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Edited Transcript of BRPR3.SA earnings conference call or presentation 31-Oct-19 3:00pm GMT

Q3 2019 BR Properties SA Earnings Call

Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of BR Properties SA earnings conference call or presentation Thursday, October 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André Bergstein

BR Properties S.A. - Chief Financial & IR Officer

* Martín Andrés Jaco

BR Properties S.A. - CEO

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for waiting. Welcome to BR Properties' Third Quarter of 2019 Results Conference Call. With us we have today, Martín Jaco, CEO; and André Bergstein, CFO and IR Officer.

This event is being recorded (Operator Instructions) This event is also being broadcast live via webcast and may be accessed through the BR Properties website at http://www.brpr.com.br/ir, where the presentation results are available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded.

Now I will turn the conference over to Martín Jaco. Mr. Martín, you may begin your presentation.

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Martín Andrés Jaco, BR Properties S.A. - CEO [2]

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Well, good morning, everyone, and thank you for your interest and presence in the third quarter 2019 results of BR Properties. The dynamic, as usual, I'll make a brief introduction and a summary of the quarter and then pass to André who'll make the detail of the results of the third quarter. After that, we'll leave enough time for Q&A and any other clarification that you might need.

So let me start by the summary of this third quarter of the company, not only talking about the company, but also on the real estate office market. It's been an excellent performance both on the real estate market and on the operational side of the company.

Let me start with the market. Talking about the office market in São Paulo, numbers, which will still be released by the consultancy companies, but we have a preview and the numbers indicating São Paulo growth absorption of around 690,000 square meters. This is close to the historical record growth absorption. And in the same year, as of -- numbers up to date, the net absorption was close to 350,000 square meters. This is a very high number of net absorption, which really reflects on the vacancy. And vacancy in the overall market of São Paulo already is below 15%. And considering only the AAA market in the core regions, we're talking about 8.5% of vacancy. This really creates the beginning of scarcity of good-quality space in the core regions of São Paulo.

All of those figures just said that the market is already in the expansion mode. As we have said in the previous years that, that will happen in São Paulo, that's what we are already observing and now you could understand why we positioned ourselves in São Paulo on the investment that we did.

When we turn back to Rio de Janeiro, the behavior is similar to what we expected, an important growth absorption around 190,000 square meters until today. And a net absorption close to 0. This clearly represents the flight to quality movement that, as you know, from 2018, started very strong in Rio. And 2019 being even stronger than last year, who favor on then the main core properties in downtown, such as Passeio, which you all know the story of the leasing activity that we have in consecutive months.

Vacancy, the overall rate is around 27%. And in downtown, which is the largest area of office, is below this average, which is around 25%. Thus showing that really the downtown area of Rio de Janeiro with all the infrastructure and transportation and services is really a differentiation when you have a AAA property. Both cities, São Paulo and Rio de Janeiro, when you analyze from the point of view of the new stock, both have very little new stock as we have said, and we don't have to repeat over and over again, but that's the behavior that we'll have for the next 2, 3 years. Therefore, the scarcity will be even worse as time passes by and we continue with those 2 levels of absorptions in São Paulo and in Rio de Janeiro.

Turning now to the performance of the company. As I mentioned, André will give the details in just a moment, but I will like to emphasize, again, the 3 main levers of value creation for the company. And the three, again, has been very active. The first one I'll be talking about leasing activity.

The main result of the leasing activity you could see on our net revenue, which compared to the same properties of the second quarter 2019, it's an increase in net revenues of around 10%. That just shows the effect of the previous leases that we had announced in the previous quarter that already began to take effect in the third quarter. In this quarter, the third quarter and considering also October, we did new leases, we signed new leases with -- in the -- at a sum of 29,000 square meters of new leases signed. And those leases haven't gone through the results yet. So again, this is what we'll see moving forward. The leasing activity is very strong as we see in the market and, therefore, it's inside our company as well. And this result, as long as we continue this feature, it will reflect in our net revenues and our EBITDA as you will see the numbers in just a minute.

The second lever is really our liability management, which is really our debt. Our debt, we work on 2 important fronts. First of all, the reduction of the total debt, gross and net debt, by paying the expensive debt. And the second is really the reduction of the cost of existing debt inside the company through renegotiations of debt or getting new debt with lower cost. And remember, this is an exercise that we've been doing for the last 2 years. We have been positioning ourselves in CDI, changing the profile of our debt in order to get all these gains that we were supposed to be having and now we are seeing clearly in our results.

Where we can see clearly these results in our FFO results, BRL 20.5 million with a margin of 22%. It's an increase of around BRL 16 million, BRL 17 million compared to the second quarter. So this is all the effects which we already can see, not only leases I mentioned but on liability management, I think the great depression that we have on this quarter.

And the third lever of value creation for the company is the M&A. As we announced, we did the sales of Barra da Tijuca, 70% in Rio de Janeiro, BRL 185 million. And we also announced the Chucri Zaidan sale of an office in São Paulo, BRL 307 million. So we're talking about close to BRL 500 million recently announced sales. The proceeds of the sales was used almost entirely to the reduction of costs as we mentioned. So as you see, all the levers are connected and they combine to generate all this value and the potential value that we have still inside the company. So there's much more to do in liability management as we said.

And on the side of acquisition, we announced the acquisition of the other 2 towers, 57,000 square meters of the remaining towers at Parque da Cidade. So combined with the previous acquisition we did in March, we have 102,000 square meters of brand new AAA property in a mixed-use development in the strongest region today in São Paulo. We had the largest AAA inventory and the largest concentration of multinational institutional tenants. So we already have inside the company, the growth of the company already hired. That's an important issue for you to bear in mind. Remember, that these builds will be delivered in 2021. And if we consider the growth of the market, the lack of new inventory, there's a huge potential to be freed once we receive these properties and we start the leasing activities.

So again, it's important that all of those 3 levels of value creation, they are working. They have been working and very active in the last quarters and that's what we expect to continue in the quarters to come.

So without further ado, let me just pass to André, who will give the details of the results of this quarter.

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André Bergstein, BR Properties S.A. - Chief Financial & IR Officer [3]

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Good morning. Thanks very much, Martín, and everyone. Thank you for attending the call. Regarding the financial highlights of the third quarter, I would like to emphasize the following points: BR Properties registered net revenues of BRL 95 million in the third quarter, representing on a same asset base, an increase of 10% over the last quarter. This growth came mainly from the lease agreements with (inaudible) in Passeio, which reached its full amount in the office area, combined with the revenues from the new lease agreement signed in the second quarter of 2019. It's important to mention that we have revenues from 22,000 square meters of already signed agreements that were not registered yet in the third quarter.

G&A expenses, excluding vacancy expenses, stock options and taxes, totaled in the first 9 months of the year, BRL 41 million, remaining stable when compared to the same period of the previous year. This confirms our commitment in keeping G&A expenses under control, achieving more efficiency in our margins.

Considering the growth in net revenues with a stable G&A, adjusted EBITDA in the quarter reached BRL 70 million with a margin of 73%. When compared to the previous quarter on a same asset base, adjusted EBITDA increased 18%. The adjusted net financial expenses recorded BRL 48 million in the quarter. That's a huge reduction of 27% when comparing with last quarter and 36% when comparing with the same quarter of last year. This performance start showing the results of our liability management work done during the last years and intensified in 2019. Not only from new financing with average costs well below our previous cost of debt, but also with the prepayments and ordinary payments which occurred within its first 9 months of the year.

Apart from ordinary amortizations, BR Properties prepaid BRL 166 million during third quarter and October. This debt had an average weighted cost of 11.4% in nominal terms over the last 12 months, which is equivalent to CDI plus 5.7%. Throughout the year, the company prepaid BRL 1.1 billion in debt that had an average cost in the last 12 months of 10.1%, which was equivalent to CDI plus 4.5%.

With all these initiatives, BR Properties has been able to reduce its average cost of debt concentrating its debt in post fixed rate, serving the benefit of continuous reduction in interest rates in Brazil. That said, adjusted FFO for the quarter, excluding noncash and nonrecurring CapEx, was BRL 20.5 million with a margin of 22%, representing a strong nominal increase of BRL 8.8 million over the third quarter of last year and BRL 16.7 million increase when compared to the previous quarter, which had an FFO of BRL 3.7 million.

So BR Properties registered, at the end of the day, a net income of BRL 25.6 million in the third quarter. In terms of liquidity, BR closed the quarter with a net debt of BRL 2.1 billion and a cash position of around BRL 600 million. The average effective cost of debt in the last 12 months was 8.7%, a decrease of 220 basis points and 100 basis points when compared to the third quarter of '18 and the second quarter of '19, respectively.

The company believes there's still room for further reductions in its cost of debt through refinancing and prepaying its most expensive debt. Considering the sale of Chucri Zaidan building that occurred now in October, the net debt will grow to a value around BRL 1.8 billion. BR Properties closed the quarter with consolidated financial and physical vacancy rates of 18.7% and 27.3%, respectively. Considering the new leases that we have now in October, financial and physical vacancy rates reduced to 7.7% (sic) [17.7%] and 26.1%.

Well, I think those were the main financial highlights of BR Properties in the third quarter. We will now open for the Q&A session. Thanks very much, again.

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Operator [4]

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(Operator Instructions) This concludes today's question-and-answer session. I would like to invite Mr. Martín Jaco to proceed with his closing remarks. Please go ahead, sir.

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Martín Andrés Jaco, BR Properties S.A. - CEO [5]

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Thank you very much for the presence. As usual, we will be available -- all our IR team will be available to any questions or clarifications that you might need. Thank you, and have a good day everyone.

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Operator [6]

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That does conclude BR Properties' conference call for today. Thank you very much for your participation, and have a nice day.