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

Good morning, ladies and gentlemen. My name is Malgorzata Czaplicka, and it's my pleasure to welcome you to today's call. The call will be dedicated to the capital increase that we announced yesterday. We will make a short introduction. The introduction will be done by Yovav Carmi, the CEO; and Ariel Ferstman, the CFO. And we will open the floor for question and answers. Thank you very much for your time and for participating in this call. Let me pass the floor over to Yovav and Ariel.

Hello. Good morning, everybody. We would make a short presentation, talk about the capital raise that we launched yesterday in the afternoon, and then we will open the floor for your questions. So I think we have made a short roadshow presentation. Most of it, all of you have seen from us before. So I would like to focus on Page #4, which is the summary of the deal, the transaction that we are trying to do. Can you put it on the screen please, Malgorzata?

I think it's on the screen. Can you see?

No. Okay. So as you all know, earlier this year, around the summer, we had an AGM approving to execute and offer size up to 20% of the shares of the company. We have been working on this capital raise, talking to our shareholders, to our majority shareholders. And now we are ready to launch it. Currently, we will launch 55 million shares, which is around 11.3% of the existing share capital. And it's a partial execution of the capital raise, but it's still something that -- this is the commitment level that we have been able to achieve from the shareholders, and it's still something that we need to -- we would like to proceed with. We would like to execute. This is within our plan. We envisage to complete these total tickets potentially in the next coming months, of course, subject to market conditions and so on. And still, we would like to execute this size. This is -- as we mentioned in various occasions, this is designated to enhance the capital structure of the company. This is something that will help us in driving the LTV levels into the medium-term target range that we announced of 40%, and this is how we see it. We outlined here the timetable. The book building is ongoing until tomorrow afternoon. And then the expected subscriptions will follow in the next few days. We envisage a lockup of 90 days for the company. A majority shareholder has provided an undertaking to acquire new shares in the amount of up to 55 million -- or 55 million. However, they are limited with a 66% threshold, which they would not like to cross. So that's, in essence, the summary. I don't know if Ariel would like to add something on that.

Yes. I think just to give you -- put it on perspective, and Yovav explained it pretty well, we are foreseeing that subsequently to finalizing the transaction and envisaging the ticket size here, which is in the range between EUR 75 million to EUR 85 million depending on final pricing, we -- plus the completion of the Serbia -- disposal of office portfolio, we will be able to bring our LTV in the medium range of the 40s, so around 45%, 46%. And then, of course, as Yovav mentioned, we will continue our strategy forward in the coming months in order to getting closer to the medium target of 40%. I think we can open, Malgorzata, the floor for Q&A.

Ladies and gentlemen, if you have any questions, we will be happy to take your questions now.

This is Piotr Zybala. Can you hear me?

Yes.

I noticed there was an announcement about the changes in the management board. Can you give color on these changes and whether it brings along any changes in the direction of the company?

No, not at all. I think on the contrary, it strengthened the management. As you all know, we had Mr. Robert Snow retiring for pension about a month ago, 1.5 months ago, and he was heading our development. He was the Head of Development of the company. And as we envisage, and this is something we announced, that the growth will predominantly come from development. This is where traditionally we have been growing our portfolio, our activity. It made sense to enhance the leadership in the development department of the company. The new person who is joining as the Head of the Development is Mr. Pedja Petronijevic, who has been working as an employee of GTC for many years, heading the Serbian activity with vast experience in development. So I think this is enhancing the development arm of the company to enable it really to execute its development program. And as we are expanding our portfolio, you have seen us growing our portfolio throughout the year with intensive acquisition mode. The necessity to enhance the team also with operational -- head of operation is also aimed to strengthen that part of our operations. So I think those 2 additions to the team are very important and will support us and help us in really growing the business and expanding our activity in line of the strategy that we conveyed throughout the year.

Okay. And the investment direction remains basically Hungary and Poland offices and also residential potentially.

Yes. Predominantly, this will be Hungary and Poland, as we mentioned. However, and as we have mentioned in our development pipeline, we would like to benefit from our presence on the ground in the other markets such as Bulgaria, Serbia, Croatia. And you will see from us also projects in those countries, maybe on a smaller scale, but you will see them. And the good examples are GTC X, which is currently ongoing, the Sofia Tower, the planned development, the next phase in Matrix in Zagreb and so on. So you'll see also that from us.

And maybe just finally, in short term, does the new cash inflow mean that you repay some of the debt, and then you basically build up leverage again? Or how do you manage the cash in short term?

You're talking about the inflow of the capital increase?

Correct.

The inflow of the capital increase will be enhancing our capital structure and will be designated for general corporate purposes. In some cases, it could be for repayment of certain debt. However, as you've seen also in this presentation, we have a very healthy maturity profile. So there's a few loans to be recycled. And we're still under the process of transitioning from secured financing to unsecured financing. And we would like to probably tap the markets, assuming the markets are friendly in terms of pricing, are competitive enough to complete the last round of Eurobonds that we planned to do it this year, but it was shifted for early next year, and also to enhance also our development and the general needs -- cash needs of the company.

Jiri Feres from Erste Bank. I was -- my first question was about the use of proceeds, but it was just answered. And the second one, what is your base case scenario towards COVID? Because with the new Omicron variant, your exposure to the retail and office might be a little bit risky. So do you see any -- what is basically your base case scenario about the situation in Poland, generally? Do you see people coming back to the offices? Or do you expect any lockdowns, et cetera, et cetera?

Nobody has the crystal ball to know exactly what will come and how the pandemic will evolve. But I can say a few comments on that. First of all, we have seen in the last 2 years already we are -- we gained some experience. So we've seen various slowdowns in the last 2 years, and we were able to weather them out with a very good performance. We had, I think, 4 lockdowns so far in Poland. The last one ended in May, and we were able to weather them out. We had to make some effort in helping out some tenants in order to help them survive and maintain our occupancy in our retail centers, and we did that. And I think it paid off because we were able to see a very good and quick revival in terms of turnover and footfall. The office sector, if you look at it, we have been able to maintain a very good occupancy throughout the year. We didn't see so far a drop in the occupancy. I also -- so that's kind of looking at the past and how we were handling the COVID so far. I think we have proven that we are able to handle that. Whether there will be any further lockdowns, nobody knows. I think governments are making an effort, a big effort with some exceptions like Austria that introduced the full lockdown. But in most of the countries where we are present, the governments are making efforts to avoid lockdowns, to avoid damaging the economy in a big scale. So far, in spite of spiking in figures of the infections, they have refrained from introducing lockdowns. Now is the Christmas season. It's the best shopping season in the year. So very much so, I think the governments will make an effort to keep the retail working in the best time of the year for retailers and vendors in the shopping centers. So I think we hear encouraging news regarding the efficacy of the vaccine on the new variant, which is also encouraging. So I cannot commit to anything. But if I add all this together, I think what you can expect to see as an outlook for the end of this year from us is a continuation of the good performance that we have been showing in the previous quarters. So far, we have not seen or did not receive any indications to any negative valuation impacts. So that's what I can share with you at this point in time.

Office. There was a question about the office.

The office?

Yes.

Yes. The leasing has slowed down. Tenants' decision-making has been slower in the last 12 months. Tenants are hesitating to commit. To a certain extent, they are postponing their commitment. And I think this is helping us in maintaining our occupancy level because the tendency that we see -- because it's the easiest decision for them to make, is simply stay where they are and make -- prolong the leases that they are until they have better clarity on what comes next and how the office market will evolve, which is a big question. And there are, of course, views going in this direction and the other direction, and we can talk about that for hours. But the result is that for the time being, they are staying put where they are. And they do ask to see some more flex in possibilities within the buildings. And in that sense, we are introducing into our -- gradually into our buildings flex options, flex operators in order to accommodate the tenants. They like that. This is what they look to see in the buildings. I hope it answered your question.

Yes, it did. I just wanted to -- obviously, as you have said, no one knows what's going to come. But obviously, we're working with some scenarios. And maybe one more question from my side, if you don't mind. Can you give us a little bit of outlook for the NAV? And are you planning any other divestments into 2022?

So as you have seen from us, from time to time, we sell properties. This year, we have a big disposal in Serbia that we are about to complete. The year before, in 2020, even in the most difficult period of the pandemic, we also sold an asset. In the year before, in 2019, we sold 2 buildings. So every year, we look to recycle the equity and to make best use of it. And where we see an asset that reached its best performance and we feel that it cannot be improved or it's time to recycle the equity and invest it in a new project, we do that. So that's our policy that we implemented for quite a long time for many years, and we will continue. You asked about the NAV. So I think I touched on the -- what we so far expect to see from valuation. We have -- the growth in the NAV traditionally in our company comes from development profitability. As we mentioned in Q3 presentation, we have quite a significant pipeline for development that is envisaged within the next 24 months. This is around 100,000 square meters. Of course, the launch of this development pipeline will very much depend on the demand for offices in the leasing sector. And we are hoping to see the COVID situation relaxing, which will bring us back to normal times and increase the leasing demand. And we do hope also -- and I think in one of our previous presentations, we showed the gap in yields between our region to Western Europe, especially Poland versus Western Europe and Hungary, which are investment-grade markets. And this gap, we believe, should somehow be narrowed and result in yield compression. So this should also contribute to our growth of NAV. So I think this is what I can share with you. I hope this is answering your question.

It is.

This is Jakub from Wood. Maybe briefly from my side, a couple of questions. Can you elaborate maybe a little bit on the valuation that we just discussed? What's the feedback, if you have any initial feedback from the appraisers regarding this kind of year-end outlook? Do you already see any evidence either on the side of yields or maybe on the rents or ERVs that would indicate we should expect some movement this year following the substantial write-down, which was booked during last year?

Nice to see you. I think you have presented pretty clear, I mean -- and I want to say as far as of today, and this is the indication we have from our valuators, is that there has no significant changes on the yields, especially on the retail assets. There's no real market evidence of changing on yields. There have been a few transactions on our market, but it's not very -- it's not very representative. But it's still in the long range. So we don't see any significant changes. In respect of the expected rental values, I think that's going along with the leasing activity. And as Yovav pointed out pretty clear, the leasing activity has not been enormous in the course of this year as well all over the region because people are hesitating to move out and take new space or -- new space, I'm talking about the office side. And on the retail side, it has been -- actually, the last 6 months of the year has been very successful in terms of turnovers and the footfall. Footfall is coming back slowly to the pre-COVID times. And the turnovers are even, in some cases, higher than pre-COVID times. And of course, there is also some impact on the inflation regarding the turnover in the shopping centers as well. But we see a very positive outlook in terms of the retail side. So as I said, we are all expecting what might come out of the new variant. Hopefully, it will be resolved quickly and we can continue with relaxing the economy, but we don't see any significant changes.

No, understood. Then on the sale of Belgrade, can you comment a bit where we are at and whether it's reasonable to expect closing already until the end of this year or in the first quarter?

Yes. The closing of the Belgrade is progressing. We had some, let's call it, regulatory [ CPs ] or [ CPs ] that are dependent on regulatory bodies that are taking a little bit longer. And therefore, we expect to be in a position to close this deal probably in January.

Understood. So it's more of a regulatory nature to delay, not the counterparty pushing back or anything like that.

Exactly.

Understood. Then on the FFO front, we are at EUR 52 million, if I recall correctly, for the 9 months. It seems that we are en route to reach similar level as you had in 2019. Can you talk about the drivers of the FFO between 2021 and '22? I guess part would be the Belgrade sale but then also the acquisitions, maybe some changes driven by the CPI occupancy development.

To give you the flavor in ballparks, you're right on the direction of the FFO this year. The indication -- we also were giving some sort of indication to reach pre-COVID levels also in the call in Q3. The main drivers for '22, I'll say as we were probably -- we will have reduction on the FFO as a result of the disposal of Serbia. That's clear. However, that will be offset with the completion of Pillar, which should be coming in completion early next year, Q1 next year, and quickly accommodate the FFO on that side. We are on the progress also on the completion of Sofia Tower, also should contribute as well, but that will be on the second part of the next year. In addition to that, we expect an improvement on the retail side in terms of the income side, where the concessions as long as -- as far as we don't see any further lockdowns and assuming that we are seeing a more relaxing economy in terms of COVID that we should bring back that lost income in the course of '20 and '21 back to normal levels to 2019, and that will contribute also positively to the FFO. But I cannot give you an exact figure, and we usually don't give forward-looking statements.

No, understood. That's helpful. And finally, from my side, regarding dividends, assuming that the sale of Belgrade closes, this capital increase goes ahead as planned. And on top of that, in case the supply on the office markets kind of became maybe less in terms of volume of new buildings completed, the vacancy starts to stabilize, and you maybe kick off some of the pipeline developments. Under such a scenario, do you think that the company would have the capacity to return to paying out dividends? And if so, can you estimate what this capacity would be maybe as a share of FFO?

I think I can say the following. We have a long-term dividend policy, 66% of the FFO. It has been suspended for the last 2 years because of the risks associated to the COVID. And we were fortunate not to suffer too much from the COVID. We suffered but to a limited extent. That allowed us to apply the funds for acquisitions and development. And now we've been talking about it -- around it for the last 20 or 25 minutes. The risks of the COVID are still out there, and it's hard to assess how things will develop. We hope that our predictions or forecasts will happen as we foresee, that there will not be lockdowns and the vaccine will be effective and so on, but we're not sure. So as long as these risks are with us and we are not certain when we come back to normality, it's premature to talk about dividends. I think we'll have to assess the situation when we come closer to the time of taking a decision about that. So that's what I can say at this point of time.

Ladies and gentlemen, are there any more questions to the management at that point? I see no more questions. Thank you very much for your participation, and hope to hear you soon. Thank you very much. Goodbye.

Thank you.

Thank you. Goodbye.