Sao Carlos Empreendimentos e Participacoes SA

BOVESPA:SCAR3

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, everyone, and welcome to São Carlos' presentation about the fourth quarter of 2019 results. In this call, we have Felipe Góes, the company's CEO; and Fábio Itikawa, CFO and IRO.

Before proceeding, please bear in mind that eventual forward-looking statements made in this presentation related to the 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 turn the presentation to Felipe.

[Felipe Góes, executive]

Good morning, everyone. It is a pleasure to be here with you to talk about the fourth quarter of '19 results. It was a very positive quarter in all metrics as a result of our strategy of acquiring highly profitable assets and the reduction of our cost of debt.

I'd like to highlight 3 main messages detailed on Page 2 of the presentation. First, the strong portfolio value appreciation of 12.1% in 2019, driven by an increase of 10.3% on a same-asset basis, according to the annual appraisal performed by CBRE in September of last year. In the quarter, we acquired Morumbi Office Tower building for BRL 147 million at a cap rate of 9.2%. On the other hand, we sold Centro Empresarial Região Portuária in Rio de Janeiro for BRL 39 million at a cap rate of 7.8%. Finally, NAV per share reached BRL 62.8, an increase of 10.8% in 12 months.

Second, on the profitability front, FFO grew 68% and reached BRL 74.1 million with a 30% margin. FFO growth was driven by higher EBITDA and by lower financial expenses. Gross revenue from leases was BRL 257 million in 2019, up 8.7%, considering the same asset base. I'd like to highlight the performance of the Convenience Center segment, with revenues growing 15% and reaching almost BRL 27 million in 2019.

On capital structure, the company closed the quarter with a net debt of BRL 1.1 billion or 24% of the portfolio value. We concluded a new financing amounting to BRL 400 million with cost equivalent to CDI plus 1.1%. We also prepaid BRL 205 million in existing debt with annual cost equivalent to CDI plus 5%.

Fábio will give you more detail later on in this presentation about our debt capital restructuring. After this new financing, the company's debt has an average term of 10.4 years and an annual cost of 8.1%, significant below 2018's cost.

I will now pass the word to Fábio, who will give you more details about the quarter's results. Thank you.

[Fábio Itikawa, executive]

Thank you, Felipe. I will start on Slide 3 with the details of 2 transactions that the company executed in the quarter. The first one is the acquisition of Morumbi Office Tower for BRL 147 million. The tower has privileged location in São Paulo with unique access to Morumbi Shopping. The highlights of this transaction were the cap rate of 9.2% and the financing structure that allowed the company to leverage 100% of the deal.

On the other hand, we divested a consolidated property located in Rio de Janeiro called Centro Empresarial Região Portuária for BRL 39 million. The exit cap rate in this transaction was 7.8%, generating a net profit of almost BRL 16 million.

Move on to the next slide. We present the main financial indicators for the quarter and for the year 2019. Overall, we delivered superior performance in the quarter and in the year in all financial indicators. Gross lease revenue increased 10% in the quarter, reaching BRL 69 million. And in 2019, revenues totaled BRL 258 million, an increase of 8.3% (sic) [ 6.3% ] over previous year, considering the same asset base.

EBITDA grew 7% in 2019, amounting BRL 181 million with 74.2% margin. The highlight is the FFO that totaled BRL 74 million with margin of 30%, driven by the lower interest expenses. Recurring net income totaled BRL 31 million in 2019, an increase of more than 8x the net income of 2018. Finally, the NAV closed the quarter at BRL 3.5 billion, an increase of 9% over the NAV of 2018.

On Slide 5, we present the growth in revenues in the quarter and in the year. The highlight in gross lease revenue was the increase in the quarter above inflation in the period. The growth was 9.3%, considering the same asset base, which is explained by the increase in leasing price in new contracts and reduction of discounts in existing contracts.

Another highlight in this page is the chart on the upper right corner. The revenue growth in the last 2 quarters were above inflation in the period, reflecting the recovery of the leasing prices in the market.

Now on Slide 6, we have the NOI analysis. The consolidated NOI in the quarter achieved BRL 64 million, a growth of almost 11% over the quarter of 2018, and a margin of almost 94%. In the year, consolidated NOI achieved BRL 237 million, with a margin of 92%. The highlight is the consolidation of the growth in NOI in the Convenience Center business. The NOI in this business grew 19% in the quarter, reaching BRL 6 million.

In addition, we had a substantial improvement in the NOI margin in this business that came from 82%, achieving 86% by the end of the year. The NOI in the year increased 22%, that reached BRL 23 million, driven by the growth in revenues of 15%. NOI margin in the year improved 5 percentage basis points, reaching 84%.

The next slide, we have the EBITDA calculation. EBITDA increased 12% in the quarter, in total BRL 45 million, as a consequence of the growth in lease revenues. In the year, EBITDA totaled BRL 181 million, with a margin of 74%. On the right-hand side of the slide, we calculate the annualized EBITDA that reaches BRL 207 million. And the highlight in this calculation is the EBITDA margin of 77% that considers recurring revenue from existing leasing contracts in December.

Now on Slide 8, we analyze FFO and net income. The highlight in this page is the FFO growth in the quarter of 99% over fourth quarter 2018. The FFO in the quarter reached BRL 19 million as a consequence of the improvement in EBITDA and the lower interest expenses from existing financing. In the year, FFO achieved is BRL 74 million, an increase of 68% over 2018, and an impressive margin of 30%.

At the bottom, we have the company's net income, which totaled BRL 86 million in 2019, driven by the gain from sale of assets in the year. Recurring net income in the year totaled BRL 31 million, which is more than 8x the recurring net income of 2018.

Moving to Slide 9, we have the capital structure of the company with a net debt closing the year at approximately BRL 1 billion, which corresponds to 5.4x recurring EBITDA or equivalent to 24% of the portfolio value. It is important to highlight the debt amortization schedule, that the cash balance is sufficient to face the debt amortization in the following 3 years.

In liability management in the next page, we restruct the debt profile of the company with new financing raising in the amount of BRL 770 million at an annual nominal cost of 5.4% per year and prepaid debts in the amount of BRL 528 million, with interest rate of 9.7% per year. The gain realized in this restructure is BRL 48 million.

On Slide 11, we give details of the evolution of the portfolio. In this slide, I would like to call your attention regarding the portfolio recycling strategy of the company. In 2019, we sold consolidated assets that generated BRL 73 million in net profit and acquired BRL 238 million in properties at an average cap rate of 9.7%.

As a consequence of this strategy, the portfolio grew 12% in 2019, driven mainly by the appreciation of 10% of the portfolio and the transactions executed during the year. We closed the year with a portfolio value in BRL 4.7 billion, consisted of 77 properties with 406,000 square meter of GLA.

Now on Slide 12, we presented the historical vacancy rates that closed the quarter at 12% in financial vacancy rate. The main impact in the quarter was the transactions in the quarter, that was the acquisition of Morumbi Office Tower, a building acquired in November with some vacant areas, and the sale of Centro Empresarial Região Portuária in December that was fully leased.

Now on Slide 13, we have the NAV analysis and the total accounting return calculation. The NAV increased 11% in 2019, reaching BRL 3.5 billion or BRL 63 per share approximately. The highlight is the NAV of the Convenience Center business, which increased 43% in the year, in total BRL 532 million. This growth reflects the upside potential of this business with the portfolio increased 20% in 2019. Another contribution of the gross NAV of this business was the reduction of the net debt of 57% in 2019.

Finally, on Slide 14, we have the implied value per square meter of the company assets and the implied cap rate that the capital market is evaluating the portfolio of the company. Considering the share price at December 2019, our portfolio was valued at BRL 3.4 billion and an implied cap rate of almost 90%, which considers the potential revenue that our portfolio can generate at current leasing price.

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