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Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, ladies and gentlemen, and thanks for waiting. Welcome to the conference call of CCP to discuss the results regarding the third quarter 2018. Audio and slides are being simultaneous webcast at 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 therefore may not become true. That is, they may materially differ from that expected.

Forward-looking statements usually shed light of the opinion of the date that they are made, and CCP is not obliged to update them. Today with us, we have Mr. Pedro Daltro, CEO; and Thiago Muramatsu, CFO and Investors Relations officer. Please, Mr. Daltro, you may go on.

[Pedro Daltro Dos Santos, executive]

Good morning, everyone. Thanks for attending our conference call for the third quarter 2018. I would say that this quarter was quite interesting, in that we were able to address many of the strategies that have been outlined since last year.

First of all, with the increase of our investments in the office portfolio, initially focusing [ the levers ] in which we already have a stake in and that happened with the purchase of 4 floors of the Miss Silvia Morizono with an area of approximately 6,000 square meters, and also the acquisition of the JK 1455 consolidating our position in those 2 office buildings.

We also had the completion of the sale of the last property of our portfolio, Parque Industrial Tamboré also taking place in the third quarter. And I think it's worth mentioning that our investment in offices in this quarter ended up to approximately BRL 180 million, more or less in line with what we expected to do this year. Together with the investments that we have in shopping malls, CCP has already transacted about BRL 350 million this year. We also had the issuance of the 10th debenture issue, which was very interesting for us because it was the first transaction that our financial team performed, and I think it was the first in the Brazilian market of 10 years.

I think that in my experience, it is a unique experience. And it was very important because it brought new investors to the Brazilian market in fixed income and also a transaction structure that is very interesting for a company like ours, basically, bringing the Brazilian market closer to what is going on in the world. So our team performed to this initiative and was extremely successful. We also approved the extraordinary payout of dividends of BRL 120 million, with a dividend yield for the company of almost 10%. That, added to the results with dividends already paid out last year, I would say that in the last 2 years, CCP probably has an accrued payout of dividends that is quite interesting. I don't follow the other companies, but I think we are one of the companies that most paid out dividends in Brazil in the period. So it was a quite interesting quarter.

I am going to go on to Slide 7 now, showing a bit why we are optimistic about our results. We closed the quarter, the third quarter '18, leasing in this quarter malls got to 95% occupancy level. In offices we are very close to 90%. And the important point here is that for the first time, we saw a resume of leases and rentals since 2013 in the buildings what we call B in our portfolio. So we start see a demand for those office -- those buildings and perhaps we are going to see a recovery of prices, especially with AAA. We thought that this would happen in the end of '19, but perhaps it can be a bit earlier than that. Today we have 11,346 square meters of offices available. And with this economic recovery, it's important to highlight that the office market had a month of September that was slightly weak because of the expectations of elections. So many decisions were postponed to the fourth quarter. So although we had a weaker office market because of elections, we still were able to decrease of the vacancy and got to the highest level of occupancy since 2014, the same for shopping malls.

If you go to Slide 8, you are going to see which shopping malls specifically. Sales grew by 8.7% and a point of data that I believe is very interesting, the flow of vehicles grew by almost 6%, which seems to be substantially above what had been reported in the shopping mall market, at least from the data we have from the shopping mall association, malls still had a quarter in terms of flow that was quite modest. But for our malls, we had growth in the number of vehicles of 6%. Also we had a recovery of sales in stores compared to the previous quarter. The last quarter, we had a deceleration because of the trucker strike, but we did have a recovery in the fourth (sic) [ third ] quarter getting to 4.2%. And more interesting than that, when we compare to the same area, that is, stores that left and stores that came, the number grows by more than 1%. And I think this is the phenomenon that is happening in the market. We have been able to replace store owners that were performing more poorly with the shop owners that are performing better, and that will generate, we believe, an improvement in our margins in all segments.

Same-store rents, we had growth of 3.7%, slight below sales. I think this is a reflex (sic) [ reflection ] of what happened in the previous quarter. Throughout the year, we are more or less in line, which I think is very interesting.

On Slide 9, we show the performance of leasing alone. You know that differences from other companies in the segment, we have a percentage of sales revenues that is higher in the - I'm sorry, in the service margin that is higher. And we have a higher return on capital invested. But still leasing revenues went up by 11.5% quarter-on-quarter, positive in absolutely all segments except for Class A because it carries an adjustment that we performed in January down in 1 leasing spot. So that will also be true for the fourth quarter. But we expect that as of the third quarter next year, if the economic recovery continues, all segments that are shown on this slide, Slide #9, will show positive growth and quite interesting growth in term of leasing revenues. With this slide, I'm going to close my part and I'm going to turn the call to Thiago to talk about our financial highlights.

[Thiago Muramatsu, executive]

Well, good morning, everyone. Going on with the presentation, I'm going to Slide #11 and I'm going to talk a bit about our results. In revenue we had a drop of 17.5% compared to the third quarter 2017. In the third quarter '17, we had the sale of the warehouse of BRL 31.7 million. So when we exclude the sale and we compare just operating net revenues quarter-on-quarter, we had the growth of 8.9%, almost 9%. And then when we compare year-to-date '18 to year-to-date '17, we have growth of almost 13%. As for leasing revenues, Pedro already explained to you what happened in the third quarter, we had growth of 11.5%. And again when we compare year-to-date '18 against '17, we had a slightly lower growth of 4%, but that is basically due to the leasing in shopping malls in the third quarter that -- as sales were quite affected by the trucker strikes. As NOI in the third quarter '17 and '18 and year-to-date in both years, we had growth above the leasing revenues. No -- NOI, we grew 15% in the quarter and 7.4% in the first 9 months of the year, basically because an improvement of margins in the third quarter. We went from 60 -- 80 -- 84.6% to 87.3%, and in the year 84.2% to 86.9%. So basically that is due to our reduction of costs that have been constant in the company. EBITDA following on our operational improvements we grew 55% with a very high increasing margin growing from 40.9% to 63.4%, and in the whole of the year 14.6% when increase of margin of 55.8% to 61.3%. And again talking about what Pedro mentioned in the relevance of our service operation as a whole, was the -- we had the -- a lower margin. And if we exclude the parking lot, we have a margin of 66%, almost 67%. And year-to-date, close to 70%.

On the next slide, Slide #12 we show our net income. In the previous quarter, we had the effect of our transaction with Prologis, so we had a very positive effect in the third quarter '17. In the third quarter '18, we show a loss of 7.2%, but that's because of an acquisition that is based on the option of the Miss Silvia building, that led to a negative impact of 32,000 because we are accounting for it. If you exclude all the nonrecurring effects on net income, we go from minus BRL 7.9 million to approximately BRL 2 million in profit. Year-to-date in '17 again we have the same explanation, it is the sale to Prologis, the operation. And we have a year-to-date results of BRL 50 million. FFO, adjusted FFO we went from losses both in the third quarter '17 and year-to-date '17 to profit of BRL 31.7 million in the quarter, BRL 74.1 million in the year, which is an inclusion that we have been reporting quarter on quarter going from a quarterly loss to profits. And profits that are increasingly frequent compared to previous quarters.

And finally in regards to financial expenses in the period, we had a quite significant reduction compared to the third quarter '17, basically because of a reduction of our debt. We had a payout (sic) [ payoff ] of our debt and that obviously brought a higher expense than recurring. But we still have a reduction that has been shown since the end of last year. And we have been working very hard on that.

If we go to Slide #13, we have our indebtedness analysis. In this quarter, we lost the benefit of a more robust EBITDA because of the transaction that we had in the third quarter '17. But we have a much more stabilized portfolio in terms of net debt to EBITDA level. We have a healthy level for the company of -- I'm sorry, so the net debt to EBITDA ratio is 4.7x. And one of our covenants, corporate net debt/EBITDA we also have the effects of the transaction of the third quarter '17 which is 1.2x. Our covenant is 1.5x, so we feel very healthy and very -- complying, very much complying with our covenant. Our indebtedness basically is divided 50-50 between TR and IT. Basically, TR we used for our shopping malls and CDI, the corporate debt that we took in recent years. Basically for production we have for TR 9.4% and CDI 8.1%. Our amortization schedule is quite linear. We have enough cash to meet all the amortizations and the payment of our debt without any need of refinancing. Our corporate debt is shown in the chart as reducing year-on-year.

I think that we are now going to open for your questions.

[Operator]

[Operator Instructions] Rafael Zanini from Banco Safra would like to ask a question.

[Rafael Zanini, analyst]

I have 2 questions. The first with regards to the adjust numbers of the quarter. Is that a number that we should wait from -- expect from now on? Or do you think you are going to have changes in this number? And second about the acquisition of JK 1455, what is the impact of this acquisition we should see in the fourth quarter?

[Pedro Daltro Dos Santos, executive]

Rafael, this is Pedro, could you repeat the first question?

[Rafael Zanini, analyst]

The first question is regards to the total adjusted. Is that the number we should expect from now on?

[Pedro Daltro Dos Santos, executive]

Okay. I think the answer is yes, but there are some things that we should take into consideration. It will depend first on the interests. If the interests are kept on at this level or even lower than that, then we do have an upside perspective for FFO. So this is the positive point. Another positive note is that we still have some areas which are empty today or vacant today. And I believe I'm a bit more encouraged for the potential of leasing those areas, which would be another positive point for the FFO. But there is a downside to it. Remember that we paid out an expressive amount of dividends and that decreases our cash. It improves the return to shareholders, but it can decrease the FFO. When you put together those 2 positive notes and the negative note, I believe this is a level that is interesting to us and should be capped. As for the JK Building, this is part of our strategy. Last year we opted to invest about BRL 200 million in acquisitions this year. At a certain point in the year, we thought we would grow further than that. We are going to close the year as planned. But there was a point in the year that we're a bit more enthusiastic, but unfortunately the pipeline did not evolve as we expected. So I think it's going to be a low impact, this area is already leased. I think the highest impact about the area that is still vacant in Miss Silvia, and what we see is a demand that is even greater and faster than what we expected.

We believed we would -- we haven't closed, so I cannot disclose any numbers now. But the demands for Miss Silvia seem to be greater than expected, at a slightly higher price than our underwriting for this building. So I think it's going to be a positive impact, but nothing has been closed yet, so I cannot give you a hard number. But one good thing about this quarter, and I don't think that's going to be true for next year, is that this year we were growing in shopping malls by about 19%. And I'm not talking about new shopping malls or shopping malls to be matured. You know that most of our portfolio is more than 5 years old, our largest malls, and I'm talking about an weighted average. I don't think next year we are going to continue to grow at the same speed. I think 19% is a very good number, but I think the level is going to accommodate next year. So I think going back to your first question, FFO is going to be close to the levels that we showed today because of positive and negative aspects. The payout dividend, as I mentioned, increases the return to shareholders.

And JK I don't think is going to be quite relevant. The acquisition is small, and I think Miss Silvia is going to be more relevant for us.

[Operator]

[Operator Instructions] Since there are no further questions, I'm going to turn the call to Mr. Pedro Daltro for his final considerations.

[Pedro Daltro Dos Santos, executive]

Well, once again, just for a recap, I think that was a quarter that made us very encouraged. CCP was able to increase all its margin, EBITDA, FFO, increased annual margins, increased the MRI of shopping for close to 7%. Vacancy levels since -- we haven't seen since 2014. We're also able to execute whatever we have planned in terms of acquisitions and sales. We are getting close to BRL 350 million of basically sales concentrated in shopping malls and warehouses and acquisitions in offices that we manage ourselves. We saw an improvement in people contacting us, looking for office buildings, which make us optimistic to see positive levels in the beginning of next year, perhaps even earlier than what we expected. So we are very much encouraged and excited for what '19 can be like. We, together with Thiago, myself, our IR team, are always at your disposal. We had again the dividend operation that I have never seen in the Brazilian market. This is a merit of our financial team, which is a projection of 10 years bullet that is a perfect match for the cycle of our business. In the past, we had amortization that was a bit of a risk and that released capital for us to pay out BRL 120 million in dividends along the past 2 years. I think we are talking about almost 45% productivity -- of profitability in terms of dividend. So I thank you once again and should you have any questions, please do not hesitate to call us.

[Operator]

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