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

Hello and welcome to today's Fourth 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. [Operator Instructions] It is now my pleasure to turn today's program over to Alicia Enriquez, director of administration and finance of the housing division, to proceed with her remarks. Please go ahead. Ms. Enriquez, please go ahead.

Thank you, Leslie. Good morning and a warm welcome to our conference call on the fourth quarter 2024 results of Consorcio ARA. This call will be also transmitted via webcast accompanied by a slide show for digital support. With me on the call to discuss the results are Miguel Lozano, Chief Executive Officer; and Felipe Loera (sic) [ Felipe de Loera ], chief financial office (sic) [ Chief Financial 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 certain 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 fourth quarter of 2024 compared to the fourth quarter of 2023. We closed the year on a very strong note. Total revenues in the fourth quarter of 2024 amounted to MXN 1.78 billion, a solid 18.1% growth, continuing the momentum of the preceding 2 quarters. Housing revenues reached MXN 1.70 billion, 20.5% higher than in the fourth quarter of 2023. This came from the sale of 1,416 homes, a 13.5% increase, at an average price of MXN 1,197,600, 6.2% above the average in the same period of the previous year. The strong performance of housing revenues was driven primarily by the affordable entry-level and middle income housing segments, both of which saw double-digit growth. In the fourth quarter of 2024, revenues from sales of affordable entry-level homes totaled MXN 677.2 million, rising 39.2% over the fourth quarter of 2023, while middle income sales came to MXN 642.6 million, 18.5% high (sic) [ higher ]. Finally, Residential home sales totaled MXN 375.9 million, basically unchanged from the year-earlier period. In the last quarter of 2024, we titled homes worth MXN 377.8 million under the Build with Infonavit Loan or Line Three [ program ]. These will be recognized in our results as revenues in a maximum of 6 months as the homes are delivered. Revenues from the titled homes delivered under this program in the last quarter totaled MXN 358.3 million. Most of the homes titled under Line Three were in the affordable entry-level segment. As we have mentioned in the past, this type of loan allows Infonavit beneficiaries to build their homes through a developer, in a authorized housing comprehensive mode. One of the benefits is that it requires a qualifying score of just 880 points for the borrower, lower than what they need for a traditional loan. Also, 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 chart, the amount from Line Three homes titled in the fourth quarter of 2024 was virtually equal to the amount from homes delivered. Revenues from other real estate projects, mainly from the sale of land and shopping center leases, totaled MXN 87.6 million due; to lower revenues from land sales. As for the mix of revenues in the fourth quarter of 2024, sales for -- of affordable entry-level homes accounted for 38%; middle income, 36%; and residential homes, 21.1%, while the remaining 4.9% came from other real estate projects. Another noteworthy feature of the fourth quarter results was the improvement in our profitability. Operating income totaled MXN 187.9 million, 30.1% higher than in the last quarter of 2023. Net income came to MXN 189.1 million, rising 36.9%. And EBITDA was MXN 244.2 million, up 20%. The operating margin in the fourth quarter of 2024 was 10.5%, improving by 90 basis points over the fourth quarter of last year, while the net margin was 10.6%, a 140 basis point gain. And the EBITDA margin was 13.7%, rising by 20 basis points. In addition to our improved profitability in the last quarter of 2024, we generated positive free cash flow to the firm totaling MXN 40.6 million, which compares very well against the negative free cash flow of MXN 438.0 million reported in the same period of last year. Results for year 2024 compared to 2023. Total revenues, which are the sum of housing revenues plus revenues from other real estate projects, came to MXN 7.12 billion in 2024, a 5.5% growth compared to 2023. Housing revenues in 2024 totaled MXN 6.81 billion, a growth of 5.7% over 2023. These revenues came from the sale of 5,749 homes at an average price of MXN 1.19 million, a 2.5% increase over the average price for 2023. Breaking down our revenues for 2024 by housing segment. The affordable entry-level segment generated MXN 2.45 billion, 23.4% higher. Middle income home sales totaled MXN 2.82 billion, a 12.4% increase. And Residential income came to MXN 1.54 billion, a decrease of 20.9% from the previous year due primarily to lower revenues in the city of Acapulco, along with the completion of some developments. As we have already mentioned in previous conference calls, that -- toward the end of September 2024, Hurricane John hit the city of Acapulco, causing serious [ fault ]. As we reported at the time, none of the 3 developments we are operating there [ were damaged ], so we continue our homebuilding and sales activities. We note, however, that in the -- in our middle income and residential projects in Acapulco, where buyers are often looking for second homes, sales slowed somewhat compared to the previous quarter. The good news is that activity picked up again the year-end holidays. And we foresee a stronger trend in the first quarter of this year. As for housing revenues in 2024 including Line Three revenues pending entry on the books, as the graph shows, the total was MXN 7.42 billion, a 13% growth over the previous year. Revenues from other real estate projects in 2024 amounted to MXN 306.0 million, practically stable against the growth of 2023. As for the mix of revenues in 2024, the affordable entry-level segment accounted for 34.4%; the middle income segment, 39.7%; the Residential segment, 21.6%; and other real estate projects, the remaining 4.3%. Operating income in 2024 totaled MXN 751.9 million, 3.1% higher than in 2023. Net income came to MXN 692.8 million, up 4.4%. And EBITDA was MXN 1.04 billion, rising 5.7%. Our operating margin was 10.6%; the net margin, 9.7%; and the EBITDA margin, 14.6%, all very stable compared to 2023. On another note, we generated positive free cash flow to the firm in 2024 totaling MXN 279.5 million, which also compares very well against the negative free cash flow of MXN 293.1 million reported in the previous year. Financial position as of December 31, 2024. The balance of cash and cash equivalents closed 2024 at MXN 2.34 billion, a 1.7% increase over the close of the previous year. As of December 31, 2024, the balance of accounts receivable stood at MXN 556.7 million, 22.9% below its level on December 31, 2023. Accounts receivable turnover was 29 days. Total inventories of December 31, 2024, amounted to MXN 18.1 billion, 8% higher than at the close of the previous year due to the acquisition of land in the cities of Tijuana and Acapulco, along with an increase in work in progress in projects with Line Three homes or vertical housing; and the initial investment in a new project in Puebla and in the third phase of a development in Mexico state. At the close of the fourth quarter of 2024, cost-bearing debt came to MXN 2.67 billion, an 8.5% increase compared to the close of 2023, attributable mainly to 2 new simple unsecured loans taken out during the year. Short-term maturities, meaning debt coming due in the next 15 months, made up 14.9% of cost-bearing debt; and long term, [ 85.1% ]. At the end of 2024, 63.2% of our cost-bearing debt was in the form of the ARA 23X and ARA 21-2X notes. 13.9% were simple unsecured bank loans without real estate collateral. 13.5% were simple secured loans for our shopping centers. And the remaining 9.4% were lease liabilities. Net debt at the close of last year was positive by MXN 336.4 million. Our leverage ratios remained at optimal levels. As of December 31, 2024, cost-bearing debt-to-EBITDA was 2.57x. The net debt-to-EBITDA ratio was just 0.32x, while the net interest coverage ratio was 3.20x. And if we base this ratio on coverage of net interest, meaning interest expense less interest income, it would be 9.31x. On December 23, HR Ratings issued a favorable opinion on the ARA 21-2X and ARA 23X sustainable issues because they have fulfilled the 4 green bond principles and sustainable bond principles, GBP and SBP. The rating also recognizes the sustainable solution that ARA offers, in which the proceeds were used to finance housing developments that incorporates eco technologies to support water and energy efficiency and promote sustainable urbanization. This is consistent with what it is established in ARA's reference framework. The full report can be viewed on our corporate website. Housing industry performance. According to Mexico's National Institute for Statistics and Geography or INEGI, in 2024, overall industry activity fell 2.4% compared to the previous year. Construction industry activity receded 7.1%, primarily due to construction of civil engineering works. And the building subsector, which includes housing and industrial base, grew by 2.5%. Information from the Unified Housing Registry group indicates that, in 2024, 178,595 homes were registered, a 7.7% increase compared to 2023. And 128,147 were -- homes were produced, the lowest level on record since 2013 and a 2.2% decline compared to the number of homes produced in 2023. Based on data from the Ministry of Agrarian, Territorial and Urban Development or SEDATU, between January and November of 2024, Infonavit granted 149,031 loans for the acquisitions of new homes, a 9% increase over the same period of the previous year. These loans required an investment of MXN 103.3 billion, 18.1% higher. The average size of a home loan in the first 11 months of 2024 was MXN 693,000, a year-over-year growth of 8.3%. Fovissste granted 13,218 loans for new homes between January and November of 2024, a 5.3% decline from the same period of 2023. And the investment in these totaled MXN 12.9 billion, 8.9% higher. The average size of a loan granted in the first 11 months of 2024 was MXN 909,000, a 15% advance over the same period of the year before. As for commercial bank firm financing between January and November 2024, 89,672 mortgages were granted for the acquisition of new and existing homes, a 4.6% reduction compared to the same period of last year. And the investment in these totaled MXN 309.9 billion, 1.1% higher. The average size of a loan granted in the first 11 months of 2024 was MXN 2.34 million, a 6% growth over the same period of the previous year. In 2024, 60.7% of our revenues came from homes financed by Infonavit, 10.3% from Fovissste and the remaining 29% from commercial banks and homes purchased without financing. Shopping centers. Results from the shopping centers division continued to show solid performance. In the fourth quarter of 2024, revenues totaled MXN 126.9 million, an 11.6% growth over the same period of last year, while net operating income was MXN 84.7 million, 1.7% higher. In 2024, revenues totaled MXN 487.3 million, a 13.2% increase over 2023, while net operating income was MXN 343.1 million, a 13.4% increase. These results correspond to shopping centers that are 100% owned by ARA and are consolidated in our financial statements: Centro San Miguel, Plaza Centella, Centro San Buenaventura and Plaza Carey, uni and mini shopping Centers; as well as 50% of Centro Las Américas and Paseo Ventura, according to our stake in those properties, which are entered under the equity [ method ]. Total gross leasable area in our 6 shopping centers and uni and mini shopping centers is 205,961 square meters. The occupancy rate as of December 31, 2024, was 96.1%, a very competitive level. Dividends. Consorcio ARA has a policy of paying out dividends equivalent to up to 50% of its net income, subject to the following conditions: first, a sufficient balance in the net tax income account; and two or second, positive free cash flow generation. Yesterday, the Board of Directors proposed a dividend payment of MXN 200 million for this year, equivalent to 28.9% of net income in 2024. This could be a dividend yield of 5.1% based on the share price as of December 31, 2024, which was MXN 3.20. As always, shareholders will be asked to vote on this proposed dividend in the next General Ordinary Annual Meeting of Consorcio ARA, to be held in April. Note also that the dividend would be paid out of the net fiscal earnings account as of [ December 31, 2014 ], which means it's not subject to income tax. Organizational changes. As we announced in the material event disclosed to the market on December 10 of last year, ARA's Board of Directors appointed Miguel Lozano Pardinas to serve as new Chief Executive Officer of the housing division, replacing Germán Ahumada Russek, who headed up that division for almost 48 years. Miguel Lozano has an undergraduate degree in civil engineering from the Universidad Nacional Autonoma de Mexico. And since coming to ARA in 2007, he has held various management posts, more recently as Co-chief Operating Officer. He has extensive experience in the industry, and we are confident that his strategic vision and management skills will be vital for driving growth and innovation in the housing division. We wish him the best of success in this new position. ARA also is deeply grateful to the outgoing CEO, Germán Ahumada Russek, whose dedication, patience and leadership have made this company one of the leading housing developers in Mexico. His impressive career and dedication will continue to inspire us to continue to offer homes to Mexican families. Germán Ahumada will stay on as the head of ARA Foundation. And in the next shareholders' meeting, a proposal will be put forth to name him Honorary Chairman of the Board of Directors so that we will surely continue to enjoy his support in the years to come. The shareholders' meeting will also be asked to vote on a proposal to appoint Germán Ahumada Russek as Chairman of the Board of Directors. Also, on January 16, we announced the appointment of Felipe Loera Reyna as Chief Financial Officer of Consorcio ARA. We believe that his experience and knowledge will be highly valuable primarily in the financial strategy of evaluating and taking actions to improve return on investment. I should also mention that myself will continue on as Director of Administration and Finance of the housing division. Consorcio ARA received Great Place To Work certification for the eighth year in a row. We are proud to share with you the news that, at the end of 2024, we received Great Place To Work certification for the eighth year in a row. We would like to thank our employees, who have made possible the last 48 years of success, an anniversary we marked on January 27. We at ARA intend to continue striving to make this a great place to work where values and teamwork are foremost. Conclusions. Mexico's housing industry continues to offer attractive opportunities for both the short and long term given the demographic bonus, sustainable demand for housing and an ample supply of mortgage loans. ARA is diversified geographically; and has a portfolio of products for serving all 3 segments of the market, affordable entry level, middle income and residential. We have an extensive, high-quality land bank; more than 48 years of experience; financial solidity; and a great team of employees. The year ahead promises many challenges but opportunities as well. And if conditions remains favorable for our industry, we are confident that we can keep up the positive momentum of 2024 and achieve growth rates similar to those of last year. Thank you. And we will now move on the questions and answers. Please, Leslie.

[Operator Instructions] We will begin by answering questions from the audio lines, followed by those we received from the webcast. The first question from the audio lines is from Mr. Andrés Aguirre from GBM.

Congrats on the results. Just wondering if you could -- how the transition process is going with recent changes in management. And should we expect to see significant shift in ARA's strategy from these? Or what are your expectations for the year? And the second question, if I may: What market dynamics are you seeing in the regions where you plan to develop or currently have projects?

Okay. Well, Andrés, regarding -- the organizational changes, well, we think, are very positive for the company. Miguel Lozano, as I mentioned, has a lot of experience before he was Co-chief Executive Officer, so he knows the industry. He knows very well the company, so we think it's very positive for ARA. Personally I'm very happy because Felipe Loera is here with us. He will help us to improve mainly the -- our OE. Together, we are going to do a great team in order to improve the financial metrics of Consorcio ARA, so I think the changes are positive. As you know, our industry takes -- well, I mean our cycle is long, but sooner or later, we think, we can get better results in our financial metrics, Andrés. And the second question, it was about the dynamic market, Andrés. Did I understand?

On the market dynamics, Alicia, the regions where you plan to develop or currently have projects. How are you seeing these dynamics?

Okay, well, it's hard to tell you because January always is the lowest month of the year. So as you know, people start -- or don't make decisions in this month, but February, it's better. So we think it could be a good year for us. At least, we are expecting to have a similar growth that we had in the previous year, but we have everything to continue growing.

Great. And another question, if I may. Do you foresee any real competition from the recent Infonavit reform allowing them to build houses?

Well, at this moment, I think it's a little early to say it because the law -- or the new law was approved but we have to see how it's implemented, so let's wait to see a clear effect. It seems that they are going to serve to the low -- well, I mean, as you know, we have affordable entry-level products, but it seems that they are going to offer a lowest product. As we know, it's a market that -- it hasn't been served in the last year, so it seems that we are not going to be competitors, but let's see. It's an aggressive plan for the government. A positive thing is that now the housing industry is in the -- is a priority for the government. And we are open and ready to help them to get that aggressive goal. It can be through Line Three, but still there are a lot of questions, so let's wait to measure a real effect, Andrés.

Our next question is from Mr. Felipe Barragán from BTG Pactual.

Congrats on the results. So first of all, congrats to the new appointments. I don't know if Felipe is on the line, but I would love to hear his expectations as the new CFO of the company and sort of what's his view coming from a competitor. What changes can we expect in the coming year? And my second question is: So there's a retail player, Planigrupo, who is announcing ambitious growth programs. And so I'm just curious if potentially you guys would be willing to sell your own retail portfolio.

Okay. We're not -- at this moment, we are not planning to sell our shopping center. It is a very valuable asset that we have. As I mentioned in the call, we have great results. So no, we don't have any plans to sell the shopping malls at this moment. And talking about the organizational changes, we don't expect more. And we are happy with that.

Our next question is from [ Mr. Abel Casco ] from Signum Research.

Congratulations on the results for the fourth quarter of 2024. I have 2 main questions. The first comes with your expectations for the company for the full year. And what are your expectations to grow in growth for the sales for the company? Also, where do you see the margins landing at the end of the year? And what are your expectations on the territorial reserve for the end of the year?

Okay, well, thank you, [ Abel ]. We expect to have a revenue growth similar with -- at least similar to the growth that we had in the previous year. And at this moment, we see our margins stable, although as you know, there are some pressures, talking about inflations. We don't know what is going to happen with steel and other materials, so it's something that we have to be very cautious and see what happen with our cost. And obviously, as previously, we are going to increase prices, but let's see what happened with the price of the materials. But at this moment, we see our margins stable. And talking about our land reserve. One of the things that we are changing is that ARA can buy directly land. Or also we can do a joint venture and put -- and receive land and -- through a joint venture scheme. So mainly to enter to new markets or recover markets. As we have mentioned in previous conference call, we lost some participation in the north part of Mexico, that we know it has a lot of housing demand. So we would like to be in states like -- well with more presence in Nuevo Leon or Tijuana. Fortunately, we bought a piece of land in 2024 in Tijuana to continue our operations. It's a great market. Also -- and practically for this year, in my budget, is to buy MXN 200 million to MXN 300 million to land reserves, but now we are open, as I mentioned, to work in joint venture to increase our market share.

Our next question is from Anton Mortenkotter from GBM.

I just have a quick one. I mean, understanding that rates are starting to decrease, do you expect to see any significant acceleration maybe in the demand for housing or maybe a shift in the kind of products that you do?

Well, talking about our mix of revenues for this year, we expect to have less than 30% in the affordable entry level. We expect to have 38%, near 40%, in the middle income. And the rest are in Residential. So it's the mix of revenues that we are expecting for this year. As you know, we have 39 projects to serve all these 3 markets. And it's what we expect for this year.

That was our last question from the audio lines. We have finished with the conference call questions, and we'll now continue with the webcast questions.

Thank you, Leslie. There's one questions from Mindset Capital. It state, "The press release for the appointment of Mr. Felipe Loera said that we are sure that his experience and knowledge will be of great value, mainly in the financial strategy of evaluation and implementation of actions aimed to -- aimed at improving the return on investment. Can you please elaborate on how you are thinking of these? And is there any actions that you are considering?" Well, as you probably know, Felipe comes from Javer. Javer is -- well, has the lowest working cycle -- working capital cycle. So we are working on strategies to be more efficient in the way that we invest and also in the way that we measure our financials. So that's the -- some activities that we are going to implement. And for example, in the past, we were driven by the -- mainly by the margins. And we know they are important, but now with Felipe, we are working with the internal return rate, so we are implementing that in the company and promoting with the building and the commercial areas. So we are going to be more driven by the -- by these ratios [ phase ]. So we are very positive. And there are other questions from Carlos Alcaraz. He says, "Congratulations on the results. I have 2 questions. The first one is about dividends. What strategy will you take forward on dividends? And will there be any change in the debt policy?" Well, our policy, as you know, is to pay dividends up to 50% of the net income. One important thing to take into consideration is the free cash flow generation. So if we have a good result in free cash flow generation, the dividend could be greater. And also we have to take into consideration what are the plans for the company. We are going to open -- or we are going to try -- because permits sometimes don't let us, but for this year, we are going to try to open new 7 projects and continue other 5 second or third phases of projects in operation, so we need cash. And with the mix of debt, I think that, if our ratio of debt to EBITDA is 3x, it's a good level for ARA. So we will continue our debt policy and our dividend policy of -- on this moment. And there's another question. Do you have -- also from Mindset Capital. "Do you have an updated strategy for buybacks and/or dividends?" Well, I already mentioned about dividends. If we generate an important amount of free cash flow generation, the dividend could be greater. And talking about buybacks, well, we are very open to continue in our buyback program. In the last, I couldn't buy, but in the coming days, you will see that I will be buying. We know that the price of the stock is really, really attractive, so we are going to continue in our buyback program. We haven't changed any plans at this moment. In a budget, I'm considering to buy MXN 100 million in this year. And I think we don't have more questions. No, Leslie, there are no more questions in the webcast.

That was the last question. This concludes the question-and-answer session for today.

Thank you very much for your interest in ARA. Have a nice day. Thank you.

Consorcio ARA would like to thank you for participating in today's conference call and webcast. You may now disconnect.