Log Commercial Properties e Participacoes SA

BOVESPA:LOGG3

Earnings Call Transcript 2023-Q2

[Operator]

Hello, ladies and gentlemen good morning. Welcome to the video conference of LOG commercial properties on the results of the second quarter of 2023. With us today are Sergio Fischer, CEO; and Andre Vitoria, CFO and Head of Investor Relations. We would like to inform you that this presentation is being recorded and translated simultaneously. [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 that political, macroeconomic and other operating factors may affect the future of the company and lead to results that differ substantially from those expressed in such forward-looking statements.

To open this video conference on the results of the second quarter of 2023. I will turn the floor to Sergio Fischer.

[Sérgio De Souza, executive]

Good morning. Thank you for participating in LOG's Second Quarter 2023 Earnings Results Call. This quarter, we celebrated LOG's 15th anniversary. Throughout our history, we have established ourselves as a reference to the development of Class A warehouses in Brazil, being the only warehouse company present in all regions of the country. At the end of June '23, we posted a new record of stabilized vacancy of only 0.72%. This is a very strong indicator of the quality of our assets, but also a good benchmark of demand. That remains very strong in all regions in operation.

In the first half of this year, we achieved gross absorption of 338,000 square meters of GLA, of which 117,000 square meters was in the second quarter of '23, the highlights being logistics and transportation. In this quarter, we achieved an agreement renewal rate of 100%. We are going through a moment in which the positive dynamics of prices as well as the slowdown in cost pressure has allowed the company to develop projects with yields close to 13% a year. This quarter, the company delivered more than 71,000 square meters of GLA, 100% lease in due projects in the Northeast.

We currently have 8 projects under construction in important metropolitan regions of the country. Since the end of the first quarter, when we announced our intention to move forward with the recycling of our portfolio, 4 transactions were concluded with 3 different buyers totaling the sale of 375,000 square meters of GLA in 11 assets. With this, we ended the second quarter with a strong emphasis on asset sales. Since May, we have sold BRL 1.2 billion.

And now I'll hand the floor over to Andre, so he can comment on our financial highlights.

[André de Ávila Vitória, executive]

The second quarter of 2023 reported an net income of BRL 43.9 million. EBITDA in the quarter stood at BRL 70 million, 61% of which was generated by our leasing activities with an operating margin of 75%. General and admin expenses have remained flat over the last few quarters, reinforcing the company's commitment to controlling expenses. Our operating performance is also positively reflected in the financial results we presented in the second quarter of '23. Net revenue was BRL 57 million, 17% higher year-on-year.

If we consider the assets sold in the period, the increase would have been 40%. Net delinquency over the last 12 months stood at an all-time low of just 0.8%. Since 2019, we have generated BRL 2.1 billion for the sale of 15 assets. We will continue to recycle our assets as we understand that this strategy is, the best way to generate value for our shareholders, monetizing our assets while building cash for new investments.

The attractiveness and liquidity of LOG's assets have been one of the key drivers of the success of our business model. In order to maintain the financial strength of our balance sheet, a large part of the proceeds from the asset sales have been allocated to reducing net debt. We have set a debt ceiling compatible with our capital structure, considering the market momentum. Net debt was reduced by BRL 490 million this quarter, representing 19% of net equity and a net LTV of 16%. We will continue to focus on maximizing results consistently throughout the year, taking advantage of opportunities to develop new projects. LOG continues to focus on several ESG initiatives, maintaining environmental, social and government -- governance practices in line with the interest and expectations of our customers and shareholders, in fact, are emphasizing that 100% -- from renewable sources.

We will now move to the Q&A session.

[Operator]

[Operator Instructions] First question comes from Mr. Bruno Mendonca from Bradesco BBI.

[Bruno Mendonca, analyst]

Sergio and Andre, my question is about the average rental ticket because the operating figures of LOG are quite impressive. You've been delivered 100% leased and what drew my attention was the 100% agreement renewal rate. But the average ticket indicator it might be a bit polluted because of the sale of assets because Amazon was attendant with a higher ticket. Could you please elaborate on that average ticket without tenants, if possible. And how did you proceed with the negotiation of the renewal of the agreements, whether you were able to transfer some price adjustments in the renewals.

[Sérgio De Souza, executive]

This is Sergio. Thank you for your questions. Yes, there was a drop in the average ticket from slightly above BRL 20 to BRL 18 because of the mix of tickets that had a high -- of leases that had a higher ticket. But we've been able to transfer prices above inflation for the fifth quarter in a row. I don't think this scenario will change. We will continue to move on with this same strategy in this third quarter. But the number will really depend on the number of agreements that are renewed.

As we have no vacancy, almost no vacancy at all, it will certainly depend on what will be renewed throughout the next quarters to see whether we will be able to transfer prices above inflation. The scenario remains quite positive as the fifth continuous quarter with transfers above inflation. But the new projects that are being delivered, this quarter, we delivered 71,000 square meters of GLA and that the average ticket was above BRL 20. And this has been the average of our new leases for this retail product of LOG. We've seen a trend where prices were increasing in the past. The price has varied more between stronger geographies. But today, prices are linear, close to BRL 20 or BRL 22, which is quite positive, and this has pushed the yield of new projects as we referred to in the beginning of the presentation. So the trend is for an increase of the average ticket in view of the new deliveries as well.

[Bruno Mendonca, analyst]

This BRL 20 or BRL 22, this is the standard warehouse with no particular specification in terms of tenant improvement. Is there any difference related to geographies or is much more in a certain region.

[Sérgio De Souza, executive]

Well, it's very linear. The 2 deliveries we did this quarter was in the North -- the Northeast, the ticket was close to BRL 22, as I said. There are some variations certainly some geographies are stronger than others. In the South and Southeast, that number could be BRL 25. But this is better than in the past. So the trend is that this will migrate close to BRL 22. So was that the question? Or am I missing something?

[Bruno Mendonca, analyst]

Well, whether this is the standard warehouse or whether there is any tenant improvement when you refer to 2022.

[Sérgio De Souza, executive]

I mean the mix of products we are delivering this year, there is only 1 BPS that it has a little bit of tenant improvement, which is very close to our standard. And this is to be delivered maybe in the fourth quarter of this year or the first quarter of next year. But the projects we are delivering today is the run of the mill, I mean, the business as usual of LOG's that fits into any kind of operation, any industry sector, this is the LOG's standard delivery with the Class A specification, of course. So we anticipate delivering more standard warehouses.

[Operator]

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

[André Mazini, analyst]

Sergio, and Andre, I also have 2 questions. My first question is about an update on your growth plan. I think -- I mean, we had an increase in interest rates. The company had some leverage and now we are -- you are deleveraging. And now we see a decrease in interest rates. Has anything changed in that program of [indiscernible], all for [ 1.5 ], I think at the -- you had some predictions for the '24. So now that you're divesting and in considering a scenario of lower interest rates, what do you anticipate going forward? I mean you just had a 100% of your projects are already using clean energy. Could you please elaborate a bit more on that? Maybe it's not everything using that distributed energy in the warehouse itself. I don't think you would have enough solar panels for all of that. I mean, we already have a very clean energy grid in Brazil. So how did you arrive at that number?

[Sérgio De Souza, executive]

This is Sergio. I will answer the first part of your question on growth and then Andre will answer the second question. Okay. Early this year, we decided to adopt a more conservative position to adjust our balance sheet. We set a ceiling of net debt that would be adequate for this current scenario. And we also anticipated some recycling. We conducted a very strong recycling operation in the first quarter, higher than in past years because we wanted to have enough cash to continue investing. Well, the positive side of that is as the market is in high demand, prices are escalating and we see some stabilization and maybe some drop in the construction cost. We've seen very good opportunities to make new businesses. So we should deliver projects close to 3% a year. And the mix delivered in the second quarter had an yield of 12.5%, which in our view is quite positive.

So we wanted to structure our balance sheet so that we could move on with our growth strategy. But the speed of growth, I mean, we have the internal capacity of making 400,000 to 500,000 square meters of GLA a year, pretty much along the lines of last year. But this year, I think we would do half of that, we may deliver about 200,000 square meters of GLA throughout the year.

But 2024 will certainly depend on the macro landscape and the capacity of the market. And that decline in interest rates that we saw yesterday, which was quite positive. And so I cannot really tell you when we will deliver the entire plan.

The fact is that we see very -- a lot of good opportunities, and we will keep the balance going so that we can benefit from all the opportunities, and that will be done through recycling. And what I wanted to emphasize here is the liquidity of our assets. I think the movement we just did in the past 3 months with the record sales. Also, we see a very challenging macro scenario. We saw assets with 8% cap. And in the past they would be sold at about 7%. We understand that this momentum will come back in the short -- in the mid-range. So the spread trends is that this will increase in a very significant way, we have not -- we are on the upside in terms of yield.

And also in the macro scenario, we will continue to pursue this plan. We will continue to invest. But at the same time, we will be conservative because we do not want to exceed the ceiling because we understand that the ceiling that we said is very reasonable for the current moment. And we will continue to monitor the macro scenario.

[André de Ávila Vitória, executive]

Now speaking about the energy part of the question, I think we have 3 pillars of ESG. I mean on the environmental side, we are putting more focus on that, especially in terms of energy, we are conducting several studies. We are using energy coming from solar panels. We constantly monitor this new energy resource. I mean, this can be a trend. If you look at the trend going forward. We are also studying the high -- to produce energy.

Now in terms of energy coming from clean and renewable sources, most of the energy we use today comes from the free market, I'd say that approximately above 80% of the energy comes from renewable sources because we believe that this energy comes from renewable sources is it, and we buy through the free market so that we can have that certification. And moreover, the new projects that we are building. We guarantee that their energy sources present renewable. We are already getting some requests from customers asking us to supply our source, our fleet with renewable energy. So the main focus now is energy. We will stick to 100% of energy coming from renewable sources.

[Operator]

Our next question comes from Mr. Andre Dibe from Itau BBA.

[André Dibe, analyst]

Sergio, Andre, I only have one question. And it's pretty much a follow-up on that yield cost. You saw an upside on that yield curve. And in the release, you said that it was something close to 13%. But I would just like to understand the direction. And where do you think there is room for further contribution to that upside? Would it come from the stronger demand? Or maybe with the construction cost being lower, whether you think something could come from savings on the construction side. And looking at a more favorable scenario, where do you think that yield cost could go to? Should it go to something close to 14% or 15% or maybe I'm just being too overoptimistic?

[Sérgio De Souza, executive]

Thank you for the question. This is Sergio. The contribution to that increase comes more from price rather than production cost. In the last 2 years, we saw a spike in construction costs during the pandemic. There was an increase of over 30%. And we've also seen the most recent projects, costs coming down a bit or even being flat. So the bulk of the contribution comes from the increase in lease prices because we've seen prices over BRL 20 in any region of the country that you look at. But going forward, we are working with a stability scenario in construction prices. I don't think that there will be any relevant variation up or down. And we are still working with it, the upside scenario, because we see that there is room to push forward the lease prices. And we see customers willing to pay more for that same space all over the country.

We are delivering one or other projects close to 14% and some even higher than that. But in terms of the mix, we are operating with 13% yield cost for our next investments.

[Operator]

Our next question is from Elvis Credendio from BTG Pactual.

[Elvis Credendio, analyst]

Sergio and Andre, we have 2 questions. The first is about demand. Because looking at the vacancy of the portfolio, it remains very low, and it's been low for quite some time. I would just like you to give me an update about how do you see demand going forward. And also, if you could talk about the pre-leases of the new developments. .

And the second question relates to competition. You said that the average tickets are increasing in all of the geographies where you operate. So I'd just like to understand a bit more your view on competition and the new lease pricing. And whether this could draw the attention of the competitors that were not operating in these regions, whether you see some movement in that direction or not.

[Unknown Executive]

Elvis, thank you for your questions. On the demand aspect, we've been experiencing a positive scenario for quite some time. We were able to deliver 100% of the leases and everything has been quite positive. We'd like to break down that number every quarter. Demands separated by sector. And our business, I mean, allows us to get demands from different sectors and different sizes. We've seen an increase in the liquidity of the assets and then we've been navigating quite well in this ocean due to our business model. Things are quite positive. We still have two drivers, which is flight to quality and e-commerce in high demand. We do not believe that this scenario will change.

E-commerce certainly is not at the same level that it was last year, but the fact that we have a nationwide operation, we are still capturing a lot of e-commerce demand, especially out of the Southeast region of the country. And we are quite positive with the outlook going forward. Now that become the competition, I mean in one or another geography, we see some movements from new entrants. But it's very one-off thing in several regions of the country, we are navigating a loan. We have the customers in house. We understand their behavior and their needs. And because of that, we can capture clients in different regions of the market, and this is one of our major differentials. And we haven't stumbled in any relevant competitor in the country.

[Operator]

Next question comes from Marcelo Motta from JPMorgan. Marcelo, please proceed.

Our next question is from Jorel Guilloty from Gilman Sachs.

[Wilfredo Jorel Guilloty, analyst]

I have 2 questions. My first question is that I would like to learn more about how you see future sales because we saw that you signed many new agreements since May. And many of them, I mean, it says that you will get 50% of the payment now and the rest in the next year or so. I would just like to understand whether you see that future sales will follow the same format. It will be through financing or you believe that it will be paid cash on spot?

And my second question is that I want to learn more about leasing spreads. If I recall, you talked about leasing spreads of approximately 50 basis points above inflation. Do you still see that this is the case? Or you believe that there is more spreading power. So anything you can tell me about leasing spreads will be very helpful.

[Sérgio De Souza, executive]

This is Sergio. Thank you for your questions. I will start with the leasing spread aspect. Leasing spread will certainly depend on the contracts that are going to be renewed in the quarter. As I said earlier, we have placed positive leasing spreads above inflation. And this has been the case for 5 quarters sequentially. I don't think that this scenario will change. I think the third quarter we will just repeat what happened in the past quarters, but it will depend on whether it will be 50 basis points or not because this will depend on the mix of contracts to be renewed in that quarter. But the moment is quite positive. We will continue to be able to transfer above inflation. But how much, that will depend on the mix.

[Wilfredo Jorel Guilloty, analyst]

Now about sales. How do you see that?

[Unknown Executive]

We have sales and the pickup, the very complicated scenario, high interest rates, real estate funds with no liquidity. So our buyers had no liquidity to buy. But I think the scenario -- we're changing. It is changing very quickly. There has been higher demand for the acquisition of assets. And we see now a very positive scenario. Well, certainly, the conditions of the business will depend on the liquidity in the market, and I think this will improve substantially. But most importantly, it's not really a matter of the selling financing because these receivables have a lot of liquidity, and we can have resources. But the most important thing is the cap rate. I think in the past, in 2021, we sold assets close to 7% cap. But today, our transactions were close to 8%. And this percentage point is a relevant margin vis-a-vis the delivery yield. Therefore, we see some room for improvement. And the trend is that this will remain closer to 7% in the coming quarters.

[Operator]

Our next question is from [indiscernible] from Santander.

[Unknown Analyst]

I think on my side, most of the questions have been answered, but I would just like to understand whether there are any tenants that concern you especially on the retail side because we see some companies that are struggling. Do you have any particular tenant that is concerning you?

[Sérgio De Souza, executive]

[indiscernible] This is Sergio. Our model of retail, where we have a very diluted geographic penetration. So this is very relevant in terms of the mix of customers. Today, our average customer have below 5,000 square meters of GLA. So if I have any problems with any tenants that would be a one-off situation. If you look at our history, that delinquency has been close to 0.8% at the most. This is not a concern for us. Certainly, there have been some large issues with some clients this year, and we are working on that, especially in the third quarter, we're trying to reduce our exposure to that customer. One case is Americanas itself, that's an example. So maybe we do some move on that end of reducing exposures. But the properties are very liquid. So to give you a more objective answer, we have no concerns in terms of delinquency of any possible tenant.

[Operator]

Next question is from Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

I had a problem with my microphone. I have 2 questions. If you could elaborate more on your divestments. I just want to understand whether your mindset is to continue selling. I mean you had BRL 1.2 billion in proceeds. But do you see the possibility of doing a faster recycling? And what would be the cap, like 500,000 square meters, do you have a ceiling in terms of cash or leverage?

And my second question relates to your capital structure. And I want to understand what kind of CapEx you see going forward or up to the end of the year, Sergio said that the deliveries would be lower, about 200,000 of GLA. So how do you see that cash disbursement until you reach to the point of your net debt for the end of the year? I just want to get a better understanding of your leverage.

[Sérgio De Souza, executive]

Okay? This is Sergio. I'll start with the second part of your question. Despite the fact that our deliveries will be a bit lower this year of 200,000 square meters. We are already preparing new projects to be delivered in 2024. So you will see CapEx running very close to what we had in the first half of the year, close to BRL 130 million, there won't be any major changes. But now about divestments. I think this is -- it's very important that we say that every square meter sold means that we can invest an additional 1.5 square meters. This is very important because we can deliver very good gross margins. This is very relevant if we want to pursue with our growth plan. But we don't have any guidance for sales, Motta.

We are looking at the operations every day. We will do more things this year. We want to do more things this year, maybe not in the third quarter, but maybe not in such a robust way as we did in the second quarter. But this is a tool we have in hand to be able to grasp all of the growth opportunities and also to strike a balance and have our net debt under control.

In the second quarter alone, we were able to reduce our net debt by almost BRL 500 million with only that movement alone. And the trend is to get a lower number, there will be an additional drop in view of all the transactions that were concluded in July. So recycling is here to help us to continue to grow and for every square meter sold means that we can invest in an additional 1.5 square meters.

[Operator]

Our next question comes in writing by [ Mr. Bruno Andrade ] from LMA Patrimonial. Where are you building these 8 new projects. Are they already leased? Is this a BTS? And what is the estimated yield for these new constructions.

[Sérgio De Souza, executive]

This is Sergio now . Thank you for your question, Bruno. We have projects today. But this year, we will invest heavily in the Northeast. We have two or three projects under construction, we already delivered some and in the Midwest as well. We have a few projects in the Southeast region that will be delivered not this year, but next year maybe. In terms of that cap question, I understand that you were questioning the yield of these projects. And as we said earlier, the yield is close to 13%. In the second quarter, we delivered yields in the range of 12.5%. And we understand that once these projects are stabilized, the cap will have at least 12% valuation or appreciation.

[Operator]

The Q&A session is now concluded. We will now turn the floor over to Sergio for his final remarks.

[Sérgio De Souza, executive]

Thank you so much for joining us today. I would like to emphasize 2 points that might be very important. One is the liquidity of our assets and the company's capacity to do recycling. I think we were able to show that in the second quarter selling 375,000 square meters of GLA and we see potential buyers and these buyers have the potential to buy new assets in the future. We continue to look at that very carefully as we deliver more growth.

And the other aspect that I already mentioned, but this is a very relevant moment of the company in terms of pricing, in terms of investments and yield -- new investments. This is a very special moment for the company. We see a lot of good growth opportunities. We will continue to grow with great quality and serving our clients quite well. The landscape will improve. And as we see a further reduction of interest rates that makes us very optimistic because we see room to make new investments. I think the worst is in the past, and we are very optimistic in terms of the future. Thank you all very much, and have a very good day.

[Operator]

LOG's earnings release video conference is now concluded. In case of questions, send your questions to our IR relations team through [e-mail]. I thank -- we thank you very much for joining us, and have a very good day.

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