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

Hello. Good afternoon, ladies and gentlemen. It's my pleasure to welcome you on the GTC 2021 results, which we just published in the morning. Thank you very much for your time and for joining us today. As usual, the presentation will be done by the CEO of GTC, Zoltán Fekete; and by CFO of GTC, which is Ariel Ferstman. Just as a reminder, the call is being recorded. We will put the recording on the website just shortly after the call. So whoever wants to have a second round, you're very much welcome. Now let me pass the floor over to Zoltán.

Thank you, Malgorzata. Welcome, everyone. I'm pleased to have the opportunity to present to you the achievements of the GTC in 2021. I would like to summarize Page 4 and -- 3 and 4 in our presentation. So 2021 was a very dynamic and successful year for us. We traded our assets on a big scale, shifting our portfolio to higher rated countries. We developed new assets, leased both retail and office space. We issued successfully our Eurobonds. We increased our equity capital, and all this was happening last year still in an environment which was heavily impacted by COVID. Our results showed significant improvement. Gross margin from operation increased by 8%. FFO increased by 11%. We also managed to bring down our LTV to 42%, while the average cost of debt decreased to 2.16%. This is an all-time low. And our average debt maturity was extended to over 5 years. I would also like to mention important number, 94% of our debt is at fixed interest or hedged into fixed interest. So higher inflation, we believe, should not impact us negatively on the funding side going forward. We also managed to keep our occupancy high. On the next slide, we'd like to mention the Eurobond issue that we launched last year. It was an important decision to switch from secured financing to predominantly unsecured financing. We are halfway through this process after we issued our Eurobonds, and we also issued 2 tranches of bonds in the Hungarian market. Altogether, we raised over EUR 660 million. Our bonds are qualified as green bonds, and we were successfully generating interest. Significant interest from investors. During 2021, we repaid over EUR 450 million secured loans and increased the unsecured debt of the company from 15% to 50%. We will also continue swapping the secured debt to unsecured going forward. So that remains our plan. Of course, we have to wait for the markets to stabilize, but we are not concerned or worried about the existing situation because the -- we currently have a low average interest rate and a good maturity profile on the remaining secured portion of our debt. On the next slide, I would like to mention 2 important events of last year. One was a capital increase and the other one was the successful disposal of assets in Serbia. The capital increase was very successful towards the end of last year. We managed to raise EUR 120 million at PLN 6.40 per share. That was an increased offer size and the equity will -- is helping us to strengthen our LTV, the capital structure and also fund future growth. In January this year, we closed the sale of the Serbian office portfolio. And this was also a very successful transaction, EUR 268 million. The valuation for the office portfolio. This included some old assets and some newer ones. And this also represents a very important milestone for us, because in Serbia, we basically completed the full development circle by investing in land doing construction. For many years, we enjoyed high rental levels. And in the end, we managed to sell successfully above book value. Zooming in on the office portfolio of GTC. We shifted the portfolio towards higher rated countries. We invested EUR 310 million in income-producing assets in Hungary. Additionally, we acquired several land plots in Budapest, Belgrade, and Sofia, which will help future expansion. And these plots will allow us to build another almost 100,000 square meters Class A green office buildings. Also, we were successful in leasing activity. We managed to lease over 117,000 square meters to reputable tenants, and we kept our office occupancy high at 89%. We are also proud to say that 88% of our OpEx portfolio is green-certified. On the next slide, regarding retail. The year was good despite some lockdowns in the first half of the year. Currently, all the malls are operational and all the restrictions are lifted. We also see retailers continue to expand. Our occupancy remained stable at very high 95%. that's actually higher than before COVID. And on the retail side, 88% of the retail portfolio is also green-certified. On this slide, we show how turnovers and footfall have evolved over the last several months from December 2020 until February '22. And I'm pleased to say that turnovers have been very close to pre-COVID levels. In some countries, in some -- shopping malls are actually even above the pre-COVID level, for example, Galeria Jurajska. We have a good performance, Galeria Pólnocna, 104% compared to Q4 2019. On the next slide. I would like to highlight that the gross asset value of the company is -- after the sale of the Serbian assets stands at EUR 2.2 billion, 86% of which is income generating. We are focused on offices, which comprise 63% of the income-generating portfolio. Active developments and land bank are at a safe 11%. If we turn the page, going deeper in our office portfolio. We have 37 properties, which generate an annualized in-place rent of EUR 84 million. And most of our offices are located in Poland and in Budapest. On the next slide, we show that we managed to lease prolonged leases. If you turn to Page 13. Yes. We managed to lease prolonged leases of 108,000 square meters over last year, and occupancy remains high in the office segment. This is a great achievement considering the COVID environment last year. We have very strong relationships with our tenants, and we have a good mix of multinational tenants. It's a well diversified tenant base. I would also like to emphasize that all our leases are euro-denominated and linked to European CPI. On the next page, we'd like to talk about green certification, sustainability. We also increased the certified element of our portfolio. 88% of our portfolio is green-certified, and the remaining 12% is in the certification process. Most of our certificates are -- over 90% are LEED Gold and above or BREEAM Excellent. On the next Page, I would like to talk about the development pipeline. Developments constitute approximately 11% of our portfolio, EUR 132 million. This include office properties in Belgrade, Budapest and Sofia. Of the space that is under development, 65% is pre-leased. We are working on some new exciting development projects, mostly in the office segment. And we are also moving forward on some mixed-use projects, where we experience significant demand. For example, we decided to convert our office project in Bucharest into a mixed-use project, so -- where we added a residential element ready for sale. And as you can see on the lower right-hand chart, we plan to launch development across the region. So we actually have a well diversified, geographically wider diversified development pipeline. On the next page. As of the year-end, we had just over 54,000 square meters on the development. We completed our flagship project earlier this year Pillar in Budapest. And it was handed over to the tenant in the beginning of March this year. So ExxonMobil moved in. That was a very successful project. We are also progressing well on our new Belgrade office project, GTC X, 17,000 meters. We are building. It's going well on schedule and on budget. And already 51% of the building has been pre-leased. We expect to complete this development before end of this year. We have a smaller development in Sofia, where we are building an office 8,000 square meter office element on top of Mall of Sofia. This will be completed before end of this year as well. And last but not least, we started the redevelopment of Center Point 1 and 2 in Budapest. It's a 40,000 square meter office building and we obtained a building permit on this one as well. On the next slide, I would like to talk about the element of the development pipeline, which is about to start or just recently started. In Zagreb, we launched Matrix C after successfully completing and leasing out Matrix A and B, which are almost fully leased. And we are also building -- working on a building permit in Sofia and ABC 3 and in Budapest on Center Point 3. And as I mentioned before, we are moving ahead with the residential component of Spatio. It's a project in Bucharest. And as part of our strategy to build back up our office portfolio in Serbia, Belgrade, we acquired a land plot earlier this year, Napred. And this should allow us to build 72,000 square meters, probably in 2 phases in the coming years. The market in Belgrade remains to be very strong. So with that, I would like to pass the floor to Ariel to talk about the numbers. Thank you.

Thank you, Zoltán, and welcome to the team. Indeed, like, Zoltán mentioned, we have a very successful year, with very strong figures. Just assuming a little bit on the income statement, we had an increase in gross margin of operations, around 8%, EUR 128 million versus EUR 119 million last year. The increase in the gross margin of operations was driven mainly by our significant acquisitions that we have done in Hungary mentioned by Zoltán previously. During the first half of 2021 with Universum, with Váci Greens, [ Heavy Deck ] and further assets, [ counter '19 ] assets that we acquired. We have several completions of our developments in Serbia with Green Heart, ABC 2; in Sofia, Matrix being Zagreb, which also contributes around EUR 3.5 million. And this was partially offset by the disposal of an office building in Budapest back in Q4 2020, Spiral. A very successful disposal, 20% above book value. Regarding the profit or loss from revaluation of the investment property, we present a very immaterial loss, EUR 130 million versus EUR 143 million last year, which was impacted by the COVID, mainly on the retail assets. Our valuations remain very strong. If we want to zoom in on those numbers, basically, we have booked a profit around EUR 5 million on our existing portfolio in Hungary, including several acquisitions that we've done recently as well, also where we valuate up. And this demonstrates the resilience of our Hungarian portfolio. And the reason why we have decided also to increase our presence there as well in the last 12 months. In addition, we have booked a profit of EUR 8 million on assets under construction, which today is completed, mainly Pillar. This was offset by a EUR 6 million loss on 1 specific asset in Poland, it's UBP in Lodz, which was as a result of an increase of vacancy. And the team on the ground is already working to relet and quickly recuperate that -- those leases that were lost. In addition to that, we have invested around EUR 20 million fleet out and capital expenditure all over our existing portfolio. And this is one of the key reasons also to -- first of all, to maintain our portfolio on a very competitive terms, Class A office building, green-certified and also maintain our very high occupancy all across the portfolio, 90%. On the finance cost, we also mentioned in previous calls, we had a slight increase 20%. This is mainly a one-off expenses. This was as a result of switching our financing policy from secured financing to unsecured financing. We post EUR 5 million related to early prepayment fees and breaking costs on hedging instruments on our secured financing. In addition, a noncash item, which was released related to the release of deferred origination costs related to secured financing, EUR 2.5 million. Overall, we had posted year-end profit, very strong, EUR 43 million versus a loss of EUR 71 million. On the next slide, you can see our balance sheet. Again, a very robust balance sheet at the end of the year, very strong figures. We have managed to increase our investment property, around 5.5%, which is driven mainly by the significant acquisitions we have done in the Hungarian market, which will also contribute to an increase on in-place rent on an annual basis, around EUR 19 million. So you will see the impact on the numbers in the upcoming quarters as well, impacting -- because we don't have the full figures for the full year in 2021. In addition to that, we invested over EUR 300 million in cash generating assets, over EUR 60 million in our current development pipeline. And this line was offset, as mentioned by Zoltán, by a reclassification of our total office portfolio in Belgrade to asset held for sale and was completed early in January, which completed the transaction, freeing up around EUR 134 million cash before taxes. We have finished 2021 with a very strong cash position, excluding deposits close to EUR 100 million. If you take a look on a pro forma basis, there were 2 main events that also Zoltán mentioned before, capital raise and the disposal of the Serbian portfolio, will bring us our cash position to even a higher cash position we have at the end of last year in EUR 134 million release free cash from the -- before taxes on the Serbian disposals, plus EUR 120 million cash, which was increased -- it was as a result of the increase of the capital, which leave us with a very strong liquid position to seek further opportunities to deploy our capital. In the next slide. This is the debt overview. We had a very active financing year, very active. We accelerated the process of shifting our finance structure from secured financing to unsecured financing. We start at the end of 2020 with the first round of bonds in the Hungarian market, EUR 160 million, very successful, and then we do another round in March, also on the back of a very strong rating that we got from Scope, investment-grade rating. And that put us in a very good position to our -- the view with Eurobond, very successful transaction, which also obtained investment grade from Fitch and very strong rating from Moody's as well. So that allow us to -- all that raising on those bonds in total, EUR 660 million in the last 24 months allow us to decrease our funding cost to a low record of 2.16%, increase our healthy maturity profile to over 5 years, increase our encumbered properties from 9% to 45% and allow us to gain flexibility on our cash flow management and release heavy cash reserves related to secure financing. As you can see, we present a very healthy coverage ratio 3.6x. And also, we managed to decrease our LTV to 42% through the disposal of the Serbian office buildings and the increase of capital at the end of the year. 95% -- 94% of our total debt. it's either hedged or fixed, which is enabling us to have a very well position in the event of potential increase of funding costs. On the next slide, Slide 23, on the cash flow. You can see our cash flow. I mean, cash flow statements, especially on the operational side. We have an increase on the operational cash flow, a very strong increase. Also, you will see it also on our FFO, increase of 11%. This was driven mainly by the acquisitions in Hungary, the completions or developments in Belgrade, Sofia and Zagreb and the improvement of our -- the performance of our retail assets in comparison to 2020, which were diminished by the impact of the COVID. With this concludes our presentation, and Malgorzata, we're open for questions.

[Operator Instructions]

Zoltán, good luck in the new role.

Thank you.

Maybe a couple from my side, if there is no one else in the queue at the moment. I was looking through the presentation, I saw that you made some upward adjustments to the budgets for some of the development projects in the pipeline. I was wondering what does this reflect? I mean, is this kind of a view as of the year-end? Does it also reflect some of the events which took place since the end of the year? Should we expect any further adjustments? And maybe more broadly, can you comment on the evolution of the cost of materials and other input costs that could be affecting you going forward?

Sure. Which adjustment do you have in mind, specifically?

We slightly adjust our budgets in our potential development pipeline, and this is as a result of the -- if you're mentioning -- Jakub, you mentioned Center Point 3 and the projects on the development pipeline, right? Mainly Center Point 3, and I think we have adjusted a few more assets there. This is in line with the trends of the increase of construction costs, but goes in parallel also with increases expected rental values at the same time. I mean we have adjusted, but it was a slight adjust, but this is in line with the expectations or at least the indications from the market that we have received. But I don't know, if you, Zoltán, if you want to...

No, no, no, just go ahead and I will...

So basically, we have revised certain budgets and certain developments. And this is, I think, it's a trend that we are facing due to the inflation pressure also on the markets. Raw material increase of cost, but at the same time, we are also carefully watching the income side as well to make every business plan visible. And we're not rushing to launch any further developments until we have a full picture of the top, either the cost side, the income side and also the potential disposal of the asset or not disposal of the asset in terms of the market. One good example is we launched Matrix C at the beginning of Q1 2022. And we managed to keep the budget more or less on the range of the single digits and we secured a turnkey agreement with the constructor. This was prior to the work in Ukraine, but allow us to launch the project and we were very confident because we see a very strong pipeline of potential leases. And at the same time, we are even working on the permitting of the Matrix D because we are very confident regarding the potential lease up and the fact of the -- that we have very successful lease-up Matrix A and B. But I don't know, Zoltán, if you want to add or something.

Sure. Basically -- well, first of all, our most important project was completed, which was Pillar, ExxonMobil building. So that was completed on time, on schedule, on budget. The GTC X -- basically, there are 2 projects, one in Belgrade and one in Sofia, which is currently in development. And there were some adjustments, but now they are on schedule. And obviously, in a development project, you always keep updating the budgets because you have to adjust to external circumstances. But on these 2, which are actually in the construction phase, you don't expect any further changes. So it will be completed this year. And the pre-leasing numbers also show that there is good demand in the market, strong demand in Belgrade. In Sofia, we are experiencing some delays because people had -- were coming back to the office until recently at a much lower pace than, for example, in Belgrade and Zagreb, but now it is changing as well. And actually, we do experience international tenants becoming more active lately in the last couple of weeks already. And on the other developments, they are still not in construction phase. So obviously, as the projects advance, you always fine-tune the budget. Now regarding the other part of your question, how raw material prices will impact, potentially, obviously, it's hard to tell. If you look at the price of steel, for example, just in the last couple of weeks, increased by 30%, 40%, for example. Obviously -- well, first of all, we believe that these are temporary disruptions right now what we are experiencing. And in the development cycle, you have more time to wait, whether there is a real impact. The general, of course, issue about inflation, which keeps coming up, I guess, for all companies you follow. It's part of our daily life, how to plan for that. The good thing is that being in the real estate and office leases, we have 100% of our leases CPI indexed. So we are in a good position to push through these impacts and the inflationary pressure. And on the other hand, when it comes to development, we are progressing with such projects where we see good demand, either on the rental side or with some residential projects, there is demand on the buyer side.

That's helpful. If I can also ask you on the energy cost side. Do you happen to know how on average are the utilities contracts for your tenant structured? How sudden or gradually is this increase in the energy cost going to be feeding into their kind of monthly bills? And to what extent is this going to be affecting for either the office and sort of retail tenants, the total amount which they need to pay? I mean, is there a certain fixed period for which you secured prices? Or are the increases in prices, which we are seeing now in the market, going to be feeding kind of more immediately to the price for tenants.

Well, our leases are -- obviously, we managed to -- well, we are in a good position to push through those increases to our tenants. Of course, we do it annually through annual reconciliations. And that may have an impact on realizing those higher costs. But ultimately, we are in a good position to be able to push through those higher energy costs to the tenants. It's part of the lease agreement.

In addition to that, Jakub, we usually have a policy to try to secure energy prices in advance, 2 or 3 years in advance, depending on the market we are present. Now at the same time, those contracts are coming to an end. And sometimes even energy companies try to open those contracts as well in case of huge deviations as well. So we cannot rule out that eventually, they might want to open that as well in case we have a fixed term for 1 or 2 years in these times. Like Zoltán mentioned, all our leases are fully reconciled in that perspective. The tenants itself, in their premises, they are paying their own electricity, so they had the old meters, so they have their own consumptions. So -- but we -- they are being charged -- although the common areas, mainly, is being -- the discussion how we transfer those costs. I'm believing that every tenant will have to do their own calculations regarding what might be the operational cost to maintain an office by themselves, but everyone understands where the environment we are living with high inflation prices and prices going higher. Not only -- energy is going higher, also salaries and wages are also going higher as well. But from our perspective, contractually, we are covered because we can reconcile. And in the shopping center, it will be case by case. But also at the same time, we have done a lot of -- we have taken a lot of steps on the shopping centers and also in our office buildings in turn to invest -- to have -- find alternative ways to secure energy or to reduce the consumption of the energy through our green certifications as well. So that will also allow us to maneuver somehow and minimize the increase of costs from that respect.

And just 1 other thing, just to put it in perspective. Of course, fully appreciate your question, but we have to remind ourselves that we've gone through a COVID period when retail shopping malls were closed. Offices, tenants were not occupying and we went through that period with success if you look at the numbers. So I don't think that we would have a big problem, basically, realizing the higher energy cost with the tenants. So obviously, it's part of our business that we have to manage.

Sure. That's a good point. Could you also briefly talk about the leasing of offices in Bucharest? And how soon do you expect to kind of source new tenants into the buildings?

Well, obviously, it's a big issue for us because in City Gate, we lost 2 tenants in the -- during last year. So basically, we are working hard on filling those space. Basically, COVID didn't help us. Now we see some increased interest from potential tenants. And in the last couple of weeks, this has been happening. The Ukraine situation doesn't help in that respect. What we see that people or corporations are holding back some decisions. But our target is to lease out the space during this year. And the property is a good one. Location is good. It's a part of Bucharest which is developing, but it's obviously a task that we have to be able to complete this year.

Is it possible to indicate whether we should expect the rent levels broadly in line with the levels we have been seeing prior?

Yes. Of course, new tenants would have -- without contributions, rent freeze as usual. But I don't see a major decrease on that one.

And maybe more broadly, I mean, appreciate that still, it's quite early to understand all the ways the geopolitics will impact the economy and kind of what direction of all the rates stake, et cetera. But if you're thinking about the business from a kind of more broader strategic perspective and maybe with a specific focus on the balance sheet. I mean, how does the current situation kind of affect your assessment thinking, for instance, about LTV or about disposals, acquisitions, would you, for instance, see that LTV in the range of 40%, 45% would be still in line with investment-grade rating? Or would you now need or see some sort of urgency to maybe push it lower because of the increased external risk environment. On the other hand, I appreciate that the interest rates are fixed and the maturity profile is quite benign after the work you have done last year.

Yes. Look, on my part, what I would like to, in general terms, first of all, I think we are in a very a healthy position in terms of balance sheet, asset-based occupancy, funding levels mix, debt equity mix. So it's a good position to have a cash position as well. It's -- I think -- I'm very comfortable with this position. This is a good base for further growth. And of course, the perception may change, but I don't really see the reason why, rating-wise, we should suffer from that because our fundamentals are strong, occupancy levels are strong. So if you look into the very situation, what we have, we are in a strong position. Now we also see activity on the investment side. So potential disposals may happen. We also see -- on one hand, you see concerns because of potentially, geopolitical situation. On the other hand, you see the inflationary pressure on investors. And I'm sure you see in other situations as well, there is an active investment market. People are looking to deploy cash and if we are approached to sell some assets at a good valuation, we are open to trade our assets. So that can also increase our liquidity. We are also looking at acquisitions, of course, because we -- there is no point keeping such a high level of cash. So we are actively trading our assets and I see a good environment for that. And perhaps, Ariel, you want to comment on the rating question?

No, I think you summarized very well. I mean, the fundamentals are still strong. I think even on several calls that we have with rating agencies, especially, they praised our diversification in terms of the portfolio, the country-wise. The fact that we have shifted our portfolio into investment-grade countries such as Poland and Hungary, predominantly. If you see on the portfolio, over almost 70% of our portfolio is in those 2 countries. The successful disposal of Serbia demonstrate the liquidity on those markets that at certain point, rating agencies were questioning whether the liquidity exists or not. Zoltán mentioned also potential disposals that we might be looking at. Also -- that will also would always like to demonstrate liquidity on every market that we're active, and I think in that perspective, we're in a good position. I don't think we have to sacrifice leverage for growth. That will be my -- the bottom line, Jakub.

Ladies and gentlemen, are there any further questions?

It's Cezary Bernatek, Erste Group. So 2 questions from my side. First one, kind of not that much into operating activity. I just wanted to ask about the recent changes to the shareholding structure. So basically, at the beginning of March, the GTC Dutch Holding sold like 16% to Icona Group. Basically, now it's holding below 50%. I understand that they are about to cooperate somehow, work in cooperation, let's say. But could you, like, give some more clearance about the reasoning and the potential consequences for the operating or activity or the strategy? So that would be the first one.

Sure, with pleasure. So Icona is an investment group with some reputable names and investors in them. Icona does not have anything in our region, in Central Europe, and they see a good growth potential in GTC and good geographical exposure, I believe, higher yield the investment can generate and therefore, decided to acquire 15% and they have been acting in concert agreement with Optima. And there is no impact on the daily operations expected. I think it's a good recognition of GTC's current market potential. It's potentially also a recognition of the undue discount to NAV.

Okay. And the second question is concerning the acquisitions of office buildings and this mixed-use project in Hungary. So as far as I'm concerned, we know about, like, 3 complexes that were acquired in May. Could you give some more color on the rest of these acquisitions about the projects acquired?

Yes. There were a couple of -- or first of all, major standing assets in Budapest. It's the Ericsson and Siemens office complex, very good yield. It's EUR 160 million acquisition, good tenants and strong cash flow generating...

EUR 9 million.

EUR 9 million annual revenue. And there were minor smaller projects, which we acquired and which create development potential in Central Budapest, mostly also in the Váci Corridor district, like, a project on Váci we are working on. It's -- we are considering that as a mixed use development office and resi for sale. That's a project that would allow us to build about 55,000 square meters. So these are good additions to our development pipeline.

Ladies and gentlemen, if there are no further questions, thank you very much for your time and see you in May on our Q1 results. In case you have any questions in between, I'm more than happy to help you out.. Thank you very much. Goodbye.

Thank you.

Thank you. Bye-bye.

Bye.