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

Good morning, and thank you for taking the time to connect to Parque Arauco's Third Quarter 2022 Earnings Call. I'm Lauren Brown, Head of Investor Relations, and I'm joined today by Francisco Moyano, CFO; and Eduardo Perez, CEO of Parque Arauco. I would like to mention a few things before we get started. [Operator Instructions] And to start today's conversation, I'm going to pass the call over to Francisco.

Thank you, Lauren, and good morning, everybody. I'd like to start the presentation in Slide 6 of our earnings report. Just to highlight the graph that is in the upper side of the slide. We can see that we have been having a new quarter with a stable operational figures. In the graph, you can see Tenant Sales, Revenues and EBITDA against 2019 levels, above 100% means that we have higher figures than 2019. And you can see how all 3 figures are in normal levels now. And the EBITDA, the green line is also catching up with the revenues and the sales. The other important factor to highlight here is the figure that is in the graph that is in the lower part of the slide. Here, you can see the evolution of the financial debt. The gross financial debt is in blue and the red one is the net financial debt in pesos. But the important ratio here is the net debt to EBITDA, which for the third quarter of 2022 is now 5.4x. Returning to the range for the company, we feel comfortable between 5 and 5.5x. In the next slide, here, we have the Tenant Sales in the upper side of the slide, you can see that our Tenant Sales are growing 1.6% against 2021. But I'd like to highlight here that 2021, we had a very important increase of our sales. So the comparison base here is challenging, especially in Chile, where anchor stores grew in sales importantly in 2021. If we compare the figure that we are having in 2022 against 2019, the growth would be 23%. So at the same time, then that the sales are growing in 1% only against 2021, is growing 23% against 2019. And with that is growing in a reasonable level when you compare sales, revenues and EBITDA. The Same Store Sales and Same Store Rent for all 3 countries is also returning to more normal levels because the comparison base of 2021 is more reasonable. If you can see in the Same Store Sales for Chile is decreasing 9% is the same reason that I said before, 2021 was had a spike in sales. And you can see here that is then decreasing 9%, mainly concentrated in anchor stores. The Same Store Rent at the same time is growing 3% in Chile and in Peru is growing for Same Store Sales and rent 2% and 8% showing that Peru is also returning to more normal levels after the pandemic. And in Colombia, a very positive scenario where we are having Same Store Sales of 22% and Same Store Rent of 16%. We have there Parque La Colina, Parque Caracoli, Parque Arboleda, having very important figures for sales and revenues. Also, I'd like to mention that since the beginning of October, we have no COVID restrictions in Chile and Peru. Colombia in the past had less restrictions for COVID than Peru and Chile. So we're very happy that now in Chile and Peru, we don't have those restrictions. So the operation is also returning to a more normal scenario. And I think that, that will also -- will be a good factor for the operation in the fourth quarter. In the next slide, we have the Occupancy Cost. Here, we can see that Chile, Peru and Colombia is still in very reasonable levels. Chile is 10.4%, Peru, 7.2% and Colombia 10.3%. The difference between countries are -- it is because the different amount of space dedicated to anchor stores. We have different type of assets. And in Peru with more secondary assets, secondary city assets. We have more anchor stores and with that, the occupancy cost is also less than Chile and Colombia. With the sales returning to normal levels against 2019 and revenues also returning to normal levels against 2019. We have occupancy cost also in normal levels. If we compare these figures with the occupancy cost that we had in 2019, we can see that we are a little bit below those levels. In 2019, we were around 11% for Chile and Colombia and Peru was almost 8%. So with that, also, we feel that the occupancy cost is in reasonable levels for this quarter. Next slide. Here, we have the growth in revenues in '20 in the graph, you can see the comparison against 2021. In the third quarter, we still had some discounts in 2021 that decreased the level of revenues. Today, we in general have no discounts. And with that, the growth in revenues is 30.8%. We also included more explanation about how our revenues are linked to inflation. We did this because we wanted to highlight that our revenues are mainly linked to inflation in the -- we can see in blue the amount of contracts that are in U.S. and linked to inflation. The U.S. is a currency that we have in Chile, which is linked to inflation, so it's changing every day with inflation. And with that, rents are also growing with inflation. And you can see how we represent that in the blue line in the graph with the revenues growing with inflation continuously. That is mainly the contract that we have in Chile. In red, we have the contract that are adjusted annually, which are the contract that we have in Peru and in Colombia with catch-up in a yearly basis. And with that, also revenues are growing with inflation. The rest of the contracts, the 14%, which is the green in the graph, those are contracts that had no close for indexation with inflation, but those are mainly contracts with maturities for less than 2 years. So with those type of contracts, what we do is that in the negotiation, we made the adjustment to inflation. Next slide. About the EBITDA, the EBITDA is growing against 2021 in the third quarter for 21%. Here, the EBITDA is also growing in -- for the last 12 months in an important factor of 65%. The increase in revenue also was related with the increase in cost because of the higher operation. But at the same time, we have less bad debt provision release. Last year, we released MXN 1.6 billion, while in 2022, we are releasing MXN 270 million. At the same time, we have the opening of Parque Alegra, which has been very successful. But in the process of opening, we received all the costs of the [ full ] mall, well in the revenue side, we are -- we have this ramp-up process that is also affecting the EBITDA in this quarter. And in the same way, as inflation affects the revenues is also affecting cost and that is the main reason then for the EBITDA for this quarter. Next slide, we have the financial -- for the financial statement, -- we have a profit before the net profit for the quarter is MXN 10.9 billion, decreasing 6.6% against 2021. The EBITDA then is growing 21%, and in the nonoperational side, we have an increases in financial income of [ 580% ]. So it's an important increase, which is related with the financial income that we have from our investment from the cash. Also, we have the financial expenses that is growing 8%, mainly because of the debt that we have in Alegra in 2021, Alegra was a [ project ]. So its financial cost was part of the assets -- but now in 2022, we are having the financial cost of Alegra in this figure. In the same way as previous quarter, we have the impact of inflation represented in the income or loss from indexed assets and liabilities related with the debt that we have in Chile in U.S. The next slide only to highlight that in the third quarter, we have renegotiations which amounted for the whole year to 15.5% of our GLA. At the third quarter of 2021, we had 18% of the GLA renegotiated. So we can see that the amount of negotiations that we are having in 2022 is less intense than in 2021. And with that, we feel that we are increasing the terms of the contracts. We are having more longer term [ of ] the negotiations are also coming back to a more normal flow of renewals. Finally, I would like to highlight in Page 15, the FFO of the company, which is increasing 46% against 2021, it is, at the same time, above 2019 levels by 36%. This is because of the EBITDA growth of 21%, but also the financial income that is growing importantly in this quarter. And with that, I would like to pass the call to Lauren for more detail.

I would like to start off by highlighting the results from Colombia. In April, as we mentioned previously, we had the grand opening of Parque Alegra and [ Barranquilla ] Colombia. And this is the first complete quarter who were reporting results from this new mall, which is performing well for mall at its stage in maturity. As we mentioned, we are reporting consolidated occupancy level at 94.5% for the whole company. However, without the incorporation of Alegra, we would have reported about 100 basis points higher for the occupancy rates in the quarter. In Colombia, specifically, the occupancy for the quarter was 90.4%. And without the incorporation of Alegra, this figure would be about 500 basis points higher. Tenant sales in Colombia were 35% higher than the sales of the second quarter -- of the third quarter of 2021, and Colombia experienced 38.6% increase in revenue and a 15.8% increase in NOI compared to the same period of the previous year. Next, I would like to highlight results from Peru. It's important to once again mention that Peru's occupancy is now 94.8%, recovering well after the departure of [indiscernible]. Tenant sales in Peru are about 5% higher than those reported in the same period of the previous year. You can also note about an 80% increase in Tenant Sales at Larcomar and that is, again, predominantly due to H&M that recently opened in the beginning of the year. Peru also experienced 14.2% increase in revenue and a 14.6% increase in NOI compared to the same period of the previous year. Finally, I would like to highlight the results from Chile. As you can see, nearly all the malls are displaying over 95% occupancy rate. Kennedy, Parque Arauco Kennedy and Arauco Maipu are experiencing very high occupancy rate of 99%. And one of our lower occupancy rate is [indiscernible], but that is because they opened during pandemic. [indiscernible] occupancy is performing extremely well. In addition, Chile experienced an 18.8% increase in revenue and a 16.6% increase in NOI compared to the same period of the previous year. I mean, I jumped slides, I would like to highlight our new organizational structure here at Parque Arauco. We have done some recent changes. And what we did was strengthen our front line, [indiscernible], our CEO. So we have now [indiscernible] the CTO position directly under the CEO. We've also created a new COO position and also have moved the CIO Director of Development, directly under the CEO. This allows us to establish technology development and unified business strategy as core pillars of Parque Arauco, with by having all of these new positions directly reporting to the CEO. It's also very important to mention that the people who assumed these roles have a long tenure at Parque Arauco. The average is 8 years. And they also have various masters degrees and a long list of experience prior to their time working at Parque Arauco. So through this, we are hoping to create more uniformity in the company and more alignment and strengthen our business objectives and coordination. In the previous quarters, we've highlighted a lot about omnichannel and what we're doing here and how that is helping our tenants. But then I would also like to take a brief moment to highlight the other side of the omnichannel and that is the customer journey map and how we are also focused on improving the experience for our clients. So we have been doing a lot of studies where we are trying to understand the voice of our customers, the voice of our mall visitors in all of the countries and become closer with them. So we can fully understand how they are experiencing their mall -- our mall and thus, how we can improve them. And then finally, I would like to highlight that this -- that we were recently recognized as one of the companies that transform Peru of 2022. So this was thanks to the various sustainability projects that have been carried out in our shopping centers. And this initiative was led by the Peruvian Institute of Business Administration and it highlights organizations that seek to solve social and environmental problems in the country through shared values and strategy. So we are, once again, very pleased to be accessing another award that recognizes what we are doing with sustainability in our company. That wraps up the presentation portion of the conference. And so now I would like to pass the call over to Eduardo, and he will be answering our questions.

[Operator Instructions] So to start off today's discussion question answering, it will be done by Eduardo and Francisco. Let me [indiscernible].

We have a few quick questions from our side. So we noticed that occupancy costs are largely back to historical averages for Chile. So is it more driven by the rents or the sales side of the equation? So this would be my first question. The second question is that you guys have mentioned that high inflation has weighted on costs, which have affected the margins. So the question would be, what cost components were affected? And do you expect this trend to continue? And last question is, we just wanted you guys to give us some color on your ambitions on the multi-family business.

Perfect. Yes, for the occupancy cost question, maybe we can return to Slide #6, where we have the graph of the EBITDA and sales, you can see how the sales and EBITDA and Revenues here, are all moving in a very reasonable level against 2019. In fact, what we expect is to return to those levels in -- not only in sales but also in revenues, also in EBITDA. And with that have normal figures. Returning -- what we are seeing is that we are returning to normal operations, and that includes sales, revenues, EBITDA and then occupancy cost as well. So it's a little bit misleading when we see the sales growing only 1.6% against 2021. As I mentioned, 2021 was a very particular year. We were in Chile coming back from the pandemic and sales grew in a very high level for -- especially for anchor stores. And now that trend, I think, is normalizing, but not to a level where we are below 2019, but we are returning to more normal levels as of 2019. So that is the main reason for the occupancy cost. And as I mentioned before, we're still below 2019 levels for the occupancy cost. So that also is quite important for the business. And then regarding the higher inflation in costs, our main cost is our -- the salaries. Around 50% of our cost is salaries and salaries are also adjusted by inflation. Other costs as salaries are also adjusted by inflation. We have the property taxes are adjusted inflation. Usually, insurance cost is also adjusted by inflation, and we have travel expenses, we have consulting fees that might also adjust by inflation. So you see, in general, most of our costs are adjusted by inflation in all 3 countries and with that also are also pushing some pressure for our margins and our EBITDA.

And for the multi-family?