Improvement in profit margins due to cost reductions

Publication of the second quarter and first half 2012 results

Improvement in profit margins due to cost reductions

 

Globe Trade Centre S.A. (GTC) released its second quarter and first half 2012 results today. The results have were in accordance with the International Financial Reporting Standards (IFRS) and are presented in Euro.


Strategy: Progress of the 3 year strategic plan (2012-2014)

  • GTC successfully completed its rights issue improving current cash position and setting the stage for further deleveraging
  • It expects to realize approximately 30% of the three-year assets disposal program still this year through the sale of Platinium Business Park and land plots in Poland and Romania
  • Improved operating results resulting through cost reductions

Q2 Highlights

  • Rental revenues improved 3% q-on-q to €33m (Q1’2012: €32m)
  • Gross profit from operations at €25m; unchanged compared to Q2’2011 and 8% up compared to Q1’2012
  • Gross margin on rental activities at 74% (Q2 2011: 71%); gross margin on residential activities at 8% (negative in Q2 2011)
  • Selling and administration expenses decreased by 39%, reflecting management efforts to improve results
  • Devaluation of investment properties of €12m; mainly due to the unstable economic environment in Romania
  • Completion of Platinium V and Corius as well as the sale of Platinium I-IV contributed to €12m revaluation gain
  • Loss in the period mainly due to loss on revaluation of portfolio

 

H1 Highlights

  • Gross profit from operations at €47m; unchanged compared to H1’2011 despite small decline in revenues
  • Gross margin on rental activities at 73% (H1 2011: 72%); gross margin on residential activities at 5% (negative in H1 2011)
  • Average occupancy rate stable at 89%
  • Cost optimization visible through all cost lines has driven up gross margin up
  • Devaluation of investment properties of €10m; mainly due to the unstable economic environment in Romania
  • Completion of Platinium V and Corius as well as the sale of Platinium I-IV contributed to €17m revaluation gain
  • Loss in the period mainly due to loss on revaluation of portfolio
  • Total completed commercial space of 635,000 sq m valued at €1.6bn as at 30 June 2012

 

 “The last few months have been very important for the Company. We have adjusted our strategy to the current market environment and have prepared a  plan with certain targets that should enable us to fulfill the plan.”   said Alain Ickovics, Chairman of the Supervisory Board of GTC S.A. “The first and one of the most important targets, the rights issue, has already been achieved and increased our cash position by approximately €100m. Additionally, we are about to realize around 30% of our three-year assets disposal program still this year. Those two steps will improve our cash position significantly and allow us to start deleveraging, while still stay focused on the significant projects that are in front of us.” – added Alain Ickovics.

Financial overview

Rental and service revenues decreased by 5% y-on-y and increased by 3% q-on-q to €33m in the second quarter of 2012. Rental and service revenues decreased by 2% to €64m in the first half of 2012 compared to the corresponding period of 2011. Such decline results mostly from the sale of Galeria Mokotów in August 2011. As of June 2012, some of GTC’s completed buildings were still not fully occupied or rents were not paid yet due to rent free periods, therefore, further rental revenue growth is probable. The margin on rental revenues was 74% in the second quarter of 2012 and 73% in the first half of 2012, an improvement over the  corresponding periods of 2011 (71% and 72% in the second quarter and first half of 2011, respectively) and also better than the 72% achieved in the first quarter of 2012.

Revenues from the sale of residential properties amounted to €5m in the second quarter of 2012 and €10m in the first half of the same year. The profit margin on the sale of residential properties was 8% in the second quarter and 5% in the first half of 2012, mostly due to the sale of houses in Osiedle Konstancja, which contributed to the profits, compared to negative margins with respect to other projects.

Gross profit from operations was unchanged at €25m in the second quarter of 2012 and at €47m in the first half of 2012. Gross profit in the second quarter of 2012 showed significant, 8%, improvement q-on-q. This was achieved mostly due to cost optimization initiatives introduced over the last 3-6 months.

Net loss on revaluations of investment property and impairments of residential projects was €12m in the second quarter of 2012 and €10m in the first half of 2012, and resulted mostly from the devaluation of the Group’s retail portfolio in Romania following yield expansion and a decline in revenues from shopping centres, as well as the unstable economic situation in the country.

 Net loss amounted to €21m in the second quarter of 2012 and €18m in the first half of 2012. This is  attributable mainly to a loss on revaluation of investment properties and taxation charges.

The value of the property portfolio was at the level of €2,042m as at 30 June 2012 (including €175m of assets held for sale). The next review of the value of completed assets and the land bank will be conducted as of 30 September 2012 by the management.

NAV per share stood at €2.6 (PLN11.1) as at 30 June 2012 compared to €3.2 as at 31 December 2011, mostly due to a rights issue (100,000,000 shares) at a price below book value.

 
Key achievements of Q2 2012

 

Strategy progress – Improving cash position and preparing for deleveraging

Successful rights issue

The issue 100,000,000 series I ordinary bearer shares with a nominal value of PLN 0.10 per share was more than two times oversubscribed. The exercise of the pre-emptive rights within the rights issue subscription period resulted in 3,671 principal subscriptions for 97,822,615 series I shares. Simultaneously, 482 additional subscriptions were submitted for 105,374,171 series I shares. Kardan N.V. participated in the rights offering pro rata to its stake. Thanks to the rights issue GTC raised PLN 445 million in equity (gross of costs).

 

Platinium Business Park (Warsaw) sold

Subsidiaries of GTC Group and Allianz Real Estate Group have signed a preliminary agreement for sale of Platinium Business Park. The part of the complex that has been sold consists of five completed buildings with a total rentable area of approximately 56,000 sq m. GTC retains development rights on this site for another building consisting of approximately 13,000 sq m.

Agreements were signed subject to customary conditions precedent and are expected to be finalized by the second half of 2012. The final price of the five buildings comprising Platinium Business Park is €171-173m and will be subject to adjustment upon closing. The final price reflects an investment yield of 6.7%. Upon completion the transaction will generate approximately €60m of free cash for GTC.

Both of the above steps are very important as they allow the Group to further deleverage.
Completed projects

Galleria Burgas (Bulgaria) opened

Galleria Burgas was opened on 15 May. It is the twelfth shopping mall developed by GTC Group in the CEE and SEE regions and the only one opened in Bulgaria in the first half of 2012. It is also the first modern shopping centre with such a strong tenant mix in the Southern part of Bulgaria. The mall hosts approximately  37,000 sq m of net rentable area and is nearly 90% let. Galleria Burgas is anchored by Inditex group (Zara, Bershka and Oysho brands), H&M, Carrefour (4,700 sq m supermarket), a Cinema City multiplex with 10 halls (first cinema of this size and quality in the region of Burgas), Pure Fitness and many other leading international and local brands.

Galleria Burgas is situated in the affluent catchment area of Burgas and has the potential to be significantly strengthened by visiting international tourists. The new mall was visited by over 32,000 guests in the first day of its activity and by a total of over 120,000 guests in 5 days following its opening.

 

Platinium V completed

Construction of the 11-storey Platinium Business Park V, with a net rentable area of 12,000 sq m ended in June 2012. The area of a typical floor is 1,024 sq m, and each floor can be efficiently arranged into separate offices or open spaces.

The list of tenants of Platinium Business Park V includes such firms as VeriFone Poland, PSA Group, Schrack-Seconet, K2 and Starcom. The building is over 90% let with advanced negotiations for the remaining space underway.

 

Awarded projects

LEED Gold certificate for Corius building (Warsaw)

GTC received official confirmation from the U.S. Green Building Council (USGBC) about granting LEED® Gold for Core and Shell certificate with respect to the Corius building. This is only the second facility in Poland with LEED for Core and Shell. This certificate covers all stages of the development process, including choice of location, design and construction works, as well as implementation of planned solutions.

Corius is the third building at Okęcie Business Park located on 17 Stycznia street and adjacent to Warsaw Chopin Airport. Corius offers 9,000 sq m of class A office space on seven storeys. The typical floor space is 1,434 sq m. Tenants have 205 parking spaces in an underground garage and additional parking space for guests, taxis and couriers on the ground level at their disposal.

 

Projects under preparation

Focus on the development of two shopping malls in Warsaw

Simultaneously with the preparations for the construction of a shopping mall in the Southern district of Wilanów, GTC plans to develop another modern shopping and entertainment centre in the Northern part of Warsaw. The mall will be constructed on a 4.9 hectare site purchased in the Białołęka area. The value of the investment is estimated at approximately EUR 160m.

According to the local zoning plan, the whole site that belongs to GTC is designated for commercial services and large scale retail projects. Thanks to very good access to public transport, the catchment area of the new centre will extend to the neighboring districts. The total catchment area of GTC’s site is estimated at nearly 520,000 inhabitants.

 

Important leases to improve occupancy

GTC’s continues to benefit from its ability to deliver high quality space and from its  track record of providing tailor-made solutions for companies from various business sectors.

In Q2 2012, GTC signed a significant number of lease agreements for office and retail space, 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 lease agreements:

–         New tenants in office projects in Warsaw: Platinium Business Park V (PSA Peugeot Citroën Group: 3,500 sq m) and Okęcie Business Park (Polish Airports: 1,900 sq m, Border Guard: 700 sq m)

–         New tenants in Francuska Office Centre in Katowice: Rockwell (2,100 sq m), Trac Tec (1,200 sq m), American Heart of Poland (1,000 sq m), Oracle (1,000 sq m), KPMG (800 sq m), Vattenfall (700 sq m). Additionally, the lease agreement with a large, Poland-based private company was also signed (3,200 sq m). The name of the new tenant will be revealed in September this year.

–         GTC has entered into a lease at University Business Park in Łódź with HP (leased area cannot be revealed pursuant to the provisions of the agreement)

–         Many new lease agreements have been signed with leading local and international brands for retail space located in GTC malls throughout the region.

 

Significant renewals and extensions

–         State Street have extended the lease agreement signed in 2008 for approximately 15,000 sq m of class A office space located at Kazimierz Office Centre in Cracow. The extension has been concluded for 10 years.

–         Subsidiaries of the international advertising group Publicis will remain tenants of Platinium Business Park for another 7 years. In addition to the current 9,500 sq m, Publicis has also secured am additional 2,200 sq m of office space. GTC has also extended its lease agreement with GE Healthcare for another 5 years. The company is renting a total of 1,500 sq m of office space.

–         IBM will stay at GTC Office Centre in Cracow for the next five years. The subject of the extended lease agreement is an area of more than 5,000 sq m. A lease agreement for 600 sq m has also been extended by the local office of Deloitte. Hitachi has also secured an additional 400 sq m, increasing the total area of their office to nearly 2,000 sq m.