Good morning, everybody. Thank you for joining us for Aroundtown's Q1 2023 results call. You should have received our press release and can view this presentation on Aroundtown's website, either on the home section or under Financial Reports in the Investor Relations section. I am Katrin Petersen, Aroundtown's Group Head of Communication, and with me today are CEO, Barak Bar-Hen, CFO, Eyal Ben- David, Chief Capital Markets Officer, Oschrie Massatschi , Executive Director, Frank Roseen, 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@aroundtown.de. Again, please send your questions also through the presentation to info@aroundtown.de. With that, I'd like to pass you over to Oschrie, who will guide you through the presentation of our results. Thank you.
Thank you, Katrin. Good morning also from my side. 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 influence our operations as well as strategic decision, direction to overcome the current crisis. After two consecutive quarters with negative growth, Germany eventually entered a technical recession. 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. Therefore, fresh capital remains significantly more expensive. At least in the short term, delevering 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 interests, 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-lever 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 EUR 297 million, resulting in an FFO I of EUR 85 million or EUR 7.07 per share for the quarter. The decrease in rent was due to the sales of assets.
For the same period, we achieved a + 3.5% like-for-like rental growth and a flat EPRA NTA per share of EUR 9.3. 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. We made a lot of effort to increase our liquidity position, reaching at the end of Q1 to EUR 3 billion, 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 4.8x , and our LTV remains 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 five, we reiterate how we plan to maintain our financial flexibility in uncertain economic environment. 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 relative 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 strength 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 six, highlights the continuous achievements of our disposal efforts in these muted 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 EUR 320 million. Disposals closed in Q1 were signed around book value and at an average rent multiple of 19x . 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 EUR 50 million 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 transaction 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 EUR 450 million 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 2022 and 2023 to EUR 930 million.
Going forward, our remaining EUR 22 billion 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 Euribor, the terms for this bank financing are materially better compared to the unsecured capital market bond terms available currently. On slide eight, 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 2024. This liquidity position amounts to over EUR 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 nine, we illustrate the positive impact from debt repurchases and disposals. The LTV declined marginally between December 2022 and Q1 2023. A further 3% reduction is expected from already signed disposals and vendor loans in the amount of EUR 1.2 billion, resulting in a low pro forma 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 EUR 710 million nominal amount of the 2024, 2025, and 2026 bonds at an average discount of 17%.
GCP announced yesterday the results of their liability management exercise, which resulted in buying back EUR 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 2023 perpetuals. The recent coupons were adjusted at the respective call dates, which results in an annualized EUR 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. 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 remain so even when not being called. Aroundtown 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 2023, which is well below the 60% covenant threshold set by the EMTN program. In a stress test scenario, our March 2023 total asset values need to drop by 39%, which implies EUR 14.6 billion 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 metrics. 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 April 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 4.8x .
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. 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 re-hedged 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.
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 EUR 22 billion of portfolio value, free of debt, which provides additional sources of capital to us. The net debt to EBITDA improved further to 11.8x on an annualized level, down from 12.1x 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 summarize 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 reletting. In recent years, about 70% of expiries were prolonged, and the remaining spaces required reletting. Rent expiries, however, also serve as a value creation opportunity in most cases. We can relet 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 investments 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, Oschrie. Since the beginning of the year, we continued to build on our ESG successes achieved last year, as highlighted on slide 14. Now, with well over half of the Dutch portfolio holding BREEAM 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. Aroundtown's office portfolio has now reached to a 70 level, 70% level of BREEAM- certified assets, up from 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 BREEAM certification.
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. As we have a large portfolio and each certification is an individual and lengthy process, we expect a gradual progress over the next years to achieve all our 40% CO2 emission reduction by 2030. Turning to the social aspect, year- to- date, Aroundtown funded already around 30 social project after reaching to 90 projects last year. These projects focus on the health and well-being of our communities and aims to support the lives of disadvantaged families. The inclusion into the Dow Jones Sustainability Indices and the Bloomberg Gender-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 non-financial report, Sustainability insights, and EPRA sBPR 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, 19% 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 mid- 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 EUR 27.9 billion, with an annualized EUR [1.66] billion recurring net rental income, and a stable rental yield of 4.5%. The long WALT is 7.3 years for the group, and the EPRA 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's 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, representing 42% of the group portfolio value, with main focus on key European financial centers such as Berlin, Frankfurt, Munich, and Amsterdam, along with the WALT of 4.2 years. In some of these cities, Aroundtown maintains its position as the largest office landlord, reaching significant economies of scales and leverage on the network with tenants, brokers, and municipalities. We maintain a well-diversified tenant mix without a dependency on a single tenant, continue to reduce the risk of industry-specific volatilities by having a balanced exposure across industries.
This year 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 remainder 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 increase potential from indexation and capturing rent upside potential for relatings should 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 rentaling tax 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, while 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 a elevated level in Germany, office vacancy levels are expected to moderately increase further, in line with our market view. Prime rents reach new heights in over 30 years as the benefit from ongoing high inflation.
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 macroeconomic 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 sales 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 and easy 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 homeownership 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 diversification into the regulated and less cyclical asset segment allows for high rental income stability in such uncertain macroeconomic 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 continued supply-demand gap in Germany, a strong record rental demand in London. Unlike in Germany, the rents in London are mostly unregulated, with shorter-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 Aroundtown's investment locations and balances the potential in 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.
Moving on to the hotel business. Slide 21 summarizes our hotel portfolio, which amounts to 19% in value of our overall investment portfolio at the end of Q1. The healthy geographic mix and low dependency across over 25 hotel operators, puts this portfolio in a good position to capture the ongoing hotel occupancy rebound. Our hotel rentals remain stable, with a 14.4 year WALT and 86% in value in the four-star category, with a focus on key cities across Europe, in Germany, Netherlands, Belgium, the U.K., France, and others, as you can see on the pie charts. As a positive driver to our rental income, we expect the opening of several of our hotels this and next year, such as in Tuscany, Rome, Greece, Paris, and Brussels.
This, in combination with the lower amount of provision required compared to last year's, supports the overall recovery to the pre-pandemic level and the collection rate. As you can see on slide 22, we highlighted the recovery path of some key European hotel markets, considering the occupancy ratio of international tourists and RevPAR. In some European countries, recovery is faster than in our main locations, but the other countries' strong rebound gives us confidence for a continuous recovery across our locations. Well, if there's a good trend to fully recover next year, we see certain factors, such as the lack in business and international travelers, slowing down the recovery process in some markets. Leisure hotels, on the other hand, have fully recovered in these three markets already, and we do see the category performing better also in the coming periods.
Note that due to the ongoing cost inflation and shortage of qualified staff, which continue to weigh on the operator's profit margin, the RevPAR need to be around 20% higher than the pre-pandemic levels to achieve the same profitability. We expect average room rates to further increase as the hospitality industry is reassured to pass on the inflated cost to its hotel guests. The following slide summarizes some main trends that will shape the rebound in the hotel business this year and into 2024. Themes such as corporate travel, business conferences, long-haul flights, and cost inflation, all having an impact on the speed of the recovery. In hindsight, we know that the hotel portfolio was among the most severe, negatively impacted asset class by the pandemic, and the resulting lockdowns, and travel restrictions.
After achieving a hotel collection rate of 69% last year, we expect to reach 85%-90% for the running year and full recovery in 2024 again, assuming no further significant negative recessionary impacts. The chart on the right-hand side illustrates our hotel collection rate, evolution since the beginning of the pandemic, and we can confirm that we are on track to meet this forecast. We present on slide 24 our development and invest portfolio composition, which accounts for 6% of the group's portfolio value at the end of Q1. The geographic and segment breakdown of our available development rights is illustrated on the two pie charts. Berlin, Paris, Frankfurt, Rotterdam, and Munich are the dominant and most attractive single locations in Aroundtown's development and investment portfolios, and make up 71% of the entire stock.
In terms of our asset class breakdown, 43% of the segment are designated for offices, 35% for residential and mixed use, and the remaining 22% for hotels. Part of our value-add strategy is to continue identifying additional building rights in existing assets we own by obtaining building permits that we can choose to sell or implement ourselves. This segment also includes properties which are under repositioning or heavy refurbishment, with the aim of significantly increase the rent potential. Here, works will be executed in more selective and moderate way. Developing new projects ourselves, however, will require high return on investment material and depends on upside potential while entering a low developer risk and high pre-let ratios. This segment provides an additional source of funds, especially for disposals, without harming our recurring operational profits.
Year- to- date, disposal of such rights reached EUR 19 million. As cost inflation show further signs of evening, we expect increased demand from developers for such rights. I'll hand now you over to Eyal to present the financial results.
Thanks, Barak. Please move to slide 26, where we present the profit and loss results for our first quarter. Our recurring net rental income resulted in EUR 293 million. This 4% decline is the result of successful disposal around book value and channeled mostly into our liability management. Our group like- for- like net rental income amounted to 3.5% in March 2023. Property evaluations and capital gains were -EUR 133 million in the first quarter. We didn't externally revalue our portfolio in the first quarter and will carry a revaluation of most of the portfolio as part of the H1 report. The loss is mainly due to CapEx investment in the quarter and a small amount of spot valuation indications received.
The rent collection for motel operators improved in the first quarter, and we booked only half of the extraordinary provision compared to the same quarter last year. The fair taxes were added back with EUR 14 million, predominantly relating to the revaluation decline. As a result, the net loss for the first quarter amounted to EUR 22 million, generating a -EUR 0.04 loss per share, down from EUR 0.06 per share from profit year-over-year. On slide 27, we break down the adjusted EBITDA calculation. Our Q1 adjusted EBITDA decreased year-over-year by 5% and amounted to EUR 246 million. The decrease is the result of disposals and cost inflation, partially offset by like-for-like growth. The adjusted EBITDA is after excluding EUR 4 million, EBITDA contribution of asset held for sale, and therefore referring to the recurring long-term portfolio.
Positive contributions continue to derive from our proportional holding in Globalworth and other JV investments, which contribute EUR 15 million in total. Looking at our FFO on slide 28, we recorded an FFO I of EUR 85 million, or EUR 0.07 per share in the first quarter of this year. Year-over-year, this reflects a 4% decrease on a per share level, slightly less than the 5% decrease in absolute FFO I due to the share buyback last year. Q1 is slightly ahead of our guidance, but the next quarter will be more impacted by higher finance expenses as we made good progress obtaining new bank debt and increase our liquidity, but this in return, will increase our interest expenses. Further, the impact of the perpetual coupon step up only had a partial impact on Q1, hence, we confirm our 2023 full year guidance.
The total profit over cost from disposals in the first quarter amounted to EUR 29 million as a result of the successful completed disposals of EUR 460 million in the period. The disposals were executed around book value, thereby generating 7% margin over total cost, including CapEx. Year-over-year, the FFO II decreased to EUR 113 million from EUR 143 million. On slide 29, we provide an overview of our EPRA KPIs. The total EPRA NTA remains stable at EUR 10.2 billion quarter-over-quarter. On a per share basis, this resulted in EUR 9.3, identical to the previous quarter. The EPRA NRV also remains stable at EUR 11.2 per share, quarter-over-quarter, demonstrating the strong fundamentals of the company.
Oschrie, please continue to conclude the final part of the presentation.
Thanks. On the final slide of our main earnings presentation, we reiterate our 2023 guidance figures. For the full year, we guide our FFO I to be in the range of EUR 300 million-EUR 330 million, and FFO I per share to be in the range of EUR 0.27-EUR 0.30. This guidance is taking into consideration some positive and negative drivers, such as a conservative rent increase, improvements in the hotel collection rate, further disposal impact, as well as an increase in the cost of debt and higher coupon payments for our perpetuals.
Thank you, Oschrie. Before we invite your direct telephone questions, we would like to answer questions that we have received by email prior to this call. For simplicity reasons, we have taken liberty to group similar questions in order to answer as many of them as possible. Allow me now to read out these questions. First question to be answered by Oschrie, please. How is the office market developing, and how are these developments impacting your office portfolio and your marketing process? What are your expectations for the coming period?
Not much has changed since our last earnings call, end of March. We continue to see macroeconomic uncertainties. In the demand side, tenants continue to move their focus from growth to managing costs, especially while the cost of rent is increasing due to indexation. The trend in general is to reduce existing space, either by continuing to develop flexible working space in industry sectors, where it is possible, by holding back potential growth or just cost-cutting measures. This slows down demand and thus the letting process. Finding new tenants or space expansion of existing tenants continues to take longer than in previous periods. Nevertheless, we managed to sign in Q1 2023, new lettings in similar levels as in Q1 2022.
On the supply side, due to a continued strong increase in construction costs, as well as high capital costs for developers, many office development projects have been canceled, which impacts the supply of office. We believe that the lower demand will outweigh in the current environment, while the supply situation will likely provide tailwind in the longer term. As we have long average lease terms of 4.2 years, with well-distributed lease maturities per year, expect to weather short-term changes in market dynamics, which gives us time to work on reletting and adjust to the new environment. At the same time, elevated levels of inflation, as well as the inflation of the past period, positively impact our rent indexation, currently offsetting the negative impact. In line with this, our office portfolio recorded a like-for-like rental growth, driven by indexation of 5.4%.
In Q1, we signed and prolonged 100,000 sq m in the period, of which around 40,000 were new lettings. The office letting were at an average in-place rent of EUR 15.6 per square meter and a WALT of nearly seven years. We prolonged 42,000 sq m in our office portfolio at an average rent of EUR 13.5 per square meter and a WALT of four years. The new lettings and prolongations were 9% higher rent than the former leases. Following the continued disposal activities in recent periods, we see our portfolio positioned well, with a focus on top cities. Our strong tenant mix, with 75% of tenants comprising governments and multinationals and large domestic corporations across a diverse set of industry, provides us further protection against significant negative impacts.
Nevertheless, we are still concerned about the severity of a potential recession, and therefore, we expect low growth levels in the coming periods.
Next question. How is your residential portfolio developing in the current market environment?
In the first quarter, the operational results of the residential portfolio remained solid, with the positive operational results in both Germany as well as in London. GCP's vacancy remains at low of 4.2%, and like-for-like of rental growth amounted to 2.6%. We see this positive development supported by structural long-term trends, which result in continued widening of the supply-demand imbalance. As a result of the high construction and capital costs, new supply is slowing down even more, while high interest rates significantly increase the cost of buying condominiums and thereby increase the demand of rental units. At the same time, Germany is continuing to see robust population growth, particularly impacting metropolitan areas. As a result, demand for affordable rental housing continues to be very strong, which supports GCP's letting achievements. We see similar trends also in London market.
That being said, as the high inflationary environment continues to have an impact on households, further impacted by the settlement of the high heating and energy costs from last year and the current year, we believe the rent increase ability might be impacted in the short term. We continue to see the German and London residential markets as attractive, believe that the strong fundamentals will remain in the long term, driving future rent growth.
Can you please provide an update on the hotel market and the progress of recovery?
Despite Q1 generally being the weakest quarter of the year, we achieved a collection rate of 80%. We see steady progress in the recovery post-COVID times. We believe in this asset segment, especially in the leisure side. Our main hotel locations, Germany and the Benelux countries, already saw recovery, and we expect almost full recovery next year, as several European countries have already shown. As in the recent years, we expect the summer months to be the strongest period, driven by the holiday season. We further see progress in business international travel, as well as conferences and smaller meeting events, which are still in recovery. We expect our collection rate this year to end up in a range of 85%-90% for the year, compared to 69% last year.
Please note that the hospitality industry continues to be impaired by the lack of staff and the cost inflation, which currently can only partially be passed through to the customers. These profitability impairments currently reflect the main struggles of the hospitality industry to get back to pre-COVID levels.
Why haven't you done valuations in Q1? How do you expect values to develop in H1?
We just had our entire portfolio externally valued for the full year reporting. Since then, there have not been any large amount of commercial real estate transactions in the market, indicating material value adjustment that require, in our opinion, an update. We continue to sell properties also recently around book value on average. As inflation remains elevated, CPI- indexed leases will result in higher rents, softening the increase in cap rates. Inflation has also significantly decreased new construction in a time when demand was already exceeding supply, especially in the residential market. Replacement costs thus remain elevated and are around 50% higher than our current portfolio value, as evident in the sale of our development rights. We will have the majority of the portfolio evaluated as part of the H1 2023 report.
Our updated expectation, considering further interest rate increases, is a value decline of around 5%-6% in the next 12-18 months across the portfolio, asset types and locations. We acknowledge that there might be other more negatives in our expectation in the market. Please note that we have a high headroom to our debt covenants, which puts us in a strong position, whether even a material amount of value decreases over our expectation.
Can you please break down your like-for-like performance? Which asset class contributed the most?
The rent like-for-like increase of 3.5% was mainly driven by the office portfolio, due to inflation-linked indexations as well as regular step-up. The office portfolio like-for-like growth was 5.4%, with 6.9% from in-place rent growth, predominantly from indexation. Going forward, we expect inflation to remain the biggest driver in rent growth, but as new lettings are taking longer than in the past, we expect the like-for-like rent growth to be partially offset by pressure on occupancy. We believe that our long WALT and staggered lease maturities put us in a reasonable position until demand picks up again. The residential portfolio was the other asset class in our portfolio, largely contributing to the like-for-like growth. GCP achieved a growth of 2.6%, benefiting from the robust demand fundamentals in Germany and London.
The hotel portfolio's like-for-like growth was largely flat and recorded a 0.5% like-for-like. For the total portfolio going forward, we remain conservative due to the current uncertain times and guide for like-for-like rent and performance of 1.5%-2.5%, supported by rent indexation.
Your amount of cash liquidity is very good, and the strategy to manage upcoming debt maturities is well perceived. Can you please elaborate on your plan to reduce leverage in the future?
We are already focusing on reducing our leverage. We are doing this through asset disposals and utilizing the proceeds to buy back our short and midterm debt. As our bonds are traded at discounts, we can buy back more debt with the same amount of cash, which further reduces our leverage.
We bought back EUR 710 million so far this year, by doing that, we saved over EUR 120 million, including the buyback results announced yesterday by GCP. Please note, as we sold some assets with vendor loans, the leverage reduction impact will occur when the vendor loan is paid, as we do not include the vendor loans in the LTV calculation. This will offset some of the expected impact of value reduction. We will continue to collect our loan to own investments or convert them into properties, which will further support our LTV. We have suspended the dividend payment this year, which has a positive impact on leverage.
What is your plan regarding the maturities in 2026 and after, if interest rates remain high?
It is still almost three years until 2026, and until then, we have time to prepare and increase our liquidity further. Our debt optimization activities in the past years put us in this favorable position, where we can explore several different options and have time to work on each in order to push back the time we need to refinance further. The plan is to continue disposing properties, continue buying back our debt at a discount, which further reduce leverage, and clean up our short and midterm debt schedule. Collecting our loan to own investments or convert them into properties, and continue raising funds through secured financing on the back of our strong banking relationships, high amount of unencumbered assets, strong portfolio diversification, and asset quality.
Including signed loans after the reporting period, we have new bank loans in the amount of EUR 450 million, on top of the EUR 500 million we have grown last year. The new loans have an average debt maturity of seven years and will refinance shorter-term debt, we extend the average debt maturity schedule. We have a secured loan pipeline of few hundred millions, which will support our liquidity and push the average debt maturity further out. We have an average debt maturity of 4.8 years, you can see in our debt maturity schedule in our presentation, that the majority of the debt matures until 2030, which gives us a lot of flexibility to refinance.
How are you going to address the increasing coupons of your perpetual notes over time? Your FFO will significantly decrease, assuming mid-swaps remain elevated.
There are a few options we can utilize. In the current market situation, we focus on debt reduction. The fact that they live perpetually, there is no repayment date, no covenants, and cannot go into default, is a strong protection in the current market. Even with the increase in rates, the perpetual notes coupon will be around 6.5%, which is not much higher than any new bank loan currently at around 5%, all-in interest. Generally, the higher interest levels harm the FFO of the real estate companies, which is one of the drivers of the decline in real estate stocks.
Can you please elaborate on your disposal success? To whom are you selling? For what prices, locations, asset types, et cetera. When do you expect to be closed? What is the size of your disposal pipeline, and which asset types and locations are you considering selling? Would you be willing to sell at discounts? It was recently reported that you are in the process to sell your Center Parcs portfolio. Can you share some information on the process?
We signed so far this year, disposal in amount of EUR 320 million. After some strong quarters of selling high volumes, it has become more difficult to find the right buyer and the right price. We will continue selling, it will take longer than in previous periods. We have identified about EUR 600 million of assets held for sale as of March, which we expect to sell in the next 12 months. Of these, more than half have been signed already. We have been selling a mix of asset types and locations. There is a wide range of buyers, including municipalities, funds, asset managers, family offices or private persons, developers, and in a few cases, also the tenant itself.
We closed in Q1 disposals in the amount of EUR 460 million at a slight discount of 1% to book value on average. Mainly office and retail, residential, mainly in London, several non-core locations in Hamburg. Please see the presentation for further details. Of the EUR 460 million closed disposals, EUR 380 million have been signed in the previous periods. Please note that this is a standard for real estate transactions to take few weeks to month between signing and closing, mainly due to pending clearance from municipalities, as they have a first right to buy and or clearance from the cartel office.
We use the fact that our properties are not pledged to grant a vendor loan to buyers who seek financing, and in this way, we manage to close the deal faster and not to be subject to financing, receive the equity part of the deal now, which is on average about 50%-60%, and also benefit from a first pledge on the property and interest on the loan. As part of our strategy to dispose properties, the group has many ongoing multi-billion euros processes relating to many properties. We will continue to dispose properties when we get fair offers and can utilize the cash proceeds to further repay debt from 2026 onwards. Referring to Center Parcs, we acquired these properties in 2019. The parks are located in Germany, the Netherlands, and Belgium.
In the last period, we received a lot of interest in this portfolio and therefore nominated a broker to handle the process. Please note that we cannot comment on potential transaction prior being signed.
Will you suspend dividend payments for a few years now, or will you start paying again next year?
We have a dividend payout policy to distribute 75% of our FFO I per share. This didn't change. We will need to see how the market situation develops until next year. This we cannot predict. Generally, we can suspend dividends, as we are not a REIT, which is in a safer option in a tough market environment. Note that we will take that decision only next year.
Could you provide some color on your secured financing efforts? What are the terms that you see currently? What is your pipeline? How much secured debt can you raise?
In 2023, year- to- date, we raised around EUR 450 million of bank debt. We continue to see margins at levels between 1%-2% for 5-10 years, varying between asset types. With current mid-swap rates, that results in a range of 4.5%-5% total interest, which is above our current cost of debt, but well below our capital market yields. In the current environment, we continue to see appetite from banking partners for new loans, but the process is taking more time compared to the past. Therefore, we see it as a key to prepare ahead of time and not wait until debt is almost due to refinance, as markets may have deteriorated further by that time, which may also limit this funding source.
For this reason, we are currently working on a large pipeline across all asset classes in a wide range of banks. We maintain a large pool of unencumbered assets amounted to EUR 22 billion, which provide us with the access to secured funding. Due to our high amount of unencumbered assets, very low amount of secured debt, and high cash and liquid assets balance, we could theoretically replace all unsecured debt with secured debt. We note that this is not our expectation, as we believe unsecured debt will remain a key pillar of our financing sources also in the future.
It seems that you are slightly ahead of your guidance. What are the assumptions included in the 2023 guidance, and what can we expect?
We confirm our guidance for an FFO of EUR 300 million-EUR 330 million, or EUR 0.27-EUR 0.30 per share in 2023. We had a good start of 2023, Q1 2023 shouldn't be annualized as expectation for the full year. In the next quarter, we will see a negative impact of increase in interest rates as rates increases Q1, impacting our variable debt portion. The maturity of certain hedging instruments, reducing our hedging ratio, as well as new financing raised during and after the reporting period. We made a good progress with obtaining new bank debt and increasing our liquidity, this in return, will increase our interest expenses. Therefore, we expect a net increase of around EUR 60 million in interest expenses compared to 2022.
In addition, the impact of the step up in the perpetual loans coupon was only partial in Q1 2023. We further expect higher coupon rates coming from the perpetual loans. The total increase in the perpetual loans will be around EUR 35 million in 2023. On the positive side, we see indexation supporting the top line with the full year impact of 2022 indexation and the continuous indexation in 2023. On a net amount, we anticipate a positive rental income, like- for- like, of around 1.5%-2.5%. In addition, we see and expect the collection rates for the hotel properties to improve to around 85% and 90% in 2023, compared to nearly 70% in 2022.
Did you get any updates from S&P regarding your rating? Is there a risk for a downgrade, and if so, would you consider an equity increase?
Continue to maintain an open dialogue with S&P. S&P has published an update after our full year 2022 financials in April, and it is noticed by S&P that a decrease in valuation puts pressure on the real estate sector as a whole, and reducing our KPI headroom. We took and are taking several measures in order to keep sufficient headroom. We do this through asset disposals, debt repayments, suspending our dividend, and signing new bank debt at longer maturities to ensure our strong access to capital and extend our average debt maturities. Referring to the perpetual notes, as we understand S&P methodology, not calling a hybrid negatively impacts the KPI by removing the equity content of such instrument.
However, in a situation where there is no market for such issuance, S&P is giving the company a qualitative benefit by not considering such negative impact as harmful, until the market will be open again. This is not a clear-cut and subject to discussion with S&P. The rating depends also on the market development. Issuing new equity or rights is part of the toolbox we have, but in the current share price and the current bond yields, we see the current measures as more relevant.
Your next perpetual call date is in July 2023. Did you decide yet if to call or not? Instead of calling these at par or buying back bonds, wouldn't it make sense to buy back other perpetuals which trade at significant discounts?
Our approach referring to the perpetual notes didn't change. We see this instrument as part of our capital structure. Referring to the July perpetual note, we will take a decision whether to exercise our voluntary option to call the note closer to the call date. At the moment, we don't see the market open for refinancing. Please note that the perpetual notes are not intended to be repaid with cash or debt, but refinanced with a new perpetual or other equity instruments, as we have done in 2021 already. In the current market environment, it is more important to focus on managing debt maturities rather than equity instruments like perpetual notes. We want to emphasize, again, as we still see misunderstanding in the market, our perpetual notes have no impact on our bond covenants.
These instruments have no covenants, no default rights, no payback obligation, and are subordinated to debt. Both covenants are based on IFRS accounting, which treats perpetual notes as 100% equity, regardless of the rating agency's view on this instrument.
Do you expect to continue lifting development rights and be able to sell them in the current environment? Can you provide us an update on our running projects and if you plan to execute new ones soon?
We have been very successful in identifying development or conversion rights in our existing assets. Due to the scarcity of land in our top locations, we have been successfully selling these rights. We will continue with this process as it is lengthy process from identifying the potential to obtaining the rights, which are also valid for a few years. Although it might become more challenging to sell these rights in the current environment, we expect the demand to remain in the mid- to- long- term. We have sold this year already development rights in the center of Berlin.
We have become more selective on which project to execute and main focus on finalizing projects which are already started, which includes several hotel properties, which we are currently under major refurbishment and repositioning with a plan to open them this year, which will add further rental growth to the portfolio. We remain selective on future CapEx projects and thus expect a lower amount of expansion CapEx spending going forward.
Thank you. Those were the questions that we received prior to this call, and we can now start the open session for your questions. We would appreciate if you can ask all your questions at once, and we will answer them one by one. Thank you.
We have a question from Ellis Acklin, from First Berlin. Your question, please.
Hi, guys. Thanks for the detailed presentation. I just want to follow up on your comments regarding the S&P rating, and I'm just wondering how important is it to you guys going forward to maintain the current credit rating, considering the emphasis on your current liability management program? A second question would be if you could give me some information also on which bonds were paid down after the Q1 reporting? Thanks.
Hi, Ellis. Keeping the BBB+ is important, but it's not now the top priority. It's not that our yields are traded as if we are a BBB+. We want to keep the rating, and we are doing, let's say, most of the measures correct for the business. The point is that there is a pressure on the general pressure of the market on real estate companies that narrows headrooms. The measures that we are taking supposed to hold and are rating supportive, we cannot assure that they will, let's say, keep the BBB+, but we are trying any discussion with the rated agencies about their view as well.
Referring to the bonds we have, we targeted the 2024, 2025, and 2026 euro bonds that we have on our portfolio. You can look at our notifications. We mentioned there clearly how much and which one we bought. Thank you.
The next question comes from Paul May, from Barclays. Your question, please.
Hi, team. Actually, Eleanor Frew here from Barclays on Paul's line. Two questions from us. Firstly, what is the Aroundtown proportional volume of sales rather than the 100%? Secondly, what gives you the confidence around your value decline guidance, given that prime values have fallen by significantly more according to brokers such as CBRE? Thank you.
Yeah, I. Can you I will answer the second question, but I would need you to repeat the first one because I didn't understand it. We guided 5%-7% in the next 12- 18 months. Initially, let's say in March, we saw it would be in the range of 5% in 2023, but the market continued to further deteriorate, so we think that it might be a bit, a bit more in the next 18 months, and that's why we guided 5%- 7%. Can you repeat your first question, please?
Yeah. Sorry, it was of the EUR 320 million sales, how much of that is Aroundtown versus the 100% being EUR 320 million? How much is Aroundtown ? [inaudible]
Hi. There was no major minorities in these disposals. Thank you.
The next question comes from Neeraj Kumar, from Barclays. Please go ahead.
Morning, everyone. I have two questions. First one on Grand City, you said the levels look attractive. I just wanted to understand, do you have any target in mind on level where you want to reach in terms of Grand City stake? Moreover, is there any threshold that you have to reach if you were to consider any related party transactions in terms of moving cash or assets between Aroundtown and Grand City buckets? My second question is on the hybrid scope, and if I remember correctly, in December, you made a press release saying that you'll pay coupons in December 2022 and January 2023 on your hybrids. Can we expect some similar press release or something of that sort, just to understand, till how long you expect to, t ill how long you have the clarity to pay coupons on hybrids? Thank you.
Hi. Referring to GCP, we don't have a target level where we want to reach. We are buying opportunistically, we increase our position mainly through choosing scrip dividends in the last years and proportionally increase our position. We are currently really buying on the small portions in the market and using the current prices and current discount to the NAV. About related party transactions, I mean, all transaction, in general, can be done if it's done in arm's length and properly disclosed. That was for the second questions. About the coupon hybrids and the notes that we made last year, I think we made it clear that the sale of coupons of hybrids is part of the toolbox we have. It's part of the terms and conditions of the perpetual notes.
We made it clear that if we see a market deteriorate further, it could be part of the open options we choose. We don't see the next coupon or the next two coupons as our lens. We look at the next three, four years of potential coupon that this could summarize to about a billion euros . If we see further deterioration in the market, this could be a relevant option as well. The idea is that no, the notification was not that we are not paying, but that this is just part of our tool, our toolbox. Thank you very much.
The next question comes from Leon Wei, from Jupiter Asset Management. Your question, please.
Yeah, maybe just a follow-up on the previous question on the coupon deferral for the hybrids. When you say conditions deteriorate, what, could you just clarify more precisely what needs to happen for you to consider deferring coupons? Secondly, when you mentioned, you consider the coupons cumulatively over the next few years, do you mean that once you defer coupons, you defer it for multiple years, once that decision is made? Thank you.
Hi, thank you for the question. It's not that we have a clear, let's say, formula, that if a certain something is happening, then we don't pay. It's a general view which takes into consideration liquidity, evaluation, development, disposal activity. If we see that the disposal activity is muted, capital markets further deteriorate or not open, maybe we see the secured financing decline or not able to support the liquidity. This is where we will start considering also that cash preservation option as well. When it comes to deferral of coupon, if you defer the coupon, you need to defer basically effectively for all of them, if you want to pay, because once you pay one coupon, you need to pay all the deferral before.
That's why when we say that this is an option to see, it's not to save, let's say, the one coupon or the second coupon that we have, but it will be a decision that we'll need to look few years in the future for saving cash. Thank you.
The next question comes from [Konstantinos Kalis] from EUROXX. Please go ahead.
Yes, good morning from the cloudy Athens. Two questions, please. One, regarding the disposals allocation, do you examine more systematic exit from a market you are currently operating, except Germany, that is London or the Netherlands? Second question, regarding the forthcoming AGM, item two, can we suppose that implies that there is a share capital increase in the distance? Thank you very much.
Hi, thanks for the questions. The disposal activity is across all the portfolio and also areas. There is no specific area we want to go out or pull out from. Referring to the AGM, giving back the ability or extending the ability of the board to decide about capital increase is just a technical issue. The board, according to Luxembourg law, has a period of about five years to use the authorized capital, and we are just now renewing this five years. There is no hint here for a further or future or near-term capital increase. Thank you for the question.
Thanks a lot, everyone, who took the time to participate in this call, and the questions you've submitted before, as well as during the call. We have now closed the live Q&A session, and I look forward to personally meet many of you over the coming months. Till then, stay safe and goodbye.