Log Commercial Properties e Participacoes SA

BOVESPA:LOGG3

Earnings Call Transcript 2024-Q3

[Operator]

Hello. Good morning, ladies and gentlemen. Welcome to the earnings release call of LOG Commercial properties. These are results referring to the Third Quarter '24. We have here with us today, Sergio Fischer, CEO, Andre Vitoria, CFO and Investor Relations Officer; and Enrique Schaffner, Director of Finance and Investor Relations. We would like to inform you that the presentation is being recorded and translated simultaneously translation is available by clicking interpretation.

[Operator Instructions]

We would like to clarify that forward-looking statements that may be made during this conference call with respect to business prospects and operational and financial goals of the company are based on beliefs and assumptions of the Executive Board of the company, which may or may not occur. Investors should understand that political, macroeconomic and other operational factors may affect the future performance of the company. and lead to results which may differ materially from those expressed in these forward-looking statements. To open our conference of the third quarter '24, I would like to hand it over to Sergio Fischer.

[Sérgio De Souza, executive]

Good morning, and thank you for being here for the LOG's Third Quarter '24 Earnings release. Throughout 24, we reached an important milestone with record asset sales of BRL 1.5 billion consolidated gross margin of 38% and cash received of 61%, reflecting not only the attractiveness of our portfolio, but also our ability to monetize assets at prices in line or above NAV. This results part of 5 transactions involving 3 real estate funds and institutional investors, which covered 8 projects in 6 different states. In the Southeast, we sold Log Viana 1 and 2, LOG Betim, Log Guarodos and Log Sao Bernardo. The later is still on the construction. In the Center West, we sold Log Goiânia and in the Northwest Log Fortaleza and Log Salvador. Asset recycling has been carried out on a recurring and consistent basis in recent years, with sales totaling BRL 3.1 billion, more than 843,000 square meters of GLA since 2022 always in line with NAV. Cash generated from sale of assets has been mostly used as a source of funds to support our growth plan.

In addition, the excess amount of asset sales was allocated to buy back shares and reduce leverage. From the beginning of '24 to date, LOG has repurchased and canceled 14.3 million shares which corresponds to 14% of the company's capital stock. The cancellation of shares reflected in our NAV per share, which showed a compound annual growth of 16.2% since the beginning of 2020, including the dividends. Deliveries in the third quarter '24 totaled 134,000 square meter of GLA in Log Campo Grande, Log Fortaleza III, Log [indiscernible] and Log BH. 68% of pre-lease -- this delivery is a part of a total of 254,000 square meter of GLA distributed throughout the year. Production in the 9 months of 2024 total 315,000 square meter GLA which allow us to maintain a constant pace of deliveries. In addition, I'll highlight the efficient management of our portfolio, which led us to the lowest stabilized vacancy rate in our history, only 0.44% much lower than the industry average of 9%.

Demand for our assets remain strong in all regions of the country. Gross absorption of 219,000 square meters of GLA in the quarter was the highest of the year. In '24, we have accumulated 497,000 square meter of GLA with diversification between sectors, the most representative one, amounting to 18% of total GLA. The most representative customer in terms of revenue correspond to 8.5% of the total. Average ticket of Log's portfolio, was 20.23%, while the price for new contracts was set as 24.12%. It indicates a potential squeeze of 90% in relation to the current average ticket of our portfolio. Net rental revenue reached BRL 55 million in this quarter, even the significant volume of asset sales. The company showed growth in revenues from these showing 18% increase over the same period last year. over the course of '24, '28 growth cycle, annualized rental revenue at the end of each year, will grow substantially ranging between 20% and 25% per year. For 9 consecutive quarters, Log has achieved a positive lease spread reflecting the appreciation of contracts.

Accumulated net delinquency of the last 12 months remains controlled at only 0.9% of accounts receivable. Quarterly revenue from asset management was BRL 4 million, 78% growth over the previous year, direct reflection of active management of the projects managed by LOG. In addition, it should be noted that our projects and the free energy market, which brings cost savings to about 30%. SG&A showed a reduction of 4% of the same period last year. EBITDA for the quarter was BRL 136 million, 77% increase compared -- a 77% increase compared to the last quarter driven by operational efficiency and rental performance and value generated. I also highlight EBITDA from lease reaching BRL 43 million, 16% growth over the same period last year with operating margin of 76%. Negative financial result of BRL 25 million, showed improvement of 21% over the previous year. Net income reflected the high performance of the quarter, reaching BRL 97 million, the double over third quarter '23. We remain focused on maintaining healthy leverage. The net debt EBIT ratio closed the quarter at 1.07x, an improvement over the same period last year, which closed at 1.49x, showing our commitment to a responsible financial management.

Our capital structure continues to strengthen 15% reduction in adjusted net debt compared to the second quarter '24, now totaling BRL 442 million. This improvement reflects our financial prudence and the success of the asset recycling carried out. In October, we issued a new CRI issue raising BRL 300 million with extremely competitive conditions of CDI plus 0.37%. This move was accompanied by the prepayment of more expensive debt, further aligning our capital structure with our long-term objectives. In addition, LOG chieved significant reduction in the effective cost of its stats, which fell to CDI plus 1.5% after the new issuance compared to CDI plus 1.9% last year. This reflects our active management of the debt, which continues the downward trajectory is expected to decrease even more. Adjusted LTV ended the period at 10%. LOG is well positioned to continue its growth trajectory, supported by decisions that increase the value delivered to our shareholders. Let's now start the Q&A session. Thank you.

[Operator]

[Operator Instructions]

The first question comes from Andre Manzini, Citi.

[André Mazini, analyst]

I have 2 questions, actually. The first one about e-commerce, it's interesting to see how e-commerce has getting more representativeness in your base, 18% of GLA. So the specifications of these e-commerce managers requests, are they different from other tenants? Do they need cross-stocking, which is very much related with e-commerce? That would mean different assets from conventional assets, not for e-commerce. And secondly, cost of construction. Log has always been very competitive in cost of construction and all be index is 5.7%. The NCC, the index for construction. We know it has an amount very much related with homebuilding. I don't know if that 5.7% is also -- be applicable to warehouse to shed construction. So how are you considering the cost inflation at large?

[Sérgio De Souza, executive]

Hi Manzini. This is Sergio speaking. Let me go first by e-commerce. We've been seeing an increasing demand of e-commerce in all regions of Brazil, the Asian companies are coming strong into Brazil. We have other investments, and we are supporting them and their growth in Brazil. There is no specific specifications in our projects, the leads for e-commerce that we've made are the [indiscernible] Our warehouse with our specifications and it tends to meet their needs. We haven't done any specific adjustments and we've been meeting their demands with regular specifications.

The demand is increasing. We can see they are getting prepared to expand their operations where they are already located and getting ready to further. We've been hearing about their growth plan, and they seem to be very robust. They want to be close to consumers. Sometimes we are the only asset in the specific region. So we are suffering a very good wave with them going into 2025 with a very good pipeline of negotiations with these players. Concerning the cost of construction, our cost is stable. We've been observing all the pressure of prices and the new rate that has been shared. But that's not our reality I have to say. Our construction is highly industrialized. I think it tends to have more pressure over labor and but it hasn't been really any increased pain point. We've been having a stabilized cost of construction.

We have a very good pipeline of development that we've put in place very advanced negotiations for procurement. So I don't expect in 2025 differences over the cost of construction.

[Operator]

Second question comes from Elvis Credendio BTG. First, about free leads this quarter.

[Elvis Credendio, analyst]

Good morning, I have 2 questions. First is free lease. This quarter you still have good numbers. What are your expectations for pre-leasing the fourth quarter? Also, what do you expect in terms of pre-lease for 2025? I think you are going to maintain high levels as you've maintained. Secondly, concerning liability management. The credit market is very heated. You've just had new issuance, very attractive cost margin. Do you think there is still more room for additional issuance? Is it part of your plans?

[Sérgio De Souza, executive]

Hi Elvis, thank you for the question. I'm going to talk about the pre-lease and then Andrea will answer the second one. The market is in high demand. In our history, we've never had that much demand and really a demand for our assets, and we have a stabilized vacancy of 0.44%, and it really confirms that this is an amazing moment for us. But at the same time, we have to talk about prices. We've succeeded to have better prices. Customers are willing to pay more. Some results for this year. Our every ticket is over BRL 24 in a very diversified portfolio all over Brazil. So it really shows that -- it confirms that in the past 18, 24 months, things have really been improving.

We've been adjusting our lease prices on a monthly basis and customers are following along, which really what matters, very good moment to all of us. And it has been impacting our projects. Projects delivered in the quarter, very considerable volume of 134,0000 square meter, we had over 3% yield on cost, and we expect to follow the same in the next quarter. And the whole pipeline for 2025, and there is a lot in prelease mode. It's going to follow along. So it's a very good time for all of us. In terms of pre-lease, there is a very relevant share of pre-lease for all the projects in the fourth quarter. We're going to have very good quarter in terms of deliveries, and we have very good pricing and yield on cost perspective.

And the constructions, which are going to be delivered next year, we also can anticipate some pre-lease and we intend to maintain that delivering assets with at least 70% pre-lease and reaching the stabilization of the assets a few months after deliveries. Let me now hand it over to Andre about credit.

[André de Ávila Vitória, executive]

Concerning the liability management for the recent months, we've been assessing and appreciating our position of credit risk, considering financial institutions and rating agencies. We could issue a new CRI with a very good attractive rate and we have revisited our debt and had a significant reduction of interest rates. At the same time, we use the prepaying window of the most expensive debt, which were CDI plus 2 approximately 2%. We intend to keep on doing the same, considering all the prepayment windows that we have, especially of most expensive debt we take our position according to what the market offers to us. This last issuance had very good conditions. As you can see, our leverage index is 1.07, considering all the management adjustments we make and we do not expect to have any more capital raising.

But as of the second quarter last year, we probably will use any prepayment window in the market is offering as favorable conditions as the one we had in the beginning of October will probably take the move to reduce our debt amortization plan for '26, '27.

[Operator]

The next question is from Pedro Lobato, Bradesco BBI.

[Pedro Lobato Garcia Fernandes, analyst]

Good morning, Sergio and Andre, thank you very much for the opportunity. EBITDA was BRL 440 million below the BRL 700 million that you shared with us as your golden rule of the selling of net debt. So I have 2 questions. First, looking towards 2025, what is going to be the strategy of asset selling? Are you going to maintain the initial strategy of selling it to on your CapEx? Or do you expect to sell as you did this year? And second, you've been extremely active in the buyback -- it's an excess of cash. If it's maintained in 2025, will the company be more active in paying dividends considering the net debt of BRL 700 million, would you expect to pay more dividend?

[Sérgio De Souza, executive]

Thank you. Sergio speaking. Let me start talking about sales. We are very optimistic with the liquidity of our assets. What we've been doing in recent years since 2022, we sold 3.1 million assets with NAV. This is what we use as a reference and always at very positive conditions with very good margins and increasing margins. This year, the operations that we did of BRL 1.5 billion. It was over 38% on average margin, very positive margin as you probably agree. What we've noticed is that liquidity is the same. We are constantly approached. We are highly demanded even though the scenario is somewhat more complicated, there is still liquidity of some real estate funds coming to us and this is going to be maintained while we have the scenario of interest rates, but we are willing to play the game. We are very optimistic about liquidity.

This year, we are not going to sell anything else. We have one more transaction now just coming to its end. It has been announced, not completed yet. Probably, we are going to close that at BRL 1.5 billion, which is more than we initially thought at first, we wanted to sell close to the CapEx to support and maintain our net GLA at this agreed range. But we've noticed the opportunity. Liquidity is there and we have the opportunity of doing something which would be interesting for our shareholders, which is the payback of shares, which we concluded in -- there were BRL 300 million, so really very good, 14% of the capital corporate stock we have new plans. So we are willing really to move ahead whenever we see an interesting gap between the NAV of these sales and what is initially planned.

About 2025, our trend is to maintain the same strategy in the beginning of the year of selling the needs of CapEx, to maintain constant activity. We do have a buffer we are below what we consider to be healthy index of leverage we do have buffer area to do more, maybe additional dividends, maybe more a buyback. We don't know we are talking it internally. And we have this reserve because we are very satisfied from an operational perspective. CapEx is quite high. We've been producing a lot. We have high demand. So we want to have that buffer so that we can deliver new assets with high yields. Probably will return, give back more of these resources back to our shareholders.

[Operator]

Our next question comes from Juan Argentine XP. Please unmute your mike.

[Unknown Analyst]

I have 2 questions actually. About average ticket potential upside between the average ticket of new contracts and the average ticket of the current operation about the speed of growth of this average ticket in the next month, there are contracts to be renewed. But do you expect have a gradual speed a linear increase of average ticket with a potential of upside? Or do you think that things are going to pick up and be faster eventually?

My second question is similar along the lines of what Sergio has answered about portfolio recycling and have been negotiating below their interest company interest. So that's going to be a problem really of raising more money in the future.

But do you anticipate any change in the profile of investors in the recycling of assets? Do you expect more institutional investors to be in demand for your assets? Do you think they are going to be your main buyers? Thank you.

[Sérgio De Souza, executive]

Thank you for the question. Sergio speaking. Let's start from the liquidity. We always have an ongoing discussions, lots of things happening every day. Some of them succeed, others not. We have demands from all kind of investors, real estate funds -- there is a component of the seller finance and that's going to be needed as has been the case in recent cases. Institutional investors have approached us as well. But what matters is liquidity is ongoing. What we've done is a record this year of sales in our company confirms that. And we've done that at a cap rate very good, a very good cap rate.

So I think that the mix between real estate funds and institutional investors will remain. There is a fund to real state funds that we provide services as real estate managers, they have been increasing significantly. It gives them more power, so they can buy more assets in the future. We are very satisfied with that recycling of our assets, sometimes are in funds that we hold the management. So these real estate funds are growing with us, so it means that we can bring to them more assets. This is what we are anticipating. Concerning average ticket, this is the ninth consecutive quarter where we can have price adjustments above inflation rate, very positive landscape. There is a large gap still. And as I told you, we've been changing our lease drive list monthly.

The spread between the current value and potential value, we'll maintain why on this situation maintains. We are just really driving it up. It's a very positive momentum. Looking ahead, we expect to maintain this pace of going ahead above inflation. This one was a very good quarter. Above inflation, very good number. We are very optimistic. We are going to be able to bridge the gap and keep on investing heavily.

[Operator]

The next question comes from Jerry Gilletts of Goldman Sachs

[Unknown Analyst]

We have a team for your time there. questions about demand. Will you see that in terms of region or drivers we say -- do you see any region which is more accelerated -- the other, Southeast, Northeast, et cetera. type of demand. You've talked about e-commerce, for example. The e-commerce -- do you think e-commerce is going to be your main driver or maybe a restructuring of supply chain I would like to understand more generally, what are the demand drivers that you see?

[Sérgio De Souza, executive]

Thank you for your question. Sergio speaking here. There are 2 main drivers for demand. The main one is the flight quality. Brazil is very poor in top quality sheds and warehouses, especially outside the Southeast. We see a lot of possibility of expansion in different regions. Brazil is going to grow to a million square meter of GLA. That's very little still -- and we've been migrating to other regions, especially customers which are already in place, but they are not really well, occupying well array. They want to go -- one of our warehouses because that means more efficiency to them. So this is good because it doesn't matter on the macro scenario.

Once you have a warehouse of quality in a region where it didn't use to exist, it's very easy to migrate potential good customers. This is our main driver, even more than e-commerce, which is at a very strong base, I know, we are making businesses with e-commerce, but regional demand is the same. There is no different mix by region. Northeast e-commerce request a lot, flight posit as well, the same Center West or Southeast. That demand is the same all over Brazil in terms of driver and I will say that we are succeeding in meeting the market with top quality warehouse. Customers are willing to pay for this quality, and we are there to support -- and these customers are already in-house. We know about their growth plans. We know what they need in terms of absorption.

So it's so much easier to have the additional inventory in each region on what our customers need so that we don't increase vacancy and do not have poor investment of our capital. So we've been very successful in working closely with them.

[Unknown Analyst]

Within this context, do you see more competition -- the company is just developing share houses. Do you see more competition? Or do you think you were alone or tend to be a loan in the market?

[Sérgio De Souza, executive]

We haven't seen an increase in competition depending on the region, yes, there are investments being made or investment funds make investments. But I would say not in a structured fashion, we haven't seen any strong competition. Some regions, such as the state of Sao Paulo or the Capital City, we are delivering an asset in the capital city of Sao Paulo, the demand is huge and competition, therefore. But we haven't felt that much of a competition, especially if we increase our ticket price.

We used to have good territory, higher prices, and then companies looking for further investments there. But not now, considering the industry rates, some decisions of competitors are being held back, which is positive to us.

[Operator]

The next question comes from Marcelo Motta, JPMorgan Please mute microphone.

[Marcelo Motta, analyst]

Can talk about the revenues from the administration even though the GLA has been somewhat flat in recent quarters, we would like to hear about the improvements you've been made to capture more benefits there. What can we expect in terms of benefits for 2025.

[Sérgio De Souza, executive]

Thank you, Motta for the question. This is Sergio speaking. We are very happy with this business unit. This strategy of selling assets to funds where we still have management is really important. This is a line that's going to increase in terms of revenues. It is something running at BRL 20 million in revenues per year. There are different services being provided. We have log shop, which has been increasing log DM, which provides condominium management. And we also have management of commercial assets.

You will see some increases. There is a new transaction which will just have the asset transferred to a fund where we have management services. So this line is going to get more and more momentum. And in the near future, we are going to see it pay for the whole SG&A of the company. We are getting close to 50% of SG&A, and we expect to get to a robust number to pay the whole company for it.

[Operator]

The next question was submitted in writing by Paulo [ Caude, investors. ]

He says -- Good morning. Could you please approach the spread between yield on cost and the cap rate of assets in the operations of the last quarter as the margin maintained the 47% rate.

[Sérgio De Souza, executive]

Thank you, Paulo for the question. Serge speaking here. This is a very strong moment of deliveries in terms of yield on cost. The construction cost is stable with an increase in lease price. It means we are delivering yield over 3% of returning the year. And we can see stabilization, the cap. We've had a less stressed scenario in the past. We have additional captures to make but we are delivering nearly 40% gross margin. That's what we did this year. Four or five transactions that we had in the year, we're at a rate of about 38%. Our trend is that throughout 25%. We are going to maintain the same range. And looking ahead, we expect to capture additional margins at the cap rate once we see a more favorable interest rate curve.

[Operator]

Well, our Q&A session is ended. I would like to hand it over to Sergio Fischer for his closing remarks.

[Sérgio De Souza, executive]

Well, thank you all very much for the call. considering demand and our investments, we are very optimistic for 2025. It's going to be a very strong year, a record year in terms of delivery of new projects and yields close to 3%, very strong demand, very strong prelease liquidity of assets is very important. We are very optimistic we are going to maintain the same pace, capture or raise the funds required to maintain our operations. In terms of balance, it's important to emphasize this move of capital cancellation. It's returning value to our shareholders.

We might do some additional activities like that in the near future, if we see this, there are opportunities. So this is something good for our net GLA. We expect to see an increasing number of revenues and positive indicators for our company. Thank you all very much for your interest and participation. See you next quarter.

[Operator]

The release call of LOG is concluded. Now if you have a question, please send a message to the Investor Relations team through the e-mail [e-mail]. Thank you all very much for your participation. Have a good day.

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