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Edited Transcript of ATRS.VA earnings conference call or presentation 31-Jul-19 7:30am GMT

Half Year 2019 Atrium European Real Estate Ltd Earnings Call

SAINT HELIER Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Atrium European Real Estate Ltd earnings conference call or presentation Wednesday, July 31, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Liad Barzilai

Atrium European Real Estate Limited - Group CEO

* Ryan Lee

Atrium European Real Estate Limited - Group CFO

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Conference Call Participants

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* Christine Reitsamer

Baader-Helvea Equity Research - Analyst

* Richard Sunderland

FTI Consulting LLC - Senior MD of Strategic Communications

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Atrium Results Conference call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, 31st of July 2019.

I would now like to hand the conference over to your first speaker today, Richard Sunderland. Thank you. Please go ahead.

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Richard Sunderland, FTI Consulting LLC - Senior MD of Strategic Communications [2]

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Good morning, ladies and gentlemen. Thank you, again, for joining the Atrium European Real Estate H1 2019 Results Call. With me on the call are Liad Barzilai, Atrium's Group Chief Executive Officer; and Ryan Lee, Atrium's Chief Financial Officer.

You should all have the presentation in front of you. If not, one is available on the company's website as usual.

Before we start, I would like to address forward-looking statements that may be discussed on the call. These involve risk and uncertainty, and actual future performance, outcomes and results may differ materially from those expressed. Please refer to the documents filed by Atrium, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. I also refer you to the disclaimer on the back page of the presentation.

Once Liad and Ryan have spoken, we will open the conference up for questions and answers. So please follow the instructions given when you dial into the call, if you wish to participate.

I will now hand you over to Liad Barzilai. Liad?

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Liad Barzilai, Atrium European Real Estate Limited - Group CEO [3]

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Thank you, Richard. Good morning, everyone. As this is an update on the results of the first 6 months of the year, I intend to focus on the group's ongoing operational process. Having said that, in my closing comments, I will address last week's public announcement, which stated that the independent committee of the Board of Directors of Atrium reached an agreement with Gazit-Globe on the terms and conditions that were recommended all cash acquisition of all Atrium's shares that Gazit doesn't already own.

Continuing with the half year results presentation and operational update. If you turn over to Slide 2, you will see some of the key highlights from the first half of the year: to continue to deliver on our strategy, to reposition our portfolio, to focus on fewer higher-quality assets in Tier 1 and capital cities that deliver more robust sustainable income and are best placed to benefit from the ongoing trend of urbanization.

Year-to-date, our disposals totaled almost EUR 400 million at approximately 2.7% above fair value. This includes the sale of the 2 Polish assets in July, Atrium Koszalin and Atrium Felicity for EUR 298 million. And in addition at the end of July, we signed an agreement to dispose of Atrium Duben in Zilina, Slovakia, added book value of EUR 37 million. We expect to close this transaction in the fourth quarter this year.

Our focus on capital and top tier cities is highlighted by the acquisition of King Cross Praga in Warsaw for EUR 43 million. We now have 5 great assets in the Polish Capital along with 2 we have in Prague.

Both our occupancy and operating margin remained strong across the portfolio at 95.2% and 95.8%, respectively. Net rental income in our core territories benefited from the cash flow generated from the acquisition and the opening of the 3 extensions in Warsaw at the end of last year. Like-for-like NRI was up 3.1% in Czech Republic and 1% in Poland. As you can see from the like-for-like growth in Czech, following the completion of our portfolio rotation, the right retail properties keep the growth always in a changing retail global environment. We believe that it will be evident that physical retail remains central to the retail industry and to our tenants and their omni-channel strategies.

The center's role as a profitable hub for customers' connectivity and logistics will endure, and will continue to be clear that online simply isn't profitable enough for many retailers. We will continue to invest in our dominant urban assets through our redevelopment pipeline of refurbishment and extension, working on creating great experiences and focusing on broadening brand new offerings to our customers.

I would like to provide you with a short update on Russia. As anticipated, the decision of (inaudible) in the country had an adverse impact on our Russian results. We continue implementing proactive asset management initiatives in Russia such as new food courts planned in the (inaudible) and Kazan in 2019 and the retail is being already achieved should see the results stabilize. Of course, this takes into account that all things stay equal in Russia.

Ryan will discuss the financials in more detail later. But the headline figures include EBITDA coming in at EUR 81 million for the first half with strong EBITDA margin of 88%.

Turning to Slide 3, you will see the evolution of our portfolio, which now comprises of 32 high-quality centers, that is from 150 assets in 2014. The average asset size has increased from 9,000 square meters to over 27,000 square meters, while the average asset value has risen from EUR 17 million to EUR 84 million over the same period.

On Slide 4, we present a geographic breakdown of the portfolio, of which 83% is located in Poland and the Czech Republic, with over half of our assets by value located in Warsaw and Prague. Our focus on urban locations in the region's strongest economy which is a product of a Europe-wide trend seeing people moving toward cities and capitals in particular. Both growing urban population and low unemployment act as structural drivers that support our active performance in these major cities. By rotating out of noncore assets and second and third tier cities, we are more closely aligning our portfolio with this market dynamic.

Over to the next page. We take a more detailed look at our Warsaw portfolio with the addition of King Cross now totals 5 assets valued at EUR 1 billion, with over 179,000 square meters of leasable area. These shopping centers are delivering strong footfalls and are tailored to the distinct local catchment areas enabling them to coexist with and complement the growth of e-commerce and changing consumer habits, while importantly attracting a diverse range of quality tenants.

As mentioned on previous earnings calls, from another (inaudible) are in different phases of redevelopment, which will continue in the coming years. The current plan is to invest in excess of EUR 300 million in a program that will add over 60,000 square meters of additional leasable space that will ensure that these shopping centers remain leading retail destinations for the foreseeable future.

In addition, we are working on redevelopments as for our new 2 additions in the cities of Wars Sawa Junior and King Cross, which will be -- which we'll update in due course.

On Slide 6, you see our Prague assets, Atrium Flora and Arkády Pankrác, which have occupancy levels of over 95% across 70,000 square meters of total leasable area. Both of these popular shopping centers also have a scheduled refurbishment program, with a refurbishment in Pankrác already ongoing. And in addition (inaudible) refurbishment is due to start soon.

On that note, I will now hand over to Ryan for a more detailed look at the financials. Ryan?

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Ryan Lee, Atrium European Real Estate Limited - Group CFO [4]

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Thank you, Liad, and good morning, everybody. I will now take you through our financial results for the period ended 30th of June 2019 and the presentation which we published this morning.

On Page 7, you will find a snapshot of the key financial highlights and KPIs and which I won't dwell on as I intend to cover these in more detail over the coming slides.

On Page 8, we look at some additional metrics for the quarter. The group NRI increased slightly to EUR 92.4 million in the first half of 2019 compared to EUR 91.8 million in the first half of 2018. Excluding Russia, Group NRI increased EUR 2.9 million.

The cash flow generated from our acquisitions, and the opening of our 3 extensions in Warsaw at the end of last year, offset cash flow loss for our disposals in Hungary and Romania, as well as a temporary decrease in rent in the Czech Republic due to the redevelopment of our Pankrác's asset in Prague.

I'll just quickly run through some of the additional metrics for the quarter that are set out on the slide. The operating margin changed from 97.3% to 95.8% due mainly to 2 factors: a temporary decrease in Russia and Arkády Pankrác in Prague in Czech Republic due to the redevelopment impacts Liad referred to and also higher cost from service providers such as cleaning and security in Russia.

The weighted average lease, WALT, was stable at 5.3 years, benefiting from high levels of leasing activity in the first 6 months of 2019, with over 50,000 square meters signed in the first half of the year at above a passing rent and ERVs. The redevelopment in Russia and of Pankrac also adversely impacted occupancy, which however still remains at our long-term target of 95% or higher.

On Slide 9, we have summarized a key operating metric, which you can see, but our EBITDA and EBITDA margin remained stable at EUR 81 million and 88% respectively. Both benefiting from our lower cost base. EPRA NAV slightly improved EUR 5.05 per share on the 30th of June 2019 compared to EUR 5.03 per share as at the end of 2018.

On Chart 10, we provide an overview of the capital structure and some further detail on our debt provision, but we'd like to highlight for you the following.

The group's cash and equivalents amounted to EUR 27.6 million as of the end of June, with a net LTV of 39.3% and the unutilized component of the revolving credit facility at EUR 189 million.

Following the completion of the disposals of Atrium Koszalin and Atrium Felicity in July, net LTV is expected to decrease to approximately 34%, and cash as at today is approximately EUR 189 million, with a revolver of EUR 300 million fully unutilized.

Before I hand back to Liad to address last week's public announcement, I'd just like to conclude with a quick recap of the progress in the first half of 2019, which we've summarized on Page 11. We continue to improve our portfolio and in doing so build a platform to fuel future growth in an evolving retail environment. Our growth strategy remains focused on asset rotation, active redevelopment and strong asset management initiatives in Poland and Czech, and more specifically in Warsaw and Prague.

In this light, we have made further progress in the first half of the year by completing the acquisition of Atrium's fifth asset in Warsaw, the King Cross Shopping Center for EUR 43 million. This is a well-connected and established retail destination for a diverse tenant mix, which also includes redevelopment opportunities in due course.

We have completed the sale of 2 Polish shopping centers, Atrium Koszalin in Koszalin and Atrium Felicity, in Lublin, with a total lettable area of approximately 111,000 square meters for EUR 298 million and around 3% above the book value.

We've monetized 13% of our land bank, with the completion of a EUR 28 million land disposal in Gdansk, Poland at around book value, and we had mentioned, we signed a transaction in late July for disposal of our shopping center in Duben, Slovakia for EUR 37 million, again broadly in line with book value.

We have also made further significant steps forward with our redevelopment extension program, working to broaden the pipeline of these initiatives.

Thank you. And I'd just like to hand it back to Liad.

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Liad Barzilai, Atrium European Real Estate Limited - Group CEO [5]

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Thanks Ryan. Having concluded the operational aspects of the first half of the year's results and before taking Q&A on this set of results, I'd like to run through the item which we opened the call -- today's call with. The announcement that the Independent Committee of the Board of Directors of Atrium reached -- sorry, the Independent Directors of Atrium reached agreement with Gazit on a recommended all cash acquisition of all Atrium shares not already owned by the group.

The Independent Committee of the Board of Directors has retained financial and legal advisers to evaluate the offer and negotiate the best possible terms and conditions for minority shareholders. The process is currently in a [go-shop] phase for 7 weeks (inaudible) the market for any other bids for Atrium shares. If no [sincere] offers are forthcoming, the details of the acquisition, which is intended to be implemented by means of a court-sanctioned scheme of arrangement. And minority shareholders will have the opportunity to vote on the acquisitions at the EGM.

We have provided a comprehensive Q&A as well as an e-mail contact in case your question has not been dealt with in the material provided on our website. The full announcement is available on our website. Please see (inaudible) for reference.

I'd ask you to address any additional Q&A that you may have on the transaction to the contact we just provided here. If successful, the transaction is expected to be completed around January next year. In the meantime, management continues to focus on the day-to-day business of executing on our portfolio rotation, strengthening our assets and ensuring the strong liquidity of the balance sheet. Thank you.

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Questions and Answers

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Richard Sunderland, FTI Consulting LLC - Senior MD of Strategic Communications [1]

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Thank you, Liad. We'd now like to open the floor up for questions and answers. So please follow the instructions you will be given by the operator.

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Operator [2]

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(Operator Instructions) And the first question comes from the line of [Usman Ederaki].

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Unidentified Analyst, [3]

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I just have one question about the acquisition by Gazit. It's more about your expectation in terms of do you think that you would keep your financial policy as it is in terms of -- for example, in terms of LTV guidance and similar type of metrics that you looked at in the past?

And I guess, secondly, do you expect in the future to -- if the transaction goes ahead, and do you expect to continue to report at Atrium level? Or would it be consolidated into Gazit?

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Liad Barzilai, Atrium European Real Estate Limited - Group CEO [4]

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Yes, thank you. In terms of your first question, which was about the financial policy. I think there is no change until we see the transaction proceed. And after that, this will be a question that will need to be addressed to the new -- into the new structure. So for the time being, there is no change to our policy.

And then in terms of the reporting, there will be consolidated reporting under Gazit, although due to our bonds -- listed bonds, we will need to have reporting to address our bondholders.

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Unidentified Analyst, [5]

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Okay. So there will be still a kind of separate -- separate reporting just at Atrium level?

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Ryan Lee, Atrium European Real Estate Limited - Group CFO [6]

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We will report on the basis of the legal commitments that we had within the volumes. So that will be the stand-alone Atrium reporting. And all other reporting, I think, is a discussion for Gazit.

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Operator [7]

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The next question comes from the line of Christine Reitsamer.

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Christine Reitsamer, Baader-Helvea Equity Research - Analyst [8]

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First one, now with the offer on the table. You said you would continue to work as this. So if you would now come across an interesting acquisition, would you then do it? And in general, what is the pipeline there? I mean, you are very good at selling at the moment, so you have -- you would have all the means. So first question, yes, if there is something on the table could you still do it? Or would you? And then -- and what's the pipeline here?

And the second is, I mean, it's a bit concerning the -- well, the offer price in relation to the NAV. It's -- at the NAV reported, it's 26% below. Yes, I don't know if you want to say anything about that? And if -- and where would you see your NAV going over the next years? Would you regard it rather stable? And then, yes -- or further increasing, just what are your thoughts around that topic? These are the 2 questions.

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Liad Barzilai, Atrium European Real Estate Limited - Group CEO [9]

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So in terms of the acquisition, we have always looked and monitored for the best opportunities, as you've seen in the last 12 months, we did 2 acquisitions of Wars Sawa Junior and Kings Cross. If we would come across an acquisition that made sense, we would bring it to the Board. And they would need to decide at that time based on that -- based on all the information known at that point.

We never discuss also historically our pipeline and opportunities. As you know, you can imagine, this is quite confidential, and we try to get an edge on that when we do business. And I don't think we will go into it now. But if relevant, we will bring it to the Board, and they will need to take a decision.

In terms of the discount in the transaction. As I mentioned, we're happy to go through any questions on the operational results for the first half. And regarding the transaction, I mean this is -- the transaction was reviewed, negotiated by the Independent Committee of the Board. And then we have all the answers in the Q&A on the website. So that should go there.

In terms of the guideline. Yes, NAV, I mean, we don't give forecasts, and it's quite difficult to forecast. I think we are doing our best to continue our strategy to improve the quality of the portfolio, to improve the sustainability of the cash flow, in the same way that we've done previously. And I think you see that in the results. And you see that in the change in the portfolio.

So that's all I can say, I don't know -- I cannot forecast the future unfortunately.

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Operator [10]

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We have no further questions at this time. You may continue. (Operator Instructions) No further questions at this time. You may continue.

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Richard Sunderland, FTI Consulting LLC - Senior MD of Strategic Communications [11]

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Well thank you for joining, everyone. Just for your information, there will be a recording of this conference call later today. Please contact me if you do have any further questions, my contact details and those of the company's are on today's announcement. Thank you.

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Operator [12]

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Thank you. And that does conclude our conference for today. Thank you all for participating, you may all disconnect.