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

Good afternoon. This is the conference call operator. Welcome to IGD's conference call presenting results for the first 9 months of 2021. [Operator Instructions] Let me now turn the conference over to Mr. Claudio Albertini, CEO of IGD. Please, sir.

Good afternoon to all of you. As I'm sure you read in our press release, our Board of Directors has just approved our accounts ended September 2021. After the COVID restrictions applied in Italy until May 17, this is the first full quarter without COVID restrictions. And this is mirrored in the results that I'm going to walk you through. Start from Page 3 in the presentation, you see it from the title, straightaway: business is returning, has not returned but is returning to pre-COVID levels, and we are starting to see the first signals of going back to normal. So, we are recording that you see four different boxes with four highlights: occupancy, first of all, financial occupancy. It went up since the beginning of the year. This is a good sign. Somehow the declining trend we had last year has come to a stop. So there's a trend reversal up 114 basis points in Italy, 95.4%. Still a long way, however, to go back to pre-COVID levels where we had about 97% overall occupancy that was pre-COVID. But this is a fine for trend reversal that makes us hope for the best for the next quarter and also for next year. In Romania, we're slightly doing better, up 133 basis points versus full year 2020 and the occupancy level is close to 95%. But what I would like, first and foremost, to share with you is the top box on the right that shows you not just the quarterly figures but the fourth month of tenant sales, the first four months of tenant sales. Recessions were closed were ended on May 17, meaning weekends closings and so shopping malls went back to being fully up and running June, July, August and September and as the first four months of full tenant sales. So we're back to the same levels of 2019. We always refer back to 2019 and that will be recurring in this presentation, 2019, because it was not affected by the pandemic. So it would be not consistent to make a comparison with 2020. In the first nine months of 2021, even the one-off COVID impacts, that is to say the impacts that are only for this fiscal year, they had a EUR 1.2 million improvement versus last year. We do not foresee any further negative impact for the last quarter of this year, whilst last year, well, mid-October, last year, we had the second wave of COVID with closings during the weekend and then also during Christmas time. So we don't expect that to happen again. And I'm telling you because the full year results will be even more improving than now. And then the collection rate, collection rate both for Italy and Romania, Italy, 86%, definitely improving. Many tenants waited for the subsidies and reliefs offered by the government, sustaining these, the relief flow decree passed by the government and also a tax incentive. Health tenants reach us to help us reach this collection rate. Revenue is close to 100%. We're at 96% collection rate. A very important event that you -- I'm sure you're aware of, but here, we are providing additional information on. And there will be more detailed slides as we move on through the presentation. It's the asset management transaction we performed over the last few weeks. It was a transaction that we had already embedded in our 2019-2021 business plan, a disposal. We've almost completed the disposal. We just wait for the closing at the end of November. The transaction, as such, of course, is a condition to the achievement of the financing, and we're very close to getting that as well. So it's a disposal of a stand-alone hyper and supermarket portfolio. In main hyper and super markets that are not within shopping malls that are freehold for us, so where we own the [ Gal Di ] Shopping Mall. The book value at end of June is EUR 140 million. The cash in would be EUR 115 million. The delta is the reinvestment in the SGR that will be the vehicle in which the portfolio will be contributed. We will have a 40% stake of that portfolio of that vehicle. And that has a positive impact on the group loan-to-value, pro forma at end of September is around 45.6% with a further assumption for a decline from now to year-end. And with this transaction, we stressed out in the press release, when we signed the agreement with the counterparty. The counterparty is IGD. It's a primary company listed on the London Stock Exchange. They have EUR 65 billion worth of assets under management and the cash in coming from the disposal will be EUR 115 million, enabling us to fully cover our financial debt maturities for 2022 with the cash flow and the cash available at end of September, which is EUR 54 million plus the cash that will be generated by this -- during the current quarter and in the 2022. Debt refinancing maturities for 2022 are entirely covered without -- and I'll tell you more about it in a minute. I'll tell you have financial strategy in a minute. Moving on to the financial highlights. So we are on Page 5 of the presentation. And financial highlights, you see there are still minus signs on net rental income and FFO. This minus time will be reserved to plus. I can't give you any details on the forecast. The Board resulted on the first 9 months, but also looked at the full year forecast. Our consolidated result a slight decline in net rental income, more marked decline in the net profit, but we expect it to go back into positive domain. And our guidance, we confirm our guidance. The guidance, we've already increased end of June, and we disclosed that at beginning of August. So FFO in a range between 7% and 8% up in the range between 7% and 8%. Group net profit, we have a clear change in sign. We go from a loss in the first 9 months of 2020 that was minus EUR 21.3 million. And then we move now to a group net profit of plus EUR 35.2 million. So loan-to-value 4.3% (sic) [48.3%]. But if you factor in the cash flow, the incoming cash flow in November, so pro forma, it's going to go down to EUR 45.6 million after the portfolio disposal effect and with a further room for reduction at year-end. All of these figures take into account the one-off net impact derived from COVID and has impairment on receivables and are also rebates and discounts. We could have stepped up over a number of years, but instead, we are taking it as a one-off. Page 7, footfall and tenant sales. Here, it's a very interesting piece of information. The red line is tenant sales. And with that from January, let me stop on the dotted area for the quarter. June to September, practically 4 months June to September 2021, and there too, it's a comparison with 2019. In red, you have tenant sales and in blue, you have footfalls. So we -- our final figures for the 4 months -- first 4 months, starting from May 17, footfall are down between 15% and 16%, 1-5, 1-6, whilst the tenant sales are in line with the similar time frame in 2019. What do we mean? And you can read that at the bottom of the page. The average ticket and we take September as a month for the average ticket, but the previous months are not different. It went up versus September 2019. So up 8.5% versus September 2020, but up 21.7% versus September 2019. So we are picking up. We are recovering. And as I said in the box on the right, footfalls are improving. October footfalls are already declining less, so to say, in October than versus 2019. They were 15%, 16%. And now instead in October, we have minus 10%. And that is somehow a trend going back to normal. For many companies, smart working has come to an end. So the lunch break for many employees is spent at our shopping malls. We're starting to organize physical events again. So we are slowly going back to normal also in our shopping malls. And if we compare that to 2019, 2019 was not a medium year or an average year performance-wise. It was one of the top performing years among the last 5 years. If you go to Page 8, you will see a comparison between in 2014 and 2021. So comparison 2014, 2015, up 4.6%; 2015, 2016, 2.6%; 2016, 2017, 1.7%. And when we compare ourselves against the 2019, we are comparing against the performance of a normal year and with one of the top performances in the last 5 years. What are the product categories that performed best, Page 9 in the presentation. Always comparison, June, September 2019 versus June, September 2021. As you can see on the dotted line box on the right, more than 80% of the product categories that are available in our shopping model showing a positive trend. The bigger chunk is clothing and accessories. They still account more than 50%, 5-0, of our merchandising mix, and the results are surprisingly positive because it was one of the most hit industries in 2020. Household goods, electronics are doing very well. And also because TV sets are being replaced, thanks to the state incentives and also cultural leisure time and home items because people are staying at home, more harder to stay at home. And therefore, as a matter of fact that in June, people could go up more. But during the COVID pandemic, they invested on items for the house. And then restaurants are still suffering. Many people are going back to their offices. So lunch break is spent in restaurants and out of home. So -- and in the malls where we have movie theaters, there's 4 of them in our portfolio. And in that case, too, movie theaters were closed during the pandemic. Now they're open again, and so all restaurants and services that are tied in with movie theaters are picking up again. Ours -- the leasing management performance, we are doing well. We have increased our occupancy level, as I said before. And also when it comes to turnover of contracts in Italy, it's after 39 -- 290 contracts. We have a downside indeed, but it was a limited one. slightly more than 1% is a downside. Unlike the very negative performance -- sorry, the forecast that were made and that we're talking about a double-digit decline when it came to renewals. We only had a 1.2% downside. And we are optimistic as to recovering even that small decline. We did better in Romania out of 300 as a sample for renewals or turnover we had accumulated related figure of financial occupancy standing at 94.93%. Collection rate is also doing very well. And now on Page 11, both in Italy and Romania. So collections in 2020, we are very close to 100% collection rate. We will reach that personal delta from now to year-end. And as to the first 9 months of 2021 in Italy, we stand at 86% and Romania is 96% collected. The delay in Italy that is still very good despite the comparables, the results, the comparables achieved is mainly due to the relief provided by the government that supported our tenants and many wait for the relief to be it should be ready for ending the contracts or agreements that are still being negotiated. So the leasing activities were quite buoyant in Italy and Romania, a year, for example, on Page 12 and 13. In Italy, we had 43 new openings since the beginning of the year, and it's not bad. And same amount more or less in Romania, different types of tenants from restaurants to clinics, multiple clinics, polyclinics and apparel, jewelry and then same applies to Romania, where, again, it's a very lively market. And some limitations are still applied. So as I said, we are gradually going back to normal. Here is an example of how we are going back to organizing physical events. Let me remind you that in 2019, we organized about 700 physical events -- and 700 events. We have 27 shopping malls. That means about 25 events per shopping mall per year. And different types of events, all enabling to gather people with flows of consumers entering the, well, footfall and flow of consumers entering the shopping malls and this footfall sometimes being converted to actual purchases. We have this event at the Centro d'Abruzzo. In 3 days, thanks to that event we had an 8% increase in footfalls, and indeed, also in conversions footfalls into actual tickets. And these are minor things, but we like to report on them because it's good to see examples of being close to sustainability to circular economy and being a center of excellence for that. We have a project in Bologna in 3 shopping malls. It's a practical example of circular economy, using second-hand garments that are then sold collecting them and then selling them in a virtuous circle. This is an example that will go on for a few months, and we'll see whether we can replicate it elsewhere. And let's now move on to Page 16. We're very proud to show you the certifications we were awarded recently. The most recent one is RINA Biosafety Trust Certification. And we obtained the certification for the Bologna headquarters and 7 IGD shopping centers, and it have safeguards they help us people. And I think this is a very, very meaningful and to avoid infections and prevent infections and safeguard health. We got 2 EPRA Gold Awards, the BPR and sBPR. It's the seventh year in a row that we get an award on our sustainability report and our actual financial reporting, that was awarded in October this year. And then another very interesting award. It's very recent, just like the biosafety certification. IGD was included in the basket of rated companies. 40, we are among the 40 greenest companies. Out of more than 200, 250 companies, we were rated as the among the 40 top and more green companies at national level. And then let's look at the details of the disposal transaction. We detailed in our press release, after an agreement with IGD. IGD is listed on the London Stock Exchange. They have EUR 65 billion assets under management. So it's a primary counterparty we're talking about. And we disposed through an ad hoc and an SPV. At SPV, we disposed EUR 140 million worth of book value five hypermarkets and one supermarket. And next year, that will mean we will have a decline in NOI and rental income equal to EUR 7.7 million. Next year, when you make a comparison, bear that in mind, it's not going to be a like-for-like and consistent comparison. This portfolio will be contributed to an SPV, and the SPV will be managed in a service fund, closed-end fund based on Italian law. And IGD will have 60% of our Class A shares preferred and IGD instead will have 40% subordinated Class B shares. So EUR 25 million, that's why it is the commitment, so is the reinvestment. So that's why we're cashing EUR 115 million. These are the impacts. So pro forma at the end of September, our loan to value goes down to 48.3% and that will be on a pro forma level, including the disposal is 45.6%. Net cash in is EUR 115 million, considering the current cash trend is in excess of EUR 50 million. We're talking about EUR 54 million, 5-4, cash available and the cash flow that will be generated over the last quarter and in 2022 will enable us to fully cover the 2022 refinancing needs. And to cover the 2022 -- and also think of refinancing 2023 and 2024 maturities. We're looking around in the market to see maybe that we could go for a bond issuance as the banking market right now doesn't seem to be very prompt in responding to retail funding, financing. I don't know we have agreed a degree of dependence on our main shareholder that goes from 25% to 20%, and that's its asset class share. Revenue-wise, rental-wise, we go from 25.8% to 21.3%. 1/5 of our rent income can come from comp because comp wholesale stake, which is in excess of 50%, 5-0. Let's move on to Page 21. And we drill down into the figures. We look at the income. We go from a net rental income in 2020, which is slightly below EUR 90 million now, EUR 89.7 million to be precise, to EUR 86.9 million. The largest decline is driven by rental, the actual rental income, because we are recouping, recovering occupancy-wise, but at the same time, there's a time mismatch between the occupancy level and the actual income. And so we are looking at the first 9 months. And in the first 9 months, we had a decline in rents EUR 2.2 million on rents for like-for-like basis on shopping malls, while hypermarket went up a bit rent-wise. And a positive impact in the bridge you see on the screen is the COVID effect delta. They're lower than EUR 1.2 million versus last year. And we had higher rental costs, especially for provisions we have to make and condominium fees and expenses because they are to be paid by and borne by the landlord as per contract. On the financial management, very well. We did well, as I said before, also still declining is the impact of the financial management. We'll give you more accurate data. We are down about EUR 2 million, EUR 2.1 million versus 2020. Its financial management adjusted. It's 25% versus 22.9%. We embark in a liability management exercise throughout 2021, but it had already been started in the previous years as well. Let's have a look at the FFO, for the corporate valuations. So we're carrying earnings and profits, FFO, so funds from operations. You will probably wonder -- you are expecting a decline of 9 points in the first 9 months. So how are you going to retain that at that level? How can you retain this guidance going up 7% to 8%? And this is the explanation: last year, in the last quarter, if you remember from mid-October, we started what we experienced the second COVID wave that caused the big problems we had closing, red lights and traffic, meaning, red areas, green areas, lockdowns, shopping malls closed over the weekends and closed during the Christmas holidays. We don't expect that to happen again in the last quarter this year. Thanks to the vaccination campaign. And Italy is only second to Spain. We are among the countries with the highest vaccination rate and occupancy rates in hospitals well below the critical thresholds and contagion levels are much better than -- cannot be compared to what we had last year. And so the quarter -- last quarter has been faring well. This quarter is also doing well. So we can assume that we can improve last year's FFO level, 16.3% from last year. We're not giving you disclosing a date, a precise figure, but we assume it's going to be better than last year. That's why we can reconfirm our guidance. And if you remember, we'd already increased our guidance. We started throwing our heart above and beyond, so to say, the obstacles. In the beginning of 2021, we gave a guidance of 3% to 4%. But after the first 6 months, when the situation in Italy was already improving, the 6-months report was given in August, so we've doubled our guidance saying 7% to 8%. And this is what I would like to reconfirm now, 7% to 8% FFO -- up 7% to 8% FFO guidance. Loan-to-value 48.3%. An interesting piece of information is shown here in the year rolling, first from 9 months this year and the last 3 months of last year, we generated a positive cash flow of about EUR 60 million. So IGD, I would like to stress that with strength, is generating cash. Our net financial position went down further. Also during this quarter went at about EUR 18 million and the write-down of our debt profile is 58% market and 52% banking system. Even though going forward, this breakdown should see an increase in the market share, meaning we should turn to the market more in the next two to three years, the bond market rather than resorting to the banking system. Or if possible, we might retain this breakdown. But given the market sentiment, we have been recording on the banking industry segment as our sentiment vis-a-vis the retail market, we will probably turn to the market rather than the banking system. So secured versus unsecured, 76% is unsecured versus 24% secured. Next page, talking about debt maturity and debt maturity profile. This is not different from what we showed you in the previous quarters. This is, again, debt maturity profile. With the transaction, we're going to close end of November, EUR 115 million cash in plus, we generated cash for the last quarter enables us to say that our debt coverage for 2022 is already available is full, that is fully covered. Maturity is fully covered. And in the first quarter of 2022, we will be thinking of refinancing our debt maturities for 2023. As you see, it's EUR 270 million, it's syndicated financing syndicated by Bancario, another banking debt that is due for maturity. And we will start taking into account refinancing 2024 maturities as well. We have two bonds there in 2024. One is a listed EUR 400 million expiring November 2024, so we have time to come up with a refinancing strategy and another EUR 100 million bond fully underwritten by Pricoa, and the rest is not very much. Should this -- well, this -- we hope this refinancing strategy will be supported by the rating that has recently been reconfirmed by Fitch, not only was it confirmed but there was an upgrade on the outlook that went from negative to stable. And S&P rating is still being revised, waiting for it to be revised. It will be plus with negative outlook, but we are moderately optimistic as to the fact that it will improve over the next weeks and months. Let me wrap up on Page 27. This is the outlook. I've already told you that we reconfirm a 7% to 8% FFO guidance for 2021. And we hope we can surprise you with a further improvement once we close the year. But let's close the year first, and then we'll see. Hopefully, mid-December, when we will present the business plan to you, we will have a greater visibility on how we did and we performed over the quarter. So we'll tell you more. And then as I already have the opportunity to say in one of my statements, after we announced the disposal transaction, but I'd like to reconfirm it here, thanks to the way we performed. Thanks to our operating performance. And thanks to the disposal transaction, we generated the related foundations to go back to paying dividends to our shareholders starting from 2022 based on 2021. I'm sure you're going to ask the question, what kind of dividend are you foreseeing? For sure, there'll be a starting base, the starting base could be the last dividend we paid out in 2020 for -- based on 2019, it was EUR 0.23. That could be, for instance, a starting floor, so to say. We see whether or not we will have the conditions to actually pay a larger dividend, a higher dividend. But that is the level and the level we are aiming at as a base, so to say, as a minimum level for us. Let me say that when it comes to dividend payout, it will be mentioned in the -- it is mentioned in the press release, not in the first part, but inside, the press release, I'm telling you that the disposal transaction was closed, and we think it should be closed by the end of November. And it will force us as we will free up reserves. We will have -- it could be mandatory for us to distribute EUR 16 million worth of dividends over the next 2 years because that's the obligation we get because of being a [ Indiscernible ]. So we'll free up to EUR 30 million reserve 50% will have to be distributed, and we can do it either in 1 shot, 1 year only in the first year and the second year or spread across the 2 years. So this is what we'll discuss once we approve the accounts -- the full year accounts in February, this is not what I told you before. The dividend for this year. Let me remind you that IGD has to distribute at least 70% of what I've said before. It is the exempt operations. So 70% plus the dividend of the operations plus these dividends. Let me wrap up with the final remarks. We are confident that our operations are on the right way to recover and to recover to pre-COVID levels. So we reconfirm our guidance for FFO to grow in a 7% to 8% range. We further strengthen our financial structure with the disposal transaction with loan-to-value moving from 49% to 45.6%. And then we've laid the ground for dividend to be paid out again in 2020. Last but not least, in November -- on November 15, we will be pleased to take part in the Exane BNP Paribas European Mid Cap Virtual CEO Conference. I will be attending it in person together with my colleagues from Investor Relations, Exane is also starting to cover as an analyst coverage on our stock. And then on November 24, so I will be attending the winter addition of the EPRA Corporate Access Conference. And I think that's it from our part. We are here to take your questions together with the colleagues. Thank you very much for attending.

[Operator Instructions] Question comes from the line of Dario Michi with Exane.

Do we have a loan-to-value target that you would like to -- do you have a loan-to-value target?

Could you repeat because we couldn't hear very well?

Do you have a loan-to-value target that you assume as a reference in the medium to long term and that you think you will achieve? Are there any further disposals in your pipeline to achieve that loan-to-value target? Are you feeling any pressure on the part of tenants to have a variable base rents rather than fixed base rents?

While loan-to-value I cannot tell you about the business plan targets, but the level we got to the 45% is a reference level already. More than focusing and drawing your attention on loan-to-value, I think you should focus on the level and the quality of debt. What is it made of? Is it rating based? When are the maturities due. Even before the transaction, our loan-to-value was sustainable. And many comparables, I know have a loan-to-value that's close to 40% or below 40% versus our 45%. But it's clear that we think that if we manage to -- I cannot advance or tell you about the business plan targets. But if we can get below 45%, that would be good. But we think that 45% already is a good level. It's what we have identified in the existing business plan. Please remember that we are still in the existing business plan 2019, 2021, and the loan-to-value target was 45%. So it's still one of the targets belonging to the old business plan, and it will probably achieved. It will be very much dependent on fair value valuations at year-end. But even fair value valuations will play a role and linked value is a breakdown between market value on the one hand and debt level on the other. We are a cash generator. IGD generates cash in the rolling year until end of September 2021, we generated EUR 60 million worth of cash. And also with the -- bearing in mind that we will have to pay a dividend as well, it won't be possible to generate such a high level of cash. We want to invest. We want to keep high quality in our portfolio. But we think that a level as the one we have is sustainable. We also have some disposals in mind, but part of the disposals will be devoted maybe to reduce our loan-to-value pressures from the tenants. But we kept the bar straight, so to say, we and we steered in the -- along the pathway would already be -- we already identified really negotiated with those tenants that have a very strong bargaining power. Otherwise, we're not going to go to revenue-based contracts. This is what we kept from. Even though we have about 800 negotiations bear in mind to discuss possible rebates -- during the pandemic 800 per year. That's the level of negotiation. Indeed, we got request from going from fixed rent to revenue-based rent, but we -- sometimes, we allowed temporary changes or temporary rebates, but we've never accepted proposals for -- to go from fixed rents to revenue-based rents.

Your next question comes from the line of Simonetta Chiriotti with Mediobanca.

I have two questions. One is about dividends. Maybe I lost something along the way. And so recap, making a recap. You may have an ambition to distribute a dividend in line with what you distributed in 2020, generally speaking. But that does not include the amount to be distributed because of the portfolio disposal. So EUR 32 million are on top of the dividend you aspire to payout. And then another question on year-end valuation. You've just made a major disposal. So for sure, you know what the market is like. Could you elaborate on whether or not there were further impairments?

No, I don't think I was clear enough then. The EUR 32 million worth of reserves that will be freed up with the disposal. We have to distribute half of that is mandatory for us. The EUR 16 million could be EUR 8 million per year or EUR 16 million in the first year or EUR 16 million in the second year, or mix of EUR 10 million plus EUR 6 million or whatever. We have 2 years' time to distribute them, distribute the EUR 16 million on top -- well, I gave you an estimate -- but also you have to bear in mind that there are variables that come into play. We have to distribute 77% of the exempt operations, which is given by operating results, FFO -- which stems from FFO. So in addition to the exempt operations, we have to fair value valuations which ties in with your second question. So sale value valuations may free up more reserves or could reduce the exempt taxable income, so to say. We have to think of a range, as I said before, between 0.2 worst case, worst case and 0.3 best case. So I would position myself some way in between the two. I would think of the reserves that will be freed up during the -- after the disposal transaction. We don't yet have any visibility as to the valuations. I may hand it over to Roberto. He's only just starting that exercise is only just probing the market on the hypermarket asset class so far. We do not expect any negative impacts also because we can rely on the fair value valuation of the disposed portfolio. On the shopping mall asset class, we're not definitely going through a time whether the value is going up. Indeed, Roberto, maybe can add something.

We do not yet have enough visibility or full visibility about year-end. There have been no major transactions concerning meaningful or big galleries. So there are no reference valuations. Appraisers are looking at what is happening to renewed fees or new rental fees, revenues. Revenues, Tenant sales are being positive. But when it comes to macroeconomic factors, we know that they are improving. There are some percentage points of improvement factoring in inflation applied to rental fees that we will have to look at it from -- well, the cost of lending that will have an impact on actual rates. End of December or midway through December, we'll have better visibility as to hypermarket, apart from our transaction. I'm sure you've seen that all over Europe -- Those are the only assets that are being the object of a transaction that are disposed off or purchased. We can't see any variations ahead of us when it comes to the hypermarket asset class.

[Operator Instructions] Mr. Albertini. There are no more questions.

I would like to thank you very much for joining us. Talk to you next time. Thank you.

This is the conference call operator, the conference call has come to an end. You may disconnect your phones. Thank you very much. .