Sao Carlos Empreendimentos e Participacoes SA

BOVESPA:SCAR3

Earnings Call Transcript 2020-Q4

[Fábio Itikawa, executive]

Good morning, everyone, and welcome to São Carlos' presentation about the fourth 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 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 circumstances that may or may not occur.

Changing Brazil's macroeconomic policies or 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]

Hello, everyone. It is my pleasure to talk about São Carlos' fourth quarter of 2020 results. I'll start with a brief introduction and then pass the word to Fábio Itikawa, our CFO, who will give you more details about the quarter.

The year of 2020 was marked by challenges and opportunities generated by the COVID-19 pandemic. São Carlos was quick in adapting to the new reality imposed by the crisis and manage to take advantage of the moment to improve its internal efficiency, execute opportunistic acquisitions and divest properties that were most vulnerable to the new market reality.

The team's speed of reaction was the main lever for the excellent results obtained in the year. During the month of March of last year, the company established a crisis committee, define a contingency plan and set new priorities for the year. The result was a substantial increase in the company's profitability and the creation of processes that put São Carlos in a privileged position to -- for growth in the coming years.

Behind that speed of reaction is the company's owner attitude culture value, practiced by all members of our team intensively throughout the year. Only through owner attitude based on high sense of urgency and 0 complacency allows for the results demonstrated in this presentation.

So let me start with the main highlights on Page 2 of the presentation. 3 key messages: first, portfolio appreciation through active management; second, very strong performance; and third, a solid capital structure. On portfolio appreciation, our portfolio value reached BRL 5 billion by the end of the year, an increase of 8.6% in the same asset base. NAV per share reached BRL 69.9, and 11.3% growth in 12 months.

We made some important acquisitions that I will detail in the next couple of pages to you, but let's continue now to the second message: a strong performance in the year. Our recurring FFO grew by 56.2% in the quarter with a 46.7% margin. Gross revenue from leases reached BRL 67.6 million and a growth of 6.8% in the same asset base. EBITDA and FFO grew by 21% and 56% in the quarter, and a very high profitability delivered by the company. The EBITDA margin was 85%. FFO margin was 47% in the quarter. We had a substantial growth in our recurring net income of 128%. It was mainly due to an improvement in EBITDA, so cost cutting as well as an improvement in our cost of debt.

Let me talk more about that in our third message here, which is our solid capital structure. Our net debt reduced to approximately BRL 1 billion by the end of the year, which is equivalent to 20% of the portfolio value. We ended the quarter with a cash balance of BRL 441 million, which puts us in a very strong position for acquisitions in 2021. Net debt to recurring EBITDA ratio was 4.8x, which is very much appropriate to the kind of business we had and -- we have and the profile of debt that we carry. The cost of debt was reduced from 8.1% in the fourth quarter of '19 to 5.6% in fourth quarter of '20 in nominal terms.

Now let's move to the next page that I will detail some more about acquisitions we've made on Page 3 and Page 4. Let me start with Page 3. This is the acquisition we did earlier this year in 2021, but the whole deal was designed and prepared throughout 2020. We acquired 3 floors of Morumbi Office Tower, very well-located building in São Paulo in which we already had a substantial ownership position before this acquisition. This was closed on February of 2021. We paid a price of BRL 43.8 million and a cap rate of 8.2%. Very profitable deal for us. And through that, we consolidated our share in that property to 83% of the GLA. So we are very proud of that kind of transaction, and we plan to do more like that in 2021.

Now moving to next page, Page 4, of the presentation. I'd like to highlight two of the recent acquisitions that the company has performed in our best center platform, which is our company dedicated to the convenience center business. We acquired a facade in São Paulo in the Miguel Yunes Avenue, a very densely populated avenue in São Paulo. By the end of last year, in December, we paid BRL 10.6 million in that property, which is approximately BRL 3,000 per square meter, much below the reposition cost, with a stabilized cap rate of 10.5%. We are currently working on the leasing of that property, and we already have 2 leasing contracts signed, and we think we're going to create a lot of value in this property.

The other interesting acquisition that we made was earlier in 2021, in February, in which we bought an existing convenience center in Cotia, which is a city within the Greater São Paulo region. We paid BRL 33 million for that property with a GLA of 5,800 square meters and 41 stores and an ongoing cap rate of 8.9%. We think we're going to create a lot of value, not only the ongoing cap rate is already pretty attractive for the company, but also we will improve tenant mix and increase revenues over time in that strip center. So with that, we are increasing the value and growing our best center platform, as Fábio will describe in greater detail in the presentation.

So now I will pass the word to Fábio, who will talk more about the fourth quarter results. Thank you very much.

[Fábio Itikawa, executive]

I will continue the presentation on Slide 5 to comment the results of the proactive management approach in managing our portfolio.

The portfolio value increased 6.8% in the same asset base in the last 12 months, reaching BRL 5 billion. This growth reflects the increase in the leasing prices in the last 12 months and the lower discount rate in assessing our portfolio. The NAV increased 12% in the last 12 months, reaching BRL 4 billion or BRL 69.9 per share.

In the graph, on the right is the NAV of our platforms. It is important to highlight the NAV of the convenience center platform, which increased 12% and totally almost BRL 600 million. In the chart below, we updated the total account return indicator, which measures the growth of NAV adjusted by the earnings distributing the period. It is a metric used by property companies in international market that aims to measure the return to its shareholders. We ended 2020 with a return of approximately 11%, considering the last 10 years.

Move on to the next slide, we present the main financial indicators in the quarter and for the year 2020. We delivered robust growth even in an adverse and a challenged scenario. Gross rental revenue grows approximately 7% in the quarter, considering the same asset base and reaching BRL 68 million. EBITDA grew 20% in the quarter and reached BRL 55 million. This gross in EBITDA reflects the efficient gains obtained in the automation and digitalization process implemented by the company, which reduced G&A expenses. The highlight is the FFO performance in the quarter, which grew 56% over the previous year's quarter. In addition to the reduction in G&A expense, the reduction in the financial expenses contribute to the growth of the FFO.

Another point to highlight is the profitability margin of our operation. We improved our profitability levels, with EBITDA margin reaching 85% in the quarter, and FFO margin reached 47% in the quarter against 30% in the previous year. Recurring net income grew significantly by 128% in the quarter, reaching BRL 18 million.

Finally, on Slide 7, we show the company's solid capital structure. We reduced our net debt to almost BRL 1 billion against BRL 1.1 billion in 2019. Our net debt to portfolio ratio decreased to 20% against 24% in 2019.

Finally, we reduced our average debt cost to 5.6% in nominal terms against 8.1% per year in comparison to 2019. This reduction is a reflection of the change of the company's debt profile to take advantage of this scenario of lower interest rate.

At the bottom of this slide, we show the amortization schedule of our debt where we have a stable amortization flow and our comfortable cash position that meets the amortizations in the coming years. We ended the year with a cash position of BRL 441 million and a strong balance sheet to take advantage of opportunities -- or investment opportunities with high returns where we see in both of our platforms in office and convenience centers.

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