Globe Trade Centre S.A. (GTC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the GTC 2019 Results Call. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Malgorzata Czaplicka. Please go ahead, ma'am.

Thank you very much. Good afternoon, ladies and gentlemen. We will hold our conference call regarding the 2019 results as usually, so there will be an introduction done by Thomas Kurzmann, the CEO; and Erez Boniel, the CFO. The presentation, based on which we will be doing the introduction, is posted on our website. So if you don't have it, please have a look at the website. Now I'm passing the floor over to Thomas.

Thank you, Malgorzata. Good afternoon, ladies and gentlemen, to our conference call. Very unusual situation. We could not have usual live presentation also in one of the hotels. We also had to talk to our analysts only via conference calls, but this is how the situation is developing at the moment. I want to, for the entrants, make sure that everybody understands that GTC operations are fully up and running. We do have contingency plans in place for all our employees. So partly, the staff is in our offices or working from home, whatever is safe or convenient at the time being. We can also report that all our buildings are open. We have some limitations, of course, on shopping malls, and I will explain later when we talk about the shopping portfolio. The office buildings are all full up and running. Our in-house property management is taking care on all the buildings, even on a reduced use models and make sure that all the safety measures are taken to make sure that we run operations for our staff, for our tenants and for their employees safe. To the results from 2019. Moving to the Page 3 on our presentation. It was a very successful year. We managed to do a lot of new developments and complete them. We did amazing, great on leasing office buildings but also shopping centers up. And therefore, the in-place rent went up by 12% compared to last year to all-in EUR 145 million annually. Gross margin from rental activity is also up a lot, 15% up to EUR 128 million. And we could keep -- not only keep the occupancy but increase the occupancy to 95% all over the portfolio. A 236,000 square meters of newly leased or renewed lease space was unbelievable big number for the whole year. And because we could also keep some of the momentum over the first 1, 2 months of this year. Of course, at the moment, we are, in this respect, on leasing activity, a little bit on idle. FFO, one, increased 14% to EUR 70 million, and this makes an FFO per share of EUR 0.14 per share. Operating profit is up 13%. And the profit after tax of the group is EUR 75 million, which makes EUR 0.15 per share. EPRA NAV increased 3%, despite paying dividend and issuing shares back the first half of last year. And the solid financial metrics of LTV at 44% could be kept. The weighted average interest rate is still at a historic low, 2.6% in average and weighted. And this is also important to understand, could be achieved by having ring-fenced property loans in place, which is, of course, in special situations, very important to know that we don't have big cost collaterals or other combinations of corporate finance in place. This is -- most of it, 2.6% is a ring-fenced property loans, mortgages, and of course, small amount of it is corporate bonds, which are also safe. The dividend was discussed with our Supervisory Board, and we made intermediate decision to put it on standby. We need to be more sure and have a better visibility about how this crisis will develop, until we will be able to decide about the dividend or to keep the cash in the company and go the safe way. The office development and portfolio page on Page 4 is showing that there was 202,400 square meters of lettings and renewals done compared to a much lower number, 157,000 in 2018. The occupancy on the office portfolio at 95%, this is an increase of 2% versus the last year. And we could deliver 46,000 square meters of high-quality space to the market. And this was namely Green Heart; the Building 1 & 2 in Belgrade. We could complete Matrix A in Zagreb and Advance Business Centre I in Sofia. Important is that all of these assets are on a very high-leasing status and producing cash. Sale of White House, Budapest and the sale of Neptun Office Center in Gdansk was important to us last year because we wanted to show also that trading activity and capital markets are on. I think it's much more important now looking back from today because these 2 transactions created for us around EUR 80 million free cash, which is now on our balance sheet, and very important to have during such a situation and crisis we face at the moment. We could commence also, Pillar office building in Budapest, 29,000 square meter GLA. More than 90% of it is preleased to Exxon. And I just confirmed today in the morning that the construction is up and running. Workers are in place, and we are in time schedule and hope to continue like that, and hopefully, well, if the crisis and the situation in Budapest is not going more severe. 62,900 square meters of high-quality office space under construction at the moment. The completion of it is scheduled for this year and part of it for next year. And this will also bring additional rent upon completion of about EUR 12.2 million value, assuming that the buildings will be leased up fully. Sustainability was also, again, an important issue for us, and we managed to get now up to 88% of our portfolio on offices into green certifications, which also is important to us. Not only that leasing is -- for the leasing activity, it is a must, but also for the energy consumption and for the all-over cost, it is a big benefit to have these buildings according to the green certification status and energy saving is on. On the retail portfolio, we have on the operation, Galeria Jurajska. It was, in 2019, a very important year, again, of growth. Despite Sunday closings and other issues we had, we could increase turnovers for the tenants. We could keep high occupancy. And a lot of negotiations are initiated to increase certain shops or even to bring new brands into the Galeria. At the moment, the status is that only food retail and pharmacy shops are open. By government instruction, all the rest of the shops had to be closed down, including leisure, cinemas and also, restaurants. So at the moment, Galeria Jurajska is on a reduced operation, open for customers only, if they go food shopping or to the pharmacy or to some absolute and necessary retailers defined by the state. Galeria Pólnocna also is the same story. We also had very good momentum in 2019. And also the first 1.5 months in 2020, we could see that turnovers of tenants increased by 21% year-on-year. The occupancy has also increased to 92%. At the moment, same story, like in Czestochowa. Government in Poland ordered the closure of most of the shops, including restaurants, leisure and everything. Just food retailers can open. Mall of Sofia is also operating on a low activity. Same story like in Poland, government closed shops and is only allowed or is forcing even that food retailers and pharmacies have to keep open. Therefore, our property management and center management also in Sofia is running this shopping mall on a low flame basically, and keep the necessary operations in safety, security and cleaning alive to grant safe operation of the food store. We have the same in Zagreb and Ada Mall in Belgrade Both shopping malls in Belgrade and Zagreb are not closed by government instruction, but that is hard. I would say, it's not much different than in Poland or in Sofia. Most of the restaurants are completely empty. Fashion stores are still open on reduced times. But of course, the footfall is still somewhere between 6,000 and 8,000 people a day because they go for grocery shopping, food stores and pharmacy. So the occupancy of retail portfolio was, at the end of 2019, 96%. We had very high FFO and contribution to the portfolio since properties were up and running and refinancing was quite reasonably priced. And at the moment, we will see how long the shutdown will last, and we are looking forward to open all the malls pretty soon again. Sustainability also was an issue on the shopping malls. So we have now 87% of retail space with Green Certificates, and we will continue also to do the last one. According to LEED's to be able to have pretty soon also, 100% Green-certified shopping malls in our portfolio. The Page 7 is giving a functional and regional overview on split. So basically, the portfolio standing and income-producing portfolio is now a little bit more than EUR 2 billion. Out of that is 41% retail and 59% office. We have, in the total portfolio, 45% in Poland, which makes EUR 896 million. And then we have Belgrade with 19%; we have Budapest with 13%; Bucharest is 10% of the portfolio; and then Sofia and Zagreb with 6% and 7% in our country allocation. The project under construction is, at the moment, in a gross asset value of EUR 84 million. This is 4 properties located in Budapest, Belgrade, Sofia and Zagreb. On the right side, you can see the status of investment. So most advanced is the Budapest with EUR 37 million invested. Second is Sofia with EUR 21 million. This is ABC II, followed by Zagreb and Belgrade. The office portfolio in big numbers. We have EUR 1.17 billion consisted value in office assets, EUR 92 million annual in-place rent out of that. This is split in 41 buildings, and makes a total gross leasable area of 532,000 square meters. Again, on this page, down on the left, certifications graph is showing that we are progressing quite nice, and we need to do another a 2% to complete, and then another 12% to get 100% of our assets. Occupancy rates. Again, 95% on the office portfolio. This is quite high. And we do hope to keep this in the same range for the year to come. The retail portfolio is valued at the moment at EUR 830 million gross asset value, EUR 53 million annual in-place rent. This split in 5 buildings with 216,000 square meters GLA and we managed to bring occupancy up to 96% by end of 2019. And the split of the portfolio is clear. Biggest concentration is in Poland with Warsaw and Czestochowa, and then followed by Belgrade, Zagreb and Sofia. The development pipeline in our future on Page 11 shows projects under construction. First one is Green Heart N3 in Belgrade. This is the last small building, which was left behind a little bit on construction for technical reasons. It was, let's say, limited space on the land, and we could only do the entrance to the garage on the space, where this building has been erected now. So this was the reason why it was down a little bit later. The rest of the Green Heart was completed. Green Heart N3 shall be completed in the first half of this year. We have very good and advanced discussions with potential tenants. It should be completed in time, and we do not see big issues here. ABC II in Sofia is also full under construction. Also by today, construction workers were still going. We do have quite nice preleasing on this asset. And at the moment, we are in time. We see a slight delay on supply chain for reinforcement steel, but I think we will overcome that and the construction will go ahead as planned. Matrix B in Zagreb is also under construction. The structure is up. Now we have fit-out works and also mechanical, electrical and plumbing going on. I think also there, we will be able to keep the time schedule as planned and also the budget. Pillar in Budapest was discussed before. It is also full under construction and in budget. The building is pre-leased to Exxon to most -- to more than 90%. And we are going together with our tenant, moving ahead with planning, with construction, and we believe that this is also to be delivered in time. The next block is planning stage, and we have here a couple of properties where we will be able immediately to push the button and start. This is GTC X Belgrade. We have construction permits in place. We have construction companies negotiated. But -- and of course, most important, a very good visibility on the pipeline of tenants who are interested to join and be a tenant for many years in this building. For crisis reasons and to get a little bit more visibility how long this will go on, we put it on hold at the moment. And we will start again if we have better visibility how all the things around corona will be developing. The tower on the Mall of Sofia. Also there, we have location permits. We are working on building permits, which will hopefully be granted soon. We did already some initial preparation works for the construction of this tower on top of the main entrance of the mall in Sofia. And we will continue to push for a building permit to go ahead and do all the design works necessary. And here is the same, whenever see more clear how the crisis will develop, we will -- we are also ready to go ahead and start construction. City Rose Park 1 & 2 in Bucharest is on hold at the moment. This is, for us, a little bit too much in balance between the achievable rent, the investment values after completion, or you can also call it cap rates, and construction costs. I think this crisis will also make here a little bit more clearance, and then we will see how to proceed with that one during the summer. Center Point 3 in Budapest. Again, we are also in the final building permit phase. There was some small issue with the city planning on building heights, which will be corrected now by the city together with us. And for Center Point 3, we expect to get a permit mid-year 2020. Moderna in Katowice, we have full permits in place. We also have almost final negotiated general contractor's agreement. And again, good visibility on potential tenants for Moderna in Katowice is the same. Barely it's done for GTC X in Belgrade, we put it for the moment at hold and we'll take quickly decisions when we have better visibility about the continuation. Further in planning stage, the City Rose Park 3, The Twist in Budapest and Zielone Tarasy Shopping Center in Wilanów, Warsaw and Matrix continuations. All these projects are in planning stage. And I would say the present situation gives us a little bit more time to optimize all these designs and permits and whatsoever, and we'll continue whenever it is appropriate. We can now go to operations and financials, and I hand over to Erez to elaborate on that part of the presentation.

Hello, good afternoon, everyone. 2019 was a very successful year for us. We had a lot of financing activity. As you can see on Page 15 of the presentation, refinancing activity was around Duna Tower, University Business Park, FortyOne, GTC House and Globis Poznan. All together, we talk about significant amount, well ahead of EUR 200 million. We also do construction loans, EUR 88 million. We issued bonds, EUR 61 million, thereby, recycling the EUR 59 million that we had to repay in 2019. And we fully repaid 3 loans. One of them is White House due to the sale of the building. Second, Neptun, also the sale of the building. And thirdly, is Aeropark, this was rather an expensive loan. And we -- as part of our deleveraging, we decided to repay. And moving ahead to the balance sheet. We can see the investment property. The investment property increased for several reasons. One of them, of course, is the revaluation that contributed the EUR 16 million. But the major one is the investment. We invested EUR 127 million. There was also the disposal I mentioned earlier, EUR 52 million. And the Right-of-Use IFRS 16 classification, that added EUR 45 million. Cash and cash equivalent on a normal days, I would say that this cash amount might look excessive. So either we have prepared to dividend it out or to invest. But on these days, we can see how this cash, in fact, provide the strength and backbone for GTC. And of course, we are well-prepared for the crisis. In terms of equity, there was a minor change in the equity. When we paid the dividend, we also gave the possibility for shareholders to elect to get shares, and about 10% of the amount is related. The amount of the dividend is related to issue of new shares of around EUR 4 million. In terms of long-term loans, there is full slides on it. I will just say that the long-term loans increased in line with the expansion of the company with the completion of the assets. All together, 80,000 square meters that were completed. Therefore, the loan amount is also increased. But side-by-side with that, we decreased the overall cost of interest to the company, meaning that the refinancing reduced the average rate from 2.7% to 2.6%. And we saved by that, around EUR 1.1 million per year. Moving ahead to the income statement. We kept the gross margin around 75%, but we can see big increase in the revenue. The revenue increase, of course, thanks to the completion of assets that were described before, but also, there was increase in the rent, existing rent. And I would say the new projects contributed around EUR 9 million, while the existing assets contributed around almost EUR 8 million, full rental increase as well as inflation. Other items on the income statement. Financial expenses increased. EUR 2 million are attributed to the IFRS 16, so it's a matter of classification. and the other 10% are in line with the increase in the volume of loans and the increase of activity. So generally speaking, the income statement was intact. Some people asked me also about the G&A increase. Of course, when we look at it in this way, from '11 to '17, it looks dramatic increase. But that's not the case, if we neutralize the effect of share-based payment, that fluctuates -- share price was close to PLN 10. Now, it's 30% below. So the fluctuation of the share-based payment plus some options that were exercised impacted here. But all together, after neutralizing them, the G&A expenses were kept on the same level. Regarding the debt and the strength of the debt. Strategic-wise, we did not change anything. We kept hedging our loans. We kept borrowing in euro. But the most important activity that was done during the quarter, through the refinance, was to push forward the maturity. Here, I can say that the biggest loan that was due for refinancing between Galeria Jurajska. Outstanding loan at the end of the year was around EUR 85 million. This was refinanced very successfully in Q1, and now the maturity is 5 years. Not only it was refinanced, we generated free cash of around EUR 45 million. And the margin is quite low, well below 2%. Other loans that are due to refinance, Metro and the Francuska project. For both of them, we signed term sheet already with the banks. And despite the crisis, both banks confirmed that they move ahead with the refinance. So we have some administrative delays, but the intention is to refinance them. They're due anyway at the end of the year, so we have time and we plan to execute them on time. Generally speaking, regarding the loans, we are quite confident that we can manage them properly. Also, one comment in view of the crisis. I had the preliminary discussion with many of our lenders and all of them express support and readiness to negotiate and to accommodate the situation, as it may be developed. Regarding the metrics, the metrics of the debt. Loan-to-value remained at the level of 44%, 45%. The interest rate, I mentioned already. And of course, the coverage are excellent coverage ratios. And the strategy regarding the loan-to-value is proven nowadays at the times of stress. Talking about the stress. We run stress test with different scenario to see how the company could cope with the crisis. We concluded unanimously, also after review of the auditors, that the company can survive this crisis. At least, as it is estimated now, meaning there is no risk of growing concern or anything like that in the foreseen period. Regarding the cash flow statement. Cash from my operating activity has been increased, around 15% increase. Talking about the investment activity here, generally speaking, we fulfill -- well, we exceeded the level of last year. We fulfilled our targets. Though, obviously, this could have been accelerated, however, nowadays, we need to continue what we have and maybe without new project until the situation is clarified. The financing activity. You can see the volumes are summarized here. We repaid dividends, EUR 38 million. All together, the cash at the end of the year, EUR 180 million, which is a very good safety cushion and this is before the refinancing of Galeria Jurajska. On Page 21, the details for the calculation of the FFO. Very strong FFO at the end of the year, EUR 70 million. You can see how the increase -- if we look at 2014/'15, how strong increase was performed, and the operational performance is robust and strong. So this conclude the financial review of the results. And if you have any questions, we'll ask the operator to open the microphone. Thank you very much.

[Operator Instructions] Our first question is from the line of Jakub Caithaml.

This is Jakub Caithaml. I hope that you can hear me well. Thank you for the presentation and also for allowing the kind of Q&A because, of course, it's quite a difficult time for any forward-looking statements. I saw some takeaways from your press conference on Bloomberg, which we're talking about kind of your stance towards rent concessions and more on kind of technical terms. I was wondering if you could walk us through what are the next steps in the scenario when the tenant would stop paying the rent in the retail properties?

Look, first of all, we are not in a situation now to estimate who is paying rent or who is not paying rent. We still assume that our business partners and tenants will, let's say, respect agreements in place. And it's middle of the month, so we'll see at the end of the month, what will happen. The prepayments for March were done much earlier. And we will see what will be in April. But the general rule is that we are, let's say, not responsible for any closure of shops or any other businesses. And we do believe, and this also was very loud and clear communicated by the governments of all the countries we are working in, that they will -- and they are working on support programs for businesses. So whether this -- not really economic crisis but health crisis. And therefore, we do believe that at the moment, we will have to ask all our business partners and tenants to stay according to the agreements and pay the rent.

Sure. Understood. And I mean if somebody would stop paying the rent, then the bank is liable to cover the payment? Or does the tenant get kind of closed down immediately or...

So first of all, most of the tenants, if you talk about Poland, they had to close down, the government instructions. And the government also promised these businesses that they will get some support to cover at least their costs. And part of the cost, of course, is the labor cost. And the second part of their cost is rental costs in shopping malls and other premises where they operate. So we are not talking about the bank. We are talking about the government, hopefully, keeping this business running. And we don't have a better view on that at the moment. If this support for tenants will be via loans, long-term loans, guaranteed loans from sales or whatsoever, we don't know. This is not completely communicated. But let's say, there is a promise on the table from government that businesses will be supported, to not go into wrenching and to continue to match their obligations.

Sure. Understood. And I mean on a similar topic, can you in just very rough terms, not looking to the last digit, but just for us to get an idea, share some color on what is the share of either rental income or -- of the GLA coming on one hand from kind of larger international tenants like Inditex, H&M, Yorker, C&A, LDP, Dieckmann, Amrest. I mean you get the picture. And how much on the other hand comes from smaller, more kind of local operators in your retail buildings?

I think we don't have these numbers ready now. And it depends a lot on performance. Because as you can imagine, that Inditex or H&M, and you just named the 2. Most of these tenants are on turnover rent. So basically, if there's no turnover, there's not much rent. And this is how this big, let's say, retailers hedge their risks. I think everyone, including the big ones and the small ones, are very keen to start as soon as possible and immediately after it is possible again, their businesses. And then everybody hopes and we also hope that everything will be going hopefully quickly to more or less normal conditions. There is no way at the moment to say the split, big ones, small ones, more risky, less risky. This is -- I think what we cannot do right now. And I think it also does make big sense. I think the impact is for everybody the same, closed down, it's closed down. And governments will need to support these businesses.

Sure. No, that makes perfect sense. I mean my -- reason I was asking is that I think that for the really kind of small and medium enterprises, it could be perhaps a bit more difficult to access these channels, be it from banks or be it from government. And also, in some cases, of course, not exclusively the financial cushion may be lower. I mean if you guys were running some exercises internally, I mean if the shopping center traffic would be separately restricted as it is now for perhaps 1 or 2 or 4 months? These kind of 3 scenarios? And the government help would not be immediately forthcoming, can you estimate what the impact on vacancy could be?

No. We cannot estimate this. But what we did, as Erez explored in his presentation, we did different stress test scenarios. And one of the scenarios was to say that we have 6 months completely down of shopping malls. And that's not collecting any rent, which I think is a very hypothetic one. And even in this case, we would not have any big issues to continue the business.

Sure. And then finally, perhaps...

And this stress test was made, which is also not realistic, in my opinion, but let's say, this stress test -- because the assumption was 6 months no rent from shopping malls. And at the same time, doing the full debt service, all the loans. So basically, we did not assume there's a back-to-back kind of reaction, which for sure will also soften the situation. For example, in Belgrade, there was yesterday, already a law coming out from the Serbian government that there's a 3-month moratorium for banks that for the next 3 months banks are not allowed to charge default interest and they are not allowed to start any foreclosure activity. And this is the first date, which really came out with a law. And I think this is only the beginning because it's, for sure, not enough, but at least, will relax the liquidity situation, if it comes very hard.

Yes. Thomas, I think that makes perfect sense. And I mean, finally on loans, perhaps to Erez. I appreciate that on the overall company level there -- as you rightly pointed out, there is a significant headroom and the leverage is conservative and allows for a degree of prospective write-downs, even without kind of touching the covenants. But I wanted to ask about kind of specific project level. For instance, you mentioned Jurajska. So if we look on the shopping center specifically, can you comment on the individual loans underpinning the shopping centers? And for instance, if there would be a situation that the valuation would result in kind of a formal covenant breach, did the discussions with banks indicate, kind of at this early stage, how do you expect that the banks would respond to that? Because my impression, as seems the last point out, there is a strong policymakers' push towards kind of more accommodated spend?

I did in the last days, I did 2 things. First of all, I discussed with valuers. And the valuers tend not to change the value at least in the next valuation, meaning 31st March, probably also 30 June. They would like to hold the value and add close, which will say this valuation was done under uncertainty. The reader should take precautions. But the value itself will not change. So the risk of immediate technical breach of covenant, I think, is deferred, at least. The second thing is I discussed with the lenders. And our lenders, all of them, expressed willingness to listen, to accommodate, to find solution. I think above all, they appreciate a lot the strength -- financial strength of GTC and the fantastic cooperation that we have with them. And definitely, I expect, I would call it a friendly approach from our lenders.

We have no further question at this time. Please go ahead.

Thank you very much, everybody, for the participation, and we are available for any questions you may have offline. Thank you very much. Goodbye.

That does conclude your conference for today. Thank you for participating. You may now all disconnect.