Log Commercial Properties e Participacoes SA

BOVESPA:LOGG3

Earnings Call Analysis

LOG Commercial Properties Q4'23 Highlights

In Q4'23, LOG Commercial Properties delivered 131,000 sqm of GLA, experiencing prelease rates of 76% and a Yield on Cost (YoC) of 13.4%, demonstrating robust demand and attractive pricing. The full year saw 263,000 sqm delivered, with a national occupancy rate over 98% and a record-low vacancy rate of 0.65%. The company anticipates a 70% portfolio net growth by 2028, aiming to deliver 2 million sqm of GLA. Financials improved, with Q4 net revenue at BRL 47.6 million contributing to a yearly sum of BRL 220 million, and an EBITDA margin of 74.9%. Asset sales generated BRL 1.2 billion, and dividends announced totaled BRL 70 billion due to strong 2023 performance, signifying a sound growth trajectory and shareholder value.

Leadership and Financial Results

Sergio Fischer, CEO, along with colleague Andre, discussed LOG Commercial Properties’ Q4 '23 earnings. They reported a quarterly net revenue of BRL 47.6 million and an annual BRL 220 million. The company's EBITDA reached BRL 63.5 million in Q4 with a lease EBITDA of BRL 32.3 million, resulting in a 74.9% margin for the year. A notable improvement in the financial results by 81.3% compared to Q4 '22 was highlighted, primarily due to reduced financial expenses as the CDI rate declined.

Debt Management and Portfolio Expansion

The company successfully reduced adjusted net debt to BRL 496 million, a 44.1% reduction, despite a 15% reduction in GLA. This is a reflection of efficient asset management and a commitment to sound financial structure. The debt-to-equity ratio improved to 13.3%, an 11 percentage-point improvement from Q4 '22. They emphasized the opportunity for expansion due to a shortage of quality logistic infrastructures in Brazil, particularly in regions with high demand for Class A logistics spaces.

Strategic Asset Recycling and Shareholder Value

LOG emphasized their asset recycling strategy, with sales of 377,000 square meters of GLA spread over 11 assets generating over BRL 1.2 billion with a 30% margin. This strategy demonstrates resilience and strengthens financial capacity for future investments. It also maximizes shareholder value, as evidenced by the announcement of BRL 70 billion in dividends based on 2023’s positive results, maintaining the company's image as a consistent dividend payer.

Yield on Cost and Rental Performance

A record yield on cost was reported at 13.2% for 263,000 meters, with Q4 '23 deliveries at 13.4%. For 2024, LOG expects to deliver 500,000 square meters of GLA with an anticipated yield on cost around 13%, thanks to stability in construction costs and rising rental prices. The LOG 2 million plan is set to roll out by 2028, prioritizing speculative, modular projects, with expectations of gross profit on asset development between BRL 1.8 million and BRL 2 billion.

Sales and CapEx Outlook

LOG plans to maintain its recycling strategy and foresees 2.5 million square meters to be delivered over the next five years. This will involve significant CapEx, with an expectation of BRL 200 million per quarter, and a strategy to keep net debt stable by aligning CapEx with similar volumes of disinvestments.

Energy Efficiency and Tenant Satisfaction

LOG's pilot plan for energy savings achieved a 35% reduction in costs, which is scalable to the portfolio. This efficiency contributes to additional revenue as they manage energy for all projects. The LOG ADM team’s management has resulted in a 20% lower cost than the industry average, aiding in increased tenant retention rates (94% this quarter) and improves the Net Promoter Score (NPS), creating potential for future rental price adjustments and solidifying tenant relationships.

Dividend Policy and EBITDA Margins

The company reported an annual margin close to 75%, with a projected future margin around 70%. LOG has positioned itself as a consistent dividend-paying company, correlating dividends with net profits. They aim to continue this policy during the growth cycle from 2024 to 2028, reinforcing their robust financial standing and commitment to shareholder returns.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, good morning, ladies and gentlemen. Welcome to the earnings release call of LOG Commercial Properties, referring to fourth quarter '23. We have here with us today, Sergio Fischer, CEO; Andre Vitoria, CFO and IRO. We also have Henrique Schuffner, Directors of Finance and Investors Relations.We would like to inform you that we are being recorded and translated simultaneously. The translation is available by clicking on the button Interpretation. For those who are listening to the conference call in English, there is the option of silencing or muting the original audio. [Operator Instructions]We would like to state that forward-looking statements made during this conference call about the company's perspective operating and financial goals are based on the beliefs and assumptions of the company management that may or may not occur. Investors should understand that conditions related to political, macroeconomic, and other operating factors can also affect the future of the company and cause results to differ materially from those expressed in such forward-looking statements.To start our conference call today for the earnings release of the fourth quarter '23, I would like to hand it over to Sergio Fischer.

[Sérgio De Souza, executive]

Good morning. Thank you very much for your participation in our earnings release call for the fourth quarter '23 of LOG. Starting with the operational highlights, in the fourth quarter, we delivered projects with significant volume of 131,000 square meters of GLA located in Salvador, Brasilia, and Maceio with prerelease rate of 76%. The average ticket of this delivery was close to BRL 24 per square meter of GLA and YoC was 13.4%. The demand generated by Flight to Quality remains a key factor for the company's continued growth. We have seen increasingly positive pricing dynamics which combined with construction price stability have positively impacted the YoC of our project.Cumulative delivery of the year totaled more than 263,000 square meters of GLA and YoC of 13.2%, reinforcing our national presence. The cumulative gross absorption for the year was 715,000 square meters of GLA, the second highest in our industry. We ended the year with 207 active clients from different industries with maximum concentration of 15%. Our level of occupancy of assets exceeding 98%.At the end of 2023, we achieved a stabilized vacancy rate of 0.65%, the lowest in the history and much lower than the national average of 10%. It shows excellence and attractiveness of our projects and the ability to serve operations of different sizes and needs regardless of their location.In addition, we have reported a price increase above inflation rate for the sixth consecutive quarter with lease spread of 1.2%. In line with our All for 1.5 growth plan, we have a plan of delivering 500,000 square meters of GLA after the recycling of the year.In 2023, we announced the beginning of a new growth cycle with LOG 2 million plan. This plan, which will start in 2025 and be completed in 2028, aims to deliver 2 million square meters of GLA in the main metropolitan regions of the country, which could represent net growth of 70% in our portfolio. This volume of deliverables sets a new level of production for the company. We expect better macroeconomics in the year end 2024.We've observed reduction in interest rates and that will have a direct impact on liquidity of our assets stimulated by the pick up of real estate investment funds. It may lead to compression of cap rates getting closer to pre-pandemic levels. This approach combined with YoC growth presents significant potential to increase the company's margins. We expect the anticipated increasing margins from asset sales to be translated in significant net GLA growth. Andre?

[André de Ávila Vitória, executive]

Net revenue in the fourth quarter of BRL 47.6 million and BRL 220 million in the year. EBITDA for the quarter reached BRL 63.5 million, lease EBITDA of BRL 32.3 million. In 2023, lease EBITDA was BRL 165 million, 74.9% margin. For the quarter, leasing operating expenses remained in line with the prior year.In the fourth quarter, the financial result improved by 81.3% over the fourth quarter '22. And in 2023, there was improvement of 23.9% due to decreasing financial expenses caused by the drop in CDI in the period.With asset recycling, we had direct impact on the reduction of our adjusted net debt, we've reached the new level of BRL 496 million. Although GLA was reduced by 15%, adjusted net debt fell by 44.1%. It reflects our efficient asset management strategy and commitment to a [ sound ] financial structure. In the fourth quarter '23, adjusted net debt to equity was 13.3%, down 11 percentage points over the fourth quarter '22.As certain regions of Brazil have shortage of quality logistic infrastructures, it has generated and will continue to generate opportunities for the expansion of our portfolio. There are 170 million square meters of warehouse is spread across the country, 80% of which are concentrated in the Southeast and only 50% are Class A assets. This situation highlights the growth potential that LOG has in line with the growing demand for high quality logistics space.This year, the highlighted sales of 377,000 square meter of GLA in 11 assets in 4 different regions, totaling more than BRL 1.2 billion with 30% margin. Asset recycling is the demonstration of the strength and resilience of our business model within which enhances asset performance, strengthens our financial capacity for future investment, and maximize shareholders value.The significant advance achieved by our company driven by a series of strategic levers have been fundamental for value creation. For the plan LOG 2 million with the spread between YoC and the cap rate, we anticipate growth profit on the asset development between BRL 1.8 million and BRL 2 billion. We announced the payment of BRL 70 billion in dividends based on the positive results of 2023. BRL 191 million dividends distributed over the past 3 years shows our commitment as a company that generates significant results and consolidates itself as a consistent dividend payer.Concerning ESG, LOG [ enabler ] has implemented charges for electric vehicles in 2 projects. In addition to reinforcing its environmental commitment, the initiative aims to encourage the adoption of sustainable practice among our customers. Charges not only provide convenience to those who use electric vehicles, but also contribute to the reduction of polluting emissions, promoting electric mobility and contributing to the preservation of the environment.Let us now move on to the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Pedro Lobato from Bradesco BBI.

[Pedro Lobato Garcia Fernandes, analyst]

We would like to understand a bit more what seems to be your new level of build on cost based on your release, the 13.4% above what you had last year seems to be the new level of yield on cost. Therefore, if that's the case, is it going to change the profile of your new project? Because in the past, we had the impression that the yield on cost of about 10%, 11% had EBITDA which was less attractive. So into the new level, do you think the pipeline of new projects will change? Or will you maintain investments on traditional ones?

[Sérgio De Souza, executive]

This is Sergio speaking. About yield on cost last year, it was a record year, 263,000 meters with 13.2% average yield on cost, which has set a record. The deliveries on the fourth quarter were 13.4%, as you said. For the pipeline of 2024, which will be record deliveries as well, we expect to have 500,000 square meters of GLA. We expect it to be about 13% yield on cost. And looking ahead, this is probably going to be a new level, not as high as 13.5%, but very close to 13%.And for 2 reasons, let me give you some more information. First of all, we believe there is a instability in construction costs. We don't expect it to increase. We expect we are going to maintain it at the same level as we have had. And pricing, we've really increased the average ticket of new businesses made in the fourth quarter, about BRL 24 per square meter. There was an impact, of course, of the product mix we delivered, but we've seen that all over Brazil. The nationalization of price, so to speak, all areas operating very closer to the numbers in Sao Paulo, where we tend to have higher prices. Therefore, we've really delivered excellent results.Now, in terms of project profile, when we designed LOG 2 million, which is the new plan to be delivered by 2028, we've just modeled projects of speculation, modular ones. We haven't used our BTS account, because that's what we anticipated. We've been performing quite well in speculative assets, crazy demand, 76% of rental as a rate. So BTS is no longer competitive. We are constantly invited to be part of the process. There is always an ongoing process, but we are going to be more selective. There is a [ fight ] and a constant strive for investments and our more speculative deliveries tend to be just our preference. We might invest in BTS, but not quite.

[Operator]

The next question comes from Rafael Rehder from Safra.

[Rafael Rehder, analyst]

And I have 2 questions. First, I would like to talk about the yield on cost of 13.4%. In your release, you said the average ticket was closer to BRL 24, which is somewhat higher than the average ticket of the company. Do you think that the BRL 24 were just a one-time delivery? Or do you think this is going to be the new average level for the company in future contracts?Finally, sales. As you are delivering higher levels with expectations of lower levels in future sales, you won't necessarily have to sell the 250 units that you had in mind for the plan. Are you going to make changes depending on additional profitability?

[Sérgio De Souza, executive]

Thank you. This is Sergio speaking. About the average ticket and the product mix, what we delivered in the fourth quarter, the mix increased our average. We had one [ indiscernible ] project, which has a higher ticket than the average ticket. Salvador, which is also very positive. I think the actual number is kind of BRL 22 per square meter, such as in Maceio, which we delivered in the fourth quarter. The yield level should be at about 13% yield on cost. That's what we have anticipated for ongoing projects.Now, in terms of scenario, we are very optimistic about what we've been seeing on both ends. Delivering higher YoC, and we've got 1 percentage point increase in 2023, and that's what we project for 2024. And we've also seen more liquidity for assets. We've been constantly approached by potential buyers. We talk around the market, and we've seen a number of real estate investment funds that are going to open throughout the year. It's a natural buyer of our assets, as you know. And we believe we are going to be able to improve the sales cap. The average sales that we have in 2023, which was a record BRL 1.2 billion, were at about 1% cap rate. We think there is room for improvement, and this is going to have a relevant impact on gross margin.We may anticipate movements, fine, because the LOG 2 million plans plus expected deliverables for 2024 will mean 2.5 million square meters being delivered for the next 5 years. It'sgoing to take significant CapEx, and the sales scenario will fluctuate somewhat. So we may anticipate some actions if we understand there are better negotiations, but nothing very relevant. We are going to maintain our recycling strategy, and what we want to have is a perfect match between the forecast CapEx and the sales volume, but things may vary somewhat depending on the scenario and how things evolve.

[Operator]

The next question comes from Andre Mazini, Citi.

[André Mazini, analyst]

My question concerns the [ pilot ] plan of energy, 35% savings, with a lot for the participating projects. How have you achieved this savings? Do you think it's scalable to the rest of the portfolio? Rental is something small in the total cost of tenants. Of course, local logistics are more complex. Ground logistics and energy tend to cost more to them than the lease. Just to understand whether this reduction in cost of energy would give you more space to increase your rentals, because then you can just have a better adjustment in all the cost lines. So reduction of energy costs would maybe mean an increase in rentals.

[André de Ávila Vitória, executive]

This is Andre speaking. Thank you for the question. We've been studying the energy efficiency in our projects for the past 1.5 year, I would say. Some of the projects we've tried to identify what the best alternatives would be, and our team has brought this energy efficiency into the project in details to all our projects. The efficiency that we've been focusing on operating in the free energy market can be replicated into existing and future projects. It does bring a significant benefit to all our leases and tenants, there is a reduction of the total amount, and it means additional revenues for us, because we are responsible for managing that for all our projects.

[Sérgio De Souza, executive]

This is going to generate one additional line, maybe some marginal result at first, but that's going to increase progressively, thanks to the initiatives that we are bringing as additional services. Now building upon what Andre has said, the possibility of adjusting tickets based on that. We have the LOG ADM team, which is responsible not only for managing power energy for our different projects. It's a new line of revenues, and we get paid for that. And also, safeguarding and just managing costs and maintenance, and it means 20% lower cost than the average in the industry, thanks to our good management. I think there are 2 benefits there. First, positive pricing and adjustment pricing in the long term. Secondly, retention rates, high retention rates. Our tenants are very satisfied. They have a digital journey, which is in full operation. We are benefiting from that, so there is improved retention. It was 94% retention rate of our tenants this quarter, and also improvement in our NPS. This is something that is noted in our average ticket, as we have a natural churn, renegotiate contracts, and especially those that expired.

[Operator]

The next question comes from Jorel Guilloty, Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

The first question concerns the EBITDA margin. There was a drop quarter-over-quarter, and if we consider your track record or history, it's low compared to what we used to have in previous years. I would like to understand whether we should think about cost differently. Is it just a one-timer? And also, the policy on dividend sharing, you've just announced dividends to be paid amounting to BRL 70 million. And are you thinking about consolidated net profit or consolidated profit just from rentals? Or can you tell us a little more about the strategy? And how you've got to that payout of dividends?

[André de Ávila Vitória, executive]

Andre speaking. Let me start by talking about margins. The best way to analyze the margin evolution would be to have a longer cycle, not only a single quarter, which is subject to seasonality, more deliveries, or some one-off events that may concentrate the margin more or less. The margin of the quarter, I would rather focus on the year margin, which was close to 75%. And also, the future growth cycles mean that our margin should be close to 70%, which is good. Also, if we compare against our peers and the whole industry at large, the margin is close to that 70%, which is something that we control quite well in terms of management.Now, speaking on our dividend policy, we've made it very clear that now we are going to have the perspective of LOG being considered a consistent -- company that consistently pays out dividend. Based on our solid, robust financial management and structure, there is room to apply this policy as we've been doing so. During this growth cycle, from '24 to '28, we are going to announce the payout of similar level of dividends. Dividends are correlated with net profit, so it's based on the profits reported by the company. As we expect [ very ] robust earnings, we are probably going to be identified as a consistent dividend payout company.

[Operator]

The next question comes from Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

I have 2 quick questions. First, can you please tell us about expected vacancy rate for 2024? You are going to have lots of deliveries, your results are very good. So can you please anticipate what would be the vacancy rate of those 500 million that you were expected to deliver? 2 months already in the year.Second question about CapEx. In the last call, you said that in '24, because of the growth plan, we could expect a CapEx of about BRL 200 million per quarter. Can we maintain that kind of understanding? Of course, depending on these investments to maintain that flats leverage, just understanding then vacancy rate and CapEx for 2024?

[Sérgio De Souza, executive]

Sergio speaking here. Let me start with CapEx. Our pipeline of projects anticipates BRL 200 million of CapEx per quarter, something very linear. We don't expect differences among quarters. We are doing very comfortable with our net debt. It is below BRL 500 million, a very comfortable number to us. Understanding there is still some room for adjustment in the number, but throughout the year of 2024, we want to match CapEx with the disinvestments in a very similar volume. We want to maintain the net debt very close to what we currently have, adjusted net debt, and as we use the CapEx, we can have disinvestments throughout the year to maintain a stable balance. Now, concerning vacancy rate, it's going to be a record year of deliveries, and we cannot deliver with 100% leased all the 500 million square meters. So I expect to have some higher vacancy rate. We have very good prelease rates, average ticket, very attractive, lots of things being delivered in the second, third quarter, fully leased. I think we're going to maintain vacancy rates closer to what we have, but always below 5%, which is our magic number that really impacts our pricing. Stabilized vacancy rate is expected to be below 2%, which has historically been our number, something of quality. Assets delivered over more than 1 year with 90% leased, so this is a constant indicator for us, and we've reached 0.65% vacancy rate this last quarter, which is amazing. So as you can see, we might have a minor increase in vacancy rate because of deliveries throughout the year, and stability in our stabilized vacancy rate, so to speak, close or below 2%.

[Operator]

The next question comes from Antonio Castrucci from Santander.

[Antonio Castrucci, analyst]

Speaking on behalf of Santander, in addition to Salvador and Brasilia, which are the regions where you expect to have a higher increase of average lease amounts? And how is the company positioning the regions? And what's the cap rate you are discussing in the different sales predicted for the year?

[Sérgio De Souza, executive]

This is Sergio speaking. If you get the pipelines from 2023, 263 square meter, 13% in the Northeast where there is a shortage. E-commerce needs a lot of expansion there. It amounted to 38% of the demand of the fourth quarter of our projects because of this shortage of quality products in the Northeast. These are regions where we have very positive average tickets, such as Salvador and Brasilia as well. Considering what we are going to deliver throughout the years, there are things being done in Sao Paulo, very nice, robust project that is going to be delivered throughout the year, more concentrated in the end of the year. There are things in the Southeast being delivered in Belo Horizonte, and lots of things in the Northeast of Brasilia as well. The average ticket will be very close, BRL 22 to BRL 24 should be really the average for the year.When we developed the model of our plan LOG 2 million, of all the projects that are going to be delivered up to 2028 are areas where we are already located. We know the region, the potential clients, the size, the best location. Some clients come already bringing their needs of expansion, all the supply chain, construction, operations, they are all setting motion. So then it's much easier to deliver what makes sense. And this is why we have delivery of assets already preleased. All the cities where we operate, we already have permits, some of them we have done 2 or 4 projects such as Fortaleza and others. This is what you can expect for the continuation of the year.

[Antonio Castrucci, analyst]

Cap rate?

[Sérgio De Souza, executive]

Yes, about the cap rates, right. We still have interest rates which are kind of high even though there is a trend of decrease. So we are talking at levels very close to what we used to up to in 2023, but we have higher liquidity. This is what we observe and this is something that's going to impact cap rates in the mid-term. If we have good performance of sales, we can talk about cap rates of 7% to 7.5% which is a great number. Which increases our gross margin.

[Operator]

The next question comes from Andre Dibe, Itau BBA.

[André Dibe, analyst]

I have 2 questions. One is a follow-up concerning your previous answer about the difference of BRL 24 per square meter in the fourth quarter which should be the expected number would be BRL 22 for the year of 2024. What determines the price, location, project? And how do you see the difference of prices among regions? Finally, repurchase. In 2023, you've executed almost all. Do you also expect more? And what are you going to do with the stocks which are still in treasury?

[Sérgio De Souza, executive]

Thank you for the questions. About the average ticket, what we've seen are all projects have the same specifications, same quality level so to speak. There are no differences in assets in terms of the region where we are. So all regions will have the same spec and this is also a demand of our clients. Construction costs are also very linear, but there are some markets which are very strong. For example, Brasilia or Salvador, it's a large area with small assets where people can operate so we can have average tickets above BRL 22, but there are other regions where we have a major shortage and then the negotiation will evolve around BRL 22. So it all depends on the product mix. And this is something that should be around BRL 22 to BRL 24.Now let's talk about the buyout of our stocks. While there are significant discounts of our stock options, we are always going to discuss buy back for investments. As we've taken most of those shares in circulation or outstanding share, I suppose the treasury stocks are going to be bought back. This is a constant discussion. And we want to really think about bringing value to shareholders by following the program, but at the same time, there is a limitation concerning liquidity. The definition will come from upcoming months with discussions with our Board. Whenever there are discounts in our stocks, we are always going to consider that possibility.

[Operator]

The next question comes from Andre Canuto of Estrela.

[Andre Baia, analyst]

I would like to congratulate you on your numbers and results. It's amazing, a conservative company in terms of financial operations, but very innovative in execution. Vacancy rate, low delinquency rate, so really great. Thanks to your excellent execution, always focusing on financial health. Do you expect to have new businesses? Or are you just going to keep on operating with logistic warehouse rental? It's a large market, you do quite well, but I'm thinking about let's say 5, 10 years perspective. Considering your great execution capacity in the medium long-term plan, do you think about going into different business lines? Considering that you are so good in execution, great results, almost 6% increase in your stock prices today.

[Sérgio De Souza, executive]

Thank you, Sergio speaking here. You see Brazil has this shortage of logistics operation, 170 square meters, what we currently have, and about [ BRL 30 million ] of class A top quality warehouse available, but only the south of Brazil, south and southeast. So we know that there is still a need of investments to be made. And this is what we have in mind with our 2.5 square meter by 2028, 2.5 million square meters, I mean. I think we can do it quite well. We have our own clients to do it. I don't think we have to go into new investment avenues because our capital is all being reinvested and well invested. So the trend is to keep on doing what we've been doing and expanding our footprint in the same market of logistics warehouse.

[Operator]

The Q&A session is finished now. Let me hand it over to Mr. Fischer for his closing remarks.

[Sérgio De Souza, executive]

Thank you all very much for your participation. I would like to wrap up by saying that in 2024 --with the plan for 2024 will be shared despite all the difficulties that we have experienced, but we are focused on the new cycle of growth LOG 2 million by 2028. We are very optimistic for the year of 2024. It's going to be a great year, very positive yield close of 13% as we delivered last year. We also have a very good scenario for recycling of assets. This is why we're going to maintain the same pipeline. We are going to observe an increase in spread for future negotiations, very benign situation so to speak, and there has been an increase in [ real-world ] cost and reduction of cap delivering more and better. And we are focused on growth. We are going to change the level of the company with delivery of 500 million square per year and the value will be captured as we deliver more and more assets. Thank you all very much. Have a great day.

[Operator]

Well, the conference call of earnings release of LOG is completed now. If you have questions, please submit your questions to the Investor Relations team through [e-mail]. We thank you very much for your participation. Have a great day. Thank you.