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Edited Transcript of BRPR3.SA earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q2 2019 BR Properties SA Earnings Call

Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of BR Properties SA earnings conference call or presentation Thursday, August 8, 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 and 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' Second Quarter of 2019 Results Conference Call. With us here today, we have 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 BR Properties' website at www.brpr.com.br/ir, where the presentation is also available. Participants maybe (sic) [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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Thank you very much. And good morning, and welcome, everybody, and thank you for the interest in BR Properties' earnings release of the second quarter of 2019. I'll start with a brief introduction and summary and then I'll pass the word to André, who will detail the earnings release and later, we'll have the Q&A session.

So as a brief introduction, first one regarding the earnings release by itself, it came in, in line with the -- what was expected by the management and by the company, which (inaudible) the same behavior that we have on the first quarter of 2019. And most important, they do not reflect all the operational results that we had during this last quarter. And that's an important point, important highlight that I would like to stress right now. So my highlight will be regarding the operational development that we have during this period, mainly three. We will talk about leasing, we'll talk about liability management and we will talk about the sales.

On the lease side, talking about the market fundamentals for us. The market behaved exactly we were expecting, both in São Paulo and Rio. São Paulo clearly not only already recover, but it's already starting its expansion. By expansion, we mean that vacancy is starting to decrease, the companies are expanding already. And in some cases, with the low vacancy, the prices are beginning to go up.

So that's really what we see on expansion. It's more than recovery by itself. In the same period, we have a gross absorption in São Paulo maybe around 400,000 square meters, out of which 44% of this was in the marginal region. That's another important highlight. Marginal region is that we concentrate most of our investment. Main reason, because that's the reason that we have liquidity in terms of occupancy and demand for occupancy.

But the important about the market fundamentals really is the net absorption that we have in this period, which is 185,000 square meters in São Paulo. This is an all-time record that really shows that supply is being taken out of the market, good quality spaces disappearing. Therefore, the strategy is already in place, giving space for a recovery in prices and expansion in prices since the new stock that we have so far is 70,000, very shy, and that's probably the same figure that we have over the next 3, 4 years.

In terms of vacancy, it's -- the overall market in São Paulo is around 16%. And in some regions, like Jardins region, already reached 7%, which shows complete [viscosity] for tenants that really need a larger demand.

On the Rio de Janeiro on the other hand, we are already starting to see the recovery as we have anticipated last year that was already occurring. That's exactly what's going on. And the figures now show what we've been telling the market, about the recovery of this market.

It lags around 18 months from what the development of São Paulo. But important thing is that the slight recoveries in movement that we have in the last 3 years in São Paulo, it's already start in 2018 and continued throughout the year 2019.

Gross absorption was around 100,000 square meters, out of which 50% of this absorption was in downtown. Again, the rationale of the thesis for our investments that we have demand, that's why we've concentrated all of our investments, the best and absolute majority of our investments in downtown, and that's where we have the gains because properties are being occupied.

In terms of net absorption in Rio, it's 0. That's exactly what we say, it's just a flight-to-quality moving. The market is not expanding yet. Who is the winner when we have a flight-to-quality? Quality buildings and good locations with infrastructure of services and transportation, which is the case of our properties, that being the biggest winner during this period.

Vacancy therefore is stable. The importance about this vacancy which still remains in the entire city of Rio, around 27%, is that the quality of this vacancy has gone worse since the good quality space being absorbed and what's left behind is the best -- poor quality space. In this scenario, what we have been leasing during the last 4 months, not only the second quarter, but the month of July as well included.

In terms of leasing, we have an operational result of 29,000 square meters of new leases in our portfolio, out of which 80% was carried out in the city of Rio de Janeiro, mainly in the 3 more important deals of our portfolio, Passeio, Ventura and Manchete. And the important part to stress here, as I mentioned before, is that only 10% of the financial results of those leases have passed in the second quarter -- in the earnings release of the second quarter.

So we have still 90% that's going to appear in the following quarters. André will give a detailed explanation of that. So that's already signed, the contract is signed, the contracts do exist. And this income will be generated in the next quarters.

Specifically, in Rio de Janeiro, those 3 main deals that we mentioned, Passeio already reached 90% of occupancy, with a total of occupancy during this period of close to 16,000 square meters, with special highlight to Stone, a new entry in our portfolio of around 14,000 square meters of new lease.

This lease was possible because we were able to negotiate with Caixa Econômica Federal that they would return 10,000 square meters, and then it was feasible to place Stone in the property with 14,000 square meters. The other 2,000 square meters of expansion that we have in the building are companies that were already in the building and they already wanted to expand, thus showing the beginning of recovery of the market in terms of expansion of the existing companies.

When we turn to Ventura, we have 1 lease signed during this period around 5,600 square meters of new lease. We cannot say the name of this company, but what we can say is that it's not a public company, it's not an oil and gas company, and it's AAA international -- multinational company. So that shows that not only oil and gas is really moving in Rio, but all the other sectors of the economy are already active in downtown. So a company that was existing in Rio, they just moved to a much better quality space for their staff.

And also on Ventura, another good news is that we were supposed to early terminate 23,000 square meters of office in August that was the part that Petrobras was supposed to give us back. But we have a new and formal instruction from Petrobras saying that they will only return around 6,000 square meters of office and the remaining 16,000, they will continue in the building until the end of the contract, which is supposed to be from the beginning of 2020.

So therefore, we have an additional income that we were not expecting by the end of this year. Not only the income, but the reduction of the vacancy cost, which is condominium and property taxes as well. So this shows how the market is behaving for good quality space, especially Ventura.

On the Manchete building, we already reached 80% of occupancy, and we have -- we reached that number by an expansion of an existing tenant that's also discussing potential additional expansions in the building. This shows that the market in Rio de Janeiro is very active for good quality spaces. And we'd like to stress this a lot, which has been our thesis since we did the most recent acquisition starting 2016 in Rio.

When we turn to São Paulo, just going back again on the properties. We have Panamérica Green Park and JK Building already with 100% of occupancy. Panamérica Park, over 90% of occupancy. That's a property that in the middle of the crisis reached 20% of occupancy and now we are above 90%. TNU, our headquarters' above 80% already of occupancy. Plaza Centenário, the new acquisition that we did and we are finalizing its entire retrofit, which was partially pre-leased, already close to 80% of occupancy. And the entire complex of Chácara Santo Antônio, where we have 6 properties already with more than 80% of occupancy. So you see that São Paulo as a whole has really done very, very well.

To finalize about leasing. If we only consider Caixa Econômica Federal and the lease that we did in Plaza Centenário, the pre-lease that we did in this property, 70% of those income has not passed in our earnings release in the second quarter. So this will come in the next quarter, which is already high, which -- this is important part. So recovery already happened in the company and we'll see this in terms of numbers and figures, financial figures in the next quarter.

Second operational highlight that I would like to stress is really the liability management related to our financing around BRL 576 million amortized in those 4 months, with the main objective of reducing costs and deleveraging the company, which been very successful, and André will get into a minute with all the detail.

And the third highlight that I would like to stress is about the sales program that we said, the recycling of our portfolio. We recycle 2 properties, the total of BRL 590 million at NAV value, exactly what we did in the previous sales that we did throughout (inaudible) slight premium of NAV.

Those are very important properties that we already reach a gain what we were supposed to do, and it was time that we recycle. So we can continue and use this capital, do what we think is best for the company, in this case was deleveraging of the company.

Therefore, what I would like to stress hard is that operational results of the company are very strong as it has been on the first quarter, as it has been at the end of 2018, and results will start to appear in our earnings releases in the next quarter. That's why I would like to make -- to say thank you for the entire commitment and discipline of BR Properties' staff and we'll continue until we realize all the gains that we are supposed to and that we prepare ourselves for.

Therefore, let me just pass the word to André. Please, André.

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

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Thanks very much, Martín. Good morning, everyone, and thank you for attending the call.

Regarding the financial highlights of the second quarter of '19, I would like to emphasize the following points. So BR registered in the second quarter of 2019 net revenues of BRL 98 million, in line -- pretty in line with the first quarter of the year.

It's very important to mention, as Martín told you, that the revenue of some of the already leased -- signed lease agreements have not been booked yet in the second quarter. Among them, we can highlight part of CEF agreement in Passeio, rework agreement in Centenário, 90% of the second quarter leased area, which is around 17,000 square meters, besides the agreements already signed in the third quarter, which is around 9,600 square meters.

This incremental revenue from already leased area, together with the vacancy reduction costs related to the same area, will generate an annual EBITDA of around BRL 55 million.

G&A expenses, excluding vacancy expenses, stock options and taxes, totaled in the quarter BRL 14 million. In the first 6 months of '19, those expenses amounted BRL 27 million, which is 2% lower when compared to the same period of the previous year, despite the effect of inflation adjustments over payroll and other contracts that we have in the period.

So the result reflect the commitment that we have in maintaining the operational efficiency level historically presented by the company.

Talking about EBITDA. The adjusted EBITDA, excluding the noncash effects of the stock option plan and nonrecurring expenses related to cost restructuring, reached BRL 71 million in the quarter with a 72% margin. In the first 6 months of the year, the adjusted EBITDA totaled BRL 143 million. And as mentioned before, as long as the new lease agreements start being registered, we will have an incremental annual EBITDA, as mentioned -- as I mentioned above.

Excluding nonrecurring effects, the adjusted financial results totaled BRL 66 million of expenses in the second Q, down 80% (sic) [8%] from the second quarter of 2018.

In relation to the first half of the year, the adjusted financial results decreased by 2% when compared to the same period of the previous year -- of 2018. This result reflects the company's success in liability management through renegotiations, reprofiling its debt and new funding in order to benefit from the current level of interest rates in Brazil, the lowest level we have to date since the beginning of the historical data in 1986.

We've got an outlook for further reductions. Okay? So there are people in the market saying that will go down to 5%, some of them even saying that it will go down below 5%.

It's important to highlight that financial expenses in the second quarter were negatively affected by the spike we have in IJPM -- IGP-M index in March and April, resulting in an additional expense of BRL 9 million when we compare to the first quarter of the year.

We registered a net income of BRL 57 million in the second quarter, mainly impacted by the positive noncash effect of the deferred tax on Paulista sale.

The FFO totaled BRL 4 million in the quarter, with an FFO margin of 4%. The decrease in FFO in the quarter is explained by the same spike in IGP-M that we have in the months of March and April, which increased our financial expenses in this quarter comparing with the first quarter of the year.

We closed the quarter with a net debt of BRL 2.3 billion and a cash balance of BRL 782 million. As part of the continuous improvement in company's liability management, between early redemptions and the final payment of the first debenture issuance that we had in July, BR amortized BRL 576 million in the second Q and in July.

Those debts had an average weighted cost in nominal terms of 10%, which is equivalent to CDI plus 3.4% over the last 12 months.

So considering the company's capital structure improvement initiatives in the last 7 months, we are able to reduce gross debt, okay, and net debt [normally] reduced by BRL 1.3 billion and BRL 380 million in the net debt.

Well, I think those are -- were the main financial highlights of BR Properties in the second quarter of 2019.

We will now open for the Q&A session. Thanks very much again for being with us today.

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Operator [4]

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(Operator Instructions) Excuse me, 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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Thanks, everyone, for your interest. And as usual, we'll be at your entire disposal for any doubt or clarification that you might need.

Thank you. Have a nice day.

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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.