Globe Trade Centre SA

WSE:GTC

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the GTC Q1 2020 results. [Operator Instructions] For your information, the conference is being recorded.

I will now like to hand the conference over to your speaker today, Malgorzata Czaplicka. Please go ahead.

[Malgorzata Czaplicka, executive]

Thank you very much. Good afternoon, ladies and gentlemen. It's my pleasure to welcome you at today's call. Today's call is going to be presented by the management board. The management board today with us is, Yovav Carmi, Ariel Ferstman, Robert Snow and Nagy Gyula. We are all very happy to host you on our call, and I'm passing the floor over to Yovav Carmi who will do the first part of the presentation.

[Yovav Carmi, executive]

Hello, everybody. Good afternoon. I will start going through the presentation. On Page 3, that's the first page. We will start with the key highlights of the Q1 2020. And first, on the Page 3, we see a very good performance in Q1. FFO went up 3% and we have FFO at EUR 18 million. We have in-place rents going up 11% with EUR 145 million. EPRA and NAV went up 1% to EUR 1.2 billion. And you can see that we have a very strong cash position of EUR 197 million. And this is for the end of March. I move on to the next page. In Q1, we completed around 18,000 square meters of leasing and renewals, maintained 95% occupancy, the same as the previous year. So we're shipping very high occupancy in our office portfolio.

We completed the last building of entry within the Green Heart office project in Belgrade. This is an additional 5,500 square meters that were completed. We still have under construction, 57,000 square meters in 3 projects, which we will touch back on them, later in the presentation. They are scheduled to be completed during this year, 2 of them during this year in 2020. And in '20 -- end of '21, third one. They will add EUR 11 million NOI upon completion and stabilization. Currently, they're highly leased. The leasing is going strong with those projects. We had -- we can report that we are on time and on budget with those assets, the COVID outbreak did not affect us in that respect. During the lockdown period, it was actually the trucks were able to easily go through the city. The workers stayed on site. So we had have no problems, and we also enjoyed from a mild winter.

A word about COVID in the office segment. We see everything slowing down. Tenant demands are slower. Decision-making is much slower. New interest for new offices is slower. And this is what we experienced at the moment. I will move to the next slide, Page #8. And we have -- I think this is a very important slide showing the post-COVID snapshot of our retail portfolio. On the upper left side, you see the footfall, the footfall progress in 2020 comparing to previous year in 2019 for all our 5 shopping centers. And it shows the footfall comparing to last year. In the weeks, 28, 27 and 26. Week 28 is the last week of June. 27 and 26 are the weeks before.

On the right-hand side, the upper right-hand side, you see the turnover of those months of April, May and June in 2020 comparing to 2019. And overall, what we can see here is that before Galeria Jurajska, Galeria Polnocna and Avenue Mall. We are reaching about 80% footfall comparing to the previous year. This is actually a very strong result, bearing in mind that cinemas, we're still closed in June. They opened during the first half of July. And cinemas are normally significant footfall generator. We see in the turnover that we are getting close on those 3 shopping centers to -- in May is around 50%, 60% turnover compared to previous year. And June is almost at pre-COVID levels which is a good indicator.

A few words separately on Ada Mall. Ada Mall is a shopping center that we just opened about a year ago. Normally, it takes time to stabilize the mall, takes 2 to 3 years. And unfortunately, after 1 year of operation, the COVID hit us. And therefore, the -- we still see a return in footfall of almost 80% in May, we see very high turnover post-COVID, which slow down a bit in June. And the reason being that, first of all, we had opening about a year ago. And the opening was gradual for the first month was relatively slower comparing to May this year. And the second thing is that the behavior of the COVID in Belgrade was such that at the second half of June, there was a significant spike in infections, resulting in -- probably everybody saw the TV and riots in Belgrade and the government taking new restrictive measures and this affected the visiting shopping centers and buying. This by the way continue into July.

Regarding Mall of Sofia, we see Mall of Sofia picking up, but picking up in the sense that the footfall is almost at 60% and the same with the turnover, but the pace of picking up is slower comparing to our other shopping centers. And the reason being that all our other shopping centers are really in a highly populated residential neighborhoods. And therefore, the pattern is that like in a residential neighborhood, people come back to sleep in the evening and they go shopping in the afternoon and they go -- and the peak is in the weekend. Mall of Sofia is really in the CBD in the downtown of Sofia. Surrounded by offices, and we will touch on the offices, but we will -- we see that offices are not coming back yet. The physical occupancy of the offices are somewhere between 20% to 50%. People still in international companies are not going to the office. They are still doing a home officing. And this is the reason we can see Mall of Sofia picking up slower. A few words about the dialogue we had with tenants.

So obviously, during the 2 months of -- from mid-March to mid-May, there were lockdown and all our shopping centers suffered from a closure because of the lockdown. And post lockdown we had to basically negotiate with all the tenants. All of them wanted discount. And on average, we were giving them up to 6 months. Of course, during the lockdown, they paid 0 rent and post lockdown, we gave them up to 6 months discounts that varies between 30% to 50% of the rent against an extension of the lease for the period of the closure plus the discount.

I will move to the next slide. We are on Page 7. What we can see here is that the split of the portfolio to -- between retail and office and in the various jurisdictions. We see -- I think the main takeaway is that we have around 90% is completed cash-generating assets. A very small portion, which is 4% is under development in 3 projects, actually, Matrix to Zagreb, ABC II in Sofia and the Pillar in Budapest. And 5% of the portfolio is still in planning stage for longer term for development? We will talk a bit more about the development projects as we go on.

The next slide is Page #8, where we can see the split of the office portfolio. Again, we have 41 buildings. I think the most important thing to mention here is that we have about 60% of the portfolio are older buildings between 11 to 20 years old, they typically attract a higher level of CapEx. And around 40% are younger buildings, up to 10 years old.

I think this is something we would like to work on. And work on this mix going forward. The second thing I would like to highlight in this slide is that we are maintaining a very high occupancy rate of 95% throughout '19 and into Q1 '20, we are at this level also going forward. As I said, we are seeing the physical occupancy in the building, meaning the number of people that really come to the office is low post-COVID. Many international companies are still not coming back fully to the office. They have policy to encourage people to do home officing. And although, we don't experience any collection difficulties with the office occupiers. The tenants on the ground floor may -- which are mainly amenities for the office occupiers, such as canteens, fitnesses, those kind of tenants are struggling and to those kind of tenants we're trying to help in order to help them to survive when things come back because those amenities are important for the operation of the office buildings and important as a service to the office occupier.

I will move to the next page, Page 9, which we can see the composition of the retail portfolio. We have 5 shopping centers and I think the important part here is that we are maintaining a very high occupancy rate, 95%. As I mentioned, post-COVID, we have to negotiate with a lot of tenants. This is a really intensive work, and we're doing it in order to maintain this very high occupancy rates. And I will move to the next section, which are the development pipeline project. This is on Page 11. What we did on this is, this is a schedule that normally we have in our presentation. We just -- we designed it a bit.

And in terms of the categories that we see here. We have -- we look at it at 3 categories. The first categories are those projects that are currently under development to construction. I mentioned them earlier in the presentation, we have 3 of those, we have ABC in Sofia, we have ABC II, which is about 75% leased during the COVID period released 3,500 square meters through Commerzbank. This is a very good achievement to be able to do that during COVID. We have Pillar in Budapest fully let to 1 tenant. And we're busy with the development. As I said, we have no impact of the COVID as we were able -- all the workers stayed on-site to work during the lockdown, the trucks bringing the concrete, we're able to much easier path through the city. So this is ongoing to be completed in Q4 '21. And we have the second phase of Matrix, which is scheduled to be completed by Q4 this year. It's now just under 30% occupancy.

We have quite a significant pipeline of tenants that we are negotiating with, naturally, things are a bit slower than normally. But given the pipeline that we see, we believe that we will have by the end of the year, occupancy is around 60% to 70%. So this is one category. Those projects under development. The next one is those projects that we are comfortable to go ahead with the development quite soon. Those are projects that we either have a building permit at hand or expecting the building permits very soon in the next couple of months. We are comfortable with the market because we have good experience with the leasing in those markets.

So if I look at them, we have GTC X in Belgrade, this one has a building permit. In all our recent developments in Belgrade, we are able to lease the asset environment to the development. We have the Tower in Sofia, which we have the building permit. Also on this one, we are comfortable with the demand for offices. We just, as I mentioned, we're able to sign a very significant lease in ABC II and Sofia during COVID. And we have center points, which is located in what we see is a growing office hub around the ARPA bridge location. So it's becoming a really important office hub that area, and we are comfortable with the office demand for that.

Then we have the last category. Those are projects that we -- in the longer term, we are, I think, we have -- we are positive about them. In some of those cases, we have a building permit. In other cases, we still need to work on the contact and on the statutory permitting. But all in all, those are projects that we are comfortable that in the longer run, we will want to go forward with them. But at the moment, we -- especially post COVID, we need to be more cautious and continue to check the market before we go ahead. So those -- this is our development pipeline. And actually in the next page, Page 12, it's a bit of a duplication. We present those 3 assets, that I mentioned, that are currently under construction and Matrix, ABC II and Pillar.

And so I will -- this is all from my side, I will hand over to Ariel to discuss the financial part.

[Ariel Ferstman, executive]

Thank you very much, Yovav. Thank you very much for the presentation. Good afternoon, ladies and gentlemen. Let's -- I would like to do a brief review on the financials for Q1 2020. Just a general comment, the financial statements for Q1 2020 are the figures presented before, the COVID impact on the company. We -- as we released our call report a few weeks ago, we do expect EUR 60 million -- EUR 62 million revaluation losses as a result of the COVID impact, mainly on our shopping centers and our rental schemes. And those figures will be impacting the P&L in Q2. And of course, as long as we go, as Yovav mentioned, that we have undergoing negotiations regarding several tenants on our rental schemes, those rent concessions would impact the operational numbers of the company in the following quarters of this year. So going forward, regarding the Q1 figures, we finalized and we have a strong quarter for Q1. There was a slight increase in the investment property, around 1%. The main increase in the investment property was driven by the ongoing construction of our development pipeline Green Heart, Matrix and Pillar was partially offset by a revaluation loss on some investment properties EUR 6 million, partially EUR 3 million on our other shopping mall. As mentioned it before, it is taking a little bit longer to stabilize the center and EUR 3 million on free -- and capital expenditure.

Going forward regarding our cash and cash position, it's still strong, very strong. We successfully refinanced a trust before the COVID lockdown with Galeria Jurajska, freeing up cash around EUR 45 million. This was partially offset by the repayment of the bonds, around EUR 90 million and investment on our piping projects around EUR 7.5 million. So if you follow me regarding the slide on Page #15, we have our P&L income statement. Regarding the revenue and the rental activity, we have an increase of 5% on a like-to-like basis against Q1 2019. This increase was driven by all these new additions, mentioning the completion of Green Heart, Ada Mall, ABC I Matrix A were partially offset by the sale of GTC White House, very successful sale of GTC Whitehouse on Neptun by the end of 2019. In addition, we have a slight impact on the COVID for the last month of March, around EUR 2.1 million, mainly from our, as I mentioned, from our shopping centers.

Overall, regarding the revaluation on losses I mentioned before, EUR 6 million, mainly from Ada Mall and some CapEx and freed up costs. Just to point out, highlight that we have the -- and one-off foreign exchange losses of EUR 5 million, driven by the stronger devaluation of the zloty versus the euro. This is correcting slowly as we pass through the quarters. But there was a strong devaluation by the end of March as a result of the COVID impact all the currencies around CE. Overall, we end up the quarter with a profit of EUR 3 million. However, if we deduct before tax and fair value adjustments. And this one-off foreign exchange losses, we end up more or less on the same numbers that we have in Q1 2019.

If I move on regarding the Slide #16. Again, perhaps the most important thing regarding this slide. And we published on the quarter report a few weeks ago. As a result of this COVID outbreak and impact on our shopping centers. We have breached covenants on several loans. Regarding the loan in the other shopping center in Belgrade. We have breached the DSCR covenant. However, we successfully secured a waiver by the banks until the end of June 2021. The same thing for Galeria Jurajska. We have breached the DSCR covenant as well, but we have successfully received a waiver for the DSCR until the end of June 2021.

Regarding the loan in Galeria Polnocna, we have breached the LTV as a result of these losses on revaluations. And as well, we have breached DSCR. We are in ongoing negotiations with the bank in order to relax the financial covenants and successfully restructure the loan. So going forward regarding the maturity of the -- of our debt, we have in the next 12 months. We have EUR 41 million. We are under negotiations with banks mainly on the office sector to recycle those loans and refinancing. Hopefully, we have better news, a great news in the next quarter. Regarding the EUR 73 million upcoming repayment of bonds. We have already successfully repaid EUR 40 million out of the EUR 73 million. And of course, we will repay the next installments by the end of the next quarters as well.

Going forward regarding Slide 17. Again, we're showing a strong debt metrics. We have historical low funding cost, 2.6%. We have a very strong interest cover of 4.1% and very low loan-to-value, 44%, which is really indicate that we are strong enough to face this COVID-19 crisis, and we remain strong as well.

So on Slide 18, moving on the cash flow statement. Not too much changes from last quarter in in 2019. If you compare it on a like-to-like basis, we are remaining stable on the cash flow from operating activities. Just to highlight that, as Yovav mentioned before, our development pipeline is getting reduced. Therefore, there was less investment on our pipeline comparing to Q1 2019, where we had a lot of development activities such as Ada Mall, White House, Matrix, Green Heart and we touch base was before, we would like to discuss this further and change these things.

So I think we can open the discussion for questions.

[Operator]

[Operator Instructions]

We are now taking our first question from the line of Jakub Caithaml from Wood & Co.

[Jakub Caithaml, analyst]

Yovav and Ariel, thank you very much for the presentation. This is Jakub from Wood. It's been quite some time since the last quarterly results. So I hope you don't mind having come -- me having quite a list of questions. Starting perhaps from the collection rate, in retail from March onwards. If you could give us some color on that. I mean, I would expect that the discounts that you were granting have been conditioned on all payables haven't been covered by the tenants? I mean, is that so? And kind of also on this note between today and the end of the first quarter? Has there been any kind of notable change in occupancy and of the retail schemes? So in other words, I mean, any tenant defaults?

[Yovav Carmi, executive]

Yes. So this is Yovav. I will try to answer your questions. First question is on collection rates. Of course, before signing any arrangement with any tenant on discounts, we conditioned that on paying all of due debt. Of course, we are -- what we see is that the collection is -- because the tenants are -- as I showed in the graph, the return is gradual. So the collection rate is similar, but it takes longer time to collect because some of the tenants have lower turnovers comparing to previous years. So it means that it takes longer time to collect, but we do not have any debt that eventually is not collected. This is the first question. Second question, yes, we do not see a major change in the occupancy comparing to previous periods in the shopping centers, this was the question. What we do see that in some cases, some shops need to be replaced. And this is being done. So altogether, the occupancy is not going down, but there is some turnover in tenant. This is not very big, but we experienced that. And some shops, which was on point to say, it took them longer to reopen post COVID. A good example is the cinema Operator, which could be up to 10% in our shopping center. They're opened just now in mid-July. I hope, I answered your question.

[Jakub Caithaml, analyst]

Absolutely. That's answers it indeed. Ariel, you were talking about this covenant breach and specifically at -- I was wondering what are the options from the table. And how likely do you think that you may be required to inject equity? And also kind of looking ahead, do you see a tangible risk that there may be some other project loans where the covenant -- the LTV covenant, specifically maybe at a risk of a breach?

[Ariel Ferstman, executive]

Thank you very much for the question. Regarding the negotiations with the loan of Galeria Polnocna, as I mentioned before, we -- negotiations are ongoing. And we expect to have a successful resolution, hopefully, by the end of September. We don't see any major impact at this point for the company. Regarding your second question, I think, as I mentioned before, we have done very thorough exercise regarding our valuations, which will be with this report that we present, and we don't foreseen so far any major breaches besides the one that we're indicating in the presentation.

[Yovav Carmi, executive]

On the current report.

[Ariel Ferstman, executive]

Yes.

[Jakub Caithaml, analyst]

Right. Perfect. And I mean you mentioned the financing of some of the project loans on the office side. Can you talk briefly about how have the conditions changed because of funding, the LTV for secured project financing and the projects -- on the office side that you have?

[Ariel Ferstman, executive]

Thank you very much. It's a very good question I think it's too early to assess where the funding costs will go. We are still in preliminary negotiations for the recycling of those assets. But I think this will be more like a macroeconomic question because we don't see also where the interest regarding central banks in Europe will go as well. So I think it's too early to assess the funding cost regarding -- we haven't seen any major changes so far.

[Jakub Caithaml, analyst]

Right. Understood. And you mentioned this kind of profit warning you guys published like 2 weeks ago relating chief revaluation losses that you expect to be booked by the end of second quarter, where the retail was kind of the key driver. I was wondering if you can elaborate on kind of the distribution of the revaluation losses across countries and segments. And also, if you could comment on the drivers on one hand, there being kind of discount rate yield movements. And on the other hand, any sort of ERV change if that were a component at all?

[Ariel Ferstman, executive]

I think, as I mentioned before, the main driven of this revaluation losses was the strong impact that our retail. There was a very thorough exercise by our valuators, where there was a mix between different rent concessions, as mentioned by Yovav between 6 to 8 months in the next 12 months, plus a combination of the yields as well. Regarding the geographic, there's no major geographic. I would say that the main impact of our valuations losses were on the retail schemes.

[Jakub Caithaml, analyst]

Would it be then kind of correct to assume that as of this juncture at this -- still expected that the rents would eventually kind of return back to the levels that have been modeled in formerly. That's kind of the adjustments to the longer-term rental equilibrium hasn't probably been taking place here?

[Yovav Carmi, executive]

I think our expectations are that after this period of discount, in this period that we are granting a discount to the tenant. And under the assumption that things will gradually normalize in terms of the people's behavior, and there will be no spike in the COVID outbreak and then no further lockdown or downturn in that respect. So under those assumptions, we expect things to normalize and go back to the pre-COVID levels, probably sometime in the next year.

[Jakub Caithaml, analyst]

And I mean looking at essentially the same question from the office perspective. I mean, you mentioned -- I mean, thank you very much for having remarked this already in the presentation that the physical occupancy of the offices still remains, especially, at the kind of international occupiers very low. This is sort of a philosophical question, but have you guys been in discussions with your major office plans? And if so, do you have any kind of early indications for our region, the CE, which is not as well covered perhaps as the big office markets in Western Europe that some of the tenants may be expecting to make these kind of more flexible working arrangements permanent and, in turn, may require lower physical office space going forward? Or is that so far not the case or the discussions have not yet taken place.

[Ariel Ferstman, executive]

This is this is very early days in that respect. I think it very much depends. And again, we -- our assumptions going forward, assume that things will gradually normalize and go back to the normality that we're used to before the COVID. Obviously, this is a very big assumption because nobody knows, by the way, applies to the retail forecast as well as to our office forecast. And this is a very big assumption because nobody really knows how things will evolve.

So putting all this in brackets, I would say that it's very early, too early to assess how office occupiers will behave going forward, whether they will require less space because they got used to home officing or on the other hand -- and this is something we have seen with many international tenants in order to reduce costs in the last few years. Their tendency was to populate the offices as crowded as possible -- as -- if you like, close to each other in very open -- in open spaces. And perhaps in the future, they will need to somehow distance the people and give them more room within the office. And this is a counter effect to the home officing because it means that they will need more space rather than less. But to forecast what would be the net of that? This is very hard to predict at this moment in time.

[Jakub Caithaml, analyst]

Right. Right. I mean, regarding the office leasing, I appreciate that the market has been obviously much, much slower than what we were used to during the past couple of years. But in case you have some degree of leasing evidence closed since, say, April. Can you kind of illustrate what levels have to lease has been closed at relative to perhaps what would have been achievable for a space of similar qualities, similar locations, perhaps at the end of last year? And also, if there have been certain changes to the overall structure of the contracts as if lower or shorter durations or some break options?

[Ariel Ferstman, executive]

We haven't seen that so far, we haven't seen such trends with office tenants so far. We -- as I mentioned, there were very little new interest coming during the COVID period. The interest that we had before COVID that went into the COVID was closed at the same condition -- I mean there is no change in the conditions in the essence that you mentioned, like more break options or lower, this we have not seen in the office sector. But again, this is, I think this is very early to assess how things will evolve.

[Jakub Caithaml, analyst]

Right. No, this is very helpful. 2 final questions for me. And I'm sorry for taking so much of your time. The kind of penultimate one. Can you comment on the transaction market because, I mean, there has been, I understand, some degree of activity, even though perhaps not an awful lot. Would you say that there is, especially in the kind of office and of things because retail with the bigger ticket size is obviously yes to come back? But do you see any sort of kind of evidence shaping up as to how the pricing may have been impacted? Or would you say that the evidence is still to bet you to have a clear view?

[Yovav Carmi, executive]

What we have seen is that transactions that commenced or the dialogue between the buyer and the seller started before COVID, we're able to go through and conclude. Give or take, at the same pricing before COVID with very minor, if at all, adjustments. We have not seen deals that started during COVID. And were concluded to be able to compare to whether there's movement contraction or expansion in yields or this is evidence that we have not yet seen. So -- and to tell you whether yields are expanding due to COVID. There's not really too much evidence for that at the moment because I think as we mentioned previously, things slowed down significantly during COVID. I think investors find it very hard to commit when they cannot really travel and look at the assets with their own eyes and the traveling restrictions are really burden at the moment. So it's early, and we haven't -- have not seen transactions that started during COVID and were completed to tell you that there is evidence through movement one way or another.

[Jakub Caithaml, analyst]

Sure. Understood. And the final question for me. We have seen today this announcement regarding the dividend and the decision to retain the profits in the company in light of the external conditions, in light of the kind of risks arising the breach of covenants. I don't think this is very surprising necessarily. But I was wondering, if you could roughly outline in case you have any sort of view on this already internally or maybe it needs to be yet established, but this wasn't kind of the lasting change. But what kind of liquidity or solvency situation would you kind of like to see before you would consider restarting the dividend payments again?

[Yovav Carmi, executive]

I think what we can say at the moment is that given what we see and what we just presented right now that we are still -- the COVID experience is still evolving. We are not over it. We don't know how this will evolve, and we don't know when and we don't know how this will develop, and those are big questions that nobody has answers. And what we have showed in this presentation and gave a little bit of light on what to expect in the coming Q2, is that we will have to have a dialogue with banks. We have losses that are still not finalized in terms of -- because some of the tenants are being still negotiated in the shopping centers. So -- but it's definite that this is a hit that we're taking.

This on one hand, points out to us that we should preserve the cash. And on the other hand, given that we're not the only players in the market and others may be suffering even more and might be more distressed, and there might be some opportunities in the market. We would like to maintain ourselves the ability to take advantage of such opportunities and benefit from them. So to give you -- and this -- I think this gives you a flavor of why we arrived at the decision not to distribute dividend this year. I don't think we can give you a hard criteria of what will be the criteria to decide to distribute. But for now, I think the flavor that I just gave you is how we see things.

[Jakub Caithaml, analyst]

It's very helpful, indeed. And if I may, then, one final follow-up. Just -- you mentioned these kind of opportunities, which may come up, would -- I mean, would you dare to be more specific? I mean, do you expect that GTC may be purchasing something kind of from the side of developers? Or would you be rather looking at more kind of repositioning value-add opportunities as has been the case in the past or kind of all avenues are open at this juncture?

[Ariel Ferstman, executive]

I think all avenues are open at the moment. I think we've all seen the crisis that happened in 2008, and we saw that there were opportunities in the market for those who were smart enough to preserve the cash and catch those opportunities when they were available. So we learned from that lesson, and this is what we would like to benefit from this experience now.

[Operator]

There are no questions on the line at the moment. Please continue.

[Malgorzata Czaplicka, executive]

Thank you very much, operator. Thank you, everybody. Have a very lovely day. Goodbye.

[Operator]

This concludes the conference for today. Thank you for participating. You may all disconnect.