Hello, ladies and gentlemen. Good morning. Welcome to the video conference of LOG Commercial Properties on the results of the first quarter of 2023. With us today are Sergio Fischer, CEO, and André Vitória, CFO and Head of Investor Relations. We would like to inform you that this presentation is being recorded and translated simultaneously. The translation feature is available by clicking in the interpretation icon in the bottom of the platform. For those of you listening to the presentation in English, you can choose to silence the original audio by clicking in the option Mute Original Audio. During the company's presentation, all participants will have their microphones disabled. At the end of the presentation, we will initiate a Q&A session. To ask a question, just click on the Q&A button and state your name and company.
Once your name is called, a request to activate your microphone will pop up, then you can unmute your microphone and ask your question. We would like to clarify that any forward-looking statements that might be made during this conference call related to LOG's business outlook, projections, and financial and operating goals are based on beliefs and assumptions of the company's management and therefore depend on circumstances that may or may not occur. Investors must understand that political, macroeconomic, and other operating factors may affect the future of the company and lead to results that differ substantially from those expressed in such forward-looking statements. To open this video conference on the results of the first quarter 2023, I will give the floor to Mr. Sergio Fischer. Mr. Fischer, you may proceed.
Good morning, and thank you for joining us for the presentation of LOG's first quarter 2023 earnings results call. We came to the end of the quarter posting excellent commercial results. At the end of March 2023, we reached the lowest stabilized vacancy in our history, only 1.43%. This is a strong measure of the quality of our assets and also a solid indication that the demand remains high in all regions where we operate. Our gross absorption was 221,000 square meters of GLA, the second highest in our history, with emphasis on the pharmaceutical segment. We signed a new BTS deal in Natal for an important customer in the food and beverage industry.
The pricing dynamic has been positive, allowing us to grow 1.6% above inflation in rents built to customers in the same lease space when comparing Q1 2023 with the same period of last year. Since the end of last year, we have adopted a more conservative posture in relation to CapEx in order to face the challenges imposed by the current macro scenario. We have only kept the 8 projects currently under construction in important metropolitan regions of the country with deliveries totaling around 200,000 square meters of GLA. These projects will be delivered in the next quarters of the year. We remain focused on the sale of assets. We intend to replicate the sales volume of the last three years of approximately BRL 1 billion in the coming months. This strategy will contribute to reducing our leverage.
I will now give the floor to André, who will talk about our financial highlights.
The company's net income in Q1 2023 was BRL 29 million. EBITDA for this quarter came to BRL 54 million, this time almost entirely generated by our leasing activities, meaning 70% higher year-on-year. The operating margin reached 81%, the best among our market peers. General and admin expenses were down 5% in relation to last year's fourth quarter, reflecting the management's focus on cost control. Our operating performance is also positively reflected in the financial results of the first quarter of this year. Net revenue was BRL 67 million, up 64% over the same period of the previous year. The net twelve-month NPL came to only 0.8% in the quarter.
The attractiveness and liquidity of LOG's assets have been one of the main differentials of the success of our business model. We will maintain our strategy of recycling assets at record levels this year. The proceeds from the sales of these assets will be mostly used to reduce our debt. The net debt of about BRL 1.2 billion, considering the receivables from asset sales, accounts for 32% of the P&L and a net LTV of 24%. We intend to reduce the net debt levels significantly in the short term. Together with our results, we release our sustainability report, which is available on our website. The report is integrated, verified by an external auditor, and reflects the adoption of our sustainable initiatives linked to our business strategy.
The highlights of the quarter were the LEED Silver certifications we obtained for our developments in Viana, the state of Espírito Santo, and Itapeva, Minas Gerais. We will now proceed to the Q&A session.
Thank you. We will now initiate the Q&A session. For questions, just click in the Q&A icon and type in your name and company. Once your name is called, a request to activate your microphone will pop up, and then you should unmute your microphone and ask your questions. Please wait while we collect the questions. Our first question is from Herman Lee from Bradesco BBI. Mr. Lee, you may proceed. Once again, Mr. Herman Lee, your microphone is on.
Good morning. First of all, congratulations for this quarter, and thank you for taking my question. We have two questions. The first is about your deliveries pipeline for the year.
How much of it is typical, and how much of that is not? The second question is about high interest rates and whether the company will conclude its plan or whether that plan could be extended.
Hello, Herman. This is Sergio. Thank you for your questions. First of all, starting with our yearly pipeline, we anticipate deliveries of around 200,000 sq m of GLA. Possibly, there will be a delivery at the end of the second quarter, and the remaining will be mostly centralized in the second half of the year. Most of these assets are very typical properties. There is no BTS anticipated for delivery this year. Now, talking a little bit about our growth plan, as we've been telling you, we have reviewed our CapEx plan. We are adopting a more conservative position vis-à-vis our CapEx.
This year, we believe that we will deliver half of our capacity. We have very good projects already approved, and we already have things ready to be built, but we will adopt a more conservative position while we navigate through this macro environment and in terms of also a possible recycling. In view of this landscape, possibly we will postpone the delivery of a few projects. There are things tested for 2024 that may be postponed to 2025. Thank you.
Perfect.
Our next question is from Mr. Ygor Altero from XP. Igor, your microphone is already on.
Good morning, and thank you for that presentation. We have two questions. The first, I would like an update on the recycling of assets. If you could elaborate a little bit about that in terms of cap rate, what is your view on that?
The second issue relates to CapEx. Given the higher leverage level, how much further your leverage could go? I mean, what would be the level that you would consider healthy and comfortable?
Hi, Ygor. This is Sergio. Thank you for your questions. I will start with your second questions. We already reached a healthy point, and we are now working to deleverage. The way to do that is through recycling. On that note about recycling, I mean, LOG's advantage is that our assets are very liquid, giving the current scenario where liquidity is low. I mean, the real estate funds are not buying anymore. We see some restrictions in terms of asset acquisition. We are, you know, getting, you know, relevant margins in the ongoing negotiations and also record volumes. We intend in the second quarter to probably disclose something to that end.
We also intend to do more of what we did last year and even 2x as much as we did last year. That's our objective. Caps close to eight, which would be close to our balance sheet.
Thank you. Great. Thank you, Fischer.
Next question comes from Antonio Castrucci from Santander. You may proceed, sir.
Good morning, Fischer and André. Thank you for taking my question. I would just like to understand the level of pre-lease of the assets to be delivered this year and the yield on cost of these assets. With this macro scenario, whether you see, you know, a shrinking of demand, even though your indicators are quite strong.
Hi, Antonio. This is Sergio again. Thank you for your question. Let me start with demand.
We still have a pre-lease level, which was quite strong last year, almost 100% of pre-leasing, you know, were delivered. We are seeing something very similar to that this year. If you look at the breakdown of the numbers that we disclosed in the first quarter, 130,000 square meters were of pre-lease, and we expect to keep that same performance being very close to the GLA lease around that project. This didn't change. Now, about demand. I mean, LOG is very strong in terms of geographic diversification. Because of that, our demand is very much in line with consumption. Sometimes we are alone in certain geographies, and this demand still remains the same.
We hear people talking about, you know, lower demand in e-commerce, you know, that the major marketplaces got well prepared during the pandemic, especially in the southeast, this is not a reality if you look at other parts of Brazil. Our lease, you know, pipeline is very strong, we do not anticipate any changes in demand in the medium range. About the yield on cost. I mean, the sector is experiencing a very positive pricing demand. If you look at pricing in the past quarters, we were able to transfer prices above inflation. We are closing good deals above inflation. I think this will prevail throughout the year. Because of that, we see a very positive impact on the yield on cost of these new projects, also linked to the stability in the construction costs.
Cost of construction throughout 2023 should remain flat or stable. Therefore, the deliveries should be close to 200,000 sq m of GLA, very close to the yield on cost. Considering our history, this is a very strong volume.
Thank you, Sergio.
Our next question comes from Mr. Elvis Credendio from BTG Pactual. Elvis, your microphone is on.
Good morning, Sergio and André. I have two questions. First, about M&A and capital structure. I know that you elaborated a lot on the topics, what is the profile of buyers? I know that the market is still slow. What do you see in terms of this market, whether you can disclose it? If you think in terms of recycling, you talked about probably twice as much recycling when compared to last year.
What would be your debt level that would be comfortable to you? The second topic relates to lease prices. When we look at the portfolio vacancy, it's very low. I would like to understand whether there is still room to increase lease prices in actual terms. You said about 1.6 in the same rental contract. I just want to understand if there is still room for more.
This is Sergio. Thank you for your questions. I will start with your last question. As I said earlier, demand remains very strong. The market is very demanding, and clients are willing to pay for the asset. I don't think that this scenario will change throughout the year. Last year, we were able to deliver about 1.5% above inflation, and this is the trend that prevails this year.
This is what happened in the first quarter as well. We believe that this number should remain, you know, flat and the same throughout the year. About M&As, the landscape is of low liquidity. In the past, we would get several proposals for LOG's assets, and the scenario is now more challenging. The positive side is that we managed to make good transactions. There are things that are way and also very good caps, which is very important, and we will be able to deliver a relevant gross margin. There are some, you know, institutional investors and real estate funds that they're still expressing their willingness to make some important transactions. Let's imagine that we will sell twice as much as we sold last year. Our net debt over EBITDA is about 1.5%.
If we sell close to BRL 1 billion this year, we will zero that leverage. We still have CapEx that will be used throughout the year, and we also intend to open a new buyback program. We understand that also this transaction could be very assertive considering, you know, our current position. We may use some proceeds for that in addition to leverage. Probably in the near future, once we understand that the macro scenario is better, that, you know, interest rates may be down, we may now reconsider. We will do buyback, leverage, and eventually some new businesses.
Okay? Thank you. That's very clear.
Thank you. Good morning.
Our next question is from Mr. Andre Mazini from Citi. You may proceed, sir.
Hello, Sergio and André. Thank you. My question is a follow-up on Elvis' question.
I think this information about that 1.6% in the quarter is some new information. Lease per square meter is increasing. It reached BRL 20 per square meter. That means an increase of about 20% year-on-year. I imagine that this is because Amazon gained more momentum. They have more specialized warehouses. I just wanna understand whether Amazon was a deciding factor that led prices to go up. Why is it that Amazon pays more than the rest? Is it because the warehouse has very unique specifications, or whether this is a reimbursement for some CapEx that you did for Amazon, or whether it's just lease itself? Okay, thank you.
Thank you for your question. This is Sergio. Certainly, these two BTSs that we did for Amazon, they were delivered at the end of last year.
They certainly impacted the ticket. Ticket is different due to the nature of the business, but I would like to emphasize that the performance was at historical levels, and these are assets that have great liquidity. Therefore, you may see transactions on these assets in the near future, which will probably allow us to dilute that weight that Amazon has in our customer base. In terms of rent, it's a summation of both things. New businesses currently, you know, increase our average ticket. In addition to that, we were able to transfer prices above inflation in the existing contracts. It's a combination of these two things. Today, the new reality of new businesses, even in geographies that are not so important as São Paulo or Belo Horizonte, you see transactions very close to that average ticket and sometimes even higher than that.
In this segment of LOG in the last 12-24 months, we are now at a different level. This yield on cost, as I said before, also changed. I don't think the scenario will change in the short or mid-range.
I just have a quick follow-up. The metric of same client rent is above inflation, and the inflation that you consider in this case could be a weighted average between IGP-M and IPCA. I think you had a little bit more of IPCA. What is the breakdown of IGP and IPCA, and whether you have clients that want to engage in any kind of negotiation or maybe you don't wanna do it. The market is converging more towards IPCA because it's less volatile. You know, IGP is really volatile, and that may be harmful in the long run.
How do you see that?
Okay. Throughout the pandemic period, we did something that proved to be very assertive because we moved a large part of our customers to IPCA. Because of that, our pricing structure is better because, you know, IGPM is very volatile. Therefore, we will not be heavily impacted now because of the strategy that we pursued two years ago about moving everyone to IPCA.
Thank you.
I would like to remind you that for questions, just send your name and company to the Q&A button. Please hold while we collect more questions. Our next question comes from André Dibe from Itaú BBA. Your microphone is on.
Good morning, Sergio and André. Thank you for the presentation and for taking my question. I just have a follow-up question about CapEx.
Could you please give me some light about the fact that you said that the ongoing projects would give about, you know, a certain number of CapEx? Or maybe considering the current scenario, this number could reach BRL 800 million. The CapEx in the quarter was about BRL 160 million, and annualized it would be close to BRL 600 million. Do you have any different perception considering asset recycling and the macro scenario, or it's just because you spent a little bit more in the first quarter and that amount could be reduced in the quarters going forward? I would just like to understand that better and what you expect in terms of CapEx amounts going forward.
André, this is Sergio. Let me tell you one thing.
I mean, at the year-end, I mean, we produced 165 square meters, you know, of GLA in the first quarter. This consumes higher CapEx. What we said in previous quarters, and our position remains the same, this ongoing projects will consume up to BRL 500 million. This will be mostly centralized in the first and second quarters, and we will just wait to see how the recycling landscape will evolve. The fact is that today, our productive capacity and our land bank and approved projects and demanding customers in such a way that we could run slightly above BRL 1 billion in investments, which was the number from last year. As we said before, we are adopting a more conservative position in terms of leverage because we want to understand how the macro scenario will evolve going forward.
The second quarter will still be very strong in terms of CapEx when compared to the first quarter. The curve will start to come down going forward throughout the year.
Thank you.
Our next question is from Jorel Guilloty from Goldman Sachs. Mr. Jorel, your microphone is on.
Good morning, everyone. I do apologize whether my question has been answered, but I would like to learn more about your leasing spread dynamics and how you see that going forward. I remember that in your last call, you said that you were more cautious about the spreads. Once again, we see that the vacancy rate was down. So maybe you could have a higher pricing power than expected. A few months ago, during the fourth quarter call, you gave us some perspectives.
I just want to know whether there has been any changes in terms of the spread now and going forward.
Jorel, thank you for your question. Earlier on, we said that the market moment is very positive. The market dynamics is very positive. There has been great demand. We are leasing a lot of things, and customers are willing to pay more. EBITDA on cost is much better. This is a very important aspect considering the market dynamics. Yields is close to 3% a year. In the last four quarters, we were able to have, you know, EBITDA on spread very positive, about one and a half percent above inflation. I believe that we will see the same thing happening going forward in the next coming quarters.
Now, about vacancies, we have a minimum vacancy in addition to a record delivery that we had last year. For 115,000 square meters, vacancy is 1.4%. This demonstrates the strength of our model in terms of sectors and geographic penetration. We are expecting good returns from all of these new investments.
Okay. Thank you.
As a reminder, for questions, just post your name and company in the Q&A button. Please hold while we collect more questions. Once again, for questions, post your name and company in the Q&A icon. The Q&A session is now concluded. I will turn the floor back to Sergio for his final remarks. You may proceed, sir.
Thank you so much for joining us today. I would just like to emphasize two aspects. We are very optimistic with the future of this industry.
I think that the market will remain very demanding, and we see great prospects of growth in the country. We see, you know, great possibilities of growing. In the first quarter, 35% of all rentals went to this industry. We're very optimistic just now and in the near future. Moreover, we are working diligently to deleverage the company. We are very much focused on the recycling moves. I mean, the liquidity of our assets allow us to believe that we will see some positive things in the near future, and that will allow us to bring liquidity down, and that, in turn, will give us, you know, more possibilities to invest in the future. Thank you all very much and have a good day.
LOG's video conference is now concluded.
In case you have further questions, please send your questions to the investor relations team using the email ri@logcp.com.br. Thank you so much for joining us today, and have an excellent day.