Globe Trade Centre SA

JSE:GTC

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the GTC Quarter 3 and 9M 2018 Results Call. [Operator Instructions] I must advise you that this call is being recorded today, Wednesday, 14th of November 2018. And without any further delay, I would now like to hand the call over to your speaker today, Malgorzata Czaplicka. Thank you, please go ahead.

[Malgorzata Czaplicka, executive]

Thank you very much. Good afternoon, ladies and gentlemen. It's my pleasure to welcome you to our Q3 and 9 months results conference call. The presentation traditionally will be given by Thomas Kurzmann, the CEO; and Erez Boniel, the CFO. Thomas, the floor is yours.

[Thomas Kurzmann, executive]

Good afternoon, ladies and gentlemen. Thomas Kurzmann speaking here. And the headline of today is GTC is delivering. We delivered amazing one more quarter with a lot of activity. Leasing was going on, construction is smooth, power on and also, financing was done in a quite substantial amount and these all lead into FFO I increase of 37% to EUR 46 million. FFO is at the moment the main focus because we are growing our existing portfolio which is outperforming anyway with a lot of new assets. Also assets which are completed in the first half of this year like White House, starting out slowly also to deliver and this results we will all see a little bit later beginning of next year when the rents will start to come in. But headlines in the first 9 months of 2018, the in-place rent went up 15% to EUR 127 million and this means a cumulative increase in excess of 60% over the last 11 quarters and we used Q4 2015 just because it was the quarter after the last capital increase. The gross margin from rental activity is up by 27% to EUR 83 million now and occupancy is kept high. There was a lot of activity needed to keep that occupancy at this level. So in the last quarter, we hit 32,000 square meters new lease agreements in the first 9 months, sum up to 117,000 square meters of new lease agreements or renewed lease agreements.

FFO I increased 37%, up to EUR 46 million in 9 months which gives FFO per share of EUR 0.10. Also, the FFO has the same cumulative increase rate of 60% since Q4 of 2015. Operating profit is up 57% and makes up for a profit before tax in Q4 in fair value adjustment of EUR 48 million in the 9 months 2018. Profit after tax is at EUR 69 million and EPRA NAV increased by 7% up to EUR 1.145 billion, which makes a cumulative increase of 47% since the last capital increase. And of course, this is just the history. We have much more to come. We do have at the moment 7 buildings under construction with about 102,700 square meters GLA and all these buildings will be completed in the coming year. So this will give another strong boost to rent income to increase rent but of course also to the FFO to be expected. On top of this EUR 7 billion under construction which will be completed next year, we will start another 5 buildings and we will start construction of another EUR 5 billion with a total leasable area of about 112,000 square meters, which will start gaining momentum and also gain some new relation profit slowly next year, but coming in 2020 and 2021 on completion, we will give not only increased FFO but also a lot of profit to come from new relation.

We also acquired a mass land plot with some existing office buildings in Budapest which will allow for future development for 35,500 square meters GLA. This is a larger extension of our existing Center Point 1 and 2 buildings that we'll picture below. There's a green dot on the right picture showing a fitness center and there's, let's say, 3 buildings in front of the office buildings. All these buildings belong to the land plot. They're still producing some income about EUR 0.5 million a year at the moment.

We started already architectural competition and we will select the right architect in the next couple of months, going for building permit applications and if we have security on permitting, we will start demolition the existing buildings to be able to do the new ones.

We also commenced in the last quarter, ABC Business Center building II, the first one is under construction and we have set on some pictures about it and because it's almost fully-leased, more than 90% and the demand is so high, we have to start second one a little bit ahead of schedule.

We also achieved a LEED Gold certificate for Galeria Pólnocna. This is one of the few shopping malls in Poland having a gold certificate and we feel that this is very important also for a shopping mall, not only for offices where it's almost mandatory to do a new one because the certification on LEED Gold also guarantees that we have very efficient building systems in place and this is also giving us a good advantage on operating cost in the future. Not only the LEED Gold was an achievement in Galeria Pólnocna but also to get into additional new anchor tenants which is MANGO from Spain and Media Expert from Poland, which will give more interesting tenant mix in the next couple of months when they open to attract more customers to come.

Galeria Jurajska also had a very positive event in the third quarter. First time since the Galeria is existing, we have 100% leasing, right? And we have a waiting list from tenants who want to enter the Galeria and this shows also the performance achieved this year turning a very good mall, which was hurt a little by financial crisis around, into one of the most successful malls in Poland at the moment. Last but not least, securing loans, investment loans for existing buildings was in an amount of EUR 118 million for much better terms than we had before which will continue to help to improve FFO ratios and also absolute numbers.

The development pipeline on Page 6 is almost unchanged, which has moved ABC II, Sofia into the first block under construction. A little change is only on that one which is not really making up, it's minor. So still a lot to do. Total investment cost about close to EUR 1 billion which will produce an estimated in-place rent at the end of about EUR 90 million, which is a major leg of the future success of GTC. Report on Page 7 and 8, a couple of pictures for our investors not having the opportunity to travel around in all our 6 campus we are active on to show that we are not only having tables and numbers but also to give a little flavor how far the construction is already going. This picture on the top shows Ada Mall from the main street, there's still a lot of construction going because there is containers in the main entrance, but you can already see that the structure is up to the top. There is facade on, there is glazing on the facade. On the right side, you see inside that of customers, still a big mobile crane lifting equipment up. We are about to close the construction, make it possible by the end of this year to be able to use the first quarter to continue to sit out together with our tenants and then in the second quarter of 2019, so not long to go, the mall will be open. A little bit further on construction is already Green Heart, first building and second building, two of them are on the picture here. This is a very successful development on the old GTC Square and the tenancy of the first building is fully leased, it's a city tenant office building to Nordeus, one of the most successful gaming -- computer gaming companies in Serbia. They are already working now inside of the building with their very expensive fit out. We are completing the building outside. The facade is already on. The building is almost watertight and they will start operation also in Q2 '19. The second new building on the left side is also full under construction, there is another 3 levels to go on the structure, also in time, in budget and this building will also be ready by next summer. We already have a very strong demand from tenants. We are very close to signing the first lease agreements with hard commitment. And we are very positive that this building when it will be ready to occupy it will be already at close to 90% occupancy next summer. Advance Business Center I, this is the one on the top, it's fully leased by now. So basically leasing activity is faster than construction. But also that building is on-time and the main tenant, Concentrix will move in Q2 2019, will be at the end of May. And because it's fully leased, we have a second permit on the right side of the building, looking from the city, and this is a little bit bigger. We also have big and strong demand for the second building, I think, about 1/3 of it is already under final negotiations. So we can also say that Sofia is really a positive development for GTC but also because of the product we are building there. It's a fantastic location, is a very efficient floorplate, very good design which is appreciated by conventional tenants.

Zagreb is also developing well, the picture of it last week, Matrix A is all the way up on the structure, the facade is about to come. Clearly, this is about 43%, but there is negotiations for almost 100% of the space and depending on the progress on the leasing, we will soon start the second building target. The last one, and this is the breakdown, did not change much. We're now at 86% income generating assets on the balance sheet. We have only 7% of it under construction but, of course, this number is growing every day as we invest in a concrete façade and build out.

The cake of office and retail will be changed, let's say, in Q2 next year when other models will be completed and most of the future development will be office except for Wilanów in Warsaw. And on the shift at the moment, Belgrade is relatively development-heavy because we have 2 big assets under construction: Green Heart and Ada Mall, which is making up for at the moment EUR 115 million book value. Although in the next -- in the third half of next year, this will move into assets, income generating and then we have a different split, then Budapest will be very heavy on development and supplement in exchange for buildup. Office portfolio overview. We have now 39 buildings in our portfolio. A little bit more than 0.5 million square meter office space to lease making up for EUR 1.14 billion gross asset value with EUR 84 million in-place rent.

One change, a positive change on this chart we're showing all the last couple of quarters is that we managed to get a big number of Green certification activities all done. We have now another 19% of our total portfolio assets under certification, which means that in the near future, we will get the Green certificates, which means that we're only left with about 12% office building in our portfolio, which are not certified. Although there are these 12%, we already have ideas and we are investing in better technology, energy-saving equipment to be able to also get certificates for those few buildings left.

Occupancy is very healthy at 92%. Usually on the big buildings, we are getting 94% to sometimes even 99%. I think we had here a quarter also despite of Clico moving out of Duna Towers, and White House is not fully committed yet, I mean committed, yes, but not signed leases. So they are not counted as occupancy. So we see a lot of positive trends on the occupancy on offices, and the leasing performance in the last quarter showed that we're really one of the major market players in office space. Retail portfolio also positive, for assets EUR 725 million gross asset value, EUR 42 million in-place rent. Here we expect upward trend to come. Upward trend should come from Pólnocna but also from Sofia. It is gaining a momentum and it will be working much better than in the past. The occupancy rate all over is quite sufficient, it's at 96%, but even on this 96%, it is an upward room because the Galeria in Warsaw is still below 90% and here we will make, hopefully, a good progress to bring it up to better numbers.

Property overview, unchanged. We have still Galeria Pólnocna and Galeria Jurajska, the 2 most in Poland as the top valued assets. Those are working very well. Galeria Jurajska, of course, is at the moment with 100% occupancy and we will also use a lot of know-how from Jurajska to also push Pólnocna to the same level even if it will take a little bit to get there but I'm quite sure that we'll make it a big success.

City Gate in Romania, still a biggest office complex with EUR 147 million of gross asset value and occupancy is now at 95%, it is a little down since last quarter, but this is just because we had to change couple of tenants out and in the next quarter, we will already see a higher occupancy rates here. The rest is quite full and we will continue to maintain it in that certain level. Now we can move to the financial part and I hand over to Erez Boniel, who's handling all the key numbers on financials.

[Erez Boniel, executive]

Good afternoon. In Q2, we started to see clearly the growth of the FFO and profit, on which we worked in the past quarters. In Q3, this trend intensified and in fact, this has the title of today's presentation, which was the FFO increased by 37% to EUR 46 million. That's of course, the number that is reflected in Q3, not an annual number. When we talk about annual number, if we annualize this, we're talking about roughly EUR 60 million, EUR 61 million. This is a very nice achievement in growth compared to last year. But that's not all. There is much more to come as could have been seen from the IPUC table that we presented.

Alongside with all the profit indicator that were improved, we posted a net profit of EUR 69 million and I will elaborate on that while we're doing the income statement. But important to note is that if we look at the FFO as well as the profit, profit is like the speed of the car or the speed of the company growth. FFO is the fuel and both of them are growing and expanding. Everything is done in -- under proper monitoring of the situation as we will explain. When reviewing the events in the 3 quarters, we had several events as reflected in the financial statements. Starting from events that were reviewed in the past, the White House completion, which generated so far EUR 10 million of profit. This is the valuation profit. The impact on the income statement, in terms of NOI was not significant yet, it will be most significant in the coming quarter and definitely next year. We've also non-core assets that generated EUR 12 million of free cash. We bought the Sofia mall that also generated income, the NOI of the Sofia mall is around EUR 7 million and this is also giving a boost to the FFO.

And as you know, we paid -- we declared and paid dividend, EUR 10 million in cash and EUR 26 million through conversion of dividend into shares. We acquired in Q3 a site in Budapest for EUR 16.5 million that's the extension of Center Point, very successful project that we have in Budapest. We refinanced Globis Wroclaw and office buildings and we continued to work on other refinancing. In terms of revaluation, during Q3, there was no external revaluation. This was just a recognition of progress regarding the development projects. Looking at the income statement, the increasing rent on in-service revenues stems mainly from the completion of the Galeria Pólnocna, Artico office building in Warsaw, BBC office building in Belgrade that was acquired earlier -- the late last year and acquisition of the Mall of Sofia. The profit from revaluation reflects mainly developers profit on assets under construction, namely Ada, White House and ABC I. And in terms of taxation, nothing so far in here. It consists -- approximately 50% of that is the ongoing tax expenses, roughly EUR 5 million. And the EUR 7 million deferred tax expenses related to revaluation. In the balance sheet looking at the investment property, the growth in investment property stems from acquisition of Mall of Sofia, Center Point 3 and other investments we made during the period as well as the revaluation gain that contributed EUR 31 million in the period. The liabilities go together with the increase of assets or loan related to Mall of Sofia, EUR 61 million we borrowed and other drawdown of construction loans, in line with the focus of construction. Regarding the other liabilities on the balance sheet, around EUR 41 million, we are talking about construction liability and provision, part of the standard process of running the projects and some other deposits from tenants as well as payables, nothing unusual here. It is worth mentioning that we are examining the impact of IFRS 16. This could come next year, it will affect us next year. This will have impact on one hand, increasing the assets out of prepaid expenses and on the other hand, the liability that is related to leasing mostly for purchase of the part of land. Regarding the loan portfolio, 92% of the portfolio is hedged versus 81% that was in Q2. So that's already a very high ratio of hedging. On average, we hedge for the maturity of the loans. The loan maturity right now is on average 4.4 years. And give or take that's the hedging situation. Currently also, the number of loans under discussion, to name a few, this is the Pillar construction finance, Globe FortyOne refinance, The Twist construction finance, Artico refinance and ABC II construction finance. There are some other loans that we're having the initial discussion to finance all these loans.

Somewhere in the finance world during the 9 months, EUR 20 million of new bonds were raised. EUR 54 million of bonds were repaid. We secured finance in the north of EUR 316 million. The average debt maturity, as I mentioned, 4.4 years, but the average interest rate 2.6% per annum.

Regarding the maturity of the loans, we are monitoring the situation carefully. We have circa EUR 90 million in year 1 to pay. This is mostly for standard amortization and we see no problems, no issues with that. And there is another EUR 200 million that will come in 2 years, that's a long time and we really think that we can meet these targets during the following quarters. LTV remains 45%.

In terms of cash flow, we generated EUR 44 million from operation, that's EUR 8 million more than in the prior period of '17. We invested around EUR 160 million, we borrowed EUR 221 million, that's almost double compared to the prior year period. And the -- maybe not surprisingly to us is that we remained with the same cash balance as in the 9 months of 2017. It means that during the 12 months, we managed to operate efficiently through internal resources of the company while carefully observing the cash situation, retaining sufficient cash for investment and for expansion of the company or if there will be any scenario that will require cash and, let's say, contingency. We continue to run the company in a risk-averse profile. That is all. As we started, I will just complete that FFO is ever increasing and that concludes this part of the presentation. I will hand over to the operator to open the line for Q&A.

[Operator]

[Operator Instructions] No further questions at this time. Thank you. Please continue.

[Thomas Kurzmann, executive]

Thank you.

[Malgorzata Czaplicka, executive]

Thank you very much, everybody, for your participation in the call. Goodbye.

[Operator]

Thank you. That does conclude our call for today. Thank you all for participating. You may all now disconnect.