Log Commercial Properties e Participacoes SA

BOVESPA:LOGG3

Earnings Call Transcript 2024-Q1

[Operator]

Hello. Good morning, ladies and gentlemen. Welcome to the conference call of the earnings release of LOG Commercial Properties referring to the earnings release of the first quarter '24. We have here with us today, Sérgio Fischer, CEO; André Vitoria, CFO and Investor Relations Officer; and Henrique Schuffner, Director of Finance and Investor Relations.

We would like to inform you that the presentation is being recorded and translated simultaneously. Translation is available by clicking on interpretation. For those listening within English, there is also the option of muting or original audio. [Operator Instructions]

Before moving on, we would like to clarify that statements that may be made during this conference call with respect to business prospects, forecast, operational and financial goals of LOG are all based on the assumptions of the Executive Board of the company, which may or may not occur. Investors should understand that political macroeconomic and other operational factors may affect the future performance of the company and lead to results which may differ materially from those expressed in these forward-looking statements.

To open our conference call this morning for the earnings release of the first quarter '24. I would like to hand it over to Mr. Sérgio Fischer.

[Sérgio De Souza, executive]

Good morning. Thank you very much for your participation in LOG's First Quarter '24 Earnings Release Call. LOG has been demonstrating the attractiveness and liquidity of its assets. We have recently completed the recycling of the assets LOG Betim and LOG Salvador to the real estate investment fund BTLC11. The 2 assets adopt to 138,000 in square meters of GLA and totaled 509 million in size, with significant gross margin of 41%. This is the third transaction with this fund, which now manages approximately BRL 1.5 billion in assets sold by LOG, totaling 430,000 square meters of GLA.

As in previous sales, we maintained the execution of the management and administration contracts of the condominium, which allows us to retain commercial and market intelligence. In the last 12 months, LOG has accumulated more than BRL 1.7 billion in sales of assets with high margins, which demonstrate our competencies in the development of greenfield projects with high returns.

In sales, we have IRR of 27.3% of LOG Salvador. It shows that we can get liquidity and gross margin growth levers, combining yield cost increase with cap rate compression. The scenario has benefited LOG, especially regarding the downward trend in interest rates, which directly reflects on the heating up of the real estate investment fund market and creates opportunities for cap rate compression. In addition, LOG has achieved yield on costs close to 13%, which results in increased margins in asset recycling.

We have made progress in the execution of Todos por Um 5 and LOG 2 Million plans, which are important for the sustainable increase of the companies. We are delivering a new level of -- we are reaching a new level of the deliveries of 500,000 square meters of GLA per year, strengthening our growth. On the operational side, it's important to highlight the quarter deliveries of 57,000 square meters of GLA, 100% pre-leasing. They were in LOG Natal and LOG BH, presenting average ticket of BRL 23.63 per square meter.

The strong demand for LOG's assets in all regions has allowed us to report a high absorbing speed, which was 134,000 square meters of GLA in the first quarter. With the deliveries, we've reached a milestone of 2 million square meters of GLA, historically delivered in all regions. We produced 93,000 square meters of GLA during the quarter, an increase of 27% over the previous quarter. Then due to our geographic and sector diversification strategy, I highlight a stabilized vacancy rate below 1%.

Let me hand over to André now.

[André de Ávila Vitória, executive]

Now rental revenue ended the period of BRL 53.8 million. Despite a decrease compared to the same quarter last year, this result is mainly due to asset sales made in the last year. Excluding the sales, the company would have recorded revenue growth of 31%. The company's asset sales strategies has its main goal, the generation of shareholders' value, aligning the capital structure with the needs and objectives of LOG's growth plan.

The positive price dynamics in the market, combined with the quality of our assets have allowed us to renew contracts with average adjustments above inflation, growing -- with an average ticket growing from 15.52% in 2020 to 20.62% in the first quarter '24. Cumulative net delinquency over the last 12 months represented only 0.68% of accounts receivable. The company is projecting a significant increase in rental revenue between 2024 and 2028, annualized revenue growth of 2.3% and 2.7x and renewed CAGR between 20% and 25%.

Excluding depreciation and amortization, operating expenses were BRL 14.5 million. The company is already prepared for the new production level of 500,000 square meters of GLA per year as of '24, and the revenue of LOG administration was BRL 2.7 million in the quarter. CapEx was BRL 158.1 million. EBITDA in the quarter was BRL 74 million, up 36.4% year-on-year, while lease EBITDA reached BRL 38.8 million, with margin of 72.1%.

The financial result improved by 65% over the first quarter '23 due to the increase in financial revenues and gradual decrease in interest rates. The deferred tax is constituted according to the company's business cycle. And net income was BRL 53.3 million, 90.1% higher than the same period last year. The company generated operating cash BRL 28.2 million in the first quarter '24. And our position, considering the asset sales in April, reached BRL 1.1 million.

Let me now hand it over to Henrique to talk about the company's structure.

[Henrique Schuffner, executive]

The company's strategy of aligning its capital structure with its growth needs and objectives is evidenced by the significant reduction of debt. In the first quarter of '24, net debt adjusted for receivables from sales decreased by 37.4% over the same quarter of the previous year. With sales disclosed last week, we had additional reduction of approximately BRL 500 million in net debt. Adjusted leverage ended the quarter at 2.6x. Considering the asset sales in [indiscernible] leverage reached 0.8x.

The company made the amortization of BRL 95.8 million of debt in the quarter and issued BRL 200 million in debt, with an average cost of CDI plus 0.95% per year, demonstrating the trend of reduction in the effective cost of vision in LOG. Adjusted net LTV improved from 23.7% in the first quarter '23 to 16.4% in the first quarter '24. Our capital structure has solid position in liquidity, with recurring opportunities to reduce costs and extending the term in line with our organic growth business model.

We now move on to the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Bruno Mendonca, Bradesco BBI.

[Bruno Mendonca, analyst]

Thank you for the presentation. I want to ask a question about the plan of LOG 2 Million. By selling the assets, as you've announced we can see the leverage going back to very low levels. But the LOG 2 Million plan is a very relevant CapEx plan. We are talking about some billion BRLs in the next 4 years. I want to hear more from you how you are going to move on with the leverage considering potential scenarios that may take place in the next 4 years.

We can see the interest rates going down, which is very helpful, bringing back investment funds and you were making good sales. But I would like to understand for the near future where we might have an increase in interest rates, how are you going to decide to start a new project? What's going to be your priorities? I understand that you've been prioritizing recycling as an investment strategy much more than equity or net cap. But deciding on the new project, if the interest rate is not very favorable, will it be, what, delay beginning of construction? Are you going to sell the asset at a lower value? Please tell us a bit more about that. Just trying to understand how you are going to deal with leverage throughout the BRL 2 million LOG plan.

[Sérgio De Souza, executive]

Bruno, this is Sérgio speaking. As we've model LOG 2 Million, 100% of the resources for CapEx will come from asset recycling. We've been having very good transactions even during delicate moments such as last year. Last year was a record year for us with a 14% interest rate. And still, we've got very positive transactions very close to what we want and the CapEx rose 8%. So we are going to maintain the same plan.

As the CapEx are happening, as investments are made, we are going to match asset recycling and the financial volumes of the investments. This year, for example, we expect to invest [ BRL 859 million ], 100% funded by asset recycling. Of course, things may change as it normally happens. And our idea is while we are delivering spread with very satisfactory yields on costs, such as in 2023, it was 13.2% of the number we delivered. And this year, we can see we can keep on delivering yield of 13%. And if the cap is close to our NAV, we are going to speed up because we are delivering quality and margin. I don't think that's going to change. Even with the deterioration of the macroeconomic scenario, we can still deliver spread.

But let's be conservative. We'll be very careful with our net debt, maintaining adjusted net debt at BRL 700 million is a positive number to us to the size of our company, and this may change with growth that we expect to have in upcoming years. But this is the number that makes us comfortable. And that net debt over EBITDA, which is very low, 0.8% of net debt over EBITDA after the transactions in April. So we still have got space in our balance sheet to keep on growing, and this is how we are going to do it.

[Bruno Mendonca, analyst]

An important detail about timing. If the market of asset recycling just have a downturn, would you expect to hold projects you want to run with enough cash level? Fine. But to have, what, a CapEx for the next year or close the projects you've already started? Is that what you're thinking? And you would not start anything new unless you have asset recycling as expected. Is -- have I understood that right?

[Sérgio De Souza, executive]

Exactly. We are not going to start anything new unless we have really comfortable level of appropriate asset recycling levels. We don't want to leverage the company strongly again, without having the guarantee that we are going to have the resources. We'll keep on measuring and analyzing. I'll say we are very optimistic. We just have got so many proposals, requests of purchase of our assets. So selling with more quality, really, we are going to do that. We've been succeeding. There are some other ongoing transactions. So it really makes us comfortable always with enough cash to complete the assets under construction.

[Operator]

The next question come by André Mazini by Citi.

[André Mazini, analyst]

I have a first question about the gap. Contracts closed in margin, BRL 23 per square meter and the average of the company, which is 15%, a bit higher -- about BRL 20, right, per square meter. How long does it -- do you expect it to catch up to have it as the overall? LOG contracts don't get to that revision of contract reanalysis, so the great opportunity to increase the average ticket of contract margins is during the contract maturity. If it's a 5-year contract, I would say 20% of them having a churn per year? Do you expect to operate like that? Or do you want to speed it up?

Secondly, about tax. Yesterday, there was a decision by the courts showing a favorable decision for tax incentives. So it's a broader question really. Do you have any definition about tax rates in the new -- in the tax reform with [ CBS ] and the new VATs that they are introducing. Have you already analyzed that?

[Sérgio De Souza, executive]

Thank you, Mazini, this is Sérgio speaking. I'm going to talk about the mid-ticket gap and then hand it over to André to talk about the other items. Considering the market values of our operational properties and the ticket in place, there is a 15% difference, a different percent gap. There are 2 ways of catching it up. First, churn rate, because historically, we can get a 10% from the basis of the assets on a yearly basis, and this is an opportunity to increase average ticket. In recent quarters, the number were down because the market is strong. Clients are staying longer in the operation, renewing the term. So it's negative in terms of closing the gap.

Secondly, when the contract is over, as you said, 15% to 20% per year, clients are back on table for negotiation. It's long-term work. It's not something to be done overnight. In the last 7 quarters, we've had a mid-spread higher than inflation. So 7 consecutive spread. And I think that the trend is going to be maintained, but it's mid-term work, you see, until we get 0 gap. Prices are still going up. We can review the table of projects on a monthly basis. We always try to increase prices. So our -- we expect to have the gap still along these lines until we can have improvement also on the price range.

[André de Ávila Vitória, executive]

Now this is André speaking. Now talking about the tax reform yesterday, we saw the complementary proposal being brought to the Congress about the tax reform. And we are within a specific category for real estate. What we've noticed that, first, the proposal includes a 20% reduction of the current rate. If it was 30%, that will be a 20% discount, plus a reduction in the calculation basis, and that would depend on the operation being executed. I think it's still too well. We've been observing, but now we are going to have more clarity during the upcoming weeks, so we'll be able to analyze it further.

When you talk about tax incentives, we have no exposure to incentivized areas. And I think that for business people, it's more important to have predictability than incentives, because there might be incentives, but suddenly, they might be gone. So we have to work on a solid basis. For the upcoming weeks, we are going to analyze how the discussions are going to take place based on the initial proposition brought to the Congress yesterday. And we can just talk further about that in the near future.

[Operator]

The next question comes from Ruan Argenton, XP Investments.

[Ruan Argenton, analyst]

I have 2 questions. First, average ticket. But I would like to talk about the absorption rate, more prices, contracts. So talk to us whether you've seen a need due to the speed of absorption. Or do you think that the absorption rate is really stabilized? Concerning asset recycling, I would like to understand more the logic about closing deals. In recent transactions, we've seen that sales finance has been a way to really enable the operation. Have you seen any changes along those lines? Any differences in the potential negotiations we've been making? Any reduction, let's say, of payment terms?

[Sérgio De Souza, executive]

Sérgio speaking. Thank you for your questions. Let me start with asset recycling. We've seen an improvement. And the main purchasers are investment funds, right, they are the main purchasers. We've seen liquidity of the funds, many of them coming to the market to increase capital. And it reflects into better sales conditions to us. The specific sales last week was really important. There was sales finance to minimize tax rates, which is a variable to be taken into consideration. It's a better moment for all of us.

As the dividend yield of the funds are getting close to the interest rate, the industry will get more liquidity and there is going to be a shortage of assets. That is our impression. And then we'll be able to have even better deals that are capped and better payment conditions. But while there is a discrepancy between dividend and yields of funds and the interest rate, we still have to adjust the sales finance to help acquire funds.

Now concerning ticket, it's interesting what we've seen in the market. Delivering assets with 100% absorption is something unique, really, for LOG. This is due to the strategy of geographical diversification and the industry diversification that we have with different module properties, really to deliver the real estate and being leased. And we try to bring together a ticket improvement and better absorption. We prefer 100% leased to avoid vacancy costs and additional cost after delivery of the real estate and also bring prices up. We've been dealing with very positive average ticket, very positive numbers. It's over 13%, as I told you before. This is not going to change. We've seen it happening throughout all deliveries of assets.

Another interesting piece of data. This is going to be a record year in terms of new businesses and new investments at LOG. We have the potential of delivering 500,000 square meters of GLA throughout the year. [ 57 ] 1st quarter, and the balance of the GLA to be delivered with a 45% premium and total already. So very well preleased. Very strong data. Very positive moment for the whole industry, always trying to increase prices, average ticket at the same time, matching with the absorption rate.

[Operator]

The next question comes from Marcelo Motta, JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions. Could you please remind us what is your agenda of receivables from the sales based on what you've sold, the 1.8%? How much still will be coming into the cash on a quarter basis so that we can have some visibility on the expected CapEx? And the increase of expected revenue through the plan that you showed in the beginning of the presentation. Could you please share with us the assumptions, price increase of GLA? So that we can understand how the average price would be growing yearly.

[Sérgio De Souza, executive]

I'm going to start with the second question first. The LOG 2 Million plan includes 22 areas with projects in all of them, 22 geographical areas. We want to have major diversification. There are 12 ongoing construction, things to be delivered in 2025, projects to be delivered in 2025, with tickets very close to what we've been delivering, BRL 22, BRL 24 per square meter. We'll see annual deliveries of 500,000 GLA and annual sales of about half of that to support the growth. The net G&A, which will be very relevant in 2024, will see the company's portfolio have a 20% increase net, maintaining the same balance and the same net debt because of the margins we've added to the operation. This is what we have predicted. Net growth of 200,000 square meters GLA per year and stable net debt and increase in revenue coming from net GLA.

Concerning receivables, I don't know top of my head. We have BRL 600 million in receivables, all short term. concentrated close to 12 months, if I'm not mistaken, and BRL 500 million, which were added in April. In April, we received close to 60% start and the others will be accounted for in 24 months. But the Investor Relations team can share with you our schedule of receivables. We can share with you later.

[Operator]

The next question comes from Elvis Credendio, BTG.

[Elvis Credendio, analyst]

I have 2 questions. First, cost and yield on cost. We've shown the cost yield, which was flat comparing '22 to '23. But you've also been talking about ticket expansion. What do you expect? This cost evolution this year and the increase in average ticket, how do you anticipate yield on cost of the next sequence of projects? Secondly, about the strategy of asset recycling. I understand that the company want to match the volume of asset recycling and the CapEx of new development. You've been talking about the market. The market has been heating up, maybe there will be a shortage of assets. But what would be a trigger for you to recycle even more to divest more assets than you have? Maybe a compression of cap rate would be enough or -- so that you would return capital to shareholders? This is the question I had.

[Sérgio De Souza, executive]

Thank you Sérgio speaking. Concerning yield, I told you last year, we had a record year, 3.2% yield on cost of 260 square meter, 1,000 square meter delivery. This year we are going to deliver the double of that and very close yield -- it was 13% and it's going to be 12.9% approximately. Because of these 2 things, the ticket is going up. We've been managing to do, it is a reality, and it's a reality all over Brazil. We've been succeeding in doing it and the stability of the construction cost.

The second quarter of this year, we're reaching over 40,000 square meter of GLA being sold monthly and very good stability in construction cost. We don't think this is going to change in the midterm. There is no pressure as we see it, there might be even a short -- a small improvement and also a positive ticket. We think that there's a new deliveries of 500,000 square meters to be delivered, and what's going to be delivered in 2025 will be in the yield over cost scenario of 13% and stability of construction costs.

Now asset recycling. There are some variables really that make the decisions. First leverage, of course, we want to have resources. We want to be available to grab the opportunities and to grow further. But we also work with a scenario where we can increase our volumes than initially predicted because of the quality of the operation. This is what's going to determine it. There is a lot of liquidity in the industry, not only investment funds, but other investors.

We've been approached by them asking for sales of investments, and it may be translated into better transactions, better margins and better payment conditions. If there is a great opportunity, we can always increase the volume as initially predicted. This is not something that we haven't considered.

[Operator]

The next question from Jorel Guilloty, Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

Good morning. I have 2 questions. First, I would like to understand the assumptions for developing projects in PPI, I know the pipeline is now at BRL 18 billion, 64% higher. But could you please tell us more about the assumptions and how do you see the cap rate for these projects or tiers? Just to have a better understanding about your pipeline.

Finally, growth absorption. We've seen that 8% of gross absorption came from e-commerce. Was it direct e-commerce? Or do you think it's something related -- is it related to a marketplace or companies that are exposed to physical retail and e-commerce? Just trying to understand how you've categorized all that understanding.

[Sérgio De Souza, executive]

Thank you, Jorel, this is Sérgio speaking. Let me start from the second question. Something interesting that we've been observing with the marketplace is that the really got very well organized during the pandemic to cover especially Sao Paulo. All the main marketplaces got very organized, use living [ chats ]. We don't see that much of a change compared to what we have in the past.

But this is not the reality outside Rio and Sao Paulo. There is a lot of exposure in the Northeast. There is still major market there not very well supported. So the demand we've seen from e-commerce has come from regions outside the southeast of Brazil, especially the Chinese have been doing business with us, Mercado Livre, and we can see they are getting organized all over Brazil to be close to consumption. This is something that has not changed. We can still perceive the demand of e-commerce, and we are supporting them.

Concerning the PPI, the assumptions for our evolution, this is normally done by an external consultant, they work it independently, and our balance is about 8% cap. And this is what we've managed to have in terms of transactions of sales of assets in the past 12 months, the BRL 1.7 billion were sold at NAV. Some are a little above, others it below it, but always very close to NAV, which really makes us very comfortable. The company has an NAV of BRL 36, BRL 37 per share, and we've been able to recycle at NAV level. So very positive movement considering the discount and what we've been doing.

Developed projects and projects in construction, is there going to be a difference there? Yes, a difference in terms of discount rate as we absorb more. Stabilized, we have a very good average ticket and the project which is under construction. And so it's not for pre-lease, they estimate an average ticket absorption costs which are locally more conservative than what we've been using. When we have a project and it's delivered at 100% lease, there is an additional gain, a gain of fair value as we deliver above what was initially predicted.

[Operator]

The next question comes from Antonio Castrucci, Santander.

[Antonio Castrucci, analyst]

I have 2 quick questions. First, I want to understand about the [ EBITDA ] manager. After the efforts to reduce net debt, do you have any prepayment or debt refinance that we would expect in the short term? And secondly, changing gears about BTS. Anything in terms of BTS and the LOG Plan 2.0? And how do you expect to see profitability here compared to retail projects?

[Sérgio De Souza, executive]

I'm going to start talking about BTS and then hand it over to André. We haven't expected to have any investments in BTS. What we've mapped and modeled was percent of the speculative sheds, as we call them, very successfully. It doesn't mean that we are not going to do it. We are constantly approached by our own clients asking to have one or the other BTS. We've been considering that. There are some ongoing. And the decision to do it or not is the quality on return. If it's not close to the 13% yield on cost that we have had, we are not going to do it. What's going to decide it, it's really the quality of the return. André, please, about the debt.

[André de Ávila Vitória, executive]

Well, Antonio, concerning the debt, there are important data to be shared. End of March, the cost of debt, CDI plus 1.8%, but we have the LTV of 16.4%. We are really very comfortable with our position of debt. Concerning liability management, what we've been observing with our financial planning team and the financial organizations. The understanding we have is more favorable than CDI plus 1.8%. We have some below -- CDI below 1. And this is why we always analyze and consider whether prepayment would be worth to reduce the cost of debt and also have an extension of terms.

For the next quarters, we probably will have something more feasible, because the macro scenario has led to reduced interest rate and it impacts positively our position. But we don't have anything defined yet. These are considerations to be done in details. But it's a positive scenario to take us to a reduction of rates, especially during the next 2 quarters.

[Operator]

Our Q&A session is closed now. Let me hand it over to Mr. Fischer so that he can draw his final conclusions.

[Sérgio De Souza, executive]

Thank you all very much for your participation. I would like to close by giving you a very positive message. It's going to be a great year, record year. We've been developing a lot. Quality of development, 500,000 square meter of GLA within 1 year. Very good pre-lease levels and excellent yields. In the second quarter, we are going to have relevant deliveries even higher than what we expected in the first quarter. Very good lease rates. And this is going to impact our net revenues in the near future.

Very optimistic with the year and with our capacity to keep on having asset recycling, especially with the spreads we've been delivering. That's it. Thank you all very much. See you next time.

[Operator]

The conference call of LOG is finished now. If you have a question, please submit your questions to the Investor Relations team with email, [e-mail]. Thank you all very much for your participation. Have a great day.

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