LOG Commercial Properties e Participações S.A. (LOGG3) Earnings Call Transcript & Summary

[Interpreted] Hello, ladies and gentlemen, good morning. Welcome to the earnings release call of LOG Commercial Properties. We are referring to the results of the fourth quarter '24. We have here with us today Sérgio Fischer, CEO; André Vitória, CFO and IRO; and we also have Henrique Schuffner, Finance and IR Officer. We would like to let you know that the presentation is being recorded and translated simultaneously. Translation is available by clicking interpretation. For those who are listening to the video conference in English, there is the option to mute original audio in Portugese by clicking Mute Original Audio. [Operator Instructions] Next, we are going to start with our Q&A session. [Operator Instructions] We would like to clarify that forward-looking statements that may be made during this conference call with respect to business prospects, forecasts, financial and operational goals of LOG are all based on assumptions of the Executive Board of the company, which may or may not occur. Investors should understand that political, macroeconomic conditions and other operational factors may affect the future performance of the company and lead to results which may differ materially from those expressed in these forward-looking statements. To start our call today for the fourth quarter '24, I would like to hand it over to Sérgio Fischer.

[Interpreted] Good morning, everyone, and thank you for being with us on LOG's fourth quarter '24 earnings call. 2024 is an exceptional year for LOG. We sold 413,000 square meters of GLA, generating BRL 1.5 billion in revenue, gross margin of 38% and performance above our NAV. The sales went beyond funding our growth. They have created real value for our shareholders and strengthened our balance sheet. Throughout the year, we distributed BRL 220 million in dividends and repurchased BRL 313 million in shares. In addition, we have reduced our leverage, which enables more solid growth. Operationally, LOG continues to evolve. We increased our average ticket by 11% this year, reaching BRL 21.76. It means our assets have value, our customers recognize our quality, and that we have been able to pass through prices above inflation for the 10th consecutive quarter. In the last quarter, we delivered LOG Ribeirão Preto, Recife II and São Bernardo do Campo, the latest sold at the beginning of its development. In the quarter, we had record of deliveries of 189,000 square meters of GLA, with 90% pre-leased and average ticket of BRL 28.83 and yield on cost of 13.1%. It shows that we are meeting a real growing demand for quality assets. In the year, we reached the highest volume of deliveries ever recorded, 443,000 square meters of GLA, maintaining vacancy rate at minimum levels of 0.65%, great indicator that we continue to invest in the right place. It's estimated that 2.5 million square meters of GLA were delivered in Brazil in '24. Deliveries made by LOG accounted for about 18% of this new stock in the country. In the end of 2024, we completed our plan of 1.5, and we started a new growth cycle with LOG 2 million. We are going to deliver 2 million square meters of GLA between '25 and '28. The expansion of our production capacity reflected our operational strength and preparedness to meet the growing demand for high-end logistics and infrastructure in Brazil. In this quarter, the company also had a record production of 126,000 square meters of GLA. In December, we reached a production of 50,000 square meters of GLA, equivalent to 600,000 square meters when annualized. Now 2 indicators demonstrate the result of company's strong operating performance. LOG recorded significant increase of 106% in earnings per share in '24, reaching BRL 3.95 per share. As a result of efficient capital allocation, we presented 23% growth in NAV per share in the year. In the fourth quarter, rental net revenue reached BRL 55.9 million, an increase of 18% compared to the same period of the previous year. In the year, LOG reached revenues of BRL 220 million. Revenue has been driven by one important aspect, positive lease spread for 10 consecutive quarters. In the last quarter, 1.2%, demonstrating that our contracts are not only staying strong, they have also been appreciating. Accumulated net delinquency in the last 12 months was only 0.57% of accounts receivables, reflecting the quality of customer portfolio and our management of receivables. LOG manages and administers not only its own logistics condominium, but also a large part of the assets sold. We believe that this line of business has enormous room for growth in the coming years. Regarding asset management, there was 50% growth in revenue, registering BRL 4 million in the quarter with margin of 66%. EBITDA for the quarter reflected the high performance of leasing and development, reaching BRL 143 million, increase of 125% compared to the same quarter of the previous year. Rental EBITDA reached BRL 42 million, an increase of 30% over the fourth quarter '23 with margin of 74%. In the year, consolidated EBITDA reached BRL 494 million, showing growth of 86%. Rental EBITDA was BRL 122 million. Operating expenses decreased by 7% compared to the same period of the previous year, driven by a drop in general and administrative expenses carried out throughout '24. Our net profit showed the high performance of the quarter, reaching BRL 100 million with growth of 37% over the fourth quarter '23. Net income for the year registered BRL 344 million, increase of 77% over 2023. For '25, we forecast net income between BRL 350 million and BRL 450 million, with dividends being distributed quarterly and corresponding to 50% of annual net income. In 2024, LOG once again proved its capacity to generate cash in a consistent disciplined manner. Last year, we generated BRL 1.3 billion in cash through the sales of assets. We highlight that of the total, BRL 533 million were directly returned to our shareholders in the form of dividends and share buybacks. In '24, we made significant progress in our debt management. We reduced adjusted net debt by 19%, ending the year with BRL 400 million and reported significant reduction in adjusted leverage, which went from 1.87x to just 0.81x. It means that we are funding our growth with intelligence and control without compromising the strength of our balance sheet. In addition, we reduced the effective cost of debt from CD1 plus 1.9% to CDI plus 1.5%. As a result, our adjusted LTV fell to 9%, a decrease of 240 bps for the year. For '25, we are ready to continue growing, creating opportunities and delivering real value. Our strategy is clear, to balance expansion, financial strength and returns for our investors. We now start the Q&A session. Thank you all very much.

[Interpreted] [Operator Instructions] Our first question comes from Ygor Altero, XP.

[Interpreted] I have 2 points. First, understand about recycling in terms of volume and cap for 2025, consider higher interest rates, understand what would be the potential buyers. Would it still be real estate funds? Do you think that they can really raise more funds to keep on investing? And if we consider a scenario of less recycling, what would you consider for CapEx?

[Interpreted] Ygor, thank you for the question. This is Sérgio speaking. Well, it's a more complex situation. We have to say that recycling scenarios are somewhat more bumpy. We believe it's going to improve throughout the year. There have been a change in regulatory aspects of real estate funds. There is less traction, especially for the real estate funds. But as you see, we just have access to different pockets. In our last transaction in October last year was with an institutional investor who is not really focused on increasing interest rate, but rather thinking about the long term. So we are comfortable that we are going to have a very positive volume this year. Our idea is to keep on recycling our assets similar to what we've done in '23 and '24, and we have ongoing negotiations. People are still at the negotiating tables. Of course, we have to have some more level of flexibility or creativity in our transactions. This is something that we've been experiencing. But we are very confident that we are going to maintain our level of sales. Another thing that really makes us comfortable and going into the second point is the fact that we have an amount of receivables, which is very relevant, almost BRL 1 billion of previous sales to be received. Part of the volume is going to be paid throughout the year. If necessary, we can anticipate part of these resources. We've done that in the past. There is some level of liquidity really in that. So this is what we are going to work with compare quarter-over-quarter, try to understand the situation, how receivables are being paid and really make the necessary investments. But that's the same situation. We are maintaining our investment plan for the year, and we are just going to keep on observing closely. Thank you.

[Interpreted] The next question comes from Pedro Lobato, Bradesco BBI.

[Interpreted] I would like to hear more about recycling of assets really and focusing on your main pillars, so net debt, LOG 2 million and guidance of dividends, 50% payout. If you get a more stressed situation for sales of asset, what would be your priority of those 3 drivers? My second question is we've just seen reported lease and new developments. Do you think that this is going to change your yield on cost from now on? Or do you expect it to be about 2.7%, which was exactly what you had in this quarter?

[Interpreted] Thank you, Pedro. Sérgio speaking. Let me start from the second question. This is a different really situation for the industry and for us. It's a positive situation, though. We've been making prelease with average tickets that we didn't use to consider 18 or 24 months ago, and the gap is being closed. In 2024, we increased our average ticketing by 11%, much above inflation rate, and that's how we started 2025. We've opened the average ticket of the fourth quarter. Just for you to realize how strong the industry is. We had rentals of about BRL 30 on average. It's a very good number. There is some pressure over the cost of construction, but nothing major really in terms of investments. So we expect to have some marginal increase of yield on cost. We've already reported a strong volume of the fourth quarter of 109,000 square meters of GLA. It were a yield of 3.2%, which was better than the average yield of the year. In 2025, we are maintaining exactly the same phase, yields above 13%, very strong number. This is not going to change. This new projects that we have for 2025, very positive, the best projects ever, I would say, very high levels of prelease and very positive tickets. I don't think that we are going to have anything unexpected in terms of yield on cost. In terms of recycling, our debt cap is maintained. We maintain it with discipline. We are not going to exceed it. We have a significant part of receivables, which makes us more comfortable. Our LOG 2 million is a 4-year plan up to 2028. We want to deliver 500,000 square meter per year, but it may change. We want to get 2 million by the end of 4 years. And the guidance of dividend on yield is not different from what we've performed in 2024. We distributed 44% of our dividends, and what we are proposing for 2025 is close to that, reaching 50%. But how can we do that? We really believe in our LOG developer, the company that builds assets of quality, of good projects, and then we can sell these assets and generate cash from that. Last year, it was BRL 1.3 billion of cash from these operations, very relevant. So that's how we could return the capital to our investors with buyback. So that's exactly what we are following this year, and we are very confident. So trying to answer your first question.

[Interpreted] The next question comes from André Mazini, Citi.

I have 2 questions as well. First, a follow-up about sales of assets. Sérgio was in an interview recently after the press release, saying that you expect the same level of sales in '25 over '24, despite the interest rate and everything you've just said. So would you be willing to accept other payment terms such as, let's say, shares of real estate funds that's accepted by other companies when they sell assets? So that's why I ask. Now the discussion of average ticket and it's been growing continuously, that's great. BRL 21.7. Then in '24, I thought was BRL 24 marginal. And Sérgio has just talked about BRL 30. So BRL 30. Is it in some specific regions, some specific states? And speaking of regions in previous discussions with you, I recall, for example, Salvador, where they have high average ticket, near BRL 30. Interesting because real estate in general does not cost that much compared to the Southeast, but the average ticket is high. Would that be a good indicator of where you're going to grow from the margins? Because if you have a high average ticket and the piece of land is cheaper, is -- are these the regions where you are going to grow? Or are there other metrics, maybe where customers expect you to be or maybe those 2 factors together, if possible? So do you consider more yield on cost? Or do you consider customer demands and see where they are going to move to and there, you just focus on that exponentially?

[Interpreted] Thank you, Mazini, Sérgio speaking. Let me start with the second question. I think things go hand in hand. You see where customers want to go and the average ticket of that specific region. Of course that the average ticket of BRL 30 in the fourth quarter has got to do with the product mix, of course. So Sao Paulo, some other strong regions, it's not the reality of our full portfolio. BRL 24 with 10% on site is the reality of our portfolio. And this is something that has been changing quarter-over-quarter because we've been really passing through prices continuously. There's going to be a gap, but we are always trying to increase prices. You see we analyze return, return on investment and how much we can prelease during the construction. Investments in 2025 focus on cities such as Salvador, yes, there are new projects there. Lots of projects in the Northeast where we can see a very positive performance and good average ticket. It's the same customer that is leasing shared in the South of Brazil or Sao Paulo, and they are willing to pay the same price in other regions because of quality. In these regions, they have a scarcity of good offers. When we offer them our products with our own customers, it's really easy to offer quality, and they are willing to pay for it. As I told you, in these regions, there is an improvement, and we expect to provide better yield on cost. Now concerning sales of assets, yes, it's more challenging. We are going to have to offer flexibility, even work on cap, but we still haven't been affected by that. There are ongoing discussions, very positive discussions of selling our assets at an NAV, even above NAV. Some discussions are more mature than others, but still working. We are open to listen to all offers, maybe get paid in some quotas or shares, that's fine. We can consider it. But we've been having very fruitful discussions with potential clients. And we are not in a hurry, you see. We want to produce a volume close to what we've done in the past 2 years. We can do it at our own pace, probably concentrating most of the sales on the second part of the year. Probably, the situation will be better than with a more -- a clear definition of how interest rate is going to go down, when will it start to -- coming down. So we are confident. Maybe it's going to be harder, but we are definitely going to deliver results.

[Interpreted] The next question comes from Marcelo Motta, JPMorgan.

I have 2 questions. First, I would like to understand whether there is room for liability management. You were talking about selling, cap rate, cost of debt. So how do you think about spread? Is there anything else that can be done once we have that bad situation of interest rate? Second question, when we think about your hurdle rate or the minimum return on investment, you have a yield on cost of 13%, 14%. And when we see the interest rate of about close to 15%, maybe the spread is too tight. You cannot generate value. So I would like to understand the macroeconomic perspective and how this is going to impact your LOG 2 million plan. Maybe you're going to postpone it for '26, '27 when interest rates are coming down. Trying to understand about marginal return and your average EBITDA.

[Interpreted] Thank you, Motta. I'm going to start and then hand it over to André. You see, Motta, considering the scenario, yes, there is going to be an increase in interest rate. It may get to 15%, 15%, 25%, I don't know. But inevitably, it will start coming down in a moment. So we are not forgetting our long-term projects because of temporary increase in interest rate. Even though it's bad, it's okay. We are going to keep on focusing. We want to provide really service to our customers. If we don't, others will. 13% of yield on costs being delivered is quite comfortable. This 13%, Motta, is 13% plus inflation. So that leads to real gains, which is what we've been obtaining recently. We deliver projects. We can bring prices above inflation immediately after when we have renewals or when we replace customers. So that's the power of our really business capability. So we are not going to shut down projects because of the current situation.

[Interpreted] André speaking. Concerning the debt, something that we've been considering with our financial planning is liability management. It's a constant concern, which has tried to identify opportunities to extend our debt at lower cost. We did that in the end of last year. The company, before all rating agencies and financial organizations, we are seen as good low credit risk. We had CDI plus 1.3. So the cost of our debt is really going down. It went from 1.3 to now 1.4. So we are going to keep on really focusing that to paying our higher debts with lower credit rates, so that we can really benefit from all the windows of opportunities throughout the year of '25. We are going to keep on executing, but we are going to maintain always our debt maximum cap.

[Interpreted] Next question from Rafael Rehder from Safra.

[Interpreted] Can you all hear me?

[Interpreted] Yes, we can hear you. Please go ahead.

[Interpreted] That always attract our attention is the inflation of civil construction, consistent -- consistently below the rates. What do you expect for the year? What about the construction mix of a regular shed in terms of raw material and personnel or labor? And how it differs in the different regions? Is it a similar cost per built square meters? Or are there differences in the Northeast and Southeast? Tell us a bit more about that.

[Interpreted] Rafael, Sérgio speaking. Thank you for the questions. About the cost of construction, our construction basket is less exposed to labor than the basket offered by INCC, the Index of Civil Construction. And this is why we've been performing well. We have less exposure to labor, which is what's more -- applying more pressure over the cost of construction. So we do not expect anything to change very relevantly, the cost of construction throughout 2025. The cost of construction is linear. There is no difference among regions. It's very similar throughout Brazil. So we don't expect to be under any pressure, and we don't expect the situation to change. I think that was the question, right?

[Interpreted] Yes, exactly.

[Interpreted] Well, our Q&A session is closed now. Let me now hand it over to Sérgio Fischer for his closing remarks.

[Interpreted] Thank you all very much for being here with us. We've had a very good year in 2024 at LOG. We've presented good results through our developer arm, the company that is building, developing and selling the assets, generating high levels of cash and returning a lot of dividends to our shareholders. We are going into 2025 with a dichotomy, so to speak. Operationally speaking, we are delivering very great projects with positive yields, very well positioned, located, very great sequence of projects. Now in the first quarter '25, we are delivering 100,000 square meters of GLA preleased with very positive yield on cost. Now on the other side, yes, the macro situation is hard, bumpy. We will have to work harder to sell more. We are working on it and paying attention to maintain really our plans for the year. But we are going to keep on selling. We've been selling over BRL 3 billion of our assets over the 3 years. Conversations are ongoing, negotiations. We are very confident with our ability to deliver results throughout the year to once again break a record of return on shareholders. Thank you all very much, and see you in the next quarter.

[Interpreted] Our call of LOG is now closed. If you have any questions, please submit your questions to Investor Relations team using the e-mail [email protected]. Thank you for your participation. Have a great day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]