Parque Arauco S.A. (PARAUCO.SN) Earnings Call Transcript & Summary

Good morning, and thank you for taking the time to connect to the Parque Arauco Second Quarter 2025 Earnings Call. I am Lauren Brown, Head of Investor Relations, and I am joined on the call today with our CFO, Francisco Moyano; and our CEO of Parque Arauco Eduardo Perez, who will be joining us for the Q&A section calling in from Guatemala, where he was just attending the Annual Latin American Malls Conference. I would like to mention a few things before we get started. [Operator Instructions] Please note that this call is being recorded, and the recording will be used for internal purposes. To start off today's call, I would like to turn it over to Francisco Moyano. Francisco.

Okay. Perfect. Well, this quarter, we have a very good results. Where we delivered outstanding results with the income presenting a 41% growth against the second quarter of last year. This performance was driven by strong operational growth across the board and was supported by a 13% increase in sales, 16% rise in revenues and an 18% growth in EBITDA. Furthermore, our funds from operations, the FFO grew by a strong 13.6%, reaching CLP 51 billion this quarter. This positive result was supported by both our good operational performance and a positive nonoperational factors by reducing our financial costs and including a growth in profits from our affiliates. The strong performance was widespread across our portfolio with all our key markets contributing significantly to EBITDA growth. Chile led with a remarkable 24% increase, followed by Peru at 20% and Colombia with 2% increase. These results show the resilience and strength of our assets in the region, the impact of our clear and consistent growth strategy and demonstrate our team's ability to drive top line growth while maintaining strong operational efficiencies. This quarter was also marked by significant progress on our growth pillar. In April, we successfully incorporated the East building of Parque Arauco Kennedy, an important addition to our portfolio. We also took an important step by opening our first multifamily building in Colombia with the successful launch of LiveSpace Calle 72, which began operations in Bogota at the end of the quarter. In addition to that, at the beginning of the third quarter, specifically on July 2, we materialized the acquisition of Minka, in Lima, a 55,000 square meter asset. We expect this acquisition to positively impact our third quarter results and continue strengthening our presence in the region. At the same time, we received a BBB investment-grade rating for Parque Arauco and a AAA rating for Parque Arauco Colombia. These ratings are important steps in preparing the company to access new financial markets, which will provide us in the future with more options and greater efficiency in managing our financial costs. Finally, we are proud that our annual integrated report in Chile received a special recognition for its quality and completeness, which supports our commitment to transparency and comprehensive reporting. With that, I would like to pass to Page 5 to talk a little bit about our tenant sales. As I mentioned, we had a very strong quarter and everything was driven first by the tenant sales, which grew 13.1%. If we consider the same assets of last year, the growth would have been 9.1%. So even without those assets, the growth in sales is very important. In Chile, the growth was 16%. Peru is 9% and Colombia 11%. Those figures are in Chilean pesos. We need to consider also that the impact of the exchange rates in this quarter is for Colombia, minus 6%. So it's negatively impacted by the exchange rate, while Peru is positively impacted around 4%. With everything in the same area sales in nominal terms and in local currency, you can see that it's growing in all 3 countries for the second quarter of 2025. Chile is growing 8.4%, Peru is growing 2.8% and Colombia is growing 14%. Those figures are quite important and is showing the recovery that we are seeing in Colombia, passing from a period where we had important inflation rates, also tax changes in the last month. So this growth in sales is quite important for the portfolio and also it is decreasing a little bit the occupancy cost in that country, which is decreasing from 12% to 11.5%. The next page, regarding revenues. We had a very positive quarter as well in correlation with the sales. We are seeing revenues growing 16.4%. If we consider the same assets as last year, that figure would be 11%. So this is still very important. In Chilean pesos, the growth is for Chile, almost 24%; Peru, 16%; and Colombia is stable with no increase in Chilean pesos, but in local currency, as I said, is growing around 6%. Those growth in revenues are also -- you can see that the same effect in the same rent, which in local currency is growing in all 3 countries. The increase in Colombia is also around 10% in local currency for rents. So it's also growing at the same level or similar level as sales. The occupancy cost is in its maximum and record high for the whole portfolio at around 96% and is showing almost 98% for Chile, 97% for Peru and 93% for Colombia. Next page, in Page 7, we are presenting these figures that are quite important for the company and our figures that we follow very closely because we think that represent the strength of our portfolio. With first quarter results and figures from the industry, we can see that in revenues per square meters, we are #1 in Chile, Peru and Colombia. And in sales per square meters, we are #1 in Colombia and Peru and second in Chile. This reflects the, as I said, the strength of our portfolio, not only in Chile and iconic assets, but in the portfolio as a whole in the 3 countries. Now in Page 9, we can see the EBITDA that is growing 18% with a very positive result for the quarter. This 18% is first driven by revenues, which is growing 16% then cost of sales is growing around 18%, both revenues and cost of sales growing because of the incorporation of the new assets. And in cost of sales, it's important to consider that last year, we have the positive impact in cost of the recovery of an important property tax in Chile, which the figure for 2024 and decrease then the base for the comparison with the cost of sales for 2025. But as a whole, we can see that the EBITDA margin, the adjusted EBITDA margin is reaching 77% with an increase against last year of 220 basis points, which is an important growth for the company. Also to highlight that the bad debt expense, which is showed in the estimated income due to impairments of account receivables, we can see that, that account is quite stable this year. We have had a sound account receivables and the bad debt expense in the last 12 months, you can see how it's decreasing against the last 12 months of 2024 by 51%. Next page, regarding the income statement as a whole. First, to highlight the important growth that we are having in net profit, which is growing 38% and 41% for the equity holders of the company. This important increase in net profit is the result first of the strong operational results, also the incorporation of new assets coming from our clear growth strategy and then good results in the nonoperational results, where we can see that the financial expense is decreasing against last year at 14%, mainly because of new renegotiations of debt in Colombia, mainly and then the financial income, which is decreasing because of the lower cash that we have in balance and the lower profits that we can have from the financial investments in the market. At the same time, we have less income or loss from indexed assets and liabilities, which is related with the UF and inflation effect in our debt, which is decreasing 20% coming from CLP 14 billion in the second quarter of last year to CLP 11 billion in the second quarter of 2025. With all then we presented a very strong quarter coming from the operational results and the nonoperational results. Now if we can pass to the -- to Page 12. The FFO is also growing 13% and the adjusted FFO, which also considers the changes of the income and loss from indexed assets is growing 33%. The FFO is reaching CLP 51 billion. And you can see in the chart below that the trend that we are having with the FFO is quite -- is showing an important increase year after year and the evolution of the price to FFO is also growing, reaching 11.4x this quarter. Finally, I would like to highlight in Page 17, the net financial debt to EBITDA, which is closing this quarter at 5.3x. And just to mention that since we acquired the Minka asset in Lima at the beginning of the third quarter, we're expecting this ratio to increase below the 6x that we have in our range and also continue decreasing towards the end of the year when we can have the effect of the 12 months of the EBITDA coming from the new assets, the East building of Parque Arauco Kennedy and the Minka assets. With all, we are seeing this ratio moving very comfortably between our range between -- that is from 5x to 6x. With that, I would like to pass the call to Lauren to continue with the presentation.

Thank you very much, Francisco. Now let's talk about our asset level milestones. Let's turn to the performance of our retail assets in Chile during the second quarter of 2025. As we have mentioned, at the beginning of second quarter, we incorporated the East Building, formerly Open Kennedy into the Parque Arauco Kennedy asset. As a result, the asset closed the quarter with a consolidated increase in NOI of over 32%, driven by a revenue increase also over 30%; however, even without taking into account the new East Building, the Parque Arauco Kennedy West building had strong performance by itself, increasing its sales by over 12%, its revenues by over 14% and its NOI by over 16%. These numbers reflect ongoing sales momentum across the mall, while the revenue increases are driven by higher minimum rent and parking revenues. Additionally, this asset has experienced higher traffic compared to the same period of the previous year. Arauco Estacion advances in its recovery with an over 11% increase in its NOI following significant improvements in security matters, thanks to our joint efforts with local authorities. Additionally, sales increased by over 5% and revenues increased by over 15% at this asset. At Arauco Quilicura, the latest stage of the expansion, including a Lider Express supermarket was opened at the asset. This helps drive the increase in the asset sales by over 16%, revenues by 21% and NOI by over 12%. Arauco Chillan continues to show positive results following the inauguration of its conversion at the end of second quarter '24, which helped drive the increase of tenant sales by over 11%, the revenue by over 19% and the NOI by over 8% compared to the same quarter of the previous year. Additionally, sales at strip centers, Arauco Coronel and Arauco Outlets increased by over 5%, 6% and 16%, respectively, while revenues at Arauco Maipu, Strip centers and Arauco Outlets also increased compared to the same quarter of the previous year by over 12%, 13% and 26%, respectively. In summary, our Chilean retail assets are showing strong and consistent performance in tenant sales, revenues and NOI, driven by a combination of strategic tenant curation, continued consumer spending and a sustained robust -- sustained rebound in tourism. Moving over to Peru. The temporary closure of Larcomar, which began on June 17 and was listed on July 1 was due to a magnitude 6 earthquake in Peru, after which the municipality ordered its preventative closure to verify the safety conditions of the asset. This process was carried out in conjunction with the authorities, reiterating our commitment to the well-being of all of our visitors. The closure of Larcomar did affect its results and also the consolidated levels of sales and revenues. However, on an asset-by-asset level, various shopping centers in Peru displayed strong performance in the quarter. Sales at MegaPlaza Pisco, Cajamarca, Chimbote, Canete and Ica grew by over 6%, 7%, 7%, 10% and 13%, respectively. Meanwhile, NOI grew at MegaPlaza Cajamarca, Arauco Outlets and Viamix Strip centers by over 20%, 13% and 104%, respectively. This large increase in NOI is largely explained by the recovery of uncollectibles. Parque La Molina continues to mature with an occupancy of over 93% and with favorable revenue results. Moving over to Colombia. Compared to 2024, there is a notable reduction in uncertainty among brands and consumers. The country has shown signs of recovery in tenant sales with an increase of over 16% after a challenging macroeconomic environment in 2024, marked by high inflation, interest rates as well as the implementation of new textile and personal taxes. Across the portfolio, tenant sales have now surpassed expectations at several key assets in the second quarter of '25. However, revenue growth has not kept pace. This lag is largely due to the stabilization phase we're currently in for some of our recently acquired or repositioned assets, particularly Parque Alegra, Parque Fabricato and Titan Plaza, which continue to follow the maturation process curve that we expected. Starting with Parque Alegra, the asset continues to mature strongly and stands out with the highest increase in tenant sales in the country's portfolio with an over 33% increase over the same period of last year. Additionally, its revenues increased by over 9% and its NOI by over 46%. Arauco Outlet Sopo had an increase of tenant sales of 22%, revenues over 8% and NOI over 21%. Additionally, Parque Caracoli experienced a growth in sales over 21%, revenue by 7% and NOI by over 9%. Sales were driven by a strong performance at Falabella increasing over 50%. And on Page 34 to 36, you can find a case study explaining more about how we optimize and enhance the value of this asset. Titan Plaza had a strong quarter with sales increasing 26%, again, led by smaller format stores and restaurants. As part of our strategy, we've made targeted tenant replacements that are paying off. For example, the space that was vacated by Forever 21 was replaced by [indiscernible], a brand with rent structure more aligned with the location's market value. At the end of the quarter, in Colombia, we also opened our very first multifamily building in this country, LiveSpace Calle 72, which has 132 units and 750 square meters of commercial space. In summary, we are seeing consistency, improved sentiment and clear progress in asset stabilization. We continue to optimize tenant mix, capture market aligned rents and support our tenants through this next phase of growth. Now moving over to development on Page 25, I would like to highlight our CapEx table. The new CapEx table includes the recent acquisitions of Parque Arauco East Building, previously known as Open Kennedy and the recently announced Premium Outlet in Buin. On the top right-hand side of the slide, you can see a pie chart showing the breakdown of our total CapEx investments by the type of project. As you can see in the table, some of these projects were already incorporated in 2024, while others will be incorporated between now and 2028. By the time all of these projects are completed, we will have expanded our total GLA to over 260,000 square meters and our own GLA to over 250,000 square meters with a total investment of USD 765 million. While Page 25 highlights total CapEx, on Page 26, we take a look at remaining CapEx. You can see the breakdown by type of project on the remaining USD 302 million in the pie chart on the left-hand side of the slide. And on the right-hand side of the slide, you can see the investment distribution by each project. Our investment pipeline totaling USD 765 million is a historic figure for the company, representing almost 1/4 of the total value of investment properties as of the end of second quarter '25. The remaining investment associated with the pipeline represents 9% of the total. This robust growth plan reflects the company's commitment to the sustainable development of its assets and ensures a strong and sustained growth outlook for the coming years. On the following page, you can see how the announced projects yet to be incorporated represent a 13% increase in the company's GLA. In the remainder of 2025, we expect to incorporate an additional 73,000 square meters driven by the acquisition of the Minka Shopping Center. On Page 30, I would like to highlight our -- the announcement of our new greenfield project in Buin, which we announced in January. We will be using one of our existing land banks to construct a new premium outlet south of Santiago, which is home to more than 3.5 million people. This will be Parque Arauco's fifth outlet in Chile and the ninth overall, including Chile, Peru and Colombia. On Page 32, I would like to speak about our expansion at MegaPlaza Ica, which has 2 subphases, which have already been completed, the gym on the third floor and the new area on the second floor where we've added banks and new stores. The next phase, which we're calling the Boulevard has already begun its construction. This includes putting the parking underground and creating a greener open air area with restaurants, making the mall much more iconic. Additionally, we will also internally connect the SODIMAC Maestro to the main mall corridor as this anchor was previously separated and operated almost as a stand-alone. The project is expected to be completed by the end of the year with some units opening by Christmas and others starting in early 2026. On Page 34 to 36, I would like to highlight our case study about the successful commercial management of Parque Caracoli located in Bucaramanga, Colombia. Over the years, in-depth analysis allowed the commercial offering to be adjusted, prioritizing national and international brands. This new approach positioned Parque Caracoli as a solid asset with an attractive and differentiated offering, layering the foundations for sustained growth. On Page 36, you can see the graph on the graph that the EBITDA and the occupancy grew significantly after 2020 as a result of our new approach. We invite you to read this case study for more details. At Parque Arauco Kennedy, moving over to our marketing initiatives. We have been working on a rebranding strategy for the new East Building. A brand logo on the main facade and entrances to the mall were incorporated as well as the implementation of new signage, both indoors and outdoors. These initial modifications not only ensure a coherent and smooth transition from the acquisition, but also marked the beginning of the creation of a space aligned with the essence of Parque Arauco. In Peru, for the second consecutive year, we are running ModoPromo, where 8 trucks will be raffled. The campaign is integrated across 16 assets and runs from May 2 to July 24. During May and June, ModoPromo achieved an 84% increase in ticket registration and an 83% increase in tenant sales compared to 2024. Tenant sales associated with the campaign represent 2.7% of the total for the period, and the average ticket price increased by 39%. In Colombia, at Parque La Colina and Parque Arboleda, we hosted one of the most renowned exhibitions at the American Museum of Natural History in New York called Magiposario. The experience reaffirms our purpose of transforming the retail by integrating entertainment, culture and education into spaces that bring real value to people. More than 2.8 million people visited the shopping centers during the campaign period, exceeding the target by over 3% and registering 8% growth compared to the previous year. We also achieved a CSAT satisfaction rating of 95%, demonstrating the high value of connection and interest generated by the experience. We continue to expand our omnichannel network and strengthen our partnerships in Chile, Peru and Colombia, integrating logistics solutions that connect the physical and digital worlds of retail. And this quarter, we initiated projects at Arauco Estacion, Quilicura, Parque Fabricato and Outlet Arauco Faucett. Additionally, in our efforts to improve the experience for our end customers, we also launched ticketless parking at Larcomar and virtual lines in Chile. Moving over to sustainability. We continue to be recognized for our sustainability efforts. We are proud to mention that for the sixth consecutive year, Parque Arauco was recognized as a member of S&P Global Sustainability Yearbook for 2025, reaffirming our commitment to sustainability and continuous improvement. We were recognized as leaders in Chile and #1 in our industry for our 2024 integrated report according to the Governor report about [indiscernible]. Our integrated report can be found on our website for your review. Additionally, we are proud to share that for our shopping centers in Chile, we were recognized with the Seal of Energy Excellence Award by the Energy Sustainability Agency of the Ministry of Energy. We earned the silver category at Arauco Maipu and Arauco Quilicura, the bronze category at Parque Arauco Kennedy and Arauco Premium Outlet Coquimbo. This important recognition reflects our commitment to increasingly efficient and responsible operations that are aligned with our decarbonization goals under the Science based Targets initiative standard. Now I will pass our call over to our questions section.

And we have a lot of eager participants who have raised their hands starting at the call. So I will be unmuting Eduardo so he can answer our questions. So give me one moment here. Eduardo you are now unmuted and I will be unmuting Alejandra from Morgan Stanley. But let's first make sure, Eduardo, can you hear me?

Yes, I can. Can you hear me well? Good morning, everybody.

Yes, we can hear you. Thank you so much for joining us from Guatemala today. So...

Also Francisco Moyano will be also taking questions. We will be both taking questions.

Okay. Excellent. To start off the questions, I am going to unmute Alejandra from Morgan Stanley.

I mean congratulations on all the multiple milestones in the quarter. And I guess I wanted to focus on Parque Kennedy East and West now. I mean the integration is clearly starting. So I was just wondering if you can walk us through what we should be keeping an eye on next. I mean there's multiple milestones here. So if you can walk us on the CapEx, cost savings, operational integration, Cerro Colorado expansion. I mean, all the things that we should be keeping an eye on next, what's already in place, what's still missing? I mean it's clear this is only the beginning here. So if you can help us kind of understand what's coming.

Thank you very much for your question. We have been working a lot in Parque Arauco Kennedy in the last years. And as you mentioned, there's a relevant transformation going on. I would say the first step at which we are currently working at is the integration of Parque Arauco Oriente, which is the name of the building that was named before Open Plaza Kennedy. Related to that, we have been working hard in capturing cost synergies, and we expect to capture those cost synergies during the next 2 quarters. With that and also considering some revenue synergies that we will capture gradually over time once the contracts expire, we expect that the acquisition cap rate of 7% will go at 8% levels, okay? So that's the first step is a successful integration of the Eastern building. The second milestone is the opening of the expansion of Parque Arauco Kennedy. And let's remember there that we are changing in a very important way, the asset, moving from 3 floors to 7 floors, including 2 floors below ground level and 5 floors above. So it's basically a first floor related to services, then 3 floors related to in-line retail and the upper 3 floors related to gastronomy. We will inaugurate all the in-line retail and service floors during the last quarter of this year. And let me mention that the commercialization is above 90%. So the commercialization has been very successful and in line with what we expected before. The gastronomy part will be opened during the first quarter of 2026. So that's another phase. Then the next phase will be the opening of the office tower at the end of '26. We are also optimistic about that office tower because we see that the office market in Chile is improving, especially the office market in the eastern part of the city, Nueva Las Condes and El Golf. And then the next milestone is the opening of the multifamily building at 28. With that, we are also currently working in the western part of the asset. So this is -- of course, in this business, changes take time. So it's important to plan in advance. And we are currently spending a lot of time working in what will happen after the eastern part of the project. So we're talking about 29 and 30 now. Let's remember also that the subway is coming to the door and with a direct connection to the asset. So we expect an important transformation of Parque Arauco Kennedy Ken in the next 5 years.

Eduardo Alejandra, did you have any follow-up questions?

That was very clear.

Moving on to our next question. I have [ Igor ] from Goldman Sachs.

So regarding the Chile revenue increase, I have 2 questions here. How can we think on the impact of Tarifa Única going forward? And the same for parking revenues. Do you expect this to increase in the next quarters? -- that's it.

Yes. Yes, regarding the revenue increase in Chile, we have -- just to remember what is for everybody, we are changing in Chile the way how we charge for rents is an option for the tenants. They can decide whether to close contracts in the new way with the Tarifa Simplificada or with the regular rate that is the rents and then the promotional rate and the common expenses. So that has followed in Chile, and we have several tenants are deciding to close in simplified rent. And today, we have around half of the tenants in simplify rents and the rest is in the normal rents. So the effect -- I don't have -- the effects on rent -- yes, the rent, you can give me one moment, so we can have -- because the revenues are growing in Chile 24% and the effect of -- in that 24% coming from the Tarifa Simplificada is almost 3%. So we would have an increase in revenues of around 20% without the effect of the Tarifa Simplificada. And regarding the parking revenues, what we are seeing, we are making several projects in order to improve other revenues in the company, including the parking revenues. And we have important projects within the company that we expect that will have positive effects on the parking revenues. As of today, we don't have actual figures for that for those projects, but we can say that we are working on having a better experience in our parking and improving the revenues in most of our iconic assets in Chile, Peru and Colombia.

Igor, and complementing on that, Eduardo here, let's remember that the change into the simplified contract does not affect NOI or EBITDA at all. It's only a different way on how we split revenues and cost of goods sold, but without an impact in EBITDA. And regarding the other income, we are working in improving the quality of the information you receive. So in the next quarter, we are working in giving you more detail regarding the other revenues different than rental revenues. And as a team, we are working hard also in increasing the relevance of these other revenues different than rent. These are related to parking as related to your question, also charges of services such as electricity, also retail media, also omnichannel services and other services that we can offer to tenants. So we are working -- we are also working in improving this transparency of these other revenues and the relevance of these other revenues.

I am now going to be unmuting Felipe from Santander.

So your EBITDA margin expanded by 17 basis points year-over-year in Chile on a consolidated basis; however, from a bottom-up perspective, like on a mall-by-mall basis, NOI margin contracted like by 260 basis points year-over-year. So it seems like EBITDA margin expansion in Chile was driven by a nonoperating effect instead of mall performance. So my question is, what was this nonoperating effect that drove margin expansion? And is it related to the property taxes recovery you guys mentioned in the presentation? That's my first question. Maybe we can kick off with that.