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Edited Transcript of GICSAB.MX earnings conference call or presentation 26-Feb-20 5:00pm GMT

Q4 2019 Grupo Gicsa SAB de CV Earnings Call

CUAJIMALPA DE MORELOS Mar 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Grupo Gicsa SAB De CV earnings conference call or presentation Wednesday, February 26, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Avril Carenzzo

Grupo Gicsa, S.A. de C.V. - Treasury & Investor Relation Officer

* Diodoro Batalla Palacios

Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance

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Conference Call Participants

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* Fernando Froylan Mendez Solther

JP Morgan Chase & Co, Research Division - Analyst

* Francisco Chávez Martínez

BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst

* Jorel Guilloty

Morgan Stanley, Research Division - Equity Analyst

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

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Presentation

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Operator [1]

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Good afternoon, and welcome to GICSA's conference call. (Operator Instructions) It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

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Rafael Borja, i-advize Corporate Communications Inc. - SVP [2]

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Thank you and hello, everyone. I'm very pleased to welcome you to GICSA's fourth quarter and full year 2019 earnings conference call. Joining us today from Mexico City are Mr. Diodoro Batalla Palacios, Chief Financial Officer; and Mrs. Avril Carenzzo, Treasury and Investor Relations Officer. They will be discussing the company's fourth quarter 2019 consolidated results per the press release issued by the company yesterday. If you wish to be included in future distributions, please contact i-advize in New York at (212) 406-3693 to be added immediately.

A special note to any members of the media who are joining us today: We would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken. If you're a member of the media and wish to direct any question to the company, please contact the company directly after the call.

Also, I just want to mention that during this call, comments made by management may include forward-looking statements, which are subject to various conditions and uncertainties based on a variety of factors. These forward-looking statements may differ materially from actual results. Thus, we ask that you refer to the disclaimer located in the earnings release prior to making any investment decision.

It is now my pleasure to turn the call over to Mrs. Avril Carenzzo, Treasury and Investor Relations Officer of GICSA who will begin her presentation. Avril, please go ahead.

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Avril Carenzzo, Grupo Gicsa, S.A. de C.V. - Treasury & Investor Relation Officer [3]

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Thank you, Rafael. Good afternoon to everyone, and thank you for joining GICSA's Fourth Quarter and Full Year 2019 Earnings Call. I would like now to begin my presentation by discussing some important events that took place during this quarter. I will then provide an overview of the company's operational highlights before turning the call over to Diodoro Batalla, our CFO, for his financial discussion. After which, we will be happy to answer any questions that you might have.

Let me start by highlighting that 2019 was a positive year for GICSA despite macroeconomic uncertainty in Mexican and international markets. We are pleased to say that throughout last year, GICSA steadily achieved solid operational and financial results driven by a strong performance of our stabilized portfolio and the maturity of our properties opened during 2018 and 2019. At the same time, we focused efforts on strengthening the balance sheet in order to obtain the best possible financial conditions for the company. As evidence of this, we are pleased to inform you that last December, GICSA successfully placed debt instruments in the international markets for approximately MXN 12 billion via a nonrecourse and bankruptcy remote vehicle.

This transaction provides GICSA with higher liquidity, [improves] with maturity up to 15 years and offers certainty in interest payments by having a fixed rate. This vehicle consists of 9 properties currently owned by GICSA. These properties are Forum Culiacan, Torre Esmeralda III, Masaryk 111, City Walk, Forum Cuernavaca, Explanada Puebla, Paseo Queretaro, Isla Merida and Explanada Pachuca. As part of this transaction, we issued our preferred equity instruments for MXN 2.3 billion. This transaction represents an important milestone in the history of GICSA since this one of a kind issuance that takes the best from a CMBS and an unsecured instrument represents the first time that we have carried out an international placement. With this transaction, GICSA managed to fulfill its funding requirement in order to continue its growth plans and strengthen its operations in the coming years while generating value for its shareholders with stable cash flows.

Now moving on to our key operational results for the quarter. We concluded the year with solid operational results. We closed the quarter with a total of 911,000 square meters of GLA, comprised of 16 properties in operation. Total and proportional GLA increased 8% and 10%, respectively. In terms of occupancy rates, our stabilized and under-stabilization portfolio reported approximately 90% of occupancy. The renewal rates remained at levels above 97%, and lease spread continues to be above inflation, closing the quarter at 4.3%. Cost of occupancy closed the quarter at 9.7%, and the average fixed rent for the stabilized portfolio reached MXN 360 per square meter. Furthermore, projects under development continues to report solid progress and are in accordance with schedules and budgets. Explanada Culiacan, Grand Outlet Riviera Maya and Cero5Cien reported progress rates of 82%, 24% and 31%, respectively.

Our 4 properties under construction represent an additional GLA of 193,000 square meters, representing an increase of 21%. Regarding Lomas Altas, it is important to highlight that 15% of the GLA is currently under contract. Regarding Galerias Metepec, in 2019, real-time work, administrative formalities and negotiations were concluded. These efforts joined the properties of Paseo Metepec GICSA with Galerias Metepec Liverpool. Consequently, during this quarter, construction restarted and the estimated delivery date of the project was modified to the first half of 2021. Regarding Explanada Culiacan, we expect to open stores during the first half of 2020. At the end of 2019, 54% of the leasable area was under contract.

Moreover, we've made solid progress in commercialization of our portfolio under operational and development. As of December, 424,000 square meters of GLA were signed. 22% of these contracts were signed during 4Q '19. Moreover, 345 stores opened throughout the year. This proves the preference of our business partners for our multi-payment contracts, which have become an important traffic growth driver. Finally, at the close of 4Q '19, we registered a total of 21 million visitors in our shopping malls. This represents an increase of 15% compared to the same period to -- in 2018.

This concludes my presentation. Thank you for your attention. I will now turn the call over to Mr. Diodoro Batalla, who will review the final numbers and financial performance of the period. Diodoro, people go ahead.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [4]

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Thank you, Avril, and good morning to everyone. I will now review the financial performance for the period with regards to GICSA main financial indicators. Please note that all figures are in Mexican pesos terms and growth rates are year-over-year unless stated otherwise. As we discussed in the previous earnings call, starting in the third quarter of 2019, revenue generated by our residential project, Cero5Cien, was recognized in our income statement. The revenue recognition method is in accordance with IFRS 15, which states that revenue recognized will only be that generated by the units already sold and according to the percentage of progress of construction invested in these units.

During this quarter, consolidated EBITDA was MXN 744 million, representing a 28% increase compared to the same quarter last year, while GICSA proportional EBITDA reached MXN 590 million, an increase of 37% compared to the fourth quarter '18. Consolidated EBITDA for the entire 2019 reached MXN 3.36 billion, while proportional EBITDA for the year was MXN 2.71 billion. Furthermore, consolidated NOI for this quarter reached MXN 810 million, while proportional NOI reached MXN 655 million, representing an increase of 17% and 21%, respectively. Consolidated NOI for all 2019 reached MXN 3.3 billion, and proportional NOI was MXN 2.65 billion, an increase of 12% and 30%, respectively.

Moving to the balance sheet. Total assets increased 13% up to MXN 72.6 billion mainly because of the cash and restricted cash obtained with the new debt and preferred equity instrument placement on December and the cash we invested during the year in the pipeline investment properties, while total liabilities reached MXN 41.6 billion, an increase of 11%. Loan-to-value closed at 38.4%. In terms of CapEx, during the fourth quarter, GICSA invested MXN 524 million for the projects under construction and MXN 3.2 billion during the whole year 2019. For 2020, we expect to invest additional MXN 4.5 billion in our new projects.

As Avril mentioned previously, in December 2019, GICSA successfully placed debt instrument in the international market for approximately MXN 12 billion via a trust comprised of 9 properties of our stabilized and in a stabilization portfolio, including all of our new multi-tenant properties. Maturity of this instrument is 14 years, and amortization schedule begins on year 3, starting at 1.75% and increasing gradually. We also played a preferred equity vehicle attached to the same properties for MXN 2.3 billion. Final call for this instrument is at 7 years with an exit option for GICSA at year 3.5. It is important to highlight that both instruments are nonrecourse to GICSA and bankruptcy remote. All debt services and preferred equity yields will be shared with the cash flows generated by the properties included in the vehicle.

In this first stage, we took MXN 9.7 billion from the debt instrument and the MXN 2.3 billion from the preferred equity instrument. The remaining MXN 2.2 billion currently -- are currently in a restricted escrow cash account that will be released in the subsequent 9 months upon reaching certain NOI metrics in the assigned portfolio. Proceeds from the debt instrument were used to repay existing debt of MXN 8.4 billion for this portfolio, and the remaining cash, along with the proceeds obtained from the preferred equity instrument and the restricted cash, will be used to complete our pipeline. With this transaction, we will obtain excess cash for approximately MXN 5 billion. We improved our debt maturity profile up to 14 years and increased our amortization schedule. We also gained certainty in our cost of debt with an average weighted fixed interest and yield rate of 10%. Furthermore, with this transaction, we also obtained the equity that we were looking for the new projects at a lower cost.

We are very pleased with the outcome of this transaction as it demonstrates the company's ability to access diversified funding sources with new financial institutions and international investors, which is a clear evidence of the trust that the financial markets have in our company. Our aim is to ensure that GICSA has enough liquidity to cover its operation as well as execute its projects under development more efficiently.

In conclusion, also, we faced a volatile domestic and global environment. We remain committed with the continued improvement of our operating and financial results. We will keep working towards achieving solid results by maintaining a high-quality portfolio and by seizing growth opportunities that are well suited for our business model. Supported by our expertise and knowledge in the market and the Mexican market and aligning our objectives and strategies currently in place, we feel we are well positioned to execute our business plan, which we consider necessary to maintain GICSA's ongoing growth.

With this, we conclude our presentation. We appreciate your continued support and interest in GICSA. Thank you for your attention. And now, let me open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Jorel Guilloty with Morgan Stanley.

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Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [2]

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I have 2 questions. The first one is on expenses because -- I apologize if you explained this earlier, but I noticed that there was material changes in how you are putting up expenses, for example, the expenses for third-party management, third-party property management went down 97%, but your operating expenses from owned property went up 43% year-on-year. Similarly, your administrative expenses went down. So it sort of seems like you're reallocating expenses. So I was wondering if you can provide a bit of color on that.

And then my second question is, I just wanted to pick up on something that was commented earlier. It's -- basically, you mentioned on how GICSA is facing a more volatile global environment. Within that context, I was wondering if you could provide some color on any contingencies that you might have in place to deal with any potential foot traffic declines in your malls and particularly in the context of the coronavirus. So anything -- any color that you can provide on how you're thinking about any potential effects. So those are my 2 questions.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [3]

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Regarding expenses, there are no reallocation of the expenses. The situation that is happening is that in third-party expenses, we are mostly insured because we stopped administrating the portfolio for Fibra Uno as of -- this year was the whole year we didn't administrate that portfolio, so we didn't incurred any expenses for third parties. And in our owned portfolio, it is that increase because we opened -- from last year to this year, we started to operate 6 new projects and also all our entertainment concepts. So that is why the expenses are growing in our owned properties. And Avril will answer you the second question. I just wanted to understand. Your question about contingencies of foot traffic is that we expect that our foot traffic are going to be lower or -- I didn't understand your question.

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Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [4]

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No, the question is on any potential effects if your foot traffic would go lower materially in your malls. Like is there any insurance that kicks in? Or are you -- how are you thinking of any potential effects if -- due to potentially coronavirus? Because one would think that, that would be in effect, like that foot traffic could go down. So basically, how are you thinking about that? Any potential?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [5]

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Well, the foot traffic, what we have been seeing in our shopping centers is that they are increasing. People is being attracted by the entertainment concept. So they are coming into our malls not only to shop but only -- but also to entertain. So the effect that we are having is that the foot traffic are growing. Also, same-store sales are -- have been a little bit lower but the foot traffics are increasing.

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Operator [6]

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(Operator Instructions) We'll go next to Froylan Mendez with JPMorgan.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [7]

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So we have not -- seen no progress in the presales of the residential project. Will this mean you will require additional resources beyond the unit sales to fund the rest of the project? Or could we expect a delay in the overall termination -- on the overall completion of the whole unit? That's the first one. And second one, what is the size of the pipeline beyond the current projects under construction? And what is the required CapEx? And if I just can complement the previous question, can you explain to us what happened to the mall traffic when we saw the H1N1 influenza episode in Mexico a few years back?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [8]

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Okay. Froylan, let me take -- regarding the residential project, as you know, with the sales that we already have, all construction is funded. So we will not -- we don't need to sell any other unit to be able to complete the whole construction of the project. So no additional resources will be needed from outside sources. And that is why we are receiving a lot of inquiries for lowering the prices in the project and sell the residences at a lower price. And because we know the quality of the product and we are not in the need of more resources, we are not giving away the houses at a lower price. That is regarding your first question.

Regarding your second question, additional of the projects that we have already here, already in construction, our pipeline goals, we also have San Luis Potosi, Explanada San Luis, Explanada Aguascalientes and Paseo Coapa. Those projects, we have already -- we have the credit lines already in place. We have the land. We have commercialization. So we are almost ready to start them, and we were waiting for these additional resources and this equity that we were looking and we obtained it in December. So we are almost ready to start it. In a -- maybe in the next quarter, we will start the project. We have been finalizing all the architectural and -- permits and all of that, things that are needed to start. But we will -- for sure, we'll start that project in this year.

And in 2009, when the influenza came in Mexico, we -- at the beginning, we saw that foot traffic, of course, decreased. But that was only for -- at the beginning because, as you can remember, that epidemic didn't went too far with the dead. There was not much -- not more of dead people, and it was very well controlled by the authorities. So it only affected us for maybe 2 or 3 months, and then foot traffic started again.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [9]

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Okay. Do you have an idea on the CapEx required for those 3 projects that you mentioned? And what would be the expected returns in average for this additional pipeline?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [10]

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For the Explanada, just for you to have -- the Explanada model has around -- only -- if you don't take into account the land, the CapEx is around MXN 1.7 billion for each project. And the Coapa is a little bit more expensive, it goes around MXN 2.5 billion and...

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [11]

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Without the land, right?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [12]

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Excuse me?

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [13]

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Coapa, MXN 2.3 billion, without the land?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [14]

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Yes, without the land because land is already there. And the returns for the projects are around 14% due to cost.

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Operator [15]

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(Operator Instructions) We'll go next to Francisco Chavez with BBVA.

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Francisco Chávez Martínez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [16]

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I have 2 questions. The first one is a follow-up of the previous question. In the case of Explanada projects in San Luis Potosi and Aguascalientes, do you already have the land? Or will the land will be contributed by a potential partner? And the second question is on leasing spreads, the slight decrease in leasing spreads in 4Q compared to the previous quarter. So if you can give us an idea of what do you expect for this year considering the current economic situation.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [17]

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Paco, let me tell you about the Explanada project, San Luis Potosi and Aguascalientes, yes, we have the land. Aguascalientes land was purchased a few years ago. And the San Luis Potosi is contributed by a partner. It's contributed by 20% -- for 20% of the business. And it's the same as Coapa. Coapa is also contributed land for the 24%. And regarding lease spreads, as you see, lease spreads are very in line with the same-store sales. I mean, if -- as you know, what we do with our clients is that, as we have information on how much they are selling, we know how much we can increase the rent. So if same-store sales are decreasing in the whole country, then our lease spreads in a consequence, are lowering down at a similar pace. So that is why our spreads are going down. So what we expect always is that we will go in the same reason of the same-store sales in our lease spreads, at least, of course, above that, but if same-store sales go down, lease spreads go down. If same-store sales go up, lease spreads go up. I don't know if that answers your question.

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Francisco Chávez Martínez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [18]

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Yes. And just another question, if I may. Can you comment on the leasing activity in offices, buildings? How is the demand in recent weeks? And what did you expect for the office segment for this year?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [19]

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Well, we have 2 recently opened buildings, office buildings, as you know, the ones that we opened in Interlomas and Zentro Lomas. Those buildings -- I mean demand for its business spaces is high but is -- also the offer is very high. So it's a very competitive environment. And clients and brokers are becoming more and more demanding with the benefits so they can go to your building, no? So we see that office market is still very difficult. So that is why we have very low investment in offices. I mean the business that you already have occupied, you mostly renew the contract because it's -- the cost of moving for the client is too high. So most of the contracts, you renew. New spaces are not as easy as -- to rent because of the competition that there is in the city.

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Francisco Chávez Martínez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [20]

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Okay. And in Zentro Lomas, any comment on the leasing activity and the time, number of months that you expect this property will be stabilized?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [21]

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Yes. Zentro Lomas, we already have 15% of the leasable area rented. We signed a contract with a very good client. And we believe that we will be, through this year, signing all the rest of the space in order to be able to get -- to take the building to maybe 85%, 90% during this year.

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Operator [22]

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(Operator Instructions) I'm showing that we have no further questions at this time. I'll turn the call back to Mr. Batalla for any closing remarks.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - Director of Administration & Finance [23]

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On behalf of GICSA and its team, I want to spread our appreciation for your interest, and we thank you for taking the time to join us today. We look forward to speaking with you again and keeping you updated of the latest developments of GICSA. Please do not hesitate to contact us with any questions you may have. Have a very good day.

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Operator [24]

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This does conclude today's program. Thank you for your participation. You may disconnect at any time.