Log Commercial Properties e Participacoes SA

BOVESPA:LOGG3

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, good morning. Welcome to the video conference on the results of LOG Commercial Properties related to the results of the third quarter of 2022. With us today are Sérgio Fischer CEO; and André Vitória, CFO and Head of Investor Relations. [Operator Instructions].

We would like to clarify that any forward-looking statements that might be made during the 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, may or may not occur. Investors should understand that political, macroeconomic and other operating factors may affect the future of the company and therefore, would lead to results that differ materially from those expressed in such forward-looking statements. To open this video conference on the results of the third quarter 2022, I would like to give the floor to Sérgio Fischer.

[Sérgio De Souza, executive]

Good morning, everyone. Thank you for joining us today for LOG's earnings release call of the third quarter 2022. We reported a very strong commercial activity in the quarter totaling 171,000 square meters of gross absorption in several projects, the highest in the last 4 quarters. This reflects the growing demand in several sectors of the economy. It's also important to highlight the 50% [Audio Gap] in addition to we know pharmaceutical and health and hygiene, which account for approximately 60% of this absorption in the quarter.

During the year, absorption totaled approximately 320,000 square meters of leases in 10 Brazilian states, reinforcing the company's business model, [ surgeons ] of being present in strategic locations close to major consumer centers. A 100% of the leases that expired in the quarter were renewed, reflecting the efforts of the property managed team and the commercial team to offer the best experience to our customers. Once again, we had record deliveries. There were 3 new assets totaling approximately 175,000 square meters of GLA, 86% already leased in between metropolitan region of Itapeva-MG, Extrema-MG region in Vienna in the metropolitan area of Vitoria.

Year-to-date, we reached a total delivery of 415,000 square meters an increase of 80% over the same period of the previous year. We have seen a positive pricing trend, which has already been reflected in this quarter with these agreement increases, which were 1.4% above inflation. The stabilized vacancy continues at historical levels and reached 1.73% at the end of the quarter. The pace of production is moving as expected. We are currently developing 7 projects in 7 cities, which together totaled 430,000 square meters of GLA. Construction costs remained stable and development yields are on an upward trend. This quarter, we concluded the historic sales of 2 assets in the amount of BRL 429 million, resulting in an average gross margin of 32.6%, being 3% above NAV.

In the last few years, we have sold BRL 1 billion, totaling approximately 300,000 square meters of GLA. There is a lot of liquidity in the market for high-quality assets such as blocks both from institutional investors and also large investment funds. The strategy of recycling assets will continue to be the main source of funding for our growth. I will now give the floor to André, who will elaborate on the financial highlights.

[André de Ávila Vitória, executive]

In the third quarter of 2022, we posted an adjusted net income of BRL 112 million and an EBITDA margin of 78%. We also maintained during the third quarter, our ability to generate value through the development of greenfield assets. There were BRL 78 million of value generated through new projects. As mentioned before by Sérgio, we continue pursuing our strategy of recycling assets, which is our main source of funding to promote the company's growth, the liquidity and attractiveness of our assets remain high as evidenced by the sales made over the last few years.

Net debt will remain flat during this growth cycle of the company, and the net debt over EBITDA ratio remains at 2x. The company's operating performance is also reflected positively in the financial results we presented in the third quarter of '22. Our indicators remain solid. The recent deliveries of assets with differentiated levels of average rental ticket continued to reflect the significant increase in revenues. This quarter, net revenue stood at BRL 59 million, representing a significant growth of 60% over the same period of last year. It is worth mentioning that -- with this current portfolio, we carried out contractual adjustments to the existing portfolio, 1.4% above inflation.

Accumulated net bad debt for the last 12 months remained low and stood at only 0.6% in the third quarter balance of admin expenses continues to grow at a slower pace when compared to the previous year and reflects our constant operating efficiency. The financial result was impacted by the increase in the average balance of debt in the CDI in the period. The equity swap transaction under the company's share buyback program generated a positive effect of BRL 16 million in the quarter due to the share price variation.

LOG continues to focus on several ESG initiatives. Currently, a 100% of the energy utilized in our projects comes from clean and renewable sources. And in this sense, 5,000 tons of CO2 are no longer being emitted each year. We certified our first inventory of greenhouse gas emissions. And in its first year, we were already awarded the Gold Seal of the Brazilian GHG Protocol program. Keeping up with our commitment to [ support ] the communities neighboring our developments, we inaugurated LOG Social in Betim in the metropolitan region of Belo Horizonte, aiming to contribute even more to the personal growth and professional qualification of the employees who work in the site as well as the region's residents.

[Operator]

[Operator Instructions] Our first question is from Bruno Mendonca from BBI.

[Bruno Mendonca, analyst]

I have 2 questions here. My first question is a bit more about the deliveries. We've seen a very high level of deliveries. And this is surprisingly well leased, even above expectations. Sérgio, could you please elaborate a bit about the yielding cost? And looking on the cost side, how do you see this cost environment in the construction business? And what has been the average rental ticket? And my second question is probably looking long term. It's probably a more strategic question. Maybe 91% of the landbank of that plan of 1.5 million already acquired. So what could you tell us about what will happen or what do you anticipate for the period after 2024? What do you have in mind in terms of what will grow further after your 1.5 million plan?

[Sérgio De Souza, executive]

This is Sérgio. Thank you for your questions. I'll start with that yield part. The deliveries that were concluded in this first quarter. I mean we just finished. We got 415,000 in GLF. That 415,000 was delivered with a good yield cost. All of the projects that were initiated in the second half to be delivered throughout 2023, we are seeing an improvement in that number, about a half percentage point. This is how we anticipate deliveries will be for the projects that were initiated this year to be delivered next year. We see a stabilization of the construction costs. Construction costs have been flat and stable, and that might be a bit lower than we see a marginal decrease in construction costs coming next year.

And in addition to that, we've seen a very positive movement for pricing, I mean, the average rental ticket and that has been over BRL 20 square per meter. This is quite positive, not only for the industry, but for our business as well because this will allow us to improve our yield costs going forward. Now about the landbank answering and answering your second question. We already have new acquisitions. We see a lot of new opportunities in the market. Some geographies that have reported high demand. And so we are going forward to deliver that 1.5 program in 2024. Now about the company, we are still internally discussing about growth going forward. The company now in all of our departments, we already -- we are working with 500,000 square meters a year. I mean land approvals, construction, commercial and everything else in the packet. Everything is already running at 500,000 square meters a year. And this is just an idea of what we could anticipate next year and for after 2024.

[Bruno Mendonca, analyst]

Very good. So BRL 20 per square meter, it's a much better level when compared to what we saw more recently.

[Operator]

Our next question comes from Gustavo Cambauva from BTG.

[Gustavo Cambauva, analyst]

I have 2 questions. My first question is whether you could tell me a little bit more because I know you just sold some assets more recently. So despite the general M&A landscape that has cooled down a little bit. But even then you were able to sell at a very interesting multiple for the company. So first of all, I would like you to tell me what you see going forward or whether somehow you still see that the market is very heated up and whether things will remain as is or you probably see things differently. And my second question is related to delay demand. When we look at e-commerce prices, in general, e-commerce prices or the pace of growth of e-commerce is slowing down a bit, and this has been one of the major drivers for GLA in your case. So what do you anticipate going forward? Have you also seen some slowdown in demand? Or do you believe that there's still grade appetite for e-commerce and also whether you're looking at other segments. So can you throw some light about e-commerce status?

[Sérgio De Souza, executive]

This is Sérgio. Thank you for your questions. I'll start with the demand -- the question on demand. We had a very strong quarter. The third quarter was the best quarter when compared to the last 4 quarters. And a great part of that demand comes from e-commerce, almost 60% of new leases came from e-commerce. We formally believe the penetration will continue to grow. I mean, of course, we come from a very strong base looking back 2 years. I mean, it's not growing as it did in the past few years. But even though it's very positive, we've been monitoring some recent studies that anticipate e-commerce penetration to be close to 25% in 2026. And if that happens, there will still be a lot of demand for warehouses, and this is what we're feeling right now. Now in terms of our strategy of geographic pricing, we've been able to capture that e-commerce demand throughout the country. This year, we made deals on the e-commerce side in several geographies around the country, and this is a bit different from our business model because we've been serving in some geographies where there is very little competition.

Now in terms -- I mean, just one more point related to the mid 40% of all of the deals signed this year related -- were related to flight quality. We are noticing that some of our clients are now preferring more quality rather than price. And so Brazil invested a lot in this current landbank. So I think we will advance still a lot in e-commerce. Now in terms of the sale of assets, this is a very interesting, very good transaction for the company. There are still a lot of things in progress, things that were already initiated and a lot of liquidity for asset like towers. We see some funds, some large investment funds that have a pro and their express interest in some assets. And also, we saw interest part of institutional investors.

We are not going to do things in a hurry. We want to maintain, now in the long run, our position. We will continue to work on recycling because I think this is very important. We see some relevant opportunities. The scenario hasn't changed. And so we also have this move towards flight to quality. So we will certainly have new transactions, but we will do that with caution. And certainly, this will be our main source of funding to fund our coming growth.

[Operator]

Our next question comes from Mr. André Dibe from Itaú BBA. Our next question comes Mr. [ Igor Altero ].

[Unknown Analyst]

I have 2 questions. It's more like a follow-up on the previous question related to recycling. In regards to valuation, how do you see the market evolving? And even considering your side, maybe we could see other transactions at the wage level between an [Audio Gap]. Is that the way you -- this is number one. Point number 2, I mean, point number one is about investor [ interest ] at this level of valuation -- question is about having some relief. So what impact should we see here growth earnings?

[Sérgio De Souza, executive]

This is Sérgio. Thank you for your question. Recycling bigger, we see the market pretty much in the same line of our third quarter, something around 7.5% and 8%. Well, we can have a relevant spread because of that, and we will continue to pursue these transactions. -- as I said earlier. About construction costs, certainly, this will have a significant impact in the improvement, especially in view of the new price because the percentage has been higher than what it was back in -- I mean, in this year 2022 and will have an impact in the gross margin together with a more positive landscape with lower interest rates in 2023, I think we will be able to increase the spread and bring those transactions closer to our historical levels, which is today is close to 40%, considering the last 3-year transaction. So this is what we have in mind.

[Operator]

Our next question from Mr. [ Rafael Header ] from [ Santander ]. Next question from André Mazini from Citi.

[André Mazini, analyst]

My question is about your agreements with Amazon. I say that rent per square meter was able to go up more recently. I think it went from BRL 16 to almost BRL 19 now in the third quarter. So probably, this relates to Amazon contracts, which they became your largest customer. And then you have contracts of longer duration of your warehouses, a lot of PI involved. So do you believe that this increase has to do with tenant improvement that you did for Amazon. And so they pay this back through the lease or it has to do with the amortization on time. And so if after the tenant improvement -- do you believe that the least prosper for that client will then be amortized back into the company. Is my reading right? Or am I reading something differently?

[Sérgio De Souza, executive]

Well, thank you for your question. Mazini, what we see is a very positive landscape. But it's across the board, new transactions are occurring above that BRL 20 that I mentioned before. I mean, this contract with Amazon is different. The ticket is different, and it will be that ticket for the next few years. But we've seen all of the other transactions and the cost of [ spec ], which is the modular warehouse with LOG specs, they've been traded above the average lease ticket that you saw today. So that there is an upward trend in terms of the average ticket. And we'll see that coming closer to the 20 as we delivered new assets that are being rented now.

[André Mazini, analyst]

Perfect, Sérgio. And what is the duration of the agreements, 10 years? Because I think, on average, the other agreements are for a 5-year term.

[Sérgio De Souza, executive]

We have several agreements with Amazon. And there is a large one in his CV, it was delivered in the second half of this year. It's a very different agreement for a 10-year term, and they are also coming with a major funding in TI, and we will be reimbursed by the [ TID ] for them. And the rest is just speculation. I think we have about 4 or 5 transactions with Amazon in addition to this, and that's this backlog with a 5-year duration in the agreement.

[Operator]

Our next question comes from Andre Dibe from BBA.

[André Dibe, analyst]

Could you please comment on the pricing dynamics related to the actual increase that you managed to post in this last year? How was absorption in pricing, looking at different geographies? Which ones had a more positive dynamic that led to that increase and which ones were probably lagging behind.

[Sérgio De Souza, executive]

Andre, thank you for your question. This is Sérgio. And this quarter, we -- we had 100% of renewals. [Audio Gap] of the agreements that did in the quarter was very short. It really shows that our clients are not leaving the operations. The -- it's a very demanding market. And with that, we were able to renew agreements from existing customers. And this is a [Audio Gap] [ Crawford ], I wouldn't highlight a particular region. Things are happening across the board in a linear manner, and we are seeing that this industry is booming, and we will try to push prices above inflation, if possible.

[Operator]

Our next question from [ Rafael Header ] from [ Santander ].

[Unknown Analyst]

My question is about your deliveries scheduled for 2023. How many of them are already pre-leased and whether we could also expect the same mix of clients.

[Sérgio De Souza, executive]

Thank you for your question. This is Sérgio. We started many projects in the second half to be delivered throughout year 2023. We anticipate a very active year in terms of delivery. We do not have any deliveries for the fourth quarter or the first quarter of 2023. They will start occurring after the second quarter. We have a lot of things going on in the northeast of the country and probably the bulk of our deliveries, 50% of deliveries will come from that part of the country. And on all the projects that are initiating, we already have a large amount that are up for [ lease ]. And this really demonstrates the strength of our business model, which is too close to consumer areas.

And we have a mix of a lot of things. We see demand coming from e-commerce demand coming from flight to quality. And so we just closed a BPS in the Northeast for a large beverage player. There are 2 other deals being [Audio Gap] [ negotiated ] in the Northeast, about to be -- the deal is about to be closed in the next few weeks. Therefore, this is a very interesting moment. For Log's business model. I mean our geographic positioning is very interesting in different regions, and we are able to capture demand coming from our clients, which are asking us for additional areas in new geographies.

[Operator]

Next question now comes from Mr. Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions. My first question, I think the operating side of the company is very strong in terms of leases, in terms of prices -- price increases, but FFO was still impacted due to higher interest rates and financial expenses. So on the side of liability management, do you see any a [Audio Gap] possibility of doing something to improve the conversion of EBITDA into FFO? And my second question, considering the demand in the market is very promising and very good and probably the main idea for you to accelerate [Audio Gap] [ growth ] would be sale of assets. What would be the announcements we will hear from you in terms of that?

[Sérgio De Souza, executive]

This is Sérgio. I will answer the second question and then André will answer the first. Marcelo, we are not in a hurry. The quality of the recycling is very important to us. We want to deliver spreads so that we can sell the square meter and have 1.5 to build with that fleet. I mean we just completed a transaction. It was a record transaction of almost BRL 420 million -- it was sold to a real estate fund from Credit [ Suisse ]. The transaction, I mean, you don't even see the full cash of that coming from that transaction in the third quarter, but it will come in the fourth quarter.

Our policy to focus on warehouses still going on. We still have something in our portfolio. We just sold another Plaza for BRL 20 million, and this will be materialized in the fourth quarter of this year. So things are in progress. We are not in a hurry. You will see some moves in that direction. But what we are pursuing made is that we want to follow our growth plan and also to maintain the stability of our net debt throughout next year. So as things are happening, we then proceed recycling. Certainly, you may see in a quarter or another some variations of our net debt, but the trend is that by 2023, it will be a lot more stable due to recycling.

[André de Ávila Vitória, executive]

Now this is André now. In terms of the debt, whenever we talk about FFO and the margin, it's a bit under pressure right now. I mean, there is a big weight in terms of interest rate. And this should become better going forward because we believe that the interest rate should be a bit lower coming next year. So the margins of 35% to 40%, but we will certainly, I mean, throw that margin back to 45%, I mean it's 45% to 50% because of the interest rate.

Now in terms of the debt, the trend is that we will have more stability in terms of our net debt. The main KPIs [Audio Gap] we have, they I mean, net debt over EBITDA, the leverage will be around 2x. This is a very important KPI for us because our growth plan will be based on recycling. And we've been demonstrating great quality in recycling despite more complex moments as the ones we faced in the last quarters, in the past quarters. Another important information is that when we look net debt vis-a-vis the PL, and our LGD will be 35% to 40% at the most. Therefore, in terms of net debt and the leverage level, we will maintain stability during the conclusion of our growth cycle, meaning in the -- along the next 2.5 years.

[Operator]

Our next question is from Mr. Steve Lam from Goldman.

[Steven Lam, analyst]

My question is about different leverage scenarios of the company. Taking into account everything that could happen. How do you see your leverage by [Audio Gap] in the next year or a more extreme scenario where you wouldn't be able to have any recycling?

[Sérgio De Souza, executive]

Steve, let me start by saying that recycling will happen. We will, therefore, move on with our growth plan by recycling our assets. So as a consequence, net debt will remain stable throughout that period, as I said before. Therefore, this is a landscape that we anticipate for next year. Therefore, any possible change in terms of net debt stabilization that is not contemplated in our growth plan. So this is our strategy for the coming year.

[Operator]

Our next question comes from Mr. Antonio Castrucci from Santander.

[Antonio Castrucci, analyst]

I have a question related to your maturity schedule that is quite high for the next 12 months for new contracts. How do you see the outlook of spreads for these negotiations? Or you still maintain IPCA minus 4%? And how can you compare these transactions to that rental per square meter, considering BRL 20 per square meter.

[Sérgio De Souza, executive]

Antonio, thank you for your question. This is Sérgio. Antonio, this dynamic will depend on the geography, on the region. What we've been saying that in the third quarter, we were able to renew 100% of our lease agreements. And in the fourth quarter, we anticipate something very close to that. We don't see anything new. Therefore, we were able to renew at [Audio Gap] above [indiscernible] in the third quarter. And again, every geography has a different dynamic -- it's different for me to really tell you what will be the lease spread for the next contracts that are about to mature.

[Operator]

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

[Sérgio De Souza, executive]

Thank you so much for your question. Thank you for joining us today. I would like to say that our growth plan is moving at full force, and we will focus on pursuing this plan and serve our demanding clients all over the country. And this will be funded through recycling. So this is our plan. We have a lot of liquidity to continue pursuing this model. We had a lot of things in progress. And as I said before, we will stabilize the net debt of the company as the company grows. And so this will be funded through these recycling projects. So this is what we had for today. Thank you so very much, and have a good day. LOG's video conference is now concluded. If you have further questions, please submit questions to the IR department of the company, [e-mail]. Thank you so much for participating, and have a very good day.

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