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

Good day, everyone, and thank you for standing by to the GICSA Third 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 conference over to Rafael Borja of InspIR Group. Sir, you may begin.

Thank you, and good morning, everyone. I'm very pleased to welcome you to GICSA's Third Quarter 2021 Earnings Conference Call. Joining us today from GICSA are Mr. Isaac Cababie, Deputy Executive Director; and Mr. Diodoro Batalla Palacios, Chief Financial Officer. They will be discussing the company's third 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, please note 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 the disclaimer located in the earnings release prior to making any investment decision. It is now my pleasure to turn the call over to Mr. Isaac Cababie, Deputy Executive Director of GICSA, who will begin today's presentation. Mr. Cababie, please go ahead, sir.

Good morning, everyone, and welcome to GICSA's Third Quarter 2021 Earnings Call. I would like to begin today's presentation by discussing the quarter's operational highlights before turning the call over to Diodoro Batalla, our CFO, who will discuss the financial measures and business continuity plan we have been implementing as well as some financial highlights, after which time we will be happy to answer any questions you may have. Clearly, our performance continues to be impacted by the pandemic, with the health crisis remaining volatile and unpredictable. During the third quarter, Mexico was facing its third COVID-19 wave. In late July, when both infections and deaths began to spike, public health measures returned, impacting both our revenue and cash flow. Due to ongoing sales restrictions, we are continuously carrying out negotiations with our tenants and business partners in order to maintain our occupancy and renewal rate at stable and long-term levels. In addition, we have several pending negotiations open with our clients to grant and recognize discounts granted in previous quarters. Thankfully, the pandemic third wave has declined significantly in Mexico in the last few weeks. The color code system reported 20 states with green light status, 11 with yellow light status and only one state with orange status. No state is operating on the red light status at this time. Today, 80% of our properties are located in areas with green light status. However, this health crisis continues to show us that the situation can change at any time. So we will remain vigilant in the face of new challenges that may arise, and we will continue to comply with general and specific sanitary guidelines for health protection at all of our properties. Moving on to our operational results. Due to mobility restrictions, the number of visitors to our properties was 13 million, an increase of 52% compared to third quarter 2020 but a decrease of 2% compared to the levels recorded in second quarter 2021 and 28% of the levels recorded in third quarter in 2019. We closed the quarter with 995,000 square meters of GLA comprised of 18 properties in operation, with GICSA's proportional GLA representing 86% of total GLA, an increase of 11% compared to third quarter 2020, mainly by Explanada Culiacan and Lomas Altas, properties that were added to the portfolio. With regard to our commercialization of our properties during the quarter, we signed 68 new doors, a decrease of 3% compared to last quarter. Also during this quarter, 44 new doors opened, representing a decrease of 20% compared to last quarter. For the quarter, our lease spread closed at 4.4%, and the average rent per square meter reached MXN 373 in the stabilized portfolio. It is important to highlight that starting this quarter, we are disclosing the concept of adjusted occupancy rate. We decided that it would be prudent to carry out a more thorough inventory of our commercial spaces under lease, which allowed us to identify a portion of clients who, even though they are currently under contract, discontinued their operations and are not meeting their payment obligations, which is reflected as an adjusted occupancy rate. The resulted adjusted occupancy rate for the third quarter represents an adjustment of 4% lower than the contractual occupancy rate for the quarter and a decrease of 12% compared to pre-pandemic occupancy rate. It represents 78% of adjusted occupancy rate in the total portfolio and 82% considering only the stabilized portfolio. Diodoro will go into further details on this subject during his presentation in order to explain the impact of these adjustments on our financial statements. In order to compensate the negative effect caused by the pandemic and given the upcoming maturities of corporate loans, we continue working closely with Lazard and our bondholders on an analysis of fixed debt structure and the monetization of nonproductive assets to reposition our company for the long term. We are convinced that the soundness of our portfolio and the experience of our team will allow us to reverse this effect in the medium term. We thank our bondholders for their support and the trust they have placed in the company. In summary, the health crisis maintains a nonlinear path and the situation can change at any time. Accordingly, we remain vigilant to any new challenges that may arise. Further, we will continue maintaining strict control of operating expenses, protecting the liquidity of the business and preserving business operations with a long-term view. We will also continue working closely with our tenants under these challenging circumstances in order to help maintain their business continuity, reduce any adverse impact on our business as well as retain customers with whom we can grow over the long term. This concludes my presentation. Thank you for your attention. I will now turn the call over to Diodoro to discuss the company's actions as well as our financial performance during the quarter. Diodoro, please go ahead.

Thank you, Isaac, and good morning to everybody. Thank you for joining us today. We welcome the opportunity to talk with you and hope you and your families are healthy and safe. This quarter, consolidated NOI and proportional NOI were MXN 762 million and MXN 645 million, year-over-year decreases of 9% and 7%, respectively. Consolidated EBITDA and proportional EBITDA were MXN 702 million and MXN 585 million, decreases of 11% and 10%, respectively. In our balance sheet, total assets at the end of this quarter were MXN 75.1 billion, while total liabilities were MXN 43.6 billion. Consolidated debt was MXN 28 billion, while our loan-to-value ratio was 37%. Additionally, as part of the COVID-19 support program that we implemented for our tenants, at the close of this quarter, we signed 61 new agreements for approximately MXN 197 million in credit notes. MXN 56 million was recognized in the income statement in this quarter, and the remaining balance is maintained in the financial position statement and will be gradually amortized in accordance with the remaining term of each contract. Now an explanation of the impact that the recognition of the adjusted occupancy rate had on our financials. And to recognize this adjustment occupancy rate compared us to legally document the abandonment of these commercial spaces in order to stop the invoices process and to be able to report their resulting revenues in the income statement. This adjustment on the annual invoices implies a decrease of 15% in our invoicing revenues compared to pre-pandemic levels. Out of this invoicing, 84% of the collections was recovered during the quarter. The combined effect of -- on the decrease in the adjustment occupancy rate and percentage of collections have represented an annual impact in our cash flow of approximately MXN 1.1 billion, which represents a decrease of 23% compared to pre-pandemic levels. Accordingly, this is also reflected as an increase in our accounts receivable, which was MXN 1.3 billion at the end of third quarter 2021, of which we estimate to collect approximately MXN 600 million, and the remaining MXN 700 million will be written off in the subsequent quarters as we legally document these abandoned status. Our more than 30 years of industry experience, the quality of our assets and the resilience of the company give us the confidence that by implementing the right measures, we will be able to recover liquidity as well as our historical high occupancy level to provide the greatest benefit to our investors and business partners in the long term. As Isaac already stated, although we anticipate a full recovery for the Mexican economy as long as COVID cases keep declining and the vaccination process continue progressing, we expect the recovery to be slow and still largely unpredictable in the near term. This concludes my presentation. Thank you for your attention. And now let's open the call for questions.

[Operator Instructions] We'll take a question from [ Nathan Jenny ] of Moneta Asset Management.

We have been looking into the results of other companies in the space like Fibra Danhos, Fibra Shop, Fibra UNO, Fibra Soma, all of them working in Mexico on the retail space. But in all of them, we have seen like improving trends, better numbers, diminishing the discounts to clients. So what's the difference -- what's going on in the company that even right now, it seems like the scenario is not improving at all?

Nathan, I really don't know what's happening with the other companies. And I -- the only thing that I can tell you is that we have been doing very specific inventory in the spaces. Now that most of the properties are in a green status and all the doors can be opened, now we can realize which of the tenants are coming back and which of them are not. And I don't know if other companies are doing the same efforts in order to identify which of the tenants are really coming back because even if you have an actual contract and its current, if the tenant is not opening again the door and you are struggling to make him open again, then you have to recognize it and start negotiating with him and see how can you recycle that door in order not to make this problem bigger. So I believe that is -- but I cannot tell you what the other companies are doing.

Okay. And looking into the accounts -- just one more question. Looking into the accounts receivable, so you are going to write down almost half of that. That half, it is -- like those are the accounts receivable generated by the 4% of occupancy that was like realized right now?

Yes. Some of it is because we continue to invoice those clients that abandoned their spaces. And another part of it is because we have the COVID agreement that we signed in past months, and we are recognizing that in the term of the contract. They are calling clients, but there are discounts that are coming down from the balance sheet to the income statement as the time progresses. And another part is because of this abandoned commercial space.

We'll take our next question from Armando Rodriguez of Signum Research.

Well, my first question here is about the next quarter. If everything remains, for example, in green light status currently in the following quarter, so my question here is if the adjustment that you saw in the occupancy, for example, on the accounts receivable should be the -- maybe should be reflected in the most -- in this quarter, in third quarter compared, for example, in the following quarter, if everything remains as it is? And my second question here is if there is any update on the debt structure and the recycling -- you had the recycling prior. That's my only 2 questions.

Okay. Thank you, Armando. And regarding your first question, this adjusted occupancy rate is a number that we are disclosing, but it is -- some of them, we are trying to get them back, and some of them will be legally documented as abandoned. And we are going to reflect that in the official, let's call it like that, occupancy rate because until we have a legal document that allow us to recognize that in our statement, then we can do the write-off of the receivable. What we did already is that we stop invoicing those clients. That is already reflected in the third Q. So that is why you see a decline in our income, because we have stopped invoicing those clients. And if we come to negotiation with them and they open again, then we will start invoicing again, and we will negotiate the debt that they have. If we don't, then we will recognize that in our statement. And that is regarding your third question. And regarding the second one, I'm going to let Isaac to tell you how negotiations are working.

Regarding your question on debt structure and monetization of noncore assets, we have been working with our partner, Lazard, for the last couple of months. We think we are progressing in talks with our bondholders, and we expect to come to a resolution in the upcoming weeks or in a couple of -- in the next quarter. That's all for now.

Okay, Isaac. So you consider that the scenario from an equity issuance is diminishing from previous quarters, so considering your comments on the negotiation with the bondholders?

We're not considering that for the moment.

We'll take our next question from Guillermo Diego of Santander.

Yes, yes, sure. And maybe 2 questions there. The first one is, as you know, you closed 2019 with MXN 700 million in accounts receivable than the first quarter of 2020 with MXN 700 million in accounts receivable. And now we have maybe close to MXN 1.7 billion in accounts receivable. Obviously, there was a mismatch between the press release and what the accounts receivable were saying. And the market signaled that. Even in the second quarter conference call, Diodoro made a mention that there could be a write-off. So on that part, the pandemic was maybe officially declared on March 2020, and it took 1.5 years to make an inventory of the slots with no operation or abandonment. One would think this doesn't happen from one day to another. And one would think there are ways to scan the abandonment of the slots, like CCTV monitoring, electricity use, security personnel in the night. But it was 1.5 years later after sales analysis when you declared the abandonment. So my question is, what's our confidence that this abandonment is going to be monitored going forward? Because one thing is that the people does not pay. And another thing is this lot is abandoned, no, that there is no use, not electricity use. So what is the guarantee that you are going to be monitoring this accurately going forward?

Guillermo, thank you for your question. I think first of all, accounts receivable is MXN 1.3 billion. I think you have a...

If you have to add up the contingency accounts receivable, the MXN 400 million. I'm not talking about everything.

Okay. That's fair. But regarding your question, we -- it's not that we took 1.5 years to recognize or to see that people abandon their spaces. It's that we are closely in talks with every single one of our tenants from all of our properties each day to try to rescue them and to take it to the last instance, to try to recover them and to open -- and to make them open again. So we can -- we think inside and our philosophy is that it's easier to recover an existing tenant than let them go and bring a new one. So the recognition of this, it didn't took 1.5 years. But the talks and negotiations with more than 2,500 tenants has been taking 1.5 years and continuously are going in effect because we are trying to rescue every last tenant that is in problem with us. We are trying to come with a plan that works for them and for us. And that's why sometimes you see the recognition months or even 1.5 years later. We expect to finish negotiations with the tenants that are in problems as fast as possible and to try to recover as much of these tenants for us to stop this problem for both -- for us and for them.

You have 18 properties, and most of them can be worked out in 2 or 3 hours. So I would say that you would notice abandonment faster than that. And I mean not -- as you said, I'm not saying about they don't paying you the rent. I'm just noting that if someone abandons a lot, the probability that they are not going to pay, I would say it's high. But the second question, on February 25, on the first quarter conference call, Mr. Isaac Cababie signaled 5 billion to 6 billion in asset sales. And maybe on the second quarter conference call, Mr. Diodoro in reference to JPMorgan signaled the number of these assets in the size of maybe close to 7 billion. And they talk about Galerías Metepec, Lomas Altas, Cero5Cien. So my question is there has been a plan for maybe close over a year. And on June 22, you highlighted this net of the hiring of Lazard as a financial adviser and I mark to develop, analyze and evaluate internal strategic alternatives, total capital structure, debt level, liquidity and interest rates. Do you think that -- do you think that you have received in these 3 months something valuable from Lazard and different from what we are talking over a year? And if not, what is the time line that you are expecting to execute your plan, the plan that Mr. Isaac Cababie signaled, that Mr. Diodoro reaffirmed and maybe the plan that Lazard is the same plan as they won before?

As I mentioned, we expect for the plan to be executed in the upcoming months, in the final quarter of this year. And we do see an interesting talks and progress with our partners, Lazard.

So it's a plan to address all of that, right? It's not just postponing everything a couple of months.

It's a complete restructure. So I can -- I guess you can say that it's a more thorough restructuring that is just short term.

And Guillermo, just let me clarify something. The inventory of the closed spaces and the monitoring of those, we have been doing it since day 1. The only difference now is that we are disclosing this number because we have more confidence that the vaccination process and the pandemic effect is not going to pull us back into a closing of the space because in the past, every 2 or 3 months, they close again. So we don't -- we didn't -- we couldn't know if they are going back because they have closed because of this pandemic. So you need to understand that this monitoring is not new, and it didn't took us 1.5 years. We have been doing this since day 1.

I agree. For us, it's not a surprise. As we said, for us the displacement of accounts, Diodoro, didn't match the press release numbers. But maybe for some people watching the 82 to 78 occupation consolidated, it's going to be a surprise. And I mean there were ways to be more transparent and to signal, okay? We haven't declared yet an official deployment, but somebody took out all the apparel and the furniture and everything and those are empty. So there's a high probability we're going to take the heat on this one.

[Operator Instructions] We'll move next to Raul Gallegos of Credit Suisse.

So a quick question. Would you have the same metrics that you mentioned for the entire portfolio just for Arcade to get a sense of where we are as far as collections and through occupancy and if you're able to meet all the senior debt payments with that and expenses for it?

Yes. The portfolio has been behaving almost the same all across. I mean Arcade is not too different than the red because the effect is national-wide. So most of the properties are doing the same. And this Arcade portfolio is being able -- has been, and we will expect that we will continue to be able to serve the senior debt and the expenses and taxes. We are not sure if it will be excess money after that. And that's what I can tell you.

[Operator Instructions] We'll move next to Valentín Mendoza of Actinver.

The first one has to do with your adjusted occupancy. You just mentioned that probably the impact of this will be over 50% hit on your revenues when compared to pre-pandemic levels. But certainly, the sanitary crisis has distorted the basis of comparison. So I think that if you could provide us with a sense of what would be the real impact, let's say, in the quarter, if we were assuming this adjusted occupancy in your results as to further assess, obviously, excluding those customers or those tenants would you reach agreements for reliefs or discounts or delays on the payments of your rentals? But I would like to get a sense of the real impact in this quarter, assuming this adjusted occupancy, so we can assess the impact that we will be seeing in the coming quarters.

Yes. For the upcoming quarters, it is not easy to predict because there are 2 situations that can happen with this adjusted occupancy rate. First of all, some of the tenants that we are now considering as abandoned, we will be able to get them back. So some of them might go back, and we will start invoicing them. And the other important thing is that for those that are not, then those spaces are becoming available, and we will commercialize it and put a new client there. So at the rate that we have the commercialization process has been rising, we might not have a long-term impact with this adjustment occupancy rate. I believe it will be most of mid-term. Maybe the next 2 or 3 quarters will be impacted by it. But it is difficult to predict if this 15% will continue or will be less. We expect it to be a little bit lesser quarter-by-quarter because of those 2 effects that I already told you.

Just one follow-up just to fully clarify, have you already started billing those abandoned spaces? Or in this third quarter, you'll also recognize some of those revenues? Or what are you expecting to -- actually, how's the billing?

At this moment, all of those adjusted occupancy, we stopped billing them. We documented the abandonment. There are 2 processes that we have to do. One -- the first one is to document that space is closed so we can stop billing because we have also fiscal implications there. We are obligated to recognize the income and to pay taxes if we do not legally and specifically document it. So that is why we couldn't stop invoicing before because of the red and the color lights that we have in the states, it didn't allow us to document it. That is the first one, to stop billing. The second one that we need to do, and that process is more specific and has more requirements legally and also fiscal requirements, is to document the nonrecovery of that invoicing. So we can make it write -- because to write it off also imply that is deductible. That's a fiscal deductible. So we need to document also. So that is why it's going to take a little bit of time to do that -- to do so because we have to go and make it, even in some cases, legal procedures with George and everything. So that will take a little bit more time.

[Operator Instructions] We'll go next to Francisco Chávez of BBVA.

I have 2 questions. The first one is, can you share with us your view on the office market? What do you expect specifically for the Mexico City and the office leasing space which you are exposed? That will be the first one.

Francisco, yes, our view on the office market, we remain aggressive on the terms of trying to bring new tenants. What we believe and what we are seeing that is happening is that there has been a recycling of the players in the market that are looking for office spaces. And for example, we've seen this -- that there are new companies coming into the market with very aggressive spaces requirements that we are trying to captivate. And we think that will compound the effect of all the actual spaces that have been reducing because of the effect of the home office. We do expect a recovery in the medium term as we have seen it before in terms of occupancy levels. We do see an adjustment in the price of the market in terms of rent per square meter because of the vacancy that is available, but we do expect that recovery as we've seen in past cycles in the mid-term of this rent per square meter. That is our main view. So I think it's a mix of 2 or 3 things that are driving the office market nowadays.

Okay. And the second question is a follow-up on the financial statement, typically the accounts receivable. Don't you think it will be easier to make the write-off once and for all? And specifically, you plan to announce and restructure in several -- restructure in the coming months. I think it will be very useful if we can have a realistic balance sheet. Unfortunately, we have seen a lot of restructure process in the Mexican market, and most of them have been nonsuccessful or have failed because of the quality of the information in the balance sheet and in the financial statements. So don't you think it will be easier to see by year-end a more realistic accounts receivable number instead of being -- rising gradually in the coming quarters?

Paco, first, there are 2 things that remains to do so. The first one and the most important one is that we are trying to recover the most of that money. I mean we have -- this number that I gave you, we are trying to make it less, the write-off, and more the recovery in cash for the company. So that's the first situation that we are working because we have the legal right to collect them on because the contract was current and the client has the obligation to pay. So we are trying to recollect that money. That is the first situation. The second one is that we cannot write off -- I mean there is a legal and a fiscal process that needs to be carried out in order to do so. We cannot write off like we decide with a pen and then this write off because the write-off means that we are taking a reduction. We already pay taxes for that income that we put in our income statement. So in order to be able to recover the taxes that we pay, we need to document the nonfeasibility of that collections. And that is a procedure that the authorities require us to do in order to do so. So we are going to reflect in the year-end an estimate of that, of course, in our statement, but it will be an estimate. And -- but in order to do that the real thing, there are -- those 2 situations, we need to take it -- to take care first.

And just to complement, Francisco, your point would be very accurate besides, obviously, the legal and fiscal things behind it. But your point would be very accurate if we would be a balance sheet-driven company, but looking at it from the angle of operationally and since we are a cash flow-driven company, we carry out negotiations with these tenants and try to recover as much as possible of their debt in addition in trying to recover their contracts and make them current and make them come back and leave that space again. So it's -- I think it's a really delicate strategy in the operational point of view in order to write off that amount that you are suggesting.

And that closes our question-and-answer session. I'd be happy to return the call to Diodoro Batalla for any concluding remarks.

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