SYN prop e tech SA

BOVESPA:SYNE3

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the CCP Earnings Conference Call with the results regarding the fourth quarter of 2019. Both audio and slides are being broadcast simultaneously on the web on the IR website, www.ccpsa.com.br/ri. [Operator Instructions] Before we proceed, we would like to clarify that this call may contain forecasts regarding future events, and they are subject to risks and uncertainties that may make such expectations not to materialize.

In other words, substantially differently from the expected. They are forecast, express the opinion strictly on the date they are made, and CCP does not advise to update them in the light of new information.

We have here with us Mr. Pedro Daltro, CEO; and Thiago Muramatsu, CFO; and IR director. Please, Mr. Daltro, you may proceed.

[Pedro Daltro Dos Santos, executive]

Good morning, everyone. Thank you for your presence in our earnings conference call of the fourth quarter 2019. I would say that last year was a year that was a watershed year for CCP, very interesting in terms of activities and absolutely all the areas we've had growth and progress and we have a quite interesting challenge for 2020. And I believe 2020 will be a continuity of 2019.

Let us start with our achievements. In May, we acquired -- on the first slide, we acquired what remains that we did not own of the Miss Silvia Morizono. It's a building that to us was quite important with good development. And over time, we bought minority interest, and we have 100% of the management. It's 100% leased in a prime region in Faria Lima and we see great upside of this building. In June, we made an acquisition. That was a major one for CCP Birmann 10 in the region of Chacara Santo Antonio neighborhood. We paid it on installments, and we made a small retrofit internally. And today, we have -- of the top of our business plan we're quite pleased with this acquisition. It is actually better than we expected. Actually, we had set up partnership with the Delivery Center. I'm going to tell you a bit more about our digital channel. But also, within the strategy of the company, it's been quite important.

In October, we had the acquisition of the 18th floor at the Faria Lima Financial Center on the portfolio. Its highest rent price per square meter. We've always had an interest in participating in growing our participation there, and as we've done that at last year, we managed to buy 2 more floors, then we attained 80% of the building. Well, November, we had our public offering of primary distribution.

We had more -- we managed to get more bargaining power to make new acquisitions. We had a plan of investment that was quite bold in our IPO, such plan has been fulfilled even in a better way than we expected, considering that. For those of you who remember the meetings, we mentioned about making acquisitions, be in the market, be more competitive within our portfolio, and we've done both. In December within the recycling process, we sold the Centro Empresarial Faria Lima, the Brasilinvest tower. We do not have the power or the management, and CCP is increasingly focusing on buildings, in which we may add value through management. So Centro Empresarial Faria Lima was not part of the strategy. We ended up selling it at the end of the year, and the price was above what we had in our books. We had the JK Towers acquisitions for BRL 1.05 billion, it was a Triple A building acquisition and on the Faria Lima region. It was important to have the first acquisition post our IPO. So 2 towers that have prime quality, people that rent it. And we had -- in January, we managed to lease or rent at levels that are well above our business plan. The rents are going faster than we imagined.

With that, we had a spread of 23.3% (sic) [ 23.8% ] Well, I don't remember in my career and the real estate office building such robust spread level as we've seen in the past quarter -- in the last quarter of last year. And we bought another floor of Faria Lima Financial Center. And with this, we have slowly or gradually's been increasing the exposure of CCP in the Triple A office market. For the time being, Faria Lima we're going to diversify a bit more within the city of São Paulo. But this is a path that we have mentioned in our IPO that CCP was going to increase the Triple A -- business segment of Triple A was going to be increasingly that. We made several liability managements over the years, especially in the fourth quarter. It was a promise at the time of the IPO that we've seen space to renegotiate the debt. We renegotiated and prepaid 7 debts that gave an amount of BRL 740 million, and we cut the spread significantly. And then we're going to have more information on that further on. We negotiated the CCP debt, as we mentioned on the IPO, it dropped almost 300 bps at the end of the year.

All of this -- well, we had a concentration of good things that happened in the fourth quarter. Over the fourth quarter, a lot of things in the last week of the year so those are things that we're going to see the impact now in 2020.

When we talk about financial occupancy, moving to the occupancy slide, so we had evolution in all the classes of assets, both offices and malls. We have a slight impact of Birmann 10 that is vacant. We had a growth of occupation of 200 bps, and the portfolio for CCP is quite significant. And I think we're going to close this year, except if we buy buildings with vacancy, which may occur if -- otherwise, if we do not buy buildings with vacancy, we're going to end this level of vacancy in buildings and offices at record levels in terms of occupancy -- record levels of low vacancies. The activity rentals has been quite active and that has really encouraged us.

On the next slide, we talk about sales of shopping mall. They grew 6.4% regarding the fourth quarter of the year 2018. There's something important here. That I'd like to mention. We had significant growth on online sales. They grew 275% in a year, and we have a goal that is extremely aggressive for this year as well. And I think online sales will be increasingly more relevant on our CCP portfolio.

The parking lot flow grew by 3.8%, which is a good number.

Same-store sales, we had a slight decrease in the last quarter in terms of explanation, the Q3 CCP. We are actually making an integration at Shopping D, Shopping mall D that has caused an impact -- a negative impact to the same-store sales. I think we mentioned that Shopping mall D is going through a revitalization or reversing process. So if we -- we're not going through this process, the growth would be quite similar to the fourth quarter of 2018, 4.4%. Here, the slowdown in the same-store sale was caused primarily by Shopping mall D, and we expect that as soon as these refurbishing process ends, the growth will be. The same-store rent grew well above inflation, 7.4%. There is an explanation for this as well for you, who have followed CCP for a longer time, you've seen that for many years, the same-store sales of CCP has been much greater than same-store rents. Because we've opened several shopping malls during the crisis period and during crisis, both at shopping malls and in offices, we decided to providing discounts and flexibility to tenants because we believe that as the time goes, shopping mall tenants and office tenants were going through difficult periods. The Brazilian economy went through difficult times as it stopped growing, this kind of subsidy and as sales grow and vacancy dropped -- drops, we actually reduced these subsidies. So we had significant growth. It's the same-store rent. And actually, in shopping malls, it almost grew by 12% in the year, which is a significant -- well above inflation.

And we sold more, and we were more efficient in terms of costs because as rent grew 7%, sales grew and NOI grew 12%. And it means that we did efficient homework and we are increasing our square meter price, which was our goal.

Next slide, talking about leasing revenues, you can see that all the segments had an increase. Once again, we had very little impact on the -- with the entry of JK. The office segment grew 6%, Triple A, 8%. When we have Class A that the growth was negative. It's mainly an accounting issue because -- since we sold this [ office. ] At year-end, we had to transfer all the revenue and the income in there, so it's just merely accounting issue. If we had not faced the effect of approximately BRL 3 million. If we had not sold Brasilinvest and transfer all the income, the increase would be 4.2% of Class A in the quarter.

So we have [indiscernible] the drops and because they become mature and for the rest, we had the payment of all this. I'm going to pass the floor to Thiago, and he's going to give you further financial information.

[Thiago Muramatsu, executive]

Good morning, everyone. I'd like to thank the presence of everyone. To proceed the presentation on Slide 12.

Revenues in the fourth quarter, we had an acceleration of our revenues, 15.2%. One of the main reasons in addition to the growth that Pedro has explained of lease rent, we had a great growth in terms of our service. Revenue, as we mentioned during the roadshow, we have revenue that is linked to new acquisitions, along with our partners. Of the JK -- with the JK acquisition, we had an increase in the revenue. When we compare year against year, we had a reduction of 4%, but this was because, in 2018, we sold an idea of 8% of the Sao Paulo Shopping Center [ D ] mall. And there was an impact of BRL 480 million in revenue. When we consider the recurrent basis of revenue, we have a growth of approximately 10% year against year. When we migrate to leasing revenue, we had an acceleration of 4.1%, in the year 5%. And this was -- leasing revenue considers the revenue of CDU.

Since our shopping malls are mature, the revenue decrease over the last -- because of the lenient approvals and the portfolio that is quite young, we have lenient approval situation since the opening of that. So excluding certain effect, we will have a growth of 5.6% in the year, 8%, close to the net earnings, 10% comparing the same basis.

Moving to Slide #13, talking about NOI margin. We had an acceleration in the quarter of 4% of our NOI, and 4.7% of NOI with the margin growth moving from 87% to 89%, which is a bit of what Pedro mentioned, greater efficiency. And when we exclude the effect of the CDU of NOI, we have the range in corporate business of 8% in the year and NOI shopping malls of 12% against a growth of 8% in revenue. So the acceleration is very much given based on our improved efficiency and the margin improvement.

And adjusted EBITDA, we have a growth of 11% in the quarter and 14% in the year. There's a fact here that is interesting in the EBITDA margin, especially of the quarter that actually moved from 70% to 64%, and the reason for that is the following: we had a change in nonrecurrent effect, which was basically the sales of Brasilinvest on Faria Lima Avenue. That was not impacting our revenue. It was actually reducing the expenses of approximately BRL 30 million, and our base of revenue maintained the same with the acceleration of service revenue. We reduced our expenses by BRL 30 million without having an impact to revenues, and we had a negative impact to the margin in the quarter.

When we look at the yearly NOI, we have growth, 69.7% to 73.4%, considering -- not considering the Park Place in this margin. And when we look at the total EBITDA with no adjustment without considering the Park -- considering Park Place, we keep these level of 67%, 68%. On Slide 14, the net profit. We moved from BRL 53 million in the full quarter of '19 against a loss of 0.6 million in '18. In the year, we practically doubled our net profit from 49.7% to 96.8%.

Looking at base operation, which is adjusted FFO with nonrecurring effects, we have a growth in the quarter of 30% so to BRL 35 million -- from BRL 27 million to BRL 35 million with a margin of 29.3%. And in the year, we have a growth of 23% year against year. So BRL 23.6 million to BRL 26.6 million, moving from a margin from 23.3% to 26.6%.

And it's FFO in the year 2020, will have an impact that is total of all the last transactions we made, especially at the end of the fourth quarter that were not captured in 2019.

Moving on to the last slide -- one before last, which is #15. We have a reduction that is quite interesting as our financial expenses moving from BRL 39.2 million in the fourth quarter of '18 and going down to BRL 34.8 million in full quarter of '19. The financial expenses without considering prepayment fees. We had maintained activity in the area of management. Just to talk about this liability management, last year, it was very tense, especially at year-end, as Pedro mentioned. So we prepaid last year BRL 740 million in debt. And those debt that we prepaid had a cost of 8.99%, and we dismissed -- where we actually transferred BRL 740 million to include these prepayment at a cost of 1.68. We had 330 bps of reduction in BRL 770 million debts that we paid. We prepaid our cheapest debt.

Moving on to Slide 16, a bit of a breakdown of our level of indebtedness. We have 80% of our debt in our -- indexed by CDI, 15.5% indexed in the IPCA, and 4.7% by TR. We reached the level of indebtedness in the fourth quarter of 2.8 moving from 4.1 in the third quarter of 2019 compared to 2018 5.1. We had quite significant reductions. That was a great impact of our issue. But anyhow, when you look at the fourth quarter of 2019 against fourth quarter of 2018, there is a high level of reduction in the leverage. On my part, this is it.

We're going to start the question-and-answer session for investors and analysts.

[Operator]

[Operator Instructions] Alex Ferraz from Itaú BBA.

[Alex Ferraz, analyst]

I have 2 questions. But first, it's regarding the revision timeline, looking at 2020. I think you've had an important revision. I'd like to know the technical effect, which you have 2019, 15%. If it went through the end of the corporate, do you have an increase of that inside the revision? You had something for 2020? Second question is regarding lease activity or rental. The great difference you've had in the Triple A portfolio, you rented -- could give us a bit of more disclosure in terms of the level of the leases? What was actually -- look that's something that pushed your leasing spread in the period of...

[Thiago Muramatsu, executive]

It's Thiago, I am going to answer your first question. The difference that we had, especially in the part of revision in the -- from the effect to the quarter was the acquisition of JK. In the tower, we have about half the revenue that is going to be adjusted this year. And since it is a revenue that is quite significant, it pushed somewhat up this timeline for the adjustment of 2024. For the adjustments on revisions, the activity started growing in the past -- the last quarter of last year. What we see in this quarter is going to be more spread amongst buildings, in almost all the Triple A's we see adjustments in this quarter. Maybe not all of them will end on the 31st of March, but there are many things happening in these levels we see, and it's more spread in the buildings. We also have it in the JK. For JK in -- that report in December, we have positive -- significant positive spread.

[Operator]

Mr. [indiscernible] from Morgan Stanley would like to ask a question.

[Unknown Analyst]

I have 2 questions. The first is about the leasing spreads of the offices. We see a leasing spread that is quite significant, 25%, in the fourth quarter. I believe there is an acceleration of the second quarter -- regarding second quarter, where we see 10%. Should the leasing spread be, more or less, on this level moving on to 2020? And if you expect an acceleration that is even faster? Second question is M&A market. I'd like to know whether you can give us some seasoning, some details, some flavor of what is happening, what type of cap rates, these kinds of things?

[Thiago Muramatsu, executive]

Thank you. With the leasing -- regarding the leasing spread, it's going to be double digits. I believe -- I expect this number a bit below because the number will increase. I don't know if it's going to be 20% every quarter, double digits starting with 2 and greater quantity over the year. That's more or less what our portfolio is below the market, that we believe some buildings will give more and others less, but we believe maybe a quarter will have it below. But we would assume that the spreads are going to continue to have high numbers, high for considering historical levels, the base is quite low.

As to acquisitions, we have a pipeline that is quite interesting. Post JK is in the line of BRL 4 billion to BRL 5 billion. What we mentioned in the follow on, we believe that the cap rates, so far, what we are -- what we have been negotiating will be below JK -- they won't be below. They may be even above JK. We had a lot of upside there. So cap rate and the entry of JK doesn't mean so much. There are so many upsides. Well, we're actually managing to work with them. And you will -- next quarter, you'll see what we're talking about. So the entry cap rates should be a bit higher, but as an offset, the upside may be a bit lower. But yes, indeed, we have quite a few things being analyzed, and we do expect to have more acquisitions over the year. We cannot assure because you never know what things will happen. But we see some movements and the fact that we actually made JK open the door to us, people did not see CCP as an active participant in the M&A market with sufficient cash to actually move into large transactions. And after this transaction, the scenario changes a bit. We should, indeed, have the transactions. We do expect with better cap rates perhaps not so much upside as in the JK.

[Unknown Analyst]

Just another question, if I may. And this would be more focused in the Triple A offices in the Faria Lima region? Would you have other types of assets you're looking into in other locations?

[Pedro Daltro Dos Santos, executive]

Well, the great majority, Triple A, I wouldn't say Faria Lima because the scarcity may not allow that with Triple A in São Paulo. We're not spending very much time outside real -- sorry, outside São Paulo. And we actually have -- we're not talking about many transactions. We have development -- share development project that we're probably going to carry out this year. And I believe, in São Paulo, in the region -- well, the region -- we cannot mention that. We have focus at certain district offices. We're not going to do things very much far from that.

[Operator]

We have a question from Eduardo [indiscernible]. He actually sent it via webcast.

Do you have any development outlines, priority in development, especially logistics?

[Pedro Daltro Dos Santos, executive]

Thank you, Eduardo, for the question. I'd say that we have a project in our portfolio that we're going to carry out. Well, for the time being, we are focused on this. We've analyzed other opportunities over the time. Today, the only thing I can say is that we have this project, that is São Paulo Capital City [indiscernible] that should start this year's. Total CapEx is BRL 200 million.

[Operator]

Since there are no more questions, I would like to give the floor to Mr. Pedro Daltro for the final remarks.

[Pedro Daltro Dos Santos, executive]

As I mentioned in the beginning, it's been an excellent year for CCP, transformational for the company. We started carry out the things that we promised during our IPO. We believe that the remainder of 2020, we'll have an activity of renegotiation and lease is -- more renegotiation than leasing because we have few vacancies. We do expect to have a leasing spread at high levels. We intend to make more acquisitions. There should be not many because we are focusing on high levels, some sales of properties that we do not control. The strategy, as I've mentioned, are properties that we can manage. We expect explicit growth of our online channel. Last year, we had a growth of 275%. And this year, we have very bold plans. With the strategy that we are outlining here quarter-by-quarter, we may have a lower EBITDA margin because we are not focusing very much on that, especially if you look at asset sales, specifically in a quarter, the EBITDA margin may drop. And if we have acquisitions of assets, the EBITDA margin will drop because we're going to have more service revenue and the margin will be smaller. We expect the FFO margin to grow and that is our focus. Our focus is to have the growth of FFO, both in specific sales and revenues from the certain unit. They may result in a smaller EBITDA margin and greater FFO and return on invested capital and the shareholders' equity. With this, I'd like to close our conference call. Our IR team is at your disposal, if you wish to clarify any doubt.

[Operator]

The CCP webcast or conference call is completed, and we thank you all for your participation. And we wish you all a very good day.

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