Log Commercial Properties e Participacoes SA

BOVESPA:LOGG3

Earnings Call Transcript 2023-Q1

[Operator]

Hello, ladies and gentlemen, good morning. Welcome to the video conference of LOG commercial properties on the results of the first quarter of 2023. With us today are Sergio Fischer, CEO; and Andre Vitoria, CFO and Head of Investor Relations. [Operator Instructions]

We would like to clarify that any forward-looking statements that might be made during this conference call related to LOG's business outlook, projections and financial and operating goals are based on beliefs and assumptions of the company's management and therefore, depend on circumstances that may or may not occur.

Investors must understand the political, macroeconomic and other operating factors may affect the future of the company and later results to differ substantially from those expressed in such forward-looking statements. To open this video conference on the results of the first quarter 2023, I will give the floor to Mr. Sergio Fischer. Mr. Fischer, you may proceed.

[Sérgio De Souza, executive]

Good morning, and thank you for joining us for the presentation of LOG's First Quarter 2023 Earnings Results Call. We came to the end of the quarter, posting excellent commercial results. At the end of March 23, we reached the lowest stabilized vacancy in our history, only 1.43%. This is a strong measure of the quality of our assets and also a solid indication that the demand remains high in all regions where we operate. Our gross absorption was 221,000 square meters of GLA, the second highest in our history, with emphasis on the Pharmaceutical segment. We signed a new BTS deal in our Town for an important customer in the food and beverage industry.

The pricing dynamic has been positive, allowing us to grow 1.6% above inflation in rents builds to customers in the same lease space when comparing Q1 '23 with the same period of last year. Since the end of last year, we have adopted a more conservative posture in relation to CapEx in order to face the challenges imposed by the current macro scenario. We have only kept the 8 projects currently under construction in important metropolitan regions in the country with deliveries totally around 200,000 square meters of GLA.

These projects will be delivered in the next quarters of the year. We remain focused on the sale of assets. We intend to replicate the sales volume over the last 3 years of approximately BRL 1 billion in the coming months. This strategy will contribute to reducing our leverage. I will now give the floor to Andre, who will talk about our financial highlights.

[André de Ávila Vitória, executive]

The company's net income in Q1 '23 was BRL 29 million. EBITDA for this quarter came to BRL 54 million. This time, almost entirely generated by our leasing activities, meaning 70% higher year-on-year. The operating margin reached 81%, the best among our market peers. General and admin expenses were down 5% in relation to last year's fourth quarter, reflecting the management's focus on cost control. Our operating performance is also positively reflected in the financial results of the first quarter of this year. Net revenue was BRL 67 million, up 64% over the same period of the previous year. The next 12-month NPL came to only 0.8% in the quarter. The attractiveness and liquidity of Logs assets have been one of the main differentials of the success of our business model. We will maintain our strategy of recycling assets at record levels this year.

The proceeds from the sales of these assets will be mostly used to reduce our debt. the net debt of about BRL 1.2 billion, considering the receivables from asset sales accounts for 32% of the P&L and a net LTV of 24%. We intend to reduce the net debt levels significantly in the short term. Together with our results, we released our sustainability report, which is available on our website. The report is integrated, verified by an external auditor and reflects the adoption of our sustainable initiatives linked to our business strategy. The highlights of the quarter were the LEED silver certifications will obtain for our developments in Vienna, [indiscernible] and [indiscernible]. We will now proceed to the Q&A session.

[Operator]

[Operator Instructions] Our first question is from [indiscernible] from Bradesco BBI.

[Unknown Analyst]

First of all, congratulations for this quarter. We have 2 questions. The first is about your deliveries pipeline for the year. How much of that is typical and how much of that is not? And the second question is about high interest rates and whether the company will conclude its plan or whether that plan could be extended.

[Sérgio De Souza, executive]

Herman, this is Sergio. First of all, starting with our early pipeline, we anticipate deliveries of around 200,000 square meters of GLA. Possibly, there will be a delivery at the end of the second quarter, and the remaining will be mostly centralized in the second half of the year. Most of these assets are very typical properties. there is no BTS anticipated for delivery this year. Now talking a little bit about our growth plan. As we've been telling you we have reviewed our CapEx plan. We are adopting a more conservative position vis-a-vis our CapEx.

And this year, we believe that we will deliver half of our capacity. We have very good projects already approved, and we already have things ready to be built, but we will adopt a more conservative position while we navigate to this macro environment and in terms of also a possible recycling.

So in view of this landscape, possibly, we will postpone the delivery of a few projects. So there are things [indiscernible] 2024 that may be postponed to 2025.

[Operator]

Our next question is from Mr. Ygor Altero from XP.

[Ygor Altero, analyst]

We have 2 questions. The first, I would like an update on the recycling of assets. If you could elaborate a little bit about that in terms of cap rate, what is your view on that? And the second issue relates to CapEx. Given the higher leverage level, how much further your leverage could go? I mean, what would be the level that you would consider healthy and comfortable?

[Sérgio De Souza, executive]

Ygor, this is Sergio. I will start with your second question. We already reached a healthy point, and we are now working to deleverage. And the way to do that is through recycling. Now on that note, about recycling. I mean, LOG's advantage here is that our assets are very liquid, given the current scenario where liquidity is low. I mean the real estate funds are not buying anymore. We see some restrictions in terms of asset acquisition. We are getting relevant margins in the ongoing negotiations and also record volumes. We intend in the second quarter to probably disclose something to their end. And we also intend to do more of what we did last year and even twice as much as we did last year. So that's our objective. And caps closed to 8%, which would be close to our balance sheet.

[Operator]

Next question comes from Antonio Castrucci from Santander.

[Antonio Castrucci, analyst]

I would just like to understand the level of pre-lease of the assets to be delivered this year and the yield to cost of these assets. And with this macro scenario, whether you see a shrinking of demand, even though your indicators are quite strong.

[Sérgio De Souza, executive]

Antonio, this is Sergio again. Thank you for your question. So let me start with demand. We still have a pre-lease level, which was quite strong. Last year, almost 100% of pre-leasing we're delivering. We are seeing something very similar to that this year. If you look at the breakdown of the numbers that we disclosed in the first quarter, 130,000 square meters were of free lease, and we expect to keep that same performance being very close to the GLA leased around that project. This didn't change now about demand. I mean LOG it's very strong in terms of geographic diversification. And because of that, our demand is very much in line with consumption.

And sometimes, we are alone in certain geographies, and this demand still remains the same. We hear people talking about lower demand in e-commerce the major marketplaces got well prepared during the pandemic, especially in the Southeast, but this is not a reality if you look at other parts of Brazil. So our lease pipeline is very strong, and we do not anticipate any changes in demand in the medium range. About the yield on cost. I mean, the sector is experiencing a very positive pricing demand. If you look at pricing in the past quarters, we were able to transfer prices above inflation. We are closing good deals above inflation. And I think this will prevail throughout the year.

And because of that, we see a very positive impact on the yield on cost of these new projects and also linked to the stability in the construction cost. So cost of construction throughout 2023 should remain flat or stable. Therefore, the deliveries should be close to 200,000 square meters of GLA, very close to the yield on cost. Considering our history, this is a very strong volume.

[Operator]

Our next question comes from Mr. Elvis Credendio from BTG Pactual.

[Elvis Credendio, analyst]

Sergio and Andrea, I have 2 questions. First, about M&A and capital structure. I know that you elaborated a lot on the topics. But what is the profile of buyers? I know that the market is still slow. So what do you see in terms of this market, whether you can disclose it? And if you think in terms of recycling, you talked about probably twice as much recycling when compared to last year.

What would be your debt level that would be comfortable to you? And the second topic relates to lease prices. When we look at the portfolio vacancy, it's very low. So I would like to understand whether there is still room to increase lease prices in actual terms. You said about 1.6% in the same rental contract. And so I just want to understand if there's still room for more.

[Sérgio De Souza, executive]

This is Sergio. I will start with your last question. As I said earlier, demand remains very strong. The market is very demanding and clients are willing to pay for the asset. So I don't think that this scenario will change throughout the year. Last year, we were able to deliver about 1.5% above inflation, and this is the trend that prevails this year. This is what happened in the first quarter as well. Therefore, we believe that this number should remain flat in the same throughout the year. Now about M&A, -- the landscape is of low liquidity. In the past, we would get several proposals for Log's assets and the scenario is now more challenging. But the positive side is that we managed to make good transactions.

There are things that are way and also very good caps, which is very important. We will be able to deliver a relevant gross margin. And there are some institutional investors and real estate funds that they're still expressing their willingness to make some important transactions. But let's imagine that we will sell twice as much as we sold last year. So our net debt over EBITDA is about 1.5%.

So if we sell close to BRL 1 billion this year, we will zero that leverage, but we still have CapEx that will be used throughout the year, and we also intend to open a new buyback program, and we understand that also this transaction could be very assertive considering our current position. So we may use some proceeds for that in addition to leverage. And probably in the near future, when once we understand that the macro scenario is better that interest rates may be down, we may now reconsider. So we will do buyback, leverage and eventually some new businesses.

[Operator]

Our next question is from Mr. Andre Mazini from Citi.

[André Mazini, analyst]

My question is a follow-up on Elvis's question. I think this information about that 1.6% in the quarter is some new information. And lease per square meter is increasing. It reached BRL 20 per square meter. So that means an increase of about 20% year-on-year. So I imagine that this is because Amazon gained more momentum. They have more specialized warehouses. So I just want to understand whether Amazon was a deciding factor that led prices to go up. And why is it that Amazon pays more than the rest? Is it because the warehouse has very unique specifications or whether this is a reimbursement for some CapEx that you did for Amazon or whether it's just lease itself.

[Sérgio De Souza, executive]

This is Sergio. Certainly, these 2 BTSs that we did for Amazon, they were delivered at the end of last year. They certainly impacted the ticket is different due to the nature of the business, but I would like to emphasize that the performance was at historical levels. And these are assets that have great liquidity. Therefore, you may see transactions on these assets in the near future, which will probably allow us to dilute that weight that Amazon has in our customer base. Well, in terms of rent. It's a summation of both things. New businesses currently increase our average ticket. But in addition to that, we were able to transfer prices above inflation in the existing contracts. So it's a combination of these 2 things.

Today, the new reality of new businesses, even in geographies that are not so important in Sao Paulo or [indiscernible], you see transactions very close to that average ticket and sometimes even higher than that. And our -- in this segment of log in the last 12 to 24 months, we are now at a different level. And this yield on cost, as I said before, also changed, and I don't think the scenario will change in the short or mid-range.

[André Mazini, analyst]

I just have a quick follow-up. The metric of same client rent is above inflation and the inflation that you consider in this case, could be a weighted average between IPC and IPCA.

I think you had a little bit more of IPCA and what is the breakdown of GP and IPCA and whether you have clients that want to engage in any kind of negotiation or maybe you don't want to do it. And the market is converging more towards IPCA because it's less volatile. IGP is really volatile and that may be harmful in the long run. How do you see that?

[Sérgio De Souza, executive]

Okay, throughout the pandemic period, we did something that proved to be very assertive because we moved a large part of our customers to IPCA. And because of that, our pricing structure is better because GPM is very volatile. Therefore, we will not be heavily impacted now because of the strategy that we pursued 2 years ago about moving everyone to IPCA.

[Operator]

[Operator Instructions] Our next question comes from Andre Dibe from Itau BBA.

[André Dibe, analyst]

I just have a follow-up question about CapEx. Could you please give me some light the fact that you said that the ongoing projects would give about a certain number of CapEx? Or maybe considering the current scenario, this number could reach BRL 800 million. The CapEx in the quarter was about BRL 160 million and annualized it will be close to BRL 600 million.

Do you have any different perception considering asset recycling and the macro scenario? Or it's just because you spent a little bit more in the first quarter, and that amount could be reduced in the quarters going forward. I would just like to understand that better and what you expect in terms of CapEx amounts going forward.

[Sérgio De Souza, executive]

Andre, this is Sergio. Let me tell you one thing. When we I mean, at the year-end, I mean, we produce 165 square meters of GLA in the first quarter. And this consumes higher CapEx. What we said in previous quarters, and our position remains the same. This going projects will consume up to BRL 500 million. And this will be mostly centralized in the first and second quarters, and we will just wait to see how the recycling landscape will evolve.

The fact is that today our productive capacity and our land bank and approved projects and demanding customers in such a way that we could run slightly above BRL 1 billion in investments, which was the number from last year. But as we said before, we are adopting a more conservative position in terms of leverage because we want to understand how the macro scenario will evolve going forward. But the second quarter will still be very strong in terms of CapEx when compared to the first quarter, and the curve will start to come down going forward throughout the year.

[Operator]

Our next question is from Jorel Guilloty from Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

I do apologize whether my question has been answered, but I would like to learn more about your leasing spread dynamics and how you see that going forward? I remember that in your last call, you said that you were more cautious about the spreads. But once again, we see that the vacancy rate was down. So maybe you could have a higher pricing power than expected or a few months ago during the fourth quarter call, you gave us some perspective. So I just want to know whether there has been any changes in terms of the spread now and going forward.

[Sérgio De Souza, executive]

Earlier on, we said that the market moment is very positive. The market dynamics is very positive. There has been great demand. We are leasing a lot of things, and customers are willing to pay more. And yield on cost is much better. This is a very important aspect. Considering the market dynamics, yield is close to 3% a year. In the last 4 quarters, we were able to have Yield on spread very positive, about 1.5 above inflation. And I believe that we will see the same thing happening going forward in the next coming quarters. Now about vacancies we have a minimum vacancy in addition to a record delivery that we had last year for 415,000 square meters, vacancy is 1.4.

So this demonstrates the strength of our model in terms of sectors and geographic penetration. And we are extracting good returns from all of these new investments.

[Operator]

[Operator Instructions] Q&A session is now concluded. I will turn the floor back to Sergio for his final remarks

[Sérgio De Souza, executive]

I would just like to emphasize 2 aspects. We are very optimistic with the future of this industry. I think that the market will remain very demanding, and we see great prospects of growth in the country. So we see great possibilities of growing in the first quarter, 35% of all rentals went to this industry. We're very optimistic in just now and in the near future. Moreover, we are working diligently to deleverage the company. We are very much focused on the recycling moves.

I mean, the liquidity of our assets allow us to believe that we will see some positive things in the near future, and that will allow us to bring liquidity down. And that, in turn, will give us more possibilities to invest in the future.

[Operator]

LOG's video conference has now concluded. In case you have further questions, please send your questions to the Investor Relations team using the e-mail [e-mail]