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

Welcome to the Parque Arauco Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kristin Lorenzo, Head of Investor Relations. Please go ahead.

Good morning, and thank you for taking the time to connect to the Parque Arauco Third Quarter 2020 Earnings Call. Presenting on our call today will be Claudio Chamorro, CFO; and Francisco Moyano, Corporate Finance Manager. To start off today's discussion, I'm going to pass the call over to Claudio.

Thanks, and good morning, everyone. Before the review of our third quarter results, I would like to introduce you all our new Head of Investor Relations is Kristin Lorenzo. She came from a huge experience in asset management from companies in Boston. So she is very welcome with us and probably she'll be working with you shortly and very closely. And before to start to review the numbers of the quarter, I would like to rely on some way to say what is the capacity utilization of the company in the third quarter, if we consider -- I'd like to follow 4 figures. One is rent collection, the other is sales of our tenants, revenues and G&A. And in the second quarter, our rent collection was 32% of the second quarter of '19. Our sales were 21% of our [ organization ] in the second quarter of '19. And revenues were 26% of our second quarter of '19. And at the G&A, the average G&A opened at the time was 25% of the G&A opened in the second quarter of '19. So pretty much in the second quarter of 2020, we were working with, I would say, 1/4 of our capacity utilization. And it was very close relations between the GLA, the open GLA, and the revenues -- our revenues, the sales of our tenants and the rent collections. If we compare the numbers of the second quarter with the third quarter, we see something similar, but double impact. The open GLA is 52% of the third quarter of '19. So it's down what we have in the second quarter 2020. And sales of our tenants is 54%. So pretty in line with the GLA which is open in our rents. And our revenue and our collection was in the range of [ 49% ]. So again, there is a close relationship between the GLA, which is open, with the sales of our tenant and our rent collection and revenue. So right now, I would like to say is that in the third quarter, we were open in average in half -- using half of our capacity. So capacity utilization was half of what we have. So after that, while it continues to be an unusual and challenging time due to the impact of the COVID-19, the third quarter was marked for this as well as the opening of our shopping centers. Our position improved with respect to the pandemic, jurisdictions started loosening up and people started to feel more comfortable going out. Consequently, GLA open, as I've said, so the people increased from 25% on average during the second quarter to 50% in the third quarter. A portion for that began with approximately 40% of GLA open to the public and ended with approximately 60%. For sure, it was an uneven quarter with a poor July and a poor August while a much better September. As explained in the second quarter, in respect to the outbreak, to the pandemic, we developed an action plan that focuses our efforts on the 3 pillars: commitment to people, operational continuity and financial strength. Thus, we have continued with our commitment to people by increasing sanitary measures and operational adjustments for our tenants and visitors. The operational continuity has been a high priority for the company. And we are continually strengthening our financial position by maintaining high levels of liquidity in the segment lines. In our third quarter results, which have been improving in line with the increase in GLA open to the public, as I mentioned, sales and revenue have been recovered by 50% approximately. These revenues reflect our current commercial situation in which rent level depend on individual tenant situations, mall operation status, regional restrictions, among other factors. That being said, it's important to highlight that the regulations have been in line with the policy changes. As part of our response to the pandemic, we maintained our cost-saving net and achieved an 11% reduction year-over-year with comparative cost and expenses net of bad debt provision. I think this is an important point and the company has been doing a very strong effort trying to contain our cost and expenses although some expenses such as the insurance policies have increased their cost, more than tripled after particularly the October 18 situation in Chile. During this quarter of 2020, the bad debt expenses, which is another important point, amounted for CLP 5.350 billion, increasing by more than 10x compared to the same period last year. Overall, there is a decrease of 15% compared with the second quarter of this year. Consequently, the company reported a gain in EBITDA of CLP 6.347 billion and net profits attributable to equity holder amounts to a loss of CLP 6.824 billion. The AFFO attributable to shareholders was negative. Given the lower level of EBITDA, it was not enough to offset the payment of financial obligations for the quarter. In the area of sustainability, we have been included in the FTSE4Good Emerging Market Index for the third year in a row. Also, we have improved our rankings in the Informe Reporta, which analyze company published reports, and we signed an agreement with Engie Chile to supply malls in Chile with sustainable layer. This conclude the overview portion of our presentation, so I will pass the call over to Francisco, who will review our results in more detail.

So thank you, Claudio. So continuing with our presentation. I'll like to pass to review the tenant sales. And tenant sales in this quarter is decreasing 46%, as you see in the chart, representing 54% of what we had in the third quarter 2019. The GLA was -- the tenant sales is proportional to the open GLA of 50%. This show consistency in our -- in the sales numbers with the GLA. And as Claudio mentioned, it's important to note that this has been increasing over time with July and August being lower than September. Also, we have different realities of situations in Chile, Peru and Colombia. In Chile, the average was lower than in Peru and Colombia. Colombia was the highest. So that is reflected in the center sales, figures and sales or rent figures. Regarding same-store sales, in Chile, it was a negative 43%. However, considering only the tenants that were open 70 days during the quarter in Chile, we have sales of negative 2.6%. Peru has the effect of having more anchor stores than Chile and Colombia. And anchor stores were performing better than other types of tenants. With that, the same-store sales were a negative 16%. And again, considering 70 days, the ones that were open 70 days, at least, the same-stores sales are negative 10%. At the same time, Colombia has a same-store sale of negative 41%, with negative 33% if we consider only the one that were open 70 days. The same-store rent figures were similar in all 3 countries with the performance in same-store sales. Now passing to our revenues slide. Revenues had a decrease of 54% in the quarter, representing 46% of what we had in last year. Again, this is -- shows consistency with the open GLA. And a little selection also of a sound reopening process. Collections have been in line with the billing. And also in this process where the inflexibility stands in order to open at different hours, and also at the same time, complying with other restrictions by authorities in these countries. First thing that I would like to highlight is a diversification that we have between countries. We can see that in revenues, Colombia is increasing the importance in the revenue breakdown by country by increasing from 13% to almost 17% in the third quarter of 2020. Peru is also increasing from 27% to 33%. And this is due to the Colombia and Peru opening faster than Chile. That situation, although it's changing after the closure of the third quarter, since Chile has been increasing the open GLA from September. In the following page, you can find the operational results. The EBITDA was positive at CLP 6.3 billion. This is also different if you -- we see the month-by-month results. We had a much lower EBITDA in July and August and September is increasing importantly and resulted in this CLP 6.3 billion. The impact of the bad debt provision is also important. As we mentioned, we have a provision of CLP 5.3 billion. So if we've not taken into consideration this bad debt provision, the EBITDA would have been decreasing, not 82% in this quarter, but 69% in this quarter. The cost of sales is decreasing 18.1% with the efforts that we have been having in maintenance, cleaning and security and personnel costs. And the administrative expenses are flat if we don't consider the bad debt expense. Now passing to the next page. The nonoperational results in this quarter is showing financial income by decreasing 60% due to the lower yield that we are having in our financial investments. And also an increasing financial expenses, given the initiatives that we have been deploying this year by strengthening our liquidity position. And today, we have -- we've had around $60 million in cash available for the CapEx. The net profit. Profit is a loss of $6.8 billion in the quarter as a result of this lower EBITDA and then lower financial income and higher financial [ FX ]. Now passing to Page 15, we have the balance sheet and the assets. And here, I would like to highlight the trade accounts receivables and other receivables. We can see that it's decreasing from CLP 35 billion to CLP 23 billion. But at the same time, in the lower chart that we've shown here, the lower table, we can see that the bad debt provision has also increased by this provision that we have been including in our income statement during this year. With that, if we calculate the coverage of the bad debt provision in the third quarter, we have a total coverage of 36%. Although at the same time, if we only consider the trade receivables and not the other receivables, the trade receivables are $28.9 billion in the third quarter. And comparing that CLP 28.9 billion with the bad debt provision, we have a coverage of 46%. This is a result of our conservative strategy that we have been following this year. This conservative strategy not only considers that we are provisioning all the invoices that are over 90 days late, but we have been following a strategy concerning the tenants or the clients where if the client has any of their invoices late for more than 90% provision, all of the debt that is related with that client. And with that, we consider that we are strengthening the financial statement of the company, and we have a strong position with this bad debt provision. Now moving to the final financial indicators on Page 17. We can see that the net debt-to-EBITDA is reaching 10.7x as a result of a lower EBITDA, mainly. The net financial debt is CLP 846 million or $1.1 million. And we have -- and with our strong position in cash, we are in a very good position to pay year 2021. We are not having more debt maturing this year and the following year in 2021, where we have debt maturing by $200 million. The covenant, the only covenant that we have in our bonds, is the leverage, which today is 0.76x with a covenant limit of 1.5x. So we are in a good position with that, too. With that, I would like to pass the call to Kristin, who's going to review the asset-level results.

Thank you, Francisco. Okay. So looking at the -- this portfolio page, which has the assets detailed out by country, not much has changed from last quarter, but I would like to point out that the percent occupancy is 93.9%, which is similar to the previous quarter. And that there's been a rotation of clients but it's been -- or tenants but it's been a normal rotation. Moving on to the next page, which shows the property-level results on a quarterly basis. As you can see, tenant sales and revenues are down due to the pandemic. Overall tenant sales have decreased by 46%. In Chile, it was almost 53%, in Peru 37%; and in Colombia 43%. Overall revenue has decreased 54%. And by country, it's 61% in Chile, almost 48% in Peru and 43% in Colombia. I'd like to point out that strip centers have done well and have been mostly been open during the quarter. Also, I'd like to just mention that Parque La Colina was closed for a few weeks at the beginning of August. So moving on to the property-level results over the last 12 months. You can see that tenant sales and numbers are similar. So for Chile, it's been down about 36%, 30% for Peru and approximately 25% for Colombia. Again, the strip centers did well. And just to point out that Parque Angamos recently opened and is currently in the ramp-up process. So now I'll move on to development. There are no big changes here, but I'll highlight a few. So we have Parque Alegra, which continues to be in construction without contingencies. Also Parque Arauco Kennedy, Phase 1 and Phase 2. For the estimated date, we -- due to the pandemic and quarantine situation, we are currently reviewing this. Okay. I'll pass through the sustainability slides because [ Claudio ] gave a good overview of the updates here. And I will talk a little bit about advances in management during the pandemic. So if you look on the bottom right-hand side, at the chart, GLA open to the public, you can see during the third quarter, Colombia had -- was higher than Chile and Peru. On average, each country was open about 42% for Chile, 52% for Peru, 64% for Colombia, and that's during the third quarter. After quarter end, you can see Chile increased a lot compared to Colombia and Peru. Colombia was flat and Peru was up a bit. So currently, as of today, the GLA open to public percentages are 72% on a consolidated basis: 74% for Chile, 64% for Peru and 77% for Colombia. I'd like to also highlight that we are continuing to open in accordance with protocols put in place by local authorities, so that it's done in a safe manner. So we've included this slide to give you a better idea of the reopening process. So we've included some comments from center managers from Parque Arauco Kennedy, Larcomar and MegaPlaza Norte, just to give you a better idea of some of the challenges that they're facing reopening during the pandemic. And the last slide that I'll talk about today is a snapshot of where we are today with respect to the reopening process. As you can see, everything is open but with restriction, and that's mainly on capacity with the exception of Arauco Coronel and that is opened only for essential services. So that concludes our prepared remarks. Operator, could you please open the line for Q&A?

[Operator Instructions] The first question comes from Nikolaj Lippmann of Morgan Stanley.

Two questions as it is today. Claudio, I appreciate your opening comments about rent and openings and the correlation and how things appear to get a lot better into September. Yet we have contracts and you, too, have obligations. When we look at the numbers, you and the peers have a high number of larger institutional, which is one thing [indiscernible] giving retail sales in Chile to pay rents and they -- it appears that they're not. So my first question is, can you provide any color on kind of who's paying, big clients, anchor tenants versus more -- your sort of smaller clients as it stands today? So that's question number one. And question number two relates more to Colombia where, as a market, we have 2 kinds of ownership models or operator models, the single owner and the multiple owner structures. We've seen this really big demand shock for space, where no one appeared to be paying, it seems to put up a really big conflict of interest and maybe a breakdown of tenant-paying culture. Do you see that as an opportunity in Colombia, either from an M&A perspective or simply from you can manage these malls better and you can gain more sort of foot traffic and revenue traffic over the course of the next couple of years?

Thanks, Nik, for your questions. The first question about who's been in Chile, in general, I would think -- I would say payment is related to GLA, which is open. And at the beginning of the -- of this pandemia, the decision was, because the shopping centers were closed because of authority regulation, we basically -- we don't charge to any tenant when the shopping center was closed. So that's the reason -- and that was finally a policy that we have in the 2 countries. And so we -- when we were closed, we don't charge to anyone. We were not meeting an anchor nor a small tenant. So when you try to understand what's happened with the different numbers in our third quarter results, this 52% GLA open in average, what I said, when you break down that number in Chile and Colombia, the numbers are different. In Chile, that average was something between 40% to 45%, Peru was 51%, 52% and Colombia was 65%, was a delay on the 65%. So that's the reason why you see the performance in Chile is worse than the performance of the company in the 1 month. And also related with the same thing is when you see the provision for bad debt. There are also an impact, a higher impact in Chile regarding the ruling. So I tried to answer your questions. This was a discount across the board when they -- when the shopping centers were closed. When it was open, we'll start charging everyone. We have some one-to-one negotiation. But I would say, mostly everyone is paying when they're open. And we have had some flexibilities to -- for a couple of months to increase the variable rent and to reduce the fixed one and to change this mix between variable and fixed, trying to push the tenant to take actions to start trying to set up as fast as they can. Regarding to Colombia, is your second question, is -- I think it's been an interest for us to try to do what you are thinking. But it's been very hard to do it. It's -- we tried to do some M&A with the shopping center where -- based on this one-by-one ownership of the stores. But at the end, that has proved to be very difficult to do it. And on our side, it's a project which has uncertain [ decision ] time and a certain budget. So in that regard, we have been biased toward -- with [indiscernible] instead of trying to [indiscernible] loans. We believe there are assets with an extraordinary location, [indiscernible] in particular, but until now have been very difficult to execute something also.

The next question comes from Diego Guzman of BTG.

I would like to [indiscernible] in your approach to continuing in the fourth quarter. And also as second pension fund is probably going to be approved, strengthening the idea of a very good Christmas, what are the expectations or maybe the negotiations that you have come up with your tenants? And well, you mentioned that the properties that have opened for a while for 70 days have had almost flat sales. So what are your thoughts of a comeback maybe in revenues in the fourth quarter? And what are your expectations there? And also a second question regarding your tenants that have 90 days of delinquency. What is your current relation with them? I know maybe there are many types of tenants, but are you trying to arrange payments in programs with them, giving them flexibility? You maybe won't charge them at all? Or maybe they have decided to leave the shopping malls. I don't know if you can give us some color on that. And maybe if we look at a very aggressive scenario, what if they leave? What's the occupancy rate that you can reach in a very negative scenario?

Firstly, Diego, it's -- as I mentioned, we see a strong relationship between sales and GLA open. And as long as we are able to keep this GLA open probably and the reopening, we are able to have more and more GLA open. But probably in our view and in our decision-making process, we are thinking that we can have more revenues and more sales of our tenants. So in that regard, right now, for example, in October, we are more in the 70s. As we -- as I mentioned, we are in 60s in the second -- in the third quarter. In October, we were more like in the 70s. So probably that will -- and each -- we don't have a second wave, which is probably our main concern there. We are in this uncertain scenario. I'm very afraid to say we're positive because this is a word that nobody is using in this time. But again, as long as we are able to keep GLA open, we believe that our assets are very strong in the area that we work. So I don't have a strong management on those assets. So we believe that we can continue to provide into the market this close relationship between GLA open and revenues and sales. Regarding to your second question, our relationship with our tenants which are -- which have been with us with more than 90 days, we continue working with them. This is our role. So our leasing team is working closing -- very closely with every tenant. And if the company is suffering because of the pandemia, but they have a good product and they are very good operators, we would like to work with them. And we're happy to work with them, and we believe in strong and long-term relationships with our tenants. So our main focus is to bid them with us, except there is a rule or they are not good operator, which is pretty much the same decision that we are making in a day-to-day operation. So I think this is not something that has changed because of this pandemic. It's the way that Parque Arauco believes in this business. We have been building very strong long-term relationship with our tenants, and this is the time that we need to strike that situation. So we are working very closely with our tenants, with the ones that are doing well and with the ones that stayed with us. And hopefully, we can help them to get out of this way.

Okay. And sorry, just regarding the first question. Are variable rates going to be applied? So we should expect to -- that your sector rent will move in line with same-store sales of the -- on your assets?

Our -- what we are seeing is because of the sales are picking up, variables are picking up also. And also in these short-term negotiations, we have been moving, as I just mentioned, the combination between fixed and variable. So there are some tenants for short-term takeup, more variable, less fixed. So we are seeing some pickup in this variable rate.

[Operator Instructions] The next question comes from Emilio Acevedo of Santander.