Commercial real estate bank Aareal Bank has told Activist Insight Online it is discussing executive remuneration with shareholders, after it received criticism from activist investor Petrus Advisers.

Petrus, a fund led by Till Hufnagel and Klaus Umek, lambasted the company’s top echelon for being overpaid for poor performance, noting that the management team took home between 12 million and 19 million euros per year between 2015 and 2019. The criticism is part of a campaign by Petrus to cut costs and double the bank’s return on equity from around 5.7% in 2019.


An Aareal spokesperson told Activist Insight Online that the remuneration system is being reviewed by regulators on an ongoing basis and was a topic for discussion “during corporate governance roadshows for investors.” As part of that exercise, Aareal said it will put the system to a shareholder vote in 2021, which is likely to take place in May. “In this context, the supervisory board has maintained an ongoing dialogue with investors, and will continue to do so,” Aareal said.

Starting in 2021, all German companies will be obliged to have votes on their remuneration report each year and remuneration policy every four years, as per a European Union shareholder rights directive. A vote on the remuneration report will not be mandatory until 2022. Unlike the U.K., German companies previously had no obligation to put their remuneration reports to a shareholder vote each year. Typically, a remuneration committee of the supervisory board makes these decisions, including whether and when to put these pay structures to a shareholder vote.

Petrus does not appear to have a problem with the structure of the executive pay, but rather with the amount of fixed salaries and bonuses, as well as the size of the management team. “The system as such isn’t bad, it is the actual amounts,” Hufnagel told Activist Insight Online.

Aareal explained that “the remuneration system as a whole” will be subjected to a shareholder vote next year, but “not the specific amounts.”

It is unclear what other shareholders think of Petrus’ campaign. Deka Investment, a 10% shareholder, and Teleios, which owns 5%, declined to comment when approached by Activist Insight Online. Hufnagel said he has been in contact with shareholders and believes they agree with him. “I would be very surprised if any of the shareholders would agree that the management team should be paid 19 million euros,” Hufnagel said.

Dr. Alexander Juschus, a managing partner at Governance & Values, which advises institutional investors, said the pay is indeed a bit steep. Fixed pay for management team members is 45% of total pay, which Juschus said is unusual for Germany, where fixed pay sits at between 25% and 35%. Marija Korsch, the supervisory board chair, received 300,000 euros – three times higher than most regular board members. Usually the chair gets twice as much in Germany, according to Juschus.

Long-time engagement

Hufnagel said Petrus started engaging with Aareal behind the scenes four years ago, when it realized that the company was a commercial real estate bank that also owned a promising software business in Aareon, which provides software solutions for housing management, including customer relationship management, document management and payment services. “We struggled to understand why would a bank own a software business,” Hufnagel said.

In 2019, the opportunity was also seen by fellow activist Teleios Capital, which built a stake and then moved to push the company to sell its software business. Petrus stayed on the sidelines but behind the scenes it expressed its desire for a spinoff of the software unit, contending that there is huge upside for the unit on a standalone basis.

Aareal eventually reached a compromise with both Teleios and Petrus by agreeing to sell a 30% stake in Aareon to private equity firm Advent International for 260 million euros this summer. Hufnagel said he begrudgingly agreed to support the deal with Advent, after the company convinced him that the business is not ready to operate as a separate entity. Yet the activist believes that eventually Aareal should spin off Aareon, arguing the firm could be worth between 2 and 3 billion euros and “hence more than the banking part of Aareal – making a separation a very natural process.”

Hufnagel sees value in both banking and software. He believes the company’s expertise in commercial real estate is a good asset, but the return on equity needs to be improved.

The bank’s poor return on equity is partly due to high cash balances by the European Central Bank (ECB) in light of the coronavirus pandemic. In April, it scrapped the 2019 and 2020 dividend to comply with ECB guidance but said it will resume the payout once the central bank eases the restrictions.

However, Hufnagel says more needs to be done. “Our message was not pay us the dividend and everything is fine. Our message was even if you are allowed to pay the dividend, you would still haven’t fixed the problem in terms of ROE.”