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

Hello, and welcome to today's Third Quarter 2024 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. [Operator Instructions] 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 2024 results of Consorcio. 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 Luis Felipe Ahumada Russek, Vice Chairman of the Board; and Miguel Lozano, Co-Chief Executive Operating Officer. Germán Ahumada Russek, Chief Executive Officer and Chairman of the Board, will not be joining us in the call at this time. 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. Results for the third quarter of 2024 compared to the third quarter of 2023. Our revenue performance in the third quarter was once again positive with a total of MXN 1.86 billion, 6% higher than in the same quarter of last year, the highest growth in 7 quarters. Housing revenues totaled MXN 1.78 billion, a 6.8% increase corresponding to the sale of 1,475 homes. So the average price was MXN 1,309,506, 7.97% higher than in the third quarter of 2023. This 6.8% increase in housing revenues was due largely to higher sales from the deals with Infonavit loans or Line III program. In the third quarter of the year, we titled homes for MXN 445.2 million, which will be booked under revenues in a maximum of 6 months as the homes are delivered. Revenues from titled homes delivered under the Line III program totaled MXN 220.6 million. The vast majority of these homes titled were affordable entry-level units. As we have mentioned in previous quarters, these type of loans allows Infonavit's beneficiaries to build their homes through a developer in an authorized housing complex, comprehensive mode. One of the benefits is that it requires a qualifying score of just 880 for the borrower, lower than what they need for a traditional loan. During the construction period, the developer receives installments as the work progresses under the supervision of a managing financial entity. As you can see in the graph, counting Line III revenues pending recognition in our results, housing revenues in the third quarter will come to MXN 2.01 billion, which is a solid 18.8% growth compared to the same period of 2023. In the third quarter of the year, revenues in the affordable entry-level housing segment came to MXN 551.9 million, a growth of 9.5% over the same period of the previous year and middle income home sales totaled MXN 770.3 million, a 12.5% increase. Residential revenues for the third quarter totaled MXN 451.8 million. This comes down by only 4.3% and these revenues were higher than in the preceding 3 quarters, so they continue to recover. As we mentioned in previous quarters, this drop in residential revenues is due primarily to lower revenues from 2 developments in Acapulco, a city that was severely affected by the devastation of Hurricane Otis in October of 2023. In the third quarter of 2024, revenues from this region accounted for 11.7% of all housing revenues compared to 18.6% in the same period of last year. On September 23, Hurricane John hit the city of Acapulco causing serious flooding. We are deeply saddened by the destruction the storm left in its way, and we hope families whose homes were lost or damaged will soon be moving forward again. As we informed our customers at the time, primarily through social media, none of the 3 developments we are operating there were damaged. So we will continue our homebuilding and sales activities. Revenues from other real estate projects, mainly from the sale of land and shopping center leases totaled MXN 61.1 million, 6.4% lower than in the third quarter of 2023 due to lower sales of commercial land. Looking at the revenue mix in the third quarter of 2024, Affordable entry-level homes contributed 3.3%; middle-income homes, 41.5%; residential, 24.4%; and other real estate projects, 3.8%. Between July and September of this year, operating income totaled MXN 192.2 million, 4.1% less than in the same period of 2023. Net income was MXN 173.8 million, down 5.8% and EBITDA came to MXN 272.9 million, virtually stable compared to the third quarter of last year. The operating margin for the third quarter of 2024 was 10.4% and the net margin 9.4%, however, 110 basis points lower than in the same quarter of 2023, primarily because of a rise in general expenses and lower interest income. In the third quarter of the year, free cash flow to the firm was basically neutral. Results for January-September 2024 compared to the same period of last year. In the first 9 months of the year, total revenues, which is a sum of housing revenues and revenues from other real estate projects came to MXN 533 billion, a 1.8% growth compared to the same period of 2023. Housing revenues totaled MXN 5.12 billion, 1.6% higher than in the first 9 months of last year, corresponding to the sale of 4,333 homes with an average price of MXN 1,180,900, a year-to-year increase of 1.4%. As you will see in the graph, complete revenues from Line III pending recognition in our results, housing revenues in the first 9 months of 2024 totaled MXN 5.70 billion, a year-on-year increase of 11.6%. Revenues in the affordable entry-level segment between January and September 2024 totaled MXN 1.77 billion, a solid 18.2% growth compared to the same period of last year. Middle income home sales totaled MXN 2.18 billion, 10.7% higher. Our residential home sales reached MXN 1.16 billion, a 25.8% reduction due primarily to lower revenues from the city of Acapulco as well as the completion of some developments. Revenues from other real estate projects, mainly from the sale of land and shopping center leases totaled MXN 218.4 million, a growth of 7.4% due to higher revenues in both these categories. As for the mix of revenues in the first 9 months of this year, the affordable entry-level segment accounted for 33.2%; the middle income segment, 40.9%; the residential segment, 21.8%; and other real estate projects, the remaining 4.1%. In the first 9 months of this year, operating income totaled MXN 564.2 million, 3.6% less than in the same period of last year and net income was MXN 503.7 million, a 4.1% reduction. This trend in our profit was due to higher general expenses and lower interest income. EBITDA meanwhile came to MXN 797.2 million, a 1.9% growth. Between January and September 2024, the operating margin was 10.6%. The net margin was 9.4% and the EBITDA margin was 14.9%. Free cash flow for the period in the first 9 months of the year was positive by MXN 238.9 million. Financial position as of September 30, 2024. At the close of the third quarter of 2024, the balance of cash and equivalents totaled MXN 2.48 billion, a 7.9% increase over the close of last year. As of September 30, 2024, accounts receivables totaled MXN 853.2 million, an 18.2% increase against the close of last year. Accounts receivable turnover remained at an optimal level of 1.5 months. Total inventories as of September 30, 2024 amounted to MXN 17.81 billion, 6.3% higher than at the close of the previous year. At the end of the third quarter of 2024, cost-bearing debt came to MXN 2.69 billion, 9% more than at the close of 2023, mainly due to 2 unsecured straight loans that we took out for a total of MXN 300 million. Short-term maturities, meaning debt coming due in the next 15 months, made up 14.9% of cost-bearing debt and long-term debt 85.1%. As of September 30, 2024, 62.9% of our cost-bearing debt was in the form of the ARA 21X and ARA 21-2X notes, 15.7% were simple unsecured bank loans without real estate collateral, 13.8% were simple secured loans for our shopping centers, and the remaining 7.6% were lease liabilities. In the third quarter of the year, we took out 2 simple loans unsecured by real estate assets for a total of MXN 300 million at the rate of 150 basis points over the period. The term is 3 years with quarterly principal payments and monthly interest payment. Regarding our leverage ratios, total debt-to-EBITDA was 2.68x and net debt to EBITDA was 2.21x, all of them stable against the close of 2023. Yesterday, HR Ratings ratified ARA's AA+ credit rating with a stable outlook. In its report, the agency commented that its rating is based on the growth of ARA's operations and stabilization of working capital needs from 2024 to 2026, which would result in positive free cash flow to the firm. HR Ratings also ratified its rating of HR AAA on the ARA 21-2X issue and HR AA+ on the ARA 23X issue. The full report is available on our corporate website. Housing industry performance. According to Mexico's National Institute for Statistics and Geography or INEGI, as of August 2024 in annual terms, overall industrial activity fell 0.3% from the same period of last year. Construction industry receded 4.1%, primarily due to construction of civil engineering works and the building subsector, which includes housing and industrial base grew by 5.9%. According to data from the Unified Housing Registry or RUV, in the first 9 months of the year, 135,843 homes were registered, a 7.6% increase over the same period of last year and 92,167 homes were produced, a decline of 1.8%. Regarding mortgage lending between January and August 2024, based on data from the Ministry of Agrarian, Territorial, and Urban Development or SEDATU importantly granted 106,600 loans for the purchase of new homes, a 12.2% increase compared to the same period of last year. These loans represented an investment of MXN 74.4 billion, 23.1% higher. The average size of home loan in the first 8 months of the year was MXN 698,000, a 9.7% increase compared to the same period of 2023. [indiscernible] loans for the purchase of new homes in the first 8 months of the year, a slight increase of 0.7% compared to the same period of 2023 and investment in this totaled MXN 9.59 billion, 16.6% high. The average size of a loan granted between January and August of this year was MXN 895,000, a 15.8% advance over the same period of the year before. As for commercial bank firm financing, in the first 7 months of 2024, 56,418 mortgages were granted for the acquisition of new and used homes, a 4.8% reduction compared to the same period of last year and the investment in this totaled MXN 131 billion, 0.9% higher. The average size of our commercial mortgage loan granted in January-July 2024 was MXN 2.32 million, a 6% growth over the same period of last year. In the first 9 months of the year, 59.5% of our revenues came from homes financed by Infonavit, 10.9% from Fovissste and the remaining 29.6% from commercial banks and homes purchased without finance. Shopping centers. Shopping center results continue showing solid performance reflected in double-digit growth rates. In the third quarter of 2024, shopping center revenues totaled MXN 123.2 million, an 11.6% growth over the same period of last year, while net operating income was MXN 88 million, 12.5% high. Revenues in the first 9 months of 2024 totaled MXN 359.3 million, a 13.4% increase over the same period of last year, while net operating income was MXN 257.9 million, a solid 17.6% growth. 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 Américas and Paseo Ventura according to our stakes in those properties, which are entered under the equity method. Total gross leasable area in our 6 shopping centers and in uni and mini shopping centers is 205,484 square meters. The occupancy rate as of September 30, 2024 was 95.6%, a very competitive level. Conclusion. In the last quarter of the year, we will continue to focus on achieving our goals for revenue growth and positive free cash flow to the firm. The fundamentals of our industry remain solid, such as continuing demand for housing and a steady flow of mortgage lending. ARA has the experience and the capacity to continue offering homes to Mexican families. We are grateful to the ARA team for the results achieved up until now, and we are confident that with their dedication and day-to-day commitment, we can reach our goals. Thank you, and we will now move on to the questions and answers.

[Operator Instructions] The first question from the audio lines is from Mr. Carlos Alcaraz from Apalache Research.

Congratulations on the results. First, I would like to ask, do you plan to start construction of any projects during the next 12 months? And during the quarter, we observed a higher proportion increase in general expenses. Could you give us some color on this increase?

Yes. Well, new projects, yes, we are going to start a new project in [ Puebla called Los Volcanes ]. And also probably we are going to start another project in Veracruz and also in Nayarit, but we are still working on that. And regarding the general expenses, well, this increase was mainly because of an increase in our wages. But it's important to mention that for the following year, as a proportion of revenues, this is going to be reduced. I mean, it could be around 15% because we have the Line III revenues that are pending to be recognized in our results. So it's an effect of this pending revenues that we have, Carlos. I hope to stabilize this proportion in the following quarters.

Our next question is from Ms. Isabela Salazar from GBM.

I was wondering if you could provide more details on the aftermath of Hurricane [indiscernible], particularly regarding any observed changes in local dynamics and their impact on your operations?

Yes, Isabela. Well, after 47 years, well, as you know, he worked very, very hard. So now he is taking some time to rest. He has some health problems, but now he is doing very, very well. And remember that 3 years ago, he created 2 co-Chief Financial. Sorry, 2 Co-Chief Executive Officers, Miguel Lozano, that -- well, he is responsible for the core business that I mean from the building and sales process, and I'm in charge of the administrative and finance part of the company. So the company is continuing our operations. And well, the Board of Directors, it is the case in the following months will propose something, but he is recovering very, very well.

Our next question is from Mr. Andres Aguirre Campillo from GBM.

Congrats on the results. I have 2 questions from my side. First, if you could provide a bit more detail regarding the dynamics you've observed in Acapulco, particularly largely after the hurricane. And my second question is, we saw that this quarter, you managed to generate a mild free cash flow. Could you share your expectations for full year, please?

Sorry, Andres, thank you very much for your questions. Regarding Acapulco, well, we are recovering from Hurricane Otis. Let's say that we have 3 projects. The residential one, another that serves for middle income and residential segment and the third one serves to middle income. Let's say that middle income is doing very, very well. It's like 80% pre-hurricane levels. And the project that serves for middle income and residential is also doing well. Let's say that it's 70% pre-hurricane levels. And the residential project is like 50% pre-hurricane revenues levels that we have. So Acapulco is recovering well. And we hope that in this quarter, not to be full pre-hurricane levels, but maybe at 80% of the revenues that we had in the past. Let's say that in general, revenues from this city are at a little more than 60% that the pre-hurricane level, Andres. I don't know if I was clear.