Multiplan Empreendimentos Imobiliarios SA

BOVESPA:MULT3

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen, welcome to -- welcome, everyone, to Multiplan's Fourth Quarter of '17 Earnings Conference Call.

Today with us we have Mr. José Isaac Peres, CEO; Mr. Armando d'Almeida Neto, CFO and IRO; Mr. Marcello Barnes, CIO; Mr. Hans Melchers, Investor Relations and Planning Director; and Mr. Franco Carrion, IR Manager.

We would like to inform you that the presentation that will be made will be available for download at ir.multiplan.com.br. [Operator Instructions].

Before proceeding, we would like to mention that forward-looking statements that might be made during this call relating to the business perspectives of the company, operating and financial projections and targets are beliefs and assumptions on the part of Multiplan's management as well as information currently available to the company.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Therefore, they refer to future events and therefore they depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future results of the company and lead to results that differ materially from those expressed in such forward-looking statements.

Now, we would like to turn the conference over to Mr. José Isaac Peres, CEO, and he will start the presentation. Mr. Peres, you may proceed.

[Jose Peres, executive]

Good morning. Good morning, everyone. Ladies and gentlemen, it's a great pleasure to be with you, again. I will try to read more slowly because we have simultaneous translation. And I'm not going to leave my text. I have a few changes here, but afterwards, we will talk about that. And I am just mentioning this because normally or very often I say things that are not in my prepared text and that I deem convenient, but I will have more discipline this time. And we will have simultaneous translation in English for the benefit of our international investors. So what I wanted to say was the following: 2017, as we had anticipated, would be a year of recovery taking into account the radical change in politics, much better structured for the rebound of the economy and fiscal equilibrium. Therefore -- or nevertheless in 2017 some dismal political facts happened and they were published in a very sensationalist and reckless fashion in my opinion. And therefore, they hindered the economic growth that already was showing some recovery. Just to show you how the Brazilian economy was affected, I can mention the impact of that on the retail sector, in which we include ourselves. We started 2017 with 2-digit growth or 12% in March and 11% in April.

And after the public prosecutor's office demonstration, the economy came to halt and we dropped to 1 digit and we only started, again, to feel an acceleration of the economy in the last quarter. And in spite of all this turbulence, the sales in the Multiplan shopping centers obtained a 7% growth and rental revenue growing by 8.4%. And the company obtained net income amounting to BRL 370 million, 18.4% higher than the previous year in spite of the major political crisis that took the country by storm as of May. And for this year, we expect a more robust economic result due to the fact that we find ourselves in a more adjusted economy with an inflation rate of about 3% and an unprecedented interest rate in the country that is, to say, 6.75%. We are always seeking new investments, new opportunities, as you know. And in 2017, we invested BRL 450 million in expansions and new projects. And another important fact that I would like to mention is that, for many years, we have already been developing technology, seeking a higher operating efficiency and also looking for digital models. And to increase our efficiency in 2017, we started negotiations with an IT company, which is very much focused on e-commerce. And in a sense, we established a partnership by acquiring a 20% stake in the company, and we could go up to 30%. And we are talking about [ Solab ], a company that has as its main activity the development of technological solutions applied to digital retail.

We are integrating the expertise of Multiplan's digital innovation team with the knowledge, tools and technologies developed by highly experienced professionals in e-commerce. And our objectives will always be to deliver more convenience and more services to our customers and tenants as well.

And ultimately, what we want us to bring to the homes of our consumers, all the retail array that we have in our shopping center always focusing on real trade commerce. And we believe that growth of retail going from real to virtual could accelerate sales in shopping centers themselves because technology and e-commerce will change the result that we obtain. And we know that we are giving very important steps and that will bring more comfort, more ease to our consumers. And we understand that the shopping centers will sell more because of this digital technology. And I would like to mention also that the model that we are building in Brazil -- or have been building in Brazil for a long time is a product that is totally different from the others that exists abroad, mainly the United States. These are projects that are focused on pleasure and give our consumers an appealing environment making them much more of a meeting point, a safe meeting point where they can carry out many activities. And we add more and more services. We recently, in June last year, we inaugurated a ribbon opening to a shopping with 32 clinics, a medical center and we are renewing our vision applying all our current knowledge of the constriction of ParkShopping Canoas supported by a tripod, nature, entertainment and shopping. And in Canoas, we inaugurated that with a spectacular success to the extent that we were worried because of the size of our parking facilities. And the first 30 days were fantastic, sales higher than our estimates. And now I would like to mention the fact that we started to build the shopping center in 2015, and we inaugurated in 2017 when we were braving the biggest economic crisis in the history of this country. And I want to mention that because we want to reiterate that we opened the shopping center with 90% of the stores already in operation.

And it was a record, when no shopping center inaugurated in this country in the last 3 years was capable of such feat. Thus motivated by the results obtained, we made a decision to start, still in 2017, as we had already announced, and I would like to reiterate that it was very good to start this in 2017. But I want to say that in December we already started to build these facilities. And we estimate this to be concluded in the next 24 months. And finally, my friends, I would like to mention that in this country, if we were to wait for the crisis to go away, we wouldn't have done practically anything, because in the last 50 years, at least, which I have been living, we have had over 10 different crises of different dimensions and proportions and nature. But what is really important is that Brazil continues steadfast as a nation and as a democracy growing. And thanks to the efforts made by the current administration today, we find ourselves in a country that was able to recover the confidence of both Brazilian and international investors. And we hope that Brazilians, in the next elections, will be able to choose a new Congress and a President that are sufficiently sensible and committed to the development and also to the reforms that were and remain to be made in order to guarantee a sustainable economic growth and a socially more equitable society. I would like to thank the Multiplan team for the very hard work done this year, which helped us to deliver this outstanding result. I would like to thank all the investors that have placed their trust in us. And now I would like to give the floor to Armando who will be talking about our figures.

[Armando Neto, executive]

Thank you, Peres. Good morning, everyone. With the announcement of the results of the fourth quarter, we realize that we are already in a new year and with the country resuming economic growth, and this brings us a lot of satisfaction because we see the results reached in 2017. And by the way, with a lot of satisfaction, we see that sales in our centers continue to grow in all quarters, even during the last few years when the country was braving a very strong crisis and the company remained profitable, delivered extremely high financial and operating margins and did not stop investing and improved even further properties, acquiring interests and developing new areas.

It looks like we have made it. While many said that this should not -- could not be done during the worst of the crisis, Multiplan delivered a new shopping center plus 5 expansions between 2015 and 2017. We exchanged approximately 1,100 stores corresponding to an area of 106,000 square meters, maintaining a high occupancy rate in our portfolio.

Recently, in January, 2018, we disclosed the preliminary data for the fourth quarter. And we heard that growth was lower than expected, and we certainly respect everybody's opinions. However, I would like to present our opinions here. What would be better to have a lower comparison base in the fourth quarter of 2016 to show a higher percentage growth in 2017, certainly, we do not consider this as right. As we said, we grew in all quarters in 2017, '16 and also '15, '14, '13 and this was what happened since we became a listed company in 2007. 43 quarters delivering growing shopping center sales, and we are very proud of that. And another point would be a fact that -- is that very often analyses focus only on same-store sales neglecting the daily tasks of property management and change of mix reflecting same area sales. In 2017, sales grew by 6.8%, same-store sales 5.2%, over 2.5x what we had in 2016, and same area sales growing 6.6%, twice what was obtained in 2016, and consumer inflation was 2.95%. And this growth is real, it is strong and it was obtained over a very high base already. Our shopping centers had 97.4% average occupancy rate, opening 57,600 square meters in the year, basically, concentrated in the fourth quarter. And the occupancy cost was stable at 12.9%, delinquency went down and the gross revenue of the company grew by 3.9% with rental revenue being the biggest part representing 77.1% of the overall gross revenue. Rental revenue grew by 8.3% with same-store rent 7.1%, however, you increase over the effect of the IGP-DI adjustment that was 6.5% in 2017. And this increase would be even higher when compared directly to the IGP-DI of 2017, that was negative by 0.4%.

In the fourth quarter, we had the biggest real growth because this -- it went back real growth. That didn't happen in 2016, that was 2% and expenses were BRL 40.2 million higher or 12.9%. And basically, the effect of the mark-to-market of phantom stock options and expenses with new projects as well. Here, concentrated in the opening of the ParkShopping Canoas, there are expenses related to the launch of new areas, as you know, that cannot be activated causing a distortion in the quarterly result. And the headquarter expenses and shopping center expenses were lower by 4.4% and 0.4%, respectively. In relation to the shopping center expenses, I would like to reminder you that we grew GLA by 7% and even in spite of that we were able to get this small reduction. And commenting about the result, the NOI was 8.4% higher with a margin increase to 87.6%, exceeding BRL 1 billion. EBITDA grew 0.9% due to one-off nonrecurring expenses, as I said a while ago. If, for analysis purposes, these expenses were to be excluded, EBITDA would grow 5.7%. FFO and net income grew very steeply, 15.3% and 18.4%, respectively. In 2017, FFO reached BRL 558.5 million and net income, as Mr. Peres said, BRL 369.4 million, both with a good performance in our margin. And the strong increase is due mainly to operating growth and a drop in interest rates and also the payment of interest on equity.

In 2017, we returned to our shareholder the highest amount ever paid out BRL 440 million, representing also the highest percentage over the net income which was 68.3%. In 2017, we invested BRL 449.6 million, allocated mainly to the development of new areas. Together with that, we had the distribution of results that I have just mentioned, and it is evident, our continued strategy to optimize capital allocation. And this has made possible due to the stable financial situation and strong cash generation that Multiplan has. Net debt corresponded at the end of 2017 to 2.34x EBITDA, very far from the covenant and representing only 11.3% of the fair value of our properties.

In the last 2 years, we accelerated our borrowings back to CDI, which allowed us to better take advantage of the drop in interest rates. And the average weighted cost of our gross debt is 8.24% a year, with an average maturity of 49 months. The amortization schedule is distributed over the years with no major concentrations, and they are, up to now, lower than the cash generation measured by the FFO of 2017, not considering our cash position that we have in our balance sheet.

We have an in-house habit in which Peres' speech, when he inaugurates a new shopping, starts with in spite of the crisis. Well, in Canoas, this was more than deserved, and we are very proud for having launched and delivered a new shopping center during the biggest crisis in the country. And what seemed almost impossible became reality as a result of our strategy, our effort and the dedication and capacity to invest. We inaugurated the most modern shopping center in the country, integrated nature to entertainment and shopping.

We opened with 90% of the area already in operation and the figure has already gone up. And at the end of January, it was already 93.4%. And before closing, a brief note about the performance of our shares going up 19.4% in 2017 with a high liquidity with the average daily trading volume of BRL 52.1 million, 32% higher than in 2016. And during these 10 years, as a listed company, Multiplan implemented its growth strategy with a clear focus on what is best for the company in the long run.

Now I think you for your attention and your trust. And I would like to open for questions now. Thank you much.

[Operator]

[Operator Instructions] Mr. Gustavo from BTG Pactual.

[Gustavo Cambauva, analyst]

I have 2 questions. The first one is about how you see the possibility of increasing what you charge for parking. In 2017, you didn't make any increases in this price and it was flat. So is there a possibility or intention on your part to increase the price for parking in some of your parking center -- some of your shopping centers? And about Mr. Peres' initial remarks, I would like to know your outlook for new greenfields today? I know you announced Jacarepaguá and on one hand, the economy is improving, but on the other hand, we see quite a lot of area being added to shopping centers. And now with the challenge of e-commerce, I would like to understand whether you are still bullish to continue building new greenfield shopping centers with the scenario?

[Unknown Executive]

I will answer your question. Parking is not the object of the company and parking is only charged in this country. Nobody ever did that before. If I do not explain the context, you will not understand the answer. Parking lots were franchised and we had a lot of problems with theft in the cars. And because of that, we came to the conclusion that we had to have a higher control and give more security. And because of the situation that we have in the country regarding public security, we had to create parking facilities and charge for that so that we could give our tenants and everybody a higher degree of safety. And I can say to you that part of what is charged for parking is shared in order to reduce the cost of operation of the shopping center. So I would like you to understand that parking is not an end, it's just a need. And it would be great if we could not charge anything and that Brazil were a country like some others that don't charge and they only have 2 security people, and we have about 200 people doing this kind of protection. So this is the first point. About increases. There were some very small cases, but let's not give a bigger step, because we are about to leave a crisis. We are leaving the crisis behind. And for this year, we expect a higher recovery and the figures are improving. And I think this year will be better. And we have Jacarepaguá as a greenfield shopping center for 40,000 meters of gross leasable area. And in Canoas, as you know, our focus [ wasn't ] on entertaining and nature and shopping, and this is a model to mitigate the fact that current society, mainly youngsters, are becoming more and more interactive, and they look for more and more interaction. So we have to think about shopping centers in a different way because shopping centers are the place where the person -- it was -- it used to be a place where people just went there to buy something specific, but now it is much more of a meeting point. People like to go there, and there are movie houses, and they go there to eat and to have fun. And this is the model that we're building in Brazil. Recently, we had a workshop with some international consultants, and I was very pleased to hear from them that had the Americans made shopping centers like the ones that we are doing in Brazil, they would not be facing a crisis today. I don't know whether I have answered your question, but we are going to do many things, expansions, we have not announced yet, but we will do this. I don't know whether I have answered your question or not.

[Operator]

Mr. Marcelo from JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions. Could you give us some additional color about Fulllab, CapEx and relevant investment for the next few years in order to have this integration with Multiplan? And will this generate an increase in sales? And do you have a target for that? And could you talk about the scenario? In view, I know it's too early to say, but have you perceived any changes in traffic -- in visitors' traffics in your shopping centers?

[Jose Peres, executive]

Marcelo, visitor flow has been increasing in the first months, exception made to February because we had Carnival in February and last year it was in March. But in spite of Carnival, visitor flow was positive. And Rio, as everybody knows, is under a federal intervention. And in a way, it was positive for Rio. In spite of the fact that he has not the highest criminality rate in the whole country, there are many other cities and states that have worse rates than Rio. Our problem in the Rio is that the publicity that is given to criminality not always corresponds to the real fact, but those who are not in Rio, those who are outside of Rio, they have the sensation that they will come to Rio and they will have to wear a bulletproof vest and a helmet and that is -- there is a war being waged, but this is not the reality. Even in the United States there are regions where cities are more or less like that. But, of course, with the economic crisis, in Rio, this became deeper and not paying policemen salaries is a big problem. I would like to tell you that, we have already been through many crises in the states with higher rates of violence. And I think that from now on we will be recovering this and overcoming violence and Rio will, once again, be seen as the beautiful city that it is, it's attracting tourists, et cetera. Today, traffic in Rio is better and subway comes to the Barra region much easily. And if it were not for this very unpleasant situation of safety in Rio and also due to the fact that the state is broke, it went down to drain because of the oil situation when the barrel reached $40, in a way all the revenue of the state was reduced. But this year, we believe that there will be a better level of fiscal equilibrium, and we hope the situation improves in Rio. And our figures are not bad for Rio. And it is important to mention that when we talk about Rio, you have, I don't know, how many square kilometers. But we are concentrated on the west zone of Rio. This is a fastest growing region in Rio. I mean, we have BarraShopping, we have VillageMall in Campo Grande. So maybe Armando could mention this, but we want to show you that Rio is not as bad as people think. Rio grew more than our average in Sao Paolo and in Belo Horizonte as an average. When we look at the individual growth, we see 10.3%, and [indiscernible] Campo Grande is 16.8%. So it's quite the opposite. Our performance in Rio was very good in spite of what has already been said. Last year, we started to talk with some people in e-commerce, and we have our digital innovation team in-house. And we have an independent company that works for a third party and a lucrative company, a profitable company. And so we decided to make this investment in this company, initially, a 20% stake and possibility going up to 30%. It was an investment of BRL 7 million, it was not a big one, but very important in terms of placing our team closer to e-commerce professionals and bringing more knowledge, more market knowledge and the way it operates. And my feeling about real commerce and virtual commerce is the following: Many companies started with e-commerce, and they decided to go to real commerce, and it has to do with distribution centers, which is one of the big problems that some of these companies face. And many of these companies, e-commerce companies, present results much based on the expectation of future results, and with a price profit ratio of 200 or 300. We understand that having real commerce so something very good, but human nature is not going to change. The need for contact, the need for human warmth and being together with other people, and we have the feeling that by having a cell phone, you have the feeling that you have lots of people around you. What I feel now is that people are suffering, in fact, and what we want to give is joy, is happiness. And I welcome the opportunity to tell you that, of course, we want to grow in real commerce as well. But with e-commerce, we want to bring to the homes consumers the whole array of products and services and maybe later on delivery, but this will represent a real increase of about 10% to 15% in our shopping centers. Of course, it's not going to be quantum leap. This is not the way things happen and it's easier to go from real to virtual than the other way around, okay?

[Operator]

Enrico from Itaú.

[Enrico Trotta, analyst]

Mr. Peres and Armando, I have 2 questions. You talked about the maturity of contracts. And looking at 2018, the expectation is that about 11% of the contracts, in terms of gross leasable area, would come to an end. So how much do they represent, not in gross leasable area but in terms of revenues? And could you talk about your expectation about renewing, when we talk about the rent per square meter? And the second question has to do with debt. You have about 35% concentrated in [indiscernible] lines and the cost of debt is higher than the CDI lines. So I believe you still have room to decrease your exposure from the TR or the reference related to the CDI. So I would like to understand a little bit of this side of opportunity for further reductions for the cost of debt?

[Armando Neto, executive]

This is Armando speaking. Thank you for participating in the call. I am sorry for the delay in my answer because I was looking for the page where you can find this information, the relevance of that. And in 2018, 52 of the -- 11.2% of the GLA coming to an end, 14.4% of our overall revenue. So there is no big distortion. And our expectations of contract renew is positive. We see shopping centers quite full of consumers and some stores and some tenants with expansion plans. And I think you saw that thousands of stores are planning to open and this is being announced by the tenant's club of [indiscernible]. And talking with major operators, we see that they want to improve the portfolio and increase space, together with an occupancy rate that, during all these challenging years, remained very high, as you saw in our presentation. And the renew of these operations will be by means of new business models and new segments such as we have been doing over the years. In relation to borrowing, financing, your view is correct. When you look at the average cost in base ATR is 9.2% something like that. And when we look at the Selic at 6.175%, it seems to exist a very good opportunity. But when you look at the curve of interest rates and pre-fixed for 5 years and 7 years, they will give you a duration more similar to the contract that we have in TR. And when you look at that, you can see that they are at 9.7%, 9.5% depending on the duration. So the path is not so clear if you take this into account. So if the company believes that the drop in interest rates will accelerate even further, and as you can see, when you look 2, 3 years ago, the drop in financing. We were able to cross a period of high interest rates with our financing in TR,, and so the average -- or the weighted gross average debt would be -- was lower than the CDI, and there we had a big gap between this and the CDI. And now with 12, 18 months duration, we were able to get a very strong reduction in this cost and taking advantage of the lower interest rates. We are always assessing opportunities. We are assessing many opportunities right now, but exchanging the TR for the CDI right now doesn't seem to be something that would be good in the extremely short run.

[Operator]

[Operator Instructions] Thank you very much. And there are no more questions. I would like to turn the floor to Mr. José Isaac Peres for his closing remarks. Mr. Peres, you may proceed.

[Jose Peres, executive]

Once again, I would like to thank you for patience in listening to us. And I would like to stress that the fact that we have to speak slowly, sometimes I think about things that I would like to say and then all of a sudden, because of simultaneous translation into English, outside what we say with the written script could make it difficult for simultaneous translation purposes. I felt a little bit constrained due to the fact that I had to follow a prepared text. But anyway, I thank you very much for your patience and your attention.

[Operator]

Thank you very much. Multiplan's conference call for the fourth quarter of 2017 results is closed. Thank you very much. And please disconnect your lines now. Thank you.