Globe Trade Centre SA

JSE:GTC

Earnings Call Transcript 2021-Q1

[Malgorzata Czaplicka, executive]

Good afternoon, ladies and gentlemen. It's our -- it's my pleasure. And of course, [indiscernible] as well to invite you and welcome you to our Q1 2021 results. We are very happy to present the results and answer any questions you may have.

I will give the floor over to Yovav Carmi, the CEO; and Ariel Ferstman, the CFO. They will conduct the presentation. And later on, we will open the floor for question and answer. Thank you very much.

Yovav?

[Yovav Carmi, executive]

Thank you. Good afternoon, everybody. We will start with the presentation.

Okay, okay. So in Q1 '21, GTC has shown strong results, in spite of the fact that we were still under lockdown in the certain countries in which we operate. So we still have the presence of the COVID-19 pandemic.

And we have shown EUR 27 million gross margin compared to Q1 2020 of EUR 30 million. We have been experiencing EUR 2.4 million loss in relation to the -- into COVID-19 lockdowns comparing to EUR 4.5 million loss comparing to the pre-COVID period in Q1 '19.

The operating profit before tax is EUR 15 million comparing to EUR 13 million in Q1 '20. FFO is strong at EUR 14 million comparing to EUR 18 million in Q1 '20. EUR 254 million is the cash balance that we ended the period with. We were able to maintain our LTV at 45.5% and historically low interest rate at 20 -- 2.3%.

In the course of the first quarter, we have been raising another round of the green bonds in the amount of EUR 54 million, with an oversubscription of 25%.

Moving to the next page. We have been able to demonstrate stronger activity in the office segment than in 2020. In the whole of 2020, we have signed leases and prolongation in the amount of 70,000 square meters. And just in Q1, we managed to sign 40,000, with main items being a very reputable IT blue chip company in Kraków with 11,000 square meters and a significant lease of the Rompetrol in City Gate in Bucharest. We've been able to maintain our high occupancy of 90% as of March '21.

And another significant item here that, in the course of the Q1, Q2, we completed the acquisition of 2 office buildings. We will talk about it in a minute, in the overall volume of EUR 212 million, contributing almost EUR 12 million per annum in-place rents.

In the next slide, we will show you those assets. Vaci Green D is an office building on the Vaci ut street in Budapest, relatively newly developed, completed in 2018, enjoys from BREEAM Excellent certificates, generating almost EUR 3 million. Closing happened in March 2021.

The next one, it's actually 2 buildings: head office of the Ericsson and head office of the Siemens Evosoft. We're generating almost EUR 9 million in-place rents. Acquisition was completed in the last 2 days, and overall acquisition price of EUR 160 million. All those buildings have high green certification, and this demonstrate our -- where we want to go forward.

Talking about COVID-19 and how they affected us in Q1, as I said, we have experienced lockdowns in Poland, in Bulgaria, in Serbia in the course of Q1. This had an impact on our gross margin of EUR 2.4 million comparing to Q1 2020. As regards to the occupancy level on the retail segment, it remained 96%. It's actually improved in the course of the Q1. You would see the retailers that were willing to commit, which is very reassuring to see that the retailers still believe in the physical shopping centers. We see a new brand of CCC in Galeria Pólnocna called the HalfPrice with 1,500. We see CCC in Galeria Pólnocna with 800 square meters, almost 700 square meters of MANGO and 500 square meters of MASS Shoes in Avenue Mall.

This is complementary to recent leases we secured at the end of last year of IKEA and Bershka and Sinsay in Pólnocna, which I think demonstrate the commitment of the retailers and their outlook that things will open up and start to improve soon.

Here actually, we can see a snapshot of our portfolio, how it looks in terms of, overall, we have EUR 2.1 million of gross asset value. You can see the split between the geographicals between the countries and allocation between the retail and office segment, that 60% office and 40% retail, and the allocation between the various cities.

We are at close to 90% of the cash we're producing, assets being -- 90% is cash-producing assets and around 10% or a little bit more than 10% is development projects, and that's the allocation to mention here.

On the next page, we have shown a pro forma, how this allocation will look like post acquisitions of those assets that I mentioned previously and how it improves our position. First of all, the overall gross asset value goes up to EUR 2.3 billion. The weight of Budapest is increasing. The allocation between office and retail is increasing towards the office is 60% versus 35% retail.

And we come back to 90% cash-generating versus 10% development. This fits within the context of our program to shift the focus into Poland and Hungary as the countries are enjoying from higher rating.

And the next page, again, we show how the cash-generating portfolio is split by age, which is another trend we are trying to implement. Currently, we have 47% under 10 years versus 52% post acquisition. So we are balancing more towards the newer assets and more towards green certification.

Today, we have 84% green certification of all our assets across the board. And the pro forma shows that post acquisition, this ratio is going to improve further.

If we look at the next page, this is with a focus on the office sector only, which is even more visible that in post acquisition, we grow from 47% below 10 years to 55%, and the green certification the same.

If we look at the pipeline, the current pipeline consists of the pillar fully led to ExxonMobil. We've been seeing that the development is ongoing, on track, on budget, on program, no disruption due to the COVID and the lockdowns. We started late last year the Sofia Tower, which is progressing on time and on schedule.

Center Point 1 and 2, we mentioned previously that we are working to renovate the building and reposition it. This is ongoing. And on the right-hand side, you see those 2 projects that are ready to go. And once we are satisfied with the demand for offices in those locations, we will launch them.

I will hand over to Ariel to talk about the financial part of the presentation, and please.

[Ariel Ferstman, executive]

Thank you, Yovav. Good afternoon, everyone. As Yovav mentioned, Q1, we ended with strong results and a strong profit of EUR 9 million, driven mainly by the fact that if you compare a like-to-like basis with Q1 2020, we suffered certain extreme difference as a result of the -- our cash holdings exposed to the zloty versus the euro, in spite of a slight devaluation during the course of the first quarter of '21 zloty versus euro.

We managed to optimize, and we'll manage our cash in a better way. So that contribute us to end up with a profit of EUR 9 million, in spite of the decline of EUR 2.4 million on the COVID. So if we're assuming regarding the gross margin of operations, like-to-like, EUR 27 million, which we posted on Q1 2021, versus EUR 30 million, you can see on the breakdown of the bridge of the operating margin, we have declined EUR $2.4 million due to impacting on the COVID mainly on the retail assets.

EUR 1 million, the disposal of Spiral, and this was offset by EUR 0.8 million that contribute cash and rent income from Green Heart, ABC 1 and Matrix A, which now they enjoy fully operations also as well as fully occupied.

Moving to the Slide 19 on the balance sheet. There was a slight increase on investment property. This is as a result of the progress on the development that Yovav mentioned before, Sofia Tower and Pillar. And we have started also the redevelopment of Center Point, our investment in capital expenditure and facelift of the building around EUR 10 million also as well.

Regarding the cash and cash equivalents, we have declined around 7%, and this is as a result of the fact that we placed the bonds, the EUR 110 million, at the end of 2020. And we said that we will use at least half of those proceeds to refinance more expenses there and also the decreased leverage on certain assets, which were -- we believe that we're a little bit over leveraged.

The plan was to deploy up to around EUR 60 million to refinance. We have actually completed that plan partially, EUR 44 million. We repaid EUR 10 million in City Gate, EUR 5 million in Galeria Jurajska, EUR 29 million in the other shopping center. And this was partially offset by the successful oversubscription placement of the bonds at the end of March, EUR 54 million.

Moving to Slide 20. As Yovav mentioned, we still -- we have posted 45% LTV. You can actually think that we are changing, and this will be part of the new financing strategy of the company that we are trying to implement. We are changing our LTV policy towards the 40%. We would like to move shifting that policy in line with the investment-grade rating. So that's what we're working on so far with different rating agencies to prepare the company for the future placement of the EUR 500 million Eurobond for GTC and switch and balance our secured financing with also unsecured financing.

Something to point out here regarding the debt maturity. GTC doesn't have to basically recycle anymore launch in the next 18 months. We have signed already and prolonged. At the beginning of the year, we started with EUR 135 million to be prolonged, and we have prolonged already the EUR 135 million for 5 years. And the next expiry of the loan is around Q3 2022. So that improved our -- basically, our weighted average debt maturity from 4.2 to 4.7.

And we still have posted the lowest average interest rate, 2.3%, thanks to the successful placement of our green bonds at the end of December and also in March.

Moving into Slide 21. Regarding the cash flow statement, I think it is visible, the decline around EUR 2 million, and this is on cash flow from operating activities. This is driven mainly by the COVID-19. There was the investment in related estate, EUR 22 million. This is in relation to the development -- maybe the development on Pillar and Sofia Tower 2.

And of course, you see a lot of activity regarding -- during the Q1 regarding the proceeds and repayment of long-term borrowings. We have successfully refinanced Pixel and Francuska, who was about to mature during Q1 with a new loan, EUR 40 -- EUR 39 million.

And also as we explained before, we early repaid around EUR 44 million as a part of the refinancing plan from the placement of the bonds in this sector.

I think with this concludes our presentation. And I think, Malgorzata, we are ready to open the floor for questions.

[Malgorzata Czaplicka, executive]

[Operator Instructions]

[Jakub Caithaml, analyst]

This is Jakub Caithaml from Wood. Can you guys hear me?

[Malgorzata Czaplicka, executive]

Sure. We can hear you, Jakub.

[Jakub Caithaml, analyst]

Perfect. If I can maybe kick it off with a few questions from my side. To start with, a technical one regarding the acquisition of the Vaci Greens building. I haven't seen it in the cash flow. Have I overlooked it? Or will it be recorded only later in the year and it's not in the numbers as of the first quarter yet?

[Ariel Ferstman, executive]

No. This -- since it was recently completed at the end of the quarter, that would be reflected on the upcoming numbers.

[Jakub Caithaml, analyst]

Perfect. Noted. So in total, we have something like EUR 210 million outlay for the buildings, which should bring the LTV to around 50%. And you were talking about the new kind of internal range that you would be targeting, the 40%. Can you talk about how do you expect to get there?

[Yovav Carmi, executive]

How do we expect to get to 40%? 40% is the long-term policy of the company. We will gradually get there in the coming months of the year. As was mentioned by Ariel, we plan on the financing side a few things.

One is the Eurobond rate, which as Ariel mentioned, we are working on the rating, and this is planned for the next couple of months.

And the other one is a complementary equity raise, which is also planned in the -- pretty much in time. As you know, the Polish regulations, the Polish stock exchange allow up to 20% capital increase on a fast track with no prospectus.

We have been exploring that, discussing with some shareholders, and the feedback so far is positive.

And the -- and this, of course, will help us in terms of the LTV ratio in the direction that we are targeting.

[Ariel Ferstman, executive]

Just to complement on euros, those acquisitions will be our finance on a 50% or, in some cases, lower leverage with different secured financing. So that -- we do not expect such a sudden increase on the LTV also as well on a group level given the fact that also we are financing also some parts from our equity. And so that's give or take, but that will give the math with you. The events will going into that direction.

[Jakub Caithaml, analyst]

Perfect. And is it fair to expect that the prospective capital increase would be done with rights issue given the discount shares are creating it?

[Yovav Carmi, executive]

Malgorzata, maybe you can explain the technicality of how we plan to do this?

[Malgorzata Czaplicka, executive]

What we are planning to do, ABB, as we did in 2014. So there were no rights issue. As such, however, the resolutions were securing the rights of existing shareholders to be allocated a certain number of shares.

This is working on the Polish market for 6 years, now 6, 7 years, and this is well approved by the local investors.

[Jakub Caithaml, analyst]

I see. Okay. Understood. Sorry, go ahead.

[Yovav Carmi, executive]

I think -- yes, yes. Just to add on that, I think we will also -- with such a move, we will also benefit on the liquidity side of the share, which currently is -- the liquidity is very thin. So I think this is also a potential achievement -- or target to achieve this move.

[Jakub Caithaml, analyst]

Sure. Yes, that makes sense. Then last question from my side, if I may, one more. It seems that we are seeing some encouraging signs in the retail footfalls after the opening. Can you talk a bit about where do you stand in the different countries? How did lockdowns impact the tenant sentiment? Do you think that we should expect some degree of pressure on the occupancy, maybe even after the opening or whether you perceive the financial help of the tenants as rather good now?

[Yovav Carmi, executive]

I can tell you the following. First of all, we -- I think as we mentioned in the presentation, we are currently at 96% occupancy across our 5 shopping centers, which was very high ratio. In fact, Galeria Pólnocna is currently on its highest occupancy at 94%, which is the highest since it was opened. And this is thanks to the recently flag store of Sinsay that was opened last year, the commitment of CCC with its new brand called HalfPrice.

So this -- and all this is happening in the course of the lockdown the late end of last year and early this year in Q1 when we were in lockdown, which the way I see it is very encouraging because it means that those retailers have confidence in the future post COVID.

What we've also seen is after quite a long period of lockdowns, we've seen the speed of the -- or the pace of the vaccination in our region accelerating. We saw in Poland, the lockdown was the longest. And as of 4th of May, shopping centers were open and we saw them very crowded with more than 20,000 people per day, which is more than pre-COVID times.

All this is very encouraging. We see that in other countries where the percentage of the population is high in terms of vaccinations, like North America, like Israel. Then it is becoming a COVID-free zone and it's very -- less people hospitalized or sick.

And markets are opening up, and we expect this to start happening. It actually is starting in some of the countries where we are present, like Hungary. Poland is just one notch behind as well as the other countries we are present in.

So I think while the weather is improving, while people are no longer under lockdowns, we will see very much so the shopping sector is coming back.

[Malgorzata Czaplicka, executive]

[Operator Instructions]

[Unknown Analyst]

This is [ Peter Breyzen ] from [ Avaron ] Asset Management. Can you tell what is the percentage of assets, especially on the office side, that is linked to the CPI on the rent side?

And on the retail side, I assume it's more linked to the sales level. So -- or maybe you can comment on this. So how much is fixed? And how much is kind of dependent on CPI development?

[Ariel Ferstman, executive]

Regarding the office side, we -- the vast majority of our leases, if not -- I don't -- I never want to use the word 100%, but the vast majority of our leases, we do believe over 95% are linked to the CPI. But usually, since our leases are based on -- are denominated in euro or linked to the euro, so it's a sort of European index.

And regarding the retail leases that usually are fixed rents are usually linked to the same index as well.

Regarding how many are viable income, the main turnover rent and base income, I mean, this is something that we do not disclose. I mean -- but most of our income in the shopping centers are predominantly base rent, fixed rents. Under certain special on the anchor side, they are linked to turnover rents as well.

[Unknown Analyst]

Okay. And one question on the acquisition pipeline. Do you expect to further increase the share of Hungary in your portfolio or it has been just a coincidence that more acquisitions have been coming from this country?

[Ariel Ferstman, executive]

I want to say something about Hungary. I know what you're going to say, Yovav.

I just want to point out, during the course of Q4 2020, we suffered losses for EUR 143 million. The only country we post positive profit was Budapest. That demonstrated the strength of the market that -- and resilience in the COVID-19.

I do believe, after the disposal of Spiral, we have even proof that our valuations are even proven correct up to a 20% uplift from the values previous to the sale. And I'm pretty confident -- this is my personal view, I'm pretty confident on the Budapest market, always show very strong performance on our assets on the portfolio.

[Yovav Carmi, executive]

Yes. And to answer your question, and this is what something we expressed, and we are saying it, the markets where we see ourselves focusing are in Poland and in Hungary, with the capital being Budapest. This is where we are targeting to focus our business.

It doesn't mean that we will not do business elsewhere. It just means that those countries enjoy from higher rating, and this is where our is business going forward the focus would be. And therefore, it is not a coincidence that we do see us expanding in Budapest.

[Unknown Analyst]

Okay. And just one clarification. Did I understand correctly that you are looking to raise EUR 500 million bond? Was it...

[Yovav Carmi, executive]

Yes.

[Unknown Analyst]

Yes. Okay.

[Jakub Caithaml, analyst]

Maybe if I may have one follow-up on the rents. Given the significant amount of leasing that you have done in the quarter, can you talk about how the levels compared to the ERVs?

And regarding the offices in Budapest, in particular, I haven't seen, I think, The Twist among the developments that you would consider launching within the next 24 months, which, rather to me, would suggest that you have a cautious outlook because I think this is a development which would take maybe 3 years from the start to finish.

So does it mean that -- is there some problem with the permitting? Or does it mean that you don't necessarily feel confident launching such a big project at this stage, even though the completion will be quite some time ahead? It's Jakub again.

[Yovav Carmi, executive]

Yes. So to answer your first question about the rent levels, we don't see at the moment the rent levels significantly softening if you are comparing to pre-COVID times. So it means that the ERVs that we see are pretty much the same. So that, I think, answers your first question.

Regarding our presentation and how we design the pipeline projects, we outlined 2 projects, that we see them as ready to go, subject to demand for office space. Those are GTC X and Center Point 3.

Regarding all other development pipeline, we thought that since the horizon of that is further on, since they are still in planning mode, since it is yet to be seen how trends will develop in the office market and so on, then we'd rather put them in one basket, in one line and come back once they are more in -- let's say, once we have a more concrete knowledge about them or idea when will they be developed.

Regarding your specific question about Twist, there's no planning problem with it nor timetable problem with it, but one has to be cautious about whether -- how the office -- demand for office will evolve, and that will dictate the time line for other office projects as well. And since we're just now coming out of the COVID, the first ones to be tested are Center Point 3 and GTC X, and we will have to monitor closely how the office market demands.

I guess, the same as you, we are hearing all kinds of sentiments going in various directions and one has to listen carefully and see how it turns out.

[Malgorzata Czaplicka, executive]

Ladies and gentlemen, if there is no more question, I would like to conclude today's call. And of course, as usual, the call is being placed on the website, so you can access to the audio recording of that call.

And we will be happy to answer any questions you may have. Please give me a call or send me an email if you need any assistance. Thank you very much. Goodbye.

[Yovav Carmi, executive]

Goodbye.