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

Good morning, ladies and gentlemen. It's my pleasure to welcome you at the GTC Call. We are presenting today 2022 results. The conference call is being recorded and the recording will be published on our website. Let me turn the voice over to Zoltan Fekete, the CEO of the company to start with the presentation.

Thank you, Malgorzata. Welcome, everyone. I'm pleased to meet you and have the opportunity to speak about the full year results of GTC. And also, before I get to the numbers, I'll talk about another announcement that we made about expanding our management team. And I'm very pleased to introduce Barbara Sikora, who is joining us as CFO at GTC. And I will ask Barbara in a while to say a few words about herself, introduce herself. Ariel Ferstman is moving into a more dedicated role, into transactions, M&A and exploring opportunities, growth opportunities in the market. And just to give you some background why we are making these changes? And if you probably noticed, for the last 2 years, we've been more active when it comes to transactions, when it comes to exploring new opportunities, diversifying our business. And we also entered the Eurobond market. And we did capital raise, a lot of -- a lot of things that was led by Ariel. And since we continue to be active in the marketplace, explored the opportunities, we also felt that we need to strengthen the team. And this is why Barbara joined us and Ariel will continue to focus on M&A/transactions, capital markets. And Barbara's role will be, as CFO, to the in charge of accounting, auditing, financial reporting, controlling and everything that the job involves. So I would like to ask Barbara to briefly introduce herself.

Thank you, Zoltan. Hello, everybody. A great honor to present myself. In a nutshell, 23 years in financial positions, starting from audit, financial management, controlling, asset management through CFO and CEO positions. More than 18 years in construction and real estate, starting from such companies as Arthur Andersen and Ernst & Young, through General Electric, Budimex, [ in-bred group ] through Atrium. The biggest one, I would say, Griffin Real Estate, the longest, the most exciting one. In terms of interesting projects completed that I was in charge of, I would say, start off with a team -- a big team was to set up, run and finance residential for rent platform with Griffin Real Estate. The others to mention, I would say, acquisition, sales, tax projects and a lot of financing. So I believe there is nothing I haven't really touched in the finance. Well, I think that's the most important part.

Thank you, Barbara. Thank you.

Thank you.

In the future, obviously, you'll have the chance to talk to Barbara directly. She [Technical Difficulty] and we're ready to start the call with this news. Turning to the results. I would like to ask Malgorzata to start the presentation. Thank you. 2022 has been another active year for us. As we discussed before and as you also saw in some transactions, we are in the process of partly a strategy shift, expanding the strategy of GTC, moving into new areas, diversifying into areas like digital, technology-related investments. We are also exploring possibilities in the field of alternative energy in a way. It's also the real estate business with very good returns. We are also exploring the possibility in the field of BRS. And we are also looking at possibilities investing in Europe, so geographical diversification is also on the cards. Actually, this whole strategy started when the Serbian portfolio, office portfolio, was sold. This deal only closed in January last year. So the result of that has only shown --started to kick in, in 2022. And this -- just to remind everyone, this transaction, which was a EUR 267 million sale of the partly hedging office portfolio in Serbia in Belgrade, allowed us to, in a way, receive investment-grade rating to issue -- to make a very successful Eurobond issue in 2021. And we benefit from then, if we look at the financing cost, 2.2%, which is a great thing to have these days. And it's really the result of the hard work that was done. And at the same time, it shifts focus in our portfolio to investment-grade countries, safer markets. It improves the risk profile of the group. Of course, this diversification means also more transactions and the changes in the management, also a reflection of the requirement on the personnel side. So if you look at the results, our annual revenues reached EUR 167 million and gross margin reached EUR 119 million. This is somewhat less than the year before. However, it is partly related to the strategic -- the strategy shift, as I mentioned before. We were selling assets in a higher revenue-generating country and more focused to a safer market. And to also mention, it doesn't mean that we will leave Serbian Belgrade, the outlook in that market is still positive. We are doing developments and rebuild the portfolio in Belgrade as well. If we have to compare the changes, as I mentioned, that in terms of revenue, the Serbian portfolio representing EUR 19.4 million. So obviously, it's a significant move downwards. Of course, we also managed to replace with new acquisitions. And the acquisitions bring EUR 7.1 million on the positive side. And we also had the Pillar office building, which [indiscernible] online opened in March last year. That added EUR 2.7 million with respect to last year to revenues. And we are on the other side, due to lower level of occupancy; our revenues dropped EUR 8.1 million. On the other hand, retail and growth in the retail sector compensated to that EUR 6.8 million. And we also, last year, put through indexation in the range of 4.5% to 5%, the growth EUR 4.7 million in terms of revenues. FFO is EUR 68 million for 2022. Our NAV stands at EUR 1.273 billion as at December 31. Our LTV remained conservative 44.5%. Occupancy across the board stands at 88% or stood at 88% at the end of the year. We continue to have a strong cash position. At the end of last year, it was EUR 115 million. And since then, we closed the sale of an office building in Debrecen, Hungary, which generated EUR 47 million in net cash. So with all of that, we are above EUR 150 million in the current cash position. If we turn the page, on the next slide, I just would like to give you some highlights on the office side of the business, 84% of our office portfolio is Green certified. Our occupancy on the office side stands at 84%. We had some successes on the leasing front, where we leased 110,000 square meters in 2022. We commenced construction of Matrix C office building in Zagreb and we have 92% pre-leased at the moment. So basically the building is built. We also commenced the development of Center Point 3 in Budapest, that's a 36,000 square meter GLA building. Last year we completed altogether 54,000 square meters of office development, which will bring EUR 10.8 million annual revenue. This includes Pillar, which we completed in Budapest in March last year. This is the Exxon Mobil headquarters building, one of the largest offices by the way for Exxon Mobil outside the U.S. This has an annual revenue of EUR 6.1 million. We also completed in November GTC X in Belgrade. That's a 17,700 square meter building, fully leased, EUR 3.6 million annual rent. And we also completed the development in Sofia Tower, Class A office building, which will generate EUR 1.1 million. The leasing of that is still ongoing. We are around 70% occupancy. On the next page, I would just like to highlight the transactions. I mentioned we are more active on the transaction front. And as I always say, it is important to demonstrate that every time -- to the market that every time when we sell an asset at book value or above, we can demonstrate to investors, analysts, valuers that our shares are undervalued and the discount to NAV is not justified. I think it's also important, as I mentioned, that we are looking to grow in new areas, in a way diversify away from the region from Central Europe. But it doesn't mean that we do not consider ourselves as a major player in our core business in Central Europe. So I mentioned the sale of Serbian office portfolio. We sold a smaller office building Cascade in Bucharest. That was an aging property that generated net proceeds of EUR 10 million last year. We also sold Matrix A, B in Zagreb. It's a major transaction in the Croatian market. And we -- as I mentioned, we sold and closed the transaction in January Forest Office Building in Debrecen. On the next page, I just would like to give you some highlights of how the retail side of our business is developing. It has been a very positive year on the retail front. Our occupancy stands at 96%. And positive trends continued throughout the year. We are above pre-COVID levels, of course, on the retail side. Inflation; we realized the impact on inflation as well. And we managed to lease 35,000 square meters on the retail front. Probably we could do more, but we are almost fully occupied. So thank you very much. If you have questions, I can answer that or if not, at this stage Ariel would continue.

Okay. Thank you very much, Zoltan. So going into the office portfolio, how the portfolio is. It's -- we have today, EUR 2.4 billion in assets. The comprehensive you've seen on the screen with over 90% income-producing assets, 65% on the office sector, a well-diversified portfolio. And we believe we've been a more stronger diversification as pointed out by Zoltan at the beginning of this call with less than 2% of really current development under our balance sheet, so very conservative. We're very cautious on which development we launch, 93% new countries. Thanks to the reposition of the portfolio, mentioned by Zoltan also, beginning of last year with the disposal of Serbia and the transition into more investment-grade countries. Exposure, a very healthy one, around 3.7 years. So I think this gives you a snapshot at the end of 2022 with regard to the portfolio. We go on into the development projects. As I mentioned, we have a couple of developments under construction, less than 2% of our portfolio. Malgorzata, we can go to the next slide, yes. Basically, we have Matrix C, which we launched last year, already 92% preleased. Just a little bit of completions, will complete in March, 100% -- almost 100% leased, also completed GTC X in November. Today we are happy to say it's 100% leased and also Sofia Tower 2, which was completed by the end of last year, which we are about 70% and also under negotiations are the remaining 30%. On the development, what we have there is Matrix C, which is going to be completed basically in the next few months. Rose Hills, we are progressing with the redevelopment of this beautiful campus on the Budapest. And also, the reposition of Center Point 1 and 2 as a redevelopment of the former Exxon Mobil headquarters. And basically this -- we are basically turning part around the common areas. There's a lot of heavy work doing by the team to basically reposition these other assets we have in our portfolio, but making it up to the standards of today with competitive trends as well. And we still -- we're working on pre-leasing already. I think we have repositioned already 10% of the backend area by Exxon already. Its pre-let and we're working on future leases. We launched last year, Center Point 3, which is the continuation of the campus of Center Point 1 and 2, a new shiny building, 36,000 square meters. We are working on the pit formation. I mean we are completing the pit formation and underground works. And we -- the team has been working very hard to pre-let this building and also in parallel working on the financing as well. Just to say that combined with all these completions, all these assets; this will contribute in addition to 16.1% expected rental income. This is pre-inflation and this is where our estimations on estimations that we've done 12 months ago by the way. Moving into the next slide. I think Zoltan mentioned a little bit about the beginning about our big shift and some changes on the rental revenues. We end up the year-end with EUR 25 million profit. Just to zoom in on a couple of items, gross margin from operations were down 6.5%, mainly as a result of the sale of the office portfolio, EUR 20 million loss of rent. But that was quickly recovered with the acquisitions in Hungary, EUR 8 million, which we acquired during '21, middle of '21, and then also some on '22. Just to mention a few, Vaci Greens, the Universum as well, Vaci 188. Also, the completion of Pillar, which contributed EUR 3 million during the course of this year. And as we continue the next projection in the next 12 months, this asset will contribute around EUR 6.5 million to the operations. We have a great performance of our retail assets during the course of 2022. I think we've seen a big recovery on the retail part with new trends, people coming back to the shopping with a downturn on online shopping as well. Just to mention a few figures, the whole contribution was EUR 9.5 million on the retail side, with the Polish malls contributing EUR 6.3 million, up to 32% on a like-to-like basis on a year comparison. Just to give you a flavor, Avenue Mall Zagreb also up 12% with no lockdowns in '21 in comparison to 2022 as well. And we managed to start bringing Ada Mall into the great path with 30% up, EUR 1.6 million increase, on a like-to-like basis in the Belgrade Shopping Mall. Indexation also plays positively into the figures while our finding costs are currently fixed in the medium term. This contributed positively EUR 4.7 million with average index applied between 4.5% to 5.5%. This was applied all over across the portfolio with no issues on collection. And we have already applied -- we are applying the new index, which is expected also in 2023. We are looking at double-digit index in the portfolio as well. Just to mention a little bit about the valuations. We posted a EUR 29 million loss on the revaluation from investment property, just as [indiscernible] because the number is a little bit distortion from this perspective. We booked losses over EUR 50 million in the last 12 months as a result of expansion on the yields, EUR 27 million on our Polish portfolio, EUR 30 million of Hungarian portfolio and EUR 11 million on the remaining part of the portfolio. This was offset with the completion of our developments Pillar, GTC X, which contributed positively development profit of EUR 18.5 million and also the successful disposals of Matrix Office, Matrix campus in Zagreb and Forest in Debrecen, which contributed possibly EUR 4 million into this line. Finance costs, we now see the fruits of the whole heavy work on the financing side in the course of '21. If we deduct the net one-off, which was around EUR 7 million related to the reshuffling of the bonds versus secured financing, we have a decrease on a like-to-like. It's not a given today, a decrease of 7% on the funding costs, on interest funding costs. And that will also allow us to keep this funding cost on this very low level in comparison to market trends. Just going into the next slide. So on the balance sheet, as mentioned by Zoltan also at the beginning, we are repositioned the company in a different path from where it used to be with bigger diversification with the entrance of our acquisition in Ireland, you see on the line of noncurrent financial assets, EUR 130 million. That's an acquisition of EUR 115 million in the Kildare Campus, a great acquisition with a big added value to the company and the local team. The dedicated management team working to basically achieve the key milestones regarding the permit and working on the potential disagreements as well. We end up with a very strong cash position, EUR 150 million at the end of '22, which additionally after the sale of Forest will increase to EUR 150 million plus. We still have our RCF EUR 94 million undrawn. And just to mention on asset held for sale. That line is mainly Forest, which was completed after balance sheet early January. So we have -- still have a few land plots, which is under sale in Poland. Moving to the next slide. The Matrix, healthy maturity, 4.4 years with no major re-financings in the next 12 to 18 months. We are getting ready to repay our bonds in the Polish market, EUR 31 million. Our next payment is coming in the next few weeks. And we're getting ready to repay. We don't see the need yet to touch capital markets given the circumstances today, healthy net LTV, 44.5%, healthy average funding cost, 2.21%. Just to mention, 95% of our total debt today, it's either right hedged, fixed or with any eventual increases on the interest rates. And it's also visible on the balance sheet side, balance sheet today with all our IRS positions over EUR 25 million assets in our company. We could say the hedging policy we've been establishing in the last few years is paying off today. With then just to mark up a little bit on the side of the bonds, covenants, healthy coverage ratio of 3.5x, secured leverage 21%, encumbered property is 54%, increase from 45% last year. I think to mention regarding our cash flow from operations is coming down. We discussed the reasons from a P&L perspective and also cash flow perspective as well [Technical Difficulty] that we presented by the end of 2022. The major transaction activity we have done since the beginning of last year until today, with over EUR 320 million in sales and net proceeds over, I would say, close to EUR 200 million plus the issuance of shares that we completed at the beginning of January, EUR 120 million, offset by the acquisition in Ireland, gives us a very strong cash position and ready to find new growth opportunities. With this concludes our presentation. I want to thank the whole management team. It's been a pleasure being the CFO of GTC. I wish Barbara good luck. And I will be looking at you on my new position in the company, looking forward to talk to every one of you. I think we have very exciting things ahead of us. So I'm a little bit mixed reviews. I don't want to -- but look, we're open to ask for Q&A.

Yes. Ladies and gentlemen, that concludes the formal presentation. So whoever wants to ask a question, please unmute yourself and ask your question?

Hello, Malgorzata, if no questions, I would ask a couple, if I may. Thanks for the presentation. Barbara, welcome on board. Maybe starting with the LTV, could you outline some more specific steps, how would you be looking to bring down the leverage in the next 1 to 2 years?

Well, we presented 44.5%, that's after disposal of Forest. I mean, the thing of the need to bring the LTV down, it's the best thing we have been doing so far. It's presenting 2 things at the same time, either proving the market that we are doing transactions of book value or above book value. And through the disposals is reducing the LTV, number 1. And also -- we are also -- in the end, also looking for new investment opportunities with added value, which will also contribute to the rapid increase to our asset value as well, not only through development as we have done, but also through the added value acquisitions like Ireland, for instance. And we also screened the market for new investment opportunities would also contribute very positively on increase on our assets. So I don't know Ariel Ferstman wants to add something from this side.

No, I think disposals; we are always open to the opportunities. Honestly, we never actively pursued disposals. We always -- we have this approach that potentially our assets are for sale. They are -- what we focus on is the performance of the assets and there's always a buyer for those. And I think over the last 2 years, we demonstrated that we've been doing that successfully. Just to give you the exact figures over the last 2 years, we actually managed to sell EUR 376 million gross asset value, which generated EUR 234 million net cash. So we have some discussions even today in progress. Of course, it's not an easy period. It's not like 5 years ago. But we are still active. And we see the possibility to sell assets. Of course, we always have to find the best way to reinvest. And as -- if you look at the balance sheet, EUR 160 million plus EUR 94 million unused revolving credit facility gives us good comfort. I don't know if this answers the question you could?

No, it's helpful. I mean, would you say that there is a chance that on a net basis, GTC could be a buyer of assets? Or certainly disposals will outweigh acquisitions in the next, say, 12 months?

I don't think it makes sense to sell more than what we invest. So I don't -- I wouldn't say disposals will outweigh. It's -- as you know, for example, the investment in Ireland is currently the EUR 150 million that we made is currently the revenue generation is quite small. It's a development project. So obviously, in a way, if we look at the next, let's say, 2-year horizon that should give the results into development. So it takes -- when we made the decision to invest last summer, we knew that looking at a 2-year kind of development period, which in this sense, just to give you some more color on the situation, the development on that front, it takes much longer. But within 2 years, we would expect to realize some significant uplift on that. So the profile of that investment is very different. Now if opportunity comes and value can be realized, of course, we are always willing to sell to realize gains. I always say that paper profit is we're interested in. Of course, this is not the period to talk about that. We like to realize gains through disposals. At the same time, of course, we have to invest wisely. And as I also mentioned, we do not restrict ourselves only to Central Europe. We are looking at developed markets as well.

On the solar farm initiative and on the Polish reservoir end market, could you also give us an update on the status of these projects?

Yes, we see interesting opportunities, good yield generation potential in solar in Hungary. There have been in the past, lots of projects commissioned and they are becoming operational. So we are not looking at developments. We are looking at possibilities to invest in already revenue generation opportunities. In terms of size of investment, right now, initially just looking at a few million euros, just to give you an indication. And of course, I think the synergies between green energy generation and real estate portfolio. These synergies are quite obvious. Through that, we would have a natural kind of hedge in terms of energy prices because we would be generating our green energy. Of course, it's more complicated than that. But that's really the theory, the idea behind it and others are exploring these possibilities as well, as you know. In terms of PRS, Ariel, would you like to say anything about that?

Yes, sure, sure. We're working on that front very actively. We are looking for potential partnerships also to operate with. We have a beautiful site in Warsaw, which everyone is fully aware, which is called Wilanow. So we are working to test and see whether that site could be applicable for the -- for PRS and working very closely with the authorities as well and reposition that clocked in a way that it would be our, let's say, our growth engine in this sector. But it's a long way to that. We are still working on permitting and planning, but it's a good start. At the same time, we are screening on the market for opportunities and see how we can cooperate with different players in the market, especially, we're looking at the Polish market and 3 main key markets were so Warsaw, Wroclaw and --. And we see the potential. We see the demand and the growth. And this -- as we said, it's part of GTC's strategy. And -- but we don't want -- we were very active last year in the summer than market changes. So we are looking for good opportunities, really good opportunities to bring the added value. And hopefully, we have good news in the near future.

Just on Wilanow, if I could just may give you some more color. Specifically what we are working on is environmental study. It takes more than a year, 1.5 years, discussions with the authorities about, the directional development of concept, because we'd like to be able to do what we are planning to do. And as part of the whole concept, we are actually increasing the PRS element of that project.

That's helpful. Could I also ask you on leasing and especially office leasing. How did the leases which you closed during last year and which you are closing so far this year? How do they compare to ERVs? And what is sort of the like-for-like momentum in new leases, those which are being rolled over versus what has been in place prior? And also, if you could talk about the outlook for office occupancy and how likely do you think that we could see some progress on that this year?

Sure. Just in general, of course, everybody knows and talked about the office side of the business is not so easy as tenants or even to the best space. So obviously, say 2 years ago or even 3 years ago, retail was an issue that had to be evolved and we managed to do that. These days, it's office that we need to focus on. And we have some challenges in the portfolio right now, I can say, City Gate in Bucharest has occupancy in the range of 70%. We managed to bottom up. It was actually well below 70% about a year ago. So it went down to 60%. We are filling that building. We have also challenges in like [ UDG ] [indiscernible], for example, we are working on that. Luckily, the proposal we're speaking up -- and I would like to ask Janos about ERV and new leases and extensions.

Yes, welcome everybody. I'm Janos Gardai, the Chief Operating Officer of GTC [Technical Difficulty] just to continue. We are able to sign new leases at about ERV level in most of the locations, so its new brand, which is a challenge for us. In certain cases, it's further allocation of our assets. Parallel to that, when it comes to renewal of the leases, I would say that 95% of the premises are happening at passing rent. And even though there was no question about it. But probably it's also interesting to hear for all the investors that we are already almost in May. Of course, in taxation of 2022 happened in case of all office and retail leases. The average indexation rate for the leases for all the countries was between 10%, 11%. And so far we didn't hear any issues. Everybody keeps paying rent. So that's definitely success. So it seems that our tenants and our partners, they accepted this new era. They were able to accommodate indexation. And also, they understand that because of construction cost and financing cost increase, then, it comes to new and in new leases. There is no discount available on the market. In terms of leasing prospect for this year, what I can just elaborate and I can confirm what Zoltan mentioned. I think generally, our portfolio is pretty healthy. With that said, we have a few challenges, mainly in the secondary cities of Poland Buch and Busman. And in Bucharest, the City Gate project, which is currently at 70% leased. But because of its location, that's challenging. But we try to look also for alternative use of all of those buildings. So we try to do our best. If you want to ask what is the forecast for this year. I think that we do everything to improve the overall occupancy of our buildings, of our portfolio. But because of certain areas or certain elements of our portfolio, I think that we cannot necessarily change the environment. I don't think that we could achieve 95%. But we do all our best to keep the current occupancy or even further increase. And now we have the proper time in place in all the countries.

And just one other thing, if I could add. I'm sure you noticed there were some management changes within GTC last year, like country heads and some people were promoted. Basically, the shift is about we want to basically build on the people who can be proactive and really be active and strong in a situation where we will have to be able to be in the front line in front potential tenants. This is not easy these days. The results roughly don't show that much and we are progressing. We also strengthened the leasing team in Poland. We also made changes within other areas in Hungary as well. So of course, these challenges were expected even a year ago. And this is why we acted. And I'm absolutely certain that we will get through this period. And overall, as Janos also mentioned, the quality and the overall occupancy is strong and we are keeping ERV. The rent levels don't really change. If you look at the overall market, in general, vacancy numbers do not change to the negative, in fact, in some places, even dropped. So that's the overall environment as well, just wanted to mention.

That's very helpful. The last from my side I'm sorry for having to the floor. On dividend, can you give us sort of some insight on how you are thinking about distribution in this environment? And what factors would maybe consider or effect the decision?

Sure. Obviously, we had some write-offs as you see in the results. And what has to be taken into consideration. I can't, at this point, give an indication about a recommendation for the dividend or what we would say, obviously. It also depends on some transactions, which are in the pipeline. So I think we'll have to wait until end of May to give you some more color on that.

Ladies and gentlemen, are there any more questions to the management of GTC? As there are no more questions, thank you very much for your participation. Thank you for the management for the presentation. And in case you have any additional questions, I am remaining at your disposal. So just give me a call or send me an e-mail. And I will try to help you to understand the results. Thank you very much. Goodbye.

Thank you. Have a good day. Bye.