Sao Carlos Empreendimentos e Participacoes SA

BOVESPA:SCAR3

Earnings Call Transcript 2020-Q1

[Fábio Itikawa, executive]

Good morning, everyone, and welcome to São Carlos' presentation about the first quarter of 2020 results. I am Fábio Itikawa, the CFO and IR Officer, and with me today is Felipe Góes, the company's CEO.

Before proceeding, please bear in mind that eventual forward-looking statements made in this presentation related to prospects, forecasts and operating financial targets of São Carlos are based on the beliefs and assumptions of São Carlos' management and on information currently available. These statements involve risks and uncertainties, given that they refer to future events and therefore, depend on circumstances that may or may not occur. Changes in Brazil macroeconomic policies or in the legislation and other operating factors could affect the future performance of São Carlos and lead to results that differ materially from those expressed in these forward-looking statements.

Now I turn the presentation to Felipe.

[Felipe Góes, executive]

Hello, everyone. It is a pleasure to talk about São Carlos first quarter of 2020 results. I'll start with a summary of the key highlights of the first quarter. We'll then move to the impact of COVID-19 pandemic crisis so far in our business, and will then pass the word to Fábio Itikawa, our CFO, who will give you more details about our results in the quarter.

Let me start with the main highlights, which are described on Page 2 of the presentation. Three key messages. First, a substantial portfolio appreciation over the last 12 months; second, very strong performance in the quarter with high profitability; and third, we have delivered once again a solid capital structure, which is appropriate for the moment that we are in given the crisis.

Let me start with the portfolio value. Our portfolio value totaled BRL 4.7 billion by the end of the quarter, which is almost a 12% growth in the last 12 months. Our NAV per share has reached BRL 63.1, almost 12% growth over the first quarter of '19. The physical vacancy rate has reached 16% by the end of the quarter, which is substantially better than market averages, once again reinforcing the great quality of our portfolio and the capability of our commercial team.

Moving on to performance. We had a great quarter. We have FFO growing 62% and reaching almost BRL 25 million in the first quarter of '20 and a margin of almost 38%. Our gross revenues reached almost BRL 69 million, a growth of 13.6% year-over-year. Our recurring EBITDA in the quarter reached BRL 53 million with a margin of 81%. So a very strong performance. The business did very well in this first quarter and the impact of the crisis in the quarter was not significant.

Then moving to capital structure. We ended the quarter with a cash position of BRL 355 million. And very important to say that our net debt was equivalent to 23.8% of our portfolio value or 5.5x our recurring EBITDA. The average term of our loans was 9.7 years by the end of the quarter. So that is very comfortable and adequate to our business.

Let me then move into the actions that we took considering the current pandemic crisis. It is a very unique moment for everyone, for every business around the world. And what we did is, by early February when we see the crisis coming, we started taking measures to make sure that we were ready to face the challenges that we have ahead of us. And we structured those measures into 3 different pillars, which are described on Page 3 of the presentation. First, the preservation of health of our employees, suppliers and clients. Second, making sure that we have the right liquidity for this moment. And third, how we position our business for the future.

On the first pillar, we created a crisis committee right very early in the process of the crisis on February, which had the objective of overseeing all the measures that we need to take to ensure that our employees remain safe, that our supplies could work well in our buildings and convenience centers as well as on a very safe manner. And our clients were able to continue to use the assets, the real estate assets that we have so that they could perform their business, always respecting the health measures which were indicated by the public authorities in Brazil.

As a result, throughout April, 100% of our office properties were open and 72% of our GLA in our Convenience Center business was also open. Let me highlight that our Convenience Center business is very much focused on essential retail activities such as grocery stores, pharmacies and pet shops. So this type of business remain open all the time and selling very well. And actually, they became a reference point for all the people and all the communities living around our convenience centers. This is a very different performance for -- from all the malls in Brazil, which remained closed most of the month, if not the whole month of April, given the nature of their business. In our case, we continued to open, and we actually became, as I said, a reference point to all people leaving around these convenience centers. I'm very proud of the role that we are playing through the quarantine period in São Paulo and Rio over these last weeks. We also implemented new cleaning and secure procedures, and we are constantly reviewing them to make sure that we are up to speed with the best practices around the world in these matters.

The second pillar is preserving liquidity. So here, the key is to focus on accounts receivable and making sure that we cut costs and CapEx. In terms of accounts receivable, I can, at this point, share with you that the March results, we did very well in March rentals, which are paid in due in April. We collected 93% of those rentals. And out of the difference, the 7%, the greater majority of them is just postponement. So we will receive those rents. A minor part of that is still under discussion and a very, very small part of that were discounts that we made to very specific situations.

In terms of our costs and CapEx, we basically cut most of the CapEx, only the very needed ones we kept. But the focus here is on preserving cash. And we reduced our G&A substantially using our methodology of zero budget basis. And I'm very pleased to say that we were also able to reduce our condominium expenses, which have an impact on both our clients' expenses, our tenants' expenses as well as in our income statement on vacant areas. And in that direction, we have implemented several badges, but let me highlight a substantial reduction in energy consumption in our business -- in our buildings, by using an external consultant that was able to identify very interesting opportunities for us to reduce those costs.

Let me move on to business opportunities. And every crisis brings opportunities, and we think that this will also be the case. Therefore, we are getting ready for it, and the company is well prepared and well positioned to take advantage of the current crisis in the right moment. I don't think that's the moment right now in early May. But that might change over the next weeks and months. So what we did is, first, we raised additional cash. We don't need this cash for our ongoing operations, but we think it's important to have that cushion so that whenever an opportunity of acquisition comes into play, we have the right cash position to execute on that acquisition, on that opportunity. If the credit market is closed by then, we do have the cash available. So we raised BRL 200 million in additional cash with a 1-year term, which is available now in our balance sheet for acquisitions.

What we also did is we selected some people in our team to work on a project that we are calling 2025. The objective of that project is to understand the key opportunities and threats that come out of this crisis so that we can prepare ourselves to capture those opportunities and work around them, and I'm sure there will be several, not only in acquisitions but also in how we operate our buildings and convenience centers, and also how we minimize threats, how we make sure that the impact of this pandemic is the minimum that we can.

So having said that, I would like to pass the word to Fábio Itikawa, who will give you more details about our quarter results. Thank you.

[Fábio Itikawa, executive]

Thank you, Felipe. I will continue the presentation on Slide 4 with the results of the active management strategy of the company.

The NAV increased 11% in the last 12 months, reaching BRL 3.5 billion or BRL 63.10 per share. The NAV growth is driven by the portfolio appreciation in the last 12 months in the properties acquired, mainly Edifício, João Brícola and Morumbi Office Tower. It is important to highlight the NAV of the Convenience Center businesses, which increased 41% and totaling BRL 534 million. This growth reflects the upside potential of this business with the portfolio increasing 15% in this period.

The reduction of the net debt in this business also contributed to the growth of the NAV. In this slide, we present the performance of the total account return in the last 10 years. The indicator measures the NAV growth adjusted by the dividend distributed over the period. In the last 10 years, we delivered a return of 13% per year.

Move on to the next slide. We present the main financial indicators in the quarter. It is important to mention that the first quarter 2020 results were not impacted by the current crisis. Overall, we delivered superior performance in the quarter in all financial indicators. Gross lease revenue increased 14% in the quarter, reaching BRL 69 million. This growth reflects not only the revenues generated from the profits acquired in the last 12 months, but also the leasing price appreciation in the period.

Considering the same asset base, revenues from lease increased 7.6% over the same period of previous years, therefore, above the inflation in the period. Recurring EBITDA grew 20% in the quarter, amounting BRL 53 million. The highlight is the FFO growth of 62% in the quarter, totaling BRL 25 million. In the quarter, we not only delivered growth in our financial indicators, but also improved the profitability of our operation. EBITDA margin achieved 81% in the quarter, one of the highest margin in the sector. FFO margin improved from 27% in the first quarter '19 to 38% in the quarter. The improving margin reflects the revenue growth in the period -- in the results from the liability management performance by the company in the last 12 months. Lastly, recurring net income totaled BRL 13 million in the quarter, an increase of 168% when you compare it to the net income of the first quarter 2019.

To conclude, on Slide 5, we have the capital structure of the company with net debt closed in the quarter at BRL 1.1 billion, which correspond to 5.5x recurring EBITDA or 24% of the portfolio value. Cash position closed the quarter at BRL 355 million. And in April, we reinforced our cash position and raised BRL 100 million in new financing. The strategy behind increasing the liquidity position is to prepare the company for future business opportunities.

In the chart below, we demonstrate the amortization schedule of our financing. It is important to highlight that the cash balance is sufficient to face the debt amortization in the following years.

I thank you all for listening. We are always available to clarify any questions you may have. Have a great day.