Edited Transcript of SSBR3.SA earnings conference call or presentation 12-Mar-20 3:00pm GMT

Another highlight of last year was a successful equity offering of BRL 1.2 billion that we concluded in December. Those resources will finance our growth strategy and strengthen our capital structure. Part of the follow-on plans has already been used for liability management with the prepayments of over BRL 450 million in that, only in December, and BRL 350 million in renegotiations of other financing. With these measures, we have significantly reduced the average cost of our overall financings. The main impact should be observed during 2020 in our FFO.

Regarding the company’s growth over 2019, even though this was a very active year due to the merger and integration of the 2 companies, we still concluded very important investments. We have acquisitions of stakes in high-performing malls in our portfolio, such as Shopping Leblon, Plaza Sul, Grande Rio and Shopping Taboão. In addition, we announced important divestments, such as the sale of our ownership stakes in West Plaza in Santa Úrsula, which is in line with our portfolio optimization strategy focused on dominant centers.

Following the same strategy of seeking growth in dominant malls in offering the best possible consumer experience, we continue to invest in shopping center expansions, such as Shopping da Bahia and Shopping Grande Rio that were inaugurated last year.

Now I will comment on the results that we reported last night. Here, we highlight the expressive growth in sales posted in the fourth quarter of last year of 10.3%, an acceleration compared to what we — was reported during the year, which ended with a strong increase of 8.7% in total sales.

Last year, we signed 715 lease contracts in our own malls which corresponds to a total of 85,000 square meters of GLA. These figures is a record if we add up what the company separately used to accomplish. With this leasing activity, our occupancy rate ended the year at 96.7% compared to 95.8% before the merger.

Regarding operational results, we had a great year as well. The 9.6% growth in net revenues, combined with the reduction in operating costs and significant drop in provisions, led to NOI and EBITDA to grow to BRL 802 million and BRL 689 million, respectively. Our FFO grew [expensively] 27.4%, supported by better operational results and a reduction in financial expenses.

Moving now to Slide 4. Here, I will comment on the successful mix management strategy, which uses the data analytic tools that we — in which we have invested in recent years, looking for the prediction of the appropriate mix of each market. Our commercial team has more precise management instruments to identify the demand of each region, selecting the most suitable tenants and services providers for each of our malls. These instruments allowed us to reach in the fourth quarter 176 leasing contracts signed, a total of 20,000 square meters. The sales per square meter performance of these replacement stores in the last 12 months is 34% higher than the former ones. It’s important to highlight that basically, our commercial strategy envisions not only increasing rent, but bringing the most suitable tenants to create the best possible consumer experience.

On the next slide, you can see another important result of our successful integration, so far. Today, Aliansce Sonae has the largest number of dominant centers in Brazil, combined with the largest leading department of the industry, which allows us to offer growth alternatives to various tenants and retail partners. Consequently, we ended 2019 with an occupancy rate of 96.7%, as I mentioned. It’s also important to highlight that the occupancy cost for tenants was only 9% in the quarter, representing a continuous reduction seen throughout 2019. We expect this trend to be reversed as our portfolio becomes more occupied and sales respond to the recovery of the overall economy.

Going now to Slide 6. Here, I would like to highlight our total sales figures that reached BRL 3.4 billion in this last quarter represented growth of 10%, as we have mentioned. Especially over the past 2 years, we then find that the NOI growth has been both in higher correlation to total sales growth. So by bringing more suitable tenants to our malls, we have had better outcomes to our business environment as a whole, and constant liquidity, better performance of rent revenue to the company.

Now I will turn the call over to Daniella Guanabara, who will comment on the details of this quarter’s results. Thank you, and I will be available for the question-and-answer session.

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Daniella de Souza Guanabara Santos, Aliansce Sonae Shopping Centers SA – Chief IR Officer & Member of Executive Board [3]

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Thank you, Rafael. Good morning, everyone. We will quickly go through the financial and operational highlights, and then open up for questions.

The next Slide #7, we have the company’s financial highlights. Rent revenue remained on a positive trend, growing 9.1% in the fourth quarter of 2019. This result derives mainly from the expansion of minimum rent, which grew 7% or BRL 11 million in the quarter. In the fourth quarter, overage and more immediate revenues also had a positive performance in growing 16.8% and 15.5%, respectively. The media segment grew more than the mall segment and continues to present accelerated expansion. We believe that this is a line of business that should greatly benefit from Aliansce Sonae’s larger scale and geographic capillarity. Net revenue, which increased 10% in the quarter, was positively impacted by the growth in parking results of 9.7% or BRL 3.8 million.

On Slide 8, we see a relevant drop in delinquency, which reached a net recovery of 0.1% in the quarter. This reduction was mostly explained by the strong recovery of late payment. In the last 12 months, net delinquency decreased to 68 bps, reaching 1.6%. Provisions for doubtful accounts have also dropped this quarter by 38.3%. In the fourth quarter, provisions accounted for 1.4% of net revenue.

Turning now to Slide 9. We see the positive trend of our results, with EBITDA growing by 13.5% and AFFO up by 26.3% in the fourth quarter year-on-year. EBITDA was positively affected by higher rent revenue and reduced operational costs and provisions. AFFO was mainly benefited from the decrease in financial expenses by BRL 10.5 million in the quarter.

On Slide 10, we show the CapEx breakdown of Aliansce Sonae, which ended the fourth quarter with a total amount of BRL 40.5 million, disregarding the acquisitions of 14% of Shopping Taboão, 25% of Shopping Grande Rio, and 32.9% of Lojas C&A at Shopping da Bahia, which totaled nearly BRL 250 million. Part of the expenses was maintenance and revitalization or direct towards the revitalization of Shopping Metrópole’s food court. The expansion amount refers mainly to Shopping da Bahia’s VIP movie theater. CapEx for 2019 was up BRL 173.8 million, disregarding the acquisitions conducted throughout the year.

On Slide #11, we present some important points about the company’s capital structure. The average cost of debt in the fourth quarter was up (sic) [down] 6.3%, a reduction of 1.6 percentage points compared to the third quarter. This was a result of the follow-on offering of December 2019 in the amount of BRL 1.2 billion in the company’s effort in restructuring its financing. In the fourth quarter, the company also prepaid a total amount of BRL 533 million at a cost of 9.3%, well above Aliansce Sonae’s average cost of debt. In the fourth quarter, the company also renegotiated to decrease the rate on BRL 350 million in debt, reducing their average cost from 10.5% to 7%. In addition, in the beginning of 2020, the company prepaid another debt in the amount of BRL 17 million with a cost of 8.5%. All of these prepayments and renegotiation transactions, including the most recent one in January, to generate an annual savings of nearly BRL 38 million in interest expenses. The company ended the quarter with a leverage ratio of 1.4x net debt EBITDA and a 61.7% exposure to the CDI floating rate.

Now I would like to open the floor to questions and answers. Thank you.

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Unidentified Company Representative, [4]

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Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Nicole Inui, Bank of America.

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Nicole Inui, BofA Merrill Lynch, Research Division – VP [2]

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I was wondering, we’re in the second week of March right now. If you can give us just a little bit of what you’re seeing in terms of flow to the malls for January, February, flow to the malls, flow to the parking lots, flow to the movie theaters. And I think especially just the last couple of weeks, if you’re seeing any sort of slowdown with the fear of coronavirus and all that, if you’ve seen any impact of that yet on the flow to the malls?

And then the second question is regarding your debt. So you have a little over 60% already linked to the CDI. The Central Bank will probably cut again next week. So do you see any more room in terms of liability management, shifting more of your debt into linked instruments? Or do you — are you comfortable with the breakdown right now?

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Rafael Sales Guimarães, Aliansce Sonae Shopping Centers SA – CEO & Member of Executive Board [3]

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Nicole, thank you for your question. This is Rafael speaking. Well, so far, we have seen a very small impact on flow in regard — after the outbreak of the virus here in Brazil. This is more impacting the country, as you know, yet. We are preparing for — we are prepared for dealing with a stronger impact. I was glad to describe a little bit the plans that we have in place. But so far, the impacts are very mild anyway, we don’t need — we need to see what is going on in the next weeks because until last weekend, the figures of people that have been impacted with the virus were very small. So we have to see how it builds in the future, but we are taking measures to keep the centers of operating very nicely. So I’ll ask Leandro to comment on that.

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Leandro Rocha Franco Lopes, Aliansce Sonae Shopping Centers SA – COO & Member of Executive Board [4]

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Nicole, so far, we have initial action plans that we’ve been working on in the last 15 days. We have actually a preventive side. First of all, we put in place a campaign about basic methods to contain the spread of the virus; working a lot in supply chain in order to keep operations and the malls open, even if you have a break in supply chain; and also very specific process in terms of improving cleaning; and a lot of small measures in order to keep the operation side safe for the customers. And also, we’re working on a contingency plan in case we have a worsening scenario.

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Rafael Sales Guimarães, Aliansce Sonae Shopping Centers SA – CEO & Member of Executive Board [5]

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Regarding the balance sheet management, I’ll ask Carlos to comment on that.

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Carlos Alberto Correa, Aliansce Sonae Shopping Centers SA – CFO & Member of Executive Board [6]

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Nicole, this is Carlos. You’re right. We — as you saw, we managed about BRL 900 million, prepayments or renegotiations along the fourth quarter. And — but whether — if you have some loan to go with — as you know, we have about 23% of our debt is linked to TR. And we expect about 200 — between BRL 240 million, BRL 250 million should be renegotiated or prepaid in this — especially in this first quarter, actually. We are in negotiations already with the banks. So we may still see some more liability management coming from this first quarter or maybe April.

And regarding the level of CDI, as you mentioned, we have about 62%. We don’t have a specific target for how the amount to be exposed to CDI, but we are comfortable at this level given the current circumstances.

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Rafael Sales Guimarães, Aliansce Sonae Shopping Centers SA – CEO & Member of Executive Board [7]

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And we also — we’ll be always analyzing the possibility of managing the balance sheet exposure, for example, taking advantage of opportunities to fix part of the debt in a lower level compared to the ones that we had before. To date, it made all the sense to prepay those prefixed financing because there were not such a level that would be better to be exposed to CDI, but it’s no problem about reducing the floating exposure.

Anyway, we have the cash and the flexibility in the balance sheet to do whatever it takes in this if the opportunities arise.

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Operator [8]

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(Operator Instructions) This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Rafael Sales for closing remarks.

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Rafael Sales Guimarães, Aliansce Sonae Shopping Centers SA – CEO & Member of Executive Board [9]

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Thank you all for your interest in Aliansce Sonae. We were glad that you have — took the time to listen to us. Our IR team is available for any additional questions that you may have. Thank you.

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Operator [10]

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Thank you. This concludes Aliansce Sonae’s Fourth Quarter 2019 Earnings Conference call. You may disconnect your lines at this time. Have a nice day.