, 2017, to the same extent: Deductible for D&O insurance for the Supervisory Board, Section 3.8 of the Code The D&O insurance for the alstria office REIT-AG Supervisory Board does not comprise a deductible. The Supervisory Board believes its members will carry out their duties responsibly irrespective of any such deductible. Change of performance targets for elements of variable remuneration, Section 4.2.3 of the Code The short-term incentive remuneration element of the Management Board is mainly based on the achievement of a funds from operations per share (FFO per share) target. In the event that the achieved FFO per share in a financial year is positively and materially impacted by new acquisitions, the Supervisory Board adjusts the FFO per share target accordingly. In doing so, the Supervisory Board ensures the Management Board is not incentivized to enter into acquisitions by means of achieving personal short-term benefits. The impact of any acquisition on management remuneration is solely linked to multi-year remuneration elements, therefore aligning the interest of the Management Board with those of the Company and its shareholders. Vice versa, the Supervisory Board adapts the FFO per share target to disposals. Furthermore, the FFO per share target will in future be adjusted to changes in the Company’s share capital carried out in the relevant financial year. 146 alstria Annual Report 2018 Corporate Governance Determination of a level of benefits for the private pension plan, Section 4.2.3 of the Code As the Company has opted for a defined contribution model for the private pension plan of the Management Board members for reasons of transparency and risk management, the Supervisory Board has not fixed a level of benefits for the private pension plan of the Management Board members. The Supervisory Board believes it is in the best interest of the Company to have a defined contribution model rather than a defined benefit model, as the defined contribution does not create any unforeseen future liability for the Company. Discussion of the financial reports by the Supervisory Board or its audit committee and the Management Board prior to their publication, Section 7.1.2 of the Code The quarterly interim statements are made available to the Supervisory Board prior to their publication and are discussed with the Supervisory Board in detail soon after publication. In the event of considerable differences to the budget or business plan as approved by the Supervisory Board, the Supervisory Board is given the opportunity to discuss the figures with the Management Board before they are published. Half-year financial reports are discussed with the audit committee of the Supervisory Board prior to publication. The Management Board and Supervisory Board consider this approach appropriate and adequate.” CORPORATE MANAGEMENT PRACTICES To achieve a value-oriented and trust-building corporate management, alstria applies a corporate management practice to an extent beyond what is legally required. Corporate Governance The Management Board and the Supervisory Board of alstria are aware of their responsibilities concerning the corporate governance of alstria regarding the Company’s shareholders, employees, tenants and business partners. Good corporate governance is the basis for our decision-making and supervising processes. It stands for a responsible, value and long-term success-driven governance and supervision of the Company, a target-orientated and efficient cooperation between the Management Board and the Supervisory Board, respect for the interests of our shareholders and employees, transparency and responsibility in all entrepreneurial decisions as well as an appropriate handling of risks. alstria has already implemented many parts of the German Corporate Governance Code (as last amended February 7, 2017) to an extent beyond what is legally required. With the few exceptions named and reasoned in the declaration of compliance, alstria office REIT-AG complied and complies with the recommendations of the German Corporate Governance Code. Beyond that, alstria also com- plied and complies with the majority of suggestions of the German Corporate Governance Code. alstria has appointed a corporate governance officer within the Company who will report any changes of the Code to the Management Board and the Supervisory Board at least once per year and whenever necessary. In this way, alstria ensures consistent compliance with these principles. alstria Annual Report 2018 147 Corporate Governance Integrity and compliance Conducting business with integrity is one of alstria’s most important principles. The entire Company shares the understanding that the trust of alstria’s shareholders, tenants, employees and business partners crucially depends on the behavior of each employee. The Management Board of the Company has set up a compliance organization to ensure that the legal provisions and internal Company guidelines are complied with and, moreover, that sets standards for treating business partners, competitors and employees fairly. A code of conduct lists guidelines for behavior and provides orientation to resolve conflicts (e. g., conflicts of interest), thereby serving as a model for correct behavior for all Company employees. The code of conduct is published on the Company’s website. The compliance officer is responsible for communicating these values by answering questions on the implementation of the code of conduct and by offering in-house training for all employees. Compliance is monitored by colleagues, supervisors and the compliance officer, as well as via regular investigation by auditors. alstria has also set up a telephone hotline at an external law firm which employees can use anonymously to report any violations of the code of conduct or the Company’s internal guidelines. Furthermore, the Management Board regularly discusses Company compliance with the Supervisory Board’s audit committee. Violations of the code of conduct will not be tolerated; they will be fully investigated, and the violators will be punished. This can include anything from disciplinary measures to dismissal, a claim for damages or even prosecution. Integrity is also an essential condition for building trusting partnerships and cooperations with our business partners. For this reason, alstria has introduced a code of conduct for its service providers and craftsmen, which defines fundamental legal and ethical requirements. The code is published on the Company’s website and defines the expectations of the Company concerning integrity and compliance behavior from business partners. Communication and transparency A transparent corporate governance and good communication with the shareholders and the public contributes to strengthening investor and public trust in alstria’s work. Relationship to the shareholders alstria respects the rights of its shareholders and makes best efforts to guarantee those rights are exercised to the extent stipulated by the law or its bylaws. In particular, these include the right to freely purchase and sell shares, to have an appropriate level of access to information, to an adequate number of voting rights per share (one share, one vote) and to participate in our Annual General Meeting. Shareholders have the option of exercising their voting rights personally, via an authorized representative present at the Annual General Meeting or by sending voting instructions to their proxies. The invitation to the Annual General Meeting includes an explanation of how voting instructions can be issued. It is possible to send invitations and documents for General Meetings to the shareholders electronically upon request. The invitation and the documents are to be made 148 alstria Annual Report 2018 Corporate Governance available for viewing prior to the upcoming Annual General Meetings pursuant to the legal provisions and will be published on the Company’s website with additional documents pursuant to Section 124a of the German Stock Corporation Act (Aktiengesetz, AktG) and the agenda. The results of the votes will likewise be published on the Company’s website following the Annual General Meeting. Communication with the public When sharing information with people outside the Company, the Management Board follows the principles of transparency, promptness, openness and clarity, and a policy of equal treatment of its shareholders. alstria informs its shareholders and the interested public about the Company’s situation and significant business events in particular through financial reports, analyst and press conferences, press and ad-hoc announcements and the Annual General Meeting. The alstria website includes information on the Company and its shares and other financial instruments, share price tracking and the Managers’ Transactions Disclosure pursuant to Article 19 of the Market Abuse Regulation (Regulation (EC) No. 596/2014 of the European Parliament and the Council) (Directors’ Dealings). Moreover, alstria’s financial reports and website include a financial calendar that indicates all dates of importance to shareholders. The announcements and pieces of information are additionally published in English. Financial reporting alstria regularly informs shareholders and third parties by publishing its consolidated and half-year financial statements, as well as quarterly interim statements, during each financial year. For the Group’s accounting, the International Financial Reporting Standards (IFRS) as applied in the European Union, are relevant. For legal reasons (calculating dividends, creditor protection), financial statements for alstria office REIT-AG also are prepared in accordance with the HGB. The Annual General Meeting appoints the independent auditor for alstria office REIT-AG and the Group as well as for the audit review of the interim financial reports. Following the election of the Annual General Meeting, the audit committee of the Supervisory Board appoints an external auditing firm to audit the financial statements and negotiates the respective auditing fees. The auditors participate in the plenary sessions of the audit committee and the Supervisory Board to advise on the consolidated financial statements and the financial statements of alstria office REIT-AG as well as in the meeting of the audit committee regarding the deliberations on the half-year financial report and to present the respective key findings of the audit. In accordance with the provisions of the auditor regulation (regu- lation (EC) No. 537/2014 of the European Parliament and Council) the audit committee provided the Supervisory Board with two recommendations for the auditor for the financial year 2018 with one reasoned preference for KPMG AG Wirtschaftsprüfungsgesellschaft, Hamburg. On the basis of the re- spective proposal of the Supervisory Board, the Annual General Meeting appointed KPMG AG Wirtschaftsprüfungsgesellschaft, Hamburg, to audit the annual and half-year financial statements of alstria office REIT-AG and of the Group for the 2018 financial year and for further interim financial alstria Annual Report 2018 149 Corporate Governance reports until the next ordinary general meeting in 2019. Haiko Schmidt and René Drotleff are the pro- fessionally qualified auditors in charge of the financial statements of alstria office REIT-AG and the Group. Sustainability alstria’s sustainability approach is based on a three-pillar model, taking the impact of business on the following pillars into account: economy, environment and social issues. As a commercial organization, alstria’s main objective is to optimize its long-term sustainable value. It strives to generate the best yield possible on its equity over time. alstria’s approach to sustainability does not solely focus on environmental matters, but it considers the economic and social impacts of its actions as well. The Company weighs the risk–benefit ratio of the three areas before making any decisions and adapts its actions to what it feels is the most viable course of action in each case. The result of this approach is that alstria might not always make decisions that maximize its short-term benefits, striving to always take the path that will yield the best long-term prospects for the Company. alstria’s sustainability approach, its achievements in its three defined areas of sustainability and the Company’s related future targets are described in detail in the Company’s yearly sustainability report. The report is available on the Company’s website. MANAGEMENT BOARD AND SUPERVISORY BOARD The Management Board and the Supervisory Board cooperate closely and faithfully in the interest of the Company. The Chairman of the Supervisory Board has regular contact with the Management Board and deliberates with it questions on strategy, planning, development of business, risk situation, risk management and compliance of the Company. On notable events, which are of substantial meaning for the evaluation of the situation and development as well as the governance, the Chairman of the Supervisory Board shall be informed without delay by the Management Board. Management Board The Management Board has two members: Olivier Elamine as Chief Executive Officer and Alexander Dexne as Chief Financial Officer. The Management Board is responsible for running alstria in the interest of the Company with the aim of sustainably increasing the Company’s value. It sets the business goals and — in conjunction with the Supervisory Board — the strategic direction of the Company. The tasks of the Management Board, the allocation of responsibilities between the individual members of the Management Board as well as the reporting and information duties towards the Supervisory Board are stipulated in the rules of procedure for the Management Board. The members of the Management Board are appointed by the Supervisory Board, which monitors and advises the Management Board on management issues. The Management Board involves the Supervisory Board in all decisions of fundamental importance to the Company. The rules of procedure for the Supervisory Board stipulate that certain, significant business transactions by the Company are 150 alstria Annual Report 2018 Corporate Governance subject to the approval of the Supervisory Board. For example, the acquisition or disposal of real estate property for a consideration of more than EUR 30 million, entering into financing agreements with a volume of more than EUR 30 million, entering or prematurely terminating lease contracts with an annual consideration of more than EUR 2 million, or investing in Company assets (modernization measures) with an annual total sum of more than EUR 2 million must be approved, if such investments have not already been included in the budget as approved by the Supervisory Board. The members of the Management Board are obligated to the Company’s interest. The members of the Management Board must immediately disclose any conflicts of interest to the Supervisory Board. Major business transactions between the Company and members of the Management Board, or with any persons or companies in close association with them, require the approval of the Supervisory Board. All such business transactions must be concluded at customary commercial conditions. The members of the Management Board require the approval of the Supervisory Board to conduct secondary activities, particularly memberships in the supervisory boards of companies not affiliated with the Group. The members of alstria’s Management Board had no conflicts of interest in the reporting year. There were no contracts regarding such business transactions between the Company and the Management Board members, persons or companies in close association with them during the reporting period. The CEO serves on supervisory boards of companies outside of the Group with approval of the Supervisory Board of the Company. A list of the memberships of the Management Board members in supervisory boards of listed companies or in supervisory boards of companies with comparable requirements pursuant to Section 285 No. 10 HGB can be found on pages 130 of the Company’s financial report. Supervisory Board In accordance with the Articles of Association, the Supervisory Board is composed of six members. No former Management Board members sit on the Supervisory Board. The Supervisory Board is composed of members who have the necessary knowledge, competence and professional experience to properly carry out their duties. There were no changes with respect to the composition of the Supervisory Board in financial year 2018; the Supervisory Board is composed of the following members: Member Profession Appointed until1) Dr Johannes Conradi (Chairman) Lawyer and partner, Freshfields Bruckhaus Deringer LLP Richard Mully (Vice Chairman) Director, Starr Street Limited Dr Bernhard Düttmann Independent business consultant Stefanie Frensch Benoît Hérault Marianne Voigt Managing Director, HOWOGE Wohnungsbaugesellschaft mbH Managing Director, Chambres de l’Artémise S.à r.l. Managing Director, bettermarks GmbH 1) Until the close of the Annual General Meeting 2020 2019 2021 2021 2019 2020 The Supervisory Board considers all its members to be independent. alstria Annual Report 2018 151 Corporate Governance On the website of the Company (Company > Supervisory Board), a curriculum vitae for each member of the Supervisory Board as well as an overview of other material activities besides the Supervisory Board mandate can be found. A list of all memberships of the Supervisory Board members in supervisory or similar controlling bodies in companies external to the Group pursuant to Section 285 No. 10 of the HGB is presented on pages 130 to 131 of the annual report. In its report to the Annual General Meeting, the Supervisory Board reports on its activities undertaken in financial year 2018. The report is presented on pages 140 to 145 of the annual report. Supervisory Board committees The Supervisory Board has formed four standing committees: an audit committee, a finance and investment committee, a nomination and remuneration committee and a solemnly advising corporate social responsibility committee. Each committee with resolution-making competence has its own rules of procedure to specify its concerns, tasks and resolution-making competence. Audit committee The audit committee monitors the Company’s accounting and the accounting process, risk management, internal control, internal audit and compliance. Moreover, the audit committee deals with the selection of the auditors, the necessary independence of the auditor and the respective engagement, the key audit areas, the auditors’ compensation as well as services additionally rendered by the auditor. The audit committee comprised Marianne Voigt as Chair as well as Dr. Bernhard Düttmann and Benoît Hérault as further members throughout the full 2018 financial year. Finance and investment committee The finance and investment committee discusses the Company’s financing strategy and approves the acquisition or disposal of real estate property or other assets worth between EUR 30 million and EUR 100 million, as well as financing agreements with a financing volume between EUR 30 million and EUR 100 million. Transactions of a value greater are to be presented to the entire Supervisory Board for approval. The finance and investment committee, furthermore, approves the conclusion or early termination of lease agreements with third parties with a total annual consideration of more than EUR 2 million, as well as contracts with Supervisory Board members, according to Section 114 of the German Stock Corporation Act (Aktiengesetz, AktG). The finance and investment committee comprised Richard Mully as Chair as well as Stefanie Frensch and Benoît Hérault as further members throughout the full 2018 financial year. Nomination and remuneration committee The nomination and remuneration committee prepares resolutions for the entire Supervisory Board for the appointment and dismissal of members of the Management Board, for the Management Board’s compensation system and for the total remuneration of individual members of the Management Board. Furthermore, it deals with the resolution of, or amendments to, the rules of procedure for the Management Board, as well as the approval of certain other activities and primary contracts of members of the Management Board. Apart from the amount of compensation, the nomination and 152 alstria Annual Report 2018 Corporate Governance remuneration committee decides on the conclusion, amendment, extension and termination of contracts with Management Board members and on the content of such contracts. Finally, the committee prepares the resolutions for the Supervisory Board regarding the proposal of the appointment of suitable Supervisory Board members at the Annual General Meetings. In the financial year 2018, the nomination and remuneration committee comprised Dr. Johannes Conradi as Chair as well as Stefanie Frensch and Richard Mully as further members. Corporate social responsibility committee The corporate social responsibility committee will deal with topics of corporate social responsibility and real estate innovations in the future. In the financial year 2018, the committee was composed of Dr. Johannes Conradi as Chair as well as Richard Mully and Marianne Voigt as further members. Special committees Additionally, in January 2018 the Supervisory Board established a special committee capital increase, which was composed of Richard Mully as Chair as well as Dr. Johannes Conradi, Stefanie Frensch and Benoît Hérault as further members. The special committee capital increase was authorized to grant all necessary approvals and make all other declarations required in connection with the execution of a capital increase from the Authorized Capital 2017 (Section 5 paragraph 3, 4 and 4a of the Articles of Association) against cash contributions in the amount of up to ten percent of the Company’s share capital. The Supervisory Board reports on the activities of the committees of the Supervisory Board during the 2018 financial year in its report to the Annual General Meeting on pages 140 to 145 of the annual report. DETERMINATION TO PROMOTE WOMEN’S PARTICIPATION IN LEADING POSITIONS PURSUANT TO SECTION 76 PARA. 4 AND SECTION 111 PARA. 5 AKTG Employees and their development in the Company are of central importance for the Company to achieve sustainable success. The Management Board pursues diversity in filling its management positions and aims to adequately consider women for these positions. The Management Board determined that the number of females in the first management level below the Management Board should be no less than 30 %. This target quota has been achieved with 41.7 % as of December 31, 2018 and applies until December 31, 2021. As there is no additional management level with decision- making competence and budget responsibility, a target quota for women’s participation in the second management level did not need to be determined. The Supervisory Board determined a target quota of at least 30 % for the Supervisory Board. This quota has been achieved with 33.33 % and applies until December 31, 2021. For the participation of women in the Management Board, the Supervisory Board determined a quota of 0%. This quota has been achieved and applies until December 31, 2021. Both Management Board alstria Annual Report 2018 153 Corporate Governance members are appointed until December 31, 2022. In 2019, the supervisory board will establish a diversity concept for the Management Board. PROFILE OF SKILLS AND EXPERTISE WITH OBJECTIVES FOR THE COMPOSITION OF THE SUPERVISORY BOARD AND DIVERSITY CONCEPTION The aim of the alstria office REIT-AG’s Supervisory Board is to have members who are equipped with the necessary skills and expertise to properly advise and control the Management Board. Therefore, the Supervisory Board developed, with due consideration of the specific alstria situation, the following profile of skills and expertise and diversity concept pursuant to Section 289f HGB and Section 5.4.1 of the German Corporate Governance Code, which specifies concrete objectives for the composition of the Supervisory Board, which are to be considered in its proposals to the shareholders in the General Meeting regarding new elections to the Supervisory Board: Requirements for the single Supervisory Board members General requirement profile  Managerial or operational experience;  Willingness and ability to ensure adequate content-related commitment;  Discretion and integrity;  Capacity for interaction and teamwork;  Leadership skills and persuasive power;  Willingness to participate in regular and independent advanced training;  Compliance with the limitation of the numbers of memberships as recommended by the German Corporate Governance Code (see Section 5.4.5 German Corporate Governance Code). Availability Each member of the Supervisory Board must ensure that he or she has sufficient time to dedicate to the proper fulfillment of the Supervisory Board mandate (see also Section 5.4.1 German Corporate Governance Code). This means ensuring that the member  can attend five ordinary Supervisory Board meetings per year, each of which requires adequate preparation work and wrap-up;  has sufficient time for the audit of the annual and consolidated financial statements;  can, in general, attend the Annual General Meeting of shareholders in person (see Section 15 paragraph 4 sentence 1 of the Articles of Association);  depending on possible membership in one or more of the Supervisory Board committees, has extra time to participate in these committee meetings and do the necessary preparation and wrap-up for these meetings;  can attend extraordinary meetings of the Supervisory Board or of a committee to deal with special matters, as and when required (also on short notice). 154 alstria Annual Report 2018 Corporate Governance Age limit Members of the Supervisory Board should not be older than 70 years of age as a general rule (see for the definition of an age limit Section 5.4.1 German Corporate Governance Code). Length of membership For each member, the membership in the Supervisory Board shall not exceed 20 years as a general rule (see for the definition of a maximum length of mandate Section 5.4.1 German Corporate Gov- ernance Code). Requirements relating to the composition of the Supervisory Board plenum Expertise  Viewed as a whole, the members must be familiar with the real estate sector (see Section 100 paragraph 5 second half-sentence of the German Stock Corporation Act).  At least two members shall have expertise in the sectors of real estate transactions, asset management and letting, project development and real estate valuation.  At least one independent member of the Supervisory Board shall have expertise in accounting or the audit of annual statements (see Section 100 paragraph 5 first half-sentence of the German Stock Corporation Act, Section 5.3.2 German Corporate Governance Code).  At least one member shall have expertise in the sectors of legal, human resources management, corporate finance, IT/innovation/digitalization, corporate social responsibility and capital markets. Experience abroad At least two members of the Supervisory Board shall have acquired reasonable international experi- ence. Diversity and participation of women The members of the Supervisory Board shall appoint new members, taking into account their back- grounds, professional experience and expertise, to provide the Supervisory Board with the most di- verse sources of experience and expertise possible. Concerning the female representation in the Su- pervisory Board, a quota of at least 30% must be maintained. Independence and conflicts of interest At least four members of the Supervisory Board shall be independent, according to Section 5.4.2 of the German Corporate Governance Code, i. e. have no business or personal relationships, which could cause a substantial and not temporary conflict of interest, with the Company, its executive bodies, a controlling shareholder or an enterprise associated with the latter. At least three members of the Supervisory Board shall not have any consulting or representation duties with main tenants, lenders or other business partners of the Company (see for the disclosure of con- flicts of interest Section 5.5.2 German Corporate Governance Code). alstria Annual Report 2018 155 Corporate Governance Current composition In September 2018, the Supervisory Board assessed the implementation of these targets and came to the conclusion that all targets named above are met. The profile of skills and expertise is fully met by the plenary body. February 2019 The Management Board The Supervisory Board 156 alstria Annual Report 2018 Corporate Governance REMUNERATION REPORT* REMUNERATION OF THE MANAGEMENT BOARD MEMBERS The remuneration system for the members of the Management Board is determined by the Supervisory Board and is reviewed regularly. The last adjustment to the remuneration system became effective January 1, 2018. 1. REMUNERATION IN THE 2018 FINANCIAL YEAR In the last financial year, the total target remuneration for the members of the Management Board amounted to EUR 2,237 k. The total amount paid to the Management Board in that financial year amounted to EUR 2,895 k (including payouts on multi-year remuneration elements). The correctness of the calculated payout amounts for the multi-year variable remuneration elements was confirmed by an independent remuneration expert. The remuneration of individual Management Board members is presented based on model tables pursuant to the German Corporate Governance Code, as amended on February 7, 2017. The ‘Benefits granted’ table shows the fixed remuneration and the target values of the variable re- muneration elements granted in the respective financial year as well as hypothetical minimum and maximum amounts for a future payout of the variable remuneration elements. The ‘Benefits paid out’ table shows the fixed remuneration and the amounts paid out in the respective financial year as variable remuneration elements. * This remuneration report forms an integral part of the audited Group Management Report and Notes to the annual financial statements. alstria Annual Report 2018 157 Corporate Governance Benefits granted Olivier Elamine CEO Alexander Dexne CFO in EUR k 2017 2018 2018 (Min) 2018 (Max) 2017 2018 2018 (Min) 2018 (Max) Total amount of fixed compensa- tion and ancillary benefits Fixed compensation1) Ancillary benefits2) Total amount of one-year variable compensation STI 2017 STI 2018 Total amount of multi-year variable compensation STI 2017 (3 years) LTI 2017 (4 years) LTI 2018 (4 years) Total amount of fixed and variable compensation Service costs8) Total 447 440 7 173 1733) - 498 585) 4406) 455 440 15 231 - 231 440 - - - 4406) 455 440 15 0 - 0 0 - - 0 455 440 15 347 - 3474) 1,100 - - 381 360 21 142 1423) - 407 475) 3606) 383 360 23 189 - 189 360 - - 1,1007) - 3606) 383 360 23 0 - 0 0 - - 0 383 360 23 284 - 2844) 900 - - 9007) 1,118 1,126 84 100 1,202 1,226 455 100 555 1,902 100 930 58 932 79 383 1,567 79 79 2,002 988 1,011 462 1,646 1) Annual base salary according to service contracts. 2) Benefits related to company car. 3) 75 % of the STI target value. 4) Maximum attainable payout amount for the STI: target value STI x 1.5. 5) 25 % of the STI target value. 6) LTI target value for the respective financial year. 7) Maximum attainable payout for the LTI after the holding period of 4 years: target value LTI x 2.5. Payout is provided in alstria shares. 8) Benefits for insurance and pension plans. Benefits paid out in EUR k Total amount of fixed compensation and ancillary benefits Fixed compensation1) Ancillary benefits2) Total amount of one-year variable compensation STI 20163) STI 20173) Total amount of multi-year variable compensation STI 2014 (3 years)4) STI 2015 (3 years)4) LTI 2013 (4 years)5) LTI 2014 (4 years)5) Total amount of fixed and variable compensation Service cost6) Total 1) Annual base salary according to service contracts. 2) Benefits related to company car. 3) Payout amount for 75 % of the STI after 1 year. 4) Payout amount for 25 % of the STI after 3 years. 5) Payout amount for LTI after holding period of 4 years. 6) Benefits for insurance and pension plans Olivier Elamine Alexander Dexne CEO CFO 2017 2018 2017 2018 447 440 7 180 180 - 822 68 - 754 - 1,449 84 1,533 455 440 15 178 - 178 855 - 83 - 772 1,488 100 1,588 381 360 21 147 147 - 673 56 - 617 - 1,201 58 383 360 23 146 - 146 699 - 68 - 631 1,228 79 1,259 1,307 158 alstria Annual Report 2018 Corporate Governance 2. REMUNERATION SYSTEM In January 2017, the Supervisory Board resolved upon amendments to the system for the remuner- ation of the members of the Management Board of alstria office REIT AG, which were approved by the shareholders in the Annual General Meeting in May 2017 and took effect on January 1, 2018. The amendments aim at better aligning the interests of the Management Board and the sharehold- ers of the Company, focusing on sustainable long-term value creation and reducing complexity. The structure of the remuneration system is kept substantially unchanged and only simplifications and amendments are made. The amounts of the fixed annual remuneration and the target values for the variable remuneration remain unchanged. When reviewing and adapting the remuneration sys- tem for the members of the Management Board, the Supervisory Board was advised by an external, independent remuneration expert. The criteria for appropriateness of the Management Board remuneration continue to be the respon- sibilities of the individual Management Board member and his or her personal performance; the financial situation, success, prospects, and the sustainable development of the Company; the ap- propriateness of the remuneration with consideration of the scope of comparison; and the Com- pany’s applicable remuneration structure. The remuneration structure still consists of a fixed basic remuneration, a short-term and long-term variable remuneration component, and ancillary benefits (payments in kind) for each member of the Management Board. As required by the German Stock Corporation Act and the German Corporate Governance Code, the majority of the remuneration consists of variable remuneration components that are mainly based on multi-year assessments with forward-looking characteristics. Furthermore, Share Ownership Guidelines have been introduced under which the members of the Management Board are obliged to invest part of their remuneration in shares of the Company. alstria Annual Report 2018 159 Corporate Governance Overview of the essential amendments STI (Short-Term Incentive) LTI (Long-Term Incentive) Share Ownership Guidelines 2017  FFO as target value  Threshold for the performance target: 50 %  Discretionary factor to reflect 2018  FFO per share as target value  Threshold for the performance target: 70 % individual performance: 0.8−1.2  Discretionary factor to reflect  75 % cash payout / 25 % payout in virtual individual performance: 0.7−1.3 shares  Virtual shares with term of 4 years, then pay-  100 % cash payout  Stock awards with term of at least out in cash 4 years, payout in Company shares  Performance subject to absolute TSR (50 %)  Performance subject to absolute TSR and relative TSR (EPRA/NAREIT Europe Ex-UK (25 %) and relative TSR (FTSE EPRA/ Index) (50 %)  Discretionary factor to reflect  Discretionary factor to reflect NAREIT Developed Europe Index) (75 %) individual performance: 0.8−1.2  N/A individual performance: 0.7−1.3  Obligation of the members of the Man- agement Board to acquire shares of the Company amounting to three times their fixed annual remuneration and to hold the same until they leave their office Variable remuneration elements Short-term incentive plan 2018 The members of the Management Board receive a short-term variable remuneration component (STI) with a target value in Euro in each financial year. Since January 1, 2018, the STI is based on the budgeted funds from operations per share (FFO per share) as the performance target (previ- ously: funds from operations). The amount of the STI depends on the degree to which the perfor- mance target is achieved, i. e. the relation between the FFO per share achieved in the correspond- ing financial year and the budgeted FFO per share. The previous remuneration system provided for a threshold of at least 50 % of the performance target that had to be met for payments to be made. This threshold has been increased so that at least 70 % of the performance target has to be met for a payout, i. e. if the achieved FFO per share is not at least 70 % of the budgeted FFO per share, remuneration from the STI will not be granted. A maximum of 150 % of the performance target can be achieved (cap). The achieved payout value is adjusted at the discretion of the Supervisory Board, i. e. multiplied with a discretionary factor of 0.7 to 1.3 (previously: 0.8 to 1.2). This enables the Supervisory Board to consider the individual performance of each Management Board member in addition to the per- formance target achievement. Criteria for this may be, in particular, the individual performance of each Management Board member in the relevant financial year as well as his or her tasks and responsibilities within alstria and the alstria Group. In total, the STI is limited to a maximum of 150 % of the target value (cap). 160 alstria Annual Report 2018 Corporate Governance According to the remuneration system as applicable until the end of financial year 2017, only 75 % of the STI were paid out in cash to the Management Board members, and 25 % of the STI were converted into virtual shares which were subject to a minimum holding period of two years. Now, the STI no longer provides for a long-term component with a conversion into virtual shares and will be paid out completely in cash without deferral. This change aims to simplify the remuneration system and was made in light of the Company’s introduction of Share Ownership Guidelines under which the members of the Management Board are obliged to acquire and hold Company shares (for details see below under Share Ownership Guidelines). Long-term incentive plan 2018 The members of the Management Board may still also be granted a long-term variable remuneration component (LTI) in each financial year with a target value in Euro to be determined by the Super- visory Board. The LTI is still being weighted more strongly than the STI. Since January 1, 2018, the Long-Term Incentive Plan 2018 no longer provides for virtual shares but for stock awards which will be converted into shares of the Company after a holding period of at least four years (previously: cash payout). The absolute total shareholder return and the relative total shareholder return re- main as performance targets. However, the relative total shareholder return has been given a greater weighting of 75 % (previously: 50 %). In order to better align with real estate industry stand- ards, the reference index for the relative total shareholder return is now the FTSE EPRA/NAREIT Developed Europe Index (previously: EPRA/NAREIT Europe Ex-UK Index). The individual perfor- mance of the Management Board member is taken into account with a discretionary factor of 0.7 to 1.3 (previously: 0.8 to 1.2). In detail: The number of stock awards to be granted results from a target value defined by the Supervisory Board in Euro and divided by the arithmetic mean of the share price of one alstria share (commer- cially rounded to two decimal places) during the last 60 trading days prior to being granted. The Management Board member must hold the stock awards for a holding period of at least four years beginning with the granting date. The number of the stock awards will be adjusted at the end of each respective holding period depending on the performance of the alstria share during the hold- ing period. Twenty-five percent of the performance target determined by the Supervisory Board is made up of the absolute total shareholder return derived from the ‘weighted average cost of cap- ital’ (WACC) and compared to the XETRA-based Total Return Index. Seventy-five percent will be calculated on the basis of the relative total shareholder return compared to the reference index FTSE EPRA/NAREIT Developed Europe. Furthermore, as with the STI, the individual performance of each Management Board member dur- ing the holding period is taken into consideration with a discretionary factor which is determined by the Supervisory Board within a corridor of 0.7 to 1.3. Criteria for this may be, in particular, the individual performance of each Management Board member during the relevant holding period as well as his or her tasks and responsibilities within alstria and the alstria Group. This allows these alstria Annual Report 2018 161 Corporate Governance factors to be taken into account in addition to the performance target achievement. After the expiration of the holding period, the number of stock awards adjusted with regard to the perfor- mance target achievement will be multiplied by the discretionary factor to determine the alstria shares to be delivered for payout. Additionally, the dividends accumulated during the holding pe- riod for the payout shares are taken into account. This is the accumulated gross dividend divided by the arithmetic mean of the alstria stock market price (rounded to two decimal places) of the last 60 trading days prior to the relevant maturity date. The resulting stock awards will be con- verted into alstria shares at a ratio of 1:1 and granted to the Management Board member. In addi- tion, the amount paid out in the Long-Term Incentive Plan 2018 is limited by a cap (to a maximum of 250 % of the target value in Euro). If the Company is not in a position to provide the alstria shares, the payout will be made in cash (determined by the number of shares to be delivered multiplied by the arithmetic mean (commer- cially rounded to two decimal places) of the alstria stock market price of the last 60 trading days prior to the relevant maturity date. Ancillary benefits The Management Board members continue to receive payments in kind, which essentially consist of insurance premiums and the private use of a company car. As a component of the remuneration, taxes on these ancillary benefits are to be paid by each individual Management Board member. Each Management Board member is, in principle, equally entitled to these ancillary benefits, but the amount varies depending on the personal situation of each member. Moreover, as in the past, the Company still grants the members of the Management Board a monthly cash amount for the purpose of a private pension plan. These benefits now amount to 20 % of each Management Board member’s annual fixed salary. There are no pension entitlements. Share ownership guidelines Share Ownership Guidelines have been introduced for the first time. According to such guidelines, the members of the Management Board have been obliged since the beginning of financial year 2018 to set up a portfolio of shares equivalent to three times the fixed annual remuneration over a period of five years and to hold the same until they leave their office. The Share Ownership Guidelines aim in particular at reconciling the interests of the members of the Management Board with those of the shareholders and thus promoting sustainable entrepreneurial approaches. 162 alstria Annual Report 2018 Corporate Governance REMUNERATION OF THE SUPERVISORY BOARD MEMBERS The remuneration system for the members of the Supervisory Board is resolved upon by the Annual General Meeting of the Company. The last adjustment to the remuneration system became effective on January 1, 2018. 1. REMUNERATION IN THE 2018 FINANCIAL YEAR The total remuneration for the Supervisory Board members in 2018 amounted to EUR 525 k. The remu- neration for the individual Supervisory Board members for the 2017 and 2018 financial years is as follows. in EUR k Supervisory Board mem- ber Dr. Johannes Conradi Dr. Bernhard Düttmann Stefanie Frensch Supervisory Board func- tion Audit commit- tee Nomination & remuneration committee Finance & investment committee CSR committee Remuner- ation for 2017 Remunera- tion for 2018 Richard Mully Vice-Chairman Chairman - - Chairman - Chairman Member Chairman Member 70.50 65.49 165.00 97.50 Member Member - - Member - Member - - - 51.30 60.00 52.00 57.00 65.00 67.50 Member Member - Member 57.00 70.00 353.29 525.00 Benoît Hérault Member Member Marianne Voigt Member Total Chair- man - - 2. REMUNERATION SYSTEM The members of the Supervisory Board each receive an annual fixed remuneration of EUR 50 k. The Chairman of the Supervisory Board receives an additional annual amount of EUR 100 k; the Vice-Chair- man receives an additional amount of EUR 25 k. Membership in the audit committee entitles a member to an additional remuneration of EUR 10 k, while the chair of the audit committee receives EUR 20 k per year. Membership in the nomination and remuneration committee as well as the finance and investment committee entitles a member to an additional annual remuneration of EUR 7.5 k. The chairpersons of these committees are compensated with another EUR 7.5 k per year. Membership in other committees does not entitle a member to addi- tional remuneration. Members who sit on the Supervisory Board for only part of a year receive a pro rata temporis remuneration. Adjustment of the remuneration system The remuneration system which had been applicable until the end of financial year 2017 was adjusted by the Annual General Meeting of the Company in May 2017, effective January 1, 2018. In order to make the remuneration attractive compared with other enterprises as well as to take into account the Supervisory Board members’ increasing workload and responsibility, a corresponding adjustment of the remuneration was proposed. Especially the comprehensive and time-consuming duties of the Chairman and deputy have been taken into account more strongly by providing differentiation in alstria Annual Report 2018 163 Corporate Governance remuneration levels of 1:1.5:3 for ordinary members of the Supervisory Board, Vice-Chairman, and Chairman. Furthermore, the increased responsibility and workload of the chairpersons of the com- mittees have been taken into account by providing differentiation in remuneration levels of 1:2 for ordinary committee members and chair. Self-commitment to acquire shares The members of the Supervisory Board have agreed upon and entered into a binding commitment to acquire shares of alstria office REIT-AG for an amount corresponding to one time the adjusted fixed annual compensation for their activity as member, Chairman, or Vice-Chairman of the Supervisory Board (without committees and before taxes) and declared that they will hold them for the duration of their membership in the Company’s Supervisory Board (Self-Commitment). The Self-Commitment has to be fulfilled within four years beginning January 1, 2018. By means of this Self-Commitment the members of the Supervisory Board intend to adhere to the guiding principles of the Share Ownership Guidelines introduced for the members of the Management Board and to declare their sustained com- mitment to the Company. 164 alstria Annual Report 2018 REIT Disclosures REIT DISCLOSURES REIT DECLARATION STATEMENT OF THE MANAGEMENT BOARD In relation with the financial statements according to Section 264 of the German Commercial Code (Handelsgesetzbuch, HGB) and IFRS consolidated financial statements according to Section 315e HGB as per December 31, 2018, the management board issues the following declaration regarding compliance with the requirements of Sections 11 to 15 of the REIT Act (German Real Estate Investment Trust Act) and regarding the calculation of the composition of income subject to and not subject to income tax for the purpose of Section 19 paragraph 3 REIT Act in conjunction with Section 19a REIT Act: 1. As per balance sheet date, to our knowledge, 75.19% of alstria’s shares were free float according to Section 11 paragraph 1 REIT Act. This was communicated in writing to the German Federal Financial Supervisory Authority (BaFin) on January 3, 2019. 2. In accordance with Section 11 paragraph 4 REIT Act, as per balance sheet date, no shareholder owned directly 10 % or more of our shares or shares of such an amount, that he holds 10 % or more of the voting rights. 3. In relation to the sum of the assets pursuant to the consolidated statements less the distribution obligation and the reserves pursuant to Section 12 paragraph 2 REIT Act a) as per the balance sheet date the immovable assets amounted to EUR 3,994,659 k which equals to 95.54 % of the assets, therefore at least 75 % of the assets belong to the immovable assets; b) the assets belonging to the property of REIT service companies as per balance sheet date which were included in the consolidated statements amount to a maximum of 20 %, namely EUR 1,634 k and therefore 0.04 %. 4. In relation to the sum of the entire sales revenue plus the other earnings from immovable assets pursuant to the IFRS consolidated financial statements (Section 12 paragraph 3 and 4 REIT Act) a) for the financial year 2018, the entire sales revenues plus other earnings from immovable assets amounted to EUR 645.7 m. This equals 100% of total revenues plus other earnings from immovable assets; b) the sum of the sales revenue plus the other earnings from immovable assets of REIT service companies amounted to EUR 43 k in the financial year 2018. This equals 0.01 % of total revenue plus other earnings from immovable assets. alstria Annual Report 2018 165 REIT Disclosures 5. In the financial year 2018, a dividend payment of EUR 92,170 k for the prior financial year was distributed to the shareholders. The financial year 2017 resulted in a net gain amounted to EUR 50,605 k according to commercial law pursuant to Section 275 HGB. 6. alstria office REIT-AG’s dividend does not derive from already taxed parts of the annual profit. 7. Since 2014, the Group has realised 28.04 % of the average portfolio of its immovable assets and therefore did not trade with real estate according to Section 14 REIT Act. 8. On balance sheet date the Group’s equity as shown in the IFRS consolidated financial statements was EUR 2,684.1 m. This equals to 67.19 % of the value of the immovable assets which are shown in the consolidated financial statements in conformance with Section 12 paragraph 1 REIT Act (Section 15 REIT Act.). Hamburg, February 21, 2019 alstria office REIT-AG Olivier Elamine CEO Alexander Dexne CFO 166 alstria Annual Report 2018 REIT Disclosures REIT MEMORANDUM AUDITOR’S MEMORANDUM ACCORDING SECTION 1 (4) REIT ACT To alstria office REIT-AG, Hamburg As auditor of the annual financial statements and the consolidated financial statements of alstria office REIT-AG, Hamburg, for the financial year from January 1 to December 31, 2018, we have au- dited the information given in the attached declaration of the management board members for the compliance with the requirements of Section 11 to 15 of the REIT Act and the composition of the proceeds concerning the pre-taxation of proceeds according to Section 19 (3) and Section 19a REIT Act as of December 31, 2018 (hereinafter referred to as “REIT declaration”). The information given in the REIT declaration is in the responsibility of the management board of the Company. Our re- sponsibility is to express an opinion on the information given based on our audit. We conducted our audit considering the audit guidance promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW): Particularities concerning the au- dit of a REIT stock corporation according to Section 1 (4) REIT Act, a pre-REIT stock corporation ac- cording to Section 2 Clause 3 REIT Act and the audit according to Section 21 (3) Clause 3 REIT Act (IDW PH 9.950.2). Therefore we have planned and performed our audit to make a judgment with reasonable assurance if the free float ratio and the maximum stock ownership per shareholder ac- cording to Section 11 (1) and (4) REIT Act agrees with the announcements due to Section 11 (5) REIT Act as of December 31, 2018 and if the provided information concerning the requirements of Sec- tions 12 to 15 REIT Act and the composition of the proceeds concerning the pre-taxation of proceeds according to Section 19a REIT Act is appropriate. It was not part of our engagement to fully assess the companies tax assessments or position. Within our audit procedures we compared the infor- mation concerning the free float ratio and the maximum stock ownership per shareholder according to Section 11 (1) and (4) REIT Act provided within the REIT declaration with the announcements due to Section 11 (5) REIT Act as of December 31, 2018 and agreed the provided information concerning the requirements of Sections 12 to 15 REIT Act with the information disclosed in the annual financial statements and the consolidated financial statements of the Company. Furthermore we tested the adjustments made to the valuation of immovable assets held as investment for their compliance with Section 12 (1) REIT Act. We believe that our audit provides a reasonable basis for our opinion. In our opinion based on the findings of our audit, the information given in the REIT declaration concerning the free float ratio and the maximum stock ownership per shareholder due to Section 11 (1) and (4) REIT Act agrees with the announcements made according to Section 11 (5) REIT Act as of December 31, 2018 and the information provided concerning the compliance with Sections 12 to 15 REIT Act and the composition of the proceeds concerning the pre-taxation of proceeds according to Section 19a REIT Act are appropriate. This memorandum is solely provided for submission to the tax authorities of the city of Hamburg within the tax declaration according to Section 21 (2) REIT Act and alstria Annual Report 2018 167 REIT Disclosures is not to be used for other purposes. The order in whose fulfillment we provided above-named services for alstria office REIT-AG was based on the General Terms and Conditions for Certified Public Accountants and Auditing Companies dated 1 January 2017 (Annex 3.). By acknowledging and using the information contained in this memo, each recipient confirms that he / she has taken note of the regulations made therein (including the liability regulation under no. 9 of the General Conditions of Contract) and acknowledges their validity in relation to us. Berlin, February 21, 2019 KPMG AG Wirtschaftsprüfungsgesellschaft [Original German version signed by:] Schmidt Wirtschaftsprüfer [German Public Auditor] Drotleff Wirtschaftsprüfer [German Public Auditor] 168 alstria Annual Report 2018 Financial Calendar/Imprint FINANCIAL CALENDAR/IMPRINT FINANCIAL CALENDAR Events 2019 May 22 May 7 August 13 November 5 CONTACT/IMPRINT Annual General Meeting Publication of Q1 Interim report Publication of Q2 Half-year interim report Publication of Q3 Interim report Publication of sustainability report alstria office REIT-AG is a member of DIRK (Deutscher Investor Relations Verband, the German Investor Relations Association). Other reports issued by alstria office REIT-AG are posted on the Company’s website. Forward-looking statements This annual report contains forward-looking statements. These statements represent assessments which we have made on the basis of the information available to us at the time. Should the assumptions on which the statements are based not occur, or if risks should arise the actual results could differ materially from the results currently expected. Note This report is published in German (original version) and English (non-binding translation). Contact Investor Relations Ralf Dibbern Phone +49 (0) 40 22 63 41−329 +49 (0) 40 22 63 41−229 Fax E-Mail rdibbern@alstria.de alstria Annual Report 2018 169 alstria office REIT-AG www.alstria.com info@alstria.de Steinstrasse 7 20095 Hamburg, Germany + 49 (0) 40 / 22 63 41-300 Danneckerstrasse 37 70182 Stuttgart, Germany + 49 (0) 711 / 33 50 01-50 Elisabethstrasse 11 40217 Düsseldorf, Germany + 49 (0) 211 / 30 12 16-600 Rankestrasse 17 10789 Berlin, Germany + 49 (0) 30 / 89 67 795-00 Platz der Einheit 1 60327 Frankfurt / Main, Germany + 49 (0) 69 / 153 256-740 BUILDING YOUR FUTURE

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