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

Good day, and welcome to the Parque Arauco First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Kristin Lorenzo, Head of Investor Relations. Please go ahead.

Great. Thank you, Cole. Good morning, and thank you for taking the time to connect to the Parque Arauco First Quarter 2021 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 the first quarter of 2021 was marked with the challenging situation of opening and closing in our malls related to the COVID-19 pandemic, we are becoming more adjusting to the process and learning how to manage it. We are always actively working to maintain the operational continuity of our malls, ensuring to comply with health and safety measures in different counties, regions and countries to ensure a safe and enjoyable experience for our clients. Against this backdrop, we managed to keep an average of approximately 65% of our assets opened to the public during the quarter, which I think is one of the main issues of the quarter. Unfortunately, and this is a bit lower than the average of 75% we have opened during the fourth quarter of last year. While still an improvement from the second and third quarter of last year, which were 25% and 50% of the [indiscernible]. On a country basis, Chile was in different phases of opening during the quarter, same areas have lockdowns on the weekends however that were opened. The end of the quarter saw Chile return to a restricted quarantine countrywide. Due to this, Chile had approximately 66% of GLA open to the public on average in this quarter. In Peru, there were massive closing of its malls during the month of February. So the quarter had 59% of GLA open to the public on average. Finally, Colombia, which has had fewer restrictions had 75% of GLA open to the public on average during this quarter. As in previous quarter, we see that the level of revenue is in sync with the GLA open to the public, achieving 68% of revenue in the same quarter of 2019, which consider this year like a normal. Or in other words, free from the effect of the pandemic. Then on sales, on the other hand, show the same relationship with the GLA open to the public, even though they were a bit higher than revenue and actually, sales for the period reached 78% of those reported in the first quarter of 2019. As explained in previous quarter, in response to the outbreak of the pandemic, we developed an action plan that focused our efforts in these areas: commitment to people, operational continuity and financial strength. This quarter, we are continuing with our commitment to people by maintaining compliance with safety and security measures to ensure our clients, tenants, suppliers and workers are taken care of. We have also made our shopping centers, in particular, Arauco Maipu available to the authorities to be used as vaccination centers in Chile. We also have been focused on operational continuity with opening our facilities as soon as possible and deepening our effort to facilitate interaction of our tenants, with their clients through different innovative initiatives. Finally, we have maintained our strong financial position by maintaining a significant cash position. Approximately $580 million in repaying some of our debt. Now turning to our first quarter results. Tenant sales were approximately 94% of tenant sales in the same quarter last year. Revenue was approximately 72% of revenue in the same quarter last year, roughly in line with the percentage of GLA open to the public. These revenues reflect our current commercial situation in which rent levels depend on individual tenant situations, small operational status, regional restrictions, among other factors. That being said, rent collection continued to be in line with billing. As part of our response to the pandemic, we maintain our cost-saving effort and achieved 1% reduction year-over-year with comparative cost of sales and administrative expenses combined. If you look at this figure without bad debt expense, which was CLP 1,865 million, it will have a reduction of 10%. Considerably, the company reported a gain in EBITDA of CLP 19,286 million, and net loss attributable to equity holder of CLP 4,700 million. The FFO attributable to shareholder was positive. CLP 7,811 million, significantly lower than the previous year with -- given the continuous situation. I would like to finish this introduction with the good news with the sales of some of our assets in Colombia. I would like to highlight the sale of the minority stake in announcing during the word. We saw 49% of our Colombian shopping centers Parque La Colina in Bogotá, and Parque Caracolí in Bucaramanga to INMOVAL for $163 million. This is a continuation of our effort strategy to actively manage our portfolio of assets. Over the period of 2019 to 2021, we have sold $256 million in [indiscernible] and we have made purchases for almost $300 million. In particular, the purchase of MegaPlaza in Peru, and we also have invested 144 million in Greenfield project with our expansion in Parque Arauco. This is a net investment of $75 million. 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. To start with a review of the results of the quarter, I would like to pass to our case study in our presentation, trying to take a wider look of what we have learned during this pandemic. What has been the trends that we have been seeing in the financial indicators of the company. First of all, one thing that we have been highlighted for the last quarter is that revenues are in line with the GLA that we managed to open to the public. In all 3 countries, we have restrictions, measures to take. But once we open, we can open the GLA, we see that the revenues come back at the same time, at the same level of the GLA that is open. And also in the last 2 quarters, we have been seeing sales being above that level. So you can see in the graph that the blue line of sales increased above revenues in the fourth -- in the first quarter of 2020. And then it's a little -- little bit more in line for the first quarter of 2021, but it is still above revenues. With that, we know that we are supporting our tenants with higher sales. But at the same time, we have the -- our idea is to manage the occupancy cost and also increase our revenue. The other part of the equation is the collection. And you can see that in the graph in the right side, you can see the revenues and the collection for the last quarters is being closely related one with the other. The revenues and the collections, we think that this is a very good news and one of the pillar of our financial strength. Another point in this topic is how we have been managing the cash. We have our cash position today of $580 million. We have been having a strong position in liquidity during the whole pandemic. And you can see in the second quarter, we have the maximum level, and then we started to repay some of our debt in order to decrease a little bit this level of cash as we've seen that the stake was advancing in a good way. But then in the first quarter of 2021, we have an increase in our cash because of the sale of the minority interest in Colombia. Our idea is to maintain this strong position though. And we are considering a strong level of cash for this year. And in the side of the cost and expenses, we have been adjusting the cost downwards during the whole pandemic. We made a lot of efforts at the start of the pandemic trying to decrease some of our variable costs, maintenance, security, trying to be -- to have those costs being more proportional to the level of GLA that we opened in each quarter. And you can see in the graph how the line of cost and expenses are also in line with the GLA. We have been doing other efforts in some of our fixed costs as well. As you can imagine with the travel cost, but the main savings has been in the variable costs. So with that, I think this is important to see -- to understand what are the trends as I said, part of the trends that we have been seeing in the pandemic. And we have been following these financial indicators during all the quarters and has been very consistent 1 quarter with the other. Now passing to this first quarter of 2021 in a closer look, starting with the tenant sales. Our tenant sales were 5.7% below the figure that we have in first quarter of 2020. The level of sales is higher than the level of revenues, as we said. And that is due mainly because of the higher sales that we have been seeing in supermarkets and home improvement stores, mainly in Chile and in Peru. And those type of stores today are paying more in the fixed part of the rent than in the variable part of the rent. And because of that, we have in Chile, same-store sales of minus 0.9% with the same-store rent of minus 18%. Similar situation happening in Peru and Colombia for the same-store sales is a little bit higher than the same-store rent. And -- but basically, the explanation for that situation is the same as in Chile with this supermarkets and home improvement stores having a better sales level than the rest of the stores. And also, it's important to know that those type of stores are considered essential stores. And because of that, they -- they have been always open in these countries even when they are in quarantine times. In the next page, we have the occupancy cost. This is in relation with the level of sales and revenues, you can see that the occupancy cost is lower than last year. And the different levels in Chile, Peru, Colombia is basically related with the level of anchor stores that we have in each country. Then in revenues, revenues are below last quarter in 28.5%. This decrease of revenue is again, correlated with the GLA that we opened in all 3 countries. So is below -- is lower in Peru, a little bit higher in Chile and then more -- we have a better level of revenues in Colombia. And in this stage, you can also see the diversification that we have in our revenues. We think that this is a very important characteristic of Parque Arauco having this diversification allow us to, in these situations, when Peru is having lower results than the rest of the countries, we have the support of Chile and Colombia. And when Colombia is lower than we have Chile and Peru. So this is diversification. We think that is an important point of Parque Arauco nowadays. And to finish my presentation, I would like to speak a little bit about the EBITDA. In the EBITDA of the company, we have this lower level of revenues. But in the cost side, we have been maintaining this -- our efforts to decrease our costs. We have 2 specific costs that are increasing when you compare with last year. One is the bad debt expense. In which we are maintaining our strategy of being conservative with the bad debt provision, we're still trying to make provisions for all the things that is all the account receivables that are -- that have more than 90 days of delay in their payments. And with that, we increased our bad debt provision in [ $1.8 million ]. Without taking into account that bad debt provision, the decrease in costs will be 10%. And the other cost that is increasing when you compare with last year is the insurance cost, which is increase in Chile and in Colombia, basically. Without that insurance as well -- cost insurance cost as well, the comparison would be a decrease of 15%. With that, I would like to pass the call to Kristin who is going to -- speak a little bit more about country level results.

Great. Thank you, Francisco. So I'd like to talk a little bit about our percent of occupancy. We ended the first quarter with an occupancy rate of 91.5%, which is quite similar to the fourth quarter. This figure has remained quite stable during the pandemic. We started the year at -- we started the year -- last year at 94.6%. And then in the second quarter of 2020, dropped down to 94.3% and then remaining fairly stable in the third quarter at 93.9%. In the fourth quarter of last year, it dropped approximately 2% due to the closings of the 4 [ party ] stores in Peru. If we return to this quarter, Chile has a percent of occupancy rate of 95.3%; Peru, 86.6%; Colombia, 91.9%. Okay. So now I'd like to advance just a little bit more in the presentation. So it's been more than a full year of us living with the pandemic. We've had strict lockdowns here in Latin America in the second quarter of last year. And during the third and fourth quarters of last year, we saw reopening. And as you can see in the graph on the bottom right-hand side, you can see Colombia last year, opened the fastest and Peru was pretty quick as well. Chile had a bit of a slower start, but eventually caught up with Colombia and Peru. At the beginning of this year, we are now seeing closings and reopenings again. And we've learned a lot about the virus and how to minimize risk. So as you can see, the quarter averages were 25% in the second quarter of last year, went up to 50% in the third quarter of last year with 75% in the fourth quarter of last year and then is around 64%, 65% in the first quarter of this year. So just want to move to -- on the sustainability news front, I'd like to highlight 2 things in particular. One is that we made progress in the MSCI ESG ratings going from a BBB in 2020 to a single A rating in 2021, demonstrating the progress we're making on the implementation of our sustainability efforts. And then lastly, I would just like to mention that here in Chile, we have offered our facilities to the community. And in particular, in Arauco Maipu, we have a vaccination point that's run in conjunction with the municipality of Maipu, where people can come and get vaccinated in their cars. The vaccination effort in Chile has been advancing extremely well. And in Maipu, we've had over 4,000 people vaccinated in our shopping centers. So that concludes the end of our prepared remarks. So now, operator, if you could please open up the floor for questions. Thank you.

[Operator Instructions] And our first question today will come from [indiscernible] with Morgan Stanley.

I have 2 questions. One -- Yes. Okay. Great. So I had 2 questions. My first one was around accounts receivable. So we noticed that sequentially, they declined, you mentioned on the report that this was due to increased collections that were increasing. And so I just wanted to get a sense of how you're seeing the trajectory for accounts receivable for the rest of the year? Do you expect a normalization at some point? And also connected to that is the fact that we did see that provisioning increase more for receivables. So we wanted to see also how you're thinking about the current receivables that you have. So basically, just trying to understand what the dynamics are that you expect going forward? Should we expect more provisions for the receivables that are there right now? And then the second question, which is sort of -- next is about collections themselves. So you mentioned that there is a big disparity between sales and rents is because you have more department store sales, home improvement sales versus rents being collected. So I just wanted to get a sense of for these big tenants, so are you collecting at a 100% right now? And then could you sort of break it down, if you can the levels of collections by type of tenant? Is it like the smaller tenants are basically just to 0, medium-size tenants are collecting more. So any color you can back would help.

Okay. Dorel, thanks for your question. And as we see that the end of the fourth quarter of 2020 improves a lot, the situation in the market compared to the second and the third quarter. Obviously, we start pushing, pushing a little bit harder in terms of billing and collection. And this is -- that you see on the figures and the numbers. And obviously, as the -- I wouldn't say, obviously. But this supports our main idea here is when the health numbers allowed us to be open, our come back to the shopping center on the sales that are coming up, and everything starts to returning to -- so that we understand the business in the past and so the billing started increasing at the beginning of the year, and the billing -- and the collections come behind this in the same way. Obviously, when the figures start going down or the health situation started getting worse, the rational reaction of every tenant is trying to keep the cash in their pocket and not in our pocket. So we see that it had a strong relation between the -- the collection and the situation or how the pandemic is evolving. And this is part of the -- I think this is a dynamic. And I would like to say that the future looks -- looks better related to what happened with the vaccination process. In Chile, right now, we are a little bit more positive regarding Peru and Colombia, but we are also seeing that the government in Peru, Colombia started doing a lot of effort to move forward this process as soon as possible. So -- and in Chile, I think we are expected that because of how the vaccination process is evolving, we would expect a better trend in the near future.

Yes. Also, I would like to add more related with the second question, probably. About the collection of these tenants. As I explained, sales have been better than revenues, mainly because of these supermarkets and home improvement having biggest levels of sales if you see how all tenants have been doing this quarter. And when you laid out with the collections, we don't have much problems with the collection of those billers. I would say it's not a situation. The collection is not a situation, concentrated in anchor stores today. And is more across the whole company. And -- but as you see in our figures, collections have been doing well. our plans, payment plans are doing well. And in some way, we are positive, we have a positive view regarding this, but we need to see how this evolve and probably see how the pandemic evolve in all 3 countries in order to change our strategy of being conservative about the bad debt provision.

Okay. Okay. And 1 more question around provision. It does increase -- what drove the increase in provisions? I'm sorry if I missed it.

No. We are increasing provisions or we have a model that is focused in the aging of the billing. And obviously here, because of -- the beginning of the quarter, was good, but it started getting worse at the end of March. So again, and you see a very good behavior in collection during February, for example, but the margin was a little bit less because of the pandemic figures and because of that, we continue with -- according to our model, we need to do some different provisions, and this is what we do. We -- I think we are on the conservative side in this particular figures.

[Operator Instructions] Our next question will come from Emilio Acevedo with Santander.

I have 2 questions. The first one is related on relationship that you're having with the different type of tenants when I mean relationship is lost within the currency rate. And when I talk about tenants, I would like to have more color on the different type of tenants. So like anchor stores, specializes, retailer, restaurant, how different is among the tenant, the relationship that you're having. This is my first question.

You will continue with the second or do you want to answer your first question...

I think it's better to have the first question, then the second.

Okay. I try to do my best Emilio in order to get the second. I think it's -- in this particular situation, obviously, there are some tenants that are doing really well as Francisco mentioned during the call. Some improvements are going really well. And obvious in those situations, I think it's -- the relation is very good. And there are another tenant, which they are not doing well, not because of them, it's because of the situation. I mean, restaurants, cinemas they are not having a good time. They are suffering, probably the market is expecting one of those companies, maybe they are going to bankrupt. So it's not an easy conversation. And it's not an easy solution. We have been talking about this in the other calls and in our view, we are trying to help in what Parque Arauco can do, which unfortunately, is not that much for some particular tenant. In trying to solve or to help them to solve their financial problem. If we believe they are a very good tenant. They have a very good product. They are a very good manager. Because although everything, they are suffering because the pandemic is shaping the way it is. So again, we are trying to help for the group that is not performing well. Obviously, the situation is not easy, and the conversation is not easy. However, we are trying to do the best we can. And on the other side, obviously, we desire that they are doing really well. I mean the conversation is in those sales. I mean, what we have seen since October '19 when we suffered the lower prices, and the main point here is, if the sales are performing well, commercial relationship start doing well immediately. We don't do anything else. If the tenants are not selling, obviously, the relationship stress out. And it's something that everybody [ is connected ].

Yes. And regarding that, we have been seeing sales of supermarkets and home improvement above the others. But the truth is that the rest of the tenants are a major part of the tenants are doing well as well. It's not something that is concentrated only in supermarkets and home improvement stores. And another signal probably about the relationship with our tenants is the occupancy that we maintain today, is in 19.5% this quarter. And as Kristin said, if you compare that with last year, the main drop that we had is in Peru because of the closure of the [indiscernible] stores. But without taking those into consider, we have maintained a very good level of occupancy in all of our malls. And that talks about the relationship that we have with them.

Do you think that the occupancy levels or vacancy rates at 10%, well maintained. Is it sustainable? Or potentially, they will decrease to 5%?

I mean, we are seeing interest in our shopping centers. As always, we have been able to rent new spaces to tenant that they weren't part of our assets in the past. So for now, we are -- we believe that the occupancy will maintain at the level that we are. Obviously, if one of the tenant decided to make some a strong decision or like to leave one market, to leave one country, this is something that is not in control of Parque Arauco. So in one of the -- those tenant decided to do that. I mean, obviously, the vacancy is going to increase. But again, we are not seeing an acceleration in the attractiveness of our assets. So our main scenario is that the occupancy will maintain at the level that we are in right now. And hopefully, if the pandemic and the vaccination process improves, obviously, we expect a better feature.

And the last question, it's about a -- do you think us in the trend on the use of a GLA related to another type of channel, so like as you know warehouses, gray stores or a kind of logistic in line with the commerce boom. Do think there is a space to some places of park to type of tenants? What is your view? Like more a strategic point of view.

We believe that our assets are very attractive on the retail side, and we are not seeing in the foreseeable future some transformation of one asset or part of some particular assets in another type of property. Wherever, we believe that in this new era, tenant can make some decisions such as to have our showroom, to have some delivery from their stores in our shopping centers, and we are going to help them that, but -- and in trying to tackle to be aligned with this e-commerce strength, but we are not seeing transformation of our asset in the property the difference that you are seeing right now.

Okay. But the fact is that the square meter for department store are decreasing. If I can say a number, I don't know 10% lower. So how you will replace that square meter. This is my question.

We -- as I mentioned, if some companies decided to reduce their spend with us, it's -- I mean, it's part of our day-to-day business. So we are always looking in the market for new tenants. And now, particularly with the case that we are having in Peru, we are working with the market. We see some -- we are positive on the opportunity to make some good deals to put some tenants back in this free spaces right now. So for us, from now, it's more like a usual business than something unusual.

And our next question will come from Marcelo Motta with JPMorgan.

Those are 2 questions as well. The first is if you can comment a little bit about the reopening situation, especially as now we are almost in the middle of the second quarter, Colombia and Peru, as you mentioned, had been lagging in vaccination and Colombia, there has been the strike the process. Just wondering the had caused any additional closure or issues on shopping mall performance during the beginning of this quarter? And the second question is more clarification. During the initial remarks you comment about Parque Arauco maintaining a very strong cash position during this year. We know that cash is almost $600 million now. So when you think about strong cash position, is more about the absolute level of cash? Or you're thinking about net debt-to-EBITDA and then you're seeing EBITDA reporting through the rest of the year? How much you compete on what do you mean by the strong cash position, so we can try to follow how this evolved during the year? That would be grateful.

Yes. So about the reopening, how is the situation today? It has all depend on the pandemic, right, and how it has evolved today. Today, we are experiencing less closures in Chile, but it still is we have a very important closure of our stores in Chile. The quarantines started at the end of March and has continued along April. And today, we are seeing a little bit a trend to open some malls, but we're still very low in the year end. And -- but we are positive as we see that the vaccination programs are working and probably that, hopefully, that would lead to more open year in the future. But we are still pretty close in Chile. Peru that was closing on February. Today is more open. It's around 70% of GLA open to the public and Colombia as well is around 70%. Colombia has had some quarantines and closures. But for a few days in Bogotá, in particular, we have been experiencing some closures during weekends and during some days, but then again open in that country. What we haven't seen is quarantines or measures for a few days or weeks that if you compare with Chile in 2 days, the malls have to be closed and then remain close for longer times. So that is the situation about the GLA today.

And Marcelo, according to your question about diversification. Obviously, our financial debt-to-EBITDA is 14.7%. I expect that, that would be the highest level probably now from now on the EBITDA the last 12 months had increased, obviously, April 2020 was lower EBITDA, and we are expecting that from the next year, the next month, we are going to compare with a very weak situation in 2020. And so I'm expecting that, that is something that is going to improve and cash position, obviously, I mean, to have $600 million in cash is a lot. We are not happy with that. We were -- this is something that we do at the beginning of the pandemic process in 2020 and in the second quarter. And when we see the vaccine information, and we expect that the process is going to improve the situation, we tried to reduce our cash position. So we are in the middle of that process, we saw 29% of our assets in Colombia. We can also increase again the cash. So we are right now, we have the $600 million. If we use that cash for doing some investment, our financial DEBT/EBITDA is going to increase again. And right now it's 14.7%. So if -- I think if the situation, we are not very happy in this kind of the corner that we are right now. But we -- as the situation is easing a little bit, we probably we are going to see -- we might find some opportunities in the market.

[Operator Instructions] And this will conclude the question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Great. Thank you, Cole. Thank you all for joining us this quarter. We look forward to seeing you again next quarter. Thank you. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.