Sao Carlos Empreendimentos e Participacoes SA

BOVESPA:SCAR3

Earnings Call Transcript 2022-Q1

[Fábio Itikawa, executive]

Good morning, everyone, and welcome to São Carlos' presentation for the first quarter of 2022 results. I am Fábio Itikawa, 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 these presentations related to prospects, forecasts and operating and 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's 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'll turn the presentation to Felipe.

[Felipe Góes, executive]

Good morning, everyone. It is my pleasure to talk about São Carlos' first quarter of 2022 results. I'll start with a summary of the key highlights of the quarter that are detailed on our presentation.

Starting with Page 2 of the presentation, which we summarize the key news regarding each of our business platforms. In office, we were able to finalize a very interesting acquisition of a building in Leblon, that is building called Leblon Green in Rio de Janeiro. We acquired this building for BRL 54 million, which is equivalent to BRL 17,500 per square meter at a cap rate of 12.1%. A very accretive acquisition. We've been negotiating this building for almost 3 years. And the key aspect that I would like to highlight is that this building is located in a prime area of Rio, where the demand for offices is very strong and just grew through the whole pandemic period.

Best Center, we faced substantial growth during the last 12 months. Our revenue grew by 108%, and we reached an EBITDA margin of 75%. So this business unit, which is dedicated to the convenience center business is expanding and growing very fast. As we explained in the past quarters, we understood that 2021 was a very attractive year to make acquisitions in both offices and convenience centers. And because of that strategy, we did grow a lot in our Best Center business.

In our new business unit called SC Living, which is dedicated to the multifamily segment. We continued the retrofit of the building we acquired last year, GO850 located in Vila Olimpia neighborhood in São Paulo. And we reached an occupancy of 82% of the apartments, which are available for leasing. Approximately today, 40% of the units are being renovated. So they are not available for leasing at this point. So occupancy has been increasing steadily, and we are optimistic with the future of this building.

As we explained in the past, we are using this experience as a learning opportunity for São Carlos to know more about multifamily and then expand this business over time.

We also, in the new ventures, the new area that the company has created last year, we also have spent time looking into potential new verticals, new investments for the company. And we have decided over the quarter to invest in a VC fund dedicated to proptech startups called Terracotta. And Terracotta will be a tool for us to get closer to proptechs and understand the key trends and also bring learnings to São Carlos. We will continue to look for other verticals and other investment opportunities in our new ventures area, and we are very excited with the future of this new vertical.

Now I'd like to move to Page 3 to give you more details about Leblon Green, which is a building we acquired in the first quarter of this year. As I mentioned, this is a great bases. The price of BRL 17,500 is below the cost of construction plus land. So it is a very attractive bases. And because of that, we estimate the cap rate of this acquisition of -- at 12.1%. We will implement a complete retrofit that should start by the third quarter of 2022, and we will bring this building to the highest environmental standards available in the Brazilian market because we do think that this can become a key reference and a key office building in the neighborhood.

One point I would like to highlight is that this avenue, Afrânio de Melo Franco, is where the most important shopping center in Leblon is located, and our building is located just across that shopping center. So it is definitely a great and privileged location that we were able to invest in.

Moving on to Page 4. I'd like to highlight that we have started the retrofit of the 2 buildings we acquired last year in the Paulista Avenue region, both Alameda Santos 1477 (sic) [ 2477 ] and Paulista Office Park are undergoing renovation and retrofit. We want to position these buildings as top quality buildings in terms of building infrastructure and building management processes. And we estimate that we will complete renovation, the full renovation of the Alameda Santos building by the fourth quarter of this year and the Paulista Office Park building renovation by the first quarter of 2023.

Moving on to Page 5. I highlight that this quarter was very productive at Best Center because we did open 5 new centers in our portfolio. Piracicaba – Rio das Pedras, Piracicaba – Santa Teresinha, São Paulo Capital – Miguel Yunes, São José do Rio Preto – José Munia, and Mogi das Cruzes – Centro, these are 5 different centers that will add more than 7,000 square meters of quality retail real estate to our bases. And Fábio will give you more details about our performance in Best Center because of these new centers and also the acquisitions we've made over the last year.

Now moving on to Page 6. The 3 key highlights of the quarter were: in terms of portfolio, a substantial growth in the last 12 months. We grew by 13%, our portfolio value, reaching BRL 5.7 billion, and that growth is due to the acquisitions that we've done over these last 12 months. I call your attention to the message that we've been speaking about in each of our quarterly calls regarding the -- how we saw the opportunity of acquisitions in the Brazilian real estate market last year because we saw a combination of low interest rates and very few buyers out there in the market, both in the office space as well as in the retail space where we operate. And therefore, we were able to do very accretive acquisitions, and that is now resulting into a substantial growth in our portfolio value.

Also, it's important to highlight that some of these properties are not generating revenues in this first quarter and will not generate revenues throughout the year. Therefore, the results in our income statement will only appear over 2023 and the years ahead. Therefore, we will see lower revenues, lower EBITDA and lower FFO over 2022 because of that. But we do think that this is the right call for the company because, as I said, last year was a perfect timing to accelerate and do substantial investments in real estate given where the market was.

In terms of profitability, I highlight the substantial growth of revenues in Best Center that grew by 107.9%, achieving BRL 18.5 million in the quarter, very profitable business. We are very excited with the future of Best Center. We will continue to grow in that segment. And we are now the leaders in this strip center business and the tendencies that we will continue to lead by far the -- our position in this segment.

In terms of capital structure, as I mentioned, we were able to get very interesting and attractive financing in the last year because of where the interest rates were. And therefore, our annual nominal cost of debt by the end of the quarter was just 86% of the Selic rate, which is the base rate of the Brazilian market.

Our net debt to portfolio value closed the quarter at 31.1%, which is a healthy and sustainable level for our business and for the profile of that, that we have. Fábio will also give you more details about this later on this presentation.

I'd like to now pass the word to Fábio, who will give you more details about our results, and I thank you very much for your attention. We are available for questions and any comments you might have at any time. Thank you very much. Goodbye.

[Fábio Itikawa, executive]

Thank you, Felipe. I will continue the presentation on Slide 7 to give you a brief overview of the financial performance of the company in the quarter.

The financial performance of the company reflects the growth of the company with acquisition of properties in the last 12 months. The company's business strategy is to acquire properties with upside potential with leverage. The recent properties acquired specifically in Office platform are currently in retrofit. Therefore, they are not generating revenues. Gross revenues from leases dropped 14% in the quarter, reflecting the props that initiated the retrofit in the last 12 months.

In addition, the revenues in the first quarter 2021 were impacted by the one-off early lease in termination fee in the amount of BRL 13 million. Excluding the one-off fee, the revenues grew 2% in the quarter.

I would like to highlight the growth in the portfolio market value of 14%, reaching BRL 5.7 billion. GLA increased 26% in 12 months, driven by the acquisition and development in the last 12 months.

Move on to the next slide. I would like to highlight the financial performance of Best Center, our convenience center platform. Gross revenues grew 180% in 12 months, reaching BRL 19 million, reflecting the accelerated M&A activity with acquisition of 88,000 square meter of GLA and the organic growth coming from tenant sales performance in our portfolio. EBITDA of Best Center grew 117%, reaching BRL 30 million. I would like to emphasize that we are growing fast, the Best Center platform with high profitability.

NOI and EBITDA margins reached 94.1% and 75.1%, respectively. Finally, Best Center portfolio market value increased 64% in the last 12 months, reaching BRL 1.1 billion.

On Slide 9, I give you more details about the Best Center growth in the quarter. In terms of organic growth, same-store sales in the quarter grew 12% and total sales of our tenants increased 91% in our portfolio. As a consequence, same-store rent increased 18% in the last 12 months, and total revenues from lease grew 112%. In addition to the properties acquired in 2021, the Best Center opened 5 new convenience centers in the quarter, adding 80,000 square meters of GLA in our portfolio. The portfolio closed the quarter with 172,000 square meters of GLA, an increase of 105% in 12 months.

On Slide 7 (sic) [ Slide 10 ], the physical and financial vacancy rate reached approximately 22%. In the quarter, new lease agreements totaling 3,700 square meters of GLA, comprised of 3,300 square meters in Office and 400 square meter of GLA in Best Center.

Finally, on Slide 11, we demonstrate the company's solid capital structure. Our net debt to purchase value ratio reached 31% in the quarter. The important message is the nominal cost of debt at 10% below the current market interest rate.

To conclude, I would like to highlight the company's ability to raise financial -- to raise financing at an interest rate below base interest rate, the Selic rate. The company concluded to financing the total amount of BRL 108 million, with interest rate equivalent to 74% of the Selic rate.

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