Sao Carlos Empreendimentos e Participacoes SA

BOVESPA:SCAR3

Earnings Call Transcript 2020-Q2

[Fábio Itikawa, executive]

Good morning, everyone, and welcome to São Carlos presentation about the second quarter of 2020 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 this presentation related to prospects, forecasts and operation 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 circumstance that may or may not occur. Change 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'll turn the presentation to Felipe.

[Felipe Góes, executive]

Hello, everyone. It is a pleasure to talk about São Carlos second quarter of 2020 results. I'll start with the main highlights of the quarter, which are described on Page 2 of the presentation.

Despite the current COVID-19 crisis, we managed to sign a substantial amount of new lease contracts and actually decreased our vacancy rates during the quarter. That is a superior performance compared to the market, and we managed to decrease vacancy from 16.3% by the end of the first quarter to 14.8% by the end of the second quarter.

I'd like to highlight a contract that we signed in the Edifício Jardim Tietê building in Sao Paulo of 13,400 square meters of area. We are very proud of that performance. We will continue to work to manage our vacancy throughout the economic and health crisis that Brazil is in.

I also would like to highlight that our portfolio value has reached BRL 4.7 billion by the end of the quarter, which represents a growth of 14% in 12 months. Our convenience centers business continued to grow, and our NAV in that business has reached BRL 536 million.

Let me talk about performance now. We had a very strong quarter, once again, despite the current crisis. Our FFO grew by 36% in 12 months and has reached BRL 23.4 million in the second quarter. Our margin -- our FFO margin was 38%, very strong margin in the quarter. That is due to the growth in revenue that we had of 6% as well as a decrease in our debt cost due to the renegotiation and prepayment of debt that we had in the past in the company.

The gross revenue in our convenience centers grew by 9%, and the NOI in that business has reached 86%, which shows that the business has been gaining scale and increasing in efficiency over time.

The third message is regarding our capital structure. We managed to increase the liquidity of the company through the crisis. And we have reached a cash position of BRL 467 million by the end of the quarter. Our net debt was BRL 1.1 billion, which is equivalent to 23% of our portfolio value. So it's a very healthy leverage position. We also managed to extend our amortization schedule. And our current average term of our debt is 9.4 years, which is very healthy for the business that we are in. Fábio will later give you more details about the results. But first, I would like to move to Page 3 of the presentation and describe to you some of the key actions that we took in response to the COVID-19 pandemic crisis.

Our first priority was to make sure that our employees had all the support they had, both in terms of health and also emotional support. And we took important measures in February when we established our crisis committee. First, we are always taking the pulse of our employees. We take systematic surveys to understand exactly how they're feeling, what they need, why we have to change the way that we work, and that has been very important for us.

Second, we implemented a change in the layout of our office, making sure that people have enough space to work as well as acrylic partitions between tables. And we have tested all the employees that have come back to the office over time. We have done 3 sets of tests over time, and that has proved to be very important for making sure that people can go back to the office on a safely manner. We have kept all the high-risk group as well as the people who live with other people in the high-risk group in terms of current COVID-19 crisis in home office. So these people are not coming back to the office. And currently, we have 80% of the people that used to be in the office back to the office. So that's a very good news. I can tell that it's working very well. And we see that the team productivity is much higher now that we are back to the office since mid-July.

In terms of our buildings, we managed to keep all the office buildings opened throughout the crisis, and that has been very important for our clients. We kept 76% of the GLA of our convenience centers opened. Some of the operations needed to close by law. And that's why 24% of the stores were closed during the quarantine. But over the last weeks, the stores are reopening again. And I can say that now, by mid-August, only about 9% of the GLAs is still closed.

Our convenience centers turn to be a very important reference for the people who live around the centers for their day-to-day consumptions in the grocery stores, pharmacies, pet shops and convenience stores. We implemented new protocols in all the buildings and convenience centers to make sure that people have the safety they need to work in those environments. And we follow the recommendations of all the Brazilian health authorities and make sure that we have the best practices implemented in terms of health and safety protocols.

We also got closer to our customers. We did several webinars with clients to assist them on their return to the offices involving architects as well as health experts. We supported our retail tenants in their integration to marketplaces and delivery service companies make sure that they were selling online when they could not open their stores. That was very important to make sure that they kept financial healthy throughout the crisis. The result of that is that we gave limited discounts in rents to a very few of our tenants that really needed that to survive the crisis, and that represented only 4% of the total lease revenues in the quarter.

With that, I would like to pass the word to Fábio Itikawa, which 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 to comment the growth of portfolio value and NAV in the last 12 months. The portfolio value increased 14% in the last 12 months, reaching BRL 4.7 billion. This growth reflects the portfolio appreciation based on CBRE appraisal and the acquisition in the last 12 months, which are João Brícola building and Morumbi Office Tower, both located in Sao Paulo. The NAV increased 14% in the last 12 months, reaching BRL 3.5 billion or BRL 63.20 per share.

It is important to highlight the NAV of the convenience center business, which increased 32% and totaling BRL 536 million. This growth reflects the upside potential of this business with increasing the portfolio value of 15% in the last 12 months. And also the reduction of the net debt in this business also contributed to the growth of the NAV.

In this slide, we present the profitability of the company managed by the total account return in the last 10 years. The indicator measures the NAV growth adjusted by dividends distributed over the period. In the last 10 years, we delivered a return above 13% per year.

Move on to the next slide, we present the main financial indicators. Even with the pandemic crisis, the company had solid and consistent results in the quarter with high profitability. In the quarter, EBITDA margin achieved 75%, one of the highest margin in the sector. And the FFO margin improved from 29% in the second quarter '19 to 38% in the third quarter 2020.

We also reported growth in the main financial indicators. Gross leasable revenue increased 6% in the quarter, reaching BRL 67 million, and recurring EBITDA grew 12% in the semester and the FFO increased 36% in the quarter totaling BRL 23 million. Finally, recurring net income totaled BRL 12 million in the quarter, an increase of 70% when we compare the recurring net income of the second quarter 2019.

To conclude on Slide 5. We have the capital structure of the company with net debt closing the quarter at BRL 1.1 billion, which correspond to 5.4x recurring EBITDA or 23% of the portfolio value. It is important to mention the cash position of the company that closed the quarter at BRL 466 million.

In the chart below, we demonstrate the amortization schedule of our debt. It is important to highlight that the cash balance position 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.