Globe Trade Centre SA

JSE:GTC

Earnings Call Transcript 2020-Q3

[Malgorzata Czaplicka, executive]

Okay. Ladies and gentlemen, I think it's time to start. Good afternoon, again. It's my pleasure to welcome you to GTC's Q3 and 9 months 2020 results. As usual, the presentation will be conducted by Yovav Carmi, the CEO; and Ariel Ferstman, the CFO. The presentation will be followed by a Q&A session. And of course, I want to say that the -- all presentation, the whole meeting is being recorded and the recording will be posted on our website. Let me now pass the floor over to Yovav.

[Yovav Carmi, executive]

Hello, good afternoon to everybody. I will start the presentation. I hope everybody has the presentation and I will start from Page 3. Yes. So this is a presentation of the results for Q3 and the 9 months of GTC. What we have seen in the financial results is that we are able to generate EUR 54 million of FFO; we still have a strong cash position of EUR 139 million; we are maintaining our LTV ratio at 45%, which is in line with our strategy to stay below 50%; and we've shown a gross margin of EUR 91 million. I think one of the biggest achievements that we've been able to achieve recently is the investment-grade rating of BBB-. We've been through a rating exercise by Scope rating agency as part of our preparation for issuing new bonds. I think Ariel will touch more on that later. We have seen gross margin, as I said, at EUR 91 million, which includes EUR 10 million impact on our income due to the COVID in the last 9 months. I will move to the next slide. We -- on Page 4, we -- here, we look at the performance of our office portfolio. The office segment continues to be showing a resilience in this quarter. Total occupancy has been kept at 94%. We've been able to renew 10,000 square meters of office space in Q3. The largest lease being Barry Callebaut, this is chocolate company. Their offices are in Lódz. We completed the sale of the Spiral office building in October this year and we secured the leads in Zagreb with Generali, 2,500 square meters, and we commenced the development of Sofia Tower, a project in Bulgaria. Moving to the next page, we see here, this slide and the next one, we will talk about the retail performance. We've seen the main indicators of our retail assets. Post opening after the previous first wave of COVID, we've seen the performance gradually normalize. Normalizing footfall was picking up. Up until September, we saw 76% comparing to previous year. And then from the second half of October, we started to see a decline. The number of infected people was on the rise still throughout into -- well into November. We saw the numbers of infected there picking up. In Poland, for example, it went up to around 25,000 people per day, which is quite a large number. And in early November, the government introduced full lockdown on shopping centers that is expected to end by sometime later this week, we'll hear from the Prime Minister. So all this of course had a negative effect on the performance of the shopping malls. We will see this in this slide and in the next one. As the shopping centers were, in Poland, completely shut but in the other markets where there was less severe restructurings, they didn't go as far as full lockdown, but still with the rising numbers of infected people, the people are more scared and less willing to go into shopping centers. Hopefully, by the 28th of November, when the malls will reopen again in Poland, we will see mitigating -- by opening, we will see mitigation of this deterioration just before the Christmas shopping that is expected to come. So hopefully that by the end of the year, we will see some improvement. Maybe you can -- we can look at the next slide which basically demonstrates the same things, but from the aspect of the turnover of the shopping centers. While at September, we were still -- it's close to 90%. This went down in October to 83%. And as I said, from the second half of October, we've seen a deterioration of performance that went well into November. Moving to Page 7, still talking about the retail. We are -- still we're able to maintain a 93% occupancy. In the last 9 months, we were at 92% collection. I think, as I said previously, we lost rental income in the amount of EUR 10 million as a result of the COVID, of the lockdown and post-opening discounts that we've given to tenants. This went alongside with the prolongation of leases and this is what helped us maintain a healthy WALT of 3.7 years. And I think a good demonstration of the confidence that retailers still see in shopping centers is what you actually see in the picture also. LPP with their brand name Sinsay expressed their confidence and signed the lease for their largest Sinsay brand. In Poland, they will open in Galeria Polnocna in the second half of December. Moving to the next slide. This is a very similar slide that we show every quarter. The main highlights being that we are -- what we see, the overall portfolio gross asset value is about EUR 2.2 billion. Cash generating is about EUR 2 billion, of which 60% office and 40% retail. We can also see here how the geographical spread works across the 6 markets where we are present in capital cities. And I think we can see the split between cash generating assets, which are close to 90% versus development projects at 10%, 11%. Moving forward, what we see here is a split by age with the disposal of Spiral. We are now at -- which was an older asset -- we are now at 43% of our assets, younger assets between -- up to 10 years and 57% older assets. We see the -- that the top selection of tenants shows that we have quite a lot of blue-chip tenants with good covenants and this enabled us to maintain good collection rates. We have no dependency on any certain tenant as we are quite diversified in the tenants, quite diversified in the industry. And we can also say here that all our leases now are denominated in euro, so we don't have any currency-exchange exposure. Moving on. We have in this slide and in the next one, we see -- this is our current development under -- those are projects under development. While the first 3, we have seen also in previous quarters being ABC II and Matrix B, those are due to be completed by the end of the year. We made some good progress in leasing, in Matrix. As I said, we signed a 2,500 square meter lease with Generali so that improved our occupancy rate significantly. And in ABC II, we are -- we have additional 15% under lease negotiations, which we hope to secure soon. And this gave us the confidence to launch what we call Sofia Tower 2. This is the office tower which is on top of Mall of Sofia, in Sofia, 8,300 square meters of offices, total investment is EUR 13.5 million and we already see some strong interest from many tenants. The financing for that project is about to be secured very shortly. We're in advanced negotiations on that one. And the last one is Pillar which also we -- is a project under development, fully let to ExxonMobil and completion is due at the end of next year. It's important to mention here that we do not see any disruption for the continuation of development due to the COVID. So this is all going ahead in accordance with the timetable and the schedule and we see nothing that could prevent completion on time. I will hand over the floor to Ariel to discuss about the financials.

[Ariel Ferstman, executive]

Thank you, Yovav. Good afternoon, ladies and gentlemen. Going on to the slide -- yes, okay, I see Malgorzata is already on Slide 16. On Slide 15, just to mention, we end up the 9 months of 2020 with a loss of EUR 17 million. This is predominantly driven by the loss of revaluation we posted in second half of the -- in the second quarter of 2020, around EUR 67 million. In addition, we -- there was a reduction around 50% on the G&A expenses. This is driven by one-off we have in last year, around EUR 6 million, the exercise of phantom shares program to the key members of the management team. Just to analyze the gross margin of operations where we have a slight decrease, around EUR 3 million, on Slide 16, we can see the bridge and the difference. The relative different impacts on the gross margin of operation in the last 9 months if we compare to like-to-like, as Yovav mentioned, the COVID impact around EUR 10 million on a gross margin of operation, around roughly 10% decrease on the gross margin operation as a result of COVID-19. This was offset by all the new completions that we added, will contribute to an increase on the rental revenues such as in Ada Mall, ABC I, in Sofia, Green Heart also in Belgrade, which basically help us out to basically reduce the impact of the COVID-19, plus a decline of around EUR 3 million due to the result of the disposal of GTC White House on Neptun by the end of 2019. Moving into Slide 17. We end up with a slight decline, around 4%, on our investment property to EUR 2.11 billion versus EUR 2.2 billion. The main difference is driven by the losses from the revaluation on our retail assets that we posted in the second quarter of 2020, we say around EUR 65 million. This was also offset partially by an investment in property under assets under construction that Yovav mentioned before, around EUR 48 million, plus a reclassification of Spiral office building, EUR 61 million, which was successfully completed the sale by the end of October. As you can see here, EUR 64 million, this will reduce significantly in Q4. This will take place in Q4, the effect on the sale. In addition, we have a decline, around 20%, on the cash and cash equivalents. This is as a result, mainly we have repaid all our bonds, EUR 60 million, at the end of September, plus development that we invested from our equity, EUR 36 million, on the property under construction. This was offset by the refinance that we finalized, we concluded at the end of Q1 2020 and realized around EUR 46 million. So moving on in the Slide 18. As you can see, we have a slight decline from the Q2 figures in our LTV from 46% to 45%, still below our long-term target, 50%. Our debt maturity has drastically changed in comparison to the second quarter of 2020 whereby we have successfully finalized the negotiations with Pekao Bank in order to cure the bridge that we have on the LTV and the DSCR. We did a prepayment around EUR 9.5 million there.

All the loan -- the short-term part of the loan was reclassified to long-term part. In addition, we have -- as you can see on the debt maturity, we have an upcoming payment of bonds, EUR 32 million in the next 12 months, EUR 10 million by the end of December and another EUR 22 million in March. We will plan to do it from equity.

Again, minimum -- we have a record minimum average interest rate, all times 2.5%. This was driven, mainly influenced by the negative sentiment on interest rates such as the Euribor. As you can see, our debt split, it's -- the secured/unsecured, it's around 92% to 8%. This will change slightly after we place the bonds that we have in the program.

As you can follow it on Slide 19, as Yovav mentioned, the great milestone that we achieved in the last few weeks, it's the rating -- the investment-grade rating for GTC, which will allow us to participate in this bond program in Hungary. These bonds will be green bonds, meaning that all proceeds will be allocated to refinance, redevelop, acquire green-certified assets. We are planning to basically use these proceeds, around 50%, to refinance an existing expensive debt and the remaining 50% will be allocated to redevelopment or potential acquisitions of green-certified buildings. As we mentioned, this is a bond issued by one of the holding entities in Hungary of GTC and guaranteed by GTC SA. Moving into the Slide 20, the cash flow statement. As you can see from -- cash flow from operating activities, we have a slight increase. Although we have a huge impact from COVID regarding our operational cash flow, around EUR 10 million to EUR 11 million decline from last year, this was offset partially -- or I would say mainly by all these completions that we mentioned before which contribute to an increase on the operational cash flow substantially such as Ada Mall, ABC 1, Green Heart in Belgrade as well. Regarding the investment in real estate, we have a decline, around EUR 60 million, which reflects the fact that we have had a greater activity in the last -- in the previous periods. And this time, we are a little bit cautious which projects we are launching due to the overall environment, due to the COVID-19 outbreak. Overall, we ended up the period with EUR 140 million cash and cash equivalents, which is a strong cash position, which we feel confident will allow us to weather any eventualities as we're seeing that second wave is coming and hitting the different markets where the company is active. Overall, I think we've finalized our presentation and I think we are open now, Malgorzata, for any questions.

[Malgorzata Czaplicka, executive]

[Operator Instructions]

[Cezary Bernatek, analyst]

Cezary Bernatek, Erste Group. Maybe one question from my side. So basically, in the light of this second stop of the shopping mall operations in Poland, do you expect any revaluations in 4Q to come after that?

[Yovav Carmi, executive]

Yes. Today, we are publishing Q3 valuations. If we would have known today a further impact beyond what we have presented, we would have published it today with the financials. And since this is still a developing situation, we had the closure in Poland. We had -- still the opening is also partial because from Thursday, only shops that are not -- I mean fitnesses and coffee shops and restaurants will not be able to fully operate still, so they will still continue suffering. And overall, we don't know for how long this restrictive measures will be in place. We do not know if other governments in the region will introduce lockdowns as well.

So all in all, for sure, this is not a positive impact on our performance. We know that for 9 months, we have experienced EUR 10 million loss of income due to discounts. We see those tenants that are suffering, knocking on our door and asking for the prolonging the reliefs or the discounts. It's hard to say or we don't know how this will affect our -- the performance by the end of the year. We see very little transactions happening, especially in retail but also in offices, they are very rare. So it's hard to -- or impossible to assess the -- whether there will be any changes in yields in the various markets. So that's where we are. Unfortunately, I do not have a crystal ball so I cannot give you more than that.

[Cezary Bernatek, analyst]

So maybe one more, if there's no questions from others, from my side. Concerning this time the office segment. So the question is whether you received some information from your tenants in the income-producing assets that they could be potentially interested in reducing the rental office space, the maturity of their rental agreements?

[Yovav Carmi, executive]

Yes. What we see is that for existing leases, as I said earlier, we did not see any -- we have been able to maintain a 94% or 95% occupancy, which is a very good ratio. We had no collection issues on the office sector. So we've been able to sign new leases during COVID, which is also demonstrating the strength of the office market. We -- what we see from new inquiries on that market is that they are coming much slower, the decision-making of occupiers is much slower. We see that they are asking for more flexibility in leases for expansion in handing back space. So they're trying to -- because they themselves are not so sure what will be their office needs in the longer future, they themselves are not so sure so they're looking for some more flexibility in the leases. So those are the things that we see now. We also see that, as I said, the decision-making is longer. The tendency to stay where you are once the lease comes to its end and simply prolong the least where you are, which is the most simple solution for them, is more common and more appealing to them rather than making the move to a new location, which I think works in our favor because it means that we can maintain our high occupancy. So those are the things that we see.

[Malgorzata Czaplicka, executive]

Are there any other questions? Okay. As I see no more questions, thank you very much, everybody, for the participation in our today's call. And if there are any other questions you may have, so you can just simply contact me directly. Thank you very much.

[Yovav Carmi, executive]

Thank you.

[Ariel Ferstman, executive]

Thank you.