Globe Trade Centre SA

JSE:GTC

Earnings Call Transcript 2023-Q1

[Malgorzata Czaplicka, executive]

Good morning, ladies and gentlemen. My name is Malgorzata Czaplicka. It's my pleasure to welcome you to our Q1 2023 financial results call. Today with me is Zoltan Fekete, the CEO; Barbara Sikora, the CFO; and Janos Gardai, the COO. They will be presenting the financial results and the achievement in the first quarter of 2023 based on the presentation that is available on our website. The call is being recorded. The recording will be posted on the website in the evening as well. Let me move to Zoltan to conduct the presentation.

[Zoltán Fekete, executive]

Thank you, Malgorzata. Welcome, everyone. I would like to start the presentation with a summary of the main numbers, if you could present it, please, on screen. So, our results for the first quarter this year are in line with the same period last year. And if you could turn the page, Malgorzata, please. [Technical Difficulty]

So our revenues from rental activity came to EUR 43 million compared to EUR 42 million a year before. Gross margin, EUR 30 million, same as last year. FFO, EUR 16 million, same as last year. And our EPRA NTA stands at EUR 1.276 billion in line with the numbers last year. So these results show that we are keeping the performance of last year, I think needless to say that we are going through a very difficult period in the general macro situation. So I consider this as a great achievement so that we can maintain the performance.

Our LTV stands at 45.2%, which is an increase from 44.5%. I would mention here that the main -- 2 main reasons behind this. One is that we have some Hungarian Forint and Zloty denominated debt. And during the first quarter, both currencies strengthened. So obviously, it has an impact of roughly EUR 5 million on our debt position. And at the same time, the increased LTV is a reflection of the fit-out that we -- and maintenance expenses that we are spending on our assets, but at the same time, these are not generating higher valuations.

Occupancy across the portfolio stands at 87%, same as a year ago. And we continue to have maintained a strong cash position, which is at the end of the quarter was EUR 147 million. Since then, I would like to mention that we signed 2 financing agreements, one related to GTC X, our new office building in Belgrade, through which we raised EUR 25 million. And we also signed a financing on Matrix C which adds EUR 14 million to our cash flow. Although on Matrix C, we are spending that on CapEx at property in Zagreb being developed.

If we turn to the page, I would like to highlight here the Supervisory Board resolution and management's recommendation to the general meeting to keep the profit of 2022 in the company. And also, we are proposing the authorization for a share buyback. We currently don't have that possibility at GTC and in line with current market practice, we believe it would be a useful tool for potentially buying back shares, returning capital to some investors. Instead of paying dividend, we would -- we are considering this as a better use of cash.

So the reasons behind not proposing dividend, of course, we had some revaluation losses, EUR 29 million at the end of last year, net and we also consider that we need to preserve the cash partly for development, partly for maintenance of the assets, improving, keeping ESG compliant, ESG requirements. And also, we see interesting acquisition opportunities also in the market.

With regards to the potential share buyback authorization, we are asking for authorization or proposing to the AGM to have the possibility to buy back up to 15% of the share capital. It's just a theoretical cap and of course, I just would like to -- the price range for the buyback we believe is reasonable to be in the range of PLN 5 to PLN 7 per share. And we are asking for an authorization for a 12-month period starting at the AGM in June. Again, this is just an authorization, the option we are asking for. It doesn't mean that we actually definitely going to do it.

We turn to the next slide, I would like to give you the highlights for our office portfolio. I would like to mention here that leasing activity reached 20,700 square meters in Q1 2023. When we compare this to 25,600 square meters in Q1 2022, I would like to mention that in the previous year, last year, 16,000 actually came through 1 client, which is a Hungarian procurement office, Hungarian government. This year, if we look at the leasing activity, I think it's a much healthier balance because as we highlight here, the biggest achievements and leasing results, you will see that we have UPS, we have Ford, KPMG, Strabag, AON, all good international names, 5-year extensions to existing leases. And from this list, only Ford handed back 400 square meters, so about 20% of the entire space which is really the challenge, and we are trying to address this issue, and this is a great result that we managed to prolong these leases.

Our occupancy on the office side stands at 84%, same as the first quarter in -- same as end of last year. And during this quarter, we also closed the disposal of the Forest Office building in Debrecen. This is a deal which was signed last year. So we closed the deal in January, and the selling price was EUR 49 million, the book value of this asset was EUR 46 million. So we realized a nice profit on this asset as well. And this is all cash to the balance sheet because we did not have financing on this asset.

We move on, just the highlights of the retail business, the retail side of the business continued to perform very well. Occupancy stands at 96%, same as 3 months before. Positive trends in retail continue. Footfall is growing. If I compare the current year's April numbers to April last year, both turnover and footfall increased by healthy margin. Although I have to mention that less than 5% of our leases in retail are on turnover trends so we are not really dependent on directly speaking on the turnover of our tenants.

On the next slide, just to give you a snapshot of our current portfolio composition. No major changes. 89% of our gross asset value is recurring income producing. 64% is in the office space. The rest is mostly retail. We have 3% are in development phase, 3% of the gross asset portfolio. 92% of our assets are in new countries and 86% are green certified, and the rest of the portfolio is going under the certification process. So we remain strong on the ESG front as well.

Just a few points on our development projects. If you -- so as I mentioned, 3% of our portfolio is in development projects. It has a current valuation -- such projects at current valuation of EUR 59 million. These assets expected to generate once on completion EUR 14 million revenue when we're talking about 3 office buildings in Budapest and Zagreb.

Just a few words on these developments. Here, we highlight 4 projects. One of them is a refurbishment. This is CP 1 and 2 in Budapest Center Point. Matrix C in Zagreb will be completed in Q2 this year, it's 92% pre-leased. We intend to complete the refurbishment of Center Point 1 and 2 in Q1 '24 and we are also progressing with the redevelopment of the of our business campus in central Budapest and also with the development of Center Point 3 in Budapest. These assets combined, represent 61,200 square meters class A office building.

With that, I would like to hand over to Barbara to present the financials.

[Barbara Sikora, executive]

Thank you, Zoltan, and good morning, ladies and gentlemen. Let's start from the income statement and a short summary of transactions that Zoltan has already mentioned, but which, of course, have influence on the current quarter and comparable quarter of last year for income statement and for balance sheet and P&L. And cash flow, it will be, of course, the end of the year. So even if gross margin, this will be our #1 in the income statement remains flat and similar as for the comparable quarter, there were some movements related to the transactions that has already been -- to the transaction that has been mentioned by Zoltan, which took place this year, meaning all was completed this year because the transaction itself started last year. But in Q1, we closed Forest Offices sale with net inflow of approximately EUR 48 million. This sale resulted in a decrease of gross margin of approximately EUR 1 million.

On the top and I would like to draw your attention here the chart on the right side of the income statement, where we show where the differences come from. The first one, exactly the sale and the EUR 2.7 million decrease in gross margin, not only includes the sale of Forest Offices, but also last year, over last year, as you remember, we sold a couple of properties. This includes Serbian portfolio, Cascade buildings and Matrix buildings A and B. The net -- the decrease in the gross margin for the last year's sale amounts to approximately EUR 1.7 million. So in total, the decrease in the gross margin on the sold building amounts to EUR 2.7 million, as you can see.

Another further transactions executed last year, meaning completion of the development projects. This was our Pillar property and GTC X resulted in an increase of current quarter's gross margin by EUR 1.4 million.

Of course, everybody expects some increase related to inflation. We recognize in Q1, such an increase amounting to EUR 2.4 million. This will be the indexation influence will grow due to the fact that for office brands, we index them in line with the -- or maybe not in line, but on each anniversary of the agreement signing. So the indexation influence will be more significant over the next quarters. And last slight decrease in the results coming from the fact that for some of the new leases, there is a delay between the signing date and when the transaction -- when the lease comes into force.

And for 2 buildings in Poland, we have a decrease in occupancy, the overall influence is EUR 1.8 million decrease as compared to Q1 2022. As we presented on the net result is flat, meaning results for the 2 quarters are comparable.

And going down the income statement, that is actually the biggest difference because -- the financials are comparable. The biggest difference comes from the revaluation of investment properties. Last -- in the comparable period, meaning Q1 '22, we recognize an increase on the valuation of the Pillar property amounting to EUR 6 million. If we excluded it, the decrease in the -- or the loss recognized on the revaluation amounting to approximately EUR 3 million results from new CapEx standard or I should say, capitalized on the properties. And then subsequently, and the period and expanded to the -- charged to the P&L as we keep the value of the properties at the end of Q1 as at the year-end, of course, assuming there is no premises to change the value. This, of course, also relates only to the operating assets because for the development of course, we increase the value, but the impact resulting from such write-offs is similar as for Q1 2022.

The net profit for the period, similar with 3 million smaller or lower net profit for Q1 2023. As I said, this is mainly the valuation. There is also a small impact of change in the taxation. It was lower this quarter. And it is due to the fact that in the comparable quarter, we recognized deferred tax on the Pillar valuation profit as well as we improved in terms of amortization of the investment properties meaning it can be currently properly charged to the P&L with some adjustments in the previous year.

If I could move then now to the balance sheet. Again, there is no significant changes as compared the end of last year. Two key differences that I would like to describe is the decrease in the assets held for sale. This is, of course, the sale of the Forest Offices property as well as the cash flow, cash and cash equivalents plus deposits. So if you try compare it to the cash flow statements, there is differences resulting from including in this position of the deposit [indiscernible]. And the main difference in the cash and cash equivalents results from the sale of Forest plus our CapEx activity, which is more -- let's maybe jump to the cash flow statement directly, we will discuss the result there.

Sorry, Malgorzata, I missed this one. So I will come back to the investment activity in the cash flow. For that metrics, they remain strong, pretty unchanged as compared to the comparable periods, again, with total debt amounting to EUR 1.24 billion, same figure for the year-end. Weighted average that maturity also remained at the level of comparable period. Looking at the chart at the right side, you will see that in the next 12 months, there is EUR 52 million planned payments. They result mainly from the payment of the Polish bonds and standard or the planned amortization of our financial liabilities. So the next significant repayment or refinancing will hit in 2025.

And net LTV, I won't be describing to the changes as Zoltan has already explained everything. Weighted average interest rates very low as compared to current interest rates in the market. From jumping currently 2.25% versus 2.21% which is a really minor increase. And this is why you can see how well we are hedged or finance, meaning that a number of loans and liability, financial liabilities with fixed interest rate. And as you can see on the debt split chart on the right bottom, 95% of our liabilities. And this remain, of course, also unchanged as compared to last -- to the previous period is fixed or hedged.

Coming also to the secured versus unsecured debt, the figures didn't change as compared to last year, basically quite flat, strong position when it comes to the debt.

Malgorzata, let's jump to the last slide that I'm going to present. Investments in real estate, EUR 27 million expanded. This is our current development Matrix C, Rose Hill Business Campus and Center Point 3 versus last year's similar -- more or less similar level of activity for developments and on top, a couple of acquisitions executed last year in this quarter, we haven't executed and major acquisition. And again, the sale of investments that we have already discussed, Forest property sold in this quarter. And in Q1, it was mainly last year, it was mainly Serbian portfolio sold.

And as for the financial statements, financial data, it is all from my side unless you have any questions, I have -- I will be, of course, pleased to answer them.

[Malgorzata Czaplicka, executive]

Ladies and gentlemen, that concludes our formal presentation. I'm opening the floor to Q&A now. If you have any questions, just unmute yourself and ask the question.

[Unknown Analyst]

Hello. This is Peter [indiscernible] Asset Management. Can you hear me?

[Malgorzata Czaplicka, executive]

Yes, of course, Peter, go on.

[Unknown Analyst]

Can you share a bit the light on the indexation of rents. Did you do most of the indexation in Q1 for the year? Or is there anything coming also in other quarters? And was it from the very beginning of the year and maybe also the principles of indexation. So I guess, mostly, it's euro or Eurozone inflation driven or maybe you can just describe it a bit.

[Barbara Sikora, executive]

Yes, Zoltan, you would like to -- or maybe Janos -- should I because, of course, I'm ready to answer the question.

[Zoltán Fekete, executive]

So please go ahead, Barbara.

[Barbara Sikora, executive]

Okay. Perfect. So for the retail portfolio, the indexation of brands hit from the beginning of the year. As I mentioned, for the office portfolio, this will be executed over the year in line with the anniversary of the agreement signing. In terms of what is the level of the indexation, yes, this was of course, related to all the European indexes in place. When it comes to the actual figures or levels of the indexation applies. On average, I would say it was around 10%. Depending on the turnout on the agreement, if there is anything quarter, Janos, you would like to add, please do but like the overview of the indexation will be -- or the average of the indexation will be approximately 10%.

[Zoltán Fekete, executive]

Yes. And just to mention all our places are euro-based and we use European Union indexation. In some at the beginning of the year, we put it through. It's by the way, everything that was initiated this year was put through the leases. So no tenants were debating. And so far, we don't see the size that there would be an issue in terms of realizing inflation through the rents this year.

[Cezary Bernatek, analyst]

Cezary Bernatek from Erste Group. I would like to have a couple of questions, please. So first of all, you mentioned that some of your existing projects require some CapEx to upgrade it to green certified. I was just wondering what kind of level this CapEx could be this year and maybe next year, just roughly? And whether you expect the valuations of these projects after this extra CapEx to pick up somehow versus the current levels? That's one thing. And maybe just 2 more quite specific questions. First one concerning ABC 3 project, is it still scheduled for kickoff this year?

[Zoltán Fekete, executive]

Which project?

[Cezary Bernatek, analyst]

ABC 3. Yes and concerning the occupancy at the office part of the portfolio at the end of 1Q '22, if you could just remind us what was the level -- is now like 87%, right? So just to have the base figure.

[Zoltán Fekete, executive]

Yes. So that's correct. ABC 3, I think the commencement of that project will probably slip over to next year, small office development project in Sofia.

[Cezary Bernatek, analyst]

And this is because of the market fundamentals there?

[Zoltán Fekete, executive]

Yes. Yes. Even though ABC 1 and 2 operate well but right now, we don't see -- I think the developments that we have in the pipeline are sufficient, and we do not intend to add further ones. By the way, I would like to mention here that we have -- we are progressing with the pre-development phase of [indiscernible] in Belgrade which is a project that, a much bigger one that would generate additional GLA of 74,000 square meters. So with that, over the next couple of years, we are actually rebuilding the portfolio in Belgrade.

Now if I had to choose between Sofia or Belgrade, where it makes right now, as it stands more sales to develop, we would probably increase the exposure in Belgrade. The leasing market remains and I think the -- also the prospects for that market are more positive than Sofia. So on the first question, I would like to ask Janos about CapEx on maintenance.

[Janos Gardai, executive]

Yes. First of all, not all of the CapEx that we have in the budget and what we spend on the buildings is strictly and only related to recertification and then the ESG profile, it's also normal rental CapEx to keep the building quality up to date. On an annual basis, we spend between EUR 10 million to EUR 12 million on the whole portfolio and the impact on the valuation, well that's a tricky question because valuation is not only driven by the CapEx that you spend on the building and as well as the rents that you collect on the trends that also on general market sentiment and how investors kept investing in the portfolio.

If I approach it from a different angle for sure, this CapEx is definitely needed to maintain the core of the building and as ESG profile is becoming more and more important for the international investors. I would say that these days, this is a must, to have greenfield certificates and bring the point of the buildings up to date. I don't know whether that answers your question or not. But if you have any further questions, more than happy to answer.

[Barbara Sikora, executive]

Maybe Janos, if you don't mind, I will add, there is very negative sentiment in the market, maybe very exaggerate. But there is negative sentiment in the market when it comes to investment. The level of investments dropped significantly over the Eurozone as compared to the Q1 last year, it's like 50% less, let's say, on average. So -- and with the cost of financing growing, everybody is talking about the decreases -- increases in the cap rate and which result in decreases in the valuation. We will be discussing -- we will be reviewing our portfolio with our valuers shortly, but the expectation of general market is that the valuations will go down.

[Cezary Bernatek, analyst]

Thanks for this answer. And maybe like taking opportunity, just one more question. How do you feel about the rental rates in the region when it comes to the office segment? Is there any chance that there could be like an upward movement in case of the supply gap or you rather see it stable going into '23, '24? On a comparable basis.

[Janos Gardai, executive]

Yes. I think at the moment, especially this year, we don't expect an increase. Companies are still looking at the impact of the utility prices, service charge cost, indexation and all the other element of the cost. With that said, as what [indiscernible] already mentioned, we put through wherever it was possible, all the indexation or accepted [indiscernible], increased rents as well as demand for all the service charge reconciliation for last year. 95% of those are already accepted. The remainder will be accepted probably in 1 month's time. So it seems that tenants already got used to this different era. But with that said, I don't see any further room for increasing rents this year.

First, we have to accommodate to this new era. So I would call it stable.

[Malgorzata Czaplicka, executive]

Ladies and gentlemen, do you have any more questions to the management of GTC at that stage?

[Cezary Bernatek, analyst]

So maybe one more from my side, if nobody else wants to ask the question now. Do you consider this buyback to conclude in the form of like a tender offer, potentially?

[Zoltán Fekete, executive]

Can you repeat, please?

[Cezary Bernatek, analyst]

Is the tender offer when it comes to the buyback possible option?

[Zoltán Fekete, executive]

Yes. In terms of execution of share buybacks, obviously, it includes this possibility, but it also includes straightforward buybacks on the stock exchange. So all the legal possible avenues will be possible. And there is no decision rather than, right now, other than just asking for the authorization.

[Malgorzata Czaplicka, executive]

Ladies and gentlemen, as there are no more questions, thank you very much for your participation and your time and your interest in GTC, and I remain available at for any further questions you may have. Thank you very much. Have a lovely day. Bye-bye.