Consorcio ARA, S. A. B. de C. V. (ARA) Earnings Call Transcript & Summary

Hello, and welcome to today's Third Quarter 2023 Results Conference Call and Webcast. My name is Leslie, and I will be your event specialist today. [Operator Instructions] Please note that today's conference call and webcast are being recorded. During the presentation, we will have a question-and-answer session. To follow the conference online, please visit https://consorcioara.transmision.com.mx. The word transmision is with 1 S only. If you would like to view the presentation in a full-screen view, please press the full-screen button in the upper left-hand corner of your screen. Press the same button to return to our original view. It is now my pleasure to turn today's program over to Alicia Enriquez, Co-Chief Executive Administrative and Finance Officer. Please go ahead.

Thank you, Leslie. Good morning, and a warm welcome to our conference call on the third quarter 2020 results of Consorcio ARA. This call will be also transmitted via webcast accompanied by a slide show for visual support. With me on the call to discuss the results are: German Ahumada Russek, Chief Executive Officer and Chairman of the Board; Luis Felipe Ahumada Russek, Vice Chairman of the Board; and Miguel Lozano, Co-Chief Executive Operating Officer. I want to alert everyone that certain statements and comments made during the course of this call must be considered forward-looking statements as defined by the Securities Litigation Reform Act of 1995. Consorcio ARA believes that such statements are based on reasonable assumptions, but there are no assurances that current outcomes will not be substantially different from those discussed today. All forward-looking statements are based on information available to the company on the date of this call. The company is under no obligation to publicly update or revise any forward-looking statements as a result of new information that may become available in the future. As usual, at the end of our prepared remarks, there will be time for Q&A. We'll wait until then to open the queue for questions. I will turn over the call to German Ahumada Russek, Consorcio ARA's Chief Executive Officer for this morning's remarks.

Good morning, and thank you for joining us on this call. Results for the third quarter of 2023 compared to the third quarter of 2022. We feel satisfied with our third quarter results. First, because our revenues continue to grow while earnings advanced at double-digit rate with stronger profitability. And second, because we positioned ourselves for a good close to the year and are within sight of our goals for the year. Housing revenues totaled MXN 1.67 billion in the third quarter of 2023, 5.1% higher than in the same quarter of last year. These revenues came from the sale of 1,490 homes at an average price of MXN 1,120,800, an 8% increase over the average price for the same period of 2022. Revenues in the Affordable Entry-Level housing segment came to MXN 513 million, a slight 2.3% reduction from the third quarter of 2022, primarily due to the completion of 2 developments along with a delay in titling of about 80 homes in one of our largest developments, which had already been sold and will be titled in the fourth quarter. Middle-Income home sales in the third quarter totaled MXN 685 million, a solid 11.1% growth over the year-earlier period. In the Residential segment, revenues came to MXN 472 million and grew 5.5%. Revenues from other real estate projects, mainly from the sale of land and shopping center leases totaled MXN 79.3 million, 21.2% lower than the third quarter of 2022 due to lower sales of commercial land. Total revenues, meaning the sum of housing revenues plus revenues from other real estate projects came to MXN 1.75 billion in the third quarter of 2023, a growth of 3.5% compared to the same period of the preceding year. Looking at the revenue mix during the third quarter of 2023, Affordable Entry-Level homes contributed 29.3%, Middle-Income homes 39.2%, Residential 27% and other real estate projects 4.5%. Between July and September of this year, operating income totaled MXN 200.5 million, a growth of 29.6%, net income was MXN 184.5 million, 20.3% higher and EBITDA came to MXN 275.2 million, rising 23.3% year-over-year. These solid double-digit growths were primarily to a stronger gross margin and the absence of one-off expenses we reported throughout 2022. With all of this, our profitability saw a marked improvement: in the third quarter of 2023, our operating margin was 11.5%, 230 basis points higher than in the same period of last year; the net margin was 10.5%, a 140-basis-point increase and the EBITDA margin was 15.7%, recovering 250 basis points. You may also be interested to hear that we have increased our share of homes titled under Infonavit's Line 3 credits. These are called Build with Infonavit loans and allow enrolled workers to build their own homes individually or through a developer in an authorized housing complex, comprehensive mode. This type of loan offers a number of benefits to the borrower, including a qualification score of just 880 points, which is lower than they need for a traditional loan, plus they can choose from one of our prototypes, and we will deliver their home in a maximum of 6 months. During the construction period, the developer receives installments as the work progresses under the supervision of a managing financial entity. As of September 30, 2023, we had MXN 85.3 million worth of titled homes under Infonavit's Line 3 pending recognition in our revenue. This is because, according to IFRS standards, the revenues can only be entered at the time the home is delivered, and this takes place in a maximum of 6 months when construction is completed. I should mention that these homes are primarily Affordable Entry-Level units, a segment where we have seen a contraction in recent years. Results for January-September 2023 compared to the same period of last year. In the first 9 months of the year, total revenues, which is the sum of housing revenues and revenues from other real estate projects came to MXN 5.24 billion, a 2.7% growth compared to the same period of 2022. Housing revenues totaled MXN 5.04 billion, 3.4% higher than in the first 9 months of the year, corresponding to the sale of 4,325 homes with an average price of MXN 1,164,500, a year-to-year increase of 11.5%. Revenues in the Affordable Entry-Level segment between January and September 2023 totaled MXN 1.50 billion, down 7% from the first -- from the same period of last year for the reasons mentioned above. Middle-Income home sales totaled MXN 1.97 billion, a solid 10.9% growth. And Residential home sales reached MXN 1.57 billion, a year-over-year increase of 5.6%. Revenues from other real estate projects, mainly from the sale of land and shopping center leases totaled MXN 203.3 million, 11% less than in January-September 2022 due to lower sales of commercial land. As for the mix of revenues in the first 9 months of this year, the Affordable Entry-Level segment accounted for 28.6%, the Middle-Income segment, 37.6%, the Residential segment, 29.9%, and other real estate projects, the remaining 3.9%. In the first 9 months of this year, operating income totaled MXN 584.9 million, a 24% growth over the same period of last year. EBITDA totaled MXN 782.0 million, a 13.5% increase. And net income was MXN 525.3 million, a 16.3% growth. These improved results were reflected in stronger profitability between January and September 2023, our operating margin was 11.2%, 190 basis points higher than in the same period in 2022. The net margin was 10%, an increase of 110 basis points and the EBITDA margin was 14.9%, a recovery of 140 basis points. Although free cash flow to the firm was slightly negative in the third quarter, it remained positive for the first 9 months of the year at MXN 144.9 million, and we are expecting stronger cash flow generation in the last quarter of the year. The financial profit as of September 30, 2023. At the close for the third quarter of 2023, the balance of cash and equivalents totaled MXN 2.69 billion, a 14.4% reduction from the balance on hand as of December 31, 2022, due largely to dividend payments totaling MXN 200 million. As of September 30, 2023, account receivables totaled MXN 704.2 million, a 6.8% increase against the close of last year, the result of a higher volume of titling in the last week of the quarter. Accounts receivable turnover remained fairly healthy, however, at 1.2x. Total inventories as of September 30, 2023, amounted to MXN 16.26 billion, 4.5% higher than at the close of the previous year. At the end of the third quarter of 2023, cost-bearing debt came to MXN 2.27 billion, a 2.2% reduction from September 31, 2022, due mainly to the repayment of simple unsecured loans, short-term [indiscernible] meaning debts coming due in the next 15 months, made up of 54.2% of cost-bearing debt and long-term debt, 45.8%. As of September 30, 2023, 65.7% of our cost-bearing debt was in the form of the ARA 21X and ARA 21-2X note, 18% were simple secured loans for our shopping centers, 9.9% were simple unsecured bank loan without real estate collateral and the remaining 6.4% were lease liabilities. At the close of this year's third quarter, net debt remained negative because of the balance of cash and cash equivalents exceeded our cost-bearing debt, resulting in a net debt position of negative MXN 426.1 million (sic) [ MXN 426.2 million ]. Our basic leverage levels remain at fairly healthy levels. Cost-bearing debt to EBITDA shrank from 2.45x at the close of 2022 to 2.18x as of September 30 of this year, while the net debt to EBITDA ratio was negative by 0.47x. We are currently in the process of issuing unsecured notes on the Mexican market for up to MXN 1.2 billion. We plan to use the proceeds for investing in our financial real-estate construction projects aligned with the Sustainable Bond Principles, as we did with the last 2 sustainable issues. With this, ARA reiterates its commitment to sustainability as an essential condition for ensuring our presence in the long term. As I have mentioned on other occasions, we are convinced that we cannot speak of good economic performance without also speaking of good social and environmental results. To keep our debt at moderate levels and maintain a cost-bearing debt to EBITDA ratio of less than 3x, which has been our financial policy for a number of years. We will be paying down MXN 1 billion on the ARA 21X issue, which expires in October 2024, using our own cash on hand. This new issue of notes will help improve our debt maturity profile. Consorcio ARA receives a rating upgrade. On October 16, HR Ratings upgraded its credit rating on Consorcio ARA from HR AA to HR AA+, reiterating its stable outlook. At the same time, it confirmed its HR AAA rating with a stable outlook on ARA 21X and ARA 21-2X issues. In its report, the agency said the rating upgrade was based on the company's cash coverage of debt service, maturity profile and our negative net debt. This report can be viewed at www.consorcioara.com.mx. Housing industry performance. According to Mexico's National Institute for Statistics and Geography, or INEGI, as of August 2023, in annual terms, overall industrial activity grew by 5% compared to the previous year. Construction industry growth was 30.1% and as in 2022, it was driven by civil engineering work and the building subsector, which includes housing growth 4.6%. According to data from the Unified Housing Registry Group, in the 12 months ended in September 2023, 162,735 homes were registered, a 13.2% increase over the same period of last year and 128,763 homes were produced, 9.3% lower. Regarding mortgage lending between January and July 2023, based on data from the Ministry of Agrarian, Territorial and Urban Development, or SEDATU, Infonavit launched 81,828 loans for the purchase of new homes, a 2.6% increase compared to the same period of last year. These loans represented an investment of MXN 51.6 billion, 20% higher. The average price of a home loan in the first 7 months of the year was MXN 630,000, a 16.9% increase compared to the same period of 2022. [indiscernible] granted 9,005 loans for new homes in the first 7 months of the year, a 35.9% decline from the same period of 2022, and the investment in this totaled MXN 7.1 billion, 29.8% lower. The average price of a loan granted between January and July of this year was MXN 790,000, a 9.4% advance over the same period of the year before. As for commercial bank home financing, in the first 7 months of 2023, 58,765 mortgages were granted for the acquisition of new and used homes, a 14.3% reduction compared to the same period of last year and the investment in this totaled MXN 128.6 billion, 1.5% lower. The average price of a commercial mortgage loan granted in January-July 2023 was MXN 2.19 million, a 15% growth over the same period of last year. In the first 9 months of the year, 46.8% of our revenue came from homes financed by Infonavit, 13.9% from Fovissste and the remaining 39.3% from commercial banks and homes purchased without finance. Shopping centers. In the third quarter of 2023, shopping center revenues totaled MXN 110.4 million, a 7.3% growth over the same period of last year, while net operating income was MXN 78.3 million, 11% higher. Revenues in the first 9 months of 2023 totaled MXN 316.9 million, a 7% increase over the same period of last year, while net operating income was MXN 219.2 million, a growth of 8.7%. These results correspond to shopping centers that are 100% owned by ARA and are consolidated into our financial statements, Centro San Miguel, Plaza Centella, Centro San Buenaventura and Plaza Carey, the uni and mini centers as well as 50% of Centro las Americas and Paseo Ventura, according to our stake in those properties, which are entered under the equity method. Total gross leasable area in our six shopping centers and uni and mini shopping centers is 205,409 409 square meters. The occupancy rate as of September 30, 2023 remains at 95%, a very competitive level. Dividends. As we mentioned in our previous conference call, on August 9, we paid a dividend of MXN 200 million. This dividend was approved in the General Ordinary Shareholders' Meeting held on April 20 of this year. This amounts to a dividend of MXN 0.1634 per share and a yield of 5.11% based on the closing price of 2022, which was MXN 3.20. ARA recognized as EDGE Champion. A year ago, we announced that we have received preliminary EDGE certification, EDGE stands for Excellence in Design for Greater Efficiency, for 4,104 homes located in 3 developments in Mexico State and 1 in Hidalgo. Early in 2023, we also received preliminary certification on 776 homes in a development in Cancun. To obtain this certification, the builder most prove that the homes' design allows for minimum savings of 20% of -- in energy, 20% in water and 20% in energy embedded in materials against a local baseline. In 2023, we completed the final certification of 722 homes in 2 developments in Mexico State, 658 were awarded EDGE Advanced certification for incorporating energy savings of more than 40%. We're proud to let you know that the International Finance Corporation, the private arm of the World Bank, recognized ARA as an EDGE Champion, citing its commitment to the design and construction of projects that make the efficient use of our planet's resources and for having built more than 200,000 square meters of EDGE-certified space. We are committed to obtain EDGE certification for 6,000 homes in the next 3 years. ARA's team will formally accept this distinction next week at the international IFC headquarters in Washington, D.C. Conclusion. As I remarked in our previous quarterly conference call, housing demand is holding steady, there is a continuing supply of mortgage loans, inflation has slowed and interest rates are unchanged since March of this year. And as I said at the start of this call, we are looking forward to a strong close to 2023. We believe revenues in the fourth quarter will be the most representative of the year. ARA has everything needed to close out the year on a strong note, experience, financial solidity, operating developments that meet the needs of various market segments, geographic diversification and above all, a great team of employees committed to achieving our goals. Thank you, and we will now move on to the questions and answers.

[Operator Instructions] The first question from the audio line is from Isabela Salazar from GBM.

My question is regarding the new Line 3 mortgage instruments. We saw you already have notarized MXN 85 million under these new instruments. But how do you expect this to affect long-term dynamics? Could you share more color on that, please?

Well, we believe that this is going to be very, very popular. As you already know, the smaller developers do not have access to credit from banks and from other means. So it is going to be much easier to get loans from this type of product. On the other hand, with a reduced point from 1,180 points with a regular credit, this one has only 880 points, so it's going to be easier to sell. So a lot of, including us, a lot of people are going to go towards this type of credit because, first of all, it's going to be much easier to sell with 880 points. And on the other hand, the money for the construction is going to be put by Infonavit as a bridge loan.

Without interest.

Without interest. And so it's going to be a very good credit. On the other hand, there is one thing that is not so good because we are going to title the home, we are going to build the home, we will have -- in order to title the home, we are going to need the buyer. But we cannot report the income until we deliver the home. So it's going to take us 6 months to be able to do that. But in the future, it's going to be a revolving method of the credit. Does that answer your question?

Yes.

Our next question is from Felipe Barragan from BTG Pactual.

I have a couple of questions. One is on the [ Danhos ] announcement. We saw yesterday they're going into the industrial estate space. And I know you guys have talked on different conference calls, you guys were looking into that. What's your take on that now? Are you guys still thinking about maybe going into the industrial estate space? And my second question is on land bank acquisitions. And I think you had also discussed earlier, not today, but on other occasions, about the [ nearshoring ] effect. And I see that your land bank, a good portion of it isn't in the northern states, Nuevo Leon, Chihuahua and whatnot. Is it in your strategy to get some of that land bank replenished in those states where it might be a little bit hot further down the line as [ nearshoring ] picks up?

Regarding our projects about the industrial parks, we are working on that. And maybe on the following years, we have -- we will have more news and an exact date on when it's going to start this project. We are working still on that.

And regarding land bank, we are in the process of closing some land in Tijuana. And of course, we are going to keep working on getting some land in Nuevo Leon. The problem is that those places are difficult to get land with location and -- with the right location and the right price. But we are working on that.

Our next question is from Juan Macedo from GBM.

My question is regarding your current EBITDA margins. Do you expect this to be a normalized level? And if you have 2024 guidance, it would be really appreciated.

Well, regarding the EBITDA, just we think that it would be around 14.5% to 15%. So I think it's a stable level. And for the following year, we are working on that. So for sure in the following call, we can share with you our projections. We are going to have our annual meeting, but we are working already on that.