Log Commercial Properties e Participacoes SA

BOVESPA:LOGG3

Earnings Call Transcript 2019-Q4

[Operator]

[Interpreted]

Ladies and gentlemen, good morning. Thank you for waiting, and welcome to the conference call from LOG Commercial Properties. [Operator Instructions] Now I'd like to pass the floor to Mr. Sérgio Fischer, Chairman of LOG; Mr. Felipe Gonçalves, CFO and Investor Relations Officer; and Mrs. Luciana Zanini, Director of Financial Planning and Investor Relations. Mr. Sérgio, you may proceed.

[Sérgio De Souza, executive]

[Interpreted]

Good morning. It's with great satisfaction that we begin this conference call for Q4 2019. We had many events that show us the bright future of the company. I will talk more about this later. I'd like to talk about 2019. We showed with numbers a winning plan we really delivered during 2019, 170,000 square meters due to our integrated operation for development of real estate and sales with a very low-cost of debt, CDI plus 1%. So we had records and a good return for our investors. We hope to do even better in the future. We closed the year with vacant properties of 4.5% due to our strategy and a strong market for -- in e-commerce where we see a lot of demand for our projects.

And I'd like to mention we have a construction that began in 2020, and we have 75% already rented, including recurring clients. This is due to our good relationship with the client base, anticipating movements and always being first. With this speed of absorption is also due to our sales team with a lot of experience, understands our business and our clients' business. Also in 2019, we did 70% of the rentals directly to the clients, and also we reinforced the partnership and relationship with the market, generating intelligence and information for the future.

60% of the rentals in 2019 were in clients that were already in our client base. So with the growth at the end of the year, we began a new project and we intend to integrate another 1 million square meters in the next 5 years. We did our homework in 2019.

Liability management. In terms of liability management, Felipe will talk about this. But I'd like to say that we are recycling, and we raised BRL 800 million with the real estate fund, more than half of what we need for the next 5 years. So we are prepared for this. We will give you more also details about LOG Interfund. So we have BRL 185 million for projects. So we're very happy. It's integrated in the strategy of LOG. It has a great capacity to generate quality funding. So the first of many, we have authorized capital of BRL 1 billion. And now we already have a great portfolio, 50% of the ODL for the plan already acquired.

These acquisitions are in line with our plans and have been done at good prices. We have -- we're generating cash and improving profitability. The plots of land acquired -- the construction continues, and we will focus on the next 2 years to develop the current plots of land. And with approvals, we should continue building. We will maintain our focus on profitability and we have no reasons to change our parameters. I would like to pass the floor to Felipe.

[Felipe Gonçalves, executive]

[Interpreted]

Thank you, Sérgio. Good morning. I will talk about liability management that Sérgio mentioned. During 2019, we made all our liabilities post fixed, and thus decreasing the cost of loans. We raised BRL 400 million. We closed the year with CDI index plus 1 interest rate. We're always monitoring the fixed-term market to improve the conditions of our debt. As Sérgio said, we have a longer-term for paying off the loans and also opportunities for prepayment, lowering even more the cost of our loans.

We'd like to highlight that LOG has a very low debt, close to 0, and we are thus making investments, this due to the growing cash generation and opportunities that we have to generate capital by recycling assets. We will continue monitoring this as the market develops. Another highlight is the growth of adjusted EBITDA. With recurring operations of rental, more than 18% more in relation to the previous year, although we had an increase in operational expenses, especially during the first year when we did our IPO. So there is volatility in the margin. Investments are coming and also recycling of assets.

I would like to pass the floor over to Luciana, and she will talk more about LOG.

[Luciana Zanini, executive]

[Interpreted]

Thank you, Felipe. Good morning. I'd like to highlight the liability management. Apart from decreasing the cost of our debt, we also freed up many assets that had been given as collateral. In 1 year, we freed BRL 400 million in assets that had been given in guarantee. This shows the quality of our credit. Apart from this with growth, with a follow-on and recycling of assets, the expectation is that we will have even lower costs as time goes by.

To conclude the year of 2019 in LOG, in the stock market was very positive, in price and also liquidity. The increase in liquidity after October was in line with our expectations, BRL 14 million. Finally, we have a shareholder base, 44% foreigners, 56% Brazilians. And of the Brazilians, 36% represent more than 22,000 individuals.

Thank you very much. And now we'd like to begin the Q&A session.

[Operator]

[Interpreted]

[Operator Instructions] Our first question comes from Gabriela C. Moraes, Itaú BBA.

[Gabriela Moraes, analyst]

[Interpreted]

I'd like to know about the pipeline for development. You said you have 47,400 square meters under construction to be delivered in the next 2 quarters. Can you give us a breakdown what you will deliver in Q1 and Q2? Also 152,000 square meters that you acquired this year. Could you give us more details? Was -- did you buy with cash? Or did you use also exchange for real estate? And how long do you believe it will take to buy the other 400,000 square meters that are being negotiated?

[Sérgio De Souza, executive]

[Interpreted]

Gabriela, well, the pipeline, if you see in our website, we have a detailed breakdown of the deliveries in terms of construction. 47,000 will be delivered during the year, concentrated in Q2, if I'm not mistaken, and one delivery in Q4. Construction, we have new things, new properties, new construction that we will begin. We have some negotiations underway to begin this year. Now apart from this, we're beginning many projects this year. So this will -- it will be a little above 2019. We will have a lot of deliveries for the beginning of 2021. In relation to the pipeline of plots of land, we're looking for new opportunities in cities, locations where we are present.

We're working with our clients. This is very important for us. The clients have come to us because of the quality of our projects. We're looking at all the regions in the country from the south to the north, so we are working. We have the All for 1 plan. And now we are buying new plots of land. Two, we have -- in 2 of these plots of land, we exchanged for other real estate instead of cash. So we have these cases, barter. We buy the plot of land in exchange for other assets. We have also plots of land that are waiting for approval. These 470,000 square meters, most of them, we will be buying this year because our team is looking at more than 20 cities together with clients. And we're anticipating things, and we should conclude these purchases during this year.

[Operator]

[Interpreted]

The next question comes from André Mazini, Citibank.

[André Mazini, analyst]

[Interpreted]

The question is about the increase in e-commerce. For example, the warehouse in Extrema for e-commerce. Do you believe we will have an increase in the participation of e-commerce? So does it make sense to have more build-to-suit and some specs? This kind of tenant, what do they ask for? Do they want cross dock? Do they want larger areas? Do they want modular warehouses? Or similar to what you already have, without many changes?

[Sérgio De Souza, executive]

[Interpreted]

Well, let's begin with the first, e-commerce. Although we're showing in the release a stake of 8%, almost 9%. These are the clients that have 100% dedicated operations in e-commerce. All the new rentals, 40% in the last year, are related to e-commerce, maybe partially. Some clients use our warehouses to operate e-commerce and also physical stores.

We're talking to all the e-commerce operators, the demand is very strong. Their people preparing themselves. Well, we have 5% of retail being sold through e-commerce. So it is growing very rapidly, and they will need quality infrastructure for this. So from north to south, we see demand from large e-commerce players. Each one of them have their own criteria. They have their own criteria, each one of them.

Normally, we only study BTS and including e-commerce in regions where we believe that the asset will be worth -- will have value for the client and others, although we have long-term contracts. For example, [ Same as Fit ]. So we worked on their project to have the capacity to have modular warehouses in case they have the necessity to leave. So for us, that is -- this is a given. We don't invest without these conditions that guarantees things. In terms of BTS, those who have internal infrastructure, we leave only the shell ready with the floor, energy and the clients divide the warehouses. So in terms of BTS, we've done this. This is in line with our specs. So this is what we do.

[Operator]

[Interpreted]

The next question comes from Luis Stacchini, Crédit Suisse.

[Luis Guilherme Braga Stacchini, analyst]

[Interpreted]

Luciana, 2 questions for you. The first related to the level of growth in rental, actual growth in rental. We see that rental grows 21% year after year, ABL, 15, but if you have the level of December, you would have the same level as [ rental ]. In the next 12 months, you have a [ quarter of a deal ] becoming mature. In 2 years, another 22%. I'd like to know from you, what are your plans to have real growth in terms of rental? What do you believe we can expect? The second question in relation to CapEx. Your investment pipeline is pretty large but due to warehouses -- warehouses being the majority. I'd like to know from you, how do you see the inflation in costs? Are you worried? Has inflation in the cost of construction had an impact? How do you see the inflation in cost of construction in the future?

[Sérgio De Souza, executive]

[Interpreted]

Let's begin with cost and then I'll talk about price. We had, in the recent past, a rise in the price of concrete and steel. We had this impact in 2019. Looking forward, we're not worried with any type of material in the future. In our plans, we will believe the construction -- price of construction will be in line with our plans in the next 2 years. In terms of the rise in rental prices, you have to take into consideration the product mix if you deliver a product with a higher rent. So your forecast is not always correct. What we saw in 2019, the mix of the projects in relation to 2019 versus 2018, we were able to get numbers higher than inflation. So we have some upwards of 10%. The trend from now on, of course, we're working on these numbers to do our best. And the fact that we have most of the contracts expiring in the short term, we can do this, increase the price. We should see in 2020, an increase.

[Luis Guilherme Braga Stacchini, analyst]

[Interpreted]

Okay. Sérgio, concerning CapEx, what is the -- what kind of parameter do you use when you do the planning in terms of CapEx?

[Sérgio De Souza, executive]

Our standard project, it depends on the size. Also 1,050 per square meter. BRL 1,050 per square meter.

[Operator]

[Interpreted]

Now Raul Grego, Eleven Financial.

[Raul Grego Lemos, analyst]

[Interpreted]

I would like to ask about the company's capacity, with the increase in cash due to recycling. I'd like to know, could you anticipate the deliveries with this extra cash? Could you anticipate the delivery? Thus I know you have plans until 2026. Would it be possible to anticipate since the net debt is now at its lowest level?

[Sérgio De Souza, executive]

[Interpreted]

Raul, we have this capacity. So especially with our strategy to recycle through investment funds. Now looking forward, we're consuming most of the company's land bank. There is a cycle between the purchase of the land and the approval to begin construction. We're being efficient. This new land bank that we are forming, that we bought in December last year, these plots of land we have approvals in progress, almost approved. We should begin the construction in Q2. So we will have positive impacts in the plan. We will be able to anticipate the plan. The bottleneck is of approval. It takes time to get the permits to begin construction.

[Raul Grego Lemos, analyst]

[Interpreted]

And the new purchases in all of Brazil, in all the regions in Brazil, is there any region that is excluded because of low demand? Like -- or a lot of offers in like in São Paulo, you are continuing to look at all regions?

[Sérgio De Souza, executive]

[Interpreted]

Raul, first, we're doing this based on the demand that we have from the 200 clients we have. So this is happening. Our clients are being proactive and asking us for new investments in real estate. A lot are in the north and northeast. São Paulo is a large market. We will always continue to look at São Paulo, but we're being very selective because of the profitability.

[Operator]

[Interpreted]

Our next question comes from André from the webcast.

[André Mazini, analyst]

[Interpreted]

I see a strong evolution of the assets based on the maturity of each plot of land. When do you believe that return on investment will stabilize in the future?

[Felipe Gonçalves, executive]

[Interpreted]

Thank you for the question. We are still in the investment phase. The land bank, we are buying plots of land for the land bank, and we will deliver during the next 5 years. So we're seeing growing profitability in the next 5 years, and the market will tell us at which speed we will be able to grow and when return on investment will stabilize. We don't have a magic number right now because we see a lot of -- we see more possibility of growth than stabilization. Stability.

[Operator]

[Interpreted]

[Operator Instructions] One more question from the webcast from Fernando Luiz, Trópico.

[Fernando Luiz, analyst]

[Interpreted]

If you are exchanging assets, wouldn't the net be 0 close to that? How is the absorption of new clients?

[Sérgio De Souza, executive]

[Interpreted]

Thank you for the question. I will answer the first part concerning exchanging plots of land for new purchase. We're not exchanging real estate from the base, we are exchanging the purchase of land for construction. This is normal. Concerning the fund, it's not an exchange. We are selling the minority share in these assets to a fund, so LOG has no participation in this fund with the exception of being a consultant. It's divestment.

If I buy more plots of land than I am selling, then the portfolio grows as a whole. Now concerning absorption of new areas. Sérgio mentioned in the beginning, this has been very good. Our client base has consumed [ all ] our areas, both those that are under construction or those that we are acquiring. And this is what we have done for new investments in new areas. We gave the example here. We have a project where construction just began. We have 75% rented. This shows the strength of the market. With clients migrating from bad assets, we have many of these in the country going to new assets and also e-commerce that needs a lot of square meters.

[Operator]

[Interpreted]

We have another question from Fernando Luiz.

[Fernando Luiz, analyst]

[Interpreted]

If you say that you do yield to cost at 12% a year, but you're integrated -- but construction is integrated, how do we know if you're not building below the costs since you don't give us the cost of construction for each project?

[Sérgio De Souza, executive]

[Interpreted]

Thank you for the question. I will try to explain. In fact, for the assets delivered during 2019, we had a yield of cost close to 12%. So -- and these rental contracts are -- have also increased according to inflation. So there is a difference also in inflation. The cost of construction, for a long time we have been talking about this. With an integrated construction with our own construction team, standard projects, there are many initiatives and internal processes that make our efficiency greater than that of the market. Thus, we are building for a lower cost in relation to competitors. So our cost is lower because the average price in the market does not have initiatives like us.

The integrated operation for us is a great edge and a great source of success, not only in production, but also in the sale and management of the projects. You can only have this relationship with the client base, and this is one of our strategies to be diversified in terms of risk of the portfolio. You can only do that if you have a good sales team that is well aligned with the business, because with these relationships, we get a lot of information and the capacity to have longer absorption curve.

Now in terms of management of these projects, we have not only revenue, but the guarantee that we will have standard procedures and scalability, making the cost of operation of our clients lower. I hope I answered your question concerning cost. So this integration of the operation. Since the integration with clients, from the identification of the plots of land and until delivery, that's one of the reasons for our success.

[Operator]

[Interpreted]

[Operator Instructions] We'd like to conclude the Q&A session. I'd like to pass the floor to Mr. Sérgio, Mr. Felipe and Mrs. Luciana for their comments.

[Sérgio De Souza, executive]

[Interpreted]

Thank you for participating. I'd like to reinforce that we have had many opportunities for growth. We have a good land bank. We're working together with our clients, and this will help us. We're going into new markets where clients are asking us to come and to increase the quality. We're very optimistic with the All for 1 project. We are sure we will capture more opportunities than we identified before. And we have quality funding by recycling and also invest -- and also real estate investment funds. So we will continue this way. Thank you, and a good day.

[Operator]

[Interpreted]

The conference call for LOG Commercial Properties is ended. We thank you all. We wish you a good day.

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