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Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, ladies and gentlemen, and thanks for standing by. Welcome to the conference call of CCP to discuss the earnings regarding the second quarter 2019. Audio and slides are being simultaneously webcast on the company's IR website, www.ccpsa.com.br/ri.

[Operator Instructions]

Before moving on, we would like to let you know that this conference call may have forward-looking statements about future events that are subject to risks and uncertainties and may have certain statements not become true or that are substantially different from expected. Forward-looking statements is the opinion only on the date they are made, and CCP is -- does not thus oblige itself to update them in the light of new information. So then with that, we have Mr. Daltro, CEO; and Thiago Muramatsu, Financial and IR Officer. Please Mr. Daltro, you may start.

[Pedro Daltro Dos Santos, executive]

Good afternoon, everyone, thanks for joining us in this conference call to discuss the earnings of the second quarter '19. I think this was a very interesting half year in terms of company activity, in which we had after almost 4 years that we were net investors. In previous quarters, we had divested or invested at the same time. And this time, we resumed growth. And I think that it was an interesting change of scenario in this quarter. And as we go through the presentation, I am going to make more comments about that.

So starting with accomplishments in this quarter, we went back to the capital and debt market with a very sustained issuance of the 11th debenture completely put to market. The reintroduction of CCP after a long period without accessing the capital market, it was a transaction of BRL 300 million. We had much better results than we expected, which reduced the stress. And it was very interesting. And with that, we settled our refinancing for next year and enabled us to go back to the market with acquisition that was in April. In May, we had the acquisition of the last floor of Miss Silvia Morizono, a building that directly or indirectly CCP manages. The building is almost completely rented. So to us, CCP, it was something very interesting.

We also, in June, had the acquisition of building Birmann 10. This is a building located in Chácara Santo Antônio in São Paulo. This building is empty now, is vacant. But we have very good prospects for rental, perhaps even above our underwriting. And I am also going to talk about that further on. We also had a leasing spread -- I don't know if it's the correct data, but I think in the last 4, 5 years, we couldn't see a leasing spread as strong as this quarter, 9.1%. And I am also going to talk about that further on. And we had the prepayment of the debenture issuance. So we had our management reducing substantially our cost of debt in this quarter.

On the next slide, we show financial and physical occupancy rate. When you take a look at financial occupancy, we are like the first quarter of '19. But what is important to mention here is because we had the acquisition of the Birmann 10 building that is -- was completely vacant at the time of acquisition, that made financial occupancy to be flat.

Now if we exclude the building that was purchased in June, our financial occupancy would be 93.9%, 94.1% in shopping malls and 93.7% in offices. 93.7%, for those that monitor the office market, know that it is very low vacancy. And that shows a change in the power of bargaining in the negotiations, no longer with the lessees but with the lessors.

And for our physical occupancy, well, the same applies. Because of the acquisition of Birmann, we had a drop in occupancy rate, but if we exclude that, we would have an increase. And today, what we can say is that finance -- occupancy rate for CCP are above the market. The market has always -- also been improving according to consulting numbers for the second quarter show vacancy at 16.6% in the market, again, 6.3 of ours. And when you take a look at Triple A in São Paulo, which is 90% of our portfolio, vacancy rate is at 12.1%.

In the second quarter, the market had another section of 173,000 square meters, which is a very substantial number. So what we saw in 2013, 2014. So I believe in the last 6 years, we have not seen a market as strong as this. And most of it in Triple A in which we concentrate most of our portfolio.

In the case of Birmann, we have various discussions in terms of rental. And we expect until the end of the year to have the building completely rated. But I believe we are going to have good news in the third quarter that is going on because the market continues to respond very well and continues to be very strong.

In the mall market, well, on the next slide, we show that sales increased by 11%, but the flow of vehicles grew by 14% -- 14.5%. It's interesting to know that the flow of vehicles grew by 14.5%, and we increased our parking fees by 12%. So in terms of revenues, it was a very interesting quarter. Most of the sales are new sales that took place, so they don't repeat in same-store sales but they are more productive rentals than what we have before. And also, we had the positive effect on the quarter of last year in which we had the truckers strike and the World Cup. And this quarter, we had a very good flow which -- in terms of movies that impacted more entertainment shopping malls.

So that was also a positive highlight for the quarter. On the next slide, which shows sales every -- same-store sales, you see a lot higher than inflation. We went up to 7.5%. And rental grew by more than 9.2% in same store, so compared to the second quarter last year, it was quite positive and again going back to the levels of '17 -- the level of growth in '17, which was a quarter where we had the release of the workers compensation funds. Because we are going to have the release of the workers compensation fund in Brazil as of next month, we believe that we'll also have a very positive impact in our portfolio.

On the next slide, we show that absolutely all segments had growth. In leasing, you see shopping malls. But altogether, we grew by 7.8%. And despite an increase in leasing revenues being still at lower level, we show, with the 2.8%, the leasing spread of offices has been very strong. So in the second quarter, we see a leasing spread in 9.1%. So it will be no surprise that in the next quarters, we see the leasing spreads in double digits.

I would say today that half of CCP's portfolio may be revisited in the next 12 months, which effectively creates a very positive scenario if things go on as we saw in the second quarter, and in the next 2 years, almost 90% of CCP's portfolio will be revisited. So as we are talking about -- the reviews today are growing at double-digit. So the market is coming back quick after 5 years of a crisis. So we are very much excited with numbers.

With that, I'm going to turn the call over to Thiago. And he's going to talk a bit about our financial results. And then we're going to open for your questions.

[Thiago Muramatsu, executive]

Well, good afternoon, everyone. Going on in our presentation.

I'm going to turn to Slide #7. On the left, we have net revenues that have dropped off 31% in the quarter and 16% in the half year, but that reflects the sales that we had in the same period of last year of Cidade São Paulo. That represents additional revenues of BRL 4 million. So other than this effect, we have growth in the quarter and in the half year. And this effect is withdrawn when we have the comparison of rentals, so when you take a look at the right side of the slide, we have growth of 7.8% in the quarter and 7.1% in the half year. And we already explained why we have improved in rentals.

And on Slide 8, we have NOI with growth for the quarter and half year, 9% in the quarter, which is an increase which reflects increased revenues but also margins. So we are able to have a growth that is beyond the growth in revenues per se. And that translates to our EBITDA. When you take a look at EBITDA, growth in the half year and quarter, we have the effect of growth in revenues with stable costs in between periods. Well, that proves what we have been talking about, which is efficiency of generating more revenues with the installed capacity that we have now.

Going on to Slide #9, net income in the period, again, the numbers that show here in the periods of '18 both in the quarter and the year would clearly have the effects of the sale of Cidade São Paulo. The effect is of BRL 21 million in the net income. And as a counterpart in the second quarter this year and obviously, we also have an impact in the half year of this year. The acquisition of Miss Silvia as Sir Pedro mentioned before. This acquisitions was structured, and it goes into the line of expenses in fixed assets and brought a negative nonrecurring effect of BRL 20 million. If we consider that both the adjustment of sales of Cidade São Paulo and the acquisition of Miss Silvia will have no impact, we would have a very similar scenario in terms of adjusted FFO in the quarter, with growth of 11% and in the half year, growth that is quite substantial of 21.6%, almost 22%.

And for financial expenses, we are ready to reap some fruit of the efforts we have engaged in the last 2, 3 years with the reduction of almost 16% compared to the second quarter '18. So this shows that we have now -- in this quarter will also reflect in future quarters for the reduction of financial expenses and as well as other actions that we have that are ongoing. And we believe that we are going to stay at a level that is way below what we have today.

And finally still talking about that, we finished the quarter with net total debt over EBITDA of 6.4x. This effect of 6.4x is impacted by 2 factors. The first is the acquisition of Miss Silvia that we had this quarter. But again, if you remember in the end of last year, in the last quarter, we also had another acquisition in Miss Silvia. It was the first acquisition that brought an impact of expenses in the quarter of BRL 250 million. So if we remove these 2 effects then we have the adjusted EBITDA, we have net debt over EBITDA of 4.9, which is way below what we had in the second quarter of '18. And until the end of the year, the effect of the acquisition in the fourth quarter is going to go away. And we are going to go back to the level that we have been showing in earlier quarters in terms of indebtedness. Amortization schedule, you have debt that is -- effects to CR. So that is -- we have been working with. If you see that we are reducing that compared to our last 2 quarters, and we continue to work that and operating cost is at 8.4. The last issuance that we had with the prepayment of the debenture in July, we also bring a bit of reduction in our average costs. And the amortization schedule, again, is very much together with our cash flow. With the last issuance, we were able to cope with the -- that we already have contracted for the coming years. So we do not see any risk for refinancing.

And in terms of indexes, we changed a bit of the breakdown. First, it was 50% CDI, 50% TR as of the fourth quarter of last year. We dropped some debt, thanks to the IPCA for us to have a more suitable breakdown. I think this is it. And so now we are going to open for your questions.

[Operator]

[Operator Instructions] Our first question comes from Rafael Zanini from Banco Safra.

[Rafael Zanini, analyst]

I have a question about the company's strategy. I would like to know how you see the strategy from now onwards. You're talking about the reduction of debt, you had some acquisitions, so when you continue to focus on your core assets, and you divest for noncore assets, we see some movement. Does it make sense to you? What is your strategy from today onwards?

[Unknown Executive]

Thanks for questions, [ Rafael ]. So we prefer to not speak for the company to divest in shopping malls. We said that about 1.5 years ago. But we are always open to opportunities. What we have found is that this year at least so far for the second year in a row, our malls are growing at double-digit. So in the past, we divested to invest in offices, and we did that quite successfully with -- first with Miss Silvia and then Birmann. But now we do see an improvement in malls. And it is a significant improvement at double digits between 15% to 20%. Last year, it was 18%. This year also growth was 18%. So I think there is an upside in the short term and then perhaps, it doesn't make sense for us to divest in malls. We did it before the others, and but that's it. But from -- for the future, we want to increase sales per square meter in malls.

This is the main goal of our mall team is to increase sales per square meter. We have been doing that with our online channels. Thus trying to offer good conditions for -- news for owners that can come to us. They can double their sales through our online channels. So I don't think that we should have some divestments, unless there is an extension that may happen. But I don't see us also making investments in new malls. Today, we have CapEx in shopping malls, but that are not new investments. And the strategy is to grow in the office segment. We also have an investment for warehouses that perhaps in the short term, may be interesting development. Offices and acquisitions, we are very much excited, as I mentioned.

As I said, I do not see the rental market for offices. We have the theme of rental that we see in the third quarter as active as many years. And with the leasing spreads that's way above what we have been historically seeing. So we are going to engage all our efforts to have more substantial growth in offices and also to invest in warehouses. That's for physical. And in digital, strategy is to continue to increase sales through our digital channels. That has been growing at very good speeds and try to make this channel exponential in the next 6 to 12 months. So we do believe that we can -- are thinking of a more exponential growth. We cannot tell you how yet, but you are going to see a long time. But I think that there are values that are hidden in CCP that will be unlocked for the future. So to summarize growth in offices, we are trying to increase the sales per square meter in existing malls and invest in warehouses in the city of São Paulo.

[Rafael Zanini, analyst]

If you allow me for a follow-up, with regards to new agreement in malls and thinking of an increase in sales, what's the dynamics like for new negotiations? In terms of fixed rental and variable rental? Do you want to increase in variable rental?

[Unknown Executive]

This is a very good question. I believe that in the coming years more and more variable rental is going to increase. And I think that more and more we'll have to help to our owners to sell larger volumes and this is what we have been doing in CCP. So I would say, yes, today, there is already a concern of -- on the part of -- for owners. We do have a variable rentals as a more significant portion. And I don't think this is necessarily bad. In our case, I would say, it's even good. I would just like to add to what you said, one of the difficulties in the past for us to give more importance to variable rental was correct sales information that we would receive from store owners. And I think that now when we have invested in systems to collect sales information. Today, we have very trustworthy information about sales from store owners, which help us in decision-making and open more room for variable rental compared to fixed rental amounts.

[Operator]

[Operator Instructions] Since there are no further questions, we are going to turn the call back to Mr. Pedro Daltro for his final remarks. Please, Mr. Daltro.

[Pedro Daltro Dos Santos, executive]

Well, I think to summarize what we said is that we are very excited for what's coming in the next quarter. The interest rate, which is one of the most important costs for our segment, seems to be extremely favorable. Credit also is showing signs that are extremely favorable in terms of the offer of credit to the segment and to CCP. We are perhaps at the highest levels since 2015. And in terms of revenues, we are also at a vacancy level that I would say is quite low, especially in the office segment, which enables me to say that it is the lessors that have the power -- the proprietors that now have the power to bargain after 5 years of crisis. In the first quarter, we had the rental market that was very strong, not only for CCP but for the market as a whole with a drop in vacancy rate and net provisions that are quite interesting, the leasing spreads getting to almost double digits in the quarter, and we see an acceleration of that in the third quarter.

And our sales been -- area for malls, beginning to get better. And I believe that now with the release of the workers compensation funds, this is going to be even better for the third and fourth quarter. And in our case, specifically, we're also very encouraged about our online channel. We believe that we are creating value that is still hidden in the company but that very soon is going to be unlocked. And I hope it is of substantial value.

Both myself and Thiago and the IR team are at your disposal if you have any more questions. Thank you very much.

[Operator]

CCP's conference call is now closed. We thank you very much for joining us, and wish you a very good afternoon.

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