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

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 only. To start off today's discussion, I'm going to pass the call over to Claudio.

Okay. Thank you, Kristin, and good morning, everyone. In the second quarter, we continue to see resilience of the shopping center industry with a rapid recovery toward pre-pandemic activity levels as sanitary restriction allow. However, similar to last quarter, we experienced the challenging situation of openings and closings in our malls related to the pandemic. Chile, in particular, was significantly affected by closing with most of the country experiencing lockdown during the -- at least half of the quarter. As a result, on average, we had approximately 60% of our asset opened to the public during this quarter. This is a bit lower than the average of 65 we had opened in the first quarter of 2021. But still an improvement from the second and third quarter of last year, which were 25% and 50% opened, respectively. On a country basis, the restrictive quarantine we saw at the end of last quarter in Chile, continued through April. Actually, in May, we started to see a reopening only to return to lockdown once again, for a couple of weeks in June. At the end of June, most areas of Chile start their reopening process again. As a result, Chile had approximately 41% of GLA opened to the public on average during this quarter. In Peru and Colombia, there were fewer restriction and closing. So the quarter had 69% and 80% of the GLA opened to the public on average, respectively. As explained in previous quarter, in response to the outbreak of the pandemic, we developed an action plan that focus our effort on 3 pillars: commitment to people, operational continuity and financial strength. This quarter, we have continued 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 available to the authorities to be used as vaccinated centers. And we have been focused on operational continuity by 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 continue to have a strong financial position by maintaining a significantly cash position, approximately $530 million. Despite this high level, we have begun the process of reducing our cash level, given improved operational levels and advancement in the fight against the pandemic by prepaying debt. And additionally, and after the close of this quarter, we executed a tender offer where we prepaid $40 million of our fee bond. Now turning to our second quarter results. Tenant sales grew 257%, and revenues grew 131% from the same quarter last year. These high increases are due to the very strict lockdown during the second quarter of 2020, where the average GLA opened to the public was at the low level of 25% compared to prepandemic level. Tenant sales were 75% of the achieved in the second quarter of 2019, and revenues reaching 59% of those in the same period in synchrony with the percentage of the GLA opened to the public. This behavior is also consistent with the support that Parque Arauco has been given to its tenant through discounts and payment facilities, especially to the tenants most affected by the pandemic situation. Cost of sales increased 56% compared to last year, mainly due to operating costs that increased as more stores in our shopping centers open. In contrast, administrative costs or SG&A costs, SG&A decreased 57% compared to the previous year, driven by lower bad debt expenses in the quarter. Consequently, the company recorded a gain in EBITDA of CLP 17,518 million. And a net loss attributable to equity holders of CLP 5,245 million. The FFO attributable to shareholder was positive, CLP 7,566 million, significantly higher than the previous year. 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.

Thank you, Claudio, and good morning, everybody. To start with the presentation of the financial indicators, I would like to start with this page. This is a summary that we presented last quarter. And today, we are updating these indicators to the second quarter. As we can see in the -- I would like to start with the chart that is in the high left side of the page. And we can see here that we had a positive quarter again with the revenues just in line with the GLA open to the public and sales showing also a strong result above the revenues. This is quite important for us because here, we have been seeing -- our thesis is that when we open our malls, the revenue come back and then -- and the sales come back. This has been very important for us, and we have been seeing this behavior in our malls and operations during the whole period of pandemic, as we can see in the graph. So today, that after the closure of the second quarter, now in July, we have been seeing the end of the quarantines periods in Chile, we have been seeing our most full of people and having very good results in revenues and sales. So this is important for us. And we can consider that then the future will depend on the sanitary restrictions that we have to face in the following quarters. We have been seeing that the main driver of our operation then is the sanitary restrictions. Once we can open our malls, the revenue come back, the sales come back and also the people is also coming back to our malls. Now passing to the right side of the page, we have the revenues and collection. This is the other part that is important for us to track very closely. And we see how the collections have been following also the revenues of the company. This is important for us because it's not only important to have the revenues and the invoices to our tenants, but also to have the collections in line. Our bad debt, as Claudio was mentioning before, our bad debt provision has been decreasing during this pandemic. And today, in the last quarter, we provisioned around CLP 500 million, which is much lower than the peak of the pandemic where we provisioned around CLP 6,300 million. This is the result of having collections above the invoicing process during the pandemic. Now analyzing the cash. We took a very strong position in debility on cash during this pandemic with a peak in the second quarter of 2020. But as of today, when we are seeing the restrictions lowering in all 3 countries in Chile, Peru and Colombia, we have been starting our process with cautious -- being cautious also, but prepaying some of our debt in order to decrease the cash. We're still having a very strong position. As of today, we maintain in cash around $450 million, which is the 2x the EBITDA that we have pre-pandemic -- in pre-pandemic times. So it's a very strong position of cash. But we think that there's a space to make some prepayments. And in -- during the second quarter and July, we have been performing some repayments of the debt. And as an example of that, we made a tender offer of one of our bonds in Chile, prepaying around $40 million. The financial obligations are for this year and the following years are below $200 million. So with that, also, we can consider that the position of the company in cash is very strong. Another point regarding this position is that just yesterday, we received the confirmation from Feller Rate, maintaining our risk rating in AA for Chile and also within a stable perspective. So with that, our 2 risk rating agencies, Feller Rate and ICR in Chile are maintaining our risk rating that we had before the pandemic in AA. And then analyzing the cost. We see also that the costs are also moving with the GLA open up to the public. This is our effort to maintain the cost under control. Part of those costs are environments, so they are decreasing with the closure of some of our malls. But also there is some efforts from the company in marketing, in other costs, which are also maintaining through this pandemic in order to control the costs. Now passing to the sales results. As we has been mentioning, this is a positive quarter, considering that we opened around 57% of our GLA. When we compare with 2020, the increase in sales is 256%, which is much higher than what we have in last year. But comparing with 2019 it is 75% of what we had in sales in that year, which is above the 57% of GLA that we had opened during this quarter. In this page, I would like to highlight Colombia, where we have very positive results. Colombia has been having around 80% of its GLA open to the public, and it has maintained higher levels than Chile and Peru in that indicator. And also it's responding very well in revenues and in sales, and we can see here in the same-store sales and same-store rent, how the indicators for Colombia are higher than the other countries. This is then a good indicator of our diversification. And our investment in Colombia is having very good results during this tough period. We can see that the same-store sales is higher than the same-store rent. This is due mainly to the results in supermarkets and home improvement stores that has a more presence in Chile and in Peru and close to 0 presence in Colombia. But taking those apart from the calculations, same-store rent and same-store sales are similar in Chile and Peru in the levels that we are showing for the second quarter of 2021. In the next page, the occupancy costs. We see that this is also controlled for this second quarter. We have maintained discounts for tenants while they are having their stores closed. The Chile is in 8%, 8.6% for this quarter, below the 11% that we have in occupancy costs in 2019. Peru is also lower than 2019 levels in 6.4%. And Colombia, due to the higher sales levels that we are having there, we have an occupancy cost of 11.3%. We evaluate these indicators as very normal, and probably a little bit lower than in average because of these higher results in sales for supermarkets and home improvement stores. Now passing to the EBITDA. The EBITDA of the company was $17,500 million in this quarter. Now in the positive side, if we compare -- recovering from the negative EBITDA that we have in 2020. It's also very positive that only having 57% of the GLA open, we had above 50% of EBITDA margin in Chile and in Peru. And in Colombia, 73%, which is in higher, in fact, from the 67% that we had in Colombia in the second quarter of 2019. So again, Colombia is showing very good results with higher levels of revenues and EBITDA. The EBITDA is a result of the higher revenues, but also of the control in costs. And in cost, again, it's the bad debt provision, which is decreasing this period. This quarter is playing also an important part. Finally, I would like to highlight a financial indication. Our net debt-to-EBITDA is decreasing from 13x to 10x -- 10.8x. This is a result of an increasing EBITDA of the last 12 months. We can see that the net financial debt is CLP 778,000 million, which is, in fact, lower than the CLP 800,000 million that we had at the beginning of the pandemic. This is important to highlight because we have -- during this pandemic, we increase our debt, but all the new debt was to increase our liquidity position, and we have not changed our debt structure in the company. And so the net financial debt is, in fact, a little bit lower than the beginning of the pandemic. So today, the net financial debt-to-EBITDA is in 10x because of the lower EBITDA that we hope will recover soon. With that, I would like to pass the call to Kristin.

Thank you, Francisco. I'd like to turn to the occupancy levels. On an overall basis, the occupancy level remained stable at 91.3% versus 91.5% last quarter. Chile declined slightly from 95.3% in the first quarter to 95% in the second, while Peru remained unchanged. Colombia declined slightly from last quarter from 91.6% to 91%. Now I'd like to move to talk about the evolution of GLA open to the public as a percent of all physical GLA we have available. We see a divergence in the second quarter of this year amongst Chile, Peru and Colombia. As can be seen from the chart, Chile had significant closures and the GLA opened to the public was on average 41% during the quarter. Peru and Colombia were, for the most part, open with an average GLA opened to the public of 69% and 80%, respectively. This translated into an average of 57% of GLA opened to the public on a consolidated basis, which is slightly lower than the first quarter of this year, but above the second and third quarters of 2020. This is a snapshot of how much each mall was opened during the quarter. And as you can see at the end of the quarter, almost everything was open with restrictions. With the exceptions of Arauco Maipu and Arauco Premium Outlet, Buenaventura. But I can tell you that as of today, now everything is open with restrictions. This concludes our prepared remarks. We will now move on to the Q&A session of our meeting.

[Operator Instructions] It looks like we have [ Gerald ].

So I have 2 questions. So the first one is, I was wondering if policymaking uncertainty in either Peru or Chile has had an effect on tenant conversations around leases, either affecting decisions on re-leasing or lease spreads or what have you? Or are the conversations still very much focused on the pandemic? And then the second question is around discounts and occupancy costs. So as you open up, do you think that you will see higher occupancy costs versus history as you increase rents with openings? Or do you think that your occupancy costs will continue with longer-term trends? And this would effectively mean your rental company sales rather than opening times. So those are my 2 questions.

Thanks for your question, [ Gerald ].

Okay. Yes. Just to start with the answer, I would like to start with the occupancy cost question. When we analyze how it's behaving the several type of stores in our malls, we see that we have very strong sales from the supermarkets and home improvement stores. And that is affecting the average of the company. In fact, those are the type of stores that are increasing. It has higher sales than revenues in percentage of what they had in 2019. So that is decreasing the average occupancy cost. For the rest of the stores, the sales and revenue are in line with the GLA opened to the public, and they are behaving the same way as they did in 2019. I would say that the only type of stores are lagging behind is movie theaters and children entertainment type of stores. But the rest, let's say, apparel and technology. In fact, restaurants and food courts are also behaving in line with the GLA opened to the public. We have received several questions about restaurants and food courts. And it's impressive to see how people wants to come back to restaurants and food courts. The problem is that the capacity is restrained. So taking into consideration the capacity that they have, the percentage of revenues and sales is in line with that capacity. So having said that, our -- what we are seeing is that occupancy cost for the company should return to the same levels as we had before. And probably the thing that is affecting us is more supermarkets and home improvement stores. But in a positive way, right, because they are having higher sales than revenues.

Francisco, I'll take the first question of [ Gerald ] about this, what is happening. I would say, [ Gerald ], that the -- when you are talking with the tenant, which has to make a strong commitment, I mean they have to invest a lot in the store and they have to sign a very long contract, there are some concern. In the other cases, I don't think the situation, the political situation is something that is driven the decision. But in those cases, what -- where the store are being and they have to invest a lot to put the store in the right fashion. And they have to commit in a long tenant contract. Yes, they are waiting. And in particular, I would say there are a couple of decisions that in Chile, elections are right around the corner in November. And in Peru, still people is thinking how the new government is going to behave. It's too -- I think there is a lot of expectation at this point. And -- but nothing clear yet. This is my answer.

[Operator Instructions] It looks like we have a question from Tito Labarta.

My question, I guess, on the occupancy rate. Do you think you can get back to pre-pandemic levels? And how long do you think it could take to get there? I mean do you think as things open up, do you see that improving this year? And where do you ultimately get to? And how long do you think it takes given the different openings in the different countries?

I start saying that our -- I could think that the pre-pandemic occupancy rate, we are expecting to have that probably back at the, I would say, at the end of 2022, at the beginning of 2023. Right now, still -- I mean, on one hand, consumption is doing really, really, really good in the 3 countries. And as Francisco mentioned in the call, we are very happy with the idea that every time that we are able to open the shopping centers, people has come and the sales are pumping up. But on the other hand, there are some concern in the long run, what's happened with these economies where most of the economies in the world are having more debt that they have in the beginning of the pandemic period. So there is some question in there. But from now, what we are expecting is to start increasing the occupancy rate and trying to return to the pre-pandemic level probably at the end of next year, beginning 2023, I could say.

It looks like we have another question from [ Jonathan Kutras ].

Two quick questions on my side. First one is, has the company noticed any relevant changes in the mix going forward? How have these negotiations with new tenants been? You see the mix shifting even more towards services, entertainment, trying to think of any changes here risen by the pandemic? And number two, on leverage, right. Company continues to highly leverage close to 11x net debt-to-EBITDA. How many quarters do you believe that this might normalize, perhaps in line with occupancy rate at the end of 2022, 2023?

Okay. Thanks for your question, Jonathan. I'll take the second one. And Francisco, you pick the first one. And regarding to the leverage, it's -- yes, we are right now a little bit below 11%. For now, our main focus is trying to recover the EBITDA levels. And if we are right in our view, probably, again, I'm very connected with the second question that I already answered is we are expecting to recover pre-pandemic level at -- probably at the beginning of 2023 or something like that. So in that regard, probably we are going to recover our leverage at the pre-pandemic level, probably in some moment of 2023, hopefully before, but this, I think, is something that we believe we can do. So right now, our feeling is the EBITDA is moving in the right directions, and we are expecting better results for the rest of the year. And so this is pretty much what we are expecting on the leverage side.

Yes. And for the other question about the mix. What we have been seeing -- the pandemic for us is kind of a pause of a long-term strategy of increasing our mix in entertainment. We think that the future of the mall makes more sense as a place where people wants to go to have fun, to spend their time. And during this time of the pandemic, I think that we have been focusing probably more on transaction. But as we open, we see that people is trying to spend time in our malls again. And as I was saying, the demand, for instance, for restaurants is quite important. The problem is that they have lower capacity. So we still think that we should be moving toward -- start increasing our -- continuing, in fact, increasing our percentage of entertainment and restaurants and -- in our malls. Although saying -- having said so, it's important to note that the location in this industry is very important. So it's not the same what is happening for Parque Arauco Kennedy, and how we see a mall in a secondary city or other type of malls. So it's not the same solution for each mall. So what we do is that we try to have the right mix for each location. And we evaluate that in a very continuously process. People in Parque Arauco is always analyzing the mix, the right mix, and our focus is try to add value to the people that lives in the surroundings of each mall.

So it looks like we have another question from [ Ivor Avanes Gambor ].

My question is regarding new development of shopping mall centers. There are some projects that are tending to be carried out in Peru, such as La Molina Lifestyle in Lima and other projects of MegaPlaza Mall in Huaraz. Do you have information about these projects? Also how has the completion of Larcomar being progressing? I remember that in this mall, there are new cinema Cinepolis, I remember. And other is the new space -- the mall, there are a new space for restaurants.

Okay. I take the questions is regarding -- thank you for your question about the new developments in Peru. And right now, this -- the 3 assets that you incorporated in your question is our projects that we are working on right now. In La Molina, we are in the -- in working and trying to have all the approvals, all the required approval from the authorities and also try to make a good case on the profitability side. In MegaPlaza Huaraz, we are also working on there. I think it's a long shot that one. So I'm not expecting to have news soon. And in the transformation of Larcomar, we are working on that. And yes, the cinema is coming. It's coming at the beginning of the next year. So yes, these are 3 cases that -- as you mentioned, this is something that we are working on right now. And they have different stages of development. I would say the MegaPlaza Huaraz is one, which is the -- which is in the lower end.