Globe Trade Centre SA

JSE:GTC

Earnings Call Transcript 2022-Q1

[Malgorzata Czaplicka, executive]

Good afternoon, ladies and gentlemen. Welcome you warmly at our Q1 2022 announcement of the results. The call is being recorded and will be available on our website.

Today's presentation will be conducted, as usually, by the Management Board, mainly Zoltán Fekete, the CEO; and Ariel Ferstman, the CFO. We have also with us, Janos Gardai, our Chief Operating Officer. After the presentation, we will open the session for the question and answer. So hold your questions until the end of the presentation, and we'll be happy to answer any questions you may have.

Thank you very much, and I'm passing over to Zoltán.

[Zoltán Fekete, executive]

Thank you, Malgorzata. Welcome, everyone. I would like to start with the announcement that with the strong results for Q1 2022 and the announcement that we are proposing a dividend payment after a while to the shareholders' meeting, and we will propose PLN 0.23 (sic) [ 0.28 ] per share, which corresponds to a 4.6% dividend yield on the current share price. We believe that company's solid performance last year, followed by the strong performance in the first quarter this year, plus the solid cash position of the company justifies that we return to dividend payment.

Malgorzata, can ask you to put the presentation on screen? Thank you. So in the first quarter, rental revenues increased to EUR 42 million compared to EUR 37 million in the first quarter of 2021. Gross margin also increased to EUR 30 million compared to EUR 27 million a year ago. FFO went up to EUR 16 million, 1-6, EUR 16 million compared to EUR 14 million in Q1 2021. And we have our current EPRA NAV is at EUR 1 point -- per share price, PLN 10.43 per share. So compared to the current share price, it's -- we are trading at an over 40% discount to NAV.

Our net LTV remains low at 43%. Occupancy level remains high or in fact increased slightly to 91% in the first quarter, and we have a strong cash position of EUR 278 million at the end of the first quarter. Plus, we also have available credit facility, unsecured credit line in the amount of EUR 94 million. So we believe we are well equipped to invest in the coming months.

We turn the page, specifically on the office side of the business. We -- during January, in the first quarter -- during January this year, we closed the disposal of our Serbian office portfolio. We completed the development of the ExxonMobil headquarters building in Hungary, which is actually the largest location office building Exxon has in Europe. And we start generating an annual EUR 6.1 million rent from the second quarter. This transaction, this development itself has an uplift on the valuation of almost EUR 30 million. We also commenced the development in Zagreb, Matrix C after successfully leasing the first 2 buildings in this development. And our leasing activity also improved and we -- during the first quarter, we leased over 36 million square -- 36,000 square meters in the office segment. And our occupancy, as I mentioned before, remains high, 89% on the office side.

If we turn to the retail part of our business, I think this is the area where we have perhaps the most pleasant surprise. The retail operation that performed very well. Occupancy increased to 96%, and we are seeing positive trends in all our shopping malls. Turnover levels are back to pre-COVID levels, I'm pleased to say that. And we also see a continuation of this trend on the next page.

We have a comparison of footfall and turnover figures for the last 2 years. And here, we can see -- I would like to highlight the bottom line, April 2022 levels in most of our shopping malls are actually significantly higher in terms of turnover compared to first quarter -- sorry, April 2019. So I think we could officially say that COVID is over in terms of retail operation. And in fact, we expect further strong performance in this segment.

If we turn to our portfolio. Our portfolio hasn't changed significantly. So we have a gross asset value of EUR 2.3 billion, 89% of which is income generating. We continue the same split between offices and retail, so office, 65% of the total income-generating portfolio with 35% on the retail side. We also have active development and land bank, which represents 11% of the entire portfolio.

If we turn the page to projects under construction. Construction represent EUR 57 million, and these include office properties in Zagreb, Belgrade, Budapest and Sofia. Some of these will be completed this year. So we are also increased development work in other areas as well. And I would like to present our development pipeline.

On the next page, first of all, I would like to mention Pillar was completed, so as I mentioned before, in Budapest. I also mentioned Matrix C in Zagreb, and this building is, although the development or the construction only started a few weeks ago, we already have almost 50% pre-lease on net property. In Belgrade, we continue the development of GTC X. It's going on -- is on track, will be completed before the end of this year. This is already pre-leased more than 50%, and we have good potential to reach almost [ 100% ] in the coming months.

We also continue the development of Mall of Sofia. Here, we see interest from tenants, but we also observed that the decision-making process is somewhat slow. So we have to focus our attention in this field. So it's an office development in CBD in Sofia.

We also started the redevelopment of Center Point 1 and 2 in Budapest after Exxon moved out to Pillar to the new building. And we are quite positive about the potential of this building given the low vacancy level, around 5% in the office segment in Budapest, more specifically in the most important office segment in Vaci Corridor, it's around 5%. And we are also progressing with the refurbishment and redevelopment of the Rose Hill Business Campus in Budapest.

On the next page, a few other projects. We launched the development of Center Point 3, so it's an extension of the existing Center Point 1 and 2, and these 3 buildings will offer us to lease 70,000 square meters in prime office space in Budapest. We are also working on obtaining the building permit for ABC III in Sofia.

And we are also progressing and launching the residential component for the Spatio project in Bucharest. And also, I would like to mention that we are starting our newest project in Belgrade in Napred. So this is a project which will allow us to build 75,000 square meters in the coming years. So after selling the Belgrade, office portfolio we will continue to be present in the market. The market is very strong. Brand levels are good. So we are progressing with a new project. So as you see, we are quite busy on the development side as well since we see interesting opportunities in the segment.

So with that, I would like to hand over to Ariel to summarize the financials.

[Ariel Ferstman, executive]

Thank you, Zoltán. Thank you very much. Good afternoon, everyone. So indeed, we have a very successful first quarter of the year operationally speaking. Very strong numbers on the income statement with an increase of gross margin of operations of 10%, EUR 30 million this quarter versus EUR 27 million last quarter. The increase was driven mainly by our last year, significant acquisitions in Hungary, which contribute around EUR 4.7 million, including Universum, Vaci Greens D, Vaci 188.

In addition to that, we have as previously mentioned by Zoltán, we have a very positive quarter on our performance of our retail assets, a very strong performance. Mainly in our shopping centers in Poland as well, which contribute to basically a growth of rental of EUR 2.4 million. And this was offset by the disposal of our office portfolio in Serbia early this year in the amount of EUR 4.4 million. So if you see from the first quarter claims there's always no impact regarding the disposal of the Serbian portfolio in the operational numbers.

In addition to that, we have posted a EUR 3 million profit from revaluation for the first quarter versus the EUR 3 million loss last year first quarter. If we zoom in this line, basically, we have booked EUR 5 million profit from revaluation from the completion of our Pillar office building, ExxonMobil headquarters. Since the commencement of the construction, we have recognized around EUR 30 million profit from revaluation of this project, which demonstrates how we are adding value through our development engine, around 36% profit on cost.

It's a very successful project.

In addition to that, we have posted EUR 1 million profit from the disposal of land bank of one of our noncore assets. And this was offset by EUR 6 million loss related to the investment in one of our existing portfolio increased our capital expenditure, which basically allow us to keep our high occupancy at 91% all across the portfolio.

On the finance line, finance cost, you see -- you don't see it properly from the presentation. However, we have post EUR 8.1 million in this quarter versus EUR 8.5 million last year's quarter, which is a decrease of 6% effectively on the funding cost. And now you're actually gradually seeing the impact of the refinance of our expenses -- secured financing for unsecured debt in line with our new financing policy. Overall, we have posted a quarterly profit of EUR 15 million versus EUR 9 million last year quarter.

On the next slide, on the balance sheet. You can see on the balance sheet, we are presenting, as usual, a very robust balance sheet with a very strong liquidity position. During the first quarter, we have managed to increase our existing portfolio in spite of the disposal of the Serbian portfolio by 3.5% to EUR 2.3 billion. This was driven mainly by the acquisition of Napred, as mentioned by Zoltán previously in Belgrade, an extremely well-located land plot right next to the former portfolio that we have for an additional 73,000 square meters of office space, plus investments under construction on our existing projects under development.

We have finalized the quarter with a very strong cash position, EUR 277 million, excluding deposits, driven mainly by the completion of the disposal of the Serbian portfolio freeing up cash in the amount of EUR 134 million before taxes. And the capital raise, final -- the capital raise around that we did back in December, which was completed in January with the successful registration of the share capital in the amount of EUR 120 million net of issuance costs. Plus, we have managed to increase our credit lines by EUR 19 million from EUR 75 million previously to EUR 94 million, a very good achievement in the same terms agreed back in September 2021. So we have available credit lines of about EUR 94 million ready to be deployed for new opportunities.

On the next slide on the debt overview. So we have a total debt of EUR 1.3 billion, almost unchanged from last year. very healthy maturity profile, about 5 years. We keep our conservative LTV 43% with no major loans to be recycled in the next 18 months, as you can see on the debt maturity profit. It's very important to emphasize 93% of our debt -- existing debits is either fixed interest or hedge so -- which enable us to have a very well position in the event of potential increase of funding costs as we're seeing all over different markets.

In addition to that, we are presenting a very healthy coverage ratio increased 3.7x and an increase of unencumbered properties to 52% from 45% last year. On the last slide on the cash flow, we managed to increase our operational cash flow in comparison to last year and offset the impact of the disposal of the Serbian portfolio, driven mainly by the acquisitions in Hungary, mentioned before, the completion of our developments in Belgrade -- sorry, completion of developments in Sofia and Zagreb as well and the significant improvement of the retail assets performance in comparison in 2021.

I think with this concludes the presentation, Malgorzata. We're open for any questions.

[Malgorzata Czaplicka, executive]

Ladies and gentlemen, you may ask your questions.

[Cezary Bernatek, analyst]

So maybe 1 question from my side, if I may? It is Cezary Bernatek, Erste Group. I hope you can hear me.

[Malgorzata Czaplicka, executive]

Yes, we can hear you.

[Zoltán Fekete, executive]

We hear you, yes.

[Cezary Bernatek, analyst]

Great. So just like a general question from my side concerning the situation in the market. Meaning, how do you assess the incoming supply on your core markets in terms of the office segment? Because what we see in Warsaw is that many projects were put on hold and basically not that much of free space is available now for rent. And I'm just wondering how do you see the potential for the supply gap starting already maybe in '23 in this segment in your core markets?

[Zoltán Fekete, executive]

First of all, we don't have active development in the Polish market. So there, our task is to extend prolonged leases and which these days is not so difficult because corporate still take some time to decide and move locations. At the same time, also, we obviously filling the existing space. We don't see actually a major impact of new developments across the board. But if I move on to other markets, vacancy levels in Hungary are quite low and lots of developments we see in the pipeline but being delayed. So this is the reason why we actually decided to launch Center Point 3.

And if we look at, for example, smaller markets like to Croatia, Sofia Belgrade. In the past, we've been actually very successful leasing out quickly the existing development. So just coming back to the question, we see some pressure in Poland. This is why actually we are not launching new projects in terms of also development costs and the rent levels, this is the market where it is priced most tightly. This is also a reason why we are not progressing with developments at the moment in Poland.

[Jakub Caithaml, analyst]

Maybe a few questions from my side as well. This is Jakub from Wood. Maybe just technical to kick things off. Pillar was completed in March, has there been any tangible rental contribution to the first quarter results? And how much could we expect from second quarter? Would it be reasonable to expect the full rental income from this one?

[Zoltán Fekete, executive]

First quarter, no meaningful amount, even in the second one because of the rent freeze, they will start with the rent. Do you have the precise number?

[Ariel Ferstman, executive]

Yes, I think the...

[Zoltán Fekete, executive]

How much for this year? Do we have that number?

[Ariel Ferstman, executive]

For this year, it should be around EUR 3 million, EUR 3.5 million. I mean -- and that's the full...

[Unknown Executive]

EUR 6.1 million.

[Ariel Ferstman, executive]

The full EUR 6.1 million will be starting in from next year because the first part we have a couple of rent freeze. That was the last part of the leasing agreement.

[Jakub Caithaml, analyst]

And wouldn't the rent freeze be in terms of IFRS distributed across the entire term?

[Ariel Ferstman, executive]

Well, they're not so significant in comparison to the maturity of the lease. So that's that different approach in terms of it's usually -- it's depending on materiality. This is how we do it in terms of the recognition of the rent first.

[Jakub Caithaml, analyst]

So it's front loaded, essentially even in the P&L?

[Ariel Ferstman, executive]

Yes.

[Jakub Caithaml, analyst]

Understood. Then maybe moving to the more substantial stuff. How -- would you say that the inflation and the supply chain bottlenecks are affecting your development pipeline? And I mean, how are things looking kind of relative to the levels that you have been budgeting for initially?

[Zoltán Fekete, executive]

We see, obviously, a rise in development costs. And we calculate with that when we decide to launch any projects. Obviously, it's not easy to predict 12 months or even 24 months going forward. But -- and therefore, we only launch projects and we see the -- also the strength on the leasing market, so that rent levels are on the rising trend. And this is what we see actually in Budapest. This is what we don't see in Poland, for example. If we look at the other markets like Bucharest, where we are launching a residential project, is a very strong residential -- resi-for-sale market, strong demand, and we see that to continue.

And also in Belgrade, with GTC X, first of all, there we are covered against inflation because this project started in the third quarter last year, fixed price. But actually, even rental levels are quite strong north of EUR 16 per square meter. And we see that it covers in terms of the new development there with Napred, it's still early. It's still going to be at least 1 year predevelopment work, so we don't have to decide on the exact timing of the launching.

But in general, I can also say that Construction costs sometimes go up and come down just to mention for structure building. I think on one of our previous calls, I was using this example, steel -- price of steel, when the Ukraine war started, it went up from EUR 800 per tonne to EUR 1,200, EUR 1,400 per tonne, but structured builders were pricing in the uncertainty at EUR 1,600 or even EUR 1,700 per tonne. Now we are back at around EUR 800 after 2 months.

So in general -- and by the way, steel is something like 30% of structural building costs. So it's quite a significant element. But these changes, usually, I mean, what we experienced are shorter term. Otherwise, of course, inflation will increase in general development cost, but we see the strength of the market in those markets where we are developing they should be able to absorb that.

[Jakub Caithaml, analyst]

That's very helpful. Maybe just a follow-up on this. I know that it's difficult maybe to come up with an estimate. But I mean, very roughly, could you guess in case, for instance, GTC X, you would be starting today comparing to having started in autumn last year, how much would the construction CapEx be different?

[Ariel Ferstman, executive]

It's a good question.

[Zoltán Fekete, executive]

Good question.

[Ariel Ferstman, executive]

What would the rent, also difference.

[Zoltán Fekete, executive]

We see rent levels rising as well. And in fact, M&A pricing levels yields even coming down even these days despite fear of inflation. But just to get back to the question, my guesstimate, we haven't run the calculations. I guess it would be some 20%, perhaps.

[Ariel Ferstman, executive]

Yes.

[Zoltán Fekete, executive]

So that's actually not exact figure.

[Jakub Caithaml, analyst]

Of course, yes, I don't think anybody does, but this is helpful. And actually, you have touched on some other points which I wanted to ask about and maybe starting with the rents. I think that the concern this is kind of forming around the view that we are looking at potentially quite sharp economic slowdown ahead. When you are discussing, for instance, the leasing of the new development projects, would you see any sort of weakness in the rents maybe comparing to the levels that you were discussing in January, February versus what is on the table today? Or is it actually still going up despite the more kind of adverse macro outlook?

[Zoltán Fekete, executive]

I think for those projects, specifically you're asking, which are about to be launched for development or new leases and potentially new tenants in existing buildings, I don't really see a major pressure on rents. In some cases, even going up, I can mention, for example, Budapest, which is explained by the 5% vacancy level and also quite a few developments where the development activity slowed down in the last year, 1.5 years. So lots of new projects in the last 2 years were put on hold, which gives actually us the opportunity to build, we would be the -- other than Center Point 3, there is only one other major project, which is about to be launched right now in this market. So there's no reason for pressure on rent levels.

In regional Poland, where some tenants have been considering moving potentially, we feel some pressure, but I think we can maintain the current levels. And if you look at Belgrade, for example, there is a shortage of high-quality space, increasing demand. So I expect that the Belgrade market will increase.

We also see that in Zagreb. I mentioned that Matrix C, which we just started the development, it's already half, 50% leasing level we reached recently. So I think there is -- in Zagreb, there's an upward pressure on pricing. And this is how we decide -- actually, these are the things we monitor, obviously, construction costs and leasing levels, vacancy levels when we decide each project to launch.

[Ariel Ferstman, executive]

I think it's also important to stress that any tenants which are already made the decision to move and looking for new space and trying to secure pre-leases as a result of the pressure on inflation and the fear of having the same lease more expensive because everything is coming to be more expensive in the end, they rush and secure their leases. And we see a trend of increasing of rents and in some cases, even beyond inflation, and then secure prices that might not be the same in 12 months time as well in terms of the leasing perspective as well. And they see it also in their own operations with increase in the wages as well.

[Zoltán Fekete, executive]

Yes. And by the way, just to mention when leases are indexed. So inflation automatically priced in. I think that's also important to mention.

[Jakub Caithaml, analyst]

Of course. Maybe moving on the yield side of the equation, and probably Ariel, I mean, I guess, even though that you don't have very significant or -- yes, not really any significant refinancing needs in the next couple of years, I imagine that you are in touch with the banks. Can you talk about how the funding costs either for standing assets if one is looking to purchase or for developments have moved?

I mean, do you already see an upward pressure? Is there a difference in the countries that you operate, maybe even overall in the readiness of the banks to provide financing? And maybe if coming from this angle, you could more broadly speak about the transaction evidence, which you may have been seeing in the markets which you operated in the past 2 months. Is there any evidence of yield expansion? Do you see kind of a 2-speed market, a bifurcation between the premium assets and maybe the older ones having different fortunes? That would be super helpful.

[Ariel Ferstman, executive]

Well, it's a very multiple question. I think we will split it and also Zoltán will take some part on the yield side as well, an expectation in terms of transaction activity that we've seen in the market. First, regarding the funding cost, true, we are covered, we are good for the next few years. I mean, you've seen in the numbers, we are hedged, we're fixed.

We've done a lot of work also as you see on the balance sheet side when the derivatives go onto the asset side, it means that you're on the right side of the story. So basically, from that perspective, we have a very solid next few years cover in terms of funding costs, which is going to be maintained low.

Indeed, there is pressure on funding costs. There's an increase of borrowing costs. We are seeing even on the discussions of -- with potential banks regarding refinancing or prolongation of certain loans. We see those on the unsecured market as well with some sort of distortion in terms of yields on the bond market as well.

But there's 2 angles here. Number one, it's -- you need to have the right asset. Not every bank is funding every asset. That's also a good question. And the importance is of focus on ESG, green certification. So we tick all those marks, so we are on that square that we can get the funding. And when we pass through that, it's about the asset itself. And today, basically, when we're talking about, it's an increase in funding cost between 20, 25 basis points from what it was last year. And the big discussion with the banks is about the variable. What do we do with the variable because the swaps are very expensive? Today, a 5-year swap, it's around 1.5%, roughly. So that makes increase the funding cost.

So the whole come to the strategy of how you will hedge our variable rates in the next few years, and we are discussing with the banks. So in the end, it's a double negotiation on the margin side and also on the variable side as well of the equation. But we see some increase on the funding cost. We see difference from different countries as well. We are negotiating today certain loans with a very good competitive margins. But the question mark is always about the variable, how much we will hedge for the next 2 or 3 years to see the trends are coming back to where it was. Regarding the transaction activity, I don't know if...

[Zoltán Fekete, executive]

What I would like to add to this is that, okay, we have to look at the situation from the bank's perspective. And obviously, this is an unstable market. This is -- we are -- this decade started tough and getting even tougher, and it will not get better. So the 2020s will be about uncertainties. And of course, the banks when they decide which way, how they're going to finance? And if they look at the portfolio, I think they love what they see when they look at GTC.

In addition, EUR 500 million secured debt was repaid. So there's plenty of room for them to fill their books, and they would -- they like the exposure of what we offer. Because I mean, if you look at the macro level, I think we are back in a situation like we were or the world was in the 1970s.

Energy crisis, even political uncertainty, inflation, nothing since for the last 50 years, this hasn't happened. And if you look at real estate valuations back then, it was -- real estate was safe payment. So -- this is how they consider us. So certainly, we are in the position to squeeze out the best pricing from them because they have to fill their books, and they will be much less keen to move out of more riskier segments. And we are not under pressure to raise financing.

So if you look at the maturity profile, the most of our debt is fixed, so we are in a comfortable position in that sense. Otherwise, of course, it became more expensive to getting financing. But at the same time, I would like to mention that euro rates and ECB hasn't started raising rates. So the funding cost is not that high. And when we look at funding levels and pricing in Western Europe, for example, it's actually significantly lower than in our region.

[Jakub Caithaml, analyst]

No, that's a very good point. I think also, one could make a point about rents having risen to a much bigger degree in Western Europe, that was the case in CE and Baltic States, especially relative to wages in the office sector. Hopefully, it should be also long-term supportive.

[Malgorzata Czaplicka, executive]

Ladies and gentlemen, do you have any more questions for the management? As there are no more questions, I'm happy to close the call. Thank you very much, everyone, for your participation and your time, and speak to you soon. Thank you very much. Goodbye.

[Ariel Ferstman, executive]

Thank you.

[Zoltán Fekete, executive]

Thank you.