Earnings Call: Q1 2021

May 13, 2021

Good afternoon, ladies and gentlemen. It's my pleasure and of course, Jovav and Ariels as well to invite you and welcome you to our Q1 2021 results. We are very happy to present the results and answer any questions you may have. I will give the floor over to Joao Pf Karni, the CEO and Ariel Firstman, the CFO. They will conduct the presentation and later on, we will open the floor for question and answer. Thank you very much. Thank you. Good afternoon, everybody. We will start with the presentation. Okay. So In Q1 2021, GTC has shown strong results In spite of the fact that we were still under lockdown in certain countries in which we operate. So we still had the presence of the COVID-nineteen pandemic. And we have shown EUR 27,000,000 gross margin compared to Q1 2020 EUR 30,000,000. We have been experiencing EUR 2,400,000 loss in relation to the COVID-nineteen lockdowns, EUR 4,500,000 loss comparing to the pre COVID period in Q1 2019. The operating profit before tax is EUR 15,000,000 comparing to EUR 13,000,000 in Q1 2020. FFO strong at EUR 14,000,000 comparing to EUR 18,000,000 in Q1 2020, EUR 254,000,000 is the cash balance that we ended the period with. We were able to maintain our LTV at 45.5% and historically low interest rate of 22.3%. In the course of the Q1, we have been raising another round of the green bonds in the amount of the €4,000,000 with an oversubscription of 25%. Moving to the next page. We have been able to demonstrate stronger activity in the office segment then in 2020. In the whole of 2020, we have signed leases and prolongation in the amount of 70,000 square meters. And just in Q1, we managed to sign 40,000 with main items being a very reputable IT blue chip company in Krakow with 11,000 square meters significantly superior home petal and city gate in Bucharest. We've been able to maintain our high occupancy of 90% as of March 21. And another significant item here that in the course of Q1 and Q2, We completed the acquisition of 2 office buildings. We will talk about it in a minute. And the overall volume of EUR 212,000,000 contributing almost EUR12,000,000 per annum in placements. In the next slide, we will show you those assets. Vasi Green D is an office building on the Vasi Street in Budapest, relatively newly developed completed in 2018, enjoys from a BREEAM excellent certificate Generating almost SEK 3,000,000 closing capital in March 2021. The next one It's actually 2 buildings, Head Office of Ericsson and Head Office of SIMON's EvoSoft, generating almost EUR 9,000,000 in place rent. Acquisition was completed in the last 2 days. And overall acquisition price is EUR 160,000,000. All those buildings have high green certification. And This demonstrates our where we want to go forward. Talking about COVID-nineteen and how they affected us in Q1, As I said, we have experienced lockdowns in Poland, in Bulgaria, in Serbia in the course of Q1. This Had an impact on our gross margin of EUR 2,400,000 comparing to Q1 2020. As regards the occupancy level on the Retail segment, it remained 96%. It's Actually improved in the course of the Q1. You will see the retailers that were willing to commit, Which is very reassuring to see that retailers still believe In the physical shopping centers, we see a new brand of CCC in Galeria Polnozna called Half Price with 1,500. CCC in Valera Polnodsen with 800 square meters, almost 700 square meters of mango 500 square meters of Mushrooms Avenue Mall. This is complementary to the recent leases we secured at the end of last year of IKEA and Bershka and Cinsei in Polnozna, Here, actually, we can see a snapshot of our portfolio, how it looks in terms of overall, we have EUR 2,100,000 of gross asset value. You can see the split between the Between the geographical split between the countries, the allocation between the retail and office segment at 60% office and 40% retail and the location between the various cities. We are at close to 90% of the cash producing assets being 90% is cash producing assets and around 10% or a little bit more, 11% development projects. And that's the allocation to mention here. On the next page, we have shown a pro form a how this allocation will look like post acquisitions of those assets that I mentioned previously and how it improves position. First of all, the overall gross asset value grows up to EUR 2,300,000,000. The weight of Budapest is increasing. The allocation between office and retail is increasing towards the office with 65% versus 35% retail. And we come back to 90% cash generating versus 10% development. This fits within the context of our program to shift the focus into Poland and Hungary As the country is enjoying from higher rating. And next page. Again, we show how the cap generating portfolio split by age, which is another trend we are trying to implement. Currently, we have 47% under 10 years versus 52 post acquisition. So we are balancing more towards the newer assets and more towards green Today, we have 84% green certification of all our assets across the board. And the pro form a shows that post acquisition, this ratio improves further. If we look at the next page. This is with focus on the office sector only, which is even more visible. That's post acquisition, we grow from 47% below 10 years to 55% and the green certification the same. If we look at the pipeline, the current pipeline consists of the pillar Fully led to ExxonMobil. We've been seeing that the development is ongoing, On track, on budget, on program, no disruption due to the COVID and the lockdowns. We started late last year the Sofia Tower, which is progressing On time and on schedule. Centerpoint 12, we mentioned previously that we are working to renovate the building and repositioning. This is ongoing. And on the right hand side, you see those two projects that are ready to go. And once we are satisfied with the demand for offices in those locations, We will launch today. I will hand over to Ariel, unless to talk about the financial part of the presentation. And please? Thank you, Joao. Good afternoon, everyone. As you have mentioned, Q1, we ended with strong results, strong profit EUR 9,000,000 driven mainly by the fact that if you compare a like to like basis with Q1 2020, we suffered certain exchange difference as a result of our cash holdings exposed to the zloty versus the euro in spite of a slight devaluation during the course of the Q1 of 2021 zloty versus euro. We managed to optimize and manage our cash in a better way. So that contributes us to end up with the profit €9,000,000 in spite of the decline of €2,400,000 on the COVID. So if we zoom in regarding the gross margin of operations like to like EUR 27,000,000 we posted on Q1 2021 versus EUR 30,000,000. You can see on the breakdown of the bridge of the operating margin, we have declined EUR 2,400,000 due to impacting on the COVID, EUR 1,000,000 the disposal of Spira. And this was offset by €800,000 that contribute cash and rent income from Green Heart ABC1 and Matrix A, which now they enjoy full year operations also as well as fully occupied. Moving to the Slide 19 on the balance sheet. There was a slight increase on investment property. This is as a result of the progress on the development that you have mentioned So here, Tower and Pillar. And we have started also the redevelopment of Centerpoint Our investment capital expenditure and face lift of the building around €10,000,000 also as well. Regarding the Cash and cash equivalents, we have declined around 7%. And this is as a result of the fact that we placed the bonds, EUR 110,000,000 at the end of 2020. And we said that we will use at least half of those proceeds to refinance more expensive debt and also the decreased leverage on certain assets, which were we believe that were a little bit over leveraged. The plan That plan partially, €44,000,000 We repaid €10,000,000 in City Gate, €5,000,000 in the Lager Grieska, €29,000,000 in the other shopping center. And this was partially offset by the successful lower subscription placement on the bonds at the End of March, EUR 54,000,000 Moving to Slide 20. As Jeroen mentioned, we still we have posted 45% LTV. You can actually see that we are changing and this will be part Of the new financing strategy of the company that we are trying to implement. We are changing our LTV policy towards the 40%. We would like to move shifting that policy in line with the investment grade rating. So that's what we're working on so far with different rating agencies to prepare the company for the future placement Of the €500,000,000 bond for GTC and switch and balance and our secured financing with The Hosos unsecured financing. Something to point out here regarding the debt maturity, GTC doesn't have to Basically, recycle any more loans in the next 18 months. We have signed already and prolonged. At the Beginning of the year, we started with €135,000,000 to be prolonged and we have prolonged already €135,000,000 for 5 years. And the next expiry of the loan is around Q3 2022. So that improved our basically our weighted average debt maturity 4.2% to 4.7%. And we still have posted the lowest average interest rate, 2.3, thanks to the successful placement of our green bonds at the end of December and also in March. Moving into Slide 21. Regarding the cash flow statement, I think It's visible the decline around €2,000,000 and this is on cash flow from operating activities. This is driven mainly by the COVID-nineteen. There was the investment in related state, EUR 22,000,000. This is in relation to the development, mainly development on Pillar and Soffe Tower 2. And of course, you see a lot of activity regarding on during the Q1, regarding the proceeds And repayment of long term borrowings, we have successfully refinanced PIXELA Fresca, who was about to mature During Q1 with a new loan, €39,000,000 And also, as we explained before, We earlier repay around EUR 44,000,000 as a part of the refinancing plan from the placement of the bonds in December. I think this concludes our presentation. And I think, Mogocha, we are ready to open the floor for questions. To ask a question. This is Jakub Sarmos from ODD. Can you guys hear me? Sure. We can hear you, Kuba. Perfect. Many thanks for the presentation. If I can maybe kick it off with a few questions from my side. To start with a technical one regarding the acquisition of the Vasi Greens building, I haven't seen it in the cash flow. Have I overlooked it? Or will it be recorded only later in the year and it's not in the numbers as of the Q1 yet? No. Since it was recently completed at the end of the quarter, that will be reflected on the upcoming numbers. Perfect. Noted. Thank you. So in total, we have something like 210 outlay for the buildings, which Should bring the LTV to around 50%. And you were talking about the new Kind of internal range that you would be targeting, the 40%. Can you talk about how do you expect to get that? How do we expect to get to 40%. 40% is the long term policy of the company. We will gradually get there. In the coming months of the year. As was mentioned by Ariel, We plan on the financing side a few things. 1 is the euro bond race, which as Ariel mentioned, we are working on the rating. And And this is planned for the next couple of months. And the other one It's a complementary equity raise, which is also planned in the Pretty much in time. As you know, the Polish regulations, the Polish Stock Exchange Allow up to 20% capital increase on a fast track with no perspectives. We have been exploring that and discussing with our shareholders And the feedback so far is positive. And this, Of course, will help us enhance the FTV ratio in the direction that we target. Just to complement on Jervas, those acquisitions will be our finance On a 50% or in some cases lower leverage with different secure financing. So that we do not expect such a Sudden increase on the LTV also as well on a group level, given the fact that also we are financing also some parts from our equity. And so that's give or take, but that will give the math with the other events. We're going into that direction. Perfect. Thank you very much for the clarification. And is it fair to expect that The prospective capital increase would be done with rights issue given the discount shares are trading it? Malgosha, maybe you can explain the technicality of how we plan to do this? Well, we are planning to do ABB as we did in 2014. So there were no rights issue as such. However, the resolutions were securing the rights of existing shareholders to be allocated certain number of shares. This is working on the Polish market for 6 years now 6, 7 years and this is well approved by the local investors. I see. Okay, understood. Thank you for the clarification. Sorry, go ahead. Yes, yes. Just to add on that, I think We will also with such a move, we will also benefit on the liquidity side of the share, which currently is The liquidity is very safe. So I think this is also a potential achievement or target to achieve with this move. Sure. Yes, that makes sense. Thank you, Pori, for the answer. Then last question from my side, if I may, One more. It seems that we are seeing some encouraging signs in the retail footfalls after the opening. Can you talk a bit about where do you stand in the different countries? How did the lockdowns impact the tenants in Twitter. You think that we should expect some degree of pressure on the occupancy maybe even After the opening or whether you perceive the financial health of the tenants as rather good now? I can tell you the following. First of all, we I think as we mentioned in the presentation, we are currently at 96% occupancy across our 5 shopping centers, which is very high ratio. In fact, Galeria Polnotsna is currently on its highest occupancy at 94%, which is the highest Since it was opened. And this is thanks to the recently flag store of Cinsei that was opened last year, the commitment of CCC with its new brand called Half Price. So this in all this is happening in the course of the lockdown the late end of last year and early this year in Q1 when we were in lockdown, Which the way I see it is very encouraging because it means that those retailers have confidence Quite a long period of lockdowns. We've seen the speed of the or the pace of the vaccination in our region accelerating. We saw in Poland, the lockdown was the longest. And as of the 4th May, shopping centers were opened. And we saw them very crowded with more than 20,000 people per day, Which is more than pre COVID times. All this is very encouraging. We see that in other countries where the percentage of the population is high in terms of their vaccinations like North America like Israel. And it is becoming a COVID free zone Very little people hospitalized or sick. And markets are opening up, And we expect this to start happening. It actually is starting in some of the countries where we are present like Hungary. Poland is just one notch behind as well as the other countries we are present in. So I think while the weather is improving, while people are no longer under lockdowns, we will see very much so the shopping centers coming back. Ladies and gentlemen, do you have any more answers that we can Questions. Questions. Hello. This is Peter Breysen from Avaron Asset Management. Can you tell what is the percentage of assets, especially on the office side, that is linked to the CPI on the rent site. And on the retail side, I assume it's more linked to the sales level. So or maybe you can comment on this. So how much is fixed and how much is kind of dependent on CPI development? Regarding the office side, we the vast majority of our leases, if not I never want to use the word 100%, but the vast majority of our leases, I believe, we believe over 95% Our link to the CPI. But usually, since our leases are based on are denominated in euro or linked to the euro, so it's sort of European index. And regarding the retail, all leases that usually are fixed rent are usually Linked to the same index as well regarding how many are variable income, I mean, turnover rent and Base income, I mean, this is something that we do not disclose. I mean, But most of our income in the shopping centers are predominantly based rent fixed rents. Under certain special on the anchor side that are linked to turnover rates as well. Okay. And one question on the acquisition pipeline. Do you expect to further increase the share of Hungary in your portfolio or it has been just a coincidence that more acquisitions have been coming from this country? I want to say something about Hungary. I know what you're going to say, Yevo. I just want to point out, During the course of Q4 2020, we suffered losses for €143,000,000 The only country we post the profit was Budapest. That demonstrates the strength of the market that and resilience in the COVID-nineteen. I do believe after the disposal of Spira, we have even proved that our valuations are even proven correct, up to a 20% uplift from the values previous to the sale. And I'm pretty confident, this is my personal view, pretty confident on the Budapest market, always show very strong performance on our asset on the portfolio. Yes. And to answer your question, This is what something we expressed and we are saying it. The markets where we see ourselves focusing are in Poland and in Hungary with the capital being Budapest. This is where we are targeting to focus our business. It doesn't mean that we will not do business elsewhere. It just means that those countries enjoy from higher rating and this is where our business going forward the focus would be. And therefore, it is not a coincidence that you see us expanding in Budapest. Okay. Thank you. And just one clarification. Did I understand correctly that you are looking to raise €500,000,000 bond? Maybe if I may have one follow-up on the rents. Given the significant amount of leasing that you have done in the quarter. Can you talk about how the levels compare to the ERVs? And regarding the offices in Budapest, in particular, I haven't seen, I think, the twist among the developments that you would consider launching within the next 24 months, which rather to me would suggest that you have A cautious outlook because I think this is a development which will take maybe 3 years from the start to finish. So does it mean that is there some problem with the permitting? Or does it mean that you don't necessarily feel confident launching such It's a big project at this stage, even though the completion will be quite some time ahead. It's Jakob again. Thank you. Yeah. So to answer your first question about the rent levels, We don't see at the moment the rent levels significantly softening if you are comparing to pre COVID times. So it means that the ERVs that we see are pretty much the same. So that's I think answers your first question. Regarding our presentation and how we designed The pipeline projects, we outlined 2 projects We see them as ready to go, subject to demand for office space. Those are G2C X and CenterPoint 3. Regarding all other development pipeline, we thought that since the horizon of that It's further on since they are still in planning mode, since it is yet to be seen how trends we developed in the office market and so on, then we'd rather Put them in one basket, in one line and come back once they are more, Let's say, once we have a more concrete knowledge about them or idea, when will they be developed? Regarding your specific question about Twist, There is no planning problem with it, nor timetable problem with it. But one has to be cautious about whether how the office demand for office will evolve. And that will dictate the timeline for other office projects as well. And since we're just now coming out of the COVID, the first market demands. I guess the same as you, we are hearing all kinds of the sentiments going in various directions. And one has to listen carefully and see how it turns out. Perfect. Thank you very much. Ladies and gentlemen. If there is no more question, I would like to conclude today's call. And of course, as usual, the call is being placed on the website, so you can have an access to the audio recording of that call. And we will be happy to answer any questions you may have. Please give me a call or send me an e mail if you need any assistance. Thank you very much. Goodbye.