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

Good afternoon, ladies and gentlemen. Welcome everybody on GTC's H1 2022 Results Call. It's my pleasure to introduce Zoltán Fekete, the CEO; and Ariel Ferstman, the CFO. As usually, we will start with a short presentation done by the management Board members, followed by the Q&A session. The call is being recorded, and it will be placed on our website. We will follow the presentation that was also posted on our website. Thank you very much, and let me take -- let me start the call passing voice over to Zoltán.

Thank you, Malgorzata. Welcome, everyone. Let's start with the presentation of the H1 results, after which we will be very happy to answer questions. So I'm happy to report strong financial results for the first half this year. Revenues increased to EUR 84 million by 6%. Gross margin went up to EUR 62 million from EUR 59 million. EBITDA grew to EUR 53 million. FFO increased by 7% to EUR 34 million compared to the same period last year. Our EPRA NAV currently stands at PLN 10.8 per share compared to our current share price of PLN 6.9, which represents a 40% discount to NAV. LTV stays at the projected 42%. Our occupancy remains high at 89.4%. We have a strong cash position, EUR 250 million on our balance sheet. We also had available credit facilities in the amount of EUR 94 million. So I can summarize that we are continuing to have a strong financial position with strong cash-generating capability. If you turn the page, I can also report that they had a busy quarter in the second quarter of this year on the transaction side. We closed the disposal of an office building in Bucharest, Cascade, that has a value of at EUR 10.1 million in Bucharest. This price is in line with book valuation. We signed an SPA for our office building in Debrecen, Hungary, slightly above book value. We expect to close this transaction in Q3 this year, which should result in a cash revenue in the range of EUR 48 million. We also signed an FCA for Matrix A and B in Zagreb, 7% above book value. This is a EUR 52 million valuation. And this valuation represents a return on cost of over 22%. I think it's important to mention here that, first of all, these transactions demonstrate that we can trade our assets even in illiquid markets, even under difficult circumstances. In some cases, we sell aging assets like the Cascade building in Bucharest. And with that, we improved our ESG profile. And on other occasions, we are -- and in fact, on all occasions, we demonstrate that we are selling assets at book value or higher. Therefore, the discounts to NAV on the share price is not justified. And we intend to continue to do these deals, stay in touch with the market and in some situations, even create liquidity in the market. I think it's very important. We also commenced in the second quarter this year, the development in Zagreb, Matrix C. As you will see later, the leasing activity on that building is going very well. And we also -- we can also report a significant increase in leasing activity. We managed to lease 52,000 square meters in the first half this year compared to 24,000 square meters in the first half of 2021. If we turn the page to the retail side of our business, I can report that we are back to pre-COVID levels. We are seeing a positive trend in all shopping malls. Footfall is growing, and turnover exceeded pre-COVID levels. Just to give you some numbers, in the first quarter -- sorry, in the second quarter of 2022 compared to the same period in 2019, we have 13% higher turnover. And if you compare the first half this year to the first half of last year, the increase is 40%. And just to give you the most recent data for July this year, turnover exceeded the turnover of the same period in 2019 by 12%. On the next page, we have some data specifically broken down at the bottom of the page per month and per shopping malls that we have, and we are comparing 2022 data to -- on a monthly basis to 2019. As you see, in Poland, the shopping malls are performing above -- in some cases, well above in the case of Galeria Jurajska, 26% higher in July. And in Serbia, Ada Mall is performing significantly higher compared to 2019. And in Zagreb and Sofia, we are close to the levels of 2019. Moving on to the breakdown of our portfolio on the next slide. Our portfolio hasn't changed significantly. We have a gross asset value of EUR 2.3 billion. 88% of this is income generating. We are focused on offices. They represent 65% of the income-generating portfolio. We have active development and land bank that represents 12% of the entire portfolio, and 88% of the portfolio is green certified and 93% of the portfolio is located in EU countries. So there isn't much change. There's no change in this respect in this quarter. If we move on to the development side of our business, we have a moderate EUR 76 million in projects under construction, and 91% of this is in the office segment. Just looking at the actual projects on the next slide. Of the existing developments, which we expect to complete this year and up to 2024, we have 50,000 square meters of Class A office space under development. And these developments are expected to generate additional revenues of EUR 10.2 million. Zooming in on the actual projects, GTC X in Belgrade will be completed in Q3 this year, on schedule. This is a 17,000 square meter office building. The pre-lease level on this building is at -- currently at 72%. So basically, by the time we complete, will be more or less fully leased. Sofia Tower will be completed by the office building in Q4 this year. This is an addition of 8.1000 (sic) [ 8,100 ] square meters. 31% of this building is pre-leased, and there's an additional 50% under advanced negotiations. Matrix C in Zagreb that I mentioned, it's a 10,000 square meter office development, which we started earlier this year. Roughly 50% is already pre-leased, and we expect to complete this development in Q3 2023. We also started the redevelopment of Center Point 1 and 2 in Budapest, and we are making progress on the leasing side as well. And also, we are progressing with the redevelopment of Rose Hill Business Campus in Budapest. If we move on to further out in the future, on the development side, we have plans for an additional 118,000 square meters office space and 22,000 square meters of residential space. These projects are in the preparatory phase. The obtained building permit for Center Point 3 in Budapest. We are working on the building permit for ABC III in Sofia. We expect to receive the building permit for that building in the coming weeks. And we are also working on the building permit for the residential component of project in Bucharest. The project is called Spatio. And we are continuing to work on the architecture of concept on the Napred office development. It's a 72,000 square meter office space development in New Belgrade. And you probably remember in January this year, we closed the sale of the entire office portfolio in Belgrade. And we intend to build and replace with new buildings and continue to invest in the bank rate market. So on that note, I would like to hand over to Ariel to discuss the financials in more detail.

Thank you. Thank you, Zoltán. Good afternoon, ladies and gentlemen. So we -- as mentioned by Zoltán previously, we have a very successful operational first half of the year with very strong figures. As you can see it on the screen, we end up our first half of 2022 with EUR 62 million gross margin versus EUR 59 million like-to-like, which is an increase of around 5%. In spite of the disposal of our office portfolio in Serbia, we continue to grow our operational numbers, and the growth is mainly driven by the acquisitions that we have done -- the significant acquisitions done last year in the Hungarian assets such as Universum, Vaci Greens, Váci 188, which are contributing around EUR 8.3 million. In addition to that, we completed early in Q -- sorry, by the end of Q1 2022 Pillar, which is contributing around EUR 700,000 for the first 6 months. However, on an annualized basis, this asset will contribute around EUR 6 million. And you don't see it here, but you will see in the upcoming quarters, the full amount. There are some incentives that are being basically booked at this moment. In addition to that, we have a very strong results on the Retail assets shown by Zoltán before with -- on all of our cross over 13% increase in turnover, which is reflected also in our NOI as well, and that contributed to an increase on the like-to-like around EUR 3.3 million. This was offset, as mentioned by the disposal of our all entire office portfolio in Serbia early this year in the amount of EUR 9.5 million. In addition to that, we have a very strong quarter in terms of the revaluation of our assets. This was EUR 16 million, post in the first 6 months of the year versus EUR 1 million loss last year. If we zoom in on this line, basically, the profit from revaluation was driven by the very successful pre-lease that we have done in Serbia and the completion of the office building in Pillar. Just to remind you, Pillar is today 99% occupied, and GTC X shall be fully let by the time that we complete the asset in the course of the end of Q3. In addition to that, we have posted a EUR 3 million uplift on the value of Matrix ANV as a result of the signing of the sell and purchase agreement, 7% above book value. And this transaction is expected to be closed by the end of Q3 or early Q4 this year. This was offset by EUR 3 million loss related to the investment in CapEx and fit-out on our existing portfolio, which allow us to keep our high occupancy all across the portfolio as presented before. On the financing costs, I'm happy to report that the decline in financing costs. And finally, we have seen the heavy work reflected on the last year, switching financing policy from secured financing to unsecured financing, 15% down, although mainly attributable to one-off due to the refinance of those expensive loans for the euro bond that we issue back in the summer of 2021. But if we zoom in on that line, we have a 7% decrease in interest expenses, which is against the trend that is on the market today. And just to remind you that over 93% of our total debt is either hedged or fixed, and we have -- in a very good situation to basically mitigate any potential increase of interest rates that we've seen today in the market. Overall, we end up the first half of the year with a very strong net profit of over EUR 41 million versus EUR 21 million as -- and driven mainly by the elements that I've discussed before. On the next slide, on the balance sheet, as you can see, we have a very still -- we have a robust balance sheet. We end up with almost no changes on the investment property in spite of the disposal of an office portfolio in Serbia, earlier this year. There was a lot of transaction activity also there in the first half of this year with some acquisitions that were done, especially as Zoltán mentioned, the acquisition of Napred, EUR 34 million. We heavily invest also in our development in order to -- which they are all on budget and on time, especially in Pillar GTC X, in Sofia Tower and Matrix C, around EUR 30 million. And this was offset by the reclassification of 4 assets, which were reclassified by the end of June 30 to asset held for sale, Matrix A, B Forest in Debrecen and Cascade, which was already closed early in July. We have finished the first half of the year with a very strong cash position, EUR 272 million. In addition, we have also our available credit lines, EUR 94 million. So we have a very strong liquidity position. And this was driven mainly by the successful disposal of our Serbian office portfolio and also the registration of the capital raise done last year. In the next slide, we can see our debt metrics. Total outstanding debt, EUR 1.3 billion. Very healthy weighted average debt maturity, 4.5 years. with still with a very low record 2.16% weighted average interest rates and very conservative net LTV, 42.1%, still with a healthy annualized consolidated coverage ratio increased in -- versus December, 3.7 versus 3.6x. And we have an increase of unencumbered properties in the -- from 45% at the end of December versus 52% back in June. As you can see on the right side of the slide, we have a very healthy debt maturity profile with almost no loans to be recycled. We have some bonds, we are maturing by the end of this year, EUR 15 million and early next year, another EUR 15 million -- [ EUR 16 million ]. We have the cash available for that repayment -- it's in the balance sheet and you see the numbers. And so moving into the next slide. Okay, yes. So basically, just to point out, as I mentioned before, we ended the period with EUR 250 million plus cash held for sale to EUR 72 million. Very strong position at the end of the year. And now what we will do is basically, we will open for Q&A session, and then we will move to -- regarding the results and the numbers we are presenting, and then we will continue our presentation regarding the strategy.

So ladies and gentlemen, do you have any questions regarding the presented results, please ask them now.

This is Jakub from Wood. On the results, I wanted to ask on the vacancy. In some of the office markets outside of Budapest, it is elevated. Can you talk about the leasing market? How do the rent levels in new leases you are discussing compared to the levels which were in place before in those premises? And to what extent do you think it may be possible to pass the indexation into the new and renewed contracts in during 2023 in the office markets that you operate in?

I think it's important to mention that all our leases are indexed, so indexation should go through automatically. Of course, when we see inflation levels at this level. So it's -- we prepare ourselves, it's not going to be easy. But we, in the past, managed to cope with challenges during COVID. I'm quite confident that we will be able to pass through those rates in the leases. As for the leasing activity, we have -- whilst the overall occupancy level remains high, the areas where we can identify challenges is Bucharest, City Gate, we have to focus on -- we have actually increased -- we see increased leasing activity interest. And I'm quite confident that we will be able to lease at the levels that we were realizing before. And also, we are -- we have some challenging situations in regional cities in Poland, and we're also working closely with potential tenants for those spaces. So of course, there are always challenges, but our track record shows that we are able to cope with these issues. So -- but to give you an answer in short, we are looking to maintain the lease -- the levels as what we said before.

That's helpful. And maybe 1 additional question. Even though this may be more appropriate in the strategy section, can you briefly talk about how is the tightening cycle by the ECB affecting your thinking on leverage? Also, in the context of the dividend, I mean, would you still see LTV at around 40% as an appropriate target to aim for? And I mean, is there a certain level of LTV where you would see it as appropriate to maybe think about discontinuing or limiting to dividend try to bring the leverage down?

With the 42% LTV, I think we are in a comfortable position. Of course, 40% would be even better. But I don't think that we are in the situation that you have to revisit or change the kind of the dividend expectations that we lately in the last EGM proposed and approved. So I don't think that the LTV consideration have or will have a significant impact or any impact on the dividend, mainly because our cash generation, as you see in the results, is -- actually, we are growing -- looking to grow FFO compared to last year, certainly maintained. And therefore, I don't see the reason why it would have an impact. In general, by the way, I think it's important also to mention that our borrowing costs are almost 100% fixed at very low level, actually historical low level of 2.16% fixed. So it gives us actually a great comfort. And also considering the average maturity of our debt over 5 years, I think we will be able to benefit from this position in the coming years.

Are there questions regarding the results. As there are no questions, we will continue with the presentation. So...

So on that front, I just would like to talk about some recent change in development addition to our strategy and which we published a few weeks ago. And it's important to start with saying that we are not talking about changing our existing cash flow generating business, our traditional business, which offices retail. So basically as we intend to keep that. We intend to keep the strong cash flow generating capability that we have. On the other hand, the current macroeconomic environment will produce, we believe, interesting opportunities. And considering that we have significant amount of cash on the balance sheet, and we also believe that we can raise more, we are considering or we have made some steps to transition into a more exciting profile by adding some new investments that we managed to identify in the market and new areas. These new areas, as we previously mentioned, they are all real estate based. These should have higher -- to produce higher sustainable growth for us compared to our existing traditional real estate portfolio. We also expect the returns should be at least the same or higher than the existing real estate portfolio that we operate. We also believe that these new segments are -- will be resilient to turbulent market conditions. And we also believe that we can create structures that we can raise dedicated funds, for example, for third-party investors. We also believe that the new areas should be addressed through dedicated management teams who have experience in these sectors. So the 3 areas we are looking at and we intend to complete transactions in the near future in these -- all these areas, is -- one is innovation and technology parks, innovation centers. The second is renewable energy, solar, wind, power generation existing revenue-producing power generation capacities that we can actually sell to our existing tenants. And we can actually, through our existing capacity or power generation capacity, we can lock in actually good prices that our talents could benefit from. And also, we are looking at PRS development initially primarily in the Polish market. So these are all new areas we intend to address and tackle through transactions. And one transaction that we already announced a few weeks ago, is an investment in an innovation campus in Dublin -- outside Dublin, where we have a facility, which is a fantastic location, 15 minutes outside Dublin. It's a site sitting on top of the fiber optics network arriving from the Atlantic from the U.S. This site has 72 -- this is a 72-hectare side, 34-hectare of which is undeveloped. And we intend to develop this campus into a life science and technology campus, which would elevate the revenue potential significantly for this property. Why Ireland? It's a center for major tax firms. This location, for example, is just 5 minutes right from Intel's largest production facility outside the U.S., which is a $33 billion investment and all the major technology firms are present there. So that's really a center of technology, and we believe that there is long-term growth potential in that market. We are also, as mentioned, planning to make some transactions in the field of renewable energy. These days, I think it's also obviously a real estate-based business. Returns on equity are actually higher than our existing business, and we believe it's a good addition to our core business. If we add up -- and PRS on that front, we believe, we can also raise dedicated funding from third-party investors, and GTC would not have to invest cash, but at the same time, a significant amount of cash. But at the same time, we have some very exciting sites like Wilanów in Warsaw or some other locations, which can be suitable for res-for-rent development. So that's where we would also like to speed up the -- our execution capability in this sector. So just one other step, if we move to the next slide. Obviously, these new investment opportunities also require further capital. And we believe that we can issue more equity in the coming weeks and months. We completed 1 equity raise in December last year, EUR 120 million successfully. With our new strategy, we believe that we can create a platform for those investors who realize that we actually provide safe haven against inflation with the investment opportunities and the existing cash flow that we generate. And unfortunately, we have a low liquidity in our stock. So we also have to create the transaction so that those new investors can also participate and we believe we can generate demand despite the difficult market environment. Potentially, we could actually buy back bonds. So that's a potential another use of proceeds. Bonds are trading at low levels. So that's also a potential area we could invest. The target size of the capital raise is in EUR 150 million, EUR 250 million. And obviously, we also believe that we can generate the same return on equity on the new capital that we raised as before or even higher. Thank you, and we would be open to any questions on this topic.

Ladies and gentlemen, we are opening the call for the Q&A. So if you have other questions regarding the strategy, this is a good time to ask them.

This is Jakub from Wood again. If there are no other questions, then I would have 3 more on the new strategy. First, on the investment in Ireland. Can you maybe elaborate at least in rough terms, the expected economics of the deal, including the rough level of the prospective future CapEx that you may commit to this project over the first 3 to 5 years? Because I understand that initially, the yield is lower than what your current portfolio is yielding. So the potential there is in the redevelopment, right?

That's correct. So we are planning to implement a major redevelopment on that plot that requires some permits. And at this point, I wouldn't like to go too much into detail. But in terms of revenue potential, I think we could generate significantly higher revenues. Once it's completed, we will see in the next 12 to 18 months if we manage to achieve that. And of course, we report to you as soon as the milestones have been achieved. As you see from the size of this plot, 72 hectors, it's a huge possibility fantastic location. We have great ideas. But obviously, to put a number on the future revenue uplift, I think it's a bit early to tell. But certainly, actually, we are very confident that we will be able to achieve a significant upside. In terms of future capital investments, we are investing EUR 150 million. Our commitment or expected further investment is EUR 7 million in order to get to significant milestones. So no major or significant further capital investment would be required at this point.

Maybe a follow-up on this. I understand that the permitting part is, I mean, inherently uncertain. If and once the permit to go ahead with the project which you envisage is granted, can you indicate what kind of time frame could we be looking at? Again, just there roughly some initial estimate between the permit is granted and between the kind of redevelopment or the first phase of the redevelopment may be completed. How long could it take?

Well, we assume 12 to 18 months to get to permit, actually, that will create a position where -- but so we can put more precise numbers and projections. So it will not be that long so that we can disclose more about that, and the development phase after that would be 5 years. So it's a long-term project. You can also conclude about the size of that plot. And we expect that at that point at the back of the long-term lease agreement, we will be able to finance this development with third-party funding. So we would not require a significant amount of capital from our part. And so obviously, this is a long-term investment. In terms of valuation uplift, I think once the permit is obtained, we will have -- we can realize significant so it will not take 5 or 7 years or 6 years to achieve that. It will be after the permit is granted, the large part could be recognized. In terms of lease agreements, I'd like just to share you more details on that. I mean, in this segment, we are looking at 15 to 20 years, those markets are slightly different in terms of potential tenant, we are talking about the global players in the technology sector, but it's a completely different dynamics.