Aroundtown SA (AT1) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the conference call of Aroundtown SA regarding the presentation of the H1 results 2020. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Ms. Sylvie Lagies, Head of Communications and ESG, who will start today's conference call. Please go ahead.

Good morning, everybody. Thank you for joining us for our H1 2020 results call for Aroundtown SA. 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 of the Investor Relations section. I am Sylvie Lagies, Aroundtown's Head of Communications and ESG. With me today will be our CEO, Shmuel Mayo; CFO, Eyal Ben David; Chief Capital Markets Officer, Oschrie Massatschi; Chairman of the Advisory Board, Gerhard Cromme and Yakir Gabay. [Operator Instructions] Please feel free to send your questions via e-mail also during the presentation. The e-mail address is [email protected]. With that, I will now hand the call over to Oschrie Massatschi to start presenting our results.

Thank you very much, Sylvie. Good morning, everyone, and welcome to our H1 2020 earnings call. Q2 2020 was a challenging period in the commercial real estate sector, with the first wave of disruption in business operations and shutdowns by COVID-19 starting in March of this year. Thanks to our dedicated workforce and proactive management to mitigate potential risks in the early stages of the impacts by the pandemic, we swiftly identified how to navigate in the new market environment. During the second quarter, we significantly accelerated property disposals over book values, launched a EUR 500 million share buyback program, worked hard on rent collections and support our diverse groups of tenants to cross through these uncertain times. We continue to take great care that all our countermeasures are in line with the health and well-being of our employees, tenants and stakeholders. Aroundtown strengthened its position during the first half of this year and is well positioned should we have to deal with a long-lasting change in the economic landscape. Let's start on Slide 3 with the presentation. You can see here our KPIs for H1 2020. We will go into more details of each KPI later in the presentation. So please move on to Slide 4. Our high portfolio quality is a sum of a great degree of geographical diversification with a focus on top-tier cities, with 59% of our office portfolio located in Berlin, Munich, Frankfurt and Amsterdam, and Berlin being our single largest location. When building our portfolio to EUR 26 billion, we focused on a balanced distribution across preferred asset classes with 70% of the portfolio being offices, logistics, wholesale and residential, while maintaining low dependency on any single tenant. During H1 2020, we signed already EUR 1 billion in asset disposals with a significant premium to total costs, of which EUR 240 million has been completed in the first half. These disposals are generating significant shareholder value as we sold them above book value at times when our share price trades at over 40% discount to NAV per share. By reinvesting the funds from the disposals into the share buyback program, we create significant shareholder value, but more about this in a few moments. We are very disciplined to our strategy to keep and improve our quality portfolio, healthy with a solid capital structure, high liquidity of EUR 2.7 billion in cash and liquid assets, long leveraged debt maturities and high headroom to our covenants. All our key financial ratios are on a healthy level supported by a BBB+ rating by S&P. Our strong liquidity is 8x the debt maturing in the next 2 years, reassuring how well prepared Aroundtown entered the global pandemic and can cope with a challenging market environment, far longer than many peers. On the next slide, we will first go through the main operational results, followed by a review of the income statement and balance sheet figures. Please move on to Slide 5. As announced on our last earnings call, we have now a clearer picture of the results from our independent external valuators. We managed to revalue 2/3 of our real estate portfolio and 95% of the hotel portfolio during H1 2020. The result is EUR 560 million revaluation gains in H1 2020 and a 2.5% like-for-like increase. During the lockdown, we took part in many discussions relating to the effects of the lockdown on real estate valuations, especially in hotels. The market uncertainty was very high as the world did not experience such extreme situation in the past. We were always positive about the fundamentals of our portfolio, much due to our diversification in asset types, locations and tenants. The diversification is reflected in our valuation results. Our hotel portfolio was devalued by EUR 200 million from EUR 6.1 billion to EUR 5.9 billion, reflecting minus 3.4% on a like-for-like basis. However, all remaining asset classes, excluding hotels, were revalued EUR 770 million higher. Like-for-like, excluding hotels, this translates to a 4.7% growth for the first 6 months, and altogether, 2.5% like-for-like. We will provide a further detailed breakdown later in the presentation. Please now move to Slide 6. During Q2 and following the breakout of the pandemic, we accelerated our disposal plans and managed to sign EUR 1 billion of disposals, 6% over book value, to be completed before year-end. 70% of the disposals are retail assets, which, as you know, is an asset class not in our focus, but inherited as part of the TLG takeover. 46% of the total disposals were in non-core locations. The average rent multiple on these disposals was 17. Moreover, we are currently in advanced negotiations for disposal of an additional EUR 1 billion in properties. These sales above book value of non-core properties are a testimony to our portfolio valuations, create NAV growth and further fuel our strong liquidity. This connects us directly to the other side of the equation, the buyback of shares. Please move to Slide 7. As announced previously, we launched the share buyback program of our shares in early June this year, and we finalized it latest at the end of this year. The current program is set at a volume of up to EUR 500 million, with the aim to maximize our shareholders' value. The buyback program is fully funded by the successful disposals of our assets above book value, whilst the repurchase of shares is being conducted at a deep discount to our current NAV per share. The graph on the left-hand side of the slide highlights the discrepancy between the 2 values and the resulting shareholder benefit from this mismatch. So far, 1/4 of the EUR 500 million program has been repurchased at significant discounts to NAV, and we plan to further grow this amount as long as we see an unreasonable discount in our share price. We expect it will also improve significantly our KPIs per share. You can follow our weekly progress on the share buyback on our website, under Investor Relations. Time for an update on our portfolio performance. And with that, I'll hand you over to Shmuel.

Thank you, Oschrie. Please move to Slide 9. You are all aware of the lockdown we experienced across most parts of Europe. This lockdown has been lifted in Germany and the Netherlands and other location of our properties. Due to the successful disposal of our non-core assets, Aroundtown has increased its strength and resilience by focusing on the quality asset classes and geographic diversification. 87% of the portfolio value is invested in Germany and the Netherlands, of which the vast majority is in top tier cities. These 2 nations maintain their position as 2 of Europe's strongest economies, in general and also during the pandemic. Office, logistics, wholesale and residential assets make up 70% of the portfolio value. These segments have shown relative stability during the first half of this year. Therefore, it comes of no surprise to us that we did not experience any material early contract termination due to the pandemic, but instead managed to extend many scheduled lease expiration. Only about 5% of our hotels have not opened for business yet. And few others are undergoing renovation or repositioning as we brought innovation plans forward in the lockdown period. All other tenants reopened their businesses. Slide 10 illustrates how healthy weighted average lease term across each segment with an average of 8.2 years over the entire portfolio. Our diversification efforts extend also to the low dependency on our largest 10 tenants and with the thousand of tenants. We managed to achieve a good mix from different industries and tenants of all sizes. Except for hotels, collection rates during the imposed lockdown in Q2 have suffered only little compared to Q1 this year. Excluding hotels, we collected over 95% of our rent in the first 6 months. Office logistics and wholesale collection rates remained robust also during the lockdown. Office collection rate stood at 95% in Q2 and grew to 96% in July. Logistics and wholesale remained stable at 100% in Q2 and in July. The dropped collection rates for retail to 81% was a direct result of the lockdown on nonessential retail, which was limited to Q2. Once the lockdown had been lifted, the collection rate for retail increased in July to 94%, and we expect this rate to further increase in the next period. Note that retail only makes up 7% of our portfolio and keeps decreasing as it is part of our non-core accelerated sales program. The Hotel businesses continues to suffer heavily from the pandemic because of reduced air travel in most parts of Europe. Hence, we saw a significant drop in the collection rates to 21% in Q2. Since the lockdown has been lifted in July, the hotel collection rate has slightly increased to 33%. The revival for demand of hotel room is likely to accelerate should there be enhanced medical treatment or even a vaccination available soon. Our hotel tenants are in constant contact with us to discuss solution on a case-by-case basis, how we can best support our tenants in these challenging times. I'll now hand you back to Oschrie for the next part of the presentation.

Thanks, Shmuel. On Slide 11, we highlight the qualities of our office assets, half of our portfolio. Berlin is our single largest city with 26% of our office portfolio. Adding Munich, Frankfurt and Amsterdam, we achieved 59% in the value of our entire office share in these top European cities with strong demand in key locations. Still, the biggest industry sector in our office portfolio is from the public sector, which has grown further to 23% of office tenants, whilst less than 1% of office tenants are related to the co-working sector. The directly impacted sectors by the pandemics, such as air travel, oil or tourism, also represent less than 1% of our office share. Thanks to the excellent operational efforts of our teams and consistent demand for office space, the weighted average lease term in our office portfolio increased during the second quarter from 4.5 to 4.8 years, mainly due to prolongations. German residential assets, as shown on Slide 12, represent 12% of our portfolio and have proven to be the most resilient segment in Europe since the pandemic reached the continent. Merely 1% of rents were deferred due to COVID-19 in Q2 of this year. Whilst the shrinking supply resulted in a lower transaction volume in Q2, the vacancy in top cities also remained stable on a low level as demand for quality residential space has not faded. The logistics and wholesale rents, shown on Slide 13, account for 8% of the portfolio with a WALT of 6.9 years. This segment saw an uninterrupted rent collection rate of close to 100% this year as the last mile properties are experiencing increased demand. Our diversified portfolio across the full spectrum of major asset classes and regions allows us to minimize our risk exposure and dependency on any single asset class or location, which becomes more evident in such uncertain times than throughout the last decade. Please move to Slide 14. Due to the successful disposal of parts of our retail portfolio, we were able to decrease our retail exposure further to just 7%, with a WALT of 4.8 years. About half of the remaining retail assets are essential goods related, such as groceries, banks, pharmacies, drug stores and others. Moving to Slide 15. Our hotel properties account for 23% of the overall portfolio value. All 176 hotels are externally operated and represent over 30 different experienced operators, with an average lease duration of 15.2 years. Our double and triple net rental agreements with the hotel tenants are fixed plus CPI-linked without a variable component and include different types of securities and guarantees. 85% of these hotels are in the 4-star category, therefore, benefiting from a large pool of diverse customers from business and leisure travelers alike. The hotel sector took a direct hit from the lockdown and decreasing air travel. Most of our hotel operators made use of the legally offered rent deferrals and closed the operations to cut costs to a minimum during Q2. As mentioned, since the lockdown has been lifted, 95% of our hotels have reopened its doors, and in particular, those catering for leisure travelers experienced growing demand from tourists in Europe that decide to travel this summer by ground transportation. Where does it leave us with regards to revaluations? Usually, we revalue each asset once per year, spread evenly across all quarters. This year, we already revaluated 95% of our hotel portfolio in the first half of 2020, as we aim to have a better understanding of the impact of the pandemic. As you can see from Slide 16, we analyzed each of our key markets and identified differences when comparing individual cities as they cater for different types of hotel guests. Overall, the like-for-like revaluations dropped on average by 3.4% when comparing to December 2019. These valuation results include the time of shutdown and travel bans when many hotels were forced to close its doors. In some regions, such as Benelux, we had positive revaluation gains due to the strong recovery of our resort hotels in these regions. In general, city hotel values decreased stronger than in regional areas. Turning to Slide 17. We want to highlight the importance of domestic travel demand. Our 3 core hotel markets, Germany, the Netherlands and the U.K., account for the majority of our hotel portfolio. Last year, even before the travel ban was in place, Germany and the U.K. had over 80% share of overnight stays from their domestic travelers. The Netherlands ranks third in Europe with over 60%. These numbers demonstrate the independency of international tourism for the demand of hotel rooms in those markets, especially when compared to Southern and Eastern European countries. We expect that the naturally high ratio of domestic hotel demand from leisure and business travelers will act as a catalyst for faster recovery for our tenants. Resort locations such as Center Parcs enjoyed strong demand since the lockdown was lifted, particularly supported by the summer vacation season and substituting air travel with driving distance locations. Looking at the hotel collection rates in more detail on Slide 18. It is fair to say that even after our hotels open, it will be a long improvement period before occupancy levels will reach precrisis levels. 60% of contractual rents have been collected during the first 6 months this year. Regarding the deferred 40%, we remain cautious and have created provisions for about half of the deferred rent, which remain to be collected when the market recovers. Post shutdown, July shows a slight improvement in the collection rate to 33%. The majority of the sector continues to suffer from the lack of demand. As a reminder, the German government gave permission to affect the tenants to defer Q2 2020 rental payments for up to 2 years. We evaluate on a case-by-case basis where rent deferrals make sense and charge up to 8% interest, as suggested by the government. On Slide 19, we see an overview of the well diversified hotel tenants and brands. These well-known and long-established operators provide a long-standing experience in different market environments, and we don't have any major dependency on a single tenant. The largest tenant in this segment is Center Parcs, who accounts for nearly 5% of the total rental income, and currently experiences a strong pickup of bookings from travelers that choose to arrive via ground transportation. I'll now hand you over to Eyal, who will guide you through our capital structure and key financials.

Let's continue to Slide 20. Here, we highlight our conservative capital structure, with an unencumbered asset ratio of 74% or EUR 16.6 billion in value as of June 2020. The loan-to-value remained low at 36% and continues to have sufficient headroom to our covenants and also our stricter BOD limit 45%. Moreover, the interest cover ratio remained constant year-over-year at a strong level of 4.5x. As a result of our reduced acquisition activities, we have been less active in the number of new capital market issuances this year compared to the previous years. Nonetheless, we still took advantage of some funding opportunities below our current average cost of debt of 1.6%, whilst maintaining a longer average debt maturity of 6.2 years. Naturally, we continue to monitor our funding options across different issuances and currencies globally to time the market and always have sufficient liquidity at hand for growth opportunities and economic challenges. During the first half of this year, we also focused on our liability management activities to successfully repurchase some shorter and more expensive bonds outstanding. Meanwhile, we maintained close ties with our large network of brokers globally, and we're involved in many due diligence processes during the first half this year. So far, we are still convinced that it is best to maintain patience until we see special investment situations opening up due to the current crisis. As in previous crisis experience, there is a time lag between the peak of the crisis and when financially distressed real estate owners appears in the market. We expect those opportunities to arise in the course of next year, offering much greater return for our long-term shareholders. Please move to Slide 22. Our net rental income in the first half of 2020 results in an amount of EUR 588 million. The like-for-like rental growth in H1 2020 stood at 3% and is a combination of 3.2% from interest rental growth and a decrease of 0.2% in the occupancy. The decrease in the occupancy relates to delay in new lettings during the lockdown in Q2. Net profit for the period amounted to EUR 626 million, and the earnings per share resulted in EUR 0.36. Moving to Slide 23. Adjusted EBITDA grew during the first 6 months of 2020 to EUR 500 million, up from EUR 363 million for H1 '19, a growth year-over-year of 29%, mainly as a result of the merger with TLG. Slide 24 provides an overview of our funds from operations. During the first 6 months of 2020, our FFO I grew to EUR 312 million, up from EUR 239 million for the first half of 2019. FFO I per share after perpetual increased by 5% to EUR 0.20 in H1 2020. As part of our management assessment, we have created a EUR 35 million extraordinary rent provision in response to the prevailing uncertainties of the effect from COVID-19 over the hotel industry. The company is still working with these tenants on a case-by-case basis, as mentioned before, to collect deferred rents. Future recovered and collected deferred rents will support future operational growth. Since the rent collection for the other asset classes didn't deviate significantly from pre-pandemic levels, there was no need for an extraordinary provision for these asset types. We thus present an FFO I after perpetual notes, COVID-adjusted, for H1 2020 with EUR 0.17 per share, which includes this extraordinary negative effect. During the first half of 2020, the FFO II increased to EUR 384 million, resulting from the FFO I COVID-adjusted of EUR 277 million, plus EUR 107 million disposal gains over the EUR 239 million disposals in H1. Continuing to Slide 25. The EPRA NAV for the first half of 2020 increased further to EUR 12.4 billion, and the EPRA NAV per share grew by 3% to EUR 9 due to the profit generation in the period. On Slide 27, we present our guidance for 2020. We feel we have now better visibility on the main COVID effects on the majority of our asset types, collection levels and performance of the company in 2020. Due to the uncertainties, especially over the hotel industry, we took a conservative approach to estimate the company's performance this year. Moreover, now we can better estimate the magnitude of the disposals, which are significantly higher than our expectation from a few months ago. Our assumptions for the full year 2020 FFO I have additional net disposals in the amount of EUR 1 billion, which are in advanced negotiations. That's in addition to the EUR 1 billion already signed deals year-to-date and a flat like-for-like results. Therefore, we expect in full year 2020 an FFO I after perpetual loans in the range of EUR 460 million to EUR 485 million, EUR 0.34 to EUR 0.36 per share. The per share amount is lower in comparison to 2019. This is due to the large amount of disposals in the amount of EUR 2 billion. The additional disposals are expected to be carried out at around book value and will provide substantial fuel for additional share buyback amounts at a very steep discount. The large disposals will weigh on the FFO of 2020. But once the share buyback will come substantial, the per share results will bounce back and more. We expect to see the effect of the share buyback more in 2021 and less in 2020, as the share buyback will have only a partial effect this year. We also provided guidance for the FFO I per share after perpetual, COVID-adjusted. We are currently conservatively assuming provisions on the hotel rents for the full year in the range of EUR 110 million to EUR 130 million in 2020, assuming the hotel performance remain on its current weak levels also in H2 2020. This provision will need to be adjusted every period based on the updated market conditions. As part of our risk management and assessment, we'll make the provision but we'll continue to work with our tenants on a case-by-case level to collect the full amount of rents. Therefore, the FFO I per share after perpetual, COVID-adjusted, is expected to be in the range of EUR 0.25 to EUR 0.28 per share. We understand we took a conservative approach and reiterate that these provisions are an extraordinary adjustments, and once the lockdown effects and travel bans are over, we expect to reach the high collection rates pre-COVID and show stronger growth on a per share level. That concludes the H1 2020 presentation. The appendix holds plenty of more information for you all to review. I will now hand you over to Sylvie, who will lead the Q&A session.

Thank you, Eyal. Before we invite your direct telephone questions, we would like to answer questions that we have received by e-mail prior and during this call. For simplicity reasons, we have taken liberty to group similar questions in order to answer as many questions as possible. Allow me now to read all these questions. First question, what is your current view on the office market? How is the vacancy and rent developing in light of the coronavirus? How do you expect the work-from-home trend to impact your operations?

Half of our portfolio are offices which are located in Germany and the Netherlands. In most aspects, the office market in Germany and the Netherlands remains stable due to the prevailing fundamentals of these markets. Our 4 largest office locations are Berlin, Munich, Frankfurt and Amsterdam, which approximately 60% of the portfolio -- of the office portfolio. They continue to benefit from positive demand also during the lockdown period. Based on market research, 87% of all new office space completed this year has been already let, and the pre-let ratios are also increased further during Q2. In our view, the demand pre-COVID has been very strong and top locations were at record low vacancy rates. So the decrease in demand within the crisis remained to be offset by the low supply. Since March, when the impact of the pandemic started to affect demand, we have seen low levels of requests for new lettings in a range of 20% to 30% in comparison to prior periods, but new leads never stopped to arrive. In addition, we also experienced a longer duration to complete a transaction in comparison to prior periods. This is the result of both the shutdown in the market, which started to be lifted in May, and also due to the economic uncertainties. The effect of the lower request for lettings is not fully included in our Q2 results and we expect to see a certain impact on the new lettings in the upcoming periods. Although with the uncertainty of the impact of the pandemic, companies tend to postpone decisions for new office space. We so far experienced a similar level of prolongation by existing tenants in comparison to former periods. We believe that tenants want to secure their spaces for the coming periods. In Q2, we have prolonged 100,000 square meter at EUR 10.5 per square meter, similar to the existing rent levels. Market reports state that the GDP decline in Europe to be the steepest since World War II. As a result, it can be expected that companies are holding back. The federal government expects GDP to decline by at least 6.3% in 2020, with export-oriented industries and service provisions particularly affected. We see tenants postponing decisions to take new spaces and expand, which might impact our operations negatively in the near future. But we expect these plans to resume once uncertainty is cleared and companies will resume to grow. Major recovery effects are expected from 2021. The federal government forecast a GDP increase of 5.2%, with the ifo Institute even predicting GDP growth of 6.4%. At the same time, the ifo business climate index has improved significantly since bottoming out in April. Companies are looking to the future with greater optimism, with business expectations returning to February's pre-coronavirus levels by the end of June. In addition, the direct consequences of the pandemic are being absorbed by economic and employment policies. We believe that market reports give a good snapshot on the current office market. Accordingly, prime rents in the top 7 cities in Germany increased by 3.5% in Q2 2020 compared to last year. The increase in rent was in all top cities. In addition, vacancies dropped further in Q2 2020 to 3.2%, a very low level. On the other hand, the take-up of new space was down by 36% year-over-year, which is a result of companies holding back, but also the result of lower available lettable area. Looking forward, according to these market reports, in 2021, over 50% of the office space in pipeline under construction is already pre-let, but we will need to see how the current crisis will fully unfold, the length and the full impact on the economy. Germany's labor laws would support employment in times of crisis, so-called Kurzarbeitergeld, provides companies the option to reduce employees working hours without terminating contracts, while employees receive benefits from the government. Thus, as soon as these companies -- as company businesses are improving again, the workforce is readily available. The effect that landlords will not reduce office space unless the business is materially impacted long term. Also not fully reflected so far is the impact of the historical record heavy stimulus packages provided by government and the current interest rate environment, which will offset the negative effect to some extent. According to market reports, the stimulus will create hundreds of thousands of jobs, which will increase the demand for office space by over 2 million square meter. The economies of Germany and the Netherlands entered this crisis from a strong position with strong economies, low unemployment rates and low debt burdens. These factors are crucial for a fast recovery as the government has the necessary power to offset negative impacts to some extent. The office collection in Q2 was not materially affected from the lockdown and amounted to 95%, which is a result of our very well distributed office portfolio in all the top cities in Germany and the Netherlands combined, with a low tenant dependency on any single-tenant industry and single tenant. So considering that the German government made it legally possible for tenants to defer rents if they have been materially impacted by the crisis, we consider our strong collection rates in this time as a testimony of our asset and tenant quality. The collection rates in July has further improved to over 96%. As to the working-from-home trend, working from home is not a new concept, but there are opinions in the market that the lockdown initiated a new trend to a higher sustainable share of working from home. We do believe that a more flexible usage of office space, working hours, working presence and new technological solutions will be part of the future office work. We do not believe a new drastic change of office space will be used now that more companies made experience with working from home. Working from home on a voluntary basis and not government-enacted basis provides several challenges, which will need to be overcome in order to enroll a sustainable shift. Employers will probably be the driving force to a higher share of working from home as the highest incentive is cost savings. We see several challenges employers need to overcome, which we don't see there suitable solutions available so far. Cost saving aspect will be less relevant for office space in Germany, where rents are significantly lower than in high-priced markets, such as Paris and London. Also new costs will arise with shifting to a flexible office space and IT solutions will need to be implemented to manage a large workforce, which has the flexibility to choose to work from home or at the office, where only limited amount of desks will be available. The infrastructure and fit-outs of home offices will need to be improved, which will lead to higher costs as well. We also believe that a flexible working space where employees can choose to work from home will have an impact on productivity. Where some industries and type of workers will be better suitable to adapt, others will suffer, also as employers will try to implement control functions to monitor working hours and productivity. For many companies, a representative office space is a tool to attract and retain employees. Central locations and perks create high attraction. Although employees might not be the main driving force in the acceleration of the working-from-home trend, they are also challenged. The employees faces challenges the employee faces, which will have an impact on the employer. We believe the efficiency and focus of employees will suffer when being forced to spend a certain amount of working time at home if the environment at home is not suitable for home office. Also the work-life balance might suffer when the borders between home and office, leisure time and working time are fading. And in general, new employees will have a harder time to adjust, and it will take longer until they will contribute their full performance. Regardless of these challenges, we believe as more market participants are now open to work from home, the incentive is high to find some sort of solutions, which will probably be fastest in the IT industry and in locations where the cost saving and commute time saving potential is highest, such as in London and Paris. We believe changes in trends and accordingly have increased investments in order to strengthen and improve our IT security, networks and connectivity as well as modes of communication. Furthermore, we are highly supportive of tenants that require changes to their fit-outs and work closely in order to ensure productivity is at its optimum levels and tenant satisfaction is maximized.

Next question. Can you please give us more color on the impact on the hotel market in general and on your properties specifically? How do you see the recovery of this sector?

The impact of the lockdown on the travel, tourism and hospitality industry was among the largest in the market. Hotels make up 23% of our portfolio. Most of the hotels either had to shut down due to government enforcement or due to lack of client demand. Very few exceptions remain opened, also as some hotels could cater COVID-related demand as municipalities needed to provide hospitality for relocation of essential workers, for example. As of now, all lockdowns have been lifted in our locations, 96% of hotels are open, but the recovery differs depending on the location and type of hotel. Our tenants report on very low occupancies, which on average are currently around 25%. Pure MICE and airport hotels are effectively not able to resume to normal capacities as long as limitations are in place. Resort, holiday park and country site locations accessible by road recovered fast due to ongoing flight restrictions and start of the holiday season. We see this in our resort and holiday park and leisure hotels in Germany and Benelux, where this summer, the resorts reached high occupancy levels. In some countries such as the U.K., the lockdown was longer than in Germany, thus negatively impacting the hospitality industry stronger. Also as of today, international tourism and business travel are still significantly below the levels pre-corona. Given no second wave as well as further easing of restrictions, the market expectations is to reach 2019 levels in 2022 to 2023. It can be expected the recovery in countries with high share of domestic travel, such as Germany and the U.K., both with over 80% is faster than countries depending on intentional travel. We expect to see recovery of city hotels in central locations and top cities in Europe, which will benefit from domestic and international business and leisure tourism. The occupancy levels are still low, but with a positive trend to recovery. As the majority of our hotels had to be closed during the lockdown, the majority of our hotel tenants used their legal right to defer rents, which resulted in a low average collection rate of our hotel tenants in Q2 of 20%. As of July, the collection rate increased to 33%. Please note that our hotels are leased to strong third-party operators with fixed long-term rental agreements and present a WALT of 15 years. The rental agreements are double or triple net fixed plus CPI-linked and no variable components in the lease. We are in constant contact with our tenants in these difficult times and try to support their fast recovery. As mentioned above, due to the uncertainty regarding to the length of this crisis and the continuation of the crisis also during Q3, most of our tenants deferred rents currently until end of September. Deferred rents carry interest of 5% to 8%. Once the material uncertainty will disappear, we will reach to a complete settlement regarding the deferred rents. As post Q2 collection rates of the hotel portfolio have not improved and the uncertainties of the coronavirus prevail, the recovery on the hotel industry remains uncertain, and we thus decided to create conservatively an extraordinary general rental provision in Q2 at the amount of EUR 35 million, which is deducted from our FFO. Nevertheless, due to our strong diversification, we are still able to achieve a high FFO, as you can see in our guidance.

Next question. Given the current market situation, are you still able to reduce existing vacancies? How strong is the current letting pipeline? Has the pandemic impacted the visionary potential?

During the first half of 2020, we have signed nearly 90,000 square meter of new leases, of which 30,000 square meter in Q2. However, many of the new leases have been negotiated during previous periods. Following a muted level of activity in Q2 due to the uncertainty surrounding in the market, we expect trends to remain relatively flat over the next period and new lettings to be more challenging, which will impact the speed which we can reduce our vacancy. On average, in the office market, we experienced a higher prolongation ratio in comparison to former periods. Tenants are happy to secure their space as they are faced with uncertainties about the future. The prolongations have been similar -- at similar rents, so no rent increases here. We didn't experience any material extraordinary lease terminations due to insolvencies. For new lettings, we are experiencing delays in the process, mainly related to tenants taking longer time to decide as they are evaluating on the right utilization of space and potential adaptation of fit-outs. What we also hear in the market is that large tenants, which are centralized in large office space in the past decades, are now considering to decentralize into many smaller locations in order to avoid clustering of employees in case of a pandemic would rise. The logistics wholesale sector has basically been -- not been any material impact from the lockdown, which can also be seen in the stable collection rates. Our retail sector has not been materially impacted due to high essential goods tenants which improved their performance during the lockdown. Supermarkets, pharmacies, drug stores, do-it-yourself stores, banks, et cetera, stayed open during the lockdown and performed very well, while other industries, such as fashion, et cetera, which are usually found in high street shopping centers, had been shut down and slow to recover. Our exposure to retail properties is only 7% of the portfolio, post signed deals. Due to our high share of essential goods tenants, the collection rates have fared relatively well with 81% collection rate in Q2 and the remaining deferred. Also the few amounts of shopping centers we have are mainly local neighborhood center in centers in Berlin, catering local demand and are thus less affected. We experienced a high interest of tenants to prolong the rents, mainly this -- of the essential good tenants who are very pleased to secure their current space. As of July, the retail collection rate increased to 94%. Looking forward, it is hard to estimate our ability to reduce vacancy significantly in the short to midterm. We expect that it will take longer to reduce vacancy, and it could also be that vacancy rates will slightly increase in the short term, especially in the retail sector, but remain positive on the long-term outlook as our properties benefit for sustainability, strong fundamentals and our portfolio remains defensive. Our properties are under-rented, and we are not constrained by having to rent at or above market rent levels in order to deliver rental growth. The high diversification of our portfolio and focus on strong asset classes at very long WALT of 8.2 years provide a high degree of stability.

Next question. Do you reconsider your strategy towards hotels now after the lockdown? Will you consider to acquire hotels in the future?

Hotel assets are a strong asset class with good cash flow and long-term characteristics, and we believe the crisis won't change the demand for hotels in the long run. And these assets will continue to produce strong long-term cash flows after the market has recovered. We see differences between cities and leisure hotels to MICE hotels heavily reliant of conferences and business travel. We believe that in the mid to long term, well-located city center and leisure hotels will continue to perform well. After the lockdown has been lifted, we saw in the resort and holiday park and country site hotels a fast recovery from high domestic demand and the vacation season. This shows that the hotel industry will recover, although it will take more time for all hotel types to recover. Also, as an alternative in case a recovery is late to come, nearly 60% of our hotels have a potential for conversion to micro apartments for elderly homes, although we do not expect that this option will be needed. Regarding acquisitions. Currently, we don't see many relevant opportunities in the market, and price levels of high-quality hotels in good locations haven't decreased much. With the prolonging of this crisis, we expect illiquid and/or leveraged players to become forced sellers and opportunities to come to our table. We will consider to acquire hotel assets in such a scenario and if very attractive opportunities will arise. Our high amount of liquidity is a competitive advantage and provides us with the firepower to act and to benefit from potential opportunities.

Next question. How did your rent collection develop during the lockdown? And did it improve afterwards? Will you do some write-downs on uncollected rents?

In Q1, the collection rate was not impacted by the low down and stand at around 98%, similar to previous periods. In Q2, the collection rate was 71% due to a low collection rate from the hotel properties, and 93% excluding hotels. From our office tenants, only a small amount of rents were deferred resulting in a collection rate of 96% in H1 compared to over 98% in former periods. There was no impact on the collection from our logistics wholesale properties, which remains nearly 100%. From our retail tenants, we collected 91% in H1 compared to nearly 100% in former period, as the majority are essential goods, which have performed very well during the lockdown. We expect to collect the deferred rents in the upcoming months, although in Germany, tenants have the right to defer rents in Q2 and repay latest within 2 years. The deferred rent carry interest of up to 8%, and we expect the repayments to happen earlier, assuming no further lockdowns.

Next question, will you decrease any rents in your hotel portfolio? Do you see any chances for insolvency of your hotels?

We are in discussion with our tenants to find suitable solution out of this crisis. We will consider longer rent deferral periods considering how long it will take to recover to a sustainable operational level. Our tenants are very professional, especially in stress situations, and are adjusting fast to market changes. We are working hard on individual solutions together with our tenants, and we expect to receive additional commitments in return for waived -- deferred rents, such as extending leases and higher rents in the future. In an extreme case, where we see that the tenant is not able to perform or recover from the crisis, we can take over the operations and/or replace with a new tenant or explore more deeply the alternative of converting these properties into micro apartments or elderly homes. We will try to avoid this situation but do have the fallback option. Currently, given that most locations have lifted the lockdown, we estimate the chances that hotel tenants will turn insolvent as quite low. As mentioned earlier, our hotel tenants are operating and managing hotels for decades and a proven track record of successfully navigating through past crisis situations and coming out strong. In a more pessimistic view of the situation, in case the virus continues to restrict travel again, and for longer periods, market reports have suggested domestic demand will continue, which benefits our hotel portfolio as it is located in regions with strong domestic demand.

Next question. Could we get more light on the valuations in 2020? What were the valuation drivers? How much of the portfolio was valuated in H1 2020? Was there an impact from COVID-19? What can we expect in the next period?

We have performed durations of over 2/3 of our portfolio compared to around usually 1/2 of the portfolio valuated in the semi-annual report. In particular, we requested from our external valuators to perform valuations of our hotel portfolio, of which 95% was valuated in H1 2020. As always, the valuations were carried out by external professional valuators. In the first half of 2020, we have recorded positive valuations of EUR 564 million, plus 2.5% on a like-for-like basis. 60% of the like-for-like result from operation improvement, 60%, and the remaining from yield compression. The overall yield compression was close to 0.1%. We see the stimulus package supporting also the investment and transaction markets. Over EUR 100 billion of German government bonds expire in 2020 and 2021, with an average yield of 3%, whereas the current 10-year yield is well below 0%. We see this yield pressure driving more capital into real estate properties, increasing the demand. We have seen the office portfolio performing well with plus 5% like-for-like value growth. The properties are very well located across strong cities in Germany and in the Netherlands and benefit from very strong fundamentals, which proved in the crisis to be sustainable and relatively resilient. Looking forward, we expect the office valuations to remain stable, supported by low yield compression. The residential portfolio held by GCP and not consolidated in Aroundtown's revaluation results shows also good valuation results with plus 3% like-for-like value book. Our retail portfolio valuation was stable with 1% like-for-like. Approximately half of the retail portfolio is comprised of essential goods, which is performing very well, also in the peak of the low. After the outbreak, we have sold around EUR 600 million of retail properties, primarily in small non-core cities at a premium to book value, highlighting our conservative valuations. On average, we expect the valuations of retail to remain stable. In the second quarter of 2020, our valuators performed an extensive efforts and valued 95%, as mentioned, of the hotel properties. As hotel industry has heavily impacted from the pandemic, it was important for us to get an updated view on the value impact on the properties, even though the transaction market for hotel properties practically froze and could not provide any reference point. The updated valuations on a like-for-like basis decreased by 3.4%. The specific sector experienced yield expansion of 0.2% in average. We have seen a moderate valuation decreases across the portfolio, minus 3.8% in Germany and minus 3.5% in the U.K., positive of 0.4% in the Benelux, and minus 4% in other locations. Benelux is an exception with nearly 2% positive like-for-like growth, as this region clusters include hotel resorts, which are performing very strongly and very good -- and has a very good outlook. The impact of city hotel was higher as the recovery from the lockdown is slower. Nevertheless, for the entire portfolio, including the hotels, we recorded a positive revaluations due to our strong location and diversifications of different asset classes.

What was the impact of the lockdown on your operations? And did it cause any damage?

The health and safety of our employees is one of the highest responsibilities which we take very serious. We initiated across the company distancing measures through working from home, virtual meetings, virtual roadshows, travel reductions and so forth. Before returning to the office, facemasks has been handed out and sanitizes installed in all entrances as well as distancing policies passed. The lockdown did not materially impact our operations, and we were able to adapt very fast to the change situation due to our remote working capabilities and experiences. Our IT infrastructure has always been built up flexible with remote working options as it is not unusual for us to work from home or on the road. Prior to the lockdown, our IT team has also rechecked all systems and set up additional securities in order to be well prepared.

Your acquisition activity significantly decreased. Is this the result of the crisis? And if so, when do you plan to restart? How much firepower do you have for acquisitions? What is the updated expected yields from new acquisitions?

We have paused our acquisition activity at the outbreak of the crisis and its uncertainty of the impact and duration. We prefer to maintain our high liquidity for the right opportunities. Crisis situations usually produce unique acquisition opportunities of distressed, forced sellers at significant discounts. We experienced this in the 2008, 2009 crisis when banks and other financial institutions unloaded their foreclosed assets in the few years following the crisis. Besides a few acquisitions, we have basically been signed prior to the crisis, we also merged this year with TLG, which adds a portfolio of close to EUR 5 billion, and thus exceeding our acquisition volume of the past years. Since the lockdowns have been lifted, we started to receive many deals from our deal sourcing network, and we are currently reviewing a pipeline of over EUR 500 million. With firepower in the amount of EUR 3 billion, our adjusted yield for new acquisitions is to reach an unlevered NOI yield of 7% on total costs within 4 years after the acquisition. Another way of acquisition is executed via our share buyback program, in which we acquire additional positions of our own properties at 40% discount to the net asset value, equivalent to the discount our share price trades to our NAV.

You disposed -- have signed for disposal a significant amount of properties in the recent period. What is the strategy behind it? And what is the plan going forward?

Year-to-date, we signed disposals of EUR 1 billion, of which EUR 240 million were closed during H1 2020, sold 2% above book value and 81% above total costs. Vast majority of the disposals were signed after the pandemic outbreak and priced in the current market environment. The disposals follow our strategy to recycle capital of non-core properties, which are either locations not in our focus or asset types and also mature assets, which are properties where the majority of upside has been lifted. The proceeds shall be used to capture higher value and new acquisitions. Freed up funds are further strengthening our liquidity and part of it is funding our share buyback program. Acquiring shares at a huge discount to NAV fueled by disposals above NAV enabled the Aroundtown team to benefit from the large mismatch between the share price and actual market levels, creating massive shareholder value. At Aroundtown, we continue to dispose properties and benefit from this buyback, and currently has an advanced disposal pipeline of over EUR 1 billion. We have the ability to extend our share buyback program and can acquire up to 20% of the aggregate nominal amount issued of share capital.

Next question. How much of the buyback program was utilized already? What is your plan with the shares you have in treasury? Also, when do you make a decision if you pay or don't pay a dividend?

We set up the buyback program to benefit from the significant share price discount to the EPRA NAV, while disposing assets of book value. The buyback program is set until the end of this year, and the volume is up to EUR 500 million. The buyback is done by an external financial institution without the involvement of the company. In the past weeks, an amount of around EUR 20 million per week is invested. The progress of the program is also presented in our website in the Investor Relations section. We have completed over 25% of the program so far. And in this space, we will probably utilize the entire program amount before the year-end. The shares are bought back at an average share price of EUR 5.1 per share, which is over 40% below EPRA NAV per share, thus creating significant shareholder value. The plan is to use this share for scrip dividends, acquisitions, capital increases and more. In case the buyback program will be completed and with the support of disposals higher than book values, we will consider to increase and extend the current program as long as the share price remains to be in a deep discount to our EPRA NAV. Regarding the dividend, our decision to postpone the decision for distribution remains. Unfortunately, there are still significant uncertainties about the stability of the market, the willingness of governments to continue supporting the market massively, the risk for a second wave, especially in the upcoming colder season, and with its further potential lockdowns, which would impact the travel and tourism industry. We can convene a general meeting at any time this year in case we -- the situation improving. Even though the lockdowns have been lifted officially, we all feel that things are not yet back to normal. As we mentioned, we estimate that the current situation might result in a financial distress for some players, which leads to very attractive for sale opportunities, which we want to be able to execute. Unless companies have problems already going into the crisis, it usually takes time to get into a distress situation with no more option to recover. We experienced these opportunities in the global financial crisis in 2008, 2009, where in the following years, we had made many very good transactions, which created very long-term value for our shareholders.

Next question. Are you planning to access the capital markets again? You recently bought back part of your bonds. What is the plan? You have a very large pool of unencumbered assets. Would you consider to focus more on bank financing now in time for high volatility?

Due to our high amount of cash and liquid assets, which we had prior to entering the crisis and due to our high headroom to all our covenants, we are in no need to access the capital market at this volatile times. Our disposals, of which we signed of EUR 1 billion year-to-date par book values, further improve our liquidity and equity position. The funds are partially used to fund our EUR 500 million share buyback program. We bought back part of our bonds with shorter maturities of 2022, 2023 and 2024. Our general policy is to extend and maintain a long average debt maturity and with thus, refinance ahead of maturities. Bank financing is, in general, always part of our diverse funding mix.

Can we get information on the lettings during the second quarter of 2020? How many square meters were let and what price level?

In the second quarter of 2020, Aroundtown concluded contracts for about 128 square meters, which represents EUR 19 million annual net rent, 2/3 of which refer to prolongation of existing tenants and 1/3 to new tenants. The prolongation were done mainly in the office sector at EUR 10.4 per square meter, a 2.4% like-for-like increase. Also the new letting focus in the office sector and were done at EUR 14 per square meter. The letting concentrated in the second quarter were mainly in the office properties. The average interest rent per square meter for prolongation in the office segment was EUR 10 with a WALT of 3.5 years, and the new letting in the office segment was concluded at EUR 14 per square meter on average and a WALT of 7.5 years.

The rent like-for-like amounted to 3% in the last 12 months, below the previous level. What is the reason for the lower result? And what can we expect to see in the next periods?

The like-for-like for the period was 3%, 3.2% from interest rent growth and a negative 0.2% occupancy growth. We experienced the strongest like-for-like increase in Berlin, Amsterdam, Rotterdam, Utrecht and Leipzig. The interest rent like-for-like remained stable in comparison to previous, while the like-for-like for occupancy decreased and declined compared to previous periods. The decrease in the occupancy is due to a lower letting levels as the muted letting activities during the second quarter of 2020 had its impact. The delayed letting resulting from the lockdown and uncertainty in the market had affected the results and resulted in a slight decrease in the occupancy. Going forward, it is hard to estimate like-for-like results due to this uncertainty in the market. The longer the uncertainty will remain in the market, the harder it will be to let new spaces. The decrease in the occupancy like-for-like is expected to be offset by the extension on new space and from tenants prolonging their leases, which is also by-product of the muted activity in the market.

What is the headroom to your covenants? And do the perpetual notes carry any covenants?

We have significant headroom to our covenants as our actual levels are very strong. We have always maintained a large headroom as we build the company with a focus on a conservative capital structure. Thus, we were able to achieve the strong credit rating early after going public. Perpetual notes do not have any covenants as they are fully subordinated equity instruments without any maturity dates, no default rights or covenants. In the current market situation, it should become more clear that these instruments provide a safety cushion in the same way as equity and not of debt.

What is the status with the ongoing development and the plan with building rights? Did the crisis impact the strategy? How much of the development rights is committed CapEx?

As of June 2020, we identified development rights in the amount of EUR 1.6 billion, accounting for about 5% of the total assets. Our strategy remains regardless of the crisis, to analyze the portfolio and identify underutilized space where we can extract the value potential by getting building rights of unused land on plots of existing properties, conversion rights and sell or potentially develop when the risk is low. We will consider executing developments in our top locations only if it will meet certain criteria, such as pre-let contracts and more than 10% unlevered NOI yields over the costs. Development rights we identified are mainly for residential and office properties, but as they are not finalized yet, could also change in order to further optimize. Over 50% is located in Berlin, 15% in Frankfurt, 10% in Hamburg, and 5% Dresden. Therefore, our committed CapEx is proportionally low and amounts to EUR 200 million, less than 1% of the portfolio value, and is related to the ongoing projects. We have a few projects currently under construction, a large office building in Frankfurt in one of the best locations in Frankfurt next to the main train station, which we started to fully refurbish in the beginning of this year. The property will be repositioned to capture the high upset potential as it was significantly under-rented when we acquired it. Please also see Slide 49 in the appendix of the presentation for more information about this project. Further, currently under construction are 2 high-quality office projects in the center of Dresden, which is a market characterized by low supply and high demand. One project is expected to be completed this year and 70% is already pre-let with the main tenants being government and blue chip companies at 10-year lease contract. Second project is expected to be completed next year, and 70% of the space is in final negotiations for pre-letting. We have few other projects currently in progress. The largest is a hotel and prime center Brussels, which we expect to be finalized next year and will result in a full repositioning of this property. Another project in Berlin, Treptow, at the river, a mixed-use building on [indiscernible] in Berlin, one of the best areas in Berlin, but the extended -- where we extended the top floors is being finalized end of this year and already partially pre-let. In addition, during the lockdown, we pushed forward few CapEx projects in Berlin, Frankfurt and Cologne, which usually are done second by section. In general, due to the lockdown, we used the opportunity of fully closed hotels and execute the CapEx measures, which will then be done faster.

Next question. What are your next steps after the merger with TLG? When will the new management come into effect? Will you increase your holding? Squeeze out maybe? What about a domination agreement or delisting?

We are currently in the integration process. The crisis only slowed down the integration process slightly, as both companies focused their resources on managing the crisis effectively. We have identified and lifted several operational synergies already, and we also announced the new management a few months ago. The CEO of the combined group will be: Shmuel Mayo; Eyal Ben David will be the CFO; Barak Bar-Hen will be the COO and Co-CEO. Myself will be the Chief Capital Market Officer, the CCMO; and Klaus Krägel will be the Chief Development Officer, the CDO. Shmuel, Eyal and myself, you already know. Barak is currently the CEO of TLG, and Klaus is currently a member of the Supervisory Board of TLG and Chairman of TLG's Project Development Committee. Both come with a large set of skills and many years of experience they gained in the real estate industry. Barak had various management positions with Elad Group, a large real estate developer headquarters in the U.S., and was CEO of the European business. Klaus has extensive experience in the German real estate industry, among others as managing directors at Goldman Sachs Real Estate Realty Management as well as managing positions in DIM Holding AG, Deutsche Real Estate AG, Jones Lang LaSalle, at Giv real estate AG and Giv Management. We hold around 80% in TLG, and we might increase our holding in the future on an opportunistic basis. The domination agreement, squeeze out or delisting of TLG are currently not in our focus.

Can you give us some color about the synergies from the merger that have already been realized or will be realized in the current year? And also quantify the effects on the FFO?

We have started to attract the -- extract the operational synergies streaming from share knowledge, economies of scale and cost-saving measures. The impact on 2020 FFO will be low, but we expect to see an impact starting from 2021. As to financing synergies coming from rating upgrade to A- rating, currently, we see the rating upgrade to be postponed due to the negative market sentiment and from the uncertainty in the market due to the pandemic. We do not expect Standard & Poor's to upgrade companies at this time and AT accordingly is affected. Once the stability will return to market, we expect to get the acknowledgment from Standard & Poor's from the stronger portfolio and financial profile supported by the merger.

Those were the questions that we received prior to this call. 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.

[Operator Instructions] We've received the first question. It is from Manuel Martin of ODDO BHF.

I have 2 questions regarding the valuation. One is concerning the hotel portfolio valuation. If I understood correctly, you valued 95% of the hotel portfolio. And you usually value properties only once a year. Are you going to make an exception given the volatility in the market and revalue the hotel portfolio maybe in Q3 and Q4 again? That would be the first question. And second question is similar to the rest of the portfolio, as you revalued, I think, 2/3 of the portfolio?

Manuel, thank you very much. Yes, we will consider an additional update for the valuation in case we see changes in the market that was not expected. And the remaining of the other portfolio will be revalued by year-end.

Now we go to the next question that is from Kai Klose of Berenberg.

I've got 2 questions. First one, could you indicate how many hotels have opened again? I think you were planning or you were told that about 63% are planning to be opened again by June. Maybe can you give an update on that? And the second question, on the CapEx plan, you mentioned EUR 200 million, is this the amount you plan to spend in this year? Or is it the total amount? So if you could indicate how much was spent in the first half and will be spent in the remainder of this year?

Kai, so thank you for the questions. About the hotels, 95% of the hotels are opened at the moment. Referring the CapEx, so we spent EUR 144 million of CapEx in the first half, and we expect a similar behavior in the next quarters.

Thank you all for the many questions we received and for your participation in this call. Finally, let me say that at Aroundtown, our employees across all functions and levels are fully aware of the challenges that lie ahead of us. We increased our resources wherever needed and accelerate the digitalization process across our operations in order to provide our staff all tools needed to maintain the best operational results for our tenants, investors and the environment. So thank you again for your time today, and we hope to meet you soon again in person. Goodbye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.