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Edited Transcript of BRPR3.SA earnings conference call or presentation 6-Feb-20 3:00pm GMT

Q4 2019 BR Properties SA Earnings Call

Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of BR Properties SA earnings conference call or presentation Thursday, February 6, 2020 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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Conference Call Participants

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* Luis Enrique Alcantara Medina;Citi;Equity Research

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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' Fourth Quarter of 2019 Results Conference Call. With us here today, we have Martin Jaco, CEO; and Andre 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 BR Properties website at www.brpr.com.br/ir, where the presentation results are available. Participants may view the slides in the order they wish. The replay will be available shortly after the event is concluded.

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

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

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Thank you very much and good morning to everyone and thanks for the presence and interest in the fourth quarter 2019 results of BR Properties. As in the previous time, I'll make a brief introduction, then all the detailing of the fourth quarter 2019 results will be presented by Andre Bergstein, and we'll leave enough time for Q&A. So starting with the introduction. There are 3 aspects that I would like to stress. The first one will be regarding the areas of activities of the company and the performance of all those areas in the company throughout 2019. By then, we'll start with our liability management group. We were able to prepay BRL 2.1 billion in very expensive debt thus provide a deleveraging of the company that lower cost, as you're going to see in just some minutes. The second activity was regarding our M&A activity. On the sales side, we were able to sell BRL 1.6 billion in assets -- noncore assets as we mentioned that we were about to do throughout 2019. Those resources were used in the liability management program, as we mentioned.

And on the acquisition side, we were able to acquire BRL 1.4 billion in AAA asset called Parque da Cidade in a prime region of São Paulo, as I mentioned, an AAA asset under construction to be delivered by the beginning of 2021. This is the fastest-growing AAA region in São Paulo, therefore, all Brazil, with only 11% of vacancy as of today.

The third activity that we did was the follow-on that we did on the fourth quarter 2019, we raised BRL 1 billion and almost 100% of the proceeds of the follow-on are already committed. So we have been very successful, as we mentioned at that time.

If we consider only those 3 activities, as we mentioned, liability management, M&A activity and the follow-on, we have an excess of BRL 6 billion in activity throughout 2020. And this is probably one of the largest, not the largest in terms of activity, of all the real estate sector. Besides those 3, we have the leasing activity throughout 2019 with another very expressive tick up from via properties of 86,000 square meters throughout 2019.

On the 3 markets that we are in Rio de Janeiro office market, São Paulo office market and São Paulo logistic market. All 3 work very, very well, with 47% of the total area being done in Rio de Janeiro, as we said, due to the flight to quality movement. An example of Rio de Janeiro, our BR Properties performance, In downtown, their condition at areas, every 3 square meters that were leased to the market, one was from BR Properties, thus giving a market share of around 35% throughout 2019. The entire leasing activity throughout 2019 provided a decrease in our vacancy rate from around 9%, bringing the financial vacancy to around 13%, as we're going to detail in just one brief moment. The reason for all the success that we have in all those areas of the company was due to the strategy that was created 3 years ago, and we keep very, very confident on this strategy, very disciplined in the way that we were following this strategy.

And most important of all, because we have the team and a capable team and a very experienced team that was able to provide all these developments throughout the last 3 years. So a very special thanks to the entire team of BR Properties due to this result that we obtained in the performance of our operational areas.

As a consequence, and that's the second point that I'd like to stress. As a consequence of all this activity, we really have a transformational year throughout 2019 that brings the company, in the beginning of 2020, to a completely different situation than we were in the beginning of 2019.

Let's start with, first of all, the quality of the portfolio. Close to 90% of the entire portfolio of BR Properties today is AAA quality. And if we consider that we have Parque de Cidade, the office development in São Paulo and Cajamar, the logistics development under construction, right now with a total of another 2,000 and 50,000 square meters to be delivered, we have a fantastic growth on AAA areas as well in the next years ahead of us only by those future growth that we have inside the company.

The second situation that we find ourselves today, as I mentioned, the deleveraging of the company. With an LTV of 5% alone, besides other metrics that will -- I will cover in a minute. But 5% of LTV which is the lowest that we ever have in the company since its creation. Again in terms of improving the efficiency, the result of the company, you can see in the fourth quarter, a significant recovery and growth of our FFO margin and this is not considered an entire quarter of -- with the operational results since we have most of the debt that was paid throughout 2000 -- the fourth quarter, not represent 100% of the quarter, the 3 months, it was not the entire 3 months and all the leasing activity that we have in the fourth quarter is not represented yet in our top line.

So already -- contracted already higher, all this growth that we'll see in the next quarters ahead of us.

And the other new situation that we found the company today is the increase in our liquidity. ADTV was increased by 10x compared to what we have in the beginning of 2019 to what we have at the end of 2019, beginning of 2020. Therefore, very good consequence of all the operational activity we have throughout 2019. And the third point that I'd like to stress is really what do we see going forward throughout 2020, specifically about the market, the real estate market that we are in.

Starting with São Paulo, 2019 was very strong in terms of growth absorption. But most important, was very strong, the record year of net absorption, around 270,000 square meters of net absorption. This is guiding for a very important reduction in vacancy and, of course, reduction in vacancy demands an increasing prices or pressure in prices ahead of us.

2020, we expect that São Paulo will continue with a very important net absorption, thus continuing to reduce the vacancy. Therefore, in 2021, we'll be more than ready to start seeing the revisions of our leases and effective gains on top of inflation. On the Rio de Janeiro side, we have a very strong growth absorption. However, the net absorption improved, it's positive but still very shy. Therefore, the growth absorption movement is a reflect of the flight to quality movement that we mentioned. That's why we -- you can see the results that we have on Manchete that you can see in Passeio of more than 90% both buildings occupied due to the movement from poor quality to good quality spaces.

The same thing happened in Ventura by the leases that we did and probably throughout 2020, that's the movement that we'll continue to see. And Ventura will be the great -- probably the great benefit throughout this entire flight to quality movement that will persist throughout 2020 as we expect, and our net absorption probably will increase when we compare to 2019. This is what we expect of the market behavior in Rio de Janeiro office market. And on the industrial side, São Paulo, where we are in, you see that vacancy are already very low, economic activity is improving. The largest consumer center is São Paulo. Cajamar is pretty close to São Paulo, it is the main distribution logistic address of Brazil. Therefore, we'll continue to see a very strong demand. Vacancies, since they are in low levels, prices will tend to go up. So we are in a very good scenario that we believe to be in relation to the real estate activity. Therefore, what we expect in 2020 for the company. Number one, we'll continue with the leasing activity to reduce even more our vacancy levels that's generating value for the company. The second, the renegotiations will probably start to occur by 2021, where we see we're going to have the best spot in order to increase and negotiate with the tenants.

We will continue -- number three would be recycling of our portfolio. We still have some properties that we'll like to continue the recycling until we reach 100% of AAA portfolio and the M&A activity will continue as long as we always continue with an opportunistic approach, that is to say, if we find the right property at the right price at the right time in other market, of course, we'd like to make acquisitions. If we do not find, we don't have any pressure in making new acquisitions, only if they are accretive to the company. So this is pretty much the scenario that we expect. And now regarding the results of the fourth quarter, I'll pass the word to Andre Bergstein.

Andre, please.

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

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Thanks very much, Martin. Good morning, everyone, and thank you for attending the call. Well, regarding the financial highlights of 2019, I would like to talk about the following points. First, 2019, net revenues reached BRL 380 million, a decrease of 10% in comparison with 2018. The reduction was expected, considering that the asset sales that took place throughout the year, throughout 2019, were of 15 properties sold in 2019. It's also worth mentioning that the revenues from the 16,000 square meters lease agreement at Centenario building and from the 36,000 square meters signed at the end of the year has not been registered yet in the fourth quarter results. G&A expenses, excluding vacancy expenses, stock options and taxes reached in the quarter BRL 19 million, representing an increase of 3% in comparison to the last quarter of '18, below inflation registered in the same period. In the full year, those expenses amounted BRL 60.7 million, remaining nearly stable when compared to the same period of the previous year.

The adjusted EBITDA, excluding the noncash effect of the stock option plan and nonrecurring expenses, reached to BRL 270 million in '19, representing a decrease of 15% in relation to 2018, and we explained that for the same reason as we were expecting that to happen with the sale of the 15 properties in 2019.

Excluding nonrecurring effects, adjusted net financial expenses registered BRL 32 million in the fourth quarter, down 48% from last quarter of 2018. In the full year, adjusted financial results decreased by 22% when compared to the previous year. This result is the outcome of the strong reduction that we have in the average cost of debt throughout last year. It's worth mentioning that the financial expenses reduction was only partially reflected in the quarter as almost half of the all prepayments that we made last year were done only by the end of the year in December.

As part of the continuous improvement in the company's liability management, BR Properties has prepaid BRL 2.1 billion during the year. This debt had an average weighted cost of 11.2% in nominal terms, mostly equivalent to CDI plus 6.5% over the last 12 months. Considering the company's capital structure improvement initiatives, year-over-year, BR Properties gross debt and net debt normally reduced by BRL 2.3 billion and BRL 2.2 billion, decreasing 57% at the total debt and 86% over 2019 in net debt. The adjusted FFO reached BRL 23 million in the quarter, representing a nominal increase of BRL 21 million when comparing to the same quarter of last year with an FFO margin of 27%. In the full year, the FFO amounted to BRL 56 million, an increase of 39% over 2018, with a margin of 15%. The significant growth in FFO and its margin reflects how the company's work in liability management as well in recycling its portfolio, leading to a greater efficiency in its results. The company registered a net income of BRL 396 million, almost BRL 400 million in the fourth quarter. In the year, BR posted a net income of BRL 311 million, representing a nominal increase of almost BRL 300 million comparing to the previous year. This result was positively impacted by the appraisal of its properties in the end of 2019.

On November, the company concluded its capital increase by issuing 84 million common shares with a price per share set at BRL 12.50. The company raised the total amount of BRL 1 billion. Regarding the use of proceeds raised at the end of November, BR has already partially used its -- the amount to prepay debt, to initiate development of Cajamar project and it's actively looking for M&A opportunities to the balance of the money that we have raised.

The offer has strongly contributed to the increase in liquidity of the company's shares, resulting in a free-float increase from 29% to 41%, meanwhile the ADTV increased from BRL 6.9 million in the 9 months of 2019 to BRL 43 million in December. Based on all the efforts that we carried out throughout 2019 in our capital structure, the company reached the end of the year with extremely comfortable leverage indicators. While our net loan-to-value reached 5% from 32% at the end of 2018, the net debt-to-EBITDA ratio went from 8.1 to 1.3 at the end of the year.

Well, those were the main highlights that we have. Thanks very much for the call. Now we are -- we will open the Q&A session. Thanks very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Enrique Alcantara from Citibank.

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Luis Enrique Alcantara Medina;Citi;Equity Research, [2]

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My question is regarding what or where you will acquire in Q2? Are you planning to acquire only office or warehouse properties?

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Martín Andrés Jaco, BR Properties S.A. - CEO [3]

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Enrique, thank you very much for your question. So your question is about M&A and what is main target. So we'll continue with the same strategy that we announced 2019, our main target, office buildings in the core areas, AAA in São Paulo, that's where we have the bulk of our portfolio. In terms of logistics, we already are in the development of 150,000 square meters. So we have our hands full with this development. So the concentration where we want to grow, our M&A is focused on São Paulo AAA asset core regions.

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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 Martin 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 your attendance. As always, we'll be at your disposal for any doubts or any questions or clarification that you might need. Thank you very much, and have a nice day.

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Operator [6]

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