Aroundtown Sa Ord

Thank you and good morning, everybody. Thanks for joining us for Around Town's Q3 2022 results call. You should have received our corporate news and you can view this presentation on Around Town's website, either on the home section or under financial reports of the investor relations section. As said, I am Katrin Petersen, Around Town's group head of communications. With me today are CEO Barak Bahen, CFO Eyal Ben-David, Chief Capital Markets Officer, Oshri Massachi, Executive Director, Frank Rosin, and Investor Relations, Timothy Wright, as well as representatives from Grand City Properties. For the duration of the call, all participants will be in a listen-only mode. Following our presentation, you will have the opportunity to ask questions, and we have asked you before to send your questions via email to info at aroundtown.de. Please feel free to continue to send us your questions via email also during this presentation. Again, the email address is info at roundtown.de. I now hand you over to Oshri, who will begin to guide you through the presentation of the results.

Thank you very much, Katrin. Good morning, everyone, and welcome to Roundtown's 9-month 2022 earnings call. During the first nine months this year, the listed real estate segment was impacted significantly by macroeconomic challenges around the globe. From stagflation to supply chain disruptions, volatile capital markets and the European war that keeps us all on edge for over nine months already. With cost inflation and nominal debt yields continuing to be volatile on an elevated level, cash preservation became a high priority. We managed to navigate well-prepared through these times that require tough yet forward-looking decisions. We keep all types of stakeholders in mind while doing so. The positive impact of our continuous disposal activities and liability management from recent years has placed us in a robust cash position with no pressure to raise funds in the near term. This cash position together with signed disposals cover our maturities until the end of 2025. with no short or mid-term pressure to refinance. However, we prioritize cash retention to maintain this important financial flexibility, which will enable us to navigate the company successfully in the next years. Any additional funds will extend this timeline, but more on this later. Although our operations continue to perform well, we remain concerned about the macroeconomic environment across the market which could potentially lead to a deep recession in our markets. This could impact the rental demand negatively, put pressure on valuations, and create further refinancing challenges. Today, we also announced that we decided not to exercise our option to call the January 2023 perpetual notes at its first call date. This decision was taken due to the current market uncertainties and our focus on cash preservation. We will elaborate also on this during the presentation. Starting on slide four, we summarize our financial highlights achieved during the first nine months of this year, which is a reflection of our efforts to strengthen and improve the fundamentals of our company. We continue to prioritize a strong level of cash and liquid assets to ensure an uninterrupted operational performance. Hence, the liquidity position at the end of Q3 amounted to 2.3 billion euros, which reflects about 16% of our debt level. This level is already after the repayment of over 1 billion euros of short-term debt during the reporting period and does not include signed disposals after Q3. Our KPIs have been improved and we will discuss each of them in more detail later. Moving to slide 5. We demonstrate once again our competitive advantage in finding the right buyers for our assets even in times of rising capital rates. Year-to-date, we signed 1.1 billion euros of asset disposals at a round book value, of which 785 million euros were signed in H1, 175 million euros in Q3, and 170 million euros in Q4 to date. showing our ability to dispose properties also in the most recent market environment. On the left-hand side of this slide, you can see the well-diversified disposal breakdown by asset class and geography. Our value creation efforts to identify development potentials and to successfully dispose them is confirmed by a share of 32% of all disposals. Since early 2020, when the COVID pandemic just started to spread across Europe, together with GCP, we achieved about 7 billion euros of successful disposals over book value, which has placed us in a financially stable position in preparation for worsening of the macro environment. Most of our buyers were real estate companies, private equity, real estate funds, asset managers, as well as sovereign and pension funds. Whilst we recognized vital benefits to our liquidity position from these cash proceeds, we also see a decreasing volume of potential buyers in the market due to the more challenging financing environment for buyers and anticipation for price correction of properties. As a result, we already experience a slower pace of disposals, but note that we are under no pressure to sell quickly and will execute deals only if we feel terms are appropriate. The debt repayments yet to date have reached 1 billion euros. Moreover, we significantly reduced the pace of our ongoing share buyback program and have executed less than 200 million euros of the 500 million euro program that expires end of this year, the majority of which was executed during the first half of this year. On the following slide, we will present our operational results. Following our most recent asset rotation, our portfolio split presents as follows. 44% in offices, 31% in residential, 17% in hotels, together making 92% of the portfolio value. The remaining 8% are in logistics and retail. Due to the low impact on our portfolio by these two segments, we will focus on our operational presentation on the three main asset classes, but you can find additional information on retail and logistics on page 37 in the appendix. Also, with 93% in value, our investment locations maintained its focus on the key European markets with a strong focus on top tier cities in Germany, the Netherlands and London. Follow our long-term strategic investment plan and monitor key European metropolitan regions for accretive acquisition opportunities if and when they arise. In the short term, however, although there could be material volumes of distressed opportunities in the market, we anticipate continuing to be a net seller. On slide 8, you see a snapshot of our diversified and strong tenant structure that is a valuable part of our asset repositioning. Our healthy commercial tenant diversity counts around 3,500 different commercial tenants from various industries and limited exposure to any single tenant. Our 10 largest tenants continue to account for less than 20% of the group's rental income. The diverse tenant structure is further supported by the highly granular residential portfolio of Grand City. Aroundtown's group portfolio platform at the end of Q3 amounted to 29.3 billion euros with close to 1.2 billion euros net rental income run rate and a rental yield of 4.3%. The long wall remains stable at 7.4 years for the group and an IPRA vacancy rate of 7.6%. For the coming periods, we expect some rent increase potential from index commercial rental agreements, but also assume less demand from new tenants, given that we are potentially facing a recession. Depending on the length and severity of a recession, this could also result in existing tenants reducing space to save costs. But reduced new development in the market due to increased construction costs can partially offset some of the potential negative momentum. We break down our office assets on slide 9. This segment focuses mainly on top-tier metropolitan cities in Germany and Netherlands and represents the lion's share of our group portfolio value with a steady 44%. We continue to hold our largest sub-portfolio in offices in key cities such as Berlin, Frankfurt, Munich and Amsterdam, which alone make up 61% of our portfolio office value. Additional key locations of Germany and the Netherlands, such as North Rhine-Westphalia, Rotterdam, Hamburg, Dresden or Stuttgart, are also amongst our top strategic investment locations. With a balanced average lease term of 4.3 years and no significant dependency on a single tenant or location, we continue to maintain a well-diversified tenant structure that should mitigate the risk of market-specific volatilities. The slowdown in supply of new development projects has become evident in the market as replacement and financing costs continue to rise, providing support to demand. Our commercial rental contracts are mostly CPI-linked or have contractual rent step-ups. We expect over €25 million rent growth on an annualized level from index leases this year, of which about €20 million are included as part of September portfolio which will have a full-year effect from next year. The indexation of leases in combination with our high EBITDA margin will support to offset higher operating and interest expenses in the next period. Our vacancy level remained fairly stable at 10.9%, and we recorded 3.3% like-for-like rental growth as of September, mainly due to indexation. Going forward, we remain cautious for the coming periods as we anticipate a potential recession to have a negative impact on office tenants as cost-cutting will become a more dominant topic in such an environment. On the following slide, we point out some facts about the performance of the German office market so far this year based on the latest market data. The IFO Business Climate Index in Germany published last week shows the deteriorating trend since the beginning of the year, which we also experience in the tenants' hesitation when negotiating rental contracts. The labor market in Germany remains strong, and corporates appear to be in better shape than during the global financial crisis. But it's uncertain how robust they will be during a severe recession. We also see that vacancy and rent levels did not show much negative impact so far, But we are concerned this might change next year due to macroeconomic forces or under a lengthy recession period. We take these signals serious and in order to be as good prepared as possible in a more challenging environment, we focus on our cash preservation options available to us. Our strategic long-term investment in the residential sector through Green Street City is reflected on slide 11. This asset class represents the Group's second-largest segment with 31% of the portfolio value. At the end of November, the effective holding rate in Grand City properties stood at 60%, excluding shares, GCP holds, and Treasury. The contribution of residential assets located in strong metropolitan locations of Germany plus London continues to have a stabilizing impact on the diversification of the Group's portfolio. This becomes evident particularly in such uncertain times when we see that our diversified portfolio reduces the exposure risk to macroeconomics for any single asset class or location. Overall, Grand City's portfolio recorded a like-for-like rental growth in September of 3.1%, of which 0.8% derived from occupancy increase and 2.3% from in-place rent growth, driven by the continuous supply-demand gap in Germany. With 78% value exposure in Northern Westphalia, Berlin, Dresden, Leipzig, London as organic growth drivers, Green City is complementary to Roundtown's top-tier investment locations and balances the portfolio between asset classes with different fundamental drivers. In addition to German key cities such as Munich, Hamburg, and Frankfurt, the London portfolio counts over 4,400 units, including pre-marketed units in the pre-let stage, 19% of Grand City Properties' portfolio value. The occupancy level continued to improve in this location due to increased demands and stands now at 96%. Starting with an occupancy level of less than 90% before the outbreak of the pandemic, this shows not only the healthy demand for this asset class in London, but also the operational achievements of the local teams. The rents in London are mostly unregulated with shorter-term leases, which enables us to capture the inflation impact faster and allows for frequent adjustments to market rent levels. Barak, please continue.

Thank you, Oshri. In slide 12, we present our hotel portfolio amounting to 17% in value of our overall investment portfolio. We aim to ensure strong geographic diversification across multiple operators and hotel types. Our hotel portfolio remains stable with 15 years vault and 86% in value in the four-star category. Although we reduced our hotel exposure over recent times by selling selectively, We continue to maintain our investment focus in top cities across European countries, like Germany, Netherlands, Belgium, the UK, France, and others. As you can see on the following slide, the number of laser travelers reached this year pre-pandemic levels, while its business travels are not back yet in the same numbers, and market reports expect the path to full recovery of the European hotel market stretching to 2024. Let's move to slide 14, when we show you this impact also on our portfolio. The end of the last restrictions in May this year has marked the beginning of the recovery for the hotel segment in our markets, and we continue to see the improvement in our rent collections in line with our expectations so far. As Q1 was still significantly impacted by existing travel restrictions across Europe resulting in only 45% collection rate, the second quarter showed a significant improvement to 70%, as most restrictions in May were lifted and the travel rebound gained sustainable momentum for the first time in two years, unlike the short-lived summer rebounds we saw in the past two years. Q3 was influenced mostly by increasing leisure travelers, and we saw our hotel collection rate climb to 80%, a level that continued also in October. Business and international travelers are not back yet in full numbers. as there are still many virtual meetings and conferences, but we see that virtual alternative is continuously retreating as an option. MICE hotels will therefore continue to recover over the coming two years in the absence of further restrictions. Our long-term fixed contracts with over 30 different third-party operators have no variable component, and we therefore maintain the same rental baseline for our collection rate calculation since before the pandemic. We maintain our full year expectation for the hotel collection rate at 65 to 70% for 2022, which includes the week Q1 performance. The collection for Q2 to Q4 this year is expected to be around 75%. Although we expect a continuity of the hotel recovery over the coming periods, we are aware of the significant negative impact on our external operators' profitability due to the ongoing cost inflation, shortage of qualified staff, and ongoing subdued international and business travelers. The potential recession is an additional threat to the recovery of the hotel business and may impact all segments. We present on Site 15 the composition of our development and building rights portfolio, which accounted for 5% of the total assets at the end of Q3. Although this is not material on a group level, it provides an additional value creation driver and also a source of funds if disposed without reducing the recurring operational profits. Our strategy remains to identify additional value on land plots of existing assets we already own by obtaining sellable building permits or conversion rights. We are planning to self-develop only the most accretive development opportunities where we see attractive upside at low risk from high pre-let ratios. Given the increased material, energy, and wage inflation, we do not have any major construction projects and were therefore not materially exposed to the increasing prices. The timing of new projects will be re-evaluated continuously based on the updated pricing levels. And in general, we plan to dispose more of our development rights. During the reporting period, we signed disposals of 200 million euros of development rights around book value. We continue to see further demand, but as said before, in lower volumes, which will affect the result of disposal going forward. The composition of development rights is illustrated on two pie charts. Berlin is the dominant and most attractive location in Around Towns development portfolios. The locations of our largest development rights include Berlin, Paris, Frankfurt, Munich, and Rotterdam. These five hubs together make up around 68% of this segment. In terms of our development rights breakdown, 44% of these segments are offices, 38% residential and mixed use, and the remaining 18% for hotels. In the appendix of this presentation, you can find detailed explanation for some of the development projects, plus some new projects for which we obtained pre-permits. Slide 16 summarizes some of the key defensive measures to balance the ongoing operational cost inflation and increase in interest expenses. This year and going into 2023, we continue to discipline with our CapEx investment as we want to maintain a strong level of liquidity and focus mainly on essential CapEx and energy improvement investments. This slide validates, again, our top-line growth drivers, which also serve as defense against cost inflation. As we discussed most of these points already, we just want to highlight the well-distributed commercial lease expiry profile at the bottom of this slide, with no single year being exposed significantly more than the average of the next decade, providing us with a steady relating volume over the next years to come. To wrap up our operation sections on the following slide, we want to elaborate on the potential impact on each asset class we see from rising energy prices. Although the German government has announced support for households and corporations by proposing a price cap on gas, a decision for rising electricity energy costs is still outstanding, and whatever the support will look like, it's only going to limit the effect on tenants. So far, Around Town's commercial portfolio shows limited impact for cost inflations, However, if this cost inflation will continue, we think that a certain impact will be inevitable. As we expect a greater cost burden on residential tenants, we anticipate a higher degree of price sensitivity on the gross rental amount going forward and limited rent increases in the short term. From our third-party hotel operators, we already received feedback that the energy and wage inflation significantly impact their profitability margins. However, This impact is already reflected in our collection rates, as increased average daily rates have not been able to compensate fully the increased costs. Nevertheless, we have conservatively created the provision in the amount of €25 million in the event that energy prices will have a more negative effect on the rent than we currently anticipate. I'll now hand you over to Eyal, who will present the financial part.

Thanks, Barak. Please move to slide 19, where we present the profit and loss results for the first nine months of the year. Our recurring net rental income resulted in €903 million, a growth of 19% year-over-year, and as seen on the chart, it is resulting mostly from the consolidation of GCP and is partially offset by disposals. As a reminder, assets that are already marked for sale are excluded in this figure, as well as in the adjusted EBITDA and FFO, despite their positive contribution, as this will be non-recurring. Our like-for-like net rental income, excluding hotels, amounted to 3.4% in September. Including hotels, the like-for-like amounted to 2.6% overall, of which 3% comes from in-place rents and minus 0.4% from occupancy decrees. We recorded property revaluations and capital gains in the amount of €409 million. As the hotel segment continued its recovery during Q3, the rent collection from hotel operators increased and we booked €15 million extraordinary provision in Q3, bringing the total for the reporting period to €60 million, 40% less compared to the same reporting period last year. Half of that was accounted for only in Q1 this year. Administrative and other expenses were stable at 45 million euros, and finance expenses were up 11 million euros year over year to 141 million euros, mainly due to the consolidation with GCP. Our average cost of debt increased during the third quarter to 1.3%. Other financial results came in at 175 million euros. The fair taxes increased to 127 million euros, and were comprised mainly of the fair tax expenses relating to revaluation gains. As a result, the net profit for the first nine months was 11% lower year over year, and amounted to 578 million euros, generating 27 cents earning per share. On slide 20, we review our portfolio valuation. As mentioned before, we recorded property valuations and capital gains in the amount of over 409 million euros, About 85% of our properties were evaluated in the reporting period, mostly in the first half of the year. However, updated valuations of the portfolio will be included in the full year 2022 results. When comparing the December 21 valuation with that of September 22, we underlined the stable like-for-like evaluation gains of 1.3%. You can see the breakdown per segment on the slide. Despite the positive evaluation results so far, we defensively anticipate some weakening of valuations in the next 12 to 18 months of around 5%, depending on the segment and markets. Please note that the sharp increase in inflation we experience has led to rent increases across our commercial rental agreements. This will partially absorb the impact of rising discount rates. As you can see from the middle of the slide, Our average portfolio valuation showing a gap of 1,200 euros per square meter, around 45% buffer to the current replacement cost. This is not factoring costs for land, which have materially increased in the last years. On slide 21, we illustrate the adjusted EBITDA before the contribution from joint ventures, which increased in September year over year by 15%. from 625 million euros to 718 million euros, predominantly as the result of the consolidation with GCP and contribution of the like-for-like, but offset by disposals. The adjusted EBITDA calculation is after excluding 10 million euros EBITDA contribution of assets for sale and therefore referring to the recurring long-term portfolio. Positive contributions continue to derive from our proportional holding in global worth and other JV investments which contributed €40 million in total as of September. Looking at our transform operation on slide 22, we recorded an FFO1 of €275 million, or 25 cents per share for the reporting period, which is within our full year guidance expectations. Year over year, this reflects a 3% increase on an absolute level. Further positive effects have become evident from our past share buyback program as they increase our FFO per share by 9% year over year, as seen on the lower right-hand side of the page. We lowered our share buyback volume since Q2 this year already, in line with our focus on cash retention. The total profit over cost from disposals in the reporting period amounted to €290 million as a result from the successful completed disposals of 1.3 billion euros. Year over year, the FFO2 decreased to 564 million euros from 650 million euros. On the next slide, we provide an overview of our APRA NTA and NRV metrics. Compared to December 21, the total APRA NRV and NTA remained stable and increased by about 1% to 13.2 billion euros and 11.6 billion euros respectively. The positive results are also reflected on a per share basis, with 3% and 2% growth in both KPIs for the same period, respectively, or 4% and 5% if adjusted for dividends. Oshri, please continue.

Thank you, Yair. On slide 24, we emphasize our healthy balance sheet fundamentals and conservative debt metrics, which are a result of our disciplined capital structure. In recent months, it has become more and more important, in our view, to focus on cash preservation and ample liquidity during these challenging times of geopolitical unrest and negative macroeconomic impacts. Nominal debt yields have become much less attractive compared to last year's. Therefore, it has become a significant challenge for the listed real estate players to identify attractive capital sources and manage capital allocation. Since December last year, we have been able to keep our LTV level stable around 40%. APRA LTV, which assumes perpetual notes fully as debt, stands at 54%. We see the LTV of 40% as a correct measurement of the company's risk level, as the perpetual notes are equity in all aspects, including IFRS accounting and fund covenants. There is no characteristic related to the perpetuals. There's no debt characteristic. The average debt maturity is 5.3 years with current average cost of debt at 1.3% and an interest cover ratio of 5.2 times. Our current 96% hedge ratio is expected to be reduced to 85% over the next year due to the expiration of some hedging instruments. This will increase next year's average cost of debt to approximately 1.6% based on expected mid-swap levels. While secured financing is still more attractive than unsecured corporate debt, we also notice that banks become more selective and the lending process takes much longer nowadays. Therefore, maintaining a high ratio of unencumbered assets supports the achieved secured financing at rates lower than current bond yields. We still maintain 83% or 23.5 billion euros of the portfolio value free of year, which provides additional sources of capital. The net debt to EBITDA stands at stable 12.2 times annualized at the end of September, down from 12.8 times year over year. As our bond covenants have moved into the spotlight in recent times, we want to highlight our significant headroom in relation to each covenant on the following slide. It's important to note that the perpetual notes are treated as full equity for the covenant calculations. To emphasize a key covenant, total net debt to total net assets, you see at the top of the slide that we stood at 34% in September, which is well below the 60% covenant thresholds. In a stress test scenario, our September total asset values need to drop by 40%, which implies over 15 billion euros decrease in property values, before this covenant will be triggered, all else being equal. On slide 26, we place our strong liquidity position in the spotlight. Given the challenging financial market and rapidly increased cost of finance in the market over the course of this year, We have less pressure today from the many years of disciplined and successful early refinancing achievements. On the right hand side of this slide, we break down our current cash and upcoming signed disposal proceeds as of September this year, amounting to about 3.2 billion euros and covering our debt maturities until the end of 2025. On top of that, we have revolving credit facilities available in the amount of over 1 billion euros without MEC clause. As mentioned earlier, we see bank financing more favorable than bond financing, and we benefit from the strong long-term relationships we fostered with many banks, even in times when bank financing yields were less attractive than bond financing yields. Since the outbreak of the war in the Ukraine, about 290 million euros of secured debt were raised to date. Our 23.5 billion euros of unencumbered assets place us in a strong position to leverage from further bank financing. I will now hand you over to Frank to explain the rationale about our decision for the January 23 perpetual notes on slide 27.

Thank you, Osprey. After careful consideration and many discussions with our stakeholders, we reached the decision not to exercise our option to call the perpetual note with the January 23 call date. The unfavorable economic conditions that we see currently in the market in respect of rising interest rates, inflation, potential recession, and the potential negative impact on our business led us to reach this decision. The decision is also based on our priority to preserve cash, and it is most economically sound decision to make in these volatile and uncertain times. We track the market continuously And we were hoping that by this day, the market environment would have been more positive to allow us to feel comfortable with deploying 370 million euros on an equity instrument. Unfortunately, this is not the case. Our offer to the note holders was to refinance this note long prior to this call date. At the beginning of 2021, two years prior to the call date, we have tendered the January 23 perpetual note and offered the perpetual holders to cash out with the premium. Out of the 600 million euros, about 230 million euros accepted, and the remaining did not accept our offer and decided to stay with the note. It was clear to us back then that we will try with a new tender during 2022, closer to the call date. However, as we all know by now, the market conditions changed dramatically and the reissued coupon is significantly higher than the reset coupon. Our decision takes into consideration the best interest of the company and its stakeholders. The decision for each node will be taken closer to its own call date, such as the next one in July 2023. From an FFO perspective, considering that both ourselves and GCP don't call any of the nodes in 2023, the impact on our FFO will be an additional cost of about $60 million on an annualized basis based on the current market conditions. From a credit rating perspective, we do not expect a negative impact on Around Town's credit rating by the S&P for not calling this note. We do see our economic rationale for the January 23 perpetual note in line with S&P's view, especially following the publication of their note last week. We would like to mention that we remain committed to retain perpetual notes as part of our long-term strategic capital structure. We want to share with you the opinion of S&P on non-cold hybrid capital instruments on slide 28. The quotes from this document were published by S&P on November 24 of this year. So it is up to date with high relevance to the current market environment for perpetual notes that we're navigating S&P wrote, hybrid capital instruments are designed to act like senior debt when credit conditions are good. They pay a known coupon and redeem on predictable dates. When credit market conditions weaken, the equity-like characteristics kick in. These characteristics include not exercising optional calls if that makes economical sense for the issuer. It is worth to note that S&P believes that there is no automatic link between their rating decision and the removal of equity content of any or all of our issuers' hybrid instruments due to no-call. Even the coupon deferral could be seen as a positive to conserve costs as an issuer. In summary, S&Ps emphasize no-calls are typically credit-supportive, economically rational financing decisions, and they expect the reputation impact to be short-lived. Orsi, please continue.

Thanks, Frank. On the next slide, we continue to confirm our full year 2022 guidance. For the full year, we guide FFO1 to be in the range of 350 to 375 million euros and FFO1 per share to be in the range of 31 to 34 cents, up from 30 cents in 2021. Bottom line, we continue to be well on track to achieving our full year guidance for this year. Based on a 75% dividend payout ratio from FFO1, dividends per share for 2022 should be in the range of 23 to 25 cents. Note that the recommendation for dividend payment will be based on the market conditions closer to the AGM invitation in Q2 next year. Finally, on slide 31, we want to emphasize three strategic efforts that we prioritize as we navigate through the current macro and geopolitical challenges. Firstly, we maintain our focus on stable asset classes. We continue to extract the embedded value in our portfolio through our highly experienced operational teams and management. By maintaining strong operations, we ensure a healthy organic growth momentum, even in volatile market conditions. Choosing the optimum asset mix in quality locations supports our rental efforts and allows us to invest more time in the ESG efforts necessary to achieve our long-term goals for the portfolio. Secondly, as we highlighted already throughout this presentation, preserving sufficient liquidity and strengthening our fundamentals through asset rotation and disciplined capital allocation. This is a foundation to reinvest the capital into higher-yielding investments such as new asset acquisitions, ESG investments, debt repayments, or deeply discounted share buybacks. Finally, we place great emphasis on our disciplined and flexible financial profile, coupled with high liquidity and sufficient headroom to all our financial covenants. Having a low average cost of debt, a long debt maturity profile, and sufficient liquidity to cover our upcoming debt issues for the next three years, allows us to weather this current crisis without the need to issue debt at unfavorable terms. This strategy outlook wraps up our Q3 2022 results presentation, and I'd like to hand you over now to Katrin, who will lead the Q&A session.

Thank you, Archie. So before we invite your direct questions, we will now answer questions that we have received by email prior or during this call. Thank you for sending them. For simplicity reasons, we have grouped similar questions in order to answer as many of them as possible. We will now begin, and I will start with the first question. What is the lasting situation of your office portfolio? Could you share what you experience in the market? What are your expectations for the coming periods?

We so far experienced a stable performance supported by the indexation, but potential tenants are very careful about the looming macro risk, which is making them more hesitant. The letting process is taking longer than usual, which results in lower demand in comparison to former periods. The uncertainty is expected to slow down the letting process and potentially can lead tenants to lower their overall expenses and reduce space and rates. On the supply side, we don't expect new projects to start and anticipate delays in existing projects, which will hold growth of supply and might slightly offset the potential negative momentum. Regarding our operation in the first nine months of 22, we have captured 22 million euros of rents through indexation, which have a partial impact on the first nine months of 22 and will have a full impact in the next period. We recorded like-for-like rental growth in the office portfolio of 3.3%, mainly driven by indexation and signed and prolonged 311,000 square meters. Of this, new lettings comprised around 108,000 square meter at an average in-place rent of 13.8 euros per square meter and a vault of 6.3 years. The remaining of 12.7 euros per square meter and a vault of 4.7 years. In recent years, we have streamlined our portfolio through the disposal of non-core properties and a stronger focus on top cities. Additionally, our office portfolio continues to maintain a defensive tenant structure with over 30% governmental and public sector tenants and a long wall of 7.4 years. We entered this difficult market environment well prepared. However, an occurrence of a potential deep recession, which may come, will have an impact across all markets and sectors.

Can you please comment on your revaluation profit? How do you expect your values to develop in the coming period?

We revalued around 85% of our portfolio across all asset types and locations in the first nine months of 2022, resulting in a revaluation and capital gain of €410 million. The revaluations resulted in like-for-like value increase of 1.3%. The strongest results were 1.5% in office and 2.5% in residential, both driven mostly by operational improvements. In Q3 2022 standalone, we only revaluated the small portions of the portfolio. We will update the portfolio values by year-end as part of the annual report. Looking forward, although valuations are supported by higher market trends, good operational results, low supplies of properties in the market, and increased replacement costs, We see the pressure of the high interest rate and magnitude and length of this difficult market environment impacting the discounts and cap rates in a stronger manner. The valuation levels are also linked to the transaction market. We have disposed properties at around book value, which confirm our valuations, but at lower volumes than previously as the market is not liquid as it was in the last years. We wait to see more evidence in the transaction market to indicate the valuation directions. However, we do think that under the existing market condition, we may see valuations to decrease in the next 12 to 18 months by around 5%.

Could you please provide an update on your residential portfolio? Will you continue increasing your position in GCP?

As of September 2022, the residential assets make up nearly a third of our portfolio. As we have increased our position in GCP to 60%, and participated in the script dividend of GCP in July. The operations of the German residential market in general, as well as GCP's portfolio, continue to perform well so far, despite the volatile capital market, mainly due to increasing demand-supply gap. GCP recorded like-for-like growth of 3.1%. Vacancy decreased further to 4.4% as of September. Nevertheless, we do see some headwinds as a result of the significant increase in the cost of living, which has an impact on the disposable income of our tenants. We expect that this will likely have a negative impact on the ability to increase rent in the short term and conservatively assume residential rental growth to be mostly flat next year. We expect that there will be likely also an impact on valuations of the residential portfolio of up to 5% value decrease over the next year. GCP's London portfolio has already seen a small negative value adjustment. As this market is generally more liquid and volatile, property values adjust faster to changes in the macro environment. In the current price levels of GCP's share price, we expect to continue increasing our position in the current city.

Could you please provide an update on the hotel market?

We continue to see a symmetric demand across the segments, with leisure recovering fast, but business travelers taking longer to recover. This year's Q3 was strong for the leisure hotels, reaching pre-pandemic levels. The city hotels improved, but they're still in the recovery stage. In many markets and locations, demand has reached pre-pandemic levels. Rates have increased strongly. As a result, revenues have mostly recovered. However, costs have increased significantly for hotel operators. The hotel operations are impacted by the significantly higher cost of energy, as well as by a combination of higher personal expenses and a continuous shortage of staff, limiting capacity. These factors impact the profitability of the hotel operator and also impact our collection rates. We have seen collection improved materially since the beginning of the year and expect that over the time to stabilize. Our collection rate in Q3 was 80% and so in October. In the nine-month period, we collected 65% as compared to slightly over 40% in the same period of 2021. We expect collection to be close to 70% for full year 2022, including the low Q1 2022 collection rate, which was still heavily impacted by the pandemic restrictions. Excluding Q1, we expect collection to be around 75%. We expect 2023 to have a higher collection rate and to reach close to full recovery by 2024.

What is the impact of cost inflation on your business and how much of that can be offset by your CPI index leases?

The main cost drivers continue to be energy, which are mainly passed through to our tenants, and material costs, which impact our CapEx projects. We are able to limit CAPEX costs as we have a high level of control over the execution of such projects and can limit part of this at our discretion. We saw an increase of around 10% for regular CAPEX expense and tenant feed-out. We have additionally experienced an increase in personal expenses driven by a continued strong labor market in our locations, as well as from pressure as a result of the higher cost of living, which also impact our employees. Deflationary environment impacts our business mainly from the increased cost of energy, which could have a negative impact on the collection of ancillary costs of our tenants. We thus conservatively created provision in the first nine months of 2022 around 25 million euros for uncollected rents and ancillary expenses. Regarding CPI protection, our commercial portfolio is mostly indexed to CPI or as step-up rents. Therefore, the higher inflation is supporting our top line and offsets higher costs. Nevertheless, we do see macroeconomic headwinds that may impact operation in the coming periods, which may offset the impact of the CPI indexation. Thirty-one percent of our portfolio comprises of residential. The German residential market is rent regulated, and as a result, does not move with inflation as quickly. but takes several years to be fully reflected in the market trends. Increases are limited to 20% in three years or up to 15% in 10 markets. Furthermore, around 20% of GCP's portfolio is located in London with a short-term lease structure and as a result, faster conversion of CPI. However, we do see the increase in cost of living negatively affecting households and therefore expect that in the short term, rent will remain broadly stable.

You provide some more details on your rental like-for-like. What is your expectation for the next period?

So, like-for-like rental growth of 2.6% in the 12-month period ending September. This was driven by 3% in-place rental growth offset by 0.4% occupancy decrease. The rent like-for-like came mostly from the office and residential portfolio and excluding hotels like-for-like rental growth was 3.4%. Higher in-place renter growth was driven mainly from indexations, but also from higher rents of new lettings, further supported by in-place rent growth in the residential portfolio. In the hotel portfolio, rent like for like remained flat as we have postponed rent increases until we see higher recovery. Regarding the outlook, here we remain cautious. We see CPI indexation as a continued driver of like-for-like rent to growth also for the next year, which will incorporate the current inflation. However, we do see macroeconomic headwinds developing, which may have negative impacts on new lettings and market rent levels, which could offset the impact from indexation. Furthermore, the residential portfolio is facing negative headwinds due to the significantly increase in cost of living. As a result, GCP expects like-for-like rental growth to be broadly flat in the short term. We expect that the combined impact of these factors will result in flat or even negative like-for-like in the coming periods.

Could you provide an update on your disposals? Do you expect to continue disposals in the current market?

The transaction market has slowed down since July. The uncertainties and increase in funding costs held back potential buyers. which are waiting to see how the market evolves and what are the updated price for properties. We managed to continue disposing properties also in the current environment, although at slower pace. In the first nine months, we sold at book value. Since July 2022, we signed nearly 350 million euro deals, with recent deals slightly below book values. However, we do receive offers for below book values and believe that future transactions might include disposal below book. Our ability to dispose properties in this challenging environment is part of our competitive advantage. We have the deal sourcing capabilities to find the right buyer for our assets, which today is more important than ever. It should be mentioned that we are under no financial pressure to dispose properties. Year to date, we have used over 1 billion euros of disposal proceeds to repay debt and used around 200 million euros for share buybacks. The reminder of the proceeds supports our strong liquidity position and thus reduces our net debt while we maintain our flexibility with no material debt maturity in the next few years. We intend to keep liquidity from disposals, mainly for developing and seize cash preservation in the current market as a key to further strengthen the company.

What is the appetite for mortgage banks to lend money?

We are in the opinion that the appetite is there, but this difficult market found many banks unprepared for the demand they receive for secured financing, and therefore the process takes much longer than before. The increased demand also makes banks more selective on the project they finance. Our assets and country diversification are therefore key in obtaining the funds as mortgage banks also want to diversify and not only focus on lending to one asset class or location. As a result, our diversified exposure to different markets and locations allows us to deal with a wide network of mortgage banks. We believe that our assets quality and credit rating combined with the strong banking relationships we have will enable us to utilize this source of funding successfully. Important to note is that we have over two years until material amounts of our debt will mature. So we are in no rush to secure funding, but we are aware that that the lending process currently takes longer than usual, and as we are always planning ahead, we are already preparing all our options now. We so far see margins of secured financing in the range of 1% to 2%, depending on asset type and location, for a period of five to seven years, which together with mid-swap result at 3.5% to 4.5% all-in interest rate, which is more attractive than a secured market. While we don't assume so far our planning The market may have stabilized in the next years and it could be that unsecured funding will become relevant again.

How much secured financing can you raise according to your covenants?

As a large majority of our debt is unsecured and we have a low leverage, we have a very high amount of unencumbered assets of nearly 24 billion or 83% of the portfolio. We have a very high headroom to our covenants, which provide us flexibility to access the secured lending market. Technically, we could replace our unsecured debt with secured debt over the next years. Well, we assume that this will not be necessary as the unsecured market may recover in the midterm, in which case our funding sources will remain a well-balanced mix. It does provide us flexibility.

Considering the market environment and your strategy to retain cash and your decision on not exercising your option to call the January perpetual, will you pay a dividend next year?

We have a dividend payout policy, but generally paying dividend is always subject to market conditions. We currently set a high priority to preserving cash. We will need to assess the situation going forward and decide whether to pay a dividend based on the market environment closer to the mid-next year.

Now that you have decided not to exercise your option to call the January perpetual notes, did you decide about the perpetuals with the call date in July 2023?

As the market continues to be highly volatile, we will take a decision closer to the call date and assess what is best for all stakeholders at that time. Regardless of our decision, this equity instrument will remain equity and are strengthening our capital structure, which becomes even more apparent in times such as this. We want to take the right decision for the company and all its stakeholders, and therefore we keep all options open. We still have a few months left until July with currently fast change in markets.

Would you consider deferring the perpetual coupon payments? How will this impact your dividend payments?

In order to distribute dividends or do a share buyback, we must pay all perpetual coupons. We see preservation of cash as one of our main targets in the next period. We currently cannot estimate the magnitude of the difficult market environment on valuations, leverage or liquidity. Therefore, we keep in our toolbox all options that will enable us to retain sufficient liquidity. This includes potentially not paying dividends as well as deferring the perpetual principal and coupons.

You have a significant cash balance which covers around 20% of your debt and considering ongoing disposals, this will increase further. Why don't you use it to repay debt and or perpetual notes?

Maintaining a strong liquidity has always been part of our strategy. We prefer to maintain a strong cash balance which on one hand provide a security caution in times of stress. Debt and perpetual balance reduction would clearly be an opportunity, but currently with the recession looming, we put the focus on cash retention, even though we have no material debt maturities in the next years. We can still repay debt and or perpetuals at the right point in time.

Bond yields remain high and interest rates have increased further in recent months. How do you expect this to impact your business? Will you raise new debt in the near future? Do you expect a negative impact on your valuation?

We have always taken a proactive approach to managing our debt profile and in recent years have taken advantage of favorable financing rates to extend our maturity schedule, as a result of which we have no material maturities until early 2025. We continue to focus on maintaining strong liquidity positions which amounts to 2.3 billion euros of cash and liquid assets as of September, further supported with over 1 billion euros of undrawn credit facilities, which are not subject to MAC. We are working in increasing liquidity by try taking more secured financing. We are in discussion with wide range of banks regarding financing opportunities. Furthermore, we currently have disposal process of around 830 million euros comprising of vendor loan, as well as signed but not yet closed transactions, which are not included in our current liquidity position, but which will provide additional liquidity in the coming periods. And on top, we are in negotiation for disposing additional several hundred millions of properties. The impact in the business is not clear yet, adding mixed signals. Latting performance has slowed down. However, we're seeing higher rents from indexations and continue to grow out our rent. However, we're cautiously looking ahead to see how the trend continues, which depends on the severity of the market's turmoil and the length on high inflation rates. Regarding the impact on valuations, we currently expect some negative impact from the increased yields. However, the environment remains volatile. and it is hard to assess exactly where yields will stabilize and how much of this will flow into property valuation, as there are also offsetting factors such as supply-demand imbalance and CPI index pieces. As mentioned previously, we currently expect a value decrease of up to 5% next 12 to 18 months.

Did you obtain any further development rights, or were you able to sell any? Would you consider developing or prefer to sell in this current environment?

Especially this year, we have made very good progress and obtained several high-valued building rights in top locations, of which we have sold some successfully, resulting in strong gains for the company, as we have elaborated in previous periods. Since our H1 publication, we continued with the strong progress and obtained further development rights, which are also presented in the appendix of our presentations, as usual. We have filed for a pre-permit for an office building in central Berlin next to Kudamm in Charlottenburg, which is a densification as well as roof addition in top office market in Berlin, which adds 10% to 15% more space. Further, we have obtained the pre-permit for another office property in central Berlin in Bergmannstrasse, which is one of the Berlin most sought-after residential districts. The pre-permit is for conversion to residential floor additions, and densification, which almost doubles the space. You can find more details on our development rights in the appendix of our presentation. Besides several successful disposals of development rights we have had in the past two years, we recently signed the disposal of two further development rights. One is an office property with high vacancy in Frankfurt Niederrath, for which we obtained a pre-permit for conversion into residential. Another is in The Hague, Netherlands, for an office property, which we received the rights for demolition and a 17-meter residential tower instead. Both deals were conditioned on receiving permits, which we successfully managed. Generally, we analyze our portfolio for internal value creation. We then aim to achieve the building permits and decide from there. We are in no rush to act after receiving the permits, as they are granted for several years, What we prefer to continue selling these as this materializes our value creation process.

Given that new financing rates are materially higher than your current cost of debt and that the perpetual notes reset coupon is much higher than the original coupon, how will your FFO evolve in the next years?

The fact that we have a long debt maturity of over five years means that refinancing will come gradually in the next years. We need to see where rates will stabilize in the next years. We see cost of secure debt of around 4% at the current relevant cost of debt of the company and not the unsecured bonds which are traded much higher. We believe that we are in the midst of a very high volatility market due to the uncertainty when inflation will reduce. The fact that we don't have to repay debt until 2025 gives us time for the yields to stabilize. Increasing costs of debt is expected to weigh on our FFO in the upcoming years. However, we do have tools to partially mitigate this impact. It is too early to quantify the impact on the FFO, and we do believe that we have the means and the time to reduce the impact on our future cash flows.

Thank you. So these were the questions that we have received so far. We can now start the open session for your questions. We appreciate if you can ask all your questions at once together, and we will answer them one by one. Thank you.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their telephone keypad. If you wish to move yourself from the question queue, you may press star then two. As a reminder, please ask all your questions at once. One moment for the first question, please. First question is from the line of Paul May with Barclays. Please go ahead.

Hi, everyone. Thanks for taking the questions. I've got five questions. You mentioned continuously about cash retention, but I understand you're still undertaking the share buyback. That doesn't sort of tally in terms of the cash retention that you've mentioned. Secondly, I think you mentioned asset value declines of 5%, I think it was, you said, over the next 12 to 18 months. Looking at prime values, they're down by, I think, sort of 10 to 15-ish percent year-to-date in terms of the yield expansion that has been recorded. Just wonder why your portfolio is performing significantly better than prime office values in Germany. I think you mentioned 1 billion of debt repayment year-to-date. Just looking at the balance sheet, I think debt has only come down by about 362 million. I appreciate it's a bit of consolidation difference with Grand City. and net debts actually increased by 500 million. So just wanted to reconcile that. Looking at the FFO impact of not calling the hybrids, just wonder whether you consider that to be a bit of a profit warning on the FFO, or is that something that was sort of pre-expected? And you mentioned around recession likely to impact office tenants. Have you had any pushback against inflationary rent increases? Just wondered how that sort of negotiations are ongoing or happening. Thank you.

Hi, Paul.

Thank you for the questions. I hope I got all of them. About cash retention and buybacks, we already minimized the buyback level to a very insignificant level, so it's not really pushing or impacting the cash retention. Anyway, the program ends end of this year, so it's in a month, and we will need to consider if we continue. About the valuations, about 5%, that's our current anticipation. We have discussed with our valuers and based on the assets, and remember that our In our opinion, already the existing valuations that we have were conservative, so the impact might not be as big as maybe others that you are referring to. About the repayment of debt, we are talking about the $1 billion is gross debt. From that, we also took some new debt in the reporting period, and some of it or most of it was bank debt that we have taken. as part of working with secured financing. In terms of inflation, so far we see that we get a good response from our tenants on inflation. Many of the tenants are anyway guvies that are paying in time. We don't have any material pushbacks on that. Clearly, if inflation will continue to increase every year, we will reach to a point that we are getting some discussions. But at the moment, we see it okay. About the FFO impact for next year, so we will include it part of the guidance of next year, the potential impact of higher coupons on perpetual notes. Thank you. Next question, please.

Next question is from the line of Rob Jones with BNP Paribas Exxon. Please go ahead.

Good morning, everybody. Thank you for taking my question. I just want to follow up from one of Paul's questions on FFO evolution and is that a profit warning? And indeed, one of the pre-questions you prepped in advance was around FFO evolution in the coming years. The way I understand it from a hybrids perspective is if market conditions don't currently change, and of course we don't know whether that's the case or not, but let's assume that's a base case, your reaction to that would be to continue to not call hybrids. And if we assume a recession environment over, say, the next 24 months, so potentially we could be in a scenario where you don't call hybrids for two calendar years, and the FFO impact for that could be north of 100 million euros, which would imply an FFO cut of about 30%. And clearly in that scenario, you wouldn't even be able to pay the Divi, even if you wanted to. So I just want to understand whether I'm right in my math surrounding an environment where you continue to elect and not call the hybrids. And if you don't call, is there any plans to replace equity components, manually convert, equity raise, et cetera? That's the first question, if I may.

Thanks, Rob. I think that we will eventually analyze and decide based on every hybrid closer to the call date. Now to prepare a scenario that if we are not paying all of them and what will happen to the FFO, I think it's not the right time. We do have elements and tools that are improving. We have indexation that is improving. if we continue, I mean, many of the things that we have talked about are depending on the market condition. If we manage to continue to dispose properties and have more liquidity, we have the ability to do a liability management, which will reduce the cost of debt. So, bottom line, what I'm saying is that we will need to analyze period after period and really read the map of the market and in a way that we feel that we are taking the right decisions to have a minimal impact on the FFO, and clearly, let's say, facing the results of the market on our business. Thank you. Next question, please.

Next question is from the line of Ashnada Shahi with Credit Sites. Please go ahead.

Yeah, hello. I just wondered if we can talk about the vendor loan business. And I just wanted to know how much percentage of assets were development assets and how much above book value were these assets executed at? And then the second question I had was really about rental demand destruction in a recessionary environment. What kind of figure do you think that we should be modeling? Would it be a 15 to 20% decline given the cyclicality of the office business? you know, segment on the portfolio.

Hi.

I'm not sure I got the last questions. On the vendor loans, so those were not being connected to a development or actual properties. So they were sold at book. Can you repeat, please, the second question?

Yeah, sure. The second question was about rental demand. So just wanted to understand what kind of rental demand destruction do you expect to see in a recessionary environment? Would it be fair to say 17%, 15% on the total portfolio?

Okay. Look, We have a very low vault of about five years. So if we are talking about the office segment, we are expecting next year expiries of about 10%. From experience, a high portion of that are prolonging, which makes the new letting activity to be in the level of, let's say, 3% to 5% from the total of this 10% that is expiring. So I think 10% to 15% on the overall sounds to me a bit high. But again, it's very hard now to measure the magnitude of the recession because it could be that we'll have requests for termination. So far, we see on the vacancy side, on the offices, more or less about... about 3% pressure on the vacancies. Thank you. Next question, please.

Next question is from the line of Kai Klose with Berenberg. Please go ahead.

Yes, good morning. I've got two quick questions, if I may. The first one is on page 25 of the nine-month report regarding the deferred taxes. You mentioned there that the increase in the deferred taxes came from valuation gain for properties in jurisdictions with a higher tax rate. May you elaborate a bit more on that, give more details on that? The second question is on page 15 of the presentation. Could you indicate how much capital is tied up in the third pocket, so to say, on the developments at small scale?

Thank you.

If I may, Kai, I will answer now about the tax, about the capital. I will need to look at the page and then answer you after. But we saw higher tax rates coming specifically in the UK, and we saw also some higher taxes. Also in Germany, part of the portfolio is under 16% tax rate, and part of it is at 30%. So when you revalue the part which is at 30%, then this is the deferred taxes that you are booking. And I will come back to you on the other part after the call. Thank you. Next question.

Next question is from the line of Neeraj Kumar with Barclays. Please go ahead.

Hello. Thank you for taking my question. So I have three questions from my side. So first one is you're talking about drafting coupons on your hybrids and at the same time you said that you can continue to buy grind city shares. Can you please explain how does it align with your cash preservation strategy? My second question is If Grand City was to call any of its hybrids without replacement, will you lose equity treatment on all your hybrids from S&P given the fact that you fully consolidated Grand City? And my third question is, can you please provide more color on your OGM agenda where you say that you can look to sort of lend 10% of shares for whatever reasons? And if it provides you any flexibility regarding your hybrids, that's all for me. All right.

Thank you. Please, next time when you say the question, if you can do it a bit slower, about the Grand City shares. So the increase in Grand City was predominantly done by the square dividend, so it was not with the cash. We now have nearly no execution of acquisitions of the share, so it is in line with our cash presentation. I will go first to the last questions and then come back to the second. Maybe you need to remind me. So on the OGM, the point is that when we are looking for all options or cheap sources for funding, clearly part of the items that came up was convertibles, mandatory convertibles that we have considered. It's not completely connected to the perpetuals. From experience, we know that we did in the past some convertibles and where there is sufficient lending shares out there, then the premium you pay on convertibles are lower. So we thought that we would like to have the flexibility to do so should we decide to do any transaction. At the moment, there are no transactions on the table that we are considering or thinking. It's just to have additional flexibility. and maybe also to gain some profits if we decide to do so on land in some shares. The second question will refer to the hybrids and the Grand City and the Round Town hybrids. So S&P, from our understanding, are looking at these two separately. So they analyze Grand City perpetuals and Round Town perpetuals separately. So basically, Round Town enjoys the equity credit of the Grand City Hub as well. Thank you. Next question.

Next question is from the line of Andrew Griffiths with Yannis Henderson Global Investors.

Good morning. Just confirm, in terms of your decision whether to defer coupons or not, that you will take that on an instrument-by-instrument basis? Is there a scenario where you could opt to defer coupons on a specific instrument but not others?

Hi. In general, the decision will be one by one, clearly, but based on the terms and conditions of the hybrids, once you pay a coupon to any perpetual, you need to pay all the deferral coupons for the others as well. So practically, once you decide to defer, it could mean that you need to defer all until you decide to pay, and then you pay all the accumulators. Thank you very much. Next question, please.

Next question is from the line of Manuel Martin with AutoBHF. Please go ahead.

Yes. Hello, gentlemen. Thank you for taking my questions. Two questions from myself. The first one would be on the dividend. You seem to become a bit more careful in saying that you're going to evaluate the payout of the dividend during the next year. What could be a scenario for you to reduce or to cut the dividend. Maybe you can give us some flavor on that. That would be the first question. The second question is on your CapEx program. Do you see yourself in a position of having some flexibility in reducing your CapEx program without endangering the decarbonization path or without disturbing the property that you have in your portfolio. This is the second question.

Thank you. Thank you, Manuel. I think the decision on the dividend and the coupon are more or less related to the same topics. How we see continuous disposals, how do we see the market, how deep is the potential recession, market condition, access to capital, secured financing, progress, and so on. So we will need to evaluate all those together and the head rooms and the valuations before we are taking decision on the dividend. In terms of CapEx and the flexibility on CapEx, so we do have flexibility. Our CAPEX includes some projects that are a decision that we are making. Currently, our CAPEX is about 1.3% from investment property. We do see it reducing as part of the cash preservation. We only do projects that are necessary and essential. So clearly, we are going to choose which projects we are doing or not in the next period. Thank you for the question.

Next question is from the line of Yannica Ariazina with Rubrics Asset Management. Please go ahead.

Hi, good morning. Thanks for taking the call. Just on the hybrids, S&P allows up to 10% of the hybrid debt stack to be redeemed over a 12-month period. Is that something that could be a consideration? Just because in your statement you said you've got a commitment to the hybrid debt class and therefore implicitly is investor-based. Interested to know your thoughts. Thank you.

Hi. At the moment, we took the decision not to exercise our option for the January. Clearly, if we see a change in the market condition in the future, this could lead for us coming back and using cash or disposal proceeds for the 10% repayment. At the moment, it's not something that we see as visible, but clearly if we see a change in market, a positive change, it will be part of the consideration. Thank you.

Next question is a follow-up question for Rob Jones, BNP Paribas exam. Please go ahead.

Hi, just one on hotels. So you mentioned obviously you're seeing further rising costs from a tenant perspective, falling profitability, and obviously a recessionary environment you highlighted likely to impact all hotel sectors, and I guess to some extent business travel as well as leisure, which is The latter has obviously recovered to pre-pandemic levels so far. On the back of those challenges that your operators are facing, I'm just intrigued to understand why you believe that you think hotel collection rates will improve further in FY23. Thanks.

First, we don't think that clearly there is a question how all this business is going to be operated. And as we said, we are a caution on the operation of all the commercial sector next year. For the moment, and based on the budget we receive from operators, we see an improvement. And that's why we think that the collection rates will stay stable as we see them today. there could be an improvement if, let's say, business travelers and leisure will continue, but if it will be with a deeper session, yes, there could be a scenario that collection rates will not be improved. Thank you.

Next question is from the line of Thomas Rothäusler with Deutsche Bank. Please go ahead.

Good morning, everybody. A couple of questions. The first is on your decision not to call the perpetual. I mean, if you assume financing markets won't recover, it basically would mean your full perpetual note equity consideration would turn completely into debt with, I think, corresponding negative impacts on LTV. I mean, what would be the consequence for the credit rating? I mean, you're referring to a rather generous view from S&P on the topic, but I assume this is only based on a few cases where you do not call perpetuals. And also, do other rating agencies have a different view on it? So that would be my first question. The second one, actually, on financing. Could you provide some recent examples for secured lending deals you have done with the banks? Then the other question would be on your rental growth outlook. Just to clarify, I think, is it right that you expect like-for-like rental growth for next year, zero or even negative, just to clarify? And then on vacancy, I mean, you sound rather cautious on vacancy for next year, referring to recession risks. What should we expect here for vacancy?

Thanks, Thomas, for the questions. On the credit, we work with S&P and know their methodology. Clearly, if you are not calling any of the hybrids and you lose the equity content on all of them, this could impact your leverage of S&P. From our perspective, we analyzed the January one, and we saw that there is not expected to be any impact. This is what we also reported. I think it's too early to decide what will happen with July and the rest. But even when we consider, let's say, as long as we don't pay, there could be more pressure on the LTV of S&P. I can say that S&P by themselves state that pressure coming only from the fact you don't call in a hybrid is not as if you are taking debt. So this is something that probably part of their modifiers, they will see it as a positive point in terms of not calling hybrid and comparing to taking debt. I also want to remind that, you know, based on IFRS, and this is very important, that LTV according to IFRS and all our bond covenants are based on IFRS results where perpetual notes are equity. regardless if they are called or not called. So on the bond covenants, we don't expect to see any impact. On the secured financing, we did talk so far about 250, 300 million euros of bank financing. The margins were about 1.2, 1.3%. So far, we are working on additional secured financing since the process takes longer. We will see the fruits of these efforts, I believe, next year, and we'll be able to elaborate more. But the range that we see on the margins is, as we already answered, between 1% to 2% depends on the asset class and the location. In terms of like-for-like, we will give a guidance of how we see the like-for-like within the year-end results. So far, we cautiously estimate zero, meaning so pressure on vacancies will be, let's say, mitigated by indexation or maybe even a slightly lower like-for-like. But we'll be smarter when we publish the year-end results and we give a clear guidance there. Thank you. Next question.

Next question is from the line of Leon Wei with Jupiter Asset Management. Please go ahead.

Yeah, quick question on your hybrids. Your comments on the call is very well understood. Just wanted to understand whether you're open to buying hybrids back on the secondary markets or not? And if so, how do you think about pricing?

We will act at a level considering and balancing our liquidity, future sources and uses, market trends, and the cost of the new financing. We currently focus on cash preservation until we see more clarification on market conditions, but clearly this is one of the alternatives for extra cash to be used. I think it's too early to discuss about pricing. It will be discussed if we decide to do a deal prior to the deal. Thank you.

Next question is from the line of Philippe Laudois with Société Générale. Please go ahead.

Good morning. Thank you for taking my questions. I have two, please, on the risk of hybrid coupon deferral. Given that the decision on the dividend will be taken in Q2 next year, Is it fair to assume that you'll defer the hybrid coupon in January, then decide on the dividend, and if you decide to pay a dividend, pay the deferred coupon at a later date? And second question is, can you just confirm that you're able to defer the hybrid coupon while still buying back shares?

Thanks for the questions. If we defer coupon... we are not able to distribute dividends. And if we decide to defer the January coupon and then want to distribute dividends in July, then we need to pay the deferred coupon. If we defer coupon, we are not able to do buyback of shares. Thank you for the questions. And I think this was the last question.

So many thanks to all who took the time to participate in this call and the questions you've submitted before and as well during the call. Look forward to meeting all of you in person over the coming months and don't hesitate to reach out to us if you'd like to discuss any topic in more detail. Enjoy the festive season and stay well. Goodbye.