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 Fourth 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, and good morning, everyone. I'm very pleased to welcome you to GICSA's Fourth 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 fourth quarter 2021 consolidated results for the press release distributed by the company yesterday. If you wish to include it 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 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 our fourth quarter 2021 earnings call. I would like to begin today's review by providing an update on the measures we have taken under the current circumstances and on the company's operations during the quarter before turning over the call to our CFO, Diodoro Batalla, who will discuss the financial measures and the business continuity plans we have been implementing. Diodoro will also cover some financial highlights, after which we will be happy to answer any questions you may have. Since the beginning of the pandemic, Mexico and the world have gone through different challenges to recover economic and financial stability and revitalization. This effect has lasted for nearly 2 years, which, without a doubt, has had the full impact on our operating and financial results, but above all, on our cash flow. Consequently, with a health crisis remaining volatile and unpredictable, we are still carrying out negotiations with our tenants and business partners to maintain our occupancy and renewal rates at stable and long-term levels. Now I will discuss some of the strategic steps that we took during the quarter to help mitigate the negative impact of the pandemic. We continue to focus our efforts on managing the upcoming maturities of our debt. In this regard, we are working closely with Lazard and our bondholders on an exhaustive restructuring process of our 5 issuance of local bonds, while in parallel, continuing the process on monetizing assets to reduce debt. On November bondholders' meeting, we signed standstill agreement and interest capitalization for 90 days. These measures were taken with the objective of eventually undertaking a comprehensive restructuring process for these bonds. Subsequently, on February 14, meeting with holders of GICSA 16 and 18 bonds, the company completed the first negotiations related to the restructuring. Certain resolutions were approved to improve related to capital, maturity, interest rates and interest capitalization. Further details will be addressed once we conclude our entire process with the [indiscernible] issuances. With respect to the holders of the other bonds, we continue to have an active and productive dialogue with them, and we hope to reach a satisfactory outcome in the near future. As a final word on our debt restructuring, I would like to say that we greatly appreciate our creditor trust and understanding as we work together towards a long-term solution that is viable for all parties involved. Moving on to our operational results. We closed the quarter with 976,000 square meters of GLA, comprised of 18 properties in operation, with GICSA's proportional GLA representing 86% of this amount. During the quarter, we had 17 million visitors to our properties, a year-over-year increase of 28%, which only represents 82% of pre-pandemic levels. The adjusted occupancy rate in our portfolio in operation was 79% during the fourth quarter. On the commercial front, we signed 52 new stores during the quarter. 66 new stores were opened, also at the close of 2021. We have sold 59 units at our [ Cero5Cien ] residential project and delivered 8 units. To conclude my remarks, our strategy is focused on 2 main pillars: first, recover our occupancy level to 94%, which would generate additional annual invoicing; second, consolidate our process to restructure debt and gradually reduce our leverage in order to align our balance sheet and income statement indicators with the approximately MXN 1 billion of NOI that will not be generated by the assets that will be monetized. Thank you for your attention. I will now turn the call over to Diodoro to discuss these measures in more detail as well as our financial results. Diodoro, please go ahead.

Thank you, Isaac, and good morning, everyone. Thank you for joining us today. We welcome the opportunity to talk to you and hope you and your families are healthy and safe. As we announced in the last quarter, we started the process to impact the nonrecoverable accounts receivable from our balance sheet to our income statement. In this quarter, we were able to write off MXN 377 million which, of course, negatively impacted our operating profit, NOI and EBITDA. According to IFRS standards, MXN 241 million were reflected as expenses and MXN 136 million were reduced directly from the income. Additionally, during the quarter, we recognized an accounting loss reflected in the other expenses line for approximately MXN 400 million, produced by the sale of the Leon land, the cancellation of the San Luis and Outlet Sur projects and the corresponding [ VAT ] from the accounts receivable write-off. Also, as part of the COVID-19 support program that we implemented for our tenants, during the quarter, we signed 67 new agreements for approximately MXN 79 million in credit notes. Since the beginning of COVID-19 support program, we have signed 1,456 agreements that represent MXN 832 million of discounts. By the end of this year, 2021, we have already impacted 50% of that amount. The remaining amount is maintained in our balance sheet and will be gradually amortized, consistent with the remaining terms of each contract during the next 4 years at an average pay of approximately MXN 24 million per quarter. As a result of all of the above, fourth quarter consolidated NOI and proportional NOI were MXN 392 million and MXN 333 million, respectively, which represents a year-to-year decrease of 51% and 50%, respectively. Consolidated EBITDA and proportional EBITDA were MXN 184 million and MXN 125 million, a decrease of 66% and 69% compared to last year. On annual basis, consolidated NOI and proportional NOI were MXN 2,657 million and MXN 2,234 million. which represents another year-over-year decreases of 21% and 20%, respectively. Consolidated EBITDA and proportional EBITDA were MXN 2,314 million and MXN 1,891 million, decreases also of 21% and 20% compared to last year's. These decreases were extraordinary and triggered by the write-off previously commented. Moving to our balance sheet. Total assets at the end of the quarter were MXN 76.2 billion, and total liabilities were MXN 44.9 billion. Consolidated debt was MXN 29 billion, and our loan-to-value ratio was 38%. As Isaac already noted, we are strongly focused on preserving liquidity, optimizing our operation and reducing our leverage levels. This includes continued to work with our tenants, lenders and advisers to maintain business continuity and minimize any adverse impact on our business. We are convinced that the resilience of our portfolio and the experience of our team -- that our team possesses which allow us to reverse in the medium term all the negative effects that have impacted our business over the last 2 years. This concludes my presentation. Thank you for your attention. And now let's open for questions.

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

Could you explain us a little better, which one were the one-offs on this quarter? Because everything seems like much more than just the MXN 377 million reported on write-offs of accounts receivable. Can you explain that better? And when do you expect like to have more like a recurring revenue stream without doing more one-offs on the company's financials?

Of course, the impact that we have on this quarter is composed by 2 components. The first one is the write-off of this MXN 377 million of income. The other one is the MXN 400 million that we had to reflect due to the cancellation of Leon, San Luis, and Outlet Sur project and the corresponding [ VAT ] from the write-off of that. So that is the main impact that we have and also, a proportional part of the COVID discounts, which was around MXN 70 million.

Okay. And what about those projects? Those were canceled. Why?

Well, because as we stated in previous conference, we are changing our strategy of developing and we are focusing on preserving liquidity and deleveraging the company. So those lands that we have, Outlet Sur and San Luis, one of the lands were provided by the owner and the other one was a lease. And Leon, we sold the land. And we have to reflect these losses because all the investment that we have in those projects, the same movement of [indiscernible] that we started, we did a lot of soft cost, architectural design, all of those investments we have to write it off because the land has to go at cost.

Okay. Okay. Okay. What about the process of selling assets that are not generating revenue right now? How is everything going? And when do you expect to have news regarding that?

Hello, Nathan. Yes, we are still actively and continually looking to monetize these assets. We obviously will take a decision that will generate the most value for us regarding this asset sales. So we think we are in a good path and hope to have some positive news soon. But we are actively, as we already mentioned in the call, in the process of this asset monetization in parallel of this different portfolios.

Okay. And just the last question. On the adjusted occupancy, do you think that the number that we have right now could be the bottom? Or you're still searching for more places or spaces with the tenant or without the tenant paying?

No. We believe that most of the adjusted occupancy is already there, of course, we cannot predict that we have some other clients closing their doors, but we do not expect that to be a big number, maybe some of them, but the majority is already impacted in the adjusted occupancy. And we are also working, as I said, with the writing off of -- all of those invoices that we did for those tenants. And that we are expecting to, in the midterm, recover all those older occupancy in the near future, and the remaining question is pricing. Maybe we will have some push down on the pricing for the new leases, especially in the new projects that we're stabilizing like Puebla, Pachuca, Queretaro. All of those might be impacted a little bit by pricing. But the occupancy will be recovered in the midterm.

Okay. I don't know if there is more people on the line. Just one more question, what have you seen in January and February in terms of occupation demand for your assets?

On regards to what? Sorry, you got a little bit cut off.

Occupation and demand for your assets and maybe new tenants on your malls.

Yes. We see new players coming. Obviously, there's always players that go, with new players that come that want to invest, and we do see that. The year started off rather good, but we are always looking the best way at the correct price to put them on our properties. And as we see it is that we are -- we have great assets, and it's just a matter of what type of concepts are the best fit there, and that is what we're looking for. We just don't want lease to lease. We want to have the correct concept for the correct people there to go and have a great experience. That has been our vision since this company was founded, and that will remain to be.

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

Yes. I'm sorry. I was muted. I just have a few questions. Those are mainly regarding your adjusted occupancy at some properties. I was wondering, if you could give us some color on the recovery, let's say, impressive recovery, for instance, in Explanada Puebla. I just want to know if that was that you probably overestimated the previous hit on the adjusted occupancy of 79% vis-a-vis the 87% that you just reported? Or is it a combination of your covering clients? Or is this just new clients? That would be the first question. And second one has to do with what you just mentioned other regarding the sale of the Leon land. If I got it right, you got a hit because it was sold below historical cost?

Valentín, let me just -- regarding the question of the occupancy, as I just said, we are recovering the occupancy and the tenants are coming. The situation that we are facing is that we are recovering that occupancy on the lower prices, especially in projects like that, Puebla, the new projects. So that is why you see that number there, and the occupancy is being recovered and so -- and also, some of the tenants that were classified as adjusted, suddenly, they appear, and we recover them. And we do negotiations with them and grant some discounts in order to keep them in the property because it's better to recover that client even with a lesser rate than to take it off and look for a new one. And regarding Leon, the sale of the land was at cost, but we have already started development on that project. We did some hard cost and a lot of soft cost. All the design was already there, and we started [ excavations ] in the land. And when we sold it, we sold it without any of that. It went as a land cost only. So that is why we have to impact the price in the results.

Just one follow-up, if I may. Diodoro, you just were mentioning that you are actually recovering some of your clients, and you just recorded a MXN 377 million write-off on accounts receivables. I just wanted to know what's your, let's say, updated estimate of what we could see coming for further write-offs considering that you are recovering some of those lost clients or those clients that were -- you said were last previously.

Most of the write-off is already there. We did a big effort in order to clean up everything by the close of '21 and do not, let's say, the work contaminate our results from 2022 and forward. So most of it is already there. So it might be more, but it will not be in this kind of amount of money. It might be a little bit more or less. And more expected in time, that is if we do more.

All right. I just leverage and there were no further questions, I think. This final question has to do with the market dynamics at Culiacan. It got my attention that Forum Culiacan actually recovered or increased occupancy versus the first quarter. But on the contrary, Explanada Culiacan decreased. Why do you think is that happening? Or is there a divergence in the market in the same city?

So the main reason we believe that, Valentin, is because Explanada Culiacan opened roughly a year ago, 14 months ago to be precise. And it's taking a normal curve of stabilization, which we always price in. Also, the environment in which it opened was in the middle of the pandemic. And obviously, that could have had a bigger impact in the stabilization curve, but we. [Audio Gap]

[Audio Gap] So we expect you those assets as a land value as the previous selling? Or should we expect that it will be sold by on value in the selling of noncore assets.

Yes, Erica, really good question. We expect, as this noncore assets are predeveloped, they have already a certain big pillars in place, like projects, et cetera. So we expect to sell them as a project, not as a land. But we will adjust to whatever the market needs. We don't have any problem with that.

I mean what is your expectation of the selling this year this semester? How do you -- is the visibility there?

We cannot say exactly a time frame. What we can say is that we are actively looking to maximize the value of those assets. We believe in them as much as we did when we first acquired them. So we are not going to sell them at a price that the company does not feel comfort, and we will seek to sell them at a [Audio Gap].

And let me add, Erica, that the one important thing is that we are all in agreement with our lenders is that we are in the process of doing this restructuring and giving some aid to the company in order to give time for those assets to come out at a good price. We have appraisal of that project, and we expect to sell them at the appraisal value or above. But the important thing is that we are not rushing on that, and we are in agreement with the lenders that are going to be benefited by that income and to give time for these assets to be sold at a good price.

So respecting to the time, the last agreement with the bondholders is 3 months, so that gives you some pressure? Or you are expecting to have some negotiation in that time frame?

Sorry, can you repeat, please?

So the last negotiation with the bondholders is 90 days, so that gives you like a short time period to sell those noncore assets. And so do you expect something on that period of time? Or -- that's why I'm asking what is the visibility because the negotiation with the bondholders was 90 days?

No. The 90 days were granted in order to achieve a restructuring -- a full restructuring of the bonds. So we will come out with much more time than that. We are extending -- we are aiming to extend maturities and to do some amendment in order to don't be pressured by that and have a company -- a healthy company in the near future.

Okay. And my follow-up question is, do you expect the GLA to recovery to pre-pandemic levels? Or do you expect a lower number?

What you mean GLA, you mean occupied GLA or total GLA.

You can tell me any projection of those numbers.

Well, total GLA is going to remain the same. We are also adding the Outlet Riviera Maya project to our GLA in the near future. We expect to finish that early next year. And in occupancy, we are expecting to recover occupancy in the midterm. We are very confident that we will do that.

But are you expecting to be in the same level of 2019? Or what will be the goal?

As I told minutes ago, we are strong a little bit with pricing in some of the properties. So it might take -- income might take a little bit longer to come back to the same levels because we are granting discounts and in renewals and new contracts in the new properties in order to, to get the GLA occupied.

So -- and your report, Page 4, you have average rent, and do you expect that number to below that the one we are seeing here?

Yes, it's very difficult to predict because our average rate is the whole portfolio and some properties are performing better than the others. The most stabilized properties are performing better, and the most new properties are the ones that we are having and renting the discount. So it's very difficult to predict. And of course, we are working to get to that number and divest it. But, let's say, we need to be objective and not be too optimistic on that.

Okay. And my last question is related with office occupancy, have you seen any impact on those assets?

Yes, we have seen 2 things there. First, the renewal rate and the renewal contracts have been adjusted to what the market is dictating, and that is a market dynamic that we do not control. We think that our assets are AAA and will always be above market because there is a premium in every asset that we have. And for new occupancy, as we mentioned in the commercial, we see the second thing in office. We see new players, new types of companies coming into the industry with different dynamics that we are used to, but that are taking office spaces because their companies are growing, and we are closely working with all of them to give them the best alignment possible with GICSA and our properties.

And I have one more question because the mall philosophy that you have is entertainment base, and that was the -- I don't know, one of the most affected philosophies in the pandemic. What are you seeing in your property?

No, we do not agree. We do think malls as entertainment and mall entertainment. Our vision is completely aligned with what the future holds for retail and customer experience. During the pandemic, everything was affected, not only entertainment. Across the board, everything was completely affected. But on our structural and an ongoing basis, we do believe entertainment is the way to go. We see tendencies, not only in Mexico, but all around the world, saying that entertainment will drive future traffic to grow the malls. So we are remaining solid with that philosophy, and we do think it's going to give dividends and fruits in the upcoming switch.

And just one part of that entertainment segment is being affected a lot is cinema. How do you see that trend into clients?

We have been working since the beginning of the pandemic with them to reach a solution that is viable for both parties in order to remain a long-term relationship.

We'll take our next question from Nikolaj Lippmann of Morgan Stanley.

I joined the call a bit late, so sorry if the question has already been answered. I was -- I'm trying to second guess sort of the balance sheet post the restructuring. And I don't know how much you can say, but can you give us a sense of range of either loan-to-value or debt-to-EBITDA that you feel is a sustainable level and also as a level of CapEx that you think once we get to the other side, this is going to be kind of the way to think about investment needs for the company?

We are finishing all the restructuring process. And our expectation is that, of course, we are going to achieve a result in our balance that give us better metrics. That is our objective, and that is what we are working on. And your second question was?

CapEx.

Regarding CapEx, yes. CapEx, we only have at this point -- and we will not predict in the near future to cover anything else. Only the [ Cero5Cien ] project, which is funded by the sales of the same project, and the Outlet Riviera Maya project, which is funded by the credit line that we have because all our equity is already in the project and the remaining equity and the remaining CapEx is coming from the bank loan that we have. And that's it.

We'll take our next question from Raul Gallegos of Credit Suisse.

Regarding your comments on seeing lower rents in your newer properties in Puebla, Queretaro, Pachuca. Do you have an order of magnitude? I mean, if you were expecting on average MXN 300 a month, do you have an order of magnitude of what you're getting now or what do you estimate this year, if it's MXN 150, MXN 200 per month?

So what we have right now is we do see a correlation between being aggressive and trying to occupy spaces and sensibility to prices. Also, we are trying not to go like really polarize one way or another and trying to compensate one with another. We do not have an exact order of magnitude of how much this will impact in the average square per average rent per square meter in those projects in strategic. What do we think is that those markets are being played by 2 players right now. And the appetite there has -- is not the same as it was pre-pandemic, obviously. So we do think that there is a necessity for us to occupy those spaces, even if it's not at the price that we had projected before because we always say we prefer to have an occupied space at a less price than at the projected price with no space -- with no lease. So when we have that information, we will like to deliver more guidance on that.

[Operator Instructions] We'll move next to Adolfo of Signum Research.

Regarding the income statement, and I would like if you could give us some color of accounting of other income and expenses net. Other net income or expenses, I see that it's MXN 451 million on expense compared to MXN 21 million on the same quarter of the past year. So I wanted to see if you could give us a little more color of this increment, please?

[indiscernible] a few minutes ago, but this is produced by the sale of the Leon land, the cancellation of the Outlet Sur project and the San Luis project and the VAT that is corresponding to the write-off of the accounts receivable.

And there are no further questions at this time. I'm happy to return the call to our host for any concluding remarks.

Thank you, everyone, again for joining us today for our fourth 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.

This does conclude today's call. You may now disconnect your lines, and everyone, have a great day.