Sao Carlos Empreendimentos e Participacoes SA

BOVESPA:SCAR3

Earnings Call Analysis

São Carlos Reports Robust Q3 2023

In Q3 2023, São Carlos's portfolio was valued at BRL 4.9 billion, translating to an NAV of BRL 63.9 per share. The company made sales worth BRL 528.4 million, in line with NAV. A significant deal involving 4 office assets was announced for BRL 865 million, promising an internal rate of return of 27.3%. Net income hit BRL 49.6 million with a substantial EBITDA margin of almost 70%. Net debt decreased by 27% from last year, resulting in a healthy net debt to portfolio value ratio of 26.6%. The company's future priorities include asset recycling in the office segment, expanding the Convenience Center business, and focusing on multifamily residential growth with occupancy improvement of the GO850 building in São Paulo.

São Carlos Announces Robust Q3 2023 Results with Significant Asset Sales and a Strong Capital Structure

São Carlos, in its third quarter of 2023, has shown a solid performance marked by strategic portfolio management, selling assets in line with Net Asset Value (NAV), amounting to BRL 528.4 million in sales for the year. With a portfolio appraised at BRL 4.9 billion and an NAV per share of BRL 63.9, they've continued their strong momentum with a new sales agreement poised to potentially yield a real IRR of 27.3% post-tax for shareholders.

Profitability in Focus: EBITDA Margin Hits 70% as Vacancy Rates Drop

São Carlos has reported a net income of BRL 49.6 million for the year and mentioned an impressive EBITDA margin of nearly 70%, reflecting operational efficiency. Key to this success is the reduction of vacancy rates in the Best Center platform, leading to stronger profitability metrics.

Deleveraging Achieved: Net Debt Reduced by 27% Year-Over-Year

In terms of capital structure, the company has managed to reduce net debt by 27% compared to the previous year. This indicates a healthier balance sheet with a net debt to portfolio value ratio now at 26.6%, signaling a considerable improvement from the 5.7 percentage points decrease year-over-year.

Recycling Assets and Eyeing Growth in Convenience Centers

São Carlos successfully executed sales of noncore assets, particularly street stores leased to Pernambucanas, capitalizing on compressed cap rates for profitability. The company plans to focus on growing their Best Center platform, a leader in the Convenience Center segment in Brazil, which presents numerous opportunities for expansion.

SC Living and Office Spaces: A Dual Strategy for Urban Real Estate

In their multifamily portfolio, SC Living, São Carlos will focus on increasing occupancy rates in their São Paulo building and move forward with their office-to-residential conversion project in Rio de Janeiro. For the office segment, they aim to battle vacancy through client retention and improving services with FlexOffice offerings playing a crucial part.

Earnings Call Transcript 2023-Q3

[Felipe Góes, executive]

Good morning, everyone. It is my pleasure to talk about São Carlos's third quarter of 2023 results. I'll start with the summary of the quarter, which is detailed on Page 2 of the presentation.

First, portfolio management. By the end of the quarter, our portfolio value was appraised at BRL 4.9 billion, which corresponds to an NAV per share of BRL 63.9. Throughout the year, we have executed sales in the total amount of BRL 528.4 million. Those sales were executed in line with NAV. I'll give you more details about those transactions later on in the presentation.

We have also announced a purchase and sale agreement execution in the amount of BRL 865 million, which comprises 4 assets in our office platform. I'll give you also more details about this transaction later in the presentation.

Second, profitability. Our net income in the year has reached BRL 49.6 million. Our EBITDA margin in the quarter has reached almost 70%, which shows the -- our operating efficiency. The other highlight in our profitability bucket has been the reduction in vacancy in our best centered platform. Gustavo will give you more details about this later on in the presentation.

Capital structure. We have reduced our net debt in 27% over the same period of last year. Our net debt to portfolio value ratio has also reduced 5.7 percentage points when compared to the same period of last year. And that ratio has reached 26.6%, a very healthy position and capital structure of the company.

Now I'd like to move on to give you more details about the transaction -- the sale transactions that we have closed throughout the year, which are detailed on Page 3 of the presentation. In the office platform, we have sold 4 properties totaling BRL 402.5 million. As you can see on the right side of the chart, these properties were sold in line with NAV, which also represented a substantial profit and value creation to our shareholders. In the Best Center platform, we have focused our sales on the noncore assets of this retail platform that we own within São Carlos. We have sold mostly our street stores leased to Pernambucanas, again, in line with NAV and with compressed cap rates, so very healthy and profitable sales.

Now I'd like to move to the next page of the presentation and talk about the transaction that we have announced in September of this year. This transaction is subject to precedent conditions, which are usual in these kind of deals. The total amount of this transaction is BRL 865 million. It comprises 4 office buildings and will generate, if executed, a real IRR, internal rate of return after taxes of 27.3% to our shareholders. The average cap rate of this transaction for us is going to be 7.4%.

Now I'd like to move to the key priorities that we have in mind in our 3 segments moving forward. In the office segment, the key priority will continue to be fighting vacancy, and that's going to be done through client retention and improving our services. The FlexOffice offering is a key part of that strategy as we use FlexOffice to attract new clients and retain current ones. We will selectively continue to recycle assets, sell major assets, but always bearing in mind the NAV, the price and the value created to our shareholders through those sales.

The Best Center platform is our business dedicated to the Convenience Center business. We are the leaders in that segment in Brazil with almost 50 centers in operation. And in this business, we will focus a lot on growth. We see a lot of space to grow the business throughout the country. We know how to develop these centers. We have the expertise in-house, and we will create a lot of value to our shareholders by growing this segment. We will, of course, continue to divest the noncore part of this business, mainly our street stores leased to Pernambucanas.

The SC Living, which is our platform to detail to the -- dedicated to the multifamily portfolio, it's going to be focused on 2 key priorities: First, the growth in occupancy of our building in Vila Olímpia in Sao Paulo, the GO850 building, which has been maturing and improving results as Gustavo will talk more later on in the presentation. And we will continue to develop the project of office to residential conversion in Rio de Janeiro, where we see a great opportunity to create value in our portfolio through those buildings.

With that, I would like to pass the word to Gustavo that will give you greater detail about our results. Thank you.

[Gustavo Mascarenhas, executive]

Good morning, everyone. It's a pleasure to present our results.

Compared to the third quarter of the last year, the results were impacted by the sales of assets over the past two halfs announced. Excluding these assets from the base, revenue remained in line and recurring EBITDA increased by 4%. Net profit reached BRL 49 million for the year, and the company NAV reached EUR 3.6 billion.

Providing an update on the progress of our business units, especially regarding vacants, in the office segment, we experienced a negative impact of selling 100% leased assets. On the other hand, we saw a significant expansion in FlexOffice units, doubling the adhesive area compared to the third quarter of the last year. We leased 3,700 square meters with the highest volume of leased area occurring in September, indicating a greater appetite for new lease.

We also completed the first phase of [indiscernible] , positively impacting the demand for the assets. In Best Center platform, we signed 4,900 square meters of new contracts, reducing vacancy by 9%. Year-to-date, we have signed twice the number of contracts compared to the same period of the last year. And total sales increased by 4% and the same-store sales by 3% that were impacted by the supermarket segments.

In SC Living, we continue to progress in the occupancy rate of GO building and in the conversion projects of corporate buildings to residential in downtown review, where we are exploring quotation partnerships with developers.

And regarding the capital structure of the company, as a consequence of this investment that we have made, we reduced our net debt by 27%. We have a comfortable cash position and our long-term debt that provides us a very strong position to focus on our challenge for the next months and years.

I would like to thank everyone that listened to us today.