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Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon, ladies and gentlemen, and thank you for holding. Welcome to the CCP conference call to discuss the earnings of the first quarter of 2020. Audio and slides are being simultaneously streamed over the Internet on the IR website, www.ccpsa.com.br/ri. [Operator Instructions]

Before proceeding, we would like to clarify that this conference call may contain forward-looking statements, which are subject to risks and uncertainties, and as such, may not materialize or to be substantially different from those anticipated. These forward-looking statements express the opinion only on the date they are made, and CCP is not obliged to update them in the light of new information.

With us today, we have Mr. Thiago Muramatsu, CEO, CFO and IRO; and Mr. Hector Leitão, Financial Superintendent. Mr. Muramatsu, the floor is yours.

[Thiago Muramatsu, executive]

Good afternoon, everyone. First of all, I'd like to thank you for your time to hear us talking about the CCP earnings for 1Q '21. So the first quarter is a very challenging quarter, but not that different than the challenges that we faced last year. However, in this last month and 10 days of the second quarter, very interesting things happened, and that gives us some optimism based on my view of the economy and CCP. So starting off with the subsequent events, we had a beginning of the second quarter that was very full of emotions. We had the issuance of the 13th debentures in 2 series: 1, BRL 100 million and the other BRL 200 million. And the shorter one: third year bullet; CDI, plus 1.75%. The longer one: BRL 200 million; fourth and fifth years of amortization; CDI, plus 2.05%.

In addition, we signed an MOU with XP to sell our stake in 3 shopping malls: 7% of Shopping Cidade Sao Paulo where XP is already a partner at 8%; 31.59% of Shopping D where we are full owners; and 40% at Estacao BH mall, which is also where we have a full stake. The value of the transaction is BRL 265 million, and we're still negotiating final documents and precedent conditions to conclude the transaction, and that's already ongoing. The sale represents what we've been talking about. Since 2018, 2019 with our investors, meaning that we would focus on assets where we have a controlling stake. And in our main assets that are AAA in quality, not only in shopping malls, but also in corporate buildings. We also signed the JV with SPX. We had already announced the signature of the MOU in the beginning of this year, and we were able to conclude that in April as well.

On the next slide, this is an example of what we've been doing the other years and the reopening of the shopping malls, which are the main ones that have been affected by the lockdown from the pandemic. Last year, in June, when malls reopened, from June to December, we had similar growth in -- as a result of the flow of people and sales of approximately 35%. But at the end of December, we already had restrictions in operations in many of our malls in January as well. So we started off the first quarter with a drop.

In terms of vehicle or flow of people in January, February and March, as you can see in the first chart achieving 64% of the flow of 2020. And March, 46%, given that most of our malls were closed in the first week of March. And in sales, you see similar case. In February, we have sales closer to what we had in 2020, but achieving 69% of sales. And in March, you can see a drop going down to 51%, achieving BRL 71 million.

Now going into the operational highlights. First of all, talking about the occupancy. So the financial occupancy and CCP remains stable from 4Q '20 and 1Q '21 at 89.5%. The shopping malls have a financial occupancy of 92% AAA offices, 89% and Class A, 59%. So physical occupancy, pretty much following the same order of magnitude. In the consolidated, we have 84.5%. Here, I have 2 disclaimers in relation to occupancy. First, in relation to shopping malls. In shopping mall occupancy at the Grand Plaza, we have a small commercial center with approximately 5,000 meters that became vacant in the end of March. And if we disregard. that vacancy will have the same level of occupancy in the shopping malls that we have had since 2Q '20, a bit higher than 83% -- 83.5% approximately.

For the AAA, office is pretty much stable in the quarter -- quarter-over-quarter. But as I mentioned, we have seen some movement of occupancy, presuming negotiations. We've seen a relatively good pipeline for the AAA of this building. We've signed some contracts in the second quarter that are not shown in this occupancy rate. And we have other contracts that are under negotiation that will take us to higher occupancy margins. And finally, about Class A office buildings.

The only changes or change that we had and what we've been mentioning in the past 2 quarters is the Itau occupancy in ITM. It's been happening in waves. The rest of the demobilization will be -- will take place at the end of May. And since it's a big area, even though the lease isn't as representative as AAA, it has been strongly affecting our occupancy levels in general terms. But as we've been mentioning, we've had a lot of conversations with different types of occupancy of that development, be it traditional offices or last mile and self-storage.

On Slide #7 about same-store sales. We ended the quarter with a drop of 39%. An interesting fact here that we'd like to show you is the impact that the reduction in hours had and how that relates to same-store sales. As our portfolio has assets that are very -- that are mainly in Sao Paulo and Grand Plaza in the ABC region of Sao Paulo, the Greater Sao Paulo area. We had almost 40% reduction of hours compared to regular store hours or mall hours that happened in 2Q '20. We see, at the end, we had 37% production in hours, and that's 1:1 with 37% drop in same-store sales.

And this is not considering the fact that there was not just hours restriction, but also occupation and a mix restriction such as movie theaters, restaurants, food court. So in Sao Paulo, we started reopening with only 20% of patients, and we reached peak at 60%. So that obviously has a direct impact on sales. And we wanted to show you that the relation that we have between hours that we operate and sales. The same-store rent had a slight growth. And in the park flow, we had a drop, which we've already represented in 2 slides ago, reaching 50% of the flow that we had in 2020 in March. So 2.5 million vehicles, reaching 1.5 million at the end of this quarter.

Now I'm going to hand over to Hector to address the financial highlights.

[Hector Bruno Franco de Carvalho Leitão, executive]

Thank you, Thiago. Thank you, everyone, for your presence. Good afternoon. Starting off with leasing revenues. We had an increase of 4% in lease revenues. And then when we break that down into shopping malls and offices, you have specific effects. In terms of office buildings, we had an increase of 24%. And in AAA, we had a positive GAAP, which is very relevant, and we can break that down into 2 effects. We had the BRL 6 million effect because of the [ linearization ] in an accounting effect, and BRL 4 million in the effect -- in the cash effect. That's a cash effect of BRL 4 million in fines and returns. So we reache inter -- reaches 8%, and that's because of the price adjustments in the contract.

In Class A, that's negative. It's focused on the vacancy that in the ITM that I've already mentioned. For shopping malls, we had a 12.5% drop in leases. And that's mainly resulting from parking. Thiago mentioned the occupation restrictions and the small closures. So that explains a great part of that drop. About CDU, we've been seeing that effect across the quarters because of the maturity of our development. So it's the rights to get close to 0, we would only recognize the new contracts moving forward.

On the next slide about our results. We had a drop of almost 9% of net revenue. And in addition to the positive effects of gross revenues, we had 2 negative effects, important ones. One of them is the discount on revenues, which is mainly focused on shopping malls, approximately BRL 8 million. And then we have revenues from services, which includes parking approximately BRL 9 million. So we consolidate the parking results in that and then affects net revenues, not just in rent and leasing. And leasing revenue, I just mentioned that.

When we go to NOI, we had a drop of close to BRL 7 million. And in addition to the effects that have already been mentioned, have the discount of BRL 1 million, parking close to BRL 4 million, the net effect of services revenues and the BRL 2 million guarantees that we mentioned in the previous slide. In the adjusted EBITDA, we add the NOI and operating expenses. So we have negative results in services result from mainly because of parking.

On the next Slide #11. Here, we have net income. Your same explanation of EBITDA, debt depreciation and taxes. So we have a drop 19% in addition to the effects that we mentioned before. We have a positive effect in admin expenses and taxes. So we have a BRL 6 million GAAP -- in absolute GAAP, lower than the EBITDA. And then the adjusted FFO, we had depreciation. So it's absolute variation of net income, 11% drop in the consolidated. And then we go down to pro forma. We have 2 effects. One effect of debt, which is mainly corporate and more since the pro forma margin, but we also have a negative effect on the shopping mall NOI, where they have a share that's higher than the developments where we saw a positive effect in the AAA office buildings.

Now about financial expenses. In the past quarters, we've been talking about debt management. And we have 2 effects of the drop, BRL 150 million less in gross debt. So the expense is lower because of that and the cost of debt dropped 1 percentage point in the average for the quarter. That's mainly in CDI. So we have those 2 effects.

Now about debt. We ended the quarter with cash and equivalents of BRL 353 million. Total net debt of BRL 1.4 billion. Our total net debt over EBITDA last 12 months approximately [ 5.2x ]. So that's -- the ratio is pretty much stable compared to the last quarter. And we had an important increase about -- in relation to the third quarter because of the dividend distribution and buyback that we observed at the end of last year. Here, the cost of debt, we have 5.5% production and 6.3% corporate average cost close to 6.2% on average. And according to the index, it's mainly in CDI plus, which was also work of migrating from CR prefix to CDI, and that has had a positive results in these past years. And part is almost 20% in the IPCA.

on the next slide, you can see our amortization schedule. So there is a strategy of having a very flat schedule in line with cash generation, and that's very important, given the type of business that we have that's capital intensive. For 2021, we have a disbursement of BRL 69 million in amortization and for next year, BRL 226 million.

That's what I had to say for financial highlights. Back over to Thiago.

[Thiago Muramatsu, executive]

Okay. I'll now let the questions, yes.

[Operator]

[Operator Instructions] This is [ Sandiago Marchi ] from Morgan Stanley, our first question.

Next question is from Elvis Credendio on BTG Pactual.

[Elvis Credendio, analyst]

Thiago, Hector, I have 2 questions. First is about occupancy in AAA office buildings. Can you please comment on the evolution of vacancy quarter-over-quarter? The areas that we returned in JK 1450 in tower a at JK. Did you expect that? And what was the rationale behind those returns? If you could share that? My second question is about transferring inflation cost in AAA offices in the contract. You did mention in [ process ] effect given price adjustments. I'd like to understand that. Is that a specific development or something more general? And the evolution of the square meter rental prices for next quarters, would there be higher inflation transfer to that? Given the rental prices that you have in your current contracts, if they're in line with the market and office.

[Thiago Muramatsu, executive]

Well, first of all, about the vacancy increase that we had in AAA office buildings. Let me explain the dynamics that we're seeing here. So the vacancy that we had in JK 1445. That's a transition because it was the time within one would enter leaving and another one coming in. So it's already -- it has already been occupied. That was after the end of the quarter. And in the JK Tower, it has a different profile compared to our other developments. This site has a little over 1,300 meters and the other, a little under 1,700. So smaller occupants. We have almost a whole tower rented to Amazon, and we have some spaces rented to law firms. The other tenants are smaller, and they're susceptible to changing locations.

So we were already expecting that vacancy. It wasn't a surprise. We've been working on that vacancy for a while. And we've had advanced conversations to be able to occupy that area. Therefore, the occupancy of those areas really doesn't affect that. Now we know that by the end of the year, those areas will be occupied. Now a little bit more about our AAA vacancy. The belief that there's some tenants that are focused on the financial markets. So there has been movements in that sense. And we'll soon be able to disclose that information. So to be very honest, our AAA occupation here in Sao Paulo, I'm very optimistic about that. And the second quarter with very healthy occupancy.

What may make the AAA occupancy down is Rio de Janeiro with the CEO. TIM produced in CEO and the tower -- and the other tower, and they decreased the area a little bit more. And in that Barra region, there is a different dynamics in leasing compared to Sao Paulo. You had asked another question, right, Elvis?

[Elvis Credendio, analyst]

Transferring inflation through the contracts, what's your expectations moving forward?

[Hector Bruno Franco de Carvalho Leitão, executive]

So far, we've been making some adjustments. I think I even mentioned that in the last call, some contracts. And I think that was part of your question that had an amount that was much lower than market price. We were able to increase that according to the IGP-M to bring it closer to market prices. So on average, from the beginning of the year till now, we transferred from 12% to 15% in all the contracts. Some contracts, a little more. Some closer to the IPCA index, 5% or 6% on average. The price adjustments for the contract so far have been around 12%. Some that were a bit higher than that, obviously, because the market was a bit detached from what we have -- I'm sorry, the prices detached from the market. And to reach this amount, it's probably 20 to 25 contracts that we did that. So it's a pretty reasonable base.

Looking forward, the -- this is a number of contracts. But in financial volume, the bigger ones have been done until the end of April. We already have some that are still ongoing. Going to try to maintain something close to that level. Obviously, we're not going to reach 30%, 32% of the IGP-M, but we've been able to negotiate and that adjusts some of the transfer of these increases that should have been done and some tenants that don't have the full impact as well as that correction index. And if any specific developments have that impact? I'd say it was widely disseminated. I can't say it's [Technical Difficulty] for the specific development. The negotiations have been in line as what Thiago mentioned, trying to get to market rental prices. So those that are very outdated, we can have a higher increase. And the ceiling, depending on the ceiling of the average market ceiling done, we increased it a little less than [ small ] because of it's a specific development.

[Operator]

Our next question is from Jorel Guilloty from Morgan Stanley.

[Wilfredo Guilloty, analyst]

Yes. Sorry, I was on mute. So I have 2 questions. A follow-up from Elvis's event. You have 65% of the contract that be updated next year. You said that most of the important contracts were negotiated at the end of April. So in that 65% for next year, how much has already been done?

[Unknown Executive]

Let me take a look here. The 65% that we have, Jorel, is not only -- it's not really related to the number of agreements. It's the financial volume. So we probably done something close to 20%. So 20% of the 65%. 20% of the 65%, correct. So 13% of the total, correct.

[Wilfredo Guilloty, analyst]

Second question. In terms of the leasing spread, you mentioned 12% for what was already done. How should we consider that this resolves the contracts? You've delayed the maturity date. It was 2019 and then 2020. Are you thinking -- what is the base of that? Is that -- are you considering 2019, 2020?

[Unknown Executive]

If you talk about the leasing spread, we're always comparing to the immediately previous rental. So it's the year before that. And in this case, it would be 2020.

[Wilfredo Guilloty, analyst]

And another thing connected to that. Do you think that the 12% be the same for the rest of them that you're looking at?

[Unknown Executive]

The 12%, it's just a contract adjustment, inflation for a reason actual. I can't say we didn't do any. We only did 1 review, which was a 1 floor that we have in Rio de Janeiro, approximately 600 square meters. And it's the highest rental. That was 250 per square meter segment down to 200. So 1% is for the quarter, we had a negative leasing spread of 20. But when you look at how much that represents, it's only less than 1% of overall revenues. So for revision, that's the only one. The rest was just an inflation adjustment. So the revisions that we had 2017 and 2018, they haven't been renegotiated, not on our side or for tenants. So the revision is open. A more simple [Technical Difficulty] to discuss that. There were many rentals that were under market price, and we didn't correct that according to a contract revision to inflation and the ones that were closer to market prices, we maintain that. Been more. So we didn't have any big movements in revision. What we did right now was just because of inflation adjustments.

[Operator]

Next question is from Elvis Credendio from BTG.

[Elvis Credendio, analyst]

Me again. Can you talk more about M&A? Not only based on the point of view of [Technical Difficulty] but also acquisitions. You said you were focusing more on AAA assets. Is there anything that you could recycle such as what you're selling to XP? And especially waiting for that, do you have any -- what would that capital be used for? To strengthen cash, to buy more M&A, such as what you're doing with SPX? So if it's M&A, are you looking more into that?

[Thiago Muramatsu, executive]

I can answer the first part of your question. We do have some assets if we're in the right time to recycle. So focus on a more premium assets in lieu of the ones that we believe are Class A, not only for office buildings, but also for shopping malls. Shopping malls, the main one was the Estacao BH as it's not managed by us. It's managed by BR Malls. And Shopping D, which has been part of the portfolio for a long time, and we believe it was the right time to recycle. Besides that little bit studying options to recycle and divest some other assets, but nothing that we have settled on. Yes. So we're still studying and how to balance out our portfolio, especially in post crisis. It's interesting to understand the behavior of each one of the assets, which makes us sense to maintain them in the portfolio. So, so far, we're very satisfied what we've been doing with the divestments.

In terms of destination of cash, we have a reasonable pipeline. We already have capital committed to the pipeline. And within that, we do have some projects together with SPX. So we can't give you any full disclosure of that yet, what we're looking at there. We have the warehouse project at the Dutra Highway to develop that. The project was just approved. So we should start the work at the end of the 2Q, beginning of third Q, and that those funds can be used in that development as well. And with the rest of the pipeline in office buildings, obviously, we continue. We have been studying some assets. So a part of the funds from the sale that's going on with XP, we use to develop the warehouse that we have on the Dutra highway and also for the investments that we've committed to work together with SPX on.

[Operator]

Next question is from the webcast from [ Emerson ].

[Unknown Analyst]

How has been the -- how is the demand for the ITM business center perspective of occupancies and rental?

[Unknown Executive]

Well, [ Anderson ], at the ITM, we will have approximately 45,000 meters empty at the ITM, which was the Itau occupation. We have some other tenants that are still there. Itau was the main occupant over the entire area. I've mentioned this before that there is a huge demand there, probably 60,000, 70,000 meters of area, but they don't -- they're not moving fast. Usually, they're for large areas. So we always look at the demand. Approximately 10,000, 15,000 meters. It won't be leased in [Technical Difficulty] of [ 2,000 meters to 3,000 meters ]. And since the requirements are big, they take longer. And at the same time, we have the pandemic that's restricting companies going back to work, right. And people going back to the office, which makes these negotiations move slower.

You ask the perspective -- about the perspective of occupation. I can't give you a precise answer about that, but what I can say is that there is a demand and about how much that will actually turn into a proposal. No, not proposal, sorry, in a signed contract, I can't really say right now. And the rental prices, it's approximately BRL 30 per square meter, so more maybe. But at this time, it's about some occupant studying how they would occupy that building than actually having a signed proposal.

[Operator]

[Operator Instructions] Since we have no further questions, I would like to hand over to Mr. Thiago Muramatsu for his final remarks.

[Thiago Muramatsu, executive]

I believe we were able to cover many things in our call and with some questions from Jorel, Elvis and Anderson. And the positive aspect that I'd like to leave you with is that we're coming from a very challenging first quarter. However, April and the beginning of May has shown to be promising months. The weekend -- the mother's day weekend in the shopping malls was a great weekend. We have a prospecting level for signing contracts in the shopping malls is very good. I didn't mention that. But in the first quarter, we were able to rent out a lot of their area, approximately 4% of our area.

And we see a return of the demand, still a bit high, but we see that coming back to office buildings. A lot of things are under negotiation being prospecting. So in terms of occupancy of our assets, we're very optimistic. Do have some other business going on, on the divestment side as what we mentioned with XP, and we also have some things going on in terms of M&A. So even though we've been facing all these challenges, we've been able to maintain our business very active. And I believe that moving forward, we'll have a more positive buys than we had last year. That's it. Thank you very much for participating.

[Operator]

The CCP conference call is now adjourned. Thank you for your participation, and good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]