Log Commercial Properties e Participacoes SA

BOVESPA:LOGG3

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, good morning. Thank you for waiting, and welcome to the conference call for earnings concerning Q3 2020. We have with us Mr. Sérgio Fischer, Chairman of LOG; and Mr. André Vitória, Investor Relations -- CFO and Investor Relations. This event is being recorded and is being translated simultaneously.

[Operator Instructions] We would like to say that any declarations that may be made during this conference call concerning the business perspectives of LOG, operational and financial goals are based on projections of the company's Board that may or may not occur. Investors should understand that political and macroeconomic factors and other operational factors may affect the future of the company and lead to results that may differ materially from those expressed. To begin the conference call for Q3, we pass the floor to Mr. Sérgio Fischer, Chairman of LOG.

[Sérgio De Souza, executive]

Good morning to all. Welcome to our conference call for earnings in Q3. Our operational results placed the company at its best performance with the plan All for One. When we launched the plan, All for One in October 2019, we wanted to add 1 million square meters to the assets of the company. We noticed a great lack of Class A assets in many regions around Brazil, and we saw a unique opportunity to really go to consumption centers that where we were not able. We wanted to use our development capacity. We are unbeatable in this segment to generate returns above average and also with modular buildings in these markets.

On that occasion, we already had a good portfolio of clients in order to grow. And the customer base allows us to go into regions we have not explored less with low risk and high occupation. We have today what we consider to be the largest and best portfolio of clients.

230 active countries (sic) [ contracts ], midsized and large companies that work in the whole country. We had already understood that these characteristics would give us really a competitive edge, which is difficult to replicate. This could bring growing benefits as we grow. It was not possible to anticipate that the recent events, the pandemic would confirm our plans in our plan, All for One, and that we would -- and we would see now that we were on the right track. We had strong result in each development cycle, excellent commercial performance and a record absorption of 320 million square meters in the last 5 months. And also, we had 62% growth in relation to 2019 in 15 cities for companies in 3 economic sectors.

At the same time, we reached a record occupation level with only 3.5% of vacancy. In 2020, the internal commercial team was responsible. They were able to rent 2/3 of what we built. In the third quarter, our customer base absorbed 70% of the ABL that was rented. We are diversifying our operations. LOG is present in 31 cities in 3 states with projects confirmed in all the regions of the country. We are no doubt the most diversified, or we have the most diversified portfolio. We are close to all the consumption centers.

100% of our condominiums are Class A and modular. And this allows us to work with a total solution, a one-stop shop for most of the clients. These clients count with us to expand their operations. So with these relationships in sales and on a day-to-day operation in rental, in this quarter, we got the best grade in our satisfaction survey, the highest grade.

In Q3, we delivered in 10 months in record time 19,000 square meters in our project in the city of Uberaba, and we anticipate deliveries in the Q4. We also began 130,000 square meters of new projects in 3 states. 3 of them are part of the acquisitions of the land bank after the plan, All for One. So we have agility in getting approval for the projects, licensing and construction, which is very positive for our growth.

The demand for e-commerce and the expansion in the regions where we are closes -- brought us even closer to e-commerce platforms and also retail companies that are using more and more online. In Q3, 38% of new rentals were for operations totally dedicated to e-commerce. So almost 45% has to do with the online. Due to this, the acquisitions of land bank foreseen of 700,000 square meters in 2021 were anticipated. In Q3, we added 2 plots of land in 2 cities, reaching 52% of the ABL foreseen, and we are already negotiating for almost all the rentals.

We have made good negotiations in the cities where we're interested, most of them via exchange as we have done. Our LOG's business model to develop greenfield projects, transforming plots of land into value-generating projects. As we evolve, as we grow, we accelerate the purchase of plots of land for the land bank, and we capture and deliver value to the shareholders.

In Q3, the development of 4 projects brought BRL 114 million. As of the next year, the trend is for our activities in development to become stronger, intensified. I will pass the floor to André for the financial highlights.

[André de Ávila Vitória, executive]

Thank you, Sérgio. Continuing with the virtuous cycle of value generation shown by Sérgio, the operational performance is also very positive, we can see this in the financial results that we had in Q3 2020.

Our indicators continue solid. Net operational revenue grew 11% when compared to the same period 2019. Net delinquency in 12 months was 0.3%. EBITA reached a level of BRL 147 million, a growth of 103% year-over-year. We reported a net profit of BRL 66 million, with BRL 114 million due to the value generated, and these values also include the societary organization expenses that were necessary. This is very important in our growth plan and shows strongly that our business plan is positive.

So we will have recurring effects as a natural effect developing assets. To record this effect in the beginning phase of the plan, All for One, shows us what we can expect as we go forward. This effect will also happen and result in more dividends as more value is generated. We are permanently looking at opportunities for financing for the growth plan of the company. We monitor the sources of financing available with healthy expansion of the debt or recycling assets.

In Q3 2020, we are placing for sale parts of 5 minority assets, and we expect to raise BRL 146 million capital for investments. This is the second time that we recycle in the fund [ LGCP11 ], to consolidate this important source of funding in the growth plan of the company. The capital markets have shown interest for the assets in investment funds with real estate, especially in the area of logistics.

The expectation is to offer the same diversified options. The rhythm will continue to be determined by market opportunities and also due to the capital demand in our expansion plan. Thus we would like to conclude the presentation, and now we will begin the Q&A session. Thank you very much.

[Operator]

[Operator Instructions]

Mr. Gustavo Cambauva from BTG Pactual.

[Gustavo Cambauva, analyst]

I have 2 questions. The first, could you talk about -- within your growth plan, do you see -- you are having a little more competition, the sector had a good performance in spite of the crisis and the yields are high in comparison with the interest rate. Looking at what you have mapped in terms of competition, do you see any stronger movements, more competition and increase in ABL in the future? Do you believe you'll have a greater pipeline? Or will you continue in the cities where you are where you have less competition?

My second question has to do with IGP-M, the inflation. So are you being able to charge higher prices due to inflation, renegotiating contracts?

Are your clients accepting higher rental rates? What is your expectation in terms of increasing revenue by increasing rental prices?

[Sérgio De Souza, executive]

Cambauva, Sérgio speaking. Concerning competition, what have we seen? We have a large geographic diversification plan. In the new cities where we are going, we don't see an organized competition. We have one or another project with local companies, but nothing organized. We don't see an organized player to be a competitor.

Now for BDF, the business model we have looked, we have more competition, larger operations. So our strategy in this line is we will only go into a project if there is an interesting yield, only with an interesting yield. Now concerning competition, what do I believe? Brazil statistics show 150 million, 160 million square meters of obsolete real estate and so there is a lot of space for growth for Class A projects.

And e-commerce has grown very strongly recently and will demand more and more space. So on competition, that's it. Now IGP-M inflation. Recently, it's beginning to increase the contracts from October -- that will mature in October, it's 20% higher. This year, we will be able to charge clients a higher price due to inflation. And I believe that the trend is to get higher. We will negotiate case by case depending on what they pay. We consider many points when we consider. But we've been able to, yes, charge the difference in inflation to most of the contracts.

[Operator]

Our next question comes from Mr. Alex Ferraz, Itaú BBA.

[Alex Ferraz, analyst]

I have 2 questions. The first, concerning delinquency. You talk about the revenue. I remember that in the beginning of the pandemic, we talked about pharma, e-commerce, but there was a concern with other sectors, automotive, for example. Looking at delinquency, it seems that everything is under control in the portfolio as a whole. Is that the real situation? How about those other sectors?

All the tenants are very healthy? And the second concerning the industrial area in Betim, in the state of Mina Gerais. When we look at the project, it seems to be progressing slowly. Is there a reason?

[Sérgio De Souza, executive]

Thank you for the question. It's Sérgio. I'll ask -- I'll answer about the GDP -- sorry, the PIB. PIB is a long-term project. And the industry suffered in the beginning of the pandemic, and we decided to continue with construction.

The strategy. First, we want to anchor this park where we are selling plots of land and buildings, so there are large industrial players in this location. Once it's anchored, we should be more aggressive in marketing. But we're -- it's very promising here. I believe it's going to give us a lot of joy in the future. So we're trying to take to the park new companies. So that's the strategy.

We did not slowdown. We did not slow down in construction. First, we're anchoring some clients, and then we will be more aggressive in sales. Considering delinquency, what we can see as in relation to the rental that was delayed in Q2, we had 0% delinquency. Those who delayed payments, we had 0% delinquency. And accumulated delinquency in September was close to 0. So this shows the quality of our portfolio of clients and also the work we did and the proximity to the portfolio. Everything that is discussed internally has allowed us to have these positive results in relation to delinquency.

[Operator]

Our next question comes from Mr. André Mazini, Citibank.

[André Mazini, analyst]

My first question is about the land bank. Sérgio mentioned that most of the land back was bought by exchange, by barter. So in this new land bank, can you give us more details about the barter contracts, the exchange contracts?

So on the other hand, if -- for example, if you change your plans, do you have to pay penalties? Do they have to pay? Another point, you mentioned something interesting, value generation, BRL 114 million with the development of 4 assets. Please explain how did you get to this number? Is it the difference between cost of development and other things? Or is it different?

[Sérgio De Souza, executive]

Thank you for the question. Sérgio. Concerning land bank, what have we seen? We have been able to make these acquisitions with barter. It's very favorable for us. So the people, they cannot withdraw from the sale. The owners of the land, they cannot withdraw. And it depends -- the percentage, as you ask, depends on each city.

We have 15% in -- for barter; exchange, 30%. All the contracts are made in the following way. The absorption will really show us the progress. The owners of the land are also interested in this. So the contracts, they show that the absorption and construction will be taken into consideration.

Now the value that we're generating developing these assets. This is transformational for LOG CP. We see a lot of value generation now and in the future.

It's the difference between the yield on cost, the spread and the cap of the project after stabilization. So this is calculated by an outside consultancy company. As we deliver new buildings, there is this value generation that is close to BRL 1,000 per ABL. So we spend for land and construction, and then it's worth much more when it's ready.

So it is the first -- this is the first step of our plan, All for One. In the next few years, we will accelerate this plan, and we believe this value will be generated and increase more and more.

[André Mazini, analyst]

Very clear.

[Operator]

Our next question comes from Ms. Gabriella Tak, Bank of America.

[Gabriella Tak, analyst]

I have a question concerning the rental activity. Could you talk about the demand, any highlights in any region concerning net absorption? Whether the driver of demand continues to be quality? Do you see any change in the clients and assets under construction? Do you have them already rented?

[Sérgio De Souza, executive]

Sérgio speaking. Thank you for the question. We have felt a strong growth in demand and in a uniform way. We're very optimistic with LOG's base this additional demand to grow in other regions.

We have seen that things are working very well. There is no region that is different or stronger. We see on a national base a lot of demand, strong demand, especially from e-commerce. 40% of the rentals are -- in Q3 were for e-commerce companies.

We have been able to rent these projects before they are delivered. Yes. 93% are already rented, those under construction. This is very strong. There is a curve of absorption of a few months after delivery. We're being able to anticipate and already rent this space.

This is -- we have lot to do. E-commerce has been very strong. So we believe that from now on this demand will continue on a national level everywhere and these players are becoming more mature and are requesting more buildings closer to the consumption centers.

We also have new clients. So we're very happy with the increase. So the logistics market is growing, and this is here to stay.

[Operator]

Our next question comes from Mr. Raul Grego, Eleven Financial.

[Raul Grego Lemos, analyst]

A question in relation to the price are you -- the renegotiations. In the next 12 months, you have another 27% of contracts that will mature. How is the renegotiation of the rental prices? Do you have any type of spread in relation to -- are you being able to readjust the rental prices according to inflation or above inflation? We see that there's a lot of demand and development of new assets.

But in relation to prices, we see that it's stabilized.

[Sérgio De Souza, executive]

Before the pandemic, we had more bargaining power. We were able to charge contract readjustments above inflation. Now with renegotiations and movements during the pandemic, we lost some power. So the contracts renewed during this period have stable prices in line with inflation. Now in the future, we don't know. It's very early to talk. Some clients have asked some things. We study case by case.

[Operator]

Our next question from JPMorgan Bank.

[Unknown Analyst]

First question, an issue about competition that this could affect. But the company is very well positioned. I'd like to know a little more about inflation, especially -- we hear some companies saying that some contracts are not delivering materials. Projects are not immediate, but to know if you have some concern about the increase in raw materials, if this could cause compression in the business.

[Sérgio De Souza, executive]

This is Sérgio speaking. What we have seen in the year is pressure in costs, especially steel and concrete. We estimate this has impacted our cost in about 4% to 5% in building. But the advantage is that we have gained productivity. We have a record of deliveries in the third quarter. Many works were concluded. So we have offset some of this additional cost. But in the future, since -- if the industry has inventory, we'll have a reduction in the pressure. And next year will be better. This is our vision.

But our costs are not impacted really because we have been able to manage with the new projects in relations to the initial forecast, maintaining our costs established -- healthy, above the 2% per year, that is our target.

[Unknown Analyst]

Good.

[Operator]

Our next question, webcast, Guilherme Ebaid from Empericus.

[Guilherme Ebaid Ferreira Santos, analyst]

My question has to do as to future expectations. How do you see the negotiation of land? The heightened prices is requiring a disbursement of higher amount. How do you see this impacting the cost of building?

[Sérgio De Souza, executive]

In relation to the question. The land costs. We have no competition outside of Southeast. We look at opportunities in every -- in all of Brazil, Rio de Janeiro, Minas Gerais also. We have more competition in the Southeast. But in the rest of the country, we're basically home alone. Maybe one or other local competitor. So we have been able to negotiate well land with barters. And we have anticipated, in fact, we have a higher demand. Capacity of putting more land bank into the company. We've done that when it's -- when the opportunity appears with barters to reach the total replenishment of the land bank.

[Operator]

[Operator Instructions] We finish now our questions-and-answer session. Sérgio, André have the floor for their final considerations.

[Sérgio De Souza, executive]

Once again, I would like to review and reinforce 3 points. First, demand. We have a deep demand. Market has grown and this demand is on a national basis, and this is very good for us. Second point. The value that we mentioned before of the development of the assets. We have a good spread between the cost of delivery and the cap of the valuation of these assets. We see that in the next future we'll have good results for our bottom line in the third quarter that this is a growing trend. And the third point the case of our strategy of recycling. We have a new offer with CP11 underway. We want to maintain the strategy. This is a very good source of income for the company, very helpful as we grow.

So we'll continue to look at this with loving eyes. So that's it. Thank you very much. Have a good day.

[Operator]

This call is ended. Thank you very much, and have an excellent day.

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