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

Good afternoon, ladies and gentlemen. It's my pleasure to welcome you to GTC's conference call, which is dedicated to its H1 2021 financial results, which were published today in the morning. The call is being recorded. The call is being conducted by Yovav Carmi, the CEO of the company; and Ariel Ferstman, the CFO of the company. This call will be conducted in a way that we will have a short presentation of the financial results. The presentation will be shown on the screen. It's also available on the website. The presentation will be followed by Q&A session. So please keep your questions to the end of the meeting. I will strongly advise to stay muted for the call that will allow us to go smoothly through the call. Yovav, Ariel, the floor is yours.

Thank you, Malgorzata. Good afternoon to everybody. Can we please put the presentation on the screen? Thank you. We can start from -- with Page #3. H1 was characterized by strong earnings, solid performance of the company while we were intensively working on transformation to unsecured debt and have the intensive investment activity. We completed the H1 with EUR 59 million of gross margin, very similar to H1 last year. FFO of EUR 31 million as well, very similar to H1 2020. We ended up H1 with EUR 246 million of cash. That's a strong a liquidity position. We have been, as I said, very intensively working on the acquisition of income-generating and some of the landback for future developments. The occupancy was kept at 91%, similar to the year-end. Moving to the next page, please. Thank you. As I said, we were intensively working and transitioning from secure to predominantly unsecured debt. We have been working with 2 rating agencies, securing investment-grade with Fitch and very close to investment-grade with Moody's. We issued in the beginning of the year a small bond on the local market in EUR 150 million and completed with another EUR 500 million of green bond in June in the international market. This was almost 3x oversubscribed, which is a very good result. As we announced before, this process that the majority of the funds will be designated to refinance existing current loans while transforming into unsecured debt. We -- by the end of June, taking advantage of the interest payment dates. We have managed to refinance EUR 369 million and post H1, another EUR 82 million of loans. We ended up with a historically low average interest rate of the group with 2.18% versus 2.3% as of December. Can we move to the next page, please? Yes. Thank you. As we've seen in the office sector, we've been intensively working on acquisitions. This volume of acquisitions of cash-generating assets of EUR 264 million added -- contributed EUR 15 million of in-place rent to our portfolio. We have announced disposal of our office portfolio in Serbia. This is envisaged to be completed and closed by the end of the third quarter. It demonstrate the liquidity that we can -- we were able to generate in the Serbian market for the first time and it demonstrates our book valuations. We also felt comfortable enough since we are not leaving Serbia, we are dwelling on our experience and our capacity in Serbia. So we have been comfortable enough to start GTC X, our new office project in Belgrade, 16,800 square meters. We have seen a demand from a couple of international blue chip potential tenants in order to be able to fit into the timetable that they require. We felt comfortable enough to start the projects. Overall, our leasing activity resulted with 53,000 square meters of leases comparing to 70,000 in the whole of 2020. And as I mentioned, we kept the occupancy rate at 90%. Moving to the next page. So this is a snapshot of the recent acquisitions, fully occupied or very close to be fully occupied in either -- or having a green air certification or in the process of the green certification, adding EUR 15 million of in-place rent. Let's go to the next page, please. Thank you. Looking at the retail sector. Currently, 100% of our retail space is open for certain customers, is open for work. We have to bear in mind that up until the first week of May, Poland and Bulgaria was closed, under lockdown. And still in May, we were under restrictions for cinemas, fitness centers and food retailers yet the malls in -- the Avenue Mall and Ada in Belgrade shown increase in the gross margin, but Polish and Bulgarian were negatively because of that. However, what we have seen that post this lockdown in May, June, July, we will see it in a minute in the next page. The recovery was very good with very good turnovers and we can move to the next page to show this performance. Yes. So you can see here that June, July, we experienced very good pickup of the shopping centers with turnovers that are exceeding even the levels of 2019 before COVID. Galeria Pólnocna and Galeria Jurajska were standing out exceptionally well performance in those months. So that's to give a flavor about the retail side of the business and how things were looking post lockdown. If we can move to the next page, please. Thank you. And this is a snapshot that we show a lot, it shows the position of our portfolio in geographical terms, the split between cash-generating and development. We are at 90% cash-producing assets and 10% landbank and development. Due to the recent acquisition, proportion between office and retail went towards 66% office and it's 34% retail. And as I mentioned, the 83% of our assets enjoy from a green certification. We can then move to the next page. This is a snapshot showing, again, the green certification that we have here. Occupancy rate that was kept in H1 and focus in capital cities, CEEE. Moving to the next page. This snapshot is of our retail sector, 85% with green certification. Occupancy was kept high at 94%. And you can see here how we are geographically spread across the region. Moving to the next page. Here, you see our development -- ongoing development projects. Pillar is about to be completed by the end of the year, ongoing, in time and budget. Sofia Tower, we have launched. Now the construction is moving ahead in accordance to the budget and plan. We were there a couple of weeks ago. It looks very impressive. GTC X is the project that we have launched very recently, sensing the -- or feeling the demand that we see in Belgrade from international tenants. So far, 2,500 of square meters have been committed in LOIs. And the Center Point is a redevelopment of an existing older assets that we are working on. We see 2 very large -- one is the current tenant that is -- we're working on a prolongation of the lease, and another one is a new very large tenant that is expressing a strong interest. So this is -- moving on. Moving to the next page. Sorry. Our -- going forward, the pipeline for the next 24 months, this -- those assets here that you see are the highlights of such pipeline. With Center Point, 3 very close to obtaining permits, building permits, which we expect in the third quarter. And The Twins is an asset that we hold on the Váci Street on -- the corner of the Váci Street at the Inner Ring Road in Budapest next to the police headquarters and on top of the metro station. This is a 40,000 square meter development that we are working on the permitting a bit. Matrix C in Belgrade -- in Zagreb, sorry, is the third phase of our office part that we are developing. With good progress with Matrix 2. We felt comfortable enough to start the planning of Matrix 3, which will be very similar, 10,000 square meters next to Matrix 2. We plan to apply for the permit in the next month or 2. And ABC 3 is a land plot that we secured earlier this year, adjacent to ABC 1 and 2 in Sofia in Bulgaria. It's about 9,500 square meters, where we started the planning, given the results that we saw in ABC 1 and 2, we think that it's a good idea to start the planning of this. Moving to the next page, I will hand over to Ariel to talk about our financials.

Thank you very much, Yovav. Good afternoon, ladies and gentlemen. As Yovav pointed out before, I think we ended the first 6 months of 2021 with strong -- very strong numbers. As we're shifting our financing policy from secured financing to unsecured financing, we see also certain transitional numbers or one-off numbers on our P&L, and I'll explain it in a few minutes. But taking a look over our P&L for the first 6 months of 2021, we end up with the June with EUR 21 million profit, very strongly. Our line on gross margin from operation remained stable. However, if we zoom out a little bit to explain the main difference between 2020, 2021, we sold Serbian office building that impact negatively on the gross margin from operations, EUR 2 million down. However, we add new completions, including the new recently acquisitions: ABC 2 in Bulgaria and Matrix's B in Zagreb; plus the acquisition -- recent acquisition of Vaci Greens and Universum and contributed positively EUR 2.5 million. The COVID line, which says here, EUR 0.6 million negatively, we have to split it in 2 sides. One side is that on a like-to-like basis for the last 6 months, we have shown an improvement on our retail numbers in Zagreb and in Belgrade, which contributed positively to this line, EUR 0.5 million. And then was offset negatively by the Polish shopping centers and the Sofia Shopping Center by EUR 1.1 million. The main difference were that in Poland and in Sofia, there were extensive lockdowns, which basically spill over in April and in May. So recently, the shopping center was in 100% activity just by the end of May and early of June. On the -- as you can see on the -- also strong line that we have shown in the last 6 months is the revaluation from investment property, with a very minor loss of EUR 1 million. If we zoom out a little bit, this is EUR 6 million profit from revaluation from the recent acquisitions done in Budapest plus the existing portfolio in Budapest, which contributed strongly to profit revaluation in our office buildings, which was offset by capital expenditure on existing portfolio as CapEx that was done during the course of 6 months. That end up with EUR 1 million versus EUR 68 million losses in 6 months on the previous year. Overall, we have also -- that I mentioned that this will be a transitional P&L in terms of one-off. We have basically a one-off EUR 4 million on the financial expenses line. This was a result of the refinancing that Yovav pointed out properly before. We successfully refinanced almost 80% of the original plan, EUR 369 million of loan already refinanced 2 weeks after we placed successfully the first Eurobond of the company. And that was translated into some early repayment fees, breaking cost in the amount of EUR 4 million. This is a one-off amount, which was asked to be expensed on the P&L. So overall, as I mentioned before, we end up the first 6 months, very strong. So moving on the balance sheet on Slide 18. You don't see the big difference on our investment property line, and I will explain. We have a very extensive activity on the transactional side with over EUR 270 million of investment activity from acquisitions. As we pointed out before, Vaci Greens, Universum and also the latest recent acquisitions, one-off is building in Budapest called Vaci 188 and a mixed-use asset head building also by the end of June. So plus investments on development that end up with EUR 300 million. However, this line was offset by the reclassification of all the office portfolio in Serbia asset held for sale as a result of the signing of the sale and purchase agreement. This transaction is basically more to close in the course of the end of this quarter or early Q4. And we expect to basically complete the transaction. On the cash and cash equivalents, we -- as I mentioned, it was impacted by a lot of activity on the financing side. We -- as we mentioned before, we refinance and finally repaid bonds for EUR 437 million and also acquisition of assets and investment in property, assets under construction, net of loans, from our equity, EUR 151 million, offset by the raising of the bonds. We finally did the last round in the Hungarian bonds in the first -- end of the first quarter of 2021, EUR 52 million. And the EUR 500 million placement Eurobond done in the end of Q2. So that contributed to a large extensive activity on the cash movements. And as we mentioned before also, as we reclassify all the assets since it is a share deal, the Serbian deal, we reclassify all the assets that's held for sale. We reclassify also the liabilities related to those assets -- that liabilities related to held for sale, which is related mainly the bank financing, which will be expected to be fully repaid as a result of the completion of this transaction. So moving on to Slide 19. Here, we're showing a snapshot of our debt metrics. We have a total debt of EUR 1.5 billion, but this will be reduced towards EUR 1.4 billion. As Yovav mentioned before, we are in the process of refinancing the last batch of identified loans, around EUR 82 million at Ada Shopping Center and Mall of Sofia. As Yovav pointed out properly, we have a low record on weighted average interest rate, driven by the successful placement of the bonds and subsequently, refinance of more expensive debt on our balance sheet. We -- I remind you, we place our bonds on a yield of 2.375% with a fixed coupon of 2.25% and we replaced -- majority of those loans were above that yield. So that contributed also to a decrease on this parameter as well. We end up with a very strong interest coverage ratio, 3.3x. We managed to increase our encumbered properties from 9% to 35%, over almost above EUR 800 million in assets, which were freed up as a result of the refinance. And there's no more encumbrance, no security on those, and free cash flow is also free. And we also be able to release around EUR 4 million, EUR 5 million of heavy cash reserves, which were linked to that kind of financing. We show you here a very healthy debt maturity profile, which allows the company the flexibility to do those investments, with no heavy loan recycles in the upcoming 12 months, merely small repayment of the bonds in the next 12 months, plus the regular amortization. One thing that we are doing regarding the financing as a result of the switching of the financing policy, is to basically any new secured financing that we are approaching the banks, we try to mirror the bonds that we issue, meaning in the terms of a full payout loans with fixed interest, and we've been very successful. And as a result of that, you see on the results on the debt split, 95% of our debt is either fixed interest or hedge. On the net LTV, we end up with margin slightly higher LTV than expected, 51.6%, which will grow a little bit higher as a result of the latest acquisition done recently after balance sheet. But this will be offset and decreasingly gradually as a result of the disposal of the Serbian portfolio and further on as a result of the planned capital increase, which will bring our LTV ratio in levels below where we posted last year. Moving into this last slide in the cash flow statement. I think in spite of the COVID and the lockdowns, we end up with a relatively stable cash flow from operating activities, EUR 25 million versus EUR 26 million. Heavy -- as I mentioned before, heavy investment activity in the first 6 months in comparison to last year as a result of the acquisitions and development. Overall, we end up with a strong cash position, which is, as you see here, EUR 253 million. But if we -- this includes also asset held for sales, related to the Serbian deal, which overall, if you netted that is EUR 246 million. Just to point out before the end of the presentation, we posted an FFO of EUR 31 million, for the last 6 months. But if we analyze the last quarter-on-quarter basis, basically Q2 versus Q2 2020, we have an improvement on our FFO, around 12%. And as long as we see the easier and no further lockdowns in the near future, we should expect the next quarter to remain even stronger as we move ahead in time. I think Malgorzata, we can conclude our presentation, and we're ready to open the floor for questions.

[Operator Instructions]

This is Peter Brisal from Asset Management. If I am not mistaken, you approved plan to issue additional new shares. Can you give an update what is the time line and what are the plans in this regard?

Yes, thank you. We, indeed, in the recent annual general meeting that was held in July. We had a voting on the capital increase. It was approved with a very big majority of the shareholders to authorized the management to execute capital increase. And just to recap for everyone to know, the Polish regulator allows up to 20% of the shares to be issued in a kind of a fast track program that does not require prospectus. If you do the math on the current share price, give or take, this is a volume of around EUR 140 million, EUR 150 million. We wanted to -- and this is something we announced. We wanted to give visibility given the questions that we had from the various investors, we wanted to give visibility on H1 figures and valuations, which we are now providing. So the plan is in the next month or 2 to gear up towards the capital raise.

Assuming that, that question has been answered. It's Andrew Abeinstein here from Ashmore. Yovav, could you just talk to us about the yields that you achieved on those Budapest acquisitions? If I just look at what's happened to the yield for Budapest office, it's come down quite a lot as a result of the acquisitions. It seems to me that you've been buying -- the new assets that you've acquired are yielding relatively lower compared with most of the rest of the portfolio and just what you were seeing there in terms of why those were attractive to you and what the outlook is for them?

As a policy, we announced that we're going to focus on Hungary and Poland. And this is what you have seen from us in H1, quite an intensive acquisition mode in Budapest mainly. In terms of the yields in the market, we actually have not seen yields moving out in the market, in Budapest, especially. We demonstrated, last year, the disposal of Serbian office Building, which was in the course of let's call it, the darkest period of the COVID. And still, we were able to execute at a decent yield. This is a bit asset that was a bit outside the Vaci corridor with a tenant in local currencies. So bearing that in mind, the yield that we achieved for that transaction was supported and actually represented a 10 million uplift in value compared to its year-end valuation a year before. So that shows -- demonstrate our book valuations. Those assets that we bought are green-certified, new buildings, Vaci Greens is on the Vaci street in Budapest. Universum assets are with long-term leases next to the University. So this is -- and this is why they attracted the pricing that they have been attracting. So we're comfortable with those leads. I don't -- yields, I don't think they represent any difference comparing to other acquisitions that we made.

I understand that there are no more questions. So thank you very much, ladies and gentlemen, for being with us today and listening to our financial results. Have a very nice rest of the day and see you next time.

Thank you.

Thank you.