Aroundtown Sa U/Adr

Thank you very much and good morning everybody. Thank you for joining us for Around Towns Q1 2023 results call. You should have received our press release and can view this presentation on Around Towns website either on the home section or under financial reports in the investor relations section. I am Katrin Petersen, Around Towns Group Head of Communication and 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, and following the presentation, you will have the opportunity to ask questions. Please feel free to send us your questions via email, also now and during the presentation, The email address is info at aroundtown.de. Again, please send your questions also through the presentation to info at aroundtown.de. And with that, I'd like to pass you over to Oshri, who will guide you through the presentation of our results. Thank you.

Thank you, Katrin. Good morning also from my side and welcome to our Q1 2023 earnings call presentation. Before we jump into the results of our first quarter, I want to review some of the trends and headlines we have seen this year so far that influenced our operations as well as strategic direction to overcome the current crisis. After two consecutive quarters with negative growth, Germany eventually entered a technical recession and the signs of a swift recovery are not visible in any clear way. As core inflation remains high, Nominal debt yields are still volatile on an elevated level, and therefore fresh capital remains significantly more expensive. At least in the short term, de-levering is still a high priority for us. The prevailing economic challenges and persistent high inflationary environment forces real estate companies to rethink about priorities and finding the right balance between growth, opportunities, stakeholder interest, and protecting the long-term goals and values of our company. Some of the goals we gear our energy towards are our internal asset operations, increasing our share of green certifications and dispose assets to further de-level the company, all giving us flexibility to adapt before we need to raise new funds. Liability management will remain our close companionship for the foreseeable future as we cross this period of difficult debt and equity capital markets. Although our operations remain stable, a further deterioration of the market environment and the macro environment could impact corporate business negatively and thus impact office letting demand as well as the business hospitality sector. The residential real estate market operations, on the other hand, especially on the affordable level, are less exposed. Yet, we believe each crisis holds opportunities. and we stay alerted for attractive opportunities that we may encounter in various forms. Our efforts to maintain a high liquidity level will provide not only downside protection, but a competitive advantage when attractive opportunities arise again. With that, let me move on to our presentation. I will begin with our financial highlights achieved in Q1 this year on slide four. On the operational side, Our net rental income for the first quarter decreased by 4% year-over-year to 297 million euros, resulting in an FFO1 of 85 million euros or 7.7 cents per share for the quarter. The decrease in rent was due to the sales of assets. For the same period, we achieved a positive 3.5% like-for-like rental growth and a flat IPRA NTA per share of 9.3 euros. Further, I can confirm our full year guidance. Turning to the capital structure, we continue to prioritize a strong level of cash and liquid assets that allow for an uninterrupted operational performance. Hence, we made a lot of effort to increase our liquidity position, reaching at the end of Q1 to 3 billion euros, which reflects 20% of our debt level up from 18% a quarter ago. This amount does not include any expected proceeds from signed disposals or vendor loans. The interest cover ratio came in at a strong 4.8 times and our LTV remained stable at 40%, ensuring a significant headroom to our bond covenants. We still have over 80% of our assets unencumbered. We will discuss each KPI in more detail throughout this presentation. On slide 5, we reiterate how we plan to maintain our financial flexibility in uncertain economic environments. These six selected pillars support our strategy to navigate across the upcoming debt maturities over the next few years without the obligation to access capital markets. Secured bank financing has become a more relevant source of capital at relatively attractive terms which we discuss with many banks in parallel thanks to our high level of unencumbered assets and good relationships we built with many banks over the years. As I will elaborate on the following slide, we continue with our disposal activities to increase our liquidity, which in turn allows for liability management exercises by buying back our own debt at discounts to further delever the company and extend the overall debt maturity. Maintaining our very high headroom to all bond covenants remains a priority. Our perpetual notes unfold their specific equity characteristics in the current volatile market environment as the voluntary option to not call perpetuals at unfavorable terms is a testament to the equity characteristics of this instrument based in IFRS accounting treatment. This flexibility supports our efforts to maintain high covenant headroom and a long repayment horizon. Moreover, we are working diligently to maintain our operational strengths through new lettings, prolongations, rent increases, as well as increasing our rent collection. In addition, our large cash balance can partially offset the increased cost of debt from positive interest earnings. On the next few slides, we will look in more detail into each point. On slide 6 highlights the continuous achievements of our disposal efforts in these mutual transaction markets. Our transaction team has demonstrated once again the strength of our network and asset quality by growing the disposal value year-to-date to 320 million euros. Disposals closed in Q1 were signed around book value and at an average rent multiple of 19 times. These results show the attractiveness of our assets and our competitive advantage to dispose properties also in a challenging market environment. On the left-hand side of the slide, you can see the well-diversified disposal breakdown by asset class and geography. Integral part of our value creation efforts is to identify development rights potentials and to successfully dispose them as we continue to do and achieved over 50 million euros in disposals year to date. You will find examples of our obtained development rights in the appendix of the presentation. We want to create a strong liquidity position to be well prepared for a possible further deterioration of the market environment and a possible freeze in transactional markets as we see most potential buyers still on the sidelines due to the more challenging financing environment. On the following slide, we highlight the contribution to our healthy capital mix derived from bank financing, which continues to have more favorable terms than comparable bond financing. Thanks to our strong banking relationships with low dependency on any single bank, year-to-date we raised 450 million euros of secured and unsecured bank debt from some of the many different local international banks we work with. which you can see on the right-hand side of the slide. This brings the total bank debt raised in 22 and 23 to 930 million euros. Going forward, our remaining 22 billion euros of unencumbered assets placed us in a strong position to access further bank financing. With an average maturity of seven years and a margin of 1.3% plus euro bond, The terms for these bank financing are materially better compared to the unsecured capital market bond terms available currently. On slide 8, we break down our strong liquidity position as a result of the cash and liquid assets at the end of Q1, plus expected proceeds from already signed but not yet closed disposals and vendor loan repayments, which have an average weighted maturity in Q4 24. This liquidity position amounts to over €4 billion and covers our debt maturities until end of 2025. This long runway provides crucial headroom in times of challenging economic influences on the real estate industry. Turning to our leverage on slide 9, we illustrate the positive impact from debt repurchases and disposals. The LTV declined marginally between December 2022 and Q1 2023, and a further 3% reduction is expected from already signed disposals and vendor loans in the amount of 1.2 billion euros, resulting in a low performer LTV of 37%. As we continue to see our bonds trading at discounts, we repay our debt at attractive discounts to further de-lever the company, which is the main purpose of our cash preservation strategy. In the liability management activities combined this year so far, we bought back €710 million nominal amount of the 24, 25 and 26 bonds at an average discount of 17%. GCP announced yesterday the results of their liability management exercise, which resulted in buying back €77 million at 6.5% discount, which is included in the total amount I just mentioned. Turning our view on our perpetual notes, we provide our rationale on slide 10. As we have been emphasizing since issuance a few years back, we see perpetuals as a preferred equity instrument. Some of the reasons for this are that they do not have any covenants and no default rights, same as common equity. Neither is there any repayment obligation and the option to repay or refinance is solely the issuer's decision. Whilst these are equity characteristics, we see it important to communicate openly the options available to us dealing with perpetuals. Prior to each individual perpetual call date, we will assess our options in the market. In general, we aim to replace perpetuals with the new perpetual issuance as we have done previously and as these are not meant to be repaid with debt. At the end of last year, we decided not to call the January 23 perpetuals The reset coupons were adjusted at their respective call dates, which results in an annualized €20 million higher coupon payment. In any case, we retain the option to call these perpetuals every year on the coupon payment date, in addition to the option to repurchase them at any time should we feel more comfortable with the conditions and access to new capital. In July, we have the next call date for our US dollar perpetual note series. We currently don't see the market open for refinancing at reasonable terms and demand for new hybrid issuances is completely muted. We will therefore wait closer to the call date before we decide if to exercise our voluntary option to call it. We recognize the fact that the prevailing high uncertainty in capital markets could result in more challenging access to capital going forward. Our view to remain committed and retain perpetual notes as part of our long-term strategic capital structure has not changed, and we continue to investigate also alternative options for refinancing. As bond covenants moved into the spotlight, we want to update you on slide 11 about our significant headroom in relation to each key covenant. Note that the perpetual notes do not have covenants as they are treated as full equity according to IFRS for all covenant calculations and remains so even when not being called. Eronton maintains one of the highest bond covenant headrooms among listed European real estate companies. Our total net debt to total net assets stood at 35% in March 23, which is well below the 60% covenant threshold set by the EMTN program. In a stress test scenario, our March 23 total asset values need to drop by 39%, which implies 14.6 billion euros decrease in values, before this covenant will be triggered, all else being equal. The adjusted EBITDA to net cash interest is almost three times higher than required by the covenant, and our net unencumbered assets to net unsecured debt is more than double what is needed. In other words, and in combination with our high cash balance, we could replace our total unsecured debt with secured debt without the risk of breaching this covenant. In line with our high covenant headroom, I want to summarize and highlight our conservative capital structure on slide 12, which is a combination of our healthy balance sheet and solid debt matrix. We continue to prioritize a strong liquidity during these challenging economic times of enduring geopolitical tension and negative macroeconomic sentiment. During the first quarter of this year, we've been able to keep our LTV level stable at 40% and an APRA LTV of 55%, assuming perpetual notes as debt. The average debt maturity stood at 4.8 years with an average cost of debt of 30 basis points higher quarter over quarter at 1.7% and an interest cover ratio of 4.8 times. The cost of debt increased due to higher interest rates seen in new financing, increasing of the rates under the hedging caps, and in the variable portion of the existing debt as well as from repayments of low-cost but near-term debt, and maturity of interest rate hedges. Our hedge ratio is 83% at the end of the first quarter, and we expect a further decrease to 85% at the end of this year due to the expiration of some further hedging instruments unless they will be rehedged before. This will increase the average cost of debt at the end of this year to approximately 2% based on current rates. We see secured financing still more attractive than unsecured corporate debt as we explained earlier in the presentation. Therefore, our high ratio of unencumbered assets supports to achieve secured financing at rates lower than current bond yields. We still maintain a high 81% or 22 billion euros of portfolio value free of debt, which provides additional sources of capital to us. The net debt to EBITDA improved further to 11.8 times on an annualized level, down from 12.1 times year over year as a combined result of operational growth on the one hand and a reduction in net debt on the other. The final pillar I want to focus on is the sound operation of our portfolio. On slide 13, we summarized some of the key defenses, mechanism, and trends by asset class, which we see in order to significantly offset the ongoing operational cost inflation and further increase in interest expenses. The rental contracts for our commercial properties mostly include partial rent indexation or step-ups in the rent. We still see a high acceptance level amongst tenants to implement the indexation increases. The affordable residential rental segment continues to benefit from supply-demand gap in German metropolitan areas, which is currently getting even worse. Therefore, the regular rent increases feasible under the rent regulation is ensuring further steady and stable rental growth whilst keeping its vacancy level at a low 4.2%. London, as a key market for residential exposure, has more frequent rent adjustments due to its less regulated nature and higher tenant fluctuation. As forecasted, our hotel portfolio is on track to recover and we continue to improve our collection rate. Moreover, This and next year, several hotels under renovation will resume operations again, adding to the rental income of this segment. We assume a full recovery and to achieve pre-pandemic collection rate levels next year, which will have positive effects on the FFO. Our well-distributed commercial lease expiry profile at the bottom of the slide has no material maturities in any single year, which allows sufficient time to work on re-letting. In recent years, about 70% of expiries were prolonged and the remaining spaces required re-letting. Rent expiries, however, also serve as a value creation opportunity in most cases. We can re-let above in-place rent levels due to the repositioning cycle our value-add investments undergo. Yet, we do see it takes longer to find new tenants in the current volatile times. In addition, our residential tenants have an average lease term of around 10 years in Germany, and we expect that to increase as fluctuation decreases now due to the lower supply and increased market rents. Our capex investment for this year will continue on a selective and disciplined basis, ensuring that in any inflationary environment, we employ smart capex investments where it's most needed and beneficial in order to not harm our healthy level of liquidity, but also where any CapEx investment have a positive impact on our long-term carbon emission reduction targets. On the following slide, we will discuss our ESG and portfolio highlights. Frank, please continue.

Thank you, Osri. Since the beginning of the year, we continue to build on our ESG successes achieved last year as highlighted on slide 14. Now, with well over half of the Dutch portfolio holding green certification, we accelerate the efforts for a green certified portfolio also in our other key locations by investing in energy efficient measures such as PVs, smart meters, EV charging stations, and many more. Our own town's office portfolio has now reached to a 70% level of green certified assets up to 4% in 2021. One prominent example is the MDR Tower in Leipzig, built 50 years ago as the tallest building in Germany, shown on the left side of the photo, which recently obtained the BRIN certification. Additionally, we aim to have the first few hotels certified this year, and we will provide further insights on our certification process in the coming periods. Yet, as we have a large portfolio, and each certification is an individual and left-in process, we expect a gradual progress over the next years to achieve our 40% CO2 emission reduction by 2030. Turning to the social aspect, here today, Around Town funded already around 30 social projects after reaching to 90% last year. These projects focus on the health and well-being of our communities and aims to support the lives of the Tasmanian families. The inclusion into the Dow Jones Sustainability Index and the Bloomberg Jedi Equality Index are testimony to the results of our ESG efforts. All our existing awards and ratings have been maintained or improved further this year. If you would like to have more information and details on our ESG strategy, our appendix holds more information for you to review on all our individual ESG elements and our long-term targets for each category. We also published our No Financial Report, Sustainability Insights, and NEPRA ESBPR reports for 2022 in April, which you may find to download on our website. Our operational results are presented from slide 16. As of Q1 2023, our portfolio value split is 42% offices, 32% residential, 90% hotels, together making 93% of the total portfolio value. The remaining 7% are logistics and retail, of which more information you can find in the appendix. Equally, with 93% in value, our investment locations maintained its focus on key European markets, with a strong focus on top-tier cities in Germany, the Netherlands, and London. Berlin, London, Frankfurt, and Munich continue to represent some of our single most important investment markets, where we still see significant upside potential in the mean to long term. On slide 17, we break down our diversified portfolio, a strong tenant structure that is a valuable part of our asset repositioning. Our group portfolio at the end of Q1 2023 amounted to 27.9 billion euros, with an annualized 1.1.6 billion euros billion euros recurring net rental income and a stable rental yield of 4.5%. The loan vault is 7.3 years for the group and the April vacancy rate came in at a stable 7.7%, up slightly from 7.6% last December. Our 10 largest tenants continue to account for less than 20% of the group's rental income. ensuring that there is only limited exposure to any single tenant in case of financial distress or inability to pay rents. We saw a split of our office assets by location on slide 18. This asset class represented 42% of the group portfolio value with main focus on key European financial centers such as Berlin, Frankfurt, Munich, and Amsterdam, along with a world of 4.2 years. In some of these cities, around how he maintains his position as the largest office landlord, reaching significant economies of scale and leverage on the network with tenants, brokers, and municipalities. We maintain a well-diversified tenant mix without a dependency on a single tenant and continue to reduce the risk of industry-specific volatilities by having a balanced exposure across industries. These years so far, our expectation of a slowdown in supply for new development projects in our markets has been reconfirmed as we see replacement and financing costs continue to be elevated. This in turn results in further tailwind to the demand side. After a strong like-for-like rental growth last year, we recorded in March 2023, 5.4% like-for-like rental growth in our office portfolio, mainly from indexation and rent step-ups. For the reminder of the year, we conservatively assume a slow office rental market with demand for existing and potential tenants to be cautious in light of the ongoing challenging economic and financial environment. However, rent increased potential from indexation and capturing rent upside potential for re-relatings will absorb parts of the slowing demand. On the following slide, I would like to draw your attention to the German office market performance. More precisely, the development of the rental latex versus take-up in the top seven German cities. The final quarter of 2022 was a turning point. Since then, take-up is down 32% year over year, whilst vacancies rose by about 50 basis point year over year. This trend is expected to develop moderately until the end of the year. Simultaneously, prime rents jumped 30% year over year in Q1 2023, lifted by inflation-driven rent increases which led to a historical peak in office rents. As economic uncertainties and high costs remain on an elevated level in Germany, office vacancy levels are expected to moderately increase further in line with our market view. Prime rents reached new heights in over 30 years as the benefit from ongoing high affiliation. We assume this trend to continue for most part of this year until the lack of supply puts pressure on future office vacancy levels again and microeconomic volatility stabilize. On slide 20, we provide an updated glance of our strategic long-term investment in the residential sector through our holding Grand City properties. At the end of Q1, 2023, the effective holding rate in Grand City properties amounted to 61%, excluding the shares Grand City properties holds in treasury. With 32% This asset class represents our second largest segment by value and remains a vital part of the group's stable residential cash flow in these volatile economic times. In Germany, the demand supply imbalance continues to widen due to the strong population increase and the increased cost of new buildings, which is supported for the letting achievements. The London residential market is experiencing an increasing demand as home ownership has become less affordable, with mortgage rates increasing significantly. However, we believe the rent increase ability might be impacted in the short term due to the significant increase in the cost of living on tenants. We continue to see material positive contribution from these residential assets located in key metropolitan locations in Germany as well as in London. The defiscation into the regulated and less cyclical asset segment allows for high rental income stability in such a certain microeconomic times, when we see that our diversified portfolio reduces the risk exposure for any single asset class or location. GCP's portfolio recorded a like-for-like rental growth of 2.6% in March this year and maintained its record low vacancy at 4.2%, driven by the continuous supply demand gap in Germany and strong rental demand in London. Unlike in Germany, the rents in London are mostly unregulated with short-term leases, which enables grand city properties to capture the inflation impact faster and allows for frequent adjustment to market rent levels. With 76% value exposure in North Rhine-Westphalia, Berlin, Dresden, Leipzig, and London, as organic growth drivers, grand city properties is complementary to around town's investment locations and balances the potential between asset classes with different fundamental drivers. We see Grand City Properties' current share price very attractive, which is also negatively affected from the current market sentiment. However, we see this as an opportunity to increase our position gradually if we secure sufficient funds from our disposals. Barak, please continue.