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Good morning, ladies and gentlemen and thank you for waiting. Welcome to CCP's Second Quarter 2020 Earnings Release Conference Call. The audio and the slides of this conference are being streamed on CCP's Investors Relations website at www.ccpsa.com.br/ri. [Operator Instructions]
Before proceeding, let me mention that this conference call may contain forward-looking statements that are subject to risks and uncertainties that could cause results to differ materially from those expressed herein. Such forward-looking statements express an opinion on the date they are made only and CCP is not obligated to update them in light of any new information.
Today, we have with us Mr. Pedro Daltro, CEO; and Thiago Muramatsu, CFO and Investors Relations Director.
Mr. Pedro, you have the floor.
Good morning, everyone. I'd like to thank you for your presence in our second quarter 2020 earnings release conference call. Let me start by giving you the highlights of the second quarter. This has been one of the most difficult quarters that we have faced in our careers. Most of the quarter had closed operations in shopping malls and offices. We had a very low level of occupation during the second quarter. And therefore, this quarter, demanded a lot from our portfolio management capacity. But it was able to show the resilience of our portfolio, either in malls or offices.
In the second quarter, the shopping malls resumed operations. At the end of the quarter, the 6 shopping malls under our management were in operations. There is 1 shopping mall that we invested in that only reopened in August. So that shopping mall had no impact on the earnings of the second quarter. And the shopping malls that did open, opened after July 11. So only a very short period of time of the second quarter.
When it comes to offices, we also showed a lot of resilience. We had a 21.2% leasing spread. These were agreements that were being revised in the second quarter and the agreements were signed in the second quarter, which also helped the performance of this segment in the quarter. And 6.5 million shares were canceled. This was part of the buyback program that we launched. Our company shares were negotiating at a low value. We were at a comfortable cash position, however, and so it was a good strategy. We could find assets with high levels of return and low risk such as our portfolio. So we thought we would not find assets such as good as our portfolio, and we decided to launch this buyback program. And we think this was a good strategy to take.
Another highlight of the quarter was the collaboration level that we saw amongst customers and suppliers with CCP. There was a high level of understanding, above our expectations, both with our customers and suppliers and another highlight was the CCP team, which was able to show great resilience during this quarter. The company decided not to fire any employee, and that was the right decision to make because our team has always shown a lot of commitment when we were growing and they were also showing a lot of commitment during such a harsh period, which was probably the most difficult period in their careers. So I would like to thank our team during the second quarter for their commitment. They helped us to go through this crisis, although the turbulence is not over yet. It's smoother now, but it's not over yet. But during the peak of this pandemic, when we were showed a lot of commitment. So I'm really proud to be a part of this company. They did great indeed.
Now let's talk about our operating highlights. You can see here the occupancy analysis and vacancy analysis. Compared to the second quarter of 2019, the financial occupancy actually went up, so vacancy went down. And that is due to the fact that we did not have any return of office square footage during the quarter. And when it comes to shopping malls, although the malls were closed and the leaseholders could not operate their stores, CCP was able to maintain this high level of occupancy without losing leaseholders. The leaseholders that we lost were probably those that we would lose anyway in spite of the pandemic. Now the physical occupancy has been stable, as you can see in the chart, so 90% against 90.2%. So we work really hard to keep our portfolio occupied, as you can see.
Now the next slide, the shopping malls operations. The second quarter had a drop. We were at a good pace in January and February, I would actually say great pace. But once the malls closed, there was a dramatic drop in same-store sales, a drop of 78.8%. Same-store rent did not drop at the same rate. But we did have to renegotiate many lease contracts. So when it comes to sales, this has been a very difficult quarter as you can see in our next slide.
Our sales in the second quarter of '19 was of BRL 812 million. In the second quarter of 2020, this was only BRL 90 million. Parking lot flow also dropped at the same proportion, so a drop of almost 90%. The good news is that in July, the operations started resuming and things started to get better, but not at the same level as July '19. But August is also improving. So we can see a slow recovery of the levels we achieved last year. August is not over yet. We haven't even reached the middle of the month, but we can see a gradual improvement of these numbers.
Now in the next slide, you can see that during the pandemic, we had already signed our stake at the delivery center. We had acquired our stake and the delivery center operations grew significantly. We had a 12% increase in operations and a 3.6x increase in the average ticket. The number of orders grew by 180% almost and the number of customers grew by 140% almost. And the number of stores grew by 46%. Retail operations that were present in the mall chose not to operate via delivery. Those who decided to operate with delivery had a great result with significant growth. And as you can see, most of the growth was for a small number of stores. Now one thing that is already happening and that will happen even more from now on is that store owners will look for our own stores, digital channel or delivery. Because once these leaseholders resume operations, like they did in July with the mall operations resuming, we're going to see a growth in these operations here. August is already much better than July in these 2 channels. So store owners want to be present on the on-store channel and on the delivery center.
Leasing revenues now. In this slide, you can see our offices and warehouses. Our offices portfolio showed resilience and significant revenue growth. Quarter-against-quarter, we grew by 60%. When we look at the Triple A segment, there was a 79.3% growth, and the Class A segment had a 4.9% drop. And that was mainly due to 2 factors. We acquired Triple A office buildings and we sold Class A buildings, which was the best strategy to take because of the leasing spreads of the realignment that we had, which achieved 21%. I don't believe that we are going to achieve leasing spreads at this level in our next quarters because of the recession. But what we are seeing here in the Triple A offices is a recovery of discussions and potential leases. So we saw an interesting movement in July, and in August we see the discussions recovering. And if we don't see a second wave of the coronavirus spread, I believe that we're going to have a quarter with a good movement. In malls, leasing revenues dropped 27.7%. I mean the shopping malls revenue dropped 27.7% quarter-against-quarter. And that's because the malls were closed during almost the whole quarter.
Now I'd like to give the floor to Thiago, who is going to give us the financial highlights, and then I'll be back for the questions-and-answer sessions at the end.
Hello, everyone. Thank you for your presence in our conference call. Let's move to Slide #11. Our net revenue dropped by 18% compared to the second quarter of 2019. And that's basically due to the closure of the shopping malls. There was a drop of BRL 20 million in the services revenues, which came basically from parking lots.
Leasing revenue dropped by 1.2% compared to the second quarter of 2019. We had strong performance in the first quarter of 2020. We acquired the JK Building in the first quarter, which was able to offset a little bit of this negative impact -- was offset by the acquisition of the JK Towers, as I said. So you can see the numbers there in the chart.
Now Slide #12. Our NOI dropped by 9%, with an impact of the discounts that we gave to shopping mall operations. And on the right-hand side, you can see the adjusted EBITDA, a 29% drop compared to the second quarter of 2019. But when it comes to absolute numbers, it's pretty much the same drop that we saw in our revenue.
Net profit of the company achieved BRL 10 million in the second quarter, adding up to BRL 46 million against BRL 18 million in the first quarter of 2019. Adjusted FFO saw a 4% increase in the quarter and a 40% increase in the semester because of the reduction of our debt level cost. We were able to offset the negative impact of the shopping mall closures and drop of our parking lot revenues by achieving a better financial result than we had last year. So here, we can compare the second quarter of 2019 to the second quarter of 2020, a reduction of almost 50% of our financial expenses, which account for about BRL 20 million.
Now in Slide 15, you can see our debt analysis. In the second quarter of 2020, we closed the quarter with a total net debt of BRL 1.2 billion against BRL 1.126 billion in the first quarter. Net debt over EBITDA in the last 12 months closed the quarter at 3.8x. When we look at the adjusted EBITDA, we would close the quarter at 2.9x.
The amortization schedule is quite relevant here because it shows that we have been postponing the debt from 2019 to 2020, which gave us a comfortable position. We were at a good cash position and a long debt profile, which does not pose any pressure over our cash. So the amortization schedule for 2020, in the second quarter, we have BRL 63 million of amortizations. And in 2021, BRL 130 million in total, so a bit below BRL 200 million, if we add up the amortizations of what we have left in 2020 and what we have for 2021.
The liability management work was pretty much executed in 2019. But most of it -- I mean, great part of it was concluded in the last week of the year. We renegotiated the last agreements in the last week after Christmas. And we wanted to seize market momentum to make a few changes in our debt portfolio. So we prepaid approximately BRL 470 million in debt at a TR rate of around 9.57%, and we issued new debt linked to CDI that now has a cost of 4.46%. So if you look at the effects of the renegotiations made in the last week of 2019, this brought us savings of about BRL 30 million in financial expenses and another BRL 70 million in amortizations that were postponed to 2025, '26 and '27. So the profitability to renegotiate these debts put us in a position to enter the year of 2020 at a low value. And our office portfolio was very resilient. We were able to keep the levels of occupancy in such a hard quarter.
So that's all for me.
[Operator Instructions] Mr. [ Pedro Radial ] from Bradesco has a question.
I think you commented on this, but can you tell me more about the lease of commercial buildings? The negotiation is taking longer than you used to. Do you feel like a price pressure on new leases and just feel that the demand is growing since the beginning of the pandemic?
That's a great question. What we felt from the beginning of the pandemic onwards, I mean, it started with the news that companies were starting to close. In the end of March and beginning of April, there were no discussions going on. And then at the end of April, we started to see discussions related to working from home, which achieved a peak in the end of April and in the month of May. Many of the leaseholders just started doing the math and they realized -- and I'm not criticizing them here, okay? This is business. But some of the leaseholders were using this to renegotiate their lease values. You know they wanted to have a lower value for a longer period of time. We've always been careful when it comes to working from home. And I think that we were right. Many companies were thinking about it, but are no longer thinking about it now. And many of them were talking about working from home, but they were actually cutting personnel. But of course, it was not politically correct to talk about firing employees, so they would use this excuse of working from home in order to get a renegotiation of their leases.
But then in the month of June, this type of discussion decreased a lot. And in July, it went away. Of course, it can come back, but the price dynamics did not change. There was a lot of noise going on during this period of time because of the pandemic and this noise may come back in the future, but I have to say that the price dynamics did not change. The vacancy of the regions in which we operate, I mean, we entered the crisis with a low level of occupancy in the regions where we work. And with a price recovery, that was still below what it was in the past, but it was going up fast. And you can see proof of that with our leasing spreads achieved in the first and the second quarter.
We don't think that the leasing spread will grow up -- will increase from now on because we are going through a recession, and it's really hard for you to increase lease during a recession. But when it comes to prices, I don't think things changed very much.
In July, we heard discussions related to returns of properties, which were not related to the pandemic. We were already looking for new tenants for those areas. But then in July, these conversations of re-leasing those areas came back. I believe that after September, when the status of our capital city changes from yellow to green, then these conversations, which are already warming up, will lead to agreements being made. Some things that we can identify in these conversations is that many leaseholders are also taking advantage of the positives to improve their occupancy because when they leave now, they leave the floor with a lot of investments made. So when a leaseholder leaves, they have 3 costs. They have a fine to pay. So if they leave now, they will have to pay a fine. They also lose the investments they made in that specific floor. And the new leaseholder will have a lower cost to occupy that floor. The dynamics are different when you are developing a new building. When the building is new, then you have to invest on the floor, but when the building is already existent and one leaseholder leaves for another one to come in, then the investment level drops substantially.
I'm quite surprised to see this demand, but part of this demand comes from the fact that the new leaseholders will be able to make use of most of the investments made by the previous leaseholder. So the leaseholder will lose the investments they made, they will pay the fine, they will have to invest in the new building and they will have to write off the investments they made, which can be amortized. So that becomes a write-off.
So I see that this new demand for floors is related to an economic improvement. There's no doubt about that. Some industries are recovering faster, like the agribusiness, in the industrial sector as well as the financial industry, there are funds that are growing.
We're also surprised with the shopping mall lease pipeline, especially companies that have raised capital recently to expand and they're looking for stores to lease. So I do believe that the worst moment was the end of April, the whole month of May and the beginning of June. And then in the end of June, we saw no conversations coming up. In July, many new visits. And in August, we are already seeing discussions for new leases. The areas that have been paid for have from 4 to 5 parties interested. And that's partly because these areas are ready. So the cost for the new leaseholders will be very low. But that's going to be an interesting discussion in this third quarter.
Mr. Alex Ferraz from ItaĂş BBA has a question.
I have two questions. First, the [indiscernible] and about the leasing spread of this quarter, which was quite high considering everything that happened. You said there was a lot of realignment this year because of the JK Towers, but I'd like to understand if you had any specific contract and what type of buildings you're talking about? Were you talking about buildings that had low lease values or what?
Now can you also tell us a bit more about the shopping malls? We've seen some news about malls reopening. In SĂŁo Paulo, we see good movement coming up. So can you tell us a bit about that? Are you worried about any specific asset in your portfolio because of the lockdown?
Okay. I'll answer the first question, and then I'll give the floor to Thiago to answer the second question.
Yes. I mean we are talking about more than one contract, but not many. These were negotiations that had been made in the first quarter. The lockdown here in Brazil happened in the second part of March. So some negotiations were postponed for April. Since the industry was at a great momentum, it started to see a downturn. So a few of the negotiations were postponed to the following quarter. But then after April, everything was at a standstill. We're not discussing realignment because we were at the peak of the lockdown, it didn't make sense to have those discussions. And this is not a well-supervised market. What we'll see in the following quarters are few negotiations only that will be able to impact the leasing spread, either positively or negatively.
We were discussing yesterday the vacancy level in Faria Lima. We closed the second quarter in the Triple A segment at 2%. So vacancy levels in SĂŁo Paulo are at 14%. So 2% is close to 0. Anything below 5% is what we call a structural vacancy. We will hardly get 0 because you can have 1,000 square meters on one building, 500 square meters on another building. And of course, leaseholders need higher square footages. So below a 5% is what we call a structural vacancy. 99% of the time, we won't be able to eliminate this vacancy level. And we closed the second quarter with a structural vacancy close to 0 because 2.6% or 0 are like almost the same.
Of course, everything will depend on the economic recovery. But if we presume that during the worst period of the pandemic, this number did not change much, either when it comes to prices and when it comes to vacancy, the proof will come in the third quarter. Starting in September, I think we're going to see companies resuming operations in the third quarter. Third and fourth quarter, we're going to see better levels. We haven't reached the middle of the third quarter yet, but the dynamics haven't changed yet.
What we see is that there is more movement than we expected. People looking for properties, startups, fintechs, investment funds. Okay, for now, they're looking for smaller square footages. But we don't have big spaces available. So large companies don't even come to us because they know we don't have that space available. But that was actually unexpected. I wasn't expecting to see so much visits to the vacant properties in July. I don't know if the movement is going to remain at the same level, that will depend on the pandemic, if there will be a second wave of the coronavirus spread or not.
Other companies have shown a similar dynamic to ours. And we see a demand to purchase assets from real estate funds and the buildings that are being sold are all leased. So when you look at the signs, it seems like the pandemic has shaken our foundations and it created a lot of noise. It was not positive to anyone in this industry, but fortunately, it seems to me that the effects are not as great as we were expecting in April and May.
So summing up, I don't think that the recent spreads are going to remain at these levels. The realignment, negotiations are not going to be significant from now on because of the recession we're facing in Brazil, which is much better than expected, but it's still a recession. But I think that we might see a lot of movement of leaseholders that are recovering or that have not been hardly hit or that are actually growing and want to take advantage of the areas that are being left by previous leaseholders that do not require a lot of investments, so they can increase their occupancy with almost no cost.
Now I'd like to give the floor to Thiago so that he can answer your second question.
So the situation of the shopping malls, they have been improving week after week. And this improvement is linked to the period in which the malls operated. Some malls are operating for 6 hours a day from 4:00 p.m. to 10:00 p.m., other malls are working from 2:00 p.m. to 8:00 p.m., other malls work 10 hours a day and others are already following their regular business hours. And the sales level of the malls, of course, depend on the number of hours the malls are open per day.
The shopping malls in the city of SĂŁo Paulo that are working from 4:00 p.m. to 10:00 p.m. have been seen better flow of guests week after week, with a conversion rate that is much higher than usual. And this has been constant in recent weeks. And in the last 10 to 15 weeks, we started to see a movement of people going to the malls only for leisure, going for a walk with the children without any purchasing goal.
Now the malls in which the working hours, I mean, the malls that are closed during lunch hours, have been hardly hit. The malls that are open during lunch time, have a better performance than those that are closed during lunch time. But there is a positive sentiment, people are feeling better because we have not reached a plateau yet when it comes to the flow of guests. Of course, we haven't reached the same level of movement we had before the pandemic, but some malls have been seeing a 25% to 30% growth in the number of guests. Store owners, I mean, almost 100% of the operations that are authorized to work, are working. So there was a very low level of contract termination in our malls, like we said when we answered Pedro's questions.
So with pandemic or without pandemic, we were already expecting a certain level of contract termination. And in April, the demand for new spaces went away. But in mid-June, this started to come back. And now we see new proposals for new stores in 100% of our malls. Retailers are already seeing a light at the end of the tunnel.
I just want to add something to what Thiago said, which is quite curious. In the month of July, we probably closed around -- contracts at around 60% of the level we closed before the pandemic, but that was quite surprising because we were expecting to have 0% of new contracts. And in August, I think that we can close new agreements at levels that are very close to what we achieved in August 2019. So although the retail was hardly hit, many were able to capitalize and those that are capitalized are taking this opportunity to occupy spaces. We have received more proposals than we were expecting, and this number is growing week after week.
We've seen new operations and operations that capitalized during pandemic, either through the capital market or through private markets, and these companies are taking the advantage to occupy spaces that were left behind by those that were hit by the pandemic. This is something we've been seeing, both in the office segment and in the mall segment. And this has actually surprised us. This was not something we were expecting.
Mr. Jorel Guilloty from Morgan Stanley.
I have 2 questions, one related to the leasing spread in the offices and also about the industry and the region as a whole. We've seen demand for buildings on Faria Lima Avenue, but what about the demand in the region? Do you see a demand for Paulista Avenue and for Triple A buildings?
Now my second question is about M&A. What is the market like right now? Have you been talking about M&A? What are your expectations?
Jorel, well, leasing spreads will probably drop a little bit. They will become more stable from now on, I believe. That's because in spite of this unexpected demand for areas on Faria Lima Avenue, this is still a recession. And the size of the recession will define our leasing spread.
If you ask me today, in the beginning of August, I would say our leasing spread will be stable, but the situation may change depending on the recession. Faria Lima will have higher vacancy levels, I believe. The market has been saying that, that part of this area is already pre-leased, but we believe that the vacancy will go up. But that's something limited to that building. If you go towards the Largo da Batata, there will be another building there. And there will be more vacancy on the [indiscernible] region. This is a great region that has been developing a lot and there is an expansion in the office segment there. But when you deliver building during a recession, it takes longer for the spaces to lease, of course. So we'll see vacancy on Faria Lima going up because of the new building there. And also on [indiscernible] because of one project, the Parque da Cidade, which will also add to the vacancy levels.
In the next 2 quarters then, we're going to see this vacancy increase. But after that, not much is going to change. In the Paulista Avenue region, there is one building, it's more towards the downtown area. It's not exactly on Paulista Avenue. And many people who are thinking about developing office buildings have put their projects on hold for now. Some of them are actually thinking about decreasing their office areas and turning them into residential buildings for 2 reasons. First of all, it's easier to get approval and the cash flow is faster. And it doesn't require as much capital because you can presell them. So there is a lot of discussion going on. It's actually good news for us that some of the office buildings will turn into residential buildings because the offer, which was not very high, will become even smaller in the near future. I mean, in the next 2 years, this is going to be quite positive for us because it's going to decrease the offer of commercial buildings. We don't think that the legislation will change, so the buildings that will become residential buildings will not be able to go back to office buildings.
So in the medium term, when it comes to offer, I'd say things are looking better than they were before the pandemic. That's because some of the new projects that were intended to launch will not launch.
Now when it comes to M&A, the market is quite heated. There are many things going on, many buildings on sale. The demand for acquisitions comes basically from individuals through real estate funds. And I believe that we can close the year with a level of transactions that will be quite close to what we achieved last year. And that's quite unexpected, right, because of the pandemic that we faced this year, which had a huge impact on our industry. So the drop in interest rates and this investment from individuals has made the M&A level being kept pretty much stable, although we saw a drop in the last quarter.
For us, specifically, this has led to a change of strategy. The private market has simply disconsidered pandemic and continued transacting at the same levels. But the public market had a 40% drop. I had never seen such an unmatch between the public and the private markets before. This is quite surprising for me. Our shares were being negotiated at half the value that we had offered for the properties. So we decided to put the M&As on hold to buy back our shares because our portfolio was doing well. We knew it really well. We understood its quality and the return has been great. If the market continues with these levels of discounts, we're going to keep the same strategy. We're not going to acquire private property, and we'll always have the option of buying back our own shares because the returns are great with this strategy. These are returns that you cannot get with private properties. But having said that, the M&A market is doing well. And I think that the third quarter will be good. Did I answer your question?
Yes, you did.
If there are no further questions, I'd like to turn the floor to Mr. Pedro Daltro for his final remarks.
I'd like to thank everyone for participating in this call. We've been through hard times, and we're still going through hard times because of the pandemic. This has been the most challenging quarter that we have faced in our careers. And the quarter has been able to show that quality is key and that our CCP team has done really well. I'd like to congratulate our team because surviving this pandemic has been a challenge.
Thiago and I are available for any questions you might have. So once again, thank you very much.
This concludes today's presentation. Thank you all for your participation, and have a nice day.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]