How to Appraise São Carlos?

The most recognized indicators for evaluating a company such as São Carlos in relation to its peers are NAV (Net Asset Value), FFO (Funds from Operations) and Cap Rate.

NAV: The market value of the Company’s real estate portfolio less the Company’s net debt on a specific date. Our methodology for calculating NAV may be different from those adopted by other companies.

FFO: Net income for the period plus depreciation and amortization expenses less earnings from property disposals and the effects of non-recurring items recorded in the period, if any. Our methodology for calculating FFO may be different from those adopted by other companies.

Cap Rate: Gross lease revenue of a property in the following 12 months, based on the values in the current lease agreements, 100% of occupation and no updates for inflation, divided by the property’s market value.

Understanding São Carlos’ income statement:

Gross Operating Revenue: almost 100% of São Carlos’ gross revenue comes from the leasing of the commercial properties in the portfolio. All rents are adjusted for inflation every year, 90% of which in line with the IGP-M inflation index. Seasonality is relatively low and concentrated in the street store lease agreements. In these cases, tenants pay a percentage of their gross revenue every month and in December they pay an additional amount, to complete the minimum annual lease value defined in the contract. The rents we charge in our agreements are Triple Net, i.e. net of common property expenses (condominium fees), property taxes (especially IPTU) and insurance and basic maintenance, which are the lessee’s direct responsibility.

Taxes on Revenue: almost 100% of the deductions from São Carlos’ gross revenue refer to PIS and COFINS revenue taxes. The PIS and COFINS tax rates are 1.65% and 7.60%, respectively, for companies using the real income (lucro real) tax regime, and 0.65% and 3.00% respectively, for companies using the presumed income (lucro presumido) tax regime. São Carlos’ corporate structure includes companies that adopt the real income regime, and companies that adopt the presumed income regime.

Cost of Goods Sold: 100% of the ‘Cost of Goods Sold’ line at São Carlos’ income statement refers to asset depreciation.

General and Administrative Expenses (G&A): São Carlos’ main G&A expenses are: PROPERTIES (primarily expenses with vacant areas, such as common property expenses, taxes, maintenance of the owner´s responsibility and commissions to brokers for leasing vacant areas); PERSONNEL; and THIRD-PARTY SERVICES (e.g. lawyers, auditors, consultants, notaries and legal publications). Provisions for management and employees’ bonuses have been recorded every month since January 2011 (instead of in December only as previously).

Income and Social Contribution Taxes (IR/CS): Income and social contribution tax rates are 25.00% (15% plus an additional 10% of annual income above R$240,000) and 9.00% of pretax earnings, respectively, for companies using the real income tax regime; and 8.00% and 2.88% of gross revenue, respectively, for companies using the presumed income tax regime. São Carlos’ corporate structure includes companies that adopt the real income regime, and companies that adopt the presumed income regime.

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