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Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Cyrela Commercial Properties conference call to discuss the first quarter of 2019 results. This event is also being broadcast simultaneously on the Internet via webcast, which can be accessed from the company's IR website, www.ccpsa.com.br/ir. [Operator Instructions]

This conference call contains forward-looking statements that are subject to risks and uncertainties that could cause the company's actual results to differ materially from those in the forward-looking statements. Such statements speak only as of the date they are made, and the company is under no obligation to update them in light of new information.

Here with us we have Mr. Pedro Daltro, CEO. Please, Mr. Daltro, you may proceed.

[Pedro Daltro Dos Santos, executive]

[Interpreted] Good morning, everyone. Thank you for attending this call and taking time to be here with us for the conference call of the earnings of the first quarter. This first quarter in the operational point of view of CCP has been quite interesting. We were able to increase productivity of our business, and this can be seen in the several occupancy rates we had as well as in a substantial improvement in margin. We will talk about that later as well. It has been a period to consolidate our digital channel. It's going to celebrate its first anniversary now. And -- but we've had a growth in sales. For the first time since the third quarter of 2015, we've had a growth in sales in all the shopping malls and also achieved a vacancy rate lower when compared to 2015.

Now I'll start with the presentation on Slide #5 that shows the final -- financial occupancy and physical occupancy. We reached 92.5% in financial occupancy, which is a growth of 2% when compared to the same period of last year. Here, it's worth mentioning that there were some agreements that did not -- were not closed in March but in April right after the end of the first quarter. So if these agreements have been accounted for, it would have reached a higher figure, 93.5%, which would be the highest in the last 4 years. This improvement happened in all segments, both in the mall as well as in offices: offices, 90.4; and shopping malls, 94%. Otherwise, it would be 93% if those new agreements have been accounted for. For vacancy, this is a very low level for any market, and that would bring us close to the financial occupancy rate seen in 2012 and '13 for offices.

As for physical occupancy, we ended the quarter with 92.9%, substantially higher than the first quarter 2018, with a very high location lease activity in the last month. There were some agreements which were also signed after the end of the quarter. Otherwise, it would have reached 93.4%, which would also be the highest in the last 4 years. Today, vacancy is split between malls and offices. At offices, it is slightly higher than in malls. Today, it's 8,280 square meter vacancy in malls and 9,779 in offices.

On Slide #6, we see what I mentioned earlier. In this quarter, we had all the malls with a substantial growth and above inflation, this both for new malls as in Goiânia as well as for shopping malls that are more mature that are -- all the other ones. In towns that have been open less than 5 years in São Paulo, the others are higher than 5 -- have been operating for more than 5 years, some for more than 20 years. And all of them have grown in sales. And part of this is a change in the mix we've done and intensive work to bring store owners that would be more productive and also decreasing vacancy.

Another important aspect about our operating performance for the shopping malls was the parking flow. We had a double-digit growth quarter-against-quarter, 10.6% growth. It's important to mention that so far we have adopted a quite conservative policy in terms of parking rates. The average rate is one of the lowest among listed companies. We always compare to the prices of [ epps ], and this improved the flow of people. But there is also a potential vacancy at parking lots that is low.

Same-store sales is 4.4% in this quarter, which is pretty close to the first quarter of 2018. If you look at the chart, this figure has remained constant for some quarters now with a few exceptions, in the second quarter of -- the third quarter of 2017 and the second quarter of 2018 due to the strike of truck drivers. So the growth in sales -- in same-store sales has been relatively constant and didn't show any decrease so far. And we don't believe this will happen in the next quarters because the scenario that we see -- that we saw in April was very good, and May seems to have started well too.

Same-store rent presents a constant scenario between 4% and 5%. We ended the first quarter at 4.2%, which is a good sign, meaning that same-store sales are growing faster than rent, meaning that from now on we have some time to reduce -- we have room to reduce this gap.

On Slide #7, we see the breakdown of lease revenues. As you can see, all the segments have shown growth. And the good news here that is quite significant and shows an improvement in the office market, that for the first time the Class A offices had a positive growth of 5.2%. So it's driven by Triple A, 10.4%, which was a segment that was falling in previous quarters. Shopping malls grew by 4.8%. And in total, a growth of 6.4%.

On Slide #9, I will show you the financial results. Starting with the net revenues has grown 7.4%, reaching BRL 112 million of revenues in the first quarter. Lease revenues have also grown, 6.4% to BRL 93.4 million. And here, there is something that's quite interesting. That despite the lease revenue growth, which is an interesting one, the difference between net revenue and lease revenue is basically revenues from services. So services are becoming more and more significant in our portfolio, and that's part of our strategy that has been defined since 2015 because then we're able to add value and return to shareholders without the need to allocate more capital.

NOI has grown more than revenues to -- by 10.3%, meaning that we are becoming more efficient. The lowest margins reached almost 90% -- or the NOI margin reached almost 90%, which is in line with the industry, whereas the adjusted EBITDA grew 20%. We reached a margin of 68.7%.

Here, there is an interesting comparison to be made. Since we've been growing revenues from services and service revenue has the lower margin, although it add on return per capital invested because it doesn't require capital, if we had not included services, this margin would be substantially higher. But since we prefer to grow revenue and results without increasing capital investment, the margin is a bit lower. But nevertheless, it's a significant growth, 20% in the adjusted EBITDA and 7% -- or more than 7% in the margin quarter-to-quarter. It's quite significant.

On Slide 11, we have the capital structure. We ended the quarter with [ 1.7 million ] in cash -- the BRL 337 million in cash is important because it covers all the amortization program for 2019 and part of 2020. But if you add cash plus cash generation, the company wouldn't need any financing short, medium and long term. The total debt has dropped. At the end of the year, it was 1, but since the EBITDA grew even faster, the net debt over EBITDA decreased.

So this despite the fact that the company has paid high dividends in the last 2 years. We even paid 45% of our markets -- of the market cap -- between 40% to 45% of market cap in dividends in the last 2 years. Nevertheless, leverage decreased and will continue to decrease along the next quarters.

When we break down the liabilities, you see that TR has become less significant and CDI and IPCA has grown, this less transaction we made for a 10-year bullet attached to the IPCA, which is the debt from 2025 onwards. So from the balance sheet standpoint, we're quite comfortable. Leverage has dropped. The liability debt growth decreased. Liability management was good. And that's a very comfortable situation in terms of covenants. We don't want to change the leverage ratio. We believe it will fall a bit more, but we feel comfortable. We don't have any pressure for refinancing, and covenants is good.

So this is the last slide, and I'll leave some room for you that -- those of you that would like to ask questions, and I remain available to answer them.

[Operator]

[Operator Instructions] Rafael Zanini from Safra Bank has a question.

[Rafael Zanini, analyst]

[Interpreted] First, a question about malls rents -- rentals, that you have some gain to capture in removing discounts. And the second question. In terms of G&A, we saw strong expenses against when compared quarter-to-quarter. Could you talk more about these expenses and what we should expect from now on?

[Pedro Daltro Dos Santos, executive]

[Interpreted] Thank you, Rafael. Okay. First, the discount issue. In the short run, I don't see this decrease in discount. We have been doing that but at a slow rate. It's not yet significant. This is a trial-and-error thing. We never know the exact moment to discuss prices again. I think things will continue to improve but slowly. So in the medium term, maybe we could remove discounts because we have done that in a few cases. But in the short term, this is quite not likely. So we'll still have rent values lower than they used to be in 2012 and '13 but better than they were in 2018.

As far as administrative expenses, there was an example in this quarter of recognition of PBD, a large lessor -- or lessee, I'm sorry, and this will not happen in the next 2 quarters. This -- provision for bad debt that was recognized. This has changed last year. So in the past, you only accounted for provision for bad debt if the person was defaulting. Now if there is any installment in default, you have to recognize the full agreement. We had to do that for a lessee in Rio de Janeiro. But in this last -- at least for the month of April, we don't see that this -- we don't think that this will happen again. As I told you, April has been a very good month, and I believe that May has so far shown that it will be an interesting month as well.

[Operator]

[Operator Instructions] Since there are no further questions, I would like to turn the floor over to Mr. Pedro Daltro for his final remarks.

[Pedro Daltro Dos Santos, executive]

[Interpreted] I would like to leave a message, a positive message to you. This first quarter there were improvements and significant ones, and the second quarter may also be good as well as the next quarters can be interesting in terms of operating results as well as new investments that the company may make. So we are quite excited about the future. Of course, the macroeconomic scenario remains important, and it may get in the way of our plans a bit. But assuming that the macroeconomic scenario developed well, I believe that 2019 can be one of the most interesting years for CCP and one of the best when compared to 2015 onwards.

So I thank you all for attending the call, and we remain available to answer any other questions you may have.

[Operator]

This concludes CCP's conference call. You may now disconnect, and have a good day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]