JHSF Participacoes SA

BOVESPA:JHSF3

Earnings Call Analysis

Investor updates on growth and strategies

The company displayed growth across its business lines, save for real estate development due to a change in revenue recognition methods. Real estate sales made in 2022 are now accounted for under the percentage-of-completion (PoC) method, with over BRL 700 million in revenue pending recognition. Healthy margins are expected from these sales. The company shifted 20,000 square meters of inventory to residential units, targeting BRL 1 billion in business, with a robust 90% gross margin in this segment. The expansion of Catarina Fashion Outlet and Cidade Jardim Mall has been successful, with key luxury brands opening stores. Two new funds from JHSF Capital focus on Brazilian and international markets.

Expanding Retail and Hospitality Ventures

The company's traditional strongholds, Cidade Jardim and Catarina Fashion Outlet, have undergone significant expansions, growing their capacity by 65%, which poises them for revenue growth in 2024. Additionally, the hospitality sector, led by the Fasano brand, is showing positive indicators with Revenue Per Available Room (RevPAR) up by 6.4%, increased dining cover numbers by 3%, and an average cover price up by 7.5%. The consequent EBITDA increase of 35% underscores the particular success of the recently opened Fasano Itaim. The brand is leveraging its growing international recognition to push into new markets, with plans to open new hotels in Miami and London.

A Pivot toward International Executive Aviation

The São Paulo Catarina International Executive Airport is taking flight as Brazil’s premier executive aviation hub, now accommodating over 65% of long-haul executive flights in the country. A staggering 75% increase in landings and takeoffs, coupled with a 94% uptick in spot flights, has fueled an 11% rise in gross revenue and 87% in adjusted EBITDA, suggesting a robust growth trajectory for this segment in the upcoming year.

Acceleration in Fund Management and Real Estate Income

Navigating through a quieter period in the real estate business line, the company's fund management arm has successfully raised BRL 800 million for one of its real estate funds, in addition to forging a substantial partnership with eB Capital, which is opening doors to a BRL 500 million fund. Four new funds are being launched, with two each focusing on markets in the U.S., Europe, and Brazil. Consequently, a growth of 30% in recurring gross revenue, 85% in adjusted EBITDA, and nearly 350% in net income within this division testifies to the success of its diversified investment strategy.

Leveraging Assets and Capital Recycling

The company has increased leverage through tactical investments in its malls and airport hangers, an approach expected to bear fruit by Q4, as they begin generating operational results. Leveraging these assets projects a yield on cost at or above 20%, indicating significant potential for value creation. To further enhance financial flexibility, the company plans to recycle capital invested in non-core assets or assets that have matured in terms of development, potentially through divestments which are becoming more attractive in the current market.

Earnings Call Transcript 2023-Q3

[Mara Dias, executive]

Good afternoon, ladies and gentlemen. And welcome to JHSF video conference to discuss the results of Q3 2023. Today with us are Mr. Thiago de Oliveira, CEO; and myself, Mara Dias, IRO. Today with us is also Sullivan from [indiscernible], who is doing the interpretation in Brazilian sign language. This is part of our initiative to be more inclusive. This presentation is being broadcast simultaneously on YouTube and Zoom from the site ri.jhsf.com.br. [Operator Instructions]

Before proceeding, we would like to clarify that any forward-looking statements that may be made during this presentation relating to the company's business projections are based on the company's assumptions and on information currently available. Therefore, they involve risks and uncertainties because they refer to future events, changes in macroeconomic policies or legislation may also affect the projections made here.

Now I turn the floor over to Mr. de Oliveira to begin his presentation.

[Thiago de Oliveira, executive]

Good afternoon. Good afternoon, Mara. Thanks for the introduction. I would like to start this video conference by giving a general message about our business. Q3 was a quarter where all the business lines grew with the exception of the real estate development area.

When we look at the real development -- real estate development area, things were different. And this has to do with the changes between Q3 2023 relative to Q3 2022, which has to do with the recognition of revenue relating to those properties that we sold in 2022, whereas now in 2023, we have to work with the PoC method. And we have to use this method now. The company has over BRL 700 million to recognize in terms of revenue coming from sales not only of this quarter but of previous quarters. I highlight that once again because part of the results that we will recognize will come from these inventories, so to speak, of revenue that we have to recognize under the PoC method and the margins there are very healthy. It's a major change in terms of the profile of the products we are selling in our development business. And we believe that there is going to be a rebalancing in the next few quarters once we launch the Santa Helena project, we will sell plots. And in this case, we recognize the revenue straight away.

Also, I would like to share with you the outlook of the market at this time for new development projects. We have been monitoring the price versus cost relationship, and this has to do with the margins. And as you are aware, there has been a major growth in terms of costs, we, as a company, have been able to maintain the margin in our development business line, but we have to be extra cautious now in relation to prices. So we are prioritizing profitability, and this will be so in the next few quarters when we launch new projects. And we are also working on the front of the profitability of the inventory.

With this in mind, we decided to take 20,000 square meters of finished products, approximately BRL 650 million. And we are going to allocate that inventory for our residential unit. We have been developing that we had mostly houses in the Fazenda Boa Vista development. And this 20,000 meters should go 10,000 for the city of São Paulo and 10,000 for the interior of the state. We have had a good yield on cost in relation to this new strategy. And our objective is that with the current revenue and with the income that this business line generates and the occupation of this 20,000 square meters. This should allow us to have a business worth BRL 1 billion. Once this curve matures, we are going to work on real estate investment fund for income in the residential field. This is the main asset class in the world as regards to real estate funds. And this is just beginning in Brazil. So we are working on that front. And we are also managing our inventories.

I would also like to draw your attention to some moves that happened in Q3. And this is something that we are seeing in Q4. We opened the expansion of Catarina Fashion Outlet together with the expansion of the Cidade Jardim Mall. So our income generating unit is coming not only from residential rentals, but also from our malls business. We have been allocating capital. We have been putting a lot of effort into it, and we have had very healthy returns. The acceptance of our partners and customers has been great. In terms of the expansion of our malls in the last few months, some flagship stores, such as Cartier opened units in the Cidade Jardim Mall. Bulgari and Valentino also are going to open, and Louis Vuitton is going to open a third shop in the city of São Paulo and is going to open at the Jardim's shopping mall together with Christian Dior and Gucci.

So in the last few years as a company, we have been working to improve our development business, but also on generating income. And in this quarter, the income-generating business lines grew. And in the development business because of the mix, there have been changes in terms of the recognition of revenue. And also, I would like to mention 2 things. One is that the international Executive Airport, São Paulo Catarina now operates 24 hours a day, 7 days a week as an international airport and the airport has been growing very fast. We opened the 12 hanger. The airport has been operating for 4 years, and it's the largest in terms of the fleet in our hangars in Brazil. And then JHSF Capital, which was opened a year ago, has launched 2 funds, and there are 4 funds which are now being structured. Of these 4 funds, 2 target the international market and 2 target the Brazilian market. As soon as these funds are launched, we are going to give you more color about them.

So let's move on to Page 4 of the presentation, and I will begin with the real estate development business. On the upper part on the left-hand side, you see the mix of products. As I said before, this mix has changed between land plots and real estate products. With this new mix, there has been a change in the process of recognizing revenue. That is, we have a revenue that has been deferred for the next few quarters and has to be recognized on a PoC basis, that revenue is now BRL 769 million, practically twice what we had last year. And in this quarter, we have recognized practically 1/3 of what we did last year.

So this change in the way we recognize revenue is very relevant. And you have to bear that in mind because in the next few quarters, this BRL 769 million will go -- will leave us an operating margin for the company. In terms of results to be appropriated on the upper part, you see our expectation that this BRL 769 million of gross revenue should translate into BRL 371 million in terms of -- or rather BRL 381 million in terms of gross profit. And we have to bear that number in mind, and it has to be watched carefully. And we are going to be talking about this number in the future. Also, the company has accounts receivable of nearly BRL 1.8 billion, of which BRL 1.100 billion has been performed and the other part will perform in the next few quarters. This deferred cash entry will also allow us to deal with the costs that we are going to incur and we will have to appropriate. In terms of the real estate development, the gross profit reduced just as the EBITDA, and you will see that this has to do with the revenue recognition method.

Then on Page 5, you see a little bit more about this vertical business that we are developing. Today, we have 20 rental houses. We are going to start operating the Boa Vista Village Surf Club of the 20,000 square meters. We have units in Fasano Residences and Golf Residences, and this is a business unit -- or rather this is a number of new units which will allow us to, as a company, invest our capital so that we can have a good rate of return on the invested capital. And we do have plans to continue to grow this business line. And part of the inventory will be built in the Bosque Cidade Jardim and Reserva Cidade Jardim and new units in the Boa Vista Village.

This business unit has generated BRL 20.4 million in gross revenue. The gross margin is extremely robust, 90%, and this contributes to our EBITDA, which makes us feel comfortable that this is a very profitable activity for the company. It is our intent in a few quarters to take part of the revenue that will be added to this BRL 20 million. We want to form an investment fund for residential income, and this will become an investment vehicle for different investors in the market. This is the main asset class in real estate funds, which in Brazil have a very low penetration. We do believe that this is a very good product.

On the next page, we are going to talk a little bit about our malls. The absolute growth was extremely positive year-on-year. Very healthy numbers in terms of occupancy cost, occupancy rate. Growing revenues, growing gross revenue, adjusted EBITDA has grown as well by 34.1%. Our strategy is to work mostly with premium national and international brands, and this has proven to be a good strategy that allows us to allocate a good space for the store owners, our business partners. And in the last few years, it has become clear that the opening of these flagships in our malls reinforce the view of national and international brands in relation to our ability to attract people to our malls, people in the high-income bracket.

Also in terms of expansion, our 2 main malls have received major investments throughout 2023. And we have seen an expansion in capacity in the Cidade Jardim and in the Catarina Fashion Outlet, which has grown by 65%. So for 2024, we should expect growth in terms of revenue from this business line because of these 2 expansions.

In terms of hospitality and gastronomy, all the indicators are positive. The RevPAR is 6.4% above Q2 2022. The number of sold couverts was 3% higher. The average price of the couvert was 7.5% above Q2 2022. And the EBITDA was 35% above the EBITDA of Q3 2022. We are seeing good results from the Fasano Itaim, which has been recently opened and is performing above our expectations. We are looking into international opportunities to expand the brand. Fasano has now been recognized by major opinion makers in terms of hospitality and gastronomy in its international operations. And this greatly encourages us and attached to the excellence of the Fasano hospitality and gastronomy. And this presents good avenues for growth in new markets. In the next few years, we are going to open a hotel in Miami and a hotel and club in London in addition to all the operations that are now on the study in other countries.

Now a little bit about the Executive Airport, means São Paulo Catarina International Executive Airport has consolidated its position as Brazil's main airport for executive aviation. We hold substantial market share over 65% of long-haul claims use us and also the number of manufacturers who want to have their service centers with us has increased. And together with us, these manufacturers will be able to provide better services to their clients.

Maintenance and the flexibility in a safe environment that we offer have been attracting owners of executive jets who either live in São Paulo or who traveled to São Paulo for business. There has been an increase in the number of planes hangar and also in spot flights. We grew practically 75% in terms of landings and takeoffs. The spot flights grew 94%, and we grew nearly 50% in terms of liters of fuel supplied to these airplanes. So not only the gross revenue grew by 11%, but the adjusted EBITDA also grew by 87%. Just as I said before, in relation to the shopping malls, the expansions that we delivered in 2023 will allow this business unit to continue to grow in terms of generating operational results. We have more capacity, and the hangers are now occupied and the airport is being used. So next year, we should see major growth in the airport.

And last but not least, JHSF Capital is a business unit that has been around for 1 year. It has raised BRL 800 million for one of its funds. In the beginning of Q3, it announced a partnership with eB Capital for a fund of over BRL 500 million and 4 new funds should be added to the portfolio, 2 focusing abroad, the U.S. and Europe and 2 funds targeting the Brazilian market. These 4 funds will deal with real estate.

And with this, I complete this part of our presentation. By looking at the consolidated results in terms of gross revenue, as I said before, the main effect is the drop in the recognition of revenue of the real estate business line. If we isolate that, we would have seen growth in recurring revenue, and this is in line with what we have been trying to do as a company. In terms of gross revenue, this is what we see, 30% growth in the gross revenue in terms of recurring revenue, 85% in terms of growth for the adjusted EBITDA in the recurring revenue business and nearly 350% growth in terms of net income in the recurring income division.

And now I would like to open for your questions.

[Mara Dias, executive]

Thank you, Thiago. We will now begin the Q&A session. [Operator Instructions] Pedro?

[Pedro Lobato Garcia Fernandes, analyst]

Mara, Thiago, this is Pedro Lobato from Bradesco. The first question has to do with the pipeline of launches. You have a major plot in Bragança. Is this still in the pipeline for this year, at least 1 phase? Or should we only see that materialize in 2024? And then if I look at the receivables, this is very substantial, and we are seeing developers that have a different profile, and they are selling to funds. So I would like to understand if this is in your strategy, is it something that we could see the company do in the short to medium term?

[Thiago de Oliveira, executive]

Thank you for your 2 questions, Pedro. First, in relation to Bragança, since we announced this project, we have been surprised because it has been very well received. We have seen clients in our offices -- select clients who are interested in participating in that project. And this has given us a fair degree of confidence in relation to the launch of this product in the next few months. We are happy with what we have seen from our clients in terms of demand and also the amounts for each of the plots.

And as for your second question, which has to do with the receivables, at any time, we might use those receivables either to get some time of securitization or an advance. This is -- these are high-quality receivables. We have to think that these receivables come from a real estate transaction. So the debtors usually have a lot of capital that they have put to buy the property and the performance of the receivables is going to assure the customer that they will own that property. There is historically a 0 loss in terms of those receivables. And I say 0 because if worse comes to worst, we will repossess the property and sell it again. And therefore, the assets of the company are protected. We have good financial partners who understand this. And whenever we wanted to do this kind of operation, it wasn't difficult for us. We have been able to do this at very good conditions for the company.

[Mara Dias, executive]

The next question comes from Fanny.

[Fanny Oreng Avino, analyst]

Mara, Thiago, I have actually 2 questions. The first one has to do with the leverage. I would like to understand what you can say about the leverage going forward, you have some CapEx in Santa Helena, for example. So could you give us a little bit more color about the leverage? And then in terms of divestment. It's a very liquid market for the divestment of shopping malls. So does it make sense for you to think in terms of divesting the shopping malls, which no longer fit your high income profile?

[Thiago de Oliveira, executive]

Thank you Fanny for your questions, I'll take the leverage first. So I'll go back here to some of the messages that I conveyed during this presentation. We made investments in the shopping malls. And this allowed us to grow the leverage a bit. But in Q4, we are going to see these investments bear fruit. Likewise, we invested in the hangers and we are going -- and also, we have that inventory of 20,000 square meters. So we mustn't lose sight of that. We made these investments. Therefore, we took money from the cash position, and it might give an idea. If we take a picture, for example, of the current situation versus that, it has grown. But we also have to look ahead where we are expected to be in terms of generating quarterly and yearly results once those investments begin to generate income. Historically, these projects have a yield on cost, which is close or above 20%. And we believe that this is a good way to create value for the company and for the shareholders.

As for your second question about divestments. I would start to say that divestments are part of our strategy to recycle capital. I even said that part of the revenue that we are forming now with the rental homes is going to be turned into real estate funds. Historically, we always think in terms of recycling capital that was invested in shopping malls and in the airport. So a source of capital that we take into account for future projects and for future investment is this capital recycling of those projects that we built in the last few years that have high quality and good operating performance. And now we have real estate funds, which are more liquid, they are more active, and this will become more attractive. These divestments will become more attractive.

So what I'm saying now is that we might do what we have done before. In the beginning of the year 2000, we divested some shopping malls. In 2015 also, we did something along the same lines. So it's a process. We build, we construct shopping mall, we stabilize the results of those areas that have been added as expansions. And then we monetize that. In a certain way, this is a cycle that we go through whenever there is growth for the company in terms of properties.

[Mara Dias, executive]

The next question comes from Rafael Reder from Safra.

[Rafael Faile Reder, analyst]

I have 2 questions. First, in terms of the pipeline of launches you have talked about the Santa Helena. And what type of products are you going to build there? Is it going to be bigger plots, smaller plots? Is it going to be accounted for on a PoC basis?? And the second question is about the receivables. You always had one of the receivables portfolio with a lower LTV. And in terms of products and plots, is there a big difference? Is this going to have an impact in terms of the cash generation of the real estate development business?

[Thiago de Oliveira, executive]

Thank you for your 2 questions. First, in relation to the Santa Helena project. This includes plots, which are smaller relative to the Boa Vista estates. The plots are, on average, very similar to the ones of Boa Vista Village on average, 3,000 square meters. There are some smaller plots as well, smaller than 3,000 square meters. As regards to the LTV of the portfolio, this type of portfolio normally is very similar to the portfolio of land plots. So there might be a variation from period-to-period, but this is not really material in terms of what we have done in the last few years in terms of managing the company's cash flow. We look not only at the down payments of the sale and purchase, but also the distribution of the receipts and the flow of receipts in the portfolio.

[Mara Dias, executive]

The next question is from Elvis from BTG.

[Elvis Credendio, analyst]

I have 2 questions as well. The first one is your perception relative to the residential developments. There is something relating to the interest rates and the opportunity cost as well. So how do you see that? Are your customers more optimistic? Are you willing to allocate more capital in that segment? So what is the outlook in terms of sales? And then the pipeline of developments for shopping malls. You have -- you are not going to do the Real Parque and you have added offices [indiscernible]. So have you revamped the pipeline to fit the company's balance sheet? Or does it depend on the performance of the residential real estate business line so that you can execute on the pipeline?

[Thiago de Oliveira, executive]

Thank you, Elvis. I'll take the second question first, and then I'll go back to demand. As regards the project that we had designed in the past, the Real Parque shopping, we decided to swap the area of the shopping mall and do the Surf Club. We believe the return on invested capital is even better under the Surf Club model.

When we look at what there is in terms of a surplus of shopping malls in very close to each other, it wouldn't make a lot of sense to build the new shopping mall. So there is a very good supply in neighboring regions, but we have the chance to do something very innovative, such as the Surf Club. So that's why we decided to swap. And instead of building the mall, we decided to keep open the possibility of having residential flats. We have a model for that. It's a very good product, very attractive.

And as I said in the beginning of the call, what we need to do, and this has to do with your first question is work on the demand for residential units and the cost of opportunity. This is something we have to monitor from a very close range. Price has to do with demand as well. When the interest rate is high or interest rates are going up, demand is a bit slow. But as the interest rates go down, demand will go up. And as I said before, we have to look at the profitability of projects. We are a company that works with real estate developments, and we are different from other developers.

We normally focus on developing our own land. We don't want to be under pressure arising from swaps. And this gives us the option of waiting for a more benign market rather than launching at the wrong time just because we have costs relating to land swaps that we would have to honor.

In previous years, we have seen the cycles of the real estate development business. And we mustn't forget that costs had to be repositioned. There was a huge inflation push, and we are not seeing this cost go down. So we are a company who focuses on profitability in a plot of land in a high income region of the city. So we have to wait for better macroeconomic conditions for us to start the project. As a company, we have demonstrated in previous years that we can keep cool and wait for the right time to take off, so to speak, and we are able to wait for the best time to launch instead of just launching under pressure when costs are high and the consumer market is not ready. All we want is to ensure the profitability that we think we should have for our land bank.

[Mara Dias, executive]

I have some questions here from the Q&A they came in writing. So I'm going to summarize. In terms of real estate development, we are asked about the Bosque project. Do we -- have we defined the project, the products and when it's going to be launched?

[Thiago de Oliveira, executive]

First, in terms of this project, those of you who have been monitoring us for long, would know that years ago, we designed this project to sell land plots for our clients to build. Now we are finalizing the business model for this project. And we are likely to take it to the rental -- down the rental avenue. Once we have that definition formalized, we will disclose it. But today and also because of a lot of what I have said is what we are thinking is more in terms of rental. Sales are important, but we are being very selected -- selective, sorry. So we always think should we launch a project or not? And what is the model for each project.

[Mara Dias, executive]

And then we are asked about the rental and it's long-term rental, not short stay. And then in terms of home -- rental homes, there is a question. The results that we showed in the release, is it a recurring result? Is it going to grow? We have an NOI for the inventory that is nearly ready in Golf and Fasano, but there are also other projects in the pipeline like the Bosque project.

[Thiago de Oliveira, executive]

Yes. This allows us to clarify something. BRL 20.4 million is what we are generating today with the Fasano Cidade Jardim. Together with Village, we should see this number increase by BRL 32 million. So we should be generating BRL 52 million, BRL 55 million. And then we have the Bosque project, which is going to be added to that. And also as an area within Reserva and other areas in Boa Vista Village, we decided to invest in this business line because it deals with 2 things: It reduces the supply, and in the equation of supply and demand that Elvis addressed, this smaller demand is a very important element. And then the yield on cost is very good. This also allows us to have the option to sell those units when prices are better. This can be done via real estate fund. But also the sale unit-by-unit. But now remember, we are focusing on the real estate funds.

[Mara Dias, executive]

And then there is a last question about the airport. Could you explain the financial strategy for the airport? There is a high amount in terms of the fixed assets in the airport. So what is the financial strategy?

[Thiago de Oliveira, executive]

That's a very good question. What we have to take into account in terms of the current figures, for the airport or the Q3 figures is that these numbers include the generation of revenue from 8 hangers, which operated in Q3. Hangers 9, 10, 11 and 12 were open during the quarter. So there's no major impact from those hangers. So we have to think about that in terms of the 25 hangers, which from our point of view is the ideal occupation of the airport. That is we have the potential to grow threefold the capacity of the hangers, which we saw in Q3 in the next few years. And we have reasons to think that this demand is there. This has to do with the growth in the executive airplane fleet and also some airports in the metropolitan region of São Paulo are being reorganized in terms of the flow of executive aviation. And Congonhas is one of them.

It has been privatized just now, and the new operator has taken over a month ago. And in this type of activity, we want to grow the hanger revenue. We should also see a growth in terms of the services, airport services, and the revenue from fuel. So this is an infrastructure project, a long-term project and the project that has a major component in the sense that it depends on operational leverage. So we are going to expand capacity in terms of hangars without the need to invest a lot more, I mean, investments made, for example, in earthworks, in runways. This will not have to be doubled. Very little is needed for us to grow 3x the time -- the size of the hangars that we have today and taxi way also which allows for more spot flights.

[Mara Dias, executive]

So this was the last question, Thiago. I would like to thank you for the presentation. And make our IR channels available to all of you. Should you have any questions or require any clarification, just feel free to send us an e-mail. And now I turn the floor over to you, Thiago, to make your final remarks.

[Thiago de Oliveira, executive]

Thank you to all of you. A special thanks to JHSF's team. We wake up early, go to sleep late to bring quality and excellence to our very special customers. Should you have any other questions, please send them to our IR team. I would like to thank Mara and the team very much for what they have been doing to interact with investors. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]