Aroundtown Sa U/Adr

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.