BR Properties SA

BOVESPA:BRPR3

Earnings Call Transcript

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to BR Properties Second Quarter of 2020 Results Conference Call. With us here today, we have Martin Jaco, CEO; 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 by BR Properties website at www.brpr.com.br/ir, where the presentation is also 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 Martin Jaco. Mr. Martin, you may begin your presentation, please.

[Martín Jaco, executive]

Thank you very much and welcome to second quarter 2020 results of BR Properties. And we appreciate your time and your interest in the present call.

In terms of routine, I'll start with a brief introduction and pass the word to Andre, who will give details of the results of the second quarter 2020, and then we'll give enough time, plenty of time, for Q&A.

So let me start by the introduction. And on the introduction, we want to tackle 4 main topics. The first topic will be the impacts of COVID-19 on the day-to-day life of our buildings. First of all, we're talking about an entire period, 90 days, the entire quarter of the COVID effect, quarantine period and people trying to understand what we were dealing with and what will be the consequences.

So the main concern that we have immediately was about security. We're talking about safety with our employees, with our service providers, with our tenant and our visitors to our properties. Therefore, a series of policies and changes were implemented in our buildings and all of those changes, all the decisions regarding safety and health were all evaluated and supervised by Sirio Libanes Hospital, one of the largest health hospitals in Brazil, internationally renowned, so we could make sure to our tenants and to our employees, to everybody that everything that was being made was being made according to the best and the best health practices in the world.

That happened by the beginning of April. Therefore, we've been -- in considering Brazil time, we've been very proactive. We've been one of the very first to tackle what will be the effect and the new policies and implementation that we have to provide in our properties. And that's what we did in April, by not only talking to this health entity as we mentioned, but also talking to all our tenants and understand well their worries, what is really that they were looking for. Therefore, we created all those changes.

And the changes, when we talk about changes in our buildings, we're talking about some equipments that we can enter into detail if you want later. We were talking about increasing the cleaning of all the common areas, mainly implementing physical distancing, and so presenting what will be the space that people will have to occupy while they were inside the building, in the elevator, so in the physical spaces that we have.

We placed in all our properties, facial recognition, not only facial recognition but the same equipment was looking for the temperature of the visitor as well as to analyze and see were using mask or not. So the idea was to implement touchless access to all our buildings, to all our facilities.

And most important that we found of note, the tool which has been most efficient was really communication through all the people which are in our system, especially the tenants. We did a series of webinars, where we brought doctors from hospital Sirio Libanes, and they were answering all the doubts and were explaining why those measures were important, what were the effects, so people not only have to obey a new policy but also understood what is the policy and take all the mythical, all the rumors of all the frightenedness that people might have. So this has been very useful. And also, all our tenants can use our app, which is BRPR3. They download and they have access, if they are one of our tenants, and they are 24/7 updated to what is changing in the building that they are occupying, what are the new policies, what are the new metrics and new films teaching them how to access the building. So it's been very important, this part of communication.

Remember that this is something that is new to everybody and every day we have something new. So update is very important in keeping everybody on real information. Real-time information is important.

Therefore, what we have with this first part, we have a very positive result. We have the acceptance and a lot of complement from our tenants. And it was important receiving complement from our international tenants from the multinational companies, which they were comparing what they were doing with -- what they were doing in some other regions like the U.S., like Asia, Europe. And it was important for us to understand that we were doing exactly the same things, the top thing, the best-in-class that we could do in our properties.

And at the same time that we did is, as we did -- as we said, with our anticipation and by April we started that. We became a kind of benchmark for the market. A company, a consulting company called SILA, responsible for information on the real estate market, of office and logistics, asked us to do a video, which is -- if you want to access on YouTube or on Instagram, you'll have some access to that -- showing what is really the changes that a building has to do in order to bring comfort and security for the occupiers, now that everybody is starting to going back to the office. So they showed what we did and they showed a good practice. So the idea was really to demystify the illness and what you have to do in order to be protected. So it's been very interesting and we're very happy with all these actions that we took.

Well, the second part that we want to put now in our introduction is really what were the impacts of COVID-19 in our operations and our market itself. So the main implication that we have in the last quarter is really that the leasing process, the leasing pipeline that we have has started to slow down. And that was already expected. People are still wanting to understand in their companies what will be the outcome, the aftermath of all this crisis in their segment. So decisions about how much space to take and when to take has been postponed until a more clearer path is in its view.

Interesting enough, when we look at our previous pipeline, previous COVID pipeline, we still have that 80% of those tenants will continue their expansion or relocation processes in a slower pace. That's true, but they will continue. So this is one fact that we already mentioned in the last quarter that we probably will see and effectively we see, is that the curve of absorption that we were expecting, our buildings probably will be on a slower pace. That's the most significant results that we see in our market.

However, when we analyze the metrics of the market, let's start with the office market, let's start with Sao Paulo. We see that the gross absorption in Sao Paulo in the last quarter was 153,000 square meters, comprising 368,000 square meters a full semester. And this is exactly the same levels, 2% less than the first semester of 2018. So we're talking about very good figures. Although, vacancy has increased in the last quarter from 13.7% to 14.7%. So we're talking about 1% increase. And this is due because we are not seeing that expansion, that strong expansions we've been seeing the last year in Sao Paulo, but we are still seeing the flight-to-quality movement. And remember, this is something very important for us in terms of how we position ourselves in our portfolio. We're talking about the prime assets that we could have. We're talking about the AAA properties. In a minute we'll get to that.

So vacancy, while vacancy in Sao Paulo is 14.7%, vacancy of our portfolio in Sao Paulo is 9.8%. So again, we are outperforming the market in Sao Paulo with our AAA properties.

When we go to Rio, pretty similar behavior. 50,000 square meters of gross absorption last quarter, comprising 132,000 on the entire semester, which is very good and in line to what we've seen in the last years. And vacancy dropping to 26.2%, while BR Properties vacancy is 24.9%. So again, we're outperforming what the market on Rio de Janeiro delivered.

So in a sense -- and this is going to be in a minute, Andre's going to show in more detail. This is the behavior that Sao Paulo and Rio de Janeiro market have. So net absorption, almost 0 for the market as a whole. But in the same quarter, we were able to reduce our physical vacancy because we have positive net absorption. We leased more space than the space that we received back. And that space that we received back has nothing to do with COVID 19. It has to do with prior delivery that were already announced, some of them beginning of this year, some on the end of last year, very small areas, but they were just returned to us on the last quarter. So it's been very positive last quarter, different from what was the market expecting.

And when we go to the market in terms of the logistics market, this is a market that's really being very favored for everything that's going on. E-commerce increased a lot over the next 4, 5 months. And we are taking advantage out of it, not only through our areas that we have in Jarinu [indiscernible] that we've been leasing a lot and vacancy is around 13% there to-date, but also the new development that we are starting construction in Cajamar, 150,000 squares of state-of-the-art logistics space in the best address of the country, which is close to Sao Paulo. This is -- this region, only for you to have an idea, has in the last quarter, 370,000 square meters of absorption only on the last quarter. So this is a very favorable market and this is a market that we started -- resumed our investment 2 years ago. And now we have this huge investment in Cajamar and timing couldn't be best for this investment.

So now going to the third topic that I want to do an introduction is really about the results, which, as I mentioned Andre will detail them. But what we'd like to stress is that all the results came in line with all the expectations that we had prior to COVID. So what I said, the results that we were able to capture in the second quarter of 2020 were exactly in line to what we were expecting prior to all this crisis that we have. So if you can sum up what our results, our results was really exceptional when we consider that we had all this crisis and we were able to keep the same -- the result that we are expecting prior to COVID. And this is only due to the resilience of our portfolio. That's how we can summarize.

The resilience of our portfolio that we set, our portfolio has been transformed to a very resilient portfolio, was now tested and was approved. We had only -- we had no discount in terms of the rent throughout this period, only deferrals, which was shy from 5% of deferral, which is a very, very low figure if you consider everything, not mentioning also what we just said about reducing the vacancy in the same period. And this resilience of the portfolio might seem pretty simple and easy, but it was very difficult to obtain that. It was throughout a lot of work, especially in 2019.

And I'd just like to point again what we've been seeing in the last quarters, that in 2019, we were very strong on the leasing area with records of leasing again. We were very strong on the recycling of our portfolio, selling the B and A spaces that we had in our portfolio and reposition ourselves on the AAA properties; AAA not only with technical specification but with good public transportation and services to our tenants. And of course, through all the work carried out by Andre on the liability management side of our company, that is to say, prepayment of debt, changing of debt to CDI cost, that we have not only a very low debt today of the company by deleverage -- all the deleveraging work that we did, but the cost are historical lows ever.

So as you're going to see in a minute, when we took -- when we look net revenues, when we look EBITDA and when we look FFO, all numbers have been very positive when we compare to the same base. And FFO for the second quarter in a row has a margin of 61%, which is the historical record that we have in the company. So not only it's been resilient, but it's been very consistent, the returns that we were able to provide in the second quarter.

And to finalize, the fourth topic that I want to do is like what is expected, what are subsequent events that we might have, we would like to call like this. First of all, in all our documentation that we present now on the results and on the presentation of the call, you can see some mismatch of Plaza Centenario complex. It's a complex that we finished construction. We bought in 2017 a full and complete retrofit repositioned as a AAA, pre-lease in all those areas. So we end up with a fantastic property. Those of you who may have the chance of visiting this property, do tell us. It will be our pleasure to show that around. We're very proud of this property that we just gained back. It's an icon that we gave back to the market of Sao Paulo. And also, we placed inside the presentation, a view of our Cajamar development, the logistic development in Cajamar, which has direct access for [Indiscernible]. This is a major differential of our property. And as you can see, BR's movement has been very, very fast, and we are going at full speed to deliver this 150,000 state-of-the-art logistics space.

A second subsequent event that we have, as we mentioned, this is not a positive news, but it's the announcement of a tenant in Ventura, around 9,000 square meters that they will return their space to us. It's been a channel called [ Penang ]. There's been a discussion that we have with them over the last 2 years, they have a property in Flamengo, and they always have the discussions, should we go back, should we leave this vacant, should we go back to our property? And they decided very recently, and they announced that they will be going to their building in Flamengo, so they gave the previous notice. And as you're about to see in a minute, we have enough time with the early warnings with the penalties and uptime to find a substitute for this occupation in this area.

And the third part and the last part of the subsequent event is yesterday we announced a new share buyback program. We finished the previous one of 4 million shares, and now we just announced yesterday a new share buyback program of 11 million of share. That just shows the commitment and how do we feel about the pricing of the company and the potential of this company and the results that we are achieving. We are not able to find a better asset to buy in the market than our own shares. It shows really how confident we are with our operation and what -- how the company has changed itself in the last 12 to 24 months, as we mentioned all the work that we did.

So in a nutshell, in terms of operational results, we've done very well throughout this period. That's been very challenging. It doesn't mean that it's easy. We'll continue in a very challenged period the next quarter as well. But we believe with the operational capabilities and the way that we've positioned ourselves, we might be able to still continue presenting this type of results.

So with no further ado, let me just pass the word now to Andre to detail the second quarter's results. Andre? Thank you.

[André Bergstein, executive]

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

Well, regarding the financial highlights of the second quarter, I would like to talk about the following points. In this quarter, we registered net revenues of BRL 75 million, representing an increase of 13% when compared to same profits second quarter '19, reflecting the strong reduction in vacancy rates in the period and the resilience of our portfolio to the impact of the pandemic. It's also worth mentioning that revenues from around 14,000 square meters already contracted, not being booked yet into the last quarter.

As we reported in the first quarter of the year, in the second Q, the company has kept analyzing its talent portfolio to understand their financial impact generated by the crisis. During the quarantine, for those tenants most sensitive and fragile to those impacts, some rents were deferred with that mostly between the second half of this year and the first half of next year, agreed on a case-by-case basis. The total volume of rents relief represented only around 5% of the company gross revenues in the period, showing once more the quality of our portfolio of tenants.

G&A expenses, excluding vacancy expenses, stock options, taxes and allowance for doubtful accounts totaled in the quarter BRL 14.7 million, absolutely in line with last quarters and years. The operating expenses increase in the quarter is explained by the noncash expense for allowance for doubtful accounts, totaling around BRL 2.2 million.

Considering revenues and G&A that I just have mentioned and the reduction in vacancy expenses, adjusted EBITDA reached BRL 52 million, an increase of 18% in relation to the same quarter and same profits of last year. Margin EBITDA in the quarter reached 69%, a very good number.

The adjusted net financial expenses recorded only BRL 5.6 million in the quarter, representing a superb 92% reduction when compared to the second quarter of '19. This result, as already mentioned by Martin, is the outcome of the company's work on its capital structure in the last years through the sale of noncore properties, capital raising and a strong reduction in our debt. Thus, providing for us a sharp financial deleverage. At the same time, BR Properties managed to reduce deeply its debt cost, which, coupled with the reduction in the SELIC rate, brought an even greater drop on our debt average cost, reaching less than half of the second quarter of last year cost. In this quarter, specifically, the average effective cost of debt was 3.7% per annum, representing a reduction of almost 600 basis points year-over-year and reaching the lowest cost of debt ever in the company.

The FFO in the second quarter, excluding noncash effects, was BRL 45.7 million. Year-to-date, FFO reached 91 -- BRL 92 million, representing a nominal increase of BRL 80 million when compared to the first half of last year. FFO margin was 61%, the highest level ever recorded in the company.

The significant growth in the FFO and its margin reflects how the company has worked in liability management as well as in recycling its portfolio, leading to greater efficiency in our results.

We registered a net income of BRL 20 million in the second quarter of 2020, and we closed the quarter with a net debt of BRL 466 million and a very comfortable cash position of BRL 1.3 billion.

Based on all efforts carried out through 2019 in its capital structure, the company keeps with extremely comfortable leverage indicators, while its net loan-to-value is 6%, the net debt-to-EBITDA ratio is around 2%.

In April, the company issued its 14th debenture of BRL 250 million, unsecured with a 3-year maturity and a cost of only 137 of SELIC. This is equivalent to-date to CDI plus 0.72% per annum. The proceeds were used to redeem the 8th debenture that was maturing in 2020 and '21. Thus, BR Properties extends the average term of debt, leaving only BRL 51 million to be amortized in this year and reducing a BRL 125 million, the amortization scale of 2021.

As Martin mentioned, new agreements signed year-to-date got to 17,000 square meters. So the portfolio reached 19.5% and 19.2% physical and financial vacancy.

Regarding [ Synapse ], they are leaving as Martin mentioned, due the end of the year. But as they are anticipating their lapse, the closing of the contract, considering the original one, they are going to pay penalty around 6 months of rent. It means that we are going to have from June, around 12 months of revenues being received from this rent, okay, which gives us a lot of comfort and time, okay, to be able to have a new agreement, a new tenant in this area in Ventura.

Finally, yes, in the quarter, the company ended its last share buyback program due to the acquisition of the totaling of shares approved by the Board by March. The company bought 4 million shares, which we acquired at an average purchase price of BRL 8.81 per share, well below NAV price.

And yesterday, our Board approved a new share buyback program of up to 11 million shares. BR Properties has a strategy to keep such programs open when we understand, among other factors, that market volatility could generate distortions in the share price, creating clear opportunities of value creation to our shareholders, but always with a conservative approach regarding our liquidity.

Well, I think those were the financial highlights of BR Properties in the second quarter. Again, thanks very much for your attendance. And now -- we are now opening for the Q&A session. Thanks very much again.

[Operator]

[Operator Instructions] Our first question is from Nicole Inui from Bank of America.

[Nicole Inui, analyst]

I think it's great you had net absorption for the quarter. I was wondering if you could just give us some color on the properties that you're able to lease during the quarter and which properties were vacated during this time that led to the net absorption? And then my other question is, I imagine at the beginning of the year before all this happened, you were having conversations with various potential tenants to occupy space, especially in Rio. Probably during the pandemic, those conversations likely halted. But I want to know kind of where are you now? Have all those conversations returned with these same tenants or potential tenants or maybe it's a new group or a different group of tenants that are looking to occupy the space? Just to get an idea of who's looking for space right Now and if -- the same tenants at the beginning of the year are still -- have come back and are reopening discussions with you?

[Martín Jaco, executive]

So let me tackle the first one. We're talking about this quarter who's been active. Mainly, we're talking about 2 large leases that we did. One was in our logistic area in Jarinu. We leased to a logistic company. They will use this warehouse to use logistics. And the second one was an office in Passeio building, an expansion of an existing company, an energy company that expanded in Passeio. Those two combined, we're talking about 6,000 square meters. So this is what we see, logistics, very good. The energy, this company, it's an expansion of already an operation that they have that something that we always stressed.

From 2017, '18 and '19 -- I mean starting 2018 and onwards, the new tenants that went to occupy spaces, both Sao Paulo and Rio, were very cautious on how they will take the space. So they were not doing the same thing that we did in Brazil, Sao Paulo and Rio in 2010, '11 and 12, taking much more space than they really needed because they were considering the growth and the expansion of their market. There was a very poor decision by 2012 that proved to be very wrong by 2015 when they had to give back this space to the market. So vacancy went to the roof, and it was not a factual loss. It was really a shadow space that nobody was occupying, but just to have a contract on it. Now the tenants that started 2017 occupancy, they were really reducing the maximum they could their occupancy. That's why you can see -- you see that in Passeio, a building that was delivered in 2017. So this was signed in 2017 or '18, has already an expansion. It's not the first expansion that we have in this property. 5 tenants already expanded in this property. This is due because their business is doing well, but they were with the minimum space that they needed. So this is probably something that we'll continue to see in Sao Paulo and Rio de Janeiro. So this is about the first part.

But Now when we go to the second part of your question about the pipeline that we have in Rio de Janeiro, we have the same pipeline that we have prior to COVID, both Sao Paulo and Rio. From all the tenants that we have prior to COVID, we can say that 80% is still continuing with the relocation or expansion plans. Most of them are tenants that want to leave a poor-quality property to go to a better-quality property.

So the tenants that we are discussing are tenants which have interest in occupying Ventura, tenants that have interest in occupying Plaza Centenario, and tenants that have interest in occupying Parque da Cidade. Those are the three assets that we really had vacancy. All the remainings are around 90% -- 90 something percent of occupancy.

So this is the type of tenants that they are really looking to flight-to-quality mode. When this crisis started, they all refrained from taking decisions, but 80% say that we will continue, we just got to have a much better view, a clearer view of what's really going on in our sector to take the decision on how we continue to go on.

So this is what we are still seeing. And on the last 30 days, we've been an increase in this demand, new tenants coming to analyze the space. And those new tenants are still shy compared to the full pipeline that we have in terms -- compared to the new tenants. But those new tenants, taking the decision that they need a much more centralized space with better specifications with public transportation and with services.

So what we have seen is that everything that we're seeing right Now AAA properties that have also transportation and services are being favored by the demand that those tenants will need. Even if they are about to reduce their total occupation or they want a consolidation, they need a better location, a better-quality property and more comfort and services for their staff.

So this is something that we happen to see in the market, and that's really what we have in our pipeline. The effect that we have in all this crisis, as we mentioned before is the decisions are taking longer. And this, of course, will affect our absorption curve, as we already said. But the demand is there. They are identified. It's just a matter of time until we are able to conclude those deals and start picking up the vacancy reduction again.

[Nicole Inui, analyst]

And if I may just ask one more question. You have about BRL 1.2 billion in cash. You just announced the buyback program, you have Parque da Cidade to be delivered next year. Is M&A off the table at this point? Or is it still something that you're actively looking to pursue?

[Martín Jaco, executive]

Nicole, M&A is extremely active in the company as it's always been from day 1, but with the opportunistic approach that we always took and will continue to take. So yes, we are looking for new M&A opportunities. Of course, we increase our observation of the logistics space, because logistics is really having a lot of traction right now. As you can see, we have a large demand for our under-construction property. The part that we leased throughout this period was in one of our assets, a logistic asset that we have in Jarinu. So yes, we're looking at those areas. We're still looking to grow our portfolio of office in Sao Paulo. That's where the target is. We are now looking for now the Rio de Janeiro. So the strategy continues the same.

Of course, with everything that's going on, we've been much more demanding on the return that we should have in our assets. But again, it's an opportunistic approach. We don't have any measures or any goals that we have provided in terms of assets and the manners of capital deployment.

But on the M&A, we continue to be very opportunistic, and this is something that we announced. We want to continue the recycling of our portfolio. So we still have something around BRL 400 million in our portfolios of B assets, that yes, we would like to continue the sales and we are under negotiations.

So if we see an M&A, we still have sales to do that can provide cash from new acquisitions. We still have a very low leverage. And today, interest rates are very low, so we could leverage part of these acquisitions if we are able to find. So definitely, M&A is not out of the table. Quite the opposite. Still the same, but with an opportunistic approach. We don't find anything that really defeats the demand that we have right now. We will not make acquisitions and we'll continue the company as it is. We have a lot to do. And remember that we were able -- we said that in 2019, we were able, through the acquisitions that we did in Parque da Cidade in Cajamar to anticipate the M&A. We have 150,000 to deliver in Cajamar and 100,000 to deliver in Parque da Cidade. We're talking about 250,000 square meters of AAA quality space, both in logistics and office.

So the M&A is already there, and we anticipated our M&A. So this is pretty much how we see that.

And let me just continue, we just received through the web channels here, a question from [ Lela Boreiro ]. "Can you please provide an update on Parque da Cidade?"

Yes, about Parque da Cidade, Parque da Cidade continued with construction at the same level that it was prior to COVID. Through all this COVID period, construction continued very fast. So probably we'll receive those assets by the end of this year. This is what we planned.

Remember that our underwriting was that we'll receive those properties 100% vacant. And in a 12-month period, we'll probably be able to lease 80%, and we were considering values around BRL 100. While today, the average on this region is around BRL 120, BRL 125, BRL 130, depending on the property. So we're still very competitive with this assets even though everything that happens right now.

The pipeline is very solid, and we didn't slow down. This is probably the property that less slow down the demand because the tenants that were looking into that are looking to move right now. They knew that the building was under construction. So we're talking about large tenants, large occupancies that they needed either to consolidate or they wanted to expand or they want to do a flight-to-quality movement. They understand the timing that they will be occupying this property only by 2021. But yes, they continue their analysis. There's a lot of technical analysis to be done. There's a lot of discussions over lease agreements that have to be done. So those are very long-term processes. But what we can tell is pretty similar to what we said in 2017 about Passeio. The pipeline, we have more than 2x the demand compared to the [ area ] that we'll be able to provide in this area. We're talking about large tenants with very few alternatives today than when you compare 2017. Current tenants today that need more than 5,000 square meters today in Sao Paulo are in a bit of a problem because they don't have that much more opportunities of contiguous space in the market. So Parque da Cidade comes really as a relief for those companies. So this is what we're seeing, a very strong pipeline yet and consistent. And still, throughout all this period, we've been negotiating and continuing our business and discussion with those tenants.

[Operator]

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

[Martín Jaco, executive]

Well, thank you very much. So I would like to leave here thanks and appreciation to all BR Properties' staff, all the people working in our headquarters, all the people working in our properties. All these results we're able to provide to our shareholders because of the hard work they've been doing throughout this entire period of the pandemic. They've been working very hard and everybody can be sure that they will continue -- we will continue together with a very strong and working really hard to continue to present these results to the market.

So again, thank you very much for your interest, and everybody have a nice day. Thank you.

[Operator]

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