Globe Trade Centre SA

WSE:GTC

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's GTC Q1 2018 Results Conference Call. [Operator Instructions] I must also advise you that the conference is being recorded today, Monday, 21st of May 2018. I would now like to hand the conference over to your speaker today, Thomas Kurzmann. Thank you. Please go ahead, sir.

[Thomas Kurzmann, executive]

Good afternoon, ladies and gentlemen, to our Q1 2017 presentation. The first quarter of 2000 -- sorry, Q1 2018 presentation, to make it correct, as we call it. The first quarter of 2018 was driven by activity preparation, activity to lease, to pre-lease assets in the planning stage, to push forward building permit design and also to negotiate a big acquisition we could sign by -- in the first quarter for the big mall in Sofia. So all in all, it was a very active time, but most of the activity will provide and leading to better results in the coming quarters because there was a lot of energy used to market our assets and to renegotiate leasing deals.

So going back to the presentation you can find on the web page of GTC, a strong result with 27% improvement in FFO and a 23% improvement in gross margin. In-place rent is up by 3%, and accounts now for EUR 114 million. Profit before tax is at EUR 30 million in the first quarter, and EPRA NAV increased by 3%, the same as EPRA NAV per share also increased 3% up to EUR 2.34 per share.

We had a huge increase in FFO I, increased by 27% up to EUR 15 million. This is mostly driven by the completion and -- of Galeria Pólnocna and the cash flow vomit but also by completing our office building called Artico in Warsaw, which also produces cash in the first quarter of 2018. The average interest rate is down to 2.7% from 2.8% in last quarter 2017, and we still maintain a conservative LTV at 43%.

The completions and the other acquisitions are the booster of GTC's rent income and FFO. We could complete 2 buildings in Belgrade, which are under renovation. These are the 2 existing buildings in the Green Heart project. They have been taken off from investment property income-producing last year and underwent a complete renovation, including facade and other parts of the building. We could place them back here and complete the renovation work. The building is now again 78% leased up upon completion, and we will continue to lease it up to a much higher degree during the next quarters. This also produces EUR 3 million of additional in-place rent per annum, which is important to also show good results in Belgrade on FFO.

Acquisition of the Mall of Sofia was signed after a very long time, including negotiation time, which took us longer than a year to complete. This is on a very good location, fantastic access via tramways, subway and also via car. The property has 23,700 square meter retail and another 10,300 square meters of office space. It is 99% leased all over. But after the acquisition, our plan is to improve further the layout and efficiency of the shopping mall. And we are quite sure that we will be able to raise the rents over the next couple of years since the economic parameters in Sofia and Bulgaria, combined with a huge wage increase, lot of people, will lead into much bigger purchase power, which leads into bigger turnover per square meter. And this allows for rent increase.

The acquisition is -- will be financed by 65% of the acquisition price by our bank upon closing. So it means that we will only have to deploy about less than EUR 30 million equity to close the transaction in June this year. The in-place rent is EUR 7.55 million, and this makes a very attractive FFO rate upon closing of the transaction, and providing full cash flow from the first day of ownership. Of course, the all over asset management and leasing activity in the portfolio was very active. We had 34,000 square meters of office and retail space leased in the first quarter of 2018, and the occupancy of the whole portfolio is now at 93%. This 1% down is all driven by bringing back Green Heart, the first 2 buildings, with only 78% occupancy, which is a high number after such a renovation. But on the course leasing these buildings up to a higher degree will also increase our occupancy in the portfolio of GTC.

On Page 7, the portfolio composition did not change much since the end of 2017. The only change here is that the completion of the Belgrade office buildings drove down the stake of the office buildings under development a little bit. And we still maintain with the main portfolio part of 56% in Poland. And we are now at Budapest with 14%; followed by Belgrade with 12%; and Bucharest, 12%; Zagreb, 6% of the portfolio. The forecast is that -- or the actual situations now that's under development, we have about 55% office buildings under construction and 45% retail. And retail is Ada Mall in Belgrade. When we will complete in June, in Q2, the acquisition of the mall in Sofia, the stake of Poland or share of Poland allocation will go down to 54%, or minus 2%, and Sofia will make up for 5% of the whole portfolio.

Page 9 shows the biggest assets of GTC. They're making up for 69% of the gross asset value of the company. The change here that we put Mall of Sofia now just after Avenue Mall Zagreb, with a value of EUR 94 million. And on the very right side, we show occupancy of -- the biggest asset, of course, Galeria Pólnocna, which has now an occupancy of 89%, but in future, of course, increasing. But the Galeria Jurajska is already at 98%; and City Gate at 96%; Avenue Mall Zagreb and Mall of Sofia then from June at 99%; Center Point at 97%; Korona Office Complex in Cracow at 92%. UBP in Lódz office building is 91%. Also, this 91% will increase because we are on the final negotiations with some tenants to increase the occupancy there. Duna Tower, anyway, is at 98%, and also FortyOne in Belgrade at 97%. You'll see that the 10 big buildings making up for 69% of the portfolio have a very healthy average occupancy, but there's still a little bit of room to improve this.

The development pipeline, I want to give a short heads-up on the status of this project here on Page 11. The White House in Budapest will be finally completed now in Q2. We'll have an opening event on the 21st of June when BlackRock will also commence the operation of the building. They already moved in with some of their equipment, but the people will follow. We had the right incentive negotiations with different tenants, big international tenants for White House. And we can say now that despite a couple of small retail units in the ground floor where we also have some candidates for, I would say 95% of the space is now in a commitment. This is not signed leases, but this is a good commitment from international companies to take the space. And it also proves that the idea and the concept of the White House office building in Budapest is a very high-quality architecture, and appearance is paying off.

Ada Mall in Belgrade is under construction still. The construction had some complications because of some findings in the construction ground which could be very bad and is okay now. So we can confirm that the building is -- in the program in time and in budget. Opening is and was scheduled for the first quarter of 2019, and this will be kept. On the tenancy side, we have good commitment from tenants, bigger than 60% at the moment and another 35% under negotiations. So we are quite confident that upon opening this mall, we'll be fully leased.

Green Heart in Belgrade, 2 buildings were completed. Therefore, the total investment cost versus the last table from Q4 2017 are now reduced. The three buildings under construction are also going exactly as scheduled at cost and in time. The first building is fully pre-leased, and we have various -- several candidates for the second 2 buildings to come. Leasing demand is quite healthy in Belgrade. And this also makes us to continue to accelerate GTC X, which is listed in the third block in -- under the planning stage a little bit, and we can probably start GTC X earlier than expected. Matrix A in Zagreb is under construction. We do have several tenants in final negotiation stage. It looks like that we are matching exactly the demand of international players for the city of Zagreb, providing for Class A office park which has very good visibility, good access via car and public transport, and is a -- let's say, since long time in Zagreb one of the few really modern buildings coming to the market in the first half of 2019.

In the planning stage, we have -- and I missed out ABC I in Sofia; it's also under construction. We could sign a term sheet with an international software company taking up 11,000 square meters plus expansion option. So also here, we have a very high pre-leased achieved now. And we still have 2 other big companies looking at the ABC building for their offices. So we might also accelerate ABC II, which is in the planning stage. And we expect anyway to get a building permit for the second phase in summer this year. And when we have the tenants lined up, we will be able to probably start the construction for ABC II in the second half of 2018.

City Rose Park in Bucharest Phase 1 and 2 is also under design. Also, the forecast for the building permit is July to August 2018. Several tenants are looking into asset at the moment -- big players, international players because we have big floor space and big interconnected spaces to lease, which is interesting for the BPO and for software businesses. So we are also quite sure that we will be able to start the construction during the second half of this year.

Matrix B in Zagreb is the second nearer building, which has 10,400 square meters GLA. It's already permitted, but we are looking into pre-leasing, of course, and business will go on. We will be able to start the second phase in Zagreb probably also against the end of this year.

The Pillar Kompakt Budapest, which is a land we acquired last year, the design works and concept design is completed. The architects in Budapest are about to complete the building permit application, and we have already pre-discussed with the city and the district; the concept. And everything is okay. It needs a couple of more basic legwork to be done. And also here we expect to get a permit during Q3 2018. On Kompakt, we might have already a big tenant out of our portfolio looking at this space. And if this will work out, we will have probably already 75% to 80% prelease for this building. The Twist, or Budapest City Tower, is also in the final stage of getting a permit. There is a chance that at the end of Q2 or at the beginning of Q3, we will get a permit in Budapest. Of course, in parallel, we are on the market, pre-leasing. This is a very prime product, and there is several big international companies interested. So we hope to synchronize pre-leasing with building permit -- with the success on the building permit to be able to start also the construction still in this year for the tower.

In the, let's say, early planning stage, this City Rose Park 3, which, of course, the building permit will be done with the Phase 1 and 2, only the construction of City Rose Park 3 will be a little bit delayed if the pre-leasing we will ask for. GTC X will be accelerated because the demand in Belgrade is higher than expected at the end of last year. Galeria Wilanów, we are in the process now of getting, hopefully soon, a new decision on the environmental permit. Depending on how the permit will go and how all the other involved parties, other than the environmental department of the city will reckon, we hope to get this new permit valid probably at the end of this year or the first quarter next year, and then we can continue with the building permit application.

Matrix F, this is another 3 to 5 buildings in Zagreb in connection to the Matrix A and B. This is a big project with 54,000 square meters, and this is under design concept at the moment. The land was acquired last year as well. We can build a lot more than initially expected, and it helps us a lot on raising the first 2 buildings because any big tenant who's going into our office park is always looking into possibilities and ways to expand if the business is growing. So this is a very good -- it's a pipeline for anybody who wants to take 5,000 to 6,000 square meters with a further expansion because we can show that it has the ability to grow for the next couple of years constantly in the same location without the need of big companies to move location and address in Zagreb.

Looking at Business Park 6 is -- in Warsaw Mokotów, we see already a little bit of light at the end of the tunnel of the big traffic jam which was created by the construction of the main road in Mokotów. So we're expecting 1.5 to 2 years that the situation will be much improved since new intersections were built, new flyovers and intersections improved. So our estimate is that we will be able to start this probably for the, let's say, pre-leasing and construction in about 2 years from now. In Katowice, so we have a new project which is on the land we had since a couple of years in our books. Katowice is the new star on BPO business, new rising star, because they have a very good university and not so much BPOs in the city right now. And since workforce is on big demand at the moment in any big city in Poland, it is a new target for big companies wanting to move to Katowice. Our land slot is very well located, very center in the city of Katowice and not far away from main railway station at the center. The concept is also very nice. So if they want us to have one of the office buildings in the city, then we will be able to start leasing on that one. So this concludes the overview on the development projects for the future. The whole package will produce or expect -- we expect that the whole package of developments will produce EUR 87.5 million rent per annum. And of course, the value creation out of these developments will be a couple of hundred million euros.

The next few pages consists of details on each development. You can have -- later on in the discussion, if somebody wants to know more in detail in the Q&A session. And we will move now to the financial outlook, and Erez Boniel will elaborate on balance sheet and AFFO.

[Erez Boniel, executive]

Thank you, Thomas. I will start by reviewing the income statement. The revenue from rental activity was EUR 36 million in Q1 versus EUR 30 million in Q1 '17. That's an increase of 20%. The main contributor for that are the Galeria Pólnocna as well as Artico building. Further in the year, in Q2, Q3, we'll see, obviously, Galeria Pólnocna continuing to contribute high amounts. And we will see the completion of White House as well as the classification of 2 buildings from -- in Green Heart Belgrade; that the renovation was completed, and they return to the cash-generating assets at good.

Going down the income statement, we see -- and the next important item is the profit from revaluation. This quarter, we did not make external valuation. We just reconfirmed the valuation that we presented in March. And we present here that the valuation gains that is attributed mostly to the profit under construction, mainly White House and the other. Other items on the P&L are standard items, as could be expected. And to put things into context, generally speaking, the income statement in the next quarters will reflect the program that Thomas presented. Mainly, we have the completions of the first group of 5 assets. And the next one in H2 or even Q2, we will start with the construction of the next buildings.

I move ahead to the balance sheet. Here on the balance sheet, the investment property has been increased by 22 million, mainly due to the reclassification of Green Heart projects and, of course, the investment in White House and Ada Mall. The cash and cash equivalent is a significant amount. This was generated from operation as well as the bonds that we have. And of course, we refinanced the bonds. We paid those in equity, some bonds, which is not reflected here at 31st March '18. But generally speaking, this is a significant cash amount, gives us a lot of capacity for new acquisitions and development. Further on the balance sheet, we can see on the positive side, short or long-term debt has been increased in line with the increase of investment. And we should see some of the refinancing effect coming partially over in Q1. We saw the decrease in average interest rate to 2.7%, but also it will continue in Q2 and Q3.

In terms of conservative financing structures that we run, we continue with the same policy. We hedge the interest rate risk to the maximum extent possible, and we manage the debt maturity in such a way that any time that the project refinance is due, we manage to do it at the same or lower interest rate. But more importantly, we are able to generate cash due to the fact that past or loan -- all loans were amortized. And the new cash, in fact, is part of our self-propelling model, which generate cash from refinancing, compensate for the amortization, and allow us to invest in new projects, which in return, once again, generate NOI, refinancing and bond.

The LTV, we continue to maintain conservative LTV below 45%. Our policy, it could be anything between 40% to 50%. And it can be seen in the last 2, 3 years we are complying with this policy.

Regarding the cash flow, here the cash flow of Q1 shows the cash that was generated, operating cash has been increased by -- before working capital changes by EUR 4 million. That's a good sign because this signifies the uptrend of the FFO generation. The investments in real estate compared to the last quarter -- I mean, sorry, to the past quarter, Q1 '17 is relatively low. But really, it's difficult to compare because there's no pattern in the tax aspect. In Q1, we had Galeria Pólnocna and it was full steam ahead, Q1 '17. In Q1 '18, we have other, and other construction will accelerate. So that for the full year of '18, we will see probably an investment in the same scale of 2017. We have to add also the acquisition of Sofia Mall with around EUR 90 million. And this means that in Q2, we will have approximately 50% of the planned investment, which is in line with our expectations.

The same applies for the financing activity. It goes together with the investments. So refinancing activities continue. We currently have several transactions under negotiation. Some of them are significant, and we will inform of this once they're done.

This concludes the financial part of the presentation and the entire presentation. I'll pass now to the operator to open the line for Q&A. Operator?

[Operator]

[Operator Instructions] At this time, sir, there are no questions over the phone.

[Thomas Kurzmann, executive]

Thank you very much. Please conclude this call. Thanks a lot.

[Operator]

Thank you very much, and that does conclude the conference for today. Thank you for participating. You may all disconnect.