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

Good morning, and thank you for taking the time to connect to the Parque Arauco's Third Quarter 2023 Earnings Call. I'm Lauren Brown, Head of Investor Relations. I am 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. To start off today's conversation, I'm going to pass the call over to Francisco.

Okay. Thanks, Lauren, and good morning, everyone. We had a very positive quarter this quarter with several important news. First, regarding our quarterly results, our EBITDA revenue continues to show a good trend with growth over the last year above inflation showing a 10.5% for the revenues and a 6.8% growth for the EBITDA. We have been seeing inflation decreasing in all 3 countries, but still is in an important level, especially in Colombia. So growing above those figures is a result of a strong business, sound commercial relationships and a strong portfolio. Also, I would like to highlight that our occupancy level is in its highest level for the last 10 years, reaching 96.1%. All of our malls are almost at 100% and Parque Alegra, which is in its ramp-up process, is also growing in occupancy every month. Another important point to mention is that we are working on our zero-based budget. We have been seeing pressure on our margins, mainly coming from accounts such as real estate taxes and insurance costs. So in this scenario, it's important to maintain the most competitive level in all other cost of operations. A zero-based budget is a methodology that aims to analyze in our bottom-up process or costs with detail, understanding the possible levers that one might have to optimize it. Regarding projects. In this quarter, we announced 2 important projects, including the expansion of our main asset in Peru, Megaplaza Independencia that with its current square meters in the first phase with its funds to add new economic options and a larger common space. Besides that, in Colombia, we were excited to announce 2 investments in multi-property assets. The first was Titan Plaza in Bogota and then Parque Fabricato in Medellin. Lauren will expand on this important investment afterwards in the presentation. Finally, to highlight our AA rating in MSCI ESG and A rating in GRESB. These recognitions are important to us since it represents our work in the ESG area, one of our strategic pillars. Now passing to Page 6. Regarding tenant sales, the tenant sales decreased 1.6% when we compare the third quarter of 2023 with the third quarter of 2022. The exchange rate did not play an important role this quarter since without this effect, the decrease would have been 0.5%. However, we are still seeing 2 different scenarios within these figures. In one side, we have the anchor stores decreasing double digits while the rest of the mall is moving around inflation. Also, it's important to mention that the anchor stores represent around 40% of our sales and GLA, but only 18% of revenues. And this decrease in sales in the anchor stores, you can see it also represented in the figures that we are showing in the country-by-country breakout. Chile is increasing 1.3%, while Peru is decreasing and Colombia is growing 6.8%. This is the result of the different composition that the mix have -- that we have in each country, where Peru has a larger portion of anchor stores. The difference in results in sales in anchor stores and the rest of the mall is also shown in the occupancy cost, which is increasing in all 3 countries. However, if we, again, separate the results of the anchor stores and the rest of the mall, the occupancy cost for the rest of the mall today is around the same levels that were in 2019. So showing good figures for the stores that represent more than 80% of the revenue. Now passing to the next page. Regarding revenue. The revenues of the company are growing 10.5%. This is a very positive figure and also is shown in the -- not only in the consolidated figures but also in the country-by-country breakup, where Chile is increasing 10.3%, Peru 6.4% and Colombia 18.1%. All these 3 figures are above inflation. Chile and Peru had inflation around 5%, and Colombia 11%. The occupancy is also, as I said, reaching its highest value since the last 10 years. You can see in the country by country that Chile is 97%. Peru, almost 96% and Colombia that is showing 94% also shows Alegra, which is in the ramp-up and today is at 81.1%. The figure for Colombia without Alegra would be 96.5%, so also in a very positive level. Also to mention that our new acquisitions, Parque Fabricato, is being added to the portfolio with very good occupancies. Titan is at 95%, Fabricato is at 97%. The same area rent is also showing positive figures, and I would like to highlight the figure for Chile, which is growing 6.8% in the same area rent when you compare the third quarter for 2022 and 2023. And finally, the revenue composition only to highlight that we are maintaining our revenues more fixed than variable, which is important also in a scenario where sales are in challenging -- are more challenged. Now passing to Page 9. Regarding the EBITDA, the EBITDA is flowing also above inflation at 6.8%. But we are aware that we are having a quarter that has a pressure from costs. And as I said, first coming from real estate taxes and insurance. But also in this quarter, we have an impact of bad debt provisions. The bad debt provision, as you might know, during the pandemic, we increased the bad debt provision in an important level, since we wanted to have a very conservative position around the bad debt provision. So we increased it from year 2020 and then in 2021. But then as the company started to show more normalized levels of operations, we're starting -- releasing some parts of that provision. The release of that provision took place in the last portion of 2021 and 2022, and the beginning of 2023. But today, we think that we are more reaching a reasonable level for this bad debt provision. And in the last quarter, we wanted to strengthen our position by adding this provision of around CLP 1.1 billion. We are seeing mainly in Chile, a specific tenant are having control with their accounts. And because of that, we wanted to strengthen our position in this provision. I also wanted to mention that the large portion of our accounts receivable are in good shape and the receivable -- and all the receivables and the amount that we have every month is in good behavior. However, when we compare the third quarter of 2023 or 2022, the last year, the bad debt provision, we released CLP 270 million bad debt provision. But this year, we are provisioning CLP 1.1 billion. So in total, the difference against last year is CLP 1.4 billion, which is impacting our EBITDA level this quarter. Around this factor, it's also important to mention that then we have some costs that are recurring and -- versus others that are nonrecurring. We think that the bad debt provision is a part of the nonrecurring type of cost. So we think that the -- the amount that we provisioned this quarter, we are not seeing that we will repeat this type of provision in the future. So we consider that as a nonrecurring cost for the company. However, more recurring would be real estate taxes and probably insurance, how -- even when we are working or trying to see levers to decrease those costs as well. Again, we are working in this zero-based budget. We are assigning a lot of time and important cost in this scenario in which we are seeing an increase of pressure. In the EBITDA in the country-by-country breakdown, we can see that the EBITDA in Peru and Colombia is down. While chile is mostly flat when we compare to last year. This is because the -- again, this bad debt provision, which was concentrated in Chile this quarter. With that, I would like to pass the call to Lauren.

Thank you, Francisco. As Francisco mentioned, we had experienced higher revenues in the 3 countries this quarter. To expand on that, Chile revenues grew at Parque Arauco premium outlet, Buenaventura by 17% and 63% at Puerto Nuevo compared to the same quarter of the previous year due to new tenant openings. Additionally, in Peru, Salazar Food hall opened in Larcomar, increasing revenues by 20% while revenues increased by 35% at MegaPlaza Ica after the opening of Dollarcity and Diverticentre. Colombia also welcomed 3 new H&M stores at Parque Alegra, Parque Caracoli and Parque Arboleda. Alegra's occupancy, sales and revenue increased as a result. Additionally, at La Colina, revenue grew by 14% as a result of the expansion of La Social Food Hall. Passing to the mall by mall pages. You will see that in this quarter, as Francisco mentioned, Chile NOI margins were effected negatively because of an increase in nonrecurring expenses, including the bad debt provisions which Francisco explained and the additional property taxes. This quarter, we announced various development projects, including an expansion in MegaPlaza Independencia in Peru as part of its master plan and 2 acquisitions of malls in Colombia, which I will expand on. Parque Fabricato is a multi-property asset with approximately 57,000 square meters of GLA, and is one of the most iconic shopping centers in the metropolitan area of Medellin. This shopping center has been managed by Parque Arauco since its inauguration in November 2021 and has important anchor stores such as Exito Supermarket, H&M and Decathlon. Additionally, it has LEED Silver certification and is considered a sustainable project due to its good energy saving practices. An agreement was reached for the acquisition of a 51% stake in the fund INMOVAL, which owns 56% of the trust rights of PAL investment vehicle that owns several stores that amount to 39,700 square meters of GLS, which is approximately 70% of the multi-owner property. Parque Arauco will pay INMOVAL an advance of about USD 17 million. And in 2026, it will pay a price adjustment based on the EBITDA of that year as per the original call auction agreement. In our accounting, you will see that we own 100% of our share and not 70% of the whole shopping mall as you would see if this were a single ownership property. With this, we will consolidate the EBITDA generated by PAL amounting to approximately USD 5.5 million per year. In Bogota, we acquired a stake in the vehicle that owns several stores and offices in Titan Plaza, which is one of the most iconic shopping centers in Bogota, and this acquisition was for USD 443 million. Titan Plaza is well located in one of the city's most consolidated neighborhood. This shopping plaza includes retail spaces such as Falabella, Jumbo, Zara and Cine Colombia, and it also has AA office spaces. The EBITDA per metro per square meter of the retail area owned by the vehicle is very similar to that of Parque La Colina, which is our main asset in Colombia. Additionally, the vehicle had USD 6.4 million of EBITDA in the last 12 months. The offices at Titan Plaza will not be consolidated as we will not have the control nor the management of them. We will use the equity method approach for accounting of these offices. This is the same method we use for Marina. For the retail space, we will consolidate about 14,000 square meters, of which we will own 57%. On Page 37, you will find a case study about these multi-owner properties in Colombia, a format that is different from what we find here in Chile. Today, 65% of the malls in Colombia have this multi-owner format and could make attractive investments. Now jumping over to ESG. We have various lamina -- various slides on ESG, but one of the most important that I would like to highlight are the awards that we received. We obtained a AA rating in the MSCI ESG rating, along with the A rating from GRESB in 2023. The prestigious MSCI rating has granted us a AA rating and it recognizes the integration of environmental, social and governance criteria in the company's risk management. Similarly, GRESB assesses the environmental, social and governance performance of multiple companies in the real estate industry worldwide. Recently, we improved our score compared to the previous year in this prestigious ranking, maintaining the highest A ranking and additionally ranking first in South America compared to our peers. We are very proud to receive these prestigious ESG rankings. And here is where you can find the case study on the Colombian shopping mall. With that, I would like to turn this over to questions. If you are joining our call using the link, you can ask a question by clicking the button ask a voice question or by submitting a written question. [Operator Instructions] And to start off today's discussion, I'm going to pass the call over to Eduardo.

Okay. I see we have a question from Marcelo Motta from JPMorgan. So Marcelo, I'm going to unmute you.

Hi, everyone. Can you guys hear me?

Yes, we can. Hi Marcelo, how are you today?

My question is regarding -- I mean, actually there are 2 questions. The first is regarding the performance of the anchor stores. When do you think we're going to see a light in the end of the tunnel, what is the end game? They have been underperforming for a while. I mean, do you think once rates in Chile it starts to decline even more and credit starts to flow. I mean, this is something that could be reversed? Or do you think this is like a structural underperformed, so how should we think about that? And the second question is regarding Francisco's comments that the level of provision right now is healthy, and we should see this like CLP 1 billion in provisions during the third quarter, more is nonrecurring, which are, let's say, the lead indicators that would make us feel comfortable that there are no additional provisions to be made with the help of the anchor, the satellites and how to think about it?

Thank you, Marcelo, for your question, and good morning. So regarding your question about our department stores, I would say that part of the decline in sales is because of fundamental conditions and part is more contingent. I believe that the part that is more contingent is related to the fact that the department stores share durable goods. And the purchases of durable goods were very strong during the pandemic. So naturally, after the pandemic, the pace of these durable goods are lower. Second, I would say the quality of the credit that the same department stores yield have been decreasing. And because of that, they have been restricting the credit and because of that restriction of credit, that has affected also sales. And I think that's also contingent and not a fundamental change. That said, I do believe that a part of the decline is more fundamental. And because of that, we have said in the last calls that we believe that the space of department stores will decrease going forward. But we believe that this will be a gradual process. And in this process, it's very important to understand the quality of the portfolio because, of course, if some square meters are closed, they will close the less profitable square meters. And because of that, the quality of the portfolio is very important. And as we have mentioned before that Arauco has the highest EBITDA per square meter in each of the countries where we operate. And because of that, also revenues and sales are among the highest or the highest in the country. So we believe that we can face some few closures going forward, but we believe that they will not be very important and because of that manageable. Also, I would like to mention that in average, we see that as an opportunity because again of the quality of the assets and the reconversion of those spaces can be accretive and very profitable for the shareholders of the company. Regarding the second question about the bad debt provision, let me give you, Marcelo, some perspectives about the big picture here. So basically, the bad debt provisions, first of all, let me mention that the outstanding days are in the lower levels of the last year. This is 30 days in Chile, 35 days in Peru and 15 days in Colombia. So the sales of the uncollectibles are strong, I would say. And let me give you a couple of KPIs there. So the level of provision that we have is equivalent to 100% of the debt, about 120 days. That level was 70% between the start of the pandemic. A second KPI that I think is important to mention is that the level of provision is equivalent to 39% of accounts receivables. That level was close to 20% between the start of the pandemic. So in summary, we are being more conservative than the start of the pandemic. And the reason is that -- as I mentioned before, the sales of the uncollectible is good, strong. However, there are some few cases very correlated to the gastronomic category that started to struggle during the pandemic. Most of cases end up in strong results after and they are now in good shape, but some few cases didn't make it until now. So they have been struggling. But again, I would like to mention that in average, the sales of the uncollectibles is very strong. And second, we are being more conservative than what we were before the start of the pandemic.

Thank you, Marcelo. I will now unmute Javier Toledo from Itau.

Congrats on the results. Maybe a follow-up question on Marcelo's comments, but I just want to know how should we think on the evolution of the additional bad debt expenses and increasing property taxes for the following quarters?