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BOVESPA:SYNE3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to CCP's conference call to discuss results relative to the fourth quarter 2018. The audio and slides are being simultaneously broadcast over the Internet at www.ccpsa.com.br/ri. [Operator Instructions]

Before moving on, we'd like to state that this conference contains forward-looking statements, which by nature are subject to risks and uncertainties, and as such, may not materialize or may be considerably different from those anticipated. Those forward-looking statements express the opinion only on the date they were made, and CCP is not obliged to update them in light of new information. Here with us, we have Mr. Thiago Muramatsu, CFO and IRO.

Please, Mr. Muramatsu, you can carry on.

[Thiago Muramatsu, executive]

Good morning, everyone. I would like to thank you for your time to participate in this conference and to listen to our numbers for the year 2018 fourth quarter. 2018 was a very positive year for CCP. We had several accomplishments. I'll list a couple of them.

Moving to Slide #5, actually, right early on in the year, we sold some of our interest, a minority interest we had at the Shopping Belém mall, and we also sold 8% interest at Shopping Cidade São Paulo. We also sold our distribution center in Tamboré, which was the only storage facility we still had in our portfolio. We made a very important acquisition, which was Miss Horizonte. The acquisition allowed us to consolidate, definitely, our participation in Miss Silvia today. It is a 13-story building. We own 12 of those 13. We also consolidated our participation at JK 155 (sic) [ JK 1455 ] building by acquiring a suite at the end of the third quarter. And we also capped our commitment in terms of capital discipline. We paid out dividends to the tune of BRL 120 million at the end of 2018.

For liability management, we have been very active for the past few years. I could mention a couple of accomplishments in 2018, such as early on in the year, we issued debentures in the amount of BRL 450 million, and we prepaid first promissory note for this debenture issuance, expanding our debt profile and decreasing our duration cost. We also issued our 10th debenture issue of BRL 300 million with a 10-year term for the bullet. It's the first issuance that we made, pegged to the IPCA index, which is in line with our receivable cycle. And with that, we managed to release some of the ones we had at Shopping Cidade São Paulo because we prepaid the real estate credit that we had since the beginning -- since the opening of the shopping mall.

Moving on to Slide #7. We have some of our operational highlights. Late in 2018, we reached very high occupancy levels, the best in the past 3 years. We reached a level of financial occupancy of 95%, and in terms of offices, 92.4% that, of course, reflects an average occupancy of 94.1%. And the physical occupancy also showed a positive uptake, 92.6% of occupancy that we reached late in the year

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slightly over 10,000 square meters in offices and another 10,000 square meters in shopping malls. Over 130 contracts were signed throughout the year, so it was a year where we worked hard, but had very positive results in terms of leasing.

Moving on to Slide #8

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indications of our performance for shopping malls. In terms of sales, we grew, when compared to fourth quarter of 2017. We grew by 9%, very considerable growth, above inflation. Our parking flow also grew by 7%, showing slight signs of recovery for our economy, especially at the end of the fourth quarter of last year.

Our same-store sales after 2 quarters, where we were growing slightly below the IPCA, we resumed growth above IPCA at 4.5%. And to do an analogous comparison, when we compare with same-store rent, we, again, resumed growth above the IPCA index at 4.2%, which also proves our efficiency in our leasing processes for managing vacancy rates and increasing productivity in the stores, where we managed to replace more profitable operations in place of less profitable ones, and that resulted in a growth of 4%, 4.2%, to be exact.

Now moving on to leasing revenues on Slide #9. When you look at the fourth quarter 2017 and compare that with the '18, we grew 0.5%, a growth of 0.9% for the Triple A segment, a growth slightly below what we had seen before for the Class A segment due to a discount negotiation we conducted, which was limited to the fourth quarter. And that drop reflects a discount for the Class A that we gave in January 2018. So starting in the next quarter, we'll be working around the same leasing basis. On the other hand, for shopping malls, we grew in the quarter by 3.5%. When you look at the year's growth, overall, we grew 5.4%, a global growth for leasing revenues of 2.4% total, and when we look at the year as a whole, 3.6%, on the right-hand side in the bottom.

Continuing on to Slide #11, the financial highlights. The first one that you saw on the left-hand side on the top, net revenue, where we grew 0.8% in the quarter, 9.7% in the year. That growth in net revenue is slightly below the leasing revenue because we acknowledged or recognized discounts offered in the third quarter that is impacting the fourth quarter. But when we look at the leasing revenues growing by 2.4%, that is a more true picture of our growth in the quarter, with no extraordinary factors affecting those numbers.

We saw a growth of 3.6% in leasing revenues because of a sale that we made in 2018, which was above a sale that we made in 2017, so 2 nonrecurring events, which, in the end, impacted our growth, when we look at those numbers in a consolidated manner. On the other hand, our NOI performance, both in the quarter and in the year, as a whole, we saw a very interesting growth, well above our leasing revenues, and that is due to an increase in our occupancy for our portfolio. Some cost reduction also, which led our margin to something close to 90% in the quarter, 87% in the year, which is a very meaningful growth, when you compare that same indicator for the same period of last year.

For the adjusted EBITDA, on the right-hand side, we see effects of the nonrecurring event. We also had a growth in the quarter of 9.4% and 12.5% in the year, which also reflect a higher margin for the comparison.

Moving on to Slide #12, our last -- our bottom line saw a net profit this quarter -- actually had a loss of minus BRL 0.6 million. And when you look at the consolidated net profit for the year, we saw a net profit of BRL 49.7 million result, which was slightly below our expectations basically due to that purchase that we conducted at Miss Silvia, which was not accounted as investment, but accounted as expense. We're talking about BRL 44 million. If we exclude that effect -- that accounting effect, we would have reached a net profit of something close to BRL 90 million.

As for the adjusted FFO that reflect the previous effect I mentioned, we had an FFO in the fourth quarter of BRL 27.3 million, but when you look at the comparison for the year, we saw a growth, which was quite considerable, and we closed the year at BRL 101.4 million in FFO.

In terms of financial expenses in the fourth quarter, we saw a drop of 5.3% when compared to the fourth quarter of 2017. Our financial expense also includes the prepayment cost for debt, so we have some extra nonrecurring costs there, which probably will reflect in the financial results in terms of expenses at a lower level in the following quarter.

Next slide, Slide #13, we talk about our debt profile. Our leverage levels closed the year -- or the quarter, rather, at 5.2x total net debt over EBITDA. On the chart to the right, we see a breakdown of the debt. Decreasing the burden of TR and CDI, we now have some more debt pegged to the IPCA. So we have something close to 50-50, where 40% TR, 43% CDI and 17% IPCA.

Our average cost is around 9.6% on prefixed debt, and for corporate, we have more variable composition at 8.7%.

And for our amortization schedule, on the left-hand side on the bottom, we have been working in such a way to make the company a cash generator. So we have a very satisfactory outlook for that. We have some amortization maturing in the short term. But with the cash that we have and with our operating cash generation for 2018, we do not anticipate any issues or problems relating to the amortization nor a need to refinance any lines.

As for the covenants, our covenants, we have been working for it to reflect in a more truer fashion our situation. We have been pegging those covenants to the total debt because we are now seeing opportunities of replacing corporate debt -- our production debt, rather, for other possibilities for corporate debt, which often times are more efficient in terms of management. So at the moment where we are now, where we have very mature assets, it makes sense for us to look at the company's leverage indexes as a whole and view the covenants in a more broader -- in a broader way so that we can work around new opportunities for asset management.

We'll now start the Q&A session for investors and analysts.

[Operator]

[Operator Instructions] Rafael Zanini from Banco Safra.

[Rafael Zanini, analyst]

I have 2 questions, the first one about the contracts which were signed more recently. Can you tell or give us some more color in terms of spread and what kind of numbers are you providing for new contracts, new loans? And as for M&A, can we expect some more sales of assets going forward? And do you have an acquisition in the pipeline for the short run?

[Thiago Muramatsu, executive]

Thank you, Rafael. Just to be sure, in your first question, you want to know -- when talking about shopping malls or offices, if you could tackle both would be interesting. Okay, our main leasing activity now for offices in the last quarter focused on a building, which was delivered in 2017. So we're talking about the first leasing contract. It's difficult to measure the spread for that. But what we can see that when compared to the first contract, which we signed and which were existing at the time of the opening in April of 2017, we can already see a resumption of pricing, which was quite considerable, remaining above 20% of the initial contract value, with 2 main differences, with a grace period which is much more comfortable and with no allowance whatsoever. So on top of being the first occupants, we delivered all floors. So those were the main drivers for office leasing. We have also been seeing quite a strong reduction in terms of discounts and grace periods across the negotiations with prices at a level above what we have been negotiating until 2017, 2018. So the outlook is quite positive. As for malls, shopping malls, I think we have managed to conduct

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So we have no imminent risks in terms of default or vacancies in the short run. So no major positive spreads just as we saw in offices -- sorry, in office buildings. The number of allowances, initial discounts stayed at a very inferior level when compared to the past. And as for the contracts we signed starting 2017 and 2018, we have been seeing a positive level of spread. What we see sometimes is a negative spread when we're talking about a retailer which had been occupying the space in the mall for a few years since 2012, and we're pressing the numbers up. Your second question was about M&A, right? Did I answer your first question, Rafael?

[Rafael Zanini, analyst]

Yes, yes. And the second was about M&A.

[Thiago Muramatsu, executive]

Okay. We have nothing in our radar in the short run. In terms of investing in assets, we look at the market, looking for opportunities to recycle our portfolio. This is what we did last year. So some interest in malls, and we bought some interest in offices, but as I said, looking for opportunities, we remain active in terms of looking for interesting assets for M&As focused on offices because of our partnership with CCP. So we have a very good appetite, if you will, for that, but always keeping in mind that they need to have good returns for us and our partners, right, having in mind what we consider to be healthy level for the market for the coming year. So as I said, we continue to assess M&A opportunities. And we have been investing time, if you will. And it's difficult to anticipate what's going to happen throughout the year. We are into our first steps on that front, okay?

[Operator]

Gustavo Cambauva from BTG Pactual has a question.

[Gustavo Cambauva, analyst]

I have 3 questions. The first, if you could give us some more color on the dynamics of the Cerrado mall in Goiânia in the Midwest region? We have a very high vacancy level there. So if you could tell us the status of that mall? And the second question has to do with the leverage level. You purchased, sold assets, you paid out dividends, now the leverage is at the current level, 5.2x, net debt-to-EBITDA, what would be the ideal or the expected earning rate -- normalized earning rate going forward? Would you say it will be around 5x? Or are you working to bring that number down? And my last question has to do with development. Historically, the company has developed several projects, which stopped because of a slow economy. Is there anything in the pipeline in terms of development? Or are you truly now focused on seeking opportunities in M&A?

[Thiago Muramatsu, executive]

Gustavo, I'll start with the first question about the Cerrado mall in Goiânia. Last year, we managed to boost our leasing there. We had a -- we hit record numbers for that mall. Of course, when we look across our portfolio, the Cerrado mall is still lagging behind because of the vacancy rate, as you mentioned, because of the high offering that the city of Goiânia has. But the mall business is the following. If you have a lot of vacancy level, it's slow to pick up. As we improve our vacancy level, we improve flow, we improve revenues, and that's what we have been seeing. As we have increased the mall's occupancy, we have been seeing very positive indicators emerge in terms of vehicle flow, people flow, and all of that combined, which was more optimistic, and also the retailers. And we can be more effective in terms of leasing and selling. And we have been working hard to make that mall more attractive. And with the most recent leasing that we made late last year and in the second half as a whole, we can see some light at the end of the tunnel, both coming from the retailers and from our commercial team. We now have more arguments when we start talking to prospect leasers. So again, I think, we are very optimistic now in terms of making more efficient operation out of that mall. The second question that you asked was about, if you could refresh, the leverage level. The current leverage level that we reached late in the year was also impacted by that one-off expense with the Miss Silvia. In fact, we reached our optimal level, which is around 4 and 4.5. So as we remove that effect and with the good prospectives we have going forward of having seen -- to see the results of the negotiations we conducted at the end of the year, I think that leverage level will resume more comfortable levels, as I mentioned, something around 4 or 4.5. At 5.2, it is not really capturing the revenues of those new leasing. And also, as I said, it does include a one-off expense with the Miss Silvia. So it's a nonrecurring effect. As for M&A investments as a whole, our DNA, as you know, has development written all over it. And I wouldn't leave aside developments going forward. You know that we have seen an excess of shopping mall operations in the previous year, so we have been slightly more cautious in terms of mall developments. But for offices development, we have been looking for opportunities to -- for new developments. And we try, of course, to measure risks to get into the market in the right point of the cycle, but it's not of our strategy. And we have plans where we could, perhaps, work on developing. I'm not really sure of when we're going to pursue that, but it is an opportunity that we have in our portfolio for development.

[Operator]

[Operator Instructions] As there are no more questions, I would like to turn the conference back over to Mr. Muramatsu for his final remarks.

[Thiago Muramatsu, executive]

Thank you. I'll try to convey what CCP did throughout 2018. It was a very positive year for the company as a whole. And this, of course, reflects the hard work we did in the previous years. And our perspectives are that for 2019, with a good outlook for the economy and also based on the result of some projects that we conducted last year, we hope to have a very positive 2019, both for shopping malls and for office buildings. We will continue to seek high levels of efficiency within the company, both operationally and in terms of liability management. So you can expect us to continue to work around those issues. And as I said, in terms of M&A and development also on the table, and we are quite optimistic for the year that has just begun. Once again, thank you for your time, and have a nice day, everyone.

[Operator]

CCP's audio conference is now over. Thank you all for participating. Have a nice day.