Immobiliare Grande Distribuzione SIIQ SpA

MIL:IGD

Earnings Call Transcript

[Operator]

Good afternoon. This is the Chorus Call operator. Welcome to IGD's Q1 Results Presentation -- Q1 for 2018. [Operator Instructions]

Let me turn the conference over to Mr. Claudio Albertini, CEO of IGD. Mr. Albertini, you have the floor.

[Claudio Albertini, executive]

Good afternoon to all of you. I am connected from the IGD headquarters, together with the colleagues and with our Chairman, Mr. Elio Gasperoni.

And you can see from the press release and from the document we uploaded on our website in the morning, the Board of Directors approved the first quarterly report for 2018. And let me tell you by way of introduction that it does not factor in the effects of the acquisition that was completed on April 18, of strategic portfolio acquisition of 4 shopping malls and the relevant rights issue. Those -- So these are standalone results.

Starting from Page 3. Having introduced the subject, we have the main highlights, the main economic highlights, financial highlights for the first quarter. Total revenues are up 4.9%. We're talking about total revenues, and landing at EUR 37.2 million. And then rental income is landing at EUR 35.6 million, up 5.2%. And then for the first time, we are also disclosing the net rental income landing at EUR 29 million, up 6%., that is to say going higher than the gross rental income.

Core business EBITDA landed at EUR 26.5 million, up 6%, with EBITDA margin that went up 70 bps, landing -- coming in at 71.4%. And margin from freehold, also EBITDA for freehold, is in excess of 80 percentage points, 80.4%, that is to say, up 50 basis points.

The group net profit went up 16.7%. And in absolute terms it's EUR 16.7 million. Funds from operation, FFOs, are EUR 18.3 million, up 17.5%, without factoring in the impact stemming from the acquisition and the rights issue mid-April. So we're very close to the lower bracket of the guidance provided at year-end 2017. That was our 2018 FFO guidance provided at 2017 year-end.

We will now move on to Page 5, looking at Italy, from the macroeconomic viewpoint. Here, we have our 2018 outlook based on the latest estimates, GDP and consumption estimates, that the Italy showing a 1.6% growth. It's a very similar trend to what we witnessed last year. And consumption is at 1.2%, slightly down versus the 2017 figure.

And with the Q1 for 2018 that witnessed a 0.3% GDP increase with a delta that had already been acquired for 2018, up 0.8%. Inflation rate, still low, 0.7%. But the backdrop is quite dynamic from the real estate and retail investments with EUR 600 million, that is to say, up 35% versus Q1 2017, of which 62% invested in the shopping center segment.

In Romania, things are doing much better, as you probably saw in 2017 as well. GDP is up, is expected to grow 4.8%, and consumption is expected to grow 4.9%. Domestic consumption is going to be the main growth driver despite an expected increase of consumer prices.

If we move on to our operating performance, moving to Page 6 of the presentation. We've split the page between Italy and Romania where Italy accounts for more than 93% of total rental revenues and Romania slightly less than 7%. Occupancy for Italy is flat, 96.8%.

And let me also make a comment on the figure for Romania. For the first time, Romania is outperforming Italy, 97.1% the occupancy rate, growing versus full year 2017. Tenant sales in Italy, including extensions, witnessed a nearly 3% growth. And footfall is up 1%, also including extensions. That is basically the opening and extension of Ravenna, starting June 1, 2017. And we have, and this confirms the trend we witnessed last year, a 3% increase in the average upside on a limited number of contracts, but it's still a positive sign that we take stock of, up 3% average upside at contract expiry.

And for Romania, the figure is 1.5% the average upside on a larger number of contracts however, on renewals, of course, with a higher turnover, it's 135 contracts. The rotation rate for Italy was 1%, but higher for Romania, landing at 11.6%.

Let's move on to Page 7 in the presentation. And here, we disclose both revenues and gross -- net rental income. Total revenues are up 5.2%, and they land at EUR 35.65 million with like-for-like growth of almost 2% for Italy and 4.1% for Romania. For Italy, we have malls growing 2.5% whilst hypermarkets are flat basically. The inflation effect on Italy was a limited one, and it's about 80 basis points, about 40%, taking into account the overall growth which is 1.5%... Net rental income is up 6%, landing at slightly less than EUR 29 million. Italy is growing a bit more, 6.4%, and Romania slightly less, 2.2%.

The revenue breakdown. The shopping malls accounting for 2/3 of total revenues, and hypermarkets account for 28%, and Romania slightly less than 7%. These last 2 asset classes are going to further decline post acquisition, landing respectively around 26% for hypermarkets and in favor of an increase in galleries instead, of course, versus -- and Romania will go down to around 6%. And this is after the -- this will be post portfolio acquisition that was completed in April. That is only consisting of 4 shopping malls plus a retail park.

Let's move on to Page 8 in the presentation. As you can read in the title, funds from operations keep growing. It's the fifth year in a row where the FFO has been growing. It started growing in 2014, '15, '16 and then '17. So this is the fifth year in a row where we witnessed a double-digit FFO growth.

As you can see, it's up 17.5%, as I mentioned in the introductory highlights, and without factoring in, let me say it for the third time, the impact stemming from the closing of the portfolio acquisition that is effective starting from April 15, the cash flow starting to rental IGD from April 19. And we believe that the guidance we disclosed to the market when we presented our 2017 full year results that was ending an FFO growth within a range between 18 and 20 to be confirmed. And you know we are always very cautionary in our financial disclosure.

We think it's now time to update the guidance, and it should be in the higher part of the range, maybe even more, maybe even better, once we will be approving the H1 results, and that will then be disclosed early in August this year.

Let's now move on to Page 10 of the presentation. We briefly summarize the main steps, the milestones, of the acquisition deal of the 4 shopping malls and 1 retail park from Eurocommercial Properties. On April 18, it was finalized, the closing was completed. And we came to a conclusion after that, that was December 15, after the clearance from the board. And then the rights issue, it was the first that went for full month. This is the time frame for Italy when we talk about this kind of deals.

And here you see the main milestones that have -- I characterized. The route was quite a long route. Back in February, we have the shareholder meeting that resolved upon the transaction and also resolved upon the reverse stock split of ordinary shares. We have the clearance from Consob on March 22. On March 26, we started the option period for the rights, with a subscription rate that was close to 98%. And on the 18th of April, there was the -- we had the auction for unexercised option rights. And they were sold as soon as the auction was open. And so we had 100% rights issue underwriting.

On April 23, we formally completed the share capital increase with a novel cash-in of EUR 151 million, including one-off proceedings of about EUR 1.5 million stemming from the selling of unexercised option rights through an auction.

Let's now move on to Page 15 (sic) [ Page 11 ]. What happens now? What do we -- what can we expect now? Now we have further consolidated our leadership in Italy in managing medium-sized shopping malls that are predominant in medium-sized Italian cities which have a high spending capacity. The portfolio we acquired is located in Central and Northern Italy. And the real estate, that will be in excess of 2.5 billion in June 2018 and end of 2018 as well as the real estate portfolio. And we are improving our financial parameters, our financial ratios. LTVs will be up 46% through the year. And ICR interest coverage ratio is 3x already in the Q1, we are in excess of 3x iCR right now, so in excess of the requirements. And we are further improving our profitability ratios. NOI, EBITDA and funds from operation. So we think we can say that we are opening up a new phase in IGD's life. We are starting up a new phase.

Let's move to Page 12. News to disclose to you. First of all, on April 3, the Livorno municipality approved the amended project variant that we submitted some time ago. Here again, the red tape in Italy takes a long time. But we acquired the clearance for this amendment, for this variant or modification, any way you want to call it, so that we can set a time, a much more precise time, for the opening of the Officine Storiche, and we'll do this second half of 2018. And we are already starting to sell some of the spaces. For instance, the gym, we already have signed an agreement with Tonika for more than 4,000 square meters. And then we got a beautiful gym on the first floor of this gym -- of this mall. And it was part of the amended project.

And Piazza Mazzini, as we said, when we approved the account for 2017, we are in excess of 90% of the flats sold, 69 out of 73. We have 15 preliminary agreements already signed. And deeds will be completed, rotary deeds will be signed in 2018. So we hope that by next year at the latest to have completed, fully completed, the sale.

And then a new -- it's not a really new opening, but it was a project we had in our business plan pipeline. On May 3, we have opened a new medium surface in Crema, in a shopping mall called Gran Rondò, and we have completed the restyling of the shopping mall external and multistory car park and a small extension as well for a total investment of EUR 7 million.

If we now move on to Page 14, we find some interesting charts on our financial structure. Without factoring in the rights issue, it's still improving. Loan to value is below 47% end of March, 46.9% at the March 2018 whilst the cost of debt has also been declining to 2.75% against 2.82% on average that we had witnessed, with ICR in excess of 3.3x versus 2.9x last year.

Our net financial position is very sound, and it's mainly consisting of medium- to long-term debt, with 2/3 of the debt consisting of bonds, so fixed income market, and slightly more than 1/3 funded by the banking system with a debt maturity in excess of 4 years residual average maturity. The first maturity, the closest ones are for EUR 125 million bond, 3.875% that we will complete, thanks to a new issue in the H2 this year of about EUR 300 million overall size.

Next step is going to be the Annual General Meeting, the AGM, to be held on June 1, 2018. In addition to clearing the accounts, giving authorization of the accounts, we'll also have to look at the dividend proposal, EUR 0.50 per share. We have decided during the board meeting to grant both old shareholders and new shareholders, the underwriters of the share capital increase. The ex dividend date is 11th of June, and the payment date is 13th of June.

And then you see a chart with the performance over the last 4 years, how we performed dividend-wise. We experienced a constant growth over time, moving from EUR 0.375, the reverse split is already included; then EUR 0.40 in 2015; EUR 0.45 in 2016; and EUR 0.50 proposed for 2017. That will make of us one of the companies that have the highest dividend yields in the market.

And the board, the old board, is expiring, and we've already disclosed that officially. We've already deposited 4 lists -- filed 4 lists for the new Board of Directors. The majority lister, Coop Alleanza; then Unicoop Tirreno, second shareholder; and 2 minority lists, one organized by Assogestioni and the second one by our minority shareholder, GWM.

I think that's it as far as I'm concerned. And then we have attachments, of course. That's it as far as I'm concerned. But of course, we're here to take your questions now. Together with the colleagues who are here in attendance with me, together with our chairman, we are ready to take your questions.

[Operator]

[Operator Instructions] First question comes from the line of Simonetta Chiriotti with Mediobanca.

[Simonetta Chiriotti, analyst]

I have a question on cost and the reduction of cost of debt that has been going on during this quarter, too. And then the final charges seems to be doing well. And operating performance is also doing well, contributing to the improvement in FFO. So could you elaborate on the upcoming deadlines? What are you going to do for the debt that is about to come to maturity? And where do you see the average cost of debt at year-end?

[Claudio Albertini, executive]

Average cost of debt is not going to decline sizably. We're going to be around 2.7% between here and year-end. So the great bulk of the work was performed over the last 24 months. There could be a further small decline next year. As you see on Page 14 of the presentation, the largest chunk of the debt, 3.875, it's the bond issued in 2014 now coming to maturity. And there, we expect to offset it with a bond issue of about EUR 300 million between, well, say, in the second half of 2018. And then, we are looking at market opportunity windows. It could be a favorable opportunity window in the second half. It depends on how the markets move over the next few months. But this is why we want to be conservative when we disclose the FFO growth with '18 to '20 seems to be within reach but we have a variable. It's a critical variable which depends on the timing of those issuance. It's going to be EUR 300 million and have a positive impact on 2018. We closed the debt at 3.875, we will have to issue at much lower -- with a much lower cost. How much lower, we'll assess, and then [ swap some spreads ] are a bit broader now. They've been expanding over the last couple of months. So this really makes us be very conservative. But this is the largest maturity. And then some -- we'll be closing some of the debts that are still outstanding and then some mortgage loans we -- and then some funding that we acquired because of the acquisition. The issue should be EUR 300 million, EUR 325 million, and issuance should be in the second half of 2018. We're talking October or November. Cost will very much depend on the market situation.

[Operator]

[Operator Instructions] Next question comes from -- it's a follow-up from Ms. Chiriotti with Mediobanca.

[Simonetta Chiriotti, analyst]

Unless there are other questions, I'll take advantage of this opportunity to have a follow-up. For the time being -- well, right now, if I'm not mistaken, your outstanding pipeline is made up exclusively of Livorno -- the Livorno project, and that's it. Is it correct?

[Claudio Albertini, executive]

It's Livorno and not very much [indiscernible] CapEx for restyling purposes, and that is already ongoing. We are looking at the acquired portfolio and we'll be more accurate in the disclosure in the coming months. We have some ideas about this acquired portfolio. Also from the point of view of restyling, small extensions, it's all ideas, but no authorized projects so far. But in the pipeline we mainly have, as we have completed Crema as well, which was another small project we had in our portfolio, and now it's been Officine Storiche in the pipeline. And we're talking 2019, time-wise, and then after that I said also from Livorno you will have completed.

[Simonetta Chiriotti, analyst]

But you had in the previous calls, you have hinted at the possibility to dispose what remains because, as far as the land is concerned, you still have areas.

[Claudio Albertini, executive]

Yes, but there's nothing practical, nothing -- there are 2, 3 [indiscernible] and another one. Well, we don't think we are the best [ sort of ] developers to develop the land. So we are looking around and looking at the market to see whether those areas can be disposed of. [ Well ], if forced, maybe we could build or develop, but we would rather dispose of it. Overall, it's about EUR 20 million worth of book value on those areas in that land. Residual value, I'm talking. Outstanding. And as I said, when we discussed and disclosed the 2017 accounts, so the board's mandate is expiring. So after the summer, once Q3 results will be approved, we will come up with a new strategy plan, more than a business plan, it's going to be a strategy plan, a very accurate one going forward for the coming years. And not only a business plan, but it's a strategy plan for these next 3 years, as the existing one is coming to an end, because with 2018 we closed the business plan spanning 2016-2018. We're the only -- well, we're just [ pulling ] off the [indiscernible]. I apologize over the state of Livorno that we started [indiscernible] because we had very long record times because of the amended project, [indiscernible].

[Operator]

[Operator Instructions] Mr. Albertini, there are no more questions.

[Claudio Albertini, executive]

Very well. Thank you very much for attending our conference call and see you once we've approved the first half year reports in early August. Thank you very much also on behalf of the colleagues who are sitting here next to me. Thank you. Bye.

[Operator]

This is the Chorus Call operator. The conference call has come to an end. You may disconnect your phones. Thank you very much.