Grupo Gicsa S.A.B. de C.V. (GICSAB) Earnings Call Transcript & Summary

Good day, everyone, and thank you for standing by. Welcome to the GICSA Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Sir, you may begin.

Thank you, Nikki, and good afternoon, everyone. I'm very pleased to welcome you to GICSA's Second Quarter 2021 Earnings Conference Call. Joining us today from GICSA is Mr. Diodoro Batalla Palacios, Chief Financial Officer. He will be discussing the company's second quarter 2021 consolidated results per the press release distributed by the company yesterday. If you wish to be included in future distributions, please contact us at InspIR Group in New York at (212) 710-9686 to be added immediately. A special note to any members of the media who are joining us today, we would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken. If you're a member of the media and wish to direct any questions to the company, please contact the company directly after the call. Also, I just want to mention that during this call, comments made by management may include forward-looking statements, which are subject to various conditions and uncertainties based on a variety of factors. These forward-looking statements may differ materially from actual results. Thus, we ask that you refer to disclaimer located in the earnings release prior to making any investment decision. It is now my pleasure to turn the call over to Mr. Diodoro Batalla, Chief Financial Officer of GICSA, who will begin his presentation. Diodoro, please go ahead.

Thank you, Rafael. Good morning, everyone, and welcome to GICSA's Second Quarter 2021 Earnings Call. I will briefly review our operational and financial results from the second quarter 2021 as well as the recent tactical and strategic measures that we have implemented to improve our company. After that, I will be happy to answer any questions you may have. Before starting my presentation, I would like to reiterate GICSA's deep gratitude to our entire team for their commitment, hard work and dedication to serving our clients, shopper and communities during this long, challenging time, great teamwork has been -- that has been the key to delivering this quarter's results. Turning to our second quarter performance. Clearly, our results continue to be impacted by the pandemic. As the health crisis remains volatile and unpredictable, consistent with the gradual recovery of the COVID-19 pandemic in Mexico and the progress with vaccinations in the quarter, we have seen a small recovery in the number of visitors to our shopping center and the sales update, which has helped us to slightly improve our collection levels. Nevertheless, our financial statements are still showing a decrease on the income due to the recognition of discounts and support programs that we have granted to clients in the last year. For the near future, our line of sight continues to be limited due to the increases in COVID cases and consequently, sanitary restrictions as a result of the new virus variant, which brings the possibility that we will need to continue granting discounts and rental support to our clients. Likewise, we still have open negotiation with some of the clients to grant and recognize pending rent discounts from previous quarters that may impact in our financial statements. As previously discussed, we continue to implement our strategy to provide financial liquidity and to significantly deleverage our business through asset sales. Further, in order to implement proactive measures in support of our business, in June, we engaged Lazard as GICSA's financial adviser and Bufete Robles Miaja and Cleary Gottlieb Steen & Hamilton as legal advisers. These advisers have initiated a process to analyze, evaluate and develop a comprehensive strategic alternatives to improve our debt and capital structure, including the levels of GICSA's indebtedness, liquidity and upcoming interest payments. The aims of these alternatives are intended to create long-term shareholder value and to maintain GICSA's financial health in response to the extreme challenges that continue affecting our company as a result of the COVID-19 pandemic. Moving to our operational results for the quarter. With regards to the commercialization of our properties, during the quarter, we signed 70 new doors, an increase of 52% compared to the first quarter of '21. In addition, 55 new doors opened during the period. As part of the COVID-19 support program implemented for our client to realize payments, we signed 58 agreements during the quarter for approximately MXN 78 million in credit notes. As a sign of the program's success, we were able to recover approximately 81% of the collection in the quarter. At the close of this quarter, our cash recovery rate for offices was 91% and 70% for shopping centers. Our lease spread closed at 4%, while average rent per square meter reached MXN 375 in our stabilized portfolio. And our renewal rate was 99%. Our occupancy rate closed at 87% and goes down to 81% considering the tenants who have not opened their doors due to the pandemic. Turning to our financial results. Second quarter consolidated NOI and proportional NOI were MXN 743 million and MXN 619 million, year-over-year decreases of 6% and 7%, respectively. Consolidated EBITDA and proportional EBITDA were MXN 681 million and MXN 557 million, decreases of 7% and 8%, respectively. Both decreases result from the recognition of the pandemic discounts granted to clients. Moving to our balance sheet. Total assets reached MXN 74.6 billion, while total liabilities reached MXN 42.3 billion. During the last quarter, consolidated debt reached MXN 27.7 billion, and our loan-to-value ratio was 37%. Also, in line with our strategy to improve our debt profile and present liquidity in May, we successfully refinanced the Paseo Arcos Bosques loan to extend its maturity and reduce our monthly debt service. This new loan has an outstanding balance of $150 million with a maturity of 5 years up to 2026, bearing an interest rate of LIBOR plus 335 basis points and with an amortization scale that starts 24 months from now. In summary, although we anticipate a full recovery of the Mexican economy, we expect the recovery to be slow and uncertain for the near future. In recent weeks, states across Mexico have been responding to an increase in COVID-19 cases and hospitalization in a variety of ways, including the introduction of new restriction that limit mobility, social interaction and the visitor capacities of our [ properties ]. As the situation develops, we will respond accordingly and always remain vigilant to any new challenges that may arise. Additionally, we will maintain a strict control of our operational expenses, preserve the liquidity of our business and seek to improve our occupancy and collections level, all of that with a long-term view. This concludes my presentation. Thank you for your attention. And now let us open the call for questions.

[Operator Instructions] We will take our first question from Valentín Mendoza with Actinver.

I actually have one regarding Galerias Metepec, which I noticed you removed from the pipeline. I was wondering if you could give us an update on this as you have already invested over MXN 1.8 billion in CapEx, right, in this project. And also if you could share some thoughts regarding Masaryk 169 and probably Lomas Altas, how are you trying to address occupancy in these 2 assets?

Thank you, Valentín. As we discussed in previous calls, Galerias Metepec is part of our strategy of providing liquidity and is under review for the asset sales that we are carrying out in order to put into the market all the development projects that we have at the moment with the exception of Riviera Maya and Cero5Cien. Masaryk 169 is now -- it has a pending license in order to commercialize it. And now we have the license and it's in the process of signing new contracts. And Lomas Altas is another property that we are analyzing the possibility of putting into sale.

And we will take our next question from Raul Gallegos with Credit Suisse.

I wanted to ask you a question specific about the arcade portfolio, just if you can comment on the level of revenue percentage, let's say, versus pre-pandemic that you may have there? And if you are able to meet both the principal payments there and also expenses with the current level of revenue there?

Raul, yes. Well, let me -- regarding revenues, we have about 10% below the revenues that we had before the pandemic; and we also -- that is revenues in the balance sheet. Collection has been more impacted due -- in that portfolio. We have -- most of it is retail and commercial centers. And collections there has been a little bit lower than in offices. And also, we have 2 properties that have been subject to more restrictions, which are Puebla and Pachuca. Merida recently opened some restrictions, but now they are starting to put them again. And also Culiacan is -- has never had any restriction, is still -- is starting to put some restrictions. So some of the hits that we have properties have been impacted by restrictions and that is impacting our level of collection. And also, we have some of the tenants that are having troubles to come back. So the authorities let them open, but they are having troubles to reopen their doors, and we are trying to reach agreements with them. And in the meanwhile, we are having -- we are not receiving income from them. Regarding expenses, we have done, since last year, a reduction of near 30% in expenses -- in operational expenses in the properties, and that is still going on, I mean, 30% if you compare pre-pandemic. This quarter has a little more than expenses than the last -- than the same quarter last year because last year when everything was closed and we did not pay any electricity bills. This year is open, so we paid electricity. So if you compare quarter versus quarter, you will see a little bit of increase in the expenses because of this year properties are open. Both pre-pandemic levels is around 30% below.

We will move next with Erica Roa with Mackenzie Investments.

Can you give us more color in terms of regulation for the arcade portfolio? And also, can you give us more color in terms of Cero5Cien CapEx needs and sales?

In arcade portfolio, we were able to collect 78% of collections this quarter. As I said, we were very bullish in the future, but with this new variant, now we don't know. So we are subject and seeing that some of the authorities are starting to reestablish restrictions, and that may impact the collections again. But that's the level that we have. And I didn't catch your second question.

My second question was about Cero5Cien CapEx and sales status of the new unit.

Okay, yes. Cero5Cien, we -- sales are starting to move. We closed one sale this quarter, and we have some clients that are in the process of analyzing to close more. So we see more movement there in Cero5Cien. This is starting to have more interest in the clients. And with that in mind, we started -- we'll start with also the CapEx there. We are investing near MXN 10 million there. As you can remember, that MXN 10 million a week, about MXN 40 million a month. But that moves -- that comes directly from the collections that we have from the property. I mean we spend CapEx there as we collect, and collections are coming as signing contracts. And all the CapEx there is already compromised with the sales that we have.

And my last question is related. When we're going to know news about the capital analysis that you are consulting now. When we're going to know more details about that?

Yes, Erica. The process is under analysis right now. It's an undergoing process. We announced the engagement with these advisers. We will provide, and we will announce any more on further details as we have them. Right now there is nothing new to report. It's only that they are having conversations with our lenders, and they are putting together a proposal to see how we are going to improve.

And my last question is about secured debt. According to your guidance, you have space for issue more secured debt over the arcade portfolio. Or is it something that is already in the [ top ] of your guidance?

No, no, there were no secured debt for arcade. The only debt that we have is the one that -- the senior debt and the junior. That's all we have. Nothing new.

And you have more space for that as you're planning to ensure more senior debt? Can you give us some guidance at this point?

We don't -- I don't think we will go that way because our strategy is more into lower the debt than to increase the debt. So I don't believe that we are going to take an option of going for more debt in any portfolio because right now, our strategy is -- and everything that we are doing is in order to lower our debt service and lower our indebtedness in the company and improve that.

And do you have any projections in the vaccination rollout in the country? Any guidelines on that sense that gives projections?

Yes. I mean the government is doing a strategy of vaccination. It's going through ages and through cities. So at this moment, around 50% of the population has at least 1 dose of the vaccine. And government is announcing weekly basis which new states and which group of ages are going to be vaccinated in the next week.

We will take our next question from Armando Rodriguez with Signum Research.

My question is about the office segment. Can you give us a little bit more detail about maybe on further negotiations, particularly with your tenants, if they are trying maybe to negotiate any other further support, COVID support from you? How are you seeing the rents in the short term, lease spreads on this segment? That's my only question.

Thank you, Armando. Well, regarding the office sector, we are being very cautious in giving COVID support to that sector because office has been open and available for clients all the time. What is really happening is that for new contracts and the contracts that we are renewing, we are having pushback from our clients in order to reduce or give them lower rents. We are analyzing our negotiation client by client basis, and we are seeing that we are having some pushback from them in order to give them lower rent. Of course, that we are being very cautious on that because we have other clients with current contracts that will come and ask for the same, so we are -- but we are seeing that. The other thing that we are seeing in renewals is that some of our clients are renewing the contracts, but they are also being cautious in giving long term as the office sector usually goes with 5 or more years of contracts. Now they are being a bit cautious and trying to only renew for 1 or 2 years. And that is the other claim we're carrying for the client, and we are in the process of negotiating with each client in a one-to-one basis.

We will move next with Jorel Guilloty with Morgan Stanley.

I apologize if these questions have been asked. I stepped a little bit late into the call, but I just wanted to start out getting a sense on the divestment pipeline, which was previously mentioned and just to get a sense of where you are in terms of conversations, negotiations, if you were closer to a running start with that pipeline. And any color you can provide in terms of that? And then the other question was looking at your accounts receivable and we noted that they were flattish, so no more of the increases that we've seen before, which is a positive thing. So I was just wondering if you can talk to us a little bit about how do you see the accounts receivable trend possibly going forward, particularly as you have both the reopening happening but the concerns about COVID and whatnot. So those are my 2 questions.

Yes. Well, regarding the pipeline, Jorel, thank you for your questions. Pipeline is under negotiation right now. So it's an ongoing process. So as we have more details, we would announce them, but right now, all I can tell is that we are in the process of putting it into the market. But it's -- that's all I can tell you because everything is ongoing. Regarding our accounts receivable, yes, we stopped that number to grow. And what is happening with that account receivable is that we are -- as we have current contracts with clients, we involve the clients and some of the clients are not coming back, as I just previously said. They are having problems to come back and maybe 10% of the clients are having difficulties to return to the -- to open their doors again. So that number, we might have to cancel that income and impact our financial statement. Some of the money, we will collect. I mean we are starting to collect money from previous quarters because we are still signing -- we are still negotiating agreements with clients. Some clients have been more difficult to sign agreements with them. So we have pending agreements from maybe the last 10 or 12 months of income that we are negotiating with them, and some of the income will -- needed to be canceled in the account receivable account and impacted in our income statement. So -- but it is hard for me to tell you how much of that money will be going. But if you can do some math and you say that 10% of the clients are in that situation and it's about 14 months of invoicing, we might have to go and impact around half of the amount that we have in that account.

We will take our next question from Froylan Mendez with JPMorgan.

Diodoro, this is Froylan. So what was the value at which Galerias Metepec and Lomas Altas were registered at the balance sheet? And can you remind us if these were -- if these 2 were registered at cost or at market values? That's my first question.

Both are at cost because both, by the IFRS rules, do put properties that are under development or finished but not generating income, there has to be a cost. When they start to have income, then you reevaluate them by discount flows methodology. Both properties are at cost. Metepec cost is around MXN 1.6 billion is the one that we have invested there, and that is the value that we have in our income statement. And Lomas Altas is nearly MXN 1 billion, isn't it? Near -- it's around MXN 1 billion.

Perfect. So is there anything else on those properties that you have mentioned a lot, that they are not generating income from those that could be sold? Is there anything else, maybe land reserves, I don't know, rights on some other properties? Can you just describe a little bit how -- what's the whole pipeline?

Yes. We have Metepec, we have Lomas Altas. We also have Aguascalientes. We have Paseo Coapa. We also have San Luis Potosí. We have Xochimilco. We have Palmas, and we have Leon. Those are the assets that we have under development, in different stages of development, some -- most of them. And those are the assets that we are charging to the market.

So you said [ MXN 2 point billion ] from Metepec and Lomas Altas. How much would the others that you mentioned at today?

If you're talking about valuation in the financial statement, all of them may come to a number of near between MXN 5 million and MXN 6 million.

Okay. Perfect. And lastly, maybe it's something related to the previous question. But you mentioned having granted almost MXN 0.5 billion of relief to -- or deals with tenants of around MXN 0.5 billion. But based on what this number means in terms of months of free rent or the type of tenant you'd actually covered, what is the potential size of additional relief that you think we could expect a similar number, maybe half? Do you have any sense?

Well, first of all, Froylan, let me tell you that further reliefs for the future is difficult for me to tell you because we don't know what is going to happen with the restrictions in the future. We have seen new restrictions in Culiacan, in Merida, also Puebla, so -- but we have to react as they come. From past negotiations, we have around that number still on negotiations. And some of the clients that are not coming back, we might have to impact 100% because some of them, we cannot find them.

[Operator Instructions] We will move next with Nikolaj Lippmann with Morgan Stanley.

I'm sorry, I tried to withdraw the question. It was the same question that's asked by Jorel. Sorry about the confusion.

Thank you, Nik.

And we show no further questions at this time. I would now like to turn the call over to Mr. Batalla for any closing remarks.

Thanks everyone again for joining our second quarter results conference. We want to remind you that we are always open and available to answer any of your questions. On behalf of GICSA, we wish you a great day. Thank you very much.