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Earnings Call Transcript

Earnings Call Transcript
2022-Q4

from 0
Operator

Good morning, ladies and gentlemen. Welcome to this video call of SYN to discuss the results on the fourth quarter 2022. This video conference has been recorded and you can watch it later at a company website, ir.syn.com.br. The presentation will be available for download. We'd like to inform that all the participants will be watching this call during this presentation. And right after that, we open up the floor for a Q&A session and further instructions.

Before starting, I'd like to reinforce that all the declarations are based on beliefs and supposition of SYN administration and the current information that we have available at the company. This statement brings risks and uncertainties considering they consider future events. So they do depend circumstances that may or may not happen. Investors, analysts and journalists should consider that events related to the macroeconomic environment, the segment and other factors, may these results be materially different from the ones expressed in the prospective statements.

We have here in this call, Mr. Thiago Muramatsu, President and COO of SYN; and Mr. Hector Leitao Financial CEO and Investor Relationship at this company. I'd like to pass the microphone to Mr. Muramatsu to start up this presentation. Mr. Muramatsu, the floor is yours.

T
Thiago Muramatsu
executive

Thank you so much for being here, participating in this call. We are going to talk about the results of 2022. And to start up this year's conference, we are going to see the highlights. The year was active when you see the structure of capital. Just to remind you, in the end of 2021, we conclude the sales of four buildings, the transaction of Brookfield, we sold one more Triple A in JK to double the participation that we had in the BA shopping mall and 40% of the project. We conclude the year with the volume of cash that was high. Although we had distribution of December of BRL 1.250 billion, we finished the year with over BRL 1 billion in cash and great part of this resource was for paying debt.

So we prepaid the 7th debenture, the 9th debenture, the first and the second series of the 11th debenture as well, also prepaid the first series of the 3rd debenture, everything at BRL 700 million in prepayment and we understand the year that we saw difficulties for new investment, this choice was assertive and this strategy proven to be correct throughout the year to reduce the debt, although that the spread that we have on the base rate, great part of CDI is low cost, but with the increase of SELIC that happened, and we end the year with almost 14% and we believe that it was a good movement to anticipate as much as we could adapt and this one is here with [indiscernible] prepayment rate.

And also now in the end of the year, we had the elevation of the rating. This was part of the movement of the capital. Moody's could not elevate our rate of the A+ Brazilian for AA+ Brazil. So we are 2 ranks up, although the environment is more hostile.

Last year, we also received 2 awards. We were awarded. One is Valor EconĂ´mico that we were awarded the best company of real estate investments and development. That is the second time we participate but it is the first time we were awarded and one more time that we were awarded this recognition of 100 startups -- Open Startups as one of the most innovative companies in Brazil, category, real estate and construction.

And the main investment that we have, a technology was an investment in Condoconta is one of the biggest rounds of investment that we had in Brazil last year with right point, we got this investment at half quarter, and the investment was BRL 24 million and the total of 10% that we acquired of this company.

And then the second year in a row, we have been working on our side ESG. And this is the second year that we issued a report. And here, we see the main points of the pillars of ESG environmental. In 2021, we closed with almost a very high number, 80%, 85% of the water resources come from alternative sources energy, this is a more expressive figure, 100% of the building is AAA, we use some kind of energy source that is incentivating and at the malls, we have malls -- half of the malls using already energy sources that are incentivized social aspects. For many years, we have been working in our institute, ISYN. And in 2022, we invested more than BRL 4 million in social initiatives, distributed here in 4 big pillars in this institute.

In addition to that, we foster -- this topic is very relevant when we manage big audience, big malls, shopping malls, 3 million, 4 million people, in our developments every month. So together with diversity, [indiscernible], we had a training session, anti-racist for the security guards and great part of the employees of the mall and here, corporate company, they were part -- they attended this training session, so we tried and understand how we decreased the effects of racist attitude inside our development.

And finally, talking about gender equity, we have 50% of our valued directors of the Board of Directors and 67 of the managers are women. If we get top management, more than half is composed of leadership positions by women. And governance in 2021, we changed the shape of our Board of Directors. In addition to [indiscernible] and I, we have more [ four ] advisers, and they are independent. So we have a comfortable number of advisers based on governance with a relevant number of advisers that are independent. And finally, in the end of the year, moving with the ESG actions, you see more ahead, some more results of these initiatives that we have been working on ESG at the company. We instituted the Committee of ESG and sustainability in November 2022.

Now talking about operational performance. In my point of view, the year was very good. And the year was more focused on inside the financial aspect and also in the very beginning, I mentioned about the prepayment of debts that we had in 2022. And also, we are going to see the operational results, and I believe they showcase that.

First, let's talk about financial occupation. We are back to the rates near 90% in the fourth quarter '22 and physical occupation, it was 83.6%. Out of this, we have ITM, representing very big rate, almost half of our vacancies is ITM. So if you remove ITM, and I'll talk more about it, the occupation of our buildings and the relevance of ITM is occupation weekly would reached 93%. And remember that everything that we sold on corporate buildings, they were 100% located. So ITM is more relevant now.

Moving ahead and talking about the shopping malls. First, we are so pleased to see this result that we achieved in occupation at the malls, and we finalized financial occupation 94.5%. But this 94.5% is the average of the quarter in our final day of 2022. We finalized financial occupation almost 96%. And when we see physical occupation, we finished with 95.2%, and there is a commercial building that a plaza 5,000 meters, and we started the year with it vacant, but now we have 1,400 meters and if we move it out, we see that the year is 96.7%. This is the average of the quarter for the end of the year, more than 97%, and the vacancy rate is under 3%. This result is very good even when we see the history of the performance of the malls.

Moving ahead, sales, we finalized the year with BRL 873 million, already more than 10%, almost 10% above the fourth quarter 2021 and the vehicles FLOW ended the year with the quarter with 2.1 million tied with the fourth quarter of 2021. And store sales, same-store sales, 7.7%.

And I would like to talk about same-store sale is also a result of several changes that happened throughout the last 3 years in the malls. And I mentioned that we could elevate the occupation of our development. And I believe the same-store sale that was not so high as we would like to see due to several factors. Our portfolio is concentrated in Sao Paulo, Rio de Janeiro. I believe that the cities that suffered this growth delayed compared to 2019 North and Northeast but I believe that it's a very important point that I would like to bring is representing a little bit of same-store sales not so accelerate throughout the last 2 years.

We have been working, replacing the store and qualifying this mix. So the volume of location in 2022 was replacement retailers that was bad in performance, or problems in their operation. And we are rationalizing and improving the operator's quality. And of course, this will bring an impact of the same-store sale because we moved the stores compared to the last year. But we believe that now we have a occupation cost with good growth with NOI. When we see the same properties in malls in 2021 and 2022, we grew more than 30% on results with the occupation cost that is healthier. And I believe that from this point on, we can capture more of these changes that we had, improving the mix in same-store sales. But currently, we captured this already on day one when we see our results.

Corporate buildings now, we finished the occupation -- financial occupation of 75% and physical 61%. When we see ITM, excluding ITM, we would go mix near 85%, and we have currently 2 problems in our portfolio on vacancy ITM that is a typical building initially was conceived to be textile center, and then it became an exposition center. And finally, it has begun office buildings in the region that is more challenging. And we see the context of occupation of the city in general. It doesn't matter the quality of this asset, the location is a very important sector for our locations.

In our buildings here, in our regions, we have a leased in 2022 at 22%, near 25%. And I believe this shows the strength that the real estate has in this region compared to other regions, the Triple A suffer vacancy. But opposite to that when we see Class A buildings, we have 3 buildings in our region with lots of vacancy, but they are 100% rented with loan contracts and one of the tenants started the operation in 2022. And we have contracts varying from terms 4 and 9 years. So we are at ease with these other properties.

Another building that is at challenge is BrasĂ­lio Machado. We had some technical problems in that building making it difficult renting it, and we spent 1.5 years solving troubleshooting, and we believe that we concluded this trouble shooting in the end of this quarter. And I believe that is a good perspective to rent this building, representing 6%, 7% of our vacancy in office buildings.

When we see general aspect of cash generation, NOI of the portfolio, these 2 assets considering 100% rented, we have an increase 7%, 8% in our NOI. And I believe that, although we report a number that seems to be -- and it is a number that's not so good. At the same time, we have been dedicating time to address all these assets. They are special assets. And the way that they have in our results is not so relevant. But of course, there's nothing that we can feel comfortable about so we have been addressing these 2 assets specially.

I pass the floor to Hector now who's going to talk about financial performance.

H
Hector Bruno de Carvalho Leitao
executive

Good morning, everybody. Before starting, deep diving into numbers, just on top of Thiago's introductions about '21 and '22, and it's important to remember that we see the reflection on these figures, NOI not of the same properties, but then total NOI, EBITDA FFO lower than FY '21 because we decreased 35%, 40% the results of our assets. But on the other hand, we have a distribution of dividends over BRL 1,000,300,000 and we have paid BRL 600 million in debts, BRL 700 million plus in interest. So we are talking about a good ratio. We lose BRL 86 million EBITDA, and we bring the return to the investors of BRL 2 billion. So the year was shy considering absolute numbers in cash flow generation of assets, but this strategy was considered an assertive considering December '21, even before the third quarter of 2022, we saw an acceleration of inflation and probability of a strong reaction of Central Bank.

So all the strategy of '22 briefly benefits to '23. When speaking about the return of capital to the stockholders also changing the profile of the debt that now is more concentrated in IPCA. And later, I will show when the rates gross. In the end of last year, in the beginning -- the end of '21, the beginning of '22, we benefit from the total cost of the debt reduction. So we had a strategy that was really aware and to me and all the team, the result was interesting.

So from the NOI, total NOI of the quarter, we reached BRL 45.8 million, a drop of 25.6% compared to '21, similar level to 29% and BRL 800 million in the total of the year dropped in almost 20% and 26% compared to '21 and 26% in '19.

So observing the same properties, how we work the productivity of what we have to compare to 2021. We grew almost 5% quarter after quarter. And the growth was very robust, 23.6% compared to last year and 32% compared to 2019.

Next slide, we are going to open up the business units on the left-hand side, shopping malls. Same properties. We had a decrease of 1.6%, basically because of recovery of default in the fourth quarter last year. So the NOI was aligned to last year than this year. This quarter, '22, the final quarter, we had the World Cup and election year, bringing a huge impact on the malls results. And these days of the World Cup and election days, the malls were empty, and it was some days in a period of a month. So the impact is really relevant.

In the accrual of the year, the growth was 37.7% in malls, BRL 145 million results and a growth of 23% compared to '19, although the same-store sale and the sale was in the same level of '19, we have been working hard. We have mentioned this before, but I'd like to highlight the team's who are maintaining the cost in nominal basis.

We had an actual gain over 40% in the last 5, 6 years. And this brings a consequence that we can keep the occupational rate that is healthy for the retailer receiving more rent so we can live with levels that are higher on occupational rate.

NOI of buildings on the right-hand side, the growth was 40% in the quarter, 60% compared to '19. And in the accrual of the year, we reached BRL 35 million in NOI of buildings and growth of '19 compared to '21 -- and 9% compared to '19. So this we see an impact of [indiscernible] building that we conclude the rent, 100% of the rent in the end of '21. And we are picking up the effects now of the revenue and the grace period in '22 and '23, we see an interesting impact.

Concerning EBITDA, and here's an important point that we do not consider the impact, the effect of the linearization of discounts, EBITDA. Without this, the effect would be higher if we compare. We reached BRL 31 million in the fourth quarter of '22 so when we compare, the effect without the assets sold in the last year, '21, we see a level of growth of EBITDA and when we see the accrual of the year, we reached BRL 136 million on operational results, excluding here the impact of selling the assets in 2021, we could see a growth near 20%.

So briefing up, this is the operational aspect. We worked in a satisfactory manner this year increasing productivity. FFO is a proxy of cash generation. The indicator that is close to that, we closed the quarter with BRL 8 million FFO, a drop of 13% compared to '21 and 50% compared to '19 and in the accrual of the year, we concluded with a cash generation of BRL 1.4 million and a decrease of 98% compared to '21 and 97% compared to '19. So the big impact was exactly selling the assets and the interest rate coming from 2 in '21, they went for 4.5 SELIC coming to 14%, the average growth superior to 12%.

So we worked on the growth rate, on productivity here of these assets and a strong work of debt management that we are going to deep dive later bringing results -- comparative results comparing the same scenario of interest rate in the same scenario snapshot December '22, but the financial result was so similar because of the increased 3x the average cost of CPI a year.

So next slide. We concluded the quarter with BRL 317 million cash and gross debt, BRL 1 billion, net debt, BRL 769 million. So we can see a decrease on the gross debt compared to the previous quarter, almost BRL 600 million. And we still have a cash that is comfortable to face possible investments, considering that we have a positive generation of cash of the assets so the situation is comfortable to have an experience of a period of lack of liquidity in the market and the credit is this accelerated because of the recent events of political uncertainty and some news on private credit with the ratings that were worse.

About covenants, we are also comfortable, net debt on EBITDA in IFRS closed in 5x and our limit is 7x. So we have a considerable gap of 2 EBITDAs and another important covenant are the exonerated assets, the valuation of the assets that are not guaranteed and the corporate debt. Our limit is 1.4 unencumbered, and we have 3x this indicator.

If we compare the previous year, we proved this indicator because on the prepayment with a ratio that was clear, increasing the duration of the debt and decreased the encumbered property and improve the value of the money for the capital.

In the final graph, we show the evolution of financial expenses. And comparing line after line what happened in CDI that I mentioned before. In the end of '21, we had the strategy of changing the debt to pay that has a descending curve, inversely proportion of the increase of CDI. The strategy is very assertive.

Next slide, we show the next 2 years, we have nothing of amortization. These values are not relevant. Adjusting '25, we have an amortization value that is important is one more factor reinforcing our liquidity and financial robustness.

On the right-hand side, we shared the debt, the share of IPCA is almost 35%. And a year ago -- 1.5 year ago was almost 20%. So this illustrates what I said before. And our average cost of the debt on CDI 1.5%, IPCA 6.5%. We have just one in IPCA.

And this slide illustrates our work managing debt, prepayments of debt and then we had 433 prepayment, amortizing more than the estimate originally in the debt contracts with the estimate of prepayment. On the left-hand side, we see savings, cash generation with this action, almost BRL 10 million in '22.

Improving our financial result in '23, we improving BRL 5.4 million and '24 to '26, almost [ BRL 28 million ]. And this calculation considers the expenses on interest that we do not have with this payment, but also the financial revenue that we do not receive, burning cash, and I call this to decrease the gross debt.

On the right-hand side, we see a table with savings in interest rate, but also improving the duration of debt. So if it did not prepay, we had an average duration of 3.2 years, but we conclude the year at a duration close to 4, 3.9. And the gain -- marginal gain of spread but in other variables, interest in earnings and in the final line of this table, average spread, we illustrate the impact of having exchanging IPCA to CDI that the average spread was 3.74% in the end of '21 because the IPCA accelerated a lot to reaching in the last -- the [ accrual ] of 12 months, almost more than 12%. And then we had this exchange of index increasing the IPCA spread considering 1.4 in spread of CDI plus IPCA, the spread is 0.93 compared to CDI. And I conclude the financial session with this information.

Operator

[Operator Instructions] The first question comes from Bruno Tomazetto, BTG Pactual.

B
Bruno Tomazetto
analyst

I have 2 questions. The first, if you can talk more about the shopping mall performance in the beginning of the year, January and February. On the consumer side, sales and also the retailers, if it is good or not. And if you see here from their side, extra difficulties, operation and financial difficulties as we've seen some industries. And the second, and if you can detail these retailers that you commented, [indiscernible] this dialogue with these players to reduce their areas and the opportunities that you see to qualify the needs, improving their renting.

T
Thiago Muramatsu
executive

Good morning. These questions are very good. About the performance in the beginning of the year has the same trend of the fourth quarter with no event that is different as the World Cup and the election year. So we had a good performance in January, double-digit growth compared to 2022. That was accelerated and strong growth in '19. It was a strong January in the city of SĂŁo Paulo.

We commented that it suffered a big impact during the pandemic because of home office. Great part of the audience, they are executives who work at Paulista Avenue and this occupational rate increases. We do not have the level of flow in 2019. But with the growth already that is robust in January, February and the sales are higher because of price re-adjustments and average ticket that is higher of the consumers that go to the mall.

Sales performance and the operational results of the assets. And the retailers, generally speaking, we are surprised in a positive way. They come for spaces. In January, the first 15 days were not so good because of the vacation time, it's normal. But now in February, in the beginning of March, even after Carnival, we accelerate the rental of these spaces. We did not see as we normally see a loss of occupation that was strong in the first quarter that is seasonal at the malls last year. We did not see this deterioration showing that the profile of the retailers that survived after the pandemic, nature of selection was done. The retailers that are reversing financial and management aspect.

And the third question specifically about the retailers that we see bad news on the media, on the press. American specifically, there is a case that is in a great concern for different stakeholders. They delayed just part of their rent in the previous management before the judicial recovery request, and they are -- they pay everything, all the malls pay their rent, and we believe that, there is a potential, great potential of loss NOI almost 1% if everything went wrong, and we see that the effect would be lower irrelevant.

And they have a small share in our portfolio. If we consider ABL total is less than 1.5% share occupation in the malls. 2 of the malls, the occupation is 400 meters, the store and another one 500-meter store. [indiscernible], problem with them and [indiscernible]. There is dialogue of composition, good news and they are proactive. They are seeking us, they are coming to us and shopping malls manager to put up an agreement, a settlement of less productive sort bringing interesting solutions but they do not meet and they anticipate that dialogue is a positive aspect. So the chances of having important impacts is very low.

[indiscernible] does not represent a lot NOI in our normals in not in area, not even results. I do not see concern, generalized concern about these players, exactly, because on the other hand, we see the players, big players and small players coming to us to keep on occupying our malls so we have a good indicator on the demand side for spaces that we do not have this concern about these players. Is there anything else that you would like to ask? Bruno, do you have anything else?

B
Bruno Tomazetto
analyst

No, that's great. Thank you so much.

Operator

Next question is from Carlos [indiscernible].

U
Unknown Analyst

Can you talk more about the trends that we should observe in the first quarter 2023. And in the year in general, should we see better results? If yes, what about the main drivers? Can you explain the advantage of restructuring this Grand Plaza Fund for [indiscernible] shareholders and the possible risks ahead. The net debt increased quarter after quarter. Is that any estimate to infer this trend selling an asset to decrease the debt? How about the ITM and the estimate of destination. Even if it is demolish everything and transform land for real estate development. And about the Grand Plaza fund with the merge, anything else that you would like to say about the quarter? Is it interesting to sell to reinforce cash flow rate?

T
Thiago Muramatsu
executive

These questions are very extensive but let me gather them both because the content is very similar. About the first quarter '23, Hector has given us a good overview on the results. We are ready to launch the first quarter. And I can talk more about it when we conclude the quarter. I can answer this later. And about Grand Plaza before, let me answer the first part of the question. There was an increase in the net debt because we were reclassified on an investment with the feed that was classified in cash, but now it's property for investment. So there was no debt increase that was opposite next quarter, what you're going to see is our debt rate dropping consistently so we presented 5.2 now, and you want to conclude the year and the quarter after quarter, we are going to see this number dropping.

And about the ITM that was the question, Carlos question that [indiscernible] question. What is the main advantage of Grand Plaza? There are 2 main advantages on this structure. The first, we address the fine that we received in the fund from the tax authorities and the basis is not sustainable. We keep on disagreeing on the tax authorities population, and we are using the legal objectives for that as we do not have a result on the fine by the tax authorities. We see the rates from this point on, this is the first achievement we have with this dialogue. And the second that now we are investors -- independent investors. Before that we were just -- we had [indiscernible]. Now we are directly in the asset, bringing some gains on governance compared to being just a shareholder of the fund. The fund is managed by the administrator, and we are holders. We do not have influence just the agenda that is taken to be voted in the assembly but now as the holder, shareholders of this fund, we can have more governance on this asset.

And about [ quote ] destination. We do not have plans. We keep on doing the things as usual. We do not change the profitability of the business from the last 13 years -- 16 years. We do not change anything. And we do not have any plans to sell part of the share to raise cash because -- so we have been trying to work with lower cash levels. All these movements that we had prepaid the debt in 2022, 700, but it was over 400. Everything was part of a strategy to put this cash more efficiently. So not to have this elevated cash in the company and the debt cost that is CDI plus 1.5% is not efficient.

And with all these movements that we have, sales and improving the performance of our assets, optimizing our capital structure, we have a cash position that is comfortable, BRL 300 million that is very comfortable so we don't need to concern about needs of refinance or new finance, nothing like that, nothing of the sort in the following 2 years considering the worst-case scenario and also some risks of business, as Bruno mentioned, retailers, we are comfortable for the next 2 years, we have enough cash as we don't have currently.

There is one more question about ITM. ITM if there is destination, we have been studying different alternatives. One of them -- then again, we do not have the power of decision. We have part of this asset. But anyway, demolished to put another development in its place. The calculation is not good, even if we have an NPS, but we have been studying alternatives also to incorporate it.

Operator

[Operator Instructions] Questions and answers closed. We pass the floor to Mr. Muramatsu for his final considerations.

T
Thiago Muramatsu
executive

And based on Diego's questions, what we have in perspectives for 2023, I believe that the value of our assets is evident based on the performance that we have had in the last year. This beginning of the year, we saw that there is a balance in the market on credit restriction and all the problems that we have for big players, but opposite to that, the market, it's same paradox, but we see good results in the operation in the first 2 months of the year. It was good.

And about the trading of loans, especially in the last few weeks, we have seen big results and big demand on new spaces. And the shopping mall flow is still growing strongly. The offices, we have great part of the offices rented, except these 2 developments, as I commented, so we are optimistic on BrasĂ­lio Machado representing 7% of vacancy because of the regulation troubleshooting those technical problems. So we believe that is based on the location, we are going to have better liquidity for this year. And ITM, we have been working in different alternatives. We have seen some of them advancing well. And I believe that we start the year of 2023 with the house clean. We have very good perspectives on growth on the mall side and also estimates of growth that is very aggressive for the malls, and they are proven correctly.

Buildings, we are so excited, especially when we observe the 2 biggest problems that we have, and we are addressing them all. And I believe that, let's see. I thank you so much for attendance, for your time. And if you have further questions, we are here available, our team of RIs is available to meet your demand. Thank you so much. Good morning.

Operator

The SYN video conferences is closed. Thank you so much for your attendance. Thank you, all. Good afternoon.

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