Sao Carlos Empreendimentos e Participacoes SA

BOVESPA:SCAR3

Earnings Call Transcript 2020-Q3

[Fábio Itikawa, executive]

Good morning, everyone, and welcome to São Carlos presentation about the third quarter 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 these prospects, forecast and operating and financial targets of São Carlos are based on the beliefs and assumption 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. Changes in Brazil's macroeconomic policies or in the legislations 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 a pleasure to talk about São Carlos' third quarter of 2020 results.

Before I go into the presentation, I'd like to share with you some messages about the impact of the current crisis in the company. In the Office segment, the third quarter of 2020 was marked by the beginning of the return of our clients to their offices. We intensified the prevention and safety procedures in our buildings, implementing a unified protocol in accordance with sector global best practices. Through that, we assured that our buildings were fully functional, increased proximity to our clients and implemented innovations in buildings operations.

The adverse scenario caused by the COVID-19 pandemic brought some learnings that are being incorporated into our processes and operations. Our vacancy rates were similar to those of 1 year ago, and the discounts in the segment were immaterial in the quarter.

In the Convenience Center segment, we observed the reopening of all stores that were previously closed or partially operational during the period that major restrictions were imposed by governments. We also observed a substantial growth in our client same-store sales as our convenience centers became the reference for consumption close to home.

Now let's move to the presentation. A summary of the key messages are on Page 2. The first is around portfolio value. As we do every year, CBRE has made an evaluation of our portfolio, and we have reached a value of BRL 4.9 billion by the end of the quarter. That is a growth of 8.2% in 12 months. Our NAV per share has reached BRL 70, which is a growth of 10.6% in 12 months.

I would like to highlight the acquisition of one convenience center that is currently being constructed in São Paulo in a neighborhood called Vila Madalena, very well-located by the Metro exit of that neighborhood. We also inaugurated 3 convenience centers in the quarter.

The other important transaction was the sale of Jardim Tietê Building, which I will give you more details on next chart. But before we go into that, I'd like to turn your attention to the second point of that Page 2, which is our performance. We had a very strong quarter with high profitability with an EBITDA margin of 78.4% and FFO margin of 32.8%. Year-to-date, our FFO grew 19% and has reached BRL 65.1 million.

In terms of our capital structure, I would like to highlight that our net debt has gone down. We have reduced debt to BRL 983 million by the end of the quarter, which is equivalent to 19.9% of the portfolio value. Through the reprofiling of our debt and also the decrease in interest rates in Brazil, our cost of debt has gone down from 8.5% in nominal terms in the third quarter of '19 to 6.2% in the third quarter of '20.

Now let's move to the next page, and I would like to give you greater detail about the sale of the Jardim Tietê Building that we did this year. This is a typical transaction that we look for, that we work in the company, which is to buy buildings who have issues, buildings that need problems to be solved, improve the operations and the profitability and sell them at the right time. That was exactly what happened with Jardim Tietê Building.

Earlier this year, this building was almost empty. Through the superb job of our commercial team, we have managed to reach 80% occupancy of this building by the third quarter of this year and sell it at a cap rate of 7%, which generated a net gain of BRL 42.9 million. If we add that to the result that we got from the 2 adjacent plots of land that we sold last year, we get an IRR in real terms after inflation and net of taxes of 11.4% for this project. So we are very proud of this transaction. This is the way we create value to our shareholders, and I think it's a great example of the value-add work that São Carlos has been doing for the last 21 years.

I would like now to pass the word to Fábio, who will give you a greater detail about the company's results. Thank you.

[Fábio Itikawa, executive]

Thank you, Felipe. I will continue the presentation on Slide 4 to comment the appreciation of the portfolio value in the last 12 months. According to company's annual brackets, we evaluate our portfolio with CBRE, and the conclusion was a portfolio value at BRL 4.9 billion, an appreciation of 80.2% in the last 12 months.

Considering the same asset base, portfolio value increased 8.5%. The highlight was the appreciation of the portfolio value of the Convenience Center segment that increased 11% in the last 12 months. This segment has been resilient during the crisis, and it is gaining share in the company's portfolio.

In the quarter, we inaugurated 3 new centers with total GLA of approximately 5,000 square meter and acquiring 1 center under development. In terms of GLA, the segment represents 20% of the total GLA of the company.

On the next slide, we present the gross of the NAV in the last 12 months. NAV increased 11% in 12 months, reaching BRL 4 billion driven by the portfolio appreciation of 80% and the reduction of the net debt. The NAV per share also increased 11% in 12 months, reaching BRL 70 per share.

It is important to highlight the NAV of the Convenience Center business, which increased 24% and totaling BRL 596 million. This growth reflects the upside potential of this business with increasing the portfolio value of 11% in the last 12 months. The reduction of net debt in this business also contributed to the growth of the NAV.

Also 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 dividend distributed over the period. In the last 10 years, we delivered a return superior to 10% per year.

Move on to the next slide, we present the main financial indicators. Even with the crisis caused by the pandemic, the company had solid results in the quarter with high profitability. In the third quarter 2020, EBITDA margin reached 78%, and FFO margin achieved 33%. Year-to-date, EBITDA grew 7%, reaching BRL 145 million with margin of 78% and FFO grew 19%, reaching BRL 65 million, with a margin of 35%. Net income in the quarter totaled BRL 500 million driven by the gain from sale of assets.

To conclude, on Slide 7, we have the capital structure of the company. Net debt reduced 2% in the last 12 months is closing the quarter at approximately BRL 1 billion. Leverage also reduced in the quarter with net debt to recurring EBITDA reaching 4.7x from 5.4x in the previous quarter, and net debt corresponds to 19.9% of the portfolio value of the company, and cash position closed the quarter at BRL 568 million.

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