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

Good morning, and thank you for taking the time to connect to the Parque Arauco Fourth Quarter 2022 Earnings Call. I'm Lauren Brown, Head of Investor Relations. I'm joined 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] Please note that this call is being recorded, and the recording will be used for internal purposes. And to start off today's conversation, I'm going to pass over the call to Francisco Moyano.

Thank you, Lauren, and well, good morning, everybody. As you might have noticed, we renovated our earnings report in order to be more effective, but meeting our results. So I'm going to mention some of our -- the changes that we implemented this year. And to start with our executive summary. First of all, we are closing a very successful year. We're leaving behind the effect of the pandemic. Compared with 2021, we have very positive results with well around increases. In sales, we increased sales in 20.5%. Revenues were increased by 43%. EBITDA by 43% as well, and the FFO increased by 73%. When we compare against 2019, we see also very important growth in sales, increasing 23.9%; revenue, 18%; EBITDA 13%; and FFO, 25%. So with that, we are closing, we are wrapping up a very good results in this year, positive figures and a normalized operation. Besides that, we are also normalizing the scenario regarding our contract negotiations with our tenants. We negotiated during this year around 20% of our GLA, signing 462 new contracts with new tenants for our spaces, which is a sample of how we are continuously managing our mix. Regarding collections, our accounts receivable decreased in more than MXN 2 billion, showing a sound scenario in this aspect of the business and good relationships with our tenants. Another positive result is the occupancy in this year. We closed the year with an occupancy level of 95%. We started this year with an occupancy of 93.6%, so we have the challenge of returning to these pre-pandemic values, which we fully accomplished during the year. This challenge was mainly in Peru, filling spaces less by Paris, where we will see new stores to fill those spaces with OSB, H&A among others. We also opened a new mall in Barranquilla, Colombia, that opened during the second quarter of this year and closed with an occupancy of 76%. Regarding the more financial results, the level of the leverage in the company also, we assume it's back again to normal level. And today is in our target range, closing in 5.3% target, and allowing that to restart growth, which we start very quickly, expanding again, our current rate locations that we have in our portfolio, Parque Arauco Quilicura and also, as I mentioned before, with Parque Alegra that we opened in Barranquilla. Besides that, we announced several multifamily projects. But it's important also to mention that considering all the openings during 2022 and the projects currently under development, 65% of the growth is coming from projects related with our shopping malls with expansion of the retail spaces or other projects that also are being built in our locations. With that, 35% of this growth is coming from multifamily. We also want to highlight that we are the only shopping center company in Latin America to be part of the Dow Jones Sustainability Index for the emerging markets in 2022 that will be more explained in more detail by Lauren afterwards. Now passing to the next page. We wanted to include this new chart in our earnings results. With the year of transmitting our income standing in a more clear and summarized way in these results. Here, you can see how we pass from our revenues coming from our -- from the operation of our 3 different countries to the profit of the equity holders to the company. So we hope that you find this interesting and I show you with the analysis of our interest statement. Regarding tenant sales then in the next page. So we are increasing our tenant sales by 20% this year. If we break down that by country, Chile is growing 18%, Peru, 17%; and Colombia, 40%. In the fourth quarter of 2022, Chile is showing negative 1.6%. This is more related with a challenging comparable base in 2022. In fact, when we see the performance of sales in this year compared with 2019, we see that sales in Chile are increasing 42%. So -- and also some can think that 2019 was a lower base of comparison due to the social unrest that we have in Chile. But then in 2019, sales were only 3% lower than 2018. So it's a reasonable base to compare. And against that, Chile is growing 42%. We are also adding -- we are changing the ratio of same store sales to the same area size, which we think that represents in a more clear way how we manage our portfolio. With same-store sales, we were comparing sales coming from the same tenant in the same space. Then setting a same situation from where we change the tenant in that space, what we think is one of the most important decisions that we make in our operations in order to improve mix and then sales. So here, we are comparing what happened in the same space, but it was occupied in both periods of time, regardless of the data that used that story. And with that, it's also including how we manage then the spaces in our portfolio. When we analyze this ratio in the fourth quarter of 2022, we see that Chile is decreasing 4%; Peru is increasing 2.5% and Colombia increasing almost 15%. So Colombia has been showing very good results in sales during the whole year. Peru as well is increasing in sales. And then again, we are showing that in comparing with 2021, Chile has a very challenging comparison level. We're expecting that this ratio should be normalized more around inflation in the future. Regarding the occupancy costs, we are seeing that we have same figures for all 3 countries. Chile is increasing to 9.9%. In reviewing historical figures for Chile in the fourth quarter of 2018, the occupancy level was 10.4%. So with that, we are also very comfortable with this occupancy cost levels. In the revenue side, on the next page, revenues are increasing 43% against 2021, as I mentioned before. And that is in the breakdown by country, we can see that we have same levels for all 3 countries. Chile is increasing 41%; Peru, 44%; and Colombia, 45%. Very positive results for all 3 countries regarding revenues. That's the same store rent, we are changing that to same other rent as well. And here, we can see that we have positive figures for all 3 countries, with Chile growing almost 8%, Peru 21%, and Colombia 6.8%. The occupancy level for the 3 countries, as we mentioned before, we closed occupancy above 95% in the consolidated figure by country. It also has very positive figures in Chile, almost 97%, Peru 95%, and Colombia, 91%, but it also includes Barranquilla that just opened and closed in 73%. Now passing to the EBITDA here. We can see the EBITDA that is growing 43%. The EBITDA growth is driven first by the revenue that grew 43%, then cost of sales, mainly is also growing when we compare with 2022 -- 2021, but we need to remember also that in 2021, we have some closures of our malls due to the pandemic at the beginning of the year. So some of the part of the reason why it costs are growing due to a higher level of operation during 2022. We are also experiencing a more higher cost in property taxes in the administrative expenses. Those expenses are partially compensated by releasing in bad debt provisions. Our bad debt provision moved from MXN 13.5 billion in 2021 to MXN 12.6 billion in 2022. So we released around MXN 900 million during the year. We are still considering a very conservative policy in this regarding the bad debt provisions. So that is why we are releasing that in a very slow pace even when we see that collections are doing very well. Then in the next page. Regarding the income statement, then in other gains by function, we are considering the fair value adjustment for our assets. In the lower part of the table. You can see that we included the fair value for the year, which amounted to MXN 108 billion in 2022 and is compared with MXN 43 billion in 2021. That increase in the fair value adjustment is mainly due to the higher inflation that we had during this year and that is included in the other gains by function. Then the financial income during the year had a very positive increase, reaching MXN 24 billion in part due to the higher inflation and also due to the higher returns that we had in our investments. The financial expense is relatively stable. It's increasing from MXN 43 billion to MXN 48 million, mainly due to the higher inflation that also affects the interest costs that we paid for our debt. The debt is also very stable during this year, in fact, decreasing a little bit. In income for indexed assets and liabilities, you can see the cost of the higher inflation and the adjustment that we have to make in our debt that we have in U.S. the currency related with inflation in Chile. Current taxes are also increasing from MXN 7 billion to MXN 13 billion due to increase in our results and higher EBITDA and deferred taxes also is increasing mainly due to the fair value adjustment that we had in this year. With that, I would like to pass the call to Lauren.

Thank you, Francisco. As Francisco mentioned, as a result of the normalization of EBITDA and our leverage throughout this year, we have been able to return to higher levels of CapEx. We invested a significant percentage of our total CapEx in regional shopping centers, including the opening of Parque Alegra and Barranquilla, Colombia and the expansion of the iconic Parque Arauco Kennedy in San Diego. Additionally, this year, we expanded into a new asset class, multifamily rental real estate, announcing 6 projects in total, 3 in Colombia, 2 in Chile and 1 in Peru, totaling $113 million between all of the project. And as you can see in the graph, despite various multifamily announcements, retail real estate remains our focus and largest investment this past year and will continue to be so in the future. Next, I would like to highlight our Parque Arauco Kennedy expansion. This is our flagship asset. And after opening Sector Rosario and the new Falabella in November of 2021, we continued our expansion throughout 2022, focusing on advancing the Cerro Colorado phase of the project. This includes 7 floors of additional parking and will also include a new retail space and new main entrants, which will be facing Parque Araucano, where the new metro line will be opening in 2025. After thoroughly analyzing many projects over 50 projects in each country, we launched into the multifamily asset class with 2 greenfield projects in Colombia, starting with Bogotá and next in Medellin. Our next multifamily announcement was the acquisition of a building that is already fully operational and with a 95% occupancy in the Maipu neighborhood of San Diego. Following this, we announced 2 additional greenfield projects, 1 in Bogotá and Other in Lima and another acquisition of an already constructed but not yet rented building in the [indiscernible] neighborhood of San Diego. And as I mentioned previously, the combined investment of these projects equal $113 million. This year, we won various awards, including the most innovative company in the shopping sector industry. We were also nominated as the most transparent company in Chile by Transparency International. And as Francisco mentioned earlier, this year, Parque Arauco remains the only Latin American shopping center to be admitted into the Emerging Markets index, one of the prestigious Dow Jones Sustainability Indexes. Finally, I would like to wrap up our call by highlighting milestones at one of our most iconic assets, Larcomar and Lima, Peru. This year, we launched the new Larcomar brand, including a new logo, marketing strategy in addition to space renovations to reflect this new Larcomar. At the end of 2022, we opened the new movie theater. And in the first quarter of 2023, we are set to open the Salazar food hall based on the successful food halls that we've had in Parque Arauco Kennedy, La Molina and now in Alegra. Not all of the enhancements at Larcomar were aesthetic, additionally, over the last 6 years, we invested in various safety and security projects, which you can read about in our fourth quarter earnings report. Now I would like to move to the question-and-answer part of our call. [Operator Instructions] And to start off today's discussion, I will be passing our call to our CEO, Eduardo Perez.

Okay. I'm going to unmute Jorel.

So I have a question around the sales and rent dynamics that we saw this quarter. So we saw the same area rent, particularly for Chile was up 8% year-on-year. But at the same time, we saw same-area sales were down about 5% year-on-year. So with this dynamic, we saw that occupancy costs rose year-on-year. So Chile rose about 120 basis points to 9.9%. And when I look at this, on one hand, it's going back to historical averages, it's about 10% for fourth quarter if we look at historical averages from 2015 and '19, but at the same time it's a meaningful rise. And we -- and according to your notes, we are seeing a drop off from peak consumption last year due to fiscal injections and what have you. So my question is, how are you thinking about pricing power going forward when it seems that occupancy costs might inch even higher as we go through 2023. That's my question.

Thank you for the question. We expect Jorel, 2023 with sales -- same area sales going at similar levels than inflation. This is mid-single digits in Chile, a little bit above abroad. And with this, I would expect going forward, a similar level of occupancy costs than the levels we are seeing currently. As you mentioned, these are the levels we had before the start of the pandemic. And I would expect these levels. They may go a little bit upwards, but not much. And we feel comfortable with these levels of occupancy.

So the read-through for that is essentially that rents should grow with or above inflation. Is that the way we should be thinking about it?

Yes, similar levels than inflation. I would expect they are up. And if above, just slightly above.

Thank you, Jorel. I will now be unmuting Javier Toledo from [indiscernible].

So as you mentioned in the press release, there was a lot of pressure in costs for increases in salaries, contributions and energy generating this 70% EBITDA margin. So my question is thinking on 2023 -- sorry, 2023 and maybe 2024, should we expect this pressure in these lines of costs to continue in the upcoming quarters? And maybe we should think in a sustained 70% EBITDA margin instead of maybe returning to the 73% pre-pandemic levels in the short term at least?