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

Good morning, everyone, and welcome to the Parque Arauco Fourth Quarter Conference Call. [Operator Instructions] Please note, today's event is being recorded. At this time, I'd like to turn the conference call over to Kristin Lorenzo, Head of Investor Relations. Ma'am, please go ahead.

Good morning, and thank you for taking the time to connect to the Parque Arauco Fourth 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.

Thank you, Kristin, and good morning, everyone. While it continues to be an unusual and challenging time due to the impact of the COVID-19 pandemic. In the fourth quarter, we continued the process of opening our shopping centers. As conditions improved with respect to the pandemic, restrictions continued loosening up and people felt more comfortable going out. Consequently, on average, GLA open to the public increased from 25% in the second quarter, 50% in the third quarter and now 75% in average in the fourth quarter. The quarter began with approximately 65% of GLA open to the public and ended with approximately 75%. Overall, it has not been completely smooth sailing as we saw [ regular ] restriction ended. In certain regions due to an uptick in COVID-19 cases and worries about [indiscernible] during the holidays. We anticipate that this stop and start will continue throughout the pandemic [indiscernible] in the quarter in response to the outbreak of the pandemic, we developed an action plan that focused our efforts in 3 pillars: commitment to people, operational continuity and financial strength. At this year, we are continuing with our commitment to people by taking care of our employees, tenants and visitors, with initiative to maintain jobs, ensure availability of transport when necessary, deepen the relationship with our communities and closely monitor health protocols. The operational continuity has been a high priority for the company. We have been active in reopening our malls as soon as possible. We have also implemented initiatives to facilitate sales, such as Arauco Pickup, Ticketless Parking and last-mile delivery agreement within certain assets. We continue to have a strong financial position. We have maintained high levels of liquidity and refinanced 2020 and 2021 maturities and amortization. As we saw an improvement in the pandemic situation and operational levels closer to normal, we started prepaying down debt. Now turning to our results -- our quarter results. We continue to see improvement in our financial indicators. Tenant sales, were approximately 95% of tenant sales in the second quarter last year, better than the 62% in the third quarter and 21% in the second quarter. Revenue was approximately 75% of revenue in the same quarter last year, quite in line with the percentage of GLA open to the public. Again, better than 50% in the third quarter and 36% in the second quarter. This realignment reflects the support that Parque Arauco has made to our tenant communities. These revenues reflect our current commercial situation in which rent levels depend on the individual tenant situations, mall operation status, regional restrictions among other factors. That being said, it's important to highlight that rent collection increased in line with the higher billing compared to previous quarter. Rent collection was 84% compared the fourth quarter to the fourth quarter of '19, which is much better than the 42% in the third quarter and 32% in the quarter of 2020. And as part of our response to the pandemic, we maintain our cost-saving effort and achieved an almost 6% reduction year-over-year when comparing cost of sales and administrative expenses combined. If you look at the figure without bad debt expense, which was CLP 2.080 billion, it was a reduction of more than 14%. Consequently, the company recorded a gain in EBITDA of CLP 28.789 million and a net profit attributable to equity holders amount to a gain of CLP 14.926 billion. The FFO attributable shareholder was positive CLP 21.850 billion, significantly lower than the previous year, given the bad delinquencies. In the area of sustainability, we continue to be the only Chilean real estate company in the Dow Jones Sustainability for Emerging Marketing Index. We also ran progress to contribute to our communities around the holiday season, including El Mensaje de la Navidad with Fundación Descúbreme in Chile and Reuniendo Saludos with a nursing home in Splendor region. We also ran entrepreneurial programs in Impúlsate Ya! and Emprende Arboleda in Colombia. This concludes the overview portion of our presentation. So I will pass the call over to Francisco, who will review our results in more detail.

Perfect. Thank you, Claudio, and good morning, everyone. I would like to start in Page 6 with tenant sales. Tenant sales in this quarter has been -- has had a very good improvement. We are below last year fourth quarter in 3.2% only. This was a result of very good results in some of our tenants, mainly anchor stores, but among anchor stores, supermarkets have done very well during this quarter and also home improvement stores. And with that -- that impacted also in the same-store sales and same-store rent figures that we have for this quarter. In Chile, we have a positive 8.6% same-store sale with a negative 14.8% same-store rent. This a result again of this situation with anchor stores where supermarket and home improvement represents around 20% of our GLA in Chile. Did very well in sales, but at the same time, has a lower occupancy cost. Same situation happening in Peru, where supermarkets are quite important and the supermarkets did very well in Peru during this quarter, not as much home improvement though. With that, we have a same-store sale of 0.7% and same-store rent of 19%. Colombia, has less anchor stores, only 22% of our GLA in Colombia is anchor stores, and they don't have home improvement stores, and only 3% of the GLA is supermarket. So the situation that we saw in Chile and Peru is not replicated in Colombia. At the same time, we need to say that we're still supporting some of our tenants who are struggling during these crisis. And -- but we are following this path, decreasing the discount that we are giving to our tenants and the ones that are doing well are paying off at the same time for rent. Now passing to the next page in the occupancy cost. We can see that we have a decrease in occupancy costs in Chile and Peru, less so in Colombia. Again, this is the result of higher revenue, higher sales in anchor stores, mainly supermarkets and home improvement stores with a lower occupancy rates than the average occupancy rates that we have in [ previous quarters ]. Passing to revenues. Comparing with the fourth quarter of 2019, we have a decrease of around 25%, in line with the GLA open to the public that was 35% for the quarter. In the consolidation figures, it's important to mention also that we have the appreciation of the Chilean peso against the Peruvian sol and Columbian peso by 5.9% and 6.1%. So that impacted negatively in the consolidation figures. However, this -- we can see that we have quite good results, and we think that it's important to know that revenues are increasing with the percentage of GLA that we are being possible to open to the public. So for the future, we see that while this amount of GLA increases over the time, we are expecting also the revenues and EBITDA to increase as well. The diversification that we can see in the revenue. For the fourth quarter, Chile is representing more than last year in part of -- because of the social crisis that we have -- that we experienced last year in Chile, but again is showing one of the strength of Parque Arauco that is diversified in 3 countries, and that gives us more stability in our figures. Next page. We have the operational results. The EBITDA is decreasing 31.9% in this quarter with quite good margins for the quarter with Chile with 61.8% margin; Peru, 71%; and Colombia, 74%. If we consider that the revenues are still low against last year, we see that this EBITDA -- high EBITDA margin is a result of this work that we have done in the company, decreasing our cost and expenses. In cost of sales, we are decreasing the cost in 20%, again last year. In expenses, it's decreasing 3.7% without considering the bad debt expense. We consider that this debt expense is a policy that we have maintained during this year, but it's a result of the pandemic. So extracting that, it's a very good result for the quarter. With the bad debt expense, cost of the administrative expenses decreasing 18%. It's also important to note that the bad debt expense for the fourth quarter is amounting to around CLP 2 billion, less than the CLP 5 billion that we had in third quarter and CLP 6 billion -- around CLP 6 billion than we had in the second quarter. So we are seeing that the situation is improving over the time also. Next page. We have the nonoperating results. Starting from the EBIT that is decreasing 32%. We have the other gains by function. In that line, we are reflecting the adjustment for the fair value of our assets. This year, it was a gain of CLP 33 billion against the CLP 48 billion that we considered last year. In other losses and by function, we are reflecting the some expenses of cost related to projects and also revaluations of intangible assets. It's important also to note, the increase that we have in the financial expenses against the 2019 is increasing at 69. 5%, but it's also including CLP 5.5 billion of cost. Without those costs, the financial expense would increase 11% again last year, which is in line with the higher debt that we have currently. The share of profit and loss of associated accounted is showing a gain of CLP 6 billion. That's the result that we are in Marina mainly, which also include a fair value revaluation. The income for indexed assets and liability is showing an expense of CLP 12 million, which is a result of the inflation that we have in Chile of 3% in this year over the debt that we have in U.S. in our balance sheet. Now passing to Page 13. We have the NOI and the FFO of this quarter. The NOI is quite in line with the EBITDA of the company. It's showing a reduction of 34%, and we can see that the NOI from associated accounted is also decreasing 53%. And in the FFO, we see that the -- from the EBITDA that is decreasing 31% with the impact of higher financial expenses without the FFO decreasing 33%. However, if we consider that we have 2 extra expenses during this quarter, which are the prepayment, extraordinary expenses, which are the prepayment cost of the debt and the bad debt expense, the FFO of CLP 22 billion would be CLP 30 billion with a decrease of 10% only from the quarter of 2019. Now passing to Page 15 in the assets. I only wanted to highlighted that the credit accounts receivable is CLP 27 billion, below the CLP 35 billion that we had at the end of 2019 as a result of the bad debt provision that we amounted the balance sheet for CLP 14 billion. This is the result of our policy of provisioning all the accounts over 90 days, 90 days in our balance sheet. At the same time, I would like to highlight also that the collections are in line with invoicing, as I mentioned. This is very important for us, seeing that the account receivables are recovering. And we are not only seeing the collection -- collection is doing well, but also the payment plans that we made with several -- with our tenants is also working. And so with that, we are seeing that the account receivables are following a sound plan. Finally, I would like to go to the Page 17. So we can see the main financial indicators. The net debt-to-EBITDA is 13.14x at the end of 2020. And as a result of lower EBITDA in the last 2 months -- 12 months of the year, the net financial debt is increasing from $1.1 billion to $1.2 billion only. So you can see that the net debt-to-EBITDA is more of the result of a decrease and an increase in the financial debt. The only covenant that we have in the company in our bonds, is the leverage, which is today in 0.79, much below the 1.5x that we needed for this [ quarter ]. And with that, I would like to pass the call to Kristin, who is going to review the asset level results.

Great. Thank you, Francisco. So I'll talk a little bit about our portfolio. So we have 171,500 square meters in GLA. Our occupancy rate on a consolidated basis is 91.6% . This is a decrease from the third quarter where it was 93.9%. In Chile, it was 95%; and in Peru, it was 87%; and in Colombia, it was 92.5%. We estimate that the closing of Parque's stores would have made -- if you did not include that would have made the number in Peru, 93% and on a consolidated basis, 94%. So now looking at property level results on a quarterly basis. As Francisco mentioned, overall tenant sales were down 3% for the quarter. This was actually an increase for Chile of 4%, and in Peru and Colombia, a decrease of 11% and 12% quarter-over-quarter. Revenues on a consolidated basis were down 25%, in line with open GLA. But in Chile, it was down 18%; Peru, down 36%; and Colombia, down 14%. I'd like to just highlight that Parque La Colina in Colombia was closed due to quarantine measures, the 5th through 17th of January, but it has been reopened. Now moving towards property results on an annual basis. Tenant sales were down 34% on a consolidated basis; in Chile, they were down 34%; Peru as well; and Colombia down 33%. Revenues were down 39% on an overall basis. In Chile, down 41%, Peru as well, and Colombia down a little bit less, 33%. I'd like to highlight Parque Arauco Kennedy, MegaPlaza Norte and Parque La Colina. As you can see, the change in the tenant sales year-over-year and the change in the revenues year-over-year are very similar. Also one more thing I'd like to highlight is the Arauco Express Strip Centers in Chile was actually up almost 14%, so it did quite well. Now I'm going to move on to new developments -- sorry, future deployments. So we continue to work on Parque Alegra, in development. It's a regional shopping mall in Barranquilla, Colombia, and we estimate that it will be open in the second half of this year. Also, we continue to work on the Parque Arauco Kennedy expansion, and the estimated date of that is under -- is still under review. Last, I'll highlight Parque La Colina, the local space, it was actually opened in December of last year, and I'll get into that a little bit more in a couple of minutes. Okay. So I would like to talk a little bit about some of our sustainability advances. We did 2 initiatives during the holidays. We did 1 in Chile and 1 in Peru to -- all right. Yes. So we did one in Chile called El Mensaje de la Navidad and one in Peru, Reuniendo Saludos. Additionally, I'd like to highlight that we did 2 programs for entrepreneurs in Colombia, Impúlsate Ya! and Emprende Arboleda. And I would also like to highlight that we remained in the Dow Jones Sustainability Index in Chile, MILA Pacific Alliance and Emerging Markets and also remained in the FTSE4Good Index of the London Stock Exchange. Next, I'll talk about our continuous innovation at Parque Arauco. We recently opened Arauco Foodie at Parque Arauco Kennedy, where customers in the mall or nearby can place orders on their phone and then go pick up their order when it's ready. There is also services for when you're physically in the restaurant as well. We also launched Compra Y Recoge in Parque La Colina in Colombia. This program is currently available for food service, but the idea is to expand it to other purchasing categories, and it works similar right now to Arauco Foodie. And then the last initiative I'll mention is the LOCAL in Parque La Colina. So it's an exclusive area of that mall for digital native entrepreneurs to try operating in -- for them to try operating in a shopping center that allows -- for the entrepreneur, it allows the customers to get to know their brands and products in a physical environment and helps them expand their business and bring their products closer to the end customer. And these initiatives joining the other initiatives we mentioned in previous reports, Arauco Pickup, • Delivery Gastronómico, Personal Shopper in Peru, Alianza Rappi Colombia and Ticketless Parking, so that kind of incapsulate off our innovative efforts. Next, I'll move to advances in management of the pandemic. I would just like to highlight the chart on the bottom right-hand side, just kind of reiterates the message that the fourth quarter continued the recovery process, which you can see in the graphic. As we mentioned during the second quarter, we had about 25% of ABL opened to the public; in the third quarter, it was about 50%; and in the fourth quarter, it was 75%. So showing that recovery process. On the next slide, we have a graphic that shows each mall and the GLA open to the public for each mall on average during the fourth quarter and then at the end of the quarter along with the current status. And as you can see, most are open with restrictions. So that concludes our prepared remarks. I'd like to ask the moderator, Jamie, to open up the line for questions at this time. Thank you.

[Operator Instructions] And our first question today comes from Emilio Acevedo.

I have 3 questions. The first one is, what are the reason why channels sales decreased at a lower than compared to revenue sale within the fourth quarter? I would like to have some guidance on that. And also on a potential risk on capital increase considering the current leverage position, if you see that potential risk? And the third question is related to the capacity on -- during January. What is the current situation on that if you are seeing setbacks on GLA openings compared to December due to wave second way? This is all from my side.

Okay. Thank you, Emilio, for your question. Let me start from the last one, is -- we have seen in January, similar but challenging numbers compared to the fourth quarter, in particular. Because I mean, in Bogotá, health situation have been worse. So we have La Colina close for the first 2 weeks. And also in Chile, with the new regulation or the changes in the -- in [indiscernible] neighborhood have been changing. So now I think it's similar, but with some risk to be a little bit lower. And regarding capital increase, we are not really seeing a capital increase now. We are concerned, and we are not happy with the level of financial debt net to EBITDA. We believe this is pretty high, and -- but most of this is because of the weakness in the EBITDA that we have right now. Hopefully, in 2021, we're expecting a better year than 2020. We believe that brings us to a more manageable number, but still, I think we have some stressful situation on that number. And -- but again, we are not seeing in this scenario, a capital increase, which will require. And the first question, I don't really understand. So if you can't repeat it or maybe somebody else here in the room understood.

Yes. Sorry. It's related to -- why -- the main reason because tenant sales have decreased at a lower extent compared to revenue in the fourth quarter. Why revenue sales have been positive by a higher contraction and tenants sales has not decreased that much. So what can be the reason behind that?

I think there are several reasons. One is, we have been working with our tenants trying to help them in the way that it's possible to help them when they are suffering from some situation, which is affecting their financial health in the short term, but we believe they have a long-term -- a good long term, a good franchise. So this is a company that requires our help. This is one reason. The other reason is, it depends on where these sales come from. If the sales come from a company which is paying, right now, fixed rent, usually we are not getting that increase in sales in our revenue. We -- in short term, it can happen. In the long run, usually, you compensate this result with other result in the future. And the third reason is the building process usually happens at the beginning of 8 month. And this particular period of time, it's been a little bit difficult to predict how the sales are going to behave during the month, which is in regular times, it's very easy. Sales are very stable, but a pickup in the sales in the last 2 months of 2020, it was huge and probably that was also part of the explanation.

And our next question comes from [indiscernible] from Morgan Stanley.

So I have 2 questions. I wanted to understand a little bit about the receivable dynamic. So we saw that the increase Q-on-Q now in the fourth quarter. Just wanted to get an understanding of where exactly are those receivables increases coming from? Is it more from Chile, Peru, Colombia? And then the second question is around Peru. So we noticed that there was a dynamic of occupancy declines. Whereas, we saw occupancy stability in Chile. And I was wondering, was that due in part that you're re-tenanting as of this moment? Or is it that some tenants are already starting to exit given the situation there? If you can provide a little bit more color about what will be the occupancy decline? What are the main drivers there?

Okay. Regarding the account receivable dynamics that you mentioned, what we've seen in the fourth quarter as the sales of the tenant improved, our collections improved also. And actually, the number that I mentioned at the beginning of this call, collection was 84% of the previous year. And the GLA, the open GLA was 75%. So it was -- the fourth quarter was a quarter where most of the tenant, they probably some accounts receivable that they have behind on schedule. So it was a time to pay in time, I would say. So as we expect when the sales are happening, usually what's happened with the account receivable is, the [indiscernible] improves a lot. And also we continue with this strategy to try to build -- we really believe we can get the money from collections. So we are not billing if -- it's not part -- I mean if the tenant is closed because of some situation or some regulation with the government or some authorities or whatever. So we continue to monitoring very closely the relationship within collections, billing and also account receivables. And the other question was about occupancy, and we are not seeing an important change in occupancy. We are not -- we need to take into account what is operating in the place such as, but if leaving Peru, which I think is the only -- the increase in occupancy and in the -- we're not seeing an important increase in occupancy, we are seeing a tougher situation in the market for sure. Tenant with financial, in some cases, we try to help them if we believe they have a long-term good strategy, but again, we have not seen a different intuition about the [indiscernible] that we have now.

Okay. So a follow-up on the receivables. So the receivables increased due to the percentage that's attached to variable rent? Did I understand that correctly? And then the second question is, is there a breakdown for those receivables by country? Is it more Chile? Is it more Peru? Is it more Colombia?

I'm not seeing some different situation between Chile, Peru, and Colombia. I think maybe in Peru, it's a little bit behind. Colombia is better. But at the same time, when you see the open GLA country by country, then obviously, it's lower than Chile and Colombia also. So there is some connection in the health of the tenant, and the GLA opened in each country. So I'm not seeing something different to that.

And I like to add also to that. I think it is important to note that the payment plans that we have with somehow -- some of our tenants is working very well. So the account receivable increased, and at the same time, we made provisions, right? And -- but the increase that we have in the account receivables is today in plan with our tenants. And we see that it will take time to recover those amounts, those funds, but it's working. As of today, it's working. The collections are in line with invoicing, as Claudio mentioned. So we are positive on the evolution that we are having in the accounts receivable. And regarding the occupancy also, I would like to add that if we see the breakdown by country, the occupancy in Chile is decreasing from 96.1% to 95%. So it's a minor decrease. Then in Colombia, it is the same occupancy, 92.5% when comparing with last year. And in Peru, it's concentrated. They probably be [indiscernible], but again, we have the situation with Parque there, which represents around 6% of the GLA in there.

[Operator Instructions] Our next question comes from Marcelo Motta from JPMorgan.

I also have 2 questions. The first is regarding discounts. If the company could comment a little bit on what is the level of discount on average that you guys are applying? And also a detail on the financial results. If we look at the share of profit for associated accounts, we saw that the proportion of profit increased by more than almost 5x. And if we look at revenues and EBITDA, those numbers were down double digits. So just wondering if there is some noncash items here on Inmobiliaria Mall Viña del Mar. So if you guys could comment on that, that would be great as well.

Thanks, Marcelo. Regarding your second question is basically in Inmobiliaria Mall Viña del Mar. As mentioned. They also have the fair value of their asset gains recorded in the fourth quarter. So that's the reason why the number is that number, and it's not in line with what you see in the third quarter than the second quarter. So -- and so the explanation is mainly the revaluation of the asset that happened once a year as the same case of Parque Arauco. And your first question, can you repeat it because I didn't get it, and I see the other people in the room, and they are [indiscernible].

Sorry. So on the first question is regarding discounts on rent.

Discounts. Okay. We continue our strategy of discounting case by case. We don't have a general policy. It depends strongly on the health of the tenant. We have been doing that, and this has been, in our view, our successful strategy, and we continue doing that. And actually, we are trying to push to get back to normal. We're -- I mean, the health numbers are not really, I mean, absolute in that situation. So we -- because this pandemic is so -- even because if some [indiscernible] is doing well in health numbers, other [indiscernible] doing bad. So because of the situation, it's sold case by case, we continue to do it in the same way. We are managing our discount and our contracts and our billings to our tenant in the case-by-case number, which is doing -- I mean, which is requesting and a strong job from our leasing team, but in what happened to do -- what we need to do in this area. So we continue with that. And again, we're trying to push back to normal times, but the reality is a little bit -- okay, how do you say it. It's a little bit reality is difficult. It's not easy.

And ladies and gentlemen, I'm showing no additional comments, I'd like to turn the call back over to management for any closing remarks.

Great. Thank you, Jamie. Thank you all for joining us on our fourth quarter call. We hope to see you next quarter. Thank you very much.

Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.