Log Commercial Properties e Participacoes SA

BOVESPA:LOGG3

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Hello, ladies and gentlemen. Good morning. Welcome to the video conference of LOG Commercial Properties on the results of the third quarter 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 managed that may or may not occur. Investors may 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 third quarter of 2023. I would like to give the floor to Mr. Sergio Fischer.

[Sérgio De Souza, executive]

Good morning. Thank you for participating in LOG's Third Quarter '23 Earnings Call. We highlighted -- the highlight of this quarter was a significant reduction in our net debt, a reduction of more than BRL 600 million over the last 12 months. During our history, we have established our reputation as a leader in the high-quality warehouse construction sector in Brazil. We're the only company with warehouses in every region of the country. We offer both modular and flexible warehouses, allowing us for fast absorption of space. We have the best portfolio of logistics clients in the country, diversified and highly relevant. We have over 190 customers from different sectors of the economy with operations all over the country.

In the year-to-date, gross absorption was 548,700 square meters. The second highest in our history, established vacancy remains at historic lows and ended the quarter at 1.65%. Our average ticket was BRL 19.32 and our lease spread was 1.55% above inflation. This is the fifth quarter in a row in which we have posted positive spreads above inflation.

Thanks to our verticalized structure, we have achieved the lowest national construction costs at all stages of development of our assets. In the third quarter of the year, the company delivered 63,000 square meters of GLA. We currently have 12 projects under construction, which together total more than 615,000 square meters of GLA.

We continue to pursue our growth plan between October '23 and December '24, approximately 700,000 square meters of GLA will be delivered in projects spread across 4 regions of Brazil. Due to the increased demand for our assets, the projects already have a high pre-leasing rate in average ticket. The positive price dynamics and the stabilization of costs reflect a yield on cost of 12.8% for those projects. Thus, we will conclude the Todos por we may plan on schedule. It is expected that during this period, LOG will show net GLA growth of more than 30% already taking into account the balance between deliveries and sales.

We would also like to take this opportunity to announce our next growth cycle, the new plant which will start in 2025 and will be called LOG 2 million, or 2 million square meters of GLA delivered between 2025 and 2028. And these new deliveries will be spread across more than 20 markets throughout the country. In 2028, at the end of the new LOG 2 million cycle, our portfolio we have grown by more than 70% compared to the end of '24, this means that over the next 5 years, the company will more than double in size. The source of funds to support the announced investments will be -- will come substantially from asset recycling.

Now I'll turn the floor over to Andre, who will comment on the financial and operating highlights of the period.

[André de Ávila Vitória, executive]

The third quarter of '23 showed a net income of BRL 48.5 million. The total EBITDA for the quarter was BRL 76 million. The operating margin from rental activities was 76%. Expenses fell by around 10% compared to the previous quarter, reinforcing the company's commitment to cost control. Our operating performance is always positively reflected in the financial results we presented in Q3 of '23.

Net revenue was BRL 48 million. Accumulated net delinquency over 12 months posted another quarter of record lows of just 0.6%. In the last 12 months, we reached BRL 1.6 billion from the sale of assets. Asset recycling will remain a constant practice. We believe that this approach is the most effective way of creating value for shareholders, maximizing the performance of our assets and strengthening our financial capabilities for future investments.

In order to ensure the financial stability of our balance sheet, a significant part of the proceeds from the sale of assets has been allocated to reducing our net debt. We have set a limit for our debt that is in line with our capital structure considering the current market environment.

In the third quarter of '23, net debt was reduced by BRL 337 million when compared to the second quarter of '23. Our adjusted net debt considering receivables from asset sales amounted to BRL 362 million, which represents only 9.8% of our shareholders' equity and net LTV decreased to 8.9%. The current macroeconomic scenario has been favorable to the reduction in interest rates, the expectation of this reduction in interest rates, combined with the company's significant deleveraging points to a considerable reduction in our financial expenses.

Another consequent impact of the fall in interest rates is an increase in the attractiveness and liquidity of our assets, which, thanks to the heating up of the real estate funds market could result in a compression of the cap rates currently practiced resuming the generation of value with more robust margins. The growth in operations, together with the increase in revenue and dilution of general and admin expenses will contribute to an increase in gross margin over the next few years.

LOG continues to focus on various ESG-related actions. We highlight our commitment to using exclusively renewable energy sources to supply 100% of the demand for our projects. In our greenhouse gas emissions inventory, we once again won the Gold Seal of the Brazilian GHG protocol program a certification that is awarded to institutions that achieved the highest level of qualification and transparency in their emissions inventories. This achievement reinforces LOG's commitment to being an increasingly sustainable company which seeks to develop decarbonization initiatives and set targets for greenhouse gas emissions. We are determined to continue on the path towards a cleaner and more conscious future.

We now move on to the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Mrs. Maria [indiscernible] from Itau BBA.

[Unknown Analyst]

I would like to learn more about the new agreements and whether you could tell me about the average ticket of the contracts? And what is the level you anticipate going forward? And whether -- I mean, the numbers from this quarter was referring to some specific project and what do you expect to see by the end of the year?

[Sérgio De Souza, executive]

This is Sergio speaking. I will start with the average ticket. Well, there is a very positive dynamics in the industry. We've been reporting constant increases in this transactional ticket. I mean the new level changed across the board, and this is what we are calling the nationalization of prices. We see transactions in the Northeast being traded with the same price that is practiced in the state of Sao Paulo, and this was not a reality not a very long time ago.

This new level is very close to BRL 22, BRL 23 and sometimes even higher than that. And this combined with the price stabilization of construction costs, which we've been experiencing in the last quarters. And I don't think this will change in the short run. With that, we've been able to deliver our projects even with 14% yield and the mix of this year 2023, we will deliver a 13.2% and our forecast for projects to be delivered in 2024 is also close to 13%, with a possible upside, I mean, as these dynamics continues, and we believe this will be the case. Maybe we could see some price changes at the end.

So the second question, was it about was -- what was it about?

[Unknown Analyst]

About absorption.

[Sérgio De Souza, executive]

Oh, absorption? What have we seen in terms of absorption? This year, we already allocated 550 square meters was the second best year in in our history, except for 2021, the year the pandemic, the dynamic remains the same. We are leasing very well in this fourth quarter. We continue to deliver assets very close to 100% absorption, which was the case of this quarter, this active of 63,000 square meters was delivered with 100% lease. And we are not seeing any changes in this dynamic. We managed to be very efficient. So throughout the cycle of the construction, we were able to rent the assets. Therefore, we are not seeing any changes in the stabilized vacancy going forward.

But as we anticipate strong deliveries next year, the next quarter, we will deliver over 700,000 square meters of GLA, which is by far a record for the company. We can certainly see vacancy -- total vacancy growth as we deliver all the new spaces we tend to see some pressure in total vacancy. But in terms of stabilized vacancy, we are very comfortable because we believe things will be kept at a comfortable level.

[Operator]

Our next question comes from Mr. [ Juan Argentine ] from XP Investments.

[Unknown Analyst]

I have 2 questions. First question, I would like to learn more about customer segment in terms of rentals. This quarter, I saw a significant increase in food and beverage and e-commerce, follows on the troy of deconcentration. I just want to understand a bit more about what was the effect in food and beverage, whether this was a one-off situation or you see some stronger demand coming from this industry? And going forward, I know that you have a lot of deliveries towards the future. How do you see the company operating in these different segments?

And my second question has to do with the recycling scenario. You said that your objective is for BRL 250 million for recycling. And in the Investor Day, you said about BRL 200 million by the end of 2024. So we've been -- considering this amount, is there anything that you still expect to do this year? And what would be the match between CapEx and sales? Should we expect a drop in net debt? Or what would be the outlook going forward?

[Sérgio De Souza, executive]

Juan, thank you for the question. This is Sergio. I'll start with your second question. What is our idea here? Well, we already posted a very relevant volume of recycling. We sold BRL 1.6 billion, just to bring the net debt to the current level today, BRL 260 million, which is a number that we haven't seen in a long time. And our idea is that from now on, we understand that we have enough breadth to continue with our growth plan. What we would do is just to match recycling and CapEx throughout our future growth.

The forecast for CapEx next year is very close to that BRL 250 million that you mentioned about recycling, close to BRL 900 million. And the trend is that we should do that through some transactions throughout the year. This year, we won't do anything else because there is not enough time to finalize all of the processes. But the idea is to do that throughout next year, probably, we will see something in the first quarter and the transactions will occur throughout the year 2024.

About your first question on customer segmentation. In fact, there was a huge expansion in the food and beverage sector this year. This is an industry that is quite demanding, and this has a very close relationship with the mix of products that we have in our portfolio. We delivered a lot of things in the Northeast. The Northeast is a region that has been very demanding, especially in the food and beverage sector. And this mix of products will influence -- we have an impact on our segmentation.

But in general terms, I mean, pharma and food and beverage are 2 areas that are very heated up. And so segmentation will tend to continue as we deliver the 700,000 square meters until the end of 2024.

[Operator]

Our next question is from Rafal Heather from Banco Sberbank.

[Unknown Analyst]

I have 2 questions on my side. The first question is that I would like to talk a little bit more about your average ticket, I remember that you've been saying for quite some time that this gap in the average ticket in Sao Paulo and some regions of the country is declining. So could you please elaborate a bit more about this gap and whether there is any relevant difference on the yield on cost of a warehouse in Sao Paulo, vis-a-vis a warehouse in the Northeast.

And my second question relates to sales of receivables, you have a very relevant portfolio of asset sales. So what kind of discounts do you think you should have to apply? And for a company, given a scenario that could probably take some time to conduct some sales, what kind of leverage do you expect?

[Sérgio De Souza, executive]

Rafael, this is Sergio. I will answer the first question and Andre will answer your second question. About the gap on the Brazil ticket, the fact today is that there are some deals outside Sao Paulo, where prices are higher than Sao Paulo. This quarter, we shut down some operations outside Sao Paulo, about BRL 30 per square meter. So this is, in fact, very positive dynamics, and we've been monitoring that. We were able to increase prices. Customers are willing to pay more to get better quality.

So I think that, in fact, we changed -- we are now at a different level now. The gap vis-a-vis Sao Paulo, it's very, very small vis-a-vis some geographies. And sometimes it's the other way around. About yield projects, we managed to deliver consistent yield in all of our projects. The cost of the land is the main variable. I mean what will vary in fact, is the cost of the land. And with that, we can have 12 or 13 in a linear way in all of our projects. So this is it, and now will allow Andre to answer the part of receivables.

[André de Ávila Vitória, executive]

Along the last transactions, the latest transactions, we are talking about the receivables of assets. We are receiving installments and all of the installments are paid immediately. What we notice is that quality, be it on the part of assets that are sold and mainly the buyers involved in the transactions. They ensure liquidity. And it's a way for us to get -- to receive it at a certain discount rate, but this causes no problem in terms of future receivables.

Even in the future, we will get payments in installments. But it won't be as many as we have it now due to the very positive dynamics because the market in terms of real estate funds and other institutional investors, they are expressing great interest in the company's assets.

[Unknown Analyst]

Perfect. Thank you, Sergio. Thank you, Andre. That's very clear.

[Operator]

Our next question is from Mr. [ Ugo Grace ] from Citi.

[Unknown Analyst]

My question is probably more conceptual. I would like to know what do you think about the different types of rentals? I mean, you have speculative rentals and sales. What are the pros and cons of different types of rentals?

[Sérgio De Souza, executive]

Ugo, thank you for your question. This is Sergio. Ugo, our business model is internally called retail. This is the modular warehouse and the modular warehouse caters is suitable to any sector of the economy and geography. And this is very unique. This is what we like to do. And we look BTS as well. We did some very relevant BTSs in the future. We will continue to look at that. But what will earmark our investment is the return, we understand it. With retail, we get returns above BTS and above leaseback. Therefore, we will continue to pursue our investment discipline, operating in retail because this model has great absorption, and this has been proven given all of the last deliveries 100% of these. So this is the way we will remain on our strategy.

[Operator]

Next question from Elvis Credendio from BTG Pactual.

[Elvis Credendio, analyst]

I also have 2 questions. And the first is on CapEx. I think you said something about it but it wasn't very clear to me. What is the remaining CapEx to conclude the program Todos por and I know that the company has an investment plan after 2025 or 2 million square meters. Therefore, what would be the annual volume that should be disbursed to execute this plan? And on the same note, I would like to understand how do you see the funding structure to execute these projects. Looking at your history, could we anticipate that the company would follow the same leverage levels in order to execute or develop these projects in even a more challenging scenario. Maybe today, your leverage level could be lower from now on. That's it.

[Sérgio De Souza, executive]

Thank you for your questions. This is Sergio, again. On CapEx, in the last quarters, CapEx has been -- I mean, BRL 130 million, BRL 150 million. In the fourth quarter, it should be something around those figures. And as for next year, with the increase in GLA, starting in the first quarter, this number should approach BRL 200 million per quarter. So the tenancies by next year, it should be around BRL 850 million to BRL 900 million CapEx to deliver the Todos por that we mentioned.

And as I said earlier, we will match this CapEx pace with recycling. In order to maintain the stability of our balance sheet to maintain our net debt at a very comfortable level. And throughout that Log 2 million program, the tender is for us to have a very close CapEx of that of 2024, around BRL 800 million to BRL 900 million a year, and our recycling level should be around those same levels to maintain the stability of our net debt.

And to keep a natural deleveraging as we close our net GLA, and this will happen in a very robust fashion in the next coming years. We show that in the release because the tender is for us to more than double the GLA through our next growth cycle up to 2028.

[Operator]

Next question is from Mr. [ Mattias Malone ] from Santander.

[Unknown Analyst]

I think we have 2 questions. My first question is that -- our attention was strong to the level of your financial expenses. We just want to understand whether there is any penalty in terms of prepayment of debt or whether the reduction of that leverage happened at the end of the quarter? I just want to get some more light in terms of the level of financial expenses in that quarter.

And the second question is that I want to -- I would like to have a better understanding about the sale of any specific asset. Maybe it's because the productivity of the asset is below your figures or maybe you're thinking about reducing the exposure to a certain segment of the economy or it is more related to the demand coming from customers.

Also, whether you think the sales will continue to be through BTS or whether you still have -- people have -- you still have more power to buy more assets or whether you see interest coming from other funds. I just wanted to get a better understanding of this process.

[Sérgio De Souza, executive]

Mattias, this is Sergio. I will answer the issue on recycling and then Andre will answer the part on financial expenses. There -- we have some relevant variables, and that is important when we make a decision about what assets to sell. And the most important thing has to do with the result of the sale. We managed to deliver a very important margin with the sales. The sales for the last 12 months approach 34%. That means that's a very relevant value generation. It's the spread of the yield versus the gap of the transaction. And this is the main variable that we take into account.

There are other variables like at asset positioning, the location, taxes, et cetera. But -- that is the major value that we are generating. This is the gross margin that we're generating from these transactions. And the level has been very good, even though considering the challenging macro scenario that we experienced. And we are seeing an improvement going forward. The market has gained more liquidity. We've been approached by different players that are looking for recycling, certainly that the real estate funds will be a very relevant part of that. These 2 that you mentioned will continue -- we will continue to do business with them, but we are looking at other very good proposals with at new price levels from institutional investors.

So we may -- we will engage in different transactions. The same thing we did in the past 12 months. Those sales were to 4 different players. So you see a little bit of arriving. But the relevant aspect is the margin. And with a bias towards an increase going forward.

[André de Ávila Vitória, executive]

Mattias, regarding financial expenses, the fluctuation between periods is due to the equity swap, this variation in the equity swap. In terms of the debt itself, there is no specific move, be it prepayment or debt assumption that could lead that variation to be more significant. I think what's worth mentioning is that the trend we see, I mean, is towards a stabilization of that net debt. We've been talking a lot about that in view of all of our investments in terms of sale of assets, et cetera, because what we want is to have a significant reduction of our net debt. So this trend should be maintained throughout this growth cycle until the end of next year and then from '25 to 2028. Therefore, I believe that somehow, we have already set up those ceilings showing that our indicators are quite positive. Our adjusted net debt over equity is below 10%. The same thing goes for our LTV, net LTV is below 10%. We already addressed these points, and we will continue pursuing that commitment to strike stability vis-a-vis net debt. But the variation is due to equity swap. There was no specific movement during the quarter that would give us an absolute number saying that the financial expense would be different vis-a-vis last quarter.

[Operator]

Our next question comes from Mr. Herman Lee from Bradesco BBI.

[Unknown Analyst]

We only have 2 very short questions. The first is that we would like to have a better understanding about your next deliveries both for 2024 and the new plan, whether you have something in your pipeline or you -- that refers to more traditional drivers? And the second question is with the new plan, whether you see any difference in the G&A dynamics, whether you should expect any additional increase when compared to what you have today?

[Sérgio De Souza, executive]

Herman, this is Sergio. Well, we will deliver, as I said, 700,000 square meters until the fourth quarter of '24. There is 1 small BTS project, which is a BTS within one of our other projects, but more than 90% of these projects our projects called Modular Retail projects, and they are ours, we've been experiencing a great absorption amount and with variable tickets. So the trend is for us to continue doing that. Continue to do retail projects throughout next year. It won't be any different.

So what we have in mind for the LOG 2 million our retail products, 100% of them. We do not have any BTS in the pipeline, even though -- even because the decision-making process for BTS, first of all, involves a geography where we understand that there is a good market. I mean, in case we no longer have a BTS contract, we should be able to do the modulation or do something about that asset.

And also the return, we understand that BTS is a bit more challenging in terms of returns. The yield is between 11 and 12, and we are managing to deliver something like 13 with retail. That's why we tend to continue with retail. And if there is any BTS that goes along our strategy, then we will take a look at it.

[André de Ávila Vitória, executive]

Herman, in terms of the G&A, throughout the past quarters, we've been very diligent with the composition. I mean be it in terms of budget when we run our annual exercises and also that considers expenses itself. Just to give you an idea. When you look at the previous quarter, there was a reduction of approximately 10% in our SG&A. So even though the company is now going through a development and growth process, we've been very selective and very diligent when it comes to the composition of these expenses because they could impact expenses in general.

The trend is that maybe we should see an increase in margin. The company will grow and the margin will grow along. You may see an evolution in terms of the balance or the value of expenses, but the margin will be very close to the levels we had in relation to that 80% we've been presenting. I would say then that we would see a stability in SG&A throughout our growth cycle, considering the size of the company in the next coming quarters with the 2 plans recently announced.

[Operator]

Our next question comes from Mr. Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

Two very quick questions. The first is about liability management. When we look at all of your efforts to reduce your net debt, the average debt cost remains at CDI plus almost 2 and the leverage level of the company is much better. I would just like to understand whether you anticipate anything coming in the short run in terms of refinancing?

And the second question refers to next year's deliveries. When we look at macro projections, most economies are anticipating a weaker GDP next year. So in your mind, what would be the trade-off in terms of your execution of that 700,000. If there is anything related to vacancy, you would deliver like 30% or 70%. Is there any level or limit or projects that you would postpone. How do you -- what is your view on absorption?

[Sérgio De Souza, executive]

Motta, this is Sergio. Thank you for your questions. About deliveries and the GDP, how do we see things? Well, first of all, in every geography, we deliver what we believe to be the absorption level of every geography, because we don't want to put excess burden of vacancy, and this is what we've been doing in the past few years, and we've been very successful. So things are not going to change. We're not going to deliver faster, running the risk of having non-leased assets.

The major demand driver unless -- I mean, we've seen is flight quality. We migrate clients that already have existing operations. They are in projects of very bad quality, migrating to higher-quality assets. It's better for the clients. They have better efficiency. It's cheaper and even paying more rent per square meter. It makes more sense at the end of the day for them.

Therefore, this demand fits into the macro scenario. We saw these things happening in the past. Customers looking more carefully at the operation during difficult times. They look at their existing operations, and then they decide to migrate to a Class A module because they have better cost, better quality. They lose less inventory. Therefore, this -- it's very positive for us. This is our major growth driver.

We see some gigantic opportunities in the country. We love to refer to these numbers. Brazil has 170,000 square meters of warehouses. Only 15% of those are of high quality. Therefore, we see a great avenue of growth.

Now I'll turn the floor to Andre, who will talk about the debt.

[André de Ávila Vitória, executive]

I think the main challenge we have here today in our financial planning team is the study of this liability management. We see opportunities that we should look at the main movements in the market that we -- that we could have a better start and mainly the extension of the debt we have today. We've been monitoring this on a day-by-day basis. It's not something that has led to an internal debate so that we could indeed make some move in that direction. But I would say that this is today the main drill that we are doing with our financial team. So we remain alert and eventually, if we see any opportunity, we make some move. I mean, rates with extension of deadlines.

[Marcelo Motta, analyst]

Perfect. Understood.

[Operator]

Our next question comes from Mr. Jorel Guilloty from Goldman Sachs.

[Jorel Guilloty, analyst]

I have 2 questions. Questions about costs -- construction costs. I would like to learn about 2 things, if possible. First, what is the behavioral costs? You're saying that you are delivering 13% yield on cost. Therefore, I want to learn whether costs in general are dropping or probably growing more than inflation. So any light could be interesting.

Also, I would appreciate if you could quantify your construction cost per square meter be it in terms of the land or construction cost per se. That's it.

[Sérgio De Souza, executive]

Thank you, Jorel, for your questions. This is Sergio. Jorel, what we've seen is cause stability in the past 18 to 12 months. We experienced a very robust increase in cost. We are a sector that is very exposed to the cost of metallic spread, and there had been increases. And from then on, things became more stable. In fact, cost is now stable. It's growing below inflation. And therefore, we are very optimistic in terms of the short-term scenario.

So for 2024, the trend and new constructions are keeping that stability in place. And we believe that this scenario is not going to change in the short run. This increase in yield occurred basically due to that increase in ticket, stability in construction cost and increase in the ticket.

In our Investor Day, Jorel, we had slide that explain the construction costs and how it evolved in the past few years. And there, we showed the evolution year-on-year. And probably that can give you some more light about that topic.

Now talking about absolute values. If you do the reverse account of our transaction costs of BRL 21, BRL 22, and yield on costs will be about BRL 1,500 per parameter. This is a reality, and this is what we are looking forward towards the future.

[Operator]

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

[Sérgio De Souza, executive]

Well, thank you so much for joining us today. I would just like to emphasize that our moment now is that we are delivering the plan Todos por 1.5, by the end of next year, we will be able to do some very cool deliveries. There are lots of projects being under construction. So we will see the revenue and the EBITDA of the company grow in a very robust way even considering recycling.

Our forecast anticipates growth of more than 50% when compared to the current levels. And in just 15 months, therefore, this is a very unique moment. Yield investments are growing with the possibility of posting higher spreads with the maintenance of the cap rates, we will continue to pursue the plan delivering this and delivering quality and growing the company in a short period of time with this additional GLA. Thank you very much, and have a good day.

[Operator]

LOG's video conference call is now concluded. If you have further questions, please submit your questions to the IR team through [e-mail]. Thank you all for participating, and have a great day.

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