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Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. You're welcome to CCP's conference to discuss the results for the fourth quarter of 2020. The audios and slides are simultaneously transmitted on the IR at www.ccpsa.com.br/ri. [Operator Instructions]

Before moving on, we'd like to clarify that this teleconference provides anticipations about future events and contains risk that may not be contemplated, and results will be different. CCP does not update them in face of new information.

I would now like to introduce to you, Mr. Muramatsu, Financial Director. Please move on.

[Thiago Muramatsu, executive]

Thank you very much. First of all, good morning, and I'd like to thank you all for your participation and for dedicating some time to listen to our earnings release. 2020 was a very challenging year. It goes without saying in different areas of the economy. And because we depend a lot on the presence of people, it was very challenging, but I believe that we were able to close the year with very positive outcome. I also think that the performance of our investments was above the expectations we had in the beginning of the pandemic.

At the beginning of our presentation, we have dedicated part of our efforts to improve the return for shareholders. We had 2 programs that were carried out, one of them was a share buyback, we canceled and improved shareholder satisfaction. We also understood that there was not a lot of opportunities for investment for the company and, therefore, we decided to have a distribution of dividends in the order of BRL 135 million equivalent to BRL 0.88 per share.

We also had the acquisition of the fourth floor of Faria Lima Financial Center. And from an operational point of view, we had 2 factors, which was a bit negative, but it was not significant, and we were able to close the year with an increase of 17% and that represented approximately 50% of our total. And then in January, we signed an MoU with SPX in resource manager. They have a real estate platform. And we will focus on the capital management of third party.

So now moving on to the next slide. We will talk about the recovery of the shopping malls. When it reopened in early June until the end of December, we had an increase of about 35% per month. Until October, the recovery was more accelerated. Between October and December, there was a small deceleration, but we still recovered our flow to levels very close to the levels before the pandemic. In terms of the recovery of sales, we had an average increase of about 32%.

And then moving on to Slide #6, where I will talk about the consolidated results. And then later, I will talk about each one of the different segments. We concluded the fourth quarter and the year 2020 with a financial occupancy of 89.5% and a physical occupancy of 86%. But I would like to make a few disclaimers here, and I will talk a little bit about each one of the different segments, so that you can better understand what the reason was for us to have such a significant decrease.

So I'm going to start with the shopping mall. We closed the year with 93.7%. We can see that we have a decrease in the order of 1% when compared to the previous year. So we were able to recover occupancy when we compare with the previous quarter of 2020, and we were very close to the last quarter of 2019. And then you can see here, 94.8%, and we concluded 2020 with 93.7%. And therefore, there was a decrease of about 1%. And an important complement is that in January, we had rentals and increased our occupancy, allowing us to be very close to the 2019 level.

We closed the year with 75.9% (sic) [ 83.9% ] of financial occupancy and 83.9% (sic) [ 75.9% ] physical occupancy. And there were some factors that had an impact. And when we defined our assets on Faria Lima and SA, in the AAA buildings, we had financial occupancy and physical occupancy of 91%. And I'd like to remind you that the 2 main impacts we had for occupancy in AAA buildings was because actually at Faria Lima Building, they had not let the building yet. And also, we purchased the empty floor. So these were the 2 main impacts we had in terms of physical and financial occupancy of the AAA buildings. And I'd like to remind you that in the case of act, we were going to have the payment for the anticipation cancellation, and we will be able to rent this area again without an adverse impact.

In case of the Class A buildings, I think that we had already announced that if we will partially let ITM, then they are going to remain there until May. We have 40,000 square meters that are going to be vacant. But on the other hand, we have good expectations. We have had some demand. Today, we have a demand, which is even higher than the vacant area we're going to have when we totally lease the building.

And then moving on to Slide 7 and talking about the performance of our shopping malls. We closed with a negative result of 23.3%. We have reduced the gap 1% to 2019, quarter-by-quarter. In the first -- in October 2020, we had a very good month. It was when the malls were reopened. We believe there was going to be a positive trend for November and December. But with the increase of new cases and closure of other shopping malls in Brazil, we realized there was some retraction in the number of sales in all of our store rentals. But we still had better results when compared to the third quarter 2020. We also increased our same-store rent. We were minus 2.4% negative in the fourth quarter. We reached total sales of BRL 771 million. And our total number was 2.2 in our investment.

In Slide 9, talking about the financial performance regarding rentals, we had an increase of 45.7% in offices for the year. Our AAA buildings had a 56.5% increase in the year and 46.8% in the quarter. On December 26, 2019, when we compare the same properties, we can see that there was a positive growth for the quarter and for the year of about 12%. In Class A buildings for the quarter, we had a positive performance of 12% of growth. When we analyze the full year, there was a positive growth of 5.2%. In shopping mall, the revenues for leasing, and this is before the discount, so this is for gross leasing. Our performance for the quarter when compared to 2019, it was flat. But when we compare 2020 with 2019, we had a decrease of 10%. Regarding payment of usage rights, so we had significant percentage of decreases, but in absolute numbers, this is minor. This is something natural as our malls are maturing and basically totally occupied and, therefore, the trend is for this usage rights to decrease over the lifetime.

In Slide #10, talking about net revenue, we had a small decrease of 4.2% in the quarter and an increment of 3.3% in the year. The reason for us not to have ground is the parking flow was really affected, and this is a rather relevant area for us and, therefore, we had a growth, which was below the leasing rate. And now the NOI was basically flat when we compare the fourth quarter year-over-year. And it was below 2% -- or around 2% when we compare the whole year. However, the loss we had in the malls was compensated by the better performance in the buildings when we compare the assets. We also had a portfolio increase, which helped us to significantly improve our results.

In Slide #11, you can see the net profit and adjusted FFO. We had a decrease in net profit when we compared one quarter to the quarter year-over-year, but that's because we had sales in 2019. And then when we analyze the adjusted FFO, and we have already discounted the sales effect, we had a 32% growth when we analyze on consolidated basis. And we had an increase of 17.7% with an increase of 19% for the fourth quarter. And when we analyze the whole year, in the consolidated basis, we had a 40% increase reaching BRL 175 million, and on the adjusted basis, we had an increase of 64%. We left from BRL 30 million -- BRL 50 million and reached BRL 82 million.

And even though the operational results were somehow flat, this investment had to do with a better performance of our debt. We had a positive impact with the reduction in the interest rate. And also we concluded 2019 and early 2020 by exchanging some of our debt, which were increased fixed amounts for CDI plus spread. It enabled us to be able to enjoy this decrease in the interest rates, which was very good for us, especially in such a challenging year.

And in Slide #12, we're going to talk about our debt analysis. We closed the year with the net debt over the EBITDA of 4.7x. When we analyze the nominal EBITDA and when we analyze the adjusted EBITDA, we had a 4.4x. Of course, there was an increase from the fourth to the third quarter due to the use of cash, both for distribution of dividends and also for shares buyback. For right now, we think this is a very comfortable situation. And we have been able to meet our covenants without any major problem.

In terms of costs, we exchanged our debt to TR. And therefore, 80% of our debt was linked to CDI, 17% to IPCA and a very small part with the fixed values, and that is linked to TR.

And now moving on to the last slide in my presentation, Slide #13 with our amortization schedule and something we are trying to do here is to have our amortization schedule without any major variations year-over-year. Because our business is capital intense, this management of our debt is very important. We have tried to have flat refinancing. In 2020, we have BRL 230 million. And most of our payments are for 2027 and over.

I am done with my presentation, and I now return to the operator.

[Operator]

[Operator Instructions] Alex Ferraz from Itaú de Valores would like to ask a question.

[Alex Ferraz, analyst]

I have 2 questions. The first one has to do with SPX, regarding the debts and the types of assets that will be focused. And in the portfolio, you're going to look for new classes for investments. And regarding vacancy, you commented, and you have already mentioned the disclaimer. But I'd like to know what the expectation is, especially for AAA Faria Lima Financial Center in terms of location? What do you think the timing is going to be? And will you have any significant change in the spread for this specific moment in time?

[Thiago Muramatsu, executive]

Well, thank you for your questions, Alex. First of all, talking about the partnership with SPX, we have 2 or 3 spots that may be explored. The first one of them I have already commented, it has to do with new revenues that may be generated. We are focusing on it. We have a partnership with the management of third party. This is something very natural for us. The partnership with SPX allows us to further expand our capillarity in capital management.

And the next one regarding our core business, especially in offices, but also properties to generate revenue. We can expand our transaction ability. We will continue doing so. And eventually, SPX is going to be a relevant player. And with that, we will have an additional component in our market.

Regarding your last question, we are negotiating co-investments rights and to capture third-party resources. And I will be able to invest directly in SPX assets and the eventual assets that they capture. Initially, our main focus is going to be in the class of assets we already work with. Offices that we can analyze other assets they may have. The mandate is going to be brought in real estate going from Faria Lima slots and residential areas. It's not going to be our main focus. Our main focus will be in the areas of assets that we're more familiar with.

Regarding the agency, even though the numbers are high, when we analyze Faria Lima, so we're talking about 2 floors with a little over 2,400 square meters. We have already worked with these areas. We have some prospects that are visiting and we are discussing prices. In Faria Lima, the same is true. In Faria Lima Square, we're talking about 1 floor. So in absolute numbers, the amounts are not so different. We only need 1 or 2 renters to zero our vacancy. And the same is true for the other buildings.

Of course, the return for the office in our case, in the case of our tenants, they were planning to come back in early February and they have postponed it to June. And of course, this slows the demand for new areas. But even though it has slowed, we have some interesting opportunities. I'm not going to tell you that we're going to rent in a faster or slower manner, but we have had some good discussions, and some of them are evolving quite quickly.

You asked about price. What we have discussed and the proposals we have received are in line and above the prices we already have for the buildings. And because there was not an expressive reduction in the market price, we continue having an opportunity to have the same positive spread.

[Operator]

Mr. Jorel from Bank -- Morgan Stanley would like to ask you a question.

[Jorel Guilloty, analyst]

I wanted to ask something related to what Ferraz asked. I wanted to better understand the amounts that are being paid for SPX. I'd like to know what we should consider in terms of leasing? What should we consider in terms of cash for you?

The second question has to do with the fact that there has been a delay in the resumption of the offices. But I would like to know whether you can see any differences in terms of demand and the different types of offices you have like AAA? Is it weaker? Or is the demand growing? I would like to know whether there are any differences among these different profiles?

[Thiago Muramatsu, executive]

Well, thank you for your question, Jorel. Well, now I'm talking about the penalties for anticipated vacancy. In addition to the penalty, there are other amounts we're going to receive. What we usually practice in our contracts are in average between 3 or 6 months of leaving. But that depends on the contract. The Tower contract was very close to its end and still had some time to go with the contract. And this is what I can tell you now. And I don't know whether I have answered your first question. Have I done so?

[Jorel Guilloty, analyst]

Yes.

[Thiago Muramatsu, executive]

Regarding demand, and the question was good. The demand varies, depending on the region and depending on the type of assets. So starting with our Class A assets, some of them are located in Chácara Santo Antonio, and we also have ITM in a region, which is not even closer where it used to be. But as amazing as it may sound, we now have more demand for ITM than for our assets in Chácara Santo Antonio.

Talking about Chácara Santo Antonio, the main things we had in that area were basically with new tenants and Brookfield very close to the south area of the marginal. And the demand for medium-sized assets has not been significant, especially now that we have regions that are close to Chácara Santo Antonio, Parque da Cidade. And of course, there is a lot of client -- dispute with tenant for Chácara Santo Antonio. We have 3 properties. Of the 3, 2 are totally rented and we are now reviewing prices. It was very positive according to what we thought we could practice.

Talking about ITM, this is a different type of tenant. These are large areas in Chácara Santo Antonio. We have demand growing from 600 square meters to 45,000 square meters. And there, the other area, we have 10,000, 15,000 square meters. It's a type of tenant who is looking for lower prices that then would find in prime regions, but they have a demand for larger critical space at the airport. What we've seen in our Class A buildings is exactly that.

And here in Faria Lima, we have some demand. And there is a return to on-premise work. Part of the economy has had a lot of activity whenever we're talking about asset management, investments, laws firms. We also have Amazon. And laws firms some of our largest tenants. We were slow in the third quarter, but resumed quite slightly in this year. We have some good things going on in terms of capital markets. And the generation of business has grown in this industry. The demand will heat up as our clients move from full-time home office going through a partial home office theme. And so we can see that in the second quarter we will have more activity.

[Jorel Guilloty, analyst]

I have another question. You have 40% of contracts of offices in 2021, and I would like you to tell us a little bit about the core and what you're conceding? What -- how you're going to go market to market? And what should we expect in terms of spreads? Is it going to be in the 5-digit order? What should you expect about these adjustments?

[Thiago Muramatsu, executive]

We have 2 important factors. The first one is that we still have an adjustment level that is very high according to the GPM, higher than the average of the last 3 years. And perhaps this will enable us not to use the revisional clause right now, and we can push this for a year where the offer and demand ratio is more favorable for us as owners of assets. But we can still capture at least partially this readjustment so that we can take our prices closer to the main market prices.

We have been able to negotiate the GPM adjustment almost totally because the contract is performing with an average lower than the market. And whenever possible, we make some concessions, but we do not have to use the revision of clause. The revision of clause are open, and you can use them when we have a more favorable moment. For the level of prices we have, I do not think that we have any possibilities in the short- and mid-term to use this clause against the tenants. In average, rentals are below or close to the market average.

[Operator]

Mr. Alves from BTG Pactual would like to ask question.

[Unknown Analyst]

I have 2 questions, both have to do with the mall. The first is about occupancy. Thiago, you mentioned you have the interesting amount in January, which was close to the fourth quarter. But thinking about the third quarter as a whole, how do you see the volume of contract cancellation? What is going to happen this year? I would like to know if in fact this is going to be closer to the average of the last year. And this is regarding the mall.

I have another question about same-store sales, same-store rents. There was a significant gap. I would like to know the reason. I know that it has to do with promotions and it opened an opportunity to increase this gap. But could you comment about this? And I would also like to know what the behavior of this gap is going to be throughout 2021?

[Thiago Muramatsu, executive]

Thank you for your questions, Mr. Alves. With regards to your first question in occupancy, I think that after Christmas it was going to be maintained according to what we've seen this far. The cancellations were even lower than what we expected, and leasing was also higher than what we expected for the month of January. We will still have some cancellations over the first quarter, but it's not going to be different from what we've seen in the past years. It's natural in the first quarter. What we've done in terms of leasing, we were able to occupy large areas that have been vacant for a long time.

And also, we have, from the point of view of anticipation of payments and occupancy, tenants and the financial health of the mall, as a whole, everything has been very positive, actually. And of course, it will all depend on how our sanitary conditions evolve. I'm optimistically careful about what is going to happen throughout the year. Perhaps the first quarter is going to be a little bit more challenging, but this scenario will change with vaccines. And I'm hoping that we will have a first half of the year, which is more similar to what we had in the pre-pandemic year, 2019.

Same-store sales has a high correlation with a flow of people in the malls. So as we have more restrictions for occupancy and time schedules, this number tends to be more negative. And then in the second quarter, we're going to have very high numbers because we were close in the second half of the year. We have good opportunities because we had a low level of sales in the previous period.

[Unknown Analyst]

Mr. Thiago, if we keep the occupation levels with more people coming to the malls, this number, of course, tends to grow.

[Thiago Muramatsu, executive]

You mentioned it well. We worked intensively while the mall was closed. We reduced 50% of our rentals. And then when we resumed activities, we resumed the 2 primes. And of course, it helped us not to be as negative than we would have for same-store sales. Of course, we gave some discounts in terms of the occupation level. If we take into account the discount regain, both for fundamental fees, rentals and the level of owners, occupation rate is going to be in the order of 12% or 12.5%.

[Operator]

We have 3 questions via webcast. The first is from Bruna. I would like to know more about the partnership with SPX. Do you intent to mind rate assets start to -- and the change from totally into a real estate channel or are you going to do it only for some assets?

[Thiago Muramatsu, executive]

Bruna, thank you for your question. Well, initially, we are not planning to have CCP migrating its assets totally or partially to this manager. This may happen, but it's not our initial plan. The plan is that along with SPX, we will prospect for new assets. And then we would have a partnership. We would have part of the assets. And we're partners of the manager as well. But part of this investment would be using third-party capital. We can transfer some of our assets to SPX. But this partnership was not created with this purpose. It was done because Pedro decided to create a real estate asset manager with an investment strategy that goes through the acquisition of assets. And then we will start working with this business and this strategy and some of them may be SPX assets, but this is not what we have in mind for this partnership. I hope you have understood. Otherwise, you can send an e-mail to us and we will be happy to answer.

[Operator]

The second question via webcast is from Bruno Andrade. What is the current payout? Do you intend to keep it? Are you anticipating to distribute dividends? And what is the amount going to be?

[Thiago Muramatsu, executive]

Well, what we have practiced and historically have been higher than this. But usually, we use a minimum of 25%. We have had extraordinary payments of dividends, one in 2017 when we sold Prologis. And then in 2018, when we sold Cidade São Paulo and part of the related mall. And now we had a dividend distribution because we opened our capital. And therefore, what we intend to keep in the short-term is a minimum payout of 25% and not 6%. The other 75% right now because we still see some opportunities for growth, we would like to keep a reserve of profit for expansion later on.

[Operator]

The third question is from Rafael Rebate. Regarding the revisions of contracts for 2021. Is the 40% you mentioned related all to offices? Or does it include malls? How are you negotiating renewals with clients? Regarding the 42% of revision for 2021, what is the AAA percentage rate?

[Thiago Muramatsu, executive]

Well, thank you very much. In response to your questions regarding the 40%, they always have to do with corporate building. They are not for the malls, and this amount is also for the revenues that these rentals represent. Regarding the 40%, it has to do with coupon, both in revisional and also contract renewals. So of those 40%, over 40 -- over 35% relates to AAA. We have very few Class A assets, the ones we had were reviewed at the end of last year. Is that all? I think that was all right.

[Operator]

We have a fourth question from Claudio. In the previous call, you talked about the stores resumption, and I'd like to know whether you have any news on this topic?

[Thiago Muramatsu, executive]

Claudio, I hope you're doing well. Well, we commented about it, and we're still studying, analyzing the logistic warehouses. In this area in general and for as far as our talks, in general, we have spent more time with last-mile warehouses than with larger warehouses, big boxes. But we are still analyzing these 2 possibilities for logistic warehouses, both large ones with the distance of up to 30 kilometers from São Paulo and also last-mile warehouses.

[Operator]

[Operator Instructions] Since we have no more questions, I'd like to turn over to Mr. Thiago for final consideration.

[Thiago Muramatsu, executive]

Well, as I mentioned before, 2020 was a very challenging year for all of us. It was not different for CCP. In 2020 -- I'm sorry, in 2021, it's not going to be easy, but we have a more optimistic view for the year despite the whole sanitary conditions we're going through. We are now dealing with something we know about. So there are less uncertainties. We are also having our immunization program, which will have a direct impact for the performance of our properties.

In terms of the shopping mall, the occupation level is very healthy. And also those stores now that have gone through these difficulties came out as winner and, therefore, this is very for comforting for us. In regards to the building and the AAA portfolio, we have a higher vacancy level.

From a financial point of view, it has to do with the Class A buildings. And therefore, the impact is not so bad. We will reach our normal levels throughout the year depending on how the immunization plan we've carried out. We have reasonable level of requirement of refunding, refinancing. So I think that this year, you will see CCP very active and more active than last year.

I'd like to take this opportunity to publicly thank Pedro for the last 5.5 years he had at the company. He did a very good job, a transformational job. We were able to do a lot. We had a lot of M&A, opened our capital, and we're able to balance our capital area. This is all thanks to Pedro. And therefore, I would like to publicly thank him. And now I will continue doing what has been done this far, pursuing the growth of the company. I thank you all for your attention and for participating in the call.

[Operator]

The CCP teleconference is now over. We thank you all for your participation, and wish you a good day.