Globe Trade Centre SA

WSE:GTC

Earnings Call Transcript 2021-Q3

[Malgorzata Czaplicka, executive]

Good morning, everyone. My name is Malgorzata Czaplicka. Welcome everyone on our Q3 Results Call. The call is being recorded. As usually, the call -- the presentation is being presented by Yovav Carmi, the CEO of the company; and Ariel Ferstman, the CFO of the Group. We will do the presentation, which will be around 25 to 30 minutes. And then after the presentation, we will be happy to answer any questions you may have. Thank you very much.

Yovav, Ariel, the floor is yours.

[Yovav Carmi, executive]

Thank you. Good morning, everybody. Thank you for joining our investors call. We will walk you through the presentation. Malgorzata, if you can please put it on the screen.

Let's start with Page #3. So I think the main takeaway from this third quarter is that we have continued the solid performance of the company. The good stronger resilient performance has continued throughout the third quarter. We have shown a gross margin of EUR 93 million over the last nine months a EUR 52 million FFO. We continue the acquisitions. Overall, the volume in the first nine months was close to EUR 340 million of acquisitions. And I think it's very important to mention that we were able to maintain our very high occupancy of 91%.

So overall, throughout the period, since last year, we kept high occupancy. Even though, if you may remember the first couple of months of the year were affected by lockdowns and pandemic was very visible and traffic was restricted in our shopping centers and there were many events related to the pandemic. Even so, we maintained a solid and good performance over the last nine months. In addition, we have from our EUR 500 million green bond raise, we have paid current loans of EUR 450 million, as we mentioned that we will do. So currently, about 50% of our debt is unencumbered properties. And we have currently a record low interest rate of 2.14% compared to 2.3% as of the end of the last year.

And another very important thing that is something we -- is important for us and we are working hard to upgrade ourselves is in the ESG front. We have been recognized by the EPRA Sustainability Best Practices. We got the Silver Award for that. And again, we've been recognized for our first ESG report. So we received a recognition as the Best Reports.

Moving to the next page. So this period was very much was influenced by our acquisition mode throughout the period. We have been acquiring the five office building and mixed-use projects in Hungary. Overall, EUR 310 million of volume. This added around EUR 19 million to our in-place rent. The disposal of the Serbian portfolio is ongoing, and we're very close to conclude that one, which is expected by the end of this year. Those are very important two malls, shifting our portfolio, as we mentioned earlier this year, shifting our portfolio towards Hungary and Poland as our main markets of focus. And this is what we're executing.

We also launched a new construction in Belgrade, 17,000 square meters of offices. Also in line with what we mentioned previously that although we are selling our portfolio in Belgrade, we are definitely staying in that market, definitely would like to continue and dwell on our know-how and our team has strong presence on the ground, and this is what we are demonstrating by launching our new project in Belgrade. And so far, we see strong demand in that market. We see tangible leases that need the space. And I believe that next time we meet, we will also show some tangible results on that leasing.

The first nine months have shown that we can secure 71,000 square meters of leases comparing to 66,000 in the nine months of 2020. This was a mixture of some renewals and some new leases in some buildings. Given that we've seen in the summer some ease in the pandemic, tenants were willing to commit. Later on this year as the pandemic is rising, again, we see this activity a bit slower than usual. However, together with that, the tenants are staying where they are, staying with where they are accommodated. And this is how we are managing to keep our very high occupancy and occupancy was kept at 90% throughout the year.

Moving to the next page, please. Talking about our retail, currently 100% of our retail space is operational. COVID impact is still visible. As I mentioned, up until May, we still had the lockdowns, discounts that were given to tenants we still are filling them. However, occupancy has remained strong at 95%. I think this is very much thanks to our willingness to reach out to tenants and offer them some temporary discounts to allow them pass through the hard time of the lockdowns and the restrictions, and they appreciate that and this buildup of the confidence. And what we see is that they are willing to commit and expand in our shopping malls and signing up for physical shops. A few examples are written here on this presentation. The most prominent one is the new brand of CCC, it's HalfPrice. They signed up in the Galeria Jurajska for 2,150 square meters.

The Polish and Serbian assets continue to show improvements in the most turnover in Q3 2021, and we will talk about it a little bit later. But since all of our shopping centers is in Sofia, and in Sofia, the level of vaccinations is very low, around 20%, some new restrictions have been introduced. So that's only those who are vaccinated are allowed to fully enter into the mall. Others who are not vaccinated can only go to the supermarket. So this is something we start to see in Bulgaria, unfortunately. But overall, the other shopping centers are compensating for that.

If we move to the next page, please. So I think we touched on that. We saw the turnovers and exceeding the levels of 2019 since the reopening in May. And in the last months, given what I mentioned about Bulgaria, this is somehow a little bit lower because of the spike in the pandemic in Midland Bulgaria.

Moving to the next page, please. This is the snapshot of our portfolio. EUR 2.5 billion total gross asset value. Around 90% is income producing assets, 10% is landbank and the projects under development and around 33% retail and 67% office. We are gradually moving from the territory of 40-60 or 60 office, 40 retail towards the territory of 70-30, and this is happening with our recent acquisitions and developments. And around 60% of our activity is in Poland and Hungary. Again, along the lines of the strategy we announced to shift our focus into Poland and Hungary is higher investment-grade markets.

Moving to the next page. Here, we have a summary of the ongoing development projects. Pillar is about to be completed and hand over to ExxonMobil. This will add another EUR 6 million to our in-place rents from some time in the first quarter of next year. GTC X is a project we launched this year. There is quite advanced discussions with around 60% of the space for tenants. So this looks very, very promising, and I think we made the right decision by launching this development. Sofia Tower is ongoing, 8,300 square meters. And again, we see here some tangible leasing progressing. And Center Point 1 and Center Point 2 is in the renovation mode. So all those are moving forward in development for us.

We can move to the next page. This is a summary, close to 95,000 square meters of the offices that we are working on. This is the pipeline to go within the next 24 months. Just to give a little bit more flavor of where we stand with those developments. 36,000 square meters of Center Point 3. The building permit has been received the other day, and it's waiting to become a final one. We are in dialogue with the authorities regarding the Twins project. We got some feedback from them. And by mid next year, Q2, Q3, we should be in the position to receive the permit for that one. For Matrix C, we have recently applied for the permit. And ABC 3, Sofia, that's the most recent acquisition that we have bought the land earlier this year. We are moving forward with the planning.

Moving to the next page. I will here pause if there are any questions so far or otherwise I will hand over to Ariel to talk about the financials.

[Ariel Ferstman, executive]

Thanks very much, Yovav. Good morning, ladies and gentlemen. Indeed, Q3 has been a continuation of our strong results show in the past six months with a strong FFO at EUR 52 million and expectations to reach by the end of this year 2021 similar levels pre-COVID back in 2019 close to EUR 70 million.

As you can see on Slide 13, we have posted a profit of EUR 33 million during the nine months of 2021, driven mainly by resilience over our valuations portfolio, whereby we have posted a slight decline of EUR 2 million in comparison to a EUR 67 million loss over the last nine months previous years. And the EUR 2 million loss is attributable mainly as a result of our heavy investment of our capital expenditure in our completed assets to keep -- always keep our portfolio up in shape in Class A.

If we zoom in a little bit on the gross margin of operations, we have recorded an increase of 2% of our gross margin of operations. And this was driven mainly by our substantial acquisitions in Hungary, mentioned Yovav before. The acquisitions contribute positively to our top-line, around EUR 7 million. This was offset by the sale of Spiral, which was sold, as you remember, back in Q4 2020. And some slight COVID impact attributable to our malls, mainly in Poland and Bulgaria. We have posted a loss of around EUR 2 million in our malls in Poland and Bulgaria versus a profit on our malls in Ada in Belgrade and in Zagreb, EUR 1 million of this versus last nine months of 2020. The reason why of the decline on the income in the shopping centers was basically longer restrictions, which rolled forward back in the first half of 2021.

Also a very important line which impact our P&L during this nine months is the financial expenses line. The line increased by EUR 9 million in comparison to the same period of last year. This is mainly as a result, as we pointed out also in our previous investors call during the six months of non-recurring costs originated by the refinance of our secured loans from the Eurobonds proceeds. This is around EUR 5 million early prepayment fees and breaking cost. This is a cash movement payment. And around EUR 3 million, which was the release of the deferred issuance debt expenses related to those secured loans that we refinanced, which is a non-cash item.

On the taxation line also, this was a slight -- it was a significant increase, around EUR 10 million. And this is driven mainly by an increase in our deferred tax liabilities, and this is due to the resilience of our valuation portfolio. This is a very similar line towards pre-COVID levels versus last year where we posted big losses as an impact of the COVID-19 mainly on our retail portfolio and on office portfolio as well, which decreased our deferred tax liabilities.

Overall, let's move to the next slide, please, on Slide 14. On the next slide, we are showing our robust balance sheet. We have increased around 18% on our portfolio, driven mainly by an intensive transaction. Activity, well described by Yovav before, during the nine months of 2021, with the acquisitions in the amount of EUR 375 million in our portfolio all related to the Hungarian increase, on the Hungarian portfolio and they're shifting in line with our new investment strategy to shift for investment-grade countries such as Poland and Hungary.

Indeed, our portfolio will decline around EUR 280 million once the disposal of the full office portfolio in Serbia materializes during Q4 2021, which will leave us to a net increase of around 4%, 5% versus the levels from 2020. To point out, the residential landbank increased by EUR 16 million. This was as a result of the acquisition of residential land plot in the city center of Budapest for 17,000 square meters residential. And also, we have reclassified half of our land plot in Romania, City Rose Park in Bucharest, from office to residential. And we are working towards an amendment on the building permit to allow this change as well.

Cash and cash equivalents decreased as we have deployed during the nine months our cash mainly to the cash-generating assets in the Hungarian market with acquisitions such as Vaci Green, the Ericsson and the evosoft headquarters, Vaci 188 and further investment into our assets under development such as Pillar, Sofia Tower and GTC X, mentioned by Yovav previously.

In the next slide, Slide 15, we are showing an overview of our debt. We have very strong intensive activity in our financing side. We start with Q1 with the completion of our second green bonds into the Hungarian market in the amount of EUR 54 million. We continue with our first debut benchmark size green Eurobond, very successful transaction, 3x oversubscribed in the summer in the amount of EUR 500 million. And following the successful completion of the Eurobond, we managed to refinance over EUR 450 million of secure financing debt, much more expensive than the bond that we post and some were going to mature in the next 12 to 24 months. And the last two refinances that we did was in this quarter, Mall of Sofia in the amount of EUR 54 million and the other shopping center in Belgrade in the amount of EUR 27 million. So we complete the full refinance target that we had in during the course of three months.

After the successfully refinanced, we managed to increase our maturity to five years, as we see on the slide. Increase unencumbered properties from 9% to 45%. This is a very good point, also showing our strength on the cash flow as well and the availability of that cash also from the unencumbered properties. And we have managed to decrease further our average funding cost to a record of 2.14%. I just want to point it out that we start our shifting to unsecured -- from secured to unsecured financing back in 2020 with our first green bond in the Hungarian market. And at that time, we have a 2.6% average funding cost. And today, we are proud to say we are moving towards 2.14%. And this will have an impact in our P&L in the upcoming 12 months. You will see it as that line will decrease in comparison to previous years.

In addition to that, we have secured our first unsecured revolving credit facility in the amount of EUR 75 million with the club of four different banks. This will support our liquidity as well and be able to deploy it for any working capital needs that might require for the company as well. In terms of our debt structure, excluding the liabilities held for sale, as you can see, we have a balance now of that structure, 50% unsecured financing, 50% secure financing with almost all our loans either hedged or fixed interest, and this is the trend that we are doing. Every time we're doing a secure financing, we try to basically mirror how the bond is working as well with the fixed coupon, also fixed interest, no amortization,, full payout, full bullet payout, and this is a result, 94%, and we minimize the risk of the interest risk for the upcoming further years.

In respect of the LTV, so basically, we have a slightly increase on the LTV, driven by the acceleration of the acquisition program. This shall go back quickly into the mid-40s once we complete our capital increase scheduled to happen in the next few weeks. And the final -- the disposal of the Serbian office portfolio, and that will bring the LTV towards mid-40s and towards our medium term of 40%.

Moving to the Slide 16. We have ended up the nine months of 2021 with a cash position of EUR 100 million, including cash held for sale in Serbia in the amount of EUR 8 million versus EUR 272 million at the beginning of the year. The decline, as I pointed out before, was a result of the intensive investment activity in the company, which will also contribute to the strong FFO we have also as well. Also to mention that the cash flow from operating activities, if we deduct the non-recurring financial expenses, we have posted an increase of 4%. So if you retract that EUR 5 million, we have EUR 55 million versus EUR53 million.

I think with this conclude our presentation today. And Malgorzata, we are open to take questions from the investors.

[Malgorzata Czaplicka, executive]

Ladies and gentlemen, please ask your questions now.

[Cezary Bernatek, analyst]

Can you hear me, first of all?

[Malgorzata Czaplicka, executive]

Sure, we hear you.

[Yovav Carmi, executive]

Yes, we hear you.

[Cezary Bernatek, analyst]

Great. So Cezary Bernatek, Erste Group. Just two quick questions. The first one concerning the Serbian portfolio -- office portfolio and where are we at present with the disposal? That's the first question basically? And the second question, just a technical one. What share of your portfolio now is light green certificated, because I remember that we had like 83% of the whole portfolio at end first half '21? And where are we now?

[Yovav Carmi, executive]

To answer the second question, the percentage of the green certified is around the same, it's around 85%. And we are working to certify the rest of the assets to achieve green certification. As I mentioned in the beginning of the presentation, we have been recognized very nicely by EPRA for our first ESG report. So this is something we strive to become better in that area. And this is something we are working on.

And going back to your first question about where do we stand with the Serbian portfolio disposal, this is a complex deal. So it's a time-consuming exercise for ourselves as well as the purchaser, and we are working hard on that. And the purchaser is advising us that they're very close to secure their financing that is about to be completed, concluded in the next couple of days or very shortly. And that will facilitate basically to be able to complete the transaction by the end of Q4.

[Cezary Bernatek, analyst]

Great. Thank you. So one just final question from my side. Concerning the office portfolio, do you feel any like pressure from the tenants which actually come to the end of their agreements when it comes to some of your office assets? Do you feel some pressure on lowering the level of leased area or any kind of material pressure on renegotiation of the rental rates down at the end of the particular period of rental period?

[Yovav Carmi, executive]

What we hear from tenants, especially given the uncertainty around the return to the office and when is it likely to happen and the current spiking in Europe overall with pandemic is -- we see two things. We see, one is a hesitancy to commit, has intensity to also move to a different location. And since we have a very high occupancy of 91%, to a certain extent, this is in our benefit because their easiest decision is to just stay where they are. So that's one kind of area that we see from them.

The other area that we see from them that since they are not sure what is their future office requirements and whether they will need more or less space or the layout will be different and how this layout would look like going forward because maybe they will need more space for meeting areas and so on. So the -- what this translates into is their wish to have more flexibility within the lease structure. And to the extent that we can because we also have to run a commercial profitable business, but to the extent that we can, we try to accommodate those needs from their side.

[Jakub Caithaml, analyst]

This is Jakub from Wood. A couple from my side, please. Following the Belgrade sale, I was wondering if you're looking into any additional larger disposals? And maybe related to that, if you are seeing any level of interest in retail assets or if it's still furloughed? And whether you expect that this could pick up next year once we get some KPIs? That would be the first question.

[Yovav Carmi, executive]

Sure. Following the -- our policy over the years has always been that on a selective basis, from time to time, we disposed some assets. You've seen it from us in 2019, we sold White House and we sold in Gdansk. Neptun, last year we sold, even in the pandemic, we sold [indiscernible] in Budapest. This year, we have quite a large disposal. So every year you see from us selling an asset or two. And this is in order to allow us to recycle the capital and invest it in development or acquisition of where we see more potential with the profitability from the equity. So that's to identify now and advise the large audience which assets and where it's a bit premature. So also, I'm sure you will understand that. So that's the answer on that question.

Regarding the interest in retail assets, we still see a very shallow interest in retail assets from the market. Those who are expressing interest, they look for a bargain, for a very cheap opportunity, which currently, there aren't any in the market. So this is why you can hardly see any retail assets being transacted.

[Jakub Caithaml, analyst]

Right, understood. Maybe on the office side, regarding the developments which you have lined up with completion scheduled for '22, I was wondering if you can tell us more about the leasing levels and how is this progressing? And maybe if it's possible to estimate roughly the contribution that we can expect from these assets in '22, whether this will be significant or not really because of the stabilization period? And maybe regarding the longer term pipeline, because you indicated these assets that you could consider kicking off within the next two years. Would any of these be speculative or would you be always looking to get a pre-lease before starting and what level of pre-lease roughly would you be considering to go ahead in this market?

[Yovav Carmi, executive]

One question, I'll try to answer everything. So regarding ongoing developments, I think we have laid out in the presentation how much each of them will add to our in-place rent. I think Pillar is the first one to come to turn into income-producing asset. You will see this contributing EUR 6.1 million. This is about to be handed over to the tenant in a couple of weeks. As always, there is some rent frees within the leases. On average, we are giving a one month per year for rent frees, but this is a very rough averaging. And the other ones will come into the market -- into the bulk of income-producing assets later on in the year.

And regarding the leasing position, GTC X, as I mentioned, there is quite a significant pipeline that we expect to be signed within the next couple of months. The same goes for Sofia Tower. And those are relatively smaller assets, but they will definitely contribute to the in-place rent. Center Point 1 and Center Point 2 are being renovated. There is some tangible interest from large tenants. So we see how this is going to fold out. It's a bit premature to discuss.

Regarding those other assets that we plan to bring into the market later within the next 24 months, normally, we would like to see some tangible interest from the market before we launch a project in order to feel comfortable. Our policy is normally to see somewhere around 30%. A tangible interest would mean either a decision by the tenant to move to our building or ahead of terms or something that we can really feel that the tenant is planning to move to our building. We normally do not start a project fully speculative and we need to fill the leasing demand in order to really start.

[Jakub Caithaml, analyst]

Right, understood. And maybe a follow-up on the offices which also links to the previous question. I mean, I wanted to ask if we should expect any adjustments to our ERVs because it seems that quite a number of markets still it's kind of tenants markets, the leasing is a bit difficult. So whether we should expect any changes there? And maybe relating to what you were talking about earlier when it comes to the adjustments of leasing contracts and maybe some more flexibility or shorter durations. Is this also something that would be playing a somewhat significant role in the valuation process?

[Yovav Carmi, executive]

I think the market will have to appreciate that as we move to the COVID accelerated certain things and we moved forward to a new era that is less fixed. Those five-year or seven-year fixed leases tenants are less and less willing to commit like that. They want more flexibility. And in order to secure those tenants or maintain them, we will need to be flexible enough to offer that, to offer some flex offices within the buildings in order for them when they have a new project to spill over to some flex office and so on. All those things have to be considered by landlords. This is a market that is changing in that respect, and it's early days. And whether this will affect ERVs, it might. It might affect the valuations, it might. But it's premature to comment on that because this is something that is currently evolving. And I think it's too early to express an opinion about that.

[Jakub Caithaml, analyst]

Sure. Fair enough. And a final one for me. And yes, sorry for holding the call and the Q&A. Regarding the resi plot in Budapest and also the conversion in Bucharest, I mean, have you been considering either resi for sale or perhaps resi for rent as something with more kind of strategic importance for the company going forward or should we see this as more of an opportunistic and something which will remain small in relative terms?

[Yovav Carmi, executive]

I think what we have been doing is listening to the market, looking carefully how trends are developing. And we have been in the past active in the residential sector to a limited extent several years ago. So now with the current environment and the way we see things developing in the market, we feel that we should to a certain degree explore the residential segment on a selective basis, enter into such projects, some assets on our landbank. As Ariel mentioned, the example in Bucharest. This was designated as a full-scale office development and we are modifying the permit to allow mixed-use office residential. I think, generally, in the market, we will see more of those. And it applies to us as well that to a certain extent, we will also be looking to execute such project type. I hope this answered your question.

[Malgorzata Czaplicka, executive]

Ladies and gentlemen, are there any further questions to the management? If there are no more questions, thank you very much for your participation and for your time. And in case of any additional questions that pops up later on, I'm more than happy to answer all the questions you may have. Thank you very much. Good bye.

[Ariel Ferstman, executive]

Have a good day. Bye, bye.

[Yovav Carmi, executive]

Thank you. Good bye.