Earnings Call: Q1 2021

Apr 28, 2021

Quarterly report

Ladies and gentlemen, good morning. Thank you for waiting, and welcome to the Log Commercial Properties Conference Call on the First Quarter Results of 2021. Hosting the event today are Mr. Sergio Fischer, LLOG's CEO and Mr. Andre Vittoria, CFO and Investor Relations Officer. We inform you that this event is being recorded and translated simultaneously. All participants will be in the listen only mode during the company's presentation. After the company's remarks are completed, there will be a question and answer section when further instructions will be given. Before proceeding, we would like to clarify that any statements made during this conference call concerning the business outlook of the company, forecasts and operating and financial targets represent the Opinions and assumptions of the company's management which may or may not occur. Investors must understand that political and macroeconomic Conditions and other operating factors may affect the company's future and lead to results that differ materially from those expressed in such forward looking statements. To start the Q1 of 2021 teleconference, I turn over to Mr. Sergio Fisher, Log's CEO. Good morning everyone and thank you for participating in the conference call of Log's results of the Q1. We had a record of absorption. We lead 212,000 square meters of total GLA, which represent almost 50% of the entire year of 2020 And twice the previous monthly record that had been set in the second half of the year. Reflecting the heated demand from e commerce, 2 thirds of this absorption was related customers in the segment at 90% outside Rio and Sao Paulo. Log's internal team is responsible for 90% of the GLA lease. We reached record levels in occupancy with only 2.5 of stabilized vacancy rate. It's important to emphasize that we have an extremely high volume of We, leasings in our ongoing projects and our existing customer base continues to be the largest base taker making us increasingly a one stop shop solution for clients seeking expansion. ECommerce reached the historical sales mark in 2020 and we believe that this robust growth will continue to Strong in the coming years. 47% of the portfolio is composed of clients directly or indirectly exposed to the growth of e commerce And this representation will increase in the coming quarters with the delivery of our projects. In this quarter, we closed a new BTS project For a relevant play in the e commerce market in the region of Extrema Minas Gerais with the potential of 78 square meters of total GLA to be built in stages, And the construction is expected to start in the Q2. We added 3 new plots of land with 110 square meters of potential GLA to the First Quarter Land Bake reaching 1,000,000 square meters of total GLA. We continue to have good negotiations for land with no direct competition, important Consumption letter most of it negotiated via border and 70% of the land for the completion of Todos Poron Ponto Cuatro is already in place. We are following our geographic diversification strategy. We currently have 9 construction sites in all five regions of the country. We are forecasting a record year of construction activities with more than 400 square meters of GLA produced and remain committed to the delivery of the Toros Puro Ponto Cuatro Plan have several funding activities at our disposal and a robust cash flow generation. We will follow this asset recycling strategy as the main funding alternative and from this year we will increase the recycling volume. In the implementation of the Taurus PONTO 1 program, we are already seeing results. Now I turn over to Andre. Thank you, Sergio. Our results were very impressive and the indicators remain solid. I would like to start by addressing the most important aspect of our business. Lag is a greenfield asset developer. There were BRL115 million of positive impact on the operating results due to the value generated in new assets. This recurring value generation throughout the Herto dos Por un Ponto Cuatro Growth Plan will bring a significant return to shareholders. By 2024, it will be more than BRL1.5 billion recorded in our financial statements through business activities and equity and consequently dividends. It is expected that as we develop new assets, We will recycle mature assets in similar proportions, maintaining value and cash generation strategy throughout the growth cycle. Always with the expectation of margins higher than 40% by the spread that exists between the yield on cost and development of access and exit cap rates. I reinforce what Sergio has already mentioned. We will recycle more assets and faster. In our portfolio, we have about BRL 1,500,000,000 in assets with high consolidated performance ready to be sold, either to Institutional Investors or to the LGCP 11 Fund. In this half this quarter, we reached in EBITDA of BRL144 1,000,000 and a net income of BRL122 1,000,000, 7 times higher than the same period last year. Those are extraordinarily strong numbers. The positive results have been recurrent over the last which shows the resilience of our business model. Besides being very well prepared operationally to continue our growth cycle, We present a very solid financial position in our balance sheet. Our cash, for example, ended the 1st 3 months of the year at BRL 931,000,000 and our default rate remains at historic lows, close to 0, reflecting the excellent quality of our customer portfolio. We have different funding alternatives at our disposal, whether through the asset recycling strategy or equity, which will always be balanced against our capital needs. In the sense, in the Q1 of 2021, we raised BRL250 1,000,000 in debt through an operation that did not require collateral. Our cost of debt is low, CDI plus 1.4%. The net debt is only BRL90 million, which represents only 2.8% of P and L, that is Growing revenue and EBITDA, solid liquidity and low leverage and different funding alternatives. These indicators put us in a comfortable position to carry out our relevant growth plan. Thank you. We will now start the Q and A session. If you have any questions, please press star 1 or you can also send your question via the webcast chat. Our first question is from Alex Fajas from Itau BBA. Good morning Sergio and Andre and thank you for your presentation. I have two questions. The first relates to the BPS announcement that you mentioned that you signed a project for a 78,000 square meter warehouse and I would like you to give us more information about that. What is the yield on cost you mentioned? Your discussion related to built in suit always said that It should be more attractive. So we would like to understand what is the yield on cost of this project and also related to the tenants? Is it just for e commerce? Is it for retailers? Any specific segment? And my second question has to do with absorption. We see the vacancy of your portfolio is low, so probably There is absorption. You probably have pre leases. Is that what is going on? Is it what you're delivering? So probably when you deliver a project is already leased, right? Good morning and thank you for your questions. Let me start by talking about absorption. Yes, 75% of the figures achieved in the Q1 were Pre leases, so these are ongoing construction projects. They're very close to completion, Almost a 100% lease throughout the construction period and that's nationals domestic. We've Being able to do that nationwide from north to south, we have construction sites in all five regions of the country with very High levels of leasing. So we've seen this trend. It's an increasing trend, especially involving e commerce. 2 thirds of these leases are for e commerce platforms exclusively and those Customers prepare in advance and they are willing to pay pre leases sometimes even when the construction site is beginning or about to begin. Related to BTS, we I cannot say the name of the client, but it is an exclusive e commerce platform. It only operates e commerce. And about the yield on cost it's about 8.1. We are checking BPS. We are going to focus on that. There are Some large BBS projects in negotiation in addition to this one we are about to complete in the Q2, but the yield should be close to 12. This is our threshold so that we can continue with our investment. So we expect to reach 12.1 of yield on cost on this project And the construction project will start in May. This is quick. It's a large project, but it is quickly constructed. And in the first or the second half of the year should be delivered of next year. Thank you, Sergio. Next question is from Elvys Credentu with BTG Pactual. Good morning, Sergio and Andrea. I have two questions on our side. First, related to competition. We see that there is heated demand, especially outside Sao Paulo and Rio. And given this Gross absorption that is a little bit stronger now. The company has always said that we didn't see Professional competitors in these regions, do you think that competition could be higher because of the increasing demand in this region. And my second question has to do with the yield on cost, specifically on the warehouses. We see an increase in the prices of steel. I know it's hard to compare, but do you think that there is room to increase the leases for speculative warehouses. How do you feel the negotiations with your tenants related to this. Yes. We got it. Thank you for your questions. This is Sergio. Regarding yield, That's exactly that. We've been surprised with this impact. Our industry is exposed to the cost of Steel and steel prices have increased. We still expect more increases throughout the year. Yes, this has impacted our construction sites. We thought that this would only last in 2020 but that's not true. We started this year with a strong pressure on prices as well. The fact that the yield is positive, prices have followed up this cost even a little bit higher than that. People were positive in terms of the yield on cost of the ongoing projects. I think that IGPM 20% to 30% in the past month. Of course, we cannot of just use the same rate, but this has affected the industry as a whole and has a positive impact for us. We've been able to keep and even improve the yield on cost in our ongoing projects. Regarding competition, We don't see any organized player moving towards doing what we do. What we see sometimes a player in one specific city to implement a project but not nationwide as we do. Maybe this will happen in the future. If of course this is a an industry with a high demand, we see that we've been able to deliver good quality and have good return and absorption so may eventually we might have a higher competition scenario but we feel comfortable because We have some barriers here at Lotte. First one is our customer portfolio. We have the largest customer portfolio in this industry And this client that has helped us become a nationwide solution makes our clients even more loyal to us. So this is competitive advantage to us. And also because of the capacity we have, No player in this business are able to have a verticalized company as we do. Because of that we can deliver Good high quality products and with very competitive prices. We can Improve our pricing because we have the yield on cost and these rates that I've mentioned. We feel comfortable with that and I believe the competition is from this scenario in Brazil. Thank you. Next question is from Nicole Louis from Bank of America. Good morning. Thank you for this call and congratulations on your results. I have a question related to development. In terms of your land bank and also looking for new plots of land, Do you see increase in prices of land in some regions? In the beginning of the year, end of last year, you mentioned The now approvals are taking place faster. Is that the case still? Those are my questions. Thank you. Hello Nicole, this is Sergio. About the approvals, overall we've been able to deliver our projects earlier than planned. Along 2021, we got projects approved within 6 this month which is a major accomplishment for us. In the Q1, we saw impact in some local administrations Because of the 2nd wave of the COVID-nineteen pandemic, but it's isolated. It's just in one local administration or not. The reason why we're able to improve our Growth plan was related to our ability of swiftly getting the approval of our projects. But the problems we've seen are one off and they do not have relevant impact. Regarding the Prices of land, we don't see competition. Of course, in Sao Paulo, there is a major Competition for logistic, land and also in Rio, but except for that is difficult to see this type of competition or to face competition with players over the same land, same plot. We've been able to make Very good purchases especially through barter and then our cash exposure is lower. For this year because we see this ability of having favorable conditions without affecting our cash. Thank you, Sergio. Next question is from Andres Marzini with Citibank. Good morning. Sergio and Andrea, thank you for this call. You have 50% of this project here in particular this was a partner that have brought you know how and capital. One of one of your typical projects, you have a higher state and then you send that to a real state fund and you are a majority shareholder. Does that make sense? Will we see more shared projects in the future? And how do you expect to see this build to suite projects as of now? This is Sergio. Mazini, this was an one off case. This is we're talking about a partner who brought A very interesting opportunity to us in a very complicated region in terms of land bank that's Extrema in the state of Minas Gerais and this is why We had this 50% share in this business. The other BPS we have negotiated today, Usually, LOG has closed or 100% of its shares and I believe we will continue to operate like that. Thank you. Next question is from Bruno Mendonca with Bradesco BBI. Hello, good morning. I have a question about capital structure. After your decision of not moving on with the follow on. So how do you see this evolution on the decision of what projects you were going to take or not. Does that change this decision, the fact that you don't have the follow on? So how do you see The capital structure evolution, should we expect a maximum leverage? And how do you In terms of recycling, have you seen any changes in the cap rates that are negotiated? Any changes in the expected cap rates related to the asset recycling expected for this year? Hello, Bruno. This is Sergio. Related to capital structure, we are very comfortable to deliver our plan. Today we have a very low debt, very robust cash position. So we will just Continue operations and focusing on recycling. Now moving to your second part of your question. We don't see a lot of variation at this point. Of course that real estate funds It's not are not easy as they were last year but we believe that this is momentary because of the political noise, Tax and pandemic noise, I think that probably things will go back to normal. So I don't think that there will be a lot of variation in the cap rates that we negotiate. And we feel comfortable because we have a very strong margin. In the past 16 months, we recycled close to BRL300 million And this was done with margins above 50%. So if we see this trend of Increased cap rates, we are still going to deliver what Andre mentioned in his speech. We're still going to Deliver above 40% of gross margin which makes it puts in a comfortable position and we will Keep on with our plan and we plan to match the value of generation and the development we have with recycling so that we can have cash return. So we will keep on We still have some pillars at our disposal, equity, recycling and the debt And of course they have different costs involved. The advantage is that we have a position that allows us to make decisions according to the situation. I would like to ask another question About the operating results of the new assets that were very strong in this quarter, how do you see the evolution of that until the end of the year. Do you believe that this rate will be continued? What can we expect from that? This was so very relevant in the results of this quarter. Bruno, I think that now we have reached a different level. Last year, We saw this trend and I believe that we will keep at the same levels we had in the Q1. We have a lot of ongoing projects. We are going to produce more than 400,000 close to 500,000 of GLA this year and this is going to have a very significant impact on value generation. It's a different level when compared to last year. And in the next quarter, we expect to reach the same levels. Thank you. Next question is from Lucas Hoang with XP Investments. Good morning. I would like to understand A few determining factors whether selling assets to a 3rd party or real estate fund or your own fund. Is this decision based on price, speed, payment conditions? We have a very strong responsibility for BN related responsible for this real estate Fund, it's a long term vision. We want to generate value to the quota holders of this fund. We don't want to do anything crazy about that in terms of price for example. If the market is paying a price that we believe is positive and we find it too strong to be included in LGP P11, we can do elsewhere because we have this long term perspective and we want to protect our shareholders. Thank you. Ladies and gentlemen, Next question is from webcasting from Matheus Barcelos with Queloz Asset. How do you see the possibility of LGCP 11 Fund not being able to collect resources for Log CP assets. Is there a possibility of selling assets to other fees? Mathias, this is Andre and thank you for your question. I will address it in 2 ways. 1, related to A situation when we might not have the resources through recycling and LGCP 11, we have other funding alternatives as we highlighted in our speech. We also have a perspective that block assets are attractive to the market. They are Class A assets with great performance. The market is more sensitive, But I believe we'll be successful in maintaining this recycling level with important margins, whether it is for LGCP 11 or for institutional investors for other types of investments in the market. We believe we'll be successful because we have other alternatives. Next question from webcast from Hena Ulrich with Infinity Investment Club. What is the deadline of administrative expenses that you believe is feasible in the long medium and long term. Andrea again. Thank you for your question. The company, it is at a different stage when we compare year over year. So our growth is opening new work streams. We believe that in the upcoming year we'll have marginal growth in this expenses. We expect to grow to increase our expenses a little bit, but We believe that in the next years, it's really going to be a marginal increase when compared to our revenue. Next question from webcast from Leandro Alves Gifretas who asks. Good morning. I would like to know what is the approximate percentage of IGPM that you are transferring to your clients surcharging our clients. Regarding changing the eGPM rate and replacing that with IPCA, is there anything that happened in 2020 or 2021? And if that's so, how many times was this exchanged or changed. Regarding those contract indices, half of our contracts Use IGPM and the other half, IPCA. Regarding IGPM, During the renegotiation of contracts, sometimes this contract rate is Change from one type to another, so from iGPM to IPCA. About 80% of this rate is applicable at renewal. Regarding IPCA, we've been able to charge it entirely 100%. Send your question using the chat in the webcast. Now we conclude the Q and A session. Now I would like to turn over to Mr. Fischer and Mr. Vittore for their final remarks. This is Sergio. Thank you for your participation. Just to wrap up, I would like to say that we have other BTS that they're being negotiation they're being negotiated. We hope to Close that in the second half, but that's X plan. So it will be an additional and inclusion to the totals on plan. So as soon as we have good news, we will share them with you. The other point has to do when I replied Bruno's question. The company has reached now a new lever in terms of value generation in greenfield product projects. Now the plan has gotten more traction. We have record levels of production and this value is going to be increasingly relevant. You will see this recurring amount of value that is