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

Good morning, everyone, and thank you for taking the time to connect to Parque Arauco Fourth Quarter 2021 Earnings Call. I'm Lauren Brown, the Head of Investor Relations, and I'm joined by Claudio Chamorro, CFO; and Francisco Moyano, Corporate Finance Manager. 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 uses. And to start off today's discussion, I'm going to pass the call over to Claudio. Thank you, Claudio.

Thanks, Lauren, and good morning to everyone. And this is the call for the fourth quarter results. And the good news is we have seen a recovery to pre-pandemic level. And in the year, almost internally open in all 3 countries. While the first half of the year was marked by significant closing, particularly in Chile, the fourth quarter experienced a near complete reopening of occupied GLA across our shopping centers. And 2021 was a dynamic year for our malls, with the opening of new stores, such as H&M in Larcomar, the upcoming opening of the new [ Osley ] store in MegaPlaza Norte, and the new flagship Falabella store in [ Palcaraco Gener ]. The latter with 25,000 square meter is the largest department store in the region, which reinforces the commercial mix and reflects in our opinion, our permanent search for brands and product that our customers are looking for. We are also pleased to have confirmed contract for about 70% of the space that was previously back-end after the departure of [indiscernible] (0:02:21) in Peru. And as a result, we are closing the quarter with 93.6% occupancy. As a direct result of the reopening, we saw a strong tenant sales figures that were higher than 2019. And revenue and EBITDA figures were also higher than 2019 or pre-pandemic level. This once again confirm the resilience of the shopping mall industry, and clearly illustrate that when the malls are open, people return to our locations. We conclude 2021 with a consolidated EBITDA of [ 119 million ] CLP 19,000 million for the year. 79% of what was obtained in 2019, and representing 81% growth with respect to the EBITDA achieved in 2020. The profit of the controlling shareholders reached CLP 23,438 million in 2021, increasing significantly compared to the previous year. Fourth quarter, the results are equally robust. The company's EBITDA total, CLP 47,289 million in the quarter, 112% of what was obtained in the fourth quarter of 2019. And with a growth of 64% when compared to the same period of 2020. Additionally, sales in the all market registered values of 128,000 of the year 2019, and total CLP 744,145 million, which in turn represent a growth of 33% compared to the fourth quarter. As a result of the positive sales numbers, revenues reached CLP 6,313 million in the quarter, 104% of what was obtained in 2019, and 39% growth compared to the fourth quarter of the previous year. In local currency, revenues in Chile were 114% of those obtained in fourth quarter of 2019, 113% in Colombia and 94% in Peru. During the fourth quarter, higher billing was aligned with collection level, reflected in account receivables that are in line with what was expected for the period of the year. Cost of sales increased 24% compared to the same quarter of previous year, mainly due to the operating cost that increased as more stores in our shopping centers opened. In contrast administrative costs decreased 48% compared to the previous year, positively impacted by a release of provision of bad debt was made possible due to the positive behavior that we have seen in our accounts receivable. Finally, in terms of cash flow, we have also observed positive results in the quarter, obtaining an FFO equal to CLP 42,347 million, representing a growth of 86% compared to the same period of the previous year. I would like to highlight some exciting news for this quarter. The first that I want to highlight is we signed an agreement for a multifamily project in Bogotá, Colombia, which marked the beginning of Parque Arauco stand-alone investment in users other than shopping centers. The investment consists of our residential building with 132 units for an approximately amount of $11 million. The second news that I would like to highlight is in terms of sustainability, in December, Parque Arauco become the first real estate company in Chile to commit -- to implement science-based target methodology to reduce its carbon footprint. Along with this, for the sixth consecutive year, we have been recognized for our management by being included in the Dow Jones Sustainability Index for Chile, MILA and emerging markets. 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. Francisco?

Yes. Thank you, Claudio, and good morning, everybody. So I would like to start the presentation in Slide 6. In this slide, very, very quickly, we can see that we are back to pre-pandemic levels in the chart, in the chart that is in the upside of the of the slide. You can see that we had a GLA -- of around 80% of the GLA was opened. And then the revenues were at 104% above pre-pandemic levels and sales, 112% above pre-pandemic levels. Also in the chart -- in the other chart, we can see the open GLA in Parque Arauco. And it's clear that in the last month, we have been almost -- with almost all the space open to the public. In the fourth quarter, the average open GLA was 84%, but that also is calculated over the total GLA of the company. So it's over the vacant and the occupied GLA. So 84% for us is almost all the spaces open to the public. Now in Slide 10. This is the second quarter that we include this information. We think that it's important for the market to understand how we're managing our contracts. In the year, we have been negotiating contracts for 25% of the GLA. That is 267,000 square meters. Of those, 25% of GLA, 8% of the GLA were negotiations of contracts with term modifications only. And in the chart that is in the right side, you can see that around half of it was negotiations close to 1 to 3 years, and the other half was above 3 years. Those type of negotiations were for contracts that are for type of contracts that usually are around these terms. You have to consider that anchor stores that has durations above 12 years is around 15 to 20 years. So the rest of the contracts are between 3 to 5 years. So this is kind of the type of terms that we had also before the pandemic. Then 13% of the GLA was negotiated changing the rents, not only the term but also the rents. And for that, in the chart, we are showing the amount of GLA that was negotiated with rates increasing and the amount of GLA with rates decreasing. And you can see that we have been having a positive trend in this matter with contracts decreasing rates being a fraction of the contracts that are increasing. Also complementing the dynamic year that we have had in 2021, 4% of the GLA was renovated with new contracts. That is 41,000 square meters. Now passing to Page 14. This is the -- our consolidated income statement. And here, I would like to start first with the EBITDA. The EBITDA of the quarter was CLP 47,289 million with revenues of CLP 60 billion, increasing 38% of revenue last year. In the other line, it's the cost of sales. In cost of sales, we have a cost of CLP 10 billion, and is increasing 24%, mainly because of the higher level of operation. The administrative expenses is around CLP 4 billion, decreasing 48% from the same quarter of last year. And that includes also a release of our bad debt expense of around CLP 2 billion. As Claudio mentioned, that is because we have had a good development of our accounts receivables. The billing and the collections were in line also -- in the last month and also in the fourth quarter, and that has allowed us to start releasing our bad debt provision. Now in the nonoperational part of the income statement. The financial income is increasing this year to almost CLP 3 billion. We have had higher investment rates for our financial investments. And even when we have lower cash levels, we are gaining a higher financial income. The financial expense is also decreasing to CLP 10.5 billion. Last year, we were decreasing our cash by prepaying some part of our debt. That increased our financial expense in 2020. Even when in 2021, we are also doing some of the prepayments of debt, is in a much lower level, and that is why the financial expense this quarter is almost a value that we can expect to have in the future. It's a regular level of financial expense. The income and loss for index assets and liabilities is also increasing this quarter to almost CLP 20 billion. That is because of the higher inflation that we have had in 2021. That higher inflation is applied to the adjustment to -- for our debt in U.S., and that is producing this level of adjustment in this line. With all, the net profit is CLP 43 billion. And for the equity holders of the company is CLP 25 billion, increasing 70% from the same quarter last year. For the year, the equity holders -- the net profit for the equity holder is CLP 23 billion, and the EBITDA is CLP 419 billion, being around 80% of what we had in 2019. Now passing to Page 19. Here, we included the same chart as the previous quarter, with the evolution of the cash and the EBITDA. As I said, we have been continued decreasing our cash since the EBITDA level is recovering, and we feel more comfortable having less cash. So the prepayment that we have been doing in our debt is only for short-term debt. So in some way, we are advancing to prepay those obligations that the company have for 2022 and 2023. In the lower chart, in the same slide, you can see that the net financial debt in green is very stable. The gross debt has been decreasing from the second quarter of 2020 because of this prepayment of debt. We increased the debt in -- at the beginning of the pandemic, but all that cash was maintaining cash in the company. That is why the net financial debt was very stable. And today, we had a net debt to EBITDA of 6.75x. And that is produced not because of an increase of a net financial debt, but because of the lower EBITDA in the last 12 months of the company. If we continue having this level of EBITDA in the next following quarters, this ratio should continue to be decreasing in the following month. With that, I'm ending this -- the review of the financial results. And I would like to pass to Slide 35, where we included a case study for the evolution of e-commerce during the pandemic. We have been seeing a lot of press around this matter. During 2020 and 2021, the level of e-commerce has increased a lot in Chile, Peru and Colombia and in the world in general because of the closure of all the physical stores. So we wanted to make it a study in order to understand what are the figures and the numbers behind this trend and understand -- and try to give some light of what is happening today in this industry. So the first chart that we are showing in the left side is an evolution of how all the industry, the retail sales for Chile is divided between channels. We have in green, the mall -- the sales that are produced in mall operators. For that, we are including figures for the mall operator that has a public figures in Chile. And then we have the e-commerce in blue in the other side of the chart, with information that is coming from Euromonitor. So we can see that e-commerce is increasing from 6% in 2018 to 7% in '19, and then increasing faster to 11% in 2020. We still don't have the figure for 2021. 2020 was a year where physical stores were closed because of the pandemic, and people didn't have all the options that have today to make their purchases. But with that growth of e-commerce, the behavior in sales for mall operators is in the other side, and is leading a big part of the retail sales in other type of retail. It's important to say that the sales in the retail industry is in malls and the other part in e-commerce, but there is a large part that is happening in other type of retails. So the question that is [indiscernible] to be answered in this evolution is when 1 channel is increasing, what is the other channel that is decreasing. Or if the total amount of the industry is also increasing. So between 2018 and 2019, we see the e-commerce increasing, but then -- but more operators are also increasing in total amount of sales. Now for 2021, in the chart that is in the middle of the slide, if we compare the mall operator sales from -- for the third quarter of 2021 against the third quarter of 2019, we're also seeing that sales in malls operators are increasing. The online penetration estimated by the Santiago Chamber of Commerce for 2021 is 13%. So the question then is, if most are increasing sales from 2019 to 2021, and online penetration is also increasing to 13%, then that increase in e-commerce probably is coming from other channels of the industry. Or the industry as a total is also increasing. Now passing to the next slide. The chart in the left side, we are seeing the sales evolution for Parque Arauco. As we have been mentioning for the fourth quarter, we are increasing the sales in Parque Arauco for Chile in 23%. Then the chart that we have in the middle is the sales for department stores in Chile. That -- those department stores is also coming from public information for retailers that has this information in Chile. And for the one that has more than 1 line of business, we are only taking into consideration department stores. So the idea was to analyze, what is happening with physical stores and online sales for those retailers. We usually see in the press an information that online sales are increasing. And in fact, in the blue bars, we can see that e-commerce sales are increasing fast, and very importantly, during the last month. And comparing the third quarter of 2019 with third quarter of 2021, it's [ increasing ] 186%. But one thing that we are not hearing much is what is happening with the physical sales at the same time. Physical sales, if we compare the third quarter of 2019 against the third quarter of 2021, the physical sales for these retailers are also increasing a lot and is, in fact, 44% when we compare the figures. So what we are seeing is not only that online sales are increasing, but physical sales are also increasing. And it's also interesting to see what happened in the second quarter of 2020. Second quarter of 2020, we saw an important decrease of physical sales, while increasing online sales, but that was because physical stores were closed because of the pandemic. And then the third quarter is increasing in sales, but probably also because physical store were partially open. And for the days that we opened, those physical sales were produced. In fact, during the pandemic, we have been learning that once we opened our malls, we saw people coming back very fast, and sales happening very fast. So the analysis that we did in the right side chart is that we compare the sales for the department stores in blue, those are the sales for -- in blue is -- in fact, is the open GLA -- no, I'm sorry, it's the department stores -- online sales -- I'm sorry. It was the -- in blue is the department sales, online sales. And in Orange, it's open GLA for Parque Arauco. So we can see that there is a negative correlation between the online sales that are produced in the department stores with the GLA that we have opened in our malls. Once -- in times where we were mostly closed, online sales were thriving. When we open the malls, we saw a decrease of the online sales as a percentage of the sales for that quarter. So with this information, we are trying to give more light to what is happening with e-commerce in this industry. And in the next slide. We are also trying to understand what is happening as an industry as a whole and what -- how has been the evolution. In the blue line, is the penetration then the online penetration for these department stores in Chile. So as we mentioned, we saw an increase during the pandemic and now a decrease now that physical stores are being mostly open. And we can see that the trend that we had before the pandemic, it seems that is being followed now that we have the physical store mostly open. In the chart, in the middle side of the slide, this is the information from the U.S. market. And for the U.S. market, we are seeing the kind of the same behavior during the pandemic, an increase in the red line, an increase of the online sales. But then if we see the trend from the previous year of the pandemic, it seems that the trend is continue for the future because of the -- considering the rate of penetration that we are having in the last month. And -- okay. So with that, I would like to finish the explanation of this study. I hope that this is giving some information for your analysis. And now we're passing the call to Lauren, that is going to talk about the information from mall by mall.

Hi, everyone. Let me just jump back. Sorry to make you sick. So today, I'm going to talk to you about our occupation. So very excited to lift some numbers for you. We're happy to report occupancy levels are at 93.6%. When Parque left Peru, they left us with 25,000 Metro square meters that were vacant, and that was about 6% of our total Peruvian GLA, and 2% of the consolidated GLA. So we're happy to report now that we have signed contracts for 70% of this phase that was previously occupied by Parque. And if you look, for example, some highlights I would like to point out is MegaPlaza Norte in Peru is now at 96.4% occupancy, and that is a great figure moving for. So in addition to our occupancy, I would like to talk about how we did in sales, revenues and NOI. So during Q4, we saw high growth in sales, revenues and NOI, all across the board. And if you look particularly at Arauco Kennedy, which is the first line on the top, which is one of our most important assets located here in Santiago, Chile, we experienced a 51.5% growth in tenant sales, a 44.8% growth in revenues and 46.6% growth in NOI from the same quarter of 2020. So these numbers also reflect a really high growth in comparison to the results in 2019, which was a pre-pandemic year. So Q4 2021 results represented an increase of 46% in sales, 16.7% in revenue and 21% in NOI compared to 2019. And that's just at Parque Arauco Kennedy. But if you look at the numbers across the board, we are seeing results that are similar in all of our malls. So now I'm going to talk a little bit more about our occupation in mall, Parque Mall. So if you look here at Arauco El Bosque, here in Chile, we're very pleased to say that we're almost at 100% occupancy here. And if you go into Peru, again, at MegaPlaza Norte, we have now increased to 96.4% occupancy. Larcomar also has grown in their occupancy from -- to 93.2%. And previously, last year, it was only at 80.2%. Also in Peru, again, these are worthy of highlighting because this is where Perez had left. In El Quinde Cajamarca, we see that we are now at 92.4% after last year being at 75%. And also going down to Colombia in Sopó, where last year, we were only at 59% occupancy and now we've increased to 72%. So our occupancy is rising due to new contracts being signed and more spaces opening. So now jumping to one of my favorite slides. We are pleased to announce that we opened Sector Rosario here at Parque Arauco Kennedy. And this is a very special moment because not only did we opened this part of our mall, which added 2,000 square meters of GLA. In addition, we opened the flagship Falabella store, which is the largest department store in the Latin American region, and that store alone is 25,000 square meters. What is notable about this is, is that the Falabella store is very innovative, and represents an omnichannel experience that we are hoping to continue throughout all of our malls. So we are very excited about this opening. Please, if you are in Santiago, and if not visited Sector Rosario yet, please go. It is very beautiful and there are lots of opportunities to take photos, as you can see here in this slide. So speaking more about our future development. As I mentioned, we just did Sector Rosario. So previously, when we had looked at our Kennedy development, we had spoken about it in phase 1 and phase 2. However, now we are referring to our Kennedy development in breaking down these spaces. So we just opened the Sector Rosario phase. Next is going to be the development of the towers, and starting that process, first, we are going to be investing in rehabilitating what was the old Falabella space and making that commercial space in addition to creating parking spaces below the old Falabella and then continuing on with the towers. So the project is still in definition as we are defining it as we go. But next up is going to be converting the old Falabella space into commercial. And then another thing to note, as Claudio also mentioned, we did sign the contract for our new multifamily project in Colombia, which although it is not very large in terms of an investment in terms of money, it is a really important project for us because it marks our first stand-alone project that is not connected to them all. And it's also our first multifamily project, which we hope will be our first of many. And skipping ahead, again, Claudio mentioned these really great sustainability achievements that we have had. We are the first real estate company in Chile and the second in Latin America to be using the science-based targets in order to reduce our carbon footprint. We are, again, recognized for the sixth year as part of the Dow Jones Sustainability Index. And we've also received other awards such as the Alas and Equipares for our management in both Chile and in Colombia. So we are very happy that not only we had a great financial year and quarter, but also we were recognized in many ways in our sustainability. And that wraps up all that I wanted to speak about today. So I will turn it over to questions.

And I see Marko has his hand up. He always has the most questions for me. Let me see if I can unmute you.

Can you hear me?

Yes.

Yes. We can hear you.

I have 2 questions related to the recently approved property tax increase in Chile. So I would like to know if you have estimated the impact of this property tax increase over the company's P&L? And secondly, I would like to ask you -- when this property tax increase was firstly raised in 2020, did the company transferred most of these increase to tenant's monthly fees, the tenant's monthly maintenance fees? And are you planning to follow the same strategy this time with the new property tax increase?

Okay. Marko, it's -- regarding to your question, we are right now in the process of understanding how big it could be. This is applying since 2023. So it wouldn't affect us in 2022. But still, I don't have the numbers for the magnitude of the impact of that. And regarding your second question, at the end this is a tricky question in some point because we have to charge our tenant the market price. So I mean -- and that means that in some shopping centers, we can pass through all the costs to our tenants in order if we can. So it depends actually if -- how -- what is our position in the market is if we are in some way below the market price, we can transfer some of that cost. But if we are charging the right price, probably we don't have room for do it. So it's not really a rule. It's part of the transactions and it's part of the negotiations. So it's not really something that a black and white answer.

Okay. But in average terms, should we think that at least, I don't know, like most half of this tax increase that was priced in the 2020 was transferred just to have a reference.

We are trying to answer your questions. If we -- we have seen some impact in our EBITDA margin because of the property taxes. And this has been an important impact, in part of the worst margin EBITDA is because we were unable to transfer most of the property tax to the tenant. And that you can see if you see at time series from 2018 to 2021 probably is -- I mean 2021 is a difficult and 2020 is a difficult number because there is a lot of COVID-19 in there. But if you try to follow the trend, probably you will notice that with the increase on the property taxes, our EBITDA margin have been decreasing a little bit.

Marcelo, what is your question?

Two quick questions. The first, if you could comment a little bit about the results of Viña del Mar subsidiary and Desarrollos Panamericana and when we look at revenues, it was up like 33% year-over-year, but when it go to proportional profit, it was down 60%. So probably, I guess, a noncash item or something impacting the results here. Just to understand why the difference between the revenues and the profit. And if you can comment a little bit about how the year began, how January is looking like given this Omicron impact. So if there is anything different from the trends that we saw during the fourth quarter.

Okay. Thank you, Marcelo. Yes, I think it's a good point. This Marina and Desarrollos Panamericana. Marina is most of the number. The number that you're seeing in our financial statement is mostly Marina and Desarrollos Panamericana still is not having an active operation. So there is almost a little bit of cost from there. And in Marina, the EBITDA was wonderful in the year. I mean the 2021, Marina did really good, actually. And they are pretty close to the level of 2019, I would say. And however, it's a company with a lot of debt from -- and debt linked to the inflation. So this was an impact in the results. And also, the fair value was low. You can see you cannot see in our financial statement, the breakdown of the financial statement of Marina, but fair value was very different between 2021 and 2020, but it was a lot lower. So that's the reason of the result that is not very good, I would say. However, again, the operation is doing great. And regarding your second question, January 2022, we are seeing a little bit of less activity. Obviously, December is December. It's Christmas. But we believe that there is some impact of the Omicron in the behavior of people. People is more aware of something would happen, and people is doing something else. But we believe that the foot traffic is a little bit lower than we were expecting.

Does anyone else have any questions? Anyone else? All right. Well, any last words, Claudio or Francisco before we wrap up? And if not, thank you, everyone, for joining today of our earnings results report for our fourth quarter of 2021. And please feel free to reach out to me directly if you have any additional questions or comments, and we can set up the phone call. And thank you very much for joining us today, and we will be in touch. Have a great day.

Thank you. Thank you, and bye-bye.

Thank you, everyone.