Immobiliare Grande Distribuzione SIIQ S.p.A. (IGD) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call operator. Welcome to IGD's conference call presenting H1 2021 results. [Operator Instructions] Let me turn the conference over to Mr. Claudio Albertini, CEO of IGD. Mr. Albertini, Please go ahead.

Thank you. Good morning to all of you from myself and from my colleagues who are here from our headquarters. As you probably saw, the Board of Directors yesterday approved our accounts end of June 2021. And we used to -- we normally have the conference call after the Board. This year, we decided to have the conference call 1 day after the Board meeting so that you could have a chance to look at the results, the figures. And our press release was available from our website yesterday already. And this morning, I'm sure you received the presentation that I'm going to walk you through. And let's start from Page 3 in the presentation. And here, we are giving you a general overview of the situation in Italy. And especially for those who are connecting from London or other countries who are not aware of what happened in Italy, and we make a comparison of -- between H1 2020 and 2021. So this first half of the year compares against the 2020. So the first 2 months of the year were quite normal. And then end of February, we have the first contagions in some parts of the north of Italy, especially Lombardy, that was 2020. And then in March 8 full lockdown, hard straight lockdown that went on until May the 18. And then, of course, there was a gradual easing of restrictions. And instead, 2021, the first half was different somehow. And let's say that in October 2020, a number of restrictions were applied already hitting shopping malls as well. But starting from January, there were restrictions, again, applied that went on until May the 17 date from which the restrictions were removed. That is to say, closing during weekends in almost all Italian regions that were in the red zone, and then were moved to a white zone. And then we fully went back to normal. And we also recorded the number of closure days, 39% in 2020. And this year, a little less, 36% of the time shopping malls were closed. And impacts on our income statement, it's just estimate. Last year, we were somehow grasping in the dark because we hadn't had any experience, similar experience in the past. So we estimated about EUR 9 million COVID one-off impact, that was our estimate. So one-off, I'll tell you more about this one-off, idea of something being one-off. We made a decision last year that they were going to be one-off impact. So the impact on the income statement was going to be a one-off. The COVID impact is lower than 2020, EUR 7.8 million versus EUR 9.3 million last year. That is the general picture for Italy. But as we say in our heading in Slide 4, that there were good news at the end of the first half of 2021 and also the start of the second half was good news. So the occupancy rate is starting up with the buoyant leasing activity and financial occupancy went up 100 basis points versus end of year 2020, 95.3% the average between full occupancy of the auto market asset class and the shopping mall asset class in Romania. The growth was slightly lower. Overall occupancy 94.3%, close to the Italian figure. COVID impact we have already mentioned as a positive delta. But it's -- again, it's estimates, it's not final figures. Both last year and this year, the tenants were waiting for government provisions last year that were called the release story. And there were 4 of them. And this year, the accounts sustaining. And only recently, only very recently, have the Italian Parliament approved the so-called sustaining base, the second part of the provisions to support the people or the buckets that were most affected by the pandemic, the social bucket. And these are highlights. So we are going to see a comparison between 2021, 2020 and 2019 as well because 2019 is somehow the benchmark. It's a normal average year. And so we thought it would be meaningful to compare footfalls and revenues for both 2019, '20 and 2021. We're talking about June, there was a decline for the entire half year, up to 0.2% footfall, plus 17.4% revenues. And then a positive sign on revenues, tenant revenues as well, footfall down 15% still. And with revenues versus 2019, were up 0.3%. This 15% is something we're still missing. And we should be seeing a better situation in the coming months. Last year, when we started the decline between 2020 and 2019 was around 30%. We managed to recover about 15% in the following months until the end of October. Again, we have the second wave of the pandemic and then restrictions starting from October. So footfall this year, we have a stronger figure than last year on revenues as well. You see a plus sign, even though a small one in June 2021 versus 2019 same month. And then collection rate, the collection rate is particularly positive. 83% collection rate in Italy net of discounts and rebates and on the abatement allowed and growth of that, but we're around 70%, 74% for Italy and in excess of 90% for Romania. We're talking about the collection rate. Let's move on to the financial highlights on Page 5. And rental income, it is down 2.1%. So not a very meaningful decline versus 2020 in this case. And a similar trend we see in net rental income, down 1.5%, EUR 55.5 million. And then core business EBITDA, the leasing business and rental business is down 1.6% to EUR 50.6 million. And then FFO, and we included an accounting item, it was a negative carry on the available cash within IGD because we've issued a bond in November 2019. And let me say once again, and you'll see that in other slides as well. All these figures will have an impact, the one-off impact of COVID. Let's move on to, again, financial highlights. This is the real novelty in this half year report, is the change in fair value. The change in fair value is much lower than the one we had last year. We're talking about EUR 12.5 million, of which EUR 5.7 million is the IFRS 16 accounting effect. But net of CapEx, we are around -- we are even with or slightly better as a balance between changing fair value and fair value write-down. So that leads to a stable to a flat real estate value, EUR 2.267 billion, up 0.1%, and we got back to a positive figure on the group net profit. Last year, we closed the 6 -- the first half year with EUR 38.8 million worth of losses. And this year, instead, because of lower impairments, changes in fair value and for lower -- for other factors, still important. We're closing with a net profit slightly below EUR 20 million, EUR 19.5 million. Another positive note, APRA NRV, which is -- it's the former NAV practically, is growing 1.7%, and it lands at EUR 10.56 per share. Coming now to our operating performance, and I'm on Page 8. I will not repeat what I said on the top part of this slide because I already described it in the initial part of my presentation. Below that however, you find some further details. There is a comparison between the first half of 2021 with 2020 and 2019 same period. A longer period compared to the part on the right, you see that we had a 10.3% increase in footfalls compared with 2020 and tenant sales life 23.4%. And you see that compared with 2019, minus 29.4% footfalls and 24.5% tenant sales. And here, you also see our benchmark, the CMCC figures, CMCC being the [ National Association of Shopping Centers ]. And you see that this a 4.5% difference, that data being worse. If you look at the 17th of May, which is the date on which restrictions were lifted, with Italy almost fully white according to the color code system. You see that the figures until the 1st of August, a few days ago, that is to say, so it's a total of 2.5 months. You'll see footfalls up 9% compared with 2020 same period, and there is a decline by 16% compared with the same period in 2019. So as I said in the highlights, when talking about the highlights, we are more or less at this level, minus 15% to 16%. This is slightly a longer time horizon. It is our challenge going forward to catch up. But anyway, this is what we did until the end of October. On the following slide, you'll find further details. You see our footfalls and tenant sales in the several months. And you see that the recovery started as early as in May. In May, footfall -- or actually sales were minus 64%. And this is something that we had already seen in April, as you can see from the chart, and then June was in the positive plus 0.3 average adding to sales. Footfalls to have this sort FIFO trend, and there was a strong recovery between May and June, up to 15.2%, which is the figure you see here. Interestingly, at the bottom of the slide, you will see our average ticket. Last year, it had already grown considerably with more targeted, more selective visits with a higher average ticket. This is confirmed this year. And that was some growth compared with 2020, 0.7%, and there is a major growth compared with June '19, 20.3%, and that was the average ticket again. On the following slide, you find a detailed analysis of the sectors and categories that performed better and those that performed less well. Let me start on the former, electronics. This includes the category that performed best. A lot of people decided to buy new technology equipment or to replace the old ones. Also because of the need to work from home. Then there was the effect of the football competition, the European one, which led to -- which led people to buy new TV sets. But anyway, last year too electronics have performed very well as well. I'd like to point out something else. It appears to be the smallest positive rate of growth. But clothing still accounts for 50% of our mix, our merchandising mix. It went down in previous years, but it still remains the main part of our sales. And you see what clothing did in June. The clothing did very well. Amongst those that performed less well, we have services, which are down 15% as well as restaurants to a minus 25%. This is the effect of smart working. Normally, restaurants and shopping centers are patronized by people who work in offices nearby, and they go and have lunch there or get some coffee there. Despite the fact that the percentage of smart workers was lower compared with the previous half year period, would still have a decline here. Interestingly, and this is also mentioned in the box at the bottom of the page, all types of services from small to large, excluding restaurants, are growing on average by 2.4% in the month of June. Coming now to our leasing management activity, and we are on the following slide now. I've already mentioned our financial occupancy rate. In Italy, we had 85 renewals and 46 leases, which were the subject of turnover, but it's a negative figure, which is quite limited though. And we're very pleased with that, minus 1%. We were expecting much more negative percentages. And this gives us hope for the coming quarter and half year period. Whereas for Romania, out of 240 contracts, including renewals and turnovers, we have a slightly positive sign, plus 0.9%. I've already referred to on the financial occupancy rate, 95.3% Italy, 94.3% Romania. I would also like to draw your attention to sales in our own freehold hypermarkets in our shopping centers that remained always open despite the fact that they were partly affected by restrictions being an essential service, though, together with other minor categories that always stayed open. And the figure for the half year period is positive, plus 1.3% compared with the first half of 2020. Consider that in the first half of 2020, particular in March or even before that, there was some holding by a lot of people with sales that have soared. So again, this result to this half year period is even more important despite some slowdown in the month of July. On the following slide, Slide #12, you find our collection rate. You see also last year figures. So last year, we are at almost 100%, both for Italy and Romania, very little housing gains being collected. We are at 97% in Italy and 98% in Romania, whereas the figure for the half year period in 2021 is 83%. In Italy, net of discounts granted. And the gross figure is very high too, it's 74%. But anyway, many negotiations [indiscernible] started recently, because a lot of retailers were waiting for the government and parliament to approve the [indiscernible] based decree, providing relief to workers in terms of a tax credit on rent. For Romania, the percentage is even higher, 93% was collected for the half year period. The pandemic, or actually the pandemic-related restrictions affected Romania to a lesser extent. We keep doing monthly invoicing. This is a commitment we've taken with our suppliers. We are considering whether to continue this for the last quarter 2. Normally, we used to have a quarterly invoicing, early invoicing, but we decided to go from monthly to actually help our tenants. Again, on leasing activities, and I'm on Page 13 now. We were very much committed to this. And the results were to be seen in the whole half year period, especially in the latter part, and we will also see the effects going forward. We have a few new tenants entering our centers throughout Italy from Livorno to Catania Ravenna, Forlì as well as Rome and elsewhere. I won't go into a list of them, but you can see them on the page. We saw the emergence of some trends, which were accelerated rather than actually created by the pandemic. First of all, restaurants and catering in general. The category was heavily and severely affected by the pandemic with strong limitations to indoor eating. This led us to creating outdoor spaces. Not all our shopping centers offered this possibility, but when that was to be had, we took advantage of it to create outdoor spaces, services, in particular, technology services, a few examples of which you can see here. These are new brands, technology brands that we are introducing in our shopping centers and also telephone sales and systems. We have a center in Emilia-Romagna in the city of Imola, where we also organized training courses. In Romania too, we had quite buoyant activity in the leasing area. Here, you see the new brands that were added in the half year period in the several cities where we have for instance [indiscernible] 4 times, but that is because that is where the main shopping center of our Romanian portfolio is located. IGD centers have been, and will continue to be even more in the future, a center to service the local community. Agreements were reached with the CNCC, and we actually decided to offer the possibility of opening vaccination hubs in our shopping centers. For shopping centers isn't vaccination hubs, we estimate that about 50,000 doses have been administered today, but I believe this is bound to increase on a daily basis. So people could go to the shopping center and get their jab. In several shopping centers, people were queuing to be vaccinated, which leads with perception of shopping centers as a place at the service of the community. And people who had never attended our shopping centers became acquainted with them through the vaccination from [ Richone ] to Palermo, where we have 2 vaccination hubs, and we also have one in Ravenna in Emilia, Romania. There is another new thing. In recent days, on the 2nd of August and Monday, we opened a health and diagnostic center in Bologna in our historical central Borgo shopping center are oldest one, which was, however, renewed. But it's the one that we first have in our portfolio. So the DYADEA group, part of the Unipol Group, is in the health and diagnostics center and others should follow soon, hopefully. Coming now to our portfolio. Fair value valuations are resilient. We have 4 independent appraisers who do their appraisals at the end of June and at the end of December. They are international and independent. So they follow international practices for these appraisals. Again, our portfolio. So a 0.10 growth in absolute terms. And fair value -- on fair value, we see more or less the same percentages, slight growth with yields which are to be found to the right-hand side of the slide, net initial yield is 5.3% in Italy and 5.9% in Romania. In the following slide, you see how our portfolio performed, starting from EUR 2.265 billion in full year 2020 to get to EUR 2.2679 billion. So the -- to catering -- to cater for the changes that we had over the first half. And then let's move on to the financial results. Rental income going from EUR 74.6 million to EUR 73.1 million in end of June 2021. And we -- well, they were partially impacted upon by the discounts we granted in the first half. But again, these are not full figures. These were mainly provisions we made. They are lower than -- EUR 1.5 million lower than last year. And the negative impact was due to the like-for-like portfolio valuation down -- well, negative 4 malls, down 3.3%. I told you that occupancy went up at the end of the half year. But vacancy was there during the 6 months. So we did pick up at the end of the first half. So that makes us confident for the results in the second half. Other markets had a slight increase, 0.6%, about EUR 0.1 million. And finally, we see a growth, even though a slight one, Romania. Romania had a limited decline, EUR 0.2 million because of the exit of a tenant with 2 shops in June 2020. So net rental income on Page 22, we go from EUR 56.3 million in the first half of 2020 to EUR 55.5 million at the end of June 2021, down 1.4%. And the impact here is less from rental income growth -- the growth figure still not factoring in discounts. So we get to EUR 55.5 million. And EBITDA, core business EBITDA, Page 23, will go from EUR 51.4 million end of H1 2020. So lower rental income, down EUR 2.3 million. And then, of course, we made provisions during this first half better figure than last year. But otherwise we end up with EUR 50.6 million EBITDA, slightly down versus last year, and that's financial management. We're now on Page 24 of the presentation. We saw an improvement, not of accounting items related to IFRS 16 and nonrecurring charges. So it's down 6.4%, about EUR 1 million or less. And we will see 0.1% decline versus 2.3%, but still, it's a virtuous financial management of our net financial position. FFO, funds from operations, we're on Page 25 of the presentation, goes from EUR 32.9 million end of first half of 2020 to EUR 30.6 million end of first half 2021. Again, we have a change in core business, slightly lower than EUR 1 million. And we have a change in financial management adjusted down 1.2%. Last year, we netted FFOs from negative carry. This year, we don't have that. The excess cash, about EUR 100 million at the end of the first half of 2020 because of a bond we had issued in November 2019. So we don't have that effect. So of course, we end up with a negative impact. The change in tax is only a marginal nature. So down 6.8%, landing at EUR 30.6 million. And EPRA metrics, let's -- on Page 26. As I said at the beginning of the presentation, there was an increase in the former NAV, you see a declaim at the bottom of the slide, we go from 10.38 to 10.56, so it's EUR 0.28 per share. Financial structure. Here, we have a decline in loan-to-value in the first 6 months. We have positive cash flow between the first and second half of about EUR 20 million, EUR 10 million in the first half and EUR 10 million in the second half. So about EUR 21 million of improvement in our net financial position. And then valuations managed to withstand. That led to a decline in loan-to-value close to 49%. So these are forecasts that should apply for the second half of 2021. To also, thanks to our collection data, giving a positive impact we should get by the -- to the yearend in a range between 37% and 48%. ICR is the same as last year with the cost of debt that has a slow decline from 2.30% to 2.22%. That's the average cost of debt. You see the chart on the bottom of the slide of this slide breakdown, 57.2% market, 42.8% banking system. 75% of our debt is unsecured, only 12% -- 25%, sorry, is secured. And the net financial position figure, you find them on the right, EUR 1.134 billion, that's net debt. So end of the first half, we have EUR 43 million in cash. And then next slide, you see our debt maturity profile. This year, with maturities have been repaid. We have very few debt expiring. It's mortgages, outstanding mortgages. And then for next year, we have this bond of EUR 153 million coming to maturity. I would like to maybe close it ahead of time, but it's not possible because it has the highest cost in our debt stock up 2.65%. That's the existing ratings, Fitch ratings, investment grade, BBB minus, negative outlook. And we have S&P Global Ratings, which is one notch below investment-grade. As to the outlook, you've already seen it or read it in the press release. In view of the positive signs of recent months and our forecast for the second half of the year and assuming things will remain where they are, will be stable, and we won't -- assuming we won't have a fifth or sixth COVID wave as we had last year. So we assume a growth of our guidance from 3.4%, the guidance we gave when we approved the accounts for -- on February the 21st. So we assume a growth to almost double, 7% to 8% against the backdrop that we consider positive, we assume to be positive. And then next slide, there's a macroeconomic backdrop better than expected, so to say. The GDP expectation -- growth expectation was increased by not only the government, but some international observers was a 4% growth expected for 2022. So this is also driving consumption. And let me say, let's hope this will be applicable and this is the backdrop we should be acting against as we move forward without any -- without assuming any negative one-offs for the second half of 2021. Let's go back to the first half. We have some final remarks on Page 32. We are reconfirming -- and we did so last year too, the resilience of our shopping malls. They are urban shopping centers that cannot be compared to the big shopping centers you see in other countries and with an attractive food anchor. So a well-balanced looks between shopping mall and food anchor. Having said that, this overall performance should lead us to increase our guidance for the entire -- for the full year, so to say, and the FFO guidance. One last thing before we wrap up for the questions, our agenda. So corporate November 4 results be for Q3 2021. And then we have IR concern as of today. These are -- this our agenda. Those are our deadlines. Thank you very much for your attention. Now we are here ready to take your questions.

[Operator Instructions] The first question is from the line of Davide Candela of Intesa Sanpaolo.

I have 3 questions. The first relates to the disposal process for your hypermarket. Can you give us an update on this? The second question relates to the market trends. Can you share with us your view on the real estate market, the retail real estate market in the coming months? Also, in the light of expected inflation to be slightly higher, so what can be the impact on the company on what could be the protection mechanisms in place? And then on your guidance for FFO, can you please kindly remind us of the COVID impact that you are assuming?

On the disposal process, we're still negotiating with a leading financial investor. We would expect to [indiscernible] negotiation before today's presentation. The sales process is continuing. It's taking slightly longer than expected, but we count on completing this negotiation during the third quarter. So this is the situation as it is now. The negotiation is ongoing. We started 3 months ago. Talks started 3 months ago with our counterparts, and we are confident that the negotiation can be closed by the end of the third quarter. Market trends. We don't see major deals on the market. Those are the ones that could have a yearend impact on the value and the fair value valuation of our industry. We don't see major transactions. Our negotiation is ongoing. And there is a must, which hasn't been a deal-breaker so far. It is the book value, which is not a problem because it's a portfolio with leases with an extended maturity, with timing with leading tenants. Of course, it all depends on what underlies everything. If you're talking about poorly performing shopping centers or malls, there can be negative impact for the owners of these centers compared with the actual book value. Here, however, we don't see major deals appearing on the market, either now or in the coming months. Then you had a question on our guidance. The scenario we assumed in the second half year period is certainly better than last year. In the half year period last year, we had considered EUR 9 billion -- sorry, EUR 9 million in terms of COVID one-off effect, whereas for this year, we estimated an effect that is EUR 1.5 million less. We expect to have some lingering effect for about EUR 1.5 million, EUR 2 million. And we have our internal estimate, also based on the recent sustained year lease decree provided that what happened last year doesn't happen this year, the estimate for last year was completely -- was actually doubled at the end of the year. So a similar amount which contributed last year, EUR 18.5 million in that case. And that was on a one-off basis, all expensed in 2020 with no carryover phase, with no spreading, et cetera, as was the case with other players, for example, foreign properties. So we are at about 10%, 10.5%. That is our estimate. So it will go up, but it will be less than last year. The leasing activity has become much more lively in the last part of the half year period. This will lead to new openings in the second half. And which is why we decided to raise our guidance to 7% to 8%.

[Operator Instructions] Next question is a follow-up from Davide Candela with Intesa Sanpaolo.