Sao Carlos Empreendimentos e Participacoes SA

BOVESPA:SCAR3

Earnings Call Transcript 2021-Q4

[Fábio Itikawa, executive]

Good morning, everyone, and welcome to São Carlos' presentation about the fourth quarter of 2021 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 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 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 turn the presentation to Felipe.

[Felipe Góes, executive]

Good morning, everyone. It is my pleasure to talk about São Carlos' Fourth Quarter of 2021 results. I'd like to start with a brief overview about our investments in 2021. 2021 was marked as the -- our record level of investments. And we have allocated more than BRL 690 million into assets throughout the year. And the reason why we did that is because we saw an opportunity for investments for high-return investments in the year because of the crisis generated by the pandemic. And the company was really successful in finding great value-add opportunities, and we grew in all of our business units and created a new area called New Ventures for new verticals and innovation. I'd like to give you more details about our acquisitions, which are detailed on Page 2 of the presentation.

In the office space, we invested more than BRL 170 million in 3 different assets. One of them was basically 3 floors in one existing asset we had a controlling position, and now we own more than 80% of the asset. This is an asset here in São Paulo called Morumbi Office Tower. We currently have more than 80% of the asset and it's more than 95% occupied. The play here was that we bought these floors mostly empty, and we worked around leasing and were very successful in getting those leasing done. The other 2 assets we acquired are described on this presentation, so I'll give you more detail later throughout this presentation.

Best Center, our platform dedicated to the convenience center business. We invested more than BRL 450 million. A lot of great opportunities. Of course, the largest one was the sale-leaseback transaction we did with Lojas Pernambucanas. And I'm going to give you more details about that also in our presentation, later in our presentation. SC Living is our platform for the multifamily business. This is a new area that we've just created this year for the company. In the first year, we were able to acquire a majority stake in a building called GO850 located in Vila Olímpia, a wealthy and affluent neighborhood in São Paulo. We invested BRL 66 million in that building. And our focus here is to learn more about multifamily in Brazil, develop our value proposition and then grow this platform in the years to come. As I said, we also created a new area in São Carlos called New Ventures, and we were able to acquire our first business within that area, which is a minority stake in a company called CliqueRetire. CliqueRetire is the leading smart lockers company in Brazil. It is a business that's complementary to Best Center, and we think that there is huge growth potential in this area due to the e-commerce growth in Brazil.

Now I'd like to move to Page 3 to give you more details on our recent acquisitions in office. We did acquire 2 buildings in the Paulista Avenue area in São Paulo. These are older buildings in need of retrofit and a complete renovation of its systems and technologies. And this is the, let's say, the typical value-add play that São Carlos has been doing over the last 20 years and been very successful in doing that. So we acquire these older, mostly-empty buildings. We do the renovation. We lease them and with that, we create a lot of value. One thing I would like to highlight is the price per square meter that we paid for each of these buildings. In the case of this Alameda Santos 1477 we paid BRL 9,500 per square meter. In the case of Paulista Office Park, we paid BRL 10,400 per square meter. So those prices are substantially below the market prices for those assets. So we are truly excited that after we do the retrofits that we're going to do in the period between 12 to 18 months in each of these buildings and bring them to the current cutting-edge technology to current, let's say, needs of clients in this area, we're going to lease them really well and create a lot of value over these 2 buildings, really excited with these projects. These are assets that we've been trying to acquire and negotiating over this past 2 and 3 years. So it takes a long time, but when we do, we are -- when we do close these deals, we are really happy with the accomplishment.

Now moving to Page 4. Best Center did 2 interesting deals, one of them a very large acquisition of 41 street stores from Lojas Pernambucanas, one of the largest retail chains in Brazil. We bought 75,000 square meters of GLA of stores. These are all located in central areas of cities, mostly in the São Paulo state. And this is a sale-leaseback transaction in which the contract is set and firm. We got an entry cap rate of 8.2% plus inflation, which is great profitability for the company. We also acquired another center in São Paulo, it's called São Paulo Panamby, and we paid BRL 27.5 million with an entry cap rate of 8.3% plus inflation. It is a great location just in the middle of that neighborhood, which is really dense and wealthy in São Paulo. So we do see a lot of value coming from this asset as we're going to implement our Best Center way of managing the property. So we will increase leases, we will reduce costs and create value on this property. Overall, Best Center did grow a lot, and we reached 45 centers by the end of the year, plus 41 street stores that we just acquired. So we are in a very strong position, reaching BRL 1.1 billion in value by the year-end in Best Center, the clear leader of this segment in Brazil.

Moving to Page 5. The key highlights of the quarter are, first, in terms of portfolio management, we did these acquisitions I just mentioned, BRL 538 million in the fourth quarter of '21. The portfolio value reached BRL 5.6 billion, it's a growth of 12% in 12 months. And the leasing activity really picked up during the year, especially in the fourth quarter, and we managed to decrease vacancy from 23% by the end of the third quarter of '21 to 18.6% by the end of the fourth quarter of the year. Profitability was strong in the year. We did grow revenues in the quarter by 20%, and we closed the year with an EBITDA margin of 71.6% and an FFO margin of 27.8%. So a great year in terms of growth and results for the company. In terms of capital structure, we ended the year with our net debt as 29.9% of our portfolio value. So it's a healthy level of leverage for the company. We believe that anywhere between 20% and 40% is healthy for our kind of business. So we are right there in the middle of that range, comfortable with that, and especially with a low cost of debt and a great term in terms of principal payments that are spread over the next year. So we are healthy. We do have cash for new acquisitions, and we intend to continue to grow in 2022 where we do see continuous opportunities for acquisitions.

I'd like to now hand over to Fábio Itikawa, our CFO, who will give you more details about our results. Thank you.

[Fábio Itikawa, executive]

Thank you, Felipe. I will continue the presentation on Slide 5 to comment the financial performance of the company in the fourth quarter of 2021 and for the year. I would like to highlight the volume of acquisitions executed in the quarter at BRL 538 million in acquiring 90,000 square meter of GLA. In the year, GLA grew 28%, reaching 504,000 square meter of GLA. In terms of portfolio value, it increased 12% in the year, reaching BRL 5.6 billion. We can see the reflection of such transactions in our financial performance.

Gross revenues from lease grew 20% in the quarter, reflecting the new GLA incorporating our portfolio. The highlight is the increase in revenues from Best Center at 97% in the quarter, driven by the sale-leaseback transaction with a major retailer chain in Brazil called Pernambucanas. It is important to highlight the profitability of our operation. The expansion in the GLA with the acquisitions will bring higher returns in the future. EBITDA and FFO margin closed the year at 22% and 28%, respectively. EBITDA reached BRL 198 million, and FFO reached BRL 77 million in the 12 months of 2021.

Moving on to the next slide, we present the revenue growth in the quarter in our platforms we operate. Consolidated gross rental revenues grew 20% in the quarter, driven by the 8% increase in the office segment, a 97% increase in Best Center. The growth in Best Center reflects the accelerating organic activity with the acquisition of 86,000 square meters of GLA and the organic growth coming from the tenant sales performance in our portfolio. Same-store sales in the quarter grew 90% and same-store rent increased 16% in the last 12 months. In addition, the reduction in vacancy rate in our portfolio that I will comment in the next slide, contributed to the increase in gross revenues.

On Slide 8, the fiscal financial vacancy rate in our portfolio reduced to 18.6% and 19.2%, respectively. The reduction is driven by the new leasing agreements signed in the quarter that totaled 12,000 square meters of GLA. It is important to mention the physical vacancy rate of the Best Center portfolio, which closed the quarter at 5.5%, the lowest level in the company's history. In the year, new lease agreements totaled 29,000 square meters of GLA, comprised of 18,000 square meters in office and 11,000 square meter in Best Center.

On Slide 7 (sic) [ Slide 9 ], we show the company's solid capital structure. Our net debt-to-portfolio ratio reached 30%, driven by the acquisition executed in 2021. Nominal cost of debt closed the year at 7.8% below the current market interest rate. At the bottom of this slide, we show the amortization schedule of our debt. We had the amortization in 2022 of the bridge loan of the sale-leaseback transaction in the amount of BRL 310 million. The payment of such loan is under execution with [ studio ] state financing structure with them in a 15-year term.

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