Publication of the third quarter 2011 results

Strong operating results while assets value impacted by Eurozone crisis

Globe Trade Centre S.A. (GTC) released its third quarter 2011 results today. The results have been prepared in accordance with International Financial Reporting Standards (IFRS) and are presented in Euro.

Highlights

  •  Improved revenues from operations (€42m; 13% y-o-y) in the third quarter, despite the sale of Galeria Mokotów, generated by new assets completed in 2010/2011
  • New stage of the Eurozone crisis, which was unveiled in August adversely impacted real estate and credit markets in the region and in particular in SEE
  • Non-cash negative revaluations and impairments of €140m due to continued adverse market conditions mainly in Romania, Bulgaria, Croatia and Hungary
  • Two new attractive and large retail projects in the strong Warsaw market will increase the portfolio value medium term
  • Attractive upcoming development projects will be funded, amongst others, by €40m free cash to be generated from the announced disposal of Platinum Business Park in Warsaw, as well as project finance loans
  • €22m free cash to be generated in the fourth quarter from successful refinancing of City Gate and Avenue 19A, demonstrating solid relationship with lenders
  • Recently signed new lease agreements, including 29,000 sq m office lease in Spiral (Budapest), improves overall occupancy and support cash generation
  • YTD investment of €152m into selected assets
  • Completed commercial space of 539,000 sq m valued at €1,444bn

 “The continuation of the European debt crisis and its impact on European financial markets have resulted in a further deterioration of the macroeconomic situation in Balkan countries, especially in Romania and Bulgaria. In a conservative and proactive process, the management of GTC reassessed the value of its property portfolio and landbank to reflect the current macroeconomic environment.”says Eli Alroy, the Chairman of Supervisory Board. “GTC Management is taking various measures and actions to resist negative trends.” – adds Eli Alroy.

Financial overview

Rental and service revenues increased by 3% to €32m in the third quarter of 2011 and by 5% to €97m in the nine months compared to the corresponding periods of 2010 and despite the sale of Galeria Mokotów. Main contributors to the increased rental revenues were newly completed assets including Galleria Stara Zagora and Avenue Mall Osijek. Some of GTC’s properties, as of September 2011, were still not fully occupied or in rent free periods; thus there is a potential for further rental revenue growth. The margin on rental revenues was 75% in the third quarter of 2011 and 73% in the first nine months.

Revenues from the sale of residential properties increased to €10m in the third quarter of 2011 and stood at €20m in the nine months, resulting from sale of villas in Warsaw. The margin on the sale of residential properties was at 13% in the third quarter of 2011 and at 6% in the nine months.

The gross profit from operations increased by 8% to €25m in the third quarter and stood at €72m in the nine months. The increase in the third quarter is attributable to higher revenues while the cost of operations grew at a slower rate. As income from some of Group’s assets has not yet been stabilized as at 30 September 2011, results have improvement potential.

Due to continued adverse market conditions mainly in Romania, Bulgaria, Croatia and Hungary, revaluations of investment property and impairments of residential projects were negative and stood at €140m in the third quarter of 2011 and at €178m in the nine months of 2011. The changes in value were determined by Management in consultation with its external appraisers and are mainly attributable to  lower Estimated Rental Value and postponements of developments. In some cases, downward valuations reflect short-term concessions given to tenants in order to improve or maintain occupancy. All the efforts taken by the Management currently are focused on creating long-term value creation of its assets.

 “The valuation of assets was determined in consultation with external appraisers  and we believe that it reflects current today’s market conditions.” – said Erez Boniel, CFO and Member of the Management Board of GTC. “In such an environment the Company is strengthening its cash position through sale of assets, raising project finance and refinancing of selected assets thanks to our solid relationships with lenders.”

 Net loss amounted to €163m in the third quarter and €201m in the nine months which resulted mainly from a loss on revaluation of investment properties.

Investment was at the level of 152m in the nine months of 2011 as compared to 113m in the corresponding period of 2010. GTC will continue with development of its best assets in the core markets using its liquidity and debt raising capacity.

“Management focuses on the most attractive markets and unsaturated segments, where GTC sees clear demand for its products. These include, amongst others, two shopping malls in Warsaw, an office building in central Bucharest and a shopping mall in Belgrade. The refinancing of City Gate (Bucharest) and Avenue 19a (Belgrade) follows our strategy to focus on quality assets.” – said Hagai Harel, Director of International Development and Member of the Management Board of GTC.

The value of the property portfolio was at the level of €2,114bn as of 30 September 2011 (including €134m of assets held for sale), after the revaluation and impairment loss that was recognized in the first nine months of 2011 and reflects the macroeconomic situation as of 30 September 2011. The next review of the value of properties and land bank will be conducted as of 31 December 2011.

NAV per share stood at €3.9 as at 30 September 2011 compared to €4.8 as at 31 December 2010.

The Company is discussing with lenders five of the company’s property-level loans (total value of €126m), a readjustment of covenants and rescheduling of loans if required. As at 30 September 2011, the affected loans have been reclassified to current liabilities until the terms of the loan agreements are amended. The management believes that it will reach an understanding with its lenders in the next 2-3 months.

As a result of the loans reclassification around 38% of GTC’s debt is expiring in 2017 or later, however upon reversal of reclassification it shall return to the historical level of 45%. The average cost of debt financing remains attractive at 5.5%. This provides the company with further comfort in realizing its development plan.

 Recent developments

Sale of Platinium Business Park in Warsaw

GTC has signed Head of Terms with Allianz Group regarding the sale of Platinium Business Park in Warsaw. Signing of the final agreement is subject to satisfactory due diligence and approvals of statutory bodies of both the buyer and the seller.

Platinium Business Park stands out for its award-winning architectural design, technical specifications, as well as the quality of its tenants. The complex is located at the intersection of Domaniewska and Wołoska streets in Warsaw. It consists of four completed buildings with a total of approx. 44,000 sq m, one building under construction consisting of 11,000 sq m and a site with a building permit for another building consisting of 13,800 sq m.

The potential sale of buildings 5 and 6 is dependent on the achieved leasing and construction thresholds. The buildings’ final price will reflect an investment yield of 6.7% on the net operating income of each building. GTC expects that upon the transaction approval and closing, the sale of buildings 1-4 for €134m will generate free cash of approximately €40m. Additionally, under full occupancy at the agreed threshold assumption, the sale of buildings No. 5 and No. 6 will free approximately €20-26m cash in 2012/13.

Plan to develop a shopping mall in Białołęka

GTC has commenced works on another modern shopping and entertainment centre in Białołęka district of Warsaw that will be developed simultaneously with its retail investment in the Wilanów district. The mall will be built on a 4.9 hectare site. According to the local zoning plan, the site which belongs to GTC is assigned for commercial services and large scale retail projects. The investment is estimated at approx. €160m.

Thanks to very good transport access, the catchment area of the new centre will extend to the neighboring districts of Żoliborz, Bielany, Praga Północ and Targówek. The total catchment area of the GTC site is estimated at nearly 520,000 inhabitants.

Refinancing activities to support cash position

GTC has finalized refinancing loan agreements for a total of €130m for its office projects developed in Bucharest and Belgrade. These refinancing transactions are amongst the largest concluded in Romania and Serbia this year, and demonstrate the continued strength of the company’s relationships with its lenders. The two loans will generate approx. €22m of free cash for GTC in the fourth quarter of 2011.

Galleria Arad now open

Galleria Arad is the 11th shopping mall developed by GTC Group in the CEE and SEE region. It is financed by the European Bank for Reconstruction and Development and Raiffeisen Bank.

Galleria Arad hosts a total of 100 shops in its 35,000 sq m net rentable area, combining international and local retail brands. The mall is anchored by CORA supermarket, a cutting edge, 8-screen multiplex Cinema City, as well as several fashion tenants, including Inditex Group (Zara, Bershka, Stradivarius and Pull&Bear) and Peeraj Group (Mango, Oviesse, Piazza Italia, Vero Moda and Jack & Jones), and the fitness center operator Pure Fitness. Galleria Arad offers a wide choice of dining & entertainment options with 18 restaurants and cafes. The mall has an underground parking facility for 1,000 cars. Galleria Arad will also serve as a seat of some local authority departments of the Municipality of Arad.

Galleria Arad features a very convenient access to public transportation and it will serve a population of over 300,000 inhabitants in a catchment area within a 30 minute drive.

The city of Arad is located in the Western part of Romania and serves as an important industrial center and transportation hub. Galleria Arad is located on Aurel Vlaicu Boulevard, the main artery of the town with a densely populated area. With its location, tenant mix and architectural features, Galleria Arad aims to be the main attraction of the city.

New significant lease agreements improve overall occupancy

During the last few months GTC has signed a number of material lease agreements for over 50,000 sq m, which will improve its overall occupancy and as a result have a positive impact on cash flow and the valuation of certain assets in its portfolio:

–         New tenants in Galerie Harfa have increased occupancy of the mall to 95%

–         New 29,000 sq m tenant in Spiral increased occupancy to 94%

–         New tenant in University Business Park in Łódź

–         Inditex Group in Galleria Burgas