Aliansce Sonae Shopping Centers SA

BOVESPA:ALSO3

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. At this time, we'd like to welcome everyone to Aliansce Sonae's Fourth Quarter 2020 Results Conference Call. Today with us, we have Mr. Rafael Sales, CEO; Mr. Leandro Lopes, COO; Mr. Carlos Correa, CFO; and Mrs. Daniella Guanabara, Strategy and IR Officer.

We would like to inform you that this event is being recorded. [Operator Instructions] There will be a replay facility for this call for 1 week. We have simultaneous webcast that may be accessed through Aliansce Sonae's IR website at [email protected] (sic) [ [email protected] ]. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. We would like to inform that questions can only be asked by telephone. So if you are connected through the webcast, you should e-mail your questions directly to the IR team at [email protected].

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of the company's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Rafael Sales, who will start the presentation. Mr. Rafael, you may begin your presentation.

[Rafael Guimarães, executive]

Good morning, everyone. I would like to thank you all for interest in Aliansce Sonae's results. 2020 ends as ultra challenging year in which we were constantly defined. We are very proud of how our team has been overcoming and responding to the obstacles faced this year, finding innovative ways to operate our malls safely, ensuring that our consumers can always stay connected to our tenants during such turbulent times. It was a time when we were able to demonstrate that our malls are important to our consumers and tenants, even while closed. And that our strategy of serving our customers, whether in person or online, is the right one.

I would like to say how much I appreciate the important commitment of our team in defending our company and our tenants in such difficult environment. In the fourth quarter of '20, we were open on average for 96% of regular hours, while some sales presented a consistent recovery, reaching almost 90% of the fourth quarter sales in '19. In the year, sales achieved almost 70% of what was required in '19. In regions with fewer operating restrictions, some malls even outperformed the previous year in total sales. As we have pointed out before, since the beginning of the pandemic, one of our main goals was to reopen our malls with a high occupancy rate to continue providing an excellent service to our consumers. We have a complete experience set.

I understand that we were successful in 2020 with an occupancy rate above 95%, equivalent to the one that we had at the beginning of the year. It's such an amazing achievement, I think. It reflects our strategy to focus primarily on the consumer and our customer and then in our good relationship with our tenants. We know how to manage, and we did it well last year, managed mix and occupancy cost in an adequate and proper way. Combining the high occupancy rate and some sales recover, it was possible to continue gradually reduce discounts on our rents. We always aim to keep tenant's occupancy cost at healthy levels. As a result, the company's net revenue was BRL 238 million in the fourth quarter, with rent revenues reaching more than BRL 190 million, representing nearly 90% of the total amount recorded in the fourth quarter of '19.

In the fourth quarter, our NOI captured both the operational indicators recover and the cost control reached nearly BRL 200 million. In the last quarter of the year, both declines in EBITDA and in FFO were already considerably lower than those in the 2 previous quarters, confirming that a good quality occupancy, a good balance between mix and rents recover, will lead us to have a strong cash flow generation, again, as we had in the last quarter of the year. I mean, operational cash flow. It was a really important achievement for this ending the year on such a good balance sheet as we have today. We were able to have even a little bit more cash by the end of the year than we had in the beginning of the year, quite an amazing achievement in my point of view.

Now moving onto Slide 3. We give a little more color about our leasing activity. Here, we can see that the company's occupancy rate, as I mentioned before, was almost 96%. Another excellent result to highlight here is the number of contracts signed during the quarter. We signed 176 contracts, the same number that we did in the fourth quarter of '19. This indicates a very resilient demand for our areas in our malls. Once again, we confirm that our centers are the main destination for shopping, services and entertainment in each of the markets that where we operate.

On the sales front, you can see on the Slide 4, in complementing what I said earlier about sales, we can see in the more -- in more detail here the correlation between malls opening hours and the pace of sales resumption, with North and Northeast regions standing out among our areas of operation. It's also important to highlight that with the vaccination rate increasing, especially as scheduled for happening during this month, it's expected to have more opening hours, getting to a more normalized level of operating hours during this semester, which will lead naturally as we see last year to also to a strong recovery in sales.

Now I'd like to show some details on our digital and omnichannel strategy on Slide 6. This year, in addition to investing heavily in strengthening our omnichannel and digital solutions team, we had a very positive result in terms of our tenants and our customers' engagement to our new platforms. One of the highlights has been the Buy Online model available on our web apps, our websites and social networks of each of our mall. Currently, we already have more than 4,500 tenants connected out of 7,000 total tenants that we have in our centers today. We are offering products, our services in our digital platforms currently. Also, both when our malls are open, they open, or when they are with restrictions of operating because of the COVID.

We also highlight here that we successfully relaunched Parque Dom Pedro marketplace in December, and that we launched our new operation on online sales for our Shopping da Bahia last month. As planned, our omnichannel presence was strengthened by our -- by plugging customers and tenants in a strong marketplace making the convergence between purchase, delivering services and even reverse logistics when exchanging product by our clients. Our focus here is to serve, especially high-frequency customers, who live or work in the malls surrounding. This is a core part of our strategy because reduces drastically the customer acquisition cost, which is the main restriction for the online operations growth in margins.

Another important front is the process of consolidating data in our data lake as a single and complete information base to support our fundamental understanding of behavior patterns of our customers. To assist in data lake mapping, we signed -- we have partnerships with companies that are specialized in solutions involving geolocation, big data and machine learning. We are also developing internal technology in those fronts. Also, we are investing in creating partnerships for extracting more value on crossing social media information and web and analytics data from our customers when they use our website and our social media platforms. Based on the data analysis, it's possible to identify opportunities, offer promotions and identify trends and optimize the customer experience. The customer relationship channels can be converted into sales, adding more frequency to the malls, our websites, in the end converting to more sales of our tenants.

Another interesting highlight is [ anecdote ]. Because this year, for the first time during Christmas, we did all the promotions exchange with the fiscal -- the invoices being captured on clients' cellphones and uploaded to our platforms to allow them to pay part on the promotions and exchange for gift and be part of our Solidarity programs. So we were very happy that this worked, showing that the COVID brought some future synergies that we'll track during the next years that will permanently sustain our better operations.

I will now turn the floor to Daniella. Thank you very much for your interest again, and I will be available for answering questions in the end. Thank you.

[Daniella Guanabara, executive]

Thank you, Rafael. Good morning, everyone. On Slide 8, net delinquency recorded in the fourth quarter was up 5.2%, the lowest level disclosed in the year, confirming the positive synchrony between sales resumption, withdrawal of discounts and recovery of overdue receivables. PDA reflects the provisioning reinforcement to face the risk of future rent and common-area charges following the best accounting practices, but already at a lower level than in the previous 2 quarters. The movement was influenced by the important recovery of overdue receivables that I just mentioned.

Moving now to Slide 9. Analyzing the company's cash flow, we see that we closed the year with a cash generation of almost BRL 190 million. We highlight that the operating cash generation was enough to cover all funds allocations throughout the year, even considering the adverse conditions faced in 2020. The company's leverage remain at the low level of 1.2x net debt/EBITDA, confirming that Aliansce Sonae's balance sheet remains the strongest within the mall industry in Brazil, allowing us to seize possible investment opportunities such as the recently announced acquisition of an additional 20% ownership in Shopping Leblon.

On Slide 11, we are going to talk about sustainability, highlighting our social commitment and some recent campaigns. The Christmas Solidarity campaign in Aliansce Sonae's malls collected toys, food, cleaning and personal hygiene items that were distributed to institution in the mall surroundings. In the state of Rio de Janeiro alone in partnership with Instituto da Criança, more than 1,600 toys were donated. We also handed out books to 600 children from Instituto Reação.

Regarding the fight against COVID-19, since the beginning of the pandemic, we have sought to support the communities where we operate and carried out several initiatives throughout 2020. Among the most recent in January 2021, together with the everyone for health and the Brazilian Association of Shopping Centers, we sent to Manaus equipment for the supply of oxygen and essential items requested by the State Health Department of Amazonas. As of February 2021, contributing to the population's immunization process, we started to offer our malls' parking lot to act as vaccination points against COVID-19.

On Slide 14 (sic) [ 13 ], we present the expansion project method for 2021. We have 4 mode in this pipeline: Shopping Taboão, Shopping Leblon, Carioca Shopping and Shopping Campo Limpo. The total estimated CapEx is BRL 280 million at 100% and BRL 216 million in Aliansce Sonae's stake. The estimated disbursement amount for 2021 for this project is nearly BRL 90 million. The continuity of the expansion projects is subject to market conditions in addition to internal and external approvals and may vary over time.

Shopping Taboão ended the fourth quarter with 99.5% occupancy rate, attesting the mall's strength, even in an adverse moment such as the 1 we are experiencing. The presented expansion corresponds only to a first phase design in the mall's master plan. For this phase, we expect an increase in GLA of 16,300 square meters. The project foresees the expansion of the ground floor, bringing 110 new operations and on the respective lower floor a new parking lot will be developed in addition to an area for services and convenience operations. The plan's concept also considers great integration between the mall's internal and external environment, with wide corridors and linear skylights, allowing natural light to enter.

For Shopping Leblon redevelopment and expansion projects are designed. The total renovation GLA is 7,600 square meters with 1,600 square meters of expansion. The project foresee the partial remodeling and expansion of one of the floors of the mall, bringing a new area with high-end restaurant and convenience and service operations basically consisted of in-line stores, which will be connected to the mall's main entrance. This expansion will allow the relocation of some stores, further strengthening the mall's mix and contributing to its NOI growth.

For Carioca, we have planned almost 4,500 square meters of GLA under redevelopment with 1,800 square meter GLA added. A new entrance gate will be opened with a complete remodeling of the internal space, providing the interconnection of corridors and GLA creation for in-line stores. Pedestrian access will also be renovated with bike rack areas in a large boulevard equipped with outdoor leisure operations. At Shopping Campo Limpo, we expect the addition of 6,600 square meter of GLA. The construction of a new parking floor is planned, which will allow the expansion of store space in a linear and continuous manner. The mall should also undergo a renovation with the modernization of its facility.

Thank you very much. We are now going to open for questions and answers.

[Operator]

[Operator Instructions] Our first question comes from Tito Labarta with Goldman Sachs.

[Daer Labarta, analyst]

A couple of questions. I guess, first, just given the recent increased restrictions, particularly in São Paulo and other regions as well, how do you think that could impact in terms of potential discounts or provisions as well as your occupancy rates? And how do you see occupancy rates evolving from here? And then second question, just looking at your cost of debt. There's a bit of an increase in the quarter. I think you mentioned partly due to higher inflation. But with expected higher interest rates this year, how should we think about that cost of debt evolving in 2021?

[Rafael Guimarães, executive]

Tito, thank you for your call -- for your questions and for attending the call. Thank you. Basically regarding the restrictions, well, of course, it's a kind of frustration because the fourth quarter was clearly a very good recover sign, and it's a terrific proxy for once things are a little bit closer to normal. So the good thing and the bad thing is that, certainly, we will need to support our tenant space again. Of course, we have mentioned our exposure. So in some areas where we are exposed, the operations are much less under restrictions and sales are more normal there -- here to more normal levels. I was just mentioning in the call important here is the case of Manaus that were the most severe -- the most severe impact in the beginning of the year, and then the main destination of vaccines were toward Manaus. So -- and now the operations there are normalized. The economic activities are back to normal. Just in one month of vaccination, they are already doing the vaccination in 65-year-old bracket, and the level of fatalities and cases have dropped very strongly as happens in U.S. -- as is starting to happen in the U.S. after they reached the 16% vaccination rate.

We believe this will be the main driver for the environment -- economic environment and the willingness of the tenants to keep their operations strongly -- strong. I think that in São Paulo, this time differently from the previous lockdown, this time there is a pre-defined deadline that is more one week. Of course, it can be extended, but also it's a good sign that things will come back to normal as soon as we have a more predictable vaccination schedule. And so the environment in general is kind of positive for the relationship with tenants in our case. Because it proved that being more tolerant in making the charge in installments and not charging that much in the increases that we had last year in the rate in the advance was proven to be the right one with the cash flow generation that we had in the last quarter.

So we believe this will be a trend that we will kept -- be similar, but hit faster in this year and the beginning of the year. So we expect already to have much better sales in second quarter. Of course, we will still assume occupancy -- as I mentioned in the release, it's a little bit lower this month after the beginning of the year. But if you look at the seasonality, it's much less -- the impact was much less relevant than it was in previous years. And I consider that this is due to the fact that we already had the tenants that were in a worse shape economically and financially speaking. They already closed the stores during the -- during last year having a more severe fear of the prices. So that's why we had just a small drop of near to 50 bps in occupancy this month -- these last 2 months, which is unusual considering the seasonality of occupancy in the industry.

So again, having said that, we also have signed a good amount of contracts this year, as we did in the fourth quarter last year. We already reported in the fourth quarter. And this month, we are already signing a good number of contracts back again for leases for -- to be occupied during this first semester. So we are quite positive with tenant relationship. There is not such -- no effects like we saw in developed markets with a lot of companies filing for Chapter 11 to hault payment of rents. So we don't -- we didn't have anything like that here. It's a little bit different from what we're seeing in developed markets, especially when we talk to our colleagues of larger companies in Europe and U.S. So we are seeing a different environment here. Regarding the debt structure, if it's okay, on that front, I will pass the word to Carlos to answer about the debt strategy, the financing strategy. Please, Carlos.

[Carlos Correa, executive]

Tito, this is Carlos. Yes. Average cost of debt went up to 5.4% in the last quarter. And this is basically because of the inflation-linked debt. We have about 16% on average of our debt linked to the inflation. And especially on the IGPs, IGP-M and IGP-Gs, which grew above 20% actually in the last 12 months. So that's why this portion of the debt increase is so high. It's a lower -- low participation. Although it's taking the total 16%, but given it went up more than 20%, that made this increase you saw in the last quarter. Going forward, yes, we do expect CDI to increase. But even so, we also expect IGPs to fall in the next quarter. So I would say the expectation for the average cost of debt should fall again -- start to fall in the first quarter, but falling more in the second and third quarter on average, given we had 62% of our debt today linked to CDI. So in spite of a hike in the basis of linked, we expect the average cost of debt to fall again.

[Rafael Guimarães, executive]

Yes. It was a conservative approach not to switch more than 65% of our finance portfolio to falling rates. Everyone was doing that, but we have very long-term interesting debt in fixed rates, with due dates, maturity that were long, and we decided that we should keep this part in fixed rates because of the profile of our business. And this would be benefited when we had a hike in the falling rates there, is probably what we're going to see today. Thank you, Tito. If you have any more questions, please go ahead.

[Operator]

[Operator Instructions] It has concluded the question-and-answer section. At this time, I would like to turn the floor back to Mr. Rafael Sales for closing remarks.

[Rafael Guimarães, executive]

Thank you, everyone. We had pretty good questions in the Portuguese version of the call previously. I incentivize -- I incent you to take a look at our transcriptions of the answers -- and their question and answers in our website. It's quite interesting discussions. I hope to see you soon for hopefully in-person during this year when things are back to normal. Thank you, and bye-bye.

[Operator]

Thank you. This concludes Aliansce Sonae's Fourth Quarter 2020 Earnings Conference Call. You may disconnect your line at this time. Have a nice day.