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

Good morning, and thank you for your patience and taking the time to connect to Parque Arauco's First Quarter 2022 Earnings Call. I'm Lauren Brown, Head of Investor Relations, and I am 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 only. And to start off today's discussion, I'm going to pass the call over to Claudio.

Thanks, Lauren, and good morning, everyone. We are very sorry with the inconvenience. And the good thing is this technology things not occur in our shopping centers, which are physical transactions. So this is an extra reason why you have to visit our shopping malls. There is no technological issue there. And okay, we are going to try to recover the time that you waste -- we wait. So I'm starting this presentation on this conversation, and I would like to start with remembering our Vice President Juan Antonio Alvarez, who passed away on April 19. And his tenure will be remember for is recognized leadership, his constant concern for people, genuine kindness, his prudence in decision-making and a clear strategic vision. These great attributes allowed him to successfully lead the company for the last decade. So we are very sorry for that. But I mean, the company has to follow. So yesterday, the Board decided Duncan Grob, our Legal Counsel as an interim CEO in the meanwhile. So now let's move on to the quarter, to our numbers. We achieved in this quarter, I mean, in April, actually, is our 40th anniversary milestone. Our story began with the construction of the very first mall in Chile, Parque Arauco Kennedy. Thanks to the vision and perseverance of our founding shareholders, this mall remains one of the most important shopping centers in the country to this day. Currently, Parque Arauco is one of the largest real estate platform, as you all know, in the region with 55 assets distributed between Chile, Peru and Colombia. The company maintains a continued focus on profitability and sustainability growth to this day. Additionally, in April, we probably received new recognition from Great Place To Work that highlighted by Parque Arauco Colombia as the second best company to work for women. While in Chile, we rank 15th in the general ranking. So the results of the first quarter of 2022 confirmed the return to normality with operational figures above the values of 2019, obtain prior to the pandemic. In addition, occupancy increased to a level above the first quarter of 2019, which practically all the spaces opened to the public. Our tenant sales continue to have a positive trend and are above pre-pandemic level. And this quarter, they grew 44% compared to the previous year and reached 19% more than what was obtained in the same period of 2019. This quarter, our income grew 56% over the previous year and 8% above the level obtained during the first quarter of 2019 in the pre-pandemic times. The stable fixed rental component represents 85% of our total income received during the quarter. And at the country level, they grew -- the growth in income when compared to the first quarter of 2022 for to the same period of the previous year was 53% in Chile, 56% in Peru and 50% in Colombia, in local currency and in nominal terms. As a result, of the positive operational flow and the higher level of income, we observed positive EBITDA figures, nearly double what was obtained in the same quarter of the previous year, representing a growth of 19%. The EBITDA level are also 4% above the level of the first quarter of 2019. This result is due to maintaining a conservative strategy and release of bad debt equaling CLP 347 million. At the FFO level, we also observed an increase reaching CLP 31,485 million, which demonstrates [ same store ] growth of 242% compared to the previous year, thanks to the higher level of EBITDA and higher financial income. In sum, the result of the controlling portion reached CLP 6,430 million, increasing strongly over the result that we obtained in the same period of the previous year. In relation to debt levels, the downward trends in the ratio of the net financial debt over EBITDA continued throughout the period falling to 5.96x by the end of the -- this quarter. This drop is due to maintaining a stable debt level and a sustained recovery of EBITDA. This ratio is calculated considering the last 12 months of this time frame. In April, we also highlight the opening of our new Parque Alegra Shopping Center on April 21, located in the city of Barranquilla, Colombia. The shopping center is 51,000 square meter and offer a mix of service and experiences that include stores such as Falabella, Arturo Calle, Cine Colombia and an Olympica supermarket. The investment in this mall, of which we have 52.5% ownership reach around $115 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. Thanks.

Thank you, Claudio. So now entering to the earnings report. First of all, I would like to highlight the 40 years anniversary for Parque Arauco. We are celebrating this anniversary in April. It has been 4 decades of history in Parque Arauco's successful history that started in 1982 with the first mall in Santiago. And after that, the internationalization of Parque Arauco entering into first of all in Argentina, but then Peru in 2006, where we have now 20 assets in operation and then in 2010, our arrival to Colombia. It has been a history of growth. And today, with the normalization of our figures and the decrease in net debt-to-EBITDA, we are pushing forward in order to continue growing as a company. In the operational side, I'd like to highlight that the figures are back. We are continuing the same trend that we saw in the third quarter of '21 and the fourth quarter in '21 with sales, income and EBITDA above 2019 levels. In the last quarter, sales were 19% above the first quarter of 2019. The revenues were 8% above the levels of 2018 and EBITDA 4%. So this is very important for us. And we think that the operation is back. And today, we are more worried about continuing the operation and improving our figures and -- than issues with the pandemic. In the financial side, we can see that the net financial debt has been -- continue being stable in this quarter, and the net debt to EBITDA is a little bit below 6x, 5.96x. So for us, it's also an important achievement of decreasing that ratio below 6%, and it's a ratio that we project in the following month to continue decreasing if we -- if the EBITDA is maintained in the current levels. Regarding sales, when we compare the sales against 2021, the growth is around 44%. In the last 12 months, a window is increasing 72%, is an impressive growth in sales. And we can see also positive figures in rents and sales in the same-store sales and same-store of rent in all 3 countries. The normalization has been similar in all 3 countries with Colombia, probably being the one with the better figures, then Chile, and lastly, Peru, but still Peru is also in the same levels of 2019. So we consider that the normalization has been seen all across the portfolio. Regarding contract management, we wanted to continue showing this part of the operation. The thing that is important in these times. So in the first quarter, if you can see in the first graph, we made changes in contracts for 5.4% of our GLA. And from that 5.4% of the GLA, 4% were in contracts with rent modifications, 0.8% in contracts with the term modifications and new contracts for 0.6% of the GLA, which was represented by around 60 new commercial spaces with new contracts in the quarter. You can see that the trend is quite stable in the contract with rent modifications. Also, the trend is similar than in the last -- in the several last quarters. And in terms of terms, also, we can see that the renovation, the renewals of contracts are also around 3 years, being have 0.4% of the GLA renovated between 1 and 3 years and 0.2% of the GLA renovated about 3 years for the contracts that had no changes in the rent. Regarding the EBITDA, the EBITDA against 2021, it's also growing very strongly by 92%. And in the last 12 months, is growing 162%. So it's also impressive figures. But it's showing that the company is returning to normal levels. The EBITDA margin is also showing good figures for all 3 countries and the consolidated is 71%. And that is a margin with -- that contains also a release in bad debt expense of CLP 347 million, but still a very, very good figures in margin. The release in the bad debt expense was also concentrated in Chile, while in Peru and Colombia were more stable in [ that side ]. Regarding then the consolidated results, for the period. The financial income is growing strongly to CLP 4,000 million from CLP 600 million in 2021. We maintained lower levels of cash. The cash level in the company today is CLP 280,000 million and were around CLP 400,000 million in 2021. So the level of cash is decreasing since we are no longer requiring such levels of liquidity. But the return of those investments is growing. It's growing in Chile, Peru and Colombia and with that, the financial income has grown also for the company. The financial expense is stable in the period as also the foreign exchange differences, that is also quite stable [ end of year ]. The share profit of associates accounted is the profit from Marina, which is increasing in 2022 against 2021. But as we can see, Parque Arauco was hit in some way by the increase in inflation in Chile, which then in turn results in higher adjustment of the debt that the company has in UF. In Parque Arauco, that adjustment for the debt is shown in the income and loss for indexed assets and liabilities, which in 2022 is increasing to CLP 15 billion from CLP 9 billion. The increase in the UF in the period, it was 2.3%, while in 2021 it was only 1%. So it's a direct effect from the increase in the UF and the result of the higher inflation that we are living in Chile. Taxes is increasing mainly because of the higher level of operations. And with that, the net profit of the company is CLP 10 billion with CLP 6.4 billion for the equity holders of the company. With that, I would like to pass very quickly to highlight the assets of the company where we can see that the trade accounts receivables is decreasing from CLP 43 billion, almost CLP 44 billion to CLP 37 billion, CLP 38 billion. And the bad debt provision is also decreasing by this CLP 347 million reaching CLP 13 billion. And lastly, I would like to highlight that the only covenant that we have in the company, the net financial debt to equity is 0.63x. The covenant really is 1.5x. So in the financial side, we are feeling comfortable with the net financial debt, again, decreasing below 6x. With that, I would like to pass the call to Lauren, who is going to review the asset-level results.

Hi, everyone. Here, you can see our occupation -- or occupancy levels. We are very happy to report that they are at 95.3% for the first quarter of 2022. And it's also important to highlight here that Peru's occupancy is now at 94.8%, recovering well after the departure of Paris last year. During Q1, we saw high growth in sales, revenue and NOI across the board. Arauco Kennedy, one of our most important assets, located in Chile experienced a 51.5% growth in tenant sales, 56.5% growth in revenues and 68.4% growth in NOI from the same quarter of 2021. Colombia as a whole, has continued to perform well with an overall growth in tenant sales and revenues reaching nearly 50% and the growth in NOI reaching 56.3% from the same quarter of 2021. And I would like to highlight some of our increased occupancy levels from the same quarter of last year. Larcomar in Peru is up 13%, and that is mainly due to the opening of the new H&M store. Lambramani is also up 13% in occupancy, and that is due to the new tenant [ Hiper Asia, Hyper Asia and Uncile ], which is a university. Cajamarca is up nearly 20% in occupancy, and that is also due to the Hyper Asia store, taking over the spaces that were left by [ produce ]. And then also in ICA, we experienced a growth of occupancy of 12%, and that is also due to the entrance of a new H&M store as well. And then finally, in Sopó we experienced 15% growth in occupancy and one of the stores highlighted that entered in was an American Eagle store. We are very excited to announce that on April 21 of this past month, we had the grand opening of Parque Alegra and this is one of the biggest malls in the South of Barranquilla, Colombia. It has over 270 stores. It also has very diverse gastronomic offerings and one of the first gastronomic markets in the area. It has a total of 51,000 square meters in additional GLA. And well located in the city. And the opening was very successful. The first day had over 30,000 visitors before 5:00 p.m. and lines outside waiting to get in. And as you can see in the bottom photo, it was quite crowded throughout the day. There was a beautiful inauguration session with dancers and shows as well. So we are very happy about the successful opening of Parque Alegra in Barranquilla, Colombia. And as Claudio mentioned, we were honored again this year as a Great Place To Work, highlighting that Parque Arauco Colombia is the second best place to work for women. And then in Chile, we earned the -- we ranked 15th in the general ranking. Another notable highlight that we achieved is that for the third consecutive year, we were admitted into the sustainable yearbook (sic) [ Sustainability Yearbook ], and this reflects our efforts in ESG, which has been very important to us over the years. And it's notable that over 7,500 companies were evaluated to be admitted into this year book and only 716 were chosen due to their highest ranking and ESG performance. So we are very happy as well to have achieved these recognitions in this first quarter. And that concludes our presentation for today. So if anyone has any questions, we can do a question and answer now, and we will unmute you or you can unmute yourself if you would like to speak, and then we will start answering your questions.

I see Marcelo. Would you like to ask a question?

Yes. Can you guys hear me well?

Yes. Marcelo, we can hear you great.

So 2 quick questions. The first is if the company can comment a little bit about April? You mentioned that first quarter was pretty normal, I guess, April the same. But just wondering if there is even an improvement if we look at maybe foot traffic and parking compared to what we saw in the first quarter? And the second question regarding the Peru occupancy, right. You mentioned a couple of tenants that took the space that Paris left. If we think about the lease and the rents that those new tenants are paying, I mean, can you share with us any metrics regard -- are they above, in line, much better? Just to understand if the -- if there was necessary to do any type of concession to bring those new tenants? Or if the rents might actually be even better than what we had before? So just 2 questions.

Yes, thank you, Marcelo, for the questions. Regarding April, what we have been seeing in the month is that April is behaving in the same way as the last month. We are not seeing an important difference about that. The sales figures, this information that we receive at the end of the month, we still don't have that information. But from what we are seeing in profit and in the operational side, I think that we are maintaining this new -- the return of these normal levels that we have been seeing in the last quarters. And then regarding Peru, this increase in occupancy, with this increase in occupancy, we are finishing the new contracts for the spaces that Paris left. We have 2 floors in -- 1 Cajamarca and then Lambramani that it's the third floor that Paris was having, and those are spaces that we are renovating for new or other tenants. So in that sense, we think that we see that all the spaces are again occupied by tenants and we are renovating some of the space for new tenants. Regarding the rents, in total, we are seeing similar levels of rents. It's not a -- we are not seeing changes importantly in that matter.

I see [ Javier. Javier ] [indiscernible]. [ Javier ], you can please unmute yourself?

Do you hear me?

Yes, we can hear you.

Congrats on this great quarter. So I just have 2 specific questions. First, I know there was a reduction of approximately 7,500 square meters in total GLA versus fourth quarter '21. It's 1,500 square meters combined between Parque Arauco Kennedy and Arauco Estacion and 6,000 in Peru. So I just wanted to know if there is a specific explanation for those reductions? And second, thinking especially in Chile, I wanted to ask how significant contributions expenses are for the company? And are you expecting concerning increases for the upcoming periods?

Yes. Okay. Regarding the GLA, the reduce in Peru, as I mentioned before, is related with the -- these floors that left, Paris, but today we are renovating those spaces for new tenants. It was the spaces that Peru occupied several floors in the mall. But then we accept new contracts with new tenants for one of the first or second floor. And then we have a third floor that has to be renovated in order to accept another type of tenant. And because of that, we decreased the space in the meantime while the spaces are ready to be leased again. The spaces in Chile and is -- mainly it's from the expansion in Kennedy. We are changing some spaces in Kennedy, basically because of the expansion that we opened the spaces of the new Falabella and the Sector Rosario and then we have to close some other spaces in the old Falabella that has to be renovated in order to continue with this project, right? And the second question. Yes. Can you repeat the question again because I didn't get it right.

I wanted to know how significant contribution expenses are for the company. And if you are expecting increases for the upcoming periods? Because I know that in the in the financial statements, you have like this line of extraordinary taxes in other expenses by function, but not sure if the contribution expenses are included in that line? Or is it on a different item in the income statement?

I can have, the contributions are cost of sales in our case. In the extraordinary taxes is -- there are some contributions that are in that line. When the land is not built yet. So when the land is not generating EBITDA, contribution is not part of the EBITDA. So this is basically for land which is not being built for now. And we are expecting to have more expenses on contribution, that's for sure. And so everybody received already the new fiscal evaluation of the land. So we're -- we have that on budget. But it's a very challenging situation because it's something that we don't control. And everybody knows because of the situation of the country, that is going to happen. So we are trying to accommodate those expenses. And this is a situation in progress.

Perfect. And then Claudio, just to have an idea of maybe how much it represents, maybe over revenues or something like that. It should be when you go to the details on costs maybe under the line of others?

In cost of sales, is a contribution. So it's in the second line, the financial expenses.

I know in that line of expenses, you also have other expenses that are considered...

In cost of sales -- yes, in cost of sales is mostly -- I mean, it's salaries, labor costs is in cost of sales. It's maintenance in -- I mean, safety, security, and I think that those are the main accounts there. So most of the -- I mean, the most important expenses are in cost of sales. The fewer ones are in administrative expenses. It's not mentioned, there expenses is insurance, it's marketing. So it's very little there. The most important things are in the cost of sales.

Perfect. But any idea just to close -- any idea of how much contributions represent from the total cost expenses? I mean maybe a 10% correspond to contributions, [ training ] I don't know.

I don't have that number in my mind now.

No worries.

And the situation is a little bit tricky because we have some -- I mean, we have the right to press past part of that cost to our tenants. But it's -- I mean, somebody has to pay the bill. If they pay the bill, we don't have the chance to increase the rent. So this -- there is one size what the contract says and on the other side, what the economic fundamental says. So I believe more in economic fundamentals. So this is -- this situation is bringing in a lot of cost to the industry, and we need to deal with it. So for -- meanwhile, the sales of the tenants are doing okay, probably, we are going to be able to accommodate those expenses. Either sales are not doing well. We are in trouble. This is pretty much it. But the math still is a little bit tricky. So -- because we have the chance to move some part of that cost to net -- the tenant but not for every tenant because it depends on some restrictions that we have in that postponed. So the math is not very direct, I would say.

Are there any other questions at this time? Anyone else? I see Sebastian. Yes.

I've got 2 quick ones. First one will be in regards to the variable part of the revenues. How should we think that is stabilizing going forward? We saw from fourth quarter to the -- prior to the first quarter. The increase on the share of the variable rents within total risk. So that will be interesting to see how that should evolve and how contracts are expiring in the pacing that had within the tenant situation. And the second one, just some regards of indebted clients, that provision last year was very meaningful and it started to revert. What should we -- should be a number that should we feel comfortable with? Even though the last few quarters, you have been showing recovery from that. So at what level that should be stabilized in terms of our cost? That's from my side.

Okay. Thank you, Sebastian, for the questions. Regarding the variable part of the revenues, today we have around 85% of our rent is the minimum rent. So we have only 15% of the revenues is the variable part of the rent. I think that we are moving forward. Our idea and the strategy has tried to [ strengthen ] our fixed part of the rent. So in the future, I would like to see the 85% increasing a little bit in the future. But that is a long-term strategy that we are pushing in the company. The pre-pandemic level was -- around 12% of the rents were variable, today is 15%. So we are not that far from what it was in pre-pandemic levels, and I think that we are moving in that direction. And then regarding...

Expiring contracts?

The other part -- sorry.

Bad debt provision.

Yes. I'm sorry. Yes, the bad debt provision this quarter, we released CLP 347 million in the bad debt provision. And the bad debt provision amounts to CLP 13 billion. The collections and the accounts receivable has had a very good [ visual ] this month. And we have been seeing, in fact, during this period of the pandemic, we have been seeing that the collection in the company has been in line with the invoicing. And with that, we are maintaining some levels of accounts receivable, but we still wanted to be more conservative. And because of that, we increased our provision, at the provision to the level that we have today. The reasonable thing to thing to consider is that bad debt provision will continue decreasing in the future. But we want to take it step-by-step in this matter. What is reasonable to think is that the bad debt provision should return in some point of time also to pre-pandemic levels. We are not seeing changes, important changes in the behavior of the account receivables. So the question is whether it's going to be plus or it's low. We are choosing to be conservative on that as well and with this bad debt provision in a long period of time. And that is just to make sure that we don't need to return to make a new bad debt provision because we are more -- too aggressive in this part. So for me, it's going to take 1 year or 1.5 years is still to return to pre-pandemic levels.

If I made that one quick one. On regards of the opening of [indiscernible], do you think that, that will have an impact on your Kennedy asset?

I'm sorry, can you repeat the question? It is very hard to hear you.

Sorry, I was referring to the -- next to the open [indiscernible] mall that is here from the -- it was in [indiscernible] just trying to figure out if when the Costa Center was opened, there was some impact on traffic and on sales with Parque Arauco Kennedy. Any reason that this may happen again with this new asset coming into the line on the -- currently that you have?

Yes. Well, one thing that we can say is that Kennedy -- from the pandemic, we have been seeing the value that the location has and how we have been seeing the behavior in Kennedy with the new Falabella and the focus on the mix, we are seeing that Kennedy is having a very good time. Still, again, there will be more competition from this mall that you're mentioning in [indiscernible] from the [ Territoria ] company. But we are focused on having the best mix in order to have the people coming to the mall. And so we're still working on that on that direction in order to have the strongest mall in the city.

Yes. We still don't know what is going to be exactly the commercial mix or [indiscernible]. The word what we have heard from The Street, it's more like a restaurant-based shopping center with a lot of focus on the office district that is near to them. So -- and I think it's a little bit far from our shopping center and after the pandemic, as Francisco was mentioning, we believe that most of our clientele that is coming to the shopping center right now is more related to our neighbors, which are far in -- not in kilometers as far in time to get to the [ Territoria ] -- the area.

Are there any additional questions at this time? If not, then that concludes our earnings call for the first quarter of 2022. Thank you very much for joining us today, and feel free to reach out with any additional questions. Have a great day, everyone. Thank you.

Thank you.