Globe Trade Centre SA

JSE:GTC

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the GTC Third Quarterly 2019 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today.

I would now like to hand the conference over to your speaker today. Please go ahead.

[Malgorzata Czaplicka, executive]

Thank you very much. Good afternoon, ladies and gentlemen. It's our pleasure to welcome you to our third quarter results conference call. As usually, the results are going to be presented by Thomas Kurzmann, the CEO; and Erez Boniel, the CFO.

Let me give the floor to Thomas.

[Thomas Kurzmann, executive]

Thank you and good afternoon. We are doing the presentation along the paper, which was disclosed on the Internet, starting with Page 3. And let me give you a quick summary of the first 3 quarters of this year, and especially also the last one.

We have been extremely successful and active in leasing up our existing asset portfolio. But not only the existing portfolio had great success, also the development projects under construction and other developments were contributing a lot to this fantastic leasing result in [ Kuchoma ] in this quarter and in the last 2 before.

And this is the main driver of the FFO I increase by 11% to EUR 52 million in the first 3 quarters of this year. We also could clock in increase -- net increase of 14% of in-place rents to EUR 144 million, which was, by the end of September last year, only EUR 127 million.

The gross margin from rental activity improved by 13% to EUR 94 million in the full year and high occupancy of 94% could be kept. We had a little down trend in the first 2 quarters, but this was only despite completions of new buildings, which needed to be leased up. Now we are back to 94% as last year, and I think we will still increase occupancy by the further actual quarter.

We had 123,600 square meters of newly leased and -- or renewed leasing space only in Q3 2019. This is a real high number. In the total 9 months so far, 204,000 (sic) [ 204,700 ] square meters new lease and renewed lease activity. This is very unique. It's a big performance, and this is due to having fantastic leasing teams all over the place, in each country and very active asset management activity.

The FFO I, as we saw at the beginning, 11% up. Operating profit, 10% increase before tax and a fair value adjustment to EUR 53 million.

Profit after tax is now EUR 63 million in the 9 months of 2019. Earnings per share, EUR 0.13 in the first 9 months of '19 and the April half increased by another 2%. And this is after dividend payments in May this year.

The financial metrics, we kept LTV at 44% and the weighted average interest rate at a continuous low level of 2.6%.

On the office segment of our portfolio, we had very successful leasing results. 113,000 square meters only on the office portfolio, where newly leased and/or renewed in first -- in the last quarter, of course, altogether with 177,700 square meters from first 9 months. The occupancy on the office portfolio even increased. And this is due to having better results in Poland but also in the area. Romania contributed to it and also the other markets were successful.

The strongest leasing activity, of course, previous activity was in Budapest with our new project Pillar, which is still under, let's say, exploration works. And we could win a big tender in Exxon with a 27,000 square meter pre-lease, where they will commence in January 2022 after the building will be completed, and the fit-out will be also made to fit their requirements.

Also, very successful extensions of leases in this Pillar building in Budapest and metro building, office building in Budapest where we increased rent levels and the new term of the rents leased to an uplift of about EUR 10 million value.

The improved occupancy in Poland was mainly contributed to AeroPark office building in Warsaw and our office building in Katowice, Francuska.

We had also a quite active transaction time. One of the transactions we did was the sale of White House in Budapest, and we are working still on Budapest. The sale of White House was closed, and we are working on Neptun Office Center in Gdansk. This transaction hopefully will be closed in this year. We have basically a commercial understanding with the buyer, it's just about finalizing the SBAs and have a closing there.

The 2 sales, of course, will contribute additionally to our [ mobile ] FFO I from leasing activity. And so basically, we have additional free cash generation during this year, which we manage to both shareholders to use as an additional dividend payment to the shareholders.

We could complete on the office portfolio another 23,900 square meters of high-quality office space. This is namely Green Heart, one office building in Belgrade, Matrix A office in Zagreb and this will be actually contribute upon stabilization, another EUR 4.5 million additional rents to our portfolio.

62,800 square meters are still under construction. The biggest one of which is Pillar in Budapest, which we could lease to Exxon; and the completion of this big amount, 62,800 square meters, will be between 2020 and 2022, and it will contribute another EUR 12.2 million additional net income to our office portfolio.

Sustainability, of course, is very important for us, not only to achieve BREEAM certificate is the main target, it is all about saving CO2 emissions and, most important for us, saving costs. This is the reason why we are very hard working on improvement of efficiencies, energy efficiencies of our buildings and their operations. And by doing so, we could also environmentally gain a lot of new Green Building certificates for our office portfolio.

The retail portfolio is also moving in the right -- absolutely right direction. Galeria Jurajska is successful like it was over the last 2, 3 years already. But the big success is that we see [ clock ] improvements of operations, which means that the [ genre ] of our tenants is continuously growing, which makes it also possible that we could increase our rent levels and, of course, the total NOI on this building. We could renew almost 11,000 square meters of new retail space only in this property in the last quarter, and we will continue to renew lease agreements at higher level as we had before. And this just contributed to our better turnovers and the better business our tenants are making.

Galeria Pólnocna is getting more and more stabilized. It could increase over there. [ Genres ] of our tenants, which is contributed to higher spending provisions mainly, so it shows also that the momentum of this Galeria is building up, people are coming back more and more and continue to spend there, which makes our tenants happier, and this is also the reflection of having a lot of new tenants, which are listed here on different sectors. It's special. It's entertainment. Even Dance Studio opened a new one, which is very famous in Poland. So all these amenities and new activity in Galeria Pólnocna will continue to help us bring this brand-new shopping mall into stabilization.

Mall of Sofia is anyway 100% leased, not only the shopping mall, also the office sector here. And here, the big change in the last quarter was that we could achieve a positive opinion from the city architectural department, allowing us planning permit. This is not the building permit. The building permit has to follow but the planning permit from master planning to build another 7,500 to 8,000 square meter GLA office on top of the main entrance, it could be seen here on the picture on the right below. And this will even improve, first of all, net income, the market share; and second, also the use of the shopping mall, especially the food court area, which will benefit from a lot of new employees from our tenants in the office space, so altogether, a win-win situation.

Avenue Mall Zagreb, Croatia, anyway, very stabilized asset. We have close to 100% occupancy there, and we continue to [ average ] as we did before. No big surprises there. Just stable cash flow and good operations.

Ada Mall in Belgrade, again, we have the 99% signed leases. Some of the tenants, including the cinema, are still doing a fit-out. So they will be probably not ready to open this year, but in the beginning of next year, the mall will be fully operational. We see already also a good trend in increased footfall and increased [ rent ] in the city. Tenants are also more happy now because the turnover is increasing. And I think it will take us a little bit shorter than in Warsaw on Galeria Pólnocna, we expect that Ada Mall will be, in the next 12 months, stabilized after completion in May this year.

Occupancy anyway on the retail portfolio is super high, it's 96%, and this, despite that Galeria Pólnocna has occupancy below of 90%. So it says -- it shows that our malls, except for Pólnocna, which is still in the stabilization phase, are fully leased.

We also save on energy and CO2 emissions on our retail portfolio, and this allows us also to get the Green Building certificates for all the buildings, and we are proud about that. And it also saves a lot of money to our tenant because we can be able to not increase, like a lot of other competitors all the time, our operating costs because of increased energy costs.

The portfolio split has not changed a lot since the last quarter. We have now EUR [ 2.057 ] billion standing assets producing income. The regional split is, again, 47% in Poland. And then we have Belgrade and Budapest, as the 2 biggest capital cities in our portfolio, followed by Bucharest with 9% and then Zagreb and Sofia close to 6% in the portfolio.

We can say that all these markets are performing extremely well. The demand on our office and retail space is high, and we do not see any issues even if you would lose 1 or 2 tenants to fill it up again immediately and continue to produce cash by leasing it up. The development portfolio with EUR 61 million is at the moment at a very low point, and this is just because we completed Ada Mall and 2 office buildings in -- one in Croatia, Zagreb, and the other one in Sofia. But since we have now Budapest Pillar, just at the beginning of the structure compaction here, the values will go up very strongly over the next month and another 2 buildings are under construction in Sofia and Croatia and in Belgrade. So the share of development, of course, is a little bit low, will increase a little bit. But when we go forward in the next 12 months, also a lot of completions will be coming, so will balance the relationship between [ processes ] value, income-producing 2 developments quite well to keep it on a low-risk profile. The office portfolio overview in big data is EUR 1.2 billion gross asset value office, EUR 93 million in-place rent, 42 buildings, together 547,000 square meter GLA, occupancy up by 1% to 94%. Performance, very good.

Retail portfolio, again, EUR 850 million, roughly, EUR 52 million in-place rents, 5 buildings only and 215,000 square meter GLA. Also on the retail portfolio, we had 1% increase in occupancy versus 2018.

The malls are all located in capital cities, except for Czestochowa. But in Czestochowa, we have the big benefit that we don't have a lot of competition, and we are really controlling not only the city, but also catchment area of about 100 kilometers.

Investments under construction table on Page 11 had some changes because we moved a couple of buildings from last quarter into income-producing asset portfolio.

So we are left with other construction blocks only with Green Heart N3 in Belgrade, which is a small building, 5,400 square meters, a very good visibility on leasing it up once it will be completed. We are in budget. We are in plan or a little bit above even with the leasing activity on pricing. So just, let's say, a couple of months more to complete it and start operations.

ABC II, the second building in Sofia, has also quite healthy pre-leasing in place. The construction is going according to the plan, in budget, we don't see any issues. And we'll open the building in Q4 next year.

Matrix B in Belgrade (sic) [ Zagreb ], again, good pre-leasing activity, demand higher than the space we have available, transaction and the timing is in plan. And this one will be completed and in use in Q3 2020.

Pillar in Budapest, as you have been reading, potentially involving the -- in the news, 27,000 square meters leased, pre-leased to Exxon. Here, we have a little longer to go. It's a big building with a lot of fit-outs to be done. Completion will be in Q4 2021 and occupancy of the tenants in January 2022. So big value creation here.

Then we have the blocks in planning stage. We have the City Rose Park 1, 2 and 3 properties where we achieved building permits. We started some preliminary works on excavation and site cleaning. We are hoping to get the pre-leasing in place. And at the same time, we hope also that the [indiscernible] needs in Bucharest will be more reasonable in the short near future, and then we will be able to start whenever it's appropriate.

Twist in Budapest, as we also told in the last quarters, will be [ slowed ] because of the city of Budapest rejected legally one of its building permits for this property. We have been ready to move Pillar up. So Pillar is now full under construction and pre-leased, which gives us a little bit more time on the Twist to repair the concept into a way that the city could also accept. We still have a court case running to force the city to [indiscernible] building permit on the single tower, but it might be necessary to do a twin tower on the project, which can be also achieved.

Center Point 3 is, again, a big building of 35,500 square meters in Budapest. Here, we could pass the city planning to City Architectural Commission in the second try, and we expect to be able to submit for the new project recommendation by the end of this year. We get a permit in the first quarter of next year. Also Center Point 3 might be a bit weaker than expected. When the pre-leasing activity is successful in Budapest, we could start this one early next year also.

GTC X in Belgrade is about to get the permit by the end of this year. Here, we have also very good visibility and demand for the office space. And whenever the pre-leasing is advanced enough in the permit this year, we might be able to start it as well in the beginning of next year and complete it then in Q1 2021.

Moderna, Katowice in Poland, has now a building permit. We also achieved reasonable pricing on construction tenders, which was very important to us. Now we're working on pre-leasing and hopefully, be able to do that this year to be able to start at beginning next year.

In the preplanning stage, we have Zielone Tarasy, which is the shopping center in Wilanów or the multifunction building in Wilanów. Here, we made very good progress on the master planning, which was a big discussion over the past many years, and we hope to be able to get the master planning approved by the city of Warsaw in the first quarter of next year, it's ready to start delivering the sand works. And I think it will be a big success. Now finally having an agreement with the city and with the inhabitants of the district about the concept and deliver with how to get this done.

Matrix F, a couple of new buildings in small -- able to split them into small stages. Each building can be done at around 16,000 square meters, depending on the -- or let's say, taking advantage of the success on Matrix, A and B, and watching how carefully Matrix B, how we will lease it up and for what leasing rates. During the next couple of months, we will be ready to start another stage on Matrix, but of course, all this depends on pre-leasing activities and demand as the season's starting.

This makes a total investment cost for this [ pipeline ] table of about EUR 832 million and it's corresponding in expected in-place rent of close to EUR 73 million. Depending on whatever estimate we have on yield, this will contribute to another EUR 1 billion and add a little bit more of income-producing assets in the next couple of years, which we -- which will be added to our performance.

The next couple of charts is -- if somebody wants for the Q&A session, we have pictures and more little details on all our development projects. And I hand over now to Erez Boniel to explain financial data.

[Erez Boniel, executive]

Good afternoon. I'm going through the presentation Page 15, where we have the balance sheet. Looking at the balance sheet, the first line, investment property. The investment property in this quarter increased due to the usual investment activity that we have. And at the same time, thanks to the successful leasing, especially of Pillar, the revaluation of EUR 9 million was booked.

In this quarter, revaluation was done internally with confirmation of external values and with a particular view into Pillar industrial prolongation of the lease since this was a significant increase in [ bulk ] as well as in the rental route.

Going further down into the balance sheet. The balance -- the amount of cash and cash equivalents, quite significant amount. This is stemming from the fact that we sold the White House, and we received most of the proceeds. The receivables are of EUR 3.7 million to be received this month.

However, side by side, we also have the liabilities. First of all, post balance sheet, we paid bonds. At the same time, we also raised at the beginning of the month, around EUR 61 million bond and there's still, but, payments of around EUR 20 million that is related to the sale of White House and it was paid to -- was paid basically after the balance sheet.

Looking at the [ land ], the portfolio is growing alongside with the expansion of the assets. We also refinanced several loans. The biggest one was, again, on Budapest, Center Point and Duna. But we also have other loans, UBP, Universities Business Park in Poland is under signature. And we -- as I mentioned, we refinanced the bonds.

I move ahead to the second page, income statement. And here, we can see the expansion or the increase in revenue, thanks to the fact that we had [indiscernible] we had increased rent, completion of White House, Green Heart, Ada, ABC I, Matrix A and when we compare to last year, also the Sofia Mall is fully working, with rental growth in the mall.

Cost of rental operations bring us to the margin, EUR 94 million versus EUR 83 million last year. We keep more or less the same level of margin percentage-wise.

In terms of G&A, when we look at the G&A without the shareholders' payment provision, we can see that there was increase of EUR 1 million, and EUR 600,000 of that are 2 or 3 items, which are one-off items. The only EUR 400 million is increased, but also this one, we can split it into EUR 200 million is the real increase and another EUR 200 million is the fact there are -- in some projects, we cannot capitalize any more the engineering, the [ salaries ], which are usually capitalized to construction.

Other than that, there was a question during the day that was raised. When Thomas looked at the balance sheet, he can see that the costs versus last year increased almost by 100%. But obviously, the reason is a shifting between the expenses and the provisions. So we should ignore such accounting shifting.

Regarding other costs, namely the financial expenses, here, on average, we keep 2.6% versus 2.7% last year. So the efficiency is increased. But financial expenses increased -- EUR 1.6 million is attributed to the IFRS 16 accounting change and another EUR 1.6 million -- EUR 1.5 million related to the real increase in activity, raising more loans and I think more interest on a bigger platform.

And overhead to the next page where the debt metrics are presented. In terms of our strategy, nothing has changed. Interest rate is almost fully hedged. Most of our debt is still in euro and we plan to maintain it in this way.

Regarding the debt maturity, as I mentioned, we recycle the bonds since some bonds to be repaid in the Q1 or beginning of Q2. And we have EUR 85 million loan-related to [indiscernible], which we are in the process of refinancing it. Other than that, the maturity is more or less spread over the next 4 to 5 years. And we feel comfortable with that. No breaches or no even risk for breaches.

Regarding the metrics themselves, the loan-to-value on overall basis is 44%. This is staying like that already for a couple of years.

Weighted average of interest rates, I mentioned, 2.6%. Very good interest cover of 4.3% (sic) [ 4.3x ], stemming from the fact that on one hand, we increased the income. On the other hand, the total costs remain relatively low. And the weighted average of debt maturity is 4.2, as I mentioned, EUR 85 million is in the schedule to be prolonged, therefore increasing the entire average of debt maturity.

Regarding the cash flow, the cash flows sum up, in fact, everything that we said starting from the beginning of this telephone call. The activity is summarized here in terms of increase from operational activities. Hence the situation, investment activities related to the projects under construction right now, we have 5 projects; and the financial activity of bonds recycling, raising long-term loans and prolonging the average maturity of the portfolio.

So all in all, we are left at the end of the quarter with cash of EUR 150 million plus some others that will be depleted a little bit.

Funds from operation increased alongside with increase of rental income as well as taking into account the operational costs.

That sum up our presentation and I pass the line to the operator. If there are any questions, we would be glad to answer them.

[Operator]

[Operator Instructions] And our first question comes from Jakub Caithaml. I can't pronounce your name. I'm sorry. You have to do the -- you have to pronounce your name.

[Jakub Caithaml, analyst]

It's Jakub from Wood. I would have a follow-up question. I may have misheard or not catch everything because my line was breaking up a bit. Did you mention what do you plan to do with the proceeds from the kind of sale of properties, please?

[Thomas Kurzmann, executive]

No, I did not refer to it specifically. Obviously, prior to the proceeds from that -- from getting the proceeds, we had our plans, where the proceeds joined the full bulk of money that we have, including refinancing activities.

There is another building that is underserved, a natural building. And at the end of the year, we will see together with our Board of Directors and shareholders, and we'll decide how to allocate it between investment and dividend. We cannot exclude that there will be also a special dividend, let's say, a dividend that will exceed the FFO.

[Jakub Caithaml, analyst]

I see. Excellent. Understood. Loud and clear. Then perhaps, if there is anything you can say with regards to the ongoing Lone Star stake sale?

[Thomas Kurzmann, executive]

Can you repeat, please? Regarding?

[Jakub Caithaml, analyst]

The prospective change of ownership and the stake sale by Lone Star?

[Thomas Kurzmann, executive]

Right. I think, first of all, this question is not adequate to launch that because they are in the process, and they have more information than the management. As far as we know, there are still ongoing discussions.

[Jakub Caithaml, analyst]

Understood. And then last question for me, and again, perhaps, this may have been something which you mentioned, and I just didn't get it. Regarding Pillar, I noticed that the kind of planned total CapEx has moved up. Can you explain what exactly is this related to because relative to the total size, I think it has been quite substantial, some EUR 5 million?

[Thomas Kurzmann, executive]

The reason is that we fully pre-let the building to Exxon. Exxon committed to invest a huge amount. I repeat a huge amount of fit-out into the building. And we had to contribute a little to that. At the same time, the rent is higher than expectations. And I can say that the yield from offers that we already received, just during the exploration, are well lower than what we saw at the White House. So new level of wins, I would say. In other words, the investment is fully paid.

[Operator]

We have no further questions at the moment. So please continue.

[Malgorzata Czaplicka, executive]

Thank you very much for your participation, and we will now talk to each other in March. Thank you very much. Bye.

[Operator]

That does conclude our conference for today. Thank you all for participating. You may all disconnect. And speakers, please stand by.